Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35416
 
 usslogo2q15a35.jpg
U.S. Silica Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
26-3718801
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
24275 Katy Freeway, Suite 600
Katy, Texas 77494
(Address of Principal Executive Offices) (Zip Code)
(281) 258-2170
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No    ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No ý
As of July 27, 2018, 77,477,209 shares of common stock, par value $0.01 per share, of the registrant were outstanding.




U.S. Silica Holdings, Inc.
FORM 10-Q
For the Quarter Ended June 30, 2018
TABLE OF CONTENTS
 
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Signatures
 


1



PART I—FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; dollars in thousands)
 
June 30, 
 2018
 
December 31,  
 2017
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
322,357

 
$
384,567

Accounts receivable, net
280,019

 
212,586

Inventories, net
167,415

 
92,376

Prepaid expenses and other current assets
14,439

 
13,715

Income tax deposits
3,191

 

Total current assets
787,421

 
703,244

Property, plant and mine development, net
1,825,653

 
1,169,155

Goodwill
414,257

 
272,079

Intangible assets, net
194,795

 
150,007

Other assets
27,219

 
12,798

Total assets
$
3,249,345

 
$
2,307,283

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
206,994

 
$
171,041

Current portion of long-term debt
13,969

 
6,867

Current portion of deferred revenue
52,021

 
36,128

Income tax payable

 
1,566

Total current liabilities
272,984

 
215,602

Long-term debt, net
1,253,384

 
505,075

Deferred revenue
59,424

 
82,286

Liability for pension and other post-retirement benefits
47,022

 
52,867

Deferred income taxes, net
172,610

 
29,856

Other long-term obligations
85,417

 
25,091

Total liabilities
1,890,841

 
910,777

Commitments and Contingencies (Note O)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized; zero issued and outstanding at June 30, 2018 and December 31, 2017

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 81,734,599 issued and 77,681,643 outstanding at June 30, 2018; 81,267,205 issued and 80,524,255 outstanding at December 31, 2017
815

 
812

Additional paid-in capital
1,160,235

 
1,147,084

Retained earnings
327,173

 
287,992

Treasury stock, at cost, 4,052,956 and 742,950 shares at June 30, 2018 and December 31, 2017, respectively
(120,056
)
 
(25,456
)
Accumulated other comprehensive loss
(9,663
)
 
(13,926
)
Total stockholders’ equity
1,358,504

 
1,396,506

Total liabilities and stockholders’ equity
$
3,249,345

 
$
2,307,283

The accompanying notes are an integral part of these financial statements.

2


U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; dollars in thousands, except per share amounts)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Sales:
 
 
 
 
 
 
 
Product
$
345,957

 
$
235,891

 
$
640,745

 
$
439,143

Service
81,476

 
54,574

 
156,001

 
96,119

Total sales
427,433

 
290,465

 
796,746

 
535,262

Cost of sales (excluding depreciation, depletion and amortization):
 
 
 
 
 
 
 
Product
236,236

 
162,238

 
443,475

 
324,134

Service
56,609

 
34,726

 
110,280

 
60,018

Total cost of sales (excluding depreciation, depletion and amortization)
292,845

 
196,964

 
553,755

 
384,152

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
42,232

 
25,839

 
76,823

 
47,978

Depreciation, depletion and amortization
36,563

 
23,626

 
65,155

 
45,225

Asset impairment
16,184

 

 
16,184

 

Total operating expenses
94,979

 
49,465

 
158,162

 
93,203

Operating income
39,609

 
44,036

 
84,829

 
57,907

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(20,214
)
 
(8,105
)
 
(27,284
)
 
(15,751
)
Other income (expense), net, including interest income
1,081

 
638

 
1,746

 
(4,779
)
Total other expense
(19,133
)
 
(7,467
)
 
(25,538
)
 
(20,530
)
Income before income taxes
20,476

 
36,569

 
59,291

 
37,377

Income tax expense
(2,832
)
 
(7,110
)
 
(10,353
)
 
(5,396
)
Net income
$
17,644

 
$
29,459

 
$
48,938

 
$
31,981

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.36

 
$
0.62

 
$
0.39

Diluted
$
0.22

 
$
0.36

 
$
0.62

 
$
0.39

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
77,784

 
81,087

 
78,636

 
81,032

Diluted
78,480

 
81,945

 
79,328

 
82,103

Dividends declared per share
$
0.06

 
$
0.06

 
$
0.13

 
$
0.13

The accompanying notes are an integral part of these financial statements.

3



U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; dollars in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
17,644

 
$
29,459

 
$
48,938

 
$
31,981

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on derivatives (net of tax of $1 and $(2) for the three months ended June 30, 2018 and 2017, respectively, and $2 and $(23) for the six months ended June 30, 2018 and 2017, respectively)
4

 
(3
)
 
6

 
(39
)
Foreign currency translation adjustment (net of tax of $(7) and zero for the three months ended June 30, 2018 and 2017, respectively, and $(9) and zero for the six months ended June 30, 2018 and 2017, respectively)
(544
)
 

 
(541
)
 

Pension and other post-retirement benefits liability adjustment (net of tax of $799 and $(1,185) for the three months ended June 30, 2018 and 2017, respectively, and $1,529 and $(845) for the six months ended June 30, 2018 and 2017, respectively)
2,505

 
(1,967
)
 
4,798

 
(1,402
)
Comprehensive income
$
19,609

 
$
27,489

 
$
53,201

 
$
30,540

The accompanying notes are an integral part of these financial statements.

4



U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; dollars in thousands, except per share amounts)
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Balance at December 31, 2017
$
812

 
$
(25,456
)
 
$
1,147,084

 
$
287,992

 
$
(13,926
)
 
$
1,396,506

Net income

 

 

 
48,938

 

 
48,938

Unrealized gain on derivatives

 

 

 

 
6

 
6

Foreign currency translation adjustment

 

 

 

 
(541
)
 
(541
)
Pension and post-retirement liability

 

 

 

 
4,798

 
4,798

Cash dividend declared ($0.0625 per share)

 

 

 
(9,757
)
 

 
(9,757
)
Common stock-based compensation plans activity:
 
 
 
 
 
 
 
 
 
 
 
Equity-based compensation

 

 
13,185

 

 

 
13,185

Proceeds from options exercised

 
93

 
(31
)
 

 

 
62

Shares withheld for employee taxes related to vested restricted stock and stock units
3

 
(4,194
)
 
(3
)
 

 

 
(4,194
)
Repurchase of common stock

 
(90,499
)
 

 

 

 
(90,499
)
Balance at June 30, 2018
$
815

 
$
(120,056
)
 
$
1,160,235

 
$
327,173

 
$
(9,663
)
 
$
1,358,504

The accompanying notes are an integral part of these financial statements.

5



U.S. SILICA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)
 
Six Months Ended 
 June 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
48,938

 
$
31,981

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
65,155

 
45,225

Asset impairment
16,184

 

Debt issuance amortization
4,421

 
692

Original issue discount amortization
561

 
188

Deferred income taxes
11,023

 
2,149

Deferred revenue
(6,970
)
 
15,235

(Gain) loss on disposal of property, plant and equipment
(5,619
)
 
394

Equity-based compensation
13,185

 
11,952

Bad debt provision, net of recoveries
387

 
848

Other
(4,516
)
 
767

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(24,472
)
 
(69,400
)
Inventories
6,040

 
5,207

Prepaid expenses and other current assets
1,333

 
2,069

Income taxes
(4,757
)
 
4,257

Accounts payable and accrued expenses
(2,883
)
 
25,443

Short-term and long-term obligations-vendor incentives
54,632

 

Liability for pension and other post-retirement benefits
301

 
454

Net cash provided by operating activities
172,943

 
77,461

Investing activities:
 
 
 
Capital expenditures
(159,196
)
 
(152,087
)
Capitalized intellectual property costs
(3,863
)
 
(1,973
)
Acquisition of business, net of cash acquired
(742,841
)
 
(18,636
)
Proceeds from sale of property, plant and equipment
26,179

 
12

Net cash used in investing activities
(879,721
)
 
(172,684
)
Financing activities:
 
 
 
Dividends paid
(10,132
)
 
(10,187
)
Repurchase of common stock
(90,499
)
 

Proceeds from options exercised
62

 
547

Tax payments related to shares withheld for vested restricted stock and stock units
(4,194
)
 
(3,926
)
Proceeds from long-term debt
1,280,000

 

Payments on long-term debt
(493,231
)
 
(3,270
)
Financing fees paid
(37,273
)
 

Principal payments on capital lease obligations
(165
)
 
(631
)
Net cash provided by (used in) financing activities
644,568

 
(17,467
)
Net decrease in cash and cash equivalents
(62,210
)
 
(112,690
)
Cash and cash equivalents, beginning of period
384,567

 
711,225

Cash and cash equivalents, end of period
$
322,357

 
$
598,535


6



Supplemental cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
22,689

 
$
12,766

Taxes, net of refunds
$
3,778

 
$
(1,010
)
Related party purchases
$
1,604

 
$
1,870

Non-cash Items:
 
 
 
Equipment received
$

 
$
18,185

Accrued capital expenditures
$
21,966

 
$
7,171

Capital lease assumed by third-party
$
119

 
$

Asset retirement obligation assumed by third-party
$
2,116

 
$

The accompanying notes are an integral part of these financial statements.

7



U.S. SILICA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; dollars in thousands, except per share amounts)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) of U.S. Silica Holdings, Inc. (“Holdings,” and together with its subsidiaries “we,” “us” or the “Company”) included in this Quarterly Report on Form 10-Q, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). They do not contain certain information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017; therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation of the Financial Statements have been included. Such adjustments are of a normal, recurring nature.
Certain reclassifications of prior year's amounts have been made to conform to the current year presentation. In conforming to the current year's presentation, the Company identified and corrected an immaterial amount in its statement of cash flows for the six months ended June 30, 2017. The correction reduced Capital Expenditures within Net Cash Used in Investing Activities with a corresponding decrease to Accounts Payable and Accrued Expenses within Net Cash Used in Operating Activities. The amount is presented as Non-cash Accrued Capital Expenditures and had no impact in the Company's Balance Sheet, Income Statement or Net Change in Cash and Cash Equivalents in the Statement of Cash Flows.
Throughout this report we refer to (i) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (ii) our Condensed Consolidated Statements of Operations as our “Income Statements,” and (iii) our Condensed Consolidated Statements of Cash Flows as our “Cash Flows.”
Unaudited Interim Financial Statements
The accompanying Balance Sheet as of June 30, 2018; the Income Statements and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017; the Condensed Consolidated Statements of Stockholders' Equity and Cash Flows for the six months ended June 30, 2018; and other information disclosed in the related notes are unaudited. The Balance Sheet as of December 31, 2017, was derived from our audited consolidated financial statements included in our 2017 Annual Report on Form 10-K.
Use of Estimates and Assumptions
The preparation of the Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to the purchase price allocation for businesses acquired; mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production amortization calculations; environmental, reclamation and closure obligations; estimates of recoverable minerals; estimates of allowance for doubtful accounts; estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill and other long-lived assets); write-downs of inventory to net realizable value; equity-based compensation expense; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; contingent considerations; reserves for contingencies and litigation and the fair value and accounting treatment of financial instruments, including derivative instruments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
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

8



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 606-10-18. 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. 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.
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 840, 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
For contracts that contain multiple performance obligations, such as work orders containing a combination of product, transportation, equipment rentals, and contract labor services, 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.
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.
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 five 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

9



considered a contract asset. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once billed.
Foreign Currency Translation
For our operations in countries where the functional currency is other than the U.S. dollar, balance sheet amounts are translated using the exchange rate in effect at the balance sheet date. Income statement amounts are translated monthly using the average exchange rate for the respective month. The gains and losses resulting from the changes in exchange rates from year-to-year are recorded as a component of accumulated other comprehensive income or loss as currency translation adjustments, net of tax. Any gains or losses on transactions in currencies other than the functional currency are included in other income (expense), net, including interest income. For the six months ended June 30, 2018, other income (expense), net, including interest income, includes a net realized foreign currency transaction gain of $0.3 million.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes previous revenue recognition guidance. The new guidance introduces a new principles-based framework for revenue recognition and disclosure. Since its issuance, the FASB has issued additional ASUs, amending the guidance and the effective dates of amendments, and the SEC has rescinded certain related SEC guidance.
On January 1, 2018, we adopted the new accounting standard and all of the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. Adoption of the new revenue standard did not result in a material cumulative effect adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We do not expect the adoption of the new revenue standard to have a material impact to our net income on an ongoing basis. See Note S -Revenue to these Financial Statements for additional disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. This update is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. This standard mandates a modified retrospective transition method. We have established a project team in order to analyze the standard and have begun to review our current accounting policies and procedures to identify potential differences and changes which would result from applying the requirements of the new standard to our lease contracts. We have identified our population of lease agreements and are currently assessing the impact of other arrangements for embedded leases. While we continue to evaluate the effect of the standard, we anticipate that the adoption will result in a material increase in assets and liabilities on our consolidated balance sheet and will not have a material impact on our consolidated income statement or statement of cash flows. 
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed with a measurement date after January 1, 2017. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit. The update requires companies to include the service cost component of net periodic benefit costs in the same line item or items as compensation costs arising from services rendered by the associated employees during the period. The update also disallows capitalization of the other components of net periodic benefit costs and requires those costs to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods for public business entities. Companies are required to retrospectively apply the requirement for a separate presentation in the income statement of service costs and other components of net benefit cost and prospectively adopt the requirement to limit the capitalization of benefit costs to the service component. Application of a practical expedient is allowed permitting an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.

10



We implemented the update on January 1, 2018 and utilized the practical expedient to estimate the impact on the prior comparative period information presented in the interim and annual financial statements. We previously capitalized all net periodic benefit costs incurred for plant personnel in inventory and recorded the majority of net periodic benefit costs incurred by corporate personnel and retirees into selling, general, and administrative expenses.
The following is a reconciliation of the effect of the reclassification (in thousands) of the net benefit cost in the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2017. In addition, the table reflects the effect of the reclassification between product sales and services sales to conform to the current year's presentation for the three and six months ended June 30, 2017:    
 
Three Months Ended June 30, 2017
 
As Previously Reported
 
Services Reclassifications
 
ASU 2017-07 Adjustments
 
As Revised
Product Sales
$
246,022

 
$
(10,131
)
 
$

 
$
235,891

Service Sales
44,443

 
10,131

 

 
54,574

Total sales
290,465

 

 

 
290,465

Product cost of sales
164,025

 
(1,340
)
 
(447
)
 
162,238

Service cost of sales
33,386

 
1,340

 

 
34,726

Total cost of sales (excluding depreciation, depletion and amortization)
197,411

 

 
(447
)
 
196,964

Selling, general and administrative expenses
26,012

 

 
(173
)
 
25,839

Operating income
43,416

 

 
620

 
44,036

Other income (expense)
1,258

 

 
(620
)
 
638

    
 
Six Months Ended June 30, 2017
 
As Previously Reported
 
Services Reclassifications
 
ASU 2017-07 Adjustments
 
As Revised
Product Sales
$
455,343

 
$
(16,200
)
 
$

 
$
439,143

Service Sales
79,919

 
16,200

 

 
96,119

Total sales
535,262

 

 

 
535,262

Product cost of sales
326,662

 
(1,794
)
 
(734
)
 
324,134

Service cost of sales
58,224

 
1,794

 

 
60,018

Total cost of sales (excluding depreciation, depletion and amortization)
384,886

 

 
(734
)
 
384,152

Selling, general and administrative expenses
48,353

 

 
(375
)
 
47,978

Operating income
56,798

 

 
1,109

 
57,907

Other income (expense)
(3,670
)
 

 
(1,109
)
 
(4,779
)

In February 2018, the FASB issued Accounting Standards Update ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Act in accumulated other comprehensive loss may be reclassified to retained earnings. The ASU is effective February 1, 2019, with early adoption permitted. We are currently evaluating the effect that the transition guidance will have on our financial statements and related disclosures.

NOTE B—EARNINGS PER SHARE

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per common share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

The following table shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2018 and 2017:


11



In thousands, except per share amounts
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
17,644

 
$
29,459

 
$
48,938

 
$
31,981

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
77,784

 
81,087

 
78,636

 
81,032

Diluted effect of stock awards
696

 
858

 
692

 
1,071

Weighted average shares outstanding assuming dilution
78,480

 
81,945

 
79,328

 
82,103

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.23

 
$
0.36

 
$
0.62

 
$
0.39

Diluted earnings per share
$
0.22

 
$
0.36

 
$
0.62

 
$
0.39


Certain stock options, restricted stock awards and performance share units were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Weighted-average stock awards (in thousands) excluded from the calculation of diluted earnings per common share were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average outstanding stock options excluded
426

 
195

 
427

 
195

Weighted-average outstanding restricted stock and performance share units awards excluded
264

 
426

 
319

 
48


NOTE C—CAPITAL STRUCTURE AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
Our Amended and Restated Certificate of Incorporation authorizes up to 500,000,000 shares of common stock, par value of $0.01. Subject to the rights of holders of any series of preferred stock, all of the voting power of the stockholders of Holdings shall be vested in the holders of the common stock. There were 81,734,599 shares issued and 77,681,643 shares outstanding at June 30, 2018. There were 81,267,205 shares issued and 80,524,255 shares outstanding at December 31, 2017.
During the six months ended June 30, 2018, our Board of Directors declared quarterly cash dividends as follows:
Dividends per Common Share
 
Declaration Date
 
Record Date
 
 Payable Date
$
0.0625

 
February 16, 2018
 
March 15, 2018
 
April 5, 2018
$
0.0625

 
May 14, 2018
 
June 15, 2018
 
July 6, 2018
All dividends were paid as scheduled.
Any determination to pay dividends and other distributions in cash, stock, or property by Holdings in the future will be at the discretion of our Board of Directors and will be dependent on then-existing conditions, including our business and financial condition, results of operations, liquidity, capital requirements, contractual restrictions including restrictive covenants contained in our debt agreements, and other factors. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness.
Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares, in the aggregate, of preferred stock, par value of $0.01 in one or more series, to fix the powers, preferences and other rights of such series, and any qualifications, limitations or restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption rights and liquidation preference, and to fix the number of shares to be included in any such series, without any further vote or action by our stockholders.

12



There were no shares of preferred stock issued or outstanding at June 30, 2018 or December 31, 2017. At present, we have no plans to issue any preferred stock.
Share Repurchase Program
We are authorized by our Board of Directors to repurchase shares of our outstanding common stock from time to time on the open market or in privately negotiated transactions. Stock repurchases, if any, will be funded using our available liquidity. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations.
In May 2018, our Board of Directors authorized the repurchase of up to $200 million of our common stock. During the three months ended June 30, 2018, we repurchased 536,139 shares of our common stock at an average price of $28.91 and had $184.5 million of remaining availability under this program.
In October 2017, our Board of Directors authorized us to repurchase up to $100 million of our common stock by December 11, 2018. During the three months ended March 31, 2018, we repurchased 2,828,023 shares of our common stock at an average price of $26.52 under this program. As of March 31, 2018, we had repurchased a total of 3,555,104 shares of our common stock at an average price of $28.13, and fully utilized our shares authorized to be repurchased at such time.

Our Board of Directors previously had authorized the repurchase of up to $50.0 million of our common stock. This program expired on December 11, 2017. We repurchased a total of 706,093 shares of our common stock at an average price of $23.83 under this program.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of fair value adjustments associated with cash flow hedges, accumulated adjustments for net experience losses and prior service cost related to employee benefit plans and foreign currency translation adjustments, net of tax. The following table presents the changes in accumulated other comprehensive loss by component (in thousands) during the six months ended June 30, 2018:
 
For the Six Months Ended June 30, 2018
 
Unrealized gain/(loss) on cash flow hedges
 
Foreign currency translation adjustments
 
Pension and other post-retirement benefits liability
 
Total
Beginning Balance
$
(76
)
 
$
(6
)
 
$
(13,844
)
 
$
(13,926
)
Other comprehensive gain (loss) before reclassifications

 
(541
)
 
4,314

 
3,773

Amounts reclassed from accumulated other comprehensive loss
6

 

 
484

 
490

Ending Balance
$
(70
)
 
$
(547
)
 
$
(9,046
)
 
$
(9,663
)
Amounts reclassified from accumulated other comprehensive loss related to cash flow hedges are included in interest expense in our Income Statements and amounts reclassified related to pension and other post-retirement benefits are included in the computation of net periodic benefit costs at their pre-tax amounts.

NOTE D—BUSINESS COMBINATIONS

2018 Acquisition:
On May 1, 2018, we completed the acquisition of all of the outstanding capital stock of EP Acquisition Parent, Inc., a Delaware corporation (“EPAP”), and the ultimate parent of EP Minerals, LLC ("EPM"). Contemporaneous with the merger, EPAP was renamed EP Minerals Holdings, Inc. ("EPMH"). The consideration paid consisted of $742.8 million of cash, net of cash acquired of $19.1 million, subject to customary post-closing adjustments. A portion of the cash consideration has been deposited into escrow to support the post-closing purchase price adjustment. EPM is a global producer of engineered materials derived from industrial minerals, including diatomaceous earth, clay (calcium bentonite) and perlite. EPM's industrial minerals are used as filter aids, absorbents and functional additives for a variety of industries including food and beverage, biofuels, recreational water, oil and gas, farm and home, landscape, sports turf, paint, plastics, and insecticides. The acquisition of EPM increased our industrial materials product offering in our Industrial & Specialty Products segment.
We have accounted for the acquisition of EPMH under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Estimates of fair value included in the consolidated financial statements represent our best estimates and valuations. In accordance with the acquisition method of accounting, the allocation of consideration value is

13



subject to adjustment until we complete our analysis, within a period of time not to exceed one year after the date of acquisition, or May 1, 2019, in order to provide us with the time to complete the valuation of its assets and liabilities.
The following table sets forth the preliminary allocation of the purchase price to EPMH's identifiable tangible and intangible assets acquired and liabilities assumed (in thousands):
Preliminary allocation of purchase price:
(In thousands)
Accounts receivable, net
$
43,354

Inventories
84,395

Property, plant and mine development
123,086

Mineral rights
462,050

Identifiable intangible assets - finite lived
21,050

Identifiable intangible assets - indefinite lived
25,050

Prepaids and deposits
2,054

Other assets
4,089

Goodwill
139,378

Total assets acquired
904,506

Accounts payable
13,435

Accrued expenses and other current liabilities
8,255

Deferred tax liabilities
130,209

Long term obligations
9,766

Total liabilities assumed
$
161,665

Net assets acquired
$
742,841


The acquired intangible assets and the related estimated useful lives consist of the following:
 
Approximate Fair Value
 
Estimated Useful Life
 
(in thousands)
 
(in years)
Technology and intellectual property
2,000

 
15
Customer relationships
$
19,050

 
15
Total identifiable intangible assets - finite lived
$
21,050


 

Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired. Goodwill in this transaction is attributable to planned growth in our industrial materials product offering in our Industrial & Specialty Products segment. Intangibles and goodwill are not expected to be deductible for tax purposes.
Our Income Statement included revenue of $41.7 million and a net loss of $0.7 million for both the three and six months ended June 30, 2018, associated with EPMH following the date of acquisition. We incurred $8.8 million and $10.9 million of acquisition-related charges, excluding debt issuance costs, for the three and six months ended June 30, 2018, respectively, which are included in selling, general and administrative expenses on our Income Statement.
The acquisition of EPMH was accounted for using the acquisition method of accounting. The purchase price and purchase price allocation is subject to customary post-closing adjustments and changes in the fair value of assets and liabilities. The above estimated fair values of net assets acquired are based on the information that was available as of the reporting date. We believe that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on our continuing review of matters related to the acquisition. As a result, our final purchase price allocation may be significantly different than reflected above. We expect to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Unaudited Pro Forma Results
The results of EPMH's operations have been included in the consolidated financial statements subsequent to the acquisition date. EPMH's fiscal year end was November 30 and the Company's fiscal year end was December 31. Under SEC regulations, if a target's fiscal year end varies by more than 93 days from the acquirer's fiscal year end, it is required to adjust

14



interim periods until it is within 93 days. Since EPMH’s fiscal year end was within 93 days of the Company's fiscal year end, no adjustment is necessary and EPMH’s fiscal year end and interim period ends are used as if they coincided with the Company's fiscal year end and interim period end. The following unaudited pro forma consolidated financial information reflects the results of operations as if the EPMH acquisition had occurred on January 1, 2017, after giving effect to certain purchase accounting adjustments. Material non-recurring transaction costs attributable to the business combination were $15.2 million. Pro forma net income includes incremental interest expense due to the related debt financing, incremental depreciation and depletion expense related to the fair value adjustment of property, plant and mine development, amortization expense related to identifiable intangible assets, and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Sales
$
451,566

 
$
341,113

 
$
879,493

 
$
629,196

Net income
$
19,693

 
$
13,196

 
$
70,539

 
$
8,097

Basic earnings per share
$
0.25

 
$
0.16

 
$
0.90

 
$
0.10

Diluted earnings per share
$
0.25

 
$
0.16

 
$
0.89

 
$
0.10

 
 
 
 
 
 
 
 
Basic shares
77,784

 
81,087

 
78,636

 
81,032

Diluted shares
78,480

 
81,945

 
79,328

 
82,103


2017 Acquisitions:

White Armor Acquisition:
On April 1, 2017, we completed the acquisition of White Armor, a product line of cool roof granules used in industrial roofing applications, for cash consideration of $18.6 million. The final purchase price was allocated to goodwill of approximately $3.9 million, identifiable intangible assets of $12.8 million and other net assets of approximately $1.9 million.
Goodwill in this transaction is attributable to planned growth in our specialty industrial sand segment. The goodwill amount is included in our Industrial & Specialty Products segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.
We incurred $0.2 million of acquisition-related charges which are included in selling, general and administrative expenses during the year ended December 31, 2017. Revenue and earnings for White Armor after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.
MS Sand Acquisition:
On August 16, 2017, we completed the acquisition of Mississippi Sand, LLC ("MS Sand"), a Missouri limited liability company, for cash consideration of approximately $95.4 million, net of cash acquired of $2.2 million. As is normal and customary, subsequent adjustments were made including $(0.5) million to the net working capital adjustment plus an additional $6.1 million consideration paid related to a pre-existing contracted asset sale, which was entered into prior to our acquisition, for total cash consideration of $101.0 million. MS Sand is a frac sand mining and logistics company based in St. Louis, Missouri. The acquisition of MS Sand increased our regional frac sand product offering in our Oil & Gas Proppants segment.
We have accounted for the acquisition of MS Sand under the acquisition method of accounting in accordance with ASC 805, Business Combinations, and have accounted for measurement period adjustments in accordance with ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. Estimates of fair value included in the consolidated financial statements represent our best estimates and valuations. In accordance with the acquisition method of accounting, the allocation of consideration value is subject to adjustment until we complete our analysis, in a period of time, but not to exceed one year after the date of acquisition, or August 16, 2018, in order to provide us with the time to complete the valuation of its assets and liabilities.
The following table sets forth the current allocation of the purchase price to MS Sands' identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments (in thousands):

15



 
Estimate as of December 31, 2017
Measurement Period Adjustments
Purchase Price Allocation
Accounts receivable
$
11,201

$

$
11,201

Inventories
8,067


8,067

Other current assets
362


362

Assets held for sale
9,453


9,453

Property, plant and mine development
27,458


27,458

Mineral rights
26,300

(2,800
)
23,500

Other non-current assets
1,136


1,136

Goodwill
22,522

2,800

25,322

Customer relationships
1,840


1,840

Total assets acquired
108,339


108,339

Accounts payable and accrued expenses
3,761


3,761

Unfavorable leasehold positions
2,237


2,237

Notes Payable
866


866

Other long term liabilities



Asset retirement obligations
474


474

Total liabilities assumed
7,338


7,338

Net assets acquired
$
101,001

$

$
101,001


The acquired intangible assets and the related estimated useful lives consist of the following:
 
Approximate Fair Value
Estimated Useful Life
 
(in thousands)
(in years)
 Customer relationships
$
1,840

15

Goodwill in this transaction is attributable to planned growth in our regional frac sand product offering in our Oil & Gas Proppants segment. The goodwill amount is included in our Oil & Gas Proppants segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.
We have incurred $1.0 million to date of acquisition-related charges which are included in selling, general and administrative expenses. Revenue and earnings for MS Sand after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.
Both acquisitions were accounted for using the acquisition method of accounting. The purchase price and purchase price allocation for the MS Sand acquisition is preliminary and subject to customary post-closing adjustments and changes in the fair value of assets and liabilities. The above estimated fair values of net assets acquired are based on the information that was available as of the reporting date. We believe that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on our continuing review of matters related to the acquisition. As a result, our final purchase price allocation may be significantly different than reflected above. We expect to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Unaudited Pro Forma Results
The results of MS Sand’s operations have been included in the consolidated financial statements subsequent to the acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the MS Sand Acquisition had occurred on January 1, 2016, after giving effect to certain purchase accounting adjustments. These adjustments mainly include incremental depreciation expense related to the fair value adjustment of property, plant, equipment and mine development, amortization expense related to identifiable intangible assets and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):

16



 
For the year ended December 31,
 
2017
 
2016
Sales
$
1,287,202

 
$
642,951

Net income (loss)
$
143,604

 
$
(55,835
)
Basic earnings (loss) per share
$
1.77

 
$
(0.86
)
Diluted earnings (loss) per share
$
1.75

 
$
(0.86
)
NOTE E—ACCOUNTS RECEIVABLE
At June 30, 2018 and December 31, 2017, accounts receivable (in thousands) consisted of the following:
 
June 30, 
 2018
 
December 31,  
 2017
Trade receivables
$
281,951

 
$
217,649

Less: Allowance for doubtful accounts
(7,773
)
 
(7,100
)
Net trade receivables
274,178

 
210,549

Other receivables
5,841

 
2,037

Total accounts receivable
$
280,019

 
$
212,586

Changes in our allowance for doubtful accounts (in thousands) during the six months ended June 30, 2018 are as follows:
 
June 30, 
 2018
Beginning balance
$
7,780

Bad debt provision
387

Write-offs
(394
)
Ending balance
$
7,773

Our ten largest customers accounted for approximately 50% and 58% of total sales during the six months ended June 30, 2018 and 2017, respectively. Sales to one of our customers accounted for 14% of our total sales during the six months ended June 30, 2018. Sales to two of our customers accounted for 14% and 12% of our total sales during the six months ended June 30, 2017. No other customers accounted for 10% or more of our total sales. At June 30, 2018, one of our customers' accounts receivable represented 15% of our total accounts receivable, net of allowance. At December 31, 2017, two of our customers' accounts receivable represented 19% and 11% of our total accounts receivable, net of allowance. No other customers accounted for 10% or more of our total accounts receivable.
NOTE F—INVENTORIES
At June 30, 2018 and December 31, 2017, inventories (in thousands) consisted of the following:
 
June 30, 2018
 
December 31, 2017
Supplies
$
36,639

 
$
21,277

Raw materials and work in process
72,238

 
28,034

Finished goods
58,538

 
43,065

Total inventories
$
167,415

 
$
92,376


17



NOTE G—PROPERTY, PLANT AND MINE DEVELOPMENT
At June 30, 2018 and December 31, 2017, property, plant and mine development (in thousands) consisted of the following:
 
June 30, 
 2018
 
December 31,  
 2017
Mining property and mine development
$
1,051,824

 
$
586,242

Asset retirement cost
14,308

 
14,184

Land
42,189

 
36,552

Land improvements
66,336

 
45,878

Buildings
73,150

 
56,330

Machinery and equipment
790,655

 
590,566

Furniture and fixtures
4,053

 
2,953

Construction-in-progress
183,222

 
189,970

 
2,225,737

 
1,522,675

Accumulated depletion, depreciation and amortization
(400,084
)
 
(353,520
)
Total property, plant and mine development, net
$
1,825,653

 
$
1,169,155

At June 30, 2018 and December 31, 2017, the aggregate cost of machinery and equipment acquired under capital leases was $1.1 million and $0.9 million, respectively, reduced by accumulated depreciation of $0.2 million and $0.2 million, respectively. The amount of interest costs capitalized in property, plant and mine development was $3.3 million for the six months ended June 30, 2018. There were no interest costs capitalized for the six months ended June 30, 2017.
On March 21, 2018, we completed the sale of three transload facilities located in the Permian, Eagle Ford, and Marcellus Basins to CIG Logistics (“CIG”) for total consideration of $86.1 million, including the assumption by CIG of $2.2 million of Company obligations. Total cash consideration was $83.9 million. The consideration includes receipt of a vendor incentive from CIG to enter into master transloading service arrangements. Of the total consideration, $25.8 million was allocated to the fair value of the transload facilities, which had a net book value of $20.0 million and resulted in a gain on sale of $5.8 million. The consideration included a related asset retirement obligation of $2.1 million and an equipment note of $0.1 million assumed by CIG. In addition, $60.3 million of the consideration received in excess of the facilities' fair value was allocated to vendor incentives to be recognized as a reduction of costs using a service-level methodology over the contract lives of the transloading service arrangements. At June 30, 2018, vendor incentives of $10.6 million and $46.3 million were classified in accounts payable and accrued expenses and in other long-term obligations, respectively, on our balance sheet.
Separately, on March 21, 2018, we accrued $7.9 million in contract termination costs for facilities contracts operated by third-parties, which will not transfer to CIG. During the three months ended June 30, 2018, as a result of the final settlement of these contracts, we recorded a $2.7 million credit in selling, general and administrative expenses on our Income Statement.
During the three months ended June 30, 2018, we recorded a $16.2 million asset impairment related to the closure of our resin coating facility and associated product portfolio.

NOTE H—GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill (in thousands) consisted of the following:
 
 
Goodwill
Balance at December 31, 2017
 
$
272,079

EPMH acquisition
 
139,378

MS Sand acquisition measurement period adjustment
 
2,800

Balance at June 30, 2018
 
$
414,257



18



The changes in the carrying amount of intangible assets (in thousands) consisted of the following:
 
 
 
June 30, 2018
 
December 31, 2017
 
Estimated Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
(in years)
 
 
 
 
 
 
 
 
 
 
 
 
Technology and intellectual property
15
 
$
76,588

 
$
(8,413
)
 
$
68,175

 
$
70,703

 
$
(5,917
)
 
$
64,786

Customer relationships
13 - 15
 
80,279

 
(11,777
)
 
68,502

 
61,229

 
(9,076
)
 
52,153

 Total definite-lived intangible assets:
 
 
$
156,867

 
$
(20,190
)
 
$
136,677

 
$
131,932

 
$
(14,993
)
 
$
116,939

Trade name
 
 
58,118

 

 
58,118

 
33,068

 

 
33,068

Total intangible assets:
 
 
$
214,985

 
$
(20,190
)
 
$
194,795

 
$
165,000

 
$
(14,993
)
 
$
150,007


Amortization expense was $2.9 million and $5.2 million for the three and six months ended June 30, 2018, respectively. Amortization expense was $2.2 million and $4.2 million for the three and six months ended June 30, 2017, respectively.

The estimated amortization expense related to definite-lived intangible assets (in thousands) for the five succeeding years is as follows:
2018
$
5,586

2019
10,894

2020
10,894

2021
10,894

2022
10,894

NOTE I—DEBT
At June 30, 2018 and December 31, 2017, debt (in thousands) consisted of the following:
 
June 30, 
 2018
 
December 31,  
 2017
Senior secured credit facility:
 
 
 
Revolver expiring May 1, 2023 (8.0% at June 30, 2018 and 5.75% at December 31, 2017)
$

 
$

Term loan facility—final maturity May 1, 2025 (6.13% at June 30, 2018 and 4.75%-5.25% December 31, 2017)
1,276,800

 
489,075

Less: Unamortized original issue discount
(6,670
)
 
(944
)
Less: Unamortized debt issuance cost
(29,665
)
 
(3,099
)
Note payable secured by royalty interest
25,410

 
24,740

Customer note payable
286

 
745

Equipment notes payable
448

 
719

Capital leases
744

 
706

Total debt
1,267,353

 
511,942

Less: current portion
(13,969
)
 
(6,867
)
Total long-term portion of debt
$
1,253,384

 
$
505,075

Revolving Line-of-Credit
We have a $100.0 million revolving line-of-credit (the “Revolver”), with zero drawn and $4.0 million allocated for letters of credit as of June 30, 2018, leaving $96.0 million available under the Revolver.

19



Senior Secured Credit Facility
At June 30, 2018, contractual maturities of our senior secured credit facility (in thousands) are as follows:
2018
$
6,400

2019
12,800

2020
12,800

2021
12,800

Thereafter
1,232,000

Total
$
1,276,800

On May 1, 2018, we entered into the Third Amended and Restated Credit Agreement (the "Credit Agreement"). 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 revolving credit facility 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. Borrowings under the Credit Agreement will bear interest at variable rates as determined at our election, at LIBOR or a base rate, in each case, plus an applicable margin. In addition, under the Credit Agreement, we are required to pay a per annum facility fee and fees for letters of credit. The Credit Agreement is secured by substantially all of our assets and of our domestic subsidiaries' assets and a pledge of the equity interests in such entities. The term loan matures on May 1, 2025, and the revolving credit facility expires May 1, 2023. We incurred $37.3 million in debt issuance costs and original issue discount, of which $35.0 million was capitalized, as result of the new Credit Agreement, and wrote-off $1.1 million of capitalized debt issuance costs relating to the previously existing senior debt.
The facility contains covenants that, among other things, govern our ability, and certain of our subsidiaries' abilities, to create, incur or assume indebtedness and liens, to make acquisitions or investments, to sell assets and to pay dividends. The Credit Agreement also requires us to maintain a consolidated leverage ratio of no more than 3.75:1.00 as of the last day of any fiscal quarter whenever usage of the Revolver (other than certain undrawn letters of credit) exceeds 30% of the Revolver commitment. These covenants are subject to a number of important exceptions and qualifications. The Credit Agreement includes events of default and other affirmative and negative covenants that are usual for facilities and transactions of this type. As of June 30, 2018, and December 31, 2017, we are in compliance with all covenants in accordance with our senior secured credit facility.
Note Payable Secured by Royalty Interest
In conjunction with the acquisition of NBI in August 2016, we assumed a note payable secured by a royalty interest. The monthly royalty payment is calculated based on future tonnages and sales related to the sand shipped from our Tyler, Texas facility. The note payable is due by June 30, 2032. The note does not provide a stated interest rate. The minimum payments (in thousands) for the next five years required by the note are as follows:
2018
$
875

2019
1,750

2020
1,750

2021
1,750

2022
1,750

Under this agreement once a certain number of tons have been shipped from the Tyler facility, the minimum payments will decrease to $0.5 million per year, subject to proration in the period this threshold is met.
The royalty note payable fair value was estimated to be $22.5 million on the acquisition date. The estimate was made using a discounted cash flow model, which calculated the present value of projected future cash payments required under the agreement using a discounted rate of 14%. As of June 30, 2018, the note payable had a balance of $25.4 million. The increase in the note payable amount is due to interest paid-in-kind. The effective interest rate based on the updated projected future cash payments was 22% at June 30, 2018.

20



NOTE J—DEFERRED REVENUE
We enter into certain customer supply agreements which give the customers the right to purchase certain products for a discounted price at certain volumes over an average initial contract term of one to five years. The advance payments represent future purchases and are recorded as deferred revenue, recognized as revenue over the contract term of each supply agreement. During the six months ended June 30, 2018 we received advances of $13.4 million. At June 30, 2018 and December 31, 2017, the total deferred revenue balance was $111.4 million and $118.4 million, respectively, of which $52.0 million and $36.1 million was classified as current on our Balance Sheets.     
NOTE K—ASSET RETIREMENT OBLIGATION
Mine reclamation or future remediation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.
As of June 30, 2018, we had a liability of $19.8 million in other long-term obligations related to our asset retirement obligation. Changes in the asset retirement obligation (in thousands) during the six months ended June 30, 2018 are as follows:
 
June 30, 
 2018
Beginning balance
$
19,032

Accretion
611

Additions and revisions of prior estimates
(487
)
Addition related to EPMH acquisition
2,733

Disposal related to sale of transloads
(2,116
)
Ending balance
$
19,773

NOTE L—FAIR VALUE ACCOUNTING
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash Equivalents
Due to the short-term maturity, we believe our cash equivalent instruments at June 30, 2018 and December 31, 2017 approximate their reported carrying values.
Long-Term Debt, Including Current Maturities
We believe that the fair values of our long-term debt, including current maturities, approximate their carrying values based on their effective interest rates compared to current market rates.
Derivative Instruments
The estimated fair value of our derivative instruments (interest rate caps) are recorded at each reporting period and are based upon widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We also incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk as well as that of the respective counterparty in the fair value measurements.

21



Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default of ourselves and our counterparties. However, as of June 30, 2018, we have assessed that the impact of the credit valuation adjustments on the overall valuation of our derivative positions is not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. As of June 30, 2018, and December 31, 2017, the fair value of our derivative instruments was zero. Additional disclosures for derivative instruments are presented in Note M - Derivative Instruments to these Financial Statements.    

NOTE M—DERIVATIVE INSTRUMENTS
Cash Flow Hedges of Interest Rate Risk
We enter into interest rate cap agreements in connection with our term loan facility (the "Term Loan") to add stability to interest expense and to manage our exposure to interest rate movements. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium.
The following table summarizes the fair value of our derivative instruments (in thousands, except contract/notional amount). See Note L - Fair Value Accounting for additional disclosures regarding the estimated fair values of our derivative instruments at June 30, 2018 and December 31, 2017.
 
 
 
June 30, 2018
 
 
 
December 31, 2017
 
Maturity
Date
 
Contract/Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Maturity Date
 
Contract/Notional
Amount
 
Carrying
Amount
 
Fair
Value
Interest rate cap agreement(1)
2019
 

$249
 million
 
$

 
$

 
2019
 

$249
 million
 
$

 
$


(1) Agreements limit the LIBOR floating interest rate base to 4%.
We have designated these contracts as qualified cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and recognized in earnings in the same period or periods during which the hedged transaction affects earnings. During the six months ended June 30, 2018, we had no material ineffectiveness for such contract. During the six months ended June 30, 2017, we had no ineffectiveness for such contract.
The following table summarizes the effect of derivatives instruments (in thousands) on our income statements and our consolidated statements of comprehensive income for the three months ended June 30, 2018 and 2017.
 
June 30, 2018
 
June 30, 2017
Deferred losses from derivatives in OCI, beginning of period
$
(76
)
 
$
(32
)
Loss recognized in OCI from derivative instruments

 
(39
)
Gain reclassified from Accumulated OCI
6

 

Deferred losses from derivatives in OCI, end of period
$
(70
)
 
$
(71
)

NOTE N—EQUITY-BASED COMPENSATION
In July 2011, we adopted the U.S. Silica Holdings, Inc. 2011 Incentive Compensation Plan (the “2011 Plan”), which was amended and restated in May 2015. The 2011 Plan provides for grants of stock options, restricted stock, performance share units and other incentive-based awards. We believe our 2011 Plan aligns the interests of our employees and directors with those of our common stockholders. At June 30, 2018, we have 3,650,262 shares of common stock that may be issued under the 2011 Plan. We use a combination of treasury stock and new shares if necessary to satisfy option exercises or vesting of restricted awards and performance share units.
Stock Options

The following table summarizes the status of, and changes in, our stock option awards during the six months ended June 30, 2018:

22



 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Aggregate Intrinsic Value (in thousands)
 
Weighted
Average
Remaining Contractual Term in Years
Outstanding at December 31, 2017
908,919

 
$
28.46

 
$
7,008

 
6.1 years
Granted

 

 

 

Exercised
(4,167
)
 
14.65

 

 

Forfeited
(918
)
 
31.30

 

 

Expired
(1,838
)
 
$
31.30

 
$

 

Outstanding at June 30, 2018
901,996

 
$
28.52

 
$
3,692

 
5.3 years
Exercisable at June 30, 2018
855,446

 
$
27.38

 
$
3,692

 
5.2 years
There were no grants of stock options during the three and six months ended June 30, 2018 and 2017.
There were 4,167 stock options exercised during both the three and six months ended June 30, 2018. There were 2,083 and 26,935 stock options exercised during the three and six months ended June 30, 2017, respectively. The total intrinsic value of stock options exercised was $0.1 million for the three and six months ended June 30, 2018. The total intrinsic value of stock options exercised was $0.1 million and $0.9 million for the three and six months ended June 30, 2017, respectively. Cash received from options exercised during the three and six months ended June 30, 2018 was $62 thousand. Cash received from options exercised during the three and six months ended June 30, 2017 was thirty thousand and $0.5 million, respectively. The tax benefit realized from option exercises was fourteen thousand for the three and six months ended June 30, 2018. The tax benefit realized from option exercises was twenty thousand and $0.3 million for the three and six months ended June 30, 2017, respectively.
We recognized $0.4 million and $0.9 million of equity-based compensation expense related to options during the three and six months ended June 30, 2018, respectively. We recognized $0.6 million and $1.3 million of equity-based compensation expense related to options during the three and six months ended June 30, 2017, respectively. As of June 30, 2018, there was $0.3 million of total unrecognized compensation expense related to these options, which is expected to be recognized over a weighted-average period of approximately 0.3 years. We account for forfeitures as they occur.
Restricted Stock and Restricted Stock Unit Awards
The following table summarizes the status of, and changes in, our unvested restricted stock awards during the six months ended June 30, 2018:
 
Number of Shares
 
Grant Date Weighted
Average Fair Value
Unvested, December 31, 2017
461,346

 
$
30.76

Granted
237,931

 
26.34

Vested
(216,228
)
 
30.04

Forfeited
(22,827
)
 
31.76

Unvested, June 30, 2018
460,222

 
$
28.77

We granted 234,079 and 237,931 restricted stock and restricted stock unit awards during the three and six months ended June 30, 2018, respectively. We granted 139,451 and 140,951 restricted stock and restricted stock unit awards during the three and six months ended June 30, 2017, respectively. The fair value of the awards was based on the market price of our stock at date of grant.
We recognized $2.0 million and $3.8 million of equity-based compensation expense related to restricted stock awards during the three and six months ended June 30, 2018, respectively. We recognized $1.8 million and $3.3 million of equity-based compensation expense related to restricted stock awards during the three and six months ended June 30, 2017, respectively. As of June 30, 2018, there was $11.0 million of total unrecognized compensation expense related to these restricted stock awards, which is expected to be recognized over a weighted-average period of 1.9 years.

23



Performance Share Unit Awards
The following table summarizes the status of, and changes in, our performance share unit awards during the six months ended June 30, 2018:
 
Number of Shares
 
Grant Date Weighted
Average Fair Value
Unvested, December 31, 2017
881,416

 
$
42.16

Granted
201,417

 
31.24

Vested
(225,000
)
 
41.99

Forfeited
(8,072
)
 
52.92

Unvested, June 30, 2018
849,761

 
$
39.31

We granted 201,417 and 90,501 of performance share unit awards during the three and six months ended June 30, 2018 and 2017, respectively. The grant date fair value of these awards was estimated to be $31.24 and $67.69 for both the three and six months ended June 30, 2018 and 2017, respectively, and the number of units that will vest will depend on the percentage ranking of the Company's total shareholder return ("TSR") compared to the TSRs for each of the companies in the peer group over the three year period from January 1, 2018 through December 31, 2020 for the current period grant, and from January 1, 2017 through December 31, 2019 for the prior year grant. The related compensation expense is recognized on a straight-line basis over the vesting period.
The grant date fair value for these awards was estimated using a Monte Carlo simulation model. The Monte Carlo simulation model requires the use of highly subjective assumptions. Our key assumptions in the model included the price and the expected volatility of our common stock and our self-determined peer group companies’ stock, risk-free rate of interest, dividend yields and cross-correlations between our common stock and our self-determined peer group companies' stock.
We recognized $4.5 million and $8.6 million of compensation expense related to performance share unit awards during the three and six months ended June 30, 2018, respectively. We recognized $4.0 million and $7.4 million of compensation expense related to performance share unit awards during the three and six months ended June 30, 2017, respectively. As of June 30, 2018, there was $15.5 million of estimated total unrecognized compensation expense related to these performance share unit awards, which is expected to be recognized over a weighted-average period of 1.4 year.
NOTE O—COMMITMENTS AND CONTINGENCIES
Future Minimum Annual Commitments at June 30, 2018 (in thousands):
Year ending December 31,
Operating Lease Minimum Rental Payments
 
Minimum Purchase Commitments
2018
$
39,115

 
$
12,413

2019
73,080

 
21,037

2020
57,683

 
15,663

2021
38,639

 
8,008

2022
31,652

 
5,640

Thereafter
61,790

 
4,141

Total future lease and purchase commitments
$
301,959

 
$
66,902

Operating Leases
We are obligated under certain operating leases for railroad cars, office space, mining property, mining/processing equipment and transportation and other equipment. Certain operating lease agreements include options to purchase the equipment for fair market value at the end of the original lease term. In general, the above leases include renewal options and provide that we pay for all utilities, insurance, taxes and maintenance. Expense related to operating leases and rental agreements totaled approximately $24.9 million and $47.7 million for the three and six months ended June 30, 2018. Expense related to operating leases and rental agreements totaled approximately $15.8 million and $31.2 million for the three and six months ended June 30, 2017, respectively.

24



Minimum Purchase Commitments
We enter into service agreements with our transload service providers and transportation service providers. Some of these agreements require us to purchase a minimum amount of services over a specific period of time. Any inability to meet these minimum contract requirements requires us to pay a shortfall fee, which is based on the difference between the minimum amount contracted for and the actual amount purchased.
Contingent Liability on Royalty Agreement
On May 17, 2017, we purchased reserves in Crane County, Texas, for $94.4 million cash consideration plus contingent consideration. The contingent consideration is a royalty that is based on the tonnage shipped to third-parties. Because the contingent consideration is dependent on future tonnage sold, the amounts of which are uncertain, it is not currently possible to estimate the fair value of these future payments. The contingent consideration will be capitalized at the time a payment is probable and reasonably estimable, and the related depletion expense will be adjusted prospectively.
Other Commitments and Contingencies
Our operating subsidiary, U.S. Silica Company (“U.S. Silica”), has been named as a defendant in various product liability claims alleging silica exposure causing silicosis. During the six months ended June 30, 2018, one new claim was brought against U.S. Silica. As of June 30, 2018, there were 56 active silica-related products liability claims pending in which U.S. Silica is a defendant. Although the outcomes of these claims cannot be predicted with certainty, in the opinion of management, it is not reasonably possible that the ultimate resolution of these matters will have a material adverse effect on our financial position or results of operations that exceeds the accrual amounts.
We have recorded estimated liabilities for these claims in other long-term obligations as well as estimated recoveries under the indemnity agreement and an estimate of future recoveries under insurance in other assets on our condensed consolidated balance sheets. As of both June 30, 2018, and December 31, 2017 other non-current assets included zero for insurance for third-party products liability claims and other long-term obligations included $1.0 million for third-party products liability claims.
NOTE P— PENSION AND POST-RETIREMENT BENEFITS
We maintain a single-employer noncontributory defined benefit pension plan covering certain employees. There have been no new entrants to the plan since May 2009 when the plan was frozen to all new employees. The plan provides benefits based on each covered employee’s years of qualifying service. Our funding policy is to contribute amounts within the range of the minimum required and maximum deductible contributions for the plan consistent with a goal of appropriate minimization of the unfunded projected benefit obligation. The pension plan uses a benefit level per year of service for covered hourly employees and a final average pay method for covered salaried employees. The plan uses the projected unit credit cost method to determine the actuarial valuation.
Net pension benefit cost (in thousands) consisted of the following for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
322

 
$
149

 
$
601

 
$
444

Interest cost
1,158

 
571

 
2,136

 
1,454

Expected return on plan assets
(1,491
)
 
(757
)
 
(2,734
)
 
(2,088
)
Net amortization and deferral
631

 
255

 
1,264

 
948

Net pension benefit costs
$
620

 
$
218

 
$
1,267

 
$
758


25



In addition, we provide defined benefit post-retirement health care and life insurance benefits to some employees. Covered employees become eligible for these benefits at retirement after meeting minimum age and service requirements. The projected future cost of providing post-retirement benefits, such as healthcare and life insurance, is recognized as an expense as employees render services. We previously maintained a Voluntary Employees’ Beneficiary Association trust that was used to partially fund health care benefits for future retirees. Benefits were funded to the extent contributions were tax deductible, which under current legislation is limited. In 2017, the trust terminated upon depletion of its assets, which were used in accordance with trust terms. In general, retiree health benefits are paid as covered expenses are incurred.
Net post-retirement benefit cost (in thousands) consisted of the following for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
27

 
$
33

 
$
54

 
$
65

Interest cost
188

 
191

 
376

 
383

Expected return on plan assets

 
(1
)
 
(1
)
 
(1
)
Net amortization and deferral

 
53

 

 
107

Net post-retirement benefit costs
$
215

 
$
276

 
$
429

 
$
554

We contributed $0.5 million and $0.8 million to the qualified pension plan for the three and six months ended June 30, 2018, respectively. We contributed $0.3 million to the qualified pension plan for the three and six months ended June 30, 2017. Total expected employer funding contributions during the fiscal year ending December 31, 2018 are $2.5 million for the pension plan and $1.4 million for the post-retirement medical and life plan.
We contribute to three multiemployer defined benefit pension plans under the terms of collective-bargaining agreements for union-represented employees. A multiemployer plan is subject to collective bargaining for employees of two or more unrelated companies. These plans allow multiple employers to pool their pension resources and realize efficiencies associated with the daily administration of the plan. Multiemployer plans are generally governed by a board of trustees composed of management and labor representatives and are funded through employer contributions. However, in most cases, management is not directly represented. Our contributions to individual multiemployer pension funds did not exceed 5% of the fund’s total contributions. Additionally, our contributions to the multiemployer post-retirement benefit plans were immaterial for the three and six months ended June 30, 2018 and 2017.
NOTE Q— OBLIGATIONS UNDER GUARANTEES
We have indemnified our insurers against any loss they may incur in the event that holders of surety bonds, issued on our behalf, execute the bonds. As of June 30, 2018, there was $28.6 million in bonds outstanding. The majority of these bonds, $25.6 million, relate to reclamation requirements issued by various governmental authorities. Reclamation bonds remain outstanding until the mining area is reclaimed and the authority issues a formal release. The remaining bonds relate to such indefinite purposes as licenses, permits, and tax collection.
NOTE R— INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) bonus depreciation that will allow for full expensing of qualified property; (2) reduction of the U.S. federal corporate tax rate; (3) elimination of the corporate alternative minimum tax; (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; (6) limitations on the deductibility of certain executive compensation; and (7) limitations on net operating losses generated after December 31, 2017, to 80 percent of taxable income.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. As we are not subject to either the international changes of the Tax Act or other applicable

26



provisions, we believe that the income tax effects of the Tax Act applicable to our accounting under ASC 740 is substantially complete as of June 30, 2018. Additional information that may affect the accounting under ASC 740 would include further clarification and guidance on how the Internal Revenue Service and state taxing authorities will implement the Tax Act. We did not make any Tax Act adjustments to the accounting under ASC 740 for the three and six months ended June 30, 2018, and we do not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of operations.
The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Because ASC 740-10-25-47 requires the effect of a change in tax laws or rates to be recognized as of the date of enactment, we were required to adjust deferred tax assets and liabilities as of December 22, 2017. Accordingly, for the year ended December 31, 2017, we recorded a decrease related to deferred tax assets and liabilities of $45.0 million and $80.8 million, respectively, with a corresponding net adjustment to deferred income tax benefit of $35.8 million.
Under the Tax Act, net operating loss (NOL) deductions arising in tax years beginning after December 31, 2017 can only offset up to 80 percent of future taxable income. The Act also prohibits NOL carrybacks, but allows indefinite carryforwards for NOLs arising in tax years beginning after December 31, 2017. Net operating losses arising before January 1, 2018 are accounted for under the previous tax rules that imposed no limit on the amount of the taxable income that can be set off using NOLs and that can be carried back 2 years, and carried forward 20 years.
The Tax Act repeals the corporate alternative minimum tax (AMT), effective for tax years beginning after December 31, 2017, but allows an entity to claim portions of any unused AMT credits over the next four years to offset its regular tax liability. An entity with unused AMT credits as of December 31, 2017 can first use these credits to offset its regular tax for 2017, and can then claim up to 50 percent of the remaining AMT credits in 2018, 2019, and 2020, with all remaining AMT credits refundable in 2021.
For interim period reporting, we record income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. At the end of each interim period, we update the estimated annual effective tax rate, and if the estimated tax rate changes based on new information, we make a cumulative adjustment in the period. We record the tax effect of an unusual or infrequently occurring item in the interim period in which it occurs as a discrete item of tax.
For the three and six months ended June 30, 2018, we recorded a tax expense of $0.2 million and $0.7 million, respectively, related to equity compensation pursuant to ASU 2016-09. For the three and six months ended June 30, 2017, we recorded a tax benefit of $0.2 million and $1.7 million, respectively, related to equity compensation pursuant to ASU 2016-09.
The effective tax rate was 14% and 17% for the three and six months ended June 30, 2018, respectively. The effective tax rate was 19% and 14% for the three and six months ended and June 30, 2017, respectively. The effective tax rate for the three and six months ended June 30, 2018 would have been 13% and 16%, respectively, without the equity compensation tax benefit or expense recorded discretely. The effective tax rate for the three and six months ended June 30, 2017 would have been 20% and 19%, respectively, without the equity compensation tax benefit or expense recorded discretely.
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.

NOTE S— REVENUE
We consider sales disaggregated at the product and service level by segment to depict how the nature, amount, timing and uncertainty of revenues and cash flow are impacted by changes in economic factors. The following table disaggregates our sales by major source for the three and six months ended June 30, 2018 (in thousands):
 
 
Three Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2018
Category
 
Oil & Gas Proppants
 
Industrial & Specialty Products
 
Total Sales
 
Oil & Gas Proppants
 
Industrial & Specialty Products
 
Total Sales
Product
 
$
242,587

 
$
103,370

 
$
345,957

 
$
481,009

 
$
159,736

 
$
640,745

Service
 
81,476

 

 
81,476

 
155,984

 
17

 
156,001

Total Sales
 
$
324,063

 
$
103,370

 
$
427,433

 
$
636,993

 
$
159,753

 
$
796,746


27



The following tables reflect the changes in our contract assets, which we classify as unbilled receivables and our contract liabilities, which we classify as deferred revenues, for the six months ended June 30, 2018 (in thousands):
 
 
Unbilled Receivables
December 31, 2017
 
$
5,245

Reclassifications to billed receivables
 
(8,161
)
Revenues recognized in excess of period billings
 
5,428

June 30, 2018
 
$
2,512

    
 
 
Deferred Revenue
December 31, 2017
 
$
118,414

Revenues recognized from balances held at the beginning of the period
 
(20,344
)
Revenues deferred from period collections on unfulfilled performance obligations
 
13,375

June 30, 2018
 
$
111,445

We have elected to use the practical expedients allowed under ASC 606-10-50-14, pursuant to which we have excluded disclosures of transaction prices allocated to remaining performance obligations and when we expect to recognize such revenue. The majority of our remaining performance obligations are primarily comprised of unfulfilled product, transportation service, and labor service orders, all of which hold a remaining duration of less than one year. The long term portion of deferred revenue primarily represents a combination of refundable and nonrefundable customer prepayments for which related current performance obligations do not yet exist, but are expected to arise, before the expiration of the contract. Our residual unfulfilled performance obligations are comprised primarily of long-term equipment rental arrangements in which we recognize revenues equal to what we have a right to invoice. Generally, no variable consideration exists related to our remaining performance obligations and no consideration is excluded from the associated transaction prices.

NOTE T— RELATED PARTY TRANSACTIONS

A current officer of one of our operating subsidiaries holds an ownership interest in a transportation brokerage and logistics services vendor, from which we made purchases of approximately $0.9 million and $1.8 million for the three and six months ended June 30, 2018, respectively, and $1.2 million and $1.9 million for the three and six months ended June 30, 2017, respectively.

NOTE U— SEGMENT REPORTING
Our business is organized into two reportable segments, Oil & Gas Proppants and Industrial & Specialty Products, based on end markets. The reportable segments are consistent with how management views the markets that we serve and the financial information reviewed by the chief operating decision maker. We manage our Oil & Gas Proppants and Industrial & Specialty Products businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.
In the Oil & Gas Proppants segment, we serve the oil and gas recovery market primarily by providing and delivering fracturing sand, or “frac sand,” which is pumped down oil and natural gas wells to prop open rock fissures and increase the flow rate of oil and natural gas from the wells.
The Industrial & Specialty Products segment consists of over 400 products and materials used in a variety of industries, including container glass, fiberglass, specialty glass, flat glass, building products, fillers and extenders, foundry products, chemicals, recreation products and filtration products.
An operating segment’s performance is primarily evaluated based on segment contribution margin, which excludes certain corporate costs not associated with the operations of the segment. These corporate costs are separately stated below and include costs that are related to functional areas such as operations management, corporate purchasing, accounting, treasury, information technology, legal and human resources. We believe that segment contribution margin, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, not a substitute for, or superior to, net income (loss) or other measures of financial performance prepared in

28



accordance with generally accepted accounting principles. The other accounting policies of each of the two reporting segments are the same as those in Note A - Summary of Significant Accounting Policies to these Financial Statements.
The following table presents sales and segment contribution margin (in thousands) for the reporting segments and other operating results not allocated to the reported segments for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Sales:
 
 
 
 
 
 
 
 
Oil & Gas Proppants
$
324,063

 
$
235,018

 
$
636,993

 
$
427,976

 
Industrial & Specialty Products
103,370

 
55,447

 
159,753

 
107,286

 
Total sales
427,433

 
290,465

 
796,746

 
535,262

 
Segment contribution margin:
 
 
 
 
 
 
 
 
Oil & Gas Proppants
114,607

 
71,222

 
214,041

 
110,062

 
Industrial & Specialty Products
41,301

 
23,267

 
61,831

 
43,484

 
Total segment contribution margin
155,908

 
94,489

 
275,872

 
153,546

 
Operating activities excluded from segment cost of sales
(21,320
)
 
(988
)
 
(32,881
)
 
(2,436
)
 
Selling, general and administrative
(42,232
)
 
(25,839
)
 
(76,823
)
 
(47,978
)
 
Depreciation, depletion and amortization
(36,563
)
 
(23,626
)
 
(65,155
)
 
(45,225
)
 
Asset impairment
(16,184
)
 

 
(16,184
)
 

 
Interest expense
(20,214
)
 
(8,105
)
 
(27,284
)
 
(15,751
)
 
Other income (expense), net, including interest income
1,081

 
638

 
1,746

 
(4,779
)
 
Income tax expense
(2,832
)
 
(7,110
)
 
(10,353
)
 
(5,396
)
 
Net income
$
17,644

 
$
29,459

 
$
48,938

 
$
31,981

 
Asset information, including capital expenditures and depreciation, depletion, and amortization, by segment is not included in reports used by management in its monitoring of performance and, therefore, is not reported by segment. At June 30, 2018, goodwill of $414.3 million has been allocated to these segments with $250.3 million assigned to Oil & Gas Proppants and $164.0 million to Industrial & Specialty Products. At December 31, 2017, goodwill of $272.1 million had been allocated to these segments with $247.5 million assigned to Oil & Gas Proppants and $24.6 million to Industrial & Specialty Products.
NOTE V— SUBSEQUENT EVENTS
On July 6, 2018, we paid a cash dividend of $0.0625 per share to common stockholders of record on June 15, 2018, which had been declared by our Board of Directors on May 14, 2018.
On July 16, 2018, our Board of Directors declared a quarterly cash dividend of $0.0625 per share to common stockholders of record at the close of business on September 14, 2018, payable on October 3, 2018.    

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the Condensed Consolidated Financial Statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the Consolidated Financial Statements, the accompanying notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "2017 Annual Report").
Overview
We are a performance materials company and one of the largest domestic producers of commercial silica, a specialized mineral that is a critical input into a variety of attractive end markets. Through our recent acquisition of EP Minerals, LLC, we are an industry leader in the production of products derived from diatomaceous earth, perlite, engineered clays, and non-activated clays. During our 118-year history, we have developed core competencies in mining, processing, logistics and materials science that enable us to produce and cost-effectively deliver over 430 diversified products to customers across these markets. As of June 30, 2018, we operate 27 production facilities across the United States. We control 757 million tons of reserves of commercial silica, which can be processed to make 320 million tons of finished products that meet American Petroleum Institute (API) frac sand specifications, and 53 million tons of reserves of diatomaceous earth, perlite, and clays.
Our operations are organized into two segments based on end markets served: (1) Oil & Gas Proppants and (2) Industrial & Specialty Products. Our segments are complementary because our ability to sell to a wide range of customers across end markets allows us to maximize recovery rates in our mining operations, optimize our asset utilization and reduce the cyclicality of our earnings.
Acquisitions
On May 1, 2018, we completed the acquisition of all of the outstanding capital stock of EP Acquisition Parent, Inc., a Delaware corporation (“EPAP”), and the ultimate parent of EP Minerals, LLC ("EPM"). Contemporaneous with the merger, EPAP was renamed EP Minerals Holdings, Inc. ("EPMH"). The consideration paid consisted of $742.8 million of cash, net of cash acquired of $19.1 million, subject to customary post-closing adjustments. A portion of the cash consideration has been deposited into escrow to support the post-closing purchase price adjustment. EPM is a global producer of engineered materials derived from industrial minerals, including diatomaceous earth, clay (calcium bentonite) and perlite. EPM's industrial minerals are used as filter aids, absorbents and functional additives for a variety of industries including food and beverage, biofuels, recreational water, oil and gas, farm and home, landscape, sports turf, paint, plastics, and insecticides. The acquisition of EPM increased our industrial materials product offering in our Industrial & Specialty Products segment.
On August 16, 2017, we completed the acquisition of Mississippi Sand, LLC ("MS Sand"). MS Sand is a frac sand mining and logistics company based in St. Louis, Missouri.
On April 1, 2017, we completed the acquisition of White Armor (the "White Armor acquisition"), a product line of cool roof granules used in industrial roofing applications.
See accompanying Note D - Business Combinations to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for pro forma results and other details regarding these acquisitions.
Recent Trends and Outlook
Oil and gas proppants end market trends
Increased demand for frac sand has historically been driven by the growth in the use of hydraulic fracturing as a means to extract hydrocarbons from shale formations. According to the IHS Markit Proppant IQ, Proppant Market Analysis 2018 Q2 release, published June 2018, U.S. raw sand proppant demand was 42% higher on a run rate basis during the first quarter of 2018 than its previous peak in 2014, and is expected to continue to grow.
Declines in oil prices beginning in 2015 reduced oil and gas drilling and completion activity in North America during 2015 and most of 2016. As of September 30, 2016, the U.S. land rig count had fallen over 70% from its peak in 2014. Demand for frac sand fell in conjunction with the rig count and activity levels, partially offset by higher proppant per well to optimize recovery and production rates. The North American market for proppant stabilized and began to grow during the last quarter of 2016 due to increases in North America oil and gas drilling and completion activity. As of June 30, 2018, U.S. land rig count has increased 59% since December 31, 2016. Driven by the corresponding increase in frac sand demand, sales and tons sold increased sequentially during the three months ended June 30, 2018 compared to the three months ended March 31, 2018, as summarized below.

30



Amounts in thousands except per ton data
Three months ended
 
Percentage Change
Oil & Gas Proppants
June 30, 
 2018
 
March 31, 2018
 
December 31, 2017
 
June 30, 2018 vs. March 31, 2018
 
March 31, 2018 vs. December 31, 2017
Sales
$
324,063

 
$
312,930

 
$
306,019

 
4
 %
 
2
 %
Tons Sold
3,465

 
3,252

 
3,171

 
7
 %
 
3
 %
Average Selling Price per Ton
$
93.52

 
$
96.23

 
$
96.51

 
(3
)%
 
 %

However, if the recovery in oil and gas drilling and completion activity does not continue, demand for frac sand may decline, which could result in us selling fewer tons, selling tons at lower prices, or both. If we sell less frac sand, or sell frac sand at lower prices, our revenue, net income, cash generated from operating activities, and liquidity would be adversely affected. We could evaluate actions to reduce cost and improve liquidity. For instance, depending on market conditions, we could implement additional cost improvement projects or reduce our capital spending by delaying or canceling capital projects.
We believe fluctuations in frac sand demand and price may occur as the market adjusts to changing supply and demand due to energy pricing fluctuations. We continue to expect long-term growth in oil and gas drilling in North American shale basins.
Oil and natural gas exploration and production companies' and oilfield service providers’ preferences and expectations have been evolving in recent years. A proppant supplier's logistics capabilities have become an important differentiating factor when competing for business, on both a spot and contract basis. Many of our customers increasingly seek convenient in-basin and wellhead proppant delivery capability from their proppant supplier. We believe that, over time, proppant customers will prefer to consolidate their purchases across a smaller group of suppliers with robust logistics capabilities and a broad offering of proppants.
Industrial and specialty products end market trends
Demand in the industrial and specialty products end markets is relatively stable and is primarily influenced by key macroeconomic drivers such as housing starts, population growth, light vehicle sales, beer and wine production, repair and remodel activity and industrial production. The primary end markets served by our production used in Industrial & Specialty Products 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. These new higher margin product sales have increased our Industrial & Specialty Products segment's profitability. For instance, on April 1, 2017, we completed the White Armor acquisition, a product line of cool roof granules used in industrial roofing applications. On May 1, 2018, we also completed the acquisition of EPM, a global producer of engineered materials derived from industrial minerals, including diatomaceous earth, clay (calcium bentonite) and perlite.
Our Strategy
The key drivers of our growth strategy include:
Expand our Oil & Gas Proppants production capacity and product portfolio. We continue to consider and execute several initiatives to increase our frac sand production capacity and augment our proppant product portfolio. We are evaluating Greenfield opportunities and are expanding production capacities and maximizing production efficiencies of our existing facilities.
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