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.
Our consolidated financial statements include the accounts of our wholly owned subsidiaries. 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, 2016
are not necessarily indicative of results that may be expected for the twelve months ended
December 31, 2016
.
We consolidate the financial statements of CSI Compressco LP and its subsidiaries ("CCLP") as part of our Compression Division, as we determined that CCLP is a variable interest entity and we are the primary beneficiary. We control the financial interests of CCLP and have the ability to direct the activities of CCLP that most significantly impact its economic performance through our ownership of its general partner. The share of CCLP net assets and earnings that is not owned by us is presented as noncontrolling interest in our consolidated financial statements. Our cash flows from our investment in CCLP are limited to the quarterly distributions we receive on our CCLP common units and general partner interest (including incentive distribution rights) and the amounts collected for services we perform on behalf of CCLP, as TETRA's capital structure and CCLP's capital structure are separate, and do not include cross default provisions, cross collateralization provisions, or cross guarantees.
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, 2015
, and notes thereto included in our Annual Report on Form 10-K, which
we filed with the SEC on
March 4, 2016
.
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 presentation of deferred financing costs in accordance with the adoption of Accounting Standards Update ("ASU") No. 2015-03 and ASU No. 2015-15 as further discussed below and the allocation of deferred financing costs from Other Expense, net to Interest Expense, net. See Note B - Long-Term Debt and Other Borrowings for further discussion and presentation.
Throughout 2015 and continuing into 2016, low 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 current capital markets is more limited and costly. Accordingly, we and CCLP have implemented and continue to implement measures designed to lower our respective cost structures, improve our respective operating cash flows and liquidity, and strengthen our respective balance sheets. These measures include headcount reductions and wage reductions. We and CCLP also continue to negotiate with our suppliers and service providers to reduce costs. We and CCLP continue to critically review all capital expenditure activities and are deferring a significant portion of our respective growth and maintenance capital expenditure plans until they may be justified in the future by expected activity levels. We and CCLP believe the steps taken have enhanced our respective capital structures and operating cash flows and additional steps may be taken to enhance our respective operating cash flows in the future.
In May 2016, and pursuant to tender offers (the “Tender Offers”) to purchase for cash any and all of the outstanding Series 2010-A Senior Notes, Series 2010-B Senior Notes, and Series 2013 Senior Notes (together the "Tender Offer Senior Notes"), we purchased Tender Offer Senior Notes in an aggregate principal amount of
$100.0 million
, representing the total outstanding principal amount of the Tender Offer Senior Notes. In June 2016, upon the closing of our offering of our common stock, we issued
11.5 million
shares of common stock and used the proceeds to repay the remaining balance outstanding under our Senior Secured Notes. (For further discussion of this common stock offering, see Note F - Equity.) In addition, in July 2016, we entered into amendments of the agreements governing our bank revolving credit facility (as amended, the "Credit Agreement") and our 11% Senior Notes due November 5, 2022 (the "11% Senior Notes Agreement") whereby, among other modifications, certain covenants under the Credit Agreement and 11% Senior Notes Agreement were favorably amended. (For further discussion of the Tender Offers and the amendments to these debt agreements, see Note B - Long-Term Debt and Other Borrowings.) We have reviewed our financial forecasts as of
November 9, 2016
for the twelve month period subsequent to September 30, 2016, which consider the impact of cost reduction efforts, our June 2016 common stock offering, and the amendments to the Credit Agreement and the 11% Senior Note Agreement. Based on our financial forecasts, which are based on certain operating and other business assumptions that we believe to be reasonable as of
November 9, 2016
, we believe that despite the current industry environment and activity levels, we will have adequate liquidity, earnings, and operating cash flows to fund our operations and debt obligations and maintain compliance with our debt covenants through September 30, 2017. However, there can be no assurance that the assumptions we have made will turn out to be accurate or that we will remain in compliance with these covenants going forward, and could consequently be in default under our Credit Agreement and 11% Senior Note Agreement if we were unable to obtain a waiver or amendment from our lenders.
In May 2016 and October 2016, CCLP entered into amendments of the agreement governing its bank revolving credit facility (as amended, the "CCLP Credit Agreement") by, among other things, favorably amending certain covenants, (See Note B - Long-Term Debt and Other Borrowings.) In
August 2016
and September 2016, CCLP received
$77.3 million
of aggregate net proceeds, after deducting certain offering expenses, from the private placements (the "Initial Private Placement" and "Subsequent Private Placement") of its Series A Convertible Preferred Units (the "CCLP Preferred Units") and such proceeds were used to pay additional offering expenses and reduce outstanding indebtedness of CCLP under the CCLP Credit Agreement and the CCLP 7.25% Senior Notes. We purchased a portion of the CCLP Preferred Units for
$10.0 million
. (For further discussion of the issuance of CCLP Preferred Units, see Note C - CCLP Series A Convertible Preferred Units.) CCLP has reviewed its financial forecasts as of
November 9, 2016
for the twelve month period subsequent to September 30, 2016 which consider the impact of recent cost reduction efforts, the amendments of the CCLP Credit Agreement, and the
$77.3 million
of aggregate net proceeds received from the private placement of Preferred Units. Based on these reviews and the current market conditions as of
November 9, 2016
, CCLP believes that despite the current industry environment and activity levels, it will have adequate liquidity, earnings, and operating cash flows to fund its operations and debt obligations and maintain compliance with its debt covenants through September 30, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management 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, expenses, and impairments during the reporting period. 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, 2016
consists primarily of escrowed cash associated with our July 2011 purchase of a heavy lift derrick barge. The escrowed cash is expected to be released to the sellers in early 2017.
Inventories
Inventories are stated at the lower of cost or market value. Except for work in progress inventory discussed below, cost is determined using the weighted average method. Components of inventories as of
September 30, 2016
and
December 31, 2015
are as follows:
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September 30, 2016
|
|
December 31, 2015
|
|
|
(In Thousands)
|
|
Finished goods
|
$
|
68,856
|
|
|
$
|
54,587
|
|
|
Raw materials
|
3,431
|
|
|
1,731
|
|
|
Parts and supplies
|
37,577
|
|
|
37,379
|
|
|
Work in progress
|
18,541
|
|
|
23,312
|
|
|
Total inventories
|
$
|
128,405
|
|
|
$
|
117,009
|
|
Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. 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. The cost of work in process is determined using the specific identification method. During the
nine
month period ended
September 30, 2016
,
$12.0 million
of CCLP work in progress inventory was transferred to Property, Plant and Equipment. We write down the value of inventory by an amount equal to the difference between its cost and its market value.
Goodwill
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.
The assessment for goodwill impairment begins with a qualitative assessment of whether it is “more likely than not” that the fair value of each reporting unit is less than its carrying value. This qualitative assessment requires the evaluation, based on the weight of evidence, of the significance of all identified events and circumstances for each reporting unit. During
2015
, and continuing into
2016
, global oil and natural gas commodity prices, particularly crude oil, were significantly reduced. These low 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 a portion of our products and services. Due to the decrease in the price of our common stock and the price per common unit of CCLP during the first three months of
2016
, our and CCLP's market capitalizations as of March 31, 2016, were below their respective recorded net book values, including goodwill. In addition, the continuing low oil and natural gas commodity price environment resulted in a further negative impact on demand for the products and services for each of our reporting units. As a result of these factors, we determined that it was “more likely than not” that the fair values of certain of our reporting units were less than their respective carrying values as of March 31, 2016.
When the qualitative analysis indicates that it is “more likely than not” that a reporting unit’s fair value is less than its carrying value, the resulting goodwill impairment test consists of a two-step accounting test performed on a reporting unit basis.
The first step of the impairment test is to compare the estimated fair value with the recorded net book value (including goodwill) of our business. If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the reporting unit. Business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill for the reporting unit, and the recorded amount is written down to the hypothetical amount, if lower.
Because quoted market prices for our reporting units other than Compression are not available, our management must apply judgment in determining the estimated fair value of these reporting units for purposes of performing the goodwill impairment test. Management uses all available information to make these fair value determinations, including the present value of expected future cash flows using discount rates commensurate with the risks involved in the assets. The resultant fair values calculated for the reporting units are then compared to
observable metrics for other companies in our industry or to mergers and acquisitions in our industry to determine whether those valuations, in our judgment, appear reasonable.
The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company’s stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole. Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of a single share of that entity’s common stock. Therefore, once the fair value of the reporting units was determined, we also added a control premium to the calculations. This control premium is judgmental and is based on observed mergers and acquisitions in our industry.
Goodwill Impairment as of March 31, 2016
. As part of our internal annual business outlook for each of our reporting units that we performed during the fourth quarter of 2015, we considered changes in the global economic environment that affected our stock price and market capitalization. As part of the first step of goodwill impairment testing as of March 31, 2016, we updated our annual assessment of the future cash flows for each of our reporting units, applying expected long-term growth rates, discount rates, and terminal values that we consider reasonable for each reporting unit. We calculated a present value of the respective cash flows for each of the reporting units to arrive at an estimate of fair value under the income approach, and then used the market approach to corroborate these values.
During the first three months of
2016
, low oil and natural gas commodity prices resulted in decreased demand for many of the products and services of each of our reporting units. However, based on updated assumptions as of March 31, 2016, we determined that the fair value of our Fluids Division was significantly in excess of its carrying value, which includes
$6.6 million
of goodwill. Our Offshore Services and Maritech Divisions had no remaining goodwill as of March 31, 2016. With regard to our Compression Division, demand for low-horsepower wellhead compression services and for sales of compressor equipment decreased significantly and is expected to continue to be decreased for the foreseeable future. In addition, the price per common unit of CCLP as of March 31, 2016 decreased compared to
December 31, 2015
. Accordingly, the fair value, including the market capitalization for CCLP, for the Compression reporting unit was less than its carrying value as of March 31, 2016, despite impairments recorded as of December 31, 2015. For our Production Testing Division, demand for production testing services decreased in each of the market areas in which we operate, resulting in decreased estimated future cash flows. As a result, the fair value of the Production Testing reporting unit was also less than its carrying value as of March 31, 2016, despite impairments recorded as of
December 31, 2015
. After making the hypothetical purchase price adjustments as part of the second step of the goodwill impairment test, there was $0.0 million residual purchase price to be allocated to the goodwill of both the Compression and Production Testing reporting units. Based on this analysis, we concluded that full impairments of the
$92.4 million
of recorded goodwill for Compression and
$13.9 million
of recorded goodwill for Production Testing were required. Accordingly, during the three month period ended March 31, 2016,
$106.2 million
was charged to Goodwill Impairment expense in the accompanying consolidated statement of operations.
As of
September 30, 2016
, we determined that there was no additional impairment of goodwill, as the fair value of our Fluids Division remains in excess of its carrying value. The carrying amounts of goodwill for the Fluids, Production Testing, Compression, and Offshore Services reporting units are net of
$23.8 million
,
$111.8 million
,
$231.8 million
, and
$27.2 million
, respectively, of accumulated impairment losses.
The changes in the carrying amount of goodwill are as follows:
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|
|
|
|
|
|
|
|
|
Fluids
|
|
Production Testing
|
|
Compression
|
|
Offshore Services
|
|
Maritech
|
|
Total
|
|
|
|
(In Thousands)
|
|
Balance as of December 31, 2014
|
|
$
|
6,636
|
|
|
$
|
53,682
|
|
|
$
|
233,548
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,866
|
|
|
Goodwill adjustments
|
|
—
|
|
|
(39,775
|
)
|
|
(141,146
|
)
|
|
—
|
|
|
—
|
|
|
(180,921
|
)
|
|
Balance as of December 31, 2015
|
|
6,636
|
|
|
13,907
|
|
|
92,402
|
|
|
—
|
|
|
—
|
|
|
112,945
|
|
|
Goodwill adjustments
|
|
—
|
|
|
(13,907
|
)
|
|
(92,402
|
)
|
|
—
|
|
|
—
|
|
|
(106,309
|
)
|
|
Balance as of September 30, 2016
|
|
$
|
6,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,636
|
|
Impairments of Long-Lived Assets
Impairments of long-lived assets, including identified intangible assets, are determined periodically when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgments as to the future undiscounted operating cash flows to be generated from these assets throughout their
remaining
estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related asset, an impairment is recognized for the excess of the carrying value over its fair value. Fair value of intangible assets is generally determined using the discounted present value of future cash flows using discount rates commensurate with the risks inherent with the specific assets. Assets held for sale are recorded at the lower of carrying value or estimated fair value less estimated selling costs.
During the first
nine
months of 2016, primarily as a result of continuing decreased demand due to current market conditions, our Compression, Production Testing, and Fluids segments recorded
$7.9 million
,
$2.8 million
, and
$0.3 million
, respectively, of impairments associated with certain identified intangible assets. These amounts were charged to Impairments of Long-Lived Assets expense in the accompanying consolidated statement of operations.
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:
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|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Number of weighted average common shares outstanding
|
91,746
|
|
|
79,219
|
|
|
85,093
|
|
|
79,098
|
|
|
Assumed exercise of stock awards
|
—
|
|
|
573
|
|
|
—
|
|
|
357
|
|
|
Average diluted shares outstanding
|
91,746
|
|
|
79,792
|
|
|
85,093
|
|
|
79,455
|
|
For the
three and nine
month periods ended
September 30, 2016
, 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. 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, 2016
, the calculation of diluted earnings per common share excludes the impact of the CCLP Preferred Units, as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been antidilutive.
Services and Rentals Revenues and Costs
A portion of our services and rentals revenues consist of income pursuant to operating lease arrangements for compressor packages and other equipment assets. For the
three and nine
month periods ended
September 30, 2016
and
2015
, 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.
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|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Rental revenue
|
$
|
15,585
|
|
|
$
|
30,478
|
|
|
$
|
41,552
|
|
|
$
|
122,476
|
|
|
Cost of rental revenue
|
$
|
8,558
|
|
|
$
|
11,245
|
|
|
$
|
31,424
|
|
|
$
|
53,680
|
|
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, respectively, 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. The U.S. dollar is the designated functional currency for all of our other foreign operations. The cumulative translation effects of translating the applicable 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
$(0.2) million
and
$(0.5) million
during the
three and nine
month periods ended
September 30, 2016
and
$0.5 million
and
$(1.8) million
during the
three and nine
month periods ended
September 30, 2015
, respectively.
Income Taxes
Our consolidated provision for income taxes during the first nine months of 2015 and 2016 is primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rates for the three and
nine
month periods ended
September 30, 2016
of negative
6.4%
and negative
0.9%
, respectively, were primarily the result of losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against the related net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. Further, the effective tax rate is negatively impacted by the nondeductible portion of our goodwill impairments recorded during the three month period ended March 31, 2016.
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 U.S. generally accepted accounting principles ("GAAP"), 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 determination of the carrying value of the CCLP Preferred Units (a Level 3 fair value measurement), which were issued in August and September 2016. 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). Fair value measurements are also utilized on a nonrecurring basis, such as 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), the initial recording of our decommissioning and other asset retirement obligations, and for the impairment of long-lived assets, including goodwill (a level 3 fair value measurement). The fair value of certain 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 11% Senior Notes and Tender Offer Senior Notes at
September 30, 2016
and
December 31, 2015
, were approximately
$121.9 million
and
$229.8 million
, respectively, based on current interest rates on those dates, which were different from the stated interest rate on the on these notes. Those fair values compared to carrying amounts of such notes of
$125.0 million
and
$275.0 million
, respectively. The fair values of the publicly traded CCLP 7.25% Senior Notes (as herein defined) at
September 30, 2016
and
December 31, 2015
, were approximately
$312.7 million
and
$259.9 million
, respectively, (a level 2 fair value measurement) based on current interest rates on those dates, which were different from the stated interest rate on the CCLP 7.25% Senior Notes. Those fair values compared to a face amounts of $
330.0 million
and
$350.0 million
, respectively. See Note C - Long-Term Debt and Other Borrowings, for further discussion. We calculated the fair values of our 11% Senior Notes and Tender Offer Senior Notes as of
September 30, 2016
and
December 31, 2015
, internally, using current market conditions and average cost of debt (a level 2 fair value measurement).
The CCLP Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items. These unobservable items include (i) the volatility of the trading price of CCLP's common units compared to a volatility analysis of equity prices of CCLP's comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis. The fair valuation of the CCLP Preferred Units liability is increased by, among other factors, projected increases in CCLP's common unit price, and by increases in the volatility and decreases in the debt yields of CCLP's comparable peer companies. Increases (or decreases) in the fair value of CCLP Preferred Units will increase (decrease) the associated liability and result in future adjustments to earnings for the associated valuation losses (gains).
A summary of these fair value measurements as of
September 30, 2016
and
December 31, 2015
, is as follows:
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|
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
|
September 30, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
(In Thousands)
|
|
CCLP Series A Preferred Units
|
$
|
77,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77,018
|
|
|
Asset for foreign currency derivative contracts
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Liability for foreign currency derivative contracts
|
(105
|
)
|
|
—
|
|
|
(105
|
)
|
|
—
|
|
|
Net liability
|
$
|
76,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
December 31, 2015
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
(In Thousands)
|
|
Asset for foreign currency derivative contracts
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
Liability for foreign currency derivative contracts
|
(385
|
)
|
|
—
|
|
|
(385
|
)
|
|
—
|
|
|
Acquisition contingent consideration liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net liability
|
$
|
(362
|
)
|
|
|
|
|
|
|
During the first quarter of 2016, in connection with the review of goodwill impairment of our Compression and Production Testing Divisions, these segments recorded total impairment charges of
$117.1 million
, reflecting the decreased fair value for certain assets. For further discussion, see "Goodwill" and "Impairment of Long-Lived Assets" section above. The fair values used in these impairment calculations were estimated based on a variety of measurements, including current replacement cost and discounted estimated future cash flows, all of which are based on significant unobservable inputs (a level 3 fair value measurement) in accordance with the fair value
hierarchy.
A summary of these nonrecurring fair value measurements as of March 31, 2016, using the fair value hierarchy is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
Total as of
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Year-to-Date
Impairment
|
|
Description
|
|
March 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Losses
|
|
|
|
(In Thousands)
|
|
Compression intangible assets
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
7,866
|
|
|
Compression goodwill
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92,334
|
|
|
Production Testing intangible assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,805
|
|
|
Production Testing goodwill
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,871
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
256
|
|
|
Total
|
|
$
|
—
|
|
|
|
|
|
|
|
|
$
|
117,132
|
|
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 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 is effective for 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 March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" to clarify the guidance on principal versus agent considerations. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.
In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" to clarify the guidance on identifying performance obligations and the licensing implementation guidance. This ASU does not change the effective date or adoption method under ASU 2014-09, which is noted above.
Additionally in May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients". This ASU addresses and amends several aspects of ASU 2014-09, but does not change the core principle of the guidance. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern.” 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 annual periods 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 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 financing 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 annual periods beginning after December 15, 2015, and interim periods within those annual periods and is to be applied retrospectively. As a result of the retrospective adoption of this guidance during the quarter, deferred financing costs of
$10.9 million
and
$13.5 million
at
September 30, 2016
and
December 31, 2015
, respectively, are netted against the carrying values of the Senior Notes of TETRA and CCLP.
Additionally, in accordance with ASU No. 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements", issued in August 2015, we elected to present the deferred financing costs associated with the bank credit facilities of
$6.3 million
and
$6.7 million
at
September 30, 2016
and
December 31, 2015
, respectively, as netted against the outstanding amount of the bank credit facilities of TETRA and CCLP.
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 annual periods beginning after December 15, 2016, and interim periods within those annual periods, and is to be applied prospectively with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) to increase comparability and transparency among different organizations. Organizations are required to recognize lease assets and lease liabilities on the balance sheet and disclose key information about the leasing arrangements and cash flows. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, under a modified retrospective adoption with early adoption permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" as part of a simplification initiative. The update addresses and simplifies several aspects of accounting for share-based payment transactions. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted, and is to be applied using either modified retrospective, retrospective, or prospective transition method based on which amendment is being applied. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13, which has an effective date of the first quarter of fiscal 2022, also applies to employee benefit plan accounting. We are currently assessing the potential effects of these changes to our consolidated financial statements and employee benefit plan accounting.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" to reduce diversity in practice in classification of certain transactions in the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
NOTE B – LONG-TERM DEBT AND OTHER BORROWINGS
We believe TETRA's capital structure and CCLP's capital structure should be considered separately, as there are no cross default provisions, cross collateralization provisions, or cross guarantees between CCLP's debt and TETRA's debt.
Consolidated long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
(In Thousands)
|
|
TETRA
|
|
Scheduled Maturity
|
|
|
|
|
Bank revolving line of credit facility (presented net of the unamortized deferred financing costs of $1.9 million as of September 30, 2016 and $1.3 million as of December 31, 2015)
|
|
September 30, 2019
|
$
|
125,849
|
|
|
$
|
21,572
|
|
|
5.09% Senior Notes, Series 2010-A (presented net of unamortized deferred financing costs of $0 million as of September 30, 2016 and $0.1 million as of December 31, 2015)
|
|
December 15, 2017
|
—
|
|
|
46,809
|
|
|
5.67% Senior Notes, Series 2010-B (presented net of unamortized deferred financing costs of $0 million as of September 30, 2016 and $0.1 million as of December 31, 2015)
|
|
December 15, 2020
|
—
|
|
|
17,964
|
|
|
4.00% Senior Notes, Series 2013 (presented net of unamortized deferred financing costs of $0 million as of September 30, 2016 and $0.2 million as of December 31, 2015)
|
|
April 29, 2020
|
—
|
|
|
34,753
|
|
|
11.00% Senior Notes, Series 2015 (presented net of the unamortized discount of $4.6 million as of September 30, 2016 and $4.9 million as of December 31, 2015 and net of unamortized deferred financing costs of $3.9 million as of September 30, 2016 and $3.2 million as of December 31, 2015)
|
|
November 5, 2022
|
116,492
|
|
|
116,837
|
|
|
Senior Secured Notes (presented net of unamortized deferred financing costs of $0 million as of September 30, 2016 and $1.4 million as of December 31, 2015)
|
|
April 1, 2019
|
—
|
|
|
48,635
|
|
|
Other
|
|
|
—
|
|
|
50
|
|
|
TETRA total debt
|
|
|
242,341
|
|
|
286,620
|
|
|
Less current portion
|
|
|
—
|
|
|
(50
|
)
|
|
TETRA total long-term debt
|
|
|
$
|
242,341
|
|
|
$
|
286,570
|
|
|
|
|
|
|
|
|
|
CCLP
|
|
|
|
|
|
|
CCLP Bank Credit Facility (presented net of the unamortized deferred financing costs of $4.4 million as of September 30, 2016 and $5.4 million as of December 31, 2015)
|
|
August 4, 2019
|
176,567
|
|
|
229,555
|
|
|
CCLP 7.25% Senior Notes (presented net of the unamortized discount of $3.9 million as of September 30, 2016 and $4.5 million as of December 31, 2015 and net of unamortized deferred financing costs of $7.0 million as of September 30, 2016 and $8.4 million as of December 31, 2015)
|
|
August 15, 2022
|
319,124
|
|
|
337,103
|
|
|
CCLP total long-term debt
|
|
|
495,691
|
|
|
566,658
|
|
|
Consolidated total long-term debt
|
|
|
$
|
738,032
|
|
|
$
|
853,228
|
|
As a result of the retrospective adoption of ASU 2015-03 during the three months ended March 31, 2016, deferred financing costs of
$20.2 million
at
December 31, 2015
were reclassified out of long-term other assets and
are netted against the carrying values of the bank credit facilities and Senior Notes of TETRA and CCLP. As of
September 30, 2016
, long-term debt is presented net of deferred financing costs of
$17.3 million
. In addition, amortization of deferred financing costs of
$1.0 million
and
$2.8 million
for the
three and nine
month periods ended
September 30, 2015
, respectively, were reclassified from Other Expense, net to Interest Expense, net in the accompanying consolidated statements of operations. As of the
three and nine
month periods ended
September 30, 2016
,
$1.0 million
and
$3.1 million
, respectively, of financing costs were expensed in interest expense.
As of
September 30, 2016
, TETRA (excluding CCLP) had an outstanding balance on its Credit Agreement of
$127.8 million
, and
had
$5.4 million
in letters of credit and guarantees
against the
revolving credit facility, leaving a net availability of
$91.8 million
. As of
September 30, 2016
, CCLP had a balance outstanding under the CCLP Credit Agreement of
$181.0 million
, had
$7.6 million
letters of credit and performance bonds outstanding, leaving a net availability under the CCLP Credit Agreement of
$151.3 million
. Availability under each of the TETRA Credit Agreement and the CCLP Credit Agreement is subject to compliance with the covenants and other provisions in the respective credit agreements that may limit borrowings thereunder. In addition, as of the November 2016 amendment to the CCLP Credit Agreement, availability under the CCLP Credit Agreement is also subject to a borrowing base limitation. See below for further discussion of the CCLP Credit Agreement.
As described below, we and CCLP are in compliance with all covenants of our respective credit agreements and senior note agreements as of
September 30, 2016
. We have reviewed our financial forecasts as of
November 9, 2016
for the twelve month period subsequent to September 30, 2016, which consider the impact of cost reduction efforts, our June 2016 common stock offering, and the amendments to the Credit Agreement and the 11% Senior Note Agreement. Based on our financial forecasts, which are based on certain operating and other business assumptions that we believe to be reasonable as of
November 9, 2016
, we anticipate that, despite the current industry environment and activity levels, we will have sufficient liquidity, earnings, and operating cash flows to maintain compliance with the covenants under our debt agreements through September 30, 2017. With regard to CCLP, considering financial forecasts as of
November 9, 2016
, and as a result of the impact of recent cost reduction efforts, the May 2016 and November 2016 amendments of the CCLP Credit Agreement, and the
$77.3 million
of aggregate net proceeds received from the private placements of the CCLP Preferred Units (including
$10.0 million
of proceeds received from us related to our purchase of a portion of the CCLP Preferred Units), CCLP believes that it will have adequate liquidity, earnings, and operating cash flows to fund its operations and debt obligations and maintain compliance with the covenants under its debt agreements through September 30, 2017.
Our Long-Term Debt
Our Credit Agreement.
On July 1, 2016, we entered into an amendment (the "Fourth Amendment") of our Credit Agreement that replaced and modified certain covenants in the Credit Agreement. Pursuant to the Fourth Amendment, the interest charge coverage ratio covenant was deleted and replaced with a fixed charge coverage ratio covenant. The fixed charge coverage ratio compares (a) EBITDA (as adjusted and defined in the Credit Agreement) less (1) cash income tax expense, (2) non-financed capital expenditures, and (3) cash dividends and distributions to (b) interest expense plus (1) scheduled principal payments and (2) stock purchases. The Fourth Amendment provides that the fixed charge coverage ratio may not be less than 1.25 to 1 as of the end of any fiscal quarter. The consolidated leverage ratio covenant was amended and may not exceed (a) 4.00 to 1 at the end of the fiscal quarters ending during the period from and including June 30, 2016 through and including March 31, 2018, (b) 3.75 to 1 at the end of the fiscal quarters ending during the period from and including June 30, 2018 through and including December 31, 2018, and (c) 3.5 to 1 at the end of each of the fiscal quarters thereafter. In addition, subsequent to the Fourth Amendment, borrowings will bear interest at the British Bankers Association LIBOR rate plus 2.25% to 4.00%, or an alternate base rate plus 0.00% to 1.00%, in each case depending on one of our financial ratios, and the commitment fee on unused portions of the facility will range from 0.35% to 0.75%. The Fourth Amendment also resulted in additional modifications, including a requirement that all obligations under the Credit Agreement and the guarantees of such obligations be secured by first-lien security interests in substantially all of our assets and the assets of our subsidiaries (limited, in the case of foreign subsidiaries, to 66% of the voting stock or equity interests of first-tier foreign subsidiaries). Such security interests are for the benefit of the lenders of the Credit Agreement as well as the holder of our 11% Senior Notes. Pursuant to the Fourth Amendment, bank fees and other financing costs of $0.8 million were deferred, netting against the carrying value of the amount outstanding during the
nine
month period ended
September 30, 2016
.
At
September 30, 2016
, our consolidated leverage ratio was
3.64
to 1 (compared to 4.00 to 1 maximum as allowed under the Credit Agreement) and our fixed charge coverage ratio was
2.32
to 1 (compared to a 1.25 to 1 minimum required under the Credit Agreement).
Our Senior Notes
.
In May 2016, we purchased for cash the Tender Offer Senior Notes, in the aggregate principal amount of
$100.0 million
, plus accrued and unpaid interest, pursuant to previously announced Tender Offers. The consideration paid for the Tender Offer Senior Notes was a cash amount equal to $100,000 per $100,000 principal amount of the Tender Offer Senior Notes validly tendered (and not validly withdrawn) prior to the expiration time of each Tender Offer, and validly accepted for purchase by us. The purchase of the Tender Offer Senior Notes was funded by borrowings under our Credit Agreement. In connection with the repayment of the Tender Offer Senior Notes, approximately
$0.4 million
of remaining unamortized deferred finance costs were charged to other expense during the nine month period ended
September 30, 2016
.
In June 2016, and following the issuance of
11.5 million
shares of our common stock, we utilized a portion of the
$60.4 million
of net proceeds to repay the remaining
$30.0 million
outstanding under our Senior Secured Notes. The remaining proceeds were used to pay offering related expenses and reduce the amount of borrowings outstanding under our Credit Agreement. In connection with the repayment of the Senior Secured Notes,
$1.1 million
of remaining unamortized deferred finance costs were charged to other expense during the nine month period ended
September 30, 2016
.
On July 1, 2016, we entered into an Amended and Restated Note Purchase Agreement (the "Amended and Restated 11% Senior Note Agreement") with GSO Tetra Holdings LP ("GSO"), to amend and replace the previous Note Purchase Agreement relating to our
$125.0 million
aggregate principal amount of 11% Senior Notes due November 5, 2022 (the "11% Senior Notes"). The Amended and Restated 11% Senior Note Agreement amends certain covenants, including replacing the interest coverage ratio covenant in the previous Note Purchase Agreement with a minimum permitted fixed charge coverage ratio at the end of any fiscal quarter of 1.1 to 1. Additionally, the maximum permitted ratio of consolidated funded indebtedness at the end of any fiscal quarter to a defined measure of earnings increased from 3.50 to 1 to (a) 4.50 to 1 as of the end of any fiscal quarter ending during the period commencing July 1, 2016 and ending on March 31, 2018, (b) 4.25 to1 as of the end of any fiscal quarter ending during the period commencing on June 30, 2018 and ending on December 31, 2018 and (c) 4.00 to 1 as of the end of any fiscal quarter ending thereafter. Pursuant to the Amended and Restated 11% Senior Note Agreement, the 11% Senior Notes are now secured by first-lien security interests in substantially all of our assets and the assets of our subsidiaries. See the above discussion of the Fourth Amendment to our Credit Agreement for a description of these security interests. The 11% Senior Notes are now pari passu in right of payment to all borrowings under the Credit Agreement and rank at least pari passu in right of payment with all other outstanding indebtedness. The Amended and Restated 11% Senior Note Agreement contains customary covenants that limit our ability 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 Amended and Restated 11% Senior Note Agreement. Pursuant to the Amended and Restated 11% Senior Note Agreement, lender fees and other financing costs of $1.3 million were deferred, netting against the carrying value of the amount outstanding during the nine month period ended
September 30, 2016
.
The Amended and Restated 11% Senior Note Agreement contains customary default provisions, as well as the following cross-default provision. An event of default will occur if we (i) fail to make any payment when due beyond any applicable grace period under any indebtedness of at least $20.0 million, (ii) default in the performance of any obligation under the Amended and Restated 11% Senior Note Agreement or collateral documents and such default is not remedied within the applicable cure period, (iii) default 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, (iv) we 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 to purchase or repay such indebtedness or (v) with certain exceptions, the security interest in the collateral ceases to be in full force and effect. Upon the occurrence and during the continuation of an event of default under the Amended and Restated 11% Senior Note Agreement, the 11% Senior Notes may become immediately due and payable, either automatically or by declaration of holders of more than 50% in principal amount of the 11% Senior Notes at the time outstanding.
CCLP Long-Term Debt
CCLP Credit Agreement.
On May 25, 2016, CCLP entered into an amendment (the "CCLP Third Amendment") to the CCLP Credit Agreement that, among other things, modified certain financial covenants in the CCLP Credit Agreement. As discussed below, these financial covenants were further amended in November 2016. In addition, the CCLP Third Amendment provided for other changes related to the CCLP Credit Agreement including (i) reducing the maximum aggregate lender commitments from
$400.0 million
to
$340.0 million
; (ii) increasing the applicable margin by 0.25% with a range between 2.00% and 3.00% per annum for LIBOR-based loans and 1.00% to 2.00% per annum for base-rate loans, based on the applicable consolidated total leverage ratio; (iii) imposed a requirement that CCLP use designated consolidated cash and cash equivalent balances in excess of
$35.0 million
to prepay the loans; (iv) imposed a requirement to deliver on an annual basis, and at such other times as may be required, an appraisal of CCLP's compressor equipment; (v) increased the amount of equipment and real property that may be disposed of in any four consecutive fiscal quarters from $5.0 million to $20.0 million; (vi) allows the prepayment or purchase of indebtedness with proceeds from the issuances of equity securities or in exchange for the issuances of equity securities; and (vii) reduced the amount of CCLP's permitted capital expenditures in the ordinary course of business during each fiscal year from $150.0 million to an amount generally ranging from $25.0 million in 2016 to $75.0 million in 2019. As a result of the reduction of the maximum lender commitment pursuant to the Third Amendment, unamortized deferred finance costs of
$0.7 million
were charged to interest expense during the
nine
months ended
September 30, 2016
. Pursuant to the CCLP Third Amendment, bank fees of
$0.7 million
were incurred during the nine month period ended
September 30, 2016
and were deferred, netting against the carrying value of the amount outstanding under the CCLP Credit Agreement.
On
November 3, 2016
, CCLP entered into an additional amendment (the "CCLP Fourth Amendment") to the CCLP Credit Agreement that, among other changes, further modified certain covenants in the CCLP Credit Agreement. The CCLP Fourth Amendment converted the CCLP Credit Agreement from a secured revolving credit facility into an asset-based revolving credit facility ("ABL Facility"). Borrowings under the CCLP Credit Agreement, as amended, may not exceed a borrowing base equal to the sum of (i) 80% of the aggregate net amount of our eligible accounts receivable, plus (ii) 20% of the aggregate value of any eligible parts inventory, in the event we elect to include eligible parts inventory pursuant to a notice to the administrative agent, plus (iii) 80% of the net in-place eligible compressor equipment, decreased each month by the amount of associated depreciation expense, plus (iv) 80% of the cost of new eligible compressor equipment, and minus (v) the amount of any reserves established by the administrative agent in its discretion. In addition, the CCLP Fourth Amendment imposed other requirements, including requirements related to borrowing base reporting on a monthly basis and provisions to permit periodic appraisal and inspection of collateral assets. Pursuant to the CCLP Fourth Amendment, certain additional restrictive provisions ("cash dominion provisions") are imposed if an event of default has occurred and is continuing or excess availability under the ABL Facility falls below $30.0 million. The CCLP Fourth Amendment modified certain covenants as follows: (i) the consolidated total leverage ratio may not exceed (a) 5.75 to 1 as of September 30, 2016, (b) 5.95 to 1 as of the fiscal quarters ended December 31, 2016 through June 30, 2018; (c) 5.75 to 1 as of September 30, 2018 and December 31, 2018; and (d) 5.50 to 1 as of March 31, 2019 and thereafter. (ii) the consolidated secured leverage ratio may not exceed (a) 3.25 to 1 as of the fiscal quarters ended September 30, 2016 through June 30, 2018; and (b) 3.50 to 1 as of September 30, 2018 and thereafter; and (iii) the consolidated interest coverage ratio may not fall below (a) 2.25 to 1 as of the fiscal quarters ended September 30, 2016 through June 30, 2018; (b) 2.50 to 1 as of September 30, 2018 and December 31, 2018; and (c) 2.75 to 1 as of March 31, 2019 and thereafter. In addition, the CCLP Fourth Amendment reduced the maximum aggregate lender commitments from $340.0 million to $315.0 million. The CCLP Fourth Amendment provides for an increase in the applicable margin by 0.25% in the event the consolidated leverage ratio exceeds 5.50 to 1, resulting in a range for the applicable margin between 2.00% and 3.25% per annum for LIBOR-based loans and 1.00% to 2.25% per annum for base-rate loans, according to the consolidated total leverage ratio. The CCLP Fourth Amendment also amended the covenant regarding restricted payments (which include distributions on CCLP's common units) by providing that no restricted payment may be made if, after giving effect to such restricted payment, the excess availability under the ABL Facility would be less than $30.0 million. As a result of the further reduction of the aggregate lender commitments pursuant to the CCLP Fourth Amendment, unamortized deferred finance costs of
$0.3 million
will be charged to interest expense during the three months ended December 31, 2016.
At
September 30, 2016
, CCLP's consolidated total leverage ratio was
4.83
to 1 (compared to 5.50 to 1 maximum as then required under the CCLP Credit Agreement), its consolidated secured leverage ratio was
1.75
to 1 (compared to 3.50 to 1 maximum as then required under the CCLP Credit Agreement) and its consolidated interest coverage ratio was
3.36
to 1 (compared to a 3.0 to 1 minimum as then required under the CCLP Credit Agreement).
The consolidated total leverage ratio and the consolidated secured leverage ratio, as both are calculated under the CCLP Credit Agreement, exclude the long-term liability for the CCLP Preferred Units, among other items, in the determination of total indebtedness.
CCLP 7.25% Senior Notes
On August 8, 2016, in connection with the closing of the Private Placement, CCLP entered into a Note Repurchase Agreement (the “CCLP Note Repurchase Agreement”) with Hudson Bay Fund LP pursuant to which CCLP agreed to repurchase up to
$20.0 million
of its CCLP 7.25% Senior Notes due August 15, 2022 (the “CCLP 7.25% Senior Notes”). Any repurchase of the CCLP 7.25% Senior Notes by CCLP was conditioned on it receiving proceeds from the sale of additional equity securities of CCLP, including, without limitation, additional CCLP Preferred Units or Series A Parity Securities (as defined in the Series A Preferred Unit Purchase Agreement) between August 8, 2016 and October 12, 2016. Additionally, the aggregate repurchase price of CCLP 7.25% Senior Notes shall not be greater than the proceeds then received by CCLP from the sale of equity described in the preceding sentence. For further discussion of the CCLP Preferred Units, see Note C - CCLP Series A Convertible Preferred Units.
In September 2016, CCLP repurchased on the open market and retired
$20.0 million
aggregate principal amount of its CCLP 7.25% Senior Notes for a purchase price of
$18.8 million
, at an average repurchase price of
94%
of the principal amount of the CCLP 7.25% Senior Notes, plus accrued interest, utilizing a portion of the net proceeds of the sale of the CCLP Preferred Units. In connection with the repurchase of these CCLP 7.25% Senior Notes,
$0.5 million
of early extinguishment net gain was credited to other expense during the three month period ended September 30, 2016, representing the difference between the repurchase price and the
$20.0 million
aggregate principal amount of the CCLP 7.25% Senior Notes repurchased, and
$0.7 million
of remaining unamortized deferred finance costs and discounts associated with the repurchased CCLP 7.25% Senior Notes. In October 2016, CCLP repurchased on the open market and retired an additional
$34.1 million
aggregate principal amount of CCLP 7.25% Senior Notes, for a purchase price of
$32.1 million
plus accrued interest. A portion of the CCLP 7.25% Senior Notes repurchased during September and October 2016 included the CCLP 7.25% Senior Notes held by Hudson Bay Fund LP, and following the repurchase of these CCLP 7.25% Senior Notes from Hudson Bay Fund LP, the above CCLP Note Repurchase Agreement was canceled.
NOTE C – CCLP SERIES A CONVERTIBLE PREFERRED UNITS
On
August 8, 2016
and
September 20, 2016
, CCLP entered into Series A Preferred Unit Purchase Agreements (the “CCLP Unit Purchase Agreements”) with certain purchasers to issue and sell in private placements (the "Initial Private Placement" and "Subsequent Private Placement," respectively) of an aggregate of
6,999,126
of CSI Compressco LP Series A Convertible Preferred Units representing limited partner interests in CCLP (the “CCLP Preferred Units”) for a cash purchase price of
$11.43
per CCLP Preferred Unit (the “Issue Price”), resulting in total net proceeds to CCLP, after deducting certain offering expenses, of
$77.3 million
. We purchased
874,891
of the CCLP Preferred Units in the Initial Private Placement at the aggregate Issue Price of
$10.0 million
. The net proceeds from the Initial Private Placement and Subsequent Private Placement were used to pay additional offering expenses and reduce outstanding CCLP indebtedness under the CCLP Credit Agreement and the CCLP 7.25% Senior Notes.
In connection with the closing of the Initial Private Placement, CSI Compressco GP Inc (our wholly owned subsidiary) executed a Second Amended and Restated Agreement of Limited Partnership of CCLP (the “Amended and Restated CCLP Partnership Agreement”) to, among other things, authorize and establish the rights and preferences of the CCLP Preferred Units. The CCLP Preferred Units are a new class of equity security that will rank senior to all classes or series of equity securities of CCLP with respect to distribution rights and rights upon liquidation. We and the other holders of CCLP Preferred Units (each, a “CCLP Preferred Unitholder”) will receive quarterly distributions, which will be paid in kind in additional CCLP Preferred Units, equal to an annual rate of
11.00%
of the Issue Price (
$1.2573
per unit annualized), subject to certain adjustments. The rights of the CCLP Preferred Units include certain anti-dilution adjustments, including adjustments for economic dilution resulting from the issuance of CCLP common units in the future below a set price.
A ratable portion of the CCLP Preferred Units will be converted into CCLP common units on the eighth day of each month over a period of thirty months beginning in March 2017 (each, a “Conversion Date”), subject to certain provisions of the Amended and Restated CCLP Partnership Agreement that may delay or accelerate all or a portion of such monthly conversions. On each Conversion Date, the CCLP Preferred Units will convert into common
units representing limited partner interests in CCLP in an amount equal to, with respect to each CCLP Preferred Unitholder, the number of CCLP Preferred Units held by such CCLP Preferred Unitholder divided by the number of Conversion Dates remaining, subject to adjustment described in the Amended and Restated CCLP Partnership Agreement, with the conversion price (the "Conversion Price") determined by the trading prices of the common units over the previous month, among other factors , and as otherwise impacted by the existence of certain conditions related to the common units. CCLP may, at its option, pay cash, or a combination of cash and common units, to the CCLP Preferred Unitholders instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Amended and Restated CCLP Partnership Agreement and the CCLP Credit Agreement.
In addition, each purchaser may convert its CCLP Preferred Units, generally on a one-for-one basis and subject to adjustment for certain splits, combinations, reclassifications or other similar transactions and certain anti-dilution adjustments, in whole or in part, at any time following May 31, 2017 so long as any conversion is not for less than $250,000 or such lesser amount, if such conversion relates to all of such purchaser’s remaining CCLP Preferred Units. CCLP has the right to be reimbursed for any cash distributions paid with respect to common units issued in any such optional conversion until March 31, 2018. The CCLP Preferred Units will vote on an as-converted basis with the common units and will have certain other rights to vote as a class with respect to any amendment to the Amended and Restated CCLP Partnership Agreement that would affect any rights, preferences or privileges of the CCLP Preferred Units, as more fully described in the Amended and Restated CCLP Partnership Agreement.
Because the Preferred Units may be settled using a variable number of common units, the fair value of the Preferred Units, net of the units we purchased, is classified as long-term liabilities on our consolidated balance sheet in accordance with ASC 480 "Distinguishing Liabilities and Equity." The fair value of the CCLP Preferred Units as of
September 30, 2016
was
$77.0 million
. Changes in the fair value during each quarterly period, including the
$6.3 million
increase in fair value during the third quarter of 2016 subsequent to the issuance of the CCLP Preferred Units, are charged to other expense in the accompanying consolidated statements of operations. Based on the conversion provisions of the Preferred Units, and using the Conversion Price calculated as of
September 30, 2016
, the theoretical number of CCLP common units that would be issued if all of the CCLP Preferred Units were settled as of
September 30, 2016
would be approximately
8.1 million
common units, with an aggregate market value of
$86.1 million
. A $1 decrease in the average trading price per CCLP common unit would result in the issuance of
0.8 million
additional common units pursuant to these conversion provisions.
In addition, the CCLP Unit Purchase Agreements include certain provisions regarding change of control, transfer of CCLP Preferred Units, indemnities, and other matters described in detail in the respective CCLP Unit Purchase Agreement. In connection with the closings of the Initial and Subsequent Private Placements, CCLP paid total transaction fees of
$2.1 million
to its financial advisors for these transactions. These transaction fees were charged to other expense in the accompanying consolidated statements of operations. The CCLP Unit Purchase Agreements contain customary representations, warranties and covenants of CCLP and the purchasers.
CCLP Registration Rights Agreement.
On
August 8, 2016
and
September 20, 2016
, in connection with the closings of the Preferred Units, CCLP entered into Registration Rights Agreements (collectively, the “Registration Rights Agreement”) with the purchasers relating to the registered resale of the common units issuable upon conversion of the CCLP Preferred Units, including any CCLP Preferred Units issued in kind pursuant to the terms of the Amended and Restated CCLP Partnership Agreement. Pursuant to the Registration Rights Agreement, CCLP is required to file or cause to be filed a registration statement for such registered resale at its expense no later than 90 days after the closing and is required to cause the registration statement to become effective no later than 180 days after the
August 8, 2016
closing, subject to certain liquidated damages set forth in the Registration Rights Agreement if such obligations are not met. Pursuant to the requirements under the Registration Rights Agreement, CCLP filed a registration statement on Form S-3 with the Securities and Exchange Commission on November 4, 2016.
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 in these properties and platforms.
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 these non-Maritech properties were
$9.7 million
and
$9.1 million
as of
September 30, 2016
and
December 31, 2015
, 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.
The changes in the values of our asset retirement obligations during the
three and nine
month period ended
September 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
(In Thousands)
|
|
Beginning balance for the period, as reported
|
$
|
55,023
|
|
|
$
|
57,449
|
|
|
Activity in the period:
|
|
|
|
|
Accretion of liability
|
632
|
|
|
1,438
|
|
|
Retirement obligations incurred
|
—
|
|
|
—
|
|
|
Revisions in estimated cash flows
|
7
|
|
|
220
|
|
|
Settlement of retirement obligations
|
(324
|
)
|
|
(3,769
|
)
|
|
Ending balance
|
$
|
55,338
|
|
|
$
|
55,338
|
|
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 oil and gas industry environment and other factors and may result in additional liabilities and charges to earnings to be recorded.
Asset retirement obligations are recorded in accordance with FASB ASC 410, "Asset Retirement and Environmental Obligations," whereby 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 obligated 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. We have currency exchange rate risk exposure related to transactions denominated in foreign currencies 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.
Derivative Contracts
Foreign Currency Derivative Contracts
.
We and CCLP enter into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of
September 30, 2016
, 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 pounds sterling
|
|
4,635
|
|
|
1.31
|
|
10/19/2016
|
|
Forward purchase Mexican peso
|
|
6,758
|
|
|
19.38
|
|
10/19/2016
|
|
Forward sale Norwegian krone
|
|
1,218
|
|
|
8.21
|
|
10/19/2016
|
|
Forward sale Mexican peso
|
|
2,781
|
|
|
19.38
|
|
10/19/2016
|
Under this program, we and CCLP may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not 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, 2016
and
December 31, 2015
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative instruments
|
Balance Sheet Location
|
|
Fair Value at
September 30, 2016
|
|
Fair Value at December 31, 2015
|
|
|
|
|
|
(In Thousands)
|
|
Forward sale contracts
|
|
Current assets
|
|
$
|
6
|
|
|
$
|
23
|
|
|
Forward purchase contracts
|
|
Current assets
|
|
—
|
|
|
—
|
|
|
Forward sale contracts
|
|
Current liabilities
|
|
(32
|
)
|
|
(31
|
)
|
|
Forward purchase contracts
|
|
Current liabilities
|
|
(73
|
)
|
|
(354
|
)
|
|
Net asset (liability)
|
|
|
|
$
|
(99
|
)
|
|
$
|
(362
|
)
|
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, 2016
, we recognized
$0.4 million
and
$1.6 million
of net losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program. During the
three and nine
month periods ended
September 30, 2015
, we recognized
$0.5 million
and
$0.2 million
, respectively, of net losses reflected in other (income) expense, net, associated with this program.
NOTE F – EQUITY
Changes in equity for the
three and nine
month periods ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
TETRA
|
|
Non-
controlling
Interest
|
|
Total
|
|
TETRA
|
|
Non-
controlling
Interest
|
|
Total
|
|
|
(In Thousands)
|
|
Beginning balance for the period
|
$
|
190,449
|
|
|
$
|
197,335
|
|
|
$
|
387,784
|
|
|
$
|
376,355
|
|
|
$
|
378,690
|
|
|
$
|
755,045
|
|
|
Net income (loss)
|
(15,009
|
)
|
|
(9,019
|
)
|
|
(24,028
|
)
|
|
9,755
|
|
|
981
|
|
|
10,736
|
|
|
Foreign currency translation adjustment
|
(1,327
|
)
|
|
(327
|
)
|
|
(1,654
|
)
|
|
(6,444
|
)
|
|
(184
|
)
|
|
(6,628
|
)
|
|
Comprehensive Income (loss)
|
(16,336
|
)
|
|
(9,346
|
)
|
|
(25,682
|
)
|
|
3,311
|
|
|
797
|
|
|
4,108
|
|
|
Exercise of common stock options
|
115
|
|
|
—
|
|
|
115
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
Proceeds from the issuance of stock, net of offering costs
|
(153
|
)
|
|
—
|
|
|
(153
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Distributions to public unitholders
|
—
|
|
|
(7,224
|
)
|
|
(7,224
|
)
|
|
—
|
|
|
(9,565
|
)
|
|
(9,565
|
)
|
|
Equity-based compensation
|
1,774
|
|
|
774
|
|
|
2,548
|
|
|
3,163
|
|
|
454
|
|
|
3,617
|
|
|
Treasury stock and other
|
—
|
|
|
(154
|
)
|
|
(154
|
)
|
|
(9
|
)
|
|
(21
|
)
|
|
(30
|
)
|
|
Tax benefit upon exercise of stock options
|
|
|
|
|
|
|
—
|
|
|
(42
|
)
|
|
—
|
|
|
(42
|
)
|
|
Ending balance as of September 30
|
$
|
175,849
|
|
|
$
|
181,385
|
|
|
$
|
357,234
|
|
|
$
|
382,841
|
|
|
$
|
370,355
|
|
|
$
|
753,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
TETRA
|
|
Non-
controlling
Interest
|
|
Total
|
|
TETRA
|
|
Non-
controlling
Interest
|
|
Total
|
|
|
(In Thousands)
|
|
Beginning balance for the period
|
$
|
241,217
|
|
|
$
|
272,963
|
|
|
$
|
514,180
|
|
|
$
|
369,713
|
|
|
$
|
395,888
|
|
|
$
|
765,601
|
|
|
Net income (loss)
|
(129,908
|
)
|
|
(71,075
|
)
|
|
(200,983
|
)
|
|
20,232
|
|
|
2,247
|
|
|
22,479
|
|
|
Foreign currency translation adjustment
|
(3,660
|
)
|
|
(843
|
)
|
|
(4,503
|
)
|
|
(12,927
|
)
|
|
(1,129
|
)
|
|
(14,056
|
)
|
|
Comprehensive Income (loss)
|
(133,568
|
)
|
|
(71,918
|
)
|
|
(205,486
|
)
|
|
7,305
|
|
|
1,118
|
|
|
8,423
|
|
|
Exercise of common stock options
|
142
|
|
|
—
|
|
|
142
|
|
|
164
|
|
|
—
|
|
|
164
|
|
|
Proceeds from the issuance of stock, net of offering costs
|
60,124
|
|
|
—
|
|
|
60,124
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Distributions to public unitholders
|
—
|
|
|
(21,642
|
)
|
|
(21,642
|
)
|
|
—
|
|
|
(28,289
|
)
|
|
(28,289
|
)
|
|
Equity-based compensation
|
9,313
|
|
|
2,236
|
|
|
11,549
|
|
|
6,157
|
|
|
1,659
|
|
|
7,816
|
|
|
Treasury stock and other
|
(1,379
|
)
|
|
(254
|
)
|
|
(1,633
|
)
|
|
(252
|
)
|
|
(21
|
)
|
|
(273
|
)
|
|
Tax adjustment upon cancellation of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
|
(246
|
)
|
|
Ending balance as of September 30
|
$
|
175,849
|
|
|
$
|
181,385
|
|
|
$
|
357,234
|
|
|
$
|
382,841
|
|
|
$
|
370,355
|
|
|
$
|
753,196
|
|
Activity within the foreign currency translation adjustment account during the periods includes no reclassifications to net income.
Issuance of Common Stock.
On June 21, 2016, we completed an underwritten public offering of
11.5 million
shares of our common stock, which included
1.5 million
shares of common stock pursuant to an option granted to the underwriters to purchase additional shares, at a price to the public of
$5.50
per share (
$5.2525
per share net of underwriting discounts). We utilized the net offering proceeds of
$60.2 million
to repay the remaining balance outstanding of our Senior Secured Notes, to reduce the balance outstanding under our Credit Agreement, to pay offering related discounts and expenses, and for general corporate purposes. The offering was made pursuant to a shelf registration statement filed with the Securities and Exchange Commission on March 23, 2016.
Issuance of CCLP Preferred Units
.
In
August 2016
and September 2016, CCLP received
$77.3 million
of aggregate net proceeds, after deducting certain offering expenses, from the private placements of the CCLP Preferred Units. (For further discussion of the issuance of CCLP Preferred Units, see Note C - CCLP Series A Convertible Preferred Units.)
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, 2016
, 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 continue to monitor the status of these companies. As of
September 30, 2016
, we do not consider the likelihood of Maritech becoming liable for decommissioning liabilities on sold properties to be probable.
Maritech has encountered situations where previously plugged and abandoned wells on its properties have later exhibited a buildup of pressure, which is evidenced by gas bubbles coming from the plugged well head. We refer to this situation as “wells under pressure” and this can either be discovered when performing additional work at the property or by notification from a third party. Wells under pressure require Maritech to return to the site to perform additional plug and abandonment procedures that were not originally anticipated and included in the
estimate of the asset retirement obligation for such property. Remediation work at previously abandoned well sites is particularly costly, due to the lack of a platform from which to base these activities. Maritech is the last operator of record for its plugged wells, and bears the risk of additional future work required as a result of wells becoming pressurized in the future.
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 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 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. The Compression Division's aftermarket services business provides compressor package reconfiguration and maintenance services as well as providing compressor package parts and components manufactured by third-party suppliers. 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.
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 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,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
|
|
|
|
Fluids Division
|
$
|
40,922
|
|
|
$
|
75,128
|
|
|
$
|
133,409
|
|
|
$
|
240,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Production Testing Division
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Compression Division
|
14,002
|
|
|
49,145
|
|
|
43,205
|
|
|
116,264
|
|
|
Offshore Division
|
|
|
|
|
|
|
|
|
|
|
Offshore Services
|
—
|
|
|
—
|
|
|
116
|
|
|
595
|
|
|
Maritech
|
238
|
|
|
475
|
|
|
575
|
|
|
2,375
|
|
|
Total Offshore Division
|
238
|
|
|
475
|
|
|
691
|
|
|
2,970
|
|
|
Consolidated
|
$
|
55,162
|
|
|
$
|
124,748
|
|
|
$
|
177,305
|
|
|
$
|
359,286
|
|
|
|
|
|
|
|
|
|
|
|
Services and rentals
|
|
|
|
|
|
|
|
|
|
|
Fluids Division
|
$
|
21,687
|
|
|
$
|
35,437
|
|
|
$
|
49,061
|
|
|
$
|
92,745
|
|
|
Production Testing Division
|
14,046
|
|
|
27,725
|
|
|
45,202
|
|
|
97,326
|
|
|
Compression Division
|
56,716
|
|
|
79,781
|
|
|
185,299
|
|
|
242,006
|
|
|
Offshore Division
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Services
|
29,239
|
|
|
37,882
|
|
|
65,488
|
|
|
84,801
|
|
|
Maritech
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment eliminations
|
(297
|
)
|
|
(429
|
)
|
|
(813
|
)
|
|
(3,609
|
)
|
|
Total Offshore Division
|
28,942
|
|
|
37,453
|
|
|
64,675
|
|
|
81,192
|
|
|
Consolidated
|
$
|
121,391
|
|
|
$
|
180,396
|
|
|
$
|
344,237
|
|
|
$
|
513,269
|
|
|
|
|
|
|
|
|
|
|
|
Interdivision revenues
|
|
|
|
|
|
|
|
|
|
|
Fluids Division
|
$
|
1
|
|
|
$
|
22
|
|
|
$
|
86
|
|
|
$
|
53
|
|
|
Production Testing Division
|
1,019
|
|
|
1,217
|
|
|
3,118
|
|
|
3,559
|
|
|
Compression Division
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Offshore Division
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Services
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Maritech
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment eliminations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Offshore Division
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interdivision eliminations
|
(1,020
|
)
|
|
(1,239
|
)
|
|
(3,204
|
)
|
|
(3,612
|
)
|
|
Consolidated
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
|
Fluids Division
|
$
|
62,610
|
|
|
$
|
110,587
|
|
|
$
|
182,556
|
|
|
$
|
332,850
|
|
|
Production Testing Division
|
15,065
|
|
|
28,942
|
|
|
48,320
|
|
|
100,885
|
|
|
Compression Division
|
70,718
|
|
|
128,926
|
|
|
228,504
|
|
|
358,270
|
|
|
Offshore Division
|
|
|
|
|
|
|
|
|
|
|
Offshore Services
|
29,239
|
|
|
37,882
|
|
|
65,604
|
|
|
85,396
|
|
|
Maritech
|
238
|
|
|
475
|
|
|
575
|
|
|
2,375
|
|
|
Intersegment eliminations
|
(297
|
)
|
|
(429
|
)
|
|
(813
|
)
|
|
(3,609
|
)
|
|
Total Offshore Division
|
29,180
|
|
|
37,928
|
|
|
65,366
|
|
|
84,162
|
|
|
Interdivision eliminations
|
(1,020
|
)
|
|
(1,239
|
)
|
|
(3,204
|
)
|
|
(3,612
|
)
|
|
Consolidated
|
$
|
176,553
|
|
|
$
|
305,144
|
|
|
$
|
521,542
|
|
|
$
|
872,555
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
Fluids Division
|
$
|
8,835
|
|
|
$
|
33,215
|
|
|
$
|
8,931
|
|
|
$
|
83,535
|
|
|
Production Testing Division
|
(4,222
|
)
|
|
(4,528
|
)
|
|
(27,924
|
)
|
|
(4,961
|
)
|
|
Compression Division
|
(15,766
|
)
|
|
2,070
|
|
|
(124,506
|
)
|
|
5,974
|
|
|
Offshore Division
|
|
|
|
|
|
|
|
|
|
|
Offshore Services
|
1,879
|
|
|
4,576
|
|
|
(5,792
|
)
|
|
(1,977
|
)
|
|
Maritech
|
(643
|
)
|
|
(1,649
|
)
|
|
(4,664
|
)
|
|
(987
|
)
|
|
Intersegment eliminations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Offshore Division
|
1,236
|
|
|
2,927
|
|
|
(10,456
|
)
|
|
(2,964
|
)
|
|
Interdivision eliminations
|
(2
|
)
|
|
5
|
|
|
5
|
|
|
(5
|
)
|
|
Corporate Overhead
(1)
|
(12,666
|
)
|
|
(18,266
|
)
|
|
(45,229
|
)
|
|
(50,103
|
)
|
|
Consolidated
|
$
|
(22,585
|
)
|
|
$
|
15,423
|
|
|
$
|
(199,179
|
)
|
|
$
|
31,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
Total assets
|
|
|
|
|
|
|
Fluids Division
|
$
|
332,322
|
|
|
$
|
414,246
|
|
|
Production Testing Division
|
93,916
|
|
|
195,920
|
|
|
Compression Division
|
832,839
|
|
|
1,205,023
|
|
|
Offshore Division
|
|
|
|
|
|
|
Offshore Services
|
127,813
|
|
|
140,815
|
|
|
Maritech
|
3,538
|
|
|
5,068
|
|
|
Total Offshore Division
|
131,351
|
|
|
145,883
|
|
|
Corporate Overhead and eliminations
|
(18,378
|
)
|
|
(19,759
|
)
|
|
Consolidated
|
$
|
1,372,050
|
|
|
$
|
1,941,313
|
|
|
|
|
|
(1)
|
Amounts reflected include the following general corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(In Thousands)
|
|
General and administrative expense
|
$
|
8,748
|
|
|
$
|
13,440
|
|
|
$
|
26,698
|
|
|
$
|
33,978
|
|
|
Depreciation and amortization
|
101
|
|
|
230
|
|
|
328
|
|
|
743
|
|
|
Interest expense
|
4,699
|
|
|
4,011
|
|
|
16,347
|
|
|
13,423
|
|
|
Other general corporate expense, net
|
(882
|
)
|
|
585
|
|
|
1,856
|
|
|
1,959
|
|
|
Total
|
$
|
12,666
|
|
|
$
|
18,266
|
|
|
$
|
45,229
|
|
|
$
|
50,103
|
|