Solaris Oilfield Infrastructure, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Solaris designs and manufactures equipment and provides field support, last-mile logistics, and software for oil and gas well completions. Figures below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $69.7 | $92.3 | $229.6 | $236.0 |
| Operating income | $10.0 | $14.0 | $40.7 | $31.7 |
| Net income | $7.6 | $11.5 | $31.8 | $25.5 |
| Net income attributable to Solaris | $4.9 | $7.4 | $20.0 | $16.4 |
| Class A diluted EPS | $0.16 | $0.22 | $0.64 | $0.49 |
| Adjusted EBITDA | $23.4 | $23.9 | $75.4 | $60.7 |
- Margins: Cost of services excluding depreciation was 60% of revenue in Q3 and 61% for the nine-month period, versus 70% and 69%, respectively, in 2022. Operating margin was approximately 14.4% in Q3 (15.1% prior year) and 17.7% year to date (13.4% prior year).
- Cash flow: Nine-month operating cash flow was $66.3, versus $43.9 in 2022. Investing cash outflow was $54.8, including $57.1 of property and equipment investment. Financing cash outflow was $16.9. Cash declined $5.4 from year-end 2022 to $3.5.
- Liquidity and debt: Current assets were $74.9 and current liabilities $42.9 at September 30. Credit-facility borrowings were $37.0, with a further $38.0 available; weighted-average borrowing rate was 8.34%. The facility matures April 26, 2025. Finance and operating lease liabilities totaled $20.3. The company reported compliance with credit covenants.
- Other obligations: The Tax Receivable Agreement liability was $71.5. Purchase obligations due within 12 months were approximately $6.2.
Changes versus prior period
- Q3 revenue fell $22.6, or about 25%, primarily due to lower last-mile tonnage. Higher fully utilized systems (108 versus 105) partly offset the decline.
- Nine-month revenue declined $6.4, or about 3%, also reflecting lower last-mile tonnage; fully utilized systems increased to 111 from 90.
- Despite lower Q3 revenue, cost of services fell faster, but operating income and Solaris-attributable income declined. For the nine months, lower service costs and higher fully utilized system counts supported higher operating income and Adjusted EBITDA.
- Interest expense rose to $1.1 in Q3 and $2.4 year to date, from $0.1 and $0.3, respectively, reflecting increased borrowings and financing costs.
Outlook, risks, and unusual items
- Outlook: The filing gives no quantified earnings or revenue guidance. Management expects oil-related drilling and completion activity to remain stable for the foreseeable future; improved gas prices could support gas-related activity in 2024. It expects capital spending to slow through the remainder of 2023 and into 2024 as new product lines are completed, with the aim of increasing cash flow.
- Management noted that fully utilized systems grew faster than the U.S. land rig count trend, supported by new technology and customer growth. Pricing increases and new products also helped sustain earnings amid lower activity.
- Property-tax litigation: A $3.1 accrual remains related to a Texas property-tax exemption dispute under appeal. An adverse resolution could materially affect results or cash flows; the company anticipated an appellate ruling in Q4 2023.
- Asset sale and impairment: A non-binding sale agreement led to $3.0 of assets being classified as held for sale and a $1.4 impairment charge.
- Controls: Disclosure controls were reported ineffective due to a previously identified material weakness in IT general controls affecting a third-party system used for last-mile logistics financial reporting. Remediation measures were substantially implemented but had not operated long enough for management to conclude the weakness was fully remediated. No financial-statement misstatements were identified.
- Business risks: Demand depends on oil and gas completion activity and commodity-market conditions; management cited geopolitical disruptions, supply-chain issues, regulation, economic slowdown, customer consolidation, and financial discipline in the sector. Customer concentration remained notable: two customers represented 13% and 12% of Q3 revenue, and two customers represented 16% and 14% of receivables at quarter-end.
- Capital returns: The company repurchased 3.08 million shares for $25.8 year to date, at an average $8.38 per share, with $24.2 remaining under the $50.0 authorization. It paid $0.11 per Class A share in quarterly dividends.
Investor verification points
- Check the outcome and potential cash impact of the Brown County property-tax appeal.
- Monitor remediation and independent assessment of the IT-control material weakness.
- Track last-mile tonnage, system utilization, customer demand, and the anticipated slowdown in capital spending.
- Assess liquidity and refinancing risk given low cash, the $37.0 facility balance, floating-rate borrowing costs, and the April 2025 maturity.
- Review customer and related-party exposure, including THRC-affiliated revenue and the $71.5 Tax Receivable Agreement liability.