10-Q



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

FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM             TO            .
 
COMMISSION FILE NUMBER 1-13455
 

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

 
Delaware
74-2148293
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands, Texas
77380
(Address of principal executive offices)
(zip code)
 
(281) 367-1983
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ X ] 
Accelerated filer [   ] 
Non-accelerated filer [   ] (Do not check if a smaller reporting company)
Smaller reporting company [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]
 
As of November 9, 2015, there were 80,230,143 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 

 
 

 
 
 
 
Product sales
$
124,748

 
$
100,021

 
$
359,286

 
$
259,644

Services and rentals
180,396

 
206,350

 
513,269

 
502,073

Total revenues
305,144

 
306,371

 
872,555

 
761,717

Cost of revenues:
 

 
 

 


 


Cost of product sales
92,542

 
102,523

 
261,205

 
244,258

Cost of services and rentals
103,159

 
135,870

 
308,550

 
344,109

Depreciation, amortization, and accretion
38,909

 
33,234

 
116,319

 
78,281

Total cost of revenues
234,610

 
271,627

 
686,074

 
666,648

Gross profit
70,534

 
34,744

 
186,481

 
95,069

General and administrative expense
40,910

 
37,099

 
113,651

 
102,789

Interest expense, net
12,201

 
9,878

 
37,427

 
19,193

Other (income) expense, net
2,000

 
12,594

 
3,927

 
11,091

Income (loss) before taxes
15,423

 
(24,827
)
 
31,476

 
(38,004
)
Provision (benefit) for income taxes
4,687

 
(12,360
)
 
8,997

 
(17,897
)
Net income (loss)
10,736

 
(12,467
)
 
22,479

 
(20,107
)
(Income) loss attributable to noncontrolling interest
(981
)
 
1,930

 
(2,247
)
 
179

Net income (loss) attributable to TETRA stockholders
$
9,755

 
$
(10,537
)
 
$
20,232

 
$
(19,928
)
Basic net income (loss) per common share:
 

 
 
 
 
 


Net income (loss) attributable to TETRA stockholders
$
0.12

 
$
(0.13
)
 
$
0.26

 
$
(0.25
)
Average shares outstanding
79,219

 
78,683

 
79,098

 
78,506

Diluted net income (loss) per common share:
 

 
 

 
 
 


Net income (loss) attributable to TETRA stockholders
$
0.12

 
$
(0.13
)
 
$
0.25

 
$
(0.25
)
Average diluted shares outstanding
79,792

 
78,683

 
79,455

 
78,506



See Notes to Consolidated Financial Statements

1



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
10,736

 
$
(12,467
)
 
$
22,479

 
$
(20,107
)
Foreign currency translation adjustment, including taxes of $0 and $0 in 2015 and including taxes of $1,198 and $1,644 in 2014
(6,627
)
 
(8,430
)
 
(14,056
)
 
(7,653
)
Comprehensive income (loss)
4,109

 
(20,897
)
 
8,423

 
(27,760
)
Comprehensive (income) loss attributable to noncontrolling interest
(981
)
 
1,930

 
(2,247
)
 
179

Comprehensive income (loss) attributable to TETRA stockholders
$
3,128

 
$
(18,967
)
 
$
6,176

 
$
(27,581
)
 

See Notes to Consolidated Financial Statements

2



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
25,478

 
$
48,384

Restricted cash
11,481

 
8,721

Trade accounts receivable, net of allowances of $6,800 in 2015 and $2,485 in 2014
203,768

 
226,966

Deferred tax asset, net
536

 
392

Inventories
145,457

 
189,357

Assets held for sale

 
2,568

Prepaid expenses and other current assets
24,305

 
24,463

Total current assets
411,025

 
500,851

Property, plant, and equipment:
 

 
 

Land and building
79,062

 
75,200

Machinery and equipment
1,373,469

 
1,292,734

Automobiles and trucks
47,307

 
57,035

Chemical plants
181,155

 
174,108

Construction in progress
6,573

 
21,483

Total property, plant, and equipment
1,687,566

 
1,620,560

Less accumulated depreciation
(581,756
)
 
(496,368
)
Net property, plant, and equipment
1,105,810

 
1,124,192

Other assets:
 

 
 

Goodwill
292,157

 
293,866

Patents, trademarks and other intangible assets, net of accumulated amortization of $48,951 in 2015 and $39,754 in 2014
95,881

 
107,167

Deferred tax assets, net
1,209

 
1,791

Other assets
35,231

 
40,966

Total other assets
424,478

 
443,790

Total assets
$
1,941,313

 
$
2,068,833

 

See Notes to Consolidated Financial Statements

3



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
56,589

 
$
119,240

Unearned income
31,084

 
70,688

Accrued liabilities
92,025

 
86,881

Current portion of long-term debt
90,425

 
90,074

Decommissioning and other asset retirement obligations
17,912

 
12,758

Total current liabilities
288,035

 
379,641

Long-term debt, net of current portion
829,049

 
844,961

Deferred income taxes
11,474

 
10,525

Decommissioning and other asset retirement obligations, net of current portion
42,064

 
49,983

Other liabilities
17,495

 
18,122

Total long-term liabilities
900,082

 
923,591

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 100,000,000 shares authorized; 82,976,740 shares issued at September 30, 2015 and 82,322,876 shares issued at December 31, 2014
829

 
823

Additional paid-in capital
247,232

 
241,166

Treasury stock, at cost; 2,732,259 shares held at September 30, 2015, and 2,672,930 shares held at December 31, 2014
(16,669
)
 
(16,419
)
Accumulated other comprehensive income (loss)
(40,271
)
 
(26,215
)
Retained earnings
190,591

 
170,358

Total TETRA stockholders' equity
381,712

 
369,713

Noncontrolling interests
371,484

 
395,888

Total equity
753,196

 
765,601

Total liabilities and equity
$
1,941,313

 
$
2,068,833

 

See Notes to Consolidated Financial Statements

4



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited) 
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Operating activities:
 

 
 

Net income (loss)
$
22,479

 
$
(20,107
)
Reconciliation of net income (loss) to cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
116,319

 
78,281

Provision (benefit) for deferred income taxes
1,743

 
(27,233
)
Equity-based compensation expense
7,816

 
4,809

Provision for doubtful accounts
4,108

 
652

Excess decommissioning and abandoning costs
786

 
41,880

Amortization of deferred financing costs
2,804

 
2,054

Other non-cash charges and credits
(1,165
)
 
(3,826
)
Acquisition and transaction financing fees

 
9,869

Gain on sale of assets
(2,656
)
 
(548
)
Changes in operating assets and liabilities, net of assets acquired:
 

 
 

Accounts receivable
14,428

 
(14,908
)
Inventories
42,481

 
(5,127
)
Prepaid expenses and other current assets
(835
)
 
2,652

Trade accounts payable and accrued expenses
(87,908
)
 
26,198

Decommissioning liabilities, net
(5,196
)
 
(40,309
)
Other
3,023

 
(2,400
)
Net cash provided by operating activities
118,227

 
51,937

Investing activities:
 

 
 

Purchases of property, plant, and equipment
(96,143
)
 
(84,135
)
Acquisition of businesses, net of cash acquired

 
(854,031
)
Proceeds on sale of property, plant, and equipment
4,902

 
5,047

Other investing activities
(3,706
)
 
(362
)
Net cash used in investing activities
(94,947
)
 
(933,481
)
Financing activities:
 

 
 

Proceeds from long-term debt
292,996

 
760,036

Principal payments on long-term debt
(308,945
)
 
(207,384
)
CCLP distributions
(28,289
)
 
(3,808
)
Proceeds from exercise of stock options
164

 
1,147

Proceeds from issuance of Compressco Partners' common units, net of underwriters' discount

 
359,205

Excess tax benefit from equity compensation
(246
)
 

Other financing activities
(250
)
 
(27,905
)
Net cash provided by (used in) financing activities
(44,570
)
 
881,291

Effect of exchange rate changes on cash
(1,616
)
 
(2,286
)
Decrease in cash and cash equivalents
(22,906
)
 
(2,539
)
Cash and cash equivalents at beginning of period
48,384

 
38,754

Cash and cash equivalents at end of period
$
25,478

 
$
36,215

Supplemental cash flow information:
 

 
 
Interest paid
$
31,399

 
$
9,614

Income taxes paid
6,475

 
9,147

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, frac flowback, production well testing, offshore rig cooling, compression services and equipment, 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 four divisions – Fluids, Production Testing, Compression, 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 CSI Compressco LP and its subsidiaries ("CCLP") as part of our Compression segment. We control CCLP through our ownership of its general partner. The public ownership share of CCLP's net assets and earnings is presented as noncontrolling interest in our consolidated financial statements. Our interests in oil and gas properties are proportionately consolidated. All intercompany accounts and transactions have been eliminated in consolidation. 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. Operating results for the period ended September 30, 2015 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2015.
 
As a result of CCLP's acquisition of Compressor Systems, Inc. ("CSI") on August 4, 2014, our Compression Division's operations have significantly expanded. 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. These financial statements should be read in connection with the financial statements for the year ended December 31, 2014, and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 2, 2015.

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation. These reclassifications include the final allocation of the purchase price of CSI. See Note B - Acquisitions for further discussion.

Beginning in 2014, and continuing into late-2015, significant decreases in oil and natural gas commodity prices lowered the capital expenditure and operating plans of many of our customers, creating uncertainty regarding the expected demand for many of our products and services and the resulting cash flows from operating activities for the foreseeable future. In addition, the availability of new borrowings in the current capital markets is more limited and costly. Accordingly, we continue to implement cost reduction measures designed to lower our cost structure in the current market environment, and have taken other steps to improve our operating cash flows. As a result of the steps taken to improve operating cash flows, we believe that despite the current industry environment and activity levels we will have adequate liquidity to fund our operations and debt obligations and maintain compliance with debt covenants through September 30, 2016. In addition, as further discussed in Note C - Long-Term Debt and Other Borrowings, on November 5, 2015, we entered into a Note Purchase Agreement (the “2015 Senior Note Purchase Agreement”) with GSO Tetra Holdings LP, an unrelated third party. Pursuant to the 2015 Senior Note Purchase Agreement, we agreed to issue and sell $125.0 million in aggregate principal amount of our 11.0% Senior Notes due November 5, 2022 (the “Series 2015 Senior Notes”). In addition, on November 5, 2015, we announced the commencement of a tender offer (the “Tender Offer”) to purchase for cash up to $25.0 million aggregate principal amount of the outstanding Series 2010-A Senior Notes and Series 2010-B Senior Notes (collectively, the “2010 Senior Notes”). Also on November 5, 2015, we entered into an amendment to the Note Purchase Agreement, conditioned upon the closing and funding of the issuance of the Series 2015 Senior Notes, that provides for the extension of the maturity date of our $50.0 million Senior Secured Notes from April 1, 2017 to

6



April 1, 2019. Immediately after closing and funding, we are required to apply a portion of the proceeds from the sale of the Series 2015 Senior Notes to repay all of the indebtedness for borrowed money outstanding under our Credit Agreement. Thereafter, we are to apply any remaining portion of the proceeds, together with other funds (to the extent necessary) to (i) pay the purchase price for 2010 Senior Notes accepted for purchase pursuant to the Tender Offer (defined above), (ii) prepay in full all amounts owed in respect of the outstanding Series 2006-A Senior Notes, due April 30, 2016 and (iii) pay fees and expenses associated with the transactions contemplated under the 2015 Senior Note Purchase Agreement. Following the completion of these transactions, we will have repaid and extended the maturity dates of a significant amount of TETRA's total long-term debt. In addition, we are considering certain additional financing transactions with a view of generating additional cash to reduce the amount of our outstanding borrowings under our Credit Agreement, repay or refinance additional amounts of our senior notes, and generate additional liquidity.

Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For further discussion of fair value measurements in connection with the allocation of the purchase price of the CSI acquisition, see Note B - Acquisitions. Actual results could differ from those estimates, and such differences could be material.

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 September 30, 2015 consists primarily of escrowed cash associated with our July 2011 purchase of a heavy lift derrick barge. The escrowed cash will be released to the sellers or us in accordance with the terms of the escrow agreement.
 
Inventories
 
Inventories are stated at the lower of cost or market value. The cost of finished goods, raw materials, and parts and supplies are determined using the weighted average method. The cost of work in progress is determined using the specific identification method.

Significant components of inventories as of September 30, 2015, and December 31, 2014, are as follows: 
 
September 30, 2015
 
December 31, 2014
 
(In Thousands)
Finished goods
$
59,261

 
$
62,188

Raw materials
3,528

 
5,005

Parts and supplies
42,031

 
51,229

Work in progress
40,637

 
70,935

Total inventories
$
145,457

 
$
189,357


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. Work in progress inventory consists primarily of new compressor packages located in the CCLP fabrication facility in Midland, Texas. We provide a reserve for estimated unrealizable inventory equal to the difference between the cost of inventory and its estimated realizable value.
 

7



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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Number of weighted average common shares outstanding
79,219

 
78,683

 
79,098

 
78,506

Assumed exercise of stock awards
573

 

 
357

 

Average diluted shares outstanding
79,792

 
78,683

 
79,455

 
78,506

 
For the three and nine month periods ended September 30, 2015, the average diluted shares outstanding excludes the impact of 3,752,879 and 3,581,111, respectively, of average outstanding stock awards that have exercise prices in excess of the average market price, as the inclusion of these shares would have been antidilutive. For the three and nine month periods ended September 30, 2014, the average diluted shares outstanding excludes the impact of all outstanding stock awards, as the inclusion of these shares would have been antidilutive due to the net losses recorded during the periods.

Services and Rentals Revenues and Costs

A portion of our services and rentals revenues consist of lease rental income pursuant to operating lease arrangements for compressors and other equipment assets. For the three and nine month periods ended September 30, 2015 and 2014, the following operating lease revenues and associated costs were included in services and rentals revenues and cost of services and rentals, respectively, in the accompanying consolidated statements of operations.

Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,

2015
 
2014
 
2015

2014

(In Thousands)
Rental revenue
$
31,978

 
$
31,842

 
$
115,476

 
$
42,686

Cost of rental revenue
$
10,981

 
$
15,692

 
$
53,417

 
$
20,955


Foreign Currency Translation
 
We have designated the euro, the British pound, the Norwegian krone, the Canadian dollar, the Brazilian real, the Argentine peso, and the Mexican peso as the functional currency for our operations in Finland and Sweden, the United Kingdom, Norway, Canada, Brazil, Argentina, and certain of our operations in Mexico, respectively. 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. Foreign currency exchange gains and (losses) are included in Other Expense and totaled $(0.5) million and $(2.7) million during the three and nine month periods ended September 30, 2015, respectively, and $(0.6) million and $(1.5) million during the three and nine months ended September 30, 2014 , respectively.

Income Taxes

Our consolidated effective tax rates for the three and nine month periods ended September 30, 2015, include the effects of changes in our expected valuation allowance at the end of 2015 related to our deferred tax assets, such as our U.S. net operating loss carryforward. In 2014, we increased our valuation allowance, primarily on our U.S. deferred tax assets after considering all available positive and negative evidence related to the realizability of our deferred tax assets. Similarly, after considering updated evidence related to the deferred tax assets of one of our international operations, during the third quarter of 2015 we also increased our valuation allowance for this international deferred tax asset. Included in our deferred tax assets are net operating loss

8



carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.
 
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 (a level 3 fair value measurement). 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 (a level 3 fair value measurement). The fair value of our financial instruments, which include cash, restricted cash, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreements, approximate their carrying amounts. The aggregate fair values of our long-term Senior Notes and Senior Secured Notes (as such terms are herein defined) at September 30, 2015 and December 31, 2014, were approximately $242.6 million and $310.7 million, respectively, compared to carrying amounts of $265.0 million and $305.0 million, respectively, as current interest rates on those dates were different than the stated interest rates on the Senior Notes and Senior Secured Notes. The fair values of the publicly tradable CCLP Senior Notes (as herein defined) at September 30, 2015 were approximately $287.0 million (a level 2 fair value measurement). Prior to the closing of a public exchange offer on July 20, 2015, and as of December 31, 2014, the fair value of the CCLP Senior Notes was approximately $354.9 million. The fair values of the CCLP Senior Notes compared to a face amount of approximately $350.0 million (See Note C - Long-Term Debt and Other Borrowings, for further discussion), as current rates on those dates were different from the stated interest rates on the CCLP Senior Notes. We calculate the fair values of our Senior Notes, our Senior Secured Notes and the CCLP Senior Notes as of September 30, 2015 and December 31, 2014 (excluding the CCLP Senior Notes as of September 30, 2015, which are publicly tradable) internally, using current market conditions and average cost of debt (a level 2 fair value measurement).

We calculate the fair value of the liability for our contingent purchase price consideration obligation in accordance with the WIT Water Transfer, LLC (acquired in January 2014 and doing business as TD Water Transfer) share purchase agreement based upon a probability weighted calculation using the actual and anticipated earnings of the acquired operations (a level 3 fair value measurement). The fair value of the liability for the TD Water Transfer contingent purchase price consideration at September 30, 2015, was $0. 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 fair value measurement). A summary of these fair value measurements as of September 30, 2015 and December 31, 2014, is as follows:

9



 
 
 
Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
Sept.30, 2015
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Asset for foreign currency derivative contracts
$
45

 

 
45

 

Liability for foreign currency derivative contracts
(213
)
 

 
(213
)
 

Acquisition contingent consideration liability

 

 

 

Net liability
$
(168
)
 
 
 
 
 
 

 
 
 
Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
Dec 31, 2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Asset for foreign currency derivative contracts
$

 
$

 

 

Liability for foreign currency derivative contracts
(174
)
 

 
(174
)
 

Acquisition contingent consideration liability

 

 

 

Net liability
$
(174
)
 


 

 


New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("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 ASU was originally scheduled to be effective for the first quarter in fiscal 2017, however, in July 2015, the FASB voted to approve a one year deferral of effectiveness of the ASU, to annual periods beginning after December 15, 2017, and interim periods within those years, under either full or modified retrospective adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Topic 250). The ASU provides guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The ASU is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statements - Extraordinary and Unusual Items” (Sub-Topic 225-20), which eliminates from U.S. GAAP the concept of extraordinary items. The guidance eliminates the separate presentation of extraordinary items on the income statement, net of tax and the related earnings per share, but does not affect the requirement to disclose material items that are unusual in nature or occurring infrequently. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods, with early adoption permitted, and may be applied prospectively or retrospectively. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

10




In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”.  The ASU requires entities that have historically presented debt issuance costs as an asset to present those costs as a direct deduction from the carrying amount of the related debt liability. This presentation will result in the debt issuance costs being presented the same way debt discounts have historically been handled. The ASU does not change the recognition, measurement, or subsequent measurement guidance for debt issuance costs. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods and is to be applied retrospectively.  Early adoption is permitted. We plan to adopt this change retrospectively, and do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which simplifies the subsequent measurement of inventory by requiring entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using the last-in, first-out (LIFO) or the retail inventory methods. The ASU requires entities to compare the cost of inventory to one measure - net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods, with early adoption permitted, and is to be applied prospectively. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement Period Adjustments” (Topic 805), which requires that adjustments to provisional amounts identified during the measurement period of a business combination be recognized in the reporting period in which those adjustments are determined, including the effect on earnings, if any, calculated as if the accounting had been completed at the acquisition date. The ASU eliminates the previous requirement to retrospectively account for such adjustments and requires additional disclosures related to the income statement effects of adjustments to provisional amounts identified during the measurement period. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods, with early adoption permitted, and is to be applied prospectively. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.


NOTE B – ACQUISITIONS

Acquisition of Compressor Systems, Inc.

On August 4, 2014, a subsidiary of CCLP acquired all of the outstanding capital stock of CSI for $825.0 million cash (the "CSI Acquisition"). Prior to the acquisition, CSI owned one of the largest fleets of natural gas compressor packages in the United States. Headquartered in Midland, Texas, CSI fabricates, sells, and maintains natural gas compressors and provides a full range of compression products and services that covers compression needs throughout the entire natural gas production and transportation cycle to natural gas and oil producing clients. CSI derives revenues through three primary business lines: compression and related services, equipment and parts sales, and aftermarket services. Strategically, the acquisition affords the Compression Division the opportunity to capture significant synergies associated with its product and service offerings and its fabrication operations, to further penetrate new and existing markets, and to achieve administrative efficiencies and other strategic benefits.
    
Our allocation of the purchase price to the estimated fair value of CSI's net assets is as follows (in thousands):

11



Current assets
$
101,411

Property and equipment
571,706

Intangible assets
68,000

Goodwill
161,387

Total assets acquired
902,504

 
 
Current liabilities
77,504

Total liabilities assumed
77,504

Net assets acquired
$
825,000

The allocation of purchase price includes approximately $161.4 million allocated to deductible goodwill recorded, and is supported by the strategic benefits discussed above that are expected to be generated from the acquisition. Adjustments to the allocation of purchase price affecting inventory, property, plant, and equipment, intangible assets, and other current assets and liabilities have been reflected in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014. The adjustment to the previously presented goodwill balance as of December 31, 2014 was $0.1 million. These adjustments to the allocation of purchase price for long-lived assets did not have a material impact on the depreciation and amortization of these assets. The acquired property, plant, and equipment is stated at fair value, and depreciation of the acquired property, plant, and equipment is computed using the straight-line method over the estimated useful lives of each asset. Buildings are depreciated using useful lives of 15 to 30 years. Machinery and equipment is depreciated using useful lives of 2 to 20 years. Automobiles and trucks are depreciated using useful lives of 3 to 4 years. The acquired intangible assets represent approximately $33.7 million for the trademark/trade name, approximately $21.4 million for customer relationships, and approximately $12.9 million of other intangible assets that are stated at estimated fair value and are amortized on a straight-line basis over their estimated useful lives, ranging from 2 to 15 years. These identified intangible assets are recorded net of approximately $9.7 million of accumulated amortization as of September 30, 2015.

For the three and nine month periods ended September 30, 2014, our revenues, depreciation and amortization, and pretax earnings included $61.0 million, $9.6 million, and $6.4 million, respectively, associated with the CSI Acquisition after the closing on August 4, 2014. In addition, CSI Acquisition-related costs of approximately $2.1 million and $3.0 million were incurred during the three and nine month periods ended September 30, 2014, respectively, consisting of external legal fees and due diligence costs. These costs have been recognized in general and administrative expenses in the consolidated statements of operations. Approximately $16.6 million of deferred financing costs related to the CSI Acquisition were incurred as of the acquisition date and included in Other Assets and is being amortized over the term of the related debt. An additional $9.3 million of interim financing costs related to the CSI Acquisition were incurred and reflected in other expense during the nine months ended September 30, 2014.

Pro Forma Financial Information

The pro forma information presented below has been prepared to give effect to the acquisition of CSI as if the transaction had occurred at the beginning of the periods presented. The pro forma information includes the impact from the allocation of the acquisition purchase price on depreciation and amortization. The pro forma information is presented for illustrative purposes only and is based on estimates and assumptions we deemed appropriate. The following pro forma information is not necessarily indicative of the historical results that would have been achieved if the acquisition transactions had occurred in the past, and our operating results may have been different from those reflected in the pro forma information below. Therefore, the pro forma information should not be relied upon as an indication of the operating results that we would have achieved if the transaction had occurred at the beginning of the period presented or the future results that we will achieve after the transaction.

12



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2014
 
(In Thousands, Except Per Share Amounts)
 
 
 
 
Revenues
$
343,920

 
$
969,615

Depreciation, amortization, and accretion
$
38,622

 
$
113,238

Gross profit
$
41,544

 
$
130,720

 
 
 

Net income (loss)
$
(3,431
)
 
$
(14,725
)
Net income (loss) attributable to TETRA stockholders
$
(5,637
)
 
$
(20,180
)
 
 
 
 
Per share information:
 
 
 
Net income (loss) attributable to TETRA stockholders
 
 
 
Basic
$
(0.07
)
 
$
(0.26
)
Diluted
$
(0.07
)
 
$
(0.26
)

NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS
 
Our consolidated capital structure changed significantly during 2014 as a result of the CSI Acquisition. Because of the increased level of consolidated debt, it is increasingly important to consider TETRA's capital structure and CCLP's capital structure separately, as we have no cross default provisions, cross collateralization provisions, or cross guarantees with CCLP's debt, nor does CCLP with TETRA's debt.

Long-term debt consists of the following:
 
 
 
September 30, 2015
 
December 31, 2014
 
 
 
(In Thousands)
 
 
 
 
 
 
TETRA
 
Scheduled Maturity
 
 
 
Bank revolving line of credit facility
 
September 30, 2019
$
65,700

 
$
90,000

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

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

Senior Secured Notes
 
April 1, 2017
50,000

 

Other
 
 
425

 
74

TETRA Total debt
 
 
331,125

 
395,074

Less current portion
 
 
(90,425
)
 
(90,074
)
TETRA Total long-term debt
 
 
$
240,700

 
$
305,000

 
 
 
 
 
 
CCLP
 
 
 
 
 
CCLP Bank Credit Facility
 
August 4, 2019
243,000

 
195,000

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $4.7 million as of September 30, 2015 and $5.0 million as of December 31, 2014)
 
August 15, 2022
345,349

 
344,961

CCLP total long-term debt
 
 
588,349

 
539,961

Consolidated total long-term debt
 
 
$
829,049

 
$
844,961



13



We and CCLP are in compliance with all covenants and conditions of our respective debt agreements as of September 30, 2015.

Our Senior Notes

On November 5, 2015, we entered into the 2015 Senior Note Purchase Agreement with GSO Tetra Holdings LP, an unrelated third party. Pursuant to the 2015 Senior Note Purchase Agreement, we agreed to issue and sell $125.0 million in aggregate principal amount of our Series 2015 Senior Notes. The Series 2015 Senior Notes will be sold in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Closing of the transaction is expected to occur on or before November 20, 2015. Immediately after closing and funding, we are required to apply a portion of the proceeds from the sale of the Series 2015 Senior Notes to repay all of the indebtedness for borrowed money outstanding under our Credit Agreement. Thereafter, we are to apply any remaining portion of the proceeds, together with other funds (to the extent necessary), to (i) pay the purchase price for 2010 Senior Notes accepted for purchase pursuant to the Tender Offer, (ii) prepay in full all amounts owed in respect of the outstanding Series 2006-A Senior Notes, due April 30, 2016 and (iii) pay fees and expenses associated with the transactions contemplated under the 2015 Senior Note Purchase Agreement.

The Series 2015 Senior Notes will bear interest at the fixed rate of 11.0% and mature on November 5, 2022. Interest on the Series 2015 Senior Notes will be due quarterly on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 2016. We may prepay the Series 2015 Senior Notes, in whole or in part (though not in an amount less than $1,000,000 in the aggregate in the case of a partial prepayment) at a prepayment price equal to (i) prior to the third anniversary of the date of the closing of the issuance and sale of the Series 2015 Senior Notes (the “Closing”), 100% of the principal amount so prepaid, plus accrued and unpaid interest and a “make-whole” prepayment amount, (ii) during the period commencing on the third anniversary of the Closing and ending on the day prior to the fourth anniversary of the Closing, 104% of the principal amount so prepaid, plus accrued and unpaid interest, (iii) during the period commencing on the fourth anniversary of the Closing and ending on the day prior to the fifth anniversary of the Closing, 102% of the principal amount so prepaid, plus accrued and unpaid interest, (iv) during the period commencing on the fifth anniversary of the Closing and ending on the day prior to the sixth anniversary of the Closing, 101% of the principal amount so prepaid, plus accrued and unpaid interest, and (v) from the sixth anniversary of Closing, 100% of the principal amount so prepaid, plus accrued and unpaid interest.

Pursuant to the 2015 Senior Note Purchase Agreement, the Series 2015 Senior Notes will be unsecured and guaranteed by certain of our material wholly owned U.S. subsidiaries. The 2015 Senior Note Purchase Agreement contains customary covenants that will limit our ability and the ability of certain of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness; incur or create liens; merge or consolidate or sell substantially all of our assets; engage in a different business; enter into transactions with affiliates; and make certain payments as set forth in the 2015 Senior Note Purchase Agreement. In addition, the 2015 Senior Note Purchase Agreement requires us to maintain certain consolidated financial ratios. The 2015 Senior Note Purchase Agreement contains customary default provisions, as well as the following cross-default provision. An event of default will occur if we or any of our restricted subsidiaries (i) fails to make any payment when due beyond any applicable grace period under any indebtedness of at least $20.0 million, (ii) defaults in the performance of or compliance with any term of any indebtedness in an aggregate outstanding principal amount of at least $20.0 million or of any mortgage, indenture or other agreement relating to such indebtedness or any other condition exists, and as a result of such default or condition such indebtedness is accelerated and declared due and payable before its stated maturity or before its regularly scheduled dates for payment, or (iii) we or any of our restricted subsidiaries become obligated to purchase or repay indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $20.0 million or one or more persons have the right to require us or any of our subsidiaries to purchase or repay such indebtedness. Upon the occurrence and during the continuation of an event of default under the 2015 Senior Note Purchase Agreement, the Series 2015 Senior Notes may become immediately due and payable, either automatically or by declaration of holders of more than 50% in principal amount of the Series 2015 Senior Notes at the time outstanding.

As discussed above, immediately after closing and funding of the Series 2015 Senior Notes, we are required to apply a portion of the proceeds from the sale of the Series 2015 Senior Notes to repay all of the indebtedness outstanding under our Credit Agreement. In December 2015, and not later than forty-five days following the settlement of the Series 2015 Senior Notes, we are to prepay in full all amounts owed in respect of the

14



outstanding Series 2006-A Senior Notes, due April 30, 2016, including an estimated $1.7 million "make-whole" prepayment premium in accordance with the Master Note Purchase Agreement.

On November 5, 2015, we announced the commencement of the Tender Offer to purchase for cash up to $25.0 million aggregate principal amount of the outstanding 2010 Senior Notes. The Tender Offer is scheduled to expire immediately after 11:59 p.m., Eastern Time, on December 4, 2015, unless extended by us in our sole discretion or if we terminate the Tender Offer earlier (the "Expiration Time"). The offered consideration for 2010 Senior Notes of either series to be purchased in the Tender Offer is an amount, payable in cash, equal to $100,000 per $100,000 principal amount of 2010 Senior Notes validly tendered by registered holders of 2010 Senior Notes prior to the Expiration Time, and accepted for purchase by us pursuant to the Tender Offer, plus accrued and unpaid interest on such 2010 Senior Notes up to, but not including, the date of payment for such Notes.

Our Senior Secured Notes

On March 18, 2015, we entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Wells Fargo Energy Capital, Inc., in its capacity as noteholder representative for the noteholders (the "Noteholder Representative"), and Wells Fargo Energy Capital, Inc., in its capacity as the sole initial purchaser. The Note Purchase Agreement relates to our issuance and sale of $50.0 million aggregate principal amount of Senior Secured Notes due April 1, 2017 (the "Senior Secured Notes"). On April 30, 2015, we completed the issuance and sale of the Senior Secured Notes in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The proceeds from these Senior Secured Notes were used to provide a portion of the funds necessary to repay the $90.0 million principal amount of the Series 2008-B Senior Notes that matured on April 30, 2015. The Senior Secured Notes are secured by our accounts receivable (excluding CCLP accounts receivable) and our common units in CCLP, and the related Note Purchase Agreement includes financial covenants consistent with those applicable to our existing bank revolving credit facility.

On November 5, 2015, we entered into the Second Amendment (the “Second Amendment”) to the Note Purchase Agreement that, conditioned upon the closing and funding of the issuance of the Series 2015 Senior Notes, (i) provides for the extension of the maturity date of the Senior Secured Notes from April 1, 2017 to April 1, 2019, (ii) amends certain definitions in the Note Purchase Agreement and (iii) requires us to pay an extension fee for the ratable account of the noteholders under the Note Purchase Agreement.

The principal portion of each of the Senior Secured Notes consists of tranches that bear interest at LIBOR, as defined in the Note Purchase Agreement, plus an applicable margin ("LIBOR Tranches") and tranches that bear interest at the Base Rate plus an applicable margin ("Base Rate Tranches"), as we may request in accordance with the Note Purchase Agreement. The initial Senior Secured Note consists of a LIBOR Tranche and the interest rate at closing and as of September 30, 2015 is 3.95% per annum. We may convert the LIBOR Tranche into a Base Rate Tranche in accordance with the Note Purchase Agreement. The Note Purchase Agreement contains customary covenants and default and cross default provisions consistent with the agreements governing our other TETRA indebtedness.

NOTE D – DECOMMISSIONING AND OTHER ASSET RETIREMENT OBLIGATIONS
 
The large majority of our asset retirement obligations consists of the remaining 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 operate facilities in various U.S. and foreign locations that are used in the manufacture, storage, and sale of our products, inventories, and equipment. These facilities are a combination of owned and leased assets.

The values of our asset retirement obligations for non-Maritech properties were approximately $8.8 million and $8.4 million as of September 30, 2015 and December 31, 2014, respectively. We are required to take certain actions in connection with the retirement of these assets. We have reviewed our obligations in this regard in detail and estimated the cost of these actions. The original estimates are the fair values that have been recorded for retiring these long-lived assets. The associated asset retirement costs are capitalized as part of the carrying amount of these long-lived assets. The costs for non-oil and gas assets are depreciated on a straight-line basis over the life of the assets.

15




The changes in the values of our asset retirement obligations during the three and nine month periods ended September 30, 2015, are as follows:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
(In Thousands)
Beginning balance for the period, as reported
$
59,408

 
$
62,741

Activity in the period:
 
 
 
Accretion of liability
571

 
1,413

Retirement obligations incurred

 

Revisions in estimated cash flows
1,110

 
1,347

Settlement of retirement obligations
(1,113
)
 
(5,525
)
Ending balance
$
59,976

 
$
59,976


We review the adequacy of our asset retirement obligation liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. For our Maritech segment, the timing and amounts of these cash flows are subject to changes in the energy industry environment and other factors and may result in additional liabilities and charges to cost of product sales to be recorded.

Asset retirement obligations are recorded in accordance with FASB ASC 410, which requires that the estimated fair value of a liability for asset retirement obligations be recorded in the period in which it is incurred and in which a reasonable estimate can be made. Such estimates are based on relevant assumptions that we believe are reasonable. The cost estimates for our Maritech asset retirement obligations are considered reasonable estimates consistent with current market conditions, and we believe reflect the amount of work legally required to be performed in accordance with Bureau of Safety and Environmental Enforcement ("BSEE") standards, as revised from time to time.

NOTE E – MARKET RISKS AND DERIVATIVE CONTRACTS
 
We are exposed to financial and market risks that affect our businesses. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our policy is to evaluate, prior to providing goods or services, each customer's financial condition and to determine the amount of open credit to be extended. We generally require appropriate additional collateral as security for credit amounts in excess of approved limits. Our customers consist primarily of major, well-established oil and gas producers and independent oil and gas companies. The risk of loss from the inability to collect trade receivables, including certain long-term contractual receivables of our Maritech Division, is heightened during prolonged periods of low oil and natural gas commodity prices.

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 of CCLP, we face market risk exposure related to changes in applicable interest rates. 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.


16



Derivative Contracts

Foreign Currency Derivative Contracts. As of September 30, 2015, we and CCLP 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 Euro
 
$
2,869

 
1.13
 
10/16/2015
Forward purchase pounds sterling
 
$
9,035

 
1.53
 
10/16/2015
Forward sale Mexican peso
 
$
7,455

 
17.06
 
10/16/2015
Forward sale Saudi Arabia riyal
 
$
6,397

 
3.75
 
10/16/2015
Forward sale Mexican peso
 
$
3,936

 
17.06
 
10/16/2015

Under a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries, we and CCLP may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as economic hedges 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 fair value measurement). The fair values of our and CCLP's foreign currency derivative instruments as of September 30, 2015 and December 31, 2014, are as follows:
Foreign currency derivative instruments
Balance Sheet Location
 
 Fair Value at
September 30, 2015
 
 Fair Value at December 31, 2014

 

 
(In Thousands)
Forward sale contracts
 
Current assets
 
$
3

 
$

Forward purchase contracts
 
Current assets
 
$
41

 
$

Forward sale contracts
 
Current liabilities
 
(77
)
 
(91
)
Forward purchase contracts
 
Current liabilities
 
(135
)
 
(83
)
Net liability
 

 
$
(168
)
 
$
(174
)

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 three and nine month periods ended September 30, 2015, we recognized approximately $(0.2) million and $(0.5) million, respectively, of net losses in other income (expense) associated with our foreign currency derivative program. During the three and nine month periods ended September 30, 2014, we recognized approximately $(0.8) million and $(0.8) million, respectively, of net losses in other income (expense) associated with our foreign currency derivative program.


17



NOTE F – EQUITY
 
Changes in equity for the three and nine month periods ended September 30, 2015 and 2014 are as follows:
 
Three Months Ended September 30,
 
2015
 
2014
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
375,409

 
$
379,635

 
$
755,044

 
$
549,654

 
$
41,428

 
$
591,082

Net income (loss)
9,755

 
981

 
10,736

 
(10,537
)
 
(1,930
)
 
(12,467
)
Foreign currency translation adjustment, including taxes of $0 in 2015 and taxes of $1,198 in 2014
(6,627
)
 

 
(6,627
)
 
(8,430
)
 

 
(8,430
)
Comprehensive income (loss)
3,128

 
981

 
4,109

 
(18,967
)
 
(1,930
)
 
(20,897
)
Exercise of common stock options
63

 

 
63

 
771

 

 
771

Proceeds from the issuance of stock

 

 

 

 
359,205

 
359,205

Distributions to public unitholders

 
(9,565
)
 
(9,565
)
 

 
(1,298
)
 
(1,298
)
Equity-based compensation
3,163

 
454

 
3,617

 
1,053

 
482

 
1,535

Treasury stock and other
(9
)
 
(21
)
 
(30
)
 
(68
)
 
(41
)
 
(109
)
Tax adjustment upon cancellation of stock options
(42
)
 

 
(42
)
 
(82
)
 

 
(82
)
Ending balance as of September 30
$
381,712

 
$
371,484

 
$
753,196

 
$
532,361

 
$
397,846

 
$
930,207


 
Nine Months Ended September 30,
 
2015
 
2014
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
369,713

 
$
395,888

 
$
765,601

 
$
555,541

 
$
41,957

 
$
597,498

Net income (loss)
20,232

 
2,247

 
22,479

 
(19,928
)
 
(179
)
 
(20,107
)
Foreign currency translation adjustment, including taxes of $0 in 2015 and taxes of $1,644 in 2014
(14,056
)
 

 
(14,056
)
 
(7,653
)
 

 
(7,653
)
Comprehensive Income (loss)
6,176

 
2,247

 
8,423

 
(27,581
)
 
(179
)
 
(27,760
)
Exercise of common stock options
164

 

 
164

 
1,147

 

 
1,147

Proceeds from the issuance of stock

 

 

 

 
359,205

 
359,205

Distributions to public unitholders

 
(28,289
)
 
(28,289
)
 

 
(3,806
)
 
(3,806
)
Equity-based compensation
6,157

 
1,659

 
7,816

 
3,889

 
919

 
4,808

Treasury stock and other
(252
)
 
(21
)
 
(273
)
 
(421
)
 
(250
)
 
(671
)
Tax adjustment upon cancellation of stock options
(246
)
 

 
(246
)
 
(214
)
 

 
(214
)
Ending balance as of September 30
$
381,712

 
$
371,484

 
$
753,196

 
$
532,361

 
$
397,846

 
$
930,207


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


18



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 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.

Other Contingencies

During 2011, in connection with the sale of a significant majority of Maritech’s oil and gas producing properties, the buyers of the properties assumed the associated decommissioning liabilities pursuant to the purchase and sale agreements. For those oil and gas properties Maritech previously operated, the buyers of the properties assumed the financial responsibilities associated with the properties' operations, including abandonment and decommissioning, and generally became the successor operator. Some buyers of these Maritech properties subsequently sold certain of these properties to other buyers who also assumed these financial responsibilities associated with the properties' operations, and these buyers also typically became the successor operator of the properties. To the extent that a buyer of these properties fails to perform the abandonment and decommissioning work required, the previous owner, including Maritech, may be required to perform the abandonment and decommissioning obligation. A significant portion of the decommissioning liabilities that were assumed by the buyers of the Maritech properties in 2011 remains unperformed and we believe the amounts of these remaining liabilities are significant. We monitor the financial condition of the buyers of these properties from Maritech, and if current oil and natural gas pricing levels continue, we expect that one or more of these buyers may be unable to perform the decommissioning work required on the properties acquired from Maritech.
    
During the nine months ended September 30, 2015, continued low oil and natural gas prices have resulted in reduced revenues and cash flows for all oil and gas producing companies, including those companies that bought Maritech properties in the past. Certain of these oil and gas producing companies that bought Maritech properties are currently experiencing severe financial difficulties. With regard to certain of these properties, Maritech has security in the form of bonds or cash escrows intended to secure the buyers' obligations to perform the decommissioning work. One company that bought, and subsequently sold, Maritech properties filed for Chapter 11 bankruptcy protection in August 2015. Maritech and its legal counsel monitor the status of these companies. As of September 30, 2015, we do not consider the likelihood of Maritech becoming liable for decommissioning liabilities on sold properties to be probable.

NOTE H – INDUSTRY SEGMENTS
 
We manage our operations through five reporting segments organized into four divisions: Fluids, Production Testing, Compression, and Offshore.
 
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

19



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 Testing Division provides frac flowback, production well testing, offshore rig 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 basins in certain regions in South America, Africa, Europe, the Middle East, and Australia.
 
The Compression Division is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing, and storage. The Compression Division's equipment and parts sales business includes the fabrication and sale of standard compressor packages, custom-designed compressor packages, and oilfield pump systems designed and fabricated at the Division's facilities as well as the sale of compressor package parts and components manufactured by third-party suppliers. The Compression Division's aftermarket services business provides compressor package reconfiguration and maintenance services. The Compression Division provides its services and equipment to a broad base of natural gas and oil exploration and production, midstream, transmission, and storage companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign countries, including Mexico, Canada, and Argentina. As a result of the August 4, 2014 acquisition of CSI, we have significantly expanded the scope of our Compression Division.
 
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 portion of these services from the Offshore Division’s Offshore Services segment.
 
We generally evaluate the performance of and allocate resources to our segments based on profit or loss from their operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments and geographic areas are priced at the estimated fair value of the products or services as negotiated between the operating units. “Corporate Overhead” includes corporate general and administrative expenses, corporate depreciation and amortization, interest income and expense, and other income and expense.

 Summarized financial information concerning the business segments is as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Revenues from external customers
 

 
 

 
 

 
 

Product sales
 

 
 

 
 
 
 
Fluids Division
$
75,128

 
$
67,925

 
$
240,052

 
$
220,250

Production Testing Division

 

 

 

Compression Division
49,145

 
30,999

 
116,264

 
34,901

Offshore Division
 

 
 

 
 
 
 
Offshore Services

 
56

 
595

 
529

Maritech
475

 
1,041

 
2,375

 
3,964

Total Offshore Division
475

 
1,097

 
2,970

 
4,493

Consolidated
$
124,748

 
$
100,021

 
$
359,286

 
$
259,644

 
 
 
 
 
 
 
 

20



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Services and rentals
 

 
 

 
 
 
 
Fluids Division
$
35,437

 
$
37,351

 
92,745

 
$
106,514

Production Testing Division
27,725

 
48,984

 
97,326

 
133,289

Compression Division
79,781

 
64,898

 
242,006

 
122,775

Offshore Division
 

 
 

 
 

 
 
Offshore Services
37,882

 
61,449

 
84,801

 
152,547

Maritech

 

 

 

Intersegment eliminations
(429
)
 
(6,332
)
 
(3,609
)
 
(13,053
)
Total Offshore Division
37,453

 
55,117

 
81,192

 
139,494

Consolidated
$
180,396

 
$
206,350

 
$
513,269

 
$
502,073

 
 
 
 
 
 
 
 
Interdivision revenues
 

 
 

 
 
 
 
Fluids Division
$
22

 
$
20

 
$
53

 
$
327

Production Testing Division
1,217

 
1,193

 
3,559

 
2,902

Compression Division

 

 

 

Offshore Division
 

 
 

 
 

 
 
Offshore Services

 

 

 

Maritech

 

 

 

Intersegment eliminations

 

 

 

Total Offshore Division

 

 

 

Interdivision eliminations
(1,239
)
 
(1,213
)
 
(3,612
)
 
(3,230
)
Consolidated
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Total revenues
 

 
 

 
 
 
 
Fluids Division
$
110,587

 
$
105,296

 
$
332,850

 
$
327,090

Production Testing Division
28,942

 
50,177

 
100,885

 
136,191

Compression Division
128,926

 
95,897

 
358,270

 
157,676

Offshore Division
 

 
 

 
 
 
 
Offshore Services
37,882

 
61,505

 
85,396

 
153,076

Maritech
475

 
1,041

 
2,375

 
3,965

Intersegment eliminations
(429
)
 
(6,332
)
 
(3,609
)
 
(13,053
)
Total Offshore Division
37,928

 
56,214

 
84,162

 
143,988

Interdivision eliminations
(1,239
)
 
(1,213
)
 
(3,612
)
 
(3,229
)
Consolidated
$
305,144

 
$
306,371

 
$
872,555

 
$
761,717

 
 
 
 
 
 
 
 

21



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Income (loss) before taxes
 

 
 

 
 
 
 
Fluids Division
$
33,215

 
$
16,541

 
$
83,535

 
$
52,077

Production Testing Division
(4,528
)
 
3,426

 
(4,961
)
 
379

Compression Division
2,070

 
(6,562
)
 
5,974

 
4,102

Offshore Division
 

 
 

 
 
 
 
Offshore Services
4,576

 
601

 
(1,977
)
 
(5,538
)
Maritech
(1,649
)
 
(22,969
)
 
(987
)
 
(40,206
)
Intersegment eliminations
 
 

 
 
 

Total Offshore Division
2,927

 
(22,368
)
 
(2,964
)
 
(45,744
)
Interdivision eliminations
5

 
3

 
(5
)
 
9

Corporate Overhead(1)
(18,266
)
 
(15,867
)
 
(50,103
)
 
(48,827
)
Consolidated
$
15,423

 
$
(24,827
)
 
$
31,476

 
$
(38,004
)

 
September 30,
 
2015
 
2014
 
(In Thousands)
Total assets
 

 
 

Fluids Division
$
414,246

 
$
427,965

Production Testing Division
195,920

 
321,589

Compression Division
1,205,023

 
1,227,920

Offshore Division
 

 
 

Offshore Services
140,815

 
181,117

Maritech
5,068

 
25,730

Total Offshore Division
145,883

 
206,847

Corporate Overhead and eliminations
(19,759
)
 
9,918

Consolidated
$
1,941,313

 
$
2,194,239


(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
General and administrative expense
$
13,440

 
$
8,821

 
$
33,978

 
$
30,279

Depreciation and amortization
230

 
394

 
743

 
1,475

Interest expense
4,011

 
4,969

 
13,423

 
14,110

Other general corporate (income) expense, net
585

 
1,683

 
1,959

 
2,963

Total
$
18,266

 
$
15,867

 
$
50,103

 
$
48,827



22



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 2, 2015. This discussion includes forward-looking statements that involve certain risks and uncertainties.

Business Overview  

The continued strong performance of our Fluids Division and the August 2014 acquisition by our Compression Division of Compressor Systems, Inc. ("CSI") resulted in growth in consolidated revenues and gross profit during the third quarter of 2015 compared to the prior year period. Increased offshore clear brine fluids ("CBF") and completion services activity, including from a customer project associated with a new completion fluids technology that was introduced during the first half of 2015, more than offset the decreased demand for onshore water management services and resulted in improved performance by the Fluids Division. Our Compression Division, through CSI Compressco LP ("CCLP"), also reflected growth in revenues and gross profit during the third quarter of 2015 compared to the prior year period, as the August 4, 2014 acquisition of CSI (the "CSI Acquisition") resulted in a full three months of activity during the current year quarterly period compared to approximately two months of the prior year quarter. The growth in these two divisions' results occurred despite the continuing overall industry market challenges as a result of lower oil and natural gas commodity prices compared to early 2014. Throughout the industry, drilling and completion activity continues to decrease, putting increased competitive pressure on several of our businesses. In addition to the decreased activity levels of the water management business of our Fluids Division, the current market environment has also negatively impacted our Production Testing and Offshore Services segments, as well as the low-horsepower production enhancement operations of our Compression Division. We continue to respond aggressively to the current environment with cost reduction actions, which have included reductions in headcount, deferral of salary increases, renegotiation of vendor contracts, and other cost restructuring measures. These steps have resulted in improved profitability for certain of our businesses, particularly for our Offshore Services segment, which reported increased profitability compared to the prior year period despite a significant decrease in revenues. As a result of the above factors, as well as from decreased Maritech excess decommissioning costs compared to the prior year period, our third quarter 2015 consolidated gross profit increased 103.0% compared to the corresponding prior year period, without an increase in revenues.    
    
Given the lower demand for certain of our products and services in the current oil and natural gas services market environment, the expected level of future consolidated operating cash flows, which we have historically used to fund our growth and liquidity needs, has become more uncertain. While remaining committed to a long-term growth strategy, our near-term focus during this period of reduced demand is to preserve and enhance liquidity through strategic operating and financial measures. In addition to cost structure rationalization and working capital management, we have also focused on capital structure enhancements designed to strengthen our consolidated balance sheet. On November 5, 2015, we entered into a Note Purchase Agreement (the “2015 Senior Note Purchase Agreement”) with GSO Tetra Holdings LP, an unrelated third party. Pursuant to the 2015 Senior Note Purchase Agreement, we agreed to issue and sell $125.0 million in aggregate principal amount of our 11.0% Senior Notes due November 5, 2022 (the “Series 2015 Senior Notes”). Closing of the transaction is expected to occur on or before November 20, 2015. In addition, on November 5, 2015, we announced the commencement of a tender offer (the “Tender Offer”) to purchase for cash up to $25.0 million aggregate principal amount of the outstanding Series 2010-A Senior Notes and Series 2010-B Senior Notes (collectively, the “2010 Senior Notes”). Also on November 5, 2015, we entered into an amendment to the Note Purchase Agreement, conditioned upon the closing and funding of the issuance of the Series 2015 Senior Notes, that provides for the extension of the maturity date of our $50.0 million Senior Secured Notes from April 2017 to April 2019. Immediately after closing and funding, we are required to apply a portion of the proceeds from the sale of the Series 2015 Senior Notes to repay all of the indebtedness for borrowed money outstanding under our Credit Agreement. Thereafter, we are to apply any remaining portion of the proceeds, together with other funds (to the extent necessary) to (i) pay the purchase price for 2010 Senior Notes accepted for purchase pursuant to the Tender Offer (defined above), (ii) prepay in full all amounts owed in respect of the outstanding Series 2006-A Senior Notes, due April 30, 2016 and (iii) pay fees and expenses associated with the transactions contemplated under the 2015 Senior Note Purchase Agreement. Following the completion of these transactions, we will have repaid and extended the maturity dates of a significant amount of TETRA's total long-term debt. In addition, we are considering certain additional financing transactions with a view of generating additional cash to reduce the amount of our outstanding borrowings under our credit agreement, repay or refinance additional amounts of our Senior Notes, and generate additional liquidity.

23




The August 2014 issuance of the CCLP 7.25% Senior Notes (the "CCLP Senior Notes") and borrowings under the CCLP Credit Agreement resulted in increased levels of our consolidated debt. However, we do not analyze or manage our capital structure on a consolidated basis, as there are no cross default provisions, cross collateralization provisions, or cross guarantees between CCLP's debt and TETRA's debt. Approximately $588.3 million of our consolidated debt balance is owed by CCLP, and is to be serviced by CCLP's existing cash balances and the future cash provided by CCLP's operations (less its capital expenditures) and is secured by the assets of CCLP.

The following table provides condensed consolidating balance sheet information reflecting our net assets and CCLP's net assets that service our and its respective capital structures.
 
September 30, 2015
Condensed Consolidating Balance Sheet
TETRA
 
CCLP
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
Cash, excluding restricted cash
$
7,173

 
$
18,305

 
$

 
$
25,478

Affiliate receivables
7,868

 

 
(7,868
)
 

Other current assets
248,925

 
136,622

 

 
385,547

Property, plant and equipment, net
399,720

 
706,090

 

 
1,105,810

Other assets, including investment in CCLP
249,165

 
307,402

 
(132,089
)
 
424,478

Total assets
$
912,851

 
$
1,168,419

 
$
(139,957
)
 
$
1,941,313

 
 
 
 
 
 
 
 
Affiliate payables
$

 
$
7,868

 
$
(7,868
)
 
$

Current portion of long-term debt
90,425

 

 

 
90,425

Other current liabilities
132,741

 
64,869

 

 
197,610

Long-term debt, net
240,700

 
588,349

 

 
829,049

Other non-current liabilities
67,273

 
3,760

 

 
71,033

Total equity
381,712

 
503,573

 
(132,089
)
 
753,196

Total liabilities and equity
$
912,851

 
$
1,168,419

 
$
(139,957
)
 
$
1,941,313


TETRA’s debt is serviced by its existing cash balances and cash provided from operating activities (excluding CCLP), supplemented by the distributions we receive from CCLP and less cash capital expenditures (excluding CCLP). During the nine months ended September 30, 2015, consolidated cash provided from operating activities was $118.2 million, which included approximately $63.5 million generated by CCLP. Our cash provided from operating activities is reduced by the amount we spend for Maritech decommissioning liabilities, which was $5.2 million during the nine months ended September 30, 2015. During the first nine months of 2015, consolidated cash capital expenditures were $96.1 million, which included $76.0 million expended by CCLP. In addition, during the first nine months of 2015 we received $22.7 million from CCLP as our share of CCLP distributions. 

Our consolidated operating cash flows during the nine months ended September 30, 2015, increased to $118.2 million, an increase of $66.3 million, or 127.6%, over the prior year period. Our consolidated operating cash flows not only reflect the acquisition of CSI, but also the impact of the fiscal management steps noted above and the growth of certain of our businesses. Consolidated capital expenditures were $96.1 million during the nine months ended September 30, 2015, and included approximately $76.0 million of capital expenditures by our Compression Division, compared to $84.1 million of consolidated capital expenditures during the corresponding prior year period. Compression Division capital expenditures primarily relate to its over 100-horsepower fleet, as the demand for lower horsepower compressor packages has decreased in the current market environment. Excluding the growth in Compression Division capital expenditures, which totaled $76.4 million during the nine months ended September 30, 2015, our capital expenditure levels reflect our efforts to defer or reduce capital expenditure projects in the current market environment. Key objectives associated with our separate capital structure (excluding the capital structure of CCLP) include the ongoing management of amounts outstanding and available under our bank revolving credit facility and repayment of our Senior Notes. CCLP plans to continue its 2015 capital expenditure program, while monitoring demand levels for its compression products and services in the current environment, by using its cash and available capacity under its revolving bank credit facility (the "CCLP Credit Agreement"). TETRA's future consolidated operating cash flows are also affected by the continuing challenges associated with extinguishing the remaining Maritech asset retirement obligations. The amount of recorded liability for these

24



remaining obligations is approximately $51.2 million as of September 30, 2015. Approximately $17.9 million of this amount is expected to be performed during the twelve month period ending September 30, 2016, with the timing of a portion of this work being discretionary.

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, 2014, except as discussed below. 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.

Goodwill Impairment Testing - Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired in purchase transactions. We perform a goodwill impairment test on an annual basis or whenever indicators of impairment are present. We perform the annual test of goodwill impairment following the fourth quarter of each year. Our annual assessment for goodwill impairment begins with a qualitative assessment of whether it is “more likely than not” that the fair values of our reporting units are less than their carrying values. 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 the first step compares 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, including its long-lived property, plant and equipment assets, and identified intangible assets. 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 our reporting units' fair values, if required, are based on a combination of an income approach and a market approach. These estimates are imprecise and subject to our estimates of the future cash flows of our reporting units and our judgment as to how these estimated cash flows translate into our reporting units’ 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. If we overestimate the fair value of our reporting units, the balance of our goodwill assets may be overstated. Alternatively, if our estimated fair values are understated, an impairment might be recognized unnecessarily or in excess of the appropriate amount.

In our most recent annual goodwill impairment assessment as of December 31, 2014, based on our qualitative assessment, we determined that it was "more likely than not" that the fair values of one or more of our reporting units were less than their respective carrying values. As a result of the goodwill assessment analysis described above, as of December 31, 2014, we recorded an impairment of the entire $3.9 million of recorded goodwill for our Offshore Services reporting unit and a partial impairment of $60.4 million of the goodwill of our Production Testing reporting unit. As of September 30, 2015, our Fluids, Production Testing, and Compression reporting units reflect goodwill in the amounts of $6.6 million, $51.9 million, and $233.6 million, respectively. During the first nine months of 2015, global oil and natural gas commodity prices continued to be decreased compared to the prior year period. The decreased levels of commodity prices have had, and are expected to continue to have, a negative impact on industry drilling and capital expenditure activity, which affects the demand for products and services of each of our reporting units. As of September 30, 2015, our stock price had decreased compared to December 31, 2014, resulting in an overall reduction in our market capitalization. As part of the first step of our third quarter 2015 goodwill impairment testing, we updated our assessment of the future cash flows for each of our reporting units as of September 30, 2015, applying expected long-term growth rates, discount rates, and terminal values that we consider reasonable. Our Maritech and Offshore Services reporting units are excluded because they have no recorded goodwill. We calculated a present value of the respective cash flows for each of our other reporting units to arrive at an estimate of fair value under the income approach, and then used the market approach

25



to corroborate these values. Based on these updated assumptions, we determined that the fair value of our Fluids reporting unit was significantly in excess of its carrying value. Because the fair values of our Production Testing and Compression reporting units exceeded their respective carrying values by approximately 10% and 4% as of September 30, 2015, there is a reasonable possibility that the $51.9 million and $233.6 million, respectively, of goodwill for these reporting units may be impaired in a future period as a non-cash charge to earnings, and the amount of such impairments may be material. Specific uncertainties affecting the estimated fair value of our Production Testing and Compression reporting units include the impact of competition, prices of oil and natural gas, future overall activity levels in the regions in which we operate, the activity levels of our significant customers, and other factors affecting the rate of future growth of these reporting units. These factors will continue to be reviewed and assessed going forward. Negative developments with regard to these factors could have a further negative effect on the fair values of our Production Testing and Compression reporting units.

Results of Operations

Three months ended September 30, 2015 compared with three months ended September 30, 2014.

Consolidated Comparisons
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
305,144

 
$
306,371

 
$
(1,227
)
 
(0.4
)%
Gross profit
70,534

 
34,744

 
35,790

 
103.0
 %
Gross profit as a percentage of revenue
23.1
%
 
11.3
 %
 
 

 
 

General and administrative expense
40,910

 
37,099

 
3,811

 
10.3
 %
General and administrative expense as a percentage of revenue
13.4
%
 
12.1
 %
 
 

 
 

Interest expense, net
12,201

 
9,878

 
2,323

 
23.5
 %
Other (income) expense, net
2,000

 
12,594

 
(10,594
)
 
(84.1
)%
Income (loss) before taxes
15,423

 
(24,827
)
 
40,250

 
162.1
 %
Income (loss) before taxes as a percentage of revenue
5.1
%
 
(8.1
)%
 
 

 
 

Provision (benefit) for income taxes
4,687

 
(12,360
)
 
17,047

 
137.9
 %
Net income (loss)
10,736

 
(12,467
)
 
23,203

 
186.1
 %
Net (income) loss attributable to noncontrolling interest
(981
)
 
1,930

 
(2,911
)
 
 

Net income (loss) attributable to TETRA stockholders
$
9,755

 
$
(10,537
)
 
$
20,292

 
192.6
 %
 
Consolidated revenues for the current quarter decreased compared to the prior year quarter, despite increased revenues for the Compression Division as a result of the August 4, 2014 acquisition of CSI, and the inclusion of CSI revenues for the complete current year period. The acquisition of CSI, which generated increased revenues of approximately $39.6 million for the current year quarter compared to the prior year quarter, greatly expands the operations of our Compression Division, allowing it to participate in the compression market at a broader level. In addition, the Fluids Division also reflected increased revenues, primarily due to increased offshore CBF sales and related services, and despite decreased water management services revenues. These increases in Compression and Fluids Division revenues were offset by decreased revenues in our Production Testing and Offshore Services segments. The decreased revenues in these segments were primarily due to the impact of decreased industry demand and activity levels in many of the domestic and international markets we serve, largely caused by decreased oil and natural gas pricing. See Divisional Comparisons section below for additional discussion.

Consolidated gross profit increased during the current year quarter compared to the prior year quarter primarily due to the impact of our Fluids Division's increased offshore activity. In addition, Compression Division gross profit increased as a result of reflecting the impact from the CSI Acquisition for the complete current year quarter. Despite decreased revenues for our Production Testing and Offshore Services businesses, the negative impact on gross profit from these businesses was minimized by cost reduction efforts. Notably, gross profit from our Offshore Services business increased, despite a significant decrease in revenues, largely as a result of cost

26



reductions implemented in response to decreased activity levels. Maritech gross profit also increased compared to the prior year quarter, due to decreased excess decommissioning costs during the current year quarter.
 
Consolidated general and administrative expenses increased during the current year quarter compared to the prior year quarter, primarily due to the increase in the Compression Division administrative costs following the CSI Acquisition. During the prior year quarter, Compression Division general and administrative costs also included approximately $2.1 million of transaction costs related to the CSI Acquisition. Corporate Overhead general and administrative costs also increased compared to the prior year quarter primarily due to increased incentive and equity compensation costs. The increase in the Compression Division and Corporate Overhead general and administrative expenses was partially offset by decreased administrative costs for our Fluids, Production Testing, and Offshore Divisions, primarily as a result of administrative cost reduction efforts by these segments. Decreases in general and administrative expenses for the Production Testing and Offshore Divisions were accomplished despite an aggregate of approximately $2.2 million of increased bad debt expense compared to the prior year period. Consolidated general and administrative expense increased as a percentage of consolidated revenues despite the administrative cost reductions implemented by each of the above divisions.
 
Consolidated interest expense increased in the current year quarter due to increased borrowings, primarily from the increased borrowings by the Compression Division, through CCLP, to finance the CSI Acquisition and to fund its capital expenditures. Consolidated interest expense levels going forward are expected to continue to be increased compared to prior periods primarily due to the increased interest rate applicable to the Series 2015 Senior Notes and additional borrowings to fund the Compression Division capital expenditures.
 
Consolidated other expense was $2.0 million during the three months ended September 30, 2015 compared to $12.6 million during the prior year period, primarily due to the interim financing costs that were incurred during the prior year period by the Compression Division in connection with the CSI Acquisition.
 
Our consolidated effective tax rate for the current year quarter includes the effect of changes in our expected valuation allowance at the end of 2015 related to our deferred tax assets, such as our U.S. net operating loss carryforward. At December 31, 2014, we increased our valuation allowance primarily on our U.S. deferred tax assets after considering all available positive and negative evidence related to the realizability of our deferred tax assets. Similarly, after considering updated evidence related to the deferred tax assets of one of our international operations, during the third quarter of 2015 we also increased our valuation allowance for this international deferred tax asset. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

Divisional Comparisons
 
Fluids Division
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
110,587

 
$
105,296

 
$
5,291

 
5.0
 %
Gross profit
41,704

 
25,981

 
15,723

 
60.5
 %
Gross profit as a percentage of revenue
37.7
%
 
24.7
%
 
 

 
 

General and administrative expense
8,450

 
9,411

 
(961
)
 
(10.2
)%
General and administrative expense as a percentage of revenue
7.6
%
 
8.9
%
 
 

 
 

Interest (income) expense, net
(15
)
 
(130
)
 
115

 
 

Other (income) expense, net
54

 
159

 
(105
)
 
 

Income before taxes
$
33,215

 
$
16,541

 
$
16,674

 
100.8
 %
Income before taxes as a percentage of revenue
30.0
%
 
15.7
%
 
 

 
 

 
The increase in Fluids Division revenues during the current year quarter compared to the prior year quarter was primarily due to approximately $7.2 million of increased product sales revenues, primarily due to increased CBF and associated products sales revenues in the U.S. Gulf of Mexico. A large increase in product sales revenues was related to a single customer well completion project associated with a new completion fluid technology that was

27



introduced earlier in 2015. These increased CBF product sales revenues were partially offset by decreased sales of other manufactured products compared to the prior year period. Service revenues decreased approximately $1.9 million, as increased activity in the U.S. Gulf of Mexico was more than offset by decreased onshore water management services activity. The increased offshore completion service revenue was also associated with the new fluid technology completion project discussed above. Revenues from onshore water management services were decreased from the prior year quarter due to the impact of lower oil and natural gas commodity prices.

Fluids Division gross profit during the current year quarter increased compared to the prior year quarter primarily due to increased profitability associated with the mix of CBF products and services, particularly for offshore completion fluids products and services and the new fluid technology completion project discussed above. These increases in Fluids Division gross profit more than offset the reduced profitability of onshore water management services activity during the current year quarter. Operating cost reduction efforts also contributed to the improved gross profit compared to the prior year quarter.
 
Fluids Division income before taxes increased compared to the prior year quarter primarily due to the increased gross profit discussed above. In addition, the Fluids Division reduced its administrative cost levels compared to the prior year quarter, particularly for its onshore water management services operations, in light of current activity levels. The Fluids Division continues to review opportunities to further reduce its administrative costs.

Production Testing Division
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
28,942

 
$
50,177

 
$
(21,235
)
 
(42.3
)%
Gross profit
926

 
8,194

 
(7,268
)
 
(88.7
)%
Gross profit as a percentage of revenue
3.2
 %
 
16.7
%
 
 

 
 

General and administrative expense
5,766

 
5,303

 
463

 
8.7
 %
General and administrative expense as a percentage of revenue
19.9
 %
 
10.8
%
 
 

 
 

Interest (income) expense, net
4

 
29

 
(25
)
 
 

Other (income) expense, net
(316
)
 
(564
)
 
248

 
 

Income (loss) before taxes
$
(4,528
)
 
$
3,426

 
$
(7,954
)
 
(232.2
)%
Income (loss) before taxes as a percentage of revenue
(15.6
)%
 
7.0
%
 
 

 
 

 
Production Testing Division revenues decreased during the current year quarter compared to the prior year quarter due to decreased overall market activity. Industry activity levels have decreased compared to the prior year period due to decreased oil and natural gas commodity pricing. The impact of increased competition for decreased industry activity negatively affected our pricing and activity levels, although the Division has successfully expanded its domestic customer base compared to the prior year quarter.

Production Testing Division gross profit decreased during the current year quarter compared to the prior year quarter due to the decreased industry activity and increased competition as discussed above. The Production Testing Division also reflected an approximately $0.6 million charge related to a Brazilian Value Added Tax audit. This decrease in gross profit occurred despite cost reduction efforts, which have included headcount reductions and other steps to adjust the Production Testing Division's cost structure in light of current market conditions.
 
The Production Testing Division reported a pretax loss compared to pretax earnings during the prior year quarter, primarily due to decreased revenues and gross profit. General and administrative expenses increased due to approximately $2.1 million of increased bad debt expense, which more than offset administrative cost reductions, primarily from reduced headcount and other employee related cost reductions. The Division continues to review additional opportunities to further reduce its operating and administrative cost levels in light of current market conditions.


28



Compression Division
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
128,926

 
$
95,897

 
$
33,029

 
34.4
%
Gross profit
22,163

 
19,871

 
2,292

 
11.5
%
Gross profit as a percentage of revenue
17.2
%
 
20.7
 %
 
 

 
 

General and administrative expense
10,382

 
10,058

 
324

 
3.2
%
General and administrative expense as a percentage of revenue
8.1
%
 
10.5
 %
 
 

 
 

Interest (income) expense, net
8,201

 
4,998

 
3,203

 
 

Other (income) expense, net
1,510

 
11,377

 
(9,867
)
 
 

Income before taxes
$
2,070

 
$
(6,562
)
 
$
8,632

 
131.5
%
Income before taxes as a percentage of revenue
1.6
%
 
(6.8
)%
 
 

 
 

    
Compression Division revenues increased significantly during the current year quarter compared to the prior year quarter due to the CSI Acquisition. Approximately $20.2 million of the $14.9 million increase in service revenues were generated by the compression services and aftermarket services revenues of CSI. This increase in CSI revenue is attributable to a full three month period of activity being included in the current year quarter compared to approximately two months of activity in the prior year quarter, due to the August 4, 2014 CSI Acquisition date. This increase in revenue was offset by decreased non-CSI service revenues of approximately $5.3 million, primarily due to decreased demand for low-horsepower production enhancement compression services as a result of lower oil and natural gas commodity prices. Revenues from sales of compressor packages and parts during the current year quarter increased $18.1 million compared to the prior year quarter, with $19.4 million of the increase related to sales of compressors and parts by CSI, which was partially offset by decreased sales of non-CSI compressors and parts.

Compression Division gross profit increased during the current year quarter compared to the prior year quarter, also primarily due to the impact of the CSI Acquisition, which generated approximately $5.2 million of increased gross profit during the current year quarter. This increase in gross profit was partially offset by the decreased activity level of our non-CSI operations as discussed above. CSI gross profit includes approximately $16.6 million of depreciation and amortization expense, which reflects the allocation of the CSI Acquisition purchase price. CCLP is continuing to capture additional synergies anticipated as part of the integration of CSI's operations. These efforts will continue going forward and are expected to result in additional cost efficiencies in future periods.
 
The Compression Division reflected pretax earnings during the current year quarter compared to a pretax loss during the prior year quarter primarily due to decreased other expense, which included $9.3 million of interim financing costs associated with the CSI Acquisition and $0.6 million of decreased amortization costs in the prior year quarter. Interest expense increased as a result of the CCLP Senior Notes and the increased borrowings by CCLP under the CCLP Credit Agreement being outstanding for the full three month period during the current year quarter. These borrowings were used to finance a portion of the August 4, 2014 purchase price of the CSI Acquisition. Increased interest expense levels compared to the prior periods are expected to continue going forward, due to increased borrowings associated with the funding of ongoing capital expenditures. General and administrative expense levels increased compared to the prior year period, also due to a full three month period of CSI administrative expenses. In addition, general and administrative costs increased due to increased corporate allocated costs. These increases in administrative costs were partially offset by decreased professional services costs, as the prior year quarter included approximately $2.1 million of CSI Acquisition transaction costs.
 

29



Offshore Division
 
Offshore Services Segment
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
37,882

 
$
61,505

 
$
(23,623
)
 
(38.4
)%
Gross profit
7,296

 
3,833

 
3,463

 
90.3
 %
Gross profit as a percentage of revenue
19.3
%
 
6.2
%
 
 
 
 
General and administrative expense
2,556

 
3,215

 
(659
)
 
(20.5
)%
General and administrative expense as a percentage of revenue
6.7
%
 
5.2
%
 
 
 
 
Interest (income) expense, net

 

 

 
 
Other (income) expense, net
164

 
17

 
147

 
 
Income before taxes
$
4,576

 
$
601

 
$
3,975

 
661.4
 %
Income before taxes as a percentage of revenue
12.1
%
 
1.0
%
 
 
 
 

Revenues for the Offshore Services segment decreased during the current year quarter compared to the prior year quarter primarily due to decreased revenues from its heavy lift and diving services businesses. Decreased heavy lift and diving services activity levels in the U.S. Gulf of Mexico during the current quarter reflected an overall decrease in demand in this market, partly due to property acquisitions by key customers that have resulted in a postponement of certain well abandonment projects. Given the current decreased oil and natural gas commodity price environment, Offshore Services anticipates a continued decrease in demand for its services for the foreseeable future. Offshore Services revenues during the current year quarter were also negatively impacted by the reduction in work performed for our Maritech segment compared to the prior year quarter, with $0.4 million of such work being performed during the current year quarter compared to $6.3 million of revenues during the prior year quarter. Revenues for work performed for Maritech, which are eliminated in consolidation, are expected to continue to be lower in future periods.

Gross profit for the Offshore Services segment increased compared to the prior year period despite the impact of decreased activity levels for heavy lift and diving services as discussed above, as a result of cost reduction measures and process efficiencies that have been implemented, including reducing the size of the segment's vessel and equipment fleets. As a result of these cost reductions and process efficiencies, gross profit as a percentage of revenue increased compared to the prior year quarter. The Offshore Services segment continues to consider additional opportunities to optimize its operating cost structure.
 
Offshore Services segment income before taxes increased compared to the prior year quarter primarily due to the increased gross profit and due to decreased general and administrative expenses, primarily from reduced salary and employee related expenses, and despite increased bad debt expense. The Offshore Services segment continues to review its administrative cost structure for additional cost reductions and process efficiency actions in response to current market conditions.


30



Maritech Segment
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2015
 
2014
 
2015 vs 2014
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
475

 
$
1,041

 
$
(566
)