TEAM, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2013, the first quarter of fiscal 2014 (not calendar 2013 Q1). Comparisons are with the three months ended August 31, 2012. TEAM provides specialty industrial inspection, assessment, heat-treating, mechanical and integrity services to heavy industries.
Financial results
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $174.3 | $161.5 |
| Gross margin | $49.0; 28.1% of revenue | $49.5; 30.7% |
| Operating income | $8.1; 4.7% of revenue | $12.8; 7.9% |
| Net income | $4.5 | $7.7 |
| Net income available to TEAM shareholders | $4.5; diluted EPS $0.21 | $7.6; diluted EPS $0.36 |
| Operating cash flow | $0.05 | $6.6 |
| Capital expenditures | $6.2 | $5.7 |
- Revenue rose 8%, but gross margin dollars were slightly lower and gross margin percentage declined. Management attributed margin pressure in IHT and MS to wage increases not yet fully passed through to customers and lower large-project activity in some regions.
- Operating income fell 37%. Quest recorded a $0.7 million operating loss versus $3.0 million income a year earlier; corporate and shared-support costs increased and included $0.7 million of severance related to the divisional reorganization.
- Operating cash flow was nearly breakeven: net income and noncash charges were largely offset by a $12.7 million working-capital increase, including reductions in accounts payable and accrued liabilities. Investing cash use was $15.9 million, including $9.8 million for acquisitions. Financing provided $15.5 million, primarily from $14.9 million of net revolving-credit borrowings.
Financial position and liquidity
- At August 31, cash was $33.7 million; current assets were $239.2 million and current liabilities $56.0 million. Long-term debt was $88.2 million, up from $72.9 million at May 31, 2013. Total liabilities were $168.0 million and total equity $297.4 million.
- The credit facility provides up to $150 million, matures in July 2016, and carried interest at LIBOR plus 1.75%. The company reported approximately $48 million of available borrowing capacity. Outstanding letters of credit were $13.7 million.
- $16.1 million of cash was held in foreign subsidiaries whose earnings were considered permanently reinvested; an additional $1.7 million was held in Venezuela. Repatriating foreign cash could trigger additional taxes, and Venezuelan cash is difficult to repatriate.
Changes, outlook and risks
- Effective July 1, 2013, TEAM reorganized from two divisions into three operating segments: Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity (Quest). IHT revenue grew 17%; MS grew 1%; Quest revenue declined 9%. Inspection and assessment revenue increased 14%, on-stream services 17%, while turnaround revenue declined 7%.
- TEAM acquired Global Ascent in July for $10.8 million cash, with up to $4.0 million of additional performance-based consideration. The acquisition added rope-access services; preliminary purchase accounting included $5.8 million of goodwill and $6.0 million of customer-relationship intangibles.
- Management said several Quest projects expected in Q1 shifted to Q2 or Q3, citing project timing, field-network expansion costs and spending on next-generation tooling. It expected Quest to achieve 20% growth in revenue and operating profit versus fiscal 2013 by year-end. This is segment-specific commentary, not consolidated-company guidance.
- Foreign-currency transaction losses were $0.4 million versus $0.1 million in the prior-year quarter. Venezuela remains exposed to possible further currency devaluation; management said further devaluations in fiscal 2014 could cause additional impairment. The company also has floating-rate debt and unhedged foreign-currency exposure.
- TEAM was defending 106 lawsuits connected to the 2007 Con Edison steam-main rupture, along with Con Edison’s indemnification claim. The company could not estimate any potential liability, had not accrued amounts beyond the $250,000 insurance deductible, and stated it did not expect a material adverse effect. Other routine claims were also disclosed.
- After quarter-end, on October 1, the board approved a new $25 million stock-repurchase plan and the credit facility was amended regarding treatment of the first $25 million of repurchases in its fixed-charge coverage calculation. Repurchases had begun.
- Management cautioned that forward-looking statements involve risks and uncertainties. It reported disclosure controls were effective as of August 31, 2013 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the deferred Quest projects were completed in Q2 or Q3 and whether Quest met the stated fiscal-year growth and profitability expectations.
- Whether lower gross margins, wage-cost pressures and weaker turnaround activity persisted, and whether revenue growth translated into operating cash flow.
- Acquisition performance and the terms or likelihood of Global Ascent’s contingent consideration.
- Available credit capacity, debt levels and compliance with facility covenants, particularly alongside the new repurchase plan.
- Developments in the Con Edison litigation and indemnification claim, and any changes to the company’s assessment of potential exposure.
- Foreign-currency movements, especially in Venezuela, and the accessibility and tax implications of overseas cash.