Business context and reporting period
TEAM, Inc. (NYSE: TISI) provides specialty industrial inspection, maintenance and mechanical services to refining, petrochemical, power, pipeline and other heavy industries. This 10-K reports fiscal 2013, the year ended May 31, 2013; it also includes unaudited fourth-quarter results for the quarter ended May 31, 2013, compared with the year-earlier quarter.
During fiscal 2013 the company reported one industrial-services segment, organized into TCM and TMS divisions. Effective July 1, 2013, it reorganized into three reportable segments: Inspection and Heat Treating, Mechanical Services, and Quest Integrity.
Financial results and position
Unless noted otherwise, amounts are in millions of dollars. Fiscal-year income-statement figures are for the years ended May 31.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $714.3 | $623.7 | +15% |
| Gross margin | $213.0 | $195.1 | +9%; margin rate about 29.8% vs. 31.3% |
| Operating income | $55.6 | $56.5 | -2%; operating margin about 7.8% vs. 9.1% |
| Net income attributable to TEAM shareholders | $32.4 | $32.9 | -1%; diluted EPS $1.53 vs. $1.59 |
| Operating cash flow | $58.6 | $36.7 | Increased |
| Capital expenditures | $26.1 | $23.9 | Increased |
Revenue growth was led by inspection and assessment (+29%, to $338.3 million); turnaround services rose 7% to $231.9 million, while on-stream services declined 1% to $144.1 million. TCM revenue increased 23% to $438.0 million, including Quest Integrity revenue of $57.4 million, up 42%. TMS revenue increased 3% to $276.4 million.
For the fourth quarter of fiscal 2013, revenue was $201.2 million versus $187.9 million a year earlier; operating income was $19.1 million versus $24.2 million, and net income attributable to shareholders was $11.5 million versus $13.8 million. Quarterly results were uneven: fiscal Q3 recorded operating income of $0.6 million and a shareholder net loss of $0.5 million.
At May 31, 2013, cash was $34.2 million, working capital $174.1 million, total assets $460.2 million and shareholders’ equity $292.2 million. Long-term debt was $72.9 million, down from $85.9 million. The $150 million revolving credit facility matures in July 2016; the company reported approximately $64 million of available capacity, after facility usage and outstanding letters of credit. Operating cash flow funded much of the year’s $42.9 million of investing outflows, including $26.1 million of capital expenditures and $18.6 million for acquisitions. No cash dividends were paid; the credit agreement restricts dividends without lender consent.
Material changes, outlook and risks
- Management attributed the lower gross margin rate to higher indirect costs in the second half and fewer very large spring turnaround projects than in spring 2012. SG&A increased 13% to $158.4 million.
- Fiscal 2013 acquisitions included a New Zealand video-inspection business for about $3.0 million and TCI Services, an above-ground storage-tank inspection and repair company, for about $23.2 million, including deferred consideration. Their combined unaudited annual revenue was approximately $24 million.
- No specific financial guidance or quantified forecast is provided in the filing. Management described expected demand drivers as inspection needs, facility turnarounds and maintenance of operating infrastructure; results remain sensitive to turnaround timing and project mix.
- Key business risks include exposure to refining and petrochemical demand, competitive pricing and margin pressure, short-notice customer contract termination, skilled-labor availability, safety incidents, international operations and foreign-exchange volatility.
- Venezuela’s February 2013 currency devaluation caused a $0.6 million pretax loss. Management cautioned that further devaluation could cause additional impairment; Venezuelan cash is difficult to repatriate. Foreign earnings of $14.4 million were considered permanently reinvested.
- The company faces 95 lawsuits related to the 2007 Con Edison steam-main rupture and a related indemnification claim. It could not estimate potential liability, had accrued no amount above the $250,000 deductible, and believed insurance should cover the claims; management did not expect a material adverse outcome.
- In a separate EPA matter, the company pleaded guilty to a misdemeanor Clean Air Act violation concerning emissions-monitoring services, paid a $200,000 fine and was placed on five years’ probation. It is implementing an environmental compliance plan.
- Other items to monitor include $58.2 million of operating lease commitments, $13.1 million of outstanding letters of credit, and the post-year-end acquisition of Global Ascent for $10 million plus up to $4 million contingent on future performance.
Investor verification points
- Verify whether margin and operating-income pressure persists as turnaround activity and indirect costs fluctuate.
- Review segment-level results after the July 2013 reorganization and assess integration and returns from recent acquisitions.
- Monitor cash conversion, receivables and unbilled revenue ($25.5 million at year-end), capital spending, and remaining credit-facility availability.
- Track the Con Edison litigation and insurance coverage, EPA probation and compliance plan, and any related accrual changes.
- Assess exposure to Venezuelan currency changes, cash repatriation constraints, and foreign-currency effects.