TEAM, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 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. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $202.3 million | $189.0 million |
| Gross margin | $47.0 million; 23.2% of revenue | $41.1 million; 21.8% of revenue |
| Operating loss | $7.7 million | $22.4 million |
| Interest expense, net | $16.7 million | $18.6 million |
| Net loss from continuing operations | $24.7 million | $38.3 million |
| Net loss per share | $5.69 | $8.61 total, including discontinued operations |
| Cash used in operating activities | $17.8 million | $50.0 million |
| Cash and cash equivalents, March 31 | $31.9 million | $53.7 million |
| Gross debt and finance lease obligations, March 31 | $288.9 million; $284.1 million classified current | — |
Revenue rose 7.0%, with growth in both segments; adverse foreign exchange reduced reported revenue by $3.2 million. Segment operating income improved to $4.7 million for IHT from $0.1 million and to $3.2 million for MS from $0.5 million. Lower corporate costs and professional fees also contributed to the narrower consolidated operating loss. Management reported consolidated adjusted EBITDA of $4.2 million versus a loss of $6.4 million, and free cash flow of negative $20.5 million versus negative $62.1 million; these are non-GAAP measures.
Cash decreased $26.2 million during the quarter. At March 31, the company reported $26.4 million unrestricted cash, $5.5 million restricted cash and approximately $37.3 million in additional borrowing capacity. At May 9, it reported $21.9 million cash excluding $5.2 million restricted and $27.4 million undrawn availability, or $49.3 million total liquidity.
Material changes and unusual items
- Revenue increased in IHT, primarily on higher U.S. call-out and turnaround activity, and in MS, largely from U.S. leak-repair and hot-tapping work and improved Canadian revenue. Canadian IHT revenue fell after a customer contract ended.
- SG&A declined to $54.7 million from $63.5 million. Management attributed the improvement in operating results to higher activity, cost reductions and efficiency gains, partly offset by inflation in labor, transportation and materials.
- Q1 2022 included $5.9 million net income from discontinued operations. TEAM sold Quest Integrity in November 2022 for approximately $279 million and used about $238 million of net proceeds primarily to repay term debt.
- Debt-related cost amortization accelerated because of provisions tied to the June 2023 trigger date. The APSC Term Loan and Subordinated Term Loan disclosed effective interest rates of 38.48% and 30.32%, respectively, at quarter-end; these rates include accelerated amortization as well as stated or cash interest.
Outlook, risks and contingencies
Going concern and refinancing: Management concluded that substantial doubt exists about TEAM’s ability to continue as a going concern. The $41.2 million principal balance of 5% convertible notes was due August 1, 2023. Under debt agreements, the notes had to be reduced below $10 million by June 17, 2023, or the company faced potential acceleration of the term loan and cross-defaults. TEAM was in covenant compliance on March 31, but said available working capital, operating cash flow and credit capacity were not expected to be sufficient to fund operations and meet obligations without refinancing, extending the notes or amending debt agreements. It was exploring alternatives; no assurance of a transaction was given.
Other risks include significant leverage and sensitivity to interest rates, operating-cost inflation, customer payment delays, project timing and economic volatility. TEAM had regained compliance with the NYSE minimum share-price requirement in January 2023 but remained subject to other listing standards and its plan to address a separate market-capitalization/shareholders’ equity deficiency. The filing provides no specific revenue or earnings guidance.
Legal matter: In the Most wrongful-death litigation, a $222 million jury verdict was on appeal. TEAM estimated possible outcomes of $13 million to approximately $51 million and accrued an aggregate approximately $41.2 million for the matters discussed, including this case. It recorded an insurance receivable corresponding to the related liability and stated that, after applicable retentions and deductibles were met, it believed further claims would be funded by insurance. Approximately $2.2 million of aggregate accruals was not covered by insurance.
Important facts for investors to verify
- Whether TEAM reduced or refinanced the convertible notes to meet the June 17 trigger and paid, extended or otherwise resolved the August 1, 2023 maturity, and whether any related debt acceleration or cross-default provisions were triggered.
- Current cash, restricted cash and borrowing-base availability, together with covenant compliance and the company’s ability to fund working capital and debt service.
- Developments in the Most litigation appeal, the amount ultimately payable and the availability and limits of insurance coverage.
- Progress on NYSE listing compliance beyond the minimum share-price requirement.
- Whether improved segment activity and cost controls translated into sustained positive operating cash flow, given the quarter’s operating cash use and continuing net loss.