UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10‑Q10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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 001‑38066001-38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
| |
Delaware | 81-4561945 |
|
|
(State of incorporation) | (IRS Employer Identification Number) |
| |
Houston, TX |
|
(Address of principal executive offices) | (Zip Code) |
(940) 668‑0259(713) 235-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A common stock, par value $0.01 per share | WTTR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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‑212b-2 of the Exchange Act.
| | | |
Large accelerated filer | Accelerated filer ☐ | 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 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of November 8, 2017,August 2, 2019, the registrant had 59,201,39380,177,766 shares of Class A common stock 6,731,845 shares of Class A-2 common stock and 40,331,98926,026,843 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 39 | |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10‑Q10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our final prospectus dated April 20, 2017 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act,most recent Annual Report on April 24, 2017 (the “Final Prospectus”)Form 10-K and under the heading “Item“Part II―Item 1A. Risk Factors” in this Quarterly Report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
| the level of capital spending and access to capital markets by |
| trends and volatility in oil and gas prices; |
| demand for our services; |
| capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services in our core markets; |
● | our ability to retain key management and employees; |
● | our ability to hire and retain skilled labor; |
● | regional impacts to our business, including our key infrastructure assets within the |
|
|
| our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
| our health, safety and environmental performance; |
| the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals and various environmental matters; |
|
|
| the |
| the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us; |
● | our level of indebtedness and our ability to |
3 |
|
|
| delays or restrictions in obtaining permits by us or our customers; |
3
| constraints in supply or availability of equipment used in our business; |
| the |
| changes in global political or economic conditions, generally, and in the markets we serve; |
| accidents, weather, seasonality or other events affecting our business; and |
| the other risks |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under “Riskthe heading “Part I―Item 1A. Risk Factors” in the Final Prospectusour most recent Annual Report on Form 10-K and under the heading “Item“Part II―Item 1A. Risk Factors” in this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.note.
4
PART I – FINANCIAL INFORMATION
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (unaudited) |
|
|
| |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 42,393 |
| $ | 40,041 |
Accounts receivable trade, net of allowance for doubtful accounts of $2,867 and $2,144, respectively |
|
| 148,372 |
|
| 75,892 |
Accounts receivable, related parties |
|
| 433 |
|
| 135 |
Inventories |
|
| 852 |
|
| 1,001 |
Prepaid expenses and other current assets |
|
| 13,495 |
|
| 7,586 |
Total current assets |
|
| 205,545 |
|
| 124,655 |
Property and equipment |
|
| 815,002 |
|
| 739,386 |
Accumulated depreciation |
|
| (535,456) |
|
| (490,519) |
Property and equipment, net |
|
| 279,546 |
|
| 248,867 |
Goodwill |
|
| 25,091 |
|
| 12,242 |
Other intangible assets, net |
|
| 35,351 |
|
| 11,586 |
Other assets |
|
| 7,216 |
|
| 7,716 |
Total assets |
| $ | 552,749 |
| $ | 405,066 |
Liabilities and Equity |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accounts payable |
| $ | 11,751 |
| $ | 10,796 |
Accounts payable and accrued expenses, related parties |
|
| 1,246 |
|
| 648 |
Accrued salaries and benefits |
|
| 8,595 |
|
| 2,511 |
Accrued insurance |
|
| 11,008 |
|
| 10,338 |
Accrued expenses and other current liabilities |
|
| 39,713 |
|
| 22,091 |
Total current liabilities |
|
| 72,313 |
|
| 46,384 |
Accrued lease obligations |
|
| 18,100 |
|
| 15,946 |
Other long term liabilities |
|
| 8,008 |
|
| 8,028 |
Long-term debt, net of current maturities |
|
| — |
|
| — |
Total liabilities |
|
| 98,421 |
|
| 70,358 |
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
Class A-1 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017; 16,100,000 shares issued and outstanding as of December 31, 2016 |
|
| — |
|
| 161 |
Class A common stock, $0.01 par value; 250,000,000 shares authorized and 30,468,249 shares issued and outstanding as of September 30, 2017; 3,802,972 shares issued and outstanding as of December 31, 2016 |
|
| 305 |
|
| 38 |
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 38,462,541 shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
|
| 385 |
|
| 385 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
|
| — |
|
| — |
Additional paid-in capital |
|
| 206,158 |
|
| 113,175 |
Accumulated deficit |
|
| (8,207) |
|
| (1,043) |
Total stockholders’ equity |
|
| 198,641 |
|
| 112,716 |
Noncontrolling interests |
|
| 255,687 |
|
| 221,992 |
Total equity |
|
| 454,328 |
|
| 334,708 |
Total liabilities and equity |
| $ | 552,749 |
| $ | 405,066 |
| | | | | | |
| | June 30, 2019 | | December 31, 2018 | ||
|
| (unaudited) | | | ||
Assets | | | | | | |
Current assets |
| | | | | |
Cash and cash equivalents | | $ | 23,818 | | $ | 17,237 |
Accounts receivable trade, net of allowance for doubtful accounts of $4,921 and $5,329, respectively | |
| 324,918 | |
| 341,711 |
Accounts receivable, related parties | |
| 3,105 | |
| 1,119 |
Inventories | |
| 39,952 | |
| 44,992 |
Prepaid expenses and other current assets | |
| 29,435 | |
| 27,093 |
Total current assets | |
| 421,228 | |
| 432,152 |
Property and equipment | |
| 1,069,496 | |
| 1,114,378 |
Accumulated depreciation | |
| (603,191) | |
| (611,530) |
Property and equipment held-for-sale, net | | | 1,906 | | | — |
Total property and equipment, net | |
| 468,211 | |
| 502,848 |
Right-of-use assets | | | 75,302 | | | — |
Goodwill | |
| 266,934 | |
| 273,801 |
Other intangible assets, net | |
| 142,438 | |
| 148,377 |
Other assets | |
| 3,064 | |
| 3,427 |
Total assets | | $ | 1,377,177 | | $ | 1,360,605 |
Liabilities and Equity | |
| | |
|
|
Current liabilities | |
| | |
|
|
Accounts payable | | $ | 53,107 | | $ | 53,847 |
Accrued accounts payable | | | 43,311 | | | 62,536 |
Accounts payable and accrued expenses, related parties | |
| 3,417 | |
| 5,056 |
Accrued salaries and benefits | |
| 16,734 | |
| 22,113 |
Accrued insurance | |
| 15,799 | |
| 14,849 |
Sales tax payable | | | 1,282 | | | 5,820 |
Accrued expenses and other current liabilities | |
| 10,615 | |
| 14,560 |
Current operating lease liabilities | | | 19,553 | | | — |
Current portion of finance lease obligations | |
| 421 | |
| 938 |
Total current liabilities | |
| 164,239 | |
| 179,719 |
Long-term operating lease liabilities | |
| 75,169 | |
| 16,752 |
Other long-term liabilities | |
| 10,921 | |
| 8,361 |
Long-term debt | |
| — | |
| 45,000 |
Total liabilities | |
| 250,329 | |
| 249,832 |
Commitments and contingencies (Note 10) | |
| | |
|
|
Class A common stock, $0.01 par value; 350,000,000 shares authorized; 80,176,078 and 78,956,555 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | |
| 802 | |
| 790 |
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of June 30, 2019 and December 31, 2018 | |
| — | |
| — |
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 26,026,843 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | |
| 260 | |
| 260 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018 | |
| — | |
| — |
Additional paid-in capital | |
| 821,968 | |
| 813,599 |
Retained earnings | |
| 25,988 | |
| 18,653 |
Accumulated other comprehensive deficit | | | (380) | | | (368) |
Total stockholders’ equity | |
| 848,638 | |
| 832,934 |
Noncontrolling interests | |
| 278,210 | |
| 277,839 |
Total equity | |
| 1,126,848 | |
| 1,110,773 |
Total liabilities and equity | | $ | 1,377,177 | | $ | 1,360,605 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
5
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
| $ | 125,086 |
| $ | 60,975 |
| $ | 311,275 |
| $ | 173,157 |
|
Accommodations and rentals |
|
| 15,615 |
|
| 5,838 |
|
| 38,457 |
|
| 19,585 |
|
Wellsite completion and construction services |
|
| 13,179 |
|
| 7,094 |
|
| 38,522 |
|
| 22,923 |
|
Total revenue |
|
| 153,880 |
|
| 73,907 |
|
| 388,254 |
|
| 215,665 |
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
| 88,087 |
|
| 49,996 |
|
| 226,737 |
|
| 144,653 |
|
Accommodations and rentals |
|
| 11,976 |
|
| 4,969 |
|
| 30,697 |
|
| 15,527 |
|
Wellsite completion and construction services |
|
| 10,888 |
|
| 6,299 |
|
| 32,155 |
|
| 19,817 |
|
Depreciation and amortization |
|
| 23,420 |
|
| 21,613 |
|
| 67,144 |
|
| 73,874 |
|
Total costs of revenue |
|
| 134,371 |
|
| 82,877 |
|
| 356,733 |
|
| 253,871 |
|
Gross profit (loss) |
|
| 19,509 |
|
| (8,970) |
|
| 31,521 |
|
| (38,206) |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 16,087 |
|
| 8,764 |
|
| 49,298 |
|
| 25,928 |
|
Depreciation and amortization |
|
| 375 |
|
| 363 |
|
| 1,312 |
|
| 1,644 |
|
Impairment of goodwill and other intangible assets |
|
| — |
|
| — |
|
| — |
|
| 138,666 |
|
Impairment of property and equipment |
|
| — |
|
| — |
|
| — |
|
| 60,026 |
|
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| 2,871 |
|
| 13,169 |
|
Total operating expenses |
|
| 17,052 |
|
| 22,296 |
|
| 53,481 |
|
| 239,433 |
|
Income (loss) from operations |
|
| 2,457 |
|
| (31,266) |
|
| (21,960) |
|
| (277,639) |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (484) |
|
| (4,343) |
|
| (1,885) |
|
| (11,792) |
|
Other income, net |
|
| 326 |
|
| 431 |
|
| 3,342 |
|
| 588 |
|
Income (loss) before tax expense |
|
| 2,299 |
|
| (35,178) |
|
| (20,503) |
|
| (288,843) |
|
Tax benefit (expense) |
|
| 294 |
|
| (26) |
|
| 326 |
|
| (392) |
|
Net income (loss) |
|
| 2,593 |
|
| (35,204) |
|
| (20,177) |
|
| (289,235) |
|
Less: Net loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,359 |
|
Less: Net (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Net income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
Allocation of net income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1 stockholders |
| $ | — |
|
|
|
| $ | (2,679) |
|
|
|
|
Class A stockholders |
|
| 1,224 |
|
|
|
|
| (4,485) |
|
|
|
|
Class B stockholders |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,224 |
|
|
|
| $ | (7,164) |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Basic |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A—Basic |
|
| 30,336,923 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B—Basic |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Basic |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A—Basic |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B—Basic |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Diluted |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A—Diluted |
|
| 30,357,572 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B—Diluted |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Diluted |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A—Diluted |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B—Diluted |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 | | 2019 | | 2018 | ||||
Revenue |
| |
|
| |
| | | | | | |
Water services | | $ | 202,011 | | $ | 233,954 | | $ | 422,606 | | $ | 452,184 |
Water infrastructure | | | 51,710 | | | 55,727 | | | 105,326 | | | 109,784 |
Oilfield chemicals | |
| 63,001 | |
| 64,807 | | | 129,830 | | | 128,437 |
Other | |
| 7,165 | |
| 38,759 | | | 28,771 | | | 79,237 |
Total revenue | |
| 323,887 | |
| 393,247 | | | 686,533 | | | 769,642 |
Costs of revenue | |
|
| |
|
| | | | | | |
Water services | | | 155,151 | | | 176,571 | | | 318,272 | | | 341,201 |
Water infrastructure | | | 38,456 | | | 37,884 | | | 79,886 | | | 77,980 |
Oilfield chemicals | |
| 54,051 | | | 58,500 | | | 113,578 | | | 115,584 |
Other | |
| 7,447 | | | 33,119 | | | 28,500 | | | 68,873 |
Depreciation and amortization | |
| 28,843 | | | 30,445 | | | 60,361 | | | 61,327 |
Total costs of revenue | |
| 283,948 | |
| 336,519 | | | 600,597 | | | 664,965 |
Gross profit | |
| 39,939 | |
| 56,728 | | | 85,936 | | | 104,677 |
Operating expenses | |
|
| |
|
| | | | | | |
Selling, general and administrative | |
| 27,297 | | | 26,871 | | | 59,673 | | | 52,552 |
Depreciation and amortization | |
| 906 | | | 807 | | | 1,906 | | | 1,348 |
Impairment of goodwill | |
| — | | | — | | | 4,396 | | | — |
Impairment of property and equipment | | | 374 | | | 2,282 | | | 893 | | | 2,282 |
Impairment of cost-method investment | |
| — | | | — | | | — | | | 2,000 |
Lease abandonment costs | |
| 183 | | | 1,973 | | | 1,256 | | | 3,097 |
Total operating expenses | |
| 28,760 | |
| 31,933 | | | 68,124 | | | 61,279 |
Income from operations | |
| 11,179 | |
| 24,795 | | | 17,812 | | | 43,398 |
Other income (expense) | |
|
| |
|
| | | | | | |
(Losses) gains on sales of property and equipment, net | | | (1,709) | | | 2,056 | | | (6,200) | | | 1,502 |
Interest expense, net | |
| (839) | | | (1,342) | | | (1,932) | | | (2,493) |
Foreign currency gain (loss), net | | | 67 | | | (340) | | | 327 | | | (740) |
Other (expense) income, net | |
| (59) | | | 4 | | | 210 | | | 100 |
Income before income tax expense | |
| 8,639 | |
| 25,173 | | | 10,217 | | | 41,767 |
Income tax expense | |
| (571) | | | (150) | | | (749) | | | (612) |
Net income | |
| 8,068 | |
| 25,023 | | | 9,468 | | | 41,155 |
Less: net income attributable to noncontrolling interests | |
| (1,868) | | | (8,060) | | | (2,133) | | | (14,093) |
Net income attributable to Select Energy Services, Inc. | | $ | 6,200 | | $ | 16,963 | | $ | 7,335 | | $ | 27,062 |
| | | | | | | | | | | | |
Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | |
Class A—Basic | | $ | 0.08 | | $ | 0.24 | | $ | 0.09 | | $ | 0.40 |
Class A-2—Basic | | $ | — | | $ | — | | $ | — | | $ | 0.40 |
Class B—Basic | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | |
Class A—Diluted | | $ | 0.08 | | $ | 0.24 | | $ | 0.09 | | $ | 0.39 |
Class A-2—Diluted | | $ | — | | $ | — | | $ | — | | $ | 0.39 |
Class B—Diluted | | $ | — | | $ | — | | $ | — | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
6
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss arising during period |
|
| — |
|
| — |
|
| — |
|
| (106) |
|
Net amount reclassified to earnings |
|
| — |
|
| — |
|
| — |
|
| 113 |
|
Net change in unrealized gain |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
Comprehensive income (loss) |
|
| 2,593 |
|
| (35,204) |
|
| (20,177) |
|
| (289,228) |
|
Less: Comprehensive loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,352 |
|
Less: Comprehensive (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Comprehensive income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 | | 2019 | | 2018 | ||||
Net income | | $ | 8,068 | | $ | 25,023 | | $ | 9,468 | | $ | 41,155 |
Other comprehensive income | |
|
| |
|
| | | | | | |
Foreign currency translation adjustment, net of tax of $0 | | | (66) | | | (191) | | | (12) | | | (450) |
Comprehensive income | |
| 8,002 | |
| 24,832 | | | 9,456 | | | 40,705 |
Less: comprehensive income attributable to noncontrolling interests | |
| (1,853) | |
| (7,998) | | | (2,130) | | | (13,939) |
Comprehensive income attributable to Select Energy Services, Inc. | | $ | 6,149 | | $ | 16,834 | | $ | 7,326 | | $ | 26,766 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
7
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)For the six months ended June 30, 2019 and 2018
(unaudited)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Class A-1 |
| Class A |
| Class B |
| Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Stockholders |
| Stockholders |
| Stockholders |
| Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
| Class A-1 |
|
|
| Class A |
|
|
| Class B |
|
|
|
|
|
| Additional |
|
|
|
| Total |
|
|
|
|
|
| |||||
|
|
|
| Common |
|
|
| Common |
|
|
| Common |
|
|
| Preferred |
| Paid-In |
| Accumulated |
| Stockholders’ |
| Noncontrolling |
|
|
| ||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||||
Balance as of December 31, 2016 |
| 16,100,000 |
| $ | 161 |
| 3,802,972 |
| $ | 38 |
| 38,462,541 |
| $ | 385 |
| — |
| $ | — |
| $ | 113,175 |
| $ | (1,043) |
| $ | 112,716 |
| $ | 221,992 |
| $ | 334,708 |
Conversion of Class A-1 to Class A |
| (16,100,000) |
|
| (161) |
| 16,100,000 |
|
| 161 |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Issuance of shares for acquisitions |
| — |
|
| — |
| 560,277 |
|
| 6 |
| — |
|
| — |
| — |
|
| — |
|
| 4,360 |
|
| — |
|
| 4,366 |
|
| 5,514 |
|
| 9,880 |
Issuance of shares for initial public offering |
| — |
|
| — |
| 10,005,000 |
|
| 100 |
| — |
|
| — |
| — |
|
| — |
|
| 87,835 |
|
| — |
|
| 87,935 |
|
| 40,569 |
|
| 128,504 |
Equity-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 788 |
|
| — |
|
| 788 |
|
| 993 |
|
| 1,781 |
Noncontrolling interest in subsidiary |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (368) |
|
| (368) |
Net loss |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (7,164) |
|
| (7,164) |
|
| (13,013) |
|
| (20,177) |
Balance as of September 30, 2017 |
| — |
| $ | — |
| 30,468,249 |
| $ | 305 |
| 38,462,541 |
| $ | 385 |
| — |
| $ | — |
| $ | 206,158 |
| $ | (8,207) |
| $ | 198,641 |
| $ | 255,687 |
| $ | 454,328 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | ��� | | | | | | | Accumulated | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | | | | Other | | | | | | | | | | |||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | | | | Comprehensive | | Total | | | | | | | ||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | Retained | | Income | | Stockholders’ | | Noncontrolling | | | | |||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| (Deficit) |
| Equity |
| Interests |
| Total | ||||||||||
Balance as of December 31, 2018 |
| 78,956,555 | | $ | 790 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 813,599 | | $ | 18,653 | | $ | (368) | | $ | 832,934 | | $ | 277,839 | | $ | 1,110,773 |
ESPP shares issued | | 5,667 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 58 | | | — | | | — | | | 58 | | | (2) | | | 56 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 6,271 | | | — | | | — | | | 6,271 | | | 2,037 | | | 8,308 |
Issuance of restricted shares |
| 1,373,930 | |
| 14 |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 3,549 | |
| — | |
| — | |
| 3,563 | |
| (3,563) |
|
| — |
Exercise of restricted stock units |
| 1,250 | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 4 | |
| — | |
| — | |
| 4 | |
| (4) |
|
| — |
Repurchase of common stock | | (152,502) | | | (2) | | — | | | — | | — | | | — | | — | | | — | | | (1,539) | | | — | | | — | | | (1,541) | | | 25 | | | (1,516) |
Restricted shares forfeited | | (8,822) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (23) | | | — | | | — | | | (23) | | | 23 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (225) |
|
| (225) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 49 | | | — | | | — | | | 49 | | | (49) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (12) | | | (12) | | | (4) | | | (16) |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 7,335 | |
| — | |
| 7,335 | |
| 2,133 |
|
| 9,468 |
Balance as of June 30, 2019 |
| 80,176,078 | | $ | 802 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 821,968 | | $ | 25,988 | | $ | (380) | | $ | 848,638 | | $ | 278,210 | | $ | 1,126,848 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | Retained | | Other | | | | | | | | | | ||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | Earnings | | Comprehensive | | Total | ��� | | | | | | |||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | (Accumulated | | Income | | Stockholders’ | | Noncontrolling | | | | |||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit) |
| (Deficit) |
| Equity |
| Interests |
| Total | ||||||||||
Balance as of December 31, 2017 |
| 59,182,176 | | $ | 592 |
| 6,731,845 | | $ | 67 |
| 40,331,989 | | $ | 404 |
| — | | $ | — | | $ | 673,141 | | $ | (17,859) | | $ | 302 | | $ | 656,647 | | $ | 406,722 | | $ | 1,063,369 |
Conversion of Class A-2 to Class A |
| 6,731,839 | |
| 67 |
| (6,731,839) | |
| (67) |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| — |
Conversion of Class B to Class A | | 10,948,669 | | | 110 | | — | | | — | | (10,948,669) | | | (110) | | — | | | — | | | 111,803 | | | — | | | — | | | 111,803 | | | (111,803) | | | — |
ESPP shares issued | | 3,986 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 50 | | | — | | | — | | | 50 | | | 4 | | | 54 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 3,617 | | | — | | | — | | | 3,617 | | | 1,848 | | | 5,465 |
Issuance of restricted shares | | 430,595 | | | 4 | | — | | | — | | — | | | — | | — | | | — | | | 2,261 | | | — | | | — | | | 2,265 | | | (2,265) | | | — |
Exercise of restricted stock units | | 27,860 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 104 | | | — | | | — | | | 104 | | | (104) | | | — |
Stock options exercised | | 37,209 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 376 | | | — | | | — | | | 376 | | | 1 | | | 377 |
Repurchase of common stock | | (45,034) | | | — | | (6) | | | — | | — | | | — | | — | | | — | | | (583) | | | — | | | — | | | (583) | | | (74) | | | (657) |
Restricted shares forfeited | | (18,640) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (70) | | | — | | | — | | | (70) | | | 70 | | | — |
Noncontrolling interest in subsidiary | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (280) | | | (280) |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (450) | | | (450) | | | (221) | | | (671) |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 27,062 | |
| — | |
| 27,062 | |
| 14,093 |
|
| 41,155 |
Balance as of June 30, 2018 |
| 77,298,660 | | $ | 773 |
| — | | $ | — |
| 29,383,320 | | $ | 294 |
| — | | $ | — | | $ | 790,699 | | $ | 9,203 | | $ | (148) | | $ | 800,821 | | $ | 307,991 | | $ | 1,108,812 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements
8
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended June 30, 2019 and 2018
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | | | | Other | | | | | | | | | | |||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | | | | Comprehensive | | Total | | | | | | | ||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | Retained | | Income | | Stockholders’ | | Noncontrolling | | | | |||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| (Deficit) |
| Equity |
| Interests |
| Total | ||||||||||
Balance as of March 31, 2019 |
| 79,998,292 | | $ | 800 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 818,556 | | $ | 19,788 | | $ | (314) | | $ | 839,090 | | $ | 276,023 | | $ | 1,115,113 |
ESPP shares issued | | 2,857 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 29 | | | — | | | — | | | 29 | | | — | | | 29 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 3,117 | | | — | | | — | | | 3,117 | | | 1,012 | | | 4,129 |
Issuance of restricted shares |
| 204,153 | |
| 3 |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 524 | |
| — | |
| — | |
| 527 | |
| (527) |
|
| — |
Exercise of restricted stock units |
| 625 | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 2 | |
| — | |
| — | |
| 2 | |
| (2) |
|
| — |
Repurchase of common stock | | (26,716) | | | (1) | | — | | | — | | — | | | — | | — | | | — | | | (295) | | | — | | | — | | | (296) | | | (4) | | | (300) |
Restricted shares forfeited | | (3,133) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (8) | | | — | | | — | | | (8) | | | 8 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (104) |
|
| (104) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 43 | | | — | | | — | | | 43 | | | (43) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (66) | | | (66) | | | (21) | | | (87) |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 6,200 | |
| — | |
| 6,200 | |
| 1,868 |
|
| 8,068 |
Balance as of June 30, 2019 |
| 80,176,078 | | $ | 802 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 821,968 | | $ | 25,988 | | $ | (380) | | $ | 848,638 | | $ | 278,210 | | $ | 1,126,848 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | Retained | | Other | | | | | | | | | | ||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | Earnings | | Comprehensive | | Total | | | | | | | |||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | (Accumulated | | Income | | Stockholders’ | | Noncontrolling | | | | |||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit) |
| (Deficit) |
| Equity |
| Interests |
| Total | ||||||||||
Balance as of March 31, 2018 |
| 66,258,163 | | $ | 662 |
| — | | $ | — |
| 40,331,989 | | $ | 404 |
| — | | $ | — | | $ | 675,895 | | $ | (7,760) | | $ | 43 | | $ | 669,244 | | $ | 412,026 | | $ | 1,081,270 |
Conversion of Class B to Class A | | 10,948,669 | | | 110 | | — | | | — | | (10,948,669) | | | (110) | | — | | | — | | | 111,803 | | | — | | | — | | | 111,803 | | | (111,803) | | | — |
ESPP shares issued | | 3,986 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 50 | | | — | | | — | | | 50 | | | 4 | | | 54 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 2,075 | | | — | | | — | | | 2,075 | | | 909 | | | 2,984 |
Issuance of restricted shares | | 99,206 | | | 1 | | — | | | — | | — | | | — | | — | | | — | | | 840 | | | — | | | — | | | 841 | | | (841) | | | — |
Exercise of restricted stock units | | 625 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 102 | | | — | | | — | | | 102 | | | (102) | | | — |
Stock options exercised | | 17,811 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 295 | | | — | | | — | | | 295 | | | (48) | | | 247 |
Repurchase of common stock | | (29,800) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (361) | | | — | | | — | | | (361) | | | (32) | | | (393) |
Restricted shares forfeited | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Noncontrolling interest in subsidiary | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (119) | | | (119) |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (191) | | | (191) | | | (63) | | | (254) |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 16,963 | |
| — | |
| 16,963 | |
| 8,060 |
|
| 25,023 |
Balance as of June 30, 2018 |
| 77,298,660 | | $ | 773 |
| — | | $ | — |
| 29,383,320 | | $ | 294 |
| — | | $ | — | | $ | 790,699 | | $ | 9,203 | | $ | (148) | | $ | 800,821 | | $ | 307,991 | | $ | 1,108,812 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
89
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash flows from operating activities |
|
|
|
|
|
|
Net loss |
| $ | (20,177) |
| $ | (289,235) |
Adjustments to reconcile net loss to net cash provided by operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
| 68,456 |
|
| 75,518 |
Gain on disposal of property and equipment |
|
| (3,127) |
|
| (30) |
Bad debt expense |
|
| 1,098 |
|
| 1,679 |
Amortization of debt issuance costs |
|
| 928 |
|
| 2,244 |
Equity-based compensation |
|
| 1,781 |
|
| 317 |
Impairment of goodwill and other intangible assets |
|
| — |
|
| 138,666 |
Impairment of property and equipment |
|
| — |
|
| 60,026 |
Other operating items |
|
| (560) |
|
| (806) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accounts receivable |
|
| (65,815) |
|
| 15,339 |
Prepaid expenses and other assets |
|
| (6,493) |
|
| 679 |
Accounts payable and accrued liabilities |
|
| 19,660 |
|
| 3,681 |
Net cash (used in) provided by operating activities |
|
| (4,249) |
|
| 8,078 |
Cash flows from investing activities |
|
|
|
|
|
|
Acquisitions, net of cash received |
|
| (62,199) |
|
| — |
Purchase of property and equipment |
|
| (66,013) |
|
| (28,630) |
Proceeds received from sale of property and equipment |
|
| 6,677 |
|
| 8,258 |
Net cash used in investing activities |
|
| (121,535) |
|
| (20,372) |
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds from revolving line of credit |
|
| 34,000 |
|
| 18,500 |
Payments on long-term debt |
|
| (34,000) |
|
| (36,334) |
Payment of debt issuance costs |
|
| — |
|
| (2,775) |
Proceeds from initial public offering |
|
| 140,070 |
|
| — |
Payments incurred for initial public offering |
|
| (11,566) |
|
| — |
Purchase of noncontrolling interests |
|
| — |
|
| (318) |
Proceeds from (distributions to) noncontrolling interests |
|
| (368) |
|
| 138 |
Member contributions |
|
| — |
|
| 23,519 |
Net cash provided by financing activities |
|
| 128,136 |
|
| 2,730 |
Net increase (decrease) in cash and cash equivalents |
|
| 2,352 |
|
| (9,564) |
Cash and cash equivalents, beginning of period |
|
| 40,041 |
|
| 16,305 |
Cash and cash equivalents, end of period |
| $ | 42,393 |
| $ | 6,741 |
Supplemental cash flow disclosure: |
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,139 |
| $ | 9,592 |
Cash paid for taxes |
| $ | 37 |
| $ | 619 |
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities |
| $ | 7,733 |
| $ | 2,479 |
| | | | | | |
| | Six months ended June 30, | ||||
|
| 2019 | | 2018 | ||
Cash flows from operating activities |
| | | | | |
Net income | | $ | 9,468 | | $ | 41,155 |
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| |
Depreciation and amortization | |
| 62,267 | |
| 62,675 |
Net loss (gain) on disposal of property and equipment | |
| 2,794 | |
| (1,503) |
Bad debt expense | |
| 1,312 | |
| 876 |
Amortization of debt issuance costs | |
| 344 | |
| 344 |
Inventory write-down | | | 209 | | | 394 |
Equity-based compensation | |
| 8,308 | |
| 5,465 |
Impairment of goodwill | |
| 4,396 | |
| — |
Impairment of property and equipment | | | 893 | | | 2,282 |
Impairment of cost-method investment | |
| — | |
| 2,000 |
Loss on divestitures | | | 3,406 | | | — |
Other operating items, net | |
| (178) | |
| (103) |
Changes in operating assets and liabilities | |
| | |
| |
Accounts receivable | |
| 3,346 | |
| (46,057) |
Prepaid expenses and other assets | |
| 1,245 | |
| (17,848) |
Accounts payable and accrued liabilities | |
| (23,075) | |
| 14,625 |
Net cash provided by operating activities | |
| 74,735 | |
| 64,305 |
Cash flows from investing activities | |
| | |
| |
Working capital settlement | |
| 691 | |
| — |
Proceeds received from divestitures | |
| 25,259 | |
| — |
Purchase of property and equipment | |
| (57,513) | |
| (63,050) |
Proceeds received from sale of property and equipment | |
| 10,507 | |
| 3,953 |
Net cash used in investing activities | |
| (21,056) | |
| (59,097) |
Cash flows from financing activities | |
| | |
| |
Borrowings from revolving line of credit | | | 5,000 | | | 25,000 |
Payments on long-term debt | |
| (50,000) | |
| (20,000) |
Payments of finance lease obligations | | | (549) | | | (1,029) |
Proceeds from share issuance | | | 56 | | | 431 |
Distributions to noncontrolling interests, net | |
| (225) | |
| (280) |
Repurchase of common stock | |
| (1,516) | |
| (657) |
Net cash (used in) provided by financing activities | |
| (47,234) | |
| 3,465 |
Effect of exchange rate changes on cash | |
| 136 | |
| (146) |
Net increase in cash and cash equivalents | |
| 6,581 | |
| 8,527 |
Cash and cash equivalents, beginning of period | |
| 17,237 | |
| 2,774 |
Cash and cash equivalents, end of period | | $ | 23,818 | | $ | 11,301 |
Supplemental cash flow disclosure: | |
| | |
| |
Cash paid for interest | | $ | 2,024 | | $ | 1,959 |
Cash paid (refunds received) for income taxes | | $ | 204 | | $ | (1,188) |
Supplemental disclosure of noncash investing activities: | |
| | |
| |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 15,208 | | $ | 25,013 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
910
SELECT ENERGY SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“Select Energy Services”we,” “Select Inc.” or “the Company”the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of a membership interestcommon units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings” or the “Predecessor”). Unless otherwise stated or the context otherwise indicates, all references to the “Company” or similar expressions for time periods prior to the reorganization and 144A Offering transactions refer to SES Holdings and its subsidiaries. For time periods subsequent to the reorganization and 144A Offering transactions, these terms refer to Select Energy Services and its subsidiaries.
SES Holdings was formed in July 2008 and, in October 2008, membersWe are a leading provider of Select Energy Services, LLC (“Select LLC”), formerly known as Peak Oilfield Services, LLC (“Peak”), a Delaware limited liability company formed in December 2006, transferred all interests in Select LLC to SES Holdings in exchange for membership interests in SES Holdings and Select LLC became a wholly owned subsidiary of SES Holdings.
Select Energy Services is an oilfield services company that provides total waterwater-management solutions to the U.S. conventional oil and natural gas industry. The Company offers water‑relatedindustry in the United States (“U.S.”). We also develop, manufacture and deliver chemical solutions for use in oil and gas well completions and production operations. Within the major shale plays in the U.S., we believe we are a market leader in water sourcing, water transfer (both by permanent pipeline and temporary hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic fracture stimulation or “fracking,” which we refer to collectively as “pre-frac water services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including sourcing, transfer, containment, monitoring,water network automation, treatment, flowback, hauling, water recycling and disposaldisposal. We also manufacture a full suite of specialty chemicals used in the U.S. shale basins. These services establishfracturing process, and maintain the flow ofwe provide chemicals needed by our customers to help increase oil and natural gas throughoutproduction and lower costs over the productive life of a horizontal well. We believe we are the only company in the oilfield services industry that combines full life cycle water-management services with the ability to develop and provide related chemical products.
The Company also operates a wellsite services group to complement its total water solutions offering. These services include equipment rental, accommodations, craneSelect 144A Offering and logistics services, wellsite and pipeline construction, and field services. The Company conducts its wellsite services activities on a third‑party contractual basis unrelated to its water‑related services.
Reorganization:Initial Public Offering. On December 20, 2016, Select Energy ServicesInc. completed a private placement (the “144A“Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A‑1A-1 common stock, par value $0.01 per share, (“Selectwhich were converted into shares of Class A-1A common stock, par value $0.01 per share (“Class A Common Stock”) at anfollowing the Company’s initial public offering price of $20.00 per share. In conjunction with the 144A Offering, SES Holdings’ then existing Class A and Class B units were converted into a single class of common units (the “SES Holdings LLC Units”(“IPO”) and SES Holdings effected a 10.3583 for 1 unit split. In exchange for the contribution of all net proceeds from the 144A Offering to SES Holdings,. SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Energy Services,Inc., and Select Energy ServicesInc. became the sole managing member of SES Holdings. Select Energy ServicesInc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Select Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”), or one share for each SES Holdings LLC Unit held by Legacy Owner Holdco. TheOn April 26, 2017, the Company also acquired 3,802,972 SES Holdings LLC Units from certain legacy owners (the “Contributing Legacy Owners”) in exchange for the issuancecompleted its IPO of 3,802,9728,700,000 shares of Class A common stock, par value $0.01 per share (“Select Class A Common Stock”).Stock. Shareholders of Select Class A‑1 Common Stock, Select Class A Common Stock and Select Class B Common Stock vote together as a single class on all matters, subject to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Select Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Energy ServicesInc. based on their ownership of Select Class B Common Stock. The reorganization transactions were treated as a combination of entities under common control
Tax Receivable Agreements: In connection with assetsthe Company’s restructuring at the Select 144A Offering, Select Inc. entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests.
Initial Public Offering: On April 26, 2017, the Company completed its initial public offering (“IPO”) of 8,700,000 shares of Select Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriterscertain other affiliates of the IPO exercised their over-allotment option to purchase an additional 1,305,000 sharesthen-holders of Select Class A Common Stock at the IPO price of $14.00 per share. After deducting underwriting discounts and commissions and estimated
10
offering expenses payable by it, the Company received approximately $128.5 million of the aggregate net proceeds from the IPO (including the over-allotment option). The Company contributed all of the net proceeds received by it to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings usedUnits (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the net proceeds in the following manner: (i) $34.0 million was used to repay borrowings incurred under“TRA Holders”). On July 18, 2017, the Company’s Credit Facilityboard of directors approved amendments to fund the cash portioneach of the purchase price of the GRR Acquisition, as defined below, (ii) $7.8 million was used for the cash settlement of outstanding phantom unit awards and (iii) the remaining net proceeds are intended to be used for general corporate purposes, including funding our 2017 budgeted capital expenditures.
Credit Facility: Concurrent with the closing of the 144A Offering, the Company repaid all of its outstanding indebtedness and amended its Credit Facility to reduce the total commitment of its revolving line of credit to $100.0 million.Tax Receivable Agreements. See Note 7—Debt13—Related Party Transactions for further discussion.
Exchange rights:rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco hasand its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Select Class A Common Stock at an exchange ratio of one share of Select Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Select Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, the CompanySelect Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Select Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Select Class
11
A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Select Class B Common Stock will be cancelled.
Registration rights: In December 2016, in connection with the closing of the 144A Offering, Select Energy Services entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the 144A Offering. Under this registration rights agreement,2017 Business Combinations: The Company completed three business combinations during 2017 that significantly increased its size. On March 10, 2017, the Company agreed, at its expense, to file withcompleted the SEC, in no event later than April 30,acquisition of Gregory Rockhouse Ranch, Inc. (the “GRR Acquisition”) and certain other affiliated entities and assets (collectively, the “GRR Entities”) for consideration of $59.6 million. On September 15, 2017, a shelf registration statement registering for resale the 16,100,000 shares of Select Class A Common Stock issuable upon conversion of the Select Class A‑1 Common Stock sold in the 144A Offering plus any additional shares of Class A‑1 common stock issued in respect thereof whether by stock dividend, stock distribution, stock split, or otherwise, and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 60 days after the closing of the IPO. The Company filed this registration statement with the SEC on April 28, and this registration statement was declared effective by the SEC on June 13, 2017. Accordingly, each share of Select Class A‑1 Common Stock outstanding automatically converted into a share of Select Class A Common Stock on a one‑for‑one basis at that time. In addition, Legacy Owner Holdco has the right, under certain circumstances, to cause the Company to registercompleted the sharesacquisition (the “Resource Water Acquisition”) of Select Class A Common Stock obtained pursuant to the Exchange Right.
Tax receivable agreements: Concurrent with the closing of the 144A Offering,Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”) for $9.0 million. Additionally, on November 1, 2017, the Company entered into two tax receivable agreementscompleted its merger (the “Rockwater Merger”) with Legacy Owner Holdco and certain legacy ownersRockwater Energy Solutions, Inc. (“Rockwater”) in which the Company combined with Rockwater for total consideration of SES Holdings. On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 12—Related Party Transactions for further discussion.$620.2 million.
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC.Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP. Accordingly,
This Form 10-Q relates to the accompanying unaudited interim consolidated financial statementsthree and related notessix months ended June 30, 2019 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2018 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s annual report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the SEC on March 1, 2019, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the Company’s consolidated financial statementsopinion of management, are necessary for a fair statement of the results for the years ended December 31, 2016interim periods have been reflected. The results for the Current Quarter and 2015 included inCurrent Period are not necessarily indicative of the Final Prospectus. results to be expected for the full year.
The unaudited interim consolidated financial statements include the accounts of Select Energy Servicesthe Company and all of its majority‑ownedmajority-owned or controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
11
In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for a fair presentation of our interim financial statements have been included in these unaudited interim consolidated financial statements. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.
The Company’s historical financial statements prior to the 144A Offering and reorganization transactions are prepared using SES Holdings’ historical basis in the assets and liabilities, and include all revenues, costs, assets and liabilities attributed to SES Holdings.
For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which Select Energy Services exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of June 30, 2019, the Company had one cost-method investee. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings.
Segment reporting: The Company has three operating and reportable segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals, following its decision in the first quarter of 2019 to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its subsidiary Affirm Oilfield Services, LLC (“Affirm”), and its sand hauling and Canadian operations.
12
The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, containment, and water treatment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business, which were previously a part of the former Wellsite Services segment.
The Water Infrastructure segment consists of the Company’s infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and pipelines, produced water gathering systems and salt water disposal wells, primarily serving E&P companies.
The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers breakers and other chemical technologies, to leading pressure pumping service companies in the United States.
The results of our remaining service lines that were previously a part of the former Wellsite Services segment including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations are combined in the “Other” category.
The unaudited interim consolidated financial statements in this report reflect our new segment structure, and the statements of operations, statements of comprehensive income and statements of cash flows for the three and six months ended June 30, 2018 have been restated to reflect our new segment structure.
Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information in order to conform to the current period presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: OurThe Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the yearsyear ended December 31, 2016 and 20152018, included in the Final Prospectus. ThereCompany’s most recent Annual Report on Form 10-K. With the exception of the adoption of the new lease standard discussed in Note 5, there have been no significant changes in such policies or the application of such policies during the quarter ended September 30, 2017.Current Quarter.
Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long‑livedlong-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory, income taxes, self‑insuranceself-insurance liabilities, share‑basedshare-based compensation, contingent liabilities and contingent liabilities.the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Emerging Growth Company status: Under
13
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 16 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are an “emerging growth company,” or an “EGC,” which allows uschanges to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase‑in periodsCompany’s ARO liability for the adoptionCurrent Period:
| | | |
|
| Six months ended June 30, 2019 | |
|
| (in thousands) | |
Balance at beginning of Current Period |
| $ | 1,898 |
Accretion expense, included in depreciation and amortization expense |
| | 57 |
Change in estimate |
| | — |
Divestitures | | | (61) |
Balance at end of Current Period |
| $ | 1,894 |
We review the adequacy of new or revised financial accounting standards under Section 107 ofour ARO liabilities whenever indicators suggest that the JOBS Act until weestimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are no longer an emerging growth company. Our election to use the phase‑included in periods permitted by this election may make it difficult to compare our financial statements to those of non‑emerging growth companiesaccrued expenses and other emerging growth companies that have opted out ofcurrent liabilities and other long-term liabilities in the longer phase‑in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply immediately with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.accompanying consolidated balance sheets.
Recent accounting pronouncements: In May 2014,February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue2016-02, Leases, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from Contracts with Customers (Topic 606), outlining a comprehensive new revenue recognition standard that will supersede ASC 605, Revenue Recognition. The new accountingleases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance creates a framework under which an entity will allocate the transaction price to separate performance obligationsin ASU 2016-02, lessees and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will belessors would have been required to use judgmentrecognize and make estimates, including identifying performance obligations in a
12
contract, estimatingmeasure leases at the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation, and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch‑up asbeginning of the earliest period presented or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements withusing a cumulative catch‑up asmodified retrospective approach, including a number of the current period.optional practical expedients. In August 2015, the FASB decided to defer the original effective date by one year. As long as the Company is an EGC and able to utilize the extended transition period for new accounting pronouncements, this guidance will be effective for annual reporting periods beginning after December 15,July 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures and has not yet determined the method by which it will adopt the standard.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet ClassificationNo. 2018-11, Leases (ASC 842): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of Deferred Taxes, which amends existing guidance on income taxes to require theretrospectively, and allows for other classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018, and may be applied either prospectively or retrospectively. The Company prospectively adopted this guidance during the nine months ended September 30, 2017. Prior periods were not retrospectively adjusted. As the Company’s deferred tax assets and liabilities are all noncurrent, the adoption did not result in a change to the consolidated financial statements and related disclosures.
In February 2016, the FASB issuedprovisions. ASU 2016-02Leases, which introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright‑line tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, that provides a new requirement to record all of the tax effects related to share‑based payments at settlement (or expiration) through the income statement. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero‑coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate‑owned life insurance policies, and distributions received from equity method investees. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, andincluding interim periods within those fiscal years, beginning after December 15,with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of 2019. The amendments in this ASU should be appliedCompany elected to recognize its lease assets and liabilities on a prospective basis, beginning on January 1, 2019, using the modified retrospective transition method. Additionally, the Company elected practical expedients to (i) exclude right-of-use assets and lease liabilities for short-term leases, (ii) elected to treat lease and non-lease components as a retrospective approach. The Company is still evaluatingsingle lease component, (iii) grandfathered its current accounting for land easements that commenced before January 1, 2019, and (iv) used the impact that the new accounting guidance will have on its consolidated financial statementspackage of practical expedients to retain prior lease classification, prior treatment of initial direct costs and related disclosures.prior determination of whether a contract constituted a lease. See Note 5—Leases for additional information.
In January 2017,June 2016, the FASB issued ASU 2017-012016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, Clarifying the Definition ofwhich amends U.S. GAAP by introducing a Business, with the objective of adding guidancenew impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) ofmost financial assets, or businesses. As an EGC utilizing the extended transition period for new accounting
13
pronouncements, this pronouncement isincluding trade accounts receivable. The amendments are effective for annual reporting periods beginning after December 15, 2018,interim and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This pronouncement is effective for annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied prospectively.requires a modified retrospective transition approach. This will mainly impact the Company’s trade receivables allowance calculation. The Company is stillassessing the best approach to estimate allowances and is evaluating the impact that the new accounting guidancethis standard will have on its consolidated financial statements and related disclosures.statements.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The pronouncement should be applied prospectively to an award modified on or after the adoption date. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
NOTE 3— ACQUISITIONS
Business combinations
On September 15, 2017, the Company completed its acquisition (the “Resource Water Acquisition”) of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”). Resource Water provides water transfer services to exploration and production (“E&P”) operators in West Texas and East Texas. Resource Water’s assets include 24 miles of layflat hose as well as numerous pumps and ancillary equipment required to support water transfer operations. Resource Water has longstanding customer relationships across its operating regions which are viewed as strategic to the Company’s water solutions business.
The total consideration for the Resource Water Acquisition was $9.1 million, with $6.7 million paid in cash and $2.4 million paid in shares of Select Class A Common Stock valued at $15.17 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the Resource Water Acquisition with $6.7 million of cash on hand. For the nine months ended September 30, 2017, the Company expensed less than $0.1 million of related transaction-related costs. The Resource Water Acquisition is being accounted for as a business combination under the acquisition method of accounting. The preliminary allocation of the consideration transferred is based on management’s estimates, judgments and assumptions. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments, and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Working capital estimates are based on provisional amounts. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.8 million, which excess was recognized as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The goodwill was included in the assets of the Company’s Water Solutions segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
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|
|
|
|
Preliminary purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousand) | |
Cash paid |
| $ | 6,692 |
Class A common stock issued |
|
| 2,380 |
Total consideration transferred |
|
| 9,072 |
Less: identified assets |
|
|
|
Working capital |
|
| 1,396 |
Fixed assets |
|
| 3,485 |
Customer relationship intangible assets |
|
| 1,912 |
Other intangible assets |
|
| 466 |
Total identified assets |
|
| 7,259 |
Goodwill |
| $ | 1,813 |
NOTE 3—ACQUISITIONS AND DIVESTITURES
Business combinations
Pro Well Acquisition
On March 10, 2017,November 20, 2018, the Company completed its acquisition (the “GRR Acquisition”)acquired Pro Well Testing and Wireline, Inc. with an initial payment of Gregory Rockhouse Ranch, Inc. and certain other affiliated entities and assets (collectively, the “GRR Entities”). The GRR Entities provide water and water‑related services to E&P companies in the Permian Basin and own and have rights to a vast array of fresh, brackish and effluent water sources$12.4 million, funded with access to significant volumes of water annually and water transport infrastructure, including over 900 miles of temporary and permanent pipeline infrastructure and related storage facilities and pumps, all located in the northern Delaware Basin portion of the Permian Basin.
The total consideration for the GRR Acquisition was $56.8 million, with $51.3 million paid in cash and $5.5 million paid in shares of Select Class A Common Stock valued at $20.00 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the GRR Acquisition with $17.3 million of cash on hand and $34.0 million of borrowings under(the “Pro Well Acquisition”). During March 2019, upon final settlement, the purchase price was revised to $11.8 million.
This acquisition expanded the Company’s Credit Facility. For the nine months ended September 30, 2017, the Company expensed $1.0 million of transaction-related costs.flowback footprint into New Mexico and added new strategic customers. The GRRPro Well Acquisition is beingwas accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that total consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $11.0acquired by $1.1 million, was recorded.with the excess recorded as goodwill. The goodwill recognized iswas primarily attributable to synergies related toexpanding the Company’s comprehensive water solutions strategy that are expected to arise from the GRR Acquisitionflowback footprint into New Mexico and is attributable to the Company’s Water Solutions segment.adding new strategic customers. The assets acquired, and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water SolutionsServices segment. The goodwill acquired is deductible for tax purposes. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
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|
Preliminary purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousand) | |
Cash paid |
| $ | 51,303 |
Class A common stock issued |
|
| 5,500 |
Total consideration transferred |
|
| 56,803 |
Less: identified assets |
|
|
|
Working capital |
|
| 6,000 |
Fixed assets |
|
| 13,225 |
Customer relationship intangible assets |
|
| 21,392 |
Other intangible assets |
|
| 5,150 |
Total identified assets |
|
| 45,767 |
Goodwill |
| $ | 11,036 |
| | | |
Purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousands) | |
Cash paid | | $ | 11,754 |
Total consideration transferred |
| | 11,754 |
Less: identifiable assets acquired and liabilities assumed |
| |
|
Working capital |
| | 1,051 |
Property and equipment |
| | 6,588 |
Customer relationship intangible assets |
| | 3,000 |
Total identifiable net assets acquired |
| | 10,639 |
Goodwill | | | 1,115 |
Fair value allocated to net assets acquired | | $ | 11,754 |
Resource Water Acquisition contributed revenueDivestitures
Affirm and Canadian Operations Divestitures
During the Current Period, the Company closed on four sale transactions and wound down the remaining Affirm and Canadian operations. The Company sold property and equipment with a combined net incomebook value of $0.2$18.6 million and less than $0.1 million, respectively,assigned contracts to the resultsbuyers. Additionally, two of the Company fromfour transactions included the dateassignment of acquisition through September 30, 2017.working capital. The GRR Acquisition contributed revenue and net income of $21.5 million and $1.9 million, respectively, to the consolidated resultsfollowing table summarizes sales details for each of the four transactions:
| | | | | | | | | | | | | | | | |
Date of Divestiture | | Entity | | Initial Net Proceeds | | Working Capital True Up | | Adjusted Net Proceeds | | Working Capital Status at June 30, 2019 | | (Gain)/loss for the six months ended June 30, 2019 | ||||
| | | | (in thousands) | ||||||||||||
February 26, 2019 | | Affirm | | $ | 10,982 | | $ | 92 | | $ | To be determined | | Not Final | | $ | (92) |
June 28, 2019 | | Affirm | | | 6,968 | | | — | | | 6,968 | | Final | | | (1,646) |
March 19, 2019 | | Canada | | | 4,975 | | | (325) | | | 4,650 | | Final | | | 5,040 |
April 1, 2019 | | Canada | | | 2,242 | | | — | | | To be determined | | Not Final | | | 101 |
In connection with the Affirm crane operation divestiture in the first quarter of 2019, no gain or loss was initially recognized and goodwill was reduced by $2.6 million. Additionally, during the first quarter of 2019, the Company fromrecorded an impairment of the dateremaining Affirm goodwill of acquisition through September 30, 2017. The following unaudited consolidated$4.4 million (see Note 8).
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pro forma information is presented as if the GRR Acquisition and Resource Water Acquisition had occurred on January 1, 2016:
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| Pro Forma |
| Pro Forma | ||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (unaudited) |
| (unaudited) | ||||||||
|
| (in thousands) |
| (in thousands) | ||||||||
Revenue |
| $ | 156,045 |
| $ | 82,824 |
| $ | 400,948 |
| $ | 237,644 |
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|
Net income (loss) |
| $ | 3,195 |
| $ | (34,344) |
| $ | (17,951) |
| $ | (289,130) |
Less: net (income) loss attributable to noncontrolling interests 1 |
|
| (1,706) |
|
| 19,284 |
|
| 11,682 |
|
| 163,044 |
Net income (loss) attributable to Select Energy Services, Inc. 1 |
| $ | 1,489 |
| $ | (15,060) |
| $ | (6,269) |
| $ | (126,086) |
1 The allocation of net loss attributable to noncontrolling interests and Select Energy Services gives effect to the equity structure as of September 30, 2017 as though the 144A Offering, the IPO, the Resource Water Acquisition, the GRR Acquisition and other equity transactions occurred as of January 1, 2016. However, the calculation of pro forma net loss does not give effect to any other pro forma adjustments for the 144A Offering or the subsequent IPO.
The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the GRR Acquisition and Resource Water Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the GRR Acquisition or Resource Water Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the GRR Acquisition and Resource Water Acquisition had occurred as of January 1, 2016 or of future operating performance.
Asset acquisitions
On June 21, 2017 the Company completed the acquisition of fixed assets from Tex-Star Water Services, LLC (the “TEX Acquisition”) for $4.2 million in cash, funded entirely with cash on hand.
On May 30, 2017 the Company completed the acquisition of automated manifold intellectual property and related assets from Data Automated Water Systems, LLC (the “DAWS Acquisition”) for $4.0 million. This acquisition was paid with $2.0 million of cash and 128,370 shares of Select Class A Common Stock valued at approximately $2.0 million. The DAWS Acquisition resulted in fixed assets of $1.8 million, patents of $1.9 million and software of $0.3 million.
NOTE 4—EXIT AND DISPOSAL ACTIVITIESREVENUE
Due to a reduction in industry activity from 2014, the Company made the decision duringEffective for the year ended December 31, 20162018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers(Topic 606), using the modified retrospective adoption method. There was no impact on the consolidated financial statements and no cumulative effect adjustment was recognized. Although most revenue recognition is governed by the new standard, the accommodations and rentals revenue continued to close 15 facilitiesbe guided by ASC 842 - Leases, discussed further below. The core principle of Topic 606 is that revenue is recognized when goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services.
ASU 2014-09 provides a five-step model for determining revenue recognition for arrangements that are within the scope of the standard: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and consolidate operations(v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that we will collect the consideration the Company is entitled to in exchange for the purpose of improving operating efficiencies. goods or services the Company transfers to the customer.
The Company recorded $2.9 millionelected practical expedients (i) not to access whether immaterial promised goods or services are performance obligations, (ii) not to provide disclosures on remaining performance obligations for contracts that have an original expected duration of charges relatedone year or less and (iii) to exitexclude transaction price taxes assessed by governmental authorities as revenue.
The following factors are applicable to all three of the Company’s segments for the first six months of 2019 and disposal activities2018, respectively:
● | The vast majority of customer agreements are short-term, lasting less than one year |
● | Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements. |
● | Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the products delivered to date. |
● | Contract terminations before the end of the agreement are rare |
● | Sales returns are rare and no sales return assets have been recognized on the balance sheet |
● | There are no volume discounts |
● | There are no service-type warranties |
● | There is no long-term customer financing |
In the Water Services and reclassified $0.2 millionWater Infrastructure segments, performance obligations arise in connection with services provided to customers in accordance with contractual terms, in an amount the Company expects to collect. Services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenues are generated by services rendered and measured based on output generated, which is usually simultaneously received and consumed by customers at their job sites. As a multi-job site organization, contract terms, including pricing for the Company’s services, are negotiated on a job site level on a per-job basis. Most jobs completed in a short period of deferred rent relatedtime, usually between one day and one month. Revenue is recognized as performance obligations are completed on a daily, hourly or per unit basis with unconditional rights to accrued leaseconsideration for services rendered reflected as accounts receivable trade, net of allowance for doubtful accounts. In cases where a prepayment is received before the Company satisfies its performance obligations, related to exited facilities during the nine months ended September 30, 2017. The Company had a remaining balance of $20.0 million, inclusive of a short‑term balance of $1.9 millioncontract liability is recorded in accrued expenses and other current liabilities,liabilities. Final billings generally occur once all of the proper approvals are obtained. No revenue is associated with mobilization or demobilization of personnel and equipment. Rather, mobilization and demobilization are factored into pricing for services. Billings and costs related to mobilization and demobilization is not material for customer
16
agreements that start in one period and end in another. As of June 30, 2019, the Company had two contracts in place lasting over a year.
In the Oilfield Chemicals segment, the typical performance obligation is to provide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the Company expects to collect. Products and services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenue is recognized as the customer takes title to chemical products in accordance with the agreement. Products may be provided to customers in packaging or delivered to the customers’ containers through a hose. In some cases, the customer takes title to the chemicals upon consumption from storage containers on their property, where the chemicals are considered inventory until customer usage. In cases where the Company delivers products and recognizes revenue before collecting payment, the Company usually has an unconditional right to payment reflected in accounts receivable trade, net of allowance for doubtful accounts. Customer returns are rare and immaterial and there were no in-process customer agreements as of SeptemberJune 30, 2017 related2019 lasting greater than one year.
The Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from renting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of June 30, 2019, no rental agreements lasted more than a year.
The following table sets forth certain financial information with respect to accrued lease obligationsthe Company’s disaggregation of revenues by geographic location:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
| | (in thousands) | ||||||||||
Geographic Region | | | | | | | | | | | | |
Permian Basin | | $ | 148,118 | | $ | 154,422 | | $ | 310,783 | | $ | 282,783 |
MidCon | | | 48,515 | | | 67,425 | | | 106,978 | | | 129,024 |
Eagle Ford | | | 41,033 | | | 42,486 | | | 79,759 | | | 89,028 |
Bakken | | | 20,361 | | | 39,487 | | | 46,143 | | | 79,261 |
Marcellus/Utica | | | 28,292 | | | 34,533 | | | 58,451 | | | 69,019 |
Rockies | | | 21,494 | | | 28,221 | | | 43,936 | | | 62,680 |
Haynesville/E. Texas | | | 18,314 | | | 13,129 | | | 35,596 | | | 30,009 |
All other/eliminations | | | (2,240) | | | 13,544 | | | 4,887 | | | 27,838 |
Total | | $ | 323,887 | | $ | 393,247 | | $ | 686,533 | | $ | 769,642 |
In the Water Services segment, the top three revenue producing regions are the Permian Basin, MidCon and terminations at exited facilities within itsEagle Ford, which collectively comprised 74%, 73%, 74% and 70% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Water Solutions segment. Infrastructure segment, the top two revenue producing regions are the Permian Basin and Bakken, which collectively comprised 81%, 82%, 82% and 83% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Oilfield Chemicals segment, the top two revenue producing regions are the Permian Basin and MidCon, which collectively comprised 75%, 78%, 76% and 74% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
17
NOTE 5—LEASES
As of SeptemberJune 30, 2017,2019, the Company was the lessee for approximately 580 operating leases with durations greater than a year, approximately 14 subleases, approximately 65 finance leases, and is the lessor for three owned properties. Most of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term. In addition to normal lease activity, the four Affirm and Canadian divestitures occurring in the Current Period included the assignment of leases to the buyers. The assigned leases impacted expenses during the Current Period, but were not included in the June 30, 2019 consolidated balance sheet.
The Company’s operating leases are primarily for (i) housing personnel for operations, (ii) operational yards for storing and staging equipment, (iii) equipment used in operations, (iv) facilities used for back-office functions and (v) equipment used for back office functions. The Company has determined that it is reasonably certain to exercise future renewal options for one facility lease for the corporate office building in Gainesville, Texas. The majority of the Company’s long-term lease expenses are at fixed prices.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement. Due to the volatility of the price of a barrel of oil and the short-term nature of the Company’s contracts with customers, the Company has completed its exit from underperforming facilities but will continuedetermined that no short-term leases with indefinite renewals are reasonably certain to make non‑cancelablelast more than a year into the future. When available, the Company uses the rate implicit in the lease to discount lease payments for relatedto present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company estimates the incremental borrowing rate based on what it would pay to borrow on a collateralized basis, over a similar term based on information available at lease commencement.
The Company previously had an $18.8 million lease obligation associated with certain exit and disposal activities in connection with approximately 17 abandoned facility leases as of December 31, 2018. Upon adopting the new lease standard, the former exit-disposal cease use liability was reclassified and factored into the initial right-of-use (“ROU”) asset impairment calculation.
The financial impact of leases is listed in the tables below:
| | | | |
Balance Sheet | Classification | | As of June 30, 2019 | |
| | | (in thousands) | |
Assets | | | | |
ROU Assets(1) | Long-term right-of-use assets | | $ | 75,302 |
Finance lease assets(2) | Property and equipment | | | 422 |
Liabilities | | | | |
Operating lease liabilities ― ST | Current operating lease liabilities | | $ | 19,553 |
Operating lease liabilities ― LT(3) | Long-term operating lease liabilities | | | 75,169 |
Finance lease liabilities ― ST | Current portion of finance lease obligations | | | 421 |
Finance lease liabilities ― LT | Other long term liabilities | | | 129 |
(1) | Net of impairment of $17.9 million. |
(2) | Net of accumulated amortization of $1.7 million. |
(3) | The $16.8 million on the consolidated balance sheet as of December 31, 2018 represented long-term lease liabilities in connection with the exit-disposal rules prior to adopting the new lease standard. |
1618
| | | | | | | |
Statements of Operations and Cash Flows | Classification | | Three months ended June 30, 2019 | | Six months ended June 30, 2019 | ||
| | | (in thousands) | ||||
Operating lease cost: | | | | | | | |
Operating lease cost ― fixed | Cost of revenue and Selling, general and administrative | | $ | 7,091 | | $ | 15,150 |
Lease abandonment costs | Lease abandonment costs | | | 183 | | | 1,256 |
| | | | | | | |
Short-term agreements: | Cost of revenue | | $ | 24,914 | | $ | 47,812 |
| | | | | | | |
Finance lease cost: | | | | | | | |
Amortization of leased assets | Depreciation and amortization | | $ | 523 | | $ | 737 |
Interest on lease liabilities | Interest expense, net | | | 3 | | | 7 |
| | | | | | | |
Lessor income: | | | | | | | |
Sublease income | Cost of sales and lease abandonment costs | | $ | 390 | | $ | 762 |
Lessor income | Cost of sales | | | 69 | | | 180 |
| | | | | | | |
Statement of cash flows | | | | | | | |
Cash paid for operating leases | Operating cash flows | | $ | 7,606 | | $ | 15,957 |
Cash paid for finance leases lease interest | Operating cash flows | | | 3 | | | 7 |
Cash paid for finance leases | Financing cash flows | | | 264 | | | 549 |
| | | |
Long Term and Discount Rate | | As of June 30, 2019 | |
Weighted-average remaining lease term (years) | | | |
Operating leases | | 4.8 | |
Finance leases | | 1.3 | |
Weighted-average discount rate | | | |
Operating leases | | 5.3 | % |
Finance leases | | 5.2 | % |
19
facilities throughTable of Contents
The Company has the year ended 2027.following operating and finance lease commitments as of June 30, 2019:
| | | | | | | | | |
Period |
| Operating Leases(1) |
| Finance Leases |
| Total | |||
| | (in thousands) | |||||||
July 2019 through December 2019 | | $ | 14,874 | | $ | 371 | | $ | 15,245 |
2020 | |
| 21,852 | |
| 135 | |
| 21,987 |
2021 | |
| 15,113 | |
| 89 | |
| 15,202 |
2022 | |
| 11,745 | |
| — | |
| 11,745 |
2023 | |
| 9,985 | |
| — | |
| 9,985 |
Thereafter | |
| 47,911 | |
| — | |
| 47,911 |
Total minimum lease payments | | $ | 121,480 | | $ | 595 | | $ | 122,075 |
| | | | | | | | | |
Less reconciling items to reconcile undiscounted cash flows to lease liabilities: | | | | | | | | | |
Leases commencing in the future | | | (621) | | | — | | | (621) |
Short-term leases excluded from balance sheet | | | (2,785) | | | — | | | (2,785) |
Imputed interest | | | (23,352) | | | (45) | | | (23,397) |
Total reconciling items | | | (26,758) | | | (45) | | | (26,803) |
Total liabilities per balance sheet | | | 94,722 | | | 550 | | | 95,272 |
(1) | This table excludes sublease income of $0.7 million from July 2019 to December 2019, $0.9 million during 2020 and $0.2 million during 2021. |
NOTE 6—INVENTORIES
Inventories, which are comprised of chemicals and materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:
| | | | | | |
| | June 30, 2019 |
| December 31, 2018 | ||
| | (in thousands) | ||||
Raw materials | | $ | 16,685 | | $ | 15,219 |
Finished goods | |
| 22,570 | |
| 28,540 |
Materials and supplies | |
| 697 | |
| 1,233 |
| | $ | 39,952 | | $ | 44,992 |
During the Current Quarter, Prior Quarter, Current Period and Prior Period, the Company recorded charges to the reserve for excess and obsolete inventory for $0.1 million, $0.1 million, $0.2 million and $0.4 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The reserve for excess and obsolete inventories is determined based on the Company’s abandonmenthistorical usage of these facilities is not a partinventory on hand, as well as future expectations, and the amount necessary to reduce the cost of a formalized exit plan.the inventory to its estimated net realizable value.
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|
| Provision during the |
| Usage during the |
|
|
| ||
|
| Balance as of |
| nine months ended |
| nine months ended |
| Balance as of | ||||
|
| December 31, 2016 |
| September 30, 2017 |
| September 30, 2017 |
| September 30, 2017 | ||||
|
| (in thousands) | ||||||||||
Lease obligations and terminations |
| $ | 18,000 |
| $ | 2,871 |
| $ | 2,153 |
| $ | 18,718 |
Reclassification of deferred rent |
|
| 1,069 |
|
|
|
|
|
|
|
| 1,254 |
Total |
| $ | 19,069 |
|
|
|
|
|
|
| $ | 19,972 |
20
NOTE 5—7—PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of SeptemberJune 30, 20172019 and December 31, 2016:2018:
| | | | | | |
|
| June 30, 2019 | | December 31, 2018 | ||
| | (in thousands) | ||||
Land | | $ | 16,030 | | $ | 17,799 |
Buildings and leasehold improvements | |
| 105,220 | |
| 106,626 |
Vehicles and equipment | |
| 62,046 | |
| 83,435 |
Vehicles and equipment - finance lease | |
| 1,599 | |
| 1,833 |
Machinery and equipment | |
| 724,500 | |
| 758,528 |
Machinery and equipment - finance lease | |
| 202 | |
| 532 |
Computer equipment and software | | | 17,044 | | | 15,775 |
Computer equipment and software - finance lease | |
| 356 | |
| 356 |
Office furniture and equipment | |
| 4,614 | |
| 4,612 |
Disposal wells | |
| 64,321 | |
| 64,038 |
Other | | | 497 | | | 497 |
Construction in progress | |
| 73,067 | |
| 60,347 |
| |
| 1,069,496 | |
| 1,114,378 |
Less accumulated depreciation(1) | |
| (603,191) | |
| (611,530) |
Property and equipment held-for-sale | | | 1,906 | | | — |
Total property and equipment, net | | $ | 468,211 | | $ | 502,848 |
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (in thousands) | ||||
Land |
| $ | 7,106 |
| $ | 8,593 |
Buildings and leasehold improvements |
|
| 83,328 |
|
| 83,352 |
Vehicles and equipment |
|
| 38,547 |
|
| 24,114 |
Machinery and equipment |
|
| 564,741 |
|
| 534,303 |
Computer equipment and software |
|
| 11,438 |
|
| 11,102 |
Office furniture and equipment |
|
| 3,709 |
|
| 4,275 |
Disposal wells |
|
| 67,778 |
|
| 67,566 |
Helicopters |
|
| 497 |
|
| 497 |
Construction in progress |
|
| 37,858 |
|
| 5,584 |
|
|
| 815,002 |
|
| 739,386 |
Less accumulated depreciation and impairment |
|
| (535,456) |
|
| (490,519) |
Total property and equipment, net |
| $ | 279,546 |
| $ | 248,867 |
(1) | Includes $1.7 million of accumulated depreciation related to finance leases. |
During the Current Quarter, Prior Quarter, Current Period and Prior Period, depreciation expense was $26.8 million, $27.9 million, $56.3 million and $55.4 million, respectively. Depreciation of assets held under finance leases for the Current Quarter, Prior Quarter, Current Period and Prior Period was $0.5 million, $0.3 million, $0.7 million and $0.7 million, respectively, and is included in the totals above and in depreciation and amortization expense in the accompanying consolidated statements of operations.
Long‑livedProperty and Equipment Held-for-Sale and Impairments
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The During the first quarter of 2019, the Company had no capital lease obligationsmade the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. This decision led us to classify the property and equipment of these business as held-for-sale. All operations have been wound down, with $1.9 million remaining in held-for-sale as of SeptemberJune 30, 20172019. The table below shows the property and December 31, 2016.equipment sold and divested as follows:
| | | | | |
Type of sale event | | Business | | Net Book Value of Property and Equipment Sold or Divested | |
| | | | (in thousands) | |
Business divestitures | | Affirm subsidiary | | $ | 11,275 |
Property and equipment sales | | Affirm subsidiary | | | 1,339 |
Business divestitures | | Canadian operations | | | 7,372 |
Property and equipment sales | | Canadian operations | | | 351 |
Property and equipment sales | | Sand hauling operations | | | 2,301 |
Total property and equipment sold and divested | | | | $ | 22,638 |
During the Current Period, the Company recorded an impairment of $0.9 million of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds. In addition, during the Current Period, the net loss on divestitures and sales of property and equipment held-for-sale was $2.8 million.
21
NOTE 6—8—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is evaluated for impairment on at least an annual basis, as of December 31, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs.inputs (see Note 12). During the first quarter of 2019, the Affirm goodwill was reduced to zero from the crane divestiture and impairment. The $4.4 million of goodwill impairment was based on the expected proceeds from selling and winding down the rest of the Affirm business. Also, in connection with the Company’s segment realignment, the Company reallocated goodwill from reporting units in the 2018 Water Solutions segment to reporting units in the 2019 Water Services and Water Infrastructure segments. The changes in the carrying
17
amounts of goodwill by reportable segment for the nine months ended Septemberas of June 30, 20172019 and the year ended December 31, 20162018 are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | Oilfield | | Water | | Wellsite | | Water | | Water | | | | | | | |||||
| | Chemicals | | Solutions | | Services | | Services | | Infrastructure | | Other | | Total | |||||||
| | (in thousands) | |||||||||||||||||||
Balance as of December 31, 2017 | | $ | 15,637 | | $ | 245,542 | | $ | 12,242 | | $ | — | | $ | — | | $ | — | | $ | 273,421 |
Additions | | | — | | | 982 | | | — | | | — | | | — | | | — | | | 982 |
Impairment | | | (12,652) | | | — | | | (5,242) | | | — | | | — | | | — | | | (17,894) |
Measurement period adjustments | |
| (2,985) | |
| 20,277 | |
| — | |
| — | |
| — | |
| — | |
| 17,292 |
Balance as of December 31, 2018 | | | — | | | 266,801 | | | 7,000 | | | — | | | — | | | — | | | 273,801 |
Resegmentation | |
| — | |
| (266,801) | |
| (7,000) | |
| 186,335 | |
| 80,466 | |
| 7,000 | |
| — |
Measurement period adjustments(1) | | | — | | | — | | | — | | | 133 | | | — | | | — | | | 133 |
Affirm crane business divestiture | |
| — | |
| — | |
| — | |
| — | | | — | | | (2,604) | |
| (2,604) |
Affirm impairment | | | — | | | — | | | — | | | — | | | — | | | (4,396) | | | (4,396) |
Balance as of June 30, 2019 | | $ | — | | $ | — | | $ | — | | $ | 186,468 | | $ | 80,466 | | $ | — | | $ | 266,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Wellsite Completion |
|
|
|
|
|
| |
|
| Water |
| and Construction |
| Accommodations |
|
|
| |||
|
| Solutions |
| Services |
| and Rentals |
| Total | ||||
|
| (in thousands) | ||||||||||
Balance as of December 31, 2015 |
| $ | 137,534 |
| $ | 12,242 |
| $ | 995 |
| $ | 150,771 |
Impairment |
|
| (137,534) |
|
| — |
|
| (995) |
|
| (138,529) |
Balance as of December 31, 2016 |
|
| — |
|
| 12,242 |
|
| — |
|
| 12,242 |
Additions |
|
| 12,849 |
|
| — |
|
| — |
|
| 12,849 |
Balance as of September 30, 2017 |
| $ | 12,849 |
| $ | 12,242 |
| $ | — |
| $ | 25,091 |
(1) | 2019 measurement period adjustment related to the Pro Well working capital settlement. See Note 3. |
The components of other intangible assets, net as of June 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | |||||||
|
| Gross |
| Accumulated |
| Net | |||
|
| Value |
| Amortization |
| Value | |||
|
| (in thousands) | |||||||
Customer relationships |
| $ | 80,131 |
| $ | 54,987 |
| $ | 25,144 |
Other |
|
| 13,222 |
|
| 3,015 |
|
| 10,207 |
Total other intangible assets |
| $ | 93,353 |
| $ | 58,002 |
| $ | 35,351 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| December 31, 2016 | |||||||||||||||||||||||||
|
| Gross |
| Accumulated |
| Net | |||||||||||||||||||||
|
| Value |
| Amortization |
| Value | |||||||||||||||||||||
|
| (in thousands) | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||
| | As of June 30, 2019 | | As of December 31, 2018 | |||||||||||||||||||||||
|
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net | |||||||||||||||
| | Value | | Amortization | | Value | | Value | | Amortization | | Value | |||||||||||||||
| | (in thousands) | | (in thousands) | |||||||||||||||||||||||
Definite-lived | | | | | | | | | | | | | | | | | | | |||||||||
Customer relationships |
| $ | 56,826 |
| $ | 48,236 |
| $ | 8,590 |
| $ | 116,078 |
| $ | 15,723 |
| $ | 100,355 |
| $ | 171,245 |
| $ | 66,402 |
| $ | 104,843 |
Patents | | | 10,110 | | | 1,918 | | | 8,192 | | | 10,110 | | | 1,417 | | | 8,693 | |||||||||
Other |
|
| 5,491 |
|
| 2,495 |
|
| 2,996 | | | 7,516 | | | 4,098 | | | 3,418 | |
| 7,234 | |
| 2,866 | |
| 4,368 |
Total other intangible assets |
| $ | 62,317 |
| $ | 50,731 |
| $ | 11,586 | ||||||||||||||||||
Total definite-lived | | | 133,704 | | | 21,739 | | | 111,965 | | | 188,589 | | | 70,685 | | | 117,904 | |||||||||
Indefinite-lived | | | | | | | | | | | | | | | | | | | |||||||||
Water rights | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 | |||||||||
Trademarks | | | 23,442 | | | — | | | 23,442 | | | 23,442 | | | — | | | 23,442 | |||||||||
Total indefinite-lived | | | 30,473 | | | — | | | 30,473 | | | 30,473 | | | — | | | 30,473 | |||||||||
| | | | | | | | | | | | | | | | | | | |||||||||
Total other intangible assets, net | | $ | 164,177 | | $ | 21,739 | | $ | 142,438 | | $ | 219,062 | | $ | 70,685 | | $ | 148,377 |
Intangibles obtained through acquisitions are initially recorded at estimated fair value based on preliminary information that is subject to change until final valuations are obtained. Customer relationships and non‑compete agreements are being amortized over estimated useful lives ranging from five to seven years and three to five years, respectively. Other intangible assets primarily relate to certain water rights that are amortized over estimated useful lives ranging from three to eight years. Intangible assets obtained in the GRR Acquisition consisted
22
Amortization expense was $2.6$2.9 million, $3.3 million, $5.9 million and $2.1$7.2 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016, respectively, and $7.3 million and $6.7 millionPrior Period, respectively. Annual amortization of intangible assets for the nine months ended September 30, 2017next five years and 2016, respectively.beyond is as follows:
| | | |
|
| Amount | |
| | (in thousands) | |
Remainder of 2019 | | $ | 5,927 |
2020 | |
| 11,561 |
2021 | |
| 10,378 |
2022 | |
| 10,163 |
2023 | |
| 10,092 |
Thereafter | | | 63,844 |
| | $ | 111,965 |
18
NOTE 7—9—DEBT
Credit Facility term loansfacility and revolving line of credit
On November 1, 2017, SES Holdings and Select Energy Services’LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Facility, originally executed in May 2011,Agreement also has been amended over time. Effective December 20, 2016,a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company amended itshas the option to increase the maximum amount under the Credit Facility to extendAgreement by $150.0 million during the first three years following the closing. The maturity date from February 28, 2018of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to February 28, 2020 and reduceSection 2.1(b) of Article VII of the revolving lineCredit Agreement.
The Credit Agreement permits extensions of credit up to $100.0 million. The agreement also amended certain financial covenantsthe lesser of $300.0 million and restrictions and outlined a new pricing gridborrowing base that is effective after receiptdetermined by calculating the amount equal to the sum of (i) 85% of the third quarter 2017 compliance certificate. Accrued interest is payable at the end of each quarter. The Credit Facility has a variable interest rate that ranges from either (i) the London interbank rate (“LIBOR”) plus a margin for Eurodollar advances or (ii) the applicable base rate plus a margin for base rate advances based on the Company’s Leverage RatioEligible Billed Receivables (as defined in the Credit Facility) falling between 2.00%Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and 4.00% as outlined below. In addition,(B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a commitment fee relatedmonthly basis pursuant to a borrowing base certificate delivered by Select LLC to the revolving line of credit is payable at the end of each calendar quarter based on a rate of 0.500% per annum on any unused portion of the commitmentAdministrative Agent.
Borrowings under the Credit Facility. Effective June 13, 2017,Agreement bear interest, at Select LLC’s election, at either the Company amended its(a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the ”Base Rate”), in each case plus an applicable margin. Interest is payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Facility to permanently waiveAgreement. During the continuance of a bankruptcy event of default, associated withautomatically and during the DAWS Acquisition. This waiver is specifically for such acquisition and does not remedycontinuance of any other presentdefault, upon the Administrative Agent’s or future defaults associated withthe required lenders’ election, all outstanding amounts under the Credit Facility.
|
|
|
|
|
|
Leverage Ratio Before Receipt of Fourth Quarter 2017 |
| Eurodollar |
| Base Rate |
|
Compliance Certificate |
| Advances |
| Advances |
|
< 4.00 |
| 4.00 | % | 3.00 | % |
≥ 4.00 |
| 4.50 | % | 3.50 | % |
|
|
|
|
|
|
Leverage Ratio After Receipt of Fouth Quarter 2017 |
| Eurodollar |
| Base Rate |
|
Compliance Certificate |
| Advances |
| Advances |
|
< 2.00 |
| 3.00 | % | 2.00 | % |
≥ 2.00 < 2.50 |
| 3.25 | % | 2.25 | % |
≥ 2.50 < 3.00 |
| 3.50 | % | 2.50 | % |
≥ 3.00 < 3.50 |
| 3.75 | % | 2.75 | % |
≥ 3.50 < 4.00 |
| 4.00 | % | 3.00 | % |
≥ 4.00 |
| 4.50 | % | 3.50 | % |
Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
23
| | | | | | |
Level | | Average Excess Availability | | Base Rate Margin | | Eurocurrency Rate Margin |
| | | | | | |
I | | < 33% of the commitments | | 1.00% | | 2.00% |
II | | < 66.67% of the commitments and ≥ 33.33% of the commitments | | 0.75% | | 1.75% |
III | | ≥ 66.67% of the commitments | | 0.50% | | 1.50% |
| | | | |
Level | | Average Revolver Usage | | Unused Line Fee Percentage |
| | | | |
I | | ≥ 50% of the commitments | | 0.250% |
II | | < 50% of the commitments | | 0.375% |
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select Energy Services had no debtLLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the revolving lineCredit Agreement to be immediately due and payable.
In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of creditcash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements. See Note 13—Related Party Transactions for further discussion of the Tax Receivable Agreements.
The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
Certain lenders party to the Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
The Company had no borrowings and $45.0 million outstanding under the Credit Agreement as of SeptemberJune 30, 20172019 and December 31, 2016.2018, respectively. The weighted-average interest rate of outstanding borrowings under the Credit Agreement was 4.256% as of December 31, 2018. As of June 30, 2019 and December 31, 2018, the borrowing base under the Credit Agreement was $256.4 million and $270.5 million, respectively. The borrowing capacity under the revolving line of creditCredit Agreement was reduced by outstanding letters of credit of $14.1$16.4 million and $20.8 million as of SeptemberJune 30, 2017.2019 and December 31, 2018, respectively. The Company’s letters of credit have a variable interest rate between 3.00%1.50% and 4.50%
24
2.00% based on the Company’s Leverage Ratioaverage excess availability as outlined above. The unused portion of the available borrowings under the revolving lineCredit Agreement was $240.0 million as of credit was $85.9 million at SeptemberJune 30, 2017.2019.
Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of SeptemberJune 30, 20172019 and December 31, 2018 were $3.0 million.$2.3 million and $2.6 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheet.sheets. Amortization expense related to debt issuance costs was $0.2 million, $0.2 million, $0.3 million and $0.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
The Company’s obligations under its Credit Facility are secured by substantially all of its assets. The Credit Facility contains customary events of default and covenants and limits its ability to incur additional indebtedness, pay dividends or make other distributions, create liens and sell assets. The Company was in compliance with all debt covenants as of SeptemberJune 30, 2017.2019.
19
NOTE 8—10—COMMITMENTS AND CONTINGENCIES
Litigation
The Company is named from timesubject to time in various legal proceedingsa number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.
Certain subsidiaries acquired in the ordinary courseRockwater Merger are under investigation by the U.S. Attorney's Office for the Middle District of business.Pennsylvania and the U.S. Environmental Protection Agency (the “EPA”). It is alleged that certain employees at some of the facilities altered emissions controls systems on 4% of the vehicles in the fleet in violation of the Clean Air Act. The legal proceedings are at different stages; however,Company is cooperating with the relevant authorities to resolve the matter. At this time no administrative, civil or criminal charges have been brought against the Company does not believeand the resolutionCompany cannot estimate the possible fines and penalties that may be levied against the Company.
Self-Insured Reserves
We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
25
General Business Risk
As discussed in Note 1, the substantial majority of the Company’s customers are in the oil and gas industry. The oil and gas industry is currently facing unique challenges due to the continued volatility and depressed state of oil and gas prices.
NOTE 9—EQUITY‑BASED11—EQUITY-BASED COMPENSATION
The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the Predecessor’s board of managers of SES Holdings in April 2011. In conjunction with the Select 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended, from time to time, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.
On July 18, 2017, the Select Energy ServicesInc. board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater Merger (as defined in Note 17 below))which occurred on November 1, 2017) and allowsallowed for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which Selectthe Company’s Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement (as defined in Note 17 below).for the Rockwater Merger. The Company’s consenting stockholders, who holdheld a majority of the outstanding common stock of Select Energy Services,the Company, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Rockwater Merger.
The Currently, the maximum number of shares initially reserved for issuance under the 2016 Plan, was 5,400,400 shares of Select Class A Common Stock, subject to adjustment intaking into account the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. After giving effect to the Equity Plan Amendment, the maximum number of shares of Select Class A Common Stock reserved for issuance under the 2016 Plan is equal to (i) 5,400,400 shares plus (ii) 1,011,087 shares that became available on account of the assumptionimpact of the Rockwater Equity Plan, subject to adjustment inMerger, is approximately 9.3 million shares. For all share-based compensation award types, the event of recapitalization or reorganization, or related toCompany accounts for forfeitures or the expiration of awards. The maximum number of shares described in the preceding sentence does not take into account 2,887,048 shares of Select Class A Common Stock related to substitute awards that were granted under the 2016 Plan following the conversion of outstanding equity awards originally granted under the Rockwater Equity Plan in accordance with the Merger Agreement. For additional information on such substitute awards, please see Note 17 below.as they occur.
Phantom unit awards granted under the 2011 Plan, upon vesting, entitled each participant with the right to receive an amount of cash based in part on the fair market value of a share of Select Class A Common Stock on the date of the IPO. Based on the fair market value of a share of Select Class A Common Stock of $14.00 on the date of the IPO, each participant received a cash payment equal to $5.53 for each phantom unit on May 5, 2017. Refer to “Phantom Unit Awards” for details related to the payments made in respect of outstanding phantom units in connection with the IPO.
20
Stock option awards
Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Select Class A Common Stock as of the date of grant. ThePrior to the Company’s initial public offering on April 26, 2017, the Company historically valued Select Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. TheThis fair value measurement reliesrelied on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards that were granted during the years ended December 31, 2017 and 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were either granted in exchange for the cancellation of outstanding options granted under the 2011 Plan or the Rockwater Equity Plan, as applicable, that were fully vested and exercisable prior to such cancellation.
The Company utilizesutilized the Black‑ScholesMonte Carlo option pricing model to determine fair value of the options granted during 2018, which incorporates assumptions to value equity‑basedequity-based awards. The risk‑freerisk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. At the time of grant, there was no public market for the Company’s equity. Therefore, the Company considered the historic volatility of publicly traded peer companies when determining the volatility factor. The expected life of the options was based on a formula considering the vesting period and term of the options awarded, which is generally seven to ten years.
26
A summary of the Company’s stock option activity and related information as of and for the nine months ended September 30, 2017Current Period is as follows:
| | | | | | | | | | |
| | For the six months ended June 30, 2019 | ||||||||
|
| | | | | | Weighted-average | | | |
| | | | Weighted-average | | Remaining Contractual | | Aggregate Intrinsic | ||
| | Stock Options | | Exercise Price | | Term (Years) | | Value (in thousands) (a) | ||
Beginning balance, outstanding |
| 3,865,678 | | $ | 16.00 | | 4.9 | | $ | 19 |
Granted |
| — | | | — | | | | | |
Exercised | | — | | | — | | | | | |
Forfeited |
| (12,459) | | | 17.83 | | | | | |
Expired | | (27,303) | | | 22.21 | | | | | |
Ending balance, outstanding |
| 3,825,916 | | $ | 15.95 | | 4.7 | | $ | 2,516 |
Ending balance, exercisable | | 3,373,046 | | $ | 15.26 | | 4.3 | | $ | 2,189 |
Nonvested at end of period | | 452,870 | | $ | 21.06 | | | | | |
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 | |||
|
|
|
| Weighted-average | |
|
| Equity Options |
| Exercise Price | |
Beginning balance |
| 620,721 |
| $ | 16.50 |
Granted |
| 455,130 |
|
| 20.00 |
Forfeited |
| (98,499) |
|
| 20.00 |
Ending balance |
| 977,352 |
| $ | 17.78 |
The weighted‑average grant date fair(a)Aggregate intrinsic value of stock options granted during the nine months ended September 30, 2017 was $7.85. The relevant assumptions for stock options granted duringis based on the period aredifference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $11.61 and $6.32 as follows:
|
|
|
|
|
|
| $20.00 Strike |
| |
Underlying Equity |
| $ | 20.00 |
|
Strike Price |
| $ | 20.00 |
|
Dividend Yield (%) |
|
| 0.0 | % |
Risk free rate (%) |
|
| 1.68 - 2.00 | % |
Volatility (%) |
|
| 46.6 - 46.8 | % |
Expected Term (Years) |
|
| 4-6 |
|
of June 28, 2019 and December 31, 2018, respectively.
There was no vested stock option activity, or exerciseThe Company recognized $1.0 million, $1.4 million, $2.3 million and $2.7 million of vestedcompensation expense related to stock options during the nine months ended SeptemberCurrent Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of June 30, 2017.2019, there was $2.2 million of unrecognized equity-based compensation expense related to nonvested stock options. This cost is expected to be recognized over a weighted-average period of one year.
Restricted Stock Awards and Restricted Stock Units
The value of the restricted stock awards and restricted stock units issued was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $2.2 million, $1.2 million, $4.0 million and $2.1 million related to the restricted stock awards and restricted stock units for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of June 30, 2019, there was $13.6 million of unrecognized compensation expense with a weighted-average remaining life of 1.6 years related to unvested restricted stock awards and restricted stock units.
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
| | | | | |
| | For the six months ended June 30, 2019 | |||
| | | | Weighted-average | |
| | Restricted Stock Awards | | Grant Date Fair Value | |
Nonvested at December 31, 2018 | | 496,945 | | $ | 19.02 |
Granted | | 1,373,930 | | | 8.77 |
Vested | | (255,582) | | | 18.80 |
Forfeited | | (8,822) | | | 19.79 |
Nonvested at June 30, 2019 | | 1,606,471 | | $ | 10.28 |
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A summary of the Company’s restricted stock unit activity and related information for the nine months ended September 30, 2017Current Period is as follows:
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 |
| |||
|
|
|
| Weighted-average |
| |
|
| Restricted Stock |
| Grant Date Fair Value |
| |
Beginning balance |
| — |
| $ | — |
|
Granted |
| 41,117 |
|
| 19.91 |
|
Forfeited |
| (10,757) |
|
| 20.00 |
|
Ending balance |
| 30,360 |
| $ | 19.88 |
|
| | | | | |
| | For the six months ended June 30, 2019 | |||
|
| |
| Weighted-average | |
| | Restricted Stock Units | | Grant Date Fair Value | |
Nonvested at December 31, 2018 |
| 2,500 | | $ | 19.00 |
Granted |
| — | | | — |
Vested |
| (1,250) | | | 19.00 |
Nonvested at June 30, 2019 |
| 1,250 | | $ | 19.00 |
Performance Share Units (PSUs)
21
performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The Company recognized approximately $0.6 million and $0.0 millionnumber of compensation expense related to stock options and restricted stock unit awards during the three months ended September 30, 2017 and 2016, respectively. The Company recognized approximately $1.8 million and $0.3 millionshares of compensation expense related to stock options and restricted stock unit awards during the nine months ended September 30, 2017 and 2016, respectively.
Phantom unit awards
The Company’s phantom unit awards were cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of Select Class A Common Stock on the date of completionissued to a recipient upon vesting of the IPO, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considered these awards toPSU will be liability awards, which are measured at fair value at each reporting date and the pro rata vested portion of the award is recognized as a liabilitycalculated based on performance against certain metrics that relate to the extent thatCompany’s return on asset performance over the January 1, 2018 through December 31, 2020 and January 1, 2019 through December 31, 2021 performance condition is deemed probable. On May 5, 2017, the Company settled its outstanding phantom unit awards for an aggregate amount equal to $7.8 million as a resultperiods, respectively.
The target number of the completionshares of its IPO, which constituted a liquidity event with respect to such phantom unit awards. Based on the fair market value of a share of Select Class A Common Stock subject to each PSU is one; however, based on the dateachievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from zero to 1.75 times the target number. The PSUs become earned at the end of the IPOperformance period after the attainment of $14.00, the cash paymentperformance level has been certified by the compensation committee, which will be no later than June 30, 2021 for the 2018 PSU grants, and June 30, 2022 for the 2019 PSU grants, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with respectthe following table:
| | |
Return on Assets at Performance Period End Date | | Percentage of Target PSUs Earned |
Less than 9.6% | | 0% |
9.6% | | 50% |
12% | | 100% |
14.4% | | 175% |
The grant date fair value of PSUs granted during 2018 was $5.9 million and the grant fair value of PSUs granted during the first half of 2019 was $6.9 million. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest, by the measurement-date (i.e., the last day of each phantom unit was approximately $5.53, before employer taxes.reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized compensation expense of $7.8$0.8 million, during the nine months ended September 30, 2017$0.4 million, $1.7 million and $0.6 million related to the settlement of its phantom unit awards. PSUs for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
As of SeptemberJune 30, 2017 there are no phantom units outstanding.
NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS
The Company had variable rate debt outstanding which was subject to interest rate risk based on volatility in underlying interest rates. In April 2013, the Company entered into a pay fixed, receive variable interest rate swap, with an aggregate notional amount of $125.0 million, which the Company designated as a cash flow hedge. The derivative contract matured in April 2016. The change in value and amounts reclassified to interest expense during the nine months ended September 30, 2016 were nominal. There was no activity during the nine months ended September 30, 2017.
Changes in the fair values of the Company’s derivative instruments are presented on a net basis in the accompanying consolidated statements of operations. Changes in2019, the fair value of outstanding PSUs issued was $11.8 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $8.6 million and is expected to be recognized over a weighted-average period of 1.8 years as of June 30, 2019.
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The following table summarizes the Company’s interest rate swap derivative instruments areinformation about the performance share units outstanding as follows:of June 30, 2019:
| | | ||
| | Performance Share Units | ||
Nonvested as of December 31, 2018 | |
| 255,364 | |
| |
| 769,741 | |
Target shares vested | |
| — | |
| |
|
| (9,442) |
| | 1,015,663 |
Stock-Settled Incentive Awards
Effective May 17, 2018, the Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Equity Incentive Plan that are subject to both market-based and service-based vesting provisions. These awards will vest after a two-year service period and, if earned, settled in shares of Class A Common Stock. The ultimate amount earned is based on the achievement of the market metrics, which is based on the stock price of the Class A Common Stock at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date is forfeited. The target amount that becomes earned during the performance period will be determined in accordance with the following table:
| | | ||
Stock Price at Vesting Date(1) |
| Percentage of Target Amount Earned | ||
| |
| 0% | |
| |
| 100% | |
| | 200% |
(1) | The stock price at vesting date equals the greater of (i) the fair market value of |
|
| a share of the Class A Common Stock on the vesting date, or (ii) the volume weighted average closing price of a share of the Class A Common Stock, as reported on the New York Stock Exchange (“NYSE”), for the 30 trading days preceding the vesting date. |
The target amount of stock-settled incentive awards granted was $3.9 million. However, the ultimate settlement of the awards will be in shares of Class A Common Stock with a fair market value equal to the earned amount, which could range from 0% to 200% of the target amount depending on the stock price at vesting date.
Compensation expense associated with the stock-settled incentive awards is recognized ratably over the corresponding requisite service period. The fair value of the stock-settled incentive awards was determined using a Monte Carlo option pricing model, similar to the Black-Scholes-Merton model, and adjusted for the specific characteristics of the awards. The key assumptions in the model included price, the expected volatility of our stock, risk-free interest rate based on U.S. Treasury yield curve, cross-correlations between us and our self-determined peer companies’ asset, equity and debt-to-equity volatility.
The Company recognized stock compensation expense of $0.1 million, $0.1 million, $0.3 million and $0.1 million related to the stock-settled incentive awards for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The unrecognized compensation cost related to our unvested stock-settled incentive awards is estimated to be $0.5 million and is expected to be recognized over approximately 11 months as of June 30, 2019.
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The following table summarizes the information about the stock-settled incentive awards outstanding as of June 30, 2019:
| | | | | | |
| | | | | Award Value | |
| | Value at Target | | Being Recognized | ||
Nonvested as of December 31, 2018 | | $ | 3,147 | | $ | 1,202 |
Granted during 2019 | | | — | | | — |
Forfeited during 2019 | | | (210) | | | (80) |
Nonvested as of June 30, 2019 | | $ | 2,937 | | $ | 1,122 |
Employee Stock Purchase Plan (ESPP)
We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of Class A Common Stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1 through August 31 and September 1 through November 30. At the end of each offering period, enrolled employees purchase shares of Class A Common Stock at a price equal to 95% of the market value of the stock on the last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period. Subject to limitations set forth in the plan and under IRS regulations, eligible employees may elect to contribute a maximum of $15,000 to the plan in a single calendar year. The plan is deemed to be noncompensatory.
The following table summarizes ESPP activity (in thousands, except shares):
| | | |
| | For the six months ended June 30, 2019 | |
Cash received for shares issued | | $ | 56 |
Shares issued | | | 5,667 |
Share-repurchases
During the Current Quarter and Current Period, the Company repurchased 0 and 82,092 shares, respectively, of Class A Common Stock in the open market and repurchased 26,716 and 70,410 shares, respectively, of Class A Common Stock in connection with employee minimum tax withholding requirements for units vested under the 2016 Plan. All repurchased shares were retired. This was accounted for as a decrease to paid-in-capital of $1.5 million and a decrease to Class A Common Stock of approximately $1,500.
30
NOTE 11—12—FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
22
ASC 820 establishes a three‑levelthree-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non‑activenon-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the ninesix months ended SeptemberJune 30, 20172019 or the year ended December 31, 2016.2018. The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of June 30, 2019.
| | | | | | | | | | | | | | | |
| | Fair Value | | | | | | | |||||||
| | Measurements Using | | Carrying | | | | ||||||||
| | Level 1 | | Level 2 | | Level 3 | | Value(1) | | Impairment | |||||
| | (in thousands) | |||||||||||||
Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Affirm goodwill | | $ | — | | $ | — | | $ | — | | $ | 4,396 | | $ | 4,396 |
Property and equipment | | | — | | | — | | | 4,732 | | | 5,625 | | | 893 |
(1) | Amount represents carrying value at the date of assessment. |
Other fair value considerations
The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value at Septemberas of June 30, 20172019 and December 31, 20162018, due to the short‑termshort-term maturity of these instruments. The Company had no outstandingcarrying value of bank debt as of September 30, 2017 and December 31, 2016.2018 approximated fair value due to variable market rates of interest. The fair value of bank debt as of December 31, 2018, which is a Level 3 measurement, was estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices are not available. The Company did not have any bank debt as of June 30, 2019. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The consideration transferred and the purchase price allocation of identified assets acquired and liabilities assumed related to the GRR Acquisition and Resource Water Acquisition areAffirm goodwill impairment was based on the Company’s estimate as of March 31, 2019 of fair value based on the expected proceeds to sell the remaining property and equipment utilizing Level 3 inputs atinputs. The property and equipment impairment during the dateCurrent Period was based on the expected proceeds from selling a portion of acquisition. Refer to Notethe remaining Canadian property and equipment utilizing Level 3 – Acquisitions for further discussion.inputs.
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NOTE 12—RELATED PARTY13—RELATED-PARTY TRANSACTIONS
The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons.persons and an unconsolidated joint venture. The Company has entered into a significant number of transactions with related parties. TheIn accordance with the Company’s related persons transactions policy, the audit committee of the Company’s board of directors regularly reviews these transactions; however, the Company’s results of operations may have been different if these transactions were conducted with non‑non-related parties. For more information regarding the Company’s policies and procedures for review of related parties.party transactions, see the Company’s Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders filed with the SEC on March 22, 2019.
During the three months ended September 30, 2017,Current Quarter, sales to related parties were $0.4$3.6 million and purchases from related partyrelated-party vendors were $2.1$6.4 million. These purchases comprised $0.7 million relating to purchasesconsisted of property and equipment, less than $0.1 million relating to inventory and consumables, $0.8 million relating to rent of certain equipment or other services used in operations, and $0.5 million relating to management, consulting and other services. During the three months ended September 30, 2016, sales to related parties were $0.2 million and purchases from related party vendors were $0.9 million. These purchases comprised $0.4 million relating to purchases of property and equipment, less than $0.1$5.6 million relating to inventory and consumables, less than $0.1 million relating to rentthe rental of certain equipment or other services used in operations and $0.4 million relating to management, consulting and other services.
During the nine months ended September 30, 2017,Prior Quarter, sales to related parties were $1.5$1.2 million and purchases from related partyrelated-party vendors were $5.0$4.2 million. These purchases comprised $1.4consisted of $1.0 million relating to purchases of property and equipment, $2.6 million relating to the rental of certain equipment or other services used in operations and $0.6 million relating to management, consulting and other services.
During the Current Period, sales to related parties were $9.9 million and purchases from related-party vendors were $12.4 million. These purchases consisted of $1.9 million relating to purchases of property and equipment, $9.5 million relating to the rental of certain equipment or other services used in operations and $1.0 million relating to management, consulting and other services.
During the Prior Period, sales to related parties were $3.6 million and purchases from related-party vendors were $7.5 million. These purchases consisted of $2.6 million relating to purchases of property and equipment, $0.2 million relating to inventory and consumables, $1.7$3.8 million relating to rentthe rental of certain equipment or other services used in operations and $1.7 million relating to management, consulting and other services. During the nine months ended September 30, 2016, sales to related parties were $0.8 million and purchases from related party vendors were $2.6 million. These purchases comprised $0.6 million relating to purchases of property and equipment,
23
$0.1 million relating to inventory and consumables, $0.4 million relating to rent of certain equipment or other services used in operations, and $1.5$0.9 million relating to management, consulting and other services.
Tax receivable agreementsReceivable Agreements
In connection with the Select 144A Offering, the Company entered into two tax receivable agreements (the “Taxthe Tax Receivable Agreements”)Agreements with Legacy Owner Holdco, Crestview Partners II GP, L.P. (“Crestview GP”), and certain affiliates of Predecessor unitholders (collectively, the “TRA Holders”).TRA Holders.
The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.
The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributing Legacy Owners and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net operating losses available to the Company as a result of certain reorganization transactions
32
entered into in connection with the Select 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement.
On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements revising the definition of a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Rockwater Merger would not result in such a change of control.
NOTE 13—14—INCOME TAXES
The Company is subject to U.S. federal and state income taxes as a corporation. SES Holdings and its subsidiaries, with the exception of certain corporate subsidiaries, are treated as flow‑through entities for U.S. federalCompany’s income tax purposes, and as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable incomeinformation is passed through to their members or partners. Accordingly, prior to our reorganization in connection with the 144A Offering, the Predecessor only recorded a provision for Texas franchise tax and U.S. federal and state provisions for certain corporate subsidiaries as the Predecessor’s taxable income or loss was includablepresented in the income tax returns of the individual partners and members. However, for periods following our reorganization in connection with the 144A Offering, Select Energy Services recognizes a tax liability on its allocable share of SES Holdings’ taxable income.
The Company’s effective tax rates for the three months ended September 30, 2017 and 2016 were (12.8)% and 0.1%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2017 and 2016 were (1.6)% and 0.1%, respectively.table below. The effective tax rates forrate is lower than the three and nine months ended September 30, 2017 differ from the statutory21% standard Federal rate of 35% due to net income allocated to noncontrolling interests, state income taxes other permanent differences between book and tax accounting, and valuation allowances.
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
| | (in thousands) | ||||||||||
Current income tax expense | | $ | 405 | | $ | 160 | | $ | 583 | | $ | 622 |
Deferred income tax expense (benefit) | | | 166 | | | (10) | | | 166 | | | (10) |
Total income tax expense | | $ | 571 | | $ | 150 | | $ | 749 | | $ | 612 |
Effective Tax Rate | | | 6.6% | | | 0.6% | | | 7.3% | | | 1.5% |
24
The Company recorded income tax expense (benefit) of $(0.3) million and less than $0.1 million for the three months ended September 30, 2017 and 2016, respectively. The Company recorded income tax expense (benefit) of $(0.3) million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.
The tax benefits of deferred tax assets are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. When the future utilization of some portion of deferred tax assets is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded tax benefits from such assets. As of September 30, 2017, management’s assessment as to the realizability of certain deferred tax assets has resulted in the recording of a valuation allowance to reduce deferred tax assets to the amounts that are considered more likely than not to be realized. Management believes there will be sufficient future taxable income based on the reversal of temporary differences to enable utilization or sustainability of those deferred tax assets that do not have a valuation allowance recorded against them.
Separate federal and state income tax returns are filed for Select Energy Services, SES Holdings, and certain consolidated affiliates. The tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject to income tax. Select Energy Services and SES Holdings are not currently under any income tax audits.
Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2017 and December 31, 2016, there was no material liability or expense for the periods then ended recorded for payments of interest and penalties associated with uncertain tax positions or material unrecognized tax positions and the Company’s unrecognized tax benefits were not material.
NOTE 14—15—NONCONTROLLING INTERESTS
The Company has ownershipCompany’s noncontrolling interests in multiple subsidiaries that are consolidated within the Company’s financial statements but are not wholly owned. During the nine months ended September 30, 2017 and 2016, the Company enteredfall into transactions that impacted itstwo categories as follows:
● | Noncontrolling interests attributable to joint ventures formed for water-related services. |
● | Noncontrolling interests attributable to holders of Class B Common Stock. |
| | | | | | |
| | As of | | As of | ||
|
| June 30, 2019 |
| December 31, 2018 | ||
| | (in thousands) | ||||
Noncontrolling interests attributable to joint ventures formed for water-related services | | $ | 2,723 |
| $ | 3,273 |
Noncontrolling interests attributable to holders of Class B Common Stock | | | 275,487 |
|
| 274,566 |
Total noncontrolling interests | | $ | 278,210 |
| $ | 277,839 |
33
For all periods presented, there were no changes to Select’s ownership interest in certain of these subsidiaries while maintaining control over such subsidiaries. As a result ofjoint ventures formed for water-related services. However, during the Company’s changeCurrent Period and Prior Period, there were changes in ownership interest in these subsidiaries, the Company reduced its noncontrolling interests and recognized an increase in equity related to transactions with holders of noncontrolling interests. The Company reports a noncontrolling interest representing the common units of SES Holdings held by Legacy Owner Holdco. Changes in Select Energy Services’Select’s ownership interest in SES Holdings while it retains its controllingLLC. The effects of the changes in Select’s ownership interest are accounted forin SES Holdings LLC is as equity transactions.follows:
| | | | | | |
| | For the six months ended June 30, | ||||
|
| 2019 |
| 2018 | ||
| | (in thousands) | ||||
Net income attributable to Select Energy Services, Inc. | | $ | 7,335 |
| $ | 27,062 |
Transfers (to) from noncontrolling interests: | | | |
|
| |
Increase (decrease) in additional paid-in capital as a result of stock option exercises | |
| — |
|
| (1) |
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures | |
| 3,540 |
|
| 2,195 |
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units | | | 4 | | | 104 |
(Decrease) increase in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units | |
| (25) |
|
| 74 |
Increase in additional paid-in capital as a result of exchanges of SES Holdings LLC Units (an equivalent number of shares of Class B Common Stock) for shares of Class A Common Stock | | | — | | | 111,803 |
Increase (decrease) in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued | | | 2 | | | (4) |
Change to equity from net income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests | | $ | 10,856 |
| $ | 141,233 |
2534
The following table summarizes the effects of changes in noncontrolling interests on equity for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
| For the nine months ended September 30, | ||||
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Net loss attributable to Select Energy Services, Inc. and its Predecessor |
| $ | (7,164) |
| $ | (285,359) |
Transfers from noncontrolling interests: |
|
|
|
|
|
|
Increase in additional paid-in capital as a result of the contribution of proceeds from the IPO to SEC Holdings, LLC in exchange for common units |
|
| 87,835 |
|
| — |
Increase in additional paid-in capital as a result of the contribution of assets acquired to SES Holdings, LLC in exchange for common units |
|
| 4,360 |
|
| — |
Increase in contributed capital due to purchase of noncontrolling interest |
|
| — |
|
| 135 |
Change to equity from net loss attributable to Select Energy Services, Inc. and its Predecessor and transfers from noncontrolling interests |
| $ | 85,031 |
| $ | (285,224) |
NOTE 15—16—EARNINGS PER SHARE
Earnings per share are based on the amount of income allocated to the shareholders and the weighted‑averageweighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 597,7492,972,967, 1,834,105, 2,976,537 and 977,3521,848,482 shares are not included in the calculation of diluted weighted-average shares outstanding for the threeCurrent Quarter, Prior Quarter, Current Period and nine months ended September 30, 2017Prior Period, respectively, as the effect is antidilutive.
26
Earnings related to periods prior to the reorganization and 144A Offering are attributable to the Predecessor. The following table presentstables present the Company’s calculation of basic and diluted earnings per share for the threeCurrent and nine months ended September 30, 2017Prior Quarter and 2016the Current and Prior Period (dollars in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
|
Net loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,359 |
|
Net (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Net income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
Allocation of net income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1 stockholders |
| $ | — |
|
|
|
| $ | (2,679) |
|
|
|
|
Class A stockholders |
|
| 1,224 |
|
|
|
|
| (4,485) |
|
|
|
|
Class B stockholders |
|
| — |
|
|
|
|
| — |
|
|
|
|
|
| $ | 1,224 |
|
|
|
| $ | (7,164) |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Basic |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A-Basic |
|
| 30,336,923 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B-Basic |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Basic |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A-Basic |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B-Basic |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Diluted |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A-Diluted |
|
| 30,357,572 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B-Diluted |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Diluted |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A-Diluted |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B-Diluted |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Three months ended June 30, 2018 | ||||||||||||||||||||
| | Select Energy Services, Inc. | | Class A | | Class A-2 | | Class B | | Select Energy Services, Inc. | | Class A | | Class A-2 | | Class B | ||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 8,068 | | | | | | | | | | | $ | 25,023 | | | | | | | | | |
Net income attributable to noncontrolling interests | | | (1,868) | | | | | | | | | | | | (8,060) | | | | | | | | | |
Net income attributable to Select Energy Services, Inc. — basic | | | 6,200 | | $ | 6,200 | | $ | — | | $ | — | | | 16,963 | | $ | 16,963 | | $ | — | | $ | — |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock | | | 9 | | | 9 | | | — | | | — | | | 6 | | | 6 | | | — | | | — |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options | | | 3 | | | 3 | | | — | | | — | | | 22 | | | 22 | | | — | | | — |
Net income attributable to Select Energy Services, Inc. — diluted | | $ | 6,212 | | $ | 6,212 | | $ | — | | $ | — | | $ | 16,991 | | $ | 16,991 | | $ | — | | $ | — |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 78,544,502 | | | — | | | 26,026,843 | | | | | | 71,412,158 | | | — | | | 34,677,182 |
Dilutive effect of restricted stock | | | | | | 471,542 | | | — | | | — | | | | | | 71,969 | | | — | | | — |
Dilutive effect of stock options | | | | | | 150,889 | | | — | | | — | | | | | | 261,582 | | | — | | | — |
Dilutive effect of ESPP | | | | | | 102 | | | — | | | — | | | | | | 99 | | | — | | | — |
Weighted-average shares of common stock outstanding — diluted | | | | | | 79,167,035 | | | — | | | 26,026,843 | | | | | | 71,745,808 | | | — | | | 34,677,182 |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | $ | 0.08 | | $ | — | | $ | — | | | | | $ | 0.24 | | $ | — | | $ | — |
Diluted | | | | | $ | 0.08 | | $ | — | | $ | — | | | | | $ | 0.24 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 | | Six months ended June 30, 2018 | ||||||||||||||||||||
| | Select Energy Services, Inc. | | Class A | | Class A-2 | | Class B | | Select Energy Services, Inc. | | Class A | | Class A-2 | | Class B | ||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 9,468 | | | | | | | | | | | $ | 41,155 | | | | | | | | | |
Net income attributable to noncontrolling interests | | | (2,133) | | | | | | | | | | | | (14,093) | | | | | | | | | |
Net income attributable to Select Energy Services, Inc. — basic | | | 7,335 | | $ | 7,335 | | $ | — | | $ | — | | | 27,062 | | $ | 25,784 | | $ | 1,278 | | $ | — |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock | | | 8 | | | 8 | | | — | | | — | | | 17 | | | 18 | | | (1) | | | — |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options | | | 2 | | | 2 | | | — | | | — | | | 49 | | | 53 | | | (4) | | | — |
Net income attributable to Select Energy Services, Inc. — diluted | | $ | 7,345 | | $ | 7,345 | | $ | — | | $ | — | | $ | 27,128 | | $ | 25,855 | | $ | 1,273 | | $ | — |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 78,533,761 | | | — | | | 26,026,843 | | | | | | 65,270,048 | | | 3,235,746 | | | 37,488,964 |
Dilutive effect of restricted stock | | | | | | 351,780 | | | — | | | — | | | | | | 118,719 | | | — | | | — |
Dilutive effect of stock options | | | | | | 78,353 | | | — | | | — | | | | | | 343,127 | | | — | | | — |
Dilutive effect of ESPP | | | | | | 195 | | | — | | | — | | | | | | 83 | | | — | | | — |
Weighted-average shares of common stock outstanding — diluted | | | | | | 78,964,089 | | | — | | | 26,026,843 | | | | | | 65,731,977 | | | 3,235,746 | | | 37,488,964 |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | $ | 0.09 | | $ | — | | $ | — | | | | | $ | 0.40 | | $ | 0.40 | | $ | — |
Diluted | | | | | $ | 0.09 | | $ | — | | $ | — | | | | | $ | 0.39 | | $ | 0.39 | | $ | — |
35
NOTE 16—17—SEGMENT INFORMATION
Select Energy ServicesInc. is an oilfield services company that provides solutions to the North American onshore oil and natural gas industry.industry in the United States. The Company’s services are offered through three operating segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”)CODM in deciding how to allocate resources and assess performance. The Company’s chief operating decision makerCODM assesses performance and allocates resources on the basis of the three reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate.Corporate or Other. Each operating segment reflects a reportable segment led by separate managers that report
27
directly to the Company’s CODM.
During the first quarter of 2019, the Company made the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. As a result, the Company reevaluated its segment structure and changed its reportable segments to Water Services, Water Infrastructure, and Oilfield Chemicals.
The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments:
Water SolutionsServices —The Water SolutionsServices segment provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transferconsists of the Company’s services businesses including water to the wellsite through permanent pipeline infrastructuretransfer, flowback and temporary pipe; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids, well testing, fluids hauling, containment, and handlingwater treatment and water network automation. Additionally, this segment includes the operations of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids.
Accommodations and Rentals—The Accommodations and Rentals segment provides workforceour accommodations and surface rental equipment supporting drilling, completionrentals business, which were previously a part of the former Wellsite Services segment.
Water Infrastructure — The Water Infrastructure segment consists of the Company’s strategic infrastructure assets and productionongoing infrastructure development projects, including operations associated with our water sourcing and pipelines, produced water gathering systems and salt water disposal wells.
Oilfield Chemicals — The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers breakers and other chemical technologies, to leading pressure pumping service companies in the U.S. onshoreUnited States. This segment also provides chemicals needed by our customers to increase oil and gas industry.production and lower production costs over the life of a well.
Wellsite Completion and Construction Services—The results of our remaining service lines that were previously a part of the former Wellsite Completion and Construction Services segment, provides oilincluding the operations of our Affirm subsidiary, our sand hauling operations and natural gas operators with a varietyour Canadian operations, are combined in the “Other” category.
36
Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:
| | | | | | | | | | | | |
| | For the three months ended June 30, 2019 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water services | | $ | 202,997 | | $ | 16,234 | | $ | 21,024 | | $ | 9,489 |
Water infrastructure | | | 51,719 | | | 3,202 | | | 6,072 | | | 11,542 |
Oilfield chemicals | | | 62,997 | | | 4,424 | | | 1,747 | | | 2,132 |
Other | | | 9,403 | | | 673 | | | — | | | 3 |
Eliminations | |
| (3,229) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 24,533 | |
| | |
| |
Corporate | |
| — | |
| (13,354) | |
| 906 | |
| — |
Interest expense, net | |
| — | |
| (839) | |
| — | |
| — |
Other income, net | |
| — | |
| (1,701) | |
| — | |
| — |
| | $ | 323,887 | | $ | 8,639 | | $ | 29,749 | | $ | 23,166 |
| | | | | | | | | | | | |
| | For the three months ended June 30, 2018 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water services | | $ | 234,040 | | $ | 27,039 | | $ | 18,947 | | $ | 33,321 |
Water infrastructure | | | 55,733 | | | 7,030 | | | 5,219 | | | 7,214 |
Oilfield chemicals | | | 64,842 | | | 1,031 | | | 2,823 | | | 3,424 |
Other | | | 39,343 | | | 911 | | | 3,456 | | | 1,860 |
Eliminations | |
| (711) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 36,011 | |
| | |
| |
Corporate | |
| — | |
| (11,216) | |
| 807 | |
| — |
Interest expense, net | |
| — | |
| (1,342) | |
| — | |
| — |
Other income, net | |
| — | |
| 1,720 | |
| — | |
| — |
| | $ | 393,247 | | $ | 25,173 | | $ | 31,252 | | $ | 45,819 |
| | | | | | | | | | | | |
| | For the six months ended June 30, 2019 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water services | | $ | 423,877 | | $ | 39,894 | | $ | 42,286 | | $ | 22,615 |
Water infrastructure | | | 105,335 | | | 7,003 | | | 12,161 | | | 28,780 |
Oilfield chemicals | | | 130,116 | | | 6,437 | | | 4,200 | | | 3,352 |
Other | | | 33,073 | | | (5,850) | | | 1,714 | | | 64 |
Eliminations | |
| (5,868) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 47,484 | |
| | |
| |
Corporate | |
| — | |
| (29,672) | |
| 1,906 | |
| — |
Interest expense, net | |
| — | |
| (1,932) | |
| — | |
| — |
Other income, net | |
| — | |
| (5,663) | |
| — | |
| — |
| | $ | 686,533 | | $ | 10,217 | | $ | 62,267 | | $ | 54,811 |
37
| | | | | | | | | | | | |
| | For the six months ended June 30, 2018 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water services | | $ | 452,395 | | $ | 49,757 | | $ | 37,839 | | $ | 51,218 |
Water infrastructure | | | 109,790 | | | 12,779 | | | 10,256 | | | 14,650 |
Oilfield chemicals | | | 128,472 | | | 1,962 | | | 5,738 | | | 5,679 |
Other | | | 80,167 | | | (58) | | | 7,494 | | | 5,378 |
Eliminations | |
| (1,182) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 64,440 | |
| | |
| |
Corporate | |
| — | |
| (21,042) | |
| 1,348 | |
| — |
Interest expense, net | |
| — | |
| (2,493) | |
| — | |
| — |
Other income, net | |
| — | |
| 862 | |
| — | |
| — |
| | $ | 769,642 | | $ | 41,767 | | $ | 62,675 | | $ | 76,925 |
Total assets by segment as of SeptemberJune 30, 20172019 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016, by segment,2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2017 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 125,142 |
| $ | 9,844 |
| $ | 19,433 |
| $ | 22,260 |
Accommodations and Rentals |
|
| 15,974 |
|
| (304) |
|
| 2,908 |
|
| 3,541 |
Wellsite Completion and Construction Services |
|
| 13,301 |
|
| (2) |
|
| 1,079 |
|
| 1,303 |
Elimination |
|
| (537) |
|
| — |
|
| — |
|
| — |
Income from operations |
|
|
|
|
| 9,538 |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (7,081) |
|
| 375 |
|
| — |
Interest expense, net |
|
| — |
|
| (484) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 326 |
|
| — |
|
| — |
|
| $ | 153,880 |
| $ | 2,299 |
| $ | 23,795 |
| $ | 27,104 |
| | | | | | |
|
| As of | | As of | ||
| | June 30, 2019 | | December 31, 2018 | ||
| | (in thousands) | ||||
Water services | | $ | 873,107 | | $ | 865,992 |
Water infrastructure |
| | 312,638 |
| | 250,207 |
Oilfield chemicals |
| | 171,457 |
| | 173,762 |
Other | | | 19,975 | | | 70,644 |
| | $ | 1,377,177 | | $ | 1,360,605 |
NOTE 18—SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and/or disclosure through August 7, 2019, the date these consolidated financial statements were available to be issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2016 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 61,082 |
| $ | (28,278) |
| $ | 17,690 |
| $ | 4,668 |
Accommodations and Rentals |
|
| 5,881 |
|
| (2,786) |
|
| 2,644 |
|
| 268 |
Wellsite Completion and Construction Services |
|
| 7,156 |
|
| (1,325) |
|
| 1,279 |
|
| 95 |
Elimination |
|
| (212) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| (32,389) |
|
|
|
|
|
|
Corporate |
|
| — |
|
| 1,123 |
|
| 363 |
|
| — |
Interest expense, net |
|
| — |
|
| (4,343) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 431 |
|
| — |
|
| — |
|
| $ | 73,907 |
| $ | (35,178) |
| $ | 21,976 |
| $ | 5,031 |
2838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 311,645 |
| $ | 5,652 |
| $ | 55,623 |
| $ | 57,273 |
Accommodations and Rentals |
|
| 39,056 |
|
| (3,813) |
|
| 8,367 |
|
| 8,311 |
Wellsite Completion and Construction Services |
|
| 38,951 |
|
| 56 |
|
| 3,154 |
|
| 6,598 |
Elimination |
|
| (1,398) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| 1,895 |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (23,855) |
|
| 1,312 |
|
| — |
Interest expense, net |
|
| — |
|
| (1,885) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 3,342 |
|
| — |
|
| — |
|
| $ | 388,254 |
| $ | (20,503) |
| $ | 68,456 |
| $ | 72,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2016 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 173,294 |
| $ | (264,416) |
| $ | 61,574 |
| $ | 28,533 |
Accommodations and Rentals |
|
| 19,750 |
|
| (8,303) |
|
| 8,197 |
|
| 834 |
Wellsite Completion and Construction Services |
|
| 23,098 |
|
| (3,820) |
|
| 4,103 |
|
| 215 |
Elimination |
|
| (477) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| (276,539) |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (1,100) |
|
| 1,644 |
|
| — |
Interest expense, net |
|
| — |
|
| (11,792) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 588 |
|
| — |
|
| — |
|
| $ | 215,665 |
| $ | (288,843) |
| $ | 75,518 |
| $ | 29,582 |
|
|
|
|
|
|
|
|
| Total Assets | ||||
|
| As of |
| As of | ||
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (in thousands) | ||||
Water Solutions |
| $ | 448,585 |
| $ | 324,171 |
Accommodations and Rentals |
|
| 50,057 |
|
| 38,874 |
Wellsite Completion and Construction Services |
|
| 38,827 |
|
| 29,994 |
Corporate |
|
| 15,280 |
|
| 12,027 |
|
| $ | 552,749 |
| $ | 405,066 |
NOTE 17—SUBSEQUENT EVENTS
Completion of the Merger
On November 1, 2017, the Company completed the transactions contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among the Company, SES Holdings, Raptor Merger Sub, Inc. (“Corporate Merger Sub”), Raptor Merger Sub, LLC (“LLC Merger Sub”), Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“RES Holdings”). Pursuant to the Merger Agreement, Corporate Merger Sub merged with and into Rockwater, with Rockwater continuing as the surviving entity as a wholly owned subsidiary of the Company (the “Corporate Merger”), and LLC Merger Sub merged with and into RES Holdings, with RES Holdings continuing as the surviving entity as an indirect wholly owned subsidiary of SES Holdings (the “LLC Merger”).
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At the effective time of the Corporate Merger (the “Corporate Merger Effective Time”), subject to certain exceptions, (x) each share of Rockwater’s Class A common stock, $0.01 par value per share (“Rockwater Class A Common Stock”), then outstanding was converted into the right to receive a number of shares of Select Class A Common Stock equal to 0.7652 per each such share (the “Exchange Ratio”), (y) each share of Rockwater’s Class A-1 common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of the Company’s Class A-2 common stock, par value $0.01 per share (“Select Class A-2 Common Stock”), equal to the Exchange Ratio, and (z) each share of Rockwater’s Class B common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of Select Class B Common Stock equal to the Exchange Ratio. At the effective time of the LLC Merger (the “LLC Merger Effective Time”), subject to certain exceptions, each unit of RES Holdings (each, an “RES Holdings Unit”) then outstanding (including RES Holdings Units held by Rockwater) was converted into the right to receive a number of units in SES Holdings equal to the Exchange Ratio. The original exchange ratio of 0.7777 set forth in the Merger Agreement was adjusted downwards to 0.7652 in accordance with the terms of the Merger Agreement.
Shares of the Company’s common stock outstanding immediately prior to the Corporate Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the Corporate Merger. Based on the number of shares of Rockwater common stock issued and outstanding immediately prior to the Corporate Merger Effective Time, a total of approximately 25.9 million shares of Select Class A Common Stock, 6.7 million shares of Select Class A-2 Common Stock and 4.4 million shares of Select Class B Common Stock (excluding the issuance of equity awards, which are described in the following paragraph), were issued to the former holders of Rockwater common stock pursuant to the Merger Agreement. In the aggregate (including the issuance of equity awards), the Company issued approximately 37.3 million shares of common stock. Units in SES Holdings outstanding immediately prior to the LLC Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the LLC Merger. Based on the number of RES Holdings Units issued and outstanding immediately prior to the LLC Merger Effective Time, a total of approximately 37.3 million units in SES Holdings were issued to the former holders of RES Holdings Units pursuant to the Merger Agreement.
At the Corporate Merger Effective Time, each outstanding option to purchase shares of Rockwater Class A Common Stock (each, a “Rockwater Stock Option”) was converted into an option to acquire, on the same terms and conditions as were applicable to such Rockwater Stock Option immediately prior to the Corporate Merger Effective Time, the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Stock Option as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio, at an exercise price per share of Select Class A Common Stock equal to the exercise price per share of Rockwater Class A Common Stock under such Rockwater Stock Option divided by the Exchange Ratio (such conversions, collectively, the “Option Conversion”). Additionally, at the Corporate Merger Effective Time, each share of restricted Rockwater Class A Common Stock (each, a “Rockwater Restricted Stock Award”) that was outstanding immediately prior to the Corporate Merger Effective Time ceased to represent Rockwater Class A Common Stock and was converted into a new award of restricted shares, subject to the same terms and conditions as were applicable to such Rockwater Restricted Stock Award prior to the Corporate Merger Effective Time, equal to the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Restricted Stock Award as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio (such conversions, collectively, the “Restricted Stock Conversion”). Subject to certain New York Stock Exchange (“NYSE”) restrictions, the shares available under the Rockwater Equity Plan as of the Corporate Merger Effective Time (as appropriately adjusted to reflect the Exchange Ratio) may be used for post-transaction grants under the 2016 Plan. The Option Conversion, Restricted Stock Conversion and assumption of shares available under the Rockwater Equity Plan described in the preceding sentences are collectively referred to as the “Equity Award Actions.” The Equity Plan Amendment, which was previously adopted to effectuate the Equity Award Actions, became effective on November 1, 2017 at the Corporate Merger Effective Time.
New Credit Agreement
On November 1, 2017, in connection with the closing of the transactions contemplated by the Merger Agreement (the “Closing”), SES Holdings and Select LLC (the “Borrower”) entered into a $300.0 million senior secured revolving credit facility (the “New Credit Agreement”), by and among SES Holdings, as parent, the Borrower, certain of
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SES Holdings’s subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The New Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company has the option to increase the maximum amount under the senior secured credit facility by $150.0 million during the first three years following the Closing.
The New Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the New Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the New Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the New Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the New Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the New Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the New Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the New Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by the Borrower to the Administrative Agent.
Borrowings under the New Credit Agreement bear interest, at the Borrower’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus ½%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the “Base Rate”), in each case plus an applicable margin, and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on the Borrower’s average excess availability under the New Credit Agreement. The applicable margin for Eurocurrency Rate loans will be 1.75% and the applicable margin for Base Rate loans will be 0.75% until June 30, 2018. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the New Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate. The New Credit Agreement is scheduled to mature on the fifth anniversary of the Closing.
The obligations under the New Credit Agreement are guaranteed by SES Holdings and certain of the subsidiaries of SES Holdings and the Borrower and secured by a security interest in substantially all of the personal property assets of SES Holdings, the Borrower and their domestic subsidiaries.
The New Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the New Credit Agreement to be immediately due and payable.
In addition, the New Credit Agreement restricts SES Holdings’s and the Borrower’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the New Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’s fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the New Credit Agreement generally permits the Borrower to make distributions required under its existing tax receivable agreements.
The New Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to [1.0] at any time availability under the New Credit Agreement is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through
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and including the first day after such time that availability under the New Credit Agreement has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
Certain lenders party to the New Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
Termination of Credit Facility
In connection with the entry into the New Credit Agreement, the obligations of SES Holdings and the Borrower under the Credit Facility were repaid in full and the Credit Facility was terminated.
Certain lenders party to the Credit Facility and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
In addition, certain lenders party to the Credit Facility are lenders under the New Credit Agreement.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with theour consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in the Final Prospectus.our 2018 Form 10-K. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements.”
This discussion relates to the three and six months ended June 30, 2019 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2018 (the “Prior Quarter” and the “Prior Period”, respectively).
Overview
We are a leading provider of total waterwater-management solutions to the U.S. unconventional oil and gas industry.industry in the United States (“U.S.”). We also develop, manufacture and deliver chemical solutions for use in oil and gas well completions and production operations. Within the major shale plays in the United States,U.S., we source andbelieve we are a market leader in water sourcing, water transfer water (both by permanent pipeline and temporary pipe)hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic fracturingfracture stimulation or “fracking,” which we collectively refer to collectively as “pre-frac water services.”services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including containment, monitoring,water network automation, treatment, flowback, hauling, water recycling and disposal. Our services are necessaryWe also manufacture a full suite of specialty chemicals used in the fracturing process, and we provide chemicals needed by our customers to establish and maintain production ofincrease oil and gas production and lower production costs over the productive life of a horizontal well. Water and related servicesWe believe we are increasingly important as E&P companies have increased the complexity and completion intensity of horizontal wells (including the use of longer horizontal wellbore laterals, tighter spacing of frac stagesonly company in the lateralsoilfield services industry that combines full life cycle water-management services with the ability to develop and increased waterprovide related chemical products.
Our operations have benefited from the investments and proppant use per foot of lateral)acquisitions we have made, and we continue to invest both in our existing business and in new infrastructure and technology. When evaluating new investment decisions, we prioritize high returns on long-lived assets where applicable. One way we do this is through margin-enhancing capital expenditures, which often comprises upgrading or automating equipment in order to improve productionincrease margin realization from those assets. One example of this type of investment is replacing conventional water transfer pumps with automated pumps, which lowers labor costs, increases reliability and recoveryimproves environmental safeguards for our customers. Another area of hydrocarbons. Historically,focus is longer-lived infrastructure assets in areas we believe will experience consistently high levels of completion activity. We have generatedsuccessfully executed these types of investments both in the Bakken, through our fixed infrastructure investments there, through our GRR Acquisition in the northern Delaware Basin and with our recently announced northern Delaware Basin pipeline project. Additionally, as market opportunities continue to grow for treating and re-using produced water for new well completions, we are also focused on developing and expanding our production-related services including our existing produced water gathering infrastructure to help manage growing produced water volumes. The quality of water used for a substantial majoritywell completion directly impacts the completion chemicals that are used in the frac fluid system. Our knowledge and expertise related to treatment, recycling and frac fluid chemistry allows us to provide our customers with sustainable solutions across a range of various water attributes.
For our Oilfield Chemicals segment, the opening of our revenues through providing total water solutionsMidland Friction Reducer production line has saved us freight and logistics cost relative to shipping this high-volume product out of our Tyler, Texas production facility. We continue to make investments in driving operational efficiencies with our in-basin manufacturing that will continue to reduce unnecessary logistics and freight cost, making us more competitive and more nimble to our customers. The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities.
We provide our serviceshave executed these acquisitions and investments within the context of a steadily improving balance sheet. As of June 30, 2019, we have no outstanding bank debt and a net cash position. We prioritize sustained positive free
39
cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to major integrated and large E&P companies, who typically represent the largest producers in eacheconomics of our areas of operations,the opportunity. We believe this approach provides the Company with additional flexibility to evaluate larger investments as well as other independent companies operatingimproved resilience in these regions.a sustained downturn versus many of our peers.
Going forward, we may pursue selected acquisitions of complementary assets, businesses and technologies, and believe we are well positioned to capture attractive opportunities due to our market position, customer and landowner relationships and industry experience and expertise.
Our Segments
Our services are offered through three operating segments: (i) Water Solutions, AccommodationsServices; (ii) Water Infrastructure; and Rentals, and Wellsite Completion and Construction Services.(iii) Oilfield Chemicals.
| Water Services. The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, containment, and water treatment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business, which were previously a part of our former Wellsite Services segment. |
● | Water |
● | Oilfield Chemicals. The Oilfield Chemicals segment develops, manufactures and provides |
|
|
|
|
The results of our remaining service lines that were previously a part of our former Wellsite Services segment including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations are combined in the “Other” category. As of June 30, 2019, these operations have ceased, and we do not expect regular recurring revenue going forward from this segment.
How We Generate Revenue
We currently generate a significant majoritymost of our revenue through our Water Solutions segment, specifically through the sourcing and transfer of water used in drilling and completion activitieswater-management services associated with hydraulic fracturing.fracturing, provided through our Water Services and Water Infrastructure segments. We generate the majority of our revenue through customer agreements with fixed pricing terms but no guaranteed throughput amounts.
33
services is provided, generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.
We also generate revenue by providing completion, specialty chemicals and production chemicals through our Accommodations and Rentals and Wellsite Completion and Construction Services segments which provide workforce accommodations, related rentals and a variety of wellsite completion and construction services, including wellsite construction, pipeline construction, field services and well services.Oilfield Chemicals segment. We invoice the majority of our clientsOilfield Chemicals customers for these services provided based on a per job basisthe quantity of chemicals used or pursuant to short-term contracts as the customer’s needs arise.
40
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, equipment costs (including depreciation, repair, rental and maintenance and leasing costs), fuelraw materials and water sourcing costs and water sourcingfuel costs. Our fixed costs are relatively low and a large portionlow. Most of the costs we incur inof serving our businesscustomers are variable, i.e., they are only incurred when we provide water and water-related services, or chemicals and chemical-related services to our customers.
Labor costs associated with our employees and contract labor represent the most significant costs of our business. We incurred labor and labor-related costs of $54.8$122.6 million, $140.0 million, $264.7 million and $34.4$278.9 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively. We incurred labor costs of $155.5 million and $104.0 million for the nine months ended September 30, 2017 and 2016, respectively. Our labor costs for the nine months ended September 30, 2017 included $12.5 million of non-recurring costs related to a payout on our phantom equity units and IPO success bonuses. The majority of our recurring labor costs are variable and are incurred only while we are providing water and water-relatedour operational services. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our assets, which areis not directly tied to our level of business activity. We alsoAdditionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters. In light of the challenging activity and pricing trends, management has taken direct action during the Current Quarter to reduce operating and equipment costs, as well as selling, general and administrative costs, in order to proactively manage these expenses as a percentage of revenue.
We incur significant equipment costs in connection with the operation of our business, including depreciation, repair and maintenance, rental and leasing costs. We incurred equipment costs of $36.0$61.6 million, $71.1 million, $127.6 million and $26.2$139.8 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively.
We incur significant transportation costs associated with our service lines, including fuel and freight. We incurred equipmentfuel and freight costs of $98.4$20.2 million, $24.5 million, $42.5 million and $84.5$47.3 million for the nine months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016, respectively. Our depreciation costs are expected to decline over the next few years as a result of recent impairments as well as the decline in our capital expenditures over the last three years, which will be partially offset by any future capital expenditures on depreciable assets.
Fuel costs associated with water transportation are a significant operating cost. We incurred fuel costs of $8.2 million and $4.6 million for the three months ended September 30, 2017 and 2016, respectively. We incurred fuel costs of $21.4 million and $12.1 million for the nine months ended September 30, 2017 and 2016,Prior Period, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand offor our services and have an impact on our results of operations.
We incur water sourcingraw material costs in connection with obtaining strategic and reliablemanufacturing our chemical products, as well as for water sources to provide repeatable water volumes tothat we source for our customers. We incurred water sourcingraw material costs of $9.7$66.0 million, $69.3 million, $136.3 million and $5.8$137.8 million for the threeCurrent Quarter, Prior Quarter, Current Period and Prior Period, respectively.
Industry Overview
During the Current Quarter, the average spot price of West Texas Intermediate (“WTI”) (Cushing) crude oil was $59.88 versus an average price of $68.07 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter was $2.56 versus an average of $2.86 for the Prior Quarter. The decline in oil and gas prices in the Current Quarter relative to the Prior Quarter has negatively impacted the pace of completions activity in 2019, relative to the Prior Period. Though oil prices have modestly recovered in recent months, ended September 30, 2017many operators prepared and 2016, respectively.announced their capital budgets during a period of lower prices. With most operators appearing to prioritize free cash flow over production growth at this time, we do not see much potential upside in activity from Current Quarter levels for the second half of 2019. Additionally, capital markets, especially the IPO market, do not appear favorably disposed towards the Oil & Gas industry at this time. While we believe that the current oil prices and production profiles could lead to increased operator cash flow and additional activity in the future, current indications lead us not to anticipate large incremental sums of capital potentially entering the market to create higher demand for our services over the course of 2019.
While we cannot predict the future direction of oil or natural gas prices, our discussions with customers and the improving financial metrics of many U.S. onshore-focused operators lead us to believe that current price levels support significant capital investment by our customers over the longer term to maintain and grow oil and gas production from U.S. onshore resources. Additionally, the high rate of decline of U.S. onshore unconventional resources requires significant ongoing investment just to maintain production levels.
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Trends beyond oil and natural gas prices present both support and challenges. While we believe leading-edge lateral lengths and proppant use are plateauing, the average operator continues to catch up to this leading edge. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing frac efficiency and the use of lower cost in-basin sand have decreased total costs for our customers. This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian, provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production lifecycle of wells. We incurred water sourcing costs of $23.8 million and $14.1 million for note the nine months ended September 30, 2017 and 2016 respectively.
Public Company Expenses
General and administrative expenses related to being a publicly traded company include: Exchange Act reporting expenses; expenses associated with compliance withcontinued efficiency gains in the Sarbanes‑Oxley Act of 2002; expenses associated with maintaining our listingwell completions process can limit the days we spend on the NYSE; incremental independent auditor fees; incremental legal fees; investor relations expenses; registrarwellsite and transfer agent fees; incremental directortherefore negatively impact the total revenue opportunity.
The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities and officer liability insurance costs;our knowledge base within our Oilfield Chemicals segment. Additionally, this trend supports more complex “on the fly” solutions that treat, proportion, and director compensation. We expect that generalblend various streams of water and administrative expenses relatedchemicals at the wellsite. This complexity favors service companies able to being a publicly traded company will increase in future periods. Costs incurred by us for corporate and other overhead expenses will be reimbursed by SES Holdings pursuant to the SES Holdings LLC Agreement.
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provide advanced technology solutions.
How We Evaluate Our Operations
We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:
| Revenue; |
| Gross Profit; |
| Gross Margins; |
● | EBITDA; and |
| Adjusted EBITDA. |
Revenue
We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections.projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our operating segments to identify potential areas for improvement, as well as to determine whether segments are meeting management’s expectations.
Gross Profit
To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation expense)and amortization expenses). We believe gross profit is a meaningful metric because it provides insight oninto profitability and true operating performance based on the historical cost basis of our assets. We also compare gross profit to prior periods and across locationssegments to identify trends as well as underperforming locations.segments.
Gross Margins
Gross margins provide an important gauge of how effective we are at converting revenue into profits. This metric works in tandem with gross profit to ensure that we do not increase gross profit at the expense of lower margins, thus decreasing our return on capital employed, nor pursue higher gross margins exclusively at the expense of declining gross profits. We track gross margins by segment and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.
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EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income,income/(loss), plus taxes, interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, non-recurring compensation expense and nonrecurringnon-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities relatedfacilities-related exit and disposal related expenditures.disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. See “—Comparison of Non-GAAP Financial Measures” and “NoteNote Regarding Non-GAAP Financial Measures”Measures—EBITDA and Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below.
Acquisition and Divestiture Activity
As described above, we are continuously evaluating potential investments, particularly in water infrastructure and other water-related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.
Pro Well Acquisition
On November 20, 2018, we completed our acquisition of the assets of Pro Well Testing and Wireline, Inc. (“Pro Well”). Our historical financial statements for periods prior to November 20, 2018 do not include the results of operations of Pro Well.
Affirm Divestitures
We sold the Affirm crane and field services businesses on February 26, 2019 and June 28, 2019, respectively. We wound down the rest of Affirm during the Current Quarter. Affirm accounted for $58.9 million of revenue during 2018. Following the two divestitures, the divested operations were not included in the consolidated results of operations.
Canadian Operations Divestitures
On March 19, 2019, we sold over half of our Canadian operationswhich accounted for approximately $40.0 million of annual revenue during 2018. On April 1, 2019, we sold and wound down the rest of the Canadian operations which accounted for approximately $8.6 million of annual revenue during 2018. Following the divestitures, the divested Canadian operations were not included in the consolidated results of operations.
Sand Hauling Wind Down
During the Current Period, we wound down our sand hauling operations and sold certain of our sand hauling property and equipment. Sand hauling accounted for $37.0 million of annual revenue during 2018.
Proceeds received from Divestitures and Wind Down
During the Current Period, we received $30.1 million from divestitures and fixed asset sale activity in connection with the sale and wind down of our Affirm subsidiary and the sand hauling and Canadian operations.
3543
Impact of Industry Conditions on Our Operating Results
Demand for oilfield services depends substantially on drilling, completion and production activity by E&P companies, which, in turn, depends largely upon the current and anticipated profitability of developing oil and natural gas reserves. Our business is directly affected by our customers’ capital spending to develop and produce oil and gas in the United States. The significant decline in oil and gas prices that began in the fourth quarter of 2014 caused a reduction in the development activities of most of our customers and their spending on our services in 2015 and 2016, which led to a reduction in the rates we were able to charge and the utilization of our assets. In 2017 and through the third quarter of 2018, our clients steadily increased their spending as compared to 2016 levels as oil prices generally recovered; however, in the fourth quarter of 2018, we experienced a pullback in spending by our customers, driven by a decline in oil prices and seasonal factors. While oil prices have since improved, customers have prioritized spending within their cash flows and capital budgets, and additional volatility or declines could result in our customers cancelling or curtailing their spending on our services. In the discussion of our operating results below, we reference the fluctuations in industry conditions in connection with certain changes in our results of operations.
44
Results of Operations
The following tables set forth selected financial and operating dataour results of operations for the periods indicated (all values are net to our interest unless indicated otherwise):presented, including revenue by segment.
Three Months Ended September 30, 2017Current Quarter Compared to the Three Months Ended September 30, 2016Prior Quarter
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three months ended September 30, |
| Change |
| |||||||||||||||||||
|
| 2017 |
|
| 2016 |
| Dollars |
| Percentage |
| ||||||||||||||
|
|
| (in thousands) |
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|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | Three months ended June 30, | | Change |
| |||||||||||||||||||
|
| 2019 |
| 2018 |
| Dollars |
| Percentage |
| |||||||||||||||
| | (in thousands) | | | | | |
| ||||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
| |
Water solutions |
| $ | 125,086 |
| $ | 60,975 |
| $ | 64,111 |
| 105.1 | % | ||||||||||||
Accommodations and rentals |
|
| 15,615 |
|
| 5,838 |
|
| 9,777 |
| 167.5 | % | ||||||||||||
Wellsite completion and construction services |
|
| 13,179 |
|
| 7,094 |
|
| 6,085 |
| 85.8 | % | ||||||||||||
Water services | | $ | 202,011 | | $ | 233,954 | | $ | (31,943) |
| (13.7) | % | ||||||||||||
Water infrastructure | | | 51,710 | | | 55,727 | | | (4,017) | | (7.2) | % | ||||||||||||
Oilfield chemicals | | | 63,001 | | | 64,807 | |
| (1,806) |
| (2.8) | % | ||||||||||||
Other | | | 7,165 | | | 38,759 | | | (31,594) |
| (81.5) | % | ||||||||||||
Total revenue |
|
| 153,880 |
|
| 73,907 |
|
| 79,973 |
| 108.2 | % | |
| 323,887 | |
| 393,247 | |
| (69,360) |
| (17.6) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | |
Water solutions |
|
| 88,087 |
|
| 49,996 |
|
| 38,091 |
| 76.2 | % | ||||||||||||
Accommodations and rentals |
|
| 11,976 |
|
| 4,969 |
|
| 7,007 |
| 141.0 | % | ||||||||||||
Wellsite completion and construction services |
|
| 10,888 |
|
| 6,299 |
|
| 4,589 |
| 72.9 | % | ||||||||||||
Water services | |
| 155,151 | |
| 176,571 | |
| (21,420) |
| (12.1) | % | ||||||||||||
Water infrastructure | | | 38,456 | | | 37,884 | |
| 572 |
| 1.5 | % | ||||||||||||
Oilfield chemicals | | | 54,051 | | | 58,500 | | | (4,449) | | (7.6) | % | ||||||||||||
Other | | | 7,447 | | | 33,119 | | | (25,672) | | (77.5) | % | ||||||||||||
Depreciation and amortization |
|
| 23,420 |
|
| 21,613 |
|
| 1,807 |
| 8.4 | % | |
| 28,843 | |
| 30,445 | |
| (1,602) |
| (5.3) | % |
Total costs of revenue |
|
| 134,371 |
|
| 82,877 |
|
| 51,494 |
| 62.1 | % | |
| 283,948 | |
| 336,519 | |
| (52,571) |
| (15.6) | % |
Gross profit (loss) |
|
| 19,509 |
|
| (8,970) |
|
| 28,479 |
| NM |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gross profit | |
| 39,939 | |
| 56,728 | |
| (16,789) |
| (29.6) | % | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | |
Selling, general and administrative |
|
| 16,087 |
|
| 8,764 |
|
| 7,323 |
| 83.6 | % | |
| 27,297 | |
| 26,871 | |
| 426 |
| 1.6 | % |
Depreciation and amortization |
|
| 375 |
|
| 363 |
|
| 12 |
| 3.3 | % | |
| 906 | |
| 807 | |
| 99 |
| 12.3 | % |
Impairment of property and equipment | | | 374 | | | 2,282 | | | (1,908) | | NM | | ||||||||||||
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| (12,579) |
| (95.5) | % | |
| 183 | |
| 1,973 | |
| (1,790) |
| (90.7) | % |
Total operating expenses |
|
| 17,052 |
|
| 22,296 |
|
| (5,244) |
| (23.5) | % | |
| 28,760 | |
| 31,933 | |
| (3,173) |
| (9.9) | % |
Income (loss) from operations |
|
| 2,457 |
|
| (31,266) |
|
| 33,723 |
| NM |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income from operations | |
| 11,179 | |
| 24,795 | |
| (13,616) |
| (54.9) | % | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | |
(Losses) gains on sales of property and equipment, net | | | (1,709) | | | 2,056 | | | (3,765) |
| NM | | ||||||||||||
Interest expense, net |
|
| (484) |
|
| (4,343) |
|
| 3,859 |
| (88.9) | % | |
| (839) | |
| (1,342) | |
| 503 |
| (37.5) | % |
Other income, net |
|
| 326 |
|
| 431 |
|
| (105) |
| (24.4) | % | ||||||||||||
Income (loss) before tax expense |
|
| 2,299 |
|
| (35,178) |
|
| 37,477 |
| NM |
| ||||||||||||
Tax benefit (expense) |
|
| 294 |
|
| (26) |
|
| 320 |
| NM |
| ||||||||||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | 37,797 |
| NM |
| ||||||||||||
Foreign currency gain (loss), net | | | 67 | | | (340) | | | 407 |
| NM | | ||||||||||||
Other (expense) income, net | |
| (59) | |
| 4 | |
| (63) |
| NM | | ||||||||||||
Income before income tax expense | |
| 8,639 | |
| 25,173 | |
| (16,534) |
| (65.7) | % | ||||||||||||
Income tax expense | |
| (571) | | | (150) | |
| (421) |
| NM | | ||||||||||||
Net income | | $ | 8,068 | | $ | 25,023 | | $ | (16,955) |
| (67.8) | % |
Revenue
Our revenue increased $80.0decreased $69.4 million, or 108.2%17.6%, to $153.9$323.9 million for the three months ended September 30, 2017Current Quarter compared to $73.9$393.2 million for the three months ended September 30, 2016.Prior Quarter. The increasedecrease was primarily attributable to an increase indriven by $31.6 million lower revenue from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were fully divested and wound down during the Current Period. Also impacting the decrease was $31.9 million of lower Water Services revenue, $4.0 million of lower Water Infrastructure revenue and $1.8 million of lower Oilfield Chemicals revenue discussed below. For the Current Quarter, our Water Solutions segment revenues of $64.1 million. For the three months ended September 30, 2017, ourServices, Water Solutions, AccommodationsInfrastructure, Oilfield Chemicals and Rentals, and Wellsite Completion and Construction ServicesOther segments constituted 81.3%62.4%, 10.1%16.0%, 19.4% and 8.6%2.2% of our total revenue, respectively, compared to 82.5%59.5%, 7.9%14.2%, 16.5%, and 9.6%9.8%, respectively, for the three months ended September 30, 2016.Prior Quarter. The 2018 adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, did not have a material impact on revenue recognition. The revenue increasedecrease by operating segment waswere as follows:
45
Water SolutionsServices. Revenue increased $64.1decreased $31.9 million, or 105.1%13.7%, to $125.1$202.0 million for the three months ended September 30, 2017Current Quarter compared to $61.0$234.0 million for the three months ended September 30, 2016.Prior Quarter. The increasedecrease was primarily attributable to an increasereduced activity and pricing pressures in the demand for our services as a result of a rise in completion activities and an increase in average quarterly rig count of 97.4% during the third quarter of 2017 compared to the third quarter of 2016. Additionally, the GRR Acquisition, which closed March 10, 2017, contributed $10.4 million of revenue for the three months ended September 30, 2017.water transfer business.
36
Accommodations and Rentals. Water Infrastructure. Revenue increased $9.8decreased by $4.0 million, or 167.5%7.2%, to $15.6$51.7 million for the three months ended September 30, 2017Current Quarter compared to $5.8$55.7 million for the three months ended September 30, 2016. The revenue increase wasPrior Quarter, primarily attributabledue to a risereduced activity on our Bakken pipeline system, partially offset by increased revenues in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals as well as an increase in pricing for such rentals and other related services.the Permian.
Wellsite Completion and Construction ServicesOilfield Chemicals. Revenue increased $6.1decreased $1.8 million, or 85.8%2.8%, to $13.2$63.0 million for the three months ended September 30, 2017Current Quarter compared to $7.1$64.8 million for the three months ended September 30, 2016. The increase wasPrior Quarter, primarily attributabledue to an increase in field services revenues of $5.1reduced demand for guar-based frac fluid systems, partially offset by increased friction reducer sales.
Other. Other revenue decreased $31.6 million, or 81.5%, to $7.2 million for the Current Quarter compared to $38.8 million in the Prior Quarter as our RockiesAffirm subsidiary, sand hauling operations and Permian regionsCanadian operations were divested and increases in crane services revenueswound down as of $1.9 million, offset by $0.9 million due to the closureJune 30, 2019.
Costs of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by increased demand for these services resulting from several new customers resuming completion activities during 2017.Revenue
Costs of Revenuerevenue decreased $52.6 million, or 15.6%, to $283.9 million for the Current Quarter compared to $336.5 million for the Prior Quarter. The decrease was primarily due to $25.7 million lower combined costs from our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease were $21.4 million lower Water Services costs, $4.4 million lower Oilfield Chemicals costs and $1.6 million lower depreciation costs further discussed below.
Water Services. Cost of revenue increased $51.5decreased $21.4 million, or 62.1%12.1%, to $134.4$155.2 million for the three months ended September 30, 2017Current Quarter compared to $82.9$176.6 million for the three months ended September 30, 2016. The increase was largely attributablePrior Quarter. Cost of revenue as a percent of revenue increased from 75.5% to higher salaries and wages76.8% due to an increase in employee headcount, and increased outside services, rentals and materials expense as a result of increased demand for our services resulting from the overall increase in drilling, completion and production activities, particularly in our pricing pressures we could not fully offset with cost reductions.
Water Solutions segment. The cost of revenue increase by operating segment was as follows:
Water SolutionsInfrastructure. Cost of revenue increased $38.1$0.6 million, or 76.2%1.5%, to $88.1$38.5 million for the three months ended September 30, 2017Current Quarter compared to $50.0$37.9 million for the three months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $14.7 million resulting from a 48% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. The increase in cost of revenue was also attributable to an increase in contract labor expense of $7.6 million, materials and supplies expense of $6.8 million, equipment rental and maintenance expense of $4.7 million, bulk and retail fuel expense of $2.9 million and allocated insurance costs of $0.4 million, offset by a decrease in allocated facility costs of $0.4 million. The increase in fuel and maintenance related expenses were largely attributable to a 28.1% increase in the average number of trucks and tractors in our fleet.
Accommodations and Rentals.Prior Quarter. Cost of revenue as a percent of revenue increased $7.0from 68.0% to 74.4% primarily due to a decline in contribution from our high-margin Bakken pipeline system.
Oilfield Chemicals. Costs of revenue decreased $4.4 million, or 141.0%7.6%, to $12.0$54.1 million for the three months ended September 30, 2017Current Quarter compared to $5.0$58.5 million for the three months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $1.9 million resulting from an 85% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $1.1 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $3.7 million resulting from increased demand for services.
Wellsite Completion and Construction Services.Prior Quarter. Cost of revenue increased $4.6as a percent of revenue decreased from 90.3% to 85.8% due primarily to freight cost savings from our Midland, Texas plant.
Other. Other costs decreased $25.7 million, or 72.9%77.5%, to $10.9$7.4 million for the three months ended September 30, 2017Current Quarter compared to $6.3$33.1 million forin the three months ended September 30, 2016. The increase wasPrior Quarter primarily attributabledue to increased direct labor costs of $1.7 million, contract labor expense of $2.2 million and rental expense of $0.7 million.the divestitures discussed above.
Depreciation and Amortization. Depreciation and amortization expense increased $1.8decreased $1.6 million, or 8.4%5.3%, to $23.4$28.8 million for the three months ended September 30, 2017Current Quarter compared to $21.6$30.4 million for the three months ended September 30, 2016. The increase wasPrior Quarter, primarily attributabledue to the depreciation recognized in the three months ended September 30, 2017 related to recently acquired assets from the GRR Acquisition, the DAWS Acquisition and the TEX Acquisition.divestitures discussed above.
3746
Gross Profit (Loss)
Gross profit (loss) improveddecreased by $28.5$16.8 million, or 29.6%, to a gross profit of $19.5$39.9 million for the three months ended September 30, 2017Current Quarter compared to a gross lossprofit of $9.0$56.7 million for the three months ended September 30, 2016Prior Quarter primarily due to a $10.5 million decrease in Water Services gross profit stemming from lower revenue, $5.9 million lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period, and a $4.6 million decrease to Water Infrastructure gross profit due to lower revenue and slightly higher costs. This was partially offset by $2.6 million higher Oilfield Chemicals gross profit and $1.6 million lower depreciation expense. Gross margin as a resultpercent of factors described above.revenue was 12.3% and 14.4% in the Current Quarter and Prior Quarter, respectively.
Selling, General and Administrative Expenses
The increase in selling,Selling, general and administrative expenses of $7.3increased $0.4 million, or 83.6%1.6%, to $16.1$27.3 million for the three months ended September 30, 2017Current Quarter compared to $8.8$26.9 million for the three months ended September 30, 2016Prior Quarter.
Lease Abandonment Costs
Lease abandonment costs were $0.2 million and $2.0 million in the Current Quarter and Prior Quarter, respectively. During the Current Quarter, lease abandonment costs primarily related to the wind-down of impaired right-of-use assets from previously abandoned properties, partially offset by sublease income. The Prior Quarter costs were primarily due to excess facility capacity stemming from the Rockwater Merger.
Net Interest Expense
Net interest expense decreased by $0.5 million, or 37.5%, to $0.8 million during the Current Quarter compared to $1.3 million in the Prior Quarter primarily due to lower average borrowings due to paying down our debt.
Net Income
Net income decreased by $17.0 million, or 67.8%, to net income of $8.1 million for the Current Quarter compared to net income of $25.0 million for the Prior Quarter primarily due to lower Water Services and Water Infrastructure revenue, higher relative Water Infrastructure costs, and lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, as discussed above. This was partially offset by lower lease abandonment costs, lower interest expense and lower impairment expense.
47
Current Period Compared to the Prior Period
| | | | | | | | | | | | |
| | Six months ended June 30, | | Change | | |||||||
|
| 2019 |
| | 2018 |
| Dollars |
| Percentage |
| ||
| | (in thousands) | | | | | |
| ||||
Revenue |
| |
|
| |
|
| |
|
|
| |
Water services | | $ | 422,606 | | $ | 452,184 | | $ | (29,578) |
| (6.5) | % |
Water infrastructure | | | 105,326 | | | 109,784 | | | (4,458) | | (4.1) | % |
Oilfield chemicals | | | 129,830 | | | 128,437 | |
| 1,393 |
| 1.1 | % |
Other | | | 28,771 | | | 79,237 | | | (50,466) |
| (63.7) | % |
Total revenue | |
| 686,533 | |
| 769,642 | |
| (83,109) |
| (10.8) | % |
| | | | | | | | | | | | |
Costs of revenue | |
|
| |
|
| |
| |
| | |
Water services | |
| 318,272 | | | 341,201 | |
| (22,929) |
| (6.7) | % |
Water infrastructure | | | 79,886 | | | 77,980 | |
| 1,906 |
| 2.4 | % |
Oilfield chemicals | | | 113,578 | | | 115,584 | | | (2,006) | | (1.7) | % |
Other | | | 28,500 | | | 68,873 | | | (40,373) | | (58.6) | % |
Depreciation and amortization | |
| 60,361 | | | 61,327 | |
| (966) |
| (1.6) | % |
Total costs of revenue | |
| 600,597 | |
| 664,965 | |
| (64,368) |
| (9.7) | % |
Gross profit | |
| 85,936 | |
| 104,677 | |
| (18,741) |
| (17.9) | % |
| | | | | | | | | | | | |
Operating expenses | |
|
| |
|
| |
| |
| | |
Selling, general and administrative | |
| 59,673 | | | 52,552 | |
| 7,121 |
| 13.6 | % |
Depreciation and amortization | |
| 1,906 | | | 1,348 | |
| 558 |
| 41.4 | % |
Impairment of goodwill | | | 4,396 | | | — | | | 4,396 | | NM | |
Impairment of property and equipment | | | 893 | | | 2,282 | | | (1,389) | | NM | |
Impairment of cost-method investment | | | — | | | 2,000 | | | (2,000) | | NM | |
Lease abandonment costs | |
| 1,256 | | | 3,097 | |
| (1,841) |
| (59.4) | % |
Total operating expenses | |
| 68,124 | |
| 61,279 | |
| 6,845 |
| 11.2 | % |
Income from operations | |
| 17,812 | |
| 43,398 | |
| (25,586) |
| (59.0) | % |
| | | | | | | | | | | | |
Other income (expense) | |
|
| |
|
| |
| |
| | |
(Losses) gains on sales of property and equipment, net | | | (6,200) | | | 1,502 | | | (7,702) |
| NM | |
Interest expense, net | |
| (1,932) | | | (2,493) | |
| 561 |
| (22.5) | % |
Foreign currency gain (loss), net | | | 327 | | | (740) | | | 1,067 |
| NM | |
Other income, net | |
| 210 | | | 100 | |
| 110 |
| NM | |
Income before income tax expense | |
| 10,217 | |
| 41,767 | |
| (31,550) |
| (75.5) | % |
Income tax expense | |
| (749) | | | (612) | |
| (137) |
| NM | |
Net income | | $ | 9,468 | | $ | 41,155 | | $ | (31,687) |
| (77.0) | % |
Revenue
Our revenue decreased $83.1 million, or 10.8%, to $686.5 million for the Current Period compared to $769.6 million for the Prior Period. The decrease was primarily due to an increase in administrative labor costs$50.5 million lower revenue from the combination of $1.5 million, primarily related to our new status as a public companyAffirm subsidiary, sand hauling operations and an increase in legalCanadian operations, all of which were fully divested and professional fees of $4.9 millionwound down during the three months ended September 30, 2017 as compared toCurrent Period. Also impacting the prior year period, largely related to the Merger,change was $29.6 million lower Water Services revenue and $4.5 million lower Water Infrastructure revenue, partially offset by lower corporate office rent of less than $0.1 million.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction inslightly higher Oilfield Chemicals revenue discussed below. For the need for facilities primarily in 2016, during the three months ended September 30, 2017, we recorded $0.6 million of lease abandonment costs related to certain facilities that were no longer in use. During the three months ended September 30, 2016, we recorded $13.2 million of lease abandonment costs related to certain facilities that were no longer in use.
Interest Expense
The decrease in interest expense of $3.9 million, or 88.9% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to the GRR Acquisition.
Net Loss
Net income (loss) improved by $37.8 million to a net income of $2.6 million for the three months ended September 30, 2017 compared to a net loss of $35.2 million for the three months ended September 30, 2016 as a result of the factors described above.
38
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
| Change |
| |||||||
|
| 2017 |
|
| 2016 |
| Dollars |
| Percentage |
| ||
|
|
| (in thousands) |
|
|
|
|
|
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
| $ | 311,275 |
| $ | 173,157 |
| $ | 138,118 |
| 79.8 | % |
Accommodations and rentals |
|
| 38,457 |
|
| 19,585 |
|
| 18,872 |
| 96.4 | % |
Wellsite completion and construction services |
|
| 38,522 |
|
| 22,923 |
|
| 15,599 |
| 68.0 | % |
Total revenue |
|
| 388,254 |
|
| 215,665 |
|
| 172,589 |
| 80.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
| 226,737 |
|
| 144,653 |
|
| 82,084 |
| 56.7 | % |
Accommodations and rentals |
|
| 30,697 |
|
| 15,527 |
|
| 15,170 |
| 97.7 | % |
Wellsite completion and construction services |
|
| 32,155 |
|
| 19,817 |
|
| 12,338 |
| 62.3 | % |
Depreciation and amortization |
|
| 67,144 |
|
| 73,874 |
|
| (6,730) |
| (9.1) | % |
Total costs of revenue |
|
| 356,733 |
|
| 253,871 |
|
| 102,862 |
| 40.5 | % |
Gross profit (loss) |
|
| 31,521 |
|
| (38,206) |
|
| 69,727 |
| NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 49,298 |
|
| 25,928 |
|
| 23,370 |
| 90.1 | % |
Depreciation and amortization |
|
| 1,312 |
|
| 1,644 |
|
| (332) |
| (20.2) | % |
Impairment of goodwill and other intangible assets |
|
| — |
|
| 138,666 |
|
| (138,666) |
| (100.0) | % |
Impairment of property and equipment |
|
| — |
|
| 60,026 |
|
| (60,026) |
| (100.0) | % |
Lease abandonment costs |
|
| 2,871 |
|
| 13,169 |
|
| (10,298) |
| (78.2) | % |
Total operating expenses |
|
| 53,481 |
|
| 239,433 |
|
| (185,952) |
| (77.7) | % |
Loss from operations |
|
| (21,960) |
|
| (277,639) |
|
| 255,679 |
| (92.1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (1,885) |
|
| (11,792) |
|
| 9,907 |
| (84.0) | % |
Other income, net |
|
| 3,342 |
|
| 588 |
|
| 2,754 |
| 468.4 | % |
Loss before tax expense |
|
| (20,503) |
|
| (288,843) |
|
| 268,340 |
| (92.9) | % |
Tax benefit (expense) |
|
| 326 |
|
| (392) |
|
| 718 |
| NM |
|
Net loss |
| $ | (20,177) |
| $ | (289,235) |
| $ | 269,058 |
| (93.0) | % |
Revenue
Our revenue increased $172.6 million, or 80.0%, to $388.3 million for the nine months ended September 30, 2017 compared to $215.7 million for the nine months ended September 30, 2016. The increase was primarily attributable to an increase inCurrent Period, our Water Solutions segment revenues of $138.1 million. For the nine months ended September 30, 2017, ourServices, Water Solutions, AccommodationsInfrastructure, Oilfield Chemicals and Rentals, and Wellsite Completion and Construction ServicesOther segments constituted 80.2%61.6%, 9.9%15.3%, 18.9% and 9.9%4.2% of our total revenue, respectively, compared to 80.3%58.7%, 9.1%14.3%, 16.7%, and 10.6%10.3%, respectively, for the nine months ended September 30, 2016.Prior Period. The 2018 adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, did not have a material impact on revenue recognition. The revenue increasevariances by operating segment waswere as follows:
48
Water SolutionsServices. Revenue decreased $29.6 million, or 6.5%, to $422.6 million for the Current Period compared to $452.2 million for the Prior Period. The decrease was primarily due to lower water transfer and fluids hauling revenue primarily attributable to reduced activity and pricing pressure, partially offset by increases in revenues from flowback and well testing, rentals and containment.
Water Infrastructure. Revenue decreased by $4.5 million, or 4.1%, to $105.3 million for the Current Period compared to $109.8 million for the Prior Period, primarily due to reduced activity on our Bakken pipeline system.
Oilfield Chemicals. Revenue increased $138.1$1.4 million, or 79.8%1.1%, to $311.3$129.8 million for the nine months ended September 30, 2017Current Period compared to $173.2$128.4 million for the nine months ended September 30, 2016. The increase wasPrior Period, primarily attributabledue to an increase inhigher friction reducer sales stemming from larger manufacturing capacity from our Midland, Texas plant, which more than offset the demand for our services as a resultdeclining sale of a rise in completion activities and an increase in average quarterly rig count of 77.2% during the nine months ended September 30, 2017 compared to nine months ended September 30, 2016. Additionally, the GRR Acquisition, which closed on March 10, 2017, contributed $21.5 million ofguar related products.
Other. Other revenue for the nine months ended September 30, 2017.
39
Accommodations and Rentals. Revenue increased $18.9decreased $50.5 million, or 96.4%63.7%, to $38.5$28.8 million for the nine months ended September 30, 2017Current Period compared to $19.6$79.2 million in the Prior Period as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down.
Costs of Revenue
Costs of revenue decreased $64.4 million, or 9.7%, to $600.6 million for the nine months ended September 30, 2016. The revenue increase was primarily attributableCurrent Period compared to a rise in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals.
Wellsite Completion and Construction Services. Revenue increased $15.6 million, or 68.0%, to $38.5$665.0 million for the nine months ended September 30, 2017 comparedPrior Period. The decrease was primarily due to $40.4 million lower costs from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $22.9 million lower Water Services costs, primarily due to aligning our cost structure to lower revenue, further discussed below.
Water Services. Cost of revenue decreased $22.9 million, or 6.7%, to $318.3 million for the nine months ended September 30, 2016. The increase was primarily attributableCurrent Period compared to an increase in field services revenues of $12.9$341.2 million in our Rockies and Permian regions, increases in construction services revenue of $2.3 million in our South Texas region and increases in crane services revenues of $3.8 million, offset by $3.1 million due tofor the closure of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by the increased demand for these services resulting from several new customers resuming completion activities during 2017.
Costs of Revenue
Prior Period. Cost of revenue increased $102.9 million, or 40.5%, to $356.7 million for the nine months ended September 30, 2017 compared to $253.9 million for the nine months ended September 30, 2016. The increase was largely attributable to higher salaries and wages due to an increase in employee headcount, and increased outside services, rentals and materials as a result of increased demand for ours services resulting from the overall increase in drilling, completion and production activities, particularly in our Water Solutions segment. The costpercent of revenue increase by operating segment was as follows:relatively flat, moving from 75.5% to 75.3%.
Water SolutionsInfrastructure. Cost of revenue increased $82.1$1.9 million, or 56.7%2.4%, to $226.7$79.9 million for the nine months ended September 30, 2017Current Period compared to $144.7$78.0 million for the nine months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $28.0 million as a result of a 28% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period. The increase was also attributable to an increase in materials and supplies expense of $17.0 million, contract labor expense of $16.1 million, equipment rental and maintenance expense of $11.3 million and bulk and retail fuel expense of $7.3 million, offset by a decrease in allocated facility costs of $3.3 million.
Accommodations and Rentals.Prior Period. Cost of revenue as a percent of revenue increased $15.2from 71.0% to 75.8% primarily due to a decline in contribution from our high-margin Bakken pipeline system.
Oilfield Chemicals. Costs of revenue decreased $2.0 million, or 97.7%1.7%, to $30.7$113.6 million for the nine months ended September 30, 2017Current Period compared to $15.5$115.6 million for the nine months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $3.8 million resulting from a 45% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $2.8 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $8.1 million resulting from increased demand for services.
Wellsite Completion and Construction Services.Prior Period. Cost of revenue increased $12.3as a percent of revenue decreased from 90.0% to 87.5% due primarily to freight cost-savings from our Midland, Texas plant.
Other. Other costs decreased $40.4 million, or 62.3%58.6%, to $32.2$28.5 million for the nine months ended September 30, 2017Current Period compared to $19.8$68.9 million forin the nine months ended September 30, 2016. The increase wasPrior Period, primarily attributabledue to expansion into the Permian region in 2017 and new customer wins which led to higher direct and contract labor expenses of $8.0 million. To support this increased labor expense, increases in fuel and repair and maintenance costs of $1.2 million were incurred. This cost of revenue increase was also partially attributable to increases in equipment rental costs of $2.2 million and supplies and materials expense of $0.9 million needed to support customer demand.divestitures discussed above.
Depreciation and Amortization. Depreciation and amortization expense decreased $6.7$1.0 million, or 9.1%1.6%, to $67.1$60.4 million for the nine months ended September 30, 2017Current Period compared to $73.9$61.3 million for the nine months ended September 30, 2016. The decrease was primarily attributable to assets becoming fully depreciated or being impaired during the first half of 2016.
40
Prior Period.
Gross Profit (Loss)
Gross profit (loss) improveddecreased by $69.7$18.7 million, or 17.9%, to a gross profit of $31.5$85.9 million for the nine months ended September 30, 2017Current Period compared to a gross lossprofit of $38.2 $104.7 million for the nine months ended September 30, 2016Prior Period, primarily due to $10.1 million lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $6.6 million lower gross profit from Water Services and $6.4 million lower gross profit from Water Infrastructure discussed above. These were partially offset by $3.4 million higher gross profit from Oilfield Chemicals and $1.0 million lower depreciation costs discussed above. Gross margin as a resultpercent of factors described above.revenue was 12.5% and 13.6% in the Current Period and Prior Period, respectively.
49
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.1 million, or 13.6%, to $59.7 million for the Current Period compared to $52.6 million for the Prior Period. The increase was primarily driven by increased equity incentive plan costs and severance expense in connection with the divestitures.
Lease Abandonment Costs
Lease abandonment costs were $1.3 million and $3.1 million in the Current Period and Prior Period, respectively. The Current Period costs were primarily due to Canadian lease terminations in connection with divesting and winding down the Canadian business. The Prior Period costs were primarily due to excess facility capacity stemming from the Rockwater Merger.
Net Interest Expense
Net interest expense decreased by $0.6 million, or 22.5%, to $1.9 million during the Current Period compared to $2.5 million in the Prior Period, primarily due to lower average borrowings.
Net Income
Net income decreased by $31.7 million, or 77.0%, to net income of $9.5 million for the Current Period compared to net income of $41.2 million for the Prior Period, primarily due to $18.7 million lower gross profit stemming from divestitures and lower revenue discussed above, $7.7 million higher losses on sales of property and equipment, net and $7.1 million higher selling, general and administrative expenses of $23.4 million, or 90.1%, to $49.3 million for the nine months ended September 30, 2017 compared to $25.9 million for the nine months ended September 30, 2016 was primarily due to a payout on our phantom equity units and IPO success bonuses of $12.5 million, including associated taxes, an increase in administrative labor costs of $2.7 million, primarily related to our new status as a public company, and an increase in legal and professional fees of $6.4 million, primarily related to the Merger, GRR Acquisition and other deal costs, during the nine months ended September 30, 2017 as compared to the prior year perioddiscussed above, partially offset by lower corporate office rent of $0.6 million.
Impairment
There were no impairment losses recorded during the nine months ended September 30, 2017. Due to significant reductions in oil and gas prices and rig counts during early 2016, we determined there were triggering events requiring an assessment of the recoverability of goodwill. This assessment resulted in our recognition in our consolidated statements of operations for the nine months ended September 30, 2016 of an impairment loss of $137.6$1.8 million related to goodwill and $60.0 million related to long-lived assets in our Water Solutions segment, $1.0 million related to goodwill and less than $0.1 million related to other intangible assets in our Accommodations and Rentals segment.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction in the need for facilities, we decided to close certain facilities beginning in the third quarter of 2016. As a result of continuing costs related to certain facilities that are no longer in use, we recorded $2.9 million oflower lease abandonment costs during the nine months ended September 30, 2017. We recorded $13.2 million of lease abandonment costs during the nine months ended September 30, 2016.
Interest Expense
The decrease in interest expense of $9.9 million, or 84.0%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to GRR Acquisition.
Net Loss
Net loss decreased by $269.1 million, or 93.0%, to $20.2 million for the nine months ended September 30, 2017 compared to $289.2 million for the nine months ended September 30, 2016 largely as a result of the impairment losses and other factors describeddiscussed above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus taxes, interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense,
41
non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures.expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs.
Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.
50
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. YouOne should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Summary—Summary Consolidated“Item 6. Selected Financial Data” in our Final Prospectus.2018 Form 10-K.
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss,income, which is the most directly comparable GAAP measure for the periods presented:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2019 |
| 2018 | | 2019 |
| 2018 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 8,068 | | $ | 25,023 | | $ | 9,468 | | $ | 41,155 |
Interest expense | | | 839 | | | 1,342 | | | 1,932 | | | 2,493 |
Income tax expense | | | 571 | | | 150 | | | 749 | | | 612 |
Depreciation and amortization | | | 29,749 | | | 31,252 | | | 62,267 | | | 62,675 |
EBITDA | | | 39,227 | | | 57,767 | | | 74,416 | | | 106,935 |
Impairment of goodwill | | | — | | | — | | | 4,396 | | | — |
Impairment of property and equipment | | | 374 | | | 2,282 | | | 893 | | | 2,282 |
Impairment of cost-method investment | | | — | | | — | | | — | | | 2,000 |
Lease abandonment costs | | | 183 | | | 1,973 | | | 1,256 | | | 3,097 |
Non-recurring severance expenses(1) | | | — | | | — | | | 1,680 | | | — |
Non-recurring transaction costs(2) | | | 412 | | | 2,481 | | | 1,074 | | | 5,175 |
Non-cash compensation expenses | | | 4,129 | | | 2,984 | | | 8,308 | | | 5,465 |
Non-cash loss on sale of assets or subsidiaries | | | 7,314 | | | 249 | | | 13,220 | | | 1,764 |
Foreign currency (gain) loss | | | (67) | | | 340 | | | (327) | | | 740 |
Inventory write-down | | | — | | | 128 | | | 75 | | | 394 |
Adjusted EBITDA | | $ | 51,572 | | $ | 68,204 | | $ | 104,991 | | $ | 127,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
|
| 2016 |
| 2017 |
|
| 2016 | ||
|
| (In thousands) |
| (In thousands) | ||||||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
Interest expense |
|
| 484 |
|
| 4,343 |
|
| 1,885 |
|
| 11,792 |
Depreciation and amortization |
|
| 23,795 |
|
| 21,976 |
|
| 68,456 |
|
| 75,518 |
Tax (benefit) expense |
|
| (294) |
|
| 26 |
|
| (326) |
|
| 392 |
EBITDA |
|
| 26,578 |
|
| (8,859) |
|
| 49,838 |
|
| (201,533) |
Impairment |
|
| — |
|
| — |
|
| — |
|
| 198,692 |
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| 2,871 |
|
| 13,169 |
Non-recurring severance costs |
|
| — |
|
| 147 |
|
| 122 |
|
| 689 |
Non-recurring deal costs |
|
| 4,382 |
|
| 20 |
|
| 5,462 |
|
| (236) |
Non-cash incentive compensation |
|
| 549 |
|
| (1) |
|
| 1,781 |
|
| (488) |
Non-cash loss on sale of subsidiaries and other assets |
|
| 268 |
|
| (491) |
|
| 775 |
|
| (29) |
Non-recurring phantom equity and IPO-related compensation |
|
| — |
|
| — |
|
| 12,537 |
|
| — |
Adjusted EBITDA |
| $ | 32,367 |
| $ | 3,985 |
| $ | 73,386 |
| $ | 10,264 |
(1) | These costs are due to severance payments in connection with the dissolution of our former Wellsite Services segment. |
(2) | For 2018, these costs were primarily related to rebranding as a result of the Rockwater Merger. |
EBITDA was $39.2 million for the Current Quarter compared to $57.8 million for the Prior Quarter. The $18.6 million decrease in EBITDA was primarily driven by a decrease of $10.5 million in Water Services gross profit, a decrease of $4.6 million in Water Infrastructure gross profit and a decrease of $5.9 million in gross profit from the operations being divested and wound down, partially offset by an increase of $2.6 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $51.6 million for the Current Quarter compared to $68.2 million for the Prior Quarter. The $16.6 million decrease is primarily attributable to the items discussed above.
EBITDA was $74.4 million for the Current Period compared to $106.9 million for the Prior Period. The $32.5 million decrease in EBITDA was primarily driven by a decrease of $6.6 million in Water Services gross profit, a decrease of $6.4 million in Water Infrastructure gross profit, a decrease of $10.1 million in gross profit from the
51
operations being divested and wound down and an increase in selling, general and administrative costs of $7.1 million, partially offset by an increase of $3.4 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $105.0 million for the Current Period compared to $127.9 million for the Prior Period. The $22.9 million decrease in Adjusted EBITDA was primarily due to the $32.5 million decrease in EBITDA discussed above partially offset by an $11.5 million increase in non-cash losses on sales of assets or subsidiaries.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been capital contributions from our members, the net proceeds from the Select 144A Offering, the net proceeds from the IPO, borrowingsborrowing capacity under our current Credit FacilityAgreement and our prior credit facility and cash flows from
42
operations. Our primary uses of capital have been to maintain our asset base, implement technological advancements, make capital expenditures to support organic growth and to fund acquisitions. Depending uponon market conditions and other factors, we may also issue debt and equity securities if needed.
We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations and borrowings fromunder our Credit Facility.Agreement. For a discussion of the Credit Facility,Agreement, see “—Credit Facility”Agreement” below. WeAlthough we cannot provide any assurance, we believe that our operating cash flow and available borrowings under our Credit FacilityAgreement will be sufficient to fund our operations for at least the next twelve months.
On April 26, 2017, we completed the IPO for net proceedsAs of approximately $111.4 million, net of underwriting discounts and commissions and estimated offering expenses. We contributed all of these net proceeds to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds to repay borrowings incurred under our Credit Facility to fund the cash portion of the purchase price of the GRR Acquisition, for the cash settlement of outstanding phantom unit awards at SES Holdings and for 2017 budgeted capital expenditures.On May 10, 2017, we received approximately $17.1 million, net of underwriting discounts and commissions and estimated offering expenses, from the exercise in full by the underwriters of our IPO of their option to purchase additional shares of our Select Class A Common Stock. We used the net proceeds from the underwriters’ option exercise for general corporate purposes, including funding 2017 budgeted capital expenditures.
At SeptemberJune 30, 2017,2019, cash and cash equivalents totaled $42.4 million. In addition to cash$23.8 million and cash equivalents, we had approximately $85.9$240.0 million of available borrowing capacity under our Credit Facility asAgreement. As of SeptemberJune 30, 2017.2019, the borrowing base under the Credit Agreement was $256.4 million, we had no outstanding borrowings and the outstanding letters of credit totaled $16.4 million. As of August 2, 2019, we had no outstanding borrowings, the borrowing base under the Credit Agreement was $256.3 million, the outstanding letters of credit totaled$19.9 million, and the available borrowing capacity under the Credit Agreement was $236.4 million.
52
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
| Change | |||||
|
| 2017 |
| 2016 |
|
| |||
|
| (In thousands) |
|
|
| ||||
Net cash (used in) provided by operating activities |
| $ | (4,249) |
| $ | 8,078 |
| $ | (12,327) |
Net cash used in investing activities |
|
| (121,535) |
|
| (20,372) |
|
| (101,163) |
Net cash provided by financing activities |
|
| 128,136 |
|
| 2,730 |
|
| 125,406 |
Net increase (decrease) in cash |
| $ | 2,352 |
| $ | (9,564) |
|
|
|
| | | | | | | | | | | | |
| | Six months ended June 30, | | Change | | |||||||
|
| 2019 |
| 2018 |
| Dollars | | Percentage | | |||
| | (in thousands) | | | | | | | ||||
Net cash provided by operating activities | | $ | 74,735 | | $ | 64,305 | | $ | 10,430 | | 16.2 | % |
Net cash used in investing activities | | | (21,056) | | | (59,097) | | | 38,041 | | (64.4) | % |
Net cash (used in) provided by financing activities | | | (47,234) | | | 3,465 | | | (50,699) | | NM | |
Subtotal | | | 6,445 | | | 8,673 | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 136 | | | (146) | | | 282 | | NM | |
Net increase in cash and cash equivalents | | $ | 6,581 | | $ | 8,527 | | | | | | |
Analysis of Cash Flow Changes Betweenbetween the NineSix Months Ended SeptemberJune 30, 20172019 and 20162018
Operating Activities. Net cash used in operating activities was $4.2 million for the nine months ended September 30, 2017, compared to net cash provided by operating activities of $8.1was $74.7 million for the nine months ended September 30, 2016.Current Period, compared to $64.3 million for the Prior Period. The $12.3$10.4 million decreaseincrease in net cash provided by operating activities wasrelated primarily attributable to increases in accounts receivable andimproved working capital during the nine months ended September 30, 2017 in response to growth in revenues driven by recovering demand for our services as compared to the prior year period.management.
Investing Activities. Net cash used in investing activities was $121.5$21.1 million for the nine months ended September 30, 2017,Current Period, compared to $20.4$59.1 million for the nine months ended September 30, 2016.Prior Period. The $101.2$38.0 million increasedecrease in net cash used in investing activities was primarily due to net$25.3 million received from divestitures, a $6.6 million increase in cash proceeds from sales of property and equipment, primarily related to the wind down of Affirm and the sand hauling and Canadian operations, a $5.5 million reduction in purchases of property and equipment and $0.7 million of working capital receipts from the 2018 Pro Well acquisition.
Financing Activities. Net cash used in financing activities was $47.2 million for acquisitions of $62.2 million and by higher capital expenditures during the nine months ended September 30, 2017 of $37.4 million asCurrent Period compared to the nine months ended September 30, 2016.
Financing Activities. Net cash$3.5 million provided by financing activities was $128.1 millionby for the nine months ended September 30, 2017, compared to cash provided by financing activities of $2.7 million for the nine months ended September 30, 2016.Prior Period. The $125.4 million increase in net cash provided byused in financing activities was primarily due to $128.5$45 million of net debt repayments during the Current Period.
53
Credit Agreement
On November 1, 2017, in net proceeds received fromconnection with the issuance of shares in the IPO, including exerciseclosing of the over-allotment option.
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Credit Facility
On May 3, 2011, weRockwater Merger (the “Closing”), SES Holdings and Select LLC entered into oura $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower, certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Facility, which was amended most recently on June 13, 2017. As of September 30, 2017, the total commitment under our Credit Facility was $100.0 million in the form of a revolver. As of September 30, 2017, we had no drawn borrowings under this bank facility. However, our available borrowings are reduced by letters of credit of $14.1 million. The revolver alsoAgreement has a sublimit of $20.0$40.0 million for letters of credit and a sublimit of $5.0$30.0 million for swing-lineswingline loans. The most recent amendment of our Credit Facility wasSubject to removeobtaining commitments from existing or new lenders, we have the requirement that businesses or assets acquired by us meet a positive EBITDA test (the “Positive EBITDA Test”) in orderoption to be a Permitted Acquisition (as defined in andincrease the maximum amount under the Credit Facility), as well asAgreement by $150.0 million during the first three years following the Closing.
The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the termination in whole of the Commitments pursuant to waive any defaults resulting fromSection 2.1(b) of Article VII of the DAWS Acquisition not being in compliance withCredit Agreement.
The Credit Agreement permits extensions of credit up to the Positive EBITDA Test.
Our Credit Facility contains certain financial covenants, includinglesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85.0% of the maintenance of an Interest Coverage RatioEligible Billed Receivables (as defined in the Credit Facility)Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not lessequal more than 35.0% of the borrowing base, plus (iii) the lesser of (A) the product of 70.0% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85.0% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30.0% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.
Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) 1.25 to 1.0 forone-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the quarter ending on March 31, 2017, (b) 1.50 to 1.0 forgreatest of (i) the quarter ending on June 30, 2017, (c) 2.50 to 1.0 for the quarter ending on September 30, 2017 and (d) 3.00 to 1.0 for each fiscal quarter ending on or after December 31, 2017 andfederal funds rate plus 0.5%, (ii) the maintenance of a Leverage Ratio of not greater than (a) 4.00 to 1.0 forone-month Eurocurrency Rate plus 1.0% and (iii) the quarter ending on September 30, 2017, (b) 3.50 to 1.0 for the quarter ending on December 31, 2017, (c) 3.25 to 1.0 for the quarters ending on March 31, 2018, June 30, 2018 and September 30, 2018, (d) 3.00 to 1.0 for the quarter ending December 31, 2018 and (e) 2.75 to 1.0 forAdministrative Agent’s prime rate (the “Base Rate”), in each fiscal quarter ending on or after March 31, 2019.
Our scheduled maturity date is February 28, 2020 and the per annum interest rate on our loans is LIBORcase plus an applicable margin, thatand interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges between 3.00%from 1.50% to 2.00% and 4.50%the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, basedin each case, depending on our Leverage Ratio. Our capacitySelect LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Agreement to be immediately due and payable.
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In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make capital expenditures is $35 milliondistributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the fiscal year ending December 31, 2017 and for each year thereafter is the greater of (i) $35 million or (ii) 50% of our EBITDA for the prior twelve months; but this restriction is not applicable for any quarter if our Leverage Ratio astime of the end ofdistribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding fiscal quarter was less than 3.00 to 1.0. Our Leverage Ratio was less than 3.00 to 1.0 as of September 30 2017. In addition, our Credit Facility contains an anti-cash hoarding provision that restricts us from making any borrowing, ifconsecutive days, on a pro forma basis and after giving effect to such borrowing, we would have in excessdistribution, is not less than the greater of $20 million in cash and cash equivalents at the end(1) 25.0% of the weeklesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements.
The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is made.less than the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
As of September 30, 2017, weWe were in compliance with all restrictivedebt covenants under our Credit Facility.as of June 30, 2019.
Contractual Obligations
Our contractual obligations include, among other things, our Credit FacilityAgreement and operating leases. Refer to Note 7—9—Debt in Part I, Item 1 of this Quarterly Report for an update to our contractual obligations as of SeptemberJune 30, 2017.2019.
Critical Accounting Policies and Estimates
ThereWith the exception of the adoption of the new lease standard, there were no other changes to our critical accounting policies from those disclosed in our Final Prospectus2018 Form 10-K filed on April 24, 2017.March 1, 2019.
Recent Accounting Pronouncements
For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Note 2 - 2—Significant Accounting Policies in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.Report.
Off Balance SheetOff-Balance-Sheet Arrangements
Currently,As of June 30, 2019, we havehad no material off balance sheet arrangements, except for operating leases.off-balance-sheet arrangements. As such, we are not materially exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of activity for the U.S. oil and gas industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and gas; the level ofcurrent prices andas well as expectations about future prices of oil and gas; the cost of exploring for, developing, producing and delivering oil and gas; the expected decline in rates of declining current production; the discovery rates of new oil and gas reserves; available pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; and merger and divestiture activity among oil and gas producers.
The level of activity in the U.S. oil and gas industry is volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Any prolonged substantial reduction in oil and gas prices would likely affect oil and gas production levelsdrilling and completion activity and therefore affect demand for our services. A material decline in oil and gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest Rate Risk
At SeptemberAs of June 30, 2017,2019, we had no outstanding debtborrowings under our Credit Facility.Agreement. As of August 2, 2019, we had no outstanding borrowings and approximately $236.4 million of available borrowing capacity under our Credit Agreement. Interest is calculated under the terms of our Credit FacilityAgreement based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. Assuming our indebtedness remained constant throughout the period, there would not be an impact on interest expense as a result of a 1% increase or decrease in the interest rate on this amount of debt for the nine months ended September 30, 2017. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
Foreign Currency Exchange Risk
We are exposed to fluctuations between the U.S. dollar and the Canadian dollar with regard to the activities of our former Canadian subsidiary, acquired in the Rockwater Merger, which designated the Canadian dollar as its functional currency. With the recent divestitures of our Canadian operations, we anticipate minimal future exposure to foreign currency exchange risk.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a‑15(b)13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d‑15(e)15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of SeptemberJune 30, 2017.2019.
Status of Previously Identified Material Weaknesses
Our management concluded that our internal control over financial reporting and our disclosure controls and procedures were ineffective as of December 31, 2018 as a result of control deficiencies related to the purchase price accounting related to the Rockwater Merger and the reconciliation of fixed assets physical counts with the general ledger that constituted material weaknesses. Specifically, the Company did not design and maintain effective controls with respect to the identification and substantiation of fixed assets purchased in the Rockwater Merger and to the reconciliation of our fixed assets physical counts with the general ledger.
In response to the material weaknesses described above, during the quarter ended March 31, 2019, we implemented new internal controls which we believe will remediate the previously identified material weaknesses. We are currently testing the operating effectiveness of these new internal controls.
Changes in Internal Control over Financial Reporting
ThereOther than noted above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 20172019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows. We are, however, named defendants in certain lawsuits, investigations and claims arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.
In December 2016, Rockwater was notified by the U.S. Attorney’s Office for the Middle District of Pennsylvania that it is being investigated for altering emissions control systems on several of its vehicles. We are cooperating with the investigation and have determined that mechanics servicing our vehicle fleet may have installed software on certain vehicles and modified a few other vehicles to deactivate or bypass the factory-installed emissions control systems. At present, it appears that 31 vehicles in Pennsylvania were modified in this manner, apparently to improve vehicle performance and reliability. As a result of a company-wide investigation undertaken voluntarily and in cooperation with the U.S. Department of Justice, we have determined that approximately 30 additional company vehicles outside of Pennsylvania may have been altered. As of the date of the initiation of the investigation, we operated approximately 1,400 vehicles in the U.S., and the modified vehicles constituted less than 5% of our fleet at such time. We are unable to predict at this time whether any administrative, civil or criminal charges will be brought against us, although we have learned that we may be the target of a criminal investigation, and it is possible that other individuals or we could become targets. We are cooperating with the U.S. Department of Justice in all aspects of the investigation and have instituted procedures to ensure that our mechanics do not tamper with or bypass any emissions control systems when they are performing vehicle maintenance, and we have also reached an agreement with the U.S. Department of Justice providing for either the restoration or removal from service of those vehicles that were modified. In December 2018, we met with the U.S. Attorney’s Office for the Middle District of Pennsylvania to begin discussions regarding a resolution of this matter. Although we are unable to predict the timing or outcome of this investigation, we note that in similar circumstances, the EPA has imposed fines of up to $7,200 per altered vehicle and has also required the responsible party to disgorge any financial benefit that it may have derived.
The following risk factors update the risk factors described under “Risk Factors” in the Final Prospectus. Except as set forth below, thereThere have been no material changes to the Risk Factors disclosed in the Final Prospectus.2018 Form 10-K.
The Merger may not be beneficial to us.
The consummation of the Merger involves potential risks, including, without limitation, the failure to realize expected profitability, growth or accretion; the incurrence of liabilities or other compliance costs related to environmental or regulatory matters, including potential liabilities that may be imposed without regard to fault or the legality of conduct; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. If these risks or other unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future financial performance and results of operations could be negatively impacted.
Failure to successfully combine our business with the business from Rockwater may adversely affect our future results.
The consummation of the Merger involves potential risks, including:
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If these risks or other anticipated or unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future business operations and our cash available for distribution could be negatively impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
On September 15, 2017, we issued 156,909 shares of Select Class A Common Stock, valued at $15.17 per share, to Resource Water Transfer, L.P. as partial consideration for the Resource Water Acquisition. This issuance of Select Class A Common Stock did not involve any underwriters, underwriting discounts or commissions or a public offering, and such issuance was exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act.
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Issuer Purchases of Equity Securities
NeitherDuring the Current Quarter, we nor any affiliated purchaser repurchased anythe shares shown in the table below to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our equity securities during the period covered by this Quarterly Report on Form 10‑Q.employees:
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| | Total Number of | | Weighted Average Price | |
Period | | Shares Purchased | | Paid Per Share | |
April 1, 2019 to April 30, 2019 | | 2,573 | | $ | 11.45 |
May 1, 2019 to May 31, 2019 | | 16,172 | | | 11.35 |
June 1, 2019 to June 30, 2019 | | 7,971 | | $ | 10.95 |
| | 26,716 | | | |
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference, as applicable, as part of this report, and such Exhibit Index is incorporated herein by reference.
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EXHIBIT INDEX
HIDDEN_ROW | | |
Exhibit |
| Description |
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3.2 | | |
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**†10.1 | | |
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31.2 | | |
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**32.1 | | |
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**32.2 | | |
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101 | | Interactive Data Files |
** Furnished herewith
†Management contract or compensatory plan or arrangement.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| SELECT ENERGY SERVICES, INC. | |
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Date: | By: | /s/ Holli Ladhani |
| | Holli Ladhani |
| | President and Chief Executive Officer |
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Date: | By: | /s/ |
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| | Senior Vice President and Chief Financial Officer
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