Business Context and Reporting Period
Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2008 (Six months ended November 30, 2008)
Business Overview: A leading provider of specialty maintenance and construction services for high-temperature and high-pressure piping systems in heavy industries (petrochemical, refining, power, etc.). Operations span over 100 locations in the U.S., Canada, Europe, and other international markets.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2008 | Six Months Ended Nov 30, 2008 |
|---|---|---|
| Revenues | $148.8 million | $272.1 million |
| Gross Margin | $50.1 million (34% of revenue) | $89.2 million (33% of revenue) |
| Operating Income | $18.4 million | $28.1 million |
| Net Income | $10.2 million | $15.2 million |
| Diluted EPS | $0.51 | $0.76 |
| Cash from Operations (6mo) | $10.5 million | |
| Total Debt (Current + Long-term) | $104.6 million | |
| Cash and Equivalents | $9.3 million (as of Nov 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 22% ($26.4 million) for the quarter and 21% ($46.3 million) for the six months compared to the prior year periods. Growth was driven by the TMS division (up 48% quarterly, 41% six-month) and the acquisition of Leak Repair Specam (LRS), which contributed $7.4 million in quarterly and $13.3 million in six-month revenues.
- Profitability: Operating income rose 26% for both the quarter and six-month periods. Net income increased 31% for the quarter and 34% for the six months.
- Foreign Currency Impact: Adverse currency fluctuations (Euro and Canadian Dollar) negatively impacted revenue growth by approximately $5.9 million for the quarter and $3.3 million for the six months. Foreign currency translation losses totaled $12.9 million (quarter) and $19.0 million (six months) in comprehensive income.
- Expenses: SG&A expenses increased 18% (quarter) and 19% (six months), partly due to increased share-based compensation and $0.7 million in hurricane-related costs.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Management anticipates capital expenditures for fiscal year 2009 to be between $15 million and $20 million.
- Liquidity and Credit: The company maintains a $145 million revolving credit facility and a $15 million term loan. A new $7.5 million Canadian line of credit was established in October 2008. Management notes that the worldwide financial crisis could reduce customer liquidity and credit availability, potentially leading to project delays or cancellations.
- Working Capital: Operating cash flow was impacted by a $5 million delay in receivables from a large subcontracting project; payment was received in December 2008, subsequent to the period end.
- Legal Proceedings:
- Con Ed Lawsuits: Multiple lawsuits filed regarding a 2007 steam main rupture in NYC. The company intends to defend vigorously and believes insurance will cover claims, though liability cannot be estimated.
- Valero Settlement: A final settlement was reached regarding a 2007 refinery fire injury; no material adverse effect on financials.
- Acquisitions: Completed acquisition of LRS (Netherlands/Belgium) in January 2008 for $18.6 million.
Investor Verification Checklist
- Receivables Collection: Verify the status of the $5 million receivable from the large subcontracting project mentioned in the liquidity section, which was collected post-period.
- Legal Exposure: Monitor the status of the Consolidated Edison (Con Ed) indemnification claims and related lawsuits, as the company states liability is currently unestimable.
- Currency Hedging: Review the effectiveness of the Euro-denominated debt hedge against the significant translation losses reported in comprehensive income.
- Debt Covenants: Confirm continued compliance with financial covenants under the Credit Facility, especially given the macroeconomic risks cited by management.
- Acquisition Integration: Assess the ongoing contribution of the LRS acquisition to the TMS division's organic growth targets.