TEAM, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Team provides specialty industrial inspection, heat-treating, maintenance, and repair services through its Inspection and Heat Treating (IHT) and Mechanical Services (MS) segments. Comparisons of operating results are for continuing operations; Quest Integrity was sold in November 2022 and is reported as discontinued operations in 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $206.7m | $218.3m | $648.5m | $628.9m |
| Gross margin | $52.8m (25.5%) | $56.0m (25.7%) | $160.7m (24.8%) | $149.3m (23.7%) |
| Operating loss | $1.3m | $1.7m | $4.4m | $34.9m |
| Net loss from continuing operations | $12.1m | $26.6m | $52.6m | $93.2m |
| Adjusted EBITDA (non-GAAP) | $11.1m | $10.6m | $32.8m | $10.0m |
Q3 revenue declined 5.3% year over year as both segments had lower activity, especially in U.S. and Canadian nested, turnaround, repair, and maintenance work. Nine-month revenue increased 3.1%, with growth in MS and modest growth in IHT. The nine-month operating loss improved substantially, reflecting higher segment operating income and lower corporate costs. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash use was $22.1m, versus $46.4m in 2022; capital expenditures were $7.4m, producing free cash flow of negative $29.5m. Q3 free cash flow was negative $0.8m versus approximately breakeven in Q3 2022.
- Cash and liquidity: September 30 cash and equivalents were $21.5m, including $5.0m restricted cash ($16.5m unrestricted). Available borrowing capacity was approximately $19.9m. At November 7, the company reported $25.5m cash excluding restricted cash, $14.0m of borrowing availability, and total liquidity of $39.5m.
- Debt: Debt and finance lease obligations totaled $301.1m at quarter-end, up from $285.9m at December 31, 2022. Interest expense for nine months was $43.5m. The company reported covenant compliance at September 30.
- Balance sheet: Total assets were $561.5m, total liabilities $496.8m, and equity $64.6m. Cash declined from $58.1m at year-end 2022.
Changes, outlook, and risks
- Q3 interest expense fell $16.6m year over year, mainly reflecting lower debt after the 2022 term-loan paydown and the June 2023 payoff of the remaining APSC term loan. The reduction was partly offset by higher interest costs on other facilities and PIK interest.
- In June, the company refinanced the APSC term loan using new ME/RE and ABL borrowing, recording a $1.6m debt-extinguishment loss. In July, it drew $42.5m of incremental term loans to repay convertible notes that matured August 1. A further $5.0m was drawn October 6; $10.0m of incremental term-loan availability remained at November 7.
- Management said cost-reduction efforts were improving cash generation and believed liquidity would be adequate for operating needs, debt service, and commitments for at least the next twelve months, while noting this could not be assured. No specific earnings or revenue guidance was provided.
- Inflation in labor, transportation, and materials remains a cost pressure. Disclosed risks include high leverage, access to capital and liquidity, covenant compliance, cash generation, customer payment delays, project timing, market and economic conditions, and litigation.
- Contingency: The Most wrongful-death case remains on appeal. A $222m jury verdict was entered against a subsidiary; the company estimated a possible outcome range of $13m–$51m and recorded approximately $40.7m in aggregate legal accruals, of which about $1.7m was not covered by insurance. The company believes further claims in this matter are expected to be funded by insurance, subject to final resolution.
Important facts for investors to verify
- Whether operating cash flow and available liquidity improve enough to support working capital and debt service, particularly given the sharp decline in cash since year-end.
- The terms, cash-versus-PIK interest burden, maturity dates, collateral, and remaining availability under the debt facilities; also monitor covenant compliance and refinancing needs.
- Developments in the Most litigation, the final liability, and the extent and timing of insurance recovery.
- Whether the improvement in nine-month operating results and adjusted EBITDA is sustained, considering Q3 revenue declines and continuing cost inflation.