Smart Sand, Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Unless stated otherwise, financial amounts are in millions of dollars. The company mines and processes frac sand and has expanded into logistics and wellsite storage solutions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $54.4 | $29.8 | $97.1 | $54.8 |
| Gross profit | $19.8 | $8.4 | $27.0 | $13.8 |
| Operating income | $12.9 | $3.8 | $14.3 | $5.4 |
| Net income | $10.0 | $2.6 | $11.0 | $3.6 |
| Diluted EPS | $0.25 | $0.06 | $0.27 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $19.3 | $6.3 | $25.1 | $10.1 |
- Gross margin was approximately 36.3% in Q2 2018 versus 28.1% in Q2 2017, and 27.8% for the first half versus 25.1% in 2017.
- Q2 sand sales were $40.5 million; volume rose approximately 58% to 839,000 tons, and average selling price increased to $48.23 per ton from $31.74. First-half volume rose approximately 43% to 1.562 million tons, with average price of $44.42 versus $30.85.
- Management attributed improved results mainly to higher sales volumes, increased in-basin and spot sales, and better pricing. Higher freight, labor and operating costs partly offset the gains. Q2 cost of goods sold per ton rose to $41.33 from $40.31; first-half cost per ton rose to $44.87 from $37.71.
- Operating cash flow was $18.8 million for the first half, compared with $0.7 million in 2017. Investing cash use was $96.7 million, including $66.8 million of property and equipment purchases and $29.9 million for acquisitions. Financing provided $44.3 million. Cash and cash equivalents fell to $1.7 million from $34.7 million at year-end. Operating cash flow less property and equipment purchases was approximately negative $48.0 million.
- At June 30, working capital was $17.1 million, down from $38.6 million at December 31, 2017. The decline primarily reflected capital spending and was partly offset by collections.
Balance sheet, acquisitions and material changes
- Assets were $311.5 million and stockholders’ equity was $202.3 million at June 30, 2018. Net property, plant and equipment was $224.0 million, up from $171.8 million at year-end.
- Borrowings under the revolving facility were $45.0 million gross ($44.7 million net of debt discount), versus no balance at year-end. The facility’s capacity had been increased to $60 million, leaving $15 million undrawn at June 30. The facility is secured by substantially all company assets and expires December 8, 2019; the company reported compliance with financial covenants.
- In March, Smart Sand acquired operating rights and assets at the Van Hook, North Dakota transload terminal for approximately $15.5 million. The terminal became operational in April. In June, it acquired substantially all Quickthree Solutions assets for approximately $30 million upfront, plus potential earn-outs of up to $12.75 million over three years. The recorded earn-out liability was $9.2 million at June 30.
- Oakdale annual processing capacity reached approximately 5.5 million tons after an expansion completed in May. Goodwill of $16.9 million and intangible assets of $19.7 million were recorded primarily in connection with the Quickthree acquisition.
- The company adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method; it reported no opening retained-earnings adjustment. Comparative periods were not restated.
Outlook, risks and contingencies
- Management said drilling and completion activity had improved through Q2 and expected it to remain relatively consistent through the rest of 2018 if oil and natural gas prices remained at then-current levels. This is a conditional expectation, not formal earnings guidance.
- Management expected 2018 spending of approximately $125–$135 million to support growth and efficiency initiatives, excluding additional acquisitions. The filing also discusses Quickthree’s upfront purchase and expected initial system-manufacturing costs; investors should verify how these amounts are included in the spending estimate. Funding was expected from operations, equipment financing and potential facility borrowings. Approximately $29.2 million of expansion and replacement capital commitments remained at June 30.
- Customer concentration remains significant: four customers represented 65% of first-half revenue, and four customers held 65% of accounts receivable at June 30. The company also relies primarily on one third-party rail provider and reported supplier concentration in costs of goods sold.
- Key exposures include oilfield activity and commodity-price trends, customer credit and contract renewal, freight and rail capacity/costs, seasonal weather effects, environmental and mine-safety regulation, and execution of the Quickthree last-mile business. The filing added risks involving protection or infringement of intellectual property, limited suppliers for system components, safety performance, and personal-injury or property-damage claims.
- Operating lease commitments totaled $89.1 million; the asset retirement obligation was $9.5 million. The company reported no probable environmental matters and no litigation expected to have a material financial impact. It had $8.6 million of outstanding performance bonds.
- The effective tax rate was approximately 19.4% in 2018, versus 30.5% for Q2 2017 and 31.7% for the first half of 2017, reflecting principally the lower federal statutory tax rate under the Tax Cuts and Jobs Act. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher sand volumes and selling prices can be sustained, and how freight and labor cost growth affects margins per ton.
- Actual 2018 capital spending versus the $125–$135 million estimate, including the treatment of Quickthree purchase and startup costs, and the resulting liquidity and borrowing needs.
- Quickthree’s system production, customer adoption, earn-out outcomes, intellectual-property position and exposure to limited suppliers.
- Facility borrowing capacity, covenant headroom and repayment/refinancing plans ahead of the December 2019 maturity.
- Customer concentration, receivables collection, rail-service dependence and the effect of any downturn in oilfield activity.