TEAM INC 10-Q

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 Note 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 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 generate sufficient cash from operations, access our 2022 ABL Credit Facility or amounts available under our Delayed Draw Term Loan, or maintain our compliance with covenants under our debt arrangements including our 2022 ABL Credit Agreement and A&R Term Loan Credit Agreement; • our ability to manage inflationary pressures in our operating costs; • negative market conditions, including threats of domestic and global economic recession, future economic uncertainties, and impacts from epidemics and pandemics; particularly in industries in which we are heavily dependent; • delays in the commencement of major projects; • 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; • our 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; • our ability to access capital and liquidity provided by the financial and capital markets; 24 Table of Contents • the timing of new client contracts and termination of existing contracts resulting in unpredictable fluctuations in our cash flows and financial results; • risk of non-payment and/or delays in payment of receivables from our clients; • our ability to continue to meet the New York Stock Exchange’s (“NYSE”) continued listing requirements and rules, and the risk that 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 in the event we are unable to list our common stock on another exchange; • our financial forecasts being based upon estimates and assumptions that may materially differ from actual results; • our incurrence of liabilities and suffering of negative financial or reputational impacts relating to occupational health and safety matters; • our ability to continue as a going concern; • changes in laws or regulations in the local jurisdictions that we conduct our business; • the inherently uncertain outcome of current and future litigation; • our failure to maintain effective internal controls, and the resulting inability to report our financial results accurately or timely or prevent or detect fraud; 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, offshore oil and gas, and liquefied natural gas); • Manufacturing and Process (chemical, petrochemical, pulp and paper industries, automotive and mining); • Midstream and Others (valves, terminals and storage, and pipeline); • Public Infrastructure (amusement parks, bridges, ports, construction and building, roads, dams, and railways); and • Aerospace and Defense. 25 Table of Contents Significant Factors Impacting Results and Recent Developments Our revenues, gross margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Cautionary Note Regarding Forward-Looking Statements above and Part 1, Item 1A of our Annual Report on Form 10-K “Risk Factors” 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 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, commodity price volatility, uncertainty about economic stability and geopolitical conflicts. 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. Results of Operations The following is a comparison of our results of operations for the three and nine months ended September 30, 2023 to the three and nine months ended September 30, 2022. Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 The following table sets forth the components of revenue and operating loss from our operations for the three-month period ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Increase (Decrease) 2023 2022 $ % (unaudited) (unaudited) Revenues by business segment: IHT $ 103,857 $ 110,312 $ (6,455) (5.9) % MS 102,858 108,027 (5,169) (4.8) % Total revenues $ 206,715 $ 218,339 $ (11,624) (5.3) % Operating income (loss): IHT $ 6,412 $ 7,390 $ (978) (13.2) % MS 6,482 7,655 (1,173) (15.3) % Corporate and shared support services (14,152) (16,774) 2,622 15.6 % Total operating loss $ (1,258) $ (1,729) $ 471 27.2 % Interest expense, net $ (10,067) $ (26,653) $ 16,586 62.2 % Loss on debt extinguishment (3) — (3) NM Other income, net 266 3,227 (2,961) (91.8) % Loss before income taxes $ (11,062) $ (25,155) $ 14,093 56.0 % Provision for income taxes (1,072) (1,465) 393 26.8 % Net loss from continuing operations $ (12,134) $ (26,620) $ 14,486 54.4 % NM = Not meaningful Revenues. Total revenues decreased $11.6 million or 5.3% from the prior year quarter and were positively impacted by $1.2 million from foreign exchange movement. IHT revenues decreased by $6.4 million or 5.9% primarily due to a $4.9 million decrease in IHT U.S. operations revenue and a $2.8 million decrease in IHT Canada operations revenue due to lower activity in nested and turnaround services. This was partially offset by a $0.7 million increase in international regions revenue and $0.6 million increase in aerospace related revenue. MS revenue decreased by $5.2 million or 4.8%, which was attributable to a $5.6 million or 8.4% decrease in MS U.S. operations revenue primarily due to lower activity in repairs and maintenance work, and a $3.3 million decrease in MS Canada operations due to less project work. This was partially offset by a $3.7 million increase in international regions revenue. 26 Table of Contents Operating income (loss). Overall operating loss was $1.3 million in the current year quarter, a $0.5 million improvement compared to prior year quarter. IHT operating income decreased by $1.0 million or 13.2% due to lower activity in several regions, partially offset by higher direct margins in U.S. and cost reduction actions in Canada operations. MS operating income decreased by $1.1 million or 15.3% as compared to the prior year quarter, driven by our Canada operations and domestic valve business, partially offset by higher operating income from our U.S. and international operations and savings in our overhead costs. Corporate operating loss decreased by $2.6 million due to lower legal cost in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s continuous 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 September 30, 2023 and 2022, operating loss includes net expenses totaling $2.8 million and $2.8 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 September 30, 2023 2022 Operating income (loss) $ (1,258) $ (1,729) Professional fees and other 1,452 539 Legal costs 650 1,543 Severance charges, net 655 670 Total non-core expenses 2,757 2,752 Operating income, excluding non-core expenses $ 1,499 $ 1,023 Excluding the impact of these identified non-core items in both periods, operating income increased by $0.5 million from income of $1.0 million in the three months ended September 30, 2022 to $1.5 million in the three months ended September 30, 2023. See our non-GAAP reconciliation for additional details of our non-core expenses. Interest expense, net. Interest expense decreased by $16.6 million compared to the prior year quarter. The decrease was primarily attributable to lower outstanding debt during the current quarter compared to the prior year quarter due to the paydown of $225 million in November 2022 and full payoff of the remaining balance of our APSC term loan in June 2023. These effects were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility and the increase in PIK interest on the Uptiered Loan / Subordinated Term Loan. Cash interest paid during the quarter ended September 30, 2023 and 2022 was $5.0 million and $7.7 million, respectively. Other income, net. Other income, net decreased by $3.0 million primarily due to the larger impact of foreign currency fluctuations and asset disposals in the third quarter of 2022 as compared to 2023. Taxes. The provision for income tax was $1.1 million on the pre-tax loss from continuing operations of $11.1 million in the current year quarter, compared to a $1.5 million income tax provision on a pre-tax loss of $25.2 million in the prior year quarter. The effective tax rate, inclusive of discrete items, was a provision of 9.7% for the three months ended September 30, 2023, compared to a provision of 5.8% for the three months ended September 30, 2022. The effective tax rate differs from the prior year quarter compared to the current year quarter and from the statutory rate due to changes in the valuation allowance. 27 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 The following is a comparison of our results of operations for the nine months ended September 30, 2023 to the nine months ended September 30, 2022. The components of revenue and operating income (loss) from our continuing operations consisted of the following (in thousands): Nine Months Ended September 30, Increase (Decrease) 2023 2022 $ % (unaudited) (unaudited) Revenues by business segment: IHT $ 322,426 $ 320,033 $ 2,393 0.7 % MS 326,058 308,884 17,174 5.6 % Total revenues $ 648,484 $ 628,917 $ 19,567 3.1 % Operating income (loss): IHT $ 17,683 $ 13,038 $ 4,645 35.6 % MS 22,395 15,152 7,243 47.8 % Corporate and shared support services (44,486) (63,119) 18,633 29.5 % Total operating loss $ (4,408) $ (34,929) $ 30,521 87.4 % Interest expense, net $ (43,499) $ (63,708) $ 20,209 31.7 % Loss on debt extinguishment (1,585) — (1,585) NM Other income, net 914 9,664 (8,750) (90.5) % Loss before income taxes $ (48,578) $ (88,973) $ 40,395 45.4 % Provision for income taxes (4,020) (4,182) 162 3.9 % Net loss from continuing operations $ (52,598) $ (93,155) $ 40,557 43.5 % NM = Not meaningful Revenues. Total revenues increased $19.6 million or 3.1% from the prior year period, with both segments seeing increases compared to prior year period. IHT revenues increased by $2.4 million or 0.7% and MS revenue increased by $17.2 million or 5.6%. Revenues were negatively impacted by $3.8 million from adverse foreign exchange movements during the nine-month period ended September 30, 2023. IHT segment year to date revenue increased 0.7%, compared to the prior year period, which was primarily driven by an increase of $8.3 million in U.S. revenue due to higher callout and turnaround activity, an increase of $3.0 million in other international regions’ revenue and an increase of $1.1 million in aerospace activity, offset by a $10.0 million decrease in Canada revenue due to turnaround/project work in 2022 that did not repeat in 2023. MS segment revenue increased 5.6% compared to the prior year period, due to a $4.0 million increase in U.S. operations, primarily attributable to higher activity in callout, hot tapping and leak repair services, a $0.2 million increase in Canada operations and a $13.0 million increase in other international operations primarily attributable to higher turnaround activity, leak repair services and product sales. Operating income (loss). Overall operating loss was $4.4 million in the current year, a $30.5 million or 87.4% improvement as compared to an operating loss of $34.9 million in the prior year. IHT operating income increased by $4.6 million or 35.6%, driven by higher activity and improved margins in the U.S. and indirect and SG&A cost reductions in the U.S. and Canada. MS operating income increased by $7.2 million as compared to the prior year period. Operating income from the U.S., Canada, and other international operations increased by $3.7 million, $1.2 million, and $2.3 million, respectively, driven by higher activity and improved margins. Corporate operating loss decreased by $18.6 million due to lower professional fees, lower legal and severance cost in the current year period as compared to the prior year period and lower overall costs due to the Company’s continuous 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 nine months ended September 30, 2023 and 2022, operating loss includes net expenses totaling $7.8 million and $16.9 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands): 28 Table of Contents Nine Months Ended September 30, 2023 2022 Operating loss $ (4,408) $ (34,929) Professional fees and other 5,820 10,576 Legal costs 850 3,271 Severance charges, net 1,177 3,028 Total non-core expenses 7,847 16,875 Operating income (loss), excluding non-core expenses $ 3,439 $ (18,054) Excluding the impact of these identified non-core items in both periods, operating loss decreased by $21.5 million from a loss of $18.1 million to income of $3.4 million. See our non-GAAP reconciliation for additional details of our non-core expenses. Interest expense, net. Interest expense, net decreased $20.2 million from the prior year period. The decrease was primarily attributable to lower outstanding debt during the 2023 period, due to a $ 225.0 million payment on the APSC term loan in November 2022 and subsequent pay off of the APSC term loan in June 2023. These decreases were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility and the increase in PIK interest on the subordinated term loan. Cash interest paid for nine months ended September 30, 2023 and 2022 was $14.5 million and $17.2 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 balance of $ 35.5 million under the Term Loan Credit Agreement with APSC plus the applicable prepayment premium, resulting in a loss on debt extinguishment of $ 1.6 million. Other income, net . Other income decreased by $8.8 million from the prior year period primarily due to larger foreign currency fluctuations, gains on disposal of assets, and insurance proceeds received from a natural disaster claim in the 2022 period. Taxes. T he provision for income tax was $4.0 million on the pre-tax loss from continuing operations of $48.6 million in the current year-to-date period compared to income tax expense o f $4.2 million o n the pre-tax loss of $89.0 million in the prior year-to-date period. The effective tax rate was a provision of 8.3% for the nine months ended September 30, 2023, compared to a provision of 4.7% for the nine months ended September 30, 2022. The effective tax rate differs from the statutory rate and from the prior year period due to a change in the valuation allowance. 29 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: 30 Table of Contents TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) (unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Adjusted Net Loss: Net loss $ (12,134) $ (26,620) $ (52,598) $ (93,155) Professional fees and other 1 1,452 539 5,820 10,576 Write-off of software cost 629 — 629 — Legal costs 2 650 1,543 850 3,271 Severance charges, net 3 655 670 1,177 3,028 Natural disaster insurance recovery — — — (872) Loss on debt extinguishment 3 — 1,585 — Tax impact of adjustments and other net tax items 4 (37) (24) (122) (31) Adjusted Net Loss $ (8,782) $ (23,892) $ (42,659) $ (77,183) Adjusted Net Loss per common share: Basic $ (2.01) $ (5.53) $ (9.79) $ (18.65) Consolidated Adjusted EBIT and Adjusted EBITDA: Net loss $ (12,134) $ (26,620) $ (52,598) $ (93,155) Provision for income taxes 1,072 1,465 4,020 4,182 Loss (gain) on equipment sale 10 (786) (286) (4,269) Interest expense, net 10,067 26,653 43,499 63,708 Professional fees and other 1 1,452 539 5,820 10,576 Write-off of software cost 629 — 629 — Legal costs 2 650 1,543 850 3,271 Severance charges, net 3 655 670 1,177 3,028 Foreign currency gain (742) (2,264) (776) (3,955) Pension credit 5 (163) (178) (481) (571) Natural disaster insurance recovery — — — (872) Loss on debt extinguishment 3 — 1,585 — Consolidated Adjusted EBIT 1,499 1,022 3,439 (18,057) Depreciation and amortization Amount included in operating expenses 3,613 3,771 11,026 11,843 Amount included in SG&A expenses 5,783 5,216 17,455 15,607 Total depreciation and amortization 9,396 8,987 28,481 27,450 Non-cash share-based compensation costs 232 629 859 570 Consolidated Adjusted EBITDA $ 11,127 $ 10,638 $ 32,779 $ 9,963 Free Cash Flow: Cash provided by (used in) operating activities $ 1,548 $ 5,913 $ (22,069) $ (50,573) Capital expenditures (2,360) (5,883) (7,433) (17,299) Free Cash Flow $ (812) $ 30 $ (29,502) $ (67,872) ____________________________________ 1 For the three and nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively related to debt financing, and $0 and $1.1 million, respectively, related to lease extinguishment charges and other project costs. For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs. 2 Primarily relates to accrued legal matters and legal fees. 3 For the three and nine months ended September 30, 2023, primarily related to customary severance costs associated with staff reductions across multiple departments. For the three months ended September 30, 2022, primarily related to customary severance costs associated with staff reductions across multiple corporate departments. For the nine months ended September 30, 2022 includes $1.3 million related to customary severance costs associated with executive departures and $1.7 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. 31 Table of Contents TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) (unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Segment Adjusted EBIT and Adjusted EBITDA: IHT Operating income $ 6,412 $ 7,390 $ 17,683 $ 13,038 Severance charges, net 1 195 150 400 192 Professional fees and other 3 — — 828 — Adjusted EBIT 6,607 7,540 18,911 13,230 Depreciation and amortization 3,148 3,022 9,390 9,372 Adjusted EBITDA $ 9,755 $ 10,562 $ 28,301 $ 22,602 MS Operating income $ 6,482 $ 7,655 $ 22,395 $ 15,152 Severance charges, net 1 287 35 595 89 Professional fees and other 3 — — 67 — Adjusted EBIT 6,769 7,690 23,057 15,241 Depreciation and amortization 4,656 4,704 14,113 14,222 Adjusted EBITDA $ 11,425 $ 12,394 $ 37,170 $ 29,463 Corporate and shared support services Net loss $ (25,028) $ (41,665) $ (92,676) $ (121,345) Provision for income taxes 1,072 1,465 4,020 4,182 Loss (gain) on equipment sale 10 (786) (286) (4,269) Interest expense, net 10,067 26,653 43,499 63,708 Foreign currency gain (742) (2,264) (776) (3,955) Pension credit 2 (163) (178) (481) (571) Professional fees and other 3 1,452 539 4,925 10,576 Write-off of software cost 629 — 629 — Legal costs 4 650 1,543 850 3,271 Severance charges, net 1 173 485 182 2,747 Loss on debt extinguishment 3 — 1,585 — Natural disaster insurance recovery — — — (872) Adjusted EBIT (11,877) (14,208) (38,529) (46,528) Depreciation and amortization 1,592 1,261 4,978 3,856 Non-cash share-based compensation costs 232 629 859 570 Adjusted EBITDA $ (10,053) $ (12,318) $ (32,692) $ (42,102) ___________________ 1 For the three and nine months ended September 30, 2023, primarily related to customary severance costs associated with staff reductions across multiple departments. For the three months ended September 30, 2022, primarily related to customary severance costs associated with staff reductions across multiple corporate departments. For the nine months ended September 30, 2022 includes $1.3 million related to customary severance costs associated with executive departures and $1.7 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 nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively related to debt financing, and $0 and $1.1 million, respectively, related to lease extinguishment charges and other project costs. For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs. 4 Primarily relates to accrued legal matters and legal fees. 32 Table of Contents Liquidity and Capital Resources Financing for operations consists primarily of our 2022 ABL Credit Agreement (which includes the Revolving Credit Loans and, the Delayed Draw Term Loan), ME/RE Loans, the A&R Term Loan Credit Agreement (which includes the Uptiered Loan and the Incremental Term Loan), and cash flows from our operations. As of September 30, 2023, we had approximately $19.9 million of borrowing capacity consisting of $4.9 million available under the 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, capital expenditures, and operations. Our cash and cash equivalents as of September 30, 2023 totaled $21.5 million, consisting of $16.5 million of unrestricted cash on hand, and $5.0 million of restricted cash. 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 of restricted cash. Our total debt and finance obligations were $301.1 million, of which $5.3 million was classified as current at September 30, 2023, compared to total debt of $285.9 million at December 31, 2022. As of November 7, 2023, we had consolidated cash and cash equivalents of $25.5 million, excluding $5.0 million of restricted cash. In addition, we had $10.0 million available under the A&R Term Loan Agreement and approximately $4.0 million of undrawn availability under our other various credit facilities, resulting in total liquidity of $39.5 million. As of September 30, 2023, we were in compliance with all debt provisions and covenants under our various debt agreements. 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 amounts available under our debt arrangements. 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. We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows and projected debt-repayment schedule, and evaluate our available alternative sources of liquidity, including accessing debt and equity capital markets in light of current and expected economic conditions. Although we cannot provide any assurance, we believe that our liquidity position and our improving ability to generate cash flows from our operations due to the success of our ongoing cost reduction efforts should be adequate to meet our cash requirements inclusive of, but not limited to, our normal operating needs, debt service obligations and commitments of at least the next twelve months. Cash Flows The following table summarizes cash flows from Operating, Investing and Financing activities (in thousands): Nine Months Ended September 30, Cash flows provided by (used in): 2023 2022 Increase (Decrease) Operating activities $ (22,069) $ (46,365) 52 % Investing activities (7,019) (13,837) 49 % Financing activities (7,395) 63,288 (112) % Effect of exchange rate changes on cash (109) (1,373) NM Net change in cash and cash equivalents $ (36,592) $ 1,713 NM NM - Not meaningful Cash flows attributable to our operating activities. For the nine months ended September 30, 2023, net cash used in operating activities was $22.1 million, an improvement of $24.3 million over the 2022 period. Our net cash used in operating activities was driven by our net loss for the period, which totaled $52.6 million and negative working capital of $26.2 million, partially offset by amortization of debt issuance costs of $16.9 million, depreciation and amortization of $28.5 million, and PIK interest of $10.9 million. For the nine months ended September 30, 2022, net cash used in operating activities was $46.4 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 $76.9 million. The decline in cash generated from operations was driven by the net loss during the period, 33 Table of Contents negative working capital impacts of $35.3 million, a gain on disposal of assets of $4.3 million, and movement in deferred income taxes of $0.4 million. These were partially offset by amortization of debt issuance costs and debt discount, and write off of deferred loan costs of $28.4 million, depreciation and amortization of $28.6 million, and PIK interest of $15.5 million. Cash flows attributable to our investing activities. For the nine months ended September 30, 2023, net cash used in investing activities was $7.0 million, consisting primarily of capital expenditures of $7.4 million, partially offset by $0.4 million of cash proceeds from asset sales. For the nine months ended September 30, 2022, net cash used in investing activities was $13.8 million, consisting primarily of $21.0 million of capital expenditures, partially offset by $7.2 million of cash proceeds from asset sales. Cash flows attributable to our financing activities. For the nine months ended September 30, 2023, net cash used in financing activities was $7.4 million consisting primarily of net borrowings under our 2022 ABL Credit Facility of $11.0 million, borrowings under ME/RE loans of $27.4 million and borrowings under the Incremental Term Loan of $42.5 million, offset by the payoff of APSC Term Loan of $37.1 million, payoff of the Notes of $41.2 million and payment of debt issuance cost of $8.4 million. For the nine months ended September 30, 2022, net cash provided by financing activities was $63.3 million consisting primarily of net borrowings under our ABL Credit Facility of $67.8 million and $9.7 million cash proceeds from the equity issuances, partially offset by $13.6 million in payments for debt issuance costs. Effect of exchange rate changes on cash and cash equivalents. For the nine months ended September 30, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.1 million and $1.4 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. See Note 11 - Debt for additional details regarding new financing transactions and amendments to our debt agreements that were executed during the year. 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. See Note 11 - Debt for additional details on our off-balance sheet arrangements. Critical Accounting Policies and Estimates A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K. There were no material changes to our critical accounting policies during the nine months ended September 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. 34 Table of Contents