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| TISI > SEC Filings for TISI > Form 10-Q on 8-Jan-2013 | All Recent SEC Filings |
8-Jan-2013
Quarterly Report
Overview
The following discussion should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in Item 1 of this report, and the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies, included in our Annual Report on Form 10-K for the year ended May 31, 2012.
We based our forward-looking statements on our reasonable beliefs and assumptions, and our current expectations, estimates and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to obtain the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including, but not limited to the statements under "Risk Factors". We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including those listed beginning on page 6 of our Annual Report on Form 10-K for the year ended May 31, 2012.
General Description of Business
We are a leading provider of specialty maintenance and inspection services required in maintaining high temperature and high pressure piping systems and vessels that are utilized extensively in heavy industries. We offer an array of complementary services including:
• Inspection and Assessment
• Field Heat Treating
• Leak Repair
• Fugitive Emissions Control
• Hot Tapping
• Field Machining
• Technical Bolting
• Field Valve Repair
• Heat Exchanger and Maintenance
• Isolation Test Plugging
• Pipeline Integrity Management
We offer these services in over 125 locations throughout the world. Our industrial services are available 24 hours a day, 7 days a week, 365 days a year. We market our services to companies in a diverse array of heavy industries which include the petrochemical, refining, power, pipeline, steel, pulp and paper industries, as well as
municipalities, shipbuilding, OEMs, distributors, and some of the world's largest engineering and construction firms. Our services are also provided across a broad geographic reach.
We operate in only one segment-the industrial services segment. Within the industrial services segment, we are organized as two divisions. Our TCM division provides the services of inspection and assessment and field heat treating. Our TMS division provides the services of leak repair, fugitive emissions control, hot tapping, field machining, technical bolting, field valve repair and other mechanical services. Both divisions derive substantially all their revenues from providing specialized labor intensive industrial services and the market for their services is principally dictated by the population of process piping systems in industrial plants and facilities. Services provided by both the TCM and TMS divisions are predominantly provided through a network of field branch locations located in proximity to industrial plants. The structure of those branch locations is similar, with locations overseen by a branch/regional manager, one or more sales representatives and a cadre of technicians to service the business requirements of our customers.
Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011
Revenues. Our revenues for the three months ended November 30, 2012 were $200.6 million compared to $158.3 million for the three months ended November 30, 2011, an increase of $42.3 million or 27%. Organic revenue growth in the quarter was $37.2 million, or 24%, while acquired revenue was $5.1 million. Revenues for our TCM division for the three months ended November 30, 2012 were $124.5 million compared to $91.0 million for the three months ended November 30, 2011, an increase of $33.5 million or 37%. TCM growth was primarily driven by increased demand for inspection and assessment services, which totaled $95 million and grew more than 40% in the quarter compared to the same quarter of fiscal 2012. Revenues for our TMS division for the three months ended November 30, 2012 were $76.2 million compared to $67.3 million for the three months ended November 30, 2011, an increase of $8.9 million or 13%. TMS revenue growth was driven by robust demand for turnaround services, which were up over 30% in the quarter.
Gross margin. Our gross margin for the three months ended November 30, 2012 was $62.5 million compared to $50.4 million for the three months ended November 30, 2011, an increase of $12.1 million or 24%. Gross margin as a percentage of revenue was 31% for the three months ended November 30, 2012 compared to 32% for the three months ended November 30, 2011. About half of the decline in gross margin percentage was due to businesses acquired in the quarter, which had substantially lower margins than our legacy businesses. The rest of the decline is due to a changing project mix, compared to the prior year quarter. We do not believe the decline in margins in the quarter is indicative of any trend.
Selling, general and administrative expenses. Our SG&A expenses for the three months ended November 30, 2012 were $39.9 million compared to $33.8 million for the three months ended November 30, 2011, an increase of $6.1 million or 18%. As a percentage of revenues, SG&A expenses were 20% in the current year quarter, down from 21% in the prior year quarter, due to the leverage of revenue growth.
Earnings from unconsolidated affiliates. Our earnings from unconsolidated affiliates consists entirely of our joint venture (50% ownership) formed in May 2008 to perform non-destructive testing and inspection services in Alaska. Revenues of the joint venture not reflected in our consolidated revenues for the three months ended November 30, 2012 and November 30, 2011 were $4.5 million and $3.6 million, respectively. Our share of the earnings from the joint venture were $0.5 million for the three months ended November 30, 2012 and $0.4 million for the three months ended November 30, 2011.
Interest. Interest expense was $0.7 million for the three months ended November 30, 2012 compared to $0.6 million for the three months ended November 30, 2011.
Foreign currency (gain) loss. There were $0.1 million currency transaction losses for the three months ended November 30, 2012 primarily related to fluctuations between the Euro and U.S. Dollar. Foreign currency transaction gains were $0.1 million for the three months ended November 30, 2011.
Taxes. The provision for income tax was $8.2 million on pre-tax income of $22.2 million for the three months ended November 30, 2012 compared to the provision for income tax of $6.2 million on pre-tax income of $16.6 million for the three months ended November 30, 2011. The effective tax rate for the three months ended November 30, 2012 was 37% compared to 38% for the three months ended November 30, 2011.
Six Months Ended November 30, 2012 Compared to Six Months Ended November 30, 2011
Revenues. Our revenues for the six months ended November 30, 2012 were $362.1 million compared to $299.4 million for the six months ended November 30, 2011, an increase of $62.7 million or 21%. Revenues for our TCM division for the six months ended November 30, 2012 were $220.7 million compared to $168.0 million for the six months ended November 30, 2011, an increase of $52.7 million or 31%. Most of the TCM revenue growth came from the strong demand for inspection and assessment services, which increased 40% year over year to $173 million. Revenues for our TMS division for the six months ended November 30, 2012 were $141.5 million compared to $131.4 million for the six months ended November 30, 2011, an increase of $10.1 million or 8%.
Gross margin. Our gross margin for the six months ended November 30, 2012 was $112.0 million compared to $94.9 million for the six months ended November 30, 2011, an increase of $17.1 million or 18%. Gross margin as a percentage of revenue was 31% for the six months ended November 30, 2012 compared to 32% for the six months ended November 30, 2011. The overall decline in year to date gross margin was primarily related to the very strong margins achieved in the first quarter of fiscal 2012, coupled with the lower margins associated with businesses acquired in the second quarter of fiscal 2013. We do not believe the decline in gross margins for the first half is indicative of any trends.
Selling, general and administrative expenses. Our SG&A expenses for the six months ended November 30, 2012 were $77.0 million compared to $66.9 million for the six months ended November 30, 2011, an increase of $10.1 million or 15%. As a percentage of revenues, SG&A expenses were 21% in the current year to date period, down from 22% in the prior year to date period, due to the leverage of revenue growth.
Earnings from unconsolidated affiliates. Our earnings from unconsolidated affiliates consists entirely of our joint venture (50% ownership) formed in May 2008, to perform non-destructive testing and inspection services in Alaska. Revenues of the joint venture not reflected in our consolidated revenues for the six months ended November 30, 2012 and 2011 were $9.0 million and $7.6 million, respectively. Our share of the earnings from the joint venture were $0.9 million and $0.8 million for the six months ended November, 2012 and 2011, respectively.
Interest. Interest expense was $1.3 million for the six months ended November 30, 2012 compared to $1.2 million for the six months ended November 30, 2011.
Foreign currency (gain) loss. There were $0.2 million currency transaction losses for the six months ended November 30, 2012 primarily related to fluctuations between the Euro and U.S. Dollar. Foreign currency transaction losses were $0.2 million for the six months ended November 30, 2011.
Taxes. The provision for income tax was $12.7 million on pre-tax income of $34.4 million for the six months ended November 30, 2012 compared to the provision for income tax of $10.3 million on pre-tax income of $27.5 million for the six months ended November 30, 2011. The effective tax rate for the six months ended November 30, 2012 was 37% compared to 38% for the six months ended November 30, 2011.
Liquidity and Capital Resources
Financing for our operations consists primarily of vendor financing and leasing arrangements, our Credit Facility and cash flows attributable to our operations, which we believe are sufficient to fund our business needs. In July 2011, we renewed our Credit Facility with our banking syndicate. The Credit Facility has borrowing
capacity of up to $150 million in multiple currencies, bears interest based on a variable Eurodollar rate option (LIBOR plus 1.75% margin at November 30, 2012) with the margin based on financial covenants set forth in the Credit Facility, and matures in July 2016. In connection with the renewal of the Credit Facility, we capitalized $0.8 million of associated debt issuance costs which are being amortized over the life of the Credit Facility. At November 30, 2012, we were in compliance with all covenants of the Credit Facility. At November 30, 2012, we had $34.5 million of cash on hand and approximately $29 million of available borrowing capacity through our Credit Facility.
Restrictions on cash. Included in our cash and cash equivalents at November 30, 2012, is $0.3 million of cash in Venezuela and $14.2 million of cash in foreign subsidiaries where earnings are deemed permanently reinvested. Repatriation of cash from these foreign subsidiaries, if deemed to be a dividend for tax purposes, would result in estimated adverse tax consequences of approximately $1.1 million. While not legally restricted from repatriating this cash, we consider all earnings of these foreign subsidiaries to be indefinitely reinvested and access to cash to be limited. Similarly, the uncertain economic and political environment in Venezuela makes it very difficult to repatriate the cash of our Venezuelan subsidiary.
Cash flows attributable to our operating activities. For the six months ended November 30, 2012, cash provided by operating activities was $19.7 million. Positive operating cash flow was primarily attributable to net income of $21.7 million, depreciation and amortization of $9.7 million, deferred taxes of $2.0 million, and non-cash compensation cost of $2.1 million offset by an $15.2 million increase in working capital.
Cash flows attributable to our investing activities. For the six months ended November 30, 2012, cash used in investing activities was $30.8 million, consisting primarily of $12.7 million of capital expenditures and $18.1 million for business acquisitions. Capital expenditures can vary depending upon specific customer needs that may arise unexpectedly.
Cash flows attributable to our financing activities. For the six months ended November 30, 2012, cash provided by financing activities was $22.9 million consisting primarily of $19.0 million of borrowings related to our Credit Facility and $3.4 million related to issuance of common stock from share-based payment arrangements.
Effect of exchange rate changes on cash. For the six months ended November 30, 2012, the effect of exchange rate changes on cash was a positive $0.2 million. We have significant operations in Europe and Canada, as well as operations in Venezuela which is considered a hyperinflationary economy. The impact of foreign currency exchange rates on cash in the current year is primarily attributable to changes in U.S. Dollar exchange rates with Canada and Europe.
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