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No investors should expect much from Fairmount Santrol's (NYSE: FMSA) earnings right now. The market for frack sand is in the dumps, and every company in the industry is struggling mightily with profitability. A $0.54 per-share loss, though, was a bit worse than most were expecting. Let's take a look at why this past quarter's results were so much lower than expectations, why the situation is not as bad as the on-paper results suggest, and what investors should be thinking about this stock's long-term prospects.
By the numbers
| Results | Q2 2016 | Q1 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $114.24 million | $145.5 million | $221.3 million |
| EBITDA | ($116.2 million) | $8.34 million | 18.6 million |
| Net income | ($87.9 million) | ($11.8 million) | $14.1 million |
| Earnings per share | ($0.54) | ($0.08) | $0.08 |
EBITDA: earnings before interest, taxes, depreciation, and amortization. Data source: Fairmount Santrol earnings release
Fairmount's results weren't great, but no company that's selling frack sand today is doing well. It's also worth noting that in the quarter the company took $70 million in after-tax charges related to asset and inventory impairments. If we strip those out, then net income results were pretty much in line with the prior quarter even though revenue declined by 21%. That is probably the most positive thing that can be pulled from the company's results.
At the end of the quarter, Fairmount had $61 million in cash on hand and $1.15 billion in debt. The company did pay down $75 million in long term debt during the quarter, but it remains, by far, the most indebted of its frack-sand peers. It also doesn't help that the Fairmount's operations are actually consuming rather than generating cash flow, a situation that will need to be alleviated quickly.
The highlights
Fairmount has two main outlets for sand sales: oil and gas proppant, and industrial and recreational products. Looking at these two segments separately, it looks like the tale to two businesses. Industrial and recreational products actually had a solid quarter as revenues increased 15% from the prior quarter, and the contribution margin for this segment -- Fairmount's measure of operating margin -- was up 36% from the first quarter, to $28 million.
However, for just about every dollar gained on this side of the business, one was lost on the oil and gas proppant side. The adjusted contribution margin for this segment was an actual loss of $17 million. Based on the company's most recent investor presentations, part of the reason for this is that the company is looking to take market share by selling at lower cost. Luckily, Fairmount has that industrial and recreational products segment to prop up results, because things would look even worse otherwise.
From the mouth of management
From an operations standpoint, the only thing that Fairmount can do to improve performance is to cut costs and reduce spending until the market picks back up again. So CEO Jenniffer Deckard really went out of her way to talk up the company's efforts on that end:
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.
What a Fool believes
Just after the second quarter but before it reported earnings, Fairmount Santrol raised $161 million in cash by selling 28.75 million shares, a dilution of about 15%. So next quarter, any per-share loss might not look as bad because it's spread across more shares. There is the obvious downside to this move -- that per-share earnings will be muted when a recovery actually comes. This was a move that the company had to make, though. Operations are burning through cash, and debt levels are way too high to consider issuing new notes.
Among frack-sand companies, Fairmount Santrol appears to have its back against the wall much more so than its peers, and it could really use an uptick in oil and gas prices to get its finances back on track. Unfortunately, that looks like it could be a little further away as oil prices are back in the $40-a-barrel range. Until the company can ease its debt load, it hardly seems worth the risk for investors to jump in on this stock.
