TEAM, Inc. (TISI) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results. TEAM provides specialty industrial inspection, integrity and mechanical services through TeamQualspec, TeamFurmanite and Quest Integrity.
Financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $289.6 | $243.6 | $876.9 | $671.4 |
| Gross margin | $76.7 | $69.6 | $241.4 | $199.1 |
| Gross margin percentage | 26.5% | 28.6% | 27.5% | 29.7% |
| Operating income (loss) | $(4.0) | $6.9 | $2.6 | $36.6 |
| Operating margin | (1.4)% | 2.8% | 0.3% | 5.4% |
| Net income (loss) attributable to TEAM shareholders | $(4.2) | $2.5 | $(3.3) | $19.8 |
| Diluted EPS | $(0.14) | $0.12 | $(0.12) | $0.92 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $60.6 | $26.2 |
- Reported revenue rose 18.9% in Q3 and 30.6% year to date, principally due to acquisitions, including Furmanite. On a pro forma basis assuming acquisitions from the start of 2015, revenue declined 11.6% in Q3 and 9.8% year to date.
- Capital expenditures were $35.9 million year to date, including $14.7 million for the ERP project. Operating cash flow less capital expenditures was approximately $24.8 million.
- At September 30, cash was $38.2 million; debt was $388.8 million, comprising $20.0 million current and $368.8 million long-term. The company reported approximately $35 million of available borrowing capacity. Cash declined from $44.8 million at December 31, 2015.
- Current assets were $428.3 million and current liabilities $152.6 million. These balances include assets and liabilities of discontinued operations held for sale.
Material changes and operating performance
- Furmanite was acquired on February 29, 2016, with consideration valued at $282.3 million, including 8.2 million TEAM shares and $70.8 million cash. Furmanite contributed $152.3 million of revenue and a $1.7 million net loss year to date, limited to directly attributable legacy operations.
- Q3 TeamQualspec revenue fell 9.4% and Quest Integrity revenue fell 8.3% year over year; TeamFurmanite revenue increased 89.4%, largely reflecting Furmanite. Year-to-date, TeamQualspec and Quest Integrity operating income declined, while TeamFurmanite operating income increased.
- Management attributed weaker underlying activity to market softness, project deferrals, scope reductions and maintenance deferrals. Heat-treating sales volumes were down approximately 45% in Q3 and 41% year to date on a pro forma basis. Louisiana flooding affected the TeamQualspec and TeamFurmanite segments; Canadian oil sands wildfires also affected results earlier in 2016.
- Lower activity and a shift away from higher-margin advanced and specialty services pressured gross margins. Corporate and shared support costs also increased, including costs absorbed from Furmanite.
- Interest expense increased to $3.2 million in Q3 and $9.6 million year to date, mainly reflecting acquisition-related borrowing.
Outlook, risks and unusual items
- Management expected market headwinds to continue through the remainder of 2016, while noting early indications that conditions might be starting to improve. The filing provides no quantitative earnings or revenue guidance.
- Q3 included $6.0 million of identified non-routine costs, including ERP implementation, acquisition-related costs, intellectual-property legal costs and accelerated vesting compensation. Year-to-date non-routine costs totaled $21.7 million. These amounts are management-identified costs, not reported adjusted earnings.
- The credit facility matures in July 2020, carries variable-rate debt (LIBOR plus 2.25% at quarter-end), and includes leverage covenants that become more restrictive over time. TEAM stated it was in compliance at September 30, 2016. Outstanding standby letters of credit were $22.2 million and reduce facility availability.
- A Furmanite pipeline-inspection business, with approximately $60 million in annual revenue, was classified as discontinued operations and held for sale; TEAM said it expected to complete a sale within one year of the acquisition. It generated $0.3 million of after-tax income in Q3 and $0.8 million year to date.
- Furmanite purchase accounting remained provisional. A measurement-period adjustment increased deferred tax liabilities and goodwill by $47.9 million, principally reflecting foreign-subsidiary earnings not considered indefinitely reinvested.
- Contingencies include 92 pending lawsuits related to the 2007 Con Edison steam-main rupture; the company could not estimate its potential liability and reported no accrual above the deductible. TEAM also disclosed patent litigation, with Delaware cases expected to proceed to trial in Q2 2017.
- The ERP system was expected to be installed by the end of 2017; $40.5 million had been capitalized through September 30, 2016.
Important facts for investors to verify
- Whether underlying demand and margins improve, given pro forma revenue declines and management’s expectation that market pressure would persist through year-end.
- Available credit and covenant headroom, including the effect of $22.2 million in letters of credit and the facility’s progressively tighter leverage limits.
- Furmanite integration progress, remaining purchase-accounting adjustments, and the planned sale and final results of the discontinued pipeline-inspection business.
- Future ERP spending and implementation timing, and whether acquisition, integration and other non-routine expenses continue.
- Developments in the Con Edison and patent matters, and any resulting changes to potential exposure or insurance coverage.