May 8, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10‑Q

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission File Number 001‑38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware	81‑4561945
(State of incorporation)	(IRS Employer Identification Number)

1233 W. Loop South, Suite 1400 Houston, TX	77027
(Address of principal executive offices)	(Zip Code)

(713) 235‑9500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.


Large accelerated filer ☑	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A common stock, par value $0.01 per share	WTTR	New York Stock Exchange

As of May 6, 2019, the registrant had 79,979,465 shares of Class A common stock and 26,026,843 shares of Class B common stock outstanding.

Table of Contents

SELECT ENERGY SERVICES, INC.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	49

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	51

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

the level of capital spending and access to capital markets by oil and gas companies;

trends and volatility in oil and gas prices;

demand for our services;

capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services in our core markets;

our ability to retain key management and employees;

our ability to hire and retain skilled labor;

regional impacts to our business, including our key infrastructure assets within the Bakken and northern Delaware formation of the Permian Basin;

our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments;

our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;

our health, safety and environmental performance;

the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals and various environmental matters;

the impact of competition on our operations;

the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us;

Table of Contents

delays or restrictions in obtaining permits by us or our customers;

constraints in supply or availability of equipment used in our business;

the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services;

changes in global political or economic conditions, generally, and in the markets we serve;

accidents, weather, seasonality or other events affecting our business; and

the other risks identified in our most recent Annual Report on Form 10-K, and under the headings “Part I―Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II―Item 1A. Risk Factors” in this Quarterly Report.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	March 31, 2019		December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	15,683	$	17,237
Accounts receivable trade, net of allowance for doubtful accounts of $5,580 and $5,329, respectively		347,703		341,711
Accounts receivable, related parties		1,634		1,119
Inventories		42,520		44,992
Prepaid expenses and other current assets		26,365		27,093
Total current assets		433,905		432,152
Property and equipment		1,071,777		1,114,378
Accumulated depreciation		(595,332)		(611,530)
Property and equipment held-for-sale, net		13,733		—
Total property and equipment, net		490,178		502,848
Right-of-use assets		72,341		—
Goodwill		266,934		273,801
Other intangible assets, net		145,408		148,377
Other assets		3,186		3,427
Total assets	$	1,411,952	$	1,360,605
Liabilities and Equity
Current liabilities
Accounts payable	$	64,694	$	53,847
Accrued accounts payable		48,162		62,536
Accounts payable and accrued expenses, related parties		7,375		5,056
Accrued salaries and benefits		25,666		22,113
Accrued insurance		13,359		14,849
Sales tax payable		2,530		5,820
Accrued expenses and other current liabilities		9,415		14,560
Current operating lease liabilities		21,959		—
Current portion of finance lease obligations		743		938
Total current liabilities		193,903		179,719
Long-term operating lease liabilities		70,641		16,752
Other long-term liabilities		7,295		8,361
Long-term debt		25,000		45,000
Total liabilities		296,839		249,832
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 79,998,292 shares issued and outstanding as of March 31, 2019; 350,000,000 shares authorized and 78,956,555 shares issued and outstanding as of December 31, 2018		800		790
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of March 31, 2019 and December 31, 2018		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 26,026,843 shares issued and outstanding as of March 31, 2019; 150,000,000 shares authorized and 26,026,843 shares issued and outstanding as of December 31, 2018		260		260
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2019 and December 31, 2018		—		—
Additional paid-in capital		818,556		813,599
Retained earnings		19,788		18,653
Accumulated other comprehensive deficit		(314)		(368)
Total stockholders’ equity		839,090		832,934
Noncontrolling interests		276,023		277,839
Total equity		1,115,113		1,110,773
Total liabilities and equity	$	1,411,952	$	1,360,605

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three Months Ended March 31,
	2019		2018
Revenue
Water services	$	220,595	$	218,230
Water infrastructure		53,616		54,057
Oilfield chemicals		66,829		63,630
Other		21,606		40,478
Total revenue		362,646		376,395
Costs of revenue
Water services		163,121		164,630
Water infrastructure		41,430		40,096
Oilfield chemicals		59,527		57,084
Other		21,053		35,754
Depreciation and amortization		31,518		30,882
Total costs of revenue		316,649		328,446
Gross profit		45,997		47,949
Operating expenses
Selling, general and administrative		32,376		25,681
Depreciation and amortization		1,000		541
Impairment of goodwill		4,396		—
Impairment of property and equipment		519		—
Impairment of cost-method investment		—		2,000
Lease abandonment costs		1,073		1,124
Total operating expenses		39,364		29,346
Income from operations		6,633		18,603
Other income (expense)
Losses on sales of property and equipment, net		(4,491)		(554)
Interest expense, net		(1,093)		(1,151)
Foreign currency gain (loss), net		260		(400)
Other income, net		269		96
Income before income tax expense		1,578		16,594
Income tax expense		(178)		(462)
Net income		1,400		16,132
Less: net income attributable to noncontrolling interests		(265)		(6,033)
Net income attributable to Select Energy Services, Inc.	$	1,135	$	10,099

Net income per share attributable to common stockholders (Note 16):
Class A—Basic	$	0.01	$	0.15
Class A-1—Basic	$	—	$	—
Class A-2—Basic	$	—	$	0.15
Class B—Basic	$	—	$	—

Net income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	0.01	$	0.15
Class A-1—Diluted	$	—	$	—
Class A-2—Diluted	$	—	$	0.15
Class B—Diluted	$	—	$	—

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2019		2018
Net income	$	1,400	$	16,132
Other comprehensive income
Foreign currency translation adjustment, net of tax of $0		54		(259)
Net change in unrealized gain (loss)		54		(259)
Comprehensive income		1,454		15,873
Less: comprehensive income attributable to noncontrolling interests		(275)		(5,936)
Comprehensive income attributable to Select Energy Services, Inc.	$	1,179	$	9,937

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended March 31, 2019 and 2018

(unaudited)

(in thousands, except share data)


	Class A			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders							Other
		Class A			Class A-2			Class B					Additional				Comprehensive		Total
		Common			Common			Common			Preferred		Paid-In		Retained		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Earnings		(Loss)		Equity		Interests		Total
Balance as of December 31, 2018	78,956,555	$	790	—	$	—	26,026,843	$	260	—	$	—	$	813,599	$	18,653	$	(368)	$	832,934	$	277,839	$	1,110,773
ESPP shares issued	2,810		—	—		—	—		—	—		—		29		—		—		29		(2)		27
Equity-based compensation	—		—	—		—	—		—	—		—		3,154		—		—		3,154		1,025		4,179
Issuance of restricted shares	1,169,777		11	—		—	—		—	—		—		3,025		—		—		3,036		(3,036)		—
Exercise of restricted stock units	625		—	—		—	—		—	—		—		2		—		—		2		(2)		—
Repurchase of common stock	(125,786)		(1)			—	—		—	—		—		(1,244)		—		—		(1,245)		29		(1,216)
Restricted shares forfeited	(5,689)		—	—		—	—		—	—		—		(15)		—		—		(15)		15		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(121)		(121)
NCI income tax adjustment	—		—	—		—	—		—	—		—		6		—		—		6		(6)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		54		54		17		71
Net income	—		—	—		—	—		—	—		—		—		1,135		—		1,135		265		1,400
Balance as of March 31, 2019	79,998,292	$	800	—	$	—	26,026,843	$	260	—	$	—	$	818,556	$	19,788	$	(314)	$	839,090	$	276,023	$	1,115,113


	Class A			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders					Retained		Other
		Class A			Class A-2			Class B					Additional		Earnings		Comprehensive		Total
		Common			Common			Common			Preferred		Paid-In		(Accumulated		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit)		(Loss)		Equity		Interests		Total
Balance as of December 31, 2017	59,182,176	$	592	6,731,845	$	67	40,331,989	$	404	—	$	—	$	673,141	$	(17,859)	$	302	$	656,647	$	406,722	$	1,063,369
Conversion of Class A-2 to Class A	6,731,839		67	(6,731,839)		(67)	—		—	—		—		—		—		—		—		—		—
Equity-based compensation	—		—	—		—	—		—	—		—		1,542		—		—		1,542		939		2,481
Issuance of restricted shares	331,389		3	—		—	—		—	—		—		1,421		—		—		1,424		(1,424)		—
Exercise of restricted stock units	27,235		—	—		—	—		—	—		—		2		—		—		2		(2)		—
Stock options exercised	19,398		—	—		—	—		—	—		—		81		—		—		81		49		130
Repurchase of common stock	(15,234)		—	(6)		—	—		—	—		—		(222)		—		—		(222)		(42)		(264)
Restricted shares forfeited	(18,640)		—	—		—	—		—	—		—		(70)		—		—		(70)		70		—
Noncontrolling interest in subsidiary	—		—	—		—	—		—	—		—		—		—		—		—		(161)		(161)
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(259)		(259)		(158)		(417)
Net income	—		—	—		—	—		—	—		—		—		10,099		—		10,099		6,033		16,132
Balance as of March 31, 2018	66,258,163	$	662	—	$	—	40,331,989	$	404	—	$	—	$	675,895	$	(7,760)	$	43	$	669,244	$	412,026	$	1,081,270

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three months ended March 31,
	2019		2018
Cash flows from operating activities
Net income	$	1,400	$	16,132
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		32,518		31,423
Net (gain) loss on disposal of property and equipment		(223)		554
Bad debt expense		732		485
Amortization of debt issuance costs		172		172
Inventory write-down		75		266
Equity-based compensation		4,179		2,481
Impairment of goodwill		4,396		—
Impairment of property and equipment		519		—
Impairment of cost-method investment		—		2,000
Loss on divestitures		4,714		—
Other operating items, net		(270)		117
Changes in operating assets and liabilities
Accounts receivable		(17,390)		(33,691)
Prepaid expenses and other assets		1,706		(1,283)
Accounts payable and accrued liabilities		4,059		16,549
Net cash provided by operating activities		36,587		35,205
Cash flows from investing activities

Form: 10-Q

Documents