TEAM, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. TEAM provides inspection, maintenance, repair and asset-integrity services through Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity.
Financial performance
- Q2 revenue: $238.9 million, up 26.2% from $189.3 million. Excluding favorable foreign exchange of $8.5 million, revenue increased about $41.0 million. Q2 gross margin was $62.8 million, or 26.3% of revenue, versus $57.4 million, or 30.3%, a year earlier.
- Q2 results: Operating loss was $6.0 million versus $4.4 million; net loss was $17.5 million, or $0.57 per share, versus $13.5 million, or $0.44 per share. Higher interest expense and weaker MS operating performance weighed on results.
- Six-month results: Revenue was $433.5 million, up 1.7%; gross margin was $106.5 million, or 24.6% of revenue, versus $114.9 million, or 27.0%. Operating loss was $30.3 million and net loss was $51.8 million, compared with losses of $217.3 million and $213.3 million, respectively, in 2020. The prior-year comparison includes a $191.8 million non-cash goodwill impairment charge.
- Segments: Q2 revenue rose 46.0% at IHT and 51.4% at Quest Integrity, and 4.7% at MS. IHT and Quest Integrity operating income improved, while MS operating income fell 76.5% to $2.3 million. For the first half, MS revenue declined 6.5% and Quest Integrity revenue was nearly flat; IHT revenue increased 10.7%.
- Cash flow: First-half operating cash flow was negative $34.8 million, versus positive $27.2 million. Capital expenditures were $9.2 million; free cash flow, as defined by the company, was negative $44.0 million versus positive $14.8 million. Cash declined $6.2 million to $18.4 million.
- Debt and liquidity: Debt and finance lease obligations totaled $356.5 million, including $49.3 million under the ABL Facility, $215.8 million under the term loan and $93.1 million principal on convertible notes. Cash was $18.4 million and ABL borrowing capacity was approximately $55.2 million. The term loan’s effective rate was 11.95%. TEAM reported compliance with debt covenants and management believed available financing and operating cash flows would meet anticipated needs for at least 12 months.
- Other balance-sheet items: Current assets were $371.4 million and current liabilities were $215.3 million. Other accrued liabilities increased to $151.6 million, principally reflecting legal accruals; prepaid and other current assets included a $75.5 million insurance receivable.
Material changes and management commentary
- Q2 revenue benefited from increased activity as markets reopened, several large turnaround projects and favorable currency movements. Management said lingering COVID-related price concessions largely rolled off late in the quarter, while project deferrals limited growth.
- Management cited inflation in materials, transportation and labor as a significant pressure on MS profitability. Higher borrowing costs from the ABL Facility and term loan also increased interest expense.
- COVID-19 and the Delta variant continued to affect employees, customers, suppliers and contractors. Management viewed vaccine rollout, easing restrictions, reopening economies and higher commodity prices as positive indicators, but said the outlook remained uncertain.
- The company launched an operating-group reorganization in January, with expenses expected to continue through year-end 2021. It also limited capital spending to critical projects. No quantified revenue or earnings guidance is provided in the filing.
Risks, contingencies and unusual items
- A Texas jury returned a $222 million compensatory-damages verdict against TEAM in the Most wrongful-death litigation. TEAM intends to challenge the verdict and said affirmation was not probable; it estimated possible outcomes of $13 million to approximately $51 million. The company accrued an estimated probable loss and recorded a related insurance receivable. Across the matters discussed, TEAM reported approximately $79 million of accrued liabilities, of which approximately $4 million was uninsured.
- EPA notices alleged environmental compliance violations at seven Texas and Louisiana facilities. The matter was preliminary and TEAM said it could not estimate potential penalties.
- California wage-and-hour class actions remained pending; TEAM had established a liability for a probable loss. Another personal-injury matter settled in July and was expected to be funded by insurance.
- Goodwill at the MS reporting unit was identified as at risk of impairment if adverse conditions persisted. TEAM was assessing whether a third-quarter triggering event had occurred; the MS reporting unit had $56 million of goodwill at June 30.
- Other stated risks include continued weak or volatile markets, delayed projects and receivable collections, liquidity and covenant compliance, foreign-exchange and variable-rate interest exposure, cyber incidents and uncertain litigation outcomes.
Important facts for investors to verify
- Subsequent developments and insurance coverage, collectability and final resolution of the Most verdict and other legal matters.
- Whether the MS reporting unit experiences a goodwill impairment and how market recovery affects segment earnings.
- Operating cash flow, working-capital needs, ABL availability, covenant headroom and the cost of debt.
- Whether inflation, project deferrals and COVID-related market effects continue to pressure MS margins or delay recovery.
- That adjusted EBITDA and free cash flow are non-GAAP measures; review the filing’s reconciliations alongside GAAP results.