Select Water Solutions, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2023; comparisons are with Q3 2022. Select provides water-management and chemical solutions to the U.S. energy industry through Water Services, Water Infrastructure, and Chemical Technologies. The company changed its name from Select Energy Services, Inc. in May 2023. Effective June 1, certain water sourcing and transfer activities were moved from Water Infrastructure to Water Services; prior-period segment figures were recast.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $389.3 million | $375.1 million | $1,210.5 million | $1,005.7 million |
| Gross profit / margin | $56.3 million / 14.5% | $58.8 million / 15.7% | $177.1 million / 14.6% | $119.2 million / 11.9% |
| Operating income | $16.8 million | $28.4 million | $54.5 million | $32.4 million |
| Net income | $15.3 million | $24.7 million | $51.6 million | $47.3 million |
| Net income attributable to Select | $14.3 million | $21.3 million | $46.8 million | $40.6 million |
| Adjusted EBITDA | $63.0 million | $62.8 million | $200.0 million | $142.6 million |
Q3 revenue rose 3.8% year over year. Water Infrastructure revenue increased 86.1% to $58.4 million, mainly reflecting acquisitions and growth in recycling and treatment agreements; Water Services revenue fell 4.7% to $251.9 million amid lower activity and reduced fresh-water sourcing; Chemical Technologies revenue was broadly flat at $79.0 million. Q3 net income declined 38.0%, primarily as selling, general and administrative expense increased 30.9% to $39.0 million. Nine-month revenue increased 20.4% and net income increased 9.1%.
Nine-month operating cash flow was $202.2 million, versus cash used of $2.1 million in the prior-year period. Investing cash outflow was $104.9 million, including $102.4 million of property and equipment purchases; financing cash outflow was $79.5 million, including $49.9 million of share repurchases and $17.9 million of dividends and distributions. Cash increased $17.7 million to $25.0 million. Management attributed much of the operating cash flow improvement to working-capital changes, particularly receivables collections.
Balance sheet, liquidity, and capital allocation
At September 30, cash was $25.0 million and current assets were $470.2 million versus current liabilities of $220.7 million. The company had no revolving-facility borrowings, $14.8 million of letters of credit, and $224.0 million of available borrowing capacity under its $270 million sustainability-linked facility; the borrowing base was $238.8 million. Long-term debt was zero, compared with $16.0 million at December 31, 2022. The company reported compliance with debt covenants.
Management stated that cash, operating cash flow, and available facility capacity should be sufficient for obligations and operations for at least the next 12 months. The company paid a quarterly dividend of $0.05 per share/unit during the period; after quarter-end, the board declared $0.06 per share/unit, payable November 17, 2023, subject to the usual review and approval of future dividends.
Material changes, outlook, and risks
- Q3 gross margin fell from 15.7% to 14.5%, with lower Water Services margins and higher depreciation partly offset by improved Water Infrastructure and Chemical Technologies margins. Nine-month gross margin improved to 14.6% from 11.9%.
- Acquisitions, including Breakwater and Cypress, and other asset purchases expanded infrastructure and contributed to revenue growth. The company also invested $102.4 million in property and equipment during the first nine months.
- Unusual costs included $4.3 million of Q3 rebranding costs in SG&A ($6.8 million for the nine-month period) and $11.1 million of trademark abandonment expense in the nine-month period. The prior-year nine-month comparison included a $13.8 million bargain purchase gain.
- Management cited lower Q3 oil prices versus the preceding quarter and materially lower natural gas prices, which contributed to activity reductions. It also noted that completion efficiencies can shorten time on site and reduce revenue for certain day-rate services.
- Risks include commodity-price and customer-spending volatility, geopolitical and macroeconomic uncertainty, interest rates and capital-market access, regulation and permitting, customer consolidation, competition, labor and supply availability, and environmental, safety, and operational exposures. The filing provides no quantified revenue or earnings guidance.
- Ordinary-course lawsuits and claims, including environmental and employee-related matters, are not expected by management to have a material adverse effect; outcomes remain uncertain. A potential future Tax Receivable Agreement liability was not recognized because payment was not considered probable or reasonably estimable.
Key facts for investors to verify
- Whether receivables collections and operating cash flow remain strong, given that working-capital changes drove much of the year-to-date cash flow improvement.
- Whether Water Services activity and margins recover, and whether Water Infrastructure recycling agreements deliver expected growth and returns.
- How much of reported growth reflects acquisitions versus organic activity, and the ongoing impact of acquisition-related depreciation and amortization.
- Future capital spending, borrowing-base availability, covenant headroom, and the sustainability of dividends and repurchases.
- Potential tax valuation-allowance release and any resulting Tax Receivable Agreement liability, along with costs from rebranding and other unusual items.