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 September 30, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35416
 
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12508767&doc=14
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 October 19, 2018, 77,511,268 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 September 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)
 
September 30, 
 2018
 
December 31,  
 2017
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
345,583

 
$
384,567

Accounts receivable, net
247,692

 
212,586

Inventories, net
170,723

 
92,376

Prepaid expenses and other current assets
18,827

 
13,715

Income tax deposits
2,804

 

Total current assets
785,629

 
703,244

Property, plant and mine development, net
1,868,382

 
1,169,155

Goodwill
414,741

 
272,079

Intangible assets, net
195,498

 
150,007

Other assets
24,405

 
12,798

Total assets
$
3,288,655

 
$
2,307,283

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Accounts payable and accrued expenses
$
231,302

 
$
171,041

Current portion of long-term debt
13,479

 
6,867

Current portion of deferred revenue
40,755

 
36,128

Income tax payable

 
1,566

Total current liabilities
285,536

 
215,602

Long-term debt, net
1,251,053

 
505,075

Deferred revenue
79,095

 
82,286

Liability for pension and other post-retirement benefits
46,045

 
52,867

Deferred income taxes, net
169,432

 
29,856

Other long-term obligations
88,013

 
25,091

Total liabilities
1,919,174

 
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 September 30, 2018 and December 31, 2017

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 81,773,127 issued and 77,511,268 outstanding at September 30, 2018; 81,267,205 issued and 80,524,255 outstanding at December 31, 2017
815

 
812

Additional paid-in capital
1,165,661

 
1,147,084

Retained earnings
328,624

 
287,992

Treasury stock, at cost, 4,261,859 and 742,950 shares at September 30, 2018 and December 31, 2017, respectively
(120,078
)
 
(25,456
)
Accumulated other comprehensive loss
(8,753
)
 
(13,926
)
Total U.S. Silica Holdings, Inc. stockholders’ equity
1,366,269

 
1,396,506

Non-controlling interest
3,212

 

Total stockholders' equity
1,369,481

 
1,396,506

Total liabilities and stockholders’ equity
$
3,288,655

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Sales:
 
 
 
 
 
 
 
Product
$
348,635

 
$
281,138

 
$
989,380

 
$
720,281

Service
74,537

 
63,885

 
230,538

 
160,004

Total sales
423,172

 
345,023

 
1,219,918

 
880,285

Cost of sales (excluding depreciation, depletion and amortization):
 
 
 
 
 
 
 
Product
270,370

 
187,634

 
713,845

 
512,115

Service
51,966

 
40,155

 
162,246

 
100,173

Total cost of sales (excluding depreciation, depletion and amortization)
322,336

 
227,789

 
876,091

 
612,288

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
37,980

 
29,542

 
114,803

 
77,553

Depreciation, depletion and amortization
37,150

 
24,673

 
102,305

 
69,898

Asset impairment

 

 
16,184

 

Total operating expenses
75,130

 
54,215

 
233,292

 
147,451

Operating income
25,706

 
63,019

 
110,535

 
120,546

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(21,999
)
 
(8,347
)
 
(49,283
)
 
(24,098
)
Other income (expense), net, including interest income
1,062

 
1,308

 
2,808

 
(3,091
)
Total other expense
(20,937
)
 
(7,039
)
 
(46,475
)
 
(27,189
)
Income before income taxes
4,769

 
55,980

 
64,060

 
93,357

Income tax benefit (expense)
1,547

 
(14,707
)
 
(8,806
)
 
(20,103
)
Net income
$
6,316

 
$
41,273

 
$
55,254

 
$
73,254

Less: Net income (loss) attributable to non-controlling interest

 

 

 

Net income attributable to U.S. Silica Holdings, Inc.
$
6,316

 
$
41,273

 
$
55,254

 
$
73,254

Earnings per share attributable to U.S. Silica Holdings, Inc.:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.51

 
$
0.71

 
$
0.90

Diluted
$
0.08

 
$
0.50

 
$
0.70

 
$
0.89

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
77,365

 
81,121

 
78,209

 
81,058

Diluted
77,859

 
81,783

 
78,676

 
81,976

Dividends declared per share
$
0.06

 
$
0.06

 
$
0.19

 
$
0.19

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
6,316

 
$
41,273

 
$
55,254

 
$
73,254

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on derivatives (net of tax of $193 and $(2) for the three months ended September 30, 2018 and 2017, respectively, and $195 and $(26) for the nine months ended September 30, 2018 and 2017, respectively)
538

 
(4
)
 
544

 
(43
)
Foreign currency translation adjustment (net of tax of $(135) and zero for the three months ended September 30, 2018 and 2017, respectively, and $(144) and zero for the nine months ended September 30, 2018 and 2017, respectively)
95

 

 
(446
)
 

Pension and other post-retirement benefits liability adjustment (net of tax of $88 and $2,180 for the three months ended September 30, 2018 and 2017, respectively, and $1,617 and $1,335 for the nine months ended September 30, 2018 and 2017, respectively)
277

 
3,618

 
5,075

 
2,216

Comprehensive income
$
7,226

 
$
44,887

 
$
60,427

 
$
75,427

Less: Comprehensive income (loss) attributable to non-controlling interest

 

 

 

Comprehensive income attributable to U.S. Silica Holdings, Inc.
$
7,226

 
$
44,887

 
$
60,427

 
$
75,427

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 U.S. Silica Holdings Inc., Stockholders’
Equity
Non-controlling Interest
Total
Stockholders’
Equity
Balance at December 31, 2017
$
812

$
(25,456
)
$
1,147,084

$
287,992

$
(13,926
)
$
1,396,506

$

$
1,396,506

Net income



55,254


55,254


55,254

Unrealized gain on derivatives




544

544


544

Foreign currency translation adjustment




(446
)
(446
)

(446
)
Pension and post-retirement liability




5,075

5,075


5,075

Cash dividend declared ($0.1875 per share)



(14,622
)

(14,622
)

(14,622
)
Contributions from non-controlling interest






3,212

3,212

Common stock-based compensation plans activity:
 
 
 
 
 
 
 
 
Equity-based compensation


18,612



18,612


18,612

Proceeds from options exercised

93

(32
)


61


61

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

(4,216
)
(3
)


(4,216
)

(4,216
)
Repurchase of common stock

(90,499
)



(90,499
)

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

$
(120,078
)
$
1,165,661

$
328,624

$
(8,753
)
$
1,366,269

$
3,212

$
1,369,481

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)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
55,254

 
$
73,254

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
102,305

 
69,898

Asset impairment
16,184

 

Debt issuance amortization
3,953

 
1,038

Original issue discount amortization
1,668

 
281

Deferred income taxes
7,699

 
10,149

Deferred revenue
(16,565
)
 
32,487

(Gain) loss on disposal of property, plant and equipment
(5,404
)
 
362

Equity-based compensation
18,612

 
18,520

Bad debt provision, net of recoveries
516

 
1,779

Other
3,554

 
3,300

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
8,177

 
(106,119
)
Inventories
2,732

 
(521
)
Prepaid expenses and other current assets
(3,057
)
 
7,449

Income taxes
(4,369
)
 
9,737

Accounts payable and accrued expenses
27,866

 
40,589

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

 

Liability for pension and other post-retirement benefits
(730
)
 
(788
)
Other noncurrent assets and liabilities
(5,337
)
 
(554
)
Net cash provided by operating activities
267,690

 
160,861

Investing activities:
 
 
 
Capital expenditures
(220,787
)
 
(261,243
)
Capitalized intellectual property costs
(7,045
)
 
(2,600
)
Acquisition of business, net of cash acquired
(743,325
)
 
(119,719
)
Proceeds from sale of property, plant and equipment
26,305

 
12

Net cash used in investing activities
(944,852
)
 
(383,550
)
Financing activities:
 
 
 
Dividends paid
(15,068
)
 
(15,285
)
Repurchase of common stock
(90,499
)
 

Proceeds from options exercised
61

 
798

Tax payments related to shares withheld for vested restricted stock and stock units
(4,216
)
 
(3,945
)
Proceeds from long-term debt
1,280,000

 

Payments on long-term debt
(497,655
)
 
(5,576
)
Financing fees paid
(37,272
)
 

Contributions from non-controlling interest
3,212

 

Principal payments on capital lease obligations
(385
)
 
(878
)
Net cash provided by (used in) financing activities
638,178

 
(24,886
)
Net decrease in cash and cash equivalents
(38,984
)
 
(247,575
)

6



Cash and cash equivalents, beginning of period
384,567

 
711,225

Cash and cash equivalents, end of period
$
345,583

 
$
463,650

Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
44,105

 
$
18,498

Taxes, net of refunds
$
5,003

 
$
216

Related party purchases
$
2,233

 
$
3,171

Non-cash Items:
 
 
 
Equipment received
$

 
$
18,185

Accrued capital expenditures
$
36,693

 
$
28,683

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 amount in its statement of cash flows for the nine months ended September 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.”
Consolidation
The Financial Statements include the accounts of Holdings and its direct and indirect wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We follow FASB Accounting Standards Codification (“ASC”) guidance for identification and reporting of entities over which control is achieved through means other than voting rights. The guidance defines such entities as Variable Interest Entities (“VIEs”). We consolidate VIEs when we have variable interests and are the primary beneficiary. We continually evaluate our involvement with VIEs to determine when these criteria are met.
During the third quarter of 2018 we finalized a shareholders' agreement with unrelated parties to form a limited liability company with the purpose of constructing and operating a water pipeline to transport and sell water. In connection with the shareholders’ agreement, we acquired a 50% equity ownership for $3.2 million, with a maximum capital contribution of $7.0 million, and a water rights intangible asset for $0.7 million. Based on our evaluation, we have determined that we are the primary beneficiary of this VIE and therefore we are required to consolidate it, including the current construction work in progress of $6.4 million.
Unaudited Interim Financial Statements
The accompanying Balance Sheet as of September 30, 2018; the Income Statements and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017; the Condensed Consolidated Statements of Stockholders' Equity and Cash Flows for the nine months ended September 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

8



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 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. 

9



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 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 three and nine months ended September 30, 2018, other income (expense), net, including interest income, includes a net realized foreign currency transaction gain of $0.1 million and $0.3 million, respectively.
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) and in July 2018, ASU 2018-11 Leases (Topic 842): Targeted Improvements. The new standard(s) 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. The new transition method allows companies to use the effective date of the new leases standard as the date of initial application on transition. 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 selected a lease software to help us account for the new lease standard. 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.

10



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.
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 nine months ended September 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 nine months ended September 30, 2017:    
 
Three Months Ended September 30, 2017
 
As Previously Reported
 
Services Reclassifications
 
ASU 2017-07 Adjustments
 
As Revised
Product Sales
$
295,768

 
$
(14,630
)
 
$

 
$
281,138

Service Sales
49,255

 
14,630

 

 
63,885

Total sales
345,023

 

 

 
345,023

Product cost of sales
189,105

 
(1,337
)
 
(134
)
 
187,634

Service cost of sales
38,818

 
1,337

 

 
40,155

Total cost of sales (excluding depreciation, depletion and amortization)
227,923

 

 
(134
)
 
227,789

Selling, general and administrative expenses
29,602

 

 
(60
)
 
29,542

Operating income
62,825

 

 
194

 
63,019

Other income (expense)
1,502

 

 
(194
)
 
1,308

    
 
Nine Months Ended September 30, 2017
 
As Previously Reported
 
Services Reclassifications
 
ASU 2017-07 Adjustments
 
As Revised
Product Sales
$
751,111

 
$
(30,830
)
 
$

 
$
720,281

Service Sales
129,174

 
30,830

 

 
160,004

Total sales
880,285

 

 

 
880,285

Product cost of sales
515,767

 
(3,131
)
 
(521
)
 
512,115

Service cost of sales
97,042

 
3,131

 

 
100,173

Total cost of sales (excluding depreciation, depletion and amortization)
612,809

 

 
(521
)
 
612,288

Selling, general and administrative expenses
77,955

 

 
(402
)
 
77,553

Operating income
119,623

 

 
923

 
120,546

Other income (expense)
(2,168
)
 

 
(923
)
 
(3,091
)

11



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.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The update is effective for calendar-year public business entities in 2020. For all other calendar-year entities, it is effective for annual periods beginning in 2021 and interim periods in 2022. Early adoption is permitted. We are currently evaluating the effect that the 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 nine months ended September 30, 2018 and 2017:

In thousands, except per share amounts
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to U.S. Silica Holdings, Inc.
$
6,316

 
$
41,273

 
$
55,254

 
$
73,254

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
77,365

 
81,121

 
78,209

 
81,058

Diluted effect of stock awards
494

 
662

 
467

 
918

Weighted average shares outstanding assuming dilution
77,859

 
81,783

 
78,676

 
81,976

 
 
 
 
 
 
 
 
Earnings per share attributable to U.S. Silica Holdings, Inc.:
 
 
 
 
 
 
 
Basic earnings per share
$
0.08

 
$
0.51

 
$
0.71

 
$
0.90

Diluted earnings per share
$
0.08

 
$
0.50

 
$
0.70

 
$
0.89


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average outstanding stock options excluded
589

 
564

 
562

 
195

Weighted-average outstanding restricted stock and performance share units awards excluded
151

 
457

 
289

 
358



12



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 81,773,127 shares issued and 77,511,268 shares outstanding at September 30, 2018. There were 81,267,205 shares issued and 80,524,255 shares outstanding at December 31, 2017.
During the nine months ended September 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
$
0.0625

 
July 16, 2018
 
September 14, 2018
 
October 3, 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.
There were no shares of preferred stock issued or outstanding at September 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. As of September 30, 2018, we have repurchased a total of 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.

13



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 nine months ended September 30, 2018:
 
For the Nine Months Ended September 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
468

 
(446
)
 
3,617

 
3,639

Amounts reclassed from accumulated other comprehensive loss
76

 

 
1,458

 
1,534

Ending Balance
$
468

 
$
(452
)
 
$
(8,769
)
 
$
(8,753
)
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 $743.3 million of cash, net of cash acquired of $19.1 million, including $0.5 million of post-closing adjustments. 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 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):

14



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
139,862

Total assets acquired
904,990

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
$
743,325


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


 
 
 
 
 
Trade name
$
25,050

 
 
Total identifiable intangible assets - indefinite lived
$
25,050

 
 

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 $60.1 million and net income of $3.9 million for the three months ended September 30, 2018, and revenue of $101.9 million and net income of $3.3 million for the nine months ended September 30, 2018, respectively, associated with EPMH following the date of acquisition. We incurred $11.0 million of acquisition-related charges, excluding debt issuance costs, for the nine months ended September 30, 2018, 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 are 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

15



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. There were no proforma adjustments for the three months ended September 30, 2018. 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 of net working capital adjustments 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 was subject to adjustment until we completed 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 final allocation of the purchase price to MS Sands' identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments (in thousands):

16



 
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 incurred $1.0 million 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.
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):
 
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
)

17



NOTE E—ACCOUNTS RECEIVABLE
At September 30, 2018 and December 31, 2017, accounts receivable (in thousands) consisted of the following:
 
September 30, 
 2018
 
December 31,  
 2017
Trade receivables
$
248,361

 
$
217,649

Less: Allowance for doubtful accounts
(7,133
)
 
(7,100
)
Net trade receivables
241,228

 
210,549

Other receivables
6,464

 
2,037

Total accounts receivable
$
247,692

 
$
212,586

Changes in our allowance for doubtful accounts (in thousands) during the nine months ended September 30, 2018 are as follows:
 
September 30, 
 2018
Beginning balance
$
7,100

Bad debt provision
516

Write-offs
(483
)
Ending balance
$
7,133

Our ten largest customers accounted for approximately 48% and 50% of total sales during the nine months ended September 30, 2018 and 2017, respectively. Sales to one of our customers accounted for 15% of our total sales during the nine months ended September 30, 2018. Sales to two of our customers accounted for 11% and 10% of our total sales during the nine months ended September 30, 2017. No other customers accounted for 10% or more of our total sales. At September 30, 2018, one of our customers' accounts receivable represented 19% 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 September 30, 2018 and December 31, 2017, inventories (in thousands) consisted of the following:
 
September 30, 2018
 
December 31, 2017
Supplies
$
39,053

 
$
21,277

Raw materials and work in process
75,932

 
28,034

Finished goods
55,738

 
43,065

Total inventories
$
170,723

 
$
92,376


18



NOTE G—PROPERTY, PLANT AND MINE DEVELOPMENT
At September 30, 2018 and December 31, 2017, property, plant and mine development (in thousands) consisted of the following:
 
September 30, 
 2018
 
December 31,  
 2017
Mining property and mine development
$
1,051,506

 
$
586,242

Asset retirement cost
14,308

 
14,184

Land
43,221

 
36,552

Land improvements
67,928

 
45,878

Buildings
69,242

 
56,330

Machinery and equipment
849,340

 
590,566

Furniture and fixtures
4,092

 
2,953

Construction-in-progress
184,431

 
189,970

 
2,284,068

 
1,522,675

Accumulated depletion, depreciation and amortization
(415,686
)
 
(353,520
)
Total property, plant and mine development, net
$
1,868,382

 
$
1,169,155

At September 30, 2018 and December 31, 2017, the aggregate cost of machinery and equipment acquired under capital leases was $5.1 million and $0.9 million, respectively, reduced by accumulated depreciation of $0.3 million and $0.2 million, respectively. The amount of interest costs capitalized in property, plant and mine development was $5.2 million and $0.2 million for the nine months ended September 30, 2018 and 2017, respectively.
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 September 30, 2018, vendor incentives of $5.1 million and $49.3 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 second quarter of 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 second quarter of 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
 
139,862

MS Sand acquisition measurement period adjustment
 
2,800

Balance at September 30, 2018
 
$
414,741



19



The changes in the carrying amount of intangible assets (in thousands) consisted of the following:
 
 
 
September 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
 
$
79,748

 
$
(10,394
)
 
$
69,354

 
$
70,703

 
$
(5,917
)
 
$
64,786

Customer relationships
13 - 15
 
80,279

 
(12,953
)
 
67,326

 
61,229

 
(9,076
)
 
52,153

 Total definite-lived intangible assets:
 
 
$
160,027

 
$
(23,347
)
 
$
136,680

 
$
131,932

 
$
(14,993
)
 
$
116,939

Trade name
 
 
58,118

 

 
58,118

 
33,068

 

 
33,068

Other
 
 
700

 

 
700

 

 

 

Total intangible assets:
 
 
$
218,845

 
$
(23,347
)
 
$
195,498

 
$
165,000

 
$
(14,993
)
 
$
150,007


Amortization expense was $3.2 million and $8.4 million for the three and nine months ended September 30, 2018, respectively. Amortization expense was $2.3 million and $6.6 million for the three and nine months ended September 30, 2017, respectively.

The estimated amortization expense related to definite-lived intangible assets (in thousands) for the five succeeding years is as follows:
2018
$
2,776

2019
11,095

2020
11,098

2021
11,098

2022
11,083

NOTE I—DEBT
At September 30, 2018 and December 31, 2017, debt (in thousands) consisted of the following:
 
September 30, 
 2018
 
December 31,  
 2017
Senior secured credit facility:
 
 
 
Revolver expiring May 1, 2023 (8.25% at September 30, 2018 and 5.75% at December 31, 2017)
$

 
$

Term loan facility—final maturity May 1, 2025 (6.25% at September 30, 2018 and 4.75%-5.25% December 31, 2017)
1,273,600

 
489,075

Less: Unamortized original issue discount
(6,417
)
 
(944
)
Less: Unamortized debt issuance cost
(29,279
)
 
(3,099
)
Note payable secured by royalty interest
25,720

 
24,740

Customer note payable

 
745

Equipment notes payable
384

 
719

Capital leases
524

 
706

Total debt
1,264,532

 
511,942

Less: current portion
(13,479
)
 
(6,867
)
Total long-term portion of debt
$
1,251,053

 
$
505,075

Revolving Line-of-Credit
We have a $100.0 million revolving line-of-credit (the “Revolver”), with zero drawn and $4.8 million allocated for letters of credit as of September 30, 2018, leaving $95.2 million available under the Revolver.

20



Senior Secured Credit Facility
At September 30, 2018, contractual maturities of our senior secured credit facility (in thousands) are as follows:
2018
$
3,200

2019
12,800

2020
12,800

2021
12,800

Thereafter
1,232,000

Total
$
1,273,600

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 a 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 September 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
$
438

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 September 30, 2018, the note payable had a balance of $25.7 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 20% at September 30, 2018.

21



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 nine months ended September 30, 2018 we received advances of $28.0 million, including a customer's purchase of an interest in our sand reserves in Lamesa, Texas, and securing a long-term supply of sand. At September 30, 2018 and December 31, 2017, the total deferred revenue balance was $119.9 million and $118.4 million, respectively, of which $40.8 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 September 30, 2018, we had a liability of $20.1 million in other long-term obligations related to our asset retirement obligation. Changes in the asset retirement obligation (in thousands) during the nine months ended September 30, 2018 are as follows:
 
September 30, 
 2018
Beginning balance
$
19,032

Accretion
894

Additions and revisions of prior estimates
(486
)
Addition related to EPMH acquisition
2,733

Disposal related to sale of transloads
(2,116
)
Ending balance
$
20,057

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 September 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 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-

22



based inputs, including interest rate curves and implied volatilities. We also incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk as well as that of the respective counterparty in the fair value measurements.
Although we have determined that the majority of the inputs used to value our derivatives fall 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 September 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. Refer to Note M - Derivative Instruments to these Financial Statements for the fair value of our derivative instruments and additional disclosures.    

NOTE M—DERIVATIVE INSTRUMENTS
Cash Flow Hedges of Interest Rate Risk
We enter into interest rate swap 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. The derivative instruments are recorded on the balance sheet within other long-term assets or liabilities at their fair values. We have designated the interest rate swap agreements 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.
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 September 30, 2018 and December 31, 2017.
 
 
 
September 30, 2018
 
 
 
December 31, 2017
 
Maturity
Date
 
Contract/Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Maturity Date
 
Contract/Notional
Amount
 
Carrying
Amount
 
Fair
Value
LIBOR(1) interest rate swap agreement
2020
 

$440
 million
 
$
419

 
$
419

 

 
$

 
$

 
$

LIBOR(1) interest rate swap agreement
2020
 

$200
 million
 
$
198

 
$
198

 

 
$

 
$

 
$

LIBOR interest rate cap agreement
2019
 

$249
 million
 
$

 
$

 
2019

 

$249
 million
 
$

 
$

(1) Agreements fix the LIBOR interest rate base to 2.74%
On May 1, 2018, as a result of entering into the new Credit Agreement, we determined the existing interest rate cap derivative no longer qualified for hedge accounting. During the nine months ended September 30, 2018 we recognized $76 thousand of deferred losses in accumulated other comprehensive loss into earnings.
During the nine months ended September 30, 2018, we had no ineffectiveness for the interest rate swap derivatives.
The following table summarizes the effect of derivative instruments (in thousands) on our income statements and our consolidated statements of comprehensive income for the nine months ended September 30, 2018 and 2017.
 
September 30, 2018
 
September 30, 
 2017
Deferred losses from derivatives in OCI, beginning of period
$
(76
)
 
$
(32
)
Gain (loss) recognized in OCI from derivative instruments
468

 
(43
)
Loss reclassified from Accumulated OCI
76

 

Deferred losses from derivatives in OCI, end of period
$
468

 
$
(75
)

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 September 30, 2018, we have 3,632,323 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.

23



Stock Options

The following table summarizes the status of, and changes in, our stock option awards during the nine months ended September 30, 2018:
 
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 September 30, 2018
901,996

 
$
28.52

 
$
1,611

 
5.0 years
Exercisable at September 30, 2018
855,446

 
$
27.38

 
$
1,611

 
5.0 years
There were no grants of stock options during the three and nine months ended September 30, 2018 and 2017.
There were 4,167 stock options exercised during the nine months ended September 30, 2018. There were 16,839 and 43,774 stock options exercised during the three and nine months ended September 30, 2017, respectively. The total intrinsic value of stock options exercised was $0.1 million for the nine months ended September 30, 2018. The total intrinsic value of stock options exercised was $0.3 million and $1.2 million for the three and nine months ended September 30, 2017, respectively. Cash received from options exercised during the nine months ended September 30, 2018 was $61 thousand. Cash received from options exercised during the three and nine months ended September 30, 2017 was $0.3 million and $0.8 million, respectively. The tax benefit realized from option exercises was fourteen thousand for the nine months ended September 30, 2018. The tax benefit realized from option exercises was $0.1 million and $0.4 million for the three and nine months ended September 30, 2017, respectively.
We recognized $0.2 million and $1.1 million of equity-based compensation expense related to options during the three and nine months ended September 30, 2018, respectively. We recognized $0.6 million and $1.9 million of equity-based compensation expense related to options during the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, there was $0.1 million of total unrecognized compensation expense related to these options, which is expected to be recognized over a weighted-average period of approximately 0.1 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 nine months ended September 30, 2018:
 
Number of Shares
 
Grant Date Weighted
Average Fair Value
Unvested, December 31, 2017
461,346

 
$
30.76

Granted
280,118

 
26.24

Vested
(219,635
)
 
30.08

Forfeited
(26,924
)
 
31.39

Unvested, September 30, 2018
494,905

 
$
28.47

We granted 42,187 and 280,118 restricted stock and restricted stock unit awards during the three and nine months ended September 30, 2018, respectively. We granted 7,771 and 148,722 restricted stock and restricted stock unit awards during the three and nine months ended September 30, 2017, respectively. The fair value of the awards was based on the market price of our stock at date of grant.
We recognized $1.4 million and $5.2 million of equity-based compensation expense related to restricted stock awards during the three and nine months ended September 30, 2018, respectively. We recognized $1.9 million and $5.2 million of equity-based compensation expense related to restricted stock awards during the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, there was $10.0 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.

24



Performance Share Unit Awards
The following table summarizes the status of, and changes in, our performance share unit awards during the nine months ended September 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
(31,723
)
 
44.93

Unvested, September 30, 2018
826,110

 
$
39.44

We granted 201,417 and 90,501 of performance share unit awards during the nine months ended September 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 nine months ended September 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 $3.7 million and $12.3 million of compensation expense related to performance share unit awards during the three and nine months ended September 30, 2018, respectively. We recognized $4.1 million and $11.5 million of compensation expense related to performance share unit awards during the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, there was $10.7 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 September 30, 2018 (in thousands):
Year ending December 31,
Operating Lease Minimum Rental Payments
 
Minimum Purchase Commitments
2018
$
19,961

 
$
7,237

2019
75,484

 
21,640

2020
59,872

 
15,406

2021
40,109

 
8,307

2022
31,802

 
5,640

Thereafter
62,375

 
10,999

Total future lease and purchase commitments
$
289,603

 
$
69,229

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 $25.7 million and $73.4 million for the three and nine months ended September 30, 2018, respectively. Expense related to operating leases and rental agreements totaled approximately $16.7 million and $47.9 million for the three and nine months ended September 30, 2017, respectively.

25



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 nine months ended September 30, 2018, three new claims were brought against U.S. Silica. As of September 30, 2018, there were 58 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 September 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 single-employer noncontributory defined benefit pension plans covering certain employees. There have been no new entrants to the US Silica Company plan since May 2009 and to the EP Management Corporation plan since January 2007 for salaried participants and January 2010 for hourly participants when the plans were frozen to all new employees. The plans provide 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 plans consistent with a goal of appropriate minimization of the unfunded projected benefit obligations. The pension plans use a benefit level per year of service for covered hourly employees and a final average pay method for covered salaried employees. The plans use 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 nine months ended September 30, 2018 and 2017:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
355

 
$
260

 
$
956

 
$
704

Interest cost
1,193

 
993

 
3,329

 
2,447

Expected return on plan assets
(1,627
)
 
(1,317
)
 
(4,361
)
 
(3,405
)
Net amortization and deferral
806

 
443

 
2,068

 
1,391

Net pension benefit costs
$
727

 
$
379

 
$
1,992

 
$
1,137


26



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 nine months ended September 30, 2018 and 2017:
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
33

 
$
11

 
$
87

 
$
76

Interest cost
173

 
79

 
549

 
462

Expected return on plan assets

 

 

 
(1
)
Net amortization and deferral

 

 

 
107

Net post-retirement benefit costs
$
206

 
$
90

 
$
636

 
$
644

We contributed $1.5 million and $2.6 million to the qualified pension plan for the three and nine months ended September 30, 2018, respectively. We contributed $1.5 million and $1.8 million to the qualified pension plan for the three and nine months ended September 30, 2017, respectively. Total expected employer funding contributions during the fiscal year ending December 31, 2018 are $3.3 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 nine months ended September 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 September 30, 2018, there was $32.7 million in bonds outstanding. The majority of these bonds, $29.7 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

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provisions, we believe that the income tax effects of the Tax Act applicable to our accounting under ASC 740 is substantially complete as of September 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. In August 2018, the Internal Revenue Service released Tax Act guidance on limitations on executive compensation which clarified transition rules for certain compensation agreements in existence on November 2, 2017. Based on the issued guidance, we recorded a discrete tax expense of $0.7 million to remove deferred tax assets on certain executive compensation agreements that were not eligible for transition relief.
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 nine months ended September 30, 2018, we recorded a tax expense of zero and $0.7 million, respectively, related to equity compensation pursuant to ASU 2016-09. For the three and nine months ended September 30, 2017, we recorded a tax benefit of $0.1 million and $1.8 million, respectively, related to equity compensation pursuant to ASU 2016-09.
The effective tax rate was (32)% and 14% for the three and nine months ended September 30, 2018, respectively. The effective tax rate was 26% and 22% for the three and nine months ended and September 30, 2017, respectively. The effective tax rate for the three and nine months ended September 30, 2018 would have been (52)% and 11%, respectively, without the discrete tax items. The effective tax rate for the three and nine months ended September 30, 2017 would have been 26% and 23%, respectively, without the discrete tax items.
With reduced profits mainly driven by decreased sand pricing, we updated our estimated annual effective tax rate to 11%. Our tax benefit in the period represented the cumulative adjustment to reflect the updated estimated annual effective tax rate, partially offset by the discrete tax items. Because of the updated tax rate and cumulative adjustment in the period, the (32)% tax rate is not representative of future tax rates.
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 nine months ended September 30, 2018 (in thousands):

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Three Months Ended 
 September 30, 2018
 
Nine Months Ended 
 September 30, 2018
Category
 
Oil & Gas Proppants
 
Industrial & Specialty Products
 
Total Sales
 
Oil & Gas Proppants
 
Industrial & Specialty Products
 
Total Sales
Product
 
$
227,915

 
$
120,720

 
$
348,635

 
$
708,924

 
$
280,456

 
$
989,380

Service
 
74,537

 

 
74,537

 
230,521

 
17

 
230,538

Total Sales
 
$
302,452

 
$
120,720

 
$
423,172

 
$
939,445

 
$
280,473

 
$
1,219,918

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 nine months ended September 30, 2018 (in thousands):
 
 
Unbilled Receivables
December 31, 2017
 
$
5,245

Reclassifications to billed receivables
 
(10,668
)
Revenues recognized in excess of period billings
 
5,911

September 30, 2018
 
$
488

    
 
 
Deferred Revenue
December 31, 2017
 
$
118,414

Revenues recognized from balances held at the beginning of the period
 
(26,600
)
Revenues deferred from period collections on unfulfilled performance obligations
 
28,036

September 30, 2018
 
$
119,850

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

An employee, who was an officer of one of our operating subsidiaries prior to the third quarter of 2018, holds an ownership interest in a transportation brokerage and logistics services vendor, from which we made purchases of approximately $0.7 million and $2.5 million for the three and nine months ended September 30, 2018, respectively, and $1.0 million and $2.8 million for the three and nine months ended September 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.

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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 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 nine months ended September 30, 2018 and 2017:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Sales:
 
 
 
 
 
 
 
 
Oil & Gas Proppants
$
302,452

 
$
286,369

 
$
939,445

 
$
714,345

 
Industrial & Specialty Products
120,720

 
58,654

 
280,473

 
165,940

 
Total sales
423,172

 
345,023

 
1,219,918

 
880,285

 
Segment contribution margin:
 
 
 
 
 
 
 
 
Oil & Gas Proppants
89,550

 
96,087

 
303,591

 
206,149

 
Industrial & Specialty Products
48,697

 
23,978

 
110,528

 
67,462

 
Total segment contribution margin
138,247

 
120,065

 
414,119

 
273,611

 
Operating activities excluded from segment cost of sales
(37,411
)
 
(2,831
)
 
(70,292
)
 
(5,614
)