TETRA Technologies, Inc. — 2012 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. TETRA is a geographically diversified oil and gas services company operating in Fluids, Production Testing, Compressco, Offshore Services, and Maritech. Its activities include completion fluids, production testing, wellhead compression, offshore services, and remaining well abandonment and decommissioning.
Key financial metrics
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Total revenue | $234.0 million | $201.4 million | $649.7 million | $659.1 million |
| Gross profit | $50.9 million | $35.7 million | $136.4 million | $97.8 million |
| Gross margin | 21.7% | 17.7% | 21.0% | 14.8% |
| Income before taxes | $13.1 million | $2.8 million | $33.3 million | $46.3 million |
| Net income attributable to TETRA stockholders | $7.7 million | $1.4 million | $20.0 million | $29.2 million |
| Diluted earnings per share | $0.10 | $0.02 | $0.25 | $0.37 |
| Cash flow from operating activities | Not separately presented | Not separately presented | $(17.4) million | $48.4 million |
At September 30, 2012, cash and cash equivalents were $20.9 million, restricted cash was $5.6 million, and total current assets were $404.2 million. Total debt was $368.6 million, including $35.7 million classified as current, compared with $305.0 million of total debt at December 31, 2011. Total equity was $596.5 million and total assets were $1.278 billion.
Operating cash flow was negatively affected by a $71.8 million increase in accounts receivable and $60.9 million of decommissioning liability settlements. Investing cash outflows were $227.9 million, including $163.3 million for acquisitions and $80.6 million for capital expenditures. Financing activities provided $59.6 million, principally from $64.2 million of long-term debt proceeds.
Material changes versus prior comparable periods
- Third-quarter revenue increased 16.2%, gross profit increased 42.7%, and net income attributable to TETRA stockholders increased 456.1% year over year.
- For the first nine months, revenue declined 1.4% and stockholder net income declined 31.7%, largely because 2011 included substantial Maritech asset-sale gains, including approximately $58.2 million from the sale of producing properties.
- Production Testing benefited from the Optima, ERS, and Greywolf acquisitions. These acquisitions contributed approximately $21.5 million of third-quarter revenue and $37.0 million of nine-month revenue.
- Compressco revenue increased 15.7% in the quarter and 11.1% year to date, driven primarily by Latin American activity. Average compressor utilization increased to 82.0% in the quarter and 81.9% for the nine months.
- Fluids revenue increased 15.0% in the quarter and 5.5% year to date, primarily from higher clear brine fluids sales associated with Gulf of Mexico activity. European calcium chloride operations experienced repairs, partial shutdowns, and higher costs.
- Offshore Services revenue declined 11.0% in the quarter and 10.1% year to date. Weather disruptions, customer delays, pricing pressure, reduced activity, vessel repairs, and asset sales offset higher heavy-lift decommissioning revenue.
- Maritech revenue declined 93.6% year to date following the sale of substantially all producing properties. Its remaining activities are primarily abandonment and decommissioning.
- General and administrative expense increased 24.4% in the quarter and 14.6% year to date, reflecting acquisition-related costs, higher personnel costs, professional fees, Compressco public-company expenses, and severance-related equity compensation.
Guidance, outlook, risks, contingencies, and unusual items
- Management planned up to $115 million of 2012 capital expenditures, excluding acquisitions, while noting that projects could be deferred or cancelled to conserve capital.
- Management stated that approximately $198.6 million remained available under the revolving credit facility as of November 9, 2012, after subsequent borrowings. The company also expected to fund the $35.0 million Series 2008-A Senior Notes maturity in April 2013 with cash, revolver borrowings, or additional debt.
- Oil and natural gas prices and industry activity materially affect demand, revenue, and operating cash flow. Lower natural gas prices have reduced certain North American activity levels, particularly affecting Production Testing, Compressco, and Fluids.
- Maritech’s remaining decommissioning liability had an estimated third-party discounted value, including estimated profit, of $92.2 million. Approximately $75.8 million of related cash outflows were expected during the twelve months ending September 30, 2013. Costs associated with a hurricane-damaged offshore platform could materially exceed current estimates.
- As of September 30, 2012, the company identified a reasonable possibility that all or part of approximately $3.9 million of Offshore Services goodwill could be impaired in a future period. The filing reported no impairment at the reporting date.
- The company was in compliance with its credit agreement and senior-note covenants at September 30, 2012. Variable-rate borrowings expose the company to interest-rate risk; no interest-rate swaps were outstanding.
- Litigation and governmental proceedings arise in the ordinary course; management did not expect them to have a material adverse effect. TETRA Micronutrients remains responsible for future remediation and monitoring costs at the Fairbury, Nebraska facility.
- Unusual year-to-date comparisons include the absence of 2011 Maritech asset-sale gains and hedge ineffectiveness losses, as well as 2012 acquisition costs and a $4.1 million gain on the sale of Offshore Services assets.
- Management stated that disclosure controls and procedures were effective as of September 30, 2012, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether production-testing acquisitions generate sustained organic growth and expected synergies after the initial contribution to 2012 results.
- The company’s ability to convert improved reported profitability into positive operating cash flow, given significant working-capital needs and decommissioning payments.
- Funding and refinancing plans for the $35.0 million debt maturity in April 2013 and compliance with leverage and interest-related covenants.
- The timing and ultimate cost of Maritech’s remaining abandonment and decommissioning obligations, including the hurricane-damaged platform.
- Potential goodwill impairment at Offshore Services if pricing, utilization, demand, or competition deteriorates.
- Exposure to oil and natural gas prices, Latin American contract renewals, Gulf of Mexico permitting, weather disruptions, and offshore operational hazards.
- The final purchase-price allocations and contingent consideration for Optima, ERS, and Greywolf, which were preliminary at the reporting date.