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TETRA TECHNOLOGIES INC - Quarter Report: 2019 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
 (Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended JUNE 30, 2019
or 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to            .
 
Commission File Number 1-13455

TETRA Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
74-2148293
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands, Texas
77380
(Address of Principal Executive Offices)
(Zip Code)
 
(281) 367-1983
(Registrant’s Telephone Number, Including Area Code)

_______________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
TTI
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ X ]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] 
Accelerated filer [ X ] 
Non-accelerated filer [   ]
Smaller reporting company [   ]
 
Emerging growth company [ ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]

 As of August 7, 2019, there were 125,583,460 shares outstanding of the Company’s Common Stock, $0.01 par value per share.




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




Table of Contents

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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 

 
 

 
 
 
 
Product sales
$
135,350

 
$
107,687

 
$
227,131

 
$
183,066

Services
153,446

 
152,385

 
305,393

 
276,387

Total revenues
288,796

 
260,072

 
532,524

 
459,453

Cost of revenues:
 

 
 

 
 
 
 
Cost of product sales
108,253

 
86,115

 
182,841

 
146,329

Cost of services
98,049

 
97,177

 
200,205

 
181,920

Depreciation, amortization, and accretion
31,817

 
28,979

 
62,445

 
55,420

Impairments and other charges
2,311

 

 
2,457

 

Total cost of revenues
240,430

 
212,271

 
447,948

 
383,669

Gross profit
48,366

 
47,801

 
84,576

 
75,784

General and administrative expense
36,295

 
33,617

 
70,572

 
64,420

Interest expense, net
18,529

 
18,379

 
36,908

 
33,352

Warrants fair value adjustment (income) expense
(1,520
)
 
2,195

 
(1,113
)
 
201

CCLP Series A Preferred Units fair value adjustment (income) expense
146

 
(512
)
 
1,309

 
846

Other (income) expense, net
627

 
3,808

 
(324
)
 
6,584

Loss before taxes and discontinued operations
(5,711
)
 
(9,686
)
 
(22,776
)
 
(29,619
)
Provision for income taxes
2,490

 
2,446

 
4,099

 
3,570

Loss before discontinued operations
(8,201
)
 
(12,132
)
 
(26,875
)
 
(33,189
)
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations (including 2018 loss on disposal of $31.5 million), net of taxes
(345
)
 
(21
)
 
(771
)
 
(41,727
)
Net loss
(8,546
)
 
(12,153
)
 
(27,646
)
 
(74,916
)
Less: loss attributable to noncontrolling interest
1,633

 
6,188

 
9,895

 
15,303

Net loss attributable to TETRA stockholders
$
(6,913
)
 
$
(5,965
)
 
$
(17,751
)
 
$
(59,613
)
Basic net loss per common share:
 

 
 
 
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.06
)
 
$
(0.05
)
 
$
(0.13
)
 
$
(0.14
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

 
$
(0.01
)
 
$
(0.33
)
Net loss attributable to TETRA stockholders
$
(0.06
)
 
$
(0.05
)
 
$
(0.14
)
 
$
(0.47
)
Average shares outstanding
125,612

 
122,474

 
125,646

 
125,553

Diluted net loss per common share:
 

 
 

 
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.06
)
 
$
(0.05
)
 
$
(0.13
)
 
$
(0.14
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

 
$
(0.01
)
 
$
(0.33
)
Net loss attributable to TETRA stockholders
$
(0.06
)
 
$
(0.05
)
 
$
(0.14
)
 
$
(0.47
)
Average diluted shares outstanding
125,612

 
122,474

 
125,646

 
125,553

See Notes to Consolidated Financial Statements

1

Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(8,546
)
 
$
(12,153
)
 
$
(27,646
)
 
$
(74,916
)
Foreign currency translation adjustment, net of taxes of $0 in 2019 and 2018
848

 
(9,249
)
 
442

 
(7,966
)
Comprehensive loss
(7,698
)
 
(21,402
)
 
(27,204
)
 
(82,882
)
Less: Comprehensive loss attributable to noncontrolling interest
1,550

 
7,942

 
9,636

 
17,442

Comprehensive loss attributable to TETRA stockholders
$
(6,148
)
 
$
(13,460
)
 
$
(17,568
)
 
$
(65,440
)
 

See Notes to Consolidated Financial Statements

2

Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
25,979

 
$
40,038

Restricted cash
66

 
64

Trade accounts receivable, net of allowances of $2,261 in 2019 and $2,583 in 2018
195,424

 
187,592

Inventories
138,424

 
143,571

Assets of discontinued operations

 
1,354

Notes receivable
7,627

 
7,544

Prepaid expenses and other current assets
25,326

 
20,528

Total current assets
392,846

 
400,691

Property, plant, and equipment:
 

 
 

Land and building
75,423

 
78,746

Machinery and equipment
1,294,944

 
1,265,732

Automobiles and trucks
35,381

 
35,568

Chemical plants
190,325

 
188,641

Construction in progress
50,016

 
44,419

Total property, plant, and equipment
1,646,089

 
1,613,106

Less accumulated depreciation
(785,654
)
 
(759,175
)
Net property, plant, and equipment
860,435

 
853,931

Other assets:
 

 
 

Goodwill
25,784

 
25,859

Patents, trademarks and other intangible assets, net of accumulated amortization of $84,387 in 2019 and $80,401 in 2018
78,272

 
82,184

Deferred tax assets, net
20

 
13

Operating lease right-of-use assets
57,924

 

Other assets
23,905

 
22,849

Total other assets
185,905

 
130,905

Total assets
$
1,439,186

 
$
1,385,527

 

See Notes to Consolidated Financial Statements

3

Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
85,757

 
$
80,279

Unearned income
32,200

 
26,695

Accrued liabilities and other
86,995

 
89,232

Liabilities of discontinued operations
2,510

 
4,145

Total current liabilities
207,462

 
200,351

Long-term debt, net
856,482

 
815,560

Deferred income taxes
3,809

 
3,242

Asset retirement obligations
12,468

 
12,202

CCLP Series A Preferred Units
7,894

 
27,019

Warrants liability
960

 
2,073

Operating lease liabilities
47,398

 

Other liabilities
8,022

 
12,331

Total long-term liabilities
937,033

 
872,427

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 250,000,000 shares authorized at June 30, 2019 and December 31, 2018; 128,381,046 shares issued at June 30, 2019 and 128,455,134 shares issued at December 31, 2018
1,284

 
1,285

Additional paid-in capital
464,305

 
460,680

Treasury stock, at cost; 2,791,742 shares held at June 30, 2019, and 2,717,569 shares held at December 31, 2018
(19,116
)
 
(18,950
)
Accumulated other comprehensive income (loss)
(51,480
)
 
(51,663
)
Retained deficit
(232,860
)
 
(217,952
)
Total TETRA stockholders' equity
162,133

 
173,400

Noncontrolling interests
132,558

 
139,349

Total equity
294,691

 
312,749

Total liabilities and equity
$
1,439,186

 
$
1,385,527

 

See Notes to Consolidated Financial Statements

4

Table of Contents

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

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

 
$
460,680

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

 
$
312,749

Net loss for first quarter 2019

 

 

 

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

 

 

 
(582
)
 

 
176

 
(406
)
Comprehensive loss

 

 

 

 

 

 
(19,506
)
Distributions to public unitholders

 

 

 

 

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

 

 

 

 

 
(1
)
Treasury stock activity, net

 

 
(155
)
 

 

 

 
(155
)
Equity compensation expense

 
1,628

 

 

 

 
311

 
1,939

Conversions of CCLP Series A Preferred

 

 

 

 

 
2,539

 
2,539

Cumulative effect adjustment

 

 

 

 
2,843

 

 
2,843

Other

 
(67
)
 

 

 

 
76

 
9

Balance at March 31, 2019
$
1,284

 
$
462,241

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

 
$
300,110

Net loss for second quarter 2019

 

 

 

 
(6,913
)
 
(1,633
)
 
(8,546
)
Translation adjustment, net of taxes of $0

 

 

 
765

 

 
83

 
848

Comprehensive loss

 

 

 

 

 

 
(7,698
)
Distributions to public unitholders

 

 

 

 

 
(308
)
 
(308
)
Treasury stock activity, net

 

 
(11
)
 

 

 

 
(11
)
Equity compensation expense

 
2,100

 

 

 

 
567

 
2,667

Other

 
(36
)
 

 

 

 
(33
)
 
(69
)
Balance at June 30, 2019
$
1,284

 
$
464,305

 
$
(19,116
)
 
$
(51,480
)
 
$
(232,860
)
 
$
132,558

 
$
294,691


See Notes to Consolidated Financial Statements


5

Table of Contents

 
Common Stock
Par Value
 
Additional Paid-In
Capital
 
Treasury
Stock
 
Accumulated Other 
Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Equity
 
 
 
 
Currency
Translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
1,185

 
$
425,648

 
$
(18,651
)
 
$
(43,767
)
 
$
(156,335
)
 
$
144,481

 
$
352,561

Net loss for first quarter 2018

 

 

 

 
(53,648
)
 
(9,115
)
 
(62,763
)
Translation adjustment, net of taxes of $0

 

 

 
1,668

 

 
(385
)
 
1,283

Comprehensive loss

 

 

 

 

 

 
(61,480
)
Distributions to public unitholders

 

 

 

 

 
(4,358
)
 
(4,358
)
Equity award activity
20

 

 

 

 

 

 
20

Treasury stock activity, net

 

 
(170
)
 

 

 

 
(170
)
Issuance of common stock for business combination
77

 
28,135

 

 

 

 

 
28,212

Equity compensation expense

 
1,434

 

 

 

 
(655
)
 
779

Conversions of CCLP Series A Preferred

 

 

 

 

 
10,103

 
10,103

Other

 
(171
)
 

 

 

 
(35
)
 
(206
)
Balance at March 31, 2018
$
1,282

 
$
455,046

 
$
(18,821
)
 
$
(42,099
)
 
$
(209,983
)
 
$
140,036

 
$
325,461

Net loss for second quarter 2018

 

 

 

 
(5,965
)
 
(6,188
)
 
(12,153
)
Translation adjustment, net of taxes of $0

 

 

 
(7,495
)
 

 
(1,754
)
 
(9,249
)
Comprehensive loss

 

 

 

 

 

 
(21,402
)
Distributions to public unitholders

 

 

 

 

 
(4,624
)
 
(4,624
)
Equity award activity
1

 

 

 

 

 

 
1

Treasury stock activity, net

 

 
(44
)
 

 

 

 
(44
)
Equity compensation expense

 
1,905

 

 

 

 
358

 
2,263

Conversions of CCLP Series A Preferred

 

 

 

 

 
9,272

 
9,272

Other

 
131

 

 

 

 
4

 
135

Balance at June 30, 2018
$
1,283

 
$
457,082

 
$
(18,865
)
 
$
(49,594
)
 
$
(215,948
)
 
$
137,104

 
$
311,062


See Notes to Consolidated Financial Statements


6

Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited) 
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 

 
 

Net loss
$
(27,646
)
 
$
(74,916
)
Reconciliation of net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization, and accretion
62,445

 
57,505

Impairment and other charges
2,457

 

Benefit for deferred income taxes
550

 
(280
)
Equity-based compensation expense
4,932

 
3,422

Provision for doubtful accounts
922

 
665

Non-cash loss on disposition of business

 
32,369

Amortization of deferred financing costs
1,900

 
2,133

CCLP Series A Preferred redemption premium
941

 

CCLP Series A Preferred accrued paid in kind distributions
928

 
2,838

CCLP Series A Preferred fair value adjustment
1,309

 
846

Warrants fair value adjustment
(1,113
)
 
201

Contingent consideration liability fair value adjustment
(800
)
 
4,300

Expense for unamortized finance costs and other non-cash charges and credits
669

 
3,616

Acquisition and transaction financing fees
75

 

Gain on sale of assets
(872
)
 
(65
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(7,075
)
 
(46
)
Inventories
(92
)
 
(18,398
)
Prepaid expenses and other current assets
(4,327
)
 
(2,434
)
Trade accounts payable and accrued expenses
4,766

 
(23,246
)
Other
(1,592
)
 
(637
)
Net cash provided by (used in) operating activities
38,377

 
(12,127
)
Investing activities:
 

 
 

Purchases of property, plant, and equipment, net
(60,604
)
 
(67,441
)
Acquisition of businesses, net of cash acquired
(11,417
)
 
(42,002
)
Proceeds from disposal of business

 
3,121

Proceeds on sale of property, plant, and equipment
1,214

 
307

Other investing activities
(447
)
 
(332
)
Net cash used in investing activities
(71,254
)
 
(106,347
)
Financing activities:
 

 
 

Proceeds from long-term debt
194,090

 
508,250

Principal payments on long-term debt
(154,217
)
 
(325,300
)
CCLP distributions
(615
)
 
(8,982
)
Redemptions of CCLP Series A Preferred
(19,760
)
 

Tax remittances on equity based compensation
(458
)
 
(593
)
Debt issuance costs and other financing activities
(325
)
 
(7,881
)
Net cash provided by financing activities
18,715

 
165,494

Effect of exchange rate changes on cash
105

 
1,021

Increase (decrease) in cash and cash equivalents
(14,057
)
 
48,041

Cash and cash equivalents and restricted cash at beginning of period
40,102

 
26,389

Cash and cash equivalents and restricted cash at end of period
$
26,045

 
$
74,430

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 

 
 
Interest paid
$
33,449

 
$
18,610

Income taxes paid
4,501

 
3,314

See Notes to Consolidated Financial Statements

7

Table of Contents

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

Organization 

We are a geographically diversified oil and gas services company, focused on completion fluids and associated products and services, water management, frac flowback, production well testing and offshore rig cooling services, and compression services and equipment. We were incorporated in Delaware in 1981. We are composed of three divisions – Completion Fluids & Products, Water & Flowback Services, and Compression. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.

Presentation  

Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods. Operating results for the period ended June 30, 2019 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2019.

We consolidate the financial statements of CSI Compressco LP and its subsidiaries ("CCLP") as part of our Compression Division, as we determined that CCLP is a variable interest entity and we are the primary beneficiary. We control the financial interests of CCLP and have the ability to direct the activities of CCLP that most significantly impact its economic performance through our ownership of its general partner. The share of CCLP net assets and earnings that is not owned by us is presented as noncontrolling interest in our consolidated financial statements. Our cash flows from our investment in CCLP are limited to the quarterly distributions we receive on our CCLP common units and general partner interest (including incentive distribution rights) and the amounts collected for services we perform on behalf of CCLP, as TETRA's capital structure and CCLP's capital structure are separate, and do not include cross default provisions, cross collateralization provisions, or cross guarantees.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2018 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 4, 2019.

Significant Accounting Policies

We have added policies for the recording of leases in conjunction with the adoption of the new lease standard discussed in our "Leases" and "New Accounting Pronouncements" sections below. Other than the additional lease policies described herein, there have been no significant changes in our accounting policies or the application of these policies.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could be material.

8

Table of Contents


Impairments and Other Charges
    
During the three month period ending June 30, 2019, our Compression Division recorded impairments of $2.3 million on certain units of its low-horsepower compression fleet, reflecting the decision to dispose of these units upon management's determination that refurbishing this equipment was not economic given limited current and forecasted demand for such equipment. A recoverability analysis was performed on the remaining low-horsepower fleet and it was concluded that the remaining fleet was recoverable from estimated future cash flows.

Leases

As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election described below, we initially recognize a lease liability and related right-of-use asset on the commencement date. The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.    

Long-term operating leases are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of June 30, 2019. Long-term finance leases are not material. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term, if it is reasonably certain that we would exercise the option.

As an accounting policy election, we do not include short-term leases on our balance sheet. Short-term leases include leases with a term of 12 months or less, inclusive of renewal options we are reasonably certain to exercise. The lease payments for short-term leases are included as operating lease costs on a straight-line basis over the lease term in cost of revenues or general and administrative expense based on the use of the underlying asset. We recognize lease costs for variable lease payments not included in the determination of a lease liability in the period in which an obligation is incurred.

As allowed by U.S. GAAP, we do not separate nonlease components from the associated lease component for our compression services contracts and instead account for those components as a single component based on the accounting treatment of the predominant component. In our evaluation of whether Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842 "Leases" or ASC 606 "Revenue from Contracts with Customers" is applicable to the combined component based on the predominant component, we determined the services nonlease component is predominant, resulting in the ongoing recognition of our compression services contracts following ASC 606.

Our operating and finance leases are recognized at the present value of lease payments over the lease term. When the implicit discount rate is not readily determinable, we use our incremental borrowing rate to calculate the discount rate used to determine the present value of lease payments. Consistent with other long-lived assets or asset groups that are held and used, we test for impairment of our right-of-use assets when impairment indicators are present.

Foreign Currency Translation
 
The cumulative translation effects of translating the applicable accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of equity. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $(0.8) million and $0.5 million during the three and six months ended June 30, 2019, respectively, and $(0.6) million and $0.3 million during the three and six months ended June 30, 2018, respectively.

New Accounting Pronouncements

Standards adopted in 2019

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize right-of-use lease assets and lease liabilities in the balance sheet related to the right to use the underlying asset for

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the lease term. In addition, through improved disclosure requirements, ASC 842 will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard effective January 1, 2019. The standard had a material impact on our consolidated balance sheet, specifically, the reporting of our operating leases. The impact in the reporting of our finance leases was insignificant.

We chose to transition using a modified retrospective approach which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. Comparative information is reported under the accounting standards that were in effect for those periods. In addition, upon transition, we elected the package of practical expedients, which allows us to continue to apply historical lease classifications to existing contracts. Upon adoption, we recognized $60.6 million in operating right-of-use assets, $12.0 million in accrued liabilities and other, and $50.7 million in operating lease liabilities in our consolidated balance sheet. In addition, we also recognized a $2.8 million cumulative effect adjustment to increase retained earnings, primarily as a result of a deferred gain from a previous sale and leaseback transaction on our corporate headquarters facility that was accounted for as an operating lease. Refer to Note K - “Leases” for further information on our leases.    

In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)" that gives entities the option to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This was effective for us on January 1, 2019, however, as we do not have associated tax effects in accumulated other comprehensive income, there was no impact.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” to align the measurement and classification guidance for share-based payments to nonemployees with the guidance currently applied to employees, with certain exceptions. We adopted this ASU during the three months ended March 31, 2019, with no material impact to our consolidated financial statements.

Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 has an effective date of the first quarter of fiscal 2020. We are currently assessing the potential effects of these changes to our consolidated financial statements.
    
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, under a prospective adoption. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements.

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NOTE B – INVENTORIES

Components of inventories as of June 30, 2019 and December 31, 2018 are as follows: 
 
June 30, 2019
 
December 31, 2018
 
(In Thousands)
Finished goods
$
63,579

 
$
69,762

Raw materials
3,428

 
3,503

Parts and supplies
44,120

 
47,386

Work in progress
27,297

 
22,920

Total inventories
$
138,424

 
$
143,571


Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. Work in progress inventory consists primarily of new compressor packages located in the CCLP fabrication facility in Midland, Texas.
NOTE C – 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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Number of weighted average common shares outstanding
125,612

 
122,474

 
125,646

 
125,553

Assumed exercise of equity awards and warrants

 

 

 

Average diluted shares outstanding
125,612

 
122,474

 
125,646

 
125,553


For the three and six month periods ended June 30, 2019 and June 30, 2018, the average diluted shares outstanding excludes the impact of all outstanding equity awards and warrants, as the inclusion of these shares would have been anti-dilutive due to the net losses recorded during the periods. In addition, for the three and six month periods ended June 30, 2019 and June 30, 2018, the calculation of diluted earnings per common share excludes the impact of the CCLP Preferred Units (as defined in Note F), as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been anti-dilutive.

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NOTE D – DISCONTINUED OPERATIONS

On March 1, 2018, we closed a series of related transactions that resulted in the disposition of our Offshore Division. As a result, we have accounted for our Offshore Division, consisting of our Offshore Services and Maritech segments, as discontinued operations and have revised prior period financial statements to exclude these businesses from continuing operations. A summary of financial information related to our discontinued operations is as follows:

Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations
(in thousands)
 
Three Months Ended
June 30, 2019
 
Three Months Ended
June 30, 2018
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$
10

 
$

 
$
10

Cost of revenues

 

 

 
(235
)
 
(98
)
 
(333
)
Depreciation, amortization, and accretion

 

 

 

 

 

General and administrative expense
345

 

 
345

 
284

 

 
284

Other (income) expense, net

 

 

 
55

 

 
55

Pretax income (loss) from discontinued operations
(345
)
 

 
(345
)
 
(94
)
 
98

 
4

Pretax loss on disposal of discontinued operations
 
 
 
 

 
 
 
 
 
(25
)
Total pretax income (loss) from discontinued operations
 
 
 
 
(345
)
 
 
 
 
 
(21
)
Income tax expense
 
 
 
 

 
 
 
 
 

Total income (loss) from discontinued operations
 
 
 
 
$
(345
)
 
 
 
 
 
$
(21
)
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$
4,487

 
$
187

 
$
4,674

Cost of revenues
22

 

 
22

 
10,888

 
139

 
11,027

Depreciation, amortization, and accretion

 

 

 
1,873

 
212

 
2,085

General and administrative expense
749

 

 
749

 
1,537

 
187

 
1,724

Other (income) expense, net

 

 

 
78

 

 
78

Pretax loss from discontinued operations
(771
)
 

 
(771
)
 
(9,889
)
 
(351
)
 
(10,240
)
Pretax loss on disposal of discontinued operations
 
 
 
 

 

 

 
(33,813
)
Total pretax loss from discontinued operations
 
 
 
 
(771
)
 
 
 
 
 
(44,053
)
Income tax benefit
 
 
 
 

 
 
 
 
 
(2,326
)
Total loss from discontinued operations
 
 
 
 
$
(771
)
 
 
 
 
 
$
(41,727
)


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Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Statement of Financial Position
(in thousands)
 
June 30, 2019
 
December 31, 2018
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Carrying amounts of major classes of assets included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade receivables
$

 
$

 
$

 
$

 
$
1,340

 
$
1,340

Other current assets

 

 

 
14

 

 
14

Assets of discontinued operations
$

 
$

 
$

 
$
14

 
$
1,340

 
$
1,354

 
 
 
 
 
 
 
 
 
 
 
 
Carrying amounts of major classes of liabilities included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade payables
$
817

 
$

 
$
817

 
$
740

 
$

 
$
740

Accrued liabilities
960

 
733

 
1,693

 
1,330

 
2,075

 
3,405

Liabilities of discontinued operations
$
1,777

 
$
733

 
$
2,510

 
$
2,070

 
$
2,075

 
$
4,145

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

Consolidated long-term debt as of June 30, 2019 and December 31, 2018, consists of the following:
 
 
 
June 30, 2019
 
December 31, 2018
 
 
 
(In Thousands)
TETRA
 
Scheduled Maturity
 
 
 
Asset-based credit agreement (presented net of unamortized deferred financing costs of $1.5 million as of June 30, 2019)
 
September 2023
$
18,507

 
$

Term credit agreement (presented net of the unamortized discount of $6.8 million as of June 30, 2019 and $7.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $10.1 million as of June 30, 2019 and $10.2 million as of December 31, 2018)
 
September 2025
203,602

 
182,547

TETRA total debt
 
 
222,109

 
182,547

Less current portion
 
 

 

TETRA total long-term debt
 
 
$
222,109

 
$
182,547

 
 
 
 
 
 
CCLP
 
 
 
 
 
CCLP asset-based credit agreement
 
June 2023

 

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $2 million as of June 30, 2019 and $2.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $3.4 million as of June 30, 2019 and $3.9 million as of December 31, 2018)
 
August 2022
290,615

 
289,797

CCLP 7.50% Senior Secured Notes (presented net of unamortized deferred financing costs of $6.2 million as of June 30, 2019 and $6.8 million as of December 31, 2018)
 
April 2025
343,758

 
343,216

CCLP total debt
 
 
634,373

 
633,013

Less current portion
 
 

 

CCLP total long-term debt
 
 
$
634,373

 
$
633,013

Consolidated total long-term debt
 
 
$
856,482

 
$
815,560



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As of June 30, 2019, TETRA had a $20.0 million outstanding balance and $8.9 million in letters of credit against its asset-based credit agreement ("ABL Credit Agreement"). As of June 30, 2019, subject to compliance with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, TETRA had an availability of $40.6 million under this agreement. There was no balance outstanding under the CCLP asset-based credit agreement ("CCLP Credit Agreement") as of June 30, 2019. On June 26, 2019, CCLP entered into an amendment of the CCLP Credit Agreement that, among other things, revised and increased the borrowing base, including adding the value of certain CCLP inventory in the determination of the borrowing base. As of June 30, 2019, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the CCLP Credit Agreement, CCLP had availability of $22.2 million.

TETRA and CCLP credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. TETRA and CCLP are both in compliance with all covenants of their respective credit and senior note agreements as of June 30, 2019.
NOTE F – CCLP SERIES A CONVERTIBLE PREFERRED UNITS

During 2016, CCLP issued an aggregate of 6,999,126 of CSI Compressco LP Series A Convertible Preferred Units representing limited partner interests in CCLP (the “CCLP Preferred Units”) for a cash purchase price of $11.43 per CCLP Preferred Unit (the “Issue Price”). We purchased 874,891 of the CCLP Preferred Units at the aggregate Issue Price of $10.0 million.

Unless otherwise redeemed for cash, a ratable portion of the CCLP Preferred Units has been, and will continue to be, converted into CCLP common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Based on the number of CCLP Preferred Units outstanding as of June 30, 2019, the maximum aggregate number of CCLP common units that could be required to be issued pursuant to the conversion provisions of the CCLP Preferred Units is approximately 4.3 million CCLP common units; however, CCLP may, at its option, pay cash, or a combination of cash and common units, to the holders of the CCLP Preferred Units instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Second Amended and Restated CCLP Partnership Agreement and the CCLP Credit Agreement. Beginning with the January 2019 Conversion Date, CCLP has elected to redeem the remaining CCLP Preferred Units for cash, resulting in 1,870,681 CCLP Preferred Units being redeemed during the six months ended June 30, 2019 for $19.8 million, which includes approximately $0.9 million of redemption premium that was paid and charged to other (income) expense, net in the accompanying consolidated statements of operations. The total number of CCLP Preferred Units outstanding as of June 30, 2019 was 751,736, of which we held 94,409. The final redemption of the remaining outstanding CCLP Preferred Units, along with a final cash payment made in lieu of paid in kind units for the quarter ended June 30, 2019, occurred on August 8, 2019, for an aggregate cash payment of $5.0 million of which $0.6 million was paid to us.

Based on the conversion provisions of the CCLP Preferred Units, calculated as of June 30, 2019, using the trading prices of the common units over the prior month, along with other factors, and as otherwise impacted by the existence of certain conditions related to the CCLP common units (the "Conversion Price"), the theoretical number of CCLP common units that would be issued if all of the outstanding CCLP Preferred Units were converted on June 30, 2019 on the same basis as the monthly conversions would be approximately 2.7 million CCLP common units, with an aggregate market value of $9.7 million. If converted to CCLP common units, a $1 decrease in the Conversion Price would result in the issuance of 1.3 million additional CCLP common units pursuant to these conversion provisions.

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NOTE G – FAIR VALUE MEASUREMENTS
 
Financial Instruments

CCLP Preferred Units

The CCLP Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (a Level 3 fair value measurement). These unobservable items include (i) the volatility of the trading price of CCLP's common units compared to a volatility analysis of equity prices of CCLP's comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis.

Warrants

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

Contingent Consideration

The fair value of the remaining contingent consideration associated with the February 2018 acquisition of SwiftWater Energy Services, LLC ("SwiftWater") is based on a probability simulation utilizing forecasted revenues and EBITDA of the water management business of SwiftWater and all of our pre-existing operations in the Permian Basin (a Level 3 fair value measurement). At June 30, 2019, based on a forecast of SwiftWater 2019 revenues and EBITDA, the estimated fair value for the liability associated with the remaining contingent purchase price consideration was $0.2 million, resulting in $0.4 million and $0.8 million being credited to other (income) expense, net, during the three and six months ended June 30, 2019, respectively. During the three months ended June 30, 2019, the sellers received a payment of $10.0 million based on SwiftWater's performance during 2018. In addition, as part of the purchase of JRGO Energy Services LLC ("JRGO") during December 2018, the sellers were paid contingent consideration of $1.4 million during the three month period ended June 30, 2019, based on JRGO's performance during the fourth quarter of 2018.

Derivative Contracts

We and CCLP each enter into short term foreign currency forward derivative contracts with third parties as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of June 30, 2019, we and CCLP had the following foreign currency derivative contracts outstanding relating to portions of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward purchase Euro
 
$
7,333

 
1.13
 
9/19/2019
Forward purchase Euro
 
2,025

 
1.15
 
9/19/2019
Forward purchase pounds sterling
 
4,285

 
1.26
 
7/19/2019
Forward purchase Mexican peso
 
780

 
19.23
 
7/19/2019
Forward purchase Norwegian krone
 
552

 
8.69
 
7/19/2019
Forward sale Mexican peso
 
7,858

 
19.09
 
7/19/2019

Derivative Contracts
 
British Pound Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward purchase Euro
 
1,780

 
0.89
 
7/19/2019

Derivative Contracts
 
Swedish Krona Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward purchase Euro
 
22,270

 
10.60
 
7/19/2019

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Under this program, we and CCLP may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.

The fair values of foreign currency derivative instruments are based on quoted market values (a Level 2 fair value measurement). The fair values of our and CCLP's foreign currency derivative instruments as of June 30, 2019 and December 31, 2018, are as follows:
Foreign currency derivative instruments
Balance Sheet Location
 
 Fair Value at June 30, 2019
 
 Fair Value at December 31, 2018

 

 
(In Thousands)
Forward purchase contracts
 
Current assets
 
$
147

 
$
41

Forward sale contracts
 
Current assets
 
64

 
76

Forward sale contracts
 
Current liabilities
 

 
(126
)
Forward purchase contracts
 
Current liabilities
 
(23
)
 
(168
)
Net asset (liability)
 
 
 
$
188

 
$
(177
)

None of our foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and six month periods ended June 30, 2019, we recognized $0.2 million and $0.7 million of net (gains) losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program. During the three and six months ended June 30, 2018, we recognized $(0.7) million and $(0.8) million of net (gains) losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program.

A summary of these recurring fair value measurements by valuation hierarchy as of June 30, 2019 and December 31, 2018, is as follows:
 
 
 
Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
June 30, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
CCLP Series A Preferred Units
$
(7,894
)
 
$

 
$

 
$
(7,894
)
Warrants liability
(960
)
 

 

 
(960
)
Asset for foreign currency derivative contracts
211

 

 
211

 

Liability for foreign currency derivative contracts
(23
)
 

 
(23
)
 

Acquisition contingent consideration liability
(200
)
 

 

 
(200
)
Net liability
$
(8,866
)
 
 
 
 
 
 


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Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
December 31, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
CCLP Series A Preferred Units
$
(27,019
)
 
$

 
$

 
$
(27,019
)
Warrants liability
(2,073
)
 

 

 
(2,073
)
Asset for foreign currency derivative contracts
117

 

 
117

 

Liability for foreign currency derivative contracts
(294
)
 

 
(294
)
 

Acquisition contingent consideration liability
(12,452
)
 

 

 
(12,452
)
Net liability
$
(41,721
)
 
 
 
 
 
 

The fair values of cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and long-term debt pursuant to TETRA's ABL Credit Agreement and Term Credit Agreement, and the CCLP Credit Agreement approximate their carrying amounts. The fair values of the publicly traded CCLP 7.25% Senior Notes at June 30, 2019 and December 31, 2018, were approximately $267.1 million and $266.3 million, respectively. Those fair values compare to the face amount of $295.9 million both at June 30, 2019 and December 31, 2018. The fair values of the CCLP 7.50% Senior Secured Notes at June 30, 2019 and December 31, 2018 were approximately $344.8 million and $332.5 million, respectively. These fair values compare to aggregate principal amount of such notes at both June 30, 2019 and December 31, 2018, of $350.0 million. We based the fair values of the CCLP 7.25% Senior Notes and the CCLP 7.50% Senior Secured Notes as of June 30, 2019 on recent trades for these notes.
NOTE H – COMMITMENTS AND CONTINGENCIES
 
Litigation
 
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.


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Contingencies of Discontinued Operations

In early 2018, we closed the Maritech Asset Purchase Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of Maritech's remaining oil and gas properties and related assets. Also in early 2018, we closed the Maritech Membership Interest Purchase Agreement with Orinoco that provided for the purchase by Orinoco of all of the outstanding membership interests in Maritech. As a result of these transactions, we have effectively exited the business of our Maritech segment and Orinoco assumed all of Maritech's abandonment and decommissioning obligations. To the extent that Maritech or Orinoco fails to perform the abandonment and decommissioning work required, we, as the former parent company of Maritech, may be required to perform the abandonment and decommissioning work. Pursuant to a Bonding Agreement entered into as part of these transactions (the "Bonding Agreement"), Orinoco provided non-revocable performance bonds in an aggregate amount of $46.8 million to cover the performance by Orinoco and Maritech of the asset retirement obligations of Maritech and agreed to replace, within 90 days following the closing, the initial bonds delivered at closing with other non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million. Orinoco further agreed to replace, within 180 days following the closing, such replacement performance bonds with a maximum of three performance bonds in the aggregate sum of $47.0 million, meeting certain requirements. In the event Orinoco does not provide either tranche of replacement bonds, Orinoco is required to make certain cash escrow payments to us. The payment obligations of Orinoco under the Bonding Agreement were guaranteed by Thomas M. Clarke and Ana M. Clarke pursuant to a separate guaranty agreement (the “Clarke Bonding Guaranty Agreement”). Orinoco has not delivered such replacement bonds and it has not made any of the agreed upon cash escrow payments and we filed a lawsuit against Orinoco and the Clarkes to enforce the terms of the Bonding Agreement and the Clarke Bonding Guaranty Agreement. Each party filed a motion for summary judgment in the lawsuit asserting its respective claims. A summary judgment was granted in favor of Orinoco and the Clarkes which has the effect of dismissing our present claims for the replacement bonds and the escrow payments provided for in the Bonding Agreement. We plan to seek reconsideration of the decision by the court and/or file an appeal of the summary judgment. The non-revocable performance bonds delivered at the closing remain in effect.

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

 Summarized financial information concerning the business segments is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Revenues from external customers
 

 
 

 
 

 
 

Product sales
 

 
 

 
 
 
 
Completion Fluids & Products Division
$
72,806

 
$
72,287

 
$
130,134

 
$
123,344

Water & Flowback Services Division
367

 

 
731

 
676

Compression Division
62,177

 
35,400

 
96,266

 
59,046

Consolidated
$
135,350

 
$
107,687

 
$
227,131

 
$
183,066

 
 
 
 
 
 
 
 
Services
 

 
 

 
 
 
 
Completion Fluids & Products Division
$
6,961

 
$
4,268

 
$
11,214

 
$
6,317

Water & Flowback Services Division
72,757

 
83,593

 
151,071

 
143,770

Compression Division
73,728

 
64,524

 
143,108

 
126,300

Consolidated
$
153,446

 
$
152,385

 
$
305,393

 
$
276,387

 
 
 
 
 
 
 
 
Interdivision revenues
 

 
 

 
 
 
 
Completion Fluids & Products Division
$

 
$
1

 
$

 
$
(1
)
Water & Flowback Services Division

 
53

 

 
275

Compression Division

 

 

 

Interdivision eliminations

 
(54
)
 

 
(274
)
Consolidated
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Total revenues
 

 
 

 
 
 
 
Completion Fluids & Products Division
$
79,767

 
$
76,556

 
$
141,348

 
$
129,660

Water & Flowback Services Division
73,124

 
83,646

 
151,802

 
144,721

Compression Division
135,905

 
99,924

 
239,374

 
185,346

Interdivision eliminations

 
(54
)
 

 
(274
)
Consolidated
$
288,796

 
$
260,072

 
$
532,524

 
$
459,453

 
 
 
 
 
 
 
 
Income (loss) before taxes
 

 
 

 
 
 
 
Completion Fluids & Products Division
$
14,614

 
$
9,981

 
$
20,800

 
$
12,430

Water & Flowback Services Division
2,460

 
8,311

 
4,691

 
14,859

Compression Division
(3,483
)
 
(8,655
)
 
(11,284
)
 
(22,673
)
Interdivision eliminations
1

 
4

 
7

 
4

Corporate Overhead(1)
(19,303
)
 
(19,327
)
 
(36,990
)
 
(34,239
)
Consolidated
$
(5,711
)
 
$
(9,686
)
 
$
(22,776
)
 
$
(29,619
)

(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
General and administrative expense
$
14,350

 
$
11,871

 
$
26,439

 
$
24,469

Depreciation and amortization
172

 
164

 
340

 
315

Interest expense
5,696

 
4,877

 
11,038

 
8,884

Warrants fair value adjustment (income) expense
(1,520
)
 
2,195

 
(1,113
)
 
201

Other general corporate (income) expense, net
605

 
220

 
286

 
370

Total
$
19,303

 
$
19,327

 
$
36,990

 
$
34,239


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NOTE J – REVENUE FROM CONTRACTS WITH CUSTOMERS

Performance Obligations. Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers.

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

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

We receive cash equal to the invoice price for most product sales and services and payment terms typically range from 30 to 60 days from the date we invoice our customer. Since the period between when we deliver products or services and when the customer pays for such products or services is not expected to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.

Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer. For any arrangements with multiple performance obligations, we use management's estimated selling price to determine the stand-alone selling price for separate performance obligations. For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period. As of June 30, 2019, we had $45.3 million of remaining performance obligations related to our compression service contracts. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than 12 months and does not consider the effects of the time value of money. The remaining performance obligations are expected to be recognized through 2022 as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
Total
 
(In Thousands)
Compression service contracts remaining performance obligations
$
19,830

 
$
19,279

 
$
6,108

 
$
101

 
$

 
$
45,318

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

Use of Estimates. In recognizing revenue for variable consideration arrangements, the amount of variable consideration recognized is limited so that it is probable that significant amounts of revenues will not be reversed in future periods when the uncertainty is resolved. For products returned by the customer, we estimate the expected returns based on an analysis of historical experience. For volume discounts earned by the customer, we estimate the discount (if any) based on our estimate of the total expected volume of products sold or services to be provided to the customer during the discount period. In certain contracts for the sale of CBF, we may agree to issue credits for the repurchase of reclaimable used fluids from certain customers at an agreed price that is based on the condition of the fluids. For sales of CBF, we adjust the revenue recognized in the period of shipment by the estimated amount of the credit expected to be issued to the customer, and this estimate is based on historical

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experience. As of June 30, 2019, the amount of remaining credits expected to be issued for the repurchase of reclaimable used fluids was $4.2 million that were recorded in inventory (right of return asset) and accounts payable. There were no material differences between amounts recognized during the three and six month periods ended June 30, 2019, compared to estimates made in a prior period from these variable consideration arrangements.

Contract Assets and Liabilities. We consider contract assets to be trade accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain instances, particularly those requiring customer specific documentation prior to invoicing, our invoicing of the customer is delayed until certain documentation requirements are met. In those cases, we recognize a contract asset rather than a billed trade accounts receivable until we are able to invoice the customer. Our contract asset balances, primarily associated with these documentation requirements, were $35.4 million and $44.2 million as of June 30, 2019 and December 31, 2018, respectively. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.

We classify contract liabilities as Unearned Income in our consolidated balance sheets. Such deferred revenue typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract.

The following table reflects the changes in our contract liabilities for the periods indicated:
 
Six Months Ended
June 30,
 
2019
 
2018
 
(In Thousands)
Unearned Income, beginning of period
$
25,333

 
$
17,050

Additional unearned income
84,456

 
59,360

Revenue recognized
(78,119
)
 
(47,276
)
Unearned income, end of period
$
31,670

 
$
29,134


During the six month period ended June 30, 2019, we recognized in product sales revenue of $19.1 million from unearned income that was deferred as of December 31, 2018. During the six months ended June 30, 2018, we recognized in product sales revenue of $15.4 million from unearned income that was deferred as of our adoption of ASC 606 on January 1, 2018.

Contract Costs. As of June 30, 2019, contract costs were immaterial.
    

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Disaggregation of Revenue. We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our three reportable segments in Note I. In addition, we disaggregate revenue from contracts with customers by geography based on the following table below.

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Completion Fluids & Products
 
 
 
 
 
 
 
U.S.
37,536

 
34,112

 
$
69,142

 
$
62,020

International
42,231

 
42,444

 
72,206

 
67,640

 
79,767

 
76,556

 
141,348

 
129,660

Water & Flowback Services
 
 
 
 
 
 
 
U.S.
68,412

 
70,838

 
141,611

 
117,877

International
4,712

 
12,808

 
10,191

 
26,844

 
73,124

 
83,646

 
151,802

 
144,721

Compression
 
 
 
 
 
 
 
U.S.
126,122

 
90,927

 
219,638

 
167,907

International
9,783

 
8,997

 
19,736

 
17,439

 
135,905

 
99,924

 
239,374

 
185,346

Interdivision eliminations
 
 
 
 
 
 
 
U.S.

 

 

 
1

International

 
(54
)
 

 
(275
)
 

 
(54
)
 

 
(274
)
Total Revenue
 
 
 
 
 
 
 
U.S.
232,070

 
195,877

 
430,391

 
347,805

International
56,726

 
64,195

 
102,133

 
111,648

 
288,796

 
260,072

 
$
532,524

 
$
459,453

NOTE K – LEASES

We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. We have finance leases for certain storage tanks and equipment rentals. These finance leases are not material to our financial statements. Our leases have remaining lease terms ranging from 1 to 16 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. The office space, warehouse space, operating location leases, and machinery and equipment leases generally require us to pay all maintenance and insurance costs. We do not have leases that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Variable rent expense was not material.

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


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Table of Contents

Components of lease expense, included in either cost of revenues or general and administrative expense based on the use of the underlying asset, are as follows (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
(In Thousands)
Operating lease expense
$
4,987

 
$
10,031

Short-term lease expense
9,552

 
20,713

Total lease expense
$
14,539

 
$
30,744


Supplemental cash flow information:
 
 
Six Months Ended June 30, 2019
 
 
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
     Operating cash flows - operating leases
 
$
9,398

 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
     Operating leases
 
$
4,881


Supplemental balance sheet information:
 
June 30, 2019
 
(In Thousands)
Operating leases:
 
     Operating lease right-of-use assets
$
57,924

 
 
     Accrued liabilities and other
$
12,652

     Operating lease liabilities
47,398

     Total operating lease liabilities
$
60,050


Additional operating lease information:
 
June 30, 2019
Weighted average remaining lease term:
 
     Operating leases
6.88 Years

 
 
Weighted average discount rate:
 
     Operating leases
9.41
%
    

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Future minimum lease payments by year and in the aggregate, under non-cancelable operating leases with terms in excess of one year consist of the following at June 30, 2019:
 
 
Operating Leases
 
(In Thousands)
 
 
 
Remainder of 2019
 
$
8,948

2020
 
15,996

2021
 
11,702

2022
 
9,107

2023
 
7,844

Thereafter
 
29,391

Total lease payments
 
82,988

Less imputed interest
 
(22,938
)
Total lease liabilities
 
$
60,050

    
At June 30, 2019, future minimum rental receipts under a non-cancelable sublease for office space in one of our locations totaled $5.9 million. For the three and six months ended June 30, 2019, we recognized sublease income of $0.2 million and $0.4 million, respectively.
NOTE L – SUBSEQUENT EVENTS

Contingencies of Discontinued Operations
    
Part of the consideration we received in the March 1, 2018 disposition of our Offshore Division was a promissory note in the original principal amount of $7.5 million (the “Epic Promissory Note”) payable by Epic Companies, LLC (“Epic Companies,” formerly known as Epic Offshore Specialty, LLC) to us in full, together with interest at a rate of 1.52% per annum, on December 31, 2019, along with a personal guaranty agreement from Thomas M. Clarke and Ana M. Clarke guaranteeing the payment obligations of Epic Companies pursuant to the Epic Promissory Note (the “Clarke Promissory Note Guaranty Agreement”). Additionally, pursuant to the Equity Interest Purchase Agreement (the “Offshore Services Purchase Agreement”) and other agreements with Epic Companies, certain other amounts relating to the Offshore Division totaling approximately $1.4 million as of June 30, 2019 are payable to us.

In August 2019, certain creditors of Epic Companies filed an involuntary petition against Epic Companies under Chapter 7 of the bankruptcy code in the Eastern District of Louisiana. Although the Epic Promissory Note is not currently due and is guaranteed by the Clarke Promissory Note Guaranty Agreement, we continue to monitor this matter and there can be no assurance that future developments, including those involving the financial condition of Epic Companies or relating to the involuntary bankruptcy proceeding, may or may not adversely impact our ability to timely collect amounts owed to us by Epic Companies pursuant to the Offshore Services Purchase Agreement and the Epic Promissory Note.

CCLP Series A Convertible Preferred Units

On August 8, 2019, the remaining 375,868 CCLP Preferred Units, of which we held 47,205, were redeemed, along with a final cash payment made in lieu of paid in kind units for the quarter ended June 30, 2019, for an aggregate cash payment of $5.0 million of which $0.6 million was paid to us.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 4, 2019 ("2018 Annual Report"). This discussion includes forward-looking statements that involve certain risks and uncertainties.

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Table of Contents

Business Overview  

The increase in consolidated revenues during the six month period ended June 30, 2019 primarily reflects the growth in demand for compression services and equipment, as well as an increase in completion fluids activity. Our Compression Division revenues increased 36.0% during the quarter ended June 30, 2019 compared to the prior year quarter, driven by increased new compressor equipment sales and reflecting the increased utilization of its compression services fleet. Our Completion Fluids & Products Division also reported increased revenues, a 4.2% increase compared to the prior year quarter, primarily due to increased Gulf of Mexico and international CBF product sales. Demand for these products and services during the period was strong despite continued volatility in pricing for oil, which affects the plans of many of our oil and gas operations customers. Recent oil price volatility has particularly affected domestic onshore demand for our Water & Flowback Services Division services, resulting in increased customer contract pricing pressure. Water & Flowback Services Division revenues and profitability during the quarter ended June 30, 2019 reflects the impact of this decreased demand. Other than for the Compression Division, the outlook for domestic onshore demand for our products and services is expected to continue to be uncertain for the remainder of 2019.

Funding for the expected long-term growth in our operations remains a key focus. Consolidated cash provided by operating activities during the six months ended June 30, 2019 increased compared to the prior year period and we and our CSI Compressco LP ("CCLP") subsidiary are utilizing operating cash flows to fund our respective capital expenditure needs. We also have capacity under our term credit agreement (the “Term Credit Agreement”) and our asset-based lending credit agreement (the “ABL Credit Agreement”) to fund our growth capital expenditure plans, as well as potential acquisition transactions. In addition, our Compression Division, through the separate capital structure of CCLP, expects to fund additional 2019 growth capital expenditures for new compression services equipment through $4.3 million of currently available cash as of June 30, 2019, expected operating cash flows, and up to $15.0 million of new compression services equipment to be purchased by us, and leased to CCLP, of which $11.1 million has been funded as of June 30, 2019. These sources are expected to enable CCLP to meet its growth capital expenditure requirements without having to access available borrowings under its credit agreement (the "CCLP Credit Agreement") and without having to access the current debt and equity markets. We and CCLP are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current environment. The earliest maturity date of our long-term debt is September 2023 and the earliest maturity date of CCLP's long-term debt is August 2022.     
Critical Accounting Policies and Estimates
 
There have been no material changes or developments in the evaluation of the accounting estimates and
the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed
in our 2018 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.    

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Table of Contents

Results of Operations

Three months ended June 30, 2019 compared with three months ended June 30, 2018.

Consolidated Comparisons
 
Three Months Ended
June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
288,796

 
$
260,072

 
$
28,724

 
11.0
%
Gross profit
48,366

 
47,801

 
565

 
1.2
%
Gross profit as a percentage of revenue
16.7
 %
 
18.4
 %
 
 

 
 

General and administrative expense
36,295

 
33,617

 
2,678

 
8.0
%
General and administrative expense as a percentage of revenue
12.6
 %
 
12.9
 %
 
 

 
 

Interest expense, net
18,529

 
18,379

 
150

 
0.8
%
Warrants fair value adjustment (income) expense
(1,520
)
 
2,195

 
(3,715
)
 
 
CCLP Series A Preferred Units fair value adjustment (income) expense
146

 
(512
)
 
658

 
 
Other (income) expense, net
627

 
3,808

 
(3,181
)
 
 
Loss before taxes and discontinued operations
(5,711
)
 
(9,686
)
 
3,975

 
41.0
%
Loss before taxes and discontinued operations as a percentage of revenue
(2.0
)%
 
(3.7
)%
 
 

 
 

Provision for income taxes
2,490

 
2,446

 
44

 
 
Loss before discontinued operations
(8,201
)
 
(12,132
)
 
3,931

 
 
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
(345
)
 
(21
)
 
(324
)
 
 
Net loss
(8,546
)
 
(12,153
)
 
3,607

 
 
Loss attributable to noncontrolling interest
1,633

 
6,188

 
(4,555
)
 
 

Net income (loss) attributable to TETRA stockholders
$
(6,913
)
 
$
(5,965
)
 
$
(948
)
 
 
 
Consolidated revenues during the current year quarter increased compared to the prior year quarter primarily due to a $36.0 million increase in Compression Division revenues. The increase in Compression Division revenues was primarily driven by increased new compressor equipment sales activity. See Divisional Comparisons section below for additional discussion.

Consolidated gross profit during the current year quarter increased slightly compared to the prior year quarter primarily due to increased gross profit from our Completion Fluids & Products and Compression Divisions. This increase was largely offset, however, by the lower gross profit of our Water & Flowback Services Division resulting primarily from increased customer pricing pressures. Despite the improvement in the activity levels of certain of our businesses, domestic onshore and offshore activity levels remain flat and the impact of pricing pressures also continues to impact profitability in certain markets. Operating expenses reflect the increase in consolidated revenues, although we remain aggressive in managing operating costs.
 
Consolidated general and administrative expenses increased during the current year quarter compared to the prior year quarter primarily due to increased salary and employee expenses of $2.7 million and increased professional services fees of $0.3 million, partially offset by decreased insurance and other general expenses of $0.2 million and decreased provision for bad debt of $0.1 million. Increased general and administrative expenses were driven primarily by executive transition costs of our Corporate Division. Due to the increased consolidated revenues discussed above, general and administrative expense as a percentage of revenues decreased compared to the prior year quarter.
 
Consolidated interest expense, net, remained flat during the current year quarter compared to the prior year quarter primarily due to increased Corporate interest expense offset by Compression Division decreased interest expense. Corporate interest expense increased due to additional borrowings under the TETRA Term Credit Agreement and ABL Credit Agreement during the current year period. Compression Division interest expense decreased due to

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the conversions and redemption of CCLP Preferred Units outstanding. Interest expense during the 2019 and 2018 quarterly periods includes $0.9 million and $0.9 million, respectively, of finance cost amortization.

The Warrants are accounted for as a derivative liability in accordance with 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 increases (or decreases) 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 volatility of our earnings during the period the CCLP Preferred Units are outstanding. The final redemption of the remaining outstanding CCLP Preferred Units occurred on August 8, 2019.

Consolidated other (income) expense, net, was $0.6 million of other expense during the current year quarter compared to $3.8 million of other expense during the prior year quarter primarily due to $4.7 million of decreased expense associated with the remeasurement of the contingent purchase price consideration for the SwiftWater acquisition, offset by increased expense of $0.6 million associated with a redemption premium incurred in connection with the redemption of CCLP Preferred Units for cash.
 
Our consolidated provision for income taxes during the three month period ended June 30, 2019 is attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rate for the three month period ended June 30, 2019 of negative 43.6% was primarily the result of losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against the related net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.


Divisional Comparisons
 
Completion Fluids & Products Division
 
Three Months Ended
June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
79,767

 
$
76,556

 
$
3,211

 
4.2
%
Gross profit
19,809

 
14,396

 
5,413

 
37.6
%
Gross profit as a percentage of revenue
24.8
%
 
18.8
%
 
 

 
 

General and administrative expense
5,200

 
4,462

 
738

 
16.5
%
General and administrative expense as a percentage of revenue
6.5
%
 
5.8
%
 
 

 
 

Interest (income) expense, net
(157
)
 
(131
)
 
(26
)
 
 

Other (income) expense, net
152

 
84

 
68

 
 

Income before taxes
$
14,614

 
$
9,981

 
$
4,633

 
46.4
%
Income before taxes as a percentage of revenue
18.3
%
 
13.0
%
 
 

 
 

 
The increase in Completion Fluids & Products Division revenues during the current year quarter compared to the prior year quarter was primarily due to $2.7 million of increased services revenue from offshore completion fluids activity in the Gulf of Mexico and Eastern hemisphere compared to the prior year quarter. Additionally, product

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sales revenue increased $0.5 million, as increased offshore completion activity resulting in increased CBF product sales more than offset a decrease in manufactured product sales.

Completion Fluids & Products Division gross profit during the current year quarter increased compared to the prior year quarter primarily due to the increased revenues and profitability associated with the mix of CBF products and services. Completion Fluids & Products 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(R) completion fluid projects.
 
The Completion Fluids & Products Division reported an increase in pretax earnings during the current year quarter compared to the prior year quarter primarily due to increased gross profit discussed above. Completion Fluids & Products Division administrative cost levels increased compared to the prior year quarter, with $0.3 million of increased legal and professional fees, $0.2 million of increased salary and employee related expenses, $0.1 million of increased bad debt expense and $0.2 million of increased general expenses. The Completion Fluids & Products Division continues to review opportunities to further reduce its administrative costs. Other expense increased primarily due to increased foreign currency losses.

Water & Flowback Services Division
 
Three Months Ended
June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
73,124

 
$
83,646

 
$
(10,522
)
 
(12.6
)%
Gross profit
7,490

 
18,631

 
(11,141
)
 
 
Gross profit as a percentage of revenue
10.2
%
 
22.3
%
 
 

 
 

General and administrative expense
5,775

 
6,444

 
(669
)
 
(10.4
)%
General and administrative expense as a percentage of revenue
7.9
%
 
7.7
%
 
 

 
 

Interest (income) expense, net
(8
)
 
(1
)
 
(7
)
 
 

Other (income) expense, net
(737
)
 
3,877

 
(4,614
)
 
 

Income before taxes
$
2,460

 
$
8,311

 
$
(5,851
)
 
 
Income before taxes as a percentage of revenue
3.4
%
 
9.9
%
 
 

 
 

 
Water & Flowback Services Division revenues decreased during the current year quarter compared to the prior year quarter primarily due to increased customer pricing pressures and revenues recorded from specific high-margin Rocky Mountain and Mid-Continents customer projects during the prior year period.

The Water & Flowback Services Division reflected decreased gross profit during the current year quarter compared to the prior year quarter primarily due to the decreased revenues from the high-margin projects described above. Customer pricing continues to be challenging due to excess availability of equipment in certain markets. The Water & Flowback Services Division continues to monitor its cost structure, minimize costs, and seeks to capture additional synergies following the SwiftWater and JRGO acquisitions.
 
The Water & Flowback Services Division reported decreased pretax income during the current year quarter compared to the prior year quarter primarily due to the reduction in gross profit described above. General and administrative expense levels decreased compared to the prior year quarter due to decreased salary and employee related expenses of $0.5 million, decreased professional services fees of $0.3 million, and decreased bad debt expense of $0.1 million, partially offset by increased insurance and other general expenses of $0.2 million. Other (income) expense includes $0.4 million current period gain compared to a $4.3 million prior period charge associated with the remeasurement of the contingent purchase price consideration for SwiftWater.


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Compression Division
 
Three Months Ended
June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
135,905

 
$
99,924

 
$
35,981

 
36.0
%
Gross profit
21,235

 
14,933

 
6,302

 
42.2
%
Gross profit as a percentage of revenue
15.6
 %
 
14.9
 %
 
 

 
 

General and administrative expense
10,972

 
10,841

 
131

 
1.2
%
General and administrative expense as a percentage of revenue
8.1
 %
 
10.8
 %
 
 

 
 

Interest expense, net
12,998

 
13,634

 
(636
)
 
 

CCLP Series A Preferred fair value adjustment (income) expense
146

 
(512
)
 
658

 
 
Other (income) expense, net
602

 
(375
)
 
977

 
 

Loss before taxes
$
(3,483
)
 
$
(8,655
)
 
$
5,172

 
59.8
%
Loss before taxes as a percentage of revenue
(2.6
)%
 
(8.7
)%
 
 

 
 

    
Compression Division revenues increased during the current year quarter compared to the prior year quarter primarily due to a $26.8 million increase in product sales revenues, due to a higher number of new compressor equipment sales compared to the prior year quarter. Demand for new compressor equipment continues to be strong. In addition, current year revenues reflect a $9.2 million increase in service revenues. This increase in service revenues was primarily due to increasing demand for compression services, as reflected by increased compression fleet utilization rates, led by increased utilization of the high- and medium-horsepower fleet.

Compression Division gross profit increased during the current year quarter compared to the prior year quarter due to increased revenues discussed above. This increase was despite a $2.5 million charge for the impairment on certain low-horsepower compressor equipment and associated inventory during the current year period. Higher compression fleet utilization rates have led to increases in customer contract pricing.
 
The Compression Division recorded a decreased pretax loss during the current year quarter compared to the prior year quarter due to increased gross profit discussed above. Interest expense decreased compared to the prior year quarter, primarily due to the conversion and redemption of CCLP Preferred Units outstanding. General and administrative expense levels increased compared to the prior year quarter, due to increased legal and professional fees of $0.4 million and increased bad debt expense of $0.1 million, offset by decreased other general expenses of $0.5 million. The CCLP Preferred Units fair value adjustment resulted in a $0.1 million charge to earnings in the current year quarter compared to a $0.5 million credit to earnings in the prior year period. Other (income) expense, net, reflected increased expense primarily due to $0.6 million of redemption premium incurred in connection with the redemption of the CCLP Preferred Units for cash and increased foreign currency losses.

Corporate Overhead
 
Three Months Ended
June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Depreciation and amortization
$
172

 
$
164

 
$
8

 
(4.9
)%
General and administrative expense
14,350

 
11,871

 
2,479

 
20.9
 %
Interest (income) expense, net
5,696

 
4,877

 
819

 
 

Warrants fair value adjustment (income) expense
(1,520
)
 
2,195

 
(3,715
)
 
 
Other (income) expense, net
605

 
220

 
385

 
 

Loss before taxes
$
(19,303
)
 
$
(19,327
)
 
$
24

 
0.1
 %

Corporate Overhead pretax loss remained flat during the current year quarter compared to the prior year quarter, primarily due to increased income associated with the fair value of the outstanding Warrants liability offset by increased general and administrative and interest expenses. The fair value of the outstanding Warrants liability

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resulted in a $1.5 million credit to earnings during the current year quarter compared to a $2.2 million charge to earnings in the prior year quarter. Corporate general and administrative expense increased primarily due to increased salary, incentives, and other employee related expenses, which included $1.8 million of executive transition costs incurred during the current year quarter. These increases were partially offset by $0.2 million of decreased professional service fees. Interest expense increased resulting from increased borrowings. In addition, other expense, net, increased primarily due to increased foreign currency losses of $0.3 million.
Results of Operations

Six months ended June 30, 2019 compared with six months ended June 30, 2018.

Consolidated Comparisons
 
Six Months Ended June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
532,524

 
$
459,453

 
$
73,071

 
15.9
%
Gross profit
84,576

 
75,784

 
8,792

 
11.6
%
Gross profit as a percentage of revenue
15.9
 %
 
16.5
 %
 
 

 
 

General and administrative expense
70,572

 
64,420

 
6,152

 
9.5
%
General and administrative expense as a percentage of revenue
13.3
 %
 
14.0
 %
 
 

 
 

Interest expense, net
36,908

 
33,352

 
3,556

 
10.7
%
Warrants fair value adjustment (income) expense
(1,113
)
 
201

 
(1,314
)
 
 
CCLP Series A Preferred Units fair value adjustment (income) expense
1,309

 
846

 
463

 
 
Other (income) expense, net
(324
)
 
6,584

 
(6,908
)
 
 
Loss before taxes and discontinued operations
(22,776
)
 
(29,619
)
 
6,843

 
23.1
%
Loss before taxes and discontinued operations as a percentage of revenue
(4.3
)%
 
(6.4
)%
 
 

 
 

Provision for income taxes
4,099

 
3,570

 
529

 
 
Loss before discontinued operations
(26,875
)
 
(33,189
)
 
6,314

 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations (including 2018 loss on disposal of $31.5 million), net of taxes
(771
)
 
(41,727
)
 
40,956

 
 
Net loss
(27,646
)
 
(74,916
)
 
47,270

 
 
Loss attributable to noncontrolling interest
9,895

 
15,303

 
(5,408
)
 
 

Net loss attributable to TETRA stockholders
$
(17,751
)
 
$
(59,613
)
 
$
41,862

 
 

Consolidated revenues for the current year period increased compared to the prior year period primarily due to increased Compression Division and Completion Fluids & Products Division revenues, which increased by $54.0 million and $11.7 million, respectively. The increased revenues of the Compression Division were primarily due to increased new compressor equipment sales activity. The increase in revenues for the Completion Fluids & Products Division was primarily due to increased international product sales. Our Water & Flowback Services Division also reported increased revenues, primarily driven by the impact of a full six months of SwiftWater, which was acquired on February 28, 2018. See Divisional Comparisons section below for additional discussion.

Consolidated gross profit increased during the current year period compared to the prior year period primarily due to the increased profitability of our Compression Division and our Completion Fluids & Products Division. The increased gross profit from these divisions more than offset the lower gross profit of our Water & Flowback Services Division, which experienced increased costs and challenging customer pricing in competitive markets compared to the prior year period. Despite the improvement in activity levels of certain of our businesses, onshore and offshore U.S. Gulf of Mexico activity levels remain flat and the impact of pricing pressures continues to challenge profitability in certain markets. Operating expenses reflect the increase in consolidated revenues, although we remain aggressive in managing operating costs and minimizing increased headcount, despite the increased operations.


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Consolidated general and administrative expenses increased during the current year period compared to the prior year period primarily due to $6.6 million of increased salary related expenses and $0.2 million of increased insurance and other general expenses, partially offset by $0.3 million of decreased professional services fees, and $0.3 million of decreased consulting and other expenses. Increased general and administrative expenses were driven primarily by our Compression and Corporate Divisions. Due to the increased consolidated revenues discussed above, general and administrative expense as a percentage of revenues decreased compared to the prior year period.
 
Consolidated interest expense, net, increased in the current year period primarily due to Corporate and Compression Division interest expense. Corporate interest expense increased due to additional borrowings under the TETRA Term Credit Agreement and ABL Credit Agreement in the current period. Compression Division interest expense increased due to higher CCLP outstanding debt balances and higher interest rates compared to the prior year period. Interest expense during the current year period and the prior year period includes $1.9 million and $2.1 million, respectively, of finance cost amortization.
 
Consolidated other (income) expense, net, was $0.3 million of income during the current year period compared to $6.6 million of expense during the prior year period primarily due to $5.1 million of decreased expense associated with the remeasurement of the contingent purchase price consideration for the SwiftWater acquisition and $3.5 million of decreased expense related to the unamortized deferred financing costs charged to earnings during the prior year period as a result of the termination of the CCLP Bank Credit Facility. These decreases were offset by increased expense of $1.1 million associated with a redemption premium incurred in connection with the redemption of CCLP Preferred Units for cash and increased foreign currency losses.

Our consolidated provision for income taxes for the current year period is primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rate for the six month period ended June 30, 2019 of negative 18.0% was primarily the result of losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against the related net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

Divisional Comparisons
 
Completion Fluids & Products Division
 
Six Months Ended June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
141,348

 
$
129,660

 
$
11,688

 
9.0
%
Gross profit
30,472

 
21,082

 
9,390

 
44.5
%
Gross profit as a percentage of revenue
21.6
%
 
16.3
%
 
 

 


General and administrative expense
9,928

 
9,102

 
826

 
9.1
%
General and administrative expense as a percentage of revenue
7.0
%
 
7.0
%
 
 

 
 

Interest (income) expense, net
(337
)
 
(365
)
 
28

 
 

Other (income) expense, net
81

 
(85
)
 
166

 
 

Income before taxes
$
20,800

 
$
12,430

 
$
8,370

 
67.3
%
Income before taxes as a percentage of revenue
14.7
%
 
9.6
%
 
 

 
 

 
The increase in Completion Fluids & Products Division revenues during the current year period compared to the prior year period was primarily due to $6.8 million of increased product sales revenue primarily due to increased international CBF product sales and domestic manufactured products sales, partially offset by reduced CBF product sales revenues in the U.S. Gulf of Mexico. Additionally, service revenues increased $4.9 million, primarily due to increased international completion services activity. Offshore U.S. Gulf of Mexico activity levels remain challenged, and the impact of pricing pressures continues to hamper profitability.


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Completion Fluids & Products Division gross profit during the current year period increased significantly compared to the prior year period primarily due to the profitability associated with the increased manufactured products and international CBF sales revenues. Gross profit was negatively affected by approximately $0.7 million of costs associated with a damaged manufactured products facility, a portion of which is expected to be reimbursed from insurance proceeds in future periods. Completion Fluids & Products Division profitability in future periods will be affected by the mix of its products and services, including the timing of TETRA CS Neptune completion fluid projects.

The Completion Fluids & Products Division reported a significant increase in pretax earnings during the current year period compared to the prior year period due to the increase in gross profit discussed above. Completion Fluids & Products Division administrative cost levels increased compared to the prior year period, as $0.7 million of increased legal and professional fees and $0.4 million of increased general expenses were partially offset by $0.3 million of decreased salary and employee related expenses.

Water & Flowback Services Division
 
Six Months Ended June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
151,802

 
$
144,721

 
$
7,081

 
4.9
 %
Gross profit
16,341

 
30,035

 
(13,694
)
 
(45.6
)%
Gross profit as a percentage of revenue
10.8
%
 
20.8
%
 
 

 
 

General and administrative expense
12,571

 
11,722

 
849

 
7.2
 %
General and administrative expense as a percentage of revenue
8.3
%
 
8.1
%
 
 

 
 

Interest (income) expense, net
(4
)
 
(16
)
 
12

 
 

Other (income) expense, net
(917
)
 
3,470

 
(4,387
)
 
 

Income before taxes
$
4,691

 
$
14,859

 
$
(10,168
)
 
68.4
 %
Income before taxes as a percentage of revenue
3.1
%
 
10.3
%
 
 

 
 

 
Water & Flowback Services Division revenues increased during the current year period compared to the prior year period due to increased water management services activity. Water management and flowback services revenues increased $7.0 million during the current year period compared to the prior year period primarily resulting from the impact of a full six month of revenues from SwiftWater, which was acquired on February 28, 2018, and the impact of the December 2018 acquisition of JRGO. Product sales revenue increased by $0.1 million, due to international equipment sales activity.

The Water & Flowback Services Division reflected decreased gross profit during the current year period compared to the prior year period, despite increased revenues, due to a shift in revenue mix away from smaller, capital constrained customers towards larger operators with stronger balance sheets. The costs to demobilize from one customer to mobilize for another within the same period had a meaningful impact on profitability. In addition, we reflected decreased revenues and profit from certain high-margin projects performed during the prior year period. We also experienced high maintenance costs on our flowback service equipment following the significant activity experienced in the fourth quarter of 2018, which was our highest flowback service revenue quarter in over three years.
 
The Water & Flowback Services Division reported decreased pretax income compared to the prior year period, primarily due to the decrease in gross profit described above. General and administrative expenses increased primarily due to the $2.5 million impact from additional administrative expenses from the operations added as a result of the 2018 acquisitions. Total general and administrative increases included increased wage and benefit related expenses of $0.6 million, increased sales and marketing expenses of $0.3 million, and increased general expenses of $0.3 million, offset by decreased professional fees of $0.3 million. The Water & Flowback Services Division reported other income, net, during the current year period compared to other expense during the prior year period primarily due to $0.8 million of current period income associated with the remeasurement of the contingent purchase price consideration for SwiftWater compared to a $4.3 million expense during the prior year period.


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Compression Division
 
Six Months Ended June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
239,374

 
$
185,346

 
$
54,028

 
29.1
%
Gross profit
38,094

 
24,973

 
13,121

 
52.5
%
Gross profit as a percentage of revenue
15.9
 %
 
13.5
 %
 
 

 
 

General and administrative expense
21,635

 
19,127

 
2,508

 
13.1
%
General and administrative expense as a percentage of revenue
9.0
 %
 
10.3
 %
 
 

 
 

Interest expense, net
26,210

 
24,848

 
1,362

 
 

CCLP Series A Preferred fair value adjustment (income) expense
1,309

 
846

 
463

 
 
Other (income) expense, net
224

 
2,825

 
(2,601
)
 
 

Loss before taxes
$
(11,284
)
 
$
(22,673
)
 
$
11,389

 
50.2
%
Loss before taxes as a percentage of revenue
(4.7
)%
 
(12.2
)%
 
 

 
 

    
Compression Division revenues increased during the current year period compared to the prior year period primarily due to a $37.2 million increase in product sales revenues, due to improving demand. Demand for new compressor equipment remains strong, although the current equipment sales backlog has decreased compared to the prior year period, due to significant sales recorded in the prior year period. Changes in our new equipment sales backlog are a function of additional customer orders less completed orders that result in equipment sales revenues. In addition, current year revenues reflect a $16.8 million increase in service revenues from compression and aftermarket services operations. This increase in service revenues was primarily due to increasing demand for compression services, as reflected by increased compression fleet utilization rates. Overall utilization of the Compression Division's compression fleet has improved sequentially for the past two year period, led by increased utilization of the high- and medium-horsepower fleet.

Compression Division gross profit increased during the current year period compared to the prior year due to increased revenues discussed above. This increase was despite a $2.5 million charge for the impairment on certain low-horsepower compressor equipment and associated inventory during the current year period. The increased compression fleet utilization rates have led to increases in customer contract pricing.

The Compression Division recorded less pretax loss in the current year period compared to the prior year period primarily due to the increased gross profit discussed above. Interest expense increased compared to the prior year period due to higher CCLP outstanding debt balances and a higher interest rate on the CCLP Senior Secured Notes, a portion of the proceeds of which were used to repay the balance outstanding under the previous CCLP bank credit facility. General and administrative expense levels increased compared to the prior year period, due to $2.2 million of increased salary and employee-related expenses, including the impact of increased headcount, incentives and equity compensation, and increased professional services of $0.4 million. In addition, other expense decreased $2.6 million, as $1.1 million of expense during the current year period associated with the redemption premium incurred in connection with the redemption of the CCLP Preferred Units for cash was offset by $3.5 million of expense during the prior year period for unamortized deferred financing costs charged to earnings as a result of the termination of the previous CCLP bank credit facility. The CCLP Preferred Units fair value adjustment resulted in a $1.3 million charge to earnings during the current year period compared to a $0.8 million charge to earnings in the prior year period.


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Table of Contents

Corporate Overhead
 
Six Months Ended June 30,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Depreciation and amortization
$
340

 
$
315

 
$
25

 
(7.9
)%
General and administrative expense
26,439

 
24,469

 
1,970

 
8.1
 %
Interest expense, net
11,038

 
8,884

 
2,154

 
 

Warrants fair value adjustment (income) expense
(1,113
)
 
201

 
(1,314
)
 
 
Other (income) expense, net
286

 
370

 
(84
)
 
 

Loss before taxes
$
(36,990
)
 
$
(34,239
)
 
$
(2,751
)
 
(8.0
)%

Corporate Overhead pretax loss increased during the current year period compared to the prior year period primarily due to increased interest expense resulting from increased borrowings. Corporate general and administrative expense increased primarily due to increased salary related expense of $4.1 million, which included $1.8 million of executive transition costs. This increase was offset by $1.1 million of decreased professional fees, $0.4 million of decreased general expenses, and $0.6 million of decreased consulting fees. The fair value of the outstanding Warrants liability resulted in a $1.1 million credit to earnings compared to an $0.2 million charge to earnings during the prior year period. In addition, other expense of $0.3 million was recorded during the current year period, compared to $0.4 million during the prior year period.
Liquidity and Capital Resources
    
We believe that the capital structure steps we have taken during the past three years continue to support our ability to meet our financial obligations and fund future growth as needed, despite current uncertain operating and financial markets. As of June 30, 2019, we and CCLP are in compliance with all covenants of our respective debt agreements. Information about the terms and covenants of debt agreements can be found in our 2018 Annual Report.

Because of the level of consolidated debt, we believe it is important to 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 TETRA's debt. Our consolidated debt outstanding has a carrying value of approximately $856.5 million as of June 30, 2019. However, approximately $634.4 million of this consolidated debt balance is owed by CCLP and is serviced from the existing cash balances and cash flows of CCLP, and $343.8 million of which is secured by certain of CCLP's assets. Through our common unit ownership interest in CCLP, which was approximately 34% as of June 30, 2019, and ownership of an approximately 1.4% general partner interest, we receive our share of the distributable cash flows of CCLP through its quarterly cash distributions. Approximately $4.3 million of the $26.0 million of the cash balance reflected on our consolidated balance sheet is owned by CCLP and is not accessible by us. The following table provides condensed consolidating balance sheet information reflecting TETRA's net assets and CCLP's net assets that service and secure TETRA's and CCLP's respective capital structures.

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Table of Contents

 
June 30, 2019
Condensed Consolidating Balance Sheet
TETRA
 
CCLP
 
Eliminations
 
Consolidated
 
(In Thousands)
Cash, excluding restricted cash
$
21,683

 
$
4,296

 
$

 
$
25,979

Affiliate receivables
10,086

 

 
(10,086
)
 

Other current assets
225,552

 
141,315

 

 
366,867

Property, plant and equipment, net
212,198

 
648,237

 

 
860,435

Long-term affiliate receivables
11,142

 

 
(11,142
)
 

Other assets, including investment in CCLP
67,404

 
42,344

 
76,157

 
185,905

Total assets
$
548,065

 
$
836,192

 
$
54,929

 
$
1,439,186

 
 
 
 
 
 
 
 
Affiliate payables
$

 
$
10,086

 
$
(10,086
)
 
$

Other current liabilities
98,149

 
109,313

 

 
207,462

Long-term debt, net
222,109

 
634,373

 

 
856,482

CCLP Series A Preferred Units

 
9,000

 
(1,106
)
 
7,894

Warrants liability
960

 

 

 
960

Long-term affiliate payable

 
11,142

 
(11,142
)
 

Other non-current liabilities
64,714

 
6,983

 

 
71,697

Total equity
162,133

 
55,295

 
77,263

 
294,691

Total liabilities and equity
$
548,065

 
$
836,192

 
$
54,929

 
$
1,439,186


As of June 30, 2019, subject to compliance with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, we had $40.6 million of availability under the ABL Credit Agreement. As of June 30, 2019, and subject to compliance with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings under the CCLP Credit Agreement, CCLP had availability of $22.2 million.
    
Our consolidated sources (uses) of cash during the six months ended June 30, 2019 and 2018 are as follows:
 
Six months ended June 30,
 
2019
 
2018
 
(In Thousands)
Operating activities
$
38,377

 
$
(12,127
)
Investing activities
(71,254
)
 
(106,347
)
Financing activities
18,715

 
165,494


Operating Activities
 
Consolidated cash flows provided by operating activities increased by $50.5 million. CCLP generated $40.3 million of our consolidated cash flows provided by operating activities during the six months ended June 30, 2019 compared to a utilization of $4.3 million during the prior year period. Operating cash flows increased due to improved operating profitability and due to minimizing the use of cash for working capital changes, particularly related to the management of inventory levels and the timing of payments of accounts payable. We have taken steps to aggressively manage working capital, including increased accounts receivable collection efforts. We continue to monitor customer credit risk in the current environment and focus on serving larger capitalized oil and gas operators and national oil companies.

Investing Activities
 
Total cash capital expenditures during the first six months of 2019 were $60.6 million. Our Completion Fluids & Products Division spent $3.6 million on capital expenditures during the first six months of 2019, the majority of which related to plant and facility additions. Our Water & Flowback Services Division spent $16.8 million on capital expenditures, primarily to add to its water management equipment fleet. Our Compression Division spent $40.1 million, primarily for growth capital expenditure projects to increase its compression fleet.


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Table of Contents

Generally, a majority of our planned capital expenditures has been related to identified opportunities to grow and expand certain of our existing businesses. However, certain of these planned expenditures have been, and may continue to be, postponed or canceled as we are reviewing all capital expenditure plans carefully in an effort to conserve cash. We currently have no long-term capital expenditure commitments. The deferral of capital projects could affect our ability to expand our operations in the future. Excluding our Compression Division, we expect to spend approximately $30.0 million to $35.0 million during 2019 on capital expenditures, primarily to expand our Water & Flowback Services Division equipment fleet. Our Compression Division expects to spend approximately $80.0 million to $85.0 million on capital expenditures during 2019 primarily to expand its compression fleet in response to increased demand for compression services. If the forecasted demand for our products and services during the remainder of 2019 increases or decreases, the amount of planned expenditures on growth and expansion may be adjusted.
 
Financing Activities 
 
During the first six months of 2019, the total amount of consolidated cash provided by financing activities was $18.7 million, consisting primarily of borrowings under our ABL Credit Agreement and our Term Credit Agreement. We and CCLP may supplement our existing cash balances and cash flow from operating activities with short-term borrowings, long-term borrowings, leases, issuances of equity and debt securities, and other sources of capital.

TETRA Long-Term Debt

Asset-Based Credit Agreement. The ABL Credit Agreement provides for a senior secured revolving credit facility of up to $100 million, subject to a borrowing base to be determined by reference to the value of TETRA’s and any other borrowers’ inventory and accounts receivable, and contains within the facility a letter of credit sublimit of $20.0 million and a swingline loan sublimit of $10.0 million. The ABL Credit Agreement is scheduled to mature on September 10, 2023. As of August 7, 2019, we have $31.0 million outstanding under our ABL Credit Agreement and $6.9 million letters of credit.
    
Term Credit Agreement.    The Term Credit Agreement provides for an initial loan in the amount of $200 million and the availability of additional loans, subject to the terms of the Term Credit Agreement, up to an aggregate amount of $75 million. The Term Credit Agreement is scheduled to mature on September 10, 2025. As of August 7, 2019, $220.5 million in aggregate principal amount of our Term Credit Agreement is outstanding.
    
CCLP Financing Activities

CCLP Preferred Units. Beginning in January 2019, CCLP elected to redeem the remaining CCLP Preferred Units for cash, resulting in 783,046 Preferred Units being redeemed during the six months ended June 30, 2019 for $22.5 million, which includes approximately $1.1 million of redemption premium that was paid. Including the impact of paid in kind distributions of CCLP Preferred Units and conversions of CCLP Preferred Units into CCLP common units, and the redemption of CCLP Preferred Units for cash, the total number of CCLP Preferred Units outstanding as of June 30, 2019 was 751,736, of which we held 94,409. The final redemption of the remaining outstanding CCLP Preferred Units, along with a final cash payment made in lieu of paid in kind Preferred Units for the quarter ended June 30, 2019, occurred on August 8, 2019.

CCLP Bank Credit Facilities. The CCLP Credit Agreement, as amended, includes a maximum credit commitment of $50.0 million available for loans, letters of credit (with a sublimit of $25.0 million) and swingline loans (with a sublimit of $5.0 million), subject to a borrowing base to be determined by reference to the value of CCLP’s and any other borrowers’ accounts receivable. Such maximum credit commitment may be increased by $25.0 million in accordance with the terms and conditions of the CCLP Credit Agreement. As of June 30, 2019, CCLP had no outstanding balance and had $4.5 million in letters of credit against the CCLP Credit Agreement. The CCLP Credit Agreement is scheduled to mature on June 29, 2023. As of August 7, 2019, CCLP has no balance outstanding under the CCLP Credit Agreement and $3.7 million in letters of credit, resulting in $31.6 million of availability, reflecting recent increases to the borrowing base.

CCLP Senior Secured Notes. As of August 7, 2019, $350.0 million in aggregate principal was outstanding. The CCLP Senior Secured Notes accrue interest at a rate of 7.50% per annum and are scheduled to mature on April 1, 2025.


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Table of Contents

CCLP Senior Notes. As of August 7, 2019, $295.9 million in aggregate principal amount was outstanding. The CCLP Senior Notes accrue interest at a rate of 7.25% per annum and are scheduled to mature on August 15, 2022.
Other Sources and Uses

In addition to the various aforementioned credit facilities and senior notes, we and CCLP fund our respective short-term liquidity requirements from cash generated by our respective operations, leases, and from short-term vendor financing. Should additional capital be required, we believe that we have the ability to raise such capital through the issuance of additional debt or equity securities. However, instability or volatility in the capital markets at the times we need to access capital may affect the cost of capital and the ability to raise capital for an indeterminable length of time. If it is necessary to issue additional equity to fund our capital needs, additional dilution to our common stockholders will occur.

On April 11, 2019, we filed a universal shelf Registration Statement on Form S-3 with the SEC. On May 1, 2019, the Registration Statement on Form S-3 was declared effective by the SEC. Pursuant to this registration statement, we have the ability to sell debt or equity securities in one or more public offerings up to an aggregate public offering price of $464.1 million, inclusive of $64.1 million of our common stock issuable upon conversion of our currently outstanding warrants. This shelf registration statement currently provides us additional flexibility with regard to potential financings that we may undertake when market conditions permit or our financial condition may require.

The Second Amended and Restated Partnership Agreement of CCLP requires that within 45 days after the end of each quarter, CCLP distribute all of its available cash, as defined in the Second Amended and Restated Partnership Agreement, to its common unitholders of record on the applicable record date. During the six months ended June 30, 2019, CCLP distributed $1.0 million in cash, including $0.6 million to its public unitholders, reflecting the reduction in quarterly distributions announced previously by CCLP in December 2018. There can be no assurance that quarterly distributions from CCLP will increase from this amount per unit going forward.
 
Off Balance Sheet Arrangements
 
As of June 30, 2019, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations. 

Recently Adopted Accounting Guidance

We adopted the new lease accounting standard on January 1, 2019. The new lease standard had a material impact to our consolidated financial statements, resulting from the inclusion of operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheet. Refer to Part I, Item 1. Financial Statements- Note A - "Organization, Basis of Presentation and Significant Accounting Policies" and Note K - “Leases” for further discussion.
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.

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Contingencies of Discontinued Operations

In early 2018, we closed the Maritech Asset Purchase Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of Maritech's remaining oil and gas properties and related assets. Also in early 2018, we closed the Maritech Membership Interest Purchase Agreement with Orinoco that provided for the purchase by Orinoco of all of the outstanding membership interests in Maritech. As a result of these transactions, we have effectively exited the business of our Maritech segment and Orinoco assumed all of Maritech's abandonment and decommissioning obligations. To the extent that Maritech or Orinoco fails to perform the abandonment and decommissioning work required, we, as the former parent company of Maritech, may be required to perform the abandonment and decommissioning work. Pursuant to a Bonding Agreement entered into as part of these transactions (the "Bonding Agreement"), Orinoco provided non-revocable performance bonds in an aggregate amount of $46.8 million to cover the performance by Orinoco and Maritech of the asset retirement obligations of Maritech and agreed to replace, within 90 days following the closing, the initial bonds delivered at closing with other non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million. Orinoco further agreed to replace, within 180 days following the closing, such replacement performance bonds with a maximum of three performance bonds in the aggregate sum of $47.0 million, meeting certain requirements. In the event Orinoco does not provide either tranche of replacement bonds, Orinoco is required to make certain cash escrow payments to us. The payment obligations of Orinoco under the Bonding Agreement were guaranteed by Thomas M. Clarke and Ana M. Clarke pursuant to a separate guaranty agreement (the “Clarke Bonding Guaranty Agreement”). Orinoco has not delivered such replacement bonds and it has not made any of the agreed upon cash escrow payments and we filed a lawsuit against Orinoco and the Clarkes to enforce the terms of the Bonding Agreement and the Clarke Bonding Guaranty Agreement. Each party filed a motion for summary judgment in the lawsuit asserting its respective claims. A summary judgment was granted in favor of Orinoco and the Clarkes which has the effect of dismissing our present claims for the replacement bonds and the escrow payments provided for in the Bonding Agreement. We plan to seek reconsideration of the decision by the court and/or file an appeal of the summary judgment. The non-revocable performance bonds delivered at the closing remain in effect.

Part of the consideration we received in the March 1, 2018 disposition of our Offshore Division was a promissory note in the original principal amount of $7.5 million (the “Epic Promissory Note”) payable by Epic Companies, LLC (“Epic Companies,” formerly known as Epic Offshore Specialty, LLC) to us in full, together with interest at a rate of 1.52% per annum, on December 31, 2019, along with a personal guaranty agreement from Thomas M. Clarke and Ana M. Clarke guaranteeing the payment obligations of Epic Companies pursuant to the Epic Promissory Note (the “Clarke Promissory Note Guaranty Agreement”). Additionally, pursuant to the Equity Interest Purchase Agreement (the “Offshore Services Purchase Agreement”) and other agreements with Epic Companies, certain other amounts relating to the Offshore Division totaling approximately $1.4 million as of June 30, 2019 are payable to us.

In August 2019, certain creditors of Epic Companies filed an involuntary petition against Epic Companies under Chapter 7 of the bankruptcy code in the Eastern District of Louisiana. Although the Epic Promissory Note is not currently due and is guaranteed by the Clarke Promissory Note Guaranty Agreement, we continue to monitor this matter and there can be no assurance that future developments, including those involving the financial condition of Epic Companies or relating to the involuntary bankruptcy proceeding, may or may not adversely impact our ability to timely collect amounts owed to us by Epic Companies pursuant to the Offshore Services Purchase Agreement and the Epic Promissory Note.


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Contractual Obligations

Our contractual obligations and commitments principally include obligations associated with our outstanding
indebtedness and obligations under operating leases. The table below summarizes our consolidated contractual cash obligations as of June 30, 2019:
 
 
Payments Due
 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
 
(In Thousands)
Long-term debt - TETRA
 
$
240,500

 
$

 
$

 
$

 
$

 
$
20,000

 
$
220,500

Long-term debt - CCLP
 
645,930

 

 

 

 
295,930

 

 
350,000

Interest on debt - TETRA
 
122,403

 
14,331

 
19,108

 
19,108

 
19,108

 
18,883

 
31,865

Interest on debt - CCLP
 
230,320

 
35,672

 
47,563

 
47,563

 
40,459

 
26,250

 
32,813

Purchase obligations
 
99,250

 
4,750

 
9,500

 
9,500

 
9,500

 
9,500

 
56,500

Asset retirement obligations(1)
 
12,468

 

 

 

 

 

 
12,468

Operating leases
 
82,988

 
8,948

 
15,996

 
11,702

 
9,107

 
7,844

 
29,391

Total contractual cash obligations(2)
 
$
1,433,859

 
$
63,701

 
$
92,167

 
$
87,873

 
$
374,104

 
$
82,477

 
$
733,537

(1) 
We have estimated the timing of these payments for asset retirement obligation liabilities based upon our plans. The amounts shown represent the discounted obligation as of June 30, 2019.
(2) 
Amounts exclude other long-term liabilities reflected in our Consolidated Balance Sheet that do not have known payment streams. These excluded amounts include approximately $0.8 million of liabilities under FASB Codification Topic 740, “Accounting for Uncertainty in Income Taxes,” as we are unable to reasonably estimate the ultimate amount or timing of settlements. These excluded amounts also include the approximately $7.9 million July 8, 2019 and August 8, 2019 final payments for liabilities related to the CCLP Preferred Units. Refer to Part I, Item 1. Financial Statements- Note F – "CCLP Series A Convertible Preferred Units," for further discussion.

For additional information about our contractual obligations as of December 31, 2018, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report on Form 10-K.
Cautionary Statement for Purposes of Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates", "assumes", “believes,” "budgets", “could,” “estimates,” "expects", "forecasts", "goal", "intends", "may", "might", "plans", "predicts", "projects", "schedules", "seeks", "should", "targets", "will", and "would".

Such forward-looking statements reflect our current views with respect to future events and financial performance and are based on assumptions that we believe to be reasonable, but such forward-looking statements are subject to numerous risks, and uncertainties, including, but not limited to:
economic and operating conditions that are outside of our control, including the supply, demand, and prices of oil and natural gas;
the availability of adequate sources of capital to us;
the levels of competition we encounter;
the activity levels of our customers;
our operational performance;
the availability of raw materials and labor at reasonable prices;
risks related to acquisitions and our growth strategy;
restrictions under our debt agreements and the consequences of any failure to comply with debt covenants;
the effect and results of litigation, regulatory matters, settlements, audits, assessments, and contingencies;
risks related to our foreign operations;

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information technology risks including the risk from cyberattack, and
other risks and uncertainties under “Item 1A. Risk Factors” in our 2018 Annual Report, and as included in our other filings with the SEC, which are available free of charge on the SEC website at www.sec.gov.

The risks and uncertainties referred to above are generally beyond our ability to control and we cannot predict all the risks and uncertainties that could cause our actual results to differ from those indicated by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may vary from those indicated by the forward-looking statements, and such variances may be material.

All subsequent written and oral forward-looking statements made by or attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements we may make, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss arising from adverse changes in market rates and prices. For a discussion of our indirect exposure to fluctuating commodity prices, please read “Risk Factors — Certain Business Risks” in our 2018 Annual Report. We depend on U.S. and international demand for and production of oil and natural gas, and a reduction in this demand or production could adversely affect the demand or the prices we charge for our services, which could cause our revenues and operating cash flows to decrease in the future. We do not currently hedge, and do not intend to hedge, our indirect exposure to fluctuating commodity prices.

Interest Rate Risk

As of June 30, 2019, due to borrowings made during the period then ended, we had balances outstanding under the Term Credit Agreement and ABL Credit Agreement, and such borrowings bear interest at variable rates of interest.
 
 
Expected Maturity Date
 
 
 
Fair Market
Value
($ amounts in thousands)
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. dollar variable rate - TETRA
 
$

 
$

 
$

 
$

 
$
20,000

 
$
220,500

 
$
240,500

 
$
240,500

Weighted average interest rate (variable)
 
%
 
%
 
%
 
%
 
4.50
%
 
8.54
%
 
 
 
 
U.S. dollar fixed rate - CCLP
 
$

 
$

 
$

 
$
295,930

 
$—
 
$
350,000

 
$
645,930

 
$
611,900

Weighted average interest rate (fixed)
 
%
 
%
 
%
 
7.25
%
 
%
 
7.50
%
 
 
 
 


Exchange Rate Risk

As of June 30, 2019, there have been no material changes pertaining to our exchange rate exposures as disclosed in our 2018 Annual Report.
Item 4. Controls and Procedures.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019, the end of the period covered by this quarterly report.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
 
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 amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.
 
Environmental Proceedings
 
One of our subsidiaries, TETRA Micronutrients, Inc. ("TMI"), previously owned and operated a production facility located in Fairbury, Nebraska. TMI is subject to an Administrative Order on Consent issued to American Microtrace, Inc. (n/k/a/ TETRA Micronutrients, Inc.) in the proceeding styled In the Matter of American Microtrace Corporation, EPA I.D. No. NED00610550, Respondent, Docket No. VII-98-H-0016, dated September 25, 1998 (the "Consent Order"), with regard to the Fairbury facility. TMI is liable for ongoing environmental monitoring at the Fairbury facility under the Consent Order; however, the current owner of the Fairbury facility is responsible for costs associated with the closure of that facility.  
Item 1A. Risk Factors.

There have been no material changes in the information pertaining to our Risk Factors as disclosed in our 2018 Annual Report.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
(a) None.
 
(b) None.
 
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Period
 
Total Number
of Shares Purchased
 
Average
Price
Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Publicly Announced Plans or Programs(1)
April 1 – April 30, 2019
 
906

 
$
2.40


 
$
14,327,000

May 1 – May 31, 2019
 
4,855

(2)
1.99


 
14,327,000

June 1 – June 30, 2019
 

 


 
14,327,000

Total
 
5,761

 
 


 
$
14,327,000

(1)
In January 2004, our Board of Directors authorized the repurchase of up to $20 million of our common stock. Purchases will be made from time to time in open market transactions at prevailing market prices. The repurchase program may continue until the authorized limit is reached, at which time the Board of Directors may review the option of increasing the authorized limit.
(2)
Shares we received in connection with the exercise of certain employee stock options or the vesting of certain shares of employee restricted stock. These shares were not acquired pursuant to the stock repurchase program.
Item 3. Defaults Upon Senior Securities.
 
None.
Item 4. Mine Safety Disclosures.
 
None.
Item 5. Other Information.
 
None.

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Item 6. Exhibits.
 
Exhibits:
10.1
31.1*
31.2*
32.1**
32.2**
101.INS+
XBRL Instance Document.
101.SCH+
XBRL Taxonomy Extension Schema Document.
101.CAL+
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB+
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE+
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF+
XBRL Taxonomy Extension Definition Linkbase Document.
*
Filed with this report.
**
Furnished with this report.
+
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and six month periods ended June 30, 2019 and 2018; (ii) Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 2019 and 2018; (iii) Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018; (iv) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2019 and 2018; and (v) Notes to Consolidated Financial Statements for the six months ended June 30, 2019.
 


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 

 
TETRA Technologies, Inc.
 
 
 
 
 
Date:
August 8, 2019
By:
/s/Brady M. Murphy
 
 
 
Brady M. Murphy
 
 
 
President
 
 
 
Chief Executive Officer
 
 
 
 
Date:
August 8, 2019
By:
/s/Elijio V. Serrano
 
 
 
Elijio V. Serrano
 
 
 
Senior Vice President
 
 
 
Chief Financial Officer
 
 
 
 
Date:
August 8, 2019
By:
/s/Richard D. O'Brien
 
 
 
Richard D. O'Brien
 
 
 
Vice President – Finance and Global Controller
 
 
 
Principal Accounting Officer

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