Solaris Oilfield Infrastructure(SOI) - 2024 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This statement outlines potential risks and uncertainties that could cause actual results to differ from forward-looking projections - The Quarterly Report includes forward-looking statements about business strategy, industry, future profitability, capital expenditures, management changes, contracts, costs of being a public corporation, capital programs, and future business and financial performance[5] - Key factors that could cause actual results to differ materially include: domestic capital spending in oil and gas, global economic developments, geopolitical risks (Russia-Ukraine, Israel-Hamas), customer consolidation, inflationary risks, interest rates, supply chain constraints, transportation costs, customer defaults, pandemics, technological advancements, competitive conditions, intellectual property rights, changes in capital availability, tax rates, regulatory changes, cyber-attacks, litigation, business acquisitions (including MER Acquisition risks), natural disasters, and future operating results[5][6] PART I: FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, statements of changes in stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's business, accounting policies, and specific financial line items for the periods ended June 30, 2024 and 2023 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric | June 30, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :-------------------------- | :-------------------------- | :------------------------------ | | Total Assets | 457,764 | 468,297 | | Total Current Assets | 74,747 | 67,141 | | Total Liabilities | 140,581 | 152,717 | | Total Current Liabilities | 59,697 | 37,201 | | Total Stockholders' Equity | 317,183 | 315,580 | - Total assets decreased by $10.5 million from December 31, 2023, to June 30, 2024, while total liabilities decreased by $12.1 million. Total stockholders' equity saw a slight increase of $1.6 million[8] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income over specific reporting periods | Metric | Three Months Ended June 30, 2024 ($ thousands) | Three Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2024 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :--------------------------------------------- | | Total Revenue | 73,886 | 77,202 | 141,776 | 159,924 | | Operating Income | 11,854 | 15,779 | 21,810 | 30,661 | | Net Income | 9,824 | 12,241 | 17,124 | 24,178 | | Net Income Attributable to Solaris Inc. | 6,208 | 7,532 | 10,525 | 15,101 | | Earnings per share of Class A common stock – basic | 0.20 | 0.24 | 0.35 | 0.47 | - Total revenue decreased by 4% for the three months ended June 30, 2024, and by 11% for the six months ended June 30, 2024, compared to the respective prior periods[9] - Net income attributable to Solaris Oilfield Infrastructure, Inc. decreased by $1.3 million (17.6%) for the three months ended June 30, 2024, and by $4.6 million (30.3%) for the six months ended June 30, 2024, compared to the respective prior periods[9] Condensed Consolidated Statements of Changes in Stockholders' Equity This statement tracks changes in the company's equity accounts, including net income, dividends, and share repurchases - Total stockholders' equity increased from $315,580 thousand at December 31, 2023, to $317,183 thousand at June 30, 2024[11] - Share repurchases and retirements reduced Class A Common Stock by $11 thousand and Additional Paid-in Capital by $7,031 thousand during the six months ended June 30, 2024[11] - Dividends paid to Class A common stock shareholders totaled $3,648 thousand for the three months ended March 31, 2024, and $3,641 thousand for the three months ended June 30, 2024[11] Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Six Months Ended June 30, 2024 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | | :---------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | 35,751 | 43,797 | | Net cash used in investing activities | (3,640) | (39,896) | | Net cash used in financing activities | (32,885) | (3,365) | | Net (decrease) increase in cash | (774) | 536 | | Cash and cash equivalents at end of period | 5,059 | 9,371 | - Net cash provided by operating activities decreased by $8.0 million (18.4%) for the six months ended June 30, 2024, compared to the same period in 2023[16] - Net cash used in investing activities significantly decreased by $36.3 million for the six months ended June 30, 2024, primarily due to reduced capital expenditures[16] Note 1. Description of Business This note describes the company's core business activities, products, and services offered to its customers - Solaris Oilfield Infrastructure, Inc. designs and manufactures specialized equipment, provides field technician support, last mile and mobilization logistics services, and software solutions[18] - The company's services aim to help oil and natural gas operators reduce operational footprint and costs during the well completion phase, primarily in active U.S. oil and natural gas basins[18] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries, reporting a non-controlling interest for the portion of Solaris LLC Units not owned by Solaris Inc[19] - Revenue is recognized in accordance with ASC Topic 606, based on the transfer of control of services and products, with transaction prices allocated to multiple performance obligations based on stand-alone selling prices[26][27] Disaggregation of Revenue | Revenue Generating Activity | Three Months Ended June 30, 2024 ($ millions) | Three Months Ended June 30, 2023 ($ millions) | Six Months Ended June 30, 2024 ($ millions) | Six Months Ended June 30, 2023 ($ millions) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :-------------------------------------------- | | Wellsite services | 73.7 | 77.1 | 141.4 | 159.6 | | Transloading and Other | 0.2 | 0.1 | 0.4 | 0.3 | | Total revenue | 73.9 | 77.2 | 141.8 | 159.9 | Note 3. Property, Plant and Equipment This note details the company's tangible assets, including their gross value, accumulated depreciation, and net book value Property, Plant and Equipment, Net | Category | June 30, 2024 ($ millions) | December 31, 2023 ($ millions) | | :--------------------------------- | :------------------------- | :----------------------------- | | Systems and related equipment | 444.0 | 434.4 | | Systems in process | 17.3 | 21.1 | | Property, plant and equipment, gross | 491.2 | 485.5 | | Less: accumulated depreciation | (179.1) | (160.4) | | Property, plant and equipment, net | 312.1 | 325.1 | - Depreciation expense was $9.4 million for the three months ended June 30, 2024 (up from $8.9 million in 2023) and $19.1 million for the six months ended June 30, 2024 (up from $17.1 million in 2023)[31] - During the six months ended June 30, 2024, $3.0 million of systems and related equipment were reclassified from assets held for sale to property, plant and equipment[32] Note 4. Accrued Liabilities This note provides a breakdown of various short-term obligations owed by the company at the balance sheet date Accrued Liabilities Breakdown | Category | June 30, 2024 ($ millions) | December 31, 2023 ($ millions) | | :-------------------------------- | :------------------------- | :----------------------------- | | Employee-related expenses | 5.8 | 7.6 | | Selling, general and administrative | 1.9 | 1.3 | | Cost of services | 7.8 | 3.5 | | Ad valorem taxes | 1.6 | 5.6 | | Total Accrued Liabilities | 18.3 | 20.3 | - Total accrued liabilities decreased from $20.3 million at December 31, 2023, to $18.3 million at June 30, 2024[33] Note 5. Senior Secured Credit Facility This note describes the company's primary debt facility, including outstanding balances, covenants, and available capacity - As of June 30, 2024, the outstanding balance of the senior secured credit facility was $16.0 million, classified as current liabilities, with a maturity date of April 25, 2025[34] - The company was in compliance with all covenants as of June 30, 2024, and had $47.8 million in additional drawing capacity[34] - In July 2024, the company borrowed an additional $33.0 million, reducing availability to $14.8 million, with $29.8 million loaned to Mobile Energy Rental LLC (MER)[34] Note 6. Other Current Liabilities This note covers miscellaneous short-term financial obligations not categorized elsewhere in the balance sheet - Other current liabilities primarily consist of insurance premium financing, totaling $3.0 million as of June 30, 2024, up from $0.4 million at December 31, 2023[35] - In Q2 2024, new insurance premium financing agreements totaling $3.6 million were entered into, carrying an 8.1% annual interest rate with monthly payments of approximately $0.3 million[35] Note 7. Equity This note details the components of stockholders' equity, including common stock, additional paid-in capital, and retained earnings - Solaris LLC paid dividend distributions of $5.3 million in Q2 2024 ($3.6 million to Solaris Inc.) and $10.6 million in H1 2024 ($7.3 million to Solaris Inc.)[36] - Under the share repurchase program, Solaris Inc. purchased and retired 1,108,349 shares of Class A common stock for $8.1 million (average $7.30/share) during the six months ended June 30, 2024[37] - As of June 30, 2024, $15.4 million remained available for future repurchases under the $50.0 million authorized plan[37] Earnings Per Share of Class A Common Stock | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | $0.20 | $0.24 | $0.35 | $0.47 | | Diluted| $0.20 | $0.24 | $0.35 | $0.47 | Note 8. Income Taxes This note explains the company's income tax expense, effective tax rates, and deferred tax liabilities - Combined U.S. federal and state income tax expense was $1.3 million for Q2 2024 (down from $2.7 million in Q2 2023) and $3.2 million for H1 2024 (down from $5.1 million in H1 2023)[42] - Effective combined U.S. federal and state income tax rates were 12.0% for Q2 2024 (down from 17.8% in Q2 2023) and 15.8% for H1 2024 (down from 17.5% in H1 2023), primarily due to Solaris LLC's partnership treatment for federal income tax[42][43] - The liability under the Tax Receivable Agreement was $71.5 million as of June 30, 2024, with $2.7 million classified as current[47] Note 9. Concentrations This note identifies significant concentrations of revenue, accounts receivable, and accounts payable with key customers and suppliers - For Q2 2024, three customers accounted for 18%, 13%, and 12% of total revenues. For H1 2024, three customers accounted for 14%, 13%, and 11% of total revenues[49] - As of June 30, 2024, three customers accounted for 17%, 12%, and 11% of accounts receivable[50] - For Q2 2024, one supplier accounted for 18% of total purchases. As of June 30, 2024, three suppliers accounted for 18%, 11%, and 10% of accounts payable[50] Note 10. Commitments and Contingencies This note discloses potential future obligations and legal matters that could impact the company's financial position - Following a favorable appellate court ruling and settlement, the company reversed $4.3 million of previously recorded property tax expenses in Q2 2024, with $2.5 million recognized as a gain on reversal of property tax contingency and $1.8 million reducing cost of services[51] - The company is defending against a lawsuit by Masaba Inc. for alleged intellectual property infringement, believing the claims are without merit[52] - A guarantee of lease agreement with Solaris Energy Management, LLC (a related party) has a total future guarantee of $2.6 million as of June 30, 2024[53] Note 11. Related Party Transactions This note describes financial dealings and agreements between the company and its affiliated entities or individuals - Solaris LLC paid $0.1 million in Q2 2024 (down from $0.3 million in Q2 2023) and $0.2 million in H1 2024 (down from $0.8 million in H1 2023) for services from Solaris Energy Management, LLC, owned by the CEO[54][55] - Revenues from THRC Affiliates were $4.2 million in Q2 2024 (down from $7.3 million in Q2 2023) and $7.5 million in H1 2024 (down from $12.2 million in H1 2023)[56] - Accounts receivable from THRC Affiliates were $4.4 million as of June 30, 2024, compared to $2.4 million as of December 31, 2023[56] Note 12. Subsequent Events This note reports significant events that occurred after the balance sheet date but before the financial statements were issued - On July 9, 2024, Solaris Inc. agreed to acquire Mobile Energy Rental LLC (MER) for $60.0 million cash (subject to adjustments) and approximately 16.5 million Solaris LLC Units and Class B common stock shares[58] - The MER Acquisition is contingent on shareholder and regulatory approvals and is expected to close by the end of Q3 2024[59] - The company secured a $300.0 million senior secured bridge term loan facility on July 9, 2024, for the MER Acquisition, though alternative financing is sought[59] - On July 30, 2024, Solaris LLC loaned $29.8 million to MER, funded by a $30.0 million draw from its existing credit facility, bearing 10% interest and secured by MER's assets[60][62] - On July 25, 2024, a quarterly cash dividend of $0.12 per share of Class A common stock was approved, payable September 6, 2024[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, operational trends, and future outlook, including a detailed analysis of revenues, costs, and profitability, as well as liquidity and capital resources. It also discusses recent strategic developments like the MER Acquisition Overview This section provides a high-level description of the company's business model and operational focus - Solaris Oilfield Infrastructure, Inc. designs and manufactures specialized equipment, provides field technician support, last mile and mobilization logistics services, and software solutions to help oil and natural gas operators reduce operational footprint and costs during well completion in most active U.S. basins[65] Recent Trends and Outlook This section discusses current industry conditions, market trends, and the company's forward-looking operational expectations - U.S. drilling and completion activity (Baker Hughes U.S. Land Rig Count) decreased by 7% in Q2 2024, with oil-directed rigs down 5% and gas-directed rigs down 13%[66] - Average WTI oil prices ranged $70-$90/barrel in Q2 2024, while Henry Hub natural gas prices remained in the low-$2/MMBtu range, driving the decrease in gas-directed drilling[66] - The company's fully utilized system count averaged 92 in Q2 2024, down from 102 in Q1 2024, aligning with overall drilling trends[66] - Capital expenditures for H1 2024 were approximately $4 million, a 90% decrease compared to H1 2023, following the completion of the prior growth capital program[67] Recent Developments This section highlights significant corporate actions and strategic initiatives undertaken by the company recently - On July 9, 2024, Solaris Inc. entered into a definitive agreement to acquire Mobile Energy Rental LLC (MER), a provider of distributed power solutions[69] - The MER Acquisition consideration includes $60.0 million cash and approximately 16.5 million Solaris LLC Units and Class B common stock shares, contingent on shareholder and regulatory approvals[69][70] - A $300.0 million senior secured bridge term loan facility was secured on July 9, 2024, for the MER Acquisition, with alternative financing being pursued[71] - Solaris LLC loaned $29.8 million to MER on July 30, 2024, funded by a $30.0 million draw from its existing credit facility, to meet MER's outstanding commitments[72] Results of Operations This section analyzes the company's financial performance, including revenue, cost of services, and profitability metrics Key Financial Performance Indicators | Metric | Three Months Ended June 30, 2024 ($ thousands) | Three Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2024 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :--------------------------------------------- | | Total Revenue | 73,886 | 77,202 | 141,776 | 159,924 | | Cost of services (exclusive of D&A) | 46,131 | 45,652 | 86,018 | 98,875 | | Depreciation and amortization | 9,565 | 9,071 | 19,499 | 17,488 | | Gain on reversal of property tax contingency | (2,483) | — | (2,483) | — | | Selling, general and administrative | 8,259 | 6,825 | 16,249 | 13,363 | | Operating Income | 11,854 | 15,779 | 21,810 | 30,661 | | Net Income attributable to Solaris Inc. | 6,208 | 7,532 | 10,525 | 15,101 | - Total revenue decreased by $3.3 million (4%) in Q2 2024 and $18.1 million (11%) in H1 2024, primarily due to a decrease in fully utilized systems (92 in Q2 2024 vs. 108 in Q2 2023) and lower last mile logistics services revenue[75] - Cost of services (excluding D&A) slightly increased by $0.5 million (1%) in Q2 2024 due to increased last mile and ancillary service costs, partially offset by lower system costs and a $1.8 million property tax reversal[76] - Selling, general and administrative expenses increased by $1.4 million (21%) in Q2 2024 and $2.9 million (22%) in H1 2024, mainly due to higher salaries, benefits, wages (increased headcount), professional fees, and office rent[81] - A gain of $2.5 million on reversal of property tax contingency was recognized in Q2 and H1 2024 due to a favorable settlement with Brown County Appraisal District[80] Comparison of Non-GAAP Financial Measures (EBITDA and Adjusted EBITDA) This section reconciles and explains key non-GAAP financial metrics used by management to assess performance - EBITDA decreased by $3.4 million (13.8%) to $21.4 million in Q2 2024 and by $6.8 million (14.1%) to $41.3 million in H1 2024[89] - Adjusted EBITDA decreased by $6.0 million (22.4%) to $20.8 million in Q2 2024 and by $8.5 million (16.3%) to $43.5 million in H1 2024[89] EBITDA and Adjusted EBITDA Reconciliation | Metric | Three Months Ended June 30, 2024 ($ thousands) | Three Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2024 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :--------------------------------------------- | | Net income | 9,824 | 12,241 | 17,124 | 24,178 | | Depreciation and amortization | 9,565 | 9,071 | 19,499 | 17,488 | | Interest expense, net | 685 | 879 | 1,484 | 1,338 | | Income taxes | 1,345 | 2,659 | 3,202 | 5,145 | | EBITDA | 21,419 | 24,850 | 41,309 | 48,149 | | Property tax contingency | (2,483) | — | (2,483) | — | | Accrued property tax | (1,794) | — | (1,794) | — | | Stock-based compensation expense | 2,659 | 1,924 | 4,876 | 3,904 | | Loss (gain) on disposal of assets | 30 | 4 | 42 | (357) | | Credit (recoveries) losses | (174) | (2) | 126 | (2) | | Transaction costs | 1,013 | — | 1,058 | — | | Other | 127 | 49 | 350 | 249 | | Adjusted EBITDA | 20,797 | 26,825 | 43,484 | 51,943 | Liquidity and Capital Resources This section evaluates the company's ability to meet its short-term and long-term financial obligations and fund operations - Primary liquidity sources include cash flows from operations, credit agreement borrowings, and equity offerings. Uses include operations, capital expenditures, share repurchases, and dividends[90] - A $300.0 million Bridge Loan was secured for the MER Acquisition, though alternative financing is expected. In July 2024, $33.0 million was borrowed from the senior secured credit facility, with $14.8 million remaining available[91][93] - During H1 2024, the company repurchased and retired 1,108,349 shares of Class A common stock for $8.1 million under the $50.0 million share repurchase program, with $15.4 million remaining[94] Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2024 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | | :---------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | 35,751 | 43,797 | | Net cash used in investing activities | (3,640) | (39,896) | | Net cash used in financing activities | (32,885) | (3,365) | | Net change in cash | (774) | 536 | - Net cash provided by operating activities decreased by $8.0 million in H1 2024 due to reduced business activity. Net cash used in investing activities decreased by $36.3 million due to lower capital expenditures. Net cash used in financing activities increased significantly to $32.9 million in H1 2024, primarily due to net debt repayments and share repurchases[97][98][99] Critical Accounting Estimates This section identifies accounting estimates that require significant judgment and could materially impact financial results - There were no material changes in critical accounting estimates during the three and six months ended June 30, 2024[101] Off Balance Sheet Arrangements This section discloses any material financial arrangements not recorded on the balance sheet that could affect the company - The company has no material off-balance sheet arrangements and is not materially exposed to related financing, liquidity, market, or credit risks[102] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section addresses the company's exposure to market risks, noting no material changes since the last annual report and highlighting customer credit risk concentrations - The company's exposure to market risk has not materially changed since December 31, 2023[103] - As of June 30, 2024, three customers accounted for 17%, 12%, and 11% of total accounts receivable, with credit risk mitigated through evaluations and payment monitoring[104] Item 4. Controls and Procedures This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures, concluding they were effective as of June 30, 2024, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2024[105] - There were no changes in the internal control over financial reporting during the quarter ended June 30, 2024, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[105] PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures Item 1. Legal Proceedings This section discloses ongoing legal matters, specifically mentioning a lawsuit by Masaba Inc. for alleged intellectual property infringement, which management believes is without merit - The company is involved in a lawsuit by Masaba Inc. in Wyoming District Court related to alleged intellectual property infringement, which management believes is without merit[106] Item 1A. Risk Factors This section updates the risk factors, primarily focusing on new risks associated with the proposed MER Acquisition, including the need for shareholder and regulatory approvals, potential integration difficulties, and significant dilution for current stockholders - The MER Acquisition is subject to various closing conditions, including shareholder approval of stock issuance, regulatory clearance (Hart-Scott-Rodino Act), and absence of material adverse effects[107][108] - Risks include potential delays or failure to obtain approvals, conditions imposed by regulators, difficulties in integrating businesses, loss of key employees or partners, and higher-than-expected integration costs[109][113][114] - The cash consideration for the MER Acquisition is subject to adjustments, which could result in a materially higher payment than anticipated. Current Solaris Inc. stockholders are expected to be significantly diluted, owning approximately 73% of the combined company post-acquisition, compared to MER holders owning 27%[110][112][118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's purchases of equity securities, specifically detailing shares bought to satisfy tax withholding obligations upon the vesting of restricted stock Issuer Purchases of Equity Securities This table details shares purchased by the company to cover tax withholding obligations for vested restricted stock | Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | | :----------------- | :----------------------------------- | :--------------------------- | | April 1 - April 30 | 1,151 | 8.16 | | May 1 - May 31 | — | — | | June 1 - June 30 | 2,412 | 8.93 | - These purchases were made to satisfy tax withholding obligations upon the vesting of restricted stock awarded to employees[122] - As of June 30, 2024, $15,440,555 remained available for repurchase under the publicly announced plan[120] Item 3. Defaults upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[121] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures were reported[121] Item 5. Other Information This section confirms that no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2024[119] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including the Contribution Agreement for the MER Acquisition, Secured Demand Note, organizational documents, and certifications - Key exhibits include the Contribution Agreement for the MER Acquisition (Exhibit 2.1), Secured Demand Note (Exhibit 10.1), Amended and Restated Certificate of Incorporation (Exhibit 3.1), and CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2)[124] SIGNATURES This section formally attests to the accuracy and completeness of the report by authorized company officers - The report was signed on August 9, 2024, by William A. Zartler, Chairman and Chief Executive Officer, and Kyle S. Ramachandran, President and Chief Financial Officer[129]