TEAM, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2011; comparative periods ended November 30, 2010. The company provides specialty maintenance and construction services to heavy industries through its TCM and TMS divisions.
Financial performance
| Metric | Three months ended Nov. 30, 2011 | Three months ended Nov. 30, 2010 | Six months ended Nov. 30, 2011 | Six months ended Nov. 30, 2010 |
|---|---|---|---|---|
| Revenue | $158.3 million | $133.1 million | $299.4 million | $237.6 million |
| Gross margin | $50.4 million; 32% | $43.7 million; 33% | $94.9 million; 32% | $75.3 million; 32% |
| Operating income | $17.1 million | $13.8 million | $28.8 million | $20.6 million |
| Net income attributable to Team shareholders | $10.3 million | $8.1 million | $17.1 million | $11.9 million |
| Diluted earnings per share | $0.50 | $0.41 | $0.83 | $0.60 |
- Quarterly revenue increased 19%; six-month revenue increased 26%. Management attributed growth to broad-based demand, new repair and upgrade projects, deferred maintenance returning, and Quest acquisition revenue.
- For the six months, TCM revenue rose 26% to $168.0 million, including $17.5 million from Quest; TCM organic growth was 15%. TMS revenue rose 25% to $131.4 million.
- Quarterly gross margin percentage declined one point amid pricing pressure. Management said value-added inspection solutions and improved TMS volume helped offset pressure. Six-month gross margin percentage was unchanged.
- SG&A rose 12% in the quarter and 21% for the six months, principally due to growth-related compensation and insurance costs and Quest. SG&A included a $0.8 million pre-tax legal settlement in the current periods; the prior-year periods included $0.6 million of Quest acquisition expense.
Cash flow, debt and liquidity
- Six-month operating cash flow was $19.4 million, versus $20.0 million a year earlier. Management cited net income and noncash charges as sources, offset by a $10.3 million increase in working capital.
- Investing cash use was $12.7 million, including $10.7 million of capital expenditures and $2.3 million for an acquisition. Financing cash use was $1.4 million. Cash increased $4.7 million to $18.7 million.
- At November 30, current assets were $196.5 million and current liabilities $53.5 million. Long-term debt was $73.6 million, down from $75.9 million at May 31; cash less total debt was approximately negative $54.9 million.
- The renewed revolving credit facility provides up to $150 million, matures in July 2016, and carried a LIBOR-plus-1.75% margin at quarter-end. The company reported covenant compliance and approximately $63 million of available borrowing capacity. Standby letters of credit totaled $13.5 million and reduce facility availability.
- Cash included $9.4 million in Europe and $0.8 million in Venezuela. Management considers access to European cash limited and earnings indefinitely reinvested; repatriation could result in approximately $0.8 million of tax. Venezuelan cash is difficult to repatriate.
Changes, outlook and risks
- In July 2011, the company renewed its credit facility. It spent $2.3 million on an acquisition during the quarter and reported a subsequent December 2011 acquisition of West Coast mechanical-services operations, financed with facility borrowings. The MD&A gives the December consideration as $17.5 million, while the note describes it as $17 million.
- No specific financial guidance is provided. Management stated that operating cash flow, the credit facility and other financing arrangements were believed sufficient to fund business needs. A Pasadena, Texas, TCM facility was under construction and scheduled for completion in February 2012.
- Foreign-exchange exposure affected comprehensive income: six-month foreign-currency translation losses in other comprehensive income were $6.3 million. Euro and Canadian-dollar exchange rates weakened against the U.S. dollar; Euro-denominated debt partly hedges the European investment. The company also has floating-rate debt and Venezuela-related currency and repatriation risk.
- Goodwill was $86.8 million at November 30, down from $89.5 million at May 31, primarily due to currency translation. Management reported no impairment indicators since its May 2011 annual test, while noting that weaker results, competition or execution could affect future impairment assessments.
- Team was named in 106 lawsuits arising from a 2007 Con Edison steam-main rupture, along with an indemnification claim. The company is defending the matters, could not estimate potential liability, and had not accrued amounts above its $250,000 insurance deductible. Management did not expect a material adverse effect.
- Management reported disclosure controls operating effectively at November 30, 2011, and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile the disclosed December acquisition consideration ($17 million in the note versus $17.5 million in MD&A) and assess resulting borrowing and integration effects.
- Track organic growth, pricing pressure, and whether gross-margin performance holds as acquisition contributions and maintenance demand change.
- Verify ongoing credit-facility availability, covenant headroom, variable-rate exposure, and the impact of letters of credit and subsequent acquisitions.
- Monitor receivables, unbilled revenue, and working-capital demands, which offset operating cash generation in the period.
- Follow the Con Edison litigation and indemnification claim, including any change in estimated exposure or insurance coverage.
- Assess foreign-exchange effects, access to overseas cash, and assumptions supporting goodwill valuations.