Solaris Oilfield Infrastructure, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as Solaris Oilfield Infrastructure, Inc. (not Solaris Energy Infrastructure, Inc.). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where noted.
Business context and results
Solaris provides mobile proppant management systems and related field services, proppant transloading, and proppant inventory software to the oil and gas industry. Growth reflects a larger and more utilized system fleet, higher rental rates, the January launch of transloading at its Kingfisher, Oklahoma facility, and the Railtronix software acquisition completed in December 2017.
- Total revenue was $36.0 million, up 249% from $10.3 million. System rental revenue rose 226% to $27.4 million; system services rose 295% to $7.5 million. Transloading and software contributed $0.45 million and $0.65 million, respectively.
- System revenue days increased 192% to 7,673. Average systems deployed rose to 85.2 from 29.2; the average fleet grew to 85.8 systems from 31.3.
- Operating income was $15.5 million versus $4.9 million. Operating margin was approximately 43.1%, compared with 47.0% a year earlier, as operating costs grew faster than revenue.
- Consolidated net income was $13.4 million versus $4.8 million. Net income attributable to Solaris was $5.9 million, or $0.24 basic and $0.23 diluted per Class A share; the prior-year period predates the IPO and reported no Class A earnings per share.
- Adjusted EBITDA, a non-GAAP measure, was $21.9 million versus $6.1 million. It includes adjustments for stock compensation and specified unusual or nonrecurring costs; it should not be treated as a substitute for GAAP income or cash flow.
Cash flow, balance sheet, and liquidity
- Cash from operations was $4.4 million, compared with $2.8 million. Investing cash outflow was $41.2 million, principally reflecting system manufacturing and Kingfisher construction; financing cash outflow was $0.3 million. Cash declined $37.0 million to $26.4 million.
- Accounts receivable increased to $20.1 million from $13.0 million, while inventories were $7.1 million. Working-capital growth absorbed cash as activity expanded.
- Property, plant and equipment, net, rose to $193.8 million from $151.2 million. Kingfisher construction in progress was $36.0 million at quarter-end.
- Current assets were $59.8 million and current liabilities $18.2 million. The balance sheet included $51.2 million payable under the Tax Receivable Agreement (TRA), up from $24.7 million at year-end; this is a tax-related obligation, not borrowings under the credit facility.
- No borrowings were outstanding under the January 2018 secured credit agreement. Reported availability was approximately $50 million under the advancing term loan and $19 million under the revolver. The facility matures in January 2022, bears interest at one-month LIBOR plus a 3.00%–3.50% margin, and Solaris reported compliance with covenants.
- Capital lease obligations totaled $0.2 million. The company said operating cash flow and available credit should fund operations for at least the next 12 months.
Material changes, outlook, and risks
- The new credit agreement replaced the previous facility. Covenant leverage limits step down during 2018; the agreement also permits up to $225 million of capital expenditures in fiscal 2018, subject to its terms.
- Kingfisher began initial transloading operations in January 2018 under a seven-year customer contract. Phase-one construction was expected to finish by August 2018. The company reported approximately $4.0 million of remaining obligations under executed construction agreements, in addition to broader purchase commitments of approximately $50.2 million.
- Management expected drilling and completion activity to continue increasing if oil and gas prices remained stable or rose, and anticipated demand for its logistics solutions to benefit from industry activity and longer, more intensive completions. This is commentary, not quantified earnings guidance; lower commodity prices or activity could reduce demand.
- Four customers accounted for 51% of Q1 revenue and 53% of receivables at March 31, 2018, creating customer concentration exposure. Management also cited risks including customer defaults, competition, transportation availability and cost, rail disruption, project delays or cost overruns, and access to capital.
- Railtronix-related performance awards of $1.625 million were paid and expensed in Q1; the company had not determined that the remaining $0.875 million in potential awards was probable. Kingfisher performance awards and a $3.5 million guarantee of a related-party office lease are additional commitments or exposures.
- The company adopted ASC 606 revenue recognition in Q1 with no material impact. It reported no material litigation, environmental matters deemed probable, or material changes to previously disclosed risk factors.
Investor facts to verify
- Whether fleet utilization, rental pricing, and service margins can be sustained as the fleet expands; system-services cost exceeded related revenue in Q1.
- Kingfisher construction completion, remaining spending, customer throughput, and whether contractual minimum-volume shortfall payments become collectible; none had been recognized to date.
- Cash conversion and funding needs as receivables, inventory, and capital spending grow, including the company’s available borrowing base and compliance with tightening covenants.
- The assumptions supporting the $51.2 million TRA liability and deferred tax assets, including future taxable income and potential revisions to provisional Tax Act accounting.
- The filing’s MD&A investment-spending detail: stated components of $34.9 million, $10.7 million, and $1.1 million do not reconcile to the $41.2 million investing cash outflow; confirm the intended classification or figures.