Solaris Oilfield Infrastructure(SOI) - 2023 Q2 - Quarterly Report

Report Information Company Information This section details Solaris Oilfield Infrastructure, Inc.'s SEC filing, including report type, exchange listing, filer status, and outstanding shares as of July 24, 2023 - Filing Type: Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023[2] - Registrant: SOLARIS OILFIELD INFRASTRUCTURE, INC[2] Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Value | | :-------------------------------- | :-------------------- | | Trading Symbol(s) | "SOI" | | Exchange on which registered | New York Stock Exchange | | Filer Status | Accelerated filer | | Class A Common Stock Outstanding (July 24, 2023) | 30,477,237 shares | | Class B Common Stock Outstanding (July 24, 2023) | 13,671,971 shares | Cautionary Statement Regarding Forward-Looking Statements Nature and Risks of Forward-Looking Statements This section warns that forward-looking statements are predictive, involve inherent risks and uncertainties, and advises against undue reliance, listing factors that could cause actual results to differ - Forward-looking statements are predictive, depend on future events or conditions, and include words like 'believe,' 'expect,' 'anticipate,' 'intend,' 'estimate'[9] - Factors that could cause actual results to differ materially include: domestic capital spending, global economic developments, geopolitical risks (e.g., war in Ukraine), industry consolidation, inflationary risks, rising interest rates, supply chain constraints, customer defaults, technological advancements, competitive conditions, and regulatory changes[10][14] - The company undertakes no obligation to publicly update or revise any forward-looking statement unless required by law[13] PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with notes on accounting policies and transactions Condensed Consolidated Balance Sheets The balance sheet shows financial position as of June 30, 2023, with increased total assets and liabilities, primarily from property, plant, equipment, and credit borrowings, while equity slightly decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :-------------------------------- | :------------ | :---------------- | :------- | | Total assets | $484,330 | $462,576 | +$21,754 | | Property, plant and equipment, net | $325,441 | $298,160 | +$27,281 | | Cash and cash equivalents | $9,371 | $8,835 | +$536 | | Total liabilities | $175,874 | $145,447 | +$30,427 | | Borrowings under the credit agreement | $43,000 | $8,000 | +$35,000 | | Total stockholders' equity | $308,456 | $317,129 | -$8,673 | Condensed Consolidated Statements of Operations For Q2 2023, revenue decreased 11%, but operating and net income rose due to lower costs; for six months, all three metrics increased year-over-year Statements of Operations Highlights (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :-------------------------------- | :--- | :--- | :----------- | | Total revenue | $77,202 | $86,711 | -$9,509 (-11%) | | Operating income | $15,779 | $10,322 | +$5,457 (+52.9%) | | Net income attributable to Solaris | $7,532 | $5,453 | +$2,079 (+38.1%) | | Income per share of Class A common stock – basic | $0.24 | $0.16 | +$0.08 (+50%) | Statements of Operations Highlights (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :-------------------------------- | :--- | :--- | :----------- | | Total revenue | $159,924 | $143,626 | +$16,298 (+11.3%) | | Operating income | $30,661 | $17,735 | +$12,926 (+72.9%) | | Net income attributable to Solaris | $15,101 | $8,955 | +$6,146 (+68.6%) | | Income per share of Class A common stock – basic | $0.47 | $0.27 | +$0.20 (+74.1%) | Condensed Consolidated Statements of Changes in Stockholders' Equity Statements detail changes in stockholders' equity for six months ended June 30, 2023, showing a decrease due to $14.4 million in repurchases and $3.7 million in dividends Changes in Stockholders' Equity (Six Months Ended June 30, 2023, in thousands) | Activity | Amount | | :-------------------------------- | :------- | | Balance at January 1, 2023 | $317,129 | | Share and unit repurchases and retirements | $(14,427) | | Dividends paid | $(3,656) | | Net income | $11,937 | | Balance at June 30, 2023 | $308,456 | Changes in Stockholders' Equity (Six Months Ended June 30, 2022, in thousands) | Activity | Amount | | :-------------------------------- | :------- | | Balance at January 1, 2022 | $297,876 | | Dividends paid | $(3,441) | | Net income | $5,722 | | Balance at June 30, 2022 | $304,595 | Condensed Consolidated Statements of Cash Flows For six months ended June 30, 2023, operating cash flow increased 103% to $45.5 million, investing cash used rose 27% to $39.9 million, and financing cash used decreased 58.5% to $5.0 million Cash Flow Summary (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :----- | :----- | :------- | | Net cash provided by operating activities | $45,460 | $22,394 | +$23,066 | | Net cash used in investing activities | $(39,896) | $(31,409) | -$8,487 | | Net cash used in financing activities | $(5,028) | $(12,131) | +$7,103 | | Net increase (decrease) in cash | $536 | $(21,146) | +$21,682 | | Cash at end of period | $9,371 | $15,351 | -$5,980 | Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business, accounting policies, property, debt, equity, taxes, concentrations, commitments, and related party transactions Note 1. Organization and Background of Business Solaris Oilfield Infrastructure designs and manufactures specialized equipment, provides field support, logistics, and software to U.S. oil and gas operators, reducing costs during well completion - Business Description: Designs and manufactures specialized equipment, provides field technician support, last mile logistics services, and software solutions for oil and natural gas well completion[27] - Geographic Focus: Deploys equipment and services across active oil and natural gas basins in the United States[27] Note 2. Summary of Significant Accounting Policies This note outlines key accounting policies, including presentation, estimates, revenue recognition, disaggregation of revenue, and recent accounting standards, notably the TRA amendment replacing LIBOR with SOFR Basis of Presentation and Consolidation Solaris Inc. consolidates Solaris LLC's financial results, reporting non-controlling interest, with statements adhering to GAAP and SEC rules, incorporating all necessary recurring adjustments - Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries, reporting non-controlling interest for units not owned by Solaris Inc[28] - Financial statements are prepared in accordance with GAAP and SEC rules, reflecting all normal recurring adjustments[29] Use of Estimates Consolidated financial statements require management to make significant estimates and assumptions impacting assets, liabilities, revenues, and expenses, where actual results may differ - Significant estimates include stock-based compensation, useful lives and salvage values of long-lived assets, goodwill and long-lived asset impairment evaluations, net realizable value of inventory, income taxes, Tax Receivable Agreement liability, collectability of accounts receivable, and determination of the present value of lease payments and right-of-use assets[33] Revenue Recognition Revenue is recognized under ASC Topic 606 upon transfer of control, reflecting expected consideration; contracts often have multiple performance obligations with prices allocated by stand-alone selling prices - Revenue recognition follows ASC Topic 606, based on the transfer of control of services and products to the customer[34][36] - Contracts typically contain multiple performance obligations (e.g., equipment, last mile logistics, labor services), with transaction prices allocated based on relative stand-alone selling prices[37] Disaggregation of Revenue Revenue is disaggregated into 'Wellsite services' and 'Transloading and Other'; Q2 2023 wellsite services revenue decreased, while six-month revenue increased year-over-year Revenue by Activity (in millions) | Activity | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Wellsite services | $77.1 | $86.5 | $159.6 | $143.1 | | Transloading and Other | $0.1 | $0.2 | $0.3 | $0.5 | | Total revenue | $77.2 | $86.7 | $159.9 | $143.6 | Recently Issued Accounting Standards The company adopted ASU No. 2020-04, extended by ASU No. 2022-06, for LIBOR transition, and amended the Tax Receivable Agreement on June 27, 2023, to replace LIBOR with SOFR plus a margin - ASU No. 2020-04 (Reference Rate Reform) guidance, extended by ASU No. 2022-06, is effective until December 31, 2024[39] - The Tax Receivable Agreement was amended on June 27, 2023, to replace LIBOR references with the 12-month term SOFR plus 71.513 basis points[39][72] Note 3. Property, Plant and Equipment Net property, plant, and equipment increased from $298.2 million to $325.4 million as of June 30, 2023, primarily due to increases in systems and related equipment and systems in process Property, Plant and Equipment, Net (in millions) | Metric | June 30, 2023 | December 31, 2022 | Change | | :-------------------------------- | :------------ | :---------------- | :------- | | Systems and related equipment | $402.0 | $369.3 | +$32.7 | | Systems in process | $37.5 | $30.1 | +$7.4 | | Property, plant and equipment, gross | $468.6 | $425.3 | +$43.3 | | Less: accumulated depreciation | $(143.2) | $(127.1) | $(16.1) | | Property, plant and equipment, net | $325.4 | $298.2 | +$27.2 | Note 4. Senior Secured Credit Facility Solaris LLC amended its Credit Agreement on April 28, 2023, increasing available borrowing to $75.0 million; as of June 30, 2023, $43.0 million was outstanding with an 8.10% interest rate, and the company was compliant with all covenants - Credit Agreement Amendment: Increased available borrowings from $50.0 million to $75.0 million, with a maximum capacity of $100.0 million, effective April 28, 2023[42] Senior Secured Credit Facility Status (as of June 30, 2023, in millions) | Metric | Amount | | :-------------------------------- | :----- | | Borrowings outstanding | $43.0 | | Ability to draw | $32.0 | | Weighted average interest rate | 8.10% | - Covenant Compliance: The company was in compliance with all covenants under the Credit Agreement as of June 30, 2023[48] Note 5. Equity This note details equity activities, including dividend distributions, the $50.0 million share repurchase program, and stock-based compensation, resulting in a decrease in outstanding Class A common stock Dividends Solaris LLC paid $4.9 million in Q2 2023 dividends and $10.1 million for the six months ended June 30, 2023, with Solaris Inc. using its portion to pay quarterly cash dividends to Class A common stockholders Dividend Distributions (in millions) | Period | Total Solaris LLC Unitholders | To Solaris Inc. | | :-------------------------------- | :---------------------------- | :-------------- | | Three months ended June 30, 2023 | $4.9 | $3.4 | | Three months ended June 30, 2022 | $4.9 | $3.4 | | Six months ended June 30, 2023 | $10.1 | $7.0 | | Six months ended June 30, 2022 | $9.7 | $6.9 | Share Repurchase Program The Board authorized a $50.0 million share repurchase plan on March 2, 2023; as of June 30, 2023, 3,078,500 shares were repurchased for $25.8 million (average $8.38/share), with $24.2 million remaining - Share Repurchase Plan: Authorized on March 2, 2023, for up to $50.0 million of Class A common stock[50] Share Repurchase Program Status (as of June 30, 2023) | Metric | Value | | :-------------------------------- | :-------------------- | | Shares repurchased (Six months) | 3,078,500 shares | | Aggregate cost (Six months) | $25.8 million | | Average price per share | $8.38 | | Amount remaining for future repurchases | $24.2 million | | Accrued stock repurchase excise tax (Six months) | $0.3 million | Stock-Based Compensation The LTIP was amended in May 2023, reserving an additional 4,700,000 shares; as of June 30, 2023, 5,521,494 awards were available, with $11.7 million unrecognized expense for restricted stock and $1.7 million for PSUs - LTIP Amendment: An additional 4,700,000 shares of Class A common stock were reserved for issuance under the LTIP as of May 17, 2023[52] Stock-Based Compensation Status (as of June 30, 2023) | Metric | Value | | :-------------------------------- | :-------------------- | | Total stock awards available for grant | 5,521,494 | | Unvested restricted stock shares | 1,508,797 shares | | Unrecognized compensation expense (restricted stock) | $11.7 million | | Outstanding performance-based restricted stock units (PSUs) | 172,212 units | | Unrecognized compensation cost (PSUs) | $1.7 million | - PSU Performance Criteria: 50% based on total shareholder return relative to peers, and 50% based on absolute total shareholder return[57] Income Per Share Basic and diluted income per share for Class A common stock significantly increased for both the three and six months ended June 30, 2023, compared to the prior year, with certain potentially dilutive shares excluded due to their antidilutive effect Income Per Share of Class A Common Stock (Three Months Ended June 30) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :--- | :--- | :----- | | Basic Income per share | $0.24 | $0.16 | +$0.08 | | Diluted Income per share | $0.24 | $0.16 | +$0.08 | Income Per Share of Class A Common Stock (Six Months Ended June 30) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :--- | :--- | :----- | | Basic Income per share | $0.47 | $0.27 | +$0.20 | | Diluted Income per share | $0.47 | $0.27 | +$0.20 | - Potentially dilutive shares excluded from diluted EPS calculation due to antidilutive effect: 15,370,598 for Q2 2023 and 15,299,846 for YTD 2023[61] Note 6. Income Taxes This note details the company's income tax structure, effective tax rates, deferred tax position, and obligations under the Tax Receivable Agreement, which was amended to replace LIBOR with SOFR Income Taxes Solaris Inc. is subject to federal and state income taxes, while Solaris LLC is a partnership; effective tax rates for Q2 and YTD 2023 were 17.8% and 17.5%, respectively, with deferred tax assets deemed realizable Income Tax Expense and Effective Rates (in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Income tax expense | $2.7 | $1.9 | $5.1 | $3.6 | | Effective tax rate | 17.8% | 19.0% | 17.5% | 20.2% | - The effective tax rate differed from the statutory rate primarily due to Solaris LLC's treatment as a partnership for United States federal income tax purposes[63] - The company believes it will be able to realize its deferred tax assets in the future, which primarily relate to its investment in Solaris LLC and net operating loss carryovers[64][65] Payables Related to the Tax Receivable Agreement The company made $1.1 million in TRA payments in January 2023; as of June 30, 2023, the liability was $71.5 million, and the agreement was amended to replace LIBOR with SOFR - Payments Made: $1.1 million in January 2023 under the Tax Receivable Agreement[67] - Liability (June 30, 2023): $71.5 million, representing 85% of anticipated future tax savings from increases in tax basis and imputed interest[68] - Amendment: The Tax Receivable Agreement was amended on June 27, 2023, to replace LIBOR references with the 12-month term SOFR plus 71.513 basis points[72] Note 7. Concentrations The company faces customer and supplier concentration risks; in Q2 2023, two customers accounted for 15% and 11% of revenues, and one supplier for 15% of purchases - Customer Concentration (Three Months Ended June 30, 2023 Revenue): Two customers accounted for 15% and 11% of the Company's revenues[73] - Customer Concentration (As of June 30, 2023 Accounts Receivable): Three customers accounted for 12%, 12%, and 10% of the Company's accounts receivable[73] - Supplier Concentration (Three Months Ended June 30, 2023 Purchases): One supplier accounted for 15% of the Company's total purchases[74] - Supplier Concentration (As of June 30, 2023 Accounts Payable): One supplier accounted for 14% of the Company's accounts payable[74] Note 8. Commitments and Contingencies This note addresses potential liabilities from tax matters and litigation, including a $3.1 million accrued liability for an unfavorable property tax ruling under appeal, with no other material litigation expected Tax Matters The company recognized a $3.1 million accrued liability as of June 30, 2023, for an unfavorable property tax ruling in Brown County, Texas, which is currently under appeal with a final ruling expected in H2 2023 - Property Tax Contingency: $3.1 million accrued liability as of June 30, 2023, related to an unfavorable ruling in Brown County, Texas, regarding property tax exemptions[75] - Appeal Status: An appeal was filed with the Eleventh District of Texas – Eastland Court of Appeals, and a final ruling is anticipated in the second half of 2023[75] Litigation and Claims Management believes no pending litigation, disputes, or claims are expected to have a material adverse effect on the condensed consolidated financial statements - Management's opinion: No pending litigation, disputes, or claims are expected to have a material adverse effect on the condensed consolidated financial statements[77] Note 9. Related Party Transactions The company engages in transactions with related parties, including administrative services from Solaris Energy Management, LLC and business dealings with THRC Affiliates, involving revenue, cost of services, and contingent payments Related Party Transactions (in millions) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Payments to Solaris Energy Management, LLC (administrative services) | $0.3 | $0.8 | | Revenue from THRC Affiliates | $7.3 | $12.2 | | Cost of services from THRC Affiliates | $0.6 | $1.7 | - THRC Holdings, LP, an entity affiliated with certain customers and suppliers, held 11.1% ownership of the Company's Class A common stock as of June 30, 2023[81] - Contingent Payments: Solaris may be required to pay up to $4.0 million to THRC Affiliates through 2024, contingent upon meeting minimum Services revenue thresholds[82] 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 condition and results, including business overview, industry trends, detailed revenue and expense analysis, non-GAAP reconciliations, and liquidity Overview Solaris Oilfield Infrastructure provides specialized equipment, field support, logistics, and software to U.S. oil and gas operators, focusing on efficiency and cost reduction during well completion, with revenue from mobile proppant and fluid management systems and logistics services - Core Business: Designs and manufactures specialized equipment, provides field technician support, last mile logistics, and software solutions for oil and natural gas well completion[86] - Primary Revenue Sources: Mobile proppant and fluid management systems, last mile logistics management services[86] - New Technologies: Proprietary top fill equipment and AutoBlend™ integrated electric blender contribute to revenue[86] Recent Trends and Outlook Demand for Solaris's offerings is driven by drilling activity; despite a decline in U.S. Land Rig Count, Solaris's system count and earnings have outpaced trends due to new technology and pricing, with continued outperformance expected Commodity Prices and Rig Count | Metric | Q2 2023 Average | 2022 Average | 2023 YTD Change | | :-------------------------------- | :-------------- | :----------- | :-------------- | | WTI Oil Prices | Over $70/barrel | $94/barrel | Softened | | Henry Hub Natural Gas Prices | $2-$3/MMBtu | Over $6/MMBtu | Down | | Baker Hughes US Land Rig Count | N/A | N/A | Down ~14% | - Company Performance: Fully utilized total system count growth has outpaced the rig count trend due to new technology-led growth with new and existing customers, and increased pricing[89] - Outlook: Expects continued earnings growth from new product lines to allow earnings to outperform the trend in underlying oil and gas activity[89] Results of Operations This section compares financial performance for the three and six months ended June 30, 2023, versus 2022, detailing changes in revenue, operating costs, and income, highlighting drivers and efficiencies Revenue Total revenue decreased 11% to $77.2 million for Q2 2023 due to lower last mile tonnage, but increased 11% to $159.9 million for the six months, driven by demand and pricing, with fully utilized systems rising from 83 to 113 Revenue Performance (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total revenue | $77,202 | $86,711 | $159,924 | $143,626 | | Change (YoY) | -$9,509 (-11%) | N/A | +$16,298 (+11%) | N/A | | Fully utilized systems (period end) | 108 | 88 | 113 | 83 | - The decrease in Q2 2023 revenue was primarily due to a decrease in last mile tonnage, partially offset by an increase in total fully utilized systems[93] - The increase in YTD 2023 revenue was primarily related to an activity-driven increase in demand for products and services and updated pricing[93] Cost of Services Cost of services (excluding depreciation) decreased 25% to $45.7 million for Q2 2023 due to lower last mile tonnage, remaining flat at $98.9 million for six months, improving as a percentage of revenue to 59% and 62% respectively Cost of Services (excluding depreciation, in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Cost of services | $45,652 | $61,237 | $98,875 | $98,908 | | Change (YoY) | -$15,585 (-25%) | N/A | -$33 (0%) | N/A | | As a percentage of revenue | 59% | 71% | 62% | 69% | - The decrease in Q2 2023 cost of services was primarily related to a decrease in last mile tonnage[94] Property Tax Contingency No additional property tax contingencies were recognized in Q2 or YTD 2023; the $3.1 million accrued liability for the Brown County ruling remains, with an appeal decision expected in H2 2023 that could be material - No additional property tax contingencies were recognized during the three and six months ended June 30, 2023[96] - A $3.1 million accrued liability related to an unfavorable Texas District Court ruling on property tax exemptions remains, with an appeal ruling anticipated in the second half of 2023[96] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses increased 13% to $6.8 million for Q2 2023 and 19% to $13.4 million for the six months, primarily due to increases in headcount and professional fees Selling, General and Administrative Expenses (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | SG&A expenses | $6,825 | $6,062 | $13,363 | $11,273 | | Change (YoY) | +$763 (+13%) | N/A | +$2,090 (+19%) | N/A | - The increase in SG&A expenses was primarily due to increases in headcount and professional fees[97] Other Operating Income Other operating income significantly decreased 89% to $0.1 million for Q2 2023 and 67% to $0.5 million for six months, primarily due to lower gains on asset sales and sales tax rebates compared to prior year Other Operating Income (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Other operating income | $125 | $1,114 | $463 | $1,423 | | Change (YoY) | -$989 (-89%) | N/A | -$960 (-67%) | N/A | - 2023 other operating income primarily relates to gain on sale of assets and sales tax rebates, partially offset by excise tax for share buybacks[98] - 2022 other operating income primarily related to change in the TRA liability, credit losses, gain on insurance claims, and write-off of prepaid purchase orders[98] Provision for Income Taxes Income tax expense increased to $2.7 million for Q2 and $5.1 million for six months ended June 30, 2023, driven by operating gains, with effective tax rates of 17.8% and 17.5% respectively, due to partnership tax treatment Provision for Income Taxes (in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Income tax expense | $2.7 | $1.9 | $5.1 | $3.6 | | Change (YoY) | +$0.8 (+42.1%) | N/A | +$1.5 (+41.7%) | N/A | | Effective tax rate | 17.8% | 19.0% | 17.5% | 20.2% | - The change in income tax expense was attributable to operating gains[99] - The effective tax rate differed from the statutory rate primarily due to Solaris LLC's treatment as a partnership for United States federal income tax purposes[99] Comparison of Non-GAAP Financial Measures This section reconciles Net Income to EBITDA and Adjusted EBITDA, both non-GAAP measures, which significantly increased for the three and six months ended June 30, 2023, driven by changes in revenues and expenses EBITDA and Adjusted EBITDA EBITDA increased by $7.4 million to $24.9 million for Q2 2023 and $16.4 million to $48.1 million for six months; Adjusted EBITDA rose by $5.8 million to $26.8 million and $15.1 million to $51.9 million respectively, driven by revenue and expense changes - EBITDA is defined as net income, plus depreciation and amortization expense, interest expense, and income tax expense[101] - Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense and certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses[103] EBITDA and Adjusted EBITDA (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income | $12,241 | $8,289 | $24,178 | $14,011 | | EBITDA | $24,850 | $17,454 | $48,149 | $31,796 | | Adjusted EBITDA | $26,825 | $21,064 | $51,943 | $36,804 | | Change in Adjusted EBITDA (YoY) | +$5,761 (+27.3%) | N/A | +$15,139 (+41.1%) | N/A | Liquidity and Capital Resources This section discusses the company's liquidity sources (operating cash, credit borrowings, equity), capital uses (operations, capex, repurchases, dividends), and cash flow activities, concluding current liquidity is sufficient Overview Solaris's liquidity comes from operations, credit, and equity; capital is used for operations, capex, repurchases, and dividends; as of June 30, 2023, $9.4 million cash and $32.0 million credit available are deemed sufficient for future needs - Primary Liquidity Sources: Cash flows from operations, borrowings under credit agreements, and proceeds from equity offerings[111] - Primary Uses of Capital: Funding ongoing operations, capital expenditures (organic growth, fleet development/maintenance/upgrades), share repurchases, and dividend payments[111] Liquidity Position (as of June 30, 2023, in millions) | Metric | Amount | | :-------------------------------- | :----- | | Cash and cash equivalents | $9.4 | | Borrowings outstanding under Credit Agreement | $43.0 | | Ability to draw under Credit Agreement | $32.0 | - Liquidity Outlook: Management believes current liquidity is sufficient to address future cash needs for the next 12 months and beyond[112] Share Repurchase Program The Board authorized a $50.0 million share repurchase program on March 2, 2023; as of June 30, 2023, 3,078,500 shares were purchased for $25.8 million (average $8.38/share), with $24.2 million remaining - Authorization: $50.0 million share repurchase plan authorized on March 2, 2023, with no set term limits[113] Share Repurchase Program Status (as of June 30, 2023) | Metric | Value | | :-------------------------------- | :-------------------- | | Shares purchased | 3,078,500 shares | | Aggregate cost | $25.8 million | | Average price per share | $8.38 | | Amount remaining under authorization | $24.2 million | Cash Flows This section summarizes cash flow activities for the six months ended June 30, 2023, compared to 2022, showing significant increases in operating cash flow and a decrease in net cash used in financing activities Cash Flow Summary (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :----- | :----- | :------- | | Net cash provided by operating activities | $45,460 | $22,394 | +$23,066 | | Net cash used in investing activities | $(39,896) | $(31,409) | -$8,487 | | Net cash used in financing activities | $(5,028) | $(12,131) | +$7,103 | | Net change in cash | $536 | $(21,146) | +$21,682 | Significant Sources and Uses of Cash Flows Operating cash flow increased due to higher profitability; investing activities rose from capital expenditures; financing cash used decreased, driven by $35.0 million net borrowings offsetting repurchases and dividends - Operating Activities: Net cash provided increased by $23.1 million for the six months ended June 30, 2023, primarily attributable to increased profitability from operations[116] - Investing Activities: Net cash used increased by $8.5 million for the six months ended June 30, 2023, primarily due to capital expenditures related to new technologies and enhancements to the fleet[117] - Financing Activities (Six months ended June 30, 2023): Net cash used was $5.0 million, primarily related to $25.8 million in share repurchases, $7.0 million in quarterly dividends, and $3.5 million in distributions to unitholders, partially offset by $35.0 million in net borrowings under the Credit Agreement[118][120] Capital Sources The company's senior secured credit facility serves as a key capital source, providing flexibility for its financial operations - The Senior Secured Credit Facility is a primary capital source for the company[122] Future Sources and Uses of Cash Material cash commitments include Credit Agreement, TRA, leases, and purchase obligations; within twelve months, $0.1 million in commitment fees, $3.5 million in interest, and $14.6 million in purchase obligations are expected - Material cash commitments consist primarily of obligations under the Credit Agreement, Tax Receivable Agreement, finance and operating leases for property and equipment, and purchase obligations[124] Expected Cash Payments (next twelve months, in millions) | Metric | Amount | | :-------------------------------- | :----- | | Commitment fees on Credit Agreement | ~$0.1 | | Interest on Credit Agreement | ~$3.5 | | Purchase obligations | ~$14.6 | Critical Accounting Policies and Estimates No material changes occurred in the company's critical accounting policies and estimates during the three and six months ended June 30, 2023 - No material changes in critical accounting policies and estimates during the three and six months ended June 30, 2023[128] Recent Accounting Pronouncements No recently adopted accounting standards were implemented during the reporting period; refer to Note 2 for information on recently issued accounting standards - No recently adopted accounting standards during the reporting period[130] Off Balance Sheet Arrangements The company has no material off-balance sheet arrangements, except for purchase commitments under supply agreements, and is not materially exposed to related financial risks - The company has no material off-balance sheet arrangements, except for purchase commitments under supply agreements[133] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that the company's exposure to market risk has not materially changed since December 31, 2022, and provides specific disclosures regarding credit risk - The company's exposure to market risk has not changed materially since December 31, 2022[134] Credit Risk Most accounts receivable have 60-day or less payment terms; as of June 30, 2023, three customers accounted for 12%, 12%, and 10% of receivables, with risk mitigated by credit evaluations and payment monitoring - Majority of accounts receivable have payment terms of 60 days or less[135] - As of June 30, 2023, three customers accounted for 12%, 12%, and 10% of the company's total accounts receivable[135] - Credit risk is mitigated by performing credit evaluations and monitoring customer payment patterns[135] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in ITGCs related to a third-party system, with a remediation plan initiated and no other material changes to internal control Disclosure Controls and Procedures As of June 30, 2023, disclosure controls and procedures were ineffective due to a material weakness in ITGCs, specifically regarding user access, change management, and segregation of duties for a third-party IT system supporting financial reporting - Disclosure controls and procedures were not effective as of June 30, 2023[136] - The material weakness is related to ineffective ITGCs in user access, application change management, operating system and logical access controls, and segregation of duties for a third-party IT system supporting financial reporting for last mile logistics services[137] Remediation Plan for Material Weakness Management initiated a remediation plan to strengthen internal controls, including developing internal software to replace the third-party IT system, enhancing risk assessment for internally developed systems, and implementing an IT management review and testing plan for ITGCs - Remediation efforts include developing and implementing internal use software to replace the third-party IT system[139] - The plan also involves developing enhanced risk assessment procedures and controls related to internally developed third-party IT systems[139] - An IT management review and testing plan will be implemented to monitor ITGCs, with a specific focus on systems supporting financial reporting[139] Changes in Internal Control over Financial Reporting Except for the identified material weakness and ongoing remediation efforts, no other material changes occurred in the company's internal control over financial reporting during the quarter ended June 30, 2023 - No other material changes in internal control over financial reporting during the quarter ended June 30, 2023, apart from the identified material weakness and remediation efforts[142] PART II: OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine litigation, but management believes no pending matters would materially affect financial condition or results, except for a $3.1 million property tax liability under appeal, which could be material - The company is involved in routine litigation, disputes, or claims related to its business activities[145] - Management's opinion: No pending litigation, disputes, or claims are expected to have a material adverse effect on financial condition, cash flows, or results of operations[145] - A $3.1 million accrued liability for an unfavorable property tax ruling in Brown County, Texas, is under appeal, with a final ruling anticipated in the second half of 2023; resolution could be material[146] Item 1A. Risk Factors No material updates to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, have occurred - No material updates to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on equity security transactions not registered under the Securities Act, detailing issuer purchases of Class A common stock under the authorized share repurchase plan and for tax withholding obligations Unregistered Sales of Equity Securities There were no unregistered sales of equity securities during the reporting period - No unregistered sales of equity securities during the reporting period[148] Issuer Purchases of Equity Securities For the six months ended June 30, 2023, the company purchased 3,229,041 shares of Class A common stock at an average price of $7.89/share, including 3,078,500 shares under the $50.0 million repurchase plan and 150,541 shares for tax withholding Issuer Purchases of Equity Securities (Six Months Ended June 30, 2023) | Metric | Value | | :-------------------------------- | :-------------------- | | Total Number of Shares Purchased | 3,229,041 shares | | Average Price Paid Per Share | $7.89 | | Shares Purchased as Part of Publicly Announced Plan | 3,078,500 shares | | Maximum Dollar Value Remaining Under Plan | $24,212,452 | - The total shares purchased include 150,541 shares bought to satisfy tax withholding obligations upon the vesting of restricted stock[155] Item 3. Defaults upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities during the reporting period[151] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report for the period - No mine safety disclosures[152] Item 5. Other Information During the three months ended June 30, 2023, no director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended June 30, 2023[153] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to key agreements and plans, along with certifications from the Chief Executive Officer and Chief Financial Officer - Key exhibits include amendments to the Certificate of Incorporation, Bylaws, Credit Agreement, Tax Receivable Agreement, and the Long Term Incentive Plan[154] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are included[154][157] SIGNATURES Report Signatures The report was officially signed on July 27, 2023, by William A. Zartler, Chairman and CEO, and Kyle S. Ramachandran, President and CFO, confirming its submission - The report was signed on July 27, 2023[163] - Signatories: William A. Zartler (Chairman and Chief Executive Officer) and Kyle S. Ramachandran (President and Chief Financial Officer)[163]