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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-35416
U.S. Silica Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
Incorporation or Organization)
26-3718801
(I.R.S. Employer
Identification No.)
8490 Progress Drive, Suite 300
Frederick, Maryland 21701
(Address of Principal Executive Offices) (Zip Code)
(301) 682-0600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Act:
Title of each class:
Common Stock, par value $0.01 per share
Name of each exchange on which registered:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Securities Act: None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☑
☐
Accelerated filer
Smaller reporting company
☐
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the outstanding common stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most
recently completed second fiscal quarter, was $1,562,047,655 based on the closing price of $29.36 per share, as reported on the New York Stock Exchange.
As of February 21, 2017, 81,061,840 shares of the common stock of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K Certain sections of the Proxy Statement for the 2017 Annual Meeting of Shareholders for U.S. Silica Holdings, Inc.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
U.S. Silica Holdings, Inc.
FORM 10-K
For the Fiscal Year Ended December 31, 2016
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements
of historical fact included in this Annual Report on Form 10-K 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, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives,
strategies or 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 expected, including:
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fluctuations in demand for commercial silica;
the cyclical nature of our customers’ businesses;
operating risks that are beyond our control, such as changes in the price and availability of transportation, natural gas or electricity; unusual
or unexpected geological formations or pressures; cave-ins, pit wall failures or rock falls; or unanticipated ground, grade or water
conditions;
our dependence on three of our plants for a significant portion of our sales;
the level of activity in the natural gas and oil industries;
decreased demand for frac sand or the development of either effective alternative proppants or new processes to replace hydraulic
fracturing;
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;
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;
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;
our ability to succeed in competitive markets;
loss of, or reduction in, business from our largest customers;
increasing costs or a lack of dependability or availability of transportation services and transload network access or infrastructure;
extensive regulation of trucking services;
our ability to recruit and retain truckload drivers;
increases in the prices of, or interruptions in the supply of, natural gas and electricity, or any other energy sources;
increases in the price of diesel fuel;
diminished access to water;
our ability to successfully complete acquisitions or integrate acquired businesses;
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;
our substantial indebtedness and pension obligations;
restrictions imposed by our indebtedness on our current and future operations;
contractual obligations that require us to deliver minimum amounts of frac sand or purchase minimum amounts of services;
the accuracy of our estimates of mineral reserves and resource deposits;
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a shortage of skilled labor and rising costs in the mining industry;
our ability to attract and retain key personnel;
our ability to maintain satisfactory labor relations;
our reliance on patents, trade secrets and contractual restrictions to protect our proprietary rights;
our significant unfunded pension obligations and post-retirement health care liabilities;
our ability to maintain effective quality control systems at our mining, processing and production facilities;
seasonal and severe weather conditions;
fluctuations in our sales and results of operations due to seasonality and other factors;
interruptions or failures in our information technology systems;
the impact of a terrorist attack or armed conflict;
extensive and evolving environmental, mining, health and safety, licensing, reclamation and other regulation (and changes in their
enforcement or interpretation);
silica-related health issues and corresponding litigation;
our ability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property; and
other factors included and disclosed in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
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 known factors, and it is impossible for us to anticipate
all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary
statements, are disclosed under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report on Form 10-K. 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 public communications. You should evaluate all forward-looking statements made in this
Annual Report on Form 10-K 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 Annual Report on Form 10-K 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.
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ITEM 1.
BUSINESS
PART I.
Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “U.S. Silica,” “the Company,” “our business,” “our
company” refer to U.S. Silica Holdings, Inc. and its consolidated subsidiaries as a combined entity. Adjusted EBITDA as used herein is a non-GAAP
measure. For a detailed description of Adjusted EBITDA and a reconciliation to the most comparable GAAP measure, please see the discussion under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Evaluate Our Business – Adjusted EBITDA.”
Our Company
Business 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 116 year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-
effectively deliver over 240 products to customers across these markets. After our acquisition of New Birmingham, Inc. ("NBI" or the "NBI Acquisition") on
August 16, 2016, as of December 31, 2016, we operate 18 production facilities across the United States. Including the purchase of reserves adjacent to our
Ottawa, Illinois, facility in May 2016, we now control 467 million tons of reserves of commercial silica, which can be processed to make 226 million tons of
finished products that meet American Petroleum Institute ("API") frac sand specifications. Additionally, on August 22, 2016, we completed the acquisition of
Sandbox Enterprises, LLC ("Sandbox" or the “Sandbox Acquisition”) as a “last mile” logistics solution for frac sand in the oil and gas industry. For more
information regarding the NBI and Sandbox Acquisitions, see Note D - Business Combinations to our Financial Statements in Part II, Item 8 to this Annual
Report on Form 10-K.
Our operations are organized into two segments based on end markets served: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. In our
largest end market, oil and gas proppants, our frac sand is used to stimulate and maintain the flow of hydrocarbons in oil and natural gas wells. We produce a
wide range of frac sand sizes and are capable of efficient delivery of large quantities of API grade frac sand to most of the major U.S. shale basins via our
logistics network. 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. 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.
Corporate History
U.S. Silica Holdings, Inc. was incorporated under the laws of the State of Delaware on November 14, 2008. U.S. Silica Company, which has been a
domestic producer of commercial silica for 116 years, became a wholly-owned subsidiary of the Company on November 25, 2008. On January 31, 2012, we
completed our initial public offering of our common stock.
Our Strengths
We attribute our success to the following strengths:
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Large-scale producer with a diverse and high-quality reserve base. Our 18 geographically dispersed production facilities control 467 million tons
of reserves, including API size frac sand and large quantities of silica with distinct characteristics, giving us the ability to sell over 240 products to
customers in both our Oil & Gas Proppants segment and Industrial & Specialty Products segment. Our large-scale production, logistics capabilities
and long reserve life make us a preferred commercial silica supplier to our customers. Our consistent, reliable supply of large quantities of silica
gives our customers the security to customize their production processes around our commercial silica. Furthermore, our large scale provides us
earnings diversification and a larger addressable market.
Geographically advantaged footprint with intrinsic transportation advantages. The strategic location of our facilities and our logistics
capabilities enable us to enjoy high customer retention and a larger addressable market. In 2016, we acquired NBI, the ultimate parent company of
NBR Sand, LLC, a regional sand producer located near Tyler, Texas. This facility allows customers to ship regional sand directly to the wellheads
in the Texas and Louisiana basins by truck, which provides us with a delivered cost advantage. In our Oil & Gas Proppants segment, our network
of frac sand production facilities with access to Class I rail either onsite or by truck and the strategic locations of our transloads serve to create an
addressable market that includes every major U.S. shale basin. We
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believe we are one of the few frac sand producers capable of cost-effectively delivering API grade frac sand to most of the major U.S. shale basins
by on-site rail. Additionally, on August 22, 2016, we completed the acquisition of Sandbox, a provider of logistics solutions and technology for the
transportation of proppant used in hydraulic fracturing in the oil and gas industry. Sandbox provides “last mile” logistics to oil and gas companies.
Sandbox has operations in Midland/Odessa, Texas, Morgantown, West Virginia, western North Dakota, northeast of Denver, Colorado, Oklahoma
City, OK and Cambridge, Ohio, where its major customers are located, which allowed us to expand our frac sand offering directly to customers'
wellhead locations.
Additionally, due to the high weight-to-value ratio of many silica products in our Industrial & Specialty Products segment, the proximity of our
facilities to our customers’ facilities often results in us being their sole supplier. This advantage has enabled us to enjoy strong customer retention
in this segment, with our top five Industrial & Specialty Products segment customers purchasing from us for an average of over 50 years.
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Low-cost operating structure. We focus on building and operating facilities with low delivered cost that will allow us to be successful through the
cycle. We believe the combination of the following factors contributes to our low-cost structure and our high margins:
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our ownership of the vast majority of our reserves, resulting in mineral royalty expense that was less than 0.3% of our sales in 2016;
the close proximity of our mines to their respective processing plants, which allows for a cost-efficient and highly automated production
process;
our processing expertise, which enables us to create over 240 products with unique characteristics while minimizing waste;
our integrated logistics management expertise and geographically advantaged facility network, which enables us to reliably ship products by
the most cost-effective method available, whether by truck, rail or barge, to meet the needs of our customers, whether at in-basin transload
locations or directly at wellhead locations via our Sandbox operations;
our large customer base across numerous end markets, which allows us to maximize our mining recovery rate and asset utilization; and
our large overall and plant-level operating scale.
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Strong reputation with our customers and the communities in which we operate. We believe that we have built a strong reputation during our
116 year operating history. Our customers know us for our dependability and our high-quality, innovative products, as we have a long track record
of timely delivery of our products according to customer specifications. We also have an extensive network of technical resources, including
materials science and petroleum engineering expertise, which enables us to collaborate with our customers to develop new products and improve
the performance of their existing applications. We are also well known in the communities in which we operate as a preferred employer and a
responsible corporate citizen, which generally serves us well in hiring new employees and securing difficult to obtain permits for expansions and
new facilities.
Experienced management team. The members of our senior management team bring significant experience to the dynamic environment in which
we operate. Their expertise covers a range of disciplines, including industry-specific operating and technical knowledge as well as experience
managing high-growth businesses. We believe we have assembled a flexible, creative and responsive team that can quickly adapt to the rapidly
evolving unconventional oil and natural gas drilling landscape.
Our Business Strategy
The key drivers of our growth strategy include:
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Expand our Oil & Gas Proppants production capacity and product portfolio. We continue to consider and execute several initiatives to increase
our frac sand production capacity and augment our proppant product portfolio.
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While we continue to work on maximizing existing production facility efficiencies, due to the recent improvements in the oil and gas
market, we are also evaluating production capacity expansion opportunities at existing facilities as well as Greenfield opportunities.
In order to increase our resin coated product portfolio, during 2015, we announced the introduction of InnoProp® Python RCS, a new
high-performance resin coated proppant designed to increase the production of oil and gas wells in an economical and efficient manner.
In early 2016, we introduced another new resin
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coated product, InnoProp® PLT, which is a curable low-temperature product and can be used without an activator in oil and gas wells that
have bottom-hole static temperatures down to 70°F.
Increase our presence and product offering in industrial and specialty products end markets. Our research and business development teams
work in tandem with our customers to develop new products, which we expect will either increase our presence and market share in certain
industrial and specialty products end markets or allow us to enter new markets. We manage a robust pipeline of new products in various stages of
development. Some of these products have already come to market, resulting in a positive impact on our financial results. We continue to work
toward offering more value-driven industrial and specialty products that will enhance the profitability of the business.
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, 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 logistics network to ensure product is available to meet the 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 key 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. We expect to 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. As of December 31, 2016,
we have storage capacity at 50 transloads located near all of the major shale basins in the United States. Our recent acquisition of Sandbox extends
our delivery capability directly to our customers' wellhead locations, which increases efficiency and provides a lower cost logistics solution for our
customers. Sandbox has operations in Midland/Odessa, Texas; Morgantown, West Virginia; western North Dakota; northeast of Denver, Colorado;
Oklahoma City, OK; and Cambridge, Ohio, where its major customers are located.
Evaluate both Greenfield and Brownfield expansion opportunities and other acquisitions. We expect to continue leveraging 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. We are continuing to actively pursue acquisitions to grow by taking advantage of our asset footprint,
our management’s experience with high-growth businesses, and our strong customer relationships. Our primary objective is to acquire assets with
differing levels of frac sand qualities that are complementary to our Oil & Gas Proppants segment, with a focus on mining, processing and
logistics to further enhance our market presence. We prioritize acquisitions that provide opportunities to realize synergies (and, in some cases, the
acquisition may be immediately accretive assuming synergies), including entering new geographic and frac sand product markets, acquiring
attractive customer contracts and improving operations. For instance, on August 16, 2016, we completed our acquisition of NBI, the ultimate
parent company of, NBR Sand, LLC, a regional sand producer located near Tyler, Texas. Additionally, on August 22, 2016, we completed the
acquisition of Sandbox, a provider of logistics solutions and technology for the transportation of proppant used in hydraulic fracturing in the oil
and gas industry. We are in active discussions to acquire additional assets fitting this strategy, which, if completed, would be “significant” under
Regulation S-X and could require additional sources of financing. There can be no assurance that we will reach a definitive agreement and
complete any of these potential transactions. See the risk factors disclosed in Item 1A of Part I, including the risk factor entitled, “If we cannot
successfully complete acquisitions or integrate acquired businesses, our growth may be limited and our financial condition may be adversely
affected.”
• Maintain financial strength and flexibility. We intend to maintain financial strength and flexibility to enable us to better manage through industry
downturns and pursue acquisitions and new growth opportunities as they arise. In March 2016, we completed a public offering of 10,000,000
shares of our common stock for total cash net proceeds of $186.2 million. In November 2016, we executed another offering of 10,350,000 shares
of common stock raising net cash proceeds of $467.0 million. As of December 31, 2016, we had $711.2 million of cash on hand and $46.0 million
of availability under our revolving credit facility (the "Revolver").
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Our Products
In order to serve a broad range of end markets, we produce and sell a variety of commercial silica products, including whole grain and ground products,
as well as other industrial mineral products that we believe complement our commercial silica products.
Whole Grain Silica Products—We sell whole grain commercial silica products in a range of shapes, sizes and purity levels. We sell whole grain silica
that has a round shape and high crush strength to be used as frac sand in connection with oil and natural gas recovery, and we have the capability to produce
resin coated sand. During 2015, we announced the introduction of InnoProp® Python RCS, a new high-performance resin coated proppant designed to
increase the production of oil and gas wells in an economical and efficient manner. In early 2016, we introduced another new resin coated product,
InnoProp® PLT, which is a curable low-temperature product and can be used without an activator in oil and gas wells that have bottom-hole static
temperatures down to 70°F.
We also sell whole grain silica products in a range of size distributions, grain shapes and chemical purity levels to our customers involved in the
manufacturing of glass products, including a low-iron whole grain product sold to manufacturers of architectural and solar glass applications. In addition, we
sell several grades of whole grain round silica to the foundry industry and provide whole grain commercial silica to the building products industry. Sales of
whole grain commercial silica products and coated proppants accounted for approximately 86%, 88%, and 87% of our total sales revenue for 2016, 2015 and
2014, respectively.
Ground Silica Products—Our ground commercial silica products are inherently inert, white and bright, with high purity. We market our ground silica in
sizes ranging from 40 to 250 microns for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass and precision castings. We also produce
and market fine ground silica in sizes ranging from 5 to 40 microns for use in premium paints, specialty coatings, sealants, silicone rubber and epoxies. We
believe we are currently the only commercial silica producer in the United States that manufactures a 5-micron product. Sales of ground silica products
accounted for approximately 12%, 9%, and 8% of our total sales revenue for 2016, 2015 and 2014 respectively.
Industrial Mineral Products—We also produce and sell certain other industrial mineral products, such as aplite and magnesium silicate. Aplite is a
mineral used to produce container glass and insulation fiberglass and is a source of alumina that has a low melting point and a low tendency to form defects in
glass. We also produce and sell a highly selective adsorbent made from a mixture of silica and magnesium, used extensively in preparative and analytical
chromatography. Sales of our other industrial mineral products accounted for approximately 2%, 3%, and 5% of our total sales revenue for 2016, 2015 and
2014, respectively.
Our Industry
The commercial silica industry consists of businesses that are involved in the mining, processing and distribution of commercial silica. Commercial
silica, also referred to as “silica,” “industrial sand and gravel,” “sand,” “silica sand” and “quartz sand,” is a term applied to sands and gravels containing a
high percentage of silica (silicon dioxide, SiO2) in the form of quartz. Commercial silica deposits occur throughout the United States, but mines and
processing facilities are typically located near end markets and in areas with access to transportation infrastructure. Other factors affecting the feasibility of
commercial silica production include deposit composition, product quality specifications, land-use and environmental regulation, including permitting
requirements, access to electricity, natural gas and water and a producer’s expertise and know-how. New entrants face serious hurdles to establish their
operations, including:
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the difficulty of finding silica reserves suitable for use as frac sand, which, according to the API, must meet stringent technical specifications,
including, among others, sphericity, grain size, crush resistance, acid solubility, purity and turbidity;
the difficulty of securing contiguous reserves of silica large enough to justify the capital investment required to develop a mine, processing plant,
product storage and rail track;
a lack of industry-specific geological, exploration, development and mining knowledge and experience needed to enable the identification,
acquisition and development of high-quality reserves;
the difficulty of identifying reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or
have the rail access needed for low-cost transportation to major shale basins;
the difficulty of securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities, a
process that can require up to three years; and
the difficulty of assembling a large, diverse portfolio of customers to optimize operations.
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Extraction Processes
Commercial silica deposits are formed from a variety of sedimentary processes and have distinct characteristics that range from hard sandstone rock to
loose, unconsolidated dune sands. While the specific extraction method utilized depends primarily on the deposit composition, most silica is mined using
conventional open-pit bench extraction methods and begins after clearing the deposit of any overlaying soil and organic matter. The silica deposit
composition and chemical purity also dictate the processing methods and equipment utilized. For example, broken rock from a sandstone deposit may require
one, two or three stages of crushing to liberate the silica grains required for most markets. Unconsolidated deposits may require little or no crushing, as silica
grains are not tightly cemented together.
We conduct only surface mining operations and do not operate any underground mines. Mining methods at our facilities include conventional hard rock
mining, hydraulic mining, surface or open-pit mining of loosely consolidated silica deposits and dredge mining. Hard rock mining involves drilling and
blasting in order to break up sandstone into sizes suitable for transport to the processing facility by truck, slurry or conveyer. Hydraulic mining involves
spraying high-pressure water to break up loosely consolidated sandstone at the mine face. Surface or open-pit mining involves using earthmoving equipment,
such as bucket loaders, to gather silica deposits for processing. Lastly, dredging involves gathering silica deposits from mining ponds and transporting them
by slurry pipelines for processing. We may also use slurry pipelines in our hydraulic and open-pit mining efforts to expedite processing. Silica mining and
processing typically has less of an environmental impact than the mining and processing of other minerals, in part because it uses fewer chemicals. Our
processing plants are equipped to receive the mined sand, wash away impurities, eliminate oversized or undersized particles and remove moisture through a
multi-stage drying process. Our 18 production facilities are located primarily in the eastern half of the United States, with operations in Alabama, Illinois,
Louisiana, Michigan, Missouri, New Jersey, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. Each of our
facilities operates year-round, typically in shift schedules designed to optimize facility utilization in accordance with market demand. Our facilities receive
regular preventative maintenance, and we make additional capital investments in our facilities as required to support customer volumes and internal
performance goals. For more information related to our production facilities, see Item 2, “Properties”.
We believe we have a broad and high quality mineral reserves base due to our strategically located mines and facilities. At December 31, 2016, we
estimate that we had approximately 467 million tons of proven and probable recoverable mineral reserves. The quantity and nature of the mineral reserves at
each of our properties are estimated by our mining engineers. Our mining engineers update our reserve estimates annually, making necessary adjustments for
operations at each location during the year and additions or reductions due to property acquisitions and dispositions, quality adjustments and mine plan
updates. Before acquiring new reserves, we perform surveying, drill core analysis and other tests to confirm the quantity and quality of the acquired reserves.
In some instances, we acquire the mineral rights to reserves without actually taking ownership of the properties. For more information related to our
production facilities, deposits and reserves, see Item 2, “Properties”.
Production Processes
After extracting the ore, the silica is washed with water to remove fine impurities such as clay and organic particles. In some deposits, these fine
contaminants or impurities are tightly bonded to the surface of the silica grain and require attrition scrubbing to be removed. Other deposits require the use of
flotation to collect and separate contaminants from the silica. When these contaminants are weakly magnetic, special high intensity magnets may be utilized
in the process to improve the purity of the final commercial silica product. After the silica has been washed, most output is dried prior to sale.
The next step in the production process involves the classification of commercial silica products according to their chemical purity, particle shape and
particle size distribution. Generally, commercial silica is produced and sold in either whole grain form or ground form. Whole grain silica generally ranges
from 12 to 140 mesh. Mesh refers to the number of openings per linear inch on a sizing screen. Whole grain silica products are sold in a range of shapes, sizes
and purity levels to be used in a variety of industrial applications, such as oil and natural gas hydraulic fracturing proppants, glass, foundry, building products,
filtration and recreation. Some whole grain silica is further processed to ground silica of much smaller particle sizes, ranging from 5 to 250 microns. A micron
is one-millionth of a meter.
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Quality Control
We maintain a standard of excellence through our mining and processing facilities some of which include ISO 9001-registered quality systems. We use
automated process control systems that efficiently manage the majority of the mining and processing functions, and we monitor the quality and consistency of
our products by conducting hourly tests throughout the production process to detect variances. All of our major facilities operate a testing laboratory to
evaluate and ensure the quality of our products and services. We also provide customers with documentation verifying that all products shipped meet
customer specifications. These quality assurance functions ensure that we deliver quality products to our customers and maintain customer trust and loyalty.
In addition, we have certain company-wide quality control mechanisms. We maintain a company-wide quality assurance database that facilitates easy
access and analysis of product and process data from all plants. We also have fully staffed and equipped corporate laboratories that provide critical technical
expertise, analytical testing resources and application development to promote product value and cost savings. The labs consist of different departments: a
foundry lab, a paint and coatings lab, an analytical lab, a minerals-processing lab and an oil and gas lab. The foundry lab is fully equipped for analyzing
foundry silica based on grain size distribution, acidity, acid demand value and turbidity, which is a measure of silica cleanliness. The paint and coatings lab
provides formulation, application, and testing of paints, coatings and grouts for end use in fillers and extenders as well as building products. The analytical lab
performs various analyses on products for quality control assessment. The minerals processing lab models plant production processes to test variations in
deposits and improve our ability to meet customer requirements. The oil and gas lab performs testing and provides in-depth analysis of all types of hydraulic
fracturing proppants to verify products meet specifications, such as API size and crush strength specifications. Additionally, this lab is responsible for the
development of new resin coated products and the technical oversight of our Rochelle, Illinois facility.
Distribution
We ship our commercial silica products direct to our customers by truck, rail or barge and through our network of in-basin transloads. Recent trends in
the oil and gas market and the expansion of our logistics footprint have resulted in more of our product volumes being transported by high-efficiency unit
trains over the past two years. During 2016, we shipped 235 unit trains to both our transload sites and our customers. Our recent acquisition of Sandbox
extends our delivery capability directly to our customers' wellhead locations. Sandbox provides “last mile” logistics to companies in the oil and gas industry,
which increases efficiency and provides a lower cost logistics solution for our customers. Sandbox has operations in Midland/Odessa, Texas; Morgantown,
West Virginia; western North Dakota; northeast of Denver, Colorado; Oklahoma City, OK; and Cambridge, Ohio, where its major customers are located.
For bulk commercial silica, transportation cost represents a significant portion of the overall product cost. Generally, we utilize trucks for shipments of
200 miles or less from our plant sites and to distribute our bagged products. Given the weight-to-value ratio of most of our products, the majority of our
shipments outside this 200-mile radius are by rail. As a result, facility location is one of the most important considerations for producers and customers.
Generally, our plant sites are strategically located to provide access to all Class I railroads or in strategic shale basins, which enables us to cost effectively
send product to points of end use in North America.
We are continuously looking to increase the number of available transload points to which we have access. This approach allows us to provide strong
customer service and puts us in a position to take advantage of opportunistic spot market sales. As of December 31, 2016, we have 50 transload facilities
strategically located in or near all major shale basins in the United States. For more information related to our transload facilities, see Item 2, “Properties”.
Both we and our customers lease a significant number of railcars for shipping purposes, as well as to facilitate the short-term storage of our products,
particularly our frac sand products. As of December 31, 2016, we leased a fleet of 6,414 railcars, of which 1,682 were in storage. We anticipate our rail car
fleet utilization to continue to improve as cars' leases end, the frac sand market recovers and we increase rail operations from the Tyler, Texas facility.
In addition to bulk shipments, commercial silica products can be packaged and shipped in 50 to 100 pound bags or bulk super sacks. Bag shipments are
usually made to smaller customers with batch operations, warehouse distributor locations or for ocean container shipments made overseas. The products that
are shipped in bags are often higher value products, such as ground and fine.
Primary End Markets
The special properties of commercial silica-chemistry, purity, grain size, color, inertness, hardness and resistance to high temperatures-make it critical to
a variety of industries. Commercial silica is a key input in the well completion process, specifically, in the hydraulic fracturing techniques used in
unconventional oil and natural gas wells. In the industrial and
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specialty products end markets, stringent quality requirements must be met when commercial silica is used as an ingredient to produce thousands of everyday
products, including glass, building and foundry products and metal castings, as well as certain specialty applications such high-performance glass, specialty
coatings, polymer additives and geothermal energy systems. Due to the unique properties of commercial silica, it is an economically irreplaceable raw
material in a wide range of industrial applications. Our major end markets include:
Oil and Gas Proppants
Commercial silica is used as a proppant for oil and natural gas recovery in conventional and unconventional resource plays. Unconventional oil and
natural gas production requires hydraulic fracturing and other well stimulation techniques to recover oil or natural gas that is trapped in the source rock and
typically involves horizontal drilling. Frac sand is pumped down oil and natural gas wells at high pressures to prop open rock fissures in order to increase the
flow rate of hydrocarbons from the wells. Proppants are also used in the "refracturing" process where older wells are restimulated using newer technologies
and additional frac sand as a viable and lower-cost alternative to drilling new wells. The frac sand market experienced substantial growth from 2008 until
2014, driven by the growth in the use of hydraulic fracturing. However, since 2015, the frac sand market has been negatively impacted due to reduced oil and
gas drilling and completion activity in North America. During 2016, leading indicators suggested a stabilization or even an increase in North American oil
and gas drilling and completion activity in the near future.
Glass
Commercial silica is a critical input into and accounts for 55% to 75% of the raw materials in glass production. The glassmaking markets served by
commercial silica producers include containers, flat glass, specialty glass and fiberglass. Demand typically varies within each of these end markets.
The container glass, flat glass and fiberglass end markets are generally mature end markets. Demand for container glass has historically grown in line
with population growth, and we expect similar growth in the future. Flat glass and fiberglass tend to be correlated with construction and automotive
production activity, both of which have been improving during the past few years. To the extent construction and domestic automotive production activity
continues its growth in the coming years, we expect that demand in these end markets will continue to increase. Specific markets such as those for solar glass
have been negatively impacted by generally weak demand. Some of the anticipated growth in the glass markets may be offset through the use of recycled
glass.
Building Products
Commercial silica is used in the manufacturing of building products for commercial and residential construction. Whole grain commercial silica
products are used in flooring compounds, mortars and grouts, specialty cements, stucco and roofing shingles. Ground commercial silica products are used by
building products manufacturers in the manufacturing of certain fiberglass products and additionally as functional extenders and to add durability and
weathering properties to cementious compounds. In addition, geothermal wells are an alternative energy source that requires specialized ground silica
products in their well casings for effectiveness. The market for commercial silica used to manufacture building products is driven primarily by the demand in
the construction markets. The historical trend for this market has been one of growth, especially in demand for cementious compounds for new construction,
renovation and repair. We have seen an increase in permits and housing starts since 2012, gains that continued during 2016. To the extent the housing market
growth continues in the coming years, we expect that demand in this end market will increase.
Foundry
Commercial silica products are used in the production of molds for metal castings and in metal casting products. In addition, commercial whole grain
silica is sold to coaters of foundry silica, or coated internally, who then sell their product to foundries for cores and shell casting processes. The demand for
foundry silica primarily depends on the rate of automobile and light truck production, construction and production of heavy equipment like rail cars. Over the
past decade, there has been some movement of foundry supply chains to Mexico and other offshore production areas. We have experienced increases in
foundry demand since 2011. During 2016, this growth in the foundry markets continued. To the extent production levels continue to strengthen in the coming
years, we expect that demand in this end market will increase.
Chemicals
Both whole grain and ground silica products are used in the manufacturing of silicon-based chemicals, such as sodium silicate, that are used in a variety
of applications, including food processing, detergent products, paper textile, specialty foundry applications and as inputs for some precipitated silicas. This
end market is driven by the development of new products by the chemicals manufacturers, including specialty coatings and polymer additives as well as the
growth of “green” tires. We expect this end market to grow as these manufacturers continue their product and applications development.
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Fillers and Extenders
Commercial silica products are sold to producers of paints and coating products for use as fillers and extenders in architectural, industrial and traffic
paints and are sold to producers of rubber and plastic for use in the production of epoxy molding compounds and silicone rubber. The commercial silica
products used in this end market are most often ground silica, including finer ground classifications. The market for fillers and extenders is driven by demand
in the construction and automotive production industries as well as by demand for materials in the housing remodeling industry. We have experienced
increases in demand in these sectors since 2011. During 2016, the growth in these sectors has continued. To the extent these industries continue to recover in
the coming years, we expect demand to improve.
Our Customers
We sell our products to a variety of end markets. Our customers in the oil and gas proppants end market include major oilfield services companies and
exploration and production companies that are engaged in hydraulic fracturing. Sales to the oil and gas proppants end market comprised approximately 65%,
67%, and 76% of our total sales revenue in 2016, 2015 and 2014, respectively.
Our primary markets have historically been core industrial end markets with customers engaged in the production of glass, building products, foundry
products, chemicals and fillers and extenders. Our diverse customer base drives high recovery rates across our production. We also benefit from strong and
long-standing relationships with our customers in each of the industrial and specialty products end markets we serve. Sales to our industrial and specialty
products end markets comprised approximately 35%, 33%, and 24% of our total sales revenue in 2016, 2015 and 2014, respectively.
Sales to our largest customer, Halliburton Company, which is an Oil & Gas Proppants customer, accounted for 13% of our total revenues during the
year ended December 31, 2016. No other customer accounted for 10% or more of our total revenues.
Competition
Both of our reporting segments operate in highly competitive markets that are characterized by a small number of large, national producers and a larger
number of small, regional or local producers. According to a January 2017 publication by the United States Geological Survey (“USGS”), in 2016, there were
254 producers of commercial silica with a combined 347 active operations in 35 states within the United States. Competition in the industry across both of
our reporting segments is based on price, consistency and quality of product, site location, distribution capability, customer service, reliability of supply,
breadth of product offering and technical support. As transportation costs are a significant portion of the total cost to customers of commercial silica, in many
instances transportation costs can represent more than 50% of delivered cost, the commercial silica market is typically local, and competition from beyond the
local area is limited. Notable exceptions to this are the frac sand and fillers and extenders markets, where certain product characteristics are not available in all
deposits and not all plants have the requisite processing capabilities, necessitating that some products be shipped for extended distances. Because the markets
for our products are typically local, we also compete with smaller, regional or local producers. For more information regarding competition, see “Risk Factors
—Risks Related to Our Business—Our future performance will depend on our ability to succeed in competitive markets, and on our ability to appropriately
react to potential fluctuations in demand for and supply of our products.”
Seasonality
Our business is affected to some extent by seasonal fluctuations in weather that impact our production levels and our customers' business needs. For example,
during the second and third quarters we sell more commercial silica to our customers in the building products and recreation end markets due to increased
construction activity resulting from more favorable weather. First and fourth quarters can experience lower sales, and sometimes production levels, largely
from adverse weather hampering logistical capabilities and general decreased customer activity levels.
Intellectual Property
Other than operating licenses for our mining and processing facilities, there are no third-party patents, licenses or franchises material to our business.
Our intellectual property primarily consists of trade secrets, know-how and trademarks, including our name US SILICA® and products with trademarked
names such as OTTAWA WHITE®, MIN-U-SIL®, MYSTIC WHITE II®, Q-ROK®, SIL-CO-SIL®, PREMIUM HICKORY®, US SILICA WHITE®,
InnoProp® and SANDBOX® among others. We own patents and have patent applications pending related to Sandbox, our "last mile" logistics solution. All
of the issued patents have an expiration date after August 20, 2027 with a majority of issued patents expiring after December 21, 2031. With respect to our
other products, we principally rely on trade secrets, rather than patents, to protect our proprietary processes, methods, documentation and other technologies,
as well as certain other business information. Although we do seek
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patents from time to time, patent protection requires a costly and uncertain federal registration process that would place our confidential information in the
public domain. As a result, we typically utilize trade secrets to protect the formulations and processes we use to manufacture our products and to safeguard
our proprietary formulations and methods. We believe we can effectively protect our trade secrets indefinitely through the use of confidentiality agreements
and other security measures.
Condition of Physical Assets and Insurance
Our business is capital intensive and requires ongoing capital investment for the replacement, modernization and/or expansion of equipment and
facilities. For more information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.”
We maintain insurance policies against property loss and business interruption and insure against risks that are typical in the operation of our business,
in amounts that we believe to be reasonable. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to
environmental liability and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular
event. See Item 1A, “Risk Factors”.
Commercial Team
Our commercial team consists of more than 63 individuals responsible for all aspects of our sales process, including pricing, marketing, transportation
and logistics, product development and general customer service. This necessitates a highly organized staff and extensive coordination between departments.
For example, product development requires the collaboration of our market development team, sales team, our production facilities and our corporate
laboratories. Our sales team interacts directly with our customers in determining their needs, our production facilities fulfill the orders and our corporate
laboratories are responsible for ensuring that our products meet those needs.
Our commercial team can be divided into five units:
•
Sales—Our sales team is organized by both region and end market. We have an experienced group of dedicated sales team members for the oil and
gas proppants and the industrial and specialty end markets. Our oil and gas proppants team is led out of our Houston office and is regionally
positioned in the oil and gas markets across the U.S. This staff consists of experienced experts in the use of frac proppants in the oil and gas
industry. Our industrial and specialty products sales team is strategically located near our major customers. As we make decisions to enter or
expand our presence in certain end markets or regions, we will continue to add dedicated team members to support that growth.
• Marketing—Our marketing team coordinates all of our new and existing customer outreach efforts as well as identify emerging market trends and
new product opportunities. This includes producing exhibits for trade shows and exhibitions, manufacturing product overview materials,
participating in regional industry meetings and other trade associations and managing our advertising efforts in trade journals.
•
•
Transportation and Logistics—Our transportation and logistics team manages domestic and international shipments by directing inbound and
outbound rail, barge and truck traffic, supervising equipment maintenance, coordinating with rail carriers to ensure equipment availability,
ensuring compliance with shipping regulations and strategically planning for future growth. With our Sandbox acquisition we can deliver frac sand
directly to wellheads.
Technical—Our technical team is anchored by our Industrial & Specialty Products laboratory in Berkeley Springs, West Virginia and our oil and
gas laboratory in Houston, Texas. At these facilities, we perform a variety of analyses including:
•
•
•
•
•
analytical chemistry by X-Ray Fluorescence (“XRF”) and Inductively Coupled Plasma (“ICP”) spectroscopy;
particle characterization by sieve, SediGraph, Brunauer, Emmett and Teller (“BET”) surface area and microscopy;
ore evaluation by mineral processing, flotation and magnetic separation;
API frac sand evaluation, including crush resistance; and
American Foundry Society (“AFS”) green sand evaluation by various foundry sand tests.
Many other product analyses are performed locally at our 18 production facilities to support new product development, plant operations and
customer quality requirements.
We also have a variety of other technical competencies including process engineering, equipment design, facility construction, maintenance
excellence, environmental engineering, geology and mine planning and development. Effective integration of these capabilities has been a
critical component of our business success
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and has allowed us to establish and maintain an extensive, high-quality silica sand reserve base, maximize the value of our reserves by
producing and selling a wide range of high-quality products, optimize processing costs to provide strong value to customers and prioritize
operating in a safe and environmentally sustainable manner.
•
Customer Service—Our customer service team is dedicated to creating an exceptional customer experience and making it easy to do business with
our company. The organization aims to accomplish this by consistently exceeding our customers’ expectations, continually improving our
performance, offering efficient and timely responses to customer needs, being available to our customers 24/7 and providing customers with
personal points of contact on whom they can rely.
Employees
As of December 31, 2016, we employed a workforce of 1,404 employees, the majority of whom are hourly wage plant workers living in the areas
surrounding our mining facilities. The majority of our hourly employees are represented by labor unions that include the Teamsters Union; United Steel,
Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union; Laborers International Union of North
America; Glass, Molders, Pottery, Plastics and Allied Workers International Union; and International Union of Operating Engineers A.F.L. - C.I.O. We
believe that we maintain good relations with our workers and their respective unions and have not experienced any material strikes or work stoppages since
1987.
Our employees average approximately 10 years of tenure with us, and we have an annual employee turnover rate of 12%, excluding the impact of
reductions in workforce as part of the restructuring actions. We believe our stable workforce has directly contributed to improved process efficiencies and
safety, which in turn help drive cost reductions. We believe our labor rates compare favorably to other mining and manufacturing facilities in the same
geographic areas. We maintain workers’ compensation coverage in amounts required by law and have no material claims pending. We also offer all full-time
employees a competitive package of employee benefits, which includes medical, dental, life and disability coverage.
Regulation and Legislation
Mining and Workplace Safety
Federal Regulation
The U.S. Mine Safety and Health Administration (“MSHA”) is the primary regulatory organization governing the commercial silica industry.
Accordingly, MSHA regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with quarries and mines.
The mission of MSHA is to administer the provisions of the Federal Mine Safety and Health Act of 1977 and to enforce compliance with mandatory safety
and health standards. MSHA works closely with the Industrial Minerals Association, a trade association in which we have a significant leadership role, in
pursuing this mission. As part of MSHA’s oversight, representatives perform at least two unannounced inspections annually for each above-ground facility. To
date these inspections have not resulted in any citations for material violations of MSHA standards. For additional information regarding mining and
workplace safety, including MSHA safety and health violations and assessments in 2016, see Item 4, “Mine Safety Disclosures”.
We also are subject to the requirements of the U.S. Occupational Safety and Health Act (“OSHA”) and comparable state statutes that regulate the
protection of the health and safety of workers. In addition, the OSHA Hazard Communication Standard requires that information be maintained about
hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public.
OSHA regulates the customers and users of commercial silica and provides detailed regulations requiring employers to protect employees from overexposure
to silica bearing dust through the enforcement of permissible exposure limits and the OSHA Hazard Communication Standard.
Internal Controls
We adhere to a strict occupational health program aimed at controlling exposure to silica bearing dust, which includes dust sampling, a respiratory
protection program, medical surveillance, training and other components. Our safety program is designed to ensure compliance with the standards of our
Occupational Health and Safety Manual and MSHA regulations. For both health and safety issues, extensive training is provided to employees. We have
safety committees at our plants made up of salaried and hourly employees. We perform annual internal health and safety audits and conduct annual crisis
management drills to test our plants’ abilities to respond to various situations. Health and safety programs are administered by our corporate health and safety
department with the assistance of plant Environmental, Health and Safety Coordinators.
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Motor Carrier Regulation
Our trucking services are regulated by the U.S. Department of Transportation ("DOT"), the Federal Motor Carrier Safety Administration ("FMCSA")
and by various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier
operations, as well as motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, transportation of hazardous
materials and periodic financial reporting. In addition, each driver is required to have a commercial driver’s license and may be subject to mandatory drug and
alcohol testing. We may be audited periodically by these regulatory authorities to ensure that we are in compliance with various safety, hours-of-service, and
other rules and regulations.
The transportation industry is subject to possible other regulatory and legislative changes (such as the possibility of more stringent environmental,
climate change, security and/or occupational safety and health regulations, limits on vehicle weight and size and a mandate to implement electronic logging
devices) that may affect the economics of our trucking services by requiring changes in operating practices or by changing the demand for motor carrier
services or the cost of providing truckload or other transportation or logistics services.
Environmental Matters
We and the commercial silica industry are subject to extensive governmental regulation on, among other things, matters such as permitting and
licensing requirements, plant and wildlife protection, hazardous materials, air and water emissions and environmental contamination and reclamation. A
variety of state, local and federal agencies enforce this regulation.
Federal Regulation
At the federal level, we may be required to obtain permits under Section 404 of the Clean Water Act from the U.S. Army Corps of Engineers for the
discharge of dredged or fill material into waters of the United States, including wetlands and streams, in connection with our operations. We also may be
required to obtain permits under Section 402 of the Clean Water Act from the U.S. Environmental Protection Agency (“EPA”) (or the relevant state
environmental agency in states where the permit program has been delegated to the state) for discharges of pollutants into waters of the United States,
including discharges of wastewater or storm water runoff associated with construction activities. Failure to obtain these required permits or to comply with
their terms could subject us to administrative, civil and criminal penalties as well as injunctive relief.
The U.S. Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the
imposition of other requirements. These regulatory programs may require us to install expensive emissions abatement equipment, modify our operational
practices and obtain permits for our existing operations, and before commencing construction on a new or modified source of air emissions, such laws may
require us to reduce emissions at existing facilities. As a result, we may be required to incur increased capital and operating costs because of these regulations.
We could be subject to administrative, civil and criminal penalties as well as injunctive relief for noncompliance with air permits or other requirements of the
U.S. Clean Air Act and comparable state laws and regulations.
As part of our operations, we utilize or store petroleum products and other substances such as diesel fuel, lubricating oils and hydraulic fluid. We are
subject to applicable requirements regarding the storage, use, transportation and disposal of these substances, including the relevant Spill Prevention, Control
and Countermeasure requirements that the EPA imposes on us. Spills or releases may occur in the course of our operations, and we could incur substantial
costs and liabilities as a result of such spills or releases, including those relating to claims for damage or injury to property and persons.
Additionally, some of our operations are located on properties that historically have been used in ways that resulted in the release of contaminants,
including hazardous substances, into the environment, and we could be held liable for the remediation of such historical contamination. The Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the Superfund law, and comparable state laws impose joint and
several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of hazardous
substances into the environment. These persons include the owner or operator of the site where the release occurred and anyone who disposed or arranged for
the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to liability for the costs of cleaning up the hazardous
substances, for damages to natural resources, and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
In addition, the Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes regulate the generation, transportation, treatment,
storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the
provisions of RCRA, sometimes in conjunction with their own,
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more stringent requirements. In the course of our operations, we generate industrial solid wastes that may be regulated as hazardous wastes.
Our operations may also be subject to broad environmental review under the National Environmental Policy Act (“NEPA”). NEPA requires federal
agencies to evaluate the environmental impact of all “major federal actions” significantly affecting the quality of the human environment. The granting of a
federal permit for a major development project, such as a mining operation, may be considered a “major federal action” that requires review under NEPA.
Therefore, our projects may require review and evaluation under NEPA. As part of this evaluation, the federal agency considers a broad array of
environmental impacts, including, among other things, impacts on air quality, water quality, wildlife (including threatened and endangered species), historical
and archaeological resources, geology, socioeconomics and aesthetics. NEPA also requires the consideration of alternatives to the project. The NEPA review
process, especially the preparation of a full environmental impact statement, can be time consuming and expensive. The purpose of the NEPA review process
is to inform federal agencies’ decision-making on whether federal approval should be granted for a project and to provide the public with an opportunity to
comment on the environmental impacts of a proposed project. While NEPA requires only that an environmental evaluation be conducted and does not
mandate a result, a federal agency could decide to deny a permit, or impose certain conditions on its approval, based on its environmental review under
NEPA, or a third party may challenge the adequacy of a NEPA review.
Federal agencies granting permits for our operations also must consider impacts to endangered and threatened species and their habitat under the
Endangered Species Act. We also must comply with and are subject to liability under the Endangered Species Act, which prohibits and imposes stringent
penalties for the harming of endangered or threatened species and their habitat. Federal agencies also must consider a project’s impacts on historic or
archaeological resources under the National Historic Preservation Act, and we may be required to conduct archaeological surveys of project sites and to avoid
or preserve historical areas or artifacts.
State and Local Regulation
Because our operations are located in numerous states, we are also subject to a variety of different state and local environmental review and permitting
requirements. Some states in which our projects are located or are being developed have state laws similar to NEPA; thus our development of new sites or the
expansion of existing sites may be subject to comprehensive state environmental reviews even if they are not subject to NEPA. In some cases, the state
environmental review may be more stringent than the federal review. Our operations may require state law based permits in addition to federal permits,
requiring state agencies to consider a range of issues, many the same as federal agencies, including, among other things, a project’s impact on wildlife and
their habitats, historic and archaeological sites, aesthetics, agricultural operations and scenic areas. Some states also have specific permitting and review
processes for commercial silica mining operations, and states may impose different or additional monitoring or mitigation requirements than federal agencies.
The development of new sites and our existing operations also are subject to a variety of local environmental and regulatory requirements, including land use,
zoning, building and transportation requirements.
As demand for frac sand in the oil and natural gas industry has driven a significant increase in current and expected future production of commercial
silica, some local communities have expressed concern regarding silica sand mining operations. These concerns have generally included exposure to ambient
silica sand dust, truck traffic, water usage and blasting. In response, certain state and local communities have developed or are in the process of developing
regulations or zoning restrictions intended to minimize dust from getting airborne, control the flow of truck traffic, significantly curtail the amount of
practicable area for mining activities, provide compensation to local residents for potential impacts of mining activities and, in some cases, ban issuance of
new permits for mining activities. To date, we have not experienced any material impact or disruption to our existing mining operations or planned capacity
expansions as a result of these types of concerns.
We have a long history of positive engagement with the communities that surround our existing mining operations. We have an annual employee
turnover rate of 12%, excluding the impact of reductions in workforce as part of the restructuring actions, and have had no significant strikes in more than 29
years, evidence of the strong relationship we have with our employees. We believe this strong relationship helps foster good relations with the communities in
which we operate. Although additional regulatory requirements could negatively impact our business, financial condition and results of operations, we believe
our existing operations are less likely to be negatively impacted by virtue of our good community relations.
Planned expansion of our mining and production capacity in new communities could be more significantly impacted by increased regulatory activity.
Difficulty or delays in obtaining or inability to obtain new mining permits or increased costs of compliance with future state and local regulatory requirements
could have a material negative impact on our ability to grow our business. In an effort to minimize these risks, we continue to be engaged with local
communities in order to grow and maintain strong relationships with residents and regulators.
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Costs of Compliance
We may incur significant costs and liabilities as a result of environmental, health and safety requirements applicable to our activities. Failure to comply
with environmental laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of investigatory, cleanup and
site restoration costs and liens, the denial or revocation of permits or other authorizations and the issuance of injunctions to limit or cease operations.
Compliance with these laws and regulations may also increase the cost of the development, construction and operation of our projects and may prevent or
delay the commencement or continuance of a given project. In addition, claims for damages to persons or property may result from environmental and other
impacts of our activities.
The process for performing environmental impact studies and reviews for federal, state and local permits for our operations involves a significant
investment of time and monetary resources. We cannot control the permit approval process. We cannot predict whether all permits required for a given project
will be granted or whether such permits will be the subject of significant opposition. The denial of a permit essential to a project or the imposition of
conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop a project. Significant opposition and delay in
the environmental review and permitting process also could impair or delay our ability to develop a project. Additionally, the passage of more stringent
environmental laws could impair our ability to develop new operations and have an adverse effect on our financial condition and results of operations.
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
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 Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 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.
Executive Officers of the Registrant
John P. Blanchard, age 43, has served as our Senior Vice President and President, Industrial & Specialty Products since July 2016, having served as
Vice President and General Manager, Industrial & Specialty Products from September 2011 until July 2016. Mr. Blanchard possesses over 20 years’
experience in a variety of industries, including nonwovens, composites, building materials and pharmaceuticals. Prior to joining us, Mr. Blanchard held
various positions of increasing responsibility with Johns Manville from 2005 to September 2011, including Global Business Director from December 2010 to
September 2011 and Global Business Manager from February 2008 to December 2010. Mr. Blanchard earned a B.S. in Chemical Engineering from Michigan
Technological University and an M.B.A. from the University of Michigan.
Bradford B. Casper, age 42, has served as an Executive Vice President since July 2016 and as our Chief Commercial Officer since May 2015. He
served as our Vice President of Strategic Planning from May 2011 until his promotion to Chief Commercial Officer in May 2015. Before joining us,
Mr. Casper was at Bain & Company, Inc., where he held various positions from 2002 to May 2011 in the United States, Australia and Hong Kong, most
recently serving as a Principal from July 2010 to May 2011. Mr. Casper earned a B.S. in Accounting from the University of Illinois at Urbana-Champaign and
an M.B.A. from the Wharton School at the University of Pennsylvania.
Christine C. Marshall, age 55, has served as our Senior Vice President, Chief Legal Officer and Corporate Secretary since July 2016. Ms. Marshall
joined us as our General Counsel and Corporate Secretary in November 2012. Prior to joining us, Ms. Marshall served as Vice President and General Counsel
of the Security Technologies Sector of Ingersoll Rand Company from September 2010 to January 2012. From 2005 to 2010, Ms. Marshall held various
positions of increasing responsibility with Tyco International, including General Counsel of Tyco Flow Control Americas from January 2008 to May 2010.
Ms. Marshall earned a B.A. degree from Harvard University and a J.D. degree from Georgetown University School of Law.
Donald A. Merril, age 52, has served as an Executive Vice President since July 2016 and as our Chief Financial Officer since January 2013. He had
previously served as our Vice President of Finance from October 2012 until his appointment as Chief Financial Officer. Previously, Mr. Merril had served as
Senior Vice President and Chief Financial Officer of Myers Industries Inc. from January 2006 through August 2012. Prior to serving at Myers Industries,
Mr. Merril held the role
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of Vice President and Chief Financial Officer, Rubbermaid Home Products Division at Newell Rubbermaid Inc. from 2003 through 2005. Mr. Merril has a
B.S. in Accounting from Miami University.
David D. Murry, age 55, has served as a Senior Vice President since July 2016 and as our Chief Human Resources Officer since October 2011. He
served as our Vice President of Talent Management from October 2011 until July 2016. Prior to joining us, Mr. Murry was the Director of Human Resources
and Talent Management for Arkema, a diversified chemicals company, from October 2005 to October 2011. He has held positions of increasing leadership
with Armstrong, Dell, and Alcoa. Mr. Murry earned a B.S. in Mining Engineering from Texas A&M University and a Master’s of Science in Management
from Antioch University.
Bryan A. Shinn, age 55, has served as our President since March 2011 and as our Chief Executive Officer and a member of the Board since January
2012. Prior to assuming this position, Mr. Shinn was our Senior Vice President of Sales and Marketing from October 2009 to February 2011. Before joining
us, Mr. Shinn was employed by the E. I. du Pont de Nemours and Company from 1983 to September 2009, where he held a variety of key leadership roles in
operations, sales, marketing and business management, including Global Business Director and Global Sales Director. Mr. Shinn earned a B.S. in Mechanical
Engineering from the University of Delaware.
Don Weinheimer, age 58, has served as a Senior Vice President and President, Oil & Gas since July 2016, having served as our Vice President and
General Manager, Oil & Gas from July 2012 until July 2016. Before joining us, Mr. Weinheimer had served in various executive positions with Key Energy
Services since October 2006 including as Senior Vice President, Strategy, Markets and Technology; Senior Vice President of Business Development,
Technology and Strategic Planning; Senior Vice President of Product Development, Strategic Planning and Quality; and Senior Vice President, Production
Services. Prior to joining Key Energy Services, Mr. Weinheimer held various positions of increasing responsibility with Halliburton Company, a global
energy services company, since 1981 including as Vice President of Technology Globalization within its Energy Services Group from July 2006 to October
2006 and as Vice President of Innovation and Marketing in its Production Optimization Division from July 2004 to June 2006. Mr. Weinheimer has over 34
years of industry experience, including international operational and business development experience in both the Middle East and Algeria. Mr. Weinheimer
earned his B.S. in Agricultural Engineering from Texas A&M University.
Michael L. Winkler, age 52, has served as a Senior Vice President since July 2016 and as our Chief Operating Officer since December 2013. He
served as a Vice President from June 2011 until July 2016 and as our Vice President of Operations from June 2011 until December 2013. Before joining us,
Mr. Winkler was Vice President of Operations for Campbell Soup Company from August 2007 to June 2011 and held various positions with Mars Inc. from
1996 to August 2007, including Plant Manager-Columbus Plant and Director of Industrial Engineering. Mr. Winkler earned a B.S. in Industrial Engineering
from the University of Wisconsin-Platteville and an M.B.A. from the University of North Texas.
ITEM 1A.
RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below and elsewhere in this Annual
Report on Form 10-K. You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report on Form
10-K in connection with evaluating us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also
materially and adversely affect our business, results of operations or financial condition. Certain statements in “Risk Factors” are forward-looking
statements.
Risks Related to Our Business
The demand for commercial silica fluctuates, which could adversely affect our results of operations.
Demand in the end markets served by our customers is influenced by many factors, including the following:
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demand for oil, natural gas and petroleum products;
fluctuations in energy, fuel, oil and natural gas prices and the availability of such fuels;
the use of alternative proppants, such as ceramic proppants, in the hydraulic fracturing process;
global and regional economic, political and military events and conditions;
changes in residential and commercial construction demands, driven in part by fluctuating interest rates and demographic shifts;
demand for automobiles and other vehicles;
the substitution of plastic or other materials for glass;
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the use of recycled glass in glass production;
competition from offshore producers of glass products;
changes in demand for our products due to technological innovations, including the development and use of new processes for oil and gas
production that do not require proppants;
changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the
environment;
prices, availability and other factors relating to our products; and
increases in costs of labor and labor strikes.
We cannot predict or control the factors that affect demand for our products. Negative developments in the above factors, among others, could cause the
demand for commercial silica or other minerals to decline, which could adversely affect our business, financial condition, results of operations, cash flows
and prospects.
Our operations are subject to the cyclical nature of our customers’ businesses, and we may not be able to mitigate that risk.
The substantial majority of our customers are engaged in industries that have historically been cyclical, such as glassmaking, building products, foundry
and oil and natural gas recovery. During periods of economic slowdown, our customers often reduce their production and also reduce capital expenditures and
defer or cancel pending projects. Such developments occur even among customers that are not experiencing financial difficulties.
Demand in many of the end markets for commercial silica is driven by the construction and automotive industries. For example, the flat glass market
depends on the automotive and commercial and residential construction and remodeling markets. The market for commercial silica used to manufacture
building products is driven primarily by demand in the construction markets. The demand for foundry silica depends on the rate of automobile, light truck and
heavy equipment production as well as construction. The demand for frac sand is driven by demand for oil and natural gas. When oil and natural gas prices
decrease, as they did throughout 2015 and into 2016, exploration and production companies may reduce their exploration, development, production and well
completion activities. The reduced level of such activities could result in a corresponding decline in the demand for frac sand and an oversupply of frac sand.
In periods where sources of supply of frac sand exceed market demand, market prices for frac sand may decline and our results of operations and cash flows
may decline or be volatile or otherwise adversely affected. In addition, given that silica transportation represents one of our customers’ largest costs, if, in
response to economic pressures, our customers choose to move their production offshore, the increased logistics costs could reduce demand for our products.
Continued weakness in the industries we serve has had, and may in the future have, an adverse effect on sales of our products and our results of operations. A
continued or renewed economic downturn in one or more of the industries or geographic regions that we serve, or in the worldwide economy, could cause
actual results of operations to differ materially from historical and expected results.
Our operations are subject to operating risks that are often beyond our control and could adversely affect production levels and costs, and such
risks may not be covered by insurance.
Our mining, processing and production facilities are subject to risks normally encountered in the commercial silica industry. These risks include:
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changes in the price and availability of transportation and transload network access;
changes in the price and availability of natural gas or electricity;
unusual or unexpected geological formations or pressures;
pit wall failures or rock falls;
unanticipated ground, grade or water conditions;
inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
environmental hazards;
industrial accidents;
physical plant security breaches;
changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the
environment;
nonperformance of contractual obligations;
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inability to acquire or maintain necessary permits or mining or water rights;
restrictions on blasting operations;
inability to obtain necessary production equipment or replacement parts;
reduction in the amount of water available for silica production;
technical difficulties or key equipment failures;
labor disputes;
cybersecurity breaches;
late delivery of supplies;
fires, explosions or other accidents; and
facility shutdowns in response to environmental regulatory actions.
Any of these risks could result in damage to, or destruction of, our mining properties or production facilities, personal injury, environmental damage,
delays in mining or processing, losses or possible legal liability. Any prolonged downtime or shutdowns at our mining properties or production facilities could
have a material adverse effect on us.
Not all of these risks are reasonably insurable, and our insurance coverage contains limits, deductibles, exclusions and endorsements. Our insurance
coverage may not be sufficient to meet our needs in the event of loss and any such loss may have a material adverse effect on us.
A significant portion of our sales is generated at four of our plants. Any adverse developments at any of those plants or in the end markets those
plants serve could have a material adverse effect on our financial condition and results of operations.
A significant portion of our sales are generated at our plants located in Ottawa, Illinois; Mill Creek, Oklahoma; Utica, Illinois; and Sparta, Wisconsin.
These plants represented a combined 51%, 62%, and 69% of our total revenue in 2016, 2015 and 2014, respectively. Any adverse development at these plants
or in the end markets these plants serve, including adverse developments due to catastrophic events or weather, decreased demand for commercial silica
products, a decrease in the availability of transportation services or adverse developments affecting our customers, could have a material adverse effect on our
financial condition and results of operations.
Our business and financial performance depend on the level of activity in the oil and natural gas industries.
Our operations that produce frac sand are materially dependent on the levels of activity in natural gas and oil exploration, development and production.
More specifically, the demand for the frac sand we produce is closely related to the number of natural gas and oil wells completed in geological formations
where sand-based proppants are used in fracture treatments. These activity levels are affected by both short- and long-term trends in natural gas and oil prices.
In recent years, natural gas and oil prices and, therefore, the level of exploration, development and production activity, have experienced significant
fluctuations. Worldwide economic, political and military events, including war, terrorist activity, events in the Middle East and initiatives by the Organization
of the Petroleum Exporting Countries (“OPEC”), have contributed, and are likely to continue to contribute, to price volatility. Additionally, warmer than
normal winters in North America and other weather patterns may adversely impact the short-term demand for natural gas and, therefore, demand for our
products. Reduction in demand for natural gas to generate electricity could also adversely impact the demand for frac sand. A prolonged reduction in natural
gas and oil prices would generally depress the level of natural gas and oil exploration, development, production and well completion activity and result in a
corresponding decline in the demand for the frac sand we produce. Such a decline could result in us selling fewer tons of frac sand at lower prices or selling
lower priced products, which would have a material adverse effect on our results of operations and financial condition. When demand for frac sand increases,
there may not be a corresponding increase in the prices for our products or our customers may not switch back to higher priced products, which could have a
material adverse effect on our results of operations and financial condition. In addition, any future decreases in the rate at which oil and natural gas reserves
are discovered or developed, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could have a
material adverse effect on our business, even in a stronger natural gas and oil price environment.
We may be adversely affected by decreased demand for frac sand or the development of either effective alternative proppants or new processes to
replace hydraulic fracturing.
Frac sand is a proppant used in the completion and re-completion of natural gas and oil wells through hydraulic fracturing. Frac sand is the most
commonly used proppant and is less expensive than ceramic proppant, which is also used in
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hydraulic fracturing to stimulate and maintain oil and natural gas production. A significant shift in demand from frac sand to other proppants, such as ceramic
proppants, could have a material adverse effect on our financial condition and results of operations. The development and use of other effective alternative
proppants, or the development of new processes to replace hydraulic fracturing altogether, could also cause a decline in demand for the frac sand we produce
and could have a material adverse effect on our financial condition and results of operations.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related regulatory action or
litigation could result in increased costs and additional operating restrictions or delays for our customers, which could negatively impact our
business, financial condition and results of operations.
A significant portion of our business supplies frac sand to hydraulic fracturing operators in the oil and natural gas industry. Although we do not directly
engage in hydraulic fracturing activities, our customers purchase our frac sand for use in their hydraulic fracturing operations. Increased regulation of
hydraulic fracturing may adversely impact our business, financial condition and results of operations.
The federal Safe Drinking Water Act (the “SDWA”) regulates the underground injection of substances through the Underground Injection Control
Program (the “UIC Program”). Hydraulic fracturing generally has been exempt from federal regulation under the UIC Program, and the hydraulic fracturing
process has been typically regulated by state or local governmental authorities. The EPA, however, has taken the position that certain aspects of hydraulic
fracturing with fluids containing diesel fuel may be subject to regulation under the UIC Program, specifically as “Class II” UIC wells. In February 2014, the
EPA released an interpretive memorandum to clarify UIC Program requirements under the SDWA for underground injection of diesel fuels in hydraulic
fracturing for oil and gas extraction and issued technical guidance containing recommendations for EPA permit writers to consider in implementing these UIC
“Class II” requirements. Among other things, the memorandum and technical guidance clarified that any owner or operator who injects diesel fuels in
hydraulic fracturing for oil or gas extraction must obtain a UIC “Class II” permit before injection. The EPA also issued final rules in 2012 that included the
first federal air standards for natural gas and oil wells that are hydraulically fractured, along with other requirements for several other sources of pollution in
the oil and gas industry that had not been regulated at the federal level. Building on the 2012 rules, the EPA announced in May 2016 additional regulations to
reduce methane and smog-forming emissions from new, modified or reconstructed sources in the the oil and natural gas industry. In May 2016, the EPA also
finalized rules regarding criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and
natural gas industry. Since the methane and aggregation rules were published in the Federal Register after May 31, 2016, they are potentially subject to repeal
by the new Congress. In addition, the EPA published in May 2014 an advance notice of proposed rulemaking regarding Toxic Substances Control Act
reporting of the chemical substances and mixtures used in hydraulic fracturing. In June 2016, the EPA finalized effluent limit guidelines that waste water from
shale resource extraction operations must meet before discharging to publicly owned wastewater treatment plants; these guidelines are potentially subject to
repeal by the new Congress. In March 2015, the federal Bureau of Land Management published a final rule that establishes new or more stringent standards
for hydraulic fracturing on federal and Indian lands, including public disclosure of chemicals used in hydraulic fracturing, confirmation that wells used in
fracturing operations meet appropriate construction standards, and development of appropriate plans for managing flowback water that returns to the surface.
However, the U.S. District Court of Wyoming struck down this rule in June 2016; the ruling is currently on appeal before the U.S. Tenth Circuit Court of
Appeals. The federal Bureau of Land Management also issued final rules to reduce methane emissions from venting, flaring, and leaks during oil and gas
operations on public lands in November 2016; these rules are potentially subject to repeal by the new Congress.
In addition, the EPA has commenced a study of the potential environmental impacts of hydraulic fracturing activities, a committee of the U.S. House of
Representatives (the “House”) conducted an investigation of hydraulic fracturing practices and a subcommittee of the Secretary of Energy Advisory Board
(the “SEAB”) of the U.S. Department of Energy was tasked with recommending steps to improve the safety and environmental performance of hydraulic
fracturing. As part of these studies, the EPA, the House committee and the SEAB subcommittee requested that certain companies provide them with
information concerning the chemicals used in the hydraulic fracturing process. These studies could potentially spur initiatives to further regulate hydraulic
fracturing under the SDWA or otherwise. In December 2016, the EPA issued a final assessment of the potential environmental effects of hydraulic fracturing
on drinking water and groundwater that found hydraulic fracturing may in some cases result in impacts to drinking water resources. Legislation has been
introduced before the U.S. Congress to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used
in the hydraulic fracturing process. If this or similar legislation becomes law, the legislation could establish an additional level of federal regulation that may
lead to additional permitting requirements or other operating restrictions, making it more difficult to complete natural gas and oil wells in shale formations.
This could increase our customers’ costs of compliance and doing business or otherwise adversely affect the hydraulic fracturing services they perform,
which may negatively impact demand for our frac sand products.
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In addition, various state, local and foreign governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing
through additional permitting requirements, operational restrictions, disclosure requirements and temporary or permanent bans on hydraulic fracturing in
certain areas such as environmentally sensitive watersheds. For example, Vermont and New York banned hydraulic fracturing in 2012 and 2015, respectively.
A number of local municipalities across the United States have instituted measures resulting in temporary or permanent bans on or otherwise limiting or
delaying hydraulic fracturing in their jurisdictions. Such moratoriums and bans could make it more difficult to conduct hydraulic fracturing operations and
increase our customers’ cost of doing business, which could negatively impact demand for our frac sand products. A number of states have also enacted
legislation or issued regulations which impose various disclosure requirements on hydraulic fracturing operators. The availability of information regarding the
constituents of hydraulic fracturing fluids could make it easier for third parties opposing the hydraulic fracturing process to initiate individual or class action
legal proceedings based on allegations that specific chemicals used in the hydraulic fracturing process could adversely affect groundwater and drinking water
supplies or otherwise cause harm to human health or the environment. Moreover, disclosure to third parties or to the public, even if inadvertent, of our
customers’ proprietary chemical formulas could diminish the value of those formulas and result in competitive harm to our customers, which could indirectly
impact our business, financial condition and results of operations.
The adoption of new laws or regulations at the federal, state, local or foreign levels imposing reporting obligations on, or otherwise limiting or delaying,
the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells in shale formations, increase our customers’ costs of
compliance and doing business and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our
frac sand products. In addition, heightened political, regulatory and public scrutiny of hydraulic fracturing practices could potentially expose us or our
customers to increased legal and regulatory proceedings, and any such proceedings could be time-consuming, costly or result in substantial legal liability or
significant reputational harm. Any such developments could have a material adverse effect on our business, financial condition and results of operations,
whether directly or indirectly. For example, we could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance
limits the ability of our customers to operate in the geographic areas we serve.
Our operations are dependent on our rights and ability to mine our properties and on our having renewed or received the required permits and
approvals from governmental authorities and other third parties.
We hold numerous governmental, environmental, mining and other permits, water rights and approvals authorizing operations at each of our facilities.
A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify
an existing permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Expansion of our existing
operations is also predicated on securing the necessary environmental or other permits, water rights or approvals, which we may not receive in a timely
manner or at all. In addition, our facilities are located near existing and proposed third-party industrial operations that could affect our ability to fully extract,
or the manner in which we extract, the mineral deposits to which we have mining rights.
Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that
examiners cannot verify. A successful claim that we do not have title to one or more of our properties or lack appropriate water rights could cause us to lose
any rights to explore, develop and extract any minerals on that property, without compensation for our prior expenditures relating to such property. Our
business may suffer a material adverse effect in the event one or more of our properties are determined to have title deficiencies.
In some instances, we have received access rights or easements from third parties, which allow for a more efficient operation than would exist without
the access or easement. A third party could take action to suspend the access or easement, and any such action could be materially adverse to our results of
operations or financial condition.
We may not be able to successfully implement capacity expansion plans within our projected timetable, the actual costs of any capacity expansion
may exceed our estimated costs and we may not be able to secure demand for the incremental production capacity. In addition, actual operating
costs once we have completed the capacity expansion may be higher than anticipated.
We undertake projects from time to time to expand our production capacity. The completion of these projects may be affected by market conditions and
demand for our products. In addition, under our current business plan, we expect to fund any expansion plans through a combination of cash on our balance
sheet and cash generated from our operating and financing activities. If the assumptions on which we base our estimated capital expenditures change or are
inaccurate, we may require additional funding. Such funding may not be available on terms acceptable to us, or at all. Moreover, actual operating costs once
we have completed a capacity expansion may be higher than initially anticipated. We also may not secure off-take commitments for the incremental
production from our capacity expansion plans, and we may not be able to secure adequate
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demand for the incremental production. Furthermore, substantial investments in transportation infrastructure may be required to effectively execute the
capacity expansion, and we may not be successful in expanding our logistical capabilities to accommodate the additional production capacity.
Any failure to successfully implement any capacity expansion plans due to an inability to obtain necessary permits, insufficient funding, delays,
unanticipated costs, adverse market conditions or other factors, or failure to realize the anticipated benefits of our capacity expansion plans, including
securing demand for the incremental production, could have a material adverse effect on our business, financial condition and results of operations.
Our future performance will depend on our ability to succeed in competitive markets, and on our ability to appropriately react to potential
fluctuations in demand for and supply of our products.
We operate in a highly competitive market that is characterized by a small number of large, national producers and a larger number of small, regional or
local producers. Competition in the industry is based on price, consistency and quality of product, site location, distribution capability, customer service,
reliability of supply, breadth of product offering and technical support. As transportation costs are a significant portion of the total cost to customers of
commercial silica-in many instances transportation costs can represent more than 50% of delivered cost-the commercial silica market is typically local, and
competition from beyond the local area is limited. Notable exceptions to this are the frac sand and fillers and extenders markets, where certain product
characteristics are not available in all deposits and not all plants have the requisite processing capabilities, necessitating that some products be shipped for
extended distances.
We compete with national producers such as Fairmount Santrol Holdings Inc., Unimin Corporation, Hi-Crush Partners LP and Emerge Energy Services
LP. Our competitors may have greater financial and other resources than we do, may develop technology superior to ours or may have production facilities
that are located closer to key customers than ours.
Because the markets for our products are typically local, we also compete with smaller, regional or local producers. For instance, prior to 2015, there
had been an increasing number of small producers servicing the frac sand market due to increased demand for hydraulic fracturing services. If demand for
hydraulic fracturing services decreases and the supply of frac sand available in the market increases, prices in the frac sand market could continue to
materially decrease as less-efficient producers exit the market, selling frac sand at below market prices. Furthermore, our competitors may choose to
consolidate, which could provide them with greater financial and other resources than us and negatively impact demand for our frac sand products. In
addition, oil and natural gas exploration and production companies and other providers of hydraulic fracturing services could acquire their own frac sand
reserves, expand their existing frac sand production capacity or otherwise fulfill their own proppant requirements and existing or new frac sand producers
could add to or expand their frac sand production capacity, which would negatively impact demand for our frac sand products. We may not be able to compete
successfully against either our larger or smaller competitors in the future, and competition could have a material adverse effect on our business, financial
condition, results of operations, cash flows and prospects.
If our customers delay or fail to pay a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity,
consolidated results of operations, and financial condition.
We bill our customers for our products in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic
environments, we may experience increased delays or failures due to, among other reasons, a reduction in our customers’ cash flow from operations and their
access to the credit markets. If our customers delay or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse
effect on our liquidity, consolidated results of operations, and financial condition.
Some of our customers may experience financial difficulties, including insolvency. If a customer cannot provide us with reasonable assurance of
payment, we will fully reserve the outstanding accounts receivable balance for the customer and only recognize revenue when we collect payment for our
products shipped, assuming all other criteria for revenue recognition have been met. Although we will continue to try to obtain payments from these
customers, it is likely that one or more of these customers will not pay us for our products. With respect to customers that are in bankruptcy proceedings, we
similarly may not be able to collect sums owed to us by these customers and we also may be required to refund pre-petition amounts paid to us during the
preference period (typically 90 days) prior to the bankruptcy filing.
A large portion of our sales is generated by our top ten customers, and the loss of, or a significant reduction in purchases by our largest customers
could adversely affect our operations.
Our top ten customers made up 52%, 56%, and 57% of our total sales revenue during the years ended December 31, 2016, 2015, and 2014, respectively.
As of December 31, 2016, we had seven long-term, competitively-bid take-or-pay supply contracts with six customers in the oil and gas proppants end
market, four of which were among our top ten overall customers. These agreements have initial terms expiring between 2017 and 2019. As of February 23,
2016, we maintained long-term take-
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or-pay supply contracts with seven customers. While some of our largest customers have entered into supply contracts with us, these customers may not
continue to purchase the same levels of our commercial silica products in the future due to a variety of reasons, contract requirements notwithstanding. For
example, some of our top customers could go out of business or, alternatively, be acquired by other companies that purchase the same products and services
provided by us from other third-party providers. Our customers could also seek to capture and develop their own sources of commercial silica. If any of our
major customers substantially reduces or altogether ceases purchasing our commercial silica products, depending on market conditions, we could suffer a
material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
In addition, the long-term take-or-pay supply agreements we have may negatively impact our results of operations. Some of our long-term agreements
are for sales at fixed prices that are adjusted only for certain cost increases. As a result, in periods with increasing prices, our sales could grow at a slower rate
than industry spot prices.
Increasing costs, a lack of dependability or availability of transportation services, transload network access or infrastructure or an oversupply of
transportation services could have a material adverse effect on our business.
Because of the relatively low cost of producing commercial silica, transportation and related costs including freight charges, fuel surcharges,
transloading fees, switching fees, railcar lease costs, demurrage costs and storage fees, tend to be a significant component of the total delivered cost of sales.
The high relative cost of transportation related expense tends to favor manufacturers located in close proximity to the customer. In addition, when we expand
our commercial silica production, we need increased transportation services and transload network access. We contract with truck, rail and barge services to
move commercial silica from our production facilities to transload sites and our customers, and increased costs under these contracts could adversely affect
our results of operations. In addition, we bear the risk of non-delivery under our contracts. Labor disputes, derailments, adverse weather conditions or other
environmental events, an increasingly tight railcar leasing market and changes to rail freight systems could interrupt or limit available transportation services.
A significant increase in transportation service rates, a reduction in the dependability or availability of transportation or transload services, or relocation of our
customers’ businesses to areas farther from our plants or transloads could impair our ability to deliver our products economically to our customers and to
expand our markets. Further, reduced demand for commercial silica has resulted in railcar over-capacity, which has led to railcar storage fees while, at the
same time, we have continued to incur lease costs for those railcars in storage, which could have a material adverse effect on our business, financial condition,
results of operations, cash flows and prospects.
Seasonal and severe weather conditions could have a material adverse impact on our business.
Our business could be materially adversely affected by weather conditions. Severe weather conditions may affect our customers’ operations, thus
reducing their need for our products. Weather conditions may impact our operations, resulting in weather-related damage to our facilities and equipment or an
inability to deliver equipment, personnel and products to job sites in accordance with contract schedules. In addition, the EPA has stated that climate change
may lead to the increased frequency and severity of extreme weather events. Any such interference with our operations could force us to delay or curtail
services and potentially breach our contractual obligations or result in a loss of productivity and an increase in our operating costs.
Our production process consumes large amounts of natural gas and electricity. An increase in the price or a significant interruption in the supply of
these or any other energy sources could have a material adverse effect on our financial condition or results of operations.
Energy costs, primarily natural gas and electricity, represented approximately 5% of our total sales in 2016. Natural gas is the primary fuel source used
for drying in the commercial silica production process and, as such, our profitability is impacted by the price and availability of natural gas we purchase from
third parties. The price and supply of natural gas are unpredictable and can fluctuate significantly based on international, political and economic
circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, actions by OPEC and other oil
and natural gas producers, regional production patterns and environmental concerns. In addition, potential climate change regulations or carbon or emissions
taxes could result in higher production costs for energy, which may be passed on to us in whole or in part. In the past, the price of natural gas has been
extremely volatile, and we believe this volatility may continue. In order to manage this risk, we may hedge natural gas prices through the use of derivative
financial instruments, such as forwards, swaps and futures. However, these measures carry risk (including nonperformance by counterparties) and do not in
any event entirely eliminate the risk of decreased margins as a result of natural gas price increases. A significant increase in the price of energy that is not
recovered through an increase in the price of our products or covered through our hedging arrangements or an extended interruption in the supply of natural
gas or electricity to our production facilities could have a material adverse effect on our business, financial condition, results of operations, cash flows and
prospects.
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Increases in the price of diesel fuel may adversely affect our results of operations.
Diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and
market factors that are outside of our control. Our operations are dependent on earthmoving equipment, railcars and tractor trailers, and diesel fuel costs are a
significant component of the operating expense of these vehicles. We use earthmoving equipment in our mining operations, and we ship the vast majority of
our products by either railcar or tractor trailer. To the extent that we perform these services with equipment that we own, we are responsible for buying and
supplying the diesel fuel needed to operate these vehicles. To the extent that these services are provided by independent contractors, we may be subject to fuel
surcharges that attempt to recoup increased diesel fuel expenses. To the extent we are unable to pass along increased diesel fuel costs to our customers, our
results of operations could be adversely affected.
Diminished access to water may adversely affect our operations.
The mining and processing activities in which we engage at a number of our facilities require significant amounts of water, and some of our facilities
are located in areas that are water-constrained. We have obtained water rights that we currently use to service the activities on our various properties, and we
plan to obtain all required water rights to service other properties we may develop or acquire in the future. However, the amount of water that we are entitled
to use pursuant to our water rights must be determined by the appropriate regulatory authorities in the jurisdictions in which we operate. Such regulatory
authorities may amend the regulations regarding such water rights, increase the cost of maintaining such water rights or eliminate our current water rights, and
we may be unable to retain all or a portion of such water rights. These new regulations, which could also affect local municipalities and other industrial
operations, could have a material adverse effect on our operating costs and effectiveness if implemented. Such changes in laws, regulations or government
policy and related interpretations pertaining to water rights may alter the environment in which we do business, which may negatively affect our financial
condition and results of operations.
If we cannot successfully complete acquisitions or integrate acquired businesses, our growth may be limited and our financial condition may be
adversely affected.
Our business strategy includes supplementing internal growth by pursuing acquisitions of complementary businesses. Any acquisition involves
potential risks, including, among other things:
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the validity of our assumptions about mineral reserves, future production, sales, capital expenditures, operating expenses and costs, including
synergies;
an inability to successfully integrate the businesses we acquire;
the use of a significant portion of our available cash or borrowing capacity to finance acquisitions and the subsequent decrease in our liquidity;
a significant increase in our interest expense or financial leverage if we incur additional debt to finance acquisitions;
the assumption of unknown liabilities, losses or costs for which we are not indemnified or for which our indemnity is inadequate;
the diversion of management’s attention from other business concerns;
an inability to hire, train or retain qualified personnel both to manage and to operate our growing business and assets;
the incurrence of other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges;
unforeseen difficulties encountered in operating in new geographic areas;
customer or key employee losses at the acquired businesses; and
the accuracy of data obtained from production reports and engineering studies, geophysical and geological analyses and other information used
when deciding to acquire a property, the results of which are often inconclusive and subject to various interpretations.
If we cannot successfully complete acquisitions or integrate acquired businesses, our growth may be limited and our financial condition may be
adversely affected.
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We will be required to make substantial capital expenditures to maintain, develop and increase our asset base. The inability to obtain needed capital
or financing on satisfactory terms, or at all, could have an adverse effect on our growth and profitability.
Although we currently use a significant amount of our cash reserves and cash generated from our operations to fund the maintenance and development
of our existing mineral reserves and our acquisitions of new mineral reserves, we may depend on the availability of credit to fund future capital expenditures.
Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of
any such financing or offering, the covenants contained in our existing credit facilities or future debt agreements, adverse market conditions or other
contingencies and uncertainties that are beyond our control. Our failure to obtain the funds necessary to maintain, develop and increase our asset base could
adversely impact our growth and profitability.
Even if we are able to obtain financing or access the capital markets, incurring additional debt may significantly increase our interest expense and
financial leverage, and our level of indebtedness could restrict our ability to fund future development and acquisition activities. In addition, the issuance of
additional common stock in an equity offering may result in significant stockholder dilution.
Our substantial indebtedness and pension obligations could adversely affect our financial flexibility and our competitive position.
We have, and we will continue to have, a significant amount of indebtedness. As of December 31, 2016, we had $513.2 million of outstanding
indebtedness. Under our senior secured credit facility, as of December 31, 2016, we had a $50.0 million line-of-credit, of which $4.0 million is being used for
outstanding letters of credit, leaving $46.0 million of borrowing availability. Our substantial level of indebtedness increases the risk that we may be unable to
generate cash sufficient to pay amounts due in respect of our indebtedness. We also have, and will continue to have, significant pension obligations. As of
December 31, 2016, our unfunded pension obligations totaled $32.3 million. Our substantial indebtedness and pension obligations could have other important
consequences to you and significant effects on our business. For example, they could:
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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness and pension obligations,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from exploiting business opportunities;
make it more difficult to satisfy our financial obligations, including payments on our indebtedness;
place us at a disadvantage compared to our competitors that have less debt and pension obligations; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our
business strategy or other general corporate purposes.
Our senior secured credit facility contains certain restrictions and financial covenants that may restrict our business and financing activities
Our existing senior secured credit facility contains, and any future financing agreements that we may enter into will likely contain, operating and
financial restrictions and covenants that may restrict our ability to finance future operations or capital needs or to engage in, expand or pursue our business
activities.
Our ability to comply with these restrictions and covenants is uncertain and will be affected by the levels of cash flow from our operations and events or
circumstances beyond our control. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we
violate any of the restrictions, covenants, ratios or tests in our senior secured credit facility, a significant portion of our indebtedness may become immediately
due and payable and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make
these accelerated payments. In addition, our obligations under our senior secured credit facility are secured by substantially all of our assets, and if we are
unable to repay our indebtedness under our senior secured credit facility, the lenders could seek to foreclose on our assets.
We may incur substantial debt in the future to enable us to maintain or increase our production levels and to otherwise pursue our business plan.
This debt may impair our ability to operate our business.
Our business plan requires a significant amount of capital expenditures to maintain and grow our production levels. If commercial silica prices were to
decline for an extended period of time, if the costs of our acquisition and development
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operations were to increase substantially or if other events were to occur which reduced our sales or increased our costs, we may be required to borrow
significant amounts in the future to enable us to finance the expenditures necessary to replace the reserves we produce. The cost of the borrowings and our
obligations to repay the borrowings could have important consequences to us, including:
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our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or
such financing may not be available on favorable terms, or at all;
covenants contained in our existing and future credit and debt arrangements will require us to meet financial tests that may affect our flexibility in
planning for, and reacting to, changes in our business, including possible acquisition opportunities;
we will need a substantial portion of our cash flow to make principal and interest payments on our indebtedness and to improve the funded status
of our defined benefit pension plan, reducing the funds that would otherwise be available for operations and future business opportunities; and
our debt level will make us more vulnerable than our less leveraged competitors to competitive pressures or a downturn in our business or the
economy generally.
Our ability to service our indebtedness will depend on, among other things, our future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying business activities, acquisitions,
investments and/or capital expenditures; selling assets; restructuring or refinancing our indebtedness; or seeking additional equity capital or bankruptcy
protection. We may not be able to affect any of these remedies on satisfactory terms or at all.
Certain of our contracts contain provisions requiring us to deliver minimum amounts of frac sand or purchase minimum amounts of services.
Noncompliance with these contractual obligations may result in penalties or termination of the agreement.
In certain instances, we commit to deliver products or purchase services, under penalty of nonperformance. Our inability to meet the minimum
contract requirements may permit the counterparty to terminate the agreements or require us to pay a fee. The amount of the fee would be based on the
difference between the minimum amount contracted for and the amount delivered or purchased. In such events, our business, financial condition and results
of operations may be materially adversely affected.
Inaccuracies in our estimates of mineral reserves and resource deposits could result in lower than expected sales and higher than expected costs.
We base our mineral reserve and resource estimates on engineering, economic and geological data assembled and analyzed by our engineers and
geologists, which are reviewed periodically by outside firms. However, commercial silica reserve estimates are necessarily imprecise and depend to some
extent on statistical inferences drawn from available drilling data, which may prove unreliable. There are numerous uncertainties inherent in estimating
quantities and qualities of commercial silica reserves and non-reserve commercial silica deposits and costs to mine recoverable reserves, including many
factors beyond our control. Estimates of economically recoverable commercial silica reserves necessarily depend on a number of factors and assumptions, all
of which may vary considerably from actual results, such as:
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geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from
experience;
assumptions concerning future prices of commercial silica products, operating costs, mining technology improvements, development costs and
reclamation costs; and
assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
Any inaccuracy in our estimates related to our mineral reserves and non-reserve mineral deposits could result in lower than expected sales and higher
than expected costs.
A shortage of skilled labor together with rising labor costs in the mining industry may further increase operating costs, which could adversely affect
our results of operations.
Efficient mining using modern techniques and equipment requires skilled laborers, preferably with several years of experience and proficiency in
multiple mining tasks, including processing of mined minerals. If the shortage of experienced
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labor continues or worsens or if we are unable to train the necessary number of skilled laborers, there could be an adverse impact on our labor productivity
and costs and our ability to grow our business may be limited.
Our business may suffer if we lose, or are unable to attract and retain, key personnel.
We depend to a large extent on the services of our senior management team and other key personnel. Members of our senior management and other key
employees have extensive experience and expertise in evaluating and analyzing industrial mineral properties, maximizing production from such properties,
marketing industrial mineral production and developing and executing financing and hedging strategies. Competition for management and key personnel is
intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have
a material adverse effect on our operations and could lead to higher labor costs or the use of less-qualified personnel. In addition, if any of our executives or
other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel. We do not
maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to attract, employ and retain
highly skilled personnel.
Difficulty in truckload driver and independent contractor recruitment and retention may have a materially adverse effect on our business.
With respect to our trucking services, difficulty in attracting or retaining qualified drivers and independent contractors could have a materially
adverse effect on our growth and profitability. The truckload transportation industry periodically experiences a shortage of qualified drivers, particularly
during periods of economic expansion, in which alternative employment opportunities are more plentiful and freight demand increases, or during periods of
economic downturns, in which unemployment benefits might be extended and financing is limited for independent contractors who seek to purchase
equipment or for students who seek financial aid for driving school. Our independent contractors are responsible for paying for their own equipment, fuel, and
other operating costs, and significant increases in these costs could cause them to seek higher compensation from us or seek other opportunities within or
outside the trucking industry. The trucking industry suffers from a high driver turnover rate, which requires us to continually recruit a substantial number of
drivers to operate our equipment. If we were unable to attract and contract with independent contractors, we could be forced to, among other things, limit our
growth, decrease the number of our tractors in service, adjust our driver compensation package or independent contractor compensation, or pay higher rates to
third-party truckload carriers, which could adversely affect our profitability and results of operations if not offset by a corresponding increase in customer
rates.
Our profitability could be negatively affected if we fail to maintain satisfactory labor relations.
As of December 31, 2016, various labor unions represented approximately 30% of our employees. If we are unable to renegotiate acceptable collective
bargaining agreements with these labor unions in the future, we could experience, among other things, strikes, work stoppages or other slowdowns by our
workers and increased operating costs as a result of higher wages, health care costs or benefits paid to our employees. An inability to maintain good relations
with our workforce could cause a material adverse effect on our business and results of operations.
We rely upon patents, trade secrets and contractual restrictions to protect our proprietary rights. Failure to protect our intellectual property rights
may undermine our competitive position, and protecting our rights or defending against third-party allegations of infringement may be costly.
Our commercial success depends on our proprietary information and technologies, know-how and other intellectual property. Because of the technical
nature of our business, we rely primarily on patents, trade secrets, trademarks and contractual restrictions to protect our intellectual property rights. The
measures we take to protect our patents, trade secrets and other intellectual property rights may be insufficient. Failure to protect, monitor and control the use
of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. It is possible that our competitors
or others could independently develop the same or similar technologies or otherwise obtain access to our unpatented technologies. In such case, our patents
and trade secrets would not prevent third parties from competing with us. As a result, our results of operations may be adversely affected. Furthermore, third
parties or employees may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could also harm our business and
results of operations. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available.
In addition, third parties may claim that our products infringe or otherwise violate their patents or other proprietary rights and seek corresponding
damages or injunctive relief. Defending ourselves against such claims, with or without merit, could be time-consuming and result in costly litigation. An
adverse outcome in any such litigation could subject us to significant liability to third parties (potentially including treble damages) or temporary or
permanent injunctions prohibiting the manufacture or
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sale of our products, the use of our technologies or the conduct of our business. Any adverse outcome could also require us to seek licenses from third parties
(which may not be available on acceptable terms, or at all) or to make substantial one-time or ongoing royalty payments. Protracted litigation could also result
in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation. In addition, we may not
have insurance coverage in connection with such litigation and may have to bear all costs arising from any such litigation to the extent we are unable to
recover them from other parties. Any of these outcomes could have a material adverse effect on our business, financial condition, results of operations, cash
flows and prospects.
We may have to utilize significant cash to meet our unfunded pension obligations and post-retirement health care liabilities and these obligations
are subject to increase.
Many of our employees participate in our defined benefit pension plans. In 2016, we made no contribution payments toward reducing the unfunded
liability of our defined benefit pension plans. Declines in interest rates or the market values of the securities held by the plans, or other adverse changes, could
materially increase the underfunded status of our plans and affect the level and timing of required cash contributions. To the extent we use cash to reduce
these unfunded liabilities, the amount of cash available for our working capital needs would be reduced. In addition, under the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to institute proceedings to terminate a
pension plan if (1) the plan has not met the minimum funding requirements, (2) the plan cannot pay current benefits when due, (3) a lump sum payment has
been made to a participant who is a substantial owner of the sponsoring company (and certain other technical conditions exist) or (4) the loss to the PBGC is
reasonably expected to increase unreasonably over time if the plan is not terminated. In the event our tax-qualified pension plans are terminated by the PBGC,
we could be liable to the PBGC for the underfunded amount, which could trigger default provisions in our credit facilities. As of December 31, 2016, our
pension obligation was $116.1 million (with plan assets of $83.9 million). The amount of cash ultimately required to fund these obligations will vary based on
a number of factors including future return on assets, mortality rates and other such actuarial assumptions. Based on current assumptions, we expect to pay
$2.1 million in the year 2017, a total of $5.6 million for the two-year period from 2018 through 2019, a total of $6.1 million for the two-year period from
2020 through 2021 and a total of $18.5 million thereafter.
We also have a post-retirement health and life insurance plan for many of our employees. The post-retirement benefit plan is unfunded. We derive post-
retirement benefit expense from an actuarial calculation based on the provisions of the plan and a number of assumptions provided by us including
information about employee demographics, retirement age, future health care costs, turnover, mortality, discount rate, amount and timing of claims and a
health care inflation trend rate. Our post-retirement healthcare obligations were $24.4 million as of December 31, 2016. Based on current assumptions, we
expect to pay $1.4 million in the year 2017, a total of $2.8 million for the two-year period from 2018 through 2019, a total of $3.0 million for the two-year
period from 2020 through 2021 and a total of $17.2 million thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Contractual Obligations.”
Failure to maintain effective quality control systems at our mining, processing and production facilities could have a material adverse effect on our
business and operations.
The performance, quality and safety of our products are critical to the success of our business. These factors depend significantly on the effectiveness of
our quality control systems, which, in turn, depends on a number of factors, including the design of our quality control systems, our quality-training program
and our ability to ensure that our employees adhere to the quality control policies and guidelines. Any significant failure or deterioration of our quality control
systems could have a material adverse effect on our business, financial condition, results of operations and reputation.
Our sales and profitability fluctuate on a seasonal basis and are affected by a variety of other factors.
Our sales and profitability are affected by a variety of factors, including actions of competitors, changes in general economic conditions, weather
conditions and seasonal periods. As a result, our results of operations may fluctuate on a quarterly basis and relative to corresponding periods in prior years,
and any of these factors could adversely affect our business and cause our results of operations to decline. For example, we sell more of our products in the
second and third quarters in the building products and recreation end markets due to the seasonal rise in construction driven by more favorable weather
conditions. We sell fewer of our products in the first and fourth quarters due to reduced construction and recreational activity largely as a result of adverse
weather conditions. Any unanticipated decrease in demand for our products during the second and third quarters could have a material adverse effect on our
sales and profitability.
We may be subject to interruptions or failures in our information technology systems.
We rely on our information technology systems to process transactions, summarize our operating results and manage our business. Our information
technology systems are subject to damage or interruption from power outages, computer and
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telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events, such as fires, floods, earthquakes, tornadoes,
hurricanes, acts of war or terrorism, and usage errors by our employees. If our information technology systems are damaged or cease to function properly, we
may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations.
The reliability and capacity of our information technology systems is critical to our operations and the implementation of our growth initiatives. Any
material disruption in our information technology systems, or delays or difficulties in implementing or integrating new systems or enhancing current systems,
could have an adverse effect on our business, and results of operations.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and
could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or
disruptions of fuel supplies and markets if pipelines, production facilities, processing plants or refineries are direct targets or indirect casualties of an act of
terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our products and
services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of
operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.
Risks Related to Environmental, Mining and Other Regulation
We and our customers are subject to extensive environmental and health and safety regulations which impose, and will continue to impose,
significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs
and liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state and local regulatory environmental requirements affecting the mining and mineral processing industry,
including among others, those relating to employee health and safety, environmental permitting and licensing, air and water emissions, greenhouse gas
emissions, water pollution, waste management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties,
hazardous materials and natural resources. These laws, regulations and permits have had, and will continue to have, a significant effect on our business. Some
environmental laws impose substantial penalties for noncompliance, and others, such as CERCLA, impose strict, retroactive and joint and several liability for
the remediation of releases of hazardous substances. Liability under CERCLA, or similar state and local laws, may be imposed as a result of conduct that was
lawful at the time it occurred or for the conduct of, or conditions caused by, prior operators or other third parties. Failure to properly handle, transport, store or
dispose of hazardous materials or otherwise conduct our operations in compliance with environmental laws could expose us to liability for governmental
penalties, cleanup costs and civil or criminal liability associated with releases of such materials into the environment, damages to property or natural
resources and other damages, as well as potentially impair our ability to conduct our operations. In addition, future environmental laws and regulations could
restrict our ability to expand our facilities or extract our mineral deposits or could require us to acquire costly equipment or to incur other significant expenses
in connection with our business. Future events, including changes in any environmental requirements (or their interpretation or enforcement) and the costs
associated with complying with such requirements, could have a material adverse effect on us.
Any failure by us to comply with applicable environmental laws and regulations may cause governmental authorities to take actions that could
adversely impact our operations and financial condition, including:
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issuance of administrative, civil and criminal penalties;
denial, modification or revocation of permits or other authorizations;
imposition of injunctive obligations or other limitations on our operations, including cessation of operations; and
requirements to perform site investigatory, remedial or other corrective actions.
Moreover, environmental requirements, and the interpretation and enforcement thereof, change frequently and have tended to become more stringent
over time. For example, greenhouse gas emission regulation is becoming more rigorous. We expect to be required to report annual greenhouse gas emissions
from our operations to the EPA, and additional greenhouse gas emission related requirements at the supranational, federal, state, regional and local levels are
in various stages of development. The U.S. Congress has considered, and may adopt in the future, various legislative proposals to address climate change,
including a nationwide limit on greenhouse gas emissions. In addition, the EPA has issued regulations, including the “Tailoring Rule,” that subject greenhouse
gas emissions from certain stationary sources to the Prevention of Significant Deterioration and Title V provisions of the federal Clean Air Act. Any such
regulations could require us to modify existing permits or obtain new
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permits, implement additional pollution control technology, curtail operations or increase significantly our operating costs. Any regulation of greenhouse gas
emissions, including, for example, through a cap-and-trade system, technology mandate, emissions tax, reporting requirement or other program, could
adversely affect our business, financial condition, reputation, operating performance and product demand.
In addition to environmental regulation, we are subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state
regulatory authorities, including MSHA and OSHA, may continue to propose changes in their regulations regarding workplace exposure to crystalline silica,
such as permissible exposure limits and required controls and personal protective equipment. For instance, in June 2016, OSHA issued final regulations that
will reduce permissible exposure limits to 50 micrograms of respirable crystalline silica per cubic meter of air, averaged over an 8-hour day. Both the North
American Industrial Mining Association and the National Industrial Sand Association, both of which we are a member, track silicosis-related issues and aim
to work with government policymakers in crafting such regulations.
We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse
effect on our operating results by requiring us to modify our operations or equipment or shut down some or all of our plants. Additionally, our customers may
not be able to comply with any new laws and regulations, and any new laws and regulations could have a material adverse effect on our customers by
requiring them to shut down old plants or to relocate plants to locations with less stringent regulations farther away from our facilities. We cannot at this time
reasonably estimate our costs of compliance or the timing of any costs associated with any new laws and regulations, or any material adverse effect that any
new standards will have on our customers and, consequently, on our operations.
We are subject to various lawsuits relating to the actual or alleged exposure of persons to silica. See “Risks Related to Our Business-Silica-related
health issues and litigation could have a material adverse effect on our business, reputation or results of operations.”
We are subject to the Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards on numerous aspects of our
operations.
Our operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response
Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training
of personnel, operating procedures, operating equipment and other matters. Our failure to comply with such standards, or changes in such standards or the
interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions
on our ability to conduct mineral extraction and processing operations.
Silica-related health issues and litigation could have a material adverse effect on our business, reputation or results of operations.
The inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica
exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health
risks have been, and may continue to be, a significant issue confronting the commercial silica industry. Concerns over silicosis and other potential adverse
health effects, as well as concerns regarding potential liability from the use of silica, may have the effect of discouraging our customers’ use of our silica
products. The actual or perceived health risks of mining, processing and handling silica could materially and adversely affect silica producers, including us,
through reduced use of silica products, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities
of us and our customers or reduced financing sources available to the commercial silica industry.
Since at least 1975, we and/or our predecessors have been named as a defendant, usually among many defendants, in numerous products liability
lawsuits brought by or on behalf of current or former employees of our customers alleging damages caused by silica exposure. As of February 21, 2017, there
were a total of 74 active silica-related products liability claims pending in which we were a defendant and 1 inactive claim. Almost all of the claims pending
against us arise out of the alleged use of our silica products in foundries or as an abrasive blast media, involve various other defendants and have been filed in
the states of Texas, Louisiana and Mississippi, although some cases have been brought in many other jurisdictions over the years.
Prior to the fourth quarter of 2012, we had insurance policies for both our predecessors that covered certain claims for alleged silica exposure for
periods prior to certain dates in 1985 and 1986 (with respect to various insurance). As a result of a settlement with a former owner and its insurers in the
fourth quarter of 2012, some of these policies are no longer available to us and we will not seek reimbursement for any defense costs or claim payments from
these policies. Other insurance policies, however, continue to remain available to us and will continue to make such payments on our behalf. The silica-
related litigation brought against us to date and associated litigation costs, settlements and verdicts have not resulted in a material liability to us
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to date. However, we continue to have silica exposure claims filed against us, including claims that allege silica exposure for periods not covered by
insurance, and the costs, outcome and impact to us of any pending or future claims is not certain. Any such pending or future claims or inadequacies of our
insurance coverage could have a material adverse effect on our business, reputation, financial condition, results of operations, cash flows and prospects. For
further information, see “Business-Legal Proceedings.”
We and our customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation,
which impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of
existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.
In addition to the regulatory matters described above, we and our customers are subject to extensive governmental regulation on matters such as
permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration of mining properties after mining is
completed, the discharge of materials into the environment and the effects that mining and hydraulic fracturing have on groundwater quality and availability.
Our future success depends, among other things, on the quantity of our commercial silica and other mineral deposits and our ability to extract these deposits
profitably, and our customers being able to operate their businesses as they currently do.
In order to obtain permits and renewals of permits in the future, we may be required to prepare and present data to governmental authorities pertaining
to the impact that any proposed exploration or production activities may have on the environment. Certain approval procedures may require preparation of
archaeological surveys, endangered species studies and other studies to assess the environmental impact of new sites or the expansion of existing sites.
Compliance with these regulatory requirements is expensive and significantly lengthens the time needed to develop a site. Finally, obtaining or renewing
required permits is sometimes delayed or prevented due to community opposition and other factors beyond our control. The denial of a permit essential to our
operations or the imposition of conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop or expand a site.
Significant opposition to a permit by neighboring property owners, members of the public or other third parties or delay in the environmental review and
permitting process also could impair or delay our ability to develop or expand a site. New legal requirements, including those related to the protection of the
environment, could be adopted that could materially adversely affect our mining operations (including our ability to extract mineral deposits), our cost
structure or our customers’ ability to use our commercial silica products. Such current or future regulations could have a material adverse effect on our
business and we may not be able to obtain or renew permits in the future.
Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a
material adverse effect on our business, financial condition and results of operations.
We are generally obligated to restore property in accordance with regulatory standards and our approved reclamation plan after it has been mined. We
are required under federal, state and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire,
maintain or renew such assurances, as required by federal, state and local laws, could subject us to fines and penalties as well as the revocation of our
operating permits. Such inability could result from a variety of factors, including:
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the lack of availability, higher expense or unreasonable terms of such financial assurances;
the ability of current and future financial assurance counterparties to increase required collateral; and
the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments.
Our inability to acquire, maintain or renew necessary financial assurances related to the reclamation and restoration of mining property could have a
material adverse effect on our business, financial condition and results of operations.
Mine closures entail substantial costs, and if we close one or more of our mines sooner than anticipated, our results of operations may be adversely
affected.
We base our assumptions regarding the life of our mines on detailed studies that we perform from time to time, but our studies and assumptions do not
always prove to be accurate. If we close any of our mines sooner than expected, sales will decline unless we are able to increase production at any of our other
mines, which may not be possible. The closure of an open pit mine also involves significant fixed closure costs, including accelerated employment legacy
costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts
and equipment leases. We accrue for the costs of reclaiming open pits, stockpiles, tailings ponds, roads and other mining support areas over the estimated
mining life of our property. If we were to reduce the estimated life of any of our mines,
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the fixed mine closure costs would be applied to a shorter period of production, which would increase production costs per ton produced and could materially
and adversely affect our results of operations and financial condition.
Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an
approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, re-grading, prevention of erosion and other forms of
water pollution, re-vegetation and post-mining land use. We may be required to post a surety bond or other form of financial assurance equal to the cost of
reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based on permit requirements
and requires various estimates and assumptions, principally associated with reclamation costs and production levels. If our accruals for expected reclamation
and other costs associated with mine closures for which we will be responsible were later determined to be insufficient, our business, results of operations and
financial condition would be adversely affected.
Our trucking services are highly regulated, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future
regulations could have a material adverse effect on our business.
The Department of Transportation (DOT) and various state agencies exercise broad powers over our trucking services, generally governing matters
including authorization to engage in motor carrier service, equipment operation, safety, and financial reporting. In the future, we may become subject to new
or more restrictive regulations, such as regulations relating to engine exhaust emissions, hours of service that our drivers may provide in any one time period,
security and other matters, which could substantially impair equipment productivity and increase our costs. We may be audited periodically by the DOT to
ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations. If we were found to be out of compliance, the DOT
could restrict or otherwise impact our trucking services, which would adversely affect our profitability and results of operations.
Risks Related to the Ownership of Our Common Stock
Our stock price could be volatile, and you may not be able to resell shares of your common stock at or above the price you paid.
The stock market has and continues to experience extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of the underlying businesses. These broad market fluctuations may adversely affect the market price of our common stock, regardless
of our actual operating performance.
In addition to the risks described in this section, the market price of our common stock may fluctuate significantly in response to a number of factors,
most of which we cannot control, including:
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quarterly variations in our operating results compared to market expectations;
announcements of acquisitions of or investments in other businesses and properties or dispositions;
changes in preferences of our customers;
announcements of new services or products or significant price reductions by us or our competitors;
size of the public float;
stock price performance of our competitors;
fluctuations in stock market prices and volumes;
default on our indebtedness or foreclosure on our properties;
actions by competitors;
changes in our management team or key personnel;
changes in ratings and financial estimates by securities analysts;
negative earnings or other announcements by us or other industrial companies;
downgrades in our credit ratings or the credit ratings of our competitors;
issuances of capital stock; and
global economic, legal and regulatory factors unrelated to our performance.
Numerous factors affect our business and cause variations in our operating results and affect our net sales, including overall economic trends, our ability
to identify and respond effectively to customer preferences, actions by competitors, pricing, the level of customer service that we provide, changes in product
mix or sales channels, our ability to source and distribute products effectively and weather conditions.
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Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the price at which you
purchased the stock. As a result, you may suffer a loss on your investment.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price
of a company’s securities. This litigation, if instituted against us, could result in substantial costs, reduce our profits, divert our management’s attention and
resources and harm our business.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider
favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our
Board. These provisions:
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authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without
stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the
holders of common stock;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the Board is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
Our certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation
Law (the “DGCL”), and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period
of three years from the date such person acquired such common stock, unless Board or stockholder approval is obtained prior to the acquisition. These anti-
takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company,
even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our
business. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock
price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume to decline.
Holders of our common stock may not receive dividends on our common stock.
Holders of our common stock are entitled to receive only such dividends as our Board may declare out of funds legally available for such payments. We
are incorporated in Delaware and are governed by the DGCL. The DGCL allows a corporation to pay dividends only out of a surplus, as determined under
Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under the
DGCL, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the
outstanding stock of all classes having a preference upon the distribution of assets. While management and our Board remain committed to evaluating
additional ways of creating shareholder value, any determination to pay dividends and other distributions in cash, stock or property by us in the future will be
at the discretion of our Board and will be dependent on then-existing conditions, including business conditions, our financial condition, results of operations,
liquidity, capital requirements, contractual restrictions including restrictive covenants contained in debt agreements and other factors. While we have declared
and paid a quarterly cash dividend on our common stock as described under Part II, Item 5 of this Annual Report on Form 10-K, we are not required to
declare future cash dividends on our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.
PROPERTIES
Our corporate headquarters is located in Frederick, Maryland. In addition, we maintain corporate support centers and sales offices in Chicago, Illinois
and Houston, Texas.
As of December 31, 2016, we operate 18 production facilities located primarily in the eastern half of the United States, with operations in Alabama,
Illinois (3), Louisiana, Michigan, Missouri, New Jersey, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas (3), Virginia, West Virginia and
Wisconsin. We own two undeveloped sites, which are located in Wisconsin and Arkansas. We also own three transload sites and operate additional transload
sites via service contracts with our transload operating partners.
Additionally, we operate corporate laboratories located at our Berkeley Springs, West Virginia and Houston, Texas facilities that provide critical
technical expertise, analytical testing resources and application development to promote product value and cost savings.
We generally own our principal production properties, although some land is leased. Substantially all of our owned assets are pledged as security under
our senior secured credit facility; for additional information regarding our indebtedness, see Note I - Debt and Capital Leases to our Financial Statements in
Part II, Item 8 of this Annual Report on Form 10-K for information related to our credit facilities.
Corporate offices, including sales locations are leased. In general, we consider our facilities, taken as a whole, to be suitable and adequate for our
current operations.
Our Production Facilities
The following is a detailed description of our 18 production facilities and our currently undeveloped sites in Fairchild, Wisconsin and Batesville,
Arkansas.
Ottawa, Illinois
Our surface mines in Ottawa use natural gas and electricity to produce whole grain and ground silica through a variety of mining methods, including
hard rock mining, mechanical mining and hydraulic mining. The reserves are part of the St. Peter Sandstone Formation that stretches north-south from
Minnesota to Missouri and east-west from Illinois to Nebraska and South Dakota. The facility is located approximately 80 miles southwest of Chicago and is
accessible by major highways including U.S. Interstate 80. Once the product is appropriately processed, it is shipped either in bulk or packaged form by rail
by either the CSX Corporation or the BNSF Railway Company (via the Illinois Railway short line), truck or barge.
We acquired the Ottawa facility in 1987 by merger with the Ottawa Silica Company, which had historically used the property to produce whole grain
and ground silica for customers in industrial and specialty products end markets. Since acquiring the facility we have renovated and upgraded its production
capabilities to enable it to produce multiple products through various processing methods, including washing, hydraulic sizing, grinding, screening and
blending. These production techniques allow the Ottawa facility to meet a wide variety of focused specifications on product composition from customers. As
such, the Ottawa facility services multiple end markets, such as glass, building products, foundry, fillers and extenders, chemicals and oil and gas proppants.
In November 2009, we expanded the frac sand capacity of this facility by 500,000 tons. During the fourth quarter of 2011, we completed a follow-on
expansion project that added an additional 900,000 tons of frac sand capacity.
Voca, Texas
Our surface mines at the Voca facility use propane and electricity to produce whole grain silica through hard rock mining. The majority of reserves in
Voca are sandstones of the Middle and Lower Hickory members of the Riley Formation in central Texas. The facility is located approximately 110 miles
northwest of Austin, TX in McCulloch County and is accessible by state highways. Once product is processed, it is shipped primarily by customer truck.
We acquired the Voca facility upon the closing of our Cadre Services, Inc. ("Cadre") acquisition in July 2014. The fully automated, state-of-the-art
facility became operational in 2011 and features one of the industry’s largest on-site storage capacities. The plant was recently expanded in 2014 and produces
a range of API/ISO certified frac sand grades. The Voca plant’s location in central Texas allows it to economically serve oil & gas customers in the Permian
basin.
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Tyler, Texas
Our Tyler facility uses natural gas and electricity to produce whole grain silica through surface mining methods. The reserves at Tyler contain mostly
unconsolidated sand of the Queen City Sand formation (Eocene Age). The facility is located approximately 9 miles north of Tyler, TX in Smith County and is
located immediately adjacent to Interstate 20. Once product is processed, it is shipped by truck.
We acquired the Tyler facility in connection with the closing of the NBI Acquisition in August 2016. The fully automated, state-of-the-art facility
became operational in 2011 and features one of the industry’s largest on-site storage capacities. The plant was recently expanded in 2014 and produces a
range of API/ISO certified frac sand grades. The Tyler plant's location in Northeast Texas allows it to ship regional sand directly to the wellheads in the Texas
and Louisiana basins by truck.
Mill Creek, Oklahoma
Our surface mines in Mill Creek use natural gas and electricity to produce whole grain, ground and fine ground silica through hydraulic mining. The
reserves are part of the Oil Creek Formation in south central Oklahoma. The facility is located approximately 100 miles southeast of Oklahoma City and is
accessible by major highways including U.S. Interstate 35. Once the product is appropriately processed, it is packaged in bulk and shipped either by rail by
BNSF Railway Company or by truck.
We acquired the Mill Creek facility in 1987 by merger with the Pennsylvania Glass Sand Corporation, which had historically used the property to
produce whole grain silica for customers in industrial and specialty products end markets. Since acquiring the facility we have renovated and upgraded its
production capabilities to enable it to produce multiple products through various processing methods, including hydraulic sizing, fluid bed drying, grinding
and air sizing. These production techniques allow the Mill Creek facility to meet a wide variety of focused specifications on product composition from
customers. As such, the Mill Creek facility services multiple end markets, such as glass, foundry, fillers and extenders, building products and oil and gas
proppants.
Sparta, Wisconsin
Our surface mines in the Sparta deposit contain over 36 million tons of proven ore reserves. The geology is comprised of high purity sands of the
Wonewoc Formation. The Wonewoc Sandstone Formation is known for its round, coarse grains and superior crush strength properties, which makes it an
ideal substrate for oil and gas proppants. The Sparta property was acquired on December 30, 2011, and site development began in April 2012. The property is
located 25 miles northeast of La Crosse; approximately 120 miles northwest of Madison, WI; and is readily accessible by both Interstate 90 and the Canadian
Pacific railroad.
Utica, Illinois
Our surface mine at the Utica facility uses natural gas and electricity to produce whole grain silica products through surface mining. The reserves are
part of the St. Peter Formation sandstone that was deposited with the Illinois Basin some 450 million years ago. We acquired the Utica property and plant in
2015 from Quality Sand Products LLC. The facility is located approximately 80 miles southwest of Chicago and is accessible by major highways including
U.S. Interstate 80. Once the product is appropriately processed, it is shipped by truck or rail by Union Pacific.
Mapleton Depot, Pennsylvania
Our surface mines in Mapleton Depot use natural gas, fuel oil and electricity to produce whole grain silica through hard rock mining. The reserves are
part of the Oriskany Sandstone Formation in central Pennsylvania. The facility is located approximately 40 miles northwest of Harrisburg and is accessible by
major highways including U.S. Interstates 99, 80 and 76. Once the product is appropriately processed, it is packaged in bulk and shipped either by rail by
Norfolk Southern Corporation or by truck.
We acquired the Mapleton Depot facility in 1987 by merger with the Pennsylvania Glass Sand Corporation, which had historically used the property to
produce whole grain silica for customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its
production capabilities to enable it to produce multiple products through various processing methods, including hydraulic sizing, fluid bed drying, scalping
and a low iron circuit. These production techniques allow the Mapleton Depot facility to meet a wide variety of focused specifications on product
composition from customers. As such, the Mapleton Depot facility services multiple end markets, such as glass, specialty glass, building products and
recreation.
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Pacific, Missouri
Our surface mines at the Pacific facility use natural gas and electricity to produce whole grain, ground and fine ground silica through a variety of
mining methods, including hard rock and hydraulic mining. The reserves are part of the St. Peter Sandstone Formation that stretches north-south from
Minnesota to Missouri and east-west from Illinois to Nebraska and South Dakota. The facility is located approximately 50 miles southwest of St. Louis and is
accessible by major highways including U.S. Interstate 44. Once the product is appropriately processed, it is packaged in bulk and shipped either by rail
directly by Union Pacific Corporation and through open switching on the same line by BNSF Railway Company or by truck.
We acquired the Pacific facility in 1987 by merger with the Pennsylvania Glass Sand Corporation, which had historically used the property to produce
whole grain silica for customers in industrial and specialty products end markets. Since acquiring the facility we have renovated and upgraded its production
capabilities to enable it to produce multiple products through
various processing methods, including hydraulic sizing, fluid bed drying, grinding, dry screening, classifying and microsizing. In August 2010, we expanded
this facility’s processing capabilities to include the processing of frac sand. These production techniques allow the Pacific facility to meet a wide variety of
focused specifications on product composition from customers. As such, the Pacific facility services multiple end markets, such as glass, foundry, fillers and
extenders and oil and gas proppants.
Kosse, Texas
Our surface mine in Kosse uses mechanical mining to extract sand ore from the reserve. The plant uses natural gas and electricity to produce whole
grain silica. The reserves are part of the Simsboro member of the Rockdale Formation in central Texas. The facility is located approximately 90 miles south of
Dallas and is accessible by major highways including U.S. Interstates 45 and 35. Once the product is appropriately processed, it is shipped by truck.
We acquired the Kosse facility in 1987 by merger with the Ottawa Silica Company, which had historically used the property to produce whole grain
silica for customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its production capabilities
to enable it to produce multiple products through various processing methods, including washing, hydraulic sizing, fluid bed drying, dry screening, and
centrifuging. These production techniques allow the Kosse facility to meet a wide variety of focused specifications on product composition from customers.
As such, the Kosse facility services multiple end markets, such as building products, recreation, and oil and gas proppants.
Berkeley Springs, West Virginia
Our surface mines at the Berkeley Springs facility use hard rock mining methods to produce high-purity sandstone. The plant uses propane, fuel oil and
electricity to make whole grain, ground, and fine ground silica. Berkeley Springs also produces a synthetic magnesium-silica product called Florisil.
The reserves are part of the Ridgeley Sandstone Formation along the Warm Springs Ridge in eastern West Virginia. The facility is located
approximately 100 miles northwest of Baltimore and is accessible by major highways including U.S. Interstate 70. Once the product is appropriately
processed, it is packaged in bulk and shipped by rail by the CSX Corporation or truck.
We acquired the Berkeley Springs facility in 1987 by merger with the Pennsylvania Glass Sand Corporation, which had historically used the property to
produce whole grain silica for customers in industrial and specialty products end markets. Since acquiring the facility we have renovated and upgraded its
production capabilities to enable it to produce multiple products through various processing methods, including primary, secondary and tertiary crushing,
grinding, flotation, dewatering, fluid bed drying, mechanical screening and rotary drying processing. These production techniques allow the Berkeley Springs
facility to meet a wide variety of focused specifications from customers producing specialty epoxies, resins and polymers, geothermal energy equipment and
fiberglass. As such, the Berkeley Springs facility services multiple end markets, such as glass, building products, foundry, chemicals and fillers and extenders.
Columbia, South Carolina
Our surface mines in Columbia use natural gas, fuel oil and electricity to produce whole grain, ground and fine ground silica through dune mining. The
reserves are part of the Tuscaloosa Formation near central South Carolina. The facility is located approximately 10 miles west of Columbia and is accessible
by major highways including U.S. Interstates 26 and 20. Once the product is appropriately processed, it is bagged or shipped in bulk either by rail by Norfolk
Southern Corporation or by truck.
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We acquired the Columbia facility in 1987 by merger with the Pennsylvania Glass Sand Corporation, which had historically used the property to
produce whole grain silica for customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its
production capabilities to enable it to produce multiple products through various processing methods, including hydraulic sizing, fluid bed drying, scalping
and grinding. These production techniques allow the Columbia facility to meet a wide variety of focused specifications on product composition from
customers. As such, the Columbia facility services multiple end markets, such as glass, building products, fillers and extenders, filtration and oil and gas
proppants.
Dubberly, Louisiana
Our surface mines in Dubberly use natural gas and electricity to produce whole grain silica through dredge mining. The reserves are part of the Sparta
Formation. The facility is located approximately 30 miles east of Shreveport and is accessible by major highways including U.S. Interstate 20 and state
Highway 532. Once the product is appropriately processed, it is bagged or shipped in bulk by truck.
We acquired the Dubberly facility in 1987 by merger with the Ottawa Silica Company, which had historically used the property to produce whole grain
silica for customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its production capabilities
to enable it to produce multiple products through various processing methods, including screening, washing, fluid bed drying and conditioning to remove
heavy and iron bearing minerals. These production techniques allow the Dubberly facility to meet a wide variety of focused specifications on product
composition from customers. As such, the Dubberly facility services multiple end markets, such as glass, foundry and building products.
Montpelier, Virginia
Our surface mines in Montpelier use fuel oil and electricity to produce aplite through hard rock mining. The reserves are part of an igneous rock
complex that is unique to this location. The facility is located approximately 20 miles northwest of Richmond and is accessible by major highways including
U.S. Interstates 64 and 95. Once the product is appropriately processed, it is packaged in bulk and shipped either by rail by Norfolk Southern Corporation or
CSX Corporation or by truck.
We acquired the Montpelier facility in 1993 from The Feldspar Company, which had historically used the property to produce aplite for customers in
industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its production capabilities to enable it to produce
multiple products through various processing methods, including hydraulic crushing and sizing, washing, fluid bed drying and grinding. These production
techniques allow the Montpelier facility to meet a wide variety of focused specifications on product composition from customers. As such, the Montpelier
facility services multiple end markets, such as glass, building products and recreation.
Hurtsboro, Alabama
Our surface mines in Hurtsboro use propane and electricity, to produce whole grain silica. Sand feed for processing is trucked in from surrounding mine
locations. The reserves are mined from the Cusseta member of the lower Ripley Formation. The facility is located approximately 75 miles east of
Montgomery and is accessible by major highways including U.S. Interstate 85 and state Highway 431. Once the product is appropriately processed, it is
shipped in bulk by truck.
We acquired the Hurtsboro facility in 1988 from Warrior Sand & Gravel Company, which had historically used the property to produce whole grain
silica for customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its production capabilities
to enable it to produce multiple products through various processing methods, including trucking in sand from surrounding locations, hydraulic sizing,
screening and fluid bed drying. These production techniques allow the Hurtsboro facility to meet a wide variety of focused specifications on product
composition from customers. As such, the Hurtsboro facility services multiple end markets, such as foundry, building products and recreation.
Jackson, Tennessee
Our surface mines in Jackson use natural gas and electricity to produce whole grain and ground silica through dredge mining. The reserves are part of
the Clairborne Formation, which is part of the Gulf Coastal Plain-Upper Mississippi Embayment. The facility is located approximately 75 miles east of
Memphis and is accessible by major highways including U.S. Interstate 40. Once the product is appropriately processed, it is shipped in bulk by truck.
We acquired the Jackson facility in 1997 from Nicks Silica Company, which had historically used the property to produce whole grain and ground silica
for customers in industrial and specialty products end markets. Since acquiring the facility, we
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have renovated and upgraded its production capabilities, turning it into one of our premier grinding facilities and enabling it to produce multiple products
through various processing methods, including rotary drying, screening and grinding. These production techniques allow the Jackson facility to meet a wide
variety of focused specifications on product composition from customers. As such, the Jackson facility services multiple end markets, such as fiberglass,
building products, ceramics, fillers and extenders and recreation.
Mauricetown, New Jersey
Our surface mines near the Mauricetown facility use natural gas, fuel oil and electricity, to produce whole grain silica through dredge mining. The
reserves are mined from the Maurice River and are similar to those found in the Cohansey, Bridgeton and Cape May deposits. The facility is located
approximately 50 miles south of Philadelphia and is accessible by major highways including U.S. Interstate 295 and state Highway 55. Once the product is
appropriately processed, it is packaged in bags or bulk and shipped either by rail by Winchester & Western Railroad or by truck.
We acquired the Mauricetown facility in 1999 from Unimin Corporation, which had historically used the property to produce whole grain silica for
customers in industrial and specialty products end markets. Since acquiring the facility, we have renovated and upgraded its production capabilities, including
the construction of a new wet processing plant, to enable it to produce multiple products through various processing methods, including washing, hydraulic
sizing, fluid bed drying, rotary drying and scalping. These production techniques allow the Mauricetown facility to meet a wide variety of focused
specifications on product composition from customers. As such, the Mauricetown facility services multiple end markets, such as foundry, filtration, building
products and recreation.
Rockwood, Michigan
Our surface mines at the Rockwood facility use natural gas and electricity to produce whole grain silica. The reserves are part of the Sylvania
Formation and are notable for their low iron content, making them particularly valuable to customers producing specialty glass for architectural or alternative
energy applications. The facility is located approximately 30 miles southwest of Detroit and is accessible by major highways including U.S. Interstate 75.
Once the product is appropriately processed, it is packaged in bulk and shipped by rail via the Canadian National Railway or truck.
We acquired the Rockwood facility in 1987 by merger with the Ottawa Silica Company, which had historically used the property to produce whole grain
and ground silica for customers in industrial and specialty products end markets. Since acquiring the facility we have renovated and upgraded its production
capabilities to enable it to produce multiple products through various processing methods, including fluid bed drying, dry screening and classifying. These
production techniques allow the Rockwood facility to meet a wide variety of focused specifications on product composition from customers. As such, the
Rockwood facility services multiple end markets, such as glass, building products, oil and gas proppants and chemicals. During the fourth quarter of 2011, we
completed the addition of 250,000 tons of annual frac sand capacity at the Rockwood facility by installing an entirely new processing circuit.
Rochelle, Illinois
Our Rochelle site is a resin coated sand processing plant. The Rochelle property was purchased in 2011, and we spent 2011 and 2012 planning and
constructing a resin coating facility on the property.
The Rochelle facility has two process lines, each with the capacity to coat 200 million pounds, or 100,000 tons, of substrate. The facility has the
flexibility to coat numerous substrates using novolac or polyurethane coating technology. Sand can be received and shipped both by truck and rail to help
meet customer requirements. One of the competitive strengths of the facility is the capability to ship by the BNSF and Union Pacific railroads to many key
locations throughout United States.
Fairchild, Wisconsin
Fairchild is a sandstone deposit with over 39 million tons of proven reserves near the town of Fairchild, Wisconsin. We acquired the reserves in 2014
from Forenergy, LLC and performed additional exploration and permitting on the site in 2015. There is no facility currently on the property and it is currently
being permitted for operations. We received a non-metallic reclamation permit in July 2015 from Eau Claire County. The reserve is comprised of high purity
sands of the Wonewoc Formation. The Wonewoc Sandstone Formation is known for its round, coarse grains and superior crush strength properties, which
makes it an ideal oil and gas proppant. The property is located approximately 30 miles southeast of Eau Claire and 50 miles north of our Sparta plant; it is
accessible by the Union Pacific rail line and highways including Interstate 94 and state Highways 10 and 12.
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Batesville, Arkansas
Whitebuck is a sandstone deposit with over 34 million tons of probable reserves near the town of Batesville, Arkansas. We acquired the reserves in
2010 from White Buck, LLC. There is no facility on the property and it is not currently fully permitted. The deposit has high purity sandstone and can provide
a long-term supplement to the reserves at our Mill Creek operations. The reserves are part of the St. Peter Sandstone deposit, which is part of the same
formation being mined at our Ottawa and Pacific operations. The property is located approximately 85 miles northeast of Little Rock and is accessible by
highways including state Highways 67 and 167.
Our Reserves
We believe we have a broad and high-quality mineral reserves base due to our strategically located mines and facilities. “Reserves” are defined by SEC
Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
Industry Guide 7 divides reserves between “proven (measured) reserves” and “probable (indicated) reserves” which are defined as follows:
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Proven (measured) reserves. Reserves for which (1) quantity is computed from dimensions revealed in outcrops, trenches, workings or
drill holes; grade and/or quality are computed from the results of detailed sampling and (2) the sites for inspection, sampling and
measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are
well-established.
Probable (indicated) reserves. Reserves for which quantity and grade and/or quality are computed from information similar to that used for
proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between
points of observation.
We categorize our reserves as proven or probable in accordance with these SEC definitions. We estimate that we had a total of approximately 467
million tons of proven and probable mineable mineral reserves as of December 31, 2016. Compared to 400 million tons of proven and probable mineable
mineral reserves we had as of December 31, 2015, the increase of 67 million tons was primarily due to our NBI Acquisition and a purchase of reserves
adjacent to our Ottawa, Illinois facility during the year ended December 31, 2016. The quantity and nature of the mineral reserves at each of our properties are
estimated by our internal Mine Planning department. Our mining engineer updates our reserve estimates annually, making necessary adjustments for
operations at each location during the year and additions or reductions due to property acquisitions and dispositions, quality adjustments and mine plan
updates. Before acquiring new reserves, we perform surveying, drill core analysis and other tests to confirm the quantity and quality of the acquired reserves.
In some instances, we acquire the mineral rights to reserves without actually taking ownership of the properties.
Description of Deposits
The following is a description of the nature of our silica sand and aplite deposits for each of our reserve locations:
Ottawa, Illinois
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron (Fe2O3) content and grain size distribution. Iron is
concentrated near the surface, where orange iron staining is evident and also increases where the bottom contact becomes concentrated in iron pyrite.
Maximum average full face iron content is 0.045%. The deposit tends to run a coarser grain size distribution in the top half of deposit.
Voca, Texas
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are sand grain crush strength and size distribution. The majority of
the sand reserves are hosted within the Hickory Sandstone, the basal member of the Riley Formation. The Cambrian age Hickory sandstone member consists
chiefly of yellow, brown, or red sandstone overlying Pre-Cambrian granites.
Tyler, Texas
The deposit has a minimum silica (SiO2) content of 98%. The controlling attributes are crush strength and size distribution of the sand grains. The
Queen City Sand formation, an Eocene Age unconsolidated sand deposit, makes up the Tyler reserves. The Queen City Sand consists mainly of white, brown,
and grayish-green sand found mostly as loose particles.
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Mill Creek, Oklahoma
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron (Fe2O3) content, calcium (CaO) content and grain size
distribution. The sand/overburden contact is occasionally concentrated in calcium and any sand with greater than 0.03% CaO is removed during the
overburden removal process. Sand with iron greater than 0.03% Fe2O3 is not mined.
Sparta, Wisconsin
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are sand grain crush strength and size distribution. A thin layer of
silt overlies the 50 to 100 foot thick sand deposit. The deposit is unconsolidated and well graded and can be used to manufacture four main API product
grades, 100-Mesh, 40/70, 30/50, and 20/40.
Utica, Illinois
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are sand grain crush strength and size distribution. The deposit is
well graded and can produce a variety of products.
Mapleton Depot, Pennsylvania
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute is iron (Fe2O3). Ore that is higher than 0.06% iron is not mined. Ore
less than 0.06% iron is mined and blended for feed to plant.
Pacific, Missouri
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron (Fe2O3) and calcium (CaO) content. Calcium can be
concentrated at the upper sand contact with overlying carbonate cap rock. This enriched calcium zone is known from drill sample results and is stripped
during the overburden removal process. Average full mining face washed sand samples are less than 0.03% iron and 0.05% calcium.
Kosse, Texas
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron content (Fe2O3) and size distribution. Up to three different
pits may be mined at any one time to assure consistency of ore and to smooth out variability of attributes. Maximum sand irons are 0.045%.
Berkeley Springs, West Virginia
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute is iron (Fe2O3). Ore that is higher than 0.06% iron is not mined. Ore
less than 0.06% iron is mined and blended for feed to plant.
Columbia, South Carolina
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron content (Fe2O3) and percentage of clay/slimes. Clay
content increases at depth and generally the pit bottom follows a marker bed at 250-foot elevation where clay content is in excess of 11%. Generally, sand
having iron values greater than 0.03% is not mined.
Dubberly, Louisiana
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are iron (Fe2O3) content and grain size distribution. Mining full-
face average for iron is 0.045%. The grain size distribution averages greater than 25% plus 50 mesh. Fine and coarse areas are blended to meet the grain size
average.
Montpelier, Virginia
The Montpelier anorthosite contains andesine feldspar which is mined and processed to create an alumina rich product. The general term aplite is used
to denote the product. The controlling attributes are titanium (TiO2), aluminum (AI2O3), iron (Fe2O3) and phosphorous (P2O5).
The Montpelier anorthosite is approximately 1,000 million years in age and intruded into the older Precambrian Sabot Gneiss. The overall dome shape
of the orebody has been altered by multiple structural and metamorphic events that result in the
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present day foliated and folded deposit. The deposit is highly weathered and soft near the surface. Hardness and strength increase with depth.
Aplite is used as a flux agent in glass making and is sold to the same glass end markets and used in the same processes and in a similar manner as our
silica product.
Hurtsboro, Alabama
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute is grain size distribution. Sand reserves are located on the crests of
rolling hills and mining occurs from multiple pits and faces within pits to assure optimum grain size distribution is available to meet the market product mix.
Jackson, Tennessee
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute of iron (Fe2O3) content is managed through keeping clay
overburden from intermixing with the sand and maintaining adequate washing of sand in the wet processing of the sand.
Mauricetown, New Jersey
The deposit has a minimum silica (SiO2) content of 99%. There is no critical attribute in the mining of this deposit other than that occasional zones high
in clay are avoided in the course of dredge mining.
Rockwood, Michigan
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute is iron content (Fe2O3). Mineable sand must have less than 0.01%
Fe2O3.
Fairchild, Wisconsin
The deposit has a minimum silica (SiO2) content of 99%. The controlling attributes are sand grain crush strength and size distribution. Topsoil, clay and
eroded sand cover the 40 to 100 feet thick sandstone formation. The deposit is well graded with varying degrees of consolidation.
Batesville, Arkansas
The deposit has a minimum silica (SiO2) content of 99%. The controlling attribute is iron (Fe2O3) content. The deposit has two horizons; a low iron
horizon where sand has less than 0.009% Fe2O3 and a regular iron horizon where sand has greater than 0.009% Fe2O3.
Mineral Rights
The mineral rights and access to mineral reserves for the majority of our operations are secured through land that is owned in fee. There are no
underlying agreements and/or royalties associated with Berkeley Springs, Dubberly, Jackson, Kosse, Mauricetown, Montpelier, Ottawa, Pacific, Rockwood,
Sparta, Tyler, Utica, Voca and Batesville.
The mineral rights and access to mineral reserves at our Mill Creek operation are a combination of land owned in fee and one mineral lease. A non-
participating royalty is paid to the original sellers of the fee property that covers 96% of the reserves. The lease agreements involve an annual minimum
payment and a non-participating per-ton production royalty payment.
The Columbia operation mineral reserves and rights are secured under a long-term mineral lease. The lease includes an annual minimum payment and a
production royalty based on gross revenue.
The Hurtsboro operation mineral reserves and rights are secured under two mineral leases. Both are long-term leases that include an annual minimum
payment and a production royalty payment based on average selling price. These mineral leases have been renewed in the past, and it is expected that if
mining is still occurring on these properties the leases can be extended again.
The mineral rights and access to mineral reserves at our Kosse operation are a combination of land owned in fee and one long-term mineral lease. The
lease is for 25 acres and a minimum royalty is paid annually.
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The Mapleton operation mineral reserves and rights are secured under two long-term mineral leases. Annual minimum royalty is nominal, and
production royalty payments are based on selling price with a minimum per-ton royalty.
When our Fairchild reserve was acquired, we entered into a royalty agreement with the company that sold us the land. The non-participating royalty
interest is based on tons of frac sand sold. Currently the site remains undeveloped.
None of our operations are on government land and, accordingly, we do not have any government leases or associated mining claims.
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Summary of Reserves
The following table provides information on our production facilities that have reserves as well as our undeveloped sites in Fairchild, Wisconsin and
Batesville, Arkansas, as of December 31, 2016. Included is the location and area of the facility; the type, amount and ownership status of its reserves; and the
primary end markets that it serves. Our facility in Rochelle, Illinois has no reserves.
Mine/Plant Location
Acreage Owned/Leased
Proven
Reserves
Probable
Reserves
Combined
Proven
and
Probable
Reserves
2016
Tons
Mined
Primary
End
Markets
Served
Ottawa
Voca
Tyler
Mill Creek
Sparta
Utica
Mapleton
Pacific
Kosse
Berkeley
Columbia
Dubberly
Montpelier(1)
Hurtsboro
Jackson
Mauricetown
Rockwood (2)
Fairchild
Batesville
Total
(in acres)
2,100 owned
1,061 owned
1,356 owned
2,174 owned
16 mineral lease
660 owned
148 owned
1,761 owned
194 mineral lease
98 access lease
524 owned
1,053 owned
25 mineral lease
4,435 owned
648 lease
204 owned
356 owned
824 owned
117 owned
1,108 mineral lease
132 owned
1279 owned
872 owned
632 owned
477 owned
(tonnage data in thousands)
132,238
—
132,238
(3,657)
Oil and gas proppants, glass,
chemicals, foundry
32,247
20,745
—
26,491
9,291
3,410
41,900
20,100
13,617
2,740
—
2,100
74,147
40,845
13,617
29,231
9,291
5,510
(2,199) Oil and gas proppants
(555) Oil and gas proppants
(1,504)
Oil and gas proppants, glass,
foundry, building products
(1,367) Oil and gas proppants
(1,555) Oil and gas proppants
(545)
Glass, building products
16,848
7,994
24,842
10,830
—
10,830
2,261
5,181
4,803
6,000
—
—
8,261
5,181
4,803
(529)
(68)
(370)
(400)
Oil and gas proppants, glass,
foundry, fillers and extenders
Oil and gas proppants, glass,
recreational products
Glass, building products, fillers and
extenders
Glass, building products, fillers and
extenders
(236)
Glass, foundry, building products
—
13,189
13,189
(292) Glass, building products
627
—
627
(109)
Foundry, building products
—
12,084
8,363
38,975
—
145
—
—
—
34,732
145
12,084
8,363
38,975
34,732
(146) Fiberglass, building products
(234) Filtration, foundry, building products
— Glass, building products
— —
— —
324,394
142,517
466,911
(13,766)
(1)
(2)
Montpelier’s reserves are comprised entirely of the mineral aplite.
Rockwood's products were produced from or sourced from a third party. It did not mine any of its reserves in 2016.
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Our Logistics Network
In order to expand our supply chain network and leverage our logistics capabilities to meet our customers’ needs in oil and gas basins, we continue to
expand our transload network to ensure product is available to meet the 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. As of December 31, 2016, we have 50 transload facilities strategically
located in or near major shale basins in the United States. All transload facilities, three of which are owned by us, are generally operated by third-party
transload service providers via service agreements, which include both longer term contracts (generally 2 to 5 years) and month-to-month arrangements.
We lease a significant number of railcars for shipping purposes and for short-term storage of our products, particularly our frac sand products. As of
December 31, 2016, we leased a fleet of 6,414 railcars, of which 1,682 were in storage. We anticipate our rail car fleet utilization to continue to improve as
cars' leases end, the frac sand market recovers and we increase rail operations from the Tyler, Texas facility.
Our recent acquisition of Sandbox extends our delivery capability directly to our customers' wellhead locations. Sandbox provides “last mile” logistics
to companies in the oil and gas industry, which increases efficiency and provides a lower cost logistics solution for our customers. Sandbox has operations in
Midland/Odessa, Texas; Morgantown, West Virginia; western North Dakota; northeast of Denver, Colorado; Oklahoma City, OK; and Cambridge, Ohio,
where its major customers are located. 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.
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The map below shows the location of our our production facilities, transload facilities and Sandbox operation sites:
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ITEM 3.
LEGAL PROCEEDINGS
In addition to the matter described below, we are subject to various legal proceedings, claims, and governmental inspections, audits or investigations
arising out of our business which cover matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability,
environmental, intellectual property, employment and other actions. Although the outcomes of these routine 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.
Prolonged inhalation of excessive levels of respirable crystalline silica dust can result in silicosis, a disease of the lungs. Breathing large amounts of
respirable silica dust over time may injure a person’s lungs by causing scar tissue to form. Crystalline silica in the form of quartz is a basic component of soil,
sand, granite and most other types of rock. Cutting, breaking, crushing, drilling, grinding and abrasive blasting of or with crystalline silica containing
materials can produce fine silica dust, the inhalation of which may cause silicosis, lung cancer and possibly other diseases including immune system disorders
such as scleroderma. Sources of exposure to respirable crystalline silica dust include sandblasting, foundry manufacturing, crushing and drilling of rock,
masonry and concrete work, mining and tunneling, and cement and asphalt pavement manufacturing.
Since at least 1975, we and/or our predecessors have been named as a defendant, usually among many defendants, in numerous lawsuits brought by or
on behalf of current or former employees of our customers alleging damages caused by silica exposure. Prior to 2001, the number of silicosis lawsuits filed
annually against the commercial silica industry remained relatively stable and was generally below 100, but between 2001 and 2004 the number of silicosis
lawsuits filed against the commercial silica industry substantially increased. This increase led to greater scrutiny of the nature of the claims filed, and in June
2005 the U.S. District Court for the Southern District of Texas issued an opinion in the former federal silica multi-district litigation remanding almost all of
the 10,000 cases then pending in the multi-district litigation back to the state courts from which they originated for further review and medical qualification,
leading to a number of silicosis case dismissals across the United States. In conjunction with this and other favorable court rulings establishing “sophisticated
user” and “no duty to warn” defenses for silica producers, several states, including Texas, Ohio and Florida, have passed medical criteria legislation that
requires proof of actual impairment before a lawsuit can be filed.
As a result of the above developments, the filing rate of new claims against us over the past few years has decreased to below pre-2001 levels, and we
were named as a defendant in one, zero and two new silicosis cases filed in 2014, 2015 and 2016, respectively. As of December 31, 2016, there were a total of
74 active silica-related products liability claims pending in which we were a defendant and 1 inactive claim. Almost all of the claims pending against us arise
out of the alleged use of our silica products in foundries or as an abrasive blast media, and involve various other defendants. Prior to the fourth quarter of
2012, we had insurance policies for both our predecessors that cover certain claims for alleged silica exposure for periods prior to certain dates in 1985 and
1986 (with respect to certain insurance). As a result of a settlement with a former owner and its insurers in the fourth quarter of 2012, some of these policies
are no longer available to us and we will not seek reimbursement for any defense costs or claim payments from these policies. Other insurance policies,
however, continue to remain available to us and will continue to make such payments on our behalf.
The silica-related litigation brought against us to date has not resulted in material liability to us. However, we continue to have silica-related products
liability claims filed against us, including claims that allege silica exposure for periods for which we do not have insurance coverage. Any such pending or
future claims or inadequacies of our insurance coverage could have a material adverse effect on our business, reputation or results of operations. For more
information regarding silica-related litigation, see Part I, Item 1A “Risk Factors—Risks Related to Our Business—Silica-related health issues and litigation
could have a material adverse effect on our business, reputation or results of operations.”
ITEM 4.
MINE SAFETY DISCLOSURES
Safety is one of our core values and we strive for excellence in the achievement of a workplace free of injuries and occupational illnesses. Our health
and safety leadership team has developed comprehensive safety policies and standards, which include detailed standards and procedures for safe production,
addressing topics such as employee training, risk management, workplace inspection, emergency response, accident investigation and program auditing. We
place special emphasis on the importance of continuous improvement in occupational health, personal injury avoidance and prevention, emergency
preparedness, and property damage elimination. In addition to strong leadership and involvement from all levels of the organization, these programs and
procedures form the cornerstone of our safety initiatives, ensuring that employees are provided a safe and healthy environment and are intended as a means to
reduce workplace accidents, incidents and losses, comply with all mining-related regulations and provide support for both regulators and the industry to
improve mine safety. While we want to have productive operations in full regulatory compliance, we know it is equally essential that we motivate and train
our people to think, practice and feel a personal responsibility for health and safety on and off the job.
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Table of Contents
All of our production facilities, with the exception of our resin-coated sand facility, are classified as mines and are subject to regulation by the Federal
Mine Safety and Health Administration ("MSHA") under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a
regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Following passage of The Mine
Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining
operations. The dollar penalties assessed for citations issued has also increased in recent years. Information concerning mine safety violations or other
regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR
229.104) is included in Exhibit 95.1 to this Annual Report filed on Form 10-K.
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PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Information
Shares of our common stock, traded under the symbol “SLCA,” have been publicly traded since February 1, 2012, when our common stock was listed
and began trading on the NYSE.
The following table sets forth for the indicated periods, the high and low sales prices, per share, for our common stock on the NYSE:
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Record
Sales Price
High
Low
$
$
$
$
$
$
$
$
22.72 $
35.60 $
46.56 $
58.24 $
35.61 $
39.07 $
27.75 $
21.99 $
14.96
22.14
32.73
42.47
23.71
28.43
13.59
13.78
On February 21, 2017, there were 81,061,840 shares of our common stock outstanding, which were held by approximately 78 stockholders of record.
Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number
of stockholders represented by these record holders. For additional information related to ownership of our stock by certain beneficial owners and
management, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Dividend
We pay dividends on our common stock after the Board declares them. 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 by U.S. Silica 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.
In 2015 and 2016, we declared dividends as follows:
Declaration date
February 12, 2015
May 8, 2015
July 24, 2015
November 9, 2015
February 22, 2016
May 5, 2016
July 21, 2016
November 3, 2016
Dividends per common share
0.125
0.125
0.125
0.0625
0.0625
0.0625
0.0625
0.0625
$
$
$
$
$
$
$
$
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Purchase of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we repurchase our common stock in the open market pursuant to programs approved by the Board. We may repurchase our common
stock for a variety of reasons, such as to offset dilution related to equity-based incentives and to optimize our capital structure.
In June 2012, the Board authorized us to repurchase up to $25 million of our common stock for a period of 18 months. In December 2014, the Board
authorized an increase in the Company's share repurchase program from $25 million to up to $50 million. As of December 31, 2016, the board has extended
this authorization through December 11, 2017. We are authorized to repurchase, from time to time, shares of our outstanding common stock on the open
market or in privately negotiated transactions. Stock repurchases will be funded using our available liquidity. The timing and amount of stock repurchases
will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The share repurchase program may be
suspended, modified or discontinued at any time and we have no obligation to repurchase any additional amount of our common stock under the program. We
intend to make all repurchases in compliance with applicable regulatory guidelines and to administer the plan in accordance with applicable laws, including
Rule 10b-18 of the Securities Exchange Act of 1934, as amended. As part of the program, as of December 31, 2016, we have repurchased 706,093 shares of
our common stock at an average price of $23.83 and are authorized to repurchase up to an additional $33.2 million of our common stock.
We consider several factors in determining when to make share repurchases including, among other things, our cash needs, the availability of funding,
our future business plans and the market price of our stock. We expect that cash provided by future operating activities, as well as available liquidity, will be
the sources of funding for our share repurchase program. Based on the anticipated amounts to be generated from those sources of funds in relation to the
remaining authorization approved by our Board under the June 2012 share repurchase program, we do not expect that future share repurchases will have a
material impact on our short-term or long-term liquidity.
The following table presents the total number of shares of our common stock that we purchased during the fourth quarter of 2016, the average price
paid per share, the number of shares that we purchased as part of our publicly announced repurchase program, and the approximate dollar value of shares that
still could have been purchased at the end of the applicable fiscal period pursuant to our June 2012 share repurchase program:
Period
October 2016
November 2016
December 2016
Total Number of
Shares
Purchased
Average Price
Paid Per
Share
— (2)
13,484 (2)
— (2)
$
$
$
—
44.95
—
Total Number of
Shares Purchased as
Part of Publicly
Announced
Program(1)
Maximum Dollar Value of
Shares that May Yet
Be Purchased Under
the Program(1)
—
—
—
Total
$
(1) A program covering the repurchase of up to $25 million of our common stock was initially announced in June 2012 and was increased to $50 million in
33,173,725
13,484
44.95
— $
December 2014. This program expires on December 11, 2017.
(2) Represents shares withheld by U.S. Silica to pay taxes due upon the vesting of employee restricted stock and restricted stock units.
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Securities Authorized for Issuance under Equity Compensation Plans
The table below contains information about securities authorized for issuance under our Amended and Restated 2011 Incentive Compensation Plan
(the “2011 Plan”) as of December 31, 2016. The features of the 2011 Plan are disclosed further in Note N - Equity-based Compensation to our consolidated
Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
U.S. Silica Holdings, Inc. Comparative Stock Performance Graph
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (A)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(B)
952,693 $
—
952,693
27.99
—
27.99
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column A) (C)
4,437,767
—
4,437,767
The information contained in this U.S. Silica Holdings, Inc. Comparative Stock Performance Graph section shall not be deemed to be "soliciting
material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the
extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock to the cumulative total return on the Russell 3000 index, the
Standard and Poor’s SmallCap 600 Energy Sector index and the Standard and Poor's SmallCap 600 GICS Oil & Gas Equipment & Services Sub-Industry
index, assuming $100 was invested on January 31, 2012, the first day our stock traded on the NYSE, and the reinvestment of all dividends. We have elected
to add the Standard and Poor’s SmallCap 600 Energy Sector index this year because this index is used in relative total shareholder return performance share
units that we have granted to employees.
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Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following table and discussion sets forth our consolidated statement of operations data for the periods presented. The results of operations by
segment are discussed in further detail following this combined overview.
Statement of Operations Data:
Sales
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Cash dividends declared per common share
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Other Financial Data:
Capital expenditures
Operating Data:
Total tons sold
Average selling price (per ton)
Segment cost of goods sold (per ton)(1)
Oil & Gas Proppants:
Sales
Segment contribution margin
Industrial & Specialty Products:
Sales
Segment contribution margin
Balance Sheet Data:
Cash, cash equivalents and short-term investments (4)
Total assets (4)(5)
Total long-term debt, including current portion (5)
Total liabilities (4)(5)
$
$
$
$
$
$
$
$
$
$
Year Ended December 31,
2016(6)
2015
2014(3)
2013
2012(2)
(amounts in thousands, excluding per share and per ton figures)
559,625 $
642,989 $
876,741 $
545,985 $
(53,531)
(77,745)
(41,056)
(0.63) $
(0.63) $
0.25 $
26,672
117
11,868
0.22 $
0.22 $
0.44 $
176,167
158,723
121,540
2.26 $
2.24 $
0.50 $
111,241
96,017
75,256
1.42 $
1.41 $
0.38 $
441,921
118,988
109,805
79,154
1.50
1.50
0.50
381 $
61,492 $
171,411 $
46,451 $
100,950
(201,657)
49
(190,906)
(135,113)
(104,461)
635,424 $
(47,530) $
208,964 $
105,896 $
5,334
46,450 $
53,646 $
92,609 $
60,470 $
105,719
9,875
56.67 $
47.51
10,025
10,927
64.14 $
48.27
80.24 $
51.20
8,161
66.90 $
42.04
362,550
11,445
430,435
88,928
662,770
256,137
347,439
145,916
197,075
212,554
213,971
198,546
78,988 $
70,137 $
61,102 $
56,983 $
711,225 $
298,926 $
338,209 $
148,577 $
2,073,220
1,108,619
1,226,727
494,175
799,930
491,705
724,452
495,086
822,911
853,547
366,196
544,253
7,170
61.63
34.62
243,765
140,070
198,156
53,601
55,632
679,309
253,314
447,615
231,694
Total stockholders’ equity
$
1,273,290 $
384,167 $
403,816 $
309,294 $
(1)
(2)
(3)
(4)
(5)
(6)
Segment cost of goods sold (per ton) equals segment cost of goods sold, divided by total tons sold.
2012 financial data above includes the impact of our initial public offering ("IPO"), including proceeds received and additional charges incurred.
We acquired Cadre on July 31, 2014, and included Cadre's financial position and results of operations in our 2014 financial information above. As a
result, our 2014 financial information may not be comparable to prior years. See Note D - Business Combinations to our Consolidated Financial
Statements in Item 8 of this Annual Report on Form 10-K for more information related to this acquisition.
In 2015, we changed the presentation of book overdraft from being classified as a liability to a reduction to our cash and cash equivalents. 2014,
2013 and 2012 cash and cash equivalents amounts presented are recasted to reflect this change. See Note B - Summary of Significant Accounting
Policies to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more information.
2014, 2013, and 2012 amounts include the reclassification of deferred debt issuance costs related to the adoption of ASU 2015-03. See Note B -
Summary of Significant Accounting Policies to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more
information.
We acquired NBI and Sandbox on August 16, 2016 and August 22, 2016, respectively, and included NBI's and Sandbox's financial position and
results of operations in our 2016 financial information above. As a result, our 2016 financial information may not be comparable to prior years. See
Note D - Business Combinations to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more information
related to this acquisition.
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ITEM 7.
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 Item 6, "Selected Financial
Data," the description of the business appearing in Item 1, “Business,” of this report, and the Consolidated Financial Statements in Item 8 of this Annual
Report on Form 10-K and the related notes included elsewhere in this report. This discussion contains forward-looking statements as a result of many factors,
including those set forth under Item 1, “Business—Forward-Looking Statements” and Item 1A, "Risk Factors," and elsewhere in this Annual Report on Form
10-K. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially
from those discussed in or implied by forward-looking statements. Factors that could cause or contribute to these differences include those discussed below
and elsewhere in this report, particularly in Item 1A, "Risk Factors."
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 116 year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-
effectively deliver over 240 products to customers across these markets. As of December 31, 2016, we operate 18 production facilities across the United
States and control 467 million tons of reserves of commercial silica, which can be processed to make 226 million tons of finished products that meet
American Petroleum Institute (API) frac sand 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.
Acquisitions
On August 16, 2016, we completed the acquisition of New Birmingham, Inc. (“NBI”), the ultimate parent company of NBR Sand, LLC (“NBR”), a
regional sand producer located near Tyler, Texas. The acquisition of NBI increased our regional frac sand product offering in our Oil & Gas Proppants
segment.
On August 22, 2016, we completed our acquisition of Sandbox Enterprises, LLC ("Sandbox" or the “Sandbox Acquisition”) as a “last mile” logistics
solution for frac sand in the oil and gas industry. See accompanying Note D - Business Combinations to our Consolidated Financial Statements in Part 2, Item
8 of this Annual Report on Form 10-K for pro forma results and other details regarding these acquisitions.
Recent Trends and Outlook
Oil and gas proppants end market trends
Increased demand for frac sand between 2008 and 2014 was driven by the growth in the use of hydraulic fracturing as a means to extract
hydrocarbons from shale formations. According to the 2014 Proppant Market Report, PropTester Inc., published February 2015, global frac sand
demand grew at a 51.2% compound annual growth rate from 2009 to 2014. This included 53.7% growth in frac sand demand from 2013 to 2014. We
significantly expanded our sales efforts to the frac sand market in 2008 and experienced rapid growth in our sales associated with our oil and gas
activities from 2008 until 2014.
However, declines in oil prices beginning in 2015 have reduced oil and gas drilling and completion activity in North America. As of December 31,
2016, the U.S. land rig count had fallen over 66% from its peak in 2014. Demand for frac sand fell in conjunction with the rig count and activity
levels, partially offset by higher proppant per well to optimize recovery and production rates. Frac sand pricing remained under pressure during the
first nine months of 2016. The table below summarizes some revenue metrics of our Oil & Gas Proppants segment for the three months ended
December 31, 2016, September 30, 2016, June 30, 2016, and March 31, 2016. During the three months ended June 30, 2016 and March 31, 2016
both tons sold and average selling price decreased sequentially due to reduced demand from our customers. During the three months ended
December 31, 2016 and September 30, 2016, both tons sold and average selling price per ton increased. Leading indicators suggest a stabilization or
even an increase in North American oil and gas drilling and completion activity in the near future.
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Dollars in thousands
except per ton data
Oil & Gas
Proppants
Sales
Tons Sold
Average Selling
Price per Ton
$
$
Quarter ended
Percentage change for quarter ended
December 31,
2016
September 30,
2016
June 30,
March 31,
2016
2016
December 31,
2016 vs.
September 30,
2016
September 30,
2016 vs. June 30,
2016
June 30,
2016 vs. March
31, 2016
136,977 $
86,782 $
64,926 $
73,865
2,081
1,617
1,333
1,411
65.82 $
53.67 $
48.71 $
52.35
58%
29%
23%
34%
21%
10%
(12)%
(6)%
(7)%
However, if the recovery in oil and gas drilling and completion activity does not continue, 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 evaluate further actions to reduce cost and improve
liquidity. For instance, depending on market conditions, we may implement additional cost improvement projects or further reduce our capital
spending for 2017 and beyond and may delay or cancel capital projects.
Additionally, due to impacts of reduced demand for our frac sand, we have engaged in ongoing discussions with our take-or-pay supply agreement
customers regarding pricing and volume requirements under our existing contracts. In certain circumstances we have provided contract customers
with temporary reductions to contract pricing in exchange for additional term and/or volume in order to preserve the value of these agreements. We
may deliver sand at prices or at volumes below the requirements in our existing take-or-pay supply agreements. We expect these circumstances may
continue into 2017. For a discussion of customer credit risk, see the Credit Risk section in Part II, Item 7A of this Annual Report on Form 10-K.
We believe fluctuations in frac sand demand and price may occur as the market adjusts to changing supply and demand due to energy pricing
fluctuations. We continue to expect long-term growth in oil and gas drilling in North American shale basins.
Oil and natural gas exploration and production companies' and oilfield service providers’ preferences and expectations have been evolving in recent
years. A proppant vendor’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 high performance proppants.
Industrial and specialty products end market trends
Demand in the industrial and specialty products end markets is relatively stable and is primarily influenced by key macroeconomic drivers
such as housing starts, light vehicle sales, repair and remodel activity and industrial production. The primary end markets served by our production
used in Industrial & Specialty Products are foundry, building products, sports and recreation, glassmaking and filtration. We have been increasing
our value-added product offerings in the industrial and specialty products end markets. These new higher margin product sales have increased our
Industrial & Specialty Products segment's profitability.
How We Generate Our Sales
We derive our sales primarily by mining and processing minerals that our customers purchase for various uses. Our sales are primarily a function of
the price per ton and the number of tons sold. The price 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. We invoice the majority of our customers on a per shipment basis, although
for some larger customers, we consolidate invoices weekly or monthly. Our ten largest customers accounted for approximately 52% of total sales during the
year ended December 31, 2016. Sales to our largest customer, Halliburton Company, accounted for 13% of our total revenues during the year ended
December 31, 2016. No other customer accounted for 10% or more of our total revenues.
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 December 31, 2016, we have seven take-or-pay supply agreements in the Oil & Gas Proppants segment with initial terms
expiring between 2017 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. Prices under these agreements are
generally fixed and subject to upward adjustment in response to certain cost increases. Additionally, at the time the take-or-pay supply agreements were
signed, some customers provided advance payments for future shipments. A percentage of these
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advance payments is recognized as revenue with each ton of applicable product shipped to the customer. Collectively, sales to customers with take-or-pay
supply agreements accounted for 22% and 31% of our total company revenue during the years ended December 31, 2016 and 2015, respectively. Although
sales under take-or-pay 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. Additionally, selling more tons under supply contracts also enables us to
be more efficient from a production, supply chain and logistics standpoint. As discussed in Part I, Item 1A, 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.
Historically we have not entered into long term take-or-pay contracts with our customers in the industrial and specialty products end markets because of
the high cost to our customers of switching providers. With these customers we often enter into price agreements which are typically negotiated annually.
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, storage fees and labor costs. 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 S - Segment Reporting to our Financial Statements in Part II, Item 8 of this Annual Report on Form 10-
K.
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. In addition, 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 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
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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.
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.
Net income (loss)
Total interest expense, net of interest income
Provision for taxes
Total depreciation, depletion and amortization expenses
EBITDA
Loss on early extinguishment of debt
Non-cash incentive compensation (1)
Post-employment expenses (excluding service costs) (2)
Business development related expenses (3)
Other adjustments allowable under our existing credit agreements (4)
Adjusted EBITDA
Year Ended December 31,
2016
2015
2014
$
(41,056) $
11,868 $
(amount in thousands)
25,779
(36,689)
68,134
16,168
—
12,107
1,040
8,206
2,033
26,578
(11,751)
58,474
85,169
—
3,857
3,335
10,701
6,446
121,540
17,868
37,183
45,019
221,610
—
7,487
1,730
11,450
3,936
$
39,554 $
109,508 $
246,213
(1)
(2)
(3)
(4)
Reflects equity-based compensation expense.
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 P - Pension and Post-retirement Benefits to our
Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Reflects expenses related to business development activities in connection with our growth and expansion initiatives, including acquisition-related
costs for our NBI Acquisition and Sandbox Acquisition completed in August 2016.
Reflects miscellaneous adjustments permitted under our existing credit agreement, including such items as restructuring costs for actions that will
provide future cost savings. Restructuring costs were $3.5 million and $4.8 million, respectively, for the years ended December 31, 2016 and 2015.
The year ended December 31, 2016 amount includes a gain on insurance settlement of $1.5 million.
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Results of Operations
Sales
Sales:
Oil & Gas Proppants
Industrial & Specialty Products
Total Sales
Tons:
Oil & Gas Proppants
Industrial & Specialty Products
Total Tons
Average Selling Price per Ton:
Oil & Gas Proppants
Industrial & Specialty Products
Overall Average Selling Price per Ton
2016 vs. 2015
For the Years Ended December 31,
Percent Change
2016
2015
2014
’16 vs. ‘15
’15 vs. ‘14
(amounts in thousands, except per ton data)
$
$
$
$
$
$
362,550 $
430,435 $
662,770
197,075
212,554
213,971
559,625 $
642,989 $
876,741
6,442
3,433
9,875
56.28 $
57.41 $
56.67 $
6,082
3,943
10,025
70.77 $
53.91 $
64.14 $
6,736
4,192
10,928
98.39
51.04
80.24
(16)%
(7)%
(13)%
6 %
(13)%
(1)%
(20)%
6 %
(12)%
(35)%
(1)%
(27)%
(10)%
(6)%
(8)%
(28)%
6 %
(20)%
Total sales decreased 13% for the year ended December 31, 2016 compared to 2015, driven by a 12% decrease in overall average selling price and
an 1% decrease in total tons sold. Tons sold in-basin represented 41% and 36% of total tons sold for the year ended December 31, 2016 and 2015,
respectively. The decrease in total sales was driven by decreases in sales for both segments.
The decrease in Oil & Gas Proppants sales was due to a 20% decrease in average selling price partially offset by a 6% increase in tons sold for the
year ended December 31, 2016 compared to 2015. The increase in tons sold was driven by sales from our newly acquired businesses and our market share
gain efforts, which were partially offset by decrease in market demand. Average selling price decreased as a result of the the decrease in frac sand demand.
Industrial & Specialty Products sales decreased by 7% for the year ended December 31, 2016 compared to 2015. Tons sold decreased 13%, driven
by our strategic shift among customers and products. Average selling price increased 6%, which was primarily a result of new higher-margin product sales
and price increases.
2015 vs. 2014
Total sales decreased 27% for the year ended December 31, 2015 compared to 2014, driven by an 8% decrease in total tons sold and a 20% decrease
in overall average selling price. Tons sold in-basin represented 36% and 41% of total tons sold for the year ended December 31, 2015 and 2014, respectively.
The decrease in total sales was primarily driven by Oil & Gas Proppants sales, which decreased 35%. Oil & Gas Proppants tons sold for the year
ended December 31, 2015 decreased 10% and average selling price decreased 28%. These decreases were mainly driven by a year over year decrease in
demand for our frac sand from customers due to reduced drilling and completion activity.
Industrial & Specialty Products sales decreased by 1% for the year ended December 31, 2015 compared to 2014. Tons sold decreased 6% driven by
our strategic shift amount customers and products. Average selling price increased 6%, which was primarily a result of new higher-margin product sales and
price increases.
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Cost of Goods Sold
2016 vs. 2015
Cost of goods sold decreased $17.8 million, or 4%, to $477.3 million for the year ended December 31, 2016 compared to $495.1 million for the year
ended December 31, 2015. The decrease was mainly a result of fewer tons sold. As a percentage of sales, costs of goods sold increased to 85% for the year
ended December 31, 2016 compared to 77% for the same period in 2015. These changes result from the main components of cost of goods sold as discussed
below.
We incurred $249.7 million and $258.1 million of transportation and related costs for the year ended December 31, 2016 and 2015, respectively.
These costs remained relatively flat due to our transportation and logistics cost improvement efforts, which were mostly offset by incremental costs related to
NBI and Sandbox operations. As a percentage of sales, transportation and related costs increased to 45% for the year ended December 31, 2016 compared to
40% in 2015 primarily due to a decrease in average selling price.
We incurred $83.2 million and $80.1 million of operating labor costs for the year ended December 31, 2016 and 2015, respectively. The $3.1 million
increase in labor costs incurred was primarily due to incremental costs related to NBI and Sandbox operations, partially offset by fewer tons sold and the
impact of our restructuring efforts. As a percentage of sales, operating labor costs represented 15% for the year ended December 31, 2016 compared to 12%
in 2015.
We incurred $26.7 million and $28.0 million of electricity and drying fuel (principally natural gas) costs for the year ended December 31, 2016 and
2015, respectively. The decrease in electricity and drying fuel costs incurred was mainly driven by fewer tons sold and strategic shift among products. As a
percentage of sales, electricity and drying fuel costs represented 5% and 4% for the years ended December 31, 2016 and 2015, respectively.
We incurred $34.3 million and $37.6 million of maintenance and repair costs for the years ended December 31, 2016 and 2015, respectively. The
decrease was a result of our cost improvement efforts and fewer tons sold. As a percentage of sales, maintenance and repair costs remained flat at 6% for the
year ended December 31, 2016 compared to 2015.
2015 vs. 2014
Cost of goods sold decreased $71.5 million, or 13%, to $495.1 million for the year ended December 31, 2015 compared to $566.6 million for the
year ended December 31, 2014. The decrease was mainly a result of fewer tons sold. As a percentage of sales, costs of goods sold increased to 77% for the
year ended December 31, 2015 compared to 65% for the same period in 2014. These changes result from the main components of cost of goods sold as
discussed below.
We incurred $258.1 million and $312.7 million of transportation and related costs for the year ended December 31, 2015 and 2014, respectively. This
decrease was due to fewer tons sold through transloads caused by lower demand for our frac sand at our transload sites. As a percentage of sales,
transportation and related costs increased to 40% for the year ended December 31, 2015 compared to 36% in 2014 mainly due to a lower average selling
price.
We incurred $80.1 million and $74.3 million of operating labor costs for the year ended December 31, 2015 and 2014, respectively. The $5.8 million
increase in labor costs incurred was primarily due to the addition of our Voca, Texas and Utica, Illinois facilities, partially offset by fewer tons sold and lower
employee headcount. As a percentage of sales, operating labor costs represented 12% for the year ended December 31, 2015 compared to 8% in 2014.
We incurred $28.0 million and $32.8 million of electricity and drying fuel (principally natural gas) costs for the years ended December 31, 2015 and
2014, respectively. The decrease in electricity and drying fuel costs incurred was mainly driven by fewer tons sold and lower natural gas prices. As a
percentage of sales, electricity and drying fuel costs remained flat at 4% for the year ended December 31, 2015 compared to 2014.
Maintenance and repair costs remained relatively flat at $37.6 million for the year ended December 31, 2015 compared to $37.4 million for the year
ended December 31, 2014. This was a result of the addition of our Voca, Texas and Utica, Illinois facilities, mostly offset by the impact of lower production
volume and scheduled maintenance. As a percentage of sales, maintenance and repair costs increased to 6% for the year ended December 31, 2015 compared
to 4% for the same period in 2014.
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Segment Contribution Margin
2016 vs. 2015
Oil & Gas Proppants contribution margin decreased by $77.5 million, or 87%, to $11.4 million for the year ended December 31, 2016 compared to
$88.9 million for the year ended December 31, 2015, driven by a $67.9 million decrease in segment revenue driven by a decrease in pricing and $9.6 million
increase in segment cost of goods sold due to more tons sold.
Industrial & Specialty Products contribution margin increased by $8.9 million, or 13%, to $79.0 million for the year ended December 31, 2016
compared to $70.1 million for the year ended December 31, 2015, primarily driven by increased higher-margin products sales as a percentage of total sales.
2015 vs. 2014
Oil & Gas Proppants contribution margin decreased by $167.2 million or 65%, to $88.9 million for the year ended December 31, 2015 compared to
$256.1 million for the year ended December 31, 2014, driven by a $232.3 million decrease in segment revenue, partially offset by lower segment cost of
goods sold mainly due to fewer tons sold.
Industrial & Specialty Products contribution margin increased by $9.0 million, or 15%, to $70.1 million for the year ended December 31, 2015
compared to $61.1 million for the year ended December 31, 2014, mainly driven by increased higher-margin products sales as a percentage of total sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $4.9 million, or 8%, to $67.7 million for the year ended December 31, 2016 compared to
$62.8 million for the year ended December 31, 2015. The increase was due to the following factors:
•
•
•
Compensation related expense increased by $11.2 million for the year ended December 31, 2016 compared to 2015, primarily due to
increased equity-based compensation and incremental compensation expense related to NBI and Sandbox employees.
Bad debt expense decreased by $0.9 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, mainly
due to a 13% decrease in sales and a recovery of a previously reserved receivable.
Business development related expense decreased by $2.5 million to $8.2 million for the year ended December 31, 2016 compared to $10.7
million for the year ended December 31, 2015, primarily due to a $6.5 million settlement of an unfavorable arbitration ruling during the year
ended December 31, 2015 partially offset by our NBI and Sandbox acquisition-related costs during the year ended December 31, 2016.
In total, our selling, general and administrative costs represented approximately 12% and 10% of our sales for the years ended December 31, 2016
and 2015, respectively.
Selling, general and administrative expenses decreased by $26.2 million, or 29%, to $62.8 million for the year ended December 31, 2015 compared
to $89.0 million for the year ended December 31, 2014. The decrease was due to the following factors:
•
•
•
Compensation-related expense decreased by $13.0 million for the year ended December 31, 2015 compared to 2014, primarily due to reduced
incentive compensation and lower employee headcount.
Bad debt expense decreased by $10.5 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, mainly
due to a 27% decrease in sales and a recovery of a previously reserved receivable.
Business development-related expense decreased by $0.8 million to $10.7 million for the year ended December 31, 2015, compared to $11.5
million for the year ended December 31, 2014, primarily due to expense related to the Cadre acquisition in 2014.
In total, our selling, general and administrative costs represented approximately 10% of our sales for both years ended December 31, 2015 and 2014.
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Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased by $9.6 million, or 17%, to $68.1 million for the year ended December 31, 2016
compared to $58.5 million for the year ended December 31, 2015. This increase was driven by incremental expense related to assets acquired in connection
with the NBI and Sandbox acquisitions as well as other capital spending. Depreciation, depletion and amortization costs represented approximately 12% and
9% of our sales for the years ended December 31, 2016 and 2015, respectively.
Depreciation, depletion and amortization expense increased by $13.5 million, or 30%, to $58.5 million for the year ended December 31, 2015
compared to $45.0 million for the year ended December 31, 2014. The year over year increase was driven by the addition of our Voca, Texas plant, Utica,
Illinois plant, Odessa, Texas transload facility, other continued capital spending and an equipment write off charge of $1.1 million during 2015. Depreciation,
depletion and amortization costs represented approximately 9% and 5% of our sales for the year ended December 31, 2015 and 2014, respectively.
Operating Income (loss)
Operating income decreased by $80.2 million, or 301%, to a $53.5 million operating loss for the year ended December 31, 2016 compared to $26.7
million for the year ended December 31, 2015. The decrease was due to a 13% decrease in sales, a 17% increase in depreciation, depletion and amortization
expense and an 8% increase in selling, general and administrative expense partially offset by a 4% decrease in cost of goods sold.
Operating income decreased by $149.5 million, or 85% to $26.7 million for the year ended December 31, 2015 compared to $176.2 million for the
year ended December 31, 2014. The decrease was due to a 27% decrease in sales and a 30% increase in depreciation, depletion and amortization expense,
partially offset by a 13% decrease in cost of goods sold and a 29% decrease in selling, general, and administrative expense.
Interest Expense
Interest expense increased by $0.7 million, or 3%, to $28.0 million for the year ended December 31, 2016 compared to $27.3 million for the year
ended December 31, 2015, primarily driven by additional long-term liabilities assumed in connection with our NBI and Sandbox acquisitions.
Interest expense increased by $9.1 million, or 50%, to $27.3 million for the year ended December 31, 2015 compared to $18.2 million for the year
ended December 31, 2014, mainly driven by an increase in debt principal and interest expense on deferred revenue.
Provision for Income Taxes
The provision for income taxes decreased $24.9 million, or 212%, to a $36.7 million income tax benefit for the year ended December 31, 2016,
compared to a $11.8 million income tax benefit for the year ended December 31, 2015. The decreases were driven by a decreased pre-tax book income and
the impact of favorable permanent tax differences including the adoption of ASU 2016-09. For more information related to ASU 2016-09, see Note B -
Summary of Significant Accounting Policies in Part II, Item 8 to this Annual Report on Form 10-K.
The provision for income taxes decreased $49.0 million, or 132%, to a $11.8 million income tax benefit for the year ended December 31, 2015,
compared to a tax expense of $37.2 million for the year ended December 31, 2014. The decreases were driven by a decreased pre-tax book income and the
impact of favorable permanent tax differences.
Historically, our actual effective tax rates have been lower than the statutory effective rate primarily due to the benefit received from statutory
depletion allowances. The deduction for statutory depletion does not necessarily change proportionately to changes in income before income taxes.
Net Income (loss)
Net income (loss) was ($41.1 million), $11.9 million and $121.5 million for the years ended December 31, 2016, 2015 and 2014. The year over year
fluctuations were due to the factors noted above.
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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
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. In March 2016, we completed a public offering of 10,000,000 shares of our common stock for total cash net proceeds of $186.2 million. In
November 2016, we executed another offering of 10,350,000 shares of common stock raising net cash proceeds of $467.0 million. As of December 31, 2016,
our working capital was $783.0 million and we had $46.0 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 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 and
other distributions in cash, stock, or property in the future will be at the discretion of our 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 (in thousands) is shown in the following table:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net Cash Provided by Operating Activities
As of December 31,
Percent Change
2016
2015
2014
’16 vs. ‘15
’15 vs. ‘14
$
381 $
61,492 $
(201,657)
635,424
49
(47,530)
171,411
(190,906)
208,964
(99)%
(411,645)%
(1,437)%
(64)%
(100)%
(123)%
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 $0.4 million for the year ended December 31, 2016 compared to $61.5 million for the year ended
December 31, 2015. This $61.1 million decrease in cash provided by operations was primarily the result of a $52.9 million decrease in net income and the
impact of the other components of operating activities.
Net cash provided by operating activities was $61.5 million for the year ended December 31, 2015 compared to $171.4 million for the year ended
December 31, 2014. This $109.9 million decrease in cash provided by operations was primarily the result of a $109.7 million decrease in net income and the
impact of the other components of operating activities.
Net Cash Provided by/Used in Investing Activities
Investing activities consist primarily of cash consideration paid to acquire businesses, capital expenditures for growth and maintenance and proceeds
from the sale and maturity of short-term investments.
Net cash used by investing activities was $201.7 million in the year ended December 31, 2016. This was due to $176.7 million of cash consideration
that was paid for our NBI and Sandbox acquisitions and capital expenditures of $46.5 million, offset by $21.9 million in proceeds from sales and maturities of
short-term investments. Capital expenditures in 2016 were
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made primarily for a purchase of reserves adjacent to our Ottawa, Illinois facility, engineering, procurement and construction of our growth projects and other
maintenance and cost improvement capital projects.
Net cash provided by investing activities was $49 thousand in the year ended December 31, 2015. This was due to $53.6 million in proceeds from sales
and maturities of short-term investments being almost fully offset by capital expenditures during the year. Capital expenditures in 2015 were $53.6 million,
which were made primarily for the engineering, procurement and construction of our growth projects including the Greenfield raw sand plant near Fairchild,
Wisconsin and other maintenance and cost improvement capital projects.
Net cash used in investing activities was $190.9 million in the year ended December 31, 2014. This use of cash was due to capital expenditures, which
totaled $92.6 million, as well as $98.3 million used for the purchase of Cadre, and other Capital expenditures for the engineering, procurement and
construction of our Greenfield raw sand plants near Utica, Illinois, and Fairchild, Wisconsin, our new transload facility in Odessa, Texas, our expansion
project at our Pacific, Missouri facility and other maintenance capital projects.
Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in 2017 will be in the range of $125 million to
$150 million, which is primarily associated with growth, maintenance and cost improvement capital projects. We expect to fund our capital expenditures
through cash on our balance sheet, cash generated from our operations and cash generated from financing activities.
Net Cash Used In/Provided by Financing Activities
Financing activities consist primarily of equity issuances, capital contributions, dividend payments, borrowings and repayments related to the Revolver,
Term Loan, as well as fees and expenses paid in connection with our credit facilities and advance payments from our customers and capital leases.
Net cash provided by financing activities was $635.4 million for the year ended December 31, 2016, driven by $678.8 million of cash received from
common stock issuances and $4.8 million of proceeds from options exercised, both of which were partially offset by $25.7 million of common stock
issuances costs, $15.1 million of dividends paid, $5.2 million of long-term debt payments and $1.6 million of tax payments related to shares withheld for
vested restricted stock.
Net cash used in financing activities was $47.5 million in the year ended December 31, 2015, driven by $26.8 million in dividend payments, $15.3
million in common stock repurchases and $5.1 million in debt payments.
Net cash provided by financing activities was $209.0 million in the year ended December 31, 2014, driven by $134.3 million in cash received from an
increase in borrowings under our Term Loan, a $100.0 million advance deposit from a customer and $9.4 million in proceeds from options exercised and
excess tax benefit from equity-based compensation partially offset by $26.9 million in dividend payments.
Share Repurchase Program
See Note C - Capital Structure and Accumulated Comprehensive Income to our Financial Statements in Part II, Item 8 of this Annual Report on Form
10-K for information related to our share repurchase program.
Credit Facilities
See Note I - Debt and Capital Leases to our Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our
credit facilities.
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.
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Contractual Obligations
As of December 31, 2016, the total of our future contractual cash commitments, including the repayment of our debt obligations under the Term Loan,
is summarized as follows:
Total
Less than
1 year
1-3 years
3-5 years
(amounts in thousands)
More than
5 years
Principal payments on long-term debt (1)
Estimated interest payments on long-term debt
Minimum payments on customer note payable
Minimum payments on note payable secured by royalty
interest
Retirement plans
Capital lease obligations
Operating leases
Minimum purchase obligations(2)
Other long-term liabilities(3)
$
494,175 $
5,100 $
10,200 $
478,875 $
71,559
2,500
28,000
58,290
3,037
381,420
83,086
1,401
20,349
500
1,750
3,664
2,315
55,525
20,739
208
40,067
1,000
3,500
8,641
722
119,392
36,922
400
11,143
1,000
3,500
9,291
—
91,598
12,625
271
Total Contractual Cash Obligations(4)
$
1,123,468 $
110,150 $
220,844 $
608,303 $
—
—
—
19,250
36,694
—
114,905
12,800
522
184,171
(1)
(2)
(3)
(4)
Excludes the unamortized debt issuance costs and original issue discount.
Includes estimated future minimum purchase obligation related to transload service agreements and transportation service agreements. As of
December 31, 2016, we accrued $2.1 million in shortfall fees under these service agreements.
Includes estimated future minimum royalty payments provided for under our mineral leases.
The above table excludes discounted asset retirement obligations in the amount of $11.2 million at December 31, 2016, the majority of which have a
settlement date beyond 2025, as well as indemnification for surety bonds issued on our behalf discussed in Note R - Obligations Under Guarantees to
our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
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 December 31, 2016, we had
$11.2 million accrued for future reclamation costs, as compared to $12.3 million as of December 31, 2015.
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” and Item 3, “Legal Proceedings.”
Critical Accounting Policies
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 is included in Note B to the Consolidated Financial Statements in Item 8 of this 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.
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Listed below are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or
assumptions involved, and that we believe are critical to the understanding of our operations.
Impairment of Long-Lived Assets
We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets, including property, plant and
mine development, goodwill, trade names, intellectual property and customer relationships, to be held and used may not be recoverable. An estimate of future
cash flows may be produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying value to determine whether an
impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted
market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash
flows. A detailed determination of the fair value may be carried forward from one year to the next if certain criteria have been met. We report an asset to be
disposed of at the lower of its carrying value or its estimated net realizable value.
Factors we generally consider important in our evaluation and that could trigger an impairment review of the carrying value of long-lived assets include
significant underperformance relative to expected operating trends, significant changes in the way assets are used, underutilization of our tangible assets,
discontinuance of certain products by us or by our customers, a decrease in estimated mineral reserves, and significant negative industry or economic trends.
The recoverability of the carrying value of our mineral properties is dependent upon the successful development, start-up and commercial production of
our mineral deposit and the related processing facilities. Our evaluation of mineral properties for potential impairment primarily includes assessing the
existence or availability of required permits and evaluating changes in our mineral reserves, or the underlying estimates and assumptions, including estimated
production costs. Assessing the economic feasibility requires certain estimates, including the prices of products to be produced and processing recovery rates,
as well as operating and capital costs.
Although we believe the carrying values of our long-lived assets were realizable as of the relevant balance sheet date, future events could cause us to
conclude otherwise.
Mine Reclamation Costs and Asset Retirement Obligations
We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities when incurred,
which is generally upon acquisition, construction or development and/or through the normal operation of the asset, if sufficient information exists to
reasonably estimate the fair value of the liability. These obligations generally include the estimated net future costs of dismantling, restoring and reclaiming
operating mines and related mine sites, in accordance with federal, state, local regulatory and land lease agreement requirements. The liability is accreted over
time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life
of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and
revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The reclamation obligation is based on when spending for
an existing environmental disturbance will occur. If the asset retirement obligation is settled for other than the carrying amount of the liability, a gain or loss is
recognized on settlement. We review, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site in accordance with
ASC guidance for accounting reclamation obligations.
Future remediation costs for inactive mines are accrued based on 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.
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Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recognized at their invoiced amounts and do not bear interest. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. We determine our
allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s
current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. Ongoing credit evaluations are performed. We
write-off accounts receivable when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for
doubtful accounts.
Self-Insurance and Product Liability Claim Reserves
We are self-insured for various levels of employee health insurance coverage, workers’ compensation and third party product liability claims alleging
occupational disease. We purchase insurance coverage for claim amounts which exceed our self-insured retentions. Depending on the type of insurance, these
self-insured retentions range from $100,000 to $500,000 per occurrence.
Our insurance reserves are accrued based on estimates of the ultimate cost of claims expected to occur during the covered period. These estimates are
prepared with the assistance of outside actuaries and consultants. Our actuaries periodically review the volume and amount of claims activity, and based upon
their findings, we adjust our insurance reserves accordingly. The ultimate cost of claims for a covered period may differ from our original estimates.
Employee Benefit Plans
We provide a range of benefits to our employees and retired employees, including pensions and post-retirement healthcare and life insurance benefits.
We record annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial
assumptions, including discount rates, assumed rates of returns, compensation increases, turnover rates, mortality table, and healthcare cost trend rates. We
review the actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed
appropriate to do so. As required by U.S. generally accepted accounting principles, the effect of the modifications is generally recorded or amortized over
future periods. We believe that the assumptions utilized in recording our obligations under the plans, which are presented in Note P to our Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K, are reasonable based on advice from our actuaries and information as to assumptions
used by other employers.
Equity-Based Compensation Expense
We recognize equity-based compensation expense in our consolidated statements of income using a fair value based method. Stock option fair value
methods use a valuation model for shorter-term, market-traded financial instruments to theoretically value stock option grants even though they are not
available for trading and are of longer duration. The Black-Scholes option-pricing model that we use includes the input of certain variables that are dependent
on future expectations, including the expected lives of our options from grant date to exercise date, the volatility of our underlying common shares in the
market over that time period, and the rate of dividends that we will pay during that time. Our estimates of these variables are made for the purpose of using
the valuation model to determine an expense for each reporting period and are not subsequently adjusted. We recognize expense related to the estimated
vesting of our performance share units granted. The estimated vesting of the performance share units is principally based on the probability of achieving
certain financial performance levels during the vesting periods. For performance share units, the vesting of which is subject to market conditions, a binomial-
lattice model (i.e., Monte Carlo simulation model) is used to fair value these awards at grant date. Unlike most of our expenses, the resulting equity-based
compensation expense's impact on earnings is a non-cash charge that is never measured by, or adjusted based on, a cash outflow.
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Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. This approach requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based upon the difference between the financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the expenses are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized.
We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained
upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure
the tax benefit as the largest amount that it judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.
The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law
developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate
includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. At the
adoption date, we applied the uncertain tax position guidance to all tax positions for which the statute of limitations remained open. The adoption of this
guidance did not have a material impact on our consolidated financial condition or results of operations.
We evaluate quarterly the realizability of our deferred tax assets by assessing the need for a valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies
that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the net
deferred tax assets. Factors that may affect our ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: a decline
in sales or margins, increased competition or loss of market share. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these
jurisdictions. These audits can involve complex issues, which may require an extended time to resolve. We believe that adequate provisions for income taxes
have been made for all years.
The largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The impact of
statutory depletion on the effective tax rate is presented in Note Q to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
The deduction for statutory depletion does not necessarily change proportionately to changes in income before income taxes.
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 B - Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form
10-K.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to certain market risks, which exist as a part of our ongoing business operations. Such risks arise from adverse changes in market rates,
prices and conditions. We address such market risks as discussed in "How We Generate Our Sales" in Item 7 of this Form 10-K, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Interest Rate Risk
We are exposed to interest rate risk arising from adverse changes in interest rates. As of December 31, 2016, we have $494.2 million of debt
outstanding under our senior credit facility. Assuming no change in the amount outstanding, and LIBOR is greater than the 1.0% minimum base rate on the
senior secured term loan facility, a hypothetical increase or decrease in interest rates by 1.0% would have changed our interest expense by $4.9 million, $3.0
million and $1.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
We use interest rate derivatives in the normal course of our business to manage both our interest cost and the risks associated with changing interest
rates. We do not use derivatives for trading or speculative purposes. The following table summarizes the fair value of our derivative instruments (in
thousands, except contract/notional amount) at December 31, 2016 and 2015:
Maturity
Date
Contract/Notional
Amount
Carrying
Amount
Fair
Value
Maturity
Date
Contract/Notional
Amount
Carrying
Amount
Fair
Value
December 31, 2016
December 31, 2015
Interest rate cap
agreement(1)
2019 $
249 million $
72 $
72
2016 $
252 million $
— $
—
(1)
Agreements limit the LIBOR floating interest rate base to 4%.
Credit Risk
We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. We examine the creditworthiness of third-party
customers to whom we extend credit and manage our exposure to credit risk through credit analysis, credit approval, credit limits and monitoring procedures,
and for certain transactions, we may request letters of credit, prepayments or guarantees, although collateral is generally not required.
Despite enhancing our examination of our customers' credit worthiness, we may still experience delays or failures in customer payments. Some of our
customers have reported experiencing financial difficulties. With respect to customers that may file for bankruptcy protection, we may not be able to collect
sums owed to us by these customers and we also may be required to refund pre-petition amounts paid to us during the preference period (typically 90 days)
prior to the bankruptcy filing.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K:
U.S. SILICA HOLDINGS, INC.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements
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67
68
69
70
71
72
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
U.S. Silica Holdings, Inc.
We have audited the accompanying consolidated balance sheets of U.S. Silica Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Silica Holdings,
Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2017 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
February 23, 2017
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Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Income tax deposits
Total current assets
Property, plant and mine development, net
Goodwill
Trade names
Intellectual property
Customer relationships, net
Other assets
Total assets
Current Liabilities:
Accounts payable
Dividends payable
Accrued liabilities
Accrued interest
Current portion of long-term debt
Current portion of capital leases
Current portion of deferred revenue
Total current liabilities
Long-term debt
Liability for pension and other post-retirement benefits
Deferred revenue
Deferred income taxes, net
Obligations under capital lease
Other long-term obligations
Total liabilities
Stockholders’ Equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
U.S. SILICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2016
2015
(in thousands)
$
711,225 $
—
89,006
78,709
12,323
1,682
892,945
783,313
240,975
32,318
57,270
50,890
15,509
277,077
21,849
58,706
65,004
9,921
6,583
439,140
561,196
68,647
14,474
—
6,453
18,709
LIABILITIES AND STOCKHOLDERS’ EQUITY
$
$
$
2,073,220 $
1,108,619
70,778 $
5,221
13,034
169
4,821
2,237
13,700
109,960
508,417
56,746
58,090
50,075
717
15,925
799,930
—
811
1,129,051
163,173
(3,869)
(15,876)
1,273,290
2,073,220 $
49,631
3,453
11,708
58
3,330
—
15,738
83,918
488,375
55,893
59,676
19,513
—
17,077
724,452
—
539
194,670
220,974
(15,845)
(16,171)
384,167
1,108,619
The accompanying notes are an integral part of these financial statements.
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U.S. SILICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales
Cost of goods sold (excluding depreciation, depletion and amortization)
Operating expenses
Selling, general and administrative
Depreciation, depletion and amortization
Operating income (loss)
Other income (expense)
Interest expense
Other income, net, including interest income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Dividends declared per share
Year Ended December 31,
2016
2015
2014
(in thousands, except per share amounts)
559,625 $
477,295
642,989 $
495,066
67,727
68,134
135,861
(53,531)
(27,972)
3,758
(24,214)
(77,745)
36,689
62,777
58,474
121,251
26,672
(27,283)
728
(26,555)
117
11,751
(41,056) $
11,868 $
(0.63) $
(0.63) $
65,037
65,037
0.25 $
0.22 $
0.22 $
53,344
53,601
0.44 $
876,741
566,584
88,971
45,019
133,990
176,167
(18,202)
758
(17,444)
158,723
(37,183)
121,540
2.26
2.24
53,719
54,296
0.50
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
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Net income
Other comprehensive income:
U.S. SILICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
2016
2015
(in thousands)
2014
$
(41,056) $
11,868 $
121,540
Unrealized gain (loss) on derivatives (net of tax of $29, $34 and ($32) for 2016,
2015, and 2014, respectively)
Unrealized gain (loss) on investments (net of tax of ($4), $29 and ($8) for 2016,
2015, and 2014, respectively)
Pension and other post-retirement benefits liability adjustment (net of tax of $152,
$2,469 and ($9,678) for 2016, 2015, and 2014, respectively)
49
(6)
252
Comprehensive income
$
(40,761) $
53
47
(55)
(14)
3,547
15,515 $
(15,732)
105,739
The accompanying notes are an integral part of these financial statements.
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U.S. SILICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Treasury
Stock
Stock
Additional
Paid-In
Capital
Retained
Earnings
Other
Total
Comprehensive
Stockholders'
Income (Loss)
Equity
Accumulated
$
534 $
— $
174,799 $
137,978 $
(4,017) $
(in thousands)
—
—
—
—
—
—
—
4
1
—
539
—
—
—
—
—
—
—
—
—
539
—
272
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
572
(615)
(499)
(542)
—
—
—
—
—
—
744
(792)
(15,255)
(15,845)
—
—
—
—
—
—
—
—
8,465
1,437
—
—
—
—
—
7,487
3,813
4,987
—
—
121,540
—
—
—
(26,967)
—
—
—
—
—
—
(55)
(14)
(15,732)
—
—
—
—
—
—
191,086
232,551
(19,818)
—
—
—
—
—
3,857
(271)
(2)
—
11,868
—
—
—
(23,445)
—
—
—
—
194,670
—
220,974
(41,056)
931,016
—
—
—
—
12,107
—
(3,640)
(1,437)
—
—
—
—
(16,893)
—
148
—
—
—
53
47
3,547
—
—
—
—
—
(16,171)
—
—
49
(6)
252
—
—
—
—
—
309,294
121,540
(55)
(14)
(15,732)
(26,967)
7,487
3,813
5,563
(614)
(499)
403,816
11,868
53
47
3,547
(23,445)
3,857
473
(794)
(15,255)
384,167
(41,056)
931,288
49
(6)
252
(16,893)
12,107
148
4,825
—
Balance at January 1, 2014
Net income
Unrealized loss on derivatives
Unrealized loss on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.500 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Excess tax benefit from equity compensation
Proceeds from options exercised
Shares withheld for employee taxes related to
vested restricted stock and stock units
Repurchase of common stock
Balance at December 31, 2014
Net income
Unrealized gain on derivatives
Unrealized gain on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.438 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Proceeds from options exercised
Shares withheld for employee taxes related to
vested restricted stock and stock units
Repurchase of common stock
Balance at December 31, 2015
Net loss
Issuance of common stock (stock offerings net of issuance
costs of $25,732)
Unrealized gain on derivatives
Unrealized loss on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.25 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Excess tax benefit from equity-based compensation
Proceeds from options exercised
Issuance of restricted stock
Shares withheld for employee taxes related to
vested restricted stock and stock units
—
2,074
(3,665)
—
—
(1,591)
Balance at December 31, 2016
$
811 $
(3,869) $ 1,129,051 $
163,173 $
(15,876) $
1,273,290
The accompanying notes are an integral part of these financial statements.
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U.S. SILICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended December 31,
2016
2015
(in thousands)
2014
$
(41,056)
$
11,868 $
121,540
Depreciation, depletion and amortization
Debt issuance amortization
Original issue discount amortization
Deferred income taxes
Loss on disposal of property, plant and equipment
Deferred revenue
Equity-based compensation
Excess tax benefit from equity-based compensation
Bad debt provision
Other
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Income taxes
Accounts payable and accrued liabilities
Accrued interest
Liability for pension and other post-retirement benefits
Net cash provided by (used in) operating activities
Investing activities:
Capital expenditures
Capitalized intellectual property costs
Proceeds from sales and maturities of short-term investments
Acquisition of business, net of cash acquired
Proceeds from sale of property, plant and equipment
Net cash provided by (used in) investing activities
Financing activities:
Issuance of common stock
Common stock issuance costs
Dividends paid
Repurchase of common stock
Proceeds from options exercised
Excess tax benefit from equity-based compensation
Tax payments related to shares withheld for vested restricted stock and stock units
Advances from customers
Issuance of long-term debt
Repayment of long-term debt
Principal payments on capital lease obligations
Financing fees
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest
Taxes
Non-cash items:
Common stock issued in connection with acquisitions
Capital lease obligations incurred to acquire assets
$
$
$
$
$
68,134
1,392
378
(36,903)
563
(9,026)
12,107
—
(1,232)
3,643
(12,996)
(10,211)
(509)
11,558
13,121
111
1,307
381
(46,450)
(959)
21,872
(176,617)
497
(201,657)
678,791
(25,732)
(15,125)
—
4,825
—
(1,591)
—
—
(5,202)
(542)
—
635,424
434,148
277,077
711,225
$
21,994
(11,322)
278,229
165
$
$
$
$
58,474
1,401
382
(10,473)
383
(16,079)
3,857
—
(290)
(5,257)
62,465
1,708
(708)
(5,837)
(42,353)
(2)
1,953
61,492
(53,646)
—
53,568
—
127
49
—
—
(26,797)
(15,255)
473
—
(794)
—
—
(5,093)
—
(64)
(47,530)
14,011
263,066
277,077 $
21,729 $
4,568 $
— $
— $
45,019
912
272
(2,442)
222
(8,508)
7,487
(3,813)
10,200
367
(48,976)
34
(2,158)
2,063
51,357
15
(2,180)
171,411
(92,609)
—
—
(98,317)
20
(190,906)
—
—
(26,871)
(499)
5,563
3,813
(614)
100,000
134,325
(3,750)
(132)
(2,871)
208,964
189,469
73,597
263,066
15,920
37,637
—
—
The accompanying notes are an integral part of these financial statements.
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NOTE A—ORGANIZATION
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Silica Holdings, Inc. (“Holdings,” and together with its subsidiaries “we,” “us” or the “Company”) is a domestic producer of commercial silica, a
specialized mineral that is a critical input into a variety of end markets. During our 116 year history, we have developed core competencies in mining,
processing, logistics and materials science that enable us to produce and cost-effectively deliver products to customers across these markets. We manufacture
frac sand used to stimulate and maintain the flow of hydrocarbons in oil and natural gas wells. Our silica is also used as a raw material in a wide range of
industrial applications, including glassmaking and chemical manufacturing. We operate in two business segments: (1) Oil & Gas Proppants and
(2) Industrial & Specialty Products (see Note S - Segment Reporting for additional details).
On August 16, 2016, we completed the acquisition of New Birmingham, Inc. (“NBI”), the ultimate parent company of NBR Sand, LLC (“NBR”), a
regional sand producer located near Tyler, Texas. On August 22, 2016, we completed the purchase of all of the outstanding units of membership interest of
Sandbox Enterprises, LLC (“Sandbox”), a “last mile” transportation service provider in the oil and gas industry. See Note D - Business Combinations for
more details for these two acquisitions.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying Consolidated Financial Statements (the “Financial Statements”) have been prepared in accordance with generally accepted
accounting principles in the United States (“GAAP”). 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’
operating activities section section of the consolidated statement of cash flows to conform to the current year presentation.
In order to make this report easier to read, we refer throughout to (i) our Consolidated Balance Sheets as our “Balance Sheets,” (ii) our Consolidated
Statements of Operations as our “Income Statements,” and (iii) our Consolidated Statements of Cash Flows as our “Cash Flows.”
Consolidation
The Financial Statements include the accounts of Holdings and its direct and indirect wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
We follow FASB Accounting Standards Codification (“ASC”) guidance for identification and reporting of entities over which control is achieved
through means other than voting rights. The guidance defines such entities as Variable Interest Entities (“VIEs”). For the periods presented herein, we have
identified no entities over which we maintain any level of control that would qualify for consolidation under ASC guidance.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Financial Statements and the
reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and
assumptions relate to purchase price allocation for businesses acquired; mineral reserves that are the basis for future cash flow estimates utilized in
impairment calculations and units-of-production amortization calculations; environmental, reclamation and closure obligations; estimates of recoverable
minerals; estimates of allowance for doubtful accounts; estimates of fair value for certain reporting units and asset impairments (including impairments of
goodwill and other long-lived assets); write-downs of inventory to net realizable value; equity-based compensation expense; post-employment, post-
retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; 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.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
We derive most of 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 and the number of tons sold. The amount invoiced reflects product, transportation and additional services as applicable, such as storage,
transloading the product from railcars to trucks and last mile logistics to the customer site.
Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is fixed and determinable, the product has been
delivered, legal title has been transferred to the customer or services are completed and collection of the sale is reasonably assured. Amounts received from
customers in advance of revenue recognition are deferred as liabilities.
We primarily sell our products under short-term price agreements or at prevailing market rates. For a limited number of customers, we sell under long-
term, competitively-bid take-or-pay supply agreements. As of December 31, 2016, we had seven take-or-pay supply agreements in the Oil & Gas Proppants
segment with initial terms expiring between 2017 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 that our customers will pay for each product. Prices under these
agreements are generally fixed and subject to upward adjustment in response to certain cost increases. Some of these existing agreements are under active
negotiations regarding pricing and volume requirements, which may often occur in volatile market conditions. While these negotiations continue, we may
deliver sand at prices or at volumes below the requirements in our existing take-or-pay supply agreements.
We invoice the majority of our clients on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly.
Standard terms are net 30 days, although extended terms are offered in competitive situations. Sales and other transaction taxes imposed by government
entities are reported on a net basis.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with a maturity of three months or less when purchased. Because of the short
maturity of these investments, the carrying amounts approximate their fair value. Cash and cash equivalents are invested primarily in money market securities
held by financial institutions with high credit ratings. Accounts at each institution are insured by Federal Deposit Insurance Corporation. Cash balances at
times may exceed federally-insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk
on cash.
Checks we issued but have not cleared our bank accounts frequently result in book overdraft balances. In 2015, we changed the presentation of book
overdraft from being classified as a liability to a reduction to our cash and cash equivalents. As a result of this change, the amount of cash and cash
equivalents was reduced by the book overdraft amounts as of December 31, 2016, 2015 and 2014 was $3.2 million, $6.7 million and $4.2 million,
respectively.
Accounts Receivable
The majority of our accounts receivable are due from companies in the oil and natural gas drilling, glass, building products, filler and extenders,
foundries and other major industries. Our ten largest customers accounted for approximately 52%, 56%, and 57% of sales in the years ended December 31,
2016, 2015 and 2014, respectively. Sales to our largest customer, Halliburton Company, which is an Oil & Gas Proppants customer, accounted for 13% of our
total revenues during the year ended December 31, 2016. No other customer accounted for 10% or more of our total revenues. Credit is extended based on
evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers net of
an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. We determine our allowance by considering
a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its
obligation to us, and the condition of the general economy and the industry as a whole. Ongoing credit evaluations are performed. We write-off accounts
receivable when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Inventories
Inventories include raw stockpiles and silica and other industrial sand available for shipment, as well as spare parts and supplies for routine facility
maintenance. We value inventory at the lower of cost or net realizable value. Cost is determined
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using the first-in, first-out and average cost methods. Costs of our raw stockpiles and silica and other industrial sand inventories include production costs and
transportation and additional service costs as applicable.
Property, Plant and Mine Development
Plant and equipment
Plant and equipment is recorded at cost and depreciated over their estimated useful lives. Interest incurred during construction of facilities is capitalized
and depreciated over the life of the asset. Costs for normal repairs and maintenance that do not extend economic life or improve service potential are
expensed as incurred. Costs of improvements that extend economic life or improve service potential are capitalized and depreciated over the estimated
remaining useful life.
Depreciation is recorded using the straight-line method over the assets’ estimated useful life as follows: buildings (15 years); land improvements (10
years); machinery and equipment, including computer equipment and software (3-10 years); furniture and fixtures (8 years). Leasehold improvements are
depreciated over the shorter of the asset life or lease term. Construction-in-progress is primarily comprised of machinery and equipment, which has not yet
been placed in service.
Mining property and development
Mining property and development includes mineral deposits and mine exploration and development. Mineral deposits are initially recognized at cost,
which approximates the estimated fair value on the date of purchase. Mine exploration and development costs include engineering and mineral studies,
drilling and other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body for production. Costs incurred before
mineralization are classified as proven and probable reserves are expensed and classified as exploration or advanced projects, research and development
expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable
reserves.
The cost of removing overburden and waste materials to access the ore body at an open pit mine prior to the production phase are referred to as “pre-
stripping costs.” Pre-stripping costs are capitalized during the development of an open pit mine. The production phase of an open pit mine commences when
saleable minerals, beyond a de minimis amount, are produced. Stripping costs incurred during the production phase of a mine are variable production costs
that are included as a component of inventory to be recognized in costs applicable to sales in the same period as the revenue from the sale of inventory.
Depletion and amortization of mineral deposits and mine development costs are recorded as the minerals are extracted, based on units of production and
engineering estimates of mineable reserves. The impact of revisions to reserve estimates is recognized on a prospective basis.
Mine reclamation costs and asset retirement obligations
We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities when incurred,
which is generally upon acquisition, construction or development and/or through the normal operation of the asset, if sufficient information exists to
reasonably estimate the fair value of the liability. These obligations generally include the estimated net future costs of dismantling, restoring and reclaiming
operating mines and related mine sites, in accordance with federal, state, local regulatory and land lease agreement requirements. The liability is accreted over
time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life
of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and
revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The reclamation obligation is based on when spending for
an existing environmental disturbance will occur. If the asset retirement obligation is settled for other than the carrying amount of the liability, a gain or loss is
recognized on settlement. We review, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site in accordance with
ASC guidance for accounting reclamation obligations.
Future remediation costs for inactive mines are accrued based on 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.
In connection with our annual review of our reclamation obligations, we have determined that some of our estimates required revision due primarily to
the additions of new plant and transload facilities and other changes in cost estimates and
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
settlement dates at various sites. These additions and changes in estimates resulted in an additional $(2.1) million and $0.2 million of asset retirement
obligations in 2016 and 2015, respectively.
Our asset retirement obligations are reported in other long-term obligations. The changes in these obligations (in thousands) during the year ending
December 31, 2016 and 2015 are as follows:
Beginning balance
Accretion
Additions and revisions of prior estimates
Ending balance
$
$
2016
2015
12,254 $
979
(2,074)
11,159 $
11,283
812
159
12,254
Impairment or Disposal of Property, Plant and Mine Development
Gains on the sale of property, plant and mine development are included in income when the assets are disposed of provided there is more than
reasonable certainty of the collectability of the sales price and any future activities required to be performed by us relating to the disposal of the assets are
complete or insignificant. Upon retirement or disposal of assets, all costs and related accumulated depreciation or amortization are written-off.
We periodically evaluate whether current events or circumstances indicate that the carrying value of our property, plant and equipment assets may not
be recoverable. If circumstances indicate that the carrying value may not be recoverable, we estimate future undiscounted net cash flows using estimates of
proven and probable sand reserves, estimated future sales prices (considering historical and current prices, price trends and related factors) and operating costs
and anticipated capital expenditures. If the undiscounted cash flows are less than the carrying value of the assets, we recognize an impairment loss equal to
the amount by which the carrying value exceeds the fair value of the assets.
Goodwill and Other Intangible Assets and Related Impairment
Our intangible assets consist of goodwill, which is not being amortized, indefinite lived intangibles, which consist of certain trade names that are not
subject to amortization, intellectual property and customer relationships.
Intellectual property was acquired in connection with our Sandbox acquisition and mainly consists of patents and technology. It is amortized on a
straight-line basis over an average useful life of 15 years. As of December 31, 2016, the gross carrying amount of the intellectual property intangible asset
was $58.7 million with accumulated amortization of $1.4 million. During the year ended December 31, 2016, we capitalized $0.9 million in legal costs and
patent filing costs. As of December 31, 2016, the remaining useful life was 14.6 years. The estimated annual amortization in each of the next five years is
$3.8 million. Amortization expense for intellectual property was $1.4 million for the year ended December 31, 2016.
Customer relationships are amortized on a straight-line basis over their useful life of 20, 15 or 13 years. We acquired additional customer relationships
in connection with our NBI and Sandbox acquisitions during the year ended December 31, 2016. As of December 31, 2016, the gross carrying amount of the
customer relationships intangible asset was $55.7 million with accumulated amortization of $4.8 million. As of December 31, 2016, the weighted average
remaining useful life of our customer relationships was 13.0 years. The estimated annual amortization in each of the next five years is $4.0 million.
Amortization expense was $1.8 million, $0.5 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Goodwill represents the excess of purchase price over the fair value of net assets from business acquisitions. Goodwill and trade names are reviewed for
impairment annually as of October 31 or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of
those assets. Prior to conducting a formal impairment test, we have an option to assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount.
Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial
performance; and other relevant entity-specific events. If the qualitative assessment determines that an impairment is more likely than not, or if we choose to
bypass the qualitative assessment, we perform a quantitative comparison of the fair value with the carrying amount, including goodwill. If this comparison
reflects impairment, then the loss would be measured as the excess of recorded goodwill, or other intangible assets with indefinite lives, over its implied fair
value. Implied
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value is the excess of our fair value over the fair value of all recognized and unrecognized assets and liabilities. As of December 31, 2016, our qualitative
assessment did not indicate that it was more likely than not that an impairment had occurred.
Debt Issuance Costs
The Company defers costs directly associated with acquiring third-party financing, primarily loan origination costs and related professional expenses.
Debt issuance costs are deferred and amortized using the effective interest rate method over the term of our senior secured term loan facility (the “Term
Loan”) and the straight-line method for our revolving line-of-credit (the "Revolver"). Debt issuance costs related to long-term debt are reflected as direct
deduction from the carrying amount of the debt. Amortization included in interest expense was $1.4 million, $1.4 million and $0.9 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
Environmental Costs
Environmental costs, other than qualifying capital expenditures, are accrued at the time the exposure becomes known and costs can be reasonably
estimated. Costs are accrued based upon management’s estimates of all direct costs, after taking into account expected reimbursement by third parties
(primarily the sellers of acquired businesses), and are reviewed by outside consultants. Environmental costs are charged to expense unless a settlement with
an indemnifying party has been reached.
Self-Insurance
We are self-insured for various levels of employee health insurance coverage, workers’ compensation and third party product liability claims alleging
occupational disease. We purchase insurance coverage for claim amounts which exceed our self-insured retentions. Depending on the type of insurance, these
self-insured retentions range from $0.1 million to $0.5 million per occurrence. Our insurance reserves are accrued based on estimates of the ultimate cost of
claims expected to occur during the covered period. The current portion of our self-insurance reserves is included in accrued liabilities and the non-current
portion is included in other long-term obligations in our Balance Sheets. For December 31, 2016 and 2015, our self-insurance reserves totaled $5.3 million
and $5.7 million, respectively, and $1.3 million and $1.8 million was classified as current, respectively.
Equity-based Compensation
We recognize the cost of employee services rendered in exchange for awards of equity instruments, including stock options, restricted stock, restricted
stock units and performance share units.
Vesting of restricted stock and restricted stock units is based on the individual continuing to render service over a three year vesting schedule. Cash
dividend equivalents are accrued and paid to the holders of time based restricted stock units and restricted stock. The fair value of the restricted stock awards
is equal to the market price of our stock at date of grant. The restricted award-related compensation expense is recognized, on a straight-line basis, over the
vesting period.
We grant performance share units to certain employees in which the number of shares of common stock ultimately received is determined based on
achievement of certain performance thresholds over a specified performance period (generally three years) in accordance with the stock award agreement.
Cash dividend equivalents are not accrued or paid on performance share units. We recognize expense based on the estimated vesting of our performance share
units granted and the grant date market price. The estimated vesting of the performance share units is principally based on the probability of achieving certain
financial performance levels during the vesting periods. In the period it becomes probable that the minimum performance criteria specified in the award
agreement will be achieved, we recognize expense for the proportionate share of the total fair value of the award related to the vesting period that has already
lapsed. The remaining fair value of the award is expensed on a straight-line basis over the remaining vesting period.
During the year ended December 31, 2016, we granted certain employees performance share units, the vesting of which is based on the Company’s total
shareholder return (“TSR”) ranking among a peer group over the three year period from January 1, 2016 through December 31, 2018. The number of units
that will vest will depend on the percentage ranking of the Company's TSR compared to the TSRs for each of the companies in the peer group over the
performance period. For these awards subject to market conditions, a binomial-lattice model (i.e., Monte Carlo simulation model) is used to fair value these
awards at grant date. The related compensation expense is recognized, on a straight-line basis, over the vesting period.
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The options vest on a vesting schedule and the related compensation expense is recognized over the vesting period, usually over 3 or 4 years. In
calculating the compensation expense for options granted, we estimate the fair value of each grant using the Black-Scholes option-pricing model. The
weighted-average fair value per share of options granted during the years ended December 31, 2015 and 2014 was $13.11 and $19.37, respectively. The fair
value of stock options granted have been calculated based on the exercise price of the option and the following assumptions, which are evaluated and revised,
as necessary, to reflect market conditions and experience. There were no options granted during the year ended December 31, 2016.
Risk-free interest rate
Expected volatility
Expected term
Expected dividend yield
Expected forfeiture rate
Weighted-average
Year ended December 31,
2015
2014
1.68%
48%
1.81%
45%
6.25 years
6.25 years
1%
0%
1%
0%
Our expected forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis before
becoming fully vested. We account for forfeitures as they occur.
Our expected term is the period of time over which the options are expected to remain outstanding. An increase in the expected term will increase
compensation expense. The computation of the expected term is based on the simplified method, under which the expected term is presumed to be the mid-
point between the average vesting date and the end of the contractual term.
The assumptions for expected volatility are based on historical experience for the same periods as our expected lives. Risk-free interest rates are set
using grant-date U.S. Treasury yield curves for the same periods as our expected lives. The expected dividend yield is based on our future dividend
expectations for the same periods as our expected lives.
Income Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss
and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. This approach requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based upon the difference between the financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the expenses are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized.
We recognize a tax benefit associated with an uncertain tax position when, in management’s judgment, it is more likely than not that the position will be
sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently
measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing
authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits,
case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax
rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.
The largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The deduction
for statutory depletion does not necessarily change proportionately to changes in income before income taxes.
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Table of Contents
Earnings per Share
Basic and diluted earnings per share is presented for net income (loss). Basic earnings per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed
similarly to basic earnings per common share except that the weighted average number of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. In accordance with the applicable
accounting guidance for calculating earnings per share, we did not include in our calculation of diluted earnings per share for the applicable periods stock
options where the exercise prices were greater than the average market prices. The weighted-average stock options (in thousands) that are antidilutive and are
therefore excluded from the calculation of diluted earnings per common share are:
Weighted-average outstanding stock options excluded
Weighted-average outstanding restricted stock awards excluded
Comprehensive Income (loss)
For the Year Ended December 31,
2016
2015
2014
573
166
528
66
33
20
In addition to net income (loss), comprehensive income (loss) includes all changes in equity during a period, such as adjustments to minimum pension
liabilities, unrealized gain or loss on our short term investments and the effective portion of changes in fair value of derivative instruments that qualify as cash
flow hedges.
Short-term Investments
Our short-term investments consist of fixed income securities that have been classified and accounted for as available-for-sale. We determine the
appropriate classification of our investments at the time of purchase and reevaluate the designations at each balance sheet date. We classify these securities as
either short-term or long-term based on each instrument’s underlying contractual maturity date. Fixed income securities with maturities of 12 months or less
are classified as short-term and fixed income securities with maturities greater than 12 months are classified as long-term. These investments are carried at
fair value, with the unrealized gains and losses, net of taxes, reported as a separate component of accumulated other comprehensive income. The cost of
securities sold is based upon the specific identification method.
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 we will be required to sell, the investment before recovery of the investment’s
cost basis. As of December 31, 2015, we considered any losses in our short-term investment portfolio to be temporary in nature and did not consider any of
our investments other-than-temporarily impaired. All short-term investments have matured as of December 31, 2016.
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Financial Instruments
We currently use interest rate hedge agreements to manage interest costs and the risk associated with changing interest rates. Amounts to be paid or
received under these hedge agreements are accrued as interest rates change and are recognized over the life of the hedge agreements as an adjustment to
interest expense. Our policy is to not hold or issue derivative financial instruments for trading or speculative purposes. When entered into, these financial
instruments are designated as hedges of underlying exposures, associated with our long-term debt and are monitored to determine if they remain effective
hedges. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income net of tax and reclassified to earnings in
a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in
income. Additional disclosures for derivative instruments are presented in Note M to these financial statements.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. Under this method, acquired assets, including separately
identifiable intangible assets, and any assumed liabilities are recorded at their acquisition date estimated fair value. The excess of purchase price over the fair
value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Determining the fair
value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Interest-Imputation of
Interest, which simplifies presentation of debt issuance costs. The new standard requires that debt issuance costs be presented in the balance sheet as a direct
deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The new standard was effective for financial statements
issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption of the
amendments in this Update is permitted for financial statements that have not been previously issued. We have elected to adopt the standard early and have
presented debt issuance costs as a direct deduction from the carrying amount of debt on our Balance Sheets as of December 31, 2016 and December 31, 2015.
In November 2015, the FASB issued ASU 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes, which will require the
presentation of deferred tax liabilities and assets be classified as non-current on balance sheets. The amendments in this update are effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for
all entities as of the beginning of an interim or annual reporting period. We have elected to early adopt this guidance prospectively as of December 31, 2015.
The adoption only impacted deferred tax presentation on our Balance Sheets and related disclosure. No prior periods were retrospectively adjusted.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The new standard requires an entity to measure most
inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of
cost or market. The new standard will not apply to inventories that are measured using either the last-in, first-out (LIFO) method or the retail inventory
method. This Update is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years; early application is permitted. We elected to prospectively early adopt the standard effective January 1, 2016 and have
measured our inventory at the lower of cost and net realizable value on our Balance Sheet. The impacts of the early adoption of this Update on our Financial
Statements are not significant.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation." The update requires that excess tax benefits and deficiencies
be recorded in the income statement when the awards vest or are settled. It also eliminates the requirement that excess tax benefits be realized (reduce cash
taxes payable) before being recognized. Previously, an entity could not recognize excess tax benefits if the tax deduction increased a net operating loss
("NOL") or tax credit carryforward. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity
separate from other income tax cash flows. The update also allows the employer to repurchase more of an employee's shares for tax withholding purposes
without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be
presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The
update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods and permits early adoption.
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We elected to early adopt this update during the three months ended September 30, 2016, which requires any adjustments to be reflected as of
January 1, 2016. This resulted in the recognition of excess tax benefits on our Balance Sheet that were previously not recognized, as the benefits would have
increased our NOL or tax credit carryforwards. The recognition decreased net deferred tax liability by $0.1 million and $2.2 million as of January 1, 2016 and
December 31, 2016, respectively. Retained earnings on January 1, 2016 was increased accordingly by $0.1 million. In addition, we will recognize excess tax
benefits or deficiencies in the provision for income taxes rather than paid-in capital for 2016 and future periods. Adoption of the update resulted in the
reduction in the provision for income taxes of $2.2 million for the year ended December 31, 2016.
The effect of the adoption of this update on our previously reported income tax provision on our Income Statement was a decrease in tax benefit of
$0.3 million for the three months ended March 31, 2016 and an increase in tax benefit of $0.2 million for the three months ended June 30, 2016, respectively.
We elected to include excess tax benefits as operating activities in the Cash Flow on a prospective basis. Prior periods are not adjusted. We also made
the accounting policy election to account for forfeitures as they occur.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance.
The new guidance introduces a new principles-based framework for revenue recognition and disclosure. Since its issuance, the FASB has issued an additional
six ASUs, including ASU 2016-20 in December 2016, amending the guidance and the effective dates of amendments, and the SEC has rescinded certain
related SEC guidance; the most recent of which was issued in May 2016. The pronouncements are effective for annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim reporting periods within that reporting period. We have not yet completed our final review of the
impact of this guidance, although we currently do not anticipate a material impact on our revenue recognition practices. We continue to review our existing
contracts with our customers, any variable consideration, potential disclosures, and our method of adoption to complete our evaluation of the impact on our
consolidated financial statements. In addition, we continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by
the FASB, which may impact our current conclusions.
In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the existing lease guidance and requires all leases with a term greater
than 12 months to be recognized on the balance sheet as assets and obligations. This Update is effective for public entities for financial statements issued for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early application is permitted. This standard mandates a
modified retrospective transition method. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The Update
provides amendments that clarify guidance or correct references in the Accounting Standards Codification that addresses current diversity in practice and
could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance. Early adoption is permitted
for the amendments that require transition guidance. We are currently evaluating the effect that the transition guidance will have on our financial statements
and related disclosures.
In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. Most of the amendments are effective upon issuance.
Six amendments clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in current practice
because of either misapplication or misunderstanding of current guidance. The transition guidance effective dates for these six amendments varies depending
upon the amendment, relevant Subtopic and applicability to other ASUs. Early adoption is permitted for the amendments that require transition guidance. We
are currently evaluating the effect that the transition guidance will have on our financial statements and related disclosures.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, we completed a public offering of 10,000,000 shares of our common stock for total cash proceeds of approximately $186.2 million net
of underwriting discounts and offering costs. In August 2016, we issued an additional 6,825,693 shares of our common stock to complete two acquisitions
discussed in Note D - Business Combinations. In November 2016, we executed another offering of 10,350,000 shares of common stock raising net cash
proceeds of $467.0 million. There were 81,028,898 shares of common stock issued and outstanding at December 31, 2016. As of December 31, 2015, there
were 53,390,136 shares issued and outstanding.
In 2016, our Board of Directors declared quarterly cash dividends as follows:
Dividends per Common Share
Declaration Date
Record Date
Payable Date
$
$
$
$
0.0625
0.0625
0.0625
0.0625
February 22, 2016
May 5, 2016
July 21, 2016
November 3, 2016
March 15, 2016
June 15, 2016
September 15, 2016
December 15, 2016
April 5, 2016
July 6, 2016
October 4, 2016
January 5, 2017
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 and to fix the preferences, powers and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption rights and liquidation preference and
to fix the number of shares to be included in any such series without any further vote or action by our stockholders.
There are no shares of preferred stock issued or outstanding at December 31, 2016 and 2015. At present, we have no plans to issue any preferred stock.
Share Repurchase Program
We are authorized by our Board of Directors to repurchase shares of our outstanding common stock on the open market or in privately negotiated
transactions. As of December 31, 2016, we are authorized to repurchase up to $50 million of our common stock through December 11, 2017. 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. Under our share repurchase program, as of December 31, 2016, we have repurchased 706,093
shares of our common stock at an average price of $23.83 and are authorized to repurchase up to an additional $33.2 million of our common stock.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of fair value adjustments associated with cash flow hedges, short-term investments 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 (in thousands) during the year ended December 31, 2016:
Unrealized
gain (loss) on
cash flow
hedges
For the Year Ended December 31, 2016
Unrealized
gain (loss) on
short-term
investments
Pension and
other post-
retirement
benefits liability
Beginning Balance
Other comprehensive income before reclassifications
Amounts reclassed from accumulated other comprehensive
income
Ending Balance
$
$
(81) $
(32)
81
(32) $
6 $
(6)
—
— $
(16,096) $
(760)
1,012
(15,844) $
Total
(16,171)
(798)
1,093
(15,876)
Amounts reclassed from accumulated other comprehensive income (loss) related to cash flow hedges are included in interest expense in our Income
Statements and amounts reclassed related to the pension and other post-retirement benefits liability are included in the computation of net periodic pension
costs, at their before tax amounts.
NOTE D—BUSINESS COMBINATIONS
NBI Acquisition:
On August 16, 2016, we completed the acquisition of New Birmingham, Inc. (“NBI”), the ultimate parent company of NBR Sand, LLC (“NBR”), by
acquiring all of the outstanding capital stock of NBI through the merger of New Birmingham Merger Corp., a Nevada corporation and wholly owned
subsidiary of the Company, with and into NBI, followed immediately by the merger of NBI with and into NBI Merger Subsidiary II, Inc., a Delaware
corporation and wholly owned subsidiary of the Company, which subsequently changed its name to Tyler Silica Company (the “NBI Acquisition”). NBR is a
regional sand producer located near Tyler, Texas. The acquisition of NBI increased our regional frac sand product offering in our Oil & Gas Proppants
segment.
The preliminary consideration paid to the stockholders of NBI at the closing of the NBI Acquisition consisted of $107.2 million of cash (net of $9.0
million cash acquired) and 2,630,513 shares of common stock. The calculation of the preliminary purchase price (in thousands, except shares) is as follows:
Cash consideration paid
Number of Holdings common shares delivered
Multiplied by closing market price per share of U.S. Silica common stock on August 16, 2016
Total value of Holdings common shares delivered
Less, cash acquired
Total purchase price
$
116,165
2,630,513
$
40.51
$
$
$
106,562
(9,002)
213,725
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the preliminary allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities
assumed (in thousands):
Allocation of Purchase price:
Accounts receivable
Inventories
Other current assets
Income tax deposits
Property, plant and mine development
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable, accrued expenses and other current liabilities
Deferred revenue
Notes payable
Capital lease liabilities
Asset retirement obligations
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
2,680
3,494
428
6,657
210,913
1,600
86,228
312,000
1,938
500
24,361
3,331
710
67,435
98,275
213,725
The acquired intangible assets and the related estimated useful lives consist of the following:
Customer relationships
Approximate Fair Value
(in thousands)
Estimated Useful Life
(in years)
$
1,600
15
Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired. Goodwill in this transaction is
attributable to planned growth in regional frac sand markets and synergies expected to be achieved from integrating the operations of our operating subsidiary,
U.S. Silica Company (“U.S. Silica”), and NBI. The goodwill amount is included in our Oil & Gas Proppants segment. Both customer relationships and
goodwill are not expected to be deductible for tax purposes.
We incurred $1.4 million of acquisition-related charges which are included in selling, general and administrative expenses during the year ended
December 31, 2016. Additionally, we incurred $1.7 million related to the inventory write-up values in cost of goods sold during the year ended December 31,
2016. Revenue and earnings for NBR after the acquisition date are not presented as the business was integrated into our operations subsequent to the
acquisition and therefore impracticable to quantify.
Sandbox Acquisition:
On August 22, 2016, we completed the purchase of all of the outstanding units of membership interest of Sandbox Enterprises, LLC, a Texas limited
liability company ("Sandbox" or the “Sandbox Acquisition”). Sandbox earns revenues from providing “last mile” transportation services to companies in the
oil and gas industry. Sandbox has operations in Midland/Odessa, Texas; Morgantown, West Virginia; western North Dakota; northeast of Denver, Colorado;
Oklahoma City, OK; and Cambridge, Ohio, where its major customers are located.
The preliminary consideration paid includes $69.5 million of cash (net of $1.3 million cash acquired) and 4,195,180 shares of our common stock.
The calculation of preliminary purchase price (in thousands, except shares) is as follows:
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash consideration paid
Number of Holdings common shares delivered
Multiplied by closing market price per share of U.S. Silica common stock on August 22, 2016
Total value of Holdings common shares delivered
Less, cash acquired
Total purchase price
$
70,760
4,195,180
40.92
$
$
$
$
171,667
(1,306)
241,121
The following table sets forth a preliminary allocation of the purchase price to Sandbox’s identifiable tangible and intangible assets acquired and
liabilities assumed (in thousands):
Allocation of Purchase price:
Accounts receivable
Prepaid expenses and other
Property, plant and mine development
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable
Deferred revenue
Accrued expenses and other current liabilities
Total liabilities assumed
Net assets acquired
(in thousands)
13,392
1,465
32,336
120,144
86,100
253,437
4,122
4,902
3,292
12,316
241,121
$
$
The acquired intangible assets and the related estimated useful lives consist of the following:
Indefinite lived intangible assets - Trade names
Definite lived intangible assets - Technology and intellectual property
Definite lived intangible asset - Customer relationships
Total fair value of identifiable intangible assets
Approximate Fair Value
(in thousands)
Estimated Useful Life
(in years)
$
$
17,844
57,700
44,600
120,144
Indefinite
15
13
Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired. Goodwill in this transaction is
attributable to expected growth in frac sand demand at the wellhead and synergies expected to be achieved from integrating the operations of U.S. Silica and
Sandbox. The goodwill amount is included in our Oil & Gas Proppants segment. Goodwill and all intangible assets identified above are expected to be
deductible for tax purposes.
Our 2016 Income Statement included revenue of $31.0 million associated with Sandbox following the date of acquisition. Sandbox's impact on our
net loss was not significant for the year ended December 31, 2016. We incurred $3.0 million of acquisition-related charges which are included in selling,
general and administrative expenses on the Income Statement for the year ended December 31, 2016.
The cost related to the issuance of the 6,825,693 shares of common stock to complete the two acquisitions totaled $0.3 million, which is included in
additional paid-in capital on our Condensed Consolidated Statements of Stockholders' Equity for the year ended December 31, 2016.
Both acquisitions were accounted for using the acquisition method of accounting. The purchase price and purchase price allocations for both
Sandbox and NBI acquisitions are preliminary and subject to customary post-closing adjustments and
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
changes in the fair value of assets and liabilities. The above estimated fair values of assets acquired and liabilities assumed are based on the information that
was available as of the reporting date. We believe that the information provides a reasonable basis for estimating the fair values of the acquired assets and
assumed liabilities, but the potential for measurement period adjustments exists based on our continuing review of matters related to the acquisitions. As a
result, our final purchase price allocations may be significantly different than those reflected in the tables above. We expect to complete the purchase price
allocations as soon as practicable, but no later than one year from the acquisition dates.
Combined Pro Forma Results
The results of NBI's and Sandbox’s operations have been included in the consolidated financial statements subsequent to the acquisition dates. The
following unaudited pro forma consolidated financial information reflects the results of operations as if the NBI Acquisition and Sandbox Acquisition had
occurred on January 1, 2015, after giving effect to certain purchase accounting adjustments. These adjustments mainly include incremental depreciation
expense related to the fair value adjustment of property, plant, equipment and mine development, amortization expense related to identifiable intangible assets
and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the
acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the
combined company (in thousands, except per share amounts):
Sales
Net income (loss)
Basic earnings per share
Diluted earnings per share
For the year ended December 31,
2016
2015
$
$
$
$
615,552 $
(45,161) $
(0.69) $
(0.69) $
753,287
43,163
0.81
0.81
NOTE E—ACCOUNTS RECEIVABLE
At December 31, 2016 and 2015, accounts receivable (in thousands) consisted of the following:
Trade receivables
Less: Allowance for doubtful accounts
Net trade receivables
Other receivables
Total accounts receivable
At December 31,
2016
2015
$
$
93,982 $
(7,042)
86,940
2,066
89,006 $
Changes in our allowance for doubtful accounts (in thousands) during the years ended December 31, 2016 and 2015 are as follows:
Balance at January 1,
Bad debt provision
Write-offs and recoveries
Balance at December 31,
Allowance for Doubtful Accounts
2016
2015
$
$
7,686 $
(1,232)
588
7,042 $
86
64,821
(7,686)
57,135
1,571
58,706
10,429
(290)
(2,453)
7,686
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F—INVENTORIES
At December 31, 2016 and 2015, inventories (in thousands) consisted of the following:
Supplies
Raw materials and work in process
Finished goods
Total inventories
At December 31,
2016
2015
18,824 $
25,161
34,724
78,709 $
18,029
18,113
28,862
65,004
$
$
NOTE G—PROPERTY, PLANT AND MINE DEVELOPMENT
At December 31, 2016 and 2015, property, plant and mine development (in thousands) consisted of the following:
Mining property and mine development
Asset retirement cost
Land
Land improvements
Buildings
Machinery and equipment
Furniture and fixtures
Construction-in-progress
At December 31,
2016
2015
$
414,434 $
8,062
35,052
42,738
52,178
450,881
2,566
43,790
1,049,701
(266,388)
783,313 $
222,439
9,889
30,322
37,791
51,280
360,817
1,917
56,130
770,585
(209,389)
561,196
Accumulated depletion, depreciation and amortization
Total property, plant and mine development, net
$
At December 31, 2016, the aggregate cost of the machinery and equipment acquired under capital lease was $4.7 million, reduced by accumulated
depreciation of $0.3 million. At December 31, 2015, we held no assets under a capital lease obligation.
During 2015, we wrote off $1.1 million of equipment due to discontinuation of certain industrial and specialty products. This amount is included in the
depreciation, depletion and amortization expense on our Income Statements. The amount of interest costs capitalized in property, plant and equipment was
$0.2 million, $0.5 million and $1.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE H—ACCRUED LIABILITIES
At December 31, 2016 and 2015, accrued liabilities (in thousands) consisted of the following:
Accrued salaries and wages
Accrued vacation liability
Current portion of liability for pension and post-retirement benefits
Accrued healthcare liability
Accrued property taxes and sales taxes
Other accrued liabilities
Total accrued liabilities
At December 31,
2016
2015
3,794 $
2,471
1,553
1,307
1,815
2,094
13,034 $
1,309
2,593
1,505
1,830
1,940
2,531
11,708
$
$
Other accrued liabilities consist of accrued transportation and related costs, customer rebates, royalties payable, and other items.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I—DEBT AND CAPITAL LEASES
At December 31, 2016 and 2015, debt (in thousands) consisted of the following:
Senior secured credit facility:
Revolver expiring July 23, 2018 (5.25% at December 31, 2016 and 5% at December 31, 2015)
$
— $
—
December 31, 2016
December 31, 2015
Term loan facility—final maturity July 23, 2020 (4% - 4.5% at December 31, 2016 and
December 31, 2015)
Less: Unamortized original issue discount
Less: Unamortized debt issuance cost
Note payable secured by royalty interest (includes $3,053 unamortized fair value premium)
Customer note payable
Total debt
Less: current portion
494,175
(1,318)
(4,482)
23,076
1,787
513,238
(4,821)
Total long-term portion of debt
$
508,417 $
499,275
(1,696)
(5,874)
—
—
491,705
(3,330)
488,375
Revolving Line-of-Credit
We have a $50 million the Revolver, with zero drawn and $4.0 million allocated for letters of credit as of December 31, 2016, leaving $46.0 million
available under the Revolver.
Debt Maturities
At December 31, 2016, contractual maturities of senior secured credit facility (in thousands) are as follows:
2017
2018
2019
2020
$
$
5,100
5,100
5,100
478,875
494,175
On July 23, 2013, we refinanced our then existing senior secured debt by amending our Term Loan and replacing our then existing revolving line-of-
credit. The Term Loan amendment refinanced our then existing senior debt by entering into a new $425 million senior secured credit facility, consisting of a
$375 million Term Loan and the $50 million Revolver that may also be used for swingline loans (up to $5 million) or letters of credit (up to $20 million). The
Term Loan amendment also, among other things, removed and amended certain financial and other covenants to provide additional operating flexibility, and
lowered interest rates on borrowed amounts. The existing revolving line-of-credit was terminated. The Term Loan will expire on July 23, 2020 and the
Revolver will expire on July 23, 2018. On December 5, 2014, we further increased our Term Loan by an additional $135 million to a total of approximately
$502 million in accordance with the incremental borrowing feature in our senior secured credit facility.
Our senior secured credit facility is secured by a pledge of substantially all of our assets, including accounts receivable, inventory, property, plant and
mine development, and a pledge of the equity interests in certain of our subsidiaries. The facility contains covenants that, among other things, govern our
ability to create, incur or assume indebtedness and liens, to make acquisitions or investments, to sell assets and to pay dividends. This includes a restriction on
the ability of our operating subsidiaries to make distributions to us to the extent that the incurrence ratio (as defined in the senior secured credit facility) after
giving effect to the distribution is 3:1 or greater. The facility also requires us to maintain a consolidated total net leverage ratio of no more than 3.75:1.00 as of
the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 25% of the Revolver commitment. As
of December 31, 2016 and December 31, 2015, we are in compliance with all covenants in accordance with our senior secured credit facility.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Payable Secured by Royalty Interest
In conjunction with the NBI Acquisition, we assumed a note payable secured by a royalty interest. The monthly royalty payment is calculated based
on future tonnages and sales related to the sand shipped from our Tyler, Texas facility. The note payable is due by June 30, 2032. The note does not provide a
stated interest rate. The minimum payments (in thousands) for the next five years required by the note are as follows:
2017
2018
2019
2020
2021
$
1,750
1,750
1,750
1,750
1,750
Under this agreement, once a certain number of tons have been shipped from the Tyler facility, the minimum payments will decrease to $0.5 million
per year, subject to proration in the period this threshold is met.
The note payable fair value was estimated to be $22.5 million on the acquisition date. The estimate was made using a discounted cash flow model
which calculated the present value of projected future cash payments required under the agreement using a discount rate of 14%. As of December 31, 2016,
the note payable has a balance of $23.1 million. The $0.6 million increase in this note payable amount is due to payment-in-kind interest.
Customer Note Payable
In connection with the NBI Acquisition, we assumed a customer note payable that was entered into by NBI. NBI entered into an amendment to a
supply agreement effective January 1, 2016. Terms of the amended agreement call for repayment of $2.5 million at 0% interest, in equal monthly payments
beginning January 1, 2016 for 60 months, or $0.5 million per year. Additionally, the principal of this note payable can be reduced via future product load
credit. We discounted the required future cash payments and projected product load credit using an effective interest rate of 3.5% and recorded the note
payable at $1.9 million on the acquisition date.
Capital Leases
We enter into financing arrangements from time to time to purchase machinery and equipment utilized in operations. At December 31, 2016,
scheduled future minimum lease payments under capital lease obligations (in thousands) are as follows:
2017
2018
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Less: current portion of capital lease obligations
Non-current portion of capital lease obligations
NOTE J—DEFERRED REVENUE
$
$
2,315
722
3,037
(83)
2,954
(2,237)
717
On July 3, 2014, we received an advance of $100.0 million from a customer under a supply agreement which gives the customer the right to
purchase certain products for a fixed price at certain volumes. The customer has an unsecured promissory note related to this deposit, which has been
recorded as deferred revenue in the Balance Sheets. The unused portion of the deposit has a stated interest rate of 4.9% compounded quarterly. The deposit
obligation and related interest are reduced as shipments occur with a portion of the sales price being received in cash and a smaller non-cash portion reducing
first any accrued interest and then, to the extent available, any outstanding deposit. We can, through December 31, 2019, repay the unused deposit obligation
at any time without penalty.
NOTE K—FAIR VALUE ACCOUNTING
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2016 and 2015 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 based on their effective interest
rates compared to current market rates.
Derivative Instruments
The estimated fair value of our derivative assets (interest rate caps) are recorded at each reporting period and are based upon widely accepted valuation
techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We also
incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk as well as that of the respective counterparty in the fair value
measurements.
Although we have determined that the majority of the inputs used to value our derivatives fall with Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default of
ourselves and our counterparties. However, as of December 31, 2016, we have assessed that the impact of the credit valuation adjustments on the overall
valuation of our derivative positions is not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2
of the fair value hierarchy.
In accordance with the fair value hierarchy, the following table presents the fair value as of December 31, 2016 and 2015, respectively, of those assets
(in thousands) that we measure at fair value on a recurring basis:
December 31, 2016
December 31, 2015
Level 1
Level 2
Total
Level 1
Level 2
Total
Short-term investments
Interest rate derivatives
Net asset
$
$
— $
—
— $
— $
72
72 $
1 $
—
1 $
21,848 $
21,849
—
21,848 $
—
21,849
— $
72
72 $
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L—SHORT-TERM INVESTMENTS
At December 31, 2015, we segregated funds into designated accounts with investment brokers who managed our short-term investment portfolio. Those
funds were held on an available-for-sale basis and are therefore reported at fair value on the balance sheet. In 2016, we liquidated our short-term investments
and have no short-term investments as of December 31, 2016. The following table summarizes our available-for-sale short-term investments (in thousands) as
of December 31, 2015:
December 31, 2015
Money market mutual funds
Fixed income securities:
Certificates of deposit
Commercial paper
Corporate notes and bonds
Government agencies
U.S. Treasuries
Variable rate demand obligations
Total available-for-sale investments
NOTE M—DERIVATIVE INSTRUMENTS
Cash Flow Hedges of Interest Rate Risk
Aggregate
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
1 $
— $
— $
1
10,535
5,689
2,006
3,598
—
—
—
19
—
4
—
—
(3)
—
—
—
—
—
10,532
5,708
2,006
3,602
—
—
$
21,829 $
23 $
(3) $
21,849
We enter into interest rate cap agreements in connection with the Term Loan to add stability to interest expense and to manage our exposure to interest
rate movements. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above
the strike rate on the contract in exchange for an upfront premium.
The following table summarizes the fair value of our derivative instruments (in thousands, except contract/notional amount). See Note K - Fair Value
Accounting for additional disclosures regarding the estimated fair values of our derivative instruments at December 31, 2016, and 2015.
Maturity
Date
Contract/Notional
Amount
Carrying
Amount
Fair
Value
Maturity
Date
Contract/Notional
Amount
Carrying
Amount
Fair
Value
December 31, 2016
December 31, 2015
Interest rate cap
agreement(1)
2019 $
249 million $
72 $
72
2016 $
252 million $
— $
—
(1) Agreements limit the LIBOR floating interest rate base to 4%.
We have designated these contracts as qualified cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and recognized in earnings in the same period or periods during which the hedged transaction affects
earnings. During the year ended December 31, 2016 and 2015, we had no ineffectiveness for such contracts.
The following table summarizes the effect of derivatives instruments (in thousands) on our income statements and our consolidated statements of
comprehensive income for the years ended December 31, 2016, 2015 and 2014.
Deferred losses from derivatives in OCI, beginning of period
Loss recognized in OCI from derivative instruments
Loss reclassified from Accumulated OCI
Deferred losses from derivatives in OCI, end of period
2016
2015
2014
(81) $
(32)
81
(32) $
(134) $
—
53
(81) $
(79)
(65)
10
(134)
$
$
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N—EQUITY-BASED COMPENSATION
In July 2011, we adopted the U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan (the “2011 Plan”), which was amended and restated in May
2015. The 2011 Plan provides for grants of stock options, restricted stock, performance share units and other incentive-based awards. We believe our 2011
Plan aligns the interests of our employees and directors with those of our common stockholders. At December 31, 2016, we have 4,437,767 shares of
common stock that may be issued under the 2011 Plan. We use a combination of treasury stock and new shares if necessary to satisfy option exercises or
vesting of restricted awards and performance share units.
Stock Options
The following table summarizes the status of and changes in our stock option grants during the year ended December 31, 2016:
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Weighted
Average
Exercise Price
Aggregate Intrinsic
Value (in
thousands)
Weighted
Average
Remaining
Contractual Term
in Years
24.61
—
14.76
24.81
27.99 $
23.71 $
27,332 7.00 years
19,712 6.33 years
Number of
Shares
1,307,067
—
(326,884)
(27,490)
952,693
597,799
The total intrinsic value of stock options exercised was $7.6 million, $0.4 million, and $10.9 million for the years ended December 31, 2016, 2015 and
2014 respectively. Cash received from options exercised in 2016 was $4.8 million. The actual tax benefit realized for the tax deductions from option exercises
totaled $2.9 million, $0.0 million, and $4.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
We recognized $3.0 million, $3.4 million, and $1.9 million of equity-based compensation expense related to these options during the years ended
December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $3.7 million of total unrecognized compensation expense related to
these options, which is expected to be recognized over a weighted-average period of approximately 1.5 years.
Restricted Stock and Restricted Stock Unit Awards
The following table summarizes the status of and changes in our unvested restricted stock awards during the year ended December 31, 2016:
Unvested, December 31, 2015
Granted
Vested
Forfeited
Unvested, December 31, 2016
Number of Shares
Grant Date Weighted
Average Fair Value
398,987 $
364,710
(180,419)
(25,562)
557,716 $
26.65
22.97
26.28
27.26
24.33
We recognized $5.7 million, $3.9 million, and $2.2 million of equity-based compensation expense related to these restricted stock awards during the
years ended December 31, 2016, 2015 and 2014 respectively. As of December 31, 2016, there was $9.5 million of total unrecognized compensation expense
related to these restricted stock awards, which is expected to be recognized over a period of 1.8 years.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance Share Unit Awards
The following table summarizes the status of and changes in our performance share unit awards during the year ended December 31, 2016:
Unvested, December 31, 2015
Granted
Vested
Forfeited
Unvested, December 31, 2016
Number of Shares
Grant Date Weighted
Average Fair Value
277,066 $
850,143
—
(163,596)
963,613 $
29.05
39.36
—
33.30
32.63
We recognized $3.3 million, ($3.4 million), and $3.4 million of compensation expense related to these performance share unit awards during the years
ended December 31, 2016, 2015 and 2014 respectively. As of December 31, 2016, there was $17.6 million of estimated total unrecognized compensation
expense related to these performance share unit awards, which is expected to be recognized over a period of 1.7 years.
NOTE O—COMMITMENTS AND CONTINGENCIES
Future Minimum Annual Commitments at December 31, 2016
Amounts in thousands
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total future lease and purchase commitments
Operating Leases
Operating Lease Minimum
Rental Payments
Minimum Purchase
Commitments
$
$
55,525 $
63,221
56,171
48,774
42,824
114,905
381,420 $
20,739
19,332
17,590
9,175
3,450
12,800
83,086
We are obligated under certain operating leases for railroad cars, office space, mining property, mining/processing equipment and transportation and
other equipment. Certain operating lease agreements include options to purchase the equipment for fair market value at the end of the original lease term. In
general, the above leases include renewal options and provide that we pay for all utilities, insurance, taxes and maintenance. Expense related to operating
leases and rental agreements for the years ended December 31, 2016, 2015 and 2014 totaled approximately $54.1 million, $48.2 million and $33.3 million,
respectively.
Minimum Purchase Commitments
We enter into service agreements with our transload service providers and transportation service providers. Some of these agreements require us to
purchase a minimum amount of services over a specific period of time. Any inability to meet these minimum contract requirements requires us to pay a
shortfall fee, which is based on the difference between the minimum amount contracted for and the actual amount purchased.
Other Commitments and Contingencies
Our operating subsidiary, U.S. Silica, has been named as a defendant in various product liability claims alleging silica exposure causing silicosis. U.S.
Silica was named as a defendant in two claims filed during the year ended December 31, 2016, no claims filed in 2015 and one claim filed in 2014. As of
December 31, 2016, there were 74 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
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certainty, in the opinion of management, it is not reasonably possible that the ultimate resolution of these matters will have a material adverse effect on our
financial position or results of operations that exceeds the accrual amounts.
For periods prior to 1986, U.S. Silica had numerous insurance policies and an indemnity from a former owner that covered silicosis claims. In the fourth
quarter of 2012, U.S. Silica settled all rights under the indemnity and its underlying insurance. The settlement was received during the 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 indemnity agreement
and an estimate of future recoveries under insurance in other assets on our consolidated balance sheets. As of both December 31, 2016 and 2015, other non-
current assets included $0.3 million for insurance for third-party products liability claims. As of December 31, 2016 and 2015, other long-term obligations
included $1.3 million and $1.5 million, respectively, in third-party products claims liability.
Additionally, during 2015, we received an unfavorable ruling in an arbitration proceeding as a result of exiting a toll manufacturing contract. The matter
was settled and the settlement amount of $6.5 million was paid on June 9, 2015, which was included in selling, general and administrative expense in our
Income Statement for the year ended December 31, 2015.
NOTE P—PENSION AND POST-RETIREMENT BENEFITS
We maintain a single-employer noncontributory defined benefit pension plan covering certain employees. There have been no new entrants to the plan
since May 2009 when the plan was frozen to all new employees. The plan provides benefits based on each covered employee’s years of qualifying service.
Our funding policy is to contribute amounts within the range of the minimum required and maximum deductible contributions for the plan consistent with a
goal of appropriate minimization of the unfunded projected benefit obligation. The pension plan uses a benefit level per year of service for covered hourly
employees and a final average pay method for covered salaried employees. The plan uses the projected unit credit cost method to determine the actuarial
valuation.
We employ a total rate of return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term
return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate
financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are
diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Investment risk is measured and monitored on an
ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies.
We employ a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical
relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility
generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market
assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and
rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.
In addition, we provide defined benefit post-retirement healthcare and life insurance benefits to some employees. Covered employees become eligible
for these benefits at retirement after meeting minimum age and service requirements. The projected future cost of providing post-retirement benefits, such as
healthcare and life insurance, is recognized as an expense as employees render services.
We maintain a Voluntary Employees’ Beneficiary Association trust that will be used to partially fund health care benefits for future retirees. Benefits are
funded to the extent contributions are tax deductible, which under current legislation is limited. In general, retiree health benefits are paid as covered expenses
are incurred.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension benefit cost (in thousands) consisted of the following for the years ended December 31, 2016, 2015 and 2014:
Service cost—benefits earned during the period
Interest cost
Expected return on plan assets
Net amortization and deferral
Net pension benefit costs
Years Ended December 31,
2016
2015
2014
1,078 $
1,295 $
4,067
(5,495)
1,592
4,813
(5,498)
2,665
1,242 $
3,275 $
$
$
Net post-retirement cost (in thousands) consisted of the following for the years ended December 31, 2016, 2015 and 2014:
Service cost—benefits earned during the period
Interest cost
Expected return on plan assets
Net amortization and deferral
Special termination benefit
Net post-retirement costs
$
$
Years Ended December 31,
2016
2015
2014
132 $
876
(1)
—
21
176 $
1,074
(1)
281
48
1,028 $
1,578 $
1,177
The changes in benefit obligations and plan assets (in thousands), as well as the funded status (in thousands) of our pension and post-retirement plans at
December 31, 2016 and 2015 are as follows:
Benefit obligation at January 1,
$
115,420 $
122,336 $
25,091 $
Pension Benefits
Post-retirement Benefits
2016
2015
2016
2015
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Amendments
Special termination benefits
Other
Benefit obligation at December 31,
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Benefits paid
Other
Fair value of plan assets at December 31,
Plan assets less than benefit obligations at December 31
recognized as liability for pension and other post-retirement
benefits
$
$
$
$
1,078
4,067
1,640
(6,517)
457
—
—
116,145 $
84,716 $
5,651
—
(6,517)
—
1,295
4,813
(7,492)
(6,106)
574
—
—
115,420 $
90,897 $
(2,100)
2,025
(6,106)
—
83,850 $
84,716 $
132
876
(802)
(1,332)
—
21
407
24,393 $
25,091
17 $
(3)
925
(1,332)
407
14 $
19
(2)
864
(1,288)
424
17
(32,295) $
(30,704) $
(24,379) $
(25,074)
The accumulated benefit obligation for the defined benefit pension plans, which excludes the assumption of future salary increases, totaled $116.0
million and $115.3 million at December 31, 2016 and 2015, respectively.
The amendments in 2015 and 2014 reflect plan changes including increases in the benefit multiplier for certain participants and allowing eligible
salaried and non-union hourly participants to have the option to receive a lump sum form of payment under certain conditions and specific benefit increases at
several plant facilities, respectively.
95
1,080
4,811
(5,146)
1,037
1,782
151
1,030
(4)
—
—
28,289
176
1,074
(3,631)
(1,288)
—
48
423
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also sponsor unfunded, nonqualified pension plans. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
these plans were $1.6 million, $1.6 million and $0.0 million at December 31, 2016 and $1.6 million, $1.6 million and $0.0 million at December 31, 2015.
Future estimated annual benefit payments (in thousands) for pension and post-retirement benefit obligations at December 31, 2016 are as follows:
2017
2018
2019
2020
2021
2022-2026
Benefits
Before
Medicare
Subsidy
Post-retirement
After
Medicare
Subsidy
Pension
$
6,824 $
1,570 $
7,050
7,201
7,343
7,419
38,158
1,544
1,521
1,598
1,676
8,627
1,429
1,402
1,379
1,452
1,528
7,839
Our best estimate of expected contributions to the pension and post-retirement medical benefit plans for the 2017 fiscal year are $2.1 million and $1.4
million, respectively.
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost (in thousands) during
the year ended December 31, 2016 are as follows:
Net actuarial loss
Prior service cost
Benefits
Pension
Post-retirement
Total
$
$
1,372 $
411
1,783 $
— $
—
— $
1,372
411
1,783
The total amounts in accumulated other comprehensive income related to net actuarial loss, net of tax, for both plans was $13.8 million and $14.1
million as of December 31, 2016 and 2015, respectively. The total amounts in accumulated other comprehensive income related to prior service cost, net of
tax, for both plans, was $1.8 million as of December 31, 2016 and 2015.
The following weighted-average assumptions were used to determine our obligations under the plans:
Discount rate
Long-term rate of compensation increase
Long-term rate of return on plan assets
Health care cost trend rate:
Pre-65 initial rate/ultimate rate
Pre-65 ultimate year
Post-65 initial rate/ultimate rate
Post-65 ultimate year
Pension Benefits
Post-retirement Benefits
2016
2015
2016
2015
4.2%
3.5%
7.0%
N/A
N/A
N/A
N/A
4.5%
3.5%
7.0%
N/A
N/A
N/A
N/A
4.2%
N/A
7.0%
4.5%
N/A
7.0%
7.3%/5.0%
7.8%/5.0%
—
8.5%/5.0%
2024/2025
—
9.0%/5.0%
2024/2025
The discount rate reflects the expected long-term rates of return with maturities comparable to payments for the plan obligations utilizing Aon Hewitt's
AA Only Above Medium Curve.
In 2016, we changed the method utilized to estimate the service cost and interest cost components of net periodic benefit costs for our defined benefit
pension and other post-retirement benefit plans. Historically, we estimated the service cost and interest cost components using a single weighted average
discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a spot rate approach in
the estimation of these components of benefit cost by applying the specific rates along the yield curve to the relevant projected cash flows, as we believe this
provides a better estimate
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of service and interest costs. We consider this a change in estimate and, accordingly, have accounted for it prospectively starting in 2016. This change does
not affect the measurement of our total benefit obligation.
Mortality tables used for pension benefits and post-retirement benefits plans are the following:
Healthy lives
Disabled lives
Pension Benefits and Post-retirement Benefits
2016
2015
RP-2014 mortality table, adjusted back to 2006 base
rates, with generational mortality improvements using
Scale MP-2016
RP-2014 mortality table, adjusted back to 2006
base rates, with generational mortality
improvements using Scale MP-2015
RP-2014 disabled retiree mortality table, adjusted back
to 2006 base rates, with generational mortality
improvements using Scale MP-2016
RP-2014 disabled retiree mortality table, adjusted
back to 2006 base rates, with generational mortality
improvements using Scale MP-2015
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in thousands):
Effect on total of service and interest cost
Effect on post-retirement benefit obligation
One-Percentage-Point
Increase
Decrease
$
144 $
2,827
(120)
(2,406)
The major investment categories and their relative percentage of the fair value of total plan assets as invested at December 31, 2016, and 2015 are as
follows:
Equity securities
Debt securities
Cash
Pension Benefits
Post-retirement Benefits
2016
2015
2016
2015
59.4%
38.3%
2.3%
97
58.1%
40.0%
1.9%
64.0 %
39.1 %
(3.1)%
52.5%
35.3%
12.2%
Table of Contents
U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the pension plan assets (in thousands) at December 31, 2016, by asset category, are as follows:
Cash and cash equivalents
Mutual funds:
Diversified emerging markets
Foreign large blend
Large-cap blend
Mid-cap blend
Real estate
Fixed income securities:
Corporate notes and bonds
Government agencies
U.S. Treasuries
Mortgage-backed securities
Asset-backed securities
Insurance policies
Net asset
Level 1
Level 2
Level 3
Total
$
— $
1,893 $
— $
1,893
7,700
12,621
16,687
8,674
4,070
21,357
301
7,495
—
—
—
—
—
—
—
—
—
—
—
2,022
983
—
—
—
—
—
—
—
—
—
—
—
47
7,700
12,621
16,687
8,674
4,070
21,357
301
7,495
2,022
983
47
$
78,905 $
4,898 $
47 $
83,850
The fair values of the pension plan assets (in thousands) at December 31, 2015, by asset category, are as follows:
Cash and cash equivalents
Mutual funds:
Diversified emerging markets
Foreign large blend
Large-cap blend
Mid-cap blend
Real estate
Fixed income securities:
Corporate notes and bonds
Government agencies
U.S. Treasuries
Mortgage-backed securities
Asset-backed securities
Insurance policies
Net asset
Level 1
Level 2
Level 3
Total
$
— $
1,635 $
— $
1,635
6,890
13,111
16,855
7,769
4,369
22,559
607
5,384
—
—
—
—
—
—
—
—
—
—
—
3,111
2,375
—
—
—
—
—
—
—
—
—
—
—
51
6,890
13,111
16,855
7,769
4,369
22,559
607
5,384
3,111
2,375
51
$
77,544 $
7,121 $
51 $
84,716
We contribute to three multiemployer defined benefit pension plans under the terms of collective-bargaining agreements for union-represented
employees. A multiemployer plan is subject to collective bargaining for employees of two or more unrelated companies. These plans allow multiple
employers to pool their pension resources and realize efficiencies associated with the daily administration of the plan. Multiemployer plans are generally
governed by a board of trustees composed of management and labor representatives and are funded through employer contributions. However, in most cases,
management is not directly represented.
The risks of participating in multiemployer plans differ from single employer plans as follows: 1) assets contributed to a multiemployer plan by one
employer may be used to provide benefits to employees of other participating employers, 2) if a participating employer stops contributing to the plan, the
unfunded obligations of the plan may be borne by the remaining participating employers, and 3) if we cease to have an obligation to contribute to one or more
of the multiemployer plans to which we contribute, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to
as a withdrawal liability.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of each multiemployer pension plan for which we participate is presented below:
Pension
Fund
EIN/ Pension
Plan No.
LIUNA 52-6074345/001
IUOE 36-6052390/001
CSSS(2) 36-6044243/001
Pension Protection Act
Zone Status(1)
2016
Red
Green
Red
2015
Red
Green
Red
FIP/RP Status
Pending/
Implemented
Yes
No
Yes
Company
Contributions
(in thousands)
2016
2015
2014
$
167 $
182 $
28
51
29
51
149
28
51
Surcharge
Imposed
Yes
No
NA
Expiration
Date of
CBA
5/31/2017
7/29/2018
NA
(1)
(2)
The Pension Protection Act of 2006 defines the zone status as follows: green—healthy, yellow—endangered, orange—seriously endangered and red
—critical.
In 2011, we withdrew from the Central States, Southeast and Southwest Areas Pension Plan. The withdrawal liability of $1.0 million will be paid in
monthly installments of $4,000 until 2031.
Our contributions to individual multiemployer pension funds did not exceed 5% of the fund’s total contributions in any of the three years ended
December 31, 2016. Additionally, our contributions to multiemployer post-retirement benefit plans were immaterial for all periods presented in the
accompanying consolidated financial statements.
We also sponsor a defined contribution plan covering certain employees. We contribute to the plan in two ways. For certain employees not covered by
the defined benefit plan, we make a contribution equal to 4% of their salary. We also contribute an employee match of 25 cents, for each dollar contributed by
an employee, up to 8% of their earnings. For certain employees, we make a profit sharing match up to 25 cents, based on financial performance, for each
dollar contributed up to 8% of their earnings. Finally, for some employees, we make a catch-up match of 25 cents for each dollar of catch-up contributions.
Contributions were $2.4 million, $2.8 million and $2.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE Q—INCOME TAXES
We evaluate our deferred tax assets periodically to determine if valuation allowances are required. Ultimately, the realization of deferred tax assets is
dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. To
this end, management considers the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected
future taxable income. Based on these considerations, and the carry-forward availability of a portion of the deferred tax assets, management believes it is
more likely than not that we will realize the benefit of the deferred tax assets.
The expense or benefit for income taxes (in thousands) consisted of the following for the years ended December 31, 2016, 2015 and 2014:
Current:
Federal
State
Deferred:
Federal
State
Income tax benefit (expense)
Years Ended December 31,
2016
2015
2014
$
$
$
$
60 $
(274)
(214) $
32,944
3,959
36,903 $
36,689 $
(170) $
1,448
1,278 $
7,439
3,034
10,473 $
11,751 $
(34,790)
(4,835)
(39,625)
(308)
2,750
2,442
(37,183)
Deferred tax assets and liabilities are recognized for the estimated future tax effects, based on enacted tax laws, of temporary differences between the
values of assets and liabilities recorded for financial reporting and for tax purposes and of net operating loss and other carry forwards.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of the types of temporary differences and carry forwards that gave rise to deferred tax assets and liabilities (in thousands) at
December 31, 2016 and 2015 consisted of the following:
Gross deferred tax assets:
Net operating loss carry forward and state tax credits
Pension and post-retirement benefit costs
Alternative minimum tax credit carry forward
Property, plant and equipment
Accrued expenses
Inventories
Third-party products liability
Stock-based compensation expense
Note payable
Other
Total deferred tax assets
Gross deferred tax liabilities:
Land and mineral property basis difference
Fixed assets and depreciation
Intangibles
Other
Total deferred tax liabilities
Net deferred tax liabilities
At December 31,
2016
2015
65,022 $
22,920
19,431
6,112
6,752
4,362
511
5,576
4,009
5,458
39,280
22,577
19,049
6,657
3,765
6,425
568
3,365
—
5,373
140,153 $
107,059
(126,315) $
(61,531)
(2,260)
(122)
(190,228) $
(50,075) $
(63,488)
(54,913)
(8,049)
(122)
(126,572)
(19,513)
$
$
$
$
$
We have federal net operating loss carry forwards of approximately $170.4 million at December 31, 2016. The losses will expire in years 2027 through
2036. Approximately $69.0 million of the losses are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully
realized.
At December 31, 2016 and 2015, we have an alternative minimum tax credit carry forward of approximately $19.4 million and $19.0 million,
respectively. The credit carry forward may be carried forward indefinitely to offset any excess of regular tax liability over alternative minimum tax liability
subject to certain limitations.
At the end of each reporting period as presented, there were no material amounts of interest and penalties recognized in the statement of operations or
balance sheets. We have no material unrecognized tax benefits or any known material tax contingencies at December 31, 2016 or December 31, 2015 and do
not expect this to change significantly within the next twelve months. Tax returns filed with the IRS for the years 2013 through 2015 along with tax returns
filed with numerous state entities remain subject to examination.
The income tax expense or benefit (in thousands) differed from the amount that would be provided by applying the U.S. federal statutory rate for the
years ended December 31, 2016, 2015 and 2014 due to the following:
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax benefit (expense) computed at U.S. federal statutory rate
$
27,211 $
(41) $
(55,553)
Years Ended December 31,
2016
2015
2014
Decrease (increase) resulting from:
Statutory depletion
Prior year tax return reconciliation
State income taxes, net of federal benefit
Domestic production deduction
Equity compensation
Other, net
Income tax benefit (expense)
4,734
435
2,369
—
2,003
(63)
$
36,689 $
8,918
393
1,370
—
—
1,111
11,751 $
15,548
1,018
(3,416)
3,911
—
1,309
(37,183)
The largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The deduction
for statutory depletion does not necessarily change proportionately to changes in income before income taxes.
NOTE R—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 December 31, 2016, Travelers had $10.5 million in bonds outstanding for us.
The majority of these bonds ($10.1 million) relate to reclamation requirements issued by various governmental authorities. Reclamation bonds remain
outstanding until the mining area is reclaimed and the authority issues a formal release. The remaining bonds relate to such indefinite purposes as licenses,
permits, and tax collection.
NOTE S—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 Note B - Summary of Significant
Accounting Policies.
In the Oil & Gas Proppants segment, we serve the oil and gas recovery market providing fracturing sand, or “frac sand,” which is pumped down oil and
natural gas wells to prop open rock fissures and increase the flow rate of natural gas and oil from the wells.
The Industrial & Specialty Products segment consists of over 215 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.
101
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents sales and segment contribution margin (in thousands) for the reporting segments and other operating results not allocated
to the reported segments for the years ended December 31, 2016, 2015 and 2014:
Sales:
Oil & Gas Proppants
Industrial & Specialty Products
Total sales
Segment contribution margin:
Oil & Gas Proppants
Industrial & Specialty Products
Total segment contribution margin
Operating activities excluded from segment cost of goods sold
Selling, general and administrative
Depreciation, depletion and amortization
Interest expense
Other income, net, including interest income
Income tax benefit (expense)
Net income (loss)
Years Ended December 31,
2016
2015
2014
362,550 $
197,075
559,625 $
11,445 $
78,988
90,433 $
(8,103)
(67,727)
(68,134)
(27,972)
3,758
36,689
430,435 $
212,554
642,989 $
88,928 $
70,137
159,065 $
(11,142)
(62,777)
(58,474)
(27,283)
728
11,751
(41,056) $
11,868 $
662,770
213,971
876,741
256,137
61,102
317,239
(7,082)
(88,971)
(45,019)
(18,202)
758
(37,183)
121,540
$
$
$
$
$
$
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 $241.0 million has been allocated to these segments
with $220.3 million assigned to Oil & Gas Proppants and $20.7 million to Industrial & Specialty Products.
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T—UNAUDITED SUPPLEMENTARY DATA
The following table sets forth our unaudited quarterly consolidated statements of operations (in thousands, except per share data) for each of the four
quarters in the years ended December 31, 2016 and 2015. This unaudited quarterly information has been prepared on the same basis as our annual audited
financial statements and includes all adjustments, consisting only of normal recurring adjustments that are necessary to present fairly the financial information
for the fiscal quarters presented. The income tax benefit amounts for 2016 first quarter and second quarter include the impacts from the early adoption of
ASU 2016-09 discussed in Note B - Summary of Significant Accounting Policies.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2016:
Sales
$
122,510 $
116,994 $
137,748 $
(Unaudited)
Cost of goods sold (excluding depreciation, depletion and amortization)
106,751
102,707
119,426
Operating expenses
Selling, general and administrative
Depreciation, depletion and amortization
Operating loss
Other income (expense)
Interest expense
Other income, net, including interest income
Loss before income taxes
Income tax benefit
Net loss
Loss per share, basic
Loss per share, diluted
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
Dividends declared per share
15,503
14,556
14,585
15,209
18,472
17,175
$
30,059 $
29,794 $
35,647 $
(14,300)
(15,507)
(17,325)
(6,643)
1,790
(6,647)
608
(6,684)
493
(4,853) $
(6,039) $
(6,191) $
(19,153)
(21,546)
8,150
9,774
(23,516)
12,177
(11,003) $
(11,772) $
(11,339) $
(0.20) $
(0.20) $
54,470
54,470
(0.19) $
(0.19) $
63,417
63,417
(0.17) $
(0.17) $
66,676
66,676
0.06 $
0.06 $
0.06 $
$
$
$
$
$
182,373
148,411
19,167
21,194
40,361
(6,399)
(7,998)
867
(7,131)
(13,530)
6,588
(6,942)
(0.09)
(0.09)
75,539
75,539
0.06
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2015:
Sales
$
203,958 $
147,511 $
155,408 $
(Unaudited)
Cost of goods sold (excluding depreciation, depletion and amortization)
138,653
117,200
122,599
Operating expenses
Selling, general and administrative
Depreciation, depletion and amortization
Operating income (loss)
Other income (expense)
Interest expense
Other income (loss), net, including interest income
Income before income taxes
Income tax benefit (expense)
Net income (loss)
Earnings (loss) per share, basic
Earnings (loss) per share, diluted
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
Dividends declared per share
136,112
116,614
15,682
16,378
32,060
26,961
13,243
6,575
13,695
13,559
15,158
$
40,204 $
20,270 $
28,717 $
25,101
10,041
4,092
(12,562)
(6,836)
11
(6,928)
498
(6,684)
309
(6,825) $
(6,430) $
(6,375) $
18,276
(3,453)
3,611
6,342
(2,283)
4,695
(6,835)
(90)
(6,925)
(19,487)
4,167
14,823 $
9,953 $
2,412 $
(15,320)
0.28 $
0.28 $
53,416
53,869
0.19 $
0.18 $
53,303
53,857
0.05 $
0.04 $
53,321
53,742
0.13 $
0.13 $
0.13 $
(0.29)
(0.29)
53,323
53,323
0.06
$
$
$
$
$
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE U—PARENT COMPANY FINANCIALS
U.S. SILICA HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31,
2016
2015
(in thousands)
ASSETS
$
$
534,378 $
—
534,378
854,860
1,389,238 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Assets:
Cash and cash equivalents
Short-term investments
Total current assets
Investment in subsidiaries
Total assets
Current Liabilities:
Accrued expenses and other current liabilities
$
461 $
Dividends payable
Due to affiliates
Total current liabilities
Deferred income taxes, net
Total liabilities
Stockholders’ Equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
5,222
110,265
115,948
—
115,948
—
811
1,129,051
163,173
(3,869)
(15,876)
1,273,290
1,389,238 $
58,579
21,849
80,428
417,462
497,890
107
3,453
110,159
113,719
4
113,723
—
539
194,670
220,974
(15,845)
(16,171)
384,167
497,890
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. SILICA HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Revenue
Cost of revenue
Operating expenses
Selling, general and administrative
Other
Operating loss
Other income (expense)
Interest income
Early extinguishment of debt
Other income, net, including interest income
Income before income taxes and equity in net earnings of subsidiaries
Income tax benefit (expense)
Income before equity in net earnings of subsidiaries
Equity in earnings of subsidiaries, net of tax
Net income (loss)
Other comprehensive income (loss), net of deferred income taxes:
Unrealized gain (loss) on investments (net of tax of ($4), $29, and ($8) for 2016, 2015,
and 2014, respectively)
Unrealized loss on derivatives, (net of tax of $29, $34 and ($32) for 2016, 2015 and
2014, respectively)
Pension and post-retirement liability (net of tax of $152, $2,469, and ($9,678) for 2016,
2015 and 2014, respectively)
Other comprehensive income (loss), net of deferred income taxes
Year Ended December 31,
2016
2015
2014
$
(in thousands, except per share amounts)
— $
— $
—
184
10
194
(194)
1,046
—
—
1,046
852
(344)
508
—
185
19
204
(204)
262
—
1
263
59
(24)
35
—
—
184
—
184
(184)
278
—
—
278
94
(38)
56
(41,564)
(41,056)
11,833
11,868
121,484
121,540
(6)
49
252
295
47
53
3,547
3,647
(14)
(55)
(15,732)
(15,801)
105,739
Comprehensive income (loss) attributable to U.S. Silica Holdings, Inc.
$
(40,761) $
15,515 $
105
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. SILICA HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Additional
Retained
Other
Total
Par
Value
Treasury
Stock
Paid-In
Capital
Earnings-
Comprehensive
Stockholders'
Present
Income (Loss)
Equity
Accumulated
$
534 $
— $
174,799
$ 137,978 $
(4,017) $
Balance at January 1, 2014
Net income
Unrealized loss on derivatives
Unrealized loss on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.500 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Excess tax benefit from equity compensation
Proceeds from options exercised
Shares withheld for employee taxes related to
vested restricted stock and stock units
Repurchase of common stock
Balance at December 31, 2014
Net income
Unrealized gain on derivatives
Unrealized gain on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.438 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Proceeds from options exercised
Shares withheld for employee taxes related to
vested restricted stock and stock units
Repurchase of common stock
Balance at December 31, 2015
Net loss
Issuance of common stock (stock offerings net of issuance costs
of $25,732)
Unrealized gain on derivatives
Unrealized loss on short-term investments
Pension and post-retirement liability
Cash dividend declared ($0.25 per share)
Common stock-based compensation plans activity:
Equity-based compensation
Excess tax benefit from equity-based compensation
Proceeds from options exercised
Issuance of restricted stock
Shares withheld for employee taxes related to
—
—
— —
—
—
121,540
—
—
—
(26,967)
—
—
—
—
—
—
—
4
1
—
539
—
—
—
—
—
—
—
—
—
—
—
—
—
—
572
(615)
(499)
(542)
—
—
—
—
—
—
744
—
—
(792)
(15,255)
7,487
3,813
4,987
—
—
191,086
—
—
—
—
—
3,857
(271)
(2)
—
539
(15,845)
194,670
—
272
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,465
1,437
—
931,016
—
—
—
—
12,107
—
(3,640)
(1,437)
—
—
—
—
—
232,551
11,868
—
—
—
(23,445)
—
—
—
—
220,974
(41,056)
—
—
—
—
(16,893)
—
148
—
—
—
(55)
(14)
(15,732)
—
—
—
—
—
—
(19,818)
—
53
47
3,547
—
—
—
—
—
(16,171)
—
—
49
(6)
252
—
—
—
—
—
—
309,294
121,540
(55)
(14)
(15,732)
(26,967)
7,487
3,813
5,563
(614)
(499)
403,816
11,868
53
47
3,547
(23,445)
3,857
473
(794)
(15,255)
384,167
(41,056)
931,288
49
(6)
252
(16,893)
12,107
148
4,825
—
(1,591)
vested restricted stock and stock units
—
2,074
(3,665)
—
Balance at December 31, 2016
$
811 $ (3,869) $ 1,129,051
$ 163,173 $
(15,876) $
1,273,290
106
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. SILICA HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Undistributed (Income) loss from equity method investment, net
Other
Changes in assets and liabilities, net of effects of acquisitions:
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Investing activities:
Proceeds from sales and maturities of short-term investments
Investment in subsidiary
Net cash provided by (used in) investing activities
Financing activities:
Dividends paid
Repurchase of common stock
Proceeds from options exercised
Tax payments related to shares withheld for vested restricted stock and stock units
Issuance of common stock (secondary offering)
Issuance of treasury stock
Costs of common stock issuance
Net financing activities with subsidiaries
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Non-cash financing activities:
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest
Non-cash transactions
Common stock issued for business acquisitions
Year Ended December 31,
2016
2015
2014
(in thousands)
$
(41,056) $
11,868 $
121,540
41,564
(30)
(11,833)
(195)
(121,484)
(213)
353
831
21,872
(188,177)
(166,305)
(15,125)
—
4,603
(1,590)
678,791
221
(25,733)
106
641,273
475,799
58,579
29
(131)
53,568
—
53,568
(26,797)
(15,255)
473
(794)
—
—
—
223
(42,150)
11,287
47,292
534,378 $
58,579 $
36
(121)
—
—
—
(26,871)
(499)
5,563
(614)
—
—
—
211
(22,210)
(22,331)
69,623
47,292
(1,046) $
(263) $
(278)
278,229 $
— $
—
$
$
$
Notes to Condensed Financial Statements of Registrant (Parent Company Only)
These condensed parent company only financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X,
because the restricted net assets of the subsidiaries of U.S. Silica Holdings, Inc. (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25% of the
consolidated net assets of the Company. The ability of the Company's operating subsidiaries to pay dividends may be restricted due to the terms of the
Company's senior credit facility, as discussed in Note I - Debt and Capital Leases to the audited consolidated financial statements.
107
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U.S. SILICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes
to the consolidated financial statements; the only exceptions are that (a) the parent company accounts for its subsidiaries using the equity method of
accounting, (b) taxes are allocated to the parent from the subsidiary using the separate return method, and (c) intercompany loans are not eliminated. In the
parent company financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the
date of acquisition. These condensed parent company financial statements should be read in conjunction with the Company's consolidated financial
statements and related notes thereto included elsewhere in this report.
No cash dividends were paid to the parent by its consolidated entities for the years presented in the condensed financial statements.
NOTE V—SUBSEQUENT EVENTS
On January 5, 2017, we paid a cash dividend of $0.0625 per share to common stockholders of record on December 15, 2016, as had been declared by
our Board of Directors on November 7, 2016.
On February 16, 2017, our Board of Directors declared a quarterly cash dividend of $0.0625 per share to common stockholders of record at the close of
business on March 15, 2017, payable on April 5, 2017.
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute,
assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, under the direction of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).
Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the framework in 2013 Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As noted in the COSO
framework, an internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance to management and
the Board of Directors regarding achievement of an entity's financial reporting objectives. We have excluded the internal control over financial reporting of
NBI and Sandbox from the evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016. Both entities were
acquired in August 2016. This decision is based upon the significance of NBI and Sandbox and the timing of integration efforts underway to transition NBI's
and Sandbox's processes, information technology systems and other components of internal control over financial reporting to our internal control structure.
NBI's total assets represented 16% of the related consolidated total assets as of December 31, 2016. Sandbox's total assets and revenues represented 13% and
6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016. We have expanded our
consolidation and disclosure controls and procedures to include NBI and Sandbox, and we continue to assess the current internal control over financial
reporting. Based upon the evaluation under this framework, management concluded that our internal control over financial reporting was effective as of
December 31, 2016.
Our independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting as of December 31,
2016, as stated in their report below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d)
of the Exchange Act during the quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting, except as noted above.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
U.S. Silica Holdings, Inc.
We have audited the internal control over financial reporting of U.S. Silica Holdings, Inc. a Delaware corporation and subsidiaries (the “Company”) as of
December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. Our audit
of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Tyler Silica
Company (“NBI”), wholly-owned subsidiary, whose financial statements reflect total assets constituting 16 percent and of Sandbox Enterprises, LLC
(“Sandbox”), wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 13 and 6 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2016. As indicated in Management’s Report, NBI and Sandbox were
acquired during 2016. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over
financial reporting of NBI and Sandbox.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements of the Company as of and for the year ended December 31, 2016, and our report dated February 23, 2017 expressed an unqualified opinion on
those financial statements.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
February 23, 2017
110
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ITEM 9B.
OTHER INFORMATION
Not applicable.
111
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to directors and corporate governance will be set forth under “Proposal No. 1: Election of Directors”
in the 2017 Proxy Statement and incorporated herein by reference.
The information required by this item with respect to executive officers of U.S. Silica, pursuant to instruction 3 of paragraph (b) of Item 401 of
Regulation S-K, is set forth following Part I, Item 1 of this Annual Report on Form 10-K under “Executive Officers of the Registrant”.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be set forth under “Executive and Director Compensation” and “Report of Compensation Committee” in the
2017 Proxy Statement and incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Item 403 of Regulation S-K regarding security ownership of certain beneficial owners and management will be set forth
under “Stock Ownership” in the 2017 Proxy Statement and incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans is furnished
as a separate item captioned “Securities Authorized for Issuance Under Equity Compensation Plans” included in Part II, Item 5 of this Annual Report on
Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth under “Transactions with Related Persons” and “Determination of Independence” in the 2017
Proxy Statement and incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth under “Ratification of Grant Thornton LLP as Independent Registered Public Accounting Firm
for 2017” in the 2017 Proxy Statement and incorporated herein by reference.
112
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
a)
Consolidated Financial Statements
PART IV.
The Consolidated Financial Statements, together with the report thereon of Grant Thornton LLP, dated February 23, 2017, are included as part of
Item 8, “Financial Statements and Supplementary Data.”
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements
Page
67
68
69
70
71
72
73
b)
Financial Statement Schedules
Schedule I - Condensed Financial Information of Parent (U.S. Silica Holdings, Inc.) at December 31, 2016 and 2015 and for the years ended December
31 2016, 2015 and 2014 is included in Note U to the Consolidated Financial Statements.
c)
Exhibits required to be filed by Item 601 of Regulation S-K
The information called for by this Item is incorporated herein by reference from the Exhibit Index included in this Annual Report.
113
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ITEM 16.
FORM 10-K SUMMARY
Not applicable.
114
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 23rd day of February, 2017.
U.S. Silica Holdings, Inc.
/s/ BRYAN A. SHINN
Name: Bryan A. Shinn
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Name
/S/ BRYAN A. SHINN
Bryan A. Shinn
/S/ DONALD A. MERRIL
Donald A. Merril
/S/ CHARLES SHAVER
Charles Shaver
/S/ PETER BERNARD
Peter Bernard
/S/ WILLIAM J. KACAL
William J. Kacal
/S/ J. MICHAEL STICE
J. Michael Stice
Capacity
President, Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
February 23, 2017
February 23, 2017
Chairman of the Board
February 23, 2017
Director
Director
Director
S-1
February 23, 2017
February 23, 2017
February 23, 2017
Table of Contents
EXHIBIT INDEX
Exhibit
Number
2.1#
Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
Agreement and Plan of Merger, dated as of July 15, 2016, by and
among U.S. Silica Holdings, Inc., New Birmingham Merger Corp., NBI
Merger Subsidiary II, Inc., New Birmingham, Inc. and each of David
Durrett and Erik Dall, as representatives of the sellers and
optionholders.
2.2# Membership Unit Purchase Agreement, dated as of August 1, 2016, by
and among U.S. Silica Company, U.S. Silica Holdings, Inc., Sandbox
Enterprises, LLC, the members of Sandbox Enterprises, LLC and
Sandy Creek Capital, LLC, as representative of the sellers.
10-Q
001-35416
2.1
November 4, 2016
Second Amended and Restated Certificate of Incorporation of U.S.
Silica Holdings, Inc., effective January 31, 2012.
Second Amended and Restated Bylaws of U.S. Silica Holdings, Inc.,
effective January 31, 2012.
Certificate of Change of Registered Agent and/or Registered Office.
10-Q
001-35416
8-K
8-K
8-K
001-35416
001-35416
001-35416
Specimen Common Stock Certificate.
S-1/A
333-175636
2.2
3.1
3.2
3.1
4.1
November 4, 2016
February 6, 2012
February 6, 2012
May 11, 2015
December 7, 2011
Registration Rights Agreement, dated as of August 16, 2016, by and
among U.S. Silica Holdings, Inc. and each person identified on the
signature pages thereto.
Registration Rights Agreement, dated as of August 22, 2016, by and
among U.S. Silica Holdings, Inc. and each person identified on the
signature pages thereto.
Amendment No. 3 to Second Amended and Restated Credit Agreement,
dated as of July 23, 2013, by and among USS Holdings, Inc. as Parent,
U.S. Silica Company as Company, the Subsidiary Guarantors listed
therein as Subsidiary Guarantors, the Lenders listed therein as Lenders
and BNP Paribas as Administrative Agent.
10.2+
Employment Agreement, dated as of March 22, 2012, by and between
U.S. Silica Company and Bryan A. Shinn.
10.3+ Amended and Restated 2011 Incentive Compensation Plan.
S-3ASR
333-213870
4.1
September 29, 2016
S-3ASR
333-213870
4.2
September 29, 2016
8-K
8-K
8-K
001-35416
10.10
July 29, 2013
001-35416
10.11
March 22, 2012
001-35416
10.1
May 11, 2015
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10
Form of Incentive Stock Option Agreement.
S-1/A
333-175636
10.15
August 29, 2011
Form of Restricted Stock Agreement.
Form of Nonqualified Stock Option Agreement.
Form of Stock Appreciation Rights Agreement.
Form of Restricted Stock Unit Agreement.
Form of Performance Share Unit Agreement.
Form of Indemnification Agreement.
S-1/A
S-1/A
S-1/A
S-1/A
10-K
S-1/A
333-175636
10.16
August 29, 2011
333-175636
10.17
August 29, 2011
333-175636
10.18
August 29, 2011
333-175636
10.19
August 29, 2011
001-35416
10.12
February 26, 2014
333-175636
10.20
December 29, 2011
10.11+ Letter Agreement, dated as of December 27, 2011, by and between
William J. Kacal and U.S. Silica Holdings, Inc.
S-1/A
333-175636
10.24
December 29, 2011
10.12+ Letter Agreement, dated April 27, 2012, by and between Peter Bernard
and U.S. Silica Holdings, Inc.
10.13+ Letter Agreement, dated October 8, 2013, by and between J. Michael
Stice and U.S. Silica Holdings, Inc.
10.14+ Omnibus Amendment dated February 18, 2016 to Award Agreements.
8-K
8-K
001-35416
10.10
May 1, 2012
001-35416
10.10
October 11, 2013
8-K
001-35416
10.3
February 23, 2016
E-1
8-K
8-K
8-K
10-K
8-K
8-K
001-35416
10.10
July 30, 2014
001-35416
10.2
July 30, 2014
001-35416
001-35416
10.1
10.2
December 11, 2014
February 25, 2015
001-35416
10.1
February 23, 2016
001-35416
10.2
February 23, 2016
10-K
001-35416
10.4
April 27, 2016
Table of Contents
10.15+ Amendment No. 1 dated July 25, 2014 to Restricted Stock Agreement
dated November 6, 2012 with Bryan A. Shinn.
10.16+ Omnibus Amendment dated July 25, 2014 to Award Agreements with
Bryan A. Shinn.
10.17+ Joinder Agreement to Second Amended and Restated Credit
Agreement, dated as of December 5, 2014.
10.18+ Form of Nonqualified Stock Option Agreement.
10.19+ Change in Control Severance Plan of U.S. Silica Holdings, Inc.
10.20+ Amendment dated February 18, 2016 to Employment Agreement by
and between U.S. Silica Holdings, Inc. and Bryan Shinn.
10.21+ Form of Performance Share Unit Agreement (TSR metric).
10.22*+ Omnibus Amendment dated November 3, 2016 to Award Agreements.
10.23*+ Amendment No. 1 dated November 3, 2016 to Amended and Restated
2011 Incentive Compensation Plan
21.1*
List of subsidiaries of U.S. Silica Holdings, Inc.
23.1* Consent of Independent Registered Public Accounting Firm.
31.1* Rule 13a-14(a)/15(d)-14(a) Certification by Bryan A. Shinn, Chief
Executive Officer.
31.2* Rule 13a-14(a)/15(d)-14(a) Certification by Donald A. Merril, Chief
Financial Officer.
32.1*
32.2*
Section 1350 Certification by Bryan A. Shinn, Chief Executive Officer.
Section 1350 Certification by Donald A. Merril, Chief Financial
Officer.
95.1* Mine Safety Disclosure
99.1* Consent of PropTester, Inc.
101*
101.INS XBRL Instance
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.LAB XBRL Taxonomy Extension Labels
101.PRE XBRL Taxonomy Extension Presentation
101.DEF XBRL Taxonomy Extension Definition
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish the omitted schedules to the Securities and Exchange
Commission upon request by the Commission.
#
+
*
Management contract or compensatory plan/arrangement
Filed herewith
We will furnish any of our shareowners a copy of any of the above Exhibits not included herein upon the written request of such shareowner and the payment
to U.S. Silica Holdings, Inc. of the reasonable expenses incurred in furnishing such copy or copies.
E-2
U.S. SILICA HOLDINGS, INC.
2011 INCENTIVE COMPENSATION PLAN
OMNIBUS AMENDMENT TO AWARD AGREEMENTS
November 3, 2016
[NAME]
[TITLE]
Re: Withholding of Shares to Cover Tax
Dear [NAME]:
Reference is hereby made to the following equity award agreements previously entered into by and between you and U.S.
Silica Holdings, Inc. (the “Company”) under the Company’s Amended and Restated 2011 Incentive Compensation Plan (the
“Plan”), as amended from time to time (collectively, the “Award Agreements”):
1. Restricted Stock Unit Award Agreement by and between you and the Company, dated [DATE], granting [NUMBER]
restricted stock units.
2. Performance Share Unit Award Agreement by and between you and the Company, dated [DATE], granting [NUMBER]
performance share units.
3. Nonqualified Stock Option Agreement by and between you and the Company, dated, [DATE], granting [NUMBER]
stock options.
[LIST ADDITIONAL AWARDS AS APPLICABLE]
4.
The Company is pleased to inform you that the Compensation Committee of the Board of Directors of the Company has
approved a modification to the Award Agreements for your benefit. Effective immediately, and notwithstanding any other provision
in the Award Agreements to the contrary, the amount of cash or number of shares of Common Stock (as defined in the Plan)
otherwise deliverable to you pursuant to an Award Agreement shall be reduced by any minimum statutorily required withholding
obligation with regard to the awards granted pursuant to the Award Agreement; provided, however, that, at your discretion, the
number of shares of Common Stock otherwise deliverable to you may be further reduced in an amount up to the maximum
individual tax rate in your particular jurisdiction, and only if the Company has a statutory obligation to withhold taxes on your
behalf, in such case only if such reduction would not result in adverse financial accounting treatment, as determined by the
Company (and in particular in connection with the effectiveness of the amendments to FASB Accounting Standards Codification
Topic 718, Compensation – Stock Compensation, as amended by FASB Accounting Standards Update No. 2016-09, Improvements
to Employee Share-Based Payment Accounting).
Except as expressly provided herein, the Award Agreements and the incentive equity awards granted thereunder shall
continue to remain outstanding in full force and effect in accordance with all of the terms and conditions of the Award Agreements
and the Company’s Amended and Restated 2011 Incentive Compensation Plan, as amended from time to time.
Very truly yours,
U.S. SILICA HOLDINGS, INC.
By:
Name:
Title: [PARTICIPANT]
AGREED AND ACKNOWLEDGED
as of November ____, 2016
1
U.S. Silica Holdings, Inc.
Amended and Restated 2011 Incentive Compensation Plan
Amendment No. 1
November 3, 2016
Section 14.4 of the Plan shall be amended in its entirety to read as follows:
“14.4 Withholding of Taxes. The Company shall have the right to deduct from any payment to be made pursuant to the Plan, or
to otherwise require, prior to the issuance or delivery of shares of Common Stock or the payment of any cash hereunder, payment
by the Participant of, any federal, state or local taxes required by law to be withheld. Upon the vesting of Restricted Stock (or other
Award that is taxable upon vesting), or upon making an election under Section 83(b) of the Code, a Participant shall pay all
required withholding to the Company. Any minimum statutorily required withholding obligation with regard to any Participant may
be satisfied, subject to the consent of the Committee, by reducing the number of shares of Common Stock otherwise deliverable or
by delivering shares of Common Stock already owned; provided, however, that the number of shares of Common Stock otherwise
deliverable to any Participant may be further reduced in an amount up to the maximum individual tax rate in such particular
Participant’s jurisdiction, and only if the Company has a statutory obligation to withhold taxes on such Participant’s behalf, in such
case only if such reduction would not result in adverse financial accounting treatment, as determined by the Company (and in
particular in connection with the effectiveness of the amendments to FASB Accounting Standards Codification Topic 718,
Compensation – Stock Compensation, as amended by FASB Accounting Standards Update No. 2016-09, Improvements to
Employee Share-Based Payment Accounting). Any fraction of a share of Common Stock required to satisfy such tax obligations
shall be disregarded and the amount due shall be paid instead in cash by the Participant.”
1
Name
Jurisdiction of Formation
Exhibit 21.1
Hourglass Acquisition I, LLC
Preferred Rocks USS Inc.
Hourglass Holdings, LLC
USS Holdings, Inc.
U.S. Silica Company
Pennsylvania Glass Sand Corporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
The Fulton Land and Timber Company
Pennsylvania
Ottawa Silica Company
Ottawa Silica Company, Ltd.
Coated Sand Solutions, LLC
Cadre Services Inc.
Cadre Material Products, LLC
Fairchild Silica, LLC
Utica Silica, LLC
Tyler Silica Company
New Birmingham Resources, LLC
NBR Sand, LLC
NBR Maritime I, LLC
NBR Maritime II, LLC
Sandbox Enterprises, LLC
Oren Technologies, LLC
Sandbox Leasing, LLC
Sandbox Logistics, LLC
Sandbox Transportation, LLC
Delaware
Quebec
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We have issued our reports dated February 23, 2017, with respect to the consolidated financial statements and internal control over financial
reporting included in the Annual Report of U.S. Silica Holdings, Inc. and subsidiaries on Form 10-K for the year ended December 31, 2016. We
hereby consent to the incorporation by reference of said reports in the Registration Statements of U.S. Silica Holdings, Inc. and subsidiaries on
Form S-3 (File Nos. 333-210238 and 333-213870) and Form S-8 (File Nos. 333-179480 and 333-204062).
/s/ Grant Thornton LLP
Baltimore, MD
February 23, 2017
Exhibit 31.1
I, Bryan A. Shinn, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of U.S. Silica Holdings, Inc. (the “Company”) for the year ended December 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: February 23, 2017
/s/ BRYAN A. SHINN
Name: Bryan A. Shinn
Title: Chief Executive Officer
Exhibit 31.2
I, Donald A. Merril, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of U.S. Silica Holdings, Inc. (the “Company”) for the year ended December 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: February 23, 2017
/s/ DONALD A. MERRIL
Name: Donald A. Merril
Title: Chief Financial Officer
SECTION 1350 CERTIFICATION
Exhibit 32.1
I, Bryan A. Shinn, Chief Executive Officer, U.S. Silica Holdings, Inc. (the “Company”), hereby certify, on the date hereof, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
i.
ii.
The Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: February 23, 2017
A signed copy of this original statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff on request.
/s/ BRYAN A. SHINN
Name: Bryan A. Shinn
Title: Chief Executive Officer
SECTION 1350 CERTIFICATION
Exhibit 32.2
I, Donald A. Merril, Chief Financial Officer, U.S. Silica Holdings, Inc. (the “Company”), hereby certify, on the date hereof, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
i.
ii.
The Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: February 23, 2017
A signed copy of this original statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff on request.
/s/ DONALD A. MERRIL
Name: Donald A. Merril
Title: Chief Financial Officer
Mine Safety Disclosure
Exhibit 95.1
The following disclosures are provided pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) and Item 104 of
Regulation S-K, which requires certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended,
that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).
Mine Safety Information. Whenever the Federal Mine Safety and Health Administration (“MSHA”) believes a violation of the Mine Act, any health or
safety standard or any regulation has occurred, it may issue a citation which describes the alleged violation and fixes a time within which the U.S. mining
operator must abate the alleged violation. In some situations, such as when MSHA believes that conditions pose a hazard to miners, MSHA may issue an
order removing miners from the area of the mine affected by the condition until the alleged hazards are corrected. When MSHA issues a citation or order, it
generally proposes a civil penalty, or fine, as a result of the alleged violation, that the operator is ordered to pay. Citations and orders can be contested and
appealed, and as part of that process, are often reduced in severity and amount, and are sometimes dismissed. The number of citations, orders and proposed
assessments vary depending on the size and type (underground or surface) of the mine as well as by the MSHA inspector(s) assigned.
Mine Safety Data. The following provides additional information about references used in the table below to describe the categories of violations,
orders or citations issued by MSHA under the Mine Act:
•
•
•
•
•
Section 104 S&S Citations: Citations received from MSHA under section 104 of the Mine Act for violations of mandatory health or safety
standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard.
Section 104(b) Orders: Orders issued by MSHA under section 104(b) of the Mine Act, which represents a failure to abate a citation under
section 104(a) within the period of time prescribed by MSHA. This results in an order of immediate withdrawal from the area of the mine
affected by the condition until MSHA determines that the violation has been abated.
Section 104(d) Citations and Orders: Citations and orders issued by MSHA under section 104(d) of the Mine Act for unwarrantable failure to
comply with mandatory health or safety standards.
Section 110(b)(2) Violations: Flagrant violations issued by MSHA under section 110(b)(2) of the Mine Act.
Section 107(a) Orders: Orders issued by MSHA under section 107(a) of the Mine Act for situations in which MSHA determined an “imminent
danger” (as defined by MSHA) existed.
The following table details the violations, citations and orders issued to us by MSHA during the year ended December 31, 2016:
Section 104
S&S
Citations(#)
Section
104(b)
Orders
(#)
Section
104(d)
Citations
and Orders
(#)
Section
110(b)(2)
Violations
(#)
Section
107(a)
Orders
(#)
Proposed
Assessments(b)
($, amounts in
dollars)
Mining
Related
Fatalities
(#)
10
—
—
5
—
3
1
3
—
—
—
—
1
—
—
—
6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
15,671
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
556
428
4,152
455
2,646
414
8,541
—
1,284
214
214
235
100
1,639
200
3,345
314
(c)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Mine(a)
Ottawa, IL
Mill Creek, OK
Pacific, MO
Berkeley Springs,
WV
Mapleton Depot, PA
Kosse, TX
Mauricetown, NJ
Columbia, SC
Montpelier, VA
Rockwood, MI
Jackson, TN
Dubberly, LA
Hurtsboro, AL
Sparta, WI
Voca, TX
Peru, IL
Utica, IL
Tyler, TX
(a)
(b)
The definition of mine under section 3 of the Mine Act includes the mine, as well as other items used in, or to be used in, or resulting from, the work of
extracting minerals, such as land, structures, facilities, equipment, machines, tools and minerals preparation facilities. Unless otherwise indicated, any
of these other items associated with a single mine have been aggregated in the totals for that mine. MSHA assigns an identification number to each
mine and may or may not assign separate identification numbers to related facilities such as preparation facilities. We are providing the information in
the table by mine rather than MSHA identification number because that is how we manage and operate our mining business and we believe this
presentation will be more useful to investors than providing information based on MSHA identification numbers.
Represents the total dollar value of proposed assessments from MSHA under the Mine Act relating to any type of citation or order issued during the
year ended December 31, 2016.
Pattern or Potential Pattern of Violations. During the year ended December 31, 2016, none of the mines operated by us received written notice from
MSHA of (a) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to
the cause and effect of mine health or safety hazards under section 104(e) of the Mine Act or (b) the potential to have such a pattern.
Pending Legal Actions. There were 76 legal actions pending before the Federal Mine Safety and Health Review Commission (the Commission) as of
December 31, 2016, each of which is a contest proceeding filed by us to challenge a citation or order issued by MSHA under the Mine Act and includes 24
contests challenging Section 104 S&S citations. During the year ended December 31, 2015, 31 legal actions were instituted and 48 legal actions were
resolved. The Commission is an independent adjudicative agency established by the Mine Act that provides administrative trial and appellate review of legal
disputes arising under the Mine Act.
Exhibit 99.1
We hereby consent to the references to our company’s name in the 2016 Annual Report on Form 10-K for the Year Ended December 31, 2016 (the
“Annual Report”) of U.S. Silica Holdings, Inc. (the “Company”) and the quotation by the Company in the Annual Report from the 2015 Proppant Market
Report, published February 2015. We also hereby consent to the filing of this letter as an exhibit to the Annual Report.
CONSENT OF PROPTESTER, INC.
February 23, 2017
PROPTESTER, INC.
By:
/s/ Ian Renkes
Name:
Title:
Ian Renkes
VP of Operations