TEAM, Inc. — Q2 2017 Form 10-Q
Business context and period: The filing reports the quarter and six months ended June 30, 2017. Team provides industrial inspection, engineering assessment, repair and remediation services through TeamQualspec, TeamFurmanite and Quest Integrity.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $312.3 million | $336.4 million | $598.8 million | $587.3 million |
| Gross margin | $84.6 million; 27.1% | $98.7 million; 29.3% | $159.4 million; 26.6% | $164.7 million; 28.0% |
| Operating income (loss) | $(6.7) million | $14.0 million | $(18.8) million | $6.6 million |
| Net income (loss) | $(11.1) million | $7.4 million | $(20.6) million | $0.9 million |
| Basic and diluted EPS | $(0.37) | $0.25 | $(0.69) | $0.03 |
- Segment trends: Q2 TeamFurmanite revenue fell 17.0% to $132.6 million; TeamQualspec was nearly flat at $158.4 million, and Quest Integrity rose 9.0% to $21.3 million. For the six months, revenue increased 2.0%, led by Quest Integrity (+28.5%) and TeamQualspec (+2.7%), partly offset by TeamFurmanite (-2.3%). On a pro forma basis, TeamFurmanite revenue declined 16.3% for the six months.
- Margins and costs: Q2 operating loss included $6.9 million of identified costs management said were not indicative of core operations. Even excluding identified items in both periods, operating performance deteriorated, principally from TeamFurmanite and TeamQualspec weakness and higher corporate costs. Management cited market softness, lower-margin work mix and higher labor costs.
- Interest and taxes: Net interest expense was $4.4 million in Q2 and $7.5 million for the six months, up year over year, mainly due to higher rates. The six-month income tax benefit was $6.1 million; Q2 tax expense was nominal despite a pretax loss.
- Cash flow: Six-month operating cash flow was negative $12.6 million, compared with positive $38.1 million in 2016. Investing cash outflow was $16.6 million, including $18.7 million of capital expenditures; financing provided $10.6 million. Cash decreased to $29.2 million from $46.2 million at year-end 2016.
- Balance sheet and liquidity: At June 30, total debt was $381.9 million, including $20.0 million current and $361.9 million long-term; cash was $29.2 million. Receivables were $281.6 million, including $80.0 million of earned but unbilled revenue. The company reported compliance with covenants then in effect and approximately $121 million of borrowing availability after giving effect to the subsequent credit amendment and note proceeds. Foreign subsidiary cash of $9.4 million was considered indefinitely reinvested, with access described as limited.
Material changes, outlook and risks
- Management described continued weak and uncertain end markets, with TeamFurmanite particularly affected by project deferrals, reduced scopes and deferred maintenance. It reported improving volumes in inspection and assessment services.
- On July 31, 2017, Team issued $230 million of 5.00% convertible senior notes due 2023, receiving approximately $222.6 million net. Proceeds repaid the $160 million term loan and $62.6 million of revolving borrowings. The notes carry a 40% conversion premium to the referenced share price; conversion may involve cash and/or shares, and shareholder approval is required for conversion beyond specified share limits. The filing warns that accounting for the notes may increase reported non-cash interest expense and earnings volatility.
- A July 2017 credit amendment reduced the facility to a $300 million revolving facility and revised covenant terms. The Total Leverage Ratio covenant is suspended until March 31, 2018; a Senior Secured Leverage Ratio test begins September 30, 2017. Management cautioned that future covenant compliance is not assured.
- On July 24, 2017, the company announced a cost-savings initiative targeting approximately $30 million of annual operating expense reductions, with benefits expected to begin in Q3 2017. Expected Q3 severance charges are $4–$6 million, mostly cash. The company cautioned that savings may not be achieved as estimated or on schedule.
- June 30 goodwill testing, prompted by continued market softness and stock-price effects, found no impairment. Goodwill was $358.6 million and intangible assets $168.1 million; the filing warns further testing or impairment could be required if conditions worsen.
- Contingencies include 68 pending lawsuits related to the 2007 Con Edison steam-main rupture and Con Edison’s indemnification claim. Team disputes the allegations, has not accrued liability beyond the deductible, and cannot estimate potential exposure. A trial was scheduled for October 2017. Quest Integrity’s patent claims received adverse summary judgments; appeals were planned or underway.
- Other noted risks include foreign-exchange and floating-rate debt exposure, environmental and safety regulation, and possible disruption or loss of personnel from workforce reductions. The filing reports no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the announced $30 million annual cost savings are realized, and the timing and cash cost of workforce reductions.
- Subsequent-quarter operating cash flow, receivables and unbilled revenue, and available liquidity under the amended revolving facility.
- Compliance with the revised leverage and interest-coverage covenants as testing dates approach.
- The accounting and economic effects of the convertible notes, including interest expense, potential cash settlement, dilution and required shareholder approval.
- Whether market conditions and operating performance prompt additional goodwill impairment testing or charges.
- Developments in the Con Edison litigation and Quest Integrity patent appeals, including any change in estimated exposure.