Smart Sand, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. Smart Sand produces and sells frac sand and related transportation and railcar services. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $42.6 | $25.1 |
| Gross profit / margin | $7.2 / 16.9% | $5.4 / 21.5% |
| Operating income / margin | $1.4 / 3.2% | $1.6 / 6.2% |
| Net income / margin | $1.0 / 2.3% | $1.0 / 3.9% |
| Adjusted EBITDA (non-GAAP) | $5.9 | $3.7 |
| Net cash from operating activities | $(1.6) | $3.8 |
| Capital expenditures | $46.9 | $1.6 |
- Sand sold increased 29% to approximately 723,000 tons from 559,000. Average selling price rose to $39.99 per ton from $29.98, reflecting higher volumes and favorable pricing, particularly in the spot market. Sand sales revenue was $28.9 million; transportation revenue, including railcar rental, was approximately $13.7 million.
- Cost of goods sold increased to $35.4 million from $19.7 million. Production costs were $20.95 per ton versus $15.84; transportation and railcar freight charges were $17.2 million versus $9.2 million. Higher staffing, utilities, equipment and freight costs contributed to the increase.
- Revenue grew about 70%, but higher costs and operating expenses compressed margins. Net income was nearly unchanged year over year. The effective tax rate fell to 19.2% from 34.7%, benefiting from the lower U.S. statutory rate following the Tax Cuts and Jobs Act.
- Cash and cash equivalents were $2.1 million, plus $0.5 million of restricted cash, at quarter-end, compared with $34.7 million of cash and $0.5 million restricted cash at year-end. Working capital declined to $15.1 million from $38.2 million, primarily due to capital spending. Operating cash use also reflected working-capital movements.
- Property, plant and equipment, net, increased to $210.0 million from $172.2 million. Total liabilities were $63.0 million and stockholders’ equity was $191.6 million at quarter-end.
Material changes and business developments
- Oakdale facility expansion is intended to raise annual processing capacity from 3.3 million to 5.5 million tons; commissioning was underway and completion was expected in Q2 2018.
- On March 15, the company acquired assets associated with the Van Hook, North Dakota unit-train terminal for approximately $15.5 million and entered into a long-term Canadian Pacific Railway agreement. The terminal became operational in April.
- The company borrowed $16.0 million under its $45 million revolving facility during the quarter; the net carrying amount was $15.6 million. It reported covenant compliance and $29 million of undrawn availability at March 31. An April 8 amendment increased facility capacity to $60 million, with $45 million then undrawn.
- On May 8, the company agreed to acquire Quickthree Solutions for $42.75 million: $30 million payable at closing and up to $12.75 million in earnouts. Closing was expected by the end of May; this was a subsequent event, not a Q1 transaction.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, with no opening retained-earnings adjustment. Comparative periods were not restated.
Outlook, risks and contingencies
- Management said drilling and completion activity had continued to improve through Q1 and anticipated stable or improving activity for the rest of 2018 if oil and gas prices remained at or improved from then-current levels. This is conditional commentary, not formal earnings guidance.
- Management expected $85–$95 million of 2018 expansion and replacement capital expenditures, funded by operating cash and potential facility borrowings. Approximately $18.9 million of capital-project commitments remained at March 31.
- Customer concentration is material: four customers generated 67% of Q1 revenue, and four customers accounted for 79% of accounts receivable. One supplier represented 37% of cost of goods sold; the company also relied primarily on one third-party rail carrier.
- Results are exposed to frac-sand demand and pricing, oil and gas activity, customer credit and contract renewal, seasonal weather effects, and the performance of key rail and supply counterparties. The floating-rate facility creates interest-rate exposure; management said a 100-basis-point LIBOR increase would have an immaterial annual interest-expense effect, assuming debt balance unchanged.
- Operating lease and rental commitments totaled $14.9 million for 2019, with additional commitments thereafter. Asset retirement obligations were $8.1 million. Outstanding performance bonds were $8.6 million. Management reported no pending litigation expected to materially affect financial position and no probable environmental matters.
- The filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Oakdale expansion reached the expected Q2 completion date and delivered planned capacity, costs and operating efficiencies.
- Post-quarter liquidity and financing after the Quickthree acquisition, including closing consideration, earnout exposure, remaining credit availability and covenant headroom.
- Whether higher selling prices and volumes offset rising production costs, freight, staffing and capital requirements, and how operating cash flow develops.
- Customer and supplier concentration, receivable collections, contract minimums and renewals, and rail-service dependence.
- Execution and utilization of the Van Hook terminal and the anticipated commercial contribution of Quickthree’s wellsite storage systems.