Smart Sand, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; amounts below are in U.S. dollars. Financial statements are unaudited.
Business context and results
Smart Sand supplies frac and industrial sand and related logistics and wellsite storage services. Its operations include Oakdale and Blair, Wisconsin, and Utica, Illinois; the Blair facility began operating in April 2023. The company says frac sand prices improved as supply-demand conditions strengthened, while its industrial products business is intended to diversify its markets.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $74.8 million | $68.7 million | $157.1 million | $110.3 million |
| Gross profit | $12.7 million | $9.0 million | $24.3 million | $7.0 million |
| Gross margin | 17.0% | 13.1% | 15.5% | 6.3% |
| Operating income (loss) | $3.1 million | $1.4 million | $1.5 million | $(8.6) million |
| Net income (loss) | $6.3 million | $(0.1) million | $2.7 million | $(6.0) million |
| Adjusted EBITDA (non-GAAP) | $11.4 million | $9.2 million | $19.8 million | $7.3 million |
- Q2 sand sales revenue rose 8% to $72.4 million despite sand volumes declining to about 1.084 million tons from 1.196 million. Management attributed the revenue and gross-profit increases mainly to higher average sand prices. Logistics revenue increased 46% to $2.3 million, reflecting greater SmartSystems utilization.
- For the first half, sand sales revenue increased 43%; tons sold rose about 11% to 2.279 million. Logistics revenue increased 56% to $4.7 million. Higher volume and prices drove gross-profit improvement, partly offset by higher production, freight and transloading costs.
- Six-month operating expenses included a $1.9 million net loss on disposal of fixed assets, associated with plant reconfiguration and equipment upgrades. Salaries and SG&A also increased, including costs related to Blair.
- Income tax benefits were unusual: $3.3 million in Q2 and $1.7 million for the first half, contributing materially to reported net income. Management cites tax credits, depletion deductions, carrybacks and state apportionment among effective-tax-rate factors.
Cash flow, debt and liquidity
- Six-month operating cash flow was $21.2 million, compared with cash used of $10.9 million a year earlier. Capital expenditures were $9.2 million; company-defined free cash flow, a non-GAAP measure, was $11.9 million versus negative $22.6 million.
- Cash was $5.5 million at June 30, 2023, nearly unchanged from year-end. Current assets were $60.3 million and current liabilities $50.8 million.
- Reported debt, including current and long-term portions, was about $13.0 million, down from about $16.0 million at December 31, 2022. No ABL borrowings were outstanding; the company reported $19.0 million of undrawn availability after $1.0 million of letters of credit. It was in compliance with financial covenants.
- Operating lease liabilities were $26.8 million. The company also reported $19.3 million of asset retirement obligations and $17.3 million of performance bonds outstanding.
- Financing cash flows included $4.5 million of treasury-stock purchases in the cash flow statement. The filing also describes a February 2023 $8.85 million purchase of Clearlake’s shares, partly financed by a promissory note that was fully repaid by June 30.
Outlook, risks and unusual items
- Management expects 2023 capital expenditures of $20 million to $25 million, primarily for efficiency projects at Oakdale and Utica and starting operations at Blair. It expects to fund these through operating cash flow, equipment financing or the ABL facility, and says available liquidity is sufficient for the next 12 months.
- As of June 30, unsatisfied customer-contract performance obligations were $218.4 million; the company expects to recognize $74.7 million in the rest of 2023, $71.4 million in 2024 and $72.3 million in 2025.
- Management cannot predict whether improved frac sand pricing will continue. Risks include oil and gas demand and price volatility, inflation and slower economic growth, seasonality, geographic concentration of mines and transport routes, and environmental and mining-safety requirements.
- Customer concentration remains significant: one customer generated 29% of Q2 revenue; two generated 41% of first-half revenue. Five customers represented 70% of receivables at quarter-end. Two suppliers accounted for 35% of first-half cost of goods sold.
- Two Wisconsin lawsuits relating to alleged noise, light and dust at the Blair facility remain in discovery; the company could not assess their likely outcome. Hi-Crush agreed to indemnify the company for covered pre-acquisition matters. The company also disclosed uncertain tax positions related to its depletion-deduction methodology and a partial valuation allowance against deferred tax assets.
- The filing reports a prior-year operating-expense classification correction of $1.462 million, deemed immaterial and with no effect on previously reported net income. It also contains an inconsistency: the financial statements report first-half net income of $2.708 million, while portions of MD&A call the period a net loss. The financial statements show net income.
Important facts for investors to verify
- Whether higher sand pricing, demand and SmartSystems utilization persist, and how Blair contributes after commencing operations.
- How much of reported earnings reflects recurring operations versus tax benefits, and the resolution of the depletion-deduction tax position.
- Progress on planned capital spending, cash generation, debt repayment and ABL availability.
- Exposure to concentrated customers and suppliers, the Blair litigation, reclamation obligations and evolving environmental or mine-safety requirements.
- The MD&A first-half net-loss wording against the net-income amount in the financial statements.