NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except 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 November 25, 2008, we issued 1,000 shares of our common stock to our then sole
stockholder, GGC USS Holdings, LLC (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.
On January 31, 2012, the Certificate of Incorporation was amended and restated to increase the authorized shares of common stock to
500 million shares, and to authorize 10 million shares of preferred stock.
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 Holdings, our sole stockholder prior to the IPO, 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 develops resin-coated sand proppants for sale into the oil and gas proppants market for use in the hydraulic fracturing process and into the foundry market.
As of December, 31, 2013, GGC USS Holdings, LLC held no interest in U.S. Silica after divesting its ownership interest in U.S. Silica
during 2013.
NOTE BSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 (the Financial Statements), present our financial
position, results of operations, and cash flows. In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of December 31, 2013 and 2012, the results of our
operations
88
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
for the years ended December 31, 2013, 2012 and 2011, and our cash flows for the year ended December 31, 2013, 2012 and 2011. We have reclassified certain immaterial amounts in the
prior years consolidated statement of cash flows within operating activities to conform to the current year presentation. These reclassifications had no effect on previously reported net cash flows from operations.
In order to make this report easier to read, we refer throughout to (i) our Consolidated Balance Sheets as our Balance
Sheets, (ii) our Consolidated Statements of Operations as our Income Statements, and (iii) our Consolidated Statements of Cash Flows as our Cash Flows.
The Financial Statements include the accounts of Holdings and its direct and indirect wholly-owned subsidiaries and GGC RCS Holdings,
Inc. (formed in 2010). 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 years ended
December 31, 2013 and 2012. For the year ended December 31, 2011, we and our subsidiaries are presented on a combined basis with GGC RCS Holdings, Inc. All significant intercompany balances and transactions have been eliminated in
combination.
We follow 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 December 31, 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.
Use of
Estimates and Assumptions
The Financial Statements have been prepared in accordance with United States generally
accepted accounting principles (GAAP). 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; equity-based compensation expense; 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.
Revenue Recognition
Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered or legal title has been transferred to the customer and
collection of the sales price is reasonably assured. Amounts received from customers in advance of revenue recognition are deferred as liabilities.
89
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We derive our sales by mining and processing minerals that our customers purchase for
various uses. Our sales are primarily a function of the price per ton realized and the volumes sold. In some instances, our sales also include a charge for transportation services we provide to our customers. Our transportation revenue fluctuates
based on a number of factors, including the volume of product we transport under contract, service agreements with our customers, the mode of transportation utilized and the distance between our plants and customers.
We primarily sell our products under short-term price agreements or at prevailing market rates. For a limited number of customers, we
sell under long-term, competitively-bid supply agreements. For the year ended December 31, 2013, we had take-or-pay supply agreements with seven of our customers in the oil & gas proppants segment with initial terms expiring between
2013 and 2016. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that it must provide and the price that it will charge and that our customers will pay for each product.
Prices under these agreements are generally fixed and subject to upward adjustment in response to certain cost increases. As a result, our realized prices may not grow at rates consistent with broader industry pricing. For example, during periods of
rapid price growth, our realized prices may grow more slowly than those of competitors, and during periods of price decline, our realized prices may outperform industry averages.
We invoice the majority of our clients on a per shipment basis, although for some larger customers, we consolidate invoices weekly or
monthly. Standard terms are net 30 days, although extended terms are offered in competitive situations. The amounts invoiced include the amount charged for the product, transportation costs (if paid by us) and costs for additional services as
applicable, such as costs related to transload the product from railcars to trucks for delivery to the customer site.
Cash and Cash
Equivalents
Cash and cash equivalents consist of all highly liquid investments with a maturity of three months or less
when purchased. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Cash and cash equivalents are invested primarily in money market securities with high quality institutions. Accounts at each
institution are insured by Federal Deposit Insurance Corporation. Cash balances at times may exceed federally-insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash.
Accounts Receivable
The majority of our accounts receivable are due from companies in the glass, oil and natural gas drilling, building products, filler and extenders, foundries and other major industries. Credit is extended
based on evaluation of a customers financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.
Accounts outstanding longer than the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the
customers current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they are deemed uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
Our ten largest customers accounted for approximately 52%,
37% and 44% of sales in the years ended December 31, 2013, 2012 and 2011, respectively. No single individual customer accounted for more than 10% of
90
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
sales in the years ended December 31, 2013, 2012 and 2011. Management believes it maintains adequate reserves for potential credit losses; ongoing credit evaluations are performed and
collateral is generally not required.
Inventories
Inventories include raw stockpiles and silica and other industrial sand available for shipment, as well as spare parts and supplies for routine facilities maintenance. We value inventory at the lower of
cost or market. Cost is determined using the first-in, first-out and average cost methods.
Property, Plant and Mine Development
Property and equipment
Property and equipment is recorded at cost and depreciated over their estimated useful lives. Interest incurred during construction of facilities is capitalized and depreciated over the life of the asset.
Depreciable properties, mining properties, and mineral deposits acquired in connection with business acquisitions are recorded at fair market value as of the date of acquisition.
Costs for normal repairs and maintenance that do not extend economic life or improve service potential are expensed as incurred. Costs of
improvements that extend economic life or improve service potential are capitalized and depreciated over the estimated remaining useful life.
Depreciation is recorded using the straight-line method over the assets estimated useful life as follows: buildings (15 years); land improvements (10 years); machinery & equipment,
including computer equipment and software (3-10 years); furniture & fixtures (8 years). Leasehold improvements are depreciated over the shorter of the asset life or lease term. Construction-in-progress is primarily comprised of machinery
and equipment, which has not yet been placed in service.
Gains on the sale of assets are included in income when the assets
are disposed of provided there is more than reasonable certainty of the collectability of the sales price and any future activities required to be performed by us relating to the disposal of the assets are complete or insignificant. Upon retirement
or disposal of assets, all costs and related accumulated depreciation or amortization are written-off.
Depletion and
amortization of mineral deposits are recorded as the minerals are extracted, based on units of production and engineering estimates of mineable reserves. The impact of revisions to reserve estimates is recognized on a prospective basis.
We evaluate the carrying value of our property and equipment if impairment evaluation triggering events occur. If it is determined that
the current net book value is in excess of the fair value, the excess of the net book value over the estimated fair value is recorded in our consolidated statements of operations as impairment loss. Fair value is generally estimated using valuation
techniques that consider the discounted cash flows of the asset at rates deemed reasonable for the type of asset and prevailing market conditions, appraisals, including recent similar transactions in the market and if appropriate and available,
current estimated net sales proceeds from pending offers.
We will classify an asset as held for sale when we have committed
to a plan to sell the asset, the sale of the asset is probable within one year, and actions to complete the sale are unlikely to change or that the sale will be
91
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
withdrawn. Accordingly, we typically classify assets as held for sale when our Board of Directors has approved the sale, a binding agreement to purchase the property has been signed under which
the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could prevent the transaction from being completed in a timely manner. If these criteria are met, we will record an impairment
loss if the fair value, less cost to sell, is lower than the carrying amount of the asset and will cease recording depreciation. We will classify the loss, together with the related operating results, including related interest expense on any debt
assumed by the buyer or that is required to be repaid as a result of the sale, as discontinued operations on our consolidated statement of operations, presuming that we will not have continuing involvement with the property or asset after the sale,
and classify the asset and related liability as held for sale on our consolidated balance sheet. Gains on sales of assets are recognized at the time of sale or deferred and recognized as income in subsequent periods as conditions requiring deferral
are satisfied or expire without further cost to us.
Mine exploration and development
Mine exploration and development costs include engineering and mineral studies, drilling and other related costs to delineate an ore body,
and the removal of overburden to initially expose an ore body for production. Costs incurred before mineralization are classified as proven and probable reserves are expensed and classified as exploration or advanced projects, research and
development expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at
obtaining additional information on the ore body or converting non-reserve mineralization to proven and probable reserves and the benefit is expected to be realized over a period beyond one year. All other drilling and related costs are expensed as
incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.
The cost of removing overburden and waste materials to access the ore body at an open pit mine prior to the production phase are referred
to as pre-stripping costs. Pre-stripping costs are capitalized during the development of an open pit mine. Where multiple open pits exist at a mining complex utilizing common processing facilities, pre-stripping costs are capitalized at
each pit. The removal, production, and sale of de minimis saleable materials may occur during development and are recorded as other income, net of incremental mining and processing costs.
The production phase of an open pit mine commences when saleable minerals, beyond a de minimis amount, are produced. Stripping costs
incurred during the production phase of a mine are variable production costs that are included as a component of inventory to be recognized in costs applicable to sales in the same period as the revenue from the sale of inventory. Our definition of
a mine and the mines production phase may differ from that of other companies in the mining industry resulting in incomparable allocations of stripping costs to deferred mine development and production costs. Other mining companies may expense
pre-stripping costs associated with subsequent pits within a mining complex.
Mine development costs are amortized using the
units-of-production method based on estimated recoverable tons in proven and probable reserves. To the extent that these costs benefit an entire ore body, they are amortized over the estimated life of the ore body. Costs incurred to access specific
ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block or area.
92
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Mine reclamation costs
We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities
when incurred, which is generally upon acquisition, construction or development and/or through the normal operation of the asset, if sufficient information exists to reasonably estimate the fair value of the liability. These obligations generally
include the estimated net future costs of dismantling, restoring and reclaiming operating mines and related mine sites, in accordance with federal, state and local regulatory requirements. The liability is accreted over time through periodic charges
to earnings. In addition, the asset retirement cost is capitalized as part of the assets carrying value and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present
value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The reclamation obligation is based on when spending for an existing environmental disturbance will
occur. If the asset retirement obligation is settled for other than the carrying amount of the liability, a gain or loss is recognized on settlement. We review, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at
each mine site in accordance with ASC guidance for accounting reclamation obligations.
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.
In connection with our annual review of our
reclamation obligations in 2013, we have determined that some of our estimates required revision due primarily to the addition of our new transload facility in San Antonio, Texas and to other changes in cost estimates and settlement dates at
numerous sites. These changes in estimates resulted in the addition of $2.3 million of reclamation obligations in 2013.
We
reported a liability of $9.4 million and $6.7 million in other long-term obligations related to this obligation as of December 31, 2013 and 2012, respectively. Changes in the asset retirement obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Beginning balance
|
|
$
|
6,659
|
|
|
$
|
9,504
|
|
Payments
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
456
|
|
|
|
658
|
|
Revisions of prior estimates
|
|
|
2,263
|
|
|
|
(3,503
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,378
|
|
|
$
|
6,659
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Other Intangible Assets and Related Impairment
Our intangible assets consist of goodwill, which is not being amortized; indefinite lived intangibles, which consist of certain trade
names that are not subject to amortization; and customer relationships, which are being amortized on a straight-line basis over their useful life of 20 years. Goodwill represents the excess of purchase price over the fair value of net assets from
the business acquisition in 2008.
Goodwill and other intangible assets with indefinite lives are reviewed for impairment
annually as of October 31 or more frequently whenever events or circumstances change that would more likely than not reduce
93
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
the fair value of those assets. Prior to conducting a formal impairment test, we assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that 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 the qualitative assessment determines that an
impairment is more likely than not, then the impairment test for goodwill, or other intangible assets with indefinite lives, requires a comparison of the fair value with the carrying amount, including goodwill. If this comparison reflects
impairment, then the loss would be measured as the excess of recorded goodwill, or other intangible assets with indefinite lives, over its implied fair value. Implied fair value is the excess of our fair value over the fair value of all recognized
and unrecognized assets and liabilities.
The evaluation of goodwill, or other intangible assets with indefinite lives, for
possible impairment includes estimating our fair value using discounted cash flows and multiples of cash earnings valuation techniques, plus valuation comparisons to similar businesses. These valuations require us to make estimates and assumptions
regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Although we believe that the estimates and assumptions used were reasonable, actual results
could differ from those estimates and assumptions. As of December 31, 2013 our qualitative assessment did not indicate that it was more likely than not that an impairment had occurred.
As of December 31, 2013, the gross carrying amount of the customer relationships intangible asset was $8.2 million with
accumulated amortization of $2.1 million. We review all finite-lived intangible assets for impairment when circumstances indicate that their carrying amounts may not be recoverable. We evaluate the carrying value of all finite-lived intangible
assets for impairment by comparing the expected undiscounted future cash flows of the asset to the net book value of the asset. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book
value over the estimated fair value is recorded in our consolidated statements of operations as impairment loss. Fair value is generally estimated using valuation techniques that consider the discounted cash flows of the asset at rates deemed
reasonable for the type of asset and prevailing market conditions, replacement cost, appraisals, including recent similar transactions in the market and if appropriate, current estimated net sales proceeds from pending offers. As of
December 31, 2013, the remaining useful life of our customer relationships was 14.9 years. The estimated annual amortization in each of the next five years is $411.
Debt Issuance Costs
Debt issuance costs consist of loan origination
costs, which are being amortized using the effective interest method over the term of the related debt principal. Amortization included in interest expense was $680, $515 and $265 for the years ended December 31, 2013, 2012 and 2011,
respectively.
Transportation Revenue and Expense
Transportation revenue is the revenue we receive from charging our customers to deliver product to their locations. Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the
price is determinable, the product has been delivered or legal title has been transferred to the customer and collection of the sales price is reasonably assured. Transportation expense is the cost we pay to ship product from our production
facilities to customer facilities.
94
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Environmental Costs
Environmental costs, other than qualifying capital expenditures, are accrued at the time the exposure becomes known and costs can be
reasonably estimated. Costs are accrued based upon managements estimates of all direct costs, after taking into account expected reimbursement by third parties (primarily the sellers of acquired businesses), and are reviewed by outside
consultants. Environmental costs are charged to expense unless a settlement with an indemnifying party has been reached.
Self-Insurance
We are self-insured for various levels of employee health insurance coverage, workers compensation and third
party product liability claims alleging occupational disease. We purchase insurance coverage for claim amounts which exceed our self-insured retentions. Depending on the type of insurance, these self-insured retentions range from $100,000 to
$500,000 per occurrence.
Our insurance reserves are accrued based on estimates of the ultimate cost of claims expected to
occur during the covered period. These estimates are prepared with the assistance of outside actuaries and consultants. Our actuaries periodically review the volume and amount of claims activity, and based upon their findings, we adjust our
insurance reserves accordingly. The ultimate cost of claims for a covered period may differ from our original estimates.
The
current portion of our self-insurance reserves is included in accrued liabilities and the non-current portion is included in other long-term obligations in our consolidated balance sheets. Our self-insurance reserves totaled $5.4 million and $4.0
million at December 31, 2013 and 2012, respectively. Of these amounts, $1.7 million and $1.3 million, respectively, were classified as current.
Equity-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.
Income Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. This approach requires recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based upon the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the expenses are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
We recognize a tax benefit associated with an uncertain tax position when, in
managements judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure
the tax benefit as the largest amount that it judges to have a greater than 50% likelihood of being realized upon ultimate
95
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law
developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and
subsequent adjustments as considered appropriate by management.
The largest permanent item in computing both our effective
tax rate and taxable income is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is presented in Note Q to these financial statements. The deduction for statutory depletion does not
necessarily change proportionately to changes in income before income taxes.
Net Income per Common Share
Basic and diluted income per share is presented for net income. Basic income per share is computed by dividing income available to common
stockholders by the weighted-average number of outstanding common shares for the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the
future were converted. Diluted income per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after conversion and adjusting net income for
changes that would result from the conversion. Only those securities or other contracts that result in a reduction in earnings per share are included in the calculation.
Comprehensive Income
In addition to net income, comprehensive
income (loss) includes all changes in equity during a period, such as adjustments to minimum pension liabilities and the effective portion of changes in fair value of derivative instruments that qualify as cash flow hedges.
Short-Term Investments
Our short-term investments consist of fixed income securities that have been classified and accounted for as available-for-sale. We determine the appropriate classification of our investments at the time
of purchase and reevaluate the designations at each balance sheet date. We classify these securities as either short-term or long-term based on each instruments underlying contractual maturity date. Fixed income securities with maturities of
12 months or less are classified as short-term and fixed income securities with maturities greater than 12 months are classified as long-term. These investments are carried at fair value, with the unrealized gains and losses, net of taxes, reported
as a separate component of accumulated other comprehensive income. The cost of securities sold is based upon the specific identification method.
Financial Instruments
We currently use interest rate hedge
agreements and have historically utilized natural gas hedge agreements to manage interest and energy costs and the risk associated with changing interest rates and natural gas prices. Amounts to be paid or received under these hedge agreements are
accrued as interest rates or natural gas prices change and are recognized over the life of the hedge agreements as an adjustment to interest expense or, in the case of natural gas, cost of goods sold. Our policy is to not hold or issue derivative
financial instruments for trading or speculative purposes. When entered into, these financial instruments are designated as hedges of underlying exposures, associated with our long-term debt and energy costs, and are monitored to determine if
96
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
they remain effective hedges. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income net of tax and reclassified to earnings in a manner that
matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in income. Additional disclosures for derivative instruments are presented in Note M to these financial
statements.
Recently Adopted Accounting Pronouncements
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. Generally Accepted Accounting Principles (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.
In July 2013, the FASB amended Accounting Standards Codification (ASC Topic 740), Income Taxes. The
amendment provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carry-forward, a similar tax loss or a tax credit
carry-forward exists. The amendment will be effective for interim and annual periods beginning after December 15, 2013 and may be applied on a retrospective basis. Early adoption is permitted. We do not expect the adoption of this
amendment to have a significant effect on our consolidated financial position or results of operations.
NOTE CEARNINGS PER SHARE
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
75,256
|
|
|
$
|
79,154
|
|
|
$
|
30,253
|
|
Less: net income allocated to outstanding restricted stockholders
|
|
|
(175
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stockholders
|
|
$
|
75,081
|
|
|
$
|
79,049
|
|
|
$
|
30,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
53,035
|
|
|
|
52,592
|
|
|
|
50,000
|
|
Outstanding assuming dilution
|
|
|
53,409
|
|
|
|
52,641
|
|
|
|
50,006
|
|
97
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 53,492,278 shares of common stock issued and outstanding at December 31, 2013. As of December 31, 2012, there were 52,920,704
shares issued and outstanding. On October 24, 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 December 16, 2013, payable on January 3,
2014.
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 December 31, 2013 and 2012. At present, we have no plans to issue any preferred stock.
Share Repurchase Program
On June 11, 2012, the Board of Directors authorized us to repurchase up to $25.0 million of our common stock. The authorization was initially for a period of 18 months, concluding on
December 11, 2013, but on November 4, 2013, the Board of Directors extended the repurchase program through December 11, 2014. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open
market or in privately negotiated transactions. Stock repurchases 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. 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 December 31, 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 December 31, 2013, all of the 100,000 shares repurchased to date have
been re-issued to satisfy employee option exercises.
98
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2013
|
|
|
|
Unrealized
gain/(loss) on
cash flow
hedges
|
|
|
Unrealized
gain/(loss)
on
short-term
investments
|
|
|
Pension and
other post-
retirement
benefits liability
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
(182
|
)
|
|
$
|
|
|
|
$
|
(13,993
|
)
|
|
$
|
(14,175
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(82
|
)
|
|
|
(27
|
)
|
|
|
8,844
|
|
|
|
8,735
|
|
Amounts reclassed from accumulated other comprehensive income
|
|
|
185
|
|
|
|
|
|
|
|
1,238
|
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(79
|
)
|
|
$
|
(27
|
)
|
|
$
|
(3,911
|
)
|
|
$
|
(4,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the reclassifications out of accumulated other comprehensive income (loss)
during the year ended December 31, 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
|
|
$
|
304
|
|
|
|
Interest expense
|
|
|
|
|
(119
|
)
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
185
|
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
Amortization of postretirement benefits liability
|
|
|
|
|
|
|
|
|
Actuarial gains/(losses)
|
|
$
|
1,933
|
|
|
|
(1
|
)
|
Prior service cost
|
|
|
92
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,025
|
|
|
|
Total before tax
|
|
|
|
|
(787
|
)
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
1,423
|
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note R).
|
99
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE EACCOUNTS RECEIVABLE
At December 31, 2013 and 2012, accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Trade receivables
|
|
$
|
76,223
|
|
|
$
|
56,519
|
|
Less: Allowance for doubtful accounts
|
|
|
(2,376
|
)
|
|
|
(1,053
|
)
|
|
|
|
|
|
|
|
|
|
Net trade receivables
|
|
|
73,847
|
|
|
|
55,466
|
|
Other receivables
|
|
|
1,360
|
|
|
|
4,098
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
75,207
|
|
|
$
|
59,564
|
|
|
|
|
|
|
|
|
|
|
Net trade receivables increased $18,381 to $73,847 as of December 31, 2013 compared to $55,466 as of
December 31, 2012, primarily due to the increase in sales. No single individual customer accounted for more than 10% of sales in the years ended December 31, 2013, 2012 and 2011.
NOTE FINVENTORIES
At December 31, 2013 and 2012, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Supplies
|
|
$
|
15,576
|
|
|
$
|
13,472
|
|
Raw materials and work in process
|
|
|
11,728
|
|
|
|
10,720
|
|
Finished goods
|
|
|
36,908
|
|
|
|
15,643
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
64,212
|
|
|
$
|
39,835
|
|
|
|
|
|
|
|
|
|
|
Inventories include raw stockpiles and silica and other industrial sand available for shipment, as well
as spare parts and supplies for routine facilities maintenance. 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 $21,265 to $36,908 as of
December 31, 2013 compared to $15,643 as of December 31, 2012, primarily due to an increase of inventory held at transloads.
100
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE GPROPERTY, PLANT AND MINE DEVELOPMENT
At December 31, 2013 and 2012, property, plant and mine development consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Mining property and mine development
|
|
$
|
164,609
|
|
|
$
|
163,538
|
|
Asset retirement cost
|
|
|
7,275
|
|
|
|
5,124
|
|
Land
|
|
|
25,738
|
|
|
|
24,795
|
|
Land improvements
|
|
|
31,093
|
|
|
|
27,604
|
|
Buildings
|
|
|
36,311
|
|
|
|
31,558
|
|
Machinery and equipment
|
|
|
263,304
|
|
|
|
221,139
|
|
Furniture and fixtures
|
|
|
1,131
|
|
|
|
915
|
|
Construction-in-progress
|
|
|
25,974
|
|
|
|
18,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,435
|
|
|
|
492,722
|
|
Accumulated depletion, depreciation and amortization
|
|
|
(113,319
|
)
|
|
|
(78,504
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and mine development, net
|
|
$
|
442,116
|
|
|
$
|
414,218
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense, including depletion and amortization, recognized during the year ended
December 31, 2013, 2012 and 2011 was $36,418, $25,099 and $20,999, respectively. The amount of interest costs capitalized in property, plant and equipment was $533, $934 and $575 for the year ended December 31, 2013, 2012 and 2011,
respectively. As of December 31, 2013, we hold no assets under a capital lease obligation.
NOTE HACCRUED LIABILITIES
At December 31, 2013 and 2012, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued salaries and wages
|
|
$
|
2,411
|
|
|
$
|
2,939
|
|
Accrued vacation liability
|
|
|
2,396
|
|
|
|
2,397
|
|
Current portion of liability for pension and post-retirement benefits
|
|
|
1,428
|
|
|
|
1,413
|
|
Accrued healthcare liability
|
|
|
1,662
|
|
|
|
1,278
|
|
Other accrued liabilities
|
|
|
2,926
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
10,823
|
|
|
$
|
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.
101
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE IDEBT
As discussed below, on July 23, 2013, we refinanced our existing senior secured debt by amending our Term Loan and
replacing our existing revolving line-of-credit. At December 31, 2013 and 2012, debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Revolving line-of-credit:
|
|
$
|
|
(1)
|
|
$
|
|
(2)
|
(1)
Revolver expiring July 23, 2018 (4.75% at December 31, 2013)
|
|
|
|
|
|
|
|
|
(2)
Revolver expiring October 31, 2016 (5.0% at December 31, 2012); replaced by
(1)
on July 23, 2013
|
|
|
|
|
|
|
|
|
Senior secured credit facility:
|
|
|
371,451
|
|
|
|
255,425
|
|
Term loan facilityfinal maturity July 23, 2020 (4% at December 31, 2013 and 4.75% at December 31, 2012), net
of unamortized original issue discount of $1,674 and $675, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
371,451
|
|
|
|
255,425
|
|
Less: current portion
|
|
|
(3,488
|
)
|
|
|
(2,433
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term portion of debt
|
|
$
|
367,963
|
|
|
$
|
252,992
|
|
|
|
|
|
|
|
|
|
|
Revolving Line-of-Credit
As of December 31, 2013, the available borrowing base under our revolving line-of-credit (the Revolver) was $50 million, with zero drawn as of that date and $9.0 million allocated for
letters of credit, leaving $41.0 million available for general corporate use under this revolving credit agreement.
Debt
Maturities
At December 31, 2013, contractual maturities of long-term debt are as follows:
|
|
|
|
|
2014
|
|
|
3,488
|
|
2015
|
|
|
3,490
|
|
2016
|
|
|
3,493
|
|
2017
|
|
|
3,495
|
|
2018
|
|
|
3,499
|
|
Thereafter
|
|
|
353,986
|
|
|
|
|
|
|
|
|
$
|
371,451
|
|
|
|
|
|
|
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 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.
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
102
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 July 23, 2013,
we refinanced our existing senior secured debt by amending our Term Loan and replacing our existing revolving line-of-credit. 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 the $50 million Revolver 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 revolving line-of-credit was terminated. The Term Loan will expire on July 23, 2020 and
the Revolver will expire on July 23, 2018. As a result of refinancing our Term Loan and replacing our revolving line-of-credit, we expensed $1.8 million of costs, consisting of $1.3 million related to third party fees in selling, general, and
administrative expenses and $0.5 million related to early extinguishment of debt.
Our senior secured credit facility is
secured by substantially all of our assets 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 pay dividends and to sell assets. 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 December 31, 2013, we are in compliance with all covenants in accordance with our senior secured credit facility.
NOTE JDEFERRED REVENUE
On November 25, 2008, we, through an affiliate, received advances from two customers totaling $27 million. The
deposits give these customers the right to purchase certain products for a fixed price at certain minimum volumes. In addition, the customers have security on their deposit in the form of promissory notes with an affiliate collateralized by
undivided mineral interests in our mineral deposits. These notes originally bore interest at 10% compounded quarterly, to the extent any interest is unpaid. The obligations and related interest are reduced as shipments occur with a portion of the
sales price being received in cash and a smaller noncash portion reducing first any accrued interest and then, to the extent available, any outstanding principal. As such, the notes do not require any payments in cash. The notes mature on
December 31, 2015 and November 25, 2016. In December 2009, $12 million of the notes were amended to reduce the interest rate to 5%, retroactive to November 25, 2008. Effective January 1, 2010, the remaining $15 million was
amended to reduce the interest rate to 6%, prospectively.
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. 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 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable inputs other than quoted prices in active markets for identical assets and liabilities, quote
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.
103
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Level 3Inputs that are generally unobservable and typically
reflect managements 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 December 31, 2013 and 2012 approximate
their reported carrying values.
Short-Term Investments
In general, the fair value of our short-term investments is based on quoted prices for similar assets in active markets, or for identical assets or similar assets in markets in which there were fewer
transactions (Level 2). Money market mutual funds are based on calculated net asset value and are reported in Level 1. Variable rate demand obligations underwritten and remarketed by a financial institution are priced at par value.
Long-Term Debt, including current maturities
We believe that the fair values of our long-term debt, including current maturities, approximates their carrying values and based on their effective interest rates compared to current market rates.
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 with 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 December 31, 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
December 31, 2013 and 2012, respectively, of those assets that we measure at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Short-term investments
|
|
$
|
622
|
|
|
$
|
74,358
|
|
|
$
|
74,980
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest rate derivatives
|
|
|
|
|
|
|
109
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
622
|
|
|
$
|
74,467
|
|
|
$
|
75,089
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE LSHORT-TERM INVESTMENTS
We have segregated funds into designated accounts with investment brokers who manage our short-term investment
portfolio. Those funds are held on an available-for-sale basis and are therefore reported at fair value on the balance sheet.
The following table summarizes our available-for-sale short-term investments as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Money market mutual funds
|
|
$
|
622
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
622
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
25,218
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
25,184
|
|
Commercial paper
|
|
|
15,168
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
15,171
|
|
Corporate notes and bonds
|
|
|
9,495
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
9,486
|
|
Government agencies
|
|
|
13,979
|
|
|
|
6
|
|
|
|
|
|
|
|
13,985
|
|
U.S. Treasuries
|
|
|
4,828
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
4,818
|
|
Variable Rate Demand Obligations
|
|
|
5,714
|
|
|
|
|
|
|
|
|
|
|
|
5,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
75,024
|
|
|
$
|
10
|
|
|
$
|
(54
|
)
|
|
$
|
74,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, we considered the declines in market value of our short-term investment
portfolio to be temporary in nature and did not consider any of our investments other-than-temporarily impaired. We typically invest in highly-rated securities, and our investment policy generally limits the amount of credit exposure to any one
issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When
evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market
interest rates, and our intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investments cost basis. During 2013, 2012 and 2011 we did not recognize any impairment charges.
NOTE MDERIVATIVE INSTRUMENTS
We are exposed to certain risk 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 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.
105
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 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 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. We entered into two
interest rate cap agreements on April 8, 2013 and September 6, 2013 with a notional amount of $128 million and $60 million, respectively, which effectively place an upper limit for three-month LIBOR at 4.0%. 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 year ended December 31, 2013 and 2012, we had no ineffectiveness for such contracts.
Cash
Flow Hedges of Commodities Risk
Our objectives in using commodities derivatives are to add stability to energy costs and
to manage our exposure to fluctuations in natural gas prices. To accomplish this objective, we have historically used natural gas swap agreements as part of our commodities risk management strategy. These hedge agreements are used to exchange the
difference between natural gas prices calculated by reference to an agreed-upon notional principal amount or natural gas quantity.
We had entered into natural gas swap agreements that effectively placed a fixed price for a specific quantity of natural gas. The agreements hedged against the increase in natural gas prices for the
purchase of 420,000 MMBTU. The agreements matured on December 31, 2011.
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 December 31, 2013, and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap agreement
(1)
|
|
|
2016
|
|
|
$
|
188 million
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
(1)
|
Agreements limit
the LIBOR floating interest rate base to 4%.
|
106
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 derivatives instruments on our income statements and our condensed consolidated statements
of comprehensive income for the years ended December 31, 2013, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Deferred gains (losses) from derivatives in OCI, beginning of period
|
|
$
|
(182
|
)
|
|
$
|
(409
|
)
|
|
$
|
(532
|
)
|
Gain (loss) recognized in OCI from derivative instruments
|
|
|
(82
|
)
|
|
|
|
|
|
|
123
|
|
Gain (loss) reclassified from Accumulated OCI
|
|
|
185
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) from derivatives in OCI, end of period
|
|
$
|
(79
|
)
|
|
$
|
(182
|
)
|
|
$
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE NEQUITY-BASED COMPENSATION
During 2009, the board of directors of our then parent company, GGC USS Holdings, LLC, approved, and the parent company
implemented, a management equity program (the Equity Program). The Equity Program granted Class C and Class D member units in the then parent company, GGC USS Holdings, LLC, to three members of executive management. As of
December 31, 2013, all Class C and Class D equity units were vested.
The Class C units vested ratably over five years.
These units have no exercise price and as such the fair value of the incentive units is equal to the fair value of the underlying equity units. The Class D units were fully vested upon grant in 2009. During 2013, the vesting of 210,333 Class C
equity units was accelerated, resulting in a total vesting for the year of 420,667.
Even though the equity was granted at the
former parent company level, we recognized compensation expense related to Class C equity incentive units of $109, $208 and $239 in the years ended December 31, 2013, 2012 and 2011, respectively. During 2013, no Class C equity incentive units
were forfeited. In 2012, we recorded a reversal of previously recognized compensation expense of $11 associated with these units and cancelled the remaining unamortized expense of $109. During 2011, 867,625 Class C equity incentive units were
forfeited resulting in a reversal of previously recognized compensation expense of $344 associated with these units and canceled the remaining unamortized expense of $476.
107
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Our activity with respect to Class C equity incentive units for 2013, 2012, and 2011 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Class C
Units
|
|
|
Class C Unit Grant
Date Weighted Average
Fair Value
|
|
Unvested, December 31, 2010
|
|
|
2,418,834
|
|
|
$
|
0.52
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(499,542
|
)
|
|
$
|
0.52
|
|
Forfeited
|
|
|
(867,625
|
)
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2011
|
|
|
1,051,667
|
|
|
$
|
0.52
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(420,667
|
)
|
|
$
|
0.52
|
|
Forfeited
|
|
|
(210,333
|
)
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2012
|
|
|
420,667
|
|
|
$
|
0.52
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(420,667
|
)
|
|
$
|
0.52
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2013
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of equity incentive units vested for the years ended December 31, 2013, 2012
and 2011 was $0, $219 and $260, respectively.
Fair value of the underlying equity units is determined by utilizing the
Black-Scholes pricing model and taking into consideration the rights and preferences of the underlying equity units.
The
following table illustrates the assumptions used in the Black-Scholes pricing model:
|
|
|
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
Expected volatility
|
|
|
50
|
%
|
Expected term
|
|
|
4 years
|
|
Risk-free interest rateThis is an interpolated rate from the U.S. constant maturity treasury rate
for a term corresponding to the time to liquidity event, as described below. An increase in the risk-free rate will increase compensation expense.
Expected volatilityThis is a measure of the amount by which the price of various comparable companies common stock has fluctuated or is expected to fluctuate. Our common stock was not
publicly-traded at the time of issuance. The comparable companies were selected by analyzing public companies in the industry based on various factors including, but not limited to, company size, financial data availability, active trading volume,
and capital structure. An increase in the expected volatility will increase compensation expense.
Expected termThis is
the period of time over which the underlying equity units are expected to remain outstanding. An increase in the expected term will increase compensation expense.
In July 2011, we adopted the U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan (the 2011 Plan), which provides for grants of stock options, stock appreciation rights, restricted
stock and other incentive-based awards.
108
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
As of December 31, 2013, there were a total of 1,231,540 options outstanding,
296,908 of which are exercisable, at a weighted-average exercise price of $14.30. The options vest on a graded vesting schedule and the related compensation expense is recognized over the vesting period of each separately vesting portion. We
recognized $2.0 million, $2.2 million and $1.0 million of equity-based compensation expense related to these options during the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, there was $4.1 million of
total unrecognized compensation expense related to these options, which is expected to be recognized over a weighted-average period of approximately 2.4 years.
Our activity with respect to stock options for the years ended December 31, 2013, 2012 and 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Range of Exercise
Prices
|
|
|
Weighted
Average
Exercise Price
|
|
|
Fair Value
|
|
Unvested, July 8, 2011 (plan inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,650,386
|
|
|
$
|
10.33 25.00
|
|
|
$
|
14.56
|
|
|
$
|
4.36
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(148,988
|
)
|
|
|
|
|
|
$
|
14.21
|
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2011
|
|
|
1,501,398
|
|
|
$
|
10.33 25.00
|
|
|
$
|
14.60
|
|
|
$
|
3.74
|
|
Granted
|
|
|
572,847
|
|
|
$
|
10.57 24.00
|
|
|
|
14.15
|
|
|
$
|
5.68
|
|
Exercised
|
|
|
(9,528
|
)
|
|
|
10.33
|
|
|
|
10.33
|
|
|
|
4.67
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(241,317
|
)
|
|
|
|
|
|
|
15.34
|
|
|
|
4.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2012
|
|
|
1,823,400
|
|
|
$
|
10.33 25.00
|
|
|
$
|
14.38
|
|
|
$
|
5.04
|
|
Granted
|
|
|
140,000
|
|
|
$
|
20.03 24.59
|
|
|
|
22.48
|
|
|
$
|
10.03
|
|
Exercised
|
|
|
(551,165
|
)
|
|
|
10.33 25.00
|
|
|
|
14.41
|
|
|
|
4.35
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(180,695
|
)
|
|
|
|
|
|
|
16.30
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2013
|
|
|
1,231,540
|
|
|
$
|
10.33 25.00
|
|
|
$
|
15.01
|
|
|
$
|
5.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised in 2013 was $5.9 million. Cash received from options
exercised in 2013 was $7.9 million. The actual tax benefit realized for the tax deductions from option exercises in 2013 totaled $2.3 million.
In calculating the compensation expense for options granted, we have estimated the fair value of each grant issued through December 31, 2013 using the Black-Scholes option-pricing model. The fair
value of stock options granted have been calculated based on the stock price on the date of the option grant, the exercise price of the option and the following assumptions, which are evaluated and revised, as necessary, to reflect market conditions
and experience. These assumptions are the weighted-average of the assumptions used for all grants which occurred during the respective fiscal year.
109
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following table illustrates the assumptions used in the Black-Scholes pricing model
for options granted during the respective fiscal year:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Risk-free interest rate
|
|
|
1.03 1.31
|
%
|
|
|
0.83 1.05
|
%
|
Expected volatility
|
|
|
45
|
%
|
|
|
45
|
%
|
Expected term
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected forfeiture yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rateThis is an interpolated rate from the U.S. constant maturity treasury rate
for a term corresponding to the expected term, as described below. An increase in the risk-free rate will increase compensation expense.
Expected volatilityThis is a measure of the amount by which the price of various comparable companies common stock has fluctuated or is expected to fluctuate, as our common stock has not been
publicly-traded for an adequate period of time. The comparable companies were selected by analyzing public companies in the industry based on various factors including, but not limited to, company size, financial data availability, active trading
volume, and capital structure. An increase in the expected volatility will increase compensation expense.
Expected
termThis is the period of time over which the options are expected to remain outstanding. An increase in the expected term will increase compensation expense. The computation of the expected term is based on the simplified method as our stock
options are standard options and we have little recent history of exercise data. Under the simplified method, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term.
Since January 31, 2012, the date of our initial public offering, we declared a special dividend of $0.50 per share on
December 10, 2012 and three quarterly dividends of $0.125 per share during 2013. Options issued in 2013 all occurred early in the year before dividends were consistently declared. As a result, the dividend yield assumptions for those and all
prior options issued was 0.00%. We will continue to evaluate this assumption as we develop a dividend history and new options are issued.
Our expected forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. We have assumed that there will
be no forfeitures due to the fact that we do not have adequate historical forfeiture data on which to base the assumption.
As
of December 31, 2013, there were a total of 228,403 shares of restricted stock. The restricted stock vests on a graded vesting schedule and the related compensation expense is recognized over the vesting period of each separately vesting
portion. The fair value of the restricted stock awards is equal to the market price of our stock at date of grant. We recognized $976 of equity-based compensation expense related to these restricted stock shares during the year ended
December 31, 2013. As of December 31, 2013, there was $2.1 million of total unrecognized compensation expense related to these restricted stock shares, which is expected to be recognized over a period of 2.3 years.
110
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Grant Date Weighted
Average Fair Value
|
|
Unvested, December 31, 2012
|
|
|
70,000
|
|
|
$
|
15.58
|
|
Granted
|
|
|
180,069
|
|
|
|
22.58
|
|
Vested
|
|
|
(21,666
|
)
|
|
|
17.11
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2013
|
|
|
228,403
|
|
|
$
|
20.95
|
|
NOTE OLEASES
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. Future minimum annual commitments under such operating leases
at December 31, 2013 are as follows:
|
|
|
|
|
2014
|
|
|
23,722
|
|
2015
|
|
|
21,915
|
|
2016
|
|
|
19,726
|
|
2017
|
|
|
17,614
|
|
2018
|
|
|
16,326
|
|
Thereafter
|
|
|
36,125
|
|
|
|
|
|
|
Total future lease commitments
|
|
$
|
135,428
|
|
|
|
|
|
|
Expense related to operating leases and rental agreements for the years ended December 31, 2013,
2012 and 2011 totaled approximately $16.3 million, $11.9 million and $6.5 million, respectively.
As of December 31, 2013
and 2012, we have no obligation under a capital lease.
In general, the above leases include renewal options and provide that
we pay for all utilities, insurance, taxes and maintenance.
NOTE PCOMMITMENTS 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. U.S. Silica was named as a defendant in three claims filed during the year ended December 31, 2013, two filed in 2012 and three filed in 2011. U.S. Silica has been named as a
defendant in similar suits since 1975. As of December 31, 2013, there were 88 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.
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.
111
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share 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 consolidated balance sheets. As of December 31, 2013 and 2012, other noncurrent assets included $313 and
$247, respectively, for insurance for third-party products liability claims and other long-term obligations included $1.6 million and $1.3 million, respectively, in third-party products claims liability. Based on decreases in the actual claims filed
during the periods along with decreases in the estimated future product liability claims and their related costs, as well as the aforementioned settlement, we recorded pre-tax adjustments to selling, general and administrative expenses related to
silica claims (including a $0.5 million loss in 2013, a $3.4 million gain in 2012, and a $2.6 million gain in 2011).
NOTE QINCOME 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.
The (expense) benefit for
income taxes consisted of the following for the years ended December 31, 2013, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(20,819
|
)
|
|
$
|
(22,165
|
)
|
|
$
|
(3,222
|
)
|
State
|
|
|
(1,831
|
)
|
|
|
(6,237
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,650
|
)
|
|
|
(28,402
|
)
|
|
|
(3,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,453
|
|
|
|
(3,645
|
)
|
|
|
(2,624
|
)
|
State
|
|
|
436
|
|
|
|
1,396
|
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,889
|
|
|
|
(2,249
|
)
|
|
|
(3,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(20,761
|
)
|
|
$
|
(30,651
|
)
|
|
$
|
(7,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recognized for the estimated future tax effects, based on enacted
tax laws, of temporary differences between the values of assets and liabilities recorded for financial reporting and for tax purposes and of net operating loss and other carry forwards.
112
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The tax effects of the types of temporary differences and carry forwards that gave rise
to deferred tax assets and liabilities at December 31, 2013 and 2012 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
State tax credits and net operating loss carry forward
|
|
$
|
1,007
|
|
|
$
|
924
|
|
Pension and post-retirement benefit costs
|
|
|
15,579
|
|
|
|
22,427
|
|
Alternative minimum tax credit carry forward
|
|
|
22,528
|
|
|
|
25,889
|
|
Property, plant and equipment
|
|
|
6,109
|
|
|
|
5,113
|
|
Accrued expenses
|
|
|
3,818
|
|
|
|
2,272
|
|
Inventories
|
|
|
5,863
|
|
|
|
1,689
|
|
Third-party products liability
|
|
|
674
|
|
|
|
531
|
|
Stock-based compensation expense
|
|
|
1,306
|
|
|
|
1,262
|
|
Other
|
|
|
5,502
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
62,386
|
|
|
$
|
66,126
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Land and mineral property basis difference
|
|
$
|
(61,366
|
)
|
|
$
|
(60,954
|
)
|
Fixed assets and depreciation
|
|
|
(47,016
|
)
|
|
|
(46,396
|
)
|
Intangible assets
|
|
|
(6,788
|
)
|
|
|
(6,957
|
)
|
Other
|
|
|
(797
|
)
|
|
|
(822
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(115,967
|
)
|
|
|
(115,129
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(53,581
|
)
|
|
|
(49,003
|
)
|
Less: Net current deferred tax assets
|
|
|
(17,737
|
)
|
|
|
(10,108
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term deferred tax liabilities
|
|
$
|
(71,318
|
)
|
|
$
|
(59,111
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2013 and 2012, we have an alternative minimum tax credit carry forward at
December 31, 2013 and 2012 of approximately $22.5 million and $25.9 million, respectively. The credit carry forward may be carried forward indefinitely to offset any excess of regular tax liability over alternative minimum tax liability subject
to certain limitations.
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 December 31, 2013 or December 31, 2012 and does not expect this to change
significantly within the next twelve months. Tax returns filed with the IRS for the years 2010 through 2012 along with tax returns filed with numerous state entities remain subject to examination.
113
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Excess tax benefits from equity-based compensation are credited to stockholders
equity. The excess tax benefits credited to stockholders equity were $1.4 million for the year ended December 31, 2013. There were no excess tax benefits for the years ended December 31, 2012 and 2011.
The effective income tax rate on pretax earnings differed from the U.S. federal statutory rate for the years ended December 31,
2013, 2012 and 2011 for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
(Expense) benefit computed at U.S. federal statutory rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
Decrease (increase) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage depletion
|
|
|
11.0
|
|
|
|
9.9
|
|
|
|
17.5
|
|
Prior year tax return reconciliation
|
|
|
1.9
|
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
State income taxes, net of federal benefit
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
|
|
(1.6
|
)
|
Domestic production deduction
|
|
|
2.4
|
|
|
|
0.7
|
|
|
|
|
|
Medicare Part D subsidy
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Other, net
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(21.6
|
)%
|
|
|
(27.9
|
)%
|
|
|
(19.1
|
)%
|
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.
We are evaluating the potential impact of the final Treasury regulations released on September 13, 2013 concerning amounts paid to acquire, produce or improve tangible property and recovery of basis
upon disposition. We are determining whether or not any changes in accounting method will be required and if they will result in a material impact to our financial statements. At this time, we do not anticipate there being a material impact.
NOTE RPENSION 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 employees 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.
We employ a total rate of return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk
tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity
investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability
measurements, and periodic asset/liability studies.
114
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
We employ a building block approach in determining the long-term rate of return for plan
assets. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return
over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper
consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.
In addition, we provide defined benefit post-retirement healthcare 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 contribute to a Voluntary Employees Beneficiary Association trust that will be used to partially fund health care benefits for
future retirees. Benefits are funded to the extent contributions are tax deductible, which under current legislation is limited. In general, retiree health benefits are paid as covered expenses are incurred.
Net pension benefit cost consisted of the following for the years ended December 31, 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service costbenefits earned during the period
|
|
$
|
1,280
|
|
|
$
|
1,118
|
|
|
$
|
1,145
|
|
Interest cost
|
|
|
4,198
|
|
|
|
4,734
|
|
|
|
4,755
|
|
Expected return on plan assets
|
|
|
(5,061
|
)
|
|
|
(5,381
|
)
|
|
|
(4,817
|
)
|
Net amortization and deferral
|
|
|
1,904
|
|
|
|
1,105
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension benefit costs
|
|
$
|
2,321
|
|
|
$
|
1,576
|
|
|
$
|
1,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net post-retirement cost consisted of the following for the years ended December 31, 2013, 2012 and
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service costbenefits earned during the period
|
|
$
|
193
|
|
|
$
|
197
|
|
|
$
|
185
|
|
Interest cost
|
|
|
947
|
|
|
|
1,163
|
|
|
|
1,161
|
|
Expected return on plan assets
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Net amortization and deferral
|
|
|
87
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net post-retirement costs
|
|
$
|
1,223
|
|
|
$
|
1,533
|
|
|
$
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The changes in benefit obligations and plan assets, as well as the funded status of our
pension and post-retirement plans at December 31, 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Post-retirement Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Benefit obligation at January 1,
|
|
$
|
107,619
|
|
|
$
|
100,083
|
|
|
$
|
25,717
|
|
|
$
|
26,528
|
|
Service cost
|
|
|
1,280
|
|
|
|
1,118
|
|
|
|
193
|
|
|
|
197
|
|
Interest cost
|
|
|
4,198
|
|
|
|
4,734
|
|
|
|
947
|
|
|
|
1,163
|
|
Actuarial gain (loss)
|
|
|
(8,071
|
)
|
|
|
10,255
|
|
|
|
(3,933
|
)
|
|
|
(1,087
|
)
|
Benefits paid
|
|
|
(5,749
|
)
|
|
|
(9,238
|
)
|
|
|
(1,102
|
)
|
|
|
(1,529
|
)
|
Amendments
|
|
|
551
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
439
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31,
|
|
$
|
99,828
|
|
|
$
|
107,619
|
|
|
$
|
22,261
|
|
|
$
|
25,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1,
|
|
$
|
80,850
|
|
|
$
|
74,596
|
|
|
$
|
54
|
|
|
$
|
54
|
|
Actual return on plan assets
|
|
|
7,986
|
|
|
|
10,711
|
|
|
|
8
|
|
|
|
|
|
Employer contributions
|
|
|
2,280
|
|
|
|
4,781
|
|
|
|
652
|
|
|
|
1,084
|
|
Benefits paid
|
|
|
(5,749
|
)
|
|
|
(9,238
|
)
|
|
|
(1,102
|
)
|
|
|
(1,529
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
439
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31,
|
|
$
|
85,367
|
|
|
$
|
80,850
|
|
|
$
|
51
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than benefit obligations at December 31 recognized as liability for pension and other post-retirement
benefits
|
|
$
|
(14,461
|
)
|
|
$
|
(26,768
|
)
|
|
$
|
(22,210
|
)
|
|
$
|
(25,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the defined benefit pension plans, which excludes the assumption
of future salary increases, totaled $99.4 million and $107.0 million at December 31, 2013 and 2012, respectively.
The
amendments in 2012 reflect plan changes including increases in the benefit multiplier for certain participants as well as the reduction of certain benefits to estimated highly compensated salary participants.
We also sponsor unfunded, nonqualified pension plans. The projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for these plans were $1.6 million, $1.6 million and $0 at December 31, 2013 and $1.7 million, $1.7 million and $0 million at December 31, 2012.
Future estimated annual benefit payments for pension and post-retirement benefit obligations as of December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
|
|
|
Post-retirement
|
|
|
|
Pension
|
|
|
Before
Medicare
Subsidy
|
|
|
After
Medicare
Subsidy
|
|
2014
|
|
|
6,104
|
|
|
|
1,524
|
|
|
|
1,354
|
|
2015
|
|
|
6,295
|
|
|
|
1,550
|
|
|
|
1,369
|
|
2016
|
|
|
6,514
|
|
|
|
1,596
|
|
|
|
1,404
|
|
2017
|
|
|
6,802
|
|
|
|
1,696
|
|
|
|
1,495
|
|
2018
|
|
|
7,039
|
|
|
|
1,722
|
|
|
|
1,513
|
|
2019-2022
|
|
|
36,711
|
|
|
|
9,080
|
|
|
|
7,960
|
|
116
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Our best estimate of expected contributions to the pension and post-retirement medical
benefit plans for the 2014 fiscal year are $4.6 million and $1.4 million, respectively.
The amounts in accumulated other
comprehensive income expected to be recognized as components of net periodic benefit cost during the 2014 fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Total
|
|
Net actuarial loss
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
485
|
|
Prior service cost
|
|
|
201
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
686
|
|
|
$
|
|
|
|
$
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total amounts in accumulated other comprehensive income related to net actuarial loss and prior
service costs, net of tax, as of December 31, 2013 were $3.4 and $2.3 million, respectively.
The following
weighted-average assumptions were used to determine our obligations under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Post-retirement Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Discount rate
|
|
|
4.8
|
%
|
|
|
4.00
|
%
|
|
|
4.8
|
%
|
|
|
4.00
|
%
|
Long-term rate of compensation increase
|
|
|
3.5
|
%
|
|
|
3.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Long-term rate of return on plan assets
|
|
|
7.5
|
%
|
|
|
8.00
|
%
|
|
|
7.5
|
%
|
|
|
8.00
|
%
|
Health care cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-65 initial rate/ultimate rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8%/5
|
%
|
|
|
8.5%/5
|
%
|
Pre-65 ultimate year
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0
|
|
|
|
0
|
|
Post-65 initial rate/ultimate rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
7.3%/5
|
%
|
|
|
7.5%/5
|
%
|
Post-65 ultimate year
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2021
|
|
|
|
2020
|
|
The discount rate reflects the expected long-term rates of return with maturities comparable to payments
for the plan obligations utilizing Aon Hewitts AA Only Above Medium Curve, rounded down to the next 0.05%.
Assumed
health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
Effect on total of service and interest cost
|
|
$
|
145
|
|
|
$
|
(122
|
)
|
Effect on post-retirement benefit obligation
|
|
|
2,535
|
|
|
|
(2,163
|
)
|
The major investment categories and their relative percentage of the fair value of total plan assets as
invested at December 31, 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Post-retirement Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Equity securities
|
|
|
57.4
|
%
|
|
|
59.9
|
%
|
|
|
59.0
|
%
|
|
|
58.7
|
%
|
Debt securities
|
|
|
36.6
|
%
|
|
|
38.6
|
%
|
|
|
29.5
|
%
|
|
|
39.2
|
%
|
Cash
|
|
|
6.0
|
%
|
|
|
1.5
|
%
|
|
|
11.5
|
%
|
|
|
2.1
|
%
|
117
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The fair values of the pension plan assets at December 31, 2013, by asset category,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
5,067
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,067
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified emerging markets
|
|
|
7,753
|
|
|
|
|
|
|
|
|
|
|
|
7,753
|
|
Foreign large blend
|
|
|
13,851
|
|
|
|
|
|
|
|
|
|
|
|
13,851
|
|
Large-cap blend
|
|
|
17,804
|
|
|
|
|
|
|
|
|
|
|
|
17,804
|
|
Long-term bonds
|
|
|
31,230
|
|
|
|
|
|
|
|
|
|
|
|
31,230
|
|
Mid-cap blend
|
|
|
5,807
|
|
|
|
|
|
|
|
|
|
|
|
5,807
|
|
Real estate
|
|
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
3,776
|
|
Insurance policies
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
85,288
|
|
|
$
|
|
|
|
$
|
79
|
|
|
$
|
85,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the pension plan assets at December 31, 2012, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
1,208
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,208
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified emerging markets
|
|
|
8,186
|
|
|
|
|
|
|
|
|
|
|
|
8,186
|
|
Foreign large blend
|
|
|
13,827
|
|
|
|
|
|
|
|
|
|
|
|
13,827
|
|
Large-cap blend
|
|
|
16,666
|
|
|
|
|
|
|
|
|
|
|
|
16,666
|
|
Long-term bonds
|
|
|
31,198
|
|
|
|
|
|
|
|
|
|
|
|
31,198
|
|
Mid-cap blend
|
|
|
5,650
|
|
|
|
|
|
|
|
|
|
|
|
5,650
|
|
Real estate
|
|
|
4,026
|
|
|
|
|
|
|
|
|
|
|
|
4,026
|
|
Insurance policies
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
80,761
|
|
|
|
|
|
|
$
|
89
|
|
|
$
|
80,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The risks of participating in multiemployer plans differ from single
employer plans as follows: 1) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, 2) if a participating employer stops contributing to the plan, the unfunded
obligations of the plan may be borne by the remaining participating employers, and 3) if we cease to have an obligation to contribute to one or more of the multiemployer plans to which we contribute, we may be required to pay those plans an amount
based on the underfunded status of the plan, referred to as a withdrawal liability.
118
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
A summary of each multiemployer pension plan for which we participate is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Fund
|
|
EIN/ Pension
Plan No.
|
|
|
Pension Protection Act
Zone Status
(1)
|
|
|
FIP/RP
Status
Pending/
Implemented
|
|
|
Company
Contributions
|
|
|
Surcharge
Imposed
|
|
|
Expiration
Date of
CBA
|
|
|
|
2013
|
|
|
2012
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
LIUNA
|
|
|
52-6074345/001
|
|
|
|
Red
|
|
|
|
Red
|
|
|
|
Yes
|
|
|
$
|
124
|
|
|
$
|
123
|
|
|
$
|
116
|
|
|
|
Yes
|
|
|
|
5/31/2014
|
|
IUOE
|
|
|
36-6052390/001
|
|
|
|
Green
|
|
|
|
Green
|
|
|
|
No
|
|
|
|
22
|
|
|
|
19
|
|
|
|
16
|
|
|
|
No
|
|
|
|
7/31/2015
|
|
CSSS
(2)
|
|
|
36-6044243/001
|
|
|
|
Red
|
|
|
|
Red
|
|
|
|
Yes
|
|
|
|
51
|
|
|
|
51
|
|
|
|
26
|
|
|
|
NA
|
|
|
|
NA
|
|
(1)
|
The Pension Protection Act of 2006 defines the zone status as follows: greenhealthy, yellowendangered, orangeseriously endangered and
redcritical.
|
(2)
|
In 2011, we withdrew from the Central States, Southeast and Southwest Areas Pension Plan. The withdrawal liability of $1.0 million will be paid in
monthly installments of $4 until 2031.
|
Our contributions to individual multiemployer pension funds did not
exceed 5% of the funds total contributions in any of the three years ended December 31, 2013. Additionally, our contributions to multiemployer postretirement benefit plans were immaterial for all periods presented in the accompanying
consolidated financial statements.
We also sponsor a defined contribution plan covering certain employees. We contribute to
the plan in two ways. For certain employees not covered by the defined benefit plan, we make a contribution equal to 4% of their salary. We also contribute an employee match of 25 cents, based on financial performance, for each dollar contributed by
an employee, up to 8% of their earnings. For certain employees, we make a profit sharing match up to 75 cents, based on financial performance, for each dollar contributed up to 8% of their earnings. Finally, for some employees, we make a catch-up
match of 25 cents for each dollar of catch-up contributions. Contributions were $1.7 million, $1.4 million and $1.0 million for the years ended December, 31, 2013, 2012 and 2011, respectively.
NOTE SOBLIGATIONS UNDER GUARANTEES
We have indemnified Travelers Casualty and Surety Company of America (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 December 31, 2013, Travelers had $7.7 million in bonds outstanding for us. The majority of these bonds ($7.6 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 behalf of us by Safeco, execute the bonds. As of December 31, 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 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.
119
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE TRELATED PARTY TRANSACTIONS
Advisory Agreement
In connection with our acquisition by Golden Gate Capital, we entered into an Advisory Agreement with Golden Gate Capital 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 $1.25 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. The $8.0 million termination fee was accrued for at December 31, 2011 and no additional expense has been recognized during the year ended December 31, 2012.
Advisory fees paid to Golden Gate Capital under the Advisory Agreement in 2011 were $1.3 million. These expenses are included in other operating expenses and presented as advisory fees to parent within our income statements.
Promissory Note
On
December 22, 2010, we entered into a $15.0 million promissory note with our former parent, GGC USS Holdings, LLC. 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 were payable upon demand, but no later than the maturity date. Upon sole election by GGC Holdings, any unpaid interest could be paid in cash on each December 22 of each
year until the maturity date. As of and for the year ended December 31, 2011, interest on the note is recorded in interest expense in the Income Statements and any unpaid interest is included in accrued interest on the Balance Sheet. 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.
As of December, 31, 2013, GGC USS Holdings, LLC held no interest in U.S. Silica after divesting its ownership interest in U.S. Silica
during 2013.
NOTE USEGMENT 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.
120
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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 its 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 years ended December 31, 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas proppants
|
|
$
|
347,439
|
|
|
$
|
243,765
|
|
|
$
|
107,074
|
|
Industrial and specialty products
|
|
|
198,546
|
|
|
|
198,156
|
|
|
|
188,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
545,985
|
|
|
|
441,921
|
|
|
|
295,596
|
|
Segment contribution margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas proppants
|
|
|
145,916
|
|
|
|
140,070
|
|
|
|
67,590
|
|
Industrial and specialty products
|
|
|
56,983
|
|
|
|
53,601
|
|
|
|
53,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment contribution margin
|
|
|
202,899
|
|
|
|
193,671
|
|
|
|
120,603
|
|
Operating activities excluded from segment cost of goods sold
|
|
|
(5,481
|
)
|
|
|
(8,285
|
)
|
|
|
(6,203
|
)
|
Selling, general and administrative
|
|
|
(49,759
|
)
|
|
|
(41,299
|
)
|
|
|
(23,348
|
)
|
Advisory fees to parent
|
|
|
|
|
|
|
|
|
|
|
(9,250
|
)
|
Depreciation, depletion and amortization
|
|
|
(36,418
|
)
|
|
|
(25,099
|
)
|
|
|
(20,999
|
)
|
Interest expense
|
|
|
(15,341
|
)
|
|
|
(13,795
|
)
|
|
|
(18,407
|
)
|
Early extinguishment of debt
|
|
|
(480
|
)
|
|
|
|
|
|
|
(6,043
|
)
|
Other income, net, including interest income
|
|
|
597
|
|
|
|
4,612
|
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
96,017
|
|
|
$
|
109,805
|
|
|
$
|
37,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 & Specialty Products. No customer exceeded 10% or more of net sales in any of the periods presented.
121
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE VUNAUDITED SUPPLEMENTARY DATA
The following table sets forth our unaudited quarterly consolidated statements of operations for each of the last four
quarters ended December 31, 2013 and 2012. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that
are necessary to present fairly the financial information for the fiscal quarters presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
122,311
|
|
|
$
|
129,828
|
|
|
$
|
144,372
|
|
|
$
|
149,474
|
|
Costs of goods sold
|
|
|
74,412
|
|
|
|
80,297
|
|
|
|
90,983
|
|
|
|
102,875
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
12,404
|
|
|
|
10,099
|
|
|
|
12,800
|
|
|
|
14,456
|
|
Depreciation, depletion and amortization
|
|
|
8,278
|
|
|
|
8,890
|
|
|
|
9,152
|
|
|
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,682
|
|
|
|
18,989
|
|
|
|
21,952
|
|
|
|
24,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,217
|
|
|
|
30,542
|
|
|
|
31,437
|
|
|
|
22,045
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,576
|
)
|
|
|
(3,535
|
)
|
|
|
(4,144
|
)
|
|
|
(4,086
|
)
|
Early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
Other income, net, including interest income
|
|
|
122
|
|
|
|
63
|
|
|
|
260
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,454
|
)
|
|
|
(3,472
|
)
|
|
|
(4,364
|
)
|
|
|
(3,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
23,763
|
|
|
|
27,070
|
|
|
|
27,073
|
|
|
|
18,111
|
|
Income tax expense
|
|
|
(6,486
|
)
|
|
|
(6,878
|
)
|
|
|
(5,739
|
)
|
|
|
(1,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,277
|
|
|
$
|
20,192
|
|
|
$
|
21,334
|
|
|
$
|
16,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic
|
|
$
|
0.33
|
|
|
$
|
0.38
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
Earnings per share, diluted
|
|
$
|
0.32
|
|
|
$
|
0.38
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
Weighted average common shares outstanding (in thousands), basic
|
|
|
52,946
|
|
|
|
52,948
|
|
|
|
53,103
|
|
|
|
53,035
|
|
Weighted average common shares outstanding (in thousands), diluted
|
|
|
52,211
|
|
|
|
53,227
|
|
|
|
53,429
|
|
|
|
53,409
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
102,591
|
|
|
$
|
104,599
|
|
|
$
|
115,885
|
|
|
$
|
118,846
|
|
Costs of goods sold
|
|
|
56,921
|
|
|
|
58,920
|
|
|
|
69,706
|
|
|
|
70,988
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
9,904
|
|
|
|
9,718
|
|
|
|
10,135
|
|
|
|
11,542
|
|
Depreciation, depletion and amortization
|
|
|
5,978
|
|
|
|
5,974
|
|
|
|
5,968
|
|
|
|
7,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,882
|
|
|
|
15,692
|
|
|
|
16,103
|
|
|
|
18,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
29,788
|
|
|
|
29,987
|
|
|
|
30,076
|
|
|
|
29,137
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,797
|
)
|
|
|
(3,428
|
)
|
|
|
(3,326
|
)
|
|
|
(3,244
|
)
|
Other income, net, including interest income
|
|
|
154
|
|
|
|
179
|
|
|
|
348
|
|
|
|
3,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,643
|
)
|
|
|
(3,249
|
)
|
|
|
(2,978
|
)
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26,145
|
|
|
|
26,738
|
|
|
|
27,098
|
|
|
|
29,824
|
|
Income tax (expense) benefit
|
|
|
(7,032
|
)
|
|
|
(7,287
|
)
|
|
|
(8,302
|
)
|
|
|
(8,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,113
|
|
|
$
|
19,451
|
|
|
$
|
18,796
|
|
|
$
|
21,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basis and diluted
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
0.36
|
|
|
$
|
0.41
|
|
Weighted average common shares outstanding (in thousands), basic
|
|
|
51,939
|
|
|
|
52,440
|
|
|
|
52,873
|
|
|
|
52,891
|
|
Weighted average common shares outstanding (in thousands), diluted
|
|
|
52,031
|
|
|
|
52,505
|
|
|
|
52,887
|
|
|
|
52,963
|
|
122
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE WSUBSEQUENT EVENTS
On January 3, 2014, we paid a cash dividend of $0.125 per share to common stockholders of record on
December 16, 2013, as had been declared by our Board of Directors on October 24, 2013.
On January 29, 2014,
Travelers Casualty and Surety Company of America released a letter of credit it previously held as collateral for surety bonds in the amount of $4.4 million. A corresponding amount of liquidity, therefore, became available under the Revolver as of
that date.
On February 6, 2014, 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 March 14, 2014, payable on April 1, 2014.
123