1 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 September 30, 1996 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 November 7, 1996 there were 12,880,247 shares of the Company's common stock, $.01 par value per share, issued and outstanding.
2 ITEM 1. Financial Statements TETRA Technologies, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended September 30, September 30, ------------------- -------------------- 1996 1995 1996 1995 ------- ------- -------- ------- <S> <C> <C> <C> <C> ($ Thousands) Revenues: Product sales $34,952 $21,609 $90,717 $60,979 Services 9,296 6,440 23,589 17,751 Rentals 910 374 1,756 1,035 ------- ------- -------- ------- Total Revenues 45,158 28,423 116,062 79,765 ------- ------- -------- ------- Cost of Revenues: Cost of product sales 26,111 15,539 64,358 41,734 Cost of services 6,812 3,499 16,861 11,483 Cost of rentals 347 164 770 284 ------- ------- -------- ------- Total Cost of Revenues 33,270 19,202 81,989 53,501 ------- ------- -------- ------- Gross Profit 11,888 9,221 34,073 26,264 General and Administrative Expense 6,746 5,689 19,961 16,739 ------- ------- -------- ------- Operating Income 5,142 3,532 14,112 9,525 Interest Expense 440 0 713 14 Interest Income 104 215 141 572 Equity in Earnings (losses) from Joint Ventures 199 (52) 436 (129) Other Income 61 101 242 225 ------- ------- -------- ------- Income Before Income Taxes 5,066 3,796 14,218 10,179 Provision for Income Taxes 1,733 1,359 5,169 3,836 ------- ------- -------- ------- Net Income $ 3,333 $ 2,437 $ 9,049 $ 6,343 ======= ======= ======== ======= Net Income per Common and Common Equivalent Share $ 0.25 $ 0.19 $ 0.67 $ 0.49 ======= ======= ======== ======= Weighted Average Common and Common Equivalent Shares Outstanding 13,503 13,073 13,441 13,013 ======= ======= ======== ======= </TABLE> See Notes to Consolidated Financial Statements 1
3 TETRA Technologies, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> September 30, December 31, ($ Thousands) 1996 1995 ------------- ----------- (Unaudited) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 5,067 $ 7,510 Trade accounts receivable, net of allowance for doubtful accounts of $1,399 in 1996 and $1,568 in 1995 38,042 33,042 Costs and estimated earnings in excess of billings on incomplete contracts 2,022 1,443 Inventories 23,752 16,309 Current portion of notes receivable 100 89 Deferred tax assets 1,143 1,451 Prepaid expenses and other current assets 1,936 1,515 -------- -------- Total Current Assets 72,062 61,359 Property, Plant and Equipment: Land and building 8,122 7,890 Machinery and Equipment 37,671 33,465 Automobiles and trucks 4,494 4,099 Chemical plants 44,583 31,370 Construction in progress 4,051 3,255 -------- -------- 98,921 80,079 Less accumulated depreciation and amortization (33,426) (25,471) -------- -------- Net Property, Plant, and Equipment 65,495 54,608 Other Assets: Patents and licenses, net of accumulated amortization of $728 in 1996 and $673 in 1995 465 519 Investment in Joint Ventures 5,887 4,189 Cost in excess of net assets acquired, net of accumulated amortization of $771 in 1996 and $552 in 1995 6,046 3,944 Notes receivable, less current portion 279 308 Other, net of accumulated amortization of $994 in 1996 and $669 in 1995 6,094 4,994 -------- -------- Total Other Assets 18,771 13,954 -------- -------- $156,328 $129,921 ======== ======== </TABLE> See Notes to Consolidated Financial Statements 2
4 TETRA Technologies, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> September 30, December 31, ($ Thousands) 1996 1995 ------------- ------------ (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 2,405 $ 2,262 Trade accounts payable 20,902 18,554 Accrued expenses 8,455 8,811 Billings in excess of costs and estimated earnings on incomplete contracts 361 44 Current portions of all long-term debt and capital lease obligations 1,710 1,600 -------- -------- Total Current Liabilities 33,833 31,271 Long-term Debt, less current portion 17,437 3,377 Capital Lease Obligations, less current portion 811 502 Deferred Income Taxes 4,869 4,977 Other liabilities 449 508 Commitments and contingencies Stockholders' Equity: Common stock, par value $.01 per share 40,000,000 shares authorized, with 12,877,264 shares issued and outstanding in 1996 and 12,809,580 shares issued and outstanding in 1995 129 128 Additional paid-in capital 63,288 62,691 Cumulative Translation Adjustment (93) (89) Retained earnings 35,605 26,556 -------- -------- Total Stockholders' Equity 98,929 89,286 -------- -------- $156,328 $129,921 ======== ======== </TABLE> See Notes to Consolidated Financial Statements 3
5 TETRA Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- ($ Thousands) 1996 1995 -------- -------- <S> <C> <C> Operating Activities: Net Income $ 9,049 $ 6,343 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,349 4,469 Undistributed (earnings) losses from joint venture (436) 129 Provision for deferred income taxes 282 (127) Provision for doubtful accounts 471 119 (Gain) on sale of property, plant and equipment (9) (83) Changes in operating assets and liabilities, net of assets acquired: Trade accounts receivable (4,121) (1,539) Costs and estimated earnings in excess of billings on incomplete contracts (579) 4 Inventories (6,321) (1,782) Prepaid expenses and other current assets (196) (775) Trade accounts payable and accrued expenses 312 4,391 Billings in excess of costs and estimated earnings on incomplete contracts 318 146 Other (999) (688) -------- -------- Net cash provided by operating activities 4,120 10,607 -------- -------- Investing Activities: Purchases of property, plant and equipment (9,224) (13,882) Acquisition of businesses, net of cash acquired (9,320) 0 Investment in Joint Venture (1,076) 0 Payments from notes receivable 18 114 Proceeds from sale of property, plant and equipment 188 182 Sale of marketable securities 0 4,854 Increase in other assets 0 0 -------- -------- Net cash used by investing activities (19,414) (8,732) -------- -------- Financing Activities: Net repayments and borrowings from short-term credit lines 143 0 Proceeds from long-term debt and capital lease obligations 15,871 513 Principal payments on long-term debt and capital lease obligations (3,761) (533) Proceeds from sale of common stock and exercised stock options 598 0 -------- -------- Net cash used by financing activities 12,851 (20) -------- -------- Increase (Decrease) in cash and cash equivalents (2,443) 1,855 Cash & Investments at Beginning of Period 7,510 8,403 -------- -------- Cash & Investments at End of Period $ 5,067 $ 10,258 ======== ======== </TABLE> See Notes to Consolidated Financial Statements 4
6 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. The Company's investment in its joint ventures is stated at cost plus equity in undistributed earnings. 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, 1995. 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 nine months ended September 30, 1996 and 1995 was $931,000 and $240,000, respectively. Income tax payments made during the nine months ended September 30, 1996 and 1995 were $2,491,000 and $1,895,000, respectively. In March 1995, FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption of Statement 121 in the first quarter of 1996 had no effect on the operations of the Company. NOTE B - COMMITMENTS AND CONTINGENCIES The Company, its subsidiaries and other related companies are named defendants in other 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 Effective October 1, 1996, the Company consummated two acquisitions for cash. The assets of Production Test, Inc., a well testing service company, were purchased for $1.5 million. These assets will be merged into TETRA's domestic onshore service operations in the Oil & Gas Services Division. The Company also acquired the stock of Wilchem Corporation for approximately $7.5 million. Wilchem Corporation is a major marketer of mold and mildew preventative products and will be integrated into the Specialty Chemicals Division's operations. Both acquisitions will be accounted for under the purchase method of accounting. - 5 -
7 In the second quarter, the Company acquired the outstanding stock of Industrias Sulfamex, S.A. DE C.V. ("Sulfamex") for approximately $8 million. The acquisition was funded by the Company drawing $10 million from its line- of-credit, $2 million of which was used to retire existing Sulfamex debt. The purchase price was allocated to the acquired assets and liabilities based on a preliminary determination of their respective fair values. The acquisition has been accounted for under the purchase method of accounting. The excess of the purchase price over the book value of the net assets acquired was approximately $2.1 million and is being amortized over 20 years. Pro forma information with respect to the acquisition has not been presented as such amounts are not material. Sulfamex is a Mexican corporation that produces certain manganese-based chemicals for distribution predominantly into U.S. markets. During the quarter ended March 31, 1996, the Company purchased the assets of Culberson Well Service, Inc. for approximately $1.4 million. Culberson Well Service, Inc. is an oilfield service company providing services along the Gulf Coast. The assets purchased consisted of machinery and equipment. The transaction was accounted for under the purchase method of accounting. Pro forma information with respect to the acquisition has not been presented as such amounts are not material. 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- ---------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Weighted average number of common shares outstanding . . . . . . . . . . . 12,877,264 12,681,778 12,857,992 12,667,014 Assumed exercise of stock options . . . . . . . . . . 625,526 391,092 583,437 346,281 ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding . . . . . . . . . . . 13,502,790 13,072,870 13,441,429 13,013,295 ========== ========== ========== ========== </TABLE> In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the third quarter of 1996, the average market price of $18.01 was used. - 6 -
8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Three months September 30, 1996 compared with three months ended September 30, 1995. Total revenues for the quarter ended September 30, 1996 were $45.2 million compared to $28.4 million in the prior period, an increase of $16.8 million or 59%. Revenues from the Oil & Gas Services Division continued to improve as activity in the Gulf Coast remains very strong. International revenues also improved, reflecting a strengthening in these markets as well. The Division's plug and abandon operations also improved by benefitting from the increased activity and acquisitions. Specialty Chemicals Division revenues also improved significantly due to improved dry calcium chloride sales and revenues from acquisitions. Gross profits were $11.9 million in the 1996 quarter compared to $9.2 million in the 1995 quarter, for an improvement of $2.7 million or 29%. Gross profit as a percentage of revenue decreased from 32% in 1995 to 26% in 1996. The gross margin for the quarter was impacted by significant increases in revenues from lower-margin heavy completion fluid sales in the Oil & Gas Services Division and from sales of high-cost startup inventories at TETRA's new Lake Charles calcium chloride facility in the Specialty Chemicals Division. Recent strengthening of heavy brine completion fluids prices and the reduction of the high-cost calcium chloride inventory should increase the profit margin percentage throughout the fourth quarter and into 1997. General and administrative expenses were $6.7 million in 1996 compared to $5.7 million in 1995. The inclusion of acquired operations accounted for a significant portion of this increase. General and administrative expenses as a percentage of revenues continued to drop from 20% in 1995 to 15% in 1996. Operating income for the quarter ended September 30, 1996 was $5.1 million, up $1.6 million or 46% from $3.5 million in 1995. This increase is the combined result of a gross margin increase of $5.4 million due to increased revenue volume and a $2.7 decrease due to lower gross margin rates, offset by a $1.1 increase in general and administrative expenses. Interest expense increased during the current quarter due in part to the capitalization of 1995 interest in conjunction with the Lake Charles plant expansion. Additionally, the long-term debt has increased by over $16 million in the past twelve months in support of the Company's acquisition program resulting in increase interest expense. Interest income is down as a result of lower levels of cash available for investment, due principally to increased levels of capital improvements and acquisitions. Net income after taxes for the three months ended September 30, 1996 was $3.3 million versus $2.4 million in 1995, an increase of $0.9 million or 38%. Net income per share was $0.25 in the 1996 quarter based on 13,503,000 weighted average common and common equivalent shares outstanding compared to earnings in 1995 of $0.19 based on 13,073,000 weighted average common and common equivalent shares outstanding. Nine months ended September 30, 1996 compared with Nine months ended September 30, 1995. For the nine months ended September 30, 1996, total revenues were $116.1 million up $36.3 million or 46% over the 1995 period total of $79.8 million. The Oil & Gas Services Division accounted for a substantial portion of this increase, with revenues in both the Gulf Coast and plug and abandon operations up considerably. Revenues from the Specialty Chemicals Division also improved over the prior year, principally through the acquisition of two agriculture businesses, American MicroTrace, Inc. and Industrias Sulfamex, S.A. CE C.V. The sale of liquid and dry calcium chloride also increased in the 1996 period, somewhat offsetting a decrease in performance chemical sales. - 7 -
9 Gross profits were $34.1 million in 1996 compared to $26.3 million in 1995, an increase of $7.8 million or 30%. Gross profit as a percentage of revenues was 29% in 1996 down from 33% in 1995. This decrease is attributable to higher than anticipated distribution costs and lower margin filtration and denitrification projects within the Specialty Chemicals Division. In addition, higher than planned product costs attributable to the new plant startup from the new Lake Charles plant also contributed to this decrease. General and administrative expenses were $20 million in 1996 compared to $16.7 million in 1995. Additional expenses from acquired operations and settlements costs of several legal suits accounted for most of this increase. As a percentage of revenues, 1996 expenses were 17% down significantly from 21% in 1995. Operating income for the nine months ended September 30, 1996 was $14.1 million compared to $9.5 million in 1995, an increase of $4.6 million or 48%. This increase is attributable to a gross margin improvement of $12 million relating to increased volume less $4.1 million from lower gross margin rates, offset by increased general and administrative expenses of $3.3 million. Net income after taxes for the first nine months of 1996 totaled $9.1 million versus $6.3 million in the comparable 1995 period. Net income per share was $0.67 in the 1996 period based on 13,441,000 weighted average common and common equivalent shares outstanding compared to earnings for the 1995 period of $0.49 based on 13,013,000 weighted average common and common equivalent shares outstanding. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased from $30.1 million at December 31, 1995 to $38.2 million at September 30, 1996, an increase of $8.1 million. An increase in borrowings under the Company's line-of-credit plus additional working capital acquired from Sulfamex accounted for the majority of this increase. Trade receivables increased $5 million reflecting the significant growth in sales volume during the third quarter. Inventories were up $7.4 million reflecting increased operating activities in both domestic and international oil and gas markets. Additionally, within the Specialty Chemicals Division inventories of dry calcium chloride were up as the new dry plant production came on-line and agricultural product inventories also increased due to weak weather-related sales activity. Other significant components of the Company's working capital changes included an increase in accounts payable of approximately $2.3 million in conjunction with increased inventory levels required to support the increases in revenues. The Company has announced its intention to augment internal growth with acquisitions. The emphasis of these purchases has been and will continue to be in areas where TETRA has technological leadership or existing distribution channels such as acids, metals, agricultural products or oil and gas services. To fund this acquisition program, the Company will use existing cash and cash flow as well as its general purpose, unsecured, prime rate $30 million line-of-credit with NationsBank and Texas Commerce Bank. As of September 30, 1996, the Company has $4 million in letters of credit and $15 million in long-term debt outstanding, leaving net availability of $11 million. The terms of the current line have been extended until the Company concludes negotiations to increase this line of credit to $60 million. In addition to this expanded line, the Company has five million shares of TETRA common stock covered by a shelf registration statement that are available to finance its acquisition program. Major investing activities during the nine months ended September 30, 1996 included the acquisition of Culberson Well Service, Inc. ("Culberson") for approximately $1.4 million and the purchase of Industrias Sulfamex, S.A. DE C.V. ("Sulfamex") for $8.0 million. Culberson is an oilfield service company in the Gulf Coast market and was incorporated into the Oil & Gas Services Division. Sulfamex is located in Tampico, Mexico where they manufacture manganese-based chemicals for distribution principally into U.S. markets. The transaction was funded by the Company drawing $10 million from its line-of-credit, $2 million of which was used to retire existing Sulfamex debt. The Company also contributed approximately $1.1 million to its 50% owned RETEC/TETRA joint venture, - 8 -
10 thereby completing its investment obligation under the partnership agreement. Additionally, the Company has continued to lease significant additional bromine reserves in close proximity to its Magnolia, Arkansas plant. Subsequent to the quarter end, the Company consummated two additional acquisitions. The assets of Production Test, Inc. and the stock of Wilchem Corporation were purchased for $1.5 million and $7.5 million, respectively. These cash transactions were funded by drawing against the Company's existing line of credit. Capital expenditures during the nine months ended September 30, 1996 totaled approximately $ 9.2 million, a significant portion of which was associated with the major expansion of the Lake Charles plant. The expanded dry calcium chloride facility began start-up operations in late 1995 with de-bottlenecking continuing during the first and second quarters of 1996. When fully operational, production from the new dry calcium chloride plant is expected to approximate 105,000 tons per year. Additional expenditures were incurred to acquire oil and gas blending and filtration equipment, plug and abandon rig equipment and specialty chemicals transportation and distribution equipment. 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 1996 and thereafter. - 9 -
11 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, its subsidiaries and other related companies are named defendants in a number of 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: None - 10 -
12 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: November 13, 1996 By: /s/ Geoffrey M. Hertel -------------------------------------- Geoffrey M. Hertel Executive Vice President - Finance and Administration (Principal Financial Officer) Date: November 13, 1996 By: /s/ Bruce A. Cobb -------------------------------------- Bruce A. Cobb, Corporate Controller (Principal Accounting Officer) - 11 -
13 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 - Financial Data Schedule