TEAM, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. TEAM provides industrial inspection, engineering, repair and maintenance services through Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018, whose financial statements were revised for income-tax errors.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $269.6 million | $302.4 million |
| Gross margin | $65.9 million; 24.5% of revenue | $75.5 million; 25.0% of revenue |
| Operating loss | $16.5 million | $14.1 million |
| Net loss | $24.2 million | $12.3 million |
| Loss per share, basic and diluted | $0.80 | $0.41 |
| Cash provided by operations | $7.6 million | $2.2 million |
| Capital expenditures | $6.6 million | $5.5 million |
Cash declined to $15.1 million from $18.3 million at year-end 2018. At March 31, 2019, long-term debt and finance lease obligations totaled $354.8 million, including $152.7 million drawn under the credit facility and $230.0 million principal on convertible notes. The company reported approximately $58 million of available credit-facility borrowing capacity. Total assets were $1.02 billion and total liabilities were $581.9 million.
Material changes versus the prior comparable period
- Revenue decreased $32.8 million, or 10.8%. IHT revenue fell 16.1% and MS revenue fell 8.6%; Quest Integrity revenue grew 16.3%.
- Management attributed weaker IHT and MS activity to market conditions and reduced customer spending, weather disruptions in Canada and parts of the U.S., U.S. government-shutdown-related project delays, fewer large non-recurring projects, discontinued underperforming businesses, and postponed refinery maintenance amid high utilization.
- Operating loss widened by $2.4 million. IHT operating income fell $5.0 million; MS and Quest Integrity operating income increased $3.0 million and $0.6 million, respectively. Corporate and shared-support costs increased $1.0 million.
- Net loss increased despite lower interest expense, partly because Q1 2018 included a $4.5 million gain on a convertible-debt embedded derivative that was no longer marked to fair value after its 2018 reclassification to equity.
- Q1 2018 results were revised: a $5.6 million income-tax benefit correction reduced the reported comparative net loss to $12.3 million from $17.8 million previously stated. The company said the errors were not material and prior filings did not require amendment.
Outlook, risks and unusual items
- Outlook: The filing provides no clear formal revenue or earnings guidance. TEAM expected its OneTEAM restructuring program to be largely completed in the first half of 2019. Estimated total program expenses were not to exceed $30 million; management expected annual cost efficiencies of $35–$45 million by 2020 and reported approximately $5.5 million of savings in Q1. These savings and targets are not assured.
- Liquidity and covenants: The $300 million revolving credit facility matures in July 2020. The company was compliant at quarter-end, with a senior secured leverage ratio of 2.63 versus a 3.50 maximum, and an interest coverage ratio of 2.78 versus a 2.50 minimum. The leverage maximum tightens to 2.75 beginning September 30, 2019. Management was evaluating renewal, replacement or other financing and cautioned that financing and future covenant compliance are not assured.
- Debt and rate exposure: Credit-facility borrowings carry variable rates; management estimated a 100-basis-point rate increase would raise annual interest expense and reduce operating cash flow by about $2 million. Convertible notes bear 5% coupon interest, mature in August 2023, and had a reported fair value of $250.7 million compared with a $196.7 million net carrying amount.
- Cash generation: Operating cash flow benefited from a $15.9 million working-capital decrease, primarily lower receivables, and non-cash expenses; it was partly offset by the $24.2 million net loss. Cash flow therefore does not represent earnings improvement alone.
- Contingencies: Eighty-three lawsuits relating to the 2007 Con Edison steam-main rupture remained pending against TEAM and others. TEAM disputes the allegations, has not accrued liability beyond its deductible, and could not estimate its exposure. The filing also describes ongoing patent litigation; two of three defendants had settled, while an appeal remained against the third.
- Accounting and other items: Adoption of lease accounting on January 1, 2019 added operating-lease assets and liabilities and reduced opening retained earnings by $0.8 million net of tax. Foreign-currency translation contributed $1.8 million of other comprehensive income before tax in Q1.
Most important facts for investors to verify
- Whether demand and turnaround activity in IHT and MS recovered after the reported market, weather and project-timing disruptions.
- Progress toward OneTEAM’s cost-saving targets, remaining program costs, and whether savings are sustainable.
- Availability and terms of refinancing or replacement funding before the July 2020 credit-facility maturity.
- Headroom under the tightening credit covenants and the company’s ability to meet them if operating results remain weak.
- Cash conversion, receivables collection, and the extent to which reported operating cash flow depends on working-capital movements.
- Developments in the Con Edison litigation and any resulting change in estimated exposure or insurance coverage.