TEAM, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. TEAM provides industrial inspection, integrity assessment, heat treating, repair and maintenance services through Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $290.9 million | $285.1 million | $937.1 million | $883.9 million |
| Gross margin | $70.1 million; 24.1% | $68.9 million; 24.2% | $242.9 million; 25.9% | $228.4 million; 25.8% |
| Operating loss | $19.7 million | $94.1 million | $32.0 million | $112.9 million |
| Net loss | $22.9 million | $83.5 million | $73.2 million | $104.1 million |
| Loss per diluted share | $0.76 | $2.80 | $2.44 | $3.49 |
| Interest expense, net | $8.0 million | $6.4 million | $23.3 million | $13.9 million |
Q3 revenue rose 2.0%; nine-month revenue rose 6.0%. The lower reported losses primarily reflect the absence of the $75.2 million goodwill impairment recognized in 2017, rather than a comparable improvement in recurring results. Excluding identified non-core operating items, management said operating performance declined $4.1 million in Q3 but improved $5.0 million for the nine-month period.
Segment revenue in Q3 increased 6.6% at IHT and 52.8% at Quest Integrity, but decreased 9.0% at MS. For the nine months, revenue increased across all three segments: IHT 6.3%, MS 4.1% and Quest Integrity 16.4%.
Cash flow, balance sheet and debt
- Operating cash flow was $5.3 million for the first nine months, versus cash used of $10.2 million in 2017. Capital expenditures were $19.4 million, compared with $26.5 million; operating cash flow less capital expenditures was therefore approximately negative $14.1 million, versus negative $36.7 million.
- Cash was $16.0 million at September 30, down from $26.6 million at year-end 2017. Current assets were $394.6 million and current liabilities $150.9 million.
- Total debt was $377.0 million: $183.3 million under the revolving Credit Facility and $193.7 million carrying value for convertible debt. The Notes have $230 million principal outstanding, bear 5% coupon interest and mature in 2023.
- TEAM reported approximately $58 million of available Credit Facility borrowing capacity, including the effect of borrowing availability restrictions and outstanding letters of credit. Standby letters of credit totaled $22.8 million.
- At September 30, the company reported compliance with its covenants: senior secured leverage ratio 2.73x against a 3.50x maximum, and interest coverage ratio 3.10x against a 2.25x minimum. The facility matures in July 2020; its borrowings bear variable rates.
Changes, outlook and significant items
- Management attributed stronger IHT and Quest Integrity activity to improved market conditions, particularly in refining and petrochemicals. In Q3, MS was hurt by large prior-year projects not recurring and planned fall turnaround work being postponed as high refinery utilization reduced maintenance activity.
- ASC 606 adoption reduced reported revenue by $7.8 million in Q3 and $2.7 million for the nine months, and increased reported operating loss by $7.5 million and $3.9 million, respectively. The company recorded an $8.4 million net increase to opening retained earnings on adoption. Prior-year figures were not restated.
- TEAM launched the OneTEAM restructuring and operating improvement program. It incurred $11.8 million of professional fees and $4.5 million of severance costs in the first nine months. Total program expense is estimated not to exceed $30 million; management targets $35–$45 million in annual efficiencies by 2020. It reported approximately $5 million of Q3 savings and expected $8–$10 million of savings in the second half of 2018. These are expectations, not guaranteed results.
- Management said labor, materials, freight and fuel cost increases were beginning to pressure margins and could affect future performance. It also cited possible continued weakness in industrial activity and uncertainty in maintaining credit covenant compliance.
- The company recorded a $24.8 million non-cash loss on the convertible-note embedded derivative for the nine months, reflecting fair-value changes before shareholder approval allowed its $45.4 million value to be reclassified to equity in May 2018. It will no longer be remeasured through earnings.
- Management was still evaluating tax estimates under the 2017 Tax Act; further fourth-quarter adjustments could materially affect income tax expense or benefit. TEAM also expects significant operating lease assets and liabilities upon adopting lease accounting in 2019, but had not quantified the impact.
- Material contingencies include 83 pending lawsuits related to the 2007 Con Edison steam-main rupture and Con Edison’s indemnification claim. TEAM disputes the allegations, has not accrued amounts beyond its deductible, and says it cannot estimate potential liability. Its subsidiary’s patent-infringement cases had adverse summary judgments and were on appeal.
No specific company-wide revenue or earnings guidance is provided in the filing. The company’s outlook includes the OneTEAM targets and the risks noted above.
Investor verification priorities
- Assess recurring segment margins and MS recovery, separating prior-year impairment effects, restructuring and other identified non-core costs, and ASC 606 impacts.
- Monitor operating cash conversion, receivables and the allowance for doubtful accounts, which rose to $18.4 million from $11.3 million at year-end.
- Verify covenant headroom and available revolver capacity, including the borrowing-base test, letters of credit, variable-rate exposure and approaching covenant thresholds.
- Track whether OneTEAM costs remain within the stated ceiling and whether targeted savings are realized without disrupting operations.
- Follow the Con Edison litigation and indemnification exposure, tax estimate updates, and the effect of 2019 lease adoption.