TEAM, Inc. (NYSE: TISI) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. TEAM provides specialty industrial inspection, heat-treating, mechanical maintenance and repair services through its Inspection and Heat Treating (IHT) and Mechanical Services (MS) segments. Comparisons below are against 2022 continuing operations; Quest Integrity was sold in November 2022 and is reported as discontinued operations.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $239.5 million | $221.5 million | $441.8 million | $410.6 million |
| Gross margin | $60.9 million (25.4%) | $52.1 million (23.5%) | $107.9 million (24.4%) | $93.2 million (22.7%) |
| Operating income (loss) | $4.6 million | $(10.8) million | $(3.2) million | $(33.2) million |
| Net loss from continuing operations | $(15.8) million | $(28.2) million | $(40.5) million | $(66.5) million |
| Net loss per share from continuing operations | $(3.61) | $(6.53) | $(9.30) | $(16.45) |
| Interest expense, net | $16.7 million | $18.5 million | $33.4 million | $37.1 million |
- Revenue increased 8.1% in Q2 and 7.6% year to date. MS was the principal growth driver, with Q2 revenue up 14.3%; IHT Q2 revenue rose 2.3%. Foreign-exchange movements reduced revenue by $1.8 million in Q2 and $4.9 million year to date.
- Operating results improved substantially, reflecting higher activity and margins in both segments and lower corporate costs, including reduced professional fees and severance. The company reported non-GAAP adjusted EBITDA of $17.4 million for Q2 and $21.7 million year to date, versus $5.7 million and negative $0.7 million, respectively, in 2022.
- Operating cash flow was negative $23.6 million for the first six months, compared with negative $53.4 million in 2022. Capital expenditures were $5.1 million; company-defined free cash flow was negative $28.7 million. Cash and cash equivalents fell to $30.4 million from $58.1 million at year-end 2022.
- At June 30, total debt and finance lease obligations were $310.9 million, including $4.5 million classified as current. Gross debt was $285.9 million at year-end 2022. The company reported $25.0 million of unrestricted cash, $5.4 million of restricted cash, and approximately $36.8 million of borrowing availability, before the subsequent term-loan draw described below.
Material changes, financing and outlook
- On June 16, TEAM refinanced and amended debt facilities. It repaid the $35.5 million APSC term loan using a new $27.4 million real-estate/equipment loan and ABL borrowings, recording a $1.6 million debt-extinguishment loss. The ABL maturity was extended to August 11, 2025, and covenant terms were amended.
- The former subordinated loan was converted to a secured “Uptiered Loan,” pari passu with a new incremental term-loan facility. These loans carry significant interest costs: the incremental term loan bears 12% cash interest; the Uptiered Loan bears 12% PIK interest through 2023, with a cash/PIK mix thereafter subject to leverage and liquidity conditions. ABL interest rates were also high at June 30: 9.92% on revolving loans and 15.27% on the delayed-draw term loan.
- On July 31, 2023, TEAM drew $42.5 million under the incremental term-loan commitment and used the proceeds to repay the approximately $41.2 million of convertible notes that matured August 1. As of August 8, the company reported $21.3 million of cash excluding restricted cash and approximately $33.4 million of undrawn credit availability, or $54.7 million of total liquidity.
- Management said the June financing and covenant amendments removed the substantial doubt about the company’s ability to continue as a going concern previously disclosed. TEAM stated it was covenant-compliant at June 30 and believed resources would fund operations and obligations for at least one year after the statements’ issuance. It cautioned that future covenant compliance depends on operating performance and lenders may not grant further relief.
- No specific revenue or earnings guidance is provided. Management cited continuing cost inflation in materials, transportation and labor, and risks from economic volatility, project delays, customer payment timing, seasonality and high leverage. TEAM regained compliance with NYSE quantitative listing standards in May 2023 but noted future compliance is not assured.
Risks, contingencies and unusual items
- The Kelli Most wrongful-death litigation remains on appeal. The jury verdict was $222 million; TEAM estimated possible outcomes of $13 million to approximately $51 million and recorded aggregate legal accruals of about $41.2 million, with approximately $2.2 million not covered by insurance. The company believes further claims will be funded by insurance, subject to final resolution.
- Q2 and year-to-date results include unusual costs, including debt-related and legal/professional fees, severance and the debt-extinguishment loss. Management’s non-GAAP measures exclude selected items and should be considered alongside GAAP results.
- TEAM reported no material changes to its previously disclosed risk factors and no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether operating cash flow and working capital improve enough to support operations without additional borrowing.
- Available borrowing capacity, borrowing-base conditions, covenant headroom and the substantial interest and PIK burden under the amended debt structure.
- Progress in converting stronger segment activity and margins into sustained positive GAAP operating income and cash generation.
- Final outcome and insurance coverage of the Most litigation, including any change to the recorded accrual or receivable.
- Whether the company maintains NYSE listing compliance and meets its stated liquidity and debt-covenant expectations.