Philip J. Hawk - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee Ted W. Owen - Chief Financial officer, Principal Accounting officer, Executive Vice President and Treasurer

Arnold Ursaner - CJS Securities, Inc. Matt Duncan - Stephens Inc., Research Division Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division Adam R. Thalhimer - BB&T Capital Markets, Research Division

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Team Inc. Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Phil Hawk, Chairman and CEO. Please proceed. Philip J. Hawk: Thank you, and good morning. It's my pleasure to welcome you to the Team web conference call. 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 Executive 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 29, 2012. 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; 8-K, 10-Q and 10-K filings to the SEC; as well as our annual report. Ted will begin with a review of the financial results. I will then follow Ted with a few remarks and observations about our performance and prospects. Following these remarks, we'll take questions from our listeners. With that, Ted, let me turn it over to you. Ted W. Owen: Thank you, Phil. First, as usual, I want to remind everyone that any forward-looking information that we discuss today is being provided in accordance with the provisions of the Private Securities and Litigation Reform Act of 1995. We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the company's SEC filings. Accordingly, there can be no assurance that the forward-looking information discussed today will occur or that our objectives will be achieved. We assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the company, whether as a result of new information, future events or otherwise. Now for the financial results. We are very pleased to report revenues for the quarter of $136.5 million, which were up 25% from the third quarter of 2011. We're disappointed, however, with what we did with that revenue growth. Net income available to shareholders was $2 million, and earnings were $0.10 per diluted share versus adjusted net income in last year's quarter of $1.7 million or $0.08 per share. Note that in last year's quarter, there was a nonrecurring tax credit which is excluded from the aforementioned comparison. Our overall gross margin declined by 1.4 percentage points in the quarter because of increased indirect cost. And while SG&A declined as a percentage of revenues, we experienced some unusually high costs in this category that impacted our earnings by $0.07 per share. Phil will elaborate more fully on those items in his remarks. Shifting now to year-to-date results. Total revenues for the 9 months of the fiscal year were nearly $435.9 million, up nearly $90 million or 26% from the prior year. Adjusted EBIT or operating income for the year was $33.1 million, an increase of 35%. Adjusted year-to-date earnings per share was $0.95 versus $0.72 last year. We remain on track to have another record year of both revenues and earnings. Now with respect to some cash flow-related items. Capital expenditures for the quarter were $5 million. Depreciation and amortization was $4.6 million, and noncash compensation expense was $900,000. Additionally, as I reported in the last call, we spent $17 million in late December to acquire a mechanical service business on the West Coast. Adjusted EBITDA was $8.9 million for the quarter and was $73 million on a trailing 12-month basis. At February 29, our total debt was $88 million, cash was $27 million, and therefore, net debt was $61 million. Our net debt to trailing 12-month EBITDA was less than 1:1 even after consideration of the additional debt added for the West Coast acquisition. And with that, Phil, I will turn it back to you. Philip J. Hawk: Thanks, Ted. Now I'd like to provide some additional perspectives on our business, recent performance and our outlook. We continue to be pleased with the broad-based growth of our business, both in the third quarter and year-to-date. As Ted indicated, total revenue growth in the quarter was nearly $28 million, a 25% increase. For the year-to-date, Team's total revenue growth is $89 million, a 26% growth rate. We continue to grow on virtually every segment of our business. In each of our major geographic markets, the U.S., Canada and Europe, Team revenues grew by more than 25% in the quarter. For the year-to-date, Team revenue growth -- Team's revenue growth in each of these markets exceeded 20%. Looking at performance by division, TMS revenues grew 22% in the quarter and 24% year-to-date. TCM division revenues grew 28% in the quarter and 27% year-to-date. Looking at revenue growth by service line, nearly all are growing. We are experiencing the highest growth rates in our inspection services and turnaround-related services. I am pleased with the continuation of our strong business growth. As we will discuss in a moment, we believe we are well positioned for continued attractive growth, both in the fourth quarter as well as in coming years. Now let me shift the discussion to third quarter earnings performance. As Ted indicated, we earned $0.10 per share during the quarter, about 21% above last year's adjusted results. As we have discussed in previous third quarter calls, this is our most difficult quarter due to the holiday season and startup activities related to spring turnarounds. However, given the business growth in the quarter and overall level of activity, our actual results were well below that we expected to achieve with -- that we expected to achieve during the quarter. Based on our business model and historical operating leverage with our business growth in the quarter, we would've expected EBIT growth of approximately $4 million and resulting earnings per share of about $0.20 per share. I will walk through an analysis of our performance in the quarter. Overall gross margin as a percentage of revenue was about 1.4 percentage points below the corresponding prior-year quarter. This entire decline in gross margin occurred in indirect costs. Our job profit margins earned in the quarter were virtually identical to both the prior year third quarter levels and the immediately preceding second quarter levels. Stable job margins are consistent with my belief that we continue to maintain pricing in line with our direct cost levels and continue to execute well in our service activities. Our unfavorable indirect cost performance was a result of increased spending, as well as reduced productivity in both our field activities and in some of our technical and operational support groups. Some of the increased spending and investment in training reflected startup costs ahead of significant turnaround projects that started in the quarter but are continuing into the fourth quarter. The integration of our new acquisitions increased training and transition costs during the quarter as well. In addition, we increased training and -- in addition, we increased the training and -- in addition, we experienced decreased productivity and additional spending related to our manufacturing, equipment centers and technical support activities, resulting in an unfavorable variance to the prior year of about $1 million in these groups. Despite the increased costs in the quarter, we do not see any fundamental changes in our markets, cost structure or business model that alters our outlook or performance expectations. Looking ahead, we expect our overall gross margins to return to historical levels or near historical levels both in the coming quarter and beyond. Now let's shift to G&A cost. While our SG&A expenses as a percentage of revenue declined by little more than one percentage point, we incurred approximately $2.5 million in one-off expenses in the quarter that significantly impacted our results. The major items were as follows. We incurred $1.2 million in increased medical cost accruals in the quarter. We accrue medical costs based on our actuarial expectation of claims. Due to an unusual number of major claims that hit in the quarter, our actual costs exceeded our accruals, thus requiring the additional expense. We incurred about $600,000 in outside legal and professional service expenses related to both the 2 acquisitions completed during the quarter, as well as significant efforts on unsuccessful transaction activities. Again, while some expense in this area is not unusual, the level of activity during the quarter was quite high. And finally, we incurred about $700,000 in one-off costs related to the integration of our 2 new acquisitions. These included onboarding costs related to new employees, transition expenses related to the conversion to Team systems and initial intangible asset amortization. These increased costs impacted both indirect and SG&A categories. The net impact of the costs related to all 3 of these one-off items is about $0.07 per share. In summary, while we are tightening up and increasing our focus in a couple of areas, we remain confident in our basic cost and margin structure. We have some fine-tuning opportunities but remain well positioned. Let's now look ahead to the fourth quarter. Based on the continued strong activity levels expected during the quarter, we now estimate that total revenues for the year will be between $605 million and $615 million. After a thorough review of our third quarter performance and based on current and expected fourth quarter activity levels, we reiterate our guidance that full year adjusted earnings will be in the range of $1.55 to $1.70 per fully diluted share. Let me wrap up with a couple of final comments before we take your questions. We look forward to record results for this fiscal year and remain confident about our prospects longer term. The basic market and business fundamentals for our company remain attractive. That concludes my remarks. Let's now open it up for your questions. Can I send it back to you, Deanna?

[Operator Instructions] The first question will come from the line of Arnie Ursaner, CJS Securities. Arnold Ursaner - CJS Securities, Inc.: I know you can't use the term onetime. But when you think about these various expenses, they certainly appear to be onetime. How much of those -- again, it sounded like you expect to return to normal historic margins in Q4 and for next year. So which of these expenses would not be viewed as onetime if -- in your thinking? Philip J. Hawk: Well, I think the -- let's just talk about the 3 of them. The easier ones are M&A, the professional fees related to our merger and acquisition activities. Those will be onetime unless we pursue other transactions, so -- which we will do on an opportunistic basis. But they're not related to the kind of core or, I guess, the base business that we already have in-house, if you will. The same goes for the transition expenses related to our 2 acquisitions. We will continue to have amortization of intangibles associated with those acquisitions. But frankly, the -- to buy -- because of the seasonally weak periods to buy a -- buy businesses in the late December, you get virtually no benefit from it for the first couple of months. So as we now get into the more active season, we will certainly expect those businesses to be positive contributors net of all those expenses -- ongoing expenses. Medical, frankly, is the trickier one. If our accrual rates and historical levels are correct, as we go forward, we will not see those special charges. But we are self-insured with some stop-loss insurance on top of that. So to the extent that we have high expenses though, it's possible that we could have medical charges again in another future quarter. We don't predict that. Our forecast isn't based on that, but it's -- I’m just trying to give you a little color on that. Arnold Ursaner - CJS Securities, Inc.: Okay. My final question is, as you are in the spring turnaround season, can you give us a sense of the intensity? We're hearing some people scrambling to get enough manpower just to handle the work that's out there. How are you positioned, and how -- what can you say about utilization and pricing in the current environment? Philip J. Hawk: We're very, very busy. So we would concur that this -- at least for our company, that we see it as a -- we have a very strong or positive view about the activity levels for the whole quarter. I don't know that, that would affect pricing in the immediate term. But as I said in my remarks about margins, that kind of -- it's a difficult -- it's always a difficult pricing environment because we have sophisticated customers that are very aggressive about pricing. But we think we're holding our own and maintaining margins and expect to continue to do so.

[Operator Instructions] The next question will come from the line of Matt Duncan, Stephens Inc. Matt Duncan - Stephens Inc., Research Division: So the first question I've got is around just kind of honing on the gross margin a little bit here. On the indirect, the incidentals that drove that year-over-year decline, is there any way to single out how much staffing up for the turnaround -- for the strong turnaround activity hurt your gross margin in that February quarter? Philip J. Hawk: We -- not really is the short answer, Matt. It's just very, very difficult. What -- you see the anecdotal evidence in increased training activities and you -- what you have is kind of mobilization costs associated -- particularly when we're bringing in moving crews into an area for a particular turnaround. But to try to add all those up or say that, that training is just do a turnaround versus not this, it's difficult. So we really haven't tried to sort that out. Matt Duncan - Stephens Inc., Research Division: Okay. And then on the guidance, the $0.07 in unusual items that you guys had in the quarter. Is the guidance adjusted for those? Or is it based off the $0.10 actual for the February quarter? Philip J. Hawk: It is based on the $0.10 actual. Matt Duncan - Stephens Inc., Research Division: Okay, that's helpful. On the recent acquisitions, Ted, do you know how much those added to sales and earnings, if any, in the quarter? Ted W. Owen: Yes. It was -- total revenues associated with the acquisitions were about $2 million in the quarter. But there would be no -- because of the startup costs, it was a negative -- a modest negative effect on earnings. Matt Duncan - Stephens Inc., Research Division: Okay. And then do you know the split by any chance, Ted, between TCM and TMS on those acquired revenues? Ted W. Owen: Order of magnitude, about $1.5 million TMS and $0.5 million TCM. Matt Duncan - Stephens Inc., Research Division: All right, very helpful. And then the last thing I've got is on the inspection business. You called that out as being one of your faster-growing service lines. How much of that do you attribute to Quest? I know that's been a pretty successful acquisition for you guys. Can you talk a little bit more about, now that you've owned it for, I guess, 15, 16 months, how that company is performing relative to the expectations you had when you bought it? Philip J. Hawk: Yes. The -- just kind of the growth rates, the total growth rate, I think, for the inspection-related activities is kind of around 30%, 31%. I think the organic growth rate's 23% or 24%, so the difference would be Quest, the impact of the -- the full year effect of Quest in those numbers. The -- we're pleased with Quest. It's off to a good start. They're just continuing to expand their in-line inspection capability, kind of just released their new tool for 16 degree pipe -- or 16-inch diameter pipeline, so they're continuing to extend their service capabilities in that area. We're continuing to work well on a number of kind of integrated service opportunities with regard to some of the target markets we're trying to build together. It's still early, but we're very pleased. The business is growing, and we continue to have high expectations. Matt Duncan - Stephens Inc., Research Division: Phil, how much revenue are you now getting on an annual basis from Quest? Ted W. Owen: Annually, Matt, it's -- we're probably a little north of $30 million of revenue from Quest. Matt Duncan - Stephens Inc., Research Division: So that's up about 50% from when you bought it, right? Ted W. Owen: It was probably about $20 million when we bought it. So yes, that'd be about 50% increase.

The next question comes from the line of Matt Tucker, KeyBanc. Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division: Hoping you could give us a little sense with regard to the guidance, the kind of implied guidance for the fourth quarter. $0.15 range seems a bit wide. Could you talk a little bit about the variables or uncertainties that could drive you towards the upper or lower end of that range? Philip J. Hawk: Sure. It's really -- our experience has just proven to us, Matt, that we're not smart enough to tighten the range. And the things that impact that, one, will be the timing cutoffs of individual jobs and projects that can swing revenues significantly kind of on the margin when you -- again, because we have a $10 million revenue range. And it's just hard to see out precisely where things are going to be, particularly for -- as we sit here today in the month of May, we kind of obviously have March done, and we see where we are in the next few weeks, but it's just hard to know with precision on kind of overall activity level. It's going to be good, but small swings -- relatively small swings can have a big impact on that. Mix effect, timing of expenses, some of the things that -- like an accrual adjustment or things like that can affect expenses, margins, et cetera. So when you -- when we just look back over the years, we've -- I guess, have a renewed, I guess, conservatism just about our ability to be very precise on that, and -- hence, we -- the wider range. Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division: Got it. And then with respect to the ongoing spring turnaround season. Last year, in the fourth quarter, you saw revenues grow 29% over the prior year. You saw the strongest quarterly revenues that I believe the company's ever generated even to today. So could you just kind of compare the activity you're seeing this year versus last year? And can we expect to see you continue to grow the top line in this kind of -- at this 20% type rate? Or should we view that comp as being a little tougher than you're seeing year-to-date? Philip J. Hawk: I think it's -- I think you correctly identified it. I think the implied revenue range for the fourth quarter is $170 million to $180 million, which would be the biggest quarter ever for Team, but that is not the same growth rate quarter-to-quarter as we've had year-to-date for exactly the reason you mentioned, that we have a much tougher comp this year, for the fourth quarter, than we had in the prior quarters. Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division: And just one more follow-up, if I could. Over the past 5 years, if you compare the second quarter to the fourth quarter, your 2 strongest quarters where you see turnaround activity, the gross margin in the fourth quarter have been lower than the second quarter regardless of whether the revenues were stronger. Is there something about the seasonality in the business that drives that? Or is it more coincidental? Should we expect that kind of seasonality to recur again this year? Ted W. Owen: Matt, one of the things that would -- that might account for that is simply the cost structure in the first half of a calendar year is considerably higher than in the second half of a calendar year because of the resetting of benefits, FICA, FUTA, SUTA and things like that. So that would really be the only thing that would be -- that might account for that difference.

[Operator Instructions] The next question comes from the line of Adam Thalhimer, BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: The unsuccessful acquisition that you talked about, was that just one deal? Or was that multiple deals, Phil? Philip J. Hawk: We don't talk about the ones we didn't get, Adam. We are -- we continue to look at things. We have lots of reasons not to talk about that, including legal reasons, frankly, in terms of confidentiality agreements. So it was a -- we kind of looked at several things, but the -- we had a significant one, a significant single effort that was in there. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And then how does that make you feel about future M&A activity? What are the other opportunities out there right now? Philip J. Hawk: I think there's lots of opportunities. Again, the key for us, hopefully, that we'll continue to have the patience and perspective that we want to just add businesses and companies that can accelerate our growth and build on our outstanding base that we have. So that's kind of how we look at things, is we don't have to do any acquisitions. We continue to have very attractive organic growth opportunities. But having said that, if we can strengthen our position, kind to add to our capabilities or accelerate our growth either in new complementary service lines or new geographic areas where we've -- maybe have under service -- underserved or no service and presence, we're interested in those kinds of opportunities. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And talk about the health of your refining customers. I mean, when we look beyond the spring turnaround season, what does the demand outlook look like to you? Philip J. Hawk: I'm going to just answer the question generally. We’re not experts in all that. My own view is -- just looking at kind of industry stats, is that the general health of the -- our -- all of our major customer groups is pretty good right now. If I look at spring margins and crack spreads, by and large, they're pretty good for refining. That certainly would be consistent kind of with our -- the tone that we get from our customers on a plant-level basis. But it's not just refining. They're very good to outstanding in the petrochemical area. They're very good in the pipeline areas, lots of kind of new projects, kind of new drivers of activities in that area as well. So again, we have a generally positive view about the environment that we're working in and our -- and for our customers. You do point out, I think, correctly that if you want to talk about fuel demand in the U.S. compared to capacity, an interesting kind of observation is that last year was the first year in 30, I believe, that the U.S. was a net exporter of fuels. So what we're -- the -- if you will, the capacity of our refining network, it somewhat exceeds the domestic demand, but I don't see that. Just as these -- this industry begin exporting, I think that will be the adjustment that will come, is that the -- that's how supply and demand in a market gets equalized or balanced. Adam R. Thalhimer - BB&T Capital Markets, Research Division: That's a good thing or a bad thing? Philip J. Hawk: I think, on balance, I'd rather be short than long. If I were a planner, I mean, just because I think you'd have -- it would make this market less competitive, I guess, if you had -- if you were importing in. But like I said, when I look at the margins out there, I don't see anything that -- when I see the margins for our customers, I don't see anything that's alarming. And frankly, I have -- when you look at the size of the refining infrastructure and the base -- not talking about the little, simple refineries maybe in the rural areas. But if you look at the big and -- refining centers of the U.S., Gulf Coast, New Orleans, West Coast, I have a high degree of confidence that, that installed base is going to be here for a long, long time. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Good. And lastly, I just wanted to ask a kind of more granular question. Phil, you mentioned that these indirect costs that went into -- that affected gross margins, and I think some of that -- I think I heard this right, with reduced productivity in the fabrication side of the business, what -- kind of what drove that? Philip J. Hawk: We have support groups that support our field operations in engineering and manufacturing of componentry and products that are used in our services themselves, as well as technical support groups that support all of our service lines. And we charge -- there's a kind of internal P&L, if you will, for those groups charging services to the -- charging for services that are provided to our various field operations. That whole collection of activities was unfavorable relative to our prior-year third quarter by about $1 million. Some of it was kind of a mix and volume levels of particular service areas. But candidly -- and I don't want to also explain away everything by a startup here or there, that we just didn't execute as well as we could in the quarter, both in some of our support activities, but also in the field, that we're not here to explain why things are lower but to make things better. And I think as a management team, we feel like that's a fine-tuning opportunity that we're focused on. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Is some of that just the fact that, I mean, you haven't seen demand this strong? It's been a while. I'm not quite sure how long. Philip J. Hawk: Well, I think we're at record demand levels that our company's ever seen. And I think you can -- one can rationalize that I'm so busy adding people or focusing on this, I didn't pay as much attention to maybe some of the other elements of our kind of business model and levers. But that's not -- there's no joy in that one. That's our responsibility to kind of manage all aspects of our business, and we intend to do so.

[Operator Instructions] There are no more questions at this time. I'd like to turn the call back to Mr. Phil Hawk for closing remarks. Philip J. Hawk: Thank you, Deanna, and I want to thank all of you for your interest in Team and your participation today in the call. We look forward to updating you on our progress with our year-end conference call that will be in late July or early August. In the meantime, to all of you, have a very good day.

Ladies and gentlemen, thank you very much. This concludes today's presentation. Thank you for your participation. You may now disconnect, and have a great day.