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 June 30, 1997 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, 1997 there were 13,204,904 shares of the Company's common stock, $.01 par value per share, issued and outstanding.
2 ITEM 1. FINANCIAL STATEMENTS TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> ($ THOUSANDS) Revenues: Product sales $35,515 $29,287 $69,499 $55,765 Services 16,883 7,423 29,765 15,139 ------- ------- ------- ------- TOTAL REVENUES 52,398 36,710 99,264 70,904 Cost of Revenues: Cost of product sales 25,216 19,993 48,947 38,247 Cost of services 11,950 5,012 21,289 10,472 ------- ------- ------- ------- Total Cost of Revenues 37,166 25,005 70,236 48,719 ------- ------- ------- ------- GROSS PROFIT 15,232 11,705 29,028 22,185 General and Administrative Expense 8,760 7,053 16,736 13,215 ------- ------- ------- ------- OPERATING INCOME 6,472 4,652 12,292 8,970 Interest Expense 616 290 1,296 314 Interest Income 54 33 107 78 Equity in Earnings from Joint Ventures 103 182 223 237 Other Income 136 62 497 181 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 6,149 4,639 11,823 9,152 Provision for Income Taxes 2,486 1,734 4,544 3,436 ------- ------- ------- ------- NET INCOME $ 3,663 $ 2,905 $ 7,279 $ 5,716 ======= ======= ======= ======= NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.26 $ 0.22 $ 0.52 $ 0.43 ======= ======= ======= ======= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 14,066 13,492 14,107 13,410 ======= ======= ======= ======= </TABLE> See Notes to Consolidated Financial Statements 1
3 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ($ THOUSANDS) 1997 1996 --------- --------- (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,727 $ 2,829 Trade accounts receivable, net of allowance for doubtful accounts of $1,267 in 1997 and $1,266 in 1996 43,424 43,768 Costs and estimated earnings in excess of billings on incomplete contracts 2,308 1,410 Inventories 32,302 24,360 Deferred tax assets 1,588 1,676 Prepaid expenses and other current assets 3,771 2,083 --------- --------- Total Current Assets 91,120 76,126 PROPERTY, PLANT AND EQUIPMENT: Land and building 10,350 8,428 Machinery and Equipment 48,184 43,477 Automobiles and trucks 7,694 5,276 Chemical plants 45,328 45,014 Construction in progress 14,204 5,409 --------- --------- 125,760 107,604 Less accumulated depreciation and amortization (39,410) (35,436) --------- --------- Net Property, Plant, and Equipment 86,350 72,168 OTHER ASSETS: Patents and licenses, net of accumulated amortization of $788 in 1997 and $750 in 1996 422 460 Investment in Joint Ventures 5,762 5,928 Cost in excess of net assets acquired, net of accumulated amortization of $1,445 in 1997 and $964 in 1996 18,918 17,381 Other, net of accumulated amortization of $1,355 in 1997 and $1,218 in 1996 7,100 6,443 --------- --------- Total Other Assets 32,202 30,212 --------- --------- $ 209,672 $ 178,506 ========= ========= </TABLE> See Notes to Consolidated Financial Statements 2
4 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ ($ THOUSANDS) (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ -- $ 2,202 Trade accounts payable 24,107 22,618 Accrued expenses 12,295 9,085 Billings in excess of costs and estimated earnings on incomplete contracts 498 567 Current portions of all long-term debt and capital lease obligations 1,628 4,256 --------- -------- Total Current Liabilities 38,528 38,728 LONG-TERM DEBT, LESS CURRENT PORTION 45,171 23,853 CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 1,229 835 DEFERRED INCOME TAXES 8,825 6,687 OTHER LIABILITIES -- 381 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share 40,000,000 shares authorized, with 13,190,220 shares issued and outstanding in 1997 and 13,069,396 shares issued and outstanding in 1996 131 131 Additional paid-in capital 68,834 67,811 Cumulative Translation Adjustment (17) 387 Retained earnings 46,971 39,693 --------- -------- Total Stockholders' Equity 115,919 108,022 --------- -------- $ 209,672 $178,506 ========= ======== </TABLE> See Notes to Consolidated Financial Statements 3
5 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------- ($ THOUSANDS) 1997 1996 -------- ------- <S> <C> <C> OPERATING ACTIVITIES: Net Income $ 7,279 $ 5,716 Adjustments to reconcile net income to net cash provided by operating activities : Depreciation and amortization 5,163 3,923 Undistributed (earnings) losses from joint venture (223) (237) Provision for deferred income taxes 214 307 Provision for doubtful accounts (13) 345 (Gain) on sale of property, plant and equipment (169) (15) Changes in operating assets and liabilities, net of assets acquired : Trade accounts receivable 147 (287) Costs and estimated earnings in excess of billings on incomplete contracts (898) (16) Inventories (7,942) (5,773) Prepaid expenses and other current assets (1,680) (972) Trade accounts payable and accrued expenses 4,926 (3,037) Billings in excess of costs and estimated earnings on incomplete contracts (69) 181 Other (1,775) (981) ------- ------ Net cash provided by operating activities 4,960 (846) ------- ------ INVESTING ACTIVITIES: Purchases of property, plant and equipment (18,449) (6,394) Acquisition of businesses, net of cash acquired -- (1,400) Payments from notes receivable -- 18 Proceeds from sale of property, plant and equipment 470 176 ------- ------ Net cash used by investing activities (17,979) (7,600) ------- ------ FINANCING ACTIVITIES: Net repayments and borrowings from short-term credit lines (2,202) (63) Proceeds from long-term debt and capital lease obligations 22,550 2,575 Principal payments on long-term debt and capital lease obligations (3,455) (962) Proceeds from sale of common stock and exercised stock options 1,024 525 ------- ------- Net cash used by financing activities 17,917 2,075 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,898 (6,371) CASH & INVESTMENTS AT BEGINNING OF PERIOD 2,829 7,510 ------- ------- CASH & INVESTMENTS AT END OF PERIOD $ 7,727 $ 1,139 ======= ======= </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, 1996. 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, 1997 and 1996 was $1,392,000 and $491,000, respectively. Income tax payments made during the six months ended June 30, 1997 and 1996 were $2,595,000 and $2,191,000, respectively. 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 - 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 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Weighted average number of common shares outstanding ........................... 13,190,220 12,869,821 13,156,046 12,848,250 Assumed exercise of stock options......................... 875,686 622,026 951,359 562,162 ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding........................... 14,065,906 13,491,847 14,107,404 13,410,412 ========== ========== ========== ========== </TABLE> -5-
7 In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the second quarter of 1997, the average market price of $23.29 was used. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Three months ended June 30, 1997 compared with three months ended June 30, 1996. Total revenues for the quarter ended June 30, 1997 were $52.4 million compared to $36.7 million in the prior period, an increase of $15.7 million or 42.8%. Revenues from the Oil & Gas Services Division were up approximately 49% over the prior quarter. This division's domestic Gulf Coast onshore operations realized substantial growth during the quarter. The impact of late 1996 acquisitions, added service equipment and additional market penetration have all combined to achieve these increased revenues. The Company continues to expand aggressively in this area, taking advantage of the growing market. Oil and gas international revenues also improved significantly during the quarter. Specialty Chemicals Division revenues were up approximately 30% over second quarter 1996 due to improved dry calcium chloride sales, stronger activity in the process technologies group and contributions from the Wilchem acquisition in late 1996. Gross profits were $15.2 million in the 1997 quarter compared to $11.7 million in the 1996 quarter, for an increase of $3.5 million or 29.9%. Gross profit as a percentage of revenues was 29.1% in 1997 versus 31.9% in 1996. The Specialty Chemicals Division's gross profit percentage was down, offsetting a moderate increase by the Oil & Gas Services Division. Operations at the Specialty Chemicals Division's Fairbury, Nebraska plant were disrupted due to site improvements, plant modifications and compliance with E.P.A. requirements. This disruption in the plant operations resulted in lost profits and significant gross margin erosion, which is expected to diminish in the third quarter. The plant is now able to utilize a variety of feedstocks while adhering to strict E.P.A. guidelines regarding the use of certain feedstocks for the production and sale of zinc-based micronutrients for fertilizers. General and administrative expenses were $8.8 million in the second quarter of 1997 compared to $7.1 million in the second quarter of 1996. 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 19% in 1996 to 17% in 1997. Operating income for the quarter ended June 30, 1997 was $6.5 million, up $1.8 million or 38.3% from $4.7 million in 1996. This increase is the combined result of a gross margin increase of $5.0 million due to increased volume, a $1.5 million decrease due the lower gross margin rates, and a $1.7 million increase in general and administrative expenses. Interest expense increased during the current quarter compared to the prior quarter due to increased long-term debt over the past twelve months in support of the Company's acquisition and internal growth programs. Net income after taxes for the three months ended June 30, 1997 was $3.7 million versus $2.9 million in 1996, an increase of $0.8 million or 27.6%. Net income per share was $0.26 in the 1997 quarter on 14,066,000 weighted average common and common equivalent shares outstanding compared to earnings in 1996 of $0.22 based on 13,492,000 weighted average common and common equivalent shares outstanding. Six months ended June 30, 1997 compared with six months ended June 30, 1996. For the period ended June 30, 1997, total revenues were $99.3 million, up $28.4 million or 40.1% over the 1996 period of $70.9 million. The Oil & Gas Services Division's revenues were up approximately 37% over the prior year. This division's well abandonment and production testing businesses have grown substantially over the last six months in response to strong market conditions. This division has also benefited from a domestic offshore market that has remained strong and improved international completion fluid and filtration operations. -6-
8 The Specialty Chemicals Division's revenues were up approximately 46% over 1996, reflecting substantial contributions from two prior year acquisitions: Sulfamex, a Mexican manufacturer of manganese sulfate, and Wilchem, a producer of mold and mildew products. The division's dry calcium chloride sales rebounded from the mild winter weather experienced along the East Coast, contributing to the period's improved revenues. Gross profits were $29.0 million in the 1997 period compared to $22.2 million in the 1996 period, for an increase of $6.8 million or 30.6%. Gross profit as a percentage of revenues was 29.2% in 1997, down from 31.3% in 1996. The Oil & Gas Services Division's gross profit percentage was comparable to the prior year; however, the Specialty Chemicals Division's gross profit percentage was down due principally to disruptions at the Division's Fairbury, Nebraska plant. General and administrative expenses were $16.7 million in the 1997 period compared to $13.2 million in the 1996 period. The addition of personnel in the Oil & Gas Services Division and the inclusion of such expenses from acquired operations in both divisions accounted for a significant portion of this increase. General and administrative expenses as a percentage of revenues continued to drop from 18.6% in 1996 to 16.9% in 1997. Operating income for the six months ended June 30, 1997 was $12.3 million, up $3.3 million or 36.7% from $9.0 million in the comparable period of 1996. This increase is attributable to a gross margin improvement of $8.8 million relating to increased volume less $2.0 million from lower gross margin rates, and by increased general and administrative expenses of $3.5 million. Interest expense increased during the six month period due in part to capitalized interest in 1996 in conjunction with the Lake Charles plant expansion with no comparable capitalization in 1997. Additionally, the long-term debt has increased by over $38 million in the past twelve months in support of the Company's acquisition and internal growth programs, resulting in increased interest expense. Net income after taxes for the first six months of 1997 totaled $7.3 million versus $5.7 million in 1996, an increase of $1.6 million or 28.1%. Net income per share was $0.52 in the 1997 period based on 14,107,000 weighted average common and common equivalent shares outstanding compared to earnings for the comparable 1996 period of $0.43 based on 13,410,000 weighted average common and common equivalent shares outstanding. LIQUIDITY AND CAPITAL RESOURCES The Company's investment in working capital, excluding cash and cash equivalents, increased to $44.9 million at June 30, 1997 compared to $34.6 million at December 31, 1996. Inventories increased $7.9 million during this period principally in dry calcium chloride, as a result of lower than anticipated first quarter sales and in oil and gas operations in response to increased drilling activity. Trade payables and accrued expenses increased during the period by $4.7 million. Oil and gas operations accounted for a substantial portion of this change, as increased inventory and capital equipment were acquired. Short-term borrowings and current portion of long-term debt decreased by nearly $4.8 million, as the Company reduced its cost of capital by refinancing the long-term debt and working capital loans of its American MicroTrace subsidiary. The Company has announced its intention to augment internal growth with acquisitions. To fund this acquisition program, the Company will use existing cash and cash flow as well as its general purpose, unsecured, prime rate/LIBOR-based line-of-credit with a syndicate of banks led by NationsBank. As of June 30, 1997, the Company has $2.4 million in letters of credit and $45 million in long-term debt outstanding against a $120 million line-of-credit, leaving a net availability of $72.6 million. The line-of-credit matures in 1999. The Company also has 4.8 million shares of TETRA common stock available under a shelf registration statement to finance its acquisition program. Capital expenditures during the six months ended June 30, 1997 totaled approximately $18.4 million. Significant components include production equipment for the Oil & Gas Services Division's well abandonment and production testing operations and additional process equipment and plant modifications at the Company's American Microtrace subsidiary. -7-
9 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 1997 and thereafter. PENDING ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the quarter ended June 30, 1997 and 1996 of $.02 and $.01 per share, respectively, and for the six months ended June 30, 1997 and 1996 of $.03 and $.02 per share, respectively. The calculation of fully diluted earnings per share for these quarters is not expected to change from reported amounts as a result of Statement 128. 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, estimated or budgeted by the Company in such forward-looking statements are set forth in the section entitled "Cautionary Statement for Purposes of Forward Looking Statements" contained in the Company's report on Form 10-Q for the quarter ended March 31, 1997. -8-
10 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 C of the Notes to Consolidated Financial Statements included in this report and is incorporated by reference into Part II of this report. (ii) 10.31 Credit Agreement dated April 10, 1997 between TETRA Technologies, Inc. and Nationsbank. 27 Financial Data Schedule (b) Reports on Form 8-K: None -9-
11 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 14, 1997 By: [Geoffrey M. Hertel] ------------------------------------- Geoffrey M. Hertel Executive Vice President - Finance and Administration (Principal Financial Officer) Date: August 14, 1997 By: [Bruce A. Cobb] ------------------------------------ Bruce A. Cobb, Corporate Controller (Principal Accounting Officer) -10-
12 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- (i) A statement of computation of per share earnings is included in Note C of the Notes to Consolidated Financial Statements included in this report and is incorporated by reference into Part II of this report. (ii) 10.31 Credit Agreement dated April 10, 1997 between TETRA Technologies, Inc. and Nationsbank. 27 Financial Data Schedule