TEAM, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and nine months ended February 28, 2015, in TEAM’s fiscal year ending May 31, 2015; it is not fiscal 2014 Q3. TEAM provides specialty industrial inspection, maintenance, turnaround, and on-stream services through Inspection and Heat Treating Services (IHT), Mechanical Services (MS), and Quest Integrity. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Nine months ended Feb. 28, 2015 | Nine months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Revenue | $174.6 million | $163.2 million | $603.3 million | $538.0 million |
| Gross margin | $46.7 million; 26.8% | $41.7 million; 25.5% | $181.9 million; 30.2% | $155.5 million; 28.9% |
| Operating income | $2.9 million; 1.7% | $1.0 million; 0.6% | $43.4 million; 7.2% | $33.0 million; 6.1% |
| Net income (loss) attributable to TEAM shareholders | $0.3 million | $(1.0) million | $24.7 million | $17.9 million |
| Diluted EPS | $0.01 | $(0.05) | $1.13 | $0.84 |
| Operating cash flow | Not presented quarterly | $31.2 million | $40.5 million |
At February 28, 2015, cash was $35.6 million, current assets $252.1 million, current liabilities $61.1 million, and long-term debt $86.4 million. The $150 million revolving facility matured in July 2016; approximately $50 million of capacity remained, including the effect of outstanding letters of credit. Nine-month capital expenditures were $18.7 million. Cash from operations less capital expenditures was approximately $12.5 million.
Material changes versus comparable periods
- Quarterly revenue increased 7.0%; nine-month revenue increased 12.1%. For nine months, IHT revenue rose 15.4%, MS 8.4%, and Quest Integrity 8.0%. In the latest quarter, IHT rose 12.0% and MS 2.5%, while Quest Integrity declined 2.8%.
- Nine-month operating income increased 31.6%. Management said adjusted operating income, excluding specified non-routine items, rose 43%, with adjusted operating margin improving to 7.5% from 5.9%. Quarterly results included $1.1 million in Quest Integrity patent-defense legal fees and a $0.4 million fixed-asset write-down.
- Nine-month operating cash flow fell to $31.2 million from $40.5 million, reflecting working-capital use, including receivables, inventory, accrued liabilities, and income taxes. Cash at period end was $35.6 million versus $39.5 million a year earlier.
- Debt increased to $86.4 million from $73.7 million at May 31, 2014. TEAM borrowed a net $15.7 million under its revolving facility during the nine-month period.
- TEAM repurchased 546,977 shares for $21.1 million during the quarter, at an average $38.62 per share; $15.5 million remained under the repurchase authorization.
Outlook, commentary, risks, and unusual items
- Management described broad-based nine-month growth, supported by pipeline, new construction and capital projects, heat treating, turnarounds, and outages. It said activity and market conditions softened in Q3 due to U.S. refinery strikes and lower oil prices; planned Quest Integrity projects were deferred. A stronger U.S. dollar also weighed on foreign revenue.
- Management said operating cash flows, the credit facility, vendor financing, and leasing arrangements were expected to meet business needs, and expressed an expectation that the facility could be renewed at maturity. No formal revenue or earnings guidance is provided.
- Effective February 1, 2015, TEAM began using the cost method for its Venezuelan operations because currency exchange restrictions and regulations impaired its ability to control operations and maintain normal service. The change caused a $1.2 million pretax charge; future operating results from Venezuela will not be consolidated. Venezuela historically represented less than 1% of consolidated revenue.
- Nine-month foreign-currency translation losses recorded in other comprehensive income were $14.8 million; transaction losses in earnings were $1.5 million. After quarter-end, TEAM initiated a foreign-currency hedging program. Foreign cash of $15.2 million was considered indefinitely reinvested; repatriation could trigger additional taxes.
- TEAM reported 95 lawsuits related to the 2007 Con Edison steam-main rupture and an associated indemnification claim. The company cannot estimate any potential liability, maintains insurance subject to a $250,000 deductible, and has not accrued amounts above the deductible. It also disclosed three patent-infringement suits brought by Quest Integrity; defendants contest the claims.
- TEAM is developing a new ERP system for installation beginning in fiscal 2016 and had capitalized $11.8 million through the reporting date. The filing also notes a prior immaterial cash-flow classification correction, with no effect on financial position or net income.
Important facts for investors to verify
- Whether deferred Quest Integrity projects resume and whether softer market conditions, refinery strikes, oil prices, and currency movements continue to affect demand and margins.
- Cash conversion and working-capital trends, especially receivables, inventory, accrued liabilities, and tax payments.
- Revolver renewal and borrowing availability ahead of its July 2016 maturity, along with debt levels and covenant headroom.
- Developments in Venezuela, including the ability to receive cash or dividends and the accounting impact of cost-method treatment.
- Potential outcomes and insurance coverage for the Con Edison litigation and the Quest Integrity patent cases.
- The estimated issuance of approximately 826,000 shares to acquire Quest Integrity’s remaining 5% interest is dependent on future EBITDA and TEAM’s share price; verify final terms and dilution.