Business context and reporting period
TEAM, Inc. provides specialty industrial inspection, assessment, turnaround, and on-stream services to heavy industries. Its three segments are Inspection and Heat Treating Services (IHT), Mechanical Services (MS), and Quest Integrity. This Form 10-Q covers the quarter and six months ended November 30, 2014, in fiscal 2015; comparisons are with the corresponding 2013 periods. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Nov. 30, 2014 | Three months ended Nov. 30, 2013 | Six months ended Nov. 30, 2014 | Six months ended Nov. 30, 2013 |
|---|---|---|---|---|
| Revenue | $240.6 million | $200.5 million | $428.7 million | $374.8 million |
| Operating income | $28.7 million | $23.9 million | $40.5 million | $32.0 million |
| Net income | $17.6 million | $14.6 million | $24.6 million | $19.1 million |
| Net income available to TEAM shareholders | $17.4 million | $14.4 million | $24.4 million | $18.9 million |
| Diluted earnings per share | $0.80 | $0.68 | $1.12 | $0.89 |
- Quarterly revenue rose 20%; all three segments grew at double-digit rates. Quarterly operating income increased 20% as reported. Management said it would have risen 32% excluding the prior-year $2.1 million contingent-consideration revaluation benefit.
- Quarterly gross margin was 32.8% of revenue, versus 32.3% a year earlier. Operating margin was 11.9%; management’s adjusted comparison was 11.9% versus 10.8% after excluding the prior-year benefit. For the six months, reported operating margin was 9.4%, and management’s adjusted comparison was 9.5% versus 8.2%.
- For the six months, operating cash flow was $9.1 million, down from $21.2 million. A $29.1 million working-capital increase, primarily reflecting higher receivables, weighed on cash generation. Capital expenditures were $11.4 million, making operating cash flow less capital expenditures negative $2.3 million.
- At November 30, cash and cash equivalents were $41.0 million; long-term debt was $85.3 million, up from $73.7 million at May 31. The $150 million revolving facility matures in July 2016, and approximately $52 million of capacity remained available. The company reported no mandatory payments before maturity.
- Total current assets were $299.6 million and current liabilities were $89.3 million. Receivables were $217.0 million, including $19.2 million of earned but unbilled revenue. Cash included $14.0 million in certain foreign subsidiaries considered permanently reinvested and $0.6 million in Venezuela; management described access to foreign cash as limited.
- Six-month investing cash outflow was $14.1 million, including $11.4 million of capital expenditures and $2.9 million for acquisitions. Financing cash inflow was $13.1 million, primarily from $13.0 million of net revolving-credit borrowings. Cash increased $6.4 million to $41.0 million.
Material changes and management commentary
- Management attributed broad-based growth to pipeline work, new construction and capital projects, large heat-treating projects, and turnaround and outage services. It cited stronger operating leverage, cost control, and service execution as contributors to margin improvement.
- Six-month revenue rose 14% and operating income rose 27% as reported. Management’s adjusted operating-income growth comparison was 33%, excluding specified non-routine items: a $2.1 million prior-year contingent-consideration benefit, $0.7 million of prior-year severance costs, and $0.2 million of current-year acquisition costs.
- A UK mechanical-services acquisition was completed in August 2014 for $2.9 million net of cash acquired, including estimated contingent consideration. Purchase-price allocation was preliminary.
- The company is implementing a new ERP system, expected to be fully installed in fiscal 2016; $8.4 million had been capitalized through November 30, 2014. The board increased the stock-repurchase authorization to $50 million, net of the $13.3 million previously repurchased; no shares were repurchased in the six months ended November 30, 2014.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings or revenue guidance. Management stated that operating cash flows, vendor financing, leasing arrangements, the credit facility, and cash were expected to be sufficient for business needs; it expected to be able to renew the facility at maturity, but renewal is not assured.
- Foreign-exchange exposure includes European and Canadian operations and Venezuela’s hyperinflationary economy. Euro and Canadian-dollar exchange rates declined against the U.S. dollar during the six-month period. Foreign-currency translation losses in other comprehensive income were $6.9 million; foreign-currency loss in earnings was $0.8 million. Euro-denominated debt serves as an economic hedge for part of the European investment.
- TEAM is defending 95 lawsuits and an indemnification claim related to a 2007 Con Edison steam-main rupture. Damages are unspecified and the company said it cannot estimate any potential liability; it had not accrued amounts above its $250,000 insurance deductible and did not expect a material adverse effect. Other ordinary-course claims were also disclosed.
- The credit facility is secured by substantially all domestic assets and most foreign-subsidiary stock; $13.2 million of standby letters of credit reduced available capacity. Floating-rate debt exposes the company to higher interest rates.
- The filing notes an immaterial prior-period cash-flow classification revision relating to deferred acquisition consideration: operating cash flow increased by $1 million and financing cash flow decreased by the same amount, with no effect on financial position or net income.
Important facts for investors to verify
- Whether receivables and unbilled revenue convert to cash, given the working-capital-driven decline in operating cash flow.
- Segment-level revenue and operating-income trends, and the comparability of management’s adjusted margins with reported results.
- Available borrowing capacity after letters of credit, covenant compliance, and the credit facility’s July 2016 maturity and renewal prospects.
- Developments in the Con Edison litigation and indemnification claim, including insurance coverage and any change in the company’s assessment.
- Foreign-exchange effects, availability of foreign cash, and the valuation and expected share issuance for the Quest Integrity put/call arrangement.
- ERP implementation costs and schedule, and the final purchase-price allocation for the UK acquisition.