TEAM, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
TEAM provides inspection, engineering assessment, and mechanical repair services to refining, petrochemical, power, pipeline, and other industrial customers. Its segments are TeamQualspec, TeamFurmanite, and Quest Integrity. This 10-K covers the year ended December 31, 2017; quarterly figures below include fourth-quarter results. Comparisons are with the year ended December 31, 2016.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,200.2 million | $1,196.7 million |
| Gross margin | $310.0 million; 25.8% of revenue | $328.6 million; 27.4% of revenue |
| Operating income (loss) | $(115.1) million | $(3.1) million |
| Net income (loss) | $(104.2) million; $(3.49) per diluted share | $(12.7) million; $(0.45) per diluted share |
| Cash from operations | $(13.7) million | $79.6 million |
| Capital expenditures | $36.8 million | $45.8 million |
Revenue was nearly flat year over year, but excluding a $4.2 million favorable foreign-exchange effect, it declined $0.7 million. Segment revenue was $588.4 million at TeamQualspec (down 0.2%), $530.0 million at TeamFurmanite (down 1.8%), and $81.8 million at Quest Integrity (up 21.0%). Management estimated hurricanes reduced TeamQualspec and TeamFurmanite revenue by about $7 million and $6 million, respectively; Quest Integrity was affected by approximately $1 million of project deferrals.
The operating loss included $75.2 million of goodwill impairment charges: $54.1 million at TeamFurmanite and $21.1 million at TeamQualspec. Other identified non-core operating expenses totaled $32.5 million, compared with $34.6 million in 2016. Interest expense rose to $21.5 million from $12.7 million. A $33.4 million income-tax benefit included a provisional $26.1 million net benefit related to the 2017 Tax Act.
At December 31, cash was $26.6 million, working capital was $249.3 million, and available Credit Facility borrowing capacity was approximately $41 million. Current and long-term debt totaled $387.7 million on the balance sheet; contractual principal was $407.9 million, including $177.9 million under the revolving Credit Facility and $230 million principal of convertible notes. Operating cash flow fell from $79.6 million provided in 2016 to $13.7 million used in 2017. No cash dividends were paid, and the company said it had no present intention to pay them in the foreseeable future.
Fourth-quarter 2017 revenue was $316.3 million, operating loss was $2.2 million, and net loss was $39,000. In fourth-quarter 2016, revenue was $319.8 million, operating loss was $5.7 million, and net loss was $9.4 million.
Material changes, outlook, and risks
- Operating performance weakened despite broadly stable reported revenue. Excluding identified non-core items, management said operating results deteriorated by $38.9 million, citing market softness, adverse work mix, higher labor costs, hurricane impacts, and higher corporate costs. TeamQualspec had more lower-margin resident work; TeamFurmanite continued to face weak market activity. Quest Integrity improved with higher service volumes.
- Beginning in July 2017, workforce and other cost actions were estimated to reduce annual operating expenses by approximately $30 million; the initiative was largely complete. A separate business-improvement program was expected to begin producing benefits in 2018, with full benefits not expected until 2020. Estimated 2018 implementation expenses were not expected to exceed $30 million. These are expectations, not guaranteed results.
- The company issued $230 million of 5.00% convertible senior notes due 2023 and used net proceeds primarily to repay Credit Facility borrowings. The notes’ initial conversion price was approximately $21.70 per share; stockholder approval was required for conversion into more than 19.99% of outstanding shares. The company disclosed potential dilution and possible cash-settlement requirements. The embedded conversion derivative had a $20.6 million year-end fair value and could increase earnings volatility.
- At year-end, TEAM complied with its Credit Facility covenants, but its senior secured leverage ratio was 3.53 versus a 4.25 maximum, and interest coverage was 3.03 versus a 3.00 minimum. A March 8, 2018 amendment revised future covenant thresholds, including leverage limits stepping down to 3.50 and then 2.75, and interest coverage minimums of 2.25 through 2018 and 2.50 thereafter. The facility matures in July 2020; variable-rate debt creates interest-rate exposure.
- Goodwill remained $284.8 million after impairment, and management warned that further impairment could result if business or market assumptions deteriorate. The Furmanite trade name’s revised useful life was expected to add approximately $12 million of amortization expense in 2018 compared with 2017.
- Other principal risks include dependence on refining and petrochemical activity, competitive pricing, short-notice customer contract termination, skilled-labor availability, industrial safety and insurance exposure, foreign exchange, environmental regulation, cybersecurity, and tax-law interpretation. A 100-basis-point rate increase was estimated to raise annual interest expense and reduce operating cash flow by about $2 million.
- TEAM was defending 68 lawsuits related to a 2007 Con Edison steam-main rupture; it could not estimate its potential liability and had not accrued amounts beyond the deductible. Quest Integrity’s patent cases had received adverse summary judgments, which the company was appealing.
- CEO Ted Owen stepped down in September 2017; Gary Yesavage served as interim CEO. Amerino Gatti was appointed CEO effective January 24, 2018. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether operating cash flow recovers and the projected cost savings are realized, net of restructuring and implementation costs.
- Current liquidity, borrowing availability, and headroom under the amended Credit Facility covenants as operating results evolve.
- The assumptions supporting goodwill valuations, especially for TeamFurmanite and TeamQualspec, and the expected 2018 amortization charge.
- Final tax effects of the 2017 Tax Act, including provisional estimates and the treatment of GILTI and BEAT.
- Potential cash requirements, shareholder approval, conversion terms, and dilution exposure associated with the convertible notes.
- Developments in the Con Edison litigation and patent appeals, including any change to estimated exposure or insurance coverage.
- Collection trends and the increase in unbilled receivables, which rose to $69.1 million from $39.7 million.