TEAM, Inc. — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Team provides industrial inspection, engineering, and mechanical services through TeamQualspec, TeamFurmanite, and Quest Integrity.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $286.6 million | $250.9 million |
| Gross margin | $74.8 million; 26.1% | $66.0 million; 26.3% |
| Operating loss | $12.1 million | $7.4 million |
| Net loss | $9.5 million; $0.32 per diluted share | $6.4 million; $0.27 per diluted share |
| Cash from operations | $(2.6) million | $21.5 million |
| Capital expenditures | $10.7 million | $11.6 million |
- Revenue increased 14.2%. Growth included the effect of the 2016 Furmanite acquisition and two smaller acquisitions; foreign exchange had an insignificant revenue impact.
- SG&A rose to $89.3 million from $73.4 million. Interest expense was $3.2 million, versus $2.9 million.
- At March 31, cash was $23.7 million, down from $46.2 million at year-end. Total debt was approximately $357.2 million, down from $366.9 million; reported net debt was approximately $333.4 million. About $18 million of borrowing capacity remained, and $20.7 million of letters of credit reduced facility availability.
- Current assets were $369.8 million and current liabilities $151.6 million. The filing reports a $6.1 million income tax benefit on a $15.6 million pretax loss.
Changes, outlook, and key developments
- Segment trends: TeamQualspec revenue grew 4.9%, TeamFurmanite 21.1%, and Quest Integrity 55.6%. TeamFurmanite’s reported growth reflects the acquisition; on a pro forma basis, its revenue declined approximately 15.6% year over year, amid project deferrals, reduced scope, and maintenance deferrals. Quest Integrity moved from a $0.8 million operating loss to $4.2 million of operating income. TeamFurmanite operating income fell to $0.5 million from $7.0 million.
- Management said market softness continued to pressure TeamFurmanite, but noted that pro forma total revenue rose slightly year over year in each of the final two months of Q1 after 13 consecutive months of declines. Management was optimistic that end markets could improve during the remainder of 2017. The filing provides no quantified revenue or earnings guidance.
- Q1 operating results included $3.6 million of net non-routine expenses, including ERP implementation, M&A-related, and intellectual-property defense costs, partly offset by contingent-consideration revaluation and exit-related gains. Prior-year Q1 included $9.7 million of non-routine expenses.
- Operating cash flow was negative, reflecting the net loss, deferred tax benefits, and working-capital use; receivables included $84.9 million of earned-but-unbilled revenue, up from $39.7 million at year-end. The ERP system was expected to be substantially installed by the end of 2017; $46.1 million had been capitalized.
- Following quarter-end, the May 5 credit amendment revised leverage covenant limits, pricing, and other terms. The company reported compliance at March 31 and a 4.77:1 total leverage ratio, while warning it might not maintain future compliance. The amended maximum total leverage ratio was 5.00:1 for Q1 and Q2 2017, declining thereafter to 3.00:1 from Q2 2018. The filing’s description of the interest-coverage covenant should be checked against the amendment text.
- Other risks include 68 pending lawsuits related to the 2007 Con Edison steam-main rupture; the company could not estimate potential liability and had not accrued amounts beyond its deductible. Quest Integrity’s patent was found invalid in two Delaware cases; the company intended to appeal, and a Washington case remained ongoing.
- Closures of Furmanite operations in Belgium and the Netherlands were expected to be substantially complete by the end of Q2 2017. The company estimated approximately $1 million of additional closure costs during the remainder of 2017.
Important facts for investors to verify
- Whether operating performance and cash conversion improve, particularly at TeamFurmanite, and whether unbilled receivables convert to cash.
- Available borrowing capacity, covenant headroom, and the exact covenant definitions and requirements in the May 2017 credit amendment.
- The financial and legal exposure from the Con Edison litigation and the outcome of Quest Integrity’s patent appeals and remaining case.
- Actual ERP completion costs and timing, restructuring costs, and progress toward the company’s stated market recovery expectations.
- The company states its disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.