Business Context and Reporting Period
Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2010 (Third Quarter of Fiscal Year 2010)
Business Overview: TEAM, Inc. is a leading provider of specialty maintenance and construction services for high-temperature and high-pressure piping systems and vessels in heavy industries (petrochemical, refining, power, etc.). Operations are conducted through two divisions: Technical Maintenance Services (TMS) and Technical Consulting & Maintenance (TCM).
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 2010 | Nine Months Ended Feb 28, 2010 | Balance Sheet (Feb 28, 2010) |
|---|---|---|---|
| Revenues | $104.1 million | $328.3 million | N/A |
| Gross Margin | $28.5 million (27.4%) | $97.4 million (29.7%) | N/A |
| Operating Income | $2.1 million | $15.0 million | N/A |
| Net Income (Loss) | $(0.4) million | $6.5 million | N/A |
| Diluted EPS | $(0.02) | $0.34 | N/A |
| Cash & Equivalents | N/A | N/A | $14.2 million |
| Total Debt | N/A | N/A | $58.0 million |
| Operating Cash Flow | N/A | $34.1 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Nine-month revenues decreased 13% ($48.0 million) compared to the prior year, driven primarily by a 22% decline in the TMS division due to reduced activity in the Canadian Oil Sands and general economic recession effects. The TCM division saw a smaller 4% decline.
- Profitability Pressure: Operating income for the nine months dropped 52% to $15.0 million. Gross margin percentage declined from 32% to 30% due to pricing pressures and lower absorption of indirect costs.
- Foreign Currency Impact: The company recorded a $2.0 million foreign currency transaction loss for the nine months, primarily due to the devaluation of the Venezuelan Bolivar. Venezuela is now treated as a highly-inflationary economy, causing currency fluctuations to be recorded directly in operations.
- Debt Reduction: Total debt decreased significantly from $81.5 million (May 31, 2009) to $58.0 million (Feb 28, 2010), resulting in lower interest expense ($2.2 million vs. $4.0 million for the nine-month period).
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The company incurred $2.8 million in non-routine pre-tax charges related to an internal investigation into potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) regarding improper payments in Trinidad. Management believes the violations were limited in scope (under $50,000 in payments) but legal costs are projected to reach $3.0 million.
- Legal Proceedings: The company is defending approximately 100 lawsuits related to a 2007 steam main rupture in New York City involving Consolidated Edison. Management does not expect a material adverse effect but cannot estimate potential liability.
- Capital Expenditures: Management anticipates capital expenditures for the full fiscal year 2010 to be approximately $8–10 million.
- Liquidity: The company maintains approximately $65.2 million in available borrowing capacity under its credit facility. Cash repatriation from Europe and Venezuela is restricted or difficult due to tax consequences and political/economic climates.
- Outlook: Management notes that the economic recession continues to result in customers aggressively managing project scopes and delaying maintenance. No specific forward-looking revenue guidance was provided in this filing.
Investor Verification Checklist
- FCPA Investigation Status: Verify the outcome of the DOJ and SEC review regarding the Trinidad subsidiary and potential penalties beyond the $3.0 million in legal costs.
- Venezuela Exposure: Monitor the volatility of the Venezuelan Bolivar and its impact on future earnings, given the $1.1 million in net assets and the shift to "parallel" exchange rate accounting.
- Canadian Oil Sands Activity: Assess the recovery of project volumes in the Canadian Oil Sands, which was a primary driver of the revenue decline in the TMS division.
- Debt Covenants: Confirm continued compliance with financial covenants under the $145 million revolving credit facility, especially given the reduction in operating income.
- Con Ed Litigation: Track developments in the New York steam main rupture lawsuits to ensure insurance coverage remains sufficient and no material liability accruals are required.