TEAM, Inc. (NYSE: TISI) — Form 10-Q summary
Reporting period: Second quarter and six months ended November 30, 2015. The quarter is within fiscal 2016 under the company’s then-current May 31 fiscal year; TEAM announced it would change to a December 31 year-end. Financial statements are unaudited. Amounts below are in millions except per-share data.
Business context and financial performance
TEAM provides specialty industrial inspection, assessment, turnaround, and on-stream services to heavy industries. Its segments are Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity. Results included Qualspec from its July 7, 2015 acquisition date.
| Metric | Three months ended Nov. 30, 2015 | Prior-year quarter | Six months ended Nov. 30, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $280.9 | $240.6 | $503.6 | $428.7 |
| Gross margin | $84.2 (30.0%) | $78.8 (32.8%) | $147.3 (29.2%) | $135.2 (31.5%) |
| Operating income | $19.4 (6.9%) | $28.7 (11.9%) | $23.8 (4.7%) | $40.5 (9.4%) |
| Net income | $11.5 | $17.6 | $12.9 | $24.6 |
| Diluted EPS | $0.54 | $0.80 | $0.60 | $1.12 |
Cash flow and liquidity: Six-month operating cash flow was $13.4, versus $9.1 a year earlier. Investing cash outflow was $283.8, including $262.2 for acquisitions and $21.8 in capital expenditures. Financing cash inflow was $285.0, primarily from $293.0 of net credit-facility borrowings. Cash and cash equivalents were $46.5 at November 30; an additional $5.0 was restricted in escrow. Long-term debt was $371.0, up from $78.5 at May 31. TEAM reported approximately $41 million of available borrowing capacity.
Material changes and management commentary
- Quarterly revenue increased 16.7%, but management attributed approximately $47.7 million of the increase to acquisitions. Excluding acquisitions and a $8.6 million adverse foreign-exchange impact, revenue rose $1.2 million. Six-month revenue increased 17.4%; acquisitions contributed approximately $73.5 million, while foreign exchange reduced revenue by $14.6 million.
- Management said refining and petrochemical customers deferred planned capital and maintenance projects. In the quarter, IHT revenue rose 30.3%, MS 2.6%, and Quest Integrity fell 11.4%. For the six months, segment revenue increased in each group, led by IHT.
- Operating income fell 32.3% for the quarter and 41.1% for the six months. Management cited weaker demand, a less favorable mix of lower-margin services, higher corporate and shared-support costs, and foreign exchange. Excluding identified non-routine costs, management reported operating income declines of 12.5% for the quarter and 13.8% for the six months.
- Reported non-routine costs were $4.5 million in the quarter and $10.0 million for the six months, including merger and acquisition and fiscal-year-change professional fees, ERP implementation, and intellectual-property defense costs; the six-month figure also included contingent-consideration revaluation.
Transactions, outlook, risks, and contingencies
- In July, TEAM acquired Qualspec for $255.6 million in cash, financed in part through the new credit facility. The acquisition was expected to add about $180 million in annual revenue and nearly 1,000 employees. The purchase-price allocation remained preliminary. TEAM reversed a previously recorded $5.8 million contingent-consideration obligation after concluding no additional Qualspec amount was expected to be payable.
- In November, TEAM agreed to acquire Furmanite in a stock transaction initially valued at $335 million, including assumed debt. Furmanite shareholders were to receive 0.215 TEAM shares per share; completion was expected in the first calendar quarter of 2016. This was a pending transaction, not a completed acquisition as of the filing.
- The new credit facility provides up to $500 million, with a $300 million revolving facility and $200 million term loan, and matures in July 2020. TEAM said it was compliant with its financial covenants at November 30. The maximum funded-debt-to-EBITDA covenant was scheduled to tighten over time. Floating-rate debt creates interest-rate exposure; foreign operations and currency movements also affect results.
- No quantified earnings or revenue guidance was provided. Management described demand as softer than expected and warned that forward-looking statements are subject to risks and uncertainties. The filing also noted $17.3 million of cash in foreign subsidiaries considered permanently reinvested and potentially subject to additional tax if repatriated.
- TEAM disclosed 92 pending lawsuits relating to the 2007 Con Edison steam-main rupture; it could not estimate any liability, had not accrued amounts above its deductible, and believed insurance should cover the claims. Three patent-infringement cases brought by Quest Integrity were ongoing; preliminary injunctive relief was denied in the Delaware cases, with later proceedings expected in 2016. The company stated it did not expect these matters to materially affect its financial position, results, or cash flows.
- Disclosure controls were reported effective as of November 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the Furmanite merger closed, its final consideration and financing, and its effect on leverage and share count.
- Qualspec’s post-acquisition performance, final purchase-price allocation, and any contingent payments.
- Whether deferred customer projects resumed and whether margins recovered as acquisition-related and corporate costs changed.
- Operating cash conversion and working-capital requirements, alongside debt availability and compliance with tightening credit covenants.
- Developments in the Con Edison and patent litigation, and any change to the company’s assessment of exposure.
- Effects of the fiscal-year change on reporting periods and comparability.