TEAM, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2014, the first quarter of fiscal 2015 (fiscal year ending May 31, 2015). The filing is unaudited. TEAM provides specialty industrial inspection, integrity, turnaround and on-stream services through IHT, Mechanical Services (MS) and Quest Integrity.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $188.1 million | $174.3 million | +7.9% |
| Gross margin | $56.3 million (29.9% of revenue) | $49.0 million (28.1%) | +15.0% |
| Operating income | $11.8 million | $8.1 million | +45.9% |
| Net income | $7.1 million | $4.5 million | +57.5% |
| Net income available to TEAM shareholders | $7.0 million; diluted EPS $0.33 | $4.5 million; diluted EPS $0.21 | |
| Cash from operations | $4.9 million | $0.05 million | |
| Capital expenditures | $5.5 million | $6.2 million |
- Revenue increased in all three segments: IHT $105.6 million (+10.2%), MS $67.8 million (+3.2%) and Quest Integrity $14.7 million (+15.5%).
- Management attributed improved operating results to stronger job execution at IHT, Quest’s revenue growth and better cost control, pricing and quality initiatives. MS operating income declined 1.9% despite higher revenue.
- Cash and cash equivalents were $31.5 million at August 31, down from $34.7 million at May 31. Net cash used in investing activities was $7.3 million, including $2.2 million for an acquisition; financing activities used $0.2 million. Operating cash flow less capital expenditures was negative $0.6 million.
- Long-term debt was $71.1 million, down from $73.7 million at May 31. The $150 million revolving facility matures in July 2016; approximately $66 million of borrowing capacity was available. Its interest rate was LIBOR plus 1.75% at quarter-end. Current assets were $243.5 million and current liabilities $63.8 million.
Material changes, outlook and risks
- TEAM acquired a UK mechanical services company in August for reported consideration of $2.3 million net of cash acquired; purchase accounting was preliminary. The Alaska inspection joint venture was dissolved in December 2013, and those operations are now conducted by IHT.
- Management described the first quarter as seasonally slow for project activity. It said operating cash flows and financing arrangements were believed sufficient for business needs and expected to be able to renew the credit facility at maturity; no quantified earnings or revenue guidance was provided.
- A new ERP system is expected to be fully installed during fiscal 2016; $6.6 million had been capitalized by quarter-end.
- The board increased the stock-repurchase authorization to $50 million, net of the $13.3 million previously repurchased. No shares were repurchased during this quarter.
- Foreign currency remains a risk: the euro weakened against the U.S. dollar during the quarter, and foreign currency translation reduced other comprehensive income. Venezuela is treated as hyperinflationary; prior fiscal-year exchange-rate changes caused substantial revaluation losses, and the local operating environment and repatriation of cash remain uncertain.
- TEAM disclosed 95 lawsuits related to the 2007 Con Edison steam-main rupture and a related indemnification claim. The company could not estimate potential liability, had accrued no amount beyond its $250,000 deductible, and stated that insurance was believed to cover the claims and that it did not expect a material adverse effect.
- Cash included $16.7 million in foreign subsidiaries considered permanently reinvested and $0.2 million in Venezuela; access to and repatriation of these funds may be limited or entail additional taxes. The filing reported disclosure controls operating effectively and no material change in internal control over financial reporting.
Key facts for investors to verify
- Reconcile management’s stated operating margins of 6.1% and 5.1% with reported operating income and revenue; those reported figures calculate to approximately 6.3% and 4.6%, respectively.
- Track whether revenue growth translates into sustained operating cash flow, particularly given working-capital movements and capital spending.
- Review credit-facility availability, covenant headroom and refinancing plans ahead of the July 2016 maturity.
- Monitor the Con Edison litigation and indemnification claim, as potential exposure was not estimable in the filing.
- Assess the purchase accounting and subsequent performance of the UK acquisition, ERP spending and the potential share issuance to acquire Quest Integrity’s remaining 5% interest.