TETRA Technologies, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
TETRA Technologies is an industrial and oil and gas products and services company operating across six continents. Its continuing operations comprise the Completion Fluids & Products Division and the Water & Flowback Services Division. The filing covers the three months ended March 31, 2023, and was filed May 1, 2023. Former Compression and Offshore Division activities are reported as discontinued operations.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $146.2 million | $130.0 million | 12.4% increase |
| Gross profit | $36.3 million | $32.4 million | 12.0% increase |
| Gross margin | 24.8% | 24.9% | Down 0.1 percentage point |
| Income before taxes and discontinued operations | $7.5 million | $8.9 million | 15.7% decrease |
| Net income attributable to TETRA stockholders | $6.0 million | $7.7 million | 21.8% decrease |
| Diluted earnings per share | $0.05 | $0.06 | Decrease |
| Adjusted EBITDA | $20.6 million | $20.5 million | 0.5% increase |
| Cash flow from operations | $9.0 million | $5.9 million | Increase |
| Capital expenditures | $12.8 million | $9.3 million | Increase |
Completion Fluids & Products revenue was $69.0 million, down 5.7% year over year, while Water & Flowback Services revenue was $77.2 million, up 35.8%. Segment income before taxes was $18.4 million and $6.4 million, respectively.
Cash and cash equivalents were $16.7 million at March 31, 2023, compared with $13.6 million at December 31, 2022. Management reported total liquidity of $86.7 million, including unrestricted cash and available borrowing capacity. Working capital included $83.9 million of inventory and $117.6 million of trade accounts receivable.
Total debt on the balance sheet was $162.7 million, including $160.5 million of long-term debt. Separately, the filing reports $171.4 million of aggregate principal debt, before certain discounts and deferred financing costs. The term credit agreement carried an 10.88% interest rate, and the company was in compliance with all debt covenants.
Material changes versus comparable periods
- Revenue increased primarily because of stronger Water & Flowback Services activity, higher pricing and volumes, and contributions from two early production facilities in Argentina that began operating in 2022.
- Completion Fluids & Products revenue declined because of lower Gulf of Mexico activity and project timing, partly offset by stronger Latin American and U.S. onshore volumes, improved industrial chemical pricing, and higher European sales.
- Gross profit benefited from improved activity, pricing and mix, but included a $2.9 million insurance recovery related to Hurricane Laura damage. Q1 2022 included a $3.8 million recovery.
- Interest expense increased 53.2% to $5.1 million because of higher borrowing costs and increased ABL borrowings.
- General and administrative expense increased 12.3% to $23.2 million, primarily because of higher wages, benefits, incentive compensation, headcount and professional fees.
- Exploration and pre-development costs declined 62.7% to $0.7 million following completion of a prior-quarter front-end engineering and design study related to the Arkansas bromine project.
- Operating cash flow improved, but capital expenditures increased to support additional SandStorm units, fleet upgrades and construction of the third Argentine early production facility. Financing activity included $52.8 million of borrowings and $47.4 million of repayments.
Guidance, outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management described international and offshore activity growth as strong, noted high utilization and positive pricing for the SandStorm fleet, and expected a third Argentine early production facility to begin operations in Q2 2023.
- The company planned a Q2 2023 expansion of its Brazil completion-fluids blending and storage facility. In March 2023, it agreed to acquire an adjacent Brazilian chemical plant for $3.2 million, subject to government approval.
- TETRA continues to evaluate lithium and bromine opportunities in Southwest Arkansas. The disclosed resources are inferred, have low geological confidence, and do not demonstrate economic value. Further exploration, studies, financing and other conditions are required before a final investment decision.
- The company adopted a Tax Benefits Preservation Plan in February 2023 to protect approximately $105.1 million of U.S. federal, state and foreign NOL-related deferred tax assets disclosed as of December 31, 2022. The plan may dilute or restrict certain acquisitions of 4.99% or more of the common stock and was intended to be submitted for stockholder ratification.
- Arbitration with LANXESS remains pending over a proposed bromine price increase. LANXESS has asserted a counterclaim seeking damages related to the increase. The final hearing was scheduled to begin March 4, 2024, and the potential financial impact could not be predicted.
- Liquidity and earnings remain exposed to commodity and oilfield activity levels, customer payment delays, borrowing-base changes, interest rates, foreign exchange, inflation, supply-chain conditions, product mix and the availability of capital.
- Unusual or nonrecurring items included the $2.9 million insurance recovery, changes in the fair value of investments, $0.7 million of exploration costs, and equity-based compensation. Adjusted EBITDA is non-GAAP and may not be comparable with other companies.
Important facts for investors to verify
- Reconcile reported balance-sheet debt of $162.7 million with the $171.4 million aggregate principal amount and review maturities, interest rates and required excess-cash-flow repayments.
- Assess whether the $86.7 million liquidity figure remains available after considering borrowing-base requirements, letters of credit, guarantees and covenant compliance.
- Determine the sustainability of margins excluding the $2.9 million insurance recovery and evaluate the effect of higher interest and corporate costs.
- Monitor utilization, pricing and cash generation from the SandStorm fleet and the timing and economics of the third Argentine early production facility.
- Track approval and closing of the $3.2 million Brazil plant acquisition and the related expansion spending.
- Review the LANXESS arbitration, potential bromine procurement costs and any eventual damages or pricing changes.
- Evaluate the feasibility, funding requirements and geological validation of the Arkansas lithium and bromine projects; inferred resources should not be treated as reserves or demonstrated economic resources.
- Review the Tax Benefits Preservation Plan, NOL expiration schedule and the possible effect of ownership changes on future cash taxes and common-stock marketability.