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TISI > SEC Filings for TISI > Form 10-Q on 8-Apr-2013All Recent SEC Filings

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Form 10-Q for TEAM INC


8-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


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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 February 28, 2013 Compared to Three Months Ended February 29, 2012

Revenues. Our revenues for the three months ended February 28, 2013 were $151.0 million compared to $136.5 million for the three months ended February 29, 2012, an increase of $14.5 million or 11%. Revenues for our TCM division for the three months ended February 28, 2013 were $91.4 million compared to $76.6 million for the three months ended February 29, 2012, an increase of $14.8 million or 19%. TCM growth was primarily driven by increased demand for inspection and assessment services, which totaled $71 million and grew more than 25% in the quarter compared to the same quarter of fiscal 2012, including $6.4 million of revenues attributable to acquisitions. Revenues for our TMS division for the three months ended February 28, 2013 were $59.5 million compared to $59.9 million for the three months ended February 29, 2012, a decrease of $0.4 million or 1%. Overall revenue growth in the third quarter was negatively impacted by declines in revenue in Canada and Europe of approximately 14%, or $4 million, compared to the same quarter last year. Our Canadian business units accounted for about $3 million of the decline, principally as a result of a softening in TMS project activity in the Canadian oil sands region of northern Alberta.

Gross margin. Our gross margin for the three months ended February 28, 2013 was $38.9 million compared to $36.6 million for the three months ended February 29, 2012, an increase of $2.3 million or 6%. Gross margin as a percentage of revenue was 26% for the three months ended February 28, 2013 compared to 27% for the three months ended February 29, 2012. The reduction in our gross margin in the third quarter was almost entirely attributable to lower margins in our Canadian business units due to underutilization of human resources during a period of declining revenues.

Selling, general and administrative expenses. Our SG&A expenses for the three months ended February 28, 2013 were $38.3 million compared to $33.2 million for the three months ended February 29, 2012, an increase of $5.1 million or 15%. As a percentage of revenues, SG&A expenses were 25% in the current year quarter, up from 24% in the prior year quarter. The increase in SG&A expenses as a percentage of revenues was primarily attributable to business development costs in the period.

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 February 28, 2013 and February 29, 2012 were $2.1 million and $1.9 million, respectively. Our share of the earnings from the joint venture was $0.0 million for the three months ended February 28, 2013 and $0.1 million for the three months ended February 29, 2012.

Interest. Interest expense was $0.7 million for the three months ended February 28, 2013 compared to $0.6 million for the three months ended February 29, 2012.


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Foreign currency loss (gain). There were $0.7 million currency transaction losses for the three months ended February 28, 2013 compared to $0.1 million in foreign currency transaction gains for the three months ended February 29, 2012. Currency transaction losses in the current period are primarily due to fluctuations between the Venezuelan Bolivar and the U.S. Dollar. We account for Venezuela as a highly-inflationary economy and accordingly, all currency fluctuations between the Bolivar and the U.S. Dollar are recorded in our statement of operations. Due to the recent devaluation of the Bolivar in February 2013, we recorded a $0.6 million foreign currency loss during the three months ended February 28, 2013.

Taxes. The provision for income tax was a benefit of $0.3 million on a pre-tax loss of $0.9 million for the three months ended February 28, 2013 compared to the provision for income tax of $0.9 million on pre-tax income of $2.9 million for the three months ended February 29, 2012. The effective tax rate for the three months ended February 28, 2013 was 37% compared to 32% for the three months ended February 29, 2012. The difference in the effective tax rates primarily relates to the income tax rates applicable in the geographical jurisdiction in which the income is earned and tax attributes related to the exercise of stock options.

Nine Months Ended February 28, 2013 Compared to Nine Months Ended February 29, 2012

Revenues. Our revenues for the nine months ended February 28, 2013 were $513.1 million compared to $435.9 million for the nine months ended February 29, 2012, an increase of $77.2 million or 18%. Revenues for our TCM division for the nine months ended February 28, 2013 were $312.1 million compared to $244.6 million for the nine months ended February 29, 2012, an increase of $67.5 million or 28%. Most of the TCM revenue growth came from the strong demand for inspection and assessment services, which increased 35% year over year to $243.5 million. Revenues for our TMS division for the nine months ended February 28, 2013 were $201.0 million compared to $191.3 million for the nine months ended February 29, 2012, an increase of $9.7 million or 5%.

Gross margin. Our gross margin for the nine months ended February 28, 2013 was $150.9 million compared to $131.5 million for the nine months ended February 29, 2012, an increase of $19.4 million or 15%. Gross margin as a percentage of revenue was 29% for the nine months ended February 28, 2013 compared to 30% for the nine months ended February 29, 2012.

Selling, general and administrative expenses. Our SG&A expenses for the nine months ended February 28, 2013 were $115.3 million compared to $100.1 million for the nine months ended February 29, 2012, an increase of $15.2 million or 15%. As a percentage of revenues, SG&A expenses were 22% in the current year to date period and 23% in the prior year to date period.

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 nine months ended February 28, 2013 and February 29, 2012 were $11.0 million and $9.5 million, respectively. Our share of the earnings from the joint venture were $0.9 million for the nine months ended February 28, 2013 and February 29, 2012.

Interest. Interest expense was $2.0 million for the nine months ended February 28, 2013 compared to $1.8 million for the nine months ended February 29, 2012.

Foreign currency loss. There were $0.9 million currency transaction losses for the nine months ended February 28, 2013 compared to losses of $0.1 million for the nine months ended February 29, 2012. Currency transaction losses in the current period are primarily due to fluctuations between the Venezuelan Bolivar and the U.S. Dollar. We account for Venezuela as a highly-inflationary economy and accordingly, all currency fluctuations between the Bolivar and the U.S. Dollar are recorded in our statement of operations. Due to the recent devaluation of the Bolivar in February 2013, we recorded a $0.6 million foreign currency loss during the nine months ended February 28, 2013.


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Taxes. The provision for income tax was $12.4 million on pre-tax income of $33.5 million for the nine months ended February 28, 2013 compared to the provision for income tax of $11.3 million on pre-tax income of $30.4 million for the nine months ended February 29, 2012. The effective tax rate was 37% for the nine months ended February 28, 2013 and February 29, 2012.

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 February 28, 2013) 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 February 28, 2013, we were in compliance with all covenants of the Credit Facility. At February 28, 2013, we had $36.4 million of cash on hand and approximately $46 million of available borrowing capacity through our Credit Facility. Our Credit Facility does not mature until July 2016 and there are no mandatory payments before the maturity date. At that time, we expect to be able to renew the facility based upon our long-term relationships with each member bank of our Credit Facility and the relatively low credit leverage on our balance sheet.

Restrictions on cash. Included in our cash and cash equivalents at February 28, 2013, is $0.5 million of cash in Venezuela and $16.9 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 $1.3 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 nine months ended February 28, 2013, cash provided by operating activities was $38.2 million. Positive operating cash flow was primarily attributable to net income of $21.1 million, depreciation and amortization of $14.5 million, deferred taxes of $5.5 million, and non-cash compensation cost of $3.0 million offset by a $6.2 million increase in working capital.

Cash flows attributable to our investing activities. For the nine months ended February 28, 2013, cash used in investing activities was $36.3 million, consisting primarily of $18.8 million of capital expenditures and $18.6 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 nine months ended February 28, 2013, cash provided by financing activities was $12.1 million consisting primarily of $2.4 million of borrowings related to our Credit Facility and $8.2 million related to issuance of common stock from share-based payment arrangements.

Effect of exchange rate changes on cash. For the nine months ended February 28, 2013, the effect of exchange rate changes on cash was a negative impact of $0.1 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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