TEAM, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted.
Business context
TEAM provides inspection, integrity, maintenance and repair services through its Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity segments. The company reported that the COVID-19 pandemic, lower oil demand and oil-price volatility reduced client activity, delayed projects and pressured demand across all three segments.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $219.1M | $290.1M | $645.2M | $875.5M |
| Gross margin | $63.7M (29.1%) | $83.0M (28.6%) | $178.6M (27.7%) | $243.6M (27.8%) |
| Operating income (loss) | $2.3M | $(1.8)M | $(215.0)M | $(5.4)M |
| Net income (loss) | $(9.1)M | $(7.1)M | $(222.3)M | $(25.2)M |
| Diluted loss per share | $(0.30) | $(0.23) | $(7.27) | $(0.83) |
| Adjusted EBITDA (non-GAAP) | $18.2M | $20.6M | $27.0M | $57.1M |
| Adjusted EBITDA margin (non-GAAP) | 8.3% | 7.1% | 4.2% | 6.5% |
- Q3 revenue declined 24.5% year over year; nine-month revenue declined 26.3%. All segments contracted in both periods. Nine-month segment revenue was IHT $285.0M, MS $299.1M and Quest Integrity $61.2M.
- The nine-month operating loss included a $191.8M non-cash goodwill impairment charge recorded in Q1 against IHT, reducing IHT goodwill to zero. Excluding items management identifies as non-core, nine-month adjusted EBIT was still negative $11.8M (non-GAAP).
- Cash from operations was $20.2M for the first nine months, down from $33.0M a year earlier. Capital expenditures were $16.7M, yielding reported non-GAAP free cash flow of $3.5M versus $9.8M. For Q3 alone, cash from operations was negative $7.1M and free cash flow was negative $11.3M.
- At September 30, cash was $19.6M, versus $12.2M at December 31, 2019. Current assets were $304.5M and current liabilities $128.8M.
- Total debt and finance lease obligations were $344.2M, including $132.1M outstanding under the credit facility and $230.0M principal on convertible notes due 2023. Long-term debt and finance lease obligations, net of current amounts, were $338.9M.
Material changes versus prior comparable periods
- Revenue fell across IHT, MS and Quest Integrity as customers cut spending, curtailed operations or postponed projects. Nine-month operating results were additionally affected by the IHT impairment.
- Q3 operating income improved from a loss to a profit, supported by lower corporate and shared-services costs and higher IHT operating income; MS and Quest Integrity operating income declined. Q3 adjusted EBITDA was lower than the prior year despite the higher adjusted margin.
- Nine-month operating cash flow declined by $12.9M year over year. Capital expenditures were reduced from $23.2M to $16.7M, consistent with the company’s liquidity-preservation measures.
- Long-term debt and finance lease obligations increased from $325.3M at year-end 2019 to $338.9M. The company amended and extended its credit facility in June 2020.
Outlook, management commentary and risks
- Management said future results may remain adversely affected by COVID-19, oil and gas market weakness, facility access restrictions and delayed client projects. The timing and extent of recovery were described as uncertain; management expected refining utilization to recover gradually, while noting demand recovery had been delayed.
- The company reported $75M of OneTEAM and other cost-reduction savings through the first nine months and estimated $85M–$95M of annualized permanent and temporary savings for the year. Management cautioned that savings are not assured. The program was expected to continue through Q1 2021.
- Management reduced capital spending by more than 30% and limited investment to critical, higher-return client needs. Temporary executive salary reductions, reductions for certain other employees, and suspension of company retirement-plan matches were in effect through the end of 2020.
- The credit facility matures January 15, 2022. Its revolving commitment was reduced from $225M to $200M; borrowing margins and covenant requirements were revised. The company reported a 2.92x senior secured leverage ratio and compliance with covenants at September 30, 2020. It warned future compliance and refinancing are uncertain and that alternative financing, if available, could be more costly or dilutive.
- Outstanding standby letters of credit totaled $19.6M and reduce credit-facility availability. The filing does not provide a clear figure for remaining drawable capacity.
- Disclosure controls and procedures were deemed ineffective because of an existing material weakness in internal control over financial reporting. Remediation efforts were ongoing; management had not yet concluded the weakness was remediated.
- The company reported no material change to previously disclosed risk factors other than the heightened effects of COVID-19. It also reported ongoing routine legal matters and stated it did not expect uninsured losses to materially affect the financial statements.
Important facts for investors to verify
- Whether revenue, client activity and margins stabilize, particularly in IHT and MS, and whether expected cost savings are realized.
- Liquidity, borrowing availability and covenant headroom under the amended credit facility, including the effect of letters of credit and any further operating deterioration.
- The company’s ability to renew, refinance or repay the credit facility before its January 2022 maturity, and the terms of any financing.
- Whether the internal-control material weakness is remediated and whether additional legal or review costs arise.
- Whether further impairment charges or cash-flow pressure occur if market conditions or forecasts worsen.
Adjusted EBITDA, adjusted EBIT and free cash flow are non-GAAP measures as defined by the company; they should be considered alongside GAAP results.