Dear Fellow Shareholders,
The past year has been exciting and productive for our
company. We continue to make further progress with our organic
growth initiatives, once again achieving significant improvement in
market share, revenues, earnings and profit margins. Team’s net
income increased 31% during the past year to the highest level ever.
This is a continuation of the consistent progress we have made over the
last several years. Our average compound annual growth rate in earn-
ings over the past three years and five years has been 27% and 58%,
respectively.
Consistent with this performance, we were pleased to be
recognized in the Fortune Small Business 100 listing of America’s
fastest-growing small companies for the third year in a row. We take
pride in being one of the highest growth companies in America,
regardless of industry.
Team took another significant strategic step forward with the
recent purchases of Thermal Solutions and the assets of Cooperheat
MQS. Together, these two businesses bring Team the #1 market
position in both inspection services and field heat treating. As a result
of these additions, we expect Team’s total revenues to nearly double
over the next twelve months. Beyond the financial benefits, these
acquisitions reinforce and support our overall company strategy to
capitalize on customer trends to consolidate their industrial service
requirements with larger multi-service, multi-location service providers
like Team.
We also were pleased that our common stock share price
nearly doubled over the past year. We believe our continued
performance improvement, combined with new initiatives, is attracting
the attention of more investors. Despite this price improvement, our
trailing P/E ratio remains below overall market averages. We look
forward to continued improvement in this area.
Operations Highlights
For the year,
the Industrial Services Business Segment
revenues increased 17% to $94.5 million. Operating profits for this
segment increased 16% to $14.0 million. Overall, the operating profit
margin for the year was 15%. The revenues for this segment included
$2.5 million in revenues from Thermal Solutions following its
acquisition in April 2004. Excluding those revenues, the organic growth
from the remainder of the industrial services business was 14% for the
full year. The organic growth in the remaining services was
broad-based, with double-digit revenue growth in nearly all service lines
as a result of continued market penetration with multi-service,
multi-plant customer agreements and increased turnaround projects.
The Equipment Sales and Rental Business Segment (Climax
Portable Machine Tool Company) also had record results for the year.
Revenues increased 22% to $13.1 million. Operating profit was $1.2
million, approximately double last year’s results. The strong revenue
growth was the result of several major special machine shipments
during the second half of the fiscal year. Climax continues to pursue
these special machine sales opportunities as a supplement to its standard
machine sales and rental offerings. The level of interest in new special
machine projects remains high going into the current year.
We realize that these results are attributable to a company-
wide focus on providing customers with the services and products they
need-in a safe, effective, efficient and timely manner. We understand
the need to reaffirm the trust and confidence of every customer with
each new service or sales opportunity.
New Business Acquisitions
For the last several years, we have discussed our receptivity to
“accelerating” strategic acquisitions, provided they were consistent
with our current industrial services strategy and accretive to earnings.
In the span of about six months, we completed two purchases that
dramatically enhance the profile and outlook for our company.
In April 2004, Team completed the purchase of Thermal
Solutions, Inc., the second largest provider of field heat treating
services in North America. In August 2004, Team purchased the assets
of Cooperheat MQS from a bankruptcy proceeding. Cooperheat MQS
is the largest provider of both field heat treating and inspection
services in North America.
Strategically, both businesses are a great complement to our
company. As a result of these acquisitions, Team has entered one new
service line, field heat treating, as the industry leader. At the same time,
we have substantially expanded our inspection capability from a
company with a regional Gulf Coast presence to the market leader with
a national presence. Further, both businesses have management and
service personnel joining Team that represent an excellent fit with our
company. Both of these service lines are solid additions to our
multi-service, multi-plant arrangements with many major customers.
Financially, we expect service line margins and overall
business profitability for these new businesses to reach levels that are on
par with Team’s other service lines. Yet, Team was able to purchase
these two businesses for a total value of about .5 times revenue,
compared to Team’s valuation of about 1.2 times revenue. Obviously,
when we can achieve the performance consistent with the expectations
above, there should be significant value enhancement opportunity
for Team.
Financial Results
For the fiscal year ending May 31, 2004, revenues were
$107.7 million, up 17% from the prior year. Earnings before interest
and taxes (EBIT) increased 26% to $9.7 million. EBIT profit margin
improved to 9%. Net income was $5.8 million ($0.69 per share fully
diluted), up 31%. Net income profit margin improved to 5.4% for
the year.
The incremental operating margins (growth in EBIT as a
percentage of growth in revenue) for the business, after adjustments for
the Thermal Solutions acquisition and other non-cash, non-operating
items, was about 18%, reflecting the continuing operating leverage of
our business. The high incremental profit margin is a key measure of
our ability to continue to achieve profit growth that outpaces revenue
growth. Profit margins will continue to receive close scrutiny and focus
from all of our managers.
Our balance sheet remains strong. At fiscal year end, total
stockholders’equity had increased nearly $11 million from the prior year
to $42 million. Total debt increased to about $19 million, reflecting the
Thermal Solutions acquisition in April 2004. The company’s debt to
EBITDA ratio at year-end was about 1.4. Because of this strength in the
balance sheet, we were able to fully finance the August 2004 purchase
of the assets of Cooperheat-MQS with a new $75 million senior debt
facility. After giving effect to the $35 million purchase price and related
financing cost, our debt level increased to $56 million and our debt to
EBITDA ratio increased to a still comfortable 2.5.
* * *
Exciting challenges lie ahead in the current year, as we merge
the new businesses into the Team family and continue our organic
growth initiatives. We appreciate your continuing interest in and support
of our company. We are proud of our company, our achievements and
the outstanding efforts of our 2000 fellow employees. It is our privilege
to be associated with this great team. We all look forward to continued
success and improvement in the coming year.
Philip J. Hawk
Chairman and CEO
Kenneth M. Tholan
President and COO
Dear Fellow Shareholders,
The past year has been exciting and productive for our
company. We continue to make further progress with our organic
growth initiatives, once again achieving significant improvement in
market share, revenues, earnings and profit margins. Team’s net
income increased 31% during the past year to the highest level ever.
This is a continuation of the consistent progress we have made over the
last several years. Our average compound annual growth rate in earn-
ings over the past three years and five years has been 27% and 58%,
respectively.
Consistent with this performance, we were pleased to be
recognized in the Fortune Small Business 100 listing of America’s
fastest-growing small companies for the third year in a row. We take
pride in being one of the highest growth companies in America,
regardless of industry.
Team took another significant strategic step forward with the
recent purchases of Thermal Solutions and the assets of Cooperheat
MQS. Together, these two businesses bring Team the #1 market
position in both inspection services and field heat treating. As a result
of these additions, we expect Team’s total revenues to nearly double
over the next twelve months. Beyond the financial benefits, these
acquisitions reinforce and support our overall company strategy to
capitalize on customer trends to consolidate their industrial service
requirements with larger multi-service, multi-location service providers
like Team.
We also were pleased that our common stock share price
nearly doubled over the past year. We believe our continued
performance improvement, combined with new initiatives, is attracting
the attention of more investors. Despite this price improvement, our
trailing P/E ratio remains below overall market averages. We look
forward to continued improvement in this area.
Operations Highlights
For the year,
the Industrial Services Business Segment
revenues increased 17% to $94.5 million. Operating profits for this
segment increased 16% to $14.0 million. Overall, the operating profit
margin for the year was 15%. The revenues for this segment included
$2.5 million in revenues from Thermal Solutions following its
acquisition in April 2004. Excluding those revenues, the organic growth
from the remainder of the industrial services business was 14% for the
full year. The organic growth in the remaining services was
broad-based, with double-digit revenue growth in nearly all service lines
as a result of continued market penetration with multi-service,
multi-plant customer agreements and increased turnaround projects.
The Equipment Sales and Rental Business Segment (Climax
Portable Machine Tool Company) also had record results for the year.
Revenues increased 22% to $13.1 million. Operating profit was $1.2
million, approximately double last year’s results. The strong revenue
growth was the result of several major special machine shipments
during the second half of the fiscal year. Climax continues to pursue
these special machine sales opportunities as a supplement to its standard
machine sales and rental offerings. The level of interest in new special
machine projects remains high going into the current year.
We realize that these results are attributable to a company-
wide focus on providing customers with the services and products they
need-in a safe, effective, efficient and timely manner. We understand
the need to reaffirm the trust and confidence of every customer with
each new service or sales opportunity.
New Business Acquisitions
For the last several years, we have discussed our receptivity to
“accelerating” strategic acquisitions, provided they were consistent
with our current industrial services strategy and accretive to earnings.
In the span of about six months, we completed two purchases that
dramatically enhance the profile and outlook for our company.
In April 2004, Team completed the purchase of Thermal
Solutions, Inc., the second largest provider of field heat treating
services in North America. In August 2004, Team purchased the assets
of Cooperheat MQS from a bankruptcy proceeding. Cooperheat MQS
is the largest provider of both field heat treating and inspection
services in North America.
Strategically, both businesses are a great complement to our
company. As a result of these acquisitions, Team has entered one new
service line, field heat treating, as the industry leader. At the same time,
we have substantially expanded our inspection capability from a
company with a regional Gulf Coast presence to the market leader with
a national presence. Further, both businesses have management and
service personnel joining Team that represent an excellent fit with our
company. Both of these service lines are solid additions to our
multi-service, multi-plant arrangements with many major customers.
Financially, we expect service line margins and overall
business profitability for these new businesses to reach levels that are on
par with Team’s other service lines. Yet, Team was able to purchase
these two businesses for a total value of about .5 times revenue,
compared to Team’s valuation of about 1.2 times revenue. Obviously,
when we can achieve the performance consistent with the expectations
above, there should be significant value enhancement opportunity
for Team.
Financial Results
For the fiscal year ending May 31, 2004, revenues were
$107.7 million, up 17% from the prior year. Earnings before interest
and taxes (EBIT) increased 26% to $9.7 million. EBIT profit margin
improved to 9%. Net income was $5.8 million ($0.69 per share fully
diluted), up 31%. Net income profit margin improved to 5.4% for
the year.
The incremental operating margins (growth in EBIT as a
percentage of growth in revenue) for the business, after adjustments for
the Thermal Solutions acquisition and other non-cash, non-operating
items, was about 18%, reflecting the continuing operating leverage of
our business. The high incremental profit margin is a key measure of
our ability to continue to achieve profit growth that outpaces revenue
growth. Profit margins will continue to receive close scrutiny and focus
from all of our managers.
Our balance sheet remains strong. At fiscal year end, total
stockholders’equity had increased nearly $11 million from the prior year
to $42 million. Total debt increased to about $19 million, reflecting the
Thermal Solutions acquisition in April 2004. The company’s debt to
EBITDA ratio at year-end was about 1.4. Because of this strength in the
balance sheet, we were able to fully finance the August 2004 purchase
of the assets of Cooperheat-MQS with a new $75 million senior debt
facility. After giving effect to the $35 million purchase price and related
financing cost, our debt level increased to $56 million and our debt to
EBITDA ratio increased to a still comfortable 2.5.
* * *
Exciting challenges lie ahead in the current year, as we merge
the new businesses into the Team family and continue our organic
growth initiatives. We appreciate your continuing interest in and support
of our company. We are proud of our company, our achievements and
the outstanding efforts of our 2000 fellow employees. It is our privilege
to be associated with this great team. We all look forward to continued
success and improvement in the coming year.
Philip J. Hawk
Chairman and CEO
Kenneth M. Tholan
President and COO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
FORM 10-K
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2004
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 0-9950
TEAM, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State of incorporation)
200 Hermann Drive, Alvin, Texas
(Address of principal executive offices)
74-1765729
(I.R.S. Employer Identification No.)
77511
(Zip Code)
Registrant’s telephone number, including area code: (281) 331-6154
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Name of Each Exchange on which Registered
Common Stock, $.30 par value
American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. YES È NO ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. È
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ‘ No È
As of August 13, 2004, 8,084,025 shares of the registrant’s common stock were outstanding, of which
5,850,453 were held by non-affiliates. The aggregate market value of common stock held by non-affiliates of the
registrant (based upon the closing sales price of $14.43 per share on the American Stock Exchange, Inc. on such
date) was $84,422,037.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders of Team,
Inc. to be held September 23, 2004.
FORM 10-K INDEX
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Team’s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors and Executive and Other Officers of Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
1
5
6
7
8
9
10
14
15
38
38
38
38
38
38
38
38
41
ITEM 1. BUSINESS
(a) General Description of Business
PART I
Team, Inc. (“Team” or the “Company”), incorporated in 1973, is a professional full service provider of
fugitive emissions control
specialized industrial services including on-stream leak repair, hot
monitoring, field machining,
treating and non destructive
technical bolting, field valve repair, field heat
testing/examination (“NDT-NDE”) inspection services. These services are provided throughout the United States
in approximately 40 locations. All references to Team or the Company are intended to include its operating
subsidiaries unless otherwise indicated.
tapping,
The Company conducts operations through international locations in Singapore, Aruba, Canada, Trinidad and
Singapore. Additionally, the Company licenses its proprietary leak repair and hot tapping techniques and materials
to various companies outside the United States and receives a royalty based upon revenues earned by the licensee.
Team’s industrial service offerings have been significantly expanded through two recent acquisitions: 1) in
April 2004, the Company acquired Thermal Solutions, Inc. (“Thermal”) a $15 million Denver, Colorado based field
heat treating service company, and 2) in August 2004, Team acquired the business assets of Cooperheat-MQS, Inc.,
(“Cooperheat”) a Houston, Texas based company with two service offerings—field heat treating and NDT
inspection services. At
the time of the acquisition, Cooperheat was operating under Chapter 11 of the
U.S. Bankruptcy Code and is generally believed to have been the number one or number two leading service
provider in each of its service lines. Annual revenues for Cooperheat are expected to be approximately $80 million.
Additionally, through its wholly-owned subsidiary, Climax Portable Machine Tools, Inc. (“Climax”) of
Newberg, Oregon, the Company is engaged in a separate business segment—equipment sales and rental. Climax
is a leading designer-manufacturer of portable, metal cutting machine tools used for on-site industrial
maintenance. The Climax acquisition provided the support for the Company’s offering of on-site field machining
services beginning in February of 1999.
(b) Financial Information about Segments
See Note 12 to accompanying financial statements for financial information about business segments.
(c) Narrative Description of Business
The Company operates in two reportable revenue generating segments—1) industrial services and 2)
equipment sales and rental. Industrial services consist principally of leak repair, hot tapping, emissions control
monitoring, on-site field machining, technical bolting, valve repair, heat treating and NDT inspection. The
equipment sales and rentals segment is comprised of the Climax business. The following table sets forth the
revenues (in thousands) from each segment in the three years ended May 31:
Segment
2004
2003
2002
Industrial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment Sales and Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94,546
13,123
$81,122
10,754
$74,513
10,568
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107,669
$91,876
$85,081
Industrial Services
The Company provides industrial services for over 2,000 customers in the petrochemical, refining, power,
pipeline, pulp and paper, steel and other industries. Services include leak repair, hot tapping, fugitive emissions
monitoring, and, more recently, field machining, technical bolting, field valve repair, field heat treating and NDT
inspection.
1
Leak Repair Services. The Company is the leader in the industry in providing on-stream repairs of leaks in
piping systems and related equipment. In conjunction with its leak repair services, the Company markets a line of
products, which includes both standard and custom-designed clamps and enclosures for plant systems and
pipelines. The Company’s leak repair services consist of on-stream repairs of leaks in pipes, valves, flanges and
other parts of piping systems and related equipment primarily in the chemical, refining and utility industries. The
Company uses specially developed techniques, sealants and equipment for repairs. Many of the Company’s
repairs are furnished as interim measures which allow plant systems to continue operating until more permanent
repairs can be made during scheduled plant shutdowns.
The Company’s leak repair services involve inspection of the leak by the Company’s field crew who record
pertinent information about the faulty part of the system and transmit the information to the Company’s
engineering department for determination of appropriate repair techniques. Repair materials such as clamps and
enclosures are custom designed and manufactured at the Company’s facility in Alvin, Texas and delivered to the
job site. The Company maintains an inventory of raw materials and semi-finished clamps and enclosures to
reduce the time required to manufacture the finished product. Installations of the clamps and enclosures for
on-stream repair work are then performed by the field crew using, in large part, materials and sealants that are
developed and produced by the Company.
The Company’s manufacturing center has earned the international ISO-9001 certification for its engineering
design and manufacturing operations. ISO-9001 is the most stringent of all ISO-9000 certification programs.
The Company’s non-destructive repair methods do not compromise the integrity of its customer’s process
system and can be performed in temperatures ranging from cryogenic to 1,700 degrees Fahrenheit and with
pressures from vacuum to 6,000 pounds per square inch. The Company’s proprietary sealants are specifically
formulated to repair leaks involving over 300 different kinds of chemicals.
Management attributes the success of its leak repair services to the quality and timely performance of its
services by its highly skilled technicians, its proprietary techniques and materials and its ability to repair leaks
without shutting down the customer’s operating system. On-stream repairs can prevent a customer’s continued
loss of energy or process materials through leaks, thereby avoiding costly energy and production losses that
accompany equipment shutdowns, and also lessen emissions escaping into the atmosphere.
The Company has continued to develop different types of standard and custom-designed clamps, enclosures
and other repair products, which complement the Company’s existing industrial market for leak repair services.
The Company’s leak repair services are supported by an in-house Quality Assurance/Quality Control program
that monitors the design and manufacture of each product to assure material traceability on critical jobs and to
ensure compliance with customers’ requirements.
Hot Tapping Services. The Company’s hot tapping services consist primarily of hot tapping and Line-stop®
services. Hot tapping services involve utilizing special equipment to cut a hole in an on-stream, pressurized
pipeline so that a new line can be connected onto the existing line without interrupting operations. Hot tapping is
frequently used for making branch connections into piping systems while the production process is operative.
Line-stop® services permit the line to be depressurized downstream so that maintenance work can be performed
on the piping system. The Company typically performs these services by mechanically drilling and cutting into
the pipeline and installing a device to stop the process flow. The Company also utilizes a line freezing procedure
when applicable to stop the process flow using special equipment and techniques.
Emissions Control Services. The Company also provides leak detection services that include fugitive
emissions identification, monitoring, data management and reporting services primarily for the chemical, refining
and natural gas processing industries. These services are designed to monitor and record emissions from specific
process equipment components as requested by the customer, typically to assist the customer in establishing an
ongoing maintenance program and/or complying with present and/or future environmental regulations. The
Company prepares standard reports in conjunction with EPA requirements or can custom-design these reports to
its customers’ specifications.
2
Field Machining and Technical Bolting Services. This service involves the use of portable machining
equipment (manufactured by Climax, as well as third party vendors) to repair or modify in-place machinery,
equipment, vessels and piping systems not easily removed from a permanent location. As opposed to the
conventional machining process where the work piece rotates and the cutting tool is fixed, in field machining, the
work piece remains fixed and the cutting tool rotates. Other common descriptions for this service are on-site or
in-place machining. Field machining services include flange facing, pipe cutting, line boring, journal turning,
drilling, and milling. Technical bolting services are often provided to our customers as an adjunct to field
machining during turnaround or maintenance activities. These services involve the use of hydraulic or pneumatic
equipment with bolt tightening techniques to achieve reliable and leak-free connections and also include bolt
disassembly using hot bolting or nut splitting techniques.
Field machining and technical bolting services are offered to the Company’s existing customer base through
its extensive branch operations. Field machining is an off-stream operation performed during piping isolations,
shutdowns, or plant turnarounds.
Inspection Services. Inspection services consist of the testing and evaluation of piping, piping components
and equipment to determine the present condition and predict remaining operability. The Company’s inspection
services use all the common methods of non-destructive testing, including radiography, ultrasound, magnetic
particle and dye penetrate, as well as, higher end robotic and newly developed ultrasonic systems. The Company
provides these services as part of planned construction and maintenance programs and on demand as the situation
dictates, and provides reports based on interpretation in accordance to industry and national standards. Inspection
services are marketed to the same industrial customer base as other Team services and to the pipeline industry.
There are a large number of companies offering NDT-NDE inspection services, with no single company having a
significant share of the overall market. This service offering has been significantly expanded with the acquisition
of the assets of Cooperheat in August 2004. With this acquisition, Team believes it is now the largest NDT-NDE
inspection service provider in the United States.
Field Valve Repair Services. In the spring of 2003, the Company launched Field Valve Repair Services as
an adjunct to its field machining services. Through this offering, the Company performs on-site repairs to process
and control valves, as well as providing preventive maintenance programs and valve data management programs.
The targeted customers for these services are generally the same as for our field machining and technical bolting
services.
Field Heat Treating Services. In April 2004, the Company commenced field heat treating services through
the acquisition of Thermal, a privately-held company based in Denver, Colorado. These services, which include
electric resistance and gas-fired combustion, are primarily utilized by industrial users to cure coatings, expand
metal parts for assembly or disassembly, remove moisture from components and to provide preheat and post-
weld heat treatments to relieve metal stresses. At the time of the acquisition, Thermal was the second largest
provider of heat treatment services in the United States. With the acquisition of the business assets of Cooperheat
in August 2004, the Company believes it is now clearly the predominant field heat treating service provider in
the United States.
Marketing and Customers. Team’s industrial repair services are marketed principally by personnel based at
the Company’s approximate 40 locations. Team has developed a cross-marketing program to utilize its sales
personnel in offering many of the Company’s services at its operating locations. Management believes that these
operating and office locations are situated to facilitate timely response to customer needs, which is an important
feature of its services. No customer accounted for 10% or more of consolidated Company revenues during any of
the last three fiscal years.
Generally, customers are billed on a time and materials basis although some work may be performed
pursuant to a fixed-price bid. Emission control services may also be billed based on the number of components
to purchase orders issued under written customer
monitored. Services are usually performed pursuant
3
agreements. While some purchase orders provide for the performance of a single job, others provide for services
to be performed for a term of one year or less. In addition, Team is a party to certain long-term contracts, which
are enabling agreements only. Substantially all such agreements may be terminated by either party on short
notice. The agreements generally specify the range of services to be performed and the hourly rates for labor.
While contracts have traditionally been entered into for specific plants or locations, the Company has recently
entered into multiple regional or national contracts, which cover multiple plants or locations.
The Company’s industrial services are available 24 hours a day, seven days a week, 365 days a year. The
Company typically provides various limited warranties for certain of its repair services. To date, there have been
no significant warranty claims filed against the Company.
Business Risks. While the Company’s management is optimistic about Team’s future, maintaining and
expanding customer relationships and service volumes are key elements of the Company’s strategy. Weakness in
the markets served by the Company could constrain demand. Although the Company has a diversified customer
base, a substantial portion of its business is dependent upon the chemical and refining industry sectors.
Competitive initiatives and/or poor service performance could also reduce the strength and breadth of current
customer relationships and preference for the Company. Although management believes sufficient qualified
personnel are available in most areas, no assurance can be made that such personnel will be available when
needed.
Competition. Competition in the Company’s industrial services is primarily on the basis of service, quality,
timeliness, and price. In general, competition stems from other outside service contractors and customers’
in-house maintenance departments. Management believes Team has a competitive advantage over most service
contractors due to the quality, training and experience of its technicians, its nationwide service capability, and
due to the broad range of services provided, as well as its technical support and manufacturing capabilities
supporting the service network. There are two other service contractors who provide a similar range of service
and broad geographical coverage as the Company. Other principal competitors are primarily single-location or
single-service companies that compete within a certain geographical area.
Equipment Sales and Rentals
The Equipment Sales and Rentals business is comprised solely of the Climax subsidiary, a leading design-
manufacturer of portable machine tools located in Newburg, Oregon. Climax’s standard tools offering consists of
boring bars, pipe beveling tools, key mills, portable flange facers, and portable lathes. These tools are sold to end
users in the utilities, refining, marine, heavy construction, and extractive industries, or to other service providers
and contractors. In addition, Climax designs and manufactures customized machining tools for on-site machine
repair, manufacturing, fabrication and construction applications.
Climax’s design and manufacturing operations are conducted in a 30,000 square feet facility in Newberg,
Oregon. Climax uses state of the art equipment in its manufacturing process and maintains an inventory of raw
materials, parts and completed machines as needed to support the current level of business. Most of the
Company’s orders for equipment are filled within 30 days of receipt. The Company believes that there are a
limited number of original equipment manufacturers that compete with Climax and that it has a market share of
approximately 10%. No single customer accounted for more than 10% of Climax revenues during any of the last
three fiscal years.
General
Employees. As of May 31, 2004, the Company and its subsidiaries had approximately 988 employees in its
operations. The Company’s employees are not unionized. There have been no employee work stoppages to date,
and management believes its relations with its employees are good. The acquisition of Cooperheat in August
2004 has approximately doubled the number of employees of the Company.
4
Insurance. The Company carries insurance it believes to be appropriate for the businesses in which it is
engaged. Under its insurance policies, the Company has per occurrence self-insured retention limits of $50,000
for general liability, and $250,000 for automobile liability and workers’ compensation in most states. The
Company has obtained fully insured layers of coverage above such self-retention limits. Since its inception, the
Company has not been the subject of any significant liability claims not covered by insurance arising from the
furnishing of its services or products to customers. However, because of the nature of the Company’s business,
there exists the risk that in the future such liability claims could be asserted which might not be covered by
insurance. One such potential claim was asserted in 2004 wherein the Company’s general liability insurance
carrier has disputed the existence of coverage and is providing a defense on behalf of the Company subject to a
reservation of rights. See Item 3, Legal Proceedings, below.
Regulation. Substantially all of the Company’s business activities are subject to federal, state and local laws
and regulations. These regulations are administered by various federal, state and local health and safety and
environmental agencies and authorities, including the Occupational Safety and Health Administration (“OSHA”)
of the U.S. Department of Labor and the EPA. The Company’s training programs are required to meet certain
OSHA standards. Expenditures relating to such regulations are made in the normal course of the Company’s
business and are neither material nor place the Company at any competitive disadvantage. The Company does
not currently expect to expend material amounts for compliance with such laws during the ensuing two fiscal
years.
From time-to-time in the operation of its environmental consulting and engineering services, the assets of
which were sold in 1996, the Company handled small quantities of certain hazardous wastes or other substances
generated by its customers. Under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (the “Superfund Act”), the EPA is authorized to take administrative and judicial action to either cause
parties who are responsible under the Superfund Act for cleaning up any unauthorized release of hazardous
substances to do so, or to clean up such hazardous substances and to seek reimbursement of the costs thereof
from the responsible parties, who are jointly and severally liable for such costs under the Superfund Act. The
EPA may also bring suit for treble damages from responsible parties who unreasonably refuse to voluntarily
participate in such a clean up or funding thereof. Responsible parties include anyone who owns or operates the
facility where the release occurred (either currently and/or at the time such hazardous substances were disposed
of), or who by contract arranges for disposal, treatment, or transportation for disposal or treatment of a hazardous
substance, or who accepts hazardous substances for transport to disposal or treatment facilities selected by such
person from which there is a release. Management believes that its risk of liability is minimized since its
handling consisted solely of maintaining and storing small samples of materials for laboratory analysis that are
classified as hazardous. The Company does not currently carry insurance to cover liabilities which the Company
may incur under the Superfund Act or similar environmental statutes due to its prohibitive costs.
Patents. While the Company is the holder of various patents, trademarks, and licenses, the Company does
not consider any individual property to be material to its consolidated business operations.
ITEM 2. PROPERTIES
Team and its subsidiaries own real estate and office facilities in the Alvin, Texas area totaling
approximately 88,000 square feet of floor space. These facilities are comprised of a corporate office and training
building and a manufacturing facility for clamps, enclosures and sealants. The Company also owns real estate
and facilities in Newburg, Oregon, which is the manufacturing facility and corporate office of Climax. All of
those facilities are pledged as security for the Company’s credit facility. (See Note 6 of Notes to Consolidated
Financial Statements.) The Company and its subsidiaries also lease 56 office and/or plant and shop facilities at
separate locations in 23 states and in Singapore, Aruba, Trinidad and Canada.
The Company believes that its property and equipment, as well as that of its subsidiaries, are adequate for its
current needs, although additional investments are expected to be made in additional property and equipment for
5
expansion, replacement of assets at the end of their useful lives and in connection with corporate development
activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
Note 10 of Notes to Consolidated Financial Statements for information regarding lease obligations on these
properties.
ITEM 3. LEGAL PROCEEDINGS
In December 2001, the Company and 18 other defendants were sued in a lawsuit styled Lyondell Chemical
Company and Atlantic Richfield Company v. Ethyl Corporation et al in the United States District Court for the
Eastern District of Texas, Beaumont Division. In April and May of 2004, the District Court granted motions for
summary judgment filed by the Company and dismissed the Plaintiffs’ claims with prejudice with respect to
claims against Team allegedly arising out of its ownership of the stock of French Limited and of Allstate
Vacuum and Tanks, Inc (“Allstate”). The Company has reason to believe that the Plaintiffs will appeal the
Court’s ruling in favor of the Company at the end of the case.
This lawsuit arises out of a previous lawsuit filed by the United States of America against the Plaintiffs,
Lyondell and Arco Chemical, alleging that hazardous substances and/or pollutants or contaminants were
deposited at the Turtle Bayou Site in Liberty County, Texas. Arco and Lyondell entered into a settlement with
the United States which was embodied in a Consent Decree. Within three years after the Consent Decree was
entered, Arco and Lyondell brought the referenced suit against approximately 18 parties seeking contribution for
the costs of response for removal and/or remedial action at the Turtle Bayou Site. The co-defendants include,
among others, Exxon-Mobil, El Paso Tennessee Pipeline Company, Du Pont, Ethyl Corporation, and Lubrizol.
Later, El Paso added approximately nine additional defendants.
Plaintiffs allege that French Ltd., a vacuum truck company that the Company owned from 1978 to 1984, or
its former parent, French Limited of Houston, Inc., had, during the time period of 1969 to 1976, transported
hazardous substances to the Turtle Bayou Site.
In 1982, as a result of the contentions made by the Environmental Protection Agency (“EPA”), the
Company informed George Whitten, the one who had sold French, Ltd. to the Company, that his failure to reveal
French, Ltd.’s activities with respect to the illegal depositing of hazardous substances was a breach of the
representations and warranties of the agreement by which the Company acquired French, Ltd. In November
1984, the Company sold French back to Whitten.
The Plaintiffs alleged that French, Ltd. and, therefore, the Company, should be held liable for French
Limited and/or French Limited of Houston, Inc.’s allegedly wrongful deposits of some of the material that was
deposited at the Site. Plaintiffs also allege that the Company should be held liable for some alleged disposal of
hazardous waste by another former Company subsidiary, Allstate.
In addition to the claims originally put forward by the Plaintiffs, nine of the Defendants have filed cross-
claims against the Company in which they contended they do not believe they should be held liable on Plaintiffs’
claims against them, but that if they are held liable then they seek contribution from the Company and other
defendants. In addition, four of those same nine defendants which are related to the El Paso Corporation (the “El
Paso Defendants”) seek contribution against the Company and others on a related claim by the United States
Government on another location within the Turtle Bayou Site at which hazardous wastes were disposed. All
defendants except the El Paso Defendants have agreed orally to dismiss their cross-claims against the Company
subject to revival if the Plaintiffs appeal the summary judgments granted by the District Court. It appears that the
El Paso defendants and the Company are close to an agreement with respect to a motion to dismiss similar to the
one proposed with the other defendants; if the Company is not successful in reaching such an agreement, then the
Company plans to file a motion for summary judgment requesting that the District Court apply its previously
granted summary judgments against the El Paso Defendants.
The Company believes that the claims against it in this matter are without merit, as is supported by the
rulings of the District Court.
6
In April 2003, Team and three other parties were named as defendants in a lawsuit styled Diamond
Shamrock Refining Company, L.P. v. Cecorp, Inc. et al in the 148th Judicial District Court of Nueces County,
Texas. The suit seeks recovery for $40 million in property damages from an explosion and fire originating at a
valve which the Company’s personnel were attempting to seal in order to prevent a leak. Liability is being
contested and other parties appear to have primary responsibility for the fire and explosion. The Company
believes it is insured against this loss with both primary and excess liability insurance, subject to any applicable
deductible. However, coverage from the $1 million primary policy is disputed and a defense is being provided by
the carrier subject to a reservation of rights.
In June 2004, Ultramar Diamond Shamrock Corporation made demand on Team Industrial Services, Inc. for
indemnity from claims asserted against Ultramar Diamond Shamrock Corporation in Linda Alapisco, et al v.
Ultramar Diamond Shamrock Corporation, et al, Cause No. L-030085, in the 156th District Court of Live Oak
County, Texas. This suit seeks unspecified damages for the 250 individuals identified in the petition for injuries
resulting from alleged exposure to toxic chemicals released as a result of the explosion and fire at the Diamond
Shamrock facility. This demand has been turned over to the general liability insurance carrier for a response. As
of the date of this report, the carrier has not responded to the claim.
The Company’s umbrella policy has limits of coverage of $25,000,000 and should be more than sufficient to
provide the Company a defense and indemnity as to all claims asserted.
The Company and certain subsidiaries are involved in various other lawsuits and are subject to various
claims and proceedings encountered in the normal conduct of business. In the opinion of management, any
uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on
the Company’s consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.
7
PART II
ITEM 5. MARKET FOR TEAM’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Team’s common stock is traded on the American Stock Exchange, Inc. under the symbol “TMI”. The table
below reflects the high and low sales prices of the Company’s common stock on the American Stock Exchange
by fiscal quarter for the fiscal years ended May 31, 2004 and 2003, respectively.
Sales Price
High
Low
Fiscal 2004
Quarter Ended:
August 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.35
10.48
11.48
16.05
$ 7.50
7.90
9.75
11.10
Fiscal 2003
Quarter Ended:
August 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.25
8.75
8.20
7.80
$ 7.40
7.40
7.00
5.00
(b) Holders
There were 282 holders of record of Team’s common stock as of August 13, 2004, excluding beneficial
owners of stock held in street name. Although exact information is unavailable, the Company estimates there are
approximately 1,750 additional beneficial owners based upon information gathered in connection with proxy
solicitation.
(c) Dividends
No dividends were declared or paid in fiscal 2004, 2003 or 2002. Pursuant to the Company’s Credit
Agreement, the Company may not pay dividends without the consent of its primary lender. Additionally, future
dividend payments will continue to depend on Team’s financial condition, market conditions and other matters
deemed relevant by the Board of Directors.
(d) Stock Repurchase Plan
In fiscal 2004, the Company repurchased 50,000 shares of its outstanding common stock on the open market
at a weighted average price of $7.89 per share. As of May 31, 2004, the Company is authorized by its Board of
Directors and lender to expend up to an additional $1.7 million on open market repurchases.
8
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information regarding the Company for the
five years ended May 31, 2004 (amounts in thousands, except per share data):
Fiscal Years Ended May 31,
2004
2003
2002
2001
2000
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107,669
$91,876
$85,081
$75,643
$66,636
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share: basic . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per share: diluted . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
5,776
$ 4,402
$ 3,909
$ 2,740
$ 1,471
0.75
0.69
$
$
0.57
0.53
$
$
0.51
0.48
$
$
0.34
0.34
$
$
0.18
0.18
Weighted average shares outstanding: basic . . . . . . . . . . . .
Weighted average shares outstanding: diluted . . . . . . . . . . .
7,709
8,429
7,707
8,369
7,664
8,229
8,015
8,122
8,238
8,283
Cash dividend declared, per common share . . . . . . . . . . . . .
$
0.00
$
0.00
$
0.00
$
0.00
$
0.00
Balance Sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt and other long-term liabilities . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
$ 74,396
$ 18,308
$ 42,299
$ 27,712
$52,224
$10,567
$31,735
$19,713
2004
2003
May 31,
2002
$51,189
$13,454
$28,182
$18,693
2001
2000
$47,996
$15,188
$24,812
$16,801
$48,384
$17,515
$23,137
$14,909
9
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 2004 Compared to Fiscal 2003
Revenues in 2004 were $107.7 million compared to $91.9 million in 2003, an increase of 17.2%. Operating
profits (earnings before interest and taxes, or “EBIT”) were $9.7 million in 2004 versus $7.7 million in 2003, an
increase of 25.8%.
The following sets forth the components of revenue and operating profits for fiscal 2004 and 2003:
2004
2003
$
%
Increase
Revenues:
Total Industrial Services . . . . . . . . . . . . . . .
Equipment Sales & Rentals . . . . . . . . . . . . .
$ 94,546,000
13,123,000
$81,122,000
10,754,000
$13,424,000
2,369,000
Total Revenues . . . . . . . . . . . . . . . . . . .
$107,669,000
$91,876,000
$15,793,000
16.5%
22.0%
17.2%
Operating Profit:
Industrial Services . . . . . . . . . . . . . . . . . . . .
Equipment Sales & Rentals . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,953,000
1,220,000
(5,432,000)
$12,012,000
603,000
(4,871,000)
$ 1,941,000
617,000
(561,000)
16.2%
102.3%
11.5%
Total Operating Profit (EBIT) . . . . . . .
$
9,741,000
$ 7,744,000
$ 1,997,000
25.8%
For the year, the Industrial Services Business Segment revenues increased 16.5% to $94.5 million. Segment
operating profit increased 16.2% to $14.0 million. A significant contributor to revenue growth in industrial
services in 2004 came from the full year impact of a new service line, field valve repair, which was introduced in
the spring of 2003. This service line contributed $4.5 million of the 2004 growth, primarily associated with two
major turnaround projects in the summer and fall of 2004. The segment also benefited from new and expanded
fugitive emissions monitoring contracts in the West Coast region of the United States and from turnaround
activity in the Gulf Coast and the Caribbean. Additionally, the acquisition of Thermal Solutions in April 2004
contributed $2.5 million to industrial services revenue, however, due to the seasonality of field heat treating, it
did not contribute to 2004 operating profit for the industrial services segment. The only service line that did not
experience revenue growth during the year was NDT inspection, which was down $1.8 million year over year,
due to continued softness in pipeline construction activities.
Management believes that demand for the Company’s traditional services is, generally, a function of the
population of high-temperature, high-pressure piping systems. Demand is also somewhat related, especially for
leak repair and hot tapping, 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 Equipment Sales and Rental Business segment (encompassing Climax Portable Machine Tool
Company) grew revenues 22% for the year to $13.1 million—the highest revenue year in the history of Climax.
Revenue growth for the year was primarily attributable to the shipment of special tool orders in the third and
fourth quarters aggregating over $2 million. Operating profit increased 102% to $1.2 million versus $603
thousand in 2003. Included in operating profit in 2004 is a $235,000 gain from the sale of idle real estate. That is
offset by a charge to other expense of $245,000 for estimated losses pertaining to a sales tax matter. A similar
charge of $150,000 was recorded in 2003. Climax is domiciled in the state of Oregon, which is a state that
imposes no tax on sales originating there. In fiscal 2003, management determined that Climax does have an
obligation to collect and remit sales taxes in certain other jurisdictions, which it had not previously done. Climax
is nearing completion of a process of entering into agreements with several states with respect to sales tax
10
obligations and collecting amounts due from its customers. The cumulative $395,000 charge represents
management’s best current estimate of the probable loss that Climax will incur with respect to this matter. The
ultimate outcome is subject to a great deal of variables and cannot be determined with a certainty.
With regard to consolidated operating results, overall gross margins were 39.6% of revenues in fiscal 2004
as compared to 40.5% in fiscal 2003. The decline primarily reflects the downturn in NDT Inspection revenues
associated with pipeline and pulp & paper customer segments as well as lower profit margins from the Thermal
Solutions revenues due to slow seasonal activity in the two months after the acquisition.
Selling, general and administrative expenses (“SG&A”) increased $3.4 million in 2004 versus 2003, an
increase of 11.7%. The overall increase in SGA reflects significant increases in incentive compensation, safety
training and legal expenses over the prior year. In spite of these elements of cost increase, as a percentage of
revenue, SG&A was down—30.3% of revenues in fiscal 2004 versus 31.8% of revenues in fiscal 2003.
Non-cash compensation expense increased by $229,000 in 2004 versus 2003 due to the achievement of a
stock-price hurdle of $10.50 per share, which resulted in the vesting of 66,667 options held by the chief executive
officer and the recognition of the unamortized compensation expense associated with these options.
Fiscal 2003 Compared to Fiscal 2002
The following sets forth the components of revenue and operating profits for fiscal 2003 and 2002:
2003
2002
$
%
Increase
Revenues:
Industrial Services:
Traditional services . . . . . . . . . . . . .
Newer services . . . . . . . . . . . . . . . . .
Total Industrial Services . . . . . . . . . . . . . . . . .
Equipment Sales & Rentals . . . . . . . . . . . . . . .
$56,933,000
24,189,000
$81,122,000
10,754,000
$51,036,000
23,477,000
$74,513,000
10,568,000
$5,897,000
712,000
$6,609,000
186,000
Total Revenues . . . . . . . . . . . . . . . . . . . .
$91,876,000
$85,081,000
$6,795,000
Operating Profit:
Industrial Services . . . . . . . . . . . . . . . . . . . . . .
Equipment Sales & Rentals . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,012,000
603,000
(4,871,000)
$11,470,000
547,000
(4,779,000)
$ 542,000
56,000
(92,000)
Total Operating Profit (EBIT) . . . . . . . . .
$ 7,744,000
$ 7,238,000
$ 506,000
11.6%
3.0%
8.9%
1.8%
8.0%
4.7%
10.2%
1.9%
7.0%
For the year, the Industrial Services Business Segment revenues increased 8.9% to $81.1 million. Segment
operating profit increased 4.7% to $12.0 million. All major service lines except NDT inspection services
experienced growth during the year. NDT inspection revenues were down slightly due to significantly reduced
pipeline and pulp & paper projects, which were nearly offset by continued growth in plant inspection services. A
significant contributor to the growth in traditional service lines came from new multi-service, multi-location
contracts that commenced in the fourth quarter of fiscal 2002.
Management believes that demand for the Company’s traditional services is, generally, a function of the
population of high-temperature, high-pressure piping systems. Demand is also somewhat related, especially for
leak repair and hot tapping, 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 Equipment Sales and Rental Business segment (encompassing Climax Portable Machine Tool
Company) grew revenues about 2% for the year to $10.8 million. The market for capital equipment continues to
11
be depressed in most of the world markets. Revenue growth in Asia offset flat to slightly depressed sales in the
U.S. and Europe. Operating profit increased 10% to $603,000 versus $547,000 in 2002. In 2003, Climax
provided a $150,000 charge to other expense for estimated losses pertaining to a sales tax matter. Climax is
domiciled in the state of Oregon, which is a state that imposes no tax on sales originating there. In fiscal 2003,
management determined that Climax had an obligation to collect and remit sales taxes in certain other
jurisdictions, which it had not previously done. Climax is in the process of entering into agreements with several
states with respect to sales tax obligations and is in the process of collecting amounts due from its customers. The
$150,000 charge recorded in 2003 represents management’s best estimate at that time of the probable loss that
Climax would incur with respect to this matter.
With regard to consolidated operating results, overall gross margins were 40.5% of revenues in fiscal 2003
as compared to 41.7% in fiscal 2002. The decline primarily reflects the downturn in NDT Inspection revenues
associated with pipeline and pulp & paper customer segments as well as lower product margins at Climax due to
an increase in lower margin international sales coupled with a strong margin comparison in fiscal 2002 due to a
$700 thousand special order in the fourth quarter of fiscal 2002.
Selling, general and administrative expenses (“SG&A”) increased $1.8 million in 2003 versus 2002, an
increase of 6.5%. The overall increase in SGA reflects a ramp-up of business development personnel in the
industrial service segment ahead of related revenue growth and an increasing level of insurance and legal costs in
fiscal 2003. In spite of these elements of cost increase, as a percentage of revenue, SG&A was down—31.8% of
revenues in fiscal 2003 versus 32.5% of revenues in fiscal 2002.
Liquidity and Capital Resources
At May 31, 2004, the Company’s liquid working capital (cash and accounts receivable, less current
liabilities) totaled $16.3 million, an increase of $7.4 million since May 31, 2003. The Company utilizes excess
operating funds to automatically reduce the amount outstanding under the revolving credit facility. At May 31,
2004, the outstanding balance under the revolving credit facility was $14.0 million and approximately $6.3
million was available to borrow under the facility.
During fiscal 2004, the Company increased its total outstanding debt by $7.5 million as a result of the
purchase of Thermal Solutions, Inc. In fiscal 2004, the Company also expended $395,000 to reacquire an
additional 50,000 shares of its common stock on the open market pursuant to a stock repurchase plan.
In the opinion of management, the Company currently has sufficient funds and adequate financial sources
available to meet its anticipated liquidity needs. Management believes that cash flows 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.
At May 31, 2004, the Company had a $34 million bank credit facility that consisted of: (i) a $22,500,000
revolving loan, which matures September 30, 2005, (ii) $9,500,000 in term loans and (iii) a $2,000,000 mortgage
loan. Amounts borrowed against the term loans are due in quarterly installments in the amount of $339,000 until
the loans mature on September 30, 2005. Amounts borrowed against the mortgage loan are repaid in quarterly
installments of $31,000 until its maturity date of September 30, 2008. Amounts outstanding under the credit
facility bear interest at a marginal rate over either the LIBOR rate or the prime rate. At May 31, 2004, the
Company’s marginal rate was 1.5% over the LIBOR rate. The weighted average rate on outstanding borrowings
at May 31, 2004 is approximately 3.1%. The Company also pays a commitment fee of .25% per annum on the
average amount of the unused availability under the revolving loan.
Loans under the credit facility are secured by substantially all of the assets of the Company. The terms of
the agreement require the maintenance of certain financial ratios and limit investments, liens, leases and
indebtedness, and dividends, among other things. At May 31, 2004 and 2003, the Company was in compliance
with all credit facility covenants.
12
At May 31, 2004, the Company was contingently liable for $2.2 million in outstanding stand-by letters of
credit and, at that date, approximately $6.3 million was available to borrow under the credit facility.
On August 11, 2004, in connection with the acquisition of the business asset of Cooperheat-MQS, Inc. (see
note 15 to the Consolidated financial statements), the existing credit facility was replaced with a new $75 million
facility. The new facility matures in August 2009 and consists of a revolving loan of $50 million and a $25
million term facility. Approximately $55 million (including the entire term loan) was borrowed on August 11,
2004 to finance the Cooperheat-MQS acquisition (approximately $36 million) and to refinance amounts
outstanding on the existing Team facilities (approximately $19 million). The term facility requires amortization
of $3 million in the first year, $4 million in year two and $6 million in each of years three through five.
Amortization begins in November 2004. Interest on the facility is at LIBOR plus a margin which is variable
depending upon the ratio of funded debt to EBITDA. Initially, the margin will be 225 basis points above the
LIBOR rate. The new facility is secured by virtually all the Company’s assets, including those acquired in the
Cooperheat-MQS transaction. The Company paid an underwriters fee of 1.625% of the aggregate amount of the
facility.
In the opinion of management, the Company currently has sufficient funds and adequate financial sources
available to meet its anticipated liquidity needs. Management believes that cash flows 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.
Critical Accounting Policies
Goodwill—The Company has $15.1 million of recorded goodwill associated with business acquisitions
made since 1999. Of that amount, approximately $12.2 million is associated with the industrial services segment
and $2.9 million is associated with the equipment sales and rental business. Effective June 1, 2002, we have
adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, which requires that goodwill
no longer be amortized but be reviewed for impairment at least annually. The Company performs its annual
impairment testing as of May 31 of each year. The Company has evaluated the carrying value of goodwill using a
cash-flow multiple calculation methodology and has determined that no adjustment is needed to the carrying
value of goodwill during 2003 or 2004.
Revenue Recognition—The Company derives its revenues by providing a variety of industrial services
including leak repair, hot tapping, emissions control services, field machining, technical bolting, field valve
repair, field heat treating and inspection services. These revenues are based on time and materials and are
generally short term in nature. In addition, the Company sells and rents portable machine tools through one of its
subsidiaries. For all of these services, revenues are recognized when services are rendered or when product is
shipped and risk of ownership passes to the customer.
Deferred Income Taxes—The Company records deferred income tax assets and liabilities related to
temporary differences between the book and tax bases of assets and liabilities. The Company computes its
deferred tax balances by multiplying these temporary differences by the current tax rates. If deferred tax assets
exceed deferred tax liabilities, the Company must estimate whether those net deferred asset amounts will be
realized in the future. A valuation allowance is then provided for the net deferred asset amounts that are not
likely to be realized. As of May 31, 2004 management believes that it is more likely than not that the Company
will have sufficient future taxable income to allow it to realize the benefits of the net deferred tax assets.
Accordingly, no valuation allowance has been recorded.
Loss Contingencies—The Company is involved in various lawsuits and claims encountered in the normal
course of business. When such a matter arises and periodically thereafter, management consults with its legal
counsel and evaluates the merits of the claim based on the facts available at that time. Currently, the Company is
involved with two significant matters, which are summarized in Legal Proceedings above. In management’s
opinion, an adequate accrual has been made as of May 31, 2004 to provide for any losses that may arise from
these contingencies.
13
Other Contractual Obligations and Commercial Commitments
The Company enters into capital leases related to certain computer and equipment and software, as well as
operating leases related to facilities and transportation and other equipment. These operating leases are over
terms ranging from one to five years with typical renewal options and escalation clauses.
The Company is occasionally required to post letters of credit generally issued by a bank as collateral under
certain agreements. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder
demonstrates that the Company has failed to meet its obligations under the letter of credit. If this were to occur,
the Company would be obligated to reimburse the issuer for any payments the issuer was required to remit to the
holder of the letter of credit. To date, the Company has not had any claims made against a letter of credit that
resulted in a payment made be the issuer or the Company to the holder. The Company believes that it is unlikely
that it will have to fund claims made under letters of credit in the foreseeable future.
At May 31, 2004, the Company’s contractual obligations are summarized as follows:
Year ending
May 31,
Operating
Leases
Debt
Obligations
Post Retirement
Benefit
2005 . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . .
$3,114,000
2,029,000
1,006,000
416,000
62,000
—
$ 1,482,000
16,160,000
125,000
810,000
—
—
Total
. . . . . . . . . . . . . .
$6,627,000
$18,577,000
$245,000
100,000
39,000
—
—
—
$384,000
Total
$ 4,841,000
18,289,000
1,170,000
1,226,000
62,000
—
$25,588,000
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” The
statement applies to legal obligations associated with the retirement of long-lived assets, except for certain
obligations of lessees. SFAS 143 became effective for the Company in June 2003 and has not impacted the
Company’s financial statements.
The company has reviewed other new accounting standards not identified above and does not believe any
other new standards will have a material impact on the Company’s financial position or operating results.
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
that objectives will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a credit facility, which subjects the Company to the risk of loss associated with
movements in market interest rates. At May 31, 2004, the Company has floating-rate obligations totaling $18.6
million outstanding under its credit facility (see Note 6 to the Company’s Consolidated Financial Statements). A
1% increase in interest rates could result in an annual increase in interest expense of $186,000.
14
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Team, Inc.
Alvin, Texas
We have audited the accompanying consolidated balance sheets of Team, Inc. and subsidiaries as of May
31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income, stockholders’
equity, and cash flows for each of the years in the three-year period ended May 31, 2004. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Team, Inc. and subsidiaries as of May 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period ended May 31, 2004, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” as of June 1,
2002.
KPMG LLP
Houston, Texas
July 14, 2004, except as to note 15,
which is as of August 11, 2004
15
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31,
2004
2003
Current Assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables, net of allowance of $506 and $533 . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,019,000
27,881,000
9,928,000
—
924,000
515,000
$
854,000
17,707,000
9,498,000
16,000
783,000
559,000
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,267,000
29,417,000
Property, Plant and Equipment:
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Intangible assets, net of accumulated amortization of $42,000 . . . . . . . . . . . . . . . . .
Goodwill, net of accumulated amortization of $922,000 . . . . . . . . . . . . . . . . . . . . . .
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,893,000
28,469,000
35,362,000
19,477,000
15,885,000
1,208,000
15,063,000
973,000
7,293,000
22,517,000
29,810,000
17,542,000
12,268,000
—
10,049,000
490,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$74,396,000
$52,224,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,482,000
4,501,000
7,021,000
551,000
$ 1,482,000
3,195,000
5,027,000
—
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,555,000
9,704,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,074,000
17,095,000
139,000
606,000
9,577,000
384,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,863,000
20,271,000
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies
234,000
218,000
Stockholders’ Equity:
Preferred stock, 500,000 shares authorized, none issued . . . . . . . . . . . . . . . . . .
Common stock, par value $.30 per share, 30,000,000 shares authorized;
9,070,250 and 8,587,512 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained earnings (deficit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 1,018,308 and 968,308 shares . . . . . . . . . . . . . . . . . . . .
—
—
2,715,000
39,060,000
5,508,000
48,000
(5,032,000)
2,576,000
34,065,000
(268,000)
(1,000)
(4,637,000)
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,299,000
31,735,000
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . .
$74,396,000
$52,224,000
See notes to consolidated financial statements.
16
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended May 31,
2004
2003
2002
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107,669,000
64,985,000
$91,876,000
54,684,000
$85,081,000
49,616,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,684,000
37,192,000
35,465,000
Selling, general and administrative expenses
Non cash G&A compensation cost . . . . . . . . . . . . . . . . . . . . . .
Other SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income)
Earnings before interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share
—Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Weighted average number of shares outstanding
344,000
32,589,000
—
10,000
9,741,000
519,000
9,222,000
3,446,000
115,000
29,183,000
—
150,000
7,744,000
601,000
7,143,000
2,741,000
368,000
27,411,000
275,000
173,000
7,238,000
892,000
6,346,000
2,437,000
5,776,000
$ 4,402,000
$ 3,909,000
0.75
0.69
$
$
0.57
0.53
$
$
0.51
0.48
—Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,709,000
7,707,000
7,664,000
—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,429,000
8,369,000
8,229,000
See notes to consolidated financial statements.
17
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Years Ended May 31,
2004
2003
2002
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of an accounting change . . . . . . . . . . . . . . . . . . . . . . .
Net income (losses) on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments related to interest rate swaps . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax (provision) benefit
$5,776,000
—
43,000
—
22,000
(16,000)
$4,402,000
—
49,000
—
26,000
(19,000)
$3,909,000
(56,000)
(149,000)
113,000
—
35,000
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,825,000
$4,458,000
$3,852,000
See notes to consolidated financial statements.
18
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fiscal Years Ended May 31,
2004
2003
2002
COMMON STOCK:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,576,000
89,000
—
50,000
$ 2,499,000
2,000
—
75,000
$ 2,503,000
5,000
(71,000)
62,000
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,715,000
$ 2,576,000
$ 2,499,000
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value of options issued in exchange for earn-out . . . . . . . . . . . .
Non cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,065,000
4,091,000
—
560,000
—
344,000
$32,961,000
58,000
—
931,000
—
115,000
$32,257,000
46,000
(741,000)
748,000
283,000
368,000
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,060,000
$34,065,000
$32,961,000
ACCUMULATED DEFICIT:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (268,000) $ (4,670,000) $ (8,579,000)
3,909,000
4,402,000
5,776,000
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,508,000
$ (268,000) $ (4,670,000)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on derivative instruments . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . .
$
(1,000) $
27,000
22,000
(57,000) $
30,000
26,000
—
(57,000)
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
48,000
$
(1,000) $
(57,000)
TREASURY STOCK:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (4,637,000) $ (2,551,000) $ (1,369,000)
(1,994,000)
(2,086,000)
812,000
(395,000)
—
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (5,032,000) $ (4,637,000) $ (2,551,000)
TOTAL STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . .
$42,299,000
$31,735,000
$28,182,000
See notes to consolidated financial statements.
19
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Equity in earnings of unconsolidated subsidiary and other
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non cash G&A compensation cost . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effects from business
acquisitions:
(Increase) decrease:
Fiscal Years Ended May 31,
2004
2003
2002
$ 5,776,000
$ 4,402,000
$ 3,909,000
2,892,000
184,000
(235,000)
(65,000)
311,000
344,000
2,555,000
263,000
—
(56,000)
312,000
115,000
2,693,000
119,000
—
(17,000)
(47,000)
368,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,358,000)
(430,000)
44,000
16,000
Increase (decrease):
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,306,000
2,053,000
786,000
(720,000)
(696,000)
(41,000)
(16,000)
242,000
827,000
(621,000)
(2,761,000)
(557,000)
(215,000)
—
996,000
882,000
(89,000)
Net cash provided by operating activities . . . . . . . . . . . . . .
$ 2,624,000
$ 6,566,000
$ 5,281,000
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Rental and demonstration equipment
Proceeds from disposal of property and equipment
. . . . . . . . . .
(Increase) decrease in other assets, net . . . . . . . . . . . . . . . . . . . .
Business acquisitions, net of cash acquired . . . . . . . . . . . . . . . .
(3,330,000)
(120,000)
170,000
(30,000)
(5,401,000)
(2,037,000)
(560,000)
37,000
30,000
—
(2,043,000)
(369,000)
122,000
(102,000)
—
Net cash used in investing activities . . . . . . . . . . . . . . . . . .
$ (8,711,000) $(2,530,000) $(2,392,000)
Cash Flows From Financing Activities:
(Payments) borrowings under debt agreements and other
long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,273,000
374,000
(395,000)
$(2,670,000) $(1,852,000)
812,000
(1,994,000)
751,000
(2,086,000)
Net cash provided by (used in) financing activities . . . . . .
7,252,000
(4,005,000)
(3,034,000)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . .
1,165,000
854,000
31,000
823,000
(145,000)
968,000
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . .
$ 2,019,000
$
854,000
$
823,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
532,000
$
626,000
$
981,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,467,000
$ 2,936,000
$ 2,200,000
See notes to consolidated financial statements.
20
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Team, Inc. (the “Company”) include the financial statements of the
Company and its subsidiaries. All significant intercompany transactions have been eliminated.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company’s financial statements include
amounts that are based on management’s best estimates and judgments. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost
less accumulated depreciation and amortization.
Depreciation and amortization of assets are computed by the straight-line method over the following estimated
useful lives:
Classification
Life
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
20-30 years
2-10 years
Machinery and equipment includes rental and demonstration machining tools used in the equipment sales
and rental business segment totaling $2,350,000 and $2,324,000 (before accumulated depreciation of $392,000
and $283,000) at May 31, 2004 and 2003, respectively. These self–constructed assets are periodically transferred
to inventory and sold as used equipment. Total depreciation expense for the Company was $2,541,000,
$2,229,000 and $2,138,000 for fiscal years ending May 31, 2004, 2003 and 2002, respectively.
Goodwill
SFAS No. 142 Accounting for Goodwill and Other Intangible Assets became effective for the Company as
of June 1, 2002. According to SFAS No. 142, goodwill that arises from purchases after June 30, 2001 cannot be
amortized. In addition, SFAS No. 142 requires that amortization of existing goodwill will cease on the first day
of the adoption year. Accordingly, the Company stopped recording the amortization of goodwill as a charge to
earnings effective as of the beginning of fiscal 2003.
21
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the pro-forma impact on the prior years had the provisions of the new
standard been applied as of June 1, 2001:
Fiscal Years Ended May 31,
2004
2003
2002
Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back: Goodwill amortization . . . . . . . . . . . . . . . . . . . .
$5,776,000
—
$4,402,000
—
$3,909,000
275,000
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,776,000
$4,402,000
$4,184,000
Basic earnings per share:
Reported net income . . . . . . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . . . . . . . . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Reported net income . . . . . . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . . . . . . . . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
0.75
—
0.75
0.69
—
0.69
$
$
$
$
0.57
—
0.57
0.53
—
0.53
$
$
$
$
0.51
0.04
0.55
0.48
0.03
0.51
The Company had six months from the date it initially applied SFAS No. 142 to test goodwill for
impairment. Thereafter, goodwill must be tested for impairment at least annually and impairment losses, if any,
will be presented in the operating section of the income statement. The Company has completed the required
annual impairment test and has determined that there is no impairment of goodwill as of May 31, 2004.
Revenue Recognition
The Company derives its revenues by providing a variety of industrial services. These revenues are based on
time and materials and are generally short term in nature. In addition, the Company sells and rents portable
machine tools through one of its subsidiaries. For all of these services, revenues are recognized when services are
rendered or when product is shipped and risk of ownership passes to the customer.
Income Taxes
The Company accounts for taxes on income using the asset and liability method wherein deferred tax assets
and liabilities are recognized for the future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities using enacted rates.
Concentration of Credit Risk
The Company provides services to the chemical, petrochemical, refining, pulp and paper, power and steel
industries throughout the United States. No single customer accounts for more than 10% of consolidated
revenues.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2004 presentation.
Earnings Per Share
The Company has 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”).
22
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
There is no difference, for any of the years 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.
Options to purchase 70,500 and 112,000 shares of common stock were outstanding during the years ended
May 31, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the
options’ exercise prices were greater than the average market price of common shares during the period. In 2002,
all outstanding options were “in the money” and therefore, no options were excluded from the computation of
diluted EPS in that year.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Dividends
No dividends were paid during the current or prior two fiscal years. 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.
Interest Rate Swap Agreements
The differential to be paid or received on interest rate swap agreements is accrued as interest rates change
and is recognized over the life of the agreements as an increase or decrease in interest expense. The Company
does not use these instruments for trading purposes. Instead, it uses them to hedge the impact of interest rate
fluctuations on floating rate debt. See Note 6 regarding the fair value of the Company’s interest rate swap
agreements.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable,
accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable
and trade accounts payable are representative of their respective fair values due to the short-term maturity of
these instruments. The fair values of the Company’s credit facility are representative of their carrying values
based upon the variable rate terms and management’s opinion that the current rates offered to the Company with
the same maturity and security structure are equivalent to that of the credit facility.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” The
statement applies to legal obligations associated with the retirement of long-lived assets, except for certain
obligations of lessees. SFAS 143 became effective for the Company in June 2003 and has not impacted the
Company’s financial statements.
The Company has reviewed other new accounting standards not identified above and does not believe any
other new standard will have a material impact on the Company’s financial position or operating results.
23
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”) and related interpretations in accounting for its employee stock options. Under
APB 25, because the exercise price of the Company’s employee stock options equals the market price of the
underlying stock on the date of grant, generally no compensation expense is recognized. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123 and 148, which also requires that the
information be determined as if the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value for the options granted after this
date was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 2004, 2003, and 2002, respectively: risk-free interest rate of 2.3%, 1.8%, and 3.8%;
volatility factor of the expected market price of the Company’s common stock of 28.0%, 35.6%, and 42.8%;
expected dividend yield percentage of 0.0% for each period; and a weighted average expected life of the option
of three years for each period.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee
stock options have characteristics significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company’s pro forma information, as if the fair value method described above had been adopted, is as
follows:
Net income—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based employee compensation expense included in
Fiscal Years Ended May 31,
2004
2003
2002
$5,776,000
$4,402,000
$3,909,000
reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
344,000
115,000
368,000
Total stock-based employee compensation expense
determined under fair value based method for all awards
(187,000)
(165,000)
(163,000)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,933,000
$4,352,000
$4,114,000
Earinings per share—Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma earnings per share—Basic . . . . . . . . . . . . . . . . . . . .
Earinings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma earnings per share—diluted . . . . . . . . . . . . . . . . . . .
$
$
$
$
0.75
0.77
0.69
0.70
$
$
$
$
0.57
0.56
0.53
0.52
$
$
$
$
0.51
0.54
0.48
0.50
2. RECEIVABLES
Receivables consist of:
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,332,000
55,000
(506,000)
$18,180,000
60,000
(533,000)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,881,000
$17,707,000
May 31,
2004
2003
24
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following summarizes the activity in the allowance for doubtful accounts:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . .
Write off of bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 533,000
452,000
(479,000)
$ 511,000
263,000
(241,000)
$392,000
119,000
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 506,000
$ 533,000
$511,000
Fiscal Years Ended May 31,
2004
2003
2002
3. INVENTORIES
Inventories consist of:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods and work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,082,000
8,846,000
$1,084,000
8,414,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,928,000
$9,498,000
May 31,
2004
2003
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of:
Payroll and other compensation expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current payments due to former officers . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,608,000
1,519,000
78,000
245,000
1,571,000
$2,771,000
1,261,000
77,000
238,000
680,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,021,000
$5,027,000
May 31,
2004
2003
5. INCOME TAXES
The provision for income taxes attributable to pre-tax earnings are as follows:
Fiscal Years Ended May 31,
2003
2004
2002
Federal income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,634,000
279,000
$2,093,000
279,000
$2,013,000
(37,000)
State income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
316,000
32,000
185,000
336,000
33,000
—
468,000
(7,000)
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,446,000
$2,741,000
$2,437,000
25
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation between income taxes related to earnings before income taxes and income taxes computed
by applying the statutory Federal income tax rate to such earnings follows:
Fiscal Years Ended May 31,
2004
2003
2002
Earnings before federal income taxes . . . . . . . . . . . . . . . . .
$9,222,000
$7,143,000
$6,346,000
Computed income taxes at statutory rate . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,136,000
—
230,000
80,000
$2,429,000
—
325,000
(13,000)
$2,158,000
93,000
309,000
(123,000)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,446,000
$2,741,000
$2,437,000
A summary of the significant components of the Company’s deferred tax assets and liabilities follows:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31,
2004
165,000
946,000
182,000
2003
201,000
777,000
222,000
Gross deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,293,000
1,200,000
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,220,000)
(223,000)
$ (800,000)
(223,000)
Gross deferred liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,443,000)
(1,023,000)
Net deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (150,000)
$
177,000
No valuation account is required for the deferred tax assets as management believes it is more likely than
not that the Company will have sufficient taxable income in the future that will allow it to realize the benefits of
the net deferred tax assets. Most of the assets represent temporary differences on certain accruals that will reverse
over a period of less than 10 years.
6. LONG-TERM DEBT
Long-term debt consists of:
Revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term and mortgage notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,000,000
4,577,000
$ 5,000,000
6,059,000
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,577,000
1,482,000
11,059,000
1,482,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,095,000
$ 9,577,000
May 31,
2004
2003
26
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Maturities of long-term debt are as follows:
Year ending May 31,
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$ 1,482,000
16,160,000
125,000
810,000
—
—
$18,577,000
The Company has a $34 million bank credit facility that consists of: (i) a $22,500,000 revolving loan, which
matures September 30, 2005, (ii) $9,500,000 in term loans for business acquisitions and (iii) a $2,000,000
mortgage loan. Amounts borrowed against the term loans are due in quarterly installments in the amount of
$339,000 until the loans mature on September 30, 2005. Amounts borrowed against the mortgage loan are repaid
in quarterly installments of $31,000 until its maturity date of September 30, 2008. Amounts outstanding under
the credit facility bear interest at a marginal rate over either the LIBOR rate or the prime rate. At May 31, 2004,
the Company’s marginal rate was 1.5% over the LIBOR rate. The weighted average rate on outstanding
borrowings at May 31, 2004 is approximately 3.1%. The Company also pays a commitment fee of .25% per
annum on the average amount of the unused availability under the revolving loan.
The Company entered into an interest rate swap agreement that expired in September, 2003 and which
qualified 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 covered approximately $2.1 million
of outstanding debt, the Company exchanged a variable LIBOR rate for a fixed LIBOR rate of approximately
5.2%. As the interest rates on the credit facility are based on market rates, the fair value of amounts outstanding
under the facility approximate the carrying value. The interest rate swap agreements had a negative mark-to-
market value of approximately $43,000 at May 31, 2003. The fair value of the interest rate swaps were estimated
by discounting expected cash flows using quoted market interest rates. Two other swap agreements, covering
approximately $3.5 million, expired on December 31, 2001. As of May 31, 2004 the Company had no
outstanding swap agreements.
Loans under the credit facility are secured by substantially all of the assets of the Company. The terms of
the agreement require the maintenance of certain financial ratios and limit investments, liens, leases and
indebtedness, and dividends, among other things. At May 31, 2004 and 2003, the Company was in compliance
with all credit facility covenants.
At May 31, 2004, the Company was contingently liable for $2.2 million in outstanding stand-by letters of
credit and, at that date, approximately $6.3 million was available to borrow under the credit facility.
On August 11, 2004, in connection with the acquisition of the business assets of Cooperheat-MQS, Inc. (see
Note 15), the existing credit facility was replaced with a new $75 million facility. The new facility matures in
August 2009 and consists of a revolving loan of $50 million and a $25 million term facility. Approximately $55
million (including the entire term loan) was borrowed on August 11, 2004 to finance the Cooperheat-MQS
acquisition (approximately $36 million) and to refinance amounts outstanding on the existing Team facilities
(approximately $19 million). The term facility requires amortization of $3 million in the first year, $4 million in
year two and $6 million in each of years three through five. Amortization begins in November 2004. Interest on
27
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the facility is at LIBOR plus a margin which is variable depending upon the ratio of funded debt to EBITDA.
Initially, the margin will be 225 basis points above the LIBOR rate. The new facility is secured by virtually all
the Company’s assets, including those acquired in the Cooperheat-MQS transaction. The Company paid an
underwriters fee of 1.625% of the aggregate amount of the facility.
7. OTHER LONG-TERM LIABILITIES
Other liabilities consisted of:
Post retirement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amounts due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 384,000
(245,000)
$ 622,000
(238,000)
$ 139,000
$ 384,000
May 31,
2004
2003
Amounts due within one year of $245,000 and $238,000, respectively, are included in other accrued
liabilities in the accompanying consolidated balance sheet.
Post Retirement Benefits:
The Company is obligated for post-retirement benefits to three former officers with payments due through
2007. Future maturities of amounts due under post retirement benefit agreements are as follows:
Year ending May 31,
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$245,000
100,000
39,000
$384,000
8. OTHER EXPENSE (INCOME)
In 2004, net other expense of $10,000 consists of a $245,000 expense associated with special sales tax
obligations offset by a $235,000 gain from the sale of idle real estate. Both matters involve the wholly owned
subsidiary, Climax Portable Machine Tools, Inc. In regards to the sales tax matter, Climax is domiciled in the
state of Oregon, a state that imposes no tax on sales originating there. In fiscal 2003, management determined
that Climax does have an obligation to collect and remit sales taxes in certain other jurisdictions, which it had not
previously done. Climax is nearing completion of a process of entering into agreements with several states with
respect to sales tax obligations and is in the process of collecting amounts due from its customers. In fiscal 2003
the Company recorded a $150,000 charge related to this matter. The cumulative $395,000 charge represents
management’s best current estimate of the probable loss that Climax will incur with respect to this matter.
In regards to the real estate sale, Climax sold idle real estate for a total consideration of $760,000,
comprised of $128,000 in cash and a note receivable for $632,000. The note bears interest at 6% per annum and
matures on May 1, 2007. Interest payments are due in quarterly installments and a principal payment of $32,000
is due annually. At May 31, 2004 the balance outstanding on the note was $601,000. The amount is recorded as
an Other asset on the balance sheet.
In 2002, other expense of $173,000 consists of severance and related costs associated with a reduction in
work force at Climax. All such amounts were paid during the year ended May 31, 2002.
28
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Options:
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”) and related interpretations in accounting for its employee stock options. Under
APB 25, because the exercise price of the Company’s employee stock options equals the market price of the
underlying stock on the date of grant, generally no compensation expense is recognized. Pursuant to various
option plans, the Company has granted options to purchase common stock to officers, directors and employees at
prices equal to or greater than the market value of the common stock on the date of grant. The exercise price,
terms and other conditions applicable to each option granted under the Company’s plans are generally
determined by the Compensation Committee at the time of grant of each option and may vary.
In addition to the options granted under the option plans discussed above, the Company’s chief executive
officer was granted options to purchase 200,000 shares of common stock at a price of $3.625 per share upon
joining the Company in 1998. Such grant was subject to a vesting schedule based on stock performance measures
which provided that one third of the options vest upon the sustained achievement of average stock prices of
$7.00, $10.50, and $14.00 per share. The first standard was met near the end of May 2002, when the price of
Team’s stock was $9.15 per share. Consequently, at that time, the Company was required to recognize a non-cash
G&A compensation charge associated with one third of the options totaling $368,000 (approximately $0.03 per
share, net of tax).
In July 2002,
the Board of Directors modified the vesting requirements of the remaining 133,333
performance based options held by the chief executive officer as well as 20,000 performance based options held
by an officer of one of the Company’s subsidiaries. The modification causes the remaining options to vest on
May 31, 2008 unless earlier vesting occurs, in the case of the chief executive officer, as a result of the
achievement of the $10.50 and $14.00 stock-price hurdles described above. The modification allowed the
Company to fix the amount of the future non-cash G&A compensation expense associated with the remaining
options ($750,000) and to recognize the charge against earnings ratably over a six-year period of time ($125,000
per year), unless otherwise accelerated by the achievement of the performance hurdles. In April 2004 the $10.50
stock-price hurdle was achieved resulting in the accelerated vesting of 66,667 shares of the chief executive
officer’s remaining 133,333 options. As a result, the Company accelerated the recognition of an additional
$219,000 in non-cash G&A compensation expense on top of the scheduled $125,000 in fiscal 2004.
In August 2004, the final stock-price hurdle of $14.00 was achieved resulting in the accelerated vesting of
the remaining 66,666 options. As a result, the Company will record the remaining $219,000 associated with the
chief executive officer’s options in the 1st quarter of fiscal 2005. The expense related to the 20,000 options held
by the officer of the Company’s subsidiary will continue to be charged against earnings ratably over their
remaining life at approximately $4,000 each quarter.
29
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Transactions under all plans are summarized below: (For purposes of the summary, the chief executive
officer’s performance options that vested in fiscal 2002 (67,000) and that were modified in 2003 (133,000) are
included as fiscal 2002 and 2003 grants, respectively).
Fiscal Years Ended May 31,
2004
2003
2002
No. of
Options
Weighted
Average
Price
No. of
Options
Weighted
Average
Price
No. of
Options
Weighted
Average
Price
Shares under option, beginning of
year . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,284,000
$ 4.04
1,277,000
$3.41
1,114,800
$3.00
Changes during the year:
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
CEO Performance Options . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . .
201,000
$10.11
— $ —
(187,000) $ 3.34
(12,000) $ 7.12
134,000
133,000
(250,000)
(10,000)
Shares under option, end of year . . . . . .
1,286,000
$ 5.06
1,284,000
$8.96
$3.63
$3.00
$7.44
$4.04
324,200
67,000
(209,000)
(20,000)
1,277,000
$4.25
$3.63
$3.88
$3.63
$3.41
Exercisable at end of year . . . . . . . . . . .
993,000
$ 4.20
1,074,000
$3.77
980,000
$3.27
Available for future grant
. . . . . . . . . . .
439,000
440,000
174,000
Weighted average grant-date fair value
of options granted during year . . . . . .
$
2.14
$
2.36
$
1.29
For options outstanding at May 31, 2004, the range of exercise prices and remaining contractual lives are as
follows:
Range of Prices
$1.94 to $2.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.12 to $3.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.56 to $4.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5.15 to $9.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.80 to $13.92 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No. of
Options
180,000
205,000
485,000
345,000
71,000
1,286,000
Weighted
Average
Price
Weighted
Average
Life (in years)
$ 2.26
$ 3.46
$ 3.71
$ 7.62
$13.61
$ 5.06
4.2
4.6
4.8
8.3
9.9
5.9
Employee Benefit Plans:
Under the Team, Inc. Salary Deferral Plan, contributions are made by qualified employees at their election
and matching Company contributions are made at specified rates. Company contributions in fiscal 2004, 2003
and 2002, were $383,000, $363,000, and $319,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
Loss Contingencies
In December 2001, the Company and 18 other defendants were sued in a lawsuit styled Lyondell Chemical
Company and Atlantic Richfield Company v. Ethyl Corporation et al in the United States District Court for the
Eastern District of Texas, Beaumont Division. In April and May of 2004, the District Court granted motions for
30
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
summary judgment filed by the Company and dismissed the Plaintiffs’ claims with prejudice with respect to
claims against Team allegedly arising out of its ownership of the stock of French Limited and of Allstate
Vacuum and Tanks, Inc (“Allstate”). The Company has reason to believe that the Plaintiffs will appeal the
Court’s ruling in favor of the Company at the end of the case.
This lawsuit arises out of a previous lawsuit filed by the United States of America against the Plaintiffs,
Lyondell and Arco Chemical, alleging that hazardous substances and/or pollutants or contaminants were
deposited at the Turtle Bayou Site in Liberty County, Texas. Arco and Lyondell entered into a settlement with
the United States which was embodied in a Consent Decree. Within three years after the Consent Decree was
entered, Arco and Lyondell brought the referenced suit against approximately 18 parties seeking contribution for
the costs of response for removal and/or remedial action at the Turtle Bayou Site. The co-defendants include,
among others, Exxon-Mobil, El Paso Tennessee Pipeline Company, Du Pont, Ethyl Corporation, and Lubrizol.
Later, El Paso added approximately nine additional defendants.
Plaintiffs allege that French Ltd., a vacuum truck company that the Company owned from 1978 to 1984, or
its former parent, French Limited of Houston, Inc., had, during the time period of 1969 to 1976, transported
hazardous substances to the Turtle Bayou Site.
In 1982, as a result of the contentions made by the Environmental Protection Agency (“EPA”), the
Company informed George Whitten, the one who had sold French, Ltd. to the Company, that his failure to reveal
French, Ltd.’s activities with respect to the illegal depositing of hazardous substances was a breach of the
representations and warranties of the agreement by which the Company acquired French, Ltd. In November
1984, the Company sold French back to Whitten.
The Plaintiffs alleged that French, Ltd. and, therefore, the Company, should be held liable for French
Limited and/or French Limited of Houston, Inc.’s allegedly wrongful deposits of some of the material that was
deposited at the Site. Plaintiffs also allege that the Company should be held liable for some alleged disposal of
hazardous waste by another former Company subsidiary, Allstate.
In addition to the claims originally put forward by the Plaintiffs, nine of the Defendants have filed cross-
claims against the Company in which they contended they do not believe they should be held liable on Plaintiffs’
claims against them, but that if they are held liable then they seek contribution from the Company and other
defendants. In addition, the four of those same nine defendants which are related to the El Paso Corporation (the
“El Paso Defendants”) seek contribution against the Company and others on a related claim by the United States
Government on another location within the Turtle Bayou Site at which hazardous wastes were disposed. All
defendants except the El Paso Defendants have agreed orally to dismiss their cross-claims against the Company
subject to revival if the Plaintiffs appeal the summary judgments granted by the District Court. Management
believes that the El Paso defendants and the Company are close to an agreement with respect to a motion to
dismiss similar to the one proposed with the other defendants; if the Company is not successful in reaching such
an agreement, then the Company plans to file a motion for summary judgment requesting that the District Court
apply its previously granted summary judgments against the El Paso Defendants.
The Company believes that the claims against it in this matter are without merit, as is supported by the
rulings of the District Court.
In April 2003, Team and three other parties were named as defendants in a lawsuit styled Diamond
Shamrock Refining Company, L.P. v. Cecorp, Inc. et al in the 148th Judicial District Court of Nueces County,
Texas. The suit seeks recovery for $40 million in property damages from an explosion and fire originating at a
valve which the Company’s personnel were attempting to seal in order to prevent a leak. Liability is being
31
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
contested and other parties appear to have primary responsibility for the fire and explosion. The Company is
insured against this loss with both primary and excess liability insurance, subject to any applicable deductible.
In June 2004, Ultramar Diamond Shamrock Corporation made demand on Team Industrial Services, Inc. for
indemnity from claims asserted against Ultramar Diamond Shamrock Corporation in Linda Alapisco, et al v.
Ultramar Diamond Shamrock Corporation, et al, Cause No. L-030085, in the 156th District Court of Live Oak
County, Texas. This suit seeks unspecified damages for the 250 individuals identified in the petition for injuries
resulting from alleged exposure to toxic chemicals released as a result of the explosion and fire at the Diamond
Shamrock facility. This demand has been turned over to American Safety for a response. As of the date of this
report, American Safety has not responded to the claim.
The Company’s umbrella policy has limits of coverage of $25,000,000 and should be more than sufficient to
provide the Company a defense and indemnity as to all claims asserted. However, coverage from the $1 million
primary policy is disputed and a defense is being provided by the carrier subject to a reservation of rights.
The Company and certain subsidiaries are involved in various other lawsuits and are subject to various
claims and proceedings encountered in the normal conduct of business. In the opinion of management, any
uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on
the Company’s consolidated financial statements.
See also Note 8 for a discussion of sales tax contingencies.
Lease Commitments
The Company’s operating leases relate to facilities and transportation and other equipment which are leased
over terms ranging from one to five years with typical renewal options and escalation clauses. Rental payments
on operating leases charged against earnings were $3,428,000, $3,294,000 and $2,848,000 in 2004, 2003 and
2002, respectively. Minimum rental commitments for future periods are as follows:
Year ending May 31,
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating
Leases
$3,114,000
2,029,000
1,006,000
416,000
62,000
Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,627,000
11. COMMON STOCK
During fiscal 2004, 2003, and 2002, the Company reacquired 50,000, 309,788, and 200,100 shares,
respectively, pursuant to an approved, open market repurchase plan at an average price of $7.89, $6.73, and
$5.93 per share, in 2004, 2003, and 2002, respectively. The shares acquired through open market purchases have
not been formally retired and, accordingly, are carried as treasury stock. Additionally, in June 2001, the
Company completed the reacquisition of 235,647 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.
32
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following summarizes the activity of shares outstanding for the years ended May 31, 2004, 2003 and
2002:
No. of Shares, May 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued for director fees . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No. of shares, May 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued for director fees . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No. of shares, May 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued for director fees . . . . . . . . . . . . . . . . . . . .
Shares issued for business acquisition . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common
Stock
Issued
8,342,654
15,150
208,975
—
(235,647)
8,331,132
6,630
249,750
—
8,587,512
7,500
288,413
186,825
—
Treasury
Stock
Shares
Outstanding
(459,420)
—
—
(434,747)
235,647
(658,520)
—
—
(309,788)
(968,308)
—
—
—
(50,000)
7,883,234
15,150
208,975
(434,747)
—
7,672,612
6,630
249,750
(309,788)
7,619,204
7,500
288,413
186,825
(50,000)
No. of shares, May 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
9,070,250
(1,018,308)
8,051,942
As of May 31, 2004, the Company is authorized by its Board of Directors and lender to expend up to an
additional $1.7 million on open market repurchases of common stock.
12. 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.
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 consists of the Climax business.
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on earnings before interest and taxes. Inter-
segment sales are eliminated in the operating measure used by the Company to evaluate segment performance,
and this has been eliminated in the following schedule. Interest is not allocated to the segments.
33
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Information about business segments for the fiscal years ended May 31, 2004, 2003 and 2002 is set forth
below:
Fiscal Year ended May 31, 2004
Industrial
Services
Equipment
Sales & Rentals
Corporate
& Other
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$94,546,000
$13,123,000
$
— $107,669,000
Earnings before interest and Taxes . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
13,953,000
—
1,220,000
—
(5,432,000)
519,000
9,741,000
519,000
Earnings before income taxes . . . . . . . . . . . . . . . . . .
$13,953,000
1,220,000
(5,951,000) $
9,222,000
Depreciation and amortization . . . . . . . . . . . . . . . . .
$ 1,774,000
Captial expenditures . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,917,000
623,000
408,000
495,000
5,000
$
$
2,892,000
3,330,000
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$56,131,000
13,056,000
5,209,000
$ 74,396,000
Fiscal Year ended May 31, 2003
Industrial
Services
Equipment
Sales & Rentals
Corporate
& Other
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$81,122,000
$10,754,000
$
— $91,876,000
Earnings before interest and taxes . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
12,012,000
—
603,000
—
(4,871,000)
601,000
7,744,000
601,000
Earnings before income taxes . . . . . . . . . . . . . . . . . . .
$12,012,000
603,000
(5,472,000) $ 7,143,000
Depreciation and amortization . . . . . . . . . . . . . . . . . .
$ 1,539,000
Captial expenditures . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,619,000
605,000
303,000
411,000
$ 2,555,000
115,000
$ 2,037,000
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36,560,000
11,386,000
4,278,000
$52,224,000
Fiscal Year ended May 31, 2002
Industrial
Services
Equipment
Sales & Rentals
Corporate
& Other
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$74,513,000
$10,568,000
$
— $85,081,000
Earnings before interest and taxes . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
11,470,000
—
547,000
—
(4,779,000)
892,000
7,238,000
892,000
Earnings before income taxes . . . . . . . . . . . . . . . . . . .
$11,470,000
Depreciation and amortization . . . . . . . . . . . . . . . . . .
$ 1,644,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,829,000
$
$
$
547,000
$(5,671,000) $ 6,346,000
684,000
120,000
$
$
365,000
$ 2,693,000
94,000
$ 2,043,000
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,430,000
$12,247,000
$ 3,512,000
$51,189,000
34
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. ACQUISITIONS
On April 15, 2004, the Company completed the acquisition of all of the outstanding capital stock of Thermal
Solutions, Inc., a Colorado corporation (“TSI”). Pursuant to the terms of a Stock Purchase Agreement (the “Stock
Purchase Agreement”) dated and effective as of April 1, 2004 among Team, Team Industrial Services, Inc., a
the TSI
Texas corporation and an indirect wholly-owned subsidiary of Team (“Team Industrial”), TSI,
shareholders and Michael J. Urban as the shareholder representative, TSI became a wholly-owned subsidiary of
Team Industrial.
Team paid consideration of approximately $9 million in cash, which included $1.3 million for the
repayment of TSI’s debt and a $1.7 million adjustment for working capital acquired in excess of the minimum
amount specified in the Stock Purchase Agreement, and issued 288,413 shares of its common stock, $0.30 par
value per share (the “Team Stock”), pursuant to the Stock Purchase Agreement. Of such amounts, $500,000 in
cash and 189,019 shares of Team Stock were deposited into an escrow fund (the “Escrow Fund”) that may be
used by Team to satisfy working capital and accounts receivable adjustments and its indemnification rights under
the Stock Purchase Agreement. (Amounts remaining in the Escrow Fund and not subject to pending claims are to
be distributed to the former TSI shareholders over a three year period ending in April 2007.) The Escrow Fund
was established pursuant to the terms of an Escrow Agreement (the “Escrow Agreement”) dated April 15, 2004
by and among Team, Team Industrial, TSI, the TSI shareholders, the shareholder representative and Compass
Bank. The amount of the consideration contemplated by the Stock Purchase Agreement was determined through
arm’s-length negotiations among the parties.
The acquisition was accounted for using the purchase method of accounting. Accordingly, the consolidated
financial statements subsequent to the effective dates of the acquisitions reflect the purchase price, including
transaction costs. As the acquisition of TSI was effective April 1, 2004, the consolidated results of operations for
the Company for the year ended May 31, 2004, include the results for TSI for the period April 1, 2004 to May
31, 2004. The purchase price of TSI was allocated to the assets and liabilities of TSI based on its estimated fair
value. The goodwill associated with the acquisition totaled approximately $5.0 million. Information regarding the
allocation of the purchase price is set forth below:
Cash and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess purchase price to be allocated to:
$ 7,796,000
4,120,000
475,000
12,391,000
6,581,000
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covenant not to compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,560,000
$ 1,250,000
The covenant not to compete is a general agreement made with the principals of Thermal not to compete
with Team for a period of five years. The valuation of the covenant was determined by an independent third
party. The covenant is being amortized on a straight line basis over the five year term of the agreement.
35
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The unaudited pro forma consolidated results of operations of the Company are shown below as if the
acquisition occurred at the beginning of the fiscal period indicated. These results are not necessarily indicative of
the results which would actually have occurred if the purchase had taken place at the beginning of the period, nor
are they necessarily indicative of future results.
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share
Pro forma data (unaudited)
Twelve months ended May 31,
2004
2003
$121,104,000
5,997,000
$
$108,123,000
4,681,000
$
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.78
0.71
$
$
0.59
0.54
14. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The Company’s consolidated results of operations by quarter for the fiscal years ended May 31, 2004, and
2003 are shown below.
Fiscal 2004
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,918,000
$25,807,000
$25,137,000
$31,807,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,112,000
$10,219,000
$ 9,951,000
$12,402,000
Earnings before interest and taxes . . . . . . . . . . . . . . . .
$ 2,363,000
$ 2,590,000
$ 1,711,000
$ 3,077,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,362,000
$ 1,552,000
$
980,000
$ 1,882,000
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.18
0.17
$
$
0.20
0.19
$
$
Fiscal 2003
0.13
0.12
$
$
0.24
0.22
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,008,000
$23,160,000
$21,777,000
$24,931,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,031,000
$ 9,607,000
$ 8,451,000
$10,103,000
Earnings before interest and taxes . . . . . . . . . . . . . . . .
$ 2,017,000
$ 2,367,000
$ 1,018,000
$ 2,342,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,148,000
$ 1,364,000
$
538,000
$ 1,352,000
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.15
0.14
$
$
0.18
0.16
$
$
0.07
0.06
$
$
0.18
0.17
15. Subsequent Events
On August 11, 2004 the Company announced that it had executed an Asset Purchase Agreement to purchase
substantially all of the assets of International Industrial Services, Inc., a Delaware corporation (“IISI”), and
Cooperheat-MQS, Inc., a Delaware corporation (“Cooperheat”), including the capital stock of certain subsidiaries
of IISI and Cooperheat (together, “Cooperheat”).
36
TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cooperheat
is operating as debtor-in-possession in a Chapter 11 case pending in the United States
Bankruptcy Court for the Southern District of Texas, Houston, Texas (the “Bankruptcy Court”) (Case Nos.
03-48272-H2-11 and 03-48273-H2-11). On August 6, 2004, the Bankruptcy Court entered an order approving the
sale of the assets by Cooperheat to the Company pursuant to the Asset Purchase Agreement.
On August 11, 2004, substantially all of the assets of Cooperheat were sold to the Company pursuant to the
Asset Purchase Agreement for cash consideration of $35 million, subject to a working capital adjustment, the
assumption of certain liabilities including the assumption of $1.7 million in letters of credit and the issuance of
warrants to purchase 100,000 shares of the common stock, $.30 par value per share, of Team. The warrants are
exercisable at $65 cash per share and expire on August 11, 2007, unless sooner exercised.
The assets purchased from Cooperheat are associated with a non-destructive testing (NDT) inspection and
field heat treating services business. The Company intends to integrate the purchased assets and associated
business activity with its other industrial service activities.
The transactions contemplated by the Asset Purchase Agreement, as well as a restructuring of the
Company’s current indebtedness to Bank of America, N.A. (“Bank of America”), were financed with funds
provided under a Credit Agreement dated as of August 11, 2004 (the “Credit Agreement”) by and among the
Company, the other lenders party thereto and Bank of America, as Administrative Agent, Swing Line lender and
L/C issuer. The Credit Agreement permits borrowing of amounts up to an aggregate $75 million, and includes a
letter of credit facility, a revolving credit facility and a term loan. Extensions of credit under the Credit
Agreement have a maturity date five years from the date of inception, and the Company may elect an interest rate
for each advance under the Credit Agreement at either (i) LIBOR plus a maximum margin of 2.25%, which may
be reduced upon the satisfaction of certain financial conditions, or (ii) the higher of Bank of America’s prime rate
or the federal funds rate plus 0.50%. The payment and performance of the Company’s obligations under the
Credit Agreement are secured by substantially all of the assets and properties of the Company and its
subsidiaries.
Cooperheat is a leading provider of non-destructive testing (NDT) inspection and field heat treating services
throughout the U.S. and Canada, and its projected calendar year 2004 revenues are estimated to be approximately
$80 million.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning accounting and financial disclosures with the Company’s
independent accountants within the past two years.
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s chief executive officer and its chief financial officer have evaluated the Company’s
disclosure controls and procedures (as defined in Exchange Act rules 13a-14(c) and 15d-14(c)) as of a date
within 90 days of the filing date of this annual report and have concluded that such controls are effective.
There have been no significant changes in the Company’s internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation.
PART III
The information contained in Items 10, 11, 12, 13 and 14 of Part III has been omitted from this Report
on Form 10-K since the Company will file, not later than 120 days following the close of its fiscal year
ended May 31, 2004, its definitive proxy statement. The information required by Part III will be included
in that proxy statement and such information is hereby incorporated by reference, with the exception of
the information under the headings “Compensation Committee Report” and “Comparison of Total
Shareholders’ Return.”
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Team, Inc. and its subsidiaries are included in Part II,
Item 8.
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets—May 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations—Years ended May 31, 2004, 2003 and 2002 . . . . . . . . .
Page
15
16
17
Consolidated Statements of Comprehensive Income—Years ended May 31, 2004, 2003 and
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
Consolidated Statements of Stockholders’ Equity—Years ended May 31, 2004, 2003 and
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows—Years ended May 31, 2004, 2003 and 2002 . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
20
21
2. Financial Statement Schedules
All other schedules are omitted because they are not applicable or because the required information is
included in the Consolidated Financial Statements or Notes thereto.
38
3. Exhibits
Exhibit
Number
3.1*
3.2*
4.1*
10.1*#
10.2*
10.3#
10.4*#
10.5*#
10.6*#
10.7*#
10.8*#
10.9*#
10.10*#
10.11*#
Second Restated Articles of Incorporation of the Company, as amended through August 31, 1999,
(filed as Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended May
31, 1999).
Bylaws of the Company (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-2,
File No. 33-31663).
Certificate representing shares of common stock of Company (filed as Exhibit 4(1) to the
Company’s Registration Statement on Form S-1, File No. 2-68928).
Employment Agreements and Consulting and Salary Continuation Agreements between the
Company and certain of its executive officers (filed as Exhibit 10(f) to the Company’s Annual
Report on Form 10-K for the fiscal year ended May 31, 1988, as Exhibit 10 to the Company’s
Annual Report on Form 10-K for the fiscal year ended May 31, 1989, as amended by Form 8 dated
October 19, 1989, and Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 1990).
Team, Inc. Salary Deferral Plan (filed as Exhibit 99(a) to the Company’s Registration Statement on
form S-8, File No. 333-74062).
Team, Inc. Restated Non-Employee Directors’ Stock Option Plan as amended through June 24,
2004.
First Amendment to the Consulting and Salary Continuation Agreement by and between Team, Inc.
and George W. Harrison dated December 24, 1990 (filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the Quarter ended November 30, 1996).
First Amendment to Employment Agreement by and between Philip J. Hawk and Team, Inc.
effective October 1, 2001 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended February 28, 2002).
Incentive Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated
November 2, 1998 (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 1998).
Standard Restricted Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc.
dated November 2, 1998 (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended November 30, 1998).
First Amendment to Price Vested Restricted Stock Option Award Agreement by and between Philip
J. Hawk and Team, Inc. dated October 1, 2001 (filed as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended February 28, 2002).
Second Amendment dated July 11, 2002 to Price Vested Restricted Stock Option Award Agreement
by and between Philip J. Hawk and Team, Inc (filed as Exhibit 10.12 to the Company’s Annual
Report on Form 10-K for the fiscal year ended May 31, 2002).
Stock Purchase Agreement by and between Philip J. Hawk and Team, Inc. dated November 2, 1998
(filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
November 30, 1998).
Incentive Stock Option Award Agreement by and between Philip J. Hawk and Team, Inc. dated
October 1, 2001 (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2002).
10.12*
Stock Purchase Agreement by and between Team, Inc. and Houston Post Oak Partners, Ltd. Dated
June 9, 1998 (filed as a exhibit to the Company’s Current Report on Form 8-K filed June 8, 1998).
39
Exhibit
Number
10.13#
1998 Incentive Stock Option Plan dated January 29, 1998 as amended through June 24, 2004.
10.14*#
Exchange Agreement by and among E. Patrick Manuel, B. Dal Miller and Team, Inc. dated July 5,
2001 (filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year
ended May 31, 2002).
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21#
10.22#
14.1*
21
23.1
31.1
31.2
32.1
32.2
Credit Agreement dated August 28, 1998 among Team, NationsBank, N.A. and various Financial
Institutions named in the Credit Agreement (filed as Exhibit 2.5 to the Company’s Current Report
on Form 8-K filed September 9, 1998).
Stock Purchase Agreement dated as of April 1, 2004, by and among Team, Inc., Team Industrial
Services, Inc. (“Team Industrial”), Thermal Solutions, Inc. (“TSI”), the TSI shareholders named
therein and Michael J. Urban as the shareholder representative (Filed as Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed April 16, 2004).
Escrow Agreement dated April 15, 2004 by and among Team, Inc., Team Industrial, TSI, the TSI
shareholders named therein, Michael J. Urban as the shareholder representative and Compass Bank
(Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 16, 2004).
Amendment No. 9 dated as of April 15, 2004 among Registrant, Bank of America, N.A., successor
by merger to NationsBank, N.A., and the financial institutions named therein (Filed as Exhibit 10.2
to the Company’s Current Report on Form 8-K filed April 16, 2004).
Asset Purchase Agreement dated July 16, 2004 by and among International Industrial Services, Inc.,
Cooperheat-MQS, Inc., Team Acquisition Corp. and Team, Inc. (Filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K filed, dated July 16, 2004, filed July 20, 2004).
Credit Agreement dated August 11, 2004 among Team, Inc., each lender from time to time party
thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.
(Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 12, 2004).
Team, Inc. 2004 Restricted Stock Option and Award Plan dated June 24, 2004.
Consulting Agreement between Team, Inc. and Emmett J. Lescroart dated July 30, 2004.
Code of Ethics (filed as Exhibit 14.1 to the Company’s Annual Report on Form 10K for the fiscal
year ended May 31, 2003).
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm—KPMG LLP
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Incorporated herein by reference to the respective filing identified above.
*
# Management contracts and/or compensation plans required to be filed as an exhibit to this Form 10-K
pursuant to Item 15(b) of Form 10-K.
(b) Reports on Form 8-K.
The Company filed three (3) reports on form 8-K during the fourth quarter. One covering a press release
announcing its earnings for the quarter ended February 28, 2004, dated March 17, 2004, and two covering the
purchase of Thermal Solutions, Inc., dated April 2, 2004 and April 16, 2004.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
thereunto duly authorized
to be signed on its behalf by the undersigned,
has duly caused this report
August 25, 2004.
Team, Inc.
By:
/s/ PHILIP J. HAWK
Philip J. Hawk
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
/s/ PHILIP J. HAWK
(Philip J. Hawk)
Chief Executive Officer and Director
August 25, 2004
/s/ GEORGE W. HARRISON
Director
August 25, 2004
(George W. Harrison)
/s/
JACK M. JOHNSON, JR.
(Jack M. Johnson, Jr.)
Director
August 25, 2004
/s/ E. THEODORE LABORDE
Director
August 25, 2004
(E. Theodore Laborde)
/s/ E. PATRICK MANUEL
Director
August 25, 2004
(E. Patrick Manuel)
/s/ LOUIS A. WATERS
Director
August 25, 2004
(Louis A. Waters)
/s/ SIDNEY B. WILLIAMS
Director
August 25, 2004
(Sidney B. Williams)
/s/ TED W. OWEN
(Ted W. Owen)
Senior Vice President Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
August 25, 2004
41
Dear Fellow Shareholders,
The past year has been exciting and productive for our
company. We continue to make further progress with our organic
growth initiatives, once again achieving significant improvement in
market share, revenues, earnings and profit margins. Team’s net
income increased 31% during the past year to the highest level ever.
This is a continuation of the consistent progress we have made over the
last several years. Our average compound annual growth rate in earn-
ings over the past three years and five years has been 27% and 58%,
respectively.
Consistent with this performance, we were pleased to be
recognized in the Fortune Small Business 100 listing of America’s
fastest-growing small companies for the third year in a row. We take
pride in being one of the highest growth companies in America,
regardless of industry.
Team took another significant strategic step forward with the
recent purchases of Thermal Solutions and the assets of Cooperheat
MQS. Together, these two businesses bring Team the #1 market
position in both inspection services and field heat treating. As a result
of these additions, we expect Team’s total revenues to nearly double
over the next twelve months. Beyond the financial benefits, these
acquisitions reinforce and support our overall company strategy to
capitalize on customer trends to consolidate their industrial service
requirements with larger multi-service, multi-location service providers
like Team.
We also were pleased that our common stock share price
nearly doubled over the past year. We believe our continued
performance improvement, combined with new initiatives, is attracting
the attention of more investors. Despite this price improvement, our
trailing P/E ratio remains below overall market averages. We look
forward to continued improvement in this area.
Operations Highlights
For the year,
the Industrial Services Business Segment
revenues increased 17% to $94.5 million. Operating profits for this
segment increased 16% to $14.0 million. Overall, the operating profit
margin for the year was 15%. The revenues for this segment included
$2.5 million in revenues from Thermal Solutions following its
acquisition in April 2004. Excluding those revenues, the organic growth
from the remainder of the industrial services business was 14% for the
full year. The organic growth in the remaining services was
broad-based, with double-digit revenue growth in nearly all service lines
as a result of continued market penetration with multi-service,
multi-plant customer agreements and increased turnaround projects.
The Equipment Sales and Rental Business Segment (Climax
Portable Machine Tool Company) also had record results for the year.
Revenues increased 22% to $13.1 million. Operating profit was $1.2
million, approximately double last year’s results. The strong revenue
growth was the result of several major special machine shipments
during the second half of the fiscal year. Climax continues to pursue
these special machine sales opportunities as a supplement to its standard
machine sales and rental offerings. The level of interest in new special
machine projects remains high going into the current year.
We realize that these results are attributable to a company-
wide focus on providing customers with the services and products they
need-in a safe, effective, efficient and timely manner. We understand
the need to reaffirm the trust and confidence of every customer with
each new service or sales opportunity.
New Business Acquisitions
For the last several years, we have discussed our receptivity to
“accelerating” strategic acquisitions, provided they were consistent
with our current industrial services strategy and accretive to earnings.
In the span of about six months, we completed two purchases that
dramatically enhance the profile and outlook for our company.
In April 2004, Team completed the purchase of Thermal
Solutions, Inc., the second largest provider of field heat treating
services in North America. In August 2004, Team purchased the assets
of Cooperheat MQS from a bankruptcy proceeding. Cooperheat MQS
is the largest provider of both field heat treating and inspection
services in North America.
Strategically, both businesses are a great complement to our
company. As a result of these acquisitions, Team has entered one new
service line, field heat treating, as the industry leader. At the same time,
we have substantially expanded our inspection capability from a
company with a regional Gulf Coast presence to the market leader with
a national presence. Further, both businesses have management and
service personnel joining Team that represent an excellent fit with our
company. Both of these service lines are solid additions to our
multi-service, multi-plant arrangements with many major customers.
Financially, we expect service line margins and overall
business profitability for these new businesses to reach levels that are on
par with Team’s other service lines. Yet, Team was able to purchase
these two businesses for a total value of about .5 times revenue,
compared to Team’s valuation of about 1.2 times revenue. Obviously,
when we can achieve the performance consistent with the expectations
above, there should be significant value enhancement opportunity
for Team.
Financial Results
For the fiscal year ending May 31, 2004, revenues were
$107.7 million, up 17% from the prior year. Earnings before interest
and taxes (EBIT) increased 26% to $9.7 million. EBIT profit margin
improved to 9%. Net income was $5.8 million ($0.69 per share fully
diluted), up 31%. Net income profit margin improved to 5.4% for
the year.
The incremental operating margins (growth in EBIT as a
percentage of growth in revenue) for the business, after adjustments for
the Thermal Solutions acquisition and other non-cash, non-operating
items, was about 18%, reflecting the continuing operating leverage of
our business. The high incremental profit margin is a key measure of
our ability to continue to achieve profit growth that outpaces revenue
growth. Profit margins will continue to receive close scrutiny and focus
from all of our managers.
Our balance sheet remains strong. At fiscal year end, total
stockholders’equity had increased nearly $11 million from the prior year
to $42 million. Total debt increased to about $19 million, reflecting the
Thermal Solutions acquisition in April 2004. The company’s debt to
EBITDA ratio at year-end was about 1.4. Because of this strength in the
balance sheet, we were able to fully finance the August 2004 purchase
of the assets of Cooperheat-MQS with a new $75 million senior debt
facility. After giving effect to the $35 million purchase price and related
financing cost, our debt level increased to $56 million and our debt to
EBITDA ratio increased to a still comfortable 2.5.
* * *
Exciting challenges lie ahead in the current year, as we merge
the new businesses into the Team family and continue our organic
growth initiatives. We appreciate your continuing interest in and support
of our company. We are proud of our company, our achievements and
the outstanding efforts of our 2000 fellow employees. It is our privilege
to be associated with this great team. We all look forward to continued
success and improvement in the coming year.
Philip J. Hawk
Chairman and CEO
Kenneth M. Tholan
President and COO