|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(unaudited)
|
|
(audited)
|
ASSETS
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
105,974
|
|
|
$
|
78,256
|
|
Short-term investments
|
75,101
|
|
|
74,980
|
|
Accounts receivable, net
|
108,452
|
|
|
75,207
|
|
Inventories, net
|
58,650
|
|
|
64,212
|
|
Prepaid expenses and other current assets
|
8,936
|
|
|
6,347
|
|
Deferred income taxes, net
|
18,582
|
|
|
17,737
|
|
Income tax deposits
|
5,074
|
|
|
—
|
|
Total current assets
|
380,769
|
|
|
316,739
|
|
Property, plant and mine development, net
|
441,450
|
|
|
442,116
|
|
Debt issuance costs, net
|
4,815
|
|
|
5,255
|
|
Goodwill
|
68,403
|
|
|
68,403
|
|
Trade names
|
10,436
|
|
|
10,436
|
|
Customer relationships, net
|
5,915
|
|
|
6,120
|
|
Other assets
|
11,073
|
|
|
14,392
|
|
Total assets
|
$
|
922,861
|
|
|
$
|
863,461
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current Liabilities:
|
|
|
|
Book overdraft
|
$
|
3,466
|
|
|
$
|
4,659
|
|
Accounts payable
|
52,826
|
|
|
37,376
|
|
Dividends payable
|
6,770
|
|
|
6,709
|
|
Accrued liabilities
|
13,020
|
|
|
10,823
|
|
Accrued interest
|
41
|
|
|
41
|
|
Current portion of long-term debt
|
3,489
|
|
|
3,488
|
|
Income tax payable
|
—
|
|
|
1,037
|
|
Total current liabilities
|
79,612
|
|
|
64,133
|
|
Long-term debt
|
366,218
|
|
|
367,963
|
|
Liability for pension and other post-retirement benefits
|
34,431
|
|
|
36,802
|
|
Deferred income taxes, net
|
74,203
|
|
|
71,318
|
|
Other long-term obligations
|
14,913
|
|
|
13,951
|
|
Total liabilities
|
569,377
|
|
|
554,167
|
|
Stockholders’ Equity:
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
Common stock
|
538
|
|
|
534
|
|
Additional paid-in capital
|
185,155
|
|
|
174,799
|
|
Retained earnings
|
171,540
|
|
|
137,978
|
|
Treasury stock, at cost
|
—
|
|
|
—
|
|
Accumulated other comprehensive loss
|
(3,749
|
)
|
|
(4,017
|
)
|
Total stockholders’ equity
|
353,484
|
|
|
309,294
|
|
Total liabilities and stockholders’ equity
|
$
|
922,861
|
|
|
$
|
863,461
|
|
The accompanying notes are an integral part of these financial statements.
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Sales
|
$
|
205,801
|
|
|
$
|
129,828
|
|
|
$
|
385,896
|
|
|
$
|
252,139
|
|
Cost of goods sold (excluding depreciation, depletion and amortization)
|
132,417
|
|
|
80,297
|
|
|
259,187
|
|
|
154,709
|
|
Operating expenses
|
|
|
|
|
|
|
|
Selling, general and administrative
|
19,267
|
|
|
10,099
|
|
|
34,712
|
|
|
22,503
|
|
Depreciation, depletion and amortization
|
10,341
|
|
|
8,890
|
|
|
19,930
|
|
|
17,168
|
|
|
29,608
|
|
|
18,989
|
|
|
54,642
|
|
|
39,671
|
|
Operating income
|
43,776
|
|
|
30,542
|
|
|
72,067
|
|
|
57,759
|
|
Other (expense) income
|
|
|
|
|
|
|
|
Interest expense
|
(4,013
|
)
|
|
(3,535
|
)
|
|
(7,821
|
)
|
|
(7,111
|
)
|
Other income, net, including interest income
|
221
|
|
|
63
|
|
|
259
|
|
|
185
|
|
|
(3,792
|
)
|
|
(3,472
|
)
|
|
(7,562
|
)
|
|
(6,926
|
)
|
Income before income taxes
|
39,984
|
|
|
27,070
|
|
|
64,505
|
|
|
50,833
|
|
Income tax expense
|
(11,330
|
)
|
|
(6,878
|
)
|
|
(17,480
|
)
|
|
(13,364
|
)
|
Net income
|
$
|
28,654
|
|
|
$
|
20,192
|
|
|
$
|
47,025
|
|
|
$
|
37,469
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.53
|
|
|
$
|
0.38
|
|
|
$
|
0.88
|
|
|
$
|
0.71
|
|
Diluted
|
$
|
0.53
|
|
|
$
|
0.38
|
|
|
$
|
0.87
|
|
|
$
|
0.70
|
|
The accompanying notes are an integral part of these financial statements.
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income
|
$
|
28,654
|
|
|
$
|
20,192
|
|
|
$
|
47,025
|
|
|
$
|
37,469
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivatives (net of tax of ($22) and $101 for the three months ended June 30, 2014 and 2013, respectively, and ($34) and $152 for the six months ended June 30, 2014 and 2013, respectively)
|
(34
|
)
|
|
157
|
|
|
(53
|
)
|
|
238
|
|
Unrealized gain (loss) on investments (net of tax of ($5) and $0 for the three months ended June 30, 2014 and 2013, respectively, and $14 and $0 for the six months ended June 30, 2014 and 2013, respectively)
|
(6
|
)
|
|
—
|
|
|
23
|
|
|
—
|
|
Pension and other post-retirement benefits liability adjustment (net of tax of $95 and $217 for the three months ended June 30, 2014 and 2013, respectively, and $190 and $434 for the six months ended June 30, 2014 and 2013, respectively)
|
149
|
|
|
341
|
|
|
298
|
|
|
682
|
|
Comprehensive income
|
$
|
28,763
|
|
|
$
|
20,690
|
|
|
$
|
47,293
|
|
|
$
|
38,389
|
|
The accompanying notes are an integral part of these financial statements.
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
Balance at December 31, 2013
|
$
|
534
|
|
|
$
|
—
|
|
|
$
|
174,799
|
|
|
$
|
137,978
|
|
|
$
|
(4,017
|
)
|
|
$
|
309,294
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
47,025
|
|
|
—
|
|
|
47,025
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
268
|
|
|
268
|
|
Proceeds from options exercised
|
4
|
|
|
534
|
|
|
4,172
|
|
|
—
|
|
|
—
|
|
|
4,710
|
|
Shares withheld for employee taxes related to vested restricted stock
|
—
|
|
|
(534
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(534
|
)
|
Cash dividends declared ($ 0.25 per share of common stock)
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,463
|
)
|
|
—
|
|
|
(13,463
|
)
|
Equity-based compensation
|
—
|
|
|
—
|
|
|
3,383
|
|
|
—
|
|
|
—
|
|
|
3,383
|
|
Excess tax benefit from equity-based compensation
|
—
|
|
|
—
|
|
|
2,801
|
|
|
—
|
|
|
—
|
|
|
2,801
|
|
Balance at June 30, 2014
|
$
|
538
|
|
|
$
|
—
|
|
|
$
|
185,155
|
|
|
$
|
171,540
|
|
|
$
|
(3,749
|
)
|
|
$
|
353,484
|
|
The accompanying notes are an integral part of these financial statements.
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
Operating activities:
|
|
|
|
Net income
|
$
|
47,025
|
|
|
$
|
37,469
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation, depletion and amortization
|
19,930
|
|
|
17,168
|
|
Debt issuance amortization
|
439
|
|
|
262
|
|
Original issue discount amortization
|
131
|
|
|
84
|
|
Deferred income taxes
|
2,042
|
|
|
3,056
|
|
Deferred revenue
|
—
|
|
|
(4,285
|
)
|
Loss on disposal of property, plant and equipment
|
79
|
|
|
47
|
|
Equity-based compensation
|
3,383
|
|
|
1,383
|
|
Excess tax benefit from equity-based compensation
|
(2,801
|
)
|
|
(185
|
)
|
Other
|
3,184
|
|
|
(3,190
|
)
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable
|
(33,926
|
)
|
|
(2,220
|
)
|
Inventories
|
5,562
|
|
|
(12,355
|
)
|
Prepaid expenses and other current assets
|
(2,659
|
)
|
|
1,228
|
|
Income taxes
|
(3,310
|
)
|
|
(22,292
|
)
|
Accounts payable and accrued liabilities
|
17,647
|
|
|
(6,925
|
)
|
Accrued interest
|
—
|
|
|
146
|
|
Liability for pension and other post-retirement benefits
|
(1,504
|
)
|
|
774
|
|
Net cash provided by operating activities
|
55,222
|
|
|
10,165
|
|
Investing activities:
|
|
|
|
Capital expenditures
|
(18,011
|
)
|
|
(31,213
|
)
|
Proceeds from sale of property, plant and equipment
|
—
|
|
|
81
|
|
Net cash used in investing activities
|
(18,011
|
)
|
|
(31,132
|
)
|
Financing activities:
|
|
|
|
Dividends paid
|
(13,402
|
)
|
|
—
|
|
Proceeds from options exercised
|
4,710
|
|
|
2,164
|
|
Excess tax benefit from equity-based compensation
|
2,801
|
|
|
185
|
|
Shares withheld to pay taxes due upon vesting of restricted stock
|
—
|
|
|
(145
|
)
|
Tax payments related to shares withheld for vested restricted stock
|
(534
|
)
|
|
—
|
|
Repayment of long-term debt
|
(1,875
|
)
|
|
(1,300
|
)
|
Change in book overdraft
|
(1,193
|
)
|
|
(377
|
)
|
Change in revolving credit facility
|
—
|
|
|
6,866
|
|
Principal payments on capital lease obligations
|
—
|
|
|
(380
|
)
|
Net cash provided by (used in) financing activities
|
(9,493
|
)
|
|
7,013
|
|
Net increase (decrease) in cash and cash equivalents
|
27,718
|
|
|
(13,954
|
)
|
Cash and cash equivalents, beginning of period
|
78,256
|
|
|
61,022
|
|
Cash and cash equivalents, end of period
|
$
|
105,974
|
|
|
$
|
47,068
|
|
Supplemental cash flow information:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
7,668
|
|
|
$
|
6,468
|
|
Taxes
|
$
|
18,920
|
|
|
$
|
33,185
|
|
The accompanying notes are an integral part of these financial statements.
U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; dollars in thousands, except per share amounts)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) of U.S. Silica Holdings, Inc. (“Holdings,” and together with its subsidiaries “we,” “us” or the “Company”) included in this Quarterly Report on Form 10-Q , have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). They do not contain certain information included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2013
; therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation of the Financial Statements have been included. Such adjustments are of a normal, recurring nature. We have reclassified certain immaterial amounts in the prior years’ assets section of the consolidated balance sheets and operating activities section of the consolidated statement of cash flows to conform to the current year presentation. These reclassifications had no effect on previously reported total assets and net cash flows from operations.
In order to make this report easier to read, we refer throughout to (i) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (ii) our Condensed Consolidated Statements of Operations as our “Income Statements,” and (iii) our Condensed Consolidated Statements of Cash Flows as our “Cash Flows.”
Unaudited Interim Financial Statements
The accompanying Balance Sheet as of
June 30, 2014
; the Income Statements for the
three and six
months ended
June 30, 2014
and
2013
; the Condensed Consolidated Statements of Comprehensive Income for the
three and six
months ended
June 30, 2014
and
2013
; the Condensed Consolidated Statements of Stockholders' Equity for the
six
months ended
June 30, 2014
; the Cash Flows for the
six
months ended
June 30, 2014
and
2013
; and other information disclosed in the related notes are unaudited. The Balance Sheet as of
December 31, 2013
was derived from our audited consolidated financial statements as included in our
2013
Annual Report.
Use of Estimates and Assumptions
The preparation of the Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production amortization calculations; environmental, reclamation and closure obligations; estimates of recoverable minerals; estimates of allowance for doubtful accounts; estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill and other long-lived assets); write-downs of inventory to net realizable value; equity-based compensation expense; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; 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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligations. Additional disclosures will be required to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts. The new standard will become effective beginning with the first quarter 2017 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
NOTE B—EARNINGS PER SHARE
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic 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. We
did not have any
stock options that were antidilutive for the
three and six
months ended
June 30, 2014
and
2013
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income
|
$
|
28,654
|
|
|
$
|
20,192
|
|
|
$
|
47,025
|
|
|
$
|
37,469
|
|
Less: net income allocated to outstanding restricted stockholders
|
(54
|
)
|
|
(23
|
)
|
|
(96
|
)
|
|
(42
|
)
|
Net income allocated to common stockholders
|
$
|
28,600
|
|
|
$
|
20,169
|
|
|
$
|
46,929
|
|
|
$
|
37,427
|
|
Weighted-average common stock
|
|
|
|
|
|
|
|
Outstanding
|
53,733
|
|
|
52,948
|
|
|
53,619
|
|
|
52,948
|
|
Outstanding assuming dilution
|
54,262
|
|
|
53,227
|
|
|
54,163
|
|
|
53,227
|
|
NOTE C—CAPITAL 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
53,847,267
shares of common stock issued and outstanding at
June 30, 2014
. As of
June 30, 2013
, there were
53,069,657
shares issued and outstanding.
In 2014, our Board of Directors declared quarterly cash dividends as follows:
|
|
|
|
|
|
|
|
|
|
Dividends per Common Share
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
$
|
0.125
|
|
|
February 6, 2014
|
|
March 14, 2014
|
|
April 1, 2014
|
$
|
0.125
|
|
|
April 25, 2014
|
|
June 13, 2014
|
|
July 3, 2014
|
All dividends were paid as scheduled.
Any determination to pay dividends and other distributions in cash, stock, or property by Holdings in the future will be at the discretion of our Board of Directors and will be dependent on then-existing conditions, including our business 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, to fix the powers, preferences and other rights of such series, and any qualifications, limitations or restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption rights and liquidation preference, and to fix the number of shares to be included in any such series, without any further vote or action by our stockholders.
There are
no
shares of preferred stock issued or outstanding at
June 30, 2014
and
2013
. At present, we have no plans to issue any preferred stock.
Share Repurchase Program
On June 11, 2012, our Board of Directors authorized us to repurchase up to
$25.0 million
of our common stock. The authorization was initially for a period of
18 months
, concluding on December 11, 2013, but on November 4, 2013, our 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
June 30, 2014
, we have repurchased
100,000
shares of our common stock at an average price of
$10.72
and are authorized to repurchase up to an additional
$23.9 million
of our common stock. As of
June 30, 2014
, all of the
100,000
shares repurchased to date have been re-issued to satisfy employee option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) consists of fair value adjustments associated with cash flow hedges and accumulated adjustments for net experience losses and prior service cost related to employee benefit plans. The following table presents the changes in accumulated other comprehensive income by component during the
six
months ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2014
|
|
Unrealized
gain/(loss) on
cash flow hedges
|
|
Unrealized
gain/(loss) on
short-term
investments
|
|
Pension and
other
post-retirement
benefits liability
|
|
Total
|
Beginning Balance
|
$
|
(79
|
)
|
|
$
|
(27
|
)
|
|
$
|
(3,911
|
)
|
|
$
|
(4,017
|
)
|
Other comprehensive income (loss) before reclassifications
|
(57
|
)
|
|
23
|
|
|
—
|
|
|
(34
|
)
|
Amounts reclassed from accumulated other comprehensive income
|
4
|
|
|
—
|
|
|
298
|
|
|
302
|
|
Ending Balance
|
$
|
(132
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3,613
|
)
|
|
$
|
(3,749
|
)
|
Amounts reclassed from accumulated other comprehensive income (loss) related to cash flow hedges category are included in interest expense in our Income Statements and amounts reclassed related to pension and other post-retirement benefits liability category are included in the computation of net periodic pension costs, respectively, at their before tax amounts.
NOTE D—ACCOUNTS RECEIVABLE
At
June 30, 2014
and
December 31, 2013
, accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Trade receivables
|
$
|
110,279
|
|
|
$
|
76,223
|
|
Less: Allowance for doubtful accounts
|
(3,057
|
)
|
|
(2,376
|
)
|
Net trade receivables
|
107,222
|
|
|
73,847
|
|
Other receivables
|
1,230
|
|
|
1,360
|
|
Total accounts receivable
|
$
|
108,452
|
|
|
$
|
75,207
|
|
The increase of
$34.1 million
in trade receivables is mainly driven by the sales increase for the
six
months ended
June 30, 2014
.
NOTE E—INVENTORIES
At
June 30, 2014
and
December 31, 2013
, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Supplies
|
$
|
16,394
|
|
|
$
|
15,576
|
|
Raw materials and work in process
|
9,029
|
|
|
11,728
|
|
Finished goods
|
33,227
|
|
|
36,908
|
|
Total inventories
|
$
|
58,650
|
|
|
$
|
64,212
|
|
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.
NOTE F—PROPERTY, PLANT AND MINE DEVELOPMENT
At
June 30, 2014
and
December 31, 2013
, property, plant and mine development consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Mining property and mine development
|
$
|
164,609
|
|
|
$
|
164,609
|
|
Asset retirement cost
|
7,997
|
|
|
7,275
|
|
Land
|
25,797
|
|
|
25,738
|
|
Land improvements
|
31,959
|
|
|
31,093
|
|
Buildings
|
36,619
|
|
|
36,311
|
|
Machinery and equipment
|
270,316
|
|
|
263,304
|
|
Furniture and fixtures
|
1,347
|
|
|
1,131
|
|
Construction-in-progress
|
35,422
|
|
|
25,974
|
|
|
574,066
|
|
|
555,435
|
|
Accumulated depletion, depreciation and amortization
|
(132,616
|
)
|
|
(113,319
|
)
|
Total property, plant and mine development, net
|
$
|
441,450
|
|
|
$
|
442,116
|
|
Depreciation expense, including depletion and amortization, recognized during the
six
months ended
June 30, 2014
and
2013
was
$19.9 million
and
$17.2 million
, respectively. The amount of interest costs capitalized in property, plant and equipment was
$474
and
$259
for the
six
months ended
June 30, 2014
and
2013
, respectively. As of
June 30, 2014
, we hold
no
assets under a capital lease obligation.
NOTE G—DEBT
At
June 30, 2014
and
December 31, 2013
, debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Senior secured credit facility:
|
|
|
|
Revolver expiring July 23, 2018 (4.75% at June 30, 2014 and December 31, 2013)
|
$
|
—
|
|
|
$
|
—
|
|
Term loan facility - final maturity July 23, 2020 (4% at June 30, 2014 and December 31, 2013), net of unamortized original issue discount of $1,543 and $1,674, respectively
|
369,707
|
|
|
371,451
|
|
Total debt
|
369,707
|
|
|
371,451
|
|
Less: current portion
|
(3,489
|
)
|
|
(3,488
|
)
|
Total long-term portion of debt
|
$
|
366,218
|
|
|
$
|
367,963
|
|
Revolving Line-of-Credit
We have a
$50 million
revolving line-of-credit (the “Revolver”), with
zero
drawn and
$3.3 million
allocated for letters of credit as of
June 30, 2014
, leaving
$46.7 million
available under the Revolver.
Debt Maturities
At
June 30, 2014
, contractual maturities of long-term debt are as follows:
|
|
|
|
|
2014
|
$
|
1,744
|
|
2015
|
3,491
|
|
2016
|
3,493
|
|
2017
|
3,495
|
|
2018
|
3,498
|
|
Thereafter
|
353,986
|
|
|
$
|
369,707
|
|
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
June 30, 2014
, we are in compliance with all covenants in accordance with our senior secured credit facility.
NOTE H—ASSET RETIREMENT OBLIGATIONS
Mine reclamation costs, or future remediation costs for inactive mines, are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.
As of
June 30, 2014
and
December 31, 2013
, we had recorded a liability of
$10.4 million
and
$9.4 million
in other long-term obligations related to our asset retirement obligation. Changes in the asset retirement obligation during the
six
months ended
June 30, 2014
and the year ended
December 31, 2013
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Beginning balance
|
$
|
9,378
|
|
|
$
|
6,659
|
|
Payments
|
—
|
|
|
—
|
|
Accretion
|
336
|
|
|
456
|
|
Revisions of prior estimates
|
722
|
|
|
2,263
|
|
Ending balance
|
$
|
10,436
|
|
|
$
|
9,378
|
|
NOTE I—FAIR VALUE ACCOUNTING
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, 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.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash equivalents
Due to the short-term maturity, we believe our cash equivalent instruments at
June 30, 2014
and
December 31, 2013
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
June 30, 2014
, we have assessed that the impact of the credit valuation adjustments on the overall valuation of our derivative positions is not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
In accordance with the fair value hierarchy, the following table presents the fair value as of
June 30, 2014
of those assets that we measure at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Short-term investments
|
$
|
340
|
|
|
$
|
74,761
|
|
|
$
|
75,101
|
|
Interest rate derivatives
|
—
|
|
|
16
|
|
|
16
|
|
Net asset
|
$
|
340
|
|
|
$
|
74,777
|
|
|
$
|
75,117
|
|
NOTE J—SHORT-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
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
340
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
340
|
|
Fixed income securities:
|
|
|
|
|
|
|
—
|
|
Certificates of deposit
|
26,736
|
|
|
—
|
|
|
(28
|
)
|
|
26,708
|
|
Commercial paper
|
14,191
|
|
|
15
|
|
|
—
|
|
|
14,206
|
|
Corporate notes and bonds
|
10,895
|
|
|
1
|
|
|
(1
|
)
|
|
10,895
|
|
Government agencies
|
13,992
|
|
|
14
|
|
|
—
|
|
|
14,006
|
|
U.S. Treasuries
|
4,811
|
|
|
—
|
|
|
(6
|
)
|
|
4,805
|
|
Variable Rate Demand Obligations
|
4,141
|
|
|
—
|
|
|
—
|
|
|
4,141
|
|
Total available-for-sale investments
|
$
|
75,106
|
|
|
$
|
30
|
|
|
$
|
(35
|
)
|
|
$
|
75,101
|
|
As of
June 30, 2014
, 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 investment’s cost basis. As of
June 30, 2014
, we did
no
t recognize any impairment charges.
NOTE K—LEASES
We are obligated under certain operating leases for railroad cars, office space, mining property, mining/processing equipment and transportation and other equipment. Certain operating lease agreements include options to purchase the equipment for fair market value at the end of the original lease term. Future minimum annual commitments under such operating leases at
June 30, 2014
are as follows:
|
|
|
|
|
2014
|
$
|
13,125
|
|
2015
|
27,128
|
|
2016
|
24,870
|
|
2017
|
22,608
|
|
2018
|
21,202
|
|
Thereafter
|
47,319
|
|
Total future lease commitments
|
$
|
156,252
|
|
Expense related to operating leases and rental agreements was
$8.2 million
and
$3.1 million
for the three months ended
June 30, 2014
and 2013, respectively, and
$15.3 million
and
$6.4 million
for the
six
months ended
June 30, 2014
and
2013
, respectively. The increase was mainly due to new leases for railroad cars.
As of
June 30, 2014
, we have
no
obligation under a capital lease. We had an obligation under capital lease of
$364
as of
June 30, 2013
, which was paid in full by
December 31, 2013
.
In general, the above leases include renewal options and some provide that we pay for all utilities, insurance, taxes and maintenance.
NOTE L—COMMITMENTS AND CONTINGENCIES
Our operating subsidiary, U.S. Silica Company (“U.S. Silica”), has been named as a defendant in various product liability claims alleging silica exposure causing silicosis. During the
six
months ended
June 30, 2014
,
no
new claims were brought against U.S. Silica. As of
June 30, 2014
, there were
87
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 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. The settlement was received during first quarter of 2013. As a result of the settlement, the indemnity and related policies are no longer available to U.S. Silica and U.S. Silica will not seek reimbursement for any defense costs or claim payments. Other insurance policies, however, continue to remain available to U.S. Silica.
We have recorded estimated liabilities for these claims in other long-term obligations as well as estimated recoveries under the remaining insurance policies in other assets on our consolidated balance sheets. As of
June 30, 2014
and
December 31, 2013
, other non-current assets included
$313
for insurance for third-party products liability claims and other long-term obligations included
$1.6 million
in third-party products claims liability.
NOTE M—PENSION AND POST-RETIREMENT BENEFITS
We maintain a single-employer noncontributory defined benefit pension plan covering certain employees. Net pension benefit cost recognized for the
three and six
months ended
June 30, 2014
and
2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service cost
|
$
|
270
|
|
|
$
|
320
|
|
|
$
|
539
|
|
|
$
|
640
|
|
Interest cost
|
1,142
|
|
|
1,049
|
|
|
2,285
|
|
|
2,099
|
|
Expected return on plan assets
|
(1,255
|
)
|
|
(1,265
|
)
|
|
(2,510
|
)
|
|
(2,531
|
)
|
Net amortization and deferral
|
238
|
|
|
476
|
|
|
476
|
|
|
952
|
|
Net pension benefit costs
|
$
|
395
|
|
|
$
|
580
|
|
|
$
|
790
|
|
|
$
|
1,160
|
|
In addition, we provide defined benefit post-retirement health care and life insurance benefits to some employees. Net periodic post-retirement benefit cost recognized for the
three and six
months ended
June 30, 2014
and
2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service cost
|
$
|
45
|
|
|
$
|
58
|
|
|
$
|
90
|
|
|
$
|
116
|
|
Interest cost
|
257
|
|
|
252
|
|
|
514
|
|
|
505
|
|
Expected return on plan assets
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Net amortization and deferral
|
—
|
|
|
74
|
|
|
—
|
|
|
148
|
|
Net post-retirement costs
|
$
|
301
|
|
|
$
|
383
|
|
|
$
|
602
|
|
|
$
|
767
|
|
We contributed $
1.9 million
and
$2.6 million
to the qualified pension plan during the
three and six
months ended
June 30, 2014
, respectively. We did not contribute during the same periods in
2013
. Total expected employer funding contributions during the fiscal year ending December 31, 2014 are
$4.6 million
for the pension plan and
$1.2 million
for the post-retirement medical and life plan.
NOTE N—OBLIGATIONS 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
June 30, 2014
, Travelers had
$8.5 million
in bonds outstanding for us. The majority of these bonds (
$8.2 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.
U.S. Silica is the contingent guarantor of Kanawha Rail Corporation’s (“KRC”) obligations as lessee of
199
covered hopper railroad cars, which are used by U.S. Silica to ship sand to its customers. KRC’s obligation as lessee includes paying monthly rent of
$66 thousand
until June 30, 2015, maintaining the cars, paying for any cars damaged or destroyed, and indemnifying all other parties to the lease transaction against liabilities including any loss of certain tax benefits. By separate agreement between U.S. Silica and KRC, KRC may, upon the occurrence of certain events, assign the lease obligations to U.S. Silica, but none of these events have occurred.
NOTE O—SEGMENT REPORTING
Our business is organized into two reportable segments, Oil & Gas Proppants and Industrial & Specialty Products, based on end markets. The reportable segments are consistent with how management views the markets that we serve and the financial information reviewed by the chief operating decision maker. We manage our Oil & Gas Proppants and Industrial & Specialty Products businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.
An operating segment’s performance is primarily evaluated based on segment contribution margin, which excludes certain corporate costs not associated with the operations of the segment. These corporate costs are separately stated below and include costs that are related to functional areas such as operations management, corporate purchasing, accounting, treasury, information technology, legal and human resources. We believe that segment contribution margin, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, not a substitute for, or superior to, 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.
In the Oil & Gas Proppants segment, we serve the oil and gas recovery market by 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 oil and natural gas from the wells.
The Industrial & Specialty Products segment consists of over
250
products and materials used in a variety of industries including, container glass, fiberglass, specialty glass, flat glass, building products, fillers and extenders, foundry products, chemicals, recreation products and filtration products.
The following table presents sales and segment contribution margin for the reporting segments and other operating results not allocated to the reported segments for the
three and six
months ended
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Sales:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
149,331
|
|
|
$
|
77,672
|
|
|
$
|
279,915
|
|
|
$
|
151,254
|
|
Industrial & Specialty Products
|
56,470
|
|
|
52,156
|
|
|
105,981
|
|
|
100,885
|
|
Total Sales
|
205,801
|
|
|
129,828
|
|
|
385,896
|
|
|
252,139
|
|
Segment contribution margin:
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
57,060
|
|
|
35,475
|
|
|
98,688
|
|
|
71,637
|
|
Industrial & Specialty Products
|
17,615
|
|
|
15,358
|
|
|
30,802
|
|
|
28,604
|
|
Total segment contribution margin
|
74,675
|
|
|
50,833
|
|
|
129,490
|
|
|
100,241
|
|
Operating activities excluded from segment cost of goods sold
|
(1,291
|
)
|
|
(1,302
|
)
|
|
(2,781
|
)
|
|
(2,811
|
)
|
Selling, general and administrative
|
(19,267
|
)
|
|
(10,099
|
)
|
|
(34,712
|
)
|
|
(22,503
|
)
|
Depreciation, depletion and amortization
|
(10,341
|
)
|
|
(8,890
|
)
|
|
(19,930
|
)
|
|
(17,168
|
)
|
Interest expense
|
(4,013
|
)
|
|
(3,535
|
)
|
|
(7,821
|
)
|
|
(7,111
|
)
|
Other income, net, including interest income
|
221
|
|
|
63
|
|
|
259
|
|
|
185
|
|
Income (loss) before income taxes
|
$
|
39,984
|
|
|
$
|
27,070
|
|
|
$
|
64,505
|
|
|
$
|
50,833
|
|
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.
NOTE P - SUBSEQUENT EVENTS
On
July 3, 2014
we paid a cash dividend of
$0.125
per share to common stockholders of record on
June 13, 2014
, as had been declared by our Board of Directors on
April 25, 2014
.
On July 3, 2014, we received an advance of
$100 million
from a customer. The deposit gives the customer the right to purchase certain products for a fixed price at certain minimum volumes. The customer has an unsecured promissory note on their deposit. The note has a stated interest rate of
4.9%
compounded quarterly. 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 note does not require any payments in cash. The note matures on December 31, 2019, and can be repaid at any time without penalty at our discretion.
On July 16, 2014, we entered into a stock purchase agreement to acquire all of the outstanding shares of Cadre Services Inc., a regional sand mining company based in Voca, Texas, for approximately
$98.0 million
in cash. Closing is expected by the end of July 2014. We are not planning to incur any additional debt in order to close this transaction.
On July 25, 2014, our Board of Directors declared a cash dividend of
$0.125
per share to common stock holders of record on September 15, 2014, and payable on October 3, 2014.
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations should be read together with the Condensed Consolidated Financial Statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the Condensed Consolidated Financial Statements, the accompanying notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2013
.
Overview
We are one of the largest domestic producers of commercial silica, a specialized mineral that is a critical input into a variety of attractive end markets. During our
114
year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-effectively deliver over
250
products to customers across these markets. In our largest end market, Oil & Gas Proppants, our frac sand is used to stimulate and maintain the flow of hydrocarbons in oil and natural gas wells. This segment of our business is experiencing rapid growth due to recent technological advances in the hydraulic fracturing process, which have made the extraction of large volumes of oil and natural gas from U.S. shale formations economically feasible. Our silica is also used as an economically irreplaceable raw material in a wide range of industrial applications, including glassmaking and chemical manufacturing. Additionally, in recent years a number of attractive new end markets have developed for our high-margin, performance silica products, including high-performance glass, specialty coatings, polymer additives and geothermal energy systems.
As of
July 30, 2014
, we operate
15
facilities across the United States and control
292
million tons of reserves. We own one of the largest frac sand processing plants in the United States and control approximately
136
million tons of reserves that can be processed to meet American Petroleum Institute (API) frac sand size specifications. Our operations are organized into two segments based on end markets served: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. Our segments are complementary because our ability to sell to a wide range of customers across end markets allows us to maximize recovery rates in our mining operations, optimize our asset utilization and reduce the cyclicality of our earnings.
Recent Trends and Outlook
U.S. demand for industrial silica has been growing steadily. According to The Freedonia Group, Inc. (“Freedonia”), demand for industrial silica sand grew at a
4%
compound annual growth rate (“CAGR”) from
2001
to
2011
. This increase in demand was driven primarily by hydraulic fracturing, which grew at a
27%
CAGR from
2001
to
2011
, according to the most recent related Freedonia report dated
October 2012
. The recovery of the U.S. housing and automotive markets has also positively affected silica related to those markets such as glass, building materials, foundry and fillers and extenders. Trends driving the acceleration in demand include:
|
|
•
|
Increased demand in the oil and gas proppants end market.
The increased demand for frac sand has been driven by the growth in the use of hydraulic fracturing as a means to extract hydrocarbons from shale formations. According to the 2013 Proppant Market Report, PropTester Inc. and KELRIK, LLC, published February 2014, global frac sand demand grew at a
35.5%
CAGR from
2008
to
2013
. This included
29.3%
growth in frac sand demand from
2012
to
2013
. Domestic proppant producers are expected to experience annual increases in demand of
11%
through
2017
, according to the most recent related Freedonia report dated
August 2013
. We expect continued growth of horizontal drilling. The industry may experience temporary fluctuations in demand and price as the market adjusts to changing supply and demand due to energy pricing fluctuations. We significantly expanded our sales efforts to the frac sand market in 2008 and have since experienced rapid growth in our sales associated with our oil and gas activities.
|
|
|
•
|
Rebound of demand in industrial end markets and continued growth in specialty end markets.
The economic downturn resulting from the financial crisis negatively impacted demand for our products in industrial and specialty products end markets, most notably in the glassmaking, building products, foundry and chemicals end markets. This drop coincided with a similar drop in key economic demand drivers, including housing starts, light vehicle sales, repair and remodel activity and industrial production. To the extent these demand drivers recover to historical levels, which is difficult to predict given current economic uncertainty, we expect to see a corresponding increase in the demand for commercial silica. In addition, to the extent commercial silica products continue to be used in key alternative energy markets, we anticipate continued volume growth in specialty end markets, such as high performance glass and geothermal energy systems as well as the increased use of commercial silica in new applications such as specialty coatings and polymer additives.
|
Our Strategy
The key drivers of our growth strategy include:
|
|
•
|
Expand our oil and gas proppants production capacity and product portfolio.
Beginning in the fourth quarter of 2011, we executed several initiatives to increase our frac sand production capacity and augment our proppant product portfolio. At our Ottawa, Illinois facility, we implemented operating improvements and installed a new dryer and six mineral separators to increase our annual frac sand production capacity by 900,000 tons. At our Rockwood, Michigan facility, we added 250,000 tons of annual frac sand production capacity by installing an entirely new processing circuit. In the first quarter of 2013, our new resin-coated sand facility became fully operational, with capacity to resin coat up to 400 million pounds of sand annually. In the second quarter of 2013, our Sparta, Wisconsin facility became fully operational with an annual raw sand production capacity of 1,700,000 tons. Also in 2013, we made an initial investment in a new Greenfield site near Utica, Illinois. We expect this facility to have an annual capacity of approximately
1,500,000
tons of raw frac sand when fully operational by the end of the
third quarter of 2014
.
|
|
|
•
|
Increase our presence in industrial and specialty products end markets.
We intend to increase our presence and market share in certain industrial and specialty products end markets that we believe are poised for growth. We will continue to work toward transforming our Industrial & Specialty Product segment from a commodity business to a more value-driven approach by developing capabilities and products that assist in enabling us to increase our presence in larger, more profitable markets.
|
|
|
•
|
Optimize product mix and further develop value-added capabilities to maximize margins.
We continue to actively manage our product mix at each of our plants to ensure we maximize our profit margins. This requires us to use our proprietary expertise in balancing key variables, such as mine geology, processing capacities, transportation availability, customer requirements and pricing. We expect to continue investing in ways to increase the value we provide to our customers by expanding our product offerings, increasing our transportation assets, improving our supply chain management, upgrading our information technology, and creating a world class customer service model.
|
|
|
•
|
Expand our supply chain network and leverage our logistics capabilities to meet our customers’ needs in each strategic oil and gas basin.
We continue to expand our transload network to ensure product is available to meet the growing in-basin needs of our customers. This approach allows us to provide strong customer service and puts us in a position to take advantage of opportunistic spot market sales. Our plant sites are strategically located to provide access to all Class I railroads, which enables us to cost effectively send product to each of the strategic basins in North America. We can ship product by truck, barge and rail with an ability to connect to short-line railroads as necessary to meet our customers’ evolving in-basin product needs. We believe that our supply chain network and logistics capabilities are a competitive advantage that enables us to provide superior service for our customers. For example, in 2013, we opened our San Antonio, Texas unit-train receiving transload facility, which was built in partnership with BNSF railroad to support the Eagle Ford market. Additionally, we have entered into an agreement with Union Pacific Railroad to build a second transload facility in Odessa, Texas, which is expected to be fully operational by the
end of 2014
. We will continue to make strategic investments and develop partnerships with transload operators and transportation providers that will enhance our portfolio of supply chain services that we can provide to customers. We now have in-basin storage capacity at
31
transloads located near all of the major shale basins in the United States.
|
|
|
•
|
Evaluate both Greenfield and Brownfield expansion opportunities and other acquisitions.
We will continue to leverage our reputation, processing capabilities and infrastructure to increase production, as well as explore other opportunities to expand our reserve base. We may accomplish this by developing Greenfield projects, where we can capitalize on our technical knowledge of geology, mining and processing and our strong reputation within local communities. For instance, we are evaluating the potential development of a Greenfield project near Fairchild, Wisconsin, which, depending on market conditions, could become operational as
early as late 2015
and eventually add
3,000,000
tons of annual frac sand capacity. Our primary objective is to acquire assets complementary to our Oil & Gas Proppants segment, with a focus on mining, processing and logistics to further enhance our market presence. Some of these assets have differing levels of frac sand quality. We prioritize acquisitions which provide opportunities to realize synergies (and, in some cases, the acquisition will only be accretive assuming synergies), including entering new geographic and frac sand product markets, acquiring attractive customer contracts, and improving operations. For instance, on July 16, 2014, we entered into a stock purchase agreement to acquire all of the outstanding shares of Cadre Services Inc., a leading regional sand mining company based in Voca, Texas. Cadre operates a single frac sand mine and plant, with an annual capacity of about 800,000
|
tons per year of Premium Hickory
®
sand and has more than 65 years of high-quality reserves. See accompanying Note P - Subsequent Events to our Financial Statements for more information regarding this acquisition. Additionally, we may pursue other opportunistic acquisitions, taking advantage of our asset footprint, our management’s experience with high-growth businesses and our strong customer relationships. We may also evaluate international acquisitions as unconventional oil and natural gas drilling expands globally.
|
|
•
|
Maintain financial strength and flexibility.
We intend to maintain financial strength and flexibility to enable us to pursue acquisitions and new growth opportunities as they arise. As of
June 30, 2014
, we had
$106.0 million
of cash on hand,
$75.1 million
in short-term investments and
$46.7 million
of availability under the Revolver.
|
How We Generate Our Sales
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. We invoice the majority of our clients on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly. The total amount invoiced reflects product, transportation and additional services as applicable, such as storage and transloading the product from railcars to trucks for delivery to the customer site. Our five largest customers accounted for approximately
37%
of total sales during the
six
months ended
June 30, 2014
.
We primarily sell our products under short-term price agreements or at prevailing market rates. For a number of customers, we sell under long-term, competitively-bid contracts. As of
July 30, 2014
, we have
ten
take-or-pay supply agreements in the Oil & Gas Proppants segment with initial terms expiring between
2014
and
2019
. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide and the price that we will charge and that our customers will pay for each product. As discussed in Part I, Item 1A, of our
2013
Annual Report, “Risk Factors—A large portion of our sales is generated by our top customers, and the loss of, or significant reduction in, purchases by our largest customers could adversely affect our operations,” these customers may not continue to purchase the same levels of product in the future due to a variety of reasons, contract requirements notwithstanding. 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. Additionally, at the time the take-or-pay supply agreements were signed, some customers provided advance payments for future shipments. A percentage of these advance payments was recognized as revenue with each ton of applicable product shipped to the customer. Collectively, sales to customers with supply agreements accounted for
38%
and
29%
of our total company revenue during the
six
months ended
June 30, 2014
and
2013
, respectively. Although sales under supply agreements, as opposed to short-term price agreements or at prevailing spot market rates, result in us realizing lower margins than we otherwise might during periods of high market prices, we believe such lower margins are offset by the benefits derived from the product mix and sales volume stability afforded by such supply agreements, which
helps us lower market risk arising from adverse changes in spot prices and market conditions.
Addition
ally, selling more tons under supply contracts also enables us to be more efficient from a production, supply chain and logistics standpoint.
The Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, electricity and drying fuel costs, maintenance and repair costs for our mining and processing equipment and facilities and transportation costs. Transportation and related costs include freight charges, fuel surcharges, transloading fees, switching fees, railcar lease costs, demurrage costs and storage fees. We believe the majority of our operating costs are relatively stable in price, but can vary significantly based on the volume of product produced. We benefit from owning the majority of the mineral deposits that we mine and having long-term mineral rights leases or supply agreements for our other primary sources of raw material, which limit royalty payments.
Additionally, we incur expenses related to our corporate operations, including costs for sales and marketing; research and development; and finance, legal, environmental, health and safety functions of our organization. These costs are principally driven by personnel expenses.
How We Evaluate Our Business
Our management team evaluates our business using a variety of financial and operational metrics. Our business is organized into two segments, Oil & Gas Proppants and Industrial & Specialty Products. We evaluate the performance of these segments based on their tons sold, average selling price and contribution margin earned. Additionally, we consider a number of
factors in evaluating the performance of the business as a whole, including total tons sold, average selling price, segment contribution margin, and Adjusted EBITDA. We view these metrics as important factors in evaluating our profitability and review these measurements frequently to analyze trends and make decisions.
Segment Contribution Margin
Segment contribution margin, a non-GAAP measure, is a key metric that management uses to evaluate our operating performance and to determine resource allocation between segments. Segment contribution margin excludes certain corporate costs not associated with the operations of the segment. These unallocated costs include costs that are related to corporate functional areas such as operations management, corporate purchasing, accounting, treasury, information technology, legal and human resources.
Segment contribution margin is not a measure of our financial performance under GAAP and should not be considered an alternative to measures derived in accordance with GAAP. For more details on the reconciliation of segment contribution margin to its most directly comparable GAAP financial measure, income (loss) before income taxes, see Note O- Segment Reporting to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Adjusted EBITDA
Adjusted EBITDA, a non-GAAP measure, is included in this report because it is a key metric used by management to assess our operating performance and by our lenders to evaluate our covenant compliance. Our target performance goals under our incentive compensation plan are tied, in part, to our Adjusted EBITDA. In addition, our Revolver now contains a consolidated total net leverage ratio that we must meet as of the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 25% of the Revolver commitment, which is calculated based on our Adjusted EBITDA. Noncompliance with the financial ratio covenant contained in the Revolver could result in the acceleration of our obligations to repay all amounts outstanding under the Revolver and the Term Loan. Moreover, the Revolver and the Term Loan contained covenants that restricted, subject to certain exceptions, our ability to make permitted acquisitions, incur additional indebtedness, make restricted payments (including dividends) and retain excess cash flow based, in some cases, on our ability to meet leverage ratios calculated based on our Adjusted EBITDA.
Adjusted EBITDA is not a measure of our financial performance or liquidity under GAAP and should not be considered as an alternative to net income as a measure of operating performance, cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized, and excludes certain non-recurring charges. Management compensates for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA only supplementally. Our measure of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.
The following table sets forth a reconciliation of net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income
|
$
|
28,654
|
|
|
$
|
20,192
|
|
|
$
|
47,025
|
|
|
$
|
37,469
|
|
Total interest expense, net of interest income
|
3,811
|
|
|
3,522
|
|
|
7,684
|
|
|
7,074
|
|
Provision for taxes
|
11,330
|
|
|
6,878
|
|
|
17,480
|
|
|
13,364
|
|
Total depreciation, depletion and amortization expenses
|
10,341
|
|
|
8,890
|
|
|
19,930
|
|
|
17,168
|
|
EBITDA
|
54,136
|
|
|
39,482
|
|
|
92,119
|
|
|
75,075
|
|
Non-cash incentive compensation
(1)
|
2,053
|
|
|
704
|
|
|
3,383
|
|
|
1,382
|
|
Post-employment expenses (excluding service costs)
(2)
|
381
|
|
|
586
|
|
|
763
|
|
|
1,172
|
|
Other adjustments allowable under our existing credit agreement
(3)
|
3,215
|
|
|
213
|
|
|
5,448
|
|
|
2,143
|
|
Adjusted EBITDA
|
$
|
59,785
|
|
|
$
|
40,985
|
|
|
$
|
101,713
|
|
|
$
|
79,772
|
|
|
|
|
|
|
|
|
(1)
|
Includes vesting of incentive equity compensation issued to our employees.
|
(2)
|
Includes net pension cost and net post-retirement cost relating to pension and other post-retirement benefit obligations during the applicable period, but in each case excluding the service cost relating to benefits earned during such period. See Note M- Pension and Post-retirement Benefits to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
(3)
|
Reflects miscellaneous adjustments permitted under our existing credit agreement, including such items as expenses related to offerings of our common stock by our former controlling shareholder, business development activities related to our growth and expansion initiatives, one-time litigation fees, expenses related to debt refinancing and employment agency fees.
|
Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Percent Change
|
|
Six Months Ended
June 30,
|
|
Percent Change
|
|
2014
|
|
2013
|
|
'14 vs. '13
|
|
2014
|
|
2013
|
|
'14 vs. '13
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
149,331
|
|
|
$
|
77,672
|
|
|
92
|
%
|
|
$
|
279,915
|
|
|
$
|
151,254
|
|
|
85
|
%
|
Industrial & Specialty Products
|
56,470
|
|
|
52,156
|
|
|
8
|
%
|
|
105,981
|
|
|
100,885
|
|
|
5
|
%
|
Total Sales
|
$
|
205,801
|
|
|
$
|
129,828
|
|
|
59
|
%
|
|
$
|
385,896
|
|
|
$
|
252,139
|
|
|
53
|
%
|
Tons:
|
|
|
|
|
|
|
|
|
|
|
|
Oil & Gas Proppants
|
1,508
|
|
|
988
|
|
|
53
|
%
|
|
2,843
|
|
|
1,909
|
|
|
49
|
%
|
Industrial & Specialty Products
|
1,095
|
|
|
1,060
|
|
|
3
|
%
|
|
2,070
|
|
|
2,025
|
|
|
2
|
%
|
Total Tons
|
2,603
|
|
|
2,048
|
|
|
27
|
%
|
|
4,913
|
|
|
3,934
|
|
|
25
|
%
|
Total sales
increased
59%
and
53%
for the three and six months ended
June 30, 2014
, respectively, when compared to the same periods in 2013. The increases were driven by a
27%
and
25%
increase in tons sold and a
25%
and
23%
increase in average selling price for the three and six months ended
June 30, 2014
, respectively. For the three and six months ended
June 30, 2014
, tons sold in-basin through transloads represented
39%
and
40%
, respectively, of total company tons sold, comparing to
20%
for the same periods in 2013. The increases were due to increased customer demand for our proppants at transload locations close to oil and gas drilling sites.
The
increases
in total sales were mainly driven by Oil & Gas Proppants sales, which
increased
92%
and
85%
for the three and six months ended
June 30, 2014
, respectively, when compared to the same periods in 2013. Oil & Gas Proppants tons sold
increased
53%
and
49%
for the three and six months ended
June 30, 2014
, respectively, due to year over year growth in the demand for our frac sands. The average selling price for Oil & Gas Proppants
increased
26%
and
24%
for the three and six months ended
June 30, 2014
, respectively, due to increased tons sold through transloads as a percentage of total tons sold and due to higher price driven by year over year demand.
Industrial & Specialty Products sales
increased
8%
and
5%
for the three and six months ended
June 30, 2014
, respectively, when compared to the same periods in 2013. Tons sold
grew
3%
and
2%
for the three and six months ended
June 30, 2014
, respectively, when compared to the same periods in 2013, and average selling price
increased
5%
and
3%
, respectively, when compared to the same periods in 2013. The increases were primarily driven by year over year growth in demand.
Cost of Goods Sold
Cost of goods sold
increased
by
$52.1 million
, or
65%
, to
$132.4 million
and by
$104.5 million
, or
68%
, to
$259.2 million
for the three and six months ended June 30, 2014, respectively, when compared to
$80.3 million
and
$154.7 million
for the same periods in 2013. These
increases
resulted from more tons sold and from higher transportation and related costs. As a percentage of sales, costs of goods sold
increased
to
64%
and
67%
for the three and six months ended
June 30, 2014
, respectively, from
62%
and
61%
for the same periods in 2013, due to additional transportation and handling costs driven by increased tons sold through transloads.
We incurred
$76.7 million
and
$150.7 million
of transportation and related costs for the three and six months ended
June 30, 2014
, respectively, compared to
$36.1 million
and
$68.5 million
for the same periods in 2013. The
increases
in transportation and related costs incurred were due to increased tons sold through transloads. As a percentage of sales, transportation and related costs increased to
37%
and
39%
for the three and six months ended
June 30, 2014
, respectively, comparing to
28%
and
27%
for the same periods in 2013 due to an increase in tons sold in-basin through transloads as a percentage of total tons sold.
We incurred
$16.5 million
and
$32.6 million
of operating labor costs for the three and six months ended
June 30, 2014
, respectively, compared to
$15.5 million
and
$29.9 million
for the same periods in 2013. The
increase
s in labor costs incurred were due to producing and selling more tons. As a percentage of sales, operating labor costs
decreased
to
8%
for the three and six months ended
June 30, 2014
, comparing to
12%
for the same periods in 2013, mainly due to an increase in average selling price.
We incurred
$7.9 million
and
$16.3 million
of electricity and drying fuel (principally natural gas) costs for the three and six months ended
June 30, 2014
, respectively, compared to
$6.6 million
and
$12.8 million
for the same periods in 2013. The
increase
s in electricity and drying fuel costs incurred were due to higher production volume. As a percentage of sales, electricity and drying fuel costs
decreased
to
4%
for the three and six months ended
June 30, 2014
, comparing to
5%
for the same periods in 2013.
We incurred
$7.4 million
and
$13.6 million
of maintenance and repair costs for the three and six months ended
June 30, 2014
, respectively, compared to
$6.2 million
and
$10.7 million
for the same periods in 2013. The
increase
s in maintenance and repair costs incurred were due to higher production volume. As a percentage of sales, maintenance and repair costs
represented
4%
for the three and six months ended
June 30, 2014
, comparing to
5%
and
4%
for the same periods in 2013, respectively.
Segment Contribution Margin
Oil & Gas Proppants contribution margin
increased
by
$21.6 million
, or
61%
, to
$57.1 million
and by
$27.1 million
, or
38%
, to
$98.7 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$35.5 million
and
$71.6 million
for the same periods in 2013. Increases were driven by the following specific factors: increased sales due to an increase in tons of product sold driven by continued year over year growth in demand for our frac sands, as well as an increase in average selling price due to increased tons sold through transloads and due to higher price driven by year over year demand, partially offset by increased cost of goods sold as a percentage of sales due to additional transportation and handling costs driven by increased tons sold through transloads.
Industrial & Specialty Products contribution margin
increased
by
$2.3 million
, or
15%
, to
$17.6 million
and by
$2.2 million
, or
8%
, to
$30.8 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$15.4 million
and
$28.6 million
for the same periods in 2013, due to
increased
sales volume and average selling price driven by growth in demand, partially offset by
increased
cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased
by
$9.2 million
, or
91%
, to
$19.3 million
and by
$12.2 million
, or
54%
, to
$34.7 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$10.1 million
and
$22.5 million
for the same periods in 2013. The increases were mainly driven by an increase in compensation expense of $6.1 million and $8.4 million for the three and six months ended
June 30, 2014
, respectively, compared to the sames periods in
2013
. Additionally, business development expense increased by
$1.7 million
and
$2.2 million
to
$1.7 million
and
$3.5 million
, respectively, for the
three and six
months ended June 30, 2014, compared to
$0
and
$1.3 million
for the same periods in 2013.
In total, our selling, general and administrative costs represented approximately
9%
for both the
three and six
months ended
June 30, 2014
, comparing to
8%
and
9%
for the same periods in
2013
, respectively.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense
increased
by
$1.5 million
, or
16%
, to
$10.3 million
and by
$2.8 million
, or
16%
, to
$19.9 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$8.9 million
and
$17.2 million
for the same periods in 2013. Year over year
increases
were driven by continued capital spending associated with our growth and capacity expansion initiatives combined with increased depletion due to additional volume of mined silica sands. We expect depreciation, depletion and amortization expense to continue to grow due to anticipated capital spending in 2014. Depreciation, depletion and amortization costs represented approximately
5%
of our sales for the three and six months ended
June 30, 2014
, compared to
7%
for the same periods in 2013.
Operating Income
Operating income
increased
by
$13.2 million
, or
43%
, to
$43.8 million
and
$14.3 million
, or
25%
, to
$72.1 million
for the three and six months ended
June 30, 2014
, respectively, compared to
$30.5 million
and
$57.8 million
for the same periods in 2013. The increases were primarily due to a
59%
and
53%
increase in sales, partially offset by a
65%
and
68%
increase in cost of goods sold and a
56%
and
38%
increase
in operating expenses for the three and six months ended
June 30, 2014
, respectively.
Interest Expense
Interest expense
increased
by
$0.5 million
, or
14%
, to
$4.0 million
and
0.7 million
, or
10%
, to
$7.8 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$3.5 million
and
$7.1 million
for the same periods in 2013, due to an
increase
in debt principal, partially offset by a decrease in our interest rate.
Provision for Income Taxes
The provision for income taxes
increased
by
$4.5 million
, or
65%
, to
$11.3 million
and
$4.1 million
, or
31%
, to
$17.5 million
for the three and six months ended
June 30, 2014
, respectively, when compared to
$6.9 million
and
$13.4 million
for the same periods in 2013. The
increases
were driven by
higher
effective tax rate and
increased
pretax book income. The effective tax rate was
28%
and
27%
for the three months and six months ended
June 30, 2014
, comparing to
25%
and
26%
for the sames periods in 2013.
Historically, our actual effective tax rates have been lower than the statutory effective rate primarily due to the benefit received from statutory percentage depletion allowances. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income before income taxes.
Net Income/Loss
Net income was
$28.7 million
and
$47.0 million
for the three and six months ended June 30, 2014, respectively, and
$20.2 million
and
$37.5 million
for the same periods in 2013, respectively. The year over year increases were due to the factors noted above.
Liquidity and Capital Resources
Overview
Our principal liquidity requirements have historically been to service our debt, to meet our working capital, capital expenditure and mine development expenditure needs, to return cash to our stockholders, and to finance acquisitions. We have historically met our liquidity and capital investment needs with funds generated through operations. We have historically funded our acquisitions through cash on hand or borrowings under our credit facilities and equity investments. Our working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. As of
June 30, 2014
, our working capital was
$301.2 million
and we had
$46.7 million
of availability under the Revolver.
We believe that cash generated through operations and our financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, scheduled debt payments for at least the next 12 months and any dividends declared.
Management and the Board remain committed to evaluating additional ways of creating shareholder value. Any determination to pay dividends and other distributions in cash, stock, or property in the future will be at the discretion of the Board and will be dependent on then-existing conditions, including our business conditions, our financial condition, results of operations, liquidity, capital requirements, contractual restrictions including restrictive covenants contained in debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness.
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
Percent
Change
|
|
2014
|
|
2013
|
|
’14 vs. ‘13
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
55,222
|
|
|
$
|
10,165
|
|
|
443
|
%
|
Investing activities
|
(18,011
|
)
|
|
(31,132
|
)
|
|
(42
|
)%
|
Financing activities
|
(9,493
|
)
|
|
7,013
|
|
|
(235
|
)%
|
Net Cash
Provided by
Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation, depletion and amortization, deferred revenue, deferred income taxes, equity-based compensation and allowance for doubtful accounts. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally accounts receivable, inventories, prepaid expenses and other current assets, income taxes payable and receivable, accounts payable and accrued expenses.
Net cash
provided
by operating activities was
$55.2 million
for the
six
months ended
June 30, 2014
compared to net cash
provided
by operating activities of
$10.2 million
for the
six
months ended
June 30, 2013
. This
$45.1 million
increase
in cash provided by operations was primarily the result of the following factors: a
$9.6 million
increase
in net income; a
$17.9 million
decrease
in inventory changes mainly due to
less
inventory on hand driven by
more
tons sold; a
$24.6 million
change in accounts payable and accrued liabilities due to
increased
expenses; a change in income tax payable of
$19.0 million
, mainly due to a federal tax extension payment of
$19.6 million
for the 2012 tax year paid in March 2013; a
$4.8 million
increase
in depreciation, depletion and amortization and equity-based compensation; partially offset by a change in accounts receivable of
$31.7 million
due to an increase in revenue.
Net Cash
Used in
Investing Activities
Investing activities consist primarily of capital expenditures for growth and maintenance.
Net cash
used
in investing activities was
$18.0 million
and
$31.1 million
in the
six
months ended
June 30, 2014
and 2013, respectively. The
use
of cash was due to capital expenditures, which totaled
$18.0 million
as of
June 30, 2014
for the engineering, procurement and construction of our Greenfield raw sand plant near Utica, Illinois, our new transload facility in Odessa, Texas, and other maintenance capital projects. Capital expenditures in the
six
months ended
June 30, 2013
, which totaled
$31.2 million
, were primarily for the continuing engineering, procurement and construction of our Greenfield raw sand plant in Sparta, Wisconsin, the construction of our transloads in San Antonio, Texas, Fairmont, West Virginia and East Liverpool, Ohio.
Management anticipates that our total capital expenditures in 2014 will be approximately
$100
million, which is primarily associated with growth and maintenance capital including the construction of the mine and processing facility near Utica, Illinois, the potential development of a Greenfield project close to Fairchild, Wisconsin and the construction of the transload facility in Odessa, Texas.
Net Cash
Provided by
(Used in)
Financing Activities
Financing activities consist primarily of equity issuances, capital contributions, dividend payments, borrowings and repayments related to the Revolver and Term Loan, as well as fees and expenses paid in connection with our credit facilities and outstanding checks to our vendors.
Net cash
used
in financing activities was
$9.5 million
in the
six
months ended
June 30, 2014
, driven by
$13.4 million
in dividend payments and a
$1.2 million
decrease
in book overdraft, partially offset by
$4.7 million
of proceeds from employee exercises of stock options.
Net cash
provided
by financing activities was
$7.0 million
in the
six
months ended
June 30, 2013
, driven by an increase in borrowings under our revolving credit facility of
$6.9 million
,
$2.2 million
of proceeds from employee exercises of stock options, partially offset by a
$1.3 million
repayment of our long-term debt and
$0.4 million
in principal payments on our capital lease obligation.
For more details about our senior credit facility, please see accompanying Note G-Debt to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
There have been no significant changes outside the ordinary course of business to our “Contractual Obligations” table in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our
2013
Annual Report, except that we entered into additional new leases for railroad cars. For more details on future minimum annual commitments under such operating leases, please see accompanying Note K-Leases to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. As of
June 30, 2014
, we had
$10.4 million
accrued for future reclamation costs, as compared to
$9.4 million
as of
December 31, 2013
.
We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure to crystalline silica and our mining activity and how such matters may affect our business in the future under Item 1, “Business,” Item 1A, “Risk Factors” Item 3, “Legal Proceedings”, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” in our
2013
Annual Report.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our
2013
Annual Report.
Recent Accounting Pronouncements
New accounting guidance that we have recently adopted, as well as accounting guidance that has been recently issued but not yet adopted by us, are included in Note A—Summary of Significant Accounting Policies to our Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Availability of Reports; Website Access; Other Information
Our internet address is http://www.ussilica.com. Through “Investor Relations”—“SEC Filings” on our home page, we make available free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our proxy statements, our Current Reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports filed with the SEC are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.
Copies of our Corporate Governance Guidelines, our Audit Committee, Compensation Committee and Nominating and Governance Committee charters, the Code of Conduct for our Board of Directors and Code of Conduct and Ethics for U.S. Silica employees (including the chief executive officer, chief financial officer and corporate controller) can also be found on our website. Any amendments or waivers to the Code of Conduct and Ethics applicable to the chief executive officer, chief financial officer and corporate controller can also be found in the “Investor Relations” section of the U.S. Silica website. Stockholders may also request a free copy of these documents from: U.S. Silica Holdings, Inc., attn.: Investor Relations, 8490 Progress Drive, Suite 300, Frederick, Maryland 21701or IR@ussilica.com.