Business Context and Reporting Period
Company: TEAM, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: May 31, 2002
Business Overview: Team, Inc. is a full-service provider of specialized industrial services, including leak repair, hot tapping, emissions control monitoring, field machining, and non-destructive testing (NDT). The company operates in two segments: Industrial Services and Equipment Sales and Rentals (via its subsidiary, Climax Portable Machine Tools, Inc.). Operations are conducted in approximately 40 locations across the United States, with limited international presence.
Key Financial Metrics
| Metric | Fiscal 2002 | Fiscal 2001 | Change |
|---|---|---|---|
| Revenues | $85,081,000 | $75,643,000 | +12.5% |
| Net Income | $3,909,000 | $2,740,000 | +42.7% |
| Earnings Per Share (Diluted) | $0.48 | $0.34 | +41.2% |
| Operating Profit (EBIT) | $7,238,000 | $5,833,000 | +24.1% |
| Gross Margin | 41.7% | 40.4% | +1.3 pts |
| Operating Cash Flow | $5,281,000 | $4,586,000 | +15.2% |
| Total Debt (Long-term + Current) | $13,490,000 | $15,067,000 | -10.5% |
| Working Capital | $18,693,000 | $16,801,000 | +11.3% |
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by the Industrial Services segment, specifically "newer services" (NDT inspection, field machining, technical bolting) which grew 43.5% year-over-year. Traditional services grew only 1.8%.
- Segment Performance: The Equipment Sales and Rentals segment (Climax) rebounded from a loss in 2001 to an operating profit of $547,000 in 2002, aided by a $700,000 shipment to the U.S. Navy in the fourth quarter.
- One-Time Charges: Operating profits were reduced by a $368,000 non-cash charge related to CEO stock option vesting and a $173,000 severance charge in the Climax segment. Conversely, 2001 profits benefited from $278,000 in gains on asset sales.
- Debt Reduction: Total outstanding debt decreased by $1.6 million due to strong cash flow from operations.
- Stock Repurchases: The company repurchased 435,000 shares of common stock for approximately $2.0 million during the fiscal year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Commentary: Management attributes success to the quality of technicians, proprietary techniques, and the ability to perform on-stream repairs. Demand for traditional services is linked to the operating performance of customers in the refining and petrochemical sectors. Management expects sufficient funds to meet liquidity needs via cash flows and available borrowings.
Risks and Contingencies:
- Legal Proceedings: A jury verdict in May 2002 resulted in a $300,000 judgment against the company regarding an employment case; management believes an adequate accrual has been made. The company is also a defendant in a lawsuit regarding alleged illegal hazardous waste disposal by a former subsidiary (French Ltd.), though it denies liability and cannot estimate potential loss.
- Market Risk: The company has $13.5 million in floating-rate debt. A 1% increase in interest rates could increase annual interest expense by $100,000, partially mitigated by an interest rate swap covering $2.9 million of debt.
- Accounting Changes: The company will adopt SFAS No. 142 effective June 1, 2002, which will cease the amortization of goodwill ($10.0 million recorded) and require annual impairment testing instead.
Investor Verification Checklist
- Legal Exposure: Verify the status of the $300,000 employment judgment and the potential liability regarding the French Ltd. hazardous waste lawsuit.
- Goodwill Impairment: Monitor the impact of the upcoming adoption of SFAS No. 142 on the $10.0 million goodwill balance, as amortization will cease and impairment testing will begin.
- Customer Concentration: Confirm that no single customer accounts for more than 10% of revenue, as stated, given the heavy reliance on the chemical and refining industries.
- Debt Covenants: Review compliance with the $24 million credit facility covenants, which restrict dividends and limit additional indebtedness.
- Stock Option Impact: Assess the future impact of the modified CEO stock option vesting schedule, which fixes future non-cash compensation expense at $750,000 over six years.