Business context and reporting period
Team, Inc. (NYSE: TISI) provides specialty industrial inspection, assessment, turnaround and on-stream services to heavy industries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. The company changed its fiscal year-end to December 31 and recast comparative information accordingly. Furmanite, acquired February 29, 2016, is included from its acquisition date.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $336.4 | $235.4 | $587.3 | $427.8 |
| Gross margin | $98.7 (29.3%) | $75.5 (32.1%) | $164.7 (28.0%) | $129.5 (30.3%) |
| Operating income | $14.0 (4.2%) | $22.0 (9.4%) | $6.6 (1.1%) | $29.7 (7.0%) |
| Net income attributable to Team shareholders | $7.4 | $13.9 | $0.9 | $17.2 |
| Diluted EPS | $0.25 | $0.65 | $0.03 | $0.80 |
| Operating cash flow | Not reported separately | Not reported separately | $38.1 | $21.7 |
Six-month capital expenditures were $21.9 million, including $9.3 million for the ERP project; cash used in investing was $64.0 million, including $48.4 million for acquisitions. Cash and cash equivalents were $65.4 million at June 30. Long-term debt was $425.7 million, including $20.0 million current; cash less reported debt implies net debt of about $360.3 million. The company reported approximately $29 million of available credit-facility borrowing capacity. Working capital was $330.6 million, including current assets and liabilities of discontinued operations.
Material changes versus the prior comparable period
- Reported revenue rose 42.9% in Q2 and 37.3% for the six months, primarily due to the Furmanite and Qualspec acquisitions. On a pro forma basis assuming both acquisitions from the start of 2015, revenue declined $34.2 million in Q2 and $62.1 million for the six months.
- Management cited continuing market softness across all three segments, with customer project deferrals and reductions in project scope, size or duration. It expected these headwinds to continue through the remainder of 2016.
- Operating income fell 36.4% in Q2 and 77.7% for the six months. Excluding management-identified non-routine items, operating income declined 24.3% and 37.4%, respectively. Management attributed the underlying decline to market softness and higher corporate and shared-support costs, partly reflecting Furmanite and increased share-based compensation.
- Quest Integrity revenue declined 18.9% in Q2 and 16.1% for the six months; segment operating income fell 52.2% and 69.2%, respectively. TeamQualspec revenue increased, but operating income declined. TeamFurmanite revenue and operating income increased, substantially reflecting the acquisition.
- Interest expense rose to $3.4 million in Q2 and $6.3 million for the six months, primarily due to acquisition-related borrowing. Six-month net income was also affected by very low pretax continuing-operations income; the 3.1% effective tax rate reflected tax-related discrete items, including an IRS settlement.
Outlook, risks and unusual items
- Management said it expected market headwinds to persist through 2016. It provided no specific revenue or earnings guidance in the supplied filing text.
- The $600 million credit facility matures in July 2020 and bears interest at LIBOR plus 2.25% at June 30. The company said it was in compliance with its financial covenants, but planned to seek an amendment deferring until September 30, 2017 the scheduled step-down in the maximum total-leverage ratio from 4.00:1.00. Floating-rate debt creates interest-rate exposure.
- Outstanding standby letters of credit were $22.5 million and reduce credit availability. Approximately $14.9 million of cash was held in foreign subsidiaries and considered indefinitely reinvested, limiting access and potentially incurring taxes if repatriated.
- Current-period non-routine operating expenses included acquisition and fiscal-year-change costs, ERP implementation, a $2.2 million contingent-consideration revaluation, intellectual-property defense costs and costs associated with an Alberta wildfire. For the six months, management identified total non-routine expenses of $15.7 million.
- The Furmanite acquisition’s purchase-price allocation remained provisional. A measurement-period adjustment increased deferred tax liabilities and goodwill by $47.9 million. The acquired pipeline inspection business, generating approximately $60 million of annual revenue, was classified as discontinued operations and was being marketed for sale; the company expected to complete a sale within one year of the acquisition.
- Ninety-two lawsuits related to the 2007 Con Edison steam-main rupture remained pending; Team said it could not estimate its liability, had not accrued amounts beyond the deductible, and anticipated trial in the first half of 2017. Quest Integrity’s patent cases also remained pending, with Delaware trials expected in first-quarter 2017; the Washington case had no trial date.
- After quarter-end, the company disclosed an estimated $0.6 million pretax third-quarter charge related to accelerated vesting of certain awards for its former Executive Chairman, who became a non-employee director and Board Chairman.
Important facts for investors to verify
- Progress on the proposed credit-facility amendment, covenant headroom, and the effect of variable-rate debt and letters of credit on liquidity.
- Whether acquired-business integration and cost savings can offset continued market weakness, corporate costs and lower Quest Integrity performance; compare reported growth with pro forma contraction.
- Cash conversion and working-capital trends, particularly receivables and unbilled revenue, which rose to $73.3 million from $47.1 million at year-end.
- Final Furmanite purchase-price allocation, sale timing and proceeds for the discontinued pipeline inspection business, and contingent-consideration revaluations.
- Developments in the Con Edison and patent litigation, and any changes to estimated exposure or insurance coverage.