TEAM INC

The following is a comparison of our results of operations for the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

The following table sets forth the components of revenue and operating loss from our operations for the three-month period ended June 30, 2024 and 2023 (in thousands):

Revenues. Total revenues decreased $10.9 million or 4.5% from the prior year quarter and were negatively impacted by $0.6 million from foreign exchange movement. IHT revenues decreased by $3.5 million or 3.0% primarily due to lower IHT Canada operations revenue of $5.4 million due to lower activity in nested and turnaround services and lower revenue from other international regions of $0.7 million, partially offset by a $2.6 million increase in the U.S. MS revenue decreased by $7.4 million or 6.0%, which was attributable to a $2.7 million decrease in MS U.S. operations primarily due to project timing, a $2.1 million decrease in MS Canada operations due to less project work and a $2.5 million decrease in other international regions revenue primarily due to lower overall activity.

Operating income (loss). Overall operating income was $11.2 million in the current year quarter, a $6.6 million improvement compared to the prior year quarter. IHT operating income increased by $5.9 million or 90.3% due to lower costs and higher margins in the U.S. mainly attributable to cost reduction actions. MS operating income decreased by $2.1 million or 16.4% as compared to the prior year quarter primarily due to a $1.9 million decrease in operating income from international regions and a $0.5 million decrease from Canada operations, driven by lower revenue and project mix, partially offset by an increase in U.S. operating income. Corporate operating loss decreased by $2.7 million due to lower professional fees in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s continuous cost reduction efforts. We continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended June 30, 2024 and 2023, operating loss includes net expenses totaling $0.8 million and $3.1 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 income increased by $4.2 million from $7.7 million in the three months ended June 30, 2023 to $11.9 million in the three months ended June 30, 2024. See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net. Interest expense decreased by $4.8 million compared to the prior year quarter. The decrease was primarily attributable to the accelerated amortization of debt related deferred costs until June 16, 2023 in the prior year quarter. This decrease was partially offset by higher interest expense on our various debt arrangements.

Cash interest paid during the quarter ended June 30, 2024 and 2023 was $6.5 million and $4.7 million, respectively.

Other income, net. Other income, net decreased by $0.6 million, driven primarily by the impact of foreign currency fluctuations.

Taxes. The provision for income tax was $1.5 million on the pre-tax loss of $1.3 million in the current year quarter, compared to a $2.1 million income tax provision on a pre-tax loss of $13.7 million in the prior year quarter. The effective tax rate, inclusive of discrete items, was a provision of 114.0% for the three months ended June 30, 2024, compared to a provision of 15.3% for the three months ended June 30, 2023. The increase in effective tax rate for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 is due to the mix of pretax income in non-valuation allowance jurisdictions and pretax losses in valuation allowance jurisdictions. The impact is additional income tax expense with minimal corresponding pretax income/(loss) movement and increase in effective tax rate.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

The following is a comparison of our results of operations for the six months ended June 30, 2024 to the six months ended June 30, 2023 (in thousands).

Revenues. Total revenues decreased $13.6 million or 3.1% from the prior year period. Revenues had no impact from foreign exchange movements during the six-month period ended June 30, 2024. IHT segment year-to-date revenue decreased 2.7% compared to the prior year period, primarily driven by decreased call out and turnaround activities in Canada and other international regions, partially offset by a $1.8 million increase in aerospace related revenue. MS segment revenue decreased by $7.7 million or 3.4% compared to the prior year period, mainly due to a $6.5 million decrease in Canada operations attributable to projects from the 2023 period that did not repeat in the 2024 period, and a $1.4 million decrease in U.S. operations.

Operating income (loss). Overall operating income was $4.8 million in the current year, a $7.9 million or 251.5% improvement as compared to an operating loss of $3.2 million in the prior year. IHT operating income increased by $6.4 million or 56.5%, primarily driven by lower costs and improved margins. MS operating income decreased by $1.2 million or 7.4% as compared to the prior year period. MS operating income from Canada and other international operations decreased by $2.1 million and $1.3 million, respectively, primarily driven by projects from the prior year period that did not repeat in 2024. This decrease in operating income was partially offset by an increase in operating income from U.S. operations of $2.2 million driven by higher activity and improved margins. Corporate operating loss decreased by $2.7 million compared to the prior year period due to lower overall costs resulting from the Company’s continuous cost reduction efforts. We continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the six months ended June 30, 2024 and 2023, operating loss includes net expenses totaling $3.4 million and $5.1 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 income increased by $6.2 million, from $1.9 million to $8.1 million. See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net. Interest expense, net decreased by $9.4 million from the prior year period. The decrease was primarily attributable to the accelerated amortization of debt related deferred cost until June 16, 2023 which was not applicable during the current year period. This decrease was partially offset by higher interest expense on our various debt arrangements.

Cash interest paid for the six months ended June 30, 2024 and 2023 was $12.4 million and $9.1 million, respectively.

Other income, net. Other income increased by $0.2 million from the prior year period driven by a higher gain on foreign currency transactions in the current year period, offset by loss on asset disposals in the current year compared to gain in the prior year period.

Taxes. The provision for income tax was $1.5 million on the pre-tax loss of $18.4 million in the current year-to-date period compared to income tax expense of $2.9 million on the pre-tax loss of $37.5 million in the prior year-to-date period. The effective tax rate was a provision of 8.4% for the six months ended June 30, 2024, compared to a provision of 7.7% for the six months ended June 30, 2023. The effective tax rate differs from the prior year period due to changes in the 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 depreciation, amortization, and non-cash share-based compensation costs from consolidated adjusted EBIT. 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 depreciation, amortization, and non-cash share-based compensation costs from segment adjusted EBIT. 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 and six months ended June 30, 2024, includes $0.5 million and $2.4 million, respectively, related to debt financing, and for the six months ended June 30, 2024, includes $0.2 million related to support costs. For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively, related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges, and for the three and six months ended June 30, 2023, includes $0.3 million of support costs.

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 and six months ended June 30, 2024, includes $0.5 million and $2.4 million, respectively, related to debt financing, and for the six months ended June 30, 2024, includes $0.2 million related to support costs. For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively, related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges, and for the three and six months ended June 30, 2023, includes $0.3 million of support costs.

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 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 June 30, 2024, we had approximately $22.2 million of borrowing capacity consisting of $12.2 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 June 30, 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 August 6, 2024, we had consolidated cash and cash equivalents of $19.5 million, excluding $4.5 million of restricted cash used mainly as collateral for letters of credit and commercial card programs, and approximately $12.8 million of undrawn availability under our various credit facilities, resulting in total liquidity of $32.3 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 June 30, 2024 totaled $22.5 million, consisting of $17.9 million of unrestricted cash on hand, and $4.6 million of restricted cash. International cash balances as of June 30, 2024 were $6.1 million, and approximately $0.5 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 $320.1 million, of which $7.1 million was classified as current at June 30, 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 six months ended June 30, 2024, net cash used in operating activities was $4.5 million, an improvement of 81% as compared to $23.6 million in the 2023 period. Our net cash used in operating activities was driven by negative working capital changes of $14.0 million, primarily attributable to an increase in accounts receivable and lower accrued liabilities, partially offset by an increase in accounts payable. Our net cash used in operating activities were further impacted by a $12.6 million reduction in amortization of debt issuance costs, debt discounts, and deferred financing costs and no loss on debt extinguishment in the current year period compared to $1.6 million in the prior year period.

For the six months ended June 30, 2023, net cash used in operating activities was $23.6 million. Our net cash used in operating activities was driven by our net loss for the period, which totaled $40.5 million, and negative working capital of $26.4 million, partially offset by amortization of debt issuance costs and debt discount of $16.2 million, depreciation and amortization of $19.1 million, and PIK interest on the Uptiered Loan of $7.1 million.

Cash flows attributable to our investing activities. For the six months ended June 30, 2024, net cash used in investing activities was $5.6 million, consisting of capital expenditures of $5.8 million, partially offset by cash proceeds from asset sales of $0.2 million.

For the six months ended June 30, 2023, net cash used in investing activities was $4.7 million, consisting primarily of capital expenditures (mainly related to the Company’s new aerospace inspection facility in Cincinnati), partially offset by $0.3 million of cash proceeds from asset sales.

Cash flows attributable to our financing activities. For the six months ended June 30, 2024, net cash used in financing activities was $2.5 million, consisting primarily of payments under the ME/RE loans of $1.4 million, payments under the Incremental Term Loan of $0.7 million and payment of debt issuance costs of $2.8 million, partially offset by equipment financing of $1.8 million and net borrowings under our 2022 ABL Credit Facility of $0.6 million.

For the six months ended June 30, 2023, net cash provided by financing activities was $0.5 million, consisting primarily of net borrowings under our 2022 ABL Credit Facility of $16.0 million and borrowings under ME/RE loans of $27.4 million offset by the payoff of the APSC Term Loan of $37.1 million and payment of deferred financing cost of $5.3 million.

Effect of exchange rate changes on cash and cash equivalents. For the six months ended June 30, 2024 and 2023, the effect of foreign exchange rate changes on cash was negative $0.4 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 six months ended June 30, 2024.