SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 Commission file number 0-18335 TETRA TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2148293 (State of incorporation) (I.R.S. Employer Identification No.) 25025 I-45 NORTH, THE WOODLANDS, TEXAS 77380 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (281) 367-1983 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. As of August 7, 1999 there were 13,522,701 shares of the Company's common stock, $.01 par value per share, issued and outstanding.
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------ ------------------------ ($ Thousands, except per share amounts) 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: PRODUCT SALES ........................ $ 33,047 $ 40,189 $ 70,912 $ 83,188 SERVICES ............................. 17,259 23,598 37,391 47,935 ---------- ---------- ---------- ---------- TOTAL REVENUES ................... 50,306 63,787 108,303 131,123 COST OF REVENUES: COST OF PRODUCT SALES ................ 27,491 29,479 57,942 61,514 COST OF SERVICES ..................... 12,703 17,391 26,105 34,445 ---------- ---------- ---------- ---------- TOTAL COST OF REVENUES ........... 40,194 46,870 84,047 95,959 ---------- ---------- ---------- ---------- GROSS PROFIT ..................... 10,112 16,917 24,256 35,164 GENERAL AND ADMINISTRATIVE EXPENSE ....... 10,154 9,410 20,675 19,701 SPECIAL CHARGE ........................... -- -- 4,745 -- ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS) ....... (42) 7,507 (1,164) 15,463 GAIN ON SALE OF ADMINISTRATION BUILDING .. -- -- 6,731 -- GAIN ON SALE OF BUSINESS ................. 28,829 -- 28,829 -- INTEREST EXPENSE, NET .................... 2,158 1,371 4,371 2,593 OTHER INCOME (EXPENSE) ................... (5) (160) 102 (337) ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 26,624 5,976 30,127 12,533 PROVISION FOR INCOME TAXES ............... 10,130 2,262 11,530 4,882 ---------- ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................... 16,494 3,714 18,597 7,651 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NET OF INCOME TAX EFFECT) ......... -- -- (5,782) -- ---------- ---------- ---------- ---------- NET INCOME ....... $ 16,494 $ 3,714 $ 12,815 $ 7,651 ========== ========== ========== ========== NET INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACOUNTING CHANGE ............ $ 1.22 $ 0.27 $ 1.38 $ 0.56 CUMULATIVE EFFECT OF ACCOUNTING CHANGE .. -- -- ($ 0.43) -- ---------- ---------- ---------- ---------- NET INCOME PER SHARE ..................... $ 1.22 $ 0.27 $ 0.95 $ 0.56 ========== ========== ========== ========== AVERAGE SHARES ........................... 13,523 13,609 13,522 13,590 ========== ========== ========== ========== NET INCOME PER DILUTED SHARE BEFORE CUMULATIVE EFFECT ACCOUNTING CHANGE ... $ 1.22 $ 0.26 $ 1.37 $ 0.54 CUMULATIVE EFFECT OF ACCOUNTING CHANGE .. -- -- ($ 0.43) -- ---------- ---------- ---------- ---------- NET INCOME PER DILUTED SHARE ............. $ 1.22 $ 0.26 $ 0.94 $ 0.54 ========== ========== ========== ========== AVERAGE DILUTED SHARES ................... 13,573 14,265 13,564 14,262 ========== ========== ========== ========== </TABLE> See Notes to Consolidated Financial Statements -1-
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ($ Thousands) 1999 1998 ------------ ------------ (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS ............................... $ 1,648 $ 2,803 TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $906 IN 1999 AND $853 IN 1998 ............ 53,320 56,167 COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON INCOMPLETE CONTRACTS .............................. -- 5,641 INVENTORIES ............................................. 59,039 58,478 DEFERRED TAX ASSETS ..................................... 3,997 4,099 PREPAID EXPENSES AND OTHER CURRENT ASSETS ............... 4,927 3,731 ------------ ------------ TOTAL CURRENT ASSETS ............................... 122,931 130,919 PROPERTY, PLANT AND EQUIPMENT: LAND AND BUILDING ....................................... 12,167 16,761 MACHINERY AND EQUIPMENT ................................. 109,396 109,116 AUTOMOBILES AND TRUCKS .................................. 8,729 8,485 CHEMICAL PLANTS ......................................... 51,598 48,040 CONSTRUCTION IN PROGRESS ................................ 5,804 23,201 ------------ ------------ 187,694 205,603 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION .......... (56,534) (60,007) ------------ ------------ NET PROPERTY, PLANT, AND EQUIPMENT ................. 131,160 145,596 OTHER ASSETS: ................................................ ` COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF $2,739 IN 1999 AND $2,510 IN 1998 ... 33,768 26,190 OTHER, NET OF ACCUMULATED AMORTIZATION OF $3,055 IN 1999 AND $3,680 IN 1998 ................................... 8,038 8,303 ------------ ------------ TOTAL OTHER ASSETS ................................. 41,806 34,493 ------------ ------------ $ 295,897 $ 311,008 ============ ============ </TABLE> See Notes to Consolidated Financial Statements -2-
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ($ Thousands) 1999 1998 ------------ ------------ (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: TRADE ACCOUNTS PAYABLE ................................... $ 22,241 $ 29,322 ACCRUED EXPENSES ......................................... 26,684 11,335 BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON INCOMPLETE CONTRACTS ....................... -- 956 CURRENT PORTIONS OF ALL LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ...................................... 1,186 1,007 ------------ ------------ TOTAL CURRENT LIABILITIES ........................... 50,111 42,620 LONG-TERM DEBT, LESS CURRENT PORTION .......................... 76,230 109,000 CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION ............... 1,054 1,307 DEFERRED INCOME TAXES ......................................... 14,861 17,759 OTHER LIABILITIES ............................................. 1,670 1,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: COMMON STOCK, PAR VALUE $.01 PER SHARE 40,000,000 SHARES AUTHORIZED, WITH 13,522,701 SHARES ISSUED AND OUTSTANDING IN 1999 AND 13,514,340 SHARES ISSUED AND OUTSTANDING IN 1998 ......................... 136 136 ADDITIONAL PAID-IN CAPITAL ............................... 77,939 77,923 TREASURY STOCK, AT COST, 94,000 SHARES IN 1999 AND IN 1998 (1,107) (1,168) ACCUMULATED OTHER COMPREHENSIVE INCOME ................... (339) (96) RETAINED EARNINGS ........................................ 75,342 62,527 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY .......................... 151,971 139,322 ------------ ------------ $ 295,897 $ 311,008 ============ ============ </TABLE> See Notes to Consolidated Financial Statements -3-
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ---------------------------- ($ Thousands) 1999 1998 ------------ ------------ <S> <C> <C> Operating Activities: NET INCOME .................................................... $ 12,815 $ 7,651 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES : DEPRECIATION AND AMORTIZATION ............................. 8,324 7,638 PROVISION FOR DEFERRED INCOME TAXES ....................... (264) (37) PROVISION FOR DOUBTFUL ACCOUNTS ........................... 444 (129) GAIN ON SALE OF PROPERTY, PLANT AND EQUIPMENT ............ (31) (20) SPECIAL CHARGES ........................................... 4,745 GAIN ON SALE OF BUSINESS ................................. (28,829) GAIN ON THE SALE OF THE ADMINISTRATION BUILDING ........... (6,731) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ........ 5,782 -- CHANGES IN OPERATING ASSETS AND LIABILITIES, NET: TRADE ACCOUNTS RECEIVABLE ............................... 61 (4,278) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON INCOMPLETE CONTRACTS ................. (986) (4,222) INVENTORIES ............................................ 330 (9,441) PREPAID EXPENSES AND OTHER CURRENT ASSETS .............. (1,417) (2,151) TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES ............ 8,793 5,729 BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON INCOMPLETE CONTRACTS .................... (519) 17 OTHER .................................................. (84) (17) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ............... 2,433 740 ------------ ------------ INVESTING ACTIVITIES: PURCHASES OF PROPERTY, PLANT AND EQUIPMENT ................... (5,701) (27,435) BUSINESS COMBINATIONS, NET OF CASH ACQUIRED .................. (11,658) PROCEEDS FROM SALE OF BUSINESS ............................... 38,825 PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT .......... 10,042 176 DECREASE (INCREASE) IN OTHER ASSETS ......................... (2,330) 188 ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES .......... 29,178 (27,071) ------------ ------------ FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS .......................................... 15,553 29,581 PRINCIPAL PAYMENTS ON LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS .......................................... (48,397) (1,864) PROCEEDS FROM SALE OF COMMON STOCK AND EXERCISED STOCK OPTIONS 78 1,361 ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .......... (32,766) 29,078 ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. (1,155) 2,747 CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 2,803 2,839 ------------ ------------ CASH & CASH EQUIVALENTS AT END OF PERIOD ....................... $ 1,648 $ 5,586 ============ ============ </TABLE> See Notes to Consolidated Financial Statements -4-
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. The accompanying financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1998. For the purposes of the statements of cash flows, the Company considers all highly liquid cash investments with a maturity of three months or less to be cash equivalents. Interest paid on debt during the six months ended June 30, 1999 and 1998 was $4,960,000 and $2,943,000, respectively. Income tax payments made during the six months ended June 30, 1999 and 1998 were $338,000 and $1,960,000, respectively. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"), which requires that costs related to start-up activities be expensed as incurred. Prior to 1999, the Company capitalized those costs incurred in connection with opening a new production facility. The Company adopted the provisions of the SOP 98-5 in its financial statements for the year ended December 31, 1999. The effect of adoption of SOP 98-5 was to record a charge for the cumulative effect of an accounting change of $5.8 million ($0.43 per share), net of taxes of $3.9 million, to expense costs that had been previously capitalized prior to 1999. Had SOP 98-5 been adopted as of January 1, 1998, the reported net income and earnings per share for the quarter and six months ended June 30, 1999 would not have materially changed. NOTE B - COMMITMENTS AND CONTINGENCIES The Company, its subsidiaries and other related companies are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse impact on the Company. NOTE C - ACQUISITIONS AND DIVESTITURES In January 1999, the Company acquired WyZinCo, Inc., CoZinCo Sales, Inc. and certain assets of CoZinCo, Inc. for approximately $11.7 million in cash and notes. The acquisition, which was accounted for under the purchase method of accounting, was funded primarily through the Company's credit facility and the sale of its corporate headquarters building. The excess of purchase price over the fair value of assets acquired was approximately $8.3 million. The acquisition will significantly expand the Company's presence in the micronutrients market. During the third quarter of 1998, the Company acquired from Cargill, Inc. the assets of its calcium chloride facility located near Amboy, California. The business, which utilizes solar evaporation and other techniques to produce three grades of calcium chloride from underground brine reserves, will be integrated into the Specialty Chemicals Division. The Company paid approximately $2.1 million cash for the assets of the facility. The excess purchase price over the fair market value of the assets acquired was approximately $2.0 million. -5-
On July 2, 1999, the Company sold its Process Technologies business for $38.8 million. The sale, which was effective May 1, generated a pre-tax gain of $28.8 million. The proceeds were used to reduce long-term bank debt. TETRA Process Technologies is in the waste and potable treatment business and was operated as part of the Specialty Chemicals Division. NOTE D - NET INCOME PER SHARE The following is a reconciliation of the weighted average number of common shares outstanding with the number of shares used in the computations of net income per common and common equivalent share: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Number of weighted average common shares outstanding ...... 13,522,701 13,609,418 13,521,839 13,590,442 Assumed exercise of stock options 50,254 655,296 41,944 671,686 ---------- ---------- ---------- ---------- Average diluted shares outstanding 13,572,955 14,264,714 13,563,783 14,262,128 ========== ========== ========== ========== </TABLE> In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the second quarter of 1999, the average market price of $8.60 was used. NOTE E - COMPREHENSIVE INCOME Comprehensive income for the six months ended June 30, 1999 and 1998 is as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1999 1998 1999 1998 ------- ------ ------- ------- Net Income............................. $16,494 $3,714 $12,815 $7,651 Translation Adjustment................. (97) (29) (243) (51) ------- ------ ------- ------ Comprehensive Income............... $16,397 $3,685 $12,572 $7,600 ======= ====== ======= ====== NOTE F - INDUSTRY SEGMENTS The Company manages its business in two segments: Oil & Gas Services and Specialty Chemicals. The Oil & Gas Services segment provides a broad range of products and services to its customers in the energy industry. The Specialty Chemicals segment manufactures and markets a variety of commercial products which are produced from low-cost feedstocks. The Specialty Chemicals segment also employs proprietary technologies to provide engineered systems to reduce or eliminate refinery and petrochemical waste. The Company evaluates performance and allocates resources based on profit or loss from operations, excluding special charges and before interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transfers between segments, as well as geographic areas, are priced at the estimated fair value of the products or services as negotiated between the two operating units. "Other" includes corporate expenses and elimination of intersegment revenues. Summarized financial information concerning the business segments is as follows: -6-
OIL & GAS SPECIALTY SERVICES CHEMICALS (IN THOUSANDS) DIVISION DIVISION OTHER CONSOLIDATED -------- -------- ------- ------------ THREE MONTHS ENDED JUNE 30, 1999 Revenues from external customers $ 28,406 $ 21,900 $ -- $ 50,306 Intersegmented revenues ........ 22 2,927 (2,949) -- -------- -------- ------- ------------ Total revenues ............. 28,428 24,827 (2,949) 50,306 Operating Income (Loss) ........ 1,050 868 (1,960)(1) (42) Total Assets ................... $135,294 $153,306 $ 7,297 $ 295,897 THREE MONTHS ENDED JUNE 30, 1998 Revenues from external customers $ 40,926 $ 22,861 $-- $ 63,787 Intersegmented revenues ........ 21 3,785 (3,806) -- -------- -------- ------- ------------ Total revenues ............. 40,947 26,646 (3,806) 63,787 Operating Income (Loss) ........ 6,843 2,491 (1,827) 7,507 Total Assets ................... $148,100 $148,164 $ 9,814 $ 306,078 SIX MONTHS ENDED JUNE 30, 1999 Revenues from external customers $ 58,862 $ 49,441 $ -- $ 108,303 Intersegmented revenues ........ 150 6,107 (6,257) -- -------- -------- ------- ------------ Total revenues ............. 59,012 55,548 (6,257) 108,303 Operating Income (Loss) ........ 3,376 4,152 (8,692)(2) (1,164) Total Assets ................... $135,294 $153,306 $ 7,297 $ 295,897 SIX MONTHS ENDED JUNE 30, 1998 Revenues from external customers $ 83,417 $ 47,706 $ -- $ 131,123 Intersegmented revenues ........ 43 8,139 (8,182) -- -------- -------- ------- ------------ Total revenues ............. 83,460 55,845 (8,182) 131,123 Operating Income (Loss) ........ 14,112 4,739 (3,388) 15,463 Total Assets ................... $148,100 $148,164 $ 9,814 $ 306,078 (1) Excludes gain on the disposition of TETRA Process Technologies of $28,829. (2) Includes special charge of $4,745 that relates the Specialty Chemicals Division. Excludes gain on the sale of the corporate headquarters building of $6,731, a gain on the disposition of TETRA Process Technologies of $28,829 and the cumulative effect of accounting change of $5,782, net of taxes. -7-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998. Total revenues for the quarter ended June 30, 1999 were $50.3 million compared to $63.8 million in the prior period, a decrease of $13.5 million or 21%. Revenues from the Oil & Gas Services Division were $28.4 million, down approximately $12.5 million or 31% from the 1998 level of $40.9 million. The Division's entire operations were significantly impacted by the continuing weak market conditions in the oil and gas industry. Specialty Chemicals Division revenues for the second quarter were $24.8 million, including intercompany, down 7% over the second quarter 1998 total of $26.6 million. The micronutrient business continued to improve over the prior year due to the WyZinCo/CoZinCo acquisition and continued market penetration, in spite of lower farm commodity prices. This was offset, however, by reduced bromine sales into oil and gas markets and lost revenues from the sale of TETRA Process Technologies. Gross profits were $10.1 million in 1999 compared to $16.9 million in 1998, a decline of $6.8 million or 40%. Gross profit as a percentage of revenues was 20.1% in 1999 versus 26.5% in 1998. Gross profits in the Oil & Gas Services Division continued to be adversely impacted by the industry slow down with reduced pricing and volume contributing to lower margin percentages. The Specialty Chemicals Division's gross profits and percentage decreased in the 1999 quarter over the 1998 quarter. Chlorides' margins are down compared to the 1998 quarter due to increased costs associated with a scheduled shutdown of the Lake Charles plant designed to control inventory levels and lower hydrochloric acid prices due to market conditions. The sale of TETRA Process Technologies also contributed to reduced margins. General and administrative expenses were $10.2 million, up slightly from $9.4 million in the prior year, due to inclusion of expenses from acquired operations and increased advertising costs. Operating loss for the quarter ended June 30, 1999 was $.04 million compared to income of $7.5 million in 1998. This change includes a decrease of $3.5 million due to decreased volume, a net $3.2 million decrease due to lower gross margin rates, and a $0.8 million increase in general and administrative expenses. Effective May 1, the Company divested its TETRA Process Technologies business, which provides systems and services that treat industrial and municipal wastewater and potable water. The Company received $38.8 million in cash and recognized a pre-tax gain of $28.8 million. The proceeds were used to reduce long-term debt. Interest expense increased during the current quarter compared to the prior year's quarter due to increased average debt balance over the period. Net income for the quarter was $16.5 million in 1999 compared to of $3.7 million in 1998. Net income per diluted share was $1.22 in 1999 based on 13,573,000 average diluted shares outstanding and $0.26 in 1998 based on 14,265,000 average diluted shares outstanding. SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998. Total revenues for the period ended June 30, 1999 were $108.3 million compared to $131.1 million in the prior period, a decrease of $22.8 million or 17%. Revenues from the Oil & Gas Services Division were $59.0 million, down approximately $24.4 million or 29% from the 1998 level of $83.5 million. The Division's revenue decline is the direct result of the reduction in drilling activity throughout the energy industry and the resulting pricing pressures that accompany it. Specialty Chemicals Division revenues for the first six months were $55.5 million, including intercompany, down slightly over the same six month period of 1998 with a total of $55.8 million. The Division's micronutrients operations, particularly the Fairbury, Nebraska plant, showed significant improvements in revenues as production volumes improved substantially and the Company regained its customer base following the EPA-related disruptions in 1997. The Micronutrients group also benefited from the acquisition of WyZinCo/CoZinCo. Revenues from the Division's bromine business were down due to the energy industry turndown. The revenue stream sold with the Process Technologies business also impacted the Division. -8-
Gross profits were $24.3 million in 1999 compared to $35.2 million in 1998, a decline of $10.9 million or 31%. Gross profit as a percentage of revenues was 22.4% in 1999 versus 26.8% in 1998. Gross profits in the Oil & Gas Services Division were down significantly as volumes declined and pricing pressures were realized from the general industry slow down. The Division's gross profits percentages were also down significantly from the prior year. The Specialty Chemicals Division's gross profits and percentage are comparable to prior years. Micronutrient margins have improved in 1999, despite reductions in market conditions arising from reduced commodity pricing, due to lower production costs combined with improved pricing and the WyZinCo/CoZinCo-related acquisitions. General and administrative expenses were $20.6 million, up slightly from $19.7 million in the prior year due to inclusion of expenses from acquired operations and increased advertising costs. In January 1999, the Company acquired WyZinCo, Inc. and certain assets of CoZinCo, Inc. As a result of this acquisition, the Company has abandoned certain redundant assets and recorded a related asset impairment charge during the period of approximately $1.1 million. In March 1999, the Company was verbally notified of the early termination of a significant liquid calcium chloride contract. Under the terms of the contract, the Company will be required to terminate its operations at that location and vacate the facility within two years from the date of written notification. The Company is also required to remove all of its equipment and fixtures, at its own cost. As a result of the early termination of the contract, the Company recorded an impairment of these specific assets of approximately $1.4 million. During the period, the Company also committed to certain actions that resulted in the impairment of other plant assets in the Company's Specialty Chemicals Division. As a result of increased production volumes achieved at the new calcium chloride dry plant in Lake Charles, Louisiana, the Company no longer needs the previously existing dry plant and has subsequently dismantled it. An impairment charge of approximately $1.8 million was recorded. In addition, the Company recently completed modifications on the West Memphis, Arkansas bromine plant. The assets related to the old zinc bromide production unit, which had a carrying value of approximately $0.4 million, were taken out of service in the first quarter. The abandoned assets of both plant facilities were written off during the quarter. Operating loss for the period ended June 30, 1999 was $(1.2) million compared to income of $15.5 million in 1998. This change includes the special charge of $4.7 million, a decrease of $6.3 million due to decreased volume, a net $4.8 million decrease due the lower gross margin rates, and a $0.9 million increase in general and administrative expenses. Interest expense increased during the period compared to the prior year's period due to increased long-term debt over the past twelve months. In March 1999, the Company sold its corporate headquarters building, realizing a pre-tax gain of approximately $6.7 million. The Company subsequently signed a ten-year lease agreement for space within the building. Effective May 1, the Company sold its Process Technologies business for $38.8 million, resulting in a pre-tax gain of $28.8 million. Net income before cumulative effect of accounting change was $18.6 million in 1999 and $7.7 million in 1998. Net income per diluted share before the cumulative effect accounting change was $1.37 in 1999 based on 13,564,000 average diluted shares outstanding and $0.54 in 1998 based on 14,262,000 average diluted shares outstanding. The Company has adopted the American Institute of Certified Public Accountants STATEMENT OF POSITION 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES, which requires that costs associated with start-up activities be expensed as incurred. Prior to 1999, the Company capitalized all costs incurred in connection with opening a new production facility. The effect of adopting SOP 98-5 was to record a cumulative effect of an accounting charge of $5.8 million, net of taxes, or $0.43 per share to expense costs that had been previously capitalized. After the cumulative effect adjustments, the Company reported a net income of $12.8 million or $0.94 per share in 1999 compared to net income of $7.7 million in 1998 or $0.54 per share. -9-
LIQUIDITY AND CAPITAL RESOURCES The Company's investment in working capital, excluding cash and cash equivalents, decreased to $71.2 million at June 30, 1999 compared to $85.5 million at December 31, 1998. Accounts receivable decreased $2.8 million during this period reflecting the sale of the Process Technologies business. Trade payables and accrued expenses increased $8.3 million during the period as a result of an increase in federal income taxes payable associated with the Process Technologies sale and liabilities acquired with the WyZinCo acquisition. The Company has a general purpose, unsecured, prime rate/LIBOR-based line-of-credit with a syndicate of banks led by Bank of America. This line is available to fund working capital requirements, capital expenditures and future acquisitions. In the first quarter of 1999, the Company amended certain financial covenants of its credit agreement to provide for increased borrowing flexibility. The Company also received a waiver for the sale of TETRA Process Technologies and its corporate headquarters. As of June 30, 1999, the Company has $1.6 million in letters of credit and $76.2 million in long-term debt outstanding against a $120 million line-of-credit, leaving a maximum net availability of $42.2 million. The line-of-credit matures in 2002. Major investing activities included the acquisition of WyZinCo, Inc. and certain assets of CoZinCo, Inc. for approximately $11.7 million cash and notes. The acquisition was funded primarily through the Company's credit facility and the sale of the corporate headquarters building. Proceeds from the building sale, $9.6 million, and from the sale of Process Technologies, $38.8 million, were used to reduce outstanding debt. Capital expenditures during the six months ended June 30, 1999 totaled approximately $5.7 million. Significant components included production testing equipment for the Oil & Gas Services Division and various Specialty Chemicals Division projects, including the completion of construction of a new manganous oxide plant in Tampico, Mexico, completion of the construction of a new liquid calcium chloride facility in West Virginia and the construction of a new production process of the West Memphis, Arkansas bromide plant. The Company believes that its existing funds, cash generated by operations, funds available under its bank line-of-credit, as well as other traditional financing arrangements, such as secured credit facilities, leases with institutional leasing companies, and vendor financing, will be sufficient to meet its current and anticipated operations and its anticipated capital expenditures through 1999 and thereafter. YEAR 2000 GENERAL The Year 2000 (Y2K) issue is the result of computer programs being written using two digits rather than four to define a specific year. Absent corrective actions, a computer program that has date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions to various activities and operations. The Company has substantially completed its assessment of how it may be impacted by the Y2K issue and has commenced implementation of a comprehensive plan to address all known aspects of the issue. THE PLAN -10-
Employees of the Company have substantially completed an evaluation of the effects the transition to Y2K could have on the products and services the Company provides, the processing capabilities of the Company's computers and other internal information systems, and non-informational systems which affect the Company's operational capabilities. The Company uses application software, including its accounting software, which has been certified by vendors as being Y2K compliant. Additionally, the Company's mainframe and network software has also been represented as Y2K compliant by the suppliers. In addition to management information systems, the Company's Y2K risks include those related to "embedded technology", such as micro-controllers. The Company is approximately 70% complete in its assessment of these risks, which included surveying each of the Company's chemical production facilities to determine if any systems might be subject to disruptions. These systems include plant equipment and instrumentation and process equipment. These systems are being modified as required and are expected to be compliant by the end of November 1999. Accordingly, management does not believe that the Company's results of operations or financial condition will be materially affected by any future costs to make its management information system Y2K compliant. In addition the Company is in the process of evaluating the Y2K compliance of its significant suppliers. The Company's significant suppliers have received a written inquiry from the Company regarding the Y2K issue. To date, the Company has received responses from fewer than 10% of the recipients of these letters, and the responses that have been received indicate that those suppliers do not anticipate significant interruptions in service to the Company. The Company anticipates the process of collecting and evaluating these written responses will be in effect for all of 1999 and may include follow-up telephone interviews and on-site meetings as considered necessary in the circumstances. The Company is not currently aware of any supplier who has known Y2K deficiencies that are expected to have a material adverse impact on the Company. The Company will be looking for alternative suppliers if circumstances warrant. COST The Company's preliminary estimate of the total cost for Y2K compliance is approximately $250,000 of which approximately $200,000 has been incurred through June 30, 1999. These costs are being expensed as incurred and are not expected to have a material impact on the Company's results of operations or financial position. RISKS The Company believes that the Y2K issue will not pose significant operational problems for the Company. However, if all Y2K problems are not identified or corrected in a timely manner, there can be no assurance that the Y2K issue will not have a material adverse impact on the Company's results of operations or adversely affect the Company's relationships with customers, suppliers, or other parties. In addition, there can be no assurance that outside third parties, including customers, suppliers, utility and governmental entities will be in compliance with all Y2K issues. The Company believes that the most likely worst case Y2K scenario, if one were to occur, would be the inability of third party suppliers such as critical raw material suppliers, utility providers, telecommunication, transportation companies, and other critical suppliers to continue providing their products and services. The failure of these third party suppliers to provide on going services could have a material adverse impact on the Company's results of operations. CONTINGENCY PLAN As the Company does not believe that the Y2K issue will pose any significant operational problems for the Company, it does not have any contingency plans related to that issue. However, if the Company determines that a key supplier is likely to have a Y2K-related problem that will likely materially affect its ability to provide critical goods or services to the Company, the Company will develop a contingency plan. Such a plan would likely include identifying an alternative supplier of those goods or services. CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD LOOKING STATEMENTS Certain statements contained herein and elsewhere may be deemed to be forward-looking within the meaning of The Private Securities Litigation Reform Act of 1995 and are subject to the "safe harbor" provisions of that act, including without limitation, statements concerning future sales, earnings, costs, expenses, acquisitions or corporate combinations, asset recoveries, working capital, capital expenditures, financial condition, and other results of operations. Such statements involve risks and uncertainties. Actual results could differ materially from the expectations expressed in such forward-looking statements. Some of the risk factors that could affect the Company's actual results and cause actual results to differ materially from any such results that might be projected, forecast, -11-
estimated or budgeted by the Company in such forward-looking statements are set forth in the section titled "Certain Business Risks" contained in the Company's report on Form 10-K for the year ended December 31, 1998. -12-
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, its subsidiaries and other related companies are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse impact on the Company. ITEM 6. EXHIBITS (a) Exhibits (i) A statement of computation of per share earnings is included in Note D of the Notes to Consolidated Financial Statements included in this report and is incorporated by reference into Part II of this report. (b) Reports on Form 8-K (i) Form 8K dated July 12, 1999 disclosing the disposition of TETRA Process Technologies and related pro forma financial information. -13-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TETRA Technologies, Inc. Date: August 12, 1999 By: [GEOFFREY M. HERTEL] ----------------------------------- Geoffrey M. Hertel Executive Vice President - Finance and Administration (Principal Financial Officer) Date: August 12, 1999 By: [BRUCE A. COBB] ----------------------------------- Bruce A. Cobb, Corporate Controller (Principal Accounting Officer) -14-