SOLARIS OILFIELD INFRASTRUCTURE, INC. References to "we," "us," "our," "Solaris Inc. " or the "Company" refer toSolaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains "forward-looking statements" that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in "Cautionary Statement Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report and "Risk Factors" included in this Quarterly Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as updated by our subsequent filings with theUnited States Securities and Exchange Commission (the "SEC"), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required
by
law.
Overview
We design and manufacture specialized equipment, which combined with field technician support, last mile logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers drive efficiencies that reduce operational footprint and costs during the completion phase of well development. The majority of our revenue is currently derived from providing equipment and services related to our mobile proppant and fluid management systems and our last mile logistics management services. We also generate revenue from new technology and offerings that work in conjunction with our mobile proppant and fluid management systems, including our proprietary top fill equipment and AutoBlend™ integrated electric blender. Our equipment and services are deployed across active oil and natural gas basins inthe United States . Recent Trends and Outlook Oil and gas supply and demand dynamics remained tight throughout the third quarter of 2022. Recent volatility in global markets driven by continued monetary policies to control inflation, continued geopolitical factors and the uncertainty of a potential global economic slowdown contributed to WTI oil prices declining from over$110 per barrel inJuly 2022 to$80 per barrel inSeptember 2022 . While commodity prices remain at healthy levels to support growth in North American drilling and completion activity, this growth continues to be impacted by capital discipline among many operators, supply chain tightness and elevated inflation. The Baker Hughes Land rig count has increased 31% since the start of the year to 749 rigs at the end ofSeptember 2022 , as compared to a 49% increase in our fully utilized systems since the fourth quarter of 2021. Overall, demand for our offerings is predominantly influenced by the level of oil and natural gas well drilling and completion activity. While our fully utilized systems are highly correlated with US land rig count activity over longer periods, timing differences between drilling and completion activity can result in lags of one to two quarters or longer. Recently, our fully utilized system count growth has outpaced the rig count trend due primarily to new technology-led growth with new and existing customers. The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including any supply chain disruptions, potential regulatory changes, uncertainty around a potential economic slowdown and potential impacts from geopolitical disruptions. Consolidation amongst some of our E&P and oil service customers combined with financial discipline from publicly traded energy companies has reduced industry-wide capital spending. Additionally, consolidation can drive procurement strategy changes, which has historically resulted in both market share gains and losses for the Company. We expect both consolidation and financial discipline will likely continue to be important themes for the energy industry going forward. 16 Table of Contents Results of Operations Three and Nine Months EndedSeptember 30, 2022 Compared to Three and Nine Months Ended September 30, 2021 Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 Change 2022 2021 Change (in thousands) (in thousands) Revenue 92,325 49,377 42,948 235,951 113,240 122,711 Operating costs and expenses: Cost of services (excluding depreciation) 64,171 38,460 25,711 163,079 82,816 80,263 Depreciation and amortization 7,716 6,842 874
21,777 20,288 1,489 Property tax contingency - - - 3,072 - 3,072 Selling, general and administrative 5,929 4,760 1,169 17,202 14,326 2,876
Other operating (income) expense 524 (2,690) 3,214
(899) (2,074) 1,175 Total operating costs and expenses 78,340 47,372 30,968 204,231 115,356 88,875 Operating income (loss) 13,985 2,005 11,980 31,720 (2,116) 33,836 Interest expense, net (141) (66) (75) (308) (170) (138) Total other expense (141) (66) (75) (308) (170) (138) Income (loss) before income tax expense 13,844 1,939 11,905 31,412 (2,286) 33,698 Expense for income taxes (2,332) (507) (1,825) (5,889) (77) (5,812) Net income (loss) 11,512 1,432 10,080 25,523 (2,363) 27,886 Less: net (income) loss related to non-controlling interests (4,106) (558) (3,548) (9,162) 857 (10,019) Net income (loss) attributable to Solaris$ 7,406 $ 874 $ 6,532 $ 16,361 $ (1,506) $ 17,867 Revenue Revenue increased$42.9 million , or 87%, to$92.3 million for the three months endedSeptember 30, 2022 compared to$49.4 million for the three months endedSeptember 30, 2021 . Revenue increased$122.7 million , or 108%, to$236.0 million for the nine months endedSeptember 30, 2022 compared to$113.2 million for the nine months endedSeptember 30, 2021 . The increase in revenue is primarily related to an activity-driven increase in demand for our products and services. Mobile proppant systems, on a fully utilized basis, increased from 59 and 55 systems for the three and nine months endedSeptember 30, 2021 , respectively, to 94 and 84 systems for the three and nine months endedSeptember 30, 2022 , respectively, in response to the increase in industry activity levels and by the introduction of new products. Cost of Services
Cost of services, excluding depreciation and amortization expense increased$25.7 million , or 67%, to$64.2 million for the three months endedSeptember 30, 2022 compared to$38.5 million for the three months endedSeptember 30, 2021 . Cost of services, excluding depreciation and amortization expense increased$80.3 million , or 97%, to$163.1 million for the nine months endedSeptember 30, 2022 compared to$82.8 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in operating costs to support an activity-driven increase in demand for our products and services. Cost of services, excluding depreciation and amortization as a percentage of revenue was 70% and 69% for the three and nine months endedSeptember 30, 2022 , respectively, and 78% and 73% for the three and nine months ended September
30,
2021, respectively.
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Property Tax Contingency
We are subject to a number of state and local taxes that are not income-based.
As many of these taxes are subject to assessment and audit by the taxing
authorities, it is possible that an assessment or audit could result in
additional taxes due. We accrue for additional taxes when we determine that it
is probable that we will have incurred a liability and we can reasonably
estimate the amount of the liability. On June 16, 2022 , Cause Number
CV20-09-372, styled Solaris Oilfield Site Services v. Brown County Appraisal
District , was presented to the 35th District Court of Brown County, Texas . The
35th District Court of Brown County ruled in favor of Brown County Appraisal
District regarding the disqualification of our equipment for certain property
tax exemptions. While we intend to vigorously appeal this ruling, we have
recognized $3.1 in Accrued Liabilities and Cost of sales in the nine months
ended September 30, 2022 . No additional contingencies were recognized during the
three months ended September 30, 2022 . If this litigation is ultimately resolved
against us, in whole or in part, it is possible that the resolution of this
matter could be material to our consolidated results of operations or cash
flows.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$1.2 million , or 25%, to$5.9 million for the three months endedSeptember 30, 2022 compared to$4.8 million for the three months endedSeptember 30, 2021 . Selling, general and administrative expenses increased$2.9 million , or 20%, to$17.2 million for the nine months endedSeptember 30, 2022 compared to$14.3 million for the nine months endedSeptember 30, 2021 . Selling, general and administrative expenses increased due primarily to increases in headcount and professional fees.
Other Operating (Income) Expense
Other operating (income) expense increased$3.2 million , or 119% to expense of$0.5 million for the three months endedSeptember 30, 2022 compared to the income of$2.7 million for the three months endedSeptember 30, 2021 . Other operating (income) expense decreased$1.2 million , or 57% to income of$0.9 million for the nine months endedSeptember 30, 2022 compared to the income of$2.1 million for the nine months endedSeptember 30, 2021 . Other operating (income) expense in the three and nine months endedSeptember 30, 2022 primarily relate to change in the TRA liability, credit losses, gain on insurance claims and other settlements, loss on disposal of assets, and costs related to the evaluation of potential acquisitions. Other operating expense in the three and nine months endedSeptember 30, 2021 primarily relate to employee retention credits, credit losses, gain on insurance claims, transaction costs, and loss on disposal of assets. Provision for Income Taxes
During the three months endedSeptember 30, 2022 , we recognized a combinedUnited States federal and state expense for income taxes of$2.3 million , an increase of$1.8 million as compared to the$0.5 million income tax expense we recognized during the three months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , we recognized a combinedUnited States federal and state expense for income taxes of$5.9 million , an increase of$5.8 million as compared to the$0.1 million income tax expense we recognized during the nine months endedSeptember 30, 2021 . This change was attributable to operating gains. The effective combinedUnited States federal and state income tax rates were 16.8% and 26.2% for the three months endedSeptember 30, 2022 and 2021, respectively. The effective combinedUnited States federal and state income tax rates were 18.7% and 3.4% for the nine months endedSeptember 30, 2022 and 2021, respectively. The effective tax rate differed from the statutory rate primarily due toSolaris LLC's treatment as a partnership forUnited States federal income tax purposes. Comparison of Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We
define EBITDA as net income, plus (i) depreciation and amortization expense,
(ii) interest expense and (iii) income tax expense, including franchise taxes.
We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense
and (ii) certain non-cash items and any extraordinary, unusual or non-recurring
gains, losses or expenses.
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EBITDA and Adjusted EBITDA should not be considered in isolation or as
substitutes for an analysis of our results of operation and financial condition
as reported in accordance with accounting standards generally accepted in the
United States ("GAAP"). Net income is the GAAP measure most directly comparable
to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be
considered alternatives to net income presented in accordance with GAAP. Because
EBITDA and Adjusted EBITDA may be defined differently by other companies in our
industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to
similarly titled measures of other companies, thereby diminishing their utility.
The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.
Three months ended Nine months ended
September 30, September 30,
2022 2021 Change 2022 2021 Change
(in thousands) (in thousands)
Net income (loss) $ 11,512 $ 1,432 $ 10,080 $ 25,523 $ (2,363) $ 27,886
Depreciation and amortization 7,716 6,842 874 21,777 20,288 1,489 Interest expense, net 141 66 75 308 170 138 Income taxes (1) 2,332 507 1,825 5,889 77 5,812 EBITDA$ 21,701 $ 8,847 $ 12,854 $ 53,497 $ 18,172 $ 35,325
Property tax contingency (2) - - - 3,072 - 3,072 Stock-based compensation expense (3) 1,553 1,355 198 4,665 3,907 758 Employee retention credit (4) - (2,992) 2,992 - (2,992) 2,992 Change in payables related to Tax Receivable Agreement (5) - - - (654) - (654) Credit losses and adjustments to credit losses (32) 30 (62) (420) 630 (1,050) Other (6) 712 422 290 578 563 15 Adjusted EBITDA$ 23,934 $ 7,662 $ 16,272 $ 60,738 $ 20,280 $ 40,458
(1)
Property tax contingency represents a reserve related to an unfavorable
currently under appeal.
(3) Represents stock-based compensation expense related to restricted stock
awards.
(4) Employee retention credit as part of Consolidated Appropriations Act of 2021,
net of administrative fees.
(5) Reduction in liability due to state tax rate change.
(6) Other includes loss on disposal of assets, gain on insurance claims and other
settlements, and costs related to the evaluation of potential acquisitions.
Three and Nine Months Ended
EBITDA increased$12.9 million to$21.7 million for the three months endedSeptember 30, 2022 compared to$8.8 million for the three months endedSeptember 30, 2021 . Adjusted EBITDA increased$16.3 million to$23.9 million for the three months endedSeptember 30, 2022 compared to$7.7 million for the three months endedSeptember 30, 2021 . EBITDA increased$35.3 million to$53.5 million for the nine months endedSeptember 30, 2022 compared to$18.2 million for the nine months endedSeptember 30, 2021 . Adjusted EBITDA increased$40.5 million to$60.7 million for the nine months endedSeptember 30, 2022 compared to$20.3 million for the nine months endedSeptember 30, 2021 . The changes in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses, discussed above. 19 Table of Contents Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been cash flows from operations, borrowings under our credit agreements and proceeds from equity offerings. Our primary uses of capital have been to fund ongoing operations, capital expenditures to support organic growth, including our fleet development and related maintenance and fleet upgrades, repurchase shares of Class A common stock in the open market, and pay dividends. Although no assurance can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed. As ofSeptember 30, 2022 , cash and cash equivalents totaled$10.4 million . We have$6.0 million in borrowings outstanding under our Credit Agreement and have$44.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our Credit Agreement will provide sufficient liquidity to address our future cash needs, including capital expenditures, working capital investments, and dividends for the next 12 months and beyond. Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
September 30,
2022 2021 Change
(in thousands)Net cash provided by operating activities$ 43,912 $ 11,697 $ 32,215 Net cash used in investing activities (57,797) (13,625) (44,172) Net cash used in financing activities (12,179) (15,607)
3,428 Net change in cash$ (26,064) $ (17,535) $ (8,529)
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities was
Investing Activities. Net cash used in investing activities was$57.8 million for the nine months endedSeptember 30, 2022 , compared to net cash used in investing activities of$13.6 million for the nine months endedSeptember 30, 2021 . The increase in investing activities of$44.2 million is primarily due to capital expenditures related to enhancements to our fleet and for new technologies. Financing Activities. Net cash used in financing activities of$12.2 million for the nine months endedSeptember 30, 2022 was primarily related to quarterly dividends of$14.7 million , payments under finance leases of$1.1 million and$1.1 million of payments related to vesting of stock-based compensation, offset by net borrowings under the credit agreement of$6.0 million . Net cash used in financing activities of$15.6 million for the nine months endedSeptember 30, 2021 was primarily related to quarterly dividends of$14.4 million and$0.7 million of payments related to vesting of stock-based compensation. Capital Sources
Senior Secured Credit Facility
See Note 4. "Debt" to our condensed consolidated financial statements as of
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Future Sources and Uses of Cash
Our material cash commitments consist primarily of obligations under our Credit
Agreement, Tax Receivable Agreement, finance and operating leases for property
and equipment, and purchase obligations as a part of normal operations. We have
no material off balance sheet arrangements as of September 30, 2022 , except for
purchase commitments under supply agreements disclosed below.
As of September 30, 2022 , we expect to pay approximately $0.2 million in
commitment fees on our Credit Agreement within the next twelve months,
calculated based on the unused portion of lender commitments, at the applicable
commitment fee rate of 0.375%. As of September 30, 2022 , if our borrowings under
the Credit Agreement remain at $6.0 million , we expect to pay approximately $0.3
million in interest within the next twelve months, calculated based on the
weighted average interest rate on the borrowings outstanding as of September 30,
2022 of approximately 5.61%.
As of
Critical Accounting Policies and Estimates
We had no material changes in our critical accounting policies and estimates
during the three and nine months ended September 30, 2022 from the amounts
listed under Part II, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Critical Accounting Policies and Estimates"
in the Company's Annual Report on Form 10-K for the year ended December 31, 2021
for additional information.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
See Note 2. "Summary of Significant Accounting Policies - Recently Issued Accounting Standards" to our condensed consolidated financial statements included in this Quarterly Report, for a discussion of recently issued accounting standards.
Under the Jumpstart Our Business Startups Act (the "JOBS Act"), we meet the
definition of an "emerging growth company," which allows us to have an extended
transition period for complying with new or revised accounting standards
pursuant to Section 107(b) of the JOBS Act, however, we elected to opt out of
such exemption (this election is irrevocable).
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements, except for purchase commitments under supply agreements.
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