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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion and analysis of our financial condition and results of operations should be read together with the Condensed Consolidated Financial Statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the Consolidated Financial Statements, the accompanying notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Annual Report").
This discussion contains forward-looking statements as discussed below and elsewhere in this report. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements.
Adjusted EBITDA and segment contribution margin as used herein are non-GAAP measures. For a detailed description of Adjusted EBITDA and segment contribution margin and reconciliations to their most comparable GAAP measures, please see the discussion below under “How We Evaluate Our Business.
”
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs; reserve and finished products estimates; anticipated expenditures, cash flows, growth rates and financial results; our plans and objectives for future operations, growth or initiatives; strategies and their anticipated effect on our performance and liquidity; and the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect, including:
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•
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fluctuations in demand for commercial silica, diatomaceous earth, perlite, clay and cellulose;
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•
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the cyclical nature of our customers’ businesses;
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•
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operating risks that are beyond our control, such as changes in the price and availability of transportation, transload network access, natural gas or electricity; unusual or unexpected geological formations or pressures; pit wall failures, underground roof falls or rock falls; or unanticipated ground, grade or water conditions;
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•
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our dependence on five of our plants for a significant portion of our sales;
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•
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the level of activity in the natural gas and oil industries;
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•
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fluctuations in demand or prices for frac sand or the development of either effective alternative proppants or new processes to replace hydraulic fracturing;
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•
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federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related regulatory action or litigation affecting our customers’ operations;
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•
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our rights and ability to mine our properties and our renewal or receipt of the required permits and approvals from governmental authorities and other third parties;
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•
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our ability to implement our capacity expansion plans within our current timetable and budget and our ability to secure demand for our increased production capacity, and the actual operating costs once we have completed the capacity expansion;
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•
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our ability to succeed in competitive markets;
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•
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loss of, or reduction in, business from our largest customers;
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•
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operational, regulatory and other risks as a result of our international sales and operations;
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•
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increasing costs or a lack of dependability or availability of transportation services and transload network access or infrastructure;
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•
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extensive regulation of trucking services;
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•
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our ability to recruit and retain truckload drivers;
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•
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increases in the prices of, or interruptions in the supply of, natural gas and electricity, or any other energy sources;
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•
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increases in the price of diesel fuel;
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•
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diminished access to water;
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•
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our ability to successfully complete acquisitions or integrate acquired businesses;
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•
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our ability to make capital expenditures to maintain, develop and increase our asset base and our ability to obtain needed capital or financing on satisfactory terms;
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•
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our substantial indebtedness and pension obligations;
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•
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restrictions imposed by our indebtedness on our current and future operations;
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•
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our ability to comply with contractual obligations that require us to deliver minimum amounts of frac sand, sometimes with certain quality specifications, or purchase minimum amounts of services;
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•
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the accuracy of our estimates of mineral reserves and resource deposits;
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•
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a shortage of skilled labor and rising costs in the mining industry;
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•
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our ability to attract and retain key personnel;
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•
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our ability to maintain satisfactory labor relations;
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•
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our reliance on patents, trade secrets, trademarks, and contractual restrictions to protect our proprietary rights;
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•
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our significant unfunded pension obligations and post-retirement health care liabilities;
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•
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our ability to maintain effective quality control systems at our mining, processing and production facilities;
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•
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seasonal and severe weather conditions;
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•
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fluctuations in our sales and results of operations due to seasonality and other factors;
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•
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interruptions or failures in our information technology systems, due to cybersecurity breaches or for other reasons;
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•
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the impact of a terrorist attack or armed conflict;
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•
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extensive and evolving environmental, mining, health and safety, licensing, reclamation, climate change and other regulation (and changes in their enforcement or interpretation);
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•
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silica-related health issues and corresponding litigation;
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•
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our ability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property;
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•
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the impact of the above factors and other future events on the market price and trading volume of our common stock; and
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•
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other factors included and disclosed in Part I, Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our 2018 Annual Report on Form 10-K.
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We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of the known factors described above, and it is impossible for us to anticipate all factors that could affect our actual results. As a result, forward-looking statements are not guarantees of future performance, and you should not place undue reliance on any forward-looking statements we make. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC"), and our other public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Overview
We are a performance materials company and one of the largest domestic producers of commercial silica used in the oil and gas industry and in a wide range of industrial applications. In addition, through our acquisition of EP Minerals, LLC ("EPM") and its affiliated companies, we are an industry leader in the production of industrial minerals, including diatomaceous earth, clay (calcium bentonite and calcium montmorillonite) and perlite.
During our
119
-year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-effectively deliver over
400
diversified product types to customers across our end markets. As of
March 31, 2019
, we operate
27
production facilities across the United States. We control
623 million
tons of reserves of commercial silica, which can be processed to make
258 million
tons of finished products that meet API frac sand specifications, and
56 million
tons of reserves of diatomaceous earth, perlite, and clays.
Our operations are organized into two reportable segments based on end markets served and the manner in which we analyze our operating and financial performance: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. We believe our segments are complementary because our ability to sell to a wide range of customers across end markets in these segments allows us to maximize recovery rates in our mining operations, optimize our asset utilization and reduce the cyclicality of our earnings.
Acquisitions
For a description of our key business acquisitions during the year see
Note E - Business Combinations
to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Recent Trends and Outlook
Oil and gas proppants end market trends
Increased demand for frac sand has historically been driven by the growth in the use of hydraulic fracturing as a means to extract hydrocarbons from shale formations. According to Rystad Energy's Proppant Market report - 2Q 2019, published on February 26, 2019, U.S. raw sand proppant demand was 43% higher in 2018 than 2017, and is expected to continue to grow in 2019. Oil and gas horizontal rig count increased during 2017 and 2018, leading to more well completion activity. We continue to expect long-term growth in oil and gas drilling in North American shale basins.
During the
three
months ended
March 31, 2019
, compared to the three months ended
December 31, 2018
, as summarized below, sales and tons sold increased due to increased frac sand demand.
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Amounts in thousands, except per ton data
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Three Months Ended
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Percentage Change for the Three Months Ended
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Oil & Gas Proppants
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March 31,
2019
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|
December 31,
2018
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March 31, 2019 vs. December 31, 2018
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Sales
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$
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260,477
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$
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243,546
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7
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%
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Tons Sold
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3,864
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3,704
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4
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%
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Average Selling Price per Ton
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$
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67.41
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$
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65.75
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3
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%
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If oil and gas drilling and completion activity does not continue to grow, demand for frac sand may decline, which could result in us selling fewer tons, selling tons at lower prices, or both. If we sell less frac sand, or sell frac sand at lower prices, our revenue, net income, cash generated from operating activities, and liquidity would be adversely affected. We could incur additional asset impairments. If these events occur, we may evaluate actions to reduce cost and improve liquidity. For instance, depending on market conditions, we could reduce our capital spending by delaying or canceling capital projects.
Oil and natural gas exploration and production companies' and oilfield service providers’ preferences and expectations have been evolving in recent years. A proppant supplier's logistics capabilities have become an important differentiating factor when competing for business, on both a spot and contract basis. Many of our customers increasingly seek convenient in-basin and wellhead proppant delivery capability from their proppant supplier. We believe that, over time, proppant customers will prefer to consolidate their purchases across a smaller group of suppliers with robust logistics capabilities and a broad offering of proppants.
Fluctuations in frac sand demand and price may occur as the market adjusts to changing supply and demand due to energy pricing fluctuations. Fluctuations in price may also occur as the supply of local in-basin sand changes. Over the past year, this trend of customers preferring local in-basin sand has accelerated.
Industrial and specialty products end market trends
Demand in the industrial and specialty products end markets has been relatively stable in recent years and is primarily influenced by key macroeconomic drivers such as housing starts, population growth, light vehicle sales, beer and wine production, repair and remodel activity and industrial production. The primary end markets served by our Industrial & Specialty Products segment are building and construction products, fillers and extenders, filtration, glassmaking, absorbents, foundry, and sports and recreation. We have been increasing our value-adding product offerings in the industrial and specialty products end markets organically as well as through acquisitions, such as White Armor and EPM. Sales of these new higher margin products have increased our Industrial & Specialty Products segment's profitability in recent periods.
Our Business Strategy
The key drivers of our growth strategy include:
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•
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increasing our presence and product offering in specialty products end markets
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•
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optimizing our product mix and further developing value-added capabilities to maximize margins
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•
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effectively positioning our Oil & Gas Proppants facilities to optimally serve our customers
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•
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optimizing our supply chain network and leveraging our logistics capabilities to meet our customers’ needs
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•
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evaluating both Greenfield and Brownfield expansion opportunities and other acquisitions; and maintaining financial strength and flexibility.
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How We Generate Our Sales
Products
We derive our product sales by mining and processing minerals that our customers purchase for various uses. Our product sales are primarily a function of the price per ton and the number of tons sold. We primarily sell our products through individual purchase orders executed under short-term price agreements or at prevailing market rates. The amount invoiced reflects product, transportation and / or additional handling services as applicable, such as storage, transloading the product
from railcars to trucks and last mile logistics to the customer site. We invoice most of our product customers on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly. Standard collection terms are net 30 days, although extended terms are offered in competitive situations.
Services
We derive our service sales primarily through the provision of transportation, equipment rental, and contract labor services to companies in the oil and gas industry. Transportation services typically consist of transporting customer proppant from storage facilities to proximal well-sites and are contracted through work orders executed under established pricing agreements. The amount invoiced reflects transportation services rendered. Equipment rental services provide customers with use of either dedicated or nonspecific wellhead proppant delivery equipment solutions for contractual periods defined either through formal lease agreements or executed work orders under established pricing agreements. The amounts invoiced reflect the length of time the equipment set was utilized in the billing period. Contract labor services provide customers with proppant delivery equipment operators through work orders executed under established pricing agreements. The amounts invoiced reflect the amount of time our labor services were utilized in the billing period. We typically invoice our customers on a weekly or monthly basis; however, some customers receive invoices upon well-site operation completion. Standard collection terms are net 30 days, although extended terms are offered in competitive situations.
Our
ten
largest customers accounted for approximately
42%
and
52%
of total sales during the
three
months ended
March 31, 2019
and
2018
, respectively. Sales to one of our customers accounted for
12%
and
15%
of our total sales during the
three
months ended
March 31, 2019
and
2018
, respectively. No other customers accounted for 10% or more of our total sales. At
March 31, 2019
, one of our customer's accounts receivable represented
16%
of our total trade accounts receivable, net of allowance. At
December 31, 2018
, one of our customers' accounts receivable represented
18%
of our total trade accounts receivable, net of allowance. No other customers accounted for 10% or more of our total trade accounts receivable.
For a limited number of customers, we sell under long-term, minimum purchase supply agreements. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide and the price that we will charge and that our customers will pay for each product. Prices under these agreements are generally fixed and subject to certain contractual adjustments. Sometimes these agreements may undergo negotiations regarding pricing and volume requirements, which may occur in volatile market conditions. When these negotiations are occurring, we may deliver sand at prices or at volumes below the requirements in our existing supply agreements. We do not consider these agreements solely representative of contracts with customers. An executed order specifying the type and quantity of product to be delivered, in combination with the noted agreements, comprise our contracts in these arrangements. Selling more tons under supply contracts enables us to be more efficient from a production, supply chain and logistics standpoint. As discussed in Part I, Item 1A., Risk Factors of our 2018 Annual Report on Form 10-K, these customers may not continue to purchase the same levels of product in the future due to a variety of reasons, contract requirements notwithstanding.
As of
March 31, 2019
, we have
twenty-two
minimum purchase supply agreements in the Oil & Gas Proppants segment with initial terms expiring between
2019 and 2034
. As of
March 31, 2018
, we had twenty-one minimum purchase supply agreements in the Oil & Gas Proppants segment with initial terms expiring between 2018 and 2022. Collectively, sales to customers with minimum purchase supply agreements accounted for
42%
and
37%
of Oil & Gas Proppants segment sales during the
three
months ended
March 31, 2019
and
2018
, respectively. Although sales under minimum purchase supply agreements may result in us realizing lower margins than we otherwise might during periods of high market prices, we believe such lower margins are offset by the benefits derived from the product mix and sales volume stability afforded by such supply agreements, which helps us lower market risk arising from adverse changes in spot prices and market conditions.
In the industrial and specialty products end markets we have not historically entered into long-term minimum purchase supply agreements with our customers because of the high cost to our customers of switching providers. We may periodically do so when capital or other investment is required to meet customer needs. Instead, we often enter into supply agreements with our customers with targeted volumes and terms of one to five years. Prices under these agreements are generally fixed and subject to annual increases.
The Costs of Conducting Our Business
The principal expenses involved in conducting our business are transportation costs, labor costs, electricity and drying fuel costs, and maintenance and repair costs for our mining and processing equipment and facilities. Transportation and related costs include freight charges, fuel surcharges, transloading fees, switching fees, railcar lease costs, demurrage costs, storage fees and labor costs. We believe the majority of our operating costs are relatively stable in price, but they 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 limits royalty payments.
Additionally, we incur expenses related to our corporate operations, including costs for sales and marketing; research and development; and the 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 operating metrics. We evaluate the performance of our two 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 our business as a whole, including total tons sold, average selling price, total 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, and we believe the presentation of these metrics provides useful information to our investors regarding our financial condition and results of operations for the same reasons.
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 directly related to 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 or superior to measures derived in accordance with GAAP. For more information about segment contribution margin, including a reconciliation of this measure to its most directly comparable GAAP financial measure, net income (loss), see
Note U - Segment Reporting
to our Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.
Adjusted EBITDA
Adjusted EBITDA, a non-GAAP measure, is included in this report because it is a key metric used by management to assess our operating performance and by our lenders to evaluate our covenant compliance. Adjusted EBITDA excludes certain income and/or costs, the removal of which improves comparability of operating results across reporting periods. Our target performance goals under our incentive compensation plan are tied, in part, to our Adjusted EBITDA.
Adjusted EBITDA is not a measure of our financial performance or liquidity under GAAP and should not be considered as an alternative or superior to net income (loss) 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 charges that may recur in the future. 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 (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA.
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(amounts in thousands)
|
Three Months Ended
March 31,
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|
2019
|
|
2018
|
Net (loss) income attributable to U.S. Silica Holdings, Inc.
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$
|
(19,324
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)
|
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$
|
31,294
|
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Total interest expense, net of interest income
|
22,920
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|
|
5,855
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Provision for taxes
|
(1,972
|
)
|
|
7,521
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Total depreciation, depletion and amortization expenses
|
44,600
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|
|
28,592
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EBITDA
|
46,224
|
|
|
73,262
|
|
Non-cash incentive compensation
(1)
|
4,045
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|
|
6,254
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Post-employment expenses (excluding service costs)
(2)
|
552
|
|
|
555
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|
Merger and acquisition related expenses
(3)
|
4,783
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|
|
2,507
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Plant capacity expansion expenses
(4)
|
8,571
|
|
|
9,380
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Contract termination expenses
(5)
|
1,000
|
|
|
—
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|
Business optimization projects
(6)
|
6
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|
|
—
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|
Other adjustments allowable under the Credit Agreement
(7)
|
3,638
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|
|
3,408
|
|
Adjusted EBITDA
|
$
|
68,819
|
|
|
$
|
95,366
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(1)
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Reflects equity-based, non-cash compensation expense.
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(2)
|
Includes net pension cost and net post-retirement cost relating to pension and other post-retirement benefit obligations during the applicable period, but in each case excluding the service cost relating to benefits earned during such period. Non-service net periodic benefit costs are not considered reflective of our operating performance because these costs do not exclusively originate from employee services during the applicable period and may experience periodic fluctuations as a result of changes in non-operating factors, including changes in discount rates, changes in expected returns on benefit plan assets, and other demographic actuarial assumptions. See Note P - Pension and Post-Retirement Benefits to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
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(3)
|
Merger and acquisition related expenses include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items such as the amortization of inventory fair value step-up, information technology integration costs and similar charges. While these costs are not operational in nature and are not expected to continue for any singular transaction on an ongoing basis, similar types of costs, expenses and charges have occurred in prior periods and may recur in the future as we continue to integrate prior acquisitions and pursue any future acquisitions.
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(4)
|
Plant capacity expansion expenses include expenses that are not inventoriable or capitalizable as related to plant expansion projects greater than $5 million in capital expenditures or plant start up projects. While these expenses are not operational in nature and are not expected to continue for any singular project on an ongoing basis, similar types of expenses have occurred in prior periods and may recur in the future as we continue to pursue future plant capacity expansion.
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(5)
|
Reflects contract termination expenses related to strategically exiting a service contract. While these expenses are not operational in nature and are not expected to continue for any singular event on an ongoing basis, similar types of expenses have occurred in prior periods and may recur in the future as we continue to strategically evaluate our contracts.
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(6)
|
Reflects costs incurred related to business optimization projects within our corporate center, which aim to measure and improve the efficiency, productivity and performance of our organization. While these costs are not operational in nature and are not expected to continue for any singular project on an ongoing basis, similar types of expenses may recur in the future.
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(7)
|
Reflects miscellaneous adjustments permitted under the Credit Agreement. The first quarter of 2019 includes $2.4 million related to facility closure costs and $2.2 million of loss contingencies reserve, partially offset by insurance proceeds of $2.2 million. The first quarter of 2018 includes a net loss of $3.4 million on divestitures of assets, consisting of $7.9 million of contract termination costs and $1.3 million of divestiture related expenses such as legal fees and consulting fees, partially offset by a $5.8 million gain on sale of assets.
|
Adjusted EBITDA-Trailing Twelve Months
Our Revolver contains a consolidated total net leverage ratio that we must meet as of the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 30% of the Revolver commitment, which is calculated based on our Adjusted EBITDA for the trailing twelve months. Noncompliance with this financial ratio covenant could result in the acceleration of our obligations to repay all amounts outstanding under the Revolver and the Term Loan. Moreover, the Revolver and the Term Loan contain covenants that restrict, subject to certain exceptions, our ability to make permitted acquisitions, incur additional indebtedness, make restricted payments (including dividends) and retain excess cash flow based, in some cases, on our ability to meet leverage ratios calculated based on our Adjusted EBITDA for the trailing twelve months.
See the description under “Adjusted EBITDA” above for certain important information about Adjusted EBITDA-trailing twelve months, including certain limitations and management’s use of this metric in light of its status as a non-GAAP measure.
As of
March 31, 2019
, we are in compliance with all covenants in accordance with our Revolver and Term Loan. The Revolver and Term Loan require us to maintain a consolidated 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 30% of the Revolver commitment. As of
March 31, 2019
, our Revolver usage was zero (other than certain undrawn letters of credit). Since the Revolver usage did not exceed 30% of the Revolver commitment, the consolidated leverage ratio covenant did not apply. The calculation of the consolidated leverage ratio incorporates the Adjusted EBITDA-trailing twelve months as follows:
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|
|
|
|
|
(All amounts in thousands)
|
|
March 31, 2019
|
|
|
|
Total debt
|
|
$
|
1,258,224
|
|
Finance leases
|
|
130
|
|
Total consolidated debt
|
|
$
|
1,258,354
|
|
|
|
|
Adjusted EBITDA-trailing twelve months
|
|
$
|
365,964
|
|
Pro forma Adjusted EBITDA including impact of acquisitions
(1)
|
|
4,121
|
|
Other adjustments for covenant calculation
(2)
|
|
265
|
|
Total Adjusted EBITDA-trailing twelve months for covenant calculation
|
|
$
|
370,350
|
|
|
|
|
Consolidated leverage ratio
(3)
|
|
3.40
|
|
|
|
|
|
|
|
|
(1)
|
Covenant calculation allows for the Adjusted EBITDA-trailing twelve months to include the impact of acquisitions on a pro forma basis.
|
(2)
|
Covenant calculation excludes activity at legal entities above the operating company, which is mainly interest income offset by public company operating expenses.
|
(3)
|
Calculated by dividing Total consolidated debt by Total Adjusted EBITDA-trailing twelve months for covenant calculation.
|
Results of Operations for the
Three Months Ended
March 31, 2019
and
2018
Sales
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per ton data)
|
Three Months Ended
March 31,
|
|
Percent Change
|
|
2019
|
|
2018
|
|
'19 vs.'18
|
Sales:
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
260,477
|
|
|
$
|
312,930
|
|
|
(17
|
)%
|
Industrial & Specialty Products
|
118,273
|
|
|
56,383
|
|
|
110
|
%
|
Total sales
|
$
|
378,750
|
|
|
$
|
369,313
|
|
|
3
|
%
|
Tons:
|
|
|
|
|
|
Oil & Gas Proppants
|
3,864
|
|
|
3,252
|
|
|
19
|
%
|
Industrial & Specialty Products
|
966
|
|
|
877
|
|
|
10
|
%
|
Total Tons
|
4,830
|
|
|
4,129
|
|
|
17
|
%
|
Average Selling Price per Ton:
|
|
|
|
|
|
Oil & Gas Proppants
|
$
|
67.41
|
|
|
$
|
96.23
|
|
|
(30
|
)%
|
Industrial & Specialty Products
|
122.44
|
|
|
64.29
|
|
|
90
|
%
|
Overall Average Selling Price per Ton
|
$
|
78.42
|
|
|
$
|
89.44
|
|
|
(12
|
)%
|
Total sales increased
3%
for the
three
months ended
March 31, 2019
compared to the
three
months ended
March 31, 2018
, driven by a
17%
increase in total tons sold, partially offset by a
12%
decrease in overall average selling price.
The increase in total sales was driven by Industrial & Specialty Products sales, which increased
110%
for the
three
months ended
March 31, 2019
compared to the
three
months ended
March 31, 2018
. Industrial & Specialty Products tons sold increased
10%
and average selling price increased
90%
. The increase in tons sold was mainly due to the acquisition of EPM. The increase in average selling price was due to the acquisition of EPM, additional higher-margin product sales and price increases.
The increase in total sales was partially offset by Oil & Gas Proppants sales, which decreased
17%
for the
three
months ended
March 31, 2019
compared to the
three
months ended
March 31, 2018
. Oil & Gas Proppants tons sold increased
19%
and average selling price decreased
30%
. The increase in tons sold was driven by year over year growth in demand for our frac sand. The decrease in average selling price was mainly driven by more tons sold from local in-basin plants which have lower logistics costs, increased proppant supply, and decreased sand pricing.
Cost of Sales (excluding depreciation, depletion, and amortization)
Cost of sales increased by
$36.6 million
, or
14%
, to
$297.5 million
for the
three
months ended
March 31, 2019
compared to
$260.9 million
for the
three
months ended
March 31, 2018
. These changes result from the main components of cost of sales as discussed below. As a percentage of sales, cost of sales represented
79%
for the
three
months ended
March 31, 2019
compared to
71%
for the same period in
2018
.
We incurred
$129.9 million
and
$134.2 million
of transportation and related costs for the
three
months ended
March 31, 2019
and
2018
, respectively. This decrease was mainly due to a decline in demand for Northern White sand caused by some of our customers shifting to local in-basin frac sands with lower logistics cost, partially offset by costs related to additional Sandbox operations and the acquisition of EPM. As a percentage of sales, transportation and related costs decreased to
34%
for the
three
months ended
March 31, 2019
compared to
36%
for the same period in
2018
.
We incurred
$53.7 million
and
$44.9 million
of operating labor costs for the
three
months ended
March 31, 2019
and
2018
, respectively. The
$8.8 million
increase in labor costs incurred was due to more tons sold, costs related to additional Sandbox operations and the acquisition of EPM. As a percentage of sales, operating labor costs represented
14%
for the
three
months ended
March 31, 2019
compared to
12%
for the same period in
2018
.
We incurred
$16.3 million
and
$10.0 million
of electricity and drying fuel (principally natural gas) costs for the
three
months ended
March 31, 2019
and
2018
, respectively. The
$6.3 million
increase in electricity and drying fuel costs incurred was due to more tons sold and the acquisition of EPM. As a percentage of sales, electricity and drying fuel costs represented
4%
for the
three
months ended
March 31, 2019
compared to
3%
for the same period in
2018
.
We incurred
$23.5 million
and
$19.1 million
of maintenance and repair costs for the
three
months ended
March 31, 2019
and
2018
, respectively. The increase in maintenance and repair costs incurred was due to plant capacity expansion expenses, higher production volume, additional Sandbox operations and the acquisition of EPM. As a percentage of sales, maintenance and repair costs represented
6%
for the
three
months ended
March 31, 2019
compared to
5%
for the same period in
2018
.
Segment Contribution Margin
Industrial & Specialty Products contribution margin increased by
$24.0 million
to
$44.6 million
for the
three
months ended
March 31, 2019
compared to
$20.5 million
for the
three
months ended
March 31, 2018
, driven by a
$61.9 million
increase in revenue, partially offset by
$37.9 million
in higher cost of sales. The increase in segment contribution margin was due to the acquisition of EPM, new higher-margin product sales and price increases.
Oil & Gas Proppants contribution margin decreased by
$40.8 million
to
$58.6 million
for the
three
months ended
March 31, 2019
compared to
$99.4 million
for the
three
months ended
March 31, 2018
, driven by a
$52.5 million
decrease in sales, partially offset by an
$11.6 million
decrease in cost of sales. The decrease in segment contribution margin was mainly driven by the decrease in average selling price due to more tons sold from local in-basin plants which have lower logistics costs, increased proppant supply, and decreased sand pricing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$0.1 million
, or
0%
, to
$34.7 million
for the
three
months ended
March 31, 2019
compared to
$34.6 million
for the
three
months ended
March 31, 2018
. The net increase was due to the following factors:
|
|
•
|
Compensation related expense increased by
$5.3 million
for the
three
months ended
March 31, 2019
compared to the
three
months ended
March 31, 2018
, mainly due to the acquisition of EPM.
|
|
|
•
|
Merger and acquisition related expense decreased by $2.1 million to $0.4 million for the
three
months ended
March 31, 2019
compared to $2.5 million for the
three
months ended
March 31, 2018
. The decrease was mainly due to lower costs related to growth and expansion initiatives.
|
|
|
•
|
A net loss of $3.4 million on divestiture of assets during the three months ended March 31, 2018 did not recur during the
three
months ended
March 31, 2019
.
|
In total, our selling, general and administrative expenses represented approximately
9%
of our sales for both the
three
months ended
March 31, 2019
and
2018
.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased by
$16.0 million
, or
56%
, to
$44.6 million
for the
three
months ended
March 31, 2019
compared to
$28.6 million
for the
three
months ended
March 31, 2018
. The increase was mainly driven by our plant capacity expansions and our acquisition of EPM, as well as other continued capital spending. Depreciation, depletion and amortization expense represented approximately
12%
and
8%
of our sales for the
three
months ended
March 31, 2019
and
2018
, respectively.
Operating Income
Operating income decreased by
$43.3 million
to
$2.0 million
for the
three
months ended
March 31, 2019
compared to operating income of
$45.2 million
for the
three
months ended
March 31, 2018
. The decrease was driven by a
14%
increase in cost of sales and a
56%
increase in depreciation, depletion and amortization expense, partially offset by a
3%
increase in total sales.
Interest Expense
Interest expense increased by
$16.9 million
, or
239%
, to
$24.0 million
for the
three
months ended
March 31, 2019
compared to
$7.1 million
for the
three
months ended
March 31, 2018
, mainly driven by the increase in our Credit Facility to finance the acquisition of EPM.
Provision for Income Taxes
For the
three
months ended
March 31, 2019
, we had a tax benefit of
$2.0 million
. For the
three
months ended
March 31, 2018
, we had a tax expense of
$7.5 million
. The effective tax rate was
9%
and
19%
for the
three
months ended
March 31, 2019
and
2018
, respectively. The effective tax rate for the
three
months ended
March 31, 2019
and
2018
would have been
29%
and
18%
, respectively, without the below items recorded discretely.
During the
three
months ended
March 31, 2019
and
2018
, we recorded a tax expense of
$3.9 million
and
$0.5 million
, respectively, related to equity compensation pursuant to ASU 2016-09.
Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion allowances. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income before income taxes.
Net (Loss) Income
Net (loss) income attributable to U.S. Silica Holdings, Inc., was a net loss of
$19.3 million
and net income of
$31.3 million
for the
three
months ended
March 31, 2019
and
2018
, respectively. The year over year changes 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, borrowings under our credit facilities, or equity issuances. Our working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. As of
March 31, 2019
, our working capital was
$251.9 million
and we had
$95.2 million
of availability under the Revolver.
In connection with the EPMH acquisition, on May 1, 2018, we entered into the Credit Agreement with BNP Paribas, as administrative agent, and the lenders named therein. The Credit Agreement increases our existing senior debt by entering into a new
$1.380 billion
senior secured Credit Facility, consisting of a
$1.280 billion
Term Loan and a
$100 million
Revolver that may also be used for swingline loans or letters of credit, and we may elect to increase the Term Loan in accordance with the terms of the Credit Agreement. The amounts owed under the Credit Agreement use LIBOR as a benchmark for establishing the rate at which interest accrues. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted but could include an increase in the cost to us of this indebtedness. For more information on the Credit Agreement see
Note J - Debt
to our Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.
We believe that cash on hand, cash generated through operations and cash generated from financing arrangements will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled debt payments and any dividends declared for at least the next 12 months.
Management and our Board remain committed to evaluating additional ways of creating shareholder value. Any determination to pay dividends or other distributions in cash, stock, or property in the future or otherwise return capital to our stockholders, including decisions about existing or new share repurchase programs, will be at the discretion of our Board and will be dependent on then-existing conditions, including industry and market conditions, our financial condition, results of operations, liquidity and capital requirements, contractual restrictions including restrictive covenants contained in debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness.
Cash Flow Analysis
A summary of operating, investing and financing activities (in thousands) is shown in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
10,901
|
|
|
$
|
77,609
|
|
Investing activities
|
(45,683
|
)
|
|
(47,378
|
)
|
Financing activities
|
(6,101
|
)
|
|
(85,286
|
)
|
Net Cash Provided by / Used in Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash and working capital items. Adjustments to net income for non-cash items include depreciation, depletion and amortization, deferred revenue, deferred income taxes, equity-based compensation and bad debt provision. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally accounts receivable, inventories, prepaid expenses and other current assets, income taxes payable and receivable, accounts payable and accrued expenses.
Net cash provided by operating activities was
$10.9 million
for the
three
months ended
March 31, 2019
. This was mainly due to a
$19.3 million
net loss adjusted for non-cash items, including
$44.6 million
in depreciation, depletion and amortization,
$2.6 million
in deferred income taxes,
$4.0 million
in equity-based compensation,
$7.6 million
in deferred revenue, and
$1.5 million
in other miscellaneous non-cash items. Also contributing to the change was a
$43.6 million
increase
in accounts receivable, a
$18.9 million
decrease in inventories, a
$3.2 million
decrease in prepaid expenses and other current assets, a
$13.0 million
increase in accounts payable and accrued liabilities, and
$1.7 million
in other operating assets and liabilities.
Net cash provided by operating activities was
$77.6 million
for the
three
months ended
March 31, 2018
. This was mainly due to
$31.3 million
in net income adjusted for non-cash items, including
$28.6 million
in depreciation, depletion and amortization,
$7.8 million
in deferred income taxes,
$6.3 million
in equity-based compensation,
$5.8 million
gain on sale of three transload facilities, and
$3.4 million
in other miscellaneous non-cash items. Also contributing to the change was a
$39.1 million
increase in accounts receivable, a
$15.8 million
decrease in inventories, a
$27.9 million
decrease in accounts payable and accrued liabilities,
$58.0 million
in short-term and long-term vendor incentives, and
$0.7 million
in other operating assets and liabilities.
Net Cash Provided by / Used in Investing Activities
Investing activities consist primarily of cash consideration paid to acquire businesses and capital expenditures for growth and maintenance.
Net cash used in investing activities was
$45.7 million
for the
three
months ended
March 31, 2019
. This was due to capital expenditures of
$44.4 million
, and capitalized intellectual property costs of
$1.3 million
. Capital expenditures for the
three
months ended
March 31, 2019
were mainly for engineering, procurement and construction of our growth projects, primarily Lamesa and equipment to expand our Sandbox operations, and other maintenance and cost improvement capital projects.
Net cash used in investing activities was
$47.4 million
for the
three
months ended
March 31, 2018
. This was mainly due to capital expenditures of
$72.3 million
, and capitalized intellectual property costs of
$1.0 million
, partially offset by proceeds from the sale of three transload facilities of
$26.0 million
. Capital expenditures for the
three
months ended
March 31, 2018
were mainly for engineering, procurement and construction of our growth projects and other maintenance and cost improvement capital projects.
Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in 2019 will be in the range of approximately $100 million to $125 million, which is primarily associated with previously announced growth projects and other maintenance and cost improvement capital projects. We expect to fund our capital expenditures through cash on hand and cash generated from our operations.
Net Cash Provided by / Used in Financing Activities
Financing activities consist primarily of equity issuances, dividend payments, share repurchases, borrowings and repayments related to the Revolver and Term Loan, as well as fees and expenses paid in connection with our credit facilities.
Net cash used in financing activities was
$6.1 million
for the
three
months ended
March 31, 2019
. This was mainly due to
$4.0 million
of long-term debt payments,
$4.7 million
of dividends paid, and
$2.2 million
of tax payments related to shares withheld for vested restricted stock and stock units, partially offset by
$4.7 million
of capital contribution from a non-controlling interest.
Net cash used in financing activities was
$85.3 million
for the
three
months ended
March 31, 2018
. This was mainly due to
$75.0 million
in common stock repurchases,
$5.1 million
of dividends paid,
$1.7 million
of long-term debt payments, and
$3.5 million
of tax payments related to shares withheld for vested restricted stock and restricted stock units.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a current material effect or are reasonably likely to have a 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
2018
Annual Report on Form 10-K. For more details on future minimum annual purchase commitments and operating leases commitments, please see accompanying
Note O - Commitments and Contingencies
and
Note Q - Leases
to our Consolidated 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
March 31, 2019
, we had
$18.8 million
accrued for future reclamation costs, as compared to
$18.4 million
as of
December 31, 2018
.
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 2018 Annual Report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.
A summary of our significant accounting policies, including certain critical accounting policies and estimates, are included in Note B - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of our
2018
Annual Report on Form 10-K. Management believes that the application of these policies on a consistent basis enables us to provide the users of the Consolidated Financial Statements with useful and reliable information about our operating results and financial condition.
Recent Accounting Pronouncements
New accounting pronouncements that have been recently adopted are described in
Note B - Summary of Significant Accounting Policies
to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Availability of Reports; Website Access; Other Information
Our Internet address is http://www.ussilica.com. Through “Investors” — “SEC Filings” on our home page, we make available free of charge our annual reports 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 Sections 13(a) or 15(d) of the Exchange Act 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 available on its website at http://www.sec.gov.
Stockholders may also request a free copy of these documents from: U.S. Silica Holdings, Inc., attn.: Investor Relations, 24275 Katy Freeway, Suite 600, Katy, Texas 77494 or view them on our website at http://www.ussilica.com/investors.