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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to            .
 
Commission File Number 1-13455
 
TETRA Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
74-2148293
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands,
 
Texas
77380
(Address of Principal Executive Offices)
(Zip Code)
(281) 367-1983
(Registrant’s Telephone Number, Including Area Code)

_______________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
TTI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company

 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

 As of May 5, 2020, there were 125,898,683 shares outstanding of the Company’s Common Stock, $0.01 par value per share.




TETRA Technologies, Inc. and Subsidiaries
Table of Contents
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
PART II—OTHER INFORMATION
 





PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Revenues:
 
 
 
Product sales
$
85,033

 
$
91,781

Services
137,909

 
151,947

Total revenues
222,942

 
243,728

Cost of revenues:
 
 
 
Cost of product sales
58,967

 
74,588

Cost of services
89,727

 
102,156

Depreciation, amortization, and accretion
29,460

 
30,628

Impairments and other charges
5,371

 
146

Total cost of revenues
183,525

 
207,518

Gross profit
39,417

 
36,210

General and administrative expense
30,537

 
34,277

Interest expense, net
17,856

 
18,379

Warrants fair value adjustment (income) expense
(338
)
 
407

CCLP Series A Preferred Units fair value adjustment (income) expense

 
1,163

Other (income) expense, net
439

 
(951
)
Loss before taxes and discontinued operations
(9,077
)
 
(17,065
)
Provision for income taxes
1,154

 
1,609

Loss before discontinued operations
(10,231
)
 
(18,674
)
Discontinued operations:
 
 
 
Loss from discontinued operations, net of taxes
(145
)
 
(426
)
Net loss
(10,376
)
 
(19,100
)
Less: loss attributable to noncontrolling interest
8,825

 
8,262

Net loss attributable to TETRA stockholders
$
(1,551
)
 
$
(10,838
)
Basic net loss per common share:
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.01
)
 
$
(0.09
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

Net loss attributable to TETRA stockholders
$
(0.01
)
 
$
(0.09
)
Average shares outstanding
125,587

 
125,681

Diluted net loss per common share:
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.01
)
 
$
(0.09
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

Net loss attributable to TETRA stockholders
$
(0.01
)
 
$
(0.09
)
Average diluted shares outstanding
125,587

 
125,681


See Notes to Consolidated Financial Statements

1


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2020
 
2019
Net loss
$
(10,376
)
 
$
(19,100
)
Foreign currency translation adjustment, net of taxes of $0 in 2020 and 2019
(6,467
)
 
(406
)
Comprehensive loss
(16,843
)
 
(19,506
)
Less: Comprehensive loss attributable to noncontrolling interest
9,054

 
8,086

Comprehensive loss attributable to TETRA stockholders
$
(7,789
)
 
$
(11,420
)
 

See Notes to Consolidated Financial Statements

2


TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
March 31,
2020
 
December 31,
2019
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
29,473

 
$
17,704

Restricted cash
53

 
64

Trade accounts receivable, net of allowances of $6,308 in 2020 and $5,262 in 2019
169,231

 
176,291

Inventories
142,116

 
136,510

Prepaid expenses and other current assets
23,107

 
20,785

Total current assets
363,980

 
351,354

Property, plant, and equipment:
 

 
 

Land and building
57,357

 
60,586

Machinery and equipment
1,347,642

 
1,335,157

Automobiles and trucks
30,052

 
31,681

Chemical plants
58,327

 
57,692

Construction in progress
24,760

 
34,393

Total property, plant, and equipment
1,518,138

 
1,519,509

Less accumulated depreciation
(777,891
)
 
(760,872
)
Net property, plant, and equipment
740,247

 
758,637

Other assets:
 

 
 

Patents, trademarks and other intangible assets, net of accumulated amortization of $89,450 in 2020 and $88,422 in 2019
72,104

 
74,199

Deferred tax assets, net
24

 
24

Operating lease right-of-use assets
75,344

 
68,131

Other assets
18,065

 
19,577

Total other assets
165,537

 
161,931

Total assets
$
1,269,764

 
$
1,271,922

 

See Notes to Consolidated Financial Statements

3


TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
March 31,
2020
 
December 31,
2019
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
88,204

 
$
88,917

Unearned income
28,422

 
9,831

Accrued liabilities and other
76,559

 
87,877

Liabilities of discontinued operations
2,011

 
2,098

Total current liabilities
195,196

 
188,723

Long-term debt, net
845,842

 
842,871

Deferred income taxes
2,762

 
2,988

Asset retirement obligations
12,878

 
12,762

Warrants liability
112

 
449

Operating lease liabilities
59,845

 
53,919

Other liabilities
6,198

 
7,384

Total long-term liabilities
927,637

 
920,373

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 250,000,000 shares authorized at March 31, 2020 and December 31, 2019; 128,693,692 shares issued at March 31, 2020 and 128,304,354 shares issued at December 31, 2019
1,287

 
1,283

Additional paid-in capital
468,088

 
466,959

Treasury stock, at cost; 2,896,627 shares held at March 31, 2020, and 2,823,191 shares held at December 31, 2019
(19,253
)
 
(19,164
)
Accumulated other comprehensive income (loss)
(58,421
)
 
(52,183
)
Retained deficit
(364,073
)
 
(362,522
)
Total TETRA stockholders' equity
27,628

 
34,373

Noncontrolling interests
119,303

 
128,453

Total equity
146,931

 
162,826

Total liabilities and equity
$
1,269,764

 
$
1,271,922

 

See Notes to Consolidated Financial Statements

4


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Equity
(In Thousands)

 
Common Stock
Par Value
 
Additional Paid-In
Capital
 
Treasury
Stock
 
Accumulated Other 
Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Equity
 
 
 
 
Currency
Translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
$
1,283

 
$
466,959

 
$
(19,164
)
 
$
(52,183
)
 
$
(362,522
)
 
$
128,453

 
$
162,826

Net loss for first quarter 2020

 

 

 

 
(1,551
)
 
(8,825
)
 
(10,376
)
Translation adjustment, net of taxes of $0

 

 

 
(6,238
)
 

 
(229
)
 
(6,467
)
Comprehensive loss

 

 

 

 

 

 
(16,843
)
Distributions to public unitholders

 

 

 

 

 
(309
)
 
(309
)
Equity award activity
4

 

 

 

 

 

 
4

Treasury stock activity, net

 

 
(89
)
 

 

 

 
(89
)
Equity compensation expense

 
1,145

 

 

 

 
228

 
1,373

Other

 
(16
)
 

 

 

 
(15
)
 
(31
)
Balance at March 31, 2020
$
1,287

 
$
468,088

 
$
(19,253
)
 
$
(58,421
)
 
$
(364,073
)
 
$
119,303

 
$
146,931




 
Common Stock
Par Value
 
Additional Paid-In
Capital
 
Treasury
Stock
 
Accumulated Other 
Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Equity
 
 
 
 
Currency
Translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
1,285

 
$
460,680

 
$
(18,950
)
 
$
(51,663
)
 
$
(217,952
)
 
$
139,349

 
$
312,749

Net loss for first quarter 2019

 

 

 

 
(10,838
)
 
(8,262
)
 
(19,100
)
Translation adjustment, net of taxes of $0

 

 

 
(582
)
 

 
176

 
(406
)
Comprehensive loss

 

 

 

 

 

 
(19,506
)
Distributions to public unitholders

 

 

 

 

 
(307
)
 
(307
)
Equity award activity
(1
)
 

 

 

 

 

 
(1
)
Treasury stock activity, net

 

 
(155
)
 

 

 

 
(155
)
Equity compensation expense

 
1,628

 

 

 

 
311

 
1,939

Conversions of CCLP Series A Preferred

 

 

 

 

 
2,539

 
2,539

Cumulative effect adjustment

 

 

 

 
2,843

 

 
2,843

Other

 
(67
)
 

 

 

 
76

 
9

Balance at March 31, 2019
$
1,284

 
$
462,241

 
$
(19,105
)
 
$
(52,245
)
 
$
(225,947
)
 
$
133,882

 
$
300,110


See Notes to Consolidated Financial Statements


5


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2020
 
2019
Operating activities:
 

 
 

Net loss
$
(10,376
)
 
$
(19,100
)
Reconciliation of net loss to cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
29,460

 
30,627

Impairment and other charges
5,371

 
146

Benefit for deferred income taxes
55

 
229

Equity-based compensation expense
784

 
2,165

Provision for doubtful accounts
1,380

 
627

Amortization and expense of financing costs
569

 
1,292

CCLP Series A Preferred Unit distributions and adjustments

 
2,159

Warrants fair value adjustment
(337
)
 
407

Contingent consideration liability fair value adjustment

 
(400
)
Gain on sale of assets
(833
)
 
(201
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
3,601

 
2,353

Inventories
(12,414
)
 
(15,809
)
Prepaid expenses and other current assets
(2,442
)
 
(3,222
)
Trade accounts payable and accrued expenses
8,742

 
6,638

Other
(1,384
)
 
(499
)
Net cash provided by operating activities
22,176

 
7,412

Investing activities:
 

 
 

Purchases of property, plant, and equipment, net
(12,390
)
 
(32,409
)
Proceeds on sale of property, plant, and equipment
1,425

 
364

Other investing activities
350

 
319

Net cash used in investing activities
(10,615
)
 
(31,726
)
Financing activities:
 

 
 

Proceeds from long-term debt
56,512

 
66,000

Principal payments on long-term debt
(54,511
)
 
(35,451
)
CCLP distributions
(309
)
 
(307
)
Redemptions of CCLP Series A Preferred

 
(8,346
)
Tax remittances on equity based compensation
(319
)
 
(429
)
Debt issuance costs and other financing activities
(235
)
 
(155
)
Net cash provided by financing activities
1,138

 
21,312

Effect of exchange rate changes on cash
(940
)
 
(167
)
Increase (decrease) in cash and cash equivalents
11,759

 
(3,169
)
Cash and cash equivalents and restricted cash at beginning of period
17,768

 
40,102

Cash and cash equivalents and restricted cash at end of period
$
29,527

 
$
36,933

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 

 
 
Interest paid
$
15,421

 
$
15,544

Income taxes paid
1,479

 
1,644

See Notes to Consolidated Financial Statements

6


TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

Organization 

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 and offshore rig cooling services, and compression services and equipment. We were incorporated in Delaware in 1981. We are composed of three divisions – Completion Fluids & Products, Water & Flowback Services, and Compression. 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.

Presentation  

Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances 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 March 31, 2020 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2020.

We consolidate the financial statements of our CSI Compressco LP subsidiary ("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 U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2019 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 16, 2020.

Significant Accounting Policies

Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K. There have been no significant changes in our accounting policies or the application thereof during the first quarter of 2020.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. 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.

Reclassifications

Certain previously reported financial information has been reclassified to conform to the current year's presentation. The impact of such reclassifications was not significant to the prior year's overall presentation.


7



Impairments and Other Charges

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 judgment as to the future undiscounted operating cash flows to be generated from the relevant assets throughout their remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related assets, an impairment is recognized for the excess of the carrying value over 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 disposal are recorded at the lower of carrying value or estimated fair value less estimated selling costs. See Note 3 - "Impairments and Other Charges" for additional discussion of recorded impairments.

Revenue Recognition
 
Performance Obligations. Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers. We receive cash equal to the invoice price for most sales of product and services and payment terms typically range from 30 to 60 days from the date we invoice our customer. Since the period between when we deliver products or services and when the customer pays for such products or services is not expected to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.

Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer.

For any arrangements with multiple performance obligations, we use management's estimated selling price to determine the stand-alone selling price for separate performance obligations. For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period.

Product Sales. Product sales revenues are generally recognized when we ship products from our facility to our customer. The product sales for our Completion Fluids & Products Division consist primarily of clear brine fluids ("CBFs"), additives, and associated manufactured products. Product sales for our Water & Flowback Services Division are typically attributed to specific performance obligations within certain production testing service arrangements. Parts and equipment sales comprise the product sales for the Compression Division.

Services. Service revenues represent revenue recognized over time, as our customer arrangements typically provide agreed upon day-rates (monthly service rates for compression services) and we recognize service revenue based upon the number of days services have been performed. Service revenue recognized over time is associated with a majority of our Water & Flowback Services Division arrangements, compression service and aftermarket service contracts within our Compression Division, and a small portion of Completion Fluids & Products Division revenue that is associated with completion fluid service arrangements. With the exception of the initial terms of the compression services contracts for medium- and high-horsepower compressor packages of our Compression Division, our customer contracts are generally for terms of one year or less. The majority of the service arrangements in the Water & Flowback Services Division are for a period of 90 days or less.

Sales taxes, value added taxes, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost for freight and shipping costs as part of cost of product sales when control over our products (i.e. delivery) has transferred to the customer.

Use of Estimates. In recognizing revenue for variable consideration arrangements, the amount of variable consideration recognized is limited so that it is probable that significant amounts of revenues will not be reversed in future periods when the uncertainty is resolved. For products returned by the customer, we estimate the expected returns based on an analysis of historical experience. For volume discounts earned by the customer, we estimate the discount (if any) based on our estimate of the total expected volume of products sold or services to be provided to the customer during the discount period. In certain contracts for the sale of CBFs, we may agree to issue credits

8


for the repurchase of reclaimable used fluids from certain customers at an agreed price that is based on the condition of the fluids.

Contract Assets and Liabilities. We consider contract assets to be trade accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain instances, particularly those requiring customer specific documentation prior to invoicing, our invoicing of the customer is delayed until certain documentation requirements are met. In those cases, we recognize a contract asset rather than a billed trade accounts receivable until we are able to invoice the customer. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.

We classify contract liabilities as unearned income in our consolidated balance sheets. Such deferred revenue typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract. New equipment sales orders generally take less than twelve months to build and deliver.

Bill-and-Hold Arrangements. We design and fabricate compressor packages based on our customer’s specifications. In some cases, the customer will request us to hold the equipment, upon completion of the unit, until the job site is ready to receive the equipment. When this occurs, we along with the customer sign a bill-and-hold agreement, which outlines that the customer has title to the equipment, the equipment is ready for delivery, we cannot use the equipment or direct it to another customer, and we have a present right to payment. When those criteria have been met and the agreement is executed, we recognize the revenue on the equipment because control of the equipment has passed to our customer and our performance obligations are complete. Entering into these arrangements is something we have done as a courtesy for certain customers for many years. The equipment subject to the bill-and-hold agreements has generally been invoiced and paid for through progressive billings such that at the time the bill-and-hold agreement is executed, the majority of the contractual cash obligation of the customer has been received by us.
Operating Costs
 
Cost of product sales includes direct and indirect costs of manufacturing and producing our products, including raw materials, fuel, utilities, labor, overhead, repairs and maintenance, materials, services, transportation, warehousing, equipment rentals, insurance, and certain taxes. Cost of services includes operating expenses we incur in delivering our services, including labor, equipment rental, fuel, repair and maintenance, transportation, overhead, insurance, and certain taxes. We include in product sales revenues the reimbursements we receive from customers for shipping and handling costs. Shipping and handling costs are included in cost of product sales. Amounts we incur for “out-of-pocket” expenses in the delivery of our services are recorded as cost of services. Reimbursements for “out-of-pocket” expenses we incur in the delivery of our services are recorded as service revenues. Depreciation, amortization, and accretion includes depreciation expense for all of our facilities, equipment and vehicles, amortization expense on our intangible assets, and accretion expense related to our decommissioning and other asset retirement obligations.
 
We include in general and administrative expense all costs not identifiable to our specific product or service operations, including divisional and general corporate overhead, professional services, corporate office costs, sales and marketing expenses, insurance, and certain taxes. 

Foreign Currency Translation
 
We have designated the euro, the British pound, the Norwegian krone, the Canadian dollar, the Brazilian real, and the Mexican peso as the functional currencies for our operations in Finland and Sweden, the United Kingdom, Norway, Canada, Brazil, and certain of our operations in Mexico, respectively. The U.S. dollar is the designated functional currency for all of our other foreign operations. The cumulative translation effects of translating the 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 (income) expense, net and totaled $1.9 million during the three months ended March 31, 2020, and $(1.2) million during the three months ended March 31, 2019, respectively.


9


Fair Value Measurements
 
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized on a recurring basis in the determination of the carrying values of certain liabilities, including the liabilities for the warrants to purchase 11.2 million shares of our common stock (the "Warrants") and our foreign currency derivative contracts. Refer to Note 9 - "Fair Value Measurements" for further discussion.

Fair value measurements are also utilized on a nonrecurring basis in certain circumstances, 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 asset retirement obligations, and for the impairment of long-lived assets, including goodwill (a Level 3 fair value measurement).

New Accounting Pronouncements

Standards adopted in 2020

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

Standards not yet adopted

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 on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairment will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. We are continuing to work through our implementation plan which includes evaluating the impact on our allowance for doubtful accounts methodology, identifying new reporting requirements, and implementing changes to business processes, systems, and controls to support adoption of the standard. Upon adoption, the allowance for doubtful accounts is expected to increase with an offsetting adjustment to retained earnings. Updates at each reporting date after initial adoption will be recorded through selling, general, and administrative expense. ASU 2016-13 has an effective date of the first quarter of fiscal 2023. We continue to assess the potential effects of these changes to our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to intraperiod tax allocation, interim period income tax calculation methodology, and the recognition of deferred tax liabilities for outside basis differences. It also simplifies certain aspects of accounting for franchise taxes and clarifies the accounting for transactions that results in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for us the first quarter of fiscal 2021. We continue to assess the potential effects of these changes to our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of the provisions of ASU 2020-04 on our consolidated financial statements.

10


NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
    
As of March 31, 2020, we had $56.7 million of remaining contractual performance obligations for compression services. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than twelve months and does not consider the effects of the time value of money. Expected revenue to be recognized in the future as of March 31, 2020 for completion of performance obligations of compression service contracts are as follows:
 
2020
 
2021
 
2022
 
2023
 
2024
 
Total
 
(In Thousands)
Compression service contracts remaining performance obligations
$
38,720

 
$
15,941

 
$
2,026

 
$
54

 
$

 
$
56,741


For sales of CBFs where we have agreed to issue credits for the repurchase of reclaimable used fluids at an agreed price based on the condition of the fluid upon return, we adjust the revenue recognized in the period of shipment by an estimated amount, based on historical experience, of the credit expected to be issued. As of March 31, 2020, the amount of remaining credits expected to be issued for the repurchase of reclaimable used fluids was $5.6 million recorded in inventory (right of return asset) and either accounts payable or as a reduction to accounts receivable. There were no material differences between amounts recognized during the three month period ended March 31, 2020, compared to estimates made in a prior period from these variable consideration arrangements.

Our contract asset balances, primarily associated with customer documentation requirements, were $33.3 million and $34.9 million as of March 31, 2020 and December 31, 2019, respectively. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.

Collections primarily associated with progressive billings to customers for the construction of compression equipment is included in unearned income in the consolidated balance sheets. The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(In Thousands)
Unearned Income, beginning of period
$
9,678

 
$
25,333

Additional unearned income
23,869

 
49,363

Revenue recognized
(5,767
)
 
(24,858
)
Unearned income, end of period
$
27,780

 
$
49,838



During the three month period ended March 31, 2020, we recognized product sales revenue of $2.9 million from unearned income that was deferred as of December 31, 2019. During the three months ended March 31, 2019, we recognized product sales revenue of $11.0 million from unearned income that was deferred as of December 31, 2018.

As of March 31, 2020, contract costs were immaterial.
    

11


We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our three reportable segments in Note 11. In addition, we disaggregate revenue from contracts with customers by geography based on the following table below.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Completion Fluids & Products
 
 
 
U.S.
$
37,958

 
$
31,606

International
37,279

 
29,975

 
75,237

 
61,581

Water & Flowback Services
 
 
 
U.S.
54,384

 
73,199

International
3,083

 
5,479

 
57,467

 
78,678

Compression
 
 
 
U.S.
80,599

 
93,517

International
9,639

 
9,952

 
90,238

 
103,469

Total Revenue
 
 
 
U.S.
172,941

 
198,322

International
50,001

 
45,406

 
$
222,942

 
$
243,728


NOTE 3 IMPAIRMENTS AND OTHER CHARGES

Impairments of Long-Lived Assets

During the first quarter of 2020, the COVID-19 pandemic and decline in oil prices had a significant impact on our customers and industry. We started to see our customers revise their capital budgets downwards and adjust their operations accordingly, which led to a decline in orders for new compression equipment to be fabricated and sold to third parties, among other impacts. We concluded these events were indicators of impairment for all asset groups within our Compression Division and certain asset groups within our Completion Fluids & Products Division. As a result, we performed recoverability analyses on the relevant asset groups within these divisions. Based upon these recoverability analyses, we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory in our Compression Division exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million during the first quarter of 2020 related to these assets. Fair value was estimated based on a market approach. No other recoverability analysis performed indicated an impairment as of March 31, 2020. Given the dynamic nature of the events beginning in the first quarter of 2020, we are not able to reasonably estimate how long our operations will be adversely impacted and the full extent these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments.
NOTE 4 – INVENTORIES

Components of inventories as of March 31, 2020 and December 31, 2019 are as follows: 
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Finished goods
$
67,824

 
$
70,135

Raw materials
3,886

 
4,125

Parts and supplies
38,859

 
47,793

Work in progress
31,547

 
14,457

Total inventories
$
142,116

 
$
136,510




12


Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. Work in progress inventory consists primarily of new compressor packages located at our Compression Division manufacturing facility in Midland, Texas.
NOTE 5 – LEASES

We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. We have finance leases for certain storage tanks and equipment rentals. These finance leases are not material to our financial statements. Our leases have remaining lease terms ranging from 1 to 16 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. The office space, warehouse space, operating location leases, and machinery and equipment leases generally require us to pay all maintenance and insurance costs. During the fourth quarter of 2019, CCLP entered into a lease agreement commitment for 14 compressor packages. The leases are for an initial term of seven years and commence upon the completion of the equipment fabrication. During the first quarter, CCLP took delivery of eight compressor packages. We anticipate taking delivery of the remaining six compressor packages when the compression units are completed, which is expected to occur during the second quarter of 2020. We have no other lease commitments that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Variable rent expense was not material.

Our corporate headquarters facility located in The Woodlands, Texas, was sold on December 31, 2012, pursuant to a sale and leaseback transaction. As a condition to the consummation of the purchase and sale of the facility, the parties entered into a lease agreement for the facility having an initial lease term of 15 years, which is classified as an operating lease. Under the terms of the lease agreement, we have the ability to extend the lease for five successive five-year periods at base rental rates to be determined at the time of each extension.

Components of lease expense, included in either cost of revenues or general and administrative expense based on the use of the underlying asset, are as follows (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less):
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Operating lease expense
$
5,148

 
$
5,044

Short-term lease expense
9,430

 
11,161

Total lease expense
$
14,578

 
$
16,205


Supplemental cash flow information:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
     Operating cash flows - operating leases
 
$
5,949

 
$
4,657

 
 
 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
 
 
     Operating leases
 
$
11,844

 
$
3,257




13


Supplemental balance sheet information:
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Operating leases:
 
 
 
     Operating lease right-of-use assets
$
75,344

 
$
68,131

 
 
 
 
     Accrued liabilities and other
$
16,782

 
$
15,850

     Operating lease liabilities
59,845

 
53,919

     Total operating lease liabilities
$
76,627

 
$
69,769


Additional operating lease information:
 
March 31, 2020
 
December 31, 2019
Weighted average remaining lease term:
 
 
 
     Operating leases
6.37 Years

 
6.43 Years

 
 
 
 
Weighted average discount rate:
 
 
 
     Operating leases
9.43
%
 
9.46
%

    
Future minimum lease payments by year and in the aggregate, under non-cancellable operating leases with terms in excess of one year consist of the following at March 31, 2020:
 
 
Operating Leases
 
(In Thousands)
 
 
 
Remainder of 2020
 
$
19,961

2021
 
22,092

2022
 
18,422

2023
 
14,776

2024
 
12,372

Thereafter
 
30,268

Total lease payments
 
117,891

Less imputed interest
 
(41,264
)
Total lease liabilities
 
$
76,627


    
At March 31, 2020, future minimum rental receipts under a non-cancellable sublease for office space in one of our locations totaled $6.1 million. For the three months ended March 31, 2020, we recognized sublease income of $0.3 million.

14


NOTE 6 – LONG-TERM DEBT AND OTHER BORROWINGS
 
We believe our capital structure, excluding CCLP, ("TETRA") 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 as of March 31, 2020 and December 31, 2019, consists of the following:
 
 
March 31, 2020
 
December 31, 2019
 
 
(In Thousands)
TETRA
Scheduled Maturity
 
 
 
Asset-based credit agreement (presented net of unamortized deferred financing costs of $1.3 million as of March 31, 2020 and $1.0 million as of December 31, 2019)
September 2023
$
2,246

 
$

Term credit agreement (presented net of the unamortized discount of $6.2 million as of March 31, 2020 and $6.4 million as of December 31, 2019 and net of unamortized deferred financing costs of $9.2 million as of March 31, 2020 and $9.5 million as of December 31, 2019)
September 2025
205,167

 
204,633

TETRA total debt
 
207,413

 
204,633

Less current portion
 

 

TETRA total long-term debt
 
$
207,413

 
$
204,633

 
 
 
 
 
CCLP
 
 
 
 
CCLP asset-based credit agreement (presented net of unamortized deferred financing costs of $0.8 million as of March 31, 2020 and $0.9 million of December 31, 2019)
June 2023
2,184

 
2,622

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $1.5 million as of March 31, 2020 and $1.7 million as of December 31, 2019 and net of unamortized deferred financing costs of $2.6 million as of March 31, 2020 and $2.8 million as of December 31, 2019)
August 2022
291,863

 
291,444

CCLP 7.50% Senior Secured Notes (presented net of unamortized deferred financing costs of $5.6 million as of March 31, 2020 and $5.8 million as of December 31, 2019)
April 2025
344,382

 
344,172

CCLP total debt
 
638,429

 
638,238

Less current portion
 

 

CCLP total long-term debt
 
$
638,429

 
$
638,238

Consolidated total long-term debt
 
$
845,842

 
$
842,871



As of March 31, 2020, TETRA had a $3.5 million outstanding balance and $7.9 million in letters of credit against its asset-based credit agreement ("ABL Credit Agreement"). As of March 31, 2020, subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement that may limit borrowings, TETRA had an availability of $40.8 million under this agreement. There was a $3.0 million balance outstanding and $3.0 million in letters of credit against the CCLP asset-based credit agreement ("CCLP Credit Agreement") as of March 31, 2020. As of March 31, 2020, and subject to compliance with the covenants, borrowing base, and other provisions of the CCLP Credit Agreement that may limit borrowings, CCLP had availability of $20.4 million.

TETRA and CCLP credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. TETRA and CCLP are both in compliance with all covenants of their respective credit and senior note agreements as of March 31, 2020.

15


NOTE 7 – DISCONTINUED OPERATIONS

On March 1, 2018, we closed a series of related transactions that resulted in the disposition of our Offshore Division. As a result, we have accounted for our Offshore Division, consisting of our Offshore Services and Maritech segments, as discontinued operations. See Note 8 - "Commitments and Contingencies" for further discussion. A summary of financial information related to our discontinued operations is as follows:

Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$

 
$

 
$

Cost of revenues
(60
)
 

 
(60
)
 
22

 

 
22

Depreciation, amortization, and accretion

 

 

 

 

 

General and administrative expense
205

 

 
205

 
404

 

 
404

Other (income) expense, net

 

 

 

 

 

Pretax loss from discontinued operations
(145
)
 

 
(145
)
 
(426
)
 

 
(426
)
Pretax loss on disposal of discontinued operations
 
 
 
 

 
 
 
 
 

Total pretax loss from discontinued operations
 
 
 
 
(145
)
 
 
 
 
 
(426
)
Income tax benefit
 
 
 
 

 
 
 
 
 

Total loss from discontinued operations
 
 
 
 
$
(145
)
 
 
 
 
 
$
(426
)
    
Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Statement of Financial Position
(in thousands)
 
March 31, 2020
 
December 31, 2019
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Carrying amounts of major classes of assets included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade receivables
$

 
$

 
$

 
$

 
$

 
$

Other current assets

 

 

 

 

 

Assets of discontinued operations
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Carrying amounts of major classes of liabilities included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade payables
$
1,303

 
$

 
$
1,303

 
$
1,233

 
$

 
$
1,233

Accrued liabilities
480

 
228

 
708

 
745

 
120

 
865

Liabilities of discontinued operations
$
1,783

 
$
228

 
$
2,011

 
$
1,978

 
$
120

 
$
2,098


NOTE 8 – 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.


16


Contingencies of Discontinued Operations

    In early 2018, we closed the Maritech Asset Purchase and Sale Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of Maritech's remaining oil and gas properties and related assets. Shortly thereafter, we closed the Maritech Membership Interest Purchase and Sale Agreement with Orinoco that provided for the purchase by Orinoco of all of the outstanding membership interests in Maritech. As a result of these transactions, we have effectively exited the business of our former Maritech segment.

Under the Maritech Asset Purchase and Sale Agreement, Orinoco assumed all of Maritech’s decommissioning liabilities related to the leases sold to Orinoco (the “Orinoco Lease Liabilities”) and, under the Maritech Membership Interest Purchase and Sale Agreement, Orinoco assumed all other liabilities of Maritech, including the decommissioning liabilities associated with the oil and gas properties previously sold by Maritech (the “Legacy Liabilities”), subject to certain limited exceptions unrelated to the decommissioning liabilities. To the extent that Maritech or Orinoco fails to satisfy decommissioning liabilities associated with any of the Orinoco Lease Liabilities or the Legacy Liabilities, we may be required to satisfy such liabilities under third party indemnity agreements and corporate guarantees that we previously provided to the US Department of the Interior and other parties, respectively.

Pursuant to a Bonding Agreement entered into as part of these transactions (the "Bonding Agreement"), Orinoco provided non-revocable performance bonds in an aggregate amount of $46.8 million to cover the performance by Orinoco and Maritech of the asset retirement obligations of Maritech (the “Initial Bonds”) and agreed to replace, within 90 days following the closing, the Initial Bonds with other non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million (collectively, the “Interim Replacement Bonds”). Orinoco further agreed to replace, within 180 days following the closing, the Interim Replacement Bonds with a maximum of three non-revocable performance bonds in the aggregate sum of $47.0 million, meeting certain requirements (the “Final Bonds”). Among the other requirements of the Final Bonds was that they must provide coverage for all of the asset retirement obligations of Maritech instead of only relating to specific properties. In the event Orinoco did not provide the Interim Replacement Bonds or the Final Bonds, Orinoco was required to make certain cash escrow payments to us.

    The payment obligations of Orinoco under the Bonding Agreement were guaranteed by Thomas M. Clarke and Ana M. Clarke pursuant to a separate guaranty agreement (the “Clarke Bonding Guaranty Agreement”). Orinoco has not delivered such replacement bonds and neither it nor the Clarkes has made any of the agreed upon cash escrow payments and we filed a lawsuit against Orinoco and the Clarkes to enforce the terms of the Bonding Agreement and the Clarke Bonding Guaranty Agreement. A summary judgment was initially granted in favor of Orinoco and the Clarkes which dismissed our claims against Orinoco under the Bonding Agreement and against the Clarkes under the Clarke Bonding Guaranty Agreement. We filed an appeal and also asked the trial court to grant a new trial on the summary judgment or to modify the judgment because we believe this judgment should not have been granted. On November 5, 2019, the trial court signed an order granting our motion for new trial and vacating the prior order granting summary judgment for Orinoco and the Clarkes. The parties are awaiting direction from the court on a new scheduling order and/or trial setting. The Initial Bonds, which are non-revocable, remain in effect.

    If we become liable in the future for any decommissioning liability associated with any property covered by either an Initial Bond or an Interim Replacement Bond while such bonds are outstanding and the payment made to us under such bond is not sufficient to satisfy such liability, the Bonding Agreement provides that Orinoco will pay us an amount equal to such deficiency and if Orinoco fails to pay any such amount, such amount must be paid by the Clarkes under the Clarke Bonding Guaranty Agreement. However, if the Final Bonds or the full amount of the escrowed cash have been provided, neither Orinoco nor the Clarkes would be liable to pay us for any such deficiency. Our financial condition and results of operations may be negatively affected if Orinoco is unable to cover any such deficiency or if we become liable for a significant portion of the decommissioning liabilities.

     In early 2018, we also closed the sale of our Offshore Division to Epic Companies, LLC (“Epic Companies,” formerly known as Epic Offshore Specialty, LLC). Part of the consideration we received was a promissory note of Epic Companies in the original principal amount of $7.5 million (the “Epic Promissory Note”) payable to us in full, together with interest at a rate of 1.52% per annum, on December 31, 2019, along with a personal guaranty agreement from Thomas M. Clarke and Ana M. Clarke guaranteeing the payment obligations of Epic Companies pursuant to the Epic Promissory Note (the “Clarke Promissory Note Guaranty Agreement”). Additionally, pursuant to the Equity Interest Purchase Agreement (the “Offshore Services Purchase Agreement”) and other agreements with Epic Companies, certain other amounts relating to the Offshore Division totaling approximately $1.5 million were

17


payable to us. At the end of August 2019, Epic Companies filed for bankruptcy. We recorded a reserve of $7.5 million for the full amount of the promissory note, including accrued interest, and the certain other receivables in the amount of $1.5 million during the quarter ended September 30, 2019. The Epic Promissory Note became due on December 31, 2019 but neither Epic nor the Clarkes made the required payment. Upon the default by Epic and the Clarkes, we filed a lawsuit against the Clarkes on January 15, 2020 in Montgomery County, Texas for breach of the Clarke Promissory Note Guaranty Agreement, seeking the amounts due under the Epic Promissory Note and related interest, as well as attorneys’ fees and expenses. The Clarkes each filed an answer and counterclaims for fraud and negligent misrepresentation and seek monetary damages in excess of $1 million, punitive damages, and attorneys’ fees. We will vigorously prosecute our claim and defend against the claims by the Clarkes.
NOTE 9 – FAIR VALUE MEASUREMENTS
 
Financial Instruments

Warrants

The Warrants are valued using a Black Scholes option valuation model that includes implied volatility of the trading price (a Level 3 fair value measurement).

Derivative Contracts

We and CCLP each enter into short term foreign currency forward derivative contracts with third parties as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of March 31, 2020, we and CCLP had the following foreign currency derivative contracts outstanding relating to portions of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward purchase Euro
 
$
8,167

 
1.08
 
4/21/2020
Forward purchase Euro
 
10,497

 
1.10
 
4/21/2020
Forward purchase pounds sterling
 
9,400

 
1.17
 
4/21/2020
Forward sale pounds sterling
 
500

 
1.18
 
4/21/2020
Forward sale pounds sterling
 
1,875

 
1.17
 
4/21/2020
Forward sale Norwegian krone
 
1,000

 
11.76
 
4/21/2020
Forward purchase Norwegian krone
 
4,300

 
11.36
 
4/21/2020
Forward sale Mexican peso
 
4,974

 
24.40
 
4/21/2020
Derivative Contracts
 
British Pound Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward purchase Euro
 
£
3,445

 
0.92
 
4/21/2020
Derivative Contracts
 
Swedish Krona Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward purchase Euro
 

210
kr
 
10.90
 
4/6/2020
Forward purchase Euro
 

66,690
kr
 
10.91
 
4/6/2020
Forward purchase Euro
 

2,400
kr
 
11.24
 
4/21/2020


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 contracts during a period will be included in the determination of earnings for that period.

The fair values of foreign currency derivative contracts are based on quoted market values (a Level 2 fair value measurement). The fair values of our and CCLP's foreign currency derivative contracts as of March 31, 2020

18


and December 31, 2019, are as follows:
Foreign currency derivative contracts
Balance Sheet Location
 
 Fair Value at March 31, 2020
 
 Fair Value at December 31, 2019

 

 
(In Thousands)
Forward purchase contracts
 
Current assets
 
$
1,160

 
$
86

Forward sale contracts
 
Current liabilities
 
(433
)
 
(53
)
Forward purchase contracts
 
Current liabilities
 
(181
)
 
(3
)
Net asset (liability)
 
 
 
$
546

 
$
30



None of our 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 months ended March 31, 2020 and March 31, 2019, we recognized $(1.0) million and $0.6 million of net (gains) losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program.

During the first quarter of 2020, we recorded impairments of approximately $5.4 million, reflecting the decreased fair value for certain assets. The fair values used in these impairment calculations were estimated based on a market approach, which is based on significant unobservable inputs (Level 3) in accordance with the fair value hierarchy.

Recurring and nonrecurring fair value measurements by valuation hierarchy as of March 31, 2020 and December 31, 2019, are 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
Description
March 31, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Midland manufacturing facility and related assets
$
19,646

 
$

 
$

 
$
19,646

Warrants liability
(112
)
 

 

 
(112
)
Asset for foreign currency derivative contracts
1,160

 

 
1,160

 

Liability for foreign currency derivative contracts
(614
)
 

 
(614
)
 

Net asset
$
20,080

 
 
 
 
 
 
 
 
 
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, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Warrants liability
$
(449
)
 
$

 
$

 
$
(449
)
Asset for foreign currency derivative contracts
86

 

 
86

 

Liability for foreign currency derivative contracts
(56
)
 

 
(56
)
 

Net liability
$
(419
)
 
 
 
 
 
 

The fair values of cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and long-term debt pursuant to TETRA's ABL Credit Agreement and Term Credit Agreement, and the CCLP Credit Agreement approximate their carrying amounts. The fair values of the publicly traded CCLP 7.25% Senior Notes at March 31, 2020 and December 31, 2019, were approximately $148.0 million and $266.0 million, respectively. Those fair values compare to the face amount of $295.9 million both at March 31, 2020 and December 31, 2019. The fair values of the CCLP 7.50% Senior Secured Notes at March 31, 2020 and December 31, 2019 were approximately $239.8 million and $344.8 million, respectively. These fair values compare

19


to aggregate principal amount of such notes at both March 31, 2020 and December 31, 2019, of $350.0 million. We based the fair values of the CCLP 7.25% Senior Notes and the CCLP 7.50% Senior Secured Notes as of March 31, 2020 on recent trades for these notes.
NOTE 10 – NET INCOME (LOSS) PER SHARE

The following is a reconciliation of the weighted average number of common shares outstanding with the number of shares used in the computations of net income (loss) per common and common equivalent share:
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
(In Thousands)
Number of weighted average common shares outstanding
 
125,587

 
125,681

Assumed exercise of equity awards and warrants
 

 

Average diluted shares outstanding
 
125,587

 
125,681



For the three month periods ended March 31, 2020 and March 31, 2019, the average diluted shares outstanding excludes the impact of all outstanding equity awards and warrants, as the inclusion of these shares would have been anti-dilutive due to the net losses recorded during the periods. In addition, for the three month period ended March 31, 2019, the calculation of diluted earnings per common share excludes the impact of the CSI Compressco LP Series A Convertible Preferred Units (the "CCLP Preferred Units"), as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been anti-dilutive.

20


NOTE 11 – INDUSTRY SEGMENTS
 
We manage our operations through three Divisions: Completion Fluids & Products, Water & Flowback Services, and Compression.

 Summarized financial information concerning the business segments is as follows:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(In Thousands)
Revenues from external customers
 

 
 

Product sales
 
 
 
Completion Fluids & Products Division
$
70,190

 
$
57,328

Water & Flowback Services Division
25

 
364

Compression Division
14,818

 
34,089

Consolidated
$
85,033

 
$
91,781

 
 
 
 
Services
 
 
 
Completion Fluids & Products Division
$
5,047

 
$
4,253

Water & Flowback Services Division
57,442

 
78,314

Compression Division
75,420

 
69,380

Consolidated
$
137,909

 
$
151,947

 
 
 
 
Total revenues
 
 
 
Completion Fluids & Products Division
$
75,237

 
$
61,581

Water & Flowback Services Division
57,467

 
78,678

Compression Division
90,238

 
103,469

Interdivision eliminations

 

Consolidated
$
222,942

 
$
243,728

 
 
 
 
Income (loss) before taxes
 
 
 
Completion Fluids & Products Division
$
19,396

 
$
6,186

Water & Flowback Services Division
(2,244
)
 
2,231

Compression Division
(12,790
)
 
(7,801
)
Interdivision eliminations
5

 
6

Corporate Overhead(1)
(13,444
)
 
(17,687
)
Consolidated
$
(9,077
)
 
$
(17,065
)

(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(In Thousands)
General and administrative expense
$
8,081

 
$
12,089

Depreciation and amortization
197

 
168

Interest expense
5,455

 
5,342

Warrants fair value adjustment (income) expense
(338
)
 
407

Other general corporate (income) expense, net
49

 
(319
)
Total
$
13,444

 
$
17,687


NOTE 12 – SUBSEQUENT EVENTS

In April 2020, we announced our plan to shutdown our Midland manufacturing facility as a result of a decline in orders for new equipment from third parties and the expectation that no incremental equipment will be fabricated for our fleet in the second half of 2020. As a result of the decision to close this facility and solely utilize third party fabricators in the future for our own service fleet, we are pursuing the sale of the Midland facility in an effort to further improve our balance sheet, and have entered into an agreement with a third party purchaser, which

21


is subject to numerous conditions. While we will continue to operate the facility until the completion and sale of our remaining backlog, we no longer intend to fabricate new compressor packages for sales to third parties. We have and will continue to evaluate the sale of other non-core assets, including our low-horsepower compression fleet. We can provide no assurance that we will consummate a sale of the Midland manufacturing facility, our low-horsepower compression fleet, or any other non-core asset.

In April 2020, we began the process of discontinuing chemical production operations at our El Dorado, Arkansas production facility, which primarily produced calcium chloride from underground brine reserves. The current COVID-19 pandemic and oil oversupply events have led to unprecedented market conditions and this facility’s relatively high fixed costs have led us to rationalize our manufacturing base. We will continue to manufacture and deliver all products through early June 2020, at which time we will begin a sequenced shutdown of the manufacturing facility. We will continue to ship product until the inventory is gone, at which time production operations at the plant will be shutdown. Going forward, we will continue to meet our customer demand for liquid calcium chloride products through our network of other manufacturing plants and terminals.

On April 17, 2020, CCLP announced the commencement of an offer (the "Exchange Offer") to certain eligible noteholders ("Eligible Holders") to exchange any and all of their outstanding 7.25% Senior Notes due 2022 (the “Unsecured Notes”) for newly issued 7.50% Senior Secured First Lien Notes due 2025 and 7.25% Senior Secured Second Lien Notes due 2027. In conjunction with the offer, consents are being solicited from Eligible Holders to eliminate substantially all restrictive covenants and certain of the default provisions in the indenture governing the Unsecured Notes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 16, 2020 ("2019 Annual Report"). This discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview  
We are a geographically diversified oil and gas services company, focused on completion fluids and associated products and services, comprehensive water management, frac flowback, production well testing and offshore rig cooling services, and compression services and equipment. We operate through three reporting segments organized into three Divisions - Completion Fluids & Products, Water & Flowback Services, and Compression.
Demand for products and services of our Completion Fluids & Products Division has remained strong despite the continued volatility in pricing for oil and uncertainty in many of the markets where we operate, which affects the plans of many of our oil and gas operations customers. During the first quarter of 2020, we experienced increased CBF product sales revenues in the U.S. Gulf of Mexico, including product sales associated with a TETRA CS Neptune completion fluid sale and increased international CBF product sales and domestic manufactured products sales. However, the significant decline in oil prices may adversely affect the demand for our products and services in the near future.
Recent macroeconomic uncertainty resulting from declining oil prices and the COVID-19 pandemic has particularly affected domestic onshore demand for our Water & Flowback Services Division services. We experienced decreased water management services activity during the first quarter of 2020 and without a meaningful recovery, we expect our water management services operations to continue to be negatively impacted in the near future.
Our Compression Division is significantly dependent upon the demand for, and production of, oil and the associated natural gas from unconventional oil and natural gas production in the domestic and international markets in which we operate. During the first part of our quarter, we continued to see increased demand in our products and services, with the exception of a declining backlog for new unit sales. However, during the latter part of the quarter, as the macroeconomic uncertainty resulting from declining oil prices and the COVID-19 pandemic continued, we started to see our customers revise their capital budgets downwards and adjust their operations accordingly. In response to both market uncertainty and the lower levels of spending by our customers, we lowered our projected growth capital expenditures originally intended to increase the horsepower of our fleet. In addition, given the decline

22


in orders for new equipment to be fabricated and sold to third parties and the expectation that no incremental equipment will be fabricated for our fleet in the second half of 2020, we announced our intentions to close our Midland manufacturing facility, retain equipment design and engineering personnel, and outsource the fabrication of new equipment for our fleet. We no longer intend to design or fabricate new compressor packages for sales to third parties. Due to excess compression equipment in the industry, we have started to and expect to continue to see lower utilization of our compression fleet, client requests to put units on stand-by, and pricing pressures as customers try to reduce their costs.
The COVID-19 pandemic and decline in oil prices had a significant impact on our customers and industry. We concluded these events were indicators of impairment for all asset groups within our Compression Division and certain asset groups in our Completion Fluids & Products Division. As a result, we performed recoverability analyses on the relevant asset groups within these divisions. Based upon these recoverability analyses, we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory in our Compression Division exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million during the first quarter of 2020 related to these assets. Given the dynamic nature of the events beginning in the first quarter of 2020, we are not able to reasonably estimate how long our operations will be adversely impacted and the full extent these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments.
We are continuing to monitor the 2020 spending plans of our customers and are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current oil and gas industry environment. Capital expenditure levels continue to be monitored carefully for each of our businesses to ensure that capital investments are only made for the most attractive return on investment. As obtaining additional financing is challenging in the current debt and equity markets, growth capital expenditures are expected to be primarily funded by available cash and cash expected to be provided by operating activities. We intend to manage our flexible cost structure to proactively respond to changing market conditions and execute on actions necessary to manage through these conditions, some of which could result in impairments or restructuring charges in future periods.
Cost reductions we have recently implemented or are in the process of implementing include reductions in 2020 capital expenditures, workforce reductions, salary reductions, the suspension of 401(k) matching contributions for our employees, targeted reduction in SG&A expenses, and negotiated reductions in expenditures with many of our suppliers. Absent a meaningful recovery in natural gas and oil prices and a material improvement in the status of the COVID-19 pandemic, we expect our operations to continue to be negatively impacted, particularly in our onshore producing regions of the United States. We are not able to predict how long market disruptions resulting from the COVID-19 pandemic will continue, or what impact it will ultimately have on our business. Despite that, we will continue to maintain our commitment to safety and service quality for our customers.
How we Evaluate Operations
We use U.S. GAAP financial measures such as revenues, gross profit, income (loss) before taxes, and net cash provided by operating activities, as well as certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures for our business.
Adjusted EBITDA. We view Adjusted EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (typically compared to the prior month, prior year period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, impairments and certain other non-cash charges and non-recurring adjustments.
Adjusted EBITDA is used as a supplemental financial measure by our management to:
evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis; and
determine our ability to incur and service debt and fund capital expenditures.


23


 The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:

 
Three Months Ended
 
March 31, 2020
 
Net Income (Loss), as reported
Tax Provision
Income (Loss) Before Tax, as Reported
Impairments & Special Charges
Adjusted Income (Loss) Before Tax
Interest Expense, Net

Depreciation & Amortization
 
Equity Comp. Expense
Adjusted EBITDA
 
(In Thousands)
Completion Fluids & Products Division
 
 
$
19,396

$
450

$
19,846

$
(154
)
$
1,934

$

$
21,626

Water & Flowback Services Division
 
 
(2,244
)
1,607

(637
)
(9
)
7,425


6,779

Compression Division
 
 
(12,790
)
5,971

(6,819
)
12,564

19,908

324

25,977

Eliminations and other
 
 
5


5


(4
)

1

Subtotal
 
 
4,367

8,028

12,395

12,401

29,263

324

54,383

Corporate and other
 
 
(13,444
)
73

(13,371
)
5,455

197

1,145

(6,574
)
TETRA excluding Discontinued Operations
$
(10,231
)
$
1,154

$
(9,077
)
$
8,101

$
(976
)
$
17,856

$
29,460

$
1,469

$
47,809

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
March 31, 2019
 
Net Income (Loss), as reported
Tax Provision
Income (Loss) Before Tax, as Reported
Impairments & Special Charges
Adjusted Income (Loss) Before Tax
Interest Expense, Net
Depreciation & Amortization
Equity Comp. Expense
Adjusted EBITDA
 
(In Thousands)
Completion Fluids & Products Division
 
 
$
6,186

$
683

$
6,869

$
(179
)
$
3,665

$

$
10,355

Water & Flowback Services Division
 
 
2,231

(400
)
1,831

4

8,267


10,102

Compression Division
 
 
(7,801
)
1,610

(6,191
)
13,213

18,532

365

25,919

Eliminations and other
 
 
6


6

(1
)
(4
)

1

Subtotal
 
 
622

1,893

2,515

13,037

30,460

365

46,377

Corporate and other
 
 
(17,687
)
331

(17,356
)
5,342

168

1,800

(10,046
)
TETRA excluding Discontinued Operations
$
(18,674
)
$
1,609

$
(17,065
)
$
2,224

$
(14,841
)
$
18,379

$
30,628

$
2,165

$
36,331


Adjusted EBITDA is a financial measure that is not in accordance with U.S. GAAP and should not be considered an alternative to net income, operating income, cash flows from operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. This measure may not be comparable to similarly titled financial metrics of other entities, as other entities may not calculate Adjusted EBITDA in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA as analytical tools by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes.
Critical Accounting Policies and Estimates
 
There have been no material changes or developments in the evaluation of the accounting estimates and
the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed
in our 2019 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.    

24


Results of Operations

Three Months Ended March 31, 2020 compared with three months ended March 31, 2019.

Consolidated Comparisons
 
Three Months Ended March 31,
 
Period to Period Change
 
2020
 
2019
 
2020 vs 2019
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
222,942

 
$
243,728

 
$
(20,786
)
 
(8.5
)%
Gross profit
39,417

 
36,210

 
3,207

 
8.9
 %
Gross profit as a percentage of revenue
17.7
 %
 
14.9
 %
 
 

 
 

General and administrative expense
30,537

 
34,277

 
(3,740
)
 
(10.9
)%
General and administrative expense as a percentage of revenue
13.7
 %
 
14.1
 %
 
 

 
 

Interest expense, net
17,856

 
18,379

 
(523
)
 
(2.8
)%
Warrants fair value adjustment (income) expense
(338
)
 
407

 
(745
)
 
(183.0
)%
CCLP Series A Preferred Units fair value adjustment (income) expense

 
1,163

 
(1,163
)
 
(100.0
)%
Other (income) expense, net
439

 
(951
)
 
1,390

 
(146.2
)%
Loss before taxes and discontinued operations
(9,077
)
 
(17,065
)
 
7,988

 
46.8
 %
Loss before taxes and discontinued operations as a percentage of revenue
(4.1
)%
 
(7.0
)%
 
 

 
 

Provision for income taxes
1,154

 
1,609

 
(455
)
 
(28.3
)%
Loss before discontinued operations
(10,231
)
 
(18,674
)
 
8,443

 
(45.2
)%
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations, net of taxes
(145
)
 
(426
)
 
281

 
(66.0
)%
Net loss
(10,376
)
 
(19,100
)
 
8,724

 
(45.7
)%
Loss attributable to noncontrolling interest
8,825

 
8,262

 
563

 
6.8
 %
Net loss attributable to TETRA stockholders
$
(1,551
)
 
$
(10,838
)