TEAM, Inc. (NYSE: TISI) — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 7, 2019. Financial statements are unaudited. TEAM provides industrial inspection, engineering, repair and integrity services through IHT, Mechanical Services (MS) and Quest Integrity.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $290.1m | $290.9m | $875.5m | $937.1m |
| Gross margin | $83.0m (28.6%) | $70.1m (24.1%) | $243.6m (27.8%) | $242.9m (25.9%) |
| Operating income (loss) | ($1.8m) | ($19.7m) | ($5.4m) | ($32.0m) |
| Net income (loss) | ($7.1m) | ($23.5m) | ($25.2m) | ($67.1m) |
| Operating cash flow | Not separately provided | Not separately provided | $33.0m | $5.3m |
| Capital expenditures | Not separately provided | Not separately provided | $23.2m | $19.4m |
Q3 interest expense was $7.6m, versus $8.0m; nine-month interest expense was $22.7m, versus $23.3m. Nine-month operating cash flow less cash capital expenditures was approximately $9.8m. Cash was $10.3m at September 30, 2019, compared with $18.3m at year-end 2018. Current assets were $343.0m and current liabilities $165.7m.
At September 30, total long-term debt and finance lease obligations were $345.7m before current maturities, including a $90.7m revolver, $49.7m term loan and $200.0m carrying value of convertible debt. Convertible notes have $230.0m principal, bear 5% interest and mature in 2023. The renewed credit facility has $275m total capacity and matures in July 2021; approximately $59m of borrowing capacity was available after considering outstanding borrowings and letters of credit.
Changes versus the prior comparable period
- Nine-month revenue declined 6.6%; excluding $8.7m of unfavorable foreign-exchange effects, it fell $52.9m. IHT revenue decreased 16.2%, while MS was approximately flat and Quest Integrity increased 18.6%.
- Q3 revenue was nearly flat overall. IHT declined 14.3%, offset largely by MS growth of 14.0% and Quest Integrity growth of 15.5%.
- Operating losses narrowed substantially: Q3 by $17.9m and nine-month by $26.7m. Management attributed much of the improvement to MS, citing better project execution, pricing and cost performance; Quest Integrity also improved. IHT operating income fell, and corporate/shared support costs increased.
- Cash from operations rose to $33.0m from $5.3m for the first nine months. Cash declined by $8.0m during the 2019 period, including net revolving-credit repayments.
Outlook, risks and unusual items
- Management gave no formal revenue or earnings guidance. The OneTEAM program is expected to produce annual run-rate cost efficiencies of $35m–$45m by 2020. Reported savings were approximately $6.2m in Q3 and $17.8m for the first nine months. Management cautioned that savings are not assured; program expenses are expected to continue through 2020, including international implementation.
- The company was in compliance with credit-facility covenants at quarter-end: senior secured leverage was 2.00x against a 2.75x maximum, and debt service coverage was 1.97x against a 1.10x minimum. Net leverage was 5.00x; its covenant was scheduled to begin March 2020. Management warned future compliance depends on operating performance and that covenant amendments may not be available on acceptable terms.
- Demand and revenue risks include IHT market weakness, Gulf Coast competitive pressure, Canadian end-market challenges, weather, deliberate market-share losses from pricing discipline and foreign-exchange movements. A 100-basis-point increase in market rates was estimated to increase annual interest expense by about $2m.
- OneTEAM-related professional fees and other identified items totaled $7.8m in Q3 and $17.1m year to date. The company reported a $24.8m embedded-derivative loss in the prior-year nine-month period; this derivative was reclassified to equity in May 2018 and is no longer remeasured through earnings.
- In October 2019, TEAM and Con Edison agreed to settle their dispute and release claims against each other. Twenty-three related lawsuits remained pending against TEAM; the company expected nominal settlements and said insurance should cover claims subject to a $250,000 deductible. The filing also describes ongoing patent litigation, with a remanded trial scheduled for Q2 2020.
- TEAM identified and corrected prior-period income-tax errors in the comparative 2018 figures, which it determined were not material to previously filed statements. The 2018 comparative results in this filing are revised. Adoption of lease accounting in 2019 added operating lease assets and liabilities to the balance sheet.
Important facts for investors to verify
- Whether improving MS execution and OneTEAM savings can offset continued IHT revenue and profit pressure and higher corporate costs.
- Available liquidity after letters of credit, cash needs for ongoing operations and program costs, and headroom under tightening credit covenants.
- The company’s ability to sustain positive operating cash flow and fund capital expenditures while managing substantial debt and interest-rate exposure.
- Progress and financial impact of the Con Edison settlement and remaining lawsuits, and the outcome and timing of the Quest Integrity patent case.
- Effects of foreign exchange, industry activity levels and Brexit-related uncertainty on revenue, margins and cash flows.