Shares of U.S. Silica (NYSE: SLCA) rose nearly 20% today after the industrial minerals company announced second-quarter 2019 operating results. The business turned in a mixed performance. Revenue and earnings were down compared to the year-ago period, but increased sequentially. More important, the company reported a whopping 12% year-over-year decrease in total operating expenses, which certainly strengthened management's latest pledge for efficiency.
CEO Bryan Shinn told investors that U.S. Silica would become a net cash generator, significantly reduce capital expenditures, and shift its investment strategy. U.S. Silica intends to focus on modest growth opportunities for its industrial segment and logistics subsidiary, make minimal investments to maintain its footprint in oil and gas sand products, and deliver stable dividend payments. Cash flow will also be diverted toward debt reduction activities, with the goal to reduce the company's gross debt to adjusted EBITDA ratio to 3 by the end of 2021.
As of 12:21 p.m. EDT, the stock had settled to a 9.1% gain.
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A new focus on operating efficiency is certainly a step in the right direction. The business hasn't been a net generator of cash without debt or stock offerings since 2015. In the three-year period ending 2018, U.S. Silica reported a cumulative cash flow from investing activities of $1.76 billion, far outpacing cumulative operating cash flow of $533 million in that span.
Of course, the $750 million acquisition of EP Minerals played a large role in the net cash consumption of the business in recent years. But now that it's beginning to deliver a growing share of total profits and harbors promising new growth products, it makes sense to refocus management bandwidth on strengthening the balance sheet and delivering more sustainable operations for the long haul.
Business is booming outside of the core oil and gas segment. The industrial and specialty products segment delivered 18% revenue growth in Q2 compared to the year-ago period, despite the fact that the volume of products sold actually decreased 5% in that span.
U.S. Silica stated that the industrial segment generated record profits, but that appears to be based on a non-GAAP income metric called contribution margin. There was a massive difference between actual operating income and contribution margin in 2018, so investors should wait to see the quarterly SEC filing (segment operating income wasn't reported in the press release) before getting too carried away.
Despite a misplaced focus on contribution margin, the press release shows U.S. Silica delivered on more traditional financial metrics in Q2. A sharp reduction in total operating expenses helped to deliver healthy operating income and net income. It also goes a long way to boost confidence in management's latest pledge for operating efficiency. Now investors just have to make sure the business executes.
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