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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, 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 October 28, 1999 there were 13,529,201 shares of the Company's
common stock, $.01 par value per share, issued and outstanding.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
($ THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
PRODUCT SALES ........................ $ 34,804 $ 31,639 $ 105,715 $ 114,827
SERVICES ............................. 17,867 20,675 55,259 68,610
--------- --------- --------- ---------
TOTAL REVENUES ................... 52,671 52,314 160,974 183,437
COST OF REVENUES:
COST OF PRODUCT SALES ................ 28,075 24,345 86,017 85,859
COST OF SERVICES ..................... 12,909 15,250 39,014 49,696
--------- --------- --------- ---------
TOTAL COST OF REVENUES ........... 40,984 39,595 125,031 135,555
--------- --------- --------- ---------
GROSS PROFIT ..................... 11,687 12,719 35,943 47,882
GENERAL AND ADMINISTRATIVE EXPENSE ....... 9,751 10,144 30,426 29,844
SPECIAL CHARGE ........................... -- 4,745
--------- --------- --------- ---------
OPERATING INCOME .............. 1,936 2,575 772 18,038
GAIN ON SALE OF ADMINISTRATION BUILDING .. -- 6,731 --
GAIN ON SALE OF BUSINESS ................. -- 28,829 --
INTEREST EXPENSE, NET .................... 1,491 1,768 5,862 4,361
OTHER INCOME (EXPENSE) ................... (60) (168) 43 (507)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 385 639 30,513 13,170
PROVISION FOR INCOME TAXES ............... 152 248 11,683 5,130
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .................... 233 391 18,830 8,040
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(NET OF INCOME TAX EFFECT) ......... -- (5,782) --
--------- --------- --------- ---------
NET INCOME ........ $ 233 $ 391 $ 13,048 $ 8,040
========= ========= ========= =========
NET INCOME PER SHARE BEFORE CUMULATIVE
EFFECT OF ACOUNTING CHANGE ............ $ 0.02 $ 0.03 $ 1.39 $ 0.59
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ... -- -- ($ 0.43) --
--------- --------- --------- ---------
NET INCOME PER SHARE ..................... $ 0.02 $ 0.03 $ 0.96 $ 0.59
========= ========= ========= =========
AVERAGE SHARES ........................... 13,524 13,551 13,523 13,577
========= ========= ========= =========
NET INCOME PER DILUTED SHARE BEFORE
CUMULATIVE EFFECT ACCOUNTING CHANGE ... $ 0.02 $ 0.03 $ 1.39 $ 0.57
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ... -- -- ($ 0.43) --
--------- --------- --------- ---------
NET INCOME PER DILUTED SHARE ............. $ 0.02 $ 0.03 $ 0.96 $ 0.57
========= ========= ========= =========
AVERAGE DILUTED SHARES ................... 13,612 13,784 13,580 14,101
========= ========= ========= =========
</TABLE>
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<PAGE>
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
($ THOUSANDS) 1999 1998
--------- ---------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ............................... $ 4,851 $ 2,803
TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $1,124 IN 1999 AND $853 IN 1998 ........... 51,910 56,167
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
ON INCOMPLETE CONTRACTS .............................. -- 5,641
INVENTORIES ............................................. 60,249 58,478
DEFERRED TAX ASSETS ..................................... 3,982 4,099
PREPAID EXPENSES AND OTHER CURRENT ASSETS ............... 4,661 3,731
--------- ---------
TOTAL CURRENT ASSETS ............................... 125,653 130,919
PROPERTY, PLANT AND EQUIPMENT:
LAND AND BUILDING ....................................... 12,167 16,761
MACHINERY AND EQUIPMENT ................................. 110,893 109,116
AUTOMOBILES AND TRUCKS .................................. 9,174 8,485
CHEMICAL PLANTS ......................................... 51,481 48,040
CONSTRUCTION IN PROGRESS ................................ 6,689 23,201
--------- ---------
190,404 205,603
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION .......... (60,072) (60,007)
--------- ---------
NET PROPERTY, PLANT, AND EQUIPMENT ................. 130,332 145,596
OTHER ASSETS:
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ACCUMULATED
AMORTIZATION OF $2,983 IN 1999 AND $2,510 IN 1998 .... 33,558 26,190
OTHER, NET OF ACCUMULATED AMORTIZATION OF $3,183 IN 1999
AND $3,680 IN 1998 ................................... 8,077 8,303
--------- ---------
TOTAL OTHER ASSETS ................................. 41,635 34,493
--------- ---------
$ 297,620 $ 311,008
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
($ THOUSANDS) 1999 1998
--------- ---------
<S> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE ................................... $ 23,560 $ 29,322
ACCRUED EXPENSES ......................................... 23,601 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 ...................................... 1,154 1,007
--------- ---------
TOTAL CURRENT LIABILITIES ........................... 48,315 42,620
LONG-TERM DEBT, LESS CURRENT PORTION .......................... 79,230 109,000
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION ............... 1,196 1,307
DEFERRED INCOME TAXES ......................................... 14,849 17,759
OTHER LIABILITIES ............................................. 1,668 1,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $.01 PER SHARE
40,000,000 SHARES AUTHORIZED, WITH 13,524,201 SHARES
ISSUED AND OUTSTANDING IN 1999 AND 13,514,340 SHARES
ISSUED AND OUTSTANDING IN 1998 ......................... 136 136
ADDITIONAL PAID-IN CAPITAL ............................... 77,947 77,923
TREASURY STOCK, AT COST, 94,000 SHARES IN 1999 AND IN 1998 (1,107) (1,168)
ACCUMULATED OTHER COMPREHENSIVE INCOME ................... (189) (96)
RETAINED EARNINGS ........................................ 75,575 62,527
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .......................... 152,362 139,322
--------- ---------
$ 297,620 $ 311,008
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
($ THOUSANDS) 1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME .................................................... $ 13,048 $ 8,040
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES :
DEPRECIATION AND AMORTIZATION ............................. 12,511 11,829
PROVISION FOR DEFERRED INCOME TAXES ....................... (261) (6)
PROVISION FOR DOUBTFUL ACCOUNTS ........................... 668 72
GAIN ON SALE OF PROPERTY, PLANT AND EQUIPMENT ............. (38) (50)
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 ............................... 1,248 (2,201)
COSTS AND ESTIMATED EARNINGS IN EXCESS
OF BILLINGS ON INCOMPLETE CONTRACTS ................. (986) (2,686)
INVENTORIES ............................................ (880) (17,577)
PREPAID EXPENSES AND OTHER CURRENT ASSETS .............. (1,151) (1,178)
TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES ............ 7,029 4,430
BILLINGS IN EXCESS OF COSTS AND ESTIMATED
EARNINGS ON INCOMPLETE CONTRACTS .................... (519) 93
OTHER .................................................. (66) 20
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 5,570 786
-------- --------
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT ................... (9,259) (36,825)
BUSINESS COMBINATIONS, NET OF CASH ACQUIRED .................. (11,658) (2,112)
PROCEEDS FROM SALE OF BUSINESS ............................... 38,825 --
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT .......... 10,051 441
DECREASE (INCREASE) IN OTHER ASSETS .......................... (1,833) 161
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES .......... 26,126 (38,335)
-------- --------
FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS .......................................... 21,011 38,650
PRINCIPAL PAYMENTS ON LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS .......................................... (50,745) (2,113)
PROCEEDS FROM SALE OF COMMON STOCK AND EXERCISED STOCK OPTIONS 86 642
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .......... (29,648) 37,179
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 2,048 (370)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 2,803 2,839
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD ....................... $ 4,851 $ 2,469
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
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 nine months ended September 30, 1999 and
1998 was $6,988,000 and $4,984,000, respectively.
Income tax payments made during the nine months ended September 30, 1999
and 1998 were $2,097,600 and $2,677,000, 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 nine
months ended September 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 July 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 water treatment business and was
operated as part of the Specialty Chemicals Division.
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
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<PAGE>
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, has been 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.
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
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of weighted average
common shares outstanding ...... 13,524,201 13,550,718 13,522,635 13,577,055
Assumed exercise of stock options 88,291 233,672 57,562 524,077
---------- ---------- ---------- ----------
Average diluted shares outstanding 13,612,492 13,784,390 13,580,197 14,101,132
========== ========== ========== ==========
</TABLE>
In applying the treasury stock method to determine the dilutive effect of
the stock options outstanding during the third quarter of 1999, the average
market price of $9.54 was used.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 1999 and 1998
is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
----- ----- ------- ------
Net Income............................. $ 233 $ 391 $13,048 $8,040
Translation Adjustment................. 149 3 (93) (48)
----- ----- ------- ------
Comprehensive Income............... $ 382 $ 394 $12,955 $7,992
===== ===== ======= ======
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<PAGE>
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:
<TABLE>
<CAPTION>
OIL & GAS SPECIALTY
SERVICES CHEMICALS
(IN THOUSANDS) DIVISION DIVISION OTHER CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------
Revenues from external customers .... $ 30,525 $ 22,146 $ -- $ 52,671
Intersegmented revenues ............. 26 2,565 (2,591) --
-------- -------- -------- --------
Total revenues .................. 30,551 24,711 (2,591) 52,671
Operating Income (Loss) ............. 2,536 1,153 (1,753) 1,936
Total Assets ........................ $135,620 $153,176 $ 8,824 $297,620
THREE MONTHS ENDED SEPTEMBER 30, 1998
- -------------------------------------
Revenues from external customers .... $ 32,079 $ 20,235 $ -- $ 52,314
Intersegmented revenues ............. 262 4,983 (5,245) --
-------- -------- -------- --------
Total revenues .................. 32,341 25,218 (5,245) 52,314
Operating Income (Loss) ............. 2,896 1,451 (1,772) 2,575
Total Assets ........................ $147,897 $160,391 $ 5,523 $313,811
NINE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------
Revenues from external customers .... $ 89,387 $ 71,587 $ -- $160,974
Intersegmented revenues ............. 176 8,671 (8,847) --
-------- -------- -------- --------
Total revenues .................. 89,563 80,258 (8,847) 160,974
Operating Income (Loss) ............. 5,912 5,305 (10,445)(1) 772
Total Assets ........................ $135,620 $153,176 $ 8,824 $297,620
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
- -------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .... $115,494 $ 67,943 $ -- $183,437
Intersegmented revenues ............. 306 13,120 (13,426) --
-------- -------- -------- --------
Total revenues .................. 115,800 81,063 (13,426) 183,437
Operating Income (Loss) ............. 17,008 6,190 (5,160) 18,038
Total Assets ........................ $147,897 $160,391 $ 5,523 $313,811
</TABLE>
(1) 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998.
Total revenues for the quarter ended September 30, 1999 were $52.7
million, compared to $52.3 million in the prior period, an increase of $.4
million or 1%. Revenues from the Oil & Gas Services Division were $30.5 million,
down approximately $1.8 million or 6% from the 1998 level of $32.3 million. The
Division's operations continue to be negatively affected by the weak market
conditions in the oil and gas industry. Specialty Chemicals Division revenues
for the third quarter were $24.8 million, including intercompany, down 2% over
the third quarter 1998 total of $25.2 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 lost revenues resulting from the sale of TETRA Process
Technologies.
Gross profits were $11.7 million in 1999, compared to $12.7 million in
1998, a decline of $1 million or 9%. Gross profit as a percentage of revenues
was 22% in 1999 versus 24% in 1998. Gross profits in the Oil & Gas Services
Division continued to be adversely impacted by the oil and gas 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. Micronutrients' margins are down compared to
the 1998 quarter due to increased costs associated with reduced production
levels and lower pricing in feed markets. The sale of TETRA Process Technologies
also contributed to reduced margins.
General and administrative expenses were $9.8 million, down slightly from
$10.1 million in the prior year.
Operating income for the quarter ended September 30, 1999 was $1.9 million
compared to income of $2.6 million in 1998. This change includes a decrease of
$1.0 million due to lower gross margin rates, and a $0.3 million decrease in
general and administrative expenses.
Interest expense decreased during the current quarter compared to the
prior year's quarter due to the long-term debt reduction from proceeds of the
sale of TETRA Process Technologies.
Net income for the quarter was $.2 million in 1999 compared to of $.4
million in 1998. Net income per diluted share was $0.02 in 1999 based on
13,612,000 average diluted shares outstanding and $0.03 in 1998 based on
13,784,000 average diluted shares outstanding.
-8-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998.
Total revenues for the period ended September 30, 1999 were $161 million,
compared to $183.4 million in the prior year's period, a decrease of $22.4
million or 14%. Revenues from the Oil & Gas Services Division were $89.6
million, down approximately $26.2 million or 29% from the 1998 level of $115.8
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. This decline has been partially offset by the
growth of the production testing business during the year. Specialty Chemicals
Division revenues for the first nine months were $80.3 million, including
intercompany, down slightly from the same nine month period of 1998 total
revenues of $81.1 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. The
revenue stream sold with the Process Technologies business also impacted the
Division.
Gross profits were $35.9 million in 1999, compared to $47.9 million in
1998, a decline of $12 million or 25%. Gross profit as a percentage of revenues
was 22% in 1999 versus 26% 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.
Despite reductions in market conditions arising from reduced commodity pricing,
Micronutrient margins have improved in 1999 due to lower production costs and
the WyZinCo/CoZinCo-related acquisitions.
General and administrative expenses were $30.4 million, up slightly from
$29.8 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. As of September 30, 1999, the Company has not received written
notification of termination.
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 first quarter.
Operating income for the period ended September 30, 1999 was $.8 million,
compared to income of $18 million in 1998. This change includes the special
charge of $4.7 million, a decrease of $5.8 million due to decreased volume, a
net $6.1 million decrease due to the lower gross margin rates, and a $0.6
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.
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<PAGE>
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 $18.8 million
in 1999 and $8.0 million in 1998. Net income per diluted share before the
cumulative effect accounting change was $1.39 in 1999 based on 13,580,000
average diluted shares outstanding and $0.57 in 1998 based on 14,103,000 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 $13 million or $0.96 per share in 1999 compared to net income of $8 million
in 1998 or $0.57 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's investment in working capital, excluding cash and cash
equivalents, decreased to $72.5 million at September 30, 1999 from $85.5 million
at December 31, 1998. Working capital decreased $6.7 million with the sale of
Process Technologies. Trade payables and accrued expenses increased $6.5 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/CoZinCo 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 agreement from the bank for the
sale of TETRA Process Technologies and its corporate headquarters. As of
September 30, 1999, the Company has $1.6 million in letters of credit and $79.2
million in long-term debt outstanding against a $120 million line-of-credit,
leaving a maximum net availability of $39.2 million, subject to other covenant
restrictions. The line-of-credit matures in 2002.
Major investing activities included the acquisition of WyZinCo, Inc.,
CoZinCo Sales, 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 nine months ended September 30, 1999
totaled approximately $9.3 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 construction of a new
liquid calcium chloride facility in West Virginia, and the construction of a new
production process at 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.
-10-
<PAGE>
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 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
Employees of the Company have 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 has completed 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 have been modified as required and are
compliant. 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 approximately 80% 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, all of which has been incurred through October 1, 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 companies, 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.
-11-
<PAGE>
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, competitors, raw material suppliers, significant customers,
environmental regulations, acquisitions or corporate combinations, 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 titled "Certain Business
Risks" contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
-12-
<PAGE>
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 8-K dated July 12, 1999 disclosing the disposition of TETRA
Process Technologies and related pro forma financial information.
-13-
<PAGE>
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 12, 1999 By: /s/ GEOFFREY M. HERTEL
Geoffrey M. Hertel
Executive Vice President -
Finance and Administration
(Principal Financial Officer)
Date: November 12, 1999 By: /s/ BRUCE A. COBB
Bruce A. Cobb,
Corporate Controller
(Principal Accounting Officer)
-14-
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