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 AUGUST 31, 2001 ----------------------------- 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 October 5, 2001, there were 7,622,537 shares of the Registrant's common stock outstanding.
TEAM, INC. INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets -- 1 August 31, 2001 (Unaudited) and May 31, 2001 Consolidated Condensed Statements of Operations 2 (Unaudited) -- Three Months Ended August 31, 2001 and 2000 Consolidated Condensed Statements of Cash Flows 3 (Unaudited) -- Three Months Ended August 31, 2001 and 2000 Notes to Unaudited Consolidated Condensed 4 Financial Statements Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 10 about Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 </TABLE>
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEAM, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <CAPTION> AUGUST 31, MAY 31, ASSETS 2001 2001 ------------ ------------ (Unaudited) <S> <C> <C> Current Assets: Cash and cash equivalents $ 1,021,000 $ 968,000 Accounts receivable, net of allowance for doubtful accounts of $402,000 and $392,000 13,987,000 14,608,000 Inventories 8,425,000 8,245,000 Prepaid expenses and other current assets 1,331,000 759,000 ------------ ------------ Total Current Assets 24,764,000 24,580,000 Property, Plant and Equipment, net of accumulated depreciation of $14,618,000 and $14,139,000 11,694,000 11,786,000 Goodwill, net of accumulated amortization of $716,000 and $648,000 10,273,000 10,341,000 Other Assets 1,295,000 1,289,000 ------------ ------------ Total Assets $ 48,026,000 $ 47,996,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,523,000 $ 1,536,000 Accounts payable 2,214,000 1,957,000 Accrued liabilities 3,846,000 3,493,000 Income taxes payable 1,004,000 1,010,000 ------------ ------------ Total Current Liabilities 8,587,000 7,996,000 Long-term debt 13,131,000 13,531,000 Other long-term liabilities 1,581,000 1,657,000 ------------ ------------ Total liabilities 23,299,000 23,184,000 ------------ ------------ Stockholders' Equity: Preferred stock, 500,000 shares authorized, none issued Common stock, par value $.30 per share, 30,000,000 shares authorized, 8,171,457 and 8,342,654 shares issued at August 31 and May 31, 2001, respectively 2,451,000 2,503,000 Additional paid-in capital 31,670,000 32,257,000 Accumulated deficit (7,777,000) (8,579,000) Accumulated other comprehensive loss (65,000) -- Treasury stock at cost, 492,920 and 459,420 shares (1,552,000) (1,369,000) ------------ ------------ Total Stockholders' Equity 24,727,000 24,812,000 ------------ ------------ Total Liabilities and Stockholders' Equity $ 48,026,000 $ 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 AUGUST 31, 2001 2000 ------------ ------------ <S> <C> <C> Revenues $ 19,828,000 $ 16,776,000 Operating expenses 11,645,000 10,184,000 ------------ ------------ Gross Margin 8,183,000 6,592,000 Selling, general and administrative expenses 6,646,000 5,816,000 ------------ ------------ Earnings before interest and taxes 1,537,000 776,000 Interest 240,000 424,000 ------------ ------------ Earnings before income taxes 1,297,000 352,000 Provision for income taxes 495,000 141,000 ------------ ------------ Net income $ 802,000 $ 211,000 ============ ============ Net income per common share: Basic $ 0.10 $ 0.03 ============ ============ Diluted $ 0.10 $ 0.03 ============ ============ Weighted average number of shares outstanding: Basic 7,699,000 8,231,000 ============ ============ Diluted 7,984,000 8,284,000 ============ ============ </TABLE> See notes to unaudited consolidated condensed financial statements. -2-
TEAM, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED AUGUST 31, 2001 2000 ----------- ----------- <S> <C> <C> Cash Flows from Operating Activities: Net income $ 802,000 $ 211,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 659,000 722,000 Allowance for doubtful accounts 10,000 -- Equity in earnings of unconsolidated subsidiary (9,000) -- Other -- 40,000 Change in assets and liabilities (Increase) decrease: Accounts receivable 611,000 (238,000) Inventories (180,000) (483,000) Prepaid expenses and other current assets (484,000) (545,000) Increase (decrease): Accounts payable 257,000 397,000 Accrued liabilities 250,000 (89,000) Income taxes payable (6,000) (327,000) ----------- ----------- Net cash provided by (used in) operating activities 1,910,000 (312,000) ----------- ----------- Cash Flows From Investing Activities: Capital expenditures (446,000) (419,000) Additions to Rental and Demo Machines (17,000) (219,000) Proceeds from sale of assets 29,000 -- Other (62,000) 39,000 ----------- ----------- Net cash used in investing activities (496,000) (599,000) ----------- ----------- Cash Flows From Financing Activities: Payments under debt agreements and other long-term liabilities (489,000) (678,000) Proceeds from issuance of long-term debt -- 2,440,000 Repurchase of common stock (995,000) (390,000) Issuance of common stock 123,000 51,000 ----------- ----------- Net cash provided by (used in) financing activities (1,361,000) 1,423,000 ----------- ----------- Net increase in cash and cash equivalents 53,000 512,000 Cash and cash equivalents at beginning of year 968,000 327,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,021,000 $ 839,000 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 267,000 $ 371,000 =========== =========== Income taxes paid $ 502,000 $ 482,000 =========== =========== </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 May 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") 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 instruments are interest rate swap agreements, which qualify as cash flow hedges under SFAS No. 133. The Company has three swap agreements, which were entered into in 1998 to hedge the exposure of an increase in interest rates. Pursuant to these agreements, which cover approximately $7 million of outstanding debt, the Company exchanged a variable LIBOR rate for a fixed LIBOR rate of approximately 5.2%. (The total interest rate on the Company's debt is the LIBOR rate plus an applicable margin of 1.75%, based upon existing financial covenants). Two of the agreements, covering approximately $3.5 million, expire on December 31, 2001 and one agreement (covering $3.5 million of debt) expires September 30, 2003. Adoption of this new accounting standard resulted in a charge to other comprehensive income of $56 thousand on June 1, 2001. During the first quarter of fiscal 2002, there has been an additional charge to other comprehensive income of $47 thousand to reflect the increase in the mark-to market liability associated with the swaps resulting from the continued reduction in variable LIBOR rates below the 5.2% fixed rate obtained by the Company. In the first quarter of fiscal 2002, interest expense includes approximately $19 thousand pertaining to settlements under the swap agreements. Approximately $70 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 Statement of Financial Accounting Standards No. 141 Accounting for Business Combinations ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142 Accounting for Goodwill and Other Intangible Assets ("SFAS No. 142"). 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 intangible assets through the end of the fiscal year preceding the adoption year, but amortization of -4-
existing goodwill will cease on the first day of the adoption year. SFAS No. 142 is 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 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 three months ended August 31, 2001 or 2000. 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 three months ended August 31, 2001, the Company reacquired 33,500 shares pursuant to an open-market repurchase plan at a weighted average price of $5.46 per share. These shares have not been formally retired and, accordingly, these shares are carried as treasury stock. As of October 5, 2001, an additional 64,500 shares have been reacquired through open market purchases. The Company is authorized by it Board of Directors and lender to expend up to an additional $2.2 million on open market repurchases. 3. Earnings Per Share In 1998 the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). There is no difference, for either of the periods presented, in the amount of net income (numerator) used in the computation of basic and diluted earnings per share. With respect to the number of weighted average shares outstanding (denominator), diluted shares reflects only the pro forma exercise of options to acquire common stock to the extent that the options' exercise prices are less than the average market price of common shares during the period. -5-
4. Inventories Inventories consist of: <TABLE> <CAPTION> August 31, May 31, 2001 2001 ------------ ------------ <S> <C> <C> Raw materials $ 882,000 $ 935,000 Finished goods and work in progress 7,543,000 7,310,000 ------------ ------------ Total $ 8,425,000 $ 8,245,000 ============ ============ </TABLE> 5. Long-term debt Long-term debt consists of: <TABLE> <CAPTION> August 31, May 31, 2001 2001 ------------ ------------ <S> <C> <C> Revolving loan $ 5,940,000 $ 5,960,000 Term and mortgage notes 8,652,000 9,022,000 Capital lease obligations 62,000 85,000 ------------ ------------ 14,654,000 15,067,000 Less current portion 1,523,000 1,536,000 ------------ ------------ Total $ 13,131,000 $ 13,531,000 ============ ============ </TABLE> 6. Industry Segment Information The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," in fiscal 1999. SFAS No. 131 requires that the Company disclose certain information about its operating segments where operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Pursuant to SFAS No. 131, the Company has two reportable segments: industrial services and equipment sales and rentals. The industrial services segment includes services consisting of leak repair, hot tapping, emissions control monitoring, field machining, and mechanical inspection. The equipment sales and rental segment is comprised solely of the operations of a wholly-owned subsidiary, Climax Portable Machine Tools, Inc. -6-
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, therefore, have been eliminated in the following schedule. Interest is not allocated down to the segments. THREE MONTHS ENDED AUGUST 31, 2001 <TABLE> <CAPTION> Industrial Equipment Corporate Services Sales & Rentals & Other Total ----------- --------------- ---------- ----------- <S> <C> <C> <C> Revenues $17,348,000 $ 2,480,000 -- $19,828,000 =========== =========== ========== =========== Earnings before interest & taxes 2,507,000 4,000 (974,000) 1,537,000 Interest -- -- 240,000 240,000 ----------- ----------- ---------- ----------- Earnings before income taxes 2,507,000 4,000 (1,214,000) 1,297,000 =========== =========== ========== =========== Depreciation and amortization 406,000 171,000 82,000 659,000 =========== =========== ========== =========== Capital expenditures 376,000 30,000 40,000 446,000 =========== =========== ========== =========== Identifiable assets $32,161,000 $11,606,000 $4,259,000 $48,026,000 =========== =========== ========== =========== </TABLE> THREE MONTHS ENDED AUGUST 31, 2000 <TABLE> <CAPTION> Industrial Equipment Corporate Services Sales & Rentals & Other Total ----------- --------------- ---------- ----------- <S> <C> <C> <C> Revenues $14,697,000 $ 2,079,000 -- $16,776,000 =========== =========== ========== =========== Earnings before interest & taxes 1,801,000 (242,000) (783,000) 776,000 Interest 0 0 424,000 424,000 ----------- ----------- ---------- ----------- Earnings before income taxes 1,801,000 (242,000) (1,207,000) 352,000 =========== =========== ========== =========== Depreciation and amortization 406,000 189,000 127,000 722,000 =========== =========== ========== =========== Capital expenditures 283,000 131,000 5,000 419,000 =========== =========== ========== =========== Identifiable assets $31,802,000 $12,379,000 $5,943,000 $50,124,000 =========== =========== ========== =========== </TABLE> -7-
7. Comprehensive income Comprehensive income represents the change in the Company's equity from transactions and other events and circumstances from non-owner sources and includes all changes in equity except those resulting from investments by owners and distributions to owners. Comprehensive income is as follows: <TABLE> <CAPTION> Three Months Ended August 31, --------------------------- 2001 2000 ------------ ------------ <S> <C> <C> Net income $ 802,000 $ 211,000 Other comprehensive loss: Unrealized loss on derivative instruments net of $38,000 tax benefit (65,000) -- ------------ ------------ Comprehensive income $ 737,000 $ 211,000 ============ ============ </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 2001 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2000 Revenues for the quarter ended August 31, 2001 were $19.8 million compared to $16.8 million for the corresponding period of the preceding year. Operating margins (shown as "gross margin" in the Condensed Statements of Operations) improved to 41.3% of revenues in the first quarter of fiscal 2002 versus 39.3% in the same quarter last year and net income increased to $802 thousand ($.10 per share) as compared to $211 thousand ($.03 per share) in fiscal 2001. Industrial services segment revenues were $17.3 million in the fiscal 2002 quarter, an increase of $2.6 million (18%) over the prior year. The significant growth in revenues was associated with the newer service lines of inspection, field machining and technical bolting which grew by more than 90% during the quarter when compared to the prior year. The significant growth is attributable to 1) the continued penetration of our newer services within our existing customer base and 2) an increase in the demand for inspection services by pipeline customers due to new pipeline construction and increased regulatory activities in the pipeline industry. Revenues from our traditional service offerings (leak repair, emissions control monitoring, hot tapping and concrete repair) were, in total, generally flat in comparison to fiscal 2001. Demand for our services was generally strong in both years as a result of good business conditions among Team's primary customer industries. While industrial services segment revenues were up 18%, operating profits for that segment (earnings before interest and taxes) were up 40%, increasing to $2.5 million in the first quarter of fiscal 2002 versus $1.8 -8-
million last year. The profit improvement reflects improved operating results from the penetration of newer services, particularly inspection, in Team's existing customer base and a general improvement in the execution of jobs during the first quarter of this fiscal year. The equipment sales and rental segment (the "Climax" business) reported substantially improved results in the first quarter of fiscal 2002, with revenues of $2.5 million versus $2.1 million in the same quarter last year, an increase of 19%. The operating profit of this segment was $ 4 thousand in the first quarter of fiscal 2002, compared to a loss of $242 thousand in the same quarter last year. The improved operating profit reflects a significantly improved operating margin ( 43.5% in fiscal 2002 versus 38.5% in fiscal 2001) as a result of increasing revenues and aggressive efforts to bring manufacturing costs down to meet existing sales levels. While we are pleased with the improved operating results from Climax, management believes that the Climax business is continuing to be negatively impacted by a softness in capital equipment markets. Total corporate general and administrative costs were $974 thousand in the first quarter of fiscal 2002, versus $783 thousand in the same quarter last year. The increase of $191 thousand is due primarily to higher costs in fiscal 2002 for incentive compensation and group insurance accruals. Interest expense was $184 thousand less in the current year's quarter than in the same quarter last year due to 1) a significant reduction in the amount of debt outstanding during the quarter, 2) general rate reductions by the Federal Reserve Bank over the past year, and 3) improvements in a key financial ratio (the ratio of debt to earnings before interest, taxes, depreciation and amortization) that impacts the rate of interest paid to our lending institution. LIQUIDITY AND CAPITAL RESOURCES At August 31, 2001, the Company's liquid working capital (cash and accounts receivable, less current liabilities) totaled $6.4 million, a decrease of approximately $ 1 million since May 31, 2001. The Company utilizes excess operating funds to automatically reduce the amount outstanding under the revolving credit facility. At August 31, 2001, the outstanding balance under the revolving credit facility was $5.9 million leaving approximately $5.0 million available to borrow under the facility. During the quarter ended August 31, 2001, the Company reduced its total outstanding debt by $413 thousand as a result of cash flows generated from operations. Additionally, the Company expended $995 thousand, including expenses, for the repurchase of 268,500 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 and debt service requirements. 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. -9-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company holds certain floating-rate obligations. The exposure of these obligations to increase 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 three months of fiscal 2001 in the Company's market risk sensitive instruments. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K A report on Form 8-K was filed on August 31, 2001, and subsequently amended on October 5, 2001, to report Item 4, Change in Registrant's Certifying Accountant. SIGNATURE 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: October 15, 2001 /s/PHILIP J. HAWK ------------------------------------- Philip J. Hawk Chief Executive Officer and Director /s/TED W. OWEN ------------------------------------- Ted W. Owen, Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -10-