TEAM, Inc. (NYSE: TISI) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are USD millions except per-share data. TEAM provides inspection, mechanical maintenance, heat-treating, and asset-integrity services through IHT, Mechanical Services (MS), and Quest Integrity.
Financial performance and liquidity
- Q2 revenue: $189.3, down 40.1% from $315.8 a year earlier. Revenue declined across IHT ($80.5, down 42.0%), MS ($92.8, down 35.9%), and Quest Integrity ($16.0, down 50.4%).
- Q2 profitability: Gross profit was $57.4, with a 30.3% gross margin versus 30.0% in Q2 2019. Operating loss was $4.4 versus operating income of $13.0; net loss was $13.5 versus net income of $6.1. Diluted loss per share was $0.44.
- First-half results: Revenue was $426.1, down 27.2%. Gross margin was 27.0% versus 27.4%. Operating loss was $217.3 and net loss was $213.3, including a $191.8 goodwill impairment charge. Diluted loss per share was $6.97.
- Cash flow: First-half operating cash flow was $27.2, versus $5.6 in 2019; capital expenditures were $12.5 versus $14.4. Company-defined free cash flow was $14.8 versus negative $8.8. Cash ended at $15.6, up $3.4 from year-end.
- Debt and liquidity: Long-term debt and finance lease obligations totaled $326.4, including $116.1 under the credit facility and $205.1 net carrying value for convertible notes ($230.0 principal). TEAM reported approximately $53 of available credit-facility borrowing capacity. Current assets were $281.7 and current liabilities $133.5.
- Balance sheet: Total assets fell to $739.2 from $985.2 at year-end, principally reflecting the goodwill impairment; equity declined to $218.9 from $436.7.
Material changes and unusual items
- COVID-19 disruption, oil-market volatility, customer spending cuts, facility closures, and project postponements drove lower activity and revenue across all three segments. Management said demand and pricing were pressured, with the ultimate duration and impact uncertain.
- TEAM recorded a $191.8 non-cash goodwill impairment in IHT in Q1 after its forecasts and market capitalization deteriorated. No impairment was recorded in Q2. The impairment assessment relied on forecasts and valuation assumptions; further charges could arise if results or assumptions change.
- Q2 restructuring and other related charges were $2.9, primarily severance. First-half charges were $3.0; additional OneTEAM program costs were expected through 2020. TEAM reported $4.1 of Q2 expenses it classified as not indicative of core operations, including severance and legal costs.
- First-half tax benefit was $18.8, including tax effects related to the impairment and a $7.3 CARES Act benefit for net operating loss carrybacks; a $22.4 increase in valuation allowance partly offset benefits.
Outlook, financing and risks
- Management expects results may remain adversely affected by the pandemic and oil-and-gas conditions. It anticipated gradual recovery in refining utilization in the second half of 2020, while noting refined-product levels remained below 2019 and recovery timing was uncertain. No specific revenue or earnings guidance was provided.
- The OneTEAM cost program was expected to deliver $35–$45 of annual run-rate efficiencies, with an additional $10–$15 expected by year-end from expanded measures. Reported savings were approximately $13.7 in Q2 and $20.3 year to date; achievement is not assured. Cost actions included reduced compensation, furloughs, headcount reductions, and lower capital spending.
- A June 2020 credit-facility amendment extended maturity to January 15, 2022, reduced revolver capacity from $225 to $200, tightened or revised financial covenants, and limited cash dividends. TEAM was compliant at June 30, 2020, with a senior secured leverage ratio of 2.51 to 1. Management warned future compliance depends on operating performance and market conditions; failure could permit lenders to restrict borrowing or accelerate debt.
- Disclosure controls were reported ineffective due to an outstanding material weakness in internal control over financial reporting. Management said remediation work was underway, but the weakness would remain until controls operated effectively for a sufficient period and were tested.
- Other risks include customer nonpayment, foreign-currency exposure, variable-rate facility debt, litigation, and continued weakness in oil-and-gas demand. Standby letters of credit totaled $17.7.
Investor verification priorities
- Track segment revenue, activity, and margins for evidence of stabilization or further deterioration.
- Verify operating cash generation, receivable collections, available revolver capacity, and covenant compliance against the amended facility requirements.
- Assess whether OneTEAM savings are realized and whether severance, legal, or other restructuring costs continue.
- Review future goodwill and long-lived-asset impairment tests, including the assumptions underlying IHT valuations.
- Monitor remediation and testing of the material weakness and any updates to the company’s COVID-19, oil-market, and liquidity outlook.