TEAM, Inc. — Q1 2021 Form 10-Q
Business context and period. TEAM provides inspection, heat-treating, mechanical, and asset-integrity services through its IHT, Mechanical Services (MS), and Quest Integrity segments. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $194.6 million | $236.8 million |
| Gross margin | $43.7 million; 22.5% | $57.5 million; 24.3% |
| Operating loss | $24.3 million | $212.9 million |
| Net loss | $34.3 million; $1.11 per diluted share | $199.7 million; $6.54 per diluted share |
| Adjusted EBITDA (non-GAAP) | $(5.3) million | $(3.9) million |
| Cash used in operating activities | $17.2 million | Cash provided: $0.9 million |
| Free cash flow (non-GAAP) | $(20.6) million | $(7.4) million |
Revenue fell 17.8% year over year (excluding favorable foreign exchange, down $45.6 million). By segment, revenue declined 15.5% at IHT, 16.4% at MS, and 34.2% at Quest Integrity. Gross margin percentage also decreased. The much smaller reported operating loss principally reflects the absence of the $191.8 million non-cash IHT goodwill impairment recorded in Q1 2020; it does not indicate improved underlying consolidated performance. Excluding management-identified non-core items, operating loss was $18.6 million versus $17.2 million, and adjusted net loss was $29.8 million versus $18.0 million.
Management attributed lower activity to COVID-19 and, during Q1 2021, a winter storm that disrupted power and temporarily closed refining and petrochemical facilities in the Midwest and Gulf Coast. Operating cash flow weakened as lower revenue and receipts contributed to the loss. Investing cash outflow was $3.4 million, primarily capital spending; financing provided $16.8 million, mainly from net ABL borrowings. Cash decreased $2.2 million to $22.3 million.
Balance sheet, debt, and liquidity
- At March 31, 2021, total assets were $736.2 million, total liabilities $553.3 million, and equity $182.9 million. Current assets of $294.2 million exceeded current liabilities of $148.3 million.
- Total debt and finance lease obligations were $333.1 million, including $28.0 million outstanding under the ABL Facility, $214.7 million under the Term Loan, and $85.3 million net carrying value of convertible debt. The convertible notes’ principal outstanding was $93.1 million.
- Cash was $22.3 million, with approximately $46.7 million of available ABL borrowing capacity. The ABL Facility has a $150 million commitment and matures in December 2024; the Term Loan matures in December 2026 and carried an 11.95% effective interest rate. The company reported compliance with both facilities’ covenants at quarter-end.
- Management said existing liquidity sources were expected to meet anticipated operating cash requirements for at least the next 12 months, while noting that weak markets could affect cash generation and covenant compliance. A 100-basis-point increase in market rates would raise annual interest expense and reduce operating cash flow by approximately $2.4 million, based on quarter-end borrowings.
Outlook, commentary, and significant items
No numerical revenue, earnings, or cash-flow guidance is provided. Management viewed vaccine availability, easing restrictions, economic reopenings, and higher commodity prices as positive signs of recovery, but said the pandemic’s duration remained uncertain. It expected refining utilization to improve as global petroleum demand strengthened. The company continued to limit capital spending to critical projects with the highest expected returns and announced a new operating-group structure focused on performance, diversification, and client value.
- Q1 included $1.9 million of restructuring charges and $5.7 million of operating expenses identified by management as not indicative of core activity, including legal costs, severance, and professional fees. Reorganization-related expenses were expected to continue through 2021.
- COVID-related government subsidies reduced Q1 operating expenses by $2.0 million and SG&A by $0.4 million. Deferred employer Social Security taxes totaled $14.2 million, with approximately half due in each of 2021 and 2022; other deferred foreign payroll and tax payments totaled $4.6 million.
- Two California wage-and-hour putative class actions remained pending after removal to federal court in April 2021; TEAM said it intended to defend them. In April, the EPA issued notices alleging potential waste-management compliance violations at seven Texas and Louisiana facilities. The company could not estimate potential penalties.
- Foreign-currency transaction losses were $1.1 million. The company also remained exposed to variable-rate borrowing costs and customer payment delays, project timing, market conditions, and pandemic-related operating disruption.
Important facts for investors to verify
- Whether demand and revenue recover across all three segments, and whether margins and operating cash flow improve without reliance on additional borrowing.
- Available ABL capacity, covenant headroom, debt-service costs, and access to liquidity under continued weak operating conditions.
- The outcome and potential financial exposure from the California litigation and EPA notices; the filing does not provide a clear estimate of any ultimate loss.
- Timing and costs of the 2021 reorganization, deferred payroll-tax payments, and other cash obligations.
- Potential dilution: the $93.1 million principal of 5% convertible notes due 2023 and warrants exercisable for up to 3,582,949 shares at $7.75 per share.