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Tetra Technologies 10-Q 2012 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDEDMARCH 31, 2012
[ ] 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)
(281) 367-1983
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of May 8, 2012, there were 77,572,427 shares outstanding of the Company’s Common Stock, $0.01 par value per share.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
See Notes to Consolidated Financial Statements
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TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
See Notes to Consolidated Financial Statements
2
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
See Notes to Consolidated Financial Statements
3
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
See Notes to Consolidated Financial Statements
4
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
See Notes to Consolidated Financial Statements
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TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
We are a geographically diversified oil and gas services company focused on completion fluids and associated products and services, production testing and associated services, wellhead compression, and selected offshore services including well plugging and abandonment, decommissioning, and diving. We also have a limited domestic exploration and production business. We were incorporated in Delaware in 1981. We are composed of five reporting segments organized into three divisions – Fluids, Production Enhancement, and Offshore. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.
The consolidated financial statements include the accounts of our wholly owned subsidiaries. Investments in unconsolidated joint ventures in which we participate are accounted for using the equity method. Our interests in oil and gas properties are proportionately consolidated. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission (SEC) and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, 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. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011.
Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation.
Cash Equivalents
We consider all highly liquid cash investments, with a maturity of three months or less when purchased, to be cash equivalents.
Restricted Cash
Restricted cash is classified as a current asset when it is expected to be repaid or settled in the next twelve month period. Restricted cash reported on our balance sheet as of March 31, 2012, consists primarily of escrowed cash associated with our July 2011 purchase of a heavy lift derrick barge. The escrowed cash will be released to the sellers in accordance with the terms of the escrow agreement.
Inventories
Inventories are stated at the lower of cost or market value and consist primarily of finished goods. Cost is determined using the weighted average method. Significant components of inventories as of March 31, 2012, and December 31, 2011, are as follows:
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Finished goods inventories include, in addition to newly manufactured clear brine fluids, recycled brines that are repurchased from certain of our customers. Recycled brines are recorded at cost, using the weighted average method.
Net Income 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 per common and common equivalent share:
In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the first three months of 2012, we used the average market price of our common stock of $9.63. For the three months ended March 31, 2012, the average diluted shares outstanding excludes the impact of 2,369,632 outstanding stock options that have exercise prices in excess of the average market price, as the inclusion of these shares would have been antidilutive. For the three months ended March 31, 2011, the average diluted shares outstanding excludes the impact of all outstanding stock options, as the inclusion of these shares would have been antidilutive due to the net loss recorded during the period.
Environmental Liabilities
Environmental expenditures that result in additions to property and equipment are capitalized, while other environmental expenditures are expensed. Environmental remediation liabilities are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Estimates of future environmental remediation expenditures often consist of a range of possible expenditure amounts, a portion of which may be in excess of amounts of liabilities recorded. In such an instance, we disclose the full range of amounts reasonably possible of being incurred. Any changes or developments in environmental remediation efforts are accounted for and disclosed each quarter as they occur. Any recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Complexities involving environmental remediation efforts can cause the estimates of the associated liability to be imprecise. Factors that cause uncertainties regarding the estimation of future expenditures include, but are not limited to, the effectiveness of the anticipated work plans in achieving targeted results and changes in the desired remediation methods and outcomes as prescribed by regulatory agencies. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally, a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable as the work is performed and the range of ultimate cost becomes more defined. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of these contingencies.
Fair Value Measurements
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.
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Under generally accepted accounting principles, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill. In addition, we utilize fair value measurements in the initial recording of our decommissioning and other asset retirement obligations. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets, including goodwill. The fair value of our financial instruments, which may include cash, temporary investments, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts. The fair value of our long-term Senior Notes at March 31, 2012, was approximately $332.8 million compared to a carrying amount of approximately $305.0 million, as current rates are more favorable than the Senior Note interest rates. We calculate the fair value of our Senior Notes internally, using current market conditions and average cost of debt (a level 2 fair value measurement).
New Accounting Pronouncements
In June 2011, the FASB published ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (ASU 2011-05), which has the objective of improving the comparability, consistency, and transparency of financial reporting and increasing the prominence of items reported in other comprehensive income. As part of ASU 2011-05, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this ASU. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this ASU are to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are to be applied retrospectively. In December 2011, with the issuance of ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” the FASB announced that it has deferred certain aspects of ASU 2011-05. The portion of this ASU that has been adopted has not had a significant impact on the accounting or disclosures in our financial statements.
In May 2011, the FASB published ASU 2011-04, “Fair Value Measurement (Topic 820) – Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” whereby the FASB and the International Accounting Standards Board (IASB) aligned their definitions of fair value such that their fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this ASU are effective during interim and annual periods beginning after December 15, 2011, and are to be applied prospectively. The adoption of the accounting and disclosure requirements of this ASU has not had a significant impact on our financial statements.
NOTE B – ACQUISITIONS AND DISPOSITIONS
Acquisition of Optima
In March 2012, we acquired 100% of the outstanding common stock of Optima Solutions Holdings Limited (Optima), a leading provider of rig cooling services and associated products that suppress heat generated by high rate flaring of hydrocarbons during well test operations. The acquisition of Optima, which is based in Aberdeen, Scotland, allows our Production Testing segment to provide its customers with a broader range of production testing and associated services, and is expected to enable the segment to expand its presence in many significant global markets. Including the impact of additional working capital
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received and other adjustments to the purchase price, we paid 41.2 million pounds sterling (approximately $64.6 million equivalent) in cash as the purchase price for the Optima stock at closing, and may pay up to an additional 4 million pounds sterling in contingent purchase price consideration, depending on a defined measure of earnings for Optima over each of the two years subsequent to the closing of the acquisition.
We allocated the purchase price to the fair value of the assets and liabilities acquired, which consisted of approximately: $3.0 million of net working capital; $19.6 million of property, plant, and equipment; $22.8 million of certain intangible assets; $7.4 million of deferred tax liabilities; $3.5 million of other liabilities associated with the contingent purchase price consideration obligation; and $31.3 million of nondeductible goodwill. This allocation of the purchase price to Optima’s net assets and liabilities is preliminary, and subject to the potential identification of additional assets and contingencies or revisions to the fair value calculations. These fair value calculations and allocations are expected to be finalized later during 2012, and could result in adjustments to the calculated depreciation and amortization of the tangible and intangible assets, respectively. The fair value of the obligation to pay the contingent purchase price consideration was calculated based on the anticipated earnings for Optima over each of the next two twelve month periods subsequent to the closing, and could increase (up to 4 million pounds sterling) or decrease (to zero) depending on Optima’s actual and expected earnings going forward. Increases or decreases in the value of the anticipated contingent purchase price consideration obligation due to changes in the amounts paid or expected to be paid will be charged or credited to earnings in the period in which such changes occur. The $31.3 million of goodwill preliminarily recorded to our Production Testing segment as a result of the Optima acquisition is supported by the expected strategic benefits discussed above to be generated from the acquisition. For the current period, our revenues, depreciation and amortization, and pretax earnings included $1.5 million, $0.4 million, and $0.5 million, respectively, associated with the acquired operations of Optima after the closing on March 9, 2012. Transaction costs associated with the acquisition of approximately $1.3 million were also charged to general and administrative expense during the period.
Acquisition of ERS
In April 2012, we acquired the assets and operations of Eastern Reservoir Services (ERS), a division of Patterson-UTI Energy, Inc. for a cash purchase price of approximately $42.5 million. ERS is a leading provider of frac flow back services to oil and gas operators in the Appalachian and U.S. Rocky Mountain regions, and the acquisition represents a strategic expansion of our existing Production Testing segment operations, allowing it to serve customers in additional basins in the U.S. As of May 9, 2012, a preliminary allocation of the ERS purchase price had yet to be calculated, but will be determined during the second quarter of 2012. Accordingly, disclosure of the allocation of the purchase price to the applicable ERS balance sheet line items, and the pro forma presentation reflecting the impact of the ERS acquisition will be presented in subsequent filings.
Pro Forma Financial Information
The pro forma information presented below has been prepared to give effect to the acquisition of Optima as if it had occurred at the beginning of the periods presented. This pro forma information does not include the impact of the April 2012 acquisition of ERS, as the initial allocation of the purchase price for this acquisition has yet to be calculated. The pro forma information is presented for illustrative purposes only and is based on estimates and assumptions we deemed appropriate. The following pro forma information is not necessarily indicative of the historical results that would have been achieved if the acquisition transactions had occurred in the past and our operating results may have been different from those reflected in the pro forma information below. Therefore, the pro forma information should not be relied upon as an indication of the operating results that we would have achieved if the transaction had occurred at the beginning of the periods presented or the future results that we will achieve after the acquisition.
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Sale of Equipment
In January 2012, our Offshore Services segment sold certain equipment assets for cash of approximately $7.8 million. As a result of the sale, we recognized a gain on disposal of approximately $4.1 million, which is included in other income.
Sale of Maritech Producing Properties
In March 2012, Maritech sold its interest in certain remaining onshore oil and gas producing properties for cash of approximately $4.4 million received at closing. Following this transaction, Maritech’s remaining oil and gas reserves and production are negligible, and its operations consist primarily of the remaining well abandonment and decommissioning of its offshore oil and gas platforms and facilities.
NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
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NOTE D – DECOMMISSIONING AND OTHER ASSET RETIREMENT OBLIGATIONS
The large majority of our asset retirement obligations consists of the future well abandonment and decommissioning costs for offshore oil and gas properties and platforms owned by our Maritech subsidiary, including the remaining abandonment, decommissioning, and debris removal costs associated with offshore platforms destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners and any contractual amount to be paid by the previous owner of the oil and gas property when the liabilities are satisfied.
The changes in the asset retirement obligations during the three months ended March 31, 2012 and 2011, are as follows:
Revisions in estimated cash flows during the first quarter of 2012 resulted primarily from additional work anticipated to be required on one of Maritech’s offshore oil and gas properties. Settlements of retirement obligations during the first quarter of 2011 include approximately $46.0 million of obligations associated with oil and gas properties sold by Maritech during the period. Revisions in estimated cash flows during the first quarter of 2011 resulted primarily from additional work anticipated to be required on one of Maritech’s hurricane damaged properties.
NOTE E – HEDGE CONTRACTS
We are exposed to financial and market risks that affect our businesses. We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facilities, to the extent we have debt outstanding, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our financial risk management activities may at times involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures. Prior to the sale of substantially all of our remaining Maritech oil and gas properties in May 2011, we utilized cash flow commodity hedge transactions to reduce our exposure related to the volatility of oil and gas prices. These cash flow commodity hedge contracts were liquidated in the second quarter of 2011. For these and other hedge contracts, we formally document the relationships between hedging instruments and hedged items, as well as our risk management objectives, our strategies for undertaking various hedge transactions, and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment, or forecasted transaction. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in these hedging transactions are highly effective in offsetting changes in cash flows of the hedged items.
Derivative Hedge Contracts
In April 2011, following the execution of the purchase and sale agreement pursuant to which Maritech agreed to sell approximately 79% of its proved reserves, we liquidated our remaining oil hedge contracts and paid $14.2 million to the counterparty. Therefore, from April 2011 forward, we have had no remaining cash flow hedging swap contracts outstanding associated with our Maritech subsidiary’s oil or gas production.
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Prior to their liquidation during 2011, we believe that our swap agreements were “highly effective cash flow hedges,” in managing the volatility of future cash flows associated with Maritech’s oil production. The effective portion of the change in the derivative’s fair value (i.e., that portion of the change in the derivative’s fair value that offsets the corresponding change in the cash flows of the hedged transaction) was initially reported as a component of accumulated other comprehensive income, which was classified within equity. This component of accumulated other comprehensive income associated with cash flow hedge derivative contracts, including any derivative contracts which have been liquidated, was subsequently reclassified into product sales revenues, utilizing the specific identification method, when the hedged exposure affected earnings (i.e., when hedged oil and gas production volumes were reflected in revenues). Any “ineffective” portion of the change in the derivative’s fair value was recognized in earnings immediately.
Pretax gains and losses associated with oil and gas derivative swap contracts for the three month period ended March 31, 2011, are summarized below:
NOTE F – EQUITY
Changes in equity for the three month periods ended March 31, 2012 and 2011, are as follows:
NOTE G – COMMITMENTS AND CONTINGENCIES
Litigation
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not reasonably expect these matters to have a material adverse impact on the financial statements.
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Environmental 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 future remediation costs and 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.
NOTE H – INDUSTRY SEGMENTS
We manage our operations through five operating segments: Fluids, Production Testing, Compressco, Offshore Services, and Maritech.
Our Fluids Division manufactures and markets clear brine fluids, additives, and associated products and services to the oil and gas industry for use in well drilling, completion, and workover operations in the United States and in certain countries in Latin America, Europe, Asia, the Middle East, and Africa. The Division also markets liquid and dry calcium chloride products manufactured at its production facilities or purchased from third-party suppliers to a variety of markets outside the energy industry.
Our Production Enhancement Division consists of two operating segments: Production Testing and Compressco. The Production Testing segment provides production testing, rig cooling, and other associated services in many of the major oil and gas basins in the United States, as well as in certain basins in certain regions in Latin America, Africa, Europe, the Middle East, and Australia.
The Compressco segment provides wellhead compression-based and other production enhancement services throughout many of the onshore producing regions of the United States, as well as certain basins in Mexico, Canada, and certain countries in South America, Europe, Asia, and other international locations. Beginning June 20, 2011, following the initial public offering of Compressco Partners, L.P. (Compressco Partners), we allocate and charge certain corporate and divisional direct and indirect administrative costs to Compressco Partners.
Our Offshore Division consists of two operating segments: Offshore Services and Maritech. The Offshore Services segment provides (1) downhole and subsea oil and gas services such as well plugging and abandonment and wireline services, (2) decommissioning and certain construction services utilizing heavy lift barges and various cutting technologies with regard to offshore oil and gas production platforms and pipelines, and (3) conventional and saturated air diving services.
The Maritech segment is an oil and gas exploration, development, and production operation that was focused in the offshore and onshore U.S. Gulf Coast region. During 2011 and the first quarter of 2012, Maritech sold substantially all of its oil and gas producing property interests. Maritech’s remaining operations consist primarily of the ongoing abandonment and decommissioning associated with its remaining offshore wells, facilities, and production platforms. Maritech intends to acquire a significant portion of these services from the Offshore Division’s Offshore Services segment.
We generally evaluate the performance of and allocate resources to our segments based on profit or loss from their operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments and geographic areas are priced at the estimated fair value of the products or services as negotiated between the operating units. “Corporate overhead” includes corporate general and administrative expenses, corporate depreciation and amortization, interest income and expense, and other income and expense.
Summarized financial information concerning the business segments from continuing operations is as follows:
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Business Overview
We have advanced our growth strategy with the recent completion of two significant acquisitions. In March 2012, we acquired the common stock of Optima Solutions Holdings Limited (Optima) for a cash purchase price of approximately $64.6 million. Optima is a leading provider of rig cooling services and associated products that suppress heat generated by high rate flaring of hydrocarbons during well test operations. The acquisition of Optima allows our Production Testing segment to provide its customers with a broader range of well completion and production testing services and is expected to enable the segment to expand its presence in many significant global markets. In April 2012, we acquired the assets and operations of Eastern Reservoir Services (ERS), a division of Patterson-UTI Energy, Inc., for a cash purchase price of approximately $42.5 million. ERS is a leading provider of frac flow back services to oil and gas operators in the Appalachian and U.S. Rocky Mountain regions. The acquisition of ERS also represents a strategic expansion of our existing Production Testing segment operations, allowing it to serve customers in additional basins in the U.S. Each of these acquisitions is expected to contribute immediately to our revenues and profitability going forward. Despite the utilization of over $100 million of cash associated with these two acquisitions, our long-term growth strategy continues to include additional acquisitions and other opportunities to expand our operations in oil and gas service and product markets. Future acquisitions could be funded by existing cash balances, borrowing capacity under our bank revolving credit facility, the issuance of additional debt or equity, or other sources of capital.
Revenues for the first quarter of 2012 reflect the growth of our Fluids, Production Testing and Compressco segments compared to the first quarter of 2011. The Fluids Division reported increased revenues and profitability primarily as a result of increased sales of clear brine fluid (CBF) products, particularly domestically. Fluids Division profitability also increased as a result of improved operating results of its El Dorado, Arkansas, calcium chloride plant. Our Production Testing segment revenues also increased, primarily due to increased domestic demand, reflecting increased drilling activity compared to the prior year period. Future revenues and profitability for the Production Testing segment are expected to increase as a result of the two acquisitions discussed above. Our Compressco segment, primarily through its Compressco Partners, L.P. subsidiary, also reported increased revenues compared to the prior year period mostly due to increased demand in Latin America. The Offshore Services segment reported decreased revenues compared to the prior year period, largely due to the sale during the second quarter of 2011 of its onshore abandonment business, and due to decreased demand for diving and cutting services during the current period. Our Maritech segment’s revenues decreased significantly due to the sale during the prior year and first quarter of 2012 of substantially all of its oil and gas producing properties. Maritech’s revenues are expected to be minimal going forward. Overall profitability improved during the current year quarter compared to the prior year period primarily due to the gain recorded by our Offshore Services segment during the first quarter of 2012 on the sale of certain equipment assets. Increased gross profit was partially offset by increased administrative costs, particularly in our Compressco segment as a result of the increased costs of being a separate public limited partnership. Future growth for our U.S. gas-directed businesses could be negatively affected if current low natural gas prices continue.
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.
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Results of Operations
Three months ended March 31, 2012 compared with three months ended March 31, 2011.
Consolidated Comparisons
Consolidated revenues for the quarter ended March 31, 2012, decreased compared to the prior year period primarily due to the sales of Maritech oil and gas producing properties, which resulted in a $41.4 million decrease in Maritech revenues. Maritech revenues are expected to continue to be negligible going forward. Increased oil and gas industry activity compared to the first quarter of 2011 led to the growth in revenues for our Fluids and Production Testing segments. In particular, our Production Testing segment reflected increased activity, primarily domestically. Our Fluids segment’s revenue growth was also due to increased industry activity and despite decreased product sales of our manufactured products. Overall gross profit increased primarily due to the increased profitability of our Fluids Division, reflecting increased efficiencies at our El Dorado, Arkansas, calcium chloride plant. Our Maritech segment also reported a decreased loss due to significant impairments and excess decommissioning costs incurred during the prior year period.
Consolidated general and administrative expenses increased by approximately $3.1 million during the first quarter of 2012 compared to the prior year period primarily due to a $2.1 million increase by our Compressco segment, as a result of increased administrative and public company costs associated with Compressco Partners, L.P. being a separate public limited partnership. In addition, consolidated general and administrative expenses also includes approximately $1.3 million of transaction costs incurred in connection with the Optima acquisition. By type of cost, general and administrative expenses increased due to approximately $1.3 million of increased employee related costs, approximately $1.4 million of increased professional fee expenses, $0.5 million of decreased billings to joint owners for Maritech administrative overhead, $0.3 million of increased insurance and taxes expense, and $0.4 million of increased general expenses. These increases were partially offset by approximately $0.8 million of decreased bad debt expense during the period compared to the prior year period.
Consolidated other income increased during the first quarter of 2012 compared to the prior year period, primarily due to approximately $3.2 million of increased gains on sales of assets and $0.5 million of increased earnings from unconsolidated joint ventures. These increases were partially offset by approximately $0.6 million of decreased minority interest income, and approximately $0.3 million of decreased other income.
Our provision for income taxes during the first quarter of 2012 was $0.6 million compared to a $1.5 million benefit during the prior year period, due to our net earnings for the current period.
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Divisional Comparisons Fluids Division
The increase in Fluids Division revenues during the first quarter of 2012 compared to the prior year period was primarily due to a $2.0 million net increase in product sales revenues. This increase was due to $5.9 million of increased clear brine fluids (CBFs) product sales revenues, particularly domestically. Partially offsetting this increase in CBF sales was approximately $3.9 million of decreased revenue from manufactured products, primarily from decreased industrial demand due to weather, particularly in Europe. Manufactured product sales revenues also decreased due to the reduced sales of dry calcium chloride following the shutdown of our Lake Charles pellet plant during mid-2011. Onshore domestic industry activity levels were increased as compared to the prior year period, primarily in unconventional shale reservoir markets.
Our Fluids Division gross profit increased compared to the prior year period primarily as a result of the increased domestic CBF revenues discussed above and increased efficiency at our El Dorado, Arkansas, calcium chloride plant.
Fluids Division income before taxes increased compared to the prior year period due to the increase in gross profit discussed above and increased other income, and despite increased administrative costs. Other income increased primarily due to increased income from an unconsolidated joint venture and foreign currency exchange gains. Fluids Division administrative costs increased primarily due to increased personnel-related costs.
Production Enhancement Division
Production Testing Segment
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Production Testing revenues increased during the first quarter of 2012 due to an increase of approximately $5.4 million in domestic revenues. This increase was a result of increased domestic onshore oil and gas drilling activity compared to the prior year period, as reflected by rig count data. In particular, the Production Testing segment capitalized on the increased domestic onshore activity associated with unconventional shale drilling in many of the regions it serves. Partially offsetting the domestic revenues increase, international revenues decreased by approximately $0.4 million, despite increased activity in Mexico, due to decreased revenue from a South American technical management contract compared to the 2011 period. During March 2012, the Production Testing segment acquired Optima, and in April 2012 acquired the assets and operations of ERS. Revenues of this segment are expected to increase going forward as a result of these acquisitions.
The decrease in Production Testing gross profit during the first quarter of 2012 was primarily due to decreased international profitability compared to the prior year period, particularly from the South American technical management contract. Revenue and gross profit from this ongoing contract is recognized upon achieving contract milestones. The decrease in segment gross profit from international activity was partially offset by the impact from the increased domestic activity discussed above.
Production Testing income before taxes decreased due to the decreased gross profit discussed above, as well as due to increased administrative expenses caused primarily by increased personnel-related costs and approximately $1.3 million of transaction costs expensed in connection with the Optima acquisition. In addition, other income decreased compared to the prior year period due to decreased minority interest income.
Compressco Segment
The increase in Compressco revenues compared to the prior year period was due to an increase of approximately $2.1 million of service revenues resulting from increased demand, particularly in Latin America. Partially offsetting this increase was a $1.3 million decrease from sales of compressor units and parts during the first quarter. Compressco has reduced the rate at which it fabricates new compressor units for its domestic operations until demand increases and inventories of available units are reduced.
Compressco gross profit increased during the first quarter of 2012 compared to the prior year period primarily due to the increased Latin America activity discussed above, and despite increased domestic operating expenses. Compressco seeks to further improve its operating profitability and is continuing to review its operating expenses, including maintenance, fuel, and labor costs.
Income before taxes for Compressco decreased during the first quarter of 2012 compared to the prior year period despite the increased gross profit discussed above due to increased administrative expenses. Compressco’s administrative expenses reflect increased professional fee expenses, which are expected to be highest during the first and fourth quarters of each year as a result of Compressco Partners being a separate public limited partnership. In addition, general and administrative expense during the first quarter of 2012 also includes the allocation of a portion of our corporate administrative expenses to Compressco Partners pursuant to our Omnibus Agreement with Compressco Partners executed in connection with its initial public offering.
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Offshore Division
Offshore Services Segment
Revenues from our Offshore Services segment decreased during the first quarter of 2012 compared to the prior year quarter. Increased decommissioning and abandonment services revenues, including those from the heavy lift barge purchased during 2011, were partially offset by decreased diving and cutting services activity during the current year period. Diving services revenues were negatively affected by certain vessel repairs scheduled during the current year period. The most significant decrease, however, was due to the 2011 sale of the segment’s onshore abandonment operations, which generated approximately $3.3 million in revenues during the prior year period. Approximately $7.3 million of Offshore Services revenues were from work performed for Maritech during the first quarter of 2012, compared to $5.6 million of such work in the prior year period, reflecting Maritech’s plans to aggressively decommission and abandon its remaining oil and gas platform structures. These intercompany revenues are eliminated in consolidation.
Gross profit for the Offshore Services segment during the first quarter of 2012 decreased as compared to the prior year period primarily due to decreased profitability of our decommissioning operations, which experienced increased costs from weather delays during the current year quarter. This decrease was partially offset by improved profitability of our abandonment and diving operations.
Offshore Services segment loss before taxes decreased despite the reduced gross profit and increased administrative costs due to the gain on the sale of certain abandonment assets that generated approximately $4.1 million of other income during the current year period.
Maritech Segment
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Maritech revenues decreased significantly during the first quarter of 2012 compared to the prior year period due to the sale of substantially all of its oil and gas reserves during 2011 and 2012. In particular, the May 31, 2011, sale of oil and gas properties resulted in the sale of approximately 79% of Maritech’s proven reserves. Following the sales of almost all of its producing properties, Maritech revenues are expected to continue to be negligible.
Maritech gross loss decreased during the first quarter of 2012 compared to the prior year period despite the decreased revenues discussed above primarily due to reduced operating and depletion expenses associated with the sold properties. In addition, Maritech recorded $3.4 million of impairments and $7.0 million of higher excess decommissioning costs during the prior year period.
Maritech pretax loss during the first quarter of 2012 decreased compared to the prior year period primarily due to the increase in gross profit discussed above. In addition, Maritech reported decreased net administrative expenses during the current year period primarily due to the reduction in its headcount following the sale of properties, and this decrease more than offset the decrease in administrative costs billed to joint owners. Partially offsetting the impact of increased gross profit and decreased administration costs, Maritech recorded decreased other income from gains on sales of properties during the first quarter of 2012 compared to the prior year period.
Corporate Overhead
Corporate Overhead includes corporate general and administrative expense, interest income and expense, and other income and expense. Such expenses and income are not allocated to our operating divisions, as they relate to our general corporate activities. However, in connection with the public offering of common units in our Compressco Partners subsidiary, on June 20, 2011, we began allocating and charging Compressco Partners for its share of our corporate administrative costs directly related to Compressco Partners’ activities. Corporate Overhead decreased during the first quarter of 2012 compared | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||