Smart Sand, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. The filing is an annual report, not a standalone fourth-quarter report. Unless noted, amounts are in U.S. dollars.
Business context and reporting period
Smart Sand produces Northern White frac sand, primarily for oil and gas exploration and oilfield service customers. Its operating mine and processing facility is in Oakdale, Wisconsin; substantially all sales in 2017 came from this site. The company also owns a permitted Wisconsin site at Hixton and holds leases for potential mines in the Permian Basin.
Oakdale had 3.3 million tons of annual nameplate capacity at year-end. An expansion to approximately 5.5 million tons was underway, with completion expected in the second quarter of 2018. The company reported 2.449 million tons sold in 2017.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $137.2 million | $59.2 million |
| Gross profit | $36.9 million | $32.7 million |
| Operating income | $18.7 million | $20.4 million |
| Net income | $21.5 million | $10.4 million |
| Adjusted EBITDA (non-GAAP) | $30.6 million | $37.8 million |
| Operating cash flow | $15.6 million | $26.7 million |
| Cash used in investing activities | $51.1 million | $2.5 million |
- Revenue rose about 132%, mainly on higher volumes and market recovery. Sand sales revenue, including reservation charges, was $80.2 million; transportation revenue was $55.8 million, largely pass-through freight.
- Gross margin was approximately 26.9% versus 55.1% in 2016, and operating margin approximately 13.6% versus 34.4%. These comparisons are affected by the sharp increase in pass-through freight revenue and related costs.
- Production costs, a company-defined non-GAAP measure excluding depreciation, depletion, asset-retirement accretion and freight, were $33.3 million, or $13.61 per ton, versus $12.6 million, or $15.22 per ton.
- Net income included an approximately $8.5 million tax benefit from remeasuring deferred tax balances after the Tax Cuts and Jobs Act. Adjusted EBITDA declined, primarily because contractual shortfall revenue fell to $1.2 million from $20.9 million.
- Fourth-quarter 2017 revenue was $43.0 million and net income was $10.9 million; fourth-quarter 2016 revenue was $29.5 million and net income was $12.4 million.
- At December 31, cash and cash equivalents were $34.7 million; working capital was $38.2 million. The $45 million revolving facility was undrawn, and the company reported compliance with its covenants. It cited approximately $61.9 million of liquidity as of March 1, 2018, including cash and full revolver availability.
- Total assets were $246.8 million and stockholders’ equity $190.0 million. No amounts were drawn on the revolver; remaining equipment financing obligations and notes payable totaled approximately $0.9 million, current at year-end.
- Capital expenditures were reported as $69.4 million for 2017; cash purchases of property, plant and equipment were $51.2 million. Operating cash flow did not cover cash investment spending. The company had $35.1 million of outstanding Oakdale construction commitments at year-end.
Material changes versus the prior comparable period
- Sales volume increased from approximately 826,000 tons in 2016 to 2.449 million tons in 2017 as industry activity recovered. Average selling price including reservation charges decreased from $38.28 to $32.74 per ton, partly because reservation charges were spread over more tons.
- Transportation revenue rose from $6.7 million to $55.8 million, with associated freight costs also increasing substantially. The filing says transportation revenue and costs generally do not materially affect gross profit.
- Operating income declined despite higher gross profit, as operating expenses increased from $12.3 million to $18.2 million, including higher public-company, legal, consulting and development costs.
- Operating cash flow fell by $11.1 million, including a significant increase in receivables as sales and freight-billed customer volumes grew. Investing outflows increased with the Oakdale expansion.
- Net income increased, helped by higher sales and lower interest expense after the 2016 redemption of preferred stock and repayment of the former credit facility, as well as the tax benefit. Adjusted EBITDA decreased.
Outlook, management commentary, risks and unusual items
- Management expected the Oakdale expansion to reach approximately 5.5 million tons of annual capacity in Q2 2018 and estimated 2018 expansion and replacement capital expenditures of $85–$95 million, funded through operating cash, prior equity proceeds and revolver availability. This is a planned investment, not earnings guidance.
- As of March 1, 2018, approximately 91.7% of existing 3.3-million-ton annual capacity was contracted under take-or-pay agreements, with a volume-weighted average remaining term of about 2.4 years. Once expanded, approximately 55% of 5.5-million-ton capacity was expected to be contracted.
- Management described recovering proppant demand and cited third-party forecasts for continued industry growth. These are market estimates, not company forecasts, and management cautioned that expansion execution, customer demand and realized costs are uncertain.
- Customer concentration remains material: four customers accounted for 71.6% of 2017 revenue, led by Rice Energy at 27.1% and Liberty at 20.6%. The business is exposed to customer credit, contract renewal and oil-and-gas activity risks.
- Key risks include new regional sand supply, especially in the Permian Basin; potential pressure on Northern White pricing; dependence on Oakdale and rail logistics; permitting and environmental requirements; weather and seasonality; energy and transportation costs; and silica-related health and regulatory exposure.
- Other notable items: a $7.1 million addition to the asset retirement obligation, including an approximately $4.5 million increase associated with a revised mining-period estimate; and a disclosed immaterial prior-period correction that increased 2015 net income by $492,000. The 2017 tax benefit was provisional and could be adjusted as tax guidance developed.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor was not required to attest to internal-control effectiveness.
Most important facts for an investor to verify
- Whether the Oakdale expansion was completed on schedule and within budget, and whether new capacity can be profitably utilized.
- Contracted volumes, customer concentration, renewal terms and counterparties’ ability to meet take-or-pay obligations.
- Underlying sand pricing and production margins after separating freight pass-through revenue and costs, reservation charges and shortfall payments.
- Cash conversion, receivable collections, remaining construction commitments, planned capital spending and available liquidity.
- Actual competitive effects of Permian and other regional mines on Northern White demand, pricing and delivery economics.
- Final tax accounting under the Tax Act and any changes to reclamation estimates, permits or environmental obligations.