TEAM, Inc. (NYSE: TISI) — Second-Quarter 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited. TEAM provides industrial inspection, integrity assessment, repair and maintenance services through IHT, Mechanical Services (MS) and Quest Integrity.
Key financial results
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $343.9 million | $312.3 million | $646.3 million | $598.8 million |
| Gross margin | $97.2 million; 28.3% | $84.6 million; 27.1% | $172.7 million; 26.7% | $159.4 million; 26.6% |
| Operating income (loss) | $1.8 million | $(6.7) million | $(12.3) million | $(18.8) million |
| Net loss | $(32.5) million | $(11.1) million | $(50.3) million | $(20.6) million |
| Loss per share, diluted | $(1.08) | $(0.37) | $(1.68) | $(0.69) |
For the six months, operating cash flow was negative $17.7 million, capital expenditures were $12.1 million, and cash declined $11.3 million to $15.3 million. Net receivables were $323.2 million, including $91.6 million of unbilled receivables; the doubtful-account allowance increased to $15.4 million from $11.3 million at year-end.
At June 30, reported long-term debt carrying value was $390.5 million, comprising $198.3 million under the credit facility and $192.2 million carrying value for convertible notes. The notes have $230.0 million principal outstanding. The company reported approximately $80 million of available credit capacity, subject to borrowing availability tests, and $21.8 million of outstanding standby letters of credit.
Changes versus prior comparable periods
- Second-quarter revenue rose 10.1%; first-half revenue rose 7.9%. Management attributed growth primarily to stronger activity and customer spending, especially in refining and petrochemicals. Excluding favorable foreign-exchange effects, revenue increased $26.9 million in Q2 and $38.0 million in the first half.
- All three segments grew revenue in Q2. First-half revenue increased in IHT and MS, while Quest Integrity was nearly flat excluding currency effects; management cited project deferrals that weighed on Quest Integrity’s first quarter.
- Operating results improved year over year, but the company remained loss-making for the first half. First-half segment operating income increased at MS and IHT, while Quest Integrity declined and corporate/shared support costs rose.
- Interest expense more than doubled to $15.2 million for the first half, reflecting higher debt and borrowing rates, including the convertible notes. The reported first-half net loss also included a $24.8 million noncash loss on the notes’ embedded derivative.
- Operating cash use worsened to $17.7 million from $12.6 million, mainly due to the larger net loss and higher working-capital use. Capital expenditures fell to $12.1 million from $18.7 million.
Outlook, risks and unusual items
- Management described market conditions as improving but warned of rising labor, materials, freight and fuel costs. It gave no quantified revenue or earnings guidance in the provided filing text.
- The OneTEAM program is expected to cost no more than $30 million in 2018, including approximately $10 million in severance costs. Management expects savings and other benefits but not full realization until 2020; it cautioned that results are not assured.
- A July 2018 organizational restructuring, including new product/service-line and regional operations organizations, was expected to be fully operational in Q4 2018. Potential effects on reportable segments were still under evaluation.
- Credit-facility covenants were amended in March 2018. TEAM was compliant at June 30, with senior secured leverage of 2.95x against a 4.25x maximum and interest coverage of 3.19x against a 2.25x minimum. Required leverage limits tighten beginning September 2018; management cautioned that future compliance depends on operating performance and cannot be assured.
- The $29.3 million Q2 derivative loss resulted from the increase in TEAM’s stock price before shareholder approval on May 17, 2018 to issue shares upon conversion of the notes. The related derivative was then reclassified to equity at a fair value of $45.4 million and is no longer remeasured each period.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $8.8 million before tax; the company reported a $5.1 million increase to first-half revenue and $3.6 million increase to first-half operating income versus amounts without adoption. Prior-year comparisons were not restated.
- Key contingencies include 83 pending lawsuits related to the 2007 Con Edison steam-main rupture and Con Edison’s indemnification claim. TEAM disputes the allegations, says it cannot estimate potential liability, and has not accrued amounts above its deductible. Quest Integrity is appealing adverse patent rulings in three infringement cases.
- Tax accounting under the 2017 Tax Act remained under evaluation; future adjustments could materially affect tax expense or benefit. TEAM also cited exposure to foreign currency and variable interest rates; a 100-basis-point rate increase was estimated to raise annual interest expense by approximately $2 million.
Important facts for investors to verify
- Whether revenue growth and segment operating improvements continue, and whether they translate into positive operating and free cash flow.
- Receivables quality, collections and working-capital needs, particularly the rise in unbilled receivables and the doubtful-account allowance.
- Liquidity and covenant headroom as leverage limits tighten, alongside credit-facility availability and the cash demands of OneTEAM.
- Actual OneTEAM spending, timing and savings; the filing’s cost and benefit estimates are forward-looking and not assured.
- Potential exposure from the Con Edison litigation and the outcomes of Quest Integrity’s patent appeals.
- Final tax effects of the 2017 Tax Act and the impact of the 2018 organizational restructuring on operations and segment reporting.