TEAM, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 28, 2014, with nine-month results compared with the periods ended February 28, 2013. The filing is for 2014, notwithstanding the request metadata’s “2013 Q3” label. TEAM provides specialty industrial inspection, integrity, turnaround and on-stream services to heavy industries.
Financial performance
| Metric | Three months ended February 28 | Nine months ended February 28 |
|---|---|---|
| Revenue | $163.2 million, up 8% | $538.0 million, up 5% |
| Gross margin | $41.7 million; 25.5% of revenue, versus 25.8% | $155.5 million; 28.9%, versus 29.4% |
| Operating income | $1.0 million, versus $0.6 million | $33.0 million, down 10% |
| Net income (loss) attributable to TEAM shareholders | $(1.0) million, versus $(0.5) million; diluted EPS $(0.05), versus $(0.03) | $17.9 million, versus $21.0 million; diluted EPS $0.84, versus $0.99 |
| Cash from operating activities | Not provided separately for the quarter | $39.5 million, versus $38.2 million |
| Capital expenditures | Not provided separately for the quarter | $23.8 million, versus $18.8 million |
At February 28, 2014, cash was $39.5 million and long-term debt was $83.6 million, compared with $34.2 million and $72.9 million, respectively, at May 31, 2013. The company reported approximately $53 million of available borrowing capacity under its $150 million revolving credit facility, which matures in July 2016. Current assets were $235.4 million and current liabilities $60.6 million. The facility’s variable rate was LIBOR plus 1.75%; $13.6 million of outstanding letters of credit reduced facility availability.
Changes and operating drivers
- Quarterly revenue growth was led by Quest, up 43%; IHT rose 5% and Mechanical Services (MS) rose 7%. By service type, turnaround revenue increased 15%, inspection and assessment 8%, and on-stream services 2%.
- Management attributed an estimated $6 million of quarterly revenue and $3–4 million of operating income impact to unusually severe, prolonged winter weather and related project delays and deferrals in the United States and Canada. IHT and MS operating income declined year over year; Quest improved.
- For the nine months, inspection and assessment revenue increased 11% and on-stream revenue 10%, while turnaround revenue declined 9%, reflecting fewer large projects in the first half. MS operating income fell $3.9 million; IHT improved $1.3 million and Quest was roughly flat.
- Nine-month operating income included a $2.1 million non-cash gain from revaluing TCI acquisition contingent consideration. It also included $0.7 million of first-quarter severance costs. Excluding these items, management said operating income declined $4.9 million.
- Cash from operations was largely offset by $33.6 million of investing outflows, including $23.8 million of capital spending and $10.2 million for acquisitions. Financing cash flow was $0.6 million, including $9.8 million of net facility borrowings and $13.3 million of share repurchases. Cash increased $5.3 million over the nine-month period.
Outlook, risks and contingencies
- The filing gives no specific revenue or earnings guidance. Management said it believes operating cash flows, cash on hand and facility capacity are sufficient to fund business needs.
- Planned spending included $10–12 million of ERP implementation costs over the following two years, with installation expected by the end of fiscal 2016, and an Alvin, Texas operations center expected to be completed in spring 2014 at an estimated total cost of $9 million.
- Venezuela’s currency environment is a material uncertainty. TEAM recorded a $1.9 million third-quarter foreign-currency loss after adopting the SICAD-1 exchange rate. Management had not decided whether to use SICAD-1 or the newer SICAD-2 rate; it warned that use of SICAD-2 could cause a further significant revaluation of Venezuelan net assets in the fourth quarter. Those net assets were $2.4 million at February 28.
- Foreign exchange exposure includes European and Canadian operations; nine-month foreign-currency translation losses in other comprehensive income were $2.9 million. Floating-rate debt also exposes the company to interest-rate risk.
- Ninety-five lawsuits relate to the 2007 Con Edison steam-main rupture and allege TEAM’s leak-repair work may have contributed. TEAM is also contesting Con Edison’s indemnification claim. The company cannot estimate any potential liability, has not accrued amounts beyond the insurance deductible, and believes the matter will not materially affect its financial position, results or cash flows.
- TEAM reported that disclosure controls were effective as of February 28, 2014 and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weather-related deferred work recovered and how project timing affected subsequent-period revenue and margins.
- Whether MS’s year-to-date operating-income decline and lower turnaround revenue persisted or reversed.
- Future Venezuela exchange-rate policy and its impact on reported results, asset values and cash repatriation.
- Facility availability, covenant headroom, debt levels and funding needs after capital spending, acquisitions and repurchases.
- Developments in the Con Edison litigation and indemnification matter, including insurance coverage and potential exposure.