UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 28, 2002 ----------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to --------------------- --------------------- Commission file number 0-9950 ----------------------------------------------------- TEAM, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 74-1765729 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Hermann Drive, Alvin, Texas 77511 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (281) 331-6154 -------------------------- ---------- Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- On April 5, 2002, there were 7,650,812 shares of the Registrant's common stock outstanding.
TEAM, INC. INDEX <Table> <Caption> PART I. FINANCIAL INFORMATION Page No. -------- <S> <C> Item 1. Financial Statements Consolidated Condensed Balance Sheets -- 1 February 28, 2002 (Unaudited) and May 31, 2001 Consolidated Condensed Statements of Operations (Unaudited) -- 2 Three Months and Nine Months Ended February 28, 2002 and 2001 Consolidated Condensed Statements of Cash Flows (Unaudited) -- 3 Nine Months Ended February 28, 2002 and 2001 Notes to Unaudited Consolidated Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 Quantitative and Qualitative Disclosure about Market Risk 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 12 </Table>
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEAM, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS <Table> <Caption> FEBRUARY 28, MAY 31, ASSETS 2002 2001 -------------- -------------- (Unaudited) <S> <C> <C> Current Assets: Cash and cash equivalents $ 709,000 $ 968,000 Accounts receivable, net of allowance for doubtful accounts of $387,000 and $392,000 14,068,000 14,608,000 Inventories 8,858,000 8,245,000 Prepaid expenses and other current assets 1,270,000 759,000 -------------- -------------- Total Current Assets 24,905,000 24,580,000 Property, Plant and Equipment, net of accumulated depreciation of $15,416,000 and $14,139,000 11,768,000 11,786,000 Goodwill, net of accumulated amortization of $854,000 and $648,000 10,135,000 10,341,000 Other Assets 1,061,000 1,289,000 -------------- -------------- Total Assets $ 47,869,000 $ 47,996,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,518,000 $ 1,536,000 Accounts payable 1,985,000 1,957,000 Other accrued liabilities 3,680,000 3,276,000 Income taxes payable 877,000 1,010,000 -------------- -------------- Total Current Liabilities 8,060,000 7,779,000 Long-term debt 12,332,000 13,531,000 Other long-term liabilities 1,440,000 1,657,000 -------------- -------------- Total Liabilities 21,832,000 22,967,000 -------------- -------------- Minority Interest 169,000 217,000 Stockholders' Equity: Preferred stock, 500,000 shares authorized, none issued -- -- Common stock, par value $.30 per share, 30,000,000 shares authorized, 8,283,832 and 8,342,654 shares issued 2,485,000 2,503,000 Additional paid-in capital 31,922,000 32,257,000 Accumulated deficit (6,007,000) (8,579,000) Accumulated other comprehensive loss (66,000) -- Treasury stock at cost, 648,520 and 459,420 shares (2,466,000) (1,369,000) -------------- -------------- Total Stockholders' Equity 25,868,000 24,812,000 -------------- -------------- Total Liabilities and Stockholders' Equity $ 47,869,000 $ 47,996,000 ============== ============== </Table> See notes to unaudited consolidated condensed financial statements. -1-
TEAM, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues $ 19,047,000 $ 18,656,000 $ 60,469,000 $ 54,977,000 Operating expenses 11,168,000 11,343,000 35,364,000 33,157,000 -------------- -------------- -------------- -------------- Gross Margin 7,879,000 7,313,000 25,105,000 21,820,000 Selling, general and administrative expenses 6,634,000 6,273,000 20,056,000 18,344,000 Other expense (income), net 173,000 82,000 173,000 (278,000) -------------- -------------- -------------- -------------- Earnings before interest and taxes 1,072,000 958,000 4,876,000 3,754,000 Interest 223,000 382,000 720,000 1,272,000 -------------- -------------- -------------- -------------- Earnings before income taxes 849,000 576,000 4,156,000 2,482,000 Provision (benefit) for income taxes 323,000 (43,000) 1,584,000 773,000 -------------- -------------- -------------- -------------- Net income $ 526,000 $ 619,000 $ 2,572,000 $ 1,709,000 ============== ============== ============== ============== Net income per common share: Basic $ 0.07 $ 0.08 $ 0.34 $ 0.21 ============== ============= ============== ============== Diluted $ 0.06 $ 0.08 $ 0.31 $ 0.21 ============== ============= ============== ============== Weighted average number of shares outstanding: Basic 7,661,000 7,893,000 7,667,000 8,167,000 ============== ============= ============== ============== Diluted 8,260,000 8,068,000 8,174,000 8,272,000 ============== ============= ============== ============== </Table> See notes to unaudited consolidated condensed financial statements. -2-
TEAM, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <Table> <Caption> NINE MONTHS ENDED FEBRUARY 28, ---------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Cash Flows from Operating Activities: Net income $ 2,572,000 $ 1,709,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other 2,015,000 2,155,000 Gain on sale of property and other -- (407,000) Allowance for doubtful accounts and other (5,000) 100,000 Equity in losses of unconsolidated subsidiaries 5,000 93,000 Change in assets and liabilities (Increase) decrease: Accounts receivable 545,000 (90,000) Inventories (613,000) (261,000) Prepaid expenses and other current assets (423,000) (29,000) Increase (decrease): Accounts payable 28,000 (229,000) Other accrued liabilities 249,000 (90,000) Income taxes payable (133,000) (376,000) ------------ ------------ Net cash provided by operating activities 4,240,000 2,575,000 ------------ ------------ Cash Flows From Investing Activities: Capital expenditures (1,270,000) (1,325,000) Additions to rental and demo machines (398,000) (464,000) Disposal of property and equipment 84,000 1,652,000 Other 5,000 177,000 ------------ ------------ Net cash provided by (used in) investing activities (1,579,000) 40,000 ------------ ------------ Cash Flows From Financing Activities: Net payments under term loans and other long-term obligations (1,423,000) (1,118,000) Repurchase of common stock (1,909,000) (1,206,000) Issuance of common stock 412,000 58,000 ------------ ------------ Net cash used in financing activities (2,920,000) (2,266,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents (259,000) 349,000 Cash and cash equivalents at beginning of year 968,000 327,000 ------------ ------------ Cash and cash equivalents at end of period $ 709,000 $ 676,000 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 809,000 $ 1,318,000 ============ ============ Income taxes paid $ 1,843,000 $ 1,203,000 ============ ============ </Table> See notes to unaudited consolidated condensed financial statements. -3-
TEAM, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Method of Presentation General The interim financial statements are unaudited, but in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for such periods. The consolidated condensed balance sheet at May 31, 2001 is derived from the Mary 31, 2001 audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in Team, Inc.'s ("the Company" or "Team") annual report on Form 10-K for the fiscal year ended May 31, 2001. New Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138, became effective for the Company as of June 1, 2001. Those statements establish accounting and reporting standards requiring that all derivative instruments be recorded as either assets or liabilities measured at fair value. These statements also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, which includes an assessment of the effectiveness of the hedging instrument. The effective portion of the change in the fair value of derivatives used as cash flow hedges are reported as other comprehensive income, with all other changes reported in net income. The Company's only derivative instrument is an interest rate swap agreement that expires in September, 2003 and which qualifies as a cash flow hedge under SFAS No. 133. The agreement was entered into in 1998 to hedge the exposure of an increase in interest rates. Pursuant to this agreement, which covers approximately $3 million of outstanding debt, the Company exchanged a variable LIBOR rate for a fixed LIBOR rate of approximately 5.2%. Two other swap agreements, covering approximately $3.5 million, expired on December 31, 2001. Adoption of this new accounting standard resulted in a before tax charge to other comprehensive income of $56 thousand on June 1, 2001. During the nine months of fiscal 2002, there has been an additional before tax charge to other comprehensive income of $51 thousand to reflect the increase in the mark-to-market liability associated with the swaps resulting from the continued reduction in variable rates below the fixed rate obtained by the Company. In the nine months of fiscal 2002, interest expense includes approximately $90 thousand pertaining to settlements under the swap agreements. Approximately $68 thousand of the amounts in accumulated other comprehensive loss will be reclassified to interest expense over the course of the next twelve months. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 Accounting for Business Combinations and SFAS No. 142 Accounting for Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and prohibits the pooling-of-interest method for business combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill that arises from purchases after June 30, 2001 cannot be amortized. In addition, SFAS No. 142 requires the continuation of the amortization of goodwill and all amortizable intangible assets through the end of the fiscal year preceding the adoption year, but amortization of existing goodwill will cease on the first day of the adoption year. SFAS No. 142 is -4-
effective for fiscal years beginning after December 15, 2001. Accordingly, the Company will adopt SFAS No. 142 as of the beginning of its next fiscal year that commences June 1, 2002. The Company has six months from the date it initially applies SFAS No. 142 to test goodwill for impairment and any impairment charge resulting from the initial application of the new standard must be classified as the cumulative effect of a change in accounting principle. Thereafter, goodwill should be tested for impairment at least annually and impairment losses will, generally, be presented in the operating section of the income statement. Management is currently assessing the impact that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements. 2. Dividends and Stock Repurchases No dividends were paid during the nine months ended February 28, 2002 or 2001. Pursuant to the Company's Credit Agreement, the Company may not pay quarterly dividends without the consent of its senior lender. Future dividend payments will depend upon the Company's financial condition and other relevant matters. In June, 2001, the Company completed the reacquisition of 235,000 shares of its common stock for $812,000, including expenses, pursuant to a self-tender offer announced in April 2001. These shares were retired and, accordingly, the cost was charged to Common Stock (at par value of $.30 per share) and to Additional Paid-in Capital. Additionally, in the nine months ended February 28, 2002, the Company reacquired 189,100 shares pursuant to an open-market repurchase plan at a weighted average price of $5.80 per share. These shares have not been formally retired and, accordingly, these shares are carried as treasury stock. As of February 28, 2002, The Company is authorized by its Board of Directors and lender to expend up to an additional $1.7 million on open market repurchases. 3. Inventories Inventories consists of: <Table> <Caption> February 28, May 31, 2002 2001 ------------ ------------ <S> <C> <C> Raw materials $ 886,000 $ 935,000 Finished goods and work in progress 7,972,000 7,310,000 ------------ ------------ Total $ 8,858,000 $ 8,245,000 ============ ============ </Table> -5-
4. Long-Term Debt Long-term debt consists of: <Table> <Caption> February 28, May 31, 2002 2001 ------------ ------------ <S> <C> <C> Revolving loan $ 5,900,000 $ 5,960,000 Term and mortgage notes 7,911,000 9,022,000 Capital lease obligations 39,000 85,000 ------------ ------------ 13,850,000 15,067,000 Less current portion 1,518,000 1,536,000 ------------ ------------ Total $ 12,332,000 $ 13,531,000 ============ ============ </Table> 5. Comprehensive income Comprehensive income represents the change in the Company's equity from transactions and other events and circumstances from non-owner sources and includes all changes in equity except those resulting from investments by owners and distributions to owners. Comprehensive income is as follows: <Table> <Caption> Three Months Ended Nine Months Ended February 28, February 28, --------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income $ 526,000 $ 619,000 $ 2,572,000 $ 1,709,000 Other comprehensive income (loss): Unrealized income (loss) on derivative instruments net of $12,000 tax provision and $41,000 tax benefit for three months and nine months ended February 28, 2002, respectively 22,000 -- (66,000) -- ------------ ------------ ------------ ------------ Comprehensive income $ 548,000 $ 619,000 $ 2,506,000 $ 1,709,000 ============ ============ ============ ============ </Table> 6. Industry Segment Information SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," requires that the Company disclose certain information about its operating segments where operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. -6-
Pursuant to SFAS No. 131, the Company has two reportable segments: industrial services and equipment sales and rentals. The industrial services segment includes services consisting of leak repair, hot tapping, emissions control monitoring, field machining, technical bolting, and NDT inspection. The equipment sales and rental segment is comprised solely of the operations of a wholly-owned subsidiary, Climax Portable Machine Tools, Inc. The Company evaluates performance based on earnings before interest and income taxes. Inter-segment sales are eliminated in the operating measures used by the company to evaluate segment performance and have, therefore, been eliminated in the following tables. Interest is not allocated down to the segments. THREE MONTHS ENDED FEBRUARY 28, 2002 <Table> <Caption> Industrial Equipment Corporate Services Sales & Rentals & Other Total -------------- --------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues $ 16,692,000 $ 2,355,000 -- $ 19,047,000 ============== ============== ============== ============== Earnings (loss) before interest and taxes 2,186,000 (93,000) (1,021,000) 1,072,000 Interest -- -- 223,000 223,000 -------------- -------------- -------------- -------------- Earnings (loss) before income taxes 2,186,000 (93,000) (1,244,000) 849,000 ============== ============== ============== ============== Depreciation and amortization 399,000 169,000 95,000 663,000 ============== ============== ============== ============== Capital expenditures 318,000 1,000 -- 319,000 ============== ============== ============== ============== Identifiable assets $ 31,925,000 $ 11,643,000 $ 4,301,000 $ 47,869,000 ============== ============== ============== ============== </Table> THREE MONTHS ENDED FEBRUARY 28, 2001 <Table> <Caption> Industrial Equipment Corporate Services Sales & Rentals & Other Total ------------ --------------- ------------ ------------ <S> <C> <C> <C> <C> Revenues $ 16,144,000 $ 2,512,000 -- $ 18,656,000 ============ ============ ============ ============ Earnings (loss) before interest and taxes 1,864,000 183,000 (1,089,000) 958,000 Interest -- -- 382,000 382,000 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 1,864,000 183,000 (1,471,000) 576,000 ============ ============ ============ ============ Depreciation and amortization 414,000 180,000 91,000 685,000 ============ ============ ============ ============ Capital expenditures 240,000 5,000 13,000 258,000 ============ ============ ============ ============ Identifiable assets $ 31,321,000 $ 12,214,000 $ 3,615,000 $ 47,150,000 ============ ============ ============ ============ </Table> -7-
6. Industry Segment Information (continued) NINE MONTHS ENDED FEBRUARY 28, 2002 <Table> <Caption> Industrial Equipment Corporate Services Sales & Rentals & Other Total -------------- --------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues $ 53,188,000 $ 7,281,000 -- $ 60,469,000 ============== ============== ============== ============== Earnings (loss) before interest and taxes 7,919,000 (52,000) (2,991,000) 4,876,000 Interest -- -- 720,000 720,000 -------------- -------------- -------------- -------------- Earnings (loss) before income taxes 7,919,000 (52,000) (3,711,000) 4,156,000 ============== ============== ============== ============== Depreciation and amortization 1,234,000 511,000 270,000 2,015,000 ============== ============== ============== ============== Capital expenditures 1,094,000 88,000 88,000 1,270,000 ============== ============== ============== ============== Identifiable assets $ 31,925,000 $ 11,643,000 $ 4,301,000 $ 47,869,000 ============== ============== ============== ============== </Table> NINE MONTHS ENDED FEBRUARY 28, 2001 <Table> <Caption> Industrial Equipment Corporate Services Sales & Rentals & Other Total -------------- --------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues $ 48,270,000 $ 6,707,000 -- $ 54,977,000 ============== ============== ============== ============== Earnings (loss) before interest and taxes 6,541,000 (274,000) (2,513,000) 3,754,000 Interest -- -- 1,272,000 1,272,000 -------------- -------------- -------------- -------------- Earnings (loss) before income taxes 6,541,000 (274,000) (3,785,000) 2,482,000 ============== ============== ============== ============== Depreciation and amortization 1,236,000 586,000 333,000 2,155,000 ============== ============== ============== ============== Capital expenditures 1,160,000 147,000 18,000 1,325,000 ============== ============== ============== ============== Identifiable assets $ 31,321,000 $ 12,214,000 $ 3,615,000 $ 47,150,000 ============== ============== ============== ============== </Table> -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 2001 Revenues for the quarter ended February 28, 2002 were $19.0 million compared to $18.7 million for the corresponding period of the preceding year, an increase of 2%. Operating margins (shown as "gross margin" in the Condensed Statements of Operations) increased to 41% in the 2002 quarter compared to 39% in the 2001 quarter, and net income decreased to $526 thousand, or $0.06 per diluted share as compared to $619 thousand, or $0.08 per diluted share in the 2001 quarter. The decline in net income was due to the recognition in last year's quarter of a one-time $400 thousand tax benefit and the inclusion in the current year's quarter of a $173 thousand severance charge associated with a reduction in workforce at Climax, the Company's equipment sales and rental business. Industrial Services Segment -- The industrial services business segment, which represents about 88% of consolidated revenues, experienced a softening in year over year growth in the third quarter. Services segment revenues were $16.7 million in the 2002 quarter compared to $16.1 million in the 2001 quarter, an increase of 3%. The following table sets forth the composition of services revenues for the current and prior year quarters: <Table> <Caption> 2002 Qtr 2001 Qtr. % Inc (dec) ------------ ------------ ------------ <S> <C> <C> <C> Tradional Services $ 11,783,000 $ 12,608,000 (7)% New Services 4,909,000 3,536,000 39% ------------ ------------ ------------ $ 16,692,000 $ 16,144,000 3% ============ ============ ============ </Table> Traditional services comprise those industrial services that have been offered by the Company for more than 20 years--leak repair, hot tapping and emissions control monitoring. New services are the service offerings added in the past three years and include NDT inspection, field machining, and technical bolting. Management believes that the Company's traditional service revenues, especially leak repair and hot tapping, are related, in part, to the operating performance of our customers--particularly in the refining, pipeline and petrochemical industries. Generally, as those customers' margins improve, more funds are expended for the specialized industrial services offered by the Company. The Company experienced weakened demand for those services in the 2002 quarter as compared to the 2001 quarter because of the generally weak business conditions the Company's refining and petro-chemical customers are currently experiencing. Additionally, demand was impacted by the generally mild winter in the northeast and mid-western United States, which resulted in refinery production curtailments due to excessive inventories of heating oil. We believe this softening to be temporary and have already seen evidence of improved demand in the month of March 2002. We continued to experience excellent growth among our new service offerings, an increase of over 38%. The third quarter growth was primarily due to the continued penetration of these new services into our traditional customer base. Additionally, operating margins improved by two percentage points year over year in the service segment due to improvements in locations where new services were introduced last year. While industrial services revenues were up by only 3%, operating profits for that segment (earnings before interest and taxes) were up 17%--$2.2 million in the 2002 quarter versus $1.9 million in the 2001 quarter. This reflects the operating leverage inherent in our business. A significant portion of the cost structure does not vary -9-
with volume-- allowing us to leverage increases in revenue to achieve greater percentage increases in operating profits. Equipment Sales and Rental Segment -- The equipment sales and rental segment (the "Climax" business) reported revenues that were essentially unchanged from last year's third quarter--$2.4 million in the current quarter versus $2.5 million last year. For the current year quarter, Climax experienced an operating loss of $93 thousand due to the recognition of a $173 thousand charge for severance associated with a reduction in workforce, as compared to a profit of $183 thousand in last year's quarter. Management believes that the Climax business continued to be negatively impacted by softness in capital equipment markets during the quarter and took additional steps, in December of 2001, to reduce its operating costs through a 20% reduction in workforce. The associated severance cost of $173 thousand was charged against earnings in the current quarter. We expect to fully realize the benefit of these cost reductions in the fourth quarter of the current fiscal year. Corporate and other -- Interest expense was substantially reduced in the current year quarter ($223 thousand) compared to the 2001 quarter ($382 thousand). This reduction reflects the general reduction in interest rates over the past year coupled with a substantial decrease in the average amount of outstanding debt. The consolidated results for the 2002 quarter reflect a tax expense of $323 thousand compared to tax benefit of $43 thousand in the 2001 quarter. The prior year quarter's net tax benefit reflects the recognition of a $400 thousand tax benefit that is associated with the liquidation of the UK subsidiary. This tax benefit directly reduced cash taxes paid for fiscal year 2001 and arose because of cumulative losses since the acquisition of the UK company by Team in the early 1990's, which had not previously been tax affected. NINE MONTHS ENDED FEBRUARY 28, 2002 COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 2001 Revenues for the nine months ended February 28, 2002 were $60.5 million as compared to $55.0 million for the corresponding period of the preceding year, an increase of 10%. Operating margins increased to 42% in the 2002 period compared to 40% in the nine month period ended in 2001. Net income for the nine months of 2002 was $2.6 million ($.31 per share-diluted) compared to $1.7 million ($.21 per share-diluted) in the 2001 period, an increase of 50%. Industrial Services Segment -- For the nine-month period, services segment revenues were $53.2 million, or $4.9 million (10%) higher than the $48.3 million in same period of 2001. The components of the increase are as follows: <Table> <Caption> 2002 Qtr 2001 Qtr. % Inc (dec) ------------ ------------ ------------ <S> <C> <C> <C> Tradional Services $ 37,133,000 $ 37,390,000 (1)% New Services 16,055,000 10,880,000 48% ------------ ------------ ------------ $ 53,188,000 $ 48,270,000 10% ============ ============ ============ </Table> The significant increase in new service revenues is due to 1) the continued penetration of our new services within our existing customer base, and 2) an increase in the demand for inspection services by pipeline customers (particularly in the first six months) due to new pipeline construction and increased regulatory activities in the pipeline industry. Traditional service revenues were virtually unchanged year over year due to a significant softening of demand in the third quarter as previously explained. Operating profits for the industrial services segment were up 21%, increasing to $7.9 million in the first nine months of fiscal 2002 versus $6.5 million last year. The profit improvement reflects improved operating -10-
results from the penetration of newer services, particularly inspection, in Team's existing customer base and a general improvement in the execution of jobs--particularly during the first quarter of the current fiscal year compared to last year's first quarter. Equipment Sales and Rentals Segment -- For the nine months ended February 28, 2002, revenues were $7.3 million, or 9% higher than the $6.7 million achieved in the same period of 2001. All of the revenue gains occurred in the first half of the year--a substantial recovery from the prior year, which reflected an extreme weakness in customer demand for capital goods. Year to date, this segment operated at close to break-even, incurring an operating loss of $52 thousand compared to a loss of $274 thousand last year to date. The current year loss includes the $173 thousand severance charge discussed in the quarter over quarter discussion above. Without that charge, the segment would have reported a small profit for the nine months of $121 thousand. The year over year profit improvement reflects a significantly improved operating margin (44% in fiscal 2002 versus 41% in fiscal 2001) as a result of increasing revenues and aggressive efforts to bring manufacturing costs down to meet existing sales levels. See the three-month analysis above for a discussion of additional steps that were taken in the third quarter to improve the profitability of this business. Corporate and other -- Net corporate general and administrative and other costs are higher in the current year, primarily as a result of the recognition of a gain on sale of real estate of $360 thousand in last year's second quarter. Year to date interest costs are down $552 thousand ($720 thousand this year versus $1.3 million last year to date) for the reasons discussed in the three-month analysis. The effective income tax rate of 38% in the 2002 period is higher than the 31% rate in the 2001 period because of the recognition of a $400 thousand tax benefit in last year's third quarter, as discussed in the three-month analysis. LIQUIDITY AND CAPITAL RESOURCES At February 28, 2002, the Company's liquid working capital (cash and accounts receivable, less current liabilities) totaled $6.7 million, a decrease of approximately $1.1 million since May 31, 2001. The Company utilizes excess operating funds to automatically reduce the amount outstanding under the revolving credit facility. At February 28, 2002, the outstanding balance under the revolving credit facility was $5.9 million, leaving approximately $5.3 million available to borrow under the facility. In the nine months ended February 28, 2002, the Company expended $1.9 million, including expenses, for the repurchase of 425 thousand shares of its outstanding common stock. In the opinion of management, cash flow from operations, cash balances and available borrowings will be sufficient for the foreseeable future to finance anticipated working capital requirements, capital expenditures, debt service requirements, and to finance the proposed cash tender offer to re-acquire shares. CRITICAL ACCOUNTING POLICIES The Company has $10.1 million of recorded goodwill associated with business acquisitions made in fiscal year 1999. Of that amount, approximately $7 million is associated with the industrial services segment and $3 million is associated with the equipment sales and rental business. Goodwill is presently amortized over 40 years and its carrying value is periodically evaluated using management's estimate of future undiscounted cash flows in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Under SFAS No. 121, there has been no impairment of the Company's recorded goodwill. Effective at the beginning of the Company's next fiscal year, June 1, 2002, we will adopt the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized but that it be reviewed for impairment annually using a methodology that is different than the methodology required under SFAS No. 121. Management is presently evaluating the impact of SFAS No. 142 on the consolidated financial statements. While we are reasonably certain that there will be no impairment of the goodwill associated with the industrial service business segment, we do not know whether there will be impairment, under SFAS No. 142, of the goodwill associated with the Climax business. -11-
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Any forward-looking information contained herein is being provided in accordance with the provisions of the Private Securities Litigation Reform Act. Such information is subject to certain assumptions and beliefs based on current information known to the Company and is subject to factors that could result in actual results differing materially from those anticipated in any forward-looking statements contained herein. Such factors include domestic and international economic activity, interest rates, market conditions for the Company's customers, regulatory changes and legal proceedings, and the Company's successful implementation of its internal operating plans. Accordingly, there can be no assurance that any forward-looking statements contained herein will occur or those objectives will be achieved. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company holds certain floating-rate obligations. The exposure of these obligations to increases in short-term interest rates is limited by interest rate swap agreements entered into by the Company. There were no material quantitative or qualitative changes during the first nine months of fiscal 2002 in the Company's market risk sensitive instruments. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10.1) First Amendment to Employment Agreement between Philip J. Hawk and Team, Inc., effective October 1, 2001. (Employment agreement filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). (10.2) First Amendment to Price Vested Restricted Stock Option Award Agreement between Philip J. Hawk and Team, Inc. effective October 1, 2001. (Original agreement filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). (10.3) Incentive Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated October 1, 2001. (b) Reports on Form 8-K No reports on Form 8-K were filed this quarter. -12-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. TEAM, INC (Registrant) Date: April 11, 2002 /s/ PHILIP J. HAWK --------------------------------------- Philip J. Hawk, Chief Executive Officer and Chairman of the Board of Directors /s/ TED W. OWEN --------------------------------------- Ted W. Owen, Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -13-
EXHIBIT INDEX <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 10.1 First Amendment to Employment Agreement between Philip J. Hawk and Team, Inc., effective October 1, 2001. (Employment agreement filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10.2 First Amendment to Price Vested Restricted Stock Option Award Agreement between Philip J. Hawk and Team, Inc. effective October 1, 2001. (Original agreement filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998). 10.3 Incentive Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated October 1, 2001. </Table>