TEAM, Inc. — Form 10-Q Summary
Business and period: TEAM provides specialty inspection, maintenance, repair and construction services for industrial facilities through more than 100 locations. This unaudited report covers the three months ended August 31, 2012, the first quarter of fiscal 2013; comparisons are with the three months ended August 31, 2011. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $161.5 | $141.1 | +14% |
| Gross margin | $49.5 | $44.4 | +11% |
| Gross margin percentage | 30.7% | 31.5% | Down 0.8 percentage points |
| Operating income | $12.8 | $11.8 | +9% |
| Net income | $7.7 | $6.8 | +12% |
| Net income available to TEAM shareholders | $7.6 | $6.8 | +11% |
| Diluted EPS | $0.36 | $0.33 | +9% |
| Operating cash flow | $6.6 | $15.8 | Down $9.1 |
- TCM division revenue rose 25% to $96.2 million, led by inspection and assessment demand, which grew more than 40%. TMS revenue increased 2% to $65.3 million; management cited strong prior-year comparisons, including an extended turnaround season and a significant Canadian project.
- SG&A increased 12% to $37.1 million, slower than revenue growth; SG&A as a percentage of revenue declined 0.5 percentage points. Management attributed the lower gross margin percentage mainly to project mix and said it did not view this as evidence of a negative job-margin trend.
- Cash from operations was lower year over year, principally reflecting a $7.5 million working-capital increase. Investing used $8.5 million, including $5.7 million of capital expenditures and $2.7 million for an acquisition. Financing provided $1.9 million, primarily from credit-facility borrowings. Cash increased $0.2 million to $22.7 million.
Financial position and liquidity
- At August 31, 2012, total assets were $407.3 million, total liabilities $150.9 million, and total equity $256.5 million. Current assets were $217.2 million and current liabilities $52.7 million.
- Long-term debt under the revolving credit facility was $87.0 million, versus $85.9 million at May 31, 2012. The facility provides up to $150 million, matures in July 2016, and carried a LIBOR-plus-1.75% margin at quarter-end. TEAM reported compliance with its covenants and approximately $46 million of available capacity.
- Outstanding standby letters of credit were $16.7 million and reduce facility availability. Of the $22.7 million cash balance, $10.0 million was in Europe and $0.6 million in Venezuela; management described access to these balances as limited. Repatriating European cash could incur an estimated $0.7 million tax cost.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said operating cash flow, the credit facility and other financing arrangements were believed sufficient to fund business needs, while cautioning that capital expenditures can vary with customer requirements.
- In August, a subsidiary acquired a New Zealand digital-video inspection business for approximately $2.7 million. After quarter-end, TEAM acquired TCI Services, an Oklahoma tank-inspection and repair business. Combined annual revenue for the two acquired businesses was approximately $24 million; expected combined consideration was approximately $25 million, subject to adjustments and future performance.
- TEAM had 106 lawsuits related to the 2007 Con Edison steam-main rupture, alleging its leak-repair services may have contributed. The company is defending the claims and Con Edison’s indemnification demand; it cannot estimate potential liability, has accrued no amount above the $250,000 insurance deductible, and believes insurance should cover the claims.
- In July 2012, TEAM pleaded guilty to a misdemeanor Clean Air Act violation involving emissions-monitoring work and agreed to implement an Environmental Compliance Plan. The court had yet to determine the penalty; the maximum stated penalty includes up to five years’ probation and a fine of up to $200,000 or twice gross gain or victim loss. Management did not expect a material adverse financial effect.
- Foreign-currency exposure includes Europe and Canada; a 10% change in the Venezuelan exchange rate used to translate net assets would affect pretax earnings by approximately $0.2 million. A portion of European investment is hedged with euro-denominated debt.
- Management concluded disclosure controls were effective as of August 31, 2012 and reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether revenue growth, particularly TCM inspection and assessment demand, continues and whether project mix improves gross margin percentage.
- Working-capital trends and cash conversion, given the marked year-over-year decline in operating cash flow.
- Acquisition closing terms, performance, integration and final purchase-price adjustments, including the post-quarter TCI Services transaction.
- Credit-facility availability after letters of credit, covenant headroom, and the impact of floating interest rates and restricted foreign cash.
- Developments in the Con Edison litigation and the court’s penalty determination and compliance-plan execution in the Clean Air Act matter.