TEAM, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. TEAM provides industrial inspection, maintenance, repair and asset-integrity services through Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $251.3 million | $238.9 million | $469.8 million | $433.5 million |
| Gross margin | $70.0 million (27.8%) | $62.8 million (26.3%) | $125.1 million (26.6%) | $106.5 million (24.6%) |
| Operating loss | $2.8 million | $6.0 million | $19.0 million | $30.3 million |
| Net loss | $21.6 million | $17.5 million | $54.0 million | $51.8 million |
| Net loss per share | $0.50 | $0.57 | $1.34 | $1.68 |
| Interest expense, net | $18.5 million | $9.6 million | $37.1 million | $19.0 million |
| Adjusted EBITDA (non-GAAP) | $14.3 million | $9.1 million | $14.7 million | $3.8 million |
Q2 revenue grew 5.2%; MS rose 10.5% and Quest Integrity 22.6%, while IHT fell 2.8%. For the first half, revenue grew 8.4%, with growth in all segments. Operating losses improved, but higher interest expense and taxes contributed to larger net losses. Management cited stronger MS activity and Quest Integrity utilization, offset by IHT weakness, inflation in labor, transport and materials, and higher corporate financing and professional costs.
Cash flow: First-half operating cash outflow was $53.4 million, versus $34.8 million a year earlier; capital expenditures were $14.0 million, producing free cash flow (non-GAAP) of negative $67.4 million. Financing provided $64.8 million, principally from borrowing and the February equity issuance. Cash and cash equivalents were $67.4 million at June 30, including $41.1 million unrestricted and $26.3 million restricted.
Balance sheet, liquidity and debt
Total debt and finance lease obligations were $491.9 million. Nearly all was classified as current because of debt maturity-trigger provisions; shareholders’ equity was only $0.5 million. The company reported $4.5 million of remaining ABL availability and additional delayed-draw commitments, subject to facility terms. Variable-rate debt exposes the company to higher interest costs; management estimated a 100-basis-point rate increase would add about $3.9 million of annual interest expense based on June 30 borrowings.
Management stated that substantial doubt exists about TEAM’s ability to continue as a going concern. The $95.2 million principal balance of 5.00% convertible notes is due August 1, 2023, and under amended financing terms must be reduced to $10 million, or backed by equivalent cash, by May 18, 2023. Failure could trigger cross-defaults and make other debt payable on demand. TEAM said it intended to refinance but could not assure successful refinancing or repayment. It reported covenant compliance at June 30, 2022.
Outlook, developments and risks
- Quest Integrity sale: After quarter-end, TEAM agreed to sell the business to Baker Hughes for $280 million, subject to customary adjustments, approvals and closing conditions; closing was expected in Q4 2022. The company expected to use net proceeds for debt reduction and general corporate purposes. Quest Integrity contributed approximately 13% of first-half revenue. The transaction was pending as of the filing.
- Funding and restructuring: TEAM completed debt amendments and financing transactions during 2022, including a $10 million equity issuance; it drew a further $10 million under the Corre delayed-draw loan in July. No numerical full-year revenue or earnings guidance is provided in the filing text.
- Legal contingency: A Texas jury awarded $222 million in a wrongful-death case; the judgment was on appeal. TEAM estimated possible outcomes at $13 million to approximately $51 million and accrued its most likely estimate. The filing reports aggregate legal accruals of approximately $44 million, with about $5 million not covered by insurance.
- NYSE listing: TEAM received notices for falling below market-capitalization/shareholders’-equity and minimum-share-price standards. It submitted a compliance plan; the exchange’s acceptance and the company’s ability to cure the deficiencies were not assured. Delisting could affect financing and potentially trigger a note repurchase offer.
- Management cited inflation, supply-chain pressures, economic uncertainty, COVID-19 effects, foreign-exchange exposure and potential impacts from sanctions related to the Russia-Ukraine conflict. The company had no employees or operations in Russia or Ukraine.
Key facts for investors to verify
- Whether the Quest Integrity sale closed, its net proceeds after adjustments and costs, and the actual debt paydown.
- Progress on refinancing or reducing the convertible notes before the May 18, 2023 trigger date, and compliance with all debt covenants.
- Unrestricted liquidity, cash burn, working-capital requirements and access to remaining borrowing commitments.
- Status and outcome of the wrongful-death appeal, related insurance recoveries and other litigation accruals.
- NYSE compliance-plan status and any potential effects of a share-price cure or delisting.
- Whether operating improvement and adjusted EBITDA translate into sustainable positive operating cash flow; adjusted EBITDA is a non-GAAP measure.