TEAM, Inc. — Form 10-Q Summary
Business context and reporting period
TEAM provides specialty maintenance, inspection and construction services for industrial piping systems and vessels, operating through its TCM and TMS divisions in more than 100 locations. This filing covers the fiscal third quarter and first nine months ended February 29, 2012; comparisons are with the corresponding 2011 periods. The filing is unaudited.
Key financial metrics
| Metric | Three months ended Feb. 29, 2012 | Nine months ended Feb. 29, 2012 |
|---|---|---|
| Revenue | $136.5 million; up 25% | $435.9 million; up 26% |
| Gross profit / margin | $36.6 million / 26.8%, versus 28.2% | $131.5 million / 30.2%, versus 30.6% |
| Operating income / margin | $3.5 million / 2.5%, up 7% | $32.3 million / 7.4%, up 36% |
| Net income available to Team shareholders | $2.0 million, versus $3.9 million | $19.1 million, versus $15.8 million |
| Diluted EPS | $0.10, versus $0.19 | $0.93, versus $0.79 |
| Operating cash flow | $32.6 million for nine months, versus $39.8 million |
At February 29, 2012, cash was $27.5 million, total assets $381.9 million, and total debt $88.1 million, all amounts in millions. The $150 million revolving facility matures in July 2016; approximately $48 million of borrowing capacity remained available. TEAM reported compliance with its covenants. Standby letters of credit totaled $13.5 million and reduce facility availability.
Material changes versus prior comparable periods
- Quarterly revenue grew in both divisions: TCM 28% and TMS 22%. Management reported growth across service lines and major geographic markets.
- Nine-month operating income rose faster than revenue, but gross margin percentage slipped in both comparison periods. Management attributed the decline mainly to indirect-cost spending and reduced productivity; direct job margins were described as relatively stable.
- Quarterly net income and EPS fell despite higher revenue and operating income. The prior-year quarter included a $2.3 million cumulative tax benefit from correcting prior-period share-based compensation tax calculation errors; no restatement was required because the errors were assessed as immaterial.
- Operating cash flow declined year over year. Investing outflows included $15.8 million of capital expenditures and $19.4 million for acquisitions; financing included $13.7 million of net revolving-credit borrowings.
Outlook, commentary, risks and unusual items
- Management said the quarter’s cost pressures did not indicate a fundamental change in markets, cost structure or business model. Training and start-up spending supported significant turnaround projects expected to continue into the fourth quarter. No specific numerical guidance was provided.
- Quarterly SG&A included about $2.5 million of unusually elevated expenses: $1.2 million of additional medical claims accruals, $0.6 million of legal and professional costs including unsuccessful transaction activity, and $0.7 million of acquisition integration costs.
- Acquisition spending included $17.1 million for a mechanical services business in December 2011; purchase-price valuations were still in progress. The company also reported acquisition-related goodwill and intangible assets.
- TEAM is defending 106 lawsuits related to the 2007 Consolidated Edison steam-main rupture and a related indemnification claim. The potential liability could not be estimated; the company reported insurance subject to a $250,000 deductible and no accrual above that deductible.
- The EPA is investigating the accuracy of fugitive-emissions monitoring statements and records supplied by some current and former employees. TEAM is cooperating; the matter could result in penalties or other action.
- Foreign-currency exposure includes European and Canadian operations, Euro-denominated debt used as a partial investment hedge, and a small Venezuelan operation accounted for as hyperinflationary. European cash repatriation could trigger approximately $0.9 million in adverse tax consequences; the company does not intend to repatriate it.
- Management stated disclosure controls were effective as of period-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth converts into improved margins as turnaround work proceeds and indirect-cost productivity recovers.
- How much of the reported growth is organic versus acquisition-related, and the acquired businesses’ subsequent performance and final purchase-price allocations.
- Cash generation, working-capital needs, capital spending and remaining revolver capacity, including the effect of standby letters of credit.
- Developments in the Con Edison litigation and EPA investigation, including any change in estimated exposure, insurance coverage or accruals.
- Foreign-exchange and interest-rate exposure, covenant headroom, and any changes to management’s outlook; this filing provides no numerical earnings guidance.