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
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TEAM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1765729
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Hermann Drive, Alvin, Texas 77511
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 331-6154
--------------------------
----------
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.
--------
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)
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
-------------- -------------- -------------- --------------
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
------------ ------------
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
------------ ------------
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
------------ ------------
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
------------ ------------ ------------ ------------
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
-------------- --------------- -------------- --------------
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
------------ --------------- ------------ ------------
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
-------------- --------------- -------------- --------------
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
-------------- --------------- -------------- --------------
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)
------------ ------------ ------------
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)
------------ ------------ ------------
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
- ------- -----------
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>