Consolidated Comparisons
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Period to Period Change |
| March 31, | | December 31, | | $ Change | | % Change |
| 2023 | | 2022 | | |
| (in thousands, except percentages) |
Revenues | $ | 146,209 | | | $ | 147,448 | | | $ | (1,239) | | | (0.8) | % |
Gross profit | 36,323 | | | 31,111 | | | 5,212 | | | 16.8 | % |
Gross profit as a percentage of revenue | 24.8 | % | | 21.1 | % | | | | |
Exploration and pre-development costs | 720 | | | 3,135 | | | (2,415) | | | (77.0) | % |
General and administrative expense | 23,191 | | | 23,846 | | | (655) | | | (2.7) | % |
General and administrative expense as a percentage of revenue | 15.9 | % | | 16.2 | % | | | | |
Interest expense, net | 5,092 | | | 4,900 | | | 192 | | | 3.9 | % |
| | | | | | | |
Other (income) expense, net | (214) | | | 393 | | | (607) | | | (154.5) | % |
Income (loss) before taxes and discontinued operations | 7,534 | | | (1,163) | | | 8,697 | | | NM(1) |
Income (loss) before taxes and discontinued operations as a percentage of revenue | 5.2 | % | | (0.8) | % | | | | |
Provision for income taxes | 1,489 | | | 666 | | | 823 | | | 123.6 | % |
Income (loss) before discontinued operations | 6,045 | | | (1,829) | | | 7,874 | | | (430.5) | % |
Discontinued operations: | | | | | | | |
Loss from discontinued operations, net of taxes | (12) | | | (75) | | | 63 | | | (84.0) | % |
Net income (loss) | 6,033 | | | (1,904) | | | 7,937 | | | (416.9) | % |
Loss attributable to noncontrolling interests | 7 | | | — | | | 7 | | | 100.0 | % |
Net income (loss) attributable to TETRA stockholders | $ | 6,040 | | | $ | (1,904) | | | $ | 7,944 | | | (417.2) | % |
(1) Percent change is not meaningful
Consolidated revenues are comparable between the current and previous quarters, with the decrease in revenues from the Water & Flowback Services division mostly offset by an increase in overall activity for the Completion Fluids & Products division. See Divisional Comparisons section below for a more detailed discussion of the change in our revenues.
Consolidated gross profit as a percentage of revenue increased primarily due to our Completion Fluids & Products division benefiting from increased overall activity levels and margins, as well as a $2.9 million insurance settlement received in March 2023, which was related to damage to our Lake Charles facility during Hurricane Laura in 2020. See Divisional Comparisons section below for additional discussion.
Consolidated exploration and pre-development costs decreased primarily due to completion of the front-end engineering and design study for our potential brine to bromine processing plant in Southwest Arkansas during the prior quarter.
Consolidated other (income) expense, net, increased in the current quarter, compared to the prior quarter primarily due to a $0.9 million increase in unrealized gain from our Standard Lithium shares received in April 2022 and a $1.5 million decrease in foreign exchange losses compared to the previous quarter. These changes are partially offset by a $1.4 million increase in unrealized loss due to the change in the unit price of the CSI Compressco common units we own and a $0.4 million increase in unrealized loss from the change in fair value of the CarbonFree convertible note embedded option.
Consolidated provision for income tax was $1.5 million during the current quarter, compared to a $0.7 million provision during the prior quarter. Our consolidated effective tax rate for the three months ended March 31, 2023 was 19.8% due to income generated during the quarter, partially offset by the utilization of net operating loss carryforwards in the United States and certain other non-U.S. jurisdictions for which a valuation allowance had been established. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the United States and certain other non-U.S. jurisdictions.
Divisional Comparisons
Completion Fluids & Products Division
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Period to Period Change |
| March 31, | | December 31, | | $ Change | | % Change |
| 2023 | | 2022 | | |
| (in thousands, except percentages) |
Revenues | $ | 69,042 | | | $ | 66,219 | | | $ | 2,823 | | | 4.3 | % |
Gross profit | 25,010 | | | 19,993 | | | 5,017 | | | 25.1 | % |
Gross profit as a percentage of revenue | 36.2 | % | | 30.2 | % | | | | |
Exploration and pre-development costs | 720 | | | 3,135 | | | (2,415) | | | (77.0) | % |
General and administrative expense | 7,173 | | | 6,730 | | | 443 | | | 6.6 | % |
General and administrative expense as a percentage of revenue | 10.4 | % | | 10.2 | % | | | | |
Interest income, net | (395) | | | (304) | | | (91) | | | 29.9 | % |
Other income, net | (930) | | | (24) | | | (906) | | | NM(1) |
Income before taxes and discontinued operations | $ | 18,442 | | | $ | 10,456 | | | $ | 7,986 | | | 76.4 | % |
Income before taxes and discontinued operations as a percentage of revenue | 26.7 | % | | 15.8 | % | | | | |
(1) Percent change is not meaningful
Revenues for our Completion Fluids & Products Division increased primarily due to increased pricing for industrial chemical sales, as well as higher sales volume in Europe.
Gross profit for our Completion Fluids & Products Division increased compared to the prior quarter period primarily due to the pricing and sales volume impact mentioned above, as well as a $2.9 million insurance settlement received in March 2023 related to damage to our Lake Charles facility during Hurricane Laura in 2020. Gross profit as a percentage of revenue improved compared to the prior quarter due to the insurance settlement related to our Lake Charles facility and the shift to a higher margin mix of products. Our profitability in future periods will continue to be affected by the mix of our products and services, market demand for our products and services, drilling and completions activity, supply chain challenges and inflationary pressures.
Income before taxes and discontinued operations for our Completion Fluids & Products Division increased primarily due to the $5.0 million higher gross profit described above, a $2.4 million decrease in exploration and pre-development costs associated with front-end engineering design for our potential Southwest Arkansas bromine development, a $0.4 million decrease in foreign exchange losses and a $0.9 million increase in unrealized gain from our investment in Standard Lithium shares received in April 2022. These changes were partially offset by the $0.4 million unrealized loss from the change in fair value of the CarbonFree convertible note embedded option.
Water & Flowback Services Division
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Period to Period Change |
| March 31, | | December 31, | | $ Change | | % Change |
| 2023 | | 2022 | | |
| (in thousands, except percentages) |
Revenues | $ | 77,167 | | | $ | 81,229 | | | $ | (4,062) | | | (5.0) | % |
Gross profit | 11,422 | | | 11,281 | | | 141 | | | 1.2 | % |
Gross profit as a percentage of revenue | 14.8 | % | | 13.9 | % | | | | |
General and administrative expense | 4,959 | | | 5,895 | | | (936) | | | (15.9) | % |
General and administrative expense as a percentage of revenue | 6.4 | % | | 7.3 | % | | | | |
| | | | | | | |
Interest income, net | 27 | | | 140 | | | (113) | | | (80.7) | % |
Other income, net | 58 | | | 322 | | | (264) | | | (82.0) | % |
Income before taxes and discontinued operations | $ | 6,378 | | | $ | 4,924 | | | $ | 1,454 | | | 29.5 | % |
Income before taxes and discontinued operations as a percentage of revenue | 8.3 | % | | 6.1 | % | | | | |
Revenues for our Water & Flowback Services Division decreased in the current quarter compared to the prior quarter, primarily in our Production Testing business due to the lower overall customer activity in the North America onshore business impacted by the timing of customer completion schedules.
Gross profit for our Water & Flowback Services Division remained flat compared to the prior quarter as the effect of lower revenue was offset by a more profitable sales mix. Gross profit as a percentage of revenue increased reflecting the continued margin expansion efforts driven by investments in technology, integration, digitalization and the benefit of our early production facilities in Argentina. Our SandStorm fleet remains at high utilization with continued market penetration and positive pricing progression.
The Water & Flowback Services Division income before taxes and discontinued operations increased due to a decrease in general and administrative expenses, including a $0.4 million decrease in wages and benefits, a $0.3 million decrease in general expenses and a $0.3 million decrease in professional fees, as well as a $0.3 million decrease in foreign exchange losses.
Corporate Overhead
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Period to Period Change |
| March 31, | | December 31, | | $ Change | | % Change |
| 2023 | | 2022 | | |
| (in thousands, except percentages) |
Depreciation and amortization | $ | 109 | | | $ | 163 | | | $ | (54) | | | (33.1) | % |
General and administrative expense | 11,059 | | | 11,221 | | | (162) | | | (1.4) | % |
Interest expense, net | 5,460 | | | 5,064 | | | 396 | | | 7.8 | % |
| | | | | | | |
Other expense, net | 658 | | | 95 | | | 563 | | | 592.6 | % |
Loss before taxes and discontinued operations | $ | (17,286) | | | $ | (16,543) | | | $ | (743) | | | 4.5 | % |
Corporate overhead loss before taxes and discontinued operations increased primarily due to a $0.4 million increase in interest expense due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement. Other expense, net increased primarily due to a $1.4 million decrease in unrealized gains related to unit price changes of our investment in CSI Compressco, partially offset by a $0.8 million decrease in foreign exchange losses.
Three months ended March 31, 2023 compared with three months ended March 31, 2022.
Consolidated Comparisons
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | Period to Period Change |
| 2023 | | 2022 | | $ Change | | % Change |
| (in thousands, except percentages) |
Revenues | $ | 146,209 | | | $ | 130,037 | | | $ | 16,172 | | | 12.4 | % |
Gross profit | 36,323 | | | 32,420 | | | 3,903 | | | 12.0 | % |
Gross profit as a percentage of revenue | 24.8 | % | | 24.9 | % | | | | |
Exploration and pre-development costs | 720 | | | 1,930 | | | (1,210) | | | (62.7) | % |
General and administrative expense | 23,191 | | | 20,643 | | | 2,548 | | | 12.3 | % |
General and administrative expense as a percentage of revenue | 15.9 | % | | 15.9 | % | | | | |
Interest expense, net | 5,092 | | | 3,324 | | | 1,768 | | | 53.2 | % |
| | | | | | | |
Other income, net | (214) | | | (2,411) | | | 2,197 | | | (91.1) | % |
Income before taxes and discontinued operations | 7,534 | | | 8,934 | | | (1,400) | | | 15.7 | % |
Income before taxes and discontinued operations as a percentage of revenue | 5.2 | % | | 6.9 | % | | | | |
Provision for income taxes | 1,489 | | | 1,200 | | | 289 | | | 24.1 | % |
Income before discontinued operations | 6,045 | | | 7,734 | | | (1,689) | | | 21.8 | % |
Discontinued operations: | | | | | | | |
Loss from discontinued operations, net of taxes | (12) | | | (15) | | | 3 | | | (20.0) | % |
Net income | 6,033 | | | 7,719 | | | (1,686) | | | (21.8) | % |
Loss attributable to noncontrolling interests | 7 | | | 1 | | | 6 | | | 600.0 | % |
Net income attributable to TETRA stockholders | $ | 6,040 | | | $ | 7,720 | | | $ | (1,680) | | | (21.8) | % |
Consolidated revenues increased in the current year primarily due to improving industry conditions compared to the prior year for our Water & Flowback Services division, as well as the first two early production facilities in Argentina that commenced operations in the third quarter of 2022, partially offset by lower revenues from our Completion Fluids & Products division. See Divisional Comparisons section below for a more detailed discussion of the change in our revenues.
Consolidated gross profit increased in the current year primarily due to the increase in revenue, partially offset by an increase in costs associated with the higher Water & Flowback Services division activity levels described above. Gross profit as a percentage of revenue decreased slightly due to a $2.9 million insurance settlement received in March 2023 associated with damage to our Lake Charles facility in 2020, compared to the $3.8 million insurance settlement received in March 2022.
Consolidated exploration and pre-development costs decreased $1.2 million compared to the prior year following completion of the front-end engineering and design study during the fourth quarter of 2022 associated with our exploratory brine well in Arkansas.
Consolidated general and administrative expenses increased compared to the prior year, primarily due to $2.1 million of increased wage and benefit-related expenses driven by divisional headcount additions as operational activity levels increased, as well as higher short and long-term incentive expense and higher travel expenses, partially offset by lower stock-based compensation expense. In addition, professional fees increased $0.5 million compared to the prior year.
Consolidated interest expense, net, increased in the current year primarily due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement.
Consolidated other income, net, decreased in the current year, compared to the prior year primarily due to a $1.6 million net decrease in unrealized gains on investments in CSI Compressco, Standard Lithium and CarbonFree, and a $1.0 million decrease in foreign exchange gains.
Consolidated provision for income taxes was $1.5 million during the current year, compared to $1.2 million during the prior year. Our consolidated effective tax rate for the current year was 19.8% during the current year, compared to 13.4% during the prior year. The increase in our tax provision and effective tax rate compared to the prior year was primarily due to income generated in certain non-U.S. jurisdictions for which a net operating loss carryforward is not available for offset. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the United States as well as in certain non-U.S. jurisdictions.
Divisional Comparisons
Completion Fluids & Products Division
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | Period to Period Change |
| 2023 | | 2022 | | $ Change | | % Change |
| (in thousands, except percentages) |
Revenues | $ | 69,042 | | | $ | 73,194 | | | $ | (4,152) | | | (5.7) | % |
Gross profit | 25,010 | | | 26,147 | | | (1,137) | | | (4.3) | % |
Gross profit as a percentage of revenue | 36.2 | % | | 35.7 | % | | | | |
Exploration and pre-development costs | 720 | | | 1,930 | | | (1,210) | | | (62.7) | % |
General and administrative expense | 7,173 | | | 6,059 | | | 1,114 | | | 18.4 | % |
General and administrative expense as a percentage of revenue | 10.4 | % | | 8.3 | % | | | | |
Interest income, net | (395) | | | (323) | | | (72) | | | 22.3 | % |
Other income, net | (930) | | | (811) | | | (119) | | | 14.7 | % |
Income before taxes and discontinued operations | $ | 18,442 | | | $ | 19,292 | | | $ | (850) | | | (4.4) | % |
Income before taxes and discontinued operations as a percentage of revenue | 26.7 | % | | 26.4 | % | | | | |
Revenues for our Completion Fluids & Products Division decreased compared to the prior year primarily due to lower activity in the Gulf of Mexico due to the timing of projects, partially offset by higher sales volumes in Latin America and onshore in the United States.
Gross profit for our Completion Fluids & Products Division decreased compared to the prior year due to decrease in revenues, as well as a $0.9 million decrease in insurance settlements received in 2023 compared to 2022 from damage to our Lake Charles facility in 2020.
Income before taxes and discontinued operations for our Completion Fluids & Products Division decreased compared to the prior year driven by lower gross profit, a $1.1 million increase in general and administrative costs due to higher short-term incentive expenses, and divisional headcount additions during 2022 to support higher activity levels, partially offset by a $1.2 million decrease in costs associated with the exploratory brine project compared to the prior period.
Water & Flowback Services Division
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | Period to Period Change |
| 2023 | | 2022 | | $ Change | | % Change |
| (in thousands, except percentages) |
Revenues | $ | 77,167 | | | $ | 56,843 | | | $ | 20,324 | | | 35.8 | % |
Gross profit | 11,422 | | | 6,462 | | | 4,960 | | | (76.8) | % |
Gross profit as a percentage of revenue | 14.8 | % | | 11.4 | % | | | | |
General and administrative expense | 4,959 | | | 4,238 | | | 721 | | | 17.0 | % |
General and administrative expense as a percentage of revenue | 6.4 | % | | 7.5 | % | | | | |
Interest expense, net | 27 | | | — | | | 27 | | | 100.0 | % |
Other (income) expense, net | 58 | | | (458) | | | 516 | | | (112.7) | % |
Income before taxes and discontinued operations | $ | 6,378 | | | $ | 2,682 | | | $ | 3,696 | | | (137.8) | % |
Income before taxes and discontinued operations as a percentage of revenue | 8.3 | % | | 4.7 | % | | | | |
Revenues for our Water & Flowback Services Division increased significantly for both water management and production testing due to overall higher customer drilling and completion activity. Customer activity levels have continued to improve, primarily in our North America land business, as commodity prices recovered during 2022 and remained strong. Revenues have also increased in Latin America due to two early production facilities that began operations in the third quarter of 2022.
Gross profit for our Water & Flowback Services Division improved substantially from the prior year primarily due to higher revenues resulting from the increased activity levels described above and pricing improvements as activity levels improved and new higher-margin projects commenced.
Income before taxes and discontinued operations for our Water & Flowback Services Division increased in the current year primarily due to an improvement in the gross profit described above, partially offset by a $0.7 million increase in salary and employee expense from higher short and long-term incentive expenses, and divisional headcount additions to support higher activity levels, partially offset by a $0.3 million decrease in foreign exchange gains.
Corporate Overhead
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | Period to Period Change |
| 2023 | | 2022 | | $ Change | | % Change |
| (in thousands, except percentages) |
Depreciation and amortization | $ | 109 | | | $ | 191 | | | $ | (82) | | | (42.9) | % |
General and administrative expense | 11,059 | | | 10,346 | | | 713 | | | 6.9 | % |
Interest expense, net | 5,460 | | | 3,647 | | | 1,813 | | | 49.7 | % |
Other (income) expense, net | 658 | | | (1,141) | | | 1,799 | | | (157.7) | % |
Loss before taxes and discontinued operations | $ | (17,286) | | | $ | (13,043) | | | $ | (4,243) | | | 32.5 | % |
Corporate overhead loss before taxes and discontinued operations increased due to a $0.7 million increase in general and administrative expense, as well as a $1.8 million increase in interest expense, net due to an increase in the interest rate on our Term Credit Agreement and higher borrowings under our ABL Credit Agreement, and a $1.8 million decrease in other income, net. Corporate general and administrative expenses increased compared to the prior year, primarily due to increased wage and benefit-related expenses driven by higher short and long-term incentive expenses. Other income, net decreased primarily due to a $1.6 million decrease in unrealized gains related to unit price changes of our investment in CSI Compressco, and a $0.4 million decrease in foreign exchange gains.
Non-GAAP Financial Measures
We use U.S. GAAP financial measures such as revenues, gross profit, income (loss) before taxes and discontinued operations, and net cash provided by operating activities, as well as certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures for our business.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before taxes and discontinued operations, excluding impairments, exploration and pre-development costs, certain special, non-recurring or other charges (or credits), interest, depreciation and amortization and certain non-cash items such as equity-based compensation expense. The most directly comparable GAAP financial measure is net income (loss) before taxes and discontinued operations. Exploration and pre-development costs represent expenditures incurred to evaluate potential future development of TETRA’s lithium and bromine properties in Arkansas. Such costs include exploratory drilling and associated engineering studies and are excluded from Adjusted EBITDA because they do not relate to the Company’s current business operations. Adjustments to long-term incentives represent cumulative adjustments to valuation of long-term cash incentive compensation awards that are related to prior years. These costs are excluded from Adjusted EBITDA because they do not relate to the current year and are considered to be outside of normal operations. Long-term incentives are earned over a three-year period and the costs are recorded over the three-year period they are earned. The amounts accrued or incurred are based on a cumulative of the three-year period. Equity-based compensation expense represents compensation that has been or will be paid in equity and is excluded from Adjusted EBITDA because it is a non-cash item.
Adjusted EBITDA is used by management as a supplemental financial measure to assess financial performance, without regard to charges or credits that are considered by management to be outside of its normal operations and without regard to financing methods, capital structure or historical cost basis, and to assess the Company’s ability to incur and service debt and fund capital expenditures.
The following tables reconcile net income (loss) before taxes and discontinued operations to Adjusted EBITDA for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2023 |
| Completion Fluids & Products | | Water & Flowback Services | | Corporate SG&A | | Other and Eliminations | | | Total |
| (in thousands, except percentages) |
Revenue | $ | 69,042 | | | $ | 77,167 | | | $ | — | | | $ | — | | | | $ | 146,209 | |
Net income (loss) before taxes and discontinued operations | 18,442 | | | 6,378 | | | (11,059) | | | (6,227) | | | | 7,534 | |
Insurance recoveries | (2,850) | | | — | | | — | | | — | | | | (2,850) | |
| | | | | | | | | | |
Exploration and pre-development costs | 720 | | | — | | | — | | | — | | | | 720 | |
Adjustment to long-term incentives | — | | | — | | | 353 | | | — | | | | 353 | |
| | | | | | | | | | |
Former CEO stock appreciation right expense (credit) | — | | | — | | | (307) | | | — | | | | (307) | |
Transactions and other expenses | — | | | — | | | 82 | | | — | | | | 82 | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest (income) expense, net | (395) | | | 27 | | | — | | | 5,460 | | | | 5,092 | |
Depreciation, amortization and accretion | 2,052 | | | 6,509 | | | — | | | 109 | | | | 8,670 | |
Equity-based compensation expense | 17 | | | — | | | 1,276 | | | — | | | | 1,293 | |
Adjusted EBITDA | $ | 17,986 | | | $ | 12,914 | | | $ | (9,655) | | | $ | (658) | | | | $ | 20,587 | |
| | | | | | | | | | |
Adjusted EBITDA as % of revenue | 26.1 | % | | 16.7 | % | | | | | | | 14.1 | % |
| | | | | | | | | | |
| Three Months Ended |
| December 31, 2022 |
| Completion Fluids & Products | | Water & Flowback Services | | Corporate SG&A | | Other and Eliminations | | | Total |
| (in thousands, except percentages) |
Revenue | $ | 66,219 | | | $ | 81,229 | | | $ | — | | | $ | — | | | | $ | 147,448 | |
Net income (loss) before taxes and discontinued operations | 10,456 | | | 4,924 | | | (11,221) | | | (5,322) | | | | (1,163) | |
Impairments | 342 | | | 200 | | | — | | | — | | | | 542 | |
Exploration and pre-development costs | 3,135 | | | — | | | — | | | — | | | | 3,135 | |
Adjustment to long-term incentives | — | | | — | | | 131 | | | — | | | | 131 | |
Transactions and other expenses | 576 | | | — | | | — | | | — | | | | 576 | |
Former CEO stock appreciation right expense (credit) | — | | | — | | | (57) | | | — | | | | (57) | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest (income) expense, net | (304) | | | 140 | | | — | | | 5,064 | | | | 4,900 | |
Depreciation, amortization and accretion | 1,787 | | | 6,808 | | | — | | | 163 | | | | 8,758 | |
Equity-based compensation expense | — | | | — | | | 3,519 | | | — | | | | 3,519 | |
Adjusted EBITDA | $ | 15,992 | | | $ | 12,072 | | | $ | (7,628) | | | $ | (95) | | | | $ | 20,341 | |
| | | | | | | | | | |
Adjusted EBITDA as % of revenue | 24.2 | % | | 14.9 | % | | | | | | | 13.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Completion Fluids & Products | | Water & Flowback Services | | Corporate SG&A | | Other and Eliminations | | Total |
| (in thousands, except percents) |
Revenues | $ | 73,194 | | | $ | 56,843 | | | $ | — | | | $ | — | | | $ | 130,037 | |
Net income (loss) before taxes and discontinued operations | 19,292 | | | 2,682 | | | (10,346) | | | (2,694) | | | 8,934 | |
Insurance settlement | (3,750) | | | — | | | — | | | — | | | (3,750) | |
Exploration and pre-development costs | 1,930 | | | — | | | — | | | — | | | 1,930 | |
Adjustment to long-term incentives | — | | | — | | | 784 | | | — | | | 784 | |
| | | | | | | | | |
Former CEO stock appreciation right expense | — | | | — | | | 472 | | | — | | | 472 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Interest (income) expense, net | (323) | | | — | | | — | | | 3,647 | | | 3,324 | |
Depreciation, amortization and accretion | 1,948 | | | 5,543 | | | — | | | 188 | | | 7,679 | |
Equity-based compensation expense | — | | | — | | | 1,104 | | | — | | | 1,104 | |
Adjusted EBITDA | $ | 19,097 | | | $ | 8,225 | | | $ | (7,986) | | | $ | 1,141 | | | $ | 20,477 | |
| | | | | | | | | |
Adjusted EBITDA as a % of revenue | 26.1 | % | | 14.5 | % | | | | | | 15.7 | % |
Adjusted EBITDA is a financial measure that is not in accordance with U.S. GAAP and should not be considered an alternative to net income, operating income, cash provided by operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. This measure may not be comparable to similarly titled financial metrics of other companies, as other companies may not calculate Adjusted EBITDA in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes.
Liquidity and Capital Resources
We believe that our capital structure allows us to meet our financial obligations. Our liquidity at the end of the first quarter was $86.7 million. Liquidity is defined as unrestricted cash plus availability under the ABL Credit Agreement, Argentina Credit Facility and Swedish Credit Facility. Information about the terms and covenants of our debt agreements can be found in our 2022 Annual Report and in Note 6 - Long Term Debt and Other Borrowings.
Our consolidated sources and uses of cash are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
Operating activities | $ | 8,985 | | | $ | 5,934 | |
Investing activities | $ | (11,197) | | | $ | (5,592) | |
Financing activities | $ | 5,136 | | | $ | 722 | |
Operating Activities
Consolidated cash flows provided by operating activities increased compared to the first three months of 2022 primarily due to an increase in cash profit and working capital changes.
Investing Activities
Total cash capital expenditures during the first three months of 2023 were $12.8 million, which reflects increased expenditures to accommodate industry-wide activity recoveries as well as traditional front-loading of expected annual expenditures. Our Water & Flowback Services Division spent $10.3 million on capital expenditures, primarily to deploy additional SandStorm units to meet increased demands and maintain, automate and upgrade its water management and flowback equipment fleet. Water and Flowback Services Division capital expenditures also included expenditures related to construction of the third early production facility in Argentina. Our Completion Fluids & Products Division spent $2.4 million on capital expenditures, primarily supporting higher activity levels in the United States and Europe.
Investing activities during the first three months of 2023 and 2022 included $2.9 million and $3.8 million, respectively, for insurance settlements from damage to our Lake Charles facility in 2020.
Historically, a significant majority of our planned capital expenditures have been related to identified opportunities to grow and expand our existing businesses. We are also focused on enhancing shareholder value by capitalizing on our key mineral assets, brine mineral extraction expertise, and deep chemistry competency to expand our offerings into the low carbon energy markets. However, we continue to review all capital expenditure plans carefully in an effort to conserve cash. We currently have no long-term capital expenditure commitments, other than the asset purchase obligation described in Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. If the forecasted demand for our products and services increases or decreases, the amount of planned expenditures on growth and expansion may be adjusted.
Lithium and Bromine Inferred Resources
We have rights to the brine underlying our approximately 40,000 gross acres of brine leases in the Smackover Formation in Southwest Arkansas, including rights to the bromine and lithium contained in the brine. With respect to approximately 35,000 acres of that total acreage, we granted Standard Lithium an option to acquire the lithium rights. The agreements governing this option contemplate a 2.5% royalty that Standard Lithium would pay us based on gross lithium revenues. Additional information on these inferred resources is described in Part I, “Item 2. Properties” in our 2022 Annual Report.
During early 2023, we completed an initial economic assessment for a bromine extraction plant. We expect an initial economic assessment to follow in late 2023 for a lithium extraction plant, subject to the progress of early engineering. Only upon completion of an indicated resources study, pre-feasibility and/or feasibility study and attainment of capital commitment from either a joint venture partner, governments grants or loans, or other cost-effective sources of capital that will not over-lever TETRA, in addition to confirmation of a successful recapitalization of the long-duration zinc-bromide battery storage manufacturers, would we proceed to a final investment decision.
Financing Activities
Our financing activities for the first three months of 2023 include $52.8 million of borrowings and $47.4 million of repayments under the ABL Credit Agreement, Argentina Credit Facility and Swedish Credit Facility, as well as $0.3 million of capital lease payments associated with equipment leased primarily for the early production facilities in Argentina. We may supplement our existing cash balances and cash flow from operating activities with short-term borrowings, long-term borrowings, issuances of equity and debt securities, and other sources of capital. We are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current environment.
Long-Term Debt
Term Credit Agreement. The Term Credit Agreement is scheduled to mature on September 10, 2025. Our Term Credit Agreement requires us to offer to prepay a percentage of Excess Cash Flow (as defined in the Term Credit Agreement) within five business days of filing our Annual Report. As of March 31, 2023, $163.1 million in aggregate principal amount of our Term Credit Agreement is outstanding.
Asset-Based Credit Agreement. As of March 31, 2023, our ABL Credit Agreement provides for a senior secured revolving credit facility of up to $80.0 million, with a $20.0 million accordion. The credit facility is subject to a borrowing base to be determined by reference to the value of inventory and accounts receivable, and includes a sublimit of $20.0 million for letters of credit, a swingline loan sublimit of $11.5 million, and a $15.0 million sub-facility subject to a borrowing base consisting of certain trade receivables and inventory in the United Kingdom. The amounts we may borrow under the ABL Credit Agreement are derived from our accounts receivable, certain accrued receivables and certain inventory. Changes in demand for our products and services have an impact on our eligible accounts receivable, accrued receivables and the value of our inventory, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Agreement. As of March 31, 2023, we had $6.2 million outstanding and $8.3 million in letters of credit and guarantees against our ABL Credit Agreement and availability of $65.4 million, subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement.
Argentina Credit Facility. In January 2023, the Company entered into a revolving credit facility for certain working capital and capital expenditure needs for its subsidiary in Argentina (“Argentina Credit Facility”). As of March 31, 2023, we had $1.7 million outstanding and availability of approximately $0.3 million under the Argentina Credit Agreement. Borrowings bear interest at a rate of 2.50% per annum. The Argentina Credit Facility expires on October 19, 2023 and is backed by a letter of credit under our ABL Credit Agreement.
Swedish Credit Facility. In January 2022, the Company entered into a revolving credit facility for seasonal working capital needs of subsidiaries in Sweden. As of March 31, 2023, we had $0.5 million outstanding and availability of approximately $4.4 million under this agreement. During each year, all outstanding loans under the Swedish Credit Facility must be repaid for at least 30 consecutive days. Borrowings bear interest at a rate of 2.95% per annum. The Swedish Credit Facility expires on December 31, 2023 and the Company intends to renew it annually.
Finland Credit Agreement. In January 2022, the Company also entered into a credit agreement guaranteed by certain accounts receivable and inventory in Finland (“Finland Credit Agreement”). As of March 31, 2023, there were $1.5 million of letters of credit outstanding against the Finland Credit Agreement. The Finland Credit Agreement expires on January 31, 2024 and the Company intends to renew it annually.
Other Sources and Uses of Cash
In addition to the aforementioned credit facilities, we fund our short-term liquidity requirements from cash generated by our operations and from short-term vendor financing. In addition, as of March 31, 2023, the market value of our investments in CSI Compressco and Standard Lithium were $6.4 million and $1.5 million, respectively, with no holding restrictions on our ability to monetize our interests. We also hold an investment in a convertible note issued by CarbonFree valued at $5.9 million as of March 31, 2023. In addition, we are party to agreements in which Standard Lithium has the right to explore for, and an option to acquire the right to produce and extract lithium in our Arkansas leases as well as additional potential resources in the Mojave region of California. We received an additional 400,000 shares of Standard Lithium stock in April 2023 under the terms of this agreement.
On May 5, 2022, we filed a universal shelf Registration Statement on Form S-3 with the SEC. On May 17, 2022, the Registration Statement on Form S-3 was declared effective by the SEC. Pursuant to this registration statement, we have the ability to sell debt or equity securities in one or more public offerings up to an aggregate public offering price of $400 million. This shelf registration statement currently provides us additional flexibility with regards to potential financing that we may undertake when market conditions permit or our financial condition may require.
Should additional capital be required, the ability to raise such capital through the issuance of additional debt or equity securities may currently be limited. Instability or volatility in the capital markets at the times we need to
access capital may affect the cost of capital and the ability to raise capital for an indeterminable length of time. If it is necessary to issue additional equity to fund our capital needs, additional dilution of our common stockholders will occur. We periodically evaluate engaging in strategic transactions and may consider divesting non-core assets where our evaluation suggests such transactions are in the best interest of our business. In challenging economic environments, we may experience increased delays and failures by customers to pay our invoices. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have an adverse effect on our liquidity. An increase of unpaid receivables would also negatively affect our borrowing availability under the ABL Credit Agreement.
As of March 31, 2023, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.
Critical Accounting Policies and Estimates
There have been no material changes or developments in the evaluation of the accounting estimates and
the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed
in our 2022 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material. Commitments and Contingencies
Litigation
For information regarding litigation, see - Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements and Part II, “Item 1. Legal Proceedings” in this report.
Long-Term Debt
For information on our credit agreements, see our 2022 Annual Report and Note 6 - “Long-Term Debt and Other Borrowings” in the Notes to Consolidated Financial Statements.
Leases
We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. We have finance leases for certain facility storage tanks and equipment rentals. Information about the terms of our lease agreements can be found in our 2022 Annual Report.
Product and Asset Purchase Obligations
For information on product and asset purchase obligations, see - Note 7 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.
Cautionary Statement for Purposes of Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should”, “targets”, “will”, and “would”.
These forward-looking statements include statements concerning the inferred mineral resources of lithium and bromine, the potential extraction of lithium and bromine from the leased acreage, the development of the assets including construction of bromine extraction plants, the economic viability thereof, the demand for such resources, and the timing and cost of such activities; the ability to obtain an indicated or measured resources report and an initial economic assessment, indicated or measured resources report, and/or pre-feasibility or feasibility studies regarding our lithium and bromine acreage; statements regarding the Company's beliefs, expectations, plans, goals, future events and performance; and other statements that are not purely historical. With respect to the Company's disclosures of inferred mineral resources, including bromine and lithium carbonate equivalent concentrations, it is uncertain if further exploration will ever result in the estimation of a higher category of mineral resource or a mineral reserve. Inferred mineral resources are considered to have the lowest level of geological confidence of all mineral resources. Investors are cautioned that inferred mineral resources do not have demonstrated economic value. Inferred mineral resources have a high degree of uncertainty as to their existence and as to whether they can be economically or legally commercialized. A significant amount of exploration must be completed in order to determine whether an inferred mineral resource may be upgraded to a higher category. Therefore, investors are cautioned not to assume that all or any part of an inferred mineral resource exists, that it can be economically or legally commercialized, or that it will ever be upgraded to a higher category. Investors should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to update or revise any forward-looking statements, except as may be required by law.
Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations, forecasts or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our 2022 Annual Report, and those described from time to time in our future reports filed with the SEC.