Select Water Solutions(WTTR) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Select Energy Services, Inc. as of June 30, 2019, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 23,818 | 17,237 | | Total current assets | 421,228 | 432,152 | | Total property and equipment, net | 468,211 | 502,848 | | Goodwill | 266,934 | 273,801 | | Total assets | 1,377,177 | 1,360,605 | | Liabilities and Equity | | | | Total current liabilities | 164,239 | 179,719 | | Long-term debt | — | 45,000 | | Total liabilities | 250,329 | 249,832 | | Total equity | 1,126,848 | 1,110,773 | Consolidated Statement of Operations Highlights (Unaudited) | Metric ($ thousands, except per share data) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | 323,887 | 393,247 | 686,533 | 769,642 | | Gross profit | 39,939 | 56,728 | 85,936 | 104,677 | | Income from operations | 11,179 | 24,795 | 17,812 | 43,398 | | Net income | 8,068 | 25,023 | 9,468 | 41,155 | | Net income attributable to Select Energy Services, Inc. | 6,200 | 16,963 | 7,335 | 27,062 | | Class A EPS - Diluted | $0.08 | $0.24 | $0.09 | $0.39 | Consolidated Statement of Cash Flows Highlights (Unaudited) | Cash Flow Activity ($ thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | 74,735 | 64,305 | | Net cash used in investing activities | (21,056) | (59,097) | | Net cash (used in) provided by financing activities | (47,234) | 3,465 | | Net increase in cash and cash equivalents | 6,581 | 8,527 | Note 1: Business and Basis of Presentation The company is a leading provider of water-management and chemical solutions to the U.S. oil and gas industry, restructuring its segments in Q1 2019 to Water Services, Water Infrastructure, and Oilfield Chemicals - The company provides full life cycle water-management services combined with related chemical products for the oil and gas industry[25] - In Q1 2019, the company changed its reportable segments to Water Services, Water Infrastructure, and Oilfield Chemicals after deciding to divest certain operations from its former Wellsite Services segment[35] Note 3: Acquisitions and Divestitures During the first half of 2019, the company finalized the purchase price for the Pro Well Acquisition at $11.8 million and divested its Affirm and Canadian operations - The purchase price for the Pro Well Acquisition was finalized at $11.8 million in March 2019, resulting in $1.1 million of goodwill[48][49] - The company divested its Affirm and Canadian operations through four transactions, selling property and equipment with a net book value of $18.6 million and recording a net loss of $3.4 million for the six months ended June 30, 2019[50] Note 4: Revenue Revenue is primarily generated from short-term customer agreements, with the Permian Basin being the largest revenue-generating region across all segments Revenue by Geographic Region ($ thousands) | Geographic Region | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Permian Basin | 148,118 | 154,422 | 310,783 | 282,783 | | MidCon | 48,515 | 67,425 | 106,978 | 129,024 | | Eagle Ford | 41,033 | 42,486 | 79,759 | 89,028 | | Bakken | 20,361 | 39,487 | 46,143 | 79,261 | | Total | 323,887 | 393,247 | 686,533 | 769,642 | - The Permian Basin, MidCon, and Eagle Ford regions collectively comprised 74% of Water Services segment revenue in Q2 2019, while the Permian Basin and Bakken comprised 81% of Water Infrastructure revenue, and the Permian Basin and MidCon comprised 75% of Oilfield Chemicals revenue in the same period[59] Note 5: Leases The company adopted the new lease standard on January 1, 2019, reporting right-of-use assets of $75.3 million and total lease liabilities of $95.3 million as of June 30, 2019 Lease Balances as of June 30, 2019 ($ thousands) | Balance Sheet Item | Classification | Amount | | :--- | :--- | :--- | | Assets | | | | ROU Assets | Long-term right-of-use assets | $75,302 | | Finance lease assets | Property and equipment | $422 | | Liabilities | | | | Operating lease liabilities - ST | Current operating lease liabilities | $19,553 | | Operating lease liabilities - LT | Long-term operating lease liabilities | $75,169 | | Finance lease liabilities - ST | Current portion of finance lease obligations | $421 | | Finance lease liabilities - LT | Other long term liabilities | $129 | - The weighted-average remaining lease term is 4.8 years for operating leases and 1.3 years for finance leases, with weighted-average discount rates of 5.3% and 5.2%, respectively[66] Note 8: Goodwill and Other Intangible Assets As of June 30, 2019, goodwill was $266.9 million and net other intangible assets were $142.4 million, with a goodwill impairment of $4.4 million recorded for the Affirm business Changes in Goodwill by Segment - H1 2019 ($ thousands) | Segment | Balance Dec 31, 2018 | Resegmentation | Divestiture/Impairment | Balance June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Water Solutions | 266,801 | (266,801) | — | — | | Wellsite Services | 7,000 | (7,000) | — | — | | Water Services | — | 186,335 | — | 186,468 | | Water Infrastructure | — | 80,466 | — | 80,466 | | Other | — | 7,000 | (7,000) | — | | Total | 273,801 | — | (7,000) | 266,934 | - A goodwill impairment of $4.4 million was recorded for the Affirm business based on expected proceeds from its sale and wind-down[74] Note 9: Debt The company has a $300.0 million senior secured revolving credit facility with no outstanding borrowings and $240.0 million available capacity as of June 30, 2019 - As of June 30, 2019, the company had no outstanding borrowings under its credit facility, compared to $45.0 million outstanding as of December 31, 2018[85] - The borrowing base under the credit agreement was $256.4 million as of June 30, 2019, with an available borrowing capacity of $240.0 million[85][86] Note 17: Segment Information The company operates through three reportable segments: Water Services, Water Infrastructure, and Oilfield Chemicals, with Water Services being the largest by revenue and assets for the six months ended June 30, 2019 Segment Financials for Six Months Ended June 30, 2019 ($ thousands) | Segment | Revenue | Income (loss) before taxes | Capital Expenditures | Total Assets (as of June 30, 2019) | | :--- | :--- | :--- | :--- | :--- | | Water Services | 423,877 | 39,894 | 22,615 | 873,107 | | Water Infrastructure | 105,335 | 7,003 | 28,780 | 312,638 | | Oilfield Chemicals | 130,116 | 6,437 | 3,352 | 171,457 | | Other | 33,073 | (5,850) | 64 | 19,975 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, discussing business overview, industry trends, operational metrics, and a detailed comparison of financial results Results of Operations For Q2 2019, total revenue decreased 17.6% to $323.9 million and net income fell 67.8% to $8.1 million, primarily due to divestitures and reduced activity in the Water Services segment Q2 2019 vs Q2 2018 Results of Operations ($ thousands) | Metric | Q2 2019 | Q2 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | 323,887 | 393,247 | (69,360) | (17.6)% | | Gross profit | 39,939 | 56,728 | (16,789) | (29.6)% | | Income from operations | 11,179 | 24,795 | (13,616) | (54.9)% | | Net income | 8,068 | 25,023 | (16,955) | (67.8)% | - The Q2 revenue decrease was driven by a $31.6 million reduction from divested operations (Affirm, sand hauling, Canadian) and a $31.9 million decrease in Water Services revenue due to reduced activity and pricing pressure[184][186][189] Reconciliation of Net Income to Adjusted EBITDA ($ thousands) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income | 8,068 | 25,023 | 9,468 | 41,155 | | EBITDA | 39,227 | 57,767 | 74,416 | 106,935 | | Adjusted EBITDA | 51,572 | 68,204 | 104,991 | 127,852 | Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its credit facility, with $23.8 million in cash and $240.0 million of available borrowing capacity as of June 30, 2019 - As of June 30, 2019, the company had $23.8 million in cash and cash equivalents and no outstanding bank debt[229][151] - Available borrowing capacity under the Credit Agreement was approximately $240.0 million as of June 30, 2019[229] Cash Flow Summary - H1 2019 vs H1 2018 ($ thousands) | Cash Flow Activity | H1 2019 | H1 2018 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 74,735 | 64,305 | 10,430 | | Net cash used in investing activities | (21,056) | (59,097) | 38,041 | | Net cash (used in) provided by financing activities | (47,234) | 3,465 | (50,699) | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks primarily related to the volatility of oil and gas industry activity, interest rate fluctuations, and minimal foreign currency exchange risk - The company's business is highly dependent on the level of activity in the U.S. oil and gas industry, which is volatile and influenced by commodity prices[249][250] - Interest rate risk exists due to the variable rates on the company's credit facility, although no borrowings were outstanding as of June 30, 2019[251] - Foreign currency exchange risk is expected to be minimal in the future due to the recent divestiture of Canadian operations[252] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, while remediating previously identified material weaknesses related to fixed asset accounting - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2019[255] - The company is remediating material weaknesses identified as of December 31, 2018, related to fixed asset accounting from the Rockwater Merger, and implemented new internal controls during Q1 2019 which are currently being tested[256][257] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is not party to any legal proceedings expected to have a material adverse effect, but is cooperating with an investigation by the U.S. Attorney's Office regarding alterations to emissions control systems - The company is under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania for altering emissions control systems on less than 5% of its vehicle fleet, and is cooperating with the investigation and has begun discussions for a resolution[262] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Form 10-K - No material changes to the Risk Factors disclosed in the 2018 Form 10-K were reported[263] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2019, the company repurchased 26,716 shares of its stock to satisfy tax withholding obligations related to the vesting of employee restricted stock awards Issuer Purchases of Equity Securities (Q2 2019) | Period | Total Number of Shares Purchased | Weighted Average Price Paid Per Share | | :--- | :--- | :--- | | April 2019 | 2,573 | $11.45 | | May 2019 | 16,172 | $11.35 | | June 2019 | 7,971 | $10.95 | | Total | 26,716 | | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[265] Item 6. Exhibits This section lists the exhibits filed with the report, including corporate governance documents, employment agreements, and required certifications by the CEO and CFO