TEAM INC

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The following is a comparison of our results of operations for the three months ended March 31, 2024 to the three months ended March 31, 2023 (in thousands).

Revenues. Total revenues decreased $2.7 million or 1.3% from the prior year period. Revenues were positively impacted by $0.6 million from favorable foreign exchange movements during the three-month period ended March 31, 2024. IHT segment year-to-date revenue decreased 2.3%, compared to the prior year period, primarily driven by decreased call out and turnaround activities in the U.S. and Canada regions, partially offset by an increase in Aerospace activity. MS segment revenue decreased 0.3% compared to the prior year period, mainly due to a $4.3 million decrease in Canada operations attributable to projects from the 2023 period that did not repeat in the 2024 period; mostly offset by a $1.2 million increase in U.S. operations and a $2.8 million increase in other international operations primarily attributable to higher nested and turnaround activity.

Operating income (loss). Overall operating loss was $6.4 million in the current year, a $1.4 million or 17.6% improvement as compared to an operating loss of $7.7 million in the prior year. IHT operating income increased by $0.5 million or 9.8%, primarily driven by lower direct costs and improved margins. MS operating income increased by $0.9 million or 28.1% as compared to the prior year period. MS operating income from the U.S., and other international operations increased by $1.9 million, and $0.6 million, respectively, driven by higher activity and improved margins, partially offset by a decrease of $1.6 million in Canada, primarily driven by non-repeating projects in the prior year. Corporate operating loss remained consistent with the prior year period. We continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended March 31, 2024 and 2023, operating loss includes net expenses totaling $2.6 million and $2.0 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Excluding the impact of these identified non-core items in both periods, operating loss decreased by $1.9 million, from a loss of $5.7 million to a loss of $3.8 million. See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net. Interest expense, net decreased by $4.6 million from the prior year period. The decrease was primarily due to elimination of accelerated amortization of debt issuance costs, and reduction in outstanding debt balance due to payoff of the remaining balance on the Atlantic Park Strategic Capital Fund, L.P. term loan in June 2023 and full payoff of the convertible debt in August 2023. These decreases were partially offset by interest expense incurred on the ME/RE Loans and the Incremental Term Loan entered in June 2023, increase in interest expense on the 2022 ABL Credit Facility due to higher interest rates and increase in the paid-in-kind (“PIK”) interest on the Uptiered Loan.

Cash interest paid for the three months ended March 31, 2024 and 2023 was $5.9 million and $5.2 million, respectively.

Other income, net. Other income increased by $0.7 million from the prior year period primarily due to a higher gain on foreign currency transactions in the current year period.

Taxes. The provision for income tax was $0.1 million on the pre-tax loss of $17.1 million in the current year-to-date period compared to income tax expense of $0.9 million on the pre-tax loss of $23.9 million in the prior year-to-date period. The effective tax rate was a provision of 0.4% for the three months ended March 31, 2024, compared to a provision of 3.6% for the three months ended March 31, 2023. The effective tax rate differs from the prior year period due to changes in valuation allowance.

Non-GAAP Financial Measures and Reconciliations

We use supplemental non-GAAP financial measures which are derived from the consolidated financial information including adjusted net income (loss); adjusted net income (loss) per share; earnings before interest and taxes (“EBIT”); adjusted EBIT; adjusted earnings before interest, taxes, depreciation, and amortization (“adjusted EBITDA”) and free cash flow to supplement financial information presented on a GAAP basis.

We define adjusted net income (loss) and adjusted net income (loss) per share to exclude the following items: non-routine legal costs and settlements, non-routine professional fees, (gain) loss on debt extinguishment, certain severance charges, non-routine write off of assets and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, pension credit, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with non-routine legal costs and settlements, non-routine professional fees, certain severance charges, and certain other items as determined by us. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures.

We believe these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders, and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA are also used as a basis for the Chief Operating Decision Maker (Chief Executive Officer) 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 on a consolidated and segmented basis:

1 For the three months ended March 31, 2024, includes $1.9 million related to debt financing, and $0.2 million related to support costs. For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support.

2 Represents customary severance costs associated with staff reductions.

3 Represents the tax effect of the adjustments.

4 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date.

1 Represents customary severance costs associated with staff reductions.

2 For the three months ended March 31, 2024, includes $1.9 million related to debt financing, and $0.2 million related to support costs. For the three months ended March 31, 2023, includes $1.7 million related to costs associated with corporate support.

3 Represents pension credits for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date.

Liquidity and Capital Resources

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

We have evaluated our liquidity within one year after the date of issuance of the accompanying condensed consolidated financial statements to assess the Company’s ability to fund its operations. Based upon such liquidity assessment, we believe that the Company’s current working capital, forecasted cash flows from operations, expected availability under our existing debt arrangements and capital expenditure financing is sufficient to fund our operations, service our indebtedness, and maintain compliance with our debt covenants. In the preparation of this liquidity assessment, we applied judgment to estimate the projected cash flows of the Company, including the following: (i) projected cash outflows, (ii) projected cash inflows, and (iii) projected availability under the Company’s existing debt arrangements. The cash flow projections were based on known or planned cash requirements for operating and financing costs and include management’s best estimate regarding future customer activity levels, pricing for its services and for its supplies and other factors. Actual results could vary significantly from those projections. We based this assessment on assumptions that may prove to be inaccurate, and we could exhaust our available capital resources sooner than we expect in the event that we fail to meet our current projections. See Note 10 - Debtin this Quarterly Report on Form 10-Q and Note 11 - Debt in our Annual Report on Form 10-K for additional details of our debt obligations.

We closely monitor the amounts and timing of our sources and uses of funds. Our ability to maintain a sufficient level of liquidity to fund our operations and meet our financial obligations will be dependent upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. For example, the threat of recession and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as that of 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, service our indebtedness, maintain compliance with the financial covenants contained in our various credit agreements and affect our future need or ability to borrow under our 2022 ABL Credit Facility and our A&R Term Loan Credit Agreement. Our ability to access the capital markets will depend on financial, economic and market conditions, many of which are outside of our control, and we may be unable to raise financing when needed, or on terms favorable to us, or at all. In addition, we may seek to engage in one or more of the following, such as refinancing and/or extending the maturities of all or part of our existing indebtedness, seeking covenant relief from our lenders, entering into a strategic partnership with one or more parties, or the sale or divestiture of assets, but there can be no assurance that we would be able to enter into such a transaction or transactions on a timely basis or on terms favorable to us, or at all. Our failure to raise capital through our operations, refinancings or strategic alternatives as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. In addition to impacting our current sources of funding, the effects of such events may also impact our liquidity or require us to revise our allocation or sources of capital, reduce capital expenditures, implement further cost reduction measures and/or change our business strategy. Political economic repercussions could also have a broad range of effects on our liquidity sources and will depend on future developments that cannot be predicted at this time.

Our ability to generate operating cash flow, sell assets, access capital markets or take any other action to improve our liquidity and manage our debt is subject to the risks described or referenced herein and other risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time or control. Such risks include the following:

• loss of customers or other unforeseen deterioration in demand for our services;

• seasonal fluctuations, such as severe weather and other variations in our clients’ industries that may impede or delay the timing of client orders and the delivery of our services;

• rapid increases in raw materials and labor costs that may hinder our ability to meet our forecasted operating expenses;

• persisting or increasing levels of inflation domestically and internationally and the impact of such inflation on our ability to meet our current forecast;

• changes in regulations governing our operations and unplanned costs to comply with such regulatory changes;

• counterparty credit risk related to our ability to collect our receivables; and

• unexpected or prolonged fluctuations in interest rates and their impact on our forecasted costs of raising additional capital.

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

As of March 31, 2024, we had approximately $16.7 million of borrowing capacity consisting of $6.7 million available under the 2022 ABL Credit Agreement, and $10.0 million available under the A&R Term Loan Agreement. Our principal uses of cash are for working capital, capital expenditures, and operations.

As of March 31, 2024, we were in compliance with our debt covenants. Our ability to maintain compliance with the financial covenants contained in the 2022 ABL Credit Agreement and the A&R Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties.

As of May 10, 2024, we had consolidated cash and cash equivalents of $15.4 million, excluding $5.1 million of restricted cash mainly as collateral for letters of credit and commercial card programs, and approximately $21.3 million of undrawn availability under our various credit facilities, resulting in total liquidity of $36.7 million.

Refer to Note 10 - Debt in this Quarterly Report on Form 10-Q and Note 11 - Debt in our Annual Report on Form 10-K for additional information on our debt instruments.

Cash and cash equivalents. Our cash and cash equivalents as of March 31, 2024 totaled $24.2 million, consisting of $19.2 million of unrestricted cash on hand, and $5.0 million of restricted cash. International cash balances as of March 31, 2024 were $8.2 million, and approximately $0.7 million of such cash is located in countries where currency or regulatory restrictions exist.

As of December 31, 2023, our cash and cash equivalents were $35.4 million, including $30.4 million of unrestricted cash on hand, and $5.0 million of restricted cash. International cash balances as of December 31, 2023 were $12.0 million, including $0.6 million of cash located in countries where currency or regulatory restrictions existed.

Our total debt and finance obligations were $307.2 million, of which $7.1 million was classified as current at March 31, 2024, compared to total debt of $311.4 million at December 31, 2023.

Cash Flows

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

Cash flows attributable to our operating activities. For the three months ended March 31, 2024, net cash provided by operating activities was $1.9 million, an improvement of over 100% compared to cash used in operating activities of $17.8 million in the 2023 period. Our net cash provided by operating activities was driven by positive working capital changes of $5.7 million, primarily attributable to lower accounts receivable and prepayment balances, partially offset by lower accrued liabilities driven by payments related to insurance, property taxes and legal claims.

For the three months ended March 31, 2023, net cash used in operating activities was $17.8 million. Our net cash used in operating activities was driven by negative working capital changes of $13.3 million, primarily due to lower accrued liabilities driven by payments related to CARES Act deferred payments, payroll and severance payments, sales and use tax, and settlement of legal claims, which were partially offset by changes in accounts receivables and prepayments.

Cash flows attributable to our investing activities. For the three months ended March 31, 2024, net cash used in investing activities was $3.0 million, consisting of capital expenditures of $3.0 million.

For the three months ended March 31, 2023, net cash used in investing activities was $2.4 million, consisting primarily of $2.7 million of capital expenditures, partially offset by $0.3 million of cash proceeds from asset sales.

Cash flows attributable to our financing activities. For the three months ended March 31, 2024, net cash used in financing activities was $9.8 million, consisting primarily of net payments under our 2022 ABL Credit Facility of $9.9 million, payments under the ME/RE loans of $0.7 million, payments under the Incremental Term Loan of $0.4 million and payment of debt issuance costs of $1.4 million, partially offset by equipment financing of $2.5 million.

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

Effect of exchange rate changes on cash and cash equivalents. For the three months ended March 31, 2024 and 2023, the effect of foreign exchange rate changes on cash was negative $0.3 million and positive $0.2 million, respectively. The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S. Dollar exchange rate against the Canadian Dollar, the Euro, the British Pound, the Australian Dollar and Mexican Peso.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. See Note 10 - Debtin this Quarterly Report on Form 10-Q and Note 11 - Debt in our Annual Report on Form 10-K for additional details of our off-balance sheet arrangements.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K. There were no material changes to our critical accounting policies during the three months ended March 31, 2024.