tti10q-20101109.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 SEPTEMBER 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 November 5, 2010, there were 76,180,764 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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
Product sales
  $ 91,624     $ 82,476     $ 308,732     $ 265,514  
Services and rentals
    120,294       171,499       350,697       401,656  
Total revenues
    211,918       253,975       659,429       667,170  
                                 
Cost of revenues:
                               
Cost of product sales
    62,043       58,598       198,302       175,913  
Cost of services and rentals
    68,766       95,159       214,623       230,403  
Depreciation, depletion, amortization, and accretion
    52,330       37,445       134,799       114,322  
Total cost of revenues
    183,139       191,202       547,724       520,638  
Gross profit
    28,779       62,773       111,705       146,532  
                                 
General and administrative expense
    24,606       24,230       72,338       71,253  
Operating income
    4,173       38,543       39,367       75,279  
                                 
Interest expense, net
    4,484       2,969       12,750       9,557  
Other (income) expense, net
    (107 )     1,687       (2,189 )     61  
Income (loss) before taxes and discontinued operations
    (204 )     33,887       28,806       65,661  
Provision (benefit) for income taxes
    (391 )     11,075       9,528       22,269  
Income before discontinued operations
    187       22,812       19,278       43,392  
Loss from discontinued operations, net of taxes
    (17 )     (150 )     (121 )     (393 )
Net income
  $ 170     $ 22,662     $ 19,157     $ 42,999  
                                 
Basic net income per common share:
                               
Income before discontinued operations
  $ 0.00     $ 0.30     $ 0.25     $ 0.58  
Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.01 )
Net income
  $ 0.00     $ 0.30     $ 0.25     $ 0.57  
Average shares outstanding
    75,538       75,013       75,469       74,973  
                                 
Diluted net income per common share:
                               
Income before discontinued operations
  $ 0.00     $ 0.30     $ 0.25     $ 0.58  
Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.01 )
Net income
  $ 0.00     $ 0.30     $ 0.25     $ 0.57  
Average diluted shares outstanding
    76,621       76,060       76,752       75,490  

 
See Notes to Consolidated Financial Statements

 
1

 

TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
   
September 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 74,154     $ 33,394  
Restricted cash
    360       266  
Trade accounts receivable, net of allowance for doubtful
   accounts of $1,736 in 2010 and $5,007 in 2009
    164,817       181,038  
Inventories
    111,690       122,274  
Derivative assets
    12,159       19,926  
Prepaid expenses and other current assets
    52,525       33,905  
Assets of discontinued operations
    378       15  
Total current assets
    416,083       390,818  
                 
Property, plant, and equipment
               
Land and building
    78,318       77,246  
Machinery and equipment
    472,766       458,675  
Automobiles and trucks
    43,244       42,432  
Chemical plants
    176,512       94,767  
Oil and gas producing assets (successful efforts method)
    711,850       676,692  
Construction in progress
    12,697       95,470  
Total property, plant, and equipment
    1,495,387       1,445,282  
Less accumulated depreciation and depletion
    (722,415 )     (628,908 )
Net property, plant, and equipment
    772,972       816,374  
                 
Other assets:
               
Goodwill
    99,005       99,005  
Patents, trademarks and other intangible assets, net of
   accumulated amortization of $21,271 in 2010 and $18,997 in 2009
    11,356       13,198  
Deferred tax assets
    1,113       1,342  
Other assets
    33,100       26,862  
Total other assets
    144,574       140,407  
Total assets
  $ 1,333,629     $ 1,347,599  
 

See Notes to Consolidated Financial Statements

 

 

TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
   
September 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
           
Trade accounts payable
  $ 55,570     $ 57,418  
Accrued liabilities
    90,311       84,638  
Decommissioning and other asset retirement obligations, current
    92,443       77,891  
Deferred tax liabilities
    14,889       19,893  
Derivative liabilities
    -       2,618  
Current portion of long-term debt
    93,114       -  
Liabilities of discontinued operations
    -       17  
Total current liabilities
    346,327       242,475  
                 
Long-term debt, net
    215,035       310,132  
Deferred income taxes
    57,662       56,125  
Decommissioning and other asset retirement obligations, net
    109,792       146,219  
Other liabilities
    15,479       16,154  
Total long-term liabilities
    397,968       528,630  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock, par value $0.01 per share; 100,000,000
   shares authorized; 77,655,545 shares issued at
   September 30, 2010, and 77,039,628 shares issued
   at December 31, 2009
    777       770  
Additional paid-in capital
    200,456       193,718  
Treasury stock, at cost; 1,527,846 shares held at 
   September 30, 2010, and 1,497,346 shares held at 
   December 31, 2009
    (8,357 )     (8,310 )
Accumulated other comprehensive income
    13,807       26,822  
Retained earnings
    382,651       363,494  
Total stockholders' equity
    589,334       576,494  
Total liabilities and stockholders' equity
  $ 1,333,629     $ 1,347,599  

 
See Notes to Consolidated Financial Statements

 
3

 

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Operating activities:
           
Net income
  $ 19,157     $ 42,999  
Reconciliation of net income to cash provided by operating activities:
         
Depreciation, depletion, amortization, and accretion
    110,780       111,073  
Impairments of long-lived assets
    24,019       10,039  
Provision (benefit) for deferred income taxes
    (2,186 )     12,943  
Stock compensation expense
    5,628       5,730  
(Gain) loss on sale of property, plant, and equipment
    (294 )     (2,478 )
Proceeds from sale of cash flow hedge derivatives
    -       23,060  
Non-cash income from sold hedge derivatives
    (16,790 )     -  
Other non-cash charges and credits
    10,068       18,334  
Proceeds from insurance settlements
    39,772       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    4,622       (5,387 )
Inventories
    10,294       (214 )
Prepaid expenses and other current assets
    (3,587 )     8,101  
Trade accounts payable and accrued expenses
    (8,400 )     (17,360 )
Decommissioning liabilities
    (74,998 )     (71,791 )
Operating activities of discontinued operations
    (380 )     203  
Other
    1,655       2,045  
Net cash provided by operating activities
    119,360       137,297  
                 
Investing activities:
               
Purchases of property, plant, and equipment
    (82,188 )     (128,031 )
Business combinations
    -       (18,105 )
Proceeds from sale of property, plant, and equipment
    2,689       1,901  
Other investing activities
    (844 )     2,664  
Net cash used in investing activities
    (80,343 )     (141,571 )
                 
Financing activities:
               
Proceeds from long-term debt
    35       96,000  
Principal payments on long-term debt
    -       (90,346 )
Proceeds from exercise of stock options
    781       376  
Excess tax benefit from exercise of stock options
    274       -  
Net cash provided by financing activities
    1,090       6,030  
                 
Effect of exchange rate changes on cash
    653       2,519  
                 
Increase in cash and cash equivalents
    40,760       4,275  
Cash and cash equivalents at beginning of period
    33,394       3,882  
Cash and cash equivalents at end of period
  $ 74,154     $ 8,157  
                 
Supplemental cash flow information:
               
Interest paid
  $ 11,314     $ 13,017  
Income taxes paid
    26,883       10,909  
                 
Supplemental disclosure of non-cash investing and financing activities:
         
Adjustment of fair value of decommissioning liabilities
   capitalized to oil and gas properties
  $ 27,063     $ 21,708  

 
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 September 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 September 30, 2010, and December 31, 2009, are as follows:
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
Finished goods
  $ 79,024     $ 88,704  
Raw materials
    5,813       3,436  
Parts and supplies
    25,549       26,060  
Work in progress
    1,304       4,074  
    $ 111,690     $ 122,274  

 
5

 

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 nine months of 2010, we expended approximately $50.6 million for these hurricane repair efforts. As of September 30, 2010, we estimate that the remaining 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 $60 to $75 million net to our interest before any insurance recoveries. Approximately $30 to $40 million of this cost relates to platforms destroyed by Hurricane Ike during 2008. Approximately $42 million of our total future cost estimate has been accrued as part of Maritech’s decommissioning liability, and an additional approximate $18 to $33 million relates primarily to the estimated cost to finalize a newly installed offshore platform at Maritech’s East Cameron 328 field and complete the redrilling of several wells at this location. We have accrued an estimate for  hurricane remediation costs that are part of Maritech’s decommissioning liabilities. Actual hurricane repair costs could exceed these estimates and, depending on the nature of the cost, could result in significant charges to earnings in future periods. See below for a discussion of our remaining insurance coverage associated with hurricane damage repairs.

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 nine months ended September 30, 2010, are as follows:

   
Nine Months Ended
 
   
September 30, 2010
 
   
(In Thousands)
 
Beginning balance
  $ 26,992  
Activity in the period:
       
   Claim-related expenditures
    370  
   Insurance reimbursements
    (26,007 )
   Contested insurance recoveries
    (192 )
Ending balance at September 30, 2010
  $ 1,163  

 
6

 
 
Anticipated insurance recoveries that have been reflected as a reduction of our decommissioning liabilities were $0 at September 30, 2010, and $10.3 million at December 31, 2009. Anticipated insurance recoveries that are included in accounts receivable were $1.2 million and $16.7 million at September 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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Number of weighted average common shares outstanding
    75,538,455       75,012,672       75,469,030       74,972,661  
Assumed exercise of stock options
    1,082,591       1,046,922       1,283,383       516,884  
Average diluted shares outstanding
    76,621,046       76,059,594       76,752,413       75,489,545  
 
For the three month periods ended September 30, 2010 and 2009, the calculations of the average diluted shares outstanding excludes the impact of 2,668,312 and 2,754,253 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 nine month periods ended September 30, 2010 and 2009, the calculations of the average diluted shares outstanding exclude the impact of 2,311,805 and 3,531,826 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 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 September 30, 2010, was approximately $332.9 million compared to a carrying amount of approximately $308.1 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 September 30, 2010, and December 31, 2009, is as follows:
 
         
Fair Value Measurements as of September 30, 2010 Using
 
         
Quoted Prices in
   
Significant
       
         
Active Markets for
   
Other
   
Significant
 
   
Total as of
   
Identical Assets
   
Observable
   
Unobservable
 
   
September 30,
   
or Liabilities
   
Inputs
   
Inputs
 
Description
 
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
   
(In Thousands)
 
Asset for natural gas swap
   contracts
  $ 10,269     $ -     $ 10,269     $ -  
Asset for oil swap contracts
    2,407       -       2,407       -  
Total
  $ 12,676                          
 
         
Fair Value Measurements as of December 31, 2009 Using
 
         
Quoted Prices in
   
Significant
       
         
Active Markets for
   
Other
   
Significant
 
   
Total as of
   
Identical Assets
   
Observable
   
Unobservable
 
   
December 31,
   
or Liabilities
   
Inputs
   
Inputs
 
Description
 
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                          
 
During the three months ended September 30, 2010, a portion of the carrying value of certain Maritech oil and gas properties was charged to earnings as an impairment of $14.0 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 the impact of increased estimated asset
 
 
8

 
 
retirement obligations, lower than expected results from development activities, weaker expected future natural gas prices, 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 nonrecurring fair value measurements as of September 30, 2010 and 2009, using the fair value hierarchy is as follows:
 
       
Fair Value Measurements as of September 30, 2010 Using
     
       
Quoted Prices in
 
Significant
         
       
Active Markets for
 
Other
 
Significant
     
   
Total as of
 
Identical Assets or
 
Observable
 
Unobservable
 
Year-to-Date
 
   
September 30,
 
Liabilities
 
Inputs
 
Inputs
 
Impairment
 
Description
 
2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Losses
 
   
(In Thousands)
 
Impairments of oil and
                     
   gas properties
  $ 25,943   $ -   $ -   $ 25,943   $ 23,111  
Other impairments
    -     -     -     -     908  
    $ 25,943                     $ 24,019  
 
       
Fair Value Measurements as of September 30, 2009 Using
     
       
Quoted Prices in
 
Significant
         
       
Active Markets for
 
Other
 
Significant
     
   
Total as of
 
Identical Assets or
 
Observable
 
Unobservable
 
Year-to-Date
 
   
September 30,
 
Liabilities
 
Inputs
 
Inputs
 
Impairment
 
Description
 
2009
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Losses
 
   
(In Thousands)
 
Impairments of oil and
                     
   gas properties
  $ 2,253   $ -   $ -   $ 2,253   $ 2,907  
Impairment of investment
                         
  in unconsolidated
                               
  joint venture
    -     -     -     -     6,790  
Other impairments
    -     -     -     -     342  
    $ 2,253                     $ 10,039  

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, requires 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 did not have a significant impact on our financial statements, and the disclosure requirements of activity in Level 3 fair value measurements will not have a significant impact on our financial statements.

 
9

 

NOTE B – ACQUISITION

In July 2010, our Maritech subsidiary purchased interests in certain onshore oil and gas properties located in McMullen County, Texas from Texoz E&P Holding, Inc. The acquired properties were recorded at a cost of approximately $6.7 million.

NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
     
September 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
    38,114       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  
5.09% Senior Notes, Series 2010-A
December 15, 2017
    -       -  
5.67% Senior Notes, Series 2010-B
December 15, 2020
    -       -  
European bank credit facility
      -       -  
Other
      35       -  
        308,149       310,132  
Less current portion
      (93,114 )     -  
   Total long-term debt, net
    $ 215,035     $ 310,132  

In September 2010, we entered into an agreement whereby we expect to issue, and sell through a private placement, $65.0 million in aggregate principal amount of Series 2010-A Senior Notes and $25.0 million in aggregate principal amount of Series 2010-B Senior Notes (collectively, the “2010 Senior Notes”) pursuant to a Master Note Purchase Agreement dated September 30, 2010. The 2010 Senior Notes are to be sold in the United States to accredited investors pursuant to an exemption from the Securities Act of 1933. Closing of the issuance and sale of the 2010 Senior Notes and funding of the proceeds from the 2010 Senior Notes is scheduled to occur on December 15, 2010 upon satisfaction of certain conditions, and the proceeds are expected to be used to repay the 2004 Senior Notes  at or prior to their maturity in September 2011.

Pursuant to the Master Note Purchase Agreement, the Series 2010-A Senior Notes are to bear interest at the fixed rate of 5.09% and mature on December 15, 2017. The Series 2010-B Senior Notes are to bear interest at the fixed rate of 5.67% and mature on December 15, 2020. Interest on the 2010 Senior Notes will be due semiannually on June 15 and December 15 of each year. The terms of all of our Senior Notes (including the 2010 Senior Notes) are similar. We may prepay the Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount outstanding, plus accrued and unpaid interest and a “make-whole” prepayment premium. The Senior Notes are unsecured and are guaranteed by substantially all of our wholly-owned U.S. subsidiaries. The agreements governing all of our Senior Notes, including the Master Note Purchase Agreement dated September 30, 2010 (collectively Senior Note Purchase Agreements), contain customary covenants and restrictions and require us to maintain certain financial ratios, including a minimum level of net worth and a ratio between our long-term debt balance and a defined measure of operating cash flow over a twelve month period. The Senior Note Purchase Agreements also contain customary default provisions as well as a cross-default provision relating to any other of our indebtedness of $20 million or more. We are in compliance with all covenants and conditions of our Senior Note Purchase Agreements as of September 30, 2010. Upon the occurrence and during the continuation of an event of default under the Senior Note Purchase Agreements, the Senior Notes may become immediately due and payable, either automatically or by declaration of holders of more than 50% in principal amount of the Senior Notes outstanding at the time.

In October 2010, we amended our existing bank revolving credit facility agreement with a syndication of banks whereby the credit facility was decreased from $300 million to $278 million and its scheduled maturity was extended from June 2011 to October 2015. In addition, the amended credit facility agreement allows us to increase the facility by $150 million up to a $428 million limit upon the
 
 
10

 
 
agreement of the lenders and the satisfaction of certain conditions. As of November 9, 2010, we have no outstanding balance under the amended credit facility. The amended credit facility remains unsecured and is guaranteed by certain of our domestic subsidiaries. Under the amended terms, borrowings generally bear interest at LIBOR plus 1.5% to 2.5%, depending on a certain financial ratio, and we will pay a commitment fee on unused portions of the facility at a rate of 0.225% to 0.500%, also depending on this financial ratio.

Similar to the previous credit facility agreement, the amended credit facility agreement contains customary covenants and other restrictions, including certain financial ratio covenants. In addition, the amended credit facility includes cross-default provisions relating to any of our other indebtedness that is greater than a defined amount. If any such indebtedness is not paid or is accelerated and such event is not remedied in a timely manner, a default will occur under the facility. Defaults under the amended credit facility that are not timely remedied could result in a termination of all commitments of the lenders and an acceleration of any outstanding loans and credit obligations.

NOTE D – 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 nine month periods ended September 30, 2010 and 2009, are as follows:
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Beginning balance as of June 30
  $ 216,147     $ 229,996  
Activity in the period:
               
   Accretion of liability
    1,392       1,950  
   Retirement obligations incurred
    -       -  
   Revisions in estimated cash flows
    19,897       12,832  
   Settlement of retirement obligations
    (35,201 )     (24,590 )
Ending balance as of September 30
  $ 202,235     $ 220,188  
 
   
Nine Months Ended
 
   
September 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
    4,090       6,350  
   Retirement obligations incurred
    -       -  
   Revisions in estimated cash flows
    42,081       36,198  
   Settlement of retirement obligations
    (68,046 )     (71,085 )
Ending balance as of September 30
  $ 202,235     $ 220,188  
 
NOTE E – 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
 
 
11

 
 
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 September 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 Period
             
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 September 30, 2010, approximately $9.4 million of the total balance (which was approximately $9.7 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 September 30, 2010, and December 31, 2009, is as follows:
 
     
Fair Value at
 
Derivatives designated
Balance Sheet
 
September 30, 2010
   
December 31, 2009
 
as hedging instruments
Location
 
(In Thousands)
 
               
Natural gas swap contracts
Current assets
  $ 10,269     $ 19,926  
Oil swap contracts
Current assets
    1,890       -  
Oil swap contracts
Long-term assets
    517       -  
Oil swap contracts
Current liabilities
    -       (2,618 )
Total derivatives designated
   as hedging instruments
    $ 12,676     $ 17,308  

 
12 

 
 
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 nine month periods ended September 30, 2010 and 2009, are summarized below:

   
Three Months Ended September 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)
  $ 6,753     $ 6,384     $ 13,137  
Amount of pretax gain (loss) from change in derivative fair
  value recognized in other comprehensive income
    (4,872 )     1,938       (2,934 )
Amount of pretax gain (loss) recognized in other income
   (expense) (ineffective portion)
    -       (108 )     (108 )
 
   
Three Months Ended September 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)
  $ 272     $ 11,593     $ 11,865  
Amount of pretax gain (loss) from change in derivative fair value
   recognized in other comprehensive income
    3,502       (751 )     2,751  
Amount of pretax gain (loss) recognized in other income
   (expense) (ineffective portion)
    (8 )     (689 )     (697 )
 
   
Nine Months Ended September 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)
  $ 16,821     $ 18,609     $ 35,430  
Amount of pretax gain (loss) from change in derivative fair
   value recognized in other comprehensive income
    4,577       9,225       13,802  
Amount of pretax gain (loss) recognized in other income
   (expense) (ineffective portion)
    125       107       232  
 
   
Nine Months Ended September 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)
  $ 7,154     $ 30,351     $ 37,505  
Amount of pretax gain (loss) from change in derivative fair
   value recognized in other comprehensive income
    (8,219 )     18,525       10,306  
Amount of pretax gain (loss) recognized in other income
   (expense) (ineffective portion)
    (292 )     (1,931 )     (2,223 )
 
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 September 30, 2010, we had 28 million euros (which was approximately $38.1 million equivalent) designated as a hedge of our net investment in this foreign operation. Changes in the foreign currency exchange rate have resulted in a cumulative change to the cumulative translation adjustment account of $3.4 million, net of taxes, at September 30, 2010, with no ineffectiveness recorded.

 
13

 

NOTE F – COMPREHENSIVE INCOME

Comprehensive income for the three month and nine month periods ended September 30, 2010 and 2009, is as follows:

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Net income
  $ 170     $ 22,662  
Net change in derivative fair value, net of taxes of $(1,051)
   and $1,283, respectively
    (1,775 )     2,165  
Reclassification of derivative fair value into product sales
   revenues, net of taxes of $(4,887) and $(4,417), respectively
    (8,250 )     (7,448 )
Foreign currency translation adjustment, net of taxes of $734
   and $(183), respectively
    3,016       1,961  
Comprehensive income
  $ (6,839 )   $ 19,340  
                 
 
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Net income
  $ 19,157     $ 42,999  
Net change in derivative fair value, net of taxes of $5,048 and
   $4,661, respectively
    8,522       7,868  
Reclassification of derivative fair value into product sales
   revenues, net of taxes of $(13,180) and $(13,953), respectively
    (22,250 )     (23,552 )
Foreign currency translation adjustment, net of taxes of
   $(914) and  $(1,806), respectively
    713       6,214  
Comprehensive income
  $ 6,142     $ 33,529  
                 
 
NOTE G – 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 insurers.
 
 
14

 
 
On September 29, 2010, the Court approved the settlement and entered the Order and Final Judgment terminating the class action lawsuit.

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.

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 this lawsuit 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 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 have finalized a joint stipulation of settlement with the EPA whereby we are responsible for a penalty of $487,000, which will be payable later during 2010. We expect this penalty to be covered by insurance.

NOTE H – 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.

 
15 

 

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 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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Revenues from external customers
                       
Product sales
                       
Fluids Division
  $ 41,818     $ 38,819     $ 155,672     $ 132,534  
Offshore Division
                               
Offshore Services
    831       656       1,978       2,226  
Maritech
    48,068       42,584       143,862       127,572  
Intersegment eliminations
    -       -       -       -  
Total Offshore Division
    48,899       43,240       145,840       129,798  
Production Enhancement Division
                               
Production Testing
    -       -       3,610       -  
Compressco
    907       417       3,610       3,182  
Total Production Enhancement Division
    907       417       7,220       3,182  
Consolidated
  $ 91,624     $ 82,476     $ 308,732     $ 265,514  
                                 

 
16 

 

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Revenues from external customers
                       
Services and rentals
                       
Fluids Division
  $ 16,036     $ 12,073     $ 47,740     $ 44,217  
Offshore Division
                               
Offshore Services
    87,248       130,652       222,696       269,351  
Maritech
    515       735       1,655       2,367  
Intersegment eliminations
    (27,996 )     (11,574 )     (51,292 )     (40,600 )
Total Offshore Division
    59,767       119,813       173,059       231,118  
Production Enhancement Division
                               
Production Testing
    25,712       19,070       73,509       61,975  
Compressco
    18,779       20,543       56,389       64,346  
Total Production Enhancement Division
    44,491       39,613       129,898       126,321  
Consolidated
    120,294       171,499       350,697       401,656  
                                 
Intersegment revenues
                               
Fluids Division
    8       (3 )     40       38  
Offshore Division
                               
Offshore Services
    742       174       946       206  
Maritech
    -       -       35       -  
Intersegment eliminations
    -       -       -       -  
Total Offshore Division
    742       174       981       206  
Production Enhancement Division
                               
Production Testing
    24       -       28       1  
Compressco
    -       -       -       -  
Total Production Enhancement Division
    24       -       28       1  
Intersegment eliminations
    (774 )     (171 )     (1,049 )     (245 )
Consolidated
    -       -       -       -  
                                 
Total revenues
                               
Fluids Division
    57,862       50,889       203,452       176,789  
Offshore Division
                               
Offshore Services
    88,821       131,482       225,620       271,783  
Maritech
    48,583       43,319       145,552       129,939  
Intersegment eliminations
    (27,996 )     (11,574 )     (51,292 )     (40,600 )
Total Offshore Division
    109,408       163,227       319,880       361,122  
Production Enhancement Division
                               
Production Testing
    25,736       19,070       77,147       61,976  
Compressco
    19,686       20,960       59,999       67,528  
Total Production Enhancement Division
    45,422       40,030       137,146       129,504  
Intersegment eliminations
    (774 )     (171 )     (1,049 )     (245 )
Consolidated
  $ 211,918     $ 253,975     $ 659,429     $ 667,170  

Income before taxes and discontinued operations
                       
Fluids Division
  $ 1,716     $ 5,800     $ 18,093     $ 19,169  
Offshore Division
                               
Offshore Services
    18,323       40,250       30,151       62,630  
Maritech
    (14,260 )     (7,158 )     (4,573 )     (9,403 )
Intersegment eliminations
    (52 )     1,120       520       622  
Total Offshore Division
    4,011       34,212       26,098       53,849  
Production Enhancement Division
                               
Production Testing
    4,233       2,850       11,751       15,931  
Compressco
    3,835       5,277       13,465       17,850  
Total Production Enhancement Division
    8,068       8,127       25,216       33,781  
Corporate overhead
    (13,999 )(1)     (14,252 )(1)     (40,601 )(1)     (41,138 )(1)
Consolidated
  $ (204 )   $ 33,887     $ 28,806     $ 65,661  

 
17 

 

 
   
September 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
Total assets
           
Fluids Division
  $ 379,605     $ 370,425  
Offshore Division
               
Offshore Services
    173,913       237,338  
Maritech
    334,554       398,089  
Intersegment eliminations
    (1,725 )     (2,280 )
Total Offshore Division
    506,742       633,147  
Production Enhancement Division
               
Production Testing
    105,613       103,871  
Compressco
    193,105       205,623  
Total Production Enhancement Division
    298,718       309,494  
Corporate
    148,564  (2)     102,041  (2)
Consolidated
  $ 1,333,629     $ 1,415,107  

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
     
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
General and administrative expense
  $ 7,860     $ 9,559     $ 25,629     $ 27,127  
Depreciation and amortization
    724       784       2,227       2,231  
Interest expense
    4,346       2,969       12,625       9,686  
Other general corporate (income) expense, net
    1,069       940       120       2,094  
Total
  $ 13,999     $ 14,252     $ 40,601     $ 41,138  

(2)
Includes assets of discontinued operations.

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

Hampered by the impact of lower natural gas prices and decreased offshore services activity during the third quarter of 2010, certain of our businesses reported significant decreases in activity and profitability compared to the prior year period. As a result, consolidated revenues and net income decreased significantly compared to levels reported during 2009. In particular, our Offshore Services segment saw particularly steep decreases from the record levels of activity and profitability reported in the prior year period. Offshore operations for our Fluids Division were also decreased, partially as a result of decreased activity levels that reflected the impact of the U.S. deepwater drilling moratorium, which was lifted in October 2010, and related regulatory issues. Following the BP Macondo well blowout earlier this year, the uncertainty of increased regulatory requirements continues to impact offshore operators, particularly deepwater drilling customers. We estimate that the combined impact of the deepwater drilling moratorium and related regulatory issues resulted in the reduction of our consolidated revenues by approximately $18 to $23 million during the third quarter of 2010, compared to the level of revenues we would have expected had the recent events in the Gulf of Mexico not occurred. This decrease was experienced primarily by our Fluids Division, although our Offshore Services segment was also affected. Our Compressco operation continued to be affected by lower natural gas prices and disruptions in its Mexico operations, and its revenues and pretax earnings decreased compared to the prior year period. Maritech, despite increased revenues as a result of strong realized oil and gas pricing from its commodity derivative program, reported a significant decrease in earnings largely as a result of increased impairments. These impairments were primarily caused by the impact from increased estimated asset retirement obligations, lower than expected results from development activities, as well as from weaker expected future natural gas pricing. Despite the impact of decreased offshore activity, our Fluids Division reported increased revenues as a result of the increased sales of calcium chloride from its new El Dorado, Arkansas plant facility, which began operation in late 2009. The impact of the increased revenues from the El Dorado, Arkansas plant facility, however, was more than offset by increased product costs, partly due to continuing early production inefficiencies at the new plant. The completion of the
 
 
18

 
 
construction of the El Dorado plant also resulted in increased interest expense, as a significant portion of interest expense was capitalized in prior periods to the cost of the plant. Partially offsetting the above decreases in profitability, our Production Testing segment reported increased revenue and profitability during the quarter as a result of improving demand from its domestic onshore customers.

We continue to maintain a strong balance sheet, and recent modifications to our long-term debt borrowings are expected to improve our liquidity going forward. Operating cash flows during the first nine months of 2010 totaled $119.4 million, which was down 13.1% compared to the prior year due to the decreased operating activity levels discussed above. Operating cash flows during the current year period 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. Our capital expenditures during the first nine months of 2010 were approximately $82.2 million. These capital requirements were funded from our operating cash flows. Approximately $93.1 million of our Senior Notes are scheduled to mature in September 2011. In anticipation of retiring these maturing Senior Notes, we entered into a new Master Note Purchase Agreement, under which we expect to sell $90 million in Series 2010 Senior Notes in December 2010. In addition, in October 2010, we amended our bank revolving credit facility, decreasing the facility to $278 million and extending its scheduled maturity to October 2015. The amended credit facility agreement allows us to increase the facility by $150 million upon the agreement of the lenders and the satisfaction of certain conditions. We continue to carry no outstanding balance on our bank credit facility as of November 9, 2010. With the recently increased borrowing capacity, we continue to review acquisition and growth opportunities for our businesses.

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 6.5%, 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. In addition, Compressco’s Mexico operations may continue to be disrupted by security issues in that country. The demand for Compressco’s wellhead compression services and products continues to be decreased compared to early 2008 levels and 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.

 
19 

 

Results of Operations

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

Consolidated Comparisons
 
   
Three Months Ended
             
   
September 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
Revenues
  $ 211,918     $ 253,975     $ (42,057 )     -16.6 %
Gross profit
    28,779       62,773       (33,994 )     -54.2 %
Gross profit as a percentage of revenue
    13.6 %     24.7 %                
General and administrative expense
    24,606       24,230       376       1.6 %
General and administrative expense as a
   percentage of revenue
    11.6 %     9.5 %                
Interest expense, net
    4,484       2,969       1,515       51.0 %
Other (income) expense, net
    (107 )     1,687       (1,794 )     -106.3 %
Income (loss) before taxes and discontinued
   operations
    (204 )     33,887       (34,091 )     -100.6 %
Income (loss) before taxes and discontinued
   operations as a percentage of revenue
    -0.1 %     13.3 %                
Provision (benefit) for income taxes
    (391 )     11,075       (11,466 )     -103.5 %
Income before discontinued operations
    187       22,812       (22,625 )     -99.2 %
Loss from discontinued operations, net of taxes
    (17 )     (150 )     133       88.7 %
Net income
  $ 170     $ 22,662     $ (22,492 )     -99.2 %
                                 

Consolidated revenues decreased primarily due to the $42.7 million decrease in Offshore Services revenues compared to the record revenue levels experienced by this segment during the prior year period. Partially offsetting this decrease, we reported increased Fluids Division revenues resulting from increased sales volumes of clear brine fluids and other manufactured products. In addition, increased revenues from our Production Testing and Maritech segments also partially offset the Offshore Services revenue decrease. Overall gross profit also decreased significantly primarily due to the prior year period performance of our Offshore Services segment. However, decreased gross profit of our Maritech, Fluids, and Compressco segments also contributed to the decrease in our consolidated gross profit.

Consolidated general and administrative expenses increased as compared to the prior year period primarily due to increased employee related costs, including $0.4 million of increased salary, benefits, contract labor costs, and other associated employee expenses. Increases in other general expenses of approximately $0.7 million were offset by $0.3 million of decreased office expenses and $0.4 million of decreased insurance expenses.

Consolidated interest expense increased $1.5 million during the third quarter of 2010 compared to the prior year period 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.

We recorded consolidated other income for the third quarter of 2010 of $0.1 million. Consolidated other (income) expense for the prior year period included a charge for a $2.0 million legal settlement. Other income also increased from the prior year period due to $0.6 million of decreased hedge ineffectiveness losses, $0.7 million of increased gains on sales of assets, and $0.5 million of increased other income. These increases were partially offset by $2.1 million of decreased foreign currency gains.

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

 
20 

 

Divisional Comparisons

Fluids Division
 
   
Three Months Ended
             
   
September 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
Revenues
  $ 57,862     $ 50,889     $ 6,973       13.7 %
Gross profit
    7,932       10,236       (2,304 )     -22.5 %
Gross profit as a percentage of revenue
    13.7 %     20.1 %                
General and administrative expense
    5,890       5,106       784       15.4 %
General and administrative expense as a
   percentage of revenue
    10.2 %     10.0 %                
Interest (income) expense, net
    29       11       18          
Other (income) expense, net
    297       (681 )     978          
Income before taxes and discontinued operations
  $ 1,716     $ 5,800     $ (4,084 )     -70.4 %
Income before taxes and discontinued
   operations as a percentage of revenue
    3.0 %     11.4 %                
                                 

The increase in Fluids Division revenues was partly due to $4.0 million of increased service revenues as compared to the prior year period. This increase was the result of increased domestic onshore frac water and filtration service activity. In addition, product sales revenues increased by $3.0 million, despite decreased pricing for selected products, primarily due to increased sales of liquid calcium chloride from our new El Dorado, Arkansas, calcium chloride plant. This plant began production during the fourth quarter of 2009. Product sales revenues also increased during the current year period due to increased international sales of clear brine fluids (CBFs) as a result of increased oil and gas activity in the international markets we serve. These increased international sales more than offset the decreases in domestic CBF and calcium chloride sales to offshore oil and gas customers during the current year period, which were caused in part by decreased activity in the Gulf of Mexico as a result of the deepwater drilling moratorium and related regulatory requirements. Although this moratorium was lifted in October 2010, delays due to permitting and increased regulatory requirements are expected to continue to postpone the return of improved demand in the Gulf of Mexico.

Gross profit decreased compared to the prior year period despite the increase in revenues discussed above, as the impact of the increase in manufactured products revenues from the new calcium chloride plant was more than offset by higher product costs, early production inefficiencies from the plant, and the impact of decreased oil and gas industry demand. We continue to take steps to improve the operational efficiency of the new plant; however, there is still a considerable effort required, and significant improvement in plant performance is not expected during the next six months. Increased gross profit from the growth in international sales of CBF products was largely offset by the decrease in gross profit due to the decreased offshore domestic CBF activity.

Income before taxes decreased compared to the prior year period primarily due to the decrease in gross profit discussed above. Other income decreased compared to the prior year period mainly due to decreased foreign currency gains for the Division’s international businesses. In addition, Fluids Division general and administrative expenses increased primarily due to increased office, professional services, and personnel related costs.

 
21

 

Offshore Division

Offshore Services Segment
 
   
Three Months Ended
             
   
September 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
Revenues
  $ 88,821     $ 131,482     $ (42,661 )     -32.4 %
Gross profit
    22,351       45,800       (23,449 )     -51.2 %
Gross profit as a percentage of revenue
    25.2 %     34.8 %                
General and administrative expense
    4,067       3,367       700       20.8 %
General and administrative expense as a
   percentage of revenue
    4.6 %     2.6 %                
Interest (income) expense, net
    159       -       159          
Other (income) expense, net
    (198 )     2,183       (2,381 )        
Income before taxes and discontinued operations
  $ 18,323     $ 40,250     $ (21,927 )     -54.5 %
Income before taxes and discontinued
   operations as a percentage of revenue
    20.6 %     30.6 %                
                                 
 
The significant decrease in Offshore Services segment revenues was due to decreased activity compared to the record levels experienced in the prior year period. The decreased activity has resulted in reduced utilization of much of the segment’s fleet. A portion of the decreased activity was due to regulatory and permitting delays, which have resulted in customers postponing some work to future periods. In addition to the decreased activity for certain of the segment’s operations, overall pricing levels have decreased during 2010 compared to the prior year period. We plan to continue to capitalize on the anticipated demand levels for well abandonment and decommissioning services in the Gulf of Mexico to be performed over the next several years on offshore properties that were damaged or destroyed by hurricanes. In addition, recently announced changes in regulatory requirements for operators of certain offshore platforms and equipment assets could also increase demand. However, we anticipate that levels of such activity will not be as high as the record activity levels enjoyed during most of 2009. Approximately $28.0 million of the segment’s revenues during the third quarter of 2010 was related to work performed for Maritech, compared with $11.6 million during the prior year period. These intersegment revenues are eliminated in the consolidated statements of operations. We anticipate that future work on Maritech properties will continue to be significant going forward into 2011.

The significant decrease in gross profit was primarily due to the decreased activity and pricing, but also included the impact of decreased utilization and efficiencies compared to the prior year period. We anticipate that profitability of the Offshore Services segment will continue to be decreased going forward compared to the record high profitability levels of 2009 due to the expected decrease in utilization and pricing.

The decrease in income before taxes as compared to the prior year period was primarily due to the decreased gross profit discussed above. In addition, general and administrative expenses increased primarily from the impact of increased salaries and employee expenses compared to the prior year period. Partially offsetting these decreases, other expense during the prior year period included a charge for a $2.0 million legal settlement.

 
22

 

Maritech Segment
 
   
Three Months Ended
             
   
September 30,
   
Period to Period Change
 
   
2010
   
2009
   
2010 vs 2009
   
% Change
 
   
(In Thousands, Except Percentages)
 
Revenues
  $ 48,583     $ 43,319     $ 5,264       12.2 %
Gross profit (loss)
    (13,070 )     (5,813 )     (7,257 )     -124.8 %
Gross profit (loss) as a percentage of revenue
    -26.90 %     -13.42 %                
General and administrative expense
    1,587       1,344       243       18.1 %
General and administrative expense as
   a percentage of revenue
    3.3 %     3.1 %                
Interest (income) expense, net
    (37 )     -       (37 )