Team, Inc
TEAM INC (Form: 10-Q, Received: 11/09/2017 16:54:51)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________ 
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-08604
TEAMLOGOA05.JPG
TEAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
74-1765729
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
13131 Dairy Ashford, Suite 600, Sugar Land, Texas
 
77478
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
(281) 331-6154
(Registrant’s Telephone Number, Including Area Code)
 
 
 
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
    
Accelerated filer
 
þ
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨      No   þ
The Registrant had 29,914,046 shares of common stock, par value $0.30, outstanding as of November 1, 2017 .
 


Table of Contents

INDEX
 
 
 
Page No.
 
 
 
 
 
 


1

Table of Contents

PART I—FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,681

 
$
46,216

Receivables, net of allowance of $12,709 and $7,835
281,956

 
262,773

Inventory
51,726

 
49,571

Income tax receivable
1,016

 
512

Deferred income taxes

 
16,521

Prepaid expenses and other current assets
22,542

 
25,764

Total current assets
383,921

 
401,357

Property, plant and equipment, net
203,116

 
203,130

Intangible assets, net of accumulated amortization of $50,143 and $37,309
164,159

 
176,104

Goodwill
284,680

 
355,786

Other assets, net
4,899

 
4,826

Deferred income taxes
6,715

 
6,215

Total assets
$
1,047,490

 
$
1,147,418

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$

 
$
20,000

Accounts payable
44,072

 
47,817

Other accrued liabilities
99,216

 
79,904

Total current liabilities
143,288

 
147,721

Deferred income taxes
61,546

 
93,318

Long-term debt
366,026

 
346,911

Defined benefit pension liability
18,896

 
21,239

Other long-term liabilities
4,230

 
2,592

Total liabilities
593,986

 
611,781

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, 500,000 shares authorized, none issued

 

Common stock, par value $0.30 per share, 60,000,000 shares authorized; 29,841,993 and 29,784,734 shares issued
8,951

 
8,934

Additional paid-in capital
351,167

 
336,756

Retained earnings
115,820

 
218,947

Accumulated other comprehensive loss
(22,434
)
 
(29,000
)
Total equity
453,504

 
535,637

Total liabilities and equity
$
1,047,490

 
$
1,147,418

See accompanying notes to unaudited condensed consolidated financial statements.

2


TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
285,067

 
$
289,577

 
$
883,877

 
$
876,871

Operating expenses
216,126

 
212,871

 
655,489

 
635,490

Gross margin
68,941

 
76,706

 
228,388

 
241,381

Selling, general and administrative expenses
85,179

 
80,749

 
265,557

 
236,612

Restructuring and other related charges, net
2,637

 

 
1,661

 

(Gain) loss on revaluation of contingent consideration

 

 
(1,174
)
 
2,184

Goodwill impairment loss
75,241

 

 
75,241

 

Operating income (loss)
(94,116
)
 
(4,043
)
 
(112,897
)
 
2,585

Interest expense, net
6,369

 
3,211

 
13,899

 
9,554

Write-off of deferred loan costs
1,244

 

 
1,244

 

Gain on convertible debt embedded derivative
(6,292
)
 

 
(6,292
)
 

Foreign currency (gain) loss and other
157

 
(61
)
 
515

 
(199
)
Loss from continuing operations before income taxes
(95,594
)
 
(7,193
)
 
(122,263
)
 
(6,770
)
Less: Income tax benefit
(12,066
)
 
(2,656
)
 
(18,141
)
 
(2,643
)
Loss from continuing operations
(83,528
)
 
(4,537
)
 
(104,122
)
 
(4,127
)
Income from discontinued operations, net of income tax

 
316

 

 
828

Net loss
$
(83,528
)
 
$
(4,221
)
 
$
(104,122
)
 
$
(3,299
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(2.80
)
 
$
(0.15
)
 
$
(3.49
)
 
$
(0.15
)
Discontinued operations

 
0.01

 

 
0.03

Net loss
$
(2.80
)
 
$
(0.14
)
 
$
(3.49
)
 
$
(0.12
)
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(2.80
)
 
$
(0.15
)
 
$
(3.49
)
 
$
(0.15
)
Discontinued operations

 
0.01

 

 
0.03

Net loss
$
(2.80
)
 
$
(0.14
)
 
$
(3.49
)
 
$
(0.12
)
 






See accompanying notes to unaudited condensed consolidated financial statements.

3


TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(83,528
)
 
$
(4,221
)
 
$
(104,122
)
 
$
(3,299
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
3,850

 
(1,178
)
 
10,406

 
1,872

Foreign currency hedge
(483
)
 
(104
)
 
(1,598
)
 
(347
)
Amortization of net actuarial loss on defined benefit pension plans
19

 

 
53

 

Other comprehensive income (loss), before tax
3,386

 
(1,282
)
 
8,861

 
1,525

Tax (provision) benefit attributable to other comprehensive income (loss)
(1,065
)
 
287

 
(2,295
)
 
(1,031
)
Other comprehensive income (loss), net of tax
2,321

 
(995
)
 
6,566

 
494

Total comprehensive loss
$
(81,207
)
 
$
(5,216
)
 
$
(97,556
)
 
$
(2,805
)
 
 
See accompanying notes to unaudited condensed consolidated financial statements.


4


TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:

 

Net loss
$
(104,122
)
 
$
(3,299
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
38,686

 
35,432

Write-off of deferred loan costs
1,244

 

Amortization of deferred loan costs and debt discount
1,434

 
381

Provision for doubtful accounts
6,157

 
3,242

Foreign currency loss (gain)
596

 
(197
)
Deferred income taxes
(22,107
)
 
(3,552
)
(Gain) loss on revaluation of contingent consideration
(1,174
)
 
2,184

(Gain) loss on asset disposal
(826
)
 
10

Gain on convertible debt embedded derivative
(6,292
)
 

Goodwill impairment loss
75,241

 

Non-cash compensation cost
5,846

 
6,672

Other, net
(3,052
)
 
(862
)
(Increase) decrease, net of the effect of acquisitions:
 
 
 
Receivables
(18,844
)
 
16,537

Inventory
(1,459
)
 
1,196

Prepaid expenses and other current assets
3,302

 
(6,264
)
Increase (decrease), net of the effect of acquisitions:
 
 
 
Accounts payable
(5,636
)
 
11,091

Other accrued liabilities
21,207

 
2,333

Income taxes
(366
)
 
(4,259
)
Net cash (used in) provided by operating activities
(10,165
)
 
60,645

Cash flows used in investing activities:

 

Capital expenditures
(26,541
)
 
(35,865
)
Business acquisitions, net of cash acquired

 
(48,382
)
Change in restricted cash

 
5,000

Proceeds from sale of assets
2,559

 
3,717

Other
(519
)
 
666

Net cash used in investing activities
(24,501
)
 
(74,864
)
Cash flows from financing activities:

 

Net borrowings (payments) on Credit Facility
(37,386
)
 
31,043

Payments under term loan
(170,000
)
 
(15,000
)
Issuance of convertible debt, net of issuance costs
222,311

 

Deferred consideration payments

 
(694
)
Contingent consideration payments
(1,278
)
 
(1,816
)
Purchase of treasury stock

 
(7,593
)
Debt issuance costs on Credit Facility
(1,038
)
 
(759
)
Corporate tax effect from share-based payment arrangements

 
108

Issuance of common stock from share-based payment arrangements
449

 
2,408

Payments related to withholding tax for share-based payment arrangements
(325
)
 
(345
)
Net cash provided by financing activities
12,733

 
7,352

Effect of exchange rate changes on cash
2,398

 
243

Net decrease in cash and cash equivalents
(19,535
)
 
(6,624
)
Cash and cash equivalents at beginning of period
46,216

 
44,825

Cash and cash equivalents at end of period
$
26,681

 
$
38,201

See accompanying notes to unaudited condensed consolidated financial statements.

5


TEAM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Introduction. Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “the Company,” “we,” “our” and “us” are used in this report to refer to Team, Inc., to one or more of our consolidated subsidiaries or to all of them taken as a whole.
We are a leading provider of standard to specialty industrial services, including inspection, engineering assessment and mechanical repair and remediation required in maintaining high temperature and high pressure piping systems and vessels that are utilized extensively in the refining, petrochemical, power, pipeline and other heavy industries. We conduct operations in three segments: TeamQualspec Group (“TeamQualspec”), TeamFurmanite Group (“TeamFurmanite”) and Quest Integrity Group (“Quest Integrity”).
TeamQualspec provides standard and advanced non-destructive testing (“NDT”) services for the process, pipeline and power sectors, pipeline integrity management services, field heat treating services, as well as associated engineering and assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities.
TeamFurmanite, our mechanical services segment, provides turnaround and on-stream services. Turnaround services are project-related and demand is a function of the number and scope of scheduled and unscheduled facility turnarounds as well as new industrial facility construction or expansion activities. The turnaround services TeamFurmanite provides include field machining, technical bolting, field valve repair, heat exchanger repair, and isolation test plugging services. On-stream services offered by TeamFurmanite represent the services offered while plants are operating and under pressure. These services include leak repair, fugitive emissions control and hot tapping.
Quest Integrity provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass two broadly-defined disciplines: (1) highly specialized in-line inspection services for unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; and (2) advanced condition assessment services through a multi-disciplined engineering team.
We offer these services globally through over 220 locations in 20 countries throughout the world with more than 7,100 employees. We market our services to companies in a diverse array of heavy industries which include the petrochemical, refining, power, pipeline, steel, pulp and paper industries, as well as municipalities, shipbuilding, original equipment manufacturers (“OEMs”), distributors, and some of the world’s largest engineering and construction firms.
Basis for presentation. These interim financial statements are unaudited, but in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods. The condensed consolidated balance sheet at December 31, 2016 is derived from the December 31, 2016 audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2016 .
Use of estimates. Our accounting policies conform to Generally Accepted Accounting Principles in the U.S. (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires management 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) aspects of revenue recognition, (2) valuation of acquisition related tangible and intangible assets and assessments of all long-lived assets for possible impairment, (3) estimating various factors used to accrue liabilities for workers’ compensation, auto, medical and general liability, (4) establishing an allowance for uncollectible accounts receivable, (5) estimating the useful lives of our assets, (6) assessing future tax exposure and the realization of tax assets, (7) estimating the value associated with contingent consideration payment arrangements, (8) the valuation of the embedded derivative liability in our convertible debt and (9) selecting assumptions used in the measurement of costs and liabilities associated with defined benefit pension plans. Our most significant accounting policies are described below.
Fair value of financial instruments . Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The

6


fair value of our banking facility is 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 banking facility. The fair value of our convertible senior notes as of September 30, 2017 is $220.3 million (inclusive of the fair value of the conversion option) and is a “Level 2” (as defined in Note 10) measurement, determined based on the observed trading price of these instruments.
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. Included in our cash and cash equivalents at September 30, 2017 and December 31, 2016 is $9.1 million and $14.0 million , respectively, of cash in certain foreign subsidiaries (located primarily in Europe and Asia) where earnings are considered by the Company to be permanently reinvested. In the event that some or all of this cash were to be repatriated, we would be required to accrue and pay additional taxes. While not legally restricted from repatriating this cash, we consider all undistributed earnings of these foreign subsidiaries to be indefinitely reinvested and access to cash to be limited.
Inventory. Except for certain inventories that are valued based on weighted-average 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 cost 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.
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

Goodwill and intangible assets. We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities, such as accounts receivable, inventory, property, plant and equipment, accounts payable and accrued liabilities. We also allocate a portion of the purchase price to identifiable intangible assets, such as non-compete agreements, trademarks, trade names, patents, technology and customer relationships. Allocations are based on estimated fair values of assets and liabilities. We use all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of future cash flows, selling prices, replacement costs, economic lives and the selection of a discount rate, as well as the use of “Level 3” measurements as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements and Disclosur e (“ASC 820”). Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities. Estimated deferred taxes are based on available information concerning the tax bases of assets acquired and liabilities assumed and loss carryforwards at the acquisition date, although such estimates may change in the future as additional information becomes known. Any remaining excess of cost over allocated fair values is recorded as goodwill. We typically engage third-party valuation experts to assist in determining the fair values for both the identifiable tangible and intangible assets. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations.
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually in accordance with the provisions of the ASC 350 Intangibles—Goodwill and Other (“ASC 350”). Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with ASC 350. We assess goodwill for impairment at the reporting unit level, which we have determined to be the same as our operating segments. Each reporting unit has goodwill relating to past acquisitions.

7


Prior to January 1, 2017, the test for impairment was a two-step process that involved comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, the goodwill of the reporting unit was not considered impaired; therefore, the second step of the impairment test would not be deemed necessary. If the carrying amount of the reporting unit exceeded its fair value, we would then perform the second step to the goodwill impairment test, which involved the determination of the fair value of a reporting unit’s assets and liabilities as if those assets and liabilities had been acquired/assumed in a business combination at the impairment testing date, to measure the amount of goodwill impairment loss to be recorded. However, as discussed under “Newly Adopted Accounting Principles—ASU No. 2017-04” below, effective January 1, 2017 we prospectively adopted a new accounting principle that eliminated the second step of the goodwill impairment test. Therefore, for goodwill impairment tests occurring after January 1, 2017, if the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Our goodwill annual test date is December 1. We performed our most recent annual impairment test as of December 1, 2016 and concluded that there was no impairment. The fair values of the reporting units at December 1, 2016 were determined using a combination of income and market approaches. The income approach was based on discounted cash flow models with estimated cash flows based on internal forecasts of revenue and expenses over a five -year period plus a terminal value period. The income approach estimated fair value by discounting each reporting unit’s estimated future cash flows using a discount rate that approximated our weighted-average cost of capital. Major assumptions applied in an income approach include forecasted growth rates as well as forecasted profitability by reporting unit. Additionally, we considered two market approaches that used multiples, based on observable market data, of certain financial metrics of our reporting units to arrive at fair value. We applied equal weighting to each of the income and the two market approaches. The fair value derived from these approaches, in the aggregate, approximated our market capitalization. At December 1, 2016, our market capitalization exceeded the carrying value of our consolidated net assets by approximately $437 million or 80% , and the fair value of each reporting unit significantly exceeded its respective carrying amount as of that date.
In the second quarter of 2017, we determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors, the continued market softness, primarily in our TeamFurmanite segment, and the related impacts on our financial results and our stock price. The Company’s interim goodwill impairment test was prepared using a similar methodology as described above for its most recent annual impairment test with a test date of June 30, 2017. The June 30, 2017 interim goodwill impairment test indicated no impairment as the fair values of each reporting unit exceeded their carrying values. On June 30, 2017, our market capitalization exceeded the carrying value of our consolidated net assets by approximately $175 million or 33% . The fair value of the Quest Integrity reporting unit significantly exceeded its carrying value. With respect to our TeamQualspec and TeamFurmanite reporting unit, the fair values exceeded carrying values by 65% and 46% , respectively.
In the third quarter of 2017, we determined that there were sufficient indicators to trigger an additional interim goodwill impairment analysis, primarily due to a 43% decrease in the Company’s stock price during the quarter, coupled with the continuation of the other factors noted above. This interim goodwill impairment test was prepared as of July 31, 2017 using a similar methodology as used in the most recent interim and annual impairment tests as described above, except that additional weighting was given to the income approach. Additionally, for the two market approaches, we added a weighting of historical financial metrics in addition to projected financial metrics. Management believes these changes were appropriate given the significant decrease in share price since the last interim impairment test in order to reconcile its reporting unit fair values to the lower market capitalization. The July 31, 2017 interim goodwill impairment test indicated impairment as the carrying values of the TeamFurmanite and TeamQualspec reporting units exceeded their fair values. The carrying value of the TeamFurmanite reporting unit exceeded its fair value by $54.1 million and the carrying value of the TeamQualspec reporting unit exceeded its fair value by $21.1 million , resulting in a total impairment loss of $75.2 million . The fair values of the reporting units are “Level 3” measurements as defined in Note 10. The fair value of the Quest Integrity reporting unit significantly exceeded its carrying value. Management also performed a qualitative assessment of events occurring after July 31, 2017 and through September 30, 2017 and concluded there were no significant changes in facts or circumstances during this period that would impacted the assumptions used in its July 31, 2017 goodwill impairment test.





8



There was $284.7 million and $355.8 million of goodwill at September 30, 2017 and December 31, 2016 , respectively. A rollforward of goodwill for the nine months ended September 30, 2017 is as follows (in thousands):
 
 
Nine Months Ended
September 30, 2017
 
(unaudited)
 
TeamQualspec
 
TeamFurmanite
 
Quest
Integrity
 
Total
Balance at beginning of period
$
213,475

 
$
109,059

 
$
33,252

 
$
355,786

Foreign currency adjustments
1,890

 
1,476

 
769

 
4,135

Impairment loss
(21,140
)
 
(54,101
)
 

 
(75,241
)
Balance at end of period
$
194,225

 
$
56,434

 
$
34,021

 
$
284,680

There was no accumulated impairment loss at December 31, 2016.
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 and related tax expense 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 that 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 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, the reversal of existing taxable temporary differences and tax planning strategies.
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 balance sheet. These reserves are based on historical experience with claims incurred but not received, estimates and judgments made by management, applicable insurance coverage for litigation matters, and are adjusted as circumstances warrant. For workers’ compensation, our self-insured retention is $1.0 million and our automobile liability self-insured retention is currently $500,000 per occurrence. For general liability claims, we have an effective self-insured retention of $3.0 million per occurrence. For medical claims, our self-insured retention is $350,000 per individual claimant determined on an annual basis. For environmental liability claims, our self-insured retention is $1.0 million per occurrence. We maintain insurance for claims that exceed such self-retention limits. The 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 management’s 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.
Revenue recognition. Most of our projects are short-term in nature and we predominantly derive revenues by providing a variety of industrial services on a time and material basis. For all of these services our revenues are recognized when services are rendered or when product is shipped to the job site and risk of ownership passes to the customer. However, due to various contractual terms with our customers, at the end of any reporting period, there may be earned but unbilled revenue that is accrued to properly match revenues with related costs. At September 30, 2017 and December 31, 2016 , the amount of earned but unbilled revenue included in accounts receivable was $99.9 million and $39.7 million , respectively.
Allowance for doubtful accounts. In the ordinary course of business, a portion of our accounts receivable are not collected due to billing disputes, customer bankruptcies, dissatisfaction with the services we performed and other various reasons. We establish an allowance to account for those accounts receivable that we estimate will eventually be deemed uncollectible. The allowance for doubtful accounts is based on a combination of our historical experience and management’s review of long outstanding accounts receivable.

9


Concentration of credit risk. No single customer accounts for more than 10% of consolidated revenues.
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) available to Team stockholders 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) available to Team stockholders 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) the dilutive effect of the assumed conversion of our convertible senior notes under the treasury stock method. The Company’s intent is to settle the principal amount of the convertible senior notes in cash upon conversion. If the conversion value exceeds the principal amount, the Company may elect to deliver shares of its common stock with respect to the remainder of its conversion obligation in excess of the aggregate principal amount (the “conversion spread”). Accordingly, the conversion spread is included in the denominator for the computation of diluted earnings per common share using the treasury stock method.

Amounts used in basic and diluted earnings (loss) per share, for the three and nine months ended September 30, 2017 and 2016 , are as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Weighted-average number of basic shares outstanding
29,841

 
29,361

 
29,824

 
27,609

Stock options, stock units and performance awards

 

 

 

Convertible senior notes

 

 

 

Total shares and dilutive securities
29,841

 
29,361

 
29,824

 
27,609

For both the three and nine months ended September 30, 2017 and 2016, all outstanding share-based compensation awards were excluded from the calculation of diluted earnings (loss) per share because their inclusion would be antidilutive due to the loss from continuing operations in all periods. Also, the effect of our convertible senior 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 convertible senior notes and our share-based compensation awards, refer to Note 8 and Note 11, respectively.
Foreign currency . For subsidiaries whose functional currency is not the U.S. Dollar, assets and liabilities are translated at period ending rates of exchange 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 loss in stockholders’ equity. Foreign currency transaction gains and losses are included in our statements of operations.
We utilize monthly foreign currency swap contracts to reduce exposures to changes in foreign currency exchange rates related to our largest exposures including, but not limited to, the Brazilian Real, British Pound, Canadian Dollar, Euro, Malaysian Ringgit, Mexican Peso and Singapore Dollar. The impact from these swap contracts was not material for the three and nine months ended September 30, 2017 or 2016 nor as of the balance sheet dates of September 30, 2017 and December 31, 2016 .
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. These rates are determined based on reference to yields. The expected return on plan assets is derived from detailed periodic studies, which 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. Such reclassifications did not have any effect on the Company’s financial condition or results of operations as previously reported.

10



Newly Adopted Accounting Principles
ASU No. 2015-11 . In July 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-11,  Inventory—Simplifying the Measurement of Inventory  (“ASU 2015-11”), which requires entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value to more closely align the measurement of inventory in GAAP with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Our adoption, on a prospective basis, of ASU 2015-11 on January 1, 2017 had no impact on our results of operations, financial position or cash flows.
ASU No. 2015-17 . In November 2015, the FASB issued ASU No. 2015-17,  Income Taxes: Balance Sheet Classification of Deferred Taxes  (“ASU 2015-17”), which simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. As a result of our prospective adoption of ASU 2015-17 on January 1, 2017, all deferred tax assets and liabilities have been classified as noncurrent on our consolidated balance sheet at September 30, 2017 , while our consolidated balance sheet at December 31, 2016 reflects classifications of deferred tax assets and liabilities in accordance with previous GAAP. The adoption of ASU 2015-17 had no impact on our results of operations or cash flows.
ASU No. 2016-09. In March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which makes several modifications to GAAP related to share-based payments including the accounting for forfeitures, employee taxes and the financial statement presentation and timing of recognition of excess tax benefits or deficiencies. Specifically, ASU 2016-09 requires excess tax benefits and deficiencies to be recognized in the statements of operations as part of the provision for income tax (benefit) whereas previous guidance generally resulted in such amounts being recognized in additional paid-in capital. ASU 2016-09 also clarifies the statement of cash flows presentation for certain items associated with share-based awards. We adopted ASU 2016-09 on January 1, 2017. With respect to the requirement to recognize excess tax benefits or deficiencies in the statements of operations, we began recognizing such amounts, on a prospective basis, effective January 1, 2017 as a component of our provision (benefit) for income taxes as a discrete item. For the three and nine months ended September 30, 2017 , an immaterial amount of net excess tax benefits are included within the income tax benefit in the consolidated statement of operations. Also, beginning prospectively on January 1, 2017, excess tax benefits from share-based awards are classified as operating activities instead of financing activities in our consolidated statements of cash flows, as required by the ASU. Additionally, in connection with the adoption, we recorded a cumulative-effect adjustment of $1.0 million that increased the opening balance of retained earnings as of January 1, 2017, reflecting the recognition of certain excess tax benefits from share-based awards that did not yet qualify for recognition under previous guidance. The adoption of the other requirements in ASU 2016-09 had no impact on our results of operations, financial position or cash flows.
ASU No. 2017-04 . In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). Prior to adoption of ASU 2017-04, if an impairment of goodwill is indicated, entities are required to then calculate the implied fair value of goodwill to determine the amount of impairment loss. This procedure, referred to as the second step of the goodwill impairment test, required the determination of the fair value of the assets and liabilities of a reporting unit as if those assets and liabilities had been acquired/assumed in a business combination at the impairment testing date. ASU 2017-04 eliminated the second step and instead requires that the impairment loss be measured as the amount by which the carrying amount of a reporting unit exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We elected to early adopt ASU 2017-04 prospectively effective January 1, 2017. Upon adoption, ASU 2017-04 had no impact on our consolidated financial statements, but we have applied this new guidance to our 2017 interim goodwill impairment tests.
Accounting Principles Not Yet Adopted
ASU No. 2014-09 . In May 2014, the FASB issued ASU No. 2014-09,  Revenue from Contracts with Customers  (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. We did not elect to early adopt ASU 2014-09. Therefore, the new standard is effective for us on January 1, 2018. ASU 2014-09 permits the use of either the full retrospective or modified retrospective transition method. To adopt the new standard, we will apply the modified retrospective transition method, pursuant to which we will record an adjustment to the opening balance of retained earnings as of January 1, 2018 for the cumulative effect of applying ASU 2014-09 to all existing contracts that are not substantially complete as of the date of application. We are continuing our assessment of ASU 2014-09. At this time, our assessment is not yet complete and therefore we are unable to quantify the potential impacts of this update on our condensed consolidated financial statements. However, as most of our projects are short-term in nature and billed on a time and materials basis, we do not

11


currently anticipate that the adoption of ASU 2014-09 will materially affect our results of operations, financial position or cash flows.
ASU No. 2016-02.  In February 2016, the FASB issued ASU No. 2016-02,  Leases  (“ASU 2016-02”), which changes the accounting for leases, including a requirement to record essentially all leases on the consolidated balance sheets as assets and liabilities. This ASU is effective for fiscal years beginning after December 15, 2018. We will adopt ASU 2016-02 effective January 1, 2019. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.
ASU No. 2016-13. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.
ASU No. 2016-15 . In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies the classification in the statement of cash flows of certain items, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and cash receipts and payments having aspects of more than one class of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our statements of cash flows.
ASU No. 2016-16 . In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective on January 1, 2018 with early adoption permitted. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.
ASU No. 2017-07 . In March 2017, the FASB issued ASU No. 2017-07,  Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), which prescribes where in the statement of operations the components of net periodic pension cost and net periodic postretirement benefit cost should be reported. Under ASU 2017-07, the service cost component is required to be reported in the same line or line items that other compensation costs of the associated employees are reported, while the other components are reported outside of operating income (loss). The changes in presentation in ASU 2017-07 are required to be adopted for annual periods beginning after December 15, 2017 and are to be applied retrospectively. ASU 2017-07 will apply to the presentation, in our statements of operations, of the net periodic pension cost (credit) associated with our defined benefit pension plans, which are discussed in Note 9. We do not believe that the changes in presentation required under ASU 2017-07 will have a material impact on our results of operations.
ASU No. 2017-09 In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity apply modification accounting in Topic 718. Under ASU 2017-09, modification accounting is required unless the effect of the modification does not impact the award’s fair value, vesting conditions and its classification as an equity instrument or liability instrument. ASU 2017-09 is required to be adopted prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our share-based compensation expense.
ASU No. 2017-12 . In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities (“ASU 2017-12”). This update makes certain targeted improvements to the accounting and presentation of certain hedging relationships. For net investment hedges, ASU 2017-12 requires that the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be recorded in the currency translation adjustment section of other comprehensive income (loss). ASU 2017-12 is required to be adopted for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.
2. ACQUISITIONS

In November 2015, Team and Furmanite entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which we acquired all the outstanding shares of Furmanite in a stock transaction whereby Furmanite shareholders received 0.215 shares of Team common stock for each share of Furmanite common stock they owned. The merger was completed on February 29, 2016. Outstanding Furmanite share-based payment awards were generally converted into comparable share-based awards of Team, with certain awards vesting upon the closing of the merger, pursuant to the Merger Agreement. The combination

12


doubled the size of Team’s mechanical services capabilities and established a deeper, broader talent and resource pool that better supports customers across standard and specialty mechanical services. In addition, our expanded capability and capacity offers an enhanced single-point of accountability and flexibility in addressing some of the most critical needs of clients; whether as individual services or as part of an integrated specialty industrial services solution.
The acquisition-date fair value of the consideration transferred totaled $282.3 million , which consisted of the following (in thousands, except shares):
 
February 29, 2016
 
 
Common stock (8,208,006 shares)
$
209,529

Converted share-based payment awards
2,001

Cash
70,811

Total consideration
$
282,341

The fair value of the 8,208,006 common shares issued was determined based on the closing market price of our common shares on the acquisition date of February 29, 2016. The issuance of common stock in the acquisition is a non-cash financing activity that has been excluded from the consolidated statement of cash flows. The fair value of the converted share-based payment awards reflects an apportionment of the fair value of the awards, based on the closing market price of our common stock and other assumptions as of the acquisition date, that is attributable to employee service completed prior to the acquisition date. The fair value of the awards attributable to service after the acquisition date is recognized as share-based compensation expense over the applicable vesting periods. The cash consideration represents amounts Team paid, immediately prior to the closing of the acquisition, to settle Furmanite’s outstanding debt and certain related liabilities, which were not assumed by Team. The cash portion of the consideration was financed through additional borrowings under our banking credit facility.

13


The following table presents the purchase price allocation for Furmanite (in thousands):
 
February 29, 2016
 
 
Cash and cash equivalents
$
37,734

Accounts receivable
65,925

Inventory
25,847

Current deferred tax assets
19,857

Prepaid expenses and other current assets
23,044

Current assets of discontinued operations
18,623

Plant, property and equipment
63,259

Intangible assets
88,958

Goodwill
89,646

Non-current deferred tax assets
2,542

Other non-current assets
687

Total assets acquired
436,122

 
 
Accounts payable
12,359

Other accrued liabilities
33,127

Income taxes payable
229

Current liabilities of discontinued operations
1,434

Non-current deferred tax liabilities
91,431

Defined benefit pension liability
13,509

Other long-term liabilities
1,692

Total liabilities assumed
153,781

Net assets acquired
$
282,341

The purchase price allocation shown above is based upon the fair values at the acquisition date. The fair values recorded are “Level 3” measurements as defined in Note 10.
Of the $89.0 million of acquired intangible assets, $69.8 million was assigned to customer relationships with an estimated useful life of 12 years, $16.9 million was assigned to trade names with a weighted-average estimated useful life of 12 years and $2.3 million was assigned to developed technology with an estimated useful life of 10 years.
The $89.6 million of goodwill was assigned to the TeamFurmanite segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Furmanite. None of the goodwill recognized is expected to be deductible for income tax purposes.
The fair value of accounts receivable acquired was $65.9 million , considering we expect $7.9 million to be uncollectible. Additionally, we acquired accounts receivable with a fair value of $13.6 million associated with discontinued operations, which is included in the current assets of discontinued operations line above. The gross contractual amount of receivables acquired was $88.0 million .
Current assets of discontinued operations as of the acquisition date includes $3.3 million of goodwill and $1.6 million of intangible assets that were allocated to a business that we sold in December 2016, as discussed in Note 15. The amount of current assets of discontinued operations acquired shown above is net of costs to sell of $1.1 million .
For the three and nine months ended September 30, 2016 , we recognized a total of $0.2 million and $6.8 million , respectively, of acquisition costs related to the Furmanite acquisition, which were included in selling, general and administrative expenses in the consolidated statements of operations.
Our unaudited condensed consolidated statement of operations for the nine months ended September 30, 2016 includes the activity of Furmanite beginning on the acquisition date of February 29, 2016. Subsequent to the acquisition date, we commenced integration activities relative to Furmanite. As a result, certain business operations have been consolidated and/or transferred from legacy Furmanite operations to legacy Team operations to facilitate the new operating structure. Revenues of $152.3 million and

14


a net loss of $1.7 million are included in the nine months ended September 30, 2016 and only include operating results that are directly attributable to legacy Furmanite operations. These amounts do not reflect any attempt to adjust for the effects of integration activities, which are not practicable to determine.
Certain transactions related to the Furmanite acquisition were recognized separately from the acquisition of assets and assumption of liabilities in accordance with GAAP. These transactions, which were attributable to certain compensation (both cash and share-based) that was paid or became payable in conjunction with the closing of the acquisition, totaled $4.7 million and were recognized as selling, general and administrative expenses during the nine months ended September 30, 2016 . There were no such amounts recognized during the three months ended September 30, 2016 .
Our unaudited pro forma consolidated results of operations are shown below as if the acquisition of Furmanite had occurred at the beginning of fiscal year 2015. These results are not necessarily indicative of the results which would actually have occurred if the acquisition had taken place at the beginning of fiscal year 2015, nor are they necessarily indicative of future results (in thousands, except per share data).
 
 
Pro forma data
 
 
Nine Months Ended
September 30,
 
 
2016
 
 
(unaudited)
Revenues
 
$
920,641

Loss from continuing operations
 
$
(841
)
Loss per share from continuing operations:
 

Basic
 
$
(0.03
)
Diluted
 
$
(0.03
)
These amounts have been calculated after applying Team’s accounting policies and adjusting the results of Furmanite to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on January 1, 2015, together with the related tax effects. Additionally, these pro forma results exclude discontinued operations as well as the impact of transaction and integration-related costs associated with the Furmanite acquisition included in the historical results.
3. RECEIVABLES
A summary of accounts receivable as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Trade accounts receivable
$
194,722

 
$
230,889

Unbilled revenues
99,943

 
39,719

Allowance for doubtful accounts
(12,709
)
 
(7,835
)
Total
$
281,956

 
$
262,773

4. INVENTORY
A summary of inventory as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Raw materials
$
9,706

 
$
6,844

Work in progress
3,739

 
2,713

Finished goods
38,281

 
40,014

Total
$
51,726

 
$
49,571


15


5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Land
$
6,812

 
$
7,429

Buildings and leasehold improvements
46,906

 
42,257

Machinery and equipment
246,868

 
233,063

Furniture and fixtures
9,410

 
8,431

Capitalized ERP system development costs
46,637

 
44,876

Computers and computer software
13,173

 
11,775

Automobiles
5,120

 
5,370

Construction in progress
17,136

 
12,997

Total
392,062

 
366,198

Accumulated depreciation and amortization
(188,946
)
 
(163,068
)
Property, plant, and equipment, net
$
203,116

 
$
203,130


At the end of 2013, we initiated the design and implementation of a new ERP system, which is expected to be substantially installed by the end of 2017. Amortization of the ERP system development costs began in March 2017 and is computed by the straight-line method. Through September 30, 2017 , we have capitalized $46.6 million associated with the project that includes $1.6 million of capitalized interest and we have recognized $1.9 million of amortization expense.
6. INTANGIBLE ASSETS
A summary of intangible assets as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
 
 
 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
175,214

 
$
(35,554
)
 
$
139,660

 
$
174,742

 
$
(25,508
)
 
$
149,234

Non-compete agreements
5,563

 
(4,388
)
 
1,175

 
5,397

 
(3,896
)
 
1,501

Trade names
24,807

 
(5,714
)
 
19,093

 
24,624

 
(4,216
)
 
20,408

Technology
7,861

 
(4,060
)
 
3,801

 
7,812

 
(3,364
)
 
4,448

Licenses
857

 
(427
)
 
430

 
838

 
(325
)
 
513

Total
$
214,302

 
$
(50,143
)
 
$
164,159

 
$
213,413

 
$
(37,309
)
 
$
176,104

Amortization expense for the three months ended September 30, 2017 and 2016 was $4.0 million and $3.8 million , respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $12.4 million and $11.0 million , respectively.

16


7. OTHER ACCRUED LIABILITIES
A summary of other accrued liabilities as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Payroll and other compensation expenses
$
52,841

 
$
38,214

Insurance accruals
14,347

 
13,896

Property, sales and other non-income related taxes
5,638

 
5,599

Lease commitments
720

 
2,119

Deferred revenue
7,506

 
3,433

Accrued commission
1,691

 
1,355

Accrued interest
2,742

 
603

Volume discount
984

 
1,067

Contingent consideration

 
2,103

Professional fees
1,693

 
1,530

Other
11,054

 
9,985

Total
$
99,216

 
$
79,904



8. LONG-TERM DEBT, LETTERS OF CREDIT AND DERIVATIVES
As of September 30, 2017 and December 31, 2016, our long-term debt is summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Credit Facility
$
163,042

 
$
366,911

Convertible debt
202,984

 

Total long-term debt
366,026

 
366,911

Less: current portion of long-term debt

 
20,000

Total long-term debt, less current portion
$
366,026

 
$
346,911

Credit Facility
In July 2015, we renewed our banking credit facility (the “Credit Facility”). In accordance with the second amendment to the Credit Facility, which was signed in February 2016, the Credit Facility had a borrowing capacity of up to $600 million and consisted of a $400 million , five -year revolving loan facility and a $200 million five -year term loan facility. The swing line facility is $35.0 million . On July 31, 2017, we completed the issuance of $230.0 million of 5.00% convertible senior notes in a private offering and used the proceeds from the Offering (as defined below) to repay in full the outstanding term-loan portion of our Credit Facility and a portion of the outstanding revolving borrowings. Concurrent with the completion of the Offering and the repayment of outstanding borrowings discussed above, we entered into the sixth amendment to the Credit Facility (the “Sixth Amendment”), effective as of June 30, 2017, which reduced the capacity of the Credit Facility to a $300 million revolving loan facility, subject to a borrowing availability test (based on eligible accounts, inventory and fixed assets). The Credit Facility matures in July 2020 , bears interest based on a variable Eurodollar rate option (LIBOR plus 3.75% margin at September 30, 2017 ) and has commitment fees on unused borrowing capacity ( 0.75% at September 30, 2017 ). The Credit Facility limits our ability to pay cash dividends.
The Credit Facility also contains financial covenants, which were amended in May 2017 and July 2017 pursuant to the fifth amendment and the Sixth Amendment, respectively, to the Credit Facility. The covenants, as amended, require the Company to maintain as of the end of each fiscal quarter (i) a maximum ratio of consolidated funded debt to consolidated EBITDA (the “Total Leverage Ratio,” as defined in the Credit Facility agreement) of not more than 4.50 to 1.00 as of March 31, 2018, of not more than 4.25 to 1.00 as of June 30, 2018 and not more than 4.00 to 1.00 as of September 30, 2018 and each quarter thereafter, (ii) a maximum ratio of senior secured debt to consolidated EBITDA (the “Senior Secured Leverage Ratio,” as defined in the Credit Facility agreement) of not more than 4.75 to 1.00 as of September 30, 2017, 4.25 to 1.00 as of December 31, 2017, 3.75 to 1.00 as of March 31, 2018, 3.25 to 1.00 as of June 30, 2018 and 3.00 to 1.00 as of September 30, 2018 and each quarter thereafter and

17


(iii) an interest coverage ratio of not less than 3.00 to 1.00 (the “Interest Coverage Ratio,” as defined in the Credit Facility agreement). Under the Sixth Amendment, the Total Leverage Ratio covenant is eliminated until March 31, 2018, but the Senior Secured Leverage Ratio covenant is effective September 30, 2017. As of September 30, 2017 , we are in compliance with the covenants in effect as of such date. The Total Leverage Ratio, the Senior Secured Leverage Ratio and the Interest Coverage Ratio stood at 8.34 to 1.00, 3.72 to 1.00 and 3.17 to 1.00, respectively, as of September 30, 2017. At September 30, 2017 , we had $26.7 million of cash on hand and had approximately $51 million of available borrowing capacity through our Credit Facility. In connection with the repayment in full of the outstanding term-loan portion of our Credit Facility of $160.0 million on July 31, 2017 and the reduction in capacity of the revolving portion of the Credit Facility, we recorded a loss of $1.2 million during the three months ended September 30, 2017 associated with the write-off of a portion of the debt issuance costs associated with the Credit Facility. As of September 30, 2017, we had  $2.4 million of unamortized debt issuance costs that are being amortized over the life of the Credit Facility.
Although the Total Leverage Ratio covenant does not resume until March 31, 2018, had such covenant been in effect as of September 30, 2017, we would not have been in compliance based on our current financial metrics and it is reasonably possible that we may not be able to be in compliance with this requirement when it becomes effective. Management continues to execute various initiatives designed to reduce the Company’s obligations outstanding under the Credit Facility and improve operating cash flows. If we were to anticipate not being able to maintain compliance, we expect that we would enter into an amendment to the Credit Facility with our bank group in order to modify and/or to provide relief from the financial covenants for an additional period of time. However, there is no assurance that these actions will be effective in maintaining compliance with our Credit Facility covenants as of any future date.

In order to secure our casualty insurance programs, we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $22.6 million at September 30, 2017 and $21.6 million at December 31, 2016 . Outstanding letters of credit reduce amounts available under our Credit Facility and are considered as having been funded for purposes of calculating our financial covenants under the Credit Facility.

Convertible Debt

Description of the Notes

On July 31, 2017, we issued $230.0 million principal amount of 5.00% Convertible Senior Notes due 2023 (the “Notes”) in a private offering to qualified institutional buyers (as defined in the Securities Act of 1933, as amended (the “Securities Act”)) pursuant to Rule 144A under the Securities Act (the “Offering”). The Notes are senior unsecured obligations of the Company. The Notes bear interest at rate of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2018. The Notes will mature on August 1, 2023 unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will be convertible at an initial conversion rate of 46.0829 shares of our common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $21.70 per share, which represents a conversion premium of 40% to the last reported sale price of $15.50 per share on the New York Stock Exchange on July 25, 2017, the date the pricing of the Notes was completed. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes.
    
Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding May 1, 2023, but only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day;

if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or;


18


upon the occurrence of specified corporate events described in the indenture governing the Notes.

On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.

Because the Notes could be convertible in full into more than 19.99 percent of our outstanding common stock, we are required by the listing rules of the New York Stock Exchange (“NYSE”) to obtain the approval of the holders of our outstanding shares of common stock before the Notes may be converted into more than 5,964,858 shares of common stock. The Notes are initially convertible into 10,599,067 shares of common stock. We have agreed to seek approval of the holders of our outstanding shares of common stock at our next annual stockholders’ meeting. The Notes will be convertible into, subject to various conditions, cash or shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, in each case, at the Company’s election, except that prior to receipt of the requisite stockholder approval, the Company will settle conversion in cash or a combination of cash and shares of common stock.

If holders elect to convert the Notes in connection with certain fundamental change transactions described in the indenture governing the Notes, we will, under certain circumstances described in the indenture governing the Notes, increase the conversion rate for the Notes so surrendered for conversion.
We may not redeem the Notes prior to August 5, 2021. We will have the option to redeem all or any portion of the Notes on or after August 5, 2021, if certain conditions (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive)), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Net proceeds received from the Offering were approximately $222.3 million after deducting discounts, commissions and expenses. We used $160.0 million of the net proceeds to repay all outstanding borrowings under the term-loan portion of our Credit Facility and $62.3 million of the net proceeds to repay a portion of the outstanding borrowings under the revolving portion of our Credit Facility, which may be subsequently reborrowed for general corporate purposes.

Accounting Treatment of the Notes

As of September 30, 2017, the Notes were recorded in our condensed consolidated balance sheet as follows (in thousands):
 
 
 
September 30, 2017
 
(unaudited)
Liability component:
 
Principal
$
230,000

Unamortized issuance costs
(7,101
)
Unamortized discount
(35,035
)
Net carrying amount of the liability component
187,864

Embedded derivative liability
15,120

Total 1
$
202,984

 
 
Equity component:
 
Carrying amount of the equity component, net of issuance costs 2
$
13,955

_________________
1    Included in the Long-term debt line of the condensed consolidated balance sheet.
2    Included in the Additional paid-in capital line of the condensed consolidated balance sheet.

Under Accounting Standards Codification (“ASC”) 470-20,  Debt with Conversion and Other Options , (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion (such as the Notes) in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15, Embedded Derivatives (“ASC 815-15”), to determine if an instrument contains an embedded feature that should be separately accounted for as a derivative. Unless an exception under ASC 815-15

19


applies, such accounting requires that an embedded feature that is not “clearly and closely related” to the host contract be accounted for separately as a derivative and marked to fair value in the statement of operations each period. The Company concluded that the conversion feature is not “clearly and closely related” to the debt host contract. However, ASC 815-15 provides an exception for embedded features that are considered both indexed to our common stock and classified in stockholders’ equity. Because the Notes permit the Company to settle the conversion feature in cash, stock or any combination thereof at its election, ordinarily the conversion feature would be considered both indexed to our common stock and classified in stockholders’ equity and therefore exempt from the requirements of ASC 815-15. However, because the Notes could be convertible into more than 19.99 percent of our outstanding common stock and shareholder approval in accordance with the NYSE rules (as described above) to issue more than 19.99 percent of our outstanding common stock has not yet been obtained, the Company could be required to settle the conversion feature for a portion of the Notes in cash instead of shares. Therefore, the conversion feature for a portion of the Notes cannot be classified in stockholders’ equity and therefore the exception under ASC 815-15 does not apply. As such, the Company concluded that for a portion of the Notes, it must recognize as an embedded derivative under ASC 815-15 while the remainder of the Notes are subject to ASC 470-20.
The Company determined the portions of the Notes subject to ASC 815-15 and ASC 470-20 as follows. First, while the Notes are initially convertible into 10,599,067 shares of common stock, the occurrence of certain corporate events could increase the conversion rate, which could result in the Notes becoming convertible into a maximum of 14,838,703 shares. As noted above, we must obtain stockholder approval to issue more than 5,964,858 shares of stock to settle the Notes upon conversion. Therefore, approximately 40% of the maximum number of shares is authorized for issuance without shareholder approval, while 8,873,845 shares, or approximately 60% would be required to be settled in cash. Therefore, the Company concluded that embedded derivative accounting under ASC 815-15 is applicable to approximately 60% of the Notes, while the remaining 40% of the Notes are subject to ASC 470-20. The Company will reassess the classification of the Notes each reporting period considering changes in facts and circumstances, if any. Once (and if) we receive stockholder approval to issue more than 19.99 percent of our outstanding common stock upon conversion of the Notes, we will reclassify the embedded derivative, at its then-current fair value, to stockholders’ equity, and it will no longer be marked to fair value each period.
We estimated the fair value of similar notes without the conversion feature to be $194.2 million , with the resulting conversion feature having an estimated fair value of $35.8 million at the issuance date. For the portion of the Notes subject to ASC 815-15, we recorded an embedded derivative liability at fair value of $21.4 million and for the portion of the Notes subject to ASC 470-20, we recorded $14.4 million as additional paid-in capital in stockholders’ equity. The fair values recorded are “Level 2” measurements as defined in Note 10. The difference between the principal amount of the Notes and the amounts allocated to the embedded derivative liability and additional paid-in capital resulted in a debt discount of $35.8 million that is amortized as interest expense over 72 months (the six-year period from issuance to maturity of the Notes).
The Company incurred approximately $7.7 million in issuance costs associated with the Notes. Issuance costs of $7.2 million were allocated as a reduction of the carrying amount of the debt while the remaining $0.5 million were allocated as a reduction to additional paid-in capital in stockholders’ equity. The portion allocated to the debt component is being amortized over the life of the debt. As of September 30, 2017, the remaining amortization period is 70 months.
The following table sets forth interest expense information related to the Notes (in thousands, except percentage):
 
Three and Nine Months Ended
September 30, 2017
 
(unaudited)
Coupon interest
$
1,949

Amortization of debt discount and issuance costs
919

    Total interest expense on convertible senior notes
$
2,868

 
 
Effective interest rate
9.12
%

Derivatives and Hedging

ASC 815,  Derivatives and Hedging  (“ASC 815”), requires that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows derivatives’ gains and losses to offset related results on the hedged item in the statement of operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent

20


the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counter-party will not fulfill the terms of the contract. We consider counterparty credit risk to our derivative contracts when valuing our derivative instruments.
Our borrowing of €12.3 million under the Credit Facility serves as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. At September 30, 2017 , the €12.3 million borrowing had a U.S. Dollar value of $14.5 million .
As discussed above, we have recorded an embedded derivative for a portion of the Notes. The embedded derivative represents conversion features to the purchasers of the Notes that provide an opportunity to profit if the value of the shares that may be attained from the conversion of the Notes is higher than the redemption amount of the Notes. In accordance with ASC 815-15, the embedded derivative instrument is recorded at fair value each period with changes in fair value reflected in our results of operations. No hedge accounting is applied.
The amounts recognized in other comprehensive income (loss), reclassified into income (loss) and the amounts recognized in income (loss) for the three and nine months ended September 30, 2017 and 2016 , are as follows (in thousands):
 
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Reclassified from
Other
Comprehensive
Income (Loss) to
Earnings
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Reclassified from
Other
Comprehensive
Income (Loss) to
Earnings
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Derivatives Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedge
$
(483
)
 
$
(104
)
 
$

 
$

 
$
(1,598
)
 
$
(347
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) Recognized in Income (Loss) 1
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
(unaudited)
 
(unaudited)
 
 
 
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
Derivatives Not Classified as Hedging Instruments

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivative in convertible debt
 
 
 
 
 
 
 
 
$
6,292

 
$

 
$
6,292

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________
1    Reflected as “Gain on convertible debt embedded derivative” in the condensed consolidated statements of operations.
The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges and derivatives not designated as hedges under ASC 815 (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
 
 
 
 
 
Classification
 
Balance Sheet
Location
 
Fair
Value
 
Classification
 
Balance Sheet
Location
 
Fair
Value
Derivatives Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
Net investment hedge
Liability
 
Long-term debt
 
$
(3,450
)
 
Liability
 
Long-term debt
 
$
(5,048
)
Derivatives Not Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
Embedded derivative in convertible debt
Liability
 
Long-term debt
 
$
15,120

 
 
 
 
 
 


21


9. EMPLOYEE BENEFIT PLANS
In connection with our acquisition of Furmanite, we assumed liabilities associated with the defined benefit pension plans of two  foreign subsidiaries, one plan covering certain United Kingdom employees (the “U.K. Plan”) and the other covering certain Norwegian employees (the “Norwegian Plan”). As the Norwegian Plan represents approximately one percent of both the Company’s total pension plan liabilities and total pension plan assets, only the schedule of net periodic pension cost (credit) includes combined amounts from the  two  plans, while assumption and narrative information relates solely to the U.K. Plan.
Net periodic pension cost (credit) for the U.K. and Norwegian Plans includes the following components (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Service cost
$
4

 
$
21

 
$
12

 
$
50

Interest cost
610

 
742

 
1,786

 
1,810

Expected return on plan assets
(780
)
 
(759
)
 
(2,279
)
 
(1,852
)
Amortization of net actuarial loss
19

 

 
53

 

Net periodic pension cost (credit)
$
(147
)
 
$
4

 
$
(428
)
 
$
8

For the nine months ended September 30, 2016 , the net periodic pension cost presented in the table above is from the date of the Furmanite acquisition.
The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories as follows: 4.5%  overall, 5.8%  for equities and  1.8%  for debt securities. We expect to contribute  $4.1 million  to the pension plan for 2017 , of which  $3.4 million  has been contributed through  September 30, 2017 .
10. FAIR VALUE MEASUREMENTS
We apply the provisions of ASC 820, which among other things, requires certain disclosures about assets and liabilities carried at fair value.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy such that “Level 1” measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, “Level 2” measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and “Level 3” measurements include those that are unobservable and of a highly subjective measure.

22


The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 . As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):
 
September 30, 2017
 
(unaudited)
 
Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Liabilities:
 
 
 
Contingent consideration 1
$

 
$

 
$
1,648

 
$
1,648

Net investment hedge
$

 
$
(3,450
)
 
$

 
$
(3,450
)
Embedded derivative in convertible debt

$

 
$
15,120

 
$

 
$
15,120

 
December 31, 2016
 
Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Liabilities:
 
 
 
Contingent consideration 1
$

 
$

 
$
3,739

 
$
3,739

Net investment hedge
$

 
$
(5,048
)
 
$

 
$
(5,048
)
__________________________
1      Inclusive of both current and noncurrent portions.

There were no transfers in and out of Level 1, Level 2 and Level 3 during the nine months ended September 30, 2017 and 2016 .
The fair value of the convertible debt embedded derivative liability is estimated using a lattice model with inputs including our stock price, our stock price volatility and interest rates. As the assumptions used in the valuation are primarily derived from observable market data, the fair value measurement is classified as Level 2 in the fair value hierarchy.
The fair value of contingent consideration liabilities classified in the table above were estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include a combination of actual cash flows and probability-weighted assessments of expected future cash flows related to the acquired businesses, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration liabilities (in thousands):
 
Nine Months Ended
September 30, 2017
 
(unaudited)
Balance, beginning of period
$
3,739

Accretion of liability
181

Foreign currency effects
180

Payment
(1,278
)
Revaluation
(1,174
)
Balance, end of period
$
1,648


23


11. SHARE-BASED COMPENSATION
We have adopted stock incentive plans and other arrangements pursuant to which our Board of Directors (the “Board”) may grant stock options, restricted stock, stock units, stock appreciation rights, common stock or performance awards to officers, directors and key employees. At September 30, 2017 , there were approximately 1.0 million stock options, restricted stock units and performance awards outstanding to officers, directors and key employees. The exercise price, terms and other conditions applicable to each form of share-based compensation under our plans are generally determined by the Compensation Committee of our Board at the time of grant and may vary.
Our share-based payments consist primarily of stock units, performance awards, common stock and stock options. In May 2016, our shareholders approved the 2016 Team, Inc. Equity Incentive Plan (the “Plan”), which replaced all of our previous equity compensation plans. The Plan authorizes the issuance of share-based awards representing up to 2,000,000 shares of common stock. Shares issued in connection with our share-based compensation are issued out of authorized but unissued common stock.
In connection with the acquisition of Furmanite in February 2016, we assumed the share plan related to Furmanite employee grants. As provided for in the Merger Agreement, each option to purchase Furmanite common stock outstanding immediately prior to the closing of the acquisition was converted into an option to purchase Team common stock, adjusted by the 0.215 exchange ratio. Similarly, each previously existing Furmanite restricted share, restricted stock unit or performance stock unit outstanding immediately prior to the acquisition were converted into Team restricted stock units, also at the 0.215 exchange ratio. The converted awards generally have the same terms and conditions as the replaced awards, except the vesting of certain awards was accelerated to the acquisition date and any performance conditions associated with the Furmanite awards no longer apply. The fair value of the options was determined using a Black-Scholes model, while the fair value of the restricted stock units was determined based on the market price on the acquisition date. The fair value of the converted Furmanite awards was allocated between consideration transferred in the acquisition and future share-based compensation expense, based on past service completed and future service required. The converted Furmanite awards have been identified, as applicable, in the tables that follow.
Compensation expense related to share-based compensation totaled $5.8 million and $6.7 million for the nine months ended September 30, 2017 and 2016 , respectively. Share-based compensation expense reflects an estimate of expected forfeitures. At September 30, 2017 , $13.5 million of unrecognized compensation expense related to share-based compensation is expected to be recognized over a remaining weighted-average period of 2.3 years . The excess tax benefit derived when share-based awards result in a tax deduction for the Company was not material for the nine months ended September 30, 2017 and 2016 .
Stock units are settled with common stock upon vesting unless it is not legally feasible to issue shares, in which case the value of the award is settled in cash. We determine the fair value of each stock unit based on the market price on the date of grant. Stock units generally vest in annual installments over four years and the expense associated with the units is recognized over the same vesting period. We also grant common stock to our directors, which typically vests immediately. Compensation expense related to stock units and director stock grants totaled $5.3 million and $5.6 million for the nine months ended September 30, 2017 and 2016 , respectively. Transactions involving our stock units and director stock grants during the nine months ended September 30, 2017 and 2016 are summarized below:
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
(unaudited)
 
(unaudited)
 
No. of Stock
Units
 
Weighted
Average
Fair Value
 
No. of Stock
Units
 
Weighted
Average
Fair Value
 
(in thousands)
 
 
 
(in thousands)
 
 
Stock and stock units, beginning of period
535

 
$
35.11

 
371

 
$
36.26

Changes during the period:
 
 
 
 
 
 
 
Granted
109

 
$
15.99

 
86

 
$
26.19

Assumed - Furmanite acquisition

 
$

 
40

 
$
25.63

Vested and settled
(52
)
 
$
25.28

 
(38
)
 
$
27.61

Cancelled
(21
)
 
$
33.10

 
(13
)
 
$
30.92

Stock and stock units, end of period
571

 
$
32.41

 
446

 
$
34.27

We have a performance stock unit award program whereby we grant Long-Term Performance Stock Unit (“LTPSU”) awards to our executive officers. Under this program, the Company communicates “target awards” to the executive officers at the beginning of a performance period. LTPSU awards cliff vest with the achievement of the performance goals and completion of the required service period. Settlement occurs with common stock as soon as practicable following the vesting date. LTPSU awards granted on November 4, 2014 and October 15, 2015 are subject to a three -year performance period and a concurrent three -year service

24


period. The performance target is based on results of operations over the three -year performance period with possible payouts ranging from 0% to 300% of the “target awards.” LTPSU awards granted on March 15, 2017 are subject to a two -year performance period and a concurrent two -year service period. For these awards, the performance goal is separated into three independent performance factors based on (i) relative shareholder total return (“RTSR”) as measured against a designated peer group, (ii) RTSR as measured against a designated index and (iii) results of operations over the two -year performance period, with possible payouts ranging from 0% to 200% of the “target awards” for the first two performance factors and ranging from 0% to 300% of the “target awards” for the third performance factor.
We determine the fair value of each LTPSU award based on the market price on the date of grant. However, for the portion of the LTPSU awards that are subject to the RTSR performance factors, we determine the fair value of that portion of the award based on the results of a Monte Carlo simulation, which uses market-based inputs as of the date of grant to simulate future stock returns. Compensation expense is recognized on a straight-line basis over the vesting term. For LTPSU awards (or portions thereof) subject to a results of operations performance goal, compensation expense is recognized based upon the performance target that is probable of being met. For the portion of LTPSU awards subject to the RTSR performance factors, because the expected outcome is incorporated into the grant date fair value, compensation expense is not subsequently adjusted for changes in the expected or actual performance outcome. Compensation expense related to performance awards totaled $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016 , respectively. Transactions involving our performance awards during the nine months ended September 30, 2017 and 2016 are summarized below:
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
(unaudited)
 
(unaudited)
 
No. of Stock
Units
 
Weighted
Average
Fair Value
 
No. of Stock
Units
 
Weighted
Average
Fair Value
 
(in thousands)
 
 
 
(in thousands)
 
 
Long-term performance stock units, beginning of period
59

 
$
37.16

 
59

 
$
37.16

Changes during the period:
 
 
 
 
 
 
 
Granted
181

 
$
19.68

 

 
$

Vested and settled

 
$

 

 
$

Cancelled

 
$

 

 
$

Long-term performance stock units, end of period
240

 
$
23.95

 
59

 
$
37.16


25


We determine the fair value of each stock option at the grant date using a Black-Scholes model and recognize the resulting expense of our stock option awards over the period during which an employee is required to provide services in exchange for the awards, usually the vesting period. Compensation expense related to stock options for the nine months ended September 30, 2017 and 2016 was not material. Our options typically vest in equal annual installments over a four -year service period. Expense related to an option grant is recognized on a straight line basis over the specified vesting period for those options. Stock options generally have a ten -year term. Transactions involving our stock options during the nine months ended September 30, 2017 and 2016 are summarized below:
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
(unaudited)
 
(unaudited)
 
No. of
Options
 
Weighted
Average
Exercise Price
 
No. of
Options
 
Weighted
Average
Exercise Price
 
(in thousands)
 
 
 
(in thousands)
 
 
Shares under option, beginning of period
203

 
$
30.63

 
376

 
$
25.71

Changes during the period:
 
 
 
 
 
 
 
Granted

 
$

 

 
$

Assumed - Furmanite acquisition

 
$

 
132

 
$
33.20

Exercised
(16
)
 
$
27.91

 
(136
)
 
$
17.71

Cancelled

 
$

 
(4
)
 
$
44.62

Expired
(20
)
 
$
28.66

 
(45
)
 
$
35.51

Shares under option, end of period
167

 
$
31.12

 
323

 
$
30.52

Exercisable at end of period
167

 
$
31.12

 
319

 
$
30.40

Options exercisable at September 30, 2017 had a weighted-average remaining contractual life of 2.2 years . For total options outstanding at September 30, 2017 , the range of exercise prices and remaining contractual lives are as follows:
Range of Prices
No. of
Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Life
 
(in thousands)
 
 
 
(in years)
$20.18 to $30.28
14

 
$
21.68

 
3.5
$30.29 to $40.38
146

 
$
31.06

 
1.8
$40.39 to $50.47
7

 
$
50.47

 
6.6
Total
167

 
$
31.12

 
2.2


26


12. ACCUMULATED OTHER COMPREHENSIVE LOSS
A summary of changes in accumulated other comprehensive loss included within shareholders’ equity is as follows (in thousands):
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
(unaudited)
 
(unaudited)
 
Foreign
Currency
Translation
Adjustments
 
Foreign
Currency
Hedge
 
Defined Benefit Pension Plans
 
Tax
Provision
 
Total
 
Foreign
Currency
Translation
Adjustments
 
Foreign
Currency
Hedge
 
Tax
Provision
 
Total
Balance, beginning of period
$
(31,973
)
 
$
5,048

 
$
(10,518
)
 
$
8,443

 
$
(29,000
)
 
$
(28,124
)
 
$
4,567

 
$
5,183

 
$
(18,374
)
Other comprehensive income (loss)
10,406

 
(1,598
)
 
53

 
(2,295
)
 
6,566

 
1,872

 
(347
)
 
(1,031
)
 
494

Balance, end of period
$
(21,567
)
 
$
3,450

 
$
(10,465
)
 
$
6,148

 
$
(22,434
)
 
$
(26,252
)
 
$
4,220

 
$
4,152

 
$
(17,880
)
The following table represents the related tax effects allocated to each component of other comprehensive income (loss) (in thousands):
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
(unaudited)
 
(unaudited)
 
Gross
Amount
 
Tax
Effect
 
Net
Amount
 
Gross
Amount
 
Tax
Effect
 
Net
Amount
Foreign currency translation adjustments
$
10,406

 
$
(2,894
)
 
$
7,512

 
$
1,872

 
$
(1,147
)
 
$
725

Foreign currency hedge
(1,598
)
 
610

 
(988
)
 
(347
)
 
116

 
(231
)
Defined benefit pension plans
53

 
(11
)
 
42

 

 

 

Total
$
8,861

 
$
(2,295
)
 
$
6,566

 
$
1,525

 
$
(1,031
)
 
$
494

13. COMMITMENTS AND CONTINGENCIES
Con Ed Matter —We have, from time to time, provided temporary leak repair services to the steam system of Consolidated Edison Company of New York (“Con Ed”) located in New York City. In July 2007, a Con Ed steam main located in midtown Manhattan ruptured resulting in one death and other injuries and property damage. As of September 30, 2017 , sixty-eight lawsuits are currently pending against Con Ed, the City of New York and Team in the Supreme Court of New York, alleging that our temporary leak repair services may have contributed to the cause of the rupture, allegations which we dispute. The lawsuits seek generally unspecified compensatory damages for personal injury, property damage and business interruption. Additionally, Con Ed is alleging that our contract with Con Ed requires us to fully indemnify and defend Con Ed for all claims asserted against Con Ed including those amounts that Con Ed has paid to settle with certain plaintiffs for undisclosed sums as well as Con Ed’s own alleged damages to its infrastructure. Con Ed filed an action to join Team and the City of New York as defendants in all lawsuits filed against Con Ed that did not include Team and the City of New York as direct defendants. We are vigorously defending the lawsuits and Con Ed’s claim for indemnification. We are unable to estimate the amount of liability to us, if any, associated with these lawsuits and the claim for indemnification. We filed a motion to dismiss in April 2016. We maintain insurance coverage, subject to a deductible limit of $250,000 , which we believe should cover these claims. We have not accrued any liability in excess of the deductible limit for the lawsuits. We do not believe the ultimate outcome of these matters will have a material adverse effect on our financial position, results of operations, or cash flows.
Patent Infringement Matters —In December 2014, our subsidiary, Quest Integrity Group, LLC, filed three patent infringement lawsuits against three different defendants, two in the U.S. District of Delaware (the “Delaware Cases”) and one in the U.S. District of Western Washington (the “Washington Case”). Quest Integrity alleges that the three defendants infringed Quest Integrity’s patent, entitled “2D and 3D Display System and Method for Furnace Tube Inspection”. This Quest Integrity patent generally teaches a system and method for displaying inspection data collected during the inspection of furnace tubes in petroleum and petro-chemical refineries. The subject patent litigation is specific to the visual display of the collected data and does not relate to Quest Integrity’s underlying advanced inspection technology. In these lawsuits Quest Integrity is seeking temporary and permanent injunctive relief, as well as monetary damages. Defendants have denied they infringe any valid claim of Quest Integrity’s patent, and have asserted declaratory judgment counterclaims that the patent at issue is invalid and/or unenforceable, and not infringed. In June 2015, the U.S. District of Delaware denied our motions for preliminary injunctive relief in the Delaware Cases (that is, our request that the defendants stop using our patented systems and methods during the pendency of the actions). In March 2017, the judge in the Delaware Cases granted summary judgment against Quest Integrity, finding certain patent claims of the asserted

27


patent invalid. In August 2017, the judge in the Washington Case granted summary judgment against Quest Integrity based on the Delaware Cases ruling. Quest Integrity is in the process of appealing both Delaware Cases and is planning to appeal the Washington Case.
We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In our opinion, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.
We establish a liability for loss contingencies, when information available to us indicates that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
14. ENTITY WIDE DISCLOSURES
ASC 280, Segment Reporting , requires us to disclose certain information about our operating segments where operating segments are defined as “components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.” We conduct operations in three segments: TeamQualspec, TeamFurmanite and Quest Integrity. All three operating segments operate under a business segment manager who reports directly to Team’s Chief Executive Officer who operates as the chief operating decision maker. Discontinued operations are not allocated to the segments. Segment data for our three operating segments are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues:
 
 
 
 
 
 
 
TeamQualspec
$
138,383

 
$
142,529

 
$
439,751

 
$
436,029

TeamFurmanite
130,768

 
131,787

 
385,154

 
392,062

Quest Integrity
15,916

 
15,261

 
58,972

 
48,780

Total
$
285,067

 
$
289,577

 
$
883,877

 
$
876,871

 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Operating income (loss):
 
 
 
 
 
 
 
TeamQualspec 1
$
(17,515
)
 
$
8,423

 
$
1,139

 
$
33,044

TeamFurmanite 1
(51,154
)
 
5,983

 
(45,318
)
 
25,004

Quest Integrity
(828
)
 
399

 
7,252

 
2,863

Corporate and shared support services
(24,619
)
 
(18,848
)
 
(75,970
)
 
(58,326
)
Total
$
(94,116
)
 
$
(4,043
)
 
$
(112,897
)
 
$
2,585

______________
1
Includes goodwill impairment loss of $21.1 million and $54.1 million for TeamQualspec and TeamFurmanite, respectively, for the three and nine months ended September 30, 2017.


28


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Capital expenditures:
 
 
 
 
 
 
 
TeamQualspec
$
2,060

 
$
1,932

 
$
7,424

 
$
7,143

TeamFurmanite
3,542

 
6,308

 
11,442

 
12,439

Quest Integrity
1,197

 
211

 
2,470

 
1,105

Corporate and shared support services
1,080

 
5,475

 
5,205

 
15,207

Total
$
7,879

 
$
13,926

 
$
26,541

 
$
35,894