U.S. SILICA HOLDINGS, INC. The following discussion and analysis of our financial condition and results of
operations should be read together with the unaudited condensed consolidated
financial statements and the accompanying notes included in Part I, Item 1 of
this Quarterly Report on Form 10-Q as well as the consolidated financial
statements, the accompanying notes and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A"), contained in
our Annual Report on Form 10-K for the fiscal year ended
This discussion contains forward-looking statements as discussed below and elsewhere in this report. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements.
Adjusted EBITDA and segment contribution margin as used herein are non-GAAP measures. For a detailed description of Adjusted EBITDA and segment contribution margin and reconciliations to their most comparable GAAP measures, please see the discussion below under "How We Evaluate Our Business."
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "could," "can have," "likely" and other words and terms of similar meaning.
For example, all statements we make relating to our estimated and projected costs; the impact of the COVID-19 pandemic on our future plans and results of operations; reserve and finished products estimates; demand for our products; the strategies of our customers; anticipated expenditures, cash flows, growth rates and financial results; our plans and objectives for future operations, growth or initiatives; strategies and their anticipated effect on our performance and liquidity; and the expected outcome or impact of pending or threatened litigation are forward-looking statements.
All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect, including but not limited to: global economic conditions; fluctuations in demand for commercial silica, diatomaceous earth, perlite, clay and cellulose; fluctuations in demand for frac sand or the development of either effective alternative proppants or new processes to replace hydraulic fracturing; changes in production spending by companies in the oil and gas industry and changes in the level of oil and natural gas exploration and development; general economic, political and business conditions in key regions of the world; effects of the COVID-19 pandemic on our customers and end users of our products; pricing pressure; weather and seasonal factors; the cyclical nature of our customers' business; our inability to meet our financial and performance targets and other forecasts or expectations; our substantial indebtedness and pension obligations, including restrictions on our operations imposed by our indebtedness; operational modifications, delays or cancellations; prices for electricity, natural gas and diesel fuel; our ability to maintain our transportation network; changes in government regulations and regulatory requirements, including those related to mining, explosives, chemicals, and oil and gas production; silica-related
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health issues and corresponding litigation; and other risks and uncertainties
detailed in this Quarterly Report on Form 10-Q and our most recent Forms 10-K,
10-Q, and 8-K filed with or furnished to the
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of the known factors described above, and it is impossible for us to anticipate all factors that could affect our actual results. As a result, forward-looking statements are not guarantees of future performance, and you should not place undue reliance on any forward-looking statements we make. If one or more of the risks described above or other risks or uncertainties materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise. 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 theSEC , and our other public communications. Overview We are a performance materials company and one of the largest domestic producers of commercial silica used in the oil and gas industry and in a wide range of industrial applications. In addition, through our acquisition ofEP Minerals, LLC ("EPM") and its affiliated companies in 2018, we are an industry leader in the production of industrial minerals, including diatomaceous earth, clay (calcium bentonite and calcium montmorillonite) and perlite. 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 ofMarch 31, 2020 , we operated 23 production facilities acrossthe United States . We control 489 million tons of reserves of commercial silica, which we believe can be processed to make 179 million tons of finished products that meet API frac sand specifications, and 79 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 periods presented, see Note E - Business Combinations to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. Recent Trends and Outlook Oil and gas proppants end market trends
The COVID-19 pandemic and related economic repercussions coupled with an
inadequate supply response and exacerbated by the lack of global storage
capacity, has resulted in a precipitous decline in crude oil prices. While the
In response to the expected second quarter effects of the pandemic on our Oil & Gas Proppants Segment, we have taken a number of steps to reduce our costs of operations. We have dramatically reduced all discretionary spending, reduced officer salaries, lowered headcount, and closed or idled facilities as appropriate.
The extent to which our business is affected by COVID-19 will depend on various
factors and consequences beyond our control, such as the duration and scope of
the pandemic; additional actions by businesses and governments in response to
the pandemic, the speed and effectiveness of responses to combat the virus, and
the effects of low oil prices on the global economy generally. These effects
could also aggravate the risk factors identified in our Annual Report on Form
10-K for the fiscal year ended
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Sales and average selling price per ton decreased sequentially during the three
months ended
Three Months Ended Percentage Change
March 31, December 31, 2019 March 31, 2020 vs.
Oil & Gas Proppants 2020 December 31, 2019
Sales $ 155,715 $ 234,273 (34 )%
Tons Sold 3,202 3,362 (5 )%
Average Selling Price per Ton $ 48.63 $ 69.68 (30 )%
If oil and gas drilling and completion activity does not 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 further actions to reduce
cost and improve liquidity.
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.
The COVID-19 pandemic has also caused, and is likely to continue to cause,
severe economic, market and other disruptions worldwide, which will begin to
affect our Industrial & Specialty Products segment in the second quarter of 2020
and beyond. In addition, after the COVID-19 pandemic has subsided, we may
experience adverse impacts in this segment as a result of any long-term economic
recession or depression that may continue in the future.
Our Business Strategy
The key drivers of our growth strategy include:
• increasing our presence and product offering in specialty products end
markets;
• optimizing our product mix and further developing value-added
capabilities to maximize margins;
• effectively positioning our Oil & Gas Proppants facilities to optimally
serve our customers;
• optimizing our supply chain network and leveraging our logistics
capabilities to meet our customers' needs;
• evaluating both Greenfield and Brownfield expansion opportunities and
other acquisitions; and
• maintaining financial strength and flexibility.
How We Generate Our Sales
Products
We derive our product sales by mining and processing minerals that our customers
purchase for various uses. Our product sales are primarily a function of the
price per ton and the number of tons sold. We primarily sell our products
through individual purchase orders executed under short-term price agreements or
at prevailing market rates. The amount invoiced reflects the price of the
product, transportation, surcharges, and additional handling services as
applicable, such as storage,
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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 38% and 42% of total sales for the three months endedMarch 31, 2020 and 2019, respectively. Sales to one of our customers accounted for 10% and 12% of our total sales for the three months endedMarch 31, 2020 and 2019, respectively. No other customers accounted for 10% or more of our total sales. AtMarch 31, 2020 , one of our customer's accounts receivable represented 10% of our total trade accounts receivable. AtDecember 31, 2019 , the same customer's accounts receivable represented 12% of our total trade accounts receivable. AtMarch 31, 2020 , one other customer's accounts receivable represented 10% of our total trade accounts receivable. 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, particularly 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. An executed order specifying the type and quantity of product to be delivered, in combination with the noted agreements, comprise our contracts in these arrangements. Selling more tons under supply contracts enables us to be more efficient from a production, supply chain and logistics standpoint. As discussed in Part I, Item 1A., Risk Factors of our 2019 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 ofMarch 31, 2020 , we had thirteen minimum purchase supply agreements in the Oil & Gas Proppants segment with initial terms expiring between 2020 and 2034. As ofMarch 31, 2019 , we had twenty-two 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 42% of Oil & Gas Proppants segment sales during the three months endedMarch 31, 2020 and 2019, 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. 29
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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,
human resources, information technology, and 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 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 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
U - Segment Reporting to our Consolidated Financial Statements in Part I,
Item 1. of this Quarterly Report on Form 10-Q.
Adjusted EBITDA
Adjusted EBITDA, a non-GAAP measure, is included in this report because it is a
key metric used by management to assess our operating performance and by our
lenders to evaluate our covenant compliance. Adjusted EBITDA excludes certain
income and/or costs, the removal of which improves comparability of operating
results across reporting periods. Our target performance goals under our
incentive compensation plan are tied, in part, to our Adjusted EBITDA.
Adjusted EBITDA is not a measure of our financial performance or liquidity under
GAAP and should not be considered as an alternative or superior to net income
(loss) as a measure of operating performance, cash flows from operating
activities as a measure of liquidity or any other performance measure derived in
accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a
measure of free cash flow for management's discretionary use, as it does not
consider certain cash requirements such as interest payments, tax payments and
debt service requirements. Adjusted EBITDA contains certain other limitations,
including the failure to reflect our cash expenditures, cash requirements for
working capital needs and cash costs to replace assets being depreciated and
amortized, and excludes certain charges that may recur in the future. Management
compensates for these limitations by relying primarily on our GAAP results and
by using Adjusted EBITDA only supplementally. Our measure of Adjusted EBITDA is
not necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the methods of calculation.
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The following table sets forth a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA.
Three Months Ended
(amounts in thousands) March 31,
2020 2019
Net loss attributable to
22,194 22,920
Provision for taxes (36,086 ) (1,972 )
Total depreciation, depletion and amortization expenses 38,449 44,600 EBITDA
(47,788 ) 46,224
Non-cash incentive compensation (1) 2,847 4,045
Post-employment expenses (excluding service costs) (2) 613 552
Merger and acquisition related expenses (3) 609 4,783
Plant capacity expansion expenses (4) 2,190 8,571
Contract termination expenses (5) - 1,000
Goodwill and other asset impairments (6) 103,866 -
Business optimization projects (7) 19 6
Facility closure costs (8) 1,097 -
Other adjustments allowable under the Credit Agreement (9) (15,207 ) 3,638
Adjusted EBITDA $ 48,246 $ 68,819
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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 P - Pension and Post-Retirement
Benefits to our Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q for more information.
(3) Merger and acquisition related expenses include legal fees, consulting fees, bank
fees, severance costs, certain purchase accounting items such as the amortization
of inventory fair value step-up, information technology integration costs and
similar charges. While these costs are not operational in nature and are not
expected to continue for any singular transaction on an ongoing basis, similar
types of costs, expenses and charges have occurred in prior periods and may recur
in the future as we continue to integrate prior acquisitions and pursue any
future acquisitions.
(4) Plant capacity expansion expenses include expenses that are not inventoriable or
capitalizable as related to plant expansion projects greater than $5 million in
capital expenditures or plant start up projects. While these expenses are not
operational in nature and are not expected to continue for any singular project
on an ongoing basis, similar types of expenses have occurred in prior periods and
may recur in the future if we continue to pursue future plant capacity expansion.
(5) Reflects contract termination expenses related to strategically exiting a service
contract. While these expenses are not operational in nature and are not expected
to continue for any singular event on an ongoing basis, similar types of expenses
have occurred in prior periods and may recur in the future as we continue to
strategically evaluate our contracts.
(6) The three months ended March 31, 2020 reflect $103.9 million of asset impairments
related to goodwill, long-lived assets, and inventory related to idled facilities
in our Oil & Gas segment. See Note G - Inventories, Note H - Property, Plant and
Mine Development , and Note I - Goodwill and Intangible Assets to our Condensed
Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q for more information.
(7) Reflects costs incurred related to business optimization projects within our
corporate center, which aim to measure and improve the efficiency, productivity
and performance of our organization. While these costs are not operational in
nature and are not expected to continue for any singular project on an ongoing
basis, similar types of expenses may recur in the future.
(8) Reflects costs incurred related to idled sand facilities and closed corporate
offices, including severance costs and remaining contracted costs such as office
lease costs, maintenance, and utilities. 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) Reflects miscellaneous adjustments permitted under the Credit Agreement, such as
recruiting fees and relocation costs. The three months ended March 31, 2020 also
included $1.6 million in severance costs and $17.6 million related to the gain
attributable to the bargain purchase of Arrows Up. See Note E - Business
Combinations to our Condensed Consolidated Financial Statements in Part I, Item 1
of this Quarterly Report on Form 10-Q for more information. The three months
ended March 31, 2019 included $2.4 million related to facility closure costs and
$2.2 million of loss contingencies reserve, partially offset by insurance
proceeds of $2.2 million .
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.
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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 ofMarch 31, 2020 , we are in compliance with all covenants under our Credit Facility, and our Revolver usage was$25 million (not including$6.5 million allocated for 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 4.71:1.00 as ofMarch 31, 2020 , we may draw up to$30.0 million without the consent of our lenders. With the consent of our lenders, we have access to the full availability of the Revolver. The calculation of the consolidated leverage ratio incorporates the Adjusted EBITDA-trailing twelve months as follows: (All amounts in thousands, except calculated ratio) March 31, 2020 Total debt$ 1,252,459 Finance leases 38 Total consolidated debt$ 1,252,497 Adjusted EBITDA-trailing twelve months$ 265,752 Pro forma Adjusted EBITDA including impact of acquisitions (1) - Other adjustments for covenant calculation (2) 253
Total Adjusted EBITDA-trailing twelve months for covenant calculation
Consolidated leverage ratio(3) 4.71
(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.
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Results of Operations for the Three Months Ended
Three Months Ended
(In thousands except per ton data) March 31, Percent Change
2020 2019 '20 vs.'19
Sales:
Oil & Gas Proppants$ 155,715 $ 260,477 (40 )% Industrial & Specialty Products 113,884 118,273 (4 )% Total sales$ 269,599 $ 378,750 (29 )%
Tons:
Oil & Gas Proppants 3,202 3,864 (17 )% Industrial & Specialty Products 959 966 (1 )% Total Tons 4,161 4,830 (14 )% Average Selling Price per Ton: Oil & Gas Proppants$ 48.63 $ 67.41 (28 )% Industrial & Specialty Products 118.75 122.44 (3 )%
Overall Average Selling Price per Ton
Total sales decreased 29% for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , driven by a 17% decrease in overall average selling price and a 14% decrease in total tons sold. The decrease in total sales was mainly driven by Oil & Gas Proppants sales, which decreased 40% for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Oil & Gas Proppants average selling price decreased 28% and tons sold decreased 17%. These decreases are a result of the shift to in-basin sand, overall decrease in demand due to current environmental conditions related to the COVID-19 pandemic as well as overall supply being greater than demand. The decrease in total sales was also partially driven by Industrial & Specialty Products sales, which decreased 4% for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Industrial & Specialty Products average selling price decreased 3% and tons sold decreased 1%. The decrease was mainly due to unfavorable product mix of lower margin tons sold. Cost of Sales (excluding depreciation, depletion, and amortization) Cost of sales decreased by$96.2 million , or 32%, to$201.3 million for the three months endedMarch 31, 2020 compared to$297.5 million for the three months endedMarch 31, 2019 . These changes result from the main components of cost of sales as discussed below. As a percentage of sales, cost of sales represented 75% for the three months endedMarch 31, 2020 compared to 79% for the same period in 2019. We incurred$74.4 million and$129.9 million of transportation and related costs for the three months endedMarch 31, 2020 and 2019, respectively. The$55.5 million decrease was mainly due to an overall decrease in demand in the Oil & Gas Proppants segment in addition to carrier rate reductions in our SandBox operations. As a percentage of sales, transportation and related costs represented 28% for the three months endedMarch 31, 2020 compared to 34% for the same period in 2019. We incurred$41.8 million and$53.7 million of operating labor costs for the three months endedMarch 31, 2020 and 2019, respectively. The$11.9 million decrease in labor cost was mainly due to idled facilities. As a percentage of sales, operating labor costs represented 16% for the three months endedMarch 31, 2020 compared to 14% for the same period in 2019. We incurred$10.5 million and$16.3 million of electricity and drying fuel (principally natural gas) costs for the three months endedMarch 31, 2020 and 2019, respectively. The$5.8 million decrease in electricity and drying fuel costs was mainly 34
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due to idled sand facilities. As a percentage of sales, electricity and drying fuel costs represented 4% for both of the three months endedMarch 31, 2020 and 2019. We incurred$15.7 million and$23.5 million of maintenance and repair costs for the three months endedMarch 31, 2020 and 2019, respectively. The$7.8 million decrease in maintenance and repair costs was due to idled sand facilities, reduced costs at our SandBox operations due to lower volumes, and a decrease in plant capacity expansion expenses. As a percentage of sales, maintenance and repair costs represented 6% for both the three months endedMarch 31, 2020 and 2019. Segment Contribution Margin Industrial & Specialty Products contribution margin decreased by$1.3 million to$43.3 million for the three months endedMarch 31, 2020 compared to$44.6 million for the three months endedMarch 31, 2019 , driven by a$4.4 million decrease in revenue and partially offset by$3.2 million in lower cost of sales. Oil & Gas Proppants contribution margin decreased by$25.7 million to$32.9 million for the three months endedMarch 31, 2020 compared to$58.6 million for the three months endedMarch 31, 2019 , driven by a$104.8 million decrease in sales, partially offset by a$79.1 million decrease in cost of sales. The decrease in segment contribution margin was mainly driven by decreased sand pricing as a result of a shift to in basin sand, and an overall decrease in demand. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by$4.6 million , or 13%, to$30.1 million for the three months endedMarch 31, 2020 compared to$34.7 million for the three months endedMarch 31, 2019 . The net decrease was primarily due to compensation related expense decreasing$4.3 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . In total, our selling, general and administrative expenses represented approximately 11% and 9% of our sales for the three months endedMarch 31, 2020 and 2019, respectively. Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense decreased by$6.2 million , or 14%, to$38.4 million for the three months endedMarch 31, 2020 compared to$44.6 million for the three months endedMarch 31, 2019 . The decrease was mainly driven by decreased production, a decrease in total depreciable assets due to idled plants and subsequent asset impairments which occurred during the fourth quarter of 2019 and the three months endedMarch 31, 2020 , and reduced capital spending. Depreciation, depletion and amortization expense represented approximately 14% and 12% of our sales for the three months endedMarch 31, 2020 and 2019, respectively.Goodwill and Other Asset Impairments During the three months endedMarch 31, 2020 , we recorded a$103.9 million asset impairment charge related to long-lived assets and inventories of idled plants, operating right-of-use assets and goodwill related to the Oil & Gas Proppants Segment. Operating Income (Loss) Operating loss for the three months endedMarch 31, 2020 was$104.1 million compared to operating income of$2.0 million for the three months endedMarch 31, 2019 . The change was mainly driven by a 29% decrease in sales, partially offset by a 14% decrease in depreciation, depletion and amortization expense, a 13% decrease in selling, general and administrative expenses, and a 32% decrease in cost of sales. Interest Expense Interest expense decreased by$1.7 million , or 7%, to$22.3 million for the three months endedMarch 31, 2020 compared to$24.0 million for the three months endedMarch 31, 2019 , mainly due to a decrease in interest rates, partially offset by a decrease in interest costs capitalized for property, plant and mine development and interest expense on the outstanding balance of the Revolver. 35
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Other Income, Net, Including Interest Income Other income, net, increased by$17.0 million , to$17.7 million for the three months endedMarch 31, 2020 compared to$0.7 million for the three months endedMarch 31, 2019 , primarily driven by the gain on bargain purchase price. Provision for Income Taxes For the three months endedMarch 31, 2020 , we had a tax benefit of$36.1 million . For the three months endedMarch 31, 2019 , we had a tax benefit of$2.0 million . The effective tax rates were 33% and 9% for the three months endedMarch 31, 2020 and 2019, respectively. Without discrete items, which primarily consist of tax expense related to equity compensation and a tax benefit related to the carryback of the 2019 NOL to 2014, the effective tax rates for the three months endedMarch 31, 2020 and 2019 would have been 24% and 29%, respectively. During the three months endedMarch 31, 2020 and 2019, we recorded tax expense related to equity compensation of$0.5 million and$3.9 million , respectively. Net Loss Net loss attributable toU.S. Silica Holdings, Inc. , was$72.3 million and$19.3 million for the three months endedMarch 31, 2020 and 2019, respectively. The year over year changes were due to the factors noted above. Liquidity and Capital Resources Overview Our principal liquidity requirements have historically been to service our debt, to meet our working capital, capital expenditure and mine development expenditure needs, to return cash to our stockholders, and to 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 ofMarch 31, 2020 , our working capital was$217.2 million and we had$68.5 million of availability under the Revolver. Based on our consolidated leverage ratio of 4.71:1.00 as ofMarch 31, 2020 , 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. Additionally, atMarch 31, 2020 , other receivables included$16.1 million of refundable alternative minimum tax credits and$28 million of refunds attributable to the CARES Act provision for net operating loss ("NOL") carrybacks from 2014-2019, which we expect to receive during 2020. 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. In response to the expected second quarter effects of the pandemic on our Oil & Gas Segment, we have taken a number of steps to reduce our costs of operations, including dramatically reducing all discretionary spending, reducing officer salaries, lowering headcount, and closing or idling facilities as appropriate. 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. During the period of economic disruption resulting from the COVID-19 pandemic, our ability to access capital markets and sources of liquidity may be impaired. At this time, we do not believe that any limited access to the capital markets will have a material adverse effect on our financial condition. 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 36
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operations, liquidity and capital requirements, contractual restrictions including restrictive covenants contained in debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. Cash Flow Analysis A summary of operating, investing and financing activities (in thousands) is shown in the following table:
Three Months Ended
March 31,
2020 2019
Net cash provided by (used in):
Operating activities $ (40,803 ) $ 10,901
Investing activities (16,386 ) (45,683 )
Financing activities 16,150 (6,101 )
Net Cash Provided by / Used in Operating Activities
Operating activities consist primarily of net income (loss) adjusted for certain
non-cash and working capital items. Adjustments to net income or loss 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 used in operating activities was $40.8 million for the three months
ended March 31, 2020 . This was mainly due to a $72.6 million net loss adjusted
for non-cash items, including $38.4 million in depreciation, depletion and
amortization, $103.9 million in goodwill and other asset impairments, $37.0
million in deferred income taxes, $2.8 million in equity-based compensation,
$2.5 million in deferred revenue, and $14.8 million in other miscellaneous
non-cash items. Also contributing to the change was a $13.5 million increase in
accounts receivable, a $2.9 million decrease in inventories, a $4.8 million
increase in prepaid expenses and other current assets, a $40.5 million decrease
in accounts payable and accrued liabilities, and $3.3 million in other operating
assets and liabilities.
Net cash provided by operating activities was $10.9 million for the three months
ended March 31, 2019 . This was mainly due to a $19.3 million net loss adjusted
for non-cash items, including $44.6 million in depreciation, depletion and
amortization, $2.6 million in deferred income taxes, $4.0 million in
equity-based compensation, $7.6 million in deferred revenue, and $1.5 million in
other miscellaneous non-cash items. Also contributing to the change was a $43.6
million increase in accounts receivable, an $18.9 million decrease in
inventories, a $3.2 million decrease in prepaid and other current assets, a
$13.0 million increase in accounts payable and accrued liabilities, and $1.7
million in other operating assets and liabilities.
Net Cash Provided by / 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 $16.4 million for the three months
ended March 31, 2020 . This was mainly due to capital expenditures of $16.1
million and capitalized intellectual property costs of $0.5 million . Capital
expenditures for the three months ended March 31, 2020 were primarily related to
the payment of capital expenditures accrued in 2019 and improvements and
expansions at our industrial facilities in Millen, Georgia , and Columbia, South
Carolina .
Net cash used in investing activities was $45.7 million for the three months
ended March 31, 2019 . This was mainly due to capital expenditures of $44.4
million and capitalized intellectual property costs of $1.3 million . Capital
expenditures for the three months ended March 31, 2019 were mainly for
engineering, procurement and construction of our growth projects, primarily
Crane and Lamesa and 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 approximately $30 million , which is
primarily associated with maintenance and cost improvement capital projects, and
near-
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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 provided by financing activities was$16.2 million for the three months endedMarch 31, 2020 . This was mainly due to$3.8 million of long-term debt payments,$4.6 million of dividends paid, and$0.5 million of tax payments related to shares withheld for vested restricted stock and stock units, offset by a$25.0 million draw down from the Revolver. Net cash used in financing activities was$6.1 million for the three months endedMarch 31, 2019 . This was mainly due to$4.0 million of long-term debt payments,$4.7 million of dividends paid,$2.2 million of tax payments related to shares withheld for vested restricted stock and restricted stock units, partially offset by$4.7 million of capital contributions from a non-controlling interest. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have a current material effect or are reasonably likely to have a future material effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations There have been no significant changes outside of the ordinary course of business to our "Contractual Obligations" table in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2019 Annual Report on Form 10-K. For more details on future minimum annual purchase commitments and operating leases commitments, please see accompanying Note O - Commitments and Contingencies and Note Q - Leases to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Environmental Matters We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. As ofMarch 31, 2020 , we had$25.3 million accrued for future reclamation costs, as compared to$25.8 million as ofDecember 31, 2019 . We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure to crystalline silica and our mining activity and how such matters may affect our business in the future under Item 1, "Business", Item 1A, "Risk Factors", Item 3, "Legal Proceedings" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Environmental Matters" in our 2019 Annual Report. 38
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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, including certain critical accounting policies and estimates, are included in Note B - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of our 2019 Annual Report on Form 10-K. Management believes that the application of these policies on a consistent basis enables us to provide the users of the Consolidated Financial Statements with useful and reliable information about our operating results and financial condition. Recent Accounting Pronouncements New accounting pronouncements that have been recently adopted are described in Note B - Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Availability of Reports; Website Access; Other Information Our Internet address is http://www.ussilica.com. Through "Investors" - "Financial Information" on our home page, we make available free of charge our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our proxy statements, our current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC . Our reports filed with theSEC are also available on its website at http://www.sec.gov. Stockholders may also request a free copy of these documents from:U.S. Silica Holdings, Inc. , attn.: Investor Relations,24275 Katy Freeway , Suite 600,Katy, Texas 77494.
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