TEAM INC

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

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

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

Revenues. Total revenues increased $4.0 million or 2.0% from the prior year quarter. IHT revenues increased by $3.7 million or 3.6% primarily due to an increase in U.S. revenue of $6.7 million driven by higher activity in nested and turnaround services, partially offset by lower Canada operations revenue of $3.0 million due to lower activity in nested and turnaround services. MS revenue increased by $0.3 million or 0.3%, comprised of a $2.3 million increase in U.S. operations due to higher turnaround activity and valve services, partially offset by a $1.2 million decrease in Canada operations due to less project work and a $0.8 million decrease in other international regions revenue caused by lower overall activity.

Operating income (loss). Overall operating income was $3.2 million in the current year quarter, a $4.4 million improvement compared to the prior year quarter. IHT operating income increased by $3.4 million or 53.8%, with the U.S. increasing by $4.7 million primarily due to higher gross margin and lower costs, partially offset by a decrease in operating income from Canada of $1.2 million driven mainly by lower revenue for the period. MS operating income decreased by $2.0 million or 31.2% as compared to the prior year quarter primarily due to a $2.2 million decrease in operating income from international regions and a $0.4 million decrease from Canada operations, driven mainly by lower revenue and project mix, partially offset by an increase in U.S. operating income of $0.6 million. Corporate operating loss decreased by $3.0 million due to lower professional fees and the reversal of a legal reserve in the current period as further described in Note 13 - Commitments and Contingencies.

For the three months ended September 30, 2024 and 2023, operating income (loss) includes net expenses (credits) totaling $1.3 million and $2.8 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Excluding the impact of these identified non-core items in both periods, operating income increased by $0.3 million from $1.5 million in the three months ended September 30, 2023 to $1.8 million in the three months ended September 30, 2024. See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net. Interest expense increased by $1.7 million compared to the prior year quarter. This was primarily attributable to increased interest rates on our various debt arrangements and higher debt balances.

Cash interest paid during the quarter ended September 30, 2024 and 2023 was $7.1 million and $5.0 million, respectively.

Other (expense) income, net. Overall change in other (expense) income is primarily due to the negative impact of a loss on foreign currency fluctuation of $2.9 million.

Taxes. The provision for income tax was $0.5 million on the pre-tax loss of $10.6 million in the current year quarter, compared to a $1.1 million income tax provision on a pre-tax loss of $11.1 million in the prior year quarter. The effective tax rate, inclusive of discrete items, was a provision of 4.7% for the three months ended September 30, 2024, compared to a provision of 9.7% for the three months ended September 30, 2023. The decrease in effective tax rate for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 is due to the mix of pretax income in non-valuation allowance jurisdictions and pretax losses in valuation allowance jurisdictions, along with changes in valuation allowances in 2023. The impact is a larger decrease in income tax expense as compared to pretax income, resulting in a decrease of effective tax rate.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

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

Revenues. Total revenues decreased $9.5 million or 1.5% from the prior year period. IHT segment year-to-date revenue decreased by $2.1 million or 0.7% compared to the prior year period, primarily driven by decreased call out and turnaround activities in Canada and other international regions of $10.5 million, partially offset by an increase in U.S. operations revenue of $8.4 million. MS segment revenue decreased by $7.4 million or 2.3% compared to the prior year period, mainly due to a $7.6 million decrease in Canada attributable to projects from the 2023 period that did not repeat in the 2024 period.

Operating income (loss). Overall operating income was $7.9 million in the 2024 period, a $12.3 million or 279.9% improvement as compared to an operating loss of $4.4 million in the prior year period. IHT operating income increased by $9.8 million or 55.5%, primarily driven by improved gross margins and lower costs. MS operating income decreased by $3.2 million or 14.3% as compared to the prior year period. MS operating income from other international operations and Canada decreased by $3.5 million and $2.5 million, respectively, primarily driven by lower year over year revenue due to 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 $2.8 million driven by higher activity and improved margins. Corporate operating loss decreased by $5.7 million compared to the prior year period primarily due to lower professional fees and the reversal of a legal reserve in the current period as further described in Note 13 - Commitments and Contingencies.

For the nine months ended September 30, 2024 and 2023, operating income (loss) includes net expenses totaling $2.0 million and $7.8 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 $6.5 million, from $3.4 million to $9.9 million. See our non-GAAP reconciliation for additional details of our non-core expenses.

Interest expense, net. Interest expense, net decreased by $7.7 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 due to increased interest rates and higher debt balances.

Cash interest paid for the nine months ended September 30, 2024 and 2023 was $19.5 million and $14.5 million, respectively.

Other (expense) income, net. Overall change in other (expense) income, net is primarily due to the negative impact of loss on foreign currency fluctuations of $2.3 million.

Taxes. The provision for income tax was $2.0 million on the pre-tax loss of $29.0 million in the current year-to-date period compared to income tax expense of $4.0 million on the pre-tax loss of $48.6 million in the prior year-to-date period. The effective tax rate was a provision of 7.1% for the nine months ended September 30, 2024, compared to a provision of 8.3% for the nine months ended September 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, 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, 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 nine months ended September 30, 2024, includes $0.3 million and $2.7 million, respectively, related to debt financing, and for the nine months ended September 30, 2024, includes $0.2 million related to support costs. For the three and nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively, related to debt financing, and for the nine months ended September 30, 2023, $1.1 million related to lease extinguishment charges and other project costs.

2 Primarily relates to accrued legal matters and legal fees. Legal credits during the three and nine months ended September 30, 2024 relate to a $2.0 million reduction in the legal accrual. See Note 13 - Commitments and contingencies for additional information.

3 Represents customary severance costs associated with staff reductions.

4 Represents the tax effect of the adjustments.

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

1 Represents customary severance costs associated with staff reductions.

2 For the three and nine months ended September 30, 2024, includes $0.3 million and $2.7 million, respectively, related to debt financing, and for the nine months ended September 30, 2024, includes $0.2 million related to support costs. For the three and nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively, related to debt financing, and for the nine months ended September 30, 2023, $1.1 million related to lease extinguishment charges and other project costs.

3 Primarily relates to accrued legal matters and legal fees. Legal credits during the three and nine months ended September 30, 2024 relate to a $2.0 million reduction in the legal accrual. See Note 13 - Commitments and contingencies for additional information.

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.

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 customers 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, amend existing debt to gain additional flexibility, 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, refinancing 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 customers’ industries that may impede or delay the timing of customer 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.

On September 30, 2024, we entered into Amendment No.5 to the 2022 ABL Credit Agreement. ABL Amendment No.5 amended the 2022 ABL Credit Agreement to, among other things, to:

(i) extend the scheduled maturity date from August 11, 2025 to September 30, 2027;

(ii) amend the applicable margin for Delayed Draw Term Loans from a flat rate of 10.00% for SOFR Loans (as defined in the 2022 ABL Credit Agreement) and 9.00% for Base Rate Loans (as defined in the 2022 ABL Credit Agreement) to a rate based on EBITDA ranging from 8.50% to 10.00% for SOFR Loans and 7.50% to 9.00% for Base Rate Loans;

(iii) amend the applicable margin for Revolving Credit Loans from a rate based on EBITDA ranging from 4.15% to 4.65% for SOFR Loans and 3.15% to 3.65% for Base Rate Loans to a rate based on both EBITDA and Average Historical Excess Availability (as defined in the 2022 ABL Credit Agreement) ranging from 3.50% to 4.25% for SOFR Loans and 2.50% to 3.25% for Base Rate Loans;

(iv) amend the applicable margin for ME/RE Loans from a flat rate of 5.75% for SOFR Loans to a flat rate of 5.00% for SOFR Loans;

(v) amend the definitions of “Borrowing Base” and “Consolidated Fixed Charge Coverage Ratio” as well as related definitions in order to expand availability under the Revolving Credit Facility (as defined in the 2022 ABL Credit Agreement); and

(vi) add a springing financial covenant requiring Excess Availability (as defined in the 2022 ABL Credit Agreement) to be above $7,500,000 only if the Consolidated Fixed Charge Coverage Ratio falls below 0.85x for twelve-month periods ending on or prior to December 31, 2024 and 1.00x for twelve month periods ending after December 31, 2024.

ABL Amendment No.5 significantly improved availability under our Revolving Credit Loans and as of September 30, 2024, we had approximately $28.0 million of borrowing capacity consisting of $18.0 million available under the Revolving Credit Loans, and $10.0 million available under the Incremental Term Loan. Our principal uses of cash are for working capital, capital expenditures, and operations.

As of September 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 November 8, 2024, we had consolidated cash and cash equivalents of $9.9 million, excluding $4.1 million of restricted cash used mainly as collateral for letters of credit and commercial card programs, and approximately $30.5 million of undrawn availability under our various credit facilities, resulting in total liquidity of $40.4 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 September 30, 2024 totaled $19.1 million, consisting of $14.9 million of unrestricted cash on hand, and $4.2 million of restricted cash. International cash balances as of September 30, 2024 were $6.2 million, and approximately $0.6 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 $321.2 million, of which $7.1 million was classified as current at September 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 nine months ended September 30, 2024, net cash provided by operating activities was $1.1 million, an improvement of $23.2 million as compared to net cash used in operating activities of $22.1 million in the 2023 period. Our improvement in net cash provided by operating activities was driven by reduced net loss due to improved operating income, and lower negative working capital impacts of $14.5 million primarily attributable to an increase in accounts receivable and lower accrued liabilities, partially offset by an increase in accounts payable. Our net cash provided by operating activities were further impacted by amortization of debt issuance costs of $4.7 million, depreciation and amortization of $27.9 million, and PIK interest of $11.0 million.

For the nine months ended September 30, 2023, net cash used in operating activities was $22.1 million. Our net cash used in operating activities was driven by our net loss for the period, which totaled $52.6 million, and negative working capital impacts of $26.2 million, partially offset by amortization of debt issuance costs of $16.9 million, depreciation and amortization of $28.5 million, and PIK interest of $10.9 million.

Cash flows attributable to our investing activities. For the nine months ended September 30, 2024, net cash used in investing activities was $7.3 million, consisting of capital expenditures of $7.4 million, partially offset by cash proceeds from asset sales of $0.1 million.

For the nine months ended September 30, 2023, net cash used in investing activities was $7.0 million, consisting primarily of capital expenditures of $7.4 million, partially offset by $0.4 million of cash proceeds from asset sales.

Cash flows attributable to our financing activities. For the nine months ended September 30, 2024, net cash used in financing activities was $9.9 million, consisting primarily of payment of debt issuance costs of $7.4 million, principal payments under the ME/RE loans of $2.1 million, and principal payments under the Incremental Term Loan of $1.1 million, partially offset by net borrowings under equipment finance loan of $1.9 million.

For the nine months ended September 30, 2023, net cash used in financing activities was $7.4 million, consisting primarily of net borrowings under our 2022 ABL Credit Facility of $11.0 million, borrowings under ME/RE loans of $27.4 million and borrowings under the Incremental Term Loan of $42.5 million, offset by the payoff of the APSC Term Loan of $37.1 million, payoff of the 5.00% Convertible Senior Notes of $41.2 million and payment of debt issuance cost of $8.4 million.

Effect of exchange rate changes on cash and cash equivalents. For the nine months ended September 30, 2024 and 2023, the effect of foreign exchange rate changes on cash was negative $0.3 million and negative $0.1 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 nine months ended September 30, 2024.