U.S. Silica Holdings' Earnings Held Few Surprises, but Management Is Making Big Moves

Image source: U.S. Silica.

For U.S. Silica Holdings (SLCA 1.10%), second-quarter earnings were much of the same from prior quarters: Drilling activity continues to decline, its industrial and specialty products segment keeps picking up the slack, and management has been keeping an eye on financials to avoid debt issues faced by many of its peers recent months. One big difference between this quarter and the prior ones, though, is that management has been very busy making acquisitions that should help lead to better times ahead. Here's a quick snapshot of U.S. Silica's results and what management has been doing this past quarter.

U.S. Silica's results: The raw numbers

* in millions, except per-share data. Data source: U.S. Silica earnings releases.

One thing that you may notice is that earnings declined $1.3 million sequentially, but earnings per share actually improved by a penny. The reason for this is the company issued 10 million shares toward the end of the prior quarter to raise cash for acquisitions and other expenses. 

There has been a recurring theme with US Silica's earnings results recently. For several quarters now, the company's industrial and specialty products segment has been a relatively reliable source of earnings while its oil and gas proppant segment continues to wade through the decline in drilling activity across the U.S. This quarter, it was especially pronounced as oil and gas' contribution margin swung into the loss column while its industrial and specialty products had another standout quarter. 

Image source: U.S. Silica earnings results, author's chart.

What happened at U.S. Silica this past quarter?

• The company took $2 million in restructuring and business development related expenses. Management considers these one-time expenses and reported a per share loss of $0.17 with these charges stripped out. 
• As promised, the company put that cash from its capital raise last quarter to work on acquisitions. The company acquired land adjacent to its Ottawa, Illinois, mine with intentions to expand operations there, it acquired the sand unit of privately held New Birmingham Inc. for $210 million, and on the day of its earnings release it announced the acquisition of logistics specialist Sandbox Enterprises for $210 million. Both acquisitions are expected to be accretive to earnings per share to the tune of $0.40 to $0.60 in 2017.
• Total cash on hand at the end of the quarter was $452 million, but that was before the $194 million that is committed to the Sandbox Enterprises and New Birmingham acquisitions. Total debt at the end of the quarter remained the same as the last quarter at $490 million.
• Capital spending ticked up a bit to $17.3 million compared to $6.1 million the prior quarter. Management also upped its guidance for capital spending from $15 million-$20 million to $28 million-$33 million. That change is attributed to the Ottawa, Illinois, land purchase.
• Management continues to refrain from giving guidance because of what it sees as continued uncertainty in the oil and gas markets.

What management had to say

Last quarter, CEO Bryan Shinn hinted in the company's earnings release that it was on the hunt for a company or two, and it certainly delivered this past quarter. After spending close to $440 million on companies and new properties, Shinn seemed to indicate that the company wants to get back to the basics of maintaining cost control and making sure that these new acquisitions will drive bottom-line results. 

I'm very pleased with our overall performance in the quarter, especially given the continued headwinds we are facing in our oil and gas business. Our industrial business had one of the best quarters in its 116-year history, we generated positive operating cash flow and subsequent to the end of the quarter used our best-in-class balance sheet to facilitate an accretive acquisition that enables us to profitably increase our market share in oil and gas.

10-second takeaway

U.S. Silica continues to face major headwinds from lack of drilling activity in the continental United States. Now that oil prices are dropping again, chances are that those woes will continue in the coming quarters. Fortunately, its industrial and specialty products business remains strong and has kept the company from deep losses that would strain the balance sheet. 

In the coming quarters, it will be worth seeing whether these new acquisitions do lead to the kinds of per-share gains that management claims they will be. A per-share turnaround of $0.40 to $0.60 in earnings would put the company solidly back into the profit column. It will also be worth seeing how these results translate to the cash flow statement now that capital spending has ticked up a bit and it continues to pay a modest $0.06-per-share dividend each quarter. These investments should help in this regard, but we need to see the results first before we make a definitive conclusion.