Team Inc (TISI) 2005 Q4 法說會逐字稿

Good morning, and welcome to your Team, Inc. quarterly earnings conference call. [OPERATOR INSTRUCTIONS.] It is now my pleasure to turn the floor over to your host, Mr. Phil Hawk. Sir, the floor is yours.

Thank you, Sharita (ph), and good morning, and welcome to the Team, Inc. web conference call to discuss recent Company performance. Again, my name is Phil Hawk, and I'm the Chairman and CEO of Team. Joining me, again, today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer. The purpose of today's conference call is to discuss our recently released financial results for the Company's fourth quarter and fiscal year 2005, ending May 31, 2005. As with past calls our primary objective is to provide our shareholders and potential shareholders with an enhanced understanding of our Company's performance and prospects. The discussion is intended to supplement our quarterly earnings releases, our 8-K, 10-Q and 10-K filings to the SEC and our annual reports.

Ted will begin with a review of the financial results. And I will then follow Ted with a few remarks and observations about our performance and prospects. Following our remarks, we will take questions from our listeners. Those wishing to ask questions should call 1-888-896-0862 and ask to join the Team IR conference call.

With that introduction, Ted, let me turn it over to you.

Thank you, Phil. First, as I always do, I want to remind everyone that any forward-looking information we discuss today 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 us, and is subject to factors that could result in actual results differing materially from those anticipated in any forward-looking statements. So please be sure to read the last paragraph of our press release for a complete description of those factors.

Now, to -- now, to the financial results. Revenues in the fourth quarter were $68 million, compared to $31.8 million in the fourth quarter of last year, an increase of over 100%, due to the acquisitions of Thermal and Cooperheat-MQS, as well as substantial revenue growth in our legacy mechanical services offerings. Operating income for the quarter was $4.3 million, versus $2.9 million in last year's fourth quarter. Net income for the quarter was $1.8 million, compared to $1.9 million last year. Earnings in the quarter was $0.20, versus $0.22 last year. For the year, total revenues were $209 million, and earnings were $0.53 a share, versus $107 million and $0.69 last year.

Now, looking at the results by segment. First, as a reminder, our Industrial Services includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems, as well as specialized NDE inspection services. As a result of the recent acquisitions, we've reorganized the Industrial Service business into two groups -- Team Mechanical Services, or TMS, which includes leak repair, hot tapping, fugitive emissions monitoring, field machining and bolting, and field valve repair services; and then the second unit is Team Cooperheat-MQS, or T -- or TCM, which is comprised of field heat treating and inspection services. That group includes the former operations of Thermal Solutions, Cooperheat-MQS, as well as Team's legacy inspection business, X-Ray Inspection.

In the table to our press release, we have once again provided enhanced disclosure about the revenues and margins for these two groups for both the quarter and year-to-date periods. With respect to revenues, total Industrial Services revenues in the quarter were $63.2 million, compared to $28 million last year. The $63.2 million consists of $27.2 million from TMS and $36 million from TCM. The TMS revenues grew by 23% over the same quarter of a year ago, which is consistent with our growth objectives. Nearly all of the TCM growth of $30 million, of course, is associated with the Thermal and Cooperheat acquisitions.

With respect to gross margins, our gross margin percentage of the TMS business is 35% for the quarter, which is down nearly 6 points from last year's quarter. On the other hand, TCM margins improved to 32% on very strong revenue growth over the third quarter from a -- from a sequential perspective. Phil will discuss these margin issues more fully in his remarks in a couple of moments.

With respect to equipment sales and rentals, which is the -- as you know, this is the Climax business -- Climax continued to perform well for the quarter and for the year. End of quarter revenues were $4.6 million, up 21% from last year's fourth quarter. That segment earned $342,000 in the quarter, which was down about $100,000 from last year. But how -- however, for the year Climax's operating income was up $239,000, or 19%, on a revenue growth of 22% year-over-year.

Now, I want to turn our attention to corporate costs, particularly, our compliance activities with respect to Sarbanes-Oxley Act of 2002. In the quarter, our total corporate SG&A costs were $3.5 million, which includes $1.1 million of costs associated with compliance with Sarbanes-Oxley, or referred to as SOX SOX compliance has required Team to undertake a very thorough documentation of key aspects of our internal financial control and financial reporting systems. We have also tested the effectiveness of key controls within our system, and developed our assessment of the overall effectiveness of our controls. Based upon the results of these tests, we believe that our internal controls over financial reporting are effective. Our report, along with a report of our auditors, will be included in our Form 10-K which is expected to be filed early next week.

The magnitude of the task of -- to meet all of the documentation and testing requirements of SOX has been certainly far greater than we had estimated. It's consumed more resources and management time than expected, particularly in the fourth quarter of 2005, as well as continuing through the first quarter of fiscal 2006. In future years, we will be able to build upon this year's work with respect to the overall control system, description, and documentation. However, there will be ongoing significant efforts and costs associated with both internal testing of financial controls, as well as extensive system assessment and testing by our external auditor.

Candidly, our current estimate for complying with SOX requirements is approximately twice the level of our earlier estimates. Based on recent articles in the financial press, we believe that that experience is not uncommon and is similar to that experienced by other public companies in America. So it is an issue. The issue for us now is just to incorporate SOX into our normal business processes, which we'll be doing in 2006.

I also want to just point out that our -- a change in our effective tax rate for the year, our tax rate is about 3 points higher than the prior year. Those 3 points are almost evenly divided, if you will, in three -- or associated with three areas. One, is higher non-deductible expenses relative to taxable income. Two, is a higher foreign tax rate, particularly in Canada, as opposed to the U.S. tax rate, as a result of our substantial volumes and results in Canada for the year. And, three, a -- about 1 point of higher state tax rates. For fiscal '06 we expect the tax rate to be about 39%.

Now let me talk about the balance sheet and cash flows for a moment. At May 31st our debt, outstanding debt on our credit facility was $62.5 million. This is a result of substantial growth in working capital, principally accounts receivable, associated with our rapid business growth throughout the year, which has continued through May. If you look at our May revenues versus -- or, sorry, our fourth quarter revenues versus third quarter revenues, you'll see that our total revenues, sequentially, are up $11.5 million quarter-to-quarter. That's continued to result in a growing working capital. Accounts receivable has grown about $24 million since the beginning of the year, and that has resulted in a negative cash flow from operations for the year of about $2.6 million. Additionally, as a point of reference, capital expenditures for the year were about $4.7 million.

We have just concluded the peak of the annual business cycle and are focused on collection activities to significantly reduce receivables and, correspondingly, to reduce debt. We expect to see cash flows dramatically improve during this weaker summer season, and expect substantial reduction in our days outstanding in the very near term.

And so with that, Phil, I will turn it back to you.

Thanks, Ted. I would now like to add a number of comments and observations. As those of you who have been investors in or followers of Team have observed, our financial results this year did not measure up to our historical track record or our-long term expectations. Rather than increasing earnings 25% or more this year, similar to our five-year track record, Team's net income for the year declined 17%. Nevertheless, while not reflected in the past year's earnings results, I believe Team has made significant progress this year, which positions the Company for break-out performance in the current year, followed by several more years of very attractive profit growth.

Let me share a few general observations about our performance and progress that supports this view. Obviously, fiscal year '05 was a transition year for Team in many respects. Most significant -- most significantly, last August Team purchased the business of Cooperheat-MQS and combined that business with our Thermal Solutions and XRI units into the new, integrated Team Cooperheat-MQS unit, which we now call the TCM Division of Team Industrial Services. This new unit is the industry's largest provider of inspection and field heat treating services. This acquisition and business combination had the following immediate effects -- a doubling of Team's overall revenues, all in complimentary industrial services for essentially the same customer base; a doubling of Team's total personnel; and a near doubling of Team's assets.

The acquisition and establishment of a new combined business required Team to address a number of major integration challenges, including the establishment of a new combined field organization; the development and implementation of common payroll, benefits, and incentive compensation programs; the development of common operating procedures, quality programs, and safety programs; the consolidation of corporate support functions from four locations into one, including the closure of Cooperheat's former headquarters location; the consolidation of all information systems to a common platform with a single overall support group; and the implementation of a common financial system. The challenge was to accomplish all of these transition activities, while continuing to maintain all aspects of our service capabilities.

Put simply, our customers don't really care one way or another about our internal integration activities. They expect and deserve outstanding service and support from Team, regardless of our other challenges. I will speak more to this point in a moment. But let me say that I'm very proud of how our Company performed in this respect.

Obviously, these transition activities have had an impact on our financial results this year in several respects. The easiest to measure are the specific expense outlays related to one-time integration activities, such as office relocations, systems transitions, related personnel training programs, and some personnel severance expenses. We estimate those expenses were a little over $1 million. Plus we incurred an additional $1 million, or so, in capital expenditures, related primarily to new systems development and hardware.

However, a far greater, but harder to measure, financial impact of the transition were the reduced revenues and profit margins during the start-up of a newly created organization. The impact, in our case, was even greater, due to the fact that Cooperheat-MQS had been operating under bankruptcy protection for the eight months prior to Team's purchase. As we said several quarters ago, we were not really even sure exactly where we were starting with our new combined business, but that we were confident that this business would earn comparable margins to our other industrial services. We haven't tried to measure or estimate the impact of reduced revenues and margins this year, but I will say that our improvement in margin performance throughout the year affirms our perspective that this business will achieve comparable profit margins to Team Mechanical Services, perhaps as early as the current year. I'll come back to this point in a moment.

And the acquisition and the -- of the Cooperheat-MQS business and the creation of the team -- the new TCM division wasn't the only other major transaction -- transition activity this year. As Ted indicated earlier, a second major transition challenge for Team was our initial adaptation to the new requirements dictated by the Sarbanes-Oxley statute. Not to repeat Ted, but put simply, this is -- this was a much bigger effort than we had originally anticipated, and it will require significant attention and resources in future years.

But the entire story for fiscal year 2005 is not one of transition challenges and transition costs. Notwithstanding the major efforts associated with completing these significant transition activities, Team did not stand still on the business front. In fact, I'm extremely pleased with the continuing success of our overall business development efforts. While a disproportionate amount of senior management time and attention was focused on these transition activities with our TCM division and SOX, the remainder of the Team businesses continued their outstanding organic growth initiatives. Reflecting this success -- revenues grew 22% and 18% for the fourth quarter and full fiscal year, respectively, for these, kind of, if you will, old Team businesses.

Revenues for TMS division grew 23% and 18% for the fourth quarter and full year, respectively. Growth was achieved in nearly every service line and across many branch locations. Our broad-based business development efforts, combined with Team's high-quality service continued to attract an ever-growing share of market for our Company. While very pleased with this growth within TMS, a current area of focus is the decline in margins within this unit, particularly in the fourth quarter. For the quarter, TMS gross margins were about 6 percentage points below the prior year, which represents about a $1.6 million additional gross margin opportunity. For the year, TMS gross margins were 3.5 percentage points below the prior year, representing about a $2.9 million gross margin opportunity.

For both the quarter and the year, about half of this decline was related to international projects, primarily in the Caribbean Basin. One low margin project in particular represented about $700,000 of this total, kind of, margin opportunity. The remaining margin decline occurred in domestic locations. A portion of the fourth quarter declined related to the timing of discounts earned by two major refiners, as a result of significant turn-around projects performed in that period. But this is primarily a timing issue. More broadly, we just weren't as focused on our margin management activities as we needed to be, and allowed some cost creep to erode our overall margins. We've had a major margin review with our key TMS managers and have already taken a number of positive steps -- steps.

Frankly, we needed to fine-tune the balance of our management attention towards project execution and margin management, versus new business development. We expect TMS gross margins in the current year to be -- to return to the 38% to 39% level. To wrap up the discussion of old Team businesses, let me note that Climax also had another solid year, both revenues and profits for the year were up about 20%, and the outlook for this business continues to be positive.

Now let me go back to discuss our new TCM group. I'm equally pleased with the business growth and development momentum they have generated this year. Following the understandable confusion and distractions resulting from the new business combination and reorganization during the second quarter of the year, TCM has enjoyed improved revenues and improved profit margins in each succeeding quarter. TCM's fourth quarter revenues were $36 million, about $10 million above the third quarter level, and above our internal forecasts.

While difficult to measure in this short time period, I believe some of this growth reflects the initial return of some of the former Cooperheat-MQS work that has been secured by other service companies during the period of Cooperheat's bankruptcy and financial uncertainty. This is a very significant growth opportunity for Team. In the last 18 months prior to Team's purchase of the business, the former Cooperheat business revenues declined by about $40 million in annualized sales. These former customers represent a very large source of future growth potential for TCM and, therefore, Team.

Finally, while growing the top line, TCM also continued to prove its -- improve its overall gross margin. For the second consecutive quarter, TCM increased its gross margin by about 2 percentage points from the prior year -- prior quarter to a total of 32% for the fourth quarter.

Now looking forward. With the major transition activities essentially completed, and exciting business growth momentum established across all of our units, we have high expectations for the current year. We are confident that we will continue the double-digit organic revenue growth in all major units. We expect to see overall margin improvement in our business from several sources. First, we will benefit from the operating leverage of the organic growth. Second, we expect improvement in the core margins, both in TMS and TCM versus the fiscal year '05 averages. Within TCM, we expect to see the full-year effect of the -- of operating at the gross margin levels achieved in the fourth quarter. Within TMS, we expect a couple of points of improvement versus FY '05 as a result of the initiatives both already taken and planned.

Reflecting these points, we expect our composite growth -- gross margin for the business to be in the 36%-range for the current fiscal year, up about 2 percentage points from FY '05. As a result, our earnings guidance for the full year is $1.15 to $1.30 per share. We realize this is more than a doubling of current year results. But we do not feel it requires heroic performance or results from any of our units, just a continuation of current momentum, plus a little more focus on margin restoration within our TMS group.

One final comment on projected earnings, as we have indicated before, we don't feel confident that we can forecast individual quarterly results very accurately. The timing and impact of individual projects can be significant and, frankly, just can't be forecast. So, again, this year we are providing annual guidance that we'll be updating quarterly. Having said this, I would like to note that the full year's earnings will be heavily weighted to the last three quarters of the year.

The first quarter is seasonally a very weak quarter for turn-around activity, which is particularly important for TCM. And per our earlier SOX comments, we also expect to incur significant audit fees in the first quarter as well. As a result, we expect first quarter earnings will be minimal. The remaining three quarters of the year are already shaping up to be extremely busy. We are pleased with the large amount of turn-around work that has already been awarded to Team, both for this fall, as well as next spring.

To wrap up, let me summarize our priorities for the coming year. With our integration and transition activities behind us, the overall theme and focus for Team this year is to make what we have work. The overall driver of our business has been and continues to be organic revenue growth. We feel very good about the momentum we have going into the year and our overall outlook. We expect some improvements in our margin, but the presumed improvements are hardly heroic. For TCM, it is maintaining the margin levels achieved in the fourth quarter throughout next year. For TMS, it's tightening up the margin focus and addressing opportunities that are familiar to us. Third, we need to continue to fine-tune our corporate support and processes. We still have some opportunities for simplifying and streamlining. We also need to find additional ways to meet our SOX requirements more efficiently with fewer extra steps.

Fourth, we have a -- we have an increased -- we have increased our focus on accounts receivable management. Our goal is to reduce days outstanding by 14 days over the next several months, representing more than a $10 million asset, and, therefore, a debt reduction. And, finally, we must continue to remember the basics of our success -- we need to reaffirm every customer's confidence and trust by providing outstanding service in every opportunity safely, effectively, and efficiently. I look forward to the coming year and to sharing what -- with you what I expect to be exciting financial performance progress. With those comments, now, I'd like to open it up for questions. Sharita?

Thank you. [OPERATOR INSTRUCTIONS.] Our first question is coming from Arnold Ursaner with CJS Securities.

Hi, good morning.

Hi, Arnie.

Good morning, Arnie.

Want to focus a little bit on the reduced '06 guidance if I can, and focus on, maybe, four different areas to see if you can help us better understand what's causing it -- demand, margin, what I would call duplicate operating expenses, and administrative costs? And, perhaps, expand a -- help us better understand what's driving down the number a little bit?

Okay. It's a pretty simple -- in terms of the -- the delta from our prior guidance, which is down about $0.10. It's all SOX. It's all -- we basically added $1 million of expense to our expectations, driven by what we see as, not only first quarter expenses related to wrap-up of this fiscal year, but ongoing -- not only our own expenses but audit expenses going forward, just given the environment as we now perceive it.

So going back to the other issues, let's focus a little bit on demand, is there anything you're seeing that changes the delta on demand?

No, not at all, Arnie. Our basic premise is that there's no demand growth in our industry, that it is a -- kind of, a fundamentally flat industry because it's driven by the population of, kind of, producing facilities that we service. I will say that on the -- on the margin -- the environment of our customer base is extremely attractive right now, in terms of the margins they're enjoying, which, again, on balance is a positive indicator, but that's really not weighing in any of our forecasts. Our very positive view about our future revenue growth is really driven by our continued belief that we're very well positioned to gain share. And I think the kind of indications of that are the -- kind of the -- I'm not going to say backlog, but the number of projects that have already been awarded to us in the fall and the spring is -- it's very significant, and much greater than it has been in the past, and we expect our harbingers of a very strong rest of the year.

I guess I'm a little confused, perhaps, by the 36% margin goal for the year. I think if I heard you right, you're talking about a return to the 38 or 39% in the -- ?

The 36% is a composite mix of TMS plus TCM. So what we're trying to do is give a -- it's really -- the 36% goal is a total corporate kind of expectation.

Right.

We don't normally provide that kind of level of specificity because we're kind of margining off where we've been, but given, really, the fact that we're dramatically improving profitability from last year, we've got a lot of noise in our last year due to the start-up of the new system -- new business, we thought that would be helpful to investors, was just -- was to kind of extend the -- what the expectations of the components mean for the total gross margin targets. So that's what the objective was with, kind of, sharing that 36% number.

Okay. On the international project, is that behind you, as is the, quote, timing of discounts? Are those two margin issues behind you?

Yes. The timing issue will -- the timing issues will continue to occur from quarter-to-quarter. But, like I said, that will -- that -- if you -- if we're kind of real honest with ourselves, we're down 3.5 points for the year. And that's not related to timing, that's related to poorer execution on our part, plus the -- domestically, plus, again, the -- this project that we mentioned in particular -- a project, and, frankly, some weak performance in one of our international locations. Those are the things we can manage and those are the things we're focusing on. So we'll -- there'll still be some -- a little bit of lumpiness, kind of, quarter-to-quarter, but we are, kind of, very confident that we can, kind of, restore our margin back to -- and, again, we're not even projecting all the way back to historical levels, but we -- certainly our expectation aspiration is to get back to where we've been historically.

One more real quick question, if I could, there's been a number of outages at some key refineries. Are you seeing a pickup in your emergency activity? And can you comment a little bit on -- there've been four, five major outages. Is that impacting your demand?

Not a lot because an individual project and a little bit of emergency work at a particular refinery isn't going to have a huge effect on us overall. We are working at some of those plants where there are outages, but, no, it hasn't been a material effect on us.

Look forward to seeing you at our conference, thanks.

Yes. Well, yes, look forward to being there, Arnie.

One last -- one last comment just on margins, this is not a -- the TMS margin issue. Obviously, we're disappointed and are taking steps to, kind of, get, really, back to fine-tune our business relative to our model. But we had a similar issue a couple of years ago where we had a weak quarter within margins and, again, took a lot of -- because of the nature of our business, very large number of individual jobs and transactions. The -- there's not a -- one fell swoop corporate edict that immediately restores margins. What this is, is a lot of hard work and focus and priority back to margin management. And, again, two years ago, we had the issue -- or two, three years ago we had a weak quarter, really focused on it and saw -- really, almost immediate restoration of those margins, and we've had that same conversation. We've had that same kind of a review of our business, and we expect, again, to bounce back, just as we did before. Sharita, you want to bring a -- next question please?

Okay. Our next question is coming from James Gentile with Sidoti & Company.

Good morning, James.

Good morning. How are you doing, Phil? Good sequential margin improvement in the TCM side of the business from, I guess, November, February, and, then, March we're at 32%. You kind of alluded to the fact that you'd like to maintain that level through 2006. I'm having a tough time with the seasonality, essentially, of this -- of this particular -- of the acquired businesses, it seems to be even more significant than your core Mechanical Services business. So I was wondering if, perhaps, you can comment on that? And, secondly, what, structurally, was changed to, I guess, demonstrate the fact that this sequential margin improvement will be sustained? Because it's absolutely essential for this -- for these levels to be maintained in order for you to maintain your -- to reach your revised guidance range. So, I guess, comment on the structural changes of TCM and why we should model in 32.5% gross margins and 12% Industrial Services operating margins next year?

All right. I guess, two comments. Let's talk to the seasonality. Again, TCM, two service lines -- inspection and heat treating. Both of them -- but really, in particular, heat treating is far more dependent on turn-around activity for -- as a percentage of its total revenues. There's just proportionately a much smaller portion of our percentage of the work is kind of -- I'm going to say day-to-day maintenance activity. You're generally -- you're heat treating when you are cutting and welding, and that tends to be turn-around activity. So that's -- you are right. It is far more seasonal, so we have the -- I guess, the weak months are going to be June, July, August, and December. And we're going to see fairly strong months, kind of, in the rest of the year. There will be stronger months on that.

Inspection is not quite as severe as heat treating, but, again, with turn-around activity, there's -- there is very, very large inspection requirements. So, again, it is relative to, kind of, the mix of our onstream and offstream business within TMS, much more seasonal. So, again, we're going to see -- and I haven't -- I've got to -- I can develop that number. I don't have a specific percentage of the revenues that are going to fall on each of the quarters, but it will be very definitely skewed away from the first quarter, most significantly in second and fourth, but third will then be, kind of, right behind those.

In terms of, kind of, why we think the margins are sustainable, I think the -- we don't really think we're going where this businesses have never been. What we're doing is we're just kind of getting back to normal operating kind of activities because of getting the disruption and lack of focus behind us, due to the reorganization of the business. The other big thing that happened, effective in February of this year is we have our -- the -- our financial system in place, which gives us visibility of the direct product -- project profitability of every job. And I will tell you that's making a big difference.

Already, and, again, I'm going to kind of go from a different -- I'm going to a, kind of, a different metric here in a minute and look at just the profitability of individual branches, and this is not exactly as we report publicly, because it doesn't include a lot of the directed corporate support or dedicated support to these activities, which are part of the activities. But the -- if you look at, kind of -- and as you are aware, James, that our goal at the branch level is to earn a 20% profit margin -- and last year for -- if you take all of TMS, we are -- about a third of our branches earned 20% and, on average, we earned about 14, 15%. If you look at TCM, again, because of -- with our new system, we are substantially below that for the year, in terms of the individual branches, but, actually, we were well above 10% and 12 -- actually above 12% in the fourth quarter and, actually, a third of our total TCM branches exceeded 20%.

So we see branches already kind of benefiting from the -- an increased visibility of their business, and we're seeing the results on that. As we get more comfortable with that system with this group, we expect to see continued improvement in those results. I will point out that the inspection businesses that we've owned for six years, the old XRI business, margins at the branch level, which are comparable to that of TMS. So where we're projecting to go, I think, is very reasonable, given our experience.

James, James, just to get tack onto that, relative to the seasonality of the revenue standpoint, we've talked about Q4, Q2 being the strongest, then 3, then 1. If you were to divide up that pie at, say, like -- normalized at 25% in each quarter, the way I look at it is Q1 is a -- is 3 to 4 points lower than the -- than that, kind of, 25% average. So it's going to be 21 to 22% in Q4 -- sorry, in Q1, and, then, that delta [inaudible] into 4, 3, 2.

Got you. All right. And, then, I just want to -- I want you to just kind of clarify or qualify the $1.15 to $1.30. I understand, you mentioned following Arnie's question, that a lot of the variance has to do with the structural and legal and compliance types of costs. If you were to classify your $1.25 to $1.40 as over-aggressive, perhaps, what word would you use to describe the $1.15 to $1.30?

I don't know quite how to -- how to answer that.

I just -- it seems as if you guys may have set the bar a bit high. Especially given the flattish first quarter, essentially, minimal profits was your guidance, call it, $0.02 to $0.04, perhaps. So we haven't seen these $0.40 quarters, particularly during your seasonally strong period in some time, so it seems as if I just -- I guess, essentially, the -- I wish you guys had set the bar a little lower is the message I'd like to send, essentially.

Well, I appreciate your comment. I will tell you that the -- I guess our guidance to you is at the low end of our internal expectations. We -- that we have our -- we have a budget that our team believes strongly in, and talking about our broad base of managers. And that's what we're going for. And, like I said in my comments, I don't think the underlying assumptions are particularly heroic, though I appreciate your point that we are projecting a doubling of earnings, and further to your point, a doubling of earnings where we're not going to get much of it in the first quarter. So I appreciate your comment, although I think when you kind of work through the assumptions that are, kind of, underlying that expectation on our part, like I say, we -- I wouldn't characterize them as, kind of, over-reaching from our standpoint.

Okay. And then you suggested that going into your season -- this is the last question, I apologize. The -- that the strong amount that the high level of new business, turn-around activity that is coming on following the first quarter, is there any way that you can kind of give us an idea, no one will hold it to you, in terms of a quantification? Do you have the year booked already, type of situation? Is there any way you can quantify the backlog that you're seeing as your activity rosters fill?

Not really. The anecdotal evidence, and its not really a quantification of that at all, because, again, we still depend on a tremendous amount of call-out and regular business work throughout the year, so it's not just turn-arounds that make our -- make our business go. But the staffing discussions I've been part of, as we're trying to man these projects that we have awarded to us already, our -- the guys that have to staff them are struggling a little bit, but I view that as tremendously good news, is that we are -- that we are looking -- we're looking high and -- high and wide and far to kind of pull together all of the resources necessary to do this work, because it's a -- it's very, very substantial. But it's -- that's an anecdotal, not a quantification as you -- as you requested, but that's kind of the best I can do for you.

Great. Thank you very much.

Thanks.

Thanks, James.

Thank you. Our next question is coming from Kerry Rigdon with Southwest Securities.

Good morning, Kerry.

Good morning, Phil. Good morning, Ted, how are you guys?

Good.

Concerning the integration of the acquisitions from last year, I know in the last couple of quarters there have been comments about -- that you guys are basically through that process. I mean, can we mark that off the list now and say that that integration process is complete and really what is being focused on now is the ramp up of the margins to, kind of, those historical levels? Is that -- would that be an accurate statement?

Yes, I think, certainly, the -- we're going to give a little bit of elaboration on that, but, certainly, from a field perspective and, kind of, customers, kind of, orient -- or branch activity and service units, absolutely true. I think we've -- we're still fine-tuning and wrapping up just -- and, kind of, wrapping up some of the enhancements to our corporate support processes to support the field, but the -- basically, all the functionality's in place. The -- all the systems are in place, all the financial tools are in place. We're just trying to fine-tune that a little bit. Obviously, kind of, concurrent with that, but separate from that is this whole SOX issue that still has some wrap-up activity to where we think we're not quite steady-state yet, in terms of how we're dealing with SOX.

And that kind of leads to my next question, you -- in the release you talk about the fact that it's -- that the SOX expenses is a lot higher than what you'd anticipated, and what I glean from that is that you expect that level to stay, those costs to stay at current levels. Is that consistent with some of your peers or is it more a result of the fact that you've got a little bit more of a complex entity because of the acquisitions?

I think -- I think it's -- first of all, our forecast's expectation isn't that our full annualized effect in the second year will be identical to the first year. But I think in fiscal year '06 we will have , at first quarter, we'll have a -- some audit fees associated with the final audit of '05. So that's where you get some of the guidance for FY '06, it kind of relates to that. So -- but we will have significant expenses, and your comment about the fact that we have a -- I'm going to comment to this, is that because we have an extensive number of branch locations, that adds to the challenge of the testing complexity, in terms of our type of business. But I don't think -- having said that, I don't think that we're -- frankly, if you look at, kind of, expenses relative to revenues and some of the information that's in the financial press, I don't think we're way out of line with some of the experiences of others. I can just tell you it's kind of staggering how significant the increase is that's related to this whole statute.

Yes. I guess what I was -- what I'm trying to get at is do you expect at some point in time some relief from that cost, or would it be more realistic to just assume that these run rates are going to be fairly consistent on an ongoing basis?

I think there's -- this is kind of an editorial here, not a forecast. I think there is some, I think, talk and sensitivity by the PCOAB that some of the requirements may be a little rigorous, and, kind of, not cost-effective, particularly for smaller, kind of, qualifying public companies, that would include someone like Team. But, frankly, if the regs as they are right now stay, our auditors are saying that their requirements for testing, really, for next year will be no different than this year, so that we ought to expect from them and their costs that we pay for to be comparable. Ted, you want to elaborate on that?

Yes. I would just characterize it this way. I think, certainly year two is probably not going to be much different than year one, from an internal cost standpoint. We will leverage on an extensive amount of documentation developed in year one. On the other hand, in year two, we will have more testing to do because the former Cooperheat locations were not subject to testing in the first year of our SOX compliance. They will be next year. So I think, really, for us, if -- from a steady-state, really, kind of, begins in year three, once we have all elements of our business incorporated into testing, and we have, kind of, rolled it into our normal business processes, if you will.

Okay. Thanks, guys.

Sure, Kerry.

Thank you. Our next question is coming from Eric Mikisson with Third Century Two.

Hi, I recall you mentioned that the expanded business cost us about $11 million of negative cash flow in the last quarter, and I guess you -- you're planning on business continuing to expand. So I'm wondering, in that budget you mentioned, is there any -- going to be any room, say, over the next 12 to 18 months to whittle down that $90 million debt load?

Wait a minute.

Okay. Well, the debt load, I think is an important clarification, was about 60 million, not 90.

Well, I assuming the current liabilities is --

We didn't talk about $11 million of negative cash flow either.

Did I mishear you there?

Yes. We had $2.6 million from negative cash from operations for the year. We had revenue growth, sequential revenue growth of $11 million in Q4 versus Q3.

I really misheard you then.

Yes. So -- and that $11 million of revenue growth is associated with a substantial accounts receivable growth throughout the year, which impacts cash flow from operations. But cash flow from operations was a negative 2.6 for the year. Embedded in that number is a -- an increase in accounts receivable during the year of about $24 million.

We, historically -- we've been growing organically at 10 to 15% a year for years, with positive cash flow nearly every year, and we expect the positive cash flow in the coming year, even with the projected growth that we have.

That sounds a lot better. I'm still wondering, though, have you budgeted any debt reduction in the coming, say, 12 to 18 months?

Yes.

As Phil mentioned, we have an aggressive plan to -- our days outstanding on accounts receivable is considerably higher than our historical experience and for businesses that we -- where we believe we ought to be by a factor of about 14 days. The impact of that is about $10 million. And so just that alone would -- reducing our DSO, will reduce our receivables and debt by about $10 million over time.

Okay. Good. Thanks, that's all I have.

Sure.

Thank you. Our next question is coming from Brad Huge with JPMorgan Chase.

Good morning, gentlemen.

Good morning, Brad. How are you?

I'm doing great. Can you guys just comment briefly on your focus for your international projects for the fiscal 2006?

I think the -- our expectations are that they will continue to be a positive contributor to our business. The issue with regard to the project that's -- we didn't lose money on the project that we talked about. It's just that our -- we had disappointing margins on that project, and we've learned from that and really don't expect a repeat of the surprises -- surprise we had on that situation. We have, again, the primary focus of our international activity and where we are most excited is our -- continues to be our Canadian operations, as well as our near-in Caribbean Basins. We've got a number of very exciting projects and opportunities that we're pursuing.

We also have a relatively modest Asian operation. We have a branch in Singapore. But we, actually, have some pretty exciting things coming from there as well that are, kind of, one-off in nature that would involve a little support from domestically. So we'll continue to -- they'll -- it will continue to be a key part of our overall growth, although, by no means, the -- just the bulk of it. We're -- we have a very broad-based, kind of, continuing development plan.

Thank you.

[OPERATOR INSTRUCTIONS.] You have a follow-up question coming from James Gentile, as a follow-up with Sidoti & Company.

One more question. This week we saw the Energy Bill signed and there was some language regarding some volatile -- some regulations surrounding hydrocarbon emissions for pipelines and refineries and producing facilities, as you like to call them, Phil. Is there anything as you look out, I mean, just kind of as you assess all of the changes, if, in fact, there are going to be any changes from a regulatory perspective, that can affect your business either positively or negatively?

Well, I -- we have not picked up anything in the Energy Bill that we're hanging our hat on in terms of driving a change in our expectations.

Right.

But more broadly, let's talk about the industry, the service lines that it, kind of -- have a lot of regulatory kind of flavor to them, probably most specifically would be our fugitive emissions monitoring programs, and I would say that -- I don't know that -- I think the laws, the guidelines have changed a little bit more stringently, but the implementation has -- and attention to it -- have changed a lot, which is increasing, kind of, more rigor and focus on that area, which I think, in general, creates opportunities for us. So we're -- that's a positive.

I think catastrophic failures, the high-profile catastrophic failures that have happened in a couple refineries, one here in Houston area in particular, I think, increase the value and importance of inspection activities for all companies. And I can't help but think that's going to be positive. And just attention to the maintenance of these facilities and the -- it's not that any of our customers have been unsafe or, kind of, derelict in their responsibilities, but I think that sets a tone and an environment that says when in doubt or on the margin, repair.

Sure.

And those kinds of tones, I guess, are, on the balance, positive for us.

Great. I just want you to know, I didn't read the document myself. It was about 9,000 pages long. So I just wanted to see what you guys were thinking.

Well, when you -- after you finish, James, tell me, give me the Cliff Notes.

Take care.

Thanks, James.

Sir, there appear to be no further questions at this time.

Thank you, Sharita. Let me just take the floor back for a couple of final comments. I just want to, again, thank all of you for your participation in this call and your continuing interest in Team. We look forward to being with you again fairly shortly, probably in a couple of months or so for next quarter's conference call. And hopefully to -- and to be available to share our continuing progress with you. In the meantime, have a good day.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.