TETRA Technologies, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, including fourth-quarter results. The filing was dated March 4, 2019 and presents consolidated U.S. GAAP results. TETRA operates through Completion Fluids & Products, Water & Flowback Services, and Compression. The former Offshore Division was sold in March 2018 and is reported as discontinued operations.
Business Context and Key Developments
- Completion Fluids & Products manufactures and markets clear brine fluids, brominated products, calcium chloride, additives, and related services.
- Water & Flowback Services provides water transfer, treatment, storage, recycling, frac flowback, production testing, and offshore rig cooling services.
- Compression, conducted primarily through partially owned CSI Compressco LP, provides natural-gas compression services, equipment sales, and aftermarket services.
- TETRA acquired SwiftWater Energy Services in February 2018 for $42.0 million of cash, approximately $28.2 million of common stock, and potential contingent consideration of up to $15.0 million. It acquired JRGO Energy Services in December 2018 for $7.6 million of cash plus potential contingent consideration of up to $1.5 million.
- The March 2018 Offshore Division disposition generated $3.1 million of cash, a $7.5 million promissory note, assumed liabilities and indemnities, and performance bonds intended to support certain decommissioning obligations.
Financial Performance and Liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $998.8 million | $723.1 million | +38.1% |
| Gross profit | $162.3 million | $108.4 million | +49.7% |
| Gross margin | 16.2% | 15.0% | +1.2 percentage points |
| General and administrative expense | $132.4 million | $115.4 million | +14.8% |
| Loss before taxes and discontinued operations | $(36.4) million | $(44.0) million | Improved by $7.6 million |
| Net loss | $(84.2) million | $(62.2) million | Loss increased by $22.1 million |
| Net loss attributable to TETRA stockholders | $(61.6) million | $(39.0) million | Loss increased by $22.6 million |
| Net loss per share | $(0.50) | $(0.34) | Worsened by $0.16 |
| Cash flow from operations | $46.6 million | $64.6 million | Down $18.0 million |
| Capital expenditures | $141.9 million | $51.9 million | +173.2% |
Segment performance: Completion Fluids & Products revenue was $257.4 million, essentially flat, while gross profit declined to $48.7 million from $71.0 million because of project mix and the absence of a significant 2017 TETRA CS Neptune project. Water & Flowback Services revenue increased 76.6% to $303.1 million and gross profit increased to $55.2 million from $2.3 million, driven by SwiftWater and higher activity. Compression revenue increased 48.4% to $438.7 million and gross profit increased 68.1% to $59.0 million, driven by equipment sales, improved pricing, and higher fleet utilization.
Fourth quarter: Revenue was $282.5 million, gross profit was $45.2 million, and net income attributable to TETRA stockholders was $4.9 million. This compared with fourth-quarter 2017 revenue of $200.1 million and a net loss attributable to TETRA stockholders of $28.7 million. Full-year results nevertheless remained a net loss, partly because of the discontinued-operations disposal loss.
Balance sheet and liquidity: Cash and cash equivalents were $40.0 million, including $15.9 million held by CCLP and not available to TETRA. Working capital was $200.3 million. Consolidated long-term debt, net, was $815.6 million, consisting of $182.5 million owed by TETRA and $633.0 million owed by CCLP. TETRA had $47.6 million of availability under its ABL facility, while CCLP had $27.1 million of availability under its revolving facility; neither facility had a balance outstanding at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth was concentrated in Compression and Water & Flowback Services; Completion Fluids & Products was stable.
- Gross margin improved despite continued pricing pressure in certain onshore markets.
- Operating cash flow declined because growth increased accounts receivable, inventory, and other working-capital requirements.
- Capital spending increased substantially, primarily for CCLP compression fleet expansion and Water & Flowback equipment.
- Interest expense increased to $72.1 million from $58.0 million, principally because of higher CCLP debt and new TETRA borrowings.
- Discontinued operations produced a $41.5 million after-tax loss in 2018, including a $33.8 million loss on disposal; discontinued operations produced a $17.4 million loss in 2017.
- Long-lived-asset impairment charges declined to approximately $3.6 million from $14.9 million. No goodwill impairment was recorded in 2018; remaining goodwill was $25.9 million and the Water Management reporting unit exceeded carrying value by approximately 30% in the annual test.
- TETRA replaced its 11% Senior Note and prior bank facility with a $200 million Term Credit Agreement and a $100 million ABL facility. The 11% note repayment included a $7.0 million make-whole payment.
Guidance, Outlook, Risks, and Unusual Items
- Management expected adequate liquidity, operating cash flow, and covenant compliance for at least the twelve months following March 4, 2019, based on then-current market conditions and assumptions.
- For 2019, TETRA expected approximately $25 million to $35 million of capital expenditures outside Compression, while Compression expected approximately $75 million to $80 million. Spending could be adjusted based on customer demand and commodity prices.
- CCLP reduced common-unit distributions from $0.75 per unit per year to $0.04 per unit per year for up to four quarters beginning with the February 2019 distribution. CCLP intended to use approximately $34 million of savings to redeem remaining preferred units and reduce potential dilution.
- Oil and natural-gas prices declined sharply in the fourth quarter of 2018. Management warned that further declines could reduce customer spending, demand, revenue, cash flow, asset utilization, and liquidity.
- CCLP had approximately $645.9 million of aggregate principal debt at year-end, including 7.25% Senior Notes due 2022 and 7.50% Senior Secured Notes due 2025. Debt service and covenant restrictions may limit growth, distributions, acquisitions, and capital spending.
- The SwiftWater contingent consideration liability increased to $11.0 million and generated $3.4 million of 2018 expense. Total contingent consideration liabilities were approximately $12.5 million at year-end.
- TETRA continues to face potential exposure to legacy Maritech abandonment and decommissioning obligations. Orinoco had not delivered required replacement performance bonds, although the bonds delivered at closing remained in effect and TETRA was seeking enforcement.
- Other significant risks include environmental and health-and-safety regulation, hydraulic-fracturing restrictions, supplier concentration, customer credit risk, foreign exchange volatility, cyberattacks, severe weather, competition, and possible additional impairments.
- Management and Ernst & Young reported effective internal control over financial reporting. The assessment excluded SwiftWater and JRGO, which represented 7.5% and less than 1.0% of consolidated assets, respectively.
Most Important Facts for Investors to Verify
- Whether 2019 oil-price weakness reduced customer activity, backlog conversion, compression utilization, and water-management pricing.
- Whether TETRA and CCLP generated sufficient cash to fund capital expenditures, debt service, and covenant requirements after the reduction in CCLP distributions.
- The repayment or conversion status of CCLP’s remaining preferred units and the resulting dilution to TETRA’s CCLP ownership.
- The collectability of the $7.5 million promissory note and enforcement status of Orinoco’s required performance bonds.
- Whether the $105.2 million Compression equipment backlog at December 31, 2018 was converted into revenue and cash during 2019.
- Whether Water Management goodwill and other long-lived assets remain recoverable under lower commodity prices or reduced customer activity.
- The effect of the 2019 lease-accounting adoption, which management preliminarily estimated would add approximately $60 million to $70 million of right-of-use assets and lease liabilities.