Company Quick10K Filing
Select Energy Services
Price1.00 EPS-3,139,000
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt-43 EBIT9
TEV-43 TEV/EBIT-5
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-02-25
10-Q 2019-09-30 Filed 2019-11-07
10-Q 2019-06-30 Filed 2019-08-07
10-Q 2019-03-31 Filed 2019-05-08
10-K 2018-12-31 Filed 2019-03-01
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-10
10-Q 2018-03-31 Filed 2018-05-11
S-1 2018-01-24 Public Filing
10-K 2017-12-31 Filed 2018-03-19
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-19
8-K 2020-05-05 Earnings, Exhibits
8-K 2020-03-31
8-K 2020-02-24 Earnings, Exhibits
8-K 2020-01-22 Officers, Exhibits
8-K 2019-12-18 Officers, Regulation FD, Exhibits
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-05-10 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-05-07 Earnings, Regulation FD, Exhibits
8-K 2019-03-22 Officers, Regulation FD, Exhibits
8-K 2019-02-26 Earnings, Exhibits
8-K 2019-02-11 Regulation FD, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-05-21 Officers, Other Events, Exhibits
8-K 2018-05-10 Earnings, Exhibits
8-K 2018-05-08 Officers, Regulation FD, Exhibits
8-K 2018-05-04 Shareholder Vote
8-K 2018-03-22 Other Events, Exhibits
8-K 2018-03-07 Earnings, Exhibits

WTTR 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Business and Basis of Presentation
Note 2 - Significant Accounting Policies
Note 3 - Impairments and Other Costs
Note 4 - Acquisitions
Note 5 - Revenue
Note 6 - Inventories
Note 7 - Property and Equipment
Note 8 - Goodwill and Other Intangible Assets
Note 9 - Debt
Note 10 - Commitments and Contingencies
Note 11 - Equity - Based Compensation
Note 12 - Fair Value Measurement
Note 13 - Related - Party Transactions
Note 14 - Income Taxes
Note 15 - Noncontrolling Interests
Note 16 - (Loss) Earnings per Share
Note 17 - Segment Information
Note 18 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-10.2 wttr-20200331xex10d2.htm
EX-10.3 wttr-20200331xex10d3.htm
EX-31.1 wttr-20200331xex31d1.htm
EX-31.2 wttr-20200331xex31d2.htm
EX-32.1 wttr-20200331xex32d1.htm
EX-32.2 wttr-20200331xex32d2.htm

Select Energy Services Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.51.20.90.60.30.02017201820192020
Assets, Equity
0.40.30.20.10.0-0.12017201820192020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12017201820192020
Ops, Inv, Fin

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2020

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)

1233 W. Loop South, Suite 1400

Houston, TX

77027

(Address of principal executive offices)

(Zip Code)

(713) 235-9500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

WTTR

New York Stock Exchange

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 May 4, 2020, the registrant had 86,852,110 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

Table of Contents

SELECT ENERGY SERVICES, INC.

TABLE OF CONTENTS

2

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

the severity and duration of world health events, including the recent outbreak of the novel coronavirus (“COVID-19”) pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;
the current significant surplus in the supply of oil and actions by the members of OPEC+ (as defined below) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;
the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand;
trends and volatility in oil and gas prices, and our ability to manage through such volatility;
demand for our services;
our customers’ ability to complete and produce new wells;
potential shut-ins of production by producers due to lack of downstream demand or storage capacity;
the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals and various environmental matters;
capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services in our core markets;
our ability to retain key management and employees;

3

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our ability to hire and retain skilled labor;
regional impacts to our business, including our key infrastructure assets within the Bakken and Northern Delaware formation of the Permian Basin;
our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;
our health, safety and environmental performance;
the impact of competition on our operations;
the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us;
our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments;
delays or restrictions in obtaining permits by us or our customers;
constraints in supply or availability of equipment used in our business;
the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis;
changes in global political or economic conditions, generally, and in the markets we serve;
the ability to source certain raw materials globally from economically advantaged sources;
accidents, weather, seasonality or other events affecting our business; and
the other risks identified in our most recent Annual Report on Form 10-K, and under the headings “Part I―Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II―Item 1A. Risk Factors” in this Quarterly Report.

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

4

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

March 31, 2020

December 31, 2019

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

114,142

$

79,268

Accounts receivable trade, net of allowance for credit losses of $7,136 and $5,773, respectively

 

232,255

 

267,628

Accounts receivable, related parties

 

2,673

 

4,677

Inventories

 

38,502

 

37,542

Prepaid expenses and other current assets

 

20,268

 

26,486

Total current assets

 

407,840

 

415,601

Property and equipment

 

986,790

 

1,015,379

Accumulated depreciation

 

(560,340)

 

(562,986)

Property and equipment held-for-sale, net

885

Total property and equipment, net

 

426,450

 

453,278

Right-of-use assets, net

65,234

70,635

Goodwill

 

 

266,934

Other intangible assets, net

 

124,878

 

136,952

Other assets, net

 

2,506

 

4,220

Total assets

$

1,026,908

$

1,347,620

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

26,518

$

35,686

Accrued accounts payable

39,692

47,547

Accounts payable and accrued expenses, related parties

 

2,345

 

2,789

Accrued salaries and benefits

 

21,304

 

20,079

Accrued insurance

 

8,012

 

8,843

Sales tax payable

1,688

2,119

Accrued expenses and other current liabilities

 

14,894

 

15,375

Current operating lease liabilities

17,002

19,315

Current portion of finance lease obligations

 

84

 

128

Total current liabilities

 

131,539

 

151,881

Long-term operating lease liabilities

 

69,110

 

72,143

Other long-term liabilities

 

10,702

 

10,784

Total liabilities

 

211,351

 

234,808

Commitments and contingencies (Note 10)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 87,991,839 shares issued and outstanding as of March 31, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019

 

880

 

879

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of March 31, 2020 and December 31, 2019

 

 

Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2020; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of December 31, 2019

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

Additional paid-in capital

 

909,812

 

914,699

Accumulated (deficit) retained earnings

 

(224,425)

 

21,437

Total stockholders’ equity

 

686,429

 

937,177

Noncontrolling interests

 

129,128

 

175,635

Total equity

 

815,557

 

1,112,812

Total liabilities and equity

$

1,026,908

$

1,347,620

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three Months Ended March 31, 

    

2020

    

2019

    

Revenue

 

  

 

  

Water Services

$

149,511

$

220,595

Water Infrastructure

57,762

53,616

Oilfield Chemicals

 

71,012

 

66,829

Other

 

 

21,606

Total revenue

 

278,285

 

362,646

Costs of revenue

 

  

 

  

Water Services

129,114

163,121

Water Infrastructure

47,813

41,430

Oilfield Chemicals

 

59,876

59,527

Other

 

4

21,053

Depreciation and amortization

 

26,182

31,518

Total costs of revenue

 

262,989

 

316,649

Gross profit

 

15,296

 

45,997

Operating expenses

 

  

 

  

Selling, general and administrative

 

25,289

32,376

Depreciation and amortization

 

685

1,000

Impairment of goodwill and trademark

 

276,016

4,396

Impairment of property and equipment

3,184

519

Lease abandonment costs

 

953

1,073

Total operating expenses

 

306,127

 

39,364

(Loss) income from operations

 

(290,831)

 

6,633

Other expense

 

  

 

  

Losses on sales of property, equipment and divestitures, net

(435)

(4,491)

Interest expense, net

 

(331)

(1,093)

Foreign currency (loss) gain, net

(46)

260

Other income, net

 

259

269

(Loss) income before income tax benefit (expense)

 

(291,384)

 

1,578

Income tax benefit (expense)

 

164

(178)

Net (loss) income

 

(291,220)

 

1,400

Less: net loss (income) attributable to noncontrolling interests

 

45,358

(265)

Net (loss) income attributable to Select Energy Services, Inc.

$

(245,862)

$

1,135

Net (loss) income per share attributable to common stockholders (Note 16):

 

Class A—Basic

$

(2.86)

$

0.01

Class B—Basic

$

$

Net (loss) income per share attributable to common stockholders (Note 16):

 

Class A—Diluted

$

(2.86)

$

0.01

Class B—Diluted

$

$

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three Months Ended March 31, 

    

2020

    

2019

    

Net (loss) income

$

(291,220)

$

1,400

Other comprehensive (loss) income

 

  

 

  

Foreign currency translation adjustment, net of tax of $0

54

Net change in unrealized gain

 

 

54

Comprehensive (loss) income

 

(291,220)

 

1,454

Less: comprehensive loss (income) attributable to noncontrolling interests

 

45,358

 

(275)

Comprehensive (loss) income attributable to Select Energy Services, Inc.

$

(245,862)

$

1,179

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended March 31, 2020 and 2019

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Accumulated

Accumulated

Class A

Class B

Additional

(Deficit)

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Earnings

   

Income

   

Equity

   

Interests

   

Total

Balance as of December 31, 2019

 

87,893,525

$

879

 

16,221,101

$

162

 

$

914,699

$

21,437

$

$

937,177

$

175,635

$

1,112,812

ESPP shares issued

4,443

30

30

(3)

27

Equity-based compensation

483

483

91

574

Issuance of restricted shares

 

1,271,706

13

2,158

2,171

(2,171)

Exercise of restricted stock units

 

625

1

1

(1)

Repurchase of common stock

(979,391)

(10)

(7,229)

(7,239)

603

(6,636)

Restricted shares forfeited

(199,069)

(2)

(338)

(340)

340

NCI income tax adjustment

8

8

(8)

Net loss

 

(245,862)

(245,862)

(45,358)

(291,220)

Balance as of March 31, 2020

 

87,991,839

$

880

 

16,221,101

$

162

 

$

909,812

$

(224,425)

$

$

686,429

$

129,128

$

815,557

Class A

Class B

Stockholders

Stockholders

Accumulated

Class A

Class B

Additional

Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Earnings

   

Loss

   

Equity

   

Interests

   

Total

Balance as of December 31, 2018

 

78,956,555

$

790

 

26,026,843

$

260

 

$

813,599

$

18,653

$

(368)

$

832,934

$

277,839

$

1,110,773

ESPP shares issued

2,810

29

29

(2)

27

Equity-based compensation

3,154

3,154

1,025

4,179

Issuance of restricted shares

1,169,777

11

3,025

3,036

(3,036)

Exercise of restricted stock units

625

2

2

(2)

Repurchase of common stock

(125,786)

(1)

(1,244)

(1,245)

29

(1,216)

Restricted shares forfeited

(5,689)

(15)

(15)

15

Distributions to noncontrolling interests, net

(121)

(121)

NCI income tax adjustment

6

6

(6)

Foreign currency translation adjustment

54

54

17

71

Net income

 

 

 

 

 

 

 

1,135

 

 

1,135

 

265

 

 

1,400

Balance as of March 31, 2019

 

79,998,292

$

800

 

26,026,843

$

260

 

$

818,556

$

19,788

$

(314)

$

839,090

$

276,023

$

1,115,113

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Three months ended March 31, 

    

2020

    

2019

Cash flows from operating activities

 

Net (loss) income

$

(291,220)

$

1,400

Adjustments to reconcile net (loss) income to net cash provided by operating activities

 

 

Depreciation and amortization

 

26,867

 

32,518

Net loss (gain) on disposal of property and equipment

 

435

 

(223)

Bad debt expense

 

2,385

 

732

Amortization of debt issuance costs

 

172

 

172

Inventory write-downs

48

75

Equity-based compensation

 

574

 

4,179

Impairment of goodwill and trademark

 

276,016

 

4,396

Impairment of property and equipment

3,184

519

Loss on divestitures

4,714

Other operating items, net

 

(47)

 

(270)

Changes in operating assets and liabilities

 

 

Accounts receivable

 

34,992

 

(17,390)

Prepaid expenses and other assets

 

6,633

 

1,706

Accounts payable and accrued liabilities

 

(13,328)

 

4,059

Net cash provided by operating activities

 

46,711

 

36,587

Cash flows from investing activities

 

 

Working capital settlement

 

 

691

Proceeds received from divestitures

 

85

 

15,957

Purchase of property and equipment

 

(11,338)

 

(36,510)

Proceeds received from sales of property and equipment

 

5,768

 

3,209

Net cash used in investing activities

 

(5,485)

 

(16,653)

Cash flows from financing activities

 

 

Borrowings from revolving line of credit

5,000

Payments on long-term debt

 

 

(25,000)

Payments of finance lease obligations

(65)

(285)

Proceeds from share issuance

27

27

Contributions from (distributions to) noncontrolling interests

 

383

 

(121)

Repurchase of common stock

 

(6,636)

 

(1,216)

Net cash used in financing activities

 

(6,291)

 

(21,595)

Effect of exchange rate changes on cash

 

(61)

 

107

Net increase (decrease) in cash and cash equivalents

 

34,874

 

(1,554)

Cash and cash equivalents, beginning of period

 

79,268

 

17,237

Cash and cash equivalents, end of period

$

114,142

$

15,683

Supplemental cash flow disclosure:

 

 

Cash paid for interest

$

386

$

1,283

Cash refunds received for income taxes, net

$

(156)

$

(365)

Supplemental disclosure of noncash investing activities:

 

 

Capital expenditures included in accounts payable and accrued liabilities

$

6,184

$

13,044

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

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SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”).

We are a leading provider of comprehensive water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. Through a combination of organic growth and acquisitions over the last decade, we have developed a leading position in the relatively new water solutions industry. We believe we are the only company in the oilfield services industry that combines comprehensive water-management services with related chemical products. Furthermore, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance of responsibly managing water resources through our operations to help conserve fresh water and protect the environment is paramount to our continued success.

Select 144A Offering and Initial Public Offering. On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A-1 common stock, par value $0.01 per share, which were converted into shares of Class A common stock, par value $0.01 per share (“Class A Common Stock”) following the Company’s initial public offering (“IPO”). 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. On April 26, 2017, the Company completed its IPO of 8,700,000 shares of Class A Common Stock. 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.

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 13—Related Party Transactions 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. During the year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for 9,805,742 shares of Class A

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Common Stock, and 9,805,742 shares of Class B Common Stock were cancelled. There were no exchanges during the Current Quarter (as defined below).

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

This Form 10-Q relates to the three months ended March 31, 2020 (the “Current Quarter”) and the three months ended March 31, 2019 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) filed with the SEC on February 25, 2020 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter are not indicative of the results to be expected for the full year, in part due to the recent coronavirus (“COVID-19”) outbreak.

The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of March 31, 2020, the Company had 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.

Segment reporting: The Company has three reportable segments. Reportable 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 current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. 

The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business.

The Water Infrastructure segment consists of the Company’s infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt water disposal wells, primarily serving E&P companies.

The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily pressure pumpers, but also include major integrated and independent oil and gas producers.

The results of service lines divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined in the “Other” category.

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Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information in order to conform to the current period presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2019, included in the Company’s most recent Annual Report on Form 10-K.

Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Allowance for credit losses: The Company’s allowance for credit losses relate to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt incurred has been with cases where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy.

The following table presents the changes to the allowance for the Current Quarter:

Three months ended March 31, 2020

(in thousands)

Balance at beginning of year

$

5,773

Increase to allowance based on a percent of Current Quarter revenue

 

556

Adjustment based on aged receivable analysis

 

1,829

Charge-offs

(1,022)

Balance at March 31, 2020

$

7,136

Asset retirement obligations:  The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Quarter:

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Three months ended March 31, 2020

 

(in thousands)

Balance at beginning of year

 

$

1,527

Accretion expense, included in depreciation and amortization expense

 

31

Disposals

 

(219)

Payments

(64)

Balance at March 31, 2020

 

$

1,275

We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Lessor Income: As of March 31, 2020, the Company had three facility leases and 13 facility subleases that are accounted for as follows:

Three Months Ended March 31, 

    

2020

    

2019

    

(in thousands)

Category

Classification

Lessor income

Cost of sales

$

116

$

111

Sublease income

Lease abandonment costs and Cost of sales

401

373