2013.06.30 10Q



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, 2013
 
[  ] 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 8, 2013, there were 78,724,179 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 

 
 

 
 
 
 
Product sales
$
79,350

 
$
75,782

 
$
150,888

 
$
143,011

Services and rentals
141,751

 
159,127

 
278,772

 
272,694

Total revenues
221,101

 
234,909

 
429,660

 
415,705

Cost of revenues:
 

 
 

 
 
 
 
Cost of product sales
80,135

 
62,516

 
135,873

 
113,006

Cost of services and rentals
89,504

 
100,064

 
183,968

 
180,642

Depreciation, amortization, and accretion
20,076

 
19,221

 
39,747

 
36,554

Total cost of revenues
189,715

 
181,801

 
359,588

 
330,202

Gross profit
31,386

 
53,108

 
70,072

 
85,503

General and administrative expense
34,365

 
31,466

 
67,919

 
62,357

Interest expense, net
4,178

 
4,084

 
8,378

 
8,235

Other (income) expense, net
(2,762
)
 
(882
)
 
(5,041
)
 
(5,281
)
Income (loss) before taxes and discontinued operations
(4,395
)
 
18,440

 
(1,184
)
 
20,192

Provision (benefit) for income taxes
(1,887
)
 
6,262

 
(776
)
 
6,866

Income (loss) before discontinued operations
(2,508
)
 
12,178

 
(408
)
 
13,326

Income (loss) from discontinued operations, net of taxes

 
3

 

 
2

Net income (loss)
(2,508
)
 
12,181

 
(408
)
 
13,328

Net (income) attributable to noncontrolling interest
(423
)
 
(607
)
 
(1,220
)
 
(1,073
)
Net income (loss) attributable to TETRA stockholders
$
(2,931
)
 
$
11,574

 
$
(1,628
)
 
$
12,255

 
 
 
 
 
 
 
 
Basic net income (loss) per common share:
 

 
 

 
 
 
 
Income (loss) before discontinued operations attributable to TETRA stockholders
$
(0.04
)
 
$
0.15

 
$
(0.02
)
 
$
0.16

Income (loss) from discontinued operations attributable to TETRA stockholders

 

 

 

Net income (loss) attributable to TETRA stockholders
$
(0.04
)
 
$
0.15

 
$
(0.02
)
 
$
0.16

Average shares outstanding
77,896

 
77,278

 
77,784

 
77,174

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share:
 

 
 

 
 
 
 
Income (loss) before discontinued operations attributable to TETRA stockholders
$
(0.04
)
 
$
0.15

 
$
(0.02
)
 
$
0.16

Income (loss) from discontinued operations attributable to TETRA stockholders

 

 

 

Net income (loss) attributable to TETRA stockholders
$
(0.04
)
 
$
0.15

 
$
(0.02
)
 
$
0.16

Average diluted shares outstanding
77,896

 
78,998

 
77,784

 
78,640

 

See Notes to Consolidated Financial Statements

1



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income (loss)
$
(2,508
)
 
$
12,181

 
$
(408
)
 
$
13,328

Foreign currency translation adjustment, including taxes of $810 and $546 in 2013 and taxes of $1,185 and $851 in 2012
(2,786
)
 
(6,942
)
 
(8,722
)
 
(3,020
)
Comprehensive income (loss)
(5,294
)
 
5,239

 
(9,130
)
 
10,308

Less: comprehensive income attributable to noncontrolling interest
(423
)
 
(607
)
 
(1,220
)
 
(1,073
)
Comprehensive income (loss) attributable to TETRA stockholders
$
(5,717
)
 
$
4,632

 
$
(10,350
)
 
$
9,235

 

See Notes to Consolidated Financial Statements

2



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
30,512

 
$
74,048

Restricted cash
9,066

 
5,571

Trade accounts receivable, net of allowances for doubtful accounts of $1,065 in 2013 and $1,085 in 2012
171,448

 
176,352

Deferred tax asset
13,981

 
29,789

Inventories
93,157

 
103,041

Assets held for sale
14,546

 
12,009

Prepaid expenses and other current assets
22,412

 
34,299

Total current assets
355,122

 
435,109

Property, plant, and equipment:
 

 
 

Land and building
41,703

 
41,153

Machinery and equipment
633,417

 
589,725

Automobiles and trucks
58,856

 
57,708

Chemical plants
166,514

 
161,565

Construction in progress
30,462

 
40,452

Total property, plant, and equipment
930,952

 
890,603

Less accumulated depreciation
(368,594
)
 
(337,889
)
Net property, plant, and equipment
562,358

 
552,714

Other assets:
 

 
 

Goodwill
186,159

 
189,604

Patents, trademarks and other intangible assets, net of accumulated amortization of $29,323 in 2013 and $27,044 in 2012
32,867

 
36,735

Deferred tax assets
1,347

 
594

Other assets
33,699

 
47,062

Total other assets
254,072

 
273,995

Total assets
$
1,171,552

 
$
1,261,818

 

See Notes to Consolidated Financial Statements

3



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
66,572

 
$
67,453

Accrued liabilities
74,122

 
73,254

Current portion of long-term debt
63

 
35,441

Decommissioning and other asset retirement obligations, net
40,814

 
80,667

Total current liabilities
181,571

 
256,815

Long-term debt, net
345,957

 
331,268

Deferred income taxes
21,961

 
41,910

Decommissioning and other asset retirement obligations, net
16,516

 
14,254

Other liabilities
19,804

 
24,263

Total long-term liabilities
404,238

 
411,695

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 100,000,000 shares authorized; 81,110,805 shares issued at June 30, 2013, and 80,446,169 shares issued at December 31, 2012
811

 
804

Additional paid-in capital
230,512

 
226,954

Treasury stock, at cost; 2,401,984 shares held at June 30, 2013 and 2,334,137 shares held at December 31, 2012
(15,293
)
 
(15,027
)
Accumulated other comprehensive income (loss)
(10,216
)
 
(1,494
)
Retained earnings
338,256

 
339,883

Total TETRA stockholders' equity
544,070

 
551,120

Noncontrolling interests
41,673

 
42,188

Total equity
585,743

 
593,308

Total liabilities and equity
$
1,171,552

 
$
1,261,818

 

See Notes to Consolidated Financial Statements

4



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
2013
 
2012
Operating activities:
 

 
 

Net income (loss)
$
(408
)
 
$
13,328

Reconciliation of net income (loss) to cash provided by (used in) operating activities:
 
 
 

Depreciation, amortization, and accretion
39,747

 
36,554

Provision (benefit) for deferred income taxes
(4,768
)
 
(547
)
Equity-based compensation expense
3,624

 
4,253

Provision for doubtful accounts
333

 
(304
)
Gain on sale of assets
(13
)
 
(3,263
)
Excess decommissioning/abandoning costs
32,877

 
9,939

Other non-cash charges and credits
(5,262
)
 
(3,035
)
Changes in operating assets and liabilities, net of assets acquired:
 

 
 

Accounts receivable
19,716

 
(38,703
)
Inventories
9,248

 
320

Prepaid expenses and other current assets
14,690

 
5,402

Trade accounts payable and accrued expenses
(8,952
)
 
8,989

Decommissioning liabilities, net
(70,788
)
 
(42,582
)
Other
317

 
1,623

Net cash provided by (used in) operating activities
30,361

 
(8,026
)
Investing activities:
 

 
 

Purchases of property, plant, and equipment
(51,535
)
 
(55,884
)
Acquisition of businesses, net

 
(107,469
)
Proceeds on sale of property, plant, and equipment
837

 
12,440

Other investing activities
258

 
3,538

Net cash provided by (used in) investing activities
(50,440
)
 
(147,375
)
Financing activities:
 

 
 

Proceeds from long-term debt
65,445

 
1,947

Payments of long-term debt
(85,928
)
 
(1,947
)
Compressco Partners' distributions
(2,393
)
 
(2,300
)
Proceeds from exercise of stock options
757

 
612

Excess tax benefit from equity compensation

 
197

Other financing activities
(307
)
 

Net cash provided by (used in) financing activities
(22,426
)
 
(1,491
)
Effect of exchange rate changes on cash
(1,031
)
 
1,692

Increase (decrease) in cash and cash equivalents
(43,536
)
 
(155,200
)
Cash and cash equivalents at beginning of period
74,048

 
204,412

Cash and cash equivalents at end of period
$
30,512

 
$
49,212

Supplemental cash flow information:
 

 
 

Interest paid
$
9,616

 
$
9,073

Income taxes paid
4,217

 
4,190



See Notes to Consolidated Financial Statements

5



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 associated products and services, frac water management, after-frac flow back, production well testing, offshore rig cooling, compression-based production enhancement, and selected offshore services including well plugging and abandonment, decommissioning, and diving. We also have a limited domestic oil and gas production business. We were incorporated in Delaware in 1981 and are composed of five reporting segments organized into three divisions – Fluids, Production Enhancement, and Offshore. 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, 2012.
 
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 is classified as a current asset when it is expected to be repaid or settled in the next twelve month period. Restricted cash reported on our balance sheet as of June 30, 2013, consists primarily of escrowed cash associated with our July 2011 purchase of a heavy lift derrick barge. The escrowed cash will be released to the sellers or us in accordance with the terms of the escrow agreement.
 
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, 2013, and December 31, 2012, are as follows: 
 
June 30, 2013
 
December 31, 2012
 
(In Thousands)
Finished goods
$
64,874

 
$
72,312

Raw materials
4,717

 
5,396

Parts and supplies
22,825

 
24,497

Work in progress
741

 
836

Total inventories
$
93,157

 
$
103,041



6



Finished goods inventories include, in addition to newly manufactured clear brine fluids, recycled brines that are repurchased from certain of our customers. Recycled brines are recorded at cost, using the weighted average method.
 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
Number of weighted average common shares outstanding
77,896

 
77,278

 
77,784

 
77,174

Assumed exercise of stock awards

 
1,720

 

 
1,466

Average diluted shares outstanding
77,896

 
78,998

 
77,784

 
78,640

 
In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the first six months of 2013, we used the average market price of our common stock of $9.38. For the three and six months ended June 30, 2013, the average diluted shares outstanding excludes the impact of all outstanding stock options, as the inclusion of these shares would have been antidilutive due to the net loss recorded during the period. For the three and six months ended June 30, 2012, the average diluted shares outstanding excludes the impact of 3,219,457 and 2,794,545 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 such an 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 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 cost 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.
 
Repair Costs and Insurance Recoveries
 
During December 2010, we initiated legal proceedings against one of Maritech’s insurance underwriters that had disputed that certain hurricane damage related costs incurred or to be incurred qualified as covered costs pursuant to Maritech’s windstorm insurance policies. In February 2013, we entered into a settlement agreement with the underwriter whereby we received $7.6 million, a portion of which was credited to operating expenses during the six months ended June 30, 2013.
 

7



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 in 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 values of our long-term Senior Notes at June 30, 2013, and December 31, 2012, were approximately $316.9 million and $327.4 million, respectively, compared to a carrying amount of $305.0 million, as current rates on those dates were more favorable than the stated interest rates on the Senior Notes. We calculate the fair value of our Senior Notes internally, using current market conditions and average cost of debt (a level 2 fair value measurement). The fair values of the liability for the OPTIMA contingent purchase price consideration obligation at June 30, 2013, and December 31, 2012, were approximately $2.2 million and $2.7 million, respectively. We calculate the fair value of the liability for our contingent purchase price consideration obligation in accordance with the OPTIMA share purchase agreement based upon the actual and anticipated earnings of our OPTIMA operations (a level 3 fair value measurement).
 
New Accounting Pronouncements
 
In June 2011,the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (ASU 2011-05), with the stated objective of improving the comparability, consistency, and transparency of financial reporting and increasing the prominence of items reported in other comprehensive income. As part of ASU 2011-05, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU 2011-05 amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU 2011-05 amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are applied retrospectively. In December 2011, with the issuance of ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” the FASB announced that it has deferred certain aspects of ASU 2011-05. In February 2013, the FASB issued ASU 2013-2, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” with the stated objective of improving the reporting of reclassifications out of accumulated other comprehensive income. The amendments in ASU 2013-2 are effective during interim and annual periods beginning after December 31, 2012. The adoption of ASU 2011-05, 2011-12 and 2013-2 regarding comprehensive income have not had a significant impact on the accounting or disclosures in our financial statements. 
 
In December 2011, the FASB published ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11), which requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of ASU 2011-11 is to make financial statements that are prepared under U.S. generally accepted accounting principles more comparable to those prepared under International Financial Reporting Standards. The new disclosures will

8



give financial statement users information about both gross and net exposures. In January 2013, the FASB published ASU 2013-01, “Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (ASU 2013-01), with the stated objective of clarifying the scope of offsetting disclosures and address any unintended consequences of ASU 2011-11. ASU 2011-11 and ASU 2013-01 are effective for interim and annual reporting period beginning after January 1, 2013 and will be applied on a retrospective basis. The adoption of ASU 2011-11 and ASU 2013-01 did not have a material impact on our financial condition, results of operations, or liquidity.
In July 2013, the FASB published ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). The amendments in this ASU provide guidance on presentation of unrecognized tax benefits and are expected to reduce diversity in practice and better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2013, with early adoption and retrospective application permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

NOTE B – ACQUISITIONS AND DISPOSITIONS
 
Acquisition of Optima
 
On March 9, 2012, we acquired 100% of the outstanding common stock of Optima Solutions Holdings Limited (OPTIMA), a provider of rig cooling services and associated products that suppress heat generated by high- rate flaring of hydrocarbons during offshore well test operations. The acquisition of OPTIMA, which is based in Aberdeen, Scotland, enables our Production Testing segment to provide its customers with a broader range of production testing and associated services and expands the segment’s presence in many significant global markets. Including the impact of additional working capital received and other adjustments to the purchase price, we paid 41.2 million pounds sterling (approximately $65.0 million equivalent) in cash as the purchase price for the OPTIMA stock at closing and may pay up to an additional 4 million pounds sterling in contingent purchase price consideration, depending on a defined measure of earnings for OPTIMA over each of the two years subsequent to the closing.
 
We allocated the purchase price to the fair value of the assets and liabilities acquired, which consisted of approximately $3.0 million of net working capital; $16.8 million of property, plant, and equipment; $20.4 million of certain intangible assets; $7.2 million of deferred and other tax liabilities; $3.5 million of other liabilities associated with the contingent purchase price consideration obligation; and $35.6 million of nondeductible goodwill. The fair value of the obligation to pay the contingent purchase price consideration was calculated based on the anticipated earnings for OPTIMA over each of the next two twelve month periods subsequent to the closing and could increase (up to 4 million pounds sterling) or decrease (to zero) depending on OPTIMA’s actual and expected earnings going forward. Increases or decreases in the value of the anticipated contingent purchase price consideration obligation due to changes in the amounts paid or expected to be paid will be charged or credited to earnings in the period in which such changes occur. Subsequent to the acquisition, the liability associated with the contingent purchase price consideration obligation was adjusted downward by approximately $1.6 million (approximately $0.5 million of which was adjusted during the six months ended June 30, 2013), and this amount was credited to earnings. The $35.6 million of goodwill recorded to our Production Testing segment as a result of the OPTIMA acquisition is supported by the expected strategic benefits discussed above to be generated from the acquisition. For the six month period ended June 30, 2012, our revenues, depreciation and amortization, and pretax earnings included $8.6 million, $1.7 million, and $2.2 million, respectively, associated with the acquired operations of OPTIMA after the closing in March 2012. Transaction costs associated with the acquisition of approximately $1.3 million were also charged to general and administrative expense during the six month period ended June 30, 2012.
 
Acquisition of ERS
 
On April 23, 2012, we acquired the assets and operations of Eastern Reservoir Services (ERS), a division of Patterson-UTI Energy, Inc. for a cash purchase price of $42.5 million. ERS is a provider of production testing and after-frac flow back services to oil and gas operators in the Appalachian and U.S. Rocky Mountain regions, and the acquisition represented a strategic geographic expansion of our Production Testing segment operations, allowing it to serve customers in additional basins in the U.S.

9



 
We allocated the purchase price to the fair value of the assets acquired, which consisted of approximately $18.5 million of property, plant, and equipment, approximately $3.4 million of certain intangible assets, and approximately $20.6 million of nondeductible goodwill. The $20.6 million of goodwill recorded to our Production Testing segment as a result of the ERS acquisition is supported by the strategic benefits discussed above to be generated from the acquisition. For the six month period ended June 30, 2012, our revenues, depreciation and amortization, and pretax earnings included $7.0 million, $0.7 million, and $2.5 million, respectively, associated with the acquired operations of ERS after the closing in April 2012. In addition to the above impact on our results of operations, transaction costs associated with the ERS acquisition of approximately $0.3 million were also charged to general and administrative expense during the six month period ended June 30, 2012.
 
Acquisition of Greywolf
 
On July 31, 2012, we acquired the assets and operations of Greywolf Production Systems Inc. and GPS Ltd. (together, Greywolf) for a cash purchase price of approximately $55.5 million. Greywolf is a provider of production testing and after-frac flow back services to oil and gas operators in western Canada and the U.S. Williston Basin (including the Bakken formation) and the Niobrara Shale formation of the U.S. Rocky Mountain region. This acquisition represented an additional strategic geographic expansion of our Production Testing segment operations.
 
We allocated the purchase price to the fair value of the assets acquired, which consisted of approximately $17.7 million of property, plant, and equipment, approximately $3.5 million of certain intangible assets, and approximately $34.3 million of nondeductible goodwill. The $34.3 million of goodwill recorded to our Production Testing segment as a result of the Greywolf acquisition is supported by the strategic benefits discussed above to be generated from the acquisition.
 
Pro Forma Financial Information
 
The pro forma information presented below has been prepared to give effect to the acquisitions of OPTIMA, ERS, and Greywolf as if they had occurred at the beginning of the period presented and include the impact from the allocation of the purchase price on depreciation and amortization. The pro forma information is presented for illustrative purposes only and is based on estimates and assumptions we deemed appropriate. The following pro forma information is not necessarily indicative of the historical results that would have been achieved if the acquisition transactions had occurred in the past, and our operating results may have been different from those reflected in the pro forma information below. Therefore, the pro forma information should not be relied upon as an indication of the operating results that we would have achieved if the transactions had occurred at the beginning of the periods presented or the future results that we will achieve after the acquisitions.
 

10



 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2012
 
(In Thousands, Except Per Share Amounts)
 
 
 
 
Revenues
$
247,612

 
$
455,875

Depreciation, depletion, amortization, and accretion
$
19,868

 
$
39,386

Gross profit
$
55,949

 
$
97,122

 
 
 
 
Income before discontinued operations
$
13,773

 
$
19,725

Net income
$
13,776

 
$
19,727

Net income attributable to TETRA stockholders
$
13,169

 
$
18,654

 
 
 
 
Per share information:
 
 
 
Income before discontinued operations attributable to TETRA stockholders
 
 
 
Basic
$
0.17

 
$
0.24

Diluted
$
0.17

 
$
0.24

 
 
 
 
Net income attributable to TETRA stockholders
 
 
 
Basic
$
0.17

 
$
0.24

Diluted
$
0.17

 
$
0.24

 
NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS
 
Long-term debt consists of the following:
 
 
June 30,
2013
 
December 31,
2012
 
 
(In Thousands)
 
Scheduled Maturity
 
 
 
Bank revolving line of credit facility
October 29, 2015
$
19,463

 
$
51,218

Compressco Partners' bank credit facility
June 24, 2015
21,494

 
10,050

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

6.56% Senior Notes, Series 2008-B
April 30, 2015
90,000

 
90,000

5.09% Senior Notes, Series 2010-A
December 15, 2017
65,000

 
65,000

5.67% Senior Notes, Series 2010-B
December 15, 2020
25,000

 
25,000

4.00% Senior Notes, Series 2013
April 29, 2020
35,000

 

European bank credit facility
 

 

Other
 
63

 
441

Total debt
 
346,020

 
366,709

Less current portion
 
(63
)
 
(35,441
)
Total long-term debt
 
$
345,957

 
$
331,268

On April 29, 2013, we issued $35.0 million in aggregate principal amount of Series 2013 Senior Notes pursuant to a Note Purchase Agreement. The Series 2013 Senior Notes bear interest at the fixed rate of 4.0% and mature on April 29, 2020. On April 30, 2013, we utilized the proceeds from the issuance to repay the 2008-A Senior Notes. The Series 2013 Senior Notes were sold in the United States to accredited investors pursuant to an exemption from the Securities Act of 1933. Interest on the Series 2013 Senior Notes is due semiannually on April 29 and October 29 of each year. Similar to each other series of our outstanding senior notes, the Series 2013 Senior Notes 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.

11



On May 14, 2013, Compressco Partners, L.P. (Compressco Partners) entered into an amendment of its bank credit facility whereby, among other modifications, the maximum credit commitment under the credit facility was increased from $20.0 million to $40.0 million.
 
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 decommissioning and debris removal costs associated with one remaining offshore platform previously destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners. We also operate facilities in various U.S. and foreign locations that are used in the manufacture, storage, and sale of our products, inventories, and equipment. These facilities are a combination of owned and leased assets. We are required to take certain actions in connection with the retirement of these assets. The value of our asset retirement obligations for non-Maritech properties was approximately $7.8 million and $7.5 million as of June 30, 2013 and December 31, 2012, respectively. The changes in consolidated asset retirement obligations during the three and six month periods ended June 30, 2013, are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2013
 
(In Thousands)
Beginning balance for the period, as reported
78,714

 
$
94,921

Activity in the period:
 

 
 
Accretion of liability
166

 
331

Revisions in estimated cash flows
23,578

 
32,866

Settlement of retirement obligations
(45,128
)
 
(70,788
)
Ending balance as of June 30
57,330

 
$
57,330


Revisions in estimated cash flows during the first six months of 2013 resulted primarily from additional work incurred and anticipated to be required on Maritech’s offshore oil and gas properties.
 
NOTE E – MARKET RISKS AND HEDGE CONTRACTS
 
We are exposed to financial and market risks that affect our businesses. We have currency exchange rate risk exposure related to 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 facilities, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our financial risk management activities may at times 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 hedge contracts qualifying for hedge accounting treatment, we formally document the 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.
 
In July 2012, we borrowed 10.0 million euros (approximately $13.0 million equivalent as of June 30, 2013) and designated the borrowing as a hedge of our net investment in our European operations. Changes in the foreign currency exchange rate have resulted in a cumulative change to the cumulative translation adjustment account of $0.6 million, net of taxes, at June 30, 2013, including a change of $0.1 million, net of taxes, during the six months ended June 30, 2013, with no ineffectiveness recorded.


12



NOTE F – EQUITY
 
Changes in equity for the three and six month periods ended June 30, 2013 and 2012, are as follows:
 
Three Months Ended June 30,
 
2013
 
2012
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
548,577

 
$
42,094

 
$
590,671

 
$
534,478

 
$
41,291

 
$
575,769

Net income (loss)
(2,931
)
 
423

 
(2,508
)
 
11,574

 
607

 
12,181

Foreign currency translation adjustment, including taxes of $810 in 2013 and taxes of $1,185 in 2012
(2,786
)
 

 
(2,786
)
 
(6,942
)
 

 
(6,942
)
Comprehensive income (loss)
(5,717
)
 
423

 
(5,294
)
 
4,632

 
607

 
5,239

Exercise of common stock options
207

 

 
207

 
280

 

 
280

Distributions to public unitholders

 
(1,202
)
 
(1,202
)
 

 
(1,066
)
 
(1,066
)
Equity-based compensation
1,398

 
371

 
1,769

 
1,521

 
377

 
1,898

Treasury stock and other
(242
)
 
(13
)
 
(255
)
 
(136
)
 
120

 
(16
)
Tax benefit upon exercise of stock options
(153
)
 

 
(153
)
 
19

 

 
19

Ending balance as of June 30
$
544,070

 
$
41,673

 
$
585,743

 
$
540,794

 
$
41,329

 
$
582,123

 
Six Months Ended June 30,
 
2013
 
2012
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
551,120

 
$
42,188

 
$
593,308

 
$
527,146

 
$
41,942

 
$
569,088

Net income (loss)
(1,628
)
 
1,220

 
(408
)
 
12,255

 
1,073

 
13,328

Foreign currency translation adjustment, including taxes of $546 in 2013 and taxes of $851 in 2012
(8,722
)
 

 
(8,722
)
 
(3,020
)
 

 
(3,020
)
Comprehensive income (loss)
(10,350
)
 
1,220

 
(9,130
)
 
9,235

 
1,073

 
10,308

Exercise of common stock options
989

 

 
989

 
758

 

 
758

Distributions to public unitholders

 
(2,393
)
 
(2,393
)
 

 
(2,275
)
 
(2,275
)
Equity-based compensation
2,930

 
693

 
3,623

 
3,604

 
649

 
4,253

Treasury stock and other
(230
)
 
(35
)
 
(265
)
 
(146
)
 
(60
)
 
(206
)
Tax benefit upon exercise of stock options
(389
)
 

 
(389
)
 
197

 

 
197

Ending balance as of June 30
$
544,070

 
$
41,673

 
$
585,743

 
$
540,794

 
$
41,329

 
$
582,123


Activity within the foreign currency translation adjustment account during the periods includes no reclassifications to net income.
 
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 consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.
 

13



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. While the outcome cannot be predicted with certainty, management does not consider it reasonably possible that a loss in excess of any amounts accrued has been incurred or is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.

NOTE H – INDUSTRY SEGMENTS
 
We manage our operations through five operating segments: Fluids, Production Testing, Compressco, Offshore Services, and Maritech.
 
Our Fluids Division manufactures and markets clear brine fluids, additives, and associated products and services to the oil and gas industry for use in well drilling, completion, and workover operations in the United States and in certain countries in Latin America, Europe, Asia, the Middle East, and Africa. The Division also markets liquid and dry calcium chloride products manufactured at its production facilities or purchased from third-party suppliers to a variety of markets outside the energy industry. The Fluids Division also provides domestic onshore oil and gas operators with comprehensive frac water management services.
 
Our Production Enhancement Division consists of two operating segments: Production Testing and Compressco. The Production Testing segment provides after-frac flow back, production well testing, offshore rig cooling, and other associated services in many of the major oil and gas basins in the United States, Mexico, and Canada, as well as in certain basins in certain regions in South America, Africa, Europe, the Middle East, and Australia.
 
The Compressco segment provides compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications, and in certain circumstances, well monitoring and sand separation services. Compressco provides these services throughout many of the onshore oil and gas producing regions of the United States, as well as certain basins in Mexico, Canada, and certain countries in South America, Eastern Europe, and the Asia-Pacific region. Beginning June 20, 2011, following the initial public offering of Compressco Partners, we allocate and charge certain corporate and divisional direct and indirect administrative costs to Compressco Partners.
 
Our Offshore Division consists of two operating segments: Offshore Services and Maritech. The Offshore Services segment provides (1) downhole and subsea oil and gas well plugging and abandonment services, (2) decommissioning and certain construction services utilizing heavy lift barges and various cutting technologies with regard to offshore oil and gas production platforms and pipelines, and (3) conventional and saturated air diving services.
 
The Maritech segment is an oil and gas production operation. During 2011 and the first quarter of 2012, Maritech sold substantially all of its oil and gas producing property interests. Maritech’s operations consist primarily of the ongoing abandonment and decommissioning associated with its remaining offshore wells, facilities, and production platforms. Maritech intends to acquire a significant portion of these services from the Offshore Division’s Offshore Services segment.
 
We generally evaluate the performance of and allocate resources to our segments based on profit or loss from their operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments and 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:

14



 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
Revenues from external customers
 

 
 

 
 
 
 
Product sales
 

 
 

 
 
 
 
Fluids Division
$
74,741

 
$
72,739

 
$
143,902

 
$
134,271

Production Enhancement Division
 

 
 

 
 

 
 

Production Testing

 

 

 

Compressco
1,341

 
1,057

 
2,429

 
2,219

Total Production Enhancement Division
1,341

 
1,057

 
2,429

 
2,219

Offshore Division
 

 
 

 
 

 
 

Offshore Services
1,584

 
882

 
1,713

 
2,877

Maritech
1,684

 
1,104

 
2,844

 
3,644

Total Offshore Division
3,268

 
1,986

 
4,557

 
6,521

Consolidated
$
79,350

 
$
75,782

 
$
150,888

 
$
143,011

 
 
 
 
 
 
 
 
Services and rentals
 

 
 

 
 
 
 
Fluids Division
$
25,493

 
$
17,006

 
$
50,324

 
$
34,782

Production Enhancement Division
 

 
 

 


 
 

Production Testing
47,433

 
50,329

 
102,040

 
88,612

Compressco
26,640

 
24,201

 
56,377

 
45,721

Intersegment eliminations
(293
)
 

 
(573
)
 

Total Production Enhancement Division
73,780

 
74,530

 
157,844

 
134,333

Offshore Division
 

 
 

 
 

 
 

Offshore Services
62,871

 
79,794

 
100,391

 
122,894

Maritech

 
75

 

 
150

Intersegment eliminations
(20,393
)
 
(12,403
)
 
(29,787
)
 
(19,715
)
Total Offshore Division
42,478

 
67,466

 
70,604

 
103,329

Corporate overhead

 
125

 

 
250

Consolidated
$
141,751

 
$
159,127

 
$
278,772

 
$
272,694

 
 
 
 
 
 
 
 
Intersegment revenues
 

 
 

 
 

 
 

Fluids Division
$
(8
)
 
$
102

 
$
40

 
$
127

Production Enhancement Division
 

 
 

 
 

 
 

Production Testing

 

 

 

Compressco

 

 

 

Total Production Enhancement Division

 

 

 

Offshore Division
 

 
 

 
 

 
 

Offshore Services

 

 

 

Maritech

 

 

 

Intersegment eliminations

 

 

 

Total Offshore Division

 

 

 

Intersegment eliminations
8

 
(102
)
 
(40
)
 
(127
)
Consolidated
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 

15



 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
Total revenues
 

 
 

 
 

 
 

Fluids Division
$
100,226

 
$
89,847

 
$
194,266

 
$
169,180

Production Enhancement Division
 

 
 

 
 

 
 

Production Testing
47,433

 
50,329

 
102,040

 
88,612

Compressco
27,981

 
25,258

 
58,806

 
47,940

Intersegment eliminations
(293
)
 

 
(573
)
 

Total Production Enhancement Division
75,121

 
75,587

 
160,273

 
136,552

Offshore Division
 

 
 

 
 

 
 

Offshore Services
64,455

 
80,676

 
102,104

 
125,771

Maritech
1,684

 
1,179

 
2,844

 
3,794

Intersegment eliminations
(20,393
)
 
(12,403
)
 
(29,787
)
 
(19,715
)
Total Offshore Division
45,746

 
69,452

 
75,161

 
109,850

Corporate overhead

 
125

 

 
250

Intersegment eliminations
8

 
(102
)
 
(40
)
 
(127
)
Consolidated
$
221,101

 
$
234,909

 
$
429,660

 
$
415,705

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In Thousands)
 
Income (loss) before taxes and
 

 
 

 
 
 
 
 
  discontinued operations
 

 
 

 
 
 
 
 
Fluids Division
$
17,847

 
$
13,959

 
$
34,852

 
$
25,424

 
Production Enhancement Division
 

 
 

 
 

 
 

 
Production Testing
4,317

 
11,170

 
10,615

 
16,847

 
Compressco
3,161

 
4,645

 
8,386

 
8,155

 
Total Production Enhancement Division
7,478

 
15,815

 
19,001

 
25,002

 
Offshore Division
 

 
 

 
 

 
 

 
Offshore Services
9,688

 
11,764

 
4,485

 
10,731

 
Maritech
(23,743
)
 
(8,626
)
 
(28,651
)
 
(10,707
)
 
Intersegment eliminations

 

 

 

 
Total Offshore Division
(14,055
)
 
3,138

 
(24,166
)
 
24

 
Corporate overhead
(15,665
)
(1)
(14,472
)
(1)
(30,871
)
(1)
(30,258
)
(1)
Consolidated
$
(4,395
)
 
$
18,440

 
$
(1,184
)
 
$
20,192

 
 

16



 
June 30,
 
2013
 
2012
 
(In Thousands)
Total assets
 

 
 

Fluids Division
$
389,580

 
$
354,680

Production Enhancement Division
 

 
 

Production Testing
320,801

 
266,991

Compressco
233,288

 
211,276

Total Production Enhancement Division
554,089

 
478,267

Offshore Division
 

 
 

Offshore Services
181,752

 
225,722

Maritech
25,640

 
48,939

Intersegment eliminations

 

Total Offshore Division
207,392

 
274,661

Corporate overhead
20,491

 
91,162

Consolidated
$
1,171,552

 
$
1,198,770

_____________________________________________________________
(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
General and administrative expense
$
10,364

 
$
9,246

 
$
20,275

 
$
19,158

Depreciation and amortization
579

 
864

 
1,160

 
1,733

Interest expense
4,090

 
4,045

 
8,242

 
8,236

Other general corporate (income) expense, net
632

 
317

 
1,194

 
1,131

Total
$
15,665

 
$
14,472

 
$
30,871

 
$
30,258



17



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Business Overview  
 
Despite the continuing growth of our Fluids Division, consolidated revenues decreased during the second quarter of 2013 as compared to the prior year period, primarily due to decreased revenues by our Offshore Services and Production Testing segments. Our Offshore Services segment revenues were adversely affected by continuing market challenges in the U.S. Gulf of Mexico market, particularly affecting its heavy lift and dive services operations, and unseasonal weather delays. Our Production Testing segment revenues also decreased compared to the prior year period, despite the acquisitions completed during 2012, primarily due to lower activity in Mexico and decreased domestic natural gas drilling and completion activity. Our Compressco segment reported increased revenues from domestic and certain international markets, but along with our Production Testing segment, it experienced a decrease in demand in Mexico due to budgetary re-evaluations by its primary customer in Mexico. Profitability for our Production Testing, Compressco, and Offshore Services segments were each lower compared to the prior year period, primarily due to the decreased activity, which more than offset cost reduction efforts by each of these segments. The most significant factor for our decrease in profitability, however, was from our Maritech segment, which incurred excess decommissioning costs associated with the ongoing efforts to extinguish its remaining asset retirement obligations. Maritech expects to complete the remaining asset retirement work on its operated properties during 2013. These decreases in profitability were partially offset by the strong performance of our Fluids Division, which continued to report growth from its onshore frac water management business and strong demand for its clear brine fluids (CBF) products in the U.S. Gulf of Mexico. Recent and ongoing cost reduction efforts by each of our businesses are expected to result in improved operating efficiencies and reduced administrative costs going forward.

We continue to prioritize the extinguishment of Maritech's remaining asset retirement obligations, and as of June 30, 2013, the remaining liability has been reduced to approximately $49.5 million. Funded by increased operating cash flows generated during the first six months of 2013, we expended approximately $70.8 million on these efforts. Despite the significant cash spent to extinguish Maritech's remaining asset retirement obligations, cash provided from operating activities was approximately $30.4 million during the first six months of 2013, compared to $8.0 million of cash flows used in operating activities during the prior year period. This increase was primarily due to the impact of efforts that resulted in improved cash collections. The cost reduction efforts discussed above are also anticipated to further improve operating cash flows in future periods. We spent approximately $50.4 million on investing activities during the first six months of 2013, primarily on capital expenditures for several of our existing businesses. To fund potential growth, as of August 8, 2013, we have approximately $252.0 million available under our revolving credit facility. Compressco Partners, L.P. (Compressco Partners) amended its bank revolving credit facility during the second quarter of 2013, increasing its maximum credit commitment to $40.0 million, and it has availability of approximately $18.3 million as of June 30, 2013. During the second quarter of 2013, we issued $35.0 million of new 4.0% Series 2013 Senior Notes, the proceeds of which were used to repay the maturity of the 6.3% Series 2008-A Senior Notes that matured during the period. In addition to the ongoing capital expenditure activity, we continue to evaluate opportunities to further expand certain of our businesses through internal growth and acquisitions, consistent with our growth plan.

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, 2012. 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 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 environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.


18



Results of Operations
 
Three months ended June 30, 2013 compared with three months ended June 30, 2012.
 
Consolidated Comparisons
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
221,101

 
$
234,909

 
$
(13,808
)
 
(5.9
)%
Gross profit
31,386

 
53,108

 
(21,722
)
 
(40.9
)%
Gross profit as a percentage of revenue
14.2
 %
 
22.6
%
 
 

 
 

General and administrative expense
34,365

 
31,466

 
2,899

 
9.2
 %
General and administrative expense as a percentage of revenue
15.5
 %
 
13.4
%
 
 

 
 

Interest expense, net
4,178

 
4,084

 
94

 
2.3
 %
Other (income) expense, net
(2,762
)
 
(882
)
 
(1,880
)
 
213.2
 %
Income (loss) before taxes and discontinued operations
(4,395
)
 
18,440

 
(22,835
)
 
(123.8
)%
Income (loss) before taxes and discontinued operations as a percentage of revenue
(2.0
)%
 
7.8
%
 
 

 
 

Provision (benefit) for income taxes
(1,887
)
 
6,262

 
(8,149
)
 
(130.1
)%
Income (loss) before discontinued operations
(2,508
)
 
12,178

 
(14,686
)
 
(120.6
)%
Income (loss) from discontinued operations, net of taxes

 
3

 
(3
)
 
 

Net income (loss)
(2,508
)
 
12,181

 
(14,689
)
 
(120.6
)%
Net (income) attributable to noncontrolling interest
(423
)
 
(607
)
 
184

 
 

Net income (loss) attributable to TETRA stockholders
$
(2,931
)
 
$
11,574

 
$
(14,505
)
 
(125.3
)%
 
Consolidated revenues for the quarter ended June 30, 2013, decreased compared to the prior year period due to decreased revenues for the Offshore Services and Production Testing segments, both of which were adversely affected by decreases in activity during the period. The decrease in Offshore Services revenues was primarily due to decreased activity in its heavy lift and dive services operations. Decreased production testing activity in Mexico and in several of the domestic markets served, along with a decrease in our Optima Solutions Holdings Limited (OPTIMA) offshore rig cooling activity, more than offset the positive impact of the 2012 acquisitions of Eastern Reservoir Services (ERS), and Greywolf Production Systems Inc. and GPS Ltd. (together, Greywolf) production testing businesses. These decreases in Offshore Services and Production Testing revenues were partially offset by increased Fluids Division revenues, which were primarily due to the growth of our onshore frac water management business. Our Compressco segment also reported increased revenues compared to the prior year period, primarily due to increased domestic and Canadian activity, which more than offset decreased activity in Mexico. Any increases in Compressco and Production Testing segment revenue levels in Mexico are dependent on the resolution of current uncertainties with their primary customer in Mexico. Consolidated gross profit decreased significantly during the current year quarter compared to the prior year period, primarily due to the impact of $23.6 million of Maritech's excess decommissioning expenses as well as from the decreased gross profit of our Production Testing segment. These decreases more than offset the increased profitability of our Fluids Division, which was primarily attributed to the increased domestic onshore frac water management activity.
 
Consolidated general and administrative expenses increased during the second quarter of 2013 compared to the prior year period primarily due to increases in general and administrative expenses by each of our segments as a result of approximately $1.3 million of employee severance expenses recorded during the current year period. The impact of cost reduction actions taken during the second quarter of 2013 are expected to result in decreased general and administrative expenses going forward. In addition, consolidated general and administrative expenses of our Production Testing segment increased approximately $0.8 million as a result of the 2012 acquisitions of OPTIMA, ERS, and Greywolf.
 
Consolidated interest expense increased slightly, primarily due to increased Compressco borrowings.
 

19



Consolidated other income increased primarily due to increased earnings from an unconsolidated joint venture.
 
We had an income tax benefit during the second quarter of 2013 due to our pretax loss during the period.
 
Divisional Comparisons
 
Fluids Division
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
100,226

 
$
89,847

 
$
10,379

 
11.6
%
Gross profit
25,875

 
21,327

 
4,548

 
21.3
%
Gross profit as a percentage of revenue
25.8
%
 
23.7
%
 
 

 
 

General and administrative expense
8,498

 
7,872

 
626

 
8.0
%
General and administrative expense as a percentage of revenue
8.5
%
 
8.8
%
 
 

 
 

Interest (income) expense, net
(59
)
 
34

 
(93
)
 
 

Other (income) expense, net
(411
)
 
(538
)
 
127

 
 

Income before taxes and discontinued operations
$
17,847

 
$
13,959

 
$
3,888

 
27.9
%
Income before taxes and discontinued operations as a percentage of revenue
17.8
%
 
15.5
%
 
 

 
 

 
The increase in Fluids Division revenues during the second quarter of 2013 compared to the prior year period was primarily due to approximately $8.5 million of increased service revenues, primarily from the growth of our onshore frac water management business. In addition, the Division's product sales revenue increased by approximately $2.0 million, primarily due to the increased domestic demand for its manufactured products. However, the increased revenues from the Division's sales of CBF products was largely offset by the impact of decreased international activity compared to the prior year period.
 
Fluids Division gross profit increased compared to the prior year period, primarily as a result of increased domestic onshore frac water management revenues. Increased gross profit from the Division's manufactured product sales was largely offset by decreased international activity.
 
Fluids Division income before taxes increased compared to the prior year period due to the increase in gross profit discussed above and despite increased administrative costs. Fluids Division administrative costs increased due to increased personnel-related costs, partially offset by decreased professional services expense.


20



Production Enhancement Division
 
Production Testing Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
47,433

 
$
50,329

 
$
(2,896
)
 
(5.8
)%
Gross profit
7,670

 
15,420

 
(7,750
)
 
(50.3
)%
Gross profit as a percentage of revenue
16.2
%
 
30.6
%
 
 

 
 

General and administrative expense
6,391

 
5,622

 
769

 
13.7
 %
General and administrative expense as a percentage of revenue
13.5
%
 
11.2
%
 
 

 
 

Interest (income) expense, net
7

 
25

 
(18
)
 
 

Other (income) expense, net
(3,045
)
 
(1,397
)
 
(1,648
)
 
 

Income before taxes and discontinued operations
$
4,317

 
$
11,170

 
$
(6,853
)
 
(61.4
)%
Income before taxes and discontinued operations as a percentage of revenue
9.1
%
 
22.2
%
 
 

 
 

 
Production Testing revenues decreased during the second quarter of 2013 compared to the prior year period, despite the acquisitions of ERS and Greywolf during 2012. These acquired production testing businesses generated a total of approximately $6.7 million of increased revenues during the period compared to the prior year, despite decreased Greywolf Canadian activity in the current year quarter compared to late 2012 levels. Revenues for our OPTIMA offshore rig cooling operation, which was acquired in March 2012, decreased by approximately $2.5 million compared to the prior year period, due to decreased completion activity in the North Sea market. The segment's previously existing production testing business decreased by approximately $7.1 million as compared to the prior year period, primarily due to the impact of decreased demand from our primary customer in Mexico due to budget re-evaluations. We believe this decline in demand in Mexico is temporary, and we expect to see a slow increase in activity levels in Mexico. In addition, decreased domestic natural gas drilling and completion activity resulted in reduced demand and pricing pressure in certain of the markets we serve. Latin America revenues also decreased, as activity pursuant to a South American technical management contract is in its final phases. These decreases were partially offset by increased production testing revenues in the Eastern Hemisphere during the second quarter of 2013.
 
Production Testing segment gross profit decreased during the second quarter of 2013 compared to the prior year period, despite the 2012 acquisitions of ERS and Greywolf. The gross profit increase from these acquired production testing businesses was more than offset by the impact of the above mentioned decreased activity in Mexico, the decreased activity and pricing levels in certain domestic markets, decreased OPTIMA activity, increased labor costs, and the impact of the decreased activity in South America mentioned above. During the second quarter of 2013, we took steps to downsize field operations and implement other cost reductions for the Production Testing segment. These cost reduction actions are expected to result in reduced operating expenses going forward.
 
Production Testing income before taxes decreased, primarily due to the decreased gross profit discussed above. In addition, general and administrative expenses increased, due to the increased personnel-related costs associated with the acquired ERS and Greywolf businesses. This decrease in profitability was partially offset by increased other income that resulted from increased earnings from an unconsolidated joint venture, partially offset by decreased foreign currency gains.


21



Compressco Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
27,981

 
$
25,258

 
$
2,723

 
10.8
 %
Gross profit
8,039

 
9,241

 
(1,202
)
 
(13.0
)%
Gross profit as a percentage of revenue
28.7
%
 
36.6
%
 
 

 
 

General and administrative expense
4,534

 
4,152

 
382

 
9.2
 %
General and administrative expense as a percentage of revenue
16.2
%
 
16.4
%
 
 

 
 

Interest (income) expense, net
108

 
(10
)
 
118

 
 

Other (income) expense, net
236

 
454

 
(218
)
 
 

Income before taxes and discontinued operations
$
3,161

 
$
4,645

 
$
(1,484
)
 
(31.9
)%
Income before taxes and discontinued operations as a percentage of revenue
11.3
%
 
18.4
%
 
 

 
 

 
The increase in Compressco revenues compared to the prior year period was due to an increase of $2.4 million of service revenues, resulting primarily from increased domestic and Canadian activity. Latin American revenues during the current year period were adversely affected by current budget re-evaluations by Compressco's primary customer in Mexico. In March 2013, Compressco began to experience a decline in demand for its oil and gas services from this customer. Compressco believes this decline in demand is temporary, and expects to see a slow increase in activity levels in Mexico. Compressco has continued to increase its compressor fleet, both domestically and in certain international markets, to serve increasing demand for services. Revenues from the sales of compressor units and parts during the second quarter of 2013 increased $0.3 million compared to the prior year period, primarily due to increased international sales.
 
Compressco gross profit decreased during the second quarter of 2013 compared to the prior year period, primarily due to the impact of the reduced revenues in Mexico and increased labor and maintenance costs. Average compressor unit utilization increased from 79.7% to 82.6%, however, gross profit as a percentage of revenue decreased compared to the prior year period as a result of the increased costs and the impact of the decreased activity in Mexico. Primarily as a result of the current reduced activity described above, Compressco has reduced its Mexico operating headcount, and it is continuing to adjust its cost structure to current activity levels.
 
Income before taxes for Compressco decreased during the second quarter of 2013 compared to the prior year period, primarily due to the decreased gross profit discussed above. Compressco’s administrative expense levels increased compared to the prior year period, primarily due to increases in administrative salary and personnel-related expenses.
 

22



Offshore Division
 
Offshore Services Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
64,455

 
$
80,676

 
$
(16,221
)
 
(20.1
)%
Gross profit
13,119

 
15,124

 
(2,005
)
 
(13.3
)%
Gross profit as a percentage of revenue
20.4
%
 
18.7
%
 
 
 
 
General and administrative expense
3,579

 
3,659

 
(80
)
 
(2.2
)%
General and administrative expense as a percentage of revenue
5.6
%
 
4.5
%
 
 
 
 
Interest (income) expense, net
27

 
27

 

 
 
Other (income) expense, net
(175
)
 
(326
)
 
151

 
 
Income (loss) before taxes and discontinued operations
$
9,688

 
$
11,764

 
$
(2,076
)
 
(17.6
)%
Income before taxes and discontinued operations as a percentage of revenue
15.0
%
 
14.6
%
 
 
 
 

Revenues from the Offshore Services segment decreased during the second quarter of 2013 compared to the prior year quarter, primarily due to decreased activity levels for its heavy lift and dive services operations as a result of increased competition and decreased pricing in the Gulf of Mexico market. These businesses were also negatively affected by unseasonal weather delays during the current year quarter. The segment has entered into contracts that are expected to result in a significant amount of work to be performed later during 2013.
 
Gross profit for the Offshore Services segment decreased due to the decreased activity levels for the heavy lift and dive services businesses compared to the prior year period. Although Offshore Services segment revenues decreased by 20.1% compared to the prior year period, gross profit as a percentage of revenues increased, reflecting the improved profitability as a result of cost reduction efforts made during late 2012. During the second quarter of 2013, the Offshore Services segment implemented additional cost reduction measures, and it continues to consider additional opportunities to optimize its cost structure.
 
Offshore Services segment income before taxes decreased, primarily due to the reduced gross profit discussed above. Segment general and administrative expenses were decreased slightly, despite approximately $0.3 million of employee severance costs expensed during the current year period. In addition, other income decreased, primarily due to decreased foreign currency gains.

Maritech Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
1,684

 
$
1,179

 
$
505

 
42.8
%
Gross profit (loss)
(22,738
)
 
(7,263
)
 
(15,475
)
 
213.1
%
General and administrative expense
999

 
915

 
84

 
9.2
%
General and administrative expense as a percentage of revenue
59.3
%
 
77.6
%
 
 
 
 
Interest (income) expense, net
6

 

 
6

 
 
Other (income) expense, net

 
448

 
(448
)
 
 
Income (loss) before taxes and discontinued operations
$
(23,743
)
 
$
(8,626
)
 
$
(15,117
)
 
175.2
%
 
As a result of the sale of almost all of its producing properties during 2011 and 2012, Maritech revenues for the second quarter of 2013 and 2012 are negligible and are expected to continue to be negligible going forward.
 

23



Maritech gross loss increased during the second quarter of 2013 compared to the prior year period due to approximately $23.6 million of excess decommissioning costs expensed during the current year period, including approximately $15.4 million associated with work to be performed during the third and fourth quarters of 2013. The amount expensed during the current year period reflects an increase of approximately $15.9 million of such costs compared to the prior year period and was due to additional oil and gas abandonment and decommissioning work required on certain offshore properties, including remediation work required on certain wells that had been previously plugged.
 
The increase in Maritech’s pretax loss during the second quarter of 2013 compared to the prior year period is primarily due to the increased gross loss discussed above. The decrease in other expense is due to loss on sales of oil and gas properties during the prior year period.
 
Corporate Overhead
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Gross profit (loss) (primarily depreciation expense)
$
(579
)
 
$
(741
)
 
$
162

 
(21.9
)%
General and administrative expense
10,364

 
9,246

 
1,118

 
12.1
 %
Interest (income) expense, net
4,090

 
4,008

 
82

 
 

Other (income) expense, net
632

 
477

 
155

 
 

(Loss) before taxes and discontinued operations
$
(15,665
)
 
$
(14,472
)
 
$
(1,193
)
 
8.2
 %

Corporate Overhead increased during the second quarter of 2013 compared to the prior year period, primarily due to increased corporate general and administrative expenses caused by approximately $1.2 million of increased personnel costs, including approximately $0.5 million of employee severance charges during the current year period, that are expected to result in decreased corporate general and administrative expenses going forward. General and administrative expenses also include approximately $0.7 million of increased office expense, which was primarily the result of the sale and leaseback of our corporate headquarters building in the fourth quarter of 2012. Partially offsetting these increases was approximately $0.3 million of decreased tax expenses, approximately $0.2 million of increased allocated costs, and approximately $0.3 million of decreased general expenses.
 

24




Six months ended June 30, 2013 compared with six months ended June 30, 2012.
 
Consolidated Comparisons
 
Six Months Ended June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
429,660

 
$
415,705

 
$
13,955

 
3.4
 %
Gross profit
70,072

 
85,503

 
(15,431
)
 
(18.0
)%
Gross profit as a percentage of revenue
16.3
 %
 
20.6
%
 
 

 
 

General and administrative expense
67,919

 
62,357

 
5,562

 
8.9
 %
General and administrative expense as a percentage of revenue
15.8
 %
 
15.0
%
 
 

 
 

Interest expense, net
8,378

 
8,235

 
143

 
1.7
 %
Other (income) expense, net
(5,041
)
 
(5,281
)
 
240

 
(4.5
)%
Income (loss) before taxes and discontinued operations
(1,184
)
 
20,192

 
(21,376
)
 
(105.9
)%
Income (loss) before taxes and discontinued operations as a percentage of revenue
(0.3
)%
 
4.9
%
 
 

 
 

Provision (benefit) for income taxes
(776
)
 
6,866

 
(7,642
)
 
(111.3
)%
Income (loss) before discontinued operations
(408
)
 
13,326

 
(13,734
)
 
(103.1
)%
Income (loss) from discontinued operations, net of taxes

 
2

 
(2
)
 
 

Net income (loss)
(408
)
 
13,328

 
(13,736
)
 
(103.1
)%
Net (income) attributable to noncontrolling interest
(1,220
)
 
(1,073
)
 
(147
)
 
 

Net income (loss) attributable to TETRA stockholders
$
(1,628
)
 
$
12,255

 
$
(13,883
)
 
(113.3
)%
 
Consolidated revenues for the six months ended June 30, 2013, increased compared to the prior year period due to increased revenues for our Fluids, Production Testing and Compressco segments. The increase in the Fluids Division’s revenues is primarily due to the growth of our onshore frac water management business. Our Production Testing segment revenues increased, reflecting the impact of 2012 acquisitions. The impact on segment revenues from these acquisitions more than offset the decreased Production Testing segment revenues resulting from decreased activity experienced in several of the markets it serves. Our Compressco segment reported increased revenues during the six month period, primarily due to increased activity in Latin America during the first quarter of 2013. Any increases in the Compressco and Production Testing segments' activity levels in Latin America are subject to the resolution of current uncertainties with our primary customer in Mexico. The increased consolidated revenues were negatively affected by our Offshore Services segment, which reported decreased revenues due to a reduction in heavy lift and dive services activity. These businesses were also adversely affected by weather delays as well as by continuing market challenges in the U.S. Gulf of Mexico during the current year period. Consolidated gross profit decreased, despite the increased profitability of our Fluids Division, as our Maritech, Production Testing, and Offshore Services segments all reported decreases. Maritech expensed approximately $32.9 million of excess decommissioning costs during the current year period.
 
Consolidated general and administrative expenses increased during the first six months of 2013 compared to the prior year period due to approximately $1.2 million of increased general and administrative expenses by our Production Testing segment as a result of the businesses acquired during 2012. Consolidated general and administrative expenses also increased as a result of approximately $1.3 million of employee severance expenses recorded during the second quarter of 2013. In addition, our Maritech segment's general and administrative expenses increased approximately $0.9 million, primarily due to legal expenses associated with an insurance-related settlement during the first quarter of 2013. These increases, along with the impact from the growth of our Fluids Division, were partially offset by our Offshore Services segment, where general and administrative costs decreased by $0.4 million, primarily due to the cost reduction steps taken in late 2012. Cost reduction efforts taken during late 2012 and the second quarter of 2013 are anticipated to reduce administrative cost levels going forward.
 
Consolidated interest expense was slightly increased during the first six months of 2013, primarily due to increased Compressco borrowings.
 

25



Consolidated other income decreased, primarily due to $3.2 million of decreased gains on sale of assets, partially offset by increased earnings from an unconsolidated joint venture.
 
We had an income tax benefit during the first six months of 2013 due to the pretax loss during the period.
 
Divisional Comparisons
 
Fluids Division
 
Six Months Ended June 30,
 
Period to Period Change
 
2013
 
2012
 
2013 vs 2012
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
194,266

 
$
169,180

 
$
25,086

 
14.8
%
Gross profit
50,220

 
39,247

 
10,973

 
28.0
%
Gross profit as a percentage of revenue
25.9
%
 
23.2
%
 
 

 
 

General and administrative expense
16,331

 
14,871

 
1,460

 
9.8
%
General and administrative expense as a percentage of revenue
8.4
%
 
8.8
%
 
 

 
 

Interest (income) expense, net
(70
)
 
61

 
(131
)
 
 

Other (income) expense, net
(893
)
 
(1,109
)
 
216

 
 

Income before taxes and discontinued operations
$
34,852