TEAM, INC. Overview
Unless otherwise indicated, the terms "Team, Inc. ," "Team," "the Company," "we," "our" and "us" are used in this report to refer toTeam, Inc. , to one or more of its consolidated subsidiaries or to all of them taken as a whole. We are incorporated in theState of Delaware and our company website can be found at www.teaminc.com. Our corporate headquarters is located at 13131 Dairy Ashford, Suite 600,Sugar Land, Texas , 77478 and our telephone number is (281) 331-6154. Our stock is traded on theNew York Stock Exchange ("NYSE") under the symbol "TISI." The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this report, and the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, including Contractual Obligations and Critical Accounting Policies, included in our Annual Report on the 2019 Form 10-K for the year endedDecember 31, 2019 ("the 2019 Form 10-K"). Cautionary Note Regarding Forward-Looking Statements. This report contains "forward-looking statements" that are accompanied by meaningful cautionary statements so as to obtain the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Without limitation, 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 our reasonable beliefs and assumptions, and our current expectations, estimates and projections about ourselves and our industry. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. We caution that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. 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. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including, but not limited to the statements under Part II, Item 1A "Risk Factors" of this report and under Part 1, Item 1A "Risk Factors" of the 2019 Form 10-K. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements are set forth in this Quarterly Report in Part II, Item 1A. "Risk Factors", and in the 2019 Form 10-K in Part I, Item 1A under the heading "Risk Factors." Such risks, uncertainties and other important factors include, among others, risks related to: •the impact to our business, financial condition, results of operations and cash flows due to negative market conditions and future economic uncertainties, particularly in industries in which we are heavily dependent; •the impact to our business, financial condition, results of operations and cash flows due to the novel coronavirus (COVID-19) pandemic and related social distancing requirements; •delays in the commencement of major projects, whether due to the COVID-19 pandemic or other factors; •our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our clients' industry; •the timing of new client contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results; •risk of non-payment and/or delays in payment of receivables from our clients; •our ability to generate sufficient cash from operations, access our Credit Facility, or maintain our compliance with our Credit Facility covenants; •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, including costs incurred in connection with the implementation of preventative measures required in regard to mitigation of the spread of COVID-19; •changes in laws or regulations in the local jurisdictions that we conduct our business; •the inherently uncertain outcome of current and future litigation; and •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. 30 -------------------------------------------------------------------------------- Table of Content General Description of Business We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our client's most critical assets. We conduct operations in three segments: Inspection and Heat Treating ("IHT"), Mechanical Services ("MS") and Quest Integrity. Through the capabilities and resources in these three segments, we believe that Team is uniquely qualified to provide integrated solutions involving in their most basic form: 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 Team is unique in its 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 integrity management and performance solutions, conventional and advanced non-destructive testing ("NDT") services, heat treating and thermal services, tank management solutions, and pipeline integrity solutions, as well as associated engineering and condition assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities. MS provides machining, bolting, and vapor barrier weld testing services, hot tap and line intervention services, valve management solutions, and emission control services primarily as call-out and turnaround services under both on-stream and off-line/shut down circumstances. On-stream services offered by MS represent the services offered while plants are operating and under pressure. Turnaround services are project-related and demand is a function of the number and scope of scheduled and unscheduled facility turnarounds as well as new industrial facility construction or expansion activities. Quest Integrity provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass three broadly-defined disciplines including highly specialized in-line inspection services for historically unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; advanced engineering and condition assessment services through a multi-disciplined engineering team and related lab support; and advanced digital imaging including remote digital video imaging, laser scanning and laser profilometry-enabled reformer care services. We offer these services globally through approximately 200 locations in more than 20 countries throughout the world with approximately 5,700 employees. We market our services to companies in a diverse array of heavy industries which include: •Energy (refining, power, renewables, nuclear and liquefied natural gas); •Manufacturing and Process (chemical, petrochemical, pulp and paper industries, manufacturing, automotive and mining); •Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas); •Public Infrastructure (amusement parks, bridges, ports, construction and building, roads and railways); and •Aerospace and Defense. 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, Item 1A. Risk Factors of Part II of this report and Item 1A. Risk Factors of Part I of the 2019 Form 10-K, and those factors have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain factors are described below. COVID-19 Pandemic and Market Conditions Update. InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughoutthe United States and the rest of the world. The COVID-19 pandemic and related economic repercussions have created significant volatility and uncertainty in domestic and international markets. Additionally, oil demand has significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus. Further, other macroeconomic events such as the geopolitical tensions betweenOPEC andRussia , resulted in a significant drop in oil prices. Although oil prices have since seen a recovery, this price volatility undermines our client's confidence in terms of project planning and execution. As such, 31 -------------------------------------------------------------------------------- Table of Content these negative factors have created significant volatility and uncertainty in the markets in which we operate and, as a result, certain clients have responded with capital spending budget cuts, cost cutting measures, personnel layoffs, limited facility access, and facility closures among other actions. Though the impact of COVID-19 and the decline in crude oil prices on our operations has varied by geographic conditions and applicable government mandates, it has adversely affected our workforce and operations, as well as the operations of our clients, suppliers and contractors. Global oil demand is recovering, driven by gasoline and diesel while jet fuel remains suppressed, however, all three refined products collectively remain below 2019 levels. The ultimate duration and impact on our global operations is presently unclear. Furthermore, the extent to which we or our clients may successfully mitigate the impact of COVID-19 and the decline in the oil and gas industry, if at all, is not presently known. We expect that our results of operations in future periods may continue to be adversely impacted due to the factors noted above. To successfully navigate through this unprecedented period, we continue to focus on the following key priorities: • the safety of our employees and business continuity; • decisive and aggressive actions taken to reduce costs, preserve capacity and manage margins in order to align our business with the near-term decrease in demand for our services; and • our end market revenue diversification strategy. To respond to the economic downturn resulting from the COVID-19 pandemic and the drop in oil prices, we initiated a cost reduction and efficiency program. All named executive officers have voluntarily taken temporary salary reductions ranging from 15% to 20% of their base salary. In addition, we instituted a reduction for certain other salaried employees, at lower percentages, and suspended our voluntary match under the executive deferred compensation retirement plan and our 401(k) plan. Further, our board of directors voluntarily agreed to a 20% reduction of their cash compensation. These reductions were effective during the second quarter of 2020 and into the third quarter of 2020. Under the CARES Act, we are qualified to defer the employer portion of social security taxes incurred through the end of calendar 2020. As ofJune 30, 2020 , we have deferred employer payroll taxes of$5.4 million with approximately half of the deferral due in each of 2021 and 2022. We may defer additional future employer payroll taxes under the CARES Act. Additionally, other governments in jurisdictions where we operate passed legislation to provide employers with wage subsidy grants and deferral of certain payroll related expenses and tax payments. We elected to treat qualified government subsidies fromCanada and other governments as offsets to the related expenses. As a result, we recognized$3.8 million and$0.9 million as a reduction to operating expenses and selling, general and administrative expenses, respectively, during the three and six months endedJune 30, 2020 . As ofJune 30, 2020 , we also deferred certain payroll related expenses and tax payments of$4.7 million under other foreign government programs with all of these deferrals currently due in the third quarter 2020. For additional risks relating to the COVID-19 pandemic and our oil and gas industry clients, see Part II, Item 1A "Risk Factors" of this report. Goodwill Impairment. As discussed in Note 7 above and discussed further below, we recognized a non-cash goodwill impairment charge during the three months endedMarch 31, 2020 of$191.8 million for the IHT operating segment. These charges were a result of an interim goodwill impairment test that was triggered as a result of certain impairment indicators that were present during the quarter, primarily the decline in operating results experienced during the first quarter of 2020 due to COVID-19, lower oil prices and related impacts on the IHT operating segment. 32 -------------------------------------------------------------------------------- Table of Content Results of Operations The following is a comparison of our results of operations for the three months endedJune 30, 2020 compared toJune 30, 2019 .
Three Months Ended
Increase
Three Months Ended June 30, (Decrease)
2020 2019 $ %
(unaudited) (unaudited)
Revenues by business segment:
IHT $ 80,474 $ 138,658 $ (58,184) (42.0) %
MS 92,820 144,897 (52,077) (35.9) %
Quest Integrity 16,010 32,274 (16,264) (50.4) %
Total $ 189,304 $ 315,829 $ (126,525) (40.1) %
Operating income (loss):
IHT $ 4,740 $ 9,497 $ (4,757) (50.1) %
MS 9,899 20,317 (10,418) (51.3) %
Quest Integrity 689 9,324 (8,635) (92.6) %
Corporate and shared support services (19,694) (26,134) 6,440 24.6 %
Total $ (4,366) $ 13,004 $ (17,370) (133.6) %
Revenues. Total revenues decreased $126.5 million or 40.1% from the prior year
quarter. Excluding the unfavorable impact of $1.9 million due to foreign
currency exchange rate changes, total revenues decreased by $124.7 million , IHT
revenues decreased by $57.8 million , MS revenues decreased by $50.9 million and
Quest Integrity revenues decreased by $16.0 million . The unfavorable impacts of
foreign exchange rate changes are primarily due to the strengthening of the U.S.
dollar relative to the Brazilian Real, the Euro, the British Pound, the Canadian
Dollar and the Australian dollar this quarter. Decreased activity levels in IHT,
MS and Quest Integrity were due to volumes being negatively impacted by the
outbreak of COVID-19 and the oversupplied oil market causing certain clients to
temporarily close facilities and/or curtail operations, resulting in the
postponement of client projects and lower demand for our services. Within the
oil and gas industry, we expect refining utilization rates to gradually recover
through the second half of the year. Without the COVID-19 pandemic effects, we
would typically benefit for a period of 12 to 18 months following a refining
utilization rate drop, however, current market dynamics have delayed the demand
growth for our products and services.
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Operating loss. Overall operating loss was $4.4 million in the current year
quarter compared to an operating income of $13.0 million in the prior year
quarter. The overall decrease in operating income is attributable to IHT, MS and
Quest Integrity which experienced decreases in operating income of $4.8 million ,
$10.4 million and $8.6 million , respectively. These movements were partially
offset by a decrease in corporate and shared services expenses of $6.4 million .
For the three months ended June 30, 2020 , operating loss includes net expenses
totaling $4.1 million that we do not believe are indicative of our core
operating activities, while the prior year quarter included $3.7 million of such
items, as detailed by segment in the table below (in thousands):
Expenses reflected in operating income (loss) that are not indicative of our core operating activities (unaudited):
Corporate
and shared
support
IHT MS Quest Integrity services Total
Three Months Ended June 30,
2020
Professional fees and other1 $ - $ - $ - $ 512 $ 512
Legal costs2 - - - 446 446
Severance charges, net3 1,030 1,537 140 473 3,180
Total $ 1,030 $ 1,537 $ 140 $ 1,431 $ 4,138
Three Months Ended June 30,
2019
Professional fees and other1 $ - $ - $ - $ 3,715 $ 3,715
Legal costs2 - - - 15 15
Severance charges, net3 26 32 - (58) -
Total $ 26 $ 32 $ - $ 3,672 $ 3,730
_________________
1 Consists primarily of professional fees and other costs for assessment of
corporate and support cost structures. For the three months ended June 30, 2020
and June 30, 2019 , includes $0.2 million and $2.7 million , respectively,
associated with the OneTEAM program (exclusive of restructuring costs).
2 For the three months ended June 30, 2020 , primarily relates to costs
associated with an accrued legal settlement. For the three months ended June 30,
2019 , primarily relates to intellectual property legal defense costs associated
with Quest Integrity.
3 For the three months ended June 30, 2020 , includes $2.9 million of severance
charges associated with the OneTEAM program, including international
restructuring under the OneTEAM program, and $0.3 million in other severance
charges due to the impact of COVID-19.
Excluding the impact of these identified non-core items in both periods,
operating loss changed unfavorably by $17.0 million , consisting of lower
operating income in IHT, MS and Quest Integrity of $3.8 million , $8.9 million
and $8.5 million , respectively, offset by a decrease in corporate and shared
support services expenses of $4.2 million . The lower operating income in IHT, MS
and Quest Integrity reflects lower activity levels due to a decline in market
conditions as a result of the outbreak of COVID-19 and the decline in oil
prices. The operating loss decrease in corporate and shared support services was
driven primarily by lower labor and information technology expenses.
Interest expense. Interest expense decreased from $7.6 million in the prior year
quarter to $7.3 million in the current year quarter due to lower overall debt
balances outstanding.
Other expense, net. Non-operating results include $0.3 million in foreign
currency transaction losses in both the current year and prior year quarter.
Foreign currency transaction losses in the current year period reflect the
effects of fluctuations in the U.S. Dollar relative to the currencies to which
we have exposure, including but not limited to, the Brazilian Real, British
Pound, Euro, Mexican Peso and New Zealand Dollar. Non-operating results also
include certain components of our net periodic pension cost (credit).
Taxes. Income tax expense was $1.7 million on the pre-tax loss of $11.8 million
in the current year quarter compared to a benefit of $1.0 million on the pre-tax
income of $5.1 million in the prior year quarter. The effective tax rate was a
provision of 14.2% for the three months ended June 30, 2020 , compared to a
benefit of 19.5% for the three months ended June 30, 2019 .
The effective tax rate change from prior year quarter compared to current year
quarter is primarily due to the limitation on recognition of tax benefits in
certain jurisdictions in which the Company has a valuation allowance and, to a
lesser extent, the correlation of domestic and foreign income and losses.
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Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth the components of revenue and operating income
(loss) from our operations for the six months ended June 30, 2020 and 2019 (in
thousands):
Increase
Six Months Ended June 30, (Decrease)
2020 2019 $ %
(unaudited) (unaudited)
Revenues by business segment:
IHT 188,355 $ 265,714 $ (77,359) (29.1) %
MS 197,339 266,423 (69,084) (25.9) %
Quest Integrity 40,449 53,291 (12,842) (24.1) %
Total $ 426,143 $ 585,428 $ (159,285) (27.2) %
Operating income (loss):
IHT1 (187,410) $ 11,218 $ (198,628) NM2
MS 10,921 25,851 (14,930) (57.8) %
Quest Integrity 6,795 10,968 (4,173) (38.0) %
Corporate and shared support services (47,604) (51,561) 3,957 7.7 %
Total $ (217,298) $ (3,524) $ (213,774) NM2
_________________
1 Includes goodwill impairment charge of $191.8 million for IHT for the three
months ended March 31, 2020 .
2 NM - Not meaningful.
Revenues. Total revenues decreased $159.3 million or 27.2% from the prior year
period. Excluding the unfavorable impact of $3.4 million due to foreign currency
exchange rate changes, total revenues decreased by $155.9 million , IHT revenues
decreased by $76.7 million , MS revenues decreased by $67.1 million and Quest
Integrity revenues decreased by $12.1 million . The unfavorable impacts of
foreign exchange rate changes are primarily due to the strengthening of the U.S.
dollar relative to the Brazilian Real, the Euro, the British Pound, the Canadian
Dollar and the Australian dollar this period. Decreased activity levels in IHT,
MS and Quest Integrity were due to volumes being negatively impacted by the
outbreak of COVID-19 and the oversupplied oil market causing certain clients to
temporarily close facilities and/or curtail operations, resulting in the
postponement of client projects and lower demand for our services. Within the
oil and gas industry, we expect refining utilization rates to gradually recover
during the second half of the year. Without the COVID-19 pandemic effects, we
would typically benefit for a period of 12 to 18 months following a refining
utilization rate drop, however, current market dynamics have delayed the demand
growth for our products and services.
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Operating loss. Overall operating loss was $217.3 million in the current year
period compared to operating loss of $3.5 million in the prior year period. The
overall increase in operating loss is primarily attributable to IHT, which
experienced a decrease in operating income of $198.6 million . Additionally, MS
and Quest Integrity experienced a decrease in operating income of $14.9 million
and $4.2 million , respectively. These movements were partially offset by a
decrease in corporate and shared services expenses of $4.0 million . The sharp
decrease in operating income for IHT is primarily attributable to goodwill
impairment charges of $191.8 million recognized during the three months ended
March 31, 2020 . These impairment charges were a result of our interim goodwill
impairment test completed during the three months ended March 31, 2020 , which
was triggered by the existence of impairment indicators, including the decline
in our forecasts as a result of the COVID-19 pandemic and the related decline in
market conditions on our IHT operating segment. The results of the impairment
test indicated that the carrying value of our IHT operating segment exceeded its
estimated fair value. The estimated fair value of IHT has been adversely
impacted by the decline in operating results experienced during the three months
ended March 31, 2020 primarily due to COVID-19, lower commodity prices, and
related impacts on our financial results.
For the six months ended June 30, 2020 , operating loss includes net expenses
totaling $199.9 million that we do not believe are indicative of our core
operating activities, while the prior year period included $9.3 million of such
items, as detailed by segment in the table below (in thousands):
Expenses reflected in operating income (loss) that are not indicative of our core operating activities (unaudited):
Corporate
and shared
support
IHT MS Quest Integrity services Total
Six Months Ended June 30, 2020
Professional fees and other1 $ - $ - $ - $ 3,057 $ 3,057
Legal costs2 - - - 1,696 1,696
Severance charges, net3 1,038 1,667 140 521 3,366
Goodwill impairment charge 191,788 - - - 191,788
Total $ 192,826 $ 1,667 $ 140 $ 5,274 $ 199,907
Six Months Ended June 30, 2019
Professional fees and other1 $ - $ - $ - $ 8,820 $ 8,820
Legal costs2 - - - 279 279
Severance charges, net3 128 117 - (37) 208
Total $ 128 $ 117 $ - $ 9,062 $ 9,307
_________________
1 Consists primarily of professional fees and other costs for assessment of
corporate and support cost structures. For the six months ended June 30, 2020
and June 30, 2019 , includes $2.0 million and $5.9 million , respectively,
associated with the OneTEAM program (exclusive of restructuring costs).
2 For the six months ended June 30, 2020 , primarily relates to accrued costs due
to international legal and internal control review matters. For the six months
ended June 30, 2019 , primarily relates to intellectual property legal defense
costs associated with Quest Integrity.
3 For the six months ended June 30, 2020 and June 30, 2019 , includes
$3.1 million and $0.2 million of severance charges associated with the OneTEAM
program, including international restructuring under the OneTEAM program. For
the six months ended June 30, 2020 , $0.3 million in other severance charges due
to the impact of COVID-19.
Excluding the impact of these identified non-core items in both periods,
operating loss changed unfavorably by $23.1 million , consisting of lower
operating income in IHT, MS and Quest Integrity of $5.9 million , $13.4 million
and $4.0 million , respectively, offset by a decrease in corporate and shared
support services expenses of $0.2 million . The lower operating income in IHT, MS
and Quest Integrity reflects lower activity levels due to a decline in market
conditions as a result of the outbreak of COVID-19 and the decline in oil
prices. The operating loss decrease in corporate and shared support services was
driven primarily by lower labor and information technology expenses.
Interest expense. Interest expense decreased from $15.0 million in the prior
year to $14.1 million in the current year due to lower overall debt balances
outstanding.
Other expense, net. Non-operating results include $0.9 million in foreign
currency transaction losses in the current year quarter compared to $0.2 million
in foreign currency transaction losses in the prior year quarter. Foreign
currency transaction losses in the current year period reflect the effects of
fluctuations in the U.S. Dollar relative to the currencies to which we have
exposure, including but not limited to, the Brazilian Real, British Pound, Euro,
Mexican Peso and New Zealand Dollar. Non-operating results also include certain
components of our net periodic pension cost (credit).
Taxes. The benefit for income tax was $18.8 million on the pre-tax loss of
$232.0 million in the current year compared to a benefit of $0.7 million on the
pre-tax loss of $18.8 million in the prior year. The effective tax rate was a
benefit of 8.1% for the six months ended June 30, 2020 , compared to a benefit of
3.5% for the six months ended June 30, 2019 .
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The effective tax rate change from prior year compared to current year is
primarily due to significant discrete items recognized in the prior quarter,
including impact of the legislative changes enacted, the goodwill impairment
charge taken during the current year, a portion of which is not deductible for
tax purposes, and an increase to the valuation allowance related to the
realizability of our net operating loss deferred tax assets. The limitation on
recognition of tax benefits in certain jurisdictions in which the Company has a
valuation allowance has also impacted the effective tax rate compared to the
prior year.
Discrete items recognized during the current year include a net tax benefit of
$30.5 million related to the goodwill impairment charge and an increase to the
valuation allowance of $22.4 million related to the goodwill impairment and our
U.S. net operating loss deferred tax assets. The current year was also impacted
by the benefit of certain provisions within the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act"), which was enacted on March 27, 2020 .
The CARES Act was enacted as a stimulus package to mitigate the negative
financial impact of the COVID-19 pandemic on the economy. A provision in the
CARES Act allows for the carryback of net operating losses generated in certain
tax years, which were previously only allowed to be carried forward, to recover
income taxes paid at a higher statutory tax rate than the rate under current
law. A tax benefit in the amount of $7.3 million was recorded during the current
year related to the carryback of net operating losses.
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 earnings before interest,
taxes, depreciation and amortization ("adjusted EBITDA") and free cash flow to
supplement financial information presented on a GAAP basis.
We define adjusted net income (loss), adjusted net income (loss) per diluted
share and adjusted EBIT to exclude the following items: costs associated with
our OneTEAM program, non-routine legal costs and settlements, restructuring
charges, certain severance charges, goodwill impairment charge and certain other
items that we believe are not indicative of core operating activities. EBIT, as
defined by us, excludes income tax expense (benefit), interest charges and items
of other (income) expense and therefore is equal to operating income (loss)
reported in accordance with GAAP. Adjusted EBITDA further excludes from 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.
We believe these non-GAAP financial measures will provide our stakeholders with
useful information to help them evaluate operating performance. However, there
are limitations to the use of the non-GAAP financial measures presented in this
report. 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.
The non-GAAP financial measures are not meant to be considered as indicators of
performance in isolation from or as a substitute for net income (loss) as a
measure of operating performance or to cash flows from operating activities as a
measure of liquidity, prepared in accordance with GAAP, and should be read only
in conjunction with financial information presented on a GAAP basis.
Reconciliations of each non-GAAP financial measure to its most directly
comparable GAAP financial measure are presented below.
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The following tables set forth the reconciliation of Adjusted Net Income (Loss),
EBIT and EBITDA to their most comparable GAAP financial measurements:
TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Adjusted Net Income (Loss):
Net income (loss) $ (13,528) $ 6,102 Professional fees and other1 512 3,715 3,057 8,820 Legal costs2 446 15 1,696 279 Severance charges, net3 3,180 - 3,366 208 Goodwill impairment charge - - 191,788 - Tax impact of adjustments and other net tax items4 (868) (783) (14,918) (1,954) Adjusted net income (loss)$ (10,258) $ 9,049
Adjusted net income (loss) per common share: Basic$ (0.33) $ 0.30 $ (0.92) $ (0.36) Diluted$ (0.33) $ 0.30 $ (0.92) $ (0.36) Adjusted EBIT and Adjusted EBITDA: Operating income (loss) ("EBIT")$ (4,366) $ 13,004 $ (217,298) $ (3,524) Professional fees and other1 512 3,715 3,057 8,820 Legal costs2 446 15 1,696 279 Severance charges, net3 3,180 - 3,366 208 Goodwill impairment charge - - 191,788 - Adjusted EBIT (228) 16,734 (17,391) 5,783 Depreciation and amortization Amount included in operating expenses 5,786 6,319 11,723 12,650 Amount included in SG&A expenses 5,692 6,060 11,463 12,000 Total depreciation and amortization 11,478 12,379 23,186 24,650 Non-cash share-based compensation costs 1,416 3,648 2,946 6,082 Adjusted EBITDA$ 12,666 $ 32,761 $ 8,741 $ 36,515 Free Cash Flow: Cash provided by operating activities$ 26,328 $ (2,058) $ 27,245 $ 5,570 Capital expenditures (4,181) (7,786) (12,486) (14,396) Free Cash Flow$ 22,147 $ (9,844) $ 14,759 $ (8,826)
____________________________________
1 For the three and six months endedJune 30, 2020 , includes$0.2 million and$2.0 million , respectively, associated with the OneTEAM program (exclusive of restructuring costs). For the three and six months endedJune 30, 2019 , includes$2.7 million and$5.9 million , respectively, associated with the OneTEAM program (exclusive of restructuring costs). 2 For the three months endedJune 30, 2020 , primarily relates to costs associated with an accrued legal settlement. For the six months endedJune 30, 2020 , primarily relates to costs associated with international legal and internal control review matters. For the three and six months endedJune 30, 2019 , primarily relates to intellectual property legal defense costs associated with Quest Integrity. 3 For the three and six months endedJune 30, 2020 ,$2.9 million and$3.1 million , respectively, are severance charges associated with the OneTEAM program as well as$0.3 million in severance charges were due to the impact of COVID-19. For the six months endedJune 30, 2019 ,$0.2 million of severance charges are associated with the OneTEAM program. 4 Represents the tax effect of the adjustments at an assumed marginal tax rate of 21% for the three and six months endedJune 30, 2020 and 2019 except for the adjustment of the goodwill impairment charge for which the actual tax impact was used. 38
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TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued)
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Adjusted EBIT and Adjusted EBITDA by
Segment:
IHT
Operating income (loss) $ 4,740 $ 9,497 $ (187,410) $ 11,218
Severance charges, net1 1,030 26 1,038 128
Goodwill impairment charge - - 191,788 -
Adjusted EBIT 5,770 9,523 5,416 11,346
Depreciation and amortization 3,746 4,401 7,729 8,903
Adjusted EBITDA $ 9,516 $ 13,924 $ 13,145 $ 20,249
MS
Operating income $ 9,899 $ 20,317 $ 10,921 $ 25,851
Severance charges, net1 1,537 32 1,667 117
Adjusted EBIT 11,436 20,349 12,588 25,968
Depreciation and amortization 5,475 5,518 10,906 10,932
Adjusted EBITDA $ 16,911 $ 25,867 $ 23,494 $ 36,900
Quest Integrity
Operating income $ 689 $ 9,324 $ 6,795 $ 10,968
Severance charges, net1 140 - 140 -
Adjusted EBIT 829 9,324 6,935 10,968
Depreciation and amortization 887 999 1,773 1,920
Adjusted EBITDA $ 1,716 $ 10,323 $ 8,708 $ 12,888
Corporate and shared support services
Operating loss $ (19,694) $ (26,134) $ (47,604) $ (51,561)
Professional fees and other2 512 3,715 3,057 8,820
Legal costs3 446 15 1,696 279
Severance charges, net1 473 (58) 521 (37)
Adjusted EBIT (18,263) (22,462) (42,330) (42,499)
Depreciation and amortization 1,370 1,461 2,778 2,895
Non-cash share-based compensation costs 1,416 3,648 2,946 6,082
Adjusted EBITDA $ (15,477) $ (17,353) $ (36,606) $ (33,522)
___________________
1 Relates to severance charges incurred associated with the OneTEAM program,
including international restructuring under the OneTEAM program for the three
and six months ended June 30, 2020 and June 30, 2019 . Also includes severance
charges due to the impact of COVID-19 for the three and six months ended June
30, 2020 .
2 For the three and six months ended June 30, 2020 , includes $0.2 million and
$2.0 million , respectively, associated with the OneTEAM program (exclusive of
restructuring costs). For the three and six months ended June 30, 2019 , includes
$2.7 million and $5.9 million , respectively, associated with the OneTEAM program
(exclusive of restructuring costs).
3 For the three months ended June 30, 2020 , primarily relates to costs
associated with an accrued legal settlement. For the six months ended June 30
2020 , primarily relates to costs associated with international legal and
internal control review matters. For the three and six months ended June 30,
2019 , primarily relates to intellectual property legal defense costs associated
with Quest Integrity.
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Liquidity and Capital Resources
Financing for our operations consists primarily of our Credit Facility (as
defined below) and cash flows attributable to our operations, which we believe
are sufficient to fund our business needs. From time to time, we may experience
periods of weakness in the industries in which we operate, with activity levels
below historical levels. These conditions, depending on their duration and
severity, have the potential to adversely impact our operating cash flows. Since
the oil and gas market downturn and outbreak of COVID-19 in the United States
beginning in March 2020 , we have maintained a continuous process of actively
managing our strategy, operations and resources to changing market conditions.
We have implemented workforce furloughs, reduced personnel compensation, reduced
headcount, eliminated all non-essential costs, lowered capital expenditure
budgets by more than 30% and reviewed all business operations within the evolved
market conditions amongst other initiatives. When the COVID-19 pandemic and oil
and gas industry downturn depressed commodity prices beginning in March 2020 ,
our active management actions helped ensure adequate available liquidity
resources for the foreseeable future. We intend to continue managing the
business to the new market realities to ensure our access to capital remains
sufficient. In the event that existing liquidity sources are no longer
sufficient for our capital requirements, we would explore additional external
financing sources. However, there can be no assurance that such sources would be
available on terms acceptable to us, if at all.
Credit Facility. On June 17, 2020 , we entered into an amendment and extension of
our banking credit facility (the "Credit Facility") evidenced by that certain
Ninth Amendment to the Third Amended and Restated Credit Agreement (the "Ninth
Amendment"), dated June 17, 2020 . The Ninth Amendment extends the term of the
Credit Facility to January 15, 2022 , modifies our financial covenants, and
revises certain other provisions under the Credit Facility, including limiting
our ability to pay cash dividends. Our obligations under the Credit Facility are
guaranteed by our material direct and indirect domestic subsidiaries and are
secured by a lien on substantially all of ours and the guarantors' tangible and
intangible property (subject to certain specified exclusions) and by a pledge of
all of the equity interests in our material direct and indirect domestic
subsidiaries and 65% of the equity interests in our material first-tier foreign
subsidiaries. Specifically, the Ninth Amendment amends and restates certain
portions of the Credit Facility, including, without limitation,
(i) increasing the Senior Secured Leverage Ratio (as defined therein) starting
June 30, 2020 to 3.50 to 1, with step-downs to 3.25 to 1 for the quarter ending
September 30, 2020 , 2.75 to 1 for the quarter ending December 31, 2020 and 2.50
to 1 for the quarter ending March 31, 2021 and thereafter;
(ii) eliminating the Maximum Net Leverage Ratio (as defined therein) until March
31, 2021 at which time it is set at a ratio of 5.50 to 1 for the quarter ending
March 31, 2021 with a step-down to 4.50 to 1 for the quarter ending June 30,
2021 and thereafter;
(iii) postponing and decreasing the Minimum Debt Service Coverage Ratio (as
defined therein) to 1.00 to 1 for the quarter ending September 30, 2020 with a
step-up to 1.25 to 1 for the quarter ending December 31, 2020 and thereafter;
(iv) adding a Minimum Consolidated EBITDA (as defined therein) measured
cumulatively with Consolidated EBITDA (as defined therein) generated from April
1, 2020 through June 30, 2020 of $6.5 million as of June 30, 2020 , April 1, 2020
through September 30, 2020 of $18.5 million as of September 30, 2020 and April
1, 2020 through December 31, 2020 of $50.5 million as of December 31, 2020 ; and
(v) reducing the size of the availability under the revolving portion of the
Credit Facility from $225 million to $200 million .
No changes were made to the term loan borrowing except the maturity date of
January 15, 2022 . Both the revolving loan facility and term loan bear interest
based on a variable Eurodollar rate option and the revolving loan commitment
have commitment fees on unused borrowing capacity. The Eurodollar rate
applicable margin range was modified to a range of 2.75% to 4.25% (the
Eurodollar rate is also subject to a 1.00% floor). The commitment fee range was
also revised to a range of 0.35% to 0.55%. At June 30, 2020 , both the revolving
loan facility and term loan bear interest based on a variable Eurodollar rate
option of LIBOR plus 4.25% margin and commitment fees on unused borrowing
capacity of 0.55%.
As of June 30, 2020 , the senior secured leverage ratio is 2.51 to 1 and we are
in compliance with the covenants in effect as of such date.
At June 30, 2020 , we had $15.6 million of cash on hand, approximately
$53 million of available borrowing capacity through our Credit Facility and $3.2
million of unamortized debt issuance costs and debt discount that are being
amortized over the life of the Credit Facility.
Our ability to maintain compliance with the financial covenants is dependent
upon our future operating performance and future financial condition, both of
which are subject to various risks and uncertainties. The effects of the
COVID-19 pandemic
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and decline in oil and gas end markets could have a significant adverse effect
on our financial position and business condition, as well as our clients and
suppliers. Additionally, it may, among other factors, impact our ability to
generate cash flows from operations, access the capital markets on acceptable
terms or at all, and affect our future need or ability to borrow under our
Credit Facility. In addition to our current sources of funding our business, the
effects of such events may impact our liquidity or our need to revise our
allocation or sources of capital, implement further cost reduction measures
and/or change our business strategy. Although the COVID-19 pandemic and the
decline in the oil and gas end markets could have a broad range of effects on
our liquidity sources, the effects will depend on future developments and cannot
be predicted at this time.
In order to secure our casualty insurance programs we are required to post
letters of credit generally issued by a bank as collateral. A letter of credit
commits the issuer to remit specified amounts to the holder, if the holder
demonstrates that we failed to meet our obligations under the letter of credit.
If this were to occur, we would be obligated to reimburse the issuer for any
payments the issuer was required to remit to the holder of the letter of credit.
We were contingently liable for outstanding stand-by letters of credit totaling
$17.7 million at June 30, 2020 and $20.5 million at December 31, 2019 .
Outstanding letters of credit reduce amounts available under our Credit Facility
and are considered as having been funded for purposes of calculating our
financial covenants under the Credit Facility.
We believe that we will be able to comply with the financial covenants in the
Credit Facility as modified by the Ninth Amendment and that sufficient credit
remains available under the Credit Facility to meet our liquidity needs.
However, due to the uncertainties being caused by the COVID-19 pandemic and the
significant drop in oil prices, such matters cannot be predicted with certainty.
Accordingly, there can be no assurance that we will be able to maintain
compliance with our financial covenants as of any future date. In the event we
are unable to maintain compliance with our financial covenants, we would seek to
enter into another amendment to the Credit Facility with our bank group in order
to modify and/or to provide relief from the financial covenants for an
additional period of time. Although we have entered into amendments in the past,
there can be no assurance that any future amendments would be available on terms
acceptable to us, if at all.
Convertible Senior Notes. On July 31, 2017 , we issued $230.0 million principal
amount of 5.00% Convertible Senior Notes due 2023 (the "Notes"). The Notes,
which are senior unsecured obligations of the Company, bear interest at a rate
of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of
each year, beginning on February 1, 2018 . The Notes will mature on August 1,
2023 unless repurchased, redeemed or converted in accordance with their terms
prior to such date. The Notes will be convertible at an initial conversion rate
of 46.0829 shares of our common stock per $1,000 principal amount of the Notes,
which is equivalent to an initial conversion price of approximately $21.70 per
share. The conversion rate, and thus the conversion price, may be adjusted under
certain circumstances as described in the indenture governing the Notes.
Holders may convert their Notes at their option prior to the close of
business on the business day immediately preceding
•during any calendar quarter commencing after the calendar quarter ending onDecember 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; •during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per$1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day; •if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or;
•upon the occurrence of specified corporate events described in the indenture governing the Notes.
On or after
The Notes are initially convertible into 10,599,067 shares of common stock. Because the Notes could be convertible in full into more than 19.99% of our outstanding common stock, we were required by the listing rules of theNew York Stock Exchange to obtain the approval of the holders of our outstanding shares of common stock before the Notes could be converted into more than 5,964,858 shares of common stock. The Notes will be convertible into, subject to various conditions, cash or 41
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Table of Content shares of the Company's common stock or a combination of cash and shares of the Company's common stock, in each case, at the Company's election. If holders elect to convert the Notes in connection with certain fundamental change transactions described in the indenture governing the Notes, we will, under certain circumstances described in the indenture governing the Notes, increase the conversion rate for the Notes so surrendered for conversion. We may not redeem the Notes prior toAugust 5, 2021 . We will have the option to redeem all or any portion of the Notes on or afterAugust 5, 2021 , if certain conditions (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive)), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. OneTEAM Program. In the fourth quarter of 2017, we engaged outside consultants to assess all aspects of our business for improvement and cost saving opportunities, including centralizing support/shared services. In the first quarter of 2018, we completed the design phase of the project, known as OneTEAM, for our domestic operations, and entered into the deployment phase in the second quarter of 2018. We incurred$0.2 million and$2.0 million of expenses during the three and six months endedJune 30, 2020 , respectively, related to professional fees associated with the program. Additionally, we incurred$2.9 million and$3.1 million of severance-related costs during the three and six months endedJune 30, 2020 , respectively, related to the elimination of certain employee positions in conjunction with the OneTEAM program. In the third quarter of 2019, we began the design phase of OneTEAM for our international operations ("OneTEAM International ") which was deployed in the fourth quarter of 2019. We expect to incur various additional expenses associated with the execution ofOneTEAM International through 2020 with funding provided by our operating cash flows and the Credit Facility. During the first quarter of 2020, in response to COVID-19 and the decline in oil and gas end markets, we expanded and accelerated the operations and center led pillars from the OneTEAM program in order to implement permanent cost savings and identify further opportunities to optimize our organization ("OneTEAM Tune-Up"). As previously disclosed, we expected to ultimately achieve annual run-rate cost efficiencies of$35 million to$45 million related to the OneTEAM program. Due to the expansion and acceleration of certain pillars under the program, we now expect to generate an additional$10 million to$15 million dollars of run rate cost efficiencies by the end of 2020. OneTEAM savings realized during the three and six months endedJune 30, 2020 were approximately$13.7 million and$20.3 million , respectively. Although management expects that cost savings and other business improvements will result from these actions, there can be no assurance that such results will be achieved. Cash and cash equivalents. Our cash and cash equivalents atJune 30, 2020 totaled$15.6 million , of which$11.6 million was in foreign accounts, primarily inEurope , theMiddle East , theUnited Kingdom andTrinidad .
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