Solaris Oilfield Infrastructure, Inc. — Q3 2018 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2018. Solaris provides mobile proppant-management systems and related services, Oklahoma transloading, and proppant-inventory software. Unless noted otherwise, dollar figures below are in millions. The company completed the first phase of construction at its Kingfisher Facility in July 2018; transloading operations began in January.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $56.7 | $18.5 | $139.9 | $42.2 |
| Operating income | $30.8 | $8.1 | $71.1 | $14.6 |
| Net income | $26.4 | $7.4 | $61.3 | $13.3 |
| Net income attributable to Solaris | $13.0 | $1.4 | $29.5 | $1.5 |
| Class A diluted EPS | $0.49 | $0.12 | $1.12 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $36.5 | $11.2 | $88.5 | $24.7 |
- Revenue grew 207% in Q3 and 231% for the nine-month period. System rental remained the largest revenue stream: $42.0 million in Q3 and $104.6 million year to date. Growth reflected more systems deployed, higher rental rates, and newly contributing transloading and software businesses.
- Operating margin was approximately 54% in Q3 versus 44% a year earlier, and 51% for the first nine months versus 35%. Net margin was approximately 47% and 44%, respectively, compared with 40% and 31% in the prior-year periods.
- System revenue days increased about 160% in Q3 and 178% for the first nine months. Average systems deployed in Q3 were 128.8, versus 49.6 a year earlier. The company reported a 152-system fleet.
- Service costs rose with activity; system-services cost excluding depreciation exceeded system-services revenue in both comparison periods. Management cited trucking and field labor costs, including elevated third-party trucking prices.
Cash flow, balance sheet, and debt
- For the nine months, operating cash flow was $57.5 million, investing cash outflow was $124.9 million, and financing cash inflow was $6.0 million. Cash declined $61.3 million to $2.1 million at September 30. Capital expenditures included $111.7 million for new systems, $13.8 million for Kingfisher, and $3.1 million for service vehicles.
- Accounts receivable increased to $34.6 million from $13.0 million at year-end 2017. Management attributed operating cash flow growth partly to higher earnings and noted the cash-flow impact of increased receivables.
- Total assets were $372.8 million, including net property, plant and equipment of $269.0 million. Current assets were $53.7 million and current liabilities $22.4 million, implying working capital of $31.3 million.
- Debt under the senior secured credit agreement was $8.0 million at quarter-end; the company subsequently drew another $2.0 million. The agreement provides a $50 million advancing term loan and a $20 million revolver, subject to borrowing-base and collateral limits. Management reported approximately $10 million of revolving availability and $50 million of term-loan availability after the subsequent draw, and compliance with covenants at September 30.
- Borrowings bear interest at one-month LIBOR plus a 3.00%–3.50% margin; the reported weighted-average rate was 5.11%. The facility matures January 2022, with term-loan amortization beginning April 2019. Financial covenants tighten beginning October 2018.
Material changes, outlook, and risks
- Solaris acquired Railtronix in December 2017, adding inventory-management software revenue. Its Kingfisher transload facility and Railtronix contributed new revenue categories in 2018. PP&E investment and depreciation rose substantially as the fleet and facility expanded.
- Management expects long-term demand to benefit from horizontal drilling, more intensive completions, and increased proppant use. It cautioned that near-term pipeline-capacity constraints and customer budget limits could reduce industry activity; it expects these challenges to ease in 2019 as budgets refresh and takeaway capacity expands. No specific earnings or revenue guidance was provided.
- Key business risks include dependence on oil-and-gas drilling and completion activity, commodity-price-driven customer spending, customer defaults or loss of major contracts, competition, transportation and rail availability, and the execution, cost, and timing of growth projects. Two customers represented 23% of Q3 revenue; two customers represented 31% of quarter-end receivables.
- The company had $52.9 million payable under its Tax Receivable Agreement, generally representing 85% of specified tax savings it anticipates realizing. The estimate depends on future taxable income and tax-asset utilization. Deferred tax assets were $26.6 million.
- Commitments included approximately $32.1 million of purchase obligations and $8.0 million of future minimum operating-lease payments, including $6.4 million related to the Kingfisher land lease. Management reported no material pending litigation or probable environmental matters. A remaining $0.875 million Railtronix performance award was not recorded because achievement was not considered probable.
- A $500 million universal shelf became effective October 16, 2018, allowing potential future company offerings; the company would receive no proceeds from any selling-stockholder sales under the shelf. Solaris stated it believed operating cash flow and available credit would fund operations for at least the next 12 months.
Important facts for investors to verify
- Whether system utilization, rental pricing, and service economics remain strong as the fleet grows, particularly given service costs exceeding service revenue.
- Kingfisher throughput, customer concentration, contract minimum volumes, and progress toward profitable utilization of the facility.
- Cash conversion and working-capital requirements as receivables rise, alongside the pace and returns on capital expenditures.
- Availability under the credit agreement, covenant headroom as limits tighten, and effects of variable interest rates and subsequent borrowing.
- Assumptions supporting deferred tax assets and the $52.9 million Tax Receivable Agreement liability, as well as the potential dilution or financing implications of future shelf offerings.