Business Context and Reporting Period
Company: TEAM, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2005
Business Overview: Team, Inc. is a provider of specialty industrial services including leak repair, hot tapping, emissions monitoring, field machining, and non-destructive testing. Following the sale of its Equipment Sales and Rental segment (Climax Portable Machine Tools, Inc.) on November 30, 2005, the Company now operates as a single segment focused on industrial services.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2005 | Six Months Ended Nov 30, 2005 |
|---|---|---|
| Revenues | $67,046,000 | $121,198,000 |
| Gross Margin | $23,404,000 (35%) | $40,687,000 (34%) |
| Operating Income | $7,087,000 | $8,772,000 |
| Net Income | $3,805,000 | $4,354,000 |
| Diluted EPS (Continuing Ops) | $0.41 | $0.47 |
| Cash and Equivalents | $2,855,000 | $2,855,000 (Ending Balance) |
| Total Debt | $53,003,000 | $53,003,000 (Total) |
| Working Capital | $50,800,000 | N/A |
Note: Net Income includes a loss of $26,000 from discontinued operations for the quarter and $6,000 for the six months.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 39% ($18.7M) for the quarter and 55% ($43.0M) for the six months compared to the prior year periods. This growth is driven by organic expansion and the full-year inclusion of the Cooperheat acquisition.
- Profitability: Operating income from continuing operations surged 143% for the quarter and 154% for the six months. Operating margins improved to 11% for the quarter (from 6% prior year) and 7% for the six months (from 4% prior year).
- Discontinued Operations: The Company sold its Climax segment for approximately $14.5 million in cash, recognizing a pre-tax gain of $1.5 million. This transaction resulted in a significant tax liability due to Section 338(h)(10) election, creating a $4.9 million differential between book and tax gain.
- Cash Flow: Operating cash flow from continuing operations was negative $2.8 million for the six months, primarily due to a $9.4 million increase in accounts receivable and $2.1 million increase in prepaid expenses (including insurance premiums). Investing activities generated a net positive $10.5 million due to the Climax sale proceeds, offset by $33.7 million in business acquisitions (Cooperheat) and capital expenditures.
Guidance, Outlook, and Risks
- Outlook: Management expects offsetting increases in work related to storm damage repairs (Hurricanes Katrina and Rita) over the next several quarters, which previously depressed revenues slightly. The Company anticipates continued market share growth driven by customer consolidation strategies.
- Liquidity: The Company maintains an $85 million credit facility ($60M revolving, $25M term). Approximately $14 million of the Climax sale proceeds were used to repay revolving debt. As of November 30, 2005, approximately $21 million was available to borrow. The Company is in compliance with its amended debt-to-EBITDA covenants (ratio less than 3.0 to 1).
- Risks and Contingencies:
- Legal Proceedings: Settled a $40 million property damage claim (Diamond Shamrock) funded by insurance. Settled a $1.8 million customer claim via pricing discounts. A lawsuit regarding the Thermal Solutions acquisition alleges damages over $1 million; management believes it has no liability.
- Receivables: Days Sales Outstanding (DSO) increased to 91 days from 82 days, partly due to a customer dispute on a major turnaround project.
- Accounting Standards: Adoption of SFAS 123(R) regarding share-based payments is required in fiscal 2007; management does not anticipate a material impact.
Investor Verification Checklist
- Receivables Quality: Verify the status of the $9.4 million increase in accounts receivable and the resolution of the customer dispute contributing to the DSO increase to 91 days.
- Tax Liability: Confirm the payment schedule for the approximately $2.2 million in taxes associated with the Climax sale, due in the third quarter of fiscal 2006.
- Debt Covenants: Monitor compliance with the debt-to-EBITDA ratio (currently < 3.0) and the impact of future EBITDA fluctuations on the credit facility.
- Legal Settlements: Review the final terms of the Diamond Shamrock and customer turnaround settlements to ensure no residual liabilities exist.
- Discontinued Operations: Confirm that no further adjustments are expected to the $14.5 million sale price of the Climax segment.