Solaris Oilfield Infrastructure, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 6, 2018. The filing’s registrant name is Solaris Oilfield Infrastructure, Inc. The company provides proppant logistics equipment, field services and inventory-management software to the U.S. oil and gas industry. Results before the May 2017 IPO reflect its accounting predecessor, Solaris LLC; Solaris Inc. owns and consolidates Solaris LLC but had a 43% ownership interest at year-end.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $67.4 million | $18.2 million |
| Operating income | $25.5 million | $2.9 million |
| Operating margin | 37.8% | 15.8% |
| Consolidated net income | $22.5 million | $2.8 million |
| Net income attributable to Solaris Inc. | $3.6 million | None reported |
| Adjusted EBITDA (non-GAAP) | $39.9 million | $6.8 million |
| Operating cash flow | $26.7 million | $4.5 million |
| Cash at year-end | $63.4 million | $3.6 million |
| Investing cash flow | $(99.0) million | $(10.9) million |
| Financing cash flow | $132.1 million | $3.1 million |
Rental revenue was $54.7 million and system-service revenue was $12.5 million; software services contributed $0.2 million following the Railtronix acquisition. Revenue growth reflected a 191% increase in system revenue days and higher rental rates as demand improved. Operating costs and expenses declined to 62% of revenue from 84% in 2016. Adjusted EBITDA is a non-GAAP measure and includes adjustments for unusual items; it should not be treated as a substitute for GAAP earnings or cash flow.
Year-end total assets were $287.1 million, including $151.2 million of net property, plant and equipment. Total liabilities were $45.5 million, including a $24.7 million Tax Receivable Agreement (TRA) payable. Long-term debt including its current portion was $0.2 million, principally capital-lease obligations; the company had no borrowings under its then-existing revolver and $20 million of commitments available. The January 2018 replacement credit agreement provides a $50 million term loan and a $20 million revolver, plus an uncommitted $10 million accordion. These are borrowing capacities, not reported borrowings.
Changes versus the prior comparable period
- Revenue increased 271% to $67.4 million; operating income increased to $25.5 million from $2.9 million.
- System utilization rose to 98% from 65%; average systems deployed rose to 45.8 from 15.7. The fleet ended 2017 at 77 systems, with management expecting 90–96 systems by the end of Q1 2018.
- Operating cash flow increased, but investing outflows also rose sharply as the company expanded its fleet and built the Kingfisher facility. Capital expenditures were $93.9 million; investing cash outflows also included $5.0 million cash consideration for Railtronix.
- Reported earnings included a $23.0 million non-operating gain from remeasuring the TRA payable following the Tax Cuts and Jobs Act (Tax Act), alongside $25.9 million of income-tax expense, including approximately $22.6 million from remeasurement of deferred tax assets. The tax accounting was provisional.
For Q4 2017, revenue was $25.2 million, operating income $10.9 million and consolidated net income $9.2 million. Q4 2016 figures were $7.3 million, $3.0 million and $3.0 million, respectively. Quarterly figures are unaudited.
Outlook, risks and unusual items
- Management expected drilling and completion activity to continue recovering if oil and gas prices held steady or improved, and cited horizontal drilling, higher proppant use and faster completion activity as potential demand drivers. No specific company revenue or earnings guidance was provided.
- The Kingfisher, Oklahoma transload facility began initial operations in January 2018. Its seven-year customer agreement includes minimum quarterly volumes and shortfall fees; management estimated minimum annual revenue of approximately $13 million upon completion of the initial phase, then expected by August 2018. Minimum contracted volumes represented about 50% of initial-phase capacity. Approximately $15 million of construction commitments remained at year-end.
- The company acquired Railtronix in December 2017 for $9.5 million in total consideration, including $5.0 million cash and equity consideration. Additional performance-based cash awards of up to $2.5 million were not recognized because achievement of the milestones was not considered probable.
- Major risks include sensitivity to commodity prices and customer capital spending, customer concentration (four customers represented 62% of 2017 revenue), customer credit risk, and reliance on one contracted customer for Kingfisher revenue. Competition, construction execution, supplier and transportation availability, regulation, silica exposure, weather and cyber risk could also affect results.
- The TRA generally requires payment to former owners of 85% of specified realized or deemed tax savings. The filing estimated an approximately $122.1 million immediate termination payment in a change-of-control or qualifying early-termination scenario, based on year-end share price and stated assumptions; the actual amount could differ materially.
- The company reported no material pending litigation, no impairment charges, and no cash dividends planned for the foreseeable future. Management concluded disclosure controls were effective at year-end; the filing did not include management’s internal-control assessment or auditor attestation under the new-public-company transition relief.
Important facts for investors to verify
- Whether Kingfisher construction was completed on schedule and whether the customer delivered contracted minimum volumes; confirm realized throughput, fees and facility utilization.
- Whether the 98% system utilization and improved rental rates persisted, and how expansion affected maintenance, service costs and returns on invested capital.
- Customer concentration, receivable collections and any changes in the credit quality or contract status of major customers.
- Actual 2018 capital spending, cash generation and borrowings under the January 2018 credit agreement, including compliance with its tightening leverage covenants.
- Final Tax Act accounting and the TRA liability, including potential cash payments and any change-of-control acceleration exposure.
- Reconcile the reported $3.6 million attributable income and $0.28 basic EPS with $22.5 million consolidated net income, considering noncontrolling interests and the material tax/TRA items.