TEAM, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. TEAM provides specialty industrial inspection, assessment, turnaround, and on-stream services. The company changed its fiscal year-end to December 31 in 2015 and recast prior-period comparisons accordingly. Financial statements are unaudited.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $250.9 million | $192.4 million |
| Gross margin | $66.0 million; 26.3% | $54.0 million; 28.1% |
| Operating income (loss) | $(7.4) million; (2.9%) | $7.7 million; 4.0% |
| Net income (loss) attributable to TEAM shareholders | $(6.4) million | $3.3 million |
| Diluted earnings (loss) per share | $(0.27) | $0.15 |
| Operating cash flow | $21.5 million | $9.9 million |
| Capital expenditures | $11.6 million | $7.6 million |
At March 31, 2016, cash and cash equivalents were $88.3 million, with an additional $5.0 million classified as restricted cash. Total debt was $436.9 million, comprising $20.0 million current and $416.9 million long-term. TEAM reported approximately $57 million of available borrowing capacity and said it was in compliance with its credit-facility covenants. Total assets were $1.18 billion and total equity was $549.2 million.
Changes versus the prior period
- Revenue rose 30.4%, but approximately $70.3 million came from acquisitions completed during the past year. Excluding acquisitions and a $2.6 million adverse foreign-exchange effect, revenue declined $9.3 million; management attributed the weakness to softer markets, deferred projects, and reduced project scope, size, or duration.
- Operating results swung to a loss. TEAM cited market weakness and a $3.6 million increase in corporate and shared-support costs, in addition to non-routine expenses. Gross margin as a percentage of revenue declined about 1.8 percentage points.
- Interest expense increased to $2.9 million from $0.6 million, primarily due to acquisition-related borrowing. The income tax benefit was $3.8 million on a $10.3 million pretax loss.
- Operating cash flow improved year over year, supported by a $14.7 million decrease in working capital, depreciation and amortization, and non-cash compensation. Investing cash outflow included $33.1 million for acquisitions and $11.6 million in capital expenditures; financing cash inflow primarily reflected $65.0 million of net credit-facility borrowings.
Acquisitions, outlook, and other notable items
- TEAM completed its stock acquisition of Furmanite on February 29, 2016, for consideration valued at $282.3 million, including $209.5 million of TEAM shares and $70.8 million cash. Furmanite contributed $28.9 million of revenue and a $1.7 million net loss from acquisition through quarter-end. The purchase-price allocation remained provisional.
- The quarter included $6.1 million of Furmanite acquisition costs and $4.7 million of separate compensation-related costs associated with the transaction. Management identified $9.7 million of non-routine costs overall, including merger and fiscal-year-change costs, ERP implementation costs, and intellectual-property defense costs.
- Management expected market headwinds to continue through the remainder of 2016. The filing gives no specific earnings or revenue guidance.
- In April 2016, TEAM acquired two related businesses in the Netherlands for approximately $9 million, adding about 65 employees.
- TEAM acquired a Furmanite pipeline-inspection business it does not intend to retain. It classified the business as discontinued operations and reported $0.1 million of after-tax income for the period included.
- Material matters include 92 pending lawsuits related to the 2007 Con Edison steam-main rupture; TEAM says it cannot estimate potential liability, maintains insurance subject to a $250,000 deductible, and has not accrued liability beyond that deductible. Trial was anticipated in the first half of 2017. Patent litigation involving Quest Integrity was also pending, with Delaware trials expected in early 2017.
- TEAM’s disclosure controls were assessed as effective as of March 31, 2016. The company was integrating Furmanite into its internal-control processes.
Important facts for investors to verify
- Whether acquired Furmanite and Qualspec operations deliver expected synergies and offset continuing organic-market weakness.
- The pace of project deferrals and scope reductions, and their impact on revenue, margins, and cash generation during 2016.
- Debt levels, interest costs, available borrowing capacity, and compliance with covenants that tighten over time.
- Final Furmanite purchase-price allocations, integration costs, and the expected sale and balance-sheet treatment of the discontinued pipeline-inspection business.
- Potential exposure and developments in the Con Edison and Quest Integrity patent cases, for which outcomes or liabilities are uncertain.
- Cash accessibility: $43.3 million was held in foreign subsidiaries considered indefinitely reinvested, and $5.0 million of restricted cash was expected to become unrestricted in the second quarter of 2016.