TETRA Technologies, Inc. 2015 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
TETRA Technologies, Inc. is a diversified oil and gas services company providing completion fluids, water management, production testing, compression services and equipment, offshore services, and related decommissioning services. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Results include the August 2014 acquisition of Compressor Systems, Inc. by consolidated subsidiary CSI Compressco LP.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $251.1 million | $212.9 million | Up 18.0% |
| Gross profit | $46.1 million | $24.9 million | Up 85.5% |
| Gross margin | 18.4% | 11.7% | Up 6.7 percentage points |
| General and administrative expense | $35.3 million | $33.4 million | Up 5.5% |
| Interest expense, net | $12.9 million | $4.7 million | Up $8.2 million |
| Loss before taxes | $2.1 million | $10.7 million | Improved by $8.6 million |
| Net loss attributable to TETRA stockholders | $4.4 million | $6.9 million | Improved by $2.5 million |
| Basic and diluted loss per share | $0.06 | $0.09 | Improved |
| Cash flow from operations | $27.8 million | $36.1 million | Down 22.9% |
| Capital expenditures | $49.0 million | $28.8 million | Up $20.2 million |
Services and rentals revenue increased to $166.2 million from $136.1 million, while product sales increased to $84.9 million from $76.8 million. Rental revenue increased substantially to $45.4 million from $2.8 million, primarily reflecting the expanded compression business.
At March 31, 2015, cash and cash equivalents were $34.5 million, including approximately $25.5 million held by CCLP and not accessible to TETRA. Total debt was $859.8 million, consisting of $306.7 million of TETRA debt and $553.1 million of CCLP debt. Current debt was $90.0 million. Total equity was $744.6 million. The company reported approximately $121.0 million of availability under TETRA’s revolving credit facility and approximately $190.8 million under CCLP’s facility.
Material Changes Versus the Prior Comparable Period
- Compression Division revenue increased 245.7% to $102.9 million, primarily because of the CSI acquisition, which contributed approximately $71.3 million of revenue and $5.8 million of pretax earnings.
- Compression gross profit increased to $22.8 million from $10.0 million, but pretax income declined to $2.4 million from $5.2 million because of higher administrative expenses, interest expense, and financing-cost amortization.
- Fluids revenue decreased 5.6% to $99.3 million, but gross margin improved to 25.5% from 23.2% through cost reductions and favorable product and service mix.
- Production Testing revenue declined 15.0% to $37.1 million, while gross margin improved to 7.7% from 4.9%; the division moved from a $2.8 million pretax loss to near break-even pretax income.
- Offshore Services revenue declined 66.6% to $11.8 million and pretax loss increased to $8.6 million, reflecting reduced diving, well abandonment, and heavy-lift activity.
- Maritech improved from a $6.5 million pretax loss to $1.0 million of pretax income because the prior-year period included $7.9 million of excess decommissioning costs.
- Foreign currency translation reduced comprehensive income by $9.8 million in 2015, compared with a $2.5 million reduction in 2014.
Liquidity, Debt, and Cash Flow
Operating cash flow declined despite improved working-capital management and lower Maritech decommissioning expenditures. Investing cash use exceeded operating cash generation, producing a $13.9 million decrease in cash during the quarter. CCLP generated approximately $32.5 million of operating cash flow and distributed approximately $7.3 million to TETRA.
The $90.0 million Series 2008-B Senior Notes matured on April 30, 2015. TETRA issued $50.0 million of Senior Secured Notes due April 1, 2017 and borrowed an additional $40.0 million under its revolving credit facility to fund repayment. The new notes are secured by TETRA accounts receivable, excluding CCLP receivables, and TETRA’s limited partner interest in CCLP.
Management stated that it expected adequate liquidity and covenant compliance through March 31, 2016, based on current activity levels, cost reductions, available borrowing capacity, and potential asset sales or financing transactions. The company and CCLP were in compliance with their debt covenants at March 31, 2015. TETRA’s leverage ratio was 2.88 to 1.
Guidance, Outlook, Risks, and Unusual Items
- Management reduced planned 2015 capital expenditures from approximately $150 million to approximately $130 million to $140 million, excluding acquisitions; approximately $100 million was expected to relate to CSI.
- Low oil and natural gas prices, reduced customer capital budgets, lower drilling activity, project delays, and increased competition are expected to pressure demand and cash flow.
- Management is pursuing headcount reductions, cost rationalization, asset redeployment, CSI integration synergies, potential asset sales, and financing alternatives.
- Maritech had approximately $54.2 million of remaining decommissioning liabilities at March 31, 2015, including approximately $9.2 million expected to be performed during the following twelve months. Actual costs may exceed estimates because of damaged platforms, uncertain site conditions, and wells that develop pressure after abandonment.
- There is a reasonable possibility of future goodwill impairment for the Production Testing and Compression reporting units. Their estimated fair values exceeded carrying values by approximately 11% and 4%, respectively, with $52.1 million and $232.2 million of goodwill recorded.
- The company faces customer credit risk, particularly from smaller energy companies affected by low commodity prices. It may also have continuing exposure if purchasers or co-owners of previously sold Maritech properties cannot fund decommissioning obligations.
- Income tax expense was $1.6 million despite a pretax loss because valuation allowances prevented recognition of tax benefits for certain domestic and foreign losses.
- Management reported effective disclosure controls as of March 31, 2015, while integration of CSI into internal control processes was ongoing.
Important Facts for Investors to Verify
- Whether compression demand, CSI integration synergies, and CCLP distributions develop as expected.
- Whether low commodity prices cause further revenue declines, customer project delays, pricing pressure, or covenant stress.
- Available liquidity at TETRA separately from CCLP, including restricted access to CCLP cash and the maturity profile of TETRA debt.
- Progress toward reducing capital expenditures and the effect of capital spending on operating cash flow.
- Potential goodwill impairment in the Compression and Production Testing reporting units.
- Actual costs and timing of Maritech decommissioning obligations, including possible liabilities related to previously sold properties, pressured wells, and nonperforming co-owners.
- Future tax benefits and the continued realizability of deferred tax assets subject to valuation allowances.