TEAM, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2012; fiscal year ends May 31. Unaudited consolidated results. Amounts below are in millions unless noted.
Business context and performance
TEAM provides specialty maintenance, inspection, and repair services for industrial piping systems and vessels through more than 125 locations. It reports one industrial services segment, organized into TCM and TMS divisions.
| Metric | Quarter ended Nov. 30, 2012 | Quarter ended Nov. 30, 2011 | Six months ended Nov. 30, 2012 | Six months ended Nov. 30, 2011 |
|---|---|---|---|---|
| Revenue | $200.6 | $158.3 | $362.1 | $299.4 |
| Gross margin | $62.5; 31% of revenue | $50.4; 32% | $112.0; 31% | $94.9; 32% |
| Operating income | $23.0 | $17.1 | $35.9 | $28.8 |
| Net income attributable to TEAM shareholders | $13.9 | $10.3 | $21.5 | $17.1 |
| Diluted earnings per share | $0.66 | $0.50 | $1.03 | $0.83 |
Quarterly revenue grew 27% year over year, including 24% organic growth and $5.1 million from acquisitions. Six-month revenue increased 21%. TCM revenue rose 37% for the quarter and 31% year to date, driven principally by inspection and assessment demand; TMS revenue increased 13% and 8%, respectively, with quarterly growth supported by turnaround services. SG&A was $39.9 million in the quarter and $77.0 million year to date; as a share of revenue it declined to 20% and 21%, respectively, from 21% and 22%.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $19.7 million, versus $19.4 million a year earlier. Management attributed cash generation to earnings and noncash expenses, partly offset by a $15.2 million increase in working capital, including higher receivables.
- Investing cash use was $30.8 million, including $12.7 million of capital expenditures and $18.1 million for acquisitions. Financing provided $22.9 million, primarily from $19.0 million of net revolving-credit borrowings. Cash increased by $12.0 million to $34.5 million.
- At November 30, cash was $34.5 million; current assets were $255.3 million and current liabilities $67.5 million. Long-term debt was $105.5 million, up from $85.9 million at May 31. The filing reports approximately $29 million of available credit capacity.
- The $150 million multi-currency credit facility matures in July 2016 and carried a LIBOR-based rate with a 1.75% margin at period-end. TEAM reported compliance with its covenants. Cash includes $14.2 million in foreign subsidiaries considered indefinitely reinvested and $0.3 million in Venezuela; management says access to some foreign cash is limited.
Material changes, outlook, and risks
- Gross margin percentage declined by one percentage point in both comparisons. Management attributed the quarterly decline partly to acquired businesses with lower margins and partly to project mix; year-to-date results also reflected unusually strong margins in the prior-year first quarter. Management said the declines were not indicative of a trend.
- During the quarter, TEAM acquired a New Zealand digital video inspection business for approximately $2.7 million and TCI Services for approximately $23.8 million, including $7.7 million of deferred consideration, some contingent on performance. Combined annual revenue of the acquired businesses was approximately $24 million. Acquisitions contributed to higher debt and goodwill.
- No specific financial guidance or quantified outlook is provided in the supplied filing text. Management stated that operating cash flows, vendor financing and leasing arrangements, and the credit facility were expected to be sufficient for business needs; capital expenditures may vary with customer requirements.
- Foreign exchange is a key exposure: TEAM has significant operations in Canada and Europe and uses euro-denominated debt as a hedge of its European net investment. Management estimated that a 10% change in the Venezuelan exchange rate used to translate net assets would affect pretax earnings by $0.3 million. Floating-rate debt also exposes the company to higher interest rates.
- TEAM is defending 95 lawsuits arising from a 2007 Con Edison steam-main rupture and an associated indemnification claim. It could not estimate potential liability, had accrued no amount above the $250,000 insurance deductible, and believed insurance should cover the claims. Separately, TEAM pleaded guilty to a misdemeanor Clean Air Act violation; in November 2012 it was fined $200,000 and placed on five years’ probation, and agreed to implement an environmental compliance plan.
- Management reported disclosure controls operating effectively as of November 30, 2012 and no material change in internal control over financial reporting during the quarter. The filing cautions that forward-looking statements are subject to risks and are not guarantees of future performance.
Important facts for investors to verify
- Whether receivables and unbilled revenue growth convert to cash; receivables were $181.4 million, including $25.9 million of unbilled revenue, at November 30.
- Acquisition integration, realized margins, contingent/deferred purchase payments, and the impact of acquisitions on debt and goodwill.
- Remaining borrowing availability and covenant headroom, particularly given higher debt and letters of credit totaling $15.3 million.
- Developments in the Con Edison litigation and the extent and limits of insurance coverage; compliance with the EPA agreement and probation terms.
- Foreign-cash accessibility, currency movements, and exposure to variable interest rates.