TEAM INC 10-Q/A

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, 2022 (“our Annual Report on Form 10-K”) and other documents previously filed with the Securities and Exchange Commission. 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 includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf in other materials we release to the public including all statements, other than statements of historical facts included or incorporated by reference in this Quarterly Report on Form 10-Q, that address activities, events or developments which we expect or anticipate will or may occur in the future. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may” and similar expressions. We based 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. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Additionally, t here 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” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and 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 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; • the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the lingering impact of widespread public health crises, epidemics and pandemics, threats of domestic and global economic recession and future economic uncertainties, particularly in industries in which we are heavily dependent; • delays in the commencement of major projects; • our business may be affected by seasonal and other variation, such as severe weather conditions (including conditions influenced by climate change) 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; 25 Table of Contents • 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; • 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; • we may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters; • 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 U.S. or elsewhere, 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 specialty industrial services offering clients access to a full suite of conventional, specialized, and proprietary mechanical, heat-treating, and inspection services. 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 two segments: Inspection and Heat Treating (“IHT”) and Mechanical Services (“MS”). Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions: 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 escalating 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 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. IHT also provides advanced digital imaging including remote digital video imaging. 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. 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, 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. Significant Factors Impacting Results and Recent Developments 26 Table of Contents 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” which includes items that 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. 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 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. The severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information. Recent Refinancing Transaction. On June 16, 2023, we entered into the A&R Term Loan Credit Agreement and ABL Amendment No. 3. 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. 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. 27 Table of Contents Results of Operations 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 (Decrease) 2023 2022 $ % (unaudited) (unaudited) Revenues by business segment: IHT $ 116,740 $ 114,124 $ 2,616 2.3 % MS 122,752 107,416 15,336 14.3 % Total revenues $ 239,492 $ 221,540 $ 17,952 8.1 % Operating income (loss): 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 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) % Loss before income taxes $ (13,664) $ (26,011) $ 12,347 47.5 % Provision for income taxes (2,089) (2,191) 102 4.7 % Net loss from continuing operations $ (15,753) $ (28,202) $ 12,449 44.1 % NM = Not meaningful Revenues. 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 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 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. operations. 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. 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. 28 Table of Contents 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, 2023 2022 Operating income (loss) $ 4,596 $ (10,794) Professional fees and other 2,647 4,693 Legal costs 200 1,200 Severance charges, net 217 1,008 Total non-core expenses 3,064 6,901 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. Interest expense, net. Interest expense decreased by $1.8 million compared to the prior year 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. Taxes. 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 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. 29 Table of Contents 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 (Decrease) 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 Revenues. 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. 30 Table of Contents 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, 2023 2022 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. Taxes. 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. 31 Table of Contents 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 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) 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, 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. 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 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. 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: 32 Table of Contents TEAM, INC. AND SUBSIDIARIES 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: Net loss $ (15,753) $ (28,202) $ (40,464) $ (66,535) 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 $ (2.55) $ (5.14) $ (7.78) $ (13.17) Consolidated Adjusted EBIT and Adjusted EBITDA: Net loss $ (15,753) $ (28,202) $ (40,464) $ (66,535) Provision for income taxes 2,089 2,191 2,948 2,717 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 3 217 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) Depreciation and amortization Amount included in operating expenses 3,694 3,914 7,413 8,072 Amount included in SG&A expenses 5,845 5,095 11,672 10,391 Total depreciation and amortization 9,539 9,009 19,085 18,463 Non-cash share-based compensation costs 245 565 627 (59) Consolidated Adjusted EBITDA $ 17,445 $ 5,678 $ 21,652 $ (677) Free Cash Flow: Cash used in operating activities $ (5,854) $ (511) $ (23,617) $ (56,486) Capital expenditures (2,381) (5,279) (5,073) (11,416) Free Cash Flow $ (8,235) $ (5,790) $ (28,690) $ (67,902) ____________________________________ 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. 5 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 was frozen in 1994 and no new participants have been added since that date. Accruals for future benefits ceased in connection with a plan curtailment in 2013. 33 Table of Contents TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) (unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Segment Adjusted EBIT and Adjusted EBITDA: IHT Operating income $ 6,548 $ 5,514 $ 11,271 $ 5,648 Severance charges, net 1 165 25 205 41 Professional fees and other 828 — 828 — Adjusted EBIT 7,541 5,539 12,304 5,689 Depreciation and amortization 3,188 3,096 6,242 6,350 Adjusted EBITDA $ 10,729 $ 8,635 $ 18,546 $ 12,039 MS Operating income $ 12,720 $ 6,984 $ 15,913 $ 7,497 Severance charges, net 1 52 54 308 54 Professional fees and other 47 — 67 — Adjusted EBIT 12,819 7,038 16,288 7,551 Depreciation and amortization 4,704 4,634 9,457 9,518 Adjusted EBITDA $ 17,523 $ 11,672 $ 25,745 $ 17,069 Corporate and shared support services Net loss $ (35,021) $ (40,700) $ (67,648) $ (79,680) Provision for income taxes 2,089 2,191 2,948 2,717 Gain on equipment sale 7 (1,172) (296) (3,485) Interest expense, net 16,691 18,476 33,432 37,055 Foreign currency gain 143 (1,029) (34) (1,691) 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) Depreciation and amortization 1,647 1,279 3,386 2,595 Non-cash share-based compensation costs 245 565 627 (59) Adjusted EBITDA $ (10,807) $ (14,629) $ (22,639) $ (29,785) ___________________ 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. 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. 2 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 was frozen in 1994 and no new participants have been added since that date. Accruals for future benefits ceased in connection with a plan curtailment in 2013. 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. 34 Table of Contents 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. 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 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 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. 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 including from asset sales, as well as cash on hand and the available borrowing capacity under our ABL and other Credit Facilities. We expect to finance our 2023 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; the extent to which non-strategic assets are sold and our liquidity outlook. 35 Table of Contents Cash Flows The following table summarizes cash flows from Operating, Investing and Financing activities (in thousands): Six Months Ended June 30, Cash flows provided by (used in): 2023 2022 Increase (Decrease) Operating activities $ (23,617) $ (53,391) 56 % Investing activities (4,741) (8,882) 47 % 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 NM - Not meaningful Cash flows attributable to our operating activities. 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 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 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 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. Dollar exchange rates against the Canadian Dollar, the Euro, the British Pound, the Australian Dollar and Mexican Peso. 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, 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 and second quarters 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 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. 36 Table of Contents Critical Accounting Policies and Estimates 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 six months ended June 30, 2023. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this item 3.