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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2013
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: 001-33816
Delaware | 26-0287117 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
14624 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254
(602) 903-7802
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s common stock as of November 7, 2013 was 259,944,134.
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Item 1. | 5 | |||||
Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 | 5 | |||||
6 | ||||||
7 | ||||||
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Condensed Consolidated Statement of Changes in Equity for the nine months ended September 30, 2013 | 9 | |||||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 | ||||
Item 3. | 48 | |||||
Item 4. | 48 | |||||
48 | ||||||
Item 1. | 48 | |||||
Item 1A. | 49 | |||||
Item 2. | 50 | |||||
Item 3. | 50 | |||||
Item 4. | 50 | |||||
Item 5. | 50 | |||||
Item 6. | 51 |
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Forward-Looking Statements
This Quarterly Report on Form-10-Q contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
• | future financial performance and growth targets or expectations; |
• | market and industry trends and developments; |
• | the benefits of our completed and future merger, acquisition and disposition transactions; and |
• | plans to increase operational capacity, including additional trucks, saltwater disposal and underground injection wells, frac tanks, rail cars, processing facilities and pipeline construction or expansion. |
You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” and similar expressions, and variations or negatives of these words.
These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and our current expectations, forecasts and assumptions and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
• | financial results that may be volatile and may not reflect historical trends due to, among other things, acquisition and disposition activities, fluctuations in consumer trends, pricing pressures, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate; |
• | risks associated with our indebtedness, including our ability to manage our liquidity needs and to comply with covenants under our credit facilities, the indenture governing our outstanding 9.875% Senior Notes due 2018 (the “2018 Notes”) and other existing financing obligations; |
• | difficulties in identifying and completing acquisitions, and differences in the type and availability to us of consideration or financing for such acquisitions; |
• | difficulties encountered in integrating acquired or merged assets, businesses, employees and management teams; |
• | our ability to attract, motivate and retain key executives and qualified employees in key areas of our business; |
• | availability of supplies of used motor oil and demand for recycled fuel oil, and prices thereof; |
• | fluctuations in prices and demand for commodities such as oil and natural gas; |
• | changes in customer drilling activities and capital expenditure plans, including impacts due to low oil and/or natural gas prices or the economic or regulatory environment; |
• | risks associated with the operation, construction and development of salt water disposal wells and pipelines, including access to additional disposal well locations and pipeline rights-of-way, and unscheduled delays or inefficiencies; |
• | the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets; |
• | changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty; |
• | reduced demand for our services, including due to regulatory or other influences related to extraction methods such as fracturing, shifts in production into shale areas in which we do not currently have operations or the loss of key customers; |
• | control of costs and expenses; |
• | present and possible future claims, litigation or enforcement actions or investigations; |
• | natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism that may impact our corporate headquarters, assets (including our wells or pipelines), or distribution channels, or which otherwise disrupt the markets we serve; |
• | the threat or occurrence of international armed conflict; |
• | the unknown future impact on our business from the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules to be promulgated thereunder; |
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• | risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and gas extraction and re-refining businesses, particularly relating to water usage, disposal, transportation and treatment, uses of refined fuel oil, collection of used motor oil, and transportation of oil; |
• | uncertainties in evaluating goodwill and long-lived assets for potential impairment; and |
• | other risks referenced from time to time in our past and future filings with the United States Securities and Exchange Commission (“SEC”) including in this Quarterly Report on Form 10-Q. |
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.
Where You Can Find Other Information
Our website is www.nuverra.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed or furnished therewith, are also available at the SEC’s website at www.sec.gov. You may also obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
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NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
Item 1. | Financial Statements. |
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
September 30, 2013 | December 31, 2012 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 9,935 | $ | 16,211 | ||||
Restricted cash | 83 | 3,536 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $6,011 and $5,967 at September 30, 2013 and December 31, 2012, respectively | 101,314 | 117,528 | ||||||
Inventories | 5,596 | 5,710 | ||||||
Prepaid expenses and other receivables | 11,237 | 8,587 | ||||||
Deferred income taxes | 11,963 | 12,495 | ||||||
Other current assets | 656 | 1,824 | ||||||
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Total Current Assets | 140,784 | 165,891 | ||||||
Property, plant and equipment, net of accumulated depreciation of $131,048 and $63,064 at September 30, 2013 and December 31, 2012, respectively | 522,657 | 604,870 | ||||||
Equity investments | 4,020 | 8,279 | ||||||
Intangibles, net | 248,978 | 284,698 | ||||||
Goodwill | 456,696 | 555,091 | ||||||
Other long-term assets | 22,905 | 25,510 | ||||||
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Total Assets | $ | 1,396,040 | $ | 1,644,339 | ||||
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Liabilities and Equity | ||||||||
Accounts payable | $ | 35,973 | $ | 29,538 | ||||
Accrued liabilities | 57,894 | 41,274 | ||||||
Accrued interest | 18,559 | 8,991 | ||||||
Current portion of contingent consideration | 8,155 | 1,968 | ||||||
Current portion of long-term debt | 5,475 | 4,699 | ||||||
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Total Current Liabilities | 126,056 | 86,470 | ||||||
Deferred income taxes | 60,041 | 128,992 | ||||||
Long-term debt | 529,686 | 561,427 | ||||||
Long-term contingent consideration | 9,140 | 8,863 | ||||||
Financing obligation to acquire non-controlling interest | 9,821 | 9,021 | ||||||
Other long-term liabilities | 4,268 | 1,805 | ||||||
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Total Liabilities | 739,012 | 796,578 | ||||||
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Commitments and contingencies (note 12) | ||||||||
Preferred stock, $0.001 par value, (1,000,000 shares authorized, no shares issued and outstanding at September 30, 2013 and December 31, 2012) | — | — | ||||||
Common stock, $0.001 par value, (500,000,000 shares authorized, 274,251,331 shares issued and 259,942,768 outstanding at September 30, 2013 and 266,118,447 shares issued and 251,809,884 outstanding at December 31, 2012) | 273 | 265 | ||||||
Additional paid-in capital | 1,340,550 | 1,318,181 | ||||||
Purchased warrants | — | (6,844 | ) | |||||
Treasury stock | (19,503 | ) | (19,503 | ) | ||||
Accumulated deficit | (664,292 | ) | (444,338 | ) | ||||
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Total Equity of Nuverra Environmental Solutions, Inc. | 657,028 | 847,761 | ||||||
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Total Liabilities and Equity | $ | 1,396,040 | $ | 1,644,339 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Non-rental revenue | $ | 143,286 | $ | 90,465 | $ | 426,470 | $ | 230,566 | ||||||||
Rental revenue | 19,320 | 2,585 | 61,125 | 8,212 | ||||||||||||
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Total revenue | 162,606 | 93,050 | 487,595 | 238,778 | ||||||||||||
Cost of sales | (143,342 | ) | (76,633 | ) | (423,071 | ) | (200,316 | ) | ||||||||
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Gross profit | 19,264 | 16,417 | 64,524 | 38,462 | ||||||||||||
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Operating expenses: | ||||||||||||||||
General and administrative expenses | 37,497 | 10,592 | 71,687 | 27,630 | ||||||||||||
Amortization of intangible assets | 5,874 | 5,281 | 23,531 | 11,413 | ||||||||||||
Goodwill impairment | 98,500 | — | 98,500 | — | ||||||||||||
Long-lived asset impairment | 108,401 | — | 111,900 | — | ||||||||||||
Restructuring and exit costs | — | — | 1,453 | — | ||||||||||||
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Total operating expenses | 250,272 | 15,873 | 307,071 | 39,043 | ||||||||||||
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(Loss) income from operations | (231,008 | ) | 544 | (242,547 | ) | (581 | ) | |||||||||
Interest expense, net | (13,473 | ) | (6,968 | ) | (40,144 | ) | (15,930 | ) | ||||||||
Income from equity investment | 183 | — | 41 | — | ||||||||||||
Loss on extinguishment of debt | — | — | — | (2,638 | ) | |||||||||||
Other expense, net | (4,355 | ) | (2,287 | ) | (5,487 | ) | (2,565 | ) | ||||||||
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Loss before income taxes | (248,653 | ) | (8,711 | ) | (288,137 | ) | (21,714 | ) | ||||||||
Income tax benefit (expense) | 54,915 | (634 | ) | 68,918 | 19,249 | |||||||||||
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Net loss attributable to common stockholders | $ | (193,738 | ) | $ | (9,345 | ) | $ | (219,219 | ) | $ | (2,465 | ) | ||||
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Loss per share: | ||||||||||||||||
Basic | $ | (0.78 | ) | $ | (0.06 | ) | $ | (0.90 | ) | $ | (0.02 | ) | ||||
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Diluted | $ | (0.78 | ) | $ | (0.06 | ) | $ | (0.90 | ) | $ | (0.02 | ) | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net loss attributable to common stockholders | $ | (193,738 | ) | $ | (9,345 | ) | $ | (219,219 | ) | $ | (2,465 | ) | ||||
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Other comprehensive loss, net of tax: | ||||||||||||||||
Available-for-sale securities | — | (8 | ) | — | (8 | ) | ||||||||||
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Comprehensive loss, net of tax | $ | (193,738 | ) | $ | (9,353 | ) | $ | (219,219 | ) | $ | (2,473 | ) | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (219,219 | ) | $ | (2,465 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 66,325 | 27,639 | ||||||
Amortization of intangible assets | 23,531 | 11,413 | ||||||
Amortization of deferred financing costs | 3,446 | 352 | ||||||
Loss on extinguishment of debt | — | 2,638 | ||||||
Amortization of issuance discounts and premiums | 106 | — | ||||||
Stock-based compensation | 3,295 | 2,377 | ||||||
Bad debt expense | 1,871 | 955 | ||||||
Deferred income taxes | (69,593 | ) | (20,921 | ) | ||||
Gain from equity investment | (41 | ) | — | |||||
Goodwill impairment | 98,500 | — | ||||||
Impairment of long-lived assets | 111,900 | — | ||||||
Loss on disposal of assets | 637 | 1,771 | ||||||
Write-down of cost method investments | 4,300 | — | ||||||
Other | 532 | 1,781 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 15,096 | (19,774 | ) | |||||
Prepaid expenses, inventory and other assets | (667 | ) | 511 | |||||
Accounts payable and accrued expenses | 26,788 | 518 | ||||||
Accrued interest | 9,568 | 11,145 | ||||||
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Net cash provided by operating activities | 76,375 | 17,940 | ||||||
Cash flows from investing activities: | ||||||||
Cash paid for acquisitions, net of cash acquired | (10,570 | ) | (232,175 | ) | ||||
Purchases of property, plant and equipment | (35,617 | ) | (33,844 | ) | ||||
Proceeds from acquisition-related working capital adjustment | 2,067 | — | ||||||
Proceeds from sale and maturity of available-for-sale securities | — | 5,169 | ||||||
Proceeds from the sale of property and equipment | 1,397 | 6,877 | ||||||
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Net cash used in investing activities | (42,723 | ) | (253,973 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from revolving credit facility | 52,001 | — | ||||||
Payments on revolving credit facility | (84,501 | ) | — | |||||
Payments on capital leases | (3,283 | ) | (3,413 | ) | ||||
Payments on notes payable | (724 | ) | (715 | ) | ||||
Proceeds from issuance of 2018 Notes | — | 248,605 | ||||||
Proceeds from equity offering | — | 74,448 | ||||||
Payments on long-term debt | — | (140,174 | ) | |||||
Payments of contingent consideration | (1,784 | ) | (500 | ) | ||||
Payment of deferred financing costs | (828 | ) | (11,481 | ) | ||||
Other | (809 | ) | 746 | |||||
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Net cash (used in) provided by financing activities | (39,928 | ) | 167,516 | |||||
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Net decrease in cash and cash equivalents | (6,276 | ) | (68,517 | ) | ||||
Cash and cash equivalents at beginning of year | 16,211 | 80,194 | ||||||
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Cash and cash equivalents at end of year | $ | 9,935 | $ | 11,677 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 25,965 | $ | 2,576 | ||||
Cash paid for taxes, net of refunds | 602 | 1,494 | ||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Purchases of property, plant and equipment under capital leases | $ | 5,774 | $ | 20,367 | ||||
Property, plant and equipment purchases in accounts payable | 4,094 | 1,925 | ||||||
Common stock issuances for business acquisitions | 24,286 | 46,122 |
The accompanying notes are an integral part of these consolidated financial statements.
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Equity
Nine months ended September 30, 2013
(Unaudited)
(In thousands, except share data)
Common Stock | Additional Paid-In Capital | Purchased Warrants | Treasury Stock | Accumulated Deficit | ||||||||||||||||||||||||||||||||
Total | Number | Amount | Number | Amount | Number | Amount | ||||||||||||||||||||||||||||||
Balance at December 31, 2012 | $ | 847,761 | 266,118,447 | $ | 265 | $ | 1,318,181 | 11,331,197 | $ | (6,844 | ) | 14,308,563 | $ | (19,503 | ) | $ | (444,338 | ) | ||||||||||||||||||
Stock-based compensation | 3,295 | — | — | 3,295 | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock to employees | — | 153,333 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for acquisitions | 24,286 | 7,408,049 | 7 | 24,279 | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for payment of contingent consideration | 47 | 11,942 | — | 47 | — | — | — | — | — | |||||||||||||||||||||||||||
Shares returned from escrow | (28 | ) | — | — | (28 | ) | — | — | — | — | — | |||||||||||||||||||||||||
Issuance of common stock for legal settlement | 1,621 | 558,660 | 1 | 1,620 | — | — | — | — | — | |||||||||||||||||||||||||||
Retirement of purchased warrants | — | — | — | (6,844 | ) | (11,331,197 | ) | 6,844 | — | — | — | |||||||||||||||||||||||||
Distribution to AWS noncontrolling shareholder | (735 | ) | — | — | — | — | — | — | — | (735 | ) | |||||||||||||||||||||||||
Other | — | 900 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Net loss | (219,219 | ) | — | — | — | — | — | — | — | (219,219 | ) | |||||||||||||||||||||||||
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Comprehensive loss | (219,219 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
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Balance at September 30, 2013 | $ | 657,028 | 274,251,331 | $ | 273 | $ | 1,340,550 | — | $ | — | 14,308,563 | $ | (19,503 | ) | $ | (664,292 | ) | |||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
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NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular dollars in thousands, except share and per share amounts)
(1) Organization and Basis of Presentation
Description of Business
Nuverra Environmental Solutions, Inc., a Delaware corporation, together with its subsidiaries (collectively, the “Company,” “we,” “us” or “our”), is an environmental solutions company providing full-cycle environmental solutions to our customers in energy and industrial end-markets. The Company focuses on the delivery, collection, treatment, recycling, and disposal of restricted solids, water, waste water, used motor oil, spent antifreeze, waste fluids and hydrocarbons.
Since the acquisition of Thermo Fluids Inc. (“TFI”) on April 10, 2012, the Company has operated through two business segments: Shale Solutions (previously referred to as Fluids Management) and Industrial Solutions (previously referred to as Recycling).
Shale Solutions provides comprehensive environmental solutions for “unconventional” oil and gas exploration and production including the delivery, collection, treatment, recycling, and disposal of restricted environmental products used in the development of unconventional oil and natural gas fields. Shale Solutions currently operates in select shale areas in the United States including the predominately oil-rich shale areas consisting of the Utica, Eagle Ford, Tuscaloosa Marine, Mississippian Lime and Permian Shale areas and, since the completion of the merger with Badlands Power Fuels, LLC on November 30, 2012, the Bakken Shale basin, and the predominately gas-rich shale areas consisting of the Haynesville, Marcellus and Barnett Shale areas. Shale Solutions serves customers seeking fresh water acquisition, temporary water transmission and storage, transportation, treatment, recycling or disposal of complex water flows, such as flowback and produced brine water, and solids such as drill cuttings, and management of other environmental products in connection with shale oil and gas hydraulic fracturing drilling, or “hydrofracturing,” operations. In addition, Shale Solutions rents certain of its equipment to customers, including providing for delivery and pickup.
In the fourth quarter of 2013, the Company announced a strategic organizational realignment of Shale Solutions into three operating divisions: (1) the Northeast Division comprising the Marcellus and Utica Shale areas (2) the Southern Division comprising the Haynesville, Barnett, Eagle Ford, Mississippian Shale areas and Permian Basin and (3) the Rocky Mountain Division comprising the Bakken Shale area. The implementation of this change is ongoing and is not expected to be finalized until early 2014. Refer to Note 13 for additional information.
Industrial Solutions provides route-based environmental services and waste recycling solutions that focus on the collection and recycling of used motor oil (“UMO”) and is the largest seller of reprocessed fuel oil (“RFO”) from recovered UMO in the Western United States. The Company also provides environmental services including the recycling of spent anti-freeze and oil filters. In October 2013, the Company’s board of directors authorized commencement of a process to divest TFI, also known as Industrial Solutions. Refer to Note 16 for additional information.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth herein. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidation.
Our condensed consolidated balance sheet as of December 31, 2012, included herein, has been derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 18, 2013 (our “2012 Annual Report on Form 10-K”). Unless stated otherwise, any reference to income statement items in these accompanying unaudited interim condensed consolidated financial statements refers to results from continuing operations. In addition, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted from these financial statements and related notes pursuant to the rules and regulations of the SEC. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2012 Annual Report on Form 10-K as well as other information we have filed with the SEC.
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Impairment of Long-Lived Assets and Goodwill
The Company tests its goodwill and long-lived assets including other identifiable intangible assets, with finite useful lives, for impairment if and when events or changes in circumstances indicate the carrying value of goodwill and/or long-lived assets may not be recoverable. Due to the existence of impairment indicators, which were present at June 30, 2013, and previously disclosed, the Company performed a company-wide impairment review of its long-lived assets, and goodwill, which it completed during the quarter ended September 30, 2013. Indicators of impairment include adverse changes in the business climate of certain Shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in the Company’s Industrial Solutions operating segment combined with lower-than-expected financial results, and the fact that the market value of the equity of the Company traded for a period of time at a value that was less than book value of the equity of the Company. In connection with the impairment review, the Company recognized charges for impairment of long-lived assets and goodwill of $108.4 million and $98.5 million, respectively, in the three months ended September 30, 2013. Refer to Note 5 to the condensed consolidated financial statements for additional information.
Use of Estimates
Our consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of the financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of operations and cash flows in order to conform to the current year’s presentation. As a result of the Power Fuels merger (see Note 3) rental revenue and non-rental revenue are now presented separately in the condensed consolidated statement of operations. Additionally, other non-cash items affecting net cash provided by operating activities are presented in greater detail.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02,Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income(“ASU 2013-02”). The amendments in this update do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012, which for the Company is the reporting period starting January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements. As permitted under ASU 2013-02, the Company will elect to present reclassification adjustments from each component of accumulated other comprehensive income within a single note to the financial statements beginning in 2013 if and when reclassification adjustments are made. There were no reclassification adjustments from any components of accumulated other comprehensive income during the nine months ended September 30, 2013 and 2012.
In July 2012, the FASB issued ASU No. 2012-02,Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Accounting Standards Codification subtopic 350-30,General Intangibles other than Goodwill. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for the Company are the annual and interim periods starting January 1, 2013. As of December 31, 2012, the Company did not have any intangible assets with indefinite lives. At this time, the Company does not anticipate the adoption of ASU 2012-02 will have a material impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,Testing Goodwill for Impairment (“ASU 2011-08”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The amendment does not change the
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requirement to perform the second step of the interim goodwill impairment test to measure the amount of an impairment loss, if any, if the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for the Company were the annual and interim periods starting January 1, 2012. As previously discussed, the Company performed an assessment of qualitative factors at June 30, 2013 and concluded that impairment indicators were present. These impairment indicators include adverse changes in the business climate of certain Shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in the Company’s Industrial Solutions operating segment combined with lower-than-expected financial results, and the fact that the market value of the equity of the Company traded for a period of time at a value that was less than book value of the equity of the Company. The Company completed its impairment review of long-lived assets and goodwill during the quarter ended September 30, 2013. See Notes 4 and 5 to the Condensed Consolidated Financial Statements for additional information.
(2) Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common stock equivalent shares during the period. Common stock equivalent shares result from the assumed exercises of outstanding warrants, restricted stock, and stock options, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock.
For the purpose of the computation of EPS, shares issued in connection with acquisitions that are contingently returnable are classified as issued but are not included in the basic weighted average number of shares outstanding until all applicable conditions are satisfied such that the shares are no longer contingently returnable. As of September 30, 2013 and 2012, respectively, excluded from the computation of basic EPS are approximately 10.4 million and 7.9 million of contingently returnable shares that are subject to sellers’ indemnification obligations and were being held in escrow as of such dates.
The following table presents the calculation of basic and diluted net loss per common share (in thousands except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss attributable to common stockholders | $ | (193,738 | ) | $ | (9,345 | ) | $ | (219,219 | ) | $ | (2,465 | ) | ||||
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Denominator: | ||||||||||||||||
Weighted average shares - basic | 248,538,766 | 147,655,773 | 243,155,155 | 139,312,830 | ||||||||||||
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Common stock equivalents (a) | — | — | — | — | ||||||||||||
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Total weighted average shares - diluted | 248,538,766 | 147,655,773 | 243,155,155 | 139,312,830 | ||||||||||||
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Loss per common share - basic | $ | (0.78 | ) | $ | (0.06 | ) | $ | (0.90 | ) | $ | (0.02 | ) | ||||
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Loss per common share - diluted | $ | (0.78 | ) | $ | (0.06 | ) | $ | (0.90 | ) | $ | (0.02 | ) | ||||
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Antidilutive stock-based awards excluded (b) | 3,395,833 | 2,801,833 | 3,445,833 | 2,851,833 | ||||||||||||
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(a) | For the three and nine months ended September 30, 2013 and 2012, no shares of common stock underlying stock options, restricted stock or other common stock equivalents were included in the computation of diluted EPS because the inclusion of such shares would be antidilutive based on the net losses reported. |
(b) | Represents stock options with exercise prices that exceeded the average market prices of our common stock for the three and nine months ended September 30, 2013 and 2012. |
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(3) Acquisitions
2013 Acquisitions
During the nine months ended September 30, 2013, the Company completed three acquisitions in Shale Solutions, including two in the Marcellus/Utica Shale (trucking and disposal assets) and one in the Bakken Shale (an oilfield waste disposal landfill). On July 9, 2013, the Company acquired Ideal Oilfield Disposal, LLC (“Ideal”), a greenfield oilfield disposal landfill site located in North Dakota. The acquisition includes land, certain land improvements and a disposal permit. Total consideration was $24.6 million including stock valued at $6.7 million, cash of $9.8 million, and contingent consideration of approximately $8.1 million. Refer to Note 12 for additional information regarding the contingent consideration related to Ideal. Further, the Company will pay the former owners of Ideal certain additional amounts based on future revenues of the landfill, which will be expensed as incurred.
The aggregate purchase price of the acquired businesses was approximately $42.9 million consisting of 7,408,050 shares of the Company’s common stock with an estimated fair value of approximately $24.3 million, cash consideration of approximately $10.5 million and contingent consideration of approximately $8.1 million. The results of operations of the three acquisitions were not material to our consolidated results of operations during the nine-month period.
The preliminary allocations of the combined aggregate purchase prices at the respective 2013 acquisition dates are summarized as follows (in thousands):
Accounts receivable | $ | 753 | ||
Other current assets | 13 | |||
Property, plant and equipment | 41,942 | |||
Customer relationships | 400 | |||
Goodwill | 341 | |||
Accounts payable and accrued liabilities | (189 | ) | ||
Other long-term liabilities | (302 | ) | ||
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Total | $ | 42,958 | ||
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The goodwill relates to the pool of customer-qualified drivers acquired in connection with one of the Marcellus/Utica acquisitions.
Power Fuels Merger
On November 30, 2012, the Company and its wholly-owned subsidiary, Rough Rider Acquisition, LLC completed a merger (the “Power Fuels Merger”) with Badlands Power Fuels, LLC (collectively with its subsidiaries, “Power Fuels”) of which the Company’s Chief Executive Officer and Vice Chairman, Mark D. Johnsrud, was the sole member. Prior to the merger, Power Fuels was a privately-held North Dakota-based environmental solutions company providing delivery and disposal of environmental products, fluids transportation and handling, water sales, and equipment rental services for unconventional oil and gas exploration and production customers. As a result of the Power Fuels Merger on November 30, 2012, Power Fuels and its subsidiaries became wholly-owned subsidiaries of the Company.
The aggregate purchase price was approximately $498.8 million (net of settlement of the working capital adjustment of $2.1 million) and was comprised of the following:
• | 95.0 million unregistered shares of the Company’s common stock, with a fair value of approximately $371.5 million, of which 10.0 million shares were placed into escrow for up to three years to pay certain potential indemnity claims; and |
• | $127.3 million in cash including adjustments for targeted versus actual debt and working capital. |
The Power Fuels Merger has been accounted for as a business combination under the acquisition method of accounting. During the nine months ended September 30, 2013, the Company amended its original purchase price allocation to reflect settlement of the working capital adjustment and refinedappraisals of the tangible and intangible assets acquired and liabilities assumed, including related tax effects. Suchadjustments resulted in a decrease in recorded goodwill of $8.7 million. The final allocation of the purchase price is summarized as follows (in thousands):
Cash | $ | 2,111 | ||
Accounts receivable | 57,484 | |||
Inventory | 3,443 | |||
Other assets | 3,271 | |||
Customer relationships | 145,000 | |||
Property, plant and equipment | 287,818 | |||
Goodwill | 304,031 | |||
Accounts payable and accrued expenses | (24,291 | ) | ||
Debt | (150,367 | ) | ||
Deferred income tax liabilities, net | (129,711 | ) | ||
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Total | $ | 498,789 | ||
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The purchase price allocation requires subjective estimates that, if incorrect, could be material to the Company’s consolidated financial statements including the amount of depreciation and amortization expense. The most important estimates for measurement of tangible fixed assets are (a) the cost to replace the asset with a new asset and (b) the economic useful life of the asset after giving effect to its age, quality and condition. The most important estimates for measurement of intangible assets are (a) discount rates and (b) timing and amount of cash flows including estimates regarding customer renewals and cancellations. The adjustments to the purchase price allocation referred to above resulted in a net decrease to depreciation and amortization totaling $1.6 million in the quarter ended September 30, 2013.
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The goodwill recognized is attributable to the premium associated with the immediate entry into the oil-rich Bakken Shale area where Power Fuels has an established workforce and operations.
TFI Acquisition
On April 10, 2012, the Company completed the acquisition of all the issued and outstanding shares of TFI Holdings, Inc. and its wholly-owned subsidiary, Thermo Fluids Inc. (collectively, “TFI”), a route-based environmental services and waste recycling solutions provider that focuses on the collection and recycling of UMO and the sale of RFO from recovered UMO.
The aggregate purchase price of $246.0 million was comprised of approximately $230.2 million in cash, and 4,050,926 shares of the Company’s common stock with a fair value of approximately $15.8 million, which shares were issued in a private placement and were held in escrow in respect of potential indemnification obligations of the sellers of TFI. In connection with the settlement of these indemnification obligations, the aggregate purchase price increased $0.6 million during the three months ended March 31, 2013. The escrow was settled and the shares remaining in escrow were released to the sellers of TFI in April 2013.
The acquisition of TFI has been accounted for as a business combination under the acquisition method of accounting. The allocation of the aggregate purchase price, which was revised in the three months ended March 31, 2013 to reflect the final valuations, is summarized as follows (in thousands):
Accounts receivable | $ | 13,808 | ||
Inventory | 3,456 | |||
Other assets | 1,431 | |||
Customer relationships | 93,200 | |||
Vendor relationships | 16,300 | |||
Other intangibles | 1,400 | |||
Property, plant and equipment | 23,685 | |||
Goodwill | 145,031 | |||
Accounts payable and accrued expenses | (13,045 | ) | ||
Deferred income tax liabilities, net | (39,261 | ) | ||
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Total | $ | 246,005 | ||
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The goodwill recognized was attributable to TFI’s assembled workforce and premium associated with the opportunity to further diversify the Company’s operations and service offerings.
As discussed in Note 16 to the condensed consolidated financial statements in October 2013, the Company’s board of directors authorized a process to divest TFI.
Other 2012 Acquisitions
During the year ended December 31, 2012, the Company completed four other acquisitions, including three in Shale Solutions (one in each of the first, second and third quarters of 2012) and one in Industrial Solutions in the second quarter of 2012. The aggregate purchase price of the acquired businesses was approximately $38.9 million consisting of 7,589,164 shares of the Company’s common stock with an estimated fair value of approximately $30.5 million, cash consideration of approximately $2.6 million and approximately $5.8 million of contingent consideration.
In conjunction with the acquisition completed in Shale Solutions in the third quarter of 2012, the Company acquired a 51% interest in Appalachian Water Services, LLC (“AWS”) which owns and operates a water treatment and recycling facility in Southwestern Pennsylvania, and has a call option to buy the remaining 49% at a fixed price at a stated future date, and the noncontrolling interest holder has a put option to sell the remaining 49% percent to the Company under those same terms. As such, the fixed price of the call option is equal to the fixed price of the put option. In accordance with ASC 480,“Distinguishing Liabilities from Equity”, the option contracts are viewed on a combined basis with the noncontrolling interest and accounted for as the Company’s financing of the purchase of the noncontrolling interest. Accordingly, $9.8 and $9.0 million, representing the present value of the option, was classified as other long-term obligations in the accompanying condensed consolidated balance sheet at September 30, 2013 and December 31, 2012, respectively, with the financing accreted, as interest expense, to the strike price of the option over the period until settlement.
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The allocations of the combined aggregate purchase prices at the respective 2012 acquisition dates are summarized as follows (in thousands):
Accounts receivable | $ | 2,653 | ||
Equipment | 21,317 | |||
Customer relationships | 10,164 | |||
Goodwill | 14,186 | |||
Other long-term obligations | (8,768 | ) | ||
Other liabilities | (613 | ) | ||
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Total | $ | 38,939 | ||
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Pro forma Financial Information Reflecting the Power Fuels Merger, TFI Acquisition and Other Acquisitions
The following unaudited pro forma results of operations was prepared assuming that all of the acquisitions or mergers that occurred during the year ended December 31, 2012 and during the nine months ended September 30, 2013, were completed on January 1, 2012 (in thousands):
(Pro forma) Nine Months Ended September 30, 2013 | (Pro forma) Nine Months Ended September 30, 2012 | |||||||
Revenue | $ | 491,177 | $ | 580,006 | ||||
Depreciation and amortization | 90,682 | 80,847 | ||||||
Income (loss) from operations | (242,143 | ) | 70,564 | |||||
Net income (loss) | (218,977 | ) | 30,405 | |||||
Net income (loss) per share: | ||||||||
Basic | $ | (0.89 | ) | $ | 0.13 | |||
Diluted | $ | (0.89 | ) | $ | 0.12 |
The pro forma results for the nine months ended September 30, 2013 and 2012, include adjustments to reflect additional amortization of intangibles and depreciation of assets associated with the acquired and merged businesses and additional interest expense for debt issued to consummate these transactions. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1, 2012 or of future operations of the Company.
(4) Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the nine months ended September 30, 2013 is as follows (in thousands):
Balance at December 31, 2012 | $ | 555,091 | ||
2013 acquisition addition (Note 3) | 341 | |||
Acquisition adjustments, net | (236 | ) | ||
Goodwill impairment | (98,500 | ) | ||
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Balance at September 30, 2013 | $ | 456,696 | ||
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During the nine months ended September 30, 2013, the Company recorded net adjustments to goodwill for the settlement of working capital adjustments, the refinement of asset valuations for Power Fuels, the settlement of tax indemnification arrangements, the write-off of certain acquisition-related deferred tax balances, and other adjustments.
During the three and nine months ended September 30, 2013, the Company recorded an impairment charge of $98.5 million for the write-down of the carrying value of Industrial Solutions’ goodwill as disclosed in Note 5 below. Goodwill by reporting unit at September 30, 2013 before and after the aforementioned impairment charge is as follows (in thousands):
Pre-Impairment September 30, 2013 | Post-Impairment September 30, 2013 | |||||||
Shale Solutions (excludes Pipeline and AWS) | $ | 390,767 | $ | 390,767 | ||||
Industrial Solutions | 146,500 | 48,000 | ||||||
Pipeline | 7,257 | 7,257 | ||||||
AWS | 10,672 | 10,672 | ||||||
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Total | $ | 555,196 | $ | 456,696 | ||||
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Intangible Assets
Intangible assets consist of the following: (in thousands)
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net | Remaining useful life (a) | Gross carrying amount | Accumulated amortization | Net | Remaining useful life (a) | |||||||||||||||||||||||||
Customer relationships | $ | 257,442 | $ | (35,146 | ) | $ | 222,296 | 11.7 | $ | 268,859 | $ | (15,370 | ) | $ | 253,489 | 12.3 | ||||||||||||||||
Disposal permits | 2,018 | (709 | ) | 1,309 | 7.7 | 2,788 | (472 | ) | 2,316 | 8.3 | ||||||||||||||||||||||
Customer contracts | 17,352 | (3,847 | ) | 13,505 | 13.3 | 17,352 | (3,073 | ) | 14,279 | 14.0 | ||||||||||||||||||||||
Vendor relationships | 16,300 | (4,890 | ) | 11,410 | 4.3 | 16,300 | (2,444 | ) | 13,856 | 5.0 | ||||||||||||||||||||||
Other | 1,195 | (737 | ) | 458 | 1.5 | 1,195 | (437 | ) | 758 | 2.1 | ||||||||||||||||||||||
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$ | 294,307 | $ | (45,329 | ) | $ | 248,978 | 11.6 | $ | 306,494 | $ | (21,796 | ) | $ | 284,698 | 12.1 | |||||||||||||||||
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(a) | Remaining useful life is weighted average, calculated based on the net book value and the remaining amortization period of each respective intangible asset. |
(b) | During the three and nine months ended September 30, 2013, the Company recorded an impairment charge of $4.5 million for the write-down of certain intangibles in the Haynesville, Eagle Ford and Barnett Shale basins. Refer to Note 5 for additional information. Amortization expense was $23.5 million and $11.4 million for the nine months ended September 30, 2013 and 2012, respectively. |
(5) Impairment of Long-Lived Assets and Goodwill
Due to the existence of impairment indicators at June 30, 2013, the Company performed a company-wide impairment review of its long-lived assets, which it completed during the quarter ended September 30, 2013. Indicators of impairment, which triggered the need for such review, include adverse changes in the business climate of certain Shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in the Company’s Industrial Solutions operating segment combined with lower-than-expected financial results. Additionally, the market value of the equity of the Company traded for a period of time at a value that was less than the book value of the equity of the Company. In its Shale Solutions operating segment long-lived assets were grouped at the shale basin level for purposes of assessing their recoverability. Except for AWS and the Company’s pipelines, the Company concluded the basin level is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For those asset groups with carrying values that exceed their undiscounted future cash flows, the Company recognized an impairment charge for the amount by which the carrying values of the asset group exceeded their respective fair values. Long-lived asset impairment was $108.4 million and $111.9 million for the three and nine months ended September 30, 2013, respectively. The impairment charge recognized during the quarter ended September 30, 2013 consists of write-downs to the carrying values of the Company’s freshwater pipeline in the Haynesville Shale basin and certain other long-lived assets, including customer relationship and disposal permit intangibles, associated with the Haynesville, Eagle Ford and Barnett Shale basins. In addition, the Company recognized a $3.5 million impairment charge during the quarter ended June 30, 2013, for the write-down of the carrying value of certain tangible assets in the Tuscaloosa Marine Shale, from which the Company has substantially exited.
At June 30, 2013, due to the presence of the impairment indicators described in the preceding paragraph, the Company concluded it was necessary to perform the first step of the two-step goodwill impairment test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. During the quarter ended September 30, 2013, the Company performed step one of the goodwill impairment test for each of its four reporting units: the Shale Solutions reporting unit, the Industrial Solutions reporting unit, the Pipeline reporting unit and the AWS reporting unit. To measure the fair value of each reporting unit, the Company used a combination of the discounted cash flow method and the guideline public company method. Based on the results of the step-one goodwill impairment review the Company concluded the fair values of the Shale Solutions, Pipeline and the AWS reporting units exceeded their respective carrying amounts and accordingly, the second step of the impairment test was not necessary for these reporting units. Conversely, the Company concluded the fair value of the Industrial Solutions reporting unit was less than its carrying value thereby requiring the Company to proceed to the second step of the two-step goodwill impairment test. The second step of the goodwill impairment test, used to measure the amount of the impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. After allocating the fair value of Industrial Solutions to the assets and liabilities of the reporting unit, the Company concluded the carrying value of reporting unit goodwill exceeded its implied fair value. Accordingly, the Company recognized a charge of $98.5 million during the three months ended September 30, 2013, which is characterized as goodwill impairment in the Company’s condensed consolidated statement of operations.
Impairment charges recorded in the nine months ended September 30, 2013, by reportable segment, consist of the following (in thousands):
Shale Solutions | Industrial Solutions | |||||||
Impairment of property, plant and equipment | $ | 107,413 | $ | — | ||||
Impairment of intangible assets | 4,487 | — | ||||||
Impairment of goodwill | — | 98,500 | ||||||
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Total 2013 impairment | $ | 111,900 | $ | 98,500 | ||||
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The fair values of each of the reporting units as well as the related assets and liabilities utilized to determine the 2013 impairment were measured using Level 2 and Level 3 inputs as described in Note 6.
The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. The Company further believes the most significant assumption used in its analysis is the expected improvement in the margins and overall profitability of its reporting units. However, the Company may not meet its revenue growth and profitability targets, working capital needs and capital expenditures may be higher than forecast, changes in credit or equity markets may result in changes to the Company’s discount rate and general business conditions may result in changes to the Company’s terminal value assumptions for its reporting units. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the Company applied a hypothetical 5% decrease to the estimated fair value of each reporting unit. With respect to the AWS and Pipeline reporting units, the estimated fair value of the reporting units exceeded the carrying value of the reporting units by a substantial amount. However, this hypothetical 5% decrease in fair value would have triggered the need to perform a step two analysis for Shale Solutions. The amount of goodwill associated with Shale Solutions was $390.8 million at September 30, 2013.
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(6) Fair Value Measurements
Measurements
Fair value represents an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
• | Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
• | Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
• | Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 and the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value are as follows (in thousands):
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
September 30, 2013 | ||||||||||||||||
Assets-cost method investments | $ | 3,382 | $ | — | $ | — | $ | 3,382 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | 17,295 | — | — | 17,295 | ||||||||||||
Obligation for AWS call/put option | 9,821 | — | — | 9,821 | ||||||||||||
December 31, 2012 | ||||||||||||||||
Assets-cost method investments | $ | 7,682 | $ | — | $ | — | $ | 7,682 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | 10,831 | — | — | 10,831 | ||||||||||||
Obligation for AWS call/put option | 9,021 | — | — | 9,021 |
The fair value of the contingent consideration was determined using a probability-weighted income approach at the acquisition date and is revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the obligations. Contingent consideration is reported as current portion of contingent consideration and long-term contingent consideration in the Company’s condensed consolidated balance sheets. Changes to the fair value of contingent consideration are recorded as other income (expense), net in the Company’s condensed consolidated statements of operations. Accretion expense related to the increase in the net present value of the contingent liabilities is included in interest expense for the period. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs. Changes to contingent consideration obligations during the nine months ended September 30, 2013 were as follows (in thousands):
Balance at December 31, 2012 | $ | 10,831 | ||
Accretion | 155 | |||
Additions from current year acquisition (Note 3) | 8,140 | |||
Issuance of common stock for payment of contingent consideration | (47 | ) | ||
Cash payments | (1,784 | ) | ||
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Balance at September 30, 2013 | $ | 17,295 | ||
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The fair value of the financing obligation to acquire non-controlling interest represents the present value of the Company’s right to acquire the remaining 49% interest in AWS from the noncontrolling interest holder at a fixed price of $11.0 million payable in shares of the Company’s common stock. The noncontrolling interest holder has a put option to sell the remaining 49% to the Company under the same terms. In accordance with ASC 480, “Distinguishing Liabilities from Equity”, the instrument is accounted for as a financing of the Company’s purchase of the minority interest. Accretion expense related to the increase in the net present value of the AWS call/put option is included in interest expense for the period. Changes to the financing obligation to acquire non-controlling interest during the nine months ended September 30, 2013 are as follows (in thousands):
Balance at December 31, 2012 | $ | 9,021 | ||
Accretion | 800 | |||
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Balance at September 30, 2013 | $ | 9,821 | ||
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In addition to the Company’s assets and liabilities that are measured at fair value on a recurring basis, the Company is required, by U.S. GAAP, to measure certain assets and liabilities at fair value on a nonrecurring basis after initial recognition. Generally, assets, liabilities and reporting units are measured at fair value on a nonrecurring basis as a result of impairment reviews and any resulting impairment charges (See Note 5). In connection with its 2013 impairment review of long-lived assets described in Note 5, the Company measured the fair value of its asset groups for those asset groups deemed not recoverable, based on level 3 inputs consisting of the discounted future cash flows associated with the use and eventual disposition of the asset group. In connection with its 2013 goodwill impairment review described in Note 5, the Company measured the fair value of its reporting units using a combination of the discounted cash flow method and the guideline public company method. The discounted cash flow method is based on level 3 inputs consisting primarily of the Company’s five-year forecast and utilizes forward-looking assumptions and projections as well as factors impacting long-range plans such as pricing, discount rates, commodity prices, etc. The guideline public company method is based on level 2 inputs and considers potentially comparable companies and transactions within the industries where the Company’s reporting units participate, and applies their trading multiples to the Company’s reporting units. This approach utilizes data from actual marketplace transactions, but reliance on its results is limited by difficultly in identifying entities that are specifically comparable to the Company’s reporting units, considering their diversity, relative sizes and levels of complexity. Cost method investments are measured at fair value on a nonrecurring basis when deemed necessary, using observable inputs such as trading prices of the stock as well as using discounted cash flows, incorporating adjusted available market discount rate information and the Company’s estimates for liquidity risk.
(7) Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30, 2013 | December 31, 2012 | |||||||
Accrued payroll and benefits | $ | 10,939 | $ | 7,685 | ||||
Accrued insurance | 9,333 | 3,564 | ||||||
Accrued legal and environmental | 18,003 | 6,457 | ||||||
Accrued taxes | 4,303 | 1,525 | ||||||
Amounts payable to Mark Johnsrud (Note 14) | 83 | 3,536 | ||||||
Accrued operating costs and other | 15,233 | 18,507 | ||||||
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Total accrued liabilities | $ | 57,894 | $ | 41,274 | ||||
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Accrued legal and environmental at September 30, 2013 includes a $16.0 million accrual in connection with the Company’s 2010 class action lawsuit. See Note 12 for additional information.
(8) Restructuring and Exit Costs
In June 2013, the Company initiated the first phase of a plan to restructure its business in certain shale basins and reduce costs, including an exit from the Tuscaloosa Marine Shale. In doing so, the Company recorded a charge of approximately $1.5 million in the quarter ended June 30, 2013. The charges are characterized as restructuring and exit costs in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2013. Such costs consisted of the following (in thousands):
Severance and termination benefits | $ | 944 | ||
Contract termination costs and exit costs | 509 | |||
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Total restructuring and exit costs | $ | 1,453 | ||
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Approximately $0.5 million of the total charge was recorded in the Shale Solutions operating segment while the remainder was recognized at the corporate level. The liability totaled approximately $1.5 million and is included as accrued liabilities in the condensed consolidated balance sheet as of September 30, 2013. A rollforward of the restructuring and exit cost accruals through September 30, 2013 is as follows (in thousands):
Employee Termination Costs (a) | Lease Exit Costs (b) | Other Exit Costs (c) | Total | |||||||||||||
Restructuring and exit costs accrued at December 31, 2012 | $ | — | $ | — | $ | — | $ | — | ||||||||
Restructuring and exit-related costs | 944 | 211 | 298 | 1,453 | ||||||||||||
Cash payments | (329 | ) | (27 | ) | (86 | ) | (442 | ) | ||||||||
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Restructuring and exit costs accrued at September 30, 2013 | $ | 615 | $ | 184 | $ | 212 | $ | 1,011 | ||||||||
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(a) | Employee termination costs consist primarily of severance and related costs. |
(b) | Lease exit costs consist primarily of costs that will continue to be incurred under non-cancellable operating leases for their remaining term without benefit to the Company. |
(c) | Other exit costs include costs related to the movement of vehicles and rental fleet in connection with the substantial exit from the Tuscaloosa Marine Shale. |
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(9) Debt
Debt consists of the following (in thousands) at September 30, 2013 and December 31, 2012:
Interest Rate | Maturity Date | September 30, 2013 | December 31, 2012 | |||||||||||||||
Unamortized Deferred Financing Costs | Debt | Debt | ||||||||||||||||
Revolving Credit Facility(a) | 4.61 | % | Nov. 2017 | $ | 6,463 | $ | 114,490 | $ | 146,990 | |||||||||
2018 Notes(b) | 9.875 | % | Apr. 2018 | 15,350 | 400,000 | 400,000 | ||||||||||||
Vehicle financings(c) | 3.30 | % | Various | — | 21,475 | 20,047 | ||||||||||||
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Total debt | $ | 21,813 | 535,965 | 567,037 | ||||||||||||||
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Issuance discount(d) | (1,133 | ) | (1,277 | ) | ||||||||||||||
Issuance premium(d) | 329 | 366 | ||||||||||||||||
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Total debt, net | 535,161 | 566,126 | ||||||||||||||||
Less: current portion | (5,475 | ) | (4,699 | ) | ||||||||||||||
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Total long-term debt | $ | 529,686 | $ | 561,427 | ||||||||||||||
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(a) | The interest rate presented represents the interest rate on the $325.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) at September 30, 2013. |
(b) | The interest rate presented represents the coupon rate on the Company’s outstanding $400 million aggregate principal amounts of 9.875% Senior Notes due 2018 (the “2018 Notes”), excluding the effect of deferred financing costs, original issue discounts and original issue premiums. Including the effect of these items, the effective interest rate on the 2018 Notes is approximately 11.0%. |
(c) | Vehicle financings consist of installment notes payable and capital lease arrangements related to fleet purchases with a weighted-average annual interest rate of approximately 3.30% and which mature in varying installments between 2013 and 2017. Installment notes payable and capital lease obligations were $1.4 million and $20.1 million respectively, at September 30, 2013 and were $2.1 million and $17.9 million, respectively, at December 31, 2012. |
(d) | The issuance discount represents the unamortized difference between the $250.0 million aggregate principal amount of the 2018 Notes issued in April 2012 and the proceeds received upon issuance (excluding interest and fees). The issuance premium represents the unamortized difference between the proceeds received in connection with the November 2012 issuance of the 2018 Notes (excluding interest and fees) and the $150.0 million aggregate principal amount thereunder. |
In September 2013, the Company amended its Revolving Credit Facility (the “Amendment”) to increase the permissible maximum total debt leverage ratio for the periods ending September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014. The pricing of the Revolving Credit Facility was unchanged by the Amendment. In connection with the Amendment, the Company incurred lender and third party fees of approximately $0.6 million.
The Revolving Credit Facility contains a number of covenants that, among other things, limit or restrict the Company’s ability to incur additional indebtedness; incur liens (other than liens securing capital leases and purchase money debt); make further negative pledges; make loans, advances and other investments, including acquisitions (provided that acquisitions shall be permitted to the extent that the target is in the water or environmental services industry, that the representations and warranties are true and correct in all material respects as of the acquisition date and certain pro forma ratios are met); declare dividends, distributions and issuances of equity interest or repayment of the same; make fundamental changes; make prepayments, redemptions and purchases of subordinated and certain other debt; engage in transactions with affiliates; pay dividends and make other payments affecting subsidiaries; make changes in lines of business, fiscal year and accounting practices; make material amendments to our organization documents; engage in sales-leaseback transactions; engage in hedging transactions; make capital expenditures and incur operating lease obligations. The Company is currently in compliance with all of the covenants in its Revolving Credit Facility. Depending on the Company’s operating results in the fourth quarter of 2013 and other factors, the Company may have difficulty meeting the minimum interest coverage ratio and/or the maximum total leverage ratio at December 31, 2013. Failure to meet the specified ratios constitutes an event of default under the Revolving Credit Facility. If any event of default were to occur, the Company would seek a waiver of the covenants or refinance the Revolving Credit Facility with an alternate structure with no ongoing maintenance covenant requirements. A decision to seek a waiver or refinancing could result in upfront fees and increased interest costs; however, there can be no assurances that such a waiver or refinancing could be obtained. Failure to obtain a waiver or refinancing, in any case, would trigger a requirement that the outstanding balance under the Revolving Credit Facility be repaid immediately, which would also likely trigger acceleration of our 2018 notes.
The indentures governing the 2018 Notes also contain restrictive covenants that, among other things, limit the Company’s ability to transfer or sell assets; pay dividends or make certain distributions, buy subordinated indebtedness or securities, make certain investments or make other restricted payments; incur or guarantee additional indebtedness or issue preferred stock; create or incur liens securing indebtedness; incur dividend or other payment restrictions affecting restricted subsidiaries; consummate a merger, consolidation or sale of all or substantially all of our assets; enter into transactions with affiliates; engage in business other than a business that is the same or similar, reasonably related, complementary or incidental to our current business and/or that of our restricted subsidiaries; and make certain acquisitions or investments. The Company was compliant with these covenants at September 30, 2013.
As previously described, in October 2013 the Company’s board of directors authorized the commencement of a process to divest TFI. As noted above, the Company’s Revolving Credit Facility and the indentures to the 2018 Notes contain certain limitations and covenants concerning changes in lines of business and the substantial sale of Company assets. Any divestiture of TFI may be subject to various third party consents. There can be no assurances that the Company will obtain any necessary consents of lenders, governmental authorities or other third parties that might be required in order for the Company to sell TFI or effectuate any other divesture.
As of September 30, 2013, the estimated fair value of the Company’s debt was as follows (in thousands):
Revolving Credit Facility | $ | 114,490 | ||
2018 Notes | 407,857 | |||
Vehicle financings | 21,475 | |||
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Total | $ | 543,822 | ||
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The estimated fair value of the Company’s 2018 Notes is based on quoted market prices as of September 30, 2013. The fair value of the Company’s Revolving Credit Facility and other debt obligations including capital leases bears interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
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(10) Income Taxes
The following table shows the components of the income tax benefit for the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Current income tax expense | $ | (621 | ) | $ | (452 | ) | $ | (675 | ) | $ | (1,672 | ) | ||||
Deferred income tax benefit (expense) | 55,536 | (182 | ) | 69,593 | 20,921 | |||||||||||
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Total income tax benefit (expense) | $ | 54,915 | $ | (634 | ) | $ | 68,918 | $ | 19,249 | |||||||
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The effective income tax rate for the three and nine months ended September 30, 2013 was 22.1% and 23.9%, which differs from the federal statutory rate of 35.0% primarily due to the tax impact of the impairment of goodwill, state taxes, and $1.2 million and $2.8 million of adjustments from prior periods to deferred tax assets and liabilities associated with fixed assets, certain acquired intangible assets and net operating loss carryforwards. The effective income tax rate for the three and nine months ended September 30, 2012 was (7.3%) and 88.6%, respectively, which differs from the federal statutory rate of 35.0% primarily due to the tax impact of state taxes and reductions in valuation allowance, due to acquired sources of taxable income in the form of deferred tax liabilities resulting from the TFI acquisition.
(11) Share-based Compensation
We may grant stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to our employees, directors, consultants and advisors pursuant to the Heckmann Corporation 2009 Equity Incentive Plan (the “2009 Plan”). On May 8, 2012, our stockholders approved an amendment to the 2009 Plan that increased the number of shares of common stock issuable under the 2009 Plan by 5,000,000 shares to an aggregate total of 10,000,000 shares. The additional shares were registered pursuant to a Registration Statement on Form S-8 (File No. 333-182068) filed with the SEC on June 12, 2012.
Stock Options
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. During the nine months ended September 30, 2013 and 2012 the Company granted 613,000 and 1,305,000 stock options, respectively, pursuant to the 2009 Plan. Stock-based compensation cost is included in general and administrative expenses in the accompanying condensed consolidated statements of operations and totaled approximately $1,559,000 and $1,393,000 for the nine months ended September 30, 2013 and 2012, respectively.
Restricted Stock
The Company measures the cost of employee and board of director services received in exchange for awards of restricted stock, based on the market value of the Company’s common shares at the date of grant. During the nine months ended September 30, 2013 and 2012, the Company awarded 10,000 and 200,000 shares of restricted stock, respectively. During the nine months ended September 30, 2013 the Company released 51,666 shares of stock to certain employees upon the lapse of restrictions. Stock-based compensation expense for grants of restricted stock was $1,387,000 and $984,000 for the nine months ended September 30, 2013 and 2012, respectively, which amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
Restricted Stock Units
The Company measures the cost of employee and board of director services received in exchange for awards of restricted stock, based on the market value of the Company’s common shares at the date of grant. During the nine months September 30, 2013, the Company granted 635,500 shares of restricted stock units. No grants of restricted stock units were made during the nine months ended September 30, 2012. Stock-based compensation expense for grants of restricted stock units was $349,000 for the nine months ended September 30, 2013, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
Employee Stock Purchase Plan
Effective September 1, 2013, the Company established a noncompensatory employee stock purchase plan (“ESPP”) which permits all regular full time employees and employees who work part time over 20 hours per week to purchase shares of the Company’s common stock at a five percent discount. Annual employee contributions are limited to $25,000, are voluntary and made through a bi-weekly payroll deduction.
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Defined Contribution Plan
Effective September 1, 2013, the Company established a defined contribution plan (the “401k Plan”) covering substantially all employees who have met certain eligibility requirements except those employees working less than 25 hours per week. Employees may participate in the 401k Plan on the first day of the first month following 60 days of employment. The Company provides a quarterly match in shares of Company common stock equal to 100% of each participant’s annual contribution up to 3% of each participant’s annual compensation and 50% of participant’s annual contribution up to an additional 2% of each participant’s annual compensation.
(12) Commitments and Contingencies
Environmental Liabilities
The Company is subject to the environmental protection laws and regulatory framework of the United States and the individual states where it operates water gathering pipelines and salt water disposal wells. The Company has installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and has established reporting and responsibility protocols for environmental protection and reporting to relevant local environmental protection departments. Management believes the Company is in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which the Company operates. The Company believes that there are no unrecorded liabilities in connection with the Company’s compliance with environment laws and regulations. The condensed consolidated balance sheet at September 30, 2013 included accruals totaling $1.8 million for various environmental matters including the estimated cost to comply with a Louisiana Department of Environmental Quality requirement that the Company perform testing and monitoring at certain locations to confirm that prior spills were remediated in accordance with applicable requirements.
Litigation
We are party to various litigation matters, including regulatory and administrative proceedings arising out of the normal course of business, the more significant of which are summarized below. The ultimate outcome of each of these matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome be reasonably estimated presently for every case. The liability we may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued with respect to such matters and, as a result of these matters, may potentially be material to our financial position or results of operations. We review our litigation activities and determine if an unfavorable outcome to us is considered “remote,” “reasonably possible” or “probable” as defined by U.S. GAAP. Where we have determined an unfavorable outcome is probable and is reasonably estimable, we have accrued for potential litigation losses. In addition to the matters described below, we are involved in various other claims and legal actions, including regulatory and administrative proceedings arising out of the normal course of our business. We do not expect that the outcome of such other claims and legal actions will have a material adverse effect on our financial position or results of operations.
2010 Derivative Action. On November 18, 2010, Melissa Hess filed a stockholder derivative complaint, purportedly on behalf of the Company, against various officers and directors in the Superior Court of California, County of Riverside captioned Hess v. Heckmann, et al. (Case No. INC10010407) (the “2010 Derivative Action”). The 2010 Derivative Action alleged claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with the acquisition of China Water. While the proceedings in the 2010 Derivative Action were pending, the parties entered into settlement discussions and, on April 1, 2013, entered into a stipulation of Settlement which was granted final approval by the Superior Court of California on June 24, 2013. Under the stipulation of settlement the Company agreed to make certain corporate governance changes, pay the plaintiff’s attorneys $300,000 in cash (which was paid by the Company’s insurance carriers) and issue 558,660 shares of the Company’s common stock to the plaintiff’s attorneys. In July 2013, the shares were issued to the plaintiff’s attorneys in full satisfaction of the order. In connection with the preliminary settlement, the Company recognized a charge of $2.4 million in the period ended March 31, 2013, which represented the product of the Company’s closing share price on March 29, 2013 of $4.29 per share and the 558,660 shares issued pursuant to the settlement. For the three months ended June 30, 2013, the Company recorded a $0.8 million adjustment to the previously recorded charge due to a decline in the Company’s closing share price at June 28, 2013 as compared to the Company’s closing share price at March 29, 2013.
2010 Class Action. On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of stockholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware captionedIn re Heckmann Corporation Securities Class Action (Case No. 1:10-cv-00378-JJF-MPT) (the “2010 Class Action”). On October 8, 2010, the court-appointed lead plaintiff filed an Amended Class Action Complaint which adds China Water as a defendant. The 2010 Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded by filing a motion to transfer the 2010 Class Action to California and a motion to dismiss the case. On October 19, 2012, plaintiff filed a motion to certify a class and appoint class representatives and class counsel. On January 18, 2013, the Company filed its opposition and a motion to exclude the declaration of plaintiff’s class certification expert. On February 19, 2013, plaintiff filed a reply brief. A hearing on plaintiff’s motion to certify a class and appoint class representatives and class counsel has not been scheduled. Depositions were taken by the parties during the three months ended September 30, 2013. During this time amediator was also appointed for the case and settlement discussions occurred. Management was subsequently apprised of the status of the case by counsel and based on these developments and an assessment of its remaining insurance coverage, the Company recorded a charge of $16.0 million in the quarter ended September 30, 2013 to establish an accrual in connection with this matter, which is included in accrued liabilities in the accompanying condensed consolidated balance sheet (see Note 7). Although the Company attempted to settle the 2010 Class Action prior to trial and may continue settlement discussions, the Company intends to continue to vigorously defend this case, up to, and including, defending this case through trial.
2013 Shareholder Class Actions. On September 3, 2013, a putative class action lawsuit was commenced in the United States District Court for the District of Arizona against the Company and four of its current and former officers and directors. The lawsuit is captionedJewyl A. Stevens, Individually and On Behalf of All Others Similarly Situated v. Nuverra Environmental Solutions, Inc., Richard J. Heckmann, Mark D. Johnsrud, Jay Parkinson and W. Christopher Chisholm, No. 13-cv-01800-JWS (the “Stevens Action”). Plaintiff in the Stevens Action alleges violations of (i) Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and (ii) Section 20(a) of the Exchange Act. Plaintiff in the Stevens Action purportedly asserts her claims on behalf of all purchasers of Nuverra common stock between August 6, 2012 and August 23, 2013. Plaintiff in the Stevens Action alleges that the Company and the individual defendants made certain material misstatements and/or omissions relating to the Company’s operations and financial condition which caused the price of the Company’s shares to fall.
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On September 26, 2013, a second and substantially similar putative class action lawsuit was commenced in the United States District Court for the District of Arizona against the Company and the same four current and former officers and directors. The lawsuit is captionedChad Monroe, Individually and On Behalf of All Others Similarly Situated v. Nuverra Environmental Solutions, Inc., Richard J. Heckmann, Mark D. Johnsrud, Jay Parkinson and W. Christopher Chisholm, No. 13-cv-01968-DGC (the “Monroe Action”). Plaintiff in the Monroe Action purportedly asserts his claims on behalf of all purchasers of Nuverra common stock between November 11, 2011 and August 23, 2013. The legal and factual allegations asserted in the Monroe Action are substantially similar to those asserted in the Stevens Action.
Neither the Company nor any of the individual defendants have yet to file a response in either the Stevens or Monroe Actions. The Company and the individual defendants intend to vigorously defend themselves against the claims asserted in these actions. While the Company continues to assess these claims, the Company believes they are without merit.
2013 Shareholder Derivative Actions. On September 20, 2013, a shareholder derivative lawsuit purportedly asserted on behalf of the Company was commenced in the United States District Court for the District of Arizona against nine of the Company’s current officers and/or directors, and against the Company as a nominal defendant. The lawsuit is captionedMatthew D. Kennedy, derivatively on behalf of Nominal Defendant Nuverra Environmental Solutions, Inc. v. Mark D. Johnsrud, Richard J. Heckmann, Robert B. Simonds, Jr., Andrew D. Seidel, Kevin L. Spence, Alfred E. Osborne, Jr., J. Danforth Quayle, Lou L. Holtz and Edward Barkett, Defendants, and Nuverra Environmental Solutions, Inc. Nominal Defendant, No. 13-cv-01933-NVW (the “Kennedy Action”). Plaintiff in the Kennedy Action principally alleges that the defendants damaged the Company by failing to prevent the issuance of certain misstatements and omissions over the course of 2012 and 2013 and asserts claims for (i) breach of fiduciary duty and (ii) abuse of control.
On October 4, 2013, a second shareholder derivative lawsuit purportedly asserted on behalf of the Company was commenced in the United States District Court for the District of Arizona against nine of the Company’s current officers and/or directors, and against the Company as nominal defendant. The lawsuit is captionedMark Mutton, derivatively on behalf of Nominal Defendant Nuverra Environmental Solutions, Inc. v. Mark D. Johnsrud, Richard J. Heckmann, Robert B. Simonds, Jr., Andrew D. Seidel, Kevin L. Spence, Alfred E. Osborne, Jr., J. Danforth Quayle, Lou L. Holtz and Edward Barkett, Defendants, and Nuverra Environmental Solutions, Inc. Nominal Defendant, No. 13-cv-02020-JWS (the “Mutton Action”). The factual and legal allegations in the Mutton Action are identical to those asserted in the Kennedy Action.
On October 7, 2013, a third shareholder derivative lawsuit purportedly asserted on behalf of the Company was commenced in the United States District Court for the District of Arizona against ten of the Company’s current officers and/or directors, and against the Company as nominal defendant. The lawsuit is captionedGeorge Partilla, Derivatively on Behalf of Nuverra Environmental Solutions, Inc. v. Richard J. Heckmann, Mark D. Johnsrud, Jay C. Parkinson, Robert B. Simonds, Alfred E. Osborne, Edward A. Barkett, Kevin L. Spence, Lou L. Holtz, J. Danforth Quayle and Andrew D. Seidel, Defendants and Nuverra Environmental Solutions, Inc., a Delaware corporation, Nominal Defendant, No. 13-cv-02034-GMS (the “Partilla Action”). The factual and legal allegations in the Partilla Action are substantially similar to those asserted in both the Kennedy and Mutton Actions.
On October 7, 2013, two identical shareholder derivative lawsuits purportedly asserted on behalf of the Company were commenced in the Superior Court for the State of Arizona in and for the County of Maricopa County against ten of the Company’s current officers and/or directors, and against the Company as nominal defendant. The lawsuits are captioned: (i) Edward K. Brill, derivatively on behalf of Nuverra Environmental Solutions, Inc. v. Richard J. Heckmann, Mark D. Johnsrud, Robert B. Simonds, Jr., Andrew D. Seidel, Kevin L. Spence, Alfred E. Osborne, Jr., J. Danforth Quayle, Lou L. Holtz, Edward A. Barkett and Jay C. Parkinson, Defendants and Nuverra Environmental Solutions, Inc., Nominal Defendant, No. CV2013-013424 (the “Brill Action”) and (ii) Merlin Stratton, derivatively on behalf of Nuverra Environmental Solutions, Inc. v. Richard J. Heckmann, Mark D. Johnsrud, Robert B. Simonds, Jr., Andrew D. Seidel, Kevin L. Spence, Alfred E. Osborne, Jr., J. Danforth Quayle, Lou L. Holtz, Edward A. Barkett and Jay C. Parkinson, Defendants and Nuverra Environmental Solutions, Inc., Nominal Defendant, No. CV2013-013425 (the “Stratton Action”). Plaintiffs in the Brill and Stratton Actions assert claims for (i) breach of fiduciary duty, (ii) waste of corporate assets and (iii) unjust enrichment. The factual allegations asserted in the Brill and Stratton Actions are substantially similar to those asserted in the Kennedy, Mutton and Partilla Actions.
Neither the Company nor any of the individual defendants have yet to file a response in any of the five pending shareholder derivative actions. The Company and the individual defendants intend to vigorously defend themselves against the claims asserted in each of the pending shareholder derivative actions. While the Company continues to assess these claims, the Company believes they are without merit.
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Contingent Consideration in Connection with Acquisitions
Appalachian Water Services, LLC Acquisition — The seller of the membership interests in Appalachian Water Services, LLC (“AWS”) is entitled to receive additional consideration equal to $1.5 million, payable entirely in shares of the Company’s common stock, in the event that EBITDA, as defined in the membership interest purchase agreement for any consecutive twelve months from September 1, 2012 to and ending on August 31, 2014, is equal to or greater than $4.0 million.
All Phase Acquisition — The Company was required to make additional payments to the former shareholders of All Phase, which the Company acquired on June 15, 2012, based upon the achievement of certain volume targets over the remainder of 2012. The Company settled this obligation during the first quarter of 2013 in exchange for a $0.4 million payment to the former shareholders.
Keystone Vacuum, Inc. Acquisition — In addition to the initial purchase price, the Company may make additional payments to the sellers of Keystone, which the Company acquired on February 3, 2012, for each of fiscal years ended December 31, 2012 through 2015, in which Keystone’s adjusted EBITDA (as defined in and calculated in accordance with the asset purchase agreement related to the Keystone Vacuum, Inc. acquisition) related to the construction portion of the acquired businesses is greater than applicable adjusted EBITDA targets. Any additional amount payable would be payable in shares of the Company’s common stock. Any such additional payments are capped at an aggregate value of $7.5 million. During July 2013, the Company issued 11,942 shares of our common stock and made a cash payment of approximately $880,000 in satisfaction of our contingent consideration obligation for the contract period ended December 31, 2012.
Complete Vacuum and Rentals, Inc. Acquisition — In addition to the initial purchase price, the Company may make additional payments to the former shareholders of Complete Vacuum and Rentals, Inc. (“CVR”), which the Company acquired on November 30, 2010. For each of the years ended December 31, 2011 through 2013, in which CVR achieves targeted adjusted EBITDA (as defined in and calculated in accordance with the stock purchase agreement related to the CVR acquisition) of $20.0 million, we could be required to pay CVR’s former shareholders an additional $2.0 million plus one-half of the amount by which adjusted EBITDA exceeds $20.0 million for the relevant year up to an aggregate maximum payment of $12.0 million (the “Earn-Out Payments”). The Earn-Out Payments are payable in a combination of 70% cash and 30% in shares of the Company’s common stock (based on the trading price of the Company’s common stock at the time any such payment is made). On September 12, 2012, the Company entered into a settlement agreement with the former owners of CVR whereby, among other settled items relating to pre- and post-closing indemnification obligations of the parties and including dismissal of a lawsuit, the Company delivered to the former owners 1,726,619 shares of the Company’s common stock representing $6.0 million in value at the time of the issuance as an Earn-Out Payment for the fiscal year ended December 31, 2011. Accordingly, the balance of the remaining Earn-Out Payments for the fiscal years ending December 31, 2012 and 2013, respectively, and in the aggregate cannot exceed $6.0 million which, pursuant to the terms of the settlement agreement, will be paid, if at all, in shares of the Company’s common stock.
Ideal Oilfield Acquisition — In addition to the initial purchase price, the Company is obligated to pay the former owners of Ideal up to a maximum amount of $8.5 million based on the total permitted capacity of a second special waste disposal permit issued to the Company to expand its current landfill. The additional amount is payable in cash or in shares of the Company’s common stock at the Company’s discretion and is due at such time the former owners deliver to the Company all permits, certificates and other documents necessary to operate the portion of the landfill associated with the additional capacity. Amounts payable in shares of common stock are based on the average closing price per share of the Company’s common stock as reported for the thirty trading days ending on the trading day preceding the day the former owners’ performance is complete and the shares are issuable. The amount is considered contingent consideration and has been allocated to the net assets acquired.
The carrying values of the Company’s above described contingent consideration obligations were $17.3 million and $10.8 million at September 30, 2013 and December 31, 2012, respectively.
(13) Segments
Since the acquisition of TFI on April 10, 2012, the Company has had two reportable segments: (a) Shale Solutions (which includes Power Fuels and which the Company previously referred to as Fluids Management); and (b) Industrial Solutions (which includes TFI and which was previously referred to as Recycling). The Company’s reportable segments at September 30, 2013 represent those used by the Company’s chief operating decision maker to evaluate performance and allocate resources and are consistent with its reportable segments at December 31, 2012. Refer to Note 1 for information on the types of services from which each segment derives its revenues.
23
Table of Contents
The condensed consolidated financial information and the Industrial Solutions segment financial information include the results of operations for TFI from April 10, 2012. The Company evaluates business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments.
The financial information for the Company’s reportable segments is as follows:
Industrial Solutions | Shale Solutions | Corporate/ Other | Total | |||||||||||||
(in millions) | ||||||||||||||||
As of or for the three months ended September 30, 2013 | ||||||||||||||||
Revenue | $ | 30.8 | $ | 131.8 | $ | — | $ | 162.6 | ||||||||
Depreciation and amortization | 3.4 | 23.5 | 0.2 | 27.1 | ||||||||||||
Loss before income taxes (b) (c) | (99.3 | ) | (110.1 | ) | (39.3 | ) | (248.7 | ) | ||||||||
Additions to property, plant and equipment | 0.9 | 33.9 | 0.6 | 35.4 | ||||||||||||
Goodwill (b) | 48.0 | 408.7 | — | 456.7 | ||||||||||||
Total assets (a) | 187.4 | 1,160.3 | 48.3 | 1,396.0 | ||||||||||||
For the nine months ended September 30, 2013 | ||||||||||||||||
Revenue | $ | 90.2 | $ | 397.4 | $ | — | $ | 487.6 | ||||||||
Depreciation and amortization | 10.1 | 79.2 | 0.6 | 89.9 | ||||||||||||
Loss before income taxes (b) (c) | (98.4 | ) | (108.6 | ) | (81.1 | ) | (288.1 | ) | ||||||||
Additions to property, plant and equipment | 2.7 | 81.2 | 1.5 | 85.4 | ||||||||||||
As of or for the three months ended September 30, 2012 | ||||||||||||||||
Revenue | $ | 33.8 | $ | 59.2 | $ | — | $ | 93.0 | ||||||||
Depreciation and amortization | 4.4 | 10.6 | — | 15.0 | ||||||||||||
Income (loss) before income taxes | 4.9 | (3.3 | ) | (10.3 | ) | (8.7 | ) | |||||||||
Additions to property, plant and equipment | 0.6 | 8.5 | — | 9.1 | ||||||||||||
Goodwill | 192.8 | 102.8 | — | 295.6 | ||||||||||||
Total assets (a) | 281.6 | 462.0 | 83.2 | 826.8 | ||||||||||||
For the nine months ended September 30, 2012 | ||||||||||||||||
Revenue | $ | 65.9 | $ | 172.9 | $ | — | $ | 238.8 | ||||||||
Depreciation and amortization | 8.5 | 30.5 | — | 39.0 | ||||||||||||
Income (loss) before income taxes | 10.4 | (5.3 | ) | (26.8 | ) | (21.7 | ) | |||||||||
Additions to property, plant and equipment | 1.5 | 50.8 | — | 52.3 |
(a) | Total assets exclude intercompany receivables eliminated in consolidation. |
(b) | The Company recorded a charge for goodwill impairment related to its Industrial Solutions operating segment of $98.5 million during the three and nine months ended September 30, 2013. Refer to Note 5 for additional information. |
(c) | The Company recorded a charge for impairment of long-lived assets related to its Shale Solutions operating segment of $108.4 million and $111.9 million during the three and nine months ended September 30, 2013 respectively. Refer to Note 5 for additional information. |
Revenues from one customer of the Industrial Solutions segment represented approximately 45% of the segment’s total revenue for the nine months ended September 30, 2013. Accounts receivable from this customer represented approximately 46% of the segment’s accounts receivable as of September 30, 2013.
Revenues from three customers of the Shale Solutions segment each exceeded 13% of the segment’s total revenue and collectively represented approximately 41% of the segment’s total revenue for the nine months ended September 2013. Accounts receivables from two customers of the Shale Solutions segment each exceeded 11% of the segment’s total accounts receivable and collectively represented approximately 31% of the segment’s total accounts receivable as of September 30, 2013.
In the fourth quarter of 2013, the Company announced a strategic organizational realignment of Shale Solutions into three operating divisions: (1) the Northeast Division comprising the Marcellus and Utica Shale areas (2) the Southern Division comprising the Haynesville, Barnett, Eagle Ford, Mississippian Shale areas and Permian Basin and (3) the Rocky Mountain Division comprising the Bakken Shale area. The implementation of this new organization is ongoing and is not expected to be finalized until early 2014. The Company is evaluating whether these operating divisions constitute separate operating segments and if so, whether two or more of them can be aggregated into one or more reportable segments. During the fourth quarter of 2013, the Company will evaluate the impact of this organizational realignment on its reporting units, which is a level of reporting at which goodwill is tested for impairment. A reporting unit is defined as an operating segment or one level below an operating segment. To the extent the Company concludes the composition of its reporting units have changed, the Company will be required to allocate goodwill on a relative fair value basis to the new reporting units and test the newly allocated goodwill for impairment if and when triggering events occur.
24
Table of Contents
(14) Related Party and Affiliated Company Transactions
The Executive Chairman of the Company’s board of directors, Richard J. Heckmann, is the sole member of an LLC that owns an aircraft used periodically by members of management for business related travel. Reimbursement paid to the affiliate in exchange for use of the aircraft was $329,300 and $715,200 for the nine months ended September 30, 2013 and 2012, respectively. Amounts payable to the affiliate were $15,800 at September 30, 2013.
The Company’s Vice Chairman and Chief Executive Officer, Mark D. Johnsrud, is the sole member of an entity that owns apartment buildings in North Dakota. The apartments are rented to certain employees of the Company’s at rates that are equal to or below market. Rent payments are collected by the Company through employee payroll deductions and remitted to Mr. Johnsrud.
In connection with the Power Fuels Merger (Note 3), assets received in exchange for the merger consideration excluded accounts receivable outstanding for more than ninety days as of November 30, 2012. Subsequent collections on these accounts receivable, which are recorded by the Company as restricted cash with an offsetting liability, are required to be periodically remitted to Mr. Johnsrud. Pursuant to the terms of the Power Fuels Merger agreement, during the nine months ended September 30, 2013, the Company paid Mr. Johnsrud $3.6 million for such collections, net of a working capital adjustment of approximately $2.1 million. Amounts payable to Mr. Johnsrud at September 30, 2013 for additional accounts receivable collections totaled approximately $83,000.
The Company periodically purchases fresh water from a proprietorship owned by Mr. Johnsrud. The fresh water is resold to customers for use in hydraulic fracturing activities. Fresh water purchases made by the Company during the nine months ended September 30, 2013 were $589,000. Purchases made by Power Fuels prior to its merger with the Company totaled approximately $2,132,500 during the nine months ended September 30, 2012. No amounts were due to the affiliate at September 30, 2013.
Mr. Johnsrud, is the sole member of an entity that owns land in North Dakota on which five of the Company’s saltwater disposal wells are situated. The Company has agreed to pay Mr. Johnsrud a per barrel royalty fee for the use of land, which the Company concluded is consistent with rates charged by non-affiliated third parties in the area. Royalties paid by the Company were $58,000 for the nine months ended September 30, 2013. There were no royalties paid by Power Fuels prior to its merger with the Company during the nine months ended September 30, 2012. Royalties payable to the affiliate were $5,100 at September 30, 2013.
During 2009, the Company acquired an approximate 7% investment in Underground Solutions, Inc. (“UGSI”) a supplier of water infrastructure pipeline products, whose chief executive officer, Andrew D. Seidel, is a member of the Company’s board of directors. The Company’s total investment in UGSI was $7.2 million. During the third quarter of 2013, management performed an evaluation of various alternatives including a decision to explore the liquidation of this non-strategic investment. As a result, the Company recorded a $3.8 million charge for the write-down of this investment to its estimated net realizable value. The Company’s interest in UGSI is accounted for as a cost method investment in the Company’s condensed consolidated balance sheet as of September 30, 2013 and December 31, 2012, and is included in the Corporate/Other group for purposes of reportable segments (see Note 13). The $3.8 million write-down was classified as a component of other expense, net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013.
(15) Subsidiary Guarantors
The obligations of Nuverra Environmental Solutions, Inc. under the 2018 Notes are jointly and severally, fully and unconditionally guaranteed by certain of the Company’s subsidiaries. The following tables present condensed consolidating financial information for Nuverra Environmental Solutions, Inc. (the “Parent Issuer”), certain 100% wholly-owned subsidiaries (the “Wholly-Owned Subsidiary Guarantors”) and Appalachian Water Services, LLC, a 51% owned subsidiary (the “Non Wholly-Owned Subsidiary Guarantor”), as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012.
25
Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
As of September 30, 2013
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,949 | $ | 5,987 | $ | 999 | $ | — | $ | 9,935 | ||||||||||
Restricted Cash | — | 83 | — | — | 83 | |||||||||||||||
Accounts Receivable – net | — | 99,739 | 1,575 | — | 101,314 | |||||||||||||||
Other current assets | 18,080 | 11,272 | 100 | — | 29,452 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current assets | 21,029 | 117,081 | 2,674 | — | 140,784 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Property, plant and equipment, net | 2,397 | 511,149 | 9,111 | — | 522,657 | |||||||||||||||
Equity Investments | 758,325 | 638 | — | (754,943 | ) | 4,020 | ||||||||||||||
Intangible assets, net | — | 247,641 | 1,337 | — | 248,978 | |||||||||||||||
Goodwill | — | 446,024 | 10,672 | — | 456,696 | |||||||||||||||
Other | 438,774 | 35,020 | — | (450,889 | ) | 22,905 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL ASSETS | $ | 1,220,525 | $ | 1,357,553 | $ | 23,794 | $ | (1,205,832 | ) | $ | 1,396,040 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||
Accounts payable | $ | 2,193 | $ | 33,586 | $ | 194 | $ | — | $ | 35,973 | ||||||||||
Accrued liabilities | 46,497 | 29,935 | 21 | — | 76,453 | |||||||||||||||
Current portion of contingent consideration | — | 6,655 | 1,500 | — | 8,155 | |||||||||||||||
Current portion of long-term debt | — | 5,475 | — | — | 5,475 | |||||||||||||||
Current portion of deferred income taxes | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current liabilities | 48,690 | 75,651 | 1,715 | — | 126,056 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Deferred income taxes | (22,770 | ) | 82,811 | — | — | 60,041 | ||||||||||||||
Long-term debt, less current portion | 513,686 | 16,000 | — | — | 529,686 | |||||||||||||||
Long-term contingent consideration | — | 9,140 | — | — | 9,140 | |||||||||||||||
Other long-term liabilities | 23,891 | 431,240 | 9,847 | (450,889 | ) | 14,089 | ||||||||||||||
Total shareholders’ equity | 657,028 | 742,711 | 12,232 | (754,943 | ) | 657,028 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 1,220,525 | $ | 1,357,553 | $ | 23,794 | $ | (1,205,832 | ) | $ | 1,396,040 | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Other assets of Parent consist primarily of intercompany receivables due from the subsidiary guarantors for the funding of capital expenditures, payments of debt at the time of acquisition and net transfers of cash to fund working capital requirements. |
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Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
As of December 31, 2012
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,819 | $ | 9,536 | $ | 856 | $ | — | $ | 16,211 | ||||||||||
Restricted Cash | — | 3,536 | — | — | 3,536 | |||||||||||||||
Accounts Receivable – net | — | 116,768 | 760 | — | 117,528 | |||||||||||||||
Other current assets | 1,488 | 27,126 | 2 | — | 28,616 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current assets | 7,307 | 156,966 | 1,618 | — | 165,891 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Property, plant and equipment, net | 44 | 595,293 | 9,533 | — | 604,870 | |||||||||||||||
Equity Investments | 957,976 | 597 | — | (950,294 | ) | 8,279 | ||||||||||||||
Intangible assets, net | — | 283,248 | 1,450 | — | 284,698 | |||||||||||||||
Goodwill | — | 544,647 | 10,444 | — | 555,091 | |||||||||||||||
Other | 462,762 | 16,761 | — | (454,013 | ) | 25,510 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL ASSETS | $ | 1,428,089 | $ | 1,597,512 | $ | 23,045 | $ | (1,404,307 | ) | $ | 1,644,339 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||
Accounts payable | $ | 757 | $ | 28,566 | $ | 215 | $ | — | $ | 29,538 | ||||||||||
Accrued liabilities | 17,833 | 32,370 | 62 | — | 50,265 | |||||||||||||||
Current portion of contingent consideration | — | 1,968 | — | — | 1,968 | |||||||||||||||
Current portion of long-term debt | — | 4,699 | — | — | 4,699 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current liabilities | 18,590 | 67,603 | 277 | — | 86,470 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Deferred income taxes | — | 128,992 | — | — | 128,992 | |||||||||||||||
Long-term debt, less current portion | 546,079 | 15,348 | — | — | 561,427 | |||||||||||||||
Long-term contingent consideration | — | 7,363 | 1,500 | — | 8,863 | |||||||||||||||
Other long-term liabilities | 15,659 | 440,159 | 9,021 | (454,013 | ) | 10,826 | ||||||||||||||
Total shareholders’ equity | 847,761 | 938,047 | 12,247 | (950,294 | ) | 847,761 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 1,428,089 | $ | 1,597,512 | $ | 23,045 | $ | (1,404,307 | ) | $ | 1,644,339 | |||||||||
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2013
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Revenue | $ | — | $ | 160,349 | $ | 2,257 | $ | — | $ | 162,606 | ||||||||||
Cost of sales | — | (142,506 | ) | (836 | ) | — | (143,342 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 17,843 | 1,421 | — | 19,264 | |||||||||||||||
General and administrative expenses | 22,215 | 21,092 | 64 | — | 43,371 | |||||||||||||||
Goodwill impairment | — | 98,500 | — | — | 98,500 | |||||||||||||||
Long-lived asset impairment | — | 108,401 | — | — | 108,401 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) from operations | (22,215 | ) | (210,150 | ) | 1,357 | — | (231,008 | ) | ||||||||||||
Interest expense, net | (12,823 | ) | (354 | ) | (296 | ) | — | (13,473 | ) | |||||||||||
Income from equity investment | (213,116 | ) | 183 | — | 213,116 | 183 | ||||||||||||||
Other expense, net | (499 | ) | (3,856 | ) | — | — | (4,355 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss before income taxes | (248,653 | ) | (214,177 | ) | 1,061 | 213,116 | (248,653 | ) | ||||||||||||
Income tax benefit | 54,915 | 50,075 | — | (50,075 | ) | 54,915 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net (loss) income attributable to common stockholders | $ | (193,738 | ) | $ | (164,102 | ) | $ | 1,061 | $ | 163,041 | $ | (193,738 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2012
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Revenue | $ | — | $ | 92,570 | $ | 480 | $ | — | $ | 93,050 | ||||||||||
Cost of sales | — | (76,413 | ) | (220 | ) | — | (76,633 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 16,157 | 260 | — | 16,417 | |||||||||||||||
General and administrative expenses | 3,061 | 12,812 | — | — | 15,873 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) from operations | (3,061 | ) | 3,345 | 260 | — | 544 | ||||||||||||||
Interest expense, net | (6,699 | ) | (269 | ) | — | — | (6,968 | ) | ||||||||||||
Income from equity investment | 1,325 | — | — | (1,325 | ) | — | ||||||||||||||
Other expense, net | (538 | ) | (1,749 | ) | — | — | (2,287 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss before income taxes | (8,973 | ) | 1,327 | 260 | (1,325 | ) | (8,711 | ) | ||||||||||||
Income tax benefit | (372 | ) | (262 | ) | — | — | (634 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net (loss) income attributable to common stockholders | $ | (9,345 | ) | $ | 1,065 | $ | 260 | $ | (1,325 | ) | $ | (9,345 | ) | |||||||
|
|
|
|
|
|
|
|
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29
Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2013
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Revenue | $ | — | $ | 483,469 | $ | 4,126 | $ | — | $ | 487,595 | ||||||||||
Cost of sales | — | (421,396 | ) | (1,675 | ) | — | (423,071 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 62,073 | 2,451 | — | 64,524 | |||||||||||||||
General and administrative expenses | 37,398 | 59,108 | 165 | — | 96,671 | |||||||||||||||
Goodwill impairment | — | 98,500 | — | — | 98,500 | |||||||||||||||
Long-lived asset impairment | — | 111,900 | — | — | 111,900 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) from operations | (37,398 | ) | (207,435 | ) | 2,286 | — | (242,547 | ) | ||||||||||||
Interest expense, net | (38,466 | ) | (878 | ) | (800 | ) | — | (40,144 | ) | |||||||||||
Income from equity investment | (210,781 | ) | 41 | — | 210,781 | 41 | ||||||||||||||
Other expense, net | (1,492 | ) | (3,995 | ) | — | — | (5,487 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss before income taxes | (288,137 | ) | (212,267 | ) | 1,486 | 210,781 | (288,137 | ) | ||||||||||||
Income tax benefit | 68,918 | 47,354 | — | (47,354 | ) | 68,918 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net (loss) income attributable to common stockholders | $ | (219,219 | ) | $ | (164,913 | ) | $ | 1,486 | $ | 163,427 | $ | (219,219 | ) | |||||||
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30
Table of Contents
Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2012
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Revenue | $ | — | $ | 238,298 | $ | 480 | $ | — | $ | 238,778 | ||||||||||
Cost of sales | — | (200,096 | ) | (220 | ) | — | (200,316 | ) | ||||||||||||
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Gross profit | — | 38,202 | 260 | — | 38,462 | |||||||||||||||
General and administrative expenses | 8,292 | 30,751 | — | — | 39,043 | |||||||||||||||
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Income (loss) from operations | (8,292 | ) | 7,451 | 260 | — | (581 | ) | |||||||||||||
Interest expense, net | (15,139 | ) | (791 | ) | — | — | (15,930 | ) | ||||||||||||
Income from equity investment | 3,601 | — | — | (3,601 | ) | — | ||||||||||||||
Other expense, net | (3,363 | ) | (1,840 | ) | — | — | (5,203 | ) | ||||||||||||
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Loss before income taxes | (23,193 | ) | 4,820 | 260 | (3,601 | ) | (21,714 | ) | ||||||||||||
Income tax benefit | 20,728 | (1,479 | ) | — | — | 19,249 | ||||||||||||||
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Net (loss) income attributable to common stockholders | $ | (2,465 | ) | $ | 3,341 | $ | 260 | $ | (3,601 | ) | $ | (2,465 | ) | |||||||
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2013
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Operating activities | ||||||||||||||||||||
Net (loss) income | $ | (219,219 | ) | $ | (164,913 | ) | $ | 1,486 | $ | 163,427 | $ | (219,219 | ) | |||||||
Depreciation and amortization | 612 | 88,917 | 327 | — | 89,856 | |||||||||||||||
Other adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | (11,123 | ) | 165,276 | 800 | — | 154,953 | ||||||||||||||
Changes in operating assets and liabilities, net of acquisitions and purchase price adjustments | 271,857 | (56,695 | ) | (950 | ) | (163,427 | ) | 50,785 | ||||||||||||
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Net cash provided by operating activities | 42,127 | 32,585 | 1,663 | — | 76,375 | |||||||||||||||
Investing activities | ||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired | (10,532 | ) | (38 | ) | — | — | (10,570 | ) | ||||||||||||
Proceeds from acquisition – related working capital adjustment | — | 2,067 | — | — | 2,067 | |||||||||||||||
Purchase of property, plant and equipment | (1,137 | ) | (34,460 | ) | (20 | ) | — | (35,617 | ) | |||||||||||
Proceeds from the sale of property and equipment | — | 1,397 | — | — | 1,397 | |||||||||||||||
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Net cash used in investing activities | (11,669 | ) | (31,034 | ) | (20 | ) | — | (42,723 | ) | |||||||||||
Financing activities | ||||||||||||||||||||
Payments on revolving credit facility, net | (32,500 | ) | — | — | — | (32,500 | ) | |||||||||||||
Payments on notes payable and capital leases | — | (4,007 | ) | — | — | (4,007 | ) | |||||||||||||
Other | (828 | ) | (1,093 | ) | (1,500 | ) | — | (3,421 | ) | |||||||||||
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Net cash used in financing activities | (33,328 | ) | (5,100 | ) | (1,500 | ) | — | (39,928 | ) | |||||||||||
Net (decrease) increase in cash | (2,870 | ) | (3,549 | ) | 143 | — | (6,276 | ) | ||||||||||||
Cash and cash equivalents – beginning of period | 5,819 | 9,536 | 856 | — | 16,211 | |||||||||||||||
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Cash and cash equivalents – end of period | $ | 2,949 | $ | 5,987 | $ | 999 | $ | — | $ | 9,935 | ||||||||||
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Nuverra Environmental Solutions, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2012
(Unaudited)
(dollars in thousands) | Nuverra Environmental Solutions, Inc. (Parent) | Subsidiary Guarantors | AWS | Eliminations | Consolidated | |||||||||||||||
Operating activities | ||||||||||||||||||||
Net (loss) income | $ | (2,465 | ) | $ | 3,341 | $ | 260 | $ | (3,601 | ) | $ | (2,465 | ) | |||||||
Depreciation and amortization | 2 | 38,918 | 132 | — | 39,052 | |||||||||||||||
Other adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | (15,554 | ) | 4,506 | — | — | (11,048 | ) | |||||||||||||
Changes in operating assets and liabilities, net of acquisitions and purchase price adjustments | 742 | (11,582 | ) | (360 | ) | 3,601 | (7,599 | ) | ||||||||||||
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Net cash (used in) provided by operating activities | (17,275 | ) | 35,183 | 32 | — | 17,940 | ||||||||||||||
Investing activities | ||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired | (230,050 | ) | (2,125 | ) | — | — | (232,175 | ) | ||||||||||||
Proceeds from available for sale securities | 5,169 | — | — | — | 5,169 | |||||||||||||||
Purchase of property, plant and equipment | — | (33,844 | ) | — | — | (33,844 | ) | |||||||||||||
Proceeds from the sale of property and equipment | — | 6,877 | — | — | 6,877 | |||||||||||||||
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Net cash used in investing activities | (224,881 | ) | (29,092 | ) | — | — | (253,973 | ) | ||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from Equity Offering | 74,448 | — | — | — | 74,448 | |||||||||||||||
Proceeds from issuance of 2018 notes, net | 248,605 | — | — | — | 248,605 | |||||||||||||||
Payments on long-term debt | (140,174 | ) | — | — | — | (140,174 | ) | |||||||||||||
Payments on notes payable and capital leases | — | (4,128 | ) | — | — | (4,128 | ) | |||||||||||||
Other | (10,735 | ) | (500 | ) | — | — | (11,235 | ) | ||||||||||||
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Net cash provided by (used in) financing activities | 172,144 | (4,628 | ) | — | — | (167,516 | ) | |||||||||||||
Net (decrease) increase in cash | (70,012 | ) | 1,463 | 32 | — | (68,517 | ) | |||||||||||||
Cash and cash equivalents – beginning of period | 79,528 | 666 | — | — | 80,194 | |||||||||||||||
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Cash and cash equivalents – end of period | $ | 9,516 | $ | 2,129 | $ | 32 | $ | — | $ | 11,677 | ||||||||||
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(16) Subsequent Events
In October 2013, the Company’s board of directors authorized commencement of a process to divest the Company’s Thermo Fluids Inc. subsidiary, which comprises its Industrial Solutions business segment. The Company expects the conditions necessary to classify TFI as held for sale and treatment as a discontinued operation will likely be met during the fourth quarter of 2013 or the first quarter of 2014.
In November 2013, the Company’s board of directors authorized a reverse stock split of the Company’s common stock at a reverse split ratio of 1-for-10. Shareholder approval for the reverse stock split was obtained at a special meeting of the Company stockholders on November 9, 2012. The reverse stock split is expected be effective by year-end 2013 at which time every 10 shares of the Company’s common stock that are issued and outstanding will automatically be combined into one issued and outstanding share.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Special Note about Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and related notes thereto. See “Forward Looking Statements” on page 3 of this Quarterly Report and “Risk Factors” included in our filings with the SEC for a description of important factors that could cause actual results to differ from expected results.
Company Overview and Recent Developments
We are one of the largest companies in the United States dedicated to providing comprehensive and full-cycle environmental solutions to our customers in energy and industrial end-markets. We focus on the delivery, collection, treatment, recycling, and disposal of restricted solids, water, waste water, used motor oil, spent antifreeze, waste fluids and hydrocarbons. We aim strategically to expand our business geographically and to enhance our suite of environmentally compliant and sustainable solutions in order to continue to serve our customers, who demand strict environmental compliance and accountability from their solutions providers.
We operate through two business segments: Shale Solutions, which includes Power Fuels, and Industrial Solutions, which includes TFI.
Shale Solutions provides comprehensive environmental solutions for “unconventional” oil and gas exploration and production, including the delivery, collection, treatment, recycling, and disposal of restricted environmental products used in the development of unconventional oil and natural gas fields. Our strategy is to provide an integrated and efficient complete environmental solution to our customers through a full suite of services which we have built and will continue to build through organic growth and acquisitions.
We currently operate in select shale areas in the United States including the Marcellus/Utica, Eagle Ford, Bakken, Haynesville, Barnett, Permian and Mississippian Lime shale areas. We serve customers seeking fresh water acquisition, temporary water transmission and storage, transportation, treatment or disposal of fresh water and complex water flows, such as flowback and produced brine water, in connection with shale oil and gas hydraulic fracturing drilling or “hydrofracturing” operations. We also transport fresh water for production and provide services for site preparation, water pit excavations and remediation. Additionally, beginning in the third quarter of 2013, we expanded our environmental solutions for the responsible management of oilfield solid waste in the Bakken shale area through our acquisition of Ideal Oilfield Disposal, LLC. We provide these services utilizing our scaled infrastructure and asset base, which currently includes 56 owned salt water disposal or underground injection wells, approximately 1,100 trucks, 5,600 tanks (including frac tanks, upright tanks and other tanks), 50 miles of freshwater delivery pipeline and 50 miles of produced water collection pipeline, a waste water treatment recycling facility and an oilfield disposal landfill operating in key unconventional resource basins. Complex water flows, in the forms of flowback and produced water, represent the largest waste stream from these unconventional methods of hydrocarbon exploration and production. Flowback water volumes represent approximately 15%–20% of the millions of gallons of water used during fracking that is returned to the surface generally within the first two to three weeks after hydrofracturing has commenced and the well starts producing. Produced water volumes, which represent water from the formation produced alongside hydrocarbons over the life of the well, are generally driven by marginal costs of production and frequently create a multi-year demand for our services once the well has been drilled. We provide, and continue to develop, comprehensive environmental solutions for the effective and efficient delivery, treatment and disposal of fresh water, flowback, produced water flows and solids resulting from increased exploration in these unconventional oil and gas fields.
Industrial Solutions provides environmental and waste solutions to our customers through collection and recycling services for waste products, including UMO, which we process and sell as RFO, oily water, spent antifreeze, used oil filters and parts washers, and provision of complementary environmental services for a diverse commercial and industrial customer base.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected in Shale Solutions by production trends in the shale areas in which we operate, in particular the level of drilling activity (which impacts the amount of environmental product being managed) and active wells (which impacts the amount of produced water being managed). Activity in the oil and gas drilling industry is also affected by market prices for those commodities, with persistent low natural gas prices and generally high oil prices driving reduced drilling and production in “dry” gas shale areas such as the Barnett, Haynesville and Marcellus Shale areas where natural gas is the predominant natural resource, and the relocation of assets and increased activity in the liquids-rich or “wet” gas shale areas, such as the Utica, Eagle Ford, Mississippian Lime and Bakken Shale areas, where oil and natural gas liquids are the predominant natural resource. In addition, the low natural gas prices have caused many natural gas producers to curtail capital budgets and these cuts in spending curtailed drilling programs as well as discretionary spending on well services in certain shale areas, and accordingly reduced demand for our services in these areas. As circumstances warrant, we can transfer certain operating assets to oil- and liquids-rich wet shale areas where drilling
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activity is more robust. We continue to seek to strategically relocate our assets to those areas where we believe demand is highest and other market conditions for our services are favorable. The industry-wide redeployment of assets from natural gas basins to oil- and liquids-rich basins has resulted in downward pressure on pricing and utilization, particularly in Texas. Capital expenditures by our exploration and production customers have been stagnant and have adversely impacted demand for our products and services; we believe these customers have been highly focused on efficiency and cost control, which negatively affects our overall pricing and utilization.
In Industrial Solutions, demand for our services is primarily driven by oil prices. While increases in oil prices increase the cost to us of UMO, they generally also cause increases in the price of, and demand for, RFO, as a lower cost, higher British Thermal Units (“BTU”) alternative to diesel fuel and, to re-refiners, as a critical feedstock for the production of base lubricants.
Our results are also driven by a number of other factors, including (i) our available inventory of equipment, which we have been building through acquisitions and capital expenditures over the last several years, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of drilling and production activities, and our ability to relocate our equipment to areas in which oil and gas exploration and production activities are growing, (iv) labor costs, which have been generally increasing through the periods discussed due to tight labor market conditions and increased government regulation, including the Affordable Care Act, (v) depreciation and amortization, which have been increasing as we have expanded our asset base, (vi) business mix between our Shale Solutions services and our Industrial Solutions services, (vii) developments in governmental regulations, (viii) seasonality and weather events and (ix) our health, safety and environmental performance record.
Our operating results are also affected by our acquisition activities, and the expenses we incur in connection with those activities, which can limit comparability of our results from period to period. We completed six acquisitions during 2012 and three acquisitions in the nine months ended September 30, 2013. We may complete other acquisitions during 2013 and beyond that will substantially change our future operating results from our historical operating results. The TFI acquisition, completed on April 10, 2012, and the Power Fuels Merger, completed November 30, 2012, are among our largest transactions to date. During the third quarter of 2013, we conducted an evaluation of strategic alternatives and, in doing so, affirmed our priority of growing our Shale Solutions business. In October 2013, our Board of Directors approved a plan to initiate a process for the sale of TFI.
Given the two large acquisitions completed in 2012, the year-over-year financial information in the three- and nine-month periods lacks comparability. See Note 3 of the notes to condensed consolidated financial statements for information regarding these acquisitions and certain pro forma financial information for the nine-month periods ended September 30, 2013 and 2012. Such pro forma financial results were impacted by the following factors:
• | Lower operating results in the Bakken Shale reflect reduced pricing and activity levels in the 2013 period compared to the same period in 2012, disruption caused by inclement weather in 2013 and increases in customer efficiencies, resulting in lower utilization of rental assets; |
• | Revenues and margins in the Haynesville and Barnett Shale basins fell in 2013 and 2012 due to lower drilling and completion activity in these basins; |
• | Revenues and margins in the Eagle Ford Shale basin have contracted in 2013 due in part to competitive pressures arising from our competitors’ redeployment of assets from other basins, predominately gas shale areas; |
• | Higher revenue in the Marcellus/Utica Shale basins in 2013 due to continued organic growth augmented by tuck-in acquisitions; and |
• | Lower margins in the Industrial Solutions segment in 2013, resulting primarily from higher feedstock and logistics costs. |
The following table sets forth our revenues from predominately oil and gas shale areas, total revenue for Shale Solutions, revenue for Industrial Solutions, total revenue, loss before income taxes, net loss attributable to common stockholders and EBITDA (defined below) for the three and nine month periods, ended September 30, 2013 and 2012 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues – from predominately oil shale areas (a) | $ | 90,852 | $ | 15,802 | $ | 278,494 | $ | 44,389 | ||||||||
Revenues – from predominately gas shale areas (b) | 40,952 | 43,418 | 118,934 | 128,539 | ||||||||||||
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Total revenue – Shale Solutions | 131,804 | 59,220 | 397,428 | 172,928 | ||||||||||||
Revenues – Industrial Solutions | 30,802 | 33,830 | 90,167 | 65,850 | ||||||||||||
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Total revenue | 162,606 | 93,050 | 487,595 | 238,778 | ||||||||||||
Loss before income taxes | (248,653 | ) | (8,711 | ) | (288,137 | ) | (21,714 | ) | ||||||||
Net loss attributable to common stockholders | (193,738 | ) | (9,345 | ) | (219,219 | ) | (2,465 | ) | ||||||||
EBITDA (c) | $ | (208,042 | ) | $ | 13,204 | $ | (158,137 | ) | $ | 33,268 |
(a) | Represents revenues associated with the Shale Solutions operating segment that are derived from predominately oil-rich areas consisting of the Bakken, Utica, Eagle Ford, Tuscaloosa Marine, Mississippian and Permian Shale basins. |
(b) | Represents revenues associated with the Shale Solutions operating segment that are derived from predominately gas-rich areas consisting of Marcellus, Haynesville and Barnett Shale basins. |
(c) | Defined as consolidated net income or loss before net interest expense, income taxes and depreciation and amortization. EBITDA is not a recognized measure under U.S. GAAP. See the reconciliation between net loss and EBITDA under EBITDA below. |
Impairment of Long-Lived Assets and Goodwill
Due to the existence of impairment indicators at June 30, 2013, we performed a company-wide impairment review of our long-lived assets, which we completed during the quarter ended September 30, 2013. Indicators of impairment, which triggered the need for such review, include adverse changes in the business climate of certain Shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in our Industrial Solutions operating segment combined with lower-than-expected financial results. Additionally, the market value of the equity of the Company traded for a period of time at a value that was less than the book value of the equity of the Company. In its Shale Solutions operating segment, long-lived assets were grouped at the shale basin level for purposes of assessing their recoverability. Except for AWS and the Company’s pipelines, we concluded the basin level is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For those asset groups with carrying values that exceed their undiscounted future cash flows, we recognized an impairment charge for the amount by which the carrying values of the asset group exceeded their respective fair values. Long-lived asset impairment was $108.4 million and $111.9 million for the three and nine months ended September 30, 2013, respectively. The impairment charge recognized during the 2013 third quarter consists of write-downs to the carrying values of our freshwater pipeline and certain long-lived assets, including customer relationship and disposal permit intangibles, associated with the Haynesville, Eagle Ford and Barnett Shale basins. In addition, we recognized a $3.5 million impairment charge during the quarter ended June 30, 2013, for the write-down of the carrying value of certain tangible assets in the Tuscaloosa Marine Shale, from which we have substantially exited.
At June 30, 2013, due to the presence of the impairment indicators described in the preceding paragraph, we concluded it was necessary to perform the first step of the two-step goodwill impairment test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. During the quarter ended September 30, 2013 we performed step one of the goodwill impairment test for each of our four reporting units: the Shale Solutions reporting unit, the Industrial Solutions reporting unit, the Pipeline reporting unit and the AWS reporting unit. To measure the fair value of each reporting unit, we used a combination of the discounted cash flow method and the guideline public company method. Based on the results of the step-one goodwill impairment review, we concluded the fair values of the Shale Solutions, Pipeline and AWS reporting units exceeded their respective carrying amounts and accordingly, the second step of the impairment test was not necessary for these reporting units. Conversely, we concluded the fair value of the Industrial Solutions reporting unit was less than its carrying value thereby requiring us to proceed to the second step of the two-step goodwill impairment test. The second step of the goodwill impairment test, used to measure the amount of the impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. After allocating the fair value of Industrial Solutions to the assets and liabilities of the reporting unit, we concluded the carrying value of reporting unit goodwill exceeded its implied fair value. Accordingly, we recognized a charge of $98.5 million during the three months ended September 30, 2013, which is characterized as goodwill impairment in our condensed consolidated statement of operations.
Impairment charges recorded in the nine months ended September 30, 2013, by reportable segment, consist of the following (in thousands):
Shale Solutions | Industrial Solutions | |||||||
Impairment of property, plant and equipment | $ | 107,413 | $ | — | ||||
Impairment of intangible assets | 4,487 | — | ||||||
Impairment of goodwill | — | 98,500 | ||||||
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Total impairment | $ | 111,900 | $ | 98,500 | ||||
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We believe the assumptions used in our discounted cash flow analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. We further believe the most significant assumption used in our analysis is the expected improvement in the margins and overall profitability of our reporting units. However, we may not meet our revenue growth and profitability targets, working capital needs and capital expenditures may be higher than forecast, changes in credit markets may result in changes to our discount rate and general business conditions may result in changes to the Company’s terminal value assumptions for our reporting units. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 5% decrease to the estimated fair value of each reporting unit. With respect to the AWS and Pipeline reporting units, the estimated fair value of the reporting units exceeded the carrying value of the reporting units by a substantial amount. However, this hypothetical 5% decrease in fair value would have triggered the need to perform a step two analysis for Shale Solutions. The amount of goodwill associated with Shale Solutions was $390.8 million at September 30, 2013.
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The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with the instructions to Form 10-Q and the rules and regulations of the SEC. These statements include all normal reoccurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations and cash flows. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2012 Annual Report on Form 10-K.
For trends affecting our business and the markets in which we operate see “Trends Affecting Our Operating Results” in the preceding paragraphs and also “Risk Factors — Risks Related to Our Business” in Part I, Item 1A of our 2012 Annual Report on Form 10-K and “Risk Factors” in Part II, Item 1A of this Form 10-Q.
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Results of Operations
Revenues:
Our consolidated revenues are generated from three primary sources: (1) environmental solutions provided to exploration and production companies operating in unconventional oil and natural gas resource areas, (2) equipment rental activities and (3) the sale of reprocessed fluids. Additional information about these revenue sources is as follows:
• | Environmental solutions revenue consists of fees charged to customers for the sale and transportation of fresh water and salt water by trucks or through temporary or permanent water transport pipelines owned by us to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of flowback and produced water originating from oil and gas wells and is attributable to Shale Solutions. Additionally, beginning in the 2013 third quarter, revenue includes fees for the transportation and disposal of oilfield solid wastes following the Company’s acquisition of a landfill in the Bakken Shale basin; |
• | Rental revenue consists of fees charged to customers for use of equipment owned by us over the term of the rental as well as other fees charged to customers for items such as delivery and pickup and is attributable to Shale Solutions; and |
• | Revenue from reprocessed fluids includes the sale of used motor oil and antifreeze after it is refined by one of our processing facilities and is attributable to Industrial Solutions. |
Cost of sales:
Cost of sales consists primarily of the following:
• | Wages and benefits for employees performing operational activities; |
• | Fuel expense associated with transportation and logistics activities; |
• | Costs to repair and maintain transportation and rental equipment and saltwater disposal wells; |
• | Depreciation of operating assets included in property, plant and equipment; and |
• | Costs to acquire UMO. |
General and Administrative Expenses:
General and administrative expenses consist primarily of the following:
• | Wages and benefits for employees performing administrative overhead roles; |
• | Legal, audit and other professional fees; |
• | Provision for doubtful accounts; |
• | Transaction and integration costs associated with business acquisitions; |
• | Certain insurance costs; and |
• | Other costs, including provision for settlement of litigation. |
Amortization of intangible assets represents the allocation of costs for other identifiable intangible assets originating from business acquisitions to future periods based on the assets’ useful lives and/or their projected future cash flows. Intangible assets include customer relationships, customer contracts, disposal permits, vendor relationships and other.
As discussed in Note 5 of the Notes to the condensed consolidated financial statements, we recognized a $98.5 million charge in the three months ended September 30, 2013 for goodwill impairment related to our Industrial Solutions reportable segment. Additionally, we recognized charges of $108.4 million and $111.9 million in the three months and nine months ended September 30, 2013, respectively, for the write-down of the carrying values of our freshwater pipeline and certain other long-lived assets in our Shale Solutions reportable segment, including $3.5 million during the second quarter of 2013 in connection with our decision to substantially exit operations in the Tuscaloosa Marine Shale.
As discussed in Note 8 of the notes to the condensed consolidated financial statements, we also incurred costs totaling $1.5 million in the quarter ended June 30, 2013 in connection with a restructuring of our business in several shale basins, including the aforementioned exit from the Tuscaloosa Marine Shale.
Interest expense includes interest incurred on the outstanding balance of our Revolving Credit Facility including fees on the unutilized portion thereof, interest incurred on our 2018 Notes as well as other indebtedness offset by interest earned on short-term investments.
Other income (expense) includes gains and losses from changes to contingent consideration estimates incurred in connection with business combinations, losses attributable to declines in the value of escrowed assets associated with the indemnification arrangements pursuant to business combinations and the impairment of cost-method investments.
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Income from equity investment represents the Company’s share of earnings from its 50% interest in a nonconsolidated venture to provide fresh water to customers in the Bakken Shale area.
For trends affecting our business and the markets in which we operate see “Trends Affecting Our Operating Results” in the preceding paragraphs and also “Risk Factors — Risks Related to Our Business” in Part I, Item 1A of our 2012 Annual Report on Form 10-K and “Risk Factors” in Part II, Item 1A of this Form 10-Q.
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Results of Operations for the Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (in thousands):
Three Months Ended September 30, | Percent of Revenue Three Months Ended September 30, | Increase (Decrease) 2013 versus 2012 | ||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||
Non-rental revenue | $ | 143,286 | $ | 90,465 | 88.1 | % | 97.2 | % | $ | 52,821 | 58.4 | % | ||||||||||||
Rental revenue | 19,320 | 2,585 | 11.9 | 2.8 | 16,735 | 647.4 | ||||||||||||||||||
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Total revenue | 162,606 | 93,050 | 100.0 | 100.0 | 69,556 | 74.8 | ||||||||||||||||||
Cost of sales | (143,342 | ) | (76,633 | ) | (88.2 | ) | (82.4 | ) | 66,709 | 87.0 | ||||||||||||||
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Gross profit | 19,264 | 16,417 | 11.8 | 17.6 | 2,847 | 17.3 | ||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||
General and administrative expenses | 37,497 | 10,592 | 23.1 | 11.4 | 26,905 | 254.0 | ||||||||||||||||||
Amortization of intangible assets | 5,874 | 5,281 | 3.6 | 5.7 | 593 | 11.2 | ||||||||||||||||||
Goodwill impairment | 98,500 | — | 60.6 | 0.0 | 98,500 | n/a | ||||||||||||||||||
Long-lived asset impairment | 108,401 | — | 66.7 | 0.0 | 108,401 | n/a | ||||||||||||||||||
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| |||||||||||||||
Total operating expenses | 250,272 | 15,873 | 153.9 | 17.1 | 234,399 | 1,476.7 | ||||||||||||||||||
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| |||||||||||||||
(Loss) income from operations | (231,008 | ) | 544 | (142.1 | ) | 0.6 | 231,552 | n/a | ||||||||||||||||
Interest expense, net | (13,473 | ) | (6,968 | ) | (8.3 | ) | (7.5 | ) | 6,505 | 93.4 | ||||||||||||||
Income from equity investment | 183 | — | 0.1 | — | 183 | n/a | ||||||||||||||||||
Loss on extinguishment of debt | — | — | — | — | — | n/a | ||||||||||||||||||
Other expense, net | (4,355 | ) | (2,287 | ) | (2.7 | ) | (2.5 | ) | 2,068 | 90.4 | ||||||||||||||
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| |||||||||||||||
Loss before income taxes | (248,653 | ) | (8,711 | ) | (152.9 | ) | (9.4 | ) | 239,942 | 2,754.5 | ||||||||||||||
Income tax benefit | 54,915 | (634 | ) | 33.8 | (0.7 | ) | 55,549 | n/a | ||||||||||||||||
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(Loss) income attributable to common stockholders | $ | (193,738 | ) | $ | (9,345 | ) | (119.1 | )% | (10.0 | )% | $ | 184,393 | 1,973.2 | |||||||||||
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Non-Rental Revenue
Non-rental revenue for the three months ended September 30, 2013 was $143.3 million, up $52.8 million from $90.5 million for the same period in 2012. The increase was primarily attributable to the Power Fuels Merger on November 30, 2012, which accounted for approximately $58.1 million of the quarter-over-quarter increase in non-rental revenue.
Rental Revenue
Rental revenue for the three months ended September 30, 2013 was $19.3 million, up $16.7 million from the prior year period. The increase primarily consisted of $16.8 million of rental revenue in the Bakken shale directly attributable to Power Fuels. Excluding the impact of Power Fuels, rental revenue was flat, with reduced activity levels offset by somewhat stronger pricing.
Segment Revenue
In the Shale Solutions segment, revenue for the three-month period ended September 30, 2013, increased by $72.6 million, or 122.6%, to $131.8 million. The increase was primarily attributable to revenue from Power Fuels following the November 30, 2012 Power Fuels Merger, coupled with strong growth in the Marcellus/Utica shale basins. Overall, revenue from predominately gas shale basins was down year-over-year. Revenue in the Industrial Solutions segment was $30.8 million for the three months ended September 30, 2013 down 8.9% from the same quarter of 2012.
Cost of Sales and Gross Profit
Cost of sales was $143.3 million in the three months ended September 30, 2013, up $66.7 million from $76.6 million in the three months ended September 30, 2012. Consistent with the increase in revenue, the increase in cost of sales was primarily attributable to the Power Fuels Merger in 2012, which accounted for approximately $63.3 million of the quarter over quarter increase. The increase in cost of sales included higher depreciation expense of $20.8, which included the effects of assets acquired in the TFI Acquisition and Power Fuels Merger as well as 2012 capital expenditures and equipment acquired in other business combinations.
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General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2013 were $37.5 million, up $26.9 million from $10.6 million for the comparable 2012 period. The increase included a $16.0 million charge to establish an accrual related to the 2010 class action litigation as described in Note 12 to the condensed consolidated financial statements. The increase was also attributable in part to acquisition, rebranding and integration activities, totaling $2.7 million during the quarter ended September 30, 2013. The addition of Power Fuels accounted for approximately $4.9 million of the quarter-over-quarter increase in general and administrative expenses. The remainder of the 2013 increase is primarily the result of increased salaries and benefit costs associated with higher staffing levels.
Amortization of Intangible Assets
Amortization of intangible assets was $5.9 million and $5.3 million for the three months ended September 30, 2013 and 2012, respectively. The increase is due primarily to the large increase in intangible assets acquired in connection with the six acquisitions, including Power Fuels and TFI, which were completed during 2012. The largest components of newly acquired intangible assets were customer relationships valued at approximately $248.4 million of which $4.7 million was amortized to expense during the third quarter of 2013. The increase attributable to 2012 acquisitions was partially offset by a $4.5 million write-down in the carrying value of certain intangible assets in the Haynesville, Eagle Ford and Barnett Shale basins as described below.
Goodwill Impairment
Goodwill impairment was $98.5 million for the three months ended September 30, 2013 and represents a write-down of the carrying value of goodwill associated with our Industrial Solutions reportable segment, consisting of TFI. Due to impairment indicators identified at June 30, 2013, including a structural shift in TFI’s customer end-markets, we commenced a goodwill impairment review of our Industrial Solutions reporting unit culminating in a conclusion that the carrying value of the Industrial Solutions reporting unit exceeded its fair value. The impairment charge represents the difference between the carrying value of goodwill and the implied fair value of Industrial Solutions reporting unit goodwill. As described in Note 16 to our condensed consolidated financial statements, in October 2013, the Company’s board of directors authorized commencement of a process to divest TFI, which comprises the Company’s Industrial Solutions business segment.
Long-Lived Asset Impairment
Long-lived asset impairment amounted to $108.4 million for the three months ended September 30, 2013, and represents a write-down of the carrying values of our freshwater pipeline and certain other assets in the Haynesville, Eagle Ford and Barnett Shale basins. Due to impairment indicators present at June 30, 2013, and previously disclosed, we commenced a company-wide impairment review of our long-lived assets during the third quarter of 2013. Long-lived assets were grouped into reporting units at the shale basin level for purposes of assessing their recoverability, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For those reporting units in which the carrying value of the long-lived group exceeded the undiscounted future cash flows associated with the continued use and disposition of the asset group, we recognized an impairment charge for the amount by which the carrying values of the asset groups exceeded their respective fair values.
Loss from Operations
Loss from operations was $231.0 million for the three months ended September 30, 2013, compared to income from operations of $0.5 million in the same prior year period. The current period loss from operations was significantly impacted by the goodwill and long-lived asset impairment charges totaling $206.9 million as described previously, as well as the $16.0 million charge to establish an accrual related to the 2010 Class Action litigation described in Note 12 of the notes to the condensed consolidated financial statements.
Interest Expense, net
Interest expense, net during the three months ended September 30, 2013 was $13.5 million compared to $7.0 million for the corresponding quarter in 2012. The increase in interest expense during the 2013 period was primarily due to a $3.7 million increase in interest expense on the $150.0 million tranche of the 2018 Notes issued in November 2012, the proceeds of which were used to partially finance the Power Fuels Merger. In addition, we incurred approximately $1.9 million of interest expense on our revolving credit facility in the third quarter of 2013 versus $0.3 million in the same quarter of 2012. Amortization of deferred financing costs was approximately $0.5 million higher in the 2013 three month period versus the 2012 three month period due primarily to creditor and third party fees associated with the issuance of the additional 2018 Notes in November 2012 and the revolving credit agreement.
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Other Expense, net
Other expense, net was $4.4 million for the three months ended September 30, 2013, compared to $2.3 million in the same period of 2012. Other expense for the three months ended September 30, 2013, consisted primarily of a $3.8 million write-down to our cost-method investment in UGSI. Refer to Note 14 to condensed consolidated financial statements for additional information.
Loss before Income Taxes
Loss before income taxes amounted to $248.7 million for the three months ended September 30, 2013, compared to $8.7 million for the corresponding period of 2012, due to factors described in the preceding paragraphs. On a segment basis, the pre-tax loss in Shale Solutions increased to $110.1 million in the 2013 third quarter from $3.3 million in the year-ago period, and was significantly impacted by the aforementioned $108.4 million long-lived asset impairment charge. Loss before income taxes in the Industrial Solutions segment was $99.3 million in the 2013 third quarter, reflecting the $98.5 million goodwill impairment charge referred to previously. During the 2013 three month-period, the loss incurred by the Corporate group was $39.3 million, up from $10.3 million in 2012. The primary factors impacting the increased loss are $3.7 million of additional interest expense associated with the 2018 Notes and our revolving credit facility, a $16.0 million charge to establish an accrual in connection with the 2010 class action litigation and $2.7 million of integration-related costs and higher personnel costs attributable to increased staffing.
Income Taxes
Our income tax benefit for the three months ended September 30, 2013 was $54.9 million, resulting in an effective tax rate of 22.1%. This rate differs from the federal statutory rate of 35.0%, primarily due to the tax impact of the impairment of goodwill, state taxes, and $1.2 million of adjustments from prior periods to deferred tax assets and liabilities associated with fixed assets, certain acquired intangible assets and net operating loss carryforwards. Our income tax expense for the three months ended September 30, 2012 was $0.6 million, with an effective income tax rate of 7.3%, which differs from the federal statutory rate of 35.0% primarily due to a valuation allowance on certain deferred tax assets and state taxes.
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Results of Operations for the Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (in thousands):
Nine Months Ended September 30, | Percent of Revenue Nine Months Ended September 30, | Increase (Decrease) 2013 versus 2012 | ||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||
Non-rental revenue | $ | 426,470 | $ | 230,566 | 87.5 | % | 96.6 | % | $ | 195,904 | 85.0 | % | ||||||||||||
Rental revenue | 61,125 | 8,212 | 12.5 | 3.4 | 52,913 | 644.3 | ||||||||||||||||||
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Total revenue | 487,595 | 238,778 | 100.0 | 100.0 | 248,817 | 104.2 | ||||||||||||||||||
Cost of sales | (423,071 | ) | (200,316 | ) | (86.8 | ) | (83.9 | ) | 222,755 | 111.2 | ||||||||||||||
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Gross profit | 64,524 | 38,462 | 13.2 | 16.1 | 26,062 | 67.8 | ||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||
General and administrative expenses | 71,687 | 27,630 | 14.7 | 11.6 | 44,057 | 159.5 | ||||||||||||||||||
Amortization of intangible assets | 23,531 | 11,413 | 4.8 | 4.8 | 12,118 | 106.2 | ||||||||||||||||||
Goodwill impairment | 98,500 | — | 20.2 | 0.0 | 98,500 | n/a | ||||||||||||||||||
Long-lived asset impairment | 111,900 | — | 22.9 | 0.0 | 111,900 | n/a | ||||||||||||||||||
Restructuring and exit costs | 1,453 | — | 0.3 | 0.0 | 1,453 | n/a | ||||||||||||||||||
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Total operating expenses | 307,071 | 39,043 | 62.9 | 16.4 | 268,028 | 686.5 | ||||||||||||||||||
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Loss from operations | (242,547 | ) | (581 | ) | (49.7 | ) | (0.2 | ) | 241,966 | n/a | ||||||||||||||
Interest expense, net | (40,144 | ) | (15,930 | ) | (8.2 | ) | (6.7 | ) | 24,214 | 152.0 | ||||||||||||||
Income from equity investment | 41 | — | (0.0 | ) | — | 41 | n/a | |||||||||||||||||
Other expense, net | (5,487 | ) | (5,203 | ) | (1.1 | ) | (2.2 | ) | 284 | 5.5 | ||||||||||||||
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Loss before income taxes | (288,137 | ) | (21,714 | ) | (59.1 | ) | (9.1 | ) | 266,423 | 1,227.0 | ||||||||||||||
Income tax benefit | 68,918 | 19,249 | 14.1 | 8.1 | 49,669 | 258.0 | ||||||||||||||||||
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Net loss attributable to common stockholders | $ | (219,219 | ) | $ | (2,465 | ) | (45.0 | )% | (1.0 | )% | $ | 216,754 | 8,793.3 | |||||||||||
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Non-Rental Revenue
Non-rental revenue for the nine months ended September 30, 2013 was $426.5 million, up $195.9 million from $230.6 million for the same period in 2012. The increase is primarily attributable to Power Fuels, which accounted for approximately $170.7 million of the year-over-year increase in non-rental revenues.
Rental Revenue
Rental revenue for the nine months ended September 30, 2013 was $61.1 million, up $52.9 million from the prior year period. The increase was substantially the result of Power Fuels, which contributed $52.8 million of the total increase.
Segment Revenue
In the Shale Solutions segment, revenue for the nine-month period ended September 30, 2013, increased by $224.5 million, or 129.8%, to $397.4 million. The increase included the revenue contribution from Power Fuels of $223.4 million as well as significant growth in other shale basins, notably the Marcellus/Utica and Mississippian Lime. Revenue from predominately gas shale basins declined markedly year-over-year, including contraction in the Haynesville and Barnett shale basins. Revenue in the Industrial Solutions segment, created upon the April 2012 acquisition of TFI, was $90.2 million for the nine months ended September 30, 2013, compared to $65.9 million in the period from April 10, 2012 thru September 30, 2012.
Cost of Sales and Gross Profit
Cost of sales was $423.1 million in the nine months ended September 30, 2013, up $222.8 million from $200.3 million in the nine months ended September 30, 2012. Consistent with the increase in revenue, the increase in cost of sales was primarily attributable to the Power Fuels Merger in 2012, which accounted for approximately $181.2 million of the year over year increase. The increase in cost of sales included higher depreciation expense of $65.0, which included the effects of assets acquired in the TFI Acquisition and Power Fuels Merger as well as 2012 capital expenditures and equipment acquired in other business combinations.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2013 were $71.7 million, up $44.1 million from $27.6 million for the comparable 2012 period. The addition of Power Fuels accounted for approximately $11.2 million of the year-to-date increase in such expenses. The remainder of the increase was due to a $16.0 million charge to establish an accrual in connection with the class action litigation described in Note 12 to the condensed consolidated financial statements, $6.0 million of integration and rebranding costs and increased personnel costs associated with expanded staffing.
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Amortization of Intangible Assets
Amortization of intangible assets was $23.5 million and $11.4 million for the nine months ended September 30, 2013 and 2012, respectively. The increase is due to the large increase in intangible assets acquired in connection with the six acquisitions completed in 2012, including Power Fuels and TFI. The largest components of newly acquired intangible assets were customer relationships valued at approximately $248.4 million of which $18.3 million was amortized to expense during the first nine months of 2013.
Goodwill Impairment
Goodwill impairment was $98.5 million for the nine-month period ended September 30, 2013 and represents a write-down of the carrying value of goodwill associated with our Industrial Solutions reportable segment, consisting of TFI. Due to impairment indicators identified at June 30, 2013, including a structural shift in our customer end-markets, we commenced a goodwill impairment review of our Industrial Solutions reporting unit culminating in a conclusion that the carrying value of the Industrial Solutions reporting unit exceeded its fair value. The impairment charge represents the difference between the carrying value of goodwill and the implied fair value of Industrial Solutions reporting unit goodwill. As described in Note 16 to the condensed consolidated financial statements, the Company’s board of directors authorized commencement of a process to divest TFI in October 2013.
Long-Lived Asset Impairment
Long-lived asset impairment was $111.9 million for the nine months ended September 30, 2013 and represents a write-down of the carrying values of our freshwater pipeline and certain other assets in the Haynesville, Eagle Ford and Barnett Shale basins. Due to impairment indicators present at June 30, 2013, we commenced a company-wide impairment review of our long-lived assets during the third quarter of 2013. Long-lived assets were grouped at the shale basin level for purposes of assessing their recoverability, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For reporting units in which the carrying value of the long-lived group exceeded the undiscounted future cash flows associated with the continued use and disposition of the asset group, we recognized recorded an impairment charge for the amount by which the carrying values of the asset groups exceeded their respective fair values. We also recognized a $3.5 million charge during the second quarter of 2013 to write down certain operating assets in connection with our decision to substantially exit operations in the Tuscaloosa Marine Shale.
Restructuring and Exit Costs
During the second quarter of 2013, the Company recorded a charge of approximately $1.5 million to restructure its operations in certain shale basins and improve overall operating efficiency. The charge includes severance and termination benefits and costs incurred to substantially cease operations in the Tuscaloosa Marine Shale.
Loss from Operations
Loss from operations was $242.6 million for the nine months ended September 30, 2013, compared to $0.6 million for the same period in 2012 and was significantly impacted by the goodwill and long-lived asset impairment charges of $98.5 million and $111.9 million, respectively, and the $16.0 million accrual in connection with the 2010 class action litigation, all of which are described in the preceding paragraphs.
Interest Expense, net
Interest expense during the nine months ended September 30, 2013 was $40.1 million as compared to $15.9 million for the year-ago period. The increase in interest expense during the 2013 period included $17.6 million of additional interest on the $250.0 million and $150.0 million tranches of the 2018 Notes issued in April 2012 and November 2012, respectively, the proceeds of which were used to partially finance the TFI Acquisition and Power Fuels Merger. In addition, we amortized $3.4 million of deferred financing costs to interest expense in the nine months ended September 30, 2013, as compared to $0.4 million for the corresponding prior year.
Other Expense, net
Other expense, net was $5.5 million in the nine months ended September 30, 2013 and consisted primarily of a $3.8 million write-down to our cost-method investment in UGSI. Refer to Note 14 to condensed consolidated financial statements for additional information. In addition, the Company incurred an approximate $1.0 million loss in the first quarter of 2013 in connection with a decline in the value of certain shares placed in escrow upon the closing of the TFI acquisition. Pursuant to the terms and conditions of the stock purchase agreement related to the TFI acquisition, the Company was required to indemnify the sellers for a decline in the value of escrowed shares after the one-year anniversary of the TFI acquisition and upon liquidation of the escrowed shares.
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Loss before Income Taxes
Loss before income taxes amounted to $288.1 million for the nine months ended September 30, 2013, compared to $21.7 million for the corresponding period of 2012, due to the items previously described. On a segment basis, the pre-tax loss in Shale Solutions was $108.6 million in the nine-month period ended September 30, 2013 compared to $5.3 million in the corresponding period in 2012, reflecting the $111.9 million impairment charge in 2013. Loss before income taxes in the Industrial Solutions segment was $98.4 million in the nine months ended September 30, 2013 reflecting the $98.5 million goodwill impairment charge and includes $10.1 million of depreciation and amortization expenses. During the nine month period ended September 30, 2013, the loss incurred by the Corporate group was $81.1 million, up from $26.8 million in 2012. The primary factors impacting Corporate pre-tax loss are $17.6 million of additional interest expense associated with the 2018 Notes, a $16.0 million charge associated with the 2010 class action litigation described previously, $5.7 million of integration related costs and higher salaries and benefit costs attributable to headcount increases.
Income Taxes
Our income tax benefit for the nine months ended September 30, 2013 was $68.9 million, resulting in an effective tax rate of 23.9%. This rate differs from the federal statutory rate of 35.0%, primarily due to the tax impact of the impairment of goodwill, state taxes, and $2.8 million of adjustments from prior periods to deferred tax assets and liabilities associated with fixed assets, certain acquired intangible assets and net operating loss carryforwards. Our income tax benefit for the nine months ended September 30, 2012 of 88.5% was $19.2 million. As noted in the quarter over-quarter discussion, our effective income tax rate for the nine months ended September 30, 2012 differs from the federal statutory rate of 35.0% primarily due to reductions in valuation allowance due to acquired sources of taxable income in the form of deferred tax liabilities resulting from the TFI acquisition.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our primary source of capital is from cash generated by our operations with additional sources of capital from borrowings available under our Revolving Credit Facility as well as the debt and equity capital markets. Our historical acquisition activity has been, and any future acquisition activity is expected to be, highly capital intensive, with significant investments required in order to expand our presence in the major United States shale basins, access new shale basins and expand the breadth and scope of the services we provide. The following table summarizes our sources and uses of cash for the nine months ended September 30, 2013 and 2012 (in thousands):
Nine months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Net cash provided by operating activities | $ | 76,375 | $ | 17,940 | ||||
Net cash used in investing activities | (42,723 | ) | (253,973 | ) | ||||
Net cash (used in) provided by financing activities | (39,928 | ) | 167,516 | |||||
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Net decrease in cash and cash equivalents | $ | (6,276 | ) | $ | (68,517 | ) | ||
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As of September 30, 2013, we had cash and cash equivalents of $9.9 million, a decrease of $6.3 million from December 31, 2012. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, to pay down the outstanding balance of our revolving credit facility. Our excess cash combined with $33.7 million of free cash flow (defined as net cash provided by operating activities less net cash used in investing activities) for the nine months ended September 30, 2013 was used to repay $15.0 million and $32.5 million of the outstanding balance on our Revolving Credit Facility during the three and nine months ended, respectively. Free cash flow for the 2013 nine-month period was due primarily to net cash provided by operating activities stemming from improvements in working capital, most notably, a $16.1 million reduction in accounts receivable and $6.5 million increase in accounts payable.
Operating Activities —Net cash provided by operating activities was $76.4 million for the nine months ended September 30, 2013 and consisted of the add-back of non-cash items and other adjustments totaling $244.8 million and a $50.8 million increase in net operating liabilities offset by a net loss of $219.2 million. The non-cash items included $90.0 million of depreciation and amortization. The increase in net operating liabilities was due primarily to a $36.4 million net increase in accounts payable including accrued interest and accrued expenses combined with a $14.4 million net decrease in accounts receivable and other current assets.
Net cash provided by operating activities was $17.9 million for the nine months ended September 30, 2012 and consisted of non-cash items and other adjustments of $28.0 million offset by a net loss of $2.5 million and a $7.6 million increase in net operating assets. The increase in net operating assets included a $19.7 million increase in accounts receivable due largely to revenue growth and slower collections. Non-cash items and adjustments included $27.6 million of depreciation expense and $11.4 million of amortization of intangible assets.
Investing Activities —Net cash used in investing activities was $42.7 million for the nine months ended September 30, 2013 and consisted primarily of $35.6 million of capital expenditures including $12.5 million of upgrades to a produced water pipeline in the Haynesville Shale area, and $10.6 million for acquisitions (net of cash acquired). These capital outlays were partially offset by $3.5 million in proceeds from the settlement of the Power Fuels working capital adjustment and from sales of property and equipment.
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Net cash used in investing activities was $253.9 million for the nine months ended September 30, 2012 and consisted of $232.2 million of cash payments associated with business acquisitions and $33.8 million of capital expenditures offset by $5.2 million of proceeds received from the sale of available-for-sale securities and $6.9 million of proceeds from the sale of property and equipment.
Financing Activities —Net cash used in financing activities was $39.9 million for the nine months ended September 30, 2013 and consisted of $32.5 million of net payments under our Revolving Credit Facility, $4.0 million of payments under capital leases and notes payable, $1.8 million of contingent consideration payments and $1.6 million in other disbursements.
Net cash provided by financing activities was $167.5 million for the nine months ended September 30, 2012 and consisted of $74.4 million of net proceeds received from the sale of 18.2 million shares of our common stock in a public offering at $4.40 per share, and net proceeds of $248.6 million from the issuance of the first tranche of our 2018 Notes in April 2012, offset by $140.2 million payment on a term loan, which was repaid during the third quarter of 2012 using a portion of the proceeds received from the sale of common stock described above. The issuance of the 2018 Notes in April 2012 was used primarily to fund our acquisition of TFI.
Capital Expenditures
Capital expenditures for the nine months ended September 30, 2013, excluding acquisitions, totaled $35.6 million, and included $12.5 million for upgrades to the Company’s produced water pipeline in the Haynesville Shale area. A significant portion of our transportation-related capital requirements are financed through capital leases, which are not included in the capital expenditures noted in the previous sentence. Transportation assets purchased under capital lease obligations totaled approximately $5.8 million and $20.4 million in the nine months ended September 30, 2013 and 2012, respectively. Excluding costs associated with the produced water pipeline, capital expenditures decreased approximately $1.7 million in the first nine months of 2013 compared to the same period of 2012. This decrease was due in part to our focus on improving the utilization of existing assets and optimizing resource allocations in the various shale areas in which we operate. Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. We may also incur additional capital expenditures for acquisitions. Our planned capital expenditures for the remainder of 2013, as well as any acquisitions we choose to pursue, will likely be financed through a combination of cash on hand, cash flow from operations, borrowings under our revolving credit facility and capital leases, and, in the case of acquisitions, issuances of equity. We may also issue additional debt securities.
Indebtedness
We are highly leveraged and a substantial portion of our liquidity needs arise from debt service requirements and from funding our costs of operations, and capital expenditures including acquisitions. As of September 30, 2013, we had $535.2 million of indebtedness outstanding, consisting of $114.5 million under the Revolving Credit Facility, $400.0 million of 2018 Notes and $21.5 million under capital lease and other notes payable obligations. The 2018 Notes, which were issued in separate tranches, are presented net of unamortized issuance discounts and issuance premiums of $1.1 million and $0.3 million, respectively, in our consolidated balance sheet at September 30, 2013.
Under the terms of the revolving credit facility, as amended in September 2013, the Company is required to comply with specified financial ratios and tests, including a minimum interest coverage ratio, a maximum total leverage ratio and a maximum senior leverage ratio based on “Consolidated EBITDA,” as defined in the revolving credit agreement, for each trailing four-quarter period. The required and actual ratios at September 30, 2013, all of which the Company was in compliance with, are as follows:
Required | Actual | |||||||
Minimum interest coverage ratio | 2.75x | 3.43x | ||||||
Maximum total leverage ratio | 4.75x | 4.21x | ||||||
Maximum senior leverage ratio | 2.50x | 1.08x |
Availability under the Revolving Credit Facility for future borrowings as of September 30, 2013, based on the most restrictive financial covenant, was $69.7 million, which is net of our total outstanding borrowings and $2.7 million of letters of credit. As of November 7, 2013 the outstanding balance on the Revolving Credit Facility was approximately $132.5 million. The increase in the outstanding balance from September 30, 2013 was due primarily to cash requirements for the payment of the semi-annual interest on our 2018 Notes on October 15, 2013.
The Revolving Credit Facility contains a number of covenants that, among other things, limit or restrict our ability to incur additional indebtedness; incur liens (other than liens securing capital leases and purchase money debt); make further negative pledges; make loans, advances and other investments, including acquisitions (provided that acquisitions shall be permitted to the extent that the target is in the water or environmental services industry, that the representations and warranties are true and correct in all material respects as of the acquisition date and certain pro forma ratios are met); declare dividends, distributions and issuances of equity interest or repayment of the same; make fundamental changes; make prepayments, redemptions and purchases of subordinated and certain other debt; engage in transactions with affiliates; pay dividends and make other payments affecting subsidiaries; make changes
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in lines of business, fiscal year and accounting practices; make material amendments to our organization documents; engage in sales-leaseback transactions; engage in hedging transactions; make capital expenditures and incur operating lease obligations. We are currently in compliance with all of our covenants in our Revolving Credit Facility. Depending on our operating results in the fourth quarter of 2013 and other factors, we may have difficulty meeting our minimum interest coverage ratio and/or our maximum total leverage ratio at December 31, 2013. Failure to meet the specified ratios constitutes an event of default under our Revolving Credit Facility. If any event of default were to occur, we would seek a waiver of the covenants or refinance the Revolving Credit Facility with an alternate structure with no ongoing maintenance covenant requirements. A decision to seek a waiver or refinancing could result in upfront fees and increased interest costs; however, there can be no assurances that such a waiver or refinancing could be obtained. Failure to obtain a waiver or refinancing, in any case, would trigger a requirement that the outstanding balance under the Revolving Credit Facility be repaid immediately, which would also likely trigger acceleration of our 2018 notes.
The indentures governing the 2018 Notes also contain restrictive covenants that, among other things, limit our ability to transfer or sell assets; pay dividends or make certain distributions, buy subordinated indebtedness or securities, make certain investments or make other restricted payments; incur or guarantee additional indebtedness or issue preferred stock; create or incur liens securing indebtedness; incur dividend or other payment restrictions affecting restricted subsidiaries; consummate a merger, consolidation or sale of all or substantially all of our assets; enter into transactions with affiliates; engage in business other than a business that is the same or similar, reasonably related, complementary or incidental to our current business and/or that of our restricted subsidiaries; and make certain acquisitions or investments. The Company was compliant with these covenants at September 30, 2013.
As previously described, in October 2013, the Company’s board of directors authorized commencement of a process to divest TFI. As noted above, our Revolving Credit Facility and the indentures to the 2018 Notes contain certain limitations and covenants concerning changes in lines of business and the substantial sale of our assets. Any divesture of TFI may be subject to various third party consents. There can be no assurances that we will obtain any necessary consents of lenders, governmental authorities or other third parties that might be required in order for us to sell TFI or effectuate any other divesture.
Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors” in Part II, Item 1A of this Quarterly Report and Part I, Item 1A of our 2012 Annual Report on Form 10-K.
From time to time, we evaluate various alternatives for the use of excess cash generated from our operations including paying down debt, funding acquisitions and repurchasing common stock or debt securities. Our capacity to repurchase common stock is limited to $3.0 million per year by the Revolving Credit Facility unless certain payment conditions are satisfied.
Off Balance Sheet Arrangements
None.
EBITDA
As a supplement to the financial statements in this Quarterly Report on Form 10-Q, which are prepared in accordance with U.S. GAAP, we also present EBITDA. EBITDA is consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. We present EBITDA because we believe this information is useful to financial statement users in evaluating our financial performance. We also use EBITDA to evaluate our financial performance, make business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. EBITDA is not a measure of performance calculated in accordance with U.S. GAAP and there are material limitations to its usefulness on a stand-alone basis. EBITDA does not include reductions for cash payments for our obligations to service our debt, fund our working capital and pay our income taxes. In addition, certain items excluded from EBTIDA such as interest, income taxes, depreciation and amortization are significant components in understanding and assessing our financial performance. All companies do not calculate EBITDA in the same manner and our presentation may not be comparable to those presented by other companies. Financial statement users should use EBITDA in addition to, and not as an alternative to, net (loss) income as defined under and calculated in accordance with U.S. GAAP.
The table below provides a reconciliation between net loss, as determined in accordance with U.S. GAAP, and EBITDA (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net loss | $ | (193,738 | ) | $ | (9,345 | ) | $ | (219,219 | ) | $ | (2,465 | ) | ||||
Depreciation of property, plant and equipment | 21,264 | 9,666 | 66,325 | 27,639 | ||||||||||||
Amortization of intangible assets | 5,874 | 5,281 | 23,531 | 11,413 | ||||||||||||
Interest expense, net | 13,473 | 6,968 | 40,144 | 15,930 | ||||||||||||
Income tax (benefit) expense | (54,915 | ) | 634 | (68,918 | ) | (19,249 | ) | |||||||||
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EBITDA | $ | (208,042 | ) | $ | 13,204 | $ | (158,137 | ) | $ | 33,268 | ||||||
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Recent Accounting Pronouncements
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02,Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income(“ASU 2013-02”). The amendments in this update do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012, which for us is the reporting period starting January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements. As permitted under ASU 2013-02, we will elect to present reclassification adjustments from each component of accumulated other comprehensive income within a single note to the financial statements beginning in 2013 if and when reclassification adjustments are made. There were no reclassification adjustments from any components of accumulated other comprehensive income during the three and nine months ended September 30, 2013 and 2012.
In July 2012, the FASB issued ASU No. 2012-02,Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Accounting Standards Codification subtopic 350-30,General Intangibles other than Goodwill. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for us are the annual and interim periods starting January 1, 2013. As of December 31, 2012, we did not have any intangible assets with indefinite lives. At this time, we do not anticipate the adoption of ASU 2012-02 will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,Testing Goodwill for Impairment (“ASU 2011-08”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The amendment does not change the requirement to perform the second step of the interim goodwill impairment test to measure the amount of an impairment loss, if any, if the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for us were the annual and interim periods starting January 1, 2012. As previously described, we performed an assessment of qualitative factors at June 30, 2013 and concluded that impairment indicators were present. These impairment indicators include adverse changes in the business climate of certain Shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in the Company’s Industrial Solutions operating segment combined with lower-than-expected financial results, and the fact that the market value of the equity of the Company traded for a period of time at a value that was less than book value of the equity of the Company. We completed our impairment review of long-lived assets and goodwill during the quarter ended September 30, 2013. See Note 5 of notes to the condensed consolidated financial statements for additional information.
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies in the nine months ended September 30, 2013 from those contained in our 2012 Annual Report on Form 10-K.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Inflation
Inflationary factors, such as increases in our cost structure, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
Commodity Risk
We are subject to market risk exposures arising from declines in oil and natural gas drilling activity in unconventional areas, which is primarily a function of the market price for oil and natural gas. Various factors beyond our control affect the market prices for oil and natural gas, including but not limited to the level of consumer demand, governmental regulation, the price and availability of alternative fuels, political instability in foreign markets, weather-related factors and the overall economic environment. During 2012, in response to a drop in natural gas prices we redeployed resources to oil-rich shale areas where drilling activity was more robust. Market prices for oil and natural gas have been volatile and unpredictable for several years, and we expect this volatility to continue in the future. Prolonged declines in the market price of oil and/or natural gas could contribute to declines in drilling activity and accordingly would reduce demand for our services. We attempt to manage this risk by strategically aligning our assets with those areas where we believe demand is highest and market conditions for our services are most favorable.
Interest Rates
As of September 30, 2013 the outstanding principal balance on our revolving credit facility was $114.5 million with variable rates of interest based generally on London inter-bank offered rate (“LIBOR”) plus a margin of between 2.50% and 3.75% based on a ratio of the Company’s total debt to EBITDA (as defined in the Revolving Credit Facility), or an alternate interest rate equal to the higher of the Federal Funds Rate as published by the Federal Reserve Bank of New York plus 0.50%, the prime commercial lending rate of the administrative agent under the Credit Agreement, and monthly LIBOR plus 1.00%, plus a margin of between 1.50% and 2.75% based on the Company’s total debt to EBITDA (as defined in the Revolving Credit Facility). We have assessed our exposure to changes in interest rates on variable rate debt by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of 1% to the interest rates on the average outstanding balance of our variable rate debt portfolio during the nine months ended September 30, 2013 our net interest expense for the three and nine months ended September 30, 2013 would have increased by an estimated $0.3 million and $1.1 million, respectively.
As of September 30, 2013 the carrying value and the fair value of our 2018 Notes was $400.0 million and $407.9 million, respectively. The fair value of our 2018 Notes is affected, among other things, by changes to market interest rates. Should we decide to retire our 2018 Notes early, a change in interest rates could affect our future repurchase price. We have assessed our exposure to changes in interest rates by analyzing the sensitivity to the fair value of our 2018 Notes assuming various changes in market interest rates. Assuming a hypothetical increase to market interest rates of 1%, we estimate the fair value of our 2018 Notes would decrease by approximately $14 million. Assuming a hypothetical decrease to market interest rates of 1%, we estimate the fair value of our 2018 Notes would increase by approximately $14 million.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, we performed an evaluation, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the SEC under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are accumulated and communicated to our management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
As a result of two material acquisitions completed in 2012, the Company is in the process of harmonizing internal controls over financial reporting on a company-wide basis. Except for this ongoing harmonization effort, there were no changes to our internal control over financial reporting that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings. |
See “Commitments and Contingencies-Litigation” in Note 12 of the Notes to our Condensed Consolidated Financial Statements for a description of our legal proceedings.
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Item 1A. | Risk Factors. |
There have been no material changes from the risk factors as previously disclosed in our 2012 Annual Report on Form 10-K filed with the SEC on March 18, 2013, except as set forth below:
An event of default under our Revolving Credit Facility may adversely affect our business, results of operations and financial condition.
Our Revolving Credit Facility requires us to comply with specified financial ratios and tests, including a minimum interest coverage ratio and a maximum total leverage ratio. Specifically, our interest coverage ratio may not be less than 2.75 to 1.00 and our total leverage ratio may not be more than 4.75 to 1.00 as of the last day of any fiscal quarter. At September 30, 2013, we had interest coverage and total leverage ratios of 3.43 to 1.00 and 4.21 to 1.00, respectively, and were in compliance with all covenants under the Revolving Credit Facility and the covenants under the 2018 Notes. However, depending on our operating results for the remainder of 2013, we anticipate that we may have difficulty meeting the minimum interest coverage ratio and/or maximum total leverage ratio under our Revolving Credit Facility in the future, potentially in the fourth quarter of 2013.
A failure to comply with the covenants contained in our Revolving Credit Facility, the indenture governing the 2018 Notes or our other existing indebtedness could result in an event of default under the existing agreements which, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.
In particular, a breach of the minimum interest coverage ratio or maximum total leverage ratio could result in an event of default under our Revolving Credit Facility. Pursuant to the Revolving Credit Facility, any such breach that remains unremedied for a period of thirty days, following the earlier of the date on which administrative agent gives notice of such breach to us and the date we are deemed to acquire knowledge of such breach, constitutes an event of default. If such an event of default occurs, the lenders under the Revolving Credit Facility, among other things,
• | would not be required to lend any additional amounts to us; and |
• | could elect to declare all borrowings outstanding under the revolving credit facility, together with accrued and unpaid interest and fees, to be due and payable and could demand cash collateral for all letters of credit issued thereunder; |
all of which could also result in an event of default under the 2018 Notes.
If the indebtedness under our Revolving Credit Facility or the 2018 Notes were to be accelerated after an event of a default, our assets may not be sufficient to repay such indebtedness in full and our lenders could foreclose on our secured assets. Under these circumstances, we cannot give assurance that a refinancing would be possible or that any additional financing could be obtained on acceptable terms.
Future charges due to possible impairments of assets may have a material adverse effect on our results of operations and stock price.
As discussed more fully in Note 5 to the condensed consolidated financial statements, during the nine months ended September 30, 2013 we recorded charges totaling $210.4 million for the impairment of goodwill and long-lived assets. At September 30, 2013, 50.5% of our assets are comprised of goodwill and other intangible assets, the majority of which relates to the Power Fuels merger. If there is further deterioration in our business operations or prospects, the value of our intangible assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs.
Accounting Standards Codification 350 (ASC 350 “Intangibles – Goodwill and Other) provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. The testing of goodwill and other intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the composition of our reporting units; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of our future performance, could affect the fair value of goodwill or other intangible assets, which may result in further impairment charges. Should the value of our goodwill or other intangible assets become impaired, it could have a material adverse effect on our consolidated results of operations and could result in our incurring net losses in future periods.
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On an ongoing basis and at least annually, we evaluate whether the carrying value of our intangible assets may no longer be recoverable, in which case a charge to earnings may be necessary. We cannot accurately predict the amount or timing of any impairment of assets. Any future determination requiring the write-off of a significant portion of unamortized intangible assets, although not requiring any additional cash outlay, could have a material adverse effect on our results of operations and stock price.
We may not recognize the anticipated benefits of our proposed disposition of the Industrial Solutions business or any other divestitures we may pursue in the future.
As described in Note 16 of notes to the condensed consolidated financial statements, in October 2013, our Board of Directors authorized commencement of a process for the divestiture of TFI, comprising our Industrial Solutions business segment. There can be no assurance that we will be able to sell TFI. Additionally, we may evaluate other potential divestiture opportunities with respect to portions of our business from time to time, and may determine to proceed with a divestiture opportunity if and when we believe such opportunity is consistent with our business strategy and we would be able to realize value for our stockholders in so doing. Any divestiture or disposition, including the planned disposition of TFI, could expose us to significant risks, including, without limitation, fees for legal and transaction-related services, diversion of management resources, loss of key personnel and reduction in revenue. Further, we may be required to retain or indemnify a buyer against certain liabilities and obligations in connection with any such divestiture, and we may also become subject to third-party claims arising out of such divestiture. As previously described, our Revolving Credit Facility and the indentures to the 2018 Notes contain certain limitations and covenants concerning changes in lines of business and the substantial sale of our assets. A divesture of TFI may be subject to various third party consents. There can be no assurances that we will obtain any necessary consents of lenders, governmental authorities or other third parties that might be required in order for us to sell TFI or effectuate any other divesture. In addition, we may not achieve the expected price in a divestiture transaction, including the proposed sale of TFI, which could result in additional losses being recorded. If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operations.
Our results of operations and financial condition may be negatively affected if we fail to adequately accrue for costs relating to pending litigation.
As described in Note 12 of the notes to the condensed consolidated financial statements, during the quarter ended September 30, 2013, we recorded a charge of $16.0 million to establish an accrual related to the 2010 class action litigation. We have not entered into any definitive settlement agreement with the plaintiffs in this matter, and there can be no assurance that our actual costs relating to this matter will not ultimately exceed the amounts we have accrued plus any remaining available insurance coverage. If our actual defense and settlement costs exceed the amounts accrued and any remaining available insurance coverage, it could result in additional charges to earnings, which could be significant, and which would negatively impact our business, results of operations and/or liquidity.
Our reverse stock split could be viewed negatively and could lead to a decrease in our overall market capitalization.
On November 9, 2012, our stockholders approved a proposed amendment to our amended and restated certificate of incorporation, as amended, and authorized our Board of Directors to effect a reverse stock split of our common stock at a ratio in the range of 1-for-2 to 1-for-10, as and when determined by our Board of Directors in its sole discretion any time prior to December 31, 2013. We anticipate implementing this reverse stock split by the end of 2013 with a ratio of 1:10. However, while we expect that the resulting reduction in our outstanding shares of common stock will increase the market price of our common stock, there can be no assurance that the reverse stock split will increase the market price of our common stock by a multiple equal to the number of pre-split shares in the reverse split ratio, or result in any permanent increase in the market price. In some cases, the stock price of companies that have effected reverse stock splits has subsequently declined. A reverse stock split is sometimes viewed negatively by the market and, consequently, could lead to a decrease in our overall market capitalization.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
On April 1, 2013, the Company entered into a stipulation of settlement with plaintiff and all defendants in a shareholder derivative lawsuit related to the Company’s acquisition of China Water & Drinks, Inc. that was filed in 2010 in the Superior Court of California, County of Riverside (Hess v. Richard Heckmann et al., Case No. INC 10010407). The court entered a final order preliminarily approving the proposed of settlement, on June 24, 2013. Pursuant to that final order, and as part of the consideration paid to settle such lawsuit, in July 2013 the Company issued 558,660 shares of Company common stock to the plaintiff’s attorneys, which shares are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. The Company did not receive cash proceeds from the issuance of such shares.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
The following exhibits are filed or furnished with this Quarterly Report on Form 10-Q.
Exhibit | Description | |
3.1 | Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed with the SEC on September 4, 2007). | |
3.1A | Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Heckmann Corporation’s Current Report on Form 8-K filed with the SEC on November 5, 2008). | |
3.1B | Second Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1B to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 14, 2011). | |
3.2 | Amended and Restated Bylaws (incorporated herein by reference to Amendment No. 4 to Heckmann Corporation’s Registration Statement on Form S-1 filed with the SEC on October 26, 2007). | |
4.1 | Nuverra 2013 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 filed with the SEC on August 16, 2013). | |
10.1 | Amendment No. 3 to the Credit Agreement, dated September 27, 2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 30, 2013). | |
31.1* | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS* | XBRL Instance Document. | |
101.SCH* | XBRL Taxonomy Extension Schema Document. | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 2013 | ||
/s/ Mark D. Johnsrud | ||
Name: | Mark D. Johnsrud | |
Title: | Chief Executive Officer and President | |
/s/ Jay C. Parkinson | ||
Name: | Jay C. Parkinson | |
Title: | Executive Vice President and Chief Financial Officer |
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