UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________
Commission File Number 001-38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
| |
Delaware | 81-4561945 |
(State of incorporation) | (IRS Employer Identification Number) |
| |
1233 W. Loop South, Suite 1400 Houston, TX | 77027 |
(Address of principal executive offices) | (Zip Code) |
(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-2 of the Exchange Act.
| | | |
Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
| | | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of November 4, 2019,2, 2020, the registrant had 85,907,21186,824,127 shares of Class A common stock and 18,461,97516,221,101 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-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, andin our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report.Report and those set forth from time to time in our other filings with the SEC. 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 severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic, which has caused a sharp decline in economic activity in the United States and around the world, resulting in lower demand for oil and gas, oversupply and therefore lower oil and gas prices, to which our exploration and production (“E&P”) customers have responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which has had, and will likely continue to have, a negative impact on our financial results; |
● | actions taken by the members of the Organization of the Petroleum Exporting Countries and other allied producing countries, (“OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with announced supply limitations; |
● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
● | the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies; |
● | the level of capital spending and access to capital markets by oil and gas |
● | the degree to which consolidation among our customers’ may affect spending on U.S. drilling and completions in the near-term; |
● | trends and volatility in oil and gas |
● |
● | 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 |
3
freshwater transfer, chemicals, carbon pricing, taxation or emissions, drilling on federal lands and various other 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 |
● | our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
● | our health, safety and environmental performance; |
● | the impact of competition on our operations; |
● | the degree to which our |
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 services, either on a volumetric or time basis; |
● | changes in global political or economic conditions, generally, and in the markets we serve; |
● | the ability to source certain raw materials globally from economically advantaged sources; |
● | accidents, weather, seasonality or other events affecting our business; and |
● | the other risks identified in our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and under the headings “Part I―Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II―Item 1A. Risk Factors” in this Quarterly Report. |
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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and 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
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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
Item 1. Financial Statements
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 | ||||
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| (unaudited) |
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| (unaudited) |
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Assets | | | | | | | | | | | | |
Current assets |
| | | | | |
| | | | | |
Cash and cash equivalents | | $ | 42,999 | | $ | 17,237 | | $ | 185,438 | | $ | 79,268 |
Accounts receivable trade, net of allowance for doubtful accounts of $5,392 and $5,329, respectively | |
| 310,730 | |
| 341,711 | ||||||
Accounts receivable trade, net of allowance for credit losses of $9,731 and $5,773, respectively | |
| 92,148 | |
| 267,628 | ||||||
Accounts receivable, related parties | |
| 5,493 | |
| 1,119 | |
| 595 | |
| 4,677 |
Inventories | |
| 39,613 | |
| 44,992 | |
| 34,366 | |
| 37,542 |
Prepaid expenses and other current assets | |
| 26,233 | |
| 27,093 | |
| 19,815 | |
| 26,486 |
Total current assets | |
| 425,068 | |
| 432,152 | |
| 332,362 | |
| 415,601 |
Property and equipment | |
| 1,084,096 | |
| 1,114,378 | |
| 907,980 | |
| 1,015,379 |
Accumulated depreciation | |
| (617,740) | |
| (611,530) | |
| (538,380) | |
| (562,986) |
Property and equipment held-for-sale, net | | | 890 | | | — | | | — | | | 885 |
Total property and equipment, net | |
| 467,246 | |
| 502,848 | |
| 369,600 | |
| 453,278 |
Right-of-use assets | | | 73,138 | | | — | ||||||
Right-of-use assets, net | | | 57,402 | | | 70,635 | ||||||
Goodwill | |
| 266,934 | |
| 273,801 | |
| — | |
| 266,934 |
Other intangible assets, net | |
| 139,969 | |
| 148,377 | |
| 118,801 | |
| 136,952 |
Other assets | |
| 4,502 | |
| 3,427 | ||||||
Other assets, net | |
| 2,468 | |
| 4,220 | ||||||
Total assets | | $ | 1,376,857 | | $ | 1,360,605 | | $ | 880,633 | | $ | 1,347,620 |
Liabilities and Equity | |
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Current liabilities | |
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Accounts payable | | $ | 38,530 | | $ | 53,847 | | $ | 11,037 | | $ | 35,686 |
Accrued accounts payable | | | 51,209 | | | 62,536 | | | 13,058 | | | 47,547 |
Accounts payable and accrued expenses, related parties | |
| 3,297 | |
| 5,056 | |
| 300 | |
| 2,789 |
Accrued salaries and benefits | |
| 25,761 | |
| 22,113 | |
| 14,811 | |
| 20,079 |
Accrued insurance | |
| 13,367 | |
| 14,849 | |
| 10,227 | |
| 8,843 |
Sales tax payable | | | 1,185 | | | 5,820 | | | 678 | | | 2,119 |
Accrued expenses and other current liabilities | |
| 12,784 | |
| 14,560 | |
| 13,296 | |
| 15,375 |
Current operating lease liabilities | | | 19,488 | | | — | | | 14,611 | | | 19,315 |
Current portion of finance lease obligations | |
| 248 | |
| 938 | |
| 304 | |
| 128 |
Total current liabilities | |
| 165,869 | |
| 179,719 | |
| 78,322 | |
| 151,881 |
Long-term operating lease liabilities | |
| 72,672 | |
| 16,752 | |
| 64,217 | |
| 72,143 |
Other long-term liabilities | |
| 12,197 | |
| 8,361 | |
| 12,698 | |
| 10,784 |
Long-term debt | |
| — | |
| 45,000 | ||||||
Total liabilities | |
| 250,738 | |
| 249,832 | |
| 155,237 | |
| 234,808 |
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 | |
| — | |
| — | ||||||
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 86,824,127 shares issued and outstanding as of September 30, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019 | |
| 868 | |
| 879 | ||||||
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 2020 and December 31, 2019 | |
| — | |
| — | ||||||
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | |
| 162 | |
| 162 | ||||||
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | |
| — | |
| — | ||||||
Additional paid-in capital | |
| 893,293 | |
| 813,599 | |
| 907,832 | |
| 914,699 |
Retained earnings | |
| 31,367 | |
| 18,653 | ||||||
Accumulated other comprehensive deficit | | | — | | | (368) | ||||||
Accumulated (deficit) retained earnings | |
| (299,264) | |
| 21,437 | ||||||
Total stockholders’ equity | |
| 925,708 | |
| 832,934 | |
| 609,598 | |
| 937,177 |
Noncontrolling interests | |
| 200,411 | |
| 277,839 | |
| 115,798 | |
| 175,635 |
Total equity | |
| 1,126,119 | |
| 1,110,773 | |
| 725,396 | |
| 1,112,812 |
Total liabilities and equity | | $ | 1,376,857 | | $ | 1,360,605 | | $ | 880,633 | | $ | 1,347,620 |
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)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
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 | ||||||||||||
Water Services | | $ | 54,516 | | $ | 196,782 | | $ | 259,834 | | $ | 619,388 | ||||||||||||
Water Infrastructure | | | 16,165 | | | 63,953 | | | 89,227 | | | 169,279 | ||||||||||||
Oilfield Chemicals | |
| 30,561 | |
| 67,932 | | | 122,705 | | | 197,762 | ||||||||||||
Other | |
| 301 | |
| 33,604 | | | 29,072 | | | 112,841 | |
| — | |
| 301 | | | — | | | 29,072 |
Total revenue | |
| 328,968 | |
| 396,970 | | | 1,015,501 | | | 1,166,612 | |
| 101,242 | |
| 328,968 | | | 471,766 | | | 1,015,501 |
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 | ||||||||||||
Water Services | | | 52,861 | | | 153,741 | | | 235,989 | | | 472,013 | ||||||||||||
Water Infrastructure | | | 12,816 | | | 46,748 | | | 74,500 | | | 126,634 | ||||||||||||
Oilfield Chemicals | |
| 28,558 | | | 57,357 | | | 110,996 | | | 170,935 | ||||||||||||
Other | |
| 1,865 | | | 29,280 | | | 30,365 | | | 98,153 | |
| 30 | | | 1,865 | | | 37 | | | 30,365 |
Depreciation and amortization | |
| 28,263 | | | 31,853 | | | 88,624 | | | 93,180 | |
| 23,877 | | | 28,263 | | | 75,567 | | | 88,624 |
Total costs of revenue | |
| 287,974 | |
| 337,573 | | | 888,571 | | | 1,002,538 | |
| 118,142 | |
| 287,974 | | | 497,089 | | | 888,571 |
Gross profit | |
| 40,994 | |
| 59,397 | | | 126,930 | | | 164,074 | ||||||||||||
Gross (loss) profit | |
| (16,900) | |
| 40,994 | | | (25,323) | | | 126,930 | ||||||||||||
Operating expenses | |
|
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|
| | | | | | | |
|
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|
| | | | | | |
Selling, general and administrative | |
| 27,280 | | | 25,110 | | | 86,953 | | | 77,662 | |
| 15,955 | | | 27,280 | | | 58,902 | | | 86,953 |
Depreciation and amortization | |
| 952 | | | 984 | | | 2,858 | | | 2,332 | |
| 685 | | | 952 | | | 2,204 | | | 2,858 |
Impairment of goodwill | |
| — | | | — | | | 4,396 | | | — | ||||||||||||
Impairment of property and equipment | | | 49 | | | — | | | 942 | | | 2,282 | ||||||||||||
Impairment of cost-method investment | |
| — | | | — | | | — | | | 2,000 | ||||||||||||
Impairment of goodwill and trademark | |
| — | | | — | | | 276,016 | | | 4,396 | ||||||||||||
Impairment and abandonment of property and equipment | | | — | | | 49 | | | 7,910 | | | 942 | ||||||||||||
Lease abandonment costs | |
| 238 | | | 1,045 | | | 1,494 | | | 4,142 | |
| 672 | | | 238 | | | 2,493 | | | 1,494 |
Total operating expenses | |
| 28,519 | |
| 27,139 | | | 96,643 | | | 88,418 | |
| 17,312 | |
| 28,519 | | | 347,525 | | | 96,643 |
Income from operations | |
| 12,475 | |
| 32,258 | | | 30,287 | | | 75,656 | ||||||||||||
(Loss) income from operations | |
| (34,212) | |
| 12,475 | | | (372,848) | | | 30,287 | ||||||||||||
Other income (expense) | |
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(Losses) gains on sales of property and equipment, net | | | (2,033) | | | 1,458 | | | (8,233) | | | 2,959 | ||||||||||||
Gains (losses) on sales of property and equipment and divestitures, net | | | 891 | | | (2,033) | | | (1,727) | | | (8,233) | ||||||||||||
Interest expense, net | |
| (438) | | | (1,322) | | | (2,370) | | | (3,815) | |
| (789) | | | (438) | | | (1,633) | | | (2,370) |
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 | ||||||||||||
Foreign currency gain (loss), net | | | 13 | | | (59) | | | (6) | | | 268 | ||||||||||||
Other expense, net | |
| (2,364) | | | (272) | | | (4,805) | | | (62) | ||||||||||||
(Loss) income before income tax benefit (expense) | |
| (36,461) | |
| 9,673 | | | (381,019) | | | 19,890 | ||||||||||||
Income tax benefit (expense) | |
| 201 | | | (2,501) | | | 495 | | | (3,250) | ||||||||||||
Net (loss) income | |
| (36,260) | |
| 7,172 | | | (380,524) | | | 16,640 | ||||||||||||
Less: net loss (income) attributable to noncontrolling interests | |
| 5,719 | | | (1,793) | | | 59,823 | | | (3,926) | ||||||||||||
Net (loss) income attributable to Select Energy Services, Inc. | | $ | (30,541) | | $ | 5,379 | | $ | (320,701) | | $ | 12,714 | ||||||||||||
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Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||||||||
Net (loss) income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||||||||
Class A—Basic | | $ | 0.07 | | $ | 0.29 | | $ | 0.16 | | $ | 0.69 | | $ | (0.36) | | $ | 0.07 | | $ | (3.76) | | $ | 0.16 |
Class A-2—Basic | | $ | — | | $ | — | | $ | — | | $ | 0.69 | ||||||||||||
Class B—Basic | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||||||||
Net (loss) income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||||||||
Class A—Diluted | | $ | 0.07 | | $ | 0.29 | | $ | 0.16 | | $ | 0.69 | | $ | (0.36) | | $ | 0.07 | | $ | (3.76) | | $ | 0.16 |
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)
| | | | | | | | | | | | |
| | 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 |
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net (loss) income | | $ | (36,260) | | $ | 7,172 | | $ | (380,524) | | $ | 16,640 |
Other comprehensive (loss) income | |
|
| |
|
| | | | | | |
Foreign currency translation adjustment, net of tax of $0 | | | — | | | 380 | | | — | | | 368 |
Comprehensive (loss) income | |
| (36,260) | |
| 7,552 | | | (380,524) | | | 17,008 |
Less: comprehensive loss (income) attributable to noncontrolling interests | |
| 5,719 | |
| (1,888) | | | 59,823 | | | (4,013) |
Comprehensive (loss) income attributable to Select Energy Services, Inc. | | $ | (30,541) | | $ | 5,664 | | $ | (320,701) | | $ | 12,995 |
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, 20192020 and 20182019
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | | | | Other | | | | | | | | | | | Stockholders | | Stockholders | | | | | Accumulated | | Accumulated | | | | | | | | | | |||||||||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | | | | Comprehensive | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | (Deficit) | | Other | | Total | | | | | | | ||||||||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | Retained | | Income | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | ||||||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| (Deficit) |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Income |
| 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) | | | — | ||||||||||||||||||||||||||||
Balance as of December 31, 2019 |
| 87,893,525 | | $ | 879 |
| 16,221,101 | | $ | 162 |
| $ | 914,699 | | $ | 21,437 | | $ | — | | $ | 937,177 | | $ | 175,635 | | $ | 1,112,812 | ||||||||||||||||||||||||||||||||||||||
ESPP shares issued | | 8,746 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 79 | | | — | | | — | | | 79 | | | 1 | | | 80 | | 10,834 | | | — | | — | | | — | | | 65 | | | — | | | — | | | 65 | | | (6) | | | 59 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 9,045 | | | — | | | — | | | 9,045 | | | 2,829 | | | 11,874 | | — | | | — | | — | | | — | | | 3,419 | | | — | | | — | | | 3,419 | | | 639 | | | 4,058 |
Issuance of restricted shares |
| 1,391,479 | |
| 14 |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 3,590 | |
| — | |
| — | |
| 3,604 | |
| (3,604) |
|
| — |
| 1,477,488 | | | 15 | | — | | | — | | | 2,407 | | | — | | | — | | | 2,422 | | | (2,422) | | | — |
Exercise of restricted stock units |
| 1,250 | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| 4 | |
| — | |
| — | |
| 4 | |
| (4) |
|
| — |
| 625 | | | — | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | (1) | | | — |
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) | | (2,199,824) | | | (22) | | — | | | — | | | (12,270) | | | — | | | — | | | (12,292) | | | 1,416 | | | (10,876) |
Restricted shares forfeited | | (10,017) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (36) | | | — | | | — | | | (36) | | | 36 | | | — | | (358,521) | | | (4) | | — | | | — | | | (527) | | | — | | | — | | | (531) | | | 531 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (349) |
|
| (349) | ||||||||||||||||||||||||||||
Noncontrolling interest in subsidiary |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (133) | | | (133) | ||||||||||||||||||||||||||||||||||||||
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 89 | | | — | | | — | | | 89 | | | (89) | | | — | | — | | | — | | — | | | — | | | 38 | | | — | | | — | | | 38 | | | (38) | | | — |
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 | ||||||||||||||||||||||||||||
Net loss |
| — | | | — | | — | | | — | | | — | | | (320,701) | | | — | | | (320,701) | | | (59,823) | | | (380,524) | ||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2020 |
| 86,824,127 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 907,832 | | $ | (299,264) | | $ | — | | $ | 609,598 | | $ | 115,798 | | $ | 725,396 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | Retained | | Other | | | | | | | | | | | Stockholders | | Stockholders | | | | | | | Accumulated | | | | | | | | | | ||||||||||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | Earnings | | Comprehensive | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | | | Other | | Total | | | | | | | |||||||||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | (Accumulated | | Income | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | ||||||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit) |
| (Deficit) |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| 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) |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| — | ||||||||||||||||||||||||||||
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 | | 14,305,146 | | | 144 | | — | | | — | | (14,305,146) | | | (144) | | — | | | — | | | 146,865 | | | — | | | — | | | 146,865 | | | (146,865) | | | — | | 7,564,868 | | | 75 | | (7,564,868) | | | (75) | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — |
ESPP shares issued | | 6,413 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 99 | | | — | | | — | | | 99 | | | (13) | | | 86 | | 8,746 | | | — | | — | | | — | | | 79 | | | — | | | — | | | 79 | | | 1 | | | 80 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 5,543 | | | — | | | — | | | 5,543 | | | 2,487 | | | 8,030 | | — | | | — | | — | | | — | | | 9,045 | | | — | | | — | | | 9,045 | | | 2,829 | | | 11,874 |
Issuance of restricted shares | | 438,182 | | | 4 | | — | | | — | | — | | | — | | — | | | — | | | 2,321 | | | — | | | — | | | 2,325 | | | (2,325) | | | — | | 1,391,479 | | | 14 | | — | | | — | | | 3,590 | | | — | | | — | | | 3,604 | | | (3,604) | | | — |
Exercise of restricted stock units | | 27,860 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 104 | | | — | | | — | | | 104 | | | (104) | | | — | | 1,250 | | | — | | — | | | — | | | 4 | | | — | | | — | | | 4 | | | (4) | | | — |
Stock options exercised | | 79,333 | | | 1 | | — | | | — | | — | | | — | | — | | | — | | | 1,018 | | | — | | | — | | | 1,019 | | | (374) | | | 645 | | 5,282 | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 |
Repurchase of common stock | | (62,777) | | | (1) | | (6) | | | — | | — | | | — | | — | | | — | | | (803) | | | — | | | — | | | (804) | | | (73) | | | (877) | | (1,597,150) | | | (16) | | — | | | — | | | (15,886) | | | — | | | — | | | (15,902) | | | 2,501 | | | (13,401) |
Restricted shares forfeited | | (49,638) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (380) | | | — | | | — | | | (380) | | | 379 | | | (1) | | (10,017) | | | — | | — | | | — | | | (36) | | | — | | | — | | | (36) | | | 36 | | | — |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (506) | | | (506) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (349) | | | (349) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 229 | | | — | | | — | | | 229 | | | (229) | | | — | | — | | | — | | — | | | — | | | 89 | | | — | | | — | | | 89 | | | (89) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (319) | | | (319) | | | (176) | | | (495) | | — | | | — | | — | | | — | | | 19 | | | — | | | 368 | | | 387 | | | 85 | | | 472 |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 50,012 | |
| — | |
| 50,012 | |
| 22,409 |
|
| 72,421 |
| — | |
| — |
| — | |
| — |
|
| — | |
| 12,714 | |
| — | |
| 12,714 | |
| 3,926 |
|
| 16,640 |
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 | ||||||||||||||||||||||||||||
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 |
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 September 30, 20192020 and 20182019
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | | | | Other | | | | | | | | | | | Stockholders | | Stockholders | | | | | Accumulated | | Accumulated | | | | | | | | | | |||||||||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | | | | Comprehensive | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | (Deficit) | | Other | | Total | | | | | | | ||||||||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | Retained | | Income | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | ||||||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| (Deficit) |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Income |
| 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) | | | — | ||||||||||||||||||||||||||||
Balance as of June 30, 2020 |
| 86,883,049 | | $ | 869 |
| 16,221,101 | | $ | 162 |
| $ | 906,164 | | $ | (268,723) | | $ | — | | $ | 638,472 | | $ | 121,165 | | $ | 759,637 | ||||||||||||||||||||||||||||||||||||||
ESPP shares issued | | 3,079 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 21 | | | — | | | — | | | 21 | | | 3 | | | 24 | | 3,194 | | | — | | — | | | — | | | 17 | | | — | | | — | | | 17 | | | (2) | | | 15 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 2,774 | | | — | | | — | | | 2,774 | | | 792 | | | 3,566 | | — | | | — | | — | | | — | | | 1,889 | | | — | | | — | | | 1,889 | | | 353 | | | 2,242 |
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) | | (43,923) | | | — | | — | | | — | | | (249) | | | — | | | — | | | (249) | | | 11 | | | (238) |
Restricted shares forfeited | | (1,195) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | 13 | | | — | | (18,193) | | | (1) | | — | | | — | | | (19) | | | — | | | — | | | (20) | | | 20 | | | — |
Distributions to noncontrolling interests, net |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (124) |
|
| (124) | ||||||||||||||||||||||||||||
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 40 | | | — | | | — | | | 40 | | | (40) | | | — | | — | | | — | | — | | | — | | | 30 | | | — | | | — | | | 30 | | | (30) | | | — |
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 | ||||||||||||||||||||||||||||
Net loss |
| — | |
| — |
| — | |
| — |
|
| — | |
| (30,541) | |
| — | |
| (30,541) | |
| (5,719) |
|
| (36,260) | ||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2020 |
| 86,824,127 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 907,832 | | $ | (299,264) | | $ | — | | $ | 609,598 | | $ | 115,798 | | $ | 725,396 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A-2 | | Class B | | Preferred | | | | | | | | Accumulated | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | | | ||||||||||||||||||||
| | Stockholders | | Stockholders | | Stockholders | | Stockholders | | | | | | | Other | | | | | | | | | | | Stockholders | | Stockholders | | | | | | | Accumulated | | | | | | | | | | ||||||||||||||||||||||
| | | | Class A | | | | Class A-2 | | | | Class B | | | | | | | Additional | | | | Comprehensive | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | | | Other | | Total | | | | | | | |||||||||||||
| | | | Common | | | | Common | | | | Common | | | | Preferred | | Paid-In | | Retained | | Income | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | ||||||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| (Deficit) |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Loss |
| 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 | ||||||||||||||||||||||||||||
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 | | 3,356,477 | | | 34 | | — | | | — | | (3,356,477) | | | (34) | | — | | | — | | | 35,062 | | | — | | | — | | | 35,062 | | | (35,062) | | | — | | 7,564,868 | | | 75 | | (7,564,868) | | | (75) | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — |
ESPP shares issued | | 2,427 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 49 | | | — | | | — | | | 49 | | | (17) | | | 32 | | 3,079 | | | — | | — | | | — | | | 21 | | | — | | | — | | | 21 | | | 3 | | | 24 |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 1,926 | | | — | | | — | | | 1,926 | | | 639 | | | 2,565 | | — | | | — | | — | | | — | | | 2,774 | | | — | | | — | | | 2,774 | | | 792 | | | 3,566 |
Issuance of restricted shares | | 7,587 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 60 | | | — | | | — | | | 60 | | | (60) | | | — | | 17,549 | | | — | | — | | | — | | | 41 | | | — | | | — | | | 41 | | | (41) | | | — |
Stock options exercised | | 42,124 | | | — | | — | | | — | | — | | | — | | — | | | — | | | 642 | | | — | | | — | | | 643 | | | (375) | | | 268 | | 5,282 | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 |
Repurchase of common stock | | (17,743) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (220) | | | — | | | — | | | (221) | | | 1 | | | (220) | | (1,444,648) | | | (14) | | — | | | — | | | (14,347) | | | — | | | — | | | (14,361) | | | 2,476 | | | (11,885) |
Restricted shares forfeited | | (30,998) | | | — | | — | | | — | | — | | | — | | — | | | — | | | (310) | | | — | | | — | | | (310) | | | 309 | | | (1) | | (1,195) | | | — | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | 13 | | | — |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (226) | | | (226) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (124) | | | (124) |
NCI income tax adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 229 | | | — | | | — | | | 229 | | | (229) | | | — | | — | | | — | | — | | | — | | | 40 | | | — | | | — | | | 40 | | | (40) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 131 | | | 131 | | | 45 | | | 176 | | — | | | — | | — | | | — | | | 19 | | | — | | | 380 | | | 399 | | | 89 | | | 488 |
Net income |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 22,951 | |
| — | |
| 22,951 | |
| 8,316 |
|
| 31,267 |
| — | |
| — |
| — | |
| — |
|
| — | |
| 5,379 | |
| — | |
| 5,379 | |
| 1,793 |
|
| 7,172 |
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 | ||||||||||||||||||||||||||||
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 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.statements
9
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| | | | | | |
| | 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 |
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities |
| | | | | |
Net (loss) income | | $ | (380,524) | | $ | 16,640 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities | |
| | |
| |
Depreciation and amortization | |
| 77,771 | |
| 91,482 |
Net loss on disposal of property and equipment | |
| 1,316 | |
| 4,971 |
Bad debt expense | |
| 6,108 | |
| 1,764 |
Amortization of debt issuance costs | |
| 516 | |
| 516 |
Inventory write-downs | | | 787 | | | 228 |
Equity-based compensation | |
| 4,058 | |
| 11,874 |
Impairment of goodwill and trademark | |
| 276,016 | |
| 4,396 |
Impairment and abandonment of property and equipment | | | 7,910 | | | 942 |
Loss on divestitures | | | 411 | | | 3,262 |
Other operating items, net | |
| 158 | |
| 259 |
Changes in operating assets and liabilities | |
| | |
| |
Accounts receivable | |
| 171,700 | |
| 14,835 |
Prepaid expenses and other assets | |
| 11,761 | |
| 9,774 |
Accounts payable and accrued liabilities | |
| (58,160) | |
| (18,727) |
Net cash provided by operating activities | |
| 119,828 | |
| 142,216 |
Cash flows from investing activities | |
| | |
| |
Working capital settlement | |
| — | |
| 691 |
Proceeds received from divestitures | |
| 197 | |
| 24,927 |
Purchase of property and equipment | |
| (19,100) | |
| (86,374) |
Acquisitions, net of cash received | |
| — | |
| (10,400) |
Proceeds received from sales of property and equipment | |
| 15,854 | |
| 13,958 |
Net cash used in investing activities | |
| (3,049) | |
| (57,198) |
Cash flows from financing activities | |
| | |
| |
Borrowings from revolving line of credit | | | — | | | 5,000 |
Payments on long-term debt | |
| — | |
| (50,000) |
Payments of finance lease obligations | | | (189) | | | (743) |
Proceeds from share issuance | | | 59 | | | 110 |
Contributions from (distributions to) noncontrolling interests | |
| 383 | |
| (349) |
Repurchase of common stock | |
| (10,876) | |
| (13,401) |
Net cash used in financing activities | |
| (10,623) | |
| (59,383) |
Effect of exchange rate changes on cash | |
| 14 | |
| 127 |
Net increase in cash and cash equivalents | |
| 106,170 | |
| 25,762 |
Cash and cash equivalents, beginning of period | |
| 79,268 | |
| 17,237 |
Cash and cash equivalents, end of period | | $ | 185,438 | | $ | 42,999 |
Supplemental cash flow disclosure: | |
| | |
| |
Cash paid for interest | | $ | 1,413 | | $ | 2,421 |
Cash paid for income taxes, net | | $ | 544 | | $ | 1,675 |
Supplemental disclosure of noncash operating activities: | |
| | |
| |
Noncash asset exchange | | $ | 1,578 | | $ | — |
Supplemental disclosure of noncash investing activities: | |
| | |
| |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 2,061 | | $ | 13,442 |
Noncash proceeds received from sale of interest in a formerly consolidated joint venture | | $ | 367 | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
10
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 common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings” or the “Predecessor”).
We are a leading provider of comprehensive water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. WithinThrough a combination of organic growth and acquisitions over the major shale playslast decade, we have developed a leading position in the U.S., we believe we are a market leader in water sourcing, water transfer (both by permanent pipeline and temporary hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic fracture stimulation or “fracking,” which we refer to collectively as “pre-frac water services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including 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.solutions industry. We believe we are the only company in the oilfield services industry that combines full life cyclecomprehensive water-management services with the ability to develop and provide related chemical products. Furthermore, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance of responsibly managing water resources through our operations to help conserve fresh water and protect the environment is paramount to our continued success.
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 Common Stock”) following the Company’s initial public offering (“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 1 share for each SES Holdings LLC Unit held by Legacy Owner Holdco. On April 26, 2017, the Company completed its IPO of 8,700,000 shares of Class A Common Stock. ShareholdersHolders 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 2 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 PartyRelated-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, 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), 7,564,868year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for 7,564,8689,805,742 shares of Class A
11
Common Stock, and 7,564,8689,805,742 shares of Class B Common Stock were cancelled.
2017 Business Combinations: The Company completed 3 business combinations There were 0 exchanges 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.Current Period (as defined below).
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 StatesU.S. (“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-QQuarterly Report relates to the three and nine months ended September 30, 20192020 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 20182019 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s annual report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Form 10-K”) filed with the SEC on March 1, 2019,February 25, 2020 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.Quarterly Report. 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 aremay not necessarilybe indicative of the results to be expected for the full year.year, in part due to the COVID-19 pandemic.
The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-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 September 30, 2019,2020, the Company had 1 cost-method investee.investment. 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 3 operating and reportable segments. OperatingReportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals, following its decision in the first quarter of 2019 to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its subsidiary Affirm Oilfield Services, LLC (“Affirm”), its sand hauling operations and Canadian operations.Chemicals.
The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, containment, water treatmentcontainment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business, which were previously a part of the former Wellsite Services segment. business.
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,pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt watersaltwater disposal wells, primarily serving E&P companies.
The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well. OurGiven the breadth of chemicals and application expertise we provide, our Oilfield Chemicals customers are primarily pressure pumpers, along withbut also include major integrated and independent oil and gas producers.
The results of our divested service lines that were previously a part of the former Wellsite Services segment,divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined in the “Other” category.
The unaudited interim consolidated financial statements in this report reflect our new segment structure, and the statements12
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, 2018,2019, included in the Company’s most recent Annual Report on2019 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-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities and 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.
Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. The duration and severity of the COVID-19 pandemic and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.
The following table presents the changes to the allowance for the Current Period:
| | | |
| | Nine months ended September 30, 2020 | |
| | (in thousands) | |
Balance at December 31, 2019 | | $ | 5,773 |
Increase to allowance based on a percentage of Current Period revenue | |
| 943 |
Adjustment based on aged receivable analysis | |
| 5,165 |
Charge-offs | | | (2,150) |
Balance at September 30, 2020 | | $ | 9,731 |
13
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 16 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:
| | | | | | |
|
| Nine months ended September 30, 2019 |
| Nine months ended September 30, 2020 | ||
|
| (in thousands) |
| (in thousands) | ||
Balance at beginning of Current Period |
| $ | 1,898 | |||
Balance at December 31, 2019 |
| $ | 1,527 | |||
Accretion expense, included in depreciation and amortization expense |
| | 86 |
| | 92 |
Change in estimate |
| | — | |||
Divestitures | | | (210) | |||
Balance at end of Current Period |
| $ | 1,774 | |||
Disposals |
| | (219) | |||
Payments | | | (163) | |||
Balance at September 30, 2020 |
| $ | 1,237 |
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.
Lessor Income: As of September 30, 2020, the Company had 2 facility leases and 15 facility subleases that are accounted for as follows:
| | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, | |||||||||
| |
| 2020 |
| 2019 |
| 2020 | | 2019 |
| ||||
| | | (in thousands) | | (in thousands) | |||||||||
Category | Classification | | | | | | | | | | | | | |
Lessor income | Cost of sales | | $ | 67 | | $ | 184 | | $ | 279 | | $ | 364 | |
Sublease income | Lease abandonment costs and Cost of sales | | | 355 | | | 393 | | | 1,091 | | | 1,155 | |
The Company also generates short-term equipment rental revenue. See Note 5—Revenue for a discussion of revenue recognition for the accommodations and rentals business.
Operating leases: Primarily due to future uncertainty stemming from the COVID-19 pandemic, certain renewal options were no longer considered reasonably certain of being exercised as of June 30, 2020. This caused a reduction of approximately $5.7 million in right of use assets and lease liabilities on the consolidated balance sheets during the second quarter of 2020. Additionally, the Company has successfully negotiated certain lease payment deferrals as well as lease payment reductions that are being accounted for as modifications, with no impact to straight-line lease expense from lease payment deferrals and a reduction in straight-line rent expense from lease payment reductions.
Defined Contribution Plan: During the Current Period, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) Plan and incurred 0 match expense in the Current Period. The Company incurred $0.9 million and $3.4 million of match expense in the Prior Quarter and Prior Period, respectively.
Payroll Tax Deferral: In the Current Period, the Company began taking advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and has deferred the payment of $3.8 million of payroll taxes as of September 30, 2020. The deferral is included in other long-term liabilities on the accompanying consolidated balance sheets. The amounts being deferred during 2020, must be repaid half by December 31, 2021 and half by December 31, 2022.
Recent accounting pronouncements: In FebruaryJune 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.
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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
14
modified retrospective transition approach. After 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 isin the first quarter of 2020 did not expectedhave a material impact to the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 in the Current Quarter and elected all aspects of this standard as of the beginning of 2020. The adoption did not have a material impact to the Company’s financial statements.
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NOTE 3—ACQUISITIONSIMPAIRMENTS 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:OTHER COSTS
| | | |
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 |
Significant challenges that emerged during the Current Period, and that are expected to continue, have had and will likely continue to have a negative impact on our results of operations. The COVID-19 pandemic has caused a worldwide slowdown in economic activity, resulting in a sharp decline in global oil demand and therefore, lower oil and natural gas prices. Global oil demand is expected to remain challenged at least until the COVID-19 pandemic can be contained. In response to lower oil and gas prices, our E&P customers have cut capital spending, resulting in a sharp drop in the number of wells drilled and completed in all of our markets. Reduced demand for our services has had a material, negative impact on our Current Quarter and Current Period financial results. While oil prices and U.S. unconventional completions activity have partially recovered from the recent lows, given the continued uncertainty around the COVID-19 pandemic and the associated impact on oil demand, we are unable to predict if, when, and by how much the demand for our services and therefore our financial performance will improve.
Pro Well Acquisition
On November 20, 2018,Because the Company acquired Pro Well Testingmagnitude 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 expanded the Company’s flowback footprint into New Mexico and added 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 valueduration of the COVID-19 pandemic is unknown, we cannot forecast with reasonable certainty its impact on our business, financial condition or near or longer-term financial or operational results. However, we currently expect that our 2020 net assets acquiredincome will be negative. During the Current Period, we have taken actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by $1.1 million,reducing headcount, reducing salaries and director compensation, idling facilities, closing yard locations, reducing third-party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the remainder of 2020, in accordance 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 operationsprovisions of the acquiredCARES Act, and may take advantage of future legislation passed by the United States Congress in response to the COVID-19 pandemic.
As a result of the downturn in our business, are includedwe recorded impairment expenses in the Company’s Water Services segment. Thefirst half of 2020 related to goodwill, acquiredproperty and equipment and other intangible assets. There is deductibleno assurance that we will not have additional impairments in subsequent quarters.
A summary of impairment, severance, yard closure and lease abandonment costs for tax purposes. The following table summarizes the Current Quarter, Prior Quarter, Current Period and Prior Period were as follows:
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Impairment of goodwill and trademark | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 186,468 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 80,466 | | | — | |
Oilfield Chemicals | | | — | | | — | | | 9,082 | | | — | |
Other | | | — | | | — | | | — | | | 4,396 | |
Total impairment of goodwill and trademark | | $ | — | | $ | — | | $ | 276,016 | | $ | 4,396 | |
For a discussion of the impairments to goodwill and trademark, See Note 8—Goodwill and Other Intangible Assets.
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| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Impairment and abandonment of property and equipment | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 3,894 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 4,016 | | | — | |
Other | | | — | | | 49 | | | — | | | 942 | |
Total impairment and abandonment of property and equipment | | $ | — | | $ | 49 | | $ | 7,910 | | $ | 942 | |
During the Current Period, the Company recorded an impairment of $7.9 million related to certain equipment that was determined to be obsolete. During the Prior Quarter and Prior Period, the Company recorded an impairment of a nominal amount and $0.9 million, respectively, of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds at that time.
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Severance | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 4,569 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 500 | | | — | |
Oilfield Chemicals | | | — | | | — | | | 813 | | | — | |
Other | | | — | | | — | | | 1,286 | | | 1,680 | |
Total severance expense | | $ | — | | $ | — | | $ | 7,168 | | $ | 1,680 | |
| | | | | | | | | | | | | |
Yard closure costs | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 2,645 | | $ | — | |
Oilfield Chemicals | | | — | | | — | | | 316 | | | — | |
Total yard closure costs | | $ | — | | $ | — | | $ | 2,961 | | $ | — | |
| | | | | | | | | | | | | |
Lease abandonment costs | | | | | | | | | | | | | |
Water Services | | $ | 673 | | $ | 173 | | $ | 2,456 | | $ | 620 | |
Water Infrastructure | | | — | | | — | | | 51 | | | — | |
Oilfield Chemicals | | | — | | | 4 | | | 42 | | | 11 | |
Other | | | (1) | | | 61 | | | (56) | | | 863 | |
Total lease abandonment costs | | $ | 672 | | $ | 238 | | $ | 2,493 | | $ | 1,494 | |
During the Current Quarter, the Company recorded $0.7 million of lease abandonment costs due to revised sublease income expectations on certain leases as well as accretion of expenses for previously abandoned facilities. During the Prior Quarter, the Company recorded $0.2 million of lease abandonment costs related to accretion of expenses for previously abandoned facilities.
During the Current Period, the Company recorded exit-disposal costs including $7.2 million of severance costs, with $1.1 million of accrued severance at September 30, 2020, $3.0 million in accrued yard closure costs recognized within costs of revenue on the accompanying consolidated statements of operations with $0.4 million accrued yard closure costs at September 30, 2020, and $2.5 million of lease abandonment costs. Severance costs of $4.0 million and $3.2 million are recognized within costs of revenue and selling, general and administrative expenses, respectively, on the accompanying consolidated statements of operations. During the Prior Period, the Company recorded exit-disposal costs including $1.7 million of severance recognized within selling, general and administrative expenses on the accompanying
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consolidated statements of operations, and $1.5 million of lease abandonment costs, both of which primarily related to the Company’s divested service lines.
NOTE 4—Acquisitions
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 $10.0 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 lifecycle of water, from pre-fracturing treatment through reuse 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 and valuation of the inventory and property and equipment acquired, customer relationships, and current liabilities were finalized as of December 31, 2019. 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:
| | | | | ||
Purchase price allocation |
| Amount |
| Amount | ||
Consideration transferred |
| (in thousands) |
| (in thousands) | ||
Cash paid | | $ | 11,754 | | $ | 10,000 |
Total consideration transferred |
| | 11,754 |
| | 10,000 |
Less: identifiable assets acquired and liabilities assumed |
| |
|
| |
|
Working capital |
| | 1,051 | |||
Inventory |
| | 5,221 | |||
Property and equipment |
| | 6,588 |
| | 4,473 |
Customer relationship intangible assets |
| | 3,000 | |||
Customer relationships |
| | 476 | |||
Current liabilities | | | (170) | |||
Total identifiable net assets acquired |
| | 10,639 |
| | 10,000 |
Goodwill | | | 1,115 | |||
Fair value allocated to net assets acquired | | $ | 11,754 | | $ | 10,000 |
Divestitures
Affirm and Canadian Operations Divestitures
During the Current Period, the Company closed on 4 sale transactions and wound down the remaining Affirm and Canadian operations. The Company sold property and equipment with a combined net book value of $18.6 million and assigned contracts to the buyers. Additionally, 2 of the 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 crane operation divestiture in the first quarter of 2019, 0 gain or loss was initially recognized and goodwill was reduced by $2.6 million. Additionally, during the first quarter of 2019, the Company recorded an impairment of the remaining Affirm goodwill of $4.4 million (see Note 8).
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NOTE 4—5—REVENUE
Effective for the year ended December 31, 2018, the
The Company adoptedfollows ASU 2014-09, Revenue from Contracts with Customers(Topic (Topic 606), using the modified retrospective adoption method. There was no impact on the consolidated financial statements and no cumulative effect adjustment was recognized. Althoughfor 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 lessaccommodations and (iii) to exclude transaction price taxes assessedrentals revenue is guided by governmental authorities as revenue.ASC 842 – Leases.
The following factors are applicable to all three3 of the Company’s segments for the first nine months of 20192020 and 2018,2019, respectively:
● | The vast majority of customer agreements are short-term, lasting less than one year. |
● | Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements. |
● | Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the services rendered and products delivered to date. |
● | Contract terminations before the end of the agreement are rare. |
● | Sales returns are rare and no sales return assets have been recognized on the balance sheet. |
● | There are minimal volume discounts. |
● | There are no service-type warranties. |
● | There is no long-term customer financing. |
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
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rendered reflected as accounts receivable trade, net of allowance for doubtful accounts.credit losses. 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 agreements that start in one period and end in another. As of September 30, 2019,2020, the Company had fourfive contracts in place for these segments lasting over aone 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.
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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.credit losses. Customer returns are rare and immaterial and there were no material in-process customer agreements for this segment as of September 30, 20192020, lasting greater than one year.
The Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from renting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of September 30, 2019,2020, no material rental agreements lasted more than aone 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, | | Three months ended September 30, | | Nine months ended September 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 | | 2019 | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Geographic Region | | | | | | | | | | | | | | | | | | | | | | | | |
Permian Basin | | $ | 158,609 | | $ | 166,330 | | $ | 469,391 | | $ | 449,113 | | $ | 38,804 | | $ | 158,609 | | $ | 213,440 | | $ | 469,391 |
Eagle Ford | | | 10,089 | | | 44,694 | | | 56,425 | | | 124,453 | ||||||||||||
Haynesville/E. Texas | | | 21,096 | | | 18,322 | | | 54,819 | | | 53,918 | ||||||||||||
MidCon | | | 45,522 | | | 58,275 | | | 152,500 | | | 187,300 | | | 11,579 | | | 45,522 | | | 44,277 | | | 152,500 |
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 | | | 11,021 | | | 21,330 | | | 44,111 | | | 79,781 |
Rockies | | | 21,045 | | | 23,228 | | | 64,981 | | | 85,908 | | | 4,488 | | | 21,045 | | | 30,284 | | | 64,981 |
Haynesville/E. Texas | | | 18,322 | | | 13,319 | | | 53,918 | | | 43,328 | ||||||||||||
Bakken | | | 4,938 | | | 20,052 | | | 30,040 | | | 66,195 | ||||||||||||
All other/eliminations | | | (606) | | | 10,140 | | | 4,282 | | | 37,977 | | | (773) | | | (606) | | | (1,630) | | | 4,282 |
Total | | $ | 328,968 | | $ | 396,970 | | $ | 1,015,501 | | $ | 1,166,612 | | $ | 101,242 | | $ | 328,968 | | $ | 471,766 | | $ | 1,015,501 |
In the Water Services segment, the top 3 revenue producingrevenue-producing regions are the Permian Basin, MidConEagle Ford and Eagle Ford,Marcellus/Utica, which collectively comprised 75%66%, 73%72%, 75%71% and 71%72% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Water Infrastructure segment, the top 2 revenue producingrevenue-producing regions are the Permian Basin and Bakken, which collectively comprised 87%, 84%, 85%,86% and 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 producing3 revenue-producing regions are the Permian Basin, Haynesville/E. Texas and MidCon, which collectively comprised 79%96%, 81%90%, 77%86% and 76%88% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
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NOTE 5—LEASES
As of September 30, 2019, the Company was the lessee for approximately 576 operating leases with durations greater than a year, approximately 16 subleases, approximately 41 finance leases, and is the lessor for 3 owned properties. Most of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term. In addition to normal lease activity, the four Affirm and Canadian divestitures occurring in the Current Period included the assignment of leases to the buyers. The assigned leases impacted expenses during the Current Period, but were not included in the 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 1 facility lease for the corporate office building in Gainesville, Texas. The majority of the Company’s long-term lease expenses are at fixed prices.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement. Due to the volatility of the price of a barrel of oil and the short-term nature of the Company’s contracts with customers, the Company has 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 as of December 31, 2018. Upon adopting the new lease standard, the former exit-disposal cease use liability was reclassified and factored into the initial right-of-use (“ROU”) asset impairment calculation.
The financial impact of leases is listed in the tables below:
| | | | | |
Balance Sheet |
| Classification |
| As of 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 |
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| | | | | | | | |
| | | | 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 |
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The Company has the following operating and finance lease commitments as of 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 |
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:
| | | | | | | | | | | | |
|
| September 30, 2019 |
| December 31, 2018 |
| | | | | | ||
|
| September 30, 2020 |
| December 31, 2019 | ||||||||
| | (in thousands) | | (in thousands) | ||||||||
Raw materials | | $ | 12,873 | | $ | 15,219 | | $ | 16,898 | | $ | 12,365 |
Finished goods | |
| 26,280 | |
| 28,540 | |
| 17,468 | |
| 24,724 |
Materials and supplies | |
| 460 | |
| 1,233 | |
| — | |
| 453 |
| | $ | 39,613 | | $ | 44,992 | ||||||
Total | | $ | 34,366 | | $ | 37,542 |
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 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, a nominal amount, $0.8 million, and $0.4$0.2 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was $4.2 million and $4.1 million as of September 30, 2020 and December 31, 2019, respectively. 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.
2320
NOTE 7—PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of September 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | |
|
| September 30, 2019 |
| December 31, 2018 |
| | | | | | ||
|
| September 30, 2020 |
| December 31, 2019 | ||||||||
| | (in thousands) | | (in thousands) | ||||||||
Land | | $ | 16,030 | | $ | 17,799 | | $ | 14,013 | | $ | 16,030 |
Buildings and leasehold improvements | |
| 107,894 | |
| 106,626 | |
| 92,232 | |
| 97,426 |
Vehicles and equipment | |
| 57,774 | |
| 83,435 | |
| 31,665 | |
| 53,819 |
Vehicles and equipment - finance lease | |
| 1,526 | |
| 1,833 | |
| 784 | |
| 1,291 |
Machinery and equipment | |
| 732,184 | |
| 758,528 | |
| 617,066 | |
| 659,835 |
Machinery and equipment - finance lease | |
| 48 | |
| 532 | |
| 612 | |
| 162 |
Pipelines | | | 72,111 | | | 69,327 | ||||||
Computer equipment and software | | | 18,777 | | | 15,775 | | | 6,697 | | | 8,051 |
Computer equipment and software - finance lease | |
| 356 | |
| 356 | |
| 356 | |
| 356 |
Office furniture and equipment | |
| 4,650 | |
| 4,612 | |
| 962 | |
| 1,157 |
Disposal wells | |
| 64,962 | |
| 64,038 | |
| 49,965 | |
| 64,149 |
Other | | | 497 | | | 497 | | | — | | | 497 |
Construction in progress | |
| 79,398 | |
| 60,347 | |
| 21,517 | |
| 43,279 |
| |
| 1,084,096 | |
| 1,114,378 | |
| 907,980 | |
| 1,015,379 |
Less accumulated depreciation(1) | |
| (617,740) | |
| (611,530) | |
| (538,380) | |
| (562,986) |
Property and equipment held-for-sale | | | 890 | | | — | ||||||
Property and equipment held-for-sale, net | | | — | | | 885 | ||||||
Total property and equipment, net | | $ | 467,246 | | $ | 502,848 | | $ | 369,600 | | $ | 453,278 |
(1) | Includes |
Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in Note 8 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | |||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 | | 2019 |
| ||||||||
| | (in thousands) | | (in thousands) | |||||||||||||||||||||
Category | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense from property and equipment | | $ | 26,163 | | $ | 29,505 | | $ | 81,698 | | $ | 84,181 | | $ | 21,449 | | $ | 26,163 | | $ | 68,720 | | $ | 81,698 | |
Amortization expense from finance leases | | | 54 | | | 293 | | | 791 | | | 1,037 | | | 123 | | | 54 | | | 239 | | | 791 | |
Amortization expense from intangible assets | | | 2,998 | | | 3,039 | | | 8,993 | | | 10,294 | | | 2,960 | | | 2,969 | | | 8,939 | | | 8,907 | |
Accretion expense from asset retirement obligations | | | 30 | | | 29 | | | (127) | | | 86 | | ||||||||||||
Total depreciation and amortization | | $ | 29,215 | | $ | 32,837 | | $ | 91,482 | | $ | 95,512 | | $ | 24,562 | | $ | 29,215 | | $ | 77,771 | | $ | 91,482 | |
24
Property and Equipment Held-for-Sale and Impairments
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the first quarterSee Note 3 for impairment and abandonment of 2019, the Company made the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. This decision led us to classify the property and 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 showsduring the propertyCurrent Quarter 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 |
Prior Quarter.
During the Current Period, the Company recorded an impairmentsold the remaining Canadian assets that were previously designated as held for sale at a loss of $0.9$0.1 million of Canadian property and equipment to write down the carrying value basedrecognized within gains (losses) on the expected future sale proceeds. In addition, during the Current Period, the net loss on divestitures and sales of property, equipment and equipment held-for-sale was $3.5 million.divestitures, net on the accompanying consolidated statements of operations.
2521
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 first quarter of 2019,2020, the Affirm goodwill was reduced to 0 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,Company had triggering events in connection with the resulting significant adverse change to the demand for the Company’s segment realignment,services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes as well as the COVID-19 pandemic. This included uncertainty regarding oil prices and the length of the recovery following the significant market disruption in the oil and gas industry. Given the volatile market environment at March 31, 2020, the Company reallocated goodwill fromutilized third-party valuation advisors to assist with these evaluations. These evaluations included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on our weighted-average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. The Company performed quantitative tests for reporting units in both the 2018 Water Solutions segment to reporting units in the 2019 Water Services and Water Infrastructure segments using the income and market approaches, resulting in a full impairment to goodwill in both segments.
The changes in the carrying amounts of goodwill by reportable segment as of September 30, 20192020 and December 31, 20182019 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 |
| | | | | | | | | |
| | Water | | Water | | | | ||
|
| Services |
| Infrastructure |
| Total | |||
| | | | | | | | | |
Balance as of December 31, 2019 | | | 186,468 | | | 80,466 | | | 266,934 |
Impairment | | | (186,468) | | | (80,466) | | | (266,934) |
Balance as of September 30, 2020 | | $ | — | | $ | — | | $ | — |
The components of other intangible assets, net as of September 30, 20192020 and December 31, 20182019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2019 | | As of December 31, 2018 | | As of September 30, 2020 | | As of December 31, 2019 | |||||||||||||||||||||||||||||||
|
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Gross |
| |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net | |||||||||||||
| | Value | | Amortization | | Value | | Value | | Amortization | | Value | | Value | | Impairment | | Amortization | | Value | | Value | | Amortization | | Value | |||||||||||||
| | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) | |||||||||||||||||||||||||||||||
Definite-lived | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 116,578 | | $ | 17,966 | | $ | 98,612 | | $ | 171,245 | | $ | 66,402 | | $ | 104,843 | | $ | 116,554 | | $ | — | | $ | (27,036) | | $ | 89,518 | | $ | 116,554 | | $ | (20,233) | | $ | 96,321 |
Patents | | | 10,110 | | | 2,169 | | | 7,941 | | | 10,110 | | | 1,417 | | | 8,693 | | | 9,741 | | | — | | | (2,923) | | | 6,818 | | | 10,110 | | | (2,420) | | | 7,690 |
Other | | | 7,516 | | | 4,573 | | | 2,943 | |
| 7,234 | |
| 2,866 | |
| 4,368 | | | 7,234 | | | — | | | (6,160) | | | 1,074 | |
| 7,234 | |
| (4,766) | |
| 2,468 |
Total definite-lived | | | 134,204 | | | 24,708 | | | 109,496 | | | 188,589 | | | 70,685 | | | 117,904 | | | 133,529 | | | — | | | (36,119) | | | 97,410 | | | 133,898 | | | (27,419) | | | 106,479 |
Indefinite-lived | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Water rights | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 |
Trademarks | | | 23,442 | | | — | | | 23,442 | | | 23,442 | | | — | | | 23,442 | | | 23,442 | | | (9,082) | | | — | | | 14,360 | | | 23,442 | | | — | | | 23,442 |
Total indefinite-lived | | | 30,473 | | | — | | | 30,473 | | | 30,473 | | | — | | | 30,473 | | | 30,473 | | | (9,082) | | | — | | | 21,391 | | | 30,473 | | | — | | | 30,473 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets, net | | $ | 164,677 | | $ | 24,708 | | $ | 139,969 | | $ | 219,062 | | $ | 70,685 | | $ | 148,377 | | $ | 164,002 | | $ | (9,082) | | $ | (36,119) | | $ | 118,801 | | $ | 164,371 | | $ | (27,419) | | $ | 136,952 |
Due to the triggering events discussed above, the Company also tested all intangible assets for impairment during the first quarter of 2020. These evaluations included significant judgment, including discount rates based on our weighted-average cost of capital and the royalty rate. This resulted in $9.1 million of impairment to trademarks using the relief from royalty method, which was recorded in the Oilfield Chemicals segment.
22
The weighted averageweighted-average amortization period for customer relationships, patents, and other definite lived assets was 11.09.9 years, 8.07.0 years, and 2.22.6 years, respectively, as of September 30, 2019.2020. See Note 7 for the amortization expense during the Current Quarter, Prior Quarter, Current Period and Prior 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 |
26
2022 | |
| 10,263 | |||
2023 | |
| 10,192 | |||
| | | | |||
|
| Amount | ||||
| | (in thousands) | ||||
Remainder of 2020 | | $ | 2,722 | |||
Year ending December 31, 2021 | |
| 10,466 | |||
Year ending December 31, 2022 | |
| 10,252 | |||
Year ending December 31, 2023 | |
| 10,180 | |||
Year ending December 31, 2024 | |
| 10,111 | |||
Thereafter | | | 63,913 | | | 53,679 |
| | $ | 109,496 | |||
Total | | $ | 97,410 |
2723
NOTE 9—DEBT
Credit facility and revolving line of credit
On November 1, 2017, SES Holdings and Select Energy Services, LLC (“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% |
| | | | |
Level | | Average Revolver Usage | | Unused Line Fee Percentage |
| | | | |
I | | ≥ 50% of the commitments | | 0.250% |
II | | < 50% of the commitments | | 0.375% |
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
2824
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“Note 13—Related Party TransactionsRelated-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 0 borrowings and $45.0 million outstanding under the Credit Agreement as of September 30, 20192020 and December 31, 2018, respectively. The weighted-average interest rate of outstanding borrowings under the Credit Agreement was 4.256% as of December 31, 2018.2019. As of September 30, 20192020 and December 31, 2018,2019, the borrowing base under the Credit Agreement was $228.4$63.6 million and $270.5$214.6 million, respectively. The significant reduction in our borrowing base since December 31, 2019 was driven primarily by the meaningful reductions during the Current Period in our accounts receivable, which represent the primary collateral for the borrowing base.The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of $19.9$15.6 million and $20.8$19.9 million as of September 30, 20192020 and December 31, 2018,2019, respectively. The Company’s letters of credit have a variable interest rate 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 $208.5$48.0 million as of September 30, 2019.2020.
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 September 30, 20192020 and December 31, 20182019, were $2.1$1.4 million and $2.6$2.0 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheets. Amortization expense related to debt issuance costs was $0.2 million, $0.2 million, $0.5 million and $0.5 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
The Company was in compliance with all debt covenants as of September 30, 2019.2020.
2925
NOTE 10—COMMITMENTS AND CONTINGENCIES
Litigation
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.
CertainAs previously disclosed, certain subsidiaries acquired in the Rockwater Mergermerger 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”).Agency. It is alleged that certain employees at some of the facilities altered emissions controls systems on 4%less than 5% of the vehicles in the fleet in violation of the Clean Air Act. The Company is cooperatingcontinuing to cooperate with the relevant authorities to resolve the matter. Atmatter, and while at this time no administrative, civil or criminal charges have been brought against the Company, and the Company cannot estimateaccrued $4.3 million related to the possible finessettlement of this investigation prior to the Current Quarter and penaltiesmade an initial payment of $1.2 million related to this accrual during the Current Quarter. The Company does not believe that maythe ultimate resolution of this matter will be levied againstmaterial to the Company.Company’s financial statements.
Self-Insured Reserves
We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters.matters, and effective June 1, 2020, health insurance. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
3026
NOTE 11—EQUITY-BASED COMPENSATION
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.Company’s board of directors approved the First Amendment to the 2016 Plan (the “Equity“ First Equity Plan Amendment”), which clarifiesclarified the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater Mergermerger 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 First 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 heldmerger. Stockholders holding a majority of the Company’s outstanding common stock ofapproved the Company, approved theFirst Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment2017, and such amendment became effective on November 1, 2017 upon the consummation of the Rockwater Merger. merger.
On February 28, 2020, the Company’s board of directors approved the Second Amendment to the 2016 Plan (the “Second Equity Plan Amendment”), which increases the number of shares of the Company’s Class A Common Stock that may be issued under the 2016 Plan by 4,000,000 shares. The effectiveness of the Second Equity Plan Amendment was subject to approval by the Company's stockholders. Stockholders holding a majority of the Company’s outstanding common stock approved the Second Equity Plan Amendment on May 8, 2020, and such amendment became immediately effective.
Currently, the maximum number of shares reserved for issuance under the 2016 Plan, taking into account the impact of the Rockwater Merger,Second Equity Plan Amendment, is approximately 9.313.3 million shares. For all share-based compensation award types, the Company accounts for forfeitures as they occur.
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, certainCertain 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 equity-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected life of the options was based on the vesting period and term of the options awarded, which is ten years. NaN stock options were granted in 2019 or in the Current Period.
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A summary of the Company’s stock option activity and related information as of and for the Current Period is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2019 | | For the nine months ended September 30, 2020 | ||||||||||||||||
| | | | | | | Weighted-average | | | | | | | | | | Weighted-average | | | |
| | | | Weighted-average | | Remaining Contractual | | Aggregate Intrinsic | | | | Weighted-average | | Grant Date Value | | Aggregate Intrinsic | ||||
|
| Stock Options |
| Exercise Price |
| Term (Years) |
| Value (in thousands) (a) |
| Stock Options |
| Exercise Price |
| Term (Years) |
| Value (in thousands) (a) | ||||
Beginning balance, outstanding |
| 3,865,678 | | $ | 16.00 | | 4.9 | | $ | 19 |
| 3,797,319 | | $ | 15.95 | | 4.2 | | $ | 509 |
Granted |
| — | | | — | | | | | | ||||||||||
Exercised | | (5,282) | | | 5.68 | | | | | | ||||||||||
Forfeited |
| (12,459) | | | 17.83 | | | | | |
| (22,437) | | | 18.52 | | | | | |
Expired | | (32,638) | | | 21.85 | | | | | | | (238,104) | | | 14.05 | | | | | |
Ending balance, outstanding |
| 3,815,299 | | $ | 15.96 | | 4.5 | | $ | 71 |
| 3,536,778 | | $ | 16.06 | | 3.6 | | $ | — |
Ending balance, exercisable | | 3,369,567 | | $ | 15.27 | | 4.0 | | $ | 71 | | 3,533,403 | | $ | 16.06 | | 3.6 | | $ | — |
Nonvested at end of period | | 445,732 | | $ | 21.15 | | | | | | ||||||||||
Nonvested at September 30, 2020 | | 3,375 | | $ | 22.22 | | | | | |
(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 $8.66$3.84 and $6.32$9.28 as of September 30, 20192020 and December 31, 2018,2019, respectively.
The Company recognized a nominal amount, $1.0 million, $1.2 million, $3.4$0.2 million and $3.9$3.4 million of compensation expense related to stock options during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2019,2020, there was $1.2 milliona nominal amount of unrecognized equity-based compensation expense remaining related to nonvested stock options. This cost is expected to be recognized over a weighted-average period of one year.
Restricted Stock Awards and Restricted Stock Units
The value of the restricted stock awards and restricted stock units issuedgranted was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $2.1 million, $2.3 million, $1.1 million, $6.3$5.8 million and $3.2$6.3 million related to the restricted stock awards and restricted stock units for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2019,2020, there was $11.5$8.9 million of unrecognized compensation expense with a weighted-average remaining life of 1.51.9 years related to unvested restricted stock awards and restricted stock units.awards.
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
| | | | | | | | | | |
| | For the nine months ended September 30, 2019 | | For the nine months ended September 30, 2020 | ||||||
| | | | Weighted-average | | | | Weighted-average | ||
|
| Restricted Stock Awards |
| Grant Date Fair Value |
| Restricted Stock Awards |
| Grant Date Fair Value | ||
Nonvested at December 31, 2018 | | 496,945 | | $ | 19.02 | |||||
Nonvested at December 31, 2019 | | 1,518,193 | | $ | 10.08 | |||||
Granted | | 1,391,479 | | | 8.80 | | 1,477,488 | | | 5.80 |
Vested | | (259,989) | | | 18.81 | | (578,281) | | | 11.79 |
Forfeited | | (10,532) | | | 19.79 | | (398,550) | | | 7.50 |
Nonvested at September 30, 2019 | | 1,617,903 | | $ | 10.26 | |||||
Nonvested at September 30, 2020 | | 2,018,850 | | $ | 6.97 |
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A summary of the Company’s restricted stock unit activity and related information for the Current Period is as follows:
| | | | | | | | | | |
| | For the nine months ended September 30, 2019 | | For the nine months ended September 30, 2020 | ||||||
| | | | Weighted-average | | | | Weighted-average | ||
|
| Restricted Stock Units |
| Grant Date Fair Value |
| Restricted Stock Units |
| Grant Date Fair Value | ||
Nonvested at December 31, 2018 |
| 2,500 | | $ | 19.00 | |||||
Granted |
| — | | | — | |||||
Nonvested at December 31, 2019 |
| 1,250 | | $ | 19.00 | |||||
Vested |
| (1,250) | | | 19.00 |
| (625) | | | 20.00 |
Nonvested at September 30, 2019 |
| 1,250 | | $ | 19.00 | |||||
Forfeited |
| (625) | | | 18.00 | |||||
Nonvested at September 30, 2020 |
| — | | $ | — |
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 granted in 2018 and 2019 is 1; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2021 for the 2018 PSU grants, and June 30, 2022 for the 2019 PSU grants, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with the following table:
| | |
Return on Assets at Performance Period End Date | | Percentage of Target PSUs Earned |
Less than 9.6% | | 0% |
9.6% | | 50% |
12% | | 100% |
14.4% | | 175% |
During 2020, the Company approved grants of PSUs that are subject to both performance-based and service-based vesting provisions related to (i) return on asset performance (“ROA”) in comparison to thirteen peer companies and (ii) Adjusted Free Cash Flow (“FCF”) performance percentage. The grant datenumber of shares of Class A Common Stock issued to a recipient upon vesting of the PSUs will be calculated based on ROA and FCF performance over the period from January 1, 2020 through December 31, 2022.
The target number of shares of Class A Common Stock subject to each PSU granted in 2020 is one; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2023 for the 2020 PSU grants, assuming the minimum performance metrics are achieved.
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The target PSUs that become earned connected with the ROA in comparison to other companies will be determined based on the Company’s Average Return on Assets (as defined in the applicable PSU agreement) relative to the Average Return on Assets of the peer companies (as defined in the applicable PSU agreement) in accordance with the following table, but only if the Company’s Average Return on Assets is equal to or greater than 5% during the performance period:
| | |
Ranking Among Peer Group | | Percentage of Target Amount Earned |
Outside of Top 10 | | 0% |
Top 10 | | 50% |
Top 7 | | 100% |
Top 3 | | 175% |
The target PSUs that become earned in connection with the adjusted FCF performance percentage will be determined (as defined in the applicable PSU agreement) in accordance with the following table:
| | |
Adjusted FCF Performance Percentage | | Percentage of Target Amount Earned |
Less than 70% | | 0% |
70% | | 50% |
100% | | 100% |
130% | | 175% |
The fair value ofon the date the PSUs were granted during 2020, 2019 and 2018 was $4.4 million, $7.0 million and $5.9 million, and the grant fair value of PSUs granted during the Current Period was $7.0 million.respectively. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest by the measurement-date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. During the Current Period, the Company revised the estimates for the PSUs granted in 2018 and 2019 and expected to vest to 0%. The Company recognized compensation expense of $0.2 million, compensation expense of $0.1 million, $0.1 million, $1.8a reduction to compensation expense of $2.0 million and $0.7compensation expense of $1.8 million related to the PSUs for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
As of September 30, 2019,2020, the fair value of outstanding PSUs issued was $8.9 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $5.4$2.3 million and is expected to be recognized over a weighted-average period of 1.6 years2.3 years. However, this compensation cost will be adjusted as of September 30, 2019.appropriate throughout the applicable performance periods.
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The following table summarizes the information about the performance share units outstanding as of September 30, 2019:2020:
| | |
|
| Performance Share Units |
Nonvested as of December 31, | |
|
Target shares granted | |
|
|
|
|
|
|
|
Target shares outstanding as of September 30, | |
|
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 arewere subject to both market-based and service-based vesting provisions. These awards will vestvested after a two-year service period and, if earned, would have settled in shares of Class A Common Stock. The ultimate amount earned iswas based on the achievement of the market metrics, which iswas based on the stock price of the Class A Common Stock at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date iswas forfeited. The target amount that becomesbecame earned during the performance period will bewas determined in accordance with the following table: