TEAM INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________
FORM
10-Q
(Mark One)
For the quarterly period ended
September 30, 2020
OR
For the transition period from to
Commission file number
001-08604
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(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
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None
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| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
þ
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
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| Non-accelerated filer |
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Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The Registrant had
30,627,882
shares of common stock, par value $0.30, outstanding as of October 30, 2020.
INDEX
| Page No. | ||||||||
1
PART I—FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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Accounts receivable, net of allowance of $
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| Inventory |
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| Income tax receivable |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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| Operating lease right-of-use assets |
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Intangible assets, net of accumulated amortization of $
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| Goodwill |
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| Deferred income taxes |
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| Other assets, net |
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| Total assets | $ |
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$ |
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| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable |
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| Current portion of long-term debt and finance lease obligations |
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| Current portion of operating lease obligations |
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| Other accrued liabilities |
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| Total current liabilities |
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| Long-term debt and finance lease obligations |
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| Operating lease obligations |
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| Defined benefit pension liability |
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| Deferred income taxes |
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| Other long-term liabilities |
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| Total liabilities |
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| Commitments and contingencies |
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| Equity: | |||||||||||
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Preferred stock,
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Common stock, par value $
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| Additional paid-in capital |
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| Retained earnings (deficit) |
(
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| Accumulated other comprehensive loss |
(
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(
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| Total equity |
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| Total liabilities and equity | $ |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues | $ |
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$ |
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$ |
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$ |
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| Operating expenses |
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| Gross margin |
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| Selling, general and administrative expenses |
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| Restructuring and other related charges, net |
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| Goodwill impairment charge |
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| Operating income (loss) |
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(
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(
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(
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| Interest expense, net |
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| Other expense, net |
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| Loss before income taxes |
(
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(
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(
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(
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| Less: Provision (benefit) for income taxes |
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(
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(
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(
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| Net loss | $ |
(
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$ |
(
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$ |
(
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$ |
(
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| Loss per common share: | |||||||||||||||||||||||
| Basic | $ |
(
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$ |
(
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$ |
(
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$ |
(
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| Diluted | $ |
(
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$ |
(
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$ |
(
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$ |
(
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| Weighted-average number of shares outstanding: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net loss | $ |
(
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$ |
(
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$ |
(
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$ |
(
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| Other comprehensive income (loss) before tax: | |||||||||||||||||||||||
| Foreign currency translation adjustment |
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(
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(
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(
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| Foreign currency hedge |
(
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(
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| Other comprehensive income (loss), before tax |
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(
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(
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| Tax (provision) benefit attributable to other comprehensive income (loss) |
(
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(
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| Other comprehensive income (loss), net of tax |
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(
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(
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| Total comprehensive loss | $ |
(
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$ |
(
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$ |
(
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$ |
(
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See accompanying notes to unaudited condensed consolidated financial statements.
4
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| Common Stock |
Additional
Paid-in Capital |
Retained
Earnings (Deficit) |
Accumulated
Other Comprehensive Loss |
Total
Shareholders’ Equity |
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| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Adoption of new accounting principle, net of tax | — | — | — |
(
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— |
(
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| Net loss | — | — | — |
(
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— |
(
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
(
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(
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| Foreign currency hedge, net of tax | — | — | — | — |
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| Non-cash compensation | — | — |
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— | — |
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| Net settlement of vested stock awards |
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(
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— | — |
(
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| Balance at March 31, 2020 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net loss | — | — | — |
(
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— |
(
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
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| Foreign currency hedge, net of tax | — | — | — | — |
(
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(
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| Non-cash compensation | — | — |
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— | — |
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| Balance at June 30, 2020 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net loss | — | — | — |
(
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— |
(
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
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| Foreign currency hedge, net of tax | — | — | — | — |
(
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(
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| Non-cash compensation | — | — |
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— | — |
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| Net settlement of vested stock awards | — | — |
(
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— | — |
(
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| Balance at September 30, 2020 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Balance at December 31, 2018 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Adoption of new accounting principle, net of tax | — | — | — |
(
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— |
(
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| Net loss | — | — | — |
(
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— |
(
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
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| Foreign currency hedge, net of tax | — | — | — | — |
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| Non-cash compensation | — | — |
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— | — |
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| Net settlement of vested stock awards |
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(
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— | — |
(
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| Balance at March 31, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net income | — | — | — |
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— |
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
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| Foreign currency hedge, net of tax | — | — | — | — |
(
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(
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| Non-cash compensation | — | — |
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— | — |
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| Net settlement of vested stock awards |
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(
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— | — |
(
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Other
1
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— | — | — |
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— |
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| Balance at June 30, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net loss | — | — | — |
(
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— |
(
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| Foreign currency translation adjustment, net of tax | — | — | — | — |
(
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(
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| Foreign currency hedge, net of tax | — | — | — | — |
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| Non-cash compensation | — | — |
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— | — |
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| Net settlement of vested stock awards |
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(
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— | — |
(
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| Balance at September 30, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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_________________
1
Amount reflects a revision of tax effects for the adoption of
.
See accompanying notes to unaudited condensed consolidated financial statements.
5
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
Nine Months Ended
September 30, |
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| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ |
(
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$ |
(
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| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization |
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| Amortization of deferred loan costs and debt discounts |
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| Provision for doubtful accounts |
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(
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| Foreign currency loss |
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| Deferred income taxes |
(
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| Loss (gain) on asset disposal |
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(
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| Goodwill impairment charge |
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| Non-cash compensation cost |
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| Other, net |
(
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(
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| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable |
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| Inventory |
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| Prepaid expenses and other current assets |
(
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(
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| Accounts payable |
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| Other accrued liabilities |
(
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| Income taxes |
(
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(
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | |||||||||||
| Capital expenditures |
(
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(
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| Business acquisitions, net of cash acquired |
(
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| Proceeds from disposal of assets |
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| Other |
(
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| Net cash used in investing activities |
(
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(
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| Cash flows from financing activities: | |||||||||||
| Net borrowings (payments) under revolving credit agreement |
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(
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| Borrowings (payments) under term loan |
(
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| Contingent consideration payments |
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(
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| Debt issuance costs |
(
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(
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| Taxes paid related to net share settlement of share-based awards |
(
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(
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| Other |
(
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(
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| Net cash provided by (used in) financing activities |
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(
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| Effect of exchange rate changes on cash and cash equivalents |
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(
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| Net increase (decrease) in cash and cash equivalents |
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(
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period | $ |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
6
TEAM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description of business.
Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “the Company,” “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.
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
5,500
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, dams and railways); and
•
Aerospace and Defense.
Our stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “TISI”.
Recent Developments.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the 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 between the Organization of the Petroleum Exporting Countries (OPEC) and Russia, 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, these negative factors have created significant volatility and
7
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 align our business with the current and 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 will continue through the end of 2020.
On March 27, 2020, in response to the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020. Based on our evaluation of the CARES Act, we qualified for certain provisions of income tax relief and the deferral of certain payroll tax payments. 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. Most notably was the Canada Emergency Wage Subsidy (“CEWS”) which helps employers offset a portion of their employee salaries and wages for a limited period. We elected to treat qualified government subsidies from Canada and other governments as offsets to the related expenses.
For additional risks relating to the COVID-19 pandemic and its impact on us and our oil and gas industry clients, see Part II, Item 1A “Risk Factors” of this report.
8
Amounts used in basic and diluted earnings (loss) per share, for the three and nine months ended September 30, 2020 and 2019, are as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Weighted-average number of basic shares outstanding |
|
|
|
|
|||||||||||||||||||
| Stock options, stock units and performance awards |
|
|
|
|
|||||||||||||||||||
| Convertible Senior Notes |
|
|
|
|
|||||||||||||||||||
| Total shares and dilutive securities |
|
|
|
|
|||||||||||||||||||
For both the three and nine months ended September 30, 2020 and 2019, all outstanding share-based compensation awards were excluded from the calculation of diluted loss per share because their inclusion would be antidilutive due to the net loss in those periods. Also, for both the three and nine months ended September 30, 2020 and 2019, the convertible senior notes were excluded from diluted loss per share because the conversion price exceeded the average price of our common stock during those periods. For information on our convertible senior notes and our share-based compensation awards, refer to Note 10 and Note 14, respectively.
Newly Adopted Accounting Principles
Topic 326 - Credit Losses.
In June 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-13,
Financial Instruments-Credit Losses
, which established ASC Topic 326, Credit Losses (“ASC 326”). Along with subsequent ASUs to clarify certain provisions, ASC 326 introduced a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets measured at amortized cost, including trade accounts receivable.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts are reported in accordance with previously applicable GAAP based on incurred credit losses. The cumulative effect of our adoption of ASC 326 on January 1, 2020 resulted in a $
1.0
million decrease, net of tax, to beginning retained earnings on our consolidated balance sheet. Refer to Note 3 for further discussion of
.
ASU No. 2018-15.
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
9
Is a Service Contract
(“ASU 2018-15”), that requires implementation costs incurred in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized in a software licensing arrangement under the internal-use software guidance in Topic 350. ASU 2018-15 requires an entity to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. Our adoption of ASU No. 2018-15 as of January 1, 2020 resulted in a reduction of $
4.9
million from property, plant, and equipment with $
0.9
million reclassified to other current assets and $
4.0
million reclassified to other non-current assets on our consolidated balance sheet.
Accounting Principles Not Yet Adopted
ASU No. 2019-12.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes
, that simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes as well as clarifies aspects of existing guidance to promote more consistent application. ASU 2019-12 clarifies and amends existing guidance related to intraperiod tax allocation and calculations, recognition of deferred taxes for change in ownership group, evaluation of a step-up in the tax basis of goodwill and other clarifications. We are currently evaluating the impact this ASU will have on our financial statements and we plan to adopt it as of January 1, 2021.
ASU No. 2020-04.
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
. The guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently determining whether we will elect the optional expedients as well as evaluating the impact of this guidance on our consolidated financial position, results of operations, and cash flows.
ASU No. 2020-06.
In August 2020, the FASB issued ASU 2020-06,
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
, which simplifies the accounting for convertible instruments by eliminating certain separation models and will generally be reported as a single liability at its amortized cost. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The amendments in ASU 2020-06 are effective for this Company as of January 1, 2022 with the option to early adopt as of January 1, 2021. We are currently determining when we will elect to adopt as well as the impact this ASU will have on our financial statements.
2.
REVENUE
In accordance with ASC 606,
Revenue from Contracts with Customers
, we follow a five-step process to recognize revenue: (1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue when the performance obligations are satisfied.
The majority of our contracts with customers are short-term in nature and billed on a time and materials basis, while certain other contracts are at a fixed price. Certain contracts may contain a combination of fixed and variable elements. We act as a principal and have performance obligations to provide the service itself or oversee the services provided by any subcontractors. Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as taxes assessed by governmental authorities. In contracts where the amount of consideration is variable, we consider our experience with similar contracts in estimating the amount to which we will be entitled and recognize revenues accordingly. As most of our contracts contain only one performance obligation, the allocation of a contract’s transaction price to multiple performance obligations is generally not applicable. Customers are generally billed as we satisfy our performance obligations and payment terms typically range from 30 to 90 days from the invoice date. Billings under certain fixed-price contracts may be based upon the achievement of specified milestones, while some arrangements may require advance customer payment. Our contracts do not include significant financing components since the contracts typically span less than one year. Contracts generally include an assurance type warranty clause to guarantee that the services comply with agreed specifications. The warranty period typically is 12 months or less from the date of service. Warranty expenses were not material for the three and nine months ended September 30, 2020 and 2019.
Revenue is recognized as (or when) the performance obligations are satisfied by transferring control over a service or product to the customer. Revenue recognition guidance prescribes two recognition methods (over time or point in time). Most of our performance obligations qualify for recognition over time because we typically perform our services on customer facilities or assets and customers receive the benefits of our services as we perform. Where a performance obligation is satisfied over time, the related revenue is also recognized over time using the method deemed most appropriate to reflect the measure of progress and transfer of control. For our time and materials contracts, we are generally able to elect the right-to-invoice
10
practical expedient, which permits us to recognize revenue in the amount to which we have a right to invoice the customer if that amount corresponds directly with the value to the customer of our performance completed to date. For our fixed price contracts, we typically recognize revenue using the cost-to-cost method, which measures the extent of progress towards completion based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under this method, revenue is recognized proportionately as costs are incurred. For contracts where control is transferred at a point in time, revenue is recognized at the time control of the asset is transferred to the customer, which is typically upon delivery and acceptance by the customer.
Disaggregation of revenue.
Essentially all of our revenues are associated with contracts with customers.
A disaggregation of our revenue from contracts with customers by geographic region, by reportable operating segment and by service type is presented below (in thousands):
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||
| United States and Canada | Other Countries | Total | United States and Canada | Other Countries | Total | ||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| MS |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||
| United States and Canada | Other Countries | Total | United States and Canada | Other Countries | Total | ||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| MS |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Non-Destructive Evaluation and Testing Services | Repair and Maintenance Services | Heat Treating | Other | Total | |||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| MS |
|
|
|
|
|
||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Non-Destructive Evaluation and Testing Services | Repair and Maintenance Services | Heat Treating | Other | Total | |||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| MS |
|
|
|
|
|
||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
11
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Non-Destructive Evaluation and Testing Services | Repair and Maintenance Services | Heat Treating | Other | Total | |||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| MS |
|
|
|
|
|
||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Non-Destructive Evaluation and Testing Services | Repair and Maintenance Services | Heat Treating | Other | Total | |||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| MS |
|
|
|
|
|
||||||||||||||||||||||||
| Quest Integrity |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
For additional information on our reportable operating segments and geographic information, refer to Note 17.
Contract balances.
The timing of revenue recognition, billings and cash collections results in trade accounts receivable, contract assets and contract liabilities on the consolidated balance sheets. Trade accounts receivable include billed and unbilled amounts currently due from customers and represent unconditional rights to receive consideration. The amounts due are stated at their net estimated realizable value. Refer to Notes 1 and 3 for additional information on the allowance for credit losses and our trade receivables. Contract assets include unbilled amounts typically resulting from sales under fixed-price contracts when the cost-to-cost method of revenue recognition is utilized, the revenue recognized exceeds the amount billed to the customer and the right to payment is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. If we receive advances or deposits from our customers, a contract liability is recorded. Additionally, a contract liability arises if items of variable consideration result in less revenue being recorded than what is billed. Contract assets and contract liabilities are generally classified as current.
Trade accounts receivable, contract assets and contract liabilities consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
|
Trade accounts receivable, net
1
|
$ |
|
$ |
|
|||||||
|
Contract assets
2
|
$ |
|
$ |
|
|||||||
|
Contract liabilities
3
|
$ |
|
$ |
|
|||||||
_________________
1
Includes billed and unbilled amounts, net of allowance for credit losses. See Note 3 for details.
2
Included in the “Prepaid expenses and other current assets” line on the condensed consolidated balance sheets.
3
Included in the “Other accrued liabilities” line of the condensed consolidated balance sheets.
The $
1.9
million increase in our contract assets from December 31, 2019 to September 30, 2020 is due to more fixed price contracts in progress at September 30, 2020 as compared to December 31, 2019. Contract liabilities as of September 30, 2020 are associated with contracts under which customers had paid for all or a portion of the consideration in advance of the work being performed. Due to the short-term nature of our contracts, contract liability balances as of the end of any period are generally recognized as revenue in the following quarter.
Contract costs.
We recognize the incremental costs of obtaining contracts as selling, general and administrative expenses when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less. Assets recognized for costs to obtain a contract were not material as of September 30, 2020. Costs to fulfill a contract are recorded as
12
3.
RECEIVABLES
Accounts receivable consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Trade accounts receivable | $ |
|
$ |
|
|||||||
| Unbilled receivables |
|
|
|||||||||
| Allowance for credit losses |
(
|
(
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
ASC 326 applies to financial assets measured at amortized cost, including trade and unbilled accounts receivable, and requires immediate recognition of lifetime expected credit losses. Significant factors that affect the expected collectability of our receivables include macroeconomic trends and forecasts in the oil and gas, refining, power, and petrochemical markets and changes in our results of operations and forecasts. For unbilled receivables, we consider them as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate. We have identified the following factors that primarily impact the collectability of our receivables and therefore determine the pools utilized to calculate expected credit losses: (i) the aging of the receivable, (ii) any identification of known collectability concerns with specific receivables and (iii) variances in economic risk characteristics across geographic regions.
For trade receivables, customers typically are provided with payment due date terms of 30 days upon issuance of an invoice. We have tracked historical loss information for our trade receivables and compiled historical credit loss percentages for different aging categories. We believe that the historical loss information we have compiled is a reasonable basis on which to determine expected credit losses for trade receivables because the composition of the trade receivables is consistent with that used in developing the historical credit-loss percentages as typically our customers and payment terms do not change significantly. Generally, a longer outstanding receivable equates to a higher percentage of the outstanding balance as current expected credit losses. We update the historical loss information for current conditions and reasonable and supportable forecasts that affect the expected collectability of the trade receivable using a loss-rate approach. We have not seen a negative trend in the current economic environment that significantly impacts our historical credit-loss percentages; however, we will continue to monitor for changes that would indicate the historical loss information is no longer a reasonable basis for the determination of our expected credit losses. Our forecasted loss rates inherently incorporate expected macroeconomic trends. A loss-rate method for estimating expected credit losses on a pooled basis is applied for each aging category for receivables that continue to exhibit similar risk characteristics.
To measure expected credit losses for individual receivables with specific collectability risk, we identify specific factors based on customer-specific facts and circumstances that are unique to each customer. Customer accounts with different risk characteristics are separately identified and a specific reserve is determined for these accounts based on the assessed credit risk.
We have also identified the following geographic regions in which to distinguish our trade receivables: the (i) United States, (ii) Canada, (iii) the European Union, (iv) the United Kingdom, and (v) other countries. These geographic regions are considered appropriate as they each operate in different economic environments with different foreign currencies, and therefore share similar economic risk characteristics. For each geographic region we evaluate the historical loss information and determine credit-loss percentages to apply to each aging category and individual receivable with specific risk characteristics. We estimate future expected credit losses based on forecasted changes in gross domestic product and oil demand for each region.
13
We consider one year from the financial statement reporting date as representing a reasonable forecast period as this period aligns with the expected collectability of our trade receivables.
Financial distress experienced by our customers could have an adverse impact on us in the event our customers are unable to remit payment for the products or services we provide or otherwise fulfill their obligations to us.
In determining the current expected credit losses, we review macroeconomic conditions, market specific conditions, and internal forecasts to identify potential changes in our assessment.
The following table shows a rollforward of the allowance for credit losses:
| September 30, 2020 | |||||
| (unaudited) | |||||
|
Balance at beginning of period
1
|
$ |
(
|
|||
| Provision for expected credit losses |
(
|
||||
| Write-offs |
|
||||
| Foreign exchange effects |
|
||||
| Balance at end of period | $ |
(
|
|||
_________________
1
Includes $
1.4
million due to the initial adoption of ASC 326 as of January 1, 2020.
4.
INVENTORY
Inventory consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Raw materials | $ |
|
$ |
|
|||||||
| Work in progress |
|
|
|||||||||
| Finished goods |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
5.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Land | $ |
|
$ |
|
|||||||
| Buildings and leasehold improvements |
|
|
|||||||||
| Machinery and equipment |
|
|
|||||||||
| Furniture and fixtures |
|
|
|||||||||
| Capitalized Enterprise Resource Planning system development costs |
|
|
|||||||||
| Computers and computer software |
|
|
|||||||||
| Vehicles |
|
|
|||||||||
| Construction in progress |
|
|
|||||||||
| Total |
|
|
|||||||||
| Accumulated depreciation |
(
|
(
|
|||||||||
| Property, plant and equipment, net | $ |
|
$ |
|
|||||||
Included in the table above are assets under finance leases of $
5.7
million and $
5.6
million as of September 30, 2020 and December 31, 2019, respectively, and accumulated amortization of $
0.8
million and $
0.5
million as of September 30, 2020 and December 31, 2019, respectively. Depreciation expense for the three months ended September 30, 2020 and 2019 was $
7.9
million and $
8.4
million, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $
23.8
million and $
25.7
million, respectively.
14
6.
INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||
|
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
||||||||||||||||||||||||||||||
| Customer relationships | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||
| Non-compete agreements |
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Trade names |
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Technology |
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Licenses |
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Total | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||
Amortization expense of intangible assets for the three months ended September 30, 2020 and September 30, 2019 was $
3.6
million and $
3.6
million, respectively. Amortization of intangible assets for the nine months ended September 30, 2020 and September 30, 2019 was $
10.9
million and $
11.0
million, respectively.
7.
GOODWILL AND IMPAIRMENT CHARGES
The COVID-19 pandemic and subsequent mitigation efforts, which included global business and societal shutdowns and the implementation of mandatory social distancing requirements, created an unprecedented disruption to our business during the first, second and third quarters of 2020. These mitigation efforts coupled with the negative economic impacts to the oil and gas industry caused by the substantial decline in the global demand for oil and the concurrent surplus in the supply of oil resulting from geopolitical tensions between the Organization of Petroleum Exporting Countries and Russia regarding limits on production of oil have significantly impacted our business. Even though our services are primarily related to infrastructure support, the oil and gas industry is one of the key industries we serve and our clients have been significantly impacted as a result of these events.
As our clients continue to adjust spending levels in response to the lower commodity prices, we have experienced activity reductions and pricing pressure for our products and services, primarily in our IHT and MS reporting units, which we expect to continue. In line with these rapidly changing market conditions, our market capitalization also deteriorated during the first quarter of 2020 and most significantly in late March 2020. In response to these events and the related decline in our forecasts from the COVID-19 pandemic, we announced cost-cutting measures to offset the expected impact to our business. We determined the totality of these events constituted a triggering event that required us to perform an interim goodwill impairment assessment as of March 31, 2020.
We determined the fair value for each reporting unit in our goodwill impairment assessment using both a discounted cash flow analysis and a multiples based market approach for comparable companies. We utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including short-term and long-term forecast of operating performance, discount rates based on our weighted average cost of capital, revenue growth rates, profitability margins, capital expenditures and the timing of future cash flows. These impairment assessments incorporate inherent uncertainties, including supply and demand for our services, utilization forecasts, pricing forecasts and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the assumptions utilized in our forecasts.
Based upon our impairment assessment, we determined the carrying amount of our IHT reporting unit exceeded the fair value. As a result, we recorded $
191.8
million in goodwill impairment charges on our IHT segment during the three months ended March 31, 2020. The fair value of the MS and Quest Integrity reporting units exceeded their respective carrying values. There was no goodwill impairment charge during the three months ended September 30, 2020. We will continue to evaluate our goodwill and long-lived assets for potential triggering events as conditions warrant.
There was $
89.9
million of goodwill at September 30, 2020 and $
282.0
million at December 31, 2019.
The following table presents a rollforward of goodwill for the nine months ended September 30, 2020 as follows (in thousands):
15
|
Nine Months Ended
September 30, 2020 |
|||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| IHT | MS | Quest Integrity | Total | ||||||||||||||||||||
| Balance, December 31, 2019 | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Acquisitions |
|
|
|
|
|||||||||||||||||||
| Foreign currency adjustments |
(
|
|
|
(
|
|||||||||||||||||||
| Impairment charge |
(
|
|
|
(
|
|||||||||||||||||||
| Balance, September 30, 2020 | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
8.
OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Personnel accruals | $ |
|
$ |
|
|||||||
| Insurance accruals |
|
|
|||||||||
| Property, sales and other non-income related taxes |
|
|
|||||||||
| Accrued commission |
|
|
|||||||||
| Accrued interest |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
9.
INCOME TAXES
We recorded an income tax provision of $
3.0
million and an income tax benefit of $
15.8
million for the three and nine months ended September 30, 2020, respectively, compared to a benefit of $
2.5
million and $
3.2
million for the three and nine months ended September 30, 2019. The effective tax rate was a provision of
48.4
% for the three months ended September 30, 2020, compared to a benefit of
26.5
% for the three months ended September 30, 2019. For the nine months ended September 30, 2020 and September 30, 2019, our effective tax rate was
6.6
% and
11.3
%, respectively.
For periods prior to June 30, 2020, we calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective rate for the full fiscal year to the year-to-date ordinary income or loss, excluding unusual or infrequently occurring discrete items. For the quarters ended June 30, 2020 and September 30, 2020, we calculated the provision for income taxes based on the year-to-date financial results. In these instances, the year-to-date calculations provided a more reliable estimate due to the fluctuations in the ordinary income or loss in the various taxing jurisdictions.
Our year-to-date effective tax rate differed from the statutory tax rate due to additional tax benefits recognized related to the CARES Act enacted on March 27, 2020, the goodwill impairment, and a change in the valuation allowance.
The CARES Act, among other things, includes modifications for net operating loss carryovers and carrybacks, an immediate refund of alternative minimum tax credit carryovers, and modification of the business interest deduction limitation for tax years beginning in 2019 and 2020 from 30% of adjusted taxable income ("ATI") to 50% of ATI. The CARES Act also includes a technical correction to the Tax Cuts and Jobs Act of 2017 (the "2017 Act") for qualified improvement property, which we do not expect to have a material impact on the Company. As a result of these modifications, a tax benefit in the amount of $
7.3
million was recorded during the first quarter related to 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.
The goodwill impairment charge of $
191.8
million taken during the three months ended March 31, 2020, a portion of which is not deductible for tax purposes, resulted in a tax benefit of $
30.5
million.
The year-to-date increase in the valuation allowance of $
25.6
million is primarily related to the goodwill impairment and the Company’s U.S. net operating losses.
16
10.
LONG-TERM DEBT, LETTERS OF CREDIT AND DERIVATIVES
Long-term debt consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Credit Facility revolver | $ |
|
$ |
|
|||||||
|
Credit Facility term loan
1
|
|
|
|||||||||
| Total Credit Facility |
|
|
|||||||||
|
Convertible debt
2
|
|
|
|||||||||
| Finance lease obligations |
|
|
|||||||||
| Total debt and finance lease obligations |
|
|
|||||||||
| Less: current portion of long-term debt and finance lease obligations |
|
|
|||||||||
| Total long-term debt and finance lease obligations, less current portion | $ |
|
$ |
|
|||||||
_________________
1
Comprised of principal amount outstanding, less unamortized discount and issuance costs
of
$
132
thousand as of September 30, 2020 and $
265
thousand as of December 31, 2019.
2
Comprised of principal amount outstanding, less unamortized discount and issuance costs. See
Convertible Debt
section below for additional information.
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 an additional
1.00
% floor). The commitment fee range was also revised to a range of
0.35
% to
0.55
%. At September 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 September 30, 2020, the Senior Secured Leverage Ratio is
2.92
to 1 and we are in compliance with the covenants in effect as of such date.
17
At September 30, 2020, we had $
19.6
million of cash on hand. As of September 30, 2020, we had $
2.7
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 and the 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, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our 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 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 $
19.6
million at September 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. 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 Debt
Description of the 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 May 1, 2023, but only under the following circumstances:
•
during any calendar quarter commencing after the calendar quarter ending on December 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
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.
18
On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.
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 the NYSE 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 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 to August 5, 2021. We will have the option to redeem all or any portion of the Notes on or after August 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.
Accounting Treatment of the Notes
The Notes were recorded in our condensed consolidated balance sheets as follows (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| (unaudited) | |||||||||||
| Liability component: | |||||||||||
| Principal | $ |
|
$ |
|
|||||||
| Unamortized issuance costs |
(
|
(
|
|||||||||
| Unamortized discount |
(
|
(
|
|||||||||
|
Net carrying amount of the liability component
1
|
$ |
|
$ |
|
|||||||
|
Equity component:
|
|||||||||||
|
Carrying amount of the equity component, net of issuance costs
2
|
$ |
|
$ |
|
|||||||
_________________
1
Included in the “Long-term debt” line of the condensed consolidated balance sheets.
2
Relates to the portion of the Notes accounted for under ASC 470-20 (defined below) and is included in the “Additional paid-in capital” line of the condensed consolidated balance sheets.
Under ASC 470-20,
Debt with Conversion and Other Options
, (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion (such as the Notes) in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15,
Embedded Derivatives
(“ASC 815-15”),
to determine if an instrument contains an embedded feature that should be separately accounted for as a derivative. We applied this guidance as of the issuance date of the Notes and concluded that for the
conversion feature for a portion of the Notes, we must recognize an embedded derivative under ASC 815-15, while the remainder of the Notes is subject to ASC 470-20.
We determined the portions of the Notes subject to ASC 815-15 and ASC 470-20 as follows. While the Notes are initially convertible into
10,599,067
shares of common stock, the occurrence of certain corporate events could increase the conversion rate, which could result in the Notes becoming convertible into a maximum of
14,838,703
shares. As of the issuance date of the Notes,
5,964,858
shares, or approximately
40
% of the maximum number of shares, was authorized for issuance without shareholder approval, while
8,873,845
shares, or approximately
60
%, would have been required to be settled in cash. Therefore, we concluded that embedded derivative accounting under ASC 815-15 was applicable to approximately
60
% of the Notes, while the remaining
40
% of the Notes was subject to ASC 470-20.
19
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Coupon interest | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Amortization of debt discount and issuance costs |
|
|
|
|
|||||||||||||||||||
| Total interest expense on convertible senior notes | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Effective interest rate |
|
% |
|
% |
|
% |
|
% | |||||||||||||||
As of September 30, 2020, the remaining amortization period for the debt discount and issuance costs is
34
months.
Derivatives and Hedging
ASC 815,
Derivatives and Hedging
(“ASC 815”), requires that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows derivatives’ gains and losses to offset related results on the hedged item in the statement of operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counter-party will not fulfill the terms of the contract. We consider counterparty credit risk to our derivative contracts when valuing our derivative instruments.
Our borrowing of €
12.3
million under the Credit Facility serves as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. At September 30, 2020, the €
12.3
million borrowing had a U.S. Dollar value of $
14.4
million.
The amounts recognized in other comprehensive income (loss), reclassified into income (loss) and the amounts recognized in income (loss) for the three and nine months ended September 30, 2020 and 2019, are as follows (in thousands):
|
Gain (Loss)
Recognized in Other Comprehensive Income (Loss) |
Gain (Loss)
Reclassified from Other Comprehensive Income (Loss) to Earnings |
Gain (Loss)
Recognized in Other Comprehensive Income (Loss) |
Gain (Loss)
Reclassified from Other Comprehensive Income (Loss) to Earnings |
||||||||||||||||||||||||||||||||||||||||||||
|
Three Months Ended
September 30, |
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Derivatives Classified as Hedging Instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Net investment hedge | $ |
(
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges and derivatives not designated as hedges under ASC 815 (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||
| Classification |
Balance Sheet
Location |
Fair
Value |
Classification |
Balance Sheet
Location |
Fair
Value |
||||||||||||||||||||||||||||||
| Derivatives Classified as Hedging Instruments | |||||||||||||||||||||||||||||||||||
| Net investment hedge | Liability | Long-term debt | $ |
(
|
Liability | Long-term debt | $ |
(
|
|||||||||||||||||||||||||||
20
11.
LEASES
We determine if an arrangement is a lease at inception. Operating leases are included in “Operating lease right-of-use (‘ROU’) assets”, “operating lease liabilities” and “current portion of operating lease obligations” on our consolidated balance sheets. Finance leases are included in “property, plant and equipment, net”, “current portion of long-term debt and finance lease obligations” and “long-term debt and finance lease obligations” on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments and short-term lease payments (leases with initial terms less than 12 months) are expensed as incurred.
We have lease agreements with lease and non-lease components for certain equipment, office, and vehicle leases. We have elected the practical expedient to not separate lease and non-lease components and account for both as a single lease component. We have operating and finance leases primarily for equipment, real estate, and vehicles. Our leases have remaining lease terms of
1
year to
14
years, some of which may include options to extend the leases for up to
10
years, and some of which may include options to terminate the leases within
1
year.
The components of lease expense are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Operating lease costs | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Variable lease costs |
|
|
|
|
|||||||||||||||||||
| Finance lease costs: | |||||||||||||||||||||||
| Amortization of right-of-use assets |
|
|
|
|
|||||||||||||||||||
| Interest on lease liabilities |
|
|
|
|
|||||||||||||||||||
| Total lease cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Other information related to leases are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Supplemental cash flow information: | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||
| Cash paid for amounts included in measurement of lease liabilities | |||||||||||||||||||||||
| Operating cash flows from operating leases |
|
|
|
|
|||||||||||||||||||
| Operating cash flows from finance leases |
|
|
|
|
|||||||||||||||||||
| Financing cash flows from finance leases |
|
|
|
|
|||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||||||||||||||
| Operating leases |
|
|
|
|
|||||||||||||||||||
| Finance leases |
|
|
|
|
|||||||||||||||||||
21
Amounts recognized in the condensed consolidated balance sheet are as follows (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Operating Leases: | (unaudited) | ||||||||||
| Operating lease right-of-use assets | $ |
|
$ |
|
|||||||
| Current portion of operating lease obligations |
|
|
|||||||||
| Operating lease obligations (non-current) |
|
|
|||||||||
| Weighted average remaining lease term |
|
|
|||||||||
| Weighted average discount rate |
|
% |
|
% | |||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Finance Leases: | (unaudited) | ||||||||||
| Property, plant and equipment, net | $ |
|
$ |
|
|||||||
| Current portion of long-term debt and finance lease obligations |
|
|
|||||||||
| Long-term debt and finance lease obligations |
|
|
|||||||||
| Weighted average remaining lease term |
|
|
|||||||||
| Weighted average discount rate |
|
% |
|
% | |||||||
As of September 30, 2020, we have no material additional operating and finance leases that have not yet commenced.
As of September 30, 2020, future minimum lease payments under non-cancellable leases (excluding short-term leases) are as follows (in thousands):
| Operating Leases | Finance Lease | ||||||||||
| (unaudited) | (unaudited) | ||||||||||
| 2020 (Remainder of the year) |
|
|
|||||||||
| 2021 |
|
|
|||||||||
| 2022 |
|
|
|||||||||
| 2023 |
|
|
|||||||||
| 2024 |
|
|
|||||||||
| Thereafter |
|
|
|||||||||
| Total future minimum lease payments |
|
|
|||||||||
| Less: Interest |
(
|
(
|
|||||||||
| Present value of lease liabilities | $ |
|
$ |
|
|||||||
12.
EMPLOYEE BENEFIT PLANS
We have a defined benefit pension plan covering certain United Kingdom employees (the “U.K. Plan”).
Net periodic pension credit includes the following components (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Interest cost |
|
|
|
$ |
|
||||||||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
$ |
(
|
||||||||||||||||||
| Amortization of prior service cost |
|
|
|
$ |
|
||||||||||||||||||
| Net periodic pension credit | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories for the U.K. Plan as follows:
2.90
% overall,
5.30
% for equities and
2.10
% for debt securities.
22
13.
FAIR VALUE MEASUREMENTS
We apply the provisions of ASC 820,
Fair Value Measurement
(“ASC 820”) which among other things, requires certain disclosures about assets and liabilities carried at fair value.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy such that “Level 1” measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, “Level 2” measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and “Level 3” measurements include those that are unobservable and of a highly subjective measure.
The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2020 and December 31, 2019. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):
| September 30, 2020 | |||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
|
Quoted Prices
in Active Markets for Identical Items (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Net investment hedge | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
|
Quoted Prices
in Active Markets for Identical Items (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Net investment hedge | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
23
14.
SHARE-BASED COMPENSATION
We have adopted stock incentive plans and other arrangements pursuant to which our Board of Directors (the “Board”) may grant stock options, restricted stock, stock units, stock appreciation rights, common stock or performance awards to officers, directors and key employees. At September 30, 2020, there were approximately
1.3
million restricted stock units, performance awards and stock options outstanding to officers, directors and key employees. The exercise price, terms and other conditions applicable to each form of share-based compensation under our plans are generally determined by the Compensation Committee of our Board at the time of grant and may vary.
Our share-based payments consist primarily of stock units, performance awards, common stock and stock options. In May 2018, our shareholders approved the 2018 Team, Inc. Equity Incentive Plan (the “2018 Plan”), which replaced the 2016 Team, Inc. Equity Incentive Plan (the “2016 Plan”). In May 2019, our shareholders approved an amendment to the 2018 Plan to increase the number of authorized shares available for issuance. The 2018 Plan authorizes the issuance of share-based awards representing up to
1.2
million shares of common stock, plus the number of shares remaining available for issuance under the 2016 Plan, plus the number of shares subject to outstanding awards under specified prior plans that may become available for reissuance in certain circumstances. Shares issued in connection with our share-based compensation are issued out of authorized but unissued common stock.
Compensation expense related to share-based compensation totaled $
4.1
million and $
8.7
million for the nine months ended September 30, 2020 and 2019, respectively. Share-based compensation expense reflects an estimate of expected forfeitures. At September 30, 2020, $
8.0
million of unrecognized compensation expense related to share-based compensation is expected to be recognized over a remaining weighted-average period of
2.3
years.
Stock units are settled with common stock upon vesting unless it is not legally feasible to issue shares, in which case the value of the award is settled in cash. We determine the fair value of each stock unit based on the market price on the date of grant. Stock units generally vest in annual installments over
four years
and the expense associated with the units is recognized over the same vesting period. We also grant common stock to our directors, which typically vests immediately. Compensation expense related to stock units and director stock grants totaled $
3.0
million and $
4.6
million for the nine months ended September 30, 2020 and 2019.
Transactions involving our stock units and director stock grants during the nine months ended September 30, 2020 are summarized below:
|
Nine Months Ended
September 30, 2020 |
|||||||||||
| (unaudited) | |||||||||||
|
No. of Stock
Units |
Weighted
Average Fair Value |
||||||||||
| (in thousands) | |||||||||||
| Stock and stock units, beginning of period |
|
$ |
|
||||||||
| Changes during the period: | |||||||||||
| Granted |
|
$ |
|
||||||||
| Vested and settled |
(
|
$ |
|
||||||||
| Forfeited and cancelled |
(
|
$ |
|
||||||||
| Stock and stock units, end of period |
|
$ |
|
||||||||
We have a performance stock unit award program whereby we grant Long-Term Performance Stock Unit (“LTPSU”) awards to our executive officers. Under this program, we communicate “target awards” to the executive officers during the first year of a performance period. LTPSU awards cliff vest with the achievement of the performance goals and completion of the required service period. Settlement occurs with common stock as soon as practicable following the vesting date. LTPSU awards granted in 2018 (the “2018 Awards”) and 2019 (the “2019 Awards”) are subject to a
two-year
performance period and a concurrent
two-year
service period. For the 2018 and 2019 Awards, the performance goals are separated into
two
independent performance factors based on (i) relative shareholder return (“RTSR”) as measured against a designated peer group and (ii) results of operations over the two-year performance period, with possible payouts ranging from
0
% to
200
% of the target awards for each of the two performance factors. The 2018 Awards vested as of March 15, 2020 at the RTSR performance target level of
100
% and the results of operations performance metric at
73
% of the target level.
The RTSR and the stock price milestone factors are considered to be market conditions under GAAP. For performance units subject to market conditions, we determine the fair value of the performance units based on the results of a Monte Carlo
24
simulation, which uses market-based inputs as of the date of grant to simulate future stock returns. Compensation expense for awards with market conditions is recognized on a straight-line basis over the longer of (i) the minimum required service period and (ii) the service period derived from the Monte Carlo simulation, separately for each vesting tranche. For performance units subject to market conditions, because the expected outcome is incorporated into the grant date fair value through the Monte Carlo simulation, compensation expense is not subsequently adjusted for changes in the expected or actual performance outcome. For performance units not subject to market conditions, we determine the fair value of each performance unit based on the market price of our common stock on the date of grant. For these awards, we recognize compensation expense over the vesting term on a straight-line basis based upon the performance target that is probable of being met, subject to adjustment for changes in the expected or actual performance outcome. Compensation expense related to performance awards totaled $
1.1
million and $
4.0
million for the nine months ended September 30, 2020 and 2019, respectively.
Transactions involving our performance awards during the nine months ended September 30, 2020 are summarized below:
|
Nine Months Ended
September 30, 2020 |
|||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| Performance Units Subject to Market Conditions | Performance Units Not Subject to Market Conditions | ||||||||||||||||||||||
|
No. of Stock
Units
1
|
Weighted
Average Fair Value |
No. of Stock
Units
1
|
Weighted
Average Fair Value |
||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Performance stock units, beginning of period |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Changes during the period: | |||||||||||||||||||||||
| Granted |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Vested and settled |
(
|
$ |
|
(
|
$ |
|
|||||||||||||||||
| Forfeited and cancelled |
(
|
$ |
|
(
|
$ |
|
|||||||||||||||||
| Performance stock units, end of period |
|
$ |
|
|
$ |
|
|||||||||||||||||
_________________
We determine the fair value of each stock option at the grant date using a Black-Scholes model and recognize the resulting expense of our stock option awards over the period during which an employee is required to provide services in exchange for the awards, usually the vesting period. Compensation expense related to stock options for the nine months ended September 30, 2020 and 2019 was not material. Our options typically vest in equal annual installments over a
-year
service period. Expense related to an option grant is recognized on a straight line basis over the specified vesting period for those options. Stock options generally have a
ten-year
term. At September 30, 2020, there are approximately
53
thousand exercisable shares outstanding at a weighted average exercise price of $
32.55
. Options exercisable at September 30, 2020 had a weighted-average remaining contractual life of
1.0
year and exercise prices ranged from $
21.12
to $
50.47
.
15.
ACCUMULATED OTHER COMPREHENSIVE LOSS
A summary of changes in accumulated other comprehensive loss included within shareholders’ equity is as follows (in thousands):
|
Nine Months Ended
September 30, 2020 |
Nine Months Ended
September 30, 2019 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Foreign
Currency Translation Adjustments |
Foreign
Currency Hedge |
Defined Benefit Pension Plans |
Tax
Provision |
Total |
Foreign
Currency Translation Adjustments |
Foreign
Currency Hedge |
Defined Benefit Pension Plans |
Tax
Provision |
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of period
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) |
(
|
(
|
|
|
(
|
(
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||||||||||||||||||||||||
25
The following table represents the related tax effects allocated to each component of other comprehensive income (loss) (in thousands):
|
Nine Months Ended
September 30, 2020 |
Nine Months Ended
September 30, 2019 |
||||||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||||||
|
Gross
Amount |
Tax
Effect |
Net
Amount |
Gross
Amount |
Tax
Effect |
Net
Amount |
||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||||||||
| Foreign currency hedge |
(
|
|
(
|
|
(
|
|
|||||||||||||||||||||||||||||
| Total | $ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
16.
COMMITMENTS AND CONTINGENCIES
17.
SEGMENT AND GEOGRAPHIC DISCLOSURES
26
Segment data for our
three
operating segments are as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| MS |
|
|
|
|
|||||||||||||||||||
| Quest Integrity |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
|
IHT
1
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| MS |
|
|
|
|
|||||||||||||||||||
| Quest Integrity |
|
|
|
|
|||||||||||||||||||
| Corporate and shared support services |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total | $ |
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
_________________
1
Includes goodwill impairment charge for IHT as discussed in Note 7 that impacted operating income (loss) for the nine months ended September 30, 2020.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
|
Capital expenditures
1
:
|
|||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| MS |
|
|
|
|
|||||||||||||||||||
| Quest Integrity |
|
|
|
|
|||||||||||||||||||
| Corporate and shared support services |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
_____________
1
Totals may vary from amounts presented in the condensed consolidated statements of cash flows due to the timing of cash payments.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| MS |
|
|
|
|
|||||||||||||||||||
| Quest Integrity |
|
|
|
|
|||||||||||||||||||
| Corporate and shared support services |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Separate measures of Team’s assets by operating segment are not produced or utilized by management to evaluate segment performance.
27
A geographic breakdown of our revenues for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
|
Total Revenues:
1
|
|||||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Canada |
|
|
|
|
|||||||||||||||||||
| Europe |
|
|
|
|
|||||||||||||||||||
| Other foreign countries |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
___________
1
Revenues attributable to individual countries/geographic areas are based on the country of domicile of the legal entity that performs the work.
18.
RESTRUCTURING AND OTHER RELATED CHARGES
Our restructuring and other related charges (credits), net are summarized by program and by segment as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| OneTEAM Program | |||||||||||||||||||||||
| Severance and related costs | |||||||||||||||||||||||
| IHT | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| MS |
|
|
|
|
|||||||||||||||||||
| Quest Integrity |
|
|
|
|
|||||||||||||||||||
| Corporate and shared support services |
|
|
|
|
|||||||||||||||||||
| Subtotal |
|
|
|
|
|||||||||||||||||||
| Grand Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
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. In the first quarter of 2018, we completed the design phase of the project, known as OneTEAM, for our domestic operations, and entered in the deployment phase starting in the second quarter of 2018. In the third quarter of 2019, we began the design phase of OneTEAM for our international operations which was deployed in the fourth quarter of 2019. During the first quarter of 2020, in response to COVID-19 and decline in the 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.
As part of the OneTEAM program, we eliminated certain employee positions. For the three and nine months ended September 30, 2020, we incurred severance charges of $
0.3
million and $
3.4
million, respectively. We have incurred $
11.8
million of OneTEAM severance charges cumulatively to date. As the OneTEAM program continues, we expect some additional employee positions may be identified and impacted, resulting in additional severance costs. In addition to the impacted employee positions, certain locations may be shut down or consolidated during this process. We expect the program-related expenses to continue through the first quarter of 2021.
28
A rollforward of our accrued severance liability associated with the OneTEAM program is presented below (in thousands):
|
Nine Months Ended
September 30, 2020 |
|||||
| (unaudited) | |||||
| Balance, beginning of period | $ |
|
|||
| Charges |
|
||||
| Payments |
(
|
||||
| Balance, end of period | $ |
|
|||
For the three and nine months ended September 30, 2020, we also incurred professional fees of $
0.6
million and $
2.6
million, respectively, associated with the OneTEAM program. For the three and nine months ended September 30, 2019, we incurred professional fees of $
3.8
million and $
9.8
million, respectively, associated with the OneTEAM program.
29
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||||
Overview
Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “the Company,” “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. We are incorporated in the State 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 the New 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 ended December 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
client
s’ 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
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 5,500 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
. In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the 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 between OPEC and Russia, 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
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 will continue through the end of 2020.
Under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), we are qualified to defer the employer portion of social security taxes incurred through the end of calendar 2020. As of September 30, 2020, we have deferred employer payroll taxes of $9.4 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 from Canada and other governments as offsets to the related expenses. As a result, we recognized $3.8 million and $1.0 million as a reduction to operating expenses and selling, general and administrative expenses, respectively, during the three months ended September 30, 2020 and $7.6 million and $1.9 million, respectively, for the nine months ended September 30, 2020. As of September 30, 2020, we also deferred certain payroll related expenses and tax payments of $4.0 million under other foreign government programs which will be due in 2021 and 2022.
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 ended March 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
Results of Operations
The following is a comparison of our results of operations for the three months ended September 30, 2020 compared to September 30, 2019.
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The components of revenue and operating income (loss) from our operations consisted of the following (in thousands):
| Three Months Ended September 30, |
Increase
(Decrease) |
||||||||||||||||||||||
| 2020 | 2019 | $ | % | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Revenues by business segment: | |||||||||||||||||||||||
| IHT | $ | 96,637 | $ | 126,379 | $ | (29,742) | (23.5) | % | |||||||||||||||
| MS | 101,738 | 135,625 | (33,887) | (25.0) | % | ||||||||||||||||||
| Quest Integrity | 20,718 | 28,075 | (7,357) | (26.2) | % | ||||||||||||||||||
| Total | $ | 219,093 | $ | 290,079 | $ | (70,986) | (24.5) | % | |||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| IHT | $ | 7,720 | $ | 6,640 | $ | 1,080 | 16.3 | % | |||||||||||||||
| MS | 9,581 | 15,871 | (6,290) | (39.6) | % | ||||||||||||||||||
| Quest Integrity | 3,006 | 7,122 | (4,116) | (57.8) | % | ||||||||||||||||||
| Corporate and shared support services | (18,010) | (31,473) | 13,463 | 42.8 | % | ||||||||||||||||||
| Total | $ | 2,297 | $ | (1,840) | $ | 4,137 |
NM
1
|
||||||||||||||||
_________________
1 NM - Not meaningful.
Revenues.
Total revenues decreased $71.0 million or 24.5% from the prior year quarter. Excluding the favorable impact of $0.1 million due to foreign currency exchange rate changes, total revenues decreased by $71.1 million, IHT revenues decreased by $29.7 million, MS revenues decreased by $34.1 million and Quest Integrity revenues decreased by $7.2 million. The favorable impacts of foreign exchange rate changes are primarily due to the weakening of the U.S. dollar relative to the Euro, the Great British Pound and the Australian Dollar partially offset by unfavorable impacts from the Canadian Dollar, Brazilian Real and Mexican Peso for the current year 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 end 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.
33
Operating loss.
Overall operating income was $2.3 million in the current year quarter compared to an operating loss of $1.8 million in the prior year quarter. The overall increase in operating income is attributable to IHT which experienced an increase in operating income of $1.1 million as well as a decrease in corporate and shared services expenses of $13.5 million partially offset by decreases in MS and Quest Integrity which experienced decreases in operating income of $6.3 million and $4.1 million, respectively.
For the three months ended September 30, 2020, operating loss includes net expenses totaling $3.3 million that we do not believe are indicative of our core operating activities, while the prior year quarter included $7.8 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): | ||||||||||||||||||||||||||||||||
| IHT | MS | Quest Integrity | Corporate and shared support services | Total | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
|
Professional fees and other
1
|
$ | — | $ | — | $ | — | $ | 929 | $ | 929 | ||||||||||||||||||||||
|
Legal costs
2
|
— | — | — | 230 | 230 | |||||||||||||||||||||||||||
|
Severance charges, net
3
|
88 | 1,326 | 186 | 35 | 1,635 | |||||||||||||||||||||||||||
|
Natural disaster costs
4
|
21 | 479 | — | — | 500 | |||||||||||||||||||||||||||
| Total | $ | 109 | $ | 1,805 | $ | 186 | $ | 1,194 | $ | 3,294 | ||||||||||||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
|
Professional fees and other
1
|
$ | — | $ | — | $ | — | $ | 4,252 | $ | 4,252 | ||||||||||||||||||||||
|
Legal costs
2
|
— | — | — | 3,306 | 3,306 | |||||||||||||||||||||||||||
|
Severance charges, net
3
|
— | — | 62 | 166 | 228 | |||||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 62 | $ | 7,724 | $ | 7,786 | ||||||||||||||||||||||
_________________
1 Consists primarily of professional fees and other costs for assessment of corporate and support cost structures. For the three months ended September 30, 2020 and September 30, 2019, includes $0.6 million and $3.8 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs).
2 For the three months ended September 30, 2020,
primarily relates to costs associated with an accrued legal settlement
. For the three months ended September 30, 2019, primarily relates to resolution of a legal matter.
3
For the three months ended September 30, 2020 and September 30, 2019, includes $0.3 million and $0.2 million, respectively, of severance charges associated with the OneTEAM program, including international restructuring under the OneTEAM program. For the three months ended September 30, 2020, $1.3 million in other severance charges were due to the impact of COVID-19.
4 Amount represents the insurance deductible amount for hurricane damage incurred during the period. $0.1 million of additional costs are expected to be collected through insurance during the three and nine months ended September 30, 2020.
Excluding the impact of these identified non-core items in both periods, operating loss changed unfavorably by $0.4 million, consisting of lower operating income in MS and Quest Integrity of $4.5 million and $4.0 million, respectively, offset by an increase in IHT of $1.2 million and a decrease in corporate and shared support services expenses of $6.9 million. The lower operating income in 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 payroll and non-cash compensation expenses.
Interest expense.
Interest expense increased from $7.6 million in the prior year quarter to $7.8 million in the current year quarter due to higher borrowing costs under the Ninth Amendment to the Credit Facility.
Other expense, net
. Non-operating results include $0.8 million in foreign currency transaction losses in the current year compared to $0.1 million during 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, 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 $3.0 million on the pre-tax loss of $6.1 million in the current year quarter compared to a benefit of $2.5 million on the pre-tax loss of $9.6 million in the prior year quarter. The effective tax rate was a provision of 48.4% for the three months ended September 30, 2020, compared to a benefit of 26.5% for the three months ended September 30, 2019.
While the current year quarter tax rate was determined based on the year-to-date financial results, the difference between this rate and the prior year quarter tax rate (determined based on annual effective rate for the full fiscal year) was impacted by
34
the increase in the valuation allowance in certain jurisdictions as well as the increase in income in our international jurisdictions.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The following table sets forth the components of revenue and operating income (loss) from our operations for the nine months ended September 30, 2020 and 2019 (in thousands):
| Nine Months Ended September 30, |
Increase
(Decrease) |
||||||||||||||||||||||
| 2020 | 2019 | $ | % | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Revenues by business segment: | |||||||||||||||||||||||
| IHT | 284,992 | $ | 392,093 | $ | (107,101) | (27.3) | % | ||||||||||||||||
| MS | 299,077 | 402,048 | (102,971) | (25.6) | % | ||||||||||||||||||
| Quest Integrity | 61,167 | 81,366 | (20,199) | (24.8) | % | ||||||||||||||||||
| Total | $ | 645,236 | $ | 875,507 | $ | (230,271) | (26.3) | % | |||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
|
IHT
1
|
(179,690) | $ | 17,858 | $ | (197,548) |
NM
2
|
|||||||||||||||||
| MS | 20,502 | 41,722 | (21,220) | (50.9) | % | ||||||||||||||||||
| Quest Integrity | 9,801 | 18,090 | (8,289) | (45.8) | % | ||||||||||||||||||
| Corporate and shared support services | (65,614) | (83,034) | 17,420 | 21.0 | % | ||||||||||||||||||
| Total | $ | (215,001) | $ | (5,364) | $ | (209,637) |
NM
2
|
||||||||||||||||
_________________
1 Includes goodwill impairment charge of $191.8 million for the nine months ended September 30, 2020.
2 NM - Not meaningful.
Revenues.
Total revenues decreased $230.3 million or 26.3% from the prior year period. Excluding the unfavorable impact of $3.4 million due to foreign currency exchange rate changes, total revenues decreased by $226.9 million, IHT revenues decreased by $106.4 million, MS revenues decreased by $101.2 million and Quest Integrity revenues decreased by $19.3 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 Canadian Dollar and the Mexican Peso during 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 through the end 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.
35
Operating loss.
Overall operating loss was $215.0 million in the current year period compared to operating loss of $5.4 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 $197.5 million. Additionally, MS and Quest Integrity experienced a decrease in operating income of $21.2 million and $8.3 million, respectively. These movements were partially offset by a decrease in corporate and shared services expenses of $17.4 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 nine months ended September 30, 2020, operating loss includes net expenses totaling $203.2 million that we do not believe are indicative of our core operating activities, while the prior year period included $17.1 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): | ||||||||||||||||||||||||||||||||
| IHT | MS | Quest Integrity | Corporate and shared support services | Total | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
|
Professional fees and other
1
|
$ | — | $ | — | $ | — | $ | 3,986 | $ | 3,986 | ||||||||||||||||||||||
|
Legal costs
2
|
— | — | — | 1,926 | 1,926 | |||||||||||||||||||||||||||
|
Severance charges, net
3
|
1,126 | 2,993 | 326 | 556 | 5,001 | |||||||||||||||||||||||||||
| Goodwill impairment charge | 191,788 | — | — | — | 191,788 | |||||||||||||||||||||||||||
|
Natural disaster costs
4
|
21 | 479 | — | — | 500 | |||||||||||||||||||||||||||
| Total | $ | 192,935 | $ | 3,472 | $ | 326 | $ | 6,468 | $ | 203,201 | ||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
|
Professional fees and other
1
|
$ | — | $ | — | $ | — | $ | 13,073 | $ | 13,073 | ||||||||||||||||||||||
|
Legal costs
2
|
— | — | — | 3,584 | 3,584 | |||||||||||||||||||||||||||
|
Severance charges, net
3
|
128 | 117 | 62 | 129 | 436 | |||||||||||||||||||||||||||
| Total | $ | 128 | $ | 117 | $ | 62 | $ | 16,786 | $ | 17,093 | ||||||||||||||||||||||
_________________
1 Consists primarily of professional fees and other costs for assessment of corporate and support cost structures. For the nine months ended September 30, 2020 and September 30, 2019, includes $2.6 million and $9.8 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs).
2 For the nine months ended September 30, 2020, primarily relates to accrued costs due to international legal and internal control review matters. For the nine months ended September 30, 2019, primarily relates to accrued costs due to the resolution of a legal matter.
3
For the nine months ended September 30, 2020 and September 30, 2019, includes $3.4 million and $0.4 million of severance charges associated with the OneTEAM program, including international restructuring under the OneTEAM program. For the nine months ended September 30, 2020, $1.6 million in other severance charges were due to the impact of COVID-19.
4 Amount represents the insurance deductible amount for hurricane damage incurred during the period. $0.1 million of additional costs are expected to be collected through insurance during the three and nine months ended September 30, 2020.
Excluding the impact of these identified non-core items in both periods, operating loss changed unfavorably by $23.5 million, consisting of lower operating income in IHT, MS a
nd Quest Integrity of
$4.7 million, $17.9 million and $8.0 million
, respectively, offset by a decrease in corporate and shared support services expenses of
$7.1 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 payroll and noncash compensation expenses.
Interest expense.
Interest expense decreased from $22.7 million in the prior year to $21.8 million in the current year due to lower overall debt balances throughout the current year.
Other expense, net
. Non-operating results include $1.6 million in foreign currency transaction losses in the current year quarter compared to $0.3 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, Mexican Peso and New Zealand Dollar. Non-operating results also include certain components of our net periodic pension cost (credit).
36
Taxes.
The benefit for income tax was $15.8 million on the pre-tax loss of $238.1 million in the current year compared to a benefit of $3.2 million on the pre-tax loss of $28.4 million in the prior year. The effective tax rate was a benefit of 6.6% for the nine months ended September 30, 2020, compared to a benefit of 11.3% for the nine months ended September 30, 2019.
The effective tax rate change from prior year compared to the current year is primarily due to 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.
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 charges and certain other items that we believe are not indicative of core operating activities. Beginning in the third quarter of 2020, we have modified our presentation of non-GAAP financial measures to reconcile net income (loss) to consolidated adjusted EBIT and EBITDA. 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 our OneTEAM program, non-routine legal costs and settlements, restructuring charges, goodwill impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share based compensation costs. Consolidated adjusted EBITDA margin is defined as consolidated adjusted EBITDA divided by revenue. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures.
Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders.
Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below.
The following tables set forth the reconciliation of Adjusted Net Income (Loss), EBIT and EBITDA to their most comparable GAAP financial measurements:
37
| TEAM, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||
| RECONCILIATION OF NON-GAAP FINANCIAL MEASURES | ||||||||||||||||||||||||||
| (unaudited, in thousands except per share data) | ||||||||||||||||||||||||||
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Adjusted Net Income (Loss): | ||||||||||||||||||||||||||
| Net loss | $ | (9,073) | $ | (7,057) | $ | (222,328) | $ | (25,183) | ||||||||||||||||||
|
Professional fees and other
1
|
929 | 4,252 | 3,986 | 13,073 | ||||||||||||||||||||||
|
Legal costs
2
|
230 | 3,306 | 1,926 | 3,584 | ||||||||||||||||||||||
|
Severance charges, net
3
|
1,635 | 228 | 5,001 | 436 | ||||||||||||||||||||||
|
Natural disaster costs
4
|
500 | — | 500 | — | ||||||||||||||||||||||
| Goodwill impairment charge | — | — | 191,788 | — | ||||||||||||||||||||||
|
Tax impact of adjustments and other net tax items
5
|
(692) | (1,636) | (15,610) | (3,590) | ||||||||||||||||||||||
| Adjusted net loss | $ | (6,471) | $ | (907) | $ | (34,737) | $ | (11,680) | ||||||||||||||||||
| Adjusted net loss per common share: | ||||||||||||||||||||||||||
| Basic | $ | (0.21) | $ | (0.03) | $ | (1.14) | $ | (0.39) | ||||||||||||||||||
| Diluted | $ | (0.21) | $ | (0.03) | $ | (1.14) | $ | (0.39) | ||||||||||||||||||
| Consolidated Adjusted EBIT and Adjusted EBITDA: | ||||||||||||||||||||||||||
| Net loss | $ | (9,073) | $ | (7,057) | $ | (222,328) | $ | (25,183) | ||||||||||||||||||
| Provision (benefit) for income taxes | 2,958 | (2,546) | (15,812) | (3,210) | ||||||||||||||||||||||
| Interest expense, net | 7,757 | 7,647 | 21,847 | 22,658 | ||||||||||||||||||||||
|
Foreign currency loss (gain)
7
|
752 | 121 | 1,641 | 388 | ||||||||||||||||||||||
|
Pension expense (credit)
6
|
(129) | (5) | (381) | (17) | ||||||||||||||||||||||
|
Professional fees and other
1
|
929 | 4,252 | 3,986 | 13,073 | ||||||||||||||||||||||
|
Legal costs
2
|
230 | 3,306 | 1,926 | 3,584 | ||||||||||||||||||||||
|
Severance charges, net
3
|
1,635 | 228 | 5,001 | 436 | ||||||||||||||||||||||
|
Natural disaster costs
4
|
500 | — | 500 | — | ||||||||||||||||||||||
| Goodwill impairment charge | — | — | 191,788 | — | ||||||||||||||||||||||
| Consolidated Adjusted EBIT | 5,559 | 5,946 | (11,832) | 11,729 | ||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Amount included in operating expenses | 5,794 | 6,107 | 17,517 | 18,757 | ||||||||||||||||||||||
| Amount included in SG&A expenses | 5,729 | 5,943 | 17,192 | 17,943 | ||||||||||||||||||||||
| Total depreciation and amortization | 11,523 | 12,050 | 34,709 | 36,700 | ||||||||||||||||||||||
| Non-cash share-based compensation costs | 1,127 | 2,588 | 4,073 | 8,670 | ||||||||||||||||||||||
| Consolidated Adjusted EBITDA | $ | 18,209 | $ | 20,584 | $ | 26,950 | $ | 57,099 | ||||||||||||||||||
| Net loss margin | (4.1) | % | (2.4) | % | (34.5) | % | (2.9) | % | ||||||||||||||||||
| Consolidated Adjusted EBITDA margin | 8.3 | % | 7.1 | % | 4.2 | % | 6.5 | % | ||||||||||||||||||
| Free Cash Flow: | ||||||||||||||||||||||||||
| Cash provided by (used in) operating activities | $ | (7,080) | $ | 27,449 | $ | 20,165 | $ | 33,019 | ||||||||||||||||||
| Capital expenditures | (4,198) | (8,803) | (16,684) | (23,199) | ||||||||||||||||||||||
| Free Cash Flow | $ | (11,278) | $ | 18,646 | $ | 3,481 | $ | 9,820 | ||||||||||||||||||
____________________________________
1 For the three and nine months ended September 30, 2020, includes $0.6 million and $2.6 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). For the three and nine months ended September 30, 2019, includes $3.8 million and $9.8 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs).
2 For the three and nine months ended September 30, 2020, primarily relates to costs associated with international legal and internal control review matters. For the three and nine months ended September 30, 2019, primarily relates to resolution of a legal matter.
3 For the three and nine months ended September 30, 2020, $0.3 million and $3.4 million, respectively, are severance charges associated with the OneTEAM program as well as $1.3 million and $1.6 million, respectively, in severance charges were due to the impact of COVID-19. For the three and nine months ended September 30, 2019, severance charges are associated with the OneTEAM program.
4 Amount represents the insurance deductible for hurricane damage incurred for the three months ended September 30, 2020.
5 Represents the tax effect of the adjustments at an assumed marginal tax rate of 21% for the three and nine months ended September 30, 2020 and 2019 except for the adjustment of the goodwill impairment charge for which the actual tax impact was used.
6 Represents pension expense (credit) for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.
7 Represents foreign currency gain/loss. For prior periods, includes other nominal fees.
38
| TEAM, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||
| RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) | ||||||||||||||||||||||||||
| (unaudited, in thousands) | ||||||||||||||||||||||||||
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Segment Adjusted EBIT and Adjusted EBITDA: | ||||||||||||||||||||||||||
| IHT | ||||||||||||||||||||||||||
| Operating income (loss) | $ | 7,720 | $ | 6,640 | $ | (179,690) | $ | 17,858 | ||||||||||||||||||
|
Severance charges, net
1
|
88 | — | 1,126 | 128 | ||||||||||||||||||||||
|
Natural disaster costs
2
|
21 | — | 21 | — | ||||||||||||||||||||||
| Goodwill impairment charge | — | — | 191,788 | — | ||||||||||||||||||||||
| Adjusted EBIT | 7,829 | 6,640 | 13,245 | 17,986 | ||||||||||||||||||||||
| Depreciation and amortization | 3,609 | 4,390 | 11,338 | 13,293 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 11,438 | $ | 11,030 | $ | 24,583 | $ | 31,279 | ||||||||||||||||||
| MS | ||||||||||||||||||||||||||
| Operating income | $ | 9,581 | $ | 15,871 | $ | 20,502 | $ | 41,722 | ||||||||||||||||||
|
Severance charges, net
1
|
1,326 | — | 2,993 | 117 | ||||||||||||||||||||||
|
Natural disaster costs
2
|
479 | — | 479 | — | ||||||||||||||||||||||
| Adjusted EBIT | 11,386 | 15,871 | 23,974 | 41,839 | ||||||||||||||||||||||
| Depreciation and amortization | 5,491 | 5,411 | 16,397 | 16,343 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 16,877 | $ | 21,282 | $ | 40,371 | $ | 58,182 | ||||||||||||||||||
| Quest Integrity | ||||||||||||||||||||||||||
| Operating income | $ | 3,006 | $ | 7,122 | $ | 9,801 | $ | 18,090 | ||||||||||||||||||
|
Severance charges, net
1
|
186 | 62 | 326 | 62 | ||||||||||||||||||||||
| Adjusted EBIT | 3,192 | 7,184 | 10,127 | 18,152 | ||||||||||||||||||||||
| Depreciation and amortization | 969 | 813 | 2,742 | 2,733 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 4,161 | $ | 7,997 | $ | 12,869 | $ | 20,885 | ||||||||||||||||||
| Corporate and shared support services | ||||||||||||||||||||||||||
| Net loss | $ | (29,380) | $ | (36,690) | $ | (72,941) | $ | (102,853) | ||||||||||||||||||
| Provision (benefit) for income taxes | 2,958 | (2,546) | (15,812) | (3,210) | ||||||||||||||||||||||
| Interest expense, net | 7,757 | 7,647 | 21,847 | 22,658 | ||||||||||||||||||||||
|
Foreign currency loss (gain)
6
|
752 | 121 | 1,641 | 388 | ||||||||||||||||||||||
|
Pension expense (credit)
3
|
(129) | (5) | (381) | (17) | ||||||||||||||||||||||
|
Professional fees and other
4
|
929 | 4,252 | 3,986 | 13,073 | ||||||||||||||||||||||
|
Legal costs
5
|
230 | 3,306 | 1,926 | 3,584 | ||||||||||||||||||||||
|
Severance charges, net
1
|
35 | 166 | 556 | 129 | ||||||||||||||||||||||
| Adjusted EBIT | (16,848) | (23,749) | (59,178) | (66,248) | ||||||||||||||||||||||
| Depreciation and amortization | 1,454 | 1,436 | 4,232 | 4,331 | ||||||||||||||||||||||
| Non-cash share-based compensation costs | 1,127 | 2,588 | 4,073 | 8,670 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | (14,267) | $ | (19,725) | $ | (50,873) | $ | (53,247) | ||||||||||||||||||
___________________
1 Relates to severance charges incurred associated with the OneTEAM program, including international restructuring under the OneTEAM program for the three and nine months ended September 30, 2020 and September 30, 2019. Also includes severance charges due to the impact of COVID-19 for the three and nine months ended September 30, 2020.
2 Amount represents the insurance deductible for hurricane damage incurred for the three months ended September 30, 2020.
3 Represents pension expense (credit) for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013.
4 For the three and nine months ended September 30, 2020, includes $0.6 million and $2.6 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). For the three and nine months ended September 30, 2019, includes $3.8 million and $9.8 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs).
5 For the three and nine months ended September 30, 2020, primarily relates to costs associated with international legal and internal control review matters. For the three and nine months ended September 30, 2019, primarily relates to resolution of a legal matter.
6 Represents foreign currency gain/loss. For prior periods, includes other nominal fees.
39
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 evolving 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. We periodically explore alternative financing to improve our balance sheet and liquidity or in the event that existing liquidity sources are no longer sufficient for our capital requirements. Any such financing could be on substantially different and more onerous terms than those of our Credit Facility, including with respect to interest rates, financial and other covenants and required collateral, and could include an equity component, which would be dilutive to our shareholders. However, there can be no assurance that such financing would be available on terms acceptable to us, if at all. From time to time, we may also seek to retire, repurchase or exchange our convertible senior notes in open market purchases or privately negotiated transactions dependent upon market conditions, liquidity, and contractual obligations and other factors.
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 an additional 1.00% floor). The commitment fee range was also revised to a range of 0.35% to 0.55%. At September 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 September 30, 2020, the Senior Secured Leverage Ratio is 2.92 to 1 and we are in compliance with the covenants in effect as of such date.
40
At September 30, 2020, we had $19.6 million of cash on hand. As of September 30, 2020, we had $2.7 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 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 $19.6 million at September 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 May 1, 2023, but only under the following circumstances:
•
during any calendar quarter commencing after the calendar quarter ending on December 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 May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.
41
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 the New 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 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 to August 5, 2021. We will have the option to redeem all or any portion of the Notes on or after August 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 $0.6 million and $2.6 million of expenses during the three and nine months ended September 30, 2020, respectively, related to professional fees associated with the program. Additionally, we incu
rred $0.3 million and $3.4 million
of severance-related costs during the three and nine months ended September 30, 2020, respectively, related to the elimination of certain employee positions in conjunction with the OneTEAM program. We expect the program-related expenses to continue through the first quarter of 2021.
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 of OneTEAM 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”). We achieved OneTEAM and other cost reduction savings of $35 million dollars during the three months ended September 30, 2020 and realized $75 million dollars of savings for the nine months ended September 30, 2020.
We now estimate the OneTEAM Tune-up and other cost reduction actions will deliver between $85 million and $95 million dollars of annualized permanent and temporary cost savings for the year, up from our previous estimate of $50 million to $75 million dollars. 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 at September 30, 2020 totaled $19.6 million, of which $12.1 million was in foreign accounts, primarily in Europe, Brazil, the United Kingdom and Trinidad.
Cash flows are summarized in the table below (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| unaudited | unaudited | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | 20,165 | 33,019 | |||||||||
| Investing activities | (17,552) | (22,359) | |||||||||
| Financing activities | 4,662 | (18,050) | |||||||||
| Effects of exchange rates on cash and cash equivalents | 161 | (630) | |||||||||
| Net change in cash and cash equivalents | 7,436 | (8,020) | |||||||||
42
Cash flows attributable to our operating activities.
For the nine months ended September 30, 2020, net cash provided by operating activities was $20.2 million. Positive operating cash flow was primarily attributable to adjustments out of $222.3 million in net losses from goodwill impairment of $191.8 million, depreciation and amortization of $34.7 million, non-cash compensation costs of $4.1 million, amortization of deferred loan costs and debt discount of $6.5 million and a decrease in working capital of $8.1 million, which was primarily due to decreases in accounts receivable and other accrued liabilities.
For the nine
months ended September 30, 2019, net cash provided by operating activities was $33.0 million. Positive operating cash flow was primarily attributable to depreciation and amortization of $36.7 million, non-cash compensation costs of $8.7 million, decrease in working capital of $8.5 million and amortization of deferred loan costs and debt discount of $5.7 million, largely offset by the net loss of $25.2 million.
Cash flows attributable to our investing activities.
As a response to the COVID-19 pandemic, oil and gas industry outlook, and in order to preserve liquidity, at this time we are limiting capital spending to critical client projects that offer the highest rate of return. Our spending outlook for the year due to these impacts include lower capital expenditures budget of 30%. For the nine months ended September 30, 2020, net cash used in investing activities was $17.6 million, consisting primarily of $16.7 million for capital expenditures and an acquisition of $1.0 million within our Quest Integrity segment. Capital expenditures can vary depending upon specific client needs or organization needs that may arise unexpectedly.
For the nine months ended September 30, 2019, net cash used in investing activities was $22.4 million, consisting primarily of $23.2 million for capital expenditures.
Cash flows attributable to our financing activities.
For the nine months ended September 30, 2020, net cash provided by financing activities was $4.7 million consisting primarily of net debt borrowings under the revolving portion of our Credit Facility of $10.8 million partially offset by our Credit Facility term loan payment of $3.8 million as well as $1.8 million of debt issuance costs.
For the nine months ended September 30, 2019, net cash used in financing activities was $18.1 million consisting primarily of $64.9 million of net debt payments under the revolving portion of our Credit Facility and $1.5 million in debt issuance costs partially offset by net borrowings on our Credit Facility term loan of $49.7 million.
Effect of exchange rate changes on cash and cash equivalents.
For the nine months ended September 30, 2020 and 2019, the effect of exchange rate changes on cash was a positive impact of $0.2 million and a negative impact of $0.6 million, respectively. The positive impact in the current year quarter is primarily attributable to favorable fluctuations in U.S. Dollar exchange rates with the Canadian Dollar, the Euro, the British Pound and Mexican Peso. The negative impact in the prior year is primarily due to unfavorable fluctuations in U.S. Dollar exchange rates with the Euro, British Pound, Australian Dollar, Canadian Dollar and Singaporean Dollar.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies is included in the 2019 Form 10-K beginning on page 41. Effective January 1, 2020, we adopted ASC 326 on a modified retrospective basis
.
Additional information on ASC 326, including the effects of adoption, is set forth in Notes 1 and 3 to the condensed consolidated financial statements included in this report. There were no material changes to our other critical accounting policies during the nine months ended September 30, 2020.
New Accounting Principles
For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 to the condensed consolidated financial statements included in this report.
43
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
We have operations in foreign countries with functional currencies that are not the U.S. Dollar. We are exposed to market risk, primarily related to foreign currency fluctuations related to these operations. Subsidiaries with asset and liability balances denominated in currencies other than their functional currency are remeasured in the preparation of their financial statements using a combination of current and historical exchange rates, with any resulting remeasurement adjustments included in net income (loss) for the period. Net foreign currency transaction losses for the nine months ended September 30, 2020 were $1.6 million, while the foreign currency transaction losses for the nine months ended September 30, 2019 were $0.3 million. The foreign currency transaction losses realized in the current year relate primarily to fluctuations in the U.S. Dollar in relation to the Brazilian Real, New Zealand Dollar and Mexican Peso while the losses in the prior year relate to fluctuations in the U.S. Dollar in relation to the Brazilian Real, Euro, and British Pound.
We have a foreign currency hedging program to mitigate the foreign currency risk in countries where we have significant assets and liabilities denominated in currencies other than the functional currency. We utilize monthly foreign currency swap contracts to reduce exposures to changes in foreign currency exchange rates related to our largest exposures including, but not limited to the Brazilian Real, British Pound, Canadian Dollar, Euro, Malaysian Ringgit, Mexican Peso and Singapore Dollar. The impact from these swap contracts was not material for the three and nine months ended September 30, 2020 and September 30, 2019.
Translation adjustments for the assets and liability accounts are included as a separate component of accumulated other comprehensive loss in shareholders’ equity. Foreign currency translation losses recognized in other comprehensive loss were $3.0 million for the nine months ended September 30, 2020.
We had foreign currency-based revenues and operating loss of approximately $180.2 million and $14.0 million, respectively, for the nine months ended September 30, 2020. A hypothetical 10% adverse change in all applicable foreign currencies would result in a change in revenues and operating loss of $18.0 million and $1.4 million, respectively.
We carry Euro-based debt to serve as a hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. We are exposed to market risk, primarily related to foreign currency fluctuations related to the unhedged portion of our investment in our European operations.
All of the debt outstanding under the Credit Facility bears interest at variable market rates. If market interest rates increase, our interest expense and cash flows could be adversely impacted. Based on Credit Facility borrowings outstanding at September 30, 2020, an increase in market interest rates of 100 basis points would increase our interest expense and decrease our operating cash flows by approximately $1.3 million on an annual basis.
Our convertible senior notes bear interest at a fixed rate, but the fair value of the Notes is subject to fluctuations as market interest rates change. In addition, the fair value of the Notes is affected by changes in our stock price. As of September 30, 2020, the outstanding principal balance of the Notes was $230.0 million. The carrying value of the liability component of the Notes, net of the unamortized discount and issuance costs, was $206.8 million as of September 30, 2020, while the estimated fair value of the Notes was $196.1 million (inclusive of the fair value of the conversion option), which was determined based on the observed trading price of the Notes. See Note 10 to the condensed consolidated financial statements for additional information regarding the Notes.
44
| ITEM 4. | CONTROLS AND PROCEDURES | ||||
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of September 30, 2020, that our disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).
Changes in internal control over financial reporting.
We adopted ASC 326,
Financial Instruments-Credit Losses
and its related amendments, as of January 1, 2020, which we discuss in Note 1,
Summary of Significant Accounting Policies and Practices,
to the condensed consolidated financial statements, included in Part I, Item 1,
Financial Statements
, of this Quarterly Report on Form 10-Q. We assessed and modified our internal controls and related processes in order to facilitate adoption of ASC 326. Except for the material weakness discussed below and the adoption of ASC 326, there were no other changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weakness.
We are in the process of remediating the material weakness in our internal control over financial reporting as noted in Part II, Item 9A of the 2019 Form 10-K. We have undertaken a number of measures designed to directly address, or contribute to, the remediation of our material weakness and the enhancement of our internal control over financial reporting including establishment of additional review procedures and monitoring activities at a centralized level over certain senior finance lead roles in order to verify that process level controls are present and functioning as designed. In addition, we have continued training finance personnel on internal control over financial reporting, the importance of monitoring control activities, and fraud risk assessment. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
45
PART II—OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS | ||||
For information on legal proceedings, see Note 16 to the condensed consolidated financial statements included this report.
| ITEM 1A. | RISK FACTORS | ||||
The Company's operations and financial results are subject to various risks and uncertainties. There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, “Risk Factors” in the 2019 Form 10-K and in Part II, Item 1A, “Risk Factors” in the Quarterly Report on Form 10-Q for the period ended June 30, 2020 other than shown below on the potential impact of the COVID-19 pandemic on our existing risks.
The recent COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, consolidated results of operations, and consolidated financial condition.
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty and turmoil in the oil and gas industry, which were further exacerbated by the price war among members of the Organization of Petroleum Exporting Countries (“OPEC”) and other non-OPEC producer nations during the first quarter of 2020, and global storage considerations. These events have directly affected our business and have exacerbated the potential negative impact from many of the risks described in the 2019 Form 10-K, including those relating to our clients’ capital spending and trends in oil and natural gas prices.
As COVID-19 continues to have global impacts, including significant impacts in the United States, Canada and the European Union, where we operate, we are taking a variety of measures to ensure the availability of our services, promote the safety and security of our employees, and preserve liquidity. However, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as closures of businesses and manufacturing facilities, the promotion of social distancing, the adoption of working from home by companies and institutions, and travel restrictions, could continue to adversely affect demand for our services. In addition, COVID-19 and related initiatives may result in greater supply chain disruption, which could have an adverse impact on volumes and make it more difficult for the Company to serve its clients. The full extent to which COVID-19 impacts operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, including the duration or future recurrence of the outbreak, emerging scientific or technological information concerning prevention, treatment and vaccination, and new governmental policies put in place to contain the health and economic impact of COVID-19 in the future, among others. Potential conflicts between federal and local government guidelines and best practices that are intended to reduce the spread of COVID-19 could result in stricter measures in certain locations that could expose us to increased risks and costs.
The confluence of events described above have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of operations, and financial condition. To the extent COVID-19 adversely affects our business, liquidity, results of operations, and financial condition, it may also have the effect of heightening many of the other risks described under Part I, Item 1A of the 2019 Form 10-K.
No assurances can be made that we will be able to renew or refinance our Credit Facility, or otherwise repay our obligations in full prior to maturity on January 15, 2022.
The Credit Facility matures on January 15, 2022 and under the terms of the Credit Facility, any outstanding balance is due in full on that date. As of September 30, 2020, under the Credit Facility, we had an outstanding principal balance of $132.1 million and outstanding letters of credit totaling $19.6 million. The ability to renew or refinance the Credit Facility, or otherwise repay the outstanding debt prior to maturity, is dependent upon capital/credit market conditions as well as our financial condition, operating results and cash flows, all of which are subject to prevailing economic and competitive conditions in addition to financial, business, legislative, governmental, political, regulatory and other factors beyond our control. The COVID-19 pandemic has introduced greater uncertainty and risk with respect to all of these factors. If we were to refinance part or all of the Credit Facility with alternate financing, this alternate financing could be on substantially different and more onerous terms than our existing credit agreement, including with respect to interest rates, financial and other covenants and required collateral. The terms of any such alternate financing could materially impact our operations and profitability. In addition, if any refinancing includes equity securities, such securities could significantly dilute our existing shareholders and have other materially adverse effects on us and our shareholders. We can give no assurance that we will be able to renew or refinance the Credit Facility on terms favorable to us, or at all, or that we will otherwise be able repay the Credit Facility obligations in full by the maturity date. In such event, we could face substantial liquidity problems, which could cause a materially adverse impact on our business operations.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||||
NONE
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | ||||
NONE
| ITEM 4. | MINE SAFETY DISCLOSURES | ||||
NOT APPLICABLE
| ITEM 5. | OTHER INFORMATION | ||||
NONE
| ITEM 6. | EXHIBITS | ||||
|
Exhibit
Number
|
Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
Note: Unless otherwise indicated, documents incorporated by reference are located under Securities and Exchange Commission file number 001-08604.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
|
TEAM, INC.
(Registrant)
|
||||||||
| Date: November 6, 2020 |
/
S
/ A
MERINO
G
ATTI
|
|||||||
|
Amerino Gatti
Chairman and Chief Executive Officer (Principal Executive Officer) |
||||||||
|
/
S
/ S
USAN
M. B
ALL
|
||||||||
|
Susan M. Ball
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
||||||||
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits