Business context and reporting period
TEAM, Inc. (NYSE: TISI) filed this Form 10-K for the fiscal year ended December 31, 2019. It provides inspection and heat-treating, mechanical maintenance and repair, and specialized integrity-assessment services through IHT, Mechanical Services (MS), and Quest Integrity. The company operates in about 20 countries and had approximately 6,800 employees. The filing also presents unaudited fourth-quarter results.
Key financial metrics
Amounts are in U.S. dollars; figures are in millions unless indicated otherwise.
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,163.3 | $1,246.9 |
| Gross profit / margin | $327.7 / 28.2% | $328.3 / 26.3% |
| Operating income (loss) | $(2.1) | $(39.0) |
| Net income (loss) | $(32.4) | $(63.1) |
| Operating cash flow | $58.8 | $41.9 |
| Capital expenditures | $29.0 | $27.2 |
| Cash at year-end | $12.2 | $18.3 |
| Working capital | $167.0 | $215.0 |
At year-end, the credit facility had $123.6 million outstanding, with about $66 million of available borrowing capacity and $20.5 million of letters of credit. The facility matures July 7, 2021. The company also had $230 million principal amount of 5.00% convertible senior notes due 2023; their balance-sheet carrying value was $201.6 million. The credit facility’s variable-rate borrowings expose the company to rate risk: management estimated a 100-basis-point increase would add about $1.2 million to annual interest expense.
Fourth-quarter 2019 revenue was $287.8 million, compared with $309.8 million in Q4 2018. Operating income was $3.2 million versus an operating loss of $6.9 million; net loss was $7.2 million versus net income of $4.0 million.
Material changes versus prior period
- Full-year revenue declined 6.7%. IHT revenue fell 16.9% to $513.0 million, reflecting competitive pressure, pricing discipline, Canadian market challenges, weather effects, and the closure of underperforming businesses. MS revenue rose 0.6% to $535.4 million, and Quest Integrity revenue grew 18.3% to $115.0 million.
- Reported operating loss narrowed to $2.1 million from $39.0 million. MS operating income increased to $55.4 million from $6.3 million, and Quest Integrity operating income rose to $28.8 million from $20.1 million; IHT operating income fell to $24.1 million from $37.3 million. Corporate and shared-support costs increased to $110.4 million.
- Management identified $23.3 million of 2019 operating expenses as not indicative of core operations, versus $33.9 million in 2018. Excluding these identified items in both years, management said the operating loss improved by $26.2 million, principally due to MS and Quest Integrity. The comparison also reflects $12.4 million of accelerated Furmanite trade-name amortization in 2018 that did not recur.
- Net cash from operations improved to $58.8 million from $41.9 million, while cash declined by $6.1 million over 2019, mainly as debt was repaid. The company reported a net loss despite positive operating cash flow.
Outlook, risks, contingencies and unusual items
- OneTEAM savings: management reported approximately $22.9 million of savings realized in 2019 and expects $35 million to $45 million in annual run-rate efficiencies exiting 2020. The program is expected to incur costs through 2020; the stated savings are expectations, not assured results.
- COVID-19: the filing describes potential effects on customers, travel, supply chains, commodity markets, and demand—particularly in refining and petrochemicals. The scale and duration of the impact were uncertain when the report was filed on March 16, 2020; the filing provides no quantified forecast.
- Goodwill: the 2019 annual impairment test identified no impairment, but the company said subsequent share-price declines made IHT goodwill potentially at risk and it was assessing whether a first-quarter 2020 triggering event had occurred. IHT goodwill was approximately $193 million at year-end.
- Controls and asset misappropriation: an investigation found that an employee at a Netherlands subsidiary had misappropriated company assets through management override of controls over multiple years. Management reported no material misstatement of the financial statements, but concluded internal control over financial reporting was ineffective due to a material weakness. KPMG issued an adverse opinion on internal controls and an unqualified opinion on the financial statements. Remediation was underway and was not yet considered complete.
- Legal matter: following February 2020 mediation in a patent dispute, the company recorded a $1.3 million loss as an adjustment to its 2019 financial statements; a final settlement and dismissal were expected in Q2 2020.
- Credit risk: the company was compliant with credit-facility covenants at December 31, 2019. Its reported senior secured leverage ratio was 1.89x and debt service coverage ratio 2.17x; the net leverage ratio was 4.97x, before that covenant became applicable in March 2020. Future compliance depends on operating performance and financial condition.
- Other exposures include cyclical customer industries and turnaround timing, competitive pricing, short-notice termination rights in many customer contracts, skilled-labor availability, safety and liability claims, foreign exchange, tax-asset realizability, pension obligations, and potential further asset impairment. No cash dividends were paid in 2019 or 2018, and the company stated it had no present intention to pay dividends in the foreseeable future.
Important facts for investors to verify
- Review the full financial statements and notes for the basis of the $58.8 million operating cash flow, debt terms, covenant definitions, and the July 2021 credit-facility maturity.
- Track subsequent COVID-19 effects on customer demand, revenue, cash generation, and covenant headroom; this 10-K does not quantify a forecast.
- Check whether the Netherlands control weakness has been remediated and whether further investigation or financial-statement consequences emerge.
- Assess the IHT reporting unit’s impairment risk and whether market recovery supports the company’s goodwill carrying value.
- Compare realized OneTEAM savings and remaining implementation costs with management’s $35–$45 million run-rate target.
- Confirm completion and final terms of the patent settlement and monitor other legal, insurance, pension, tax, and liquidity exposures.