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TISI > SEC Filings for TISI > Form 10-K on 12-Aug-2013All Recent SEC Filings

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Form 10-K for TEAM INC


12-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following review of our results of operations and financial condition should be read in conjunction with Item 1 "Business," Item 1A "Risk Factors," Item 2 "Properties," and Item 8 "Consolidated Financial Statements and Supplementary Data," included in this Form 10-K.

CAUTIONARY STATEMENT FOR THE PURPOSE OF

SAFE HARBOR PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on behalf of the Company in other materials we release to the public including all statements, other than statements of historical facts, included or incorporated by reference in this Form 10-K, that address activities, events or developments which we expect or anticipate will or may occur in the future. You can generally identify our forward-looking statements by the words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "projection," "predict," "budget," "forecast," "goal," "guidance," "target," "will," "could," "should," "may" and similar expressions.

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.

This Management's Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, changes in financial condition, and results of operations.

General Information

We are a leading provider of specialty industrial services, including inspection and assessment, required in maintaining high temperature and high pressure piping systems and vessels that are utilized extensively in the refining, petrochemical, power, pipeline and other heavy industries. Through fiscal year 2013, we operated in only one segment- the industrial services segment (see Note 14). Within the industrial services segment, we were organized as two divisions. Our TCM division provided the services of inspection and assessment and field heat treating and pipeline integrity management. Our TMS division provided the services of leak repair, fugitive emissions, hot tapping, field machining, technical bolting, field valve repair and other mechanical services.

Effective July 1, 2013, we implemented a reorganization of our business divisions and from that date forward we will conduct operations in three segments: Inspection and IHT Group. MS Group, and Quest Integrity Group. While our services have been realigned in three business groups, we believe our services broadly fall into three different classifications that have unique customer demand drivers: inspection and assessment services, turnaround services, and on-stream services.


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Inspection and assessment services are offered in both IHT Group and Quest Integrity Group. These services include basic and advanced non-destructive testing, pipeline integrity management services, as well as associated engineering and assessment services. These services can be offered while facilities are running (on-stream) or during facility turnarounds or during new construction or expansion activities. We believe there is a general growth in market demand for these services as improved inspection technologies enable better information about asset reliability and integrity to be available to facility owners and operators.

Turnaround services are offered in both the IHT Group and in the MS Group. These services represent project-related services and demand is a function of the number and scope of scheduled and unscheduled facility turnarounds and as well as new industrial facility construction or expansion. Turnaround services includes the field machining, technical bolting, field valve repair, heat exchanger repair, and isolation test plugging services that are part of the MS Group and the Field Heat Treating services that are part of the IHT Group.

On-stream services are offered by the MS Group and represent the services offered while plants are operating and under pressure. These services include leak repair, fugitive emissions control and hot tapping. We believe demand for on-stream services is a function of the population of the existing infrastructure of operating industrial facilities.

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.

Year Ended May 31, 2013 Compared to Year Ended May 31, 2012

The following table sets forth the components of revenue and operating income
from our operations for fiscal years 2013 and 2012 (in thousands):



                                                                                            Increase
                                              Year Ended           Year Ended              (Decrease)
                                             May 31, 2013         May 31, 2012           $              %
Revenues:
TCM division
Inspection and Heat Treating                $      380,518       $      314,408       $ 66,110           21 %
Quest Integrity Group                               57,433               40,422         17,011           42 %

                                                   437,951              354,830         83,121           23 %
TMS division                                       276,360              268,910          7,450            3 %

Total revenues                                     714,311              623,740         90,571           15 %

Gross margin                                       212,965              195,051         17,914            9 %
SG&A expenses:
Field operations                                   135,495              117,044         18,451           16 %
Corporate costs                                     22,860               21,893            967            4 %
Non-routine legal settlement                            -                   800           (800 )        100 %

Total SG&A expenses                                158,355              139,737         18,618           13 %
Earnings from unconsolidated affiliates                992                1,183           (191 )        (16 )%

Operating income                            $       55,602       $       56,497       $   (895 )         (2 )%

Revenues. Our revenues for the year ended May 31, 2013 were $714.3 million compared to $623.7 million for the year ended May 31, 2012, an increase of $90.6 million or 15%. Revenues for our TCM division for the year ended May 31, 2013 were $438.0 million compared to $354.8 million for the year ended May 31, 2012, an increase of $83.1 million or 23%. Included in the TCM division for 2013 are revenues from Quest Integrity


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Group, which became a stand-alone segment effective as of the beginning of fiscal year 2014. Quest Integrity revenues of $57.4 million were up 42% over the prior year as a result of expanded pipeline integrity management services and further market penetration of proprietary in-line inspection technologies. The remainder of the TCM division, which now comprises the new Inspection and Heat Treating Services group, had revenues of $380.5 million, up $66.1 million, or 21% over the prior year. Included in that amount was $13 million of revenue associated with businesses acquired during the year.

Revenues for our TMS division for the year ended May 31, 2013 were $276.4 million compared to $268.9 million for the year ended May 31, 2012, an increase of $7.5 million or 3%. TMS revenue growth was negatively impacted by a reduction in the number of very large turnaround projects in the second half of the fiscal year 2013 as compared to the same period of fiscal year 2012.

The following table presents our revenues by customer demand drivers (in thousands):

                                                                           Increase
                                  Year Ended         Year Ended           (Decrease)
                                 May 31, 2013       May 31, 2012         $           %
    Inspection and assessment   $      338,343     $      262,523     $ 75,820        29 %
    Turnaround                         231,916            215,908       16,008         7 %
    On-stream services                 144,052            145,309       (1,257 )      (1 )%

                                $      714,311     $      623,740     $ 90,571        15 %

Gross margin. Our gross margin for the year ended May 31, 2013 was $213.0 million compared to $195.1 million for the year ended May 31, 2012, an increase of $17.9 million or 9%. Gross margin as a percentage of revenue was 30% for the year ended May 31, 2013 compared to 31% for the year ended May 31, 2012. The decline in gross margin percentage was primarily due to higher indirect costs in the second half of the year. Revenue growth rates declined as a result of a reduction in the number of very large turnaround projects in the spring of 2013 compared to the very strong spring 2012 turnaround season.

Selling, general and administrative expenses. Our SG&A expenses for the year ended May 31, 2013 were $158.4 million compared to $139.7 million for the year ended May 31, 2012, an increase of $18.6 million or 13%. As a percentage of revenues, SG&A expenses were 22% in the current year and the prior year.

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 year ended May 31, 2013 and May 31, 2012 were $13.5 million and $12.3 million, respectively. Our share of the earnings from the joint venture were $1.0 million for the year ended May 31, 2013 and $1.2 million for the year ended May 31, 2012.

Interest. Interest expense was $2.7 million for the year ended May 31, 2013 compared to $2.4 million for the year ended May 31, 2012.

Foreign currency loss (gain). There were $0.9 million currency transaction losses for the year ended May 31, 2013 compared to gains of $0.1 million for the year ended May 31, 2012. Currency transaction gains and losses 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 year ended May 31, 2013. Management is closely monitoring currency valuation developments in Venezuela. If further devaluations occur in fiscal year 2014, we will incur further impairments of our investment in Venezuela.

Taxes. The provision for income tax was $19.2 million on pre-tax income of $51.9 million for the year ended May 31, 2013 compared to the provision for income tax of $19.4 million on pre-tax income of $52.5 million for the year ended May 31, 2012. The effective tax rate was 37% for the year ended May 31, 2013 and May 31, 2012.


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Year Ended May 31, 2012 Compared to Year Ended May 31, 2011

The following table sets forth the components of revenue and operating income
from our operations for fiscal years 2012 and 2011 (in thousands):



                                                                                       Increase
                                        Year Ended           Year Ended               (Decrease)
                                       May 31, 2012         May 31, 2011            $              %
Revenues:
TCM division
Inspection and Heat Treating          $      314,408       $      268,783       $  45,625            17 %
Quest Integrity Group                         40,422               15,833          24,589           155 %

                                             354,830              284,616          70,214            25 %
TMS division                                 268,910              223,404          45,506            20 %

Total revenues                               623,740              508,020         115,720            23 %

Gross margin                                 195,051              157,143          37,908            24 %
SG&A expenses:
Field operations                             117,044               95,806          21,238            22 %
Corporate costs                               21,893               19,260           2,633            14 %
Non-routine acquisition costs                     -                   632            (632 )        (100 )%
Non-routine legal settlement                     800                   -              800           100 %

Total SG&A expenses                          139,737              115,698          24,039            21 %
Earnings from unconsolidated
affiliates                                     1,183                1,030             153            15 %

Operating income                      $       56,497       $       42,475       $  14,022            33 %

Revenues. Our revenues for the year ended May 31, 2012 were $623.7 million compared to $508.0 million for the year ended May 31, 2011, an increase of $115.7 million or 23%. Revenues for our TCM division for the year ended May 31, 2012 were $354.8 million compared to $284.6 million for the year ended May 31, 2011, an increase of $70.2 million or 25%. Revenues for our TMS division for the year ended May 31, 2012 were $268.9 million compared to $223.4 million for the year ended May 31, 2011, an increase of $45.5 million or 20%. Organic revenue growth was approximately $100 million or 20% for the year ended May 31, 2012. Overall revenue growth was broad based across services lines, geography and customers and was a result of strong service performance, beginning the year with a strong tailwind as it relates to turnaround projects, expansion of new services lines and capabilities, and long term procurement consolidation trends by our customers.

The following table presents our revenues by customer demand drivers (in thousands):

                                                                           Increase
                                  Year Ended         Year Ended           (Decrease)
                                 May 31, 2012       May 31, 2011          $          %
    Inspection and assessment   $      262,523     $      200,926     $  61,597       31 %
    Turnaround                         215,908            175,728        40,180       23 %
    On-stream services                 145,309            131,366        13,943       11 %

                                $      623,740     $      508,020     $ 115,720       23 %

Gross margin. Our gross margin for the year ended May 31, 2012 was $195.1 million compared to $157.1 million for the year ended May 31, 2011, an increase of $37.9 million or 24%. Gross margin as a percentage of revenue was 31% for the year ended May 31, 2012 and 2011. Gross margin for our TCM division for the year ended May 31, 2012 was $110.2 million compared to $87.6 million for the year ended May 31, 2011, an increase of $22.6 million or 26%. TCM division gross margin as a percentage of revenue was 31% for the year ended May 31, 2012 and 2011. Gross margin for our TMS division was $84.9 million for the year ended May 31, 2012 compared to $69.6 million for the year ended May 31, 2011, an increase of $15.3 million or 22%.


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TMS division gross margin as a percentage of revenue was 32% for the year ended May 31, 2012 and 31% for the year ended May 31, 2011. Gross margins for both divisions reflect relatively flat year over year job margins. Fluctuations in gross margins are primarily impacted by service line mix.

Selling, general and administrative expenses. Our SG&A expenses for the year ended May 31, 2012 were $139.7 million compared to $115.7 million for the year ended May 31, 2011, an increase of $24.0 million or 21%. SG&A expenses for the current year ended May 31, 2012 includes a non-routine $0.8 million pre-tax legal settlement related to the resolution of a long outstanding personal injury matter and in the prior year included $0.6 million of non-routine expense related to the Quest Integrity acquisition. Excluding these non-routine charges, SG&A expenses for the year ended May 31, 2012 were $138.9 million, an increase of $23.9 million or 21%. SG&A expenses as a percentage of revenue, adjusted to exclude the non-routine charges, was 22% for the year ended May 31, 2012 compared to 23% for the year ended May 31, 2011. The increase in SG&A expenses primarily was related to compensation related costs within field operations supporting organic growth. Also included in SG&A expenses were approximately $2.7 million in unusually elevated expenses in the year. First, we incurred $2.0 million in increased medical costs accruals. We accrue medical costs based on our actuarial expectation of claims. Due to an unusual number of major claims that hit during the fiscal year, our actual costs exceeded our accruals, thus requiring the additional expense. Second, we incurred about $0.7 million in outside legal and professional services expenses related to two recently completed acquisitions as well as significant efforts on unsuccessful transaction activities.

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 year ended May 31, 2012 and 2011 were $12.3 million and $9.9 million, respectively. As a result of the higher revenue levels in the joint venture, and leverage of fixed costs of the joint venture, our share of the earnings from the joint venture were $1.2 million, an increase of $0.2 million or 15%.

Interest. Interest expense was $2.4 million for the year ended May 31, 2012 compared to $2.2 million for the year ended May 31, 2011. The increase is a result of higher interest rates applied to increased outstanding borrowings.

Foreign currency (gain) loss. There were no significant currency transaction gains or losses for the year ended May 31, 2012 and 2011, respectively.

Taxes. The provision for income tax for fiscal year 2012 was $19.4 million on pre-tax income of $52.5 million, compared to the provision for income tax for fiscal year 2011 of $13.5 million on pre-tax income of $40.2 million. During the third quarter of fiscal year 2011, we identified and corrected accounting errors relating to the effect of share-based compensation on tax provisions for fiscal years 2007-2010. During those periods, reported earnings were understated because effective tax rates were overstated as a result of the previously undetected errors in the tax provision calculation. No restatement of previously issued financial statements was required because the effect on those statements was immaterial. The cumulative effect of the errors in the tax provision calculation was a tax benefit consisting of $1.8 million associated with the prior years. Our effective tax rate for the fiscal year 2012 was 37% compared to 38% for the fiscal year 2011 which excludes the effect of the $1.8 million portion of the cumulative adjustments related to prior years (see Note 8).

Liquidity and Capital Resources

Financing for our operations consists primarily of vendor financing and leasing arrangements, our banking credit facility "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


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Eurodollar rate option (LIBOR plus 1.75% margin at May 31, 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 May 31, 2013, we had $34.2 million of cash on hand and approximately $64 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 defined as our debt to EBITDA ratio. During fiscal year 2013, our net borrowing/repayment activity resulted in a $13.6 million reduction to the outstanding balance of the Credit Facility compared to the ending balance as of May 31, 2012.

In order to secure our casualty insurance programs we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. At May 31, 2013 and May 31, 2012, we were contingently liable for outstanding stand-by letters of credit totaling $13.1 million and $13.5 million, respectively. Outstanding letters of credit reduce amounts available under our Credit Facility and are considered as having been funded for purposes of calculating our financial covenants under the Credit Facility.

On February 12, 2008, we borrowed 12.3 million under the Credit Facility to serve as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate offset translation gains or losses attributable to our investment in our European operations. At May 31, 2013, the 12.3 million borrowing had a U.S. Dollar value of $16.0 million.

Contractual Obligations

A summary of contractual obligations as of May 31, 2013 are as follows (in
thousands):



                                 Less than 1 year         1-3 years         3-5 years         More than 5 years          Total
Long term debt obligations      $               -        $        -        $    72,946       $                -        $  72,946
Operating lease obligations                 14,736            21,123             8,999                    13,383          58,241
Other long-term liabilities                     -              5,097                -                         -            5,097

Total                           $           14,736       $    26,220       $    81,945       $            13,383       $ 136,284

A summary of long-term debt and other contractual obligations as of May 31, 2013 and May 31, 2012 is as follows (in thousands):

                                                               May 31,
                                                          2013         2012
         Credit Facility                                $ 72,946     $ 85,872
         Current maturities                                   -            -

         Long-term debt, excluding current maturities   $ 72,946     $ 85,872

         Outstanding letters of credit                  $ 13,149     $ 13,548
         Leasing arrangements                           $ 58,241     $ 36,121
         Other long-term liabilities                    $  5,097           -

Restrictions on cash. Included in our cash and cash equivalents at May 31, 2013, is $1.2 million of cash in Venezuela and $16.5 million of cash in foreign subsidiaries (located primarily in Europe and Canada) where earnings are considered by the Company to be permanently reinvested. In the event that some or all of this cash were to be repatriated, we would be required to accrue and pay additional taxes. While not legally restricted from


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repatriating this cash, we consider all undistributed earnings of these foreign subsidiaries in the amount of $14.4 million 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. Due to the official devaluation of the Venezuelan currency, the Bolivar, in February 2013 we recorded a devaluation loss of $0.6 million during the year ended May 31, 2013. Management is closely monitoring currency valuation developments in Venezuela. If further devaluations occur in fiscal year 2014, we will incur further impairments of our investment in Venezuela.

Cash flows attributable to our operating activities. For the year ended May 31, 2013, net cash provided by operating activities was $58.6 million. Positive . . .

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