TETRA Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly filing for the three months ended March 31, 2012, compared with the same period in 2011. TETRA provides completion fluids and related products and services, production testing, wellhead compression, offshore services, and limited oil and gas exploration and production activities.
The company operates through Fluids, Production Testing, Compressco, Offshore Services, and Maritech. Maritech had sold substantially all of its producing properties, and its remaining activities primarily involve offshore well abandonment and decommissioning.
Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $180.8 million | $222.5 million | Down 18.8% |
| Gross profit | $32.4 million | $26.4 million | Up 22.9% |
| Gross margin | 17.9% | 11.8% | Up 6.1 percentage points |
| General and administrative expense | $30.9 million | $27.8 million | Up 11.3% |
| Income before taxes and discontinued operations | $1.8 million | $(4.0) million | Improved by $5.8 million |
| Net income | $1.1 million | $(2.5) million | Improved by $3.7 million |
| Net income attributable to TETRA stockholders | $0.7 million | $(2.5) million | Improved by $3.2 million |
| Diluted earnings per share | $0.01 | $(0.03) | Improved |
| Operating cash flow | $(11.6) million | $30.4 million | Decrease of $42.0 million |
| Capital expenditures | $25.8 million | $19.3 million | Increased |
| Cash used in investing activities | $(74.3) million | $(28.1) million | Increased use |
Cash and cash equivalents were $121.4 million at March 31, 2012, compared with $204.4 million at December 31, 2011. Restricted cash was $5.6 million. Total assets were $1.219 billion, and total equity was $575.8 million.
Total debt was approximately $307.0 million, including $305.0 million of long-term debt and approximately $2.0 million under the European credit facility. The company had no borrowings under its principal revolving credit facility as of May 9, 2012; $8.1 million of letters of credit and guarantees reduced net availability to approximately $269.9 million of the $278 million facility. The company reported compliance with its debt covenants as of March 31, 2012.
The company’s senior notes had an estimated fair value of approximately $332.8 million compared with a carrying value of approximately $305.0 million. The earliest significant senior-note maturity is $35.0 million due in April 2013.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Maritech revenue decreased by $41.4 million following sales of substantially all of its oil and gas producing properties. Maritech revenue is expected to remain negligible.
- Fluids revenue increased 2.6% to $79.3 million, while pretax income increased 58.2% to $11.5 million. Results benefited from stronger clear brine fluid sales and improved efficiency at the El Dorado, Arkansas calcium chloride plant.
- Production Testing revenue increased 15.3% to $38.3 million, but pretax income fell 37.5% to $5.7 million because of lower international profitability, higher personnel costs, and $1.3 million of Optima transaction costs.
- Compressco revenue increased 3.6% to $22.7 million and gross profit increased 19.1%, but pretax income declined 12.4% because of substantially higher administrative and public-company costs.
- Offshore Services revenue declined 12.8% to $45.1 million. The segment remained unprofitable at the gross-profit level, but its pretax loss improved because of an approximately $4.1 million gain on the sale of equipment.
- General and administrative expense increased by $3.1 million, including higher Compressco public-company costs and Optima acquisition expenses.
- Comprehensive income attributable to TETRA stockholders was $4.6 million, compared with a $3.4 million comprehensive loss in Q1 2011, primarily reflecting foreign currency translation gains.
Outlook, Risks, Contingencies, and Unusual Items
- In March 2012, TETRA acquired Optima Solutions Holdings Limited for approximately $64.6 million in cash. Optima contributed $1.5 million of revenue and $0.5 million of pretax earnings after the March 9 closing. The purchase-price allocation was preliminary and included $31.3 million of goodwill.
- In April 2012, after the reporting period, TETRA acquired Eastern Reservoir Services for approximately $42.5 million in cash. The acquisition expands Production Testing in the Appalachian and U.S. Rocky Mountain regions. Purchase-price allocation and pro forma information were not yet available in the filing.
- Management expects both acquisitions to contribute to revenue and profitability, and continues to pursue additional acquisitions. The acquisitions used more than $100 million of cash in aggregate.
- The company planned up to $140 million of 2012 capital expenditures, excluding acquisitions. Future capital spending may be postponed or cancelled depending on market conditions and liquidity needs.
- Operating cash flow was negative in Q1 2012, partly because of $15.7 million of decommissioning liability settlements and increased working-capital requirements.
- Maritech’s estimated third-party discounted decommissioning liability was $119.7 million at March 31, 2012. Approximately $94.2 million of the remaining cash outflow was expected over the twelve months ending March 31, 2013. Costs associated with two hurricane-damaged offshore platforms could materially exceed estimates and result in significant future charges.
- Low North American natural gas prices could reduce drilling activity and negatively affect Production Testing, Compressco, and Fluids.
- The company is exposed to customary oilfield-service hazards, environmental liabilities, litigation, foreign currency risk, and risks related to acquisitions, debt covenants, and capital-market access. Management did not expect current litigation to have a material adverse effect, but environmental remediation costs remain uncertain.
- The filing reports no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2012.
Important Facts for Investors to Verify
- Whether Optima and ERS achieve the expected revenue, profitability, and strategic benefits, including the impact of Optima’s contingent consideration of up to £4 million.
- The timing and ultimate cost of Maritech’s remaining decommissioning obligations, particularly the hurricane-damaged platforms.
- Cash generation and liquidity after the acquisitions, capital expenditures, and scheduled debt maturities.
- Compliance with revolving-credit and senior-note covenants as operating cash flow and leverage change.
- The sensitivity of Fluids, Production Testing, and Compressco to sustained low natural gas prices and reduced drilling activity.
- The sustainability of improved gross margins, excluding the approximately $4.1 million equipment-sale gain and other unusual items.
- The final purchase-price allocations and accounting effects for Optima and ERS, including goodwill, intangible assets, depreciation, amortization, and contingent liabilities.