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1. Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows of the reported interim periods. The condensed consolidated balance sheet as of December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for the full year or any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as filed in the 2015 Annual Report on Form 10-K and notes thereto and information included elsewhere in this Quarterly Report on Form 10-Q.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Change in Classification
In the three months ended June 30, 2016, the Company changed the classification of certain operating expenses on the Condensed Consolidated Statements of Income (Loss). Previously, the Company classified expenses incurred related to the downturn in the proppant market as “restructuring and other charges.” The Company now further classifies these types of expenses between asset impairments and restructuring charges. All comparative periods presented have been restated accordingly. See Notes 14 and 15 for further detail.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03 – Interest – Imputation of Interest (Subtopic 835-30). Under Subtopic 835-30, debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is required to be applied on a retrospective basis beginning January 1, 2016. Accordingly, the Company applied this guidance to its Condensed Consolidated Balance Sheets in the first quarter of 2016. See Note 4 for further detail.
In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The ASU requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. ASC 842 supersedes the previous leases standard, ASC 840 – Leases. The ASU is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), which provides guidance on simplified accounting for and presentation of share-based payment transactions, including income tax consequences, minimum tax withholding requirements, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU requires all tax effects of share-based payments to be recorded through the income statement, windfall tax benefits to be recorded when the benefit arises, and all share-based payment tax-related cash flows to be reported as operating activities in the statement of cash flows. Regarding tax withholding requirements, the ASU allows entities to withhold an amount up to the employees’ maximum individual tax rates without classifying the award as a liability. The ASU also permits entities to make an accounting policy election for the impact of forfeitures on expense recognition, either recognized when forfeitures are estimated or when forfeitures occur. The ASU is expected to impact the Company’s financial statements and disclosures as the Company makes share-based payments to its employees. The ASU is effective beginning January 1, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.
In April and May 2016, the FASB issued ASU No. 2016-10 – Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing, ASU No. 2016-11 – Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance, and ASU No. 2016-12 – Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients. These ASU’s each affect the guidance of the new revenue recognition standard in ASU No. 2014-09 – Revenue from Contracts with Customers and related subsequent ASUs. This guidance is effective beginning January 1, 2018. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
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2. Inventories
At June 30, 2016 and December 31, 2015, inventories consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Raw materials |
$ | 4,913 | $ | 10,145 | ||||
Work-in-process |
11,353 | 14,613 | ||||||
Finished goods |
43,074 | 48,648 | ||||||
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59,340 | 73,406 | |||||||
Less: LIFO reserve |
(2,647 | ) | (2,912 | ) | ||||
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Inventories |
$ | 56,693 | $ | 70,494 | ||||
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3. Property, Plant, and Equipment
At June 30, 2016 and December 31, 2015, property, plant, and equipment consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Land and improvements |
$ | 83,763 | $ | 82,966 | ||||
Mineral reserves and mine development |
248,196 | 323,691 | ||||||
Machinery and equipment |
576,933 | 575,034 | ||||||
Buildings and improvements |
152,951 | 171,791 | ||||||
Furniture, fixtures, and other |
3,455 | 3,609 | ||||||
Construction in progress |
39,260 | 37,047 | ||||||
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1,104,558 | 1,194,138 | |||||||
Accumulated depletion and depreciation |
(347,875 | ) | (323,141 | ) | ||||
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Property, plant, and equipment, net |
$ | 756,683 | $ | 870,997 | ||||
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Under ASC 360 Property, Plant, and Equipment, the Company is required to evaluate the recoverability of the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Based on the continuing adverse business conditions and the idling of certain assets, the Company evaluated certain of its asset groups that contained mineral reserves and other long-lived assets contained in the Proppant Solutions segment and concluded that the carrying amounts of those assets were not recoverable. Fair value was determined by prices obtained from third parties for the assets and from estimating the net present value of the future cash flows over the life of the assets. Critical assumptions for these valuations included future selling prices of products, future operating costs, and the cost of capital. The Company incurred $90,578 and $6,475 of such asset impairments in the three months ended June 30, 2016 and 2015, respectively, and $90,654 and $6,475 in the six months ended June 30, 2016 and 2015, respectively. These impairments are recorded as asset impairments in operating expenses in the Condensed Consolidated Statements of Income (Loss). See Notes 14 and 15 for further detail. Of the carrying value of the assets (after impairment), $1,317 is classified as a current asset held-for-sale as of June 30, 2016.
If the ongoing uncertainty in oil and gas markets continues, it is possible that additional assets, both tangible and intangible, could be subject to additional impairment losses in future periods.
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4. Long-Term Debt
At June 30, 2016 and December 31, 2015, long-term debt consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Term B-1 Loans |
$ | 16,790 | $ | 156,134 | ||||
Term B-2 Loans |
898,153 | 902,402 | ||||||
Extended Term B-1 Loans |
159,103 | 159,878 | ||||||
2016 Extended Term Loans |
69,492 | — | ||||||
Industrial Revenue bond |
10,000 | 10,000 | ||||||
Revolving credit facility and other |
88 | 101 | ||||||
Capital leases, net |
5,472 | 9,301 | ||||||
Deferred financing costs, net |
(12,544 | ) | (14,710 | ) | ||||
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1,146,554 | 1,223,106 | |||||||
Less: current portion |
(30,677 | ) | (17,385 | ) | ||||
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Long-term debt including leases |
$ | 1,115,877 | $ | 1,205,721 | ||||
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As detailed in “Recent Accounting Pronouncements” in Note 1, ASU 2015-03 dictates that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The “deferred financing costs, net” line in the table above is the application of this new guidance.
On September 5, 2013, the Company entered into the Second Amended and Restated Credit Agreement (the “2013 Amended Credit Agreement”). The 2013 Amended Credit Agreement initially contained a revolving credit facility (“Revolving Credit Facility”) and two tranches of term loans, a term B-1 facility (“Term B-1 Loans”) and a term B-2 facility (“Term B-2 Loans”). The Revolving Credit Facility, the Term B-1 Loans, and the Term B-2 Loans are secured by a first priority lien on substantially all of the Company’s domestic assets.
The 2013 Amended Credit Agreement was amended in March 2014, April 2015, and May 2015 as well as joinder agreements as of August 2014 and September 2014. These amendments and joinder agreements made various changes to maturity dates and interest rate margins. In addition, amounts that were initially Term B-1 Loans and balances on the Revolving Credit Facility were converted into term loans with essentially the same terms as the Term B-2 Loans (the “Extended Term B-1 Loans”). The applicable margin for B-1 and B-2 Base Rate loans was 2.5% and the margin on B-1 and B-2 Eurodollar Rate loans was 3.5%.
On September 30, 2015, the Company entered into an amendment to the 2013 Amended Credit Agreement that modified the Revolving Credit Facility. These modifications consisted primarily of (i) a reduction in the U.S. revolving commitments from $124,000 to $99,000 (while the aggregate Canadian revolving commitment remained at $1,000) and (ii) changes in the financial covenant governing the availability of amounts under the Revolving Credit Facility if, and only if, the Company has drawn, including letters of credit, more than $31,250 on the Revolving Credit Facility. Generally, if the Company’s leverage ratio is greater than 4.75:1.00 during the period from the third quarter of 2015 through the fourth quarter of 2016, so long as the stated quarterly adjusted EBITDA thresholds are exceeded, the amount available to borrow under the Revolving Credit Facility is increased from $31,250 to $40,000. Commencing with the end of the first quarter of 2017, the quarterly adjusted EBITDA thresholds are discontinued and the full amount of the revolving commitment ($100,000) is available so long as the Company’s leverage ratio does not exceed a revised limit (6.50:1.00 for the first quarter of 2017 declining quarterly to 4.75:1.00 for the fourth quarter of 2017). As of June 30, 2016, the Company’s leverage ratio was 77.75:1.00.
On April 28, 2016, the Company entered into an amendment to the 2013 Amended Credit Agreement that extended the maturity of certain of the Term B-1 Loans to July 15, 2018 (the “2016 Extended Term Loans”). The Company made a prepayment of accrued interest of $227 and principal of $69,580 on April 28, 2016 to the lenders consenting to the amendment. Accrued interest on the extended remainder of the Term B-1 Loan is due at maturity on July 15, 2018. Under the terms of the agreement, the change in the maturities of the Term B-1 Loans and the 2016 Extended Term Loans are as follows:
Principal Payments | ||||||||
Due Date |
Prior to Extension | Subsequent to Extension | ||||||
4/28/2016(A) |
$ | — | $ | 69,580 | ||||
6/30/2016 |
400 | 43 | ||||||
9/30/2016 |
400 | 43 | ||||||
12/31/2016 |
400 | 43 | ||||||
3/17/2017 |
154,812 | 16,723 | ||||||
7/15/2018 |
— | 69,580 | ||||||
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Total(B) |
$ | 156,012 | $ | 156,012 | ||||
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(A) | - | The principal payment shown for April 28, 2016 represents a prepayment of principal to the lenders consenting to the extended maturity. | ||
(B) | - | These amounts do not reflect the amortization of original issue discounts. |
Accrued interest related to the $16,723 principal payment due on March 17, 2017 will also be due on the same date, as shown above. The applicable base rate margin on the interest rate for the Base Rate Term B-1 Loans, the Extended Term B-1 Loans, the 2016 Extended Term Loans, and the Term B-2 Loans is 2.5% and the applicable margin on the interest rate for the Eurodollar Term B-1, Extended Term B-1, 2016 Extended Term Loans, and the Term B-2 Loans is 3.5%. The Eurodollar Extended Term B-1, 2016 Extended Term, and Term B-2 Loans all contain a 1% rate floor, plus the applicable margin. The Term B-1 Loan does not contain any type of interest rate floor.
As of June 30, 2016, Term B-1 Loans, Term B-2 Loans, Extended Term B-1 Loans, the 2016 Extended Term Loans, and the Revolving Credit Facility had interest rates of 4.2%, 4.5%, 4.5%, 4.5%, and 4.3%, respectively.
As of June 30, 2016, there was $18,323 available capacity on the Revolving Credit Facility and $12,927 committed to outstanding letters of credit. As of June 30, 2016, the Company has not drawn on the Revolving Credit Facility.
The Company has a $10,000 Industrial Revenue Bond outstanding related to the construction of a manufacturing facility in Wisconsin. The bond bears interest, which is payable monthly, at a variable rate. The rate was 0.46% at June 30, 2016. The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10,000.
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6. Derivative Instruments
The Company enters into interest rate swap agreements as a means to partially hedge its variable interest rate risk on debt instruments. The current notional value of these swap agreements is $525,225, which represents a total of approximately 46% of term debt outstanding at June 30, 2016 and effectively fixes the variable rate in a range of 0.83% to 3.115% for the portion of the debt that is hedged. The interest rate swap agreements mature at various dates between March 15, 2017 and September 5, 2019.
The derivative instruments are recorded on the balance sheet at their fair values. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. For cash flow hedges in which the Company is hedging the variability of cash flows related to a variable-rate liability, the effective portion of the gain or loss on the derivative instrument is reported in other comprehensive income in the periods during which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges is recognized in current period earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income (loss) related to the interest rate swaps are reclassified into income to obtain a net cost on the debt obligation equal to the effective yield of the fixed rate of each swap. In the event that an interest rate swap is terminated prior to maturity, gains or losses in accumulated other comprehensive income (loss) remain deferred and are reclassified into earnings in the periods in which the hedged forecasted transaction affects earnings.
The Company formally designates and documents instruments at inception that qualify for hedge accounting of underlying exposures in accordance with GAAP. Both at inception and for each reporting period, the Company assesses whether the financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposure.
The following table summarizes the fair values and the respective classification in the Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015:
Assets (Liabilities) | ||||||||||
Interest Rate Swap Agreements |
Balance Sheet Classification |
June 30, 2016 | December 31, 2015 | |||||||
Designated as hedges |
Other long-term liabilities |
$ | (20,161 | ) | $ | (12,107 | ) | |||
Designated as hedges |
Other assets |
— | 118 | |||||||
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$ | (20,161 | ) | $ | (11,989 | ) | |||||
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The Company recognized $109 and $16 in interest expense, representing the ineffective portion of interest rate swap agreements designated as hedges, in the six months ended June 30, 2016 and 2015, respectively. The Company expects $6,550 to be reclassified from accumulated other comprehensive income (loss) into interest expense within the next twelve months.
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7. Fair Value Measurements
Financial instruments held by the Company include cash equivalents, accounts receivable, accounts payable, long-term debt (including the current portion thereof) and interest rate swaps. The Company is also liable for contingent consideration from an acquisition that is subject to fair value measurement. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.
Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities at fair value will be classified and disclosed in one of the following three categories:
Level 1 | Quoted market prices in active markets for identical assets or liabilities | |
Level 2 | Observable market based inputs or unobservable inputs that are corroborated by market data | |
Level 3 | Unobservable inputs that are not corroborated by market data |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The book value of cash equivalents, accounts receivable and accounts payable are considered to be representative of their fair values because of their short maturities. The carrying value of the Company’s long-term debt (including the current portion thereof) is recognized at amortized cost. The fair value of the Term B-1 Loans, the Extended Term B-1 Loans, the 2016 Extended Term Loans, and the Term B-2 Loans differs from amortized costs and is valued at prices obtained from a readily-available source for trading non-public debt, which represent quoted prices for identical or similar assets in markets that are not active, and therefore is considered Level 2. The following table presents the fair value as of June 30, 2016 and December 31, 2015 for the Company’s long-term debt:
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Long-Term Debt Fair Value Measurements |
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
June 30, 2016 |
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Term B-1 Loans |
$ | — | $ | 15,464 | $ | — | $ | 15,464 | ||||||||
Term B-2 Loans |
— | 729,514 | — | 729,514 | ||||||||||||
Extended Term B-1 Loans |
— | 127,543 | — | 127,543 | ||||||||||||
2016 Extended Term Loans |
— | 60,535 | — | 60,535 | ||||||||||||
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$ | — | $ | 933,056 | $ | — | $ | 933,056 | |||||||||
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December 31, 2015 |
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Term B-1 Loans |
$ | — | $ | 106,360 | $ | — | $ | 106,360 | ||||||||
Term B-2 Loans |
— | 443,580 | — | 443,580 | ||||||||||||
Extended Term B-1 Loans |
— | 76,922 | — | 76,922 | ||||||||||||
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$ | — | $ | 626,862 | $ | — | $ | 626,862 | |||||||||
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The following table presents the amounts carried at fair value as of June 30, 2016 and December 31, 2015 for the Company’s other financial instruments.
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Recurring Fair Value Measurements |
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
June 30, 2016 |
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Interest rate swap agreements |
$ | — | $ | (20,161 | ) | $ | — | $ | (20,161 | ) | ||||||
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$ | — | $ | (20,161 | ) | $ | — | $ | (20,161 | ) | |||||||
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December 31, 2015 |
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Interest rate swap agreements |
$ | — | $ | (11,989 | ) | $ | — | $ | (11,989 | ) | ||||||
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$ | — | $ | (11,989 | ) | $ | — | $ | (11,989 | ) | |||||||
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8. Common Stock and Stock-Based Compensation
The Company granted options to purchase 1,731 and 1,615 shares of common stock in the six months ended June 30, 2016 and 2015, respectively. The average grant date fair value was $2.21 and $3.97 for options issued in the six months ended June 30, 2016 and 2015, respectively. The Company issued restricted stock units (“RSUs”) of 1,020 and 360 in the six months ended June 30, 2016 and 2015, respectively. The Company issued performance restricted stock units (“PRSUs”) of 481 and 0 in the six months ended June 30, 2016 and 2015, respectively.
Options | Weighted Average Exercise Price, Options |
Restricted Stock Units |
Weighted Average Price at RSU Issue Date |
Performance Restricted Stock Units |
Weighted Average Price at PRSU Issue Date |
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Outstanding at December 31, 2015 |
16,277 | $ | 6.28 | 579 | $ | 10.45 | — | $ | — | |||||||||||||||
Granted |
1,731 | 2.21 | 1,020 | 2.40 | 481 | 2.27 | ||||||||||||||||||
Exercised |
(488 | ) | 4.11 | (14 | ) | 8.83 | — | — | ||||||||||||||||
Forfeited |
(425 | ) | 8.54 | (97 | ) | 7.07 | (23 | ) | 2.04 | |||||||||||||||
Expired |
(542 | ) | 7.38 | — | — | — | — | |||||||||||||||||
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Outstanding at June 30, 2016 |
16,553 | $ | 5.79 | 1,488 | $ | 5.12 | 458 | $ | 2.28 |
In the three months ended June 30, 2016, the Company recorded approximately $2,135 of stock compensation expense related to a modification of the retirement provisions of the Company’s Long Term Incentive Plans. The modification allows retirement-eligible participants (defined as age 55, plus 10 years of service) to continue to vest in options following retirement, and also allows retired participants to exercise options for up to 10 years from grant date.
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9. Income Taxes
The Company computes and applies to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.
For the three months ended June 30, 2016, the Company recorded a tax benefit of $63,019 on a loss before income taxes of $150,889 resulting in an effective tax rate of 41.8%, compared to a tax benefit of $26,677 on a loss before income taxes of $12,536 resulting in an effective tax rate of 212.8% for the same period of 2015. The reduction in the effective tax rate is primarily attributable to a decrease in the impact of depletion applied against forecasted results in 2016 as compared to 2015. The effective rate differs from the U.S. federal statutory rate due primarily to the benefit from a loss carryback and depletion.
For the six months ended June 30, 2016, the Company recorded a tax benefit $78,773 on a loss before income taxes of $178,422 resulting in an effective tax rate of 44.1%, compared to a tax benefit of $16,060 on income before income taxes of $28,961 resulting in an effective tax rate of (55.5%) for the same period of 2015. The increase in the effective tax rate is primarily attributable to the impact of depletion as well as a tax benefit from a loss carryback, applied against forecasted results in 2016 as compared to forecasted results in 2015. The effective rate differs from the U.S. federal statutory rate due primarily to the benefit from a loss carryback and depletion.
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10. Defined Benefit Plans
The Company maintained two defined benefit pension plans, the Wedron pension plan and the Troy Grove pension plan, covering union employees at certain facilities that provide benefits based upon years of service or a combination of employee earnings and length of service. The benefits under the Wedron plan were frozen effective December 31, 2012.
Net periodic benefit cost recognized for other Company defined benefit pension plans for the six months ended June 30, 2016 and 2015 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Components of net periodic benefit cost |
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Service cost |
$ | 21 | 27 | $ | 42 | $ | 54 | |||||||||
Interest cost |
87 | 85 | 174 | 170 | ||||||||||||
Expected return on plan assets |
(120 | ) | (127 | ) | (240 | ) | (254 | ) | ||||||||
Amortization of prior service cost |
— | 4 | — | 8 | ||||||||||||
Amortization of net actuarial loss |
35 | 70 | 109 | 140 | ||||||||||||
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Net periodic benefit cost |
$ | 23 | $ | 59 | $ | 85 | $ | 118 | ||||||||
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The Company contributed $42 and $33 during the six months ended June 30, 2016 and 2015, respectively. Total expected employer contributions during the year ending December 31, 2016 are $76.
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11. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at June 30, 2016 and December 31, 2015 were as follows:
June 30, 2016 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (10,390 | ) | $ | 1,627 | $ | (8,763 | ) | ||||
Additional pension liability |
(3,906 | ) | 1,464 | (2,442 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(18,342 | ) | 6,548 | (11,794 | ) | |||||||
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$ | (32,638 | ) | $ | 9,639 | $ | (22,999 | ) | |||||
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December 31, 2015 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (10,030 | ) | $ | 1,318 | $ | (8,712 | ) | ||||
Additional pension liability |
(4,014 | ) | 1,464 | (2,550 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(10,128 | ) | 3,697 | (6,431 | ) | |||||||
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$ | (24,172 | ) | $ | 6,479 | $ | (17,693 | ) | |||||
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The following table presents the changes in accumulated other comprehensive income by component for the six months ended June 30, 2016:
Six Months Ended June 30, 2016 | ||||||||||||||||
Unrealized | ||||||||||||||||
Foreign | Additional | gain (loss) | ||||||||||||||
currency | pension | on interest | ||||||||||||||
translation | liability | rate hedges | Total | |||||||||||||
Beginning balance |
$ | (8,712 | ) | $ | (2,550 | ) | $ | (6,431 | ) | $ | (17,693 | ) | ||||
Other comprehensive income (loss) before reclassifications |
(51 | ) | — | (7,540 | ) | (7,591 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
— | 108 | 2,177 | 2,285 | ||||||||||||
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Ending balance |
$ | (8,763 | ) | $ | (2,442 | ) | $ | (11,794 | ) | $ | (22,999 | ) | ||||
|
|
|
|
|
|
|
|
The following table presents the reclassifications out of accumulated other comprehensive income during the six months ended June 30, 2016:
Amount reclassified | ||||||
from accumulated | ||||||
other comprehensive | Affected line item on | |||||
Details about accumulated other comprehensive income |
income |
the statement of income |
||||
Change in fair value of derivative swap agreements |
||||||
Interest rate hedging contracts |
$ | 3,332 | Interest expense | |||
Tax effect |
(1,156 | ) | Tax expense (benefit) | |||
|
|
|||||
$ | 2,176 | Net of tax | ||||
Amortization of pension obligations |
||||||
Prior service cost |
$ | — | Cost of sales | |||
Actuarial losses |
109 | Cost of sales | ||||
|
|
|||||
109 | Total before tax | |||||
Tax effect |
— | Tax expense | ||||
|
|
|||||
109 | Net of tax | |||||
|
|
|||||
Total reclassifications for the period |
$ | 2,285 | Net of tax | |||
|
|
|
12. Commitments and Contingent Liabilities
The Company has entered into numerous mineral rights agreements, in which payments under the agreements are expensed as incurred. Certain agreements require annual payments while other agreements require payments based upon annual tons mined and others a combination thereof.
The Company has entered into agreements with third party terminal operators whereby certain minimum payments are due regardless of terminal utilization.
The Company leases certain machinery, equipment (including railcars), buildings and office space under operating lease arrangements. Total rent expense associated with these leases was $35,156 and $33,503 for the six months ended June 30, 2016 and 2015, respectively.
The Company is subject to a contingent consideration arrangement related to the purchase of Self-Suspending Proppant LLC (“SSP”), which was accounted for as an acquisition of a group of assets. The contingent consideration is based on a fixed percentage of the cumulative product margin, less certain adjustments, generated by sales of Propel SSP and other products incorporating SSP technology for the five years commencing on October 1, 2015. The Company entered into an Amendment to this agreement on December 17, 2015. This Amendment (a) extends the period during which the aggregate earnout payments must equal or exceed $45,000 from the two-year period ending October 1, 2017 until the three-year period ending October 1, 2018; and (b) provides that the aggregate earnout payments during the two-year period ending October 1, 2017 must equal or exceed $15,000 and granted the Seller a security interest in 51% of the equity interests in the Company to secure such $15,000. The Amendment does not alter the final threshold earnout amount, which continues to be $195,000 (inclusive of the $45,000 payment, if any) by October 1, 2020. The contingent consideration is accrued and capitalized as part of the cost of the SSP assets at the time a payment is probable and reasonably estimable. Accordingly, the Company accrued and capitalized $56 in the six months ended June 30, 2016.
Certain subsidiaries are defendants in lawsuits in which the alleged injuries are claimed to be silicosis-related and to have resulted, in whole or in part, from exposure to silica-containing products, allegedly including those sold by certain subsidiaries. In the majority of cases, there are numerous other defendants. In accordance with its insurance obligations, the defense of these actions has been tendered to and the cases are being defended by the subsidiaries’ insurance carriers. Management believes that the Company’s substantial level of existing and available insurance coverage combined with various open indemnities is more than sufficient to cover any exposure to silicosis-related expenses. An estimate of the possible loss, if any, cannot be made at this time.
In December 2015, the Company was notified by the Securities and Exchange Commission (the “SEC”) that it was being investigated for possible violations of the Foreign Corrupt Practices Act (the “FCPA”) and other securities laws relating to matters concerning certain of the Company’s international operations. The Company had previously retained outside legal counsel to investigate the subject matter of the SEC’s investigation, and at that time, the Company determined that no further action was necessary. The Company cannot predict what, if any, further action the SEC may take regarding its investigation, and cannot provide an estimate of the potential costs of the SEC’s investigation or any possible fines, penalties, or other remedial actions that might result, if any, at this time.
|
13. Transactions with Related Parties
The Company had purchases from an affiliated entity for freight, logistic services and consulting services related to its operations in China of $372 and $120 in the six months ended June 30, 2016 and 2015, respectively.
|
14. Segment Reporting
The Company organizes its business into two reportable segments, Proppant Solutions and Industrial & Recreational Products. The reportable segments are consistent with how management views the markets served by the Company and the financial information reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance.
The chief operating decision maker primarily evaluates an operating segment’s performance 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.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues |
||||||||||||||||
Proppant Solutions |
$ | 82,102 | $ | 188,150 | $ | 199,565 | $ | 461,019 | ||||||||
Industrial & Recreational Products |
32,147 | 33,173 | 60,142 | 61,794 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
114,249 | 221,323 | 259,707 | 522,813 | ||||||||||||
Segment contribution margin |
||||||||||||||||
Proppant Solutions(A) |
(74,398 | ) | 35,416 | (61,790 | ) | 119,235 | ||||||||||
Industrial & Recreational Products(B) |
12,006 | (894 | ) | 20,852 | 6,182 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total segment contribution margin |
(62,392 | ) | 34,522 | (40,938 | ) | 125,417 | ||||||||||
Operating expenses excluded from segment contribution margin |
||||||||||||||||
Selling, general, and administrative |
15,565 | 12,694 | 26,384 | 28,454 | ||||||||||||
Depreciation, depletion, and amortization |
18,056 | 16,276 | 36,642 | 32,499 | ||||||||||||
Stock compensation expense |
3,914 | 2,618 | 5,567 | 4,501 | ||||||||||||
Corporate asset impairments, restructuring charges, and other operating expense |
34,356 | 576 | 35,028 | 800 | ||||||||||||
Interest expense, net |
16,606 | 14,894 | 33,868 | 30,202 | ||||||||||||
Other non-operating income |
— | — | (5 | ) | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before provision for income taxes |
$ | (150,889 | ) | $ | (12,536 | ) | $ | (178,422 | ) | $ | 28,961 | |||||
|
|
|
|
|
|
|
|
(A) | - | Includes asset impairments and restructuring charges of $57,224 and $2,337 for the three months ended June 30, 2016 and 2015, respectively, and $57,300 and $2,337 for the six months ended June 30, 2016 and 2015, respectively. | ||
(B) | - | Includes asset impairments and restructuring charges of $0 and $12,085 for the three and six months ended June 30, 2016 and 2015, respectively. |
|
15. Restructuring Charges
As a result of challenging conditions in the energy market, the Company has taken actions to adjust its overall operational footprint and reduce costs. The restructuring program primarily consists of workforce reductions and costs to idle or exit facilities. The Company expects to complete these activities prior to the end of 2016, although a continued sustained downturn in the oil and gas market could extend the duration of this restructuring process. A summary of the restructuring costs recognized for the six months ended June 30, 2016 and 2015, respectively, is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Restructuring charges |
||||||||||||||||
Workforce reduction costs, including one-time severance payments |
$ | 1,155 | $ | 401 | $ | 1,155 | $ | 725 | ||||||||
Other exit costs, including multiemployer pension plan withdrawal liability and additional cash costs to exit facilities |
— | 7,948 | — | 7,948 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total restructuring charges |
$ | 1,155 | $ | 8,349 | $ | 1,155 | $ | 8,673 | ||||||||
|
|
|
|
|
|
|
|
A summary of the restructuring costs by operating segment is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Restructuring charges |
||||||||||||||||
Proppant Solutions |
$ | — | $ | 1,162 | $ | — | $ | 1,162 | ||||||||
Industrial & Recreational Products |
— | 6,786 | — | 6,786 | ||||||||||||
Corporate |
1,155 | 401 | 1,155 | 725 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total restructuring charges |
$ | 1,155 | $ | 8,349 | $ | 1,155 | $ | 8,673 | ||||||||
|
|
|
|
|
|
|
|
|
16. Indefinite-Lived Intangibles – Goodwill
As of June 30, 2016, the balance of Goodwill was $15,301, which represents goodwill related to acquisitions in the Company’s Industrial & Recreational Products segment. The Company performed a review of qualitative factors and concluded that, as of June 30, 2016, there were no events or changes in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value.
|
17. Subsequent Event
On July 26, 2016, the Company completed a public offering of 25,000 shares of its common stock. In addition, the underwriters completed their exercise of an overallotment option on July 28, 2016 to sell an additional 3,750 shares. Cash proceeds received by the Company for the 28,750 shares sold were approximately $161,000, net of underwriting commissions and estimated offering expenses. After these transactions, there were 191,413 shares of common stock issued and outstanding as of July 31, 2016.
The Company intends to use the net proceeds of the offering for general corporate purposes, which include, but are not limited to, working capital, repayment, redemption or refinancing of debt and leases, investments in or loans to subsidiaries, and satisfaction of other obligations.
|
Basis of Presentation
The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows of the reported interim periods. The condensed consolidated balance sheet as of December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for the full year or any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as filed in the 2015 Annual Report on Form 10-K and notes thereto and information included elsewhere in this Quarterly Report on Form 10-Q.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Change in Classification
In the three months ended June 30, 2016, the Company changed the classification of certain operating expenses on the Condensed Consolidated Statements of Income (Loss). Previously, the Company classified expenses incurred related to the downturn in the proppant market as “restructuring and other charges.” The Company now further classifies these types of expenses between asset impairments and restructuring charges. All comparative periods presented have been restated accordingly. See Notes 14 and 15 for further detail.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03 – Interest – Imputation of Interest (Subtopic 835-30). Under Subtopic 835-30, debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is required to be applied on a retrospective basis beginning January 1, 2016. Accordingly, the Company applied this guidance to its Condensed Consolidated Balance Sheets in the first quarter of 2016. See Note 4 for further detail.
In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The ASU requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. ASC 842 supersedes the previous leases standard, ASC 840 – Leases. The ASU is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), which provides guidance on simplified accounting for and presentation of share-based payment transactions, including income tax consequences, minimum tax withholding requirements, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU requires all tax effects of share-based payments to be recorded through the income statement, windfall tax benefits to be recorded when the benefit arises, and all share-based payment tax-related cash flows to be reported as operating activities in the statement of cash flows. Regarding tax withholding requirements, the ASU allows entities to withhold an amount up to the employees’ maximum individual tax rates without classifying the award as a liability. The ASU also permits entities to make an accounting policy election for the impact of forfeitures on expense recognition, either recognized when forfeitures are estimated or when forfeitures occur. The ASU is expected to impact the Company’s financial statements and disclosures as the Company makes share-based payments to its employees. The ASU is effective beginning January 1, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.
In April and May 2016, the FASB issued ASU No. 2016-10 – Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing, ASU No. 2016-11 – Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance, and ASU No. 2016-12 – Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients. These ASU’s each affect the guidance of the new revenue recognition standard in ASU No. 2014-09 – Revenue from Contracts with Customers and related subsequent ASUs. This guidance is effective beginning January 1, 2018. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
|
At June 30, 2016 and December 31, 2015, inventories consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Raw materials |
$ | 4,913 | $ | 10,145 | ||||
Work-in-process |
11,353 | 14,613 | ||||||
Finished goods |
43,074 | 48,648 | ||||||
|
|
|
|
|||||
59,340 | 73,406 | |||||||
Less: LIFO reserve |
(2,647 | ) | (2,912 | ) | ||||
|
|
|
|
|||||
Inventories |
$ | 56,693 | $ | 70,494 | ||||
|
|
|
|
|
At June 30, 2016 and December 31, 2015, property, plant, and equipment consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Land and improvements |
$ | 83,763 | $ | 82,966 | ||||
Mineral reserves and mine development |
248,196 | 323,691 | ||||||
Machinery and equipment |
576,933 | 575,034 | ||||||
Buildings and improvements |
152,951 | 171,791 | ||||||
Furniture, fixtures, and other |
3,455 | 3,609 | ||||||
Construction in progress |
39,260 | 37,047 | ||||||
|
|
|
|
|||||
1,104,558 | 1,194,138 | |||||||
Accumulated depletion and depreciation |
(347,875 | ) | (323,141 | ) | ||||
|
|
|
|
|||||
Property, plant, and equipment, net |
$ | 756,683 | $ | 870,997 | ||||
|
|
|
|
|
At June 30, 2016 and December 31, 2015, long-term debt consisted of the following:
June 30, 2016 | December 31, 2015 | |||||||
Term B-1 Loans |
$ | 16,790 | $ | 156,134 | ||||
Term B-2 Loans |
898,153 | 902,402 | ||||||
Extended Term B-1 Loans |
159,103 | 159,878 | ||||||
2016 Extended Term Loans |
69,492 | — | ||||||
Industrial Revenue bond |
10,000 | 10,000 | ||||||
Revolving credit facility and other |
88 | 101 | ||||||
Capital leases, net |
5,472 | 9,301 | ||||||
Deferred financing costs, net |
(12,544 | ) | (14,710 | ) | ||||
|
|
|
|
|||||
1,146,554 | 1,223,106 | |||||||
Less: current portion |
(30,677 | ) | (17,385 | ) | ||||
|
|
|
|
|||||
Long-term debt including leases |
$ | 1,115,877 | $ | 1,205,721 | ||||
|
|
|
|
Under the terms of the agreement, the change in the maturities of the Term B-1 Loans and the 2016 Extended Term Loans are as follows:
Principal Payments | ||||||||
Due Date |
Prior to Extension | Subsequent to Extension | ||||||
4/28/2016(A) |
$ | — | $ | 69,580 | ||||
6/30/2016 |
400 | 43 | ||||||
9/30/2016 |
400 | 43 | ||||||
12/31/2016 |
400 | 43 | ||||||
3/17/2017 |
154,812 | 16,723 | ||||||
7/15/2018 |
— | 69,580 | ||||||
|
|
|
|
|||||
Total(B) |
$ | 156,012 | $ | 156,012 | ||||
|
|
|
|
(A) | - | The principal payment shown for April 28, 2016 represents a prepayment of principal to the lenders consenting to the extended maturity. | ||
(B) | - | These amounts do not reflect the amortization of original issue discounts. |
|
The following table summarizes the fair values and the respective classification in the Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015:
Assets (Liabilities) | ||||||||||
Interest Rate Swap Agreements |
Balance Sheet Classification |
June 30, 2016 | December 31, 2015 | |||||||
Designated as hedges |
Other long-term liabilities |
$ | (20,161 | ) | $ | (12,107 | ) | |||
Designated as hedges |
Other assets |
— | 118 | |||||||
|
|
|
|
|||||||
$ | (20,161 | ) | $ | (11,989 | ) | |||||
|
|
|
|
|
The following table presents the fair value as of June 30, 2016 and December 31, 2015 for the Company’s long-term debt:
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Long-Term Debt Fair Value Measurements |
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
June 30, 2016 |
||||||||||||||||
Term B-1 Loans |
$ | — | $ | 15,464 | $ | — | $ | 15,464 | ||||||||
Term B-2 Loans |
— | 729,514 | — | 729,514 | ||||||||||||
Extended Term B-1 Loans |
— | 127,543 | — | 127,543 | ||||||||||||
2016 Extended Term Loans |
— | 60,535 | — | 60,535 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | — | $ | 933,056 | $ | — | $ | 933,056 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 |
||||||||||||||||
Term B-1 Loans |
$ | — | $ | 106,360 | $ | — | $ | 106,360 | ||||||||
Term B-2 Loans |
— | 443,580 | — | 443,580 | ||||||||||||
Extended Term B-1 Loans |
— | 76,922 | — | 76,922 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | — | $ | 626,862 | $ | — | $ | 626,862 | |||||||||
|
|
|
|
|
|
|
|
The following table presents the amounts carried at fair value as of June 30, 2016 and December 31, 2015 for the Company’s other financial instruments.
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Recurring Fair Value Measurements |
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
June 30, 2016 |
||||||||||||||||
Interest rate swap agreements |
$ | — | $ | (20,161 | ) | $ | — | $ | (20,161 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
$ | — | $ | (20,161 | ) | $ | — | $ | (20,161 | ) | |||||||
|
|
|
|
|
|
|
|
|
Options | Weighted Average Exercise Price, Options |
Restricted Stock Units |
Weighted Average Price at RSU Issue Date |
Performance Restricted Stock Units |
Weighted Average Price at PRSU Issue Date |
|||||||||||||||||||
Outstanding at December 31, 2015 |
16,277 | $ | 6.28 | 579 | $ | 10.45 | — | $ | — | |||||||||||||||
Granted |
1,731 | 2.21 | 1,020 | 2.40 | 481 | 2.27 | ||||||||||||||||||
Exercised |
(488 | ) | 4.11 | (14 | ) | 8.83 | — | — | ||||||||||||||||
Forfeited |
(425 | ) | 8.54 | (97 | ) | 7.07 | (23 | ) | 2.04 | |||||||||||||||
Expired |
(542 | ) | 7.38 | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Outstanding at June 30, 2016 |
16,553 | $ | 5.79 | 1,488 | $ | 5.12 | 458 | $ | 2.28 |
|
Net periodic benefit cost recognized for other Company defined benefit pension plans for the six months ended June 30, 2016 and 2015 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Components of net periodic benefit cost |
||||||||||||||||
Service cost |
$ | 21 | 27 | $ | 42 | $ | 54 | |||||||||
Interest cost |
87 | 85 | 174 | 170 | ||||||||||||
Expected return on plan assets |
(120 | ) | (127 | ) | (240 | ) | (254 | ) | ||||||||
Amortization of prior service cost |
— | 4 | — | 8 | ||||||||||||
Amortization of net actuarial loss |
35 | 70 | 109 | 140 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 23 | $ | 59 | $ | 85 | $ | 118 | ||||||||
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at June 30, 2016 and December 31, 2015 were as follows:
June 30, 2016 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (10,390 | ) | $ | 1,627 | $ | (8,763 | ) | ||||
Additional pension liability |
(3,906 | ) | 1,464 | (2,442 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(18,342 | ) | 6,548 | (11,794 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | (32,638 | ) | $ | 9,639 | $ | (22,999 | ) | |||||
|
|
|
|
|
|
|||||||
December 31, 2015 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (10,030 | ) | $ | 1,318 | $ | (8,712 | ) | ||||
Additional pension liability |
(4,014 | ) | 1,464 | (2,550 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(10,128 | ) | 3,697 | (6,431 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | (24,172 | ) | $ | 6,479 | $ | (17,693 | ) | |||||
|
|
|
|
|
|
The following table presents the changes in accumulated other comprehensive income by component for the six months ended June 30, 2016:
Six Months Ended June 30, 2016 | ||||||||||||||||
Unrealized | ||||||||||||||||
Foreign | Additional | gain (loss) | ||||||||||||||
currency | pension | on interest | ||||||||||||||
translation | liability | rate hedges | Total | |||||||||||||
Beginning balance |
$ | (8,712 | ) | $ | (2,550 | ) | $ | (6,431 | ) | $ | (17,693 | ) | ||||
Other comprehensive income (loss) before reclassifications |
(51 | ) | — | (7,540 | ) | (7,591 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
— | 108 | 2,177 | 2,285 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | (8,763 | ) | $ | (2,442 | ) | $ | (11,794 | ) | $ | (22,999 | ) | ||||
|
|
|
|
|
|
|
|
The following table presents the reclassifications out of accumulated other comprehensive income during the six months ended June 30, 2016:
Amount reclassified | ||||||
from accumulated | ||||||
other comprehensive | Affected line item on | |||||
Details about accumulated other comprehensive income |
income |
the statement of income |
||||
Change in fair value of derivative swap agreements |
||||||
Interest rate hedging contracts |
$ | 3,332 | Interest expense | |||
Tax effect |
(1,156 | ) | Tax expense (benefit) | |||
|
|
|||||
$ | 2,176 | Net of tax | ||||
Amortization of pension obligations |
||||||
Prior service cost |
$ | — | Cost of sales | |||
Actuarial losses |
109 | Cost of sales | ||||
|
|
|||||
109 | Total before tax | |||||
Tax effect |
— | Tax expense | ||||
|
|
|||||
109 | Net of tax | |||||
|
|
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Total reclassifications for the period |
$ | 2,285 | Net of tax | |||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues |
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Proppant Solutions |
$ | 82,102 | $ | 188,150 | $ | 199,565 | $ | 461,019 | ||||||||
Industrial & Recreational Products |
32,147 | 33,173 | 60,142 | 61,794 | ||||||||||||
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Total revenues |
114,249 | 221,323 | 259,707 | 522,813 | ||||||||||||
Segment contribution margin |
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Proppant Solutions(A) |
(74,398 | ) | 35,416 | (61,790 | ) | 119,235 | ||||||||||
Industrial & Recreational Products(B) |
12,006 | (894 | ) | 20,852 | 6,182 | |||||||||||
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Total segment contribution margin |
(62,392 | ) | 34,522 | (40,938 | ) | 125,417 | ||||||||||
Operating expenses excluded from segment contribution margin |
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Selling, general, and administrative |
15,565 | 12,694 | 26,384 | 28,454 | ||||||||||||
Depreciation, depletion, and amortization |
18,056 | 16,276 | 36,642 | 32,499 | ||||||||||||
Stock compensation expense |
3,914 | 2,618 | 5,567 | 4,501 | ||||||||||||
Corporate asset impairments, restructuring charges, and other operating expense |
34,356 | 576 | 35,028 | 800 | ||||||||||||
Interest expense, net |
16,606 | 14,894 | 33,868 | 30,202 | ||||||||||||
Other non-operating income |
— | — | (5 | ) | — | |||||||||||
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Income (loss) before provision for income taxes |
$ | (150,889 | ) | $ | (12,536 | ) | $ | (178,422 | ) | $ | 28,961 | |||||
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A summary of the restructuring costs recognized for the six months ended June 30, 2016 and 2015, respectively, is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Restructuring charges |
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Workforce reduction costs, including one-time severance payments |
$ | 1,155 | $ | 401 | $ | 1,155 | $ | 725 | ||||||||
Other exit costs, including multiemployer pension plan withdrawal liability and additional cash costs to exit facilities |
— | 7,948 | — | 7,948 | ||||||||||||
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Total restructuring charges |
$ | 1,155 | $ | 8,349 | $ | 1,155 | $ | 8,673 | ||||||||
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A summary of the restructuring costs by operating segment is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Restructuring charges |
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Proppant Solutions |
$ | — | $ | 1,162 | $ | — | $ | 1,162 | ||||||||
Industrial & Recreational Products |
— | 6,786 | — | 6,786 | ||||||||||||
Corporate |
1,155 | 401 | 1,155 | 725 | ||||||||||||
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Total restructuring charges |
$ | 1,155 | $ | 8,349 | $ | 1,155 | $ | 8,673 | ||||||||
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