TEAM, Inc. (TISI) — Q3 2017 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2017. TEAM provides industrial inspection, engineering assessment, repair and remediation services through TeamQualspec, TeamFurmanite and Quest Integrity, operating in more than 20 countries. The company cited continued market softness and hurricane-related disruption. Gary G. Yesavage became interim CEO in September after Ted W. Owen stepped down.
Key financial results
Amounts are USD millions except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $285.1 | $289.6 | $883.9 | $876.9 |
| Gross margin | $68.9 (24.2%) | $76.7 (26.5%) | $228.4 (25.8%) | $241.4 (27.5%) |
| Operating income (loss) | $(94.1) | $(4.0) | $(112.9) | $2.6 |
| Net income (loss) | $(83.5) | $(4.2) | $(104.1) | $(3.3) |
| Diluted loss per share | $(2.80) | $(0.14) | $(3.49) | $(0.12) |
| Operating cash flow | Not provided separately | Not provided separately | $(10.2) | $60.6 |
| Capital expenditures | Not provided separately | Not provided separately | $26.5 | $35.9 |
- Revenue and segments: Q3 revenue fell 1.6%. TeamQualspec revenue declined 2.9%, TeamFurmanite 0.8%, while Quest Integrity grew 4.3%. For the first nine months, revenue increased 0.8%; Quest Integrity grew 20.9%, TeamQualspec 0.9%, and TeamFurmanite declined 1.8%.
- Operating performance: Q3 and nine-month results included a $75.2 million goodwill impairment charge: $54.1 million for TeamFurmanite and $21.1 million for TeamQualspec. Excluding impairment and other identified non-core items, management reported year-over-year operating income deterioration of $9.1 million in Q3 and $39.7 million for the nine-month period.
- Cash and liquidity: Cash was $26.7 million at September 30, 2017, down from $46.2 million at December 31, 2016. Available Credit Facility borrowing capacity was approximately $51 million. Nine-month operating cash flow swung to a $10.2 million outflow from a $60.6 million inflow a year earlier.
- Debt: Reported long-term debt was $366.0 million, comprising $163.0 million under the Credit Facility and $203.0 million carrying value for convertible debt. The company issued $230 million of 5.00% convertible senior notes due 2023 and used the net proceeds mainly to repay the term loan and revolving borrowings. Credit Facility borrowings bear variable interest; the notes’ reported effective interest rate was 9.12%.
Material changes, outlook and risks
- Demand and margins: Management described activity levels as below historical levels. Hurricanes and related customer deferrals and lost billable hours were estimated to reduce Q3 revenue by approximately $7 million at TeamQualspec, $6 million at TeamFurmanite and $1 million at Quest Integrity. TeamQualspec also faced lower-margin work mix and higher labor costs. Management reported a pro forma 11.6% decline in nine-month TeamFurmanite revenue versus the prior-year comparable period.
- Cost savings: A cost-reduction initiative launched in July was expected to lower annual operating expenses by approximately $30 million; $2.9 million of severance and related charges had been recorded through September. Management was evaluating additional savings, but stated that anticipated savings are not assured. No formal earnings or revenue guidance is provided in the filing.
- Goodwill and unusual items: The impairment followed a 43% decline in the company’s share price during Q3 and continued market softness. Management warned further impairment could occur; the annual goodwill test was scheduled for December 1, 2017. Other Q3 items identified as non-core included ERP costs, restructuring, executive transition costs, hurricane-related costs and legal/professional fees. A $6.3 million gain on the convertible-note embedded derivative reduced reported losses; its fair value changes with TEAM’s share price and may increase earnings volatility.
- Debt covenants: TEAM reported compliance with covenants effective at September 30, 2017. The Senior Secured Leverage Ratio was 3.72x against a 4.75x limit, and interest coverage was 3.17x against a 3.00x minimum. The Total Leverage Ratio was 8.34x; its covenant was suspended until March 31, 2018. Management said the company would not have met that covenant had it applied at quarter-end and acknowledged possible difficulty meeting it when reinstated. Amendment relief is possible but not assured.
- Contingencies: Sixty-eight lawsuits relating to the 2007 Con Edison steam-main rupture remained pending; TEAM said it could not estimate its potential liability and had not accrued amounts above the insurance deductible. Quest Integrity received adverse summary judgments in patent litigation and planned appeals. The filing also describes estimated UK pension contributions of about $2.4 million annually through 2032.
- Other notable items: Earned-but-unbilled receivables rose to $99.9 million from $39.7 million at year-end 2016. The company reported effective disclosure controls and no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow improves and the sharp increase in unbilled receivables converts to collected cash.
- Progress toward the $30 million annual cost-saving target and any additional restructuring costs or initiatives.
- Performance against the reinstated leverage covenant from March 31, 2018, including lender amendments, available borrowing capacity and liquidity needs.
- Results of the December 2017 goodwill test and whether further impairment is required.
- Shareholder approval for conversion of the notes into additional shares, and the resulting dilution, potential cash settlement and derivative remeasurement effects.
- Developments in the Con Edison and patent matters, and any related financial exposure.