TISI

Business Context and Reporting Period

Company: TEAM, INC. (TISI)
Filing Type: Form 10-K (Annual Report)
Period Ended: May 31, 2010
Business Overview: Team, Inc. is a leading provider of specialty maintenance and construction services for high-temperature and high-pressure piping systems in heavy industries (petrochemical, refining, power, pipeline). The company operates in one segment with two divisions: TCM (Non-destructive Testing, Field Heat Treating) and TMS (Leak Repair, Hot Tapping, Fugitive Emissions Control, Field Machining, Technical Bolting, Field Valve Repair). Services are provided in over 100 locations globally, with 71% of revenue originating from the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 9% ($43.7 million) compared to fiscal 2009. The TMS division saw a 14% decline, while the TCM division declined 4%. Management attributed this to the economic recession, customer project cancellations, and reduced spending in the Canadian Oil Sands sector.
• Profitability Compression: Operating income dropped 40% ($16.5 million). Gross margin percentage fell from 32% to 30% due to pricing pressures and lower absorption of indirect costs.
• Debt Reduction: The company significantly reduced debt, with long-term debt decreasing by approximately $29 million as borrowings under the Credit Facility were repaid.
• Non-Recurring Costs: SG&A expenses included $3.2 million in professional fees related to an internal investigation (FCPA) and $0.7 million in severance charges.
• Foreign Currency Impact: The company recorded a $1.6 million foreign currency transaction loss, primarily due to fluctuations in the Venezuelan Bolivar.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management noted that while the fourth quarter of fiscal 2010 showed 4% revenue growth, the overall environment remains challenging with conservative customer spending. Capital expenditures for the next 12 months are anticipated to be between $8 million and $10 million.
• FCPA Investigation: An internal investigation into improper payments in Trinidad concluded that payments totaling less than $50,000 were made to foreign government employees. The company has spent approximately $3.2 million on legal fees. While the DOJ and SEC reviews are ongoing, management believes violations are limited in scope and has not recorded a provision for penalties.
• Legal Proceedings: The company is a defendant in approximately 100 lawsuits related to a 2007 steam main rupture in New York City involving Consolidated Edison. The company maintains insurance with a $250,000 deductible and does not believe the outcome will have a material adverse effect.
• Stock Repurchase: Subsequent to year-end, the Board authorized a $15 million stock repurchase plan.
• Risks: Key risks include dependence on the refining and petrochemical industries, intense competition, labor shortages, and exposure to foreign currency fluctuations (specifically in Venezuela and Europe).

Investor Verification Checklist

• FCPA Resolution: Monitor the status of the DOJ and SEC review regarding the Trinidad subsidiary investigation and potential penalties.
• Customer Concentration: Verify the impact of the economic recession on the refining and petrochemical sectors, which drive the majority of demand.
• Debt Covenants: Confirm continued compliance with the $145 million Credit Facility covenants, particularly given the reduction in operating income.
• Foreign Operations: Assess the ongoing impact of the hyperinflationary economy in Venezuela on cash repatriation and asset valuation.
• Turnaround Activity: Track the timing and scale of customer plant turnarounds, as these are seasonal drivers of revenue.