TETRA Technologies, Inc. 2014 Q3 Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2014; filed November 10, 2014. TETRA is a diversified oil and gas services company operating in Fluids, Production Testing, Compression, and Offshore businesses. Results include Compressor Systems, Inc. (CSI) from its August 4, 2014 acquisition date.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $306.4 million | $254.3 million | $761.7 million | $684.0 million |
| Gross profit | $34.7 million | $47.4 million | $95.1 million | $116.9 million |
| Gross margin | 11.3% | 18.7% | 12.5% | 17.1% |
| Income before taxes | $(24.8) million | $18.7 million | $(38.0) million | $17.5 million |
| Net income attributable to TETRA stockholders | $(10.5) million | $12.1 million | $(19.9) million | $10.5 million |
| Diluted EPS | $(0.13) | $0.15 | $(0.25) | $0.13 |
| Operating cash flow | Not separately provided | Not separately provided | $51.9 million | $43.9 million |
- Cash and cash equivalents were $36.2 million at September 30, 2014, including approximately $21.1 million held by Compressco Partners and not immediately accessible to TETRA.
- Total assets were $2.19 billion, compared with $1.21 billion at December 31, 2013, principally reflecting the CSI acquisition.
- Consolidated debt was approximately $940.2 million, including $509.9 million attributable to Compressco Partners. TETRA excluding Compressco Partners had approximately $430.3 million of debt.
- At September 30, TETRA had $125.0 million outstanding under its revolving facility. As of November 7, 2014, approximately $69.1 million was available under that facility; Compressco Partners had approximately $227.9 million of availability under its $400 million facility.
- Capital expenditures were $84.1 million during the first nine months. Management planned up to approximately $135.4 million of 2014 capital expenditures, excluding acquisitions.
Material changes versus the prior comparable period
- Revenue increased 20.5% in the quarter and 11.4% for the first nine months, driven primarily by the CSI acquisition and additional growth in Fluids and Production Testing.
- Gross profit and margins declined substantially because of weaker Offshore Services and Fluids profitability, competitive pricing, customer delays, and higher depreciation and amortization.
- Compression revenue increased 222.2% in the quarter to $95.9 million. CSI contributed approximately $61.0 million of quarterly revenue and $6.4 million of pretax earnings, but the division reported a $6.6 million pretax loss after higher interest, transaction costs, and financing charges.
- Offshore Services revenue declined 28.8% in the quarter and 18.8% year to date. Quarterly pretax income fell to $0.6 million from $20.6 million, reflecting reduced Gulf of Mexico abandonment and diving activity and pricing pressure.
- Production Testing revenue increased 5.9% in the quarter but declined 8.9% year to date, due to lost or reduced activity from significant customers and competitive pressure in North American markets.
- Fluids revenue increased 5.7% in the quarter and 11.3% year to date, largely from water management and international activity, but gross margin fell to 24.7% from 28.8% in the quarter.
- Interest expense increased 134.8% in the quarter and 52.5% year to date due to acquisition-related borrowings and new Compressco debt.
- Noncontrolling interest increased materially after TETRA’s ownership of Compressco Partners declined from approximately 82% to approximately 44%, while TETRA retained control and continued consolidation.
Acquisitions, unusual items, outlook, and risks
- Compressco Partners acquired CSI for $825.0 million, funded with $350.0 million of 7.25% senior notes, equity issuance, and borrowings under a new $400.0 million credit facility. Integration and synergy realization remain important to future results.
- CSI-related costs included approximately $2.1 million of transaction expenses in the quarter, $9.3 million of interim financing costs, and approximately $0.8 million of expensed financing costs from the terminated prior Compressco facility.
- Maritech recorded approximately $22.9 million of excess decommissioning costs in the quarter and $41.9 million year to date. Remaining decommissioning liabilities were approximately $46.5 million, although actual costs could materially exceed estimates.
- Management expected increased future Compressco distributions beginning in the fourth quarter of 2014, supported by expanded operations and incentive distribution rights, but debt service will consume a portion of Compressco’s cash flow.
- Management cited continued competition, customer project delays, reduced Gulf of Mexico activity, international and domestic operating challenges, and ongoing cost-reduction initiatives.
- Production Testing and Offshore Services goodwill remained supported as of September 30, but estimated fair value exceeded carrying value by only approximately 11% and 25%, respectively. Adverse market developments could result in material future impairment.
- TETRA and Compressco were in compliance with their debt covenants at September 30, 2014. However, deterioration in operating results, higher decommissioning costs, or unsuccessful CSI integration could reduce covenant headroom and liquidity.
- The company reported effective disclosure controls. CSI was still being integrated into internal control processes and was expected to be excluded from TETRA’s December 31, 2014 internal-control assessment.
Most important facts for investors to verify
- Whether CSI integration produces the expected operating synergies and cash flow sufficient to service approximately $509.9 million of Compressco debt.
- Actual fourth-quarter and 2015 distributions from Compressco Partners and the amount accessible to TETRA after debt service and other restrictions.
- Compliance headroom under TETRA’s and Compressco’s leverage and interest-coverage covenants, particularly if margins remain depressed.
- The final purchase-price allocation for CSI and any resulting goodwill or intangible-asset impairment exposure.
- Whether Production Testing and Offshore Services performance improves enough to avoid a material goodwill impairment.
- Actual remaining Maritech abandonment and decommissioning costs versus the approximately $46.5 million estimate.
- Cash requirements for planned capital expenditures, acquisitions, debt maturities, and the $90.0 million of debt due in 2015.