Solaris Oilfield Infrastructure(SOI) - 2023 Q4 - Annual Report

Cautionary Statement Regarding Forward-Looking Statements This section details forward-looking statements and factors that could cause actual results to differ materially - This Annual Report includes forward-looking statements that are predictive in nature and depend upon or refer to future events or conditions, identified by words like "believe," "expect," "anticipate," "intend," and "estimate"[10] - Factors that could cause actual results to differ materially from forward-looking statements include the level of domestic capital spending and access to capital markets by the oil and natural gas industry, global economic developments, geopolitical risks (e.g., Russia-Ukraine war, Israel-Hamas conflict), inflationary risks, and significant changes in transportation industries[11] - Additional factors include technological advancements in well completion, competitive conditions, inability to protect intellectual property, changes in capital availability, increases in tax rates, effects of existing and future laws/regulations, cyber-attacks, future litigation, business acquisitions, natural disasters, and uncertainty regarding future operating results[15] PART I Item 1. Business Solaris provides specialized equipment, logistics, and software for U.S. oil and gas well completion, focusing on efficient electric solutions Our Company - Solaris Oilfield Infrastructure, Inc. is a Houston, Texas based business that designs and manufactures specialized equipment, combined with field technician support, last mile and mobilization logistics services, and software solutions[18] - The company's service offering helps oil and natural gas operators and their suppliers drive efficiencies that reduce operational footprint and costs during the completion phase of well development in most active U.S. basins[18] - Solaris specializes in developing all-electric equipment that automates the low-pressure section of oil and gas well completion sites, believing it operates more efficiently, is more reliable, safer, and lowers environmental and operating footprints[19] Our Properties - The company owns or leases its corporate headquarters in Houston, Texas, a repair and maintenance facility in Monahans, Texas, and a manufacturing facility in Early, Texas[21] Suppliers - Solaris has long-term relationships with third-party suppliers for equipment and product transportation and materials for manufacturing and maintenance[22] - No single supplier accounted for more than 10% of total spending in 2023 or 2022[22] - The company does not have long-term agreements with third-party trucking suppliers and could experience shortages and price increases in the future[23] Our Customers and Contracts - Primary customers are major E&P and oilfield service companies, with relationships generally governed by master service agreements (MSAs) and specific work performed under individual work orders[24] Customer Revenue Concentration | Customer | 2023 Revenue Contribution | 2022 Revenue Contribution | | :-------------------------- | :-------------------------- | :-------------------------- | | Liberty Oilfield Services, LLC | Approximately 12% | Approximately 22% | | EOG Resources, Inc. | Approximately 12% | N/A | Competition - The oil and natural gas services industry is highly competitive, with numerous competitors including logistics companies, equipment manufacturers, hydraulic fracturing service companies, and sand mining companies[25] - Principal competitive factors include equipment reliability, technical expertise, patent-protected technology, unique/bundled service offerings, equipment capacity, transportation and storage, workforce competency, efficiency, safety record, reputation, experience, and price[26] - Solaris differentiates itself by delivering high-quality services and equipment, coupled with superior execution and operating efficiency in a safe working environment[26] Seasonality - The company's business is not significantly impacted by seasonality, but may be affected by holidays, inclement weather, and clients' budget cycles, potentially leading to declines in operating results[27] Human Capital - Employees are considered the foundation for fostering an innovative culture, safe operations, and delivery of services, with a focus on a collaborative and inclusive work environment[27] Human Capital Statistics (as of December 31, 2023) | Metric | Value | | :------------------------------------------ | :---- | | Total employees | 338 | | Employees subject to collective bargaining | None | | Racially or ethnically diverse in supervisory/managerial roles | 25% | | Total racially or ethnically diverse workforce | 38% | | Women in supervisory/managerial roles | 22% | | Total female workforce | 14% | - Safety is a core value, with an integrated system of policies, practices, and controls, including regular safety and regulatory compliance training[30] - Recruiting efforts include dedicated personnel, online job postings, and programs at academic and professional institutions to attract and retain talented individuals[31] Environmental and Occupational Health and Safety Regulations - Business operations are subject to stringent federal, tribal, state, and local laws and regulations governing occupational health and safety, environmental discharges, and environmental protection, enforced by entities like the EPA and OSHA[32] - Key U.S. legal standards include the Clean Air Act, Clean Water Act, Oil Pollution Act of 1990, CERCLA, RCRA, Safe Drinking Water Act, Occupational Safety and Health Act, Endangered Species Act, and DOT regulations[33][34] - The trend in environmental regulation is towards more restrictions, with initiatives impacting hydraulic fracturing (e.g., federal regulatory authority, state requirements, water access), induced seismicity (e.g., disposal well regulations, potential shutdowns), and ground-level ozone standards (e.g., NAAQS, potential for more stringent rules)[35][39] - Climate change initiatives, including federal (e.g., EPA methane rules, Inflation Reduction Act's methane fee) and international (e.g., Paris Agreement, Global Methane Pledge, COP28) efforts, could increase operating/capital costs for customers and reduce demand for Solaris's services[38][39][40] - Climate change policies may also impact access to capital for fossil fuel energy companies, with institutional investors and banks shifting towards 'clean' power sources and setting 'net zero' carbon emission commitments[42] - The SEC has proposed rules requiring climate-related disclosures (Scope 1, 2, and 3 GHG emissions), which could increase operating costs and litigation risks[42][44] - Worker safety regulations, particularly concerning human exposure to crystalline silica in hydraulic fracturing, pose health risks and potential liability for the industry[46] Intellectual Property - Solaris continuously innovates its product and service offerings, including software solutions, and protects its technology through patent, copyright, trademark, and trade secret laws[48] Patent Portfolio (as of December 31, 2023) | Type | Number | | :-------------------------------- | :----- | | Issued U.S. patents | 7 | | Issued Canadian corollary patents | 9 | | Issued Mexican corollary patents | 2 | | Pending U.S. utility patent applications | 4 | | Pending Mexican utility patent applications | 2 | - Issued patents expire between 2032 and 2043, but there is no assurance that pending applications will result in granted patents or that existing patents will not be contested or found unenforceable[49] Available Information - Solaris is required to file annual, quarterly, and current reports, proxy statements, and other information with the SEC, which are available on www.sec.gov and the company's website, www.solarisoilfield.com[50](index=50&type=chunk)[51] Board of Directors and Executive Officers - The Board of Directors as of February 27, 2024, includes William A. Zartler (Chairman and CEO), Laurie H. Argo, James R. Burke, Cynthia M. Durrett, Edgar R. Giesinger, W. Howard Kennan, Jr., F. Gardner Parker, A. James Teague, and Ray N. Walker, Jr[52][54][55][56][58][59][60][61][62][63] - Executive officers (excluding directors) as of February 27, 2024, include Kyle S. Ramachandran (President and CFO), Kelly L. Price (COO), Christopher P. Wirtz (Chief Accounting Officer), and Christopher M. Powell (Chief Legal Officer and Corporate Secretary)[64][65][66][67][69][70] Item 1A. Risk Factors Solaris faces risks from market volatility, competition, operational hazards, customer concentration, regulatory shifts, and financial limitations - The demand for Solaris's products and services is primarily determined by current and anticipated oil and natural gas prices and the related levels of capital spending and drilling activity, making the company vulnerable to price volatility[72] - The company faces significant competition from various industry players, and consolidation among customers or competitors could impede market share gains or make adoption of new product offerings difficult[73][74] - Continuing inflationary issues and associated changes in monetary policy may increase the cost of goods, services, and personnel, leading to higher capital expenditures and operating costs[75] - Changes in the transportation industry, including availability, reliability, or costs, could impair customers' ability to take delivery of products or make Solaris's offerings less attractive[76][78] - Operational risks include natural or man-made disasters, extreme weather events, and employee/employer liabilities, which may not be fully covered by insurance and could disrupt business[79][80] - Reliance on a few large customers means the loss of any material customer could adversely affect revenue and operating results, as redeploying equipment at similar utilization or pricing levels may be challenging[81] - External events such as pandemics, political unrest, armed conflicts (e.g., Ukraine-Russia, Israel-Hamas), and economic recessions could materially disrupt demand for oil and natural gas and Solaris's services[82][84] - Failure to protect proprietary information and intellectual property rights, or successful challenges against them, could result in a loss of competitive advantage or market share[89] - Technological advancements in well service products, including those that reduce proppant or chemical requirements, could adversely affect business if Solaris cannot adapt or implement new technologies rapidly[90] - Cybersecurity risks, including information theft, data corruption, and operational disruption, are significant, and existing protective measures may not be sufficient against evolving threats[91] - The business depends on domestic capital spending by the oil and natural gas industry, and reductions in such spending due to commodity price declines or other factors could materially affect liquidity and financial condition[96] - Uncertainty in global financial markets or deterioration of customer financial condition could lead to reduced spending, non-payment, or inability to perform obligations[97][100] - The Credit Agreement subjects Solaris to financial and restrictive covenants, and non-compliance could lead to acceleration of outstanding amounts or limited access to funds[101] - The ability to use net operating loss (NOL) carryovers may be limited by future income or an 'ownership change' under Section 382 of the Internal Revenue Code[102] - Laws, regulations, and executive orders relating to hydraulic fracturing could increase costs, result in restrictions, delays, or cancellations of oil and natural gas exploration and production activities, thereby reducing demand for Solaris's services[103] - Increasing attention to environmental, social, and governance (ESG) matters, including climate change, may lead to increased costs, reduced demand for hydrocarbon products, negative investor sentiment, and restricted access to capital markets[109][110][111] - Solaris Inc. is a holding company dependent on distributions from Solaris LLC to pay taxes and obligations under the Tax Receivable Agreement (TRA), and restrictions on such distributions could adversely affect liquidity[116] - Payments under the Tax Receivable Agreement could be substantial, potentially accelerated in a change of control, and may significantly exceed actual tax benefits, impacting liquidity and potentially deterring acquisitions[136][138][140][141][143] - The requirements of being a public company, including compliance with Exchange Act and Sarbanes-Oxley Act, strain resources, increase costs, and distract management, with potential for future material weaknesses in internal control[144][145][147][149][150] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report - There are no unresolved staff comments[151] Item 1C. Cybersecurity Solaris implements a NIST-based cybersecurity system with risk assessments, incident response, training, and access controls, overseen by the Audit Committee - Solaris implements policies, standards, and technical controls based on the National Institute of Standards and Technology (NIST) framework to protect networks and applications[153] - Cybersecurity risk management processes include regular risk assessments, a monitoring and detection system with an incident response plan, bi-annual employee training (including phishing campaigns), least privilege access controls with multi-factor authentication, and encryption for sensitive data[154][155][156][157] - Due diligence is conducted on third-party service providers to evaluate their cybersecurity capabilities, and contractual requirements are included to mitigate risks[158] - Cybersecurity risk management is integrated into the company's overall enterprise risk management activities[159] - As of the Annual Report date, no previous cybersecurity threats have materially affected the company, but it acknowledges that threats are continually evolving and no security measure can guarantee absolute protection[160][162] - The Audit Committee of the Board of Directors is responsible for overseeing cybersecurity, information security, and information technology risks, with the Chief Administrative Officer (CAO) reporting on emerging incidents[163][164] Item 2. Properties The company's principal properties are described in detail under the 'Our Properties' section within Item 1. Business - The principal properties are described in Item 1. 'Business' under the caption '—Our Properties'[165] Item 3. Legal Proceedings Disclosure concerning legal proceedings is incorporated by reference from Note 12. Commitments and Contingencies in the Financial Statements and Supplementary Data section - Disclosure concerning legal proceedings is incorporated by reference to 'Part II. Item 8. "Financial Statements and Supplementary Data—Note 12. Commitments and Contingencies"' in this Annual Report[165] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[166] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Solaris Class A common stock trades on NYSE (SOI); the company paid $0.45 per share in dividends and repurchased $26.5 million in shares in 2023 - Shares of Class A common stock trade on the NYSE under the symbol 'SOI.' As of February 21, 2024, there were approximately 4 holders of record for Class A common stock and 13 holders of record for Class B common stock (which has no market)[168][169] Dividend Policy | Year | Quarterly Cash Dividends per Class A Share | | :--- | :----------------------------------------- | | 2023 | $0.45 | | 2022 | $0.42 | | Current Intent | $0.12 (quarterly) / $0.48 (annually) | - Future dividend policy is at the discretion of the board of directors and depends on business conditions, financial condition, capital requirements, investment opportunities, and contractual restrictions[170] Issuer Purchases of Equity Securities (Year Ended December 31, 2023) | Metric | Value | | :------------------------------------------ | :---------------- | | Total Number of Shares Purchased | 3,316,079 | | Average Price Paid Per Share | $8.40 | | Total Number of Shares Purchased as Part of Publicly Announced Plan | 3,163,778 | | Maximum Dollar Value of Shares That May Yet be Purchased Under the Plan | $23,532,857 | | Excise Tax Accrued (2023) | $265,000 | - The company's board of directors authorized a plan in March 2023 to repurchase up to $50 million of Class A common stock[174] Item 6. Reserved This item is reserved and contains no information - This item is reserved[176] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Solaris's financial condition, operations, and outlook, highlighting 2023 profit growth and projected 2024 capital expenditure reductions Overview - Solaris designs and manufactures specialized equipment, combined with field technician support, last mile and mobilization logistics services, and software solutions, to help oil and natural gas operators drive efficiencies and reduce costs during well development in the United States[180] Recent Trends and Outlook - In 2023, U.S. drilling and completion activity declined 5% (full year average) and over 20% (start to end of year) due to a decrease in commodity prices (WTI oil down over 20%, Henry Hub natural gas down 50-70%)[182] - Despite industry decline, Solaris's fully utilized total system count grew from 95 in 2022 to 109 in 2023, and operating profit grew over 19% due to new technology-led growth, increased pricing, and new services[183] - For 2024, revenue and profitability are expected to track closer to U.S. drilling and completion activity, with oil prices in the mid-$70s supporting oil-directed activity (80% of rig count)[184] - Capital expenditures are expected to decline to below $15 million in 2024 (over 75% decrease from $64 million in 2023), which, combined with a stable market, should generate significantly increased cash flow[185] Results of Operations (Year Ended December 31, 2023 Compared to Year Ended December 31, 2022) Consolidated Statements of Operations (in thousands) | Metric | 2023 | 2022 | Change | | :------------------------------------------ | :----- | :----- | :------- | | Revenue | $292,947 | $320,005 | $(27,058) | | Operating costs and expenses: | | | | | Cost of services (excluding depreciation) | 177,847 | 219,775 | (41,928) | | Depreciation and amortization | 36,185 | 30,433 | 5,752 | | Property tax contingency | — | 3,072 | (3,072) | | Selling, general and administrative | 26,951 | 23,074 | 3,877 | | Impairment losses | 1,423 | — | 1,423 | | Other operating expense, net | 639 | 1,847 | (1,208) | | Total operating costs and expenses | 243,045 | 278,201 | (35,156) | | Operating income | 49,902 | 41,804 | 8,098 | | Interest expense, net | (3,307) | (489) | (2,818) | | Income before income tax expense | 46,595 | 41,315 | 5,280 | | Provision for income taxes | (7,820) | (7,803) | (17) | | Net income | 38,775 | 33,512 | 5,263 | | Less: net income related to non-controlling interests | (14,439) | (12,354) | (2,085) | | Net income attributable to Solaris | $24,336 | $21,158 | $3,178 | - Revenue decreased by $27.1 million (8%) to $292.9 million in 2023, mainly due to a decrease in last mile logistics services activity, partially offset by an increase in fully utilized systems (from 95 to 109) and increased pricing[189] - Cost of services (excluding depreciation) decreased by $41.9 million (19%) to $177.8 million in 2023, primarily due to decreased last mile and mobilization logistics services activity. Cost of services as a percentage of revenue improved from 69% in 2022 to 61% in 2023[190] - Selling, general and administrative expenses increased by $3.9 million (17%) to $27.0 million in 2023, primarily due to increases in headcount and professional fees[194] - An impairment loss of $1.4 million was recorded in 2023 on certain fixed assets classified as held for sale, as their carrying value exceeded fair value less estimated costs to sell[195] - Interest expense, net, increased by $2.8 million (560%) to $3.3 million in 2023, driven by an increase in average borrowings outstanding and effective interest rates on the senior secured credit facility[197] Comparison of Non-GAAP Financial Measures (Year Ended December 31, 2023 Compared to Year Ended December 31, 2022) - EBITDA and Adjusted EBITDA are used as important indicators of performance to assess operating results on a consistent basis by removing effects of interest expense, depreciation, amortization, and other non-recurring items[200] Reconciliation of Net Income to EBITDA and Adjusted EBITDA (in thousands) | Metric | 2023 | 2022 | Change | | :------------------------------------------ | :----- | :----- | :------- | | Net income | $38,775 | $33,512 | $5,263 | | Depreciation and amortization | 36,185 | 30,433 | 5,752 | | Interest expense, net | 3,307 | 489 | 2,818 | | Income taxes | 7,820 | 7,803 | 17 | | EBITDA | $86,087 | $72,237 | $13,850 | | Property tax contingency | — | 3,072 | (3,072) | | Stock-based compensation expense | 7,732 | 6,092 | 1,640 | | Loss on disposal of assets | 386 | 3,754 | (3,368) | | Impairment on fixed assets | 1,423 | — | 1,423 | | Change in payables related to Tax Receivable Agreement | — | (663) | 663 | | Credit losses | 810 | (420) | 1,230 | | Other | 255 | (290) | 545 | | Adjusted EBITDA | $96,693 | $83,782 | $12,911 | - EBITDA increased by $13.9 million to $86.1 million in 2023, and Adjusted EBITDA increased by $12.9 million to $96.7 million, primarily due to the changes in revenues and expenses discussed[207] Liquidity and Capital Resources - Primary liquidity sources are cash flows from operations, borrowings under credit agreements, and proceeds from equity offerings, used for ongoing operations, capital expenditures, share repurchases, and dividends[209] - As of December 31, 2023, cash and cash equivalents totaled $5.8 million, with $30.0 million in borrowings outstanding under the Credit Agreement and $41.3 million of available borrowing capacity, which is believed to be sufficient for operations for the next 12 months and beyond[210] Summary of Cash Flows (in thousands) | Metric | 2023 | 2022 | Change (2023 vs. 2022) | | :-------------------------------- | :----- | :----- | :--------------------- | | Net cash provided by operating activities | $89,924 | $67,996 | $21,928 | | Net cash used in investing activities | (62,003) | (79,539) | 17,536 | | Net cash used in financing activities | (30,923) | (16,119) | (14,804) | | Net change in cash | (3,002) | (27,662) | 24,660 | - Net cash provided by operating activities increased by $21.9 million to $89.9 million in 2023, primarily due to increased profitability from operations[212] - Net cash used in investing activities decreased by $17.5 million to $62.0 million in 2023, primarily due to a reduction in capital expenditures as the build-out of new service lines was largely completed[213] - Net cash used in financing activities increased to $30.9 million in 2023, driven by $26.4 million in share repurchases and $20.7 million in dividends, partially offset by $22.0 million in net borrowings under the Credit Agreement[214] - Material cash commitments include obligations under the Credit Agreement, Tax Receivable Agreement, finance and operating leases, and purchase obligations[215] - Expected 2024 payments include approximately $0.2 million in commitment fees and $2.5 million in interest on the Credit Agreement, and approximately $3.5 million in purchase obligations[216][218] Critical Accounting Estimates - Critical accounting estimates involve significant judgments and assumptions, particularly for the fair value and recoverability of long-lived assets, definite-lived intangible assets, and goodwill, which are sensitive to management's forecasts of operating performance, useful lives, discount rates, and market conditions[220][222][223] - Income tax estimates, including deferred tax assets and the Tax Receivable Agreement liability, require significant judgment in projecting future taxable income, which is inherently uncertain and can materially impact financial statements[227][229][231][232] Item 7A. Quantitative and Qualitative Disclosures about Market Risk Solaris's market risks are primarily related to potential changes in the fair value of long-lived assets and long-term debt due to interest rate fluctuations. The company is indirectly exposed to commodity price risk through its customers' drilling activity but does not hedge this exposure. It also faces credit risk from customer concentrations, which is mitigated through credit evaluations and monitoring - Market risks primarily relate to potential changes in the fair value of long-lived assets and long-term debt due to fluctuations in applicable market interest rates[235] - The company is indirectly exposed to commodity price risk through its customers' drilling and completion activity levels, but does not currently intend to hedge this exposure[236] - Solaris is subject to interest rate risk on its $30.0 million outstanding debt under the Credit Agreement (as of December 31, 2023), with a weighted average interest rate of approximately 8.38%. A 1% change in this rate would impact interest expense by about $0.3 million annually[237] - Credit risk arises from customer concentrations; as of December 31, 2023, two customers accounted for 12% and 10% of total accounts receivable. This risk is mitigated through credit evaluations, monitoring payment patterns, and pursuing legal remedies[238] Item 8. Financial Statements and Supplementary Data This section presents Solaris's audited consolidated financial statements and notes, with BDO USA, P.C. issuing an unqualified opinion on financial statements and internal controls Report of Independent Registered Public Accounting Firm - BDO USA, P.C. issued an unqualified opinion on the consolidated financial statements as of December 31, 2023 and 2022, and for the three years ended December 31, 2023, stating they present fairly the financial position, results of operations, and cash flows in conformity with GAAP[242] - The firm also expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023, based on COSO criteria[243][256] - Critical audit matters included the estimation of future taxable income, which requires significant judgment for deferred tax asset recoverability, and the remediation of a prior year material weakness impacting last mile service revenue, which required significant audit effort[248][250][251][252] Consolidated Balance Sheets as of December 31, 2023 and 2022 Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :------------------------------------------ | :----------- | :----------- | | Assets: | | | | Cash and cash equivalents | $5,833 | $8,835 | | Accounts receivable, net | 44,916 | 64,543 | | Accounts receivable - related party | 2,378 | 4,925 | | Prepaid expenses and other current assets | 4,342 | 5,151 | | Inventories | 6,672 | 5,289 | | Assets held for sale | 3,000 | — | | Total current assets | 67,141 | 88,743 | | Property, plant and equipment, net | 325,121 | 298,160 | | Operating lease right-of-use assets | 10,721 | 4,033 | | Goodwill | 13,004 | 13,004 | | Intangible assets, net | 702 | 1,429 | | Deferred tax assets, net | 48,010 | 55,370 | | Total assets | $468,297 | $462,576 | | Liabilities: | | | | Accounts payable | $12,654 | $25,934 | | Accrued liabilities | 20,292 | 25,252 | | Current portion of payables related to Tax Receivable Agreement | — | 1,092 | | Current portion of operating lease liabilities | 1,385 | 917 | | Current portion of finance lease liabilities | 2,462 | 1,924 | | Total current liabilities | 37,201 | 55,909 | | Operating lease liabilities, net of current | 11,541 | 6,212 | | Credit agreement | 30,000 | 8,000 | | Finance lease liabilities, net of current | 2,401 | 3,429 | | Payables related to Tax Receivable Agreement | 71,530 | 71,530 | | Total liabilities | $152,717 | $145,447 | | Stockholders' Equity: | | | | Total stockholders' equity attributable to Solaris Oilfield Infrastructure, Inc. | 205,983 | 215,715 | | Non-controlling interest | 109,597 | 101,414 | | Total stockholders' equity | $315,580 | $317,129 | - Total assets increased slightly to $468.3 million in 2023 from $462.6 million in 2022, driven by an increase in property, plant and equipment, net, partially offset by a decrease in current assets[264] - Total liabilities increased to $152.7 million in 2023 from $145.4 million in 2022, primarily due to an increase in credit agreement borrowings[264] Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021 Consolidated Statements of Operations (in thousands, except share and per share amount) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | :----- | | Total revenue | $292,947 | $320,005 | $159,189 | | Operating costs and expenses | 243,045 | 278,201 | 159,576 | | Operating income (loss) | 49,902 | 41,804 | (387) | | Interest expense, net | (3,307) | (489) | (247) | | Income (loss) before income tax expense | 46,595 | 41,315 | (634) | | Provision for income taxes | (7,820) | (7,803) | (626) | | Net income (loss) | 38,775 | 33,512 | (1,260) | | Less: net (income) loss related to non-controlling interests | (14,439) | (12,354) | 392 | | Net income (loss) attributable to Solaris Oilfield Infrastructure, Inc. | $24,336 | $21,158 | $(868) | | Earnings (loss) per share of Class A common stock - basic | $0.78 | $0.64 | $(0.04) | | Earnings (loss) per share of Class A common stock - diluted | $0.78 | $0.64 | $(0.04) | - Total revenue decreased by 8% to $292.9 million in 2023 from $320.0 million in 2022[265] - Operating income increased by 19% to $49.9 million in 2023 from $41.8 million in 2022[265] - Net income attributable to Solaris Oilfield Infrastructure, Inc. increased by 15% to $24.3 million in 2023 from $21.2 million in 2022[265] - Basic and diluted earnings per share of Class A common stock increased to $0.78 in 2023 from $0.64 in 2022[265] Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2023, 2022 and 2021 - Total stockholders' equity decreased slightly to $315.6 million as of December 31, 2023, from $317.1 million in 2022, primarily due to share repurchases and dividends, partially offset by net income[267] - In 2023, the company repurchased and retired 3,164 thousand Class A common shares for $26.4 million[267] - Dividends paid to Class A common stockholders totaled $14.1 million in 2023[267] Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 Consolidated Statements of Cash Flows (in thousands) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | :----- | | Net cash provided by operating activities | $89,924 | $67,996 | $16,473 | | Net cash used in investing activities | (62,003) | (79,539) | (19,524) | | Net cash used in financing activities | (30,923) | (16,119) | (20,818) | | Net decrease in cash and cash equivalents | (3,002) | (27,662) | (23,869) | | Cash and cash equivalents at end of period | $5,833 | $8,835 | $36,497 | - Net cash provided by operating activities increased by $21.9 million to $89.9 million in 2023, primarily due to increased profitability[212][269] - Net cash used in investing activities decreased by $17.5 million to $62.0 million in 2023, mainly due to a reduction in capital expenditures[213][269] - Net cash used in financing activities increased to $30.9 million in 2023, driven by $26.4 million in share repurchases and $20.7 million in dividends, partially offset by $22.0 million in net borrowings under the Credit Agreement[214][269] Notes to the Consolidated Financial Statements 1. Organization and Background of Business - Solaris Oilfield Infrastructure, Inc. designs and manufactures specialized equipment, combined with field technician support, last mile and mobilization logistics services, and software solutions, to help oil and natural gas operators and their suppliers drive efficiencies and reduce costs during well development in the United States[271] 2. Summary of Significant Accounting Policies - Solaris Inc. consolidates the financial results of Solaris LLC and its subsidiaries, reporting non-controlling interest for the portion of units not owned by Solaris Inc[272] - Significant estimates are made for 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 present value of lease payments[275] - Inventories are stated at the lower of weighted average cost or net realizable value; no impairments were recorded for the years ended December 31, 2023 and 2022[279] - Property, plant and equipment are stated at cost less accumulated depreciation, computed using the straight-line method over estimated useful lives (up to 15 years for systems and related equipment)[280] Net Book Value of Identifiable Intangible Assets (in thousands) | Asset Type | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Customer relationships | $616 | $1,287 | | Software acquired in the acquisition of Railtronix | 45 | 95 | | Patents and other | 41 | 47 | | Total identifiable intangibles | $702 | $1,429 | - Goodwill of $13.0 million (as of December 31, 2023 and 2022) relates to the purchase of the silo manufacturing business from Loadcraft Industries Ltd.; no goodwill impairments were recognized in 2021-2023[292][294] - A $1.4 million impairment was recorded in 2023 for certain fixed assets classified as held for sale, as their carrying value exceeded fair value less estimated costs to sell; no impairments were recorded in 2021-2022[297][298] - Revenue is recognized in accordance with ASC Topic 606, based on the transfer of control of services and products, with transaction prices allocated to performance obligations[300] Disaggregation of Revenue by Activity (in thousands) | Activity | 2023 | 2022 | 2021 | | :---------------- | :----- | :----- | :----- | | Wellsite services | $292,302 | $318,977 | $158,052 | | Other | 645 | 1,028 | 1,137 | | Total revenue | $292,947 | $320,005 | $159,189 | - Solaris Inc. is subject to U.S. federal, state, and local income taxes, while Solaris LLC is treated as a partnership for federal income tax purposes. Deferred tax assets and liabilities are determined based on temporary differences[318][319][320] - The Tax Receivable Agreement (TRA) commits Solaris Inc. to pay TRA Holders 85% of net cash savings from certain tax basis increases and imputed interest; the liability was $71.5 million as of December 31, 2023[325][327] 3. Allowance for Credit Losses Allowance for Credit Losses on Customer Receivables (in thousands) | Metric | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Balance, January 1 | $385 | $746 | | Credit losses | 2,221 | 330 | | Adjustments | (1,411) | (691) | | Less write-offs | (229) | — | | Balance, December 31 | $966 | $385 | - The allowance for credit losses increased to $966 thousand as of December 31, 2023, from $385 thousand in 2022, reflecting increased credit losses and adjustments, partially offset by write-offs[333] 4. Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Current Assets (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Prepaid purchase orders | $— | $25 | | Prepaid insurance | 1,166 | 964 | | Deposits | 123 | 122 | | Employee retention credit | 958 | 1,900 | | Other assets | 2,095 | 2,140 | | Prepaid expenses and other current assets | $4,342 | $5,151 | - Prepaid expenses and other current assets decreased to $4.3 million as of December 31, 2023, from $5.2 million in 2022, primarily due to a reduction in the employee retention credit[334] 5. Property, Plant and Equipment Property, Plant and Equipment, Net (in thousands) | Asset Type | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Systems and related equipment | $434,386 | $369,352 | | Systems in process | 21,130 | 30,110 | | Vehicles | 13,527 | 13,211 | | Machinery and equipment | 5,762 | 5,414 | | Buildings | 4,877 | 4,595 | | Computer hardware and software | 3,866 | 1,670 | | Land | 612 | 612 | | Furniture and fixtures | 1,342 | 357 | | Property, plant and equipment, gross | 485,502 | 425,321 | | Less: accumulated depreciation | (160,381) | (127,161) | | Property, plant and equipment, net | $325,121 | $298,160 | - Net property, plant and equipment increased to $325.1 million as of December 31, 2023, from $298.2 million in 2022, primarily due to additions to systems and related equipment[335] - Depreciation expense for the year ended December 31, 2023, was $35.5 million, up from $29.7 million in 2022[335] 6. Accrued Liabilities Accrued Liabilities (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Property, plant and equipment | $761 | $— | | Employee related expenses | 7,580 | 6,913 | | Selling, general and administrative | 1,337 | 876 | | Cost of revenue | 3,421 | 11,598 | | Excise, franchise and sales taxes | 1,525 | 1,317 | | Ad valorem taxes (includes property tax contingency) | 5,626 | 4,448 | | Interest payable | 42 | 71 | | Other | — | 29 | | Accrued liabilities | $20,292 | $25,252 | - Accrued liabilities decreased to $20.3 million as of December 31, 2023, from $25.3 million in 2022, primarily due to a significant reduction in cost of revenue accruals[336] 7. Leases - The company leases offices and storage under operating leases and property, vehicles, and computer equipment under finance leases[337][338] Components of Lease Expense (in thousands) | Metric | 2023 | 2022 | 2021 | | :-------------------------- | :----- | :----- | :----- | | Operating lease cost | $2,471 | $1,254 | $1,187 | | Finance lease cost (Amortization of ROU assets) | 2,452 | 775 | 26 | | Finance lease cost (Interest on lease liabilities) | 327 | 115 | 4 | | Sublease income | (50) | — | — | | Total lease cost | $5,200 | $2,144 | $1,217 | - Total lease cost increased to $5.2 million in 2023 from $2.1 million in 2022, driven by higher operating and finance lease costs[339] Future Minimum Lease Payments (as of December 31, 2023, in thousands) | Year Ending December 31, | Operating Leases | Finance Leases | | :----------------------- | :--------------- | :------------- | | 2024 | $2,267 | $2,673 | | 2025 | 2,096 | 1,998 | | 2026 | 1,949 | 498 | | 2027 | 1,848 | — | | 2028 | 1,663 | — | | Thereafter | 9,514 | — | | Total future minimum lease payments | $19,337 | $5,169 | - The weighted average remaining lease term for operating leases was 10.8 years and for finance leases was 2.5 years as of December 31, 2023[341] 8. Senior Secured Credit Facility - Solaris LLC executed Amendment No. 2 to the Credit Agreement in April 2023, increasing available borrowings from $50 million to $75 million, with a maximum total capacity of $100 million[342] - As of December 31, 2023, $30.0 million in borrowings were outstanding, with an additional $41.3 million of available borrowing capacity. The Credit Agreement matures on April 26, 2025[343][342] - Borrowings bear interest at either SOFR or an alternate base rate plus an applicable margin, with a weighted average interest rate of approximately 8.38% on outstanding borrowings as of December 31, 2023[345] - The Credit Agreement includes financial covenants requiring maintenance of specific ratios (consolidated EBITDA to interest expense, senior indebtedness to consolidated EBITDA, and eligible assets to total revolving exposure), with which the company was in compliance as of December 31, 2023[346][349] 9. Equity - Solaris LLC paid distributions totaling $20.7 million to all unitholders in 2023, and Solaris Inc. paid $14.1 million in quarterly cash dividends to Class A common stockholders[350] - Under a share repurchase plan authorized in March 2023 for up to $50 million, Solaris Inc. purchased and retired 3,163,778 Class A common shares for $26.5 million in 2023, with $23.5 million remaining available[351] - The company accrued $265 thousand for the 1% U.S. federal excise tax on stock repurchases in 2023[352] - The Long Term Incentive Plan (LTIP) authorized 9,818,080 Class A common shares for equity-based awards, with 5,328,470 shares remaining available as of December 31, 2023[354] - As of December 31, 2023, 6,605 stock options remained outstanding (all vested, exercise price $2.87), and 1,481,111 unvested restricted stock awards had $8.7 million in unrecognized compensation cost[356][358][359][360] - 172,212 performance-based restricted stock units (PSUs) were outstanding as of December 31, 2023, with $1.3 million in unrecognized compensation cost, based on relative and absolute total shareholder return criteria[361][362][363] Earnings (Loss) Per Share (in thousands, except per share amount) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | :----- | | Net income (loss) attributable to Solaris Oilfield Infrastructure Inc. | $24,336 | $21,158 | $(868) | | Net income (loss) attributable to common stockholders | $23,167 | $20,311 | $(1,233) | | Basic EPS | $0.78 | $0.64 | $(0.04) | | Diluted EPS | $0.78 | $0.64 | $(0.04) | Weighted-Average Potentially Dilutive Shares Excluded (in thousands) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | :----- | | Class B common stock | 13,672 | 13,717 | 14,035 | | Restricted stock awards | 1,478 | 583 | 282 | | Performance-based restricted stock awards | 118 | — | — | | Stock options | 7 | 7 | 8 | | Total | 15,275 | 14,307 | 14,325 | 10. Income Taxes Income Tax Expense (in thousands) | Component | 2023 | 2022 | 2021 | | :---------------- | :----- | :----- | :----- | | Current Federal | $— | $— | $— | | Current State | 569 | 120 | 494 | | Deferred Federal | 6,424 | 6,167 | (20) | | Deferred State | 827 | 1,516 | 152 | | Total | $7,820 | $7,803 | $626 | - Solaris Inc. recognized a combined U.S. federal and state income tax expense of $7.8 million in both 2023 and 2022[368] Net Deferred Tax Asset (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total deferred tax assets | $51,625 | $55,370 | | Total deferred tax liabilities | (3,615) | — | | Net deferred tax asset | $48,010 | $55,370 | - As of December 31, 2023, the company had approximately $226.0 million of federal net operating loss (NOL) carryovers ($170.0 million with no expiration date) and $49.4 million of state NOL carryovers (expiring between 2037 and 2042)[369] - The company's uncertain tax benefits totaled $802 thousand as of December 31, 2023, reported as a component of the net deferred tax asset[375] - The liability under the Tax Receivable Agreement was $71.5 million as of December 31, 2023, representing 85% of anticipated net cash savings in income tax[376] 11. Concentrations - For the year ended December 31, 2023, two customers each accounted for 12% of the company's revenue[378] - As of December 31, 2023, two customers accounted for 12% and 10% of the company's total accounts receivable[378] - No single supplier accounted for more than 10% of total purchases for the years ended December 31, 2023, 2022, and 2021[379] - As of December 31, 2023, two suppliers accounted for 17% and 12% of the company's accounts payable[379] 12. Commitments and Contingencies - A property tax contingency of $3.1 million was recognized in accrued liabilities as of December 31, 2023, related to an unfavorable Texas District Court ruling, with an appeal ruling anticipated in the first half of 2024[380] - The company has purchase obligations of approximately $3.5 million payable within the next twelve months as of December 31, 2023[382] - A guarantee of lease agreement with Solaris Energy Management, LLC (a related party) for office space totals $2.8 million as of December 31, 2023[383] 13. Related Party Transactions - Solaris LLC paid $1.2 million in 2023 to Solaris Energy Management, LLC (partially owned by the CEO) for administrative services, including rent, travel, personnel, and consulting costs[384][385] - The company recognized $23.5 million in revenue and $2.1 million in cost of services in 2023 related to THRC Affiliates, which are affiliated with a significant shareholder (THRC Holdings, LP)[386] - Payments under the Tax Receivable Agreement involved a $1.1 million payment in January 2023, with a concurrent $0.4 million cash distribution to other Solaris LLC members[388] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in and disagreements with accountants on accounting and financial disclosure[390] Item 9A. Controls and Procedures Management concluded Solaris's disclosure controls were effective as of December 31, 2023, after remediating a material weakness in IT general controls - Management, under the supervision of the principal executive officer and principal financial officer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[391] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2023, using COSO criteria, and concluded it was effective[394] - A previously reported material weakness related to ineffective information technology general controls (ITGCs) for a third-party IT system supporting last mile logistics services was remediated as of December 31, 2023[149][395][396] - Remediation efforts included developing an internal use application to replace the third-party IT system, enhancing risk assessment procedures, and implementing an IT management review and testing plan[396] Item 9B. Other Information No directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended December 31, 2023 - None of the directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023[399] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[400] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 2024[402] - The company's Code of Business Conduct and Ethics is available on its website, www.solarisoilfield.com, under the 'Governance Documents' tab within 'Investor Relations'[403] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders - Information regarding executive compensation is incorporated by reference from the Proxy Statement for the Annual Meeting[404] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders - Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the Proxy Statement for the Annual Meeting[405] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders - Information regarding certain relationships and related transactions and director independence is incorporated by reference from the Proxy Statement for the Annual Meeting[406] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Shareholders - The independent registered public accounting firm is BDO USA, P.C., Houston, Texas, Auditor Firm ID: PCAOB ID 243[407] - Information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement for the Annual Meeting[407] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules (all omitted as not applicable or presented elsewhere), and a detailed index of exhibits filed or furnished with the Annual Report on Form 10-K - The consolidated financial statements of Solaris Oilfield Infrastructure, Inc. and subsidiaries and the Report of Independent Registered Public Accounting Firm are included in Part II, Item 8[410] - All financial statement schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes thereto[411] - A detailed index to exhibits required to be filed or furnished pursuant to Item 601 of Regulation S-K is provided[412][413][414][416][419] Item 16. Form 10-K Summary This item is not applicable - This item is not applicable[418]