2014.06.30 TTI 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, 2014
 
[  ] 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, 2014, there were 79,550,793 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,
 
2014
 
2013
 
2014
 
2013
Revenues:
 

 
 

 
 
 
 
Product sales
$
82,871

 
$
79,350

 
$
159,623

 
$
150,888

Services and rentals
159,618

 
141,751

 
295,723

 
278,772

Total revenues
242,489

 
221,101

 
455,346

 
429,660

Cost of revenues:
 

 
 

 


 
 
Cost of product sales
76,706

 
80,135

 
141,735

 
135,873

Cost of services and rentals
108,301

 
89,841

 
208,239

 
184,631

Depreciation, amortization, and accretion
22,007

 
20,076

 
45,047

 
39,747

Total cost of revenues
207,014

 
190,052

 
395,021

 
360,251

Gross profit
35,475

 
31,049

 
60,325

 
69,409

General and administrative expense
32,270

 
34,028

 
65,690

 
67,256

Interest expense, net
4,604

 
4,178

 
9,315

 
8,378

Other (income) expense, net
1,095

 
(2,762
)
 
(1,503
)
 
(5,041
)
Income (loss) before taxes
(2,494
)
 
(4,395
)
 
(13,177
)
 
(1,184
)
Provision (benefit) for income taxes
(944
)
 
(1,887
)
 
(5,537
)
 
(776
)
Net income (loss)
(1,550
)
 
(2,508
)
 
(7,640
)
 
(408
)
Net (income) loss attributable to noncontrolling interest
(907
)
 
(423
)
 
(1,751
)
 
(1,220
)
Net income (loss) attributable to TETRA stockholders
$
(2,457
)
 
$
(2,931
)
 
$
(9,391
)
 
$
(1,628
)
Basic net income (loss) per common share:
 

 
 

 
 
 
 
Net income (loss) attributable to TETRA stockholders
$
(0.03
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.02
)
Average shares outstanding
78,525

 
77,896

 
78,416

 
77,784

Diluted net income (loss) per common share:
 

 
 

 
 
 
 
Net income (loss) attributable to TETRA stockholders
$
(0.03
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.02
)
Average diluted shares outstanding
78,525

 
77,896

 
78,416

 
77,784



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,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(1,550
)
 
$
(2,508
)
 
$
(7,640
)
 
$
(408
)
Foreign currency translation adjustment, including taxes of $(750) and $446 in 2014 and including taxes of $810 and $546 in 2013
3,244

 
(2,786
)
 
777

 
(8,722
)
Comprehensive income (loss)
1,694

 
(5,294
)
 
(6,863
)
 
(9,130
)
Less: comprehensive income attributable to noncontrolling interest
(907
)
 
(423
)
 
(1,751
)
 
(1,220
)
Comprehensive income (loss) attributable to TETRA stockholders
$
787

 
$
(5,717
)
 
$
(8,614
)
 
$
(10,350
)
 

See Notes to Consolidated Financial Statements

2



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
37,569

 
$
38,754

Restricted cash
8,945

 
9,067

Trade accounts receivable, net of allowances for doubtful accounts of $1,440 in 2014 and $1,349 in 2013
179,888

 
180,659

Deferred tax asset
12,330

 
14,740

Inventories
92,686

 
100,792

Assets held for sale
2,536

 
5,541

Prepaid expenses and other current assets
22,382

 
24,386

Total current assets
356,336

 
373,939

Property, plant, and equipment:
 

 
 

Land and building
43,158

 
42,954

Machinery and equipment
713,570

 
682,836

Automobiles and trucks
56,235

 
57,588

Chemical plants
175,550

 
175,494

Construction in progress
32,310

 
14,170

Total property, plant, and equipment
1,020,823

 
973,042

Less accumulated depreciation
(435,538
)
 
(400,426
)
Net property, plant, and equipment
585,285

 
572,616

Other assets:
 

 
 

Goodwill
202,235

 
188,159

Patents, trademarks and other intangible assets, net of accumulated amortization of $29,801 in 2014 and $31,956 in 2013
55,855

 
31,980

Deferred tax assets
3,327

 
2,170

Other assets
25,228

 
37,669

Total other assets
286,645

 
259,978

Total assets
$
1,228,266

 
$
1,206,533

 

See Notes to Consolidated Financial Statements

3



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
88,671

 
$
69,220

Accrued liabilities
62,047

 
65,017

Current portion of long-term debt
90,000

 
89

Decommissioning and other asset retirement obligations, net
30,157

 
38,700

Total current liabilities
270,875

 
173,026

Long-term debt, net of current portion
327,052

 
387,727

Deferred income taxes
7,695

 
17,651

Decommissioning and other asset retirement obligations, net of current portion
12,031

 
12,204

Other liabilities
19,531

 
18,427

Total long-term liabilities
366,309

 
436,009

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 100,000,000 shares authorized; 82,075,195 shares issued at June 30, 2014 and 81,333,631 shares issued at December 31, 2013
821

 
813

Additional paid-in capital
237,447

 
234,360

Treasury stock, at cost; 2,565,935 shares held at June 30, 2014, and 2,478,084 shares held at December 31, 2013
(16,132
)
 
(15,765
)
Accumulated other comprehensive income (loss)
(3,127
)
 
(3,903
)
Retained earnings
330,645

 
340,036

Total TETRA stockholders' equity
549,654

 
555,541

Noncontrolling interests
41,428

 
41,957

Total equity
591,082

 
597,498

Total liabilities and equity
$
1,228,266

 
$
1,206,533

 

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,
 
2014
 
2013
Operating activities:
 

 
 

Net income (loss)
$
(7,640
)
 
$
(408
)
Reconciliation of net income (loss) to cash provided by (used in) operating activities:
 
 

Depreciation, amortization, and accretion
45,047

 
39,747

Provision (benefit) for deferred income taxes
(12,932
)
 
(4,768
)
Equity-based compensation expense
3,273

 
3,624

Provision (benefit) for doubtful accounts
(10
)
 
333

Gain on sale of assets
(239
)
 
(13
)
Excess decommissioning and abandoning costs
18,965

 
32,877

Other non-cash charges and credits
(3,272
)
 
(5,262
)
Changes in operating assets and liabilities, net of assets acquired:
 

 
 

Accounts receivable
10,198

 
19,716

Inventories
8,979

 
9,248

Prepaid expenses and other current assets
3,820

 
14,690

Trade accounts payable and accrued expenses
6,536

 
(8,952
)
Decommissioning liabilities, net
(29,766
)
 
(70,788
)
Other
(2,339
)
 
317

Net cash provided by (used in) operating activities
40,620

 
30,361

Investing activities:
 

 
 

Purchases of property, plant, and equipment
(52,240
)
 
(51,535
)
Acquisition of businesses, net of cash acquired
(18,337
)
 

Proceeds on sale of property, plant, and equipment
4,250

 
837

Other investing activities
(935
)
 
258

Net cash used in investing activities
(67,262
)
 
(50,440
)
Financing activities:
 

 
 

Proceeds from long-term debt
76,450

 
65,445

Payments of long-term debt
(47,626
)
 
(85,928
)
Compressco Partners' distributions
(2,508
)
 
(2,393
)
Proceeds from exercise of stock options
391

 
757

Excess tax benefit from equity compensation

 

Other financing activities
(369
)
 
(307
)
Net cash provided by (used in) financing activities
26,338

 
(22,426
)
Effect of exchange rate changes on cash
(881
)
 
(1,031
)
Increase (decrease) in cash and cash equivalents
(1,185
)
 
(43,536
)
Cash and cash equivalents at beginning of period
38,754

 
74,048

Cash and cash equivalents at end of period
$
37,569

 
$
30,512

Supplemental cash flow information:
 

 
 

Interest paid
$
8,916

 
$
9,616

Income taxes paid
6,972

 
4,217

 
 
 
 

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, 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. We consolidate the financial statements of Compressco Partners, L.P. and its subsidiaries (Compressco Partners) as part of our Compressco segment. We control Compressco Partners through our ownership of its general partner. The public ownership share of Compressco Partners' net assets and earnings is presented as a component of noncontrolling interest in our consolidated financial statements. 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.
 
As a result of a transaction entered into subsequent to June 30, 2014, Compressco Partners has significantly expanded its operations through the acquisition of Compressor Systems, Inc. (CSI). See Note B - Acquisitions for further discussion.

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, 2013.
 
Beginning in September 2013, certain ad valorem tax expenses for operating equipment of our Compressco segment have been classified as cost of revenues instead of being included in general and administrative expense as reported in prior periods. Prior period amounts have been reclassified to conform to the current year period's presentation. The amounts of such reclassifications are $0.3 million and $0.7 million for the three and six month periods ended June 30, 2013. This reclassification had no effect on net income for any of the periods presented.

Certain other 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, 2014, 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.

6



 
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, 2014, and December 31, 2013, are as follows: 
 
June 30, 2014
 
December 31, 2013
 
(In Thousands)
Finished goods
$
62,348

 
$
73,515

Raw materials
4,933

 
3,894

Parts and supplies
24,333

 
22,668

Work in progress
1,072

 
715

Total inventories
$
92,686

 
$
100,792


Finished goods inventories include newly manufactured clear brine fluids as well as recycled brines that are repurchased from certain customers. Recycled brines are recorded at cost using the weighted average method. We provide a reserve for estimated unrealizable inventory equal to the difference between the cost of inventory and its estimated realizable value.
 
Net Income (Loss) 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 (loss) per common and common equivalent share:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
Number of weighted average common shares outstanding
78,525

 
77,896

 
78,416

 
77,784

Assumed exercise of stock awards

 

 

 

Average diluted shares outstanding
78,525

 
77,896

 
78,416

 
77,784

 
For the three and six month periods ended June 30, 2014 and 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 losses recorded during the periods.
 
Environmental Liabilities
 
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.

7



 
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 three months ended March 31, 2013.

Foreign Currency Translation
 
We have designated the euro, the British pound, the Norwegian krone, the Canadian dollar, the Brazilian real, and the Mexican peso as the functional currency for our operations in Finland and Sweden, the United Kingdom, Norway, Canada, Brazil, and certain of our operations in Mexico, respectively. Effective January 1, 2014, we changed the functional currency in Argentina from the U.S. dollar to the Argentina peso. The U.S. dollar is the designated functional currency for all of our other foreign operations. The cumulative translation effects of translating the accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of equity.

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 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, 2014, and December 31, 2013, were approximately $313.1 million and $318.4 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 value of the liability for the WIT Water Transfer, LLC (doing business as TD Water Transfer) contingent purchase price consideration at June 30, 2014, was approximately $1.2 million. We calculate the fair value of the liability for our contingent purchase price consideration obligation in accordance with the TD Water Transfer share purchase agreement based upon the actual and anticipated earnings of our TD Water Transfer operations (a level 3 fair value measurement). We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward sale derivative contracts. For these fair value measurements, we utilize the quoted value as determined by our counterparty financial institution (a level 2 measurement). A summary of these fair value measurements as of June 30, 2014, is as follows:

8



 
 
 
Fair Value Measurements Using
 
Total as of
June 30, 2014
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Asset for foreign currency derivative contracts
$
129

 

 
129

 

Liability for foreign currency derivative contracts
(176
)
 

 
(176
)
 

     Acquisition contingent
        consideration liability
(1,192
)
 

 

 
(1,192
)
Total
$
(1,239
)
 
 
 
 
 
 

New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (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. The adoption of this standard did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", which modifies the criteria for disposals to quality as discontinued operations and expands related disclosures. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. We believe that the adoption of this amendment will not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for our first quarter in fiscal 2017 under either full or modified retrospective adoption. Early application is not permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements.

9




NOTE B – ACQUISITIONS
 
Acquisition of Limited Liability Company Interest

On January 16, 2014, we finalized the purchase of the 50% ownership interest of Ahmad Albinali & TETRA Arabia Company Ltd. (TETRA Arabia, a Saudi Arabian limited liability company) that we did not previously own for consideration of $25.2 million. The closing of this transaction was pursuant to the terms of the Share Sale and Purchase Agreement entered into as of October 1, 2013, with the other shareholder in TETRA Arabia. TETRA Arabia is a provider of production testing services, offshore rig cooling services, and clear brine fluids products and related services to its customer in Saudi Arabia. The acquisition of the other 50% interest of TETRA Arabia results in the Production Testing and Fluids segments owning a 100% interest in their Saudi Arabian operations, which they will operate directly through the TETRA Arabia entity. Prior to the transaction, our 50% ownership interest in TETRA Arabia was accounted for under the equity method of accounting, whereby our investment was classified as Other Assets in our consolidated balance sheets, and our share of TETRA Arabia's earnings was classified as other income in the consolidated statements of operations. Following the acquisition, TETRA Arabia is consolidated as a wholly owned subsidiary. The $25.2 million purchase price for the 50% ownership interest includes $15.0 million in cash that was paid at closing, and an additional $10.2 million in cash that was paid on July 16, 2014.

As a result of the purchase of the remaining 50% ownership interest of TETRA Arabia during the first quarter of 2014, we remeasured the fair value of our existing investment carrying value in TETRA Arabia based on estimated future cash flows which resulted in a calculated fair value of approximately $21.8 million (a level 3 measurement). We allocated this calculated fair value to the applicable consolidated balance sheet line items and recorded a remeasurement gain of approximately $5.7 million. Additionally, we recorded a charge to earnings of approximately $2.9 million associated with a similar fair value measurement related to the termination of our previous relationship with the other shareholder. The charge to earnings and the remeasurement gain were included in other (income) expense in the accompanying Consolidated Statement of Operations for the six month period ended June 30, 2014. We allocated the purchase price as well as the remeasured value of our existing investment based on the fair values of the assets and liabilities acquired or remeasured, which consisted of a total of approximately $18.5 million of net working capital, $1.3 million of property, plant, and equipment, approximately $22.5 million of certain intangible assets (primarily a customer relationship asset), $4.5 million of deferred tax liabilities, and approximately $6.3 million of nondeductible goodwill (allocated between the Fluids and Production Testing segments). For the six month period ended June 30, 2014, our revenues, depreciation and amortization, and income before taxes included $14.5 million, $0.8 million, and $1.5 million, respectively, associated with the acquired operations of TETRA Arabia after the closing in January 2014.

Acquisition of TD Water Transfer

On January 29, 2014, we acquired the assets and operations of WIT Water Transfer, LLC (doing business as TD Water Transfer) for a cash purchase price of $15.0 million. In addition, contingent consideration ranging from $0 to $8.0 million in cash may be paid, depending on a defined measure of earnings over each of the two twelve month periods subsequent to closing. TD Water Transfer is a provider of water management services to oil and gas operators in the South Texas and North Dakota regions, and the acquisition represented a strategic geographic expansion of our Fluids segment operations, allowing it to serve customers in additional basins in the U.S.

We allocated the purchase price to the fair value of the assets and liabilities acquired, which consisted of approximately $7.3 million of property, plant and equipment, approximately $3.4 million of certain intangible assets, approximately $6.5 million of nondeductible goodwill, and approximately $2.3 million of liabilities associated with the contingent purchase price consideration. The fair value of the obligation to pay the contingent purchase price consideration was calculated based on the anticipated earnings for our water management services operations in the South Texas and North Dakota regions over each of the two twelve month periods subsequent to the closing and could increase (to $8.0 million) or decrease (to $0) depending on actual and expected earnings in these regions going forward. Increases or decreases in the value of the anticipated contingent purchase price consideration liability 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. During the three months ended June 30, 2014, the liability associated with the contingent consideration was adjusted downward by approximately $1.1 million, and this amount was credited to earnings (depreciation, amortization, and accretion) during the period. The $6.5 million of goodwill recorded to the Fluids segment as a result of the TD Water Transfer acquisition is supported by the expected strategic benefits discussed above to be generated from the acquisition. This allocation of the purchase

10



price to TD Water Transfer’s net assets and liabilities is preliminary, and subject to the potential identification of additional assets and contingencies or revisions to the fair value calculations. During the second quarter of 2014, the allocated value to goodwill decreased from $8.9 million to $6.5 million due to adjustments to the purchase price allocation to the acquired assets and liabilities. These fair value calculations and allocations are expected to be finalized later in 2014, and could result in adjustments to the calculated depreciation and amortization of the tangible and intangible assets, respectively.

Acquisition of Compressor Systems, Inc.

On August 4, 2014, pursuant to a stock purchase agreement dated July 20, 2014, a subsidiary of Compressco Partners acquired all of the outstanding capital stock of Compressor Systems, Inc. (CSI), a Delaware corporation, for $825.0 million cash (the CSI Acquisition). The total consideration payable is subject to an adjustment based on working capital. CSI owns one of the largest fleets of natural gas compression equipment in the U.S. Headquartered in Midland, Texas, CSI fabricates, sells, and maintains natural gas compressors and provides a full range of products and compression services that cover a wide range of the natural gas production and transportation cycle to a broad customer base. CSI derives revenues through three primary business lines: service operations, unit sales, and aftermarket services.
    
The CSI Acquisition purchase price was funded from (i) the issuance of the 7.25% Senior Notes due 2022 in the aggregate principal amount of $350.0 million by Compressco Partners and its subsidiary, Compressco Finance, Inc. (the Compressco Senior Notes) resulting in net proceeds of $337.8 million ($350.0 million aggregate face amount) (ii) Compressco Partners' issuance of 15,280,000 common units (the New Units) in an underwritten public offering resulting in the net proceeds of $346.0 million ($359.1 million gross proceeds less commissions), and (iii) a portion of $210.0 million borrowed under Compressco Partners' new $400.0 million bank revolving credit facility (the New Partnership Credit Facility). A subsidiary of our Compressco Partners GP Inc. subsidiary purchased 1,391,113 of the New Units. Additionally, Compressco Partners GP Inc. contributed approximately $7.3 million to Compressco Partners in order to maintain its approximately 2% general partner interest in Compressco Partners. Following the CSI Acquisition and the completion of the offering of the New Units and the contribution by Compressco Partners GP Inc., our aggregate ownership percentage in Compressco Partners was reduced to approximately 47% from approximately 82%. Through our Compressco Partners GP Inc. subsidiary, we will continue to manage Compressco Partners, and, accordingly, we will continue to consolidate the results of Compressco Partners as part of our consolidated results of operations. To fund our purchase of New Units and the additional general partner contribution, we borrowed $40.0 million under our credit facility.

In connection with the CSI Acquisition and Compressco Partners' issuance of the New Units, Compressco Partners granted an option to the underwriters (subject to certain terms and conditions as set forth in the Underwriting Agreement) to purchase up to an additional 2,292,000 common units at the public offering price of $23.50 per common unit, less the underwriting discount. This option expires August 23, 2014.

Our preliminary allocation of the purchase price to the estimated fair value of the CSI net assets is as follows (in thousands):
Current assets
$
112,147

Property and equipment
559,507

Intangible and other assets
236,738

Total assets acquired
908,392

 
 
Current liabilities
83,392

Long-term debt

Other long-term liabilities

Total liabilities assumed
83,392

Net assets acquired
$
825,000


11



The actual allocation of the CSI Acquisition purchase price will be based on the CSI balance sheet as of the August 4, 2014, closing date and the finalization of fair value measurements. The final purchase price allocation could differ materially from the above summary. Actual purchase price allocation amounts will be disclosed in subsequent filings.

Pro Forma Financial Information

The pro forma information presented below has been prepared to give effect to the acquisition of the remaining 50% ownership interest of TETRA Arabia and the acquisition of CSI as if each of the transactions had occurred at the beginning of the periods presented. The pro forma information includes the impact from the allocation of the acquisition purchase price for each acquisition on depreciation and amortization. The pro forma information also excludes the impact of the remeasurement gain and charge to earnings recorded in connection with the 50% interest in TETRA Arabia during the 2014 period. The pro forma information is presented for illustrative purposes only and is based on estimates and assumptions we deemed appropriate. The impact of the acquisition of TD Water Transfer is not significant and is therefore not included in the pro forma information below. 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 transactions.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands, Except Per Share Amounts)
 
 
 
 
 
 
 
 
Revenues
$
320,374

 
$
315,189

 
$
627,856

 
$
637,431

Depreciation, depletion, amortization, and accretion
$
36,653

 
$
34,900

 
$
74,223

 
$
68,131

Gross profit
$
63,881

 
$
63,983

 
$
119,538

 
$
139,435

 
 
 
 
 

 

Net income (loss)
$
(3,445
)
 
$
(1,698
)
 
$
(9,238
)
 
$
5,846

Net income (loss) attributable to TETRA stockholders
$
(4,353
)
 
$
(2,121
)
 
$
(10,989
)
 
$
4,626

 
 
 
 
 
 
 
 
Per share information:
 
 
 
 
 
 
 
Net income (loss) attributable to TETRA stockholders
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
(0.03
)
 
$
(0.14
)
 
$
0.06

Diluted
$
(0.06
)
 
$
(0.03
)
 
$
(0.14
)
 
$
0.06



12



NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS
 
Long-term debt consists of the following:
 
 
June 30, 2014
 
December 31, 2013
 
 
(In Thousands)
 
Scheduled Maturity
 
 
 
Bank revolving line of credit facility
October 29, 2015
$
74,201

 
$
52,768

Compressco Partners' bank credit facility
October 15, 2017
37,851

 
29,959

5.90% Senior Notes, Series 2006-A
April 30, 2016
90,000

 
90,000

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

 
35,000

European bank credit facility
 

 

Other
 

 
89

Total debt
 
417,052

 
387,816

Less current portion
 
(90,000
)
 
(89
)
Total long-term debt
 
$
327,052

 
$
387,727


Our Bank Credit Facility

On August 4, 2014, in connection with the CSI Acquisition, we borrowed $40.0 million under our credit facility to fund the purchase of 1,391,113 common units of Compressco Partners and to fund a contribution of $7.3 million by our wholly owned subsidiary Compressco Partners GP Inc. to maintain its approximately 2% general partners interest in Compressco Partners.

Compressco Partners 7.25% Senior Notes

On July 29, 2014, Compressco Partners, Compressco Finance Inc., a Delaware corporation and indirect wholly owned subsidiary of Compressco Partners (Compressco Finance and, together with Compressco Partners, the Issuers), and the guarantors named therein (the Guarantors and, together with the Issuers, the Obligors), entered into the Note Purchase Agreement (the Note Purchase Agreement) with Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the initial purchasers named therein (collectively, the Initial Purchasers) related to the issuance and sale by the Issuers to the Initial Purchasers of $350.0 million aggregate principal amount of the Issuers’ 7.25% Senior Notes due 2022 (the Compressco Senior Notes) in a private offering (the Offering) exempt from the registration requirements under the Securities Act of 1933, as amended (the Securities Act). The Note Purchase Agreement contains customary representations and warranties of the parties thereto and indemnification and contribution provisions under which the Obligors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

The Issuers closed the Offering on August 4, 2014. Their obligations under the Compressco Senior Notes are jointly and severally, and fully and unconditionally, guaranteed on a senior unsecured basis initially by each of Compressco Partners’ domestic restricted subsidiaries (other than Compressco Finance) that guarantee Compressco Partners’ other indebtedness. The Compressco Senior Notes and the subsidiary guarantees thereof (together, the Securities) were issued pursuant to an indenture described below.

The Initial Purchasers intend to resell the Securities (i) to "qualified institutional buyers," as defined in Rule 144A under the Securities Act (Rule 144A), in private sales exempt from registration under the Securities Act in accordance with Rule 144A, and (ii) to investors other than U.S. persons, pursuant to offers and sales that occur outside of the U.S. in accordance with Regulation S under the Securities Act. The offer and sale of the Securities have not been registered under the Securities Act or applicable state securities laws, and the Securities may not be offered or sold in the U.S. absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.


13



Compressco Partners used the net proceeds of the Offering of approximately $337.8 million (consisting of $350.0 million aggregate principal amount net of a $5.2 million discount and certain fees and offering expenses) to fund a portion of the $825.0 million cash purchase price for the CSI Acquisition, to pay certain acquisition expenses and to repay a portion of outstanding borrowings under the Compressco Partners’ existing credit facility.

Pursuant to the Note Purchase Agreement, CSI and any domestic subsidiaries of CSI required to guarantee the Compressco Senior Notes pursuant to the indenture governing the Compressco Senior Notes were joined as parties to the Note Purchase Agreement pursuant to a purchase agreement joinder, dated August 4, 2014.

The Obligors issued the Securities pursuant to the Indenture dated as of August 4, 2014(the Indenture) by and among the Obligors and U.S. Bank National Association, as trustee (the Trustee). The Compressco Senior Notes accrue interest at a rate of 7.25% per annum. Interest on the Compressco Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning February 15, 2015. The Compressco Senior Notes are scheduled to mature on August 15, 2022.

On and after August 15, 2017, Compressco Partners may on one or more occasions redeem the Compressco Senior Notes, in whole or in part, upon not less than 30-days’ nor more than 60-days’ prior notice, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and liquidated damages thereon, if any, to the applicable redemption date, subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the 12-month period beginning on August 15 of the years indicated below:
Date
 
Price
2017
 
105.438
%
2018
 
103.625
%
2019
 
101.813
%
2020 and thereafter
 
100
%

In addition, any time or from time to time before August 15, 2017, Compressco Partners may redeem all or a part of the Compressco Senior Notes at a redemption price equal to 100% of the principal amount of the Compressco Senior Notes redeemed, plus an applicable "make whole" prepayment premium and interest up to the redemption date.

Prior to August 15, 2017, Compressco Partners may, on one or more occasions redeem up to 35% of the principal amount of the Compressco Senior Notes with an amount of cash not greater than the amount of the net cash proceeds from one or more equity offerings at a redemption price equal to 107.250% of the principal amount of the Compressco Senior Notes to be redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption, subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date, as long as (a) at least 65% of the aggregate principal amount of the Compressco Senior Notes originally issued on the issue date (excluding notes held by Compressco Partners and its subsidiaries) remains outstanding after each such redemption; and (b) the redemption occurs within 180 days after the date of the closing of the equity offering.

The Indenture contains customary covenants restricting Compressco Partners’ ability and the ability of its restricted subsidiaries to: (i) pay dividends and make certain distributions, investments and other restricted payments; (ii) incur additional indebtedness or issue certain preferred shares; (iii) create certain liens; (iv) sell assets; (v) merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; (vi) enter into transactions with affiliates; and (vii) designate its subsidiaries as unrestricted subsidiaries under the Indenture. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting Compressco Partners, subject to the satisfaction of certain conditions, to transfer assets to certain of its unrestricted subsidiaries. Moreover, if the Compressco Senior Notes receive an investment grade rating from at least two rating agencies and no default has occurred and is continuing under the Indenture, many of the restrictive covenants in the Indenture will be terminated. The Indenture also contains customary events of default and acceleration provisions relating to such events of default, which provide that upon an event of default under the Indenture, the Trustee or the holders of at least 25% in aggregate principal amount of the Compressco Senior Notes then outstanding may declare all amounts owing under the Compressco Senior Notes to be due and payable.
 

14



In connection with the Offering of the Compressco Senior Notes, the Obligors entered into the Registration Rights Agreement dated as of August 4, 2014 (the Registration Rights Agreement) with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the Initial Purchasers, obligating the Obligors to use commercially reasonable efforts to file a registration statement with the Securities and Exchange Commission (the SEC) registering an exchange offer by the Obligors that would allow holders of the Securities to exchange their restricted Securities for registered freely tradable notes having substantially the same terms as the Securities and evidencing the same indebtedness as the restricted Securities. Under certain circumstances, in lieu of a registered exchange offer, the Obligors must use commercially reasonable efforts to file a shelf registration statement for the resale of the Securities. If, among other things, such exchange offer registration statement is not declared effective by the SEC on or prior to 365 days after the closing of the Offering, or the exchange offer has not been consummated within 30 business days following the expiration of the 365-day period following the closing of the Offering to have an exchange offer registration statement declared effective by the SEC, the Obligors will be required to pay to the holders of the Compressco Senior Notes liquidated damages in an amount equal to 0.25% per annum on the principal amount of the Compressco Senior Notes held by such holder during the 90-day period immediately following the occurrence of such registration default, and if such registration default is not cured, such amount of liquidated damages shall increase by 0.25% per annum at the end of such 90-day period, such that the maximum amount of liquidated damages for all registration defaults would be one-half of one percent (0.5%) per annum.

Compressco Partners New Bank Credit Facility

On August 4, 2014, in connection with the CSI Acquisition, Compressco Partners entered into a new credit agreement (the New Partnership Credit Agreement), and it borrowed $210.0 million, which was used to fund, in part, Compressco Partners' $825.0 million CSI Acquisition purchase price. In addition, the New Partnership Credit Agreement borrowings were used to pay fees and expenses related to the CSI Acquisition, the Compressco Senior Notes offering, and the New Partnership Credit Agreement, and to repay the $38.1 million balance outstanding under Compressco Partners' previous Partnership Credit Agreement dated October 15, 2013, which was then terminated. Approximately $0.8 million of deferred financing costs associated with that terminated Partnership Credit Agreement will be expensed and charged to income during the third quarter of 2014. Under the New Partnership Credit Agreement, Compressco Partners and Compressco Partners Sub, Inc. were named as the borrowers, and all obligations under the New Partnership Credit Agreement are guaranteed by all of Compressco Partners' existing and future, direct and indirect, domestic restricted subsidiaries, other than domestic subsidiaries that are wholly owned by foreign subsidiaries. We are not a borrower or a guarantor under the New Partnership Credit Agreement. The New Partnership Credit Agreement includes a maximum credit commitment of $400.0 million, and included within such amount is availability for letters of credit (with a sublimit of $20.0 million) and swingline loans (with a sublimit of $60.0 million).

The New Partnership Credit Agreement is available to provide Compressco Partners' working capital needs, letters of credit, and for general partnership purposes, including capital expenditures and potential future expansions or acquisitions. So long as Compressco Partners is not in default, the New Partnership Credit Agreement can also be used to fund Compressco Partners’ quarterly distributions at the option of the board of directors of Compressco Partners' general partner (provided, that after giving effect to such distributions, the borrowers will be in compliance with the financial covenants). Borrowings under the New Partnership Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default. The maturity date of the New Partnership Credit Agreement is August 4, 2019.

Borrowings under the New Partnership Credit Agreement bear interest at a rate per annum equal to, at Compressco Partners' option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two, three, or six months (as selected by Compressco Partners), plus a leverage-based margin or (b) a base rate plus a leverage-based margin; such base rate shall be determined by reference to the highest of (1) the prime rate of interest per annum announced from time to time by Bank of America, N.A. (2) the Federal Funds rate plus 0.50% per annum and (3) LIBOR (adjusted to reflect any required bank reserves) for a one month interest period on such day plus 1.00% per annum. Initially, from the closing date until the delivery of the financial statements for the first full fiscal quarter after closing, LIBOR based loans will have an applicable margin of 2.75% per annum, and base rate loans will have an applicable margin of 1.75% per annum; thereafter, the applicable margin will range between 1.75% and 2.50% per annum for LIBOR based loans and 0.75% and 1.50% per annum for base rate loans based on Compressco Partners' consolidated total leverage ratio when financial statements are delivered. In addition to paying interest on outstanding principal under the New Partnership Credit Agreement, Compressco Partners is required to pay a commitment fee in respect of the unutilized commitments thereunder

15



initially at the rate of 0.50% per annum until the delivery of the financial statements for the first full quarter after the closing date and thereafter at the applicable rate ranging from 0.375% to 0.50% per annum, paid quarterly in arrears based on Compressco Partners' consolidated total leverage ratio. Compressco Partners is also required to pay a customary letter of credit fee equal to the applicable margin on revolving credit LIBOR loans, fronting fees and other fees, agreed to with the administrative agent and lenders.

The New Partnership Credit Agreement requires Compressco Partners to maintain (i) a minimum consolidated interest coverage ratio (ratio of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges) of 3.0 to 1.0, (ii) a maximum consolidated total leverage ratio (ratio of consolidated total indebtedness to consolidated EBITDA) of 5.5 to 1.0 (with step downs to 5.0 to 1.0), and (iii) a maximum consolidated secured leverage ratio (consolidated secured indebtedness to consolidated EBITDA) of 4.0 to 1.0, in each case, as of the last day of each fiscal quarter, calculated on a trailing four quarters basis. In addition, the New Partnership Credit Agreement includes customary negative covenants that, among other things, limit Compressco Partners' ability to incur additional debt, incur, or permit certain liens to exist, or make certain loans, investments, acquisitions, or other restricted payments. The New Partnership Credit Agreement provides that Compressco Partners can make distributions to holders of its common and subordinated units, but only if there is no default or event of default under the facility.

All obligations under the New Partnership Credit Agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first lien security interest in substantially all of Compressco Partners' assets and the assets of its existing and future domestic subsidiaries, and all of the capital stock of its existing and future subsidiaries (limited in the case of foreign subsidiaries, to 66% of the voting stock of first tier foreign subsidiaries to the extent security over a greater percentage would result in a material tax liability).

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 its remaining offshore platforms previously destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners. We also have asset retirement obligations associated with operated 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. The value of our asset retirement obligations for non-Maritech properties was approximately $8.1 million and $7.6 million as of June 30, 2014 and December 31, 2013, respectively. The changes in consolidated asset retirement obligations during the three month period ended June 30, 2014, are as follows:
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
(In Thousands)
Beginning balance for the period, as reported
$
47,167

 
$
50,904

Activity in the period:


 

Accretion of liability
181

 
371

Revisions in estimated cash flows
11,299

 
20,680

Settlement of retirement obligations
(16,459
)
 
(29,767
)
Ending balance as of June 30
$
42,188

 
$
42,188


Revisions in estimated cash flows during the first six months of 2014 resulted primarily from changes that arose during the period for additional work incurred and estimates for additional work anticipated to be required on Maritech’s offshore oil and gas properties, including remediation work required on certain wells that had been previously plugged.

NOTE E – MARKET RISKS AND DERIVATIVE 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, including the variable rate credit facility

16



of Compressco Partners, 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.

Derivative Contracts

Foreign Currency Derivative Contracts. In October 2013, we and Compressco Partners began entering into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of June 30, 2014, we and Compressco Partners had the following foreign currency derivative contracts outstanding relating to portions of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward purchase pounds sterling
 
$
4,246

 
1.71
 
7/18/2014
Forward purchase Brazil real
 
$
1,667

 
2.22
 
7/18/2014
Forward purchase Canadian dollar
 
$
3,284

 
1.07
 
7/18/2014
Forward sale Mexican peso
 
$
8,289

 
13.01
 
7/18/2014
Forward purchase Argentina peso
 
$
3,694

 
8.26
 
7/18/2014
Forward purchase Canadian dollar
 
$
1,891

 
1.07
 
7/18/2014
Forward purchase Mexican peso
 
$
2,129

 
13.01
 
7/18/2014

Under this program, we and Compressco Partners may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they will not be formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.

The fair value of foreign currency derivative instruments are based on quoted market values as reported to us by our counterparty (a level 2 measurement). The fair values of our foreign currency derivative instruments as of June 30, 2014, are as follows:
Foreign currency derivative instruments
Balance Sheet Location
 
 Fair Value at
June 30, 2014

 

 
(In Thousands)
Forward purchase contracts
 
Current assets
 
$
47

Forward sale contracts
 
Current assets
 
82

Forward purchase contracts
 
Current liabilities
 
(176
)
Total
 

 
$
(47
)

None of the foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the six month period ended June 30, 2014, we recognized approximately $0.05 million of net losses in other income (expense) associated with our foreign currency derivative program.


17



Other Hedge Contracts

Transaction gains and losses attributable to a foreign currency transaction that is designated as, and is effective as, an economic hedge of a net investment in a foreign entity is subject to the same accounting as translation adjustments. As such, the effect of a rate change on a foreign currency hedge is the same as the accounting for the effect of the rate change on the net foreign investment; both are recorded in the cumulative translation account, a component of stockholders’ equity, and are partially or fully offsetting. In July 2012, we borrowed 10.0 million euros (approximately $13.6 million equivalent as of June 30, 2014) 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 loss charged to the cumulative translation adjustment account of $1.0 million net of taxes at June 30, 2014, with no ineffectiveness recorded.

NOTE F – EQUITY
 
Changes in equity for the three and six month periods ended June 30, 2014 and 2013, are as follows:
 
Three Months Ended June 30,
 
2014
 
2013
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
548,062

 
$
41,585

 
$
589,647

 
$
548,577

 
$
42,094

 
$
590,671

Net income (loss)
(2,457
)
 
907

 
(1,550
)
 
(2,931
)
 
423

 
(2,508
)
Foreign currency translation adjustment, including taxes of ($750) in 2014 and taxes of $810 in 2013
3,244

 

 
3,244

 
(2,786
)
 

 
(2,786
)
Comprehensive income (loss)
787

 
907

 
1,694

 
(5,717
)
 
423

 
(5,294
)
Exercise of common stock options
105

 

 
105

 
207

 

 
207

Distributions to public unitholders

 
(1,265
)
 
(1,265
)
 

 
(1,202
)
 
(1,202
)
Equity-based compensation
1,184

 
235

 
1,419

 
1,398

 
371

 
1,769

Treasury stock and other
(352
)
 
(34
)
 
(386
)
 
(242
)
 
(13
)
 
(255
)
Tax benefit upon exercise of stock options
(132
)
 

 
(132
)
 
(153
)
 

 
(153
)
Ending balance as of June 30
$
549,654

 
$
41,428

 
$
591,082

 
$
544,070

 
$
41,673

 
$
585,743


 
Six Months Ended June 30,
 
2014
 
2013
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
555,541

 
$
41,957

 
$
597,498

 
$
551,120

 
$
42,188

 
$
593,308

Net income
(9,391
)
 
1,751

 
(7,640
)
 
(1,628
)
 
1,220

 
(408
)
Foreign currency translation adjustment, including taxes of $446 in 2014 and taxes of $546 in 2013
777

 

 
777

 
(8,722
)
 

 
(8,722
)
Comprehensive Income (loss)
(8,614
)
 
1,751

 
(6,863
)
 
(10,350
)
 
1,220

 
(9,130
)
Exercise of common stock options
391

 

 
391

 
989

 

 
989

Distributions to public unitholders

 
(2,508
)
 
(2,508
)
 

 
(2,393
)
 
(2,393
)
Equity-based compensation
2,836

 
437

 
3,273

 
2,930

 
693

 
3,623

Treasury stock and other
(368
)
 
(209
)
 
(577
)
 
(230
)
 
(35
)
 
(265
)
Tax benefit upon exercise of stock options
(132
)
 

 
(132
)
 
(389
)
 

 
(389
)
Ending balance as of June 30
$
549,654

 
$
41,428

 
$
591,082

 
$
544,070

 
$
41,673

 
$
585,743


18




Activity within the foreign currency translation adjustment account during the periods includes no reclassifications to net income.

As discussed in Note B - Acquisitions, to finance a portion of the CSI Acquisition purchase price, Compressco Partners completed a public offering of its common units pursuant to which it sold 15,280,000 of New Units. . A subsidiary of our Compressco Partners GP Inc. subsidiary purchased 1,391,113 of the New Units. Additionally, Compressco Partners GP Inc. contributed approximately $7.3 million in order to maintain its approximately 2% general partner interest in Compressco Partners. Prior to the CSI Acquisition and the offering of the New Units by Compressco Partners, we owned approximately 82% of Compressco Partners through our ownership of common units, subordinated units, and general partner interest (through which we hold incentive distribution rights). Following the CSI Acquisition, and the issuance of the New Units, our ownership of Compressco Partners is approximately 47%, consisting of approximately 45% limited partner interest (common and subordinated units) plus the approximately 2% general partner interest. Through Compressco Partners GP Inc., we will continue to manage Compressco Partners, and, accordingly, we will continue to consolidate the results of Compressco Partners as part of our consolidated results of operations. In connection with the Compressco Partners' offering of the New Units, Compressco Partners granted an option to the underwriters (subject to certain terms and conditions as set forth in the Underwriting Agreement) to purchase up to an additional 2,292,000 common units at the public offering price of $23.50 per common unit, less the underwriting discount. This option expires August 23, 2014. As a result of these transactions, and beginning in the third quarter of 2014, the non-controlling interest associated with the public ownership of Compressco Partners will be significantly increased.

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.
 
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 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

19



cooling, and other associated services in many of the major oil and gas producing regions 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. The Compressco segment 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. As a result of the August 4, 2014, acquisition of CSI, we have significantly expanded the scope of our Compressco segment. See Note B - Acquisitions for further discussion.
 
Our Offshore Division consists of two operating segments: Offshore Services and Maritech. The Offshore Services segment provides (1) downhole and subsea services such as well plugging and abandonment and workover 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 saturation diving services.
 
The Maritech segment is a limited 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 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 and are eliminated in consolidation. “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 is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
Revenues from external customers
 

 
 

 
 

 
 

Product sales
 

 
 

 
 
 
 
Fluids Division
$
78,905

 
$
74,741

 
$
152,325

 
$
143,902

Production Enhancement Division
 

 
 

 


 
 

Production Testing

 

 

 

Compressco
2,065

 
1,341

 
3,902

 
2,429

Total Production Enhancement Division
2,065

 
1,341

 
3,902

 
2,429

Offshore Division
 

 
 

 


 
 

Offshore Services
354

 
1,584

 
473

 
1,713

Maritech
1,547

 
1,684

 
2,923

 
2,844

Total Offshore Division
1,901

 
3,268

 
3,396

 
4,557

Consolidated
$
82,871

 
$
79,350

 
$
159,623

 
$
150,888

 
 
 
 
 


 
 

20



 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
Services and rentals
 

 
 

 


 
 
Fluids Division
$
37,423

 
$
25,493

 
$
69,163

 
$
50,324

Production Enhancement Division
 

 
 

 


 


Production Testing
42,377

 
47,433

 
86,015

 
102,040

Compressco
29,950

 
26,640

 
57,877

 
56,377

Intersegment eliminations
(1,085
)
 
(293
)
 
(1,709
)
 
(573
)
Total Production Enhancement Division
71,242

 
73,780

 
142,183

 
157,844

Offshore Division
 

 
 

 
 

 
 

Offshore Services
55,887

 
62,871

 
91,098

 
100,391

Maritech

 

 

 

Intersegment eliminations
(4,934
)
 
(20,393
)
 
(6,721
)
 
(29,787
)
Total Offshore Division
50,953

 
42,478

 
84,377

 
70,604

Corporate Overhead

 

 

 

Consolidated
$
159,618

 
$
141,751

 
$
295,723

 
$
278,772

 
 
 
 
 
 
 
 
Intersegment revenues
 

 
 

 
 
 
 
Fluids Division
$
322

 
$
(8
)
 
$
307

 
$
40

Production Enhancement Division
 

 
 

 


 
 

Production Testing

 

 

 

Compressco

 

 

 

Total Production Enhancement Division

 

 

 

Offshore Division
 

 
 

 
 

 
 

Offshore Services

 

 

 

Maritech

 

 

 

Intersegment eliminations

 

 

 

Total Offshore Division

 

 

 

Intersegment eliminations
(322
)
 
8

 
(307
)
 
(40
)
Consolidated
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Total revenues
 

 
 

 
 
 
 
Fluids Division
$
116,650

 
$
100,226

 
$
221,795

 
$
194,266

Production Enhancement Division


 
 

 


 
 

Production Testing
42,377

 
47,433

 
86,015

 
102,040

Compressco
32,015

 
27,981

 
61,779

 
58,806

Intersegment eliminations
(1,085
)
 
(293
)
 
(1,709
)
 
(573
)
Total Production Enhancement Division
73,307

 
75,121

 
146,085

 
160,273

Offshore Division
 

 
 

 


 
 

Offshore Services
56,241

 
64,455

 
91,571

 
102,104

Maritech
1,547

 
1,684

 
2,923

 
2,844

Intersegment eliminations
(4,934
)
 
(20,393
)
 
(6,721
)
 
(29,787
)
Total Offshore Division
52,854

 
45,746

 
87,773

 
75,161

Corporate Overhead

 

 

 

Intersegment eliminations
(322
)
 
8

 
(307
)
 
(40
)
Consolidated
$
242,489

 
$
221,101

 
$
455,346

 
$
429,660



21



 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
 
 

 
 

 
 
 
 
Income (loss) before taxes
 

 
 

 
 
 
 
Fluids Division
$
17,059

 
$
17,847

 
$
35,536

 
$
34,852

Production Enhancement Division


 
 

 


 
 

Production Testing
(249
)
 
4,317

 
(3,047
)
 
10,615

Compressco
5,477

 
3,161

 
10,664

 
8,386

Intersegment eliminations
3

 

 
6

 

Total Production Enhancement Division
5,231

 
7,478

 
7,623

 
19,001

Offshore Division
 

 
 

 


 
 

Offshore Services
1,833

 
9,688

 
(6,139
)
 
4,485

Maritech
(10,698
)
 
(23,743
)
 
(17,237
)
 
(28,651
)
Intersegment eliminations

 

 

 

Total Offshore Division
(8,865
)
 
(14,055
)
 
(23,376
)
 
(24,166
)
Corporate Overhead(1)
(15,919
)
 
(15,665
)
 
(32,960
)
 
(30,871
)
Consolidated
$
(2,494
)
 
$
(4,395
)
 
$
(13,177
)
 
$
(1,184
)
 
 
June 30,
 
2014
 
2013
 
(In Thousands)
Total assets
 

 
 

Fluids Division
$
439,793

 
$
389,580

Production Enhancement Division
 

 
 

Production Testing
333,531

 
320,801

Compressco
233,956

 
233,288

Total Production Enhancement Division
567,487

 
554,089

Offshore Division
 

 
 

Offshore Services
170,663

 
181,752

Maritech
20,727

 
25,640

Intersegment eliminations

 

Total Offshore Division
191,390

 
207,392

Corporate Overhead
29,596

 
20,491

Consolidated
$
1,228,266

 
$
1,171,552

(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
General and administrative expense
$
10,064

 
$
10,364

 
$
21,458

 
$
20,275

Depreciation and amortization
527

 
579

 
1,081

 
1,160

Interest expense
4,610

 
4,090

 
9,141

 
8,242

Other general corporate (income) expense, net
718

 
632

 
1,280

 
1,194

Total
$
15,919

 
$
15,665

 
$
32,960

 
$
30,871


22




NOTE I – SUBSEQUENT EVENTS

On July 11, 2014, the Board of Compressco Partners GP Inc. confirmed that the conditions set forth in the definition of "Subordination Period" contained in the Partnership Agreement of Compressco Partners will be met upon the payment of the August 15, 2014 cash distribution. As a result, effective August 18, 2014, the 6,273,970 subordinated units of Compressco Partners will automatically convert on a one-for-one basis into common units. After the conversion of our subordinated units, we will no longer have any subordinated units and our common units will no longer be entitled to arrearages in cash distributions. The conversion of these subordinated units does not impact the amount of cash distributions paid to us by Compressco Partners or the total number of outstanding units of Compressco Partners. These subordinated units were issued to us by Compressco Partners in connection with its initial public offering.

On August 4, 2014, pursuant to a stock purchase agreement dated July 20, 2014, a subsidiary of Compressco Partners acquired all of the outstanding capital stock of CSI for $825.0 million cash, subject to an adjustment based on working capital. See Note B - Acquisitions for further discussion of this acquisition and related financings.

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC on March 3, 2014. This discussion includes forward-looking statements that involve certain risks and uncertainties.

Business Overview  

With the August 4, 2014, acquisition by Compressco Partners of Compressor Systems, Inc. (CSI), a Delaware corporation, (the CSI Acquisition), we have effected a significant change in the composition of our consolidated operations and our consolidated capital structure. The acquisition of CSI is expected to increase our Compressco segment's total horsepower (HP) from approximately 187,000 to over 1,045,000 and will allow the Compressco segment to utilize an expanded range of compressor packages (from 20 HP to 2,370 HP units) for compression services to customers. It is anticipated that this expansion of the Compressco segment's service offerings will allow it to participate in the compression market at a broader level. Strategically, the acquisition is expected to afford the Compressco segment the opportunity to capture significant synergies associated with its product and service offerings and its fabrication and manufacturing operations, further penetrate new and existing markets, and to achieve administrative efficiencies and other strategic benefits. A portion of the $825.0 million purchase price for CSI was funded through the offering by Compressco Partners of 15,280,000 common units (the New Units), which together with the contribution by our Compressco Partners GP Inc. subsidiary of additional capital, resulted in our ownership of Compressco Partners being reduced from approximately 82% to approximately 47%. In connection with Compressco Partners' offering of the New Units, it granted an option to the underwriters (subject to certain terms and conditions as set forth in the Underwriting Agreement) to purchase up to an additional 2,292,000 common units at the public offering price of $23.50 per common unit, less the underwriting discount. This option expires August 23, 2014. If exercised, Compressco Partners intends to use all or a portion of the proceeds generated from the exercise of this option to reduce outstanding indebtedness. Through our wholly owned subsidiary, Compressco Partners GP Inc., we will continue to manage Compressco Partners, and accordingly, we will continue to consolidate the results of Compressco Partners as part of our consolidated results of operations. Despite the decreased ownership percentage in Compressco Partners, our quarterly distributions from Compressco Partners following the CSI Acquisition are expected to increase compared to the amount of distributions prior to the acquisition, as a result of the increased operations of Compressco Partners and the incentive distribution rights held by our Compressco Partners GP Inc. subsidiary.

The CSI Acquisition purchase price was funded from (i) the issuance of 7.25% Senior Notes due 2022 in the aggregate principal amount of $350.0 million by Compressco Partners and its subsidiary, Compressco Finance, Inc. (the Compressco Senior Notes) resulting in net proceeds of $337.8 million (after deducting a $5.2 million discount and certain transaction related fees), (ii) Compressco Partners' issuance of 15,280,000 common units (the New Units) in an underwritten public offering resulting in net proceeds of $346.0 million, and (iii) a portion of the $210.0 million borrowed under Compressco Partners' new $400 million bank revolving credit facility (the New

23



Partnership Credit Agreement). A subsidiary of our Compressco Partners GP Inc. subsidiary purchased 1,391,113 of the New Units for approximately $32.7 million and Compressco Partners GP Inc. contributed approximately $7.3 million in order to maintain its approximately 2% general partner interest in Compressco Partners. These investments were funded through approximately $40.0 million borrowed under our existing Credit Agreement.

Consolidated results of operations for the quarter ended June 30, 2014, were improved compared to the prior year period, but continue to reflect the challenges faced by many of our businesses. Our Compressco segment reported increased revenues and profitability due to continued strength of its unconventional compression services and increased sales of compressor packages compared to the prior year period. Our Fluids Division reported increased revenues despite continued weakness in its offshore clear brine fluids (CBF) business and increased competition for its water management business. These increased Fluids Division revenues were offset, however, by increased operating expenses in several of our markets. Offshore Services segment operations were affected by decreased work performed for Maritech and the impact of unseasonal weather and barge repairs that affected its heavy lift services business compared to the prior year period. Significant challenges continue for our Production Testing segment, which again reported decreased revenues compared to the prior year period, primarily due to the impact of increased competition and decreased activity by certain customers in certain key U.S. and Canadian markets. During 2013, a significant South Texas Production Testing customer suspended its activity in the region and the Production Testing segment's significant customer in Mexico suspended its operations in the northern region of Mexico. The segment continues to seek to expand its customer base in an attempt to replace the revenues from these customers. In addition, the impact of increased competition has negatively affected pricing for Production Testing services in selected markets. Maritech results included $11.1 million of excess decommissioning costs charged to earnings during the current year quarter, a decrease of $12.5 million compared to the prior year period. Results of operations for our Fluids and Production Testing segments also include the positive impact on consolidated revenues of the January acquisitions of TD Water Transfer and the remaining ownership interest of TETRA Arabia. We implemented additional cost reduction steps during the first half of 2014 and continue to review each of our businesses to adjust our cost structure and operational footprint in light of challenging market conditions.

Consolidated operating cash flows during the six months ended June 30, 2014, increased approximately $10.2 million compared to the prior year period. This increase was largely due to a decrease in the amount spent on Maritech decommissioning activity. These increased operating cash flows, along with available cash balances and additional credit facility borrowings, were used to fund much of the approximately $18.3 million spent on the acquisition of TD Water Transfer and the remaining ownership interest of TETRA Arabia, net of cash acquired, and $52.2 million of capital expenditures during the current year period. We continue to evaluate opportunities to further expand certain of our businesses through acquisitions. As discussed above, we also continue to review opportunities for cost reductions, such as the headcount reductions we made during the first half of 2014, in order to maximize our operating cash flows and right-size our operations in light of continuing operating challenges in certain markets. Efforts have also begun during the third quarter of 2014 to integrate the newly acquired CSI operations into Compressco Partners and to begin to capture the anticipated synergies of the combined operations. As a result of $29.8 million of decommissioning work performed by Maritech during the first half of 2014, our remaining decommissioning liability for such work is approximately $34.0 million as of June 30, 2014. As of August 8, 2014, we have approximately $121.9 million available under our revolving credit facility, and Compressco Partners has an additional $179.1 million available under its New Partnership Credit Agreement facility.

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, 2013. 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.


24



Goodwill Impairment Testing - Goodwill is assessed for impairment on an annual basis and more frequently if indicators of impairment exist. First we have the option to evaluate on a qualitative basis the significance of all identified events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If based on the events and circumstances we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a two-step goodwill impairment test, where we first compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value is in excess of the reporting unit carrying amount, no additional steps are necessary. However, if the carrying amount of the reporting unit exceeds its estimated fair value, a second step is performed, using a hypothetical purchase price methodology to allocate total fair value to the reporting unit's balance sheet. The resulting allocation of fair value to goodwill is then compared to the reporting units' goodwill balance, and any excess to fair value is then recorded in our statement of operations as an impairment. Our estimates of reporting unit fair value are imprecise and are subject to our estimates of the future cash flows of each business and our judgment as to how these estimated cash flows translate into each business’ estimated fair value. These estimates and judgments are affected by numerous factors, including the general economic environment at the time of our assessment, which affects our overall market capitalization.

As of June 30, 2014, our Fluids, Offshore Services, Production Testing, and Compressco reporting units reflect goodwill in the amounts of $3.2 million, $3.9 million, $122.9 million, and $72.2 million, respectively. We are not aware of any events or circumstances that would indicate that it is more likely than not that the fair values of our Fluids, Offshore Services, or our Compressco reporting units are below their carrying values since our last test date of December 31, 2013. However, because the estimated fair value of our Production Testing reporting unit currently exceeds its carrying value by approximately 12%, there is a reasonable possibility that our Production Testing reporting unit'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 Production Testing reporting unit include the impact of competition, future overall activity levels in the regions in which we operate and, particularly, the activity levels of our significant customers, and other factors affecting the rate of future growth of the Production Testing business. Further decreases in such demand could have a further negative effect on the fair value of our Production Testing reporting unit.

Results of Operations

Three months ended June 30, 2014 compared with three months ended June 30, 2013.

As a result of the significantly expanded operations of Compressco Partners following its August 4, 2014, CSI Acquisition, our consolidated revenues, earnings, and cash flows will be significantly affected. See below for further detailed discussion of the expected impact of this transaction on the Compressco segment.
 
Consolidated Comparisons
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
242,489

 
$
221,101

 
$
21,388

 
9.7
 %
Gross profit
35,475

 
31,049

 
4,426

 
14.3
 %
Gross profit as a percentage of revenue
14.6
 %
 
14.0
 %
 
 

 
 

General and administrative expense
32,270

 
34,028

 
(1,758
)
 
(5.2
)%
General and administrative expense as a percentage of revenue
13.3
 %
 
15.4
 %
 
 

 
 

Interest expense, net
4,604

 
4,178

 
426

 
10.2
 %
Other (income) expense, net
1,095

 
(2,762
)
 
3,857

 
(139.6
)%
Income (loss) before taxes
(2,494
)
 
(4,395
)
 
1,901

 
(43.3
)%
Income (loss) before taxes as a percentage of revenue
(1.0
)%
 
(2.0
)%
 
 

 
 

Provision (benefit) for income taxes
(944
)
 
(1,887
)
 
943

 
(50.0
)%
Net income (loss)
(1,550
)
 
(2,508
)
 
958

 
(38.2
)%
Net (income) attributable to noncontrolling interest
(907
)
 
(423
)
 
(484
)
 
 

Net income (loss) attributable to TETRA stockholders
$
(2,457
)
 
$
(2,931
)
 
$
474

 
(16.2
)%

25



 
Consolidated revenues for the quarter ended June 30, 2014, increased compared to the prior year period, primarily due to increased revenues for the Fluids Division. The increase in the Fluids Division revenues was primarily due to increased water management services revenues, foreign sales of clear brine fluids (CBF) products, and increased sales of manufactured products. Revenues for our Compressco segment also increased, due to increased compressor package sales and increased unconventional compression services activity. These increases in Fluids and Compressco segment revenues were partly offset by decreased revenues in our Production Testing segment. Revenues for our Offshore Services segment decreased, primarily due to decreased heavy lift services revenues from Maritech, although Offshore Services segment revenues from third party customers increased. Decreased revenues in our Production Testing segment reflect the suspension of activity by a significant U.S. customer and increased competitive pressure in several key North American markets. Consolidated gross profit increased during the current year quarter compared to the prior year period, primarily due to the decreased amount of excess decommissioning expenses recorded by our Maritech segment compared to the prior year period associated with its ongoing extinguishment of its remaining decommissioning liabilities. In addition, gross profit for the Compressco and Fluids segments also improved; however, these improvements were more than offset by the decreased profitability of our Offshore Services and Production Testing segments compared to the prior year period.
 
Consolidated general and administrative expenses decreased during the second quarter of 2014 compared to the prior year period, as increases in Fluids and Compressco administrative cost levels were more than offset by decreases by our Production Testing, Offshore Services, Maritech, and Corporate segments. The decreased consolidated general and administrative costs were a result of cost reduction efforts by our Production Testing and Offshore Services segments, and were realized despite approximately $2.1 million of transaction related expenses, including costs associated with Compressco's CSI Acquisition.
 
Consolidated interest expense increased due to increased borrowings, including increased borrowings by our Compressco segment. Interest expense levels going forward are expected to increase significantly as a result of borrowings associated with the CSI Acquisition.
 
Consolidated other income decreased as a result of the consolidation of TETRA Arabia, as the earnings during the prior year period from the unconsolidated subsidiary were reported in other income.
 
The consolidated benefit for income taxes decreased during the prior year period due to a decreased pretax loss in the current period.
 
Divisional Comparisons
 
Fluids Division
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
116,650

 
$
100,226

 
$
16,424

 
16.4
 %
Gross profit
26,273

 
25,875

 
398

 
1.5
 %
Gross profit as a percentage of revenue
22.5
%
 
25.8
%
 
 

 
 

General and administrative expense
9,197

 
8,498

 
699

 
8.2
 %
General and administrative expense as a percentage of revenue
7.9
%
 
8.5
%
 
 

 
 

Interest (income) expense, net
(103
)
 
(59
)
 
(44
)
 
 

Other (income) expense, net
120

 
(411
)
 
531

 
 

Income before taxes
$
17,059

 
$
17,847

 
$
(788
)
 
(4.4
)%
Income before taxes as a percentage of revenue
14.6
%
 
17.8
%
 
 

 
 

 
The increase in Fluids Division revenues during the second quarter of 2014 compared to the prior year period was primarily due to approximately $11.9 million of increased service revenues. This increase was largely due to increased international completion services revenue, including approximately $2.5 million from the January 2014 acquisition of the additional 50% interest in TETRA Arabia that resulted in TETRA Arabia becoming a wholly owned consolidated subsidiary. In addition, the January 2014 acquisition of TD Water Transfer also contributed to

26



the continued growth of our U.S. water management business revenues, despite the impact from increased competition. Fluids Division product sales increased $4.5 million. Increases in foreign CBF product sales revenues were largely offset by decreased U.S. CBF product sales revenues, primarily due to decreased sales from the U.S. Gulf of Mexico that were caused by customer operational delays. In addition, increased European and U.S. demand for the Division's calcium chloride manufactured products resulted in increased product sales revenues, although they were partially offset by decreased bromine sales.
 
Fluids Division gross profit during the second quarter of 2014 increased slightly compared to the prior year period, as increased revenues from water management services were largely offset by the impact of increased competition on prices and due to increased operating expenses in certain operating regions. Increased gross profit associated with foreign CBF product sales and the consolidation of TETRA Arabia was offset by the decreased profitability from decreased Gulf of Mexico CBF activity.
 
Fluids Division income before taxes decreased compared to the prior year period despite the increased gross profit during the second quarter of 2014 due to increased general and administrative expenses and increased other expense due to the consolidation of TETRA Arabia, as its unconsolidated earnings was reflected in other income during the prior year period. Fluids Division general and administrative costs increased, primarily due to increased personnel costs.

Production Enhancement Division
 
Production Testing Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
42,377

 
$
47,433

 
$
(5,056
)
 
(10.7
)%
Gross profit
4,221

 
7,670

 
(3,449
)
 
(45.0
)%
Gross profit as a percentage of revenue
10.0
 %
 
16.2
%
 
 

 
 

General and administrative expense
4,764

 
6,391

 
(1,627
)
 
(25.5
)%
General and administrative expense as a percentage of revenue
11.2
 %
 
13.5
%
 
 

 
 

Interest (income) expense, net
(57
)
 
7

 
(64
)
 
 

Other (income) expense, net
(237
)
 
(3,045
)
 
2,808

 
 

Income (loss) before taxes
$
(249
)
 
$
4,317

 
$
(4,566
)
 
(105.8
)%
Income before taxes as a percentage of revenue
(0.6
)%
 
9.1
%
 
 

 
 

 
Production Testing segment revenues decreased during the second quarter of 2014 compared to the prior year period, primarily due to the impact of decreased activity by customers in certain key U.S. markets. During 2013, a significant South Texas customer suspended its activity in the region and the segment's significant customer in Mexico suspended its operations in the northern region of Mexico. The segment continues to seek to expand its customer base in an attempt to replace the revenues from these customers. Additionally, the impact of increased competition has negatively affected pricing and activity levels for services in selected markets in the U.S. and Canada. These decreases were partially offset by approximately $5.2 million of increased revenues resulting from our January 2014 acquisition of the 50% ownership interest in TETRA Arabia that we did not previously own and which resulted in TETRA Arabia becoming a wholly owned consolidated subsidiary.

Production Testing segment gross profit decreased during the second quarter of 2014 compared to the prior year period due to the impact of the above mentioned decreased activity and pricing levels in certain U.S. and Canadian markets. Increased gross profit resulting from the consolidation of TETRA Arabia was more than offset by the impact of decreased Mexico activity and decreased profitability for the segment's operations in South America and in the Eastern Hemisphere.
 
Production Testing segment loss before taxes was primarily due to the significant decrease in gross profit discussed above. Other income decreased due to the consolidation of the TETRA Arabia subsidiary following the January 2014 acquisition of the other 50% ownership interest. Prior to the acquisition, the segment recorded its share of earnings from the unconsolidated TETRA Arabia subsidiary in other income. Production Testing segment

27



general and administrative expenses decreased due to the impact of costs reductions and due to the $0.5 million net impact from a legal settlement during the current year period.

Compressco Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
32,015

 
$
27,981

 
$
4,034

 
14.4
%
Gross profit
11,085

 
7,702

 
3,383

 
43.9
%
Gross profit as a percentage of revenue
34.6
%
 
27.5
%
 
 

 
 

General and administrative expense
4,990

 
4,197

 
793

 
18.9
%
General and administrative expense as a percentage of revenue
15.6
%
 
15.0
%
 
 

 
 

Interest (income) expense, net
145

 
108

 
37

 
 

Other (income) expense, net
473

 
236

 
237

 
 

Income before taxes
$
5,477

 
$
3,161

 
$
2,316

 
73.3
%
Income before taxes as a percentage of revenue
17.1
%
 
11.3
%
 
 

 
 

    
As a result of the significantly expanded operations of Compressco Partners following its August 4, 2014, CSI Acquisition, the product and compression services revenues, gross profit, general and administrative expenses, interest expense, and pretax earnings of our Compressco segment are expected to be significantly affected. For the three months ended June 30, 2014, CSI had aggregate revenues of $77.3 million.

Compressco segment revenues increased during the second quarter of 2014 compared to the prior year period due to a $3.3 million increase in service revenues. The increase in U.S. service revenues was primarily due to increased unconventional compression services applications activity, primarily in horizontal resource play reservoirs. Increased activity by Compressco's primary customer in Mexico also resulted in increased revenues during the current year period. Compressco has continued to increase its compressor fleet in the U.S. and certain foreign markets to serve increasing demand for services. Revenues from the sales of compressor packages and parts during the second quarter of 2014 increased $0.7 million compared to the prior year period.
 
Compressco segment gross profit increased during the second quarter of 2014 compared to the prior year period, primarily due to the impact of the increased sales of compressor packages and overall cost reduction efforts. In addition, compressor package utilization increased from 82.6% to 85.3%, primarily due to the increased U.S. activity. Primarily as a result of the current reduced Mexico activity described above, Compressco reduced its Mexico operating headcount and relocated equipment to the U.S. during 2013.
 
Income before taxes for the Compressco segment increased during the second quarter of 2014 compared to the prior year period due to the increased gross profit discussed above. Compressco’s administrative expense levels increased compared to the prior year period, primarily due to increased professional and employee expenses. Increased professional expenses include approximately $0.9 million associated with the CSI Acquisition. Interest expense increased as a result of increased borrowings by Compressco Partners under its bank credit facility and is expected to significantly increase following the CSI Acquisition. Other expense increased primarily due to increased foreign currency losses compared to the prior year period.
 

28



Offshore Division
 
Offshore Services Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
56,241

 
$
64,455

 
$
(8,214
)
 
(12.7
)%
Gross profit
4,780

 
13,119

 
(8,339
)
 
(63.6
)%
Gross profit as a percentage of revenue
8.5
%
 
20.4
%
 
 
 
 
General and administrative expense
2,917

 
3,579

 
(662
)
 
(18.5
)%
General and administrative expense as a percentage of revenue
5.2
%
 
5.6
%
 
 
 
 
Interest (income) expense, net
9

 
27

 
(18
)
 
 
Other (income) expense, net
21

 
(175
)
 
196

 
 
Income before taxes
$
1,833

 
$
9,688

 
$
(7,855
)
 
(81.1
)%
Income before taxes as a percentage of revenue
3.3
%
 
15.0
%
 
 
 
 

Revenues for the Offshore Services segment decreased during the second quarter of 2014 compared to the prior year quarter due to decreased revenues from its heavy lift services business. The heavy lift business was affected by unseasonal weather as well as from unexpected repairs required by the TETRA Hedron heavy lift barge during the current year period. The Offshore Services segment was also affected by decreased well abandonment activity in the U.S. Gulf of Mexico. Offshore Services revenues during the three months ended June 30, 2014 and 2013 include approximately $4.9 million and $20.4 million, respectively, of revenues related to work performed for Maritech, which are eliminated in consolidation. A portion of this decreased revenue from Maritech was offset by increased revenues from third parties during the current year period.
 
Gross profit for the Offshore Services segment compared to the prior year period decreased primarily due to the impact of the decreased heavy lift activity levels as discussed above. This decrease occurred despite the impact of cost reduction measures that were implemented during the first half of 2013.
 
Offshore Services segment income before taxes decreased compared to prior year period income primarily due to the decreased gross profit discussed above. Decreased general and administrative expenses reflect the segment's administrative cost reductions taken during the first half of 2013. In addition, other income decreased compared to the prior year period, primarily due to decreased foreign currency gains.

Maritech Segment
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
1,547

 
$
1,684

 
$
(137
)
 
(8.1
)%
Gross profit (loss)
(10,358
)
 
(22,738
)
 
12,380

 
(54.4
)%
General and administrative expense
340

 
999

 
(659
)
 
(66.0
)%
General and administrative expense as a percentage of revenue
22.0
%
 
59.3
%
 
 
 
 
Interest (income) expense, net

 
6

 
(6
)
 
 
Other (income) expense, net

 

 

 
 
Income (loss) before taxes
$
(10,698
)
 
$
(23,743
)
 
$
13,045

 
(54.9
)%
 
As a result of the sale of almost all of its producing properties during 2011 and 2012, Maritech revenues were negligible and are expected to continue to be negligible going forward.
 
Maritech gross loss decreased during the second quarter of 2014 compared to the prior year period due to lower excess decommissioning cost compared to the prior year period. Maritech charged approximately $11.1

29



million of excess decommissioning costs to expense during the current year period, which reflects a $12.5 million decrease for these costs compared to the prior year period. The amount of excess decommissioning cost charged to expense during the current year period was due to additional oil and gas abandonment and decommissioning work required on certain offshore properties, including remediation work required on certain wells that were previously plugged.
 
The reduction in Maritech’s pretax loss during the second quarter of 2014 compared to the prior year period is primarily due to the decreased gross loss discussed above. Maritech administrative costs decreased compared to the prior year period due to decreased legal and professional fee expenses.
 
Corporate Overhead
 
Three Months Ended 
 June 30,
 
Period to Period Change
 
2014
 
2013
 
2014 vs 2013
 
% Change
 
(In Thousands, Except Percentages)
Gross profit (loss) (depreciation expense)
$
(527
)
 
$
(579
)
 
$
52

 
(9.0
)%
General and administrative expense
10,064

 
10,364

 
(300
)
 
(2.9
)%
Interest (income) expense, net
4,610

 
4,090