Solaris Oilfield Infrastructure, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Solaris supplies mobile proppant and chemical management systems and related services, and operates the Kingfisher transloading facility and inventory-management software.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $55.1 million | $36.0 million |
| Operating income | $27.7 million | $15.5 million |
| Net income | $23.4 million | $13.4 million |
| Net income attributable to Solaris | $12.3 million | $5.9 million |
| Diluted EPS | $0.43 | $0.23 |
| Operating cash flow | $23.0 million | $4.4 million |
| Capital expenditures | $20.4 million | $41.2 million |
| Adjusted EBITDA (non-GAAP) | $35.1 million | $21.9 million |
Revenue increased 53%. System rental revenue rose 36% to $37.3 million, system services increased 52% to $11.4 million, and transloading revenue increased to $5.8 million from $0.5 million. Inventory software revenue declined 14% to $0.5 million. Operating income margin increased to approximately 50% from 43%; total operating costs and expenses were 50% of revenue versus 57%. Adjusted EBITDA increased 60%.
Operating cash flow improved by $18.6 million year over year, mainly reflecting higher earnings. Cash used in investing was $20.3 million, primarily for new systems. Cash used in financing was $18.4 million, including repayment of $13.0 million of credit-facility borrowings and $4.8 million of dividends and distributions. Cash fell to $9.4 million from $25.1 million at year-end.
Balance sheet, debt and liquidity
At March 31, 2019, total assets were $431.6 million, total liabilities $111.1 million, and total stockholders’ equity $320.4 million. The company had no borrowings outstanding under its 2018 credit agreement after repaying $13.0 million during the quarter; it reported compliance with the agreement’s covenants. Deferred revenue totaled $22.3 million, including $3.1 million recognized as transloading revenue in Q1 from a customer payment received in 2018.
On April 26, 2019, after quarter-end, Solaris replaced the prior facility with a $50 million revolving credit agreement, with an uncommitted $25 million accordion. The facility matures April 26, 2022; no borrowings were outstanding and $50 million was available as of April 30, 2019. Management stated that operating cash flow and available borrowings were expected to fund operations for at least the next 12 months.
The company adopted ASC 842 lease accounting on January 1, 2019, recognizing $8.5 million of operating lease right-of-use assets and $9.0 million of lease liabilities at adoption. The Tax Receivable Agreement liability rose to $66.6 million from $56.1 million at year-end; Solaris generally owes former LLC unitholders 85% of certain realized or deemed tax savings.
Changes, outlook and risks
- Growth reflected greater system deployment: average mobile proppant systems on a fully utilized basis increased 34% year over year; the fleet had 162 proppant systems and five chemical systems at quarter-end.
- Management expected to end Q2 2019 with 164 proppant systems and 14 chemical systems. Most chemical systems were in customer field trials as the company pursued broader market adoption.
- Transloading growth included $3.1 million of deferred revenue recognition and higher throughput; the company also recorded $474,000 of minimum-volume shortfall revenue.
- Capital spending declined from the prior-year quarter as system manufacturing slowed and Kingfisher facility construction had been completed in 2018. Management described industry activity as relatively flat in 2019; the U.S. land rig count fell 7% sequentially in Q1. Demand remains tied to oil and gas prices, customer drilling and completion spending, and industry efficiency trends.
- Customer and credit exposure is concentrated: four customers represented 51% of Q1 revenue, and three customers represented 47% of accounts receivable at March 31. Management reported no allowance for doubtful accounts.
- Other exposures include competition, changes in completion technology, customer defaults, supply and transportation disruptions, financing availability, and possible impairment if industry or market conditions deteriorate. Management reported no material pending litigation, environmental liabilities deemed probable, or material changes to previously disclosed risk factors.
- Unusual or notable items: Q1 2018 included $1.7 million of Railtronix performance-based awards and $0.6 million of IPO-related stock compensation; neither item recurred in Q1 2019. Q1 2019 included a $0.2 million loss on asset disposal. No impairment was recorded in either period.
Important facts for investors to verify
- How much of transloading revenue and earnings reflects ongoing throughput versus the deferred contract payment and minimum-volume shortfall revenue.
- Whether chemical systems move from field trials to commercial adoption, and whether deployment and utilization support further growth.
- Customer concentration, receivables collectability, and the effect of oil and gas activity levels on customer demand.
- Cash generation relative to fleet investment, dividends, and the $66.6 million Tax Receivable Agreement liability.
- Availability and covenant requirements under the post-quarter $50 million revolving facility, including any future borrowing needs.