Business context and reporting period
Smart Sand, Inc.’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The company mines, processes and sells Northern White frac sand, primarily under long-term take-or-pay contracts. Its Oakdale, Wisconsin facility had annual processing capacity of 3.3 million tons; an expansion to 5.5 million tons was expected to be completed in early 2018. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $29.8 | $8.5 | $54.8 | $18.9 |
| Gross profit | $8.4 | $2.0 | $13.8 | $7.0 |
| Gross margin | 28.1% | 23.1% | 25.1% | 37.0% |
| Operating income (loss) | $3.8 | $(0.3) | $5.4 | $2.6 |
| Net income (loss) | $2.6 | $(2.3) | $3.6 | $(2.0) |
| Adjusted EBITDA (non-GAAP) | $6.5 | $1.7 | $10.2 | $6.4 |
Q2 sand sales were approximately 531,000 tons, up about 175% year over year; first-half sales were approximately 1.089 million tons, up about 238%. Average selling price, including reservation revenue, declined to $31.74 per ton in Q2 from $35.53, and to $30.85 for the first half from $39.30. Management attributed the price-per-ton decline to reservation revenue being spread over higher sales volumes. Transportation revenue largely represented costs passed through to customers and, management said, did not materially affect gross profit.
Production costs, a non-GAAP measure, were $13.17 per ton in Q2 versus $16.57, and $14.55 per ton for the first half versus $17.35. The filing reported approximately $0.5 million of unplanned maintenance costs in the first half, alongside railcar availability and rail-loop completion inefficiencies. First-half operating cash flow was $0.7 million, versus $6.1 million; investing cash flow was $(7.7) million, mainly reflecting expansion spending; financing cash flow was $23.4 million, including net equity-offering proceeds.
At June 30, cash and cash equivalents were $63.4 million, restricted cash $0.5 million, working capital $80.0 million, and total assets $204.7 million. The company had no borrowings under its $45 million revolving facility and reported covenant compliance. Equipment financing obligations and notes payable totaled approximately $1.0 million; long-term deferred tax liabilities were $19.2 million. The facility is secured by substantially all company assets.
Material changes versus the prior comparable period
- Revenue and volumes increased substantially as oil and gas exploration and production activity improved; Q2 net income turned positive from a loss.
- First-half gross margin declined year over year despite higher gross profit, while Q2 gross margin improved. Costs rose with volume, freight and railcar activity, and operational inefficiencies.
- Interest expense fell sharply: the Series A preferred stock was redeemed and the former revolving facility repaid in November 2016. Q2 2017 interest expense was $0.1 million versus $2.5 million in Q2 2016.
- Cash increased from $46.6 million at year-end 2016, supported in part by a February 2017 equity offering that generated approximately $24.2 million net. Accounts receivable also rose materially, contributing to weaker operating cash flow.
Outlook, risks and unusual items
- Management expected drilling and completion activity to remain at current levels or improve for the rest of 2017 if oil and natural gas prices remained at or improved from then-current levels. This was a conditional outlook, not a quantified earnings forecast.
- The company expected approximately $85 million of 2017 expansion and replacement capital expenditures; commitments for expansion and replacement projects were approximately $18.1 million at June 30. Funding sources cited included cash flow, equity proceeds and potential revolver borrowings.
- Capacity expansion is intended to meet anticipated demand, particularly for fine mesh sand, but execution, rail logistics and customer demand remain relevant uncertainties. Weather seasonality can constrain excavation and wet processing.
- Customer and supplier exposure is concentrated: four customers generated 76% of first-half revenue, while five customers represented 91% of accounts receivable at June 30. Two suppliers accounted for 62% of first-half cost of goods sold. The company also primarily relied on one third-party rail carrier.
- Long-term operating lease commitments were substantial, including $10.3 million due in 2018 and $9.5 million in 2019. Outstanding performance bonds totaled $8.6 million. Management said pending litigation was not expected to materially affect financial position; no probable environmental matters were reported.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the expected 5.5-million-ton annual capacity and early-2018 completion timing were achieved, and whether the planned 2017 capital spending was funded as described.
- Whether sales volumes, realized prices and gross margins remained sustainable as reservation revenue was allocated across higher contracted volumes.
- Whether receivables were collected promptly: first-half operating cash flow was low relative to net income, with accounts receivable increasing by $9.5 million.
- Whether railcar availability, rail-loop completion and maintenance issues were resolved, and whether freight pass-throughs continued to offset transportation costs.
- Customer, supplier and rail-carrier concentration, along with take-or-pay contract terms, renewal dates and counterparty credit quality.
- Revolver availability and covenant terms, lease commitments, performance bonds, and any subsequent developments affecting capital needs or liquidity.