OREANDA-NEWS. Fairmount Santrol (NYSE:FMSA), a leading provider of high-performance sand and sand-based products, today announced results for the second quarter of 2016.   

Second-Quarter 2016 Results

Second-quarter 2016 revenues were $114.2 million, down 21% from $145.5 million in the first quarter of 2016 and down 48% from $221.3 million for the same period in 2015. Overall volumes sold were 2.0 million tons for the quarter, a decrease of 8% from 2.1 million tons in the first quarter of 2016 and a decline of 13% from 2.2 million tons in the second quarter of 2015.

For second-quarter 2016, the Company had a net loss of $87.9 million, or $(0.54) per diluted share, compared with a net loss of $11.8 million, or $(0.07) per diluted share, in the first quarter of 2016. The net loss for second-quarter 2016 includes $111.3 million of pre-tax charges ($70.1 million after taxes), including asset impairment charges of $90.6 million, stock compensation expense of $3.9 million, inventory write-downs of $10.3 million, restructuring costs of $1.2 million and $5.3 million of committed professional fees for cost reduction initiatives and debt extension fees, both included in SG&A. The net loss for the first quarter of 2016 included stock compensation expense of $1.7 million. Net income for second-quarter 2015 was $14.1 million, or $0.08 per diluted share, and included stock compensation expense of $2.6 million and asset impairment and restructuring charges of $15.3 million. 

Adjusted EBITDA loss for the second quarter of 2016 was $21.8 million, excluding the impact from non-cash stock compensation expense and asset impairment charges totaling $94.5 million. Inventory write-downs, restructuring costs and professional fees of $16.8 million, noted above, have not been added back to second-quarter Adjusted EBITDA. In the first quarter of 2016, Adjusted EBITDA, excluding the impact from stock compensation expense of $1.7 million, was $10.1 million.

“A strong performance from our Industrial and Recreational business served to partially offset second-quarter declines within our Proppant Solutions segment. As expected, conditions within the oil and gas market further deteriorated in the second quarter, with average U.S. rig counts dropping an estimated 25% sequentially,” said Jenniffer Deckard, President and Chief Executive Officer. “In addition to an 8% overall volume decline, our profit margins experienced additional pressure from both proppant pricing declines and a shift in mix toward raw frac sand.”

Deckard added, “In response to the downturn that began in late 2014, we committed to a specific multistep strategy to navigate market challenges and ensure the financial stability of the Company. Our very deliberate first step was a fundamental realignment of our cost structure with new market realities. And, while we are continuing with the implementation of even further cost reduction initiatives, we have already meaningfully delivered on this objective through operational consolidation into our primary, low-cost Wedron facility, efficiency improvements, and targeted cost reductions across all business functions and cost categories. Second, we addressed our near-term liquidity challenges by extending the maturity date for approximately $70 million of our term debt from first-quarter 2017 to third-quarter 2018. And, most recently, we completed a primary common stock offering that raised net proceeds of approximately $161 million. We will continue to diligently execute additional steps to best position the Company for both near-term and future success.”

Business Segments

Proppant Solutions Segment

Proppant Solutions volumes for the second quarter of 2016 were 1.3 million tons, a decrease of 15% compared with the first quarter of 2016 and down 19% compared with the prior-year period. Raw frac sand volumes were 1.2 million tons, a 13% sequential decrease and an 11% decline compared with volumes for the same period a year ago. Coated proppant volumes were 0.06 million tons, a 47% decrease compared with the first quarter of 2016 and a 71% decline from the prior-year period.

Proppant Solutions revenues were $82.1 million in the second-quarter 2016, a 30% decrease compared with $117.5 million in the first quarter of 2016 and a 56% decrease compared with $188.2 million in the same period a year ago. The sequential decrease in revenues was largely driven by increased pressure on volumes, in particular value-added products, and pricing.

Adjusted contribution margin, which excludes $57.2 million of asset impairment charges for the segment, decreased to a loss of $17.2 million in the second quarter of 2016 compared with income of $12.7 million in the first quarter of 2016. Inventory write-downs of $9.9 million were not added back to the segment’s second-quarter adjusted contribution margin. Adjusted contribution margin in the second quarter of 2015 was $37.8 million, which excluded $2.3 million in asset impairments and restructuring charges for the segment.

The Company’s logistics capabilities continue to be a significant differentiator for the organization and its customers. Unit train deliveries have remained strong, and the Company has continued to deliver more than 70% of its volumes in-basin.

Industrial and Recreational Products Segment

Industrial and Recreational volumes were 0.7 million tons in second-quarter 2016, up 13% from first-quarter 2016 and up 3% over volumes in the prior year’s second quarter.

Revenues for the segment were $32.1 million in second-quarter 2016, a 15% increase from $28.0 million last quarter and a 3% decrease from $33.2 million for the second quarter a year ago. The sequential increases in volumes and revenues were primarily driven by seasonal sales growth in the sports and recreation market coupled with stronger volumes in key markets, particularly those aligned with construction-driven markets.

Adjusted contribution margin for the segment was $12.0 million in second-quarter 2016, a 36% increase from $8.8 million last quarter and a 7% increase from an adjusted contribution margin of $11.2 million for the second quarter of 2015. Inventory write-downs of $0.4 million were not added back to the segment’s second-quarter 2016 contribution margin. Second-quarter 2015 adjusted contribution margin excluded $12.1 million in asset impairments and restructuring charges for the segment.

Balance Sheet and Other Information

In the second quarter of 2016, operating cash flow was a $4.6 million use of cash, which was primarily due to lower overall income from reduced volumes and pricing, partially offset by improvements in working capital. Capital expenditures including stripping were $8.2 million in second-quarter 2016. Second-quarter 2016 capital expenditures and stripping costs were down 40% from first-quarter 2016 and down 72% from second-quarter 2015. The Company expects full-year 2016 capital expenditures, including stripping costs, will approximate $30 million.

In July 2016, the Company completed a primary common stock offering, which resulted in total net proceeds of approximately $161 million, after deducting underwriting commissions and estimated offering expenses, for 28.75 million common shares issued. The Company intends to use the net proceeds of the offering for general corporate purposes, which include, but are not limited to, working capital, repayment, redemption or refinancing of debt and leases, investments in or loans to subsidiaries and satisfaction of other obligations.  

Deckard said, “We are pleased to have completed this equity offering, as we believe it provides us with the flexibility needed through 2018 and helps to better position us to address our 2019 debt maturities. We are appreciative of our Fairmount Santrol family members, Board members and external partners for their support in helping us execute this latest action in our multistep strategy to improve the financial stability of our Company.”

As of June 30, 2016, cash and cash equivalents totaled $61.6 million, and debt totaled $1.1 billion, compared to $143.9 million of cash and cash equivalents and total debt of $1.2 billion as of March 31, 2016. A $69.6 million prepayment of the Company’s B-1 term facility was made during second-quarter 2016, which is reflected in the lower cash balance at June 30, 2016. The net proceeds of the stock offering would increase cash and cash equivalents to approximately $223 million on a pro-forma basis at June 30, 2016.

Outlook

Due to the ongoing uncertainty in the oil and gas markets, the Company is continuing to suspend its earnings guidance.

Use of Certain GAAP and Non-GAAP Financial Measures

The Company defines EBITDA as net income before interest expense, income tax expense, depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA before non-cash stock-based compensation, asset impairment, and certain other non-cash income or expenses. The Company believes EBITDA and adjusted EBITDA are useful because they allow management to more effectively evaluate our operational performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. 

Segment contribution margin is defined as total revenues less the cost of goods sold to produce and deliver the products of each segment and selling, general and administrative expenses that are directly attributable to each segment. The definition excludes certain corporate costs not associated with the operations of the segment. Adjusted contribution margin is defined as contribution margin excluding the impact of non-cash transaction expenses, asset impairments and certain other non-cash income or expenses.

About Fairmount Santrol

Fairmount Santrol is a leading provider of high-performance sand and sand-based products used by oil and gas exploration and production companies to enhance the productivity of their wells. The Company also provides high-quality products, strong technical leadership and applications knowledge to end users in the foundry, building products, water filtration, glass, and sports and recreation markets. Its global logistics capabilities include a wide-ranging network of distribution terminals and rail cars that allow the Company to effectively serve customers wherever they operate. As one of the nation’s longest continuously operating mining organizations, Fairmount Santrol has developed a strong commitment to all three pillars of sustainable development, People, Planet and Prosperity. Correspondingly, the Company’s motto and action orientation is: “Do Good. Do Well.” 

                     
  Fairmount Santrol   
  Condensed Consolidated Statements of Income (Loss)   
  (unaudited)   
      Three Months Ended June 30,   Six Months Ended June 30,  
        2016       2015       2016       2015    
      (in thousands, except per share
amounts)
   (in thousands, except per share
amounts)
  
                                     
                     
  Revenues   $   114,249     $   221,323     $   259,707     $   522,813    
  Cost of goods sold (excluding depreciation, depletion,                  
  amortization, and stock compensation expense shown separately)       114,129         165,130         232,593         367,678    
                     
  Operating expenses                  
  Selling, general and administrative expenses       21,126         19,204         37,751         43,224    
  Depreciation, depletion and amortization expense       18,056         16,276         36,642         32,499    
  Stock compensation expense       3,914         2,618         5,567         4,501    
  Asset impairments       90,578         6,475         90,654         6,475    
  Restructuring charges       1,155         8,349         1,155         8,673    
  Other operating expense (income)       (426 )       913         (96 )       600    
  Income (loss) from operations       (134,283 )       2,358         (144,559 )       59,163    
                     
  Interest expense, net       16,606         14,894         33,868         30,202    
  Other non-operating income       -         -         (5 )       -    
  Income (loss) before provision for income taxes       (150,889 )       (12,536 )       (178,422 )       28,961    
                     
  Benefit from income taxes       (63,019 )       (26,677 )       (78,773 )       (16,060 )  
  Net income (loss)       (87,870 )       14,141         (99,649 )       45,021    
  Less: Net income attributable to the non-controlling interest       16         4         13         125    
  Net income (loss) attributable to Fairmount Santrol Holdings Inc.   $    (87,886 )   $    14,137     $    (99,662 )   $    44,896    
                     
  Earnings (loss) per share                  
  Basic   $   (0.54 )   $   0.09     $   (0.62 )   $   0.28    
  Diluted   $   (0.54 )   $   0.08     $   (0.62 )   $   0.27    
                     
  Weighted average number of shares outstanding                  
  Basic       161,647         161,368         161,547         161,161    
  Diluted       161,647         166,866         161,547         166,632    
           
  Fairmount Santrol 
  Condensed Consolidated Statements of Cash Flows 
  (unaudited) 
      Six Months Ended June 30,
        2016       2015  
           
      (in thousands)
           
  Net income (loss)   $   (99,649 )   $   45,021  
  Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:            
  Depreciation and depletion       34,284         30,231  
  Amortization       5,745         5,650  
  Reserve for doubtful accounts       1,954         -  
  Asset impairments       90,654         6,475  
  Restructuring charges       -         1,162  
  Inventory write-downs and reserves       10,302         513  
  Loss on sale of fixed assets       35         -  
  Unrealized loss on interest rate swaps       -         40  
  Deferred income taxes and taxes payable       (59,913 )       (13,456 )
  Refundable income taxes       (15,535 )       (14,849 )
  Stock compensation expense       5,567         4,501  
  Change in operating assets and liabilities:        
  Accounts receivable       10,524         84,056  
  Inventories       3,500         40,475  
  Prepaid expenses and other assets       3,745         26,369  
  Accounts payable       298         (38,562 )
  Accrued expenses       (4,742 )       (4,062 )
  Net cash provided by (used in) operating activities       (13,231 )       173,564  
           
  Cash flows from investing activities        
  Proceeds from sale of fixed assets       3,918         -  
  Capital expenditures and stripping costs       (21,948 )       (61,293 )
  Other investing activities       (150 )       -  
  Net cash used in investing activities       (18,180 )       (61,293 )
           
  Cash flows from financing activities        
  Payments on long-term debt       (75,479 )       (7,867 )
  Change in other long-term debt and capital leases       (4,109 )       (3,044 )
  Proceeds from option exercises       2,007         1,759  
  Tax effect of stock options exercised       (1,297 )       21  
  Distributions to non-controlling interest       (551 )       -  
  Other financing activities       -         (4,339 )
  Net cash used in financing activities       (79,429 )       (13,470 )
           
  Change in cash and cash equivalents related to assets classified as held-for-sale       1,376         -  
  Foreign currency adjustment       (387 )       (236 )
  Increase (decrease) in cash and cash equivalents        (109,851 )       98,565  
           
  Cash and cash equivalents:        
  Beginning of period       171,486         76,923  
  End of period   $    61,635     $    175,488  
           
           
Fairmount Santrol   
Condensed Consolidated Balance Sheets   
(unaudited)   
    June 30, 2016   December 31, 2015  
           
    (in thousands)  
Assets          
Current assets          
Cash and cash equivalents   $   61,635     $   171,486    
Accounts receivable, net       63,930         73,566    
Inventories       56,693         70,494    
Prepaid expenses and other assets       6,816         13,404    
Refundable income taxes       42,041         26,506    
Current assets classified as held-for-sale (includes cash, accounts receivable,          
inventories, and property, plant, and equipment)       1,317         4,218    
Total current assets       232,432         359,674    
           
Property, plant and equipment, net       756,683         870,997    
Deferred income taxes       834         834    
Goodwill       15,301         15,301    
Intangibles, net       94,057         96,482    
Other assets       9,744         10,961    
Total assets   $    1,109,051     $    1,354,249    
           
Liabilities and Equity          
Current liabilities          
Current portion of long-term debt   $   30,677     $   17,385    
Accounts payable       34,319         40,421    
Accrued expenses       20,121         26,785    
Current liabilities directly related to current assets classified as held-for-sale          
(includes accounts payable and accrued expenses)       -         934    
Total current liabilities       85,117         85,525    
           
Long-term debt       1,115,877         1,205,721    
Deferred income taxes       26,487         89,569    
Other long-term liabilities       41,167         33,802    
Total liabilities       1,268,648         1,414,617    
           
Equity          
Common stock       2,397         2,391    
Additional paid-in capital       782,976         776,705    
Retained earnings       305,382         405,044    
Accumulated other comprehensive loss       (22,999 )       (17,693 )  
Treasury stock at cost       (1,227,663 )       (1,227,663 )  
Non-controlling interest       310         848    
Total equity (deficit)       (159,597 )       (60,368 )  
Total liabilities and equity   $    1,109,051     $    1,354,249    
           
                   
Fairmount Santrol                  
Segment Reports                  
(unaudited)   Three Months Ended June 30,   Six Months Ended June 30,  
      2016       2015       2016       2015    
                   
    (in thousands, except volume amounts)   (in thousands, except volume amounts)  
                   
Volume (tons)                  
Proppant Solutions                  
Raw sand       1,230,077         1,387,203         2,643,325         2,874,617    
Coated proppant       59,826         206,572         172,530         497,140    
Total Proppant Solutions       1,289,903         1,593,775         2,815,855         3,371,757    
                   
Industrial & Recreational Products       661,244         641,482         1,248,422         1,175,503    
                   
Total volumes       1,951,147         2,235,257         4,064,277         4,547,260    
                   
Revenues                  
Proppant Solutions   $   82,102     $   188,150     $   199,565     $   461,019    
Industrial & Recreational Products       32,147         33,173         60,142         61,794    
Total revenues       114,249         221,323         259,707         522,813    
                   
Segment contribution margin                  
Proppant Solutions       (74,398 )       35,416         (61,790 )       119,235    
Industrial & Recreational Products       12,006         (894 )       20,852         6,182    
Total segment contribution margin       (62,392 )       34,522         (40,938 )       125,417    
                   
                       
Fairmount Santrol                      
Non-GAAP Financial Measures                                   Three Months Ended    
(unaudited)   Three Months Ended June 30,    Six Months Ended June 30,    March 31,   
      2016       2015       2016       2015       2016    
                                           
    (in thousands)    (in thousands)    (in thousands)   
                                           
                       
Reconciliation of Adjusted EBITDA                      
                       
Net income (loss) attributable to Fairmount Santrol Holdings Inc.   $    (87,886 )   $    14,137     $    (99,662 )   $    44,896     $    (11,776 )  
Interest expense, net       16,606         14,894         33,868         30,202         17,262    
Benefit from income taxes       (63,019 )       (26,677 )       (78,773 )       (16,060 )       (15,754 )  
Depreciation, depletion, and amortization expense       18,056         16,276         36,642         32,499         18,586    
EBITDA       (116,243 )       18,630         (107,925 )       91,537         8,318    
                       
Non-cash stock compensation expense(1)       3,914         2,618         5,567         4,501         1,653    
Asset impairments(2)       90,578         6,475         90,654         6,475         76    
Other charges(3)       -         465         -         465         -    
Restructuring charges(4)       -         8,349         -         8,673         -    
Adjusted EBITDA   $    (21,751 )   $    36,537     $    (11,704 )   $    111,651     $    10,047    
__________                      
                       
(1) Represents the non-cash expense for stock-based awards issued to our employees and outside directors.   
                       
(2) Non-cash charges associated with the impairment of mineral reserves and other long-lived assets.   
                       
(3) Cash payment associated with an audit of our Employee Stock Bonus Plan.   
                       
(4) For the three months ended June 30, 2016 and 2015, respectively, we incurred cash charges of approximately $1.2 million and $6.1 million for restructuring.  We are no longer reflecting cash charges as an adjustment to EBITDA in 2016 results.  
                                           
                       
Reconciliation of adjusted segment contribution margin                      
Proppant Solutions                      
Segment contribution margin   $   (74,398 )   $   35,416     $   (61,790 )   $   119,235     $   12,608    
Asset impairments and restructuring charges(A)       57,224         2,337         57,300         2,337         76    
Proppant Solutions adjusted segment contribution margin       (17,174 )       37,753         (4,490 )       121,572         12,684    
                       
Industrial & Recreational Products                      
Segment contribution margin       12,006         (894 )       20,852         6,182         8,846    
Asset impairments and restructuring charges(B)       -         12,085         -         12,085         -    
Industrial & Recreational Products adjusted segment contribution margin       12,006         11,191         20,852         18,267         8,846    
Total adjusted segment contribution margin   $    (5,168 )   $    48,944     $    16,362     $    139,839     $    21,530    
__________                      
                       
(A) Adjustments in the three and six months ended June 30, 2016 include asset impairment charges.  Adjustments in the three and six months ended June 30, 2015 include asset impairment and restructuring charges.   
                                           
(B) Adjustments in the three and six months ended June 30, 2015 include asset impairment and restructuring charges.