Smart Sand, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Smart Sand supplies frac sand, logistics and wellsite storage solutions to the oil and gas industry. Figures below are in millions of dollars except per-share data, percentages and tons.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $26.1 | $67.9 | $73.6 | $119.7 |
| Gross profit / margin | $14.2 / 54.4% | $24.9 / 36.6% | $20.6 / 28.0% | $36.0 / 30.1% |
| Operating income | $8.7 | $19.2 | $9.2 | $25.2 |
| Net income / diluted EPS | $4.6 / $0.12 | $14.3 / $0.36 | $4.6 / $0.11 | $18.3 / $0.46 |
| Adjusted EBITDA (non-GAAP) | $15.6 | $26.2 | $22.0 | $38.7 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $25.8 | $17.4 |
- Q2 sand sales were approximately 208,000 tons, versus 741,000 a year earlier; first-half sales were 964,000 tons, versus 1.389 million. Q2 contribution margin per ton was $92.62 versus $41.80; first-half margin per ton was $31.92 versus $34.59. These are company-defined non-GAAP measures.
- At June 30, cash was $16.6; working capital was $63.9, up from $52.2 at year-end 2019. Total current assets were $97.1 and current liabilities $33.1.
- Reported debt, net, totaled $31.3, including $6.4 current; no ABL borrowings were outstanding. The company reported $8.0 of available ABL borrowing capacity and compliance with covenants. Oakdale equipment financing carries a fixed 5.79% rate.
- First-half capital expenditures were $6.4. Cash increased $14.0 to $16.6 over the six months, after operating cash flow of $25.8, investing outflows of $6.4 and financing outflows of $5.4.
Material changes and management commentary
- Revenue fell 62% in Q2 and 39% for the first half year over year, chiefly reflecting lower volumes amid depressed oil prices, pandemic-driven demand weakness and industry oversupply. Logistics revenue declined; contractual shortfall revenue was $14.0 in Q2 and $15.3 for the first half. Shortfall revenue represented 54% of Q2 revenue.
- Net income declined 67% in Q2 and 75% year to date. Lower costs and expenses partly offset reduced volumes; first-half SG&A increased, primarily due to professional fees associated with litigation. Interest expense declined with lower rates and debt.
- Management reduced the 2020 capital expenditure budget by up to $20 million and expected full-year capex below $10 million, mainly by reducing SmartSystems manufacturing. Cost actions included headcount and salary reductions, suspension of some variable compensation, and negotiating deferred lease, debt and minimum royalty payments.
- Management said available liquidity should cover cash needs for the next 12 months, based on information available at filing. It warned that the duration and effects of the pandemic and oil-market disruption were uncertain and could materially affect revenue, asset values, cash flows and access to borrowing or other capital. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Customer concentration and collection risk are significant: one customer represented 98% of accounts receivable at June 30. Two customers generated 91% of Q2 revenue. U.S. Well Services is in litigation with Smart Sand over alleged unpaid amounts and contract terms; the outcome is uncertain. U.S. Well-related accounts and unbilled receivables were $54.6 at June 30, versus $37.4 at year-end 2019. The filing says these balances do not represent the full damages sought.
- The company identified a vendor-rebate accounting error: $1.8 attributable to 2018 expenses, with a related $0.4 tax effect, and revised prior-period presentation. It judged the prior-period errors immaterial but said they could be material to the current period given reduced activity. Management classified the omission as a significant deficiency and added review controls; it nevertheless concluded disclosure controls were effective.
- The CARES Act generated a discrete $0.8 tax benefit in Q1. The effective tax rate was 42.8% in Q2 and 44.4% for the first half, versus 21.8% and 21.3% in the comparable 2019 periods.
- Other exposures include $40.4 of future minimum land-use commitments, $25.5 of operating lease liabilities, $6.3 of asset retirement obligations, and $7.4 of outstanding performance bonds. A single facility and primary rail provider, seasonal operations, environmental and mine-safety requirements, and concentrated suppliers add operating risk.
Important facts for investors to verify
- Whether the $54.6 million U.S. Well receivable is collectible, and the status and possible financial impact of the litigation and contract claims.
- Current customer demand, contract shortfalls and sand volumes, particularly as pandemic and commodity-market conditions evolve.
- Actual ABL borrowing availability and liquidity under the borrowing-base terms, along with the effects of deferred payments and debt maturities.
- Implementation and effectiveness of the new controls addressing the vendor-rebate accounting deficiency and the planned revision of historical statements.
- Whether full-year capital spending stays below $10 million and whether cost reductions preserve operations and customer service.