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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 28, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-9950
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TEAM, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1765729
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Hermann Drive, Alvin, Texas 77511
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 331-6154
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
On April 10, 2003, there were 7,596,304 shares of the Registrant's common stock
outstanding.
TEAM, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- 1
February 28, 2003 (Unaudited) and May 31, 2002
Consolidated Condensed Statements of Operations
(Unaudited) -- 2
Three Months and Nine Months Ended
February 28, 2003 and 2002
Consolidated Condensed Statements of Cash Flows
(Unaudited) -- 3
Nine Months Ended
February 28, 2003 and 2002
Notes to Unaudited Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
CERTIFICATIONS 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 28, MAY 31,
ASSETS 2003 2002
-------------- --------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 539,000 $ 823,000
Accounts receivable, net of allowance for doubtful
accounts of $625,000 and $511,000 15,702,000 17,250,000
Inventories 9,119,000 8,802,000
Prepaid expenses and other current assets 2,090,000 1,198,000
-------------- --------------
Total Current Assets 27,450,000 28,073,000
Property, Plant and Equipment, net of accumulated
depreciation of $17,164,000 and $15,719,000 12,321,000 11,937,000
Goodwill, net of accumulated amortization
of $922,000 10,049,000 10,049,000
Other Assets 368,000 1,130,000
-------------- --------------
Total Assets $ 50,188,000 $ 51,189,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,485,000 $ 1,512,000
Accounts payable 1,529,000 2,953,000
Other accrued liabilities 3,506,000 4,294,000
Income taxes payable -- 621,000
-------------- --------------
Total Current Liabilities 6,520,000 9,380,000
Long-term debt 11,357,000 11,978,000
Other long-term liabilities 1,076,000 1,476,000
Minority interest 211,000 173,000
-------------- --------------
Total Liabilities 19,164,000 23,007,000
-------------- --------------
Stockholders' Equity:
Preferred stock, 500,000 shares authorized, none issued -- --
Common stock, par value $.30 per share, 30,000,000 shares
authorized, 8,547,262 and 8,331,132 shares issued at
February 28, 2003 and May 31, 2002, respectively 2,564,000 2,499,000
Additional paid-in capital 33,846,000 32,961,000
Accumulated deficit (1,620,000) (4,670,000)
Accumulated other comprehensive loss (41,000) (57,000)
Treasury stock at cost, 809,300 and 658,520 shares (3,725,000) (2,551,000)
-------------- --------------
Total Stockholders' Equity 31,024,000 28,182,000
-------------- --------------
Total Liabilities and Stockholders' Equity $ 50,188,000 $ 51,189,000
============== ==============
See notes to unaudited consolidated condensed financial statements.
-1-
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 21,777,000 $ 19,047,000 $ 66,945,000 $ 60,469,000
Operating expenses 13,326,000 11,168,000 39,856,000 35,364,000
------------ ------------ ------------ ------------
Gross Margin 8,451,000 7,879,000 27,089,000 25,105,000
Selling, general and administrative expenses 7,402,000 6,565,000 21,604,000 19,850,000
Goodwill amortization -- 69,000 -- 206,000
Non-cash compensation cost 31,000 -- 83,000 --
Other expense -- 173,000 -- 173,000
------------ ------------ ------------ ------------
Earnings before interest and taxes 1,018,000 1,072,000 5,402,000 4,876,000
Interest 139,000 223,000 454,000 720,000
------------ ------------ ------------ ------------
Earnings before income taxes 879,000 849,000 4,948,000 4,156,000
Provision for income taxes 341,000 323,000 1,898,000 1,584,000
------------ ------------ ------------ ------------
Net income $ 538,000 $ 526,000 $ 3,050,000 $ 2,572,000
============ ============ ============ ============
Net income per common share:
Basic $ 0.07 $ 0.07 $ 0.39 $ 0.34
============ ============ ============ ============
Diluted $ 0.06 $ 0.06 $ 0.36 $ 0.31
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 7,751,000 7,661,000 7,736,000 7,667,000
============ ============ ============ ============
Diluted 8,398,000 8,260,000 8,468,000 8,174,000
============ ============ ============ ============
See notes to unaudited consolidated condensed financial statements.
-2-
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28,
2003 2002
-------------- --------------
Cash Flows from Operating Activities:
Net income $ 3,050,000 $ 2,572,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,879,000 2,015,000
Allowance for doubtful accounts and other 78,000 (5,000)
Equity in losses of unconsolidated subsidiaries (33,000) 5,000
Non-cash compensation cost 83,000 --
Change in assets and liabilities
(Increase) decrease:
Accounts receivable 1,470,000 545,000
Inventories (317,000) (613,000)
Prepaid expenses and other current assets (488,000) (423,000)
Increase (decrease):
Accounts payable (1,424,000) 28,000
Other accrued liabilities (724,000) 249,000
Income taxes payable (621,000) (133,000)
-------------- --------------
Net cash provided by operating activities 2,953,000 4,240,000
-------------- --------------
Cash Flows From Investing Activities:
Capital expenditures (1,625,000) (1,270,000)
Net additions to rental and demo machines (430,000) (398,000)
Proceeds from sale of assets 56,000 84,000
Other 153,000 5,000
-------------- --------------
Net cash used in investing activities (1,846,000) (1,579,000)
-------------- --------------
Cash Flows From Financing Activities:
Net payments under term loans and other long-term obligations (827,000) (1,423,000)
Repurchase of common stock (1,174,000) (1,909,000)
Issuance of common stock 610,000 412,000
-------------- --------------
Net cash used in financing activities (1,391,000) (2,920,000)
-------------- --------------
Net decrease in cash and cash equivalents (284,000) (259,000)
Cash and cash equivalents at beginning of year 823,000 968,000
-------------- --------------
Cash and cash equivalents at end of period $ 539,000 $ 709,000
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 483,000 $ 809,000
============== ==============
Income taxes paid $ 2,775,000 $ 1,843,000
============== ==============
See notes to unaudited consolidated condensed financial statements.
-3-
TEAM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. Method of Presentation
General
The interim financial statements are unaudited, but in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results for such periods.
The consolidated condensed balance sheet at May 31, 2002 is derived from
the May 31, 2002 audited consolidated financial statements. The results of
operations for any interim period are not necessarily indicative of results
for the full year. These financial statements should be read in conjunction
with the financial statements and notes thereto contained in Team, Inc.'s
("the Company") annual report on Form 10-K for the fiscal year ended May
31, 2002.
New Accounting Standards
Statement of Financial Accounting Standards No. 142 Accounting for
Goodwill and Other Intangible Assets ("SFAS No. 142") became effective for
the Company as of June 1, 2002. According to SFAS No. 142, goodwill that
arises from purchases after June 30, 2001 cannot be amortized. In addition,
SFAS No. 142 requires that amortization of existing goodwill will cease on
the first day of the adoption year. Accordingly, the Company stopped
recording the amortization of goodwill as a charge to earnings effective as
of the beginning of the current year.
The following table sets forth the pro-forma impact on the prior year
had the provisions of the new standard been applied as of June 1, 2001:
Three Months Ended Nine Months Ended
February 28, February 28,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Reported net income $ 538,000 $ 526,000 $ 3,050,000 $ 2,572,000
Add back: Goodwill amortization -- 69,000 -- 206,000
-------------- -------------- -------------- --------------
Adjusted net income $ 538,000 $ 595,000 $ 3,050,000 $ 2,778,000
============== ============== ============== ==============
Basic earnings per share:
Reported net income $ 0.07 $ 0.07 $ 0.39 $ 0.34
Goodwill amortization -- 0.01 -- 0.03
-------------- -------------- -------------- --------------
Adjusted net income $ 0.07 $ 0.08 $ 0.39 $ 0.37
============== ============== ============== ==============
Diluted earnings per share:
Reported net income $ 0.06 $ 0.06 $ 0.36 $ 0.31
Goodwill amortization -- 0.01 -- 0.03
-------------- -------------- -------------- --------------
Adjusted net income $ 0.06 $ 0.07 $ 0.36 $ 0.34
============== ============== ============== ==============
-4-
The Company has completed the initial impairment test required by SFAS
No. 142 and has preliminarily determined that there is no impairment of
goodwill as of June 1, 2002, the beginning of the fiscal year. Goodwill
will be tested for impairment at least annually hereafter, and impairment
losses, if any, will be presented in the operating section of the income
statement.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations
associated with the retirement of long-lived assets, except for certain
obligations of lessees. SFAS 143 is effective for the Company in June 2003.
Management is in the process of evaluating the impact of the adoption of
Statement 143.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued
in April 2002. SFAS No. 145 provides guidance for income statement
classification of gains and losses on extinguishment of debt and accounting
for certain lease modifications that have economic effects that are similar
to sale-leaseback transactions. SFAS No. 145 is effective for the Company
in June 2003. The Company is evaluating the impact of SFAS No. 145.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued
in June 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." SFAS No. 146 is effective for
disposal activities occurring after December 31, 2002. The adoption of
SFAS No. 146 has not impacted the Company's financial statements.
2. Dividends and Stock Repurchases
No dividends were paid during the nine months ended February 28, 2003
or 2002. Pursuant to the Company's Credit Agreement, the Company may not
pay quarterly dividends without the consent of its senior lender. Future
dividend payments will depend upon the Company's financial condition and
other relevant matters.
In January 2003, the Board of Directors increased the Company's
authority to repurchase its common stock on the open market to an
additional $2.5 million plus the amount of proceeds from stock option
exercises. This approval follows a similar authority given by the Company's
senior lender in December 2002 in connection with an amendment to the
Company's credit facility.
In the nine months ended February 28, 2003, the Company reacquired
150,780 shares pursuant to an open-market repurchase plan at a weighted
average price of $7.79 per share. These shares have not been formally
retired and, accordingly, these shares are carried as treasury stock.
Cumulatively, since the inception of the stock repurchase program in July
2000, the Company has reacquired 1,035,247 shares at a total cost of $4.4
million.
In March 2003, after the close of the quarter, the Company reacquired
an additional 150,908 for a total consideration of $869 thousand. As of
April 10, 2003, the Company has a remaining authorization of approximately
$1.4 million under the stock repurchase program, which is equivalent to
approximately 233,000 shares at recent prices.
3. Earnings Per Share
There is no difference, for either of the periods presented, in the
amount of net income (numerator) used in the computation of basic and diluted
earnings per share. With respect to the number of weighted
-5-
average shares outstanding (denominator), diluted shares reflects the pro forma
exercise of options to acquire common stock to the extent that the options'
exercise prices are less than the average market price of common shares during
the period. There were 113,250 shares of Common Stock outstanding for the
three-months and nine-months ended February 28, 2003, but were not included in
the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the Common Stock.
4. Inventories
Inventories consist of:
February 28, May 31,
2003 2002
-------------- --------------
Raw materials $ 986,000 $ 953,000
Finished goods and work in progress 8,133,000 7,849,000
-------------- --------------
Total $ 9,119,000 $ 8,802,000
============== ==============
5. Long-Term Debt
Long-term debt consists of:
February 28, May 31,
2003 2002
-------------- --------------
Revolving loan $ 6,410,000 $ 5,919,000
Term and mortgage notes 6,429,000 7,540,000
Capital lease obligations 3,000 31,000
-------------- --------------
12,842,000 13,490,000
Less current portion 1,485,000 1,512,000
-------------- --------------
Total $ 11,357,000 $ 11,978,000
============== ==============
In December 2002, the Company extended its loan agreements to expire
in September 2005 and to increase its authority to repurchase stock to $2.5
million plus proceeds from exercises of stock options.
6. Industry Segment Information
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," requires that the Company disclose certain information about
its operating segments where operating segments are defined as components
of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
Pursuant to SFAS No. 131, the Company has two reportable segments:
industrial services and equipment sales and rentals. The industrial
services segment includes services consisting of leak repair, hot tapping,
emissions control monitoring, field machining, and inspection. The
equipment sales and
-6-
rental segment is comprised solely of the operations of a wholly-owned
subsidiary, Climax Portable Machine Tools, Inc.
The Company evaluates performance based on earnings before interest
and income taxes. Inter-segment sales are eliminated in the operating
measures used by the company to evaluate segment performance and have,
therefore, been eliminated in the following schedule. Interest is not
allocated down to the segments.
THREE MONTHS ENDED FEBRUARY 28, 2003
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
-------------- ---------------- -------------- --------------
Revenues $ 19,125,000 $ 2,652,000 -- $ 21,777,000
============== ================ ============== ==============
Earnings (loss) before interest and taxes 2,091,000 204,000 (1,277,000) 1,018,000
Interest -- -- 139,000 139,000
-------------- ---------------- -------------- --------------
Earnings (loss) before income taxes 2,091,000 204,000 (1,416,000) 879,000
============== ================ ============== ==============
Depreciation and amortization 329,000 143,000 98,000 570,000
============== ================ ============== ==============
Capital expenditures 551,000 174,000 73,000 798,000
============== ================ ============== ==============
Identifiable assets $ 35,170,000 $ 11,085,000 $ 3,933,000 $ 50,188,000
============== ================ ============== ==============
THREE MONTHS ENDED FEBRUARY 28, 2002
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
-------------- ---------------- -------------- --------------
Revenues $ 16,692,000 $ 2,355,000 -- $ 19,047,000
============== ================ ============== ==============
Earnings (loss) before interest and taxes 2,186,000 (93,000) (1,021,000) 1,072,000
Interest -- -- 223,000 223,000
-------------- ---------------- -------------- --------------
Earnings (loss) before income taxes 2,186,000 (93,000) (1,244,000) 849,000
============== ================ ============== ==============
Depreciation and amortization 399,000 169,000 95,000 663,000
============== ================ ============== ==============
Capital expenditures 318,000 1,000 -- 319,000
============== ================ ============== ==============
Identifiable assets $ 31,925,000 $ 11,643,000 $ 4,301,000 $ 47,869,000
============== ================ ============== ==============
-7-
6. Industry Segment Information (continued)
NINE MONTHS ENDED FEBRUARY 28, 2003
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
-------------- ---------------- -------------- --------------
Revenues $ 58,875,000 $ 8,070,000 -- $ 66,945,000
============== ================ ============== ==============
Earnings (loss) before interest and taxes 8,385,000 598,000 (3,581,000) 5,402,000
Interest -- -- 454,000 454,000
-------------- ---------------- -------------- --------------
Earnings (loss) before income taxes 8,385,000 598,000 (4,035,000) 4,948,000
============== ================ ============== ==============
Depreciation and amortization 1,123,000 445,000 311,000 1,879,000
============== ================ ============== ==============
Capital expenditures 1,271,000 239,000 115,000 1,625,000
============== ================ ============== ==============
Identifiable assets $ 35,170,000 $ 11,085,000 $ 3,933,000 $ 50,188,000
============== ================ ============== ==============
NINE MONTHS ENDED FEBRUARY 28, 2002
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
-------------- ---------------- -------------- --------------
Revenues $ 53,188,000 $ 7,281,000 -- $ 60,469,000
============== ================ ============== ==============
Earnings (loss) before interest and taxes 7,919,000 (52,000) (2,991,000) 4,876,000
Interest -- -- 720,000 720,000
-------------- ---------------- -------------- --------------
Earnings (loss) before income taxes 7,919,000 (52,000) (3,711,000) 4,156,000
============== ================ ============== ==============
Depreciation and amortization 1,234,000 511,000 270,000 2,015,000
============== ================ ============== ==============
Capital expenditures 1,094,000 88,000 88,000 1,270,000
============== ================ ============== ==============
Identifiable assets $ 31,925,000 $ 11,643,000 $ 4,301,000 $ 47,869,000
============== ================ ============== ==============
-8-
7. Comprehensive income
Comprehensive income represents the change in the Company's equity
from transactions and other events and circumstances from non-owner sources
and includes all changes in equity except those resulting from investments
by owners and distributions to owners.
Comprehensive income is as follows:
Three Months Ended Nine Months Ended
February 28, February 28,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income $ 538,000 $ 526,000 $ 3,050,000 $ 2,572,000
Other comprehensive loss:
Unrealized gain/(loss) on derivative instruments 18,000 34,000 26,000 (107,000)
Tax benefit/(expense) (7,000) (12,000) (10,000) 41,000
------------ ------------ ------------ ------------
Comprehensive income $ 549,000 $ 548,000 $ 3,066,000 $ 2,506,000
============ ============ ============ ============
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 2003 COMPARED
TO THREE MONTHS ENDED FEBRUARY 28, 2002
Revenues for the quarter ended February 28, 2003 were $21.8 million
compared to $19.0 million for the corresponding period of the preceding year, an
increase of 14%. Operating margins (shown as "gross margin" in the Condensed
Statements of Operations) decreased to 38.8% in the 2003 quarter compared to
41.4% in the 2002 quarter. Net income of $538 thousand was comparable to last
year's $526 thousand, or $0.06 per diluted share.
Industrial Services Segment--The industrial services business segment,
which represents about 88% of consolidated revenues, experienced a significant
revenue growth in year over year comparisons in the third quarter. Services
segment revenues were $19.1 million in the 2003 quarter compared to $16.7
million in the 2002 quarter, an increase of 14.6%. The following table sets
forth the composition of industrial services revenues between our traditional
services that have been offered for more than twenty years (leak repair, hot
tapping, and fugitive emissions monitoring) and the newer service offerings
which were initiated approximately four years ago (NDT inspection, field
machining and technical bolting):
Increase
-----------------------
2003 Qtr. 2002 Qtr.
------------ ------------
Traditional Services $ 13,638,000 $ 11,985,000 $ 1,653,000 13.8%
Newer Services 5,487,000 4,707,000 780,000 16.6%
------------ ------------ ------------ ------
$ 19,125,000 $ 16,692,000 $ 2,433,000 14.6%
============ ============ ============ ======
Approximately half of the growth in industrial services came from the
addition of two multi-service, multi-location contracts which commenced in the
fourth quarter of fiscal 2002, with the remainder coming from many different
customers. This growth was achieved in spite of very tough market conditions
facing most of our served industry groups.
Revenues from newer service offerings grew at nearly 17% over last
year's quarter. We continued to grow field machining and technical bolting at a
robust pace--with revenues from these service lines increasing by more than 30%
over last year's third quarter. That reflects a continued penetration of those
services into our traditional customer base, as well as an increase in plant
turnaround projects in the quarter. NDT inspection revenues were generally flat
in the quarter due to a continued softness in pipeline related activity.
While industrial services revenues were up by nearly 15%, operating
profits for that segment (earnings before interest and taxes) actually declined
4% to $2.1 million in the 2003 quarter versus $2.2 million in the 2002 quarter.
The decline in operating profit was due to lower gross margins from services,
especially in the Gulf Coast and Western geographic areas of the United States,
coupled with higher support costs. We believe the operating profit decline is
attributed to three areas: 1) unusual insurance reserve increases, 2) low job
profit margins in several branch locations, and 3) cost increases related to
both our field and headquarters support activities.
Equipment Sales and Rental Segment--The equipment sales and rental
segment (the "Climax" business) grew revenues by 12.6% in the third quarter
($2.7 million) versus the same quarter last year ($2.4 million).
-10-
For the current year quarter, Climax earned an operating profit of $204 thousand
as compared to an operating loss of $93 thousand in last year's quarter, which
reflected a $173 thousand charge for severance associated with a reduction in
workforce. The improved operating results reflect the impact of the cost
reduction program implemented a year ago.
Corporate and other-- Corporate and other expenses for the third
quarter were $256 thousand higher than last year. $65 thousand of the increase
was due to severance costs incurred in the quarter associated with the
elimination of a senior level headquarters position. $130 thousand of the
increase related to legal costs, primarily resulting from increased legal
defense costs associated with litigation discussed in Part II, Item 1., "Legal
Proceedings". Management continues to expect legal defense costs to be
approximately $100 thousand per quarter for the next few quarters.
Interest expense was $84 thousand less in the current year's quarter
than in the same quarter last year due to 1) a significant reduction in the
amount of debt outstanding during the quarter, 2) general rate reductions by the
Federal Reserve Bank over the past year.
NINE MONTHS ENDED FEBRUARY 28, 2003 COMPARED
TO THE NINE MONTHS ENDED FEBRUARY 28, 2002
Revenues for the nine months ended February 28, 2003 were $66.9 million
compared to $60.5 million for the corresponding period of the preceding year, an
increase of 10.7%. Operating margins declined to 40.5% of revenues in the first
nine months of fiscal 2003 versus 41.5% in the same period last year and net
income increased to $3.1 million ($0.36 per share-diluted) as compared to $2.6
million ($0.31 per share) in fiscal 2002--an improvement of 18.6%.
Industrial Service Segment -- The following table sets forth the
composition of the industrial services segment revenues for the nine-month
periods:
Increase
-----------------------
2003 2002 $ %
------------ ------------
Traditional services $ 41,499,000 $ 37,133,000 $ 4,366,000 11.8%
Newer services 17,376,000 16,055,000 1,321,000 8.2%
------------ ------------ ------------ ------
$ 58,875,000 $ 53,188,000 $ 5,687,000 10.7%
============ ============ ============ ======
Reasons for year over year changes are generally consistent with the
above discussion for the third quarter comparison. Approximately half of the
increase in traditional services came from the multi-plant, multi-location
contracts that commenced in the fourth quarter of fiscal 2002. Growth in the
newer services came from the penetration of field machining and technical
bolting services which were up over 40% year over year. Year-to-date, NDT
inspection revenues were down 4.9% due to market conditions in the pipeline
customer segment and due to adverse weather conditions in the second quarter.
Operating profits for the industrial segment (earnings before interest
and taxes) were up 6%, increasing to $8.4 million in the first nine months of
fiscal 2003 versus $7.9 million last year. Profits were significantly impacted
by the margin decline issues in the third quarter, as discussed above.
Equipment Sales and Rental Segment -- The discussion of the Climax
segment for the nine-month period mirrors the three-month discussion above. The
business reported substantially improved results in the first nine months of
fiscal 2003, with revenues of $8.1 million versus $7.3 million in the same
period last year. Operating profits were $598
-11-
thousand year to date in fiscal 2003, versus a loss of $52 thousand in the
fiscal 2002 period, reflecting the cost improvements implemented in the third
quarter last year.
On a year to date basis, corporate general and administrative expenses
were up approximately $590 thousand over last year, due primarily to an increase
in legal costs as discussed above and as a result of the non-cash compensation
charge ($83 thousand) associated with performance based stock options.
Interest costs for the nine-month period of $454 thousand were $266
thousand less than incurred in the nine-month period of last year for the
reasons discussed in the three-month analysis above.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 2003, our liquid working capital (cash and accounts
receivable, less current liabilities) totaled $9.7 million, which is up $1.0
million from May 31, 2002. Since the end of the last fiscal year, we have
reduced our total outstanding debt by $650 thousand as a result of cash flow
from operations. We generally utilize excess operating funds to automatically
reduce the amount outstanding under the revolving credit facility.
In the opinion of management, we currently have sufficient funds and
adequate financial sources available to meet our anticipated liquidity needs.
Management believes that cash flows from operations, cash balances and available
borrowings will be sufficient for the foreseeable future to finance anticipated
working capital requirements, capital expenditures and debt service
requirements.
We have a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2005, (ii) $9,500,000 in
term loans for business acquisitions and (iii) a $2,000,000 mortgage loan.
Amounts borrowed against the term loans are due in quarterly installments in the
amount of $339,000 until the loans mature on September 30, 2005. Amounts
borrowed against the mortgage loan are repaid in quarterly installments of
$31,000 until its maturity date of September 30, 2008. Amounts outstanding under
the credit facility bear interest at a marginal rate over either the LIBOR rate
or the prime rate. At February 28, 2003, our marginal rate was 1.5% over the
LIBOR rate. The weighted average rate on outstanding borrowings at February 28,
2003 is approximately 3.92%. The Company also pays a commitment fee of .25% per
annum on the average amount of the unused availability under the revolving loan.
The Company entered into an interest rate swap agreement that expires
in September 2003 and which qualifies as a cash flow hedge under SFAS No. 133.
The agreement was entered into in 1998 to hedge the exposure of an increase in
interest rates. Pursuant to this agreement, which covers approximately $2.4
million of outstanding debt, the Company exchanged a variable LIBOR rate for a
fixed LIBOR rate of approximately 5.2%.
As the interest rates on the credit facility are based on market rates,
the fair value of amounts outstanding under the facility approximate the
carrying value. The interest rate swap agreements had a negative mark-to-market
value of approximately $66,000 and $92,000 at February 28, 2003 and May 31,
2002, respectively. The fair value of interest rate swaps is estimated by
discounting expected cash flows using quoted market interest rates.
Loans under the credit facility are secured by substantially all of the
assets of the Company. The terms of the agreement require the maintenance of
certain financial ratios and limit investments, liens, leases and indebtedness,
and dividends, among other things. At February 28, 2003, the Company was in
compliance with all credit facility covenants.
At February 28, 2003, the Company was contingently liable for $2.1
million in outstanding stand-by letters of credit and, at that date,
approximately $4.7 million was available to borrow under the credit facility.
-12-
CRITICAL ACCOUNTING POLICIES
Goodwill - The Company has $10.0 million of recorded goodwill
associated with business acquisitions made in fiscal year 1999. Of that amount,
approximately $7.1 million is associated with the industrial services segment
and $2.9 million is associated with the equipment sales and rental business.
Through May 31, 2002, goodwill was being amortized over 40 years and its
carrying value was periodically evaluated using management's estimate of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Under SFAS No. 121, there has been
no impairment of the Company's recorded goodwill. Effective at the beginning of
the Company's current fiscal year, June 1, 2002, we have adopted the provisions
of SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that
goodwill no longer be amortized but be reviewed for impairment at least annually
using a methodology that is different than the methodology required under SFAS
No. 121. Management has evaluated the impact of SFAS No. 142 on the consolidated
financial statements and determined that no adjustment is needed to the carrying
value of goodwill as a result of the implementation adoption of SFAS No. 142.
Revenue Recognition - The Company derives its revenues by providing a
variety of industrial services including leak repair, hot tapping, emissions
control services, field machining and inspection services. In addition, the
Company sells and rents portable machine tools through one of its subsidiaries.
For all of these services, revenues are recognized when services are rendered or
when product is shipped and risk of ownership passes to the customer.
Deferred Income Taxes - The Company records deferred income tax assets
and liabilities related to temporary differences between the book and tax bases
of assets and liabilities. The Company computes its deferred tax balances by
multiplying these temporary differences by the current tax rates. A valuation
allowance is provided for the net deferred tax asset amounts that are not likely
to be realized. As of February 28, 2003 management believes that it is more
likely than not that the Company will have sufficient future taxable income to
allow it to realize the benefits of the net deferred tax assets. Accordingly, no
valuation allowance has been recorded.
Loss Contingencies - The Company is involved in various lawsuits and
claims encountered in the normal course of business. When such a matter arises
and periodically thereafter, management consults with its legal counsel and
evaluates the merits of the claim based on the facts available at that time.
Currently, the Company is involved with two significant matters, which are
summarized in Legal Proceedings in Part II below. In management's opinion, an
adequate accrual has been made as of February 28, 2003 to provide for any losses
that may arise from these contingencies.
OTHER CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company enters into capital leases related to certain computer and
equipment and software, as well as operating leases related to facilities and
transportation and other equipment. These operating leases are over terms
ranging from one to five years with typical renewal options and escalation
clauses.
The Company is occasionally required to post letters of credit
generally issued by a bank as collateral under certain agreements. A letter of
credit commits the issuer to remit specified amounts to the holder, if the
holder demonstrates that the Company has failed to meet its obligations under
the letter of credit. If this were to occur, the Company would be obligated to
reimburse the issuer for any payments the issuer was required to remit to the
holder of the letter of credit. To date, the Company has not had any claims made
against a letter of credit that resulted in a payment made by the issuer or the
Company to the holder. The Company believes that it is unlikely that it will
have to fund claims made under letters of credit in the foreseeable future.
-13-
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 142 Accounting for
Goodwill and Other Intangible Assets ("SFAS No. 142") became effective for the
Company as of June 1, 2002. According to SFAS No. 142, goodwill that arises from
purchases after June 30, 2001 cannot be amortized. In addition, SFAS No. 142
requires that amortization of existing goodwill will cease on the first day of
the adoption year. Accordingly, the Company stopped recording the amortization
of goodwill as a charge to earnings effective as of the beginning of the current
year. See also the above discussion of goodwill under "Critical Accounting
Policies".
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations associated
with the retirement of long-lived assets, except for certain obligations of
lessees. SFAS 143 is effective for the Company in June 2003. Management is in
the process of evaluating the impact of the adoption of Statement 143.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued in
April 2002. SFAS No. 145 provides guidance for income statement classification
of gains and losses on extinguishment of debt and accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 is effective for the Company in June 2003. The
Company is evaluating the impact of SFAS No. 145.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued
in June 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS No. 146 is effective for disposal activities
occurring after December 31, 2002. The adoption of SFAS No. 146 has not impacted
the Company's Financial Statements.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Any forward-looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in any
forward-looking statements contained herein. Such factors include domestic and
international economic activity, interest rates, market conditions for the
Company's customers, regulatory changes and legal proceedings, and the Company's
successful implementation of its internal operating plans. Accordingly, there
can be no assurance that any forward-looking statements contained herein will
occur or those objectives will be achieved.
-14-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company holds certain floating-rate obligations. The exposure of
these obligations to increases in short-term interest rates is limited by
interest rate swap agreements entered into by the Company. There were no
material quantitative or qualitative changes during the first nine months of
fiscal 2003 in the Company's market risk sensitive instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and its chief financial officer
have evaluated the Company's disclosure controls and procedures (as defined in
Exchange Act rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the
filing date of this quarterly report and have concluded that such controls are
effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their evaluation.
-15-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 2002, The Company settled a lawsuit with respect to one of
two plaintiffs in a case involving allegations of misconduct by personnel in one
of the Company's branches during the years 1998 and 1999. The settlement follows
a jury verdict rendered against the Company in May 2002. An adequate accrual was
made at May 31, 2002 with respect to the ultimate settlement. With respect to
the second plaintiff, the Court set aside the jury verdict and granted the
Company's motion for a new trial on a specific issue. The Company is presently
evaluating its options with respect to this plaintiff and does not expect any
significant future costs with respect to this matter.
In December 2001, the Company was named a defendant in a lawsuit, along
with 18 other parties, alleging that a former subsidiary, French Ltd.
("French"), was involved in the illegal disposal of hazardous substances during
the years 1969 and 1970. The plaintiff's allege that Team is a
successor-in-interest to French and is, therefore, liable for contribution to a
settlement embodied in a consent decree entered into by the plaintiffs with the
EPA in 1998. French was acquired by Team in 1978 and sold back to its prior
owner in 1984. The case is early in the discovery stage and the Company is
unable to estimate a range of potential loss, if any, with respect to this
matter. However, the Company vigorously denies that it is a
successor-in-interest of French and that it has any responsibility in this
matter. The Company expects to incur ongoing litigation defense costs of
approximately $100 thousand per quarter for the next few quarters with respect
to this matter.
The Company and certain subsidiaries are involved in various other
lawsuits and are subject to various claims and proceedings encountered in the
normal conduct of business. In the opinion of management, any uninsured losses
that might arise from these lawsuits and proceedings will not have a materially
adverse effect on the Company's consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
99.1 Certification for Chief Executive Officer
99.2 Certification for Chief Financial Officer
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended February 28, 2003.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
TEAM, INC
(Registrant)
Date: April 14, 2003
/s/ PHILIP J. HAWK
-----------------------------------
Philip J. Hawk
Chairman and Chief Executive Officer
/s/ TED W. OWEN
-----------------------------------
Ted W. Owen, Senior Vice President -
Finance and Administration
(Principal Financial Officer and
Principal Accounting Officer)
-17-
CERTIFICATIONS
I, Philip J. Hawk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Team, Inc., ("Team");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. Team's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Team's other certifying officer and I have disclosed, based on our most
recent evaluation, to Team's auditors and audit committee of Team's board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. Team's other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ PHILIP J. HAWK
------------------------------------
Philip J. Hawk
Chairman and Chief Executive Officer
-18-
I, Ted W. Owen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Team, Inc., ("Team");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. Team's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Team's other certifying officer and I have disclosed, based on our most
recent evaluation, to Team's auditors and audit committee of Team's board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. Team's other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ Ted W. Owen
----------------------------
Ted W. Owen
Senior Vice President -
Finance and Administration
-19-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
99.1 Certification for Chief Executive Officer
99.2 Certification for Chief Financial Officer