Smart Sand, Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are presented in millions unless noted.
Business context
Smart Sand produces Northern White frac sand and provides transportation, transloading and wellsite storage services to oil and gas producers and oilfield service companies. Its main mine and processing facility is in Oakdale, Wisconsin, with annual nameplate capacity of 5.5 million tons. The company also operates the Van Hook, North Dakota terminal and rents SmartSystems equipment. Its business is exposed to oil and gas activity, frac sand pricing, regional-sand competition and customer demand.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $233.1 | $212.5 |
| Gross profit / margin | $81.1 / 34.8% | $67.6 / 31.8% |
| Operating income / margin | $43.5 / 18.7% | $25.9 / 12.2% |
| Net income | $31.6 | $18.7 |
| Diluted EPS | $0.78 | $0.46 |
| Cash from operations | $44.6 | $50.9 |
| Adjusted EBITDA (non-GAAP) | $87.1 | $66.0 |
| Contribution margin (non-GAAP) | $106.5 | $83.9 |
Revenue rose 9.7%, while sand tons sold fell to 2.462 million from 2.995 million. Gross profit and earnings improved despite lower volumes, primarily on substantially higher contractual shortfall revenue and increased logistics revenue. Adjusted EBITDA and contribution margin are company-defined non-GAAP measures and should not be treated as substitutes for GAAP results.
Fourth-quarter 2019 revenue was $47.7 million and net income was $2.4 million, compared with $52.2 million revenue and a $4.4 million net loss in fourth-quarter 2018.
At year-end, cash was $2.6 million, working capital $50.4 million and total current assets $90.4 million against current liabilities of $40.0 million. Accounts and unbilled receivables included $37.4 million due from U.S. Well Services, with which the company is litigating. Net carrying debt was approximately $34.4 million, compared with $48.7 million a year earlier. The company reported $2.5 million outstanding under its new ABL facility and $17.5 million of undrawn availability; availability depends on eligible receivables and inventory. Total assets were $361.6 million and stockholders’ equity was $244.1 million.
Material changes versus prior year
- Shortfall revenue increased to $49.3 million from $6.0 million, representing 21% of FY2019 revenue; $24.8 million related to U.S. Well Services. Sand sales revenue declined to $109.6 million from $143.5 million.
- Logistics revenue increased to $74.2 million from $62.9 million, reflecting more in-basin sales and SmartSystems rentals. Four SmartSystems fleets were operating with customers at year-end.
- Operating cash flow declined to $44.6 million from $50.9 million, with a significant working-capital use including a $41.1 million increase in accounts receivable.
- The company recorded $15.5 million of impairment charges in 2019: $7.6 million for Quickload-developed technology and $7.9 million for its Hixton, Wisconsin property. The company no longer plans to actively market Quickload and has no immediate plans to develop Hixton. In 2018, it recorded $17.8 million of goodwill and indefinite-lived intangible impairment.
- In December 2019, the company refinanced and terminated its former revolving facility using a five-year Oakdale equipment financing arrangement and entered a new five-year, $20 million ABL facility. The Oakdale financing bears fixed interest of 5.79%; the ABL’s stated margin is 2.00% over LIBOR or 1.00% over its alternate base rate.
- Adoption of lease accounting in 2019 brought operating lease right-of-use assets and liabilities onto the balance sheet. The company also reduced its asset-retirement obligation by $9.8 million following an updated reclamation plan; management said this will reduce future depreciation and accretion expense.
Outlook, risks and unusual items
Management expected 2020 frac sand demand to be broadly consistent with 2019 and forecast capital expenditures of $20–$30 million, primarily for SmartSystems growth. The filing provides no specific company revenue or earnings guidance. Industry forecasts cited in the filing anticipated flat North American proppant demand, while the company cautioned that greater supply could keep sand prices depressed. Management stated that available liquidity was sufficient for the next twelve months, including planned investments, and that refinancing resolved the substantial doubt previously associated with the former facility’s short-term maturity.
Key risks include customer concentration and contract renewals, spot-market and regional-sand competition, oil and gas activity and commodity-price exposure, dependence on the Oakdale facility and rail transportation, and environmental, mining, permitting and silica-related requirements. Long-term take-or-pay sales represented 92.5% of revenue, but six such contracts had a volume-weighted average remaining term of about 15 months as of January 1, 2020. Four customers generated 73% of FY2019 revenue.
The U.S. Well Services dispute is a major contingency: Smart Sand alleges breach and seeks payment under take-or-pay and railcar agreements; U.S. Well has filed counterclaims. The matter was in discovery, and the company could not assess its likely outcome or assure collection. The filing says the $37.4 million receivable does not represent the full amounts sought in the lawsuit. The company also disclosed that 2019 earnings included substantial shortfall revenue, noncash impairments and a contingent-consideration fair-value reduction.
Important facts for investors to verify
- Collectability and timing of the $37.4 million U.S. Well Services receivable, additional accrued shortfalls and the litigation’s outcome.
- How much future revenue and cash flow depends on shortfall payments versus delivered sand sales, and the terms and renewal prospects of remaining take-or-pay contracts.
- Whether operating cash flow can recover as receivables convert to cash, given year-end cash of only $2.6 million and customer concentration.
- Execution, utilization and returns on the planned $20–$30 million of 2020 capital expenditures and the expansion of SmartSystems.
- Borrowing-base availability, debt-service obligations and covenant headroom under the ABL and Oakdale financing.
- Actual 2020 demand, pricing and competitive effects from regional sand and any changes in permitting or environmental requirements.