TISI

Business Context and Reporting Period

Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2010
Business Overview: TEAM, Inc. is a leading provider of specialty maintenance and construction services for high-temperature and high-pressure piping systems and vessels in heavy industries (petrochemical, refining, power, etc.). The company operates globally through two divisions: TCM (Non-destructive Testing, Field Heat Treating) and TMS (Leak Repair, Hot Tapping, Field Machining, etc.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 4% ($3.6 million) driven by marginally improving market conditions and the startup of previously deferred maintenance activities across both TCM and TMS divisions.
• Profitability Surge: Operating income increased 154% ($4.1 million) and Net Income increased 238% ($2.7 million). This was primarily due to a 7% reduction in Selling, General, and Administrative (SG&A) expenses.
• SG&A Reduction: SG&A expenses decreased by $1.9 million. A significant portion of this decrease ($1.1 million) is attributable to non-routine costs associated with an FCPA investigation incurred in the prior year period that were not repeated in the current period.
• Debt Reduction: Total debt decreased by approximately $9.6 million due to repayments under the revolving credit agreement and term loans.
• Interest Expense: Interest expense dropped from $0.8 million to $0.4 million due to lower borrowing rates and reduced debt levels.

Guidance, Outlook, Risks, and Unusual Items

• Capital Expenditures: Management anticipates capital expenditures for fiscal year 2011 to be approximately $8–10 million.
• Stock Repurchase: On July 29, 2010, the Board authorized a $15 million stock repurchase program. As of August 31, 2010, the company repurchased 89,569 shares for $1.3 million.
• FCPA Investigation: The company is under review by the DOJ and SEC regarding an internal investigation into improper payments made by employees in Trinidad. The investigation concluded payments were limited in size (under $50,000 total) and scope. The company has expended approximately $3.2 million on legal fees related to this matter but has not recorded a provision for penalties as the outcome is uncertain.
• Venezuela Operations: Due to the hyperinflationary economy and political uncertainty in Venezuela, the company began accounting for these operations under specific guidance for such economies. Repatriation of cash flows from Venezuela is difficult.
• Legal Proceedings: The company is defending 105 lawsuits related to a 2007 steam main rupture in New York City involving a client (Con Ed). The company maintains insurance coverage and does not believe the outcome will have a material adverse effect.

Investor Verification Checklist

• FCPA Resolution: Monitor updates on the DOJ/SEC review regarding the Trinidad subsidiary to assess potential future penalties or settlements.
• Working Capital Trends: Verify the sustainability of the $10.1 million decrease in working capital that drove operating cash flow, specifically the reduction in receivables.
• Debt Covenants: Confirm continued compliance with financial covenants under the $145 million Credit Facility, particularly given the reduction in debt levels.
• Foreign Currency Exposure: Review the impact of currency fluctuations on European and Canadian operations, noting the use of Euro-denominated debt as a hedge.
• Stock Repurchase Execution: Track the execution of the remaining $13.7 million authorized under the new stock repurchase program.