Business Context and Reporting Period
Company: TEAM, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2006
Business Overview: Team, Inc. is a provider of specialty industrial services, including leak repair, hot tapping, emissions monitoring, field machining, and inspection services. Following the sale of its Equipment Sales and Rental segment (Climax) on November 30, 2005, the Company now operates as a single segment: Industrial Services.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 2006 | Nine Months Ended Feb 28, 2006 |
|---|---|---|
| Revenues | $62,630,000 | $183,828,000 |
| Gross Margin | $21,046,000 (33.6%) | $61,733,000 (33.6%) |
| Operating Income | $4,830,000 | $13,602,000 |
| Net Income | $2,279,000 | $6,633,000 |
| Diluted EPS | $0.25 | $0.72 |
| Cash and Equivalents | $3,525,000 | $3,525,000 (Ending Balance) |
| Total Debt | $55,656,000 | $55,656,000 (Total) |
| Working Capital | $56,595,000 | N/A |
Note: Total Debt includes $5,389,000 current portion and $50,267,000 long-term portion.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 21% ($10.97M) for the quarter and 42% ($53.99M) for the nine-month period compared to the prior year. Growth was driven by organic expansion and the full-year inclusion of the Cooperheat acquisition.
- Profitability: Operating income from continuing operations surged 128% for the quarter and 144% for the nine-month period. Net income increased 78% for the quarter and 122% for the nine-month period.
- Discontinued Operations: The Company sold its Climax segment in November 2005. The prior year periods included income from this segment, while the current period reflects only the industrial services segment.
- Debt Reduction: Proceeds from the Climax sale ($14.5M) were used to repay approximately $14M of revolving debt. Total debt decreased from $63.7M (May 2005) to $55.7M (Feb 2006).
- Cash Flow: Net cash provided by operating activities from continuing operations was $1.4M for the nine months ended Feb 28, 2006, compared to a use of $3.7M in the prior year period. This improvement was offset by a $7.1M increase in accounts receivable.
Outlook, Risks, and Management Commentary
- Market Drivers: Management attributes growth to robust customer profit margins in key segments, market share gains, and post-hurricane maintenance demand on the Gulf Coast.
- Segment Performance: The TMS (Team Mechanical Services) segment saw revenue growth of 14% (quarter) and 23% (nine months). The TCM (Team Cooperheat-MQS) segment grew 29% (quarter) and 61% (nine months), reflecting a rebound from bankruptcy-era lows.
- Liquidity: The Company maintains an $85M credit facility ($60M revolving, $25M term). As of Feb 28, 2006, approximately $14M was available to borrow. The Company is in compliance with all amended debt covenants.
- Risks and Contingencies:
- Accounts Receivable: Days Sales Outstanding (DSO) increased to 91 days from 82 days, indicating a lengthening collection cycle.
- Legal Proceedings: A lawsuit involving the estate of Robert Barker claims damages exceeding $1M related to a prior stock sale; management believes it has no liability.
- Self-Insurance: The Company retains significant risk for workers' compensation and auto liability claims.
- Accounting Changes: The Company is evaluating the impact of SFAS 123(R) regarding share-based payments, required for adoption in fiscal 2007.
Investor Verification Checklist
- Receivables Quality: Verify the trend in Days Sales Outstanding (DSO) and the adequacy of the allowance for doubtful accounts given the $7.1M increase in receivables.
- Debt Covenants: Confirm continued compliance with the debt-to-EBITDA ratio (currently capped at 3.75:1, reducing to 3.0:1 post-Climax sale) under the amended credit agreement.
- Discontinued Operations Tax Impact: Review the $2.2M tax payment associated with the Climax sale and the Section 338(h)(10) election implications.
- Capital Expenditures: Assess the $4.7M in capital expenditures, including the $0.9M Microsoft licensing note, against future cash flow projections.
- Legal Exposure: Monitor the status of the Barker estate lawsuit and any potential impact on the Company's indemnification obligations.