NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; dollars in thousands, except per share amounts)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) of U.S. Silica Holdings, Inc. (“Holdings,” and together with its subsidiaries “we,” “us” or the “Company”) included in this Quarterly Report on Form 10-Q, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). They do not contain certain information included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
; therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation of the Financial Statements have been included. Such adjustments are of a normal, recurring nature.
Certain reclassifications of prior year's amounts have been made to conform to the current year presentation. In conforming to the current year's presentation, the Company identified and corrected an immaterial amount in its statement of cash flows for the three months ended March 31, 2017. The correction reduced Capital Expenditures within Net Cash Used in Investing Activities with a corresponding decrease to Accounts Payable and Accrued Expenses within Net Cash Used in Operating Activities. The amount is presented as Non-cash Accrued Capital Expenditures and had no impact in the Company's Balance Sheet, Income Statement or Net Change in Cash and Cash Equivalents in the Statement of Cash Flows.
In order to make this report easier to read, we refer throughout to (i) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (ii) our Condensed Consolidated Statements of Operations as our “Income Statements,” and (iii) our Condensed Consolidated Statements of Cash Flows as our “Cash Flows.”
Unaudited Interim Financial Statements
The accompanying Balance Sheet as of
March 31, 2018
; the Income Statements and Condensed Consolidated Statements of Comprehensive Income for the
three
months ended
March 31, 2018
and
2017
; the Condensed Consolidated Statements of Stockholders' Equity and Cash Flows for the
three
months ended
March 31, 2018
; and other information disclosed in the related notes are unaudited. The Balance Sheet as of
December 31, 2017
, was derived from our audited consolidated financial statements included in our
2017
Annual Report.
Use of Estimates and Assumptions
The preparation of the Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to purchase price allocation for businesses acquired; mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production amortization calculations; environmental, reclamation and closure obligations; estimates of recoverable minerals; estimates of allowance for doubtful accounts; estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill and other long-lived assets); write-downs of inventory to net realizable value; equity-based compensation expense; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; contingent considerations; reserves for contingencies and litigation and the fair value and accounting treatment of financial instruments including derivative instruments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Revenue Recognition
Products
We derive our product sales by mining and processing 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. We primarily sell our products through individual purchase orders executed under short-term price agreements or at prevailing market rates. The amount invoiced reflects product, transportation and / or additional handling services as applicable, such as storage, transloading the product from railcars to trucks and last mile logistics to the customer site. We invoice most of our product customers on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly. Standard collection terms are net 30 days, although extended terms are offered in competitive situations.
We recognize revenue for products and materials at a point in time following the transfer of control of such items to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. We account for shipping and handling activities related to product and material sales contracts with customers as costs to fulfill our promise
to transfer the associated products pursuant to the accounting policy election allowed under ASC 606-10-18. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales, and accrue and classify related costs as a component of cost of sales at the time revenue is recognized.
For a limited number of customers, we sell under long-term, minimum purchase supply agreements. 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 certain contractual adjustments. Sometimes these agreements may undergo negotiations regarding pricing and volume requirements, which may often occur in volatile market conditions. While these negotiations continue, we may deliver sand at prices or at volumes below the requirements in our existing supply agreements. We do not consider these agreements solely representative of contracts with customers. An executed order specifying the type and quantity of product to be delivered, in combination with the noted agreements, comprise our contracts in these arrangements.
Service
We derive our service revenues primarily through the provision of transportation, equipment rental, and contract labor services to companies in the oil and gas industry. Transportation services typically consist of transporting customer proppant from storage facilities to proximal well-sites and are contracted through work orders executed under established pricing agreements. The amount invoiced reflects the transportation services rendered. Equipment rental services provide customers with use of either dedicated or nonspecific wellhead proppant delivery equipment solutions for contractual periods defined either through formal lease agreements or executed work orders under established pricing agreements. The amounts invoiced reflect the length of time the equipment set was utilized in the billing period. Contract labor services provide customers with proppant delivery equipment operators through work orders executed under established pricing agreements. The amounts invoiced reflect the amount of time our labor services were utilized in the billing period.
We typically invoice our customers on a weekly or monthly basis; however, some customers receive invoices upon well-site operation completion. Standard collection terms are net 30 days, although extended terms are offered in competitive situations. We typically recognize revenue for specific, dedicated equipment set rental arrangements under ASC 840, Leases. For the remaining components of service revenue, we have applied the practical expedient allowed under ASC 606-10-55-18 to recognize transportation revenues in proportion to the amount we have the right to invoice.
Contracts with Multiple Performance Obligations
For contracts that contain multiple performance obligations, such as work orders containing a combination of product, transportation, equipment rentals, and contract labor services, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations.
Taxes Collected from Customers and Remitted to Governmental Authorities.
We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales.
Deferred Revenues
For a limited number of customers, we enter into supply agreements which give customers the right to make advanced payments toward the purchase of certain products at specified volumes over an average initial period of
one
to
five
years. These payments represent consideration that is unconditional for which we have yet to transfer the related product. These payments are recorded as contract liabilities referred to as “deferred revenues” upon receipt and recognized as revenue upon delivery of the related product.
Unbilled Receivables
Revenues recognized in advance of invoice issuance create assets referred to as “unbilled receivables.” Any portion of our unbilled receivables for which our right to consideration is conditional on a factor other than the passage of time is considered a contract asset. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once billed.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes previous revenue recognition guidance. The new guidance introduces a new principles-based framework for revenue recognition and disclosure. Since its issuance, the
FASB has issued additional ASUs, amending the guidance and the effective dates of amendments, and the SEC has rescinded certain related SEC guidance.
On January 1, 2018, we adopted the new accounting standard and all of the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. Adoption of the new revenue standard did not result in a material cumulative effect adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We do not expect the adoption of the new revenue standard to have a material impact to our net income on an ongoing basis. See
Note S -Revenue
to these Financial Statements for additional disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. This update is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. This standard mandates a modified retrospective transition method. While we continue to evaluate the effect of the standard, we anticipate that the adoption will result in a material increase in assets and liabilities on our consolidated balance sheet and will not have a material impact on our consolidated income statement or statement of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed with a measurement date after January 1, 2017. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit. The update requires companies to include the service cost component of net periodic benefit costs in the same line item or items as compensation costs arising from services rendered by the associated employees during the period. The update also disallows capitalization of the other components of net periodic benefit costs and requires those costs to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods for public business entities. Companies are required to retrospectively apply the requirement for a separate presentation in the income statement of service costs and other components of net benefit cost and prospectively adopt the requirement to limit the capitalization of benefit costs to the service component. Application of a practical expedient is allowed permitting an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.
We implemented the update on January 1, 2018 and utilized the practical expedient to estimate the impact on the prior comparative period information presented in the interim and annual financial statements. We previously capitalized all net periodic benefit costs incurred for plant personnel in inventory and recorded the majority of net periodic benefit costs incurred by corporate personnel and retirees into selling, general, and administrative expenses. The following is a reconciliation of the effect of the reclassification (in thousands) of the net benefit cost in the Company’s condensed consolidated statements of income for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
Adjustments
|
As Revised
|
Product cost of sales
|
$
|
162,637
|
|
$
|
(287
|
)
|
$
|
162,350
|
|
Total cost of sales
|
187,475
|
|
(287
|
)
|
187,188
|
|
Selling, general and administrative expenses
|
22,341
|
|
(202
|
)
|
22,139
|
|
Operating income
|
13,382
|
|
489
|
|
13,871
|
|
Other income (expense)
|
(4,928
|
)
|
(489
|
)
|
(5,417
|
)
|
In February 2018, the FASB issued Accounting Standards Update ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Act in accumulated other comprehensive loss may be reclassified
to retained earnings. The ASU is effective February 1, 2019, with early adoption permitted. We are currently evaluating the effect that the transition guidance will have on our financial statements and related disclosures.
NOTE B—EARNINGS PER SHARE
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per common share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
The following table shows the computation of basic and diluted earnings per share for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income
|
$
|
31,294
|
|
|
$
|
2,522
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted average shares outstanding
|
79,496
|
|
—
|
|
80,983
|
|
Diluted effect of stock awards
|
813
|
|
|
1,261
|
|
Weighted average shares outstanding assuming dilution
|
80,309
|
|
|
82,244
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.39
|
|
|
$
|
0.03
|
|
Diluted earnings per share
|
$
|
0.39
|
|
|
$
|
0.03
|
|
Certain stock options, restricted stock awards and performance share units were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Weighted-average stock awards (in thousands) excluded from the calculation of diluted earnings per common share were as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Weighted-average outstanding stock options excluded
|
428
|
|
|
195
|
|
Weighted-average outstanding restricted stock and performance share units awards excluded
|
337
|
|
|
—
|
|
NOTE C—CAPITAL STRUCTURE AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
Our Amended and Restated Certificate of Incorporation authorizes up to
500,000,000
shares of common stock, par value of
$0.01
. Subject to the rights of holders of any series of preferred stock, all of the voting power of the stockholders of Holdings shall be vested in the holders of the common stock. There were
81,518,347
shares issued and
77,867,261
shares outstanding at
March 31, 2018
. There were
81,267,205
shares issued and
80,524,255
shares outstanding at
December 31, 2017
.
During the
three
months ended
March 31, 2018
, our Board of Directors declared quarterly cash dividends as follows:
|
|
|
|
|
|
|
|
|
|
Dividends per Common Share
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
$
|
0.0625
|
|
|
February 16, 2018
|
|
March 15, 2018
|
|
April 5, 2018
|
All dividends were paid as scheduled.
Any determination to pay dividends and other distributions in cash, stock, or property by Holdings in the future will be at the discretion of our Board of Directors and will be dependent on then-existing conditions, including our business and
financial condition, results of operations, liquidity, capital requirements, contractual restrictions including restrictive covenants contained in our 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.
Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes our Board of Directors to issue up to
10,000,000
shares, in the aggregate, of preferred stock, par value of
$0.01
in one or more series, to fix the powers, preferences and other rights of such series, and any qualifications, limitations or restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption rights and liquidation preference, and to fix the number of shares to be included in any such series, without any further vote or action by our stockholders.
There were
no
shares of preferred stock issued or outstanding at
March 31, 2018
or
December 31, 2017
. At present, we have
no
plans to issue any preferred stock.
Share Repurchase Program
We are authorized by our Board of Directors to repurchase shares of our outstanding common stock from time to time on the open market or in privately negotiated transactions. As of
March 31, 2018
, we were authorized to repurchase up to
$100 million
of our common stock through December 11, 2018. Stock repurchases, if any, will be funded using our available liquidity. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. During the three months ended
March 31, 2018
we repurchased
2,828,023
shares of our common stock at an average price of
$26.52
. As of
March 31, 2018
, we have repurchased a total of
3,555,104
shares of our common stock at an average price of
$28.13
, completing the
$100 million
authorized under this program.
Our Board of Directors previously had authorized the repurchase of up to
$50.0 million
of our common stock. This program expired on December 11, 2017. We repurchased a total of
706,093
shares of our common stock at an average price of
$23.83
under this program.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of fair value adjustments associated with cash flow hedges, accumulated adjustments for net experience losses and prior service cost related to employee benefit plans and foreign currency translation adjustments primarily related to accounts payable denominated in Euros. The following table presents the changes in accumulated other comprehensive income (loss) by component (in thousands) during the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
Unrealized gain/(loss) on cash flow hedges
|
|
Foreign currency translation adjustments
|
|
Pension and other post-retirement benefits liability
|
|
Total
|
Beginning Balance
|
$
|
(76
|
)
|
|
$
|
(6
|
)
|
|
$
|
(13,844
|
)
|
|
$
|
(13,926
|
)
|
Other comprehensive gain (loss) before reclassifications
|
—
|
|
|
(3
|
)
|
|
1,806
|
|
|
1,803
|
|
Amounts reclassed from accumulated other comprehensive income
|
2
|
|
|
—
|
|
|
489
|
|
|
491
|
|
Ending Balance
|
$
|
(74
|
)
|
|
$
|
(9
|
)
|
|
$
|
(11,549
|
)
|
|
$
|
(11,632
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) related to cash flow hedges are included in interest expense in our Income Statements and amounts reclassified related to pension and other post-retirement benefits are included in the computation of net periodic benefit costs at their pre-tax amounts.
NOTE D—BUSINESS COMBINATIONS
2018 Acquisitions:
On March 22, 2018, U.S. Silica entered into a definitive agreement to acquire all of the outstanding capital stock of EP Minerals, a global producer of engineered materials derived from industrial minerals, including diatomaceous earth (DE), clay (calcium bentonite) and perlite. The consideration payable consists of
$750.0 million
of cash, subject to customary adjustments for net working capital, indebtedness, cash and transaction expenses as of the closing. U.S. Silica expects to fund the
consideration with additional borrowings pursuant to a contemplated amendment to its existing credit facilities and with cash on hand. The consummation of the acquisition is subject to the satisfaction or waiver of closing conditions applicable to both U.S. Silica and EP Minerals and it is expected to close in the second quarter of 2018.
2017 Acquisitions:
White Armor Acquisition:
On April 1, 2017, we completed the acquisition of White Armor, a product line of cool roof granules used in industrial roofing applications, for cash consideration of
$18.6 million
. The final purchase price was allocated to goodwill of approximately
$3.9 million
, identifiable intangible assets of
$12.8 million
and other net assets of approximately
$1.9 million
.
Goodwill in this transaction is attributable to planned growth in our specialty industrial sand segment. The goodwill amount is included in our Industrial & Specialty Products segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.
We incurred
$0.2 million
of acquisition-related charges which are included in selling, general and administrative expenses during the year ended December 31, 2017. Revenue and earnings for White Armor after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.
MS Sand Acquisition:
On August 16, 2017, we completed the acquisition of Mississippi Sand, LLC ("MS Sand"), a Missouri limited liability company, for cash consideration of approximately
$95.4 million
, net of cash acquired of
$2.2 million
. As is normal and customary, subsequent adjustments were made including
$(0.5) million
to the net working capital adjustment plus an additional
$6.1 million
consideration paid related to a pre-existing contracted asset sale, which was entered into prior to our acquisition, for total cash consideration of
$101.0 million
. MS Sand is a frac sand mining and logistics company based in St. Louis, Missouri. The acquisition of MS Sand increased our regional frac sand product offering in our Oil & Gas Proppants segment.
We have accounted for the acquisition of MS Sand under the acquisition method of accounting in accordance with ASC 805, Business Combinations, and have accounted for measurement period adjustments in accordance with ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. Estimates of fair value included in the consolidated financial statements represent our best estimates and valuations. In accordance with the acquisition method of accounting, the allocation of consideration value is subject to adjustment until we complete our analysis, in a period of time, but not to exceed one year after the date of acquisition, or August 16, 2018, in order to provide us with the time to complete the valuation of its assets and liabilities.
The following table sets forth the current allocation of the purchase price to MS Sands' identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimate as of December 31, 2017
|
Measurement Period Adjustments
|
Purchase Price Allocation
|
Accounts receivable
|
$
|
11,201
|
|
$
|
—
|
|
$
|
11,201
|
|
Inventories
|
8,067
|
|
—
|
|
8,067
|
|
Other current assets
|
362
|
|
—
|
|
362
|
|
Assets held for sale
|
9,453
|
|
—
|
|
9,453
|
|
Property, plant and mine development
|
27,458
|
|
—
|
|
27,458
|
|
Mineral rights
|
26,300
|
|
(2,800
|
)
|
23,500
|
|
Other non-current assets
|
1,136
|
|
—
|
|
1,136
|
|
Goodwill
|
22,522
|
|
2,800
|
|
25,322
|
|
Customer relationships
|
1,840
|
|
—
|
|
1,840
|
|
Total assets acquired
|
108,339
|
|
—
|
|
108,339
|
|
Accounts payable and accrued expenses
|
3,761
|
|
—
|
|
3,761
|
|
Unfavorable leasehold positions
|
2,237
|
|
—
|
|
2,237
|
|
Notes Payable
|
866
|
|
—
|
|
866
|
|
Other long term liabilities
|
—
|
|
—
|
|
—
|
|
Asset retirement obligations
|
474
|
|
—
|
|
474
|
|
Total liabilities assumed
|
7,338
|
|
—
|
|
7,338
|
|
Net assets acquired
|
$
|
101,001
|
|
$
|
—
|
|
$
|
101,001
|
|
The acquired intangible assets and the related estimated useful lives consist of the following:
|
|
|
|
|
|
|
Approximate Fair Value
|
Estimated Useful Life
|
|
(in thousands)
|
(in years)
|
Customer relationships
|
$
|
1,840
|
|
15
|
Goodwill in this transaction is attributable to planned growth in our regional frac sand product offering in our Oil & Gas Proppants segment. The goodwill amount is included in our Oil & Gas Proppants segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.
We have incurred
$0.9 million
to date of acquisition-related charges which are included in selling, general and administrative expenses. Revenue and earnings for MS Sand after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.
Both acquisitions were accounted for using the acquisition method of accounting. The purchase price and purchase price allocation for the MS Sand acquisition is preliminary and subject to customary post-closing adjustments and changes in the fair value of assets and liabilities. The above estimated fair values of net assets acquired are based on the information that was available as of the reporting date. We believe that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on our continuing review of matters related to the acquisition. As a result, our final purchase price allocation may be significantly different than reflected above. We expect to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Unaudited Pro Forma Results
The results of MS Sand’s operations have been included in the consolidated financial statements subsequent to the acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the MS Sand Acquisition had occurred on January 1, 2016, after giving effect to certain purchase accounting adjustments. These adjustments mainly include incremental depreciation expense related to the fair value adjustment of property, plant, equipment and mine development, amortization expense related to identifiable intangible assets and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2017
|
|
2016
|
Sales
|
$
|
1,287,202
|
|
|
$
|
642,951
|
|
Net income (loss)
|
$
|
143,604
|
|
|
$
|
(55,835
|
)
|
Basic earnings (loss) per share
|
$
|
1.77
|
|
|
$
|
(0.86
|
)
|
Diluted earnings (loss) per share
|
$
|
1.75
|
|
|
$
|
(0.86
|
)
|
NOTE E—ACCOUNTS RECEIVABLE
At
March 31, 2018
and
December 31, 2017
, accounts receivable (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Trade receivables
|
$
|
247,178
|
|
|
$
|
217,649
|
|
Less: Allowance for doubtful accounts
|
(7,250
|
)
|
|
(7,100
|
)
|
Net trade receivables
|
239,928
|
|
|
210,549
|
|
Other receivables
|
11,347
|
|
|
2,037
|
|
Total accounts receivable
|
$
|
251,275
|
|
|
$
|
212,586
|
|
Changes in our allowance for doubtful accounts (in thousands) during the
three
months ended
March 31, 2018
are as follows:
|
|
|
|
|
|
March 31,
2018
|
Beginning balance
|
$
|
7,100
|
|
Bad debt provision
|
237
|
|
Write-offs
|
(87
|
)
|
Ending balance
|
$
|
7,250
|
|
Our ten largest customers accounted for approximately
52%
and
55%
of total sales during the
three
months ended
March 31, 2018
and
2017
, respectively. Sales to one of our customers accounted for
15%
of our total sales during the
three
months ended
March 31, 2018
. Sales to two of our customers accounted for
14%
and
11%
of our total sales during the
three
months ended
March 31, 2017
. No other customers accounted for 10% or more of our total sales. At
March 31, 2018
, one of our customers' accounts receivable represented
17%
of our total accounts receivable, net of allowance. At
December 31, 2017
, two of our customers' accounts receivable represented
19%
and
11%
of our total accounts receivable, net of allowance. No other customers accounted for 10% or more of our total accounts receivable.
NOTE F—INVENTORIES
At
March 31, 2018
and
December 31, 2017
, inventories (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Supplies
|
$
|
22,338
|
|
|
$
|
21,277
|
|
Raw materials and work in process
|
24,175
|
|
|
28,034
|
|
Finished goods
|
30,066
|
|
|
43,065
|
|
Total inventories
|
$
|
76,579
|
|
|
$
|
92,376
|
|
NOTE G—PROPERTY, PLANT AND MINE DEVELOPMENT
At
March 31, 2018
and
December 31, 2017
, property, plant and mine development (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Mining property and mine development
|
$
|
584,778
|
|
|
$
|
586,242
|
|
Asset retirement cost
|
12,166
|
|
|
14,184
|
|
Land
|
36,552
|
|
|
36,552
|
|
Land improvements
|
50,793
|
|
|
45,878
|
|
Buildings
|
55,280
|
|
|
56,330
|
|
Machinery and equipment
|
634,807
|
|
|
590,566
|
|
Furniture and fixtures
|
2,862
|
|
|
2,953
|
|
Construction-in-progress
|
187,639
|
|
|
189,970
|
|
|
1,564,877
|
|
|
1,522,675
|
|
Accumulated depletion, depreciation and amortization
|
(369,155
|
)
|
|
(353,520
|
)
|
Total property, plant and mine development, net
|
$
|
1,195,722
|
|
|
$
|
1,169,155
|
|
At
March 31, 2018
and
December 31, 2017
, the aggregate cost of machinery and equipment acquired under capital leases was
$0.9 million
, reduced by accumulated depreciation of
$0.2 million
. The amount of interest costs capitalized in property, plant and mine development was
$1.8 million
for the
three
months ended
March 31, 2018
. There were
no
interest costs capitalized for the
three
months ended
March 31, 2017
.
On March 21, 2018, we completed the sale of
three
transload facilities located in the Permian, Eagle Ford, and Marcellus Basins to CIG Logistics (“CIG”) for total consideration of
$86.1 million
, including the assumption by CIG of
$2.2 million
of Company obligations. Total cash consideration was
$83.9 million
. The consideration includes receipt of a vendor incentive from CIG to enter into master transloading service arrangements. Of the total consideration,
$25.8 million
was allocated to the fair value of the transload facilities, which had a net book value of
$20.0 million
and resulted in a gain on sale of
$5.8 million
. The consideration included a related asset retirement obligation of
$2.1 million
and an equipment note of
$0.1 million
assumed by CIG. In addition,
$60.3 million
of the consideration received in excess of the facilities' fair value was allocated to vendor incentives to be recognized as a reduction of costs using a service-level methodology over the contract lives of the transloading service arrangements. At
March 31, 2018
, vendor incentives are classified in accounts payable and accrued expenses and in other long-term obligations on our balance sheet.
Separately, the Company has accrued
$7.9 million
in contract termination costs for facilities contracts operated by third-parties, which will not transfer to CIG. These costs of
$5.9 million
in accounts payable and accrued expenses and
$2.0 million
of other long-term obligations are on our balance sheet.
NOTE H—GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
Goodwill
|
Balance at December 31, 2017
|
|
$
|
272,079
|
|
MS Sand acquisition measurement period adjustment
|
|
2,800
|
|
Balance at March 31, 2018
|
|
$
|
274,879
|
|
The changes in the carrying amount of intangible assets (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Estimated Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and intellectual property
|
15
|
|
$
|
71,713
|
|
|
$
|
(7,127
|
)
|
|
$
|
64,586
|
|
|
$
|
70,703
|
|
|
$
|
(5,917
|
)
|
|
$
|
64,786
|
|
Customer relationships
|
13 - 15
|
|
61,229
|
|
|
(10,181
|
)
|
|
51,048
|
|
|
61,229
|
|
|
(9,076
|
)
|
|
52,153
|
|
Total definite-lived intangible assets:
|
|
|
$
|
132,942
|
|
|
$
|
(17,308
|
)
|
|
$
|
115,634
|
|
|
$
|
131,932
|
|
|
$
|
(14,993
|
)
|
|
$
|
116,939
|
|
Trade name
|
|
|
33,068
|
|
|
—
|
|
|
33,068
|
|
|
33,068
|
|
|
—
|
|
|
33,068
|
|
Total intangible assets:
|
|
|
$
|
166,010
|
|
|
$
|
(17,308
|
)
|
|
$
|
148,702
|
|
|
$
|
165,000
|
|
|
$
|
(14,993
|
)
|
|
$
|
150,007
|
|
Amortization expense was
$2.3 million
and
$2.0 million
for the three months ended
March 31, 2018
and
2017
.
The estimated amortization expense related to definite-lived intangible assets (in thousands) for the five succeeding years is as follows:
|
|
|
|
|
2018
|
$
|
6,980
|
|
2019
|
9,306
|
|
2020
|
9,306
|
|
2021
|
9,306
|
|
2022
|
9,291
|
|
NOTE I—DEBT
At
March 31, 2018
and
December 31, 2017
, debt (in thousands) consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Senior secured credit facility:
|
|
|
|
Revolver expiring July 23, 2018 (6.25% at March 31, 2018 and 5.75% at December 31, 2017)
|
$
|
—
|
|
|
$
|
—
|
|
Term loan facility—final maturity July 23, 2020 (4.94%-5.44% at March 31, 2018 and 4.75%-5.25% December 31, 2017)
|
487,800
|
|
|
489,075
|
|
Less: Unamortized original issue discount
|
(850
|
)
|
|
(944
|
)
|
Less: Unamortized debt issuance cost
|
(2,755
|
)
|
|
(3,099
|
)
|
Note payable secured by royalty interest
|
25,635
|
|
|
24,740
|
|
Customer note payable
|
566
|
|
|
745
|
|
Equipment notes payable
|
516
|
|
|
719
|
|
Total debt
|
510,912
|
|
|
511,236
|
|
Less: current portion
|
(4,305
|
)
|
|
(4,504
|
)
|
Total long-term portion of debt
|
$
|
506,607
|
|
|
$
|
506,732
|
|
Revolving Line-of-Credit
We have a
$50.0 million
revolving line-of-credit (the “Revolver”), with
zero
drawn and
$4.5 million
allocated for letters of credit as of
March 31, 2018
, leaving
$45.5 million
available under the Revolver.
Senior Secured Credit Facility
At
March 31, 2018
, contractual maturities of our senior secured credit facility (in thousands) are as follows:
|
|
|
|
|
2018
|
$
|
3,825
|
|
2019
|
5,100
|
|
2020
|
478,875
|
|
Total
|
$
|
487,800
|
|
Our senior secured credit facility is secured by a pledge of substantially all of our assets, including accounts receivable, inventory, property, plant and mine development, and a pledge of the equity interests in certain of our subsidiaries. The facility contains covenants that, among other things, govern our ability to create, incur or assume indebtedness and liens, to make acquisitions or investments, to sell assets and to pay dividends. This includes a restriction on the ability of our operating subsidiaries to make distributions to us to the extent that the incurrence ratio (as defined in the senior secured credit facility) after giving effect to the distribution is
3
:1 or greater. The facility also requires us to maintain a consolidated total net leverage ratio of no more than
3.75
:1.00 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. As of
March 31, 2018
and
December 31, 2017
, we are in compliance with all covenants in accordance with our senior secured credit facility.
Note Payable Secured by Royalty Interest
In conjunction with the acquisition of NBI in August 2016, we assumed a note payable secured by a royalty interest. The monthly royalty payment is calculated based on future tonnages and sales related to the sand shipped from our Tyler, Texas facility. The note payable is due by
June 30, 2032
. The note does not provide a stated interest rate. The minimum payments (in thousands) for the next five years required by the note are as follows:
|
|
|
|
|
2018
|
$
|
1,313
|
|
2019
|
1,750
|
|
2020
|
1,750
|
|
2021
|
1,750
|
|
2022
|
1,750
|
|
Under this agreement once a certain number of tons have been shipped from the Tyler facility, the minimum payments will decrease to
$0.5 million
per year, subject to proration in the period this threshold is met.
The royalty note payable fair value was estimated to be
$22.5 million
on the acquisition date. The estimate was made using a discounted cash flow model, which calculated the present value of projected future cash payments required under the agreement using a discounted rate of
14%
. As of
March 31, 2018
, the note payable has a balance of
$25.6 million
. The increase in the note payable amount is due to interest paid-in-kind. The effective interest rate based on the updated projected future cash payments is
22%
at
March 31, 2018
.
NOTE J—DEFERRED REVENUE
We enter into certain customer supply agreements which give the customers the right to purchase certain products for a discounted price at certain volumes over an average initial contract term of
one
to
five
years. The advance payments represent future purchases and are recorded as deferred revenue, recognized as revenue over the contract term of each supply agreement. During the
three
months ended
March 31, 2018
we received advances of
$10.5 million
. At
March 31, 2018
and
December 31, 2017
, the total deferred revenue balance was
$122.0 million
and
$118.4 million
, respectively, of which
$52.3 million
and
$36.1 million
was classified as current on our Balance Sheets.
NOTE K—ASSET RETIREMENT OBLIGATION
Mine reclamation or future remediation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.
As of
March 31, 2018
, we had a liability of
$16.8 million
in other long-term obligations related to our asset retirement obligation. Changes in the asset retirement obligation (in thousands) during the
three
months ended
March 31, 2018
are as follows:
|
|
|
|
|
|
March 31,
2018
|
Beginning balance
|
$
|
19,032
|
|
Accretion
|
326
|
|
Additions and revisions of prior estimates
|
(486
|
)
|
Disposal related to sale of transloads
|
(2,116
|
)
|
Ending balance
|
$
|
16,756
|
|
NOTE L—FAIR VALUE ACCOUNTING
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash Equivalents
Due to the short-term maturity, we believe our cash equivalent instruments at
March 31, 2018
and
December 31, 2017
approximate their reported carrying values.
Long-Term Debt, Including Current Maturities
We believe that the fair values of our long-term debt, including current maturities, approximate their carrying values based on their effective interest rates compared to current market rates.
Derivative Instruments
The estimated fair value of our derivative instruments (interest rate caps) are recorded at each reporting period and are based upon widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We also incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk as well as that of the respective counterparty in the fair value measurements.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default of ourselves and our counterparties. However, as of
March 31, 2018
, we have assessed that the impact of the credit valuation adjustments on the overall valuation of our derivative positions is not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. As of
March 31, 2018
and
December 31, 2017
, the fair value of our derivative instruments was
zero
. Additional disclosures for derivative instruments are presented in
Note M - Derivative Instruments
to these Financial Statements.
NOTE M—DERIVATIVE INSTRUMENTS
Cash Flow Hedges of Interest Rate Risk
We enter into interest rate cap agreements in connection with our term loan facility (the "Term Loan") to add stability to interest expense and to manage our exposure to interest rate movements. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium.
The following table summarizes the fair value of our derivative instruments (in thousands, except contract/notional amount). See
Note L - Fair Value Accounting
for additional disclosures regarding the estimated fair values of our derivative instruments at
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
December 31, 2017
|
|
Maturity
Date
|
|
Contract/Notional
Amount
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Maturity Date
|
|
Contract/Notional
Amount
|
|
Carrying
Amount
|
|
Fair
Value
|
Interest rate cap agreement
(1)
|
2019
|
|
|
$249
|
million
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2019
|
|
|
$249
|
million
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
Agreements limit the LIBOR floating interest rate base to
4%
.
We have designated these contracts as qualified cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and recognized in earnings in the same period or periods during which the hedged transaction affects earnings. During the three months ended
March 31, 2018
and
2017
, we had
no
ineffectiveness for such contracts.
The following table summarizes the effect of derivatives instruments (in thousands) on our income statements and our consolidated statements of comprehensive income for the three months ended
March 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
Deferred losses from derivatives in OCI, beginning of period
|
$
|
(76
|
)
|
|
$
|
(32
|
)
|
Loss recognized in OCI from derivative instruments
|
—
|
|
|
(36
|
)
|
Gain reclassified from Accumulated OCI
|
2
|
|
|
—
|
|
Deferred losses from derivatives in OCI, end of period
|
$
|
(74
|
)
|
|
$
|
(68
|
)
|
NOTE N—EQUITY-BASED COMPENSATION
In July 2011, we adopted the U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan (the “2011 Plan”), which was amended and restated in May 2015. The 2011 Plan provides for grants of stock options, restricted stock, performance share units and other incentive-based awards. We believe our 2011 Plan aligns the interests of our employees and directors with those of our common stockholders. At
March 31, 2018
, we have
4,481,559
shares of common stock that may be issued under the 2011 Plan. We use a combination of treasury stock and new shares if necessary to satisfy option exercises or vesting of restricted awards and performance share units.
Stock Options
The following table summarizes the status of, and changes in, our stock option awards during the three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Weighted
Average
Remaining Contractual Term in Years
|
Outstanding at December 31, 2017
|
908,919
|
|
|
$
|
28.46
|
|
|
$
|
7,008
|
|
|
6.1 years
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Forfeited
|
(918
|
)
|
|
31.30
|
|
|
—
|
|
|
|
Outstanding at March 31, 2018
|
908,001
|
|
|
$
|
28.46
|
|
|
$
|
3,679
|
|
|
5.5 years
|
Exercisable at March 31, 2018
|
791,868
|
|
|
$
|
27.02
|
|
|
$
|
3,679
|
|
|
5.3 years
|
There were
no
grants of stock options during the three months ended
March 31, 2018
and
2017
.
There were
zero
and
24,852
stock options exercised during the three months ended
March 31, 2018
and
2017
, respectively. The total intrinsic value of stock options exercised was
$0.9 million
for the three months ended
March 31, 2017
. Cash received from options exercised during the three months ended
March 31, 2017
was
$0.5 million
. The tax benefit realized from option exercises totaled
$0.3 million
for the three months ended
March 31, 2017
.
We recognized
$0.5 million
and
$0.6 million
of equity-based compensation expense related to options during the three months ended
March 31, 2018
and
2017
, respectively. As of
March 31, 2018
, there was
$0.7 million
of total unrecognized compensation expense related to these options, which is expected to be recognized over a weighted-average period of approximately
0.5
years. We account for forfeitures as they occur.
Restricted Stock and Restricted Stock Unit Awards
The following table summarizes the status of, and changes in, our unvested restricted stock awards during the three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Grant Date Weighted
Average Fair Value
|
Unvested, December 31, 2017
|
461,346
|
|
|
$
|
30.76
|
|
Granted
|
3,852
|
|
|
30.11
|
|
Vested
|
(132,081
|
)
|
|
24.56
|
|
Forfeited
|
(10,309
|
)
|
|
35.65
|
|
Unvested, March 31, 2018
|
322,808
|
|
|
$
|
33.14
|
|
We granted
3,852
and
1,500
restricted stock and restricted stock unit awards during the three months ended
March 31, 2018
and
2017
, respectively. The fair value of the awards was based on the market price of our stock at date of grant.
We recognized
$1.8 million
and
$1.5 million
of equity-based compensation expense related to restricted stock awards during the three months ended
March 31, 2018
and
2017
, respectively. As of
March 31, 2018
, there was
$7.2 million
of total unrecognized compensation expense related to these restricted stock awards, which is expected to be recognized over a weighted-average period of
1.6
years.
Performance Share Unit Awards
The following table summarizes the status of, and changes in, our performance share unit awards during the three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Grant Date Weighted
Average Fair Value
|
Unvested, December 31, 2017
|
881,416
|
|
|
$
|
42.16
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(225,000
|
)
|
|
41.99
|
|
Forfeited
|
(5,972
|
)
|
|
58.71
|
|
Unvested, March 31, 2018
|
650,444
|
|
|
$
|
42.07
|
|
There were
no
grants of performance share unit awards during the three months ended
March 31, 2018
and
2017
, respectively.
We recognized
$4.3 million
and
$3.4 million
of compensation expense related to performance share unit awards during the three months ended
March 31, 2018
and
2017
, respectively. As of
March 31, 2018
, there was
$13.9 million
of estimated total unrecognized compensation expense related to these performance share unit awards, which is expected to be recognized over a weighted-average period of
1
year.
NOTE O—COMMITMENTS AND CONTINGENCIES
Future Minimum Annual Commitments at
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
Operating Lease Minimum Rental Payments
|
|
Minimum Purchase Commitments
|
2018
|
$
|
53,739
|
|
|
$
|
18,292
|
|
2019
|
64,746
|
|
|
22,829
|
|
2020
|
52,868
|
|
|
17,951
|
|
2021
|
36,031
|
|
|
9,459
|
|
2022
|
30,301
|
|
|
6,851
|
|
Thereafter
|
55,739
|
|
|
4,565
|
|
Total future lease and purchase commitments
|
$
|
293,424
|
|
|
$
|
79,947
|
|
Operating Leases
We are obligated under certain operating leases for railroad cars, office space, mining property, mining/processing equipment and transportation and other equipment. Certain operating lease agreements include options to purchase the equipment for fair market value at the end of the original lease term. In general, the above leases include renewal options and provide that we pay for all utilities, insurance, taxes and maintenance. Expense related to operating leases and rental agreements totaled approximately
$22.8 million
and
$15.4 million
for the three months ended
March 31, 2018
and
2017
, respectively.
Minimum Purchase Commitments
We enter into service agreements with our transload service providers and transportation service providers. Some of these agreements require us to purchase a minimum amount of services over a specific period of time. Any inability to meet these minimum contract requirements requires us to pay a shortfall fee, which is based on the difference between the minimum amount contracted for and the actual amount purchased.
Contingent Liability on Royalty Agreement
On May 17, 2017, we purchased reserves in Crane County, Texas, for
$94.4 million
cash consideration plus contingent consideration. The contingent consideration is a royalty that is based on the tonnage shipped to third-parties. Because the contingent consideration is dependent on future tonnage sold, the amounts of which are uncertain, it is not currently possible to estimate the fair value of these future payments. The contingent consideration will be capitalized at the time a payment is probable and reasonably estimable, and the related depletion expense will be adjusted prospectively.
Other Commitments and Contingencies
Our operating subsidiary, U.S. Silica Company (“U.S. Silica”), has been named as a defendant in various product liability claims alleging silica exposure causing silicosis. During the
three
months ended
March 31, 2018
,
one
new claim was brought against U.S. Silica. As of
March 31, 2018
, there were
60
active silica-related products liability claims pending in which U.S. Silica is a defendant. Although the outcomes of these claims cannot be predicted with certainty, in the opinion of management, it is not reasonably possible that the ultimate resolution of these matters will have a material adverse effect on our financial position or results of operations that exceeds the accrual amounts.
We have recorded estimated liabilities for these claims in other long-term obligations as well as estimated recoveries under the indemnity agreement and an estimate of future recoveries under insurance in other assets on our condensed consolidated balance sheets. As of both
March 31, 2018
, and
December 31, 2017
other non-current assets included
zero
for insurance for third-party products liability claims and other long-term obligations included
$1.0 million
for third-party products liability claims.
NOTE P— PENSION AND POST-RETIREMENT BENEFITS
We maintain a single-employer noncontributory defined benefit pension plan covering certain employees. There have been no new entrants to the plan since May 2009 when the plan was frozen to all new employees. The plan provides benefits based on each covered employee’s years of qualifying service. Our funding policy is to contribute amounts within the range of the minimum required and maximum deductible contributions for the plan consistent with a goal of appropriate minimization of the unfunded projected benefit obligation. The pension plan uses a benefit level per year of service for covered hourly employees and a final average pay method for covered salaried employees. The plan uses the projected unit credit cost method to determine the actuarial valuation.
Net pension benefit cost (in thousands) consisted of the following for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Service cost
|
$
|
279
|
|
|
$
|
295
|
|
Interest cost
|
978
|
|
|
883
|
|
Expected return on plan assets
|
(1,243
|
)
|
|
(1,331
|
)
|
Net amortization and deferral
|
631
|
|
|
693
|
|
Net pension benefit costs
|
$
|
645
|
|
|
$
|
540
|
|
In addition, we provide defined benefit post-retirement health care and life insurance benefits to some employees. Covered employees become eligible for these benefits at retirement after meeting minimum age and service requirements. The projected future cost of providing post-retirement benefits, such as healthcare and life insurance, is recognized as an expense as employees render services. We previously maintained a Voluntary Employees’ Beneficiary Association trust that was used to partially fund health care benefits for future retirees. Benefits were funded to the extent contributions were tax deductible, which under current legislation is limited. In 2017, the trust terminated upon depletion of its assets, which were used in accordance with trust terms. In general, retiree health benefits are paid as covered expenses are incurred.
Net post-retirement benefit cost (in thousands) consisted of the following for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Service cost
|
$
|
27
|
|
|
$
|
32
|
|
Interest cost
|
188
|
|
|
192
|
|
Net amortization and deferral
|
—
|
|
|
54
|
|
Net post-retirement benefit costs
|
$
|
215
|
|
|
$
|
278
|
|
We made
$0.3 million
and
zero
contributions to the qualified pension plan for the
three
months ended
March 31, 2018
and
2017
, respectively. Total expected employer funding contributions during the fiscal year ending
December 31, 2018
are
$2.5 million
for the pension plan and
$1.4 million
for the post-retirement medical and life plan.
We contribute to
three
multiemployer defined benefit pension plans under the terms of collective-bargaining agreements for union-represented employees. A multiemployer plan is subject to collective bargaining for employees of two or more unrelated companies. These plans allow multiple employers to pool their pension resources and realize efficiencies associated with the daily administration of the plan. Multiemployer plans are generally governed by a board of trustees composed of management and labor representatives and are funded through employer contributions. However, in most cases, management is not directly represented. Our contributions to individual multiemployer pension funds did not exceed
5%
of the fund’s total contributions. Additionally, our contributions to the multiemployer post-retirement benefit plans were immaterial for the
three
months ended
March 31, 2018
and
2017
NOTE Q— OBLIGATIONS UNDER GUARANTEES
We have indemnified the Travelers Companies, Inc. and subsidiaries (“Travelers”) against any loss Travelers may incur in the event that holders of surety bonds, issued on behalf of us by Travelers, execute the bonds. As of
March 31, 2018
, Travelers had
$12.2 million
in bonds outstanding for us. The majority of these bonds,
$10.3 million
, relate to reclamation requirements issued by various governmental authorities. Reclamation bonds remain outstanding until the mining area is reclaimed and the authority issues a formal release. The remaining bonds relate to such indefinite purposes as licenses, permits, and tax collection.
NOTE R— INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) bonus depreciation that will allow for full expensing of qualified property; (2) reduction of the U.S. federal corporate tax rate; (3) elimination of the corporate alternative minimum tax; (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; (6) limitations on the deductibility of certain executive compensation; and (7) limitations on net operating losses generated after December 31, 2017, to 80 percent of taxable income.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. Additional information that may affect the accounting under ASC 740 would include further clarification and guidance on how the Internal Revenue Service and state taxing authorities will implement the Tax Act. We did not make any Tax Act adjustments to the accounting under ASC 740 for the three months ending March 31, 2018 and we do not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of operations.
The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Because ASC 740-10-25-47 requires the effect of a change in tax laws or rates to be recognized as of the date of enactment, we were required to adjust deferred tax assets and liabilities as of December 22, 2017. Accordingly, for the year ended December 31, 2017, we recorded a decrease related to deferred tax assets and liabilities of
$45.0 million
and
$80.8 million
, respectively, with a corresponding net adjustment to deferred income tax benefit of
$35.8 million
.
Under the Tax Act, net operating loss (NOL) deductions arising in tax years beginning after December 31, 2017 can only offset up to 80 percent of future taxable income. The Act also prohibits NOL carrybacks, but allows indefinite carryforwards for NOLs arising in tax years beginning after December 31, 2017. Net operating losses arising before January 1, 2018 are accounted for under the previous tax rules that imposed no limit on the amount of the taxable income that can be set off using NOLs and that can be carried back 2 years, and carried forward 20 years.
The Tax Act repeals the corporate alternative minimum tax (AMT), effective for tax years beginning after December 31, 2017, but allows an entity to claim portions of any unused AMT credits over the next four years to offset its regular tax liability. An entity with unused AMT credits as of December 31, 2017 can first use these credits to offset its regular tax for 2017, and can then claim up to 50 percent of the remaining AMT credits in 2018, 2019, and 2020, with all remaining AMT credits refundable in 2021.
For interim period reporting, we record income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. At the end of each interim period, we update the estimated annual effective tax rate, and if the estimated tax rate changes based on new information, we make a cumulative adjustment in the period. We record the tax effect of an unusual or infrequently occurring item in the interim period in which it occurs as a discrete item of tax.
In the
three
months ended
March 31, 2018
, we recorded a tax expense of
$0.5 million
related to equity compensation pursuant to ASU 2016-09. In the
three
months ended
March 31, 2017
, we recorded a tax benefit of
$1.5 million
related to equity compensation pursuant to ASU 2016-09.
The effective tax rate was
19%
and
(212)%
for the
three
months ended
March 31, 2018
and
2017
, respectively. The tax rate for the
three
months ended
March 31, 2018
and
2017
would have been
18%
and
(26)%
, respectively, without the equity compensation tax expense or benefit recorded discretely.
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.
NOTE S— REVENUE
We consider sales disaggregated at the product and service level by segment to depict how the nature, amount, timing and uncertainty of revenues and cash flow are impacted by changes in economic factors. The following table disaggregates our sales by major source for the
three
months ended
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Oil & Gas Proppants
|
|
Industrial & Specialty Products
|
|
Total Sales
|
Product
|
|
$
|
238,422
|
|
|
$
|
56,366
|
|
|
$
|
294,788
|
|
Service
|
|
74,508
|
|
|
17
|
|
|
74,525
|
|
Total Sales
|
|
312,930
|
|
|
56,383
|
|
|
369,313
|
|
The following tables reflect the changes in our contract assets, which we classify as unbilled receivables and our contract liabilities, which we classify as deferred revenues, for the
three
months ended
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
Unbilled Receivables
|
December 31, 2017
|
|
$
|
5,245
|
|
Reclassifications to billed receivables
|
|
(5,245
|
)
|
Revenues recognized in excess of period billings
|
|
2,939
|
|
March 31, 2018
|
|
$
|
2,939
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
December 31, 2017
|
|
$
|
118,414
|
|
Revenues recognized from balances held at the beginning of the period
|
|
(6,969
|
)
|
Revenues deferred from period collections on unfulfilled performance obligations
|
|
10,530
|
|
March 31, 2018
|
|
$
|
121,975
|
|
We have elected to use the practical expedients allowed under ASC 606-10-50-14, pursuant to which we have excluded disclosures of transaction prices allocated to remaining performance obligations and when we expect to recognize such revenue. The majority of our remaining performance obligations are primarily comprised of unfulfilled product, transportation service, and labor service orders, all of which hold a remaining duration of less than
one
year. The long term portion of deferred revenue primarily represents a combination of refundable and nonrefundable customer prepayments for which related current performance obligations do not yet exist, but are expected to arise, before the expiration of the contract. Our residual unfulfilled performance obligations are comprised primarily of long-term equipment rental arrangements in which we recognize revenues equal to what we have a right to invoice. Generally, no variable consideration exists related to our remaining performance obligations and no consideration is excluded from the associated transaction prices.
NOTE T— RELATED PARTY TRANSACTIONS
A current officer of one of our operating subsidiaries holds an ownership interest in a transportation brokerage and logistics services vendor, from which we made purchases of approximately
$0.9 million
and
$0.6 million
for the three months ended
March 31, 2018
and
2017
, respectively.
NOTE U— SEGMENT REPORTING
Our business is organized into
two
reportable segments, Oil & Gas Proppants and Industrial & Specialty Products, based on end markets. The reportable segments are consistent with how management views the markets that we serve and the financial information reviewed by the chief operating decision maker. We manage our Oil & Gas Proppants and Industrial & Specialty Products businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.
In the Oil & Gas Proppants segment, we serve the oil and gas recovery market primarily by providing and delivering fracturing sand, or “frac sand,” which is pumped down oil and natural gas wells to prop open rock fissures and increase the flow rate of oil and natural gas from the wells.
The Industrial & Specialty Products segment consists of over
200
products and materials used in a variety of industries, including container glass, fiberglass, specialty glass, flat glass, building products, fillers and extenders, foundry products, chemicals, recreation products and filtration products.
An operating segment’s performance is primarily evaluated based on segment contribution margin, which excludes certain corporate costs not associated with the operations of the segment. These corporate costs are separately stated below and include costs that are related to functional areas such as operations management, corporate purchasing, accounting, treasury, information technology, legal and human resources. We believe that segment contribution margin, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, not a substitute for, or superior to, net income (loss) or other measures of financial performance prepared in accordance with generally accepted accounting principles. The other accounting policies of each of the
two
reporting segments are the same as those in
Note A - Summary of Significant Accounting Policies
to these Financial Statements.
The following table presents sales and segment contribution margin (in thousands) for the reporting segments and other operating results not allocated to the reported segments for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Sales:
|
|
|
|
Oil & Gas Proppants
|
$
|
312,930
|
|
|
$
|
192,959
|
|
Industrial & Specialty Products
|
56,383
|
|
|
51,838
|
|
Total sales
|
369,313
|
|
|
244,797
|
|
Segment contribution margin:
|
|
|
|
Oil & Gas Proppants
|
99,433
|
|
|
38,842
|
|
Industrial & Specialty Products
|
20,530
|
|
|
20,215
|
|
Total segment contribution margin
|
119,963
|
|
|
59,057
|
|
Operating activities excluded from segment cost of sales
|
(11,560
|
)
|
|
(1,735
|
)
|
Selling, general and administrative
|
(34,591
|
)
|
|
(22,341
|
)
|
Depreciation, depletion and amortization
|
(28,592
|
)
|
|
(21,599
|
)
|
Interest expense
|
(7,070
|
)
|
|
(7,646
|
)
|
Other income (expense), net, including interest income
|
665
|
|
|
(4,928
|
)
|
Income tax (expense) benefit
|
(7,521
|
)
|
|
1,714
|
|
Net income
|
$
|
31,294
|
|
|
$
|
2,522
|
|
Asset information, including capital expenditures and depreciation, depletion, and amortization, by segment is not included in reports used by management in its monitoring of performance and, therefore, is not reported by segment. At
March 31, 2018
, goodwill of
$274.9 million
has been allocated to these segments with
$250.3 million
assigned to Oil & Gas Proppants and
$24.6 million
to Industrial & Specialty Products. At December 31, 2017, goodwill of
$272.1 million
had been allocated to these segments with
$247.5 million
assigned to Oil & Gas Proppants and
$24.6 million
to Industrial & Specialty Products.
NOTE V— SUBSEQUENT EVENTS
On
April 5, 2018
, we paid a cash dividend of
$0.0625
per share to common stockholders of record on
March 15, 2018
, which had been declared by our Board of Directors on
February 16, 2018
.