Smart Sand, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed March 16, 2017. The filing also reports unaudited fourth-quarter results. Smart Sand produces Northern White frac sand for oil and gas hydraulic fracturing, primarily at its Oakdale, Wisconsin mine and processing facility.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $59.2 million | $47.7 million |
| Gross profit | $32.7 million; 55.1% margin | $26.7 million; 56.0% margin |
| Operating income | $20.4 million; 34.4% margin | $16.6 million; 34.8% margin |
| Net income | $10.4 million; 17.5% margin | $5.0 million; 10.5% margin |
| Adjusted EBITDA | $37.8 million | $23.9 million |
| Cash from operating activities | $26.7 million | $30.7 million |
| Cash used in investing activities | $2.5 million | $29.4 million |
- Sand sales were approximately 826,000 tons in 2016, versus 751,000 tons in 2015. Year-end processing capacity was 3.3 million tons annually.
- 2016 revenue included $20.9 million of contractual shortfall payments and $15.0 million of reservation revenue. Sand sales revenue was $31.6 million. These contract payments materially supported reported revenue.
- Cash was $46.6 million and restricted cash was $1.0 million at year-end. Working capital was $51.3 million, compared with a $32.1 million deficit in 2015.
- No borrowings were outstanding under the $45 million revolving credit facility at year-end; equipment financing obligations and notes payable totaled approximately $1.8 million, including current portions. Management reported $117.6 million of liquidity, including cash and full revolver availability, as of March 13, 2017.
Changes versus prior periods and unusual items
- Revenue increased 24% from 2015, reflecting higher sales volumes and contract-related payments. Sand sales revenue itself was nearly flat, at $31.6 million versus $31.8 million, while average selling price per ton including reservation charges declined to $38.28 from $42.32.
- Net income and Adjusted EBITDA rose, but 2016 net income included $8.9 million of other income. This included approximately $1.9 million related to settlement of a former customer’s bankruptcy matter and $6.6 million from selling the resulting unsecured bankruptcy claim.
- Fourth-quarter revenue was $29.5 million and net income was $12.4 million, compared with $15.2 million and $2.3 million, respectively, in fourth-quarter 2015. The 2016 quarter included the bankruptcy settlement and claim-sale income, as well as $1.9 million of performance-based bonus expense recorded in that quarter.
- Operating cash flow declined despite higher net income, partly reflecting working-capital movements, including lower deferred revenue. Investing outflows fell substantially as capital spending slowed after the Oakdale capacity expansion completed in 2015.
- The November 2016 IPO generated approximately $127.3 million of net proceeds. The company used IPO proceeds to redeem $40.3 million of Series A preferred stock and repay its former revolving facility. A February 2017 company share offering generated a further $24.3 million of net proceeds; selling shareholders received no proceeds for their shares.
Outlook, risks and contingencies
- Management expected market conditions to improve into 2017, citing stabilization in commodity prices and increased drilling and completion activity. This is an expectation, not a guarantee; frac sand demand and pricing remain closely tied to oil and gas activity.
- The company planned to expand Oakdale processing capacity from 3.3 million to approximately 4.4 million tons annually, with anticipated completion by year-end 2017, and to expand Wisconsin rail and logistics infrastructure. It expected approximately $55 million of 2017 expansion and replacement capital expenditures, funded by operating cash flow and equity proceeds. Execution, permitting, costs and demand are uncertain.
- As of March 13, 2017, approximately 63.3% of current annual capacity was contracted under take-or-pay agreements, with a volume-weighted average remaining term of about 3.1 years. The business remained concentrated: four customers accounted for approximately 96% of 2016 revenue, and all sales were generated at Oakdale.
- Key exposures include customer credit and contract renegotiation, volatile frac sand prices and oversupply, dependence on oil and gas activity, transportation and rail disruption, energy costs, seasonality and weather, and environmental, mining, permitting and silica-health regulation. The company had previously experienced a leverage covenant issue under its former facility, but reported compliance with its current facility covenants at December 31, 2016.
- Management reported no pending litigation believed likely to materially affect financial position, results or cash flows, and no probable environmental matters at year-end. Reclamation obligations were $1.4 million; performance bonds totaled $8.3 million. The filing identifies no material legal proceedings.
- The audited financial statements received an unqualified opinion. The auditor was not engaged to express an opinion on internal control over financial reporting; management said disclosure controls were effective. The filing also disclosed an immaterial correction to prior-period preferred-stock transaction-cost amortization.
Important facts for investors to verify
- How much future revenue and cash flow will come from physical sand deliveries versus shortfall and reservation payments, and whether those payments recur.
- Customer concentration, contract volumes, pricing terms, renewal prospects and counterparties’ ability to perform—especially after the C&J Energy Services bankruptcy settlement.
- Whether the planned $55 million capital program can deliver the stated capacity increase on schedule and within budget, and whether demand will absorb the additional production.
- The sustainability of earnings excluding the $8.9 million of 2016 other income and the unusually strong fourth quarter.
- Actual cash availability and borrowing conditions under the $45 million revolver, including covenant headroom, alongside ongoing railcar lease commitments and expansion funding needs.