Smart Sand, Inc. — Q3 2018 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the same periods in 2017. Smart Sand mines and processes frac sand and provides transportation, transloading and wellsite storage solutions. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $63.1 | $39.3 | $160.2 | $94.2 |
| Gross profit | $22.6 | $13.0 | $49.5 | $26.8 |
| Operating income | $17.4 | $8.8 | $31.7 | $14.1 |
| Net income | $12.1 | $7.0 | $23.1 | $10.6 |
| Diluted EPS | $0.30 | $0.17 | $0.57 | $0.26 |
| Adjusted EBITDA (non-GAAP) | $22.1 | $11.6 | $47.2 | $21.7 |
Revenue increased about 61% in Q3 and 70% for the nine-month period. Gross margin was approximately 35.7% in Q3 (33.1% prior year) and 30.9% for nine months (28.5% prior year). Management attributed improved results mainly to higher sand volumes and average selling prices; higher freight, labor and operating costs partly offset gains. Sand sold was 823,000 tons in Q3, up about 26%, and 2.384 million tons for nine months, up about 37%. Average selling price per ton rose to $53.77 from $34.02 in Q3 and to $47.66 from $32.02 for nine months.
Q3 and nine-month operating income included a $2.1 million unrealized gain from reducing the estimated fair value of Quickthree acquisition earn-out consideration. Interest expense rose to $0.8 million in Q3 and $1.4 million for nine months, principally due to Credit Facility borrowings. The nine-month effective tax rate was 23.9%, versus 24.0% in 2017; management said capital expensing under the Tax Reform Act was expected to result in a tax net operating loss for 2018.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $33.7 million, versus $8.6 million in 2017.
- Investing cash outflow was $111.6 million, including $81.7 million of property and equipment purchases and $29.9 million for acquisitions, net of cash acquired. Financing cash inflow was $43.8 million.
- Cash and cash equivalents were $1.2 million at September 30, 2018, down from $34.7 million at December 31, 2017. Working capital was $22.3 million, down from $38.6 million.
- Revolver borrowings were $44.5 million gross ($44.2 million net of debt discount), with $15.5 million undrawn availability under the $60 million facility. The facility matures December 8, 2019; the company reported covenant compliance. Substantially all assets secure the facility.
- Operating lease and rental commitments totaled $86.1 million. Required capital for expansion and replacement projects was approximately $23 million at quarter-end.
Developments, outlook and risks
- Smart Sand acquired rights to operate the Van Hook, North Dakota transload terminal for approximately $15.5 million; it began operating in April 2018. In June, it acquired substantially all Quickthree assets for approximately $30 million cash plus potential earn-outs of up to $12.75 million over three years. The recorded earn-out liability was $7.1 million at quarter-end.
- Oakdale processing capacity reached approximately 5.5 million tons annually after expansion. Management expected 2018 capital project spending of approximately $125–$135 million, excluding additional acquisitions; the filing says this amount includes the Quickthree acquisition.
- Management reported lower Northern White sand demand in Q3, citing constrained takeaway capacity, greater in-basin sand availability in the Permian, and reduced customer spending late in the year. It expected spot sales to remain lower through the rest of 2018 and warned that continued spot-market weakness could pressure prices. Management did not expect material changes to long-term contract terms for the remainder of 2018.
- Risks include customer and industry concentration, dependence on a primary third-party rail provider, seasonal weather impacts, spot-price pressure, floating-rate debt, and significant lease and capital commitments. Three customers represented 74% of receivables; five customers generated 82% of Q3 revenue. No material litigation or probable environmental matters were reported.
Key facts for investors to verify
- Whether Q3’s demand and spot-sales weakness continued after September, and its effect on pricing and volumes.
- How the Van Hook and Quickthree acquisitions contribute to revenue, margins and cash generation, and whether Quickthree earn-out estimates change.
- Whether planned capital spending can be funded while cash remains low and revolver availability is limited; confirm subsequent borrowing and covenant headroom.
- Customer concentration, rail-service dependence, and the company’s ability to meet substantial lease and other contractual commitments.
- The filing reports expected full-year 2018 capital spending of $125–$135 million and says the amount includes Quickthree; verify the scope and actual expenditure against that disclosure.