Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “we,” “our” and “us” are used in this report to refer to Team, Inc., to one or more of its consolidated subsidiaries or to all of them taken as a whole.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this report, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (“our Annual Report on Form 10-K”) and other documents previously filed with the SEC. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those described in more detail under the heading “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. See also “Cautionary Statement Regarding Forward-Looking Statements” below.
Cautionary Note Regarding Forward-Looking Statements.
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements include statements containing words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may” and similar expressions. We base our forward-looking statements on beliefs and assumptions that we believe to be reasonable, and our current expectations, estimates and projections about ourselves and our industry. However, all forward-looking statements are subject to risks and uncertainties, many of which are out of our control, that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
There are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks include those disclosed under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as, risks related to:
• our ability to continue as a going concern;
• our ability to manage inflationary pressures in our operating costs;
• the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the impact of the COVID-19 pandemic or other public health crises, the ongoing conflict in Ukraine, and future economic uncertainties, particularly in industries in which we are heavily dependent;
• delays in the commencement of major projects, whether due to the COVID-19 pandemic or other factors;
• our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our client s’ industry;
• our ability to expand into new markets (including low carbon energy transition) and attract clients in new industries may be limited due to our competition’s breadth of service offerings and intellectual property;
• we have significant debt and high leverage which could have a negative impact on our financing options, liquidity position and ability to manage increases in interest rates;
• the timing of new client contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results;
• risk of non-payment and/or delays in payment of receivables from our clients;
• our ability to generate sufficient cash from operations, access our ABL Credit Facility, or maintain our compliance with our ABL Credit Agreement, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement covenants;
• compliance with continued listing standards of the New York Stock Exchange;
• if we cannot regain compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our
common stock, which could negatively affect our company, the price of our common stock and our shareholders’ ability to sell our common stock and may lead to potential events of default on existing debt instruments.
• our financial forecasts are based upon estimates and assumptions that may materially differ from actual results;
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• we may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters, including costs incurred in connection with the implementation of preventative measures required in regard to mitigation of the spread of COVID-19 or other public health crises;
• changes in laws or regulations in the local jurisdictions that we conduct our business;
• the inherently uncertain outcome of current and future litigation;
• if we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which could have a material adverse effect on our business; and
• acts of terrorism, war or political or civil unrest in the United States or elsewhere, including the current events involving Russia and Ukraine, changes in laws and regulations, or the imposition of economic or trade sanctions affecting international commercial transactions.
General Description of Business
We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our clients’ most critical assets. We conduct operations in three segments: Inspection and Heat Treating (“IHT”), Mechanical Services (“MS”) and Quest Integrity. Through the capabilities and resources in these three segments, we believe that we are uniquely qualified to provide integrated solutions involving: inspection to assess condition; engineering assessment to determine fitness for purpose in the context of industry standards and regulatory codes; and mechanical services to repair, rerate or replace based upon the client’s election. In addition, we are capable of scaling with the client’s needs, as dictated by the severity of the damage found and the related operating conditions, from standard services to some of the most advanced services and integrated asset integrity and reliability management solutions available in the industry. We also believe that we are unique in our ability to provide services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services and (iii) nested or run-and-maintain services.
IHT provides conventional and advanced non-destructive testing (“NDT”) services primarily for the process, pipeline and power sectors, and pipeline integrity management services, and field heat treating and thermal services, tank management solutions, and pipeline integrity solutions, as well as associated engineering and condition assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities. IHT also provides advanced digital imaging including remote digital video imaging, laser scanning and laser profilometry-enabled reformer care services.
MS provides solutions designed to serve clients’ unique needs during both the operational (onstream) and off-line states of their assets. Our onstream services include our range of standard to custom-engineered leak repair and composite solutions; emissions control and compliance; hot tapping and line stopping; and on-line valve insertion solutions, which are delivered while assets are in an operational condition, which maximizes client production time. Asset shutdowns can be planned, such as a turnaround maintenance event, or unplanned, such as those due to component failure or equipment breakdowns. Our specialty maintenance, turnaround and outage services are designed to minimize client downtime and are primarily delivered while assets are off-line and often through the use of cross-certified technicians, whose multi-craft capabilities deliver the production needed to achieve tight time schedules. These critical services include on-site field machining; bolted-joint integrity; vapor barrier plug testing; and valve management solutions.
Quest Integrity provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass two broadly-defined disciplines: (1) highly specialized in-line inspection services for historically unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; and (2) advanced engineering and condition assessment services through a multi-disciplined engineering team and related lab support.
We market our services to companies in a diverse array of heavy industries which include:
• Energy (refining, power, renewables, nuclear and liquefied natural gas);
• Manufacturing and Process (chemical, petrochemical, pulp and paper industries, manufacturing, automotive and mining);
• Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas);
• Public Infrastructure (amusement parks, bridges, ports, construction and building, roads, dams and railways); and
• Aerospace and Defense.
In January 2021, we announced a strategic reorganization (the “Operating Group Reorganization”). The new streamlined structure supports our global operations with greater focus on further improving operational and financial performance through
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three new operating groups: Inspection and Heat Treating Group (the “IHT Group”), Mechanical & Onstream Services group (the “MOS Group”) and Asset Integrity & Digital (the “AID Group”). The IHT Group, which included in the IHT segment, is dedicated to growing its stable nested footprint as regulatory compliance requirements increase, expanding turnaround activity, and diversifying its end markets globally, such as through increased investment in the Aerospace business line. The MOS Group, which is included the MS segment, continues to target turnarounds and capital projects, and improve performance, efficiency, and longevity of aging critical assets. The MOS Group is primed to grow with the industry recovery led by the high demand of maintenance and call-out work. The AID Group, which is included in our Quest Integrity segment, will focus on expanding mechanical and pipeline integrity, risk-based inspection, remote visual inspection, and digital platform. The AID Group will also optimize our research and development activities, including product and technology development. These changes had no effect on our reportable segments.
Significant Factors Impacting Results and Recent Developments
Our revenues, gross margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Cautionary Note Regarding Forward-Looking Statements above and Part 1, Item 1A of our Annual Report on Form 10-K. “Risk Factors” included in our Annual Report on Form 10-K include items which have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain factors are described below.
COVID-19 Pandemic and Market Conditions Update. The impact of COVID-19 had less effect on our workforce and operations during the second quarter of 2022, as well as the operations of our clients, suppliers and contractors. However, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, rising interest rates, disruption to global supply chains, declines in economic growth, and uncertainty about economic stability. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A, “Risk Factors” for additional information.
Recent Financing Transactions. During 2022 the Company executed a number of amendments to its debt instruments, including amendments to our ABL Credit Facility, Subordinated Term Loan Credit Agreement, and the Term Loan Credit Agreement. Refer to Note 11 - Debt to the unaudited condensed consolidated financial statements for additional details related to these amendments.
Listing Notices from NYSE. The Company’s share price and total market capitalization have fallen below NYSE listing standard thresholds and therefore the Company received the following notices of non-compliance from the NYSE .
• On June 17, 2022, we were notified from the NYSE that the Company was no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE's Listed Company Manual due to the fact that the Company's average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, its shareholders' equity was less than $50.0 million. The notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE during the applicable cure period, and does not result in a default under the Company's material debt or other agreements.
• On July 13, 2022, the Company was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual requiring listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period. The Company has a period of six months following the receipt of the notice to regain compliance with the minimum share price requirement, with the possibility of extension at the discretion of the NYSE. In order to regain compliance, on the last trading day in any calendar month during the cure period, our common stock must have: (i) a closing price of at least $1.00 per share; and (ii) an average closing price of at least $1.00 per share over the 30 trading day period ending on the last trading day of such month. The notice has no immediate impact on the listing of the Common Stock, which will continue to be listed and traded on the NYSE during this period, subject to the Company’s compliance with the other continued listing requirements of the NYSE. Our common stock will continue to trade on the NYSE under the symbol “TISI” but will have an added designation of “.BC” to indicate the status of our common stock as “below compliance.” If the Company fails to regain compliance with Section 802.01C of the NYSE Listed Company Manual by the end of the cure period, our common stock will be subject to the NYSE’s suspension and delisting procedures.
• As required by the NYSE, the Company notified the NYSE of its intent to cure the deficiency and restore its compliance with the NYSE continued listing standards. In accordance with applicable NYSE procedures on August 1, 2022 the Company submitted a plan advising the NYSE of the definitive actions the Company has taken and is taking, that would bring it into compliance with the minimum global market capitalization and minimum average closing share price listing standards within 18 months of receipt of the written notice. The NYSE will review the plan and, within 45 days of its receipt, determine whether the Company has made a reasonable demonstration of an ability to conform to the relevant standards in the 18-month period. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and traded on the NYSE during the 18-month period, subject to the Company’s compliance with other NYSE continued
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listing standards and continued periodic review by the NYSE of the Company’s progress with respect to its plan. The Company can provide no assurances that the NYSE will accept its plan or that it will be able to satisfy any of the steps outlined in the plan submitted to the NYSE and maintain the listing of its shares on the NYSE.
Current Quarter Financial Results and Significant Operational Trends and Events
Key consolidated financial results for the three and six months ended June 30, 2022 included:
• Revenues for the three months ended June 30, 2022 increased 5.2%, or $12.4 million, to $251.3 million as compared to consolidated revenues of $238.9 million for the three months ended June 30, 2021;
• Revenues for the six months ended June 30, 2022 increased 8.4%, or $36.4 million, to $469.8 million as compared to consolidated revenues of $433.5 million for the six months ended June 30, 2021;
• Operating loss for the three months ended June 30, 2022 improved 53.6%, or $3.2 million, to a loss of $2.8 million as compared to a loss of $6.0 million for the three months ended June 30, 2021;
• Operating loss for the six months ended June 30, 2022 improved 37.3%, or $11.3 million, to a loss of $19.0 million as compared to a loss of $30.3 million for the six months ended June 30, 2021;
• Net loss for the three months ended June 30, 2022 increased by 23.2%, or $4.1 million, to a loss of $21.6 million as compared to a loss of $17.5 million for the three months ended June 30, 2021;
• Net loss for the six months ended June 30, 2022 increased by 4.3%, or $2.2 million, to a loss of $54.0 million as compared to a loss of $51.8 million for the six months ended June 30, 2021;
• Basic earnings per share for the three months ended June 30, 2022 improved 11.7%, or $0.07, to negative $0.50 as compared to negative $0.57 for the three months ended June 30, 2021;
• Consolidated Adjusted EBITDA (a non-GAAP financial measure) for the three months ended June 30, 2022 improved 56.6%, or $5.2 million, to $14.3 million, as compared to $9.1 million for the three months ended June 30, 2021;and
• Net cash used by operating activities for the three months ended June 30, 2022 improved by 80.8%, or $14.2 million to $3.4 million, as compared to net cash used in operating activities of $17.6 million for the three months ended June 30, 2021.
For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to common stock, the most comparable GAAP financial measure, see Non-GAAP Financial Measures below.
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Results of Operations
The following is a comparison of our results of operations for the three months ended June 30, 2022 compared to June 30, 2021.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following table sets forth the components of revenue and operating loss from our operations for the three month period ended June 30, 2022 and 2021 (in thousands):
Three Months Ended June 30, Increase
(Decrease)
2022 2021 $ %
(unaudited) (unaudited)
Revenues by business segment:
IHT $ 114,124 $ 117,462 $ (3,338) (2.8) %
MS 107,416 97,167 10,249 10.5 %
Quest Integrity 29,725 24,244 5,481 22.6 %
Total revenues $ 251,265 $ 238,873 $ 12,392 5.2 %
Operating income (loss):
IHT $ 5,514 $ 7,395 $ (1,881) (25.4) %
MS 6,984 2,328 4,656 NM
Quest Integrity 8,014 5,702 2,312 40.6 %
Corporate and shared support services (23,292) (21,419) (1,873) 8.7 %
Total operating loss $ (2,780) $ (5,994) $ 3,214 53.6 %
Interest expense, net (18,480) (9,598) (8,882) 92.5 %
Other income (expense), net 1,476 (1,044) 2,520 NM
Loss before income taxes $ (19,784) $ (16,636) $ (3,148) (18.9) %
Provision for income taxes (1,768) (857) (911) NM
Net loss $ (21,552) $ (17,493) $ (4,059) (23.2) %
NM = Not meaningful
Revenues. Total revenues increased $12.4 million or 5.2% from the prior year quarter primarily driven by increases in MS revenue and Quest Integrity revenue, partially offset by decreases in IHT revenue. Revenues were impacted from foreign exchange negatively by $5.0 million and positively by $8.5 million during the three month period ended June 30, 2022 and 2021. IHT revenues decreased by $3.3 million, MS revenue increased by $10.2 million and Quest Integrity revenue increased by $5.5 million. IHT segment’s second quarter revenue decreased 2.8% compared to the prior year quarter, primarily driven by completion of a significant Canadian customer contract during the second quarter in the prior year. The MS segment delivered second quarter revenue growth of 10.5% over the prior year quarter, primarily from increases in the Canada and US markets, and valve business, partially offset by decreases in international due to non-repeating project work in the UK and continued weakness in Europe offsetting growth in Latin America and the Middle East. The 22.6% increase in revenue for Quest Integrity was due to increased demand in core and growth markets across most geographies and $1.3 million in 2021 deferred projects executed in Q2 2022.
Operating income (loss). Overall operating loss was $2.8 million in the current year quarter compared to operating loss of $6.0 million in the prior year quarter. The overall decrease in operating loss is primarily attributable to MS which experienced an increase in operating income of $4.7 million due to $1.5 million increase in Canada, $2.1 million increase in the valve business, and realized efficiency gains in equipment centers, manufacturing, and engineering, partially offset by lower operating income in the US and international areas. Quest Integrity operating income increased $2.3 million due to increased utilization and a favorable project mix. IHT experienced a decrease of $1.9 million in operating income due to a Canadian customer contract completed in the current period, and the lack of COVID-19 related subsidies in the 2022 period that were received in 2021. Corporate operating loss increased due to higher professional fees related to debt restructuring partially offset by headcount reductions. Additionally, we continue to realize cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.
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For the three months ended June 30, 2022, operating loss includes net expenses totaling $6.9 million that we do not believe are indicative of our core operating activities, the prior year quarter included $2.6 million of such items, as detailed by segment in the table below (in thousands):
Expenses reflected in operating loss that are not indicative of our core operating activities (unaudited) (in thousands):
IHT MS Quest Integrity Corporate and shared support services Total
Three Months Ended June 30, 2022
Professional fees and other 1
$ — $ — $ — $ 4,693 $ 4,693
Legal costs 2
— — — 1,200 1,200
Severance charges, net 3
25 54 12 929 1,020
Total $ 25 $ 54 $ 12 $ 6,822 $ 6,913
Three Months Ended June 30, 2021
Professional fees and other 1
$ — $ — $ — $ 688 $ 688
Legal costs 2
— — — 1,634 1,634
Severance charges, net 3
10 216 42 33 301
Total $ 10 $ 216 $ 42 $ 2,355 $ 2,623
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1 For the three months ended June 30, 2022, includes $3.2 million related to costs associated with the debt financing and $1.5 million of corporate support costs. For the three months ended June 30, 2021, includes $0.7 million of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).
2 For the three months ended June 30, 2022, primarily relates to legal matters. For June 30, 2021, primarily relates to accrued legal matters and other legal fees.
3 For the three months ended June 30, 2022, $1.0 million primarily related to customary severance costs associated with staff reductions. For the three months ended June 30, 2021, includes $0.3 million related to the Operating Group Reorganization.
The detail of operating income (loss) excluding non-core expenses are as follows (unaudited) (in thousands):
Three Months Ended June 30, Increase
(Decrease)
2022 2021 $ %
Operating income (loss), excluding non-core expenses:
IHT $ 5,539 $ 7,405 $ (1,866) (25.2) %
MS 7,038 2,544 4,494 NM
Quest Integrity 8,026 5,744 2,282 39.7 %
Corporate and shared support services (16,470) (19,064) 2,594 13.6 %
Total operating income (loss), excluding non-core expenses $ 4,134 $ (3,371) $ 7,505 NM
Excluding the impact of these identified non-core items in both periods, operating income improved by $7.5 million, consisting of lower operating income at IHT of $1.9 million, higher operating income at MS and Quest Integrity of $4.5 million and $2.3 million, respectively, and a decrease in corporate and shared support services expenses of $2.6 million. The lower operating income in IHT is due to a Canadian customer contract completed in the current period, and inflationary cost pressures associated with the ramp up in activity.
Interest expense, net. Interest expense increased $8.9 million, or 92.5% compared to the prior year quarter, primarily due to the increased outstanding debt amount, attributable to the debt financing executed in the quarter ended March 31, 2022 and increased amortization of deferred financing costs, debt and warrant discounts and debt issuance costs. Due to the various maturity trigger events, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was shortened to reflect the accelerated maturity dates. This resulted in an additional $4.6 million in amortization charges during the three months ended June 30, 2022. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.
Other income (expense), net. Other income (expense), net increased $2.5 million from the prior year quarter expense of $1.0 million to a gain of $1.5 million primarily due to insurance proceeds of $0.9 million in cash from natural disaster coverage, received in June 2022, gain on disposal of assets of $1.2 million, and a pension gain of $0.2 million, partially offset by higher foreign currency transaction losses realized in the prior year period.
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Taxes. The provision for income tax was $1.8 million on the pre-tax loss from continuing operations of $19.8 million in the current year quarter, compared to a $0.9 million income tax provision on a pre-tax loss of $16.6 million in the prior year quarter. The effective tax rate, inclusive of discrete items, was a provision of 9.0% for the three months ended June 30, 2022, compared to a provision of 5.1% for the three months ended June 30, 2021. The effective tax rate change from the prior year quarter compared to the current year quarter is due an increase in the valuation allowance.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following is a comparison of our results of operations for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
The components of revenue and operating income (loss) from our operations consisted of the following (in thousands):
Six Months Ended June 30, Increase
(Decrease)
2022 2021 $ %
(unaudited) (unaudited)
Revenues by business segment:
IHT $ 209,721 $ 208,601 $ 1,120 0.5 %
MS 200,857 184,563 16,294 8.8 %
Quest Integrity 59,263 40,327 18,936 47.0 %
Total revenues $ 469,841 $ 433,491 $ 36,350 8.4 %
Operating income (loss):
IHT $ 5,648 $ 7,759 $ (2,111) (27.2) %
MS 7,497 2,443 5,054 NM
Quest Integrity 14,218 5,450 8,768 NM
Corporate and shared support services (46,346) (45,946) (400) (0.9) %
Total operating loss $ (18,983) $ (30,294) $ 11,311 37.3 %
Interest expense, net (37,085) (18,994) (18,091) (95.2) %
Other income (expense), net 4,178 (1,994) 6,172 NM
Loss before income taxes $ (51,890) $ (51,282) $ (608) (1.2) %
Provision for income taxes (2,124) (502) (1,622) NM
Net loss $ (54,014) $ (51,784) $ (2,230) (4.3) %
Revenues. Total revenues increased $36.4 million or 8.4% from the prior year period, with all segments seeing increases compared to prior year period. IHT revenues increased by $1.1 million, MS revenue increased by $16.3 million and Quest Integrity revenue increased by $18.9 million. Revenues were impacted from foreign exchange negatively by $6.6 million and positively by $11.9 million during the six month period ended June 30, 2022 and 2021. IHT segment’s year to date 0.5% increase in revenue, compared to the prior year period was primarily driven by increases in US business partially offset by decreases in Canada and international. The MS segment 8.8% increase in revenue compared to the prior year period, primarily from increases of $8.0 million in Canada, $4.2 million in the US, and $3.2 million in the valve business. The 47.0% increase in revenue for Quest Integrity was due to a pronounced recovery of the downstream and pipeline energy markets, continued success in adjacent growth markets and execution of approximately $7.0 million of deferred projects from 2021.
Operating loss. Overall operating loss was $19.0 million in the current year period compared to an operating loss of $30.3 million in the prior year period. The overall decrease in operating loss is attributable to MS experiencing a $5.1 million increase in operating income due to strength in the valve business of $2.0 million, a $1.4 million increase in Canada business and improvements in machinery, engineering and equipment centers. Quest Integrity realized a $8.8 million improvement in operating income due to increased customer sales volume, utilization and a favorable project mix. IHT experienced a decrease in operating income due to declines in aerospace and Canada business, partially offset by a $1.2 million improvement in the US. Corporate operating income was similar to the prior period due to cost reductions, partially offset by higher professional fees in 2022.
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For the six months ended June 30, 2022, operating loss includes net expenses totaling $14.1 million that we do not believe are indicative of our core operating activities as they relate to one time or non-reoccurring items, while the prior year period included $8.3 million of such items, as detailed by segment in the table below (in thousands):
Expenses reflected in operating loss that are not indicative of our core operating activities (unaudited) (in thousands):
IHT MS Quest Integrity Corporate and shared support services Total
Six Months Ended June 30, 2022
Professional fees and other 1
$ — $ — $ — $ 10,036 $ 10,036
Legal costs 2
— — — 1,728 1,728
Severance charges, net 3
41 54 12 2,263 2,370
Total $ 41 $ 54 $ 12 $ 14,027 $ 14,134
Six Months Ended June 30, 2021
Professional fees and other 1
$ — $ — $ — $ 1,834 $ 1,834
Legal costs 2
— — — 4,109 4,109
Severance charges, net 3
485 355 251 1,257 2,348
Total $ 485 $ 355 $ 251 $ 7,200 $ 8,291
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1 For the six months ended June 30, 2022, includes $7.9 million related to costs associated with the debt financing and $2.1 million of corporate support costs. For the six months ended June 30, 2021, includes $1.5 million of costs associated with the Operating Group Reorganization (exclusive of restructuring costs) and $0.3 million of costs associated with the OneTEAM program (exclusive of restructuring costs).
2 For the six months ended June 30, 2022, primarily relates to accrued legal matters. For the six months ended June 30, 2021, primarily relates to accrued legal matters and other legal fees.
3 For the six months ended June 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.1 million associated with severance across multiple corporate departments. For the six months ended June 30, 2021, includes $2.2 million associated with the Operating Group Reorganization and $0.2 million associated with other severances.
The detail of operating income (loss) excluding non-core expenses are as follows (unaudited) (in thousands):
Six Months Ended June 30, Increase
(Decrease)
2022 2021 $ %
Operating income (loss), excluding non-core expenses:
IHT $ 5,689 $ 8,244 $ (2,555) (31.0) %
MS 7,551 2,798 4,753 NM
Quest Integrity 14,230 5,701 8,529 NM
Corporate and shared support services (32,319) (38,746) 6,427 16.6 %
Total operating loss, excluding non-core expenses $ (4,849) $ (22,003) $ 17,154 78.0 %
NM = Not meaningful
Excluding the impact of these identified non-core items in both periods, operating loss decreased by $17.2 million, consisting of lower operating income in IHT of $2.6 million, offset by increases in operating income from MS, Quest Integrity, and corporate and shared support services of $4.8 million, $8.5 million, and $6.4 million, respectively. The higher operating income in Quest Integrity reflects recovery of the downstream and pipeline energy markets. The operating income increase in MS was largely attributable to ramp up in activity from customers in valve business and Canada. The operating income increase from corporate and shared support services improved due to staff reductions and other cost efficiency projects.
Interest expense, net. Interest expense, net increased $18.1 million, or 95.2%, from the prior year period primarily due to higher outstanding debt, higher interest rate paid on paid-in-kind interest, and accelerated amortization of deferred financing costs, debt and warrant discounts and debt issuance costs. Due to the various maturity trigger events, the amortization period for deferred financing costs, debt and warrant discounts and debt issuance costs was shortened to reflect the accelerated maturity dates. This resulted in an additional $4.6 million in amortization charges during the six months ended June 30, 2022. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion. Additionally, due to the debt extinguishment of the Citi Credit Agreement on February 11, 2022, during the three months ended March 31, 2022, the Company recognized interest expense of $2.7 million of related deferred financing costs previously capitalized.
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Other income (expense), net . Other income (expense) improved $6.2 million from the prior year period primarily due to gains on the sale of equipment and inventory of $3.5 million, $0.9 million related to insurance proceeds from a natural disaster claim, and $0.4 million from pension gain, partially offset by higher foreign currency transaction losses realized in the prior year period. Foreign currency transaction losses in the current year period reflect the effects of fluctuations in the U.S. Dollar relative to the currencies to which we have exposure.
Taxes. The provision for income tax was $2.1 million on the pre-tax loss from continuing operations of $51.9 million in the current year-to-date compared to income tax expense of $0.5 million on the pre-tax loss of $51.3 million in the in the prior year-to-date period. The effective tax rate was a provision of 4.1% for the six months ended June 30, 2022, compared to a provision of 1.0% for the six months ended June 30, 2021. The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.
Non-GAAP Financial Measures and Reconciliations
We use supplemental non-GAAP financial measures which are derived from the condensed consolidated financial information including adjusted net income (loss); adjusted net income (loss) per diluted share, earnings before interest and taxes (“EBIT”); adjusted EBIT (defined below); adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) and free cash flow to supplement financial information presented on a GAAP basis.
We define adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items: costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization and non-cash share-based compensation, and other non cash costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with our past integration and transformation program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures.
Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders.
Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below.
The following tables set forth the reconciliation of Adjusted Net Income (Loss), EBIT and EBITDA to their most comparable GAAP financial measurements:
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TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(unaudited, in thousands except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Adjusted Net Income (Loss):
Net loss $ (21,552) $ (17,493) $ (54,014) $ (51,784)
Professional fees and other 1
4,693 688 10,036 1,834
Legal costs 2
1,200 1,634 1,728 4,109
Severance charges, net 3
1,020 301 2,370 2,348
Natural disaster insurance recovery (872) — (872) —
Tax impact of adjustments and other net tax items 4
(2) (40) (6) (63)
Adjusted net loss $ (15,513) $ (14,910) $ (40,758) $ (43,556)
Adjusted net loss per common share:
Basic and diluted $ (0.36) $ (0.48) $ (1.01) $ (1.41)
Consolidated Adjusted EBIT and Adjusted EBITDA:
Net loss $ (21,552) $ (17,493) (54,014) $ (51,784)
Provision (benefit) for income taxes 1,768 857 2,124 502
Gain on equipment sale (1,170) — (3,483) —
Interest expense, net 18,480 9,598 37,085 18,994
Professional fees and other 1
4,693 688 10,036 1,834
Legal costs 2
1,200 1,634 1,728 4,109
Severance charges, net 3
1,020 301 2,370 2,348
Foreign currency (gain) loss 5
754 1,218 569 2,341
Pension credit 6
(190) (174) (393) (347)
Natural disaster insurance recovery (872) — (872) —
Consolidated Adjusted EBIT 4,131 (3,371) (4,850) (22,003)
Depreciation and amortization
Amount included in operating expenses 4,333 5,036 8,912 10,550
Amount included in SG&A expenses 5,245 5,311 10,697 10,756
Total depreciation and amortization 9,578 10,347 19,609 21,306
Non-cash share-based compensation costs 565 2,138 (59) 4,468
Consolidated Adjusted EBITDA $ 14,274 $ 9,114 $ 14,700 $ 3,771
Free Cash Flow:
Cash used in operating activities $ (3,385) $ (17,616) $ (53,391) $ (34,799)
Capital expenditures (6,933) (5,807) (14,001) (9,220)
Free Cash Flow $ (10,318) $ (23,423) $ (67,392) $ (44,019)
____________________________________
1 For the three and six months ended June 30, 2022, includes $4.7 million and $10.0 million, respectively, related to costs associated with the debt financing and corporate support costs. For the three and six months ended June 30, 2021, includes $0.7 million and $1.5 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).
2 For the three and six months ended June 30, 2022, primarily relates to accrued legal matters. For the three and six months ended June 30, 2021, primarily relates to accrued legal matters and other legal fees.
3 For the three months ended June 30, 2022 includes $1.0 million primarily related to customary severance costs associated with staff reductions. For the six months ended June 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.1 million associated with severance across multiple corporate departments. For the three months and six months ended June 30, 2021, $0.3 million and $2.2 million, respectively, associated with the Operating Group Reorganization.
4 Represents the tax effect of the adjustments. Beginning in Q2 2021, we use the statutory tax rate, net of valuation allowance by legal entity to determine the tax effect of the adjustments. Prior to Q2 2021, we used an assumed marginal tax rate of 21%.
5 Represents foreign currency losses primarily due to strengthening USD against EUR, GBP, CAN and AUD.
6 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.
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TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued)
(unaudited, in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Segment Adjusted EBIT and Adjusted EBITDA:
IHT
Operating income $ 5,514 $ 7,395 $ 5,648 $ 7,759
Severance charges, net 1
25 10 41 485
Adjusted EBIT 5,539 7,405 5,689 8,244
Depreciation and amortization 3,096 3,270 6,350 6,740
Adjusted EBITDA $ 8,635 $ 10,675 $ 12,039 $ 14,984
MS
Operating income $ 6,984 $ 2,328 $ 7,497 $ 2,443
Severance charges, net 1
54 216 54 355
Adjusted EBIT 7,038 2,544 7,551 2,798
Depreciation and amortization 4,634 5,043 9,518 10,482
Adjusted EBITDA $ 11,672 $ 7,587 $ 17,069 $ 13,280
Quest Integrity
Operating income (loss) $ 8,014 $ 5,702 $ 14,218 $ 5,450
Severance charges, net 1
12 42 12 251
Adjusted EBIT 8,026 5,744 14,230 5,701
Depreciation and amortization 569 710 1,146 1,422
Adjusted EBITDA $ 8,595 $ 6,454 $ 15,376 $ 7,123
Corporate and shared support services
Net loss $ (42,031) $ (32,918) $ (81,398) $ (67,436)
Provision (benefit) for income taxes 1,768 857 2,124 502
Gain on equipment sale (1,203) — (3,463) —
Interest expense, net 18,480 9,598 37,085 18,994
Foreign currency (gain) losses 2
754 1,218 569 2,341
Pension credit 3
(190) (174) (393) (347)
Professional fees and other 4
4,693 688 10,036 1,834
Legal costs 5
1,200 1,634 1,728 4,109
Severance charges, net 1
929 33 2,263 1,257
Natural disaster insurance recovery (872) — (872) —
Adjusted EBIT (16,472) (19,064) (32,321) (38,746)
Depreciation and amortization 1,279 1,324 2,595 2,662
Non-cash share-based compensation costs 565 2,138 (59) 4,468
Adjusted EBITDA $ (14,628) $ (15,602) $ (29,785) $ (31,616)
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1 For the three months ended June 30, 2022 includes $1.0 million primarily related to customary severance costs associated with staff reductions. For the six months ended June 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.1 million associated with severance across multiple corporate departments. For the three months and six months ended June 30, 2021, $0.3 million and $2.2 million, respectively, associated with the Operating Group Reorganization.
2 Represents foreign currency losses primarily due to strengthening USD against EUR, GBP, CAN and AUD.
3 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.
4 For the three and six months ended June 30, 2022, includes $4.7 million and $10.0 million, respectively, related to costs associated with the debt financing and corporate support costs. For the three and six months ended June 30, 2021, includes $0.7 million and $1.5 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs).
5 For the three and six months ended June 30, 2022, primarily relates to accrued legal matters. For the three and six months ended June 30, 2021, primarily relates to accrued legal matters and other legal fees.
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Liquidity and Capital Resources
General. Financing for our operations consists primarily of our ABL Credit Facility, Term Loan and our Subordinated Term Loan, and Notes (refer to Note - 11 Debt , for additional details). Our principal uses of cash are for working capital needs, capital expenditures and operations. We have suffered recurring operating losses related to unfavorable market conditions, including the impact of the COVID-19 pandemic and cost inflation related to supply chain disruptions. In response to the above, we evaluated the Company’s current liquidity resources within one year after the date of issuance of these condensed consolidated financial statements and determined there is substantial doubt about the Company’s ability to continue as a going concern (as further described in Note 1 - Summary of Significant Accounting Policies and Practices ). Management is evaluating strategic alternatives, including potential asset sales, to address our near-term liquidity needs; and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity to position the Company for improved cash flow generation from operations.
Our ability to maintain compliance with the financial covenants contained in the ABL Credit Facility, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. The effects of the current economic environment, including the COVID-19 pandemic, ongoing conflict in Ukraine and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as our clients and suppliers. Additionally, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our ABL Credit Facility. In addition to our current sources of funding our business, the effects of such events may impact our liquidity or our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy.
We had approximately $24.5 million in available borrowing capacity, consisting of $4.5 million available under the ABL Credit Facility, $10.0 million available under the incremental delayed draw term loan (the “Delayed Draw Term Loans”), and $10.0 million available under the Subordinated Term Loan.
Recently Announced Asset Sale. On August 15, 2022, Team announced it executed a definitive purchase and sale agreement with Baker Hughes to sell Quest Integrity for $280.0 million, before customary post-closing adjustments. Post-closing, Team expects the net proceeds from the Quest Integrity Sale will be used to pay down debt and for general corporate purposes, thereby reducing the Company’s future debt service obligations and leverage and improving its liquidity and capital resources. Refer to Note 20 – Subsequent Events for additional details regarding this transaction.
Cash and cash equivalents . Our cash and cash equivalents at June 30, 2022 totaled $67.4 million, consisting of $41.1 million of unrestricted cash on hand and $26.3 million of restricted cash, pledged as cash collateral for letters of credit and other obligations. Additionally, $21.8 million of the $67.4 million of cash and cash equivalents was in foreign accounts, primarily in the Europe, Canada and Australia, including $1.5 million of cash located in countries where currency restrictions exist.
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Cash Flows
The following table summarizes cash flows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Cash flows provided by (used in): 2022 2021 % Change 2022 2021 % Change
Operating activities $ (3,385) $ (17,616) 81 % $ (53,391) $ (34,799) (53) %
Investing activities (4,840) (5,787) 16 % (8,882) (9,171) 3 %
Financing activities 22,820 20,858 (9) % 64,786 37,666 (72) %
Net change in cash and cash equivalents $ 14,595 $ (2,545) NM $ 2,513 $ (6,304) NM
NM - Not meaningful
Cash flows attributable to our operating activities. For the six months ended June 30, 2022, net cash used in operating activities was $53.4 million. Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $54.0 million . The decline in cash generated from operations was driven by the net loss for the period, $38.0 million decline in working capital, a gain on disposal of assets of $3.5 million, deferred income taxes of $0.4 million, partially offset by amortization of debt issuance costs and debt discount and write off of deferred loan costs of $14.8 million, adjustments to depreciation and amortization of $19.6 million, and paid-in-kind interest of $10.0 million, resulted in negative operating cash flow.
For the six months ended June 30, 2021, net cash used by operating activities was $34.8 million. Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $51.8 million for the period. Overall, the decline in cash generated from operations was driven primarily by the impacts of inclement weather and COVID-19 on our operations which generated reduced revenue and receipts during the period. Partially offsetting the net loss for the period were adjustments of $25.5 million for depreciation and amortization and $4.5 million in non-cash compensation cost.
Cash flows attributable to our investing activities. For the six months ended June 30, 2022, net cash used in investing activities was $8.9 million, consisting primarily of $14.0 million of capital expenditures, partially offset by $5.1 million of cash proceeds from asset sales.
For the six months ended June 30, 2021, net cash used in investing activities was $9.2 million, primarily for capital expenditures.
Cash flows attributable to our financing activities. For the six months ended June 30, 2022, net cash provided by financing activities was $64.8 million consisting primarily of net borrowings under our ABL Credit Facility of $66.1 million and issuance of common stock amounting to $9.7 million cash proceeds from the Equity Issuance partially offset by $10.6 million in payments of debt issuance costs.
On February 11, 2022 we completed a capital structure refinancing, including the ABL Credit Facility which is a new $165.0 million credit facility, consisting of a $130.0 million revolving facility and a $35.0 million delayed draw term loan, plus an incremental $10.0 million of unsecured funding, and an additional $10.0 million equity investment.
For the six months ended June 30, 2021, net cash provided by financing activities was $37.7 million consisting primarily of net borrowings under our Citi Credit Agreement of $40.3 million partially offset by $2.3 million in payments of debt issuance costs.
Effect of exchange rate changes on cash and cash equivalents. For the six months ended June 30, 2022 and 2021, the effect of foreign exchange rate changes on cash was a negative $0.4 million and a positive $0.1 million, respectively. The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S. Dollar exchange rates against the Canadian Dollar, the Euro, the British Pound, the Australian Dollar and Mexican Peso.
Capital Resources. We establish a capital budget at the beginning of each calendar year and review it during the course of the year. Our capital budgets are based upon our estimate of internally generated sources of cash, as well as cash on hand and the available borrowing capacity under our ABL Credit Facilities. We expect to finance our 2022 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and our credit facility. Actual capital expenditure levels may vary significantly due to many factors, including industry conditions; the prices and availability of goods and services; and the extent to which non-strategic assets are sold.
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We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows and projected debt-repayment schedule, and evaluate our available alternative sources of liquidity, including accessing debt and equity capital markets in light of current and expected economic conditions. As discussed above, we will require additional financing to fund our operations for the next 12 months and beyond. However, we believe that our liquidity position and ability to generate cash flows from our operations will be adequate to fund 2022 operations and continue to meet our other obligations. See Note 1 - Summary of Significant Accounting Policies and Practices for further information.
Contractual Obligations. We have various contractual obligations in the normal course of our operations. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the contractual obligation disclosure since year-end 2021, see Note 11 - Debt for additional details regarding amendments to our debt agreements that were executed during the first quarter of 2022.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K. Except for the item referenced below, there were no material changes to our critical accounting policies during the six months ended June 30, 2022.
ASU 2020-06 Adoption. In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . The ASU simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. On January 1, 2022, we adopted the ASU using the modified retrospective method. We recognized a cumulative effect of initially applying the ASU as an adjustment to the January 1, 2022 opening balance of accumulated deficit. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. Refer to Note 11 - Debt , for additional details.
New Accounting Principles
For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 - Summary of Significant Accounting Policies and Practices to the condensed consolidated financial statements.
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