UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10‑Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 001‑38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
81‑4561945 |
(State of incorporation) |
(IRS Employer Identification Number) |
515 Post Oak Boulevard, Suite 200 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 ☑
As of November 2, 2018, the registrant had 80,658,534 shares of Class A common stock and 26,026,843 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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 level of capital spending by oil and gas companies; |
· |
trends and volatility in oil and gas prices; |
· |
demand for our services; |
· |
capacity constraints on regional oil and natural gas gathering, processing and pipeline systems that result in slowdown in drilling and completion investment, and thus the demand for our services in our core markets; |
· |
the effects of our business combination with Rockwater, including the combined company’s future financial condition, results of operations, strategy and plans; |
· |
our ability to retain key management and employees; |
· |
our ability to hire and retain skilled labor; |
· |
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 fresh water 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; |
3
· |
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.
4
PART I – FINANCIAL INFORMATION
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
September 30, 2018 |
|
December 31, 2017 |
||
|
|
(unaudited) |
|
|
||
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,050 |
|
$ |
2,774 |
Accounts receivable trade, net of allowance for doubtful accounts of $2,549 and $2,979, respectively |
|
|
422,383 |
|
|
373,633 |
Accounts receivable, related parties |
|
|
2,313 |
|
|
7,669 |
Inventories, net |
|
|
49,457 |
|
|
44,598 |
Prepaid expenses and other current assets |
|
|
20,805 |
|
|
17,842 |
Total current assets |
|
|
508,008 |
|
|
446,516 |
Property and equipment |
|
|
1,112,138 |
|
|
1,034,995 |
Accumulated depreciation |
|
|
(608,040) |
|
|
(560,886) |
Property and equipment, net |
|
|
504,098 |
|
|
474,109 |
Goodwill |
|
|
274,753 |
|
|
273,421 |
Other intangible assets, net |
|
|
148,327 |
|
|
156,066 |
Other assets |
|
|
3,599 |
|
|
6,256 |
Total assets |
|
$ |
1,438,785 |
|
$ |
1,356,368 |
Liabilities and Equity |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accounts payable |
|
$ |
54,437 |
|
$ |
52,579 |
Accounts payable and accrued expenses, related parties |
|
|
4,341 |
|
|
2,772 |
Accrued salaries and benefits |
|
|
25,614 |
|
|
21,324 |
Accrued insurance |
|
|
20,492 |
|
|
12,510 |
Sales tax payable |
|
|
5,155 |
|
|
12,931 |
Accrued expenses and other current liabilities |
|
|
91,218 |
|
|
81,112 |
Current portion of capital lease obligations |
|
|
1,176 |
|
|
1,965 |
Total current liabilities |
|
|
202,433 |
|
|
185,193 |
Accrued lease obligations |
|
|
18,547 |
|
|
18,979 |
Other long-term liabilities |
|
|
10,133 |
|
|
13,827 |
Long-term debt |
|
|
65,000 |
|
|
75,000 |
Total liabilities |
|
|
296,113 |
|
|
292,999 |
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 80,658,534 shares issued and outstanding as of September 30, 2018; 350,000,000 shares authorized and 59,182,176 shares issued and outstanding as of December 31, 2017 |
|
|
807 |
|
|
592 |
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of September 30, 2018; 40,000,000 shares authorized, 6,731,845 shares issued and outstanding as of December 31, 2017 |
|
|
— |
|
|
67 |
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 26,026,843 shares issued and outstanding as of September 30, 2018; 150,000,000 shares authorized and 40,331,989 shares issued and outstanding as of December 31, 2017 |
|
|
260 |
|
|
404 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of September 30, 2018 and December 31, 2017 |
|
|
— |
|
|
— |
Additional paid-in capital |
|
|
828,137 |
|
|
673,141 |
Retained earnings (accumulated deficit) |
|
|
32,153 |
|
|
(17,859) |
Accumulated other comprehensive (deficit) income |
|
|
(17) |
|
|
302 |
Total stockholders’ equity |
|
|
861,340 |
|
|
656,647 |
Noncontrolling interests |
|
|
281,332 |
|
|
406,722 |
Total equity |
|
|
1,142,672 |
|
|
1,063,369 |
Total liabilities and equity |
|
$ |
1,438,785 |
|
$ |
1,356,368 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
5
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
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2018 |
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2017 |
|
2018 |
|
2017 |
||||
Revenue |
|
|
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|
|
|
|
|
|
|
|
|
Water solutions and related services |
|
$ |
301,410 |
|
$ |
125,086 |
|
$ |
880,411 |
|
$ |
311,275 |
Accommodations and rentals |
|
|
18,022 |
|
|
15,615 |
|
|
48,715 |
|
|
38,457 |
Wellsite completion and construction services |
|
|
13,553 |
|
|
13,179 |
|
|
45,064 |
|
|
38,522 |
Oilfield chemical product sales |
|
|
63,985 |
|
|
— |
|
|
192,422 |
|
|
— |
Total revenue |
|
|
396,970 |
|
|
153,880 |
|
|
1,166,612 |
|
|
388,254 |
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions and related services |
|
|
226,622 |
|
|
88,087 |
|
|
665,805 |
|
|
226,737 |
Accommodations and rentals |
|
|
11,578 |
|
|
11,976 |
|
|
33,016 |
|
|
30,697 |
Wellsite completion and construction services |
|
|
11,047 |
|
|
10,888 |
|
|
38,480 |
|
|
32,155 |
Oilfield chemical product sales |
|
|
56,473 |
|
|
— |
|
|
172,057 |
|
|
— |
Depreciation and amortization |
|
|
31,853 |
|
|
23,420 |
|
|
93,180 |
|
|
67,144 |
Total costs of revenue |
|
|
337,573 |
|
|
134,371 |
|
|
1,002,538 |
|
|
356,733 |
Gross profit |
|
|
59,397 |
|
|
19,509 |
|
|
164,074 |
|
|
31,521 |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
25,110 |
|
|
16,087 |
|
|
77,662 |
|
|
49,298 |
Depreciation and amortization |
|
|
984 |
|
|
375 |
|
|
2,332 |
|
|
1,312 |
Impairment of property and equipment |
|
|
— |
|
|
— |
|
|
2,282 |
|
|
— |
Impairment of investment |
|
|
— |
|
|
— |
|
|
2,000 |
|
|
— |
Lease abandonment costs |
|
|
1,045 |
|
|
590 |
|
|
4,142 |
|
|
2,871 |
Total operating expenses |
|
|
27,139 |
|
|
17,052 |
|
|
88,418 |
|
|
53,481 |
Income (loss) from operations |
|
|
32,258 |
|
|
2,457 |
|
|
75,656 |
|
|
(21,960) |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,322) |
|
|
(484) |
|
|
(3,815) |
|
|
(1,885) |
Foreign currency gain (loss), net |
|
|
248 |
|
|
— |
|
|
(492) |
|
|
— |
Other income, net |
|
|
1,498 |
|
|
326 |
|
|
3,099 |
|
|
3,342 |
Income (loss) before tax expense |
|
|
32,682 |
|
|
2,299 |
|
|
74,448 |
|
|
(20,503) |
Income tax (expense) benefit |
|
|
(1,415) |
|
|
294 |
|
|
(2,027) |
|
|
326 |
Net income (loss) |
|
|
31,267 |
|
|
2,593 |
|
|
72,421 |
|
|
(20,177) |
Less: net (income) loss attributable to noncontrolling interests |
|
|
(8,316) |
|
|
(1,369) |
|
|
(22,409) |
|
|
13,013 |
Net income (loss) attributable to Select Energy Services, Inc. |
|
$ |
22,951 |
|
$ |
1,224 |
|
$ |
50,012 |
|
$ |
(7,164) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders (Note 15): |
|
|
|
|
|
|
|
|
|
|
|
|
Class A—Basic |
|
$ |
0.29 |
|
$ |
0.04 |
|
$ |
0.69 |
|
$ |
(0.28) |
Class A-1—Basic |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(0.28) |
Class A-2—Basic |
|
$ |
— |
|
$ |
— |
|
$ |
0.69 |
|
$ |
— |
Class B—Basic |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders (Note 15): |
|
|
|
|
|
|
|
|
|
|
|
|
Class A—Diluted |
|
$ |
0.29 |
|
$ |
0.04 |
|
$ |
0.69 |
|
$ |
(0.28) |
Class A-1—Diluted |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(0.28) |
Class A-2—Diluted |
|
$ |
— |
|
$ |
— |
|
$ |
0.69 |
|
$ |
— |
Class B—Diluted |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
6
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Net income (loss) |
|
$ |
31,267 |
|
$ |
2,593 |
|
$ |
72,421 |
|
$ |
(20,177) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax of $0 |
|
|
131 |
|
|
— |
|
|
(319) |
|
|
— |
Net change in unrealized gain (loss) |
|
|
131 |
|
|
— |
|
|
(319) |
|
|
— |
Comprehensive income (loss) |
|
|
31,398 |
|
|
2,593 |
|
|
72,102 |
|
|
(20,177) |
Less: comprehensive (income) loss attributable to noncontrolling interests |
|
|
(8,351) |
|
|
(1,369) |
|
|
(22,310) |
|
|
13,013 |
Comprehensive income (loss) attributable to Select Energy Services, Inc. |
|
$ |
23,047 |
|
$ |
1,224 |
|
$ |
49,792 |
|
$ |
(7,164) |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
7
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine months ended September 30, 2018 and 2017
(unaudited)
(in thousands, except share data)
|
|
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) |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Conversion of Class B to Class A |
|
14,305,146 |
|
|
144 |
|
— |
|
|
— |
|
(14,305,146) |
|
|
(144) |
|
— |
|
|
— |
|
|
146,865 |
|
|
— |
|
|
— |
|
|
146,865 |
|
|
(146,865) |
|
|
— |
ESPP shares issued |
|
6,413 |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
99 |
|
|
— |
|
|
— |
|
|
99 |
|
|
(13) |
|
|
86 |
Equity-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
5,543 |
|
|
— |
|
|
— |
|
|
5,543 |
|
|
2,487 |
|
|
8,030 |
Issuance of restricted shares |
|
438,182 |
|
|
4 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
2,321 |
|
|
— |
|
|
— |
|
|
2,325 |
|
|
(2,325) |
|
|
— |
Exercise of restricted stock units |
|
27,860 |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
104 |
|
|
— |
|
|
— |
|
|
104 |
|
|
(104) |
|
|
— |
Stock options exercised |
|
79,333 |
|
|
1 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
1,018 |
|
|
— |
|
|
— |
|
|
1,019 |
|
|
(374) |
|
|
645 |
Repurchase of common stock |
|
(62,777) |
|
|
(1) |
|
(6) |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(803) |
|
|
— |
|
|
— |
|
|
(804) |
|
|
(73) |
|
|
(877) |
Restricted shares forfeited |
|
(49,638) |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(380) |
|
|
— |
|
|
— |
|
|
(380) |
|
|
379 |
|
|
(1) |
Distributions to noncontrolling interests, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(506) |
|
|
(506) |
NCI income tax adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
229 |
|
|
— |
|
|
— |
|
|
229 |
|
|
(229) |
|
|
— |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(319) |
|
|
(319) |
|
|
(176) |
|
|
(495) |
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
50,012 |
|
|
— |
|
|
50,012 |
|
|
22,409 |
|
|
72,421 |
Balance as of September 30, 2018 |
|
80,658,534 |
|
$ |
807 |
|
— |
|
$ |
— |
|
26,026,843 |
|
$ |
260 |
|
— |
|
$ |
— |
|
$ |
828,137 |
|
$ |
32,153 |
|
$ |
(17) |
|
$ |
861,340 |
|
$ |
281,332 |
|
$ |
1,142,672 |
|
|
Class A |
|
Class A-1 |
|
Class A-2 |
|
Class B |
|
Preferred |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
Stockholders |
|
Stockholders |
|
Stockholders |
|
Stockholders |
|
Stockholders |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
Class A |
|
|
|
Class A-1 |
|
|
|
Class A-2 |
|
|
|
Class B |
|
|
|
|
|
|
Additional |
|
|
|
|
Comprehensive |
|
Total |
|
|
|
|
|
|
|||||||
|
|
|
|
Common |
|
|
|
Common |
|
|
|
Common |
|
|
|
Common |
|
|
|
Preferred |
|
Paid-In |
|
Accumulated |
|
Income |
|
Stockholders’ |
|
Noncontrolling |
|
|
|
||||||||||
|
|
Shares |
|
Stock |
|
Shares |
|
Stock |
|
Shares |
|
Stock |
|
Shares |
|
Stock |
|
Shares |
|
Stock |
|
Capital |
|
Deficit |
|
(Loss) |
|
Equity |
|
Interests |
|
Total |
|||||||||||
Balance as of December 31, 2016 |
|
3,802,972 |
|
$ |
38 |
|
16,100,000 |
|
$ |
161 |
|
— |
|
$ |
— |
|
38,462,541 |
|
$ |
385 |
|
— |
|
$ |
— |
|
$ |
113,175 |
|
$ |
(1,043) |
|
$ |
— |
|
$ |
112,716 |
|
$ |
221,992 |
|
$ |
334,708 |
Conversion of Class A-1 to Class A |
|
16,100,000 |
|
|
161 |
|
(16,100,000) |
|
|
(161) |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Issuance of shares for acquisition |
|
560,277 |
|
|
6 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
4,360 |
|
|
— |
|
|
— |
|
|
4,366 |
|
|
5,514 |
|
|
9,880 |
Issuance of shares for initial public offering |
|
10,005,000 |
|
|
100 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
87,835 |
|
|
— |
|
|
— |
|
|
87,935 |
|
|
40,569 |
|
|
128,504 |
Equity-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
788 |
|
|
— |
|
|
— |
|
|
788 |
|
|
993 |
|
|
1,781 |
Distributions to noncontrolling interests, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(368) |
|
|
(368) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(7,164) |
|
|
— |
|
|
(7,164) |
|
|
(13,013) |
|
|
(20,177) |
Balance as of September 30, 2017 |
|
30,468,249 |
|
$ |
305 |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
38,462,541 |
|
$ |
385 |
|
— |
|
$ |
— |
|
$ |
206,158 |
|
$ |
(8,207) |
|
$ |
— |
|
$ |
198,641 |
|
$ |
255,687 |
|
$ |
454,328 |
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)
|
|
Nine months ended September 30, |
||||
|
|
2018 |
|
2017 |
||
Cash flows from operating activities |
|
|
|
|
|
|
Net income (loss) |
|
$ |
72,421 |
|
$ |
(20,177) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
|
95,512 |
|
|
68,456 |
Net gain on disposal of property and equipment |
|
|
(2,959) |
|
|
(3,127) |
Bad debt expense |
|
|
1,430 |
|
|
1,098 |
Amortization of debt issuance costs |
|
|
516 |
|
|
928 |
Inventory reserve |
|
|
430 |
|
|
— |
Equity-based compensation |
|
|
8,030 |
|
|
1,781 |
Impairment of property and equipment |
|
|
2,282 |
|
|
— |
Impairment of investment |
|
|
2,000 |
|
|
— |
Other operating items, net |
|
|
971 |
|
|
(560) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accounts receivable |
|
|
(46,010) |
|
|
(65,815) |
Prepaid expenses and other assets |
|
|
(7,950) |
|
|
(6,493) |
Accounts payable and accrued liabilities |
|
|
(2,043) |
|
|
19,660 |
Net cash provided by (used in) operating activities |
|
|
124,630 |
|
|
(4,249) |
Cash flows from investing activities |
|
|
|
|
|
|
Acquisitions, net of cash received |
|
|
(1,953) |
|
|
(62,199) |
Purchase of property and equipment |
|
|
(109,500) |
|
|
(66,013) |
Proceeds received from sale of property and equipment |
|
|
9,363 |
|
|
6,677 |
Net cash used in investing activities |
|
|
(102,090) |
|
|
(121,535) |
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds from revolving line of credit and issuance of long-term debt |
|
|
45,000 |
|
|
34,000 |
Payments on long-term debt |
|
|
(55,000) |
|
|
(34,000) |
Payments of capital lease obligations |
|
|
(1,517) |
|
|
— |
Proceeds from initial public offering |
|
|
— |
|
|
140,070 |
Proceeds from share issuance |
|
|
731 |
|
|
— |
Payments incurred for initial public offering |
|
|
— |
|
|
(11,566) |
Distributions to noncontrolling interests, net |
|
|
(506) |
|
|
(368) |
Repurchase of common stock |
|
|
(877) |
|
|
— |
Net cash (used in) provided by financing activities |
|
|
(12,169) |
|
|
128,136 |
Effect of exchange rate changes on cash |
|
|
(95) |
|
|
— |
Net increase in cash and cash equivalents |
|
|
10,276 |
|
|
2,352 |
Cash and cash equivalents, beginning of period |
|
|
2,774 |
|
|
40,041 |
Cash and cash equivalents, end of period |
|
$ |
13,050 |
|
$ |
42,393 |
Supplemental cash flow disclosure: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3,356 |
|
$ |
1,139 |
Cash (refunds) paid for income taxes |
|
$ |
(1,750) |
|
$ |
37 |
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities |
|
$ |
23,689 |
|
$ |
7,733 |
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 a membership interest in SES Holdings, LLC (“SES Holdings”).
On November 1, 2017, the Company completed the transactions in which subsidiaries of Select Inc. and SES Holdings merged with Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“Rockwater LLC”), respectively, in a stock-for-stock or unit-for-unit transaction (the “Rockwater Merger”). Rockwater operations described in this report describe the operations of Rockwater LLC. See Note 3—Acquisitions for further discussion.
We are a leading provider of total water management and chemical solutions to the oil and gas industry in North America. The oilfield water services market has grown rapidly over the past decade, driven by advances in drilling, completion and production technologies. Within the major unconventional onshore oil and gas plays in the United States, we believe we are a market leader in sourcing, transfer (both by permanent pipeline and temporary hose) and temporary containment of water prior to its use in drilling and completion activities associated with hydraulic fracturing or “fracking,” which we collectively refer to as “pre‑frac water services.” We also provide well testing and flowback services immediately following the well completion. In most of our areas of operations, we provide additional complementary water‑related services that support oil and gas well completion and production activities including monitoring, treatment, hauling, recycling and disposal. In addition to our water-related services, we also develop and manufacture specialty chemicals used in frac-fluid systems and production chemicals used to enhance performance over the life of a well. We believe we are the only oilfield services company that provides total water solutions together with complementary chemical products and related expertise, which we believe gives us a unique competitive advantage in our industry.
We also offer wellsite services that complement our total water management and chemical solutions offering. These services include equipment rental, accommodations, crane and logistics services, wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada.
Reorganization: On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A‑1 common stock, par value $0.01 per share (“Class A-1 Common Stock”) at an offering price of $20.00 per share. In conjunction with the Select 144A Offering, SES Holdings’ then existing Class A and Class B units were converted into a single class of common units (the “SES Holdings LLC Units”) and SES Holdings effected a 10.3583 for 1 unit split. In exchange for the contribution of all net proceeds from the Select 144A Offering to SES Holdings, SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or one share for each SES Holdings LLC Unit held by Legacy Owner Holdco. Select Inc. also acquired 3,802,972 SES Holdings LLC Units from certain legacy owners (the “Contributing Legacy Owners”) in exchange for the issuance of 3,802,972 shares of Select Inc. Class A common stock, par value $0.01 per share (“Class A Common Stock”). Upon the effectiveness of a shelf registration statement registering such shares for resale on June 13, 2017, all shares of Class A-1 Common Stock converted into shares of Class A Common Stock on a one-for-one basis. Refer below for further discussion. Shareholders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters, subject to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based on their ownership of Class B Common Stock. The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests.
10
Initial Public Offering: On April 26, 2017, the Company completed its initial public offering (“IPO”) of 8,700,000 shares of Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriters of the IPO exercised their over-allotment option to purchase an additional 1,305,000 shares of Class A Common Stock at the IPO price of $14.00 per share. After deducting underwriting discounts and commissions and estimated offering expenses payable by it, the Company received $128.5 million of the aggregate net proceeds from the IPO (including the over-allotment option). The Company contributed all of the net proceeds received by it to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds in the following manner: (i) $34.0 million was used to repay borrowings incurred under the Company’s Previous Credit Facility (as defined and discussed in Note 8) to fund the cash portion of the purchase price of the GRR Acquisition, as described below, (ii) $7.8 million was used for the cash settlement of outstanding phantom unit awards and (iii) the remaining net proceeds were used for general corporate purposes, including funding capital expenditures.
Rockwater Merger: On November 1, 2017, we completed the Rockwater Merger, as contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among us, SES Holdings, Raptor Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary, Raptor Merger Sub, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of SES Holdings, Rockwater and Rockwater LLC. Pursuant to the Merger Agreement, we combined with Rockwater in a stock‑for‑stock transaction in which we issued approximately 25.9 million shares of Class A Common Stock, 6.7 million shares of Select Inc. Class A-2 common stock, par value $0.01 (the “Class A‑2 Common Stock”) and 4.4 million shares of Class B Common Stock to the former holders of Rockwater common stock and a unit‑for‑unit transaction in which SES Holdings issued approximately 37.3 million common units of SES Holdings (each, an “SES Holdings LLC Unit”) to the former holders of units in Rockwater LLC (each, a “Rockwater LLC Unit”). See Note 3—Acquisitions for further discussion.
Credit Agreement: Concurrent with the Rockwater Merger, the Company entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”). In addition, the obligations under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated. See Note 8—Debt for further discussion.
Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class 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.
11
Registration rights: In December 2016, in connection with the closing of the Select 144A Offering, Select Inc. entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the Select 144A Offering. Under this registration rights agreement, the Company agreed, at its expense, to file with the U.S Securities and Exchange Commission (“SEC”), in no event later than April 30, 2017, a shelf registration statement registering for resale the 16,100,000 shares of Class A Common Stock issuable upon conversion of the Class A‑1 Common Stock sold in the Select 144A Offering plus any additional shares of Class A‑1 Common Stock issued in respect thereof whether by stock dividend, stock distribution, stock split or otherwise, and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 60 days after the closing of the IPO. The Company filed this registration statement with the SEC on April 28, 2017 and this registration statement was declared effective by the SEC on June 13, 2017. Accordingly, each share of Class A‑1 Common Stock outstanding automatically converted into a share of Class A Common Stock on a one‑for‑one basis at that time. In addition, Legacy Owner Holdco has the right, under certain circumstances, to cause the Company to register the shares of Class A Common Stock obtained pursuant to the Exchange Right. Legacy Owner Holdco exercised this right in May 2018, and the registration statement registering these shares was declared automatically effective by the SEC on May 16, 2018.
Rockwater Registration Rights Agreement: In connection with the closing of the Rockwater Merger, pursuant to that certain Assignment and Assumption Agreement (the “Assignment and Assumption Agreement”), dated as of November 1, 2017, by and between Rockwater and Select Inc., Rockwater assigned, and Select Inc. assumed, Rockwater’s rights and obligations under that certain Registration Rights Agreement made and entered into as of February 16, 2017, between Rockwater and FBR Capital Markets & Co. (as assumed by Select Inc. pursuant to the Assignment and Assumption Agreement, the “Rockwater Registration Rights Agreement”). Under the Rockwater Registration Rights Agreement, Select Inc. agreed, at its expense, to file with the SEC a shelf registration statement registering for resale shares of Class A Common Stock into which the outstanding shares of Class A-2 Common Stock were convertible, and to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 180 days after the initial filing of such registration statement.
On January 12, 2018, the Company, pursuant to the Rockwater Registration Rights Agreement, filed with the SEC, a shelf registration statement registering for resale of 6,653,777 shares of Class A Common Stock into which certain of the outstanding shares of Class A-2 Common Stock registered under such registration statement were convertible. Pursuant to the Company’s Third Amended and Restated Certificate of Incorporation, upon the effectiveness of this registration statement on March 29, 2018, each outstanding share of Class A-2 Common Stock converted automatically into a share of Class A Common Stock on a one-for-one basis. No shares of Class A-2 Common Stock are currently outstanding.
Tax receivable agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then-holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder” and together, the “TRA Holders”). On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 12—Related-Party Transactions for further discussion.
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the 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.
12
This Form 10-Q relates to the three and nine months ended September 30, 2018 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2017 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s annual report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) filed with the SEC on March 19, 2018, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year.
The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority‑owned or controlled subsidiaries. All significant 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 in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of September 30, 2018, the Company has no equity method investees and one cost method investee. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. During the first quarter of 2018, the Company determined that its cost method investee was no longer fully recoverable and was written down to its estimated fair value of $0.5 million. The impairment expense of $2.0 million is included in impairment of investment within the consolidated statements of operations.
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, total assets, total liabilities or total stockholders’ equity.
13
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2017 included in the Company’s most recent Annual Report on Form 10-K. There have been no significant changes in such policies or the application of such policies during the Current Period.
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 recoverability of long‑lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, income taxes, self‑insurance liabilities, share‑based compensation and contingent liabilities. 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.
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 19 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:
|
|
Nine months ended September 30, 2018 |
|
|
|
(in thousands) |
|
Balance at beginning of Current Period |
|
$ |
1,846 |
Accretion expense, included in depreciation and amortization expense |
|
|
142 |
Change in estimate |
|
|
386 |
Divestitures |
|
|
(508) |
Balance at end of Current Period |
|
$ |
1,866 |
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 for the nine months ended September 30, 2018 and year ended December 31, 2017.
Change in depreciable lives of property and equipment: In accordance with its policy, the Company reviews the estimated useful lives and estimated salvage values of its fixed assets on an ongoing basis. This most recent review, conducted in the first quarter of 2018, indicated that the economic lives of certain assets were longer than the historic asset lives previously used by the Company. This increase was positively supported by effective use, care and custody of the assets. Also, this review indicated increased salvage value estimates for certain assets within vehicles and equipment, which was supported by recent vehicle sales data, and is expected to continue prospectively. As a result, effective January 1, 2018, the Company changed its estimates of the useful lives of certain assets included in vehicles and equipment and machinery and equipment, and increased salvage value estimates for certain assets within vehicles and equipment, to better reflect the estimated periods and depreciable amounts during which these assets will remain in service.
14
The average estimated useful lives of the assets impacted in the vehicles and equipment category increased from 6.0 to 8.1 years, while the average estimated useful lives of assets impacted in machinery and equipment increased from 5.5 years to 6.9 years. The impact of the increase of useful lives was to defer and extend out depreciation expense, including lower expense in 2018. The impact of the increase in salvage values was to permanently lower current and future depreciation expense. The fixed assets obtained in 2017 through mergers and acquisitions, including the Rockwater Merger, have consistent useful life and salvage value estimates with the rest of the Company’s fixed assets.
The change in the estimated useful lives of fixed assets and change in salvage value estimates was implemented on a prospective basis starting January 1, 2018. Excluding fixed assets attained through mergers and acquisitions during 2017, the impact of the change in useful estimate of fixed assets purchased on or before December 31, 2017 was to reduce and defer depreciation expense by $2.7 million and $11.7 million during the Current Quarter and Current Period, respectively. Also, the increase in estimated vehicle salvage value produced a permanent depreciation expense reduction of $0.9 million and $2.9 million, during the Current Quarter and Current Period, respectively. For the Current Quarter and Current Period, the changes in useful life estimate and increased salvage value produced an increase to net income of $2.5 million and $9.9 million, respectively, and increased basic and diluted earnings per share attributable to our stockholders by $0.03 and $0.14, respectively.
Emerging Growth Company status: Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is an “emerging growth company,” or an “EGC,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase‑in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. The Company’s election to use the phase‑in periods permitted by this election may make it difficult to compare the Company’s financial statements to those of non‑emerging growth companies and other emerging growth companies that have opted out of the longer phase‑in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. The Company will lose its emerging growth company status as of December 31, 2018, as the market value of our common stock held by non-affiliates was greater than $700 million as of June 30, 2018.
Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The Company does not expect the adoption of the ASU or related ASUs 2016-08, 2016-10, 2016-12 and 2016-20, will have a material impact on its consolidated financial statements because (i) most customer agreements begin and end within the same period and (ii) our current revenue recognition methodologies are similar to the new guidance. The Company is evaluating the impact on the related disclosures and internal controls over financial reporting. The Company will use the modified retrospective method upon adoption of the ASU.
In February 2016, the FASB issued ASU 2016-02, Leases, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients. In July 2018, the FASB issued ASU No. 2018-11, Leases (ASC 842): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective January 1, 2019. The Company currently anticipates that it will elect to recognize its lease assets and liabilities on a prospective basis, beginning on January 1, 2019, using an optional transition method.
15
Additionally, the Company expects (i) not to set up right of use assets and lease liabilities for short-term leases, (ii) to elect to treat lease and non-lease components as a single lease component and (iii) to grandfather its current accounting for land easements that commenced before January 1, 2019. The Company expects the adoption of these ASUs to have a material increase to assets and liabilities on the consolidated balance sheets. However, because the Company is currently evaluating the impact of these ASUs and, ASU 2018-01, Land Easements, it is unable to quantify the overall impact at this time.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share‑based payment award transactions. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement was effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. Certain amendments in this update should be applied prospectively, while other amendments in the update should be applied retrospectively, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied using a retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update was effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied prospectively. The Company does not expect the adoption of the ASU will have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
16
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The pronouncement should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU in 2018, and the adoption of this guidance did not materially affect its consolidated financial statements and related disclosures.
NOTE 3— ACQUISITIONS
Business combinations
Rockwater Merger
On November 1, 2017, the Company completed the Rockwater Merger in which the Company combined with Rockwater. Total consideration was $620.2 million based on the closing price of the Company’s shares of Class A Common Stock on November 1, 2017. Consideration transferred consisted of shares of Class A Common Stock, shares of Class A-2 Common Stock, shares of Class B Common Stock, and SES Holdings LLC Units. Consideration transferred also included the Company’s previously held interest in Rockwater, which was acquired as consideration in a sale of assets by Select’s predecessor to Rockwater’s predecessor in 2008 prior to the contribution of those assets to Rockwater and the related conversion of the ownership interests received by Select’s predecessor to ownership interests in Rockwater in 2011, and the fair value of Rockwater’s replaced share-based payments attributed to pre-acquisition service. In addition, the Company’s previously held interest in Rockwater was cancelled pursuant to the Merger Agreement. The previously held interest in Rockwater was previously included in other assets in the consolidated balance sheet. It was remeasured to a fair value of $2.3 million, which resulted in a gain of $1.2 million recognized in the fourth quarter of 2017 in other income in the consolidated statements of operations. For the Current Quarter and the Current Period, the Company expensed $2.6 million and $6.3 million of transaction-related costs, respectively, which are included in selling, general and administrative expenses within the consolidated statements of operations.
The Rockwater Merger 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. The Company also engaged third-party valuation experts to assist in the purchase price allocation and the recorded valuation of property and equipment. Management estimated that total consideration paid exceeded the fair value of the net assets acquired and liabilities assumed by $248.6 million, with the excess recorded as goodwill. The goodwill recognized was primarily attributable to synergies driven by expanding into new geographies, service offerings and customer relationships, strengthening existing service lines and geographies, acquiring an established, trained workforce and expected cost reductions. Goodwill of $235.9 million and $12.7 million was allocated to the Company’s Water Solutions and Oilfield Chemicals segments, respectively. The acquired goodwill is not deductible for tax purposes.
17
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) |
|
Class A Common Stock (25,914,260 shares) |
|
$ |
423,957 |
Class A-2 Common Stock (6,731,845 shares) |
|
|
110,133 |
Class B Common Stock (4,356,477 shares) and SES Holdings common units issued (4,356,477 units) |
|
|
71,272 |
Fair value of previously held interest in Rockwater |
|
|
2,310 |
Fair value of Rockwater share-based awards attributed to pre-acquisition service |
|
|
12,529 |
Total consideration transferred |
|
|
620,201 |
Less: identifiable assets acquired and liabilities assumed |
|
|
|
Working capital(1) |
|
|
141,720 |
Property and equipment(2) |
|
|
188,610 |
Intangible assets |
|
|
|
Customer relationships(3) |
|
|
89,661 |
Trademarks and patents |
|
|
31,223 |
Non-compete agreements |
|
|
3,811 |
Other long-term assets |
|
|
88 |
Deferred tax liabilities |
|
|
(408) |
Long-term debt |
|
|
(80,555) |
Other long-term liabilities(3) |
|
|
(2,517) |
Total identifiable net assets acquired |
|
|
371,633 |
Goodwill |
|
|
248,568 |
Fair value allocated to net assets acquired |
|
$ |
620,201 |
(1) |
During the Current Period, the Company obtained additional information related to working capital which led to a decrease of $5.2 million and a corresponding increase in goodwill of $5.2 million compared to the estimated fair values included in the 2017 Form 10-K. |
(2) |
During the Current Period, the Company obtained additional information related to property and equipment which led to an increase of $3.0 million and a corresponding decrease in goodwill of $3.0 million compared to the estimated fair values included in the 2017 Form 10-K. |
(3) |
During the Current Period, the Company obtained additional information related to customer relationships and other long-term liabilities which led to an increase of $0.7 million and a decrease of $0.1 million, respectively, and a corresponding decrease to goodwill of $0.8 million compared to the estimated fair values included in the 2017 Form 10-K. |
18
Resource Water Acquisition
On September 15, 2017, the Company completed its acquisition (the “Resource Water Acquisition”) of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”). Resource Water provides water transfer services to E&P operators in West Texas and East Texas. Resource Water’s assets include 24 miles of layflat hose as well as numerous pumps and ancillary equipment required to support water transfer operations. Resource Water has longstanding customer relationships across its operating regions which are viewed as strategic to the Company’s water solutions business. The acquired goodwill is deductible for tax purposes.
The total consideration for the Resource Water Acquisition was $9.0 million, with $6.6 million paid in cash and $2.4 million paid in shares of Class A Common Stock valued at $15.17 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the Resource Water Acquisition with $6.6 million of cash on hand. The Resource Water Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.9 million, with the excess recorded as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions 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 |
|
$ |
6,586 |
Class A Common Stock (156,909 shares) |
|
|
2,380 |
Total consideration transferred |
|
|
8,966 |
Less: identifiable assets acquired and liabilities assumed |
|
|
|
Working capital |
|
|
1,189 |
Fixed assets |
|
|
3,485 |
Customer relationship intangible assets |
|
|
1,933 |
Other intangible assets |
|
|
465 |
Total identifiable net assets acquired |
|
|
7,072 |
Goodwill |
|
|
1,894 |
Fair value allocated to net assets acquired |
|
$ |
8,966 |
19
GRR Acquisition
On March 10, 2017, the Company completed its acquisition (the “GRR Acquisition”) of Gregory Rockhouse Ranch, Inc. and certain other affiliated entities and assets (collectively, the “GRR Entities”). The GRR Entities provide water and water‑related services to E&P companies in the Permian Basin and own and have rights to a vast array of fresh, brackish and effluent water sources with access to significant volumes of water annually and water transport infrastructure, including over 1,200 miles of temporary and permanent pipeline infrastructure and related storage facilities and pumps, all located in the northern Delaware Basin portion of the Permian Basin.
The total consideration for the GRR Acquisition was $59.6 million, subject to customary post-closing adjustments, with $53.0 million paid in cash, $1.1 million in assumed tax liabilities and $5.5 million paid to the sellers in shares of Class A Common Stock valued at $20.00 per share. The Company funded the cash portion of the consideration for the GRR Acquisition with $19.0 million of cash on hand and $34.0 million of borrowings under the Company’s Previous Credit Facility. For the nine months ended September 30, 2017, the Company expensed $1.0 million of transaction-related costs, which are included in selling, general and administrative expenses within the consolidated statements of operations. The GRR Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired by $12.0 million, with the excess recorded as goodwill. The goodwill recognized was primarily attributable to synergies related to the Company’s comprehensive water solutions strategy that are expected to arise from the GRR Acquisition and was attributable to the Company’s Water Solutions segment. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions segment. The acquired goodwill is deductible for tax purposes. 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 |
|
$ |
53,032 |
Class A Common Stock (274,998 shares) |
|
|
5,500 |
Assumed liabilities |
|
|
1,106 |
Total consideration transferred |
|
|
59,638 |
Less: identifiable assets acquired and liabilities assumed |
|
|
|
Working capital |
|
|
7,728 |
Fixed assets |
|
|
13,225 |
Customer relationship intangible assets |
|
|
21,484 |
Other intangible assets |
|
|
5,152 |
Total identifiable net assets acquired |
|
|
47,589 |
Goodwill |
|
|
12,049 |
Fair value allocated to net assets acquired |
|
$ |
59,638 |
20
The following unaudited consolidated pro forma information is presented as if the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition had occurred on January 1, 2017:
|
|
Pro Forma |
||||
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
||
|
|
2017 |
|
2017 |
||
|
|
(unaudited) |
||||
|
|
(in thousands) |
||||
Revenue |
|
$ |
357,160 |
|
$ |
889,442 |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,935 |
|
$ |
(11,602) |
Less: net (income) loss attributable to noncontrolling interests(1) |
|
|
(8,885) |
|
|
4,679 |
Net income (loss) attributable to Select Energy Services, Inc.(1) |
|
$ |
13,050 |
|
$ |
(6,923) |
(1) The allocation of net income (loss) attributable to noncontrolling interests and Select Inc. gives effect to the equity structure as of September 30, 2017 as though the Select 144A Offering, the IPO, the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition occurred as of January 1, 2017. However, the calculation of pro forma net income (loss) does not give effect to any other pro forma adjustments for the Select 144A Offering or the subsequent IPO.
The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Rockwater Merger, Resource Water Acquisition and GRR Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2017 and other related pro forma adjustments.
The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Rockwater Merger, the Resource Water Acquisition or the GRR Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition had occurred as of January 1, 2017 or of future operating performance.
Asset acquisitions
On June 21, 2017 the Company completed the acquisition of fixed assets from Tex-Star Water Services, LLC for $4.2 million in cash.
On May 30, 2017 the Company completed the acquisition of automated manifold intellectual property and related assets from Data Automated Water Systems, LLC (the “DAWS Acquisition”) for $4.0 million. This acquisition was paid with $2.0 million of cash and 128,370 shares of Class A Common Stock valued at $2.0 million. The DAWS Acquisition resulted in fixed assets of $1.8 million, patents of $1.9 million and software of $0.3 million.
21
NOTE 4—EXIT AND DISPOSAL ACTIVITIES
Due to a reduction in oil and gas industry activity that began in 2014, the Company decided during the year ended December 31, 2016 to close 15 facilities and consolidate operations for the purpose of improving operating efficiencies. In addition, the Company decided to consolidate or close additional facilities in relation to its Rockwater Merger. With the recent rebound in the oil and gas industry, the Company expects to ramp up operations in some areas while continuing to consolidate operations in others. During the Current Period and Prior Period, the Company recorded $4.1 million and $2.9 million, respectively, of charges related to exit and disposal activities. These costs are included in lease abandonment costs in the consolidated statements of operations. Additionally, during the Prior Period, we reclassified $0.2 million of deferred rent related to accrued lease obligations related to exited facilities. The Company had a remaining balance of $21.1 million, inclusive of a short‑term balance of $2.6 million in accrued expenses and other current liabilities, as of September 30, 2018, related to accrued lease obligations and terminations at exited facilities within its Water Solutions segment. The Company will continue to make non‑cancelable lease payments for related facilities through the year ended 2027. The Company’s abandonment of these facilities is not a part of a formalized exit plan. The changes in the abandoned lease obligations for the Current Period and Prior Period are as follows:
|
|
|
|
|
Provision during the |
|
Usage during the |
|
|
|
||
|
|
Balance as of |
|
nine months ended |
|
nine months ended |
|
Balance as of |
||||
|
|
December 31, 2017 |
|
September 30, 2018 |
|
September 30, 2018 |
|
September 30, 2018 |
||||
|
|
(in thousands) |
||||||||||
Lease obligations and terminations |
|
$ |
21,350 |
|
$ |
4,142 |
|
$ |
5,709 |
|
$ |
19,783 |
Reclassification of deferred rent |
|
|
1,254 |
|
|
|
|
|
|
|
|
1,332 |
Total |
|
$ |
22,604 |
|
|
|
|
|
|
|
$ |
21,115 |
|
|
|
|
|
Provision during the |
|
Usage during the |
|
|
|
||
|
|
Balance as of |
|
nine months ended |
|
nine months ended |
|
Balance as of |
||||
|
|
December 31, 2016 |
|
September 30, 2017 |
|
September 30, 2017 |
|
September 30, 2017 |
||||
|
|
(in thousands) |
||||||||||
Lease obligations and terminations |
|
$ |
18,000 |
|
$ |
2,871 |
|
$ |
2,153 |
|
$ |
18,718 |
Reclassification of deferred rent |
|
|
1,069 |
|
|
|
|
|
|
|
|
1,254 |
Total |
|
$ |
19,069 |
|
|
|
|
|
|
|
$ |
19,972 |
22
NOTE 5—INVENTORIES
Inventories, which are comprised of chemicals and materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:
|
|
September 30, 2018 |
|
December 31, 2017 |
||
|
|
(in thousands) |
||||
Raw materials |
|
$ |
13,217 |
|
$ |
11,462 |
Finished goods |
|
|
33,753 |
|
|
29,674 |
Materials and supplies |
|
|
2,917 |
|
|
3,462 |
|
|
|
49,887 |
|
|
44,598 |
Inventory reserve |
|
|
(430) |
|
|
— |
|
|
$ |
49,457 |
|
$ |
44,598 |
During the Current Quarter and the Current Period, the Company recorded charges to the reserve for excess and obsolete inventory for a nominal amount and $0.4 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. No charges were recorded during the Prior Quarter or Prior Period. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations, and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.
NOTE 6—PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of September 30, 2018 and December 31, 2017:
|
|
September 30, 2018 |
|
December 31, 2017 |
||
|
|
(in thousands) |
||||
Land |
|
$ |
17,111 |
|
$ |
15,286 |
Buildings and leasehold improvements |
|
|
100,900 |
|
|
99,222 |
Vehicles and equipment |
|
|
84,394 |
|
|
70,537 |
Vehicles and equipment - capital lease |
|
|
2,169 |
|
|
2,810 |
Machinery and equipment |
|
|
744,086 |
|
|
716,420 |
Machinery and equipment - capital lease |
|
|
532 |
|
|
544 |
Computer equipment and software |
|
|
14,442 |
|
|
12,466 |
Computer equipment and software - capital lease |
|
|
356 |
|
|
356 |
Office furniture and equipment |
|
|
4,634 |
|
|
4,320 |
Disposal wells |
|
|
63,422 |
|
|
67,805 |
Other |
|
|
497 |
|
|
497 |
Construction in progress |
|
|
79,595 |
|
|
44,732 |
|
|
|
1,112,138 |
|
|
1,034,995 |
Less accumulated depreciation and impairment |
|
|
(608,040) |
|
|
(560,886) |
Total property and equipment, net |
|
$ |
504,098 |
|
$ |
474,109 |
Long‑lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the Current Period, the Company reviewed certain fluid disposal machinery and equipment used in our fluid hauling and disposal services that are included in our Water Solutions segment. Due to the condition of the equipment, the Company determined that long-lived assets with a carrying value of $2.3 million were no longer recoverable and were written down to their estimated fair value of zero.
During the Current Quarter, Prior Quarter, Current Period and Prior Period, depreciation expense was $29.8 million, $21.2 million, $85.2 million and $61.1 million, respectively.
23
As a result of the Rockwater Merger, the Company acquired various capital leases for certain vehicles, machinery and equipment that expire at various dates during the next five years. Depreciation of assets held under capital leases for the Current Quarter and the Current Period was $0.3 million and $1.0 million, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations. The Company had no capital lease obligations as of September 30, 2017.
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 11). The changes in the carrying amounts of goodwill by reportable segment as of September 30, 2018 and December 31, 2017 are as follows:
|
|
Water |
|
Oilfield |
|
Wellsite |
|
|
|
|||
|
|
Solutions |
|
Chemicals |
|
Services |
|
Total |
||||
|
|
(in thousands) |
||||||||||
Balance as of December 31, 2016 |
|
$ |
— |
|
$ |
— |
|
$ |
12,242 |
|
$ |
12,242 |
Additions |
|
|
245,542 |
|
|
15,637 |
|
|
— |
|
|
261,179 |
Balance as of December 31, 2017 |
|
|
245,542 |
|
|
15,637 |
|
|
12,242 |
|
|
273,421 |
Measurement period adjustment(1) |
|
|
4,317 |
|
|
(2,985) |
|
|
— |
|
|
1,332 |
Balance as of September 30, 2018 |
|
$ |
249,859 |
|
$ |
12,652 |
|
$ |
12,242 |
|
$ |
274,753 |
(1) |
See Note 3―Acquisitions for additional information. |
The components of other intangible assets as of September 30, 2018 and December 31, 2017 are as follows:
|
|
As of September 30, 2018 |
|
As of December 31, 2017 |
||||||||||||||
|
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
||||||
|
|
Value |
|
Amortization |
|
Value |
|
Value |
|
Amortization |
|
Value |
||||||
|
|
(in thousands) |
|
(in thousands) |
||||||||||||||
Customer relationships |
|
$ |
169,901 |
|
$ |
65,837 |
|
$ |
104,064 |
|
$ |
169,250 |
|
$ |
57,836 |
|
$ |
111,414 |
Patents and trademarks |
|
|
33,552 |
|
|
1,166 |
|
|
32,386 |
|
|
33,544 |
|
|
414 |
|
|
33,130 |
Other |
|
|
16,458 |
|
|
4,581 |
|
|
11,877 |
|
|
14,704 |
|
|
3,182 |
|
|
11,522 |
Total other intangible assets |
|
$ |
219,911 |
|
$ |
71,584 |
|
$ |
148,327 |
|
$ |
217,498 |
|
$ |
61,432 |
|
$ |
156,066 |
The Company had $7.0 million and $5.3 million in indefinite-lived water rights at September 30, 2018 and December 31, 2017, respectively, and are included within the other component in the tables above. The Company had $23.4 million in indefinite-lived trademarks as of both September 30, 2018 and December 31, 2017 and are included in the patents and trademarks component in the table above.
Amortization expense was $3.0 million, $2.6 million, $10.3 million and $7.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Annual amortization of intangible assets for the next five years and beyond is as follows:
|
|
Amount |
|
|
|
(in thousands) |
|
Remainder of 2018 |
|
$ |
2,899 |
2019 |
|
|
11,595 |
2020 |
|
|
11,302 |
2021 |
|
|
10,118 |
2022 |
|
|
9,904 |
Thereafter |
|
|
72,037 |
24
NOTE 8—DEBT
Credit facility and revolving line of credit
Our subsidiary, Select Energy Services, LLC’s (“Select LLC”) previous credit facility (the “Previous Credit Facility”), had a maturity date of February 28, 2020 and a revolving line of credit of $100.0 million. On November 1, 2017, in connection with the closing of the Rockwater Merger (the “Closing”), SES Holdings entered into the Credit Agreement, the obligations of SES Holdings and Select LLC under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated.
On November 1, 2017, in connection with the Closing, SES Holdings and Select LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as Borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company has the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the closing. The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.
The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.
Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the ”Base Rate”), in each case plus an applicable margin. Interest is payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
25
Level |
|
Average Excess Availability |
|
Base Rate Margin |
|
Eurocurrency Rate Margin |
|
|
|
|
|
|
|
I |
|
< 33% of the commitments |
|
1.00% |
|
2.00% |
II |
|
< 66.67% of the commitments and ≥ 33.33% of the commitments |
|
0.75% |
|
1.75% |
III |
|
≥ 66.67% of the commitments |
|
0.50% |
|
1.50% |
Level |
|
Average Revolver Usage |
|
Unused Line Fee Percentage |
|
|
|
|
|
I |
|
≥ 50% of the commitments |
|
0.250% |
II |
|
< 50% of the commitments |
|
0.375% |
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Agreement to be immediately due and payable.
In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements.
The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
Certain lenders party to the Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
In addition, certain lenders party to the Previous Credit Facility are lenders under the Credit Agreement.
26
The Company had $65.0 million and $75.0 million outstanding under the Credit Agreement as of September 30, 2018 and December 31, 2017, respectively. The weighted‑average interest rate of outstanding borrowings under the Credit Agreement was 3.992% and 3.319% as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, the borrowing base under the Credit Agreement was $290.8 million and $261.1 million, respectively. The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of $20.8 million and $19.8 million as of September 30, 2018 and December 31, 2017, respectively. The Company’s letters of credit have a variable interest rate between 1.50% and 2.00% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Credit Agreement was $205.0 million at September 30, 2018.
Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of September 30, 2018 and December 31, 2017 were $2.8 million and $3.3 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheet. Amortization expense related to debt issuance costs were $0.2 million, $0.3 million, $0.5 million and $0.9 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
The Company was in compliance with all debt covenants as of September 30, 2018.
NOTE 9—COMMITMENTS AND CONTINGENCIES
The Company is subject to a number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.
Certain subsidiaries acquired in the Rockwater Merger are under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. Environmental Protection Agency (“U.S. EPA”). It is alleged that certain employees at some of the facilities altered emissions controls systems on 4% of the vehicles in the fleet in violation of the Clean Air Act. The Company is cooperating with the relevant authorities to resolve the matter. At this time no administrative, civil or criminal charges have been brought against the Company and the Company cannot estimate the possible fines and penalties that may be levied against the Company.
Self-Insured Reserves
We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
27
NOTE 10—EQUITY‑BASED COMPENSATION
The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the Select 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended from time to time, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.
On July 18, 2017, the Select Inc. board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater Merger) and allows for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement for the Rockwater Merger. The Company’s consenting stockholders, who hold a majority of the outstanding common stock of the Company, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Rockwater Merger.
The maximum number of shares initially reserved for issuance under the 2016 Plan was 5,400,400 shares of Class A Common Stock, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. After giving effect to the Equity Plan Amendment, the maximum number of shares of Class A Common Stock reserved for issuance under the 2016 Plan is equal to (i) 5,400,400 shares plus (ii) 1,011,087 shares that became available on account of the assumption of the Rockwater Equity Plan, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. The maximum number of shares described in the preceding sentence does not include 2,879,112 shares of Class A Common Stock related to substitute awards granted under the 2016 Plan following the conversion of outstanding equity awards originally granted under the Rockwater Equity Plan in accordance with the Merger Agreement.
Stock option awards
Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. The Company historically valued Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. This fair value measurement relied on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards granted during the years ended December 31, 2017 and 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were either granted in exchange for the cancellation of outstanding options granted under the 2011 Plan or the Rockwater Equity Plan, as applicable, that were fully vested and exercisable prior to such cancellation.
The Company utilized the Monte Carlo simulation model to determine fair value of the options granted during January 2018, which incorporates assumptions to value equity‑based awards. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected life of the options was based on the vesting period and term of the options awarded, which is ten years.
28
The table below presents the assumptions used in determining the fair value of stock options granted during January 2018. The weighted‑average grant date fair value of stock options granted was $8.98.
|
|
Assumptions |
||
Underlying equity |
|
$ |
20.50 |
|
Strike price |
|
$ |
20.50 - 30.75 |
|
Dividend yield (%) |
|
|
0.0 |
% |
Risk-free rate (%) |
|
|
2.3 |
% |
Volatility (%) |
|
|
50.0 |
% |
Expected term (years) |
|
|
10.0 |
|
A summary of the Company’s stock option activity and related information as of and for the Current Period is as follows:
|
|
For the nine months ended September 30, 2018 |
||||||||
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
|
|
Weighted-average |
|
Remaining Contractual |
|
Aggregate Intrinsic |
||
|
|
Stock Options |
|
Exercise Price |
|
Term (Years) |
|
Value (in thousands) (a) |
||
Beginning balance, outstanding |
|
3,495,935 |
|
$ |
14.12 |
|
5.1 |
|
$ |
16,368 |
Granted |
|
584,846 |
|
|
26.02 |
|
|
|
|
|
Exercised |
|
(79,333) |
|
|
8.12 |
|
|
|
|
|
Forfeited |
|
(85,849) |
|
|
15.05 |
|
|
|
|
|
Expired |
|
(40,390) |
|
|
17.32 |
|
|
|
|
|
Ending balance, outstanding |
|
3,875,209 |
|
$ |
15.98 |
|
5.1 |
|
$ |
2,750 |
Ending balance, exercisable |
|
2,850,903 |
|
$ |
14.64 |
|
3.8 |
|
$ |
1,702 |
Non-vested at end of period |
|
1,024,306 |
|
$ |
19.72 |
|
|
|
|
|
(a) Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $11.84 and $18.24 as of September 28, 2018 and December 29, 2017, respectively.
The Company recognized $1.2 million, $0.4 million, $3.9 million and $1.4 million of compensation expense related to stock options during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2018, there was $5.9 million of unrecognized equity-based compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.3 years.
Restricted Stock Awards and Restricted Stock Units
The value of the restricted stock awards and restricted stock units issued was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $1.1 million, $0.1 million, $3.2 million and $0.4 million related to the restricted stock awards and restricted stock units for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2018, there was $6.8 million of unrecognized compensation expense with a weighted-average remaining life of 1.9 years related to unvested restricted stock awards and restricted stock units.
29
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
|
|
For the nine months ended September 30, 2018 |
|||
|
|
|
|
Weighted-average |
|
|
|
Restricted Stock Awards |
|
Grant Date Fair Value |
|
Non-vested at December 31, 2017 |
|
299,801 |
|
$ |
16.36 |
Granted |
|
438,182 |
|
|
19.52 |
Vested |
|
(191,400) |
|
|
16.36 |
Forfeited |
|
(49,634) |
|
|
17.62 |
Non-vested at September 30, 2018 |
|
496,949 |
|
$ |
19.02 |
A summary of the Company’s restricted stock unit activity and related information for the Current Period is as follows:
|
|
For the nine months ended September 30, 2018 |
|||
|
|
|
|
Weighted-average |
|
|
|
Restricted Stock Units |
|
Grant Date Fair Value |
|
Non-vested at December 31, 2017 |
|
30,360 |
|
$ |
19.88 |
Granted |
|
— |
|
|
— |
Vested |
|
(27,860) |
|
|
19.96 |
Non-vested at September 30, 2018 |
|
2,500 |
|
$ |
19.00 |
Performance Share Units (PSUs)
During 2018, the Company approved grants of performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSU will be calculated based on performance against certain metrics that relate to the Company’s return on asset performance over the January 1, 2018 through December 31, 2020 performance period. The target number of shares of Class A Common Stock subject to each PSU is one; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from zero to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2021, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with the following table:
Return on Assets at Performance Period End Date |
|
Percentage of Target PSUs Earned |
Less than 9.6% |
|
0% |
9.6% |
|
50% |
12% |
|
100% |
14.4% |
|
175% |
Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest, by the measurement-date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized compensation expense of $0.1 million and $0.7 million related to the PSUs for the Current Quarter and Current Period, respectively.
As of September 30, 2018, the fair value of outstanding PSUs issued was $3.2 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $2.5 million and is expected to be recognized over a weighted-average period of 2.3 years as of September 30, 2018.
30
The following table summarizes the information about the performance share units outstanding at September 30, 2018:
Period Granted |
|
Target Shares Outstanding at Beginning of Period |
|
Target Shares Granted |
|
Target Shares Vested |
|
Target Shares Forfeited |
|
Target Shares Outstanding at End of Period |
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
— |
|
280,021 |
|
— |
|
(11,852) |
|
268,169 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
— |
|
280,021 |
|
— |
|
(11,852) |
|
268,169 |
Stock-Settled Incentive Awards
Effective May 17, 2018, Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Equity Incentive Plan that are subject to both market-based and service-based vesting provisions. These awards will vest after a two-year service period and, if earned, settled in shares of the Company stock. The ultimate amount earned is based on the achievement of the market metrics, which is based on the stock price of the Company at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date is forfeited. The target amount that becomes earned during the performance period will be determined in accordance with the following table:
Stock Price at Vesting Date(1) |
|
Percentage of Target Amount Earned |
Less than $20.00 |
|
0% |
At least $20.00, but less than $25.00 |
|
100% |
$25.00 or greater |
|
200% |
(1) |
The stock price at vesting date equals the greater of (i) the fair market value of a share of the Company’s stock on the vesting date, or (ii) the volume weighted average closing price of a share of the Company’s stock, as reported on the NYSE, for the 30 trading days preceding the vesting date. |
The target amount of stock-settled incentive awards granted was $3.9 million. However, the ultimate settlement of the awards will be in shares of the Company’s stock with fair market value equal to the earned amount, which could range from 0% to 200% of the target amount depending on the stock price at vesting date.
Compensation expense associated with the stock-settled incentive awards is recognized ratably over the corresponding requisite service period. The fair value of the stock-settled incentive awards was determined using a Monte Carlo option pricing model, similar to the Black-Scholes-Merton model, and adjusted for the specific characteristics of the awards. The key assumptions in the model included price, the expected volatility of our stock, risk-free interest rate based on U.S. Treasury yield curve, cross-correlations between us and our self-determined peer companies’ asset, equity and debt-to-equity volatility.
During the Current Quarter and the Current Period, the Company recognized stock compensation expense of $0.1 million and $0.2 million, respectively, related to the stock-settled incentive awards. The unrecognized compensation cost related to our unvested stock-settled incentive awards is estimated to be $1.0 million and is expected to be recognized over approximately 20 months as of September 30, 2018.
The following table summarizes the information about the stock-settled incentive awards outstanding at September 30, 2018:
|
|
|
|
|
Award Value |
|
|
|
Value at Target |
|
Being Recognized |
||
Non-vested at December 31, 2017 |
|
$ |
— |
|
$ |
— |
Granted during 2018 |
|
|
3,871 |
|
|
1,479 |
Forfeited during 2018 |
|
|
(724) |
|
|
(277) |
Ending balance at September 30, 2018 |
|
$ |
3,147 |
|
$ |
1,202 |
31
Employee Stock Purchase Plan (ESPP)
We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of our common stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1 through August 31 and September 1 through November 30. At the end of each offering period, enrolled employees purchase shares of our common stock at a price equal to 95% of the market value of the stock on the last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period. Subject to limitations set forth in the plan and under IRS regulations, eligible employees may elect to contribute a maximum of $15,000 to the plan in a single calendar year. The plan is deemed to be noncompensatory.
The following table summarizes ESPP activity (in thousands, except shares):
|
|
For the nine months ended September 30, 2018 |
|
Cash received for shares issued |
|
$ |
85,635 |
Shares issued |
|
|
6,413 |
Phantom unit awards
The Company’s phantom unit awards were cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of the Company’s Class A common stock on the date of completion of the Company’s IPO, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considered these awards to be liability awards, which were measured at fair value at each reporting date and the pro rata vested portion of the award was recognized as a liability to the extent that the performance condition was deemed probable. On May 5, 2017, the Company settled its outstanding phantom unit awards for an aggregate amount equal to $7.8 million as a result of the completion of its IPO, which constituted a liquidity event with respect to such phantom unit awards. Based on the fair market value of a share of the Company’s Class A common stock on the date of the IPO of $14.00, the cash payment with respect to each phantom unit was approximately $5.53, before employer taxes. The Company recognized compensation expense of $7.8 million during both the Prior Quarter and the Prior Period related to the settlement of its phantom unit awards. As of September 30, 2018 and 2017 there were no phantom units outstanding.
32
NOTE 11—FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
ASC 820 establishes a three‑level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non‑active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the nine months ended September 30, 2018 or the year ended December 31, 2017.
Other fair value considerations
The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value at September 30, 2018 and December 31, 2017 due to the short‑term maturity of these instruments. The carrying value of debt as of September 30, 2018 and December 31, 2017 approximates fair value due to variable market rates of interest. The fair value of debt at September 30, 2018 and December 31, 2017, which is a Level 3 measurement, is estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices are not available. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The consideration transferred and the purchase price allocation of identified assets acquired and liabilities assumed related to the Rockwater Merger, Resource Water Acquisition and GRR Acquisition are based on the Company’s estimate of fair value utilizing Level 3 inputs at the date of acquisition. Refer to Note 3 – Acquisitions for further discussion.
33
NOTE 12—RELATED-PARTY TRANSACTIONS
The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons and an unconsolidated joint venture. The Company has entered into a significant number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the Company’s board of directors regularly reviews these transactions; however, the Company’s results of operations may have been different if these transactions were conducted with non‑related parties.
During the Current Quarter, sales to related parties were $2.7 million and purchases from related-party vendors were $5.2 million. These purchases consisted of $1.0 million relating to purchases of property and equipment, $4.0 million relating to the rental of certain equipment or other services used in operations and $0.2 million relating to management, consulting and other services.
During the Prior Quarter, sales to related parties were $0.4 million and purchases from related-party vendors were $2.1 million. These purchases consisted of $0.7 million relating to purchases of property and equipment, less than $0.1 million relating to inventory and consumables, $0.8 million relating to the rental of certain equipment or other services used in operations, and $0.5 million relating to management, consulting and other services.
During the Current Period, sales to related parties were $6.3 million and purchases from related-party vendors were $12.7 million. These purchases consisted of $3.5 million relating to purchases of property and equipment, $0.3 million relating to inventory and consumables, $7.8 million relating to the rental of certain equipment or other services used in operations and $1.1 million relating to management, consulting and other services.
During the Prior Period, sales to related parties were $1.5 million and purchases from related-party vendors were $5.0 million. These purchases consisted of $1.4 million relating to purchases of property and equipment, $0.2 million relating to inventory and consumables, $1.7 million relating to the rental of certain equipment or other services used in operations, and $1.7 million relating to management, consulting and other services.
Tax receivable agreements
In connection with the Select 144A Offering, the Company entered into the Tax Receivable Agreements with the TRA Holders.
The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.
The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributing Legacy Owners and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net operating losses available to the Company as a result of certain reorganization transactions entered into in connection with the Select 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement.
34
On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements revising the definition of a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Rockwater Merger would not result in such a change of control.
NOTE 13—INCOME TAXES
The Company’s effective tax rates for the Current Quarter, Prior Quarter, Current Period and Prior Period were 4.3%, (12.8)%, 2.7% and 1.6%, respectively. The effective tax rates for the Current and Prior Quarter and the Current and Prior Period differ from the statutory rate of 21% and 35%, respectively, due to net income allocated to noncontrolling interests, state income taxes, and valuation allowances. The change in the effective tax rate is primarily due to positive pretax income in the Current Period relative to a loss in the Prior Period. The Company recorded income tax expense (benefit) of $1.4 million, $(0.3) million, $2.0 million and $(0.3) million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017, and the Company has now filed its tax returns for the year ended December 31, 2017. The Company recorded $0.6 million to its provision for income taxes during the Current Quarter for the effects of the TCJA. This increased the effective tax rate by 1.7% and 0.8% in the Current Quarter and Current Period, respectively.
35
NOTE 14—NONCONTROLLING INTERESTS
The Company has ownership interests in multiple subsidiaries that are consolidated within the Company’s financial statements but are not wholly owned. During the Current Period and Prior Period, the Company entered into transactions that impacted its ownership interest in certain of these subsidiaries while maintaining control over such subsidiaries. As a result of the Company’s change in ownership interest in these subsidiaries, the Company reduced its noncontrolling interests and recognized an increase in equity related to transactions with holders of noncontrolling interests. The Company reports a noncontrolling interest representing the common units of SES Holdings held by Legacy Owner Holdco. Changes in Select Inc.’s ownership interest in SES Holdings while it retains its controlling interest are accounted for as equity transactions.
The following table summarizes the effects of changes in noncontrolling interests on equity for the Current Period and the Prior Period:
|
|
For the nine months ended September 30, |
||||
|
|
2018 |
|
2017 |
||
|
|
(in thousands) |
||||
Net income (loss) attributable to Select Energy Services, Inc. |
|
$ |
50,012 |
|
$ |
(7,164) |
Transfers (to) from noncontrolling interests: |
|
|
|
|
|
|
Decrease in additional paid-in capital as a result of the contribution of proceeds from the IPO to SES Holdings, LLC in exchange for common units |
|
|
— |
|
|
(40,569) |
Decrease in additional paid-in capital as a result of the contribution of net assets acquired to SES Holdings, LLC in exchange for common units |
|
|
— |
|
|
(5,514) |
Increase in additional paid-in capital as a result of stock option exercises |
|
|
374 |
|
|
— |
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures |
|
|
1,946 |
|
|
— |
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units |
|
|
104 |
|
|
— |
Increase in additional paid-in capital as a result of the repurchase of common units of SES Holdings, LLC |
|
|
73 |
|
|
— |
Increase in additional paid-in capital as a result of the conversion of Class B to Class A shares |
|
|
146,865 |
|
|
— |
Increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued |
|
|
13 |
|
|
— |
Change to equity from net income (loss) attributable to Select Energy Services, Inc. and transfers from noncontrolling interests |
|
$ |
199,387 |
|
$ |
(53,247) |
36
NOTE 15—EARNINGS (LOSS) PER SHARE
Earnings per share are based on the amount of income allocated to the shareholders and the weighted‑average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 2,682,883 and 1,856,550 shares are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter and Current Period, respectively, as the effect is antidilutive.
The following tables present the Company’s calculation of basic and diluted earnings per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):
|
|
Three months ended September 30, 2018 |
|
Three months ended September 30, 2017 |
||||||||||||||||||||
|
|
Select Energy Services, Inc. |
|
Class A |
|
Class A-2 |
|
Class B |
|
Select Energy Services, Inc. |
|
Class A |
|
Class A-1 |
|
Class B |
||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,267 |
|
|
|
|
|
|
|
|
|
|
$ |
2,593 |
|
|
|
|
|
|
|
|
|
Net (income) attributable to noncontrolling interests |
|
|
(8,316) |
|
|
|
|
|
|
|
|
|
|
|
(1,369) |
|
|
|
|
|
|
|
|
|
Net income attributable to Select Energy Services, Inc. — basic |
|
|
22,951 |
|
$ |
22,951 |
|
$ |
— |
|
$ |
— |
|
|
1,224 |
|
$ |
1,224 |
|
$ |
— |
|
$ |
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock |
|
|
4 |
|
|
4 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options |
|
|
15 |
|
|
15 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of ESPP |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net income attributable to Select Energy Services, Inc. — diluted |
|
$ |
22,970 |
|
$ |
22,970 |
|
$ |
— |
|
$ |
— |
|
$ |
1,224 |
|
$ |
1,224 |
|
$ |
— |
|
$ |
— |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding — basic |
|
|
|
|
|
78,896,373 |
|
|
— |
|
|
27,239,419 |
|
|
|
|
|
30,336,923 |
|
|
— |
|
|
38,462,541 |
Dilutive effect of restricted stock |
|
|
|
|
|
55,858 |
|
|
— |
|
|
— |
|
|
|
|
|
14,307 |
|
|
— |
|
|
— |
Dilutive effect of stock options |
|
|
|
|
|
188,179 |
|
|
— |
|
|
— |
|
|
|
|
|
6,342 |
|
|
— |
|
|
— |
Dilutive effect of ESPP |
|
|
|
|
|
92 |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
Weighted-average shares of common stock outstanding — diluted |
|
|
|
|
|
79,140,502 |
|
|
— |
|
|
27,239,419 |
|
|
|
|
|
30,357,572 |
|
|
— |
|
|
38,462,541 |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$ |
0.29 |
|
$ |
— |
|
$ |
— |
|
|
|
|
$ |
0.04 |
|
$ |
— |
|
$ |
— |
Diluted |
|
|
|
|
$ |
0.29 |
|
$ |
— |
|
$ |
— |
|
|
|
|
$ |
0.04 |
|
$ |
— |
|
$ |
— |
|
|
Nine months ended September 30, 2018 |
|
Nine months ended September 30, 2017 |
||||||||||||||||||||
|
|
Select Energy Services, Inc. |
|
Class A |
|
Class A-2 |
|
Class B |
|
Select Energy Services, Inc. |
|
Class A |
|
Class A-1 |
|
Class B |
||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
72,421 |
|
|
|
|
|
|
|
|
|
|
$ |
(20,177) |
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling interests |
|
|
(22,409) |
|
|
|
|
|
|
|
|
|
|
|
13,013 |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Select Energy Services, Inc. — basic |
|
|
50,012 |
|
$ |
48,523 |
|
$ |
1,489 |
|
$ |
— |
|
|
(7,164) |
|
$ |
(4,485) |
|
$ |
(2,679) |
|
$ |
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock |
|
|
8 |
|
|
10 |
|
|
(2) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options |
|
|
22 |
|
|
27 |
|
|
(5) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of ESPP |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net income (loss) attributable to Select Energy Services, Inc. — diluted |
|
$ |
50,042 |
|
$ |
48,560 |
|
$ |
1,482 |
|
$ |
— |
|
$ |
(7,164) |
|
$ |
(4,485) |
|
$ |
(2,679) |
|
$ |
— |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding — basic |
|
|
|
|
|
69,929,330 |
|
|
2,145,311 |
|
|
33,994,800 |
|
|
|
|
|
16,189,997 |
|
|
9,671,795 |
|
|
38,462,541 |
Dilutive effect of restricted stock |
|
|
|
|
|
95,822 |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
Dilutive effect of stock options |
|
|
|
|
|
285,606 |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
Dilutive effect of ESPP |
|
|
|
|
|
94 |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
Weighted-average shares of common stock outstanding — diluted |
|
|
|
|
|
70,310,852 |
|
|
2,145,311 |
|
|
33,994,800 |
|
|
|
|
|
16,189,997 |
|
|
9,671,795 |
|
|
38,462,541 |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$ |
0.69 |
|
$ |
0.69 |
|
$ |
— |
|
|
|
|
$ |
(0.28) |
|
$ |
(0.28) |
|
$ |
— |
Diluted |
|
|
|
|
$ |
0.69 |
|
$ |
0.69 |
|
$ |
— |
|
|
|
|
$ |
(0.28) |
|
$ |
(0.28) |
|
$ |
— |
37
NOTE 16—SEGMENT INFORMATION
Select Inc. is an oilfield services company that provides solutions to the North American onshore oil and natural gas industry. The Company’s services are offered through three operating segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s CODM assesses performance and allocates resources on the basis of the three reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate. Each operating segment reflects a reportable segment led by separate managers that report directly to the Company’s CODM.
As a result of the Rockwater Merger, during the fourth quarter 2017, the Company reorganized its reporting structure and aligned its segments and underlying businesses to execute on the strategies of the combined company. The Company’s revised operating and reportable segments are Water Solutions, Oilfield Chemicals and Wellsite Services. Accordingly, prior period segment information has been retrospectively revised as of December 31, 2017 and for the Prior Quarter and Prior Period ended September 30, 2017.
The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments:
Water Solutions —The Water Solutions segment provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer of the water to the wellsite through permanent pipeline infrastructure and temporary pipe; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids, well testing and handling of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids.
Oilfield Chemicals —The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals utilized in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers, breakers and other chemical technologies, to leading pressure pumping service companies in the United States.
Wellsite Services —The Wellsite Services segment provides oil and natural gas operators with a variety of services, including provision of workforce accommodations and surface rental equipment, crane and logistics services, wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada. These services are performed to establish, maintain or improve production throughout the productive life of an oil or gas well or to otherwise facilitate other services performed on a well.
38
Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:
|
|
For the three months ended September 30, 2018 |
||||||||||
|
|
|
|
|
Income (loss) |
|
Depreciation and |
|
Capital |
|||
|
|
Revenue |
|
before taxes |
|
Amortization |
|
Expenditures |
||||
|
|
(in thousands) |
||||||||||
Water solutions |
|
$ |
281,361 |
|
$ |
37,384 |
|
$ |
23,548 |
|
$ |
39,692 |
Oilfield chemicals |
|
|
64,206 |
|
|
2,824 |
|
|
2,115 |
|
|
2,585 |
Wellsite services |
|
|
51,956 |
|
|
1,167 |
|
|
6,190 |
|
|
2,853 |
Eliminations |
|
|
(553) |
|
|
— |
|
|
— |
|
|
— |
Income from operations |
|
|
|
|
|
41,375 |
|
|
|
|
|
|
Corporate |
|
|
— |
|
|
(9,117) |
|
|
984 |
|
|
— |
Interest expense, net |
|
|
— |
|
|
(1,322) |
|
|
— |
|
|
— |
Other income, net |
|
|
— |
|
|
1,746 |
|
|
— |
|
|
— |
|
|
$ |
396,970 |
|
$ |
32,682 |
|
$ |
32,837 |
|
$ |
45,130 |
|
|
For the three months ended September 30, 2017 |
||||||||||
|
|
|
|
|
Income (loss) |
|
Depreciation and |
|
Capital |
|||
|
|
Revenue |
|
before taxes |
|
Amortization |
|
Expenditures |
||||
|
|
(in thousands) |
||||||||||
Water solutions |
|
$ |
125,142 |
|
$ |
9,844 |
|
$ |
19,433 |
|
$ |
22,260 |
Oilfield chemicals |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Wellsite services |
|
|
29,275 |
|
|
(306) |
|
|
3,987 |
|
|
4,844 |
Eliminations |
|
|
(537) |
|
|
— |
|
|
— |
|
|
— |
Income from operations |
|
|
|
|
|
9,538 |
|
|
|
|
|
|
Corporate |
|
|
— |
|
|
(7,081) |
|
|
375 |
|
|
— |
Interest expense, net |
|
|
— |
|
|
(484) |
|
|
— |
|
|
— |
Other income, net |
|
|
— |
|
|
326 |
|
|
— |
|
|
— |
|
|
$ |
153,880 |
|
$ |
2,299 |
|
$ |
23,795 |
|
$ |
27,104 |
39
|
|
For the nine months ended September 30, 2018 |
||||||||||
|
|
|
|
|
Income (loss) |
|
Depreciation and |
|
Capital |
|||
|
|
Revenue |
|
before taxes |
|
Amortization |
|
Expenditures |
||||
|
|
(in thousands) |
||||||||||
Water solutions |
|
$ |
812,681 |
|
$ |
98,584 |
|
$ |
66,390 |
|
$ |
101,461 |
Oilfield chemicals |
|
|
192,678 |
|
|
4,786 |
|
|
7,853 |
|
|
8,264 |
Wellsite services |
|
|
163,078 |
|
|
2,445 |
|
|
18,937 |
|
|
12,330 |
Eliminations |
|
|
(1,825) |
|
|
— |
|
|
— |
|
|
— |
Income from operations |
|
|
|
|
|
105,815 |
|
|
|
|
|
|
Corporate |
|
|
— |
|
|
(30,159) |
|
|
2,332 |
|
|
— |
Interest expense, net |
|
|
— |
|
|
(3,815) |
|
|
— |
|
|
— |
Other income, net |
|
|
— |
|
|
2,607 |
|
|
— |
|
|
— |
|
|
$ |
1,166,612 |
|
$ |
74,448 |
|
$ |
95,512 |
|
$ |
122,055 |
|
|
For the nine months ended September 30, 2017 |
||||||||||
|
|
|
|
|
Income (loss) |
|
Depreciation and |
|
Capital |
|||
|
|
Revenue |
|
before taxes |
|
Amortization |
|
Expenditures |
||||
|
|
(in thousands) |
||||||||||
Water solutions |
|
$ |
311,645 |
|
$ |
5,652 |
|
$ |
55,623 |
|
$ |
57,273 |
Oilfield chemicals |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Wellsite services |
|
|
78,007 |
|
|
(3,757) |
|
|
11,521 |
|
|
14,909 |
Eliminations |
|
|
(1,398) |
|
|
— |
|
|
— |
|
|
— |
Loss from operations |
|
|
|
|
|
1,895 |
|
|
|
|
|
|
Corporate |
|
|
— |
|
|
(23,855) |
|
|
1,312 |
|
|
— |
Interest expense, net |
|
|
— |
|
|
(1,885) |
|
|
— |
|
|
— |
Other income, net |
|
|
— |
|
|
3,342 |
|
|
— |
|
|
— |
|
|
$ |
388,254 |
|
$ |
(20,503) |
|
$ |
68,456 |
|
$ |
72,182 |
Total assets by segment as of September 30, 2018 and December 31, 2017 is as follows:
|
|
As of |
|
As of |
||
|
|
September 30, 2018 |
|
December 31, 2017 |
||
|
|
(in thousands) |
||||
Water solutions |
|
$ |
1,087,425 |
|
$ |
994,159 |
Oilfield chemicals |
|
|
184,635 |
|
|
186,333 |
Wellsite services |
|
|
135,378 |
|
|
151,272 |
Corporate |
|
|
31,347 |
|
|
24,604 |
|
|
$ |
1,438,785 |
|
$ |
1,356,368 |
The Company has evaluated subsequent events for potential recognition and/or disclosure through November 7, 2018, the date these consolidated financial statements were available to be issued.
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our 2017 Form 10-K. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements.”
This discussion relates to the three and nine months ended September 30, 2018 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2017 (the “Prior Quarter” and the “Prior Period”, respectively).
Overview
We are a leading provider of total water management and chemical solutions to the oil and gas industry in North America. The oilfield water services market has grown rapidly over the past decade, driven by advances in drilling, completion and production technologies. Within the major unconventional onshore oil and gas plays in the United States, we believe we are a market leader in sourcing, transfer (both by permanent pipeline and temporary hose) and temporary containment of water prior to its use in drilling and completion activities associated with hydraulic fracturing or “fracking,” which we collectively refer to as “pre‑frac water services.” We also provide well testing and flowback services immediately following the well completion. In most of our areas of operations, we provide additional complementary water‑related services that support oil and gas well completion and production activities including monitoring, treatment, hauling, recycling and disposal. In addition to our water-related services, we also develop and manufacture specialty chemicals used in frac-fluid systems and production chemicals used to enhance performance over the life of a well. We believe we are the only oilfield services company that provides total water solutions together with complementary chemical products and related expertise, which we believe gives us a unique competitive advantage in our industry.
We also offer wellsite services that complement our total water management and chemical solutions offering. These services include equipment rental, accommodations, crane and logistics services, wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada.
Going forward, we may pursue selected, accretive acquisitions of complementary assets, businesses and technologies, including water transfer infrastructure, and believe we are well positioned to capture attractive opportunities due to our market position, customer relationships and industry experience and expertise.
41
Our Segments
Our services are offered through three operating segments: (i) Water Solutions, (ii) Oilfield Chemicals and (iii) Wellsite Services.
· |
Water Solutions. Our Water Solutions segment is operated primarily under our subsidiary, Select Energy Services, LLC (“Select LLC”), and provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer of the water to the wellsite through permanent pipeline infrastructure and temporary hose; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids, well testing and handling of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids. |
· |
Oilfield Chemicals. Our Oilfield Chemicals segment is operated primarily under our subsidiary, Rockwater Energy Solutions, LLC (“Rockwater LLC”). Under this segment, we develop, manufacture and provide a full suite of completion and specialty chemical products utilized in hydraulic fracturing, stimulation, cementing and related well completion processes. These products include polymers that create viscosity, crosslinkers, friction reducers, surfactants, buffers, breakers and other chemical technologies. Our customers for completion and specialty chemicals are primarily leading pressure pumping service companies in the United States. We also provide production chemicals, which are used by oil and gas companies to enhance well performance and reduce production costs throughout the life of a well. |
· |
Wellsite Services. Our Wellsite Services segment provides a number of services across the U.S. and Canada and is operated primarily under our subsidiaries Peak Oilfield Services, LLC (“Peak”), Affirm Oilfield Services, LLC (“Affirm”) and Rockwater LLC. Peak provides workforce accommodations and surface rental equipment supporting drilling, completion and production operations to the U.S. onshore oil and gas industry. Affirm provides oil and gas operators with a variety of services, including crane and logistics services, wellsite and pipeline construction and field services. Operating under Rockwater LLC, we also offer sand-hauling and fluid-logistics services in the Rockies and Bakken regions as well as water transfer, containment, fluid hauling and rental services in Canada. |
How We Generate Revenue
We currently generate a significant majority of our revenue through our Water Solutions segment, specifically through our water-management services associated with hydraulic fracturing. We generate the majority of our revenue through customer agreements with fixed pricing terms and earn revenue when delivery of services is provided, generally at our customers’ sites. While we have some long‑term pricing arrangements, most of our water and water‑related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.
We also generate revenue through our Oilfield Chemicals segment, which provides completion, specialty chemicals and production chemicals, and our Wellsite Services segment, which provides workforce accommodations and related rentals; a variety of wellsite completion and construction services, including wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada. We invoice the majority of our Oilfield Chemicals customers for services provided under such segment based on the quantity of chemicals used or pursuant to short‑term contracts as the customer’s needs arise. We invoice the majority of our customers for services under our Wellsite Services segments on a per job basis or pursuant to short‑term contracts as the customer’s needs arise.
42
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, equipment costs (including depreciation, repair and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low and a large portion of the costs we incur in our business are only incurred when we provide water, water‑related services, chemicals and chemical‑related services to our customers.
Labor costs associated with our employees represent the most significant costs of our business. We incurred labor costs of $125.0 million, $54.8 million, $358.8 million and $155.5 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The majority of our recurring labor costs are variable and are incurred only while we are providing our operational services. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our assets which are not directly tied to our level of business activity. Additionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters.
We incur significant equipment costs in connection with the operation of our business, including depreciation, repair and maintenance and leasing costs. We incurred equipment costs of $73.6 million, $36.0 million, $213.8 million and $98.4 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Our depreciation costs have increased as a result of the Rockwater Merger.
We incur significant transportation costs, associated with our service lines, including fuel and freight. We incurred fuel costs of $24.1 million, $8.2 million, $66.2 million and $21.4 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand of our services and have an impact on our results of operations.
We incur raw material costs in manufacturing our chemical products, as well as water sourcing costs in connection with obtaining strategic and reliable water sources to provide repeatable water volumes to our customers. We incurred raw material costs of $72.8 million, $12.4 million, $210.7 million and $33.2 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Raw materials costs of $46.1 million and $141.7 million were attributable to our chemical products for the Current Quarter and the Current Period, respectively. We incurred water sourcing costs of $19.8 million, $9.7 million, $46.5 million and $23.8 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
Industry Overview
During the Current Quarter, the average crude oil WTI (Cushing) spot price was $69.69 versus an average price of $48.18 for the Prior Quarter. During the Current Period, the average crude oil WTI (Cushing) spot price was $66.93 versus an average price of $49.30 for the Prior Period. While we cannot be confident on the future direction of oil prices, our discussions with customers and market knowledge indicate that this price range is supportive for continued development of U.S. unconventional oil resources. While natural gas prices are not presently at a level that would encourage activity growth, the bulk of our business is tied to completions of oil wells.
Trends beyond oil prices present both support and challenges. While leading-edge lateral lengths and proppant use have plateaued, the average operator continues to catch up to this leading-edge. The increased use of lower cost, in-basin sand in the Permian Basin supports this development, which should lead to increased pre-frac water demand per well. While pipeline capacity constraints may temporarily restrain completion activity in the Permian, we believe we are better positioned than many of our smaller competitors to reallocate equipment and personnel across basins to where they are most needed. A moderation of activity in this region may also curb cost inflation, which has posed a challenge as both the rig count and the number of working frac crews have increased substantially in the Permian over the last 24 months. Finally, as many operators have tracked ahead of their announced budgets on a prorated basis over the first half of the year, we are seeing slowdowns in completions activity as we move into the fourth quarter. However, we expect this slowdown to be short-lived, and anticipate that the current oil prices would lead to increased capital budgets and heightened activity in 2019.
43
For our Oilfield Chemicals segment, the recent opening of our Midland Friction Reducer production line should save us substantial freight and logistics cost relative to shipping this high-volume product out of our Tyler, TX production facility. The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities.
Our operations have benefited from the investments and acquisitions we have made, and we continue to invest in our business. When evaluating new investment decisions, we prioritize high returns on long-lived assets. One way we do this is through margin-enhancing capital expenditures, which often comprises upgrading equipment in order to increase margin realization from those assets. One example of this type of investment is replacing conventional water pumps with automated pumps, which lowers labor costs and increases reliability. Another area of focus is longer-lived infrastructure assets in areas we believe will see consistently high levels of completion activity. We have successfully executed these types of investments both in the Bakken, through our fixed infrastructure investments there, and through our GRR Acquisition in the northern Delaware basin.
How We Evaluate Our Operations
We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:
· |
Revenue; |
· |
Gross Profit (Loss); |
· |
EBITDA; and |
· |
Adjusted EBITDA. |
Revenue
We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our operating segments to identify potential areas for improvement, as well as to determine whether segments are meeting management’s expectations.
Gross Profit (Loss)
To measure our financial performance, we analyze our gross profit (loss), which we define as revenues less direct operating expenses (including depreciation and amortization expenses). We believe gross profit is a meaningful metric because it provides insight into profitability and true operating performance based on the historical cost basis of our assets. We also compare gross profit (loss) to prior periods and across segments to identify trends as well as underperforming segments.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus interest expense, taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. See “—Comparison of Non‑GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
44
Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below.
Acquisition Activity
As described above, we are continuously evaluating potential investments, particularly in water transfer, infrastructure and other water‑related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.
Rockwater Merger
On November 1, 2017, we completed the Rockwater Merger whereby we acquired the business, assets and operations of Rockwater and Rockwater LLC. Our historical financial statements for periods prior to November 1, 2017 do not include the results of operations of Rockwater or Rockwater LLC.
Resource Water Acquisition
On September 15, 2017, we completed our acquisition of Resource Water. Our historical financial statements for periods prior to September 15, 2017 do not include the results of operations of Resource Water.
GRR Acquisition
On March 10, 2017, we completed our acquisition of GRR Entities. Our historical financial statements for periods prior to March 10, 2017 do not include the results of operations of the GRR Entities.
45
Results of Operations
The following tables set forth our results of operations for the periods presented, including revenue by segment.
Current Quarter Compared to the Prior Quarter
|
|
Three months ended September 30, |
|
Change |
|
|||||||
|
|
2018 |
|
2017 |
|
Dollars |
|
Percentage |
|
|||
|
|
|
(in thousands) |
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
$ |
281,358 |
|
$ |
125,086 |
|
$ |
156,272 |
|
124.9 |
% |
Oilfield chemicals |
|
|
63,986 |
|
|
— |
|
|
63,986 |
|
NM |
|
Wellsite services |
|
|
51,626 |
|
|
28,794 |
|
|
22,832 |
|
79.3 |
% |
Total revenue |
|
|
396,970 |
|
|
153,880 |
|
|
243,090 |
|
158.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
|
208,387 |
|
|
88,087 |
|
|
120,300 |
|
136.6 |
% |
Oilfield chemicals |
|
|
56,473 |
|
|
— |
|
|
56,473 |
|
NM |
|
Wellsite services |
|
|
40,860 |
|
|
22,864 |
|
|
17,996 |
|
78.7 |
% |
Depreciation and amortization |
|
|
31,853 |
|
|
23,420 |
|
|
8,433 |
|
36.0 |
% |
Total costs of revenue |
|
|
337,573 |
|
|
134,371 |
|
|
203,202 |
|
151.2 |
% |
Gross profit |
|
|
59,397 |
|
|
19,509 |
|
|
39,888 |
|
204.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
25,110 |
|
|
16,087 |
|
|
9,023 |
|
56.1 |
% |
Depreciation and amortization |
|
|
984 |
|
|
375 |
|
|
609 |
|
162.4 |
% |
Lease abandonment costs |
|
|
1,045 |
|
|
590 |
|
|
455 |
|
77.1 |
% |
Total operating expenses |
|
|
27,139 |
|
|
17,052 |
|
|
10,087 |
|
59.2 |
% |
Income from operations |
|
|
32,258 |
|
|
2,457 |
|
|
29,801 |
|
1212.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,322) |
|
|
(484) |
|
|
(838) |
|
173.1 |
% |
Foreign currency gain, net |
|
|
248 |
|
|
— |
|
|
248 |
|
NM |
|
Other income, net |
|
|
1,498 |
|
|
326 |
|
|
1,172 |
|
359.5 |
% |
Income before tax expense |
|
|
32,682 |
|
|
2,299 |
|
|
30,383 |
|
1321.6 |
% |
Income tax (expense) benefit |
|
|
(1,415) |
|
|
294 |
|
|
(1,709) |
|
NM |
|
Net income |
|
$ |
31,267 |
|
$ |
2,593 |
|
$ |
28,674 |
|
1105.8 |
% |
Revenue
Our revenue increased $243.1 million, or 158.0%, to $397.0 million for the Current Quarter compared to $153.9 million for the Prior Quarter. The increase was primarily attributable to an increase in our Water Solutions segment revenues of $156.3 million resulting from an increase in demand for our services as a result of a rise in completion activities, as well as the Rockwater Merger, which closed on November 1, 2017. For the Current Quarter, our Water Solutions, Oilfield Chemicals and Wellsite Services segments constituted 70.9%, 16.1% and 13.0% of our total revenue, respectively, compared to 81.3%, 0.0%, and 18.7%, respectively, for the Prior Quarter. The revenue increase by operating segment was as follows:
Water Solutions. Revenue increased $156.3 million, or 124.9%, to $281.4 million for the Current Quarter compared to $125.1 million for the Prior Quarter. The increase was primarily attributable to the Rockwater Merger as well as an increase in the demand for our services as a result of a rise in well completion count of 20.8% and an increase in average quarterly U.S. land rig count of 11.3% during the Current Quarter compared to the Prior Quarter.
46
Oilfield Chemicals. Revenue from our oilfield chemicals segment of $64.0 million relates entirely to our Rockwater LLC operations acquired on November 1, 2017.
Wellsite Services. Revenue increased $22.8 million, or 79.3%, to $51.6 million for the Current Quarter compared to $28.8 million for the Prior Quarter. The increase was primarily attributable to the Rockwater Merger as well as an increase in the demand for our services as a result of a rise in well completion count of 20.8% and an increase in average quarterly U.S. land rig count of 11.3% as compared to the Prior Quarter. The Rockwater Merger contributed $20.1 million of revenue for the Current Quarter.
Costs of Revenue
Costs of revenue increased $203.2 million, or 151.2%, to $337.6 million for the Current Quarter compared to $134.4 million for the Prior Quarter. The increase was largely attributable to the Rockwater Merger as well as higher salaries and wages due to an increase in employee headcount, and outside services, rentals and materials expense as a result of increased demand for our services due to the overall increase in drilling, completion and production activities, particularly in our Water Solutions segment. The cost of revenue increase by operating segment was as follows:
Water Solutions. Cost of revenue increased $120.3 million, or 136.6%, to $208.4 million for the Current Quarter compared to $88.1 million for the Prior Quarter. The results for the Current Quarter include costs associated with Rockwater LLC’s operations. The increase was partly attributable to an increase in salaries and wages of $45.6 million as a result of a 97.9% increase in average headcount during the Current Quarter as compared to the Prior Quarter. In addition to the increases in salaries and wages, we saw an increase in our contract labor expense of $7.4 million as the rapid growth rate in the demand for our services resulted in increased short-term labor needs while our internal recruitment and hiring continues. The increase in cost of revenue was also attributable to an increase in equipment rental and maintenance expense of $22.2 million, materials and supplies expense of $17.2 million and bulk and retail fuel expense of $12.3 million. The increase in fuel and maintenance related expenses were largely attributable to a 105.8% increase in the average number of trucks and tractors in our fleet.
Oilfield Chemicals. Cost of revenue from our oilfield chemicals segment of $56.5 million relates entirely to our Rockwater LLC operations acquired on November 1, 2017. These costs primarily related to raw material costs incurred in manufacturing our chemical products.
Wellsite Services. Cost of revenue increased $18.0 million, or 78.7%, to $40.9 million for the Current Quarter compared to $22.9 million for the Prior Quarter. This was primarily due to $18.2 million of costs associated with Rockwater LLC’s Canadian operations and Bakken sand and fluid hauling operations.
Depreciation and Amortization. Depreciation and amortization expense increased $8.4 million, or 36.0%, to $31.9 million for the Current Quarter compared to $23.4 million for the Prior Quarter. The increase was primarily attributable to additional depreciation from assets acquired in the Rockwater Merger, which closed on November 1, 2017.
Gross Profit
Gross profit improved by $39.9 million, or 204.5%, to a gross profit of $59.4 million for the Current Quarter compared to a gross profit of $19.5 million for the Prior Quarter as a result of factors described above. Gross margin as a percent of revenue increased 2.3% to 15.0% during the Current Quarter, from 12.7% during the Prior Quarter. The increase was primarily driven by lower depreciation expense as a percentage of revenues, impacted by higher utilization of fixed assets, and longer useful lives and increased salvage value estimates on certain fixed assets. This was partially offset by the impact of the lower margin chemicals segment from the Rockwater Merger.
47
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $9.0 million, or 56.1%, to $25.1 million for the Current Quarter compared to $16.1 million for the Prior Quarter. This overall increase was primarily related to the Rockwater Merger.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction in the need for facilities, we decided to close certain facilities beginning in the third quarter of 2016. In conjunction with the Rockwater Merger, we decided to close certain additional facilities that were deemed duplicative of our existing operational locations. As a result of continuing costs related to certain facilities that are no longer in use, we recorded $1.0 million of lease abandonment costs during the Current Quarter. We recorded $0.6 million of lease abandonment costs during the Prior Quarter.
Net Interest Expense
Net interest expense increased by $0.8 million, or 173.1% to $1.3 million during the Current Quarter compared to $0.5 million in the Prior Quarter due to an increase in our debt borrowings largely in connection with the Rockwater Merger.
Net Income (Loss)
Net income (loss) improved by $28.7 million, or 1,105.8% to a net income of $31.3 million for the Current Quarter compared to a net income of $2.6 million for the Prior Quarter largely as a result of the factors described above.
48
Current Period Compared to the Prior Period
|
|
Nine months ended September 30, |
|
Change |
|
|||||||
|
|
2018 |
|
2017 |
|
Dollars |
|
Percentage |
|
|||
|
|
|
(in thousands) |
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
$ |
812,634 |
|
$ |
311,275 |
|
$ |
501,359 |
|
161.1 |
% |
Oilfield chemicals |
|
|
192,422 |
|
|
— |
|
|
192,422 |
|
NM |
|
Wellsite services |
|
|
161,556 |
|
|
76,979 |
|
|
84,577 |
|
109.9 |
% |
Total revenue |
|
|
1,166,612 |
|
|
388,254 |
|
|
778,358 |
|
200.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
|
606,131 |
|
|
226,737 |
|
|
379,394 |
|
167.3 |
% |
Oilfield chemicals |
|
|
172,057 |
|
|
— |
|
|
172,057 |
|
NM |
|
Wellsite services |
|
|
131,170 |
|
|
62,852 |
|
|
68,318 |
|
108.7 |
% |
Depreciation and amortization |
|
|
93,180 |
|
|
67,144 |
|
|
26,036 |
|
38.8 |
% |
Total costs of revenue |
|
|
1,002,538 |
|
|
356,733 |
|
|
645,805 |
|
181.0 |
% |
Gross profit |
|
|
164,074 |
|
|
31,521 |
|
|
132,553 |
|
420.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
77,662 |
|
|
49,298 |
|
|
28,364 |
|
57.5 |
% |
Depreciation and amortization |
|
|
2,332 |
|
|
1,312 |
|
|
1,020 |
|
77.7 |
% |
Impairment of property and equipment |
|
|
2,282 |
|
|
— |
|
|
2,282 |
|
NM |
|
Impairment of investment |
|
|
2,000 |
|
|
— |
|
|
2,000 |
|
NM |
|
Lease abandonment costs |
|
|
4,142 |
|
|
2,871 |
|
|
1,271 |
|
44.3 |
% |
Total operating expenses |
|
|
88,418 |
|
|
53,481 |
|
|
34,937 |
|
65.3 |
% |
Income (loss) from operations |
|
|
75,656 |
|
|
(21,960) |
|
|
97,616 |
|
444.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(3,815) |
|
|
(1,885) |
|
|
(1,930) |
|
102.4 |
% |
Foreign currency losses, net |
|
|
(492) |
|
|
— |
|
|
(492) |
|
NM |
|
Other income, net |
|
|
3,099 |
|
|
3,342 |
|
|
(243) |
|
(7.3) |
% |
Income (loss) before tax expense |
|
|
74,448 |
|
|
(20,503) |
|
|
94,951 |
|
463.1 |
% |
Income tax (expense) benefit |
|
|
(2,027) |
|
|
326 |
|
|
(2,353) |
|
NM |
|
Net income (loss) |
|
$ |
72,421 |
|
$ |
(20,177) |
|
$ |
92,598 |
|
458.9 |
% |
Revenue
Our revenue increased $778.4 million, or 200.5%, to $1,166.6 million for the Current Period compared to $388.3 million for the Prior Period. The increase was primarily attributable to an increase in our Water Solutions segment revenues of $501.4 million, resulting from an increase in demand for our services as a result of a rise in completion activities, as well as the GRR Acquisition, which closed on March 10, 2017, the Resource Water Acquisition, which closed on September 15, 2017, and the Rockwater Merger, which closed on November 1, 2017. For the Current Period, our Water Solutions, Oilfield Chemicals and Wellsite Services segments constituted 69.7%, 16.5% and 13.8% of our total revenue, respectively, compared to 80.2%, 0.0%, and 19.8%, respectively, for the Prior Period. The revenue increase by operating segment was as follows:
49
Water Solutions. Revenue increased $501.4 million, or 161.1%, to $812.6 million for the Current Period compared to $311.3 million for the Prior Period. The increase was primarily attributable to the Rockwater Merger as well as an increase in the demand for our services as a result of a rise in well completion count of 26.4% and an increase in the nine month average U.S. land rig count of 19.0% during the Current Period compared to the Prior Period.
Oilfield Chemicals. Revenue from our oilfield chemicals segment of $192.4 million relates entirely to our Rockwater LLC operations acquired on November 1, 2017.
Wellsite Services. Revenue increased $84.6 million, or 109.9%, to $161.6 million for the Current Period compared to $77.0 million for the Prior Period. The increase was primarily attributable to the Rockwater Merger as well as an increase in the demand for our services as a result of a rise in well completion count of 26.4% and an increase in the nine month average U.S. land rig count of 19.0% as compared to the Prior Period. The Rockwater Merger contributed $67.8 million of revenue for the Current Period.
Costs of Revenue
Cost of revenue increased $645.8 million, or 181.0%, to $1,002.5 million for the Current Period compared to $356.7 million for the Prior Period. The increase was largely attributable to the Rockwater Merger as well as higher salaries and wages due to an increase in employee headcount, and outside services, rentals and materials expense as a result of increased demand for our services due to the overall increase in drilling, completion and production activities, particularly in our Water Solutions segment. The cost of revenue increase by operating segment was as follows:
Water Solutions. Cost of revenue increased $379.4 million, or 167.3%, to $606.1 million for the Current Period compared to $226.7 million for the Prior Period. The results for the Current Period include costs associated with Rockwater LLC’s operations. The increase was partly attributable to an increase in salaries and wages of $138.8 million as a result of a 116.1% increase in average headcount during the Current Period as compared to the Prior Period. In addition to the increases in salaries and wages, we saw an increase in our contract labor expense of $53.6 million as the rapid growth rate in the demand for our services resulted in increased short-term labor needs while our internal recruitment and hiring continues. The increase in cost of revenue was also attributable to an increase in equipment rental and maintenance expense of $64.5 million, materials and supplies expense of $50.0 million and bulk and retail fuel expense of $33.9 million. The increase in fuel and maintenance related expenses were largely attributable to a 126.6% increase in the nine month average number of trucks and tractors in our fleet.
Oilfield Chemicals. Cost of revenue from our oilfield chemicals segment of $172.1 million relates entirely to our Rockwater LLC operations acquired on November 1, 2017. These costs primarily related to raw material costs incurred in manufacturing our chemical products.
Wellsite Services. Cost of revenue increased $68.3 million, or 108.7%, to $131.2 million for the Current Period compared to $62.9 million for the Prior Period. The results for the Current Period include $59.7 million of costs associated with Rockwater LLC’s Canadian operations and Bakken sand and fluid hauling operations. Excluding Rockwater LLC’s operations, the remaining increase was partially attributable to an increase in salaries and wages and certain labor support and materials costs of $8.9 million resulting from a 7.2% increase in average headcount during the Current Period as compared to the Prior Period resulting from increased demand for our services.
Depreciation and Amortization. Depreciation and amortization expense increased $26.0 million, or 38.8%, to $93.2 million for the Current Period compared to $67.1 million for the Prior Period. The increase was primarily attributable to additional depreciation from assets acquired in the Rockwater Merger, which closed on November 1, 2017.
Gross Profit
Gross profit improved by $132.6 million, or 420.5% to a gross profit of $164.1 million for the Current Period compared to a gross profit of $31.5 million for the Prior Period as a result of factors described above. Gross margin as a percent of revenue increased 6.0% to 14.1% during the Current Period, from 8.1% during the Prior Period. The increase
50
was primarily driven by lower depreciation expense as a percentage of revenues, impacted by higher utilization of fixed assets, and longer useful lives and increased salvage value estimates on certain fixed assets. This was partially offset by the impact of the lower margin chemicals segment from the Rockwater Merger.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $28.4 million, or 57.5%, to $77.7 million for the Current Period compared to $49.3 million for the Prior Period. The Prior Period included one-time charges of $12.5 million related to payouts on our phantom equity units and IPO bonuses. Excluding these one-time charges incurred during the Prior Period, selling, general and administrative expenses increased $40.9 million, or 111.3% for the Current Period compared to the Prior Period. This overall increase was primarily related to the Rockwater Merger and GRR Acquisition, which significantly increased our size. Trailing deal costs stemming from the Rockwater Merger and other acquisitions, as well as incremental costs to support our new status as a public company, also contributed to the increase.
Impairment
During the Current Period, we determined that our basis in our cost method investee was no longer fully recoverable, and as such, it was written down to its estimated fair value of $0.5 million. The impairment expense of $2.0 million is included in impairment of investment within the consolidated statements of operations. Additionally, during the Current Period, the company reviewed certain fluid disposal machinery and equipment used in our fluid hauling and disposal services that are included in our Water Solutions segment. Due to the condition of the equipment, the Company determined that long-lived assets with a carrying value of $2.3 million were no longer recoverable and were written down to their estimated fair value of zero. The impairment expense of $2.3 million is included in impairment of property and equipment within the consolidated statements of operations. There was no impairment expense incurred during the Prior Period.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction in the need for facilities, we decided to close certain facilities beginning in the third quarter of 2016. In conjunction with the Rockwater Merger, we decided to close certain additional facilities that were deemed duplicative of our existing operational locations. As a result of continuing costs related to certain facilities that are no longer in use, we recorded $4.1 million of lease abandonment costs during the Current Period, approximately $1.3 million of which are directly attributable to the Rockwater Merger. We recorded $2.9 million of lease abandonment costs during the Prior Period.
Net Interest Expense
Net interest expense increased by $1.9 million, or 102.4% to $3.8 million during the Current Period compared to $1.9 million in the Prior Period due to an increase in our debt borrowings in connection with the Rockwater Merger.
Net Income (Loss)
Net income (loss) improved by $92.6 million, or 458.9%, to a net income of $72.4 million for the Current Period compared to a net loss of $20.2 million for the Prior Period largely as a result of the factors described above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus interest expense, taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs.
51
Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. One should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Item 6. Selected Financial Data” in our 2017 Form 10-K.
The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
||||||||
2018 |
2017 |
2018 |
2017 |
|||||||||
|
|
(in thousands) |
||||||||||
Net income (loss) |
|
$ |
31,267 |
|
$ |
2,593 |
|
$ |
72,421 |
|
$ |
(20,177) |
Interest expense |
|
|
1,322 |
|
|
484 |
|
|
3,815 |
|
|
1,885 |
Income tax expense (benefit) |
|
|
1,415 |
|
|
(294) |
|
|
2,027 |
|
|
(326) |
Depreciation and amortization |
|
|
32,837 |
|
|
23,795 |
|
|
95,512 |
|
|
68,456 |
EBITDA |
|
|
66,841 |
|
|
26,578 |
|
|
173,775 |
|
|
49,838 |
Impairment of property and equipment |
|
|
— |
|
|
— |
|
|
2,282 |
|
|
— |
Impairment of investment |
|
|
— |
|
|
— |
|
|
2,000 |
|
|
— |
Lease abandonment costs |
|
|
1,045 |
|
|
590 |
|
|
4,142 |
|
|
2,871 |
Non-recurring severance expenses |
|
|
495 |
|
|
— |
|
|
495 |
|
|
122 |
Non-recurring transaction costs |
|
|
2,645 |
|
|
4,382 |
|
|
7,820 |
|
|
5,462 |
Non-cash compensation expenses |
|
|
2,565 |
|
|
549 |
|
|
8,030 |
|
|
1,781 |
Non-cash loss on sale of assets or subsidiaries |
|
|
315 |
|
|
268 |
|
|
2,079 |
|
|
775 |
Non-recurring phantom equity and IPO-related compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
12,537 |
Foreign currency (gain) loss |
|
|
(248) |
|
|
— |
|
|
492 |
|
|
— |
Inventory write-downs |
|
|
36 |
|
|
— |
|
|
430 |
|
|
— |
Adjusted EBITDA |
|
$ |
73,694 |
|
$ |
32,367 |
|
$ |
201,545 |
|
$ |
73,386 |
EBITDA was $66.8 million for the Current Quarter compared to $26.6 million for the Prior Quarter. Adjusted EBITDA was $73.7 million for the Current Quarter compared to $32.4 million for the Prior Quarter. The increases in EBITDA and Adjusted EBITDA resulted from an increase in our revenues and gross profit, as discussed above.
EBITDA was $173.8 million for the Current Period compared to $49.8 million for the Prior Period. Adjusted EBITDA was $201.5 million for the Current Period compared to $73.4 million for the Prior Period. The increases in EBITDA and Adjusted EBITDA resulted from an increase in our revenues and gross profit, as discussed above.
52
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been capital contributions from our members and shareholders, the net proceeds from the Select 144A Offering, the net proceeds from the IPO, borrowings under our credit facilities and cash flows from operations. Our primary uses of capital have been capital expenditures to support organic growth and fund acquisitions. Depending upon market conditions and other factors, we may also issue debt and equity securities if needed.
We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations and borrowings from our Credit Agreement. For a discussion of the Credit Agreement, see “—Credit Agreement” below. We believe that our operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for at least the next twelve months.
On April 26, 2017, we completed the IPO for net proceeds of approximately $111.4 million, net of underwriting discounts and commissions and estimated offering expenses. We contributed all of these net proceeds to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds to repay borrowings incurred under our Previous Credit Facility to fund the cash portion of the purchase price of the GRR Acquisition, for the cash settlement of outstanding phantom unit awards at SES Holdings and for capital expenditures. On May 10, 2017, we received cash proceeds of approximately $17.1 million, net of underwriting discounts and commissions and estimated offering expenses, from the exercise in full by the underwriters of our IPO of their option to purchase additional shares of Class A Common Stock. We used the net proceeds from the underwriters’ option exercise for general corporate purposes, including funding additional capital expenditures.
At September 30, 2018, cash and cash equivalents totaled $13.1 million. In addition to cash and cash equivalents, we had approximately $205.0 million of available borrowing capacity under our Credit Agreement as of September 30, 2018. As of September 30, 2018, the borrowing base under the Credit Agreement was $290.8 million, the outstanding borrowings totaled $65.0 million and the outstanding letters of credit totaled $20.8 million. As of November 2, 2018, the borrowing base under the Credit Agreement was $285.6 million, the outstanding borrowings totaled $55.0 million, the outstanding letters of credit totaled $20.8 million, and the available borrowing capacity under the Credit Agreement was $209.8 million.
53
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
Nine months ended September 30, |
|
Change |
|
|||||||
|
|
2018 |
|
2017 |
|
Dollars |
|
Percentage |
|
|||
|
|
(in thousands) |
|
|
|
|
|
|
||||
Net cash provided by (used in) operating activities |
|
$ |
124,630 |
|
$ |
(4,249) |
|
$ |
128,879 |
|
NM |
|
Net cash used in investing activities |
|
|
(102,090) |
|
|
(121,535) |
|
|
19,445 |
|
(16.0) |
% |
Net cash (used in) provided by financing activities |
|
|
(12,169) |
|
|
128,136 |
|
|
(140,305) |
|
(109.5) |
% |
Subtotal |
|
|
10,371 |
|
|
2,352 |
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(95) |
|
|
— |
|
|
(95) |
|
NM |
|
Net increase in cash |
|
$ |
10,276 |
|
$ |
2,352 |
|
|
|
|
|
|
Analysis of Cash Flow Changes Between the Nine Months Ended September 30, 2018 and 2017
Operating Activities. Net cash provided by operating activities was $124.6 million for the Current Period, compared to net cash used in operating activities of $4.2 million for the Prior Period. The $128.9 million increase in net cash provided by operating activities related primarily to increased net income adjusted for noncash items which was driven by a significant growth in revenue and improvement in gross margins resulting from recovering demand for our services as compared to the prior year period, as well as the financial earnings contribution of the Rockwater Merger.
Investing Activities. Net cash used in investing activities was $102.1 million for the Current Period, compared to $121.5 million for the Prior Period. The $19.4 million decrease in net cash used in investing activities was primarily due to the $60.2 million decrease in cash used for acquisitions, primarily related to the GRR Acquisition in March 10, 2017, partially offset by an increase in cash used for capital expenditures during the Current Period of $43.5 million to support the increased scale of operations following the Rockwater Merger which occurred on November 1, 2017.
Financing Activities. Net cash used in financing activities was $12.2 million for the Current Period, compared to cash provided by financing activities of $128.1 million for the Prior Period. The $140.3 million decrease in net cash provided by financing activities was primarily due to non-recurring nature of the $128.5 million in net proceeds received from the issuance of shares in our IPO on April 26, 2017, including the exercise of the over-allotment option, coupled with a net $10.0 million pay down of long-term debt.
54
Credit Agreement
Our previous credit facility (the “Previous Credit Facility”), had a maturity date of February 28, 2020 and a revolving line of credit of $100.0 million.
On November 1, 2017, in connection with the closing of the Rockwater Merger (the “Closing”), SES Holdings and Select LLC, entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower, and certain of SES Holdings’ subsidiaries, as guarantors, and each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, we have the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the Closing. The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.
In connection with our entry into the Credit Agreement, the obligations of SES Holdings and Select LLC under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated.
The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85.0% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35.0% of the borrowing base, plus (iii) the lesser of (A) the product of 70.0% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85.0% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30.0% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.
Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one‑, two‑, three‑ or six‑month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one‑month Eurocurrency Rate plus 1.0% and (iii) the Administrative Agent’s prime rate (the “Base Rate”), in each case plus an applicable margin, and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Agreement to be immediately due and payable.
55
In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25.0% of the lesser of (A) the maximum revolver amount and (B) the then‑effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20.0% of the lesser of (A) the maximum revolver amount and (B) the then‑effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements.
The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then‑effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then‑effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
We were in compliance with all debt covenants as of September 30, 2018.
Contractual Obligations
Our contractual obligations include, among other things, our Credit Agreement and operating leases. Refer to Note 8—Debt in Part I, Item 1 of this Quarterly Report for an update to our contractual obligations as of September 30, 2018.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our 2017 Form 10-K filed on March 19, 2018.
Recent Accounting Pronouncements
For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Note 2—Significant Accounting Policies in Part I, Item 1 of this Quarterly Report.
Off-Balance-Sheet Arrangements
At September 30, 2018, we had no material off balance sheet arrangements, except for operating leases. As such, we are not exposed to any material financing, liquidity, market or credit risk that could arise had we engaged in such financing arrangements.
56
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of activity for the U.S. oil and gas industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and gas; current prices as well as expectations about future prices of oil and gas; the cost of exploring for, developing, producing and delivering oil and gas; the expected decline in rates of current production; the discovery rates of new oil and gas reserves; available pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil‑producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; and merger and divestiture activity among oil and gas producers.
The level of activity in the U.S. oil and gas industry is volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Any prolonged substantial reduction in oil and gas prices would likely affect oil and gas drilling and completion activity and therefore affect demand for our services. A material decline in oil and gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest Rate Risk
At September 30, 2018, we had $65.0 million outstanding debt under our Credit Agreement. As of November 2, 2018, we had $55.0 million of outstanding borrowings and approximately $209.8 million of available borrowing capacity under our Credit Agreement. Interest is calculated under the terms of our Credit Agreement based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. Assuming no change in the amount currently outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $0.7 million per year. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
Foreign Currency Exchange Risk
We are exposed to fluctuations between the U.S. dollar and the Canadian dollar with regard to the activities of our Canadian subsidiary, acquired in the Rockwater Merger, which has designated the Canadian dollar as its functional currency. As such, future earnings are subject to change due to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than our functional currencies. Given the small size of this business relative to our overall operations, we do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in exchange rates applicable to the Canadian dollar.
57
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
58
We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows. We are, however, named defendants in certain lawsuits, investigations and claims arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.
In December 2016, Rockwater was notified by the U.S. Attorney’s Office for the Middle District of Pennsylvania that it is being investigated for altering emissions control systems on several of its vehicles. We are cooperating with the investigation and have determined that mechanics servicing our vehicle fleet may have installed software on certain vehicles and modified a few other vehicles to deactivate or bypass the factory‑installed emissions control systems. At present, it appears that 31 vehicles in Pennsylvania were modified in this manner, apparently to improve vehicle performance and reliability. As a result of a company‑wide investigation undertaken voluntarily and in cooperation with the U.S. Department of Justice, we have determined that approximately 30 additional company vehicles outside of Pennsylvania may have been altered. As of the date of the initiation of the investigation, we operated approximately 1,400 vehicles in the U.S., and the modified vehicles constituted 4% of our fleet at such time. We are unable to predict at this time whether any administrative, civil or criminal charges will be brought against us, although we have learned that at least one employee, a service shop supervisor, may be the target of a criminal investigation, and it is possible that other individuals or we could become targets. We are cooperating with the U.S. Department of Justice in all aspects of the investigation and have instituted procedures to ensure that our mechanics do not tamper with or bypass any emissions control systems when they are performing vehicle maintenance, and we have also reached an agreement with the U.S. Department of Justice providing for either the restoration or removal from service of those vehicles that were modified. Although we are unable to predict the outcome of this investigation, we note that in similar circumstances, the EPA has imposed fines of up to $7,200 per altered vehicle and has also required the responsible party to disgorge any financial benefit that it may have derived.
There have been no material changes to the Risk Factors disclosed in the 2017 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the Current Quarter, we repurchased the shares shown in the table below to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:
|
|
Total Number of |
|
Weighted Average Price |
|
Period |
|
Shares Purchased |
|
Paid Per Share |
|
July 1, 2018 to July 31, 2018 |
|
1,190 |
|
$ |
15.08 |
August 1, 2018 to August 31, 2018 |
|
— |
|
|
— |
September 1, 2018 to September 30, 2018 |
|
16,553 |
|
$ |
12.25 |
|
|
17,743 |
|
|
|
59
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference, as applicable, as part of this report, and such Exhibit Index is incorporated herein by reference.
60
EXHIBIT INDEX
Exhibit |
|
Description |
|
|
|
2.1 |
|
|
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
**32.1 |
|
|
|
|
|
**32.2 |
|
|
|
|
|
101 |
|
Interactive Data Files |
** Furnished herewith
61
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECT ENERGY SERVICES, INC. |
||
Date: November 7, 2018 |
By: |
/s/ Holli Ladhani |
Holli Ladhani |
||
President and Chief Executive Officer |
||
Date: November 7, 2018 |
By: |
/s/ Nick Swyka |
Nick Swyka |
||
Senior Vice President and Chief Financial Officer |
62
EXHIBIT 31.1
Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act OF 1934, as amended
I, Holli Ladhani, certify that:
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 7, 2018
|
/s/ Holli Ladhani |
|
Holli Ladhani |
|
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act OF 1934, as amended
I, Nick Swyka, certify that:
1. |
I have reviewed this quarterly report of Select Energy Services, Inc. (the “registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 7, 2018
/s/ Nick Swyka |
|
Nick Swyka |
|
Senior Vice President and Chief Financial Officer |
Exhibit 32.1
Certification of
Chief Executive Officer
under Section 906 of the
Sarbanes Oxley Act of 2002, 18 U.S.C. § 1350
In connection with the quarterly report of Select Energy Services, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Holli Ladhani, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to her knowledge:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 7, 2018 |
|
|
/s/ Holli Ladhani |
|
Holli Ladhani |
|
President and Chief Executive Officer |
Exhibit 32.2
Certification of
Chief Financial Officer
under Section 906 of the
Sarbanes Oxley Act of 2002, 18 U.S.C. § 1350
In connection with the quarterly report of Select Energy Services, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Nick Swyka, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 7, 2018 |
|
|
/s/ Nick Swyka |
|
Nick Swyka |
|
Senior Vice President and Chief Financial Officer |
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Nov. 02, 2018 |
|
Document and Entity Information | ||
Entity Registrant Name | Select Energy Services, Inc. | |
Entity Central Index Key | 0001693256 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2018 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | No | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q3 | |
Class A Common Stock | ||
Document and Entity Information | ||
Entity Common Stock, Shares Outstanding | 80,658,534 | |
Class B Common Stock | ||
Document and Entity Information | ||
Entity Common Stock, Shares Outstanding | 26,026,843 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||
Net income (loss) | $ 31,267 | $ 2,593 | $ 72,421 | $ (20,177) |
Other comprehensive income (loss) | ||||
Foreign currency translation adjustment, net of tax of $0 | 131 | (319) | ||
Net change in unrealized gain (loss) | 131 | (319) | ||
Comprehensive income (loss) | 31,398 | 2,593 | 72,102 | (20,177) |
Less: comprehensive (income) loss attributable to noncontrolling interests | (8,351) | (1,369) | (22,310) | 13,013 |
Comprehensive income (loss) attributable to Select Energy Services, Inc. | $ 23,047 | $ 1,224 | $ 49,792 | $ (7,164) |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||
Foreign currency translation adjustment, tax amount | $ 0 | $ 0 | $ 0 | $ 0 |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - USD ($) $ in Thousands |
Class A Common Stock
Conversion of Class A-1 to Class A
|
Class A Common Stock
Conversion of Class A-2 to Class A
|
Class A Common Stock
Conversion of Class B to Class A
|
Class A Common Stock |
Class A-1 Common Stock
Conversion of Class A-1 to Class A
|
Class A-1 Common Stock |
Class A-2 Common Stock
Conversion of Class A-2 to Class A
|
Class A-2 Common Stock |
Class B Common Stock
Conversion of Class B to Class A
|
Class B Common Stock |
Conversion of Class B to Class A
Total Stockholders’ Equity
|
Conversion of Class B to Class A
Additional Paid-In Capital
|
Conversion of Class B to Class A
Noncontrolling Interests
|
Total Stockholders’ Equity |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
Total |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Beginning balance at Dec. 31, 2016 | $ 38 | $ 161 | $ 385 | $ 112,716 | $ 113,175 | $ (1,043) | $ 221,992 | $ 334,708 | |||||||||||
Beginning balance (in shares) at Dec. 31, 2016 | 3,802,972 | 16,100,000 | 38,462,541 | ||||||||||||||||
Conversion of common stock | $ 161 | $ (161) | |||||||||||||||||
Conversion of common stock (in shares) | 16,100,000 | (16,100,000) | |||||||||||||||||
Issuance of shares for acquisition | $ 6 | 4,366 | 4,360 | 5,514 | 9,880 | ||||||||||||||
Issuance of shares for acquisition (in shares) | 560,277 | ||||||||||||||||||
Issuance of shares for initial public offering | $ 100 | 87,935 | 87,835 | 40,569 | 128,504 | ||||||||||||||
Issuance of shares for initial public offering (in shares) | 10,005,000 | ||||||||||||||||||
Equity-based compensation | 788 | 788 | 993 | 1,781 | |||||||||||||||
Distributions to noncontrolling interest, net | (368) | (368) | |||||||||||||||||
Net income (loss) | (7,164) | (7,164) | (13,013) | (20,177) | |||||||||||||||
Ending balance at Sep. 30, 2017 | $ 305 | $ 385 | 198,641 | 206,158 | (8,207) | 255,687 | 454,328 | ||||||||||||
Ending balance (in shares) at Sep. 30, 2017 | 30,468,249 | 38,462,541 | |||||||||||||||||
Beginning balance at Dec. 31, 2017 | $ 592 | $ 67 | $ 404 | 656,647 | 673,141 | (17,859) | $ 302 | 406,722 | 1,063,369 | ||||||||||
Beginning balance (in shares) at Dec. 31, 2017 | 59,182,176 | 6,731,845 | 40,331,989 | ||||||||||||||||
Conversion of common stock | $ 67 | $ 144 | $ (67) | $ (144) | $ 146,865 | $ 146,865 | $ (146,865) | ||||||||||||
Conversion of common stock (in shares) | 6,731,839 | 14,305,146 | (6,731,839) | (14,305,146) | |||||||||||||||
ESPP shares issued | 99 | 99 | (13) | 86 | |||||||||||||||
ESPP shares issued (in shares) | 6,413 | ||||||||||||||||||
Equity-based compensation | 5,543 | 5,543 | 2,487 | 8,030 | |||||||||||||||
Issuance of restricted shares | $ 4 | 2,325 | 2,321 | (2,325) | |||||||||||||||
Issuance of restricted shares (in shares) | 438,182 | ||||||||||||||||||
Exercise of restricted stock units | 104 | 104 | (104) | ||||||||||||||||
Exercise of restricted stock units (in shares) | 27,860 | ||||||||||||||||||
Stock options exercised | $ 1 | 1,019 | 1,018 | (374) | $ 645 | ||||||||||||||
Stock options exercised (in shares) | (79,333) | (79,333) | |||||||||||||||||
Repurchase of common stock | $ (1) | (804) | (803) | (73) | $ (877) | ||||||||||||||
Repurchase of common stock ( in shares) | (62,777) | (6) | |||||||||||||||||
Restricted shares forfeited | (380) | (380) | 379 | (1) | |||||||||||||||
Restricted shares forfeited (in shares) | (49,638) | ||||||||||||||||||
Distributions to noncontrolling interest, net | (506) | (506) | |||||||||||||||||
NCI income tax adjustment | 229 | 229 | (229) | ||||||||||||||||
Foreign currency translation adjustment | (319) | (319) | (176) | (495) | |||||||||||||||
Net income (loss) | 50,012 | 50,012 | 22,409 | 72,421 | |||||||||||||||
Ending balance at Sep. 30, 2018 | $ 807 | $ 260 | $ 861,340 | $ 828,137 | $ 32,153 | $ (17) | $ 281,332 | $ 1,142,672 | |||||||||||
Ending balance (in shares) at Sep. 30, 2018 | 80,658,534 | 26,026,843 |
BUSINESS AND BASIS OF PRESENTATION |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
BUSINESS AND BASIS OF PRESENTATION | |
BUSINESS AND BASIS OF PRESENTATION | NOTE 1—BUSINESS AND BASIS OF PRESENTATION Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of a membership interest in SES Holdings, LLC (“SES Holdings”). On November 1, 2017, the Company completed the transactions in which subsidiaries of Select Inc. and SES Holdings merged with Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“Rockwater LLC”), respectively, in a stock-for-stock or unit-for-unit transaction (the “Rockwater Merger”). Rockwater operations described in this report describe the operations of Rockwater LLC. See Note 3—Acquisitions for further discussion. We are a leading provider of total water management and chemical solutions to the oil and gas industry in North America. The oilfield water services market has grown rapidly over the past decade, driven by advances in drilling, completion and production technologies. Within the major unconventional onshore oil and gas plays in the United States, we believe we are a market leader in sourcing, transfer (both by permanent pipeline and temporary hose) and temporary containment of water prior to its use in drilling and completion activities associated with hydraulic fracturing or “fracking,” which we collectively refer to as “pre‑frac water services.” We also provide well testing and flowback services immediately following the well completion. In most of our areas of operations, we provide additional complementary water‑related services that support oil and gas well completion and production activities including monitoring, treatment, hauling, recycling and disposal. In addition to our water-related services, we also develop and manufacture specialty chemicals used in frac-fluid systems and production chemicals used to enhance performance over the life of a well. We believe we are the only oilfield services company that provides total water solutions together with complementary chemical products and related expertise, which we believe gives us a unique competitive advantage in our industry. We also offer wellsite services that complement our total water management and chemical solutions offering. These services include equipment rental, accommodations, crane and logistics services, wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada. Reorganization: On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A‑1 common stock, par value $0.01 per share (“Class A-1 Common Stock”) at an offering price of $20.00 per share. In conjunction with the Select 144A Offering, SES Holdings’ then existing Class A and Class B units were converted into a single class of common units (the “SES Holdings LLC Units”) and SES Holdings effected a 10.3583 for 1 unit split. In exchange for the contribution of all net proceeds from the Select 144A Offering to SES Holdings, SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or one share for each SES Holdings LLC Unit held by Legacy Owner Holdco. Select Inc. also acquired 3,802,972 SES Holdings LLC Units from certain legacy owners (the “Contributing Legacy Owners”) in exchange for the issuance of 3,802,972 shares of Select Inc. Class A common stock, par value $0.01 per share (“Class A Common Stock”). Upon the effectiveness of a shelf registration statement registering such shares for resale on June 13, 2017, all shares of Class A-1 Common Stock converted into shares of Class A Common Stock on a one-for-one basis. Refer below for further discussion. Shareholders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters, subject to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based on their ownership of Class B Common Stock. The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests. Initial Public Offering: On April 26, 2017, the Company completed its initial public offering (“IPO”) of 8,700,000 shares of Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriters of the IPO exercised their over-allotment option to purchase an additional 1,305,000 shares of Class A Common Stock at the IPO price of $14.00 per share. After deducting underwriting discounts and commissions and estimated offering expenses payable by it, the Company received $128.5 million of the aggregate net proceeds from the IPO (including the over-allotment option). The Company contributed all of the net proceeds received by it to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds in the following manner: (i) $34.0 million was used to repay borrowings incurred under the Company’s Previous Credit Facility (as defined and discussed in Note 8) to fund the cash portion of the purchase price of the GRR Acquisition, as described below, (ii) $7.8 million was used for the cash settlement of outstanding phantom unit awards and (iii) the remaining net proceeds were used for general corporate purposes, including funding capital expenditures. Rockwater Merger: On November 1, 2017, we completed the Rockwater Merger, as contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among us, SES Holdings, Raptor Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary, Raptor Merger Sub, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of SES Holdings, Rockwater and Rockwater LLC. Pursuant to the Merger Agreement, we combined with Rockwater in a stock‑for‑stock transaction in which we issued approximately 25.9 million shares of Class A Common Stock, 6.7 million shares of Select Inc. Class A-2 common stock, par value $0.01 (the “Class A‑2 Common Stock”) and 4.4 million shares of Class B Common Stock to the former holders of Rockwater common stock and a unit‑for‑unit transaction in which SES Holdings issued approximately 37.3 million common units of SES Holdings (each, an “SES Holdings LLC Unit”) to the former holders of units in Rockwater LLC (each, a “Rockwater LLC Unit”). See Note 3—Acquisitions for further discussion. Credit Agreement: Concurrent with the Rockwater Merger, the Company entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”). In addition, the obligations under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated. See Note 8—Debt for further discussion. Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class 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.
Registration rights: In December 2016, in connection with the closing of the Select 144A Offering, Select Inc. entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the Select 144A Offering. Under this registration rights agreement, the Company agreed, at its expense, to file with the U.S Securities and Exchange Commission (“SEC”), in no event later than April 30, 2017, a shelf registration statement registering for resale the 16,100,000 shares of Class A Common Stock issuable upon conversion of the Class A‑1 Common Stock sold in the Select 144A Offering plus any additional shares of Class A‑1 Common Stock issued in respect thereof whether by stock dividend, stock distribution, stock split or otherwise, and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 60 days after the closing of the IPO. The Company filed this registration statement with the SEC on April 28, 2017 and this registration statement was declared effective by the SEC on June 13, 2017. Accordingly, each share of Class A‑1 Common Stock outstanding automatically converted into a share of Class A Common Stock on a one‑for‑one basis at that time. In addition, Legacy Owner Holdco has the right, under certain circumstances, to cause the Company to register the shares of Class A Common Stock obtained pursuant to the Exchange Right. Legacy Owner Holdco exercised this right in May 2018, and the registration statement registering these shares was declared automatically effective by the SEC on May 16, 2018. Rockwater Registration Rights Agreement: In connection with the closing of the Rockwater Merger, pursuant to that certain Assignment and Assumption Agreement (the “Assignment and Assumption Agreement”), dated as of November 1, 2017, by and between Rockwater and Select Inc., Rockwater assigned, and Select Inc. assumed, Rockwater’s rights and obligations under that certain Registration Rights Agreement made and entered into as of February 16, 2017, between Rockwater and FBR Capital Markets & Co. (as assumed by Select Inc. pursuant to the Assignment and Assumption Agreement, the “Rockwater Registration Rights Agreement”). Under the Rockwater Registration Rights Agreement, Select Inc. agreed, at its expense, to file with the SEC a shelf registration statement registering for resale shares of Class A Common Stock into which the outstanding shares of Class A-2 Common Stock were convertible, and to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 180 days after the initial filing of such registration statement. On January 12, 2018, the Company, pursuant to the Rockwater Registration Rights Agreement, filed with the SEC, a shelf registration statement registering for resale of 6,653,777 shares of Class A Common Stock into which certain of the outstanding shares of Class A-2 Common Stock registered under such registration statement were convertible. Pursuant to the Company’s Third Amended and Restated Certificate of Incorporation, upon the effectiveness of this registration statement on March 29, 2018, each outstanding share of Class A-2 Common Stock converted automatically into a share of Class A Common Stock on a one-for-one basis. No shares of Class A-2 Common Stock are currently outstanding. Tax receivable agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then-holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder” and together, the “TRA Holders”). On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 12—Related-Party Transactions for further discussion. Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.
This Form 10-Q relates to the three and nine months ended September 30, 2018 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2017 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s annual report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) filed with the SEC on March 19, 2018, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year. The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority‑owned or controlled subsidiaries. All significant 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 in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of September 30, 2018, the Company has no equity method investees and one cost method investee. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. During the first quarter of 2018, the Company determined that its cost method investee was no longer fully recoverable and was written down to its estimated fair value of $0.5 million. The impairment expense of $2.0 million is included in impairment of investment within the consolidated statements of operations. 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, total assets, total liabilities or total stockholders’ equity. |
SIGNIFICANT ACCOUNTING POLICIES |
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SIGNIFICANT ACCOUNTING POLICIES | 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, 2017 included in the Company’s most recent Annual Report on Form 10-K. There have been no significant changes in such policies or the application of such policies during the Current Period. 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 recoverability of long‑lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, income taxes, self‑insurance liabilities, share‑based compensation and contingent liabilities. 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. Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 19 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:
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 for the nine months ended September 30, 2018 and year ended December 31, 2017. Change in depreciable lives of property and equipment: In accordance with its policy, the Company reviews the estimated useful lives and estimated salvage values of its fixed assets on an ongoing basis. This most recent review, conducted in the first quarter of 2018, indicated that the economic lives of certain assets were longer than the historic asset lives previously used by the Company. This increase was positively supported by effective use, care and custody of the assets. Also, this review indicated increased salvage value estimates for certain assets within vehicles and equipment, which was supported by recent vehicle sales data, and is expected to continue prospectively. As a result, effective January 1, 2018, the Company changed its estimates of the useful lives of certain assets included in vehicles and equipment and machinery and equipment, and increased salvage value estimates for certain assets within vehicles and equipment, to better reflect the estimated periods and depreciable amounts during which these assets will remain in service.
The average estimated useful lives of the assets impacted in the vehicles and equipment category increased from 6.0 to 8.1 years, while the average estimated useful lives of assets impacted in machinery and equipment increased from 5.5 years to 6.9 years. The impact of the increase of useful lives was to defer and extend out depreciation expense, including lower expense in 2018. The impact of the increase in salvage values was to permanently lower current and future depreciation expense. The fixed assets obtained in 2017 through mergers and acquisitions, including the Rockwater Merger, have consistent useful life and salvage value estimates with the rest of the Company’s fixed assets. The change in the estimated useful lives of fixed assets and change in salvage value estimates was implemented on a prospective basis starting January 1, 2018. Excluding fixed assets attained through mergers and acquisitions during 2017, the impact of the change in useful estimate of fixed assets purchased on or before December 31, 2017 was to reduce and defer depreciation expense by $2.7 million and $11.7 million during the Current Quarter and Current Period, respectively. Also, the increase in estimated vehicle salvage value produced a permanent depreciation expense reduction of $0.9 million and $2.9 million, during the Current Quarter and Current Period, respectively. For the Current Quarter and Current Period, the changes in useful life estimate and increased salvage value produced an increase to net income of $2.5 million and $9.9 million, respectively, and increased basic and diluted earnings per share attributable to our stockholders by $0.03 and $0.14, respectively. Emerging Growth Company status: Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is an “emerging growth company,” or an “EGC,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase‑in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. The Company’s election to use the phase‑in periods permitted by this election may make it difficult to compare the Company’s financial statements to those of non‑emerging growth companies and other emerging growth companies that have opted out of the longer phase‑in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. The Company will lose its emerging growth company status as of December 31, 2018, as the market value of our common stock held by non-affiliates was greater than $700 million as of June 30, 2018. Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The Company does not expect the adoption of the ASU or related ASUs 2016-08, 2016-10, 2016-12 and 2016-20, will have a material impact on its consolidated financial statements because (i) most customer agreements begin and end within the same period and (ii) our current revenue recognition methodologies are similar to the new guidance. The Company is evaluating the impact on the related disclosures and internal controls over financial reporting. The Company will use the modified retrospective method upon adoption of the ASU. In February 2016, the FASB issued ASU 2016-02, Leases, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients. In July 2018, the FASB issued ASU No. 2018-11, Leases (ASC 842): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective January 1, 2019. The Company currently anticipates that it will elect to recognize its lease assets and liabilities on a prospective basis, beginning on January 1, 2019, using an optional transition method. Additionally, the Company expects (i) not to set up right of use assets and lease liabilities for short-term leases, (ii) to elect to treat lease and non-lease components as a single lease component and (iii) to grandfather its current accounting for land easements that commenced before January 1, 2019. The Company expects the adoption of these ASUs to have a material increase to assets and liabilities on the consolidated balance sheets. However, because the Company is currently evaluating the impact of these ASUs and, ASU 2018-01, Land Easements, it is unable to quantify the overall impact at this time. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share‑based payment award transactions. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement was effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. Certain amendments in this update should be applied prospectively, while other amendments in the update should be applied retrospectively, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied using a retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update was effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied prospectively. The Company does not expect the adoption of the ASU will have a material impact on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The pronouncement should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU in 2018, and the adoption of this guidance did not materially affect its consolidated financial statements and related disclosures. |
ACQUISITIONS |
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ACQUISITIONS | NOTE 3— ACQUISITIONS Business combinations Rockwater Merger On November 1, 2017, the Company completed the Rockwater Merger in which the Company combined with Rockwater. Total consideration was $620.2 million based on the closing price of the Company’s shares of Class A Common Stock on November 1, 2017. Consideration transferred consisted of shares of Class A Common Stock, shares of Class A-2 Common Stock, shares of Class B Common Stock, and SES Holdings LLC Units. Consideration transferred also included the Company’s previously held interest in Rockwater, which was acquired as consideration in a sale of assets by Select’s predecessor to Rockwater’s predecessor in 2008 prior to the contribution of those assets to Rockwater and the related conversion of the ownership interests received by Select’s predecessor to ownership interests in Rockwater in 2011, and the fair value of Rockwater’s replaced share-based payments attributed to pre-acquisition service. In addition, the Company’s previously held interest in Rockwater was cancelled pursuant to the Merger Agreement. The previously held interest in Rockwater was previously included in other assets in the consolidated balance sheet. It was remeasured to a fair value of $2.3 million, which resulted in a gain of $1.2 million recognized in the fourth quarter of 2017 in other income in the consolidated statements of operations. For the Current Quarter and the Current Period, the Company expensed $2.6 million and $6.3 million of transaction-related costs, respectively, which are included in selling, general and administrative expenses within the consolidated statements of operations. The Rockwater Merger 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. The Company also engaged third-party valuation experts to assist in the purchase price allocation and the recorded valuation of property and equipment. Management estimated that total consideration paid exceeded the fair value of the net assets acquired and liabilities assumed by $248.6 million, with the excess recorded as goodwill. The goodwill recognized was primarily attributable to synergies driven by expanding into new geographies, service offerings and customer relationships, strengthening existing service lines and geographies, acquiring an established, trained workforce and expected cost reductions. Goodwill of $235.9 million and $12.7 million was allocated to the Company’s Water Solutions and Oilfield Chemicals segments, respectively. The acquired goodwill is not deductible for tax purposes.
The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
Resource Water Acquisition On September 15, 2017, the Company completed its acquisition (the “Resource Water Acquisition”) of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”). Resource Water provides water transfer services to E&P operators in West Texas and East Texas. Resource Water’s assets include 24 miles of layflat hose as well as numerous pumps and ancillary equipment required to support water transfer operations. Resource Water has longstanding customer relationships across its operating regions which are viewed as strategic to the Company’s water solutions business. The acquired goodwill is deductible for tax purposes. The total consideration for the Resource Water Acquisition was $9.0 million, with $6.6 million paid in cash and $2.4 million paid in shares of Class A Common Stock valued at $15.17 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the Resource Water Acquisition with $6.6 million of cash on hand. The Resource Water Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.9 million, with the excess recorded as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions 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:
GRR Acquisition On March 10, 2017, the Company completed its acquisition (the “GRR Acquisition”) of Gregory Rockhouse Ranch, Inc. and certain other affiliated entities and assets (collectively, the “GRR Entities”). The GRR Entities provide water and water‑related services to E&P companies in the Permian Basin and own and have rights to a vast array of fresh, brackish and effluent water sources with access to significant volumes of water annually and water transport infrastructure, including over 1,200 miles of temporary and permanent pipeline infrastructure and related storage facilities and pumps, all located in the northern Delaware Basin portion of the Permian Basin. The total consideration for the GRR Acquisition was $59.6 million, subject to customary post-closing adjustments, with $53.0 million paid in cash, $1.1 million in assumed tax liabilities and $5.5 million paid to the sellers in shares of Class A Common Stock valued at $20.00 per share. The Company funded the cash portion of the consideration for the GRR Acquisition with $19.0 million of cash on hand and $34.0 million of borrowings under the Company’s Previous Credit Facility. For the nine months ended September 30, 2017, the Company expensed $1.0 million of transaction-related costs, which are included in selling, general and administrative expenses within the consolidated statements of operations. The GRR Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired by $12.0 million, with the excess recorded as goodwill. The goodwill recognized was primarily attributable to synergies related to the Company’s comprehensive water solutions strategy that are expected to arise from the GRR Acquisition and was attributable to the Company’s Water Solutions segment. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions segment. The acquired goodwill is deductible for tax purposes. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
The following unaudited consolidated pro forma information is presented as if the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition had occurred on January 1, 2017:
(1) The allocation of net income (loss) attributable to noncontrolling interests and Select Inc. gives effect to the equity structure as of September 30, 2017 as though the Select 144A Offering, the IPO, the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition occurred as of January 1, 2017. However, the calculation of pro forma net income (loss) does not give effect to any other pro forma adjustments for the Select 144A Offering or the subsequent IPO. The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Rockwater Merger, Resource Water Acquisition and GRR Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2017 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Rockwater Merger, the Resource Water Acquisition or the GRR Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition had occurred as of January 1, 2017 or of future operating performance. Asset acquisitions On June 21, 2017 the Company completed the acquisition of fixed assets from Tex-Star Water Services, LLC for $4.2 million in cash. On May 30, 2017 the Company completed the acquisition of automated manifold intellectual property and related assets from Data Automated Water Systems, LLC (the “DAWS Acquisition”) for $4.0 million. This acquisition was paid with $2.0 million of cash and 128,370 shares of Class A Common Stock valued at $2.0 million. The DAWS Acquisition resulted in fixed assets of $1.8 million, patents of $1.9 million and software of $0.3 million.
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EXIT AND DISPOSAL ACTIVITIES | NOTE 4—EXIT AND DISPOSAL ACTIVITIES Due to a reduction in oil and gas industry activity that began in 2014, the Company decided during the year ended December 31, 2016 to close 15 facilities and consolidate operations for the purpose of improving operating efficiencies. In addition, the Company decided to consolidate or close additional facilities in relation to its Rockwater Merger. With the recent rebound in the oil and gas industry, the Company expects to ramp up operations in some areas while continuing to consolidate operations in others. During the Current Period and Prior Period, the Company recorded $4.1 million and $2.9 million, respectively, of charges related to exit and disposal activities. These costs are included in lease abandonment costs in the consolidated statements of operations. Additionally, during the Prior Period, we reclassified $0.2 million of deferred rent related to accrued lease obligations related to exited facilities. The Company had a remaining balance of $21.1 million, inclusive of a short‑term balance of $2.6 million in accrued expenses and other current liabilities, as of September 30, 2018, related to accrued lease obligations and terminations at exited facilities within its Water Solutions segment. The Company will continue to make non‑cancelable lease payments for related facilities through the year ended 2027. The Company’s abandonment of these facilities is not a part of a formalized exit plan. The changes in the abandoned lease obligations for the Current Period and Prior Period are as follows:
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INVENTORIES |
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INVENTORIES |
NOTE 5—INVENTORIES Inventories, which are comprised of chemicals and materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:
During the Current Quarter and the Current Period, the Company recorded charges to the reserve for excess and obsolete inventory for a nominal amount and $0.4 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. No charges were recorded during the Prior Quarter or Prior Period. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations, and the amount necessary to reduce the cost of the inventory to its estimated net realizable value. |
PROPERTY AND EQUIPMENT |
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PROPERTY AND EQUIPMENT | NOTE 6—PROPERTY AND EQUIPMENT Property and equipment consists of the following as of September 30, 2018 and December 31, 2017:
Long‑lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the Current Period, the Company reviewed certain fluid disposal machinery and equipment used in our fluid hauling and disposal services that are included in our Water Solutions segment. Due to the condition of the equipment, the Company determined that long-lived assets with a carrying value of $2.3 million were no longer recoverable and were written down to their estimated fair value of zero. During the Current Quarter, Prior Quarter, Current Period and Prior Period, depreciation expense was $29.8 million, $21.2 million, $85.2 million and $61.1 million, respectively. As a result of the Rockwater Merger, the Company acquired various capital leases for certain vehicles, machinery and equipment that expire at various dates during the next five years. Depreciation of assets held under capital leases for the Current Quarter and the Current Period was $0.3 million and $1.0 million, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations. The Company had no capital lease obligations as of September 30, 2017. |
GOODWILL AND OTHER INTANGIBLE ASSETS |
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GOODWILL AND OTHER INTANGIBLE ASSETS | NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 11). The changes in the carrying amounts of goodwill by reportable segment as of September 30, 2018 and December 31, 2017 are as follows:
The components of other intangible assets as of September 30, 2018 and December 31, 2017 are as follows:
The Company had $7.0 million and $5.3 million in indefinite-lived water rights at September 30, 2018 and December 31, 2017, respectively, and are included within the other component in the tables above. The Company had $23.4 million in indefinite-lived trademarks as of both September 30, 2018 and December 31, 2017 and are included in the patents and trademarks component in the table above. Amortization expense was $3.0 million, $2.6 million, $10.3 million and $7.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Annual amortization of intangible assets for the next five years and beyond is as follows:
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DEBT |
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DEBT | NOTE 8—DEBT Credit facility and revolving line of credit Our subsidiary, Select Energy Services, LLC’s (“Select LLC”) previous credit facility (the “Previous Credit Facility”), had a maturity date of February 28, 2020 and a revolving line of credit of $100.0 million. On November 1, 2017, in connection with the closing of the Rockwater Merger (the “Closing”), SES Holdings entered into the Credit Agreement, the obligations of SES Holdings and Select LLC under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated. On November 1, 2017, in connection with the Closing, SES Holdings and Select LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as Borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company has the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the closing. The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement. The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent. Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the ”Base Rate”), in each case plus an applicable margin. Interest is payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Agreement to be immediately due and payable. In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements. The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days. Certain lenders party to the Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments. In addition, certain lenders party to the Previous Credit Facility are lenders under the Credit Agreement.
The Company had $65.0 million and $75.0 million outstanding under the Credit Agreement as of September 30, 2018 and December 31, 2017, respectively. The weighted‑average interest rate of outstanding borrowings under the Credit Agreement was 3.992% and 3.319% as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, the borrowing base under the Credit Agreement was $290.8 million and $261.1 million, respectively. The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of $20.8 million and $19.8 million as of September 30, 2018 and December 31, 2017, respectively. The Company’s letters of credit have a variable interest rate between 1.50% and 2.00% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Credit Agreement was $205.0 million at September 30, 2018. Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of September 30, 2018 and December 31, 2017 were $2.8 million and $3.3 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheet. Amortization expense related to debt issuance costs were $0.2 million, $0.3 million, $0.5 million and $0.9 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The Company was in compliance with all debt covenants as of September 30, 2018. |
COMMITMENTS AND CONTINGENCIES |
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COMMITMENTS AND CONTINGENCIES. | |
COMMITMENTS AND CONTINGENCIES | NOTE 9—COMMITMENTS AND CONTINGENCIES The Company is subject to a number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters. Certain subsidiaries acquired in the Rockwater Merger are under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. Environmental Protection Agency (“U.S. EPA”). It is alleged that certain employees at some of the facilities altered emissions controls systems on 4% of the vehicles in the fleet in violation of the Clean Air Act. The Company is cooperating with the relevant authorities to resolve the matter. At this time no administrative, civil or criminal charges have been brought against the Company and the Company cannot estimate the possible fines and penalties that may be levied against the Company. Self-Insured Reserves We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
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EQUITY-BASED COMPENSATION |
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EQUITY‑BASED COMPENSATION | NOTE 10—EQUITY‑BASED COMPENSATION The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the Select 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended from time to time, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan. On July 18, 2017, the Select Inc. board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater Merger) and allows for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement for the Rockwater Merger. The Company’s consenting stockholders, who hold a majority of the outstanding common stock of the Company, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Rockwater Merger. The maximum number of shares initially reserved for issuance under the 2016 Plan was 5,400,400 shares of Class A Common Stock, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. After giving effect to the Equity Plan Amendment, the maximum number of shares of Class A Common Stock reserved for issuance under the 2016 Plan is equal to (i) 5,400,400 shares plus (ii) 1,011,087 shares that became available on account of the assumption of the Rockwater Equity Plan, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. The maximum number of shares described in the preceding sentence does not include 2,879,112 shares of Class A Common Stock related to substitute awards granted under the 2016 Plan following the conversion of outstanding equity awards originally granted under the Rockwater Equity Plan in accordance with the Merger Agreement. Stock option awards Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. The Company historically valued Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. This fair value measurement relied on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards granted during the years ended December 31, 2017 and 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were either granted in exchange for the cancellation of outstanding options granted under the 2011 Plan or the Rockwater Equity Plan, as applicable, that were fully vested and exercisable prior to such cancellation. The Company utilized the Monte Carlo simulation model to determine fair value of the options granted during January 2018, which incorporates assumptions to value equity‑based awards. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected life of the options was based on the vesting period and term of the options awarded, which is ten years.
The table below presents the assumptions used in determining the fair value of stock options granted during January 2018. The weighted‑average grant date fair value of stock options granted was $8.98.
A summary of the Company’s stock option activity and related information as of and for the Current Period is as follows:
(a) Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $11.84 and $18.24 as of September 28, 2018 and December 29, 2017, respectively. The Company recognized $1.2 million, $0.4 million, $3.9 million and $1.4 million of compensation expense related to stock options during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2018, there was $5.9 million of unrecognized equity-based compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.3 years. Restricted Stock Awards and Restricted Stock Units The value of the restricted stock awards and restricted stock units issued was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $1.1 million, $0.1 million, $3.2 million and $0.4 million related to the restricted stock awards and restricted stock units for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of September 30, 2018, there was $6.8 million of unrecognized compensation expense with a weighted-average remaining life of 1.9 years related to unvested restricted stock awards and restricted stock units.
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
A summary of the Company’s restricted stock unit activity and related information for the Current Period is as follows:
Performance Share Units (PSUs) During 2018, the Company approved grants of performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSU will be calculated based on performance against certain metrics that relate to the Company’s return on asset performance over the January 1, 2018 through December 31, 2020 performance period. The target number of shares of Class A Common Stock subject to each PSU is one; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from zero to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2021, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with the following table:
Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest, by the measurement-date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized compensation expense of $0.1 million and $0.7 million related to the PSUs for the Current Quarter and Current Period, respectively. As of September 30, 2018, the fair value of outstanding PSUs issued was $3.2 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $2.5 million and is expected to be recognized over a weighted-average period of 2.3 years as of September 30, 2018. The following table summarizes the information about the performance share units outstanding at September 30, 2018:
Stock-Settled Incentive Awards Effective May 17, 2018, Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Equity Incentive Plan that are subject to both market-based and service-based vesting provisions. These awards will vest after a two-year service period and, if earned, settled in shares of the Company stock. The ultimate amount earned is based on the achievement of the market metrics, which is based on the stock price of the Company at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date is forfeited. The target amount that becomes earned during the performance period will be determined in accordance with the following table:
The target amount of stock-settled incentive awards granted was $3.9 million. However, the ultimate settlement of the awards will be in shares of the Company’s stock with fair market value equal to the earned amount, which could range from 0% to 200% of the target amount depending on the stock price at vesting date. Compensation expense associated with the stock-settled incentive awards is recognized ratably over the corresponding requisite service period. The fair value of the stock-settled incentive awards was determined using a Monte Carlo option pricing model, similar to the Black-Scholes-Merton model, and adjusted for the specific characteristics of the awards. The key assumptions in the model included price, the expected volatility of our stock, risk-free interest rate based on U.S. Treasury yield curve, cross-correlations between us and our self-determined peer companies’ asset, equity and debt-to-equity volatility. During the Current Quarter and the Current Period, the Company recognized stock compensation expense of $0.1 million and $0.2 million, respectively, related to the stock-settled incentive awards. The unrecognized compensation cost related to our unvested stock-settled incentive awards is estimated to be $1.0 million and is expected to be recognized over approximately 20 months as of September 30, 2018. The following table summarizes the information about the stock-settled incentive awards outstanding at September 30, 2018:
Employee Stock Purchase Plan (ESPP) We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of our common stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1 through August 31 and September 1 through November 30. At the end of each offering period, enrolled employees purchase shares of our common stock at a price equal to 95% of the market value of the stock on the last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period. Subject to limitations set forth in the plan and under IRS regulations, eligible employees may elect to contribute a maximum of $15,000 to the plan in a single calendar year. The plan is deemed to be noncompensatory. The following table summarizes ESPP activity (in thousands, except shares):
Phantom unit awards The Company’s phantom unit awards were cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of the Company’s Class A common stock on the date of completion of the Company’s IPO, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considered these awards to be liability awards, which were measured at fair value at each reporting date and the pro rata vested portion of the award was recognized as a liability to the extent that the performance condition was deemed probable. On May 5, 2017, the Company settled its outstanding phantom unit awards for an aggregate amount equal to $7.8 million as a result of the completion of its IPO, which constituted a liquidity event with respect to such phantom unit awards. Based on the fair market value of a share of the Company’s Class A common stock on the date of the IPO of $14.00, the cash payment with respect to each phantom unit was approximately $5.53, before employer taxes. The Company recognized compensation expense of $7.8 million during both the Prior Quarter and the Prior Period related to the settlement of its phantom unit awards. As of September 30, 2018 and 2017 there were no phantom units outstanding. |
FAIR VALUE MEASUREMENT |
9 Months Ended |
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Sep. 30, 2018 | |
FAIR VALUE MEASUREMENT | |
FAIR VALUE MEASUREMENT | NOTE 11—FAIR VALUE MEASUREMENT The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. ASC 820 establishes a three‑level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets. Level 2—Quoted prices for similar assets or liabilities in non‑active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the nine months ended September 30, 2018 or the year ended December 31, 2017. Other fair value considerations The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value at September 30, 2018 and December 31, 2017 due to the short‑term maturity of these instruments. The carrying value of debt as of September 30, 2018 and December 31, 2017 approximates fair value due to variable market rates of interest. The fair value of debt at September 30, 2018 and December 31, 2017, which is a Level 3 measurement, is estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices are not available. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The consideration transferred and the purchase price allocation of identified assets acquired and liabilities assumed related to the Rockwater Merger, Resource Water Acquisition and GRR Acquisition are based on the Company’s estimate of fair value utilizing Level 3 inputs at the date of acquisition. Refer to Note 3 – Acquisitions for further discussion.
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RELATED PARTY TRANSACTIONS |
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Sep. 30, 2018 | |
RELATED PARTY TRANSACTIONS | |
RELATED PARTY TRANSACTIONS | NOTE 12—RELATED-PARTY TRANSACTIONS The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons and an unconsolidated joint venture. The Company has entered into a significant number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the Company’s board of directors regularly reviews these transactions; however, the Company’s results of operations may have been different if these transactions were conducted with non‑related parties. During the Current Quarter, sales to related parties were $2.7 million and purchases from related-party vendors were $5.2 million. These purchases consisted of $1.0 million relating to purchases of property and equipment, $4.0 million relating to the rental of certain equipment or other services used in operations and $0.2 million relating to management, consulting and other services. During the Prior Quarter, sales to related parties were $0.4 million and purchases from related-party vendors were $2.1 million. These purchases consisted of $0.7 million relating to purchases of property and equipment, less than $0.1 million relating to inventory and consumables, $0.8 million relating to the rental of certain equipment or other services used in operations, and $0.5 million relating to management, consulting and other services. During the Current Period, sales to related parties were $6.3 million and purchases from related-party vendors were $12.7 million. These purchases consisted of $3.5 million relating to purchases of property and equipment, $0.3 million relating to inventory and consumables, $7.8 million relating to the rental of certain equipment or other services used in operations and $1.1 million relating to management, consulting and other services. During the Prior Period, sales to related parties were $1.5 million and purchases from related-party vendors were $5.0 million. These purchases consisted of $1.4 million relating to purchases of property and equipment, $0.2 million relating to inventory and consumables, $1.7 million relating to the rental of certain equipment or other services used in operations, and $1.7 million relating to management, consulting and other services. Tax receivable agreements In connection with the Select 144A Offering, the Company entered into the Tax Receivable Agreements with the TRA Holders. The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement. The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributing Legacy Owners and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net operating losses available to the Company as a result of certain reorganization transactions entered into in connection with the Select 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement. On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements revising the definition of a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Rockwater Merger would not result in such a change of control. |
INCOME TAXES |
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Sep. 30, 2018 | |
INCOME TAXES | |
INCOME TAXES | NOTE 13—INCOME TAXES The Company’s effective tax rates for the Current Quarter, Prior Quarter, Current Period and Prior Period were 4.3%, (12.8)%, 2.7% and 1.6%, respectively. The effective tax rates for the Current and Prior Quarter and the Current and Prior Period differ from the statutory rate of 21% and 35%, respectively, due to net income allocated to noncontrolling interests, state income taxes, and valuation allowances. The change in the effective tax rate is primarily due to positive pretax income in the Current Period relative to a loss in the Prior Period. The Company recorded income tax expense (benefit) of $1.4 million, $(0.3) million, $2.0 million and $(0.3) million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017, and the Company has now filed its tax returns for the year ended December 31, 2017. The Company recorded $0.6 million to its provision for income taxes during the Current Quarter for the effects of the TCJA. This increased the effective tax rate by 1.7% and 0.8% in the Current Quarter and Current Period, respectively.
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NONCONTROLLING INTERESTS |
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NONCONTROLLING INTERESTS |
NOTE 14—NONCONTROLLING INTERESTS The Company has ownership interests in multiple subsidiaries that are consolidated within the Company’s financial statements but are not wholly owned. During the Current Period and Prior Period, the Company entered into transactions that impacted its ownership interest in certain of these subsidiaries while maintaining control over such subsidiaries. As a result of the Company’s change in ownership interest in these subsidiaries, the Company reduced its noncontrolling interests and recognized an increase in equity related to transactions with holders of noncontrolling interests. The Company reports a noncontrolling interest representing the common units of SES Holdings held by Legacy Owner Holdco. Changes in Select Inc.’s ownership interest in SES Holdings while it retains its controlling interest are accounted for as equity transactions. The following table summarizes the effects of changes in noncontrolling interests on equity for the Current Period and the Prior Period:
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EARNINGS (LOSS) PER SHARE |
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EARNINGS PER SHARE |
NOTE 15—EARNINGS (LOSS) PER SHARE Earnings per share are based on the amount of income allocated to the shareholders and the weighted‑average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 2,682,883 and 1,856,550 shares are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter and Current Period, respectively, as the effect is antidilutive. The following tables present the Company’s calculation of basic and diluted earnings per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):
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SEGMENT INFORMATION |
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SEGMENT INFORMATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION | NOTE 16—SEGMENT INFORMATION Select Inc. is an oilfield services company that provides solutions to the North American onshore oil and natural gas industry. The Company’s services are offered through three operating segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s CODM assesses performance and allocates resources on the basis of the three reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate. Each operating segment reflects a reportable segment led by separate managers that report directly to the Company’s CODM. As a result of the Rockwater Merger, during the fourth quarter 2017, the Company reorganized its reporting structure and aligned its segments and underlying businesses to execute on the strategies of the combined company. The Company’s revised operating and reportable segments are Water Solutions, Oilfield Chemicals and Wellsite Services. Accordingly, prior period segment information has been retrospectively revised as of December 31, 2017 and for the Prior Quarter and Prior Period ended September 30, 2017. The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments: Water Solutions —The Water Solutions segment provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer of the water to the wellsite through permanent pipeline infrastructure and temporary pipe; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids, well testing and handling of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids. Oilfield Chemicals —The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals utilized in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers, breakers and other chemical technologies, to leading pressure pumping service companies in the United States. Wellsite Services —The Wellsite Services segment provides oil and natural gas operators with a variety of services, including provision of workforce accommodations and surface rental equipment, crane and logistics services, wellsite and pipeline construction, field and well services, sand-hauling and fluid-logistics services. In addition, we provide water transfer, fluid hauling, containment and rental services in Canada. These services are performed to establish, maintain or improve production throughout the productive life of an oil or gas well or to otherwise facilitate other services performed on a well. Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:
Total assets by segment as of September 30, 2018 and December 31, 2017 is as follows:
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SUBSEQUENT EVENTS |
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SUBSEQUENT EVENTS | NOTE 17—SUBSEQUENT EVENTS The Company has evaluated subsequent events for potential recognition and/or disclosure through November 7, 2018, the date these consolidated financial statements were available to be issued.
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Use of estimates | 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 recoverability of long‑lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, income taxes, self‑insurance liabilities, share‑based compensation and contingent liabilities. 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. |
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Asset retirement obligations | Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 19 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:
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 for the nine months ended September 30, 2018 and year ended December 31, 2017. |
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Change in depreciable lives of property and equipment | Change in depreciable lives of property and equipment: In accordance with its policy, the Company reviews the estimated useful lives and estimated salvage values of its fixed assets on an ongoing basis. This most recent review, conducted in the first quarter of 2018, indicated that the economic lives of certain assets were longer than the historic asset lives previously used by the Company. This increase was positively supported by effective use, care and custody of the assets. Also, this review indicated increased salvage value estimates for certain assets within vehicles and equipment, which was supported by recent vehicle sales data, and is expected to continue prospectively. As a result, effective January 1, 2018, the Company changed its estimates of the useful lives of certain assets included in vehicles and equipment and machinery and equipment, and increased salvage value estimates for certain assets within vehicles and equipment, to better reflect the estimated periods and depreciable amounts during which these assets will remain in service.
The average estimated useful lives of the assets impacted in the vehicles and equipment category increased from 6.0 to 8.1 years, while the average estimated useful lives of assets impacted in machinery and equipment increased from 5.5 years to 6.9 years. The impact of the increase of useful lives was to defer and extend out depreciation expense, including lower expense in 2018. The impact of the increase in salvage values was to permanently lower current and future depreciation expense. The fixed assets obtained in 2017 through mergers and acquisitions, including the Rockwater Merger, have consistent useful life and salvage value estimates with the rest of the Company’s fixed assets. The change in the estimated useful lives of fixed assets and change in salvage value estimates was implemented on a prospective basis starting January 1, 2018. Excluding fixed assets attained through mergers and acquisitions during 2017, the impact of the change in useful estimate of fixed assets purchased on or before December 31, 2017 was to reduce and defer depreciation expense by $2.7 million and $11.7 million during the Current Quarter and Current Period, respectively. Also, the increase in estimated vehicle salvage value produced a permanent depreciation expense reduction of $0.9 million and $2.9 million, during the Current Quarter and Current Period, respectively. For the Current Quarter and Current Period, the changes in useful life estimate and increased salvage value produced an increase to net income of $2.5 million and $9.9 million, respectively, and increased basic and diluted earnings per share attributable to our stockholders by $0.03 and $0.14, respectively. |
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Emerging Growth Company Status | Emerging Growth Company status: Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is an “emerging growth company,” or an “EGC,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase‑in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. The Company’s election to use the phase‑in periods permitted by this election may make it difficult to compare the Company’s financial statements to those of non‑emerging growth companies and other emerging growth companies that have opted out of the longer phase‑in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. The Company will lose its emerging growth company status as of December 31, 2018, as the market value of our common stock held by non-affiliates was greater than $700 million as of June 30, 2018. |
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Recent accounting pronouncements: | Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The Company does not expect the adoption of the ASU or related ASUs 2016-08, 2016-10, 2016-12 and 2016-20, will have a material impact on its consolidated financial statements because (i) most customer agreements begin and end within the same period and (ii) our current revenue recognition methodologies are similar to the new guidance. The Company is evaluating the impact on the related disclosures and internal controls over financial reporting. The Company will use the modified retrospective method upon adoption of the ASU. In February 2016, the FASB issued ASU 2016-02, Leases, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients. In July 2018, the FASB issued ASU No. 2018-11, Leases (ASC 842): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective January 1, 2019. The Company currently anticipates that it will elect to recognize its lease assets and liabilities on a prospective basis, beginning on January 1, 2019, using an optional transition method. Additionally, the Company expects (i) not to set up right of use assets and lease liabilities for short-term leases, (ii) to elect to treat lease and non-lease components as a single lease component and (iii) to grandfather its current accounting for land easements that commenced before January 1, 2019. The Company expects the adoption of these ASUs to have a material increase to assets and liabilities on the consolidated balance sheets. However, because the Company is currently evaluating the impact of these ASUs and, ASU 2018-01, Land Easements, it is unable to quantify the overall impact at this time. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share‑based payment award transactions. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement was effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. Certain amendments in this update should be applied prospectively, while other amendments in the update should be applied retrospectively, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied using a retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update was effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As the Company will lose its EGC status as of December 31, 2018, the ASU will become effective for calendar year 2018 at that time. The amendments in this ASU should be applied prospectively. The Company does not expect the adoption of the ASU will have a material impact on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures. In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The pronouncement should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU in 2018, and the adoption of this guidance did not materially affect its consolidated financial statements and related disclosures. |
SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Summary of change in asset retirement obligations |
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ACQUISITION (Tables) |
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Schedule Of consideration transferred and the estimated fair value of identified assets acquired and liabilities |
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Resource Water Acquisition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of consideration transferred and the estimated fair value of identified assets acquired and liabilities |
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GRR Acquisition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of consideration transferred and the estimated fair value of identified assets acquired and liabilities |
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Schedule of unaudited consolidated pro forma information |
(1) The allocation of net income (loss) attributable to noncontrolling interests and Select Inc. gives effect to the equity structure as of September 30, 2017 as though the Select 144A Offering, the IPO, the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition occurred as of January 1, 2017. However, the calculation of pro forma net income (loss) does not give effect to any other pro forma adjustments for the Select 144A Offering or the subsequent IPO. |
EXIT AND DISPOSAL ACTIVITIES (Tables) |
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Summary of exit and disposal activities |
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INVENTORIES (Tables) |
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Schedule of inventory |
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PROPERTY AND EQUIPMENT (Tables) |
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Schedule of property and equipment |
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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables) |
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Schedule of changes in the carrying amounts of goodwill by reportable segment |
See Note 3―Acquisitions for additional information. |
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Summary of components of other intangible assets |
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Summary of future estimated amortization expense for other intangible assets |
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DEBT (Tables) |
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Summary of Company’s leverage ratio |
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Schedule of fee Percentage on unused credit facility |
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EQUITY-BASED COMPENSATION (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of assumptions used in determining the fair value of certain equity options |
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Schedule of equity option activity and related information |
(a) Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $11.84 and $18.24 as of September 28, 2018 and December 29, 2017, respectively. |
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Schedule of percentage of stock settled incentives earned |
The stock price at vesting date equals the greater of (i) the fair market value of a share of the Company’s stock on the vesting date, or (ii) the volume weighted average closing price of a share of the Company’s stock, as reported on the NYSE, for the 30 trading days preceding the vesting date. |
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Schedule of stock-settled incentive awards outstanding |
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summary of ESPP activity | The following table summarizes ESPP activity (in thousands, except shares):
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Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of restricted stock activity |
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Restricted Stock Units | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of restricted stock activity |
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Performance share units | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of percentage of target PSUs earned |
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Summary of activity related to the units outstanding |
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NONCONTROLLING INTERESTS (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NONCONTROLLING INTERESTS. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of the effects of changes in noncontrolling interests |
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EARNINGS (LOSS) PER SHARE (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EARNINGS (LOSS) PER SHARE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of calculation of basic and diluted earnings per share | The following tables present the Company’s calculation of basic and diluted earnings per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):
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SEGMENT INFORMATION (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of financial information by segment |
Total assets by segment as of September 30, 2018 and December 31, 2017 is as follows:
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ACQUISITIONS - Resource Water Acquisition (Details) - USD ($) $ / shares in Units, $ in Thousands |
Sep. 15, 2017 |
Sep. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|---|
ACQUISITION | ||||
Goodwill | $ 274,753 | $ 273,421 | $ 12,242 | |
Resource Water Acquisition | ||||
ACQUISITION | ||||
Miles of layflat hose | 24 | |||
Total consideration paid | $ 8,966 | |||
Cash paid | $ 6,586 | |||
Class A Common stock issued, Share Price | $ 15.17 | |||
Cash on hand | $ 6,600 | |||
Goodwill | 1,894 | |||
Resource Water Acquisition | Class A Common Stock | ||||
ACQUISITION | ||||
Common stock issued | $ 2,380 |
ACQUISITIONS - GRR Acquisition (Details) - USD ($) $ / shares in Units, $ in Thousands |
9 Months Ended | |||
---|---|---|---|---|
Mar. 10, 2017 |
Sep. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
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ACQUISITION | ||||
Goodwill | $ 274,753 | $ 273,421 | $ 12,242 | |
GRR Acquisition | ||||
ACQUISITION | ||||
Miles of layflat hose | 1,200 | |||
Cash paid | $ 53,032 | |||
Class A Common Stock (274,998 shares) | 5,500 | |||
Total consideration paid | 59,638 | |||
Goodwill | $ 12,049 | |||
Class A Common stock issued, Share Price | $ 20.00 | |||
Cash on hand | $ 19,000 | |||
Proceeds from credit facility | $ 34,000 | |||
Transaction cost | $ 1,000 |
ACQUISITIONS - GRR Acquisition - Purchase price allocation (Details) - USD ($) $ in Thousands |
Mar. 10, 2017 |
Sep. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|---|
Less: identified assets acquired and liabilities assumed | ||||
Goodwill | $ 274,753 | $ 273,421 | $ 12,242 | |
GRR Acquisition | ||||
Consideration transferred | ||||
Cash paid | $ 53,032 | |||
Class A Common Stock (274,998 shares) | 5,500 | |||
Assumed liabilities | 1,106 | |||
Total consideration transferred | 59,638 | |||
Less: identified assets acquired and liabilities assumed | ||||
Working capital | 7,728 | |||
Fixed assets | 13,225 | |||
Total identifiable net assets acquired | 47,589 | |||
Goodwill | 12,049 | |||
Fair value allocated to net assets acquired | $ 59,638 | |||
Shares issued in Merger Agreement | 274,998 | |||
GRR Acquisition | Customer relationships | ||||
Less: identified assets acquired and liabilities assumed | ||||
Intangible assets | $ 21,484 | |||
GRR Acquisition | Other | ||||
Less: identified assets acquired and liabilities assumed | ||||
Intangible assets | $ 5,152 |
ACQUISITIONS - Proforma (Details) - GRR Acquisition - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2017 |
Sep. 30, 2017 |
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Pro forma information | ||
Revenue | $ 357,160 | $ 889,442 |
Net loss (loss) | 21,935 | (11,602) |
Less: net (income) loss attributable to noncontrolling interests | (8,885) | 4,679 |
Net income (loss) attributable to Select Energy Services, Inc. | $ 13,050 | $ (6,923) |
ACQUISITIONS - Asset Acquisitions (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
May 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Jun. 21, 2017 |
|
Asset acquisitions | ||||||
Cash payment | $ 45,130 | $ 27,104 | $ 122,055 | $ 72,182 | ||
Tex-Star Water Services, LLC | Nonrecurring | ||||||
Asset acquisitions | ||||||
Fixed assets acquired | $ 4,200 | |||||
Data Automated Waters Systems, LLC | Nonrecurring | ||||||
Asset acquisitions | ||||||
Assets acquired | $ 4,000 | |||||
Cash payment | 2,000 | |||||
Fixed assets acquired | $ 1,800 | |||||
Data Automated Waters Systems, LLC | Nonrecurring | Class A Common Stock | ||||||
Asset acquisitions | ||||||
Shares of stock issued for asset purchase | 128,370 | |||||
Value os stock issued for asset purchase | $ 2,000 | |||||
Data Automated Waters Systems, LLC | Nonrecurring | Patents | ||||||
Asset acquisitions | ||||||
Intangible assets acquired | 1,900 | |||||
Data Automated Waters Systems, LLC | Nonrecurring | Software | ||||||
Asset acquisitions | ||||||
Intangible assets acquired | $ 300 |
INVENTORIES (Details) - USD ($) $ in Thousands |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
Sep. 30, 2017 |
|
Significant components of inventory | |||
Raw materials | $ 13,217 | $ 11,462 | |
Finished goods | 33,753 | 29,674 | |
Materials and supplies | 2,917 | 3,462 | |
Inventory gross | 49,887 | 44,598 | |
Inventory reserve | (430) | $ 0 | |
Inventory net | 49,457 | $ 44,598 | |
Inventory reserve | $ 430 |
GOODWILL AND OTHER INTANGIBLE ASSETS - GOODWILL (Details) - USD ($) $ in Thousands |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Goodwill | ||
Balance at the beginning of the period | $ 273,421 | $ 12,242 |
Additions | 261,179 | |
Measurement period adjustment | 1,332 | |
Balance at the end of the period | 274,753 | 273,421 |
Water Solutions | ||
Goodwill | ||
Balance at the beginning of the period | 245,542 | |
Additions | 245,542 | |
Measurement period adjustment | 4,317 | |
Balance at the end of the period | 249,859 | 245,542 |
Oilfield Chemicals | ||
Goodwill | ||
Balance at the beginning of the period | 15,637 | |
Additions | 15,637 | |
Measurement period adjustment | (2,985) | |
Balance at the end of the period | 12,652 | 15,637 |
Wellsite Services | ||
Goodwill | ||
Balance at the beginning of the period | 12,242 | 12,242 |
Balance at the end of the period | $ 12,242 | $ 12,242 |
GOODWILL AND OTHER INTANGIBLE ASSETS - OTHER INTANGIBLE ASSETS (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Dec. 31, 2017 |
|
Other intangible assets | |||||
Gross Value | $ 219,911 | $ 219,911 | $ 217,498 | ||
Accumulated Amortization | 71,584 | 71,584 | 61,432 | ||
Net Value | 148,327 | 148,327 | 156,066 | ||
Amortization expense | 3,000 | $ 2,600 | 10,300 | $ 7,300 | |
Annual amortization of intangible assets | |||||
Remainder of 2018 | 2,899 | 2,899 | |||
2019 | 11,595 | 11,595 | |||
2020 | 11,302 | 11,302 | |||
2021 | 10,118 | 10,118 | |||
2022 | 9,904 | 9,904 | |||
Thereafter | 72,037 | 72,037 | |||
Water rights | |||||
Other intangible assets | |||||
Intangible assets | 7,000 | 7,000 | 5,300 | ||
Trademarks | |||||
Other intangible assets | |||||
Intangible assets | 23,400 | 23,400 | 23,400 | ||
Customer relationships | |||||
Other intangible assets | |||||
Gross Value | 169,901 | 169,901 | 169,250 | ||
Accumulated Amortization | 65,837 | 65,837 | 57,836 | ||
Net Value | 104,064 | 104,064 | 111,414 | ||
Trademarks and patents | |||||
Other intangible assets | |||||
Gross Value | 33,552 | 33,552 | 33,544 | ||
Accumulated Amortization | 1,166 | 1,166 | 414 | ||
Net Value | 32,386 | 32,386 | 33,130 | ||
Other | |||||
Other intangible assets | |||||
Gross Value | 16,458 | 16,458 | 14,704 | ||
Accumulated Amortization | 4,581 | 4,581 | 3,182 | ||
Net Value | $ 11,877 | $ 11,877 | $ 11,522 |
COMMITMENTS AND CONTINGENCIES (Details) |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
COMMITMENTS AND CONTINGENCIES. | |
Percentage of vehicles in which certain employees at some of the facilities altered emissions controls systems | 4.00% |
EQUITY-BASED COMPENSATION (Details) - $ / shares |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2018 |
May 10, 2017 |
Apr. 26, 2017 |
|
EQUITY-BASED COMPENSATION | |||
Share Price | $ 20.50 | ||
offering period | 3 years | ||
Class A Common Stock | Over-allotment option | |||
EQUITY-BASED COMPENSATION | |||
Share Price | $ 14.00 | ||
Class A Common Stock | IPO | |||
EQUITY-BASED COMPENSATION | |||
Share Price | $ 14.00 | ||
2016 plan | Maximum | |||
EQUITY-BASED COMPENSATION | |||
Equity options term | 10 years | ||
2016 plan | Class A Common Stock | |||
EQUITY-BASED COMPENSATION | |||
Maximum number of shares | 5,400,400 | ||
Rockwater Equity Plan | Class A Common Stock | |||
EQUITY-BASED COMPENSATION | |||
Maximum number of shares | 1,011,087 | ||
Substitute Awards | 2016 plan | Class A Common Stock | |||
EQUITY-BASED COMPENSATION | |||
Maximum number of shares | 2,879,112 |
EQUITY-BASED COMPENSATION - Assumptions (Details) |
9 Months Ended |
---|---|
Sep. 30, 2018
$ / shares
| |
EQUITY-BASED COMPENSATION | |
Weighted-average grant date fair value of equity options granted | $ 8.98 |
Assumptions for equity options granted: | |
Underlying Equity | 20.50 |
Strike Price | $ 30.75 |
Dividend Yield (%) | 0.00% |
Risk free rate(%) | 2.30% |
Volatility (%) | 50.00% |
Expected Term (Years) | 10 years |
Minimum | |
Assumptions for equity options granted: | |
Strike Price | $ 20.50 |
EQUITY-BASED COMPENSATION - Equity Options (Details) - USD ($) $ / shares in Units, $ in Millions |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 28, 2018 |
Sep. 29, 2017 |
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||
Share Price | $ 20.50 | $ 20.50 | ||||
Equity options | ||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||
Share Price | $ 11.84 | $ 18.24 | ||||
Compensation expense | $ 1.2 | $ 0.4 | $ 3.9 | $ 1.4 | ||
Unrecognized compensation expense | $ 5.9 | $ 5.9 | ||||
Weighted-average period for recognition (in years) | 1 year 3 months 18 days |
EQUITY-BASED COMPENSATION - Performance share units outstanding (Details) - Performance share units |
9 Months Ended |
---|---|
Sep. 30, 2018
shares
| |
Performance share units | |
Target Shares Granted | 280,021 |
Target Shares Forfeited | (11,852) |
Ending balance (in shares) | 268,169 |
2018 | |
Performance share units | |
Target Shares Granted | 280,021 |
Target Shares Forfeited | (11,852) |
Ending balance (in shares) | 268,169 |
EQUITY-BASED COMPENSATION - Stock-settled incentive awards outstanding (Details) - Stock-Settled Incentive Awards $ in Thousands |
9 Months Ended |
---|---|
Sep. 30, 2018
USD ($)
| |
Value at Target | |
Granted during 2018 | $ 3,871 |
Forfeited during 2018 | (724) |
Non-vested at end of period | 3,147 |
Award Value Being Recognized | |
Granted during 2018 | 1,479 |
Forfeited during 2018 | (277) |
Non-vested at end of period | $ 1,202 |
EQUITY-BASED COMPENSATION - Employee Stock Purchase Plan (ESPP) (Details) |
9 Months Ended |
---|---|
Sep. 30, 2018
USD ($)
shares
| |
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
offering period | 3 years |
ESPP | |
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Employee service period | 1 year |
offering period | 4 years |
Issue price (percentage) | 95.00% |
Maximum annual employees contribution | $ 15,000 |
Cash received for shares issued | $ 85,635,000 |
Shares issued | shares | 6,413 |
EQUITY-BASED COMPENSATION - Phantom unit awards (Details) - USD ($) $ / shares in Units, $ in Millions |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
May 07, 2017 |
May 05, 2017 |
Sep. 30, 2017 |
Sep. 30, 2017 |
Sep. 30, 2018 |
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||
Payments For Settlement Of Phantom Units | $ 7.8 | ||||
Share price | $ 20.50 | ||||
Phantom unit awards [Member] | |||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||
Payments For Settlement Of Phantom Units | $ 7.8 | ||||
Share price | $ 14.00 | ||||
Cash payment (in dollars per share) | $ 5.53 | ||||
Compensation expense | $ 7.8 | $ 7.8 | |||
Outstanding units | 0 | 0 | 0 |
FAIR VALUE MEASUREMENT (Details) - USD ($) $ in Thousands |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
Transfers into Level3 | $ 0 | $ 0 |
Transfers out of Level3 | $ 0 | $ 0 |
INCOME TAXES (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Dec. 31, 2017 |
|
INCOME TAXES | |||||
Effective Income tax (as percent) | 4.30% | (12.80%) | 2.70% | 1.60% | |
Statutory tax rate (as a percent) | 21.00% | 35.00% | |||
Tax expense (benefit) | $ 1,415 | $ (294) | $ 2,027 | $ (326) | |
Tax provision related to TCJA | $ 600 | ||||
Increase in efffective tax rate | 1.70% | 0.80% |
SEGMENT INFORMATION - Total Assets (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Segment Reporting Information [Line Items] | ||
Assets | $ 1,438,785 | $ 1,356,368 |
Operating segment | Water Solutions | ||
Segment Reporting Information [Line Items] | ||
Assets | 1,087,425 | 994,159 |
Operating segment | Oilfield Chemicals | ||
Segment Reporting Information [Line Items] | ||
Assets | 184,635 | 186,333 |
Operating segment | Wellsite Services | ||
Segment Reporting Information [Line Items] | ||
Assets | 135,378 | 151,272 |
Corporate | ||
Segment Reporting Information [Line Items] | ||
Assets | $ 31,347 | $ 24,604 |
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