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

FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM             TO             .
 
COMMISSION FILE NUMBER 1-13455
 

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

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

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check One):
Large accelerated filer [ ] 
Accelerated filer [ X ] 
Non-accelerated filer [   ] (Do not check if a smaller reporting company)
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 ]
 
As of November 8, 2017 , there were 115,887,747 shares outstanding of the Company’s Common Stock, $0.01 par value per share.




PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 

 
 

 
 
 
 
Product sales
$
73,054

 
$
55,162

 
$
227,791

 
$
177,305

Services and rentals
143,310

 
121,391

 
364,943

 
344,237

Total revenues
216,364

 
176,553

 
592,734

 
521,542

Cost of revenues:
 

 
 

 
 
 
 
Cost of product sales
50,384

 
38,832

 
162,335

 
135,102

Cost of services and rentals
95,625

 
77,116

 
260,793

 
226,880

Depreciation, amortization, and accretion
29,200

 
31,852

 
87,298

 
98,997

Impairments of long-lived assets


 

 

 
10,927

Insurance recoveries
(2,352
)
 

 
(2,352
)
 

Total cost of revenues
172,857

 
147,800

 
508,074

 
471,906

Gross profit
43,507

 
28,753

 
84,660

 
49,636

General and administrative expense
31,208

 
28,589

 
90,896

 
89,381

Goodwill impairment

 

 

 
106,205

Interest expense, net
14,654

 
14,325

 
42,749

 
43,299

Warrants fair value adjustment income
(47
)
 

 
(11,568
)
 

CCLP Series A Preferred fair value adjustment
(1,137
)
 
6,294

 
(4,340
)
 
6,294

Litigation arbitration award expense (income), net
38

 

 
(10,064
)
 

Other (income) expense, net
(668
)
 
2,130

 
(94
)
 
3,636

Income (loss) before taxes
(541
)
 
(22,585
)
 
(22,919
)
 
(199,179
)
Provision (benefit) for income taxes
797

 
1,443

 
4,290

 
1,804

Net income (loss)
(1,338
)
 
(24,028
)
 
(27,209
)
 
(200,983
)
(Income) loss attributable to noncontrolling interest
4,483

 
9,019

 
16,900

 
71,075

Net income (loss) attributable to TETRA stockholders
$
3,145

 
$
(15,009
)
 
$
(10,309
)
 
$
(129,908
)
Basic net income (loss) per common share:
 

 
 
 
 
 
 
Net income (loss) attributable to TETRA stockholders
$
0.03

 
$
(0.16
)
 
$
(0.09
)
 
$
(1.53
)
Average shares outstanding
114,563

 
91,746

 
114,435

 
85,093

Diluted net income (loss) per common share:
 

 
 

 
 
 
 
Net income (loss) attributable to TETRA stockholders
$
0.03

 
$
(0.16
)
 
$
(0.09
)
 
$
(1.53
)
Average diluted shares outstanding
114,569

 
91,746

 
114,435

 
85,093



See Notes to Consolidated Financial Statements

1



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(1,338
)
 
$
(24,028
)
 
$
(27,209
)
 
$
(200,983
)
Foreign currency translation adjustment
2,620

 
(1,654
)
 
7,781

 
(4,503
)
Comprehensive income (loss)
1,282

 
(25,682
)
 
(19,428
)
 
(205,486
)
Comprehensive (income) loss attributable to noncontrolling interest
4,670

 
9,346

 
17,271

 
71,918

Comprehensive income (loss) attributable to TETRA stockholders
$
5,952

 
$
(16,336
)
 
$
(2,157
)
 
$
(133,568
)
 

See Notes to Consolidated Financial Statements

2



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
20,850

 
$
29,840

Restricted cash
262

 
6,691

Trade accounts receivable, net of allowances of $4,246 in 2017 and $6,291 in 2016
152,872

 
114,284

Inventories
122,045

 
106,546

Assets held for sale
30

 
214

Prepaid expenses and other current assets
19,372

 
18,216

Total current assets
315,431

 
275,791

Property, plant, and equipment:
 

 
 

Land and building
79,258

 
78,929

Machinery and equipment
1,358,008

 
1,348,286

Automobiles and trucks
35,359

 
36,341

Chemical plants
185,663

 
182,951

Construction in progress
14,458

 
11,918

Total property, plant, and equipment
1,672,746

 
1,658,425

Less accumulated depreciation
(776,876
)
 
(712,974
)
Net property, plant, and equipment
895,870

 
945,451

Other assets:
 

 
 

Goodwill
6,636

 
6,636

Patents, trademarks and other intangible assets, net of accumulated amortization of $63,225 in 2017 and $57,663 in 2016
63,645

 
67,713

Deferred tax assets, net
28

 
28

Other assets
19,800

 
19,921

Total other assets
90,109

 
94,298

Total assets
$
1,301,410

 
$
1,315,540

 

See Notes to Consolidated Financial Statements

3



TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
64,320

 
$
45,889

Unearned income
16,659

 
13,879

Accrued liabilities
59,127

 
55,666

Decommissioning and other asset retirement obligations
492

 
1,451

Total current liabilities
140,598

 
116,885

Long-term debt, net
624,126

 
623,730

Deferred income taxes
7,081

 
7,296

Decommissioning and other asset retirement obligations, net of current portion
56,025

 
54,027

CCLP Series A Preferred Units
68,309

 
77,062

Warrants liability
6,936

 
18,503

Other liabilities
15,825

 
17,571

Total long-term liabilities
778,302

 
798,189

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 250,000,000 shares authorized at September 30, 2017 and 150,000,000 shares authorized at December 31, 2016; 118,518,896 shares issued at September 30, 2017 and 117,351,746 shares issued at December 31, 2016
1,185

 
1,174

Additional paid-in capital
424,129

 
419,237

Treasury stock, at cost; 2,606,601 shares held at September 30, 2017, and 2,536,421 shares held at December 31, 2016
(18,612
)
 
(18,316
)
Accumulated other comprehensive income (loss)
(43,133
)
 
(51,285
)
Retained earnings (deficit)
(127,595
)
 
(117,287
)
Total TETRA stockholders' equity
235,974

 
233,523

Noncontrolling interests
146,536

 
166,943

Total equity
382,510

 
400,466

Total liabilities and equity
$
1,301,410

 
$
1,315,540

 

See Notes to Consolidated Financial Statements

4



TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)  
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating activities:
 

 
 

Net income (loss)
$
(27,209
)
 
$
(200,983
)
Reconciliation of net income (loss) to cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
87,298

 
98,997

Impairment of long-lived assets

 
10,927

Impairment of goodwill

 
106,205

Provision (benefit) for deferred income taxes
(431
)
 
(1,002
)
Equity-based compensation expense
7,242

 
11,549

Provision for doubtful accounts
1,333

 
2,323

Excess decommissioning and abandoning costs

 
2,795

Amortization of deferred financing costs
3,491

 
2,475

Insurance recoveries associated with damaged equipment
(2,352
)
 

CCLP Series A Preferred offering costs
37

 
3,046

CCLP Series A Preferred accrued paid in kind distributions
5,606

 
723

CCLP Series A Preferred fair value adjustment
(4,340
)
 
6,295

Warrants fair value adjustment
(11,568
)
 

Other non-cash charges and credits
(258
)
 
2,966

Gain on the extinguishment of debt

 
(540
)
Gain on sale of assets
(605
)
 
(2,242
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(34,187
)
 
59,816

Inventories
(13,394
)
 
(19,193
)
Prepaid expenses and other current assets
(1,659
)
 
3,723

Trade accounts payable and accrued expenses
28,368

 
(55,506
)
Decommissioning liabilities
(550
)
 
(3,769
)
Other
12

 
(1,379
)
Net cash provided by operating activities
36,834

 
27,226

Investing activities:
 

 
 

Purchases of property, plant, and equipment, net
(28,587
)
 
(15,438
)
Proceeds on sale of property, plant, and equipment
786

 
2,994

Insurance recoveries associated with damaged equipment
2,352

 

Other investing activities
254

 
3,337

Net cash used in investing activities
(25,195
)
 
(9,107
)
Financing activities:
 

 
 

Proceeds from long-term debt
297,100

 
367,500

Principal payments on long-term debt
(301,250
)
 
(485,451
)
CCLP distributions
(14,815
)
 
(21,642
)
Proceeds from issuance of common stock, net of underwriters' discount

 
60,152

Proceeds from CCLP Series A Preferred Units, net of offering costs

 
67,321

Tax remittances on equity based compensation
(624
)
 
(1,562
)
Debt issuance costs and other financing activities
(1,573
)
 
(4,094
)
Net cash used in financing activities
(21,162
)
 
(17,776
)
Effect of exchange rate changes on cash
533

 
(1,190
)
Increase (decrease) in cash and cash equivalents
(8,990
)
 
(847
)
Cash and cash equivalents at beginning of period
29,840

 
23,057

Cash and cash equivalents at end of period
$
20,850

 
$
22,210

Supplemental cash flow information:
 

 
 
Interest paid
$
39,919

 
$
48,139

Income taxes paid
5,217

 
3,311

See Notes to Consolidated Financial Statements

5



TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
We are a geographically diversified oil and gas services company, focused on completion fluids and associated products and services, water management, frac flowback, production well testing, offshore rig cooling, compression services and equipment, and selected offshore services including well plugging and abandonment, decommissioning, and diving. We also have a limited domestic oil and gas production business. We were incorporated in Delaware in 1981 and are composed of five reporting segments organized into four divisions – Fluids, Production Testing, Compression, and Offshore. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.
 
Our consolidated financial statements include the accounts of our wholly owned subsidiaries. Our interests in oil and gas properties are proportionately consolidated. All intercompany accounts and transactions have been eliminated in consolidation. The information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods. Operating results for the period ended September 30, 2017 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2017 .

We consolidate the financial statements of CSI Compressco LP and its subsidiaries ("CCLP") as part of our Compression Division, as we determined that CCLP is a variable interest entity and we are the primary beneficiary. We control the financial interests of CCLP and have the ability to direct the activities of CCLP that most significantly impact its economic performance through our ownership of its general partner. The share of CCLP net assets and earnings that is not owned by us is presented as noncontrolling interest in our consolidated financial statements. Our cash flows from our investment in CCLP are limited to the quarterly distributions we receive on our CCLP common units and general partner interest (including incentive distribution rights) and the amounts collected for services we perform on behalf of CCLP, as TETRA's capital structure and CCLP's capital structure are separate, and do not include cross default provisions, cross collateralization provisions, or cross guarantees.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements for the year ended December 31, 2016 , and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 1, 2017 .

In April 2017, CCLP announced a reduction to the level of cash distributions to its common unitholders, including us. We have reviewed our financial forecasts as of November 9, 2017 for the subsequent twelve month period, which consider the impact of the current distribution levels from CCLP. Based on our financial forecasts, which reflect certain operating and other business assumptions that we believe to be reasonable as of November 9, 2017 , we believe that we will have adequate liquidity, earnings, and operating cash flows to fund our operations and debt obligations and maintain compliance with our debt covenants through November 9, 2018.

In May 2017, CCLP entered into an amendment of the agreement governing its bank revolving credit facility (as amended, the "CCLP Credit Agreement") that, among other things, favorably amended certain financial covenants. (See Note B - Long-Term Debt and Other Borrowings.) CCLP has reviewed its financial forecasts as of November 9, 2017 for the subsequent twelve month period, which consider the impact of the amendment of the CCLP Credit Agreement, and the current level of distributions to its common unitholders. Based on these reviews and the current market conditions as of November 9, 2017 , CCLP believes that it will have adequate liquidity, earnings, and operating cash flows to fund its operations and debt obligations and maintain compliance with its debt covenants through November 9, 2018.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and

6



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 period’s presentation. The impact of such reclassifications was not significant to the prior period’s overall presentation. During the current quarterly period, recycled brines of $5.6 million repurchased from customers pursuant to obligations under customer sales arrangements during the six months ended June 30, 2017 were recorded as a reduction to product sales revenues and costs of product sales.

Cash Equivalents
 
We consider all highly liquid cash investments with a maturity of three months or less when purchased to be cash equivalents.
 
Restricted Cash
 
Restricted cash is classified as a current asset when it is expected to be repaid or settled in the next twelve month period. Restricted cash reported on our balance sheet as of December 31, 2016 consisted primarily of $6.6 million of escrowed cash associated with our July 2011 purchase of a heavy lift derrick barge, which was released to the sellers during the third quarter of 2017 and therefore no longer reflected on our balance sheet as of September 30, 2017 .
 
Inventories
 
Inventories are stated at the lower of cost or market value. Except for work in progress inventory discussed below, cost is determined using the weighted average method. Components of inventories as of September 30, 2017 and December 31, 2016 are as follows: 
 
September 30, 2017
 
December 31, 2016
 
(In Thousands)
Finished goods
$
63,947

 
$
62,064

Raw materials
3,604

 
2,429

Parts and supplies
41,122

 
35,548

Work in progress
13,372

 
6,505

Total inventories
$
122,045

 
$
106,546


Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. Recycled brines are recorded at cost, using the weighted average method. Work in progress inventory consists primarily of new compressor packages located in the CCLP fabrication facility in Midland, Texas. The cost of work in process is determined using the specific identification method. We write down the value of inventory by an amount equal to the difference between its cost and its estimated market value.


7



Goodwill

During the first three months of 2016, low oil and natural gas commodity prices resulted in decreased demand for many of the products and services of each of our reporting units. However, based on updated assumptions as of March 31, 2016, we determined that the fair value of our Fluids Division was significantly in excess of its carrying value, which includes $6.6 million of goodwill. Our Offshore Services and Maritech Divisions had no remaining goodwill as of March 31, 2016. With regard to our Compression Division, demand for low-horsepower wellhead compression services and for sales of compressor equipment decreased significantly and as of March 31, 2016, was expected to continue to be decreased for the foreseeable future. In addition, the price per common unit of CCLP as of March 31, 2016 decreased compared to December 31, 2015. Accordingly, the fair value, including the market capitalization for CCLP, for the Compression reporting unit was less than its carrying value as of March 31, 2016, despite impairments recorded as of December 31, 2015. For our Production Testing Division, demand for production testing services decreased in each of the market areas in which we operate, resulting in decreased estimated future cash flows. As a result, the fair value of the Production Testing reporting unit was also less than its carrying value as of March 31, 2016, despite impairments recorded as of December 31, 2015. After making the hypothetical purchase price adjustments as part of the second step of the goodwill impairment test, there was $0.0 million residual purchase price to be allocated to the goodwill of both the Compression and Production Testing reporting units. Based on this analysis, we concluded that full impairments of the $92.4 million of recorded goodwill for Compression and $13.9 million of recorded goodwill for Production Testing were required. Accordingly, during the three month period ended March 31, 2016, $106.2 million was charged to Goodwill Impairment expense in the accompanying consolidated statement of operations. As of September 30, 2017 we determined that there was no additional impairment of goodwill, as it was not "more likely than not" that the fair value of our Fluids Division was less than its carrying value.

Impairments of Long-Lived Assets

During the first quarter of 2016, primarily as a result of continuing decreased demand due to then-current market conditions, our Compression, Production Testing, and Fluids segments recorded $7.9 million , $2.8 million , and $0.3 million respectively, of impairments associated with certain identified intangible assets. These amounts were charged to Impairments of Long-Lived Assets expense in the accompanying consolidated statement of operations.
 
Insurance Recoveries

During the fourth quarter of 2016, our Compression Division recorded $2.4 million of long-lived asset impairments associated with damages sustained on certain compression equipment packages in its fleet. During the third quarter of 2017, our insurer processed and paid $3.0 million of claim proceeds associated with this equipment damage claim. This amount was credited to earnings, with $2.4 million classified as insurance recoveries for the damaged equipment, and $0.6 million classified as other income.

Net Income (Loss) per Share
 
The following is a reconciliation of the weighted average number of common shares outstanding with the number of shares used in the computations of net income (loss) per common and common equivalent share:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Number of weighted average common shares outstanding
114,563

 
91,746

 
114,435

 
85,093

Assumed exercise of equity awards and warrants
6

 

 

 

Average diluted shares outstanding
114,569

 
91,746

 
114,435

 
85,093

 
For the nine month period ended September 30, 2017 and the three and nine month periods ended September 30, 2016 , 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 and nine month periods ended September 30, 2017 , the calculation of diluted

8



earnings per common share excludes the impact of the CCLP Preferred Units, as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been anti-dilutive.

Services and Rentals Revenues and Costs

A portion of our services and rentals revenues consist of income pursuant to operating lease arrangements for compressor packages and other assets. For the three and nine month periods ended September 30, 2017 and 2016 , the following operating lease revenues and associated costs were included in services and rentals revenues and cost of services and rentals, respectively, in the accompanying consolidated statements of operations.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Rental revenue
$
16,036

 
$
15,508

 
$
37,800

 
$
41,540

Cost of rental revenue
$
4,052

 
$
3,641

 
$
12,670

 
$
16,147


Foreign Currency Translation
 
We have designated the euro, the British pound, the Norwegian krone, the Canadian dollar, the Brazilian real, the Argentine peso, and the Mexican peso, respectively, as the functional currency for our operations in Finland and Sweden, the United Kingdom, Norway, Canada, Brazil, Argentina, and certain of our operations in Mexico. The U.S. dollar is the designated functional currency for all of our other foreign operations. The cumulative translation effects of translating the applicable accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of equity. Foreign currency exchange gains and (losses) are included in other (income) expense, net and totaled $(0.3) million and $(1.5) million during the three and nine month periods ended September 30, 2017 and $(0.2) million and $0.5 million during the three and nine month periods ended September 30, 2016 , respectively.

Income Taxes

Our consolidated provision for income taxes during the first nine months of 2016 and 2017 is primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rates for the three and nine month periods ended September 30, 2017 of negative 147.3% and negative 18.7% were primarily the result of losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against the related net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions. Further, the effective tax rate during 2016 was negatively impacted by the nondeductible portion of our goodwill impairments during the three month period ended March 31, 2016.
 
Fair Value Measurements
 
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.
 
Under U.S. generally accepted accounting principles ("GAAP"), the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the

9



reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
 
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized on a recurring basis in the determination of the carrying value of the liability for the warrants to purchase 11.2 million shares of our common stock (the "Warrants") and CCLP Preferred Units. We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency derivative contracts. For these fair value measurements, we utilize the quoted value as determined by our counterparty financial institution (a level 2 fair value measurement). Fair value measurements are also utilized on a nonrecurring basis, such as in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill (a level 3 fair value measurement), the initial recording of our decommissioning and other asset retirement obligations, and for the impairment of long-lived assets, including goodwill (a level 3 fair value measurement). The fair value of certain of our financial instruments, which include cash, restricted cash, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreements, approximate their carrying amounts. The aggregate fair values of our long-term 11% Senior Note at September 30, 2017 and December 31, 2016 , were approximately $128.5 million and $133.9 million , respectively, based on current interest rates on those dates, which were different from the stated interest rate on the 11% Senior Note. Those fair values compare to face amounts of the 11% Senior Note of $125.0 million both at September 30, 2017 and December 31, 2016 . The fair values of the publicly traded CCLP 7.25% Senior Notes (as herein defined) at September 30, 2017 and December 31, 2016 , were approximately $273.7 million and $278.2 million , respectively, (a level 2 fair value measurement) based on current interest rates on those dates, which were different from the stated interest rate on the CCLP 7.25% Senior Notes. Those fair values compare to a face amount of $ 295.9 million both at September 30, 2017 and December 31, 2016 . See Note C - Long-Term Debt and Other Borrowings, for further discussion. We calculated the fair values of our 11% Senior Note as of September 30, 2017 and December 31, 2016 internally, using current market conditions and average cost of debt (a level 2 fair value measurement).

The CCLP Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (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. The fair valuation of the CCLP Preferred Units liability is increased by, among other factors, projected increases in CCLP's common unit price and by increases in the volatility and decreases in the debt yields of CCLP's comparable peer companies. Increases (or decreases) in the fair value of CCLP Preferred Units will increase (decrease) the associated liability and result in future adjustments to earnings for the associated valuation losses (gains).

The Warrants are valued either by using their traded market prices (a level 1 fair value measurement) or, for periods when market prices are not available, by using the Black Scholes option valuation model that includes estimates of the volatility of the Warrants implied by their trading prices (a level 3 fair value measurement). As of December 31, 2016 and September 30, 2017 , the fair valuation methodology utilized for the Warrants was a level 3 fair value measurement, as there were no available traded market prices to value the Warrants. The fair valuation of the Warrants liability is increased by, among other factors, increases in our common stock price, and by increases in the volatility of our common stock price. Increases (or decreases) in the fair value of the Warrants will increase (decrease) the associated liability and result in future adjustments to earnings for the associated valuation losses (gains). During the nine months ended September 30, 2017 , the fair value of the Warrants liability decreased by $11.6 million , which was credited to earnings in the consolidated statement of operations.

During the third quarter of 2017, we issued a stand-alone, cash-settled stock appreciation rights award to an executive officer. This award is valued by using the Black Scholes option valuation model and such fair value is recognized based on the portion of the requisite service period satisfied as of each valuation date. The fair valuation of the stock appreciation rights liability is increased by, among other factors, increases in our common stock price, and by increases in the volatility of our common stock price. This stock appreciation rights award is reflected as an accrued liability in our consolidated balance sheet. Increases (or decreases) in the fair value of the stock appreciation rights award will increase (decrease) the associated liability and result in future adjustments to earnings for the associated valuation losses (gains).


10



A summary of these fair value measurements as of September 30, 2017 and December 31, 2016 , 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
September 30, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
CCLP Series A Preferred Units
$
(68,309
)
 
$

 
$

 
$
(68,309
)
Warrants liability
(6,936
)
 

 

 
(6,936
)
Cash-settled stock appreciation rights
(22
)
 

 

 
(22
)
Asset for foreign currency derivative contracts
275

 

 
275

 

Liability for foreign currency derivative contracts
(172
)
 

 
(172
)
 

Net liability
$
(75,164
)
 
 
 
 
 
 

 
 
 
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, 2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
CCLP Series A Preferred Units
$
(77,062
)
 
$

 
$

 
$
(77,062
)
Warrants liability
(18,503
)
 

 

 
(18,503
)
Asset for foreign currency derivative contracts
81

 

 
81

 

Liability for foreign currency derivative contracts
(371
)
 

 
(371
)
 

Net liability
$
(95,855
)
 
 
 
 
 
 

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years, under either full or modified retrospective adoption. During 2016, in preparation for the adoption of ASU 2014-09, we began a review of the various types of customer contract arrangements for each of our businesses. These reviews include 1) accumulating all customer contractual arrangements; 2) identifying individual performance obligations pursuant to each arrangement; 3) quantifying consideration under each arrangement; 4) allocating consideration among the identified performance obligations; and 5) determining the timing of revenue recognition pursuant to each arrangement. We have substantially completed these contract reviews and are implementing revised accounting system processes in order to capture information required to be disclosed under ASU 2014-09. While the timing and amount of revenue recognized for a large portion of our customer contractual arrangements under ASU 2014-09 will not change, we have determined that the presentation in the financial statements may be impacted. Adoption of ASU 2014-09 will have a significant impact on disclosures. We plan to adopt ASU 2014-09 on January 1, 2018 using the modified retrospective adoption method.

11




In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" to clarify the guidance on principal versus agent considerations. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.

In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" to clarify the guidance on identifying performance obligations and the licensing implementation guidance. This ASU does not change the effective date or adoption method under ASU 2014-09, which is noted above.

Additionally, in May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." This ASU addresses and amends several aspects of ASU 2014-09, but does not change the core principle of the guidance. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which simplifies the subsequent measurement of inventory by requiring entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using the last-in, first-out (LIFO) or the retail inventory methods. The ASU requires entities to compare the cost of inventory to one measure - net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and is to be applied prospectively with early adoption permitted. As a result of the adoption of this standard during the first quarter of 2017, there was no material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) to increase comparability and transparency among different organizations. Organizations are required to recognize lease assets and lease liabilities on the balance sheet and disclose key information about the leasing arrangements and cash flows. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, under a modified retrospective adoption with early adoption permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" as part of a simplification initiative. The update addresses and simplifies several aspects of accounting for share-based payment transactions. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted, and is to be applied using either modified retrospective, retrospective, or prospective transition method based on which amendment is being applied. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur, using a modified retrospective method and determined that a cumulative-effect adjustment to retained earnings would be immaterial at transition during the first quarter of 2017. Amendments related to accounting for excess tax benefits have been adopted using a prospective transition method and there were no unrealized excess tax benefits prior to adoption that would require a modified retrospective transition method. Prospectively, excess tax benefits for share-based payments, if any, are now included in cash flows from operating activities rather than financing activities. The ASU also requires entities to classify as financing activities on the statement of cash flows, the cash paid to tax authorities when shares are withheld to satisfy the employer’s statutory income tax withholding obligation, with the application of this requirement to be applied retrospectively. As a result of share-based compensation that vested during the third quarter of 2017 and 2016, the impact to the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 was $0.6 million and $1.6 million , respectively, of tax remittances on equity based compensation as a financing activity.
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 more timely recognition of losses. ASU 2016-13, which has an effective date of the first quarter of fiscal 2022, also applies to employee benefit plan accounting. We are currently assessing the potential effects of these changes to our consolidated financial statements and employee benefit plan accounting.

12



In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" to reduce diversity in practice in classification of certain transactions in the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" which requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a modified retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
Additionally, in November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
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, 2020, 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.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting" to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception" to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Entities that present EPS under ASC 260 will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" to change how companies account for and disclose hedges. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are currently assessing the potential effects of these changes to our consolidated financial statements.

13




NOTE B – LONG-TERM DEBT AND OTHER BORROWINGS
 
We believe TETRA's capital structure and CCLP's capital structure should be considered separately, as there are no cross default provisions, cross collateralization provisions, or cross guarantees between CCLP's debt and TETRA's debt.

Consolidated long-term debt as of September 30, 2017 and December 31, 2016 , consists of the following:
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
(In Thousands)
TETRA
 
Scheduled Maturity
 
 
 
Bank revolving line of credit facility (presented net of the unamortized deferred financing costs of $2.3 million as of December 31, 2016)
 
September 30, 2019
$

 
$
3,229

11.0% Senior Note, Series 2015 (presented net of the unamortized discount of $4.0 million as of September 30, 2017 and $4.4 million as of December 31, 2016 and net of unamortized deferred financing costs of $3.6 million as of September 30, 2017 and $4.2 million as of December 31, 2016)
 
November 5, 2022
117,355

 
116,411

TETRA total debt
 
 
117,355

 
119,640

Less current portion
 
 

 

TETRA total long-term debt
 
 
$
117,355

 
$
119,640

 
 
 
 
 
 
CCLP
 
 
 
 
 
CCLP Bank Credit Facility (presented net of the unamortized deferred financing costs of $4.4 million as of September 30, 2017 and $4.5 million as of December 31, 2016)
 
August 4, 2019
218,977

 
217,467

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $2.9 million as of September 30, 2017 and $3.3 million as of December 31, 2016 and net of unamortized deferred financing costs of $5.2 million as of September 30, 2017 and $6.0 million as of December 31, 2016)
 
August 15, 2022
287,794

 
286,623

CCLP total debt
 
 
506,771

 
504,090

Less current portion
 
 
$

 
$

Consolidated total long-term debt
 
 
$
624,126

 
$
623,730


As of September 30, 2017 , TETRA (excluding CCLP) had no outstanding balance and $4.4 million in letters of credit against its Credit Agreement, leaving a net availability of $195.6 million . Because there was no outstanding balance on this Credit Agreement, associated deferred financing costs of $1.7 million as of September 30, 2017 , were classified as other long-term assets on the accompanying consolidated balance sheet. As of September 30, 2017 , CCLP had an outstanding balance of $223.4 million and had $1.9 million letters of credit outstanding against the CCLP Credit Agreement, leaving a net availability of $89.7 million , subject to a borrowing base limitation. Availability under each of the TETRA Credit Agreement and the CCLP Credit Agreement is subject to compliance with the covenants and other provisions in the respective credit agreements that may limit borrowings thereunder. See below for further discussion of the CCLP Credit Agreement.

As described below, we and CCLP are in compliance with all covenants of our respective credit agreements and senior note agreements as of September 30, 2017 .
    
Our Long-Term Debt

Our Credit Agreement.

14




At September 30, 2017 , our consolidated leverage ratio was 1.95 to 1 (compared to a 5.00 to 1 maximum allowed under the Credit Agreement) and our fixed charge coverage ratio was 2.77 to 1 (compared to a 1.25 to 1 minimum required under the Credit Agreement).

CCLP Long-Term Debt     

At September 30, 2017 , CCLP's consolidated total leverage ratio was 6.33 to 1 (compared to 6.75 to 1 maximum allowed under the CCLP Credit Agreement), its consolidated secured leverage ratio was 2.75 to 1 (compared to 3.25 to 1 maximum allowed under the CCLP Credit Agreement) and its consolidated interest coverage ratio was 2.63 to 1 (compared to a 2.25 to 1 minimum required under the CCLP Credit Agreement).

On May 5, 2017, CCLP entered into an amendment of the CCLP Credit Agreement (the "CCLP Fifth Amendment") that, among other things, modified certain financial covenants in the CCLP Credit Agreement, providing that (i) the consolidated total leverage ratio may not exceed (a) 5.95 to 1 as of March 31, 2017; (b) 6.75 to 1 as of June 30, 2017 and September 30, 2017; (c) 6.50 to 1 as of December 31, 2017 and March 31, 2018; (d) 6.25 to 1 as of June 30, 2018 and September 30, 2018; (e) 6.00 to 1 as of December 31, 2018; and (f) 5.75 to 1 as of March 31, 2019 and thereafter; and (ii) the consolidated secured leverage ratio may not exceed 3.25 to 1 as of the end of any fiscal quarter. The consolidated interest coverage ratio was not amended by the CCLP Fifth Amendment. In addition, the CCLP Fifth Amendment (i) increased the applicable margin by 0.25% in the event the consolidated total leverage ratio exceeds 6.00 to 1, resulting in a range for the applicable margin between 2.00% and 3.50% per annum for LIBOR-based loans and between 1.00% and 2.50% per annum for base-rate loans, depending on the consolidated total leverage ratio, and (ii) modified the appraisal delivery requirement from an annual requirement to a semi-annual requirement. In connection with the CCLP Fifth Amendment, the level of CCLP's cash distributions payable on its common units for the quarterly period ended June 30, 2017 will be limited to the current reduced level. The CCLP Fifth Amendment also included additional revisions that provide flexibility to CCLP for the issuance of preferred securities.

The consolidated total leverage ratio and the consolidated secured leverage ratio, as both are calculated under the CCLP Credit Agreement, exclude the long-term liability for the CCLP Preferred Units, among other items, in the determination of total indebtedness.

NOTE C – CCLP SERIES A CONVERTIBLE PREFERRED UNITS

On August 8, 2016 and September 20, 2016 , CCLP entered into Series A Preferred Unit Purchase Agreements (the “CCLP Unit Purchase Agreements”) with certain purchasers to issue and sell in private placements (the "Initial Private Placement" and "Subsequent Private Placement," respectively) an aggregate of 6,999,126 of CSI Compressco LP Series A Convertible Preferred Units representing limited partner interests in CCLP (the “CCLP Preferred Units”) for a cash purchase price of $11.43 per CCLP Preferred Unit (the “Issue Price”), resulting in total 2016 net proceeds to CCLP, after deducting certain offering expenses, of $77.3 million . We purchased 874,891 of the CCLP Preferred Units in the Initial Private Placement at the aggregate Issue Price of $10.0 million .

We and the other holders of CCLP Preferred Units (each, a “CCLP Preferred Unitholder”) will receive quarterly distributions, which are paid in kind in additional CCLP Preferred Units, equal to an annual rate of 11.00% of the Issue Price ( $1.2573 per unit annualized), subject to certain adjustments. The rights of the CCLP Preferred Units include certain anti-dilution adjustments, including adjustments for economic dilution resulting from the issuance of CCLP common units in the future below a set price.

A ratable portion of the CCLP Preferred Units have 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 (each, a “Conversion Date”), subject to certain provisions of the Amended and Restated CCLP Partnership Agreement that may delay or accelerate all or a portion of such monthly conversions. On each Conversion Date, a portion of the CCLP Preferred Units will convert into CCLP common units representing limited partner interests in CCLP in an amount equal to, with respect to each CCLP Preferred Unitholder, the number of CCLP Preferred Units held by such CCLP Preferred Unitholder divided by the number of Conversion Dates remaining, subject to adjustment described in the Amended and Restated CCLP Partnership Agreement, with the conversion price (the "Conversion Price") determined by the trading prices of the common units over the prior month, among other factors, and as otherwise impacted by the existence of certain conditions related to the CCLP common units. On June, 7, 2017, as

15



permitted under the Amended and Restated CCLP Partnership Agreement, CCLP elected to defer the monthly conversion of CCLP Preferred Units for each of the Conversion Dates during the three month period beginning July 8, 2017. As a result, no CCLP Preferred Units were converted into CCLP common units during the three month period ended September 30, 2017, and future monthly conversions will be increased beginning in October 2017. Based on the number of Preferred Units outstanding as of September 30, 2017 , 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 38.1 million CCLP common units; however, CCLP may, at its option, pay cash, or a combination of cash and common units, to the CCLP Preferred Unitholders instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Amended and Restated CCLP Partnership Agreement and the CCLP Credit Agreement. The total number of CCLP Preferred Units outstanding as of September 30, 2017 was 6,673,202 , of which we held 838,078 .

Because the CCLP Preferred Units may be settled using a variable number of CCLP common units, the fair value of the CCLP Preferred Units, net of the units we purchased, is classified as long-term liabilities on our consolidated balance sheet in accordance with ASC 480 "Distinguishing Liabilities and Equity." The fair value of the CCLP Preferred Units as of September 30, 2017 was $68.3 million . Changes in the fair value during each quarterly period, including the $4.3 million net decrease in fair value during the nine month period ended September 30, 2017 , are charged or credited to earnings in the accompanying consolidated statements of operations. Based on the conversion provisions of the CCLP Preferred Units, and using the Conversion Price calculated as of September 30, 2017 , the theoretical number of CCLP common units that would be issued if all of the outstanding CCLP Preferred Units were converted on September 30, 2017 on the same basis as the monthly conversions would be approximately 17.3 million CCLP common units, with an aggregate market value of $90.2 million . A $1 decrease in the Conversion Price would result in the issuance of 4.9 million additional CCLP common units pursuant to these conversion provisions.

NOTE D – DECOMMISSIONING AND OTHER ASSET RETIREMENT OBLIGATIONS
 
The large majority of our asset retirement obligations consists of the remaining future well abandonment and decommissioning costs for offshore oil and gas properties and platforms owned by our Maritech subsidiary, including the decommissioning and debris removal costs associated with its remaining offshore platforms previously destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners in these properties and platforms.

We also operate facilities in various U.S. and foreign locations that are used in the manufacture, storage, and sale of our products, inventories, and equipment. These facilities are a combination of owned and leased assets. The values of our asset retirement obligations for these non-Maritech properties were $10.0 million and $9.4 million as of September 30, 2017 and December 31, 2016 , respectively. We are required to take certain actions in connection with the retirement of these assets. We have reviewed our obligations in this regard in detail and estimated the cost of these actions. The original estimates are the fair values that have been recorded for retiring these long-lived assets. The associated asset retirement costs are capitalized as part of the carrying amount of these long-lived assets. The costs for non-oil and gas assets are depreciated on a straight-line basis over the life of the assets.

The changes in the values of our asset retirement obligations during the three and nine month period ended September 30, 2017 , are as follows:
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
(In Thousands)
Beginning balance for the period, as reported
$
55,999

 
$
55,478

Activity in the period:
 
 
 
Accretion of liability
551

 
1,582

Retirement obligations incurred

 

Revisions in estimated cash flows
26

 
12

Settlement of retirement obligations
(59
)
 
(555
)
Ending balance
$
56,517

 
$
56,517



16



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

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

NOTE E – MARKET RISKS AND DERIVATIVE CONTRACTS
 
We are exposed to financial and market risks that affect our businesses. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. We have currency exchange rate risk exposure related to transactions denominated in foreign currencies as well as to investments in certain of our international operations. As a result of our variable rate bank credit facilities, including the variable rate credit facility of CCLP, we face market risk exposure related to changes in applicable interest rates. Our financial risk management activities may at times involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures.

Derivative Contracts

Foreign Currency Derivative Contracts . We and CCLP enter into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of September 30, 2017 , 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
 
$
1,879

 
1.20
 
10/18/2017
Forward purchase pounds sterling
 
6,980

 
1.32
 
10/18/2017
Forward sale Canadian dollar
 
3,270

 
1.22
 
10/18/2017
Forward purchase Mexican peso
 
6,951

 
17.93
 
10/18/2017
Forward sale Norwegian krone
 
3,009

 
7.88
 
10/18/2017
Forward sale Mexican peso
 
5,088

 
17.93
 
10/18/2017

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 as reported to us by our counterparty (a level 2 fair value measurement). The fair values of our and CCLP's foreign currency derivative instruments as of September 30, 2017 and December 31, 2016 , are as follows:


17



Foreign currency derivative instruments
Balance Sheet Location
 
 Fair Value at September 30,  2017
 
 Fair Value at December 31, 2016

 

 
(In Thousands)
Forward sale contracts
 
Current assets
 
$
187

 
$
81

Forward purchase contracts
 
Current assets
 
88

 

Forward purchase contracts
 
Current liabilities
 
(161
)
 
(371
)
Net asset (liability)
 
 
 
$
114

 
$
(290
)

None of the foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and nine month periods ended September 30, 2017 , we recognized $0.1 million and $1.2 million of net gains (losses), respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program. During the three and nine month periods ended September 30, 2016 , we recognized $(0.4) million and $(1.6) million , of net gains (losses), respectively, reflected in other income (expense), net associated with this program.


18



NOTE F – EQUITY
 
Changes in equity for the three and nine month periods ended September 30, 2017 and 2016 are as follows:

 
Three Months Ended September 30,
 
2017
 
2016
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
228,673

 
$
155,054

 
$
383,727

 
$
190,449

 
$
197,335

 
$
387,784

Net income (loss)
3,145

 
(4,483
)
 
(1,338
)
 
(15,009
)
 
(9,019
)
 
(24,028
)
Foreign currency translation adjustment
2,807

 
(187
)
 
2,620

 
(1,327
)
 
(327
)
 
(1,654
)
Comprehensive Income (loss)
5,952

 
(4,670
)
 
1,282

 
(16,336
)
 
(9,346
)
 
(25,682
)
Exercise of common stock options

 

 

 
115

 

 
115

Proceeds from the issuance of stock, net of offering costs

 

 

 
(153
)
 

 
(153
)
Conversions of CCLP Series A Preferred

 

 

 

 

 

Distributions to public unitholders

 
(3,871
)
 
(3,871
)
 

 
(7,224
)
 
(7,224
)
Equity-based compensation
1,537

 
45

 
1,582

 
1,774

 
774

 
2,548

Treasury stock and other
(188
)
 
(22
)
 
(210
)
 

 
(154
)
 
(154
)
Ending balance as of September 30
$
235,974

 
$
146,536

 
$
382,510

 
$
175,849

 
$
181,385

 
$
357,234

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
 
TETRA
 
Non-
controlling
Interest
 
Total
 
TETRA
 
Non-
controlling
Interest
 
Total
 
(In Thousands)
Beginning balance for the period
$
233,523

 
$
166,943

 
$
400,466

 
$
241,217

 
$
272,963

 
$
514,180

Net income (loss)
(10,309
)
 
(16,900
)
 
(27,209
)
 
(129,908
)
 
(71,075
)
 
(200,983
)
Foreign currency translation adjustment
8,152

 
(371
)
 
7,781

 
(3,660
)
 
(843
)
 
(4,503
)
Comprehensive Income (loss)
(2,157
)
 
(17,271
)
 
(19,428
)
 
(133,568
)
 
(71,918
)
 
(205,486
)
Exercise of common stock options

 

 

 
142

 

 
142

Proceeds from the issuance of stock, net of offering costs
(16
)
 

 
(16
)
 
60,124

 

 
60,124

Conversions of CCLP Series A Preferred

 
10,020

 
10,020

 

 

 

Distributions to public unitholders

 
(14,815
)
 
(14,815
)
 

 
(21,642
)
 
(21,642
)
Equity-based compensation
5,089

 
1,784

 
6,873

 
9,313

 
2,236

 
11,549

Treasury stock and other
(465
)
 
(125
)
 
(590
)
 
(1,379
)
 
(254
)
 
(1,633
)
Ending balance as of September 30
$
235,974

 
$
146,536

 
$
382,510

 
$
175,849

 
$
181,385

 
$
357,234


On May 5, 2017, our stockholders approved the amendment of our Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 250,000,000 .

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

NOTE G – COMMITMENTS AND CONTINGENCIES
 
Litigation
 
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.

19




On March 18, 2011, we filed a lawsuit in the Circuit Court of Union County, Arkansas, asserting claims of professional negligence, breach of contract and other claims against the engineering firm we hired for engineering design, equipment, procurement, advisory, testing and startup services for our El Dorado, Arkansas chemical production facility. The engineering firm disputed our claims and promptly filed a motion to compel the matter to arbitration. After a lengthy procedural dispute in Arkansas state court, arbitration proceedings were initiated on November 15, 2013. Ultimately, on December 16, 2016, the arbitration panel ruled in our favor, declared us as the prevailing party, and awarded us a total net amount of $12.8 million . We received full payment of the $12.8 million final award on January 5, 2017, and this amount was credited to earnings in the accompanying consolidated statement of operations for the nine months ended September 30, 2017 .

From May 2009 to December 2014, EPIC Diving & Marine Services, LLC (“EPIC”), a wholly-owned subsidiary, was the charterer of a dive support vessel from a service provider. At the time of redelivery of the vessel there was a dispute between EPIC and the service provider that was submitted to arbitration in London pursuant to the dispute resolution provision of the charter agreement. Just prior to the scheduled arbitration proceedings in June 2017, EPIC reached a favorable settlement in relation to certain of the service provider's claims against EPIC. EPIC’s dispute with the service provider that a fee was due at the time of redelivery of the vessel proceeded to arbitration on June 20, 2017. On July 6, 2017, the arbitration panel issued its ruling against EPIC, awarding the service provider $3.0 million , plus interest and fees. A net exposure of $2.8 million was accrued and charged to earnings during 2017.

  Other Contingencies

During 2011, in connection with the sale of a significant majority of Maritech’s oil and gas producing properties, the buyers of the properties assumed the associated decommissioning liabilities pursuant to the purchase and sale agreements. For those oil and gas properties Maritech previously operated, the buyers of the properties assumed the financial responsibilities associated with the properties' operations, including abandonment and decommissioning, and generally became the successor operator. Some buyers of these Maritech properties subsequently sold certain of these properties to other buyers who also assumed these financial responsibilities associated with the properties' operations, and these buyers also typically became the successor operator of the properties. To the extent that a buyer of these properties fails to perform the abandonment and decommissioning work required, the previous owner, including Maritech, may be required to perform the abandonment and decommissioning obligation. A significant portion of the decommissioning liabilities that were assumed by the buyers of the Maritech properties in 2011 remains unperformed and we believe the amounts of these remaining liabilities are significant. We monitor the financial condition of the buyers of these properties from Maritech, and if current oil and natural gas pricing levels continue, we expect that one or more of these buyers may be unable to perform the decommissioning work required on the properties acquired from Maritech.
    
During the nine months ended September 30, 2017 , continued low oil and natural gas prices have resulted in reduced revenues and cash flows for all oil and gas producing companies, including those companies that bought Maritech properties in the past. Certain of these oil and gas producing companies that bought Maritech properties are currently experiencing severe financial difficulties. With regard to certain of these properties, Maritech has security in the form of bonds or cash escrows intended to secure the buyers' obligations to perform the decommissioning work. Maritech and its legal counsel continue to monitor the status of these companies. As of September 30, 2017 , we do not consider the likelihood of Maritech becoming liable for decommissioning liabilities on sold properties to be probable.

Maritech has encountered situations where previously plugged and abandoned wells on its properties have later exhibited a buildup of pressure, which is evidenced by gas bubbles coming from the plugged well head. We refer to this situation as “wells under pressure” and this can either be discovered when performing additional work at the property or by notification from a third party. Wells under pressure require Maritech to return to the site to perform additional plug and abandonment procedures that were not originally anticipated and included in the estimate of the asset retirement obligation for such property. Remediation work at previously abandoned well sites is particularly costly, due to the lack of a platform from which to base these activities. Maritech is the last operator of record for its plugged wells, and bears the risk of additional future work required as a result of wells becoming pressurized in the future.


20



NOTE H – INDUSTRY SEGMENTS
 
We manage our operations through five reporting segments organized into four divisions: Fluids, Production Testing, Compression, and Offshore.
 
Our Fluids Division manufactures and markets clear brine fluids, additives, and associated products and services to the oil and gas industry for use in well drilling, completion, and workover operations in the United States and in certain countries in Latin America, Europe, Asia, the Middle East, and Africa. The division also markets liquid and dry calcium chloride products manufactured at its production facilities or purchased from third-party suppliers to a variety of markets outside the energy industry. The Fluids Division also provides domestic onshore oil and gas operators with comprehensive water management services.
 
Our Production Testing Division provides frac flowback, production well testing, offshore rig cooling, and other associated services in many of the major oil and gas producing regions in the United States, Mexico, and Canada, as well as in basins in certain regions in South America, Africa, Europe, the Middle East, and Australia.
 
The Compression Division is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing, and storage. The Compression Division's equipment sales business includes the fabrication and sale of standard compressor packages, custom-designed compressor packages, and oilfield pump systems designed and fabricated at the division's facilities. The Compression Division's aftermarket services business provides compressor package reconfiguration and maintenance services as well as providing compressor package parts and components manufactured by third-party suppliers. The Compression Division provides its services and equipment to a broad base of natural gas and oil exploration and production, midstream, transmission, and storage companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign countries, including Mexico, Canada, and Argentina.
 
Our Offshore Division consists of two operating segments: Offshore Services and Maritech. The Offshore Services segment provides (1) downhole and subsea services such as well plugging and abandonment and workover services, (2) decommissioning and certain construction services utilizing heavy lift barges and various cutting technologies with regard to offshore oil and gas production platforms and pipelines, and (3) conventional and saturation diving services.
 
The Maritech segment is a limited oil and gas production operation. During 2011 and the first quarter of 2012, Maritech sold substantially all of its oil and gas producing property interests. Maritech’s operations consist primarily of the ongoing abandonment and decommissioning associated with its remaining offshore wells and production platforms. Maritech intends to acquire a portion of these services from the Offshore Services segment.
 
We generally evaluate the performance of and allocate resources to our segments based on profit or loss from their operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments and geographic areas are priced at the estimated fair value of the products or services as negotiated between the operating units. “Corporate overhead” includes corporate general and administrative expenses, corporate depreciation and amortization, interest income and expense, and other income and expense.

 Summarized financial information concerning the business segments is as follows:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Revenues from external customers
 

 
 

 
 

 
 

Product sales
 

 
 

 
 
 
 
Fluids Division
$
58,191

 
$
40,922

 
$
177,839

 
$
133,409

Production Testing Division

 

 
6,130

 

Compression Division
14,374

 
14,002

 
42,755

 
43,205

Offshore Division
 

 
 

 
 
 
 

21



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Offshore Services
468

 

 
640

 
116

Maritech
21

 
238

 
427

 
575

Total Offshore Division
489

 
238

 
1,067

 
691

Consolidated
$
73,054

 
$
55,162

 
$
227,791

 
$
177,305

 
 
 
 
 
 
 
 
Services and rentals
 

 
 

 
 
 
 
Fluids Division
$
35,239

 
$
21,687

 
$
77,631

 
$
49,061

Production Testing Division
18,634

 
14,046

 
48,935

 
45,202

Compression Division
57,237

 
56,716

 
169,727

 
185,299

Offshore Division
 

 
 

 
 

 
 
Offshore Services
32,200

 
29,239

 
68,650

 
65,488

Maritech

 


 

 


Intersegment eliminations

 
(297
)
 

 
(813
)
Total Offshore Division
32,200

 
28,942

 
68,650

 
64,675

Consolidated
$
143,310

 
$
121,391

 
$
364,943

 
$
344,237

 
 
 
 
 
 
 
 
Interdivision revenues
 

 
 

 
 
 
 
Fluids Division
$
12

 
$
1

 
$
13

 
$
86

Production Testing Division
293

 
1,019

 
1,311

 
3,118

Compression Division

 

 

 

Offshore Division
 

 
 

 
 

 
 
Offshore Services

 

 

 

Maritech

 

 

 

Intersegment eliminations

 

 

 

Total Offshore Division

 

 

 

Interdivision eliminations
(305
)
 
(1,020
)
 
(1,324
)
 
(3,204
)
Consolidated
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Total revenues
 

 
 

 
 
 
 
Fluids Division
$
93,442

 
$
62,610

 
$
255,483

 
$
182,556

Production Testing Division
18,927

 
15,065

 
56,376

 
48,320

Compression Division
71,611

 
70,718

 
212,482

 
228,504

Offshore Division
 

 
 

 
 
 
 
Offshore Services
32,668

 
29,239

 
69,290

 
65,604

Maritech
21

 
238

 
427

 
575

Intersegment eliminations

 
(297
)
 

 
(813
)
Total Offshore Division
32,689

 
29,180

 
69,717

 
65,366

Interdivision eliminations
(305
)
 
(1,020
)
 
(1,324
)
 
(3,204
)
Consolidated
$
216,364

 
$
176,553

 
$
592,734

 
$
521,542

 
 
 
 
 
 
 
 

22



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Income (loss) before taxes
 

 
 

 
 
 
 
Fluids Division
$
24,891

 
$
8,835

 
$
60,953

 
$
8,931

Production Testing Division
(1,405
)
 
(4,222
)
 
(6,565
)
 
(27,924
)
Compression Division
(7,014
)
 
(14,862
)
 
(27,527
)
 
(123,602
)
Offshore Division
 

 
 

 
 
 
 
Offshore Services
452

 
1,879

 
(12,328
)
 
(5,792
)
Maritech
(914
)
 
(643
)
 
(1,698
)
 
(4,664
)
Intersegment eliminations

 

 

 

Total Offshore Division
(462
)
 
1,236

 
(14,026
)
 
(10,456
)
Interdivision eliminations

 
(2
)
 
(162
)
 
5

Corporate Overhead (1)
(16,551
)
 
(13,570
)
 
(35,592
)
 
(46,133
)
Consolidated
$
(541
)
 
$
(22,585
)
 
$
(22,919
)
 
$
(199,179
)

 
September 30,
 
2017
 
2016
 
(In Thousands)
Total assets
 

 
 

Fluids Division
$
343,881

 
$
332,322

Production Testing Division
83,731

 
93,916

Compression Division
787,747

 
832,839

Offshore Division
 

 
 

Offshore Services
120,464

 
127,813

Maritech
1,389

 
3,538

Total Offshore Division
121,853

 
131,351

Corporate Overhead and eliminations
(35,802
)
 
(18,378
)
Consolidated
$
1,301,410

 
$
1,372,050



(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
General and administrative expense
$
12,277

 
$
8,748

 
$
33,883

 
$
26,698

Depreciation and amortization
129

 
101

 
338

 
328

Interest expense
3,899

 
4,699

 
11,913

 
16,347

Warrants fair value adjustment
(47
)
 

 
(11,568
)
 

Other general corporate (income) expense, net
293

 
22

 
1,026

 
2,760

Total
$
16,551

 
$
13,570

 
$
35,592

 
$
46,133



23



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, 2016 filed with the SEC on March 1, 2017 . This discussion includes forward-looking statements that involve certain risks and uncertainties.

Business Overview  

During the third quarter of 2017, we saw improved demand for many of our products and services, reflecting recent reduced volatility of oil and natural gas commodity prices. Despite flat offshore rig counts compared to 2016, demand from certain of our offshore Fluids Division customers has continued to be strong during 2017. Onshore rig counts in the U.S. and Canada have improved steadily from levels one year ago, resulting in improving markets for our Fluids and Production Testing Divisions. For our Compression Division, increased demand for high- and mid-level horsepower compression services and equipment is reflected in improved fleet utilization as well as a significant increase in new equipment sales backlog. Demand for certain products and services in many of our foreign markets has also improved. While this improving market environment resulted in an increase in our consolidated revenues and gross profit during the third quarter of 2017 compared to the corresponding prior year period, the impact of improved demand is partially mitigated by continued customer pricing pressures faced by each of our businesses. Such pricing challenges are expected to ease going forward, particularly if demand and activity levels continue to increase. Our Offshore Services segment was also negatively impacted by challenging weather conditions during the third quarter of 2017, as hurricane activity in the Gulf of Mexico reduced equipment utilization. We continue to minimize headcount additions and seek to maintain the reduced operating and administrative cost structure implemented during the past three years, despite the recent increase in operating activity and the reinstatement of company-wide wages and benefits to their levels prior to the reductions that were implemented during 2016. Our consolidated pretax loss was reduced compared to the prior year period primarily due to the increased gross profit, but also partially due to the fair market valuation gain that was credited to earnings during the third quarter of 2017 on the liabilities recorded for the CSI Compressco LP ("CCLP") Series A Preferred Units.

Despite the indicators of an improving market environment discussed above, both we and CCLP continue to focus aggressively on conserving cash and monitoring liquidity. We consider our capital structure and CCLP's capital structure separately, as there are no cross default provisions, cross collateralization provisions, or cross guarantees between CCLP's debt and our debt. Our debt is serviced by our existing cash balances and cash provided by operating activities (excluding CCLP) and the distributions we receive from CCLP, in excess of our cash capital expenditures (excluding CCLP). As a result of improving operating cash flows, as of September 30, 2017 , we have no amounts outstanding under our bank credit facility. During the nine months ended September 30, 2017 , consolidated cash provided by operating activities was $36.8 million compared to $27.2 million during the corresponding prior year period, including $24.6 million of cash provided by the operating activities of CCLP. This increase in consolidated cash provided by operating activities was driven primarily by improved operating profitability, and despite the decrease in cash provided by working capital changes related to the timing of collections of significant accounts receivable. Growth and maintenance capital expenditure levels continue to be significantly reduced for each of our businesses, including CCLP, in order to conserve cash in the current environment. We and CCLP continue to consider additional cost reductions and maintain our efforts to manage working capital. In April 2017, CCLP announced a reduction of approximately 50% in the level of cash distributions to its common unitholders, including us. Despite the current level of cash distributions from CCLP, we believe that the cost reduction and capital structuring steps we and CCLP have taken during the past two years will allow us and CCLP to continue to meet our respective financial obligations and fund our respective future growth plans as needed, despite current uncertain operating and financial markets. We and CCLP believe that maintaining reduced cost structures and monitoring our balance sheets and capital structures on an ongoing basis enhances our respective abilities to remain fiscally responsible for the uncertain duration of the current customer pricing environment, and position each of us to capitalize on growth opportunities as industry conditions continue to improve.
    

24



Approximately $506.8 million of our consolidated debt balance is owed by CCLP, serviced by CCLP's existing cash balances and cash provided by CCLP's operations (less its capital expenditures), and is secured by the assets of CCLP. The following table provides condensed consolidating balance sheet information reflecting our net assets and CCLP's net assets that service and secure our and CCLP's respective capital structures.
 
September 30, 2017
Condensed Consolidating Balance Sheet
TETRA
 
CCLP
 
Eliminations
 
Consolidated
 
(In Thousands)
Cash, excluding restricted cash
$
13,472

 
$
7,378

 
$

 
$
20,850

Affiliate receivables
12,008

 

 
(12,008
)
 

Other current assets
202,388

 
92,193

 

 
294,581

Property, plant and equipment, net
284,204

 
611,666

 

 
895,870

Other assets, including investment in CCLP
21,673

 
34,705

 
33,731

 
90,109

Total assets
$
533,745

 
$
745,942

 
$
21,723

 
$
1,301,410

 
 
 
 
 
 
 
 
Affiliate payables
$

 
$
12,008

 
$
(12,008
)
 
$

Other current liabilities
95,810

 
44,788

 

 
140,598

Long-term debt, net
117,355

 
506,771

 

 
624,126

CCLP Series A Preferred Units


 
78,120

 
(9,811
)
 
68,309

Warrants liability
6,936

 

 

 
6,936

Other non-current liabilities
77,670

 
1,261

 

 
78,931

Total equity
235,974

 
102,994

 
43,542

 
382,510

Total liabilities and equity
$
533,745

 
$
745,942

 
$
21,723

 
$
1,301,410


During the first nine months of 2017, we received $11.3 million from CCLP as our share of CCLP common unit distributions. As a result of the April 2017 announcement by CCLP related to the reduction of its quarterly cash distributions on CCLP common units, the level of distributions from CCLP is expected to continue to be reduced for the foreseeable future.

Cash provided by operating activities for the nine months ended September 30, 2017 was $36.8 million compared to $27.2 million for the nine months ended September 30, 2016 , an increase of $9.6 million , or 35.3% , primarily due to improved operating profitability. Consolidated capital expenditures were $28.6 million during the nine months ended September 30, 2017 , and included $13.7 million of capital expenditures by our Compression Division resulting primarily from a system software development project designed to improve operating and administrative efficiencies. Corresponding prior year period consolidated capital expenditures were $15.4 million , including $7.6 million by our Compression Division. Although our capital expenditure levels are expected to increase going forward, they reflect our continuing efforts to defer or reduce capital expenditure projects where possible in the current market environment. Key objectives associated with our capital structure (excluding the capital structure of CCLP) include the ongoing management of amounts outstanding and available under our bank revolving credit facility and repayment of our 11% Senior Note. CCLP also continues to carefully monitor its 2017 capital expenditure program, in light of current customer pricing levels for its compression products and services, in order to minimize borrowings under the CCLP Credit Agreement. TETRA's future consolidated operating cash flows are also affected by the continuing challenges associated with extinguishing the remaining Maritech asset retirement obligations. The amount of recorded liability for these remaining obligations is approximately $46.5 million as of September 30, 2017 . Approximately $0.5 million of this amount is expected to be performed during the twelve month period ending September 30, 2018 , with the timing of a portion of this work being subject to change.

Critical Accounting Policies
 
There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended December 31, 2016 . In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We base these estimates on historical experience, available information, and various other assumptions that we believe are reasonable. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the collectability of accounts receivable, the current cost of future abandonment and

25



decommissioning obligations, and the allocation of acquisition purchase price. The fair values of portions of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.

Results of Operations

Three months ended September 30, 2017 compared with three months ended September 30, 2016 .

Consolidated Comparisons
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2017
 
2016
 
2017 vs 2016
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
216,364

 
$
176,553

 
$
39,811

 
22.5
%
Gross profit
43,507

 
28,753

 
14,754

 
51.3
%
Gross profit as a percentage of revenue
20.1
 %
 
16.3
 %
 
 

 
 

General and administrative expense
31,208

 
28,589

 
2,619

 
9.2
%
General and administrative expense as a percentage of revenue
14.4
 %
 
16.2
 %
 
 

 
 

Interest expense, net
14,654

 
14,325

 
329

 
2.3
%
Warrants fair value adjustment income
(47
)
 

 
(47
)
 
 
CCLP Series A Preferred fair value adjustment
(1,137
)
 
6,294

 
(7,431
)
 
 
Litigation arbitration award expense (income), net
38

 

 
38

 
 
Other (income) expense, net
(668
)
 
2,130

 
(2,798
)
 
 
Income (loss) before taxes
(541
)
 
(22,585
)
 
22,044

 
97.6
%
Income (loss) before taxes as a percentage of revenue
(0.3
)%
 
(12.8
)%
 
 

 
 

Provision (benefit) for income taxes
797

 
1,443

 
(646
)
 
 
Net income (loss)
(1,338
)
 
(24,028
)
 
22,690

 
 
Net (income) loss attributable to noncontrolling interest
4,483

 
9,019

 
(4,536
)
 
 

Net income (loss) attributable to TETRA stockholders
$
3,145

 
$
(15,009
)
 
$
18,154

 
 
 
Consolidated revenues during the current year quarter increased compared to the prior year quarter primarily due to increased Fluids Division revenues. The increase in Fluids Division revenues was primarily driven by increased sales of offshore completion fluids products and onshore water management services activity, resulting in a $30.8 million increase in revenues. Increases in revenues of our Production Testing and Compression Divisions are due to increased activity levels compared to the prior year and despite continuing pricing challenges. Our Offshore Division reported a $3.9 million increase in revenues compared to the prior year period, primarily due to increased diving, well abandonment, and cutting activity. See Divisional Comparisons section below for additional discussion.

Consolidated gross profit increased compared to the prior year quarter primarily due to the improving demand for our Fluids and Production Testing Divisions' products and services. Despite the improvement in the activity levels of certain of our businesses, the impact of pricing pressures continues to challenge the profitability of each of our businesses. While we remain aggressive in managing operating costs and maintaining reduced headcount, the results of each of our businesses partially reflect the impact of company-wide wage and benefit reinstatements during the first half of 2017 to reverse wage and benefit reductions that were implemented during the first half of 2016.
 
Consolidated general and administrative expenses increased during the third quarter of 2017 compared to the prior year period, primarily due to increased salary and employee expenses of $3.4 million, which included the impact of the reinstatements of wages and benefits to their levels prior to the reductions, as well as increased insurance and other general expenses of $0.9 million. These increases were partially offset by decreased professional services fees of $0.8 million and decreased bad debt expense of $0.9 million.

26



 
Consolidated interest expense, net, increased during the third quarter of 2017 compared to the prior year quarter, as decreased Corporate interest expense, reflecting the decrease in long-term debt outstanding, was more than offset by Compression Division interest expense. Compression Division interest expense increased mainly due to the paid in kind distributions on the CCLP Preferred Units that were issued during the prior year quarter. Interest expense during the 2017 and 2016 periods includes $1.2 million and $1.0 million , respectively, of finance cost amortization.

The Warrants are accounted for as a derivative liability in accordance with Accounting Standards Codification ("ASC") 815 and therefore they are classified as a long-term liability on our consolidated balance sheet at their fair value. Increases (or decreases) in the fair value of the Warrants are generally associated with the increase (or decrease) in the trading price of our common stock, resulting in adjustments to earnings for the associated valuation losses (gains), and resulting in future volatility of our earnings during the period the Warrants are outstanding.

The CCLP Preferred Units may be settled using a variable number of CCLP common units, and therefore the fair value of the CCLP Preferred Units is classified as a long-term liability on our consolidated balance sheet in accordance with ASC 480. Because the CCLP Preferred Units are convertible into CCLP common units at the option of the holder, the fair value of the CCLP Preferred Units will generally increase or decrease with the trading price of the CCLP common units, and this increase (decrease) in CCLP Preferred Unit fair value will be charged (credited) to earnings, as appropriate, resulting in future volatility of our earnings during the period the CCLP Preferred Units are outstanding.

Consolidated other (income) expense, net, was $0.7 million of other income during the current year quarter compared to $2.1 million of other expense during the prior year quarter, primarily due to issuance costs related to the CCLP Preferred Units which were issued during the prior year quarter and due to insurance recoveries recorded during the current year quarter.
 
Our consolidated provision for income taxes during the third quarter of 2017 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 September 30, 2017 of negative 147.3% 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
 
Fluids Division
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2017
 
2016
 
2017 vs 2016
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
93,442

 
$
62,610

 
$
30,832

 
49.2
%
Gross profit
31,359

 
15,369

 
15,990

 
104.0
%
Gross profit as a percentage of revenue
33.6
%
 
24.5
%
 
 

 
 

General and administrative expense
6,491

 
6,434

 
57

 
0.9
%
General and administrative expense as a percentage of revenue
6.9
%
 
10.3
%
 
 

 
 

Interest (income) expense, net
(8
)
 
8

 
(16
)
 
 

Other (income) expense, net
(15
)
 
92

 
(107
)
 
 

Income before taxes
$
24,891

 
$
8,835

 
$
16,056

 
181.7
%
Income before taxes as a percentage of revenue
26.6
%
 
14.1
%
 
 

 
 

 

27



The increase in Fluids Division revenues during the current year quarter compared to the prior year quarter was primarily due to $17.3 million of increased product sales revenues, attributed to increased clear brine fluids ("CBF") and associated product sales revenues in the U.S. Gulf of Mexico, including increased revenues from a TETRA CS Neptune (R) completion fluid project during the period, and increased international fluid sales. While offshore rig counts remain low, we have seen an increase in demand from our customers, contributing to this increase. In addition, onshore manufactured product sales also increased compared to the prior year period. Service revenues increased $13.6 million , primarily due to increased water management services demand and activity, reflecting improved activity levels resulting from the growth in domestic onshore rig count.

Fluids Division gross profit during the current year quarter increased significantly compared to the prior year quarter primarily due to the increased revenues and profitability associated with the mix of CBF products and services, including the impact of the TETRA CS Neptune completion fluid project discussed above, In addition, improved profitability from the increased water management services activity also contributed to the increase. Fluids Division profitability in future periods will continue to be affected by the mix of its products and services, including the timing of TETRA CS Neptune completion fluid projects.
 
The Fluids Division reported a significant increase in pretax earnings during the current year quarter compared to the prior year quarter primarily due to the increased gross profit discussed above. In addition, increased foreign currency gains compared to the prior year quarter resulted in other income during the current year quarter. Fluids Division administrative cost levels remained consistent compared to the prior year quarter, as $0.8 million of increased salary and employee related expenses and $0.1 million of increased general expenses were partially offset by $0.3 million of decreased legal and professional fees and $0.6 million of decreased bad debt expense. The Fluids Division continues to review opportunities to further reduce its administrative costs.

Production Testing Division
 
Three Months Ended 
 September 30,
 
Period to Period Change
 
2017
 
2016
 
2017 vs 2016
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
18,927

 
$
15,065

 
$
3,862

 
25.6
%
Gross profit (loss)
404

 
(2,032
)
 
2,436

 
119.9
%
Gross profit as a percentage of revenue