What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-11 · 184 added, 126 removed, 214 unchanged (59% of the section changed)

1 unchanged sentence

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, 2022 (“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.

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• our ability to continue as a going concern;

• we do not have sufficient available cash forecasted to fund our Notes due in August 2023 and we may not be able to restructure our debt prior to their maturity;

• our ability to generate sufficient cash from operations, access our 2022 ABL Credit Facility, or maintain our compliance with our 2022 ABL Credit Agreement, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement covenants;

• our ability to generate sufficient cash from operations, access our 2022 ABL Credit Facility, or maintain our compliance with our 2022 ABL Credit Agreement and A&R Term Loan Credit Agreement covenants;

• our ability to manage inflationary pressures in our operating costs;

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• risk of non-payment and/or delays in payment of receivables from our clients;

• we may not be able to meet the NYSE’s continued listing requirements and rules, and 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;

• we may not be able to continue to meet the New York Stock Exchange’s (“NYSE”) continued listing requirements and rules, and 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;

• our financial forecasts are based upon estimates and assumptions that may materially differ from actual results;

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• acts of terrorism, war or political or civil unrest in the U.S.

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.

or elsewhere, changes in laws and regulations, or the imposition of economic or trade sanctions affecting international commercial transactions.

General Description of Business

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(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 services primarily for the process, pipeline and power sectors, and pipeline integrity management services, and field heat treating services, as well as associated engineering and condition assessment services.

IHT provides conventional and advanced non-destructive testing services primarily for the process, pipeline and power sectors, pipeline integrity management services, and field heat treating services, 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.

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Market Conditions Update.

The lingering impact of widespread public health crises, epidemics and pandemics had less effect on our workforce and operations during the first quarter of 2023, as well as the operations of our clients, suppliers and contractors.

The lingering impact of widespread public health crises, epidemics and pandemics had less effect on our workforce and operations during the first and second quarters of 2023, 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, volatility in foreign currency exchange rates, and uncertainty about economic stability.

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See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information.

Recent Financing Transaction.

During the first quarter of 2023, the Company executed an additional amendment to our Subordinated Term Loan Credit Agreement.

Refer to Note 11 - Debt to the unaudited condensed consolidated financial statements for additional details related to this amendment.

Listing Notices from NYSE.

Recent Refinancing Transaction.

On June 16, 2023, we entered into the A&R Term Loan Credit Agreement and ABL Amendment No.

Refer to Note 1 - Description of Business and Basis of Presentation and Note 11 - Debt to the unaudited condensed consolidated financial statements for additional details.

Listing Notice from NYSE.

During 2022, the Company’s share price and total market capitalization and Shareholders equity had fallen below NYSE listing standard thresholds and therefore the Company received notices of non-compliance from the NYSE.

The following are the communications with the NYSE in connection with these notices:

• On June 17, 2022, we were notified by the NYSE that we were no longer in compliance with the NYSE continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual due to the fact that our average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and, at the same time, our shareholders’ equity was less than $50.0 million.

NYSE notified us that if our average global market capitalization over a consecutive 30 trading-day period drops below $15.0 million, it would initiate delisting proceedings.

As required by the NYSE, we notified the NYSE of our intent to cure the deficiency and restore our compliance with the NYSE continued listing standards.

In accordance with applicable NYSE procedures, on August 1, 2022 we submitted a plan advising the NYSE of the definitive actions we have taken and are taking that would bring us into compliance with NYSE continued listing standards within 18 months of receipt of the written notice.

The NYSE accepted the plan and as a result our common stock may continue to be listed and traded on the NYSE during the 18-month period commencing on June 17, 2022, subject to our compliance with other NYSE continued listing standards and continued periodic review by the NYSE of our progress with respect to our plan.

• On November 2, 2022, we were notified by the NYSE that the average closing price of our common stock, over a prior consecutive 30 trading-day period was below $1.00 per share.

We had 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.

• On November 2, 2022 our shareholders approved a proposal to authorize the Board to implement the Reverse Stock Split, which became effective on December 21, 2022.

• On January 3, 2023, we were notified by the NYSE that we had regained compliance with the minimum share price continued listing standard.

• On January 30, 2023 and March 21, 2023, we sent progress updates and updated financial information to the NYSE pursuant to the plan.

Although we have regained compliance with the NYSE’s minimum share price requirement within the cure period, there

is no assurance that we will remain in compliance with such requirement or other NYSE continued listing standards in the

On May 25, 2023, we were notified by the NYSE that we had regained compliance with the NYSE’s quantitative continued listing standards.

Although we have regained compliance with the NYSE’s quantitative continued listing within the cure period, there is no assurance that we will remain in compliance with such requirement or other NYSE continued listing standards in the future.

Results of Operations

The following is a comparison of our results of operations for the three months ended March 31, 2023 compared to March 31, 2022.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table sets forth the components of revenue and operating loss from our operations for the three month period ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31, Increase

The following is a comparison of our results of operations for the three and six months ended June 30, 2023 to the three and six months ended June 30, 2022.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The following table sets forth the components of revenue and operating loss from our operations for the three month period ended June 30, 2023 and 2022 (in thousands):

Three Months Ended June 30, Increase

2023 2022 $ %

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Operating income (loss):

IHT $ 4,723 $ 134 $ 4,589 NM

MS 3,193 513 2,680 NM

IHT $ 6,548 $ 5,514 $ 1,034 18.8 %

MS 12,720 6,984 5,736 82.1 %

Corporate and shared support services (14,672) (23,292) 8,620 37.0 %

Total operating loss $ (7,746) $ (22,407) $ 14,661 65.4 %

Total operating income (loss) $ 4,596 $ (10,794) $ 15,390 142.6 %

Interest expense, net $ (16,691) $ (18,476) $ 1,785 9.7 %

Loss on debt extinguishment (1,582) — (1,582) NM

Other income, net 13 3,259 (3,246) (99.6) %

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Provision for income taxes (2,089) (2,191) 102 4.7 %

Net loss $ (24,711) $ (38,333) $ 13,622 35.5 %

Net loss from continuing operations $ (15,753) $ (28,202) $ 12,449 44.1 %

NM = Not meaningful

Total revenues increased $13.2 million or 7.0% from the prior year quarter and were impacted negatively from adverse foreign exchange movement by $3.2 million.

IHT revenues increased by $6.2 million or 6.5% and benefited from an $8.8 million or 11% increase in IHT U.S.

revenue due to higher callout and turnaround activity in all regions, a $1.1 million increase in IHT international revenue, and a $0.3 million increase in aerospace revenue.

This increase was partially offset by, a $4.1 million decrease in Canada due to a customer contract completion.

Total revenues increased $18.0 million or 8.1% from the prior year quarter and were negatively impacted by $1.8 million from adverse foreign exchange movement.

IHT revenues increased by $2.6 million or 2.3% and benefited from a $4.6 million or 5% increase in IHT U.S.

revenue due to higher callout and turnaround activity, and a $1.1 million increase in IHT international revenue, partially offset by a $3.1 million decrease in Canada revenue due to lower turnaround activity.

MS revenue increased by $15.3 million or 14.3%, attributable to a $4.8 million or 8.9% increase in U.S.

revenue due to higher activity in leak repair and hot tapping services, a $2.8 million revenue increase in MS Canada, and a $1.3 million increase in our valves business, partially offset by a $1.0 million decrease in other international regions.

revenue due to higher callout activity in leak repair, turnaround activity, hot tapping services, and a $10.0 million revenue increase in international regions and Canada.

Operating income (loss).

Overall operating loss was $7.7 million in the current year quarter, a $14.7 million or 65% improvement compared to an operating loss of $22.4 million in the prior year quarter.

IHT operating income increased by $4.6 million due to higher activity in the U.S.

and lower overhead costs, partially offset by lower revenue in Canada related to the completion of a customer contract in the current period.

MS operating income increased by $2.7 million as compared to the prior year quarter, primarily from our U.S.

and Canada operations as well as lower overhead costs and realized efficiency gains in equipment centers during the current quarter compared to prior year quarter.

Overall operating income was $4.6 million in the current year quarter, a $15.4 million improvement compared to an operating loss of $10.8 million in the prior year quarter.

IHT operating income increased by $1.0 million or 18.8% due to higher activity and higher margins in all regions, partially offset by higher labor related costs in U.S.

MS operating income increased by $5.7 million or 82.1% as compared to the prior year quarter, driven by higher revenue and margins from the Company’s U.S., Canada and international operations.

Operating income from U.S.

operations increased by $1.4 million and operating income from Canada operations increased by $1.2 million.

Corporate operating loss decreased by $7.4 million due to lower professional fees in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s ongoing cost reduction efforts.

and international operations increased by $3.4 million and $2.8 million, respectively, and Canada increased by $0.9 million, partially offset by a decrease in operating income from our domestic valve business.

Corporate operating loss decreased by $8.6 million due to lower professional fees and lower severance cost in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s ongoing cost reduction efforts.

In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended March 31, 2023 and 2022, operating loss includes net expenses totaling $2.0 million and $7.2 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Three Months Ended March 31,

Operating loss (7,746) (22,407)

For the three months ended June 30, 2023 and 2022, operating loss includes net expenses totaling $3.1 million and $6.9 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Three Months Ended June 30,

Operating income (loss) $ 4,596 $ (10,794)

Professional fees and other 2,647 4,693

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Total non-core expenses 3,064 6,901

Operating loss, excluding non-core expenses $ (5,720) $ (15,185)

Excluding the impact of these identified non-core items in both periods, operating income increased by $9.5 million.

Operating income (loss), excluding non-core expenses $ 7,660 $ (3,893)

Excluding the impact of these identified non-core items in both periods, operating income increased by $11.6 million from a loss of $3.9 million to income of $7.7 million.

See our non-GAAP reconciliation for additional details of our non-core expenses.

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Interest expense decreased by $1.8 million compared to the prior year quarter.

The decrease was primarily attributable to lower outstanding debt during the 2023 period due to the $225.0 million paydown of our term debt in November 2022 and the 2022 period write off of deferred financing costs related to our Citi ABL facility that was refinanced in February 2022.

These effects were partially offset by a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid during the quarter ended March 31, 2023 and 2022 was $5.2 million and $6.8 million, respectively.

Other income, net.

Other income (expense), net decreased by $2.5 million from $3.2 million to $0.6 million, primarily due to foreign currency fluctuations and lower gains on asset disposals in the 2023 quarter.

The decrease was primarily attributable to lower outstanding debt during the second quarter of 2023 due to the $225.0 million pay down of our term debt in November 2022.

These effects were partially offset by the increase in PIK interest on the subordinated term loan, a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs until June 16, 2023 to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid during the quarter ended June 30, 2023 and 2022 was $4.7 million and $3.3 million, respectively.

Loss on Debt Extinguishment.

On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding Term Loan balance of $35.5 million plus the applicable prepayment premium of $1.4 million and related accrued interest, resulting in a loss on debt extinguishment of $1.6 million.

Other income (expense), net.

Other income (expense), net decreased by $3.2 million primarily due to foreign currency fluctuations and lower gains on asset disposals in the second quarter of 2023 as compared to the 2022 period, and insurance proceeds received from a natural disaster claim in the 2022 period.

The provision for income tax was $2.1 million on the pre-tax loss from continuing operations of $13.7 million in the current year quarter, compared to a $2.2 million income tax provision on a pre-tax loss of $26.0 million in the prior year quarter.

The effective tax rate, inclusive of discrete items, was a provision of 3.6% for the three months ended March 31, 2023, compared to a provision of 1.4% for the three months ended March 31, 2022.

The effective tax rate, inclusive of discrete items, was a provision of 15.3% for the three months ended June 30, 2023, compared to a provision of 8.5% for the three months ended June 30, 2022.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to changes in the valuation allowance.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The following is a comparison of our results of operations for the six months ended June 30, 2023 to the six months ended June 30, 2022.

The components of revenue and operating income (loss) from our continuing operations consisted of the following (in thousands):

Six Months Ended June 30, Increase

2023 2022 $ %

(unaudited) (unaudited)

Revenues by business segment:

IHT $ 218,569 $ 209,721 $ 8,848 4.2 %

MS 223,200 200,857 22,343 11.1 %

Total revenues $ 441,769 $ 410,578 $ 31,191 7.6 %

Operating income (loss):

IHT $ 11,271 $ 5,648 $ 5,623 99.6 %

MS 15,913 7,497 8,416 112.3 %

Corporate and shared support services (30,334) (46,346) 16,012 34.5 %

Total operating loss $ (3,150) $ (33,201) $ 30,051 90.5 %

Interest expense, net $ (33,432) $ (37,055) $ 3,623 9.8 %

Loss on debt extinguishment (1,582) — (1,582) NM

Other income (expense), net 648 6,438 (5,790) (89.9) %

Loss before income taxes $ (37,516) $ (63,818) $ 26,302 41.2 %

Provision for income taxes (2,948) (2,717) (231) (8.5) %

Net loss from continuing operations $ (40,464) $ (66,535) $ 26,071 39.2 %

NM = Not meaningful

Total revenues increased $31.2 million or 7.6% from the prior year period, with both segments seeing increases compared to prior year period.

IHT revenues increased by $8.8 million or 4.2% and MS revenue increased by $22.3 million or 11.1%.

Revenues were negatively impacted by adverse foreign exchange movements of $4.9 million during the six month period ended June 30, 2023.

IHT segment year to date revenue increased 4.2%, compared to the prior year period, which was primarily driven by an increase of $13.2 million in U.S.

revenue due to higher callout and turnaround activity and an increase of $2.2 million increase in international revenue, partially offset by lower activity in Canada revenue.

MS segment revenue increased 11.1% compared to the prior year period, due to a $8.8 million increase in the U.S.

market, primarily attributable to higher activity in callout, hot taping and leak repair services, a $9.3 million increase in international operations primarily attributable to higher turnaround activity, leak repair services and product sales, and a $3.5 million increase in Canada.

Operating income (loss).

Overall operating loss was $3.2 million in the current year, a $30.1 million or 90.5% improvement as compared to an operating loss of $33.2 million in the prior year.

IHT operating income increased by $5.6 million or 99.6% driven by higher activity and improved margins in the U.S.

and cost reductions in Canada.

MS operating income increased by $8.4 million as compared to the prior year period.

Operating income from the U.S., international and Canada operations increased by $4.2 million, $2.1 million and $2.1 million, respectively, driven by higher activity and improved margins.

Corporate operating loss decreased by $16.0 million due to lower professional fees and lower severance cost in the current year period as compared to the prior year period and lower overall costs due to the Company’s ongoing cost reduction efforts.

In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the six months ended June 30, 2023 and 2022, operating loss includes net expenses totaling $5.1 million and $14.1 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Six Months Ended June 30,

Operating loss $ (3,150) $ (33,201)

Professional fees and other 4,368 10,037

Legal costs 200 1,728

Severance charges, net 522 2,358

Total non-core expenses 5,090 14,123

Operating income (loss), excluding non-core expenses $ 1,940 $ (19,078)

Excluding the impact of these identified non-core items in both periods, operating loss decreased by $21.0 million from a loss of $19.1 million to income of $1.9 million.

See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net.

Interest expense, net decreased $3.6 million from the prior year period.

The decrease was primarily attributable to lower outstanding debt during the 2023 period, due to the $ 225.0 million pay down of our term debt in November 2022 and the 2022 period write off of deferred financing costs related to our Citi ABL facility that was refinanced in February 2022.

These effects were partially offset by a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs until June 16, 2023 to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid for six months ended June 30, 2023 and 2022 was $9.1 million and $9.4 million, respectively.

Loss on Debt Extinguishment.

On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding Term Loan balance of $35.5 million under the Term Loan Credit Agreement with APSC plus the applicable prepayment premium of $1.4 million and related accrued interest, resulting in a loss on debt extinguishment of $1.6 million.

Other income (expense), net .

Other income (expense) improved by $5.8 million from the prior year period primarily due to foreign currency fluctuations, lower gains on disposal of assets in 2023 compared to the 2022 period, and insurance proceeds received from a natural disaster claim in 2022.

T he provision for income tax was $2.9 million on the pre-tax loss from continuing operations of $37.5 million in the current year-to-date compared to income tax expense o f $2.7 million o n the pre-tax loss of $63.8 million in the prior year-to-date period.

The effective tax rate was a provision of 7.7% for the six months ended June 30, 2023, compared to a provision of 4.2% for the six months ended June 30, 2022.

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 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 net income (loss) per share;

earnings before interest and taxes (“EBIT”);

adjusted EBIT;

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:

non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance charges, and certain other items that we believe are not indicative of core operating activities.

We define adjusted net income (loss) and adjusted net income (loss) per share to exclude the following items:

non-routine legal costs and settlements, non-routine professional fees, restructuring charges, loss on debt extinguishment, certain severance 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 costs.

Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with non-routine legal costs and settlements, non-routine professional fees, restructuring charges, certain severance charges, and certain other items as determined by management.

Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with non-routine legal costs and settlements, non-routine professional fees, loss on debt extinguishment, certain severance 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.

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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.

In particular, adjusted net income (loss), adjusted net income (loss) per 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 are 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.

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AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(unaudited, in thousands except per share data)

Three Months Ended March 31,

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued)

(unaudited, in thousands)

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Adjusted Net Loss:

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Professional fees and other 1

2,647 4,693 4,368 10,037

Legal costs 2

200 1,200 200 1,728

Severance charges, net 3

217 1,008 522 2,358

Natural disaster insurance recovery — (872) — (872)

Loss on debt extinguishment 1,582 — 1,582 —

Tax impact of adjustments and other net tax items 4

(7) (3) (85) (7)

Adjusted Net Loss $ (11,114) $ (22,176) $ (33,877) $ (53,291)

Adjusted Net Loss per common share:

Basic and diluted $ (5.24) $ (8.25)

Basic $ (2.55) $ (5.14) $ (7.78) $ (13.17)

Consolidated Adjusted EBIT and Adjusted EBITDA:

1 unchanged sentence

Provision for income taxes 2,089 2,191 2,948 2,717

Gain on equipment sale (303) (2,313)

Loss (gain) on equipment sale 7 (1,172) (296) (3,485)

Interest expense, net 16,691 18,476 33,432 37,055

Professional fees and other 1

2,647 4,693 4,368 10,037

Legal costs 2

200 1,200 200 1,728

Severance charges, net 3

Foreign currency gain (177) (662)

217 1,008 522 2,358

Foreign currency (gain) loss 143 (1,029) (34) (1,691)

Pension credit 5

(162) (189) (318) (393)

Natural disaster insurance recovery — (872) — (872)

Loss on debt extinguishment 1,582 — 1,582 —

Consolidated Adjusted EBIT 7,661 (3,896) 1,940 (19,081)

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____________________________________

1 For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support costs.

For the three months ended March 31, 2022, includes $4.7 million related to costs associated with the debt financing and $0.6 million of corporate support costs.

2 For the three months ended March 31, 2022, primarily relates to accrued legal matters and legal fees.

3 For the three months ended March 31, 2023, includes $0.3 million primarily related to customary severance costs associated with staff reductions.

For the three months ended March 31, 2022, includes $1.3 million related to customary severance costs associated with executive departures.

1 For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges.

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.

2 Primarily relates to accrued legal matters and legal fees.

3 For the three and six months ended June 30, 2023, primarily related to costs associated with staff reductions.

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.

4 Represents the tax effect of the adjustments.

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(unaudited, in thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Segment Adjusted EBIT and Adjusted EBITDA:

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Severance charges, net 1

165 25 205 41

Professional fees and other 828 — 828 —

Adjusted EBIT 7,541 5,539 12,304 5,689

3 unchanged sentences

Severance charges, net 1

Other project costs 20 —

Professional fees and other 47 — 67 —

Adjusted EBIT 12,819 7,038 16,288 7,551

8 unchanged sentences

Pension credit 2

(162) (189) (318) (393)

Professional fees and other 3

1,772 4,693 3,473 10,037

Legal costs 4

200 1,200 200 1,728

Severance charges, net 1

— 929 9 2,263

Loss on debt extinguishment 1,582 — 1,582 —

Natural disaster insurance recovery — (872) — (872)

Adjusted EBIT (12,699) (16,473) (26,652) (32,321)

3 unchanged sentences

___________________

1 For the three months ended March 31, 2023, includes $0.3 million primarily related to customary severance costs associated with staff reductions.

For the three months ended March 31, 2022, includes $1.3 million related to customary severance costs associated with executive departures.

1 For the three and six months ended June 30, 2023, primarily related to costs associated with staff reductions.

For the three months ended June 30, 2022, includes $1.0 million primarily related to customary severance costs associated with staff reductions.

2 Represents pension credits for the U.K.

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Accruals for future benefits ceased in connection with a plan curtailment in 2013.

3 For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support costs.

For the three months ended March 31, 2022, includes $4.7 million related to costs associated with the debt financing and $0.6 million of corporate support costs.

4 For the three months ended March 31, 2022, primarily relates to accrued legal matters and legal fees.

3 For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges.

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.

4 Primarily relates to accrued legal matters and legal fees.

Liquidity, Capital Resources and Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP and assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the issue date of these condensed consolidated financial statements.

Our ability to continue as a going concern is dependent on many factors, including among other things, our ability to comply with the covenants in our debt agreements, our ability to cure any defaults that occur under our debt agreements, or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due.

Liquidity risk is the risk that we will be unable to meet our financial obligations as they become due.

Our liquidity may be affected by improvements or declines in commodity prices, our segments’ operational performance, and our ability to access capital and credit markets.

We evaluated our liquidity within one year after the date of issuance of the accompanying unaudited condensed consolidated financial statements to determine if there is substantial doubt about the Company’s ability to continue as a going concern.

In the preparation of this liquidity assessment, we applied judgment to estimate the projected cash flows of the Company, including the following:

(i) projected cash outflows, (ii) projected cash inflows, and (iii) projected availability under the Company’s existing debt arrangements.

The cash flow projections were based on known or planned cash requirements for operating and financing costs and include management’s best estimate regarding future customer activity levels, pricing for its services and for its supplies and other factors.

Actual results could vary significantly from those projections.

We do not believe, based on the Company’s forecast, that current working capital, cash flow from operations, expected availability under our existing credit agreements and capital expenditure financing is sufficient to fund the operations, maintain compliance with our debt covenants (as amended), and satisfy the Company’s obligations, specifically with respect to the Notes described below, as they come due within one year after the date of issuance of these condensed consolidated financial statements.

Our Notes are due on August 1, 2023 and had a principal balance of $41.2 million as of March 31, 2023 .

Under the terms of our amended financing arrangements that were entered into during 2022, the Maturity Reserve Trigger Date (as defined in the 2022 ABL Credit Agreement), and the Maturity Trigger Date (as defined in the Term Loan Credit Agreement) and collectively referred to as the “Trigger Date”, is June 17, 2023, see Note 11 - Debt for additional information.

The Trigger Date requires that the Notes balance be reduced to less than $10.0 million by June 17, 2023.

As of March 31, 2023, we are in compliance with our debt covenants.

However, without the execution of a refinancing transaction, an agreement to extend the Notes maturity date, and/or amendments to our existing debt agreements, there is a risk that the Company could be, among other things, unable to make principal payments on the Notes to satisfy the Trigger Date provision or will be unable to pay off the Notes when they become due on August 1, 2023.

The failure to pay down the Notes to less than $10.0 million by the Trigger Date will result in an acceleration of the Term Loan Credit Agreement and failure to pay would result in an event of default and associated cross defaults under the Company’s other debt instruments.

Refer to Note 11 - Debt for more information on the terms, cross default provisions and maturity dates of our debt that may affect our future liquidity.

As a result of our current liquidity condition, the potential inability to negotiate an extension or amend the financial covenants, substantial doubt about the Company’s ability to continue as a going concern is raised.

We are exploring alternatives to reduce or refinance the Notes outstanding balance, including extending their maturity as well as other alternatives.

While our lenders agreed on an extension and amended the financial covenants in prior periods, there can be no assurance that our lenders will provide additional extensions, waivers or amendments in the event of future non-compliance with our debt covenants, or other possible events of default or that we will be able to execute a reduction, extension, or refinancing of the Notes or that the terms of any replacement financing would be as favorable as the terms of the Notes prior to the maturity date.

The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Financing for our operations consists primarily of our 2022 ABL Credit Facility, Term Loan, Subordinated Term Loan and cash flows attributable to our operations.

As of March 31, 2023, we had approximately $37.3 million of borrowing capacity consisting of $27.3 million available under the 2022 ABL Credit Facility and $10.0 million available under the Subordinated Term Loan Credit Agreement.

As discussed in Note 1 - Description of Business and Basis of Presentation , the Company successfully negotiated amendments to existing debt instruments (including to the financial covenants contained therein) and / or entered into new agreements with our lenders.

These actions removed the substantial doubt about our ability to continue as a going concern that previously existed and had been disclosed in prior periods.

In addition, as of June 30, 2023, we are in compliance with our debt covenants.

Based on the Company’s forecast and the amendments/new agreements entered in June 2023, we believe that our current working capital including cash on hand, our capital expenditure financing and the remaining borrowing availability under our various debt agreements is sufficient to fund our operations, maintain compliance with our debt covenants (as amended), and satisfy the Company’s obligations as they come due within one year after the date of issuance of these unaudited condensed consolidated financial statements.

Our ability to maintain compliance with the financial covenants contained in the various debt agreements is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties.

While our lenders agreed to amend the financial covenants contained therein and, in the case of the ABL Credit Agreement, to extend the maturity, there can be no assurance that our lenders will provide additional waivers or amendments in the event of future non-compliance with our debt covenants, or other possible events of default that could happen.

Financing for our operations consists primarily of our 2022 ABL Credit Agreement (which includes the Revolving Credit Loans, the Delayed Draw Term Loan, and the ME/RE Loans), the A&R Term Loan Credit Agreement (which includes the Uptiered Loan and the Incremental Term Loan), and cash flows attributable to our operations.

As of June 30, 2023, excluding availability dedicated to repayment of the Notes and drawn on July 31, 2023, we had approximately $36.8 million of pro forma borrowing capacity consisting of $21.8 million available under the amended 2022 ABL Credit Agreement, and $15.0 million available under the A&R Term Loan Agreement.

Our principal uses of cash are for working capital needs and operations.

We have entered into recent financing transactions as further described in Note 11 – Debt and certain amendments to address our near-term liquidity needs, and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity, and position the Company for future growth;

We have entered into recent refinancing transactions as further described in Note 11 – Debt and certain amendments to address our near-term liquidity needs, and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity, and position the Company for future growth;

however, we have suffered recurring operating losses and subsequent to year-end, we had reduced borrowing capacity to fund our increasing working capital needs.

Our cash and cash equivalents as of March 31, 2023 totaled $31.9 million, consisting of $26.4 million of unrestricted cash on hand, $4.5 million restricted as collateral for outstanding letters of credit and card programs and $1.0 million restricted due to foreign currency regulations.

As of December 31, 2022, our cash and cash equivalents were $58.1 million, including $51.1 million of unrestricted cash on hand, $5.5 million restricted as collateral for outstanding letters of credit and card programs and $1.4 million restricted due to foreign currency regulations.

$13.7 million a nd $16.3 million o f the cash and cash equivalents as of March 31, 2023 and December 31, 2022, respectively, were in foreign accounts, primarily in Europe, Canada and Australia.

Additionally, we had approximately $37.3 million in undrawn availability under our various credit facilities at March 31, 2023.

Our gross debt and finance obligations were $288.9 million, of which $284.1 million was classified as current at March 31, 2023, compared to gross debt of $285.9 million at December 31, 2022.

As of May 9, 2023, we had consolidated cash and cash equivalents of $21.9 million, excluding $5.2 million of restricted cash held mainly as collateral for outstanding letters of credit and our purchasing card programs, and approximately $27.4 million of undrawn availability under our various credit facilities, resulting in total liquidity of $49.3 million.

Our cash and cash equivalents as of June 30, 2023 totaled $30.4 million, consisting of $25.0 million of unrestricted cash on hand, and $5.4 million restricted.

As of December 31, 2022, our cash and cash equivalents were $58.1 million, including $51.1 million of unrestricted cash on hand, and $7.0 million restricted.

Our gross debt and finance obligations were $310.9 million, of which $4.5 million was classified as current at June 30, 2023, compared to gross debt of $285.9 million at December 31, 2022.

On July 31, 2023, $42.5 million of the $57.5 million availability under the A&R Term Loan Credit Agreement was drawn down and the proceeds were used to repay the Notes that matured on August 1, 2023.

As of August 8, 2023, we had consolidated cash and cash equivalents of $21.3 million, excluding $5.3 million of restricted cash, and approximately $33.4 million of undrawn availability under our various credit facilities, resulting in total liquidity of $54.7 million.

Refer to Note 11 - Debt for information on our debt instruments.

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The following table summarizes cash flows from Operating, Investing and Financing activities (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows provided by (used in):

2023 2022 % Change

2023 2022 Increase (Decrease)

Operating activities $ (23,617) $ (53,391) 56 %

Investing activities (4,741) (8,882) 47 %

Financing activities (6,236) 41,966 NM

Effect of exchange rate changes on cash 153 465 67 %

Financing activities 483 64,786 (99) %

Effect of exchange rate changes on cash 237 (382) NM

Net change in cash and cash equivalents $ (27,638) $ 2,131 NM

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Cash flows attributable to our operating activities.

For the three months ended March 31, 2023, net cash used in operating activities was $17.8 million.

Our net cash used in operating activities was driven by our net loss for the period, which totaled $24.7 million and negative working capital of $13.3 million, offset by amortization of debt issuance costs and debt discount of $8.5 million, depreciation and amortization of $9.5 million, and PIK Interest of $3.5 million.

For the three months ended March 31, 2022, net cash used in operating activities was $50.0 million.

Overall, the decline in cash used in 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 offset by $10.0 million for depreciation and amortization, and $0.6 million in non-cash compensation cost.

For the six months ended June 30, 2023, net cash used in operating activities was $23.6 million.

Our net cash used in operating activities was driven by our net loss for the period, which totaled $40.5 million and negative working capital of $26.4 million, partially offset by amortization of debt issuance costs and debt discount of $16.2 million, depreciation and amortization of $19.1 million, and PIK Interest of $7.1 million.

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 during the period, decline in working capital of $38.0 million, a gain on disposal of assets of $3.5 million, and movement in deferred income taxes of $0.4 million.

These were partially offset by amortization of debt issuance costs and debt discount, write off of deferred loan costs of $14.8 million, depreciation and amortization of $19.6 million, and paid-in-kind interest of $10.0 million, resulting in negative operating cash flows for the period.

Cash flows attributable to our investing activities.

For the three months ended March 31, 2023, net cash used in investing activities was $2.4 million, consisting primarily of capital expenditures, partially offset by $0.3 million of cash proceeds from asset sales.

For the three months ended March 31, 2022, net cash used in investing activities was $4.0 million, primarily for capital expenditures, partially offset by $3.0 million of cash proceeds from asset sales.

For the six months ended June 30, 2023, net cash used in investing activities was $4.7 million, consisting primarily of capital expenditures (mainly related to the Company’s new aerospace inspection facility in Cincinnati), partially offset by $0.3 million of cash proceeds from asset sales.

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.

Cash flows attributable to our financing activities.

For the three months ended March 31, 2023, net cash used in financing activities was $6.2 million consisting primarily of net repayments under our ABL Credit Facility of $6.0 million.

For the three months ended March 31, 2022, net cash provided by financing activities was $42.0 million consisting primarily of net borrowings under our ABL Credit Facility of $42.7 million and proceeds from issuance of common stock amounting to $9.8 million, partially offset by $10.3 million in payments for debt issuance costs.

For the six months ended June 30, 2023, net cash provided by financing activities was $0.5 million consisting primarily of net borrowings under our 2022 ABL Credit Facility of $16.0 million and borrowings under ME/RE loans of $27.4 million offset by the payoff of APSC Term Loan of $37.1 million and payment of deferred financing cost of $5.3 million.

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 2022 ABL Credit Facility of $66.1 million and issuance of common stock amounting to $9.7 million partially offset by $10.6 million in payments for debt issuance costs.

Effect of exchange rate changes on cash and cash equivalents.

For the three months ended March 31, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.2 million and $0.5 million, respectively.

For the six months ended June 30, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.2 million and $0.4 million, respectively.

The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S.

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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, 2022.

There have been no material changes to the contractual obligation disclosure since year-end 2022, see Note 11 - Debt for additional details regarding amendments to our debt agreements that were executed during the first quarter of 2023.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations.

As of March 31, 2023, the material off-balance sheet arrangements and transactions that we have entered into include $8.9 million in outstanding letters of credit under the ABL Facility.

As of June 30, 2023, the material off-balance sheet arrangements and transactions that we have entered into include $10.1 million in outstanding letters of credit under the 2022 ABL Credit Facility.

See Note 11 - Debt for additional details.

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A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no material changes to our critical accounting policies during the three months ended March 31, 2023.

There were no material changes to our critical accounting policies during the six months ended June 30, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis