TISI

Business Context and Reporting Period

Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2009 (Six months ended November 30, 2009)
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.). Operations are conducted through two divisions: TMS (leak repair, hot tapping, etc.) and TCM (non-destructive testing, heat treating). Services are provided in over 100 locations globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 18% ($47.9 million) year-over-year. The TMS division saw a 27% decline, while the TCM division declined 9%. Management attributes this to the economic recession, customer project cancellations/delays, and reduced spending, particularly in the Canadian Oil Sands region.
• Margin Compression: Gross margin decreased 23% to $68.9 million. Gross margin percentage dropped from 33% to 31% due to pricing pressures and lower utilization levels.
• Operating Income: Operating income fell 54% to $12.9 million, driven by lower revenues and a $2.3 million non-routine pre-tax charge related to an internal investigation (see below).
• Debt Reduction: Total debt decreased by approximately $12.5 million compared to the prior fiscal year-end, with interest expense dropping 47% due to lower rates and reduced debt levels.
• Cash Flow: Operating cash flow improved to $14.0 million (up from $10.5 million), despite lower net income, due to working capital management and non-cash adjustments.

Guidance, Outlook, Risks, and Unusual Items

• Internal Investigation (FCPA): The company is conducting an internal investigation into allegations of improper payments by employees in Trinidad to foreign government officials, potentially violating the Foreign Corrupt Practices Act (FCPA).
  • Estimated improper payments: < $50,000 over five years.
  • Investigation costs incurred to date: ~$2.3 million (projected total ~$3.0 million).
  • Voluntary disclosure made to the DOJ and SEC; investigation expected to conclude in Q1 2010.
  • Management believes violations are limited in scope, but potential penalties cannot be estimated.
• Capital Expenditures: Anticipated capital expenditures for fiscal year 2010 are projected to be between $10 million and $15 million.
• Liquidity: The company maintains a $145 million revolving credit facility and a $15 million term loan. As of November 30, 2009, approximately $59.3 million of borrowing capacity remained available.
• Foreign Currency Risk: Significant operations in Europe and Canada expose the company to currency fluctuations. The company utilizes Euro-denominated debt as an economic hedge for European net investments. Venezuelan operations are subject to high inflation and repatriation risks.
• Legal Proceedings: Ongoing litigation related to a 2007 steam main rupture in New York City involving Consolidated Edison. The company intends to vigorously defend the claims and believes insurance will cover liabilities beyond the deductible.

Investor Verification Checklist

• FCPA Investigation Outcome: Monitor the conclusion of the internal investigation and any potential fines or sanctions from the DOJ or SEC.
• Canadian Oil Sands Activity: Verify the recovery of industrial activity in the Canadian Oil Sands region, which accounted for approximately half of the revenue decline.
• Utilization Rates: Assess whether pricing pressures and lower utilization levels persist or improve in the coming quarters.
• Debt Covenants: Confirm continued compliance with financial covenants under the Credit Facility, especially given the reduction in operating income.
• Capital Expenditure Execution: Track actual capital expenditures against the $10-15 million guidance for fiscal 2010.