Team, Inc
TEAM INC (Form: 10-Q, Received: 01/08/2014 15:16:21)
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 November 30, 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

 

LOGO

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)

None

 

(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 20,327,149 shares of common stock, par value $0.30, outstanding as of December 27, 2013.

 

 

 


Table of Contents

INDEX

 

         Page No.  

PART I—FINANCIAL INFORMATION

     2   

Item 1.

  Financial Statements      2   
 

Condensed Consolidated Balance Sheets as of November 30, 2013 (Unaudited) and May 31, 2013

     2   
 

Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended November 30, 2013 and 2012

     3   
 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended November 30, 2013 and 2012

     4   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2013 and 2012

     5   
  Notes to Unaudited Condensed Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      22   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      26   

Item 4.

  Controls and Procedures      26   

PART II—OTHER INFORMATION

     28   

Item 1.

  Legal Proceedings      28   

Item 1A.

  Risk Factors      28   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      28   

Item 3.

  Defaults Upon Senior Securities      28   

Item 4.

  Mine Safety Disclosures      29   

Item 5.

  Other Information      29   

Item 6.

  Exhibits      29   

SIGNATURES

     30   

 

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

TEAM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

     November 30, 2013     May 31, 2013  
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 36,631      $ 34,201   

Receivables, net of allowance of $5,141 and $5,438

     184,586        172,108   

Inventory

     26,633        26,507   

Deferred income taxes

     3,892        5,321   

Prepaid expenses and other current assets

     7,341        8,781   
  

 

 

   

 

 

 

Total current assets

     259,083        246,918   

Property, plant and equipment, net

     79,728        74,939   

Assets held for sale

     5,207        5,207   

Intangible assets, net of accumulated amortization of $10,913 and $9,039

     25,340        25,950   

Goodwill

     113,945        103,466   

Other assets, net

     3,584        2,907   

Deferred income taxes

     1,079        816   
  

 

 

   

 

 

 

Total assets

   $ 487,966      $ 460,203   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 21,977      $ 22,411   

Other accrued liabilities

     45,372        49,165   

Income taxes payable

     4,209        1,228   

Deferred income taxes

     29        —     
  

 

 

   

 

 

 

Total current liabilities

     71,587        72,804   

Deferred income taxes

     19,108        17,166   

Long-term debt

     91,708        72,946   

Other long-term liabilities

     4,588        5,097   
  

 

 

   

 

 

 

Total liabilities

     186,991        168,013   

Commitments and contingencies

    

Equity:

    

Preferred stock, 500,000 shares authorized, none issued

     —          —     

Common stock, par value $0.30 per share, 60,000,000 and 30,000,000 shares authorized; 20,325,149 and 20,587,808 shares issued

     6,096        6,176   

Additional paid-in capital

     100,172        99,278   

Retained earnings

     191,112        184,485   

Accumulated other comprehensive (loss) income

     (1,920     (1,789

Treasury stock at cost, 0 and 89,569 shares

     —          (1,344
  

 

 

   

 

 

 

Total Team shareholders’ equity

     295,460        286,806   

Non-controlling interest

     5,515        5,384   
  

 

 

   

 

 

 

Total equity

     300,975        292,190   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 487,966      $ 460,203   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
     2013      2012      2013      2012  

Revenues

   $ 200,493       $ 200,648       $ 374,804       $ 362,140   

Operating expenses

     135,678         138,184         260,992         250,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     64,815         62,464         113,812         112,000   

Selling, general and administrative expenses

     43,422         39,928         84,757         77,002   

Earnings from unconsolidated affiliates

     350         504         793         866   

Gain on revaluation of contingent consideration

     2,138         —           2,138         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     23,881         23,040         31,986         35,864   

Interest expense, net

     811         677         1,419         1,276   

Foreign currency loss

     140         114         530         188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     22,930         22,249         30,037         34,400   

Less: Provision for income taxes

     8,333         8,232         10,963         12,728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     14,597         14,017         19,074         21,672   

Less: Income attributable to non-controlling interest

     172         81         139         175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to Team shareholders

   $ 14,425       $ 13,936       $ 18,935       $ 21,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share: Basic

   $ 0.71       $ 0.69       $ 0.93       $ 1.08   

Net income per share: Diluted

   $ 0.68       $ 0.66       $ 0.89       $ 1.03   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
         2013             2012             2013             2012      

Net income

   $ 14,597      $ 14,017      $ 19,074      $ 21,672   

Foreign currency translation adjustment

     719        1,252        (210     4,290   

Foreign currency hedge

     (400     (536     (762     (648

Tax benefit (provision) attributable to other comprehensive income

     319        488        833        (376
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     15,235        15,221        18,935        24,938   

Less: Total comprehensive income attributable to non-controlling interest

     182        92        131        203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income available to Team shareholders

   $ 15,053      $ 15,129      $ 18,804      $ 24,735   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TEAM, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months Ended
November 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 19,074      $ 21,672   

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

    

Earnings from unconsolidated affiliates

     (793     (866

Depreciation and amortization

     10,691        9,654   

Amortization of deferred loan costs

     110        111   

Foreign currency loss

     530        188   

Deferred income taxes

     3,438        2,038   

Gain on contingent consideration revaluation

     (2,138     —     

Gain on asset sales

     (85     —     

Non-cash compensation cost

     2,210        2,120   

(Increase) decrease:

    

Receivables

     (12,150     (18,361

Inventory

     (83     (1,393

Prepaid expenses and other current assets

     1,457        1,174   

Increase (decrease):

    

Accounts payable

     (507     182   

Other accrued liabilities

     (4,459     5,005   

Income taxes

     2,923        (1,805
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,218        19,719   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (13,619     (12,654

Business acquisitions, net of cash acquired

     (10,175     (18,144

Proceeds from sale of assets

     204        —     

Decrease (increase) in other assets, net

     3       (8
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,587     (30,806
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net borrowings under revolving credit agreement

     18,000        19,000   

Corporate tax effect from share-based payment arrangements

     679        1,997   

Issuance of common stock from share-based payment arrangements

     1,987        3,394   

Payments related to withholding tax for share-based payment arrangements

     (1,692     (1,517

Payments related to purchase of treasury stock

     (13,334 )     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     5,640        22,874   

Effect of exchange rate changes on cash

     159        221   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     2,430        12,008   

Cash and cash equivalents at beginning of period

     34,201        22,477   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 36,631      $ 34,485   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TEAM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

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. Our stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “TISI” and our fiscal year ends on May 31 of each calendar year.

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

Effective July 1, 2013, we implemented a reorganization of our business divisions to conduct operations in three segments: Inspection and Heat Treating Services (“IHT”) Group, Mechanical Services (“MS”) Group and Quest Integrity (“Quest”) Group. While our services have been realigned in three business groups, we believe our services broadly fall into three different classifications that have unique customer demand drivers: inspection and assessment services, turnaround services, and on-stream services.

Inspection and assessment services are offered in both the IHT Group and Quest Group. The IHT Group provides basic and advanced non-destructive testing services for the process, pipeline and power sectors, pipeline integrity management services, as well as associated engineering and assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction and expansion activities. The Quest Group provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass two broadly-defined disciplines: (1) highly specialized in-line inspection services for unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; and (2) advanced condition assessment services through a multi-disciplined engineering team. We believe there is a general growth in market demand for inspection and assessment services as improved inspection technologies enable better information about asset reliability to be available to facility owners and operators.

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

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

We offer these services in over 125 locations throughout the world. Our industrial services are available 24 hours a day, 7 days a week, 365 days a year. We market our services to companies in a diverse array of heavy industries which include the petrochemical, refining, power, pipeline, steel, pulp and paper industries, as well as

 

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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, 2013 is derived from the May 31, 2013 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, 2013.

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 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.

 

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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.

Effective July 1, 2013, we implemented a reorganization of our business divisions and now conduct operations in three segments: IHT Group, MS Group and Quest Group. Each operating segment has goodwill relating to past acquisitions and we now assess goodwill for impairment at the operating segment level. Due to the changes in the underlying assumptions surrounding our goodwill testing, during the first quarter of fiscal year 2014, we performed a quantitative analysis of goodwill to test for impairment. The test for impairment is performed at the reporting unit level which is deemed to be at the operating segment level. The test was a two-step process that involved comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, the goodwill of the reporting unit was not considered impaired; therefore, the second step of the impairment test would not be deemed necessary. If the carrying amount of the reporting unit exceeded its fair value, we would then perform a second step to the goodwill impairment test to measure the amount of goodwill impairment loss to be recorded.

The fair value of the reporting units at July 1, 2013 were determined using a method based on discounted cash flow models with estimated cash flows based on internal forecasts of revenue and expenses over a four year period plus a terminal value period (the income approach). The income approach estimated fair value by discounting each reporting unit’s estimated future cash flows using a discount rate that approximated our weighted-average cost of capital. The fair value derived from the income approach, in the aggregate, approximated our market capitalization. At July 1, 2013, our market capitalization exceeded the carrying value of our consolidated net assets by approximately $500 million or 170%, and the fair value of each operating segment significantly exceeded their respective carrying amounts as of that date.

There was $113.9 million and $103.5 million of goodwill at November 30, 2013 and May 31, 2013, respectively. A summary of goodwill is as follows (in thousands):

 

     Six Months Ended
November 30, 2013
 
     MS      IHT     Quest      Total  

Balance at May 31, 2013

   $ 19,130       $ 53,800      $ 30,536       $ 103,466   

Acquisitions

     —           10,412        —           10,412   

Foreign currency adjustments

     545         (487     9         67   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at November 30, 2013

   $ 19,675       $ 63,725      $ 30,545       $ 113,945   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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In November 2010, we purchased 95% of Quest Integrity Group, a leading provider of proprietary in-line inspection and advanced engineering and assessment services. We expect to purchase the remaining 5% interest (the “Non-Controlling Interests”) at the end of fiscal 2015 based upon a valuation methodology as specified in the purchase agreement.

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

     613   

Other comprehensive income attributable to non-controlling interest

     (15
  

 

 

 

Carrying value of non-controlling interest at November 30, 2013

   $ 5,515   
  

 

 

 

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, future reversals of existing taxable temporary differences, and tax planning strategies.

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 $1.0 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 $3.0 million per occurrence. For medical claims, our self-insured retention is $175,000 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

 

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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. At November 30, 2013 and May 31, 2013, the amount of earned but unbilled revenue included in accounts receivable was $25.0 million and $25.5 million, respectively.

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, 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).

Amounts used in basic and diluted earnings per share, for the three and six months ended November 30, 2013 and 2012, are as follows (in thousands):

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
         2013          2012      2013      2012  

Weighted-average number of basic shares outstanding

     20,409         20,052         20,459         19,963   

Stock options, stock units and performance awards

     614         736         657         753   

Assumed conversion of non-controlling interest

     210         206         207         216   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares and dilutive securities

     21,233         20,994         21,323         20,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no stock options outstanding during the three months ended November 30, 2013 and 2012 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 zero and 67,000 options to purchase shares of common stock outstanding during the six months ended November 30, 2013 and 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 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).

Newly Adopted Accounting Principles

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.

 

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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.

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 standard did not have a material effect on our results of operations, financial position or cash flows.

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. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

ASU 2013-02. In February 2013, an update regarding other comprehensive income was issued to require entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, it requires entities to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. The update is effective for fiscal years beginning after December 15, 2012. This update was adopted by Team on June 1, 2013. The adoption of this update did not have a material impact on our results of operations, financial position or cash flows.

2. ACQUISITIONS

In July 2013, we purchased a leading provider of industrial rope access services, for a total consideration of approximately $13 million including $11.7 million allocated to goodwill and intangible assets. In September 2012, we purchased TCI Services, Inc., (“TCI”), a leading provider of inspection and repair services of above ground storage tanks. The TCI acquisition included total consideration of approximately $23 million, including $16.4 million allocated to goodwill and intangible assets. The purchase price included contingent consideration which we revalued at November 30, 2013, resulting in the recognition of a non-cash gain of $2.1 million.

In the fiscal year ended May 31, 2013, we also purchased a specialty remote digital video inspection company in New Zealand for approximately $3 million in cash.

3. RECEIVABLES

A summary of accounts receivable as of November 30, 2013 and May 31, 2013 is as follows (in thousands):

 

     November 30, 2013     May 31, 2013  
     (unaudited)        

Trade accounts receivable

   $ 164,751      $ 152,030   

Unbilled revenues

     24,976        25,516   

Allowance for doubtful accounts

     (5,141     (5,438
  

 

 

   

 

 

 

Total

   $ 184,586      $ 172,108   
  

 

 

   

 

 

 

 

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4. INVENTORY

A summary of inventory as of November 30, 2013 and May 31, 2013 is as follows (in thousands):

 

     November 30, 2013      May 31, 2013  
     (unaudited)         

Raw materials

   $ 3,237       $ 3,460   

Work in progress

     1,037         845   

Finished goods

     22,359         22,202   
  

 

 

    

 

 

 

Total

   $ 26,633       $ 26,507   
  

 

 

    

 

 

 

5. PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment as of November 30, 2013 and May 31, 2013 is as follows (in thousands):

 

     November 30, 2013     May 31, 2013  
     (unaudited)        

Land

   $ 3,087      $ 3,108   

Buildings and leasehold improvements

     19,215        18,445   

Machinery and equipment

     145,431        137,439   

Furniture and fixtures

     4,790        4,469   

Capitalized ERP system development costs

     850        —     

Computers and computer software

     9,387        8,871   

Automobiles

     3,517        3,842   

Construction in progress

     6,900        3,816   
  

 

 

   

 

 

 

Total

     193,177        179,990   

Accumulated depreciation and amortization

     (113,449     (105,051
  

 

 

   

 

 

 

Property, plant, and equipment, net

   $ 79,728      $ 74,939   
  

 

 

   

 

 

 

In the second quarter of 2013, we initiated the design and implementation of a new ERP system, which is expected to be fully installed during fiscal 2016. Total future capital costs associated with the implementation are expected to be in the range of $10 to 12 million over the next two years.

Included in construction in progress are costs of approximately $3.5 million associated with the re-development of Team’s former headquarters in Alvin, Texas as an equipment, training and technical center for operations support. The Alvin project is expected to be completed in the spring of 2014 at a total cost of approximately $9 million.

6. ASSETS HELD FOR SALE

Assets held for sale consists of $5.2 million related to 50 acres of undeveloped land in Pearland, Texas.

 

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7. INTANGIBLE ASSETS

A summary of intangible assets as of November 30, 2013 and May 31, 2013 is as follows (in thousands):

 

     November 30, 2013      May 31, 2013  
     (unaudited)               
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Customer relationships

   $ 22,701       $ (5,498   $ 17,203       $ 21,418       $ (4,168   $ 17,250   

Non-compete agreements

     3,682         (3,352     330         3,701         (3,232     469   

Trade names

     4,075         (550     3,525         4,075         (424     3,651   

Technology

     5,112         (1,432     3,680         5,112         (1,166     3,946   

Licenses

     683         (81     602         683         (49     634   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 36,253       $ (10,913   $ 25,340       $ 34,989       $ (9,039   $ 25,950   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended November 30, 2013 and 2012 was $0.9 million and $1.0 million, respectively. Amortization expense for the six months ended November 30, 2013 and 2012 was $1.9 million and $1.7 million, respectively.

8. OTHER ACCRUED LIABILITIES

A summary of other accrued liabilities as of November 30, 2013 and May 31, 2013 is as follows (in thousands):

 

     November 30, 2013      May 31, 2013  
     (unaudited)         

Payroll and other compensation expenses

   $ 26,492       $ 32,093   

Insurance accruals

     5,475         5,385   

Property, sales and other non-income related taxes

     2,356         2,385   

Other

     11,049         9,302   
  

 

 

    

 

 

 

Total

   $ 45,372       $ 49,165   
  

 

 

    

 

 

 

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

In fiscal year 2012, we renewed our banking credit facility (“Credit Facility”) with our banking syndicate. The Credit Facility has borrowing capacity of up to $150 million in multiple currencies, is secured by virtually all of our domestic assets and a majority of the stock of our foreign subsidiaries and matures in July 2016. In connection with the renewal, we capitalized $0.8 million of associated debt issuance costs which will be amortized over the life of the Credit Facility. The Credit Facility bears interest based on a variable Eurodollar rate option (LIBOR plus 1.75% margin at November 30, 2013) and has commitment fees of 0.30% on unused borrowing capacity.

In order to secure our casualty insurance programs we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $13.7 million at November 30, 2013 and $13.1 million at May 31, 2013. 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.

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

 

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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.

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 November 30, 2013, the €12.3 million borrowing had a U.S. Dollar value of $16.8 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 amounts recognized in other comprehensive income, and reclassified into income, for the three and six months ended November 30, 2013 and 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
November 30,
    Three Months
Ended
November 30,
     Six Months
Ended
November 30,
    Six Months
Ended
November 30,
 
     (unaudited)     (unaudited)      (unaudited)     (unaudited)  
     2013     2012       2013          2012        2013     2012       2013          2012    

Euro denominated long-term debt

   $ (400   $ (536   $ —         $ —         $ (762   $ (648   $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

 

    November 30, 2013     May 31, 2013  
    (unaudited)                    
    Classification     Balance Sheet
Location
    Fair
Value
    Classification     Balance Sheet
Location
    Fair
Value
 

Euro denominated long-term debt

    Liability        Long-term debt      $ 1,242        Liability        Long-term debt      $ 2,004   
     

 

 

       

 

 

 

10. FAIR VALUE MEASUREMENTS

Effective June 1, 2008, we adopted the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which among other things, requires enhanced disclosures about assets and liabilities carried at fair value.

As defined in 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

 

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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 November 30, 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):

 

    May 31, 2013  
    Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Total  

Liabilities:

       

Contingent consideration

  $ —        $ —        $ 2,047      $ 2,047   

Euro denominated long-term debt

    —          2,004        —         2,004   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $        $ 2,004      $ 2,047      $ 4,051   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    November 30, 2013  
    (unaudited)  
    Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Total  

Liabilities:

       

Contingent consideration

  $ —        $ —        $ 2,059      $ 2,059   

Euro denominated long-term debt

    —          1,242        —         1,242   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $        $ 1,242      $ 2,059      $ 3,301   
 

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of contingent consideration liabilities that was classified as Level 3 in the table above was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement are not supported by market activity include a combination of actual cash flows and probability-weighted assessments of expected future cash flows related to the acquired businesses, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the acquisition agreement.

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 November 30, 2013, there were approximately

 

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1.3 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. However, the total number of shares ultimately issued may not exceed the total number of shares cumulatively authorized, which is 7,120,000 at November 30, 2013. 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 $2.2 million and $2.1 million for the six months ended November 30, 2013 and 2012 respectively. At November 30, 2013, $10.9 million of unrecognized compensation expense related to share-based compensation is expected to be recognized over a remaining weighted-average period of 3.1 years. The tax benefit derived when share-based awards result in a tax deduction for the company was $0.7 million and $2.0 million for the six months ended November 30, 2013 and 2012, respectively.

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 six months ended November 30, 2013 and 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 six months ended November 30, 2013 and 2012 are summarized below:

 

    Six Months Ended
November 30, 2013
    Six Months Ended
November 30, 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

    1,052      $ 20.24        1,562      $ 18.95   

Changes during the period:

       

Granted

    —       $ —         —       $ —    

Exercised

    (80   $ 24.73        (258   $ 13.17   

Cancelled

    —       $ —         —       $ —    

Expired

    —       $ —         —       $ —    
 

 

 

     

 

 

   

Shares under option, end of period

    972      $ 19.87        1,304      $ 20.09   
 

 

 

     

 

 

   

Exercisable at end of period

    972      $ 19.87        1,304      $ 20.09   
 

 

 

     

 

 

   

Options exercisable at November 30, 2013 had a weighted-average remaining contractual life of 2.9 years. For total options outstanding at November 30, 2013, the range of exercise prices and remaining contractual lives are as follows:

 

Range of Prices

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

$6.42 to $9.62

     116       $ 8.92         1.4   

$9.63 to $12.82

     152       $ 11.11         2.2   

$12.83 to $16.03

     295       $ 14.61         2.6   

$16.04 to $32.05

     409       $ 30.01         3.9   
  

 

 

       
     972       $ 19.87         2.9   
  

 

 

       

 

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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 $0.3 million for the six months ended November 30, 2013 and 2012. Transactions involving our performance awards during the six months ended November 30, 2013 and 2012 are summarized below:

 

     Six Months Ended
November 30, 2013
     Six Months Ended
November 30, 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

     57      $ 25.45         65      $ 21.86   

Changes during the period:

         

Granted

     17     $ 36.40        19      $ 32.89  

Vested and settled

     (24 )   $ 22.65        (27   $ 22.04  

Cancelled

     —       $ —          —       $ —    
  

 

 

      

 

 

   

Performance awards, end of period

     50      $ 30.63         57      $ 25.45   
  

 

 

      

 

 

   

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 $1.9 million for the six months ended November 30, 2013 and 2012. Transactions involving our stock units and director stock grants during the six months ended November 30, 2013 and 2012 are summarized below:

 

    Six Months Ended
November 30, 2013
    Six Months Ended
November 30, 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

    329      $ 26.07        342      $ 21.73   

Changes during the period:

       

Granted

    136      $ 36.71        141     $ 32.81   

Vested and settled

    (137 )   $ 24.34       (142   $ 22.54   

Cancelled

    (11   $ 26.86        (8   $ 21.84   
 

 

 

     

 

 

   

Stock and stock units, end of period

    317      $ 31.38        333      $ 26.07   
 

 

 

     

 

 

   

 

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12. OTHER COMPREHENSIVE INCOME

A summary of changes in other comprehensive income included within shareholders’ equity is as follows (in thousands):

 

     Six Months Ended
November 30, 2013
    Six Months Ended
November 30, 2012
 
     (unaudited)     (unaudited)  
     Foreign
Currency
Translation
Adjustments
    Foreign
Currency
Hedge
    Tax
Provision
    Total     Foreign
Currency
Translation
Adjustments
    Foreign
Currency
Hedge
    Tax
Provision
    Total  

Balance, beginning of period

   $ (3,532   $ 2,004      $ (261   $ (1,789   $ (4,593   $ 2,678      $ (672   $ (2,587

Other comprehensive income before tax

     (210     (762     833        (139     4,290        (648     (376     3,266   

Non-controlling interest

     8        —         —         8        (28     —         —         (28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (3,734   $ 1,242      $ 572      $ (1,920   $ (331   $ 2,030      $ (1,048   $ 651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Six Months Ended
November 30, 2013
    Six Months Ended
November 30, 2012
 
     (unaudited)     (unaudited)  
     Gross
Amount
    Tax
Effect
     Net
Amount
    Gross
Amount
    Tax
Effect
    Net
Amount
 

Foreign currency translation adjustments

   $ (210   $ 542       $ 332      $ 4,290      $ (629   $ 3,661   

Foreign currency hedge

     (762     291         (471     (648     253        (395
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (972   $ 833       $ (139   $ 3,642      $ (376   $ 3,266   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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 November 30, 2013, one hundred and six 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.

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.

 

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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.” Through July 1, 2013, we operated in only one segment—the industrial services segment. Within the industrial services segment, we were organized as two divisions. Our TCM division provided the services of inspection and assessment and field heat treating. Our TMS division provided the services of leak repair, fugitive emissions control, hot tapping, field machining, technical bolting and field valve repair.

Effective July 1, 2013, we implemented a reorganization of our business divisions to conduct operations in three segments: IHT Group, MS Group and Quest Group. All three operating segments operate under a business segment manager who reports directly to Team’s Chief Executive Officer who operates as the chief operating decision maker. Segment data for our three operating segments are as follows (in thousands):

 

    Three Months Ended     Six Months Ended  
    November 30, 2013     November 30, 2012     November 30, 2013     November 30, 2012  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Revenues:

       

IHT

  $ 109,427      $ 108,935      $ 205,260      $ 191,145   

MS

    70,987        76,171        136,756        141,498   

Quest

    20,079        15,542        32,788        29,497   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 200,493      $ 200,648      $ 374,804      $ 362,140   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended     Six Months Ended  
    November 30, 2013     November 30, 2012     November 30, 2013     November 30, 2012  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Operating income:

       

IHT

  $ 17,700      $ 16,313      $ 27,883      $ 25,972   

MS

    7,380        10,459        14,181        17,703   

Quest

    5,512        2,985        4,816        6,006   

Corporate and shared support services

    (6,711     (6,717     (14,894     (13,817
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 23,881      $ 23,040      $ 31,986      $ 35,864   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended     Six Months Ended  
    November 30, 2013     November 30, 2012     November 30, 2013     November 30, 2012  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Capital expenditures:

       

IHT

  $ 1,570      $ 2,584      $ 3,415      $ 4,855   

MS

    1,751        1,825        3,191        4,612   

Quest

    719        876        2,675        1,401   

Corporate and shared support services

    3,356        1,640        4,338        1,786   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,396      $ 6,925      $ 13,619      $ 12,654   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended     Six Months Ended  
    November 30, 2013     November 30, 2012     November 30, 2013     November 30, 2012  
          (unaudited)                 (unaudited)           (unaudited)     (unaudited)  

Depreciation and amortization:

       

IHT

  $ 1,929      $ 2,090      $ 4,011      $ 3,838   

MS

    1,812        1,685        3,590        3,394   

Quest

    1,365        1,175        2,690        2,155   

Corporate and shared support services

    202        131        400        267   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 5,308      $ 5,081      $ 10,691      $ 9,654   
 

 

 

   

 

 

   

 

 

   

 

 

 

Separate measures of Team’s assets by operating segment are not produced or utilized by management to evaluate segment performance.

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

 

     Three Months Ended      Six Months Ended  
     November 30, 2013      November 30, 2012      November 30, 2013      November 30, 2012  
     (unaudited)      (unaudited)      (unaudited)      (unaudited)  

Revenues:

           

United States

   $ 137,601       $ 137,188       $ 261,406       $ 250,242   

Canada

     38,426         43,615         71,354         78,701   

Europe

     12,198         8,666         20,631         15,366   

Other foreign countries

     12,268         11,179         21,413         17,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 200,493       $ 200,648       $ 374,804       $ 362,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     November 30, 2013      May 31, 2013  
     (unaudited)         

Total assets:

     

United States

   $ 353,681       $ 334,579   

Canada

     68,090         68,164   

Europe

     39,964         35,734   

Other foreign countries

     26,231         21,726   
  

 

 

    

 

 

 

Total

   $ 487,966       $ 460,203   
  

 

 

    

 

 

 

15. UNCONSOLIDATED SUBSIDIARIES

Our earnings from unconsolidated affiliates consists entirely of our joint venture (50% ownership) to perform non-destructive testing and inspection services in Alaska. Our investment in the net assets of the joint venture, accounted for using the equity method of accounting, was $2.6 million at November 30, 2013 and $1.8 million at May 31, 2013. Revenues from the joint venture not reflected in our consolidated revenues were $7.8 million and $9.0 million for the six months ended November 30, 2013 and 2012, respectively. At December 31, 2013 the joint venture was dissolved and the net assets were liquidated resulting in no material gain or loss.

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 hyperinflationary economies. Following the designation of the

 

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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 was 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 during the third quarter of fiscal year 2013. Management is closely monitoring currency valuation developments in Venezuela. If further devaluations occur in fiscal year 2014, we will incur further impairments of our investment in Venezuela. Due to the uncertain economic and political environment in Venezuela, it is very difficult to repatriate cash flows of these operations. At November 30, 2013, our Venezuelan subsidiary had $3.6 million of net assets, consisting primarily of Bolivar denominated cash equal to $1.7 million.

17. REPURCHASE OF COMMON STOCK

On October 1, 2013, our Board approved an initial $25 million stock repurchase plan, superseding and replacing our previous stock repurchase plan. During the three months ended November 30, 2013, we repurchased 369,900 shares for a total cost of $13.3 million. These shares along with 89,569 shares purchased in a prior period at a cost of $1.3 million were retired and are not included in common stock issued and outstanding as of November 30, 2013. The retirement of the shares purchased resulted in a reduction in common stock of $0.1 million, a reduction of $2.2 million to additional paid-in capital, and a $12.3 million reduction in retained earnings.

 

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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 condensed consolidated 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, 2013.

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 7 of our Annual Report on Form 10-K for the year ended May 31, 2013.

General Description of Business

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

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

Inspection and assessment services are offered in both the IHT Group and Quest Group. The IHT Group provides basic and advanced non-destructive testing services for the process, pipeline and power sectors, pipeline integrity management services, as well as associated engineering and assessment services. These services can be offered while facilities are running (on-stream) or during facility turnarounds or during new construction or expansion activities. The Quest Group provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass two broadly-defined disciplines: (1) highly specialized in-line inspection services for unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; and (2) advanced condition assessment services through a multi-disciplined engineering team. We believe there is a general growth in market demand for inspection and assessment services as improved inspection technologies enable better information about asset reliability to be available to facility owners and operators.

 

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

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

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

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

The following table sets forth the components of revenue and operating income from our operations for the quarters ending November 30, 2013 and 2012:

 

     Three Months Ended
November 30,
    Increase
(Decrease)
 
     2013     2012     $     %  

Revenues by business segment:

        

IHT

   $ 109,427      $ 108,935      $ 492        0

MS

     70,987        76,171        (5,184     (7 )% 

Quest

     20,079        15,542        4,537        29
  

 

 

   

 

 

   

 

 

   
   $ 200,493      $ 200,648      $ (155     (0 )% 
  

 

 

   

 

 

   

 

 

   

Revenues by service type:

        

Inspection and assessment

   $ 109,483      $ 98,275      $ 11,208        11

Turnaround

     50,562        66,746        (16,184     (24 )% 

On-stream services

     40,448        35,627        4,821        14
  

 

 

   

 

 

   

 

 

   
   $ 200,493      $ 200,648      $ (155     (0 )% 
  

 

 

   

 

 

   

 

 

   

Operating income:

        

IHT

   $ 17,700      $ 16,313      $ 1,387        9

MS

     7,380        10,459        (3,079     (29 )% 

Quest

     5,512        2,985        2,527        85

Corporate and shared support

     (6,711     (6,717     6        0
  

 

 

   

 

 

   

 

 

   
   $ 23,881      $ 23,040      $ 841        4
  

 

 

   

 

 

   

 

 

   

Operating income % of revenues

     12     11    

Revenues. While overall revenues were largely unchanged from the prior year quarter, the components of our revenue shifted significantly in the current year quarter. Quest revenues grew 29% reflecting continued growth in both process and pipeline inspection services. Both IHT and MS business units were negatively impacted by fewer large turnaround projects in the current year quarter as compared to the prior year quarter. As a result, total turnaround service revenues declined $16 million compared to the prior year quarter, with about half of that decline attributable to a reduction in major projects in the Canadian oil sands.

 

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Operating Income. Overall operating income was virtually the same as the prior year quarter. However, the current year quarter includes (in the IHT business unit) a non-cash $2.1 million gain from the revaluation of contingent consideration (see note 2 to condensed financial statements). Changes in operating income within business groups were driven primarily by revenue changes. Quest’s operating income improved $2.5 million (85%) over the prior year quarter due to its significant revenue growth in the quarter. MS operating income declined by $3.0 million primarily as a result of the fewer large turnaround projects compared to the prior year quarter.

Six Months Ended November 30, 2013 Compared to Six Months Ended November 30, 2012

The following table sets forth the components or revenue and operating income from our operations for the six months ending November 30, 2013 and 2012:

 

     Six Months Ended
November 30,
    Increase
(Decrease)
 
     2013     2012     $     %  

Revenues by business segment:

        

IHT

   $ 205,260      $ 191,145      $ 14,115        7

MS

     136,756        141,498        (4,742     (3 )% 

Quest

     32,788        29,497        3,291        11
  

 

 

   

 

 

   

 

 

   
   $ 374,804      $ 362,140      $ 12,664        3
  

 

 

   

 

 

   

 

 

   

Revenues by service type:

        

Inspection and assessment

   $ 198,069      $ 176,317      $ 21,752        12

Turnaround

     96,204        116,008        (19,804     (17 )% 

On-stream services

     80,531        69,815        10,716        15
  

 

 

   

 

 

   

 

 

   
   $ 374,804      $ 362,140      $ 12,664        3
  

 

 

   

 

 

   

 

 

   

Operating income:

        

IHT

   $ 27,883      $ 25,972      $ 1,911        7

MS

     14,181        17,703        (3,522     (20 )% 

Quest

     4,816        6,006        (1,190     (20 )% 

Corporate and shared support

     (14,894     (13,817     (1,077     (8 )% 
  

 

 

   

 

 

   

 

 

   
   $ 31,986      $ 35,864      $ (3,878     (11 )% 
  

 

 

   

 

 

   

 

 

   

Operating income % of revenues

     9     10    

Revenues . For the first half of fiscal 2014, overall revenues increased $12.7 million over the prior year-to-date period, including $7.0 million associated with business acquisitions (all in IHT). The current year-to-date period reflects significantly fewer large turnaround projects as compared to the prior year to date period. The reduction in turnaround activity was partially offset by a 15% increase in on-stream services. Quest revenues were up 11% over the prior year-to-date period, reflecting its slow start in the first quarter of the fiscal year followed by a very strong second quarter.

Operating income . Overall operating income was down $3.9 million from the first half of last year. Without regard to the $2.1 million non-cash gain recognized in the second quarter and $0.7 million of severance costs in the first quarter (included in corporate and shared support costs), operating income would have declined by $5.3 million. $3.5 million of the decline in operating income is attributable to the MS Group, reflecting the fewer number of large projects in the first half of the current year compared to last year, and $1.2 million is due to the slow first quarter of the fiscal year by Quest.

 

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Liquidity and Capital Resources

Financing for our operations consists primarily of vendor financing and leasing arrangements, our Credit Facility and cash flows attributable to our operations, which we believe are sufficient to fund our business needs. In July 2011, we renewed our Credit Facility with our banking syndicate. The Credit Facility has borrowing capacity of up to $150 million in multiple currencies, bears interest based on a variable Eurodollar rate option (LIBOR plus 1.75% margin at November 30, 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 November 30, 2013, we had $36.6 million of cash on hand and approximately $45 million of available borrowing capacity through our Credit Facility. Our Credit Facility does not mature until July 2016 and there are no mandatory payments before the maturity date. At that time, we expect to be able to renew the facility based upon our long-term relationships with each member bank of our Credit Facility and the relatively low credit leverage defined as our debt to EBITDA ratio.

In the second quarter of 2013, we initiated the design and implementation of a new ERP system, which is expected to be fully installed by the end of fiscal 2016. Total future capital costs associated with the implementation are expected to be in the range of $10 to 12 million over the next two years.

Additionally, we have committed about $9 million for the re-development of Team’s former headquarters in Alvin, Texas as an equipment, training and technical center for operations support. The Alvin project is expected to be completed in the spring of 2014 at a total cost of approximately $9 million.

On October 1, 2013, our Board approved an initial $25 million stock repurchase plan, superseding and replacing our previous stock repurchase plan. Concurrently, our Credit Facility was amended to exclude the first $25 million of stock repurchases from the definition of “fixed charges” for purposes of calculating the fixed charge coverage ratio under the Credit Facility. During the three months ended November 30, 2013, we completed stock repurchases of 369,900 shares for a total cost of $13.3 million. These shares were then retired and are now no longer included within common stock issued and outstanding.

Restrictions on cash .  Included in our cash and cash equivalents at November 30, 2013, is $1.7 million of cash in Venezuela and $15.1 million of cash in foreign subsidiaries (located primarily in Europe and Canada) where earnings are considered by the Company to be permanently reinvested. In the event that some or all of this cash were to be repatriated, we would be required to accrue and pay additional taxes. While not legally restricted from repatriating this cash, we consider all undistributed 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. Due to the official devaluation of the Venezuelan currency, the Bolivar, in February 2013 we recorded a devaluation loss of $0.6 million during the year ended May 31, 2013. Management is closely monitoring currency valuation developments in Venezuela. If further devaluations occur in fiscal year 2014, we will incur further impairments of our investment in Venezuela.

Cash flows attributable to our operating activities.  For the six months ended November 30, 2013, net cash provided by operating activities was $20.2 million. Net income of $19.1 million, depreciation and amortization of $10.7 million, deferred taxes of $3.4 million, and non-cash compensation cost of $2.2 million were offset by a contingent consideration revaluation of $2.1 million and a $12.8 million increase in working capital.

Cash flows attributable to our investing activities.  For the six months ended November 30, 2013, net cash used in investing activities was $23.6 million, consisting primarily of $13.6 million of capital expenditures and $10.2 million for business acquisitions. Capital expenditures can vary depending upon specific customer needs that may arise unexpectedly.

 

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Cash flows attributable to our financing activities.  For the six months ended November 30, 2013, net cash provided by financing activities was $5.6 million consisting primarily of $18.0 million of net borrowings related to our Credit Facility offset by $13.3 million of payments related to the purchase of treasury stock.

Effect of exchange rate changes on cash.  For the six months ended November 30, 2013, the effect of exchange rate changes on cash was a positive $0.2 million. We have significant operations in Europe and Canada, as well as operations in Venezuela which is considered a hyperinflationary economy. The impact of foreign currency exchange rates on cash in the current year is primarily attributable to changes in U.S. Dollar exchange rates with Canada and Europe.

 

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 six months ended November 30, 2013, the exchange rate with the Euro increased from $1.30 per Euro to $1.36 per Euro, an increase of 5%. During the same period, the exchange rate with the Canadian Dollar decreased from $0.97 per Canadian Dollar to $0.94 per Canadian Dollar, a decrease of 3%. 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 losses in other comprehensive income were $0.2 million for the six months ended November 30, 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 November 30, 2013, our Venezuelan subsidiary had $3.6 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 $0.4 million. As discussed above, there was an official devaluation of the Venezuelan currency, the Bolivar, in February 2013 which resulted in the recognition of a devaluation loss of $0.6 million during the year ended May 31, 2013. Management is closely monitoring currency valuation developments in Venezuela. If further devaluations occur in fiscal year 2014, we will incur further impairments of our investment in Venezuela.

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.

 

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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 the 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 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 November 30, 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 second quarter of our fiscal year ending May 31, 2014.

 

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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 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 November 30, 2013, one hundred and six 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.

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 7 of our Annual Report on Form 10-K for the year ended May 31, 2013 for a detailed discussion of our risk factors.

 

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

On October 1, 2013, our Board approved an initial $25 million stock repurchase plan, superseding and replacing our previous stock repurchase plan. Concurrently, our Credit Facility was amended to exclude the first $25 million of stock repurchases from the definition of “fixed charges” for purposes of calculating the fixed charge coverage ratio under the Credit Facility. Through November 30, 2013, we repurchased a total of 369,900 shares under this program for an aggregate cost of $13.3 million, or an average price of $36.05 per share.

Repurchases during the first half of fiscal year 2014 were as follows:

 

Period

  (a) Total number of
Shares (or Units)
Purchased
    (b) Average Price
Paid per Share (or Unit)
    (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
    (d) Maximum Number
(or Appropriate
Dollar Value) of
Shares (or Units) that
May Yet be Purchased
Under the Plan or
Program
 

June 1—August 31, 2013

    —          —          —          —     

September 1—September 30, 2013

    —          —          —          —     

October 1—November 30, 2013

    369,900      $ 36.05        369,900      $ 11,666,511   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    369,900      $ 36.05        369,900      $ 11,666,511   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

 

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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 Section 906 of the Sarbanes-Oxley Act of 2002
    32.2    Certification of Chief Financial Officer 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.

 

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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: January 8, 2014   / 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)

 

30

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 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: January 8, 2014

 

/ 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 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: January 8, 2014

 

/ 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 November 30, 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 (15 U.S.C. 78m or 78o(d)); 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

January 8, 2014

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 November 30, 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 (15 U.S.C. 78m or 78o(d)); 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

January 8, 2014