TEAM, Inc. (NYSE: TISI) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. TEAM provides inspection, maintenance, repair and asset-integrity services through Inspection and Heat Treating (IHT), Mechanical Services (MS) and Quest Integrity. The filing was delayed from its May 11 deadline because COVID-19 restrictions, remote work and furloughs slowed financial reporting and impairment and tax analyses; it was signed June 19, 2020.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $236.8 | $269.6 |
| Gross margin | $57.5 (24.3%) | $65.9 (24.5%) |
| Operating loss | $(212.9) | $(16.5) |
| Net loss | $(199.7) | $(24.2) |
| Loss per diluted share | $(6.54) | $(0.80) |
| Adjusted EBITDA (non-GAAP) | $(3.9) | $3.8 |
| Operating cash flow | $0.9 | $7.6 |
| Capital expenditures | $8.3 | $6.6 |
| Free cash flow (non-GAAP) | $(7.4) | $1.0 |
- Revenue fell 12.2% year over year. IHT revenue declined 15.1% to $107.9 million; MS declined 14.0% to $104.5 million; Quest Integrity increased 16.3% to $24.4 million.
- The operating loss included a $191.8 million non-cash goodwill impairment charge, entirely attributed to IHT. IHT goodwill was written down to zero; goodwill totaled $88.1 million at quarter-end versus $282.0 million at year-end 2019. The fair values of MS and Quest Integrity exceeded their carrying values.
- Excluding identified items, adjusted EBIT was $(17.2) million versus $(11.0) million. Adjusted EBITDA was $(3.9) million versus $3.8 million. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
Financial position and liquidity
- At March 31, cash was $20.5 million, current assets $324.0 million and current liabilities $151.4 million. Total assets were $787.5 million and equity was $227.4 million.
- Total debt and finance lease obligations were $350.7 million, including $142.0 million under the credit facility and convertible notes with $230.0 million principal ($203.3 million net carrying value). Cash increased $8.3 million during the quarter, with $20.2 million of net revolver borrowings contributing to the increase.
- The credit facility then had $275 million of total capacity, including a $225 million revolver, and matured in July 2021. The company reported compliance with its March 31 covenants. Standby letters of credit of $18.3 million reduced facility availability.
- On June 17, 2020, the company amended and extended the facility to January 15, 2022. The amendment reduced revolving availability to $200 million, revised pricing and relaxed or reset certain covenants, while adding minimum cumulative EBITDA tests. Management said it expected to comply and have sufficient credit, but warned future compliance and liquidity were uncertain.
Changes, outlook and risks
- Management attributed lower IHT and MS activity to weather, fewer non-recurring projects, COVID-19-related facility closures and operating curtailments, and the oil-price shock. It expected future results to remain adversely affected; the duration and extent were uncertain. Management anticipated refining utilization would decline further in Q2 and recover gradually in the second half, but said the usual demand uplift following lower utilization had been delayed.
- In response, TEAM implemented furloughs, headcount and compensation reductions, suspended company matching contributions, and restricted spending. Executive salary reductions of 15%–20% and a 20% board cash-compensation reduction applied in Q2. Capital spending budgets were reduced by more than 30%, with spending focused on critical, higher-return client projects.
- The OneTEAM program was expanded and accelerated. Management targeted $35–$45 million in annual run-rate savings by year-end 2020 and reported approximately $6.6 million of savings in Q1. Further severance and program costs were expected; savings were not assured.
- The quarter’s tax benefit was $20.5 million, including a $7.3 million benefit related to CARES Act net operating loss carrybacks. Goodwill impairment tax effects and a $23.2 million valuation-allowance increase also materially affected the tax result.
- Risks include prolonged pandemic effects, weak oil and gas markets, customer spending cuts and payment delays, project postponements, covenant compliance and access to financing. A 100-basis-point increase in variable rates was estimated to raise annual interest expense by about $1.4 million.
- Disclosure controls were deemed ineffective because of a previously reported material weakness in internal control over financial reporting. Remediation was underway but not yet complete. A Quest Integrity patent dispute was settled, with final settlement and dismissal completed April 6, 2020; the company reported other ordinary-course claims and did not expect uninsured losses to be materially adverse.
Most important facts for investors to verify
- Whether post-quarter revenue, margins and operating cash flow stabilized or worsened as COVID-19 and oil-market conditions developed.
- Available revolver capacity after borrowings and letters of credit, and compliance with the amended facility’s covenants and minimum EBITDA tests.
- Whether the $35–$45 million OneTEAM savings target is achieved, and the related implementation costs.
- Whether further goodwill or other asset impairments, credit losses, or valuation-allowance changes are required.
- Progress and testing evidence for remediation of the material weakness in financial reporting controls.