Smart Sand, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. Smart Sand supplies frac and industrial sand, logistics services, and wellsite storage systems. Its operations include mines in Oakdale, Wisconsin; Utica, Illinois; and Blair, Wisconsin. The Blair facility began operating in the second quarter of 2023.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Total revenue | $296.0 million | $255.7 million | Up 16% |
| Sand sold | 4.514 million tons | 4.333 million tons | Up 4% |
| Gross profit / margin | $41.6 million / 14.0% | $29.6 million / 11.6% | Improved with higher volumes and selling prices |
| Operating loss | $(1.5) million | $(3.1) million | Loss narrowed |
| Net income (loss) | $4.6 million | $(0.7) million | Includes a $6.9 million income tax benefit |
| Adjusted EBITDA (non-GAAP) | $34.1 million | $29.3 million | Up; company cites higher sales and production cost savings, partly offset by freight costs |
| Cash from operating activities | $31.0 million | $5.4 million | Improved, including from higher sales and collections |
| Capital expenditures | $23.0 million | $12.7 million | Higher investment |
| Free cash flow (non-GAAP) | $8.0 million | $(13.9) million | Defined as operating cash flow less purchases of property, plant and equipment |
Sand sales revenue was $283.2 million; shortfall revenue was $4.3 million and logistics revenue was $8.5 million. Management attributed the year-over-year revenue increase to higher sales volume and stronger sand prices during part of the year. Operating expenses rose 32% to $43.1 million, including higher staffing and costs associated with expanded operations. A $1.8 million net loss on fixed-asset disposals was primarily related to a wet-plant reconfiguration.
Balance sheet and liquidity at December 31, 2023: Cash was $6.1 million; total current assets were $61.9 million and current liabilities were $54.5 million. Financial debt was approximately $19.2 million, including $8.0 million drawn on the ABL facility; the company reported $12.0 million of undrawn ABL availability and total cash-plus-availability liquidity of $18.1 million. The ABL facility matures December 13, 2024. Operating lease liabilities were $24.6 million, separate from financial debt. The company reported compliance with ABL financial covenants at year-end.
Material changes and business developments
- Revenue increased 16%, while gross profit rose 40%; sand volume increased 4%. Management said prices improved during part of 2023, but demand softened in the fourth quarter as some customers exhausted budgets after accelerating spending earlier in the year.
- Blair added operating capacity and direct access to the Canadian National rail network. Company-wide annual processing capacity is approximately 10.0 million tons.
- Waynesburg, Pennsylvania was expanded in the fourth quarter. Rights to operate terminals in Minerva and Dennison, Ohio were acquired in December 2023 and January 2024, respectively; both were expected to become operational in the second quarter of 2024.
- Industrial Products Solutions (IPS) remained a small share of sales. Utica blending and cooling upgrades were completed in 2023 to broaden industrial product offerings.
- Two customers represented 42% of 2023 revenue: Equitable Gas Corporation, 30.2%; and Liberty Oilfield Services, 11.4%. Four customers represented 70% of year-end accounts receivable.
- The company repurchased approximately 5.176 million shares from a Clearlake affiliate for $8.85 million in February 2023; the related note was repaid by year-end. Treasury stock increased during the year.
Outlook, risks, and unusual items
- Management expects 2024 capital expenditures of $19 million to $23 million, primarily for mine and processing efficiency, terminal work, and IPS support. Expected funding sources include cash, operating cash flow, ABL borrowings, or other financing.
- Management expects frac sand demand to remain healthy and prices relatively stable in 2024. Spears and Associates estimated North American proppant demand would be similar to 2023; this is an industry estimate, not company guidance.
- Major risks include oil and gas activity and commodity-price volatility; sand pricing and competition from regional suppliers; dependence on a limited number of customers; rail and logistics disruptions; energy and labor costs; seasonality and severe weather; permitting, environmental and silica-safety requirements; and the ability to renew or replace the ABL facility before its December 2024 maturity.
- The collective bargaining agreements covering 42 employees expire April 30, 2024. Management stated it intends to renew them.
- Net income benefited materially from a $6.9 million tax benefit; the reported effective tax rate was approximately 306%. The filing also reports a $2.2 million liability for uncertain tax positions. These items warrant attention when assessing the sustainability of reported earnings.
- The company reported no material probable environmental matters and said routine litigation was not expected to have a material adverse effect. It had $18.9 million of performance bonds, principally supporting reclamation and related obligations. The auditor issued an unqualified opinion on the financial statements and reported no critical audit matters; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the 2024 Ohio terminals become operational as planned and generate incremental sales and margins.
- ABL renewal or refinancing terms and the company’s liquidity after the facility’s December 2024 maturity.
- Customer concentration, receivable collections, and the durability of sales volumes and pricing after fourth-quarter demand softened.
- Whether planned 2024 capital expenditures can be funded while maintaining liquidity and meeting debt, lease, and land-minimum-payment obligations.
- How much of 2023 net income reflects recurring operations versus the unusually large income tax benefit, and how deferred tax assets and uncertain tax positions may affect future results.
- Progress on IPS growth and the returns from Blair, terminal expansions, and other recent investments.