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TETRA TECHNOLOGIES INC - Quarter Report: 2019 March (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 MARCH 31, 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)
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
TTI
New York Stock Exchange

 As of May 8, 2019, there were 125,609,276 shares outstanding of the Company’s Common Stock, $0.01 par value per share.




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
March 31,
 
2019
 
2018
Revenues:
 
 
 
Product sales
$
91,781

 
$
75,953

Services
151,947

 
123,428

Total revenues
243,728

 
199,381

Cost of revenues:
 
 
 
Cost of product sales
74,588

 
60,214

Cost of services
102,156

 
84,743

Depreciation, amortization, and accretion
30,628

 
26,441

Impairments and other charges
146

 

Total cost of revenues
207,518

 
171,398

Gross profit
36,210

 
27,983

General and administrative expense
34,277

 
30,803

Interest expense, net
18,379

 
14,973

Warrants fair value adjustment (income) expense
407

 
(1,994
)
CCLP Series A Preferred Units fair value adjustment (income) expense
1,163

 
1,358

Other (income) expense, net
(951
)
 
2,776

Loss before taxes and discontinued operations
(17,065
)
 
(19,933
)
Provision for income taxes
1,609

 
1,124

Loss before discontinued operations
(18,674
)
 
(21,057
)
Discontinued operations:
 
 
 
Loss from discontinued operations (including 2018 loss on disposal of $31.5 million), net of taxes
(426
)
 
(41,706
)
Net loss
(19,100
)
 
(62,763
)
Less: loss attributable to noncontrolling interest
8,262

 
9,115

Net loss attributable to TETRA stockholders
$
(10,838
)
 
$
(53,648
)
Basic net loss per common share:
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.09
)
 
$
(0.10
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
(0.36
)
Net loss attributable to TETRA stockholders
$
(0.09
)
 
$
(0.46
)
Average shares outstanding
125,681

 
117,598

Diluted net loss per common share:
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.09
)
 
$
(0.10
)
Loss from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
(0.36
)
Net loss attributable to TETRA stockholders
$
(0.09
)
 
$
(0.46
)
Average diluted shares outstanding
125,681

 
117,598

See Notes to Consolidated Financial Statements

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Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Net loss
$
(19,100
)
 
$
(62,763
)
Foreign currency translation adjustment, net of taxes of $0 in 2019 and 2018
(406
)
 
1,283

Comprehensive loss
(19,506
)
 
(61,480
)
Less: Comprehensive loss attributable to noncontrolling interest
8,086

 
9,500

Comprehensive loss attributable to TETRA stockholders
$
(11,420
)
 
$
(51,980
)
 

See Notes to Consolidated Financial Statements

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Table of Contents

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

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
36,868

 
$
40,038

Restricted cash
65

 
64

Trade accounts receivable, net of allowances of $1,651 in 2019 and $2,583 in 2018
183,646

 
187,592

Inventories
156,628

 
143,571

Assets of discontinued operations
1,422

 
1,354

Notes receivable
7,586

 
7,544

Prepaid expenses and other current assets
24,078

 
20,528

Total current assets
410,293

 
400,691

Property, plant, and equipment:
 

 
 

Land and building
78,183

 
78,746

Machinery and equipment
1,286,832

 
1,265,732

Automobiles and trucks
35,519

 
35,568

Chemical plants
189,522

 
188,641

Construction in progress
49,540

 
44,419

Total property, plant, and equipment
1,639,596

 
1,613,106

Less accumulated depreciation
(778,647
)
 
(759,175
)
Net property, plant, and equipment
860,949

 
853,931

Other assets:
 

 
 

Goodwill
25,859

 
25,859

Patents, trademarks and other intangible assets, net of accumulated amortization of $82,634 in 2019 and $80,401 in 2018
80,293

 
82,184

Deferred tax assets, net
13

 
13

Operating lease right-of-use assets
60,149

 

Other assets
21,969

 
22,849

Total other assets
188,283

 
130,905

Total assets
$
1,459,525

 
$
1,385,527

 

See Notes to Consolidated Financial Statements

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Table of Contents

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

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
88,223

 
$
80,279

Unearned income
50,379

 
26,695

Accrued liabilities and other
77,107

 
89,232

Liabilities of discontinued operations
3,529

 
4,145

Total current liabilities
219,238

 
200,351

Long-term debt, net
845,843

 
815,560

Deferred income taxes
3,456

 
3,242

Asset retirement obligations
12,331

 
12,202

CCLP Series A Preferred Units
18,278

 
27,019

Warrants liability
2,480

 
2,073

Operating lease liabilities
49,632

 

Other liabilities
8,157

 
12,331

Total long-term liabilities
940,177

 
872,427

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 250,000,000 shares authorized at March 31, 2019 and December 31, 2018; 128,412,688 shares issued at March 31, 2019 and 128,455,134 shares issued at December 31, 2018
1,284

 
1,285

Additional paid-in capital
462,241

 
460,680

Treasury stock, at cost; 2,785,981 shares held at March 31, 2019, and 2,717,569 shares held at December 31, 2018
(19,105
)
 
(18,950
)
Accumulated other comprehensive income (loss)
(52,245
)
 
(51,663
)
Retained deficit
(225,947
)
 
(217,952
)
Total TETRA stockholders' equity
166,228

 
173,400

Noncontrolling interests
133,882

 
139,349

Total equity
300,110

 
312,749

Total liabilities and equity
$
1,459,525

 
$
1,385,527

 

See Notes to Consolidated Financial Statements

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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


 
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




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Table of Contents

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2019
 
2018
Operating activities:
 

 
 

Net loss
$
(19,100
)
 
$
(62,763
)
Reconciliation of net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization, and accretion
30,627

 
28,509

Impairment and other charges
146

 

Benefit for deferred income taxes
229

 
(61
)
Equity-based compensation expense
2,165

 
876

Provision for doubtful accounts
627

 
453

Non-cash loss on disposition of business

 
32,369

Amortization of deferred financing costs
953

 
1,224

CCLP Series A Preferred redemption premium
397

 

CCLP Series A Preferred accrued paid in kind distributions
599

 
1,523

CCLP Series A Preferred fair value adjustment
1,163

 
1,358

Warrants fair value adjustment
407

 
(1,994
)
Contingent consideration liability fair value adjustment
(400
)
 

Expense for unamortized finance costs and other non-cash charges and credits
339

 
3,668

Gain on sale of assets
(201
)
 
90

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
2,353

 
6,584

Inventories
(15,809
)
 
(13,467
)
Prepaid expenses and other current assets
(3,222
)
 
(4,311
)
Trade accounts payable and accrued expenses
6,638

 
(24,586
)
Other
(499
)
 
(733
)
Net cash provided by (used in) operating activities
7,412

 
(31,261
)
Investing activities:
 

 
 

Purchases of property, plant, and equipment, net
(32,409
)
 
(28,892
)
Acquisition of businesses, net of cash acquired

 
(42,002
)
Proceeds from disposal of business

 
3,121

Proceeds on sale of property, plant, and equipment
364

 
76

Other investing activities
319

 
146

Net cash used in investing activities
(31,726
)
 
(67,551
)
Financing activities:
 

 
 

Proceeds from long-term debt
66,000

 
474,550

Principal payments on long-term debt
(35,451
)
 
(278,150
)
CCLP distributions
(307
)
 
(4,358
)
Redemptions of CCLP Series A Preferred
(8,346
)
 

Tax remittances on equity based compensation
(429
)
 
(293
)
Debt issuance costs
(155
)
 
(6,139
)
Net cash provided by financing activities
21,312

 
185,610

Effect of exchange rate changes on cash
(167
)
 
(96
)
Increase (decrease) in cash and cash equivalents
(3,169
)
 
86,702

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
$
36,933

 
$
113,091

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 

 
 
Interest paid
$
15,544

 
$
17,710

Income taxes paid
1,644

 
1,331

See Notes to Consolidated Financial Statements

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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 March 31, 2019 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2019.

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

Significant Accounting Policies

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

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

Leases

As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election described below, we initially recognize a lease liability and related right-of-use asset on the commencement date.

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The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.    

Long-term operating leases are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of March 31, 2019. Long-term finance leases are included in property, plant and equipment, accrued liabilities and other, and other liabilities in our consolidated balance sheet as of March 31, 2019. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term, if it is reasonably certain that we would exercise the option.

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

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

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

Foreign Currency Translation
 
The cumulative translation effects of translating the applicable accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of equity. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $1.2 million during the three months ended March 31, 2019 and $0.9 million during the three months ended March 31, 2018, respectively.

New Accounting Pronouncements

Standards adopted in 2019

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize right-of-use lease assets and lease liabilities in the balance sheet related to the right to use the underlying asset for the lease term. In addition, through improved disclosure requirements, ASC 842 will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard effective January 1, 2019. The standard had a material impact on our consolidated balance sheet, specifically, the reporting of our operating leases. The impact in the reporting of our finance leases was insignificant.

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

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leaseback transaction on our corporate headquarters facility that was accounted for as an operating lease. Refer to Note K - “Leases” for further information on our leases.    

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

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

Standards not yet adopted

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

Components of inventories as of March 31, 2019 and December 31, 2018 are as follows: 
 
March 31, 2019
 
December 31, 2018
 
(In Thousands)
Finished goods
$
72,831

 
$
69,762

Raw materials
3,279

 
3,503

Parts and supplies
44,915

 
47,386

Work in progress
35,603

 
22,920

Total inventories
$
156,628

 
$
143,571


Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. Work in progress inventory consists primarily of new compressor packages located in the CCLP fabrication facility in Midland, Texas.


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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
March 31,
 
2019
 
2018
 
(In Thousands)
Number of weighted average common shares outstanding
125,681

 
117,598

Assumed exercise of equity awards and warrants

 

Average diluted shares outstanding
125,681

 
117,598


For the three month periods ended March 31, 2019 and March 31, 2018, the average diluted shares outstanding excludes the impact of all outstanding equity awards and warrants, as the inclusion of these shares would have been anti-dilutive due to the net losses recorded during the periods. In addition, for the three month periods ended March 31, 2019 and March 31, 2018, the calculation of diluted earnings per common share excludes the impact of the CCLP Preferred Units (as defined in Note F), as the inclusion of the impact from conversion of the CCLP Preferred Units into CCLP common units would have been anti-dilutive.
NOTE D – DISCONTINUED OPERATIONS

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

Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$
4,477

 
$
186

 
$
4,663

Cost of revenues
22

 

 
22

 
11,123

 
238

 
11,361

Depreciation, amortization, and accretion

 

 

 
1,856

 
213

 
2,069

General and administrative expense
404

 

 
404

 
1,253

 
186

 
1,439

Other (income) expense, net

 

 

 
39

 

 
39

Pretax loss from discontinued operations
(426
)
 

 
(426
)
 
(9,794
)
 
(451
)
 
(10,245
)
Pretax loss on disposal of discontinued operations
 
 
 
 

 

 

 
(33,788
)
Total pretax loss from discontinued operations
 
 
 
 
(426
)
 
 
 
 
 
(44,033
)
Income tax benefit
 
 
 
 

 
 
 
 
 
(2,327
)
Total loss from discontinued operations
 
 
 
 
$
(426
)
 
 
 
 
 
$
(41,706
)


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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)
 
March 31, 2019
 
December 31, 2018
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Carrying amounts of major classes of assets included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade receivables
$
81

 
$
1,340

 
$
1,421

 
$

 
$
1,340

 
$
1,340

Other current assets
1

 

 
1

 
14

 

 
14

Assets of discontinued operations
$
82

 
$
1,340

 
$
1,422

 
$
14

 
$
1,340

 
$
1,354

 
 
 
 
 
 
 
 
 
 
 
 
Carrying amounts of major classes of liabilities included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade payables
$
616

 
$

 
$
616

 
$
740

 
$

 
$
740

Accrued liabilities
838

 
2,075

 
2,913

 
1,330

 
2,075

 
3,405

Liabilities of discontinued operations
$
1,454

 
$
2,075

 
$
3,529

 
$
2,070

 
$
2,075

 
$
4,145

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

Consolidated long-term debt as of March 31, 2019 and December 31, 2018, consists of the following:
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
(In Thousands)
TETRA
 
Scheduled Maturity
 
 
 
Asset-based credit agreement (presented net of unamortized deferred financing costs of $1.6 million as of March 31, 2019)
 
September 10, 2023
$
29,131

 
$

Term credit agreement (presented net of the unamortized discount of $7 million as of March 31, 2019 and $7.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $10 million as of March 31, 2019 and $10.2 million as of December 31, 2018)
 
September 10, 2025
183,020

 
182,547

TETRA total debt
 
 
212,151

 
182,547

Less current portion
 
 

 

TETRA total long-term debt
 
 
$
212,151

 
$
182,547

 
 
 
 
 
 
CCLP
 
 
 
 
 
CCLP asset-based credit agreement
 
June 29, 2023

 

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $2.1 million as of March 31, 2019 and $2.2 million as of December 31, 2018 and net of unamortized deferred financing costs of $3.6 million as of March 31, 2019 and $3.9 million as of December 31, 2018)
 
August 15, 2022
290,204

 
289,797

CCLP 7.50% Senior Secured Notes (presented net of unamortized deferred financing costs of $6.5 million as of March 31, 2019 and $6.8 million as of December 31, 2018)
 
April 1, 2025
343,488

 
343,216

CCLP total debt
 
 
633,692

 
633,013

Less current portion
 
 

 

Consolidated total long-term debt
 
 
$
845,843

 
$
815,560


As of March 31, 2019, TETRA had a $30.7 million outstanding balance and $9.0 million in letters of credit against its asset-based credit agreement ("ABL Credit Agreement"). As of March 31, 2019, subject to compliance

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with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, TETRA had an availability of $27.3 million under this agreement. There was no balance outstanding under the CCLP asset-based credit agreement ("CCLP Credit Agreement") as of March 31, 2019. As of March 31, 2019, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the CCLP Credit Agreement, CCLP had availability of $18.4 million.

TETRA and CCLP credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. TETRA and CCLP are both in compliance with all covenants of their respective credit and senior note agreements as of March 31, 2019.
NOTE F – CCLP SERIES A CONVERTIBLE PREFERRED UNITS

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

Unless otherwise redeemed for cash, a ratable portion of the CCLP Preferred Units has been, and will continue to be, converted into CCLP common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Based on the number of CCLP Preferred Units outstanding as of March 31, 2019, the maximum aggregate number of CCLP common units that could be required to be issued pursuant to the conversion provisions of the CCLP Preferred Units is approximately 10.2 million CCLP common units; however, CCLP may, at its option, pay cash, or a combination of cash and common units, to the holders of the CCLP Preferred Units instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Second Amended and Restated CCLP Partnership Agreement and the CCLP Credit Agreement. Beginning with the January 2019 Conversion Date, CCLP has elected to redeem the remaining CCLP Preferred Units for cash, resulting in 783,046 CCLP Preferred Units being redeemed during the three months ended March 31, 2019 for $8.3 million, which includes approximately $0.4 million of redemption premium that was paid and charged to other (income) expense, net in the accompanying consolidated statements of operations. The total number of CCLP Preferred Units outstanding as of March 31, 2019 was 1,779,417, of which we held 223,474.

Based on the conversion provisions of the CCLP Preferred Units, calculated as of March 31, 2019, using the trading prices of the common units over the prior month, along with other factors, and as otherwise impacted by the existence of certain conditions related to the CCLP common units (the "Conversion Price"), the theoretical number of CCLP common units that would be issued if all of the outstanding CCLP Preferred Units were converted on March 31, 2019 on the same basis as the monthly conversions would be approximately 7.4 million CCLP common units, with an aggregate market value of $21.0 million. If converted to CCLP common units, a $1 decrease in the Conversion Price would result in the issuance of 2.8 million additional CCLP common units pursuant to these conversion provisions.
NOTE G – FAIR VALUE MEASUREMENTS
 
Financial Instruments

CCLP Preferred Units

The CCLP Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (a Level 3 fair value measurement). These unobservable items include (i) the volatility of the trading price of CCLP's common units compared to a volatility analysis of equity prices of CCLP's comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis. During the three month periods ended March 31, 2019 and March 31, 2018, the changes in the fair value of the CCLP Preferred Units resulted in $1.2 million and $1.4 million being charged to earnings, respectively, in the consolidated statements of operations.


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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). During the three month periods ended March 31, 2019 and March 31, 2018, the changes in the fair value of the Warrants liability resulted in $0.4 million being charged to earnings and $2.0 million being credited to earnings, respectively, in the consolidated statement of operations.

Contingent Consideration

The fair value of the contingent consideration associated with the February 2018 acquisition of SwiftWater Energy Services, LLC ("SwiftWater") is based on a probability simulation utilizing forecasted revenues and EBITDA of the water management business of SwiftWater and all of our pre-existing operations in the Permian Basin (a Level 3 fair value measurement). At March 31, 2019, the estimated fair value for the liability associated with the contingent purchase price consideration was $10.6 million, resulting in $0.4 million being credited to other (income) expense, net, during the three months ended March 31, 2019. In addition, as part of the purchase of JRGO Energy Services LLC ("JRGO") during December 2018, the sellers have the right to receive contingent consideration of up to $1.5 million to be paid during 2019, based on JRGO's performance during the fourth quarter of 2018. Approximately $11.5 million of the $12.1 million combined contingent consideration liability is based on actual 2018 performance and was paid in April 2019, with the remaining being a fair value measurement based on a forecast of SwiftWater 2019 revenues and EBITDA.

Derivative Contracts

We and CCLP each enter into short term foreign currency forward derivative contracts with third parties as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of March 31, 2019, we and CCLP had the following foreign currency derivative contracts outstanding relating to portions of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward purchase Euro
 
$
7,245

 
1.14
 
6/19/2019
Forward sale Euro
 
1,139

 
1.14
 
4/17/2019
Forward sale pounds sterling
 
1,329

 
1.33
 
4/17/2019
Forward purchase Mexican peso
 
820

 
19.52
 
4/17/2019
Forward sale Norwegian krone
 
527

 
8.53
 
4/17/2019
Forward sale Mexican peso
 
6,301

 
19.52
 
4/17/2019

Derivative Contracts
 
British Pound Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward purchase Euro
 
1,535

 
0.85
 
4/17/2019

Derivative Contracts
 
Swedish Krona Notional Amount
 
Traded Exchange Rate
 
Settlement Date
 
 
(In Thousands)
 
 
 
 
Forward sale Euro
 
14,041

 
10.40
 
4/17/2019

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


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

 

 
(In Thousands)
Forward purchase contracts
 
Current assets
 
$
27

 
$
41

Forward sale contracts
 
Current assets
 
49

 
76

Forward sale contracts
 
Current liabilities
 
(22
)
 
(126
)
Forward purchase contracts
 
Current liabilities
 
(100
)
 
(168
)
Net asset (liability)
 
 
 
$
(46
)
 
$
(177
)

None of the foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three months ended March 31, 2019 and March 31, 2018, we recognized $0.6 million and $28,000 of net gains (losses), respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program.

A summary of these recurring fair value measurements by valuation hierarchy as of March 31, 2019 and December 31, 2018, is as follows:
 
 
 
Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
March 31, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
CCLP Series A Preferred Units
$
(18,278
)
 
$

 
$

 
$
(18,278
)
Warrants liability
(2,480
)
 

 

 
(2,480
)
Asset for foreign currency derivative contracts
75

 

 
75

 

Liability for foreign currency derivative contracts
(121
)
 

 
(121
)
 

Acquisition contingent consideration liability
(12,052
)
 

 

 
(12,052
)
Net liability
$
(32,856
)
 
 
 
 
 
 

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

 
$

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

 

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

 

 
117

 

Liability for foreign currency derivative contracts
(294
)
 

 
(294
)
 

Acquisition contingent consideration liability
(12,452
)
 

 

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

The fair values of cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and long-term debt pursuant to TETRA's ABL Credit Agreement and Term Credit Agreement, and the CCLP Credit Agreement approximate their carrying amounts. The fair values of the publicly traded CCLP 7.25% Senior Notes at March 31, 2019 and December 31, 2018, were approximately $264.9 million and $266.3 million, respectively. Those fair values compare to the face amount of $295.9 million both at March 31, 2019 and

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December 31, 2018. The fair value of the publicly traded CCLP 7.50% Senior Secured Notes at March 31, 2019 and December 31, 2018 were approximately $336.0 million and $332.5 million, respectively. This fair value compares to aggregate principal amount of such notes at both March 31, 2019 and December 31, 2018, of $350.0 million. We based the fair values of the CCLP 7.25% Senior Notes and the CCLP 7.50% Senior Secured Notes as of March 31, 2019 on recent trades for these notes.
NOTE H – COMMITMENTS AND CONTINGENCIES
 
Litigation
 
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.

Contingencies of Discontinued Operations

During 2011, in connection with the sale of a significant majority of Maritech's oil and gas producing properties, the buyers of the properties assumed the associated decommissioning liabilities pursuant to the purchase and sale agreements. To the extent that a buyer of these properties fails to perform the abandonment and decommissioning work required, a previous owner, including Maritech, may be required to perform the abandonment and decommissioning obligation. As the former parent company of Maritech, we also may be responsible for performing these abandonment and decommissioning obligations. In March 2018, we closed the Maritech Asset Purchase Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of the Maritech Properties. Also in March 2018, we finalized the Maritech Equity Purchase Agreement with Orinoco that provided for the purchase by Orinoco of the Maritech Equity Interests. Pursuant to a bonding agreement as part of these transactions (the "Bonding Agreement"), Orinoco is required to replace, within 90 days following the closing, the initial bonds delivered at closing with non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million. Orinoco has not delivered such replacement bonds and we are seeking to enforce the terms of the Bonding Agreement. The non-revocable performance bonds delivered at the closing remain in effect. As a result of these transactions, we have effectively exited the businesses of our Offshore Services and Maritech segments and Orinoco assumed all of Maritech's remaining abandonment and decommissioning obligations.

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Table of Contents

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
March 31,
 
2019
 
2018
 
(In Thousands)
Revenues from external customers
 

 
 

Product sales
 
 
 
Completion Fluids & Products Division
$
57,328

 
$
51,057

Water & Flowback Services Division
364

 
1,250

Compression Division
34,089

 
23,646

Consolidated
$
91,781

 
$
75,953

 
 
 
 
Services
 
 
 
Completion Fluids & Products Division
$
4,253

 
$
2,049

Water & Flowback Services Division
78,314

 
59,603

Compression Division
69,380

 
61,776

Consolidated
$
151,947

 
$
123,428

 
 
 
 
Interdivision revenues
 
 
 
Completion Fluids & Products Division
$

 
$
(2
)
Water & Flowback Services Division

 
222

Compression Division

 

Interdivision eliminations

 
(220
)
Consolidated
$

 
$

 
 
 
 
Total revenues
 
 
 
Completion Fluids & Products Division
$
61,581

 
$
53,104

Water & Flowback Services Division
78,678

 
61,075

Compression Division
103,469

 
85,422

Interdivision eliminations

 
(220
)
Consolidated
$
243,728

 
$
199,381

 
 
 
 
Income (loss) before taxes
 
 
 
Completion Fluids & Products Division
$
6,186

 
$
2,449

Water & Flowback Services Division
2,231

 
6,548

Compression Division
(7,801
)
 
(14,018
)
Interdivision eliminations
6

 

Corporate Overhead(1)
(17,687
)
 
(14,912
)
Consolidated
$
(17,065
)
 
$
(19,933
)

(1)
Amounts reflected include the following general corporate expenses:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(In Thousands)
General and administrative expense
$
12,089

 
$
12,598

Depreciation and amortization
168

 
151

Interest expense
5,342

 
4,007

Warrants fair value adjustment (income) expense
407

 
(1,994
)
Other general corporate (income) expense, net
(319
)
 
150

Total
$
17,687

 
$
14,912


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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 products or services are not expected to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.

Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer. For any arrangements with multiple performance obligations, we use management's estimated selling price to determine the stand-alone selling price for separate performance obligations. For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period. As of March 31, 2019, we had $24.6 million of remaining performance obligations related to our compression service contracts. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than 12 months and does not consider the effects of the time value of money. The remaining performance obligations are expected to be recognized through 2022 as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
Total
 
(In Thousands)
Compression service contracts remaining performance obligations
$
10,444

 
$
9,851

 
$
4,240

 
$
32

 
$

 
$
24,567

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

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

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experience. As of March 31, 2019, the amount of remaining credits expected to be issued for the repurchase of reclaimable used fluids was $1.1 million that were recorded in inventory (right of return asset) and accounts payable. There were no material differences between amounts recognized during the three month period ended March 31, 2019, compared to estimates made in a prior period from these variable consideration arrangements.

Contract Assets and Liabilities. Any contract assets, along with billed and unbilled accounts receivable, are included in trade accounts receivable in our consolidated balance sheets. We classify contract liabilities as Unearned Income in our consolidated balance sheets. Such deferred revenue typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract.

As of March 31, 2019 and December 31, 2018, contract assets were immaterial. The following table reflects the changes in our contract liabilities during the three month period ended March 31, 2019:
 
March 31, 2019
 
(In Thousands)
Unearned Income, beginning of period
$
25,333

Additional unearned income
49,363

Revenue recognized
(24,858
)
Unearned income, end of period
$
49,838


During the three month period ended March 31, 2019, contract liabilities increased due to unearned income for consideration received on new compressor equipment being fabricated. During the three month period ended March 31, 2019, $24.9 million of unearned income was recognized as product sales revenue, primarily associated with deliveries of new compression equipment.

Contract Costs. As of March 31, 2019 and March 31, 2018, contract costs were immaterial.
    
Disaggregation of Revenue. We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our three reportable segments in Note I. In addition, we disaggregate revenue from contracts with customers by geography based on the following table below.

 
Three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Completion Fluids & Products
 
 
 
U.S.
$
31,606

 
$
27,909

International
29,975

 
25,195

 
61,581

 
53,104

Water & Flowback Services
 
 
 
U.S.
73,199

 
47,038

International
5,479

 
14,037

 
78,678

 
61,075

Compression
 
 
 
U.S.
93,517

 
76,980

International
9,952

 
8,442

 
103,469

 
85,422

Interdivision eliminations
 
 
 
U.S.

 
2

International

 
(222
)
 

 
(220
)
Total Revenue
 
 
 
U.S.
198,322

 
151,929

International
45,406

 
47,452

 
$
243,728

 
$
199,381


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

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

Components of lease expense, included in either cost of revenues or general and administrative expense based on the use of the underlying asset, are as follows (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less):
 
Three Months Ended March 31, 2019
 
(In Thousands)
Operating lease expense
$
5,044

Short-term lease expense
11,161

Finance lease cost:
 
     Accumulated depreciation
31

     Interest on lease liabilities
3

Total lease expense
$
16,239

Supplemental cash flow information:
 
Three Months Ended March 31, 2019
 
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows - operating leases
$
4,657

     Financing cash flows - finance leases
$
43

     Operating cash flows - finance leases
$
3

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
     Operating leases
$
3,257

     Finance leases
$



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Supplemental balance sheet information:
 
March 31, 2019
 
(In Thousands)
Operating leases:
 
     Operating lease right-of-use assets
$
60,149

 
 
     Accrued liabilities and other
$
12,659

     Operating lease liabilities
49,632

     Total operating lease liabilities
$
62,291

 
 
Finance leases:
 
     Property, plant and equipment
$
875

     Accumulated depreciation
(664
)
     Net property, plant and equipment
$
211

 
 
     Accrued liabilities and other
$
147

     Other liabilities
48

     Total finance lease liabilities
$
195


Additional operating and finance lease information:
 
March 31, 2019
Weighted average remaining lease term:
 
     Operating leases
7 years

     Finance leases
1 year

 
 
Weighted average discount rate:
 
     Operating leases
9.37
%
     Finance leases
5.80
%
    
Future minimum lease payments by year and in the aggregate, under non-cancelable finance and operating leases with terms in excess of one year consist of the following at March 31, 2019:
 
Finance Leases
 
Operating Leases
 
(In Thousands)
 
 
 
 
2019
$
148

 
$
13,350

2020
33

 
15,536

2021
17

 
11,488

2022

 
9,009

2023

 
7,770

Thereafter

 
29,351

Total lease payments
198

 
86,504

Less imputed interest
(3
)
 
(24,213
)
Total lease liabilities
$
195

 
$
62,291

    
At March 31, 2019, future minimum rental receipts under a non-cancelable sublease for office space in one of our locations totaled $6.1 million. For the three months ended March 31, 2019, we recognized sublease income of $0.2 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

The growth in revenues for each of our divisions during the three months ended March 31, 2019, resulted in consolidated revenues increasing 22.2% compared to the corresponding prior year quarter. Our Water & Flowback Services Division reported a 28.8% growth in revenues, primarily due to the impact of 2018 acquisition activity, including the impact from the February 2018 acquisition of SwiftWater Energy Services, LLC ("SwiftWater"), along with growth in our existing operations. Our Compression Division also reported strong growth, as continued high demand for compression equipment and services, reflected by a strong new equipment sales backlog and increased compression fleet utilization, resulted in a 21.1% increase in Compression Division revenues compared to the prior year quarter. Our Completion Fluids & Products Division also reported increased revenues, a 16.0% increase compared to the prior year quarter, primarily due to increased international CBF product sales. Demand for many of our products and services remains strong despite continued volatility in pricing for oil, which affects the plans of many of our oil and gas operations customers. Consolidated gross profit increased, primarily due to improved Compression Division profitability, and despite continuing pricing and operating cost challenges in certain markets for our Water & Flowback Services Division and Completion Fluids & Products Division. Consolidated increases in interest expense and general and administrative costs, attributed to the overall growth in operations, partially offset the improved profitability during the three months ended March 31, 2019 compared to the prior year quarter.     

Funding for the expected continuing growth in our operations remains a key focus. Consolidated capital expenditures and consolidated cash provided by operating activities during the three months ended March 31, 2019 both increased compared to the prior year quarter. Following the financing restructuring transactions completed during 2018, we have capacity under our term credit agreement (the “Term Credit Agreement”) and our asset-based lending credit agreement (the “ABL Credit Agreement”) to fund our growth capital expenditure plans, as well as potential acquisition transactions. These growth plans, particularly of our Water & Flowback Services Division, are designed to enable us to capitalize on the current demand for domestic onshore services that support hydraulic fracturing in unconventional oil and gas reservoirs. In addition, our Compression Division, through the separate capital structure of our CSI Compressco LP ("CCLP") subsidiary, expects to fund additional 2019 growth capital expenditures for new compression services equipment through $16.9 million of currently available cash as of March 31, 2019, expected operating cash flows, and through up to $15.0 million of new compression services equipment to be purchased by us, and leased to CCLP. These sources are expected to enable CCLP to meet its growth capital expenditure requirements without having to access available borrowings under its credit agreement (the "CCLP Credit Agreement") and without having to access the current debt and equity markets. We and CCLP are aggressively managing our working capital and capital expenditure needs in order to maximize our liquidity in the current environment. The earliest maturity date of our long-term debt is September 2023 and the earliest maturity date of CCLP's long-term debt is August 2022.

Approximately $633.7 million of our consolidated debt balance carrying value is owed by CCLP, serviced by CCLP's existing cash balances and cash provided by CCLP's operations (less its capital expenditures), and $343.5 million of which is secured by certain assets of CCLP. The following table provides condensed consolidating balance sheet information reflecting TETRA's net assets and CCLP's net assets that service and secure TETRA's and CCLP's respective capital structures.

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Table of Contents

 
March 31, 2019
Condensed Consolidating Balance Sheet
TETRA
 
CCLP
 
Eliminations
 
Consolidated
 
(In Thousands)
Cash, excluding restricted cash
$
19,998

 
$
16,870

 
$

 
$
36,868

Affiliate receivables
9,856

 

 
(9,856
)
 

Other current assets
233,774

 
139,651

 

 
373,425

Property, plant and equipment, net
210,898

 
650,051

 

 
860,949

Long-term affiliate receivables
2,402

 

 
(2,402
)
 

Other assets, including investment in CCLP
71,750

 
43,297

 
73,236

 
188,283

Total assets
$
548,678

 
$
849,869

 
$
60,978

 
$
1,459,525

 
 
 
 
 
 
 
 
Affiliate payables
$

 
$
9,856

 
$
(9,856
)
 
$

Other current liabilities
102,643

 
116,595

 

 
219,238

Long-term debt, net
212,151

 
633,692

 

 
845,843

CCLP Series A Preferred Units

 
20,890

 
(2,612
)
 
18,278

Warrants liability
2,480

 

 

 
2,480

Long-term affiliate payable

 
2,402

 
(2,402
)
 

Other non-current liabilities
65,176

 
8,400

 

 
73,576

Total equity
166,228

 
58,034

 
75,848

 
300,110

Total liabilities and equity
$
548,678

 
$
849,869

 
$
60,978

 
$
1,459,525

Critical Accounting Policies
 
There have been no material changes or developments in the evaluation of the accounting estimates and
the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed
in our 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 March 31, 2019 compared with three months ended March 31, 2018.

Consolidated Comparisons
 
Three Months Ended March 31,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
243,728

 
$
199,381

 
$
44,347

 
22.2
%
Gross profit
36,210

 
27,983

 
8,227

 
29.4
%
Gross profit as a percentage of revenue
14.9
 %
 
14.0
 %
 
 

 
 

General and administrative expense
34,277

 
30,803

 
3,474

 
11.3
%
General and administrative expense as a percentage of revenue
14.1
 %
 
15.4
 %
 
 

 
 

Interest expense, net
18,379

 
14,973

 
3,406

 
22.7
%
Warrants fair value adjustment (income) expense
407

 
(1,994
)
 
2,401

 
 
CCLP Series A Preferred Units fair value adjustment (income) expense
1,163

 
1,358

 
(195
)
 
 
Other (income) expense, net
(951
)
 
2,776

 
(3,727
)
 
 
Loss before taxes and discontinued operations
(17,065
)
 
(19,933
)
 
2,868

 
14.4
%
Loss before taxes and discontinued operations as a percentage of revenue
(7.0
)%
 
(10.0
)%
 
 

 
 

Provision for income taxes
1,609

 
1,124

 
485

 
 
Loss before discontinued operations
(18,674
)
 
(21,057
)
 
2,383

 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations (including 2018 loss on disposal of $31.5 million), net of taxes
(426
)
 
(41,706
)
 
41,280

 
 
Net loss
(19,100
)
 
(62,763
)
 
43,663

 
 
Loss attributable to noncontrolling interest
8,262

 
9,115

 
(853
)
 
 

Net loss attributable to TETRA stockholders
$
(10,838
)
 
$
(53,648
)
 
$
42,810

 
 

Consolidated revenues for the first quarter of 2019 increased compared to the prior year quarter, primarily due to increased Compression Division and Water & Flowback Services Division revenues, which increased by $18.0 million and $17.6 million, respectively. Our Compression Division reported increased revenues of $18.0 million, primarily due to increased new compressor equipment sales activity. The increase in Water & Flowback Services Division revenues was primarily driven by increased activity in certain domestic and international markets and the impact of a full quarter of SwiftWater, which was acquired on February 28, 2018. Our Completion Fluids & Products Division also reported increased revenues, primarily due to increased international product sales. See Divisional Comparisons section below for additional discussion.

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

Consolidated general and administrative expenses increased during the current year quarter compared to the prior year quarter, primarily due to $3.9 million of increased salary related expenses and $0.3 million of increased insurance and other general expenses, partially offset by $0.6 million of decreased professional services fees, and $0.2 million of decreased consulting and other expenses. Increased general and administrative expenses were driven primarily by our Compression and Water & Flowback Services Divisions. Due to the increased consolidated revenues discussed above, general and administrative expense as a percentage of revenues decreased compared to the prior year period.

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Consolidated interest expense, net, increased in the current year quarter primarily due to Compression Division interest expense. Compression Division interest expense increased due to higher CCLP outstanding debt balances and a higher interest rate on the CCLP Senior Secured Notes, a portion of the proceeds of which were used to repay the balance outstanding under the previous CCLP bank credit facility. Corporate interest expense also increased due to higher outstanding debt balances under the TETRA Term Credit Agreement and ABL Credit Agreement. Interest expense during 2019 and 2018 includes $1.0 million and $1.2 million, respectively, of finance cost amortization.
 
Consolidated other (income) expense, net, was $1.0 million of income during the current year quarter compared to $2.8 million of expense during the prior year quarter, primarily due to $3.5 million of increased expense related to the unamortized deferred financing costs charged to earnings during the prior year quarter as a result of the termination of the CCLP Bank Credit Facility. In addition, other income during the current year period includes $0.4 million associated with the remeasurement of the contingent purchase price consideration for the SwiftWater acquisition.

Our consolidated provision for income taxes during the first three months of 2019 is primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our consolidated effective tax rate for the three month period ended March 31, 2019 and March 31, 2018 of negative 9.4% and negative 5.6%, respectively, was primarily the result of losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against the related net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

Divisional Comparisons
 
Completion Fluids & Products Division
 
Three Months Ended March 31,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
61,581

 
$
53,104

 
$
8,477

 
16.0
%
Gross profit
10,664

 
6,686

 
3,978

 
59.5
%
Gross profit as a percentage of revenue
17.3
%
 
12.6
%
 
 

 


General and administrative expense
4,728

 
4,640

 
88

 
1.9
%
General and administrative expense as a percentage of revenue
7.7
%
 
8.7
%
 
 

 
 

Interest (income) expense, net
(179
)
 
(233
)
 
54

 
 

Other (income) expense, net
(71
)
 
(170
)
 
99

 
 

Income before taxes
$
6,186

 
$
2,449

 
$
3,737

 
152.6
%
Income before taxes as a percentage of revenue
10.0
%
 
4.6
%
 
 

 
 

 
The increase in Completion Fluids & Products Division revenues during the current year quarter compared to the prior year quarter was primarily due to $6.3 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 $2.2 million, 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.

Completion Fluids & Products Division gross profit during the current year quarter increased significantly compared to the prior year quarter 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.

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Table of Contents


The Completion Fluids & Products Division reported a significant increase in pretax earnings during the current year quarter compared to the prior year quarter due to the increase in gross profit discussed above . Completion Fluids & Products Division administrative cost levels remained level compared to the prior year period, as $0.4 million of increased legal and professional fees and $0.2 million of increased general expenses were partially offset by $0.5 million of decreased salary and employee related expenses and $0.1 million of decreased bad debt expense.

Water & Flowback Services Division
 
Three Months Ended March 31,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
78,678

 
$
61,075

 
$
17,603

 
28.8
 %
Gross profit
8,851

 
11,404

 
(2,553
)
 
(22.4
)%
Gross profit as a percentage of revenue
11.2
%
 
18.7
%
 
 

 
 

General and administrative expense
6,796

 
5,278

 
1,518

 
28.8
 %
General and administrative expense as a percentage of revenue
8.6
%
 
8.6
%
 
 

 
 

Interest (income) expense, net
4

 
(15
)
 
19

 
 

Other (income) expense, net
(180
)
 
(407
)
 
227

 
 

Income before taxes
$
2,231

 
$
6,548

 
$
(4,317
)
 
65.9
 %
Income before taxes as a percentage of revenue
2.8
%
 
10.7
%
 
 

 
 

 
Water & Flowback Services Division revenues increased during the current year quarter compared to the prior year quarter due to increased water management services activity. Water management and flowback services revenues increased $18.5 million during the current year quarter compared to the prior year quarter primarily resulting from the impact of a full quarter of SwiftWater, which was acquired on February 28, 2018, the impact of the December 2018 acquisition of JRGO, and increased demand in completion activity. Product sales revenue decreased by $0.9 million, due to an international equipment sale in the prior period.

The Water & Flowback Services Division reflected decreased gross profit during the current year quarter compared to the prior year quarter, 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 quarterly period had a meaningful impact on profitability. 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 quarter, primarily due to the decrease in gross profit described above. General and administrative expenses increased primarily due to the $1.1 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 $1.1 million, increased sales and marketing expenses of $0.4 million, and increased general expenses of $0.1 million, offset by decreased professional fees of $0.1 million. Other income, net, decreased during the current year period despite $0.4 million of income associated with the remeasurement of the contingent purchase price consideration for SwiftWater, primarily due to increased foreign currency losses.


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Table of Contents

Compression Division
 
Three Months Ended March 31,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Revenues
$
103,469

 
$
85,422

 
$
18,047

 
21.1
%
Gross profit
16,859

 
10,040

 
6,819

 
67.9
%
Gross profit as a percentage of revenue
16.3
 %
 
11.8
 %
 
 

 
 

General and administrative expense
10,664

 
8,286

 
2,378

 
28.7
%
General and administrative expense as a percentage of revenue
10.3
 %
 
9.7
 %
 
 

 
 

Interest expense, net
13,213

 
11,214

 
1,999

 
 

CCLP Series A Preferred fair value adjustment
1,163

 
1,358

 
(195
)
 
 
Other (income) expense, net
(380
)
 
3,200

 
(3,580
)
 
 

Loss before taxes
$
(7,801
)
 
$
(14,018
)
 
$
6,217

 
44.4
%
Loss before taxes as a percentage of revenue
(7.5
)%
 
(16.4
)%
 
 

 
 

    
Compression Division revenues increased during the current year quarter compared to the prior year quarter, primarily due to a $10.4 million increase in product sales revenues, due to improving demand. Demand for new compressor equipment remains strong, and the current equipment sales backlog has decreased only slightly compared to the prior year quarter, despite significant sales recorded. 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 $7.6 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 compressor fleet utilization rates. Overall utilization of the Compression Division's compressor 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. The increased compressor fleet utilization rates have led to increases in customer contract pricing.

The Compression Division recorded a decreased pretax loss primarily due to the increased gross profit discussed above. Interest expense increased compared to the prior year period due to higher outstanding CCLP debt balances and a higher interest rate from the CCLP Senior Secured Notes, issued in March 2018, when compared to the previous CCLP bank credit facility. General and administrative expense levels increased compared to the prior year period, due to increased salary and employee-related expenses, including the impact of increased headcount, incentives and equity compensation, of $2.1 million and increased other general expenses of $0.3 million, offset by $0.1 million of decreased sales and marketing expenses. Largely offsetting the increase in general and administrative and interest expense, prior year other expense, net, reflected $3.5 million of unamortized deferred financing costs charged to earnings as a result of the termination of the previous CCLP bank credit facility. In addition, the Series A Preferred fair value adjustment resulted in a $1.2 million charge to earnings during the current year period compared to a $1.4 million charge to earnings in the prior year period.

Corporate Overhead
 
Three Months Ended March 31,
 
Period to Period Change
 
2019
 
2018
 
2019 vs 2018
 
% Change
 
(In Thousands, Except Percentages)
Gross profit (loss) (depreciation expense)
$
(168
)
 
$
(151
)
 
$
(17
)
 
(11.3
)%
General and administrative expense
12,089

 
12,598

 
(509
)
 
(4.0
)%
Interest expense, net
5,342

 
4,007

 
1,335

 
 

Warrants fair value adjustment (income)/expense
407

 
(1,994
)
 
2,401

 
 
Other (income) expense, net
(319
)
 
150

 
(469
)
 
 

Loss before taxes
$
(17,687
)
 
$
(14,912
)
 
$
(2,775
)
 
(18.6
)%


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Table of Contents

Corporate Overhead pretax loss increased during the current year period compared to the prior year quarter, primarily due to the adjustment of the fair value of the outstanding Warrants liability that resulted in a $0.4 million charge to earnings compared to an $2.0 million credit to earnings during the prior year quarter. Corporate general and administrative expense decreased primarily due to $0.9 million of decreased professional fees, $0.4 million of decreased general expenses, and $0.5 million of decreased consulting fees. These decreases were offset by increased salary related expense of $1.1 million. In addition, other income of $0.3 million was recorded during the current year quarter, compared to $0.2 million of expense during the prior year quarter, primarily due to increased foreign currency gains.
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 March 31, 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 $845.8 million as of March 31, 2019. However, approximately $633.7 million of this consolidated debt balance is owed by CCLP and is serviced from the existing cash balances and cash flows of CCLP, and is secured by certain of CCLP's assets. Through our common unit ownership interest in CCLP, which was approximately 34% as of March 31, 2019, and ownership of an approximately 1% general partner interest, we receive our share of the distributable cash flows of CCLP through its quarterly cash distributions. Approximately $16.9 million of the $36.9 million of the cash balance reflected on our consolidated balance sheet is owned by CCLP and is not accessible by us. As of March 31, 2019, subject to compliance with the covenants, borrowing base, and other provisions of the agreement that may limit borrowings, we had $27.3 million availability under the ABL Credit Agreement. As of March 31, 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 $18.4 million.
    
Our consolidated sources and uses of cash during the three months ended March 31, 2019 and 2018 are as follows:
 
Three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Operating activities
$
7,412

 
$
(31,261
)
Investing activities
(31,726
)
 
(67,551
)
Financing activities
21,312

 
185,610


Operating Activities
 
Consolidated cash flows increased by $38.7 million. CCLP generated $31.6 million of our consolidated cash flows provided by operating activities during the three months ended March 31, 2019 compared to $0.4 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 timing of payments of accounts payable. We have taken steps to aggressively manage working capital, including increased collection efforts. We continue to monitor customer credit risk in the current environment and have historically focused on serving larger capitalized oil and gas operators and national oil companies.

Investing Activities
 
Total cash capital expenditures during the first three months of 2019 were $32.4 million. Our Completion Fluids & Products Division spent $1.5 million on capital expenditures during the first three months of 2019, the majority of which related to plant and facility additions. Our Water & Flowback Services Division spent $7.6 million

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Table of Contents

on capital expenditures, primarily to add to its water management equipment fleet. Our Compression Division spent $23.3 million, primarily for growth capital expenditure projects to increase its compression fleet.

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 $25.0 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 $75.0 million to $80.0 million on capital expenditures during 2019 to expand its compressor fleet in response to increased demand for compression services. If the forecasted demand for our products and services during 2019 increases or decreases, the amount of planned expenditures on growth and expansion may be adjusted.
 
Financing Activities 
 
During the first three months of 2019, the total amount of consolidated cash provided by financing activities was $21.3 million, consisting primarily of the use of available funds provided under our ABL 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 May 9, 2019, we have $26.9 million outstanding under our ABL Credit Agreement and $8.9 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 May 9, 2019, $220.5 million in aggregate principal amount of our Term Credit Agreement is outstanding.
    
CCLP Financing Activities

CCLP Preferred Units. The CCLP Preferred Units rank senior to all classes or series of equity securities of CCLP with respect to distribution rights and rights upon liquidation. We and the other holders of CCLP Preferred Units receive quarterly distributions, which are paid in kind in additional CCLP Preferred Units, equal to an annual rate of 11.00% of the Issue Price ($1.2573 per unit annualized) of the outstanding CCLP Preferred Units, subject to certain adjustments. 

Unless otherwise redeemed for cash, a ratable portion of the CCLP Preferred Units has been, and will 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”). Beginning with the January 2019 Conversion Date, CCLP elected to redeem the remaining CCLP Preferred Units for cash, resulting in 783,046 Preferred Units being redeemed during the three months ended March 31, 2019 for $9.4 million, which includes approximately $0.4 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 March 31, 2019 was 1,779,417, of which we held 223,474.

CCLP Bank Credit Facilities. The CCLP Credit Agreement 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 March 31, 2019, CCLP had no

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outstanding balance and had $3.5 million in letters of credit against the CCLP Credit Agreement. The CCLP Credit Agreement is scheduled to mature on June 29, 2023. As of May 8, 2019, CCLP has no balance outstanding under the CCLP Credit Agreement and $5.3 million in letters of credit.

CCLP Senior Secured Notes. As of May 8, 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.

CCLP Senior Notes. As of May 8, 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 three months ended March 31, 2019, CCLP distributed $0.5 million in cash, including $0.3 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 March 31, 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

During 2011, in connection with the sale of a significant majority of Maritech's oil and gas producing properties, the buyers of the properties assumed the associated decommissioning liabilities pursuant to the purchase and sale agreements. To the extent that a buyer of these properties fails to perform the abandonment and decommissioning work required, a previous owner, including Maritech, may be required to perform the abandonment and decommissioning obligation. As the former parent company of Maritech, we also may be responsible for performing these abandonment and decommissioning obligations. In March 2018, we closed the Maritech Asset Purchase Agreement with Orinoco that provided for the purchase by Orinoco of the Maritech Properties. Also in March 2018, we finalized the Maritech Equity Purchase Agreement with Orinoco that provided for the purchase by Orinoco of the Maritech Equity Interests. As a result of these transactions, we have effectively exited the businesses of our Maritech segment and Orinoco assumed all of Maritech's remaining abandonment and decommissioning obligations.

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 March 31, 2019:
 
 
Payments Due
 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
 
(In Thousands)
Long-term debt - TETRA
 
$
230,701

 
$

 
$

 
$

 
$

 
$

 
$
230,701

Long-term debt - CCLP
 
645,930

 

 

 

 
295,930

 

 
350,000

Interest on debt - TETRA
 
114,270

 
13,553

 
18,071

 
18,071

 
18,071

 
17,672

 
28,832

Interest on debt - CCLP
 
230,286

 
35,665

 
47,553

 
47,553

 
40,452

 
26,250

 
32,813

Purchase obligations
 
101,625

 
7,125

 
9,500

 
9,500

 
9,500

 
9,500

 
56,500

Asset retirement obligations(1)
 
12,331

 

 

 

 

 

 
12,331

Operating and finance leases
 
86,702

 
13,498

 
15,569

 
11,505

 
9,009

 
7,770

 
29,351

Total contractual cash obligations(2)
 
$
1,421,845

 
$
69,841

 
$
90,693

 
$
86,629

 
$
372,962

 
$
61,192

 
$
740,528

(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 March 31, 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 approximately $18.3 million of liabilities related to the CCLP Preferred Units. The CCLP Preferred Units are expected to be serviced with non-cash paid-in-kind distributions, and may be satisfied either through conversions to CCLP common units or redemptions for cash, at CCLP's election. 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.
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;

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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;
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 March 31, 2019, due to borrowings made during the period then ended, we had a balance 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
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. dollar variable rate - TETRA
 
$

 
$

 
$

 
$

 
$

 
$
230,701

 
$
230,701

 
$
230,701

Weighted average interest rate (variable)
 
%
 
%
 
%
 
%
 
%
 
8.08
%
 
 
 
 
U.S. dollar fixed rate - CCLP
 
$

 
$

 
$

 
$
295,930

 
$—
 
$
350,000

 
$
645,930

 
$
600,900

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



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Exchange Rate Risk

As of March 31, 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 March 31, 2019, the end of the period covered by this quarterly report.

As discussed above in this Quarterly Report on Form 10-Q, in February 2018, we completed the acquisition of SwiftWater, and in December 2018, we purchased JRGO. SwiftWater and JRGO were both excluded from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, as disclosed in our 2018 Annual Report in accordance with SEC Staff guidance permitting the exclusion for the year in which an acquisition is completed. During the quarter ended March 31, 2019, we completed our integration of SwiftWater and the oversight, policies, procedures, and monitoring that support our internal control over financial reporting has been extended to include SwiftWater. We are continuing to integrate JRGO into our internal control over financial reporting processes. In executing this integration, we are analyzing, evaluating, and, where necessary, making changes in controls and procedures related to the JRGO business, which we expect to be completed in fiscal year 2019. We will include both SwiftWater and JRGO in our annual assessment of internal control over financial reporting for our fiscal year ending December 31, 2019.

In connection with the adoption of the new lease accounting standard on January 1, 2019, we evaluated and updated certain internal controls to facilitate the proper capture and assessment of contractual information required to support proper preparation of financial information upon adoption.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended March 31, 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)
January 1 – January 31, 2019
 

 
$


 
$
14,327,000

February 1 – February 28, 2019
 
68,412

(2)
2.49


 
14,327,000

March 1 – March 31, 2019
 

 


 
14,327,000

Total
 
68,412

 
 


 
$
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*
10.2*
10.3*
10.4*
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 month periods ended March 31, 2019 and 2018; (ii) Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2019 and 2018; (iii) Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018; (iv) Consolidated Statements of Cash Flows for the three month periods ended March 31, 2019 and 2018; and (v) Notes to Consolidated Financial Statements for the three months ended March 31, 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:
May 9, 2019
By:
/s/Brady M. Murphy
 
 
 
Brady M. Murphy
 
 
 
President
 
 
 
Chief Executive Officer
 
 
 
 
Date:
May 9, 2019
By:
/s/Elijio V. Serrano
 
 
 
Elijio V. Serrano
 
 
 
Senior Vice President
 
 
 
Chief Financial Officer
 
 
 
 
Date:
May 9, 2019
By:
/s/Richard D. O'Brien
 
 
 
Richard D. O'Brien
 
 
 
Vice President – Finance and Global Controller
 
 
 
Principal Accounting Officer

35