TETRA TECHNOLOGIES INC (TTI) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to analyze major elements of our consolidated financial statements and provide insight into important areas of management’s focus. This section should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes included elsewhere in this Annual Report. Statements in the following discussion may include forward-looking statements. These forward-looking statements involve risks and uncertainties. See “Item 1A. Risk Factors” for additional discussion of these factors and risks. For discussion of 2022 compared to 2021, see disclosures titled “Results of Operations” set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 27, 2023.

Business Overview

We are an energy services and solutions company with operations on six continents focused on developing environmentally conscious services and solutions that help make people’s lives better. Calcium chloride is used in the oil and gas industry, and also has broad industrial applications to the agricultural, road, food and beverage, and lithium production markets. We operate through two reporting segments - Completion Fluids & Products Division and Water & Flowback Services Division.

Completion Fluids & Products Division revenues increased during 2023 as a result of increased completions activity in the Gulf of Mexico and international markets, as well as higher volumes in Europe following resolution of raw materials limitations. As the offshore market continues to improve, our pipeline of TETRA CS Neptune® completion fluid opportunities has continued to grow consistent with deepwater market growth. The division has also benefited from the December 2022 Peacock acquisition in Europe. We have also continued to successfully leverage opportunities to expand integrated services to completion fluids customers.

Our Water & Flowback Services revenues increased compared to the prior year, due to margin expansion efforts driven by investments in technology, integration, digitalization, as well as the benefit of having two early production facilities in Latin America operating the entire year and a third beginning in May 2023. The early production facilities are longer-term, high-margin projects with stable and predictable cash flows. Our fleet of TETRA SandStormTM advanced cyclone technology separators remains at high utilization with continued market penetration and positive pricing progression. Revenue growth was a result of the continued increase in the number of integrated projects and customers, high utilization of SandStorm units and market share gains with private oil and gas operators.

We are committed to pursuing low-carbon energy initiatives that leverage our fluids and aqueous chemistry core competencies, our significant bromine and lithium assets and technologies, and our leading calcium chloride production capabilities. In June 2023, we entered into a MOU with Saltwerx, an indirect wholly owned subsidiary of ExxonMobil Corporation, relating to a newly formed Evergreen Brine Unit and potential bromine and lithium production from brine produced from the unit. The MOU with Saltwerx includes provisions relating to: (i) initial brine ownership percentages within the Evergreen Brine Unit, including the bromine and lithium contained in the brine, (ii) the transfer of certain leased acres outside the proposed Evergreen Brine Unit from us to Saltwerx, (iii) reimbursement by Saltwerx of certain expenses that we incurred for the development of leased acreage to be included in the Evergreen Brine Unit, and (iv) an allocation of certain future costs for the drilling of a brine production test well and other development operations, including front-end engineering and design studies for bromine and lithium production facilities. The extraction of lithium and bromine from these brine leases would likely require a significant amount of time and capital, which we are not able to estimate at this time. We completed an initial preliminary economic assessment in early 2023 for a bromine extraction plant. We expect an initial economic assessment to follow in early 2024 for a lithium extraction plant, subject to the progress of early engineering. Only upon completion of a 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.

Substantially all of our former Compression Division’s operations were conducted through our partially-owned CSI Compressco subsidiary. On January 29, 2021, we closed the GP Sale of the general partner of CSI Compressco, which included the sale of the incentive distribution rights (“IDRs”) in CSI Compressco and approximately 23.1% of the outstanding limited partner interests in CSI Compressco, referred to as the “GP Sale.” We have reflected the operations of our former Compression Division as discontinued operations for all periods

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presented. See Note 3 – “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.

Results of Operations

The following data should be read in conjunction with the Consolidated Financial Statements and the associated Notes contained elsewhere in this report.

Consolidated Comparisons

Revenues

Consolidated revenues for 2023 increased compared to the prior year due to higher activity in both our Completion Fluids & Products and Water & Flowback Services divisions, where revenue increased by $39.7 million and $33.4 million, respectively. The increase in our Completion Fluids & Products division is primarily due to an increase in industrial chemicals product pricing and incremental volumes. The increase in our Water & Flowback Services division is primarily from an entire year of operations of the first two early production facilities in Latin America which came on line beginning in the third quarter of 2022 and the third early production facility that came online during the second quarter of 2023.

Gross Profit

Consolidated gross profit as a percentage of revenue increased due to revenue and margin improvements in both our Completion Fluids & Products and Water & Flowback Services divisions. See Divisional Comparisons section below for additional discussion.

Exploration and Pre-Development Costs

Exploration and pre-development costs increased $5.5 million compared to the prior year due to the increased activities surrounding our Arkansas strategic initiatives, which included additional front-end engineering design studies and completing a second exploration test well.

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General and Administrative Expense

Consolidated general and administrative expenses increased during 2023 compared to the prior year primarily due to a $5.1 million increase in employee compensation from additional headcount to support higher activity levels as well as merit and inflationary factors, and additional incentive compensation as a result of higher operational margin performance and the impact of increases in the company’s stock price on long-term incentive awards.

Interest Expense, Net

Consolidated interest expense, net, increased in 2023 compared to the prior year primarily due to an increase in the interest rate on our Term Credit Agreement.

Other Income, net

Consolidated other (income) expense, net increased during 2023 compared to the prior year primarily due to a $9.3 million reimbursement from our partner associated with the collaborative arrangement related to our Arkansas resource development opportunity, partially offset by a $4.5 million increase in foreign exchange losses, including the impact of currency volatility in Argentina.

Provision for Income Tax

Our consolidated provision for income taxes during 2023 was primarily attributable to taxes in certain foreign jurisdictions and state taxes. Our consolidated effective tax rate for the year ended December 31, 2023 and December 31, 2022 was 19.6% and 31.9% respectively. The increase in our tax provision compared to the prior year was primarily due to the increase in income before taxes, while our effective tax rate decreased because a significant portion of the increase in income was in jurisdictions for which we were able to utilize net operating losses for which we had established valuation allowances. 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 $95.0 million of net operating loss carryforwards that may be available to offset future income tax liabilities in the U.S. as well as in certain international jurisdictions where net operating loss carryforwards exist.

Divisional Comparisons

Completion Fluids & Products Division

Completion Fluids & Products Division revenues increased primarily due to incremental brominated product sales in the United States and Latin America, an increase in European calcium chloride pricing, and higher volumes in Europe as a result of resolution of raw materials limitations as well as the Peacock acquisition in December 2022. Improved market conditions lead to increased demand and volume and contributed to the increase in revenues compared to the prior period. Revenues also increased through leveraging opportunities to expand services to completion fluids customers.

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Completion Fluids & Products Division gross profit during 2023 increased compared to the prior year due to higher revenue and margin growth as described above, as well as pricing improvements. Completion Fluids & Products Division profitability in future periods will continue to be affected by the mix of its products and services, market demand for our products and services, drilling and completions activity and commodity prices.

Completion Fluids & Products Division pretax income increased during 2023 compared to the prior year primarily due to the increase in gross profit, along with a $9.3 million increase in other income due to reimbursements from TETRA's partner for the Arkansas resource development, partially offset by the $0.8 million decrease in the unrealized gain on the CarbonFree convertible notes. The increase in gross profit was also offset by a $5.5 million increase in exploration and pre-development costs due to increased activities for our Arkansas strategic initiatives, which included additional front-end engineering design studies and completing a second exploration test well. General and administrative expenses increased primarily due to a $1.9 million increase in employee compensation from additional headcount to support higher activity levels as well as merit and inflationary factors and a $0.5 million increase in professional services.

Water & Flowback Services Division

(1) Percent change is not meaningful

Water & Flowback Services Division revenues increased during 2023 compared to the prior year primarily due to improved market conditions. Our growth has been boosted from investments in our SandStorm advanced cyclone technology to significantly expand our fleet and capture market share. In addition, revenue increased from an entire year of operations of three early production facilities in Latin America which came on line beginning in the third quarter of 2022. Revenues also include the sale of one early production facility to the operator in October 2023 for $5.4 million.

The Water & Flowback Services Division gross profit improved primarily due to higher revenues resulting from the increased activity levels described above and pricing improvements as activity levels improved and new projects commenced.

The Water & Flowback Services Division income before taxes increased during 2023 compared to prior year primarily due to the increase in gross profit. In addition, general and administrative expenses decreased primarily due to a $1.0 million decrease in employee compensation expense primarily due to lower short-term incentive compensation, a $0.7 million decrease in general expenses and a $0.7 million decrease in legal expenses. Other (income) expense, net moved from income to expenses due to a $3.9 million swing in foreign exchange losses caused by exchange rate devaluation in Argentina.

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Corporate Overhead

Corporate Overhead loss before taxes increased during 2023 compared to the prior year primarily due to higher interest expense due to an increase in the interest rate on our Term Credit Agreement, an increase in general administrative expenses primarily due to $4.1 million of increased salary related expense driven by a $2.7 million increase in short and long-term incentive and equity-based compensation expenses, and a $0.8 million impairment of our corporate office lease.

Non-GAAP Financial Measures

We use U.S. GAAP financial measures such as revenues, gross profit, income (loss) before taxes, 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, income from collaborative arrangement 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. Income from collaborative arrangement represents the portion of exploration and pre-development costs that are reimbursable by our strategic partner. Exploration and pre-development costs, net of the associated income from collaborative arrangement are excluded from Adjusted EBITDA because they do not relate to the Company’s current business operations. Adjustments to long-term incentives represent 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.

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 flows from 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 entities, as other entities may not calculate Adjusted EBITDA in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA as analytical tools by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes.

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The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:

Liquidity and Capital Resources

We believe that our capital structure allows us to meet our financial obligations and fund future growth as needed, despite uncertain operating conditions and financial markets. Our liquidity at the end of the fourth quarter of 2023 was $126.3 million consisting of $52.5 million of unrestricted cash plus $73.8 million of availability under our credit agreements. Liquidity is defined as unrestricted cash plus availability under our revolving credit facilities.

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Our consolidated sources and uses of cash for the years ended December 31, 2023 and 2022 are as follows:

Operating Activities

Consolidated cash flows provided by operating activities totaled $70.2 million during 2023 compared to $19.0 million during the prior year, an increase of $51.2 million. Operating cash flows increased compared to the prior year primarily due to increased activity levels and higher consolidated margins from changes in product mix, as well as the effect of working capital movements. We continue to monitor customer credit risk in the current environment and focus on serving larger capitalized oil and gas operators and national oil companies.

Investing Activities

Total cash capital expenditures during 2023 were $38.2 million. Our Water & Flowback Services Division spent $26.6 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 which became operational in May 2023. Our Completion Fluids & Products Division spent $11.1 million on capital expenditures during 2023, primarily supporting higher activity levels in the United States and Europe.

Investing activities for 2023 also included $6.7 million proceeds from sales of property, plant and equipment, $3.9 million of proceeds from the sale of marketable securities, and a $2.9 million insurance settlement received from damage to our Lake Charles facility in 2020.

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. Additional information on these resources is described in Part I, “Item 2. Properties” in this Annual Report. The extraction of lithium and bromine from these brine leases will likely require a significant amount of time and capital, which are subject to further analysis and consideration. Only upon completion of a pre-feasibility and/or feasibility study and attainment of capital commitment from either a joint venture partner, government 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.

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. As of December 31, 2023, we have no long-term capital expenditure commitments. If the forecasted demand for our products and services increases or decreases, or we proceed with development of brine resources in Arkansas, the amount of planned expenditures on growth and expansion may be adjusted.

Financing Activities

During the year ended December 31, 2023, consolidated net cash used in financing activities was $4.7 million, consisting of $100.5 million borrowings and $97.5 million repayments of our revolving credit facilities, as well as $1.7 million of payments of finance lease obligations in Latin America. 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.

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Term Credit Agreement. As of December 31, 2023, the $163.1 million principal balance of the Term Credit Agreement was due on September 10, 2025. On January 12, 2024, the Company entered into a New Term Credit Agreement consisting of a $190.0 million funded term loan and a $75.0 million delayed-draw term loan that refinanced the Company’s Term Credit Agreement outstanding as of December 31, 2023 and provided capital to advance the Company’s Arkansas bromine processing project. The maturity date of the New Term Credit Agreement is January 12, 2030. As of February 23, 2024, $190.0 million in aggregate principal amount of our New Term Credit Agreement was outstanding.

Asset-Based Credit Agreement. The amended ABL Credit Agreement provides for a senior secured revolving credit facility of up to $80 million, with a $20 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 million for letters of credit, a swingline loan sublimit of $11.5 million, and a $15 million sub-facility subject to a borrowing base consisting of certain trade receivables and inventory in the United Kingdom. The ABL Credit Agreement may be used for working capital needs, capital expenditures and other general corporate purposes. 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. The ABL Credit Agreement is scheduled to mature on May 31, 2025. As of December 31, 2023, we had no balance outstanding under the ABL Credit Agreement and, subject to compliance with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, we had availability of $68.8 million under the ABL Credit Agreement. As of February 23, 2024, we have no outstanding borrowings under our ABL Credit Agreement and $0.5 million letters of credit, resulting in $70.5 million of availability.

Swedish Credit Facility. In January 2022, the Company entered into a new revolving credit facility for seasonal working capital needs of subsidiaries in Sweden and Finland (“Swedish Credit Facility”). As of December 31, 2023, we had no balance outstanding and availability of approximately $5.0 million under the Swedish Credit Facility. 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, 2024 and the Company intends to renew it annually.

Finland Credit Agreement. In January 2022, the Company entered into an agreement guaranteed by certain accounts receivable and inventory in Finland (“Finland Credit Agreement”). As of December 31, 2023, we had $1.5 million of letters of credit outstanding against the Finland Credit Agreement. The Finland Credit Agreement has been renewed by the Company through January 31, 2025.

As of December 31, 2023, we are in compliance with all covenants of our debt agreements. See Note 10 - “Long-Term Debt and Other Borrowings” and Note 18 - “Subsequent Events” in the Notes to Consolidated Financial Statements for further information.

Other Sources and Uses of Cash

In addition to the aforementioned credit facilities and senior notes, we fund our short-term liquidity requirements from cash generated by our operations and from short-term vendor financing. In addition, as of December 31, 2023, the market value of our equity holdings of CSI Compressco and Standard Lithium were $8.5 million and $1.6 million, respectively, with no holding restrictions on our ability to monetize our investments. If the pending acquisition of CSI Compressco by Kodiak closes, our common units in CSI Compressco will be exchanged for Kodiak common stock. 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 transaction is in the best interest of our business. In challenging economic environments, we may experience increased delays and failures by customers to pay our invoices. We could experience delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies. 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 and Swedish Credit Facility.

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Leases

We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. See Note 2 - “Basis of Presentation and Significant Accounting Policies” and Note 9 - “Leases” in the Notes to Consolidated Financial Statements for further information on our lease obligations.

Asset Retirement Obligations

We operate facilities in various U.S. and foreign locations that are used in the manufacture, storage, and sale of our products, inventories, and equipment. We are required to take certain actions in connection with the retirement of these assets.

Product Purchase Obligations

In the normal course of our Completion Fluids & Products Division operations, we enter into supply agreements with certain manufacturers of various raw materials and finished products. For information on product purchase obligations, see - Note 11 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.

Off Balance Sheet Arrangements

As of December 31, 2023, we do not have any off balance sheet arrangements that may have a current or future material effect on our consolidated financial condition or results of operations.

Litigation

For information regarding litigation, including contingencies of discontinued operations, see Note 11 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepared these financial statements in conformity with U.S. GAAP. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We base these on historical experience, available information, and various other assumptions that we believe are reasonable. Our assumptions, estimates, and judgments 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.

An accounting policy is considered critical if it is both material to the presentation of the financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on the financial condition or results of operations. Accounting estimates and assumptions may become critical when they are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance.

Critical accounting estimates are estimates that require us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely occur from period to period, have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. We believe there are currently no critical accounting policies and estimates that affect the preparation of our financial statements.

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