Solaris Energy Infrastructure, Inc.(SEI) - 2024 Q3 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements concerning business strategy and market conditions that are subject to significant risks and uncertainties - This report contains forward-looking statements concerning business strategy, future profitability, capital expenditures, and market conditions, which are subject to various risks and uncertainties[6] - Key factors that could cause actual results to differ from forward-looking statements include spending levels in the power generation and oil/gas industries, geopolitical risks, inflation, interest rates, customer consolidation, and cyber-attacks[7][8] - The company undertakes no obligation to update forward-looking statements, and investors are warned not to place undue reliance on them, with risks further detailed in the company's 10-K and this 10-Q[9] PART I: FINANCIAL INFORMATION This part presents the unaudited financial statements and management's analysis of the company's performance and condition Financial Statements (Unaudited) The company's financial position was significantly altered by the September 2024 acquisition of Mobile Energy Rentals (MER), impacting assets, liabilities, revenue, and net income Condensed Consolidated Financial Statements This section presents the unaudited balance sheets, statements of operations, and cash flows for the reporting period Condensed Consolidated Balance Sheets (in thousands) | Account | September 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $197,032 | $67,141 | | Total Assets | $939,487 | $468,297 | | Total Current Liabilities | $54,597 | $37,201 | | Total Liabilities | $446,112 | $152,717 | | Total Stockholders' Equity | $493,375 | $315,580 | Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $75,018 | $69,676 | $216,794 | $229,600 | | Operating Income | $5,267 | $10,000 | $27,077 | $40,661 | | Net (Loss) Income | $(2,210) | $7,638 | $14,914 | $31,816 | | Diluted EPS | $(0.04) | $0.16 | $0.30 | $0.64 | Condensed Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $46,267 | $64,678 | | Net cash used in investing activities | $(189,949) | $(54,830) | | Net cash provided by (used in) financing activities | $254,390 | $(15,232) | | Net increase (decrease) in cash | $110,708 | $(5,384) | Notes to the Financial Statements This section details the MER acquisition, segment reorganization, new debt, purchase commitments, and legal proceedings - On September 11, 2024, the company acquired Mobile Energy Rentals LLC (MER) for a total consideration of $323.1 million, comprising $186.4 million in equity and $136.7 million in cash, establishing the new Solaris Power Solutions segment[23][28][29] - Following the MER acquisition, the company reorganized into two reportable segments: Solaris Logistics Solutions (oil and gas well completion services) and Solaris Power Solutions (mobile power generation)[42][43][44] - To fund the MER acquisition, the company entered into a new $325.0 million senior secured term loan agreement on September 11, 2024, and subsequently established a new $75.0 million revolving credit facility[104][111][112] - The company has significant purchase commitments of $219.2 million, primarily for power equipment for the new Solaris Power Solutions segment, with payments due in 2024 and 2025[135] - The company has significant customer concentration, with three customers accounting for 21%, 13%, and 10% of Q3 2024 revenues, and two customers representing 21% and 12% of accounts receivable[130] - The company is involved in a lawsuit with Masaba Inc regarding alleged intellectual property infringement, which is currently stayed pending a patent review by the USPTO[134] Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlights the transformative MER acquisition, which created a new power solutions segment and diversified the company into high-growth distributed power markets Executive Overview & Recent Developments The company's recent acquisition of MER established a new power solutions segment and required new financing arrangements - The company now operates through two segments: Solaris Logistics Solutions (oil & gas) and Solaris Power Solutions (distributed power), following the acquisition of Mobile Energy Rentals (MER) on September 11, 2024[143][144][145] - To finance the MER acquisition and future growth, the company entered into a $325.0 million senior secured term loan and established a new revolving credit facility of up to $75.0 million[147][148] Market Trends and Outlook The company provides a market outlook for its logistics and power solutions segments, including growth plans and capital expenditures - Solaris Logistics Solutions: Expects a ~10% decline in fully utilized systems in Q4 2024 due to seasonality, with long-term demand dependent on commodity prices and geopolitical risk[150] - Solaris Power Solutions: Demand is driven by accelerating power needs for data centers and energy customers against a backdrop of constrained grid infrastructure[151][152] - The company plans to significantly increase its power generation fleet to approximately 535 MW by Q3 2025, with an estimated 84% of this capacity already committed under multi-year agreements[153] - Total company capital expenditures are expected to be approximately $295 million over the next four quarters, primarily for the Power Solutions segment[154] Results of Operations This section analyzes segment revenue performance, operating expenses, and the impact of acquisition-related costs Segment Revenue Comparison (in thousands) | Segment | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Solaris Logistics Solutions | $70,279 | $69,676 | $212,055 | $229,600 | | Solaris Power Solutions | $4,739 | $— | $4,739 | $— | | Total Revenues | $75,018 | $69,676 | $216,794 | $229,600 | - Solaris Logistics Solutions revenue for the first nine months of 2024 decreased by 8% YoY, primarily due to a drop in fully utilized systems from 112 to 95[158] - Selling, General and Administrative (SG&A) expenses for the first nine months of 2024 increased by 27% YoY to $25.0 million, driven by higher headcount and professional fees[167] - Other operating expenses for the nine months ended Sep 30, 2024, were $3.7 million, primarily due to acquisition-related costs from the MER deal[168] Liquidity and Capital Resources The company's liquidity is primarily sourced from operations and new debt facilities used to fund growth and shareholder returns - Primary liquidity sources are cash from operations and debt financing, with $325.0 million in outstanding borrowings under its term loan as of Sep 30, 2024[171][172] - The company has a share repurchase program with $15.4 million remaining available as of Sep 30, 2024, though no shares were repurchased in Q3 2024[175] - Net cash from financing activities was $254.4 million for the nine months ended Sep 30, 2024, reflecting $295.0 million in net debt proceeds offset by dividends and share repurchases[181] Critical Accounting Policies and Estimates A new critical accounting policy for fair value measurements in business combinations has been introduced following the MER acquisition - A new critical accounting estimate has been added for Fair Value Measurements in Business Combinations, involving significant estimates for allocating purchase consideration in an acquisition[184][185] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure has shifted to interest rate risk due to its new variable-rate debt - The company is exposed to interest rate risk from its variable-rate senior secured term loan, with rates tied to Term SOFR or a Base Rate plus a margin of 5.0% to 6.0%[187] - As of September 30, 2024, a hypothetical 100 basis point (1%) change in interest rates would result in an estimated annual change in interest expense of approximately $3.3 million[188] Controls and Procedures Management concluded that disclosure controls were effective, though the assessment excluded the recently acquired and currently integrating MER business - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2024[189] - The assessment of internal controls excluded the newly acquired MER business, which is permissible under SEC guidance for up to one year post-acquisition[190][191] - There were no material changes during the quarter that affected the company's internal control over financial reporting[192] PART II: OTHER INFORMATION This part details legal proceedings, new risk factors, share repurchase activity, and other required disclosures Legal Proceedings The company is involved in an intellectual property lawsuit with Masaba Inc, which management believes is without merit - The company is involved in a lawsuit with Masaba Inc regarding alleged intellectual property infringement and does not expect the outcome to have a material adverse effect[193] Risk Factors The company identifies new material risks following the MER acquisition, including challenges of entering a new market and significant additional debt - The company faces risks related to its entry into a new line of business (scaled distributed power solutions), including lack of management experience in the sector[195][196] - Significant additional indebtedness ($325 million term loan) incurred for the MER acquisition may limit financial flexibility and dedicate cash flow to debt service[199][200][201] - The Solaris Power Solutions segment is dependent on a limited number of key suppliers for its specialized equipment, creating operational risk[202][203] - The company's new power systems business involves long sales cycles, which require substantial upfront sales and marketing expenses[206] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred, and no shares were repurchased under the company's plan in Q3 2024 - There were no unregistered sales of equity securities in the period[208] - No shares were purchased under the company's $50 million share repurchase plan during the three months ended September 30, 2024, with $15.4 million remaining available[209][210] Defaults upon Senior Securities The company reports no defaults upon its senior securities - None[210] Mine Safety Disclosures The company reports no mine safety disclosures for the period - None[210] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2024 - During Q3 2024, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement[211] Exhibits This section lists all exhibits filed with the report, including acquisition and debt agreements, and officer certifications Signatures The report is duly signed and authorized by the company's Chief Executive Officer and Chief Financial Officer - The report was duly signed and authorized on November 7, 2024, by William A. Zartler (Chairman and Chief Executive Officer) and Kyle S. Ramachandran (President and Chief Financial Officer)[217]