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 March 31,September 30, 2019
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)
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Delaware | 81-4561945 |
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(State of incorporation) | (IRS Employer Identification Number) |
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1233 W. Loop South, Suite 1400 Houston, TX | 77027 |
(Address of principal executive offices) | (Zip Code) |
(713) 235‑9500(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 every Interactive Data File required to be submitted 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 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 ☑
Securities registered pursuant to Section 12(b) of the Act:
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As of May 6,November 4, 2019, the registrant had 79,979,46585,907,211 shares of Class A common stock and 26,026,84318,461,975 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 46 | |
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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 most recent Annual Report on Form 10-K and under the heading “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 oil and gas companies; |
| trends and volatility in oil and gas prices; |
| demand for our services; |
| 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; |
● | 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 Bakken and northern Delaware formation of the Permian Basin; |
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| 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; |
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| the impact of competition on our operations; |
| 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; |
3
| our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments; |
● | delays or restrictions in obtaining permits by us or our customers; |
| constraints in supply or availability of equipment used in our business; |
| the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our |
| 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 identified in our most recent Annual Report on Form 10-K, |
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 the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “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 note.
4
PART I – FINANCIAL INFORMATION
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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| March 31, 2019 |
| December 31, 2018 | ||
|
| (unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 15,683 |
| $ | 17,237 |
Accounts receivable trade, net of allowance for doubtful accounts of $5,580 and $5,329, respectively |
|
| 347,703 |
|
| 341,711 |
Accounts receivable, related parties |
|
| 1,634 |
|
| 1,119 |
Inventories |
|
| 42,520 |
|
| 44,992 |
Prepaid expenses and other current assets |
|
| 26,365 |
|
| 27,093 |
Total current assets |
|
| 433,905 |
|
| 432,152 |
Property and equipment |
|
| 1,071,777 |
|
| 1,114,378 |
Accumulated depreciation |
|
| (595,332) |
|
| (611,530) |
Property and equipment held-for-sale, net |
|
| 13,733 |
|
| — |
Total property and equipment, net |
|
| 490,178 |
|
| 502,848 |
Right-of-use assets |
|
| 72,341 |
|
| — |
Goodwill |
|
| 266,934 |
|
| 273,801 |
Other intangible assets, net |
|
| 145,408 |
|
| 148,377 |
Other assets |
|
| 3,186 |
|
| 3,427 |
Total assets |
| $ | 1,411,952 |
| $ | 1,360,605 |
Liabilities and Equity |
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|
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|
Current liabilities |
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Accounts payable |
| $ | 64,694 |
| $ | 53,847 |
Accrued accounts payable |
|
| 48,162 |
|
| 62,536 |
Accounts payable and accrued expenses, related parties |
|
| 7,375 |
|
| 5,056 |
Accrued salaries and benefits |
|
| 25,666 |
|
| 22,113 |
Accrued insurance |
|
| 13,359 |
|
| 14,849 |
Sales tax payable |
|
| 2,530 |
|
| 5,820 |
Accrued expenses and other current liabilities |
|
| 9,415 |
|
| 14,560 |
Current operating lease liabilities |
|
| 21,959 |
|
| — |
Current portion of finance lease obligations |
|
| 743 |
|
| 938 |
Total current liabilities |
|
| 193,903 |
|
| 179,719 |
Long-term operating lease liabilities |
|
| 70,641 |
|
| 16,752 |
Other long-term liabilities |
|
| 7,295 |
|
| 8,361 |
Long-term debt |
|
| 25,000 |
|
| 45,000 |
Total liabilities |
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| 296,839 |
|
| 249,832 |
Commitments and contingencies (Note 10) |
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Class A common stock, $0.01 par value; 350,000,000 shares authorized and 79,998,292 shares issued and outstanding as of March 31, 2019; 350,000,000 shares authorized and 78,956,555 shares issued and outstanding as of December 31, 2018 |
|
| 800 |
|
| 790 |
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of March 31, 2019 and December 31, 2018 |
|
| — |
|
| — |
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 26,026,843 shares issued and outstanding as of March 31, 2019; 150,000,000 shares authorized and 26,026,843 shares issued and outstanding as of December 31, 2018 |
|
| 260 |
|
| 260 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2019 and December 31, 2018 |
|
| — |
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| — |
Additional paid-in capital |
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| 818,556 |
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| 813,599 |
Retained earnings |
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| 19,788 |
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| 18,653 |
Accumulated other comprehensive deficit |
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| (314) |
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| (368) |
Total stockholders’ equity |
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| 839,090 |
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| 832,934 |
Noncontrolling interests |
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| 276,023 |
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| 277,839 |
Total equity |
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| 1,115,113 |
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| 1,110,773 |
Total liabilities and equity |
| $ | 1,411,952 |
| $ | 1,360,605 |
| | | | | | |
| | September 30, 2019 | | December 31, 2018 | ||
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| (unaudited) |
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Assets | | | | | | |
Current assets |
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Cash and cash equivalents | | $ | 42,999 | | $ | 17,237 |
Accounts receivable trade, net of allowance for doubtful accounts of $5,392 and $5,329, respectively | |
| 310,730 | |
| 341,711 |
Accounts receivable, related parties | |
| 5,493 | |
| 1,119 |
Inventories | |
| 39,613 | |
| 44,992 |
Prepaid expenses and other current assets | |
| 26,233 | |
| 27,093 |
Total current assets | |
| 425,068 | |
| 432,152 |
Property and equipment | |
| 1,084,096 | |
| 1,114,378 |
Accumulated depreciation | |
| (617,740) | |
| (611,530) |
Property and equipment held-for-sale, net | | | 890 | | | — |
Total property and equipment, net | |
| 467,246 | |
| 502,848 |
Right-of-use assets | | | 73,138 | | | — |
Goodwill | |
| 266,934 | |
| 273,801 |
Other intangible assets, net | |
| 139,969 | |
| 148,377 |
Other assets | |
| 4,502 | |
| 3,427 |
Total assets | | $ | 1,376,857 | | $ | 1,360,605 |
Liabilities and Equity | |
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Current liabilities | |
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Accounts payable | | $ | 38,530 | | $ | 53,847 |
Accrued accounts payable | | | 51,209 | | | 62,536 |
Accounts payable and accrued expenses, related parties | |
| 3,297 | |
| 5,056 |
Accrued salaries and benefits | |
| 25,761 | |
| 22,113 |
Accrued insurance | |
| 13,367 | |
| 14,849 |
Sales tax payable | | | 1,185 | | | 5,820 |
Accrued expenses and other current liabilities | |
| 12,784 | |
| 14,560 |
Current operating lease liabilities | | | 19,488 | | | — |
Current portion of finance lease obligations | |
| 248 | |
| 938 |
Total current liabilities | |
| 165,869 | |
| 179,719 |
Long-term operating lease liabilities | |
| 72,672 | |
| 16,752 |
Other long-term liabilities | |
| 12,197 | |
| 8,361 |
Long-term debt | |
| — | |
| 45,000 |
Total liabilities | |
| 250,738 | |
| 249,832 |
Commitments and contingencies (Note 10) | |
| | |
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Class A common stock, $0.01 par value; 350,000,000 shares authorized; 86,321,013 and 78,956,555 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | |
| 863 | |
| 790 |
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 2019 and December 31, 2018 | |
| — | |
| — |
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 18,461,975 and 26,026,843 shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively | |
| 185 | |
| 260 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018 | |
| — | |
| — |
Additional paid-in capital | |
| 893,293 | |
| 813,599 |
Retained earnings | |
| 31,367 | |
| 18,653 |
Accumulated other comprehensive deficit | | | — | | | (368) |
Total stockholders’ equity | |
| 925,708 | |
| 832,934 |
Noncontrolling interests | |
| 200,411 | |
| 277,839 |
Total equity | |
| 1,126,119 | |
| 1,110,773 |
Total liabilities and equity | | $ | 1,376,857 | | $ | 1,360,605 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
5
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
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| Three Months Ended March 31, | ||||
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| 2019 |
| 2018 | ||
Revenue |
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Water services |
| $ | 220,595 |
| $ | 218,230 |
Water infrastructure |
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| 53,616 |
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| 54,057 |
Oilfield chemicals |
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| 66,829 |
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| 63,630 |
Other |
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| 21,606 |
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| 40,478 |
Total revenue |
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| 362,646 |
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| 376,395 |
Costs of revenue |
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Water services |
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| 163,121 |
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| 164,630 |
Water infrastructure |
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| 41,430 |
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| 40,096 |
Oilfield chemicals |
|
| 59,527 |
|
| 57,084 |
Other |
|
| 21,053 |
|
| 35,754 |
Depreciation and amortization |
|
| 31,518 |
|
| 30,882 |
Total costs of revenue |
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| 316,649 |
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| 328,446 |
Gross profit |
|
| 45,997 |
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| 47,949 |
Operating expenses |
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Selling, general and administrative |
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| 32,376 |
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| 25,681 |
Depreciation and amortization |
|
| 1,000 |
|
| 541 |
Impairment of goodwill |
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| 4,396 |
|
| — |
Impairment of property and equipment |
|
| 519 |
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| — |
Impairment of cost-method investment |
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| — |
|
| 2,000 |
Lease abandonment costs |
|
| 1,073 |
|
| 1,124 |
Total operating expenses |
|
| 39,364 |
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| 29,346 |
Income from operations |
|
| 6,633 |
|
| 18,603 |
Other income (expense) |
|
|
|
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Losses on sales of property and equipment, net |
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| (4,491) |
|
| (554) |
Interest expense, net |
|
| (1,093) |
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| (1,151) |
Foreign currency gain (loss), net |
|
| 260 |
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| (400) |
Other income, net |
|
| 269 |
|
| 96 |
Income before income tax expense |
|
| 1,578 |
|
| 16,594 |
Income tax expense |
|
| (178) |
|
| (462) |
Net income |
|
| 1,400 |
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| 16,132 |
Less: net income attributable to noncontrolling interests |
|
| (265) |
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| (6,033) |
Net income attributable to Select Energy Services, Inc. |
| $ | 1,135 |
| $ | 10,099 |
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Net income per share attributable to common stockholders (Note 16): |
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Class A—Basic |
| $ | 0.01 |
| $ | 0.15 |
Class A-1—Basic |
| $ | — |
| $ | — |
Class A-2—Basic |
| $ | — |
| $ | 0.15 |
Class B—Basic |
| $ | — |
| $ | — |
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Net income per share attributable to common stockholders (Note 16): |
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Class A—Diluted |
| $ | 0.01 |
| $ | 0.15 |
Class A-1—Diluted |
| $ | — |
| $ | — |
Class A-2—Diluted |
| $ | — |
| $ | 0.15 |
Class B—Diluted |
| $ | — |
| $ | — |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | ||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenue |
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Water services | | $ | 196,782 | | $ | 233,503 | | $ | 619,388 | | $ | 685,687 |
Water infrastructure | | | 63,953 | | | 65,878 | | | 169,279 | | | 175,662 |
Oilfield chemicals | |
| 67,932 | |
| 63,985 | | | 197,762 | | | 192,422 |
Other | |
| 301 | |
| 33,604 | | | 29,072 | | | 112,841 |
Total revenue | |
| 328,968 | |
| 396,970 | | | 1,015,501 | | | 1,166,612 |
Costs of revenue | |
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Water services | | | 153,741 | | | 177,643 | | | 472,013 | | | 518,844 |
Water infrastructure | | | 46,748 | | | 42,324 | | | 126,634 | | | 120,304 |
Oilfield chemicals | |
| 57,357 | | | 56,473 | | | 170,935 | | | 172,057 |
Other | |
| 1,865 | | | 29,280 | | | 30,365 | | | 98,153 |
Depreciation and amortization | |
| 28,263 | | | 31,853 | | | 88,624 | | | 93,180 |
Total costs of revenue | |
| 287,974 | |
| 337,573 | | | 888,571 | | | 1,002,538 |
Gross profit | |
| 40,994 | |
| 59,397 | | | 126,930 | | | 164,074 |
Operating expenses | |
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| |
|
| | | | | | |
Selling, general and administrative | |
| 27,280 | | | 25,110 | | | 86,953 | | | 77,662 |
Depreciation and amortization | |
| 952 | | | 984 | | | 2,858 | | | 2,332 |
Impairment of goodwill | |
| — | | | — | | | 4,396 | | | — |
Impairment of property and equipment | | | 49 | | | — | | | 942 | | | 2,282 |
Impairment of cost-method investment | |
| — | | | — | | | — | | | 2,000 |
Lease abandonment costs | |
| 238 | | | 1,045 | | | 1,494 | | | 4,142 |
Total operating expenses | |
| 28,519 | |
| 27,139 | | | 96,643 | | | 88,418 |
Income from operations | |
| 12,475 | |
| 32,258 | | | 30,287 | | | 75,656 |
Other income (expense) | |
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| |
|
| | | | | | |
(Losses) gains on sales of property and equipment, net | | | (2,033) | | | 1,458 | | | (8,233) | | | 2,959 |
Interest expense, net | |
| (438) | | | (1,322) | | | (2,370) | | | (3,815) |
Foreign currency (loss) gain, net | | | (59) | | | 248 | | | 268 | | | (492) |
Other (expense) income, net | |
| (272) | | | 40 | | | (62) | | | 140 |
Income before income tax expense | |
| 9,673 | |
| 32,682 | | | 19,890 | | | 74,448 |
Income tax expense | |
| (2,501) | | | (1,415) | | | (3,250) | | | (2,027) |
Net income | |
| 7,172 | |
| 31,267 | | | 16,640 | | | 72,421 |
Less: net income attributable to noncontrolling interests | |
| (1,793) | | | (8,316) | | | (3,926) | | | (22,409) |
Net income attributable to Select Energy Services, Inc. | | $ | 5,379 | | $ | 22,951 | | $ | 12,714 | | $ | 50,012 |
| | | | | | | | | | | | |
Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | |
Class A—Basic | | $ | 0.07 | | $ | 0.29 | | $ | 0.16 | | $ | 0.69 |
Class A-2—Basic | | $ | — | | $ | — | | $ | — | | $ | 0.69 |
Class B—Basic | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | |
Class A—Diluted | | $ | 0.07 | | $ | 0.29 | | $ | 0.16 | | $ | 0.69 |
Class A-2—Diluted | | $ | — | | $ | — | | $ | — | | $ | 0.69 |
Class B—Diluted | | $ | — | | $ | — | | $ | — | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
6
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
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| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
Net income |
| $ | 1,400 |
| $ | 16,132 |
Other comprehensive income |
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax of $0 |
|
| 54 |
|
| (259) |
Net change in unrealized gain (loss) |
|
| 54 |
|
| (259) |
Comprehensive income |
|
| 1,454 |
|
| 15,873 |
Less: comprehensive income attributable to noncontrolling interests |
|
| (275) |
|
| (5,936) |
Comprehensive income attributable to Select Energy Services, Inc. |
| $ | 1,179 |
| $ | 9,937 |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | | $ | 7,172 | | $ | 31,267 | | $ | 16,640 | | $ | 72,421 |
Other comprehensive income | |
|
| |
|
| | | | | | |
Foreign currency translation adjustment, net of tax of $0 | | | 380 | | | 131 | | | 368 | | | (319) |
Comprehensive income | |
| 7,552 | |
| 31,398 | | | 17,008 | | | 72,102 |
Less: comprehensive income attributable to noncontrolling interests | |
| (1,888) | |
| (8,351) | | | (4,013) | | | (22,310) |
Comprehensive income attributable to Select Energy Services, Inc. | | $ | 5,664 | | $ | 23,047 | | $ | 12,995 | | $ | 49,792 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
7
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine months ended September 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 December 31, 2018 |
| 78,956,555 | | $ | 790 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 813,599 | | $ | 18,653 | | $ | (368) | | $ | 832,934 | | $ | 277,839 | | $ | 1,110,773 |
Conversion of Class B to Class A | | 7,564,868 | | | 75 | | — | | | — | | (7,564,868) | | | (75) | | — | | | — | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — |
ESPP shares issued | | 8,746 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 79 | | | — | | | — | | | 79 | | | 1 | | | 80 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 9,045 | | | — | | | — | | | 9,045 | | | 2,829 | | | 11,874 |
Issuance of restricted shares |
| 1,391,479 | |
| 14 |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 3,590 | |
| — | |
| — | |
| 3,604 | |
| (3,604) |
|
| — |
Exercise of restricted stock units |
| 1,250 | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 4 | |
| — | |
| — | |
| 4 | |
| (4) |
|
| — |
Stock options exercised | | 5,282 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 |
Repurchase of common stock | | (1,597,150) | | | (16) | | — | | | — | | — | | | — | | — | | | — | | | (15,886) | | | — | | | — | | | (15,902) | | | 2,501 | | | (13,401) |
Restricted shares forfeited | | (10,017) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (36) | | | — | | | — | | | (36) | | | 36 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (349) |
|
| (349) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 89 | | | — | | | — | | | 89 | | | (89) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 19 | | | — | | | 368 | | | 387 | | | 85 | | | 472 |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 12,714 | |
| — | |
| 12,714 | |
| 3,926 |
|
| 16,640 |
Balance as of September 30, 2019 |
| 86,321,013 | | $ | 863 |
| — | | $ | — |
| 18,461,975 | | $ | 185 |
| — | | $ | — | | $ | 893,293 | | $ | 31,367 | | $ | — | | $ | 925,708 | | $ | 200,411 | | $ | 1,126,119 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | 14,305,146 | | | 144 | | — | | | — | | (14,305,146) | | | (144) | | — | | | — | | | 146,865 | | | — | | | — | | | 146,865 | | | (146,865) | | | — |
ESPP shares issued | | 6,413 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 99 | | | — | | | — | | | 99 | | | (13) | | | 86 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 5,543 | | | — | | | — | | | 5,543 | | | 2,487 | | | 8,030 |
Issuance of restricted shares | | 438,182 | | | 4 | | — | | | — | | — | | | — | | — | | | — | | | 2,321 | | | — | | | — | | | 2,325 | | | (2,325) | | | — |
Exercise of restricted stock units | | 27,860 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 104 | | | — | | | — | | | 104 | | | (104) | | | — |
Stock options exercised | | 79,333 | | | 1 | | — | | | — | | — | | | — | | — | | | — | | | 1,018 | | | — | | | — | | | 1,019 | | | (374) | | | 645 |
Repurchase of common stock | | (62,777) | | | (1) | | (6) | | | — | | — | | | — | | — | | | — | | | (803) | | | — | | | — | | | (804) | | | (73) | | | (877) |
Restricted shares forfeited | | (49,638) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (380) | | | — | | | — | | | (380) | | | 379 | | | (1) |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (506) | | | (506) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 229 | | | — | | | — | | | 229 | | | (229) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (319) | | | (319) | | | (176) | | | (495) |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 50,012 | |
| — | |
| 50,012 | |
| 22,409 |
|
| 72,421 |
Balance as of September 30, 2018 |
| 80,658,534 | | $ | 807 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 828,137 | | $ | 32,153 | | $ | (17) | | $ | 861,340 | | $ | 281,332 | | $ | 1,142,672 |
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 March 31,September 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 |
| (Loss) |
| 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 |
| 2,810 |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 29 |
|
| — |
|
| — |
|
| 29 |
|
| (2) |
|
| 27 |
Equity-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 3,154 |
|
| — |
|
| — |
|
| 3,154 |
|
| 1,025 |
|
| 4,179 |
Issuance of restricted shares |
| 1,169,777 |
|
| 11 |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 3,025 |
|
| — |
|
| — |
|
| 3,036 |
|
| (3,036) |
|
| — |
Exercise of restricted stock units |
| 625 |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
| (2) |
|
| — |
Repurchase of common stock |
| (125,786) |
|
| (1) |
|
|
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| (1,244) |
|
| — |
|
| — |
|
| (1,245) |
|
| 29 |
|
| (1,216) |
Restricted shares forfeited |
| (5,689) |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| (15) |
|
| — |
|
| — |
|
| (15) |
|
| 15 |
|
| — |
Distributions to noncontrolling interests, net |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (121) |
|
| (121) |
NCI income tax adjustment |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 6 |
|
| — |
|
| — |
|
| 6 |
|
| (6) |
|
| — |
Foreign currency translation adjustment |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 54 |
|
| 54 |
|
| 17 |
|
| 71 |
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,135 |
|
| — |
|
| 1,135 |
|
| 265 |
|
| 1,400 |
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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 June 30, 2019 |
| 80,176,078 | | $ | 802 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 821,968 | | $ | 25,988 | | $ | (380) | | $ | 848,638 | | $ | 278,210 | | $ | 1,126,848 |
Conversion of Class B to Class A | | 7,564,868 | | | 75 | | — | | | — | | (7,564,868) | | | (75) | | — | | | — | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — |
ESPP shares issued | | 3,079 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 21 | | | — | | | — | | | 21 | | | 3 | | | 24 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 2,774 | | | — | | | — | | | 2,774 | | | 792 | | | 3,566 |
Issuance of restricted shares |
| 17,549 | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 41 | |
| — | |
| — | |
| 41 | |
| (41) |
|
| — |
Exercise of restricted stock units |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| — |
Stock options exercised | | 5,282 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 |
Repurchase of common stock | | (1,444,648) | | | (14) | | — | | | — | | — | | | — | | — | | | — | | | (14,347) | | | — | | | — | | | (14,361) | | | 2,476 | | | (11,885) |
Restricted shares forfeited | | (1,195) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | 13 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (124) |
|
| (124) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 40 | | | — | | | — | | | 40 | | | (40) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 19 | | | — | | | 380 | | | 399 | | | 89 | | | 488 |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 5,379 | |
| — | |
| 5,379 | |
| 1,793 |
|
| 7,172 |
Balance as of September 30, 2019 |
| 86,321,013 | | $ | 863 |
| — | | $ | — |
| 18,461,975 | | $ | 185 |
| — | | $ | — | | $ | 893,293 | | $ | 31,367 | | $ | — | | $ | 925,708 | | $ | 200,411 | | $ | 1,126,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) |
| (Loss) |
| 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) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Equity-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 1,542 |
|
| — |
|
| — |
|
| 1,542 |
|
| 939 |
|
| 2,481 |
Issuance of restricted shares |
| 331,389 |
|
| 3 |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 1,421 |
|
| — |
|
| — |
|
| 1,424 |
|
| (1,424) |
|
| — |
Exercise of restricted stock units |
| 27,235 |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
| (2) |
|
| — |
Stock options exercised |
| 19,398 |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 81 |
|
| — |
|
| — |
|
| 81 |
|
| 49 |
|
| 130 |
Repurchase of common stock |
| (15,234) |
|
| — |
| (6) |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| (222) |
|
| — |
|
| — |
|
| (222) |
|
| (42) |
|
| (264) |
Restricted shares forfeited |
| (18,640) |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| (70) |
|
| — |
|
| — |
|
| (70) |
|
| 70 |
|
| — |
Noncontrolling interest in subsidiary |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (161) |
|
| (161) |
Foreign currency translation adjustment |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (259) |
|
| (259) |
|
| (158) |
|
| (417) |
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 10,099 |
|
| — |
|
| 10,099 |
|
| 6,033 |
|
| 16,132 |
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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 June 30, 2018 |
| 77,298,660 | | $ | 773 |
| — | | $ | — |
| 29,383,320 | | $ | 294 |
| — | | $ | — | | $ | 790,699 | | $ | 9,202 | | $ | (148) | | $ | 800,820 | | $ | 307,991 | | $ | 1,108,811 |
Conversion of Class B to Class A | | 3,356,477 | | | 34 | | — | | | — | | (3,356,477) | | | (34) | | — | | | — | | | 35,062 | | | — | | | — | | | 35,062 | | | (35,062) | | | — |
ESPP shares issued | | 2,427 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 49 | | | — | | | — | | | 49 | | | (17) | | | 32 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 1,926 | | | — | | | — | | | 1,926 | | | 639 | | | 2,565 |
Issuance of restricted shares | | 7,587 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 60 | | | — | | | — | | | 60 | | | (60) | | | — |
Stock options exercised | | 42,124 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 642 | | | — | | | — | | | 643 | | | (375) | | | 268 |
Repurchase of common stock | | (17,743) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (220) | | | — | | | — | | | (221) | | | 1 | | | (220) |
Restricted shares forfeited | | (30,998) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (310) | | | — | | | — | | | (310) | | | 309 | | | (1) |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (226) | | | (226) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 229 | | | — | | | — | | | 229 | | | (229) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 131 | | | 131 | | | 45 | | | 176 |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 22,951 | |
| — | |
| 22,951 | |
| 8,316 |
|
| 31,267 |
Balance as of September 30, 2018 |
| 80,658,534 | | $ | 807 |
| — | | $ | — |
| 26,026,843 | | $ | 260 |
| — | | $ | — | | $ | 828,137 | | $ | 32,153 | | $ | (17) | | $ | 861,340 | | $ | 281,332 | | $ | 1,142,672 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
89
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
| Three months ended March 31, | ||||
|
| 2019 |
| 2018 | ||
Cash flows from operating activities |
|
|
|
|
|
|
Net income |
| $ | 1,400 |
| $ | 16,132 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
| 32,518 |
|
| 31,423 |
Net (gain) loss on disposal of property and equipment |
|
| (223) |
|
| 554 |
Bad debt expense |
|
| 732 |
|
| 485 |
Amortization of debt issuance costs |
|
| 172 |
|
| 172 |
Inventory write-down |
|
| 75 |
|
| 266 |
Equity-based compensation |
|
| 4,179 |
|
| 2,481 |
Impairment of goodwill |
|
| 4,396 |
|
| — |
Impairment of property and equipment |
|
| 519 |
|
| — |
Impairment of cost-method investment |
|
| — |
|
| 2,000 |
Loss on divestitures |
|
| 4,714 |
|
| — |
Other operating items, net |
|
| (270) |
|
| 117 |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accounts receivable |
|
| (17,390) |
|
| (33,691) |
Prepaid expenses and other assets |
|
| 1,706 |
|
| (1,283) |
Accounts payable and accrued liabilities |
|
| 4,059 |
|
| 16,549 |
Net cash provided by operating activities |
|
| 36,587 |
|
| 35,205 |
Cash flows from investing activities |
|
|
|
|
|
|
Working capital settlement |
|
| 691 |
|
| — |
Proceeds received from divestitures |
|
| 15,957 |
|
| — |
Purchase of property and equipment |
|
| (36,510) |
|
| (32,612) |
Proceeds received from sale of property and equipment |
|
| 3,209 |
|
| 1,609 |
Net cash used in investing activities |
|
| (16,653) |
|
| (31,003) |
Cash flows from financing activities |
|
|
|
|
|
|
Borrowings from revolving line of credit |
|
| 5,000 |
|
| — |
Payments on long-term debt |
|
| (25,000) |
|
| — |
Payments of finance lease obligations |
|
| (285) |
|
| (511) |
Proceeds from share issuance |
|
| 27 |
|
| 130 |
Distributions to noncontrolling interests, net |
|
| (121) |
|
| (161) |
Repurchase of common stock |
|
| (1,216) |
|
| (264) |
Net cash used in financing activities |
|
| (21,595) |
|
| (806) |
Effect of exchange rate changes on cash |
|
| 107 |
|
| (53) |
Net (decrease) increase in cash and cash equivalents |
|
| (1,554) |
|
| 3,343 |
Cash and cash equivalents, beginning of period |
|
| 17,237 |
|
| 2,774 |
Cash and cash equivalents, end of period |
| $ | 15,683 |
| $ | 6,117 |
Supplemental cash flow disclosure: |
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,283 |
| $ | 991 |
Cash (refunds received) paid for income taxes |
| $ | (365) |
| $ | 344 |
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities |
| $ | 13,044 |
| $ | 9,632 |
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2019 |
| 2018 | ||
Cash flows from operating activities |
| | | | | |
Net income | | $ | 16,640 | | $ | 72,421 |
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| |
Depreciation and amortization | |
| 91,482 | |
| 95,512 |
Net loss (gain) on disposal of property and equipment | |
| 4,971 | |
| (2,959) |
Bad debt expense | |
| 1,764 | |
| 1,430 |
Amortization of debt issuance costs | |
| 516 | |
| 516 |
Inventory write-down | | | 228 | | | 430 |
Equity-based compensation | |
| 11,874 | |
| 8,030 |
Impairment of goodwill | |
| 4,396 | |
| — |
Impairment of property and equipment | | | 942 | | | 2,282 |
Impairment of cost-method investment | |
| — | |
| 2,000 |
Loss on divestitures | | | 3,262 | | | — |
Other operating items, net | |
| 259 | |
| 971 |
Changes in operating assets and liabilities | |
| | |
| |
Accounts receivable | |
| 14,835 | |
| (46,010) |
Prepaid expenses and other assets | |
| 9,774 | |
| (7,950) |
Accounts payable and accrued liabilities | |
| (18,727) | |
| (2,043) |
Net cash provided by operating activities | |
| 142,216 | |
| 124,630 |
Cash flows from investing activities | |
| | |
| |
Working capital settlement | |
| 691 | |
| — |
Proceeds received from divestitures | |
| 24,927 | |
| — |
Purchase of property and equipment | |
| (86,374) | |
| (109,500) |
Acquisitions, net of cash received | |
| (10,400) | |
| (1,953) |
Proceeds received from sales of property and equipment | |
| 13,958 | |
| 9,363 |
Net cash used in investing activities | |
| (57,198) | |
| (102,090) |
Cash flows from financing activities | |
| | |
| |
Borrowings from revolving line of credit | | | 5,000 | | | 45,000 |
Payments on long-term debt | |
| (50,000) | |
| (55,000) |
Payments of finance lease obligations | | | (743) | | | (1,517) |
Proceeds from share issuance | | | 110 | | | 731 |
Distributions to noncontrolling interests, net | |
| (349) | |
| (506) |
Repurchase of common stock | |
| (13,401) | |
| (877) |
Net cash used in financing activities | |
| (59,383) | |
| (12,169) |
Effect of exchange rate changes on cash | |
| 127 | |
| (95) |
Net increase in cash and cash equivalents | |
| 25,762 | |
| 10,276 |
Cash and cash equivalents, beginning of period | |
| 17,237 | |
| 2,774 |
Cash and cash equivalents, end of period | | $ | 42,999 | | $ | 13,050 |
Supplemental cash flow disclosure: | |
| | |
| |
Cash paid for interest | | $ | 2,421 | | $ | 3,356 |
Cash paid (refunds received) for income taxes | | $ | 1,675 | | $ | (1,750) |
Supplemental disclosure of noncash investing activities: | |
| | |
| |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 13,442 | | $ | 23,689 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
910
SELECT ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or 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”).
We are a leading provider of water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver chemical solutions for use in oil and gas well completionscompletion 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“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‑relatedwater-related services that support oil and gas well completion and production activities, including monitoring,water network automation, treatment, hauling, water recycling and disposal. We also manufacture a full suite of specialty chemicals used in the fracturing and water recycling process, and we provide chemicals needed by our customers to help increase oil and gas production and lower costs over the life of a 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.
Select 144A Offering and Initial Public Offering. On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A-1 common stock, par value $0.01 per share, which were converted into shares of Class A common stock, par value $0.01 per share (“Class A-1A Common Stock”) at anfollowing the Company’s initial public offering price of $20.00 per share. In conjunction with the Select 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”). SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or one1 share for each SES Holdings LLC Unit held by Legacy Owner Holdco. Upon the effectiveness of a shelf registration statement registering such shares for resale on June 13, 2017, all shares of Class A-1 Common Stock converted into shares of Class A Common Stock on a one-for-one basis.
On April 26, 2017, the Company completed its initial public offering (“IPO”)IPO of 8,700,000 shares of Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriters of the IPO exercised their over-allotment option to purchase an additional 1,305,000 shares of Class A Common Stock at the IPO price of $14.00 per share.Stock. Shareholders of Class A Common Stock and 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 Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based on their ownership of Class B Common Stock.
Tax Receivable Agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into two2 tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then-holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the “TRA Holders”). On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 13—Related Party Transactions for further discussion.
Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco and 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 Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends,
10
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 Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select 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 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 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 Class B Common Stock will be cancelled. During the Current Quarter and Current Period (each as defined below), 7,564,868 SES Holdings LLC Units were exchanged for 7,564,868 shares of Class A Common Stock, and 7,564,868 shares of Class B Common Stock were cancelled.
2017 Business Combinations: The Company completed three3 business combinations during 2017 that significantly increased its size. On March 10, 2017, the Company completed the 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, the Company completed the acquisition (the “Resource Water Acquisition”) of 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 completed its merger (the “Rockwater Merger”) with Rockwater Energy Solutions, Inc. (“Rockwater”) in which the Company combined with Rockwater for total consideration of $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 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.
This Form 10-Q relates to the three and nine months ended March 31,September 30, 2019 (the “Current Quarter”) and the “Current Period”, respectively) and the three and nine months ended March 31,September 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 opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and Current Period are not necessarily indicative of the results to be expected for the full year.
The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority‑ownedmajority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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 for which the Company does not have significant control or influence are accounted for using the cost method. As of March 31,September 30, 2019, the Company had one1 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 three3 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. During The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals, following its decision in 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 subsidiary Affirm Oilfield Services, LLC (“Affirm”), its Canadiansand hauling operations and its sand hauling business. As a result, the Company reevaluated its segment structure and changed its reportable segments to Water Services, Water Infrastructure, and Oilfield Chemicals.
11
Canadian operations.
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 monitoring.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.
12
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.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,completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies,technologies. This segment also provides chemicals needed by our customers to leadingincrease oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily pressure pumping service companies in the United States.pumpers, along with major integrated and independent oil and gas producers.
The results of our remainingdivested service lines that were previously a part of the former Wellsite Services segment, including the operations of our Affirm subsidiary, our Canadiansand hauling operations and our sand hauling businessCanadian operations, are combined in the “Other” category.
The unaudited interim consolidated financial statements in this report reflect our new segment structure, and the statementstatements of operations, statementstatements of comprehensive income and statementstatements of cash flows for the three and nine months ended March 31,September 30, 2018 have been restated to reflect our new segment structure.
Substantially complete liquidation: During the Current Quarter, the Company substantially completed liquidating our Canadian subsidiary and transferred $0.4 million from cumulative translation adjustment to (losses)/gains on sales of property and equipment, net.
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.
13
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2018, included in the Company’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 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.
12
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 changes to the Company’s ARO liability for the Current Quarter:Period:
|
|
|
|
|
| Three months ended March 31, 2019 | |
|
| (in thousands) | |
Balance at beginning of year |
| $ | 1,898 |
Accretion expense, included in depreciation and amortization expense |
|
| 28 |
Change in estimate |
|
| — |
Divestitures |
|
| (61) |
Balance at end of period |
| $ | 1,865 |
| | | |
|
| Nine months ended September 30, 2019 | |
|
| (in thousands) | |
Balance at beginning of Current Period |
| $ | 1,898 |
Accretion expense, included in depreciation and amortization expense |
| | 86 |
Change in estimate |
| | — |
Divestitures | | | (210) |
Balance at end of Current Period |
| $ | 1,774 |
We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets as of March 31, 2019 and as of December 31, 2018, respectively.sheets.
Recent accounting pronouncements: In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients. In July 2018, the FASB issued ASU No. 2018-11, Leases (ASC 842): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of 2019. The Company 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 single lease component, (iii) grandfathered its current accounting for land easements that commenced before January 1, 2019, and (iv) used the package of practical expedients to retain prior lease classification, prior treatment of initial direct costs and prior determination of whether a contract constituted a lease. See Note 5—Leases for additional information.
14
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. The CompanyAfter reviewing the new standard and reexamining current and prior year bad debt expense from trade receivables, as well as updating future expectations, the adoption of the new standard is currently evaluatingnot expected to have a material impact to the impact this standard will have on its consolidatedCompany’s financial statements.
1315
NOTE 3—ACQUISITIONS AND DIVESTITURES
Business combinations
Well Chemical Services Acquisition
On September 30, 2019, the Company acquired a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, for $10.4 million, funded with cash on hand (the “WCS Acquisition”). WCS provides advanced water treatment solutions, specialized stimulation flow assurance and integrity additives and post-treatment monitoring service in the U.S. This acquisition expands the Company’s service offerings in oilfield water treatment across the full life-cycle of water, from pre-frac treatment through re-use and recycling.
The WCS Acquisition was 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. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. The assets acquired and liabilities assumed are included in the Company’s Oilfield Chemicals 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:
| | | |
Preliminary purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousands) | |
Cash paid | | $ | 10,400 |
Total consideration transferred |
| | 10,400 |
Less: identifiable assets acquired and liabilities assumed |
| |
|
Inventory |
| | 6,287 |
Property and equipment |
| | 3,713 |
Intangible assets |
| | 500 |
Current liabilities | | | (100) |
Total identifiable net assets acquired |
| | 10,400 |
Fair value allocated to net assets acquired | | $ | 10,400 |
Pro Well Acquisition
On November 20, 2018, the Company acquired Pro Well Testing and Wireline, Inc. (“Pro Well”) with an initial payment of $12.4 million, funded with cash on hand (the “Pro Well Acquisition”). During March 2019, upon final settlement, the purchase price was revised to $11.8 million.
This acquisition expandsexpanded the Company’s flowback footprint into New Mexico and addsadded new strategic customers. The Pro Well Acquisition was 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 by $1.1 million, with the excess recorded as goodwill. The goodwill recognized was primarily attributable to expanding the Company’s flowback footprint into New Mexico and adding new strategic customers. The assets acquired, liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Services segment. The goodwill acquired is deductible for tax purposes. The following table summarizes the
16
consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
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 |
| | | |
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 |
Divestitures
Affirm Crane Business Saleand Canadian Operations Divestitures
On February 26, 2019,During the Current Period, the Company closed on 4 sale transactions and wound down the saleremaining Affirm and Canadian operations. The Company sold property and equipment with a combined net book value of a portion$18.6 million and assigned contracts to the buyers. Additionally, 2 of itsthe 4 transactions included the assignment of working capital. The following table summarizes sales details for each of the 4 transactions:
| | | | | | | | | | | | | | | | |
Date of Divestiture | | Entity | | Initial Net Proceeds | | Working Capital True Up | | Adjusted Net Proceeds | | Working Capital Status at | | (Gain)/loss for the nine months ended September 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 | | | (189) | | | 4,786 | | Final | | | 4,900 |
April 1, 2019 | | Canada | | | 2,242 | | | — | | | 2,242 | | Final | | | 101 |
In connection with the Affirm subsidiary that focused on crane operations for a sales priceoperation divestiture in the first quarter of $11.2 million, with $11.0 million of proceeds received. No2019, 0 gain or loss was initially recognized and goodwill was reduced by $2.6 million. During 2018,Additionally, during the Affirm crane operations comprised approximately 20%first quarter of total Affirm revenue earned during 2018. The sale included property and equipment with a net book value of $6.2 million, working capital, and the assignment of employees, obligations and contracts to the buyer.
Canadian Operations Divestiture
On March 19, 2019, the Company closed onrecorded an impairment of the saleremaining Affirm goodwill of a portion of its Canadian operations for a base sales price of $5.8$4.4 million with a future adjustment for target working capital. The initial transaction resulted in a $4.7 million loss. The Canadian operations sold comprised approximately 80% of total 2018 Canadian revenue. The sale included property and equipment with a net book value of approximately $5.0 million, working capital, and the assignment of employees, obligations and contracts to the buyer.(see Note 8).
1417
NOTE 4—REVENUE
Effective for the year ended December 31, 2018, 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 be 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 (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 goods or services the Company transfers to the customer.
The Company elected 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 one year or less and (iii) to exclude 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 quarternine months of 2019 and 2018, respectively:
| The vast majority of customer agreements are short-term, lasting less than one |
| 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 |
| Sales returns are rare and no sales return assets have been recognized on the balance |
| There are |
| There are no service-type |
| There is no long-term customer |
In the Water Services and Water 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 are completed in a short period of time, 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 consideration for services
18
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, a contract liability is recorded in accrued expenses and other current 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
15
agreements that start in one period and end in another. As of March 31,September 30, 2019, the Company had nofour contracts in processplace 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 at March 31,as of September 30, 2019 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 one monththree months and as of March 31,September 30, 2019, no rental agreements lasted more than a year.
The following table sets forth certain financial information with respect to the Company’s disaggregation of revenues by geographic location:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| | (in thousands) | ||||||||||
Geographic Region | | | | | | | | | | | | |
Permian Basin | | $ | 158,609 | | $ | 166,330 | | $ | 469,391 | | $ | 449,113 |
MidCon | | | 45,522 | | | 58,275 | | | 152,500 | | | 187,300 |
Eagle Ford | | | 44,694 | | | 46,895 | | | 124,453 | | | 135,923 |
Bakken | | | 20,052 | | | 41,673 | | | 66,195 | | | 120,934 |
Marcellus/Utica | | | 21,330 | | | 37,110 | | | 79,781 | | | 106,129 |
Rockies | | | 21,045 | | | 23,228 | | | 64,981 | | | 85,908 |
Haynesville/E. Texas | | | 18,322 | | | 13,319 | | | 53,918 | | | 43,328 |
All other/eliminations | | | (606) | | | 10,140 | | | 4,282 | | | 37,977 |
Total | | $ | 328,968 | | $ | 396,970 | | $ | 1,015,501 | | $ | 1,166,612 |
In the Water Services segment, the top 3 revenue producing regions are the Permian Basin, MidCon and Eagle Ford, which collectively comprised 75%, 73%, 75% and 71% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Water Infrastructure segment, the top 2 revenue producing regions are the Permian Basin and Bakken, which collectively comprised 84%, 85%, 83% and 84% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Oilfield Chemicals segment, the top 2 revenue producing regions are the Permian Basin and MidCon, which collectively comprised 79%, 81%, 77% and 76% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
19
NOTE 5—5—LEASES
At March 31,As of September 30, 2019, the Company was the lessee for approximately 720576 operating leases with durations greater than a year, approximately 1516 subleases, approximately 8041 finance leases, and is the lessor for four3 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 quarterCurrent Period included the assignment of leases to the buyers. The assigned leases impacted expenses during the quarterCurrent Period, but were not included in the March 31,September 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 approximately three1 facility leases that it is committed to renewing following 2019 expirations as well aslease 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 sheetsheets 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 jobs,contracts with customers, the Company has determined that no short-term leases with indefinite renewals are reasonably certain to last more than a year into the future. When available, the Company uses the rate implicit in the lease to discount lease payments to 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’s variable lease costs are comprised of variable royalties, variable common area maintenance, and variable reimbursement of lessor insurance and property taxes. Variable lease costs were $0.3 million and $1.1 million during the Current Quarter and Current Period, respectively.
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 atas 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.
16
The financial impact of leases is listed in the tables below:
| | | | | |
Balance Sheet |
| Classification |
| As of September 30, 2019 | |
| | | | (in thousands) | |
Assets | | | | | |
ROU Assets(1) | | Long-term right-of-use assets | | $ | 73,138 |
Finance lease assets(2) | | Property and equipment | | | 386 |
Liabilities | | | | | |
Operating lease liabilities ― ST | | Current operating lease liabilities | | $ | 19,488 |
Operating lease liabilities ― LT(3) | | Long-term operating lease liabilities | | | 72,672 |
Finance lease liabilities ― ST | | Current portion of finance lease obligations | | | 248 |
Finance lease liabilities ― LT | | Other long term liabilities | | | 108 |
|
|
|
|
|
Balance Sheet | Classification |
| As of March 31, 2019 | |
|
|
| (in thousands) | |
Assets |
|
|
|
|
ROU Assets(1) | Long-term right-of-use assets |
| $ | 72,341 |
Finance lease assets(2) | Property and equipment |
|
| 1,066 |
Liabilities |
|
|
|
|
Operating lease liabilities ― ST | Current operating lease liabilities |
| $ | 21,959 |
Operating lease liabilities ― LT | Long-term operating lease liabilities |
|
| 70,641 |
Finance lease liabilities ― ST | Current portion of finance lease obligations |
|
| 743 |
Finance lease liabilities ― LT | Other long term liabilities |
|
| 122 |
(1) | Net of impairment of |
(2) | Net of accumulated amortization of |
|
|
|
|
|
Statements of Operations and Cash Flows | Classification |
| As of March 31, 2019 | |
|
|
| (in thousands) | |
Operating lease cost: |
|
|
|
|
Operating lease cost ― fixed | Cost of revenue and Selling, general and administrative |
| $ | 8,059 |
Lease abandonment costs | Lease abandonment costs |
|
| 1,073 |
|
|
|
|
|
Short-term agreements: | Cost of revenue |
| $ | 22,898 |
|
|
|
|
|
Finance lease cost: |
|
|
|
|
Amortization of leased assets | Depreciation and amortization |
| $ | 214 |
Interest on lease liabilities | Interest expense, net |
|
| 4 |
|
|
|
|
|
Lessor income: |
|
|
|
|
Sublease income | Cost of sales and lease abandonment costs |
| $ | 373 |
Lessor income | Cost of sales |
|
| 111 |
|
|
|
|
|
Statement of cash flows |
|
|
|
|
Cash paid for operating leases | Operating cash flows |
| $ | 8,351 |
Cash paid for finance leases lease interest | Operating cash flows |
|
| 4 |
Cash paid for finance leases | Financing cash flows |
|
| 285 |
20
(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. |
| | | | | | | | |
| | | | Three Months Ended | | Nine months ended | ||
Statements of Operations and Cash Flows |
| Classification |
| September 30, 2019 |
| September 30, 2019 | ||
| | | | (in thousands) | ||||
Operating lease cost: | | | | | | | | |
Operating lease cost ― fixed | | Cost of revenue and Selling, general and administrative | | $ | 6,242 | | $ | 21,392 |
Lease abandonment costs | | Lease abandonment costs | | | 238 | | | 1,494 |
| | | | | | | | |
Short-term agreements: | | Cost of revenue | | $ | 25,611 | | $ | 73,423 |
| | | | | | | | |
Finance lease cost: | | | | | | | | |
Amortization of leased assets | | Depreciation and amortization | | $ | 54 | | $ | 791 |
Interest on lease liabilities | | Interest expense, net | | | 14 | | | 21 |
| | | | | | | | |
Lessor income: | | | | | | | | |
Sublease income | | Cost of sales and lease abandonment costs | | $ | 393 | | $ | 1,155 |
Lessor income | | Cost of sales | | | 184 | | | 364 |
| | | | | | | | |
Statement of cash flows | | | | | | | | |
Cash paid for operating leases | | Operating cash flows | | $ | 7,689 | | $ | 23,646 |
Cash paid for finance leases lease interest | | Operating cash flows | | | 14 | | | 21 |
Cash paid for finance leases | | Financing cash flows | | | 194 | | | 743 |
| | | |
Long Term and Discount Rate | As of | ||
Weighted-average remaining lease term (years) | | | |
Operating leases | |
| |
Finance leases | |
| |
Weighted-average discount rate | | | |
Operating leases | | 5.3 | % |
Finance leases | | 5.2 | % |
1721
The Company has the following operating and finance lease commitments as of March 31,September 30, 2019:
| | | | | | | | | |
Period |
| Operating Leases(1) (2) |
| Finance Leases |
| Total | |||
| | (in thousands) | |||||||
October 2019 through December 2019 | | $ | 7,197 | | $ | 144 | | $ | 7,341 |
2020 | |
| 22,079 | |
| 135 | |
| 22,214 |
2021 | |
| 15,371 | |
| 89 | |
| 15,460 |
2022 | |
| 12,039 | |
| — | |
| 12,039 |
2023 | |
| 10,141 | |
| — | |
| 10,141 |
Thereafter | |
| 48,287 | |
| — | |
| 48,287 |
Total minimum lease payments | | $ | 115,114 | | $ | 368 | | $ | 115,482 |
| | | | | | | | | |
Less reconciling items to reconcile undiscounted cash flows to lease liabilities: | | | | | | | | | |
Short-term leases excluded from balance sheet | | | 694 | | | — | | | 694 |
Imputed interest | | | 22,260 | | | 12 | | | 22,272 |
Total reconciling items | | | 22,954 | | | 12 | | | 22,966 |
Total liabilities per balance sheet | | | 92,160 | | | 356 | | | 92,516 |
|
|
|
|
|
|
|
|
|
|
Three months ending March 31, 2019 |
| Operating Leases(1) |
| Finance Leases |
| Total | |||
|
| (in thousands) | |||||||
April 2019 through December 2019 |
| $ | 23,686 |
| $ | 665 |
| $ | 24,351 |
2020 |
|
| 20,864 |
|
| 163 |
|
| 21,027 |
2021 |
|
| 14,806 |
|
| 89 |
|
| 14,895 |
2022 |
|
| 11,343 |
|
| — |
|
| 11,343 |
2023 |
|
| 9,686 |
|
| — |
|
| 9,686 |
Thereafter |
|
| 45,069 |
|
| — |
|
| 45,069 |
Total minimum lease payments |
| $ | 125,454 |
| $ | 917 |
| $ | 126,371 |
|
|
|
|
|
|
|
|
|
|
Less reconciling items to reconcile undiscounted cash flows to lease liabilities: |
|
|
|
|
|
|
|
|
|
Leases commencing in the future |
|
| (10,173) |
|
| — |
|
| (10,173) |
Short-term leases excluded from balance sheet |
|
| (2,673) |
|
| — |
|
| (2,673) |
Imputed interest |
|
| (20,008) |
|
| (52) |
|
| (20,060) |
Total reconciling items |
|
| (32,854) |
|
| (52) |
|
| (32,906) |
Total liabilities per balance sheet |
|
| 92,600 |
|
| 865 |
|
| 93,465 |
(1) | This table excludes sublease and lessor income of |
(2) | This table excludes 2 leases signed by the Company with commencement dates anticipated being established in calendar year 2020, for which the Company expects to pay approximately $9.6 million in total lease costs over ten years. |
22
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:
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||
|
| (in thousands) | ||||
Raw materials |
| $ | 17,895 |
| $ | 15,219 |
Finished goods |
|
| 23,663 |
|
| 28,540 |
Materials and supplies |
|
| 962 |
|
| 1,233 |
|
| $ | 42,520 |
| $ | 44,992 |
| | | | | | |
|
| September 30, 2019 |
| December 31, 2018 | ||
| | (in thousands) | ||||
Raw materials | | $ | 12,873 | | $ | 15,219 |
Finished goods | |
| 26,280 | |
| 28,540 |
Materials and supplies | |
| 460 | |
| 1,233 |
| | $ | 39,613 | | $ | 44,992 |
During the Current Quarter, the Company added $6.3 million of finished goods inventory from the purchase of WCS (see Note 3). During the Current Quarter, Prior Quarter, Current Period and Prior Quarter,Period, the Company recorded charges to the reserve for excess and obsolete inventory for less than $0.1 million, $0.4 million, $0.2 million and $0.3$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 historical usage of inventory on hand, as well as future expectations, and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.
1823
NOTE 7—PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31,September 30, 2019 and December 31, 2018:
| | | | | | |
|
| September 30, 2019 |
| December 31, 2018 | ||
| | (in thousands) | ||||
Land | | $ | 16,030 | | $ | 17,799 |
Buildings and leasehold improvements | |
| 107,894 | |
| 106,626 |
Vehicles and equipment | |
| 57,774 | |
| 83,435 |
Vehicles and equipment - finance lease | |
| 1,526 | |
| 1,833 |
Machinery and equipment | |
| 732,184 | |
| 758,528 |
Machinery and equipment - finance lease | |
| 48 | |
| 532 |
Computer equipment and software | | | 18,777 | | | 15,775 |
Computer equipment and software - finance lease | |
| 356 | |
| 356 |
Office furniture and equipment | |
| 4,650 | |
| 4,612 |
Disposal wells | |
| 64,962 | |
| 64,038 |
Other | | | 497 | | | 497 |
Construction in progress | |
| 79,398 | |
| 60,347 |
| |
| 1,084,096 | |
| 1,114,378 |
Less accumulated depreciation(1) | |
| (617,740) | |
| (611,530) |
Property and equipment held-for-sale | | | 890 | | | — |
Total property and equipment, net | | $ | 467,246 | | $ | 502,848 |
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||
|
| (in thousands) | ||||
Land |
| $ | 16,558 |
| $ | 17,799 |
Buildings and leasehold improvements |
|
| 105,593 |
|
| 106,626 |
Vehicles and equipment |
|
| 65,894 |
|
| 83,435 |
Vehicles and equipment - finance lease |
|
| 1,683 |
|
| 1,833 |
Machinery and equipment |
|
| 720,927 |
|
| 758,528 |
Machinery and equipment - finance lease |
|
| 299 |
|
| 532 |
Computer equipment and software |
|
| 16,812 |
|
| 15,775 |
Computer equipment and software - finance lease |
|
| 356 |
|
| 356 |
Office furniture and equipment |
|
| 4,637 |
|
| 4,612 |
Disposal wells |
|
| 64,241 |
|
| 64,038 |
Other |
|
| 497 |
|
| 497 |
Construction in progress |
|
| 74,280 |
|
| 60,347 |
|
|
| 1,071,777 |
|
| 1,114,378 |
Less accumulated depreciation(1) |
|
| (595,332) |
|
| (611,530) |
Property and equipment held-for-sale |
|
| 13,733 |
|
| — |
Total property and equipment, net |
| $ | 490,178 |
| $ | 502,848 |
(1) | Includes $1.5 million and $1.3 million of accumulated depreciation related to finance |
During the Current Quarter and Prior Quarter, depreciation expense was $29.5 million and $27.5 million, respectively. Depreciation of assets held under finance leases for the Current Quarter and Prior Quarter was $0.2 million and $0.4 million, respectively, and is included inTotal depreciation and amortization expense related to property and equipment and finance leases presented in the accompanying consolidated statementstable above, as well as amortization of operations.intangible assets presented in Note 8 is as follows:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| | (in thousands) | ||||||||||
Category | | | | | | | | | | | | |
Depreciation expense from property and equipment | | $ | 26,163 | | $ | 29,505 | | $ | 81,698 | | $ | 84,181 |
Amortization expense from finance leases | | | 54 | | | 293 | | | 791 | | | 1,037 |
Amortization expense from intangible assets | | | 2,998 | | | 3,039 | | | 8,993 | | | 10,294 |
Total depreciation and amortization | | $ | 29,215 | | $ | 32,837 | | $ | 91,482 | | $ | 95,512 |
24
Property and Equipment Held-for-Sale and Impairments
Long‑livedLong-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the Current Quarter,first quarter of 2019, the Company made the decision to sell and wind down certain operations within its previousformer Wellsite Services segment, including the operations of its Affirm subsidiary, its Canadiansand hauling operations and its sand hauling business. The Affirm crane and Canadian divestitures included $6.2 million and $5.0 million, respectively, ofoperations. This decision led us to classify the property and equipment. Additionally,equipment of these business as held-for-sale. All operations have been wound down, with $0.9 million remaining in held-for-sale as of September 30, 2019. The table below shows the property and equipment sold and divested as follows:
| | | | | |
| | | | Net Book Value of Property and | |
Type of sale event |
| Business |
| 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 | | | 388 |
Property and equipment sales | | Sand hauling operations | | | 3,030 |
Total property and equipment sold and divested | | | | $ | 23,404 |
During the Current Period, the Company impaired $0.5recorded an impairment of $0.9 million of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds. The remaining $13.7 millionIn addition, during the Current Period, the net loss on divestitures and sales of property and equipment expected to be sold, within a year, is classified as held-for-sale at March 31, 2019. was $3.5 million.
1925
NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 12). During the Current Quarter,first quarter of 2019, the Affirm goodwill was reduced to zero0 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 amounts of goodwill by reportable segment as of March 31,September 30, 2019 and December 31, 2018 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 adjustment(1) | | | — | | | — | | | — | | | 133 | | | — | | | — | | | 133 |
Affirm crane business divestiture | |
| — | |
| — | |
| — | |
| — | | | — | | | (2,604) | |
| (2,604) |
Affirm impairment | | | — | | | — | | | — | | | — | | | — | | | (4,396) | | | (4,396) |
Balance as of September 30, 2019 | | $ | — | | $ | — | | $ | — | | $ | 186,468 | | $ | 80,466 | | $ | — | | $ | 266,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 March 31, 2019 |
| $ | — |
| $ | — |
| $ | — |
| $ | 186,468 |
| $ | 80,466 |
| $ | — |
| $ | 266,934 |
(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 March 31,September 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of March 31, 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 |
| $ | 116,078 |
| $ | 13,478 |
| $ | 102,600 |
| $ | 171,245 |
| $ | 66,402 |
| $ | 104,843 |
Patents |
|
| 10,110 |
|
| 1,668 |
|
| 8,442 |
|
| 10,110 |
|
| 1,417 |
|
| 8,693 |
Other |
|
| 7,516 |
|
| 3,623 |
|
| 3,893 |
|
| 7,234 |
|
| 2,866 |
|
| 4,368 |
Total definite-lived |
|
| 133,704 |
|
| 18,769 |
|
| 114,935 |
|
| 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 |
| $ | 164,177 |
| $ | 18,769 |
| $ | 145,408 |
| $ | 219,062 |
| $ | 70,685 |
| $ | 148,377 |
| | | | | | | | | | | | | | | | | | |
| | As of September 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 | | $ | 116,578 | | $ | 17,966 | | $ | 98,612 | | $ | 171,245 | | $ | 66,402 | | $ | 104,843 |
Patents | | | 10,110 | | | 2,169 | | | 7,941 | | | 10,110 | | | 1,417 | | | 8,693 |
Other | | | 7,516 | | | 4,573 | | | 2,943 | |
| 7,234 | |
| 2,866 | |
| 4,368 |
Total definite-lived | | | 134,204 | | | 24,708 | | | 109,496 | | | 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 | | $ | 164,677 | | $ | 24,708 | | $ | 139,969 | | $ | 219,062 | | $ | 70,685 | | $ | 148,377 |
20
AmortizationSeptember 30, 2019. See Note 7 for the amortization expense was $3.0 million and $3.9 million forduring the Current Quarter, Prior Quarter, Current Period and Prior Quarter,Period, respectively. The indefinite lived water rights and trademarks are generally subject to renewal every five to ten years at immaterial renewal costs. Annual amortization of intangible assets for the next five years and beyond is as follows:
| | | |
|
| Amount | |
| | (in thousands) | |
Remainder of 2019 | | $ | 2,989 |
2020 | |
| 11,661 |
2021 | |
| 10,478 |
|
|
|
|
|
| Amount | |
|
| (in thousands) | |
Remainder of 2019 |
| $ | 8,891 |
2020 |
|
| 11,561 |
2021 |
|
| 10,378 |
2022 |
|
| 10,163 |
2023 |
|
| 10,092 |
Thereafter |
|
| 63,850 |
|
| $ | 114,935 |
26
NOTE 9—DEBT
Credit facility and revolving line of credit
On November 1, 2017, SES Holdings and Select 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 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 Credit Agreement 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 earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.
The 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 Credit 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 (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 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) 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 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.
| | | | | | |
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% |
| | | |
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. 28 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. 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 cash 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
between 1.50% and 2.00% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Credit Agreement was 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 The Company was in compliance with all debt covenants as of 29 NOTE 10—COMMITMENTS AND CONTINGENCIES The Company is subject to a 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 Rockwater Merger are under investigation by the U.S. Attorney's Office for the Middle District of 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 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 and the Company 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.
NOTE 11— The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the 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, 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 Inc. 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 which occurred on November 1, 2017) and allowed 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 the 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 for the Rockwater Merger. The Company’s consenting stockholders, who
Stock option awards Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. Prior to the Company’s initial public offering on April 26, 2017, the Company historically valued 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. This fair value measurement relied 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 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 utilized the Monte Carlo option pricing model to determine fair value of the options granted during 2018, which incorporates assumptions to value
A summary of the Company’s stock option activity and related information as of and for the Current
(a)Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of The Company recognized 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 A summary of the Company’s restricted stock awards activity and related information for the Current
A summary of the Company’s restricted stock unit activity and related information for the Current
Performance Share Units (PSUs) During 2018 and 2019, the Company approved grants of performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSU will be calculated based on performance against certain metrics that relate to the Company’s return on asset performance over the January 1, 2018 through December 31, 2020 and January 1, 2019 through December 31, 2021 performance periods, respectively. The target number of shares of Class A Common Stock subject to each PSU is
The grant date fair value of PSUs granted during 2018 was $5.9 million and the grant fair value of PSUs granted during the As of 33 The following table summarizes the information about the performance share units outstanding
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
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 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.
34 The following table summarizes the information about the stock-settled incentive awards outstanding
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 The following table summarizes ESPP activity (in thousands, except shares):
During the Current Quarter and Current Period, the Company repurchased
NOTE 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. ASC 820 establishes a Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets. Level 2—Quoted prices for similar assets or liabilities in 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 The following table presents information about the Company’s assets measured at fair value on a
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
impairment during the Current Period was based on the expected proceeds from selling a portion of the remaining Canadian property and equipment utilizing Level 3 inputs. 36 NOTE 13—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 and an unconsolidated joint venture. The Company has entered into a number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the audit committee of the Company’s board of directors regularly reviews these During the Current Quarter, sales to related parties were During the Prior Quarter, sales to related parties were During the Current Period, sales to related parties were $10.8 million and purchases from related-party vendors were $15.6 million. These purchases consisted of $2.5 million relating to purchases of property and equipment, $11.8 million relating to the rental of certain equipment or other services used in operations and $1.3 million relating to management, consulting and other services. During the Prior Period, sales to related parties were $6.3 million and purchases from related-party vendors were $12.7 million. These purchases consisted of $3.5 million relating to purchases of property and equipment, $0.3 million relating to inventory and consumables, $7.8 million relating to the rental of certain equipment or other services used in operations and $1.1 million relating to management, consulting and other services. Tax Receivable Agreements In connection with the Select 144A Offering, the Company entered into the Tax Receivable Agreements with the 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 37 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 boardof 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.
The Company’s
39 NOTE 15—NONCONTROLLING INTERESTS The Company’s noncontrolling interests fall into two categories as follows:
For all periods presented, there were no changes to Select’s ownership interest in joint ventures formed for water-related services. However, during the Current
NOTE 16—EARNINGS PER SHARE Earnings per share are based on the amount of income allocated to the shareholders and the The following tables present the Company’s calculation of basic and diluted earnings per share for the Current
NOTE 17—SEGMENT INFORMATION Select Inc. is an oilfield services company that provides solutions to the onshore oil and natural gas industry in the United States. The Company’s services are offered through 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 The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments: Water Services — The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, containment, Water Infrastructure — The Water Infrastructure segment consists of the Company’s strategic 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. Oilfield Chemicals — The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well The results of our
Financial information by segment for the Current
43
Total assets by segment as of
44 NOTE 18—SUBSEQUENT EVENTS The Company has evaluated subsequent events for potential recognition and/or disclosure through
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 our consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in 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 nine months ended Overview We are a leading provider of water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver chemical solutions for use in oil and gas well
Our operations have benefited from the investments and 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 For our Oilfield Chemicals segment, the opening of our Midland Friction Reducer production line has saved us freight and logistics costs 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 costs, 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 existing water treatment capabilities, as well as our recent acquisition of a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, which provides advanced water treatment solutions, specialized stimulation flow assurance and integrity additives and pre-during and post-treatment monitoring service in the United States. We expect our Oilfield Chemicals business will continue to grow along with the rise of produced water utilization in our served markets. As a leading provider of chlorine dioxide generators and specialty chemical 46 deployment services in the U.S., we are now positioned to serve a much larger customer base with multiple disinfection service offerings. In addition, WCS’s large fleet of chemical addition units allows us to expand well chemical services by applying various biocides, preservatives, scale inhibitors and corrosion inhibitors for the hydraulic fracturing process. WCS will also be the exclusive provider of certain proprietary dry scale additives that are used in the fracking process for long-term well flow assurance. WCS will report within our Oilfield Chemicals segment, and will work closely with both the Oilfield Chemicals and Water Services operational teams to manage the unique relationship between water quality and frac chemistry to deliver superior water treatment and chemical additive solutions to our customers. We have executed these acquisitions and investments within the context of a steadily improving balance sheet. 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
The results of our How We Generate Revenue We currently generate most of our revenue through our water-management services associated with hydraulic fracturing, provided through our Water Services and Water Infrastructure 47 We also generate revenue
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), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are only incurred when we provide water and 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 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 We incur significant transportation costs associated with our service lines, including fuel and freight. We incurred fuel and freight costs of We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of Industry Overview During the Current Quarter, the average spot While we cannot predict the future direction of oil or natural gas prices, our discussions with customers 48 Trends beyond oil and natural gas prices present both support and challenges. Our customers, generally speaking, have transitioned from a focus on production growth to a focus on free cash flow generation. While this should lead to a better capitalized industry with greater resilience to commodity price cyclicality over the longer term, this transition has negatively impacted the overall level of spending on oilfield services and equipment in the Current Quarter, and will likely constrain customer capital expenditures in 2020 as well. While we believe leading-edge lateral lengths and proppant use
However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and therefore 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, our recent WCS acquisition and our knowledge base within our Oilfield Chemicals segment. Additionally, this trend supports more complex “on the fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to 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 We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal 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 and amortization expenses). We believe gross profit provides insight into profitability and true operating performance of our assets. We also compare gross profit to prior periods and across segments to identify trends as well as underperforming segments. 49 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. EBITDA and Adjusted EBITDA We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus 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,
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 Well Chemical Services Acquisition On September 30, 2019, we completed our acquisition of WCS. Our historical financial statements for periods prior to September 30, 2019 do not include the results of operations of WCS. Pro Well Acquisition On November 20, 2018, we completed our acquisition of Affirm
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 50 which accounted for approximately $8.6 million of annual revenue during 2018. Following the 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 $30.2 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. Impact of Industry Conditions on Our Operating Results Demand for
Results of Operations The following tables set forth our results of operations for the periods presented, including revenue by segment. Current Quarter Compared to the Prior Quarter
52 Revenue Our revenue decreased
Water Services. Revenue Water Infrastructure. Revenue
Costs of Revenue Costs of revenue decreased $49.6 million, or 14.7%, to $288.0 million for the Current Quarter compared to $337.6 million for the Prior Quarter. The decrease was primarily due to $27.4 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 contributing to the decline was a $23.9 million decrease in Water Services costs and a $3.6 million decrease in depreciation costs, partially offset by a $4.4 million increase in Water Infrastructure costs and a $0.9 million increase in Oilfield Chemicals costs as further discussed below. Water Services. Cost of revenue decreased $23.9 million, or 13.5%, to $153.7 million for the Current Quarter compared to $177.6 million for the Prior Quarter. Cost of revenue decreased due to reduced customer drilling and completions activity levels in the Current Quarter and costs as a percent of revenue increased from 76.1% to 78.1% due to pricing pressures we could not fully offset with cost reductions. Water Infrastructure. Cost of revenue increased $4.4 million, or 10.5%, to $46.7 million for the Current Quarter compared to $42.3 million for the Prior Quarter. Cost of revenue as a percent of revenue increased from 64.2% to 73.1% primarily due to certain pricing pressures in the Bakken from non-Pipeline related water sales and logistics that we could not fully offset during the period. Oilfield Chemicals. Costs of revenue increased $0.9 million, or 1.6%, to $57.4 million for the Current Quarter compared to $56.5 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from Other. Other costs
53 Depreciation and Amortization. Depreciation and amortization expense
Quarter, primarily due to the divestitures discussed above. Gross Profit Gross profit decreased by Selling, General and Administrative Expenses Selling, general and administrative expenses increased Lease Abandonment Costs Lease abandonment costs were Net Interest Expense Net interest expense decreased by $0.9 million, or 66.9%, to $0.4 million during the Current Quarter compared to $1.3 million in the Prior Quarter primarily due to lower average borrowings resulting from the repayment of all remaining borrowings on our credit facility since the Prior Quarter. Net Income Net income decreased by $24.1 million, or 77.1%, to net income of $7.2 million for the Current Quarter compared to net income of $31.3 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 higher Oilfield Chemicals gross profit, lower lease abandonment costs, and lower interest expense. 54 Current Period Compared to the Prior Period
55 Revenue Our revenue decreased $151.1 million, or 13.0%, to $1.0 billion for the Current Period compared to $1.2 billion for the Prior Period. The decrease was primarily due to $83.8 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 change was $66.3 million lower Water Services revenue and $6.4 million lower Water Infrastructure revenue, partially offset by $5.3 million higher Oilfield Chemicals revenue discussed below. For the Current Period, our Water Services, Water Infrastructure, Oilfield Chemicals and Other segments constituted 61.0%, 16.6%, 19.5% and 2.9% of our total revenue, respectively, compared to 58.8%, 15.0%, 16.5%, and 9.7%, respectively, for the 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 variances by operating segment were as follows: Water Services. Revenue decreased $66.3 million, or 9.7%, to $619.4 million for the Current Period compared to $685.7 million for the Prior Period. The decrease was primarily due to lower water transfer and containment revenue primarily attributable to reduced drilling and completions activity and pricing pressure, partially offset by increases in revenues from flowback and well testing, water treatment, equipment rentals and water network automation and technology services. Water Infrastructure. Revenue decreased by $6.4 million, or 3.6%, to $169.3 million for the Current Period compared to $175.7 million for the Prior Period, primarily due to reduced activity on our Bakken pipeline system during the first half of 2019. Oilfield Chemicals. Revenue increased $5.3 million, or 2.8%, to $197.8 million for the Current Period compared to $192.4 million for the Prior Period, primarily due to increased sales of our friction reducer products supported by the increased manufacturing capacity from our Midland, Texas plant. Other. Other revenue decreased $83.8 million, or 74.2%, to $29.1 million for the Current Period compared to $112.8 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 $114.0 million, or 11.4%, to $888.6 million for the Current Period compared to $1.0 billion for the Prior Period. The decrease was primarily due to $67.8 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 $46.8 million lower Water Services costs, primarily due to aligning our cost structure to lower revenue, further discussed below. Water Services. Cost of revenue decreased $46.8 million, or 9.0%, to $472.0 million for the Current Period compared to $518.8 million for the Prior Period primarily driven by reduced drilling and completions activity levels. Cost of revenue as a percent of revenue was relatively flat, moving from 75.7% to 76.2%. Water Infrastructure. Cost of revenue increased $6.3 million, or 5.3%, to $126.6 million for the Current Period compared to $120.3 million for the Prior Period. Cost of revenue as a percent of revenue increased from 68.5% to 74.8% primarily due to a decline in contribution from our high-margin Bakken pipeline system. Oilfield Chemicals. Costs of revenue decreased $1.1 million, or 0.7%, to $170.9 million for the Current Period compared to $172.1 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 89.4% to 86.4% due primarily to freight cost-savings from our Midland, Texas plant as well as improved inventory management and increased sales of higher-margin friction reducer products. Other. Other costs decreased $67.8 million, or 69.1%, to $30.4 million for the Current Period compared to $98.2 million in the Prior 56 Depreciation and Amortization. Depreciation and amortization expense decreased $4.6 million, or 4.9%, to $88.6 million for the Current Period compared to $93.2 million for the Prior Period, primarily due to the divestitures discussed above. Gross Profit Gross profit decreased by $37.1 million, or 22.6%, to a gross profit of $126.9 million for the Current Period compared to a gross profit of $164.1 million for the Prior Period, primarily due to $16.0 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 $19.5 million lower gross profit from Water Services and $12.7 million lower gross profit from Water Infrastructure discussed above. These were partially offset by $6.5 million higher gross profit from Oilfield Chemicals and $4.6 million lower depreciation costs discussed above. Gross margin as a percent of revenue was 12.5% and 14.1% in the Current Period and Prior Period, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $9.3 million, or 12.0%, to $87.0 million for the Current Period compared to $77.7 million for the Prior Period. The increase was primarily driven by increased costs associated with our recent divestitures, including severance expenses, professional fees and other transaction costs, as well as increased equity incentive plan expenses as the incentive plan initiated in 2018 provides for a three year vesting period and there were more grants outstanding in the Current Period than the Prior Period. Lease Abandonment Costs Lease abandonment costs were $1.5 million and $4.1 million in the Current Period and Prior Period, respectively. The Current Net Interest Expense Net interest expense decreased by Net Income Net income decreased by 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 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, 57 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. 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.
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. One 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 “Item 6. Selected Financial Data” in our 2018 Form 10-K. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net income, which is the most directly comparable GAAP measure for the periods presented:
59 EBITDA was EBITDA was $113.7 million for the Current Period compared to $173.8 million for the Prior Period. The $60.0 million decrease in EBITDA was primarily driven by a decrease of $19.5 million in Water Services gross profit, a decrease of $16.0 million in gross profit from the operations being divested and wound down, a decrease of $12.7 million in Water Infrastructure gross profit, an increase in selling, general and administrative costs of $9.2 million and $11.2 higher losses on sales of property and equipment including divestitures, partially offset by an increase of $6.5 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $153.9 million for the Current Period compared to $201.5 million for the Prior Period. The $47.6 million decrease in Adjusted EBITDA was primarily due to
Liquidity and Capital Resources Overview Our primary sources of liquidity As of September 30, 2019, we had no outstanding bank debt and a net cash position. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers. We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations and borrowings
Cash Flows The following table summarizes our cash flows for the periods indicated:
Analysis of Cash Flow Changes Operating Activities. Net cash provided by operating activities was Investing Activities. Net cash used in investing activities was Financing Activities. Net cash used in financing activities was
Current Period. Credit Agreement On November 1, 2017, in connection with the closing of the Rockwater Merger (the “Closing”), SES Holdings and Select 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, 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 Section 2.1(b) of Article VII of the Credit Agreement. The 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) 85.0% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal 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 61 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) 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.
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 cash 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) 25.0% of the lesser of (A) the maximum revolver amount and (B) the 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) 10.0% of the lesser of (A) the maximum revolver amount and (B) the We were in compliance with all debt covenants as of Contractual Obligations Our contractual obligations include, among other things, our Credit Agreement and operating leases. Refer to Note 5—Leases and Note 9—Debt in Part I, Item 1 of this Quarterly Report for an update to our contractual obligations as of 62 Critical Accounting Policies and Estimates With 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 2018 Form 10-K filed on 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 Off-Balance-Sheet Arrangements
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; current prices as 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 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 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 drilling 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
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
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) 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) under the Exchange Act) as of the end of the period covered by this Quarterly 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 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 Other than noted above,
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 There have been no material changes to the Risk Factors disclosed in the 2018 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Issuer Purchases of Equity Securities During the Current Quarter,we repurchased the shares of Class A Common Stock as shown in the table below,
Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable. None. The following exhibits
**Furnished herewith
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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