TISI

Business Context and Reporting Period

Company: TEAM, INC. (TISI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 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 globally through over 100 locations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 18% year-over-year, driven by an 18% drop in the TCM division and a 25% drop in the TMS division. Management attributes this to the economic recession, causing customers to delay projects and cut discretionary spending.
• Profitability Compression: Operating income fell 73% to $2.7 million. Gross margin percentage declined from 32% to 29% due to reduced volume and rate adjustments.
• SG&A Expenses: Selling, General, and Administrative expenses decreased 9% to $27.0 million. However, this included a $1.1 million non-routine pre-tax charge related to an internal investigation (see below). Excluding this charge, SG&A decreased 12%.
• Debt Reduction: Total debt decreased by approximately $14.8 million as the company utilized strong operating cash flows to pay down borrowings under its Credit Facility.
• Working Capital: Accounts receivable decreased by $17.5 million, contributing significantly to the $18.3 million in operating cash flow.

Outlook, Risks, and Contingencies

• Internal Investigation (FCPA): The company is investigating allegations of improper payments by employees in its Trinidad branch to foreign government officials, potentially violating the Foreign Corrupt Practices Act (FCPA).
  • Estimated improper payments over five years: < $50,000.
  • Investigation costs to date: ~$1.1 million; estimated total cost: ~$2.0 million.
  • Voluntary disclosure made to the DOJ and SEC; potential for monetary penalties exists but cannot be estimated.
• Legal Proceedings: Approximately 100 lawsuits filed regarding a 2007 steam main rupture in New York City involving Con Ed. The company intends to defend vigorously and believes insurance will cover claims; no liability has been accrued.
• Capital Expenditures: Anticipated CapEx for fiscal year 2010 is estimated at $10–15 million.
• Liquidity: The company maintains approximately $81 million in available borrowing capacity under its banking syndicate and holds $13.6 million in cash. However, $2.7 million of cash in Europe and $0.2 million in Venezuela are considered indefinitely reinvested or difficult to repatriate due to tax and political constraints.
• Market Risks: Exposure to foreign currency fluctuations (Euro, Canadian Dollar, Venezuelan Bolivar) and interest rate changes on variable-rate debt. The company utilizes an interest rate swap and Euro-denominated debt as hedges.

Investor Verification Checklist

• FCPA Investigation Outcome: Monitor for updates on the DOJ/SEC review of the Trinidad branch payments and any resulting penalties or sanctions.
• Revenue Recovery: Assess whether the 18% revenue decline is a temporary recessionary effect or a structural shift in customer spending habits.
• Margin Sustainability: Verify if the company can maintain gross margins near 29% as project volumes fluctuate and rate adjustments are negotiated.
• Con Ed Litigation: Track the status of the New York steam main rupture lawsuits to ensure insurance coverage remains sufficient and no material uninsured losses occur.
• Debt Covenants: Confirm continued compliance with financial covenants under the Credit Facility, particularly given the reduction in operating income.