TEAM, Inc. (NYSE: TISI) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. TEAM provides industrial inspection, engineering, repair and integrity services through IHT, Mechanical Services (MS) and Quest Integrity.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $302.4 million | $286.6 million | +5.5% |
| Gross margin | $75.5 million (25.0%) | $74.8 million (26.1%) | Margin down 1.1 percentage points |
| Operating loss | $14.1 million (4.7% of revenue) | $12.1 million (4.2%) | Loss widened $2.0 million |
| Net loss | $17.8 million | $9.5 million | Loss widened $8.3 million |
| Diluted loss per share | $0.60 | $0.32 | — |
| Operating cash flow | $2.2 million | $(2.6) million | Improved $4.7 million |
| Capital expenditures | $5.5 million | $10.7 million | Down $5.2 million |
Revenue growth reflected higher activity in IHT and MS, partly offset by lower Quest Integrity revenue. Excluding favorable foreign-exchange effects, revenue increased approximately $11.0 million. By segment, revenue was $151.4 million for IHT (+5.9%), $132.9 million for MS (+9.1%) and $18.1 million for Quest Integrity (−17.0%). Segment operating income was $6.7 million, $2.5 million and $1.1 million, respectively.
Cash and cash equivalents were $18.2 million at quarter-end, versus $26.6 million at December 31, 2017. Total assets were $1.04 billion; long-term debt was $382.9 million, comprising $176.1 million under the credit facility and $206.8 million carrying value of convertible debt. Receivables, net, were $289.0 million, including $92.4 million of unbilled receivables. The filing reports approximately $60 million of available credit-facility borrowing capacity.
Changes, unusual items and management commentary
- Interest expense rose to $7.6 million from $3.2 million, primarily due to higher debt and rates and the convertible notes’ effective interest cost. A $4.5 million noncash gain from revaluing the notes’ embedded derivative partly offset the loss; the gain was driven primarily by a decline in TEAM’s share price.
- Q1 2018 operating results included $5.1 million of items management identified as not indicative of core activity, including $4.3 million of corporate professional fees, of which $3.4 million related to the OneTEAM program. The prior-year quarter included $3.6 million of such items. Management said operating results, excluding these items, declined by approximately $0.5 million year over year.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The filing attributes $5.5 million of reported Q1 revenue and $4.3 million of improvement in reported net loss to the adoption; comparative 2017 results were not restated. Adoption increased opening retained earnings by $8.8 million before tax.
- Management cited improved market conditions and higher activity in IHT and MS, while Quest Integrity was affected by nonrecurring prior-year projects and projects deferred to later in 2018. No specific revenue or earnings guidance was provided.
- The 2017 cost-saving initiative was completed and is estimated to reduce annual operating expenses by about $30 million. OneTEAM entered deployment after its design phase; management estimated 2018 expenses would not exceed $30 million and expected benefits to be fully realized by 2020. It cautioned that savings are not assured.
Liquidity, debt and risks
- The March 2018 credit-facility amendment eliminated the total leverage covenant and revised other tests. At March 31, TEAM reported a senior secured leverage ratio of 3.27x against a 4.25x limit, and interest coverage of 2.80x against a 2.25x minimum. Limits tighten over time; TEAM warned future covenant compliance depends on operating performance and cannot be assured.
- The $300 million revolving facility matures in July 2020 and bears interest at LIBOR plus 3.75% at quarter-end. A 100-basis-point rate increase would raise annual interest expense and reduce operating cash flow by approximately $2 million, based on quarter-end borrowings.
- The $230 million principal amount of 5.00% convertible notes is due in 2023. Shareholder approval was to be sought at the May 17, 2018 annual meeting for potential share settlement above the NYSE threshold; until approval, conversions may require cash settlement in whole or in part. The filing reports a $16.0 million embedded derivative liability whose fair-value changes can make earnings volatile.
- Standby letters of credit totaled $22.5 million and reduce facility availability. Foreign-currency exposures, customer collection risk and the ability to maintain covenant compliance are relevant liquidity risks.
- TEAM disclosed 83 pending lawsuits related to a 2007 Con Edison steam-main rupture and a related indemnity claim. The company disputes the allegations, has not accrued amounts beyond its deductible and cannot estimate potential liability. Quest Integrity was appealing adverse summary judgments in three patent cases.
- The effective tax rate was negative 3.6%, versus 39.0% in Q1 2017. Valuation allowances and the 2017 Tax Act affected the rate; accounting for certain tax provisions remained under evaluation and adjustments could materially affect tax expense or benefit.
Important facts for investors to verify
- Whether operating cash generation improves enough to support OneTEAM spending, capital needs and debt service.
- Headroom against the tightening secured-leverage and interest-coverage covenants, including the effect of letters of credit and seasonal working capital.
- Progress and realized savings from OneTEAM, compared with its stated 2018 cost estimate and 2020 benefit timeline.
- Receivable quality, including the rising doubtful-account allowance and unbilled receivables, and the effect of ASC 606 on comparisons with prior periods.
- Outcome of the convertible-note shareholder vote and resulting cash, dilution and derivative-accounting implications.
- Developments in the Con Edison litigation, patent appeals, and unresolved 2017 Tax Act accounting estimates.