(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically 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 [ X ] 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 [ X ]
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 [ X ]
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
As of May 8, 2019, there were 125,609,276 shares outstanding of the Company’s Common Stock, $0.01 par value per share.
Common stock, par value $0.01 per share; 250,000,000 shares authorized at March 31, 2019 and December 31, 2018; 128,412,688 shares issued at March 31, 2019 and 128,455,134 shares issued at December 31, 2018
1,284
1,285
Additional paid-in capital
462,241
460,680
Treasury stock, at cost; 2,785,981 shares held at March 31, 2019, and 2,717,569 shares held at December 31, 2018
NOTE A – 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, 2019 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2019.
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 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, 2018 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 4, 2019.
Significant Accounting Policies
We have added policies for the recording of leases in conjunction with the adoption of the new lease standard discussed in our "Leases" and "New Accounting Pronouncements" sections below. Other than the additional lease policies described herein, there have been no significant changes in our accounting policies or the application of these policies.
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.
Leases
As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election described below, we initially recognize a lease liability and related right-of-use asset on the commencement date.
The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.
Long-term operating leases are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of March 31, 2019. Long-term finance leases are included in property, plant and equipment, accrued liabilities and other, and other liabilities in our consolidated balance sheet as of March 31, 2019. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term, if it is reasonably certain that we would exercise the option.
As an accounting policy election, we do not include short-term leases on our balance sheet. Short-term leases include leases with a term of 12 months or less, inclusive of renewal options we are reasonably certain to exercise. The lease payments for short-term leases are included as operating lease costs on a straight-line basis over the lease term in cost of revenues or general and administrative expense based on the use of the underlying asset. We recognize lease costs for variable lease payments not included in the determination of a lease liability in the period in which an obligation is incurred.
As allowed by U.S. GAAP, we do not separate nonlease components from the associated lease component for our compression services contracts and instead account for those components as a single component based on the accounting treatment of the predominant component. In our evaluation of whether Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842 "Leases" or ASC 606 "Revenue from Contracts with Customers" is applicable to the combined component based on the predominant component, we determined the services nonlease component is predominant, resulting in the ongoing recognition of our compression services contracts following ASC 606.
Our operating and finance leases are recognized at the present value of lease payments over the lease term. When the implicit discount rate is not readily determinable, we use our incremental borrowing rate to calculate the discount rate used to determine the present value of lease payments. Consistent with other long-lived assets or asset groups that are held and used, we test for impairment of our right-of-use assets when impairment indicators are present.
Foreign Currency Translation
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 $1.2 million during the three months ended March 31, 2019 and $0.9 million during the three months ended March 31, 2018, respectively.
New Accounting Pronouncements
Standards adopted in 2019
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize right-of-use lease assets and lease liabilities in the balance sheet related to the right to use the underlying asset for the lease term. In addition, through improved disclosure requirements, ASC 842 will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard effective January 1, 2019. The standard had a material impact on our consolidated balance sheet, specifically, the reporting of our operating leases. The impact in the reporting of our finance leases was insignificant.
We chose to transition using a modified retrospective approach which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. Comparative information is reported under the accounting standards that were in effect for those periods. In addition, upon transition, we elected the package of practical expedients, which allows us to continue to apply historical lease classifications to existing contracts. Upon adoption, we recognized $60.6 million in operating right-of-use assets, $12.0 million in accrued liabilities and other, and $50.7 million in operating lease liabilities in our consolidated balance sheet. In addition, we also recognized a $2.8 million cumulative effect adjustment to increase retained earnings, primarily as a result of a deferred gain from a previous sale and
leaseback transaction on our corporate headquarters facility that was accounted for as an operating lease. Refer to Note K - “Leases” for further information on our leases.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)" that gives entities the option to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This is effective for us on January 1, 2019, however, as we do not have associated tax effects in accumulated other comprehensive income, there was no impact.
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” to align the measurement and classification guidance for share-based payments to nonemployees with the guidance currently applied to employees, with certain exceptions. We adopted this ASU during the three months ended March 31, 2019, with no material impact to 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. ASU 2016-13 has an effective date of the first quarter of fiscal 2020. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, under a prospective adoption. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
NOTE B – INVENTORIES
Components of inventories as of March 31, 2019 and December 31, 2018 are as follows:
March 31, 2019
December 31, 2018
(In Thousands)
Finished goods
$
72,831
$
69,762
Raw materials
3,279
3,503
Parts and supplies
44,915
47,386
Work in progress
35,603
22,920
Total inventories
$
156,628
$
143,571
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 in the CCLP fabrication facility in Midland, Texas.
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,
2019
2018
(In Thousands)
Number of weighted average common shares outstanding
125,681
117,598
Assumed exercise of equity awards and warrants
—
—
Average diluted shares outstanding
125,681
117,598
For the three month periods ended March 31, 2019 and March 31, 2018, 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 periods ended March 31, 2019 and March 31, 2018, the calculation of diluted earnings per common share excludes the impact of the CCLP Preferred Units (as defined in Note F), as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been anti-dilutive.
NOTE D – 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 and have revised prior period financial statements to exclude these businesses from continuing operations. 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, 2019
Three Months Ended March 31, 2018
Offshore Services
Maritech
Total
Offshore Services
Maritech
Total
Major classes of line items constituting pretax loss from discontinued operations
Revenue
$
—
$
—
$
—
$
4,477
$
186
$
4,663
Cost of revenues
22
—
22
11,123
238
11,361
Depreciation, amortization, and accretion
—
—
—
1,856
213
2,069
General and administrative expense
404
—
404
1,253
186
1,439
Other (income) expense, net
—
—
—
39
—
39
Pretax loss from discontinued operations
(426
)
—
(426
)
(9,794
)
(451
)
(10,245
)
Pretax loss on disposal of discontinued operations
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, 2019
December 31, 2018
Offshore Services
Maritech
Total
Offshore Services
Maritech
Total
Carrying amounts of major classes of assets included as part of discontinued operations
Trade receivables
$
81
$
1,340
$
1,421
$
—
$
1,340
$
1,340
Other current assets
1
—
1
14
—
14
Assets of discontinued operations
$
82
$
1,340
$
1,422
$
14
$
1,340
$
1,354
Carrying amounts of major classes of liabilities included as part of discontinued operations
Trade payables
$
616
$
—
$
616
$
740
$
—
$
740
Accrued liabilities
838
2,075
2,913
1,330
2,075
3,405
Liabilities of discontinued operations
$
1,454
$
2,075
$
3,529
$
2,070
$
2,075
$
4,145
NOTE E – 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, 2019 and December 31, 2018, consists of the following:
March 31, 2019
December 31, 2018
(In Thousands)
TETRA
Scheduled Maturity
Asset-based credit agreement (presented net of unamortized deferred financing costs of $1.6 million as of March 31, 2019)
September 10, 2023
$
29,131
$
—
Term credit agreement (presented net of the unamortized discount of $7 million as of March 31, 2019 and $7.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $10 million as of March 31, 2019 and $10.2 million as of December 31, 2018)
September 10, 2025
183,020
182,547
TETRA total debt
212,151
182,547
Less current portion
—
—
TETRA total long-term debt
$
212,151
$
182,547
CCLP
CCLP asset-based credit agreement
June 29, 2023
—
—
CCLP 7.25% Senior Notes (presented net of the unamortized discount of $2.1 million as of March 31, 2019 and $2.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $3.6 million as of March 31, 2019 and $3.9 million as of December 31, 2018)
August 15, 2022
290,204
289,797
CCLP 7.50% Senior Secured Notes (presented net of unamortized deferred financing costs of $6.5 million as of March 31, 2019 and $6.8 million as of December 31, 2018)
April 1, 2025
343,488
343,216
CCLP total debt
633,692
633,013
Less current portion
—
—
Consolidated total long-term debt
$
845,843
$
815,560
As of March 31, 2019, TETRA had a $30.7 million outstanding balance and $9.0 million in letters of credit against its asset-based credit agreement ("ABL Credit Agreement"). As of March 31, 2019, subject to compliance
with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, TETRA had an availability of $27.3 million under this agreement. There was no balance outstanding under the CCLP asset-based credit agreement ("CCLP Credit Agreement") as of March 31, 2019. As of March 31, 2019, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the CCLP Credit Agreement, CCLP had availability of $18.4 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, 2019.
NOTE F – CCLP SERIES A CONVERTIBLE PREFERRED UNITS
During 2016, CCLP issued 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”). We purchased 874,891 of the CCLP Preferred Units at the aggregate Issue Price of $10.0 million.
Unless otherwise redeemed for cash, a ratable portion of the CCLP Preferred Units has been, and will continue to be, converted into CCLP common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Based on the number of CCLP Preferred Units outstanding as of March 31, 2019, the maximum aggregate number of CCLP common units that could be required to be issued pursuant to the conversion provisions of the CCLP Preferred Units is approximately 10.2 million CCLP common units; however, CCLP may, at its option, pay cash, or a combination of cash and common units, to the holders of the CCLP Preferred Units instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Second Amended and Restated CCLP Partnership Agreement and the CCLP Credit Agreement. Beginning with the January 2019 Conversion Date, CCLP has elected to redeem the remaining CCLP Preferred Units for cash, resulting in 783,046 CCLP Preferred Units being redeemed during the three months ended March 31, 2019 for $8.3 million, which includes approximately $0.4 million of redemption premium that was paid and charged to other (income) expense, net in the accompanying consolidated statements of operations. The total number of CCLP Preferred Units outstanding as of March 31, 2019 was 1,779,417, of which we held 223,474.
Based on the conversion provisions of the CCLP Preferred Units, calculated as of March 31, 2019, using the trading prices of the common units over the prior month, along with other factors, and as otherwise impacted by the existence of certain conditions related to the CCLP common units (the "Conversion Price"), the theoretical number of CCLP common units that would be issued if all of the outstanding CCLP Preferred Units were converted on March 31, 2019 on the same basis as the monthly conversions would be approximately 7.4 million CCLP common units, with an aggregate market value of $21.0 million. If converted to CCLP common units, a $1 decrease in the Conversion Price would result in the issuance of 2.8 million additional CCLP common units pursuant to these conversion provisions.
NOTE G – FAIR VALUE MEASUREMENTS
Financial Instruments
CCLP Preferred Units
The CCLP Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (a Level 3 fair value measurement). 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. During the three month periods ended March 31, 2019 and March 31, 2018, the changes in the fair value of the CCLP Preferred Units resulted in $1.2 million and $1.4 million being charged to earnings, respectively, in the consolidated statements of operations.
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). During the three month periods ended March 31, 2019 and March 31, 2018, the changes in the fair value of the Warrants liability resulted in $0.4 million being charged to earnings and $2.0 million being credited to earnings, respectively, in the consolidated statement of operations.
Contingent Consideration
The fair value of the contingent consideration associated with the February 2018 acquisition of SwiftWater Energy Services, LLC ("SwiftWater") is based on a probability simulation utilizing forecasted revenues and EBITDA of the water management business of SwiftWater and all of our pre-existing operations in the Permian Basin (a Level 3 fair value measurement). At March 31, 2019, the estimated fair value for the liability associated with the contingent purchase price consideration was $10.6 million, resulting in $0.4 million being credited to other (income) expense, net, during the three months ended March 31, 2019. In addition, as part of the purchase of JRGO Energy Services LLC ("JRGO") during December 2018, the sellers have the right to receive contingent consideration of up to $1.5 million to be paid during 2019, based on JRGO's performance during the fourth quarter of 2018. Approximately $11.5 million of the $12.1 million combined contingent consideration liability is based on actual 2018 performance and was paid in April 2019, with the remaining being a fair value measurement based on a forecast of SwiftWater 2019 revenues and EBITDA.
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, 2019, 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
$
7,245
1.14
6/19/2019
Forward sale Euro
1,139
1.14
4/17/2019
Forward sale pounds sterling
1,329
1.33
4/17/2019
Forward purchase Mexican peso
820
19.52
4/17/2019
Forward sale Norwegian krone
527
8.53
4/17/2019
Forward sale Mexican peso
6,301
19.52
4/17/2019
Derivative Contracts
British Pound Notional Amount
Traded Exchange Rate
Settlement Date
(In Thousands)
Forward purchase Euro
1,535
0.85
4/17/2019
Derivative Contracts
Swedish Krona Notional Amount
Traded Exchange Rate
Settlement Date
(In Thousands)
Forward sale Euro
14,041
10.40
4/17/2019
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 values of foreign currency derivative instruments are based on quoted market values (a Level 2 fair value measurement). The fair values of our and CCLP's foreign currency derivative instruments as of March 31, 2019 and December 31, 2018, are as follows:
Foreign currency derivative instruments
Balance Sheet Location
Fair Value at March 31, 2019
Fair Value at December 31, 2018
(In Thousands)
Forward purchase contracts
Current assets
$
27
$
41
Forward sale contracts
Current assets
49
76
Forward sale contracts
Current liabilities
(22
)
(126
)
Forward purchase contracts
Current liabilities
(100
)
(168
)
Net asset (liability)
$
(46
)
$
(177
)
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 months ended March 31, 2019 and March 31, 2018, we recognized $0.6 million and $28,000 of net gains (losses), respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program.
A summary of these recurring fair value measurements by valuation hierarchy as of March 31, 2019 and December 31, 2018, 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
Description
March 31, 2019
(Level 1)
(Level 2)
(Level 3)
(In Thousands)
CCLP Series A Preferred Units
$
(18,278
)
$
—
$
—
$
(18,278
)
Warrants liability
(2,480
)
—
—
(2,480
)
Asset for foreign currency derivative contracts
75
—
75
—
Liability for foreign currency derivative contracts
(121
)
—
(121
)
—
Acquisition contingent consideration liability
(12,052
)
—
—
(12,052
)
Net liability
$
(32,856
)
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, 2018
(Level 1)
(Level 2)
(Level 3)
(In Thousands)
CCLP Series A Preferred Units
$
(27,019
)
$
—
$
—
$
(27,019
)
Warrants liability
(2,073
)
—
—
(2,073
)
Asset for foreign currency derivative contracts
117
—
117
—
Liability for foreign currency derivative contracts
(294
)
—
(294
)
—
Acquisition contingent consideration liability
(12,452
)
—
—
(12,452
)
Net liability
$
(41,721
)
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, 2019 and December 31, 2018, were approximately $264.9 million and $266.3 million, respectively. Those fair values compare to the face amount of $295.9 million both at March 31, 2019 and
December 31, 2018. The fair value of the publicly traded CCLP 7.50% Senior Secured Notes at March 31, 2019 and December 31, 2018 were approximately $336.0 million and $332.5 million, respectively. This fair value compares to aggregate principal amount of such notes at both March 31, 2019 and December 31, 2018, 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, 2019 on recent trades for these notes.
NOTE H – 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.
Contingencies of Discontinued Operations
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. To the extent that a buyer of these properties fails to perform the abandonment and decommissioning work required, a previous owner, including Maritech, may be required to perform the abandonment and decommissioning obligation. As the former parent company of Maritech, we also may be responsible for performing these abandonment and decommissioning obligations. In March 2018, we closed the Maritech Asset Purchase Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of the Maritech Properties. Also in March 2018, we finalized the Maritech Equity Purchase Agreement with Orinoco that provided for the purchase by Orinoco of the Maritech Equity Interests. Pursuant to a bonding agreement as part of these transactions (the "Bonding Agreement"), Orinoco is required to replace, within 90 days following the closing, the initial bonds delivered at closing with non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million. Orinoco has not delivered such replacement bonds and we are seeking to enforce the terms of the Bonding Agreement. The non-revocable performance bonds delivered at the closing remain in effect. As a result of these transactions, we have effectively exited the businesses of our Offshore Services and Maritech segments and Orinoco assumed all of Maritech's remaining abandonment and decommissioning obligations.
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.
Product Sales. Product sales revenues are generally recognized when we ship products from our facility to our customer. The product sales for our Completion Fluid & 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. Within our Compression Division service revenue, most aftermarket service revenues are recognized at a point in time when we transfer control of our products and complete the delivery of services to our customers.
We receive cash equal to the invoice price for most product sales 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 products or services are 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. As of March 31, 2019, we had $24.6 million of remaining performance obligations related to our compression service contracts. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than 12 months and does not consider the effects of the time value of money. The remaining performance obligations are expected to be recognized through 2022 as follows (in thousands):
2019
2020
2021
2022
2023
Total
(In Thousands)
Compression service contracts remaining performance obligations
$
10,444
$
9,851
$
4,240
$
32
$
—
$
24,567
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 CBF, we may agree to issue credits for the repurchase of reclaimable used fluids from certain customers at an agreed price that is based on the condition of the fluids. For sales of CBF, we adjust the revenue recognized in the period of shipment by the estimated amount of the credit expected to be issued to the customer, and this estimate is based on historical
experience. As of March 31, 2019, the amount of remaining credits expected to be issued for the repurchase of reclaimable used fluids was $1.1 million that were recorded in inventory (right of return asset) and accounts payable. There were no material differences between amounts recognized during the three month period ended March 31, 2019, compared to estimates made in a prior period from these variable consideration arrangements.
Contract Assets and Liabilities. Any contract assets, along with billed and unbilled 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.
As of March 31, 2019 and December 31, 2018, contract assets were immaterial. The following table reflects the changes in our contract liabilities during the three month period ended March 31, 2019:
March 31, 2019
(In Thousands)
Unearned Income, beginning of period
$
25,333
Additional unearned income
49,363
Revenue recognized
(24,858
)
Unearned income, end of period
$
49,838
During the three month period ended March 31, 2019, contract liabilities increased due to unearned income for consideration received on new compressor equipment being fabricated. During the three month period ended March 31, 2019, $24.9 million of unearned income was recognized as product sales revenue, primarily associated with deliveries of new compression equipment.
Contract Costs. As of March 31, 2019 and March 31, 2018, contract costs were immaterial.
Disaggregation of Revenue. We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our three reportable segments in Note I. In addition, we disaggregate revenue from contracts with customers by geography based on the following table below.
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. 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. We do not have leases 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, 2019
(In Thousands)
Operating lease expense
$
5,044
Short-term lease expense
11,161
Finance lease cost:
Accumulated depreciation
31
Interest on lease liabilities
3
Total lease expense
$
16,239
Supplemental cash flow information:
Three Months Ended March 31, 2019
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases
$
4,657
Financing cash flows - finance leases
$
43
Operating cash flows - finance leases
$
3
Right-of-use assets obtained in exchange for lease obligations:
Additional operating and finance lease information:
March 31, 2019
Weighted average remaining lease term:
Operating leases
7 years
Finance leases
1 year
Weighted average discount rate:
Operating leases
9.37
%
Finance leases
5.80
%
Future minimum lease payments by year and in the aggregate, under non-cancelable finance and operating leases with terms in excess of one year consist of the following at March 31, 2019:
Finance Leases
Operating Leases
(In Thousands)
2019
$
148
$
13,350
2020
33
15,536
2021
17
11,488
2022
—
9,009
2023
—
7,770
Thereafter
—
29,351
Total lease payments
198
86,504
Less imputed interest
(3
)
(24,213
)
Total lease liabilities
$
195
$
62,291
At March 31, 2019, future minimum rental receipts under a non-cancelable sublease for office space in one of our locations totaled $6.1 million. For the three months ended March 31, 2019, we recognized sublease income of $0.2 million.
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, 2018 filed with the SEC on March 4, 2019 ("2018 Annual Report"). This discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview
The growth in revenues for each of our divisions during the three months ended March 31, 2019, resulted in consolidated revenues increasing 22.2% compared to the corresponding prior year quarter. Our Water & Flowback Services Division reported a 28.8% growth in revenues, primarily due to the impact of 2018 acquisition activity, including the impact from the February 2018 acquisition of SwiftWater Energy Services, LLC ("SwiftWater"), along with growth in our existing operations. Our Compression Division also reported strong growth, as continued high demand for compression equipment and services, reflected by a strong new equipment sales backlog and increased compression fleet utilization, resulted in a 21.1% increase in Compression Division revenues compared to the prior year quarter. Our Completion Fluids & Products Division also reported increased revenues, a 16.0% increase compared to the prior year quarter, primarily due to increased international CBF product sales. Demand for many of our products and services remains strong despite continued volatility in pricing for oil, which affects the plans of many of our oil and gas operations customers. Consolidated gross profit increased, primarily due to improved Compression Division profitability, and despite continuing pricing and operating cost challenges in certain markets for our Water & Flowback Services Division and Completion Fluids & Products Division. Consolidated increases in interest expense and general and administrative costs, attributed to the overall growth in operations, partially offset the improved profitability during the three months ended March 31, 2019 compared to the prior year quarter.
Funding for the expected continuing growth in our operations remains a key focus. Consolidated capital expenditures and consolidated cash provided by operating activities during the three months ended March 31, 2019 both increased compared to the prior year quarter. Following the financing restructuring transactions completed during 2018, we have capacity under our term credit agreement (the “Term Credit Agreement”) and our asset-based lending credit agreement (the “ABL Credit Agreement”) to fund our growth capital expenditure plans, as well as potential acquisition transactions. These growth plans, particularly of our Water & Flowback Services Division, are designed to enable us to capitalize on the current demand for domestic onshore services that support hydraulic fracturing in unconventional oil and gas reservoirs. In addition, our Compression Division, through the separate capital structure of our CSI Compressco LP ("CCLP") subsidiary, expects to fund additional 2019 growth capital expenditures for new compression services equipment through $16.9 million of currently available cash as of March 31, 2019, expected operating cash flows, and through up to $15.0 million of new compression services equipment to be purchased by us, and leased to CCLP. These sources are expected to enable CCLP to meet its growth capital expenditure requirements without having to access available borrowings under its credit agreement (the "CCLP Credit Agreement") and without having to access the current debt and equity markets. We and CCLP are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current environment. The earliest maturity date of our long-term debt is September 2023 and the earliest maturity date of CCLP's long-term debt is August 2022.
Approximately $633.7 million of our consolidated debt balance carrying value is owed by CCLP, serviced by CCLP's existing cash balances and cash provided by CCLP's operations (less its capital expenditures), and $343.5 million of which is secured by certain assets of CCLP. The following table provides condensed consolidating balance sheet information reflecting TETRA's net assets and CCLP's net assets that service and secure TETRA's and CCLP's respective capital structures.
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 2018 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.
Three months ended March 31, 2019 compared with three months ended March 31, 2018.
Consolidated Comparisons
Three Months Ended March 31,
Period to Period Change
2019
2018
2019 vs 2018
% Change
(In Thousands, Except Percentages)
Revenues
$
243,728
$
199,381
$
44,347
22.2
%
Gross profit
36,210
27,983
8,227
29.4
%
Gross profit as a percentage of revenue
14.9
%
14.0
%
General and administrative expense
34,277
30,803
3,474
11.3
%
General and administrative expense as a percentage of revenue
14.1
%
15.4
%
Interest expense, net
18,379
14,973
3,406
22.7
%
Warrants fair value adjustment (income) expense
407
(1,994
)
2,401
CCLP Series A Preferred Units fair value adjustment (income) expense
1,163
1,358
(195
)
Other (income) expense, net
(951
)
2,776
(3,727
)
Loss before taxes and discontinued operations
(17,065
)
(19,933
)
2,868
14.4
%
Loss before taxes and discontinued operations as a percentage of revenue
(7.0
)%
(10.0
)%
Provision for income taxes
1,609
1,124
485
Loss before discontinued operations
(18,674
)
(21,057
)
2,383
Discontinued operations:
Loss from discontinued operations (including 2018 loss on disposal of $31.5 million), net of taxes
(426
)
(41,706
)
41,280
Net loss
(19,100
)
(62,763
)
43,663
Loss attributable to noncontrolling interest
8,262
9,115
(853
)
Net loss attributable to TETRA stockholders
$
(10,838
)
$
(53,648
)
$
42,810
Consolidated revenues for the first quarter of 2019 increased compared to the prior year quarter, primarily due to increased Compression Division and Water & Flowback Services Division revenues, which increased by $18.0 million and $17.6 million, respectively. Our Compression Division reported increased revenues of $18.0 million, primarily due to increased new compressor equipment sales activity. The increase in Water & Flowback Services Division revenues was primarily driven by increased activity in certain domestic and international markets and the impact of a full quarter of SwiftWater, which was acquired on February 28, 2018. Our Completion Fluids & Products Division also reported increased revenues, primarily due to increased international product sales. See Divisional Comparisons section below for additional discussion.
Consolidated gross profit increased during the current year quarter compared to the prior year quarter primarily due to the increased revenues of our Compression Division and our Completion Fluids & Products Division. The increased gross profit from these divisions more than offset the lower gross profit of our Water & Flowback Services Division, which experienced increased costs and challenging customer pricing in competitive markets compared to the prior year quarter. Despite the improvement in activity levels of certain of our businesses, offshore U.S. Gulf of Mexico activity levels remain flat and the impact of pricing pressures continues to challenge profitability in certain onshore markets. Operating expenses reflect the increase in consolidated revenues, although we remain aggressive in managing operating costs and minimizing increased headcount, despite the increased operations.
Consolidated general and administrative expenses increased during the current year quarter compared to the prior year quarter, primarily due to $3.9 million of increased salary related expenses and $0.3 million of increased insurance and other general expenses, partially offset by $0.6 million of decreased professional services fees, and $0.2 million of decreased consulting and other expenses. Increased general and administrative expenses were driven primarily by our Compression and Water & Flowback Services Divisions. Due to the increased consolidated revenues discussed above, general and administrative expense as a percentage of revenues decreased compared to the prior year period.
Consolidated interest expense, net, increased in the current year quarter primarily due to Compression Division interest expense. Compression Division interest expense increased due to higher CCLP outstanding debt balances and a higher interest rate on the CCLP Senior Secured Notes, a portion of the proceeds of which were used to repay the balance outstanding under the previous CCLP bank credit facility. Corporate interest expense also increased due to higher outstanding debt balances under the TETRA Term Credit Agreement and ABL Credit Agreement. Interest expense during 2019 and 2018 includes $1.0 million and $1.2 million, respectively, of finance cost amortization.
Consolidated other (income) expense, net, was $1.0 million of income during the current year quarter compared to $2.8 million of expense during the prior year quarter, primarily due to $3.5 million of increased expense related to the unamortized deferred financing costs charged to earnings during the prior year quarter as a result of the termination of the CCLP Bank Credit Facility. In addition, other income during the current year period includes $0.4 million associated with the remeasurement of the contingent purchase price consideration for the SwiftWater acquisition.
Our consolidated provision for income taxes during the first three months of 2019 is primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rate for the three month period ended March 31, 2019 and March 31, 2018 of negative 9.4% and negative 5.6%, respectively, was 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.
Divisional Comparisons
Completion Fluids & Products Division
Three Months Ended March 31,
Period to Period Change
2019
2018
2019 vs 2018
% Change
(In Thousands, Except Percentages)
Revenues
$
61,581
$
53,104
$
8,477
16.0
%
Gross profit
10,664
6,686
3,978
59.5
%
Gross profit as a percentage of revenue
17.3
%
12.6
%
General and administrative expense
4,728
4,640
88
1.9
%
General and administrative expense as a percentage of revenue