TEAM, Inc. (TISI) — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2012. The filing also reports fourth-quarter results for the three months ended May 31, 2012; it is not a calendar-year 2011 filing. Amounts below are in U.S. dollars.
Business context
TEAM provides specialty industrial inspection, maintenance, repair and related services for high-pressure and high-temperature piping systems and equipment. It reports one industrial services segment, organized into TCM (inspection, assessment and heat treating) and TMS (leak repair, emissions control, hot tapping, machining, bolting and valve repair). Services are labor-intensive and serve industries including refining, petrochemicals, power and pipelines.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $623.7 million | $508.0 million | +23% |
| Gross margin | $195.1 million; 31% of revenue | $157.1 million; 31% | +24%; margin flat |
| Operating income | $56.5 million | $42.5 million | +33% |
| Net income attributable to TEAM shareholders | $32.9 million | $26.6 million | +24% |
| Diluted EPS | $1.59 | $1.32 | — |
| Cash from operating activities | $36.7 million | $28.5 million | — |
| Capital expenditures | $23.9 million | $13.2 million | — |
Organic revenue growth was approximately 20%. TCM revenue rose 25% to $354.8 million and TMS revenue rose 20% to $268.9 million. Management attributed growth to strong service performance, turnaround work, expanded service capabilities and customer procurement consolidation. Operating cash flow included an $18.3 million working-capital increase, principally reflecting receivables and inventory growth.
Fourth quarter: Revenue was $187.9 million, operating income $24.2 million, net income attributable to TEAM shareholders $13.8 million, and diluted EPS $0.66. Compared with fourth-quarter FY2011, revenue increased from $161.6 million, operating income from $18.7 million, net income from $10.8 million and diluted EPS from $0.53.
At May 31, 2012, cash was $22.5 million, working capital $157.0 million, total assets $403.8 million and stockholders’ equity $245.0 million. Long-term debt was $85.9 million, up from $75.9 million; the company reported approximately $50.6 million of available borrowing capacity. The renewed $150 million credit facility matures in July 2016, bears interest at LIBOR plus 1.75%, and was in covenant compliance at year-end. Standby letters of credit were $13.5 million. Non-cancellable operating lease commitments totaled $36.1 million.
Material changes and unusual items
- TEAM completed two acquisitions for $19.4 million, funded through credit-facility borrowings. Preliminary purchase accounting included $8.9 million of goodwill; valuations remained subject to completion.
- Gross margin percentage remained 31%, while adjusted SG&A as a percentage of revenue declined to 22% from 23%. SG&A included a $0.8 million legal settlement, approximately $2.0 million of additional medical claims expense and about $0.7 million of acquisition and unsuccessful transaction-related professional fees.
- A $1.7 million fourth-quarter charge wrote off development costs after management abandoned plans to build a new facility on land near Houston. The land, valued at approximately $5.8 million, was classified as held for sale.
- Foreign-currency translation reduced other comprehensive income by $8.3 million. TEAM reported no significant currency transaction gains or losses for FY2012.
- No cash dividends were declared; the credit agreement requires bank-syndicate consent for dividends, and management stated it had no present intention to pay them in the foreseeable future.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or cash-flow guidance. Management described growth drivers but cautioned that results fluctuate with turnaround schedules, customer demand, service mix, pricing, staffing and project timing. Seasonal refinery shutdowns can materially affect revenue. Other principal risks include economic weakness and customer credit constraints, dependence on refining and petrochemical customers, competitive pricing pressure, short-notice contract termination, skilled-labor availability, safety incidents, environmental regulation, international operations and foreign exchange, acquisition integration, and insurance limitations.
- EPA matter: In July 2012, after fiscal year-end, TEAM negotiated a plea agreement and pleaded guilty to a misdemeanor Clean Air Act violation involving emissions-monitoring services. It agreed to implement an Environmental Compliance Plan. The penalty had not been determined; the stated maximum was probation of up to five years and a fine up to $200,000 or twice gross gain or victim loss. Management did not expect a material financial effect.
- Con Edison litigation: 106 lawsuits related to a 2007 steam-main rupture alleged TEAM’s temporary repair work may have contributed. TEAM also disputed Con Edison’s indemnification claim. The company could not estimate potential liability, had not accrued amounts above its $250,000 deductible and believed insurance should cover the claims; management did not expect a material adverse effect.
- TEAM has a $3 million self-insured retention per occurrence for general liability and disclosed that insurance may not cover all claims or losses.
- Cash in Europe and Venezuela was difficult to access or repatriate; repatriating European cash could trigger estimated tax consequences of $0.7 million.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal control were effective as of May 31, 2012.
Important facts for investors to verify
- Whether strong organic growth and fourth-quarter performance continued, and how much was driven by turnaround timing, acquisitions or recurring demand.
- Receivables, unbilled revenue ($20.6 million at year-end), working-capital needs and cash conversion as the business expands.
- Debt capacity and covenant headroom after acquisitions, letters of credit and planned capital spending.
- Final purchase-price allocations for FY2012 acquisitions and the performance-based obligation for Quest’s remaining 5% interest.
- Developments and financial exposure in the EPA plea matter and Con Edison litigation, including insurance coverage and any additional accruals.
- Execution of the Sugar Land office relocation and disposition of the land held for sale.