TEAM, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2011, the first quarter of fiscal 2012 (fiscal year ending May 31, 2012). Comparisons are with the three months ended August 31, 2010, unless stated otherwise. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
TEAM provides specialty inspection, maintenance and construction services for industrial piping systems and vessels, through more than 100 locations. It reports one industrial-services segment, organized into TCM and TMS divisions. The November 2010 Quest acquisition is included in TCM.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $141.1 | $104.5 | +35% |
| Gross margin | $44.4 | $31.5 | +41% |
| Gross margin percentage | 31.5% | 30.2% | +1.3 percentage points |
| Operating income | $11.8 | $6.7 | +74% |
| Net income attributable to TEAM shareholders | $6.8 | $3.8 | +79% |
| Diluted EPS | $0.33 | $0.20 | +$0.13 |
| Operating cash flow | $15.8 | $18.0 | -$2.3 |
| Capital expenditures | $5.3 | $2.3 | +$3.0 |
SG&A was $33.1 million, up 32%, but declined to 23% of revenue from 24%. Interest expense rose to $0.6 million from $0.4 million. The income tax provision was $4.1 million on $10.9 million of pretax income, versus $2.5 million on $6.3 million.
Balance sheet, debt and liquidity
- At August 31, cash was $21.3 million, total assets $348.5 million, and total liabilities $130.5 million.
- Total debt was approximately $72.8 million, down from $76.1 million at May 31, 2011. Long-term debt excluding current maturities was $72.7 million.
- Current assets were $181.2 million and current liabilities $46.9 million. Receivables were $128.2 million, including $13.7 million of unbilled revenue.
- The renewed revolving credit facility has capacity of up to $150 million, matures in July 2016, and carried a LIBOR-plus-1.75% margin at quarter-end. TEAM reported approximately $64 million of available borrowing capacity and compliance with all covenants.
- Operating cash flow was $15.8 million; investing activities used $5.8 million, primarily for capital expenditures; financing activities used $2.8 million, primarily for revolving-credit repayments. Cash increased $7.2 million to $21.3 million.
- Outstanding standby letters of credit were $13.5 million, reducing facility availability. Cash included $7.6 million in Europe and $0.8 million in Venezuela; management described access to these funds as limited. Repatriating European cash could result in approximately $0.7 million of adverse tax consequences.
Material changes and management commentary
- TCM revenue rose 30% to $77.0 million; Quest contributed $7.4 million. Excluding Quest, TCM organic growth was 17%.
- TMS revenue rose 42% to $64.1 million. Management attributed broad-based organic growth to new repair and upgrade projects and a return of previously deferred maintenance.
- Management said demand for higher-value inspection technology and volume leverage in TMS helped offset pricing pressure and improve gross margin.
- SG&A growth reflected compensation and insurance costs supporting organic growth and the addition of Quest. Higher interest expense reflected higher rates applied to increased borrowings.
- Operating cash flow was lower than the prior-year quarter despite stronger earnings; working-capital movements and increased capital spending were significant cash-flow considerations.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified outlook. Management said operating cash flows, the credit facility and other financing arrangements were believed sufficient for business needs.
- Risks discussed include foreign-exchange and floating-rate exposure, execution and market risks in goodwill valuations, and the difficulty of repatriating cash from Europe and Venezuela. A 10% change in the Venezuelan exchange rate used to value net assets would affect pretax earnings by $0.2 million.
- TEAM faced 106 lawsuits related to a 2007 Consolidated Edison steam-main rupture, along with Con Edison’s indemnification claim. The company said it could not estimate any liability, had not accrued amounts above its $250,000 deductible, and believed insurance should cover the claims; it did not expect a material adverse effect.
- Venezuela was treated as a hyperinflationary economy. Its official exchange rate remained unchanged during the quarter, and the company reported no Venezuelan currency gains or losses for the period.
- Management concluded disclosure controls were operating effectively as of August 31, 2011; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong revenue growth and improved margins persist, particularly after separating Quest’s contribution from organic growth.
- Whether receivables, unbilled revenue and working-capital movements support ongoing cash conversion.
- Available credit capacity and covenant headroom after accounting for letters of credit, and sensitivity to variable interest rates.
- Progress and potential exposure in the Consolidated Edison litigation and indemnification claim.
- Cash accessibility and currency, political and tax risks relating to Europe and Venezuela.