SELECT WATER SOLUTIONS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 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 Annual Report on Form 10-K for the year endedDecember 31, 2022 , filed with theSecurities and Exchange Commission onFebruary 22, 2023 (our "2022 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" and other cautionary statements described under the heading "Risk Factors" included in our 2022 Form 10-K and this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements.
This discussion relates to the three months ended
Overview
We are a leading provider of sustainable water-management and chemical solutions to the energy industry in theU.S. As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.
Sustainability
Select is committed to a corporate strategy that supports the long-term
viability of our business model in a manner that focuses on our people, our
customers, the environment, and the communities in which we operate. We believe
this focus will help us and our customers achieve their short-term and long-term
environmental, social and governance ("ESG") goals, help us attract and retain
top talent, and further our efforts to generate investor returns. We believe our
commitment to foster a culture of corporate responsibility is an important part
of being a company with operations spanning the contiguous U.S. Further, we
believe being a good corporate steward is strategic to our growth in the energy
industry and will better allow us to develop solutions that both address the
needs of our customers and contribute to sustainable business practices. We have
identified the following four priorities as part of our comprehensive corporate
responsibility initiative: Environmental Consciousness, Health and Safety, Human
Capital Management and Community Outreach. As a service company, we compete with
other service providers based on various factors, including safety and
operational performance, pricing, technological innovation, process efficiencies
and reputational awareness. We believe there is a strong link between these
corporate responsibility initiatives and our ability to provide value to our
stakeholders.
We are one of the few public companies whose primary focus is on the management
of water and water logistics in the energy industry with a focus on driving
efficient, environmentally responsible and economic solutions that lower costs
throughout the lifecycle of the well. We believe water is a valuable resource
and understand that the energy industry as well as other industries and the
general public are competing for this resource. As a company, we continue to
provide access to water as demanded by our customers and have significantly
increased our focus on the recycling and reuse of produced water, as well as
industrial water sources, to meet the industry's water demand and align our
operations with the goals of our customers. We have invested significantly in
recent quarters in the development and acquisition of fixed and mobile recycling
facilities that support the advancement of commercialized produced water reuse
solutions. By doing so, we strive to reduce the amount of produced water being
reinjected into salt-water disposal wells ("SWDs") and to reduce our usage of
fresh water. We view our unique position as an opportunity to strategically
transform water management by leveraging our Oilfield Chemicals business to
develop produced water management solutions that increase our customers' ability
to reuse this produced water and add value to their operations. By
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implementing our innovative approach to water solutions, Select has become a leader in recycling produced water to be used in well completions.
Our strong company culture includes commitments to all stakeholders, and we aim to create a work environment that fosters a diverse and inclusive company culture. Additionally, we prioritize safety in our operations through rigorous training, structured protocols and ongoing automation of our operations. Our prioritization of safety includes a commitment to safeguarding the communities in which we operate. We believe that proper alignment of our management and our board of directors with our shareholders is critical to creating long-term value, including the alignment of management compensation and incentive structures and the establishment of an experienced, diverse and independent board of directors.
Recent Developments
OnFebruary 21, 2023 , we announced our intent to rebrand ourselves under the nameSelect Water Solutions, Inc. during the first half of 2023. We will retain our current stock ticker "WTTR" trading on theNew York Stock Exchange . On bothJanuary 27 andApril 25, 2023 , our board of directors declared a quarterly cash dividend of$0.05 per share of Class A common stock. TheJanuary 27 declaration was paid onFebruary 17, 2023 . A distribution of$0.05 per unit was also approved for those holders of units ofSES Holdings, LLC , who also hold an equal number of shares of Class B common stock of the Company, which was subject to the same payment and record dates. TheApril 25 declaration is to be paid onMay 17, 2023 , to holders of record as of the close of business onMay 5, 2023 . All future dividend payments are subject to quarterly review and approval by the board of directors. The recent completion of three business combinations, two asset acquisitions and the buyout of noncontrolling interests in a recycling system joint venture has strengthened our financial results for theCurrent Quarter , as well as our competitive positioning in the water solutions market. These acquisitions enhanced our geographic footprint and significantly expanded the capacity and reach of our sustainable recycling solutions. While the ongoing effects of the COVID-19 pandemic on our operations have largely ended, this pandemic has had a material negative impact on our financial results. Some impacts related to the COVID-19 pandemic, such as increased inflation and supply chain constraints, have resulted in rising interest rates and cost of capital, which in turn increase the risk of economic stagnation or an economic recession. While we have seen economic growth and constructive oil prices through theCurrent Quarter , such negative impacts may continue well beyond the containment of the pandemic until global gross domestic product ("GDP") levels, associated oil demand and resulting oilfield activity fully rebound. While we have seen oilfield activity improve considerably and global inventories rapidly normalize with continued demand growth since the low point experienced in 2020, uncertainty does remain. Even with this recovery however, we cannot provide assurance that our assumptions used to estimate our future financial results will be correct, given the unpredictable nature of the current market environment after the recent elevated volatility in demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain. InFebruary 2022 ,Russia launched a large-scale invasion ofUkraine that has led to significant armed hostilities. As a result, theU.S. , theUnited Kingdom , the member states of theEuropean Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions and concerns regarding global energy security, has contributed to increases and volatility in the prices for oil and natural gas. Such volatility may lead to a more difficult investing and planning environment for us and our customers. While the near-term impact of these events has resulted in higher oil and gas prices, the ultimate geopolitical and macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities inUkraine or elsewhere, could severely impact the world economy and may adversely affect our financial condition. An end to theRussia -Ukraine conflict and an easing or elimination of the related sanctions againstRussia could result in a significant fall in commodity prices as Russian hydrocarbons become more readily accessible on 35 Table of Contents
global markets, which could have an adverse effect on our customers, and therefore adversely affect our customers' demand for our services.
In addition, OPEC+ countries announced production cuts of around 1.16 million barrels per day inApril 2023 . The actions of OPEC+ countries with respect to oil production levels and announcements of potential changes in such levels, including agreement on and compliance with production cuts, may result in volatility in the industry in which we and our customers operate. The average price of West Texas Intermediate ("WTI") crude oil decreased in theCurrent Quarter versus the Prior Quarter as a result of increased production coupled with a moderate decrease in global demand. During theCurrent Quarter , the average spot price of WTI crude oil was$75.93 versus an average price of$95.18 for the Prior Quarter. While WTI price levels reduced during theCurrent Quarter relative to the Prior Quarter, these WTI price levels remain supportive of our customers' drilling and completion programs in the major shale basins. Additionally, WTI price levels have been impacted higher by the recent OPEC+ announcements following the end of theCurrent Quarter . The averageHenry Hub natural gas spot price during theCurrent Quarter was$2.65 versus an average of$4.66 for the Prior Quarter.Henry Hub natural gas price levels in theCurrent Quarter have reduced materially relative to the Prior Quarter and sustained reduced prices could impact activity levels in the near term. Many of our customers have demonstrated their resolve to manage their capital spending within budgets and cash flow from operations and increase redemptions of debt and/or returns of capital to investors. Additionally, consolidation among our customers can disrupt our market in the near-term and the resulting demand for our services. Overall however, the financial health of the oil and gas industry and many of our customers specifically, as reflected in debt metrics, recent capital raises, and equity valuations, has greatly improved over the year endedDecember 31, 2022 and through theCurrent Quarter . While the financial health of the broader oil and gas industry has continued to improve, the potential inability of broader banking and other financial services firms to access liquidity, which has resulted in twoU.S. bank failures and ongoing uncertainty regarding the going concern of certain banks, has resulted in significant disruptions to global markets. Central bank policy actions, bank failures and associated liquidity risks and other factors may negatively impact the value of our Class A and Class B common stock and that of our customers, and may reduce our and their ability to access liquidity in the bank and capital markets or result in capital being available on less favorable terms, which could negatively affect our financial condition and that of our customers. From an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing fracturing efficiency and the use of lower-cost in-basin sand has decreased total costs for our customers. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and, therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models. This multi-well pad development, combined with recent upstream acreage consolidation and the growing trends around the recycling and reuse applications of produced water provides a significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production lifecycle of wells. While these trends have advanced the most in thePermian Basin to date, they are emerging in other basins as well. The increased reuse of produced water requires additional chemical treatment solutions. We have a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. Our FluidMatch™ design solutions enable our customers to economically use these alternative sources to optimize their fluid systems by providing water profiling and fluid assessment services working towards real-time. This trend also supports more complex "on-the-fly" solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions. Ultimately, we intend to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of key stakeholders. 36 Table of Contents
Our water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas. We are working to further commercialize our services in other businesses and industries through our industrial solutions group.
Our Segments
Our services are offered through three reportable segments: (i) Water Services; (ii) Water Infrastructure; and (iii) Oilfield Chemicals.
Water Services. The Water Services segment consists of the Company's services
businesses, including water transfer, flowback and well testing, fluids
? hauling, water monitoring, water containment and water network automation,
primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business. Water Infrastructure. The Water Infrastructure segment consists of the
Company's infrastructure assets, including operations associated with our water
? sourcing and pipeline infrastructure, our water recycling solutions, and our
produced water gathering systems and SWDs, as well as solids disposal facilities, primarily serving E&P companies. Oilfield Chemicals. The Oilfield Chemicals segment provides technical
solutions, products and expertise related to chemical applications in the oil
and gas industry. We develop, manufacture, manage logistics and provide a full
suite of chemicals used in hydraulic fracturing, stimulation, cementing and
? well completions for customers ranging from pressure pumpers to major
integrated and independent oil and gas producers. This segment also utilizes
its chemical experience and lab testing capabilities to customize tailored
water treatment solutions designed to optimize the fracturing fluid system in
conjunction with the quality of water used in well completions.
How We Generate Revenue
We currently generate the majority of our revenue through our water-management services associated with well completions as well as ongoing produced water management, provided through our Water Services and Water Infrastructure segments. The majority of this revenue is realized through customer agreements with fixed pricing terms and is recognized when delivery of services is provided, generally at our customers' sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, 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 by providing completion and specialty chemicals through our Oilfield Chemicals segment. We invoice the majority of our Oilfield Chemicals customers for services provided based on the quantity of chemicals used or pursuant to short-term contracts as customer needs arise.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, vehicle and equipment costs (including depreciation, repair, rental and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are incurred only when we provide water and water-related services, or chemicals and chemical-related services to our customers. Labor costs associated with our employees and contract labor comprise the largest portion of our costs of doing business. We incurred labor and labor-related costs of$138.2 million and$104.0 million for theCurrent Quarter and Prior Quarter, respectively. The majority of our recurring labor costs are variable and dependent on the market environment and are incurred only while we are providing our operational services. We also incur costs to employ 37
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personnel to ensure safe operations, sell and supervise our services and perform maintenance on our assets, which is not as 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, as well as for third-party support, licensing and services. We incur significant vehicle and equipment costs in connection with the services we provide, including depreciation, repairs and maintenance, rental and leasing costs. We incurred vehicle and equipment costs of$78.2 million and$57.3 million for theCurrent Quarter and Prior Quarter, respectively. We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of$83.2 million and$71.1 million for theCurrent Quarter and Prior Quarter, respectively.
We incur variable transportation costs associated with our service lines,
predominately fuel and freight. We incurred fuel and freight costs of
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; ? Gross Margins; ? EBITDA; and ? Adjusted EBITDA. Revenue We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our reportable segments to identify potential areas for improvement, as well as to determine whether segment performance is meeting management's expectations.
Gross Profit
To measure our financial performance, we analyze our gross profit, which we
define as revenues less direct operating expenses (including depreciation and
amortization expenses). We believe gross profit provides insight into
profitability and the true operating performance of our assets. We also compare
gross profit to prior periods and across segments to identify trends as well as
underperforming segments.
Gross Margins
Gross margins provide an important gauge of how effective we are at converting
revenue into profits. This metric works in tandem with gross profit to ensure
that we do not seek to increase gross profit at the expense of lower margins,
nor pursue higher gross margins at the expense of declining gross profits. We
track gross margins by segment
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and service line and compare them across prior periods and across segments and service lines 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, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment and abandonment charges or asset write-offs pursuant to accounting principles generally accepted in theU.S. ("GAAP"), plus non-cash losses on the sale of assets or subsidiaries, nonrecurring compensation expense, non-cash compensation expense, and nonrecurring 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/(minus) losses/(gains) on unconsolidated entities less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See "-Comparison of Non-GAAP Financial Measures-EBITDA and Adjusted EBITDA" 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.
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 and those described in "-Recent Developments" above.
Acquisition Activity
As described above, we continuously evaluate potential investments, particularly in water 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. BetweenJanuary 2022 andMarch 2023 , we completed three business combinations, three asset acquisitions and the buyout of all noncontrolling interests in a recycling system joint venture. Our historical financial statements for periods prior to the respective date each acquisition was completed do not include the results of operations of that acquisition. See "-Recent Developments" and "Note 3-Acquisitions" for a description of these transactions. 39 Table of Contents 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 March 31, Change
2023 2022 Dollars Percentage
(in thousands)
Revenue
Water Services $ 228,597 $ 163,606 $ 64,991 39.7 %
Water Infrastructure 101,547 58,554 42,993 73.4 %
Oilfield Chemicals 86,448 72,609 13,839 19.1 %
Total revenue 416,592 294,769 121,823 41.3 %
Costs of revenue
Water Services 181,699 137,046 44,653 32.6 %
Water Infrastructure 72,576 44,378 28,198 63.5 %
Oilfield Chemicals 69,709 62,163 7,546 12.1 %
Depreciation and amortization 32,943 26,500 6,443 24.3 %
Total costs of revenue 356,927 270,087 86,840 32.2 %
Gross profit 59,665 24,682 34,983 141.7 %
Operating expenses
Selling, general and administrative 35,829 28,315 7,514 26.5 %
Depreciation and amortization 595 567 28 4.9 %
Impairments and abandonments 11,166 - 11,166 NM
Lease abandonment costs 76 91 (15) (16.5) %
Total operating expenses 47,666 28,973 18,693 64.5 %
Income (loss) from operations 11,999 (4,291) 16,290 379.6 %
Other income (expense) Gain on sales of property and equipment and divestitures, net 2,911 1,653 1,258 76.1 % Interest expense, net (1,483) (720) (763) 106.0 % Foreign currency (loss) gain, net (4)
3 (7) NM Bargain purchase gain - 11,434 (11,434) NM Other 846 249 597 NM Income before income tax expense 14,269 8,328 5,941 71.3 % Income tax expense (198) (214) 16 NM Equity in losses of unconsolidated entities (366) (129) (237) NM Net income$ 13,705 $ 7,985$ 5,720 71.6 % Revenue Our revenue increased$121.8 million , or 41.3%, to$416.6 million for theCurrent Quarter compared to$294.8 million for the Prior Quarter. This increase was composed of a$65.0 million increase in Water Services revenue, a$43.0 million increase in Water Infrastructure revenue and a$13.8 million increase in Oilfield Chemicals revenue. These increases were driven primarily by higher demand for our services coupled with increased pricing in comparison to the Prior Quarter. Included in the increases in Water Services and Water Infrastructure were incremental revenue contributions from the Nuverra, Breakwater and Cypress acquisitions. For theCurrent Quarter , our Water Services, Water Infrastructure and Oilfield Chemicals constituted 54.8%, 24.4% and 20.8% of our total revenue, respectively, compared to 55.5%, 19.9% and 24.6%, respectively, for the Prior Quarter. The revenue changes by reportable segment are as follows: 40 Table of Contents Water Services. Revenue increased$65.0 million , or 39.7%, to$228.6 million for theCurrent Quarter compared to$163.6 million for the Prior Quarter. The increase was primarily attributable to higher demand for our services coupled with increased pricing in comparison to the Prior Quarter. The increase was also impacted by incremental revenue contributed by the Nuverra and Breakwater acquisitions. Water Infrastructure. Revenue increased by$43.0 million , or 73.4%, to$101.5 million for theCurrent Quarter compared to$58.6 million for the Prior Quarter. The increase was primarily attributable to higher demand for our services in comparison to the Prior Quarter, as well as by incremental revenue contributed by the Nuverra, Breakwater, Cypress and other asset acquisitions. Oilfield Chemicals. Revenue increased$13.8 million , or 19.1%, to$86.4 million for theCurrent Quarter compared to$72.6 million for the Prior Quarter. The increase was primarily attributable to higher demand for our services in comparison to the Prior Quarter and was not directly impacted by acquisition activity. Costs of Revenue Costs of revenue increased$86.8 million , or 32.2%, to$356.9 million for theCurrent Quarter compared to$270.1 million for the Prior Quarter. The increase was primarily composed of a$44.7 million increase in Water Services costs, a$28.2 million increase in Water Infrastructure costs, and a$7.5 million increase in Oilfield Chemicals costs due to supporting the higher revenue-producing activity discussed above. Water Services. Costs of revenue increased$44.7 million , or 32.6%, to$181.7 million for theCurrent Quarter compared to$137.0 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 83.8% to 79.5% due primarily to higher pricing for our services and economies of scale from higher revenue activity. Water Infrastructure. Costs of revenue increased$28.2 million , or 63.5%, to$72.6 million for theCurrent Quarter compared to$44.4 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 75.8% to 71.5% due primarily to a higher relative contribution of high-margin disposal revenue as well as increased water treatment and recycling margins, which were favorably impacted by the Breakwater acquisition. Oilfield Chemicals. Costs of revenue increased$7.5 million , or 12.1%, to$69.7 million for theCurrent Quarter compared to$62.2 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 85.6% to 80.6% due primarily to picking up additional higher-margin market share within our portfolio of products. Depreciation and Amortization. Depreciation and amortization expense increased$6.4 million , or 24.3%, to$32.9 million for theCurrent Quarter compared to$26.5 million for the Prior Quarter, due primarily to a higher fixed asset base related to acquisitions occurring afterDecember 31, 2021 .
Gross Profit
Gross profit was$59.7 million for theCurrent Quarter compared to$24.7 million for the Prior Quarter due primarily to higher revenue in all three segments resulting from increased activity levels and pricing. Gross profit increased by$20.3 million ,$14.8 million and$6.3 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. Partially offsetting the increase in gross profit was a$6.4 million increase in depreciation and amortization expense. Gross margin as a percent of revenue was 14.3% and 8.4% in theCurrent Quarter and Prior Quarter, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$7.5 million , or 26.5%, to$35.8 million for theCurrent Quarter compared to$28.3 million for the Prior Quarter. The increase was due primarily to$2.1 million higher wages, associated payroll taxes and employer 401(k) match contributions, a$1.6 million increase in business development costs, a$1.4 million increase in bad debt expense, a$1.1 million increase in incentive and equity-based compensation cost,$0.8 million in rebranding costs,$0.5 million higher information technology costs,$0.5 million in higher contract 41
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labor and
Impairments and Abandonments
$11.1 million of trademark abandonment was recorded in the Oilfield Chemicals segment during theCurrent Quarter . Also,$0.1 million of impairment was recorded in our Water Services segment to write-off the remaining value of
a cost-method investment. Net Interest Expense
Net interest expense increased by$0.8 million , or 106.0%, to$1.5 million for theCurrent Quarter compared to$0.7 million in the Prior Quarter due primarily to higher interest expense due to borrowings in theCurrent Quarter .
Bargain Purchase Gain
A bargain purchase gain of
Net Income
Net Income increased by$5.7 million , or 71.6%, to$13.7 million for theCurrent Quarter compared to$8.0 million for the Prior Quarter, driven primarily by increased revenue, including contributions from our recent acquisitions, while also being negatively impacted in theCurrent Quarter by the trademark abandonment referenced above. 42
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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, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment and abandonment charges or asset write-offs pursuant to GAAP, plus non-cash losses 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/(minus) losses/(gains) on unconsolidated entities less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. 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. 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
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 the 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.
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The following table sets forth our reconciliation of EBITDA and Adjusted EBITDA
to our net income, which is the most directly comparable GAAP measure for the
periods presented:
Three months ended March 31,
2023 2022
(in thousands)
Net income $ 13,705 $ 7,985
Interest expense, net 1,483 720
Income tax expense 198 214Depreciation and amortization 33,538
27,067
EBITDA 48,924
35,986
Non-cash compensation expenses 2,964 3,275 Non-cash loss on sale of assets or subsidiaries(1) 823 520 Non-recurring transaction costs(2) 2,881
3,617
Lease abandonment costs 76 91
Impairments and abandonments 11,166 -
Bargain purchase gain - (11,434)Equity in losses of unconsolidated entities 366 129 Foreign currency loss (gain), net 4
(3)
Adjusted EBITDA $ 67,204 $ 32,181
(1) For all periods presented, the losses were due primarily to sales of real
estate and underutilized or obsolete property and equipment.
For all periods presented, these costs were due primarily to legal-related (2) due diligence costs and rebranding costs as well as costs related to certain
acquired subsidiaries.
EBITDA was$48.9 million for theCurrent Quarter compared to$36.0 million for the Prior Quarter. The$12.9 million increase in EBITDA was driven primarily by an increase of$41.4 million in gross profit partially offset by a$11.4 million bargain purchase gain in the Prior Quarter, trademark abandonment costs of$11.1 million in theCurrent Quarter and a$7.5 million increase in selling, general and administrative in theCurrent Quarter . Adjusted EBITDA was$67.2 million for theCurrent Quarter compared to$32.2 million for the Prior Quarter. The$35.0 million increase is primarily attributable to the items discussed above.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash on hand, borrowing capacity under the Sustainability-Linked Credit Facility, cash flows from operations and proceeds from the sale of excess property and equipment. As ofMarch 31, 2023 , we had$75.5 million of outstanding bank debt, approximately$159.2 million of available borrowing capacity under our Sustainability-Linked Credit Facility, and cash and cash equivalents of$6.0 million . Our primary uses of capital have been to fund current operations, maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions and minority investments, and when appropriate, repurchase shares of Class A common stock in the open market. Depending on available opportunities, market conditions and other factors, we may also issue debt and equity securities in the future, if needed. We prioritize sustained positive free cash flow and a strong balance sheet and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers. 44 Table of Contents Based on our current cash and cash equivalents balance, operating cash flow, available borrowings under our Sustainability-Linked Credit Facility and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants through the next twelve months and beyond, prior to giving effect to any future financing that may occur. We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations and borrowings under our Sustainability-Linked Credit Facility. For a discussion of the Sustainability-Linked Credit Facility, see "-Sustainability-Linked Credit Facility" below. Although we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Sustainability-Linked Credit Facility will be sufficient to fund our operations for at least the next twelve months. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global markets, ESG matters and other factors, many of which are beyond our control. In this regard, the inability of banking and other financial services firms to access liquidity, which has resulted in twoU.S. bank failures and ongoing uncertainty regarding the going concern of certain banks, has resulted in significant disruptions to global markets. Central bank policy actions, bank failures and associated liquidity risks and other factors may negatively impact the value of our Class A and Class B common stock and that of our customers and may reduce our and their ability to access liquidity in the bank and capital markets or result in capital being available on less favorable terms, which could negatively affect our financial condition and that of our customers. During the fourth quarter of 2022, we initiated a quarterly dividend and distribution program of$0.05 per share and$0.05 per unit for holders of Class A and units inSES Holdings, LLC (along with Class B shares), respectively. This resulted in a financing outflow of$6.2 million in theCurrent Quarter , and this quarterly dividend program is expected to continue. All future dividend payments are subject to quarterly review and approval by our board of directors. As ofMarch 31, 2023 , cash and cash equivalents totaled$6.0 million , and we had approximately$159.2 million of available borrowing capacity under our Sustainability-Linked Credit Facility. As ofMarch 31, 2023 , the borrowing base under the Sustainability-Linked Credit Facility was$257.3 million , we had$75.5 million in outstanding borrowings and outstanding letters of credit totaled$22.6 million . As ofMay 1, 2023 , we had$104.0 million in outstanding borrowings, the borrowing base under the Sustainability-Linked Credit Facility was$260.6 million , the outstanding letters of credit totaled$22.6 million , and the available borrowing capacity under the Sustainability-Linked Credit Facility was$134.0 million . Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three months ended March 31, Change
2023 2022 Dollars Percentage
(in thousands)
Net cash used in operating activities $ (18,016) $ (18,550) $ 534 2.9 %
Net cash used in investing activities (30,579) (91) (30,488) (33503.3) %
Net cash provided by (used in) financing activities 47,304 (39,768) 87,072 218.9 %
Subtotal (1,291) (58,409)
Effect of exchange rate changes on cash and cash equivalents (3) 7 (10) NM
Net decrease in cash, cash equivalents and restricted cash
Analysis of Cash Flow Changes between the Three Months Ended
Operating Activities. Net cash used in operating activities was$18.0 million for theCurrent Quarter , compared to$18.6 million in the Prior Quarter. The$0.5 million improvement is comprised of an increase of$34.2 million of net income combined with non-cash adjustments, partially offset by$33.7 million of increased working capital primarily due to the timing of billing and collecting trade receivables connected with increased revenue. 45
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Investing Activities. Net cash used in investing activities was$30.6 million for theCurrent Quarter , compared to$0.1 million for the Prior Quarter. The$30.5 million increase in net cash used in investing activities was due primarily to an increase of$16.4 million spent for acquisitions, net of cash and restricted cash received, a$12.4 million increase in purchases of property and equipment and a$5.4 million decrease in proceeds received from sales of property and equipment partially offset by a decrease of$3.5 million in investments made in non-controlled entities. Financing Activities. Net cash provided by financing activities was$47.3 million for theCurrent Quarter compared to net cash used in financing activities of$39.8 million for the Prior Quarter. The$87.1 million increase in net cash provided by (used in) financing activities was due primarily to borrowings net of debt repayments increasing$78.3 million , an$8.0 million decrease in repurchases of shares of Class A common stock,$5.0 million of cash received from a noncontrolling interest holder in theCurrent Quarter and$2.0 million in debt issuance costs paid in the Prior Quarter partially offset by$6.2 million in dividends paid during theCurrent Quarter .
Sustainability-Linked Credit Facility
OnMarch 17, 2022 (the "Restatement Date"),SES Holdings , a subsidiary of the Company, andSelect Energy Services, LLC ("Select LLC "), a wholly-owned subsidiary ofSES Holdings , entered into a$270.0 million amended and restated senior secured sustainability-linked revolving credit facility (the "Sustainability-Linked Credit Facility"), by and amongSES Holdings , as parent,Select LLC , as borrower and certain ofSES Holdings' subsidiaries, as guarantors, each of the lenders party thereto andWells Fargo Bank, N.A. , as administrative agent, issuing lender and swingline lender (the "Administrative Agent") (which amended and restated the Prior Credit Agreement datedNovember 1, 2017 ). The Sustainability-Linked Credit Facility also has a sublimit of$40.0 million for letters of credit and a sublimit of$27.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders,Select LLC has the option to increase the maximum amount under the senior secured credit facility by$135.0 million during the first three years following the Restatement Date.
Refer to "Note 8-Debt" for further discussion of the Sustainability-Linked Credit Facility.
Contractual Obligations
Our contractual obligations include, among other things, our Sustainability-Linked Credit Facility and operating leases. Refer to "Note 6-Leases" in our 2022 Form 10-K for operating lease obligations as ofDecember 31, 2022 and "Note 8-Debt" in Part I, Item 1 of this Quarterly Report for an update to our Sustainability-Linked Credit Facility as ofMarch 31, 2023 .
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our 2022 Form 10-K.
Recent Accounting Pronouncements
None.
Off-Balance-Sheet Arrangements
As of
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