10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 6, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(IRS Employer Identification Number) |
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(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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.
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).
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.
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company |
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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
As of May 4, 2020, the registrant had
SELECT ENERGY SERVICES, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K 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 severity and duration of world health events, including the recent outbreak of the novel coronavirus (“COVID-19”) pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business; |
● | the current significant surplus in the supply of oil and actions by the members of OPEC+ (as defined below) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; |
● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
● | the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand; |
● | trends and volatility in oil and gas prices, and our ability to manage through such volatility; |
● | demand for our services; |
● | our customers’ ability to complete and produce new wells; |
● | potential shut-ins of production by producers due to lack of downstream demand or storage capacity; |
● | the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals and various environmental matters; |
● | capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services in our core markets; |
● | our ability to retain key management and employees; |
3
● | 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 access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
● | our health, safety and environmental performance; |
● | the impact of competition on our operations; |
● | the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us; |
● | our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments; |
● | delays or restrictions in obtaining permits by us or our customers; |
● | constraints in supply or availability of equipment used in our business; |
● | the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis; |
● | changes in global political or economic conditions, generally, and in the markets we serve; |
● | the ability to source certain raw materials globally from economically advantaged sources; |
● | accidents, weather, seasonality or other events affecting our business; and |
● | the other risks identified in our most recent Annual Report on Form 10-K, and 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 on Form 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.
4
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2020 |
December 31, 2019 |
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(unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable trade, net of allowance for credit losses of $ |
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Accounts receivable, related parties |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment |
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Accumulated depreciation |
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( |
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( |
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Property and equipment held-for-sale, net |
— |
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Total property and equipment, net |
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Right-of-use assets, net |
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Goodwill |
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— |
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Other intangible assets, net |
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Other assets, net |
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Total assets |
$ |
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$ |
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Liabilities and Equity |
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Current liabilities |
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Accounts payable |
$ |
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$ |
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Accrued accounts payable |
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Accounts payable and accrued expenses, related parties |
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Accrued salaries and benefits |
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Accrued insurance |
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Sales tax payable |
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Accrued expenses and other current liabilities |
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Current operating lease liabilities |
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Current portion of finance lease obligations |
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Total current liabilities |
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Long-term operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 10) |
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Class A common stock, $ |
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Class A-2 common stock, $ |
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— |
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— |
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Class B common stock, $ |
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Preferred stock, $ |
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Additional paid-in capital |
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Accumulated (deficit) retained earnings |
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( |
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Total stockholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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The accompanying notes to consolidated financial statements are an integral part of these financial statements.
5
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
Three Months Ended March 31, |
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2020 |
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2019 |
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Revenue |
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Water Services |
$ |
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$ |
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Water Infrastructure |
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Oilfield Chemicals |
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Other |
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— |
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Total revenue |
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Costs of revenue |
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Water Services |
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Water Infrastructure |
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Oilfield Chemicals |
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Other |
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Depreciation and amortization |
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Total costs of revenue |
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Gross profit |
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Operating expenses |
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Selling, general and administrative |
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Depreciation and amortization |
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Impairment of goodwill and trademark |
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Impairment of property and equipment |
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Lease abandonment costs |
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Total operating expenses |
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(Loss) income from operations |
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( |
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Other expense |
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Losses on sales of property, equipment and divestitures, net |
( |
( |
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Interest expense, net |
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( |
( |
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Foreign currency (loss) gain, net |
( |
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Other income, net |
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(Loss) income before income tax benefit (expense) |
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( |
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Income tax benefit (expense) |
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( |
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Net (loss) income |
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( |
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Less: net loss (income) attributable to noncontrolling interests |
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( |
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Net (loss) income attributable to Select Energy Services, Inc. |
$ |
( |
$ |
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Net (loss) income per share attributable to common stockholders (Note 16): |
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Class A—Basic |
$ |
( |
$ |
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Class B—Basic |
$ |
— |
$ |
— |
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Net (loss) income per share attributable to common stockholders (Note 16): |
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Class A—Diluted |
$ |
( |
$ |
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Class B—Diluted |
$ |
— |
$ |
— |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
6
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
Three Months Ended March 31, |
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2020 |
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2019 |
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Net (loss) income |
$ |
( |
$ |
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Other comprehensive (loss) income |
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Foreign currency translation adjustment, net of tax of $ |
— |
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Net change in unrealized gain |
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— |
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Comprehensive (loss) income |
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( |
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Less: comprehensive loss (income) attributable to noncontrolling interests |
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( |
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Comprehensive (loss) income attributable to Select Energy Services, Inc. |
$ |
( |
$ |
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The accompanying notes to consolidated financial statements are an integral part of these financial statements.
7
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended March 31, 2020 and 2019
(unaudited)
(in thousands, except share data)
Class A |
Class B |
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Stockholders |
Stockholders |
Accumulated |
Accumulated |
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Class A |
Class B |
Additional |
(Deficit) |
Other |
Total |
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Common |
Common |
Paid-In |
Retained |
Comprehensive |
Stockholders’ |
Noncontrolling |
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Shares |
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Stock |
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Shares |
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Stock |
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Capital |
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Earnings |
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Income |
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Equity |
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Interests |
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Total |
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Balance as of December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
— |
$ |
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$ |
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$ |
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ESPP shares issued |
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— |
— |
— |
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— |
— |
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( |
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Equity-based compensation |
— |
— |
— |
— |
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— |
— |
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Issuance of restricted shares |
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— |
— |
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— |
— |
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( |
— |
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Exercise of restricted stock units |
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— |
— |
— |
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— |
— |
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( |
— |
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Repurchase of common stock |
( |
( |
— |
— |
( |
— |
— |
( |
|
( |
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Restricted shares forfeited |
( |
( |
— |
— |
( |
— |
— |
( |
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— |
||||||||||||||||||
NCI income tax adjustment |
— |
— |
— |
— |
|
— |
— |
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( |
— |
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Net loss |
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— |
— |
— |
— |
— |
( |
— |
( |
( |
( |
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Balance as of March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
$ |
— |
$ |
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$ |
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$ |
|
Class A |
Class B |
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Stockholders |
Stockholders |
Accumulated |
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Class A |
Class B |
Additional |
Other |
Total |
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Common |
Common |
Paid-In |
Retained |
Comprehensive |
Stockholders’ |
Noncontrolling |
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Shares |
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Stock |
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Shares |
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Stock |
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Capital |
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Earnings |
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Loss |
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Equity |
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Interests |
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Total |
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Balance as of December 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
$ |
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$ |
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$ |
|
|||||||
ESPP shares issued |
|
— |
— |
— |
|
— |
— |
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( |
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Equity-based compensation |
— |
— |
— |
— |
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— |
— |
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Issuance of restricted shares |
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— |
— |
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— |
— |
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( |
— |
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Exercise of restricted stock units |
|
— |
— |
— |
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— |
— |
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( |
— |
||||||||||||||||||
Repurchase of common stock |
( |
( |
— |
— |
( |
— |
— |
( |
|
( |
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Restricted shares forfeited |
( |
— |
— |
— |
( |
— |
— |
( |
|
— |
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Distributions to noncontrolling interests, net |
— |
— |
— |
— |
— |
— |
— |
— |
( |
( |
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NCI income tax adjustment |
— |
— |
— |
— |
|
— |
— |
|
( |
— |
||||||||||||||||||
Foreign currency translation adjustment |
— |
— |
— |
— |
— |
— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
$ |
|
$ |
|
$ |
|
The accompanying notes to consolidated financial statements are an integral part of these financial statements
8
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended March 31, |
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2020 |
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2019 |
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Cash flows from operating activities |
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Net (loss) income |
$ |
( |
$ |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities |
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Depreciation and amortization |
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Net loss (gain) on disposal of property and equipment |
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( |
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Bad debt expense |
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Amortization of debt issuance costs |
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Inventory write-downs |
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Equity-based compensation |
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Impairment of goodwill and trademark |
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Impairment of property and equipment |
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Loss on divestitures |
— |
|
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Other operating items, net |
|
( |
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( |
||
Changes in operating assets and liabilities |
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Accounts receivable |
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( |
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Prepaid expenses and other assets |
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Accounts payable and accrued liabilities |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Working capital settlement |
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— |
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Proceeds received from divestitures |
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Purchase of property and equipment |
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( |
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( |
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Proceeds received from sales of property and equipment |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities |
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Borrowings from revolving line of credit |
— |
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Payments on long-term debt |
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— |
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( |
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Payments of finance lease obligations |
( |
( |
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Proceeds from share issuance |
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Contributions from (distributions to) noncontrolling interests |
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( |
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Repurchase of common stock |
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( |
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( |
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Net cash used in financing activities |
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( |
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( |
||
Effect of exchange rate changes on cash |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
||
Cash and cash equivalents, beginning of period |
|
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Cash and cash equivalents, end of period |
$ |
|
$ |
|
||
Supplemental cash flow disclosure: |
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Cash paid for interest |
$ |
|
$ |
|
||
Cash refunds received for income taxes, net |
$ |
( |
$ |
( |
||
Supplemental disclosure of noncash investing activities: |
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||||
Capital expenditures included in accounts payable and accrued liabilities |
$ |
|
$ |
|
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
9
SELECT ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”).
We are a leading provider of comprehensive water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. Through a combination of organic growth and acquisitions over the last decade, we have developed a leading position in the relatively new water solutions industry. We believe we are the only company in the oilfield services industry that combines comprehensive water-management services with related chemical products. Furthermore, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance of responsibly managing water resources through our operations to help conserve fresh water and protect the environment is paramount to our continued success.
Select 144A Offering and Initial Public Offering. On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of
Tax Receivable Agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into
Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled. During the year ended December 31, 2019, a total of
10
Common Stock, and
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.
This Form 10-Q relates to the three months ended March 31, 2020 (the “Current Quarter”) and the three months ended March 31, 2019 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) filed with the SEC on February 25, 2020 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter are not indicative of the results to be expected for the full year, in part due to the recent coronavirus (“COVID-19”) outbreak.
The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of March 31, 2020, the Company had
Segment reporting: The Company has
The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business.
The Water Infrastructure segment consists of the Company’s infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt water disposal wells, primarily serving E&P companies.
The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily pressure pumpers, but also include major integrated and independent oil and gas producers.
The results of service lines divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined in the “Other” category.
11
Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information in order to conform to the current period presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2019, included in the Company’s most recent Annual Report on Form 10-K.
Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Allowance for credit losses: The Company’s allowance for credit losses relate to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt incurred has been with cases where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy.
The following table presents the changes to the allowance for the Current Quarter:
Three months ended March 31, 2020 |
|||
(in thousands) |
|||
Balance at beginning of year |
$ |
|
|
Increase to allowance based on a percent of Current Quarter revenue |
|
|
|
Adjustment based on aged receivable analysis |
|
|
|
Charge-offs |
( |
||
Balance at March 31, 2020 |
$ |
|
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Quarter:
12
|
Three months ended March 31, 2020 |
||
|
(in thousands) |
||
Balance at beginning of year |
|
$ |
|
Accretion expense, included in depreciation and amortization expense |
|
|
|
Disposals |
|
( |
|
Payments |
( |
||
Balance at March 31, 2020 |
|
$ |
|
We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.
Lessor Income: As of March 31, 2020, the Company had
Three Months Ended March 31, |
||||||||
|
2020 |
|
2019 |
|
||||
(in thousands) |
||||||||
Category |
Classification |
|||||||
Lessor income |
Cost of sales |
$ |
|
$ |
|
|||
Sublease income |
Lease abandonment costs and Cost of sales |
|
|
The Company also generates short-term equipment rental revenue. See Note 5—Revenue for a discussion of revenue recognition for the accommodations and rentals business.
Defined Contribution Plan: During the Current Quarter, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) Plan and incurred no match expense. During the Prior Quarter, the Company incurred $
Recent accounting pronouncements: In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019 and requires a modified retrospective transition approach. After reviewing the new standard and reexamining current and prior year bad debt expense from trade receivables, as well as updating future expectations, the adoption of the new standard in the first quarter of 2020 did not have a material impact to the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently reviewing the provisions of this new pronouncement.
13
NOTE 3—IMPAIRMENTS AND OTHER COSTS
Significant challenges that emerged during the Current Quarter, and which are expected to continue into the foreseeable future, have had and will continue to have a negative impact on our results of operations. The COVID-19 outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in global oil demand as well as international and U.S. economies and financial markets. Additionally, the failure of Saudi Arabia and Russia to reach a decision to cut production of oil and gas along with the Organization of the Petroleum Exporting Countries (“OPEC”), and Saudi Arabia’s subsequent decision to reduce the prices at which it sells oil and increase production, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the Current Quarter. While an agreement to cut production was reached in April 2020, oil prices have remained low, with storage capacity rapidly being reached, and global oil demand is expected to remain challenged at least until the COVID-19 outbreak can be contained. As a result of these market disruptions, oil prices have declined significantly and our Current Quarter results have been negatively impacted. With the significant recent drop in oil prices, the activity levels of our customers and the demand for our services will certainly decrease materially in the near-term; however, at this time, we believe it is too soon to determine the depth or magnitude of the declines.
We believe the ongoing effects of COVID-19 on our operations have had, and will continue to have, a material negative impact on our financial results, and such negative impact may continue well beyond the containment of such outbreak until oil demand and prices, recover. We cannot assure you that our assumptions used to estimate our future financial results will be correct given the unpredictable nature of the current market environment after the rapid decline in the demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain.
The magnitude and duration of the COVID-19 pandemic is also uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but at this time, we expect a net loss for 2020. We are taking further actions to maintain our liquidity, including decreasing operating expenses by reducing headcount, reducing salaries, closing yard locations, reducing third party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the remainder of 2020, in accordance with the provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and may take advantage of future legislation passed by the United States Congress in response to COVID-19.
As a result of the above mentioned economic conditions, we recorded impairment expenses in the first quarter related to goodwill, property and equipment and other intangible assets and there is no assurance that we will not have additional impairments in subsequent quarters.
A summary of impairment, severance, yard closure and lease abandonment costs for the Current Quarter and Prior Quarter were as follows:
Three Months Ended March 31, |
||||||
|
2020 |
|
2019 |
|||
(in thousands) |
||||||
Impairment of goodwill and trademark |
||||||
Water Services |
$ |
|
$ |
— |
||
Water Infrastructure |
|
— |
||||
Oilfield Chemicals |
|
— |
||||
Other |
— |
|
||||
Total impairment of goodwill and trademark |
$ |
|
$ |
|
For a discussion of the impairments to goodwill and trademark, See Note 8—Goodwill and Other Intangible Assets.
14
Three Months Ended March 31, |
||||||
2020 |
|
2019 |
||||
(in thousands) |
||||||
Impairment of property and equipment |
||||||
Water Services |
$ |
|
$ |
— |
||
Water Infrastructure |
|
— |
||||
Other |
— |
|
||||
Total impairment of property and equipment |
$ |
|
$ |
|
During the Current Quarter, the Company determined that certain equipment was obsolete, and recorded a $
Three Months Ended March 31, |
||||||
2020 |
|
2019 |
||||
(in thousands) |
||||||
Severance |
||||||
Water Services |
$ |
|
$ |
— |
||
Water Infrastructure |
|
— |
||||
Oilfield Chemicals |
|
— |
||||
Other |
|
|
||||
Total severance expense |
$ |
|
$ |
|
||
Yard closure costs |
||||||
Water Services |
$ |
|
$ |
— |
||
Total yard closure costs |
$ |
|
$ |
— |
||
Lease abandonment costs |
||||||
Water Services |
$ |
|
$ |
|
||
Water Infrastructure |
|
— |
||||
Other |
( |
|
||||
Total lease abandonment costs |
$ |
|
$ |
|
During the Current Quarter, the Company recorded exit-disposal costs including $
15
NOTE 4—Acquisitions
Business combinations
Well Chemical Services Acquisition
On September 30, 2019, the Company acquired a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, for $
The WCS Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the inventory and property and equipment acquired, customer relationships, and current liabilities were finalized as of December 31, 2019. The assets acquired and liabilities assumed are included in the Company’s Oilfield Chemicals segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
Purchase price allocation |
|
Amount |
|
Consideration transferred |
|
(in thousands) |
|
Cash paid |
$ |
|
|
Total consideration transferred |
|
|
|
Less: identifiable assets acquired and liabilities assumed |
|
|
|
Inventory |
|
|
|
Property and equipment |
|
|
|
Customer relationships |
|
|
|
Current liabilities |
( |
||
Total identifiable net assets acquired |
|
|
|
Fair value allocated to net assets acquired |
$ |
|
16
NOTE 5—REV