Team, Inc
TEAM INC (Form: 10-Q, Received: 04/08/2013 15:29:01)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number 001-08604

TEAM, INC.

 

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   74-1765729

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

13131 Dairy Ashford, Suite 600, Sugar Land, Texas   77478
(Address of Principal Executive Offices)   (Zip Code)

(281) 331-6154

 

(Registrant’s Telephone Number, Including Area Code)

200 Hermann Drive, Alvin, Texas 77511

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark 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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   þ  
Non-accelerated filer   ¨      Smaller reporting company   ¨  
(Do not check if a smaller reporting company)    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                       Yes   ¨      No   þ

The Registrant had 20,587,808 shares of common stock, par value $0.30, outstanding and 89,569 shares of treasury stock as of April 1, 2013.

 

 

 


Table of Contents

INDEX

 

         Page No.  

PART I—FINANCIAL INFORMATION

     2   

Item 1.

  Financial Statements      2   
 

Consolidated Condensed Balance Sheets as of February 28, 2013 (Unaudited) and May 31, 2012

     2   
 

Unaudited Consolidated Condensed Statements of Operations for the Three and Nine Months Ended February 28, 2013 and February 29, 2012

     3   
 

Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended February 28, 2013 and February 29, 2012

     4   
 

Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months Ended February 28, 2013 and February 29, 2012

     5   
 

Notes to Unaudited Consolidated Condensed Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4.

 

Controls and Procedures

     24   

PART II—OTHER INFORMATION

     26   

Item 1.

 

Legal Proceedings

     26   

Item 1A.

 

Risk Factors

     26   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 3.

 

Defaults Upon Senior Securities

     27   

Item 4.

 

Mine Safety Disclosures

     27   

Item 5.

 

Other Information

     27   

Item 6.

 

Exhibits

     27   

SIGNATURES

     28   

 

1


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

TEAM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

 

     February 28, 2013     May 31, 2012  
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 36,422      $ 22,477   

Receivables, net of allowance of $5,352 and $4,405

     154,974        157,625   

Inventory

     26,811        24,986   

Prepaid income taxes

     4,588        —     

Deferred income taxes

     4,660        5,157   

Prepaid expenses and other current assets

     6,643        8,430   
  

 

 

   

 

 

 

Total current assets

     234,098        218,675   

Property, plant and equipment, net

     72,503        62,041   

Assets held for sale

     5,757        5,830   

Intangible assets, net of accumulated amortization of $8,118 and $5,658

     26,899        18,508   

Goodwill

     104,787        95,002   

Other assets, net

     2,834        3,081   

Deferred income taxes

     259        651   
  

 

 

   

 

 

 

Total assets

   $ 447,137      $ 403,788   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 15,805      $ 18,427   

Other accrued liabilities

     37,935        38,492   

Income taxes payable

     1,396        4,737   

Deferred income taxes

     107        —     
  

 

 

   

 

 

 

Total current liabilities

     55,243        61,656   

Deferred income taxes

     15,563        11,259   

Long-term debt

     89,063        85,872   

Other long-term liabilities

     6,661        —    
  

 

 

   

 

 

 

Total liabilities

     166,530        158,787   

Commitments and contingencies

    

Equity:

    

Preferred stock, 500,000 shares authorized, none issued

     —         —    

Common stock, par value $0.30 per share, 30,000,000 shares authorized; 20,586,397 and 19,954,996 shares issued

     6,175        5,985   

Additional paid-in capital

     98,357        85,801   

Retained earnings

     173,011        152,049   

Accumulated other comprehensive income (loss)

     (878     (2,587

Treasury stock at cost, 89,569 and 89,569 shares

     (1,344     (1,344
  

 

 

   

 

 

 

Total Team shareholders’ equity

     275,321        239,904   

Non-controlling interest

     5,286        5,097   
  

 

 

   

 

 

 

Total equity

     280,607        245,001   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 447,137      $ 403,788   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

2


Table of Contents

TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     February 28,
2013
    February 29,
2012
    February 28,
2013
     February 29,
2012
 

Revenues

   $ 150,975      $ 136,523      $ 513,115       $ 435,889   

Operating expenses

     112,084        99,920        362,224         304,393   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross margin

     38,891        36,603        150,891         131,496   

Selling, general and administrative expenses

     38,278       33,210        115,280         100,116   

Earnings (loss) from unconsolidated affiliates

     (4 )     63        862         911   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     609       3,456        36,473         32,291   

Interest expense, net

     743       619        2,019         1,769   

Foreign currency loss (gain)

     729       (90     917         74   
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) before income taxes

     (863 )     2,927        33,537         30,448   

Less: Provision for income taxes

     (319 )     946        12,409         11,266   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

     (544 )     1,981        21,128         19,182   

Less: Income (loss) attributable to non-controlling interest

     (9 )     (30     166         35   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) available to Team shareholders

   $ (535 )   $ 2,011      $ 20,962       $ 19,147   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) per share: Basic

   $ (0.03 )   $ 0.10      $ 1.04       $ 0.98   

Net income (loss) per share: Diluted

   $ (0.03 )   $ 0.10      $ 0.99       $ 0.93   

See accompanying notes to unaudited consolidated condensed financial statements.

 

3


Table of Contents

TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

    Three Months Ended     Nine Months Ended  
    February 28,
2013
    February 29,
2012
    February 28,
2013
    February 29,
2012
 

Net income (loss)

  $ (544   $ 1,981      $ 21,128      $ 19,182   

Foreign currency translation adjustment

    (1,985     3,293        2,305        (3,037

Foreign currency hedge

    (143     (117     (791     1,164   

Tax provision attributable to other comprehensive income

    594        (754     218        41   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

    (2,078     4,403        22,860        17,350   

Less: Total comprehensive income (loss) attributable to non-controlling interest

    (14     2        189        33   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) available to Team shareholders

  $ (2,064 )   $ 4,401      $ 22,671     $ 17,317   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

4


Table of Contents

TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months Ended  
     February 28,
2013
    February 29,
2012
 

Cash flows from operating activities:

    

Net income

   $ 21,128     $ 19,182   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Earnings from unconsolidated affiliates

     (862 )     (911

Depreciation and amortization

     14,454       12,913   

Amortization of deferred loan costs

     167       228   

Foreign currency loss

     917       74   

Deferred income taxes

     5,475        2,135   

Write-down of fixed assets

     73        —      

Non-cash compensation cost

     3,022       3,518   

(Increase) decrease:

    

Receivables

     6,675       7,554   

Inventory

     (1,675 )     (2,170

Prepaid expenses and other current assets

     2,596        2,056   

Increase (decrease):

    

Accounts payable

     (3,528 )     (7,150

Other accrued liabilities

     (2,796 )     (229

Income taxes

     (7,430 )     (4,572
  

 

 

   

 

 

 

Net cash provided by operating activities

     38,216        32,628   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (18,803 )     (15,825

Business acquisitions, net of cash acquired

     (18,589     (19,351

Proceeds from sale of assets

     15       220   

Distributions from joint venture

     1,000       800   

Decrease in other assets, net

     55       13   
  

 

 

   

 

 

 

Net cash used in investing activities

     (36,322 )     (34,143
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under revolving credit agreement, net

     2,400       13,710   

Payments related to term and auto notes

     —         (236

Debt issuance costs

     —         (799

Corporate tax effect from share-based payment arrangements

     3,002        1,195   

Issuance of common stock from share-based payment arrangements

     8,242       2,227   

Payments related to withholding tax for share-based payment arrangements

     (1,517 )     (853
  

 

 

   

 

 

 

Net cash provided by financing activities

     12,127        15,244   

Effect of exchange rate changes on cash

     (76 )     (347
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     13,945       13,382   

Cash and cash equivalents at beginning of period

     22,477       14,078   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 36,422     $ 27,460   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

5


Table of Contents

TEAM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED

FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Introduction.  Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “the Company,” “we,” “our” and “us” are used in this report to refer to Team, Inc., to one or more of our consolidated subsidiaries or to all of them taken as a whole. We are incorporated in the State of Delaware and our company website can be found at www.teamindustrialservices.com . Our corporate headquarters is located at 13131 Dairy Ashford, Suite 600, Sugar Land, Texas, 77478 and our telephone number is (281) 331-6154. Prior to January 3, 2012 our stock was traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “TISI”. Beginning January 3, 2012 our stock is now traded on the New York Stock Exchange (“NYSE”) under the same symbol. Our fiscal year ends on May 31 of each calendar year.

We are a leading provider of specialty maintenance and inspection services required in maintaining high temperature and high pressure piping systems and vessels that are utilized extensively in heavy industries. We offer an array of complementary services including:

 

   

Inspection and Assessment

 

   

Field Heat Treating

 

   

Leak Repair

 

   

Fugitive Emissions Control

 

   

Hot Tapping

 

   

Field Machining

 

   

Technical Bolting

 

   

Field Valve Repair

 

   

Heat Exchanger and Maintenance

 

   

Isolation Test Plugging

 

   

Pipeline Integrity Management

We offer these services in over 125 locations throughout the world. Our industrial services are available 24 hours a day, 7 days a week, 365 days a year. We market our services to companies in a diverse array of heavy industries which include the petrochemical, refining, power, pipeline, steel, pulp and paper industries, as well as municipalities, shipbuilding, original equipment manufacturers (“OEMs”), distributors, and some of the world’s largest engineering and construction firms. Our services are also provided across a broad geographic reach.

Basis for presentation. These interim financial statements are unaudited, but in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of results for such periods. The consolidated condensed balance sheet at May 31, 2012 is derived from the May 31, 2012 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 our annual report on Form 10-K for the fiscal year ended May 31, 2012.

Consolidation.  The consolidated financial statements include the accounts of Team, Inc. and our majority-owned subsidiaries where we have control over operating and financial policies. Investments in affiliates in

 

6


Table of Contents

which we have the ability to exert significant influence over operating and financial policies, but where we do not control the operating and financial policies, are accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates .  Our accounting policies conform to Generally Accepted Accounting Principles in the U.S. (“GAAP”). Our most significant accounting policies are described below. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect our reported financial position and results of operations. We review significant estimates and judgments affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Estimates and judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements. Estimates and judgments are used in, among other things, (1) aspects of revenue recognition, (2) valuation of tangible and intangible assets and subsequent assessments for possible impairment, (3) the fair value of the non-controlling interest in subsidiaries that are not wholly-owned, (4) estimating various factors used to accrue liabilities for workers’ compensation, auto, medical and general liability, (5) establishing an allowance for uncollectible accounts receivable, (6) estimating the useful lives of our assets and (7) assessing future tax exposure and the realization of tax assets.

Fair value of financial instruments .  Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair value of our banking facility is representative of the carrying value based upon the variable terms and management’s opinion that the current rates available to us with the same maturity and security structure are equivalent to that of the banking facility.

Cash and cash equivalents . Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid short-term investments with original maturities of three months or less.

Inventory Inventory is stated at the lower of cost (first-in, first-out method) or market. Inventory includes material, labor and certain fixed overhead costs.

Property, plant and equipment .  Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the shorter of their respective useful life or the lease term. Depreciation and amortization of assets are computed by the straight-line method over the following estimated useful lives of the assets:

 

Classification

   Useful Life  

Buildings

     20-40 years   

Leasehold improvements

     2-15 years   

Machinery and equipment

     2-12 years   

Furniture and fixtures

     2-10 years   

Computers and computer software

     2-5 years   

Automobiles

     2-5 years   

Goodwill, intangible assets, and non-controlling interest .  Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other (“ASC 350”). Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with ASC 350.

 

7


Table of Contents

We operate in only one segment—the industrial services segment (see Note 14). 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, hot tapping, field machining, technical bolting, field valve repair and other mechanical services. Each division has goodwill relating to past acquisitions and we assess goodwill for impairment at the TCM and TMS divisional level. Our annual goodwill impairment test is conducted as of May 31 of each year, which is our fiscal year end. Conducting the impairment test as of May 31 of each fiscal year aligns with our annual budget process which is typically completed during the fourth quarter of each year. In addition, performing our annual goodwill impairment test as of this date allows for a thorough consideration of the valuations of our business units subsequent to the completion of our annual budget process but prior to our financial year end reporting date.

On May 31, 2012, we adopted Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which requires reporting entities to assess relevant events and circumstances in evaluating whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount of goodwill. If, after assessing the totality of events and circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is greater than the carrying amount, then the first and second steps of the goodwill impairment test described in ASC 350 are not necessary. We evaluated considerations under ASU 2011-08 such as macroeconomic effects on our business, industry and market considerations, cost factors that could have a negative effect on cash flows or earnings, overall financial performance, entity-specific events, events affecting reporting units, and any realization of a sustained decrease in the price of our stock. After consideration of the aforementioned events and circumstances, we concluded that it was more likely than not that the fair value of a reporting unit was greater than the carrying amount of goodwill. Accordingly, we did not perform the two-step process described in ASC 350 for our fiscal year 2012 annual test.

There was $104.8 million and $95.0 million of goodwill at February 28, 2013 and May 31, 2012, respectively. A summary of goodwill is as follows (in thousands):

 

     Nine Months Ended
February 28, 2013
 
     (unaudited)  
     TCM Division      TMS Division     Total  

Balance at May 31, 2012

   $ 75,131      $ 19,871     $ 95,002  

Acquisition and purchase price adjustments

     9,950        (1,222 )     8,728  

Foreign currency adjustments

     492        565       1,057  
  

 

 

    

 

 

   

 

 

 

Balance at February 28, 2013

   $ 85,573      $ 19,214     $ 104,787  
  

 

 

    

 

 

   

 

 

 

Income taxes .  We follow the guidance of the ASC 740, Income Taxes (“ASC 740”), which requires that we use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant temporary differences. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax payable and related tax expense together with assessing temporary differences resulting from differing treatment of certain items, such as depreciation, for tax and accounting purposes. These differences can result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized, we must establish a valuation allowance. We consider all available evidence to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities, share-based compensation and tax planning strategies.

 

8


Table of Contents

Workers’ compensation, auto, medical and general liability accruals In accordance with ASC 450, Contingencies (“ASC 450”), we record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review our loss contingencies on an ongoing basis to ensure that we have appropriate reserves recorded on our balance sheet. These reserves are based on historical experience with claims incurred but not received, estimates and judgments made by management, applicable insurance coverage for litigation matters, and are adjusted as circumstances warrant. For workers’ compensation, our self-insured retention is $1 million and our automobile liability self-insured retention is currently $500,000 per occurrence. For general liability claims we have an effective self-insured retention of $3 million per occurrence. For medical claims, our self-insured retention is $150,000 per individual claimant determined on an annual basis. For environmental liability claims, our self-insured retention is $500,000 per occurrence. We maintain insurance for claims that exceed such self-retention limits. The insurance is subject to terms, conditions, limitations and exclusions that may not fully compensate us for all losses. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’s plans or intentions, or the outcome of legal proceedings, settlements or other factors. If different estimates and judgments were applied with respect to these matters, it is likely that reserves would be recorded for different amounts.

Revenue recognition.  We determine our revenue recognition guidelines for our operations based on guidance provided in applicable accounting standards and positions adopted by the FASB or the Securities and Exchange Commission (the “SEC”). Most of our projects are short-term in nature and we predominantly derive revenues by providing a variety of industrial services on a time and material basis. For all of these services, our revenues are recognized when services are rendered or when product is shipped to the job site and risk of ownership passes to the customer. However, due to various contractual terms with our customers, at the end of any reporting period, there may be earned but unbilled revenue that is accrued to properly match revenues with related costs. The amount of earned but unbilled revenue included in accounts receivable was $20.6 million at February 28, 2013 and May 31, 2012.

Allowance for doubtful accounts.  In the ordinary course of business, a percentage of our accounts receivable are not collected due to billing disputes, customer bankruptcies, dissatisfaction with the services we performed and other various reasons. We establish an allowance to account for those accounts receivable that will eventually be deemed uncollectible. The allowance for doubtful accounts is based on a combination of our historical experience and management’s review of long outstanding accounts receivable.

Concentration of credit risk.  No single customer accounts for more than 10% of consolidated revenues.

Earnings per share. Basic earnings per share is computed by dividing net income available to Team shareholders by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing net income available to Team shareholders, less income or loss for the period attributable to the non-controlling interest, by the sum of, (1) the weighted-average number of shares of common stock, net of treasury stock, outstanding during the period, (2) the dilutive effect of the assumed exercise of share-based compensation using the treasury stock method and (3) the dilutive effect of the assumed conversion of our non-controlling interest to our common stock (see Note 2).

 

9


Table of Contents

Amounts used in basic and diluted earnings per share, for the three and nine months ended February 28, 2013 and February 29, 2012, are as follows (in thousands):

 

    Three Months Ended     Nine Months Ended  
    (unaudited)     (unaudited)  
    February 28,
2013
    February 29,
2012
    February 28,
2013
    February 29,
2012
 

Weighted-average number of basic shares outstanding

    20,387       19,733        20,104       19,610   

Stock options, stock units and performance awards

    753       792        770       757   

Assumed conversion of non-controlling interest

    171       203        204       233   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total shares and dilutive securities

    21,311       20,728        21,078        20,600   
 

 

 

   

 

 

   

 

 

   

 

 

 

There were zero and 578,000 options to purchase shares of common stock outstanding during the three month periods ended, February 28, 2013 and February 29, 2012, respectively, excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common shares during the periods. There were 1,000 and 643,000 options to purchase shares of common stock outstanding during the nine month periods ended February 28, 2013 and February 29, 2012, respectively, excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common shares during the periods.

Foreign currency .  For subsidiaries whose functional currency is not the U.S. Dollar, assets and liabilities are translated at period ending rates of exchange and revenues and expenses are translated at period average exchange rates. Translation adjustments for the asset and liability accounts are included as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Foreign currency transaction gains and losses are included in our statement of income. Effective December 1, 2009, we began to account for Venezuela as a highly-inflationary economy and the effect of all subsequent currency fluctuations between the Bolivar and the U.S. Dollar are recorded in our statement of income (see Note 16).

Accounting Principles Not Yet Adopted

ASU 2011-11. In December 2011, an update was issued related to new disclosures on offsetting assets and liabilities of financial and derivative instruments. The amendments require the disclosure of gross asset and liability amounts, amounts offset on the balance sheet and amounts subject to the offsetting requirements, but not offset on the balance sheet. This standard does not amend the existing guidance on when it is appropriate to offset. The standard update is effective for annual periods beginning after January 1, 2013. We do not expect the adoption of this standard to have a material impact on our results of operations, financial position or cash flows.

Newly Adopted Accounting Principles

ASU 2011-08 . In September 2011, the FASB issued ASU 2011-08. ASU 2011-08 amends ASC 350 to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount of goodwill as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after assessment of qualitative factors, an entity determines that it is more likely than not that the fair value of a reporting unit is greater than the carrying amount, then the first and second steps of the goodwill impairment test described in ASC 350 are not necessary. ASU 2011-08 is effective for annual and interim impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This update was early adopted by Team on May 31, 2012. The adoption of this pronouncement did not have any impact on our results of operations, financial position or cash flows.

 

10


Table of Contents

ASU 2011-05.  In June 2011, the FASB issued an update to existing guidance on the presentation of comprehensive income. This update requires the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. In addition, companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. In December 2011, the FASB issued an accounting update to defer the effective date for presentation of reclassification of items out of accumulated other comprehensive income to net income. These updates are effective for fiscal years and interim periods beginning after December 15, 2011 with early adoption permitted. This update was adopted by Team on June 1, 2012. The adoption of this pronouncement did not have a material effect on our results of operations, financial position or cash flows.

ASU 2011-04. In May 2011, an update regarding fair value measurement was issued to conform the definition of fair value and common requirements for measurement of and disclosure about fair value under U.S. GAAP and International Financial Reporting Standards. The standard also clarifies the application of existing fair value measurement requirements and expands the disclosure requirements for fair value measurements that are estimated using significant unobservable Level 3 inputs. The standard update is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

2. ACQUISITIONS

In August 2012, Team’s subsidiary, Quest Integrity Group (“Quest”), acquired a specialty remote digital video inspection company based in New Zealand for approximately $3.0 million. Based upon the substantially completed purchase price allocation, we have recorded $0.7 million in fixed assets, $1.1 million in intangible assets classified as customer relationships, $0.3 million in intangible assets classified as non-compete agreements and $0.9 million in goodwill. In September 2012, Team also acquired the common stock of TCI Services, Inc. (“TCI”) for approximately $24.1 million of which $16.5 million was cash paid and $7.6 million was deferred payments. TCI is a company based in Oklahoma specializing in the inspection and repair of above ground storage tanks. Based upon the substantially completed purchase price allocation associated with the acquisition of TCI, we have recorded $4.1 million in net working capital, $2.6 million in fixed assets, $6.7 million in intangible assets classified as customer relationships, $1.1 million in intangible assets classified as trade name, $9.6 million in goodwill, $1.0 million in other current liabilities and $6.6 million in other long-term liabilities. The $1.0 million in other current liabilities and $6.6 million in other long-term liabilities represent future consideration to be paid of which $3.0 million is an estimate of contingent payments to be made based upon the future performance criteria of TCI. The combined unaudited annual revenues for both acquired businesses are approximately $24 million in their most recently completed fiscal years and the total consideration for both was approximately $27 million, subject to adjustments for working capital true-ups and the future performance of the businesses. As a result of the two business acquisitions, we expect to be able to deduct $6.7 million of the goodwill recognized for tax purposes.

In fiscal year 2012, we completed two small acquisitions for a total of $19.4 million which were recorded as $1.2 million in net working capital, $3.0 million in fixed assets, $7.5 million in intangible assets classified as customer relationships and $7.7 million in goodwill. Both acquisitions were financed through borrowings on our banking credit facility. We performed purchase price allocations based on our most current assessments of fair value of the assets acquired and the liabilities assumed. We completed a final valuation report of intangibles and goodwill associated with these transactions during the first half of fiscal year 2013. The final purchase price allocation associated with both of these transactions did not result in material adjustments and, accordingly, no retrospective adjustments were made in the accompanying 2012 financial statements.

On November 3, 2010, we purchased Quest, a privately held advanced inspection services and engineering assessment company. We effectively purchased 95% of Quest and expect to purchase the remaining 5% in fiscal year 2015 for a purchase consideration based upon the future financial performance of Quest as defined in the purchase agreement. Future consideration would be payable in unregistered shares of our common stock for an

 

11


Table of Contents

aggregate value of no less than $2.4 million, provided the aggregate value of the consideration does not exceed 20% of our outstanding common stock. Our valuation of the remaining 5% equity of Quest at the date of acquisition was $4.9 million, which is reflected in the equity section of the Consolidated Balance Sheet as “Non-controlling interest.”

Information regarding the change in carrying value of the non-controlling interest is set forth below (in thousands):

 

Fair value of non-controlling interest at November 3, 2010

   $  4,917   

Income attributable to non-controlling interest

     362   

Other comprehensive income attributable to non-controlling interest

     7   
  

 

 

 

Carrying value of non-controlling interest at February 28, 2013

   $ 5,286  
  

 

 

 

3. RECEIVABLES

A summary of accounts receivable as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013     May 31, 2012  
     (unaudited)        

Trade accounts receivable

   $ 139,757     $ 141,469   

Unbilled revenues

     20,569       20,561   

Allowance for doubtful accounts

     (5,352 )     (4,405
  

 

 

   

 

 

 

Total

   $ 154,974     $ 157,625   
  

 

 

   

 

 

 

4. INVENTORY

A summary of inventory as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013      May 31, 2012  
     (unaudited)         

Raw materials

   $ 3,253       $ 3,529   

Work in progress

     948         937   

Finished goods

     22,610         20,520   
  

 

 

    

 

 

 

Total

   $ 26,811       $ 24,986   
  

 

 

    

 

 

 

5. PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013     May 31, 2012  
     (unaudited)        

Land

   $ 3,112      $ 1,285   

Buildings and leasehold improvements

     18,017       15,095   

Machinery and equipment

     133,738       121,533   

Furniture and fixtures

     2,668       2,246   

Computers and computer software

     8,600       7,980   

Automobiles

     3,856       2,624   

Construction in progress

     4,848        1,912   
  

 

 

   

 

 

 

Total

     174,839       152,675   

Accumulated depreciation and amortization

     (102,336 )     (90,634
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 72,503     $ 62,041   
  

 

 

   

 

 

 

 

12


Table of Contents

6. ASSETS HELD FOR SALE

Assets held for sale of $5.8 million pertains to two parcels of land in or around Houston. The largest parcel is 50 acres purchased in October 2007 on which we had previously planned to construct future facilities in Pearland, Texas. During the fourth quarter of fiscal year 2012, we decided not to proceed with construction of the future facilities at this location and recognized a $1.7 million asset write-down of pre-construction building costs and capitalized interest. The properties are being actively marketed using the services of a broker.

7. INTANGIBLE ASSETS

A summary of intangible assets as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013      May 31, 2012  
     (unaudited)               
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Customer relationships

   $ 21,462      $ (3,559 )   $ 17,903       $ 12,198       $ (1,973   $ 10,225   

Non-compete agreements

     3,719         (3,164     555         3,136         (2,844     292   

Trade names

     4,075         (362     3,713         2,962         (207     2,755   

Technology

     5,112         (1,033     4,079         5,112         (634     4,478   

Licenses

     649        —         649         758         —         758   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 35,017      $ (8,118 )   $ 26,899       $ 24,166       $ (5,658   $ 18,508   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended February 28, 2013 and February 29, 2012 was $0.8 million and $0.9 million, respectively. Amortization expense for the nine months ended February 28, 2013 and February 29, 2012 was $2.5 million and $2.0 million, respectively.

8. OTHER ACCRUED LIABILITIES

A summary of other accrued liabilities as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013      May 31, 2012  
     (unaudited)         

Payroll and other compensation expenses

   $ 23,942      $ 27,871   

Insurance accruals

     4,925        4,388   

Property, sales and other non-income related taxes

     1,508        1,966   

Other

     7,560        4,267   
  

 

 

    

 

 

 

Total

   $ 37,935      $ 38,492   
  

 

 

    

 

 

 

9. LONG-TERM DEBT, DERIVATIVES AND LETTERS OF CREDIT

In July 2011, we renewed our banking credit facility (the “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 amortized over the life of the Credit Facility. At February 28, 2013, we were in compliance with all financial covenants of the Credit Facility. All debt is long term.

ASC 815, Derivatives and Hedging (“ASC 815”) established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The

 

13


Table of Contents

accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows derivatives’ gains and losses to offset related results on the hedged item in the statement of income. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counter-party will not fulfill the terms of the contract. We considered counter-party credit risk to our derivative contracts when valuing our derivative instruments.

The amounts recognized in other comprehensive income, and reclassified into income, for the three and nine months ended February 28, 2013 and February 29, 2012 are as follows (in thousands):

 

    Gain (Loss)
Recognized in
Other
Comprehensive
Income
    Gain (Loss)
Reclassified from
Other Comprehensive
Income to
Earnings
    Gain (Loss)
Recognized in
Other
Comprehensive
Income
    Gain (Loss)
Reclassified from
Other Comprehensive
Income to
Earnings
 
    Three Months
Ended
    Three Months
Ended
    Nine Months
Ended
    Nine Months
Ended
 
    February 28,
2013
    February 29,
2012
    February 28,
2013
    February 29,
2012
    February 28,
2013
    February 29,
2012
    February 28,
2013
    February 29,
2012
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Euro denominated long-term debt

  $   (143 )   $   (117   $   —        $   —        $   (791 )   $   1,164      $   —        $   —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   (143 )   $   (117   $   —        $   —        $   (791 )   $   1,164      $   —        $   —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our borrowing of €12.3 million under the Credit Facility serves 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 will offset translation gains or losses attributable to our investment in our European operations. At February 28, 2013, the €12.3 million borrowing had a U.S. Dollar value of $16.1 million.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Any ineffectiveness related to our hedges was not material for any of the periods presented.

The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges under ASC 815 (in thousands):

 

    February 28, 2013     May 31, 2012  
    (unaudited)                    
    Classification     Balance Sheet
Location
    Fair
Value
    Classification     Balance Sheet
Location
    Fair
Value
 

Euro denominated long-term debt

    Liability        Long-term debt      $   1,887       Liability        Long-term debt      $   2,678   
     

 

 

       

 

 

 

Total

      $   1,887         $   2,678   
     

 

 

       

 

 

 

In order to secure our 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. We were contingently liable for outstanding stand-by letters of credit totaling $15.3 million at

 

14


Table of Contents

February 28, 2013 and $13.5 million at May 31, 2012. 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.

10. FAIR VALUE MEASUREMENTS

As defined in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy such that “Level 1” measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, “Level 2” measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and “Level 3” measurements include those that are unobservable and of a highly subjective measure.

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of February 28, 2013. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):

 

     February 28, 2013  
     (unaudited)  
     Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Total  

Euro denominated long-term debt

   $   —         $   1,887      $   —         $   1,887  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net liabilities

   $   —        $   1,887      $   —         $   1,887  
  

 

 

    

 

 

    

 

 

    

 

 

 

11. SHARE-BASED COMPENSATION

We have adopted stock incentive plans and other arrangements pursuant to which our Board of Directors (the “Board”) may grant stock options, restricted stock, stock units, stock appreciation rights, common stock or performance awards to officers, directors and key employees. At February 28, 2013, there were approximately 1.4 million stock options, restricted stock units and performance awards outstanding to officers, directors and key employees. The exercise price, terms and other conditions applicable to each form of share-based compensation under our plans is generally determined by the Compensation Committee of our Board at the time of grant and may vary.

Our share-based payments consist primarily of stock options, stock units, common stock and performance awards. The governance of our share-based compensation does not directly limit the number of future awards. There are 7,020,000 shares cumulatively authorized to be issued under our stock incentive plans. Shares issued in connection with our share-based compensation are issued out of authorized but unissued common stock. Compensation expense related to share-based compensation totaled $3.0 million and $3.5 million for the nine months ended February 28, 2013 and February 29, 2012, respectively. The tax benefit related to share-based

 

15


Table of Contents

compensation was $3.0 million and $1.2 million for the nine months ended February 28, 2013 and February 29, 2012, respectively. At February 28, 2013, $8.7 million of unrecognized compensation expense related to share-based compensation is expected to be recognized over a remaining weighted-average period of 2.9 years.

We determine the fair value of each stock option at the grant date using a Black-Scholes model and recognize the resulting expense of our stock option awards over the period during which an employee is required to provide services in exchange for the awards, usually the vesting period. There was no compensation expense related to stock options for the nine months ended February 28, 2013. Compensation expense related to stock options was $0.8 million for the nine months ended February 29, 2012. Our options typically vest in equal annual installments over a four year service period. Expense related to an option grant is recognized on a straight line basis over the specified vesting period for those options. Stock options generally have a ten year term. Transactions involving our stock options during the nine months ended February 28, 2013 and February 29, 2012 are summarized below:

 

    Nine months Ended
February 28, 2013
    Nine Months Ended
February 29, 2012
 
    (unaudited)     (unaudited)  
    No. of
Options
    Weighted
Average
Exercise Price
    No. of
Options
    Weighted
Average
Exercise Price
 
    (in thousands)           (in thousands)        

Shares under option, beginning of period

    1,562      $ 18.95        1,856      $ 17.81   

Changes during the period:

       

Granted

    —       $ —         —       $ —    

Exercised

    (508 )   $ 16.23       (217   $ 10.27   

Cancelled

    —       $ —         (2   $ 30.33   

Expired

    —       $ —         (10   $ 30.33   
 

 

 

     

 

 

   

Shares under option, end of period

    1,054      $ 20.25       1,627      $ 18.73   

Exercisable at end of period

    1,054      $ 20.25       1,623      $ 18.70   

Options exercisable at February 28, 2013 had a weighted-average remaining contractual life of 3.7 years. For total options outstanding at February 28, 2013, the range of exercise prices and remaining contractual lives are as follows (unaudited):

 

Range of Prices

   No. of
Options
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Life
 
     (in thousands)             (in years)  

$6.42 to $9.62

     122       $ 8.92         2.2   

$9.63 to $12.82

     157       $ 11.10         2.9   

$12.83 to $16.03

     308       $ 14.56         3.3   

$16.04 to $32.05

     467       $ 30.05         4.6   
  

 

 

       
     1,054       $ 20.25         3.7   
  

 

 

       

Stock units are settled with common stock upon vesting unless it is not legally feasible to issue shares, in which case the value of the award is settled in cash. We determine the fair value of each stock unit based on the market price on the date of grant. Stock units generally vest in annual installments over four years and the expense associated with the units is recognized over the same vesting period. We also grant common stock to our directors which typically vest immediately. Compensation expense related to stock units and director stock grants totaled $2.6 million and $2.3 million for the nine months ended February 28, 2013 and February 29, 2012, respectively.

 

16


Table of Contents

Transactions involving our stock units and director stock grants during the nine months ended February 28, 2013 and February 29, 2012 are summarized below:

 

    Nine Months Ended
February 28, 2013
    Nine Months Ended
February 29, 2012
 
    (unaudited)     (unaudited)  
    No. of Stock
Units
    Weighted
Average
Fair Value
    No. of Stock
Units
    Weighted
Average
Fair Value
 
    (in thousands)           (in thousands)        

Stock and stock units, beginning of period

    342     $ 21.73        310      $ 19.80   

Changes during the period:

       

Granted

    141     $ 32.81        159      $ 24.78   

Vested and settled

    (142 )   $ 22.54        (119   $ 20.80   

Cancelled

    (8 )   $ 22.40        (5   $ 21.19   
 

 

 

     

 

 

   

Stock and stock units, end of period

    333     $ 26.07        345      $ 21.73   
 

 

 

     

 

 

   

Performance awards are settled with common stock upon vesting unless it is not legally feasible to issue shares, in which case the value of the award is settled in cash. We determine the fair value of each performance award based on the market price on the date of grant. Performance awards granted to our Chairman of our Board vest over the longer of four years or the achievement of performance goals based upon our future results of operations. Compensation expense related to performance awards totaled $0.4 million for the nine months ended February 28, 2013 and February 29, 2012. Transactions involving our performance awards during the nine months ended February 28, 2013 and February 29, 2012 are summarized below:

 

     Nine Months Ended
February 28, 2013
     Nine Months Ended
February 29, 2012
 
     (unaudited)      (unaudited)  
     No. of
Performance
Awards
    Weighted
Average
Fair Value
     No. of
Performance
Awards
    Weighted
Average
Fair Value
 
     (in thousands)            (in thousands)        

Performance awards, beginning of period

     65     $ 21.86        61      $ 20.33   

Changes during the period:

         

Granted

     19     $ 32.89        24      $ 25.16   

Vested and settled

     (27 )   $ 22.04        (20   $ 21.14   

Cancelled

     —       $ —          —       $ —    
  

 

 

      

 

 

   

Performance awards, end of period

     57     $ 25.45        65      $ 21.86   
  

 

 

      

 

 

   

12. OTHER COMPREHENSIVE INCOME

A summary of other comprehensive income included within shareholders’ equity as of February 28, 2013 and May 31, 2012 is as follows (in thousands):

 

     February 28, 2013     May 31, 2012  
     (unaudited)        

Foreign currency translation adjustments

   $ (2,311 )   $ (4,593

Foreign currency hedge

     1,887        2,678   

Tax provision on other comprehensive income

     (454     (672
  

 

 

   

 

 

 

Total

   $ (878   $ (2,587
  

 

 

   

 

 

 

 

17


Table of Contents

The following table represents the related tax effects allocated to each component of other comprehensive income (in thousands):

 

     Nine Months Ended
February 28, 2013
    Nine Months Ended
February 29, 2012
 
     (unaudited)     (unaudited)  
     Gross
Amount
    Tax
Effect
    Net
Amount
    Gross
Amount
    Tax
Effect
    Net
Amount
 

Foreign currency translation adjustments

   $ 2,305     $ (91 )   $ 2,214     $ (3,037   $ 494      $ (2,543

Foreign currency hedge

     (791     309        (482     1,164        (453     711   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,514     $ 218     $ 1,732     $ (1,873   $ 41     $ (1,832
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

13. COMMITMENTS AND CONTINGENCIES

Con Ed Matter— We have, from time to time, provided temporary leak repair services for the steam operations of Consolidated Edison Company of New York (“Con Ed”) located in New York City. In July 2007, a Con Ed steam main located in midtown Manhattan ruptured causing one death and other injuries and property damage. As of February 28, 2013, ninety-five lawsuits have been filed against Con Ed, the City of New York and Team in the Supreme Courts of New York located in Kings, New York and Bronx County, alleging that our temporary leak repair services may have contributed to the cause of the rupture. The lawsuits seek generally unspecified compensatory damages for personal injury, property damage and business interruption. Additionally, on March 31, 2008, we received a letter from Con Ed alleging that our contract with Con Ed requires us to indemnify and defend Con Ed for additional claims filed against Con Ed as a result of the rupture. Con Ed filed an action to join Team and the City of New York as defendants in all lawsuits filed against Con Ed that did not include Team and the City of New York as direct defendants. We are vigorously defending the lawsuits and Con Ed’s claim for indemnification. We are unable to estimate the amount of liability to us, if any, associated with these lawsuits and the claim for indemnification. We maintain insurance coverage, subject to a deductible limit of $250,000, which we believe should cover these claims. We have not accrued any liability in excess of the deductible limit for the lawsuits. We do not believe the ultimate outcome of these matters will have a material adverse effect on our financial position, results of operations or cash flows.

EPA Matter —As part of a plea agreement entered in July 2012, we pled guilty to a single misdemeanor violation of a section of the Clean Air Act related to fugitive emissions monitoring services provided to a customer serviced by our Borger, Texas office. As part of the plea agreement, we developed and are now implementing an environmental compliance plan for our emissions monitoring services to enhance our compliance with the Clean Air Act. In November 2012, we were assessed a fine of $200,000 and placed on probation for a term of five years.

We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In our opinion, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.

14. ENTITY WIDE DISCLOSURES

ASC 280, Segment Reporting (“ASC 280”) requires we disclose certain information about our 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.” 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. Each division has goodwill relating to past acquisitions and we assess goodwill for impairment at the TCM and TMS divisional level. Both divisions derive substantially all their revenues from providing specialized labor intensive industrial services. The market for their services is principally dictated by

 

18


Table of Contents

the population of industrial facilities, pipelines and related equipment. 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. Both the TCM and TMS division field locations share the same chief operating decision maker and both divisions are supported by common and often centralized technical and commercial support staffs, quality assurance, training, finance, legal, human resources and health and safety departments.

Revenues and total assets in the United States and other countries are as follows (in thousands):

 

     Three Months Ended
February 28, 2013
     Three Months Ended
February 29, 2012
     Nine Months Ended
February 28, 2013
     Nine Months Ended
February 29, 2012
 
     (unaudited)      (unaudited)      (unaudited)      (unaudited)  

Revenues

           

United States

   $ 116,155       $ 99,132       $ 366,397      $ 301,652   

Canada

     19,946         22,927         98,647         87,724   

Europe

     8,220         9,672         23,586         26,559   

Other foreign countries

     6,654         4,792         24,485         19,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 150,975      $ 136,523       $ 513,115       $ 435,889   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     February 28, 2013      May 31, 2012  
     (unaudited)         

Total Assets

     

United States

   $ 324,801      $ 296,240   

Canada

     65,081         60,334   

Europe

     32,461         30,352   

Other foreign countries

     24,794         16,862   
  

 

 

    

 

 

 

Total

   $ 447,137      $ 403,788   
  

 

 

    

 

 

 

15. UNCONSOLIDATED SUBSIDIARIES

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. The joint venture is an integral part of our operations in Alaska. Our investment in the net assets of the joint venture, accounted for using the equity method of accounting, was $1.6 million at February 28, 2013 and $1.8 million at May 31, 2012. Revenues from the joint venture not reflected in our consolidated revenues were $11.0 million and $9.5 million for the nine months ended February 28, 2013 and February 29, 2012, respectively.

16. VENEZUELA’S HIGHLY INFLATIONARY ECONOMY

We operate a small service location in Punta Fijo, Venezuela, whose annual revenues have historically been less than one percent of our consolidated revenues for all periods presented. Because of the uncertain political environment in Venezuela, starting in the third quarter of fiscal year 2010, we began to account for Venezuelan operations pursuant to accounting guidance for designated hyperinflationary economies. Following the designation of the Venezuelan economy as hyperinflationary, we ceased taking the effects of currency fluctuations to accumulated other comprehensive income and began reflecting all effects as a component of other income in our statement of operations. Prior to February 2013, we were using the Venezuelan central bank’s official published rate (5.30 Bolivars per U.S. Dollar) to translate Venezuelan assets into U.S. Dollars as no other legal rate is readily available. In February 2013, the Venezuelan government announced a devaluation in its currency and created a new official exchange rate of 6.30 Bolivars per U.S. Dollar. As a result of the currency devaluation, we recognized a $0.6 million pre-tax foreign currency loss for the three months ended February 28, 2013. Due to the uncertain economic and political environment in Venezuela, it is very difficult to repatriate cash flows of these operations. At February 28, 2013, our Venezuelan subsidiary had $2.8 million of net assets, consisting primarily of Bolivar denominated receivables of approximately $2.6 million.

 

19


Table of Contents
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

 

20


Table of Contents

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.

 

21


Table of Contents

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.

 

22


Table of Contents

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.

 

23


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations in foreign countries with a functional currency that is not the U.S. Dollar. We are exposed to market risk, primarily related to foreign currency fluctuations related to these operations. A significant part of these assets relate to our operations in Europe and Canada. During the nine months ended February 28, 2013, the exchange rate with the Euro increased from $1.24 per Euro to $1.31 per Euro, an increase of 6%. During the same period, the exchange rate with the Canadian Dollar remained constant at $0.97 per Canadian Dollar. For foreign subsidiaries with a functional currency that is not the U.S. Dollar, such as our operations in Europe and Canada, assets and liabilities are translated at period ending rates of exchange. Translation adjustments for the assets and liability accounts are included as a separate component of accumulated other comprehensive income in shareholders’ equity. Foreign currency translation gains in other comprehensive income were $2.3 million for the nine months ended February 28, 2013.

We carry Euro based debt to serve as a 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 will offset translation gains or losses attributable to our investment in our European operations. We are exposed to market risk, primarily related to foreign currency fluctuations related to the unhedged portion of our investment in our European operations.

At February 28, 2013, our Venezuelan subsidiary had $2.8 million of net assets denominated in Venezuelan Bolivars and translated into U.S. Dollars. We account for Venezuelan operations pursuant to accounting guidance for hyperinflationary economies. Following the designation of the Venezuelan economy as hyperinflationary, we ceased recording the effects of currency fluctuations to accumulated other comprehensive income and began reflecting all effects as a component of other income in our statement of operations. We use the Venezuelan central bank’s official published rate (6.30 Bolivars per U.S. Dollar) to translate Venezuelan assets into U.S. Dollars as no other legal rate is readily available. A 10% change in the exchange rate used to value the net assets of our Venezuelan subsidiary would have an effect on pretax earnings of $0.3 million.

We hold certain floating-rate obligations. We are exposed to market risk primarily related to potential increases in interest rates related to our debt.

 

ITEM 4. CONTROLS AND PROCEDURES

Limitations on effectiveness of control.  Our management, including the principal executive and financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of our control system reflects the fact that there are resource constraints and the benefits of such controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of management’s assessments of the current effectiveness of our disclosure controls and procedures and its internal control over financial reporting are subject to risks. However, our disclosure controls and procedures are designed to provide reasonable assurance that the objectives of our control system are met.

Evaluation of disclosure controls and procedures .  As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and

 

24


Table of Contents

operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). This evaluation included consideration of the various processes carried out under the direction of our disclosure committee in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC. This evaluation also considered the work completed relating to our compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Based on this evaluation, our CEO and CFO concluded that, as of February 28, 2013, our disclosure controls and procedures were operating effectively to ensure that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the requisite time periods and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting .  There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the third quarter of our fiscal year ending May 31, 2013.

 

25


Table of Contents

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Con Ed Matter —We have, from time to time, provided temporary leak repair services for the steam operations of Con Ed located in New York City. In July 2007, a Con Ed steam main located in midtown Manhattan ruptured causing one death and other injuries and property damage. As of February 28, 2013, ninety-five lawsuits have been filed against Con Ed, the City of New York and Team in the Supreme Courts of New York located in Kings, New York and Bronx County, alleging that our temporary leak repair services may have contributed to the cause of the rupture. The lawsuits seek generally unspecified compensatory damages for personal injury, property damage and business interruption. Additionally, on March 31, 2008, we received a letter from Con Ed alleging that our contract with Con Ed requires us to indemnify and defend Con Ed for additional claims filed against Con Ed as a result of the rupture. Con Ed filed an action to join Team and the City of New York as defendants in all lawsuits filed against Con Ed that did not include Team and the City of New York as direct defendants. We are vigorously defending the lawsuits and Con Ed’s claim for indemnification. We are unable to estimate the amount of liability to us, if any, associated with these lawsuits and the claim for indemnification. We maintain insurance coverage, subject to a deductible limit of $250,000, which we believe should cover these claims. We have not accrued any liability in excess of the deductible limit for the lawsuits. We do not believe the ultimate outcome of these matters will have a material adverse effect on our financial position, results of operations, or cash flows.

EPA Matter —As part of a plea agreement entered in July 2012, we pled guilty to a single misdemeanor violation of a section of the Clean Air Act related to fugitive emissions monitoring services provided to a customer serviced by our Borger, Texas office. As part of the plea agreement, we developed and are now implementing an environmental compliance plan for our emissions monitoring services to enhance our compliance with the Clean Air Act. In November 2012, we were assessed a fine of $200,000 and placed on probation for a term of five years.

We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In our opinion, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.

 

ITEM 1A. RISK FACTORS

See page 6 of our Annual Report on Form 10-K for the year ended May 31, 2012 for a detailed discussion of our risk factors.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

 

26


Table of Contents
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

 

ITEM 4. MINE SAFETY DISCLOSURES

NOT APPLICABLE

 

ITEM 5. OTHER INFORMATION

NONE

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  

Description

    31.1

   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    31.2

   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    32.1

   Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

    32.2

   Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*101.INS—

   XBRL Instance Document.

*101.SCH—

   XBRL Taxonomy Schema Document.

*101.CAL—

   XBRL Calculation Linkbase Document.

*101.DEF—

   XBRL Definition Linkbase Document.

*101.LAB—

   XBRL Label Linkbase Document.

*101.PRE—

   XBRL Presentation Linkbase Document.

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

27


Table of Contents

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 8, 2013   / S /    P HILIP J. H AWK
    Philip J. Hawk
    Chairman and Chief Executive Officer
    / S /    T ED W. O WEN
    Ted W. Owen, Executive Vice President and
   

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 

28

Exhibit 31.1

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 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 report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Team and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Team, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of Team’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in Team’s internal control over financial reporting that occurred during Team’s most recent fiscal quarter (Team’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Team’s internal control over financial reporting; and

 

5. Team’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Team’s auditors and the audit committee of Team’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Team’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in Team’s internal control over financial reporting.

Date: April 8, 2013

 

/ S /    P HILIP J. H AWK

Philip J. Hawk

Chairman and Chief Executive Officer

Exhibit 31.2

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 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 report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Team and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Team, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of Team’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in Team’s internal control over financial reporting that occurred during Team’s most recent fiscal quarter (Team’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Team’s internal control over financial reporting; and

 

5. Team’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Team’s auditors and the audit committee of Team’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Team’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in Team’s internal control over financial reporting.

Date: April 8, 2013

 

/ S /    T ED W. O WEN

Ted W. Owen

Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Team, Inc. (the Company) on Form 10-Q for the period ended February 28, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Philip J. Hawk, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/ S /    P HILIP J. H AWK

Philip J. Hawk

Chairman and Chief Executive Officer

April 8, 2013

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Team, Inc. (the Company) on Form 10-Q for the period ended February 28, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ted W. Owen, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/ S /    T ED W. O WEN

Ted W. Owen

Executive Vice President and Chief Financial Officer

April 8, 2013