Business Context and Reporting Period
Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended February 28, 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.). Services include leak repair, hot tapping, and non-destructive testing, offered in over 100 locations globally.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Feb 28, 2009 | Nine Months Ended Feb 28, 2009 | Nine Months Ended Feb 29, 2008 |
|---|---|---|---|
| Revenues | $104,266 | $376,356 | $334,621 |
| Gross Margin | $29,954 (29%) | $119,148 (32%) | $107,784 (32%) |
| Operating Income | $3,470 | $31,549 | $28,829 |
| Net Income | $2,181 | $17,355 | $14,262 |
| Diluted EPS | $0.11 | $0.88 | $0.73 |
| Cash from Operations (9mo) | $36,773 | ||
| Cash and Equivalents (End of Period) | $17,176 | ||
| Total Debt (Current + Long-term) | $87,565 |
Material Changes vs. Prior Period
- Quarterly Performance (3 Months): Revenues decreased 4% to $104.3 million, and Operating Income declined 47% to $3.5 million. The decline in operating income was driven by a 11% drop in gross margin and increased corporate costs (including severance and share-based compensation).
- Year-to-Date Performance (9 Months): Revenues increased 12% to $376.4 million, and Operating Income rose 9% to $31.5 million. Growth was primarily driven by the TMS division (up 26%), which includes incremental revenue from the acquisition of Leak Repair Specam (LRS).
- Foreign Currency Impact: Adverse foreign exchange rates (Euro and Canadian Dollar) negatively impacted revenue growth by approximately $6.6 million for the quarter and $14.9 million for the nine-month period.
- Debt Reduction: Total debt decreased from $103.1 million (May 31, 2008) to $87.6 million (Feb 28, 2009), resulting in lower interest expense.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that customers are adopting conservative spending postures due to the worldwide financial crisis and economic recession. This has led to deferrals and downsizing of turnarounds and increased discussions regarding rate adjustments.
- Liquidity: The company maintains $17.2 million in cash and $63.3 million in available borrowing capacity under its Credit Facility. Management believes cash flows are sufficient to fund capital expenditures and debt maturities.
- Capital Expenditures: Anticipated capital expenditures for fiscal year 2009 are approximately $15 million.
- Legal Proceedings:
- Con Ed Lawsuits: Multiple lawsuits allege TEAM's leak repair services contributed to a steam main rupture in NYC. TEAM intends to vigorously defend these claims and believes insurance coverage (subject to a $250k deductible) is adequate. No material adverse effect is expected.
- Valero Settlement: A final settlement was reached regarding an employee injury at a Valero refinery; no material effect on financials.
- Market Risk: Significant exposure to foreign currency fluctuations (Euro and Canadian Dollar) and interest rate changes on floating-rate debt. The company utilizes Euro-denominated debt and interest rate swaps to hedge these risks.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of revenue growth in the TMS division given the economic downturn and customer spending deferrals.
- Foreign Exchange Sensitivity: Assess the impact of continued currency volatility on future earnings, as FX rates already reduced revenue by ~$15M YTD.
- Legal Contingencies: Monitor the status of the Consolidated Edison (Con Ed) litigation and indemnification claims to ensure no unexpected liabilities arise.
- Debt Covenants: Confirm continued compliance with financial covenants under the Credit Facility, especially given the economic environment.
- Margin Compression: Investigate the causes of the 14% gross margin decline in the TMS division for the quarter to determine if it is a one-time mix issue or a structural trend.