ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, changes in financial condition, and results of operations. The following should be read in conjunction with Item 1 “Business,” Item 1A “Risk Factors,” Item 2 “Properties,” and Item 8 “Consolidated Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future developments and/or otherwise are not statements of historical fact. See Item 1 at the beginning of this Annual Report.
Overview of Business
We are a global, leading provider of specialty industrial services offering clients access to a full suite of conventional, specialized, and proprietary mechanical, heat-treating, and inspection services. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our clients’ most critical assets. We conduct operations in two segments: Inspection and Heat Treating (“IHT”) and Mechanical Services (“MS”). Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions involving: 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 we are unique in our ability to provide these services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services, and (iii) nested or run-and-maintain services.
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 and Part 1, Item 1A. “Risk Factors” included in this report and 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.
Financing Transactions. During 2023, we entered into an amendment and restatement of that certain subordinated term loan credit agreement dated as of November 9, 2021 (as amended and restated, the “A&R Term Loan Credit Agreement”) among us, as borrower, the guarantors party thereto, the lenders from time to time party thereto and Cantor Fitzgerald Security, as agent; we entered into ABL Amendment No. 3; we paid off the remaining balance on the APSC Term Loan (defined below) and our 5.00% Convertible Senior Notes due 2023 (the “Notes”); and entered into an amendment of the Substitute Insurance Reimbursement Facility Agreement. See Note 11 - Debt to the consolidated financial statements for additional details related to these transactions.
Market Conditions Update. Fluctuations in oil and gas prices continued during 2023 with an overall decline in prices as compared to 2022. Oil and gas price volatility may impact the current and future spending on our services by our clients. Although oil and gas prices are expected to be relatively stable in 2024 given the current balance between oil and gas supply and demand, the future impacts to our business from potentially higher interest rates, persistent global and domestic inflation, geopolitical unrest especially in the Middle East, and volatility in global supply chains cannot be predicted. See Item 1A “Risk Factors” in this Annual Report on Form 10-K for additional information.
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Results of Operations
The following is a comparison of our results of operations for the twelve months ended December 31, 2023 and December 31, 2022.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table sets forth the components of revenue and operating income (loss) from our operations for the twelve months ended December 31, 2023 and 2022 (in thousands):
Twelve Months Ended December 31, Increase(Decrease)
Revenues by business segment:
Operating income (loss):
Revenues. Total revenues increased $22.4 million or 2.7% from the prior year. Total revenue was negatively impacted by $2.3 million of unfavorable foreign exchange rate movements during 2023. IHT revenues increased by $7.0 million or 1.7%, driven by a $10.3 million increase in the U.S., primarily due to higher callout and turnaround activities in various districts due to higher demand for our non-destructive testing services, a $5.1 million increase in Europe due to higher turnaround activity primarily in the Netherlands, and a $1.5 million increase in our aerospace business as our new facility in Cincinnati experienced increased client interest. These increases were partially offset by a $9.9 million decrease in Canada due to reduced scope in certain client turnaround projects. MS revenues increased by $15.4 million or 3.7%, over prior year, driven by a $16.7 million increase across our international regions other than Canada due to higher activity related to leak repair, machining and bolting services, and hot tapping services primarily in the United Kingdom and Europe. MS revenue in the U.S. increased by $1.1 million, these increases were offset by decreases in valve sales and non-repeating turnaround work in Canada of $1.4 million, and $1.0 million, respectively.
Operating income (loss). Overall operating loss decreased by $26.5 million to a loss of $13.3 million in 2023 as compared to a loss of $39.8 million in the prior year. IHT’s operating income increased by $7.1 million, primarily driven by higher activity as described above. MS operating income increased by $6.8 million year over year to $27.8 million for 2023, mainly due to increased activity levels from U.S. and international operations; partially offset by a decrease in operating income from our valve business. Corporate operating loss decreased by $12.6 million year over year, mainly due to lower personnel and professional costs in the current year as compared to prior year and lower overall costs due to our ongoing cost reduction efforts. The impact of our cost reduction efforts has been partially offset by continued cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.
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Operating loss for the current year includes net expenses totaling $16.3 million that we do not believe are indicative of our core operating activities, while the same period in the prior year included $20.4 million of such items.
Twelve Months Ended December 31, Increase(Decrease)
Excluding the impact of these identified non-core expenses in both periods, operating loss decreased by $22.4 million from a loss of $19.4 million to income of $3.0 million. See our non-GAAP reconciliation for additional details of our non-core expenses.
Interest expense, net. Interest expense for 2023 was $55.2 million, a decrease of $29.9 million compared to the prior year. The decrease was primarily attributable to lower interest expense and amortization of debt issuance costs on our APSC Term Loan in 2023 due to the pay down of $225.0 million of the balance in November 2022, full payoff of the remaining balance in June 2023, payoff of the Notes in August 2023, as well as decrease in accelerated amortization due to the “Maturity Reserve Trigger Date” provision that was previously applicable. These effects were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility due to higher balances outstanding related to the June 2023 Refinancing and an increase in the Secured Overnight Financing Rate (“SOFR”) rate, and the increase in amounts outstanding and paid-in-kind (noncash) (“PIK”) interest on the Uptiered Loan / Subordinated Term Loan and the Incremental Term Loan.
Cash interest paid for the years ended December 31, 2023 and 2022 amounted to $19.5 million and $29.2 million, respectively.
Loss on debt extinguishment. Loss on debt extinguishment for the year ended December 31, 2023 was $1.6 million compared to $30.1 million in the prior year. Loss on debt extinguishment during 2023 was due to the payoff of the remaining balance of the APSC Term Loan in June 2023 and consisted mainly of an early payment premium. The prior year loss on debt extinguishment was due to the $225.0 million paydown of the APSC Term Loan in November 2022 and consisted of $12.4 million of cash fees and early payment premium and $17.7 million of noncash expense related to the write off of the related unamortized balance of deferred issuance costs and debt and warrant discounts.
Other expense (income), net. Other expense (income), net decreased by $9.3 million, from income of $8.2 million in the prior year to expense of $1.1 million for 2023. The decrease was primarily driven by a $4.6 million gain on disposal of assets and impairment in prior year as compared to current year, and $3.4 million foreign currency transaction gain in the prior year. Foreign currency transaction losses in the current year period reflect the effects of negative fluctuations in the value of the U.S. dollar relative to the foreign currencies to which we have exposure.
Taxes. The provision for income tax was $4.6 million on the pre-tax loss from continuing operations of $71.1 million in the current year compared to the provision for income tax of $3.3 million on pre-tax loss from continuing operations of $146.8 million in the prior year. The effective tax rate was a provision of 6.4% and 2.3% for years ended December 31, 2023 and 2022, respectively.
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, loss on debt extinguishment, certain severance charges, non-routine
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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, 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:
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TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(unaudited, in thousands except per share data)
Three Months EndedDecember 31, Twelve Months EndedDecember 31,
Adjusted Net Income (Loss):
Natural disaster insurance recovery4 — (324) — (1,196)
Tax impact of adjustments and other net tax items7 (37) (48) (159) (79)
Adjusted net loss per common share:
Consolidated Adjusted EBIT and Adjusted EBITDA:
Natural disaster insurance recovery4 — (324) — (1,196)
Depreciation and amortization
Free Cash Flow:
____________________________________
1 The three and twelve months ended December 31, 2023, includes $2.2 million and $6.7 million, respectively, related to costs associated with debt financing, and $1.1 million and $2.4 million, respectively, for lease extinguishment charges, support and other costs. The three and twelve months ended December 31, 2022, includes $1.8 million and $10.2 million, respectively, related to costs associated with debt financing, and $1.5 million and $3.7 million of corporate support and other costs.
2 Primarily relates to accrued legal matters, adjustments to legal reserves and other legal fees related to debt restructuring and other non-routine matters. These amounts include $3.9 million for 2023 and $1.6 million for 2022 related to accruals for repayment of pandemic related subsidies in foreign jurisdiction.
3 For 2023, represents customary severance costs associated with staff reductions across multiple departments. For 2022, severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments.
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4 Represents the insurance recovery received during the year for hurricane damage incurred in 2021.
5 Represents loss on payoff of remaining APSC Term Loan in June 2023 and loss on payoff of $225.0 million of the APSC Term Loan in November 2022. The 2022 loss consists of $12.4 million of cash fees and premium, and $17.7 million of noncash expense related to the write off of the related unamortized balance of deferred issuance cost and warrant and debt discounts.
6 Includes $0.7 million for the loss on settlement of a note receivable and, for the full year 2023, an additional $0.6 million for the write-off of software related costs.
7 Represents the tax effect of the adjustments.
8 Represents pension credit for the U.K. pension plan based on the difference between the expected return on plan assets and the amount of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date.
TEAM, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued)
(unaudited, in thousands)
Three Months EndedDecember 31, Twelve Months EndedDecember 31,
IHT
Professional fees and other 113 — 941 —
MS
Professional fees and other 80 — 147 —
Corporate and shared support services
Natural disaster insurance recovery7 — (324) — (1,196)
_________________
1 For 2023, represents customary severance costs associated with staff reductions across multiple departments. For 2022, severance charges represent costs associated with executive departures and our ongoing cost reduction efforts across multiple segments.
2 Represents loss on payoff of remaining APSC Term Loan in June 2023 and loss on payoff of $225.0 million of the APSC Term Loan in November 2022. The 2022 loss consists of $12.4 million of cash fees and premium, and $17.7 million of noncash expense related to the write off of the related unamortized balance of deferred issuance cost and warrant and debt discounts.
3 Represents pension credit for the U.K. pension plan based on the difference between the expected return on plan assets and the amount of the discounted pension liability. The pension plan was frozen in 1994 and no new participants have been added since that date.
4 Includes $0.7 million for the loss on settlement of a note receivable and, for the full year 2023, an additional $0.6 million for the write-off of software related costs.
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5 The three and twelve months ended December 31, 2023, includes $2.2 million and $6.7 million, respectively, related to costs associated with debt financing, and $1.1 million and $2.4 million, respectively, for lease extinguishment charges, support and other costs. The three and twelve months ended December 31, 2022, includes $1.8 million and $10.2 million, respectively, related to costs associated with debt financing, and $1.5 million and $3.7 million of corporate support and other costs.
6 Primarily relates to accrued legal matters, adjustments to legal reserves and other legal fees related to debt restructuring and other non-routine matters. These amounts include $3.9 million for 2023 and $1.6 million for 2022 related to accruals for repayment of pandemic related subsidies in foreign jurisdiction.
7 Represents the insurance recovery received during the year for hurricane damage incurred in 2021.
Liquidity and Capital Resources.
We have evaluated our liquidity within one year after the date of issuance of the accompanying audited consolidated financial statements to assess the Company’s ability to fund its operations. 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. 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. 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 11 - Debt to the consolidated financial statements for a further discussion of our liquidity.
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 discussed 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.
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See Item 1A “Risk Factors” in this Annual Report on Form 10-K for additional information.
On June 19, 2023, we announced the successful closing of a series of refinancing transactions (the “June 2023 Refinancing”) that raised $87.4 million of new funding (approximately $82.0 million following deductions for transaction related fees, expenses and original issue discounts) which consisted of the following:
•A new $57.5 million, 12% senior secured first lien term loan provided by funds managed by Corre that matures in December 2026, and is comprised of a $37.5 million term loan tranche and a $20.0 million delayed draw term loan tranche (the “Incremental Term Loan”), and
•A new $27.4 million term loan secured by certain real estate and machinery and equipment of the Company provided by Eclipse Business Capital LLC (the “ME/RE Loans”), that matures in August 2025. Our 2022 ABL Credit Facility was also amended to extend the maturity date to August 2025, and to increase availability under that facility by an additional $2.5 million.
We used the proceeds from the ME/RE Loan, together with advances under the 2022 ABL Facility, to repay in full our existing senior secured term loan with Atlantic Park Strategic Capital Fund, L.P.We used the proceeds from the Incremental Term Loan to repay in full our remaining $41.0 million of the Notes and for general corporate purposes.
Subsequent to the June 2023 Refinancing, financing for our operations consists primarily of our 2022 ABL Credit Agreement, which includes our 2022 ABL Credit Facility 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. As of December 31, 2023, we had approximately $31.3 million of available borrowing capacity under our various credit facilities, consisting of $21.3 million available under the 2022 ABL Credit Facility and $10.0 million available under the A&R Term Loan Credit Agreement. Our principal uses of cash and liquidity are for working capital needs, capital expenditures and operations.
As of December 31, 2023 we are in compliance with our debt covenants. Our ability to maintain compliance with the financial covenants contained in the 2022 ABL Credit Agreement and 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 March 5, 2024, we had consolidated cash and cash equivalents of $24.0 million, excluding $4.9 million restricted mainly as collateral for outstanding letters of credit, and approximately $12.1 million of undrawn availability under our various credit facilities, resulting in total liquidity of $36.1 million.
Refer to Note 11 - Debt for information on our debt instruments.
Cash and cash equivalents. Our cash and cash equivalents as of December 31, 2023 totaled $35.4 million, of which $12.0 million was in foreign accounts, primarily in Europe, Canada and Australia, including $0.6 million of cash located in countries where currency restrictions exist.
Our cash and cash equivalents as of December 31, 2022 totaled $58.1 million of which $16.3 million was in foreign accounts, primarily in Europe, Canada and Australia, including $1.4 million of cash located in countries where currency restrictions exist.
Cash flows attributable to our operating activities. For the year ended December 31, 2023, net cash used in operating activities was $11.0 million. We incurred a net loss of $75.7 million, further adjusted for a decrease in net working capital of $7.5 million, partially offset by the effect of depreciation and amortization of $37.9 million, non-cash amortization of debt issuance costs and debt discount of $18.7 million and paid-in-kind interest of $14.5 million.
For the year ended December 31, 2022, net cash used in operating activities was $57.9 million. We had net income of $70.1 million, further adjusted for the gain on sale of our Quest Integrity segment (“Quest Integrity”) of $203.4 million and a decrease in net working capital of $30.2 million, partially offset by the effect of depreciation and amortization of $37.6 million, loss on debt extinguishment of $17.7 million, amortization of non-cash debt issuance costs and debt discount of $35.5 million and paid- in-kind interest of $18.2 million.
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Cash flows attributable to our investing activities. For the year ended December 31, 2023, net cash used in investing activities was $10.0 million, consisting of $10.4 million of capital expenditures offset by net proceeds from asset disposals of $0.4 million.
For the year ended December 31, 2022, net cash provided by investing activities was $243.4 million, consisting primarily of net proceeds from the sale of Quest Integrity of $260.8 million and net proceeds from asset disposals of $7.2 million, partially offset by $24.7 million of capital expenditures.
Cash flows attributable to our financing activities. For the year ended December 31, 2023, net cash used in financing activities was $1.9 million, consisting primarily of the $37.1 million payoff of the APSC Term Loan, $41.2 million payoff of the Notes, and $9.1 million of term loan debt issuance costs, partially offset by $47.2 million of borrowings under the Corre Incremental Term Loan, $27.4 million of borrowings under the ME/RE loans and net borrowings on our 2022 ABL Credit Facility of $13.5 million.
For the year ended December 31, 2022, net cash used in financing activities was $192.0 million, consisting primarily of the $224.9 million payoff on the APSC term loan, $62.0 million of net payments under the 2020 ABL Credit Facility and $13.7 million of term loan debt issuance costs, partially offset by net borrowings on our 2022 ABL Credit Facility of $64.9 million and borrowings of $35.0 million under the Corre Delayed Draw Term Loan.
Effect of exchange rate changes on cash. For the year ended December 31, 2023, the effect of foreign exchange rate changes on cash was a positive impact of $0.3 million.
For the year ended December 31, 2022, the effect of foreign exchange rate changes on cash was a negative impact of $0.7 million. The negative impact in 2022 is primarily attributable to unfavorable fluctuations in U.S. dollar exchange rates with 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 11 - Debt for additional details on our off-balance sheet arrangements.
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Critical Accounting Policies
The process of preparing financial statements in accordance with GAAP requires us to make estimates and judgments. It is possible that materially different amounts could be recorded if these estimates and judgments change or if actual results differ from these estimates and judgments. We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted rates in effect for the year in which the differences are expected to reverse. The effect of the change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be unable to realize our deferred tax assets, we would make an adjustment to the deferred tax asset valuation allowance.
We establish reserves for uncertain tax positions when it is not more likely than not that the position will be sustained upon challenge. When facts and circumstances change, we adjust these reserves through our provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any related underpayment of income tax, such amounts have been accrued and are classified as a component of income tax expense.
New Accounting Principles
For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 - Summary of Significant Accounting Policies and practices to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item 7A.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 185) 24
Consolidated Balance Sheets as of December 31, 2023 and 2022 26
Notes to Consolidated Financial Statements 32
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Team, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Team, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of accounting for income taxes
As discussed in Note 1 and Note 10 to the consolidated financial statements, the Company recognized $4.5 million of deferred tax liabilities, net as of December 31, 2023. The Company’s provision for income taxes from continuing operations was $4.6 million for the year ended December 31, 2023. The Company conducts business globally and consequently is subject to U.S. federal, state, and foreign income taxes in the jurisdictions in which it operates. The Company exercises judgment in the application of complex tax regulations in multiple jurisdictions.
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We identified the evaluation of accounting for income taxes as a critical audit matter. Evaluating the Company’s application of current tax regulations and the impact of those regulations on the U.S. federal tax provision required complex auditor judgment and the use of tax professionals with specialized skills.
The following are the primary procedures we performed to address this critical audit matter. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the Company’s analyses over the application of current tax regulations and the Company’s interpretation of tax regulations.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
March 7, 2024
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TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 65,992 65,679
Defined benefit pension asset 4,323 398
Non-current deferred tax asset 1,225 375
LIABILITIES AND EQUITY
Current liabilities:
Current portion of operating lease obligations 14,232 13,823
Long-term debt and finance lease obligations 306,214 4,942
Commitments and contingencies
Shareholders' Equity:
Preferred stock, 500,000 shares authorized, none issued — —
Accumulated other comprehensive loss (36,932) (38,997)
Total liabilities and shareholders' equity $ 565,744 $ 616,645
See accompanying notes to consolidated financial statements.
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TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Twelve Months EndedDecember 31,
Restructuring and other related charges, net — 16
Other income (expense), net (1,102) 8,156
Provision for income taxes (see Note 10) (4,578) (3,306)
Net loss from continuing operations $ (75,722) $ (150,087)
Discontinued operations:
Net income from discontinued operations, net of income tax — 220,166
Basic net income (loss) per common share:
Loss from continuing operations (17.32) (35.85)
Income from discontinued operations — 52.58
Weighted-average number of shares outstanding:
See accompanying notes to consolidated financial statements.
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TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Twelve Months EndedDecember 31,
Other comprehensive income (loss) before tax:
Foreign currency translation adjustment 3,006 (6,589)
Defined benefit pension plans:
Net actuarial loss arising during period (883) (6,632)
Amortization of prior service cost 31 31
Amortization of net actuarial loss 285 —
Other comprehensive income (loss), before tax 2,439 (13,190)
Other comprehensive income (loss), net of tax 2,065 (12,265)
Total comprehensive income (loss) $ (73,657) $ 57,814
See accompanying notes to consolidated financial statements.
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TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Foreign currency translation adjustment, net of tax — — — — (6,589) (6,589)
Defined benefit pension plans, net of tax — — — — (5,676) (5,676)
Non-cash compensation — — 247 — — 247
Accounting pronouncement adjustment — — (5,650) 3,826 — (1,824)
Foreign currency translation adjustment, net of tax — — — — 3,028 3,028
Defined benefit pension plans, net of tax — — — — (963) (963)
Non-cash compensation — — 1,590 — — 1,590
Net settlement of vested stock awards 72 12 (109) — — (97)
See accompanying notes to consolidated financial statements.
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TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS1
(in thousands)
Twelve Months EndedDecember 31,
Cash flows from operating activities:
Write-off of deferred loan costs — 2,748
Gain on sale of Quest Integrity — (203,351)
Write-off of software cost 629 —
Amortization of debt issuance costs and debt discounts 18,725 35,509
Allowance for credit losses 267 402
Gain on asset disposal (231) (4,721)
Non-cash compensation cost 1,590 247
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (7,527) (3,201)
Net cash used in operating activities (10,986) (57,935)
Cash flows from investing activities:
Net proceeds from sale of discontinued operations — 260,841
Proceeds from disposal of assets 414 7,205
Net cash (used in) provided by investing activities (10,016) 243,356
Cash flows from financing activities:
Borrowings under 2020 ABL Facility, gross — 10,300
Payments under 2020 ABL Facility, gross — (72,300)
Borrowings under Corre Delayed Draw Term Loan, gross — 35,000
Borrowings under Corre Incremental Term Loan 47,500 —
Payments under Corre Incremental Term Loan (319) —
Repayments of Convertible Debt (41,161) —
Borrowings under ME/RE Loans 27,398 —
Payments under ME/RE Loans (1,575) —
Payments for debt issuance costs (9,102) (13,709)
Issuance of common stock, net of issuance costs — 9,639
Taxes paid related to net share settlement of share-based awards — 16
Net cash used in financing activities (1,899) (191,971)
Effect of exchange rate changes on cash 253 (690)
Net decrease in cash and cash equivalents (22,648) (7,240)
Cash and cash equivalents at beginning of period 58,075 65,315
Cash and cash equivalents at end of period $ 35,427 $ 58,075
1Consolidated statement of cash flows for the year ended December 31, 2022 includes cash flows from discontinued operations. See Note 2.
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Supplemental disclosure of cash flow information:
Cash paid (refunded) during the year for:
See accompanying notes to consolidated financial statements.
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TEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description of Business. Unless otherwise indicated, the terms “we”, “our” and “us” are used in this report to refer to either Team, Inc., to one or more of our consolidated subsidiaries, or to all of them taken as a whole.
We are a global, leading provider of specialty industrial services offering clients access to a full suite of conventional, specialized, and proprietary mechanical, heat-treating, and inspection services. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability, and operational efficiency for our clients’ most critical assets. We conduct operations in two segments: Inspection and Heat Treating (“IHT”) and Mechanical Services (“MS”). Through the capabilities and resources in these two segments, we believe that we are uniquely qualified to provide integrated solutions involving: 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 we are unique in our ability to provide these 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 conventional and advanced non-destructive testing services primarily for the process, pipeline and power sectors, pipeline integrity management services, and field heat treating services, 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. In addition, IHT provides comprehensive non-destructive testing services and metallurgical and chemical processing services to the aerospace industry, covering a range of components including finished machined and in-service components. IHT also provides advanced digital imaging including remote digital video imaging.
MS provides solutions designed to serve clients’ unique needs during both the operational (onstream) and off-line states of their assets. Our onstream services include our range of standard to custom-engineered leak repair and composite solutions; emissions control and compliance; hot tapping and line stopping; and on-line valve insertion solutions, which are delivered while assets are in an operational condition, which maximizes client production time. Asset shutdowns can be planned, such as a turnaround maintenance event, or unplanned, such as those due to component failure or equipment breakdowns. Our specialty maintenance, turnaround and outage services are designed to minimize client downtime and are primarily delivered while assets are off-line and often through the use of cross-certified technicians, whose multi-craft capabilities deliver the production needed to achieve tight time schedules. These critical services include on-site field machining; bolted-joint integrity; vapor barrier plug testing; and valve management solutions.
We market our services to companies in a diverse array of heavy industries which include:
•Energy (refining, power, renewables, nuclear, offshore oil and gas and liquefied natural gas);
•Manufacturing and Process (chemical, petrochemical, pulp and paper industries, automotive and mining);
•Midstream (valves, terminals and storage, and pipeline);
•Public Infrastructure (construction and building, roads, dams, amusement parks, bridges, ports, and railways); and
•Aerospace and Defense.
Discontinued Operations. On November 1, 2022, we completed the sale of all of the issued and outstanding equity interests of our wholly-owned subsidiary, TQ Acquisition Inc., a Texas corporation (“TQ Acquisition”), to Baker Hughes Holdings LLC (“Baker Hughes”) for an aggregate purchase price of approximately $279.0 million, after certain post-closing adjustments (the “Quest Integrity Transaction”), pursuant to that certain Equity Purchase Agreement by and among us and Baker Hughes, dated as of August 14, 2022 (the “Sale Agreement”). TQ Acquisition and its subsidiaries constituted Quest Integrity, which provided integrity and reliability management solutions for the process, pipeline and power sectors.
The criteria for reporting Quest Integrity as a discontinued operation were met during the third quarter of 2022 pursuant to the Sale Agreement and, as such, the prior year amounts related to Quest Integrity are presented as discontinued operations. Unless otherwise specified, the financial information and discussion in this Form 10-K are based on our continuing operations (IHT and MS segments) and exclude any results of our discontinued operations (Quest Integrity). Refer to Note 2 - Discontinued Operations for additional details.
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Basis for presentation. These consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods.
Consolidation. The consolidated financial statements include the accounts of our subsidiaries where we have control over operating and financial policies. All material intercompany accounts and transactions have been eliminated in consolidation.
Related Party Transactions. A related party transaction is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the Company or any of its subsidiaries is a participant, and (2) any Related Party (as defined herein) has or will have a direct or indirect material interest.
A related party is any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members include a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.
Use of estimates. Our accounting policies conform to GAAP in the United States. The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect our reported financial position and results of operations. We review significant estimates and judgments affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Estimates and judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements. Estimates and judgments are used in, among other things, (1) valuation of acquisition related tangible and intangible assets and assessments of all long-lived assets for possible impairment, (2) estimating various factors used to accrue liabilities for workers’ compensation, auto, medical and general liability, (3) establishing an allowance for uncollectible accounts receivable, (4) estimating the useful lives of our assets, (5) assessing future tax exposure and the realization of tax assets, (6) selecting assumptions used in the measurement of costs and liabilities associated with defined benefit pension plans, (7) assessments of fair value and (8) managing our foreign currency risk in foreign operations. Our most significant accounting policies are described below.
Revenue recognition. In accordance with ASC Topic 606, Revenue from Contracts with Customers, (“ASC 606”), 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.
Most 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 customer contract and excludes amounts collected on behalf of third parties, such as taxes assessed by governmental authorities. Generally, in contracts where the amount of consideration is variable, the amount is determinable each period based on our right to invoice (as discussed further below) the customer for services performed to date. 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.
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 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
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contracts, as they are short term in nature, we recognize revenue as jobs are completed or 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.
The timing of revenue recognition, billings, and cash collections results in the recognition of 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 Note 4 - Accounts Receivable for additional information on our trade receivables, unbilled revenue and the allowance for credit losses. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer. Amounts may not exceed their net realizable value. Contract assets are included in “Prepaid expenses and other current assets” on our consolidated balance sheet. 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. We did not have a material amount of contract assets or contract liabilities as of December 31, 2023 and 2022.
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. Costs to fulfill a contract are recorded as assets if they relate directly to a contract or a specific anticipated contract, the costs are incurred to generate or enhance resources that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered. Costs to fulfill a contract recognized as assets primarily consist of labor and material costs and generally relate to engineering and set-up costs incurred prior to when the satisfaction of performance obligations begins. Assets recognized for costs to fulfill a contract are included in the “Prepaid expenses and other current assets” line of the consolidated balance sheet and were not material as of December 31, 2023 and 2022. Such assets are recognized as expenses as we transfer the related goods or services to the customer and recognize the related revenue. All other costs to fulfill a contract are expensed as incurred.
Fair value of financial instruments. As defined in Financial Accounting Standards Board (“FASB”) ASC 820 Fair Value Measurements and Disclosure (“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.
Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable, pension assets and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. For additional information regarding our pension assets, see Note 15 - Employee Benefit plan. The fair value of our 2022 ABL Credit Facility, ME/RE Loans, and Term Loans under the A&R Term Loan Credit Agreement are representative of the carrying value based upon the variable terms and management’s opinion that the current rates available to us with the same maturity and security structure are equivalent to that of the debt. The Notes were fully paid off on August 1, 2023, however, the fair value of the Notes as of December 31, 2022 was $37.5 million (inclusive of the fair value of the conversion option) and are a “Level 2” measurement, determined based on the observed trading price of these instruments. For additional information regarding our debt obligations, see Note 11 - Debt.
Cash and cash equivalents. Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid short-term investments with original maturities of three months or less.
Inventory. Except for certain inventories that are valued based on standard cost, we use the first-in, first-out method to value our inventory. Inventory includes material, labor, and certain fixed overhead costs. Inventory is stated at the lower of cost and net realizable value. Inventory quantities on hand are reviewed periodically and carrying value is reduced to net realizable value for inventories for which their cost exceeds their utility. The cost of inventories consumed or products sold are included in operating expenses.
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Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Leasehold improvements are amortized over the shorter of their respective useful life or the lease term. Depreciation and amortization of assets are computed by the straight-line method over the following estimated useful lives of the assets:
Classification Useful Life
Buildings 20-40 years
Enterprise Resource Planning (“ERP”) System 15 years
Leasehold improvements 2-15 years
Machinery and equipment 2-12 years
Furniture and fixtures 2-10 years
Computers and computer software 2-5 years
Automobiles 2-5 years
Intangible assets. Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with ASC 360-10 Impairment or Disposal of Long-Lived Assets (“ASC 360”).
Impairment of Long-lived Assets. We review our property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the asset in that asset class; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected undiscounted cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted cash flows. There were no impairment charges in 2023 or 2022.
Income taxes. We follow the guidance of ASC 740 Income Taxes (“ASC 740”), which requires that we use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant temporary differences. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax payable or receivable and related tax expense or benefit together with assessing temporary differences resulting from differing treatment of certain items such as depreciation for tax and accounting purposes. These differences can result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.
In accordance with ASC 740, we are required to assess the likelihood that our deferred tax assets will be realized and, to the extent we believe it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized, we must establish a valuation allowance. We consider all available evidence to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes the reversal of existing taxable temporary differences, taxable income in prior carryback years if carryback is permitted by tax law, information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance and tax planning strategies.
We regularly assess whether it is more likely than not that we will realize the deferred tax assets in the jurisdictions we operate in. We believe future sources of taxable income, reversing temporary differences and other tax planning strategies will be sufficient to realize the deferred tax assets for which no valuation allowance has been established. Our valuation allowance primarily relates to net operating loss carryforwards. While we have considered these factors in assessing the need for additional valuation allowance, there is no assurance that additional valuation allowance would not need to be established in the future if information about future years change. Any changes in valuation allowance would impact our income tax provision and net income (loss) in the period in which such a determination is made. As of December 31, 2023, our deferred tax assets were $111.5 million, less a valuation allowance of $93.7 million. As of December 31, 2023, our deferred tax liabilities were $22.4 million.
Significant judgment is required in assessing the timing and amounts of deductible and taxable items for tax purposes. In accordance with ASC 740-10, we establish reserves for uncertain tax positions when, despite our belief that our tax return positions are supportable, we believe that it is not more likely than not that the position will be sustained upon challenge. When facts and circumstances change, we adjust these reserves through our provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any related underpayment of income tax, such amounts have been accrued
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and are classified as a component of income tax expense (benefit) in our consolidated statements of operations. As of December 31, 2023, our gross unrecognized tax benefits, excluding penalties and interest related to uncertain tax positions, were $1.5 million.
Workers’ compensation, auto, medical and general liability accruals. In accordance with ASC 450 Contingencies (“ASC 450”), we record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review our loss contingencies on an ongoing basis to ensure that we have appropriate reserves recorded on our consolidated balance sheet. These reserves are based on historical experience with claims incurred but not received, estimates and judgments made by us, applicable insurance coverage for litigation matters, and are adjusted as circumstances warrant. For workers’ compensation, our retention is $1.0 million and our automobile liability retention is currently $2.0 million. For professional liability claims, our retention is $2.0 million. For general liability claims, we have a retention of $6.0 million. For environmental liability claims, our retention is $1.0 million. We maintain insurance for claims that exceed such retention limits. In 2023, our health care plan for U.S. employees was self-funded and administered by a third party. We purchased appropriate stop-loss coverage for self-funded insurance in 2023. We moved our U.S. employees to a fully funded healthcare policy in 2024 and no longer self-fund our health care plan for U.S. employees. Our insurance is subject to terms, conditions, limitations, and exclusions that may not fully compensate us for all losses. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in our plans or intentions, or the outcome of legal proceedings, settlements, or other factors. If different estimates and judgments were applied with respect to these matters, it is likely that reserves would be recorded for different amounts.
Accounts receivable and Allowance for credit losses. In the ordinary course of business, a portion of our accounts receivable are not collected due to billing disputes, customer bankruptcies or other various reasons. We establish an allowance to account for those accounts receivable that we estimate will eventually be deemed uncollectible. The allowance for credit losses is based on a combination of our historical experience and our review of long outstanding accounts receivable.
We measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This 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 in the range of 30 to 90 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, the longer a receivable is outstanding the higher the percentage of the outstanding balance is reported 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: (i) the 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.
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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.
Concentration of credit risk. No single customer accounted for more than 10% of consolidated revenues during the year ended December 31, 2023 or 2022.
Accounting for Warrants. We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance.
As of December 31, 2023 and 2022, we had the following warrants:
•Equity-classified warrants issued in connection with our APSC Term Loan (“APSC Warrants”), and
•Equity-classified warrants issued in connection with our Subordinated Term Loan Credit Agreement (“Corre Warrants”).
The warrants were accounted for as a component of additional paid-in capital and a debt warrant discount (See Note 11 - Debt). The warrant discount is amortized over the term of the debt. As of December 31, 2023 and 2022, unamortized balance of warrant discount amounted to $0.2 million and $3.3 million, respectively.
Earnings (loss) per share. Basic earnings (loss) per share is computed by dividing income (loss) from continuing operations, income (loss) from discontinued operations or net income (loss) by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing income (loss) from continuing operations, income (loss) from discontinued operations or net income (loss) by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of share-based compensation using the treasury stock method and (3) for 2022, the dilutive effect of the assumed conversion of our Notes under the treasury stock method. The Notes were fully paid off on August 1, 2023.
For the years ended December 31, 2023, and 2022, 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 loss from continuing operations in those periods. Also, for 2022, the effect of our Notes was excluded from the calculation of diluted earnings (loss) per share since the conversion price exceeded the average price of our common stock during the applicable periods. For information on our Notes and our share-based compensation awards, refer to Note 11 - Debt and Note 13 -Share-Based Compensation, respectively.
Non-cash investing and financing activities. Non-cash investing and financing activities are excluded from the consolidated statements of cash flows and are as follows (in thousands):
Twelve Months EndedDecember 31,
Assets acquired under finance lease $ 1,371 $ 1,270
Also, we had $2.4 million, and $2.4 million, of accrued capital expenditures as of December 31, 2023, and 2022 respectively, which are excluded from the consolidated statements of cash flows until paid.
Foreign currency. For subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated at the exchange rates as of end of the period and revenues and expenses are translated at period average exchange rates. Translation adjustments for the asset and liability accounts are included as a separate component of accumulated other comprehensive income (loss) in the consolidated statements of shareholders’ equity. Foreign currency transaction gains and losses are included in our statements of operations.
Defined benefit pension plans. Pension benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected investment return on plan assets, mortality rates and retirement rates. These rates are reviewed annually and adjusted to reflect current conditions and are determined based on reference to yields. The expected return on plan assets is derived from detailed periodic studies, which
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include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return. Mortality and retirement rates are based on actual and anticipated plan experience. In accordance with GAAP, actual results that differ from the assumptions are accumulated and are subject to amortization over future periods and, therefore, generally affect recognized expense in future periods. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the pension obligation and future expense.
Reclassifications. Certain amounts in prior periods have been reclassified to conform to the current year presentation, including the separate presentation and reporting of discontinued operations. Such reclassifications did not have any effect on our financial condition or results of operations as previously reported.
Newly Adopted Accounting Standards
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, (“ASU 2020-04”). The guidance in ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which was issued in January 2021, provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference the London Interbank Offered Rate, (“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. On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) Deferral of the Sunset Date of Topic 848 which defers the sunset date of ASC 848, Reference Rate Reform, from December 31, 2022, to December 31, 2024. We adopted ASU 2020-04 during the year ended December 31, 2023. The adoption of ASU 2020-04 did not have a material impact on our Consolidated Financial Statements.
Accounting Standards Not Yet Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires entities to provide additional information in the rate reconciliation and additional disclosures about income taxes paid. This guidance requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. ASU 2023-09 is effective to all annual periods beginning after December 31, 2024, and is applied prospectively, while retrospective application is permitted. We are currently evaluating the effect this guidance will have on our tax disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires enhanced disclosures regarding significant segment expenses and other segment items. The guidance requires public entities to provide in interim periods all disclosures about a reportable segment's profit or loss and assets that are currently required annually. ASU 2023-07 is effective to all fiscal years beginning after December 15, 2023 and for interim periods beginning after December 15, 2024, and is applied retrospectively to all periods presented. We are evaluating the effect this guidance will have on our segment disclosures.
2. DISCONTINUED OPERATIONS
On November 1, 2022, we completed the Quest Integrity Transaction with Baker Hughes for an aggregate purchase price of approximately $279.0 million, after certain post-closing adjustments, in accordance with the Sale Agreement. We used approximately $238.0 million of the net proceeds from the sale of Quest Integrity to pay down $225.0 million of our term loan debt, and to pay certain fees associated with that repayment and related accrued interest, with the remainder reserved for general corporate purposes, thereby reducing our future debt service obligations and leverage, and improving our liquidity. Quest Integrity previously represented a reportable segment. Following the completion of the Quest Integrity Transaction, we now operate in two segments, IHT and MS.
Our consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our consolidated statements of comprehensive income (loss), statements of shareholders’ equity and statements of cash flows combine continuing and discontinued operations. A summary of financial information related to our discontinued operations is presented in the tables below.
The table below represents major line items constituting net income (loss) from discontinued operations to the after-tax income from discontinued operations (in thousands):
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Twelve Months Ended
December 31,
Operating expenses (45,044)
Selling, general and administrative expenses (32,230)
Interest expense, net (108)
Other expense, net (4,390)
Income before income taxes 19,646
Gain on sale of Quest transaction 203,351
Income before income taxes 222,997
Provision for income taxes (2,831)
Net income from discontinued operations $ 220,166
We completed the sale of Quest Integrity on November 1, 2022. As a result, there were no assets or liabilities in discontinued operations as of December 31, 2023 or 2022.
The following table presents the depreciation and amortization and capital expenditures of Quest Integrity (in thousands):
Twelve Months Ended
December 31,
Cash flows provided by operating activities of discontinued operations:
Depreciation and amortization $ 1,141
Cash flows provided by investing activities of discontinued operations:
Capital expenditures $ 4,146
3. REVENUE
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):
Twelve Months Ended December 31, 2023
United States and Canada Other Countries Total
Revenue:
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Twelve Months Ended December 31, 2022
United States and Canada Other Countries Total
Revenue:
Twelve Months Ended December 31, 2023
Revenue:
Twelve Months Ended December 31, 2022
Revenue:
For additional information on our reportable operating segments and geographic information, refer to Note 17 - Segment and Geographic Disclosures.
Remaining performance obligations. As permitted by ASC 606, Revenue from Contracts with Customers, we have elected not to disclose information about remaining performance obligations where (i) the performance obligation is part of a contract that has an original expected duration of one year or less or (ii) when we recognize revenue from the satisfaction of the performance obligation in accordance with the right-to-invoice 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. As most of our contracts with customers are short-term in nature and billed on a time and material basis, there were no material amounts of remaining performance obligations as of December 31, 2023 and 2022.
4. ACCOUNTS RECEIVABLE
A summary of accounts receivable as of December 31, 2023 and 2022 is as follows (in thousands):
December 31,
Allowance for credit losses (3,738) (5,262)
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The following table shows a rollforward of the allowance for credit losses (in thousands):
Twelve Months EndedDecember 31,
Balance at beginning of period $ 5,262 $ 7,843
Provision for expected credit losses 1,680 1,059
Foreign exchange effects (6) (47)
5. INVENTORY
A summary of inventory as of December 31, 2023 and 2022 is as follows (in thousands):
December 31,
6. PREPAID AND OTHER CURRENT ASSETS
A summary of prepaid expenses and other current assets as of December 31, 2023 and 2022 is as follows (in thousands):
December 31,
The insurance receivables relate to receivables from our third-party insurance providers for legal claims that are recorded in other accrued liabilities, refer to Note 9 - Other Accrued Liabilities. These receivables will be covered from our third-party insurance providers for litigation matters that have been settled or are pending settlements and where the deductibles have been satisfied. The prepaid expenses primarily relate to prepaid insurance and other expenses that have been paid in advance of the coverage period.
As of December 31, 2023 and 2022, other current assets include deferred financing fees of $1.8 million each in connection with that certain Substitute Insurance Reimbursement Facility Agreement (as amended); other accounts receivable of $4.4 million and $2.4 million, respectively, primarily related to insurance rebates; and software implementation cost (net of amortization) of $1.7 million and $2.1 million, respectively. As of December 31, 2022, the other current assets also included deferred financing costs of $3.1 million due to all long-term debt then being classified as current.
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7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of December 31, 2023 and 2022 is as follows (in thousands):
December 31,
Capitalized ERP system development costs 45,903 45,917
Accumulated depreciation and amortization (310,775) (293,256)
Included in the table above are assets under finance leases of $8.5 million and $7.4 million and related accumulated amortization of $3.3 million and $2.3 million as of December 31, 2023 and 2022, respectively. Depreciation expense for the years ended December 31, 2023 and 2022 was $21.8 million, and $22.9 million respectively.
Assets sold and disposed of during the twelve months ended December 31, 2023 and 2022 had a carrying value of $0.2 million and $2.5 million, respectively, resulting in a gain on sale of $0.2 million and $4.2 million, respectively. The assets sold for the twelve months ended December 31, 2023 consisted of $0.1 million in machinery and equipment and $0.1 million primarily in leasehold improvements. The assets sold for the twelve months ended December 31, 2022 primarily consisted of $1.3 million in land, $0.9 million in buildings and $0.3 million in machinery and equipment.
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8. INTANGIBLE ASSETS
A summary of intangible assets as of December 31, 2023 and 2022 is as follows (in thousands):
GrossCarryingAmount AccumulatedAmortization NetCarryingAmount
GrossCarryingAmount AccumulatedAmortization NetCarryingAmount
Amortization expense on intangible assets for the years ended December 31, 2023 and 2022 was $12.7 million, and $12.9 million, respectively. Amortization expense for intangible assets is forecasted to be approximately $12.4 million, $12.4 million, $12.0 million, $11.3 million, and $6.4 million in 2024, 2025, 2026, 2027 and 2028, respectively.
The weighted-average amortization period for intangible assets subject to amortization was 13.8 years and 13.7 years as of December 31, 2023 and 2022, respectively. The weighted-average amortization period as of December 31, 2023 is 13.8 years for customer relationships, 13.6 years for trade name and 10.0 years for technology.
9. OTHER ACCRUED LIABILITIES
A summary of other accrued liabilities as of December 31, 2023 and 2022 is as follows (in thousands):
December 31,
Payroll and other compensation expenses $ 39,943 $ 48,507
Property, sales and other non-income related taxes 7,248 7,348
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Under the Coronavirus Aid, Relief and Economic Security Act we qualified to defer the employer portion of social security taxes incurred through the end of calendar year 2020. As of December 31, 2022, we had $6.5 million outstanding under this program, included in Payroll and other compensation expenses in the above table and paid in January 2023. We also deferred certain payroll related expenses and tax payments under other foreign government programs. We had $1.6 million and $2.1 million as of December 31, 2023 and 2022, respectively, related to these foreign deferrals. Legal and professional accruals include accruals for legal and professional fees as well as accrued legal claims, refer to Note 16 - Commitments and Contingencies for legal claims information. Certain legal claims are covered by our third-party insurance providers and the related insurance receivables for these claims are recorded in prepaid expenses and other current assets, refer to Note 6 - Prepaid and Other Current Assets. Payroll and other compensation expenses include all payroll related accruals including, among others, accrued vacation, severance, and bonuses. Insurance accruals primarily relate to accrued medical and workers compensation costs. Property, sales and other non-income related taxes includes accruals for items such as sales and use tax, property tax and other related tax accruals. Accrued interest relates to the interest accrued on our long-term debt. Other accruals include various business accruals.
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10. INCOME TAXES
For the year ended December 31, 2023, our income tax provision resulted in an effective tax rate of 6.4%. For the year ended December 31, 2022, our income tax provision resulted in an effective tax rate of 2.3%. Our income tax provision for the year ended December 31, 2023 was $4.6 million, our income tax provision for December 31, 2022 was $3.3 million and includes federal, state and foreign taxes.
The components of our tax provision and benefit on continuing operations were as follows (in thousands):
Current Deferred Total
Twelve months ended December 31, 2023:
Twelve months ended December 31, 2022:
U.S. Federal $ (211) $ — $ (211)
The components of pre-tax income (loss) from continuing operations for the years ended December 31, 2023 and 2022 were as follows (in thousands):
Twelve Months EndedDecember 31,
Pre-tax loss from continuing operations $ (71,144) $ (146,781)
The income tax provision in 2023 and 2022 attributable to the loss from continuing operations, respectively, differed from the amounts computed by applying the U.S. federal income tax rate 21% in 2023 and 2022, to pre-tax loss from continuing operations as a result of the following (in thousands):
Twelve Months EndedDecember 31,
Pre-tax loss from continuing operations $ (71,144) $ (146,781)
Computed income taxes at statutory rate (14,940) (30,824)
State income taxes, net of federal benefit (200) 395
Foreign tax rate differential 1,229 701
Deferred taxes on investment in foreign subsidiaries 305 —
Non-deductible expenses 246 118
Prior year tax adjustments (299) 7
Total expense for income tax on continuing operations $ 4,578 $ 3,306
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
December 31,
Deferred tax assets:
Accrued compensation and benefits $ 4,710 $ 7,630
Share based compensation 525 258
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries (2,960) (3,581)
Net deferred tax liability $ (4,517) $ (3,286)
We successfully negotiated amendments to existing debt instruments and entered into new agreements with lenders. These actions removed the substantial doubt about the Company's ability to continue as a going concern that previously existed and disclosed in prior periods. As of December 31, 2023, a valuation allowance of $93.7 million was recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized, primarily attributable to the domestic operations. However, on the basis of the Company's ability to continue as a going concern, we evaluated all available evidence, both positive and negative and determined that sufficient future taxable income will be generated to allow for the realization of the existing deferred tax assets in certain foreign jurisdictions in which the we operate. As a result, we were able to release $2.9 million of valuation allowance in the current year, primarily attributable to our UK and Australia subsidiaries. These benefits were offset by an increase in valuation allowance of $23.1 million on the expected realizability of our deferred tax assets for federal and state tax net operating loss carryforwards. A significant factor of negative evidence evaluated for the domestic jurisdiction was the cumulative pre-tax loss incurred over the three-year period ended December 31, 2023.
As of December 31, 2023, we had net operating loss carryforwards for U.S. federal income tax purposes of $137.8 million, all of which have an indefinite carryforward period. These carryforwards are available, subject to certain limitations such as mentioned above, to offset future taxable income. Further, we have state net operating loss carryforwards of $210.8 million with $177.2 million expiring on various dates through 2043 and $33.5 million with an indefinite carryforward period.
As of December 31, 2023, we had interest expense carryforward for U.S. income tax purposes of $174.9 million. The entire $174.9 million has an indefinite carryforward period. These carryforwards are available, subject to certain limitations, to offset future taxable income.
As of December 31, 2023, we had $2.9 million of tax credits that will expire on various dates through 2037 if not utilized.
As of December 31, 2023, we had foreign net operating loss carryforwards totaling $16.7 million. Of this amount, $0.2 million will expire in various dates through 2033 and $16.5 million has an unlimited carryforward period.
As of December 31, 2023, none of our undistributed earnings of foreign operations were considered to be permanently reinvested overseas. As of December 31, 2023, the deferred tax liability related to undistributed earnings of foreign subsidiaries was $2.9 million.
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As of December 31, 2023, $2.3 million of unrecognized tax benefits would affect our effective tax rate. We estimate the uncertain tax benefits that may be recognized within the next twelve months will not be material. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
We file income tax returns in the U.S. federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2016. We are currently under audit in one of the states in which we do substantial business. As of December 31, 2023, we recorded a $0.9 million tax liability in our uncertain positions related to this audit due to retroactive changes included in final regulations issued by the state. Certain Dutch entities were also under audit. We did not anticipate any material adjustments related to these examinations.
Periodic examinations of our tax filings occur by the taxing authorities for the jurisdictions in which we conduct business. These examinations review the significant positions taken on our returns, including the timing and amount of income and deductions reported, as well as the allocation of income among multiple taxing jurisdictions. We do not expect any material adjustments to result from positions taken on our income tax returns.
The following table summarizes reconciliation of gross unrecognized tax benefits, excluding penalties and interest, for the year ended December 31, 2023 and 2022 (in thousands):
Twelve Months EndedDecember 31,
Unrecognized tax benefits - January 1 $ 1,097 $ 1,285
Additions based on tax positions related to prior years 399 350
Disposition of uncertain tax positions of discontinued operations — (426)
Unrecognized tax benefits - December 31 $ 1,452 $ 1,097
We have recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of December 31, 2023 and 2022, the total amount of accrued interest and penalties related to unrecognized tax benefits was $0.8 million and $0.6 million, respectively. There was approximately $0.2 million and $0.0 million, respectively, of interest and penalties related to unrecognized tax benefits that was recorded in income tax expense for the period ended December 31, 2023 and 2022.
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11. DEBT
As of December 31, 2023 and 2022, our total long-term debt and finance lease obligations are summarized as follows (in thousands):
December 31,
Incremental Term Loan1 38,758 —
_________________
1 Comprised of principal amount outstanding, less unamortized discount and issuance costs. See below for additional information.
2 For information on our finance lease obligations, see Note 12 - Leases.
The following table summarizes scheduled maturities of our debt for the years succeeding December 31, 2023 (in thousands):
December 31
Thereafter —
2022 ABL Credit Facility
On February 11, 2022, we entered into a credit agreement, with the lender parties thereto, and Eclipse Business Capital, LLC, a Delaware limited liability company, as agent, (the “ABL Agent”) (such agreement, as amended by Amendment No. 1 dated as of May 6, 2022, Amendment No. 2 dated as of November 1, 2022, Amendment No.3 dated June 16, 2023, and Amendment No.4 dated March 6, 2024, and as further amended from time to time, the “2022 ABL Credit Agreement”). Available funding commitments to us under the 2022 ABL Credit Agreement, subject to certain conditions, include a revolving credit line in an amount of up to $130.0 million to be provided by certain affiliates of the ABL Agent (the “Revolving Credit Loans”), with a $35.0 million sublimit for swingline borrowings, a $26.0 million sublimit for issuances of letters of credit, and an incremental delayed draw term loan of up to $35.0 million (the “Delayed Draw Term Loan”) provided by Corre Partners Management, LLC and certain of its affiliates (collectively, the “2022 ABL Credit Facility”). The proceeds from the 2022 ABL Credit Facility were used to, among other things, pay off and terminate the 2020 ABL Facility (asset-based credit agreement with Citibank, N.A. for available borrowings up to $150.0 million entered on December 18, 2020).
Our obligations under the 2022 ABL Credit Agreement are guaranteed by certain of our direct and indirect subsidiaries referenced below as the “ABL Guarantors” and, together with the Company, the “ABL Loan Parties.” Our obligations under the 2022 ABL Credit Facility are secured on a first priority basis by, among other things, accounts receivable, deposit accounts, securities accounts and inventory of the ABL Loan Parties (collectively, the “ABL Priority Collateral”) and are secured on a lower priority basis by substantially all of the other assets of the ABL Loan Parties, subject to the terms of the Intercreditor Agreement (as defined below). Availability under the revolving credit line is based on a percentage of the value of qualifying accounts receivable and inventory, reduced by certain reserves.
The terms of the 2022 ABL Credit Facility are described in the table below (dollar amounts are presented in thousands):
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Revolving Credit Loans Delayed Draw Term Loan
Actual interest rate:
Interest payments monthly monthly
Cash paid for interest
Unamortized balance of deferred financing cost
The “applicable margin” in the table above is defined as a rate of 3.15%, 3.40% or 3.65% for Base Rate Loans with a 2.00% base rate floor and a rate of 4.15%, 4.40% or 4.65% for Adjusted Term SOFR Loans with a 1.00% SOFR floor, in each case depending on the amount of EBITDA (as defined in ABL Amendment No. 3 to the 2022 ABL Credit Agreement) as of the most recent measurement period as reported in a monthly compliance certificate. Base rate is used when SOFR (or LIBOR previously) is not available. The fee for undrawn revolving amounts is 0.50%.
We may make voluntary prepayments of the loans under the 2022 ABL Credit Facility from time to time, subject, in the case of the Delayed Draw Term Loan, to certain conditions. Mandatory prepayments are also required in certain circumstances, including with respect to the Delayed Draw Term Loan, if the ratio of aggregate value of the collateral under the 2022 ABL Credit Facility to the sum of the Delayed Draw Term Loan plus revolving facility usage outstanding is less than 130%. In addition, mandatory prepayments are required for the Delayed Draw Term Loan, equal to 100% of all net cash proceeds attributable to certain European collateral realized in connection with the assets disposition.
Amounts repaid under the Revolving Credit Loans may be re-borrowed, subject to compliance with the borrowing base and the other conditions set forth in the 2022 ABL Credit Agreement. Amounts repaid under the Delayed Draw Term Loan cannot be re-borrowed. Certain permanent repayments of the 2022 ABL Credit Facility loans are subject to the payment of a premium of1.00% from June 16, 2023 until August 11, 2024, and 0.50% after August 11, 2024 until August 11, 2025. The 2022 ABL Credit Agreement contains customary conditions to borrowings and covenants, including covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of certain debt. The 2022 ABL Credit Agreement following the execution of Amendment No. 3 also requires that we will not exceed $15.0 million in unfinanced capital expenditures in any CapEx Test Period (as defined therein); provided we shall be permitted to make up to $25.0 million in unfinanced capital expenditures in any CapEx Test Period (as defined therein) if we maintain a total leverage ratio of less than or equal to 2.00 to 1.00 on a pro forma basis immediately after giving effect to each such unfinanced capital expenditure in excess of the capital expenditure limit. In addition, the 2022 ABL Credit Agreement includes customary events of default, the occurrence of which may require that we pay an additional 2.0% interest on the outstanding loans under the 2022 ABL Credit Facility and that the debt becomes payable immediately. As of December 31, 2023, we are in compliance with the covenants.
Direct and incremental costs associated with the issuance of the 2022 ABL Credit Facility were approximately $8.4 million and were capitalized as deferred financing costs. These costs were fully amortized as of June 16, 2023 due to the Maturity Reserve Trigger Date provision that was previously applicable. We incurred an additional $0.4 million of financing cost related to the existing ABL Credit Facility in connection with the ABL Amendment No. 3. These costs were capitalized and amortized on a straight-line basis over the amended term of the 2022 ABL Credit Facility.
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As of December 31, 2023, we had $78.4 million outstanding under the Revolving Credit Loans and $35.0 million outstanding under the Delayed Draw Term Loans. There were $10.2 million in outstanding letters of credit secured by these instruments, which are off-balance sheet.
ME/RE Loans
The ABL Amendment No. 3, in addition to making certain other changes to the 2022 ABL Credit Facility, provided us with $27.4 million of new term loans (the “ME/RE Loans”). Our obligations in respect of the ME/RE Loans are guaranteed by certain direct and indirect material subsidiaries of the Company (the “ABL Guarantors” and, together with the Company, the “ABL Loan Parties”). The ME/RE Loans under the 2022 ABL Credit Agreement are secured on a first priority basis by, among other things, certain real estate and machinery and equipment (the “Specified ME/RE Collateral”) and are secured on a lower priority basis by substantially all of the other assets of the ABL Loan Parties. The ME/RE Loans were drawn in full on June 16, 2023 and were used to pay off the amounts owed under the existing APSC Term Loan, discussed below.
The terms of ME/RE Loans are described in the table below (dollar amounts are presented in thousands):
Original stated interest rate SOFR + 5.75% + 0.11% credit spread adjustment
Principal payments $237 monthly
Effective interest rate
Actual interest rate
Interest payments monthly
Cash paid for interest
Unamortized balance of debt issuance cost $(1,762)
Net carrying balance $24,061
_________________
1 The effective interest rate as of December 31, 2023, consisted of a 11.21% variable interest rate paid in cash and an additional 6.19% due to amortization of the related debt issuance costs.
We may make voluntary prepayments of the ME/RE Loans from time to time. Mandatory prepayments are required in certain instances when sales of assets are completed that are related to the Specified ME/RE Collateral, and with annual excess cash flow (as defined in the 2022 ABL Credit Agreement), subject to certain prepayment premiums (subject to certain exceptions), plus accrued and unpaid interest. The remaining unpaid principal balance of the ME/RE loans at maturity will be $21.3 million. The ME/RE Loans are governed by the 2022 ABL Credit Agreement and the same restrictive covenants described above under 2022 ABL Credit Facility apply.
Direct and incremental costs associated with the issuance of the ME/RE Loans in connection with ABL Amendment No. 3 were approximately $2.2 million and were deferred and presented as a direct deduction from the carrying amount of the related debt and are amortized over the term of the ME/RE Loans.
APSC Term Loan
On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding APSC Term Loan (defined below) balance of $35.5 million plus the applicable prepayment premium, resulting in a loss on debt extinguishment of $1.6 million.
In the previous years, we entered into that certain Term Loan Credit Agreement, dated December 18, 2020, (as amended, the “APSC Term Loan Credit Agreement”) with Atlantic Park Strategic Capital Fund, L.P., as agent (“APSC”), pursuant to which we borrowed $250.0 million (the “APSC Term Loan”).
The terms of APSC Term Loan are described in the table below (dollar amounts are presented in thousands):
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Original stated interest rate variable
Effective interest rate1
Actual interest rate:
Interest payments Quarterly
Cash paid for interest
PIK interest added to principal
Unamortized balance of debt issuance cost $(3,948)
Net carrying balance $31,562
1 The effective interest rate as of June 16, 2023, consisted of a 12.63% variable interest rate paid in cash and an additional 25.98% due to the acceleration of amortization of the related debt issuance costs. The effective interest rate as of December 31, 2022, consisted of a 11.73% variable interest rate paid in cash and an additional 26.26% due to the acceleration of amortization of the related debt issuance costs.
Amended and Restated Term Loan Credit Agreement - Uptiered Loan / Subordinated Term Loan and Incremental Term Loan
On November 9, 2021, we entered into a credit agreement (as amended by Amendment No. 1 dated as of November 30, 2021, Amendment No. 2 dated as of December 6, 2021, Amendment No. 3 dated as of December 7, 2021, Amendment No. 4 dated as of December 8, 2021, Amendment No. 5 dated as of February 11, 2022, Amendment No. 6 dated as of May 6, 2022, Amendment No. 7 dated as of June 28, 2022, Amendment No. 8 dated as of October 4, 2022, Amendment No. 9 dated as of November 1, 2022, Amendment No. 10 dated as of November 4, 2022, Amendment No. 11 dated as of November 21, 2022 and Amendment No. 12 dated as of March 29, 2023, the “Subordinated Term Loan Credit Agreement”) with Cantor Fitzgerald Securities, as agent, and the lenders party thereto providing for an unsecured approximately $123.1 million delayed draw subordinated term loan facility. Pursuant to the Subordinated Term Loan Credit Agreement, we borrowed $22.5 million on November 9, 2021, and an additional $27.5 million on December 8, 2021. On October 4, 2022, an additional approximately $57.0 million was added to the outstanding principal amount under the Subordinated Term Loan Credit Agreement in exchange for an equivalent amount of the Company’s senior unsecured 5.00% Convertible Senior Notes due 2023 (the “Notes”) held by Corre.
On June 16, 2023, we entered into an amendment and restatement of that certain subordinated term loan credit agreement dated as of November 9, 2021 (such agreement, as amended and restated, and as further amended by Amendment No.1 dated March 6, 2024, the “A&R Term Loan Credit Agreement”) among the Company, as borrower, the guarantors party thereto, the lenders from time-to-time party thereto and Cantor Fitzgerald Securities, as agent (the “A&R Term Loan Agent”). Additional funding commitments under the A&R Term Loan Credit Agreement, subject to certain conditions, included a $57.5 million senior secured first lien term loan (the “Incremental Term Loan”) provided by Corre and certain of its affiliates, consisting of a $37.5 million term loan tranche and a $20.0 million delayed draw tranche. Amounts outstanding under the existing subordinated term loan credit agreement (the “Uptiered Loan”) have become senior secured obligations of the Company and the A&R Term Loan Guarantors (as defined below) and are secured on a pari passu basis with the Incremental Term Loan, on the terms described below.
On July 31, 2023, $42.5 million, made up of $37.5 million of the term loan tranche and $5.0 million of the delayed draw tranche, of the $57.5 million Incremental Term Loan under the A&R Term Loan Credit Agreement was drawn down and the proceeds thereof were used to repay the Notes that matured on August 1, 2023. We borrowed an additional $5.0 million on October 6, 2023. The remaining availability of the delayed draw tranche of $10.0 million will be used, subject to certain maximum liquidity conditions, for working capital purposes.
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The Company’s obligations under the A&R Term Loan Credit Agreement are guaranteed by certain direct and indirect material subsidiaries of the Company (the “A&R Term Loan Guarantors” and, together with the Company, the “A&R Term Loan Parties”). The obligations of the A&R Term Loan Parties are secured on a second or lower priority basis by the ABL Priority Collateral and the Specified ME/RE Collateral, and on a first priority basis by substantially all of the other assets of the A&R Term Loan Parties, subject to the terms of an intercreditor agreement (the “Intercreditor Agreement”) between the A&R Term Loan Agent, the ABL Agent and the A&R Term Loan Parties, that sets forth the priorities in respect of the collateral and certain related agreements with respect thereto.
We may make voluntary prepayments of the loans under the A&R Term Loan Credit Agreement from time to time, and we are required in certain instances related to change of control, asset sales, equity issuances, non-permitted debt issuances and with annual excess cash flow (as defined in the A&R Term Loan Credit Agreement), to make mandatory prepayments of the loans under the A&R Term Loan Credit Agreement, subject to certain prepayment premiums as specified in the A&R Term Loan Credit Agreement (subject to certain exceptions), plus accrued and unpaid interest.
The A&R Term Loan Credit Agreement contains certain customary conditions to borrowings, events of default and affirmative, negative, and financial covenants (including a net leverage ratio and maximum annual capital expenditures covenant, all as described in the A&R Term Loan Credit Agreement). As of December 31, 2023, we were in compliance with the covenants.
Further, the A&R Term Loan Credit Agreement includes certain customary events of default, the occurrence of which may require an additional 2.00% interest on the outstanding loans and other obligations under the A&R Term Loan Credit Agreement and the debt may become payable immediately.
The terms of Uptiered Loan / Subordinated Term Loan and Incremental Term Loan are described in the table below (dollar amounts are presented in thousands):
Uptiered Loan / Subordinated Term Loan Incremental Term Loan
Principal payments at maturity $356 quarterly
Effective interest rate
Interest payments cash quarterly/PIK monthly quarterly
Cash paid for interest
PIK interest added to principal
Unamortized balance of debt issuance cost $(651) $(9,294)
Unamortized balance of debt issuance cost $(7,538) N/A
Net carrying balance $107,905 N/A
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1 The effective interest rate on the Uptiered Loan/Subordinated Term Loan as of December 31, 2023, consisted of a 12.00% stated interest rate paid in PIK and an additional 0.86% due to the amortization of the related debt issuance costs. The effective interest rate on the Uptiered Loan/Subordinated Term Loan as of December 31, 2022 consisted of a 12.00% stated interest rate paid in PIK and an additional 17.23% due to the acceleration of the amortization of the related debt issuance costs.
2 The effective interest rate on the Incremental Term Loan as of December 31, 2023, consisted of a 12.00% stated interest rate paid in cash and an additional 10.96% due to the amortization of the related debt issuance costs.
3 The principal balance of the Uptiered Loan / Subordinated Term Loan is made up of $22.5 million drawn on November 9, 2021, $27.5 million drawn on December 8, 2021, and $57.0 million added as part of the exchange agreement on October 4, 2022. In addition, the principal balance includes PIK interest recorded of $22.2 million and $7.4 million as of December 31, 2023 and December 31, 2022 respectively, and PIK fees of $0.9 million.
The Uptiered Loan under the A&R Term Loan Credit Agreement bears interest at an annual rate of 12.00%, PIK from June 16, 2023 through December 31, 2023, and thereafter a split between cash and PIK, with the cash portion ranging from 2.50% per annum to 12.00% per annum, and the PIK portion ranging from 9.50% per annum to 0.00% per annum, depending on the Company’s Net Leverage Ratio (as defined in the A&R Term Loan Credit Agreement). In addition, if certain minimum liquidity thresholds set forth in the A&R Term Loan Credit Agreement are not met for an applicable interest payment date, all interest in respect of the Uptiered Loan payable on such interest payment date will be PIK, irrespective of the Net Leverage Ratio at such time.
In addition, if certain conditions related to repayments in respect of the Incremental Term Loan are not met, certain additional quarterly fees (not to exceed 4 such fees) plus a 150 basis point increase to the applicable interest rate will be payable to the lenders under the A&R Term Loan Credit Agreement in cash or common stock of the Company, at the Company’s option.
Direct and incremental costs associated with the issuance of the Incremental Term Loan in connection with the A&R Term Loan Credit Agreement were approximately $10.1 million and were deferred and presented as a direct deduction from the carrying amount of the related debt and are amortized over the term of the Incremental Term Loan.
Warrants
As of December 31, 2023 and December 31, 2022, APSC Holdco II, L.P. held 500,000 warrants and certain Corre holders collectively held 500,000 warrants in each case providing for the purchase of one share of the Company’s common stock per warrant at an exercise price of $15.00. The warrants will expire on December 8, 2028. See table below for further details.
Original After 1 for 10 Reverse Stock Split (Effective date December 22, 2022)
APSC Holdco II, LP
The exercise price and the number of shares of our common stock issuable on exercise of the warrants are subject to certain antidilution adjustments, including for stock dividends, stock splits, reclassifications, noncash distributions, cash dividends, certain equity issuances and business combination transactions.
In connection with the transactions contemplated by the 2022 ABL Credit Agreement, on February 11, 2022 we entered into a common stock subscription agreement with the Corre holders, pursuant to which we issued and sold the common stock to the Corre holders. The Company, the Corre holders and APSC Holdco entered into those certain Team, Inc. Waivers of Anti-Dilution Adjustments and Cash Transaction Exercise (collectively, the “Warrant Waivers”) and agreed, among other things, (i) to irrevocably waive certain anti-dilution adjustments set forth in such Warrant in connection with the Proposed Equity Financing (as defined in the Warrant Waivers); (ii) to not exercise such Warrant, in whole or in part, if the Company determines that such exercise will cause an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (assuming, among other things, that the ownership change threshold is 47% rather than 50%); and (iii) to only exercise such Warrant in a “cashless” or “net-issue” exercise.
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Convertible Debt
On July 31, 2023, $42.5 million of the $57.5 million under the Incremental Term Loan was drawn down and the proceeds thereof were used to repay in full the remaining principal and accrued interest of the outstanding Notes on their maturity date of August 1, 2023.
Previously, on July 31, 2017, we had issued $230.0 million principal amount of Notes in a private offering to qualified institutional buyers (as defined in the Securities Act of 1933) pursuant to Rule 144A under the Securities Act (the “Offering”). Net proceeds received from the Offering were approximately $222.3 million after deducting discounts, commissions and expenses and were used to repay outstanding borrowings under a previous credit facility. In December 2020, we retired $136.9 million par value of our Notes, and on October 4, 2022, we had entered into an exchange agreement (the “Exchange Agreement”) with certain holders to exchange approximately $57.0 million of aggregate principal amount, plus accrued and unpaid PIK Interest, of the Notes for an equivalent increased principal amount of term loan under the Subordinated Term Loan Credit Agreement. Following the closing of the Exchange Agreement and Amendment No.8 to the Subordinated Term Loan Credit Agreement, we had approximately $41.2 million in aggregate principal amount of Notes outstanding.
The Notes bore 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 were originally scheduled to mature on August 1, 2023. Effective interest rate as of December 31, 2022 was 7.84%. Amortization of discount and debt issuance cost for the years ended December 31, 2023 and 2022 amounted to $0.5 million and $2.4 million, respectively.
As of December 31, 2022, the outstanding net carrying balance of the Notes was $40.7 million consisting of the principal balance of $41.2 million and unamortized discount and debt issuance cost of $0.5 million.
Cash interest paid for the years ended December 31, 2023 and 2022 amounted to $2.1 million and $2.1 million, respectively. PIK interest of $4.2 million was added to principal during 2022. There was no PIK interest in 2023.
Fair Value of Debt