TEAM, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 28, 2013, and nine months ended that date; comparisons are to the corresponding prior-year periods. The filing is for fiscal 2013, notwithstanding the request metadata’s “2012 Q3.” TEAM provides specialty industrial maintenance and inspection services through its TCM and TMS divisions, operating in more than 125 locations. Figures below are in millions of dollars except per-share data.
Key financial results
| Metric | Three months ended Feb. 28, 2013 | Prior-year quarter | Nine months ended Feb. 28, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $151.0 | $136.5 | $513.1 | $435.9 |
| Gross margin | $38.9; 26% of revenue | $36.6; 27% | $150.9; 29% | $131.5; 30% |
| Operating income | $0.6 | $3.5 | $36.5 | $32.3 |
| Net income (loss) attributable to TEAM shareholders | $(0.5); $(0.03) per diluted share | $2.0; $0.10 | $21.0; $0.99 | $19.1; $0.93 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $38.2 | $32.6 |
Quarterly SG&A was $38.3 million, or 25% of revenue, versus $33.2 million, or 24%, a year earlier. Nine-month SG&A was $115.3 million versus $100.1 million. Nine-month net income was $21.1 million before $0.2 million attributable to non-controlling interests. Quarterly pretax loss was $0.9 million; the income-tax provision was a $0.3 million benefit.
Balance sheet, liquidity and cash flow
- At February 28, cash and cash equivalents were $36.4 million; current assets were $234.1 million and current liabilities $55.2 million.
- Long-term debt was $89.1 million, all classified as long term. The $150 million multi-currency credit facility matures July 2016, bears variable-rate interest (LIBOR plus 1.75% at period-end), and had approximately $46 million of available borrowing capacity. TEAM reported compliance with its covenants and no mandatory payments before maturity.
- Nine-month cash flows: $38.2 million provided by operations, $36.3 million used in investing (including $18.8 million of capital expenditures and $18.6 million for acquisitions), and $12.1 million provided by financing. Cash increased $13.9 million to $36.4 million.
- Cash includes $16.9 million at foreign subsidiaries considered indefinitely reinvested; estimated adverse tax consequences on repatriation were approximately $1.3 million. Repatriating Venezuelan cash was also described as difficult.
Material changes and management commentary
- Quarterly revenue grew 11%, but operating income fell to $0.6 million and TEAM shareholders recorded a net loss. Management attributed lower gross-margin percentage primarily to underutilization in Canadian operations amid declining revenue; higher business-development costs contributed to SG&A growth.
- TCM quarterly revenue rose 19% to $91.4 million, led by inspection and assessment demand; TMS revenue declined 1% to $59.5 million. Canadian and European revenue declined about 14% combined, or approximately $4 million, with Canadian oil-sands project activity a key factor.
- For nine months, revenue increased 18%. TCM revenue rose 28% to $312.1 million, including strong inspection and assessment demand; TMS revenue rose 5% to $201.0 million. Gross-margin percentage eased to 29% from 30%.
- Two fiscal-2013 acquisitions—the New Zealand inspection business and TCI Services, an above-ground storage-tank inspection and repair company—had combined consideration of approximately $27 million, subject to adjustments and contingent payments. The filing reported approximately $24 million of combined revenue in their most recently completed fiscal years.
Outlook, risks and unusual items
- No specific revenue, earnings, margin, or capital-spending guidance is provided. Management stated that operating cash flow, the credit facility, vendor financing, and leasing arrangements were believed sufficient for business needs; forward-looking statements remain subject to risks and uncertainties.
- The February 2013 Venezuelan bolivar devaluation resulted in a $0.6 million pretax foreign-currency loss in the quarter. TEAM reported $2.8 million of Venezuelan net assets, primarily bolivar-denominated receivables, and noted that a 10% exchange-rate change would affect pretax earnings by $0.3 million.
- TEAM faces 95 lawsuits related to the 2007 Con Edison steam-main rupture and a related indemnification claim. The company could not estimate its potential liability, had not accrued amounts above the $250,000 insurance deductible, and stated that it did not expect a material adverse effect.
- In a separate environmental matter, TEAM pleaded guilty to a misdemeanor Clean Air Act violation, was fined $200,000, and was placed on five years’ probation; it is implementing an environmental compliance plan.
- Foreign-currency exposure, variable interest rates, acquisition integration and valuation, self-insured claims, and reliance on estimates are additional matters to monitor. Management reported disclosure controls operating effectively and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether the revenue growth and inspection-services demand continue, particularly given weaker Canadian and European activity and the quarter’s reduced margin.
- Drivers of the sharp quarterly decline in operating income and the extent to which business-development costs and Canadian underutilization persist.
- Credit-facility availability after letters of credit, covenant headroom, and exposure to variable interest rates; the filing disclosed $15.3 million of outstanding standby letters of credit.
- Acquisition performance, deferred and contingent consideration, and the assumptions supporting acquired goodwill and intangible assets.
- Developments in the Con Edison litigation and indemnification claim, and compliance with the EPA-related probation and environmental plan.
- Foreign-currency developments, especially in Venezuela, and the practical availability of cash held by foreign subsidiaries.