TEAM, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2013. The interim financial statements are unaudited. TEAM provides specialty industrial inspection, integrity, mechanical, turnaround, and on-stream services. Effective July 1, 2013, it reorganized into Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity (Quest) segments.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $200.5 | $200.6 | $374.8 | $362.1 |
| Gross margin | $64.8 (32.3%) | $62.5 (31.1%) | $113.8 (30.4%) | $112.0 (30.9%) |
| Operating income | $23.9 (11.9%) | $23.0 (11.5%) | $32.0 (8.5%) | $35.9 (9.9%) |
| Net income attributable to TEAM shareholders | $14.4 | $13.9 | $18.9 | $21.5 |
| Diluted EPS | $0.68 | $0.66 | $0.89 | $1.03 |
- Second-quarter revenue was essentially flat year over year; first-half revenue increased 3%. First-half operating income fell 11%.
- Second-quarter segment revenue: IHT $109.4 million, MS $71.0 million, Quest $20.1 million. First-half revenue: IHT $205.3 million, MS $136.8 million, Quest $32.8 million.
- First-half operating cash flow was $20.2 million, compared with $19.7 million. Investing cash use was $23.6 million, including $13.6 million of capital expenditures and $10.2 million for acquisitions. Financing provided $5.6 million; cash increased $2.4 million to $36.6 million.
- At November 30, cash was $36.6 million, current assets $259.1 million, and current liabilities $71.6 million. Long-term debt was $91.7 million, up from $72.9 million at May 31. The $150 million revolving facility matures in July 2016; the company reported approximately $45 million of available borrowing capacity. Standby letters of credit totaled $13.7 million.
Changes and management commentary
- For the quarter, inspection and assessment revenue rose 11% and on-stream revenue rose 14%, while turnaround revenue declined 24%. Management attributed the downturn partly to fewer large projects, including reduced activity in the Canadian oil sands.
- For the first half, inspection and assessment revenue increased 12% and on-stream revenue increased 15%; turnaround revenue declined 17%. Management said acquisitions contributed $7.0 million of first-half revenue, all in IHT.
- Quest grew 29% in the quarter, with improved quarterly operating income. MS quarterly revenue declined 7% and operating income declined 29%, primarily reflecting fewer large turnaround projects. First-half operating income also reflected Quest’s slow first quarter and $0.7 million of first-quarter severance costs.
- Second-quarter results included a $2.1 million non-cash gain from revaluation of contingent consideration related to the TCI acquisition. Management said first-half operating income, excluding this gain and the severance costs, would have declined by $5.3 million year over year.
Outlook, spending, and risks
- The filing provides no specific revenue or earnings guidance. Management described financing and operating cash flows as sufficient for business needs, while cautioning that interim results are not necessarily indicative of full-year results.
- The company expects to spend $10–12 million over the next two years on a new ERP system, expected to be fully installed by the end of fiscal 2016. The Alvin, Texas equipment, training, and technical center is expected to cost approximately $9 million and be completed in spring 2014.
- A new $25 million share-repurchase plan was approved October 1, 2013. TEAM repurchased 369,900 shares for $13.3 million, or $36.05 per share, through November 30; approximately $11.7 million remained under the plan.
- TEAM is defending 106 lawsuits related to the 2007 Con Edison steam-main rupture and a related indemnification claim. The company cannot estimate any potential liability, has not accrued amounts above its $250,000 deductible, and believes insurance should cover the claims; it does not expect a material adverse effect.
- Foreign-exchange exposure includes Europe, Canada, and Venezuela. Venezuela’s hyperinflationary conditions, potential further currency devaluation, and difficulty repatriating cash pose risks. Venezuelan net assets were $3.6 million, including $1.7 million of cash; management said a 10% exchange-rate change would affect pretax earnings by $0.4 million.
- Approximately $15.1 million of cash held in foreign subsidiaries was considered permanently reinvested; repatriation could trigger additional taxes. The filing also identifies exposure to floating interest rates and foreign-currency movements.
Important facts for investors to verify
- Whether turnaround activity recovers and offsets the continued weakness in MS and the first-half operating-income decline.
- Quest’s growth and profitability following its strong second quarter and slow first quarter.
- Available revolver capacity, covenant headroom, and the impact of additional borrowing and share repurchases on liquidity.
- The final costs and timing of the ERP implementation and Alvin facility project.
- Developments in the Con Edison litigation and any change in the company’s assessment of exposure or insurance coverage.
- Venezuelan exchange rates, the recoverability and accessibility of local cash, and any further impairment risk.