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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q
(Mark one)

☑ 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: 1-07908

ADAMS RESOURCES & ENERGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
74-1753147
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

17 South Briar Hollow Lane, Suite 100
Houston, Texas 77027
(Address of Principal Executive Offices, including Zip Code)
(713) 881-3600
(Registrant’s Telephone Number, including Area Code)

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

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.10 Par Value AE NYSE American LLC

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 þ No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ 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 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 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

A total of 4,235,750 shares of Common Stock were outstanding at May 1, 2020.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2020 2019
ASSETS
Current assets:
Cash and cash equivalents $ 87,398    $ 112,994   
Restricted cash 8,827    9,261   
Accounts receivable, net of allowance for doubtful
accounts of $117 and $141, respectively
52,941    94,534   
Inventory 10,021    26,407   
Derivative assets 545    —   
Income tax receivable 14,495    2,569   
Prepayments and other current assets 1,306    1,559   
Total current assets 175,533    247,324   
Property and equipment, net 65,381    69,046   
Operating lease right-of-use assets, net 9,090    9,576   
Intangible assets, net 1,465    1,597   
Cash deposits and other assets 2,187    3,299   
Total assets $ 253,656    $ 330,842   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 78,245    $ 147,851   
Accounts payable – related party    
Derivative liabilities 526    —   
Current portion of finance lease obligations 2,193    2,167   
Current portion of operating lease liabilities 2,203    2,252   
Other current liabilities 8,808    7,302   
Total current liabilities 91,981    159,577   
Other long-term liabilities:
Asset retirement obligations 1,585    1,573   
Finance lease obligations 3,818    4,376   
Operating lease liabilities 6,887    7,323   
Deferred taxes and other liabilities 10,059    6,352   
Total liabilities 114,330    179,201   
Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock – $1.00 par value, 960,000 shares
authorized, none outstanding
—    —   
Common stock – $0.10 par value, 7,500,000 shares
authorized, 4,235,750 and 4,235,533 shares outstanding, respectively
423    423   
Contributed capital 12,912    12,778   
Retained earnings 125,991    138,440   
Total shareholders’ equity 139,326    151,641   
Total liabilities and shareholders’ equity $ 253,656    $ 330,842   

See Notes to Unaudited Condensed Consolidated Financial Statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Three Months Ended
March 31,
2020 2019
Revenues:
Marketing $ 337,221    $ 429,761   
Transportation 16,256    15,407   
Total revenues 353,477    445,168   
Costs and expenses:
Marketing 352,865    420,541   
Transportation 13,185    13,101   
General and administrative 2,894    2,684   
Depreciation and amortization 4,473    3,589   
Total costs and expenses 373,417    439,915   
Operating (losses) earnings (19,940)   5,253   
Other income (expense):
Gain on dissolution of investment —    498   
Interest income 365    656   
Interest expense (150)   (65)  
Total other income (expense), net 215    1,089   
(Losses) Earnings before income taxes (19,725)   6,342   
Income tax benefit (provision) 8,298    (1,434)  
Net (losses) earnings $ (11,427)   $ 4,908   
(Losses) Earnings per share:
Basic net (losses) earnings per common share $ (2.70)   $ 1.16   
Diluted net (losses) earnings per common share $ (2.69)   $ 1.16   
Dividends per common share $ 0.24    $ 0.22   


See Notes to Unaudited Condensed Consolidated Financial Statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Three Months Ended
March 31,
2020 2019
Operating activities:
Net (losses) earnings $ (11,427)   $ 4,908   
Adjustments to reconcile net (losses) earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,473    3,589   
Gains on sales of property (140)   (178)  
Provision for doubtful accounts (24)   (32)  
Stock-based compensation expense 134    123   
Deferred income taxes (2,689)   834   
Net change in fair value contracts (19)   19   
Gain on dissolution of AREC —    (498)  
Changes in assets and liabilities:
Accounts receivable 41,617    (2,866)  
Accounts receivable/payable, affiliates   (23)  
Inventories 16,386    (6,458)  
Income tax receivable (5,530)   426   
Prepayments and other current assets 253    (52)  
Accounts payable (68,384)   17,914   
Accrued liabilities 1,506    2,432   
Other (3)   878   
Net cash provided by (used in) operating activities (23,846)   21,016   
Investing activities:
Property and equipment additions (2,212)   (8,351)  
Proceeds from property sales 502    543   
Proceeds from dissolution of AREC —    923   
Insurance and state collateral (deposits) refunds 1,128    842   
Net cash used in investing activities (582)   (6,043)  
Financing activities:
Principal repayments of finance lease obligations (532)   (218)  
Payment of contingent consideration liability (54)   —   
Dividends paid on common stock (1,016)   (928)  
Net cash used in financing activities (1,602)   (1,146)  
(Decrease) Increase in cash and cash equivalents, including restricted cash (26,030)   13,827   
Cash and cash equivalents, including restricted cash, at beginning of period 122,255    117,066   
Cash and cash equivalents, including restricted cash, at end of period $ 96,225    $ 130,893   


See Notes to Unaudited Condensed Consolidated Financial Statements.

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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Total
Common Contributed Retained Shareholders’
Stock Capital Earnings Equity
Balance, January 1, 2020 $ 423    $ 12,778    $ 138,440    $ 151,641   
Net (losses) earnings —    —    (11,427)   (11,427)  
Stock-based compensation expense —    134    —    134   
Dividends declared:
Common stock, $0.24/share
—    —    (1,016)   (1,016)  
Awards under LTIP, $0.24/share
—    —    (6)   (6)  
Balance, March 31, 2020 $ 423    $ 12,912    $ 125,991    $ 139,326   

Total
Common Contributed Retained Shareholders’
Stock Capital Earnings Equity
Balance, January 1, 2019 $ 422    $ 11,948    $ 134,228    $ 146,598   
Net earnings —    —    4,908    4,908   
Stock-based compensation expense —    123    —    123   
Dividends declared:
Common stock, $0.22/share
—    —    (928)   (928)  
Awards under LTIP, $0.22/share
—    —    (2)   (2)  
Balance, March 31, 2019 $ 422    $ 12,071    $ 138,206    $ 150,699   


See Notes to Unaudited Condensed Consolidated Financial Statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

Adams Resources & Energy, Inc. (“AE”) is a publicly traded Delaware corporation organized in 1973, the common shares of which are listed on the NYSE American LLC under the ticker symbol “AE”. We, through our subsidiaries, are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.  

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk. See Note 7 for further information regarding our business segments.

Basis of Presentation

Our results of operations for the three months ended March 31, 2020 are not necessarily indicative of results expected for the full year of 2020. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals necessary for fair presentation.  The condensed consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the rules of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) filed with the SEC on March 6, 2020. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to use estimates and assumptions that affect the reported amount 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. We base our estimates and judgments on historical experience and on various other assumptions and information we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. While we believe the estimates and assumptions used in the preparation of these condensed consolidated financial statements are appropriate, actual results could differ from those estimates.



Note 2. Summary of Significant Accounting Policies

Cash, Cash Equivalents and Restricted Cash

Restricted cash represents an amount held in a segregated bank account by Wells Fargo as collateral for outstanding letters of credit.

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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported in the unaudited condensed consolidated balance sheets that totals to the amounts shown in the unaudited condensed consolidated statements of cash flows at the dates indicated (in thousands):

March 31, December 31,
2020 2019
Cash and cash equivalents $ 87,398    $ 112,994   
Restricted cash 8,827    9,261   
Total cash, cash equivalents and restricted cash shown in the
unaudited condensed consolidated statements of cash flows $ 96,225    $ 122,255   

Common Shares Outstanding

The following table reconciles our outstanding common stock for the periods indicated:

Common
shares
Balance, January 1, 2020 4,235,533   
Vesting of restricted stock unit awards 217   
Balance, March 31, 2020 4,235,750   

Earnings Per Share

Basic earnings (losses) per share is computed by dividing our net earnings (losses) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (losses) per share is computed by giving effect to all potential shares of common stock outstanding, including our stock related to unvested restricted stock unit awards. Unvested restricted stock unit awards granted under the Adams Resources & Energy, Inc. 2018 Long-Term Incentive Plan (“2018 LTIP”) are not considered to be participating securities as the holders of these shares do not have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares (see Note 10 for further discussion).


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the calculation of basic and diluted (losses) earnings per share was as follows for the periods indicated (in thousands, except per share data):
Three Months Ended
March 31,
2020 2019
(Losses) Earnings per share — numerator:
Net (losses) earnings $ (11,427)   $ 4,908   
Denominator:
Basic weighted average number of shares outstanding 4,236    4,218   
Basic (losses) earnings per share $ (2.70)   $ 1.16   
Diluted (losses) earnings per share:
Diluted weighted average number of shares outstanding:
Common shares 4,236    4,218   
Restricted stock unit awards 12     
Performance share unit awards (1)
  —   
Total 4,250    4,224   
Diluted (losses) earnings per share $ (2.69)   $ 1.16   
_______________
(1)The dilutive effect of performance share awards are included in the calculation of diluted earnings per share when the performance share award performance conditions have been achieved. The performance conditions for the performance share unit awards granted in 2018 were achieved as of December 31, 2018.

Fair Value Measurements

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities are recorded at fair value based on market quotations from actively traded liquid markets.

A three-tier hierarchy has been established that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate these fair values.  The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3).  At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.

Fair value contracts consist of derivative financial instruments and are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during any current reporting periods (see Note 9 for further information).

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of these items and their respective tax basis.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses (“NOL”) incurred in tax years 2018, 2019 and 2020 to offset 100 percent of taxable income and be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We are continuing to evaluate the full impact of the CARES Act. However, we have determined that the NOL carryback provision in the CARES Act would result in a cash benefit to us, and we have recorded an income tax receivable at March 31, 2020 of approximately $6.4 million for the benefit of carrying back the NOLs for the fiscal years 2018 and 2019. We are forecasting an NOL for fiscal year 2020 and expect to carry it back to previous years. As a result, we have also included the 2020 provisional amounts in income tax receivable at March 31, 2020. As we are carrying the losses back to years beginning before January 1, 2018, the receivables were recorded at the previous 35 percent federal tax rate rather than the current statutory rate of 21 percent.

Inventory

Inventory consists of crude oil held in storage tanks and at third-party pipelines as part of our crude oil marketing operations. Crude oil inventory is carried at the lower of cost or net realizable value. At the end of each reporting period, we assess the carrying value of our inventory and make adjustments necessary to reduce the carrying value to the applicable net realizable value. Any resulting adjustments are a component of marketing costs and expenses on our consolidated statements of operations. During the three months ended March 31, 2020, we recorded a charge of $24.2 million related to the write-down of our crude oil inventory due to significant declines in prices in 2020. There were no charges recognized during the three months ended March 31, 2019.

Property and Equipment

Property and equipment is recorded at cost. Expenditures for additions, improvements and other enhancements to property and equipment are capitalized, and minor replacements, maintenance and repairs that do not extend asset life or add value are charged to expense as incurred. When property and equipment assets are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in results of operations in operating costs and expenses for the respective period. Property and equipment, except for land, is depreciated using the straight-line method over the estimated average useful lives ranging from two to thirty-nine years.

We review our long-lived assets for impairment whenever there is evidence that the carrying value of these assets may not be recoverable. Any impairment recognized is permanent and may not be restored. Property and equipment is reviewed at the lowest level of identifiable cash flows. For properties requiring impairment, the fair value is estimated based on an internal discounted cash flow model of future cash flows.

See Note 5 for additional information regarding our property and equipment.

Stock-Based Compensation

We measure all share-based payments, including the issuance of restricted stock units and performance share units to employees and board members, using a fair-value based method. The cost of services received from employees and non-employee board members in exchange for awards of equity instruments is recognized in the consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. The fair value of restricted stock unit awards and performance share unit awards is based on the closing price of our common stock on the grant date. We account for forfeitures as they occur. See Note 10 for additional information regarding our 2018 LTIP.



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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Revenue Recognition

Revenue Disaggregation

The following table disaggregates our revenue by segment and by major source for the periods indicated (in thousands):
Reporting Segments
Marketing Transportation Total
Three Months Ended March 31, 2020
Revenues from contracts with customers $ 319,717    $ 16,256    $ 335,973   
Other (1)
17,504    —    17,504   
Total revenues $ 337,221    $ 16,256    $ 353,477   
Timing of revenue recognition:
Goods transferred at a point in time $ 319,717    $ —    $ 319,717   
Services transferred over time —    16,256    16,256   
Total revenues from contracts with customers $ 319,717    $ 16,256    $ 335,973   
Three Months Ended March 31, 2019
Revenues from contracts with customers $ 360,731    $ 15,407    $ 376,138   
Other (1)
69,030    —    69,030   
Total revenues $ 429,761    $ 15,407    $ 445,168   
Timing of revenue recognition:
Goods transferred at a point in time $ 360,731    $ —    $ 360,731   
Services transferred over time —    15,407    15,407   
Total revenues from contracts with customers $ 360,731    $ 15,407    $ 376,138   
_______________
(1)Other marketing revenues are recognized under Accounting Standards Board (“ASC”) 815, Derivatives and Hedging, and ASC 845, Nonmonetary Transactions – Purchases and Sales of Inventory with the Same Counterparty.

Other Crude Oil Marketing Revenue

Certain of the commodity purchase and sale contracts utilized by our crude oil marketing business qualify as derivative instruments with certain specifically identified contracts also designated as trading activity. From the time of contract origination, these contracts are marked-to-market and recorded on a net revenue basis in the accompanying consolidated financial statements.

Certain of our crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a variety of reasons, including effecting the transportation of the commodity, to minimize credit exposure, and/or to meet the competitive demands of the customer. These buy/sell arrangements are reflected on a net revenue basis in the accompanying consolidated financial statements.

Reporting these crude oil contracts on a gross revenue basis would increase our reported revenues as follows for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Revenue gross-up $ 157,439    $ 242,123   
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Prepayments and Other Current Assets

The components of prepayments and other current assets were as follows at the dates indicated (in thousands):
March 31, December 31,
2020 2019
Insurance premiums $ 346    $ 473   
Rents, licenses and other 960    1,086   
Total $ 1,306    $ 1,559   


Note 5. Property and Equipment

The historical costs of our property and equipment and related accumulated depreciation balances were as follows at the dates indicated (in thousands):
Estimated
Useful Life March 31, December 31,
in Years 2020 2019
Tractors and trailers (1)
5 – 6
$ 116,509    $ 115,693   
Field equipment (2)
2 – 5
25,149    25,094   
Buildings
5 – 39
16,055    16,055   
Office equipment
2 – 5
1,958    1,951   
Land 1,790    1,790   
Construction in progress 283    3,661   
Total 161,744    164,244   
Less accumulated depreciation (96,363)   (95,198)  
Property and equipment, net $ 65,381    $ 69,046   
_______________
(1)Amounts include tractors held under finance leases in our crude oil marketing segment. At March 31, 2020 and December 31, 2019, gross property and equipment associated with these assets held under finance leases were $5.5 million and $5.5 million, respectively. Accumulated amortization associated with these assets held under these finance leases were $2.0 million and $1.7 million at March 31, 2020 and December 31, 2019, respectively (see Note 12 for further information).
(2)Amounts include a tank storage and throughput arrangement in our crude oil marketing segment held under a finance lease. At March 31, 2020 and December 31, 2019, gross property and equipment associated with these assets held under a finance lease were $3.3 million and $3.3 million, respectively. Accumulated amortization associated with these assets held under a finance lease was $1.0 million and $0.7 million at March 31, 2020 and December 31, 2019, respectively (see Note 12 for further information).

Components of depreciation and amortization expense were as follows for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Depreciation and amortization, excluding amounts under finance leases $ 3,920    $ 3,344   
Amortization of property and equipment under finance leases 553    245   
Total depreciation and amortization $ 4,473    $ 3,589   

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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Cash Deposits and Other Assets

Components of cash deposits and other assets were as follows at the dates indicated (in thousands):

March 31, December 31,
2020 2019
Amounts associated with liability insurance program:
Insurance collateral deposits $ 709    $ 1,233   
Excess loss fund 620    943   
Accumulated interest income 332    609   
Other amounts:
State collateral deposits 33    37   
Materials and supplies 493    477   
Total $ 2,187    $ 3,299   

We have established certain deposits to support participation in our liability insurance program and remittance of state crude oil severance taxes and other state collateral deposits. Insurance collateral deposits are held by the insurance company to cover past or potential open claims based upon a percentage of the maximum assessment under our insurance policies. Insurance collateral deposits are invested at the discretion of our insurance carrier. Excess amounts in our loss fund represent premium payments in excess of claims incurred to date that we may be entitled to recover through settlement or commutation as claim periods are closed. Interest income is earned on the majority of amounts held by the insurance companies and will be paid to us upon settlement of policy years.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Segment Reporting

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk.

Financial information by reporting segment was as follows for the periods indicated (in thousands):

Reporting Segments
Marketing Transportation Other Total
Three Months Ended March 31, 2020
Revenues $ 337,221    $ 16,256    $ —    $ 353,477   
Segment operating (losses) earnings (1)
(17,651)   605    —    (17,046)  
Depreciation and amortization 2,007    2,466    —    4,473   
Property and equipment additions (2)
2,032    41    139    2,212   
Three Months Ended March 31, 2019
Revenues $ 429,761    $ 15,407    $ —    $ 445,168   
Segment operating (losses) earnings (1)
7,098    839    —    7,937   
Depreciation and amortization 2,122    1,467    —    3,589   
Property and equipment additions (3)
1,654    6,697    —    8,351   
_______________
(1)Our crude oil marketing segment’s operating (losses) earnings included inventory valuation losses of $24.2 million and inventory liquidation gains of $4.5 million for the three months ended March 31, 2020 and 2019, respectively.
(2)During the three months ended March 31, 2020, we had $0.1 million of property and equipment additions for leasehold improvements at our corporate headquarters, which is not attributed or allocated to any of our reporting segments.
(3)Our crude oil marketing segment’s property and equipment additions do not include approximately $0.6 million of tractors acquired under finance leases during the three months ended March 31, 2019. See Note 12 for further information.

Segment operating (losses) earnings reflect revenues net of operating costs and depreciation and amortization expense and are reconciled to (losses) earnings before income taxes, as follows for the periods indicated (in thousands):

Three Months Ended
March 31,
2020 2019
Segment operating (losses) earnings $ (17,046)   $ 7,937   
General and administrative (2,894)   (2,684)  
Operating (losses) earnings (19,940)   5,253   
Gain on dissolution of investment —    498   
Interest income 365    656   
Interest expense (150)   (65)  
(Losses) Earnings before income taxes $ (19,725)   $ 6,342   


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets by business segment were as follows at the dates indicated (in thousands):

March 31, December 31,
2020 2019
Reporting segment:
Marketing $ 81,887    $ 141,402   
Transportation 56,933    58,483   
Cash and other 114,836    130,957   
Total assets $ 253,656    $ 330,842   

There were no intersegment sales during the three months ended March 31, 2020 and 2019, respectively. Other identifiable assets are primarily corporate cash, corporate accounts receivable and properties not identified with any specific segment of our business. Accounting policies for transactions between reportable segments are consistent with applicable accounting policies as disclosed herein.


Note 8. Transactions with Affiliates

We enter into certain transactions in the normal course of business with affiliated entities including direct cost reimbursement for shared phone and administrative services. In addition, we lease our corporate office space in a building operated by 17 South Briar Hollow Lane, LLC, an affiliate of KSA Industries, Inc., which is an affiliated entity.

Activities with affiliates were as follows for the periods indicated (in thousands):

Three Months Ended
March 31,
2020 2019
Affiliate billings to us $ 17    $ 17   
Billings to affiliates    
Rentals paid to affiliate 122    122   



Note 9. Derivative Instruments and Fair Value Measurements

Derivative Instruments

In the normal course of our operations, our crude oil marketing segment purchases and sells crude oil. We seek to profit by procuring the commodity as it is produced and then delivering the material to the end users or the intermediate use marketplace. As typical for the industry, these transactions are made pursuant to the terms of forward month commodity purchase and/or sale contracts. Some of these contracts meet the definition of a derivative instrument, and therefore, we account for these contracts at fair value, unless the normal purchase and sale exception is applicable. These types of underlying contracts are standard for the industry and are the governing document for our crude oil marketing segment. None of our derivative instruments have been designated as hedging instruments.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2020, we had in place four commodity purchase and sale contracts, all of which had fair values associated with them as the contractual prices of crude oil were outside of the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately:
322 barrels per day of crude oil during April 2020; and
258 barrels per day of crude oil during May 2020 through December 2020.
At December 31, 2019, we had in place six commodity purchase and sale contracts with no fair value associated with them as the contractual prices of crude oil were within the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately:
258 barrels per day of crude oil during January 2020 through February 2020;
322 barrels per day of crude oil during March 2020 through April 2020; and
258 barrels per day of crude oil during May 2020 through December 2020.
The estimated fair value of forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated balance sheet were as follows at the dates indicated (in thousands):
Balance Sheet Location and Amount
Current Other Current Other
Assets Assets Liabilities Liabilities
March 31, 2020
Asset derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation $ 545    $ —    $ —    $ —   
Liability derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation —    —    526    —   
Less counterparty offsets —    —    —    —   
As reported fair value contracts $ 545    $ —    $ 526    $ —   
December 31, 2019
Asset derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation $ —    $ —    $ —    $ —   
Liability derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation —    —    —    —   
Less counterparty offsets —    —    —    —   
As reported fair value contracts $ —    $ —    $ —    $ —   

We only enter into commodity contracts with creditworthy counterparties and evaluate our exposure to significant counterparties on an ongoing basis. At March 31, 2020 and December 31, 2019, we were not holding nor have we posted any collateral to support our forward month fair value derivative activity. We are not subject to any credit-risk related trigger events. We have no other financial investment arrangements that would serve to offset our derivative contracts.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated statements of operations were as follows for the periods indicated (in thousands):

Gains (losses)
Three Months Ended
March 31,
2020 2019
Revenues – marketing $ 19    $ (20)  

Fair Value Measurements

The following tables set forth, by level with the Level 1, 2 and 3 fair value hierarchy, the carrying values of our financial assets and liabilities at the dates indicated (in thousands):

Fair Value Measurements Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Assets Observable Unobservable
and Liabilities Inputs Inputs Counterparty
(Level 1) (Level 2) (Level 3) Offsets Total
March 31, 2020
Derivatives:
Current assets $ —    $ 545    $ —    $ —    $ 545   
Current liabilities —    (526)   —    —    (526)  
Net value $ —    $ 19    $ —    $ —    $ 19   
December 31, 2019
Derivatives:
Current assets $ —    $ —    $ —    $ —    $ —   
Current liabilities —    —    —    —    —   
Net value $ —    $ —    $ —    $ —    $ —   

These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value. Our assessment of the relative significance of these inputs requires judgments.

When determining fair value measurements, we make credit valuation adjustments to reflect both our own nonperformance risk and our counterparty’s nonperformance risk. When adjusting the fair value of derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements. Credit valuation adjustments utilize Level 3 inputs, such as credit scores to evaluate the likelihood of default by us or our counterparties. At March 31, 2020 and December 31, 2019, credit valuation adjustments were not significant to the overall valuation of our fair value contracts. As a result, applicable fair value assets and liabilities are included in their entirety in the fair value hierarchy.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Stock-Based Compensation Plan

We have in place a long-term incentive plan under which any employee or non-employee director who provides services to us is eligible to participate in the plan. The 2018 LTIP, which is overseen by the Compensation Committee of our Board of Directors, provides for the grant of various types of equity awards, of which restricted stock unit awards and performance-based compensation awards have been granted. The maximum number of shares authorized for issuance under the 2018 LTIP is 150,000 shares, and the 2018 LTIP is effective until May 8, 2028. After giving effect to awards granted under the 2018 LTIP, forfeitures under the 2018 LTIP and assuming the potential achievement of the maximum amounts of the performance factors through March 31, 2020, a total of 79,228 shares were available for issuance.

Compensation expense recognized in connection with equity-based awards was as follows for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Compensation expense $ 134    $ 123   

At March 31, 2020 and December 31, 2019, we had $28,800 and $23,600, respectively, of accrued dividend amounts for awards granted under the 2018 LTIP.

Restricted Stock Unit Awards

The following table presents restricted stock unit award activity for the periods indicated:
Weighted-
Average Grant
Number of Date Fair Value
Shares
per Share (1)
Restricted stock unit awards at January 1, 2020
18,782    $ 37.05   
Granted (2)
20,346    $ 24.85   
Vested (217)   $ 37.61   
Forfeited (282)   $ 37.61   
Restricted stock unit awards at March 31, 2020
38,629    $ 30.62   
_______________
(1)Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.
(2)The aggregate grant date fair value of restricted stock unit awards issued during 2020 was $0.5 million based on a grant date market price of our common shares ranging from $24.77 to $26.23 per share.

Unrecognized compensation cost associated with restricted stock unit awards was approximately $0.7 million at March 31, 2020. Due to the graded vesting provisions of these awards, we expect to recognize the remaining compensation cost for these awards over a weighted-average period of 1.7 years.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Performance Share Unit Awards

The following table presents performance share unit award activity for the periods indicated:
Weighted-
Average Grant
Number of Date Fair Value
Shares
per Share (1)
Performance share unit awards at January 1, 2020
2,787    $ 43.00   
Granted (2)
10,781    $ 24.92   
Vested —    $ —   
Forfeited (27)   $ 43.00   
Performance share unit awards at March 31, 2020
13,541    $ 28.60   
_______________
(1)Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.
(2)The aggregate grant date fair value of performance share unit awards issued during 2020 was $0.2 million based on a grant date market price of our common shares ranging from $24.77 to $26.23 per share and assuming a performance factor of 100 percent.

Unrecognized compensation cost associated with performance share unit awards was approximately $0.3 million at March 31, 2020. We expect to recognize the remaining compensation cost for these awards over a weighted-average period of 2.7 years.


Note 11. Supplemental Cash Flow Information

Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Cash paid for interest $ 150    $ 65   
Cash paid for federal and state income taxes 21     
Non-cash transactions:
Change in accounts payable related to property and equipment additions 1,129    (683)  
Property and equipment acquired under finance leases —    556   

See Note 12 for information related to other non-cash transactions related to leases.


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Leases

The following table provides the components of lease expense for the periods indicated (in thousands):

Three Months Ended
March 31,
2020 2019
Finance lease cost:
Amortization of ROU assets $ 553    $ 245   
Interest on lease liabilities 74    45   
Operating lease cost 679    862   
Short-term lease cost 2,503    1,965   
Total lease expense $ 3,809    $ 3,117   

The following table provides supplemental cash flow and other information related to leases for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases (1)
$ 678    $ 861   
Operating cash flows from finance leases 105    30   
Financing cash flows from finance leases 532    218   
ROU assets obtained in exchange for new lease liabilities:
Finance leases —    556   
Operating leases 81    11,410   
______________
(1)Amounts are included in Other operating activities on the unaudited condensed consolidated statements of cash flows.

The following table provides the lease terms and discount rates for the periods indicated:

Three Months Ended
March 31,
2020 2019
Weighted-average remaining lease term (years):
Finance leases 2.78 4.21
Operating leases 4.58 5.41
Weighted-average discount rate:
Finance leases 4.9  % 4.7  %
Operating leases 5.0  % 5.0  %


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides supplemental balance sheet information related to leases at the dates indicated (in thousands):
March 31, December 31,
2020 2019
Assets
Finance lease ROU assets (1)
$ 5,830    $ 6,384   
Operating lease ROU assets 9,090    9,576   
Liabilities
Current
Finance lease liabilities 2,193    2,167   
Operating lease liabilities 2,203    2,252   
Noncurrent
Finance lease liabilities 3,818    4,376   
Operating lease liabilities 6,887    7,323   
______________
(1)Amounts are included in Property and equipment, net on the unaudited condensed consolidated balance sheets.

The following table provides maturities of undiscounted lease liabilities at March 31, 2020 (in thousands):
Finance Operating
Lease Lease
Remainder of 2020 $ 1,818    $ 2,007   
2021 2,426    2,285   
2022 1,492    1,942   
2023 642    1,778   
2024 39    1,668   
Thereafter —    443   
Total lease payments 6,417    10,123   
Less: Interest (406)   (1,033)  
Present value of lease liabilities 6,011    9,090   
Less: Current portion of lease obligation (2,193)   (2,203)  
Total long-term lease obligation $ 3,818    $ 6,887   


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides maturities of undiscounted lease liabilities at December 31, 2019 (in thousands):
Finance Operating
Lease Lease
2020 $ 2,426    $ 2,660   
2021 2,426    2,256   
2022 1,492    1,914   
2023 642    1,776   
2024 37    1,668   
Thereafter —    443   
Total lease payments 7,023    10,717   
Less: Interest (480)   (1,142)  
Present value of lease liabilities 6,543    9,575   
Less: Current portion of lease obligation (2,167)   (2,252)  
Total long-term lease obligation $ 4,376    $ 7,323   


Note 13. Commitments and Contingencies

Insurance Policies

We establish a liability under our automobile and workers’ compensation insurance policies for expected claims incurred but not reported on a monthly basis. As claims are paid, the liability is relieved. Our accruals for automobile and workers’ compensation claims are presented in the table below.

For periods prior to October 1, 2017, we pre-funded our estimated claims, and therefore, we could either receive a return of premium paid or be assessed for additional premiums up to pre-established limits. Additionally, in certain instances, the risk of insured losses was shared with a group of similarly situated entities through an insurance captive. We have appropriately recognized estimated expenses and liabilities related to these policies for losses incurred but not reported to us or our insurance carrier. The amount of pre-funded insurance premiums left to cover potential future losses are presented in the table below. If the potential insurance claims do not further develop, the pre-funded premiums will be returned to us as a premium refund.

The amount of pre-funded insurance premiums left to cover potential future losses related to periods prior to October 1, 2017, and our accruals for automobile and workers’ compensation claims were as follows at the dates indicated (in thousands):
March 31, December 31,
2020 2019
Pre-funded premiums for losses incurred but not reported $ 58    $ 168   
Accrued automobile and workers’ compensation claims 3,170    2,956   


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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We maintain a self-insurance program for managing employee medical claims. A liability for expected claims incurred but not reported is established on a monthly basis. As claims are paid, the liability is relieved. We also maintain third party insurance stop-loss coverage for individual medical claims exceeding a certain minimum threshold. In addition, we maintain $1.4 million of umbrella insurance coverage for annual aggregate medical claims exceeding approximately $7.5 million. Medical accrual amounts were as follows at the dates indicated (in thousands):
March 31, December 31,
2020 2019
Accrued medical claims $ 1,329    $ 1,016   

Legal Proceedings

On August 15, 2019, we received a notice from the Internal Revenue Service (the “IRS”) regarding a proposed penalty of approximately $1.2 million for our 2017 tax year information returns. The notice alleges that certain taxpayer identification numbers supplied to the IRS for our returns in 2017 were either missing or incorrect and that certain filings were late. We responded to the IRS on September 25, 2019 disputing the proposed penalty and requesting that the amount be waived, abated or a hearing held. On March 11, 2020, we received a response from the IRS indicating that they had reviewed our response and waived the full penalty. As such, this matter will not have a material impact on our consolidated financial position, results of operations or cash flows.

Litigation

From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. Primarily as an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims and other items of general liability as would be typical for the industry. We are presently unaware of any claims against us that are either outside the scope of insurance coverage or that may exceed the level of insurance coverage and could potentially represent a material adverse effect on our financial position or results of operations.


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Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and accompanying Notes included in this quarterly report on Form 10-Q and the Audited Consolidated Financial Statements and related Notes, together with our discussion and analysis of financial position and results of operations, included in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), as filed on March 6, 2020 with the U.S. Securities and Exchange Commission (“SEC”).  Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).


Cautionary Statement Regarding Forward-Looking Information

This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “seek,” “goal,” “estimate,” “forecast,” “intend,” “could,” “should,” “would,” “will,” “believe,” “may,” “potential” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that our expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct.  Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Part I, Item 1A of our 2019 Form 10-K and within Part II, Item 1A of this quarterly report.  If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected.  You should not put undue reliance on any forward-looking statements.  The forward-looking statements in this quarterly report speak only as of the date hereof.  Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.


Overview of Business

Adams Resources & Energy, Inc. (“AE”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.  

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk. See Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our business segments.


Recent Developments and Outlook

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve.
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We are dependent on our workforce of truck drivers to transport products for our customers. Developments such as social distancing and shelter-in-place directives thus far have not had a significant impact on our ability to deploy our workforce effectively as the transportation industry has been deemed an essential service under current Cybersecurity and Infrastructure Security Agency guidelines. We have taken measures to seek to ensure the safety of our employees and operations while maintaining uninterrupted service to our customers. While expected to be temporary, prolonged workforce disruptions may negatively impact our revenues in 2020 and our overall liquidity.

Thus far, the adverse economic effects of the COVID-19 outbreak have not had a material effect on demand for our transportation services based on the restrictions in place by governments trying to curb the outbreak and changes in consumer behavior. However, continued restrictions over a longer time period may lead to us not achieving our profitability goals in 2020, and our overall liquidity may decline.

Our transportation operations have remained steady during the efforts to curtail the spread of the COVID-19 outbreak in the U.S. as we have transported products including bleach, disinfectant, soap and other similar products that are in high demand.

In March 2020, members of OPEC failed to agree on crude oil production levels, which has resulted in an increased supply of crude oil and has led to a substantial decline in crude oil prices and an increasingly volatile market. As a result, our crude oil marketing operations have declined as low crude oil prices have negatively impacted production of crude oil, and demand for crude oil and other related products has significantly decreased due to the global economic slowdown from COVID-19. While we consider the lower crude oil price and decrease in demand to be temporary, if it continues, it may materially affect purchases and sales of crude oil for 2020 and our overall liquidity.

At March 31, 2020, we had 494,812 barrels of crude oil in inventory, and during the three months ended March 31, 2020, we recognized an inventory valuation loss of approximately $24.2 million as the price of our inventory declined from $61.93 per barrel at December 31, 2019 to $20.25 per barrel at March 31, 2020. Further valuation losses may occur if the price of crude oil continues to decline.

The safety of our employees and operations while providing uninterrupted service to our customers remains our primary focus. We are actively monitoring the global situation and its effect on our financial condition, liquidity, operations, customers, industry and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we cannot estimate the length or gravity of the impacts of these events at this time. If the pandemic and decline in oil prices continue, they may have a material adverse effect on our results of future operations, financial position and liquidity in 2020.

We plan to continue to operate our remaining business segments with internally generated cash flows during the remainder of 2020, but intend to remain flexible as the focus will be on increasing efficiencies and on business development opportunities. During the remainder of 2020, we plan to leverage our investment in our transportation segment’s Houston terminal with the continued efforts to diversify service offerings, and we plan to grow in new or existing areas with our crude oil marketing segment.



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Results of Operations

Marketing

Our crude oil marketing segment revenues, operating (losses) earnings and selected costs were as follows for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Change (1)
Revenues $ 337,221    $ 429,761    (22  %)
Operating (losses) earnings (2)
(17,651)