U.S. SILICA HOLDINGS, INC. 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 and the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. This discussion contains forward-looking statements, as discussed under "Forward-Looking Statements". These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly under "Forward-Looking Statements" and in Item 1A. Risk Factors. Adjusted EBITDA and segment contribution margin as used herein are non-GAAP measures. For a detailed description of Adjusted EBITDA and segment contribution margin and reconciliations to their most comparable GAAP measures, please see the discussion below under "How We Evaluate Our Business." Overview We are a performance materials company and a leading producer of commercial silica used in a wide range of industrial applications and in the oil and gas industry. In addition, through our acquisition ofEP Minerals, LLC ("EPM") and its affiliated companies in 2018, we are an industry leader in the production of products derived from diatomaceous earth, perlite, engineered clays, and non-activated clays. During our 120-year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-effectively deliver over 400 diversified product types to customers across our end markets. As ofDecember 31, 2019 , we operate 25 production facilities acrossthe United States . We control 527 million tons of reserves of commercial silica, which can be processed to make 202 million tons of finished products that meet API frac sand specifications, and 59 million tons of reserves of diatomaceous earth, perlite, and clays. Our operations are organized into two reportable segments based on end markets served and the manner in which we analyze our operating and financial performance: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. We believe our segments are complementary because our ability to sell to a wide range of customers across end markets in these segments allows us to maximize recovery rates in our mining operations and optimize our asset utilization. Acquisitions For a description of our key business acquisitions during the past three years, see the discussion under "Our Company-Business Overview-Acquisitions" in Item 1. Business and Note E - Business Combinations to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. Recent Trends and Outlook Oil and gas proppants end market trends Demand for frac sand is driven by the use of hydraulic fracturing as a means to extract hydrocarbons from shale formations. According to Rystad Energy's Proppant Market report - 1Q 2020, published onDecember 10, 2019 ,U.S. raw sand proppant demand was 4% higher in 2019 than 2018, and is expected to continue to grow by 2% assuming a per barrel oil price higher than$50 . We continue to expect long-term growth in oil and gas drilling in North American shale basins. During the three months endedDecember 31, 2019 , frac sand demand and tons sold declined sequentially compared to the three months endedSeptember 30, 2019 , as summarized below. Average selling price per ton increased sequentially from the three months endedSeptember 31, 2019 compared to the three months endedDecember 31, 2019 due to revenue recognized from shortfall penalties assessed to customers, partly offset by increased proppant supply causing decreased sand pricing. 50 -------------------------------------------------------------------------------- Amounts in thousands, except per ton data Three Months Ended Percentage Change for the Three Months Ended December 31, September June 30, December 31, September 30, June 30, 2019 March 31, 2019 2019 vs. 30, 2019 vs. 2019 vs. Oil & Gas 2019 2019 September June 30, March 31, Proppants 30, 2019 2019 2019 Sales$ 234,273 $ 242,707 $ 273,064 $ 260,477 (3 )% (11 )% 5 % Tons Sold 3,362 3,896 3,932 3,864 (14 )% (1 )% 2 % Average Selling Price per Ton $ 69.68$ 62.30 $ 69.45 $ 67.41 12 % (10 )% 3 % If oil and gas drilling and completion activity does not continue to grow or if frac sand supply remains greater than demand, then we may sell fewer tons, sell 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, and we could incur material asset impairments. If these events occur, we may evaluate actions to reduce costs and improve liquidity. Fluctuations in frac sand demand and price may occur as the market adjusts to supply and demand due to energy pricing fluctuations. Fluctuations in price may also occur as the supply of local in-basin sand changes. Oil and natural gas exploration and production companies' and oilfield service providers' preferences and expectations have been evolving in recent years. A proppant supplier's logistics capabilities have become an important differentiating factor when competing for business, on both a spot and contract basis. Many of our customers increasingly seek convenient in-basin and wellhead proppant delivery capability from their proppant supplier. Over the past year, this trend of customers preferring local in-basin sand has accelerated. Industrial and specialty products end market trends Demand in the industrial and specialty products end markets has been relatively stable in recent years and is primarily influenced by key macroeconomic drivers such as housing starts, population growth, light vehicle sales, beer and wine production, repair and remodel activity and industrial production. The primary end markets served by our Industrial & Specialty Products segment are building and construction products, fillers and extenders, filtration, glassmaking, absorbents, foundry, and sports and recreation. We have been increasing our value-added product offerings in the industrial and specialty products end markets organically as well as through acquisitions, such as White Armor and EPM. Sales of these new higher margin products have increased our Industrial & Specialty Products segment's profitability in recent periods. Our Business Strategy The key drivers of our strategy include: • increasing our presence and product offering in specialty products end
markets;
• further developing value-added capabilities to maximize margins;
• optimizing our product mix and keeping operating costs low;
• effectively positioning our Oil & Gas Proppants facilities and utilizing
our supply chain network and logistics capabilities to meet our
customers' needs;
• evaluating both expansion opportunities and other acquisitions; and,
• maintaining financial strength and flexibility.
For additional information about our key business strategies, see the discussion
under "Our Company-Our Business Strategy" in Item 1. Business."
How We Generate Our Sales
Products
We derive our product sales by mining and processing minerals that our customers
purchase for various uses. Our product sales are primarily a function of the
price per ton and the number of tons sold. We primarily sell our products
through individual purchase orders executed under short-term price agreements or
at prevailing market rates. The amount invoiced
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reflects the price of the product, transportation, surcharges, and additional
handling services as applicable, such as storage, transloading the product from
railcars to trucks and last mile logistics to the customer site. We invoice most
of our product customers on a per shipment basis, although for some larger
customers, we consolidate invoices weekly or monthly. Standard collection terms
are net 30 days, although extended terms are offered in competitive situations.
Services
We derive our service sales primarily through the provision of transportation,
equipment rental, and contract labor services to companies in the oil and gas
industry. Transportation services typically consist of transporting customer
proppant from storage facilities to proximal well-sites and are contracted
through work orders executed under established pricing agreements. The amount
invoiced reflects transportation services rendered. Equipment rental services
provide customers with use of either dedicated or nonspecific wellhead proppant
delivery equipment solutions for contractual periods defined either through
formal lease agreements or executed work orders under established pricing
agreements. The amounts invoiced reflect the length of time the equipment set
was utilized in the billing period. Contract labor services provide customers
with proppant delivery equipment operators through work orders executed under
established pricing agreements. The amounts invoiced reflect the amount of time
our labor services were utilized in the billing period. We typically invoice our
customers on a weekly or monthly basis; however, some customers receive invoices
upon well-site operation completion. Standard collection terms are net 30 days,
although extended terms are offered in competitive situations.
Our ten largest customers accounted for approximately 43%, 48% and 58% of total
sales during the year ended December 31, 2019 , 2018 and 2017, respectively.
Sales to one of our customers accounted for 11% of our total sales during the
year ended December 31, 2019 . Sales to one of our customers accounted for 15% of
our total sales during the year ended December 31, 2018 . Sales to two of our
customers accounted for 15% and 12% of our total sales during the year ended
December 31, 2017 . No other customers accounted for 10% or more of our total
sales. At December 31, 2019 , one of our customer's accounts receivable
represented 12% of our total trade accounts receivable, net of allowance. At
December 31, 2018 , one of our customers' accounts receivable represented 18% of
our total trade accounts receivable, net of allowance. No other customers
accounted for 10% or more of our total trade accounts receivable.
For a limited number of customers, we sell under long-term, minimum purchase
supply agreements. These agreements define, among other commitments, the volume
of product that our customers must purchase, the volume of product that we must
provide, and the price that we will charge and that our customers will pay for
each product. Prices under these agreements are generally fixed and subject to
certain contractual adjustments. Sometimes these agreements may undergo
negotiations regarding pricing and volume requirements, which may occur in
volatile market conditions. When these negotiations occur, we may deliver sand
at prices or at volumes below the requirements in our existing supply
agreements. We do not consider these agreements solely representative of
contracts with customers. An executed order specifying the type and quantity of
product to be delivered, in combination with the noted agreements, comprise our
contracts in these arrangements. Selling more tons under supply contracts
enables us to be more efficient from a production, supply chain, and logistics
standpoint. As discussed in Part I, Item 1A., Risk Factors of this Annual Report
on Form 10-K, these customers may not continue to purchase the same levels of
product in the future due to a variety of reasons, contract requirements
notwithstanding.
As of December 31, 2019 , we have sixteen minimum purchase supply agreements in
the Oil & Gas Proppants segment with initial terms expiring between 2020 and
2034. As of December 31, 2018 , we had 21 minimum purchase supply agreements in
the Oil & Gas Proppants segment with initial terms expiring between 2019 and
2034. Collectively, sales to customers with minimum purchase supply agreements
accounted for 60% and 52% of Oil & Gas Proppants segment sales during the years
ended December 31, 2019 and 2018, respectively.
In the industrial and specialty products end markets we have not historically
entered into long-term minimum purchase supply agreements with our customers
because of the high cost to our customers of switching providers. We may
periodically do so when capital or other investment is required to meet customer
needs. Instead, we often enter into supply agreements with our customers with
targeted volumes and terms of one to five years. Prices under these agreements
are generally fixed and subject to annual increases.
The Costs of Conducting Our Business
The principal expenses involved in conducting our business are transportation
costs, labor costs, electricity and drying fuel costs, and maintenance and
repair costs for our mining and processing equipment and facilities.
Transportation and related costs include freight charges, fuel surcharges,
transloading fees, switching fees, railcar lease costs, demurrage costs, storage
fees and labor costs. We believe the majority of our operating costs are
relatively stable in price, but they can vary significantly based on the volume
of product produced. We benefit from owning the majority of the mineral deposits
that we mine and having long-term mineral rights leases or supply agreements for
our other primary sources of raw material, which limits royalty payments.
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Additionally, we incur expenses related to our corporate operations, including
costs for sales and marketing; research and development; and the finance, legal,
environmental, health and safety functions of our organization. These costs are
principally driven by personnel expenses.
How We Evaluate Our Business
Our management team evaluates our business using a variety of financial and
operating metrics. We evaluate the performance of our two segments based on
their tons sold, average selling price and contribution margin earned.
Additionally, we consider a number of factors in evaluating the performance of
our business as a whole, including total tons sold, average selling price, total
segment contribution margin, and Adjusted EBITDA. We view these metrics as
important factors in evaluating our profitability and review these measurements
frequently to analyze trends and make decisions, and we believe the presentation
of these metrics provides useful information to our investors regarding our
financial condition and results of operations for the same reasons.
Segment Contribution Margin
Segment contribution margin, a non-GAAP measure, is a key metric that management
uses to evaluate our operating performance and to determine resource allocation
between segments. Segment contribution margin excludes costs such as selling,
general, and administrative costs, corporate costs, plant capacity expansion
expenses, and facility closure costs.
Segment contribution margin is not a measure of our financial performance under
GAAP and should not be considered an alternative measure or superior to measures
derived in accordance with GAAP. Our measure of segment contribution margin is
not necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the methods of calculation. For more
information about segment contribution margin, including a reconciliation of
this measure to its most directly comparable GAAP financial measure, net income
(loss), see Note W - Segment Reporting to our Consolidated 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.
Adjusted EBITDA is not a measure of our financial performance or liquidity under
GAAP and should not be considered as an alternative or superior to net income
(loss) as a measure of operating performance, cash flows from operating
activities as a measure of liquidity or any other performance measure derived in
accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a
measure of free cash flow for management's discretionary use, as it does not
consider certain cash requirements such as interest payments, tax payments and
debt service requirements. Adjusted EBITDA contains certain other limitations,
including the failure to reflect our cash expenditures, cash requirements for
working capital needs and cash costs to replace assets being depreciated and
amortized, and excludes certain charges that may recur in the future. Management
compensates for these limitations by relying primarily on our GAAP results and
by using Adjusted EBITDA only supplementally. Our measure of Adjusted EBITDA is
not necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the methods of calculation.
The following table sets forth a reconciliation of net (loss) income, the most
directly comparable GAAP financial measure, to Adjusted EBITDA.
53
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(amounts in thousands) Year ended December 31,
2019 2018 2017
Net (loss) income attributable to U.S. Silica
Holdings, Inc. $ (329,082 ) $ (200,808 ) $ 145,206
Total interest expense, net of interest income 92,063 64,689 25,871
Provision for taxes (99,151 ) (29,132 ) (8,680 )
Total depreciation, depletion and amortization
expenses 179,444 148,832 97,233
EBITDA (156,726 ) (16,419 ) 259,630
Non-cash incentive compensation (1) 15,906 22,337 25,050 Post-employment expenses (excluding service costs) (2)
1,735 2,206 1,231
Merger and acquisition related expenses (3) 32,021 34,098 9,010
Plant capacity expansion expenses (4) 17,576 59,112 5,667
Contract termination expenses (5) 1,882 2,491 325
Goodwill and other asset impairments (6) 363,847 281,899 -
Business optimization projects (7) 55 1,980 -
Facility closure costs (8) 12,718 529 -
Gain on valuation change of royalty note payable (9) (16,854 )
- - Other adjustments allowable under the Credit Agreement (10) 14,165 4,290 6,790 Adjusted EBITDA$ 286,325 $ 392,523 $ 307,703 54
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(1) Reflects equity-based, non-cash compensation expense. (2) Includes net pension cost and net post-retirement cost relating to pension and
other post-retirement benefit obligations during the applicable period, but in
each case excluding the service cost relating to benefits earned during such
period. Non-service net periodic benefit costs are not considered reflective of
our operating performance because these costs do not exclusively originate from
employee services during the applicable period and may experience periodic
fluctuations as a result of changes in non-operating factors, including changes in
discount rates, changes in expected returns on benefit plan assets, and other
demographic actuarial assumptions. See Note R - Pension and Post-Retirement
Benefits to our Consolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K for more information. (3) Merger and acquisition related expenses include legal fees, consulting fees, bank
fees, severance costs, purchase-related costs such as the amortization of
inventory fair value step-up, information technology integration costs and similar
charges. While these costs are not operational in nature and are not expected to
continue for any singular transaction on an ongoing basis, similar types of costs,
expenses and charges have occurred in prior periods and may recur in the future as
we continue to integrate prior acquisitions and pursue any future acquisitions. (4) Plant capacity expansion expenses include expenses that are not inventoriable or
capitalizable as related to plant expansion projects greater than
capital expenditures or plant start up projects. While these expenses are not
operational in nature and are not expected to continue for any singular project on
an ongoing basis, similar types of expenses have occurred in prior periods and may
recur in the future. (5) Reflects contract termination expenses related to strategically exiting service
contracts. While these expenses are not operational in nature and are not expected
to continue for any singular event on an ongoing basis, similar types of expenses
have occurred in prior periods and may recur in the future as we continue to
strategically evaluate our contracts. (6) See Footnote Z - Impairments for additional information. While these expenses are
not operational in nature and are not expected to continue for any singular event
on an ongoing basis, similar types of expenses have occurred in prior periods and
may recur in the future. (7) Reflects costs incurred related to business optimization projects mainly within
our corporate center, which aim to measure and improve the efficiency,
productivity and performance of our organization. While these costs are not
operational in nature and are not expected to continue for any singular project on
an ongoing basis, similar types of expenses may recur in the future. (8) Reflects costs incurred mainly related to idled sand facilities and closed
corporate offices, including severance costs and remaining contracted costs such
as office lease costs, and common area maintenance fees. While these costs are not
operational in nature and are not expected to continue for any singular event on
an ongoing basis, similar types of expenses may recur in the future. (9) Gains on valuation change of royalty note payable due to a change in estimate of
future tonnages and sales related to the sand shipped from our
facility. These gains are not operational in nature and are not expected to
continue for any singular event on an ongoing basis. (10) Reflects miscellaneous adjustments permitted under the Credit Agreement. For 2019,
includes
for actions that will provide future savings, storm damage costs, recruiting fees,
relocation costs and a loss on sale of assets, partially offset by insurance
proceeds of
relocation costs, and a net loss of
consisting of
divestiture related expenses such as legal fees and consulting fees, partially
offset by a
restructuring cost of
operational in nature and are not expected to continue for any singular event on
an ongoing basis, similar types of gains and expenses have occurred in prior
periods and may recur in the future.
55-------------------------------------------------------------------------------- Adjusted EBITDA-Trailing Twelve Months Our revolving credit facility (the "Revolver") contains a consolidated total net leverage ratio of no more than 3.75:1.00 that, unless we have the consent of our lenders, we must meet as of the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 30% of the Revolver commitment. This ratio is calculated based on our Adjusted EBITDA for the trailing twelve months. Noncompliance with this financial ratio covenant could result in the acceleration of our obligations to repay all amounts outstanding under the Revolver and the term loan (the "Term Loan") (collectively the "Credit Facility"). Moreover, the Revolver and the Term Loan contain covenants that restrict, subject to certain exceptions, our ability to make permitted acquisitions, incur additional indebtedness, make restricted payments (including dividends) and retain excess cash flow based, in some cases, on our ability to meet leverage ratios calculated based on our Adjusted EBITDA for the trailing twelve months. See the description under "Adjusted EBITDA" above for certain important information about Adjusted EBITDA-trailing twelve months, including certain limitations and management's use of this metric in light of its status as a non-GAAP measure. As ofDecember 31, 2019 , we are in compliance with all covenants under our Credit Facility, and our Revolver usage was zero (other than certain undrawn letters of credit). Since the Revolver usage did not exceed 30% of the Revolver commitment, the consolidated leverage ratio covenant did not apply. Based on our consolidated leverage ratio of 4.30:1.00 as ofDecember 31, 2019 , we may draw up to$30.0 million without the consent of our lenders. With the consent of our lenders, we have access to the full availability of the Revolver. The calculation of the consolidated leverage ratio incorporates the Adjusted EBITDA-trailing twelve months as follows: (All amounts in thousands) December 31, 2019 Total debt $ 1,232,378 Finance leases 70 Total consolidated debt $ 1,232,448 Adjusted EBITDA-trailing twelve months $
286,325
Pro forma Adjusted EBITDA including impact of acquisitions (1) - Other adjustments for covenant calculation (2) 252
Total Adjusted EBITDA-trailing twelve months for covenant calculation $
286,577
Consolidated leverage ratio(3) 4.30
(1) Covenant calculation allows for the Adjusted EBITDA-trailing twelve months to
include the impact of acquisitions on a pro forma basis. (2) Covenant calculation excludes activity at legal entities above the operating
company, which is mainly interest income offset by public company operating
expenses.
(3) Calculated by dividing Total consolidated debt by Total Adjusted EBITDA-trailing
twelve months for covenant calculation.
56--------------------------------------------------------------------------------
Results of Operations for the Years Ended
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . Sales (In thousands except per ton data) Year ended December 31, Percent Change 2019 2018 '19 vs. '18 Sales: Oil & Gas Proppants$ 1,010,521 $ 1,182,991 (15 )% Industrial & Specialty Products 463,956 394,307 18 % Total sales$ 1,474,477 $ 1,577,298 (7 )% Tons: Oil & Gas Proppants 15,054 14,242 6 % Industrial & Specialty Products 3,734 3,817 (2 )% Total Tons 18,788 18,059 4 % Average Selling Price per Ton: Oil & Gas Proppants $ 67.13$ 83.06 (19 )% Industrial & Specialty Products 124.25 103.30 20 % Overall Average Selling Price per Ton $ 78.48$ 87.34
(10 )%
Total sales decreased 7% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , driven by a 10% decrease in overall average selling price partially offset by a 4% increase in total tons sold. The decrease in total sales was driven by Oil & Gas Proppants sales, which decreased 15% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Oil & Gas Proppants average selling price decreased 19% and tons sold increased 6%. The decrease in average selling price was driven by more tons sold from local in-basin plants which have lower logistics costs, increased in-basin proppant supply, and decreased sand pricing. The increase in tons sold was mainly due to more tons produced and sold in-basin inWest Texas . The decrease in total sales was partially offset by Industrial & Specialty Products sales, which increased 18% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Industrial & Specialty Products average selling price increased 20% and tons sold decreased 2%. The increase in average selling price was due to the acquisition of EPM, additional higher-margin product sales and price increases. The decrease in tons sold was mainly driven by a decrease in low-margin tons sold. Cost of Sales Cost of sales decreased by$30.0 million , or 3%, to$1.133 billion for the year endedDecember 31, 2019 compared to$1.163 billion for the year endedDecember 31, 2018 . These changes result from the main components of cost of sales as discussed below. As a percentage of sales, cost of sales represented 77% for the year endedDecember 31, 2019 compared to 74% for the same period in 2018. We incurred$506.3 million and$545.8 million of transportation and related costs for the year endedDecember 31, 2019 and 2018, respectively. The decrease was mainly due to a decline in demand for Northern White sand caused by some of our customers shifting to local in-basin frac sands with lower logistics costs, partially offset by costs related to additional SandBox operations and the acquisition of EPM. As a percentage of sales, transportation and related costs decreased to 34% for the year endedDecember 31, 2019 compared to 35% for the same period in 2018. We incurred$198.6 million and$198.5 million of operating labor costs for the year endedDecember 31, 2019 and 2018, respectively. The$0.1 million increase in labor costs incurred was due to more tons sold and the acquisition of EPM, 57 -------------------------------------------------------------------------------- offset by lower SandBox driver costs and idled sand facilities. As a percentage of sales, operating labor costs represented 13% for the year endedDecember 31, 2019 compared to 13% for the same period in 2018. We incurred$54.8 million and$53.7 million of electricity and drying fuel (principally natural gas) costs for the year endedDecember 31, 2019 and 2018, respectively. The$1.1 million increase in electricity and drying fuel costs incurred was due to more tons sold and the acquisition of EPM, partially offset by idled sand facilities. As a percentage of sales, electricity and drying fuel costs represented 4% for the year endedDecember 31, 2019 compared to 3% for the same period in 2018. We incurred$92.3 million and$108.8 million of maintenance and repair costs for the year endedDecember 31, 2019 and 2018, respectively. The decrease in maintenance and repair costs incurred was mainly due to idled sand facilities and a decrease in plant capacity expansion expenses, partially offset by higher production volume, additional SandBox operations and the acquisition of EPM. As a percentage of sales, maintenance and repair costs represented 6% for the year endedDecember 31, 2019 compared to 7% for the same period in 2018. Segment Contribution Margin Oil & Gas Proppants contribution margin decreased by$109.2 million to$248.6 million for the year endedDecember 31, 2019 compared to$357.8 million for the year endedDecember 31, 2018 , driven by a$172.5 million decrease in sales, partially offset by$63.2 million in lower cost of sales. The decrease in segment contribution margin was mainly driven by decreased sand pricing. Industrial & Specialty Products contribution margin increased by$23.1 million , or 15%, to$178.2 million for the year endedDecember 31, 2019 compared to$155.1 million for the year endedDecember 31, 2018 , driven by a$69.6 million increase in revenue, partially offset by$46.5 million in higher cost of sales. The increase in segment contribution margin was due to the acquisition of EPM, new higher-margin product sales and price increases. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by$3.8 million , or 3%, to$150.8 million for the year endedDecember 31, 2019 compared to$147.0 million for the year endedDecember 31, 2018 . The increase was due to the following factors: • Compensation related expense increased by$9.4 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , mainly due to the acquisition of EPM.
• Merger and acquisition related expense decreased by
$2.8 million for the year endedDecember 31, 2019 compared to$13.9 million for the year endedDecember 31, 2018 . The decrease was mainly due to costs related to the acquisition of EPM during 2018 that did not recur during 2019. • During the year endedDecember 31, 2019 ,$6.3 million of costs were incurred related to closing the corporate office inFrederick, Maryland . These costs included severance and remaining
contracted
costs such as office lease costs and common area maintenance fees.
In total, our selling, general and administrative expenses represented approximately 10% and 9% of our sales for the years endedDecember 31, 2019 and 2018, respectively. Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense increased by$30.6 million , or 21%, to$179.4 million for the year endedDecember 31, 2019 compared to$148.8 million for the year endedDecember 31, 2018 . The increase was mainly driven by our plant capacity expansions and our acquisitions, including the acquisition of EPM, as well as other continued capital spending. Depreciation, depletion and amortization expense represented approximately 12% and 9% of our sales for the year endedDecember 31, 2019 and 2018, respectively.Goodwill and Other Asset Impairments During the year endedDecember 31, 2019 , we recorded$243.1 million of long-lived asset impairments,$115.4 million of right-of-use asset impairments,$4.1 million of inventory impairments, and$1.2 million of intangible asset impairments in our Oil & Gas segment due to a sharp decline in customer demand for Northern White frac sand and for regional non-in-basin frac sand as more tons are produced and sold in-basin. During 2018, we recorded$164.2 million in goodwill impairments,$97.0 million of long-lived asset impairments and$4.5 million of intangible impairments in our Oil & Gas segment due to a declining shift in demand for Northern White sand caused by some of our customers shifting to local in- 58 -------------------------------------------------------------------------------- basin frac sands with lower logistics costs. We also recorded a$16.2 million asset impairment related to the closure of our resin coating facility and associated product portfolio during the second quarter of 2018. Operating (Loss) Income Operating loss increased by$189.5 million to$353.0 million for the year endedDecember 31, 2019 compared to$163.5 million for the year endedDecember 31, 2018 . The increase was driven by asset impairments as discussed above, a 7% decrease in total sales, a 3% increase in selling, general and administrative expense and a 21% increase in depreciation, depletion and amortization expense, partially offset by a 3% decrease in cost of sales. Interest Expense Interest expense increased by$24.9 million , or 35%, to$95.5 million for the year endedDecember 31, 2019 compared to$70.6 million for the year endedDecember 31, 2018 , mainly driven by an increase in our new Credit Facility to finance the acquisition of EPM. Other Income (Expense), net, including interest income Other income increased by$15.4 million to$19.5 million for the year endedDecember 31, 2019 compared to$4.1 million in other expense for the year endedDecember 31, 2018 . The increase was mainly due to gains driven by the change in valuation of the royalty note payable. Provision for Income Taxes Our income tax benefit increased by$70.1 million to$99.2 million for the year endedDecember 31, 2019 compared to a$29.1 million income tax benefit for the year endedDecember 31, 2018 . The increase was mainly due to decreased profit before income tax during the year endedDecember 31, 2019 . The effective tax rate was 23% and 13% for the year endedDecember 31, 2019 and 2018, respectively. For the year endedDecember 31, 2018 , the tax effect of goodwill impairments described in Note I -Goodwill and Intangible Assets is a significant permanent item in the effective tax rate calculation. See Note T - Income Taxes to our Consolidated Financial Statements in Part II, Item 8. of this Annual report on Form 10-K for more information. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion allowances. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income before income taxes. Net (loss) income Net loss attributable toU.S. Silica Holdings, Inc. , was$329.1 million and$200.8 million for the years endedDecember 31, 2019 and 2018, respectively. The year over year changes were due to the factors noted above. 59 --------------------------------------------------------------------------------
Liquidity and Capital Resources
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Liquidity and Capital Resources" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . 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 pay for acquisitions. We have historically met our liquidity and capital investment needs with funds generated through operations. We have historically funded our acquisitions through cash on hand, borrowings under our credit facilities, or equity issuances. Our working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. As ofDecember 31, 2019 , our working capital was$173.6 million and we had$93.5 million of availability under the Revolver. Based on our consolidated leverage ratio of 4.30:1.00 as ofDecember 31, 2019 , we may draw up to$30.0 million without the consent of our lenders. With the consent of our lenders, we have access to the full availability of the Revolver. In connection with the EPMH acquisition, onMay 1, 2018 , we entered into the Credit Agreement withBNP Paribas , as administrative agent, and the lenders named therein. The Credit Agreement increases our existing senior debt by entering into a new$1.380 billion senior secured Credit Facility, consisting of a$1.280 billion Term Loan and a$100 million Revolver that may also be used for swingline loans or letters of credit, and we may elect to increase the Term Loan in accordance with the terms of the Credit Agreement. The amounts owed under the Credit Agreement use LIBOR as a benchmark for establishing the rate at which interest accrues. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted but could include an increase in the cost to us of this indebtedness. During the third quarter of 2019, we repurchased outstanding debt under the Term Loan in the amount of$10 million at a rate of 95.5%. Debt issuance costs and original issue discount were recalculated with the reduced future debt payments, and additional costs of approximately$0.4 million were expensed. As a result, we recorded a gain on extinguishment of debt in the amount of$0.1 million . For more information on the Credit Agreement see Note K - Debt to our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. We believe that cash on hand, cash generated through operations and cash generated from financing arrangements will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled debt payments and any dividends declared for at least the next 12 months. Management and our Board remain committed to evaluating additional ways of creating shareholder value. Any determination to pay dividends or other distributions in cash, stock, or property in the future or otherwise return capital to our stockholders, including decisions about existing or new share repurchase programs, will be at the discretion of our Board and will be dependent on then-existing conditions, including industry and market conditions, our financial condition, results of operations, liquidity and capital requirements, contractual restrictions including restrictive covenants contained in debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. Cash Flow Analysis A summary of operating, investing and financing activities (in thousands) is shown in the following table: Year ended December 31, 2019 2018 2017 Net cash provided by (used in): Operating activities$ 144,046 $ 310,706 $ 222,013 Investing activities (120,393 ) (1,066,879 ) (491,529 ) Financing activities (40,411 ) 574,104 (57,142 ) 60
-------------------------------------------------------------------------------- Net Cash Provided by / Used in Operating Activities Operating activities consist primarily of net income adjusted for certain non-cash and working capital items. Adjustments to net income for non-cash items include depreciation, depletion and amortization, deferred revenue, deferred income taxes, equity-based compensation and bad debt provision. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally accounts receivable, inventories, prepaid expenses and other current assets, income taxes payable and receivable, accounts payable and accrued expenses. Net cash provided by operating activities was$144.0 million for the year endedDecember 31, 2019 . This was mainly due to a$329.8 million net loss adjusted for non-cash items, including$179.4 million in depreciation, depletion and amortization,$363.8 million in goodwill and other asset impairments,$101.7 million in deferred income taxes,$15.9 million in equity-based compensation,$74.9 million in deferred revenue,$16.9 million in gain on valuation of royalty note payable,$22.4 million in inventory step-up adjustments,$1.6 million mainly related to the gain on sales of property, plant and equipment, and$1.9 million in other miscellaneous non-cash items. Also contributing to the change was a$33.8 million decrease in accounts receivable, an$11.2 million decrease in inventories, an$8.5 million decrease in prepaid expenses and other current assets, a$1.7 million decrease in income taxes, a$21.0 million increase in accounts payable and accrued liabilities,$4.0 million in short-term and long-term vendor incentives, and$5.7 million in other operating assets and liabilities. Net Cash Provided by / Used in Investing Activities Investing activities consist primarily of cash consideration paid to acquire businesses and capital expenditures for growth and maintenance. Net cash used in investing activities was$120.4 million for the year endedDecember 31, 2019 . This was mainly due to capital expenditures of$118.4 million and capitalized intellectual property costs of$3.9 million , partially offset by proceeds from the sale of property, plant and equipment of$1.9 million . Capital expenditures for the year endedDecember 31, 2019 were mainly for engineering, procurement and construction of our growth projects, primarilyLamesa and Millen, equipment to expand our SandBox operations, and other maintenance and cost improvement capital projects. Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in 2020 will be in the range of approximately$30 million to$40 million , which is primarily associated with maintenance, cost improvement capital projects and near-term payback growth 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 Provided by / Used in Financing Activities Financing activities consist primarily of equity issuances, dividend payments, share repurchases, borrowings and repayments related to the Revolver and Term Loan, as well as fees and expenses paid in connection with our credit facilities. Net cash used in financing activities was$40.4 million for the year endedDecember 31, 2019 . This was mainly due to$23.4 million of long-term debt payments,$18.6 million of dividends paid,$3.0 million of tax payments related to shares withheld for vested restricted stock and stock units, and a$4.6 million capital contribution from a non-controlling interest. Share Repurchase Program See Purchase ofEquity Securities by the Issuer in Part II, Item 5. and Note D - Capital Structure and Accumulated Comprehensive Income (Loss) to our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for information related to our share repurchase program. Credit Facilities See Note K - Debt to our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for information related to our credit facilities. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have a current material effect or are reasonably likely to have a future material effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources. 61 -------------------------------------------------------------------------------- Contractual Obligations As ofDecember 31, 2019 , the total of our future contractual cash commitments, including the repayment of our debt obligations under the Term Loan, is summarized as follows: Less than More than Total 1 year 1-3 years 3-5 years 5 years (amounts in thousands) Principal payments on long-term debt(1)$ 1,247,600 $ 12,800 $ 25,600 $ 25,600 $ 1,183,600 Estimated interest payments on long-term debt(4) 378,336 71,526 140,714 137,770 28,326 Minimum payments on note payable secured by a royalty interest(6) 10,438 454 812 1,069 8,103 Retirement plans 107,826 11,571 21,666 21,989 52,600 Finance lease obligations 70 67 3 - -
Operating lease obligations(5) 202,039 63,337 77,802
38,616 22,284
Minimum purchase obligations(2) 43,648 14,512 16,153 10,493 2,490
Total Contractual Cash
Obligations(3): $ 1,989,957 $ 174,267 $ 282,750 $ 235,537 $ 1,297,403 (1) Excludes the unamortized debt issuance costs and original issue discount.
(2) Includes estimated future minimum purchase obligations related to
transload service agreements and transportation service agreements. As of
service agreements.
(3) The above table excludes discounted asset retirement obligations in the
amount of
settlement date beyond 2025, as well as indemnification for surety bonds
issued on our behalf discussed in Note Q - Commitments and Contingencies
to our Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K.
(4) Estimated interest payment amounts are computed using forecasted
three-month LIBOR rates as of December 31, 2019 .
(5) Includes interest costs. See Note S - Leases for additional information on
interest costs.
(6) Excludes interest costs. See Note K - Debt for additional information
about this note payable.
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 we cannot estimate or predict the full amount of such future expenditures. As ofDecember 31, 2019 , we had$25.8 million accrued for future reclamation costs, as compared to$18.4 million as ofDecember 31, 2018 . We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure to crystalline silica and our mining activity and how such matters may affect our business in the future under Item 1. Business, Item 1A. Risk Factors and Item 3. Legal Proceedings. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe 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 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K. Management believes that the 62 -------------------------------------------------------------------------------- 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. Described 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 and our performance. Revenue Recognition Products We derive our product sales by mining and processing minerals that our customers purchase for various uses. Our product sales are primarily a function of the price per ton and the number of tons sold. We primarily sell our products through individual purchase orders executed under short-term price agreements or at prevailing market rates. The amount invoiced reflects product, transportation and / or additional handling services as applicable, such as storage, transloading the product from railcars to trucks and last mile logistics to the customer site. We invoice most of our product customers on a per shipment basis, although for some larger customers, we consolidate invoices weekly or monthly. Standard collection terms are net 30 days, although extended terms are offered in competitive situations. We recognize revenue for products and materials at a point in time following the transfer of control of such items to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. We account for shipping and handling activities related to product and material sales contracts with customers as costs to fulfill our promise to transfer the associated products pursuant to the accounting policy election allowed under ASC 606-10-25-10b. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and accrue and classify related costs as a component of cost of sales at the time revenue is recognized. For a limited number of customers, we sell under long-term, minimum purchase supply agreements. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide and the price that we will charge and that our customers will pay for each product. Prices under these agreements are generally fixed and subject to certain contractual adjustments. Sometimes these agreements may undergo negotiations regarding pricing and volume requirements, which may 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 supply agreements. An executed order specifying the type and quantity of product to be delivered, in combination with the noted agreements, comprise our contracts in these arrangements. Service We derive our service revenues primarily through the provision of transportation, equipment rental, and contract labor services to companies in the oil and gas industry. Transportation services typically consist of transporting customer proppant from storage facilities to proximal well-sites and are contracted through work orders executed under established pricing agreements. The amount invoiced reflects the transportation services rendered. Equipment rental services provide customers with use of either dedicated or nonspecific wellhead proppant delivery equipment solutions for contractual periods defined either through formal lease agreements or executed work orders under established pricing agreements. The amounts invoiced reflect the length of time the equipment set was utilized in the billing period. Contract labor services provide customers with proppant delivery equipment operators through work orders executed under established pricing agreements. The amounts invoiced reflect the amount of time our labor services were utilized in the billing period. We typically invoice our customers on a weekly or monthly basis; however, some customers receive invoices upon well-site operation completion. Standard collection terms are net 30 days, although extended terms are offered in competitive situations. We typically recognize revenue for specific, dedicated equipment set rental arrangements under ASC 842, Leases. For the remaining components of service revenue, we have applied the practical expedient allowed under ASC 606-10-55-18 to recognize transportation revenues in proportion to the amount we have the right to invoice. Contracts with Multiple Performance Obligations From time to time, we may enter into contracts that contain multiple performance obligations, such as work orders containing a combination of product, transportation, equipment rentals, and contract labor services. For these arrangements, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. We typically invoice our customers on a weekly or monthly basis; however, some customers receive invoices upon well-site operation completion. Standard collection terms are net 30 days, although extended terms are offered in competitive situations. 63 -------------------------------------------------------------------------------- Taxes Collected from Customers and Remitted to Governmental Authorities We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales. See Note U - Revenue. Deferred Revenues For a limited number of customers, we enter into supply agreements which give customers the right to make advanced payments toward the purchase of certain products at specified volumes over an average initial period of one to fifteen years. These payments represent consideration that is unconditional for which we have yet to transfer the related product. These payments are recorded as contract liabilities referred to as "deferred revenues" upon receipt and recognized as revenue upon delivery of the related product. Unbilled Receivables Revenues recognized in advance of invoice issuance create assets referred to as "unbilled receivables." Any portion of our unbilled receivables for which our right to consideration is conditional on a factor other than the passage of time is considered a contract asset. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once billed. 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. 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. See Note F - Accounts Receivable and Note U - Revenue. Impairment or Disposal of Property, Plant andMine Development 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. 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. 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. 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 64 -------------------------------------------------------------------------------- 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. See Note M - Asset Retirement Obligations.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 mainly consists of patents and technology, and it is amortized on a straight-line basis over an average useful life of 15 years. Customer relationships are amortized on a straight-line basis over their useful life of 20, 15 or 13 years.Goodwill represents the excess of the purchase price of business combinations over the fair value of net assets acquired.Goodwill and trade names are reviewed for impairment annually as ofOctober 31 , or more frequently when indicators of impairment exist. An impairment exists if the fair value of a reporting unit to which goodwill has been allocated, or the fair value of indefinite-lived intangible assets, is less than their respective carrying values. 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 assessment by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. See Note I -Goodwill and Intangible Assets.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. These estimates are prepared with the assistance of outside actuaries and consultants. Our actuaries periodically review the volume and amount of claims activity, and based upon their findings, we adjust our insurance reserves accordingly. The ultimate cost of claims for a covered period may differ from our original estimates. The current portion of our self-insurance reserves is included in accrued liabilities and the non-current portion is included in other long-term obligations in our Balance Sheets. As ofDecember 31, 2019 and 2018, our self-insurance reserves totaled$6.6 million and$5.4 million , respectively, of which$4.1 million and$2.6 million , respectively, was classified as current. 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 byU.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 R - Pension and Post-Retirement Benefits to our Consolidated Financial Statements in 65 -------------------------------------------------------------------------------- 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 We grant stock options, restricted stock, restricted stock units and performance share units to certain of our employees and directors under theAmended and Restated U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan. We recognize the cost of employee services rendered in exchange for awards of equity instruments. 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. We grant 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 a three-year period. 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. We grant stock options to certain employees and directors. Stock 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 stock options granted, we estimate the fair value of each grant using the Black-Scholes option-pricing model. The fair value of stock options granted is based on the exercise price of the option and certain assumptions, which are evaluated and revised, as necessary, to reflect market conditions and experience. 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. 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-dateU.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. See Note P - Equity-based Compensation. 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 66
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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. See Note T - Income Taxes. Recent Accounting Pronouncements New accounting guidance that has been recently issued is described 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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