tti-20100809.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO            

COMMISSION FILE NUMBER 1-13455


TETRA Technologies, Inc.
 (Exact name of registrant as specified in its charter)
 

Delaware
74-2148293
(State of incorporation)
(I.R.S. Employer Identification No.)
   
24955 Interstate 45 North
 
The Woodlands, Texas
77380
(Address of principal executive offices)
(zip code)

(281) 367-1983
(Registrant’s telephone number, including area code)

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 [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]  No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ X ]
Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if a smaller reporting company)
Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]

As of August 5, 2010, there were 76,120,893 shares outstanding of the Company’s Common Stock, $0.01 par value per share.

 
 

 
 
PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
   Product sales
  $ 113,915     $ 92,380     $ 217,108     $ 183,038  
   Services and rentals
    127,703       125,564       230,403       230,157  
      Total revenues
    241,618       217,944       447,511       413,195  
                                 
Cost of revenues:
                               
   Cost of product sales
    71,327       68,627       136,259       117,315  
   Cost of services and rentals
    76,824       68,310       145,857       135,244  
   Depreciation, depletion, amortization, and accretion
    45,635       40,618       82,469       76,877  
      Total cost of revenues
    193,786       177,555       364,585       329,436  
         Gross profit
    47,832       40,389       82,926       83,759  
                                 
General and administrative expense
    24,955       22,454       47,732       47,023  
   Operating income
    22,877       17,935       35,194       36,736  
                                 
Interest expense, net
    4,238       3,411       8,266       6,588  
Other (income) expense, net
    (1,899 )     885       (2,082 )     (1,626 )
Income before taxes and discontinued operations
    20,538       13,639       29,010       31,774  
Provision for income taxes
    6,903       4,429       9,919       11,194  
Income before discontinued operations
    13,635       9,210       19,091       20,580  
Loss from discontinued operations, net of taxes
    (75 )     (35 )     (104 )     (243 )
   Net income
  $ 13,560     $ 9,175     $ 18,987     $ 20,337  
                                 
Basic net income per common share:
                               
   Income before discontinued operations
  $ 0.18     $ 0.12     $ 0.25     $ 0.27  
   Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
   Net income
  $ 0.18     $ 0.12     $ 0.25     $ 0.27  
Average shares outstanding
    75,491       74,980       75,434       74,952  
                                 
Diluted net income per common share:
                               
   Income before discontinued operations
  $ 0.18     $ 0.12     $ 0.25     $ 0.27  
   Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
   Net income
  $ 0.18     $ 0.12     $ 0.25     $ 0.27  
Average diluted shares outstanding
    76,857       75,401       76,819       75,200  
 

See Notes to Consolidated Financial Statements

 
1

 
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)

 
   
June 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
   Cash and cash equivalents
  $ 89,227     $ 33,394  
   Restricted cash
    351       266  
   Trade accounts receivable, net of allowance for doubtful
               
     accounts of $1,613 in 2010 and $5,007 in 2009
    169,883       181,038  
   Inventories
    107,792       122,274  
   Derivative assets
    19,665       19,926  
   Prepaid expenses and other current assets
    44,203       33,905  
   Assets of discontinued operations
    378       15  
   Total current assets
    431,499       390,818  
                 
Property, plant, and equipment
               
   Land and building
    78,378       77,246  
   Machinery and equipment
    467,913       458,675  
   Automobiles and trucks
    42,824       42,432  
   Chemical plants
    176,512       94,767  
   Oil and gas producing assets (successful efforts method)
    683,754       676,692  
   Construction in progress
    12,697       95,470  
   Total property, plant, and equipment
    1,462,078       1,445,282  
Less accumulated depreciation and depletion
    (698,780 )     (628,908 )
   Net property, plant, and equipment
    763,298       816,374  
                 
Other assets:
               
   Goodwill
    99,005       99,005  
   Patents, trademarks and other intangible assets, net of accumulated
         
     amortization of $20,449 in 2010 and $18,997 in 2009
    12,073       13,198  
   Deferred tax assets
    998       1,342  
   Other assets
    30,149       26,862  
   Total other assets
    142,225       140,407  
Total assets
  $ 1,337,022     $ 1,347,599  

 
See Notes to Consolidated Financial Statements

 

 
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)

 
   
June 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
           
   Trade accounts payable
  $ 61,955     $ 57,418  
   Accrued liabilities
    68,478       84,638  
   Decommissioning and other asset retirement obligations, current
    80,404       77,891  
   Deferred tax liabilities
    16,981       19,893  
   Derivative liabilities
    -       2,618  
   Liabilities of discontinued operations
    -       17  
   Total current liabilities
    227,818       242,475  
                 
Long-term debt, net
    304,217       310,132  
Deferred income taxes
    60,327       56,125  
Decommissioning and other asset retirement obligations, net
    135,743       146,219  
Other liabilities
    15,477       16,154  
   Total long-term liabilities
    515,764       528,630  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
   Common stock, par value $0.01 per share; 100,000,000 shares
         
     authorized; 77,633,643 shares issued at June 30, 2010,
               
     and 77,039,628 shares issued at December 31, 2009
    776       770  
   Additional paid-in capital
    197,711       193,718  
   Treasury stock, at cost; 1,511,308 shares held at June 30, 2010,
         
     and 1,497,346 shares held at December 31, 2009
    (8,344 )     (8,310 )
   Accumulated other comprehensive income
    20,816       26,822  
   Retained earnings
    382,481       363,494  
   Total stockholders' equity
    593,440       576,494  
Total liabilities and stockholders' equity
  $ 1,337,022     $ 1,347,599  

 
See Notes to Consolidated Financial Statements

 
3

 
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
Operating activities:
           
   Net income
  $ 18,987     $ 20,337  
   Reconciliation of net income to cash provided by operating activities:
         
     Depreciation, depletion, amortization, and accretion
    72,542       74,576  
     Impairments of long-lived assets
    9,927       9,091  
     Provision (benefit) for deferred income taxes
    (1,217 )     8,777  
     Stock compensation expense
    3,055       3,829  
     Provision (benefit) for doubtful accounts
    (1,302 )     1,736  
     (Gain) loss on sale of property, plant, and equipment
    250       (2,640 )
     Proceeds from sale of cash flow hedge derivatives
    -       23,060  
     Non-cash income from sold hedge derivatives
    (11,161 )     -  
     Other non-cash charges and credits
    2,370       11,147  
     Proceeds from insurance settlements
    39,772       -  
     Changes in operating assets and liabilities:
               
       Accounts receivable
    (1,802 )     6,771  
       Inventories
    12,445       5,480  
       Prepaid expenses and other current assets
    (557 )     5,034  
       Trade accounts payable and accrued expenses
    (19,672 )     1,726  
       Decommissioning liabilities
    (33,796 )     (39,301 )
       Operating activities of discontinued operations
    (380 )     119  
       Other
    993       249  
       Net cash provided by operating activities
    90,454       129,991  
                 
Investing activities:
               
   Purchases of property, plant, and equipment
    (33,866 )     (95,361 )
   Business combinations
    -       (14,296 )
   Proceeds from sale of property, plant, and equipment
    353       1,694  
   Other investing activities
    (303 )     2,260  
       Net cash used in investing activities
    (33,816 )     (105,703 )
                 
Financing activities:
               
   Proceeds from long-term debt
    35       75,700  
   Principal payments on long-term debt
    -       (83,200 )
   Proceeds from exercise of stock options
    732       378  
   Excess tax benefit from exercise of stock options
    250       -  
       Net cash provided by (used in) financing activities
    1,017       (7,122 )
                 
Effect of exchange rate changes on cash
    (1,822 )     1,548  
                 
Increase in cash and cash equivalents
    55,833       18,714  
Cash and cash equivalents at beginning of period
    33,394       3,882  
Cash and cash equivalents at end of period
  $ 89,227     $ 22,596  
                 
Supplemental cash flow information:
               
   Interest paid
  $ 9,007     $ 10,347  
   Income taxes paid
    25,391       8,154  
                 
Supplemental disclosure of non-cash investing and financing activities:
         
   Adjustment of fair value of decommissioning liabilities
               
     capitalized to oil and gas properties
  $ 4,447     $ 5,945  

 
See Notes to Consolidated Financial Statements

 

 

TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We are a geographically diversified oil and gas services company focused on completion fluids and other products, production testing, wellhead compression, and selected offshore services including well plugging and abandonment, decommissioning, and diving, with a concentrated domestic exploration and production business. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.

The consolidated financial statements include the accounts of our wholly owned subsidiaries. Investments in unconsolidated joint ventures in which we participate are accounted for using the equity method. Our interests in oil and gas properties are proportionately consolidated. All significant intercompany accounts 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 (SEC) 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 provide a fair statement of the results for the interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2009.

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation.

Cash Equivalents

We consider all highly liquid cash investments, with a maturity of three months or less when purchased, to be cash equivalents.

Restricted Cash

Restricted cash reflected on our balance sheet as of June 30, 2010, includes funds related to agreed repairs to be expended at one of our former Fluids Division facility locations. This cash will remain restricted until such time as the associated project is completed, which we expect to occur during the next twelve months.

Inventories

Inventories are stated at the lower of cost or market value and consist primarily of finished goods. Cost is determined using the weighted average method. Significant components of inventories as of June 30, 2010, and December 31, 2009, are as follows:
 
   
June 30, 2010
   
December 31, 2009
 
   
(In Thousands)
 
             
Finished goods
  $ 76,613     $ 88,704  
Raw materials
    3,441       3,436  
Parts and supplies
    26,245       26,060  
Work in progress
    1,493       4,074  
    $ 107,792     $ 122,274  


 

 

Repair Costs and Insurance Recoveries

Maritech incurred significant damage from hurricanes during 2005 and 2008. Hurricane damage repair efforts consist of the repair of damaged facilities and equipment, well intervention, abandonment, decommissioning, and debris removal associated with destroyed offshore platforms, construction of replacement platforms and facilities, and redrilling of destroyed wells. During the first six months of 2010, we have expended approximately $27.8 million for these hurricane repair efforts. We estimate that the future well intervention, abandonment, decommissioning, debris removal, platform reconstruction, and well redrill efforts associated with the platforms destroyed by the hurricanes during 2005 and 2008 will cost approximately $75 to $90 million net to our interest before any insurance recoveries. Approximately $40 to $50 million of this cost relates to platforms destroyed by Hurricane Ike during 2008. Approximately $53 million of our total future cost estimate has been accrued as part of Maritech’s decommissioning liability, and an additional approximate $20 to $35 million relates primarily to the estimated cost to construct a new offshore platform at Maritech’s East Cameron 328 field and redrill several wells at this location. Actual hurricane repair costs could greatly exceed these estimates and, depending on the nature of the cost, could result in significant charges to earnings in future periods.

We typically maintain insurance protection that we believe to be customary and in amounts sufficient to reimburse us for a portion of our casualty losses, including for a portion of the repair, well intervention, abandonment, decommissioning, and debris removal costs associated with the damages incurred from named windstorms and hurricanes. In addition, other damages, such as the value of lost inventory and the cost to replace a sunken transport barge which was lost in 2009, are also covered by insurance. Our insurance coverage is subject to certain overall coverage limits and deductibles. For the Maritech hurricane damages caused by Hurricane Ike during 2008, we anticipate that those damages will exceed these overall coverage limits. With regard to costs incurred that we believe will qualify for coverage under our various insurance policies, we recognize anticipated insurance recoveries when collection is deemed probable. Any recognition of anticipated insurance recoveries is used to offset the original charge to which the insurance recovery relates. The amount of anticipated insurance recoveries is either included in accounts receivable or is recorded as an offset to Maritech’s decommissioning liabilities in the accompanying consolidated balance sheets.

In March 2010, Maritech collected approximately $39.8 million of insurance proceeds associated with Hurricane Ike, which included the settlement of certain coverage at an amount less than the applicable coverage limit. This amount collected was greater than the covered hurricane repair, well intervention, and abandonment costs incurred to date, with the excess representing an advance payment of costs anticipated to be incurred in the future. The collection of these settlement proceeds resulted in the extinguishment of all of Maritech’s insurance receivables, the reversal of the future decommissioning costs previously capitalized to certain oil and gas properties, the reversal of anticipated insurance recoveries that had been netted against certain decommissioning liabilities, and approximately $2.2 million of pre-tax insurance gains that were credited to earnings during the first quarter. Following the collection of the $39.8 million insurance settlement proceeds in March 2010, Maritech has additional maximum remaining coverage available relating to hurricane damage repairs of approximately $29.5 million, all of which relates to Hurricane Ike.

 The changes in anticipated insurance recoveries, including recoveries associated with a sunken transport barge and other non-hurricane related claims, during the six months ended June 30, 2010, are as follows:
 
   
Six Months Ended
 
   
June 30, 2010
 
   
(In Thousands)
 
       
Beginning balance
  $ 26,992  
         
Activity in the period:
       
   Claim-related expenditures
    304  
   Insurance reimbursements
    (26,007 )
   Contested insurance recoveries
    (186 )
Ending balance at June 30, 2010
  $ 1,103  


 

 
 
Anticipated insurance recoveries that have been reflected as a reduction of our decommissioning liabilities were $0 at June 30, 2010, and $10.3 million at December 31, 2009. Anticipated insurance recoveries that are included in accounts receivables were $1.1 million and $16.7 million at June 30, 2010, and December 31, 2009, respectively.

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:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Number of weighted average common
                       
  shares outstanding
    75,491,288       74,979,536       75,433,742       74,952,324  
Assumed exercise of stock options
    1,366,009       421,041       1,385,443       247,472  
Average diluted shares outstanding
    76,857,297       75,400,577       76,819,185       75,199,796  
 
In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the first six months of 2010, we used the average market price of our common stock of $11.48 per share. For the three months ended June 30, 2010 and 2009, the calculations of the average diluted shares outstanding excludes the impact of 2,110,024 and 3,653,072 outstanding stock options, respectively, that have exercise prices in excess of the average market price, as the inclusion of these shares would have been antidilutive. For the six months ended June 30, 2010 and 2009, the calculations of the average diluted shares outstanding exclude the impact of 2,130,597 and 3,927,057 outstanding stock options, respectively, that have exercise prices in excess of the average market price, as the inclusion of these shares would have been antidilutive.

Environmental Liabilities

Environmental expenditures that result in additions to property and equipment are capitalized, while other environmental expenditures are expensed. Environmental remediation liabilities are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Estimates of future environmental remediation expenditures often consist of a range of possible expenditure amounts, a portion of which may be in excess of amounts of liabilities recorded. In this instance, we disclose the full range of amounts reasonably possible of being incurred. Any changes or developments in environmental remediation efforts are accounted for and disclosed each quarter as they occur. Any recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Complexities involving environmental remediation efforts can cause the estimates of the associated liability to be imprecise. Factors that cause uncertainties regarding the estimation of future expenditures include, but are not limited to, the effectiveness of the anticipated work plans in achieving targeted results and changes in the desired remediation methods and outcomes as prescribed by regulatory agencies. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally, a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable as the work is performed and the range of ultimate costs becomes more defined. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of these contingencies.

Fair Value Measurements

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability, or if a different market is potentially more
 
 
7

 
 
advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.

Under generally accepted accounting principles, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available under the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.

We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill. In addition, we utilize fair value measurements in the initial recording of our decommissioning and other asset retirement obligations. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets, including goodwill. The fair value of our financial instruments, which may include cash, temporary investments, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts. The fair value of our long-term Senior Notes at June 30, 2010, was approximately $322.3 million compared to a carrying amount of approximately $304.2 million, as current rates are more favorable than the Senior Note interest rates. We calculate the fair value of our Senior Notes internally, using current market conditions and average cost of debt. We have not calculated or disclosed recurring fair value measurements of non-financial assets and non-financial liabilities.

We also utilize fair value measurements on a recurring basis in the accounting for our derivative contracts used to hedge a portion of our oil and gas production cash flows. For these fair value measurements, we utilize both a market approach and income approach, as we compare forward oil and natural gas pricing data from published sources over the remaining derivative contract term to the contract swap price and calculate a fair value using market discount rates. We have historically had no transfers of recurring fair value measurements between hierarchy levels. A summary of these fair value measurements as of June 30, 2010, and December 31, 2009, is as follows:
 
         
Fair Value Measurements as of June 30, 2010 Using
 
         
Quoted Prices in
             
         
Active Markets for
   
Significant Other
   
Significant
 
         
Identical Assets
   
Observable
   
Unobservable
 
   
Total as of
   
or Liabilities
   
Inputs
   
Inputs
 
Description
 
June 30, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
   
(In Thousands)
 
Asset for natural gas
                       
   swap contracts
  $ 14,167     $ -     $ 14,167     $ -  
Asset for oil swap contracts
    8,413       -       8,413       -  
Total
  $ 22,580                          
 

         
Fair Value Measurements as of December 31, 2009 Using
 
         
Quoted Prices in
             
         
Active Markets for
   
Significant Other
   
Significant
 
         
Identical Assets
   
Observable
   
Unobservable
 
   
Total as of
   
or Liabilities
   
Inputs
   
Inputs
 
Description
 
December 31, 2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
   
(In Thousands)
 
Asset for natural gas
                       
   swap contracts
  $ 19,926     $ -     $ 19,926     $ -  
Liability for oil swap contracts
    (2,618 )     -       (2,618 )     -  
Total
  $ 17,308                          
 
 
 
8

 
 
During the three months ended June 30, 2010, a portion of the carrying value of certain Maritech oil and gas properties was charged to earnings as an impairment of $8.9 million. The change in the fair value of these properties was due to decreased expected future cash flows based on forward pricing data from published sources, and was primarily due to unfavorable development activities and the decreased fair value of certain probable and possible reserves as reflected in recent market transactions. Because published forward pricing data was applied to estimated oil and gas reserve volumes based on our internally prepared reserve estimates, such fair value calculation is based on significant unobservable inputs (Level 3) in accordance with the fair value hierarchy.

A summary of these nonrecurring fair value measurements as of June 30, 2010 and 2009, using the fair value hierarchy is as follows:

   
Fair Value Measurements as of June 30, 2010 Using
       
         
Quoted Prices in
                   
         
Active Markets for
   
Significant Other
   
Significant
       
         
Identical Assets
   
Observable
   
Unobservable
       
   
Total as of
   
or Liabilities
   
Inputs
   
Inputs
   
Total
 
Description
 
June 30, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Losses
 
   
(In Thousands)
       
Impairments of oil and gas
                             
   properties
  $ 8,460     $ -     $ -     $ 8,460     $ 8,859  
Other impairments
    2,415       -       -       2,415       1,068  
    $ 10,875                             $ 9,927  


   
Fair Value Measurements as of June 30, 2009 Using
       
         
Quoted Prices in
                   
         
Active Markets for
   
Significant Other
   
Significant
       
         
Identical Assets
   
Observable
   
Unobservable
       
   
Total as of
   
or Liabilities
   
Inputs
   
Inputs
   
Total
 
Description
 
June 30, 2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Losses
 
   
(In Thousands)
       
Impairments of oil and gas
                             
   properties
  $ -     $ -     $ -     $ -     $ 2,301  
Impairment of investment in
                                       
  unconsolidated joint venture
    -       -       -       -       6,790  
    $ -                             $ 9,091  

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605), Multiple Deliverable Revenue Arrangements,” which establishes the accounting and reporting guidance for arrangements under which service providers will perform multiple revenue-generating activities. Specifically, this guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Additional disclosures of multiple deliverable arrangements will also be required. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of the accounting and disclosure requirements of this ASU will not have a significant impact on our financial statements.

In January 2010, the FASB published ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements,” which requires new disclosures about transfers in and out of fair value hierarchy levels, more detailed disclosures about activity in Level 3 fair value measurements, and clarifies existing disclosure requirements about asset and liability aggregation, inputs, and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements of activity in Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the disclosure requirements of this ASU will not have a significant impact on our financial statements.

 

 

NOTE B – LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
     
June 30, 2010
   
December 31, 2009
 
     
(In Thousands)
 
 
Scheduled Maturity
           
Bank revolving line of credit facility
June 26, 2011
  $ -     $ -  
5.07% Senior Notes, Series 2004-A
September 30, 2011
    55,000       55,000  
4.79% Senior Notes, Series 2004-B
September 30, 2011
    34,182       40,132  
5.90% Senior Notes, Series 2006-A
April 30, 2016
    90,000       90,000  
6.30% Senior Notes, Series 2008-A
April 30, 2013
    35,000       35,000  
6.56% Senior Notes, Series 2008-B
April 30, 2015
    90,000       90,000  
European bank credit facility
      -       -  
Other
      35       -  
        304,217       310,132  
Less current portion
      -       -  
     Total long-term debt
    $ 304,217     $ 310,132  
 
NOTE C – DECOMMISSIONING AND OTHER ASSET RETIREMENT OBLIGATIONS

The large majority of our asset retirement obligations consists of the future well abandonment and decommissioning costs for offshore oil and gas properties and platforms owned by our Maritech subsidiary, including the remaining well intervention, abandonment, decommissioning, and debris removal costs associated with offshore platforms that were previously destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners, anticipated insurance recoveries, and any contractual amount to be paid by the previous owner of the oil and gas property when the liabilities are satisfied.

The changes in the asset retirement obligations during the three month and six month periods ended June 30, 2010 and 2009 are as follows:
 
   
Three Months Ended June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Beginning balance as of March 31
  $ 236,418     $ 243,696  
Activity in the period:
               
   Accretion of liability
    1,350       2,119  
   Retirement obligations incurred
    -       -  
   Revisions in estimated cash flows
    4,902       12,883  
   Settlement of retirement obligations
    (26,523 )     (28,702 )
Ending balance as of June 30
  $ 216,147     $ 229,996  

 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
Beginning balance as of December 31 of
           
  the preceding year
  $ 224,110     $ 248,725  
Activity in the period:
               
   Accretion of liability
    2,698       4,400  
   Retirement obligations incurred
    -       -  
   Revisions in estimated cash flows
    22,184       16,445  
   Settlement of retirement obligations
    (32,845 )     (39,574 )
Ending balance as of June 30
  $ 216,147     $ 229,996  

 
10

 
 
The majority of the increase in estimated cash flows for decommissioning liabilities and other asset retirement obligations during the six months ended June 30, 2010 relates primarily to Maritech’s offshore platforms that were destroyed by hurricanes, and resulted from the collection of anticipated insurance recoveries that had been previously netted against Maritech’s decommissioning liabilities.

NOTE D – HEDGE CONTRACTS

We are exposed to financial and market risks that affect our businesses. We have market risk exposure in the sales prices we receive for our oil and gas production. We have currency exchange rate risk exposure related to specific transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facility, to the extent we have debt outstanding, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables from companies in the energy industry. Our financial risk management activities involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures for a significant portion of our oil and gas production and for certain foreign currency transactions. We are exposed to the volatility of oil and gas prices for the portion of our oil and gas production that is not hedged. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives, our strategies for undertaking various hedge transactions, and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment, or forecasted transaction. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in these hedging transactions are highly effective in offsetting changes in cash flows of the hedged items.

Derivative Hedge Contracts

As of June 30, 2010, we had the following cash flow hedging swap contracts outstanding relating to a portion of our Maritech subsidiary’s oil and gas production:

Derivative Contracts
 
Aggregate
Daily Volume
 
Weighted Average Contract Price
 
Contract Year
June 30, 2010
           
             
Oil swap contracts
 
3,000 barrels/day
 
$80.77/barrel
 
2010
Oil swap contracts
 
2,000 barrels/day
 
$87.68/barrel
 
2011
             
Natural gas swap contracts
 
20,000 MMBtu/day
 
$8.147/MMBtu
 
2010

We believe that our swap agreements are “highly effective cash flow hedges,” in managing the volatility of future cash flows associated with our oil and gas production. During the second quarter of 2009, we liquidated certain cash flow hedging swap contracts associated with Maritech’s oil production in exchange for cash of approximately $23.1 million. The effective portion of the change in derivative fair value (i.e., that portion of the change in the derivative’s fair value that offsets the corresponding change in the cash flows of the hedged transaction) is initially reported as a component of accumulated other comprehensive income, which is classified within stockholders’ equity. This component of accumulated other comprehensive income associated with cash flow hedge derivative contracts, including those derivative contracts that have been liquidated, will be subsequently reclassified into product sales revenues, utilizing the specific identification method, when the hedged exposure affects earnings (i.e., when hedged oil and gas production volumes are reflected in revenues). As of June 30, 2010, approximately $17.9 million of the total balance (approximately $19.8 million) of accumulated other comprehensive income associated with cash flow hedge derivatives is expected to be reclassified into product sales revenue over the next twelve month period. Any “ineffective” portion of the change in the derivative’s fair value is recognized in earnings immediately.

The fair value of hedging instruments reflects our best estimates and is based upon exchange or over-the-counter quotations, whenever they are available. Quoted valuations may not be available. Where quotes are not available, we utilize other valuation techniques or models to estimate fair values. These modeling techniques require us to make estimations of future prices, price correlation, and market volatility and liquidity. The actual results may differ from these estimates, and these differences can be positive or negative. The fair value of our oil and natural gas swap contracts as of June 30, 2010, and December 31, 2009, is as follows:
 
 
11

 
 
Derivatives designated
Balance Sheet
 
Fair Value at
 
as hedging instruments
Location
 
June 30, 2010
   
December 31, 2009
 
     
(In Thousands)
 
               
Natural gas swap contracts
Current assets
  $ 14,167     $ 19,926  
Oil swap contracts
Current assets
    5,498       -  
Oil swap contracts
Long-term assets
    2,915       -  
Oil swap contracts
Current liabilities
    -       (2,618 )
                   
Total derivatives designated as hedging instruments
  $ 22,580     $ 17,308  
 
Oil and natural gas swap assets that are classified as current assets or current liabilities relate to the portion of the derivative contracts associated with hedged oil and gas production to occur over the next twelve month period. None of the oil and natural gas swap contracts contain credit risk related contingent features that would require us to post assets as collateral for contracts that are classified as liabilities. Pretax gains and losses associated with oil and gas derivative swap contracts for the three month and six month periods ended June 30, 2010 and 2009 are summarized below:
 
   
Three Months Ended June 30, 2010
 
Derivative Swap Contracts
 
Oil
   
Natural Gas
   
Total
 
   
(In Thousands)
 
Amount of pretax gain reclassified from accumulated other comprehensive
                 
  income into product sales revenue (effective portion)
  $ 4,858     $ 7,725     $ 12,583  
Amount of pretax gain (loss) from change in derivative fair value
                       
  recognized in other comprehensive income
    (11,097 )     1,371       (9,726 )
Amount of pretax gain (loss) recognized in other income (expense)
                       
  (ineffective portion)
    419       (35 )     384  
 
   
Three Months Ended June 30, 2009
 
Derivative Swap Contracts
 
Oil
   
Natural Gas
   
Total
 
   
(In Thousands)
 
Amount of pretax gain reclassified from accumulated other comprehensive
                 
  income into product sales revenue (effective portion)
  $ 2,361     $ 11,365     $ 13,726  
Amount of pretax gain (loss) from change in derivative fair value
                       
  recognized in other comprehensive income
    13,677       (2,369 )     11,308  
Amount of pretax gain (loss) recognized in other income (expense)
                       
  (ineffective portion)
    (43 )     (604 )     (647 )
 
   
Six Months Ended June 30, 2010
 
Derivative Swap Contracts
 
Oil
   
Natural Gas
   
Total
 
   
(In Thousands)
 
Amount of pretax gain reclassified from accumulated other comprehensive
                 
  income into product sales revenue (effective portion)
  $ 9,939     $ 12,225     $ 22,164  
Amount of pretax gain (loss) from change in derivative fair value
                       
  recognized in other comprehensive income
    (9,320 )     (7,287 )     (16,607 )
Amount of pretax gain (loss) recognized in other income (expense)
                       
  (ineffective portion)
    125       215       340  
 
   
Six Months Ended June 30, 2009
 
Derivative Swap Contracts
 
Oil
   
Natural Gas
   
Total
 
   
(In Thousands)
 
Amount of pretax gain reclassified from accumulated other comprehensive
                 
  income into product sales revenue (effective portion)
  $ 6,882     $ 18,758     $ 25,640  
Amount of pretax gain (loss) from change in derivative fair value
                       
  recognized in other comprehensive income
    11,722       (19,277 )     (7,555 )
Amount of pretax gain (loss) recognized in other income (expense)
                       
  (ineffective portion)
    (284 )     (1,242 )     (1,526 )
 
Other Hedge Contracts

Our long-term debt includes borrowings that are designated as a hedge of our net investment in our European calcium chloride operations. The hedge is considered to be effective, since the debt balance designated as the hedge is less than or equal to the net investment in the foreign operation. At June 30, 2010, we had 28 million euros (approximately $34.2 million) designated as a hedge of our net investment in this
 
 
12

 
 
foreign operation. Changes in the foreign currency exchange rate have resulted in a cumulative change to the cumulative translation adjustment account of $0.9 million, net of taxes, at June 30, 2010, with no ineffectiveness recorded.

NOTE E – COMPREHENSIVE INCOME

Comprehensive income for the three month and six month periods ended June 30, 2010 and 2009 is as follows:
 
   
Three Months Ended June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Net income
  $ 13,560     $ 9,175  
Net change in derivative fair value, net of taxes of $3,475
               
  and $(3,966), respectively
    5,867       (6,695 )
Reclassification of derivative fair value into product sales
               
  revenues, net of taxes of $(4,681) and $(5,103), respectively
    (7,902 )     (8,623 )
Foreign currency translation adjustment, net of taxes of
               
  $(1,112) and $324, respectively
    (1,650 )     5,681  
Comprehensive income
  $ 9,875     $ (462 )

 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Net income
  $ 18,987     $ 20,337  
Net change in derivative fair value, net of taxes of $6,051
               
  and $3,378, respectively
    10,216       5,703  
Reclassification of derivative fair value into product sales
               
  revenues, net of taxes of $(8,245) and $(9,536), respectively
    (13,919 )     (16,104 )
Foreign currency translation adjustment, net of taxes of
               
  $(1,648) and $(772), respectively
    (2,303 )     4,253  
Comprehensive income
  $ 12,981     $ 14,189  
 
NOTE F – COMMITMENTS AND CONTINGENCIES

Litigation

We 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 us cannot be predicted with certainty, management does not reasonably expect these matters to have a material adverse impact on the financial statements.

Class Action Lawsuit – Between March 27, 2008, and April 30, 2008, two putative class action complaints were filed in the United States District Court for the Southern District of Texas (Houston Division) against us and certain former officers by certain stockholders on behalf of themselves and other stockholders who purchased our common stock between January 3, 2007, and October 16, 2007. The complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaints allege that the defendants violated the federal securities laws during the period by, among other things, disseminating false and misleading statements and/or concealing material facts concerning our current and prospective business and financial results. The complaints also allege that, as a result of these actions, our stock price was artificially inflated during the class period, which enabled our insiders to sell their personally-held shares for a substantial gain. The complaints seek unspecified compensatory damages, costs, and expenses. On May 8, 2008, the Court consolidated these complaints as In re TETRA Technologies, Inc. Securities Litigation, No. 4:08-cv-0965 (S.D. Tex.). On August 27, 2008, Lead Plaintiff Fulton County Employees’ Retirement System filed its Amended Consolidated Complaint. On October 28, 2008, we filed a motion to dismiss the federal class action. On July 9, 2009, the Court issued an opinion dismissing, without prejudice, most of the claims in this lawsuit, but permitting plaintiffs to proceed on their allegations regarding disclosures pertaining to the collectability of certain insurance receivables. On June 16, 2010, defendants and plaintiff’s counsel reached a settlement agreement whereby all claims against defendants will be released in exchange for a payment of $8.25 million, which is expected to be paid by our
 
 
13

 
 
insurers. On July 21, 2010, the parties filed a motion for preliminary approval of the settlement with the Court, and we expect the settlement to become final in late 2010.

Derivative Lawsuit – Between May 28, 2008 and June 27, 2008, two petitions were filed by alleged stockholders in the District Courts of Harris County, Texas, 133rd and 113th Judicial Districts, purportedly on our behalf. The suits name our directors and certain officers as defendants. The factual allegations in these lawsuits mirror those in the class action lawsuit, and the claims are for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The petitions seek disgorgement, costs, expenses, and unspecified equitable relief. On September 22, 2008, the 133rd District Court consolidated these complaints as In re TETRA Technologies, Inc. Derivative Litigation, Cause No. 2008-23432 (133rd Dist. Ct., Harris County, Tex.), and appointed Thomas Prow and Mark Patricola as Co-Lead Plaintiffs. This lawsuit was stayed by agreement of the parties pending the Court’s ruling on our motion to dismiss the federal class action. On September 8, 2009, the plaintiffs in this state court action filed a consolidated petition which makes factual allegations similar to the surviving allegations in the federal lawsuit. On April 19, 2010, the Court granted our motion to abate the suit, based on plaintiff’s inability to demonstrate derivative standing. On June 8, 2010, we received a letter from plaintiff’s counsel demanding that our board of directors take action against the defendants named in the previously filed derivative lawsuit. Our board is currently evaluating the best course of action to take in response to the demand letter.

Although a settlement agreement in the federal complaint is pending before the Court, it has not been finalized. At this stage, it is impossible to predict the outcome of the derivative lawsuit or its impact upon us. We continue to believe that the allegations made in the derivative lawsuit are without merit, and we intend to continue to seek dismissal of and vigorously defend against this lawsuit. While a successful outcome cannot be guaranteed, we do not reasonably expect these lawsuits to have a material adverse effect.

Environmental

One of our subsidiaries, TETRA Micronutrients, Inc. (TMI), previously owned and operated a production facility located in Fairbury, Nebraska. TMI is subject to an Administrative Order on Consent issued to American Microtrace, Inc. (n/k/a/ TETRA Micronutrients, Inc.) in the proceeding styled In the Matter of American Microtrace Corporation, EPA I.D. No. NED00610550, Respondent, Docket No. VII-98-H-0016, dated September 25, 1998 (the Consent Order), with regard to the Fairbury facility. TMI is liable for future remediation costs and ongoing environmental monitoring at the Fairbury facility under the Consent Order; however, the current owner of the Fairbury facility is responsible for costs associated with the closure of that facility.

In August of 2009, the Environmental Protection Agency (EPA), pursuant to Sections 308 and 311 of the Clean Water Act (CWA), served a request for information with regard to a release of our zinc bromide that occurred from one of our transport barges on the Mississippi River on March 11, 2009. We timely filed a response to that request for information in August 2009. In January 2010, the EPA issued a Notice of Violation and Opportunity to Show Cause related to the spill. We met with the EPA in April 2010 to discuss potential violations and penalties. It has been agreed that no injunctive relief will be required. We are currently working with the EPA to finalize a joint stipulation of settlement whereby we will be responsible for a penalty of $487,000, which will be payable later during 2010. We expect this penalty to be covered by insurance.

NOTE G – INDUSTRY SEGMENTS

We manage our operations through five operating segments: Fluids, Offshore Services, Maritech, Production Testing, and Compressco.

Our Fluids Division manufactures and markets clear brine fluids, additives, and other associated products and services to the oil and gas industry for use in well drilling, completion, and workover operations both in the United States and in certain regions of Latin America, Europe, the Middle East, and other international locations. The Division also markets a variety of liquid and dry calcium chloride products, including products manufactured at its production facilities, to a variety of markets outside the energy industry.

Our Offshore Division consists of two operating segments: Offshore Services and Maritech, an oil and gas exploration, exploitation, and production segment. The Offshore Services segment provides (1) downhole and subsea services such as plugging and abandonment, workover, and wireline services, (2) construction and decommissioning services for offshore oil and gas platforms and pipelines, including hurricane damage
 
 
14

 
 
remediation utilizing heavy lift barges and cutting technologies, and (3) diving services involving conventional and saturated air diving and the operation of several dive support vessels.
 
The Maritech segment consists of our Maritech subsidiary, which is an oil and gas exploration, exploitation, and production company focused in the offshore and onshore U.S. Gulf of Mexico region. Maritech periodically acquires oil and gas properties in order to replenish or expand its production operations and to provide additional development and exploitation opportunities. The Offshore Division’s Offshore Services segment performs a significant portion of the well abandonment and decommissioning services required by Maritech.
 
Our Production Enhancement Division consists of two operating segments: Production Testing and Compressco. The Production Testing segment provides production testing services in many of the major oil and gas basins in the United States, as well as onshore basins in Latin America, Northern Africa, the Middle East, and other international markets.

The Compressco segment provides wellhead compression-based production enhancement services and products throughout many of the onshore producing regions of the United States, as well as certain oil and gas basins in Canada, Mexico, South America, Europe, Asia, and other international locations. These compression services can improve the value of natural gas and oil wells by increasing daily production and total recoverable reserves.

We generally evaluate performance and allocate resources based on profit or loss from operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments, as well as geographic areas, are priced at the estimated fair value of the products or services as negotiated between the operating units. “Corporate overhead” includes corporate general and administrative expenses, corporate depreciation and amortization, interest income and expense, and other income and expense.

Summarized financial information concerning the business segments from continuing operations is as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Revenues from external customers
                       
   Product sales
                       
      Fluids Division
  $ 62,599     $ 46,733     $ 113,854     $ 93,715  
      Offshore Division
                               
         Offshore Services
    499       678       1,147       1,570  
         Maritech
    49,576       44,518       95,794       84,988  
         Intersegment eliminations
    -       -       -       -  
            Total Offshore Division
    50,075       45,196       96,941       86,558  
      Production Enhancement Division
                               
         Production Testing
    -       -       3,610       -  
         Compressco
    1,241       451       2,703       2,765  
            Total Production Enhancement Division
    1,241       451       6,313       2,765  
      Consolidated
    113,915       92,380       217,108       183,038  
                                 
   Services and rentals
                               
      Fluids Division
    16,714       15,462       31,704       32,144  
      Offshore Division
                               
         Offshore Services
    84,839       91,579       135,448       138,699  
         Maritech
    759       890       1,140       1,632  
         Intersegment eliminations
    (18,156 )     (21,383 )     (23,296 )     (29,026 )
            Total Offshore Division
    67,442       71,086       113,292       111,305  
      Production Enhancement Division
                               
         Production Testing
    24,822       18,286       47,797       42,905  
         Compressco
    18,725       20,730       37,610       43,803  
            Total Production Enhancement Division
    43,547       39,016       85,407       86,708  
      Consolidated
    127,703       125,564       230,403       230,157  


 
15

 

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Revenues from external customers
                       
   Intersegment revenues
                       
      Fluids Division
  $ 16     $ 16     $ 32     $ 41  
      Offshore Division
                               
         Offshore Services
    63       -       204       32  
         Maritech
    -       -       35       -  
         Intersegment eliminations
    -       -       -       -  
            Total Offshore Division
    63       -       239       32  
      Production Enhancement Division
                               
         Production Testing
    4       1       4       1  
         Compressco
    -       -       -       -  
            Total Production Enhancement Division
    4       1       4       1  
      Intersegment eliminations
    (83 )     (17 )     (275 )     (74 )
      Consolidated
    -       -       -       -  
                                 
   Total revenues
                               
      Fluids Division
    79,329       62,211       145,590       125,900  
      Offshore Division
                               
         Offshore Services
    85,401       92,257       136,799       140,301  
         Maritech
    50,335       45,408       96,969       86,620  
         Intersegment eliminations
    (18,156 )     (21,383 )     (23,296 )     (29,026 )
            Total Offshore Division
    117,580       116,282       210,472       197,895  
      Production Enhancement Division
                               
         Production Testing
    24,826       18,287       51,411       42,906  
         Compressco
    19,966       21,181       40,313       46,568  
            Total Production Enhancement Division
    44,792       39,468       91,724       89,474  
      Intersegment eliminations
    (83 )     (17 )     (275 )     (74 )
      Consolidated
  $ 241,618     $ 217,944     $ 447,511     $ 413,195  


Income before taxes and discontinued operations
     
      Fluids Division
  $ 10,191     $ 1,216     $ 16,377     $ 13,369  
      Offshore Division
                               
         Offshore Services
    14,269       23,024       11,828       22,380  
         Maritech
    1,044       (11,431 )     9,687       (2,245 )
         Intersegment eliminations
    81       (187 )     572       (498 )
            Total Offshore Division
    15,394       11,406       22,087       19,637  
      Production Enhancement Division
                               
         Production Testing
    3,322       7,382       7,518       13,081  
         Compressco
    4,735       5,904       9,630       12,573  
            Total Production Enhancement Division
    8,057       13,286       17,148       25,654  
      Corporate overhead
    (13,104 )(1)     (12,269 )(1)     (26,602 )(1)     (26,886 )(1)
      Consolidated
  $ 20,538     $ 13,639     $ 29,010     $ 31,774  


 
16

 

   
June 30,
 
   
2010
   
2009
 
Total assets
 
(In Thousands)
 
      Fluids Division
  $ 381,485     $ 361,522  
      Offshore Division
               
         Offshore Services
    177,656       195,527  
         Maritech
    308,292       428,475  
         Intersegment eliminations
    (1,674 )     (3,399 )
            Total Offshore Division
    484,274       620,603  
      Production Enhancement Division
               
         Production Testing
    104,151       108,616  
         Compressco
    195,333       207,945  
            Total Production Enhancement Division
    299,484       316,561  
      Corporate overhead
    171,779  (2)     120,312  (2)
      Consolidated
  $ 1,337,022     $ 1,418,998  

(1) Amounts reflected include the following general corporate expenses:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
General and administrative expense
  $ 9,083     $ 7,901     $ 17,769     $ 17,568  
Depreciation and amortization
    727       748       1,503       1,447  
Interest expense
    4,303       3,349       8,279       6,717  
Other general corporate (income) expense, net
    (1,009 )     271       (949 )     1,154  
Total
  $ 13,104     $ 12,269     $ 26,602     $ 26,886  
(2) Includes assets of discontinued operations.


NOTE H – SUBSEQUENT EVENT

In July 2010, our Maritech subsidiary purchased interests in certain onshore oil and gas properties located in South Texas from Aurora Resources Corporation. The acquired properties will be recorded at a cost of approximately $6.7 million.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

Similar to the previous quarter, consolidated revenues increased during the second quarter of 2010 compared to the prior year period. Our Fluids Division reported the most significant increase due to the increased sales of clear brine fluids compared to the prior year period, as our customers’ completion activities increased during the period. In addition, the Fluids Division reported increased revenues from sales of production from its new El Dorado, Arkansas calcium chloride plant facility, which began operations in late 2009. Our Production Testing segment also reported increased revenues due to increased activity compared to the prior year period. We believe the continuing growth in revenues for these segments reflects the ongoing economic recovery that has resulted in increased oil and gas industry activity. This increased industry activity is reflected by the total domestic rig count during the second quarter of 2010, which showed a 61.2% increase from the prior year period. Maritech also showed increased revenues, due to increased realized pricing primarily as a result of commodity derivative hedge contracts. The increased revenue from these segments was partially offset by decreased activity for the Compressco and Offshore Services segments. Offshore Services revenues were decreased compared to the record levels of 2009, but were comparable to periods prior to 2009. The increased revenue levels for our Fluids Division and Production Testing and Maritech segments contributed to increased overall profitability during the second quarter of 2010 as compared to the prior year period. We expect continued growth in many of our businesses during the remainder of 2010, although these expectations are dependent on the continuing recovery from the current economic recession. Additionally, certain of our operating activities and those of our customers are also subject to the impact of the recent blowout of BP’s Macondo well in the Gulf of Mexico and the announced and anticipated changes to the U.S. offshore regulatory environment.
 
 
17

 
 
Operating cash flows during the first half of 2010 totaled $90.5 million, which was down 30.4% compared to the prior year period. Operating cash flows during the first half of 2010 include a $39.8 million Maritech insurance settlement received during the first quarter of 2010. Much of our operating cash flows continue to be dedicated to the extinguishment of Maritech decommissioning obligations for its offshore oil and gas properties. The decrease in operating cash flows primarily reflects the decreased demand for our Offshore Services segment compared to the record levels of the previous year, and is despite the improving activity levels of several of our other businesses. Given the uncertainty of the current environment, we continue to seek additional ways to operate prudently by maintaining many of the fiscal measures we implemented in late 2008. We continue to utilize our operating cash flows to fund all of our working capital and capital expenditure needs, requiring no outstanding balance under our bank revolving credit facility. Our capital expenditure plans for 2010 are less than $130 million, and many of these projects are discretionary and can be postponed as needed to conserve capital. With $284.4 million available to be drawn under the revolving credit facility, $89.2 million of available cash at June 30, 2010, and a strong balance sheet, we have significant liquidity to consider acquisition and growth opportunities. Certain of our borrowings, including our revolving credit facility and the 2004 Series Senior Notes, have maturities scheduled during 2011. Efforts have begun to replace or refinance these maturing debt agreements.

Critical Accounting Policies

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 Form 10-K for the year ended December 31, 2009. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the collectability of accounts receivable, and the current cost of future abandonment and decommissioning obligations. Our estimates are based on historical experience and on future expectations that we believe are reasonable. The fair values of large portions of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environment are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.

Because the estimated fair value of our Compressco reporting unit currently exceeds its carrying value by approximately 9.6%, there is a reasonable possibility that Compressco’s goodwill may be impaired in a future period, and the amount of such impairment may be material. Specific uncertainties affecting the estimated fair value of our Compressco reporting unit include the prices received by Compressco’s customers for natural gas production, the rate of future growth of Compressco’s business, and the need and timing of the full resumption of the fabrication of Compressco’s GasJack® compressor units. Although the demand for Compressco’s wellhead compression services and products has improved during the past two quarters, the demand continues to be decreased compared to early 2008 levels, and has been negatively affected by the current economic environment. Any further decrease of natural gas prices could have a further negative effect on the fair value of our Compressco reporting unit.

 
18 

 

Results of Operations

Three months ended June 30, 2010 compared with three months ended June 30, 2009.

Consolidated Comparisons
 
   
Three Months Ended June 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
                         
Revenues
  $ 241,618     $ 217,944     $ 23,674       10.9 %
Gross profit
    47,832       40,389       7,443       18.4 %
   Gross profit as a percentage of revenue
    19.8 %     18.5 %                
General and administrative expense
    24,955       22,454       2,501       11.1 %
   General and administrative expense as
                               
     a percentage of revenue
    10.3 %     10.3 %                
Interest expense, net
    4,238       3,411       827       24.2 %
Other (income) expense, net
    (1,899 )     885       (2,784 )     -314.6 %
Income before taxes and discontinued operations
    20,538       13,639       6,899       50.6 %
   Income before taxes and discontinued operations as
                               
     a percentage of revenue
    8.5 %     6.3 %                
Provision for income taxes
    6,903       4,429       2,474       55.9 %
Income before discontinued operations
    13,635       9,210       4,425       48.0 %
Loss from discontinued operations, net of taxes
    (75 )     (35 )     (40 )     114.3 %
Net income
  $ 13,560     $ 9,175     $ 4,385       47.8 %

Consolidated revenues increased primarily due to increased Fluids Division activity, which resulted from increased sales volumes of clear brine fluids and other manufactured products. Increased revenues from our Production Testing and Maritech segments were largely offset by decreased Offshore Services and Compressco revenues. Overall gross profit increased due to overall increased margins as a result of improving demand for our products and services compared to the prior year period. This increase in gross profit was despite the decreased profitability of our Offshore Services segment compared to the record performance of the prior year period.

Consolidated general and administrative expenses increased as compared to the prior year period primarily due to increased employee related costs, including $2.2 million of increased salary, benefits, contract labor costs, and other associated employee expenses. In addition, general and administrative expenses increased due to $0.5 million of increased professional fees, $0.5 million of increased office expenses, and $0.8 million of increased general expenses. These increases were partially offset by approximately $1.1 million of decreased bad debt expense and $0.5 million of decreased insurance expenses.

Consolidated interest expense increased primarily due to a decrease in capitalized interest compared to the prior year period, following the completion of significant construction projects, including the El Dorado, Arkansas, calcium chloride facility and our corporate headquarters building.

Consolidated other (income) expense for the prior year period included a $6.8 million charge for an impairment of European joint venture investment, which was partially offset by a $5.8 million legal settlement. Other income also increased from the prior year due to $1.0 million of increased hedge ineffectiveness gains and $0.7 million of increased foreign currency gains.

Consolidated provision for income taxes increased during the current year period as compared to the prior year period primarily due to increased earnings.

 
19 

 

Divisional Comparisons

Fluids Division
 
   
Three Months Ended June 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
                         
Revenues
  $ 79,329     $ 62,211     $ 17,118       27.5 %
Gross profit
    15,369       13,182       2,187       16.6 %
   Gross profit as a percentage of revenue
    19.4 %     21.2 %                
General and administrative expense
    5,684       5,446       238       4.4 %
   General and administrative expense as
                               
     a percentage of revenue
    7.2 %     8.8 %                
Interest (income) expense, net
    (5 )     50       (55 )        
Other (income) expense, net
    (501 )     6,470       (6,971 )        
Income before taxes and discontinued operations
  $ 10,191     $ 1,216     $ 8,975       738.1 %
   Income before taxes and discontinued operations as
                               
     a percentage of revenue
    12.8 %     2.0 %                

The increase in Fluids Division revenues was primarily due to $15.9 million of increased product sales revenues, primarily from increased domestic and international sales of clear brine fluids (CBFs) during the current year period as a result of increased oil and gas activity. In addition, revenues increased from sales of liquid calcium chloride from our new El Dorado, Arkansas, calcium chloride plant, which began production during the fourth quarter of 2009. Increased domestic activity levels also resulted in approximately $1.3 million of increased service revenues as compared to the prior year period. Certain activity in the Gulf of Mexico may continue to be decreased going forward due to the current deepwater drilling moratorium and the anticipated impact of increased regulation of offshore drilling.

Gross profit increased compared to the prior year period primarily due to the increase in CBF sales discussed above, although the impact of increased volumes for selected CBF products were partially offset by increased product costs. In addition, gross profit from completion services increased during the period. This increased gross profit from completion fluids sales and services were partially offset by the impact of start-up costs and early production inefficiencies from the new calcium chloride plant.

Income before taxes increased significantly compared to the prior year period primarily due to a $6.8 million charge during 2009 for the impairment of the Division’s investment in a European unconsolidated joint venture. The joint venture ceased its calcium chloride manufacturing plant operation during 2009 following our joint venture partner’s announced closure of its adjacent plant facility that supplied the joint venture’s plant with feedstock raw material.

Offshore Division
 
Offshore Services Segment
 
   
Three Months Ended June 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
                         
Revenues
  $ 85,401     $ 92,257     $ (6,856 )     -7.4 %
Gross profit
    18,334       26,673       (8,339 )     -31.3 %
   Gross profit as a percentage of revenue
    21.5 %     28.9 %                
General and administrative expense
    4,010       3,635       375       10.3 %
   General and administrative expense as
                               
     a percentage of revenue
    4.7 %     3.9 %                
Interest (income) expense, net
    1       -       1          
Other (income) expense, net
    54       14       40          
Income before taxes and discontinued operations
  $ 14,269     $ 23,024     $ (8,755 )     -38.0 %
   Income before taxes and discontinued operations as
                               
     a percentage of revenue
    16.7 %     25.0 %