NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
NOTE AORGANIZATION
U.S. Silica Holdings, Inc. (Holdings,
and together with its subsidiaries we, us or the Company), formerly GGC USS Holdings, Inc., was organized as a holding company on November 14, 2008. On November 25, 2008, we acquired Hourglass
Acquisitions I, LLC, whose only operating subsidiary was U.S. Silica Company (U.S. Silica).
On January 31,
2012, we completed an initial public offering of common stock (the IPO) through a Registration Statement on Form S-1 (File No. 333-175636), pursuant to which we registered and issued 2,941,176 shares of our common stock, and we
registered and certain of our stockholders sold 8,823,529 shares of common stock at an offering price of $17.00 per share. On February 6, 2012, we issued all 2,941,176 shares of common stock for an aggregate offering price of approximately
$50.0 million and the selling stockholders sold all 8,823,529 shares of common stock for an aggregate offering price of approximately $150.0 million. As a result of the offering, we received net proceeds of approximately $40.8 million, after
deducting $3.5 million of underwriting discounts and commissions and offering expenses of $5.7 million.
On
January 31, 2012, simultaneously with the initial public offering of our common stock, GGC USS Holdings, LLC (GGC Holdings), our sole stockholder prior to the IPO and now our largest stockholder, contributed to us all of the stock
of its wholly-owned subsidiary, GGC RCS Holdings, Inc., and its operating subsidiary, Coated Sand Solutions, LLC. Prior to this transaction, GGC RCS Holdings, Inc. had a $15.0 million note payable to GGC Holdings which, together with accrued
interest of $1.7 million, was converted to an equity contribution by GGC Holdings, simultaneously with the IPO. Coated Sand Solutions, LLC is currently developing resin-coated sand proppants for sale into the Oil and Gas market for use in the
hydraulic fracturing process.
NOTE BSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements as of and for the three and six months ended June 30, 2013 and 2012 (the Financial Statements), present our financial position, results of
operations, and cash flows. In consideration of the contribution of GGC RCS Holdings, Inc. to us on January 31, 2012, we and our subsidiaries are presented on a consolidated basis with GGC RCS Holdings, Inc. as of and for the three and six
months ended June 30, 2013 and 2012 and as of the year ended December 31, 2012.
We have condensed or omitted
certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP). Although we believe our disclosures are adequate to make the
information presented not misleading, you should read the Financial Statements in this report in conjunction with the combined financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, as filed with the Securities and Exchange Commission (SEC) on February 26, 2013 (our 2012 Annual Report). Certain terms not otherwise defined in this Quarterly Report on Form 10-Q, have the
meanings specified in our 2012 Annual Report.
In our opinion, our Financial Statements reflect all normal and recurring
adjustments necessary to present fairly our financial position as of June 30, 2013, and December 31, 2012, the results of our operations for the three and six months ended June 30, 2013 and 2012, and our cash flows for the six months
ended June 30, 2013
6
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
and 2012. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances
between entities consolidated in these Financial Statements.
We follow Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) guidance for identification and reporting of entities over which control is achieved through means other than voting rights. The guidance defines such entities as Variable
Interest Entities (VIEs). As of June 30, 2013 and for the periods presented herein, we have identified no entities over which we maintain any level of control that would qualify for consolidation under ASC guidance.
In order to make this report easier to read, we refer throughout to (i) our Condensed Consolidated Balance Sheets as our
Balance Sheets, and (ii) our Condensed Consolidated Statements of Operations as our Income Statements, and (iii) our Condensed Consolidated Statements of Cash Flows as our Cash Flows.
Use of Estimates
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 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 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;
post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; 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.
Unaudited Interim Financial Statements
The accompanying Balance Sheet as of June 30, 2013, the Income Statements for the three and six months ended June 30, 2013 and
2012; the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012; the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and other information disclosed
in the related notes, are unaudited. The Balance Sheet as of December 31, 2012 was derived from our audited consolidated financial statements as included in our 2012 Annual Report. The accompanying Financial Statements should be read in
conjunction with the audited combined financial statements and related notes contained in our 2012 Annual Report.
Recently Adopted
Accounting Pronouncements
In May 2011, the FASB issued changes to conform existing guidance regarding fair value
measurement and disclosure between GAAP and International Financial Reporting Standards. These changes both clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements and amend certain
principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of
an instrument classified in a reporting entitys stockholders equity, and
7
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are
managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for
those items categorized as Level 3, a reporting entitys use of a nonfinancial asset in a way that differs from the assets highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured
at fair value for disclosure purposes only. We adopted this guidance, effective January 1, 2012, with no material impact on our Financial Statements.
In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of
changes in stockholders equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made
to the calculation and presentation of earnings per share. We adopted this guidance, effective January 1, 2012, with no material impact on our Financial Statements.
In September 2011, the FASB issued changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions;
industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity
is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative
impairment test. We adopted this guidance, effective January 1, 2012 with no material impact on our Financial Statements.
In September 2011, the FASB issued changes to increase the level of disclosure about an employers participation in a multiemployer
pension plan. These changes require that employers provide additional separate quantitative and qualitative disclosures for multiemployer pension plans and multiemployer other post-retirement benefit plans, including the significant multiemployer
plan(s) in which an employer participates, the level at which an employer participates in the plan(s), the financial health of the plan(s) and the nature of the employer commitments to the plan(s). We adopted this guidance, effective January 1,
2012 with no material impact on our Financial Statements.
In July 2012, the FASB issued changes to the testing of
indefinite-lived intangible assets for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not
(more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. In accordance with the amendment, an entity has the option first to assess qualitative factors to determine whether the existence of events
and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. In conducting a qualitative assessment, an entity should consider the extent to which relevant events and circumstances, both
individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. If, after assessing the totality of events and circumstances, an
entity concludes that it is not more likely than not that the indefinite-
8
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the
indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any
period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. We adopted this guidance, effective for the 2012 reporting period with no
material impact on our Financial Statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income
(ASC Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by
component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items
of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety
to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. We adopted this guidance, effective for the 2013 reporting period with no material impact on our
Financial Statements.
NOTE CEARNINGS PER SHARE
On November 25, 2008, we issued 1,000 shares of our common stock to our then sole stockholder, GGC Holdings for an aggregate purchase price of $10.00. The shares were issued in reliance on
Section 4(2) of the Securities Act, because the sale of the securities did not involve a public offering. Appropriate legends were affixed to the securities issued in this transaction. On July 8, 2011, our Board of Directors approved, and
we subsequently filed, an Amended and Restated Certificate of Incorporation which, among other things, increased the authorized shares of common stock to 100 million shares. The Amended and Restated Certificate of Incorporation also created a
50,000-for-one split of our common stock. All of our common stock share and per share data contained in the financial statements has been retroactively adjusted to reflect this stock split for all periods presented.
Basic income 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 income per common share is computed similarly to basic income 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. In accordance with the applicable accounting guidance for calculating earnings per share, we did not include in our calculation of diluted earnings
per share for the applicable periods, stock options where the exercise prices were greater than the average market prices. The weighted average outstanding stock options excluded were (in thousands) 197 and 202 for the three and six months ended
June 30, 2013, respectively, and 951 and 970 for the three and six months ended June 30, 2012.
9
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income
|
|
$
|
20,192
|
|
|
$
|
19,451
|
|
|
$
|
37,469
|
|
|
$
|
38,564
|
|
Less: net income allocated to outstanding restricted stockholders
|
|
|
(23
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stockholders
|
|
$
|
20,169
|
|
|
$
|
19,451
|
|
|
$
|
37,427
|
|
|
$
|
38,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
52,948
|
|
|
|
51,938
|
|
|
|
52,948
|
|
|
|
52,440
|
|
Outstanding assuming dilution
|
|
|
53,227
|
|
|
|
51,985
|
|
|
|
53,227
|
|
|
|
52,505
|
|
NOTE DCAPITAL STRUCTURE AND ACCUMULATED COMPREHENSIVE INCOME
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 53,069,657 shares of common stock issued and outstanding at June 30, 2013. As of June 30, 2012, there were 52,941,176 and 52,921,176 shares issued and outstanding,
respectively. On April 29, 2013, our Board of Directors declared a quarterly cash dividend of $0.125 per share to common stockholders of record at the close of business on June 19, 2013, payable on July 3, 2013.
Management and our Board of Directors remain committed to evaluating additional ways of creating shareholder value. 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 conditions, our 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 and to fix the preferences, powers and relative, participating, optional or other special rights and 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 are no shares of preferred stock issued or outstanding at June 30, 2013 and 2012. At present, we have no plans to issue any
preferred stock.
10
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
Initial Public Offering
On January 31, 2012, we completed an initial public offering of 2,941,176 shares of our common stock at an offering price of $17.00
per share for an aggregate offering price of approximately $50.0 million. As a result of the offering, we received net proceeds of approximately $40.8 million, after deducting $3.5 million of underwriting discounts and commissions and offering
expenses of $5.7 million.
Simultaneously with the initial public offering of our common stock, GGC Holdings, our sole
stockholder prior to the IPO and now our largest stockholder, contributed to us all of the stock of its wholly-owned subsidiary, GGC RCS Holdings, Inc., and its operating subsidiary, Coated Sand Solutions, LLC. Prior to this transaction, GGC RCS
Holdings, Inc. had a $15.0 million note payable to GGC Holdings, which, together with accrued interest of $1.7 million, was converted to an equity contribution by GGC Holdings.
Share Repurchase Program
On June 11, 2012, our Board of
Directors authorized us to repurchase up to $25.0 million of our common stock. The authorization remains open for a period of 18 months, concluding on December 11, 2013. We are authorized to repurchase, from time to time, shares of our
outstanding common stock on the open market or in privately negotiated transactions using available cash. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions and corporate and regulatory
considerations. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any additional amount of our common stock under the program. We intend to make all repurchases in compliance
with applicable regulatory guidelines and to administer the plan in accordance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
As part of the program, as of June 30, 2013, we have repurchased 100,000 shares of our common stock at an average price of $10.72 and are authorized to repurchase up to an additional $23.9 million of
our common stock. As of June 30, 2013, all of the 100,000 shares repurchased to date have been re-issued to satisfy employee option exercises.
11
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
Stockholders Equity
The following table presents the activity included in stockholders equity during the six months ended June 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
Stockholders
Equity
|
|
Balance at December 31, 2012
|
|
$
|
529
|
|
|
$
|
(970
|
)
|
|
$
|
163,579
|
|
|
$
|
82,731
|
|
|
$
|
(14,175
|
)
|
|
$
|
231,694
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,469
|
|
|
|
|
|
|
|
37,469
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
920
|
|
|
|
920
|
|
Proceeds from options exercised
|
|
|
1
|
|
|
|
1,115
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
2,164
|
|
Shares withheld to pay taxes due upon vesting of restricted stock
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
Cash dividends declared ($0.125 per share of common stock)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,634
|
)
|
|
|
|
|
|
|
(6,634
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
Excess tax benefit from equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
530
|
|
|
$
|
|
|
|
$
|
166,195
|
|
|
$
|
113,566
|
|
|
$
|
(13,255
|
)
|
|
$
|
267,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) consists of fair value adjustments associated with cash flow hedges and accumulated
adjustments for net experience losses and prior service cost related to employee benefit plans. The following table presents the changes in accumulated other comprehensive income by component during the six months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2013
|
|
|
|
Unrealized
gain/(loss) on
cash flow hedges
|
|
|
Pension and
other
postretirement
benefits liability
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
(183
|
)
|
|
$
|
(13,992
|
)
|
|
$
|
(14,175
|
)
|
Other comprehensive income before reclassifications
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
Amounts reclassed from accumulated other comprehensive income
|
|
|
183
|
|
|
|
682
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
55
|
|
|
$
|
(13,310
|
)
|
|
$
|
(13,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
The following table presents the reclassifications out of accumulated other comprehensive income (loss)
during the six months ended June 30, 2013:
|
|
|
|
|
|
|
Details about accumulated other comprehensive income
|
|
Amount reclassified from
accumulated other
comprehensive income
|
|
|
Affected line item in the
statement of operations
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
299
|
|
|
Interest expense
|
|
|
|
(116
|
)
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
$
|
183
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Amortization of postretirement benefits liability
|
|
|
|
|
|
|
Actuarial gains/(losses)
|
|
$
|
1,072
|
|
|
(1)
|
Prior service cost
|
|
|
46
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
1,118
|
|
|
Total before tax
|
|
|
|
(436
|
)
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
682
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
865
|
|
|
Net of tax
|
|
|
|
|
|
|
|
(1)
|
These accumulated
other comprehensive income components are included in the computation of net periodic pension cost (see note Q).
|
NOTE
EACCOUNTS RECEIVABLE
At June 30, 2013 and December 31 2012, accounts receivable consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
June
30,
2013
|
|
|
December
31,
2012
|
|
Trade receivables
|
|
$
|
62,562
|
|
|
$
|
56,519
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,055
|
)
|
|
|
(1,053
|
)
|
|
|
|
|
|
|
|
|
|
Net trade receivables
|
|
|
61,507
|
|
|
|
55,466
|
|
Other receivables
|
|
|
277
|
|
|
|
4,098
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
61,784
|
|
|
$
|
59,564
|
|
|
|
|
|
|
|
|
|
|
Changes in our allowance for doubtful accounts during the six months ended June 30, 2013 are as
follows:
|
|
|
|
|
|
|
Allowance for
Doubtful
Accounts
|
|
Beginning balance
|
|
$
|
1,053
|
|
Bad debt provision
|
|
|
|
|
Accounts recovered
|
|
|
2
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,055
|
|
|
|
|
|
|
13
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
Our five largest customers accounted for approximately 23% and 29% of sales in the six
months ended June 30, 2013 and 2012, respectively. No single individual customer accounted for more than 10% of sales in the six months ended June 30, 2013 and 2012.
NOTE FINVENTORIES
At June 30, 2013 and December 31, 2012,
inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June
30,
2013
|
|
|
December
31,
2012
|
|
Supplies
|
|
$
|
14,588
|
|
|
$
|
13,472
|
|
Raw materials and work in process
|
|
|
10,269
|
|
|
|
10,720
|
|
Finished goods
|
|
|
27,333
|
|
|
|
15,643
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
52,190
|
|
|
$
|
39,835
|
|
|
|
|
|
|
|
|
|
|
Inventories include spare parts and supplies for routine facilities maintenance, raw stockpiles and
silica and other industrial sand available for shipment. We value inventory at the lower of cost or market. Cost is determined using the first-in, first-out and average cost methods. Finished goods increased $11.7 million to $27.3 million as of June
30, 2013 compared to $15.6 million as of December 31, 2012, primarily due to an increase of inventory held at transloads.
NOTE
GPROPERTY, PLANT AND MINE DEVELOPMENT
At June 30, 2013 property, plant and mine development consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation/
Amortization
|
|
|
Net Book Value
|
|
Mining property and mine development
|
|
$
|
163,538
|
|
|
$
|
(18,068
|
)
|
|
$
|
145,470
|
|
Asset retirement cost
|
|
|
5,124
|
|
|
|
(723
|
)
|
|
|
4,401
|
|
Land
|
|
|
25,738
|
|
|
|
|
|
|
|
25,738
|
|
Land improvements
|
|
|
29,311
|
|
|
|
(5,484
|
)
|
|
|
23,827
|
|
Buildings
|
|
|
33,726
|
|
|
|
(5,456
|
)
|
|
|
28,270
|
|
Machinery and equipment
|
|
|
239,437
|
|
|
|
(64,944
|
)
|
|
|
174,493
|
|
Furniture and fixtures
|
|
|
956
|
|
|
|
(201
|
)
|
|
|
755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497,830
|
|
|
|
(94,876
|
)
|
|
|
402,954
|
|
Construction-in-progress
|
|
|
26,410
|
|
|
|
|
|
|
|
26,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
524,240
|
|
|
$
|
(94,876
|
)
|
|
$
|
429,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
At December 31, 2012 property, plant and mine development consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation/
Amortization
|
|
|
Net Book Value
|
|
Mining property and mine development
|
|
$
|
163,538
|
|
|
$
|
(15,778
|
)
|
|
$
|
147,760
|
|
Asset retirement cost
|
|
|
5,124
|
|
|
|
(597
|
)
|
|
|
4,527
|
|
Land
|
|
|
24,795
|
|
|
|
|
|
|
|
24,795
|
|
Land improvements
|
|
|
27,604
|
|
|
|
(4,034
|
)
|
|
|
23,570
|
|
Buildings
|
|
|
31,558
|
|
|
|
(4,354
|
)
|
|
|
27,204
|
|
Machinery and equipment
|
|
|
221,139
|
|
|
|
(53,599
|
)
|
|
|
167,540
|
|
Furniture and fixtures
|
|
|
915
|
|
|
|
(142
|
)
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,673
|
|
|
|
(78,504
|
)
|
|
|
396,169
|
|
Construction-in-progress
|
|
|
18,049
|
|
|
|
|
|
|
|
18,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
492,722
|
|
|
$
|
(78,504
|
)
|
|
$
|
414,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense, including depletion and amortization, recognized during the three months ended
June 30, 2013 and 2012 was $8.9 million and $6.0 million, respectively, and $17.2 million and $12.0 million for the six months ended June 30, 2013 and 2012, respectively. The amount of interest costs capitalized in property, plant and
equipment was $131 and $168 for the three months ended June 30, 2013 and 2012, respectively, and $259 and $233 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we hold $364 assets under a capital
lease obligation. We also made an initial investment in a new Greenfield site near Utica, Illinois, which may require additional investment in the future.
NOTE HACCRUED LIABILITIES
At June 30, 2013 and
December 31, 2012, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June
30,
2013
|
|
|
December
31,
2012
|
|
Accrued salaries and wages
|
|
$
|
1,505
|
|
|
$
|
2,939
|
|
Accrued vacation liability
|
|
|
1,722
|
|
|
|
2,397
|
|
Current portion of liability for pension and post-retirement benefits
|
|
|
2,491
|
|
|
|
1,413
|
|
Accrued healthcare liability
|
|
|
1,171
|
|
|
|
1,278
|
|
Other accrued liabilities
|
|
|
2,289
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
9,178
|
|
|
$
|
9,481
|
|
|
|
|
|
|
|
|
|
|
We are self-insured for health care claims for eligible participating employees and qualified dependent
medical claims, subject to deductibles and limitations. Our liabilities for claims incurred but not reported (IBNR) are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is calculated
from actual historical claim rates and reviewed and adjusted periodically, as necessary.
Other accrued liabilities consist of
taxes payable, accrued shipping costs, royalties payable, and other immaterial items.
15
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
NOTE IDEBT
At June 30, 2013 and December 31, 2012, debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June
30,
2013
|
|
|
December
31,
2012
|
|
Revolving line-of-credit: (expires October 31, 2016) (5.0% at June 30, 2013 and December 31, 2012)
|
|
$
|
6,866
|
|
|
$
|
|
|
Senior secured credit facility:
|
|
|
|
|
|
|
|
|
Term loan facility (final maturity June 8, 2017) (4.75% at June 30, 2013 and December 31, 2012), net of
unamortized original issue discount of $591 and $675, respectively
|
|
|
254,208
|
|
|
|
255,425
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
261,074
|
|
|
|
255,425
|
|
Less: current portion
|
|
|
(9,300
|
)
|
|
|
(2,433
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term portion of debt
|
|
$
|
251,774
|
|
|
$
|
252,992
|
|
|
|
|
|
|
|
|
|
|
Revolving Line-of-Credit
As of June 30, 2013, the available borrowing base under our asset-based revolving line-of-credit (the Revolver) was $50.0 million, with $6.9 million drawn as of that date and $10.0
million allocated for letters of credit leaving $33.1 million available for general corporate use under this revolving credit agreement. Since the agreement contains a lock-box arrangement whereby receipts from customers are automatically used to
repay any borrowings, amounts outstanding under the agreement are classified as a current liability.
Debt Maturities
As of June 30, 2013, contractual maturities of our debt are as follows:
|
|
|
|
|
2013
|
|
$
|
8,083
|
|
2014
|
|
|
2,435
|
|
2015
|
|
|
2,436
|
|
2016
|
|
|
124,648
|
|
2017
|
|
|
123,472
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
261,074
|
|
|
|
|
|
|
On December 31, 2012, we amended our Revolver. The primary revisions to the Revolver included an
increase of the commitment under the Revolver from $35 million to $50 million, and the letter of credit sublimit from $15 million to $20 million; provided, however, that the aggregate principal amount of the loans and letters of credit obligations
outstanding at any one time shall not exceed the borrowing base as calculated pursuant to the agreement. The amendment also extended the termination date of the Revolver from October 31, 2015 to October 31, 2016, reduced prices and fees on
borrowings, letters of credit and unused commitments and added an additional subsidiary, Coated Sand Solutions, LLC, as a co-borrower.
On January 31, 2012, we amended our senior secured term loan facility (the Term Loan). The primary revisions to the Term Loan were to eliminate a requirement to provide monthly financial
reports, to remove
16
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
financial covenant restrictions related to capital expenditures, to provide flexibility to make investments and acquisitions and to incur indebtedness, and to provide a new subsidiary guarantee
from Coated Sand Solutions, LLC.
The Term Loan was secured by substantially all of our assets with the exception of our
accounts receivable and inventory, which we have pledged as collateral under the Revolver. As of June 30, 2013, we are in compliance with all covenants in accordance with our debt agreements.
As discussed in Note U, on July 23, 2013, we refinanced our existing senior debt by amending the Term Loan and replacing our
Revolver.
NOTE JASSET RETIREMENT OBLIGATIONS
Mine reclamation costs, or future remediation costs for inactive mines, are accrued based on managements 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 June 30, 2013 and December 31, 2012, we had recorded a liability of $6.9 million and $6.7 million in other long-term
obligations related to our asset retirement obligation. Changes in the asset retirement obligation during the six month period ended June 30, 2013 and the year ended December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December
31,
2012
(1)
|
|
Beginning balance
|
|
$
|
6,659
|
|
|
$
|
9,504
|
|
Liabilities settled/payments
|
|
|
|
|
|
|
|
|
Accretion expense
|
|
|
228
|
|
|
|
658
|
|
Additions, revisions of prior estimates and other
|
|
|
|
|
|
|
(3,503
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,887
|
|
|
$
|
6,659
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents change in the asset retirement obligation during the 12-month period ended December 31, 2012.
|
NOTE KFAIR 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.
Cash equivalents
Due to the short-term maturity, we believe that our cash equivalent instruments at June 30, 2013 and December 31, 2012
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 and based on their
effective interest rates compared to current market rates.
17
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
Derivative Instruments
The estimated fair value of our derivative assets (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 by us and our counterparties. However, as of June 30,
2013, 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.
In accordance with the fair value hierarchy, the following table presents the fair value
as of June 30, 2013, of those derivative assets that we must measure at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest rate derivatives
|
|
$
|
|
|
|
$
|
198
|
|
|
$
|
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
|
|
|
$
|
198
|
|
|
$
|
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE LDERIVATIVE INSTRUMENTS
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operation risks through management
of our core business activities. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value of which
are determined by current interest rates. Interest rate derivatives are utilized in the normal course of business to manage our interest cost and the risk associated with changing interest rates. We do not use derivative financial instruments for
trading or speculative purposes. By their nature, all such instruments involve risk, including the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract (credit risk) or the possibility
that future changes in market price may make a financial instrument less valuable or more onerous (market risk). As is customary for these types of instruments, we do not require collateral or other security from other parties to these instruments.
In managements opinion, there is no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest
rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate cap agreements as part of our interest rate risk management strategy.
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.
In connection with the Term Loan, we have entered into two interest rate cap agreements that effectively place an upper limit for
one-month LIBOR at 4.0% on the interest rate charged for $130.0 million of our floating
18
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
rate Term Loan. On March 31, 2012, one of the agreements with a notional amount of $100.0 million matured. Concurrently with the maturity, the notional amount of a second agreement with an
original notional amount of $30.0 million automatically increased to $130.0 million per the terms of the contract. On June 30, 2013 the second agreement matured. No additional expense was reclassified from accumulated other comprehensive
income or recognized directly in earnings as a result of the maturity or adjustment. On April 8, 2013, we entered into a new interest rate cap agreement that effectively places an upper limit for three-month LIBOR at 4.0% with a notional amount
of $128 million.
We assess the effectiveness of our hedges in offsetting the variability in the cash flow of the hedged
obligations on a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in equity as accumulated other comprehensive income and is subsequently reclassified into
earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the six months ended June 30, 2013 and
December 31, 2012, we had no ineffectiveness for such contracts.
The following table summarizes the fair value of our
derivative instruments. See Note K for additional disclosures regarding the estimated fair values of our derivative instruments at June 30, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Maturity
Date
|
|
|
Contract/Notional
Amount
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Contract/Notional
Amount
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Interest rate cap agreement
(1)
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130 million
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
2016
|
|
|
$
|
128 million
|
|
|
$
|
198
|
|
|
$
|
198
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
(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.
The following table summarizes the effect of our derivatives instruments on our income statements and our condensed consolidated
statements of comprehensive income for the three and six months ended June 30, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Deferred (losses) from derivatives in OCI, beginning of period
|
|
$
|
(102
|
)
|
|
$
|
(416
|
)
|
|
$
|
(183
|
)
|
|
$
|
(409
|
)
|
Gain recognized in OCI from derivative instruments
|
|
|
55
|
|
|
|
168
|
|
|
|
55
|
|
|
|
161
|
|
Gain reclassified from Accumulated OCI into income
|
|
|
102
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) from derivatives in OCI, end of period
|
|
$
|
55
|
|
|
$
|
(248
|
)
|
|
$
|
55
|
|
|
$
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE MEQUITY-BASED COMPENSATION
We recognize the cost of employee services rendered in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of the
grant. Compensation expense for equity units is recognized, on a straight-line basis, net of forfeitures, over the requisite service period for the fair value of the awards that actually vest.
19
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
As of June 30, 2013, we maintain two equity incentive plans (i) the GGC USS
Holdings, LLC Management Equity Program (the Equity Program), and (ii) the U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan (the 2011 Plan). The Equity Program granted Class C and Class D member units in GGC
Holdings to three members of executive management; one of whom continues to be employed by us at June 30, 2013. The 2011 Plan provides for grants of stock options, stock appreciation rights, restricted stock and other incentive-based awards.
For awards granted under the Equity Program, we recognized $27 and $54 of compensation expense during the three months ended
June 30, 2013 and 2012, respectively, and $55 and $109 during the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was $146 of total unrecognized compensation expense related to equity incentive
shares, which is expected to be recognized over a weighted-average period of approximately 1.34 years.
For awards granted
under the 2011 Plan, we recognized $677 and $439 of compensation expense during the three months ended June 30, 2013 and 2012, respectively and $1,328 and $1,038 during the six months ended June 30, 2013 and 2012, respectively. As of
June 30, 2013, there was $7.4 million of total unrecognized compensation expense related to equity incentive awards, which is expected to be recognized over a weighted-average period of approximately 2.83 years.
NOTE NLEASES
We
are obligated under certain operating leases and rental agreements for railroad cars, office space, mining property, mining/processing equipment and transportation and other equipment. Future minimum annual commitments under such operating leases at
June 30, 2013 are as follows:
|
|
|
|
|
2013
|
|
|
12,932
|
|
2014
|
|
|
11,382
|
|
2015
|
|
|
10,640
|
|
2016
|
|
|
8,591
|
|
2017
|
|
|
6,461
|
|
Thereafter
|
|
|
11,932
|
|
|
|
|
|
|
Total future lease commitments
|
|
$
|
61,938
|
|
|
|
|
|
|
Expense related to operating leases and rental agreements was $3.1 million and $2.9 million for the three
months ended June 30, 2013 and 2012, respectively, and $6.4 and $5.5 million for the six months ended June 30, 2013 and 2012, respectively.
We also have an obligation under a capital lease of $364 and $0 as of June 30, 2013 and 2012, respectively.
NOTE OCOMMITMENTS 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 six months ended June 30, 2013, no new claims were brought against U.S. Silica.
As of June 30, 2013, there were 92 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, the ultimate
resolution of these matters will not have a material adverse effect on our financial position or results of operations.
20
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
For periods prior to 1986, U.S. Silica had numerous insurance policies and an indemnity
from a former owner that covered silicosis claims. In the fourth quarter of 2012, U.S. Silica settled all rights under the indemnity and its underlying insurance policies receiving $5.1 million from the parties involved. As a result of the
settlement, the indemnity and related policies are no longer available to U.S. Silica and U.S. Silica will not seek reimbursement for any defense costs or claim payments. Other insurance policies, however, continue to remain available to U.S.
Silica.
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 consolidated balance sheets. As of June 30, 2013 and December 31, 2012, other noncurrent assets included $247 for
insurance for third-party products liability claims and other long-term obligations included $1.2 million and $1.3 million, respectively, in third-party products claim liability.
NOTE PINCOME TAXES
We evaluate our deferred tax assets periodically
to determine if valuation allowances are required. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be
utilized. To this end, management considers the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income. Based on these considerations, and the carry-forward
availability of a portion of the deferred tax assets, management believes it is more likely than not that we will realize the benefit of the deferred tax assets.
At the end of each reporting period as presented, there were no material amounts of interest and penalties recognized in the statement of operations or balance sheets. We have no material unrecognized tax
benefits or any known material tax contingencies at June 30, 2013 and December 31, 2012. Tax returns filed with the IRS for the years 2009 through 2011 along with tax returns filed with numerous state entities remain subject to
examination.
In accordance with generally accepted accounting principles, it is our practice at the end of each interim
reporting period to make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. Estimates are revised as additional information becomes available.
The largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion.
The deduction for statutory depletion does not necessarily change proportionately to changes in income before income taxes.
21
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
NOTE QPENSION AND POST-RETIREMENT BENEFITS
We maintain a noncontributory defined benefit pension plan covering certain employees. Net periodic pension benefit cost recognized for
the three and six months ended June 30, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
320
|
|
|
$
|
285
|
|
|
$
|
640
|
|
|
$
|
559
|
|
Interest cost
|
|
|
1,049
|
|
|
|
1,207
|
|
|
|
2,099
|
|
|
|
2,367
|
|
Expected return on plan assets
|
|
|
(1,265
|
)
|
|
|
(1,390
|
)
|
|
|
(2,531
|
)
|
|
|
(2,691
|
)
|
Amortization of prior service cost
|
|
|
21
|
|
|
|
11
|
|
|
|
42
|
|
|
|
13
|
|
Amortization of net (gain) loss
|
|
|
455
|
|
|
|
186
|
|
|
|
910
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
580
|
|
|
$
|
299
|
|
|
$
|
1,160
|
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, we provide defined benefit post-retirement healthcare and life insurance benefits to some
employees. Net periodic post-retirement benefit cost recognized for the three and six months ended June 30, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
116
|
|
|
$
|
116
|
|
Interest cost
|
|
|
252
|
|
|
|
296
|
|
|
|
505
|
|
|
|
592
|
|
Expected return on plan assets
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Amortization of net (gain) loss
|
|
|
74
|
|
|
|
95
|
|
|
|
148
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
383
|
|
|
$
|
448
|
|
|
$
|
767
|
|
|
$
|
896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We contributed $760 and $3.1 million to the qualified pension plan during the three months ended
June 30, 2013 and 2012, respectively and $760 and $8.9 during the six months ended June 30, 2013 and 2012, respectively. Total expected employer funding contributions during the fiscal year ending December 31, 2013 are $2.3 million
for the pension plan, and $1.3 million for the post-retirement medical and life plan.
NOTE ROBLIGATIONS UNDER GUARANTEES
We have indemnified St. Paul Travelers (Travelers) against any loss Travelers may incur in the event that
holders of surety bonds, issued on our behalf by Travelers, execute the bonds. As of June 30, 2013, Travelers had $6.4 million in bonds outstanding for us. The majority of these bonds ($6.3 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.
We have indemnified Safeco Insurance Company of America (Safeco) against any loss Safeco may incur in the event
that holders of surety bonds, issued on our behalf by Safeco, execute the bonds. As of June 30, 2013, Safeco had $513 in bonds outstanding for us. These are all reclamation bonds.
U.S. Silica is the contingent guarantor of Kanawha Rail Corporations (KRC) obligations as lessee of 199 covered hopper
railroad cars, which are used by U.S. Silica to ship sand to its customers. KRCs obligation as
22
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
lessee includes paying monthly rent of $66 until June 30, 2015, maintaining the cars, paying for any cars damaged or destroyed, and indemnifying all other parties to the lease transaction
against liabilities including any loss of certain tax benefits. By separate agreement between U.S. Silica and KRC, KRC may, upon the occurrence of certain events, assign the lease obligations to U.S. Silica, but none of these events have occurred.
NOTE SRELATED PARTY TRANSACTIONS
Advisory Agreement
In connection with our acquisition by an affiliate of
Golden Gate Capital (the Golden Gate Capital Acquisition), we entered into an Advisory Agreement with Golden Gate Capital (the Advisory Agreement) whereby Golden Gate Capital agreed to provide business and organizational
strategy and financial and advisory services. Such services included support and assistance to management with respect to negotiating and analyzing acquisitions and divestitures, negotiating and analyzing financing alternatives, preparing financial
projections, monitoring compliance with financing agreements, marketing functions and searching for and hiring management personnel.
As compensation for these services, we agreed to pay Golden Gate Capital (1) an annual advisory fee in the aggregate amount equal to $1.3 million, payable quarterly in arrears, and (2) a
transaction fee of 1.25% of the aggregate value of each transaction resulting in a change in control of GGC Holdings or its subsidiaries, along with each acquisition, divestiture, recapitalization and financing. In addition to the fees described
above, we also reimbursed Golden Gate Capital for all out-of-pocket costs incurred by Golden Gate Capital in connection with its activities under the Advisory Agreement, and indemnified Golden Gate Capital from and against all losses, claims,
damages and liabilities related to the performance of its duties under the Advisory Agreement.
On February 6, 2012, we
paid $8.0 million to Golden Gate Capital to terminate the advisory agreement previously entered into in connection with the Golden Gate Capital Acquisition. The $8.0 million termination fee was accrued for at December 31, 2011 and no additional
expense was recognized during the year ended December 31, 2012 or as of the three and six months ended June 30, 2013.
Promissory
Note
On December 22, 2010, GGC RCS Holdings, Inc., entered into a $15.0 million promissory note with GGC Holdings,
our sole stockholder prior to the IPO and now largest stockholder. The note provided working capital for a new subsidiary and was scheduled to mature on December 22, 2015. The note bore interest at 10%. Outstanding principal and interest under
the note was payable upon demand, but no later than the maturity date. Upon sole election by the parent, any unpaid interest could be paid in cash on December 22 of each year until the maturity date. Interest on the note was recorded in
interest expense in the Income Statements and any unpaid interest was included in accrued interest on the Balance Sheets. On January 31, 2012, simultaneously with the IPO, GGC Holdings contributed to us all of the stock of GGC RCS Holdings,
Inc. and converted the $15.0 million promissory note, including $1.7 million of accrued interest, to equity.
NOTE TSEGMENT 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
23
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
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.
An operating segments
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, income from operations 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 the summary of significant accounting policies included in Note B.
In the Oil & Gas Proppants segment, we serve the oil and gas recovery market providing 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 natural gas and oil from the wells.
The Industrial & Specialty Products segment consists of over 250 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.
The
following table presents sales and segment contribution margin for the reporting segments and other operating results not allocated to the reported segments for the three and six months ended June 30, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
|
$
|
77,672
|
|
|
$
|
54,497
|
|
|
$
|
151,254
|
|
|
$
|
108,307
|
|
Industrial & Specialty Products
|
|
|
52,156
|
|
|
|
50,102
|
|
|
|
100,885
|
|
|
|
98,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
129,828
|
|
|
|
104,599
|
|
|
|
252,139
|
|
|
|
207,190
|
|
Segment contribution margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
|
|
35,475
|
|
|
|
33,262
|
|
|
|
71,637
|
|
|
|
68,327
|
|
Industrial & Specialty Products
|
|
|
15,358
|
|
|
|
14,027
|
|
|
|
28,604
|
|
|
|
26,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment contribution margin
|
|
|
50,833
|
|
|
|
47,289
|
|
|
|
100,241
|
|
|
|
94,711
|
|
Operating activities excluded from segment cost of goods sold
|
|
|
(1,302
|
)
|
|
|
(1,610
|
)
|
|
|
(2,811
|
)
|
|
|
(3,362
|
)
|
Selling, general and administrative
|
|
|
(10,099
|
)
|
|
|
(9,718
|
)
|
|
|
(22,503
|
)
|
|
|
(19,622
|
)
|
Depreciation, depletion and amortization
|
|
|
(8,890
|
)
|
|
|
(5,974
|
)
|
|
|
(17,168
|
)
|
|
|
(11,952
|
)
|
Interest expense
|
|
|
(3,535
|
)
|
|
|
(3,428
|
)
|
|
|
(7,111
|
)
|
|
|
(7,225
|
)
|
Other income, net, including interest income
|
|
|
63
|
|
|
|
179
|
|
|
|
185
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
27,070
|
|
|
$
|
26,738
|
|
|
$
|
50,833
|
|
|
$
|
52,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
24
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except share and per share amounts)
segment. As of June 30, 2013 and December 31, 2012, goodwill of $68.4 million has been allocated to these segments with $47.7 million assigned to Oil & Gas Proppants and $20.7
million to Industrial and Specialty Products.
NOTE USUBSEQUENT EVENTS
On July 3, 2013 we paid a cash dividend of $0.125 per share to common stockholders of record on June 19, 2013, as had been
declared by our Board of Directors on April 29, 2013.
On July 23, 2013, we refinanced our existing senior secured
debt by amending our Term Loan and replacing our Revolver. The Term Loan amendment refinanced our existing senior debt by entering into a new $425 million senior secured credit facility, consisting of a $375 million Term Loan and a $50 million
revolving credit facility that may also be used for swingline loans (up to $5 million) or letters of credit (up to $20 million). The Term Loan amendment also, among other things, removed and amended certain financial and other covenants to provide
additional operating flexibility, and lowered interest rates on borrowed amounts. The existing Revolver was terminated. The Term Loan will expire on July 23, 2020 and the revolving credit facility will expire on July 23, 2018.
On July 29, 2013, our Board of Directors declared a quarterly cash dividend of $0.125 per share to common stockholders of record at the
close of business on September 19, 2013, payable on October 3, 2013.
25