Business context and reporting period
TEAM, Inc. provides specialty inspection, integrity, maintenance and repair services to industrial customers, including refining, petrochemical, power and pipeline businesses. Its segments are Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity.
The 10-K reports the fiscal year ended May 31, 2015, with comparisons to fiscal 2014. Although the request metadata says “2014 Q4,” the filing covers fiscal 2015; its fourth-quarter data are for the three months ended May 31, 2015, compared with the three months ended May 31, 2014.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $842.0 million | $749.5 million |
| Gross profit / margin | $258.0 million / 30.6% | $221.9 million / 29.6% |
| Operating income / margin | $68.5 million / 8.1% | $53.4 million / 7.1% |
| Net income attributable to TEAM shareholders | $40.1 million | $29.9 million |
| Diluted earnings per share | $1.85 | $1.40 |
| Cash from operating activities | $43.5 million | $52.9 million |
| Capital expenditures | $28.8 million | $33.0 million |
| Cash and cash equivalents at year-end | $33.2 million | $34.7 million |
| Long-term debt at year-end | $78.5 million | $73.7 million |
| Working capital | $197.5 million | $173.7 million |
Year-end current assets were $288.7 million and current liabilities $91.2 million. Operating cash flow fell despite higher earnings, principally because working capital increased $27.4 million, including a substantial rise in receivables. The company reported $58 million of available capacity on its existing facility at year-end. Its subsequent credit agreement provides for a $300 million revolver and a $200 million term loan; proceeds partly funded the Qualspec acquisition.
Fourth-quarter FY2015 revenue was $238.7 million, operating income $25.0 million, and net income attributable to TEAM shareholders $15.4 million. For fourth-quarter FY2014, the corresponding figures were $211.5 million, $20.4 million, and $11.9 million.
Material changes versus the prior year
- Revenue rose 12%, and operating income increased 28%. All three segments grew: IHT revenue increased 14%, MS 9%, and Quest Integrity 13%.
- IHT benefited from stronger inspection and heat-treating activity. MS turnaround revenue increased 22%, while its on-stream revenue was roughly flat. Quest Integrity’s pipeline inspection growth was partly offset by a weak process inspection market and deferred turnarounds amid lower crude oil prices.
- Gross margin improved overall; management reported gains in IHT and Quest Integrity, with MS margin unchanged. Operating income included $3.2 million of non-routine costs in FY2015, versus a $1.4 million net benefit from non-routine items in FY2014.
- Foreign currency translation reduced comprehensive income: translation loss was $15.8 million in FY2015, compared with $1.6 million in FY2014. Foreign currency transaction losses in earnings were $1.5 million, down from $4.2 million.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management cited favorable market conditions and strong turnaround activity in FY2015, but noted that lower crude prices had contributed to process turnaround deferrals. Demand is also affected by the timing and scope of customer turnarounds and projects.
- After year-end, TEAM acquired Qualspec for $255 million in cash, subject to up to $10 million additional consideration. Management expected the business to add about $180 million of annual revenue and nearly 1,000 employees. A separate June 2015 valve-related acquisition cost $10.3 million, with up to $4 million of earn-out consideration.
- TEAM recorded a $1.2 million pre-tax loss related to changing its accounting for Venezuelan operations; it subsequently disposed of those operations with no gain or loss. Foreign exchange movements, including currency effects on revenue and operating income, remain a risk.
- The company is implementing a new ERP system, expected to be fully installed by the end of FY2017; $14.5 million had been capitalized through FY2015. Management identified implementation disruption and cybersecurity as risks.
- TEAM is defending 92 lawsuits arising from the 2007 Con Edison steam-main rupture and a related indemnification claim. The company could not estimate any liability, had accrued no amount beyond the $250,000 deductible, and did not expect a material adverse effect. Quest Integrity’s patent litigation also remains ongoing; preliminary injunction requests in two Delaware cases were denied in June 2015.
- Other principal risks include exposure to refining and petrochemical demand, competition and pricing pressure, short-notice contract termination, skilled labor availability, safety incidents, insurance limitations, and the possibility that acquisition integration or expected benefits fall short. The filing states that dividend payments are constrained by the credit agreement and that TEAM had no present intention to pay cash dividends.
Key facts investors should verify
- Reconcile the requested “2014 Q4” period with this FY2015 10-K and confirm the intended quarter and comparison period.
- Review receivables, collections and working-capital trends given the $27.4 million working-capital cash use and the increase in reported receivables.
- Assess the Qualspec acquisition financing, resulting debt and leverage, covenant requirements, integration progress and realized contribution against management’s expectations.
- Track foreign-currency exposure and the effect of currency movements on reported revenue, operating income and equity.
- Monitor the Con Edison claims, patent litigation and other contingencies; the filing does not quantify potential exposure for the Con Edison matter.
- Check progress and costs for the ERP implementation and whether the stated FY2017 completion target is maintained.