TETRA Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Filed October 31, 2022, for the quarter and nine months ended September 30, 2022. TETRA operates on six continents through two continuing segments: Completion Fluids & Products and Water & Flowback Services. The former Compression and Offshore divisions are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $135.0 million | $95.5 million | $405.8 million | $275.1 million |
| Gross profit | $29.5 million | $15.7 million | $90.0 million | $40.0 million |
| Gross margin | 21.8% | 16.5% | 22.2% | 14.6% |
| Income before taxes and discontinued operations | $2.1 million | $3.1 million | $12.3 million | $(14.0) million |
| Net income attributable to TETRA stockholders | $0.3 million | $2.5 million | $9.7 million | $104.5 million |
| Diluted EPS | $0.00 | $0.02 | $0.08 | $0.83 |
| Operating cash flow | Not separately provided | Not separately provided | $25.9 million | $10.4 million |
Adjusted EBITDA was $18.6 million in Q3, or 13.8% of revenue, compared with $18.7 million, or 13.3% of revenue, in Q2 2022. Q3 revenue declined 4.1% sequentially, while gross profit increased 4.9% and gross margin improved from 20.0%.
Cash and cash equivalents were $25.2 million at September 30, 2022, versus $31.6 million at December 31, 2021. Nine-month capital expenditures were $32.7 million, producing approximate cash flow before financing and other investing items of negative $6.7 million. Total debt was $153.9 million net of discounts and financing costs on the balance sheet; reported principal under the term credit agreement was $163.1 million as of October 28, 2022. Reported liquidity was $92.3 million, including cash and available credit facilities.
Material changes versus comparable periods
- Q3 revenue increased 41.4% year over year, driven by higher activity in both segments. Nine-month revenue increased 47.5%.
- Completion Fluids & Products revenue increased 21.4% in Q3 and 29.6% for the nine months. Nine-month segment gross margin improved to 32.2% from 27.0%.
- Water & Flowback Services revenue increased 62.1% in Q3 and 72.2% for the nine months. Nine-month gross profit improved to $23.8 million from a $2.5 million loss, reflecting higher activity, pricing, technology investments and early production facilities in Argentina.
- Q3 consolidated income attributable to TETRA stockholders declined despite stronger operations, primarily because of higher taxes, interest expense and corporate costs, as well as lower investment-related gains.
- Nine-month 2021 results included a primarily non-cash $120.6 million gain from the GP Sale and therefore are not directly comparable to 2022 net income.
- General and administrative expense increased 21.4% for the nine months, mainly from restored salaries and benefits, incentive compensation and additional personnel.
- Cash from operations increased to $25.9 million from $10.4 million, while capital expenditures increased to $32.7 million from $14.6 million.
Guidance, outlook, risks and unusual items
- No formal quantitative earnings or revenue guidance is provided in the filing. Management expects continued benefits from higher commodity prices, Water & Flowback activity, high SandStorm utilization and early production facilities. A third Argentina facility is expected to begin operations in early 2023.
- Management reported an expanding pipeline of TETRA CS Neptune completion-fluid opportunities, with additional projects expected to begin late in 2023. It also expects continued shipments of TETRA PureFlow zinc bromide to Eos Energy Enterprises.
- TETRA reported inferred resources of approximately 5.25 million short tons of elemental bromine and 44,000 short tons of elemental lithium, equivalent to approximately 234,000 short tons of lithium carbonate equivalent. These are inferred resources, not reserves, and their economic or legal recoverability is uncertain.
- The company expects to complete an initial economic assessment for a bromine extraction plant and begin lithium extraction assessment work in 2023. Exploration and appraisal costs were $3.5 million through nine months.
- Supply-chain disruptions related indirectly to the Russia-Ukraine conflict reduced calcium chloride production and affected margins during the first half of 2022. Supply improved but had not returned to full production levels at filing.
- TETRA is arbitrating with LANXESS over a proposed bromine price increase. LANXESS filed a counterclaim seeking, among other relief, damages tied to the proposed increase beginning July 1, 2022. The outcome and financial impact cannot currently be predicted.
- The company carries $153.9 million of debt on the balance sheet, with the term facility bearing an 8.77% rate at September 30, 2022. Rising interest rates may increase financing costs. TETRA was in compliance with its debt covenants.
- Q2 included $2.3 million of impairments, while the first nine months included a $3.8 million insurance recovery related to damage at the Lake Charles facility. Q3 taxes were unusually high relative to pretax income, with a 103.0% effective rate due primarily to changes in the full-year forecast.
- The Inflation Reduction Act may benefit low-carbon and carbon-capture opportunities but could also accelerate substitution away from fossil fuels and reduce demand from oil and gas customers.
Important facts for investors to verify
- Reconcile reported liquidity of $92.3 million to cash, ABL availability, and Swedish and Finland facilities, including borrowing-base and covenant restrictions.
- Confirm the difference between $153.9 million of balance-sheet debt and $163.1 million of term-loan principal reported as of October 28, 2022.
- Monitor the LANXESS arbitration, potential bromine-price exposure and the company’s $120.2 million of fixed and determinable product-purchase obligations through 2029.
- Assess whether Water & Flowback margin improvements and Argentina facility cash flows persist as capital spending remains elevated.
- Evaluate the funding requirements, economic assessments and permitting needed to commercialize the Arkansas bromine and lithium resources; inferred resources should not be treated as economically recoverable reserves.
- Review exposure to commodity prices, raw-material availability, foreign exchange, customer receivable collections, interest rates and potential future debt or equity financing.