Team Inc (TISI) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Team third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure that I turn the floor over to your host, Mr. Phil Hawk, Chairman and CEO. Sir, you may begin your conference.

Thank you, Lawrence and good morning. It is again my pleasure to welcome you to the Team, Inc. web conference call to discuss recent Company performance. Again, my name is Phil Hawk. 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 third fiscal quarter ending February 28, 2006. 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.

This discussion is intended to supplement our quarterly earnings releases, our 8-K, 10-Q and 10-K filings to the SEC and our annual report. Ted will begin with a review of the financial results and I will follow Ted with a few remarks and observations about our performance and prospects. As Lawrence indicated, following our remarks, we will take questions from our listeners. With that, Ted, let me turn it over to you.

Thank you, Phil. As usual, 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 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 the financial results. Revenues for the quarter were 62.6 million compared to 51.7 in the third quarter last year. That's an increase of 21%. Income from continuing operations was 2.3 million in the quarter versus 900,000 in last year's third quarter. Earnings per diluted share from continuing operations was $0.25 cents versus $0.10 in last year's quarter. Last year's quarter also included $0.04 from discontinued operations.

As a result of the Climax sale, which was completed at the end of the second quarter, all of our operations are now in a single business segment. That's Industrial Services. As a reminder, these services include an array of specialized services related to the construction and maintenance of pressurized piping and process systems, as well as specialized NDT inspection services.

Our Industrial Services segment is organized into two groups; TMS, which includes leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair services and TCM, which is comprised of field heat treating and NDE inspection.

TMS revenues in the quarter were 28.7 million compared to 25.3 million in last year's quarter. That's an increase of 14%. TCM revenues were 33.9 million in the quarter versus 26.4 million for the same quarter last year or an increase of 29%. And all of the growth from this quarter is organic.

Operating income for the Industrial Services business was 7.3 million in the current year quarter versus 4.8 million in last year's quarter. Operating margin as a percent of revenue was 12% in the current quarter versus 9% last year. Total corporate SG&A costs were 2.4 million in the quarter, which is down $300,000 from last year's quarter.

Now with respect to our balance sheet and cash flows. At February 28, our total debt was 55.6 million, down about 8.2 million from year end. During the third quarter, we began to see progress with respect to our accounts receivable initiatives. We completed a major analysis of our invoicing and collection processes and have begun implementing its recommendations.

As a result of this emphasis, AR has declined by over $2 million from the second quarter and in spite of having to pay in over $2 million in taxes related to the Climax transaction that completed in November, we generated about $1.8 million of cash flow from operations in the quarter.

While our DSO is fairly flat with the end of the second quarter, we are confident we will begin to see improvement in that metric as we implement new business processes in this area. Capital expenditures for the year to date period was $5.5 million and DD&A on a year-to-date basis is 4.6 million.

EBITDA from continuing operations was 6.4 million for the quarter and over $23 million on a trailing twelve-month basis. At the end of the quarter, our debt to EBITDA was 2.5 to 1. And with that, Phil, I'll turn it back to you.

Thanks, Ted. I'd like to add several observations and comments to the financial results that Ted has reviewed with you. Overall, I'm pleased with our continued growth and progress. At last quarter's conference call, I reviewed in some detail the history behind the formation of our TCM Division and why we believe that business would be an attractive addition to our total Industrial Services portfolio.

I also spoke about the initiatives that we've undertaken to bring our new branches into our network, to implement our branch management tools within these new branches and to capitalize on the synergies and cross-selling opportunities across our entire business.

In this most recent quarter, we continued to reflect the progress we are making in our financial results. Let me focus on a few of the highlights from my perspective. First, our revenue growth for all of our Industrial Services business remains strong. The overall quarterly growth rate was a very attractive 21% above the prior year quarter and it is broad-based.

The newer services, inspection and field heat treating delivered through the TCM Division, grew 29%. The historical mechanical services, on-stream leak repair, hot tapping, fugitive emissions monitoring, field machining, bolting and field valve repair delivered through TMS Division, grew 14%. Nearly all geographic regions contributed to this growth.

As with last quarter, I believe our revenue growth reflects a combination of strong market demand and continued marketshare growth. The strong market growth is coming from two sources. First, several major customer segments, notably refining, power and pipelines, continue to experience extremely attractive market environments and profit margins. These high margins encourage our customers to consider more extensive maintenance services to keep facilities on stream and producing. It is also leading to more optimization projects to incrementally expand output at various facilities.

Second, we are now seeing the positive affect of last fall's hurricanes on our Gulf Coast maintenance and turnaround business. Candidly, the combined demand growth of these two drivers has been such that our demand has exceeded our short-term capacity in a few areas.

We also believe we are continuing to increase marketshare. There is no evidence of any change in the fundamental trends driving our marketshare growth. Customers continue to consolidate their procurement of Industrial Services with fewer service providers. We continue to benefit from cross-selling opportunities across our divisions.

Yet, let me again remind everyone that despite this growth this year plus the strong marketshare growth over the past several years, Team's composite marketshare is still below 15%. We have many years of future marketshare growth ahead of us as long as we continue to earn it.

Second, this revenue growth is driving attractive profit growth. As Ted indicated earlier, our overall segment profits increased about 2.4 million, up about 50%. Our segment operating profit margins in this seasonally weaker quarter increased to 12% from 9%. This is progress.

However, we also aren't ready to declare victory in our margin and profit improvement plans. We continue to focus on a small number of branches that are not yet contributing positively to our performance. The impact of bringing the performance of these branches to positive territory would have added more than $0.05 per share to our earnings just in the current quarter.

However, as perspective, one must use these sensitivity analysis with a little caution. With nearly 70 branch locations, it is inevitable that we will have issues somewhere in each quarter. Nevertheless, we still have the real improvement -- we feel we still have real improvement potential available to us.

The logical follow-on question is what is Team doing about these underperforming branches and when can we expect to see the results? The short answer is that it takes time to bring an underperforming branch back to optimal performance levels, but that we expect to make and see progress in the short term and throughout the rebuilding process.

Branch performance in nearly all cases is associated with lost business momentum in the area sometimes combined with an imbalance in branch skills and resources as compared with current customer requirements and demands. The challenge is to simultaneously restore and develop expanded demand for local branch services while enhancing the technical skills and capabilities necessary to meet this demand.

In short, it is bringing both demand and supply up to critical mass levels and restoring the positive momentum of the branch at the same time. Our ability to leverage our national customer relationships and technical resources from contiguous branches provide Team with advantages to accelerate this process. We will not solve all of our problems in the current quarter, but we are confident that we will make progress.

One positive fact about the nature of this challenge is that it speaks to the difficulty any competitor will have in trying to replicate Team's service network.

Let me say that were not really surprised that we have a view challenges in underperforming branches to address. As I mentioned in the earnings release, we remain confident that all of our current branch locations will be positive contributors to our overall network.

As a final comment about the performance of our Industrial Service business, we fully recognize that we must re-earn our customers' trust and confidence every day with safe, efficient and responsive service delivery. Our customers choose us not vice versa. Fortunately, we are blessed with nearly 2500 talented colleagues who are committed to bringing the industry's best service and capabilities to our customers every day. These terrific colleagues will be instrumental in our continued success.

Now referring to the outlook for the remainder of the year. As I indicated in the earnings release, we've continued to affirm our earnings guidance for the full fiscal year ending May 31 of $1.15 to $1.30 per share. The business outlook continues to be strong across both the TMS and TCM Divisions and we look forward to not only strong volumes, but also continued margin improvement during this quarter.

That concludes our introductory remarks. Let's now open it up for questions.

(OPERATOR INSTRUCTIONS) Arnie Ursaner, CJS Securities.

Good morning. The first question I have is a clarification. In the first paragraph of your press release, you talked about operating profit margin of 8%, but I think both Ted and Phil, you both mentioned 12% operating margin. Which is --?

8% is EBIT for the total corporation.

Right.

12% is the segment operating profit margin. So that's segment operating profit as a percentage of revenue. So that would be before corporate.

Got it. Thank you. Just wanted to clarify that. I guess the biggest question that our clients are trying to help me understand and so perhaps you could help me do this is why such a wide range at this point on your annual guidance given that we're halfway through the fourth quarter and a lot of your work is known well ahead of time. What are some of the issues that would cause you to have such a wide range or spread on your guidance even at this point?

Well, Arnie, it's kind of in the eye of the beholder a little bit is that one might view as wide, others, like me, might view as fairly narrow. And I will tell you as an example of that is that because we only have about 9 million shares in our total outstanding on a diluted basis that relatively small changes can make relatively significant change earnings wise. And again, we have some pretty good visibility on our revenues to be sure. But a 1% revenue change or a $3 million -- again, looking at our annualized revenue of 215 million, about a 1% revenue change or say of $3 million would be about $0.10 cents a share when you look at it on an incremental basis.

So all I am saying is using that as a sensitivity is that a project falling in one quarter or another or kind of adjustments or a project that's not as good as we had thought it would be, it doesn't take much to tweak this thing up or down a little bit. I guess what I would urge all investors to think about and it's -- believe me, we want to maximize the performance in the current quarter. There is no misunderstanding in our organization about that. But frankly what is I think more important and what I spend a lot of time kind of completely focused on is are the key drivers that are going to sustain our very attractive performance growth over time.

So the questions I ask myself and I would suggest are good affirming question is is there any evidence or continued evidence that this Company can meet its internal aspirations of growing revenue on a continued basis at a double-digit level? Can this Company continue to capitalize on the operating leverage that's inherent in this business and reflect that in our results? And can we demonstrate that when we make acquisitions that we can effectively integrate them in our Company and make them a good return?

So, those are the things that I think really are going to be the drivers of our long-term earnings and value. As it reflects to a quarter, I guess it is inherently difficult -- I guess I'm not smart enough to really pin it down more narrowly, but candidly it's not a big focus either.

I'm pretty sure you indicated quite clearly that the margin issue at the branch or the activity issue at the branch hit you to the tune of about $0.05 a share in the quarter. And then I think you said you won't solve it in the current quarter, but will make progress toward solving it. Should one assume that it won't be a zero impact, but probably somewhere in between a $0.0 to $.05 negative hit in the current quarter in terms of the issue with the branches?

I expect that the sum of those branches will still lose money in aggregate in the fourth quarter. That is correct. But they will lose less. And by the way, this is not a new phenomenon that we all of a sudden in this quarter had branches that were kind of underperforming or I should say diluting our overall performance. This has been the case for each of the quarters since the acquisition. And frankly one of the underperforming branches isn't in TCM. So this isn't all just a TCM issue.

But it's just -- I'm just pointing out that we're pleased -- we're very pleased with the margins at our branches in the vast majority of the instances we're seeing the performance that we expected to see and we're growing and building off that strong base. We just have a handful that frankly aren't contributing and we're working on it.

Before I jump back into queue, two more kind of timing or seasonality-related questions I wouldn't mind a little clarity on. One is obviously this is the most critical quarter for turnaround activity. So any comment you could make on what you are seeing there. And just remind us exactly as best you can what impact the hurricanes had in the last quarter and what impact you expect them to have in the current quarter?

Okay, very good. Just in terms of kind of the current activity level -- I presume you are speaking now to the fourth quarter?

Correct.

I think we can say that we have as robust an environment as existed since I've been at Team for the last eight years. We have very, very strong not only turnaround activity, but as I mentioned these optimization projects and some of that is hard to sometimes separate all of that along the Gulf Coast of the hurricane affect. But there is very major activity going on in a handful of refineries that were significantly damaged by particularly Hurricane Katrina in the New Orleans and the Louisiana areas that are positively affecting demand.

That demand -- those hurricanes affects, while positive -- it was positive in the third quarter and will be positive in the fourth I think for several quarters to come, they were actually a net negative to our demand in the second quarter. That is -- going to get the right timeframe here, would be September, October, November simply because the complete destruction of the infrastructure made it impossible to work in the refineries. So there was no ability to work even though there was obviously a need for work there.

Well that infrastructure is slowly getting put in place and now we are kind of benefiting from our -- industry is benefiting from the very large rehabilitation work that needs to be done on those plants and refineries.

To be clear -- I'm sorry. Keep going.

I was going to just say I think in terms of -- it's not so much a seasonality, but I think just as a little blip in demand, I don't generally think of us as being a growth industry. In fact, I've spoken with many of you and certainly on these calls about our planning premise is a zero market growth business because the nature of our business is we're a necessary evil. And what we need for growth is we need more facilities and plants. And I don't see that happening frankly in any planning period or timeframe that we would be talking about.

Having said that, I think just incredible margins that are now -- that now exist and have for the last year to a couple of years, particularly in refining, are changing some of the maintenance habits to make them a little more I'm going to say more aggressive. Not in the sense of less safe or anything of that sort, but more aggressive in the sense that it's the economics dictate that more assertive, aggressive actions to keep plants up-time -- increase that up-time just even fractionally is economically a very attractive thing to do.

So I think for a while, we're going to see a little bit of an uptick in market. I don't think it's the next quarter or two, I think it is for a couple of years probably just as a guess on my part.

Thank you very much.

Mike Carney, Aperion Group.

Good morning, Phil and Ted. A number of questions. I will just do a couple and then we will move on. Do you have -- can you give the turnaround growth versus the on-stream growth in TMS?

No, we don't really have that broken out. We had growth in both places. I would just say directionally, the turnaround revenue growth was bigger. It was percentage wise higher than the on-stream services.

Okay. I guess last quarter was 50% turnaround growth year-over-year and I think on-stream was 19% growth or something. So it's going to be -- obviously that is lower this quarter, but it would be somewhat around the same split between on-stream and turnaround?

Directionally, I think it would be. I think -- obviously when we look at quarter-over-quarter growth rates, that is a function of both quarters, right? So the fact that the growth rate is down, I think reflects maybe more strength last year than the fact that we are slowing down in any way.

Right, the third quarter was a pretty good quarter last year.

I would just say that the demand was higher, proportionately higher than the second quarter. There is no -- the reason third quarter is kind of a lower performance quarter than second or fourth quarter extensively relates to the Christmas holidays that we have a couple of week period where we have expenses and not revenue. It's just the nature of the holidays. So that is really what drives the lower revenues and profits in the third quarter versus second and fourth.

I will just tell you that the activity levels are not down versus the second quarter. There is no -- so the notion that we are slowing down is not a perception that we have.

Would you have the gross margin breakout between TCM and TMS?

Yes, Mike, it's about -- hang on a second, let me just put my hand on that. It's about 29% for TCM for the quarter and 38% or 39% for TMS.

Okay.

It will be in the Q.

It will be in the Q when we release --

So basically TMS margins are staying up there. TCM is down. I guess when I look at the gross margins and you have the robust demand, but they are not improving really, I'm trying to figure out what the function is there. Obviously you mentioned that some underperforming branches, but that is not necessarily any change from prior quarters. So it just seems like there should be either greater pricing, obviously if you have more demand than you can execute on or is it the fact that labor costs are rising?

Well, I accept your view that we have improvement opportunity, as I mentioned earlier and a 30% kind of gross margin -- TCM margin, as we've talked in previous discussions, the gross margins of TCM generally will be lower than TMS due to the higher labor intensity --.

Right.

-- that are provided. Although as you well point out, that 29% or 30%, which I think is where we are today, is not our target end point. We expect to be several points higher than that. And that is just an opportunity. I do believe with our very robust environment, we do have pressure on labor rates -- excuse me -- pressure on labor costs. So we are adjusting wages kind of in response to market demand. But we are also -- are in an environment where it is quite possible to pass on those increased costs in the way of pricing increases. So we work very hard to do that.

Right.

I can't speak to -- are we a little out of sync that caused maybe a little less performance than we would all like in this quarter? I can't speak to that because it is clearly the sum of a very large number of individual jobs and arrangements. But I can assure you that we are very cognizant of the need to kind of adjust our rates with our customers. And as our they by the way. And they are very receptive and understanding of the industry circumstances so that we are adjusting rates rapidly to reflect our increased costs.

Right. So I guess essentially last quarter and the second quarter, which was also robust demand, you were able to increase gross margin 100 basis point, a percent. Going forward, can you continue to get those margins back to kind of where they were previously or do you think there is some type of constraint?

I don't believe there is any constraint. I think we are actually -- we have not had big improvements in gross margin on either side. We've actually had some strengthening on the TMS side. We've not had big improvements on the TCM side, but nor have we had any declines. I point I would make though just generally about our business is that gross margin is not a particularly volumes sensitive area. So you are kind of -- one aspect to your question here is that there's operating leverage in gross margin. I won't say there is none, but there is not much.

What our whole thrust of operating leverage is really below the gross margin line. The reason is is because all the costs above the line tend to be direct personnel expense. And we are fully utilizing our personnel. So as we have more revenue or more activity, we are having -- we have more personnel and more directly more personnel cost. So it shouldn't be expected that gross margin is going to track with volume as being an essentially a fixed cost.

Well, there is a bench workforce though isn't there? I mean in times when you have robust demand, everyone is going to be working in times where there is less demand. There is going to be a workforce that is on the bench there.

It's variously different because what will happen is in the slower periods, there is possibly some idle time, but it is very minor. What happens is we go from a slower period to a more robust period you see over time. So the utilization of our -- in terms of the hours per person above kind of standard wages go up. That is not idle time we've paid for, but more labor expense related to additional activity. Plus particularly with the big project work, we're supplementing our permanent staff with contract employees who again will not be -- only are paid when we work.

So there is not a -- when you look at that kind of gross margin, there is just not a lot of idle time or cost that we are absorbing anytime during the year.

Okay. Do you think the business can get to 35% gross margins, which is kind of --?

Total company?

Right.

I think we are pretty close to that right now.

Year to date, we are at 34%.

Right.

-- on a composite basis.

I guess before Cooperheat, there was -- the TMS business was 39% to 41% and --.

We would expect -- if I gave you my kind of long-term expectations, we expect the TMS business to be 38 to 40. We expect TCM to continue to improve to probably the 32 to 35 range, 33 to 35. And a composite of the two is 36 to 37. That is where we're driving toward and I think when we -- if you look on our website and look at our economic model and the operating leverage, I believe that is what is in there as our baseline is 36, 37.

In terms of mentioning that you expect continued robust demand for a few more quarters. I mean is it -- are you thinking that it would -- you're going to have growth -- growth this quarter was I believe 21%. That growth pretty much kind of moves towards the long-term normalized at 10%?

That is a precision I'm not sure I can respond to, Mike. I just -- I don't know exactly -- we're in kind of new territory with our environment that our customers are experiencing. I think we are just seeing -- as I said, I think we are seeing the benefit of kind of modified maintenance practices that are a little more assertive and aggressive that creates a little more demand. But frankly whether we have those or not given just the other fundamentals of our business, I guess we remain pretty confident that we're going to grow our revenue and top line pretty much the way we've done it. We've kind of mentioned those comments that we -- our expectation is 10% plus or double digit every year.

If you look back historically, I think probably the last six, seven years, we've averaged 13%, 14% a year and we have done that in good times and bad or what would be perceived as kind of high margin and low margin environments for our customers. I don't want to make too much of the blip in the market. It's just I think a little bit of extra wind at our back right now. Like I said, I don't see it changing a lot, at least for the next several quarters.

And then one more question on the -- I would have -- I guess on the SG&A, has there been a fall-off in the costs related to SOX or has that pretty much continued to be at the same level as what you kind of -- as it crept up I guess last year?

I think the -- I'll start and then turn it over to Ted here. I think the fall-off in SG&A corporate costs you see is not so much with SOX, but it's just the completion of some of the integration activities that we had in last year's third quarter that we didn't have this year. SOX is going to be a big expense for us. It doesn't really fall. It falls principally in the fourth and first quarters. I think our aspirations are that it will be less than last year. We're working hard to make it that way. Ted, why don't you talk to that.

Again, it is principally loaded toward the fourth quarter and first quarter. A year ago, we spent a combined $2 million on SOX-related activities and audit-related activities. We are very focused on reducing our internal cost, which a year ago were about $1 million of that total by about 50% in year two. We can't control other than just trying to do the best job we could do internally what our external costs are. So I don't have a -- I don't know if that's going to be substantially different than it was a year ago. As we continue to improve our processes, that will come down.

So last year, you had SG&A expenses of 17.1 million. I assume you'd be working hard to get those lower than that this year?

I'm not sure -- I don't know that I looked at it in that way, Mike. With our business significantly stronger, I think year-to-date -- well, first of all, when you look at year-to-date numbers or full-year numbers, you don't have a full-year effect of the Cooperheat acquisition in the FY '05 numbers. It was an August acquisition. So you have got to be careful with that. Also we do have increasing costs in SG&A as a result of businesses, which is probably 25% above last year.

Oh, I'm sorry. I was talking about the fourth quarter.

We haven't really given any guidance or reflection on details of components.

The way I would look at it though -- I think if you just look at the -- on a third-quarter basis, which is an apples-to-apples comparison to a year ago.

So you are up 1 million or 1.1 million I guess.

Which is 7%. When you look at that relative to the business growth and the operating leverage that we've described, operating leverage in the third quarter was 22% at the segment operating income level.

Right.

Which is in line with what our expectations were.

Okay. Thanks a lot. I appreciate it.

Byron Pope, Pickering Energy.

Good morning, guys. Given the high labor intensity of your businesses, I'm just curious as to -- it seems as though your ability to grow is somewhat joined at the hip with your ability to add headcount on the service technician side. So I am just curious if you could speak to what those targets are in terms of headcount growth over the next call it 6 to 12 months or so and particularly in regions like the Texas, Louisiana Gulf Coast where you may be having to compete for human capital with some of the other areas within the energy industry these days?

Great question and you are right. Driving our -- in order to cover our volume or demand that we can create for our services, we need to add technician resources to cover that. In our view, we are really effectively fully utilized right now and we have roughly 2000 technicians. So when we talk about 10% growth or 10% to 15% growth, you are talking about net adds of 200 to 250 technicians a year.

Where are they all coming from? In a less robust environment, frankly, and by the way, just as a point of reference, we were 400 technicians in 1998 that we grew to 1200 technicians and then we added 800 technicians with an acquisition. So we have added -- we organically added 800 technicians over the last five, six years, as well as -- then added another 800 via acquisition. So this is not a new issue for us, but it is fundamental to kind of sustaining that growth is to have the capacity to do so.

In softer environments where there is clearly no growth in terms of service demand, it is easier because as we are growing, somebody is shrinking and it pulls toward us. In today's environment, it's tougher, as you point out, because we have people competing for resources. What we are doing is aggressively looking at -- several things we do and one of the basics are be a great company, be a great place to work and be the employer of choice, if you will, for technicians so we keep drawing people who want to work for Team because of attractive compensation, attractive benefits and frankly a very attractive business outlook. So that is kind of fundamental to our approach.

We are trying to -- although more rapidly, we develop and accelerate some other dimensions of personnel development is we have launched several programs here and we're actually piloting them in the Houston area where we are kind of going to the trade schools and actually the trade programs of the high schools to attract more entry-level personnel into our industry because our belief is that one of the best ways we can increase our capacity is to accelerate the internal development of our people, split crews and then bring in I'm going to say entry-level people to kind of the helper positions underneath our technicians.

So we have -- we've got a number of initiatives underway to drive that. But I think your basic question is right on. It is a critical determinant of our long-term success is our ability to continue to attract and develop technician resources.

That is helpful, thanks. Ted, just one question for you. Obviously Team is throwing off free cash and just wondering how you all think about, on the order of magnitude, of potential debt paydown over the next few quarters? I don't know if you think about it in terms of a net debt to cap. How do you think about how much debt Team might pay down over the next few quarters?

Currently, we think of cash flow being equivalent to earnings. DD&A and CapEx has generally -- is generally aligned, It's about the same. We expect, as I said, to get some significant reductions in Accounts Receivable. That is a longer process than just a quarter because we are implementing some new business processes around our contract to cash cycle, if you will. So I would think of it in terms of over time earnings equal cash flow. We will use cash flow to pay down debt in the absence of more strategic uses for it.

Great. Thanks, guys. Appreciate it.

Arnie Ursaner, CJS Securities.

Could you briefly comment on stock option expense either -- in the upcoming year, please?

We will be implementing 123R -- FASB 123R in the first quarter of 2007. We are in the process of evaluating exactly what that will mean and we don't have an answer for that yet. Relative to looking at kind of a -- the pro forma disclosure of --

123

Under the 123, which is not 123R for those of you who are familiar with the accounting treatments. Would have -- for the quarter, would have reduced our earnings per share by $0.02 and for the year to date period through nine months would have reduced it by $0.05 had we been expensing options under 123. So that gives you at least a directional answer. But that is not equivalent to implementing expensing options under 123R. There are a variety of complexities and we still haven't locked in on all of those just yet.

Got it. To follow up on the various margin-related questions you've been getting, I just want to clarify something. Your customers, in some cases, have longer-term contracts with you. Yet it sounds like your labor costs are going up. To be as specific as I can, are you getting relief from customers where you have existing longer-term contracts?

Yes. It just is a -- yes is the answer. Those contracts tend to be enabling mechanisms and when they are in a changing environment that changes the need for that, we wouldn't see them every week of course, but when there is some -- this is particularly a Gulf Coast issue right now is that with the environment in the Houston area and particularly in Louisiana, it is absolutely necessary for us to make adjustments in our wages and customers understand that and understand it is in our mutual interest for us to sustain things. We have it that we have to make alternative arrangements or adjustments to reflect that.

So you obliquely referred to the difficulty in putting together complex mergers within the industry and one of your key competitors is in the process of doing that. Can you comment on what impact, if any, you've seen in the quarter that just ended or in the current business environment from your competitor? How are they impacting the market?

I don't see any big change. And frankly we're focusing on our customers and our operation. We got plenty to do there. They did -- I think what we are aware of is what they announced in January. And so they are in the process of kind of pulling together that. But in terms of any kind of major change in the market, I think it is premature to see anything and we haven't seen anything that is really different.

Okay, thank you.

Mike Carney, Aperion Group.

Ted, did you mention that for the nine months CapEx was 5.8 million? Is that right?

About 5.5 million.

5.5. Okay. So you actually -- free cash flow was close to flat then I guess?

Yes. We generated about $2 million of cash flow from operations in the quarter.

Okay.

You guys (indiscernible) talking about two different things here is that if you think about kind of a cash flow as being net income plus DD&A, minus CapEx, that is about flat. I think Mike to your comment that our cash flow -- as you look at GAAP, cash flow from operations, you are all also looking at change in working capital and our growth is increasing our AR. So that would not be a GAAP cash from operations.

Right. I guess I'm just trying to get at what point you're going to be able to pay down debt, which I assume is probably the number one cash flow --.

Expect us to pay down debt in this quarter?

Well, after -- I guess after your investing it in the business with CapEx then --.

But the point I think we made earlier is that our CapEx is basically in line with D&A, depreciation and amortization. So if you look at net income, net income is what is available for debt repayment. Although there is some consideration of working capital changes as well. We think we have more upside than not on that because of our opportunity in AR --

Absolutely.

-- although the continued growth of the business will require more AR even on attractive DSOs.

So in looking out into '07 fiscal year, then you would expect to generate cash and likely pay down debt?

Absolutely.

Okay. Thank you.

There appear to be no further questions, sir.

Great. Thank you, Lawrence. And I want to thank all of our participants this morning and listeners for the call and particularly your continuing interest in Team. Let me wrap up by summarizing a couple of key points. First, we are pleased with our performance and progress. While we continue to have improvement opportunities that we discussed earlier, the results posted in the quarter reflect the significant progress that we are making. And finally, we expect continued strong performance going forward. We are pleased with the positive momentum of the business. We look forward to visiting with you again in our fiscal year-end conference call in late July or early August. In the meantime, have a great day. Thanks again. Bye.

This concludes today's Team third-quarter earnings conference call. You may now disconnect your lines at this time.