Smart Sand, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with the three months ended March 31, 2018. Smart Sand supplies frac sand and mine-to-wellsite logistics and storage services. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $51.8 | $42.6 | +21% |
| Gross profit | $11.2 | $7.2 | +55% |
| Gross margin | 21.6% | 16.9% | +4.7 percentage points |
| Operating income | $6.0 | $1.4 | +340% |
| Net income | $4.0 | $1.0 | +314% |
| Diluted EPS | $0.10 | $0.02 | +$0.08 |
| Adjusted EBITDA (non-GAAP) | $12.4 | $5.9 | More than doubled |
| Operating cash flow | $6.3 | $(1.6) | Improved |
| Capital expenditures | $8.5 | $46.9 | Lower |
Sand volume sold fell to approximately 648,000 tons from 723,000 tons. Revenue mix shifted: sand sales were $21.1 million versus $22.3 million; logistics revenue was $20.4 million versus $13.7 million; and shortfall revenue was $5.8 million versus none. Reservation revenue was $4.5 million versus $6.6 million. Contribution margin, a non-GAAP measure, rose to $17.1 million, or $26.35 per ton, from $10.3 million, or $14.28 per ton.
At March 31, cash was $2.4 million and working capital was $18.4 million, down from $25.4 million at year-end. Total debt carrying value was $52.6 million, including $47.5 million outstanding under the revolving facility. The company reported $12.5 million of undrawn facility availability and compliance with its covenants. Total assets were $362.3 million and stockholders’ equity was $214.4 million. Adoption of lease accounting added $34.3 million of operating right-of-use assets and $34.9 million of operating lease liabilities at quarter-end.
Changes and management commentary
- Management attributed higher revenue and margins primarily to shortfall payments, increased logistics activity through the Van Hook terminal, and lower operating costs after adjusting labor and equipment to sales volumes. Higher transportation costs partly offset these benefits.
- Management said demand began to increase late in Q1 as completions activity resumed. It noted that reduced takeaway capacity, in-basin sand supply, producer spending and commodity prices had weakened Northern White sand demand in the second half of 2018. Average WTI prices were lower in Q1, prompting downward adjustments to many contract prices for Q2. Management cautioned that growing in-basin supply could keep sand prices depressed.
- Net interest expense increased to $1.0 million from $0.2 million, primarily reflecting borrowings used to fund 2018 acquisitions. The contingent-consideration liability related to Quickthree fell to $5.5 million from $7.2 million, including a $1.0 million favorable fair-value adjustment in Q1.
- The February 2019 credit amendment extended facility maturity to June 30, 2020, while reducing capacity to $55 million by June 30, 2019 and $50 million by December 31, 2019. The filing states management believes liquidity is sufficient for the next 12 months.
Outlook, risks and contingencies
- 2019 capital expenditures were estimated at approximately $30–$40 million, excluding additional acquisitions, for growth and efficiency initiatives. Management expected to fund them through operating cash flow, equipment financing or facility borrowings. No revenue or earnings guidance is provided in the filing.
- Revenue and collections are concentrated: Liberty, EQT and Hess represented 33.3%, 20.8% and 10.6% of Q1 revenue, respectively; three customers generated 65% of total revenue. Four customers represented 74% of accounts receivable at quarter-end.
- Smart Sand is pursuing contract-payment claims against U.S. Well Services and Schlumberger; both defendants have asserted counterclaims. At March 31, $17.1 million of accounts and unbilled receivables related to customers with pending litigation. The company said it could not assess the likely outcomes; recorded receivables do not represent the full amounts sought in the lawsuits.
- Other exposures include environmental and mine-safety regulation, weather-related seasonality, reliance on a primary third-party rail provider, and operations and inventory concentrated in Wisconsin. The filing notes possible additional costs under equipment-lease residual-value guarantees. Performance bonds totaled $8.6 million.
Important facts for investors to verify
- Progress and collectability of the disputed customer balances, litigation outcomes and any effects on reported revenue or receivables.
- Whether improving completions activity and logistics volumes offset lower contract pricing, lower sand volumes and pressure from in-basin supply.
- Facility availability and borrowing-capacity step-downs, covenant compliance, and funding for the $30–$40 million 2019 capital-spending plan.
- Future Quickthree earn-out remeasurements and whether wellsite storage investments generate expected demand and returns.
- Customer and supplier concentration, rail-service dependence, environmental and safety requirements, and lease obligations.