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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion and analysis of our financial condition and results of operations should be read together with the Condensed Consolidated Financial Statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the Consolidated Financial Statements, the accompanying notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
(the "2016 Annual Report").
Overview
We are one of the largest domestic producers of commercial silica, a specialized mineral that is a critical input into a variety of attractive end markets. During our
117
-year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-effectively deliver
247
products to customers across these markets. As of
September 30, 2017
, we operate
19
production facilities across the United States and control
760 million
tons of reserves of commercial silica, which can be processed to make
316 million
tons of finished products that meet American Petroleum Institute (API) frac sand specifications. On August 16, 2016, we completed the acquisition of New Birmingham, Inc. ("NBI"). On August 22, 2016, we completed the acquisition of Sandbox Enterprises, LLC ("Sandbox" or the “Sandbox acquisition”) as a “last mile” logistics solution for frac sand in the oil and gas industry. On April 1, 2017, we completed the acquisition of White Armor
(the "White Armor
a
cquisition"), a product line of cool roof granules used in industrial roofing applications. On
August 16, 2017
, we completed the acquisition of
Mississippi Sand, LLC
("MS Sand"). MS Sand is a frac sand mining and logistics company based in St. Louis, Missouri.
Our operations are organized into two segments based on end markets served: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. Our segments are complementary because our ability to sell to a wide range of customers across end markets allows us to maximize recovery rates in our mining operations, optimize our asset utilization and reduce the cyclicality of our earnings.
Recent Trends and Outlook
Oil and gas proppants end market trends
Increased demand for frac sand between 2008 and 2014 was driven by the growth in the use of hydraulic fracturing as a means to extract hydrocarbons from shale formations. According to the 2014 Proppant Market Report, PropTester Inc., published February 2015, global frac sand consumption grew at a 51.2% compound annual growth rate from 2009 to 2014. This included 53.7% growth in frac sand demand from 2013 to 2014. We significantly expanded our sales efforts to the frac sand market in 2008 and experienced rapid growth in our sales associated with our oil and gas activities from 2008 until 2014.
Declines in oil prices starting in 2015 reduced oil and gas drilling and completion activity in North America during 2015 and most of 2016. As of September 30, 2016, the U.S. land rig count had fallen over 70% from its peak in 2014. Demand for frac sand fell in conjunction with the rig count and activity levels, partially offset by higher proppant per well to optimize recovery and production rates. Beginning in the last quarter of 2016, leading indicators have suggested the stabilization and increase in North American oil and gas drilling and completion activity. As of
September 30, 2017
, U.S. land rig count has increased
43%
since December 31, 2016. Driven by the corresponding increase in frac sand demand, sales, tons sold and average selling price all increased sequentially during the three months ended
September 30, 2017
compared to the three months ended June 30, 2017, March 31, 2017 and December 31, 2016, as summarized below.
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Amounts in thousands except per ton data
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|
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Percentage Change for Three Months Ended
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September 30,
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|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30, 2017 vs. June 30, 2017
|
|
June 30, 2017 vs. March 31, 2017
|
|
March 31,
2017 vs. December 31, 2016
|
Oil & Gas Proppants
|
2017
|
|
2017
|
|
2017
|
|
2016
|
|
|
|
Sales
|
$
|
286,369
|
|
|
$
|
235,018
|
|
|
$
|
192,959
|
|
|
$
|
136,977
|
|
|
22
|
%
|
|
22
|
%
|
|
41
|
%
|
Tons Sold
|
3,147
|
|
|
2,745
|
|
|
2,532
|
|
|
2,081
|
|
|
15
|
%
|
|
8
|
%
|
|
22
|
%
|
Average Selling Price per Ton
|
$
|
91.00
|
|
|
$
|
85.62
|
|
|
$
|
76.21
|
|
|
$
|
65.82
|
|
|
6
|
%
|
|
12
|
%
|
|
16
|
%
|
However, if recovery in oil and gas drilling and completion activity does not continue, demand for frac sand may decline, which could result in us selling fewer tons, selling tons at lower prices, or both. If we sell less frac sand, or
sell frac sand at lower prices, our revenue, net income, cash generated from operating activities, and liquidity would be adversely affected. We could evaluate further actions to reduce cost and improve liquidity. For instance, depending on market conditions, we could implement additional cost improvement projects or reduce our capital spending by delaying or canceling capital projects.
We believe fluctuations in frac sand demand and price may occur as the market adjusts to changing supply and demand due to energy pricing fluctuations. We continue to expect long-term growth in oil and gas drilling in North American shale basins.
Oil and natural gas exploration and production companies' and oilfield service providers’ preferences and expectations have been evolving in recent years. A proppant vendor’s logistics capabilities have become an important differentiating factor when competing for business on both a spot and contract basis. Many of our customers increasingly seek convenient in-basin and wellhead proppant delivery capability from their proppant supplier. We believe that, over time, proppant customers will prefer to consolidate their purchases across a smaller group of suppliers with robust logistics capabilities and a broad offering of high performance proppants. For a discussion of customer credit risk, see the Credit Risk section in Part I, Item 3 of this Quarterly Report on Form 10-Q.
Industrial and specialty products end market trends
Demand in the industrial and specialty products end markets is relatively stable and is primarily influenced by key macroeconomic drivers such as housing starts, light vehicle sales, repair and remodel activity and industrial production. The primary end markets served by our production used in Industrial & Specialty Products are foundry, building products, sports and recreation, glassmaking and filtration. We have been increasing our value-added product offerings in the industrial and specialty products end markets. These new higher margin product sales have increased our Industrial & Specialty Products segment's profitability. For instance, on April 1, 2017, we completed the White Armor acquisition, a product line of cool roof granules used in industrial roofing applications.
Our Strategy
The key drivers of our growth strategy include:
|
|
•
|
Expand our Oil & Gas Proppants
production capacity and product portfolio.
We continue to consider and execute several initiatives to increase our frac sand production capacity and augment our proppant product portfolio. We are evaluating Greenfield opportunities and are expanding production capacities and maximizing production efficiencies of our existing facilities.
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•
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Increase our presence and product offering in industrial and specialty products end markets.
Our research and business development teams work in tandem with our customers to develop new products, which we expect will either increase our presence and market share in certain industrial and specialty products end markets or allow us to enter new markets. We manage a robust pipeline of new products in various stages of development. Some of these products have already come to market, resulting in a positive impact on our financial results. We continue to work toward offering more value-driven industrial and specialty products that will enhance the profitability of the business. For instance, on April 1, 2017, we completed the White Armor acquisition, a product line of cool roof granules used in industrial roofing applications.
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•
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Optimize product mix and further develop value-added capabilities to maximize margins.
We continue to actively manage our product mix at each of our plants to ensure we maximize our profit margins. This requires us to use our proprietary expertise in balancing key variables, such as mine geology, processing capacities, transportation availability, customer requirements and pricing. We expect to continue investing in ways to increase the value we provide to our customers by expanding our product offerings, improving our supply chain management, upgrading our information technology, and creating a world class customer service model.
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•
|
Expand our supply chain network and leverage our logistics capabilities to meet our customers’ needs in each strategic oil and gas basin.
We continue to expand our transload network to ensure product is available to meet the in-basin needs of our customers. This approach allows us to provide strong customer service and puts us in a position to take advantage of opportunistic spot market sales. Our plant sites are strategically located to provide access to key Class I railroads, which enables us to cost effectively send product to each of the strategic basins in North America. We can ship product by truck, barge and rail with an ability to connect to short-line railroads as necessary to meet our customers’ evolving in-basin product needs. We believe that our supply chain network and logistics capabilities are a competitive advantage that enables us to provide superior service for our customers. We expect to continue to make strategic investments and develop partnerships with transload operators and transportation providers that will enhance our portfolio of supply chain services that we can provide to customers. As of
September 30, 2017
, we have storage capacity at
58
transloads located near all of the major shale basins in the
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United States. Our acquisition of Sandbox extends our delivery capability directly to our customers' wellhead locations, which increases efficiency and provides a lower cost logistics solution for our customers. Sandbox has operations in Midland/Odessa, Texas; Morgantown, West Virginia; western North Dakota; northeast of Denver, Colorado; Oklahoma City, OK; and Cambridge, Ohio, where its major customers are located.
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•
|
Evaluate both Greenfield and Brownfield expansion opportunities and other acquisitions.
We expect to continue leveraging our reputation, processing capabilities and infrastructure to increase production, as well as explore other opportunities to expand our reserve base.
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◦
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We may accomplish this by developing Greenfield projects, where we can capitalize on our technical knowledge of geology, mining and processing and our strong reputation within local communities. For instance, in May 2017, we purchased a new Greenfield site in Crane County, Texas, which depending on market conditions, could become operational as early as late 2017 and add approximately 4 million tons of annual frac sand capacity. Additionally, in July 2017, we purchased a new Greenfield site near Lamesa, Texas, which depending on market conditions, could become operational as early as the second quarter of 2018 and add approximately 2.6 million tons of annual frac sand capacity.
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◦
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W
e are continuing to actively pursue acquisitions to grow by taking advantage of our asset footprint, our management’s experience with high-growth businesses, and our strong customer relationships. Our primary objective is to acquire assets with differing levels of frac sand qualities that are complementary to our Oil & Gas Proppants segment, with a focus on mining, processing and logistics to further enhance our market presence. We prioritize acquisitions that provide opportunities to realize synergies (and, in some cases, the acquisition may be immediately accretive assuming synergies), including entering new geographic and frac sand product markets, acquiring attractive customer contracts and improving operations. On August 16, 2016, we completed our acquisition of NBI, the ultimate parent company of NBR Sand, LLC, a regional sand producer located near Tyler, Texas. On August 22, 2016, we completed the acquisition of Sandbox, a provider of logistics solutions and technology for the transportation of proppant used in hydraulic fracturing in the oil and gas industry. On
August 16, 2017
, we completed our acquisition of MS Sand, a frac sand mining and logistics company based in St. Louis, Missouri. We are in active discussions to acquire additional assets fitting this strategy, which, if completed, could be “significant” under Regulation S-X and could require additional sources of financing. There can be no assurance that we will reach a definitive agreement and complete any of these potential transactions. See the risk factors disclosed in Item 1A of Part I of our 2016 Annual Report, including the risk factor entitled, “If we cannot successfully complete acquisitions or integrate acquired businesses, our growth may be limited and our financial condition may be adversely affected.”
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•
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Maintain financial strength and flexibility
.
We intend to maintain financial strength and flexibility to enable us to better pursue acquisitions and new growth opportunities as they arise and manage through any oil and gas proppant industry downturn. As of
September 30, 2017
, we had
$463.7 million
of cash on hand and
$45.2 million
of availability under our Revolver.
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How We Generate Our Sales
We derive our sales primarily by mining, processing and delivering minerals that our customers purchase for various uses. Our product sales are primarily a function of the price per ton and the number of tons sold. The price invoiced reflects product, transportation and additional services as applicable, such as storage and transloading the product from railcars to trucks for delivery to the customer site. We invoice the majority of our customers on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly. Service sales are billed periodically after services are completed. Depending on the types of services, the total amount billed includes labor, equipment costs, freight, handling and other costs.
Our
five
largest customers accounted for approximately
38
% of total sales during the
nine
months ended
September 30, 2017
.
Sales to our two largest customers, Schlumberger N.V. and Halliburton Company accounted for
11%
and
10%
of our total revenues during the
nine
months ended
September 30, 2017
, respectively. No other customer accounted for 10% or more of our total sales.
We primarily sell our products under short-term price agreements or at prevailing market rates. For a number of customers, we sell under long-term competitively-bid contracts. Some customers provided advance payments for future shipments. A percentage of these advance payments is recognized as revenue with each ton of applicable product shipped to the customer. Selling more tons under supply contracts enables us to be more efficient from a production, supply chain and logistics standpoint. As discussed in Part I, Item 1A., "Risk Factors", of our
2016
Annual Report—"A large portion of our sales is generated by our top ten customers, and the loss of, or significant reduction in, purchases by our largest customers could
adversely affect our operations,” these customers may not continue to purchase the same levels of product in the future due to a variety of reasons, contract requirements notwithstanding.
As of
September 30, 2017
, we have
ten
take-or-pay supply agreements in the Oil & Gas Proppants segment with initial terms expiring between
2018 and 2020
. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide and the price that we will charge and that our customers will pay for each product. Prices under these agreements are generally fixed and subject to adjustment in response to certain metrics such as market indices or changes in cost. Collectively, sales to customers with take-or-pay supply agreements accounted for
28%
and
21%
of our total company revenue during the
nine
months ended
September 30, 2017
and
2016
, respectively. Although sales under take-or-pay supply agreements may result in us realizing lower margins than we otherwise might during periods of high market prices, we believe such lower margins are offset by the benefits derived from the product mix and sales volume stability afforded by such supply agreements, which helps us lower market risk arising from adverse changes in spot prices and market conditions.
Historically we have not entered into long-term take-or-pay contracts with our customers in the industrial and specialty products end markets because of the high cost to our customers of switching providers. With these customers, we often enter into price agreements which are typically negotiated annually.
The Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, electricity and drying fuel costs, maintenance and repair costs for our mining and processing equipment and facilities and transportation costs. Transportation and related costs include freight charges, fuel surcharges, transloading fees, switching fees, railcar lease costs, demurrage costs, storage fees and labor costs. We believe the majority of our operating costs are relatively stable in price, but can vary significantly based on the volume of product produced. We benefit from owning the majority of the mineral deposits that we mine and having long-term mineral rights leases or supply agreements for our other primary sources of raw material, which limit royalty payments.
Additionally, we incur expenses related to our corporate operations, including costs for sales and marketing; research and development; and finance, legal, environmental, health and safety functions of our organization. These costs are principally driven by personnel expenses.
How We Evaluate Our Business
Our management team evaluates our business using a variety of financial and operational metrics. Our business is organized into two segments, Oil & Gas Proppants and Industrial & Specialty Products. We evaluate the performance of these segments based on their tons sold, average selling price and contribution margin earned. Additionally, we consider a number of factors in evaluating the performance of the business as a whole, including total tons sold, average selling price, segment contribution margin, and Adjusted EBITDA. We view these metrics as important factors in evaluating our profitability and review these measurements frequently to analyze trends and make decisions.
Segment Contribution Margin
Segment contribution margin, a non-GAAP measure, is a key metric that management uses to evaluate our operating performance and to determine resource allocation between segments. Segment contribution margin excludes certain corporate costs not associated with the operations of the segment. These unallocated costs include costs that are related to corporate functional areas such as operations management, corporate purchasing, accounting, treasury, information technology, legal and human resources.
Segment contribution margin is not a measure of our financial performance under GAAP and should not be considered an alternative to measures derived in accordance with GAAP. For more details on the reconciliation of segment contribution margin to its most directly comparable GAAP financial measure, net income (loss), see
Note O - Segment Reporting
to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Adjusted EBITDA
Adjusted EBITDA, a non-GAAP measure, is included in this report because it is a key metric used by management to assess our operating performance and by our lenders to evaluate our covenant compliance. Adjusted EBITDA excludes certain income and/or costs, the removal of which improves comparability of operating results across reporting periods. Our target performance goals under our incentive compensation plan are tied, in part, to our Adjusted EBITDA. In addition, our Revolver contains a consolidated total net leverage ratio that we must meet as of the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 25% of the Revolver commitment, which is calculated based on our Adjusted EBITDA. Noncompliance with the financial ratio covenant contained in the Revolver could result in the acceleration of our obligations to repay all amounts outstanding under the Revolver and the Term Loan. Moreover, the Revolver and the Term Loan contain covenants that restrict, subject to certain exceptions, our ability to make permitted acquisitions, incur additional indebtedness, make restricted payments (including dividends) and retain excess cash flow based, in some cases, on our ability to meet leverage ratios calculated based on our Adjusted EBITDA.
Adjusted EBITDA is not a measure of our financial performance or liquidity under GAAP and should not be considered as an alternative to net income as a measure of operating performance, cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized, and excludes certain non-recurring charges. Management compensates for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA only supplementally. Our measure of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.
The following table sets forth a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA.
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(All amounts in thousands)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
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2016
|
Net income (loss)
|
$
|
41,273
|
|
|
$
|
(11,339
|
)
|
|
$
|
73,254
|
|
|
$
|
(34,113
|
)
|
Total interest expense, net of interest income
|
6,900
|
|
|
6,211
|
|
|
19,852
|
|
|
18,731
|
|
Provision for taxes
|
14,707
|
|
|
(12,177
|
)
|
|
20,103
|
|
|
(30,102
|
)
|
Total depreciation, depletion and amortization expenses
|
24,673
|
|
|
17,175
|
|
|
69,898
|
|
|
46,940
|
|
EBITDA
|
87,553
|
|
|
(130
|
)
|
|
183,107
|
|
|
1,456
|
|
Non-cash incentive compensation
(1)
|
6,567
|
|
|
3,720
|
|
|
18,519
|
|
|
9,075
|
|
Post-employment expenses (excluding service costs)
(2)
|
194
|
|
|
(184
|
)
|
|
923
|
|
|
780
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|
Business development related expenses
(3)
|
2,355
|
|
|
4,667
|
|
|
5,384
|
|
|
5,635
|
|
Other adjustments allowable under our existing credit agreement
(4)
|
7
|
|
|
185
|
|
|
6,527
|
|
|
1,937
|
|
Adjusted EBITDA
|
$
|
96,676
|
|
|
$
|
8,258
|
|
|
$
|
214,460
|
|
|
$
|
18,883
|
|
|
|
|
|
|
|
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(1)
|
Reflects equity-based compensation expense.
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(2)
|
Includes net pension cost and net post-retirement cost relating to pension and other post-retirement benefit obligations during the applicable period, but in each case excluding the service cost relating to benefits earned during such period. See Note M - Pension and Post-retirement Benefits to our Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
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(3)
|
Reflects expenses related to business development activities in connection with our growth and expansion initiatives.
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(4)
|
Reflects miscellaneous adjustments permitted under our existing credit agreement. The nine months ended September 30, 2017 amount includes a contract restructuring cost of $6.3 million.
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Results of Operations for the Three Months Ended
September 30, 2017
and
2016
Sales
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|
|
|
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|
|
|
|
|
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(All numbers in thousands except per ton data)
|
Three Months Ended
September 30,
|
|
Amount Change
|
|
Percent Change
|
|
2017
|
|
2016
|
|
'17 vs.'16
|
|
'17 vs.'16
|
Sales:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
286,369
|
|
|
$
|
86,782
|
|
|
$
|
199,587
|
|
|
230
|
%
|
Industrial & Specialty Products
|
58,654
|
|
|
50,966
|
|
|
7,688
|
|
|
15
|
%
|
Total Sales
|
$
|
345,023
|
|
|
$
|
137,748
|
|
|
$
|
207,275
|
|
|
150
|
%
|
Tons:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
3,147
|
|
|
1,617
|
|
|
1,530
|
|
|
95
|
%
|
Industrial & Specialty Products
|
928
|
|
|
876
|
|
|
52
|
|
|
6
|
%
|
Total Tons
|
4,075
|
|
|
2,493
|
|
|
1,582
|
|
|
63
|
%
|
Average Selling Price per Ton:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
91.00
|
|
|
$
|
53.67
|
|
|
$
|
37.33
|
|
|
70
|
%
|
Industrial & Specialty Products
|
63.20
|
|
|
58.18
|
|
|
5.02
|
|
|
9
|
%
|
Overall Average Selling Price per Ton:
|
$
|
84.67
|
|
|
$
|
55.25
|
|
|
$
|
29.42
|
|
|
53
|
%
|
Total sales increased
150%
for the three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
, driven by a
63%
increase in total tons sold and a
53%
increase in overall average selling price. Tons sold in-basin represented
51%
and
42%
of total company tons sold for the three months ended
September 30, 2017
and
2016
, respectively.
The increase in total sales was primarily driven by Oil & Gas Proppants sales, which increased
230%
for the three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
. Oil & Gas Proppants tons sold increased
95%
and average selling price increased
70%
. These increases were driven by year over year growth in demand for our frac sand and the acquisitions of Sandbox, NBI and MS Sand.
Industrial & Specialty Products sales increased by
15%
for the three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
, driven by a
6%
increase in tons sold and a
9%
increase in average selling price. The increase in average selling price was primarily a result of new higher-margin product sales and price increases.
Cost of Sales
Cost of sales increased by
$108.5 million
, or
91%
, to
$227.9 million
for the three months ended
September 30, 2017
compared to
$119.4 million
for the three months ended
September 30, 2016
. As a percentage of sales, cost of sales decreased to
66%
for the three months ended
September 30, 2017
compared to
87%
for the same period in
2016
. These changes result from the main components of cost of sales as discussed below.
We incurred
$133.2 million
and
$64.7 million
of transportation and related costs for the three months ended
September 30, 2017
and
2016
, respectively. This increase was due to increased tons sold through our transloads and the Sandbox acquisition. As a percentage of sales, transportation and related costs decreased to
39%
for the three months ended
September 30, 2017
compared to
47%
for the same period in
2016
.
We incurred
$34.9 million
and
$20.8 million
of operating labor costs for the three months ended
September 30, 2017
and
2016
, respectively. The
$14.1 million
increase in labor costs incurred was primarily due to more tons sold and incremental costs related to Sandbox operations. As a percentage of sales, operating labor costs represented
10%
for the three months ended
September 30, 2017
compared to
15%
for the same period in
2016
.
We incurred
$8.7 million
and
$6.3 million
of electricity and drying fuel (principally natural gas) costs for the three months ended
September 30, 2017
and
2016
, respectively. The
$2.4 million
increase in electricity and drying fuel costs incurred was mainly due to more tons sold. As a percentage of sales, electricity and drying fuel costs represented
3%
for the three months ended
September 30, 2017
compared to
5%
for the same period in
2016
.
We incurred
$15.1 million
and
$8.5 million
of maintenance and repair costs for the three months ended
September 30, 2017
and
2016
, respectively. The increase in maintenance and repair costs incurred was mainly due to higher production volume and incremental costs related to Sandbox operations. As a percentage of sales, maintenance and repair costs represented
4%
for the three months ended
September 30, 2017
compared to
6%
for the same period in
2016
.
Segment Contribution Margin
Oil & Gas Proppants contribution margin increased by
$98.0 million
to
$96.1 million
for the three months ended
September 30, 2017
compared to
$(1.9) million
for the three months ended
September 30, 2016
, driven by a
$199.6 million
increase in segment revenue, partially offset by higher segment cost of sales.
Industrial & Specialty Products contribution margin increased by
$2.4 million
, or
11%
, to
$24.0 million
for the three months ended
September 30, 2017
compared to
$21.6 million
for the three months ended
September 30, 2016
, driven by increased higher-margin products sales as a percentage of total sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$11.1 million
, or
60%
, to
$29.6 million
for the three months ended
September 30, 2017
compared to
$18.5 million
for the three months ended
September 30, 2016
. The increase was due to the following factors:
|
|
•
|
Compensation-related expense increased by
$9.6 million
for the three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
, mainly driven by increased equity-based compensation and incremental personnel expense related to our NBI, Sandbox and MS Sand employees.
|
|
|
•
|
Bad debt expense increased by
$1.1 million
for the three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
, mainly due to increased sales.
|
|
|
•
|
Business development related expense decreased by
$2.3 million
to
$2.4 million
for the three months ended
September 30, 2017
compared to
$4.7 million
for the three months ended
September 30, 2016
. The decrease was primarily due to cost related to our NBI and Sandbox acquisitions in 2016 partially offset by cost related to our MS Sand acquisition in 2017.
|
In total, our selling, general and administrative costs represented approximately
9%
and
13%
of our sales for the three months ended
September 30, 2017
and
2016
, respectively.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased by
$7.5 million
, or
44%
, to
$24.7 million
for the three months ended
September 30, 2017
compared to
$17.2 million
for the three months ended
September 30, 2016
. The year over year increase was mainly driven by our acquisitions as well as other continued capital spending. Depreciation, depletion and amortization costs represented approximately
7%
and
12%
of our sales for the three months ended
September 30, 2017
and
2016
, respectively.
Operating Income (Loss)
Operating income increased by
$80.2 million
to
$62.8 million
for the three months ended
September 30, 2017
compared to an operating loss of
$(17.3) million
for the three months ended
September 30, 2016
. The increase was due to a
150%
increase in total sales partially offset by a
91%
increase in cost of sales, a
60%
increase in selling, general and administrative expense and a
44%
increase in depreciation, depletion and amortization expense.
Interest Expense
Interest expense increased by
$1.7 million
, or
25%
, to
$8.3 million
for the three months ended
September 30, 2017
compared to
$6.7 million
for the three months ended
September 30, 2016
, driven by additional long-term liabilities assumed in conjunction with our NBI and Sandbox acquisitions.
Other Income, net, including interest income
Other income increased by
$1.0 million
, or
205%
, to
$1.5 million
for the three months ended
September 30, 2017
compared to
$0.5 million
for the three months ended
September 30, 2016
. The increase was primarily due to an increase in interest income earned during the three months ended
September 30, 2017
.
Provision for Income Taxes
The income tax expense increased by
$26.9 million
to
$14.7 million
for the three months ended
September 30, 2017
compared to
$12.2 million
in income tax benefit for the three months ended
September 30, 2016
. The increase was due to increased profit before income tax during the three months ended
September 30, 2017
. The effective tax rate was
26%
and
52%
for the three months ended
September 30, 2017
and
2016
, respectively. See accompanying
Note L - Income Taxes
of our Financial Statements for more information.
Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion allowances. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income before income taxes.
Net Income (Loss)
Net income was
$41.3 million
for the three months ended
September 30, 2017
compared to a net loss of
$(11.3) million
for the three months ended
September 30, 2016
. The year over year increase was due to the factors noted above.
Results of Operations for the
Nine Months Ended
September 30, 2017
and
2016
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(All numbers in thousands except per ton data)
|
Nine Months Ended
September 30,
|
|
Amount Change
|
|
Percent Change
|
|
2017
|
|
2016
|
|
'17 vs. '16
|
|
'17 vs. '16
|
Sales:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
714,345
|
|
|
$
|
225,573
|
|
|
$
|
488,772
|
|
|
217
|
%
|
Industrial & Specialty Products
|
165,940
|
|
|
151,679
|
|
|
14,261
|
|
|
9
|
%
|
Total Sales
|
$
|
880,285
|
|
|
$
|
377,252
|
|
|
$
|
503,033
|
|
|
133
|
%
|
Tons:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
8,424
|
|
|
4,361
|
|
|
4,063
|
|
|
93
|
%
|
Industrial & Specialty Products
|
2,682
|
|
|
2,642
|
|
|
40
|
|
|
2
|
%
|
Total Tons
|
11,106
|
|
|
7,003
|
|
|
4,103
|
|
|
59
|
%
|
Average Selling Price per Ton:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
84.80
|
|
|
$
|
51.73
|
|
|
$
|
33.07
|
|
|
64
|
%
|
Industrial & Specialty Products
|
61.87
|
|
|
57.41
|
|
|
4.46
|
|
|
8
|
%
|
Overall Average Selling Price per Ton:
|
$
|
79.26
|
|
|
$
|
53.87
|
|
|
$
|
25.39
|
|
|
47
|
%
|
Total sales increased
133%
for the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, driven by a
59%
increase in total tons sold and a
47%
increase in overall average selling price. Tons sold in-basin represented
49%
and
36%
of total company tons sold for the
nine
months ended
September 30, 2017
and
2016
, respectively.
The increase in total sales was driven by Oil & Gas Proppants sales, which increased
217%
for the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
. Oil & Gas Proppants tons sold for the
nine
months ended
September 30, 2017
increased
93%
and average selling price increased
64%
. These increases were driven by the year over year growth in demand for our frac sand and the acquisitions of Sandbox, NBI and MS Sand.
Industrial & Specialty Products sales increased
9%
for the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
driven by a
2%
increase in tons sold and an
8%
increase in average selling price. The increase in average selling price was primarily a result of new higher-margin product sales and price increases.
Cost of Sales
Cost of sales increased by
$283.9 million
, or
86%
, to
$612.8 million
for the
nine
months ended
September 30, 2017
compared to
$328.9 million
for the
nine
months ended
September 30, 2016
. As a percentage of sales, cost of sales decreased to
70%
for the
nine
months ended
September 30, 2017
compared to
87%
for the same period in
2016
. These changes result from the main components of cost of sales as discussed below.
We incurred
$349.6 million
and
$169.0 million
of transportation and related costs for the
nine
months ended
September 30, 2017
and
2016
, respectively. This increase was due to increased tons sold through our transloads and the Sandbox acquisition. As a percentage of sales, transportation and related costs decreased to
40%
for the
nine
months ended
September 30, 2017
compared to
45%
for the same period in
2016
.
We incurred
$96.8 million
and
$57.3 million
of operating labor costs for the
nine
months ended
September 30, 2017
and
2016
, respectively. The
$39.5 million
increase in labor costs incurred was primarily due to more tons sold and incremental costs related to Sandbox operations. As a percentage of sales, operating labor costs represented
11%
for the
nine
months ended
September 30, 2017
compared to
15%
for the same period in
2016
.
We incurred
$26.1 million
and
$18.9 million
of electricity and drying fuel (principally natural gas) costs for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase in electricity and drying fuel costs incurred was due to more tons sold. As a percentage of sales, electricity and drying fuel costs represented
3%
for the
nine
months ended
September 30, 2017
compared to
5%
for the same period in
2016
.
We incurred
$42.9 million
and
$24.5 million
of maintenance and repair costs for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase in maintenance and repair costs incurred was mainly due to higher production volume, incremental costs related to Sandbox operations and the addition of our Tyler, Texas facility. As a percentage of sales, maintenance and repair costs decreased to
5%
for the
nine
months ended
September 30, 2017
compared to
7%
for the same period in
2016
.
Segment Contribution Margin
Oil & Gas Proppants contribution margin increased by
$213.2 million
to
$206.1 million
for the
nine
months ended
September 30, 2017
compared to
$(7.0) million
for the
nine
months ended
September 30, 2016
, driven by a
217%
increase in revenue partially offset by a
118%
higher segment cost of sales.
Industrial & Specialty Products contribution margin increased by
$7.5 million
, or
12%
, to
$67.5 million
for the
nine
months ended
September 30, 2017
compared to
$60.0 million
for the
nine
months ended
September 30, 2016
, driven by increased higher margin products sales as a percentage of total sales and price increases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$29.4 million
, or
61%
, to
$78.0 million
for the
nine
months ended
September 30, 2017
compared to
$48.6 million
for the
nine
months ended
September 30, 2016
. The increase was primarily due to the following factors:
|
|
•
|
Compensation related expense increased by
$23.4 million
for the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, primarily due to increased equity-based compensation and higher employee headcount due to our acquisitions of NBI, Sandbox and MS Sand.
|
|
|
•
|
Bad debt expense increased by
$1.9 million
for the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, mainly due to increased sales.
|
|
|
•
|
Business development related expense decreased by
$0.3 million
to
$5.4 million
for the
nine
months ended
September 30, 2017
compared to
$5.6 million
for the
nine
months ended
September 30, 2016
. The decrease was primarily due to cost related to our NBI and Sandbox acquisitions in 2016 partially offset by cost related to our MS Sand acquisition in 2017.
|
In total, our selling, general and administrative costs represented approximately
9%
and
13%
of our sales for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased by
$23.0 million
, or
49%
, to
$69.9 million
for the
nine
months ended
September 30, 2017
compared to
$46.9 million
for the
nine
months ended
September 30, 2016
. The year over
year increase was driven by our acquisitions as well as other capital spending. Depreciation, depletion and amortization costs represented approximately
8%
and
12%
of our sales for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Operating Income (Loss)
Operating income increased by
$166.8 million
, or
354%
, to
$119.6 million
for the
nine
months ended
September 30, 2017
compared to
$(47.1) million
of operating loss for the
nine
months ended
September 30, 2016
. The increase was due to a
133%
increase in sales partially offset by an
86%
increase in cost of sales, a
61%
increase in selling, general and administrative expense and a
49%
increase in depreciation, depletion and amortization expense.
Interest Expense
Interest expense increased by
$4.1 million
, or
21%
, to
$24.1 million
for the
nine
months ended
September 30, 2017
compared to
$20.0 million
for the
nine
months ended
September 30, 2016
, driven by additional long-term liabilities assumed in conjunction with our NBI and Sandbox acquisitions.
Other Income (Expense), net, including interest income
Other expense increased by
$5.1 million
, or
175%
to
$(2.2) million
for the
nine
months ended
September 30, 2017
compared to other income of
$2.9 million
for the
nine
months ended
2016
. The increase was primarily due to a contract restructuring cost incurred which was partially reduced by increased interest income during the
nine
months ended
September 30, 2017
.
Provision for Income Taxes
Income tax expense increased
$50.2 million
to
$20.1 million
for the
nine
months ended
September 30, 2017
compared to
$30.1 million
of income tax benefit for the
nine
months ended
September 30, 2016
. The increase was due to increased profit before income taxes partially offset by the equity compensation tax benefit recorded discretely for the
nine
months ended
September 30, 2017
. The effective tax rate was
22%
and
47%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. See accompanying
Note L - Income Taxes
of our Financial Statements for more information.
Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion allowances. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income before income taxes.
Net Income (Loss)
Net income was
$73.3 million
for the
nine
months ended
September 30, 2017
compared to a net loss of
$(34.1) million
for the
nine
months ended
September 30, 2016
. The year over year increase was due to the factors noted above.
Liquidity and Capital Resources
Overview
Our principal liquidity requirements have historically been to service our debt, to meet our working capital, capital expenditure and mine development expenditure needs, to return cash to our stockholders, and to finance acquisitions. We have historically met our liquidity and capital investment needs with funds generated through operations. We have historically funded our acquisitions through cash on hand or borrowings under our credit facilities and equity issuances. Our working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. As of
September 30, 2017
, our working capital was
$560.8 million
and we had
$45.2 million
of availability under the Revolver.
We believe that cash on hand, cash generated through operations and cash generated from financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, scheduled debt payments and any dividends declared for at least the next 12 months.
Management and our Board remain committed to evaluating additional ways of creating shareholder value. Any determination to pay dividends and other distributions in cash, stock, or property in the future will be at the discretion of our Board and will be dependent on then-existing conditions, including our business conditions, our financial condition, results of operations, liquidity, capital requirements, contractual restrictions including restrictive covenants contained in debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness.
Cash Flow Analysis
A summary of operating, investing and financing activities (in thousands) is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Percent
Change
|
|
2017
|
|
2016
|
|
'17 vs. '16
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
189,153
|
|
|
$
|
70
|
|
|
270,119
|
%
|
Investing activities
|
(411,842
|
)
|
|
(187,506
|
)
|
|
120
|
%
|
Financing activities
|
(24,886
|
)
|
|
174,419
|
|
|
(114
|
)%
|
Net Cash Provided by Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash and working capital items. Adjustments to net income for non-cash items include depreciation, depletion and amortization, deferred revenue, deferred income taxes, equity-based compensation and bad debt provision. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally accounts receivable, inventories, prepaid expenses and other current assets, income taxes payable and receivable, accounts payable and accrued expenses.
Net cash provided by operating activities was
$189.2 million
for the
nine
months ended
September 30, 2017
compared to
$0.1 million
for the
nine
months ended
September 30, 2016
. This
$189.1 million
increase in cash provided by operations was mainly the result of a
$107.4 million
increase in net income and
$81.7 million
increase due to other components of operating activities.
Net Cash Used in Investing
Activities
Investing activities consist primarily of cash consideration paid to acquire businesses, capital expenditures for growth and maintenance and proceeds from the sale and maturity of short-term investments.
Net cash used in investing activities was
$411.8 million
for the
nine
months ended
September 30, 2017
. This was due to capital expenditures of
$289.5 million
, cash consideration of
$119.7 million
paid for acquisition of businesses and capitalized intellectual property costs of
$2.6 million
. Capital expenditures for the
nine
months ended
September 30, 2017
were approximately
$49.6 million
for a purchase of reserves in Lamesa, Texas,
$94.4 million
for a purchase of reserves in Crane County, Texas, and
$145.5 million
for engineering, procurement and construction of our growth projects and other maintenance and cost improvement capital projects.
Net cash used in investing activities was
$187.5 million
for the
nine
months ended
September 30, 2016
. This was due to
$176.4 million
of cash consideration that was paid for NBI and Sandbox acquisitions and capital expenditures of
$32.8 million
offset by
$21.9 million
in proceeds from sales and maturities of short-term investments. Capital expenditures for the
nine
months ended
September 30, 2016
were primarily for a purchase of reserves adjacent to our Ottawa, Illinois, facility, engineering, procurement and construction of our growth projects and other maintenance and cost improvement capital projects.
Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in
2017
will be approximately
$375 million
, which is primarily associated with previously announced growth projects and other maintenance and cost improvement capital projects. We expect to fund our capital expenditures through cash on our balance sheet, cash generated from our operations and cash generated from financing activities.
Net Cash Provided by Financing Activities
Financing activities consist primarily of equity issuances, capital contributions, dividend payments, borrowings and repayments related to the Revolver, Term Loan, as well as fees and expenses paid in connection with our credit facilities, advance payments from our customers and capital leases.
Net cash used in financing activities was
$24.9 million
for the
nine
months ended
September 30, 2017
, driven by
$15.3 million
of dividends paid,
$5.6 million
of long-term debt payments,
$3.9 million
of tax payments related to shares withheld for vested restricted stock and
$0.9 million
of capital lease repayments partially offset by
$0.8 million
of proceeds from employee stock options exercised.
Net cash provided by financing activities was
$174.4 million
in the
nine
months ended
September 30, 2016
, driven by
$200.0 million
of common stock issuances and
$4.3 million
of proceeds from options exercised, both of which were partially offset by
$14.0 million
common stock issuance costs,
$10.7 million
of dividends paid and
$4.0 million
of long-term debt payments,
$0.2 million
of capital lease repayments and
$1.0 million
of tax payments related to shares withheld for vested restricted stock.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a current material effect or are likely to have future material effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
There have been no significant changes outside the ordinary course of business to our “Contractual Obligations” table in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our
2016
Annual Report. For more details on future minimum annual commitments under such operating leases, please see accompanying
Note K - Commitments and Contingencies
to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. As of
September 30, 2017
, we had
$12.3 million
accrued for future reclamation costs, as compared to
$11.2 million
as of
December 31, 2016
.
We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure to crystalline silica and our mining activity and how such matters may affect our business in the future under Item 1, “Business,” Item 1A, “Risk Factors” Item 3, “Legal Proceedings”, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” in our
2016
Annual Report.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of
our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our
2016
Annual Report.
Recent Accounting Pronouncements
New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued but not yet adopted by us, are included in
Note A - Summary of Significant Accounting Policies
to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Availability of Reports; Website Access; Other Information
Our internet address is http://www.ussilica.com. Through “Investors”—“SEC Filings” on our home page, we make available free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our proxy statements, our Current Reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports filed with the SEC are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information about the Public Reference Room may be obtained by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.
Copies of our Corporate Governance Guidelines, our Audit Committee, Compensation Committee and Nominating and Governance Committee charters, the Code of Conduct for our Board of Directors and Code of Conduct and Ethics for U.S. Silica employees (including the chief executive officer, chief financial officer and corporate controller) can also be found on our website. Any amendments or waivers to the Code of Conduct and Ethics applicable to the chief executive officer, chief financial officer and corporate controller can also be found in the “Investors” section of the U.S. Silica website. Stockholders may also request a free copy of these documents from: U.S. Silica Holdings, Inc., attn.: Investor Relations, 8490 Progress Drive, Suite 300, Frederick, Maryland 21701 or IR@ussilica.com.