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TTI > SEC Filings for TTI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for TETRA TECHNOLOGIES INC


9-Nov-2012

Quarterly Report


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

Business Overview

Our consolidated revenues and gross profit for the quarter ended September 30, 2012, reflect the growth of our Production Testing, Compressco, and Fluids segments compared to the prior year period. In particular, the results of our Production Testing segment for the current year period include the impact of its acquisitions of Optima Solutions Holdings Limited (Optima), and the assets and operations of Eastern Reservoir Services (ERS), and Greywolf Production Systems, Inc. and GPS Ltd. (together Greywolf), all of which were acquired during the first three quarters of 2012. These acquisitions contributed aggregate revenues and earnings before taxes, excluding transaction costs, during the quarter of $21.5 million and $4.8 million, respectively. Our Compressco segment, primarily through the Compressco Partners, L.P. subsidiary (Compressco Partners), reflected growth in revenues and profitability during the current year quarter compared to the prior year period, primarily as a result of increased Latin America activity. Our Fluids segment also reported increased revenues and profitability compared to the prior year period, primarily due to increased clear brine fluids (CBF) product sales due to increased activity in the Gulf of Mexico, as permitting and well completion activity has increased. Partially offsetting the growth in these segments, our Offshore Services segment reported decreased profitability during the current year quarter due to a number of factors, including weather disruptions, customer project delays, and pricing pressures. Following the sales of its oil and gas producing properties, our Maritech segment now generates minimal revenues. Increased gross profit was partially offset by increased general and administrative expense, primarily due to the above mentioned acquisitions.

The consideration for the Optima, ERS, and Greywolf acquisitions during 2012 consisted of aggregate cash of approximately $163.0 million. The majority of the aggregate consideration for these acquisitions was funded from available cash, although, during the third quarter of 2012, we borrowed approximately $57.2 million under our revolving credit facility to fund a portion of the purchase price for Greywolf acquisition, and for general corporate purposes. Each of these acquisitions represents a strategic expansion of our Production Testing segment. In addition, subsequent to September 30, 2012, and through November 9, 2012, we borrowed approximately $13.7 million for working capital purposes.

Our future operating cash flows, as well as revenues and profitability levels, are largely dependent on the level of oil and gas industry activity in the markets we serve, and they are significantly affected by oil and natural gas commodity prices. Given that these commodity prices have decreased from late 2011 levels, our capital expenditure and acquisition plans are being reviewed carefully in light of the activity levels of our businesses. Following the above mentioned borrowings, as of November 9, 2012, we have approximately $198.6 million available under our revolving credit facility if needed to fund additional working capital requirements, capital expenditure plans, or additional acquisitions. We will continue to review additional suitable acquisition candidates as a part of our continuing growth strategy. Future acquisitions could be funded by existing cash balances, funds borrowed under our bank revolving credit facility, the issuance of additional debt or equity, or other sources of capital.

Critical Accounting Policies

There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended December 31, 2011. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these


estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the collectability of accounts receivable, and the cost of future abandonment and decommissioning obligations. Our estimates are based on historical experience and on future expectations that we believe are reasonable. The fair values of large portions of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.

As of September 30, 2012, and during a portion of the third quarter of 2012, our market capitalization was below the recorded net book value of our equity, including goodwill. The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company's stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole. Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over an entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of a single share of that entity's common stock. Therefore, a control premium was estimated based on observed mergers and acquisitions in our industry. We have estimated the fair value of each of our reporting units and compared the aggregate fair value of our reporting units to our market capitalization after applying an estimated control premium. Such aggregate fair value exceeded our net book value, however, because the estimated fair value of our Offshore Services reporting unit currently exceeds its carrying value by approximately 13.7%, there is a reasonable possibility that all or a portion of Offshore Service's goodwill of approximately $3.9 million may be impaired in a future period, and the impact of such impairment may be material. Specific uncertainties affecting the estimated fair value of our Offshore Services reporting unit include the prices received for the segment's services, the rate of future growth of the segment's business, demand and utilization for the segment's heavy lift barges and other service vessels, levels of competition, and the segment's ability to expand its services to other markets.

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