TEAM, Inc. — Q1 2022 Form 10-Q
Business and period: TEAM provides inspection, heat treating, mechanical maintenance and asset-integrity services through Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $218.6 | $194.6 |
| Gross margin | $55.1; 25.2% | $43.7; 22.5% |
| Operating loss | $(16.2); (7.4)% of revenue | $(24.3); (12.5)% of revenue |
| Net loss | $(32.5) | $(34.3) |
| Loss per diluted share | $(0.86) | $(1.11) |
| Net cash used in operating activities | $(50.0) | $(17.2) |
| Capital expenditures | $7.1 | $3.4 |
| Free cash flow (company-defined non-GAAP) | $(57.1) | $(20.6) |
| Adjusted EBITDA (company-defined non-GAAP) | $0.4 | $(5.3) |
Revenue increased 12.3%. IHT revenue rose 4.9% to $95.6 million, MS rose 6.9% to $93.4 million, and Quest Integrity rose 83.7% to $29.5 million. The Quest increase included approximately $6 million of projects deferred from 2021. Operating loss narrowed by $8.1 million, but higher interest expense substantially offset the operating improvement.
At March 31, cash and cash equivalents were $53.7 million, including $20.8 million pledged as collateral; management also reported $32.9 million of cash on hand and $8.8 million of available ABL borrowing capacity. Total current assets were $368.1 million versus current liabilities of $181.1 million. Accounts receivable rose $19.0 million from year-end to $207.8 million.
Long-term debt and finance lease obligations were $456.5 million, including $95.2 million principal on 5% convertible notes due August 2023. Debt and finance lease obligations were $405.9 million at December 31, 2021. Interest expense nearly doubled to $18.6 million, partly reflecting new debt and $2.7 million of written-off deferred financing costs. The company reported $27.1 million of equity, down from $51.9 million at year-end.
Material changes and unusual items
- Q1 operating cash use worsened to $50.0 million, with the filing attributing much of the cash drain to $33.7 million of working-capital changes, including receivables and other operating balances.
- On February 11, TEAM refinanced its prior Citi ABL facility with a new ABL facility providing up to $130 million revolving and up to $35 million delayed-draw term financing. Corre-related incremental financing also included a $10 million subordinated loan and a $10 million equity investment: 11.9 million shares issued at $0.84 each. Outstanding common shares rose to 43.1 million from 31.2 million at year-end.
- Other income of $2.7 million included a gain on asset sales; TEAM received $3.0 million in cash from an equipment and inventory sale. Financing fees and other items not considered core operations totaled approximately $7.2 million in Q1.
- TEAM adopted ASU 2020-06 on January 1, 2022. The adoption reduced Q1 net interest expense by approximately $0.3 million and loss per share by $0.01; prior-period figures were not restated.
Outlook, liquidity, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management said COVID-19 had less effect on operations in Q1 and cited improving market conditions, vaccine availability, easing restrictions and higher commodity prices, while noting that pandemic and economic effects remain uncertain. Inflation in labor, raw materials and transportation continued to pressure costs.
- Management stated that, based on its forecast and May 2022 financing amendments, working capital and capital-expenditure financing should be sufficient to fund operations and obligations for one year after issuance of the statements. TEAM said it was compliant with debt covenants at March 31; continuing compliance depends on future performance and amended covenant terms. The filing warns that additional lender waivers or amendments are not assured.
- On May 6, 2022, after quarter-end, TEAM amended its ABL and term-loan arrangements to move certain 2023 note-related trigger dates to 75 days before note maturity from 120 days. The term-loan and subordinated-loan amendments also raised the maximum net leverage ratio test for the quarter ending March 31, 2023 from 7.0x to 12.0x.
- TEAM reported a $222 million jury verdict in the Most wrongful-death case. It estimated a possible outcome range of $13 million to approximately $51 million and accrued its best estimate; aggregate legal accruals were approximately $44 million, with about $5 million not covered by insurance. The judgment was entered in January 2022, post-judgment motions were denied in April, and an appeal was pending. TEAM believes the judgment is unlikely to be affirmed.
- A California wage-and-hour class settlement was formally agreed in March 2022 and was awaiting court approval. An EPA matter was settled for $0.2 million in penalties in April 2022. TEAM had $7.1 million of deferred employer payroll taxes due at the end of 2022.
- Variable-rate debt exposes TEAM to rate increases; the company estimated a 100-basis-point increase would add approximately $3.6 million in annual interest expense and reduce operating cash flow by the same amount, based on March 31 borrowings. Other stated risks include high leverage, covenant compliance, receivable collection, project timing, inflation, COVID-19 impacts, litigation, foreign exchange and NYSE listing requirements. TEAM reported regaining NYSE minimum-price compliance on April 1, 2022.
Important facts for investors to verify
- Whether operating cash generation improves and receivables convert to cash, given the sharp Q1 operating cash outflow and increased working capital.
- Available borrowing capacity, collateral requirements, cash restrictions and covenant headroom under the amended facilities, and the ability to service high-cost variable-rate debt.
- Funding and refinancing plans for the $95.2 million of convertible notes due August 2023, including the consequences of the related maturity-trigger provisions.
- The outcome, insurance coverage and ultimate cash exposure for the Most litigation, and approval and payment timing for other legal settlements.
- Whether revenue growth and improved gross margin persist after accounting for inflation, project timing and the large increase in Quest Integrity activity.
- The effects of the Corre equity issuance and outstanding warrants on future share dilution. Non-GAAP adjusted EBITDA and free cash flow are company-defined measures and should be assessed alongside GAAP results.