TETRA Technologies, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. TETRA is a diversified oil and gas services company operating through five segments: Fluids, Production Testing, Compressco, Offshore Services, and Maritech. Its businesses provide completion fluids, calcium chloride and bromide products, water management, production testing, wellhead compression, offshore abandonment and decommissioning, diving, and limited oil and gas production.
Maritech had sold substantially all of its producing properties during 2011 and early 2012. Its remaining activities primarily involve plugging, abandonment, and decommissioning of offshore wells, platforms, and facilities.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $909.4 million | $880.8 million | Up 3.2% |
| Gross profit | $135.4 million | $167.4 million | Down 19.1% |
| Gross margin | 14.9% | 19.0% | Down 4.1 percentage points |
| Income before taxes | $(0.1) million | $28.2 million | Down $28.3 million |
| Net income | $3.3 million | $18.8 million | Down 82.3% |
| Net income attributable to TETRA stockholders | $0.2 million | $16.0 million | Down 99.0% |
| Diluted EPS attributable to TETRA stockholders | $0.00 | $0.20 | Down $0.20 |
| Operating cash flow | $49.7 million | $17.7 million | Up $32.0 million |
| Capital expenditures | $101.4 million | $107.5 million | Down $6.1 million |
Fourth-quarter revenue was $225.4 million, compared with $231.1 million in the fourth quarter of 2012. Fourth-quarter gross profit was $18.5 million, compared with $32.2 million. Net loss attributable to TETRA stockholders was $10.3 million, or $(0.13) per diluted share, compared with a loss of $4.0 million, or $(0.05) per diluted share.
At December 31, 2013, cash and cash equivalents were $38.8 million, restricted cash was $9.1 million, working capital was $200.9 million, total assets were $1.21 billion, and equity was $597.5 million.
Total debt was approximately $387.8 million, equal to a reported debt-to-total-capital ratio of 36.9%. The company had $52.8 million drawn under its $278 million revolving credit facility, plus $9.5 million of letters of credit and guarantees, leaving approximately $215.7 million of net availability at year-end. Compressco Partners had $30.0 million outstanding and approximately $37.0 million of availability under its asset-based facility at December 31, 2013.
Segment performance and material changes
- Fluids: Revenue increased 14.4% to $382.7 million; gross profit increased 26.0% to $100.1 million; gross margin improved to 26.2% from 23.7%. Growth came from water management, manufactured products, and stronger Gulf of Mexico clear-brine-fluid demand.
- Production Testing: Revenue declined 5.8% to $196.0 million; gross profit declined 49.0% to $29.6 million; gross margin fell to 15.1% from 27.9%. Results were affected by lower Mexico activity, suspension of a significant South Texas customer’s activity, competitive pressure, and higher labor costs.
- Compressco: Revenue increased 10.8% to $121.3 million, but gross profit was essentially flat at $38.7 million and gross margin fell to 31.9% from 35.6%. U.S., Canadian, and Argentine growth offset lower Mexico activity, while labor, maintenance, fuel, and interest costs increased.
- Offshore Services: Revenue decreased 3.8% to $255.8 million, while gross profit increased 8.6% to $36.1 million and gross margin improved to 14.1%. Cost reductions offset weaker Gulf of Mexico activity, weather delays, project delays, and pricing pressure.
- Maritech: Revenue was only $5.6 million, while the pretax loss widened to $64.4 million from $42.8 million. The segment recorded approximately $75.3 million of excess decommissioning costs, partly offset by approximately $5.7 million of insurance settlements and a $5.4 million gain on an asset sale.
Consolidated gross profit and earnings declined despite revenue growth because of Maritech’s decommissioning charges and weaker Production Testing results. General and administrative expense was broadly stable at $131.5 million. Long-lived asset impairments totaled $9.6 million, including approximately $9.3 million related to the TETRA DB-1 heavy-lift barge, which was sold in January 2014 for $3.0 million.
Cash flow, liquidity, debt, and commitments
- Operating cash flow rose to $49.7 million, primarily due to improved collections and working-capital management, despite $114.1 million spent on Maritech decommissioning and related work.
- Investing cash outflow was $100.0 million, principally reflecting $101.4 million of capital expenditures. Fluids spent approximately $45.3 million and Production Enhancement spent approximately $50.8 million.
- Financing activities provided $15.7 million. The company issued $35.0 million of 4.0% Senior Notes in April 2013 and used the proceeds to repay the maturing 2008-A notes.
- Contractual cash obligations totaled approximately $779.6 million, including $387.8 million of debt, $205.9 million of purchase obligations, $50.9 million of decommissioning and asset-retirement obligations, and $74.8 million of operating and capital leases.
- Scheduled debt maturities include approximately $172.7 million in 2015 and $90.0 million in 2016. Management reported compliance with debt covenants at December 31, 2013.
Guidance, outlook, risks, and unusual items
Management expected operating cash flow to improve as most of Maritech’s remaining decommissioning work was scheduled for 2014. Remaining Maritech decommissioning liabilities were approximately $43.3 million at year-end, with approximately $38.7 million planned for completion during 2014. Actual costs could exceed estimates, particularly for hurricane-damaged platforms and remediation of previously plugged wells.
Management planned up to approximately $119 million of 2014 capital expenditures, excluding acquisitions, although projects could be postponed or canceled depending on market and financing conditions. The company also expected growth from shale-related applications, offshore completion activity, regulatory-driven decommissioning, and international expansion.
In January 2014, TETRA acquired the remaining 50% of TETRA Arabia for $25.2 million, including $15.0 million paid at closing and $10.2 million payable in June 2014. It also acquired TD Water Transfer for $15.0 million in cash, plus contingent consideration of up to approximately $8.0 million. These transactions were expected to expand Fluids and Production Testing operations, but purchase-price allocations were not complete when the filing was issued.
- Results remain sensitive to oil and natural gas prices, customer exploration and production spending, natural gas prices, competition, and activity in the Gulf of Mexico, Mexico, and other international markets.
- Offshore operations face regulatory, safety, environmental, weather, insurance, vessel-utilization, and fixed-price-contract risks.
- Maritech’s decommissioning estimates are highly judgmental and could require additional charges or cash expenditures.
- Debt refinancing and covenant compliance are material considerations, particularly ahead of the 2015 maturities.
- Customer credit exposure, reliance on certain suppliers, foreign exchange volatility, Mexico budget and security conditions, and Argentina’s economic instability may affect results.
- No material adverse impact from pending litigation or environmental proceedings was considered reasonably possible by management; TETRA Micronutrients remains subject to remediation and monitoring obligations at a former Nebraska facility.
Important facts for investors to verify
- Whether Maritech’s approximately $43.3 million of remaining decommissioning liabilities, including the planned 2014 expenditures, were completed within budget.
- Whether Production Testing margins recover after the 2013 decline and whether Offshore Services replaces lower-margin Maritech work with third-party projects.
- Actual 2014 capital expenditures, operating cash flow, acquisition spending, and debt reduction relative to management’s plans.
- The integration, earnings contribution, and final purchase-price allocations for TETRA Arabia and TD Water Transfer.
- Debt refinancing plans for the 2015 maturities and continued compliance with minimum interest coverage and maximum leverage covenants.
- Exposure to additional impairment charges, hurricane-related costs, environmental liabilities, insurance shortfalls, and potential obligations related to previously sold Maritech properties.