TEAM, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2014. The filing also reports fourth-quarter results; it is not a filing for a calendar 2013 fourth quarter.
Business context
Team provides specialty industrial inspection, integrity management, heat-treating, mechanical maintenance and on-stream services to refining, petrochemical, power, pipeline and other heavy-industry customers. Effective July 1, 2013, it reorganized into three reportable groups: Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity. No customer represented 10% or more of consolidated revenue.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $749.5 million | $714.3 million |
| Gross profit / margin | $221.9 million / 29.6% | $213.0 million / 29.8% |
| Operating income / margin | $53.4 million / 7.1% | $55.6 million / 7.8% |
| Net income attributable to Team shareholders | $29.9 million | $32.4 million |
| Diluted EPS | $1.40 | $1.53 |
| Cash from operations | $52.9 million | $58.6 million |
| Capital expenditures | $33.0 million | $26.1 million |
FY2014 revenue rose 5%, while operating income fell 4% and shareholder net income fell 8%. IHT revenue increased 7% to $408.3 million, MS was nearly flat at $275.3 million, and Quest Integrity grew 15% to $65.9 million. IHT inspection revenue benefited from stronger NDE activity; heat treating and project-related turnaround work declined. MS on-stream revenue grew, but turnaround revenue fell.
Fourth-quarter FY2014 revenue was $211.5 million, operating income $20.4 million, shareholder net income $11.9 million and diluted EPS $0.56. In Q4 FY2013, those figures were $201.2 million, $19.1 million, $11.5 million and $0.54, respectively.
Liquidity, debt and capital allocation
- At May 31, 2014, cash was $34.7 million, working capital $173.7 million and long-term debt $73.7 million; reported available borrowing capacity was approximately $63 million.
- The $150 million multi-currency credit facility matures in July 2016, has no mandatory payments before maturity, and carried a LIBOR-plus-1.75% margin at year-end. Outstanding letters of credit were $13.6 million.
- Operating cash flow was $52.9 million; investing activities used $40.6 million, including $33.0 million of capital expenditures and $10.2 million for acquisitions. Financing activities used $9.6 million, including $13.3 million for share repurchases.
- The Board increased the repurchase authorization to $50 million in June 2014, inclusive of the $13.3 million already repurchased. The company paid no dividends and stated that bank consent is required for cash dividends.
Outlook, commentary and risks
- No consolidated revenue or earnings guidance is provided. Management expected FY2015 effective tax rates of approximately 36% and noted that some Quest Integrity projects deferred from Q4 were expected in FY2015.
- Management cited a $2.1 million non-cash gain from revaluing contingent consideration, partly offset by a $4.2 million foreign-currency transaction loss. Venezuelan currency revaluations accounted for $4.0 million of the currency loss; the subsidiary’s remaining net assets were $0.7 million.
- Quest Integrity’s engineering and development costs rose 36% to $4.9 million as the company invested in next-generation tools. A new ERP system was underway, with completion expected by the end of FY2016; $4.7 million had been capitalized by year-end.
- Key risks include exposure to refining and petrochemical demand and project timing, competitive pricing, workforce availability and safety, contract termination on short notice, foreign exchange and political risks, and acquisition integration. A Con Edison-related matter involved 95 lawsuits; the company said it could not estimate its potential liability, had not accrued amounts beyond the deductible, and believed insurance should cover the claims.
Most important facts for investors to verify
- Whether the turnaround/project revenue weakness and deferred Quest projects reversed in FY2015, and how segment growth translated into margins.
- The sustainability of operating cash generation relative to elevated capital spending, acquisition needs and share repurchases.
- Credit-facility availability, covenant headroom, refinancing plans before July 2016, and the treatment of outstanding letters of credit.
- The financial impact of Venezuelan currency changes, cash repatriation constraints and other foreign-exchange exposures.
- Developments in the Con Edison litigation and insurance coverage, as well as the value and potential share dilution associated with Quest’s remaining 5% interest.