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1. | Significant Accounting Policies |
Basis of Presentation
The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. (formerly FMSA Holdings Inc.) and its consolidated subsidiaries (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 presentation 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, 2014 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 2014 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Under ASU 2014-09, companies recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services. The new requirements significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02 – Consolidation (Topic 810). The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments modify the evaluation of whether certain limited partnerships and similar entities are variable interest entities (VIEs) or voting interest entities, impact the consolidation analysis of VIEs, and provide an exception for certain registered money market funds. The Company does not have any unconsolidated or consolidated legal entities impacted by this amendment.
On April 1, 2015, the FASB voted to propose a delay in the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and the interim periods within that year. As such, for a public business entity with a calendar year-end, the ASU would be effective on January 1, 2018, for both its interim and annual reporting periods. This proposal represents a one-year deferral from the original effective date. The proposed new effective date guidance will allow early adoption for all entities (i.e., both public business entities and other entities) as of the original effective date for public business entities, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. Early adoption by public business entities was not permitted under the original effective date guidance. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update 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 retrospective basis. The Company is not required to adopt this reporting standard until reporting periods beginning after December 15, 2015. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), which provides guidance on whether a cloud computing arrangement includes a software license. Under Subtopic 350-40, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance provides that an entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The amendments will be effective for annual periods beginning after December 15, 2015. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11 – Inventory (Topic 330) – Simplifying the Measurement of Inventory. An entity should measure inventory within the scope of this update at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendment is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. 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, 2015 and December 31, 2014, inventories consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Raw materials |
$ | 16,378 | $ | 19,803 | ||||
Work-in-process |
15,204 | 23,568 | ||||||
Finished goods |
60,760 | 91,202 | ||||||
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92,342 | 134,573 | |||||||
Less: LIFO reserve |
(1,717 | ) | (2,960 | ) | ||||
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Inventories |
$ | 90,625 | $ | 131,613 | ||||
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3. | Property, Plant and Equipment |
At June 30, 2015 and December 31, 2014, property, plant and equipment consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Land and improvements |
$ | 77,686 | $ | 63,800 | ||||
Mineral reserves and mine development |
313,905 | 303,804 | ||||||
Machinery and equipment |
534,370 | 478,225 | ||||||
Buildings and improvements |
147,685 | 146,165 | ||||||
Furniture, fixtures and other |
3,732 | 3,604 | ||||||
Construction in progress |
89,644 | 110,677 | ||||||
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1,167,022 | 1,106,275 | |||||||
Accumulated depletion and depreciation |
(301,238 | ) | (265,001 | ) | ||||
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Property, plant and equipment, net |
$ | 865,784 | $ | 841,274 | ||||
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4. | Long-Term Debt |
At June 30, 2015 and December 31, 2014, long-term debt consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Term B-1 Loans |
$ | 156,233 | $ | 319,917 | ||||
Term B-2 Loans |
906,651 | 910,900 | ||||||
Extended Term B-1 Loans |
160,653 | — | ||||||
Industrial Revenue bond |
10,000 | 10,000 | ||||||
Revolving credit facility and other |
1,082 | 1,098 | ||||||
Capital leases, net |
11,824 | 10,724 | ||||||
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1,246,443 | 1,252,639 | |||||||
Less: current portion |
(16,797 | ) | (17,274 | ) | ||||
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Long-term debt including leases |
$ | 1,229,646 | $ | 1,235,365 | ||||
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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 with a commitment amount of $75,000 (“Revolving Credit Facility”) and two tranches of term loans, pursuant to which the Company has borrowed $325,000 in aggregate principal amount under a term B-1 facility (“Term B-1 Loans”) and $885,000 in aggregate principal under a term B-2 facility (“Term B-2 Loans”). The Revolving Credit Facility and the Term B-1 and B-2 Loans are secured by a first priority lien on substantially all of the Company’s domestic assets.
In February 2014 the Company executed a joinder agreement to borrow $41,000 as an additional Term B-2 Loan. The proceeds of this borrowing were used to repay then outstanding amounts under the revolving credit facility. The additional borrowings mature on the same date as the then existing Term B-2 Loan (September 5, 2019) and the required quarterly principal repayments for the Term B-2 Loan were increased by one-quarter of 1% of the amount borrowed with the balance due at maturity. There were no other changes in the terms, interest rates or covenants of the 2013 Amended Credit Agreement.
In March 2014, the Company amended the 2013 Amended Credit Agreement whereby the applicable margin for the Term B-1 Loan and the Term B-2 Loan base rate loans was reduced to 2.5% and the applicable margin for the Term B-1 Loan and the Term B-2 Loan Eurodollar rate loans was reduced to 3.5%.
In August and September 2014, the Company executed additional joinder agreements for incremental revolving commitments to the Revolving Credit Facility for $46,629 and $3,371 respectively, which brings the Company’s total Revolving Credit Facility commitment to $125,000. As of June 30, 2015, there was $113,467 available borrowing remaining on this facility. There were no other changes in the terms, interest rates or covenants of the Revolving Credit Facility.
As of April 30, 2015, the Company entered into the Third Amendment to the Second Amended and Restated Credit Agreement (the “April 2015 Amendment”) to the 2013 Amended Credit Agreement. The April 2015 Amendment provides for the extension of the maturity date of $46,036 of outstanding Term B-1 Loans from March 15, 2017 (the “Stated B-1 Maturity Date”) to September 5, 2019 (the “Extended Maturity Date,” which is the same maturity date applicable to Term B-2 Loans under the Credit Agreement). The Company paid a fee of approximately $1,151 to the lender as a consent fee.
As of May 15, 2015, the Company entered into the Fourth Amendment to the Second Amended and Restated Credit Agreement (the “May 2015 Amendment”). The May 2015 Amendment provides for the extension of the maturity date of $115,458 of outstanding Term B-1 Loans from March 15, 2017 (the “Stated B-1 Maturity Date”) to September 5, 2019 (the “Extended Maturity Date,” which is the same maturity date applicable to Term B-2 Loans under the Credit Agreement). Such loans (together with other loans whose maturity dates were so extended under a prior amendment to the Credit Agreement, “Extended Term B-1 Loans”) effectively will be converted to Term B-2 Loans, and will be treated as Term B-2 Loans under the Credit Agreement for all purposes (including pricing), except for certain minor administrative differences and except that, prior to the Stated B-1 Maturity Date, Extended Term B-1 Loans shall continue to amortize as Term B-1 Loans. Upon giving effect to the April 2015 and May 2015 Amendments, the maturity date of approximately $161,495 in principal amount of outstanding Term B-1 Loans was so extended, and leaving approximately $156,619 in principal amount of outstanding Term B-1 Loans (not including Extended Term B-1 Loans) maturing on the Stated B-1 Maturity Date. The Company paid a fee of approximately $2,886 to the lender as a consent fee for the May 2015 Amendment.
After the Amendments above, $156,619 in principal amount of outstanding Term B-1 Loans mature on March 15, 2017 and $1,073,706 in principal amount of outstanding Term B-2 Loans (including Extended Term B-1 Loans) mature on September 5, 2019.
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6. | Derivative Instruments |
The Company enters into interest rate swap agreements as a means to hedge its variable interest rate risk on debt instruments. The current notional value of these swap agreements is $520,225 at June 30, 2015 and effectively fixes the variable rate in a range of 0.83% to 3.115%. The notional amount of these instruments is scheduled to increase over time to provide a hedge against variable interest rate debt. The interest rate swap agreements mature at various dates between October 31, 2015 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, 2015 and December 31, 2014:
Assets (Liabilities) | ||||||||||
Interest Rate Swap Agreements |
Balance Sheet Classification |
June 30, 2015 | December 31, 2014 | |||||||
Designated as hedges |
Other long-term liabilities | $ | (14,263 | ) | $ | (10,253 | ) | |||
Not designated as hedges |
Other long-term liabilities | (557 | ) | (1,443 | ) | |||||
Designated as hedges |
Other assets | — | 333 | |||||||
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$ | (14,820 | ) | $ | (11,363 | ) | |||||
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The Company recognized $16 and $21 in interest expense, representing the ineffective portion of interest rate swap agreements designated as hedges, in the six months ended June 30, 2015 and 2014, respectively. The Company expects $5,884 to be reclassified from accumulated other comprehensive income into interest expense in the twelve-month period ending June 30, 2016.
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7. | Fair Value Measurements |
Financial instruments held by the Company include cash equivalents, accounts receivable, accounts payable, long-term debt 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 carried 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 is recognized at amortized cost. The value of the Company’s Term B-1, Extended Term, and 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 fair value of the Company’s Term B-1 loan was $153,490 and $295,750, Extended Term loan was $150,206 and $0, and Term B-2 loan was $857,577 and $796,500 at June 30, 2015 and December 31, 2014, respectively.
The fair value of certain of the Company’s long-lived assets held and used with a carrying value of $15,271 was written down to a fair value of $7,634 in accordance with ASC 360-10. The resulting impairment charge of $7,637, which was based on management’s estimate of the disposed value of the assets, was recognized in restructuring and other charges in the current period.
The following tables present the amounts carried at fair value as of June 30, 2015 and December 31, 2014 for the Company’s other financial instruments.
Recurring Fair Value Measurements |
Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | ||||||||||||
June 30, 2015 |
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Interest rate swap agreements |
$ | — | $ | (14,820 | ) | $ | — | $ | (14,820 | ) | ||||||
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$ | — | $ | (14,820 | ) | $ | — | $ | (14,820 | ) | |||||||
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December 31, 2014 |
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Interest rate swap agreements |
$ | — | $ | (11,363 | ) | $ | — | $ | (11,363 | ) | ||||||
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$ | — | $ | (11,363 | ) | $ | — | $ | (11,363 | ) | |||||||
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Non-Recurring Fair Value Measurements |
Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | ||||||||||||
June 30, 2015 |
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Long-lived assets held and used |
$ | — | $ | — | $ | 7,634 | $ | 7,634 | ||||||||
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$ | — | $ | — | $ | 7,634 | $ | 7,634 | |||||||||
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December 31, 2014 |
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Long-lived assets held and used |
$ | — | $ | — | $ | 15,271 | $ | 15,271 | ||||||||
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$ | — | $ | — | $ | 15,271 | $ | 15,271 | |||||||||
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8. | Common Stock and Stock-Based Compensation |
The Company granted options to purchase 1,614,604 shares of common stock in the six months ended June 30, 2015. No options were granted in the six months ended June 30, 2014. The average grant date fair value was $3.97 for options issued in the six months ended June 30, 2015. The Company was not publicly traded in the six months ended June 30, 2014. The company issued restricted stock units of 360,412 in the six months ended June 30, 2015. No restricted stock units were issued in the six months ended June 30, 2014.
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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, 2015, the Company recorded a tax benefit of $26,677 on loss before income taxes of $12,536. For the six months ended June 30, 2015, the Company recorded a tax benefit of $16,060 on income before income taxes of $28,961. For the three months ended June 30, 2014, the Company recorded tax expense of $18,146 on income before income taxes of $62,349. For the six months ended June 30, 2014, the Company recorded tax expense of $32,412 on income before income taxes of $111,227. The effective tax rate for the three and six months ended June 30, 2015 was negative 212.8% and negative 55.5%, respectively, as compared with 29.1% for the three and six months ended June 30, 2014, respectively. The decreases in the effective tax rate from the corresponding fiscal periods in 2014 was primarily due to a greater impact on the effective tax rate from the depletion deduction.
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10. | Defined Benefit Plans |
The Company currently maintains two multiemployer defined benefit pension plans 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 Company is in the process of closing these facilities and is in the process of negotiating a withdrawal from the plans. The estimated cost of the withdrawal liability on a net present value basis has been recorded in the quarter. Net periodic benefit cost recognized for these plans for the six months ended June 30, 2015 and 2014 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Service cost |
$ | 27 | $ | 19 | $ | 54 | $ | 38 | ||||||||
Interest cost |
85 | 83 | 170 | 166 | ||||||||||||
Expected return on plan assets |
(127 | ) | (146 | ) | (254 | ) | (292 | ) | ||||||||
Amortization of prior service cost |
4 | 5 | 8 | 10 | ||||||||||||
Amortization of net actuarial loss |
70 | 40 | 140 | 80 | ||||||||||||
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Net periodic benefit cost |
$ | 59 | $ | 1 | $ | 118 | $ | 2 | ||||||||
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The Company contributed $33 and $130 during the six months ended June 30, 2015 and 2014, respectively. Total expected employer contributions during the year ending December 31, 2015 are $63.
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11. | Accumulated Other Comprehensive Income |
The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at June 30, 2015 and December 31, 2014 were as follows:
June 30, 2015 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (8,332 | ) | $ | — | $ | (8,332 | ) | ||||
Additional pension liability |
(4,088 | ) | 1,564 | (2,524 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(12,353 | ) | 4,459 | (7,894 | ) | |||||||
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$ | (24,773 | ) | $ | 6,023 | $ | (18,750 | ) | |||||
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December 31, 2014 |
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Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (4,979 | ) | $ | — | $ | (4,979 | ) | ||||
Additional pension liability |
(4,236 | ) | 1,588 | (2,648 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(8,292 | ) | 3,110 | (5,182 | ) | |||||||
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$ | (17,507 | ) | $ | 4,698 | $ | (12,809 | ) | |||||
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The following table presents the changes in accumulated other comprehensive income by component for the six months ended June 30, 2015:
Six Months Ended June 30, 2015 | ||||||||||||||||
Unrealized gain (loss) on interest rate hedges |
Additional pension liability |
Foreign currency translation |
Total | |||||||||||||
Beginning balance |
$ | (5,182 | ) | $ | (2,648 | ) | $ | (4,979 | ) | $ | (12,809 | ) | ||||
Other comprehensive income (loss) before reclassifications |
(3,401 | ) | — | (3,353 | ) | (6,754 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
689 | 124 | — | 813 | ||||||||||||
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Ending balance |
$ | (7,894 | ) | $ | (2,524 | ) | $ | (8,332 | ) | $ | (18,750 | ) | ||||
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The following table presents the reclassifications out of accumulated other comprehensive income during the six months ended June 30, 2015:
Details about accumulated other comprehensive income |
Amount reclassified from accumulated other comprehensive income |
Affected line item on |
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Change in fair value of derivative swap agreements |
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Interest rate hedging contracts |
$ | 1,269 | Interest expense | |||
Tax effect |
(579 | ) | Tax expense (benefit) | |||
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$ | 690 | Net of tax | ||||
Amortization of pension obligations |
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Prior service cost |
$ | 8 | Cost of sales | |||
Actuarial losses |
140 | Cost of sales | ||||
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148 | Total before tax | |||||
Tax effect |
(25 | ) | Tax expense | |||
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123 | Net of tax | |||||
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Total reclassifications for the period |
$ | 813 | Net of tax | |||
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12. | Commitments and Contingencies |
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.
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 leases certain machinery, equipment (including railcars), buildings and office space under operating lease arrangements. Total rent expense associated with these leases was $33,503 and $25,458 for the six months ended June 30, 2015 and 2014, 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. Because the earnout is dependent on future sales and the related cost of sales, the amounts of which are highly uncertain, it is not currently possible to estimate the amounts that will be paid. The contingent consideration will be accrued and capitalized as part of the cost of the SSP assets at the time a payment is probable and reasonably estimable.
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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 $120 and $976 in the six months ended June 30, 2015 and 2014, respectively. The Company had purchases from an affiliated entity for material purchases related to its operations in China of $62 and $0 in the six months ended June 30, 2015 and 2014, respectively.
The Company paid management fees of $0 and $526 in the six months ended June 30, 2015 and 2014, respectively. Concurrent with the Company’s initial public offering on October 3, 2014, the Company no longer pays a management fee to A.S. LLC.
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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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue |
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Proppant Solutions |
$ | 188,150 | $ | 300,685 | $ | 461,019 | $ | 567,185 | ||||||||
Industrial & Recreational Products |
33,173 | 33,606 | 61,794 | 62,038 | ||||||||||||
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Total revenue |
221,323 | 334,291 | 522,813 | 629,223 | ||||||||||||
Segment contribution margin |
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Proppant Solutions |
35,416 | 103,900 | 119,235 | 192,928 | ||||||||||||
Industrial & Recreational Products |
(894 | ) | 10,613 | 6,182 | 16,835 | |||||||||||
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Total segment contribution margin |
34,522 | 114,513 | 125,417 | 209,763 | ||||||||||||
Operating expenses excluded from segment contribution margin |
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Selling, general, and administrative |
12,694 | 18,884 | 28,454 | 32,010 | ||||||||||||
Depreciation, depletion, and amortization |
16,276 | 14,584 | 32,499 | 27,522 | ||||||||||||
Stock compensation expense |
2,618 | 2,219 | 4,501 | 4,313 | ||||||||||||
Corporate restructuring charges and other operating expense (income) |
576 | (345 | ) | 800 | (328 | ) | ||||||||||
Interest expense, net |
14,894 | 16,572 | 30,202 | 34,478 | ||||||||||||
Other non-operating expense (income) |
— | 250 | — | 541 | ||||||||||||
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|||||||||
Income (loss) before provision for taxes |
$ | (12,536 | ) | $ | 62,349 | $ | 28,961 | $ | 111,227 | |||||||
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15. | Restructuring and Other Charges |
As a result of recent challenging conditions in the proppant market, in the first and second quarters of 2015 the Company took actions to rationalize its overall operational footprint and reduce selling, general, and administrative costs. The restructuring program primarily consists of workforce reductions and closure of excess facilities. The expected completion date of these activities is September 30, 2015. A summary of the restructuring and other costs recognized for the six months ended June 30, 2015 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Restructuring and other charges |
||||||||||||||||
Workforce reduction costs, including one-time severance payments |
$ | 401 | $ | — | $ | 725 | $ | — | ||||||||
Write-down to net realizable value of exited facilities and other capitalized costs |
7,637 | — | 7,637 | — | ||||||||||||
Other exit costs, including multiemployer pension plan withdrawal liability and additional cash costs to exit facilities |
6,786 | — | 6,786 | — | ||||||||||||
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Total restructuring and other charges |
14,824 | — | 15,148 | — | ||||||||||||
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While these restructuring activities primarily were driven by the decline in proppant demand in 2015, certain plants supporting the Industrial & Recreational Products segment have been adversely impacted as well. A summary of the restructuring and other costs by operating segment is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Restructuring and other charges |
||||||||||||||||
Proppant Solutions |
$ | 2,402 | $ | — | $ | 2,402 | $ | — | ||||||||
Industrial & Recreational Products |
12,085 | — | 12,085 | — | ||||||||||||
Corporate |
337 | — | 661 | — | ||||||||||||
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Total restructuring and other charges |
$ | 14,824 | $ | — | $ | 15,148 | $ | — | ||||||||
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Basis of Presentation
The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. (formerly FMSA Holdings Inc.) and its consolidated subsidiaries (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 presentation 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, 2014 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 2014 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Under ASU 2014-09, companies recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services. The new requirements significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02 – Consolidation (Topic 810). The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments modify the evaluation of whether certain limited partnerships and similar entities are variable interest entities (VIEs) or voting interest entities, impact the consolidation analysis of VIEs, and provide an exception for certain registered money market funds. The Company does not have any unconsolidated or consolidated legal entities impacted by this amendment.
On April 1, 2015, the FASB voted to propose a delay in the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and the interim periods within that year. As such, for a public business entity with a calendar year-end, the ASU would be effective on January 1, 2018, for both its interim and annual reporting periods. This proposal represents a one-year deferral from the original effective date. The proposed new effective date guidance will allow early adoption for all entities (i.e., both public business entities and other entities) as of the original effective date for public business entities, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. Early adoption by public business entities was not permitted under the original effective date guidance. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update 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 retrospective basis. The Company is not required to adopt this reporting standard until reporting periods beginning after December 15, 2015. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), which provides guidance on whether a cloud computing arrangement includes a software license. Under Subtopic 350-40, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance provides that an entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The amendments will be effective for annual periods beginning after December 15, 2015. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11 – Inventory (Topic 330) – Simplifying the Measurement of Inventory. An entity should measure inventory within the scope of this update at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendment is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is in the process of evaluating the effect of the new guidance on its financial statements and disclosures.
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At June 30, 2015 and December 31, 2014, inventories consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Raw materials |
$ | 16,378 | $ | 19,803 | ||||
Work-in-process |
15,204 | 23,568 | ||||||
Finished goods |
60,760 | 91,202 | ||||||
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92,342 | 134,573 | |||||||
Less: LIFO reserve |
(1,717 | ) | (2,960 | ) | ||||
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Inventories |
$ | 90,625 | $ | 131,613 | ||||
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At June 30, 2015 and December 31, 2014, property, plant and equipment consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Land and improvements |
$ | 77,686 | $ | 63,800 | ||||
Mineral reserves and mine development |
313,905 | 303,804 | ||||||
Machinery and equipment |
534,370 | 478,225 | ||||||
Buildings and improvements |
147,685 | 146,165 | ||||||
Furniture, fixtures and other |
3,732 | 3,604 | ||||||
Construction in progress |
89,644 | 110,677 | ||||||
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|||||
1,167,022 | 1,106,275 | |||||||
Accumulated depletion and depreciation |
(301,238 | ) | (265,001 | ) | ||||
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Property, plant and equipment, net |
$ | 865,784 | $ | 841,274 | ||||
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At June 30, 2015 and December 31, 2014, long-term debt consisted of the following:
June 30, 2015 | December 31, 2014 | |||||||
Term B-1 Loans |
$ | 156,233 | $ | 319,917 | ||||
Term B-2 Loans |
906,651 | 910,900 | ||||||
Extended Term B-1 Loans |
160,653 | — | ||||||
Industrial Revenue bond |
10,000 | 10,000 | ||||||
Revolving credit facility and other |
1,082 | 1,098 | ||||||
Capital leases, net |
11,824 | 10,724 | ||||||
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|||||
1,246,443 | 1,252,639 | |||||||
Less: current portion |
(16,797 | ) | (17,274 | ) | ||||
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|||||
Long-term debt including leases |
$ | 1,229,646 | $ | 1,235,365 | ||||
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The following table summarizes the fair values and the respective classification in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014:
Assets (Liabilities) | ||||||||||
Interest Rate Swap Agreements |
Balance Sheet Classification |
June 30, 2015 | December 31, 2014 | |||||||
Designated as hedges |
Other long-term liabilities | $ | (14,263 | ) | $ | (10,253 | ) | |||
Not designated as hedges |
Other long-term liabilities | (557 | ) | (1,443 | ) | |||||
Designated as hedges |
Other assets | — | 333 | |||||||
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|||||||
$ | (14,820 | ) | $ | (11,363 | ) | |||||
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The following tables present the amounts carried at fair value as of June 30, 2015 and December 31, 2014 for the Company’s other financial instruments.
Recurring Fair Value Measurements |
Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | ||||||||||||
June 30, 2015 |
||||||||||||||||
Interest rate swap agreements |
$ | — | $ | (14,820 | ) | $ | — | $ | (14,820 | ) | ||||||
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$ | — | $ | (14,820 | ) | $ | — | $ | (14,820 | ) | |||||||
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|||||||||
December 31, 2014 |
||||||||||||||||
Interest rate swap agreements |
$ | — | $ | (11,363 | ) | $ | — | $ | (11,363 | ) | ||||||
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$ | — | $ | (11,363 | ) | $ | — | $ | (11,363 | ) | |||||||
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|||||||||
Non-Recurring Fair Value Measurements |
Quoted Prices in Active Markets (Level 1) |
Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Total | ||||||||||||
June 30, 2015 |
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Long-lived assets held and used |
$ | — | $ | — | $ | 7,634 | $ | 7,634 | ||||||||
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$ | — | $ | — | $ | 7,634 | $ | 7,634 | |||||||||
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December 31, 2014 |
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Long-lived assets held and used |
$ | — | $ | — | $ | 15,271 | $ | 15,271 | ||||||||
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$ | — | $ | — | $ | 15,271 | $ | 15,271 | |||||||||
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Net periodic benefit cost recognized for these plans for the six months ended June 30, 2015 and 2014 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Service cost |
$ | 27 | $ | 19 | $ | 54 | $ | 38 | ||||||||
Interest cost |
85 | 83 | 170 | 166 | ||||||||||||
Expected return on plan assets |
(127 | ) | (146 | ) | (254 | ) | (292 | ) | ||||||||
Amortization of prior service cost |
4 | 5 | 8 | 10 | ||||||||||||
Amortization of net actuarial loss |
70 | 40 | 140 | 80 | ||||||||||||
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Net periodic benefit cost |
$ | 59 | $ | 1 | $ | 118 | $ | 2 | ||||||||
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The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at June 30, 2015 and December 31, 2014 were as follows:
June 30, 2015 | ||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (8,332 | ) | $ | — | $ | (8,332 | ) | ||||
Additional pension liability |
(4,088 | ) | 1,564 | (2,524 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(12,353 | ) | 4,459 | (7,894 | ) | |||||||
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|
|||||||
$ | (24,773 | ) | $ | 6,023 | $ | (18,750 | ) | |||||
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|
|
|
|
|||||||
December 31, 2014 |
||||||||||||
Gross | Tax Effect | Net Amount | ||||||||||
Foreign currency translation |
$ | (4,979 | ) | $ | — | $ | (4,979 | ) | ||||
Additional pension liability |
(4,236 | ) | 1,588 | (2,648 | ) | |||||||
Unrealized gain (loss) on interest rate hedges |
(8,292 | ) | 3,110 | (5,182 | ) | |||||||
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|
|||||||
$ | (17,507 | ) | $ | 4,698 | $ | (12,809 | ) | |||||
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The following table presents the changes in accumulated other comprehensive income by component for the six months ended June 30, 2015:
Six Months Ended June 30, 2015 | ||||||||||||||||
Unrealized gain (loss) on interest rate hedges |
Additional pension liability |
Foreign currency translation |
Total | |||||||||||||
Beginning balance |
$ | (5,182 | ) | $ | (2,648 | ) | $ | (4,979 | ) | $ | (12,809 | ) | ||||
Other comprehensive income (loss) before reclassifications |
(3,401 | ) | — | (3,353 | ) | (6,754 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
689 | 124 | — | 813 | ||||||||||||
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|||||||||
Ending balance |
$ | (7,894 | ) | $ | (2,524 | ) | $ | (8,332 | ) | $ | (18,750 | ) | ||||
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The following table presents the reclassifications out of accumulated other comprehensive income during the six months ended June 30, 2015:
Details about accumulated other comprehensive income |
Amount reclassified from accumulated other comprehensive income |
Affected line item on |
||||
Change in fair value of derivative swap agreements |
||||||
Interest rate hedging contracts |
$ | 1,269 | Interest expense | |||
Tax effect |
(579 | ) | Tax expense (benefit) | |||
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|||||
$ | 690 | Net of tax | ||||
Amortization of pension obligations |
||||||
Prior service cost |
$ | 8 | Cost of sales | |||
Actuarial losses |
140 | Cost of sales | ||||
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148 | Total before tax | |||||
Tax effect |
(25 | ) | Tax expense | |||
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123 | Net of tax | |||||
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|||||
Total reclassifications for the period |
$ | 813 | Net of tax | |||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue |
||||||||||||||||
Proppant Solutions |
$ | 188,150 | $ | 300,685 | $ | 461,019 | $ | 567,185 | ||||||||
Industrial & Recreational Products |
33,173 | 33,606 | 61,794 | 62,038 | ||||||||||||
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Total revenue |
221,323 | 334,291 | 522,813 | 629,223 | ||||||||||||
Segment contribution margin |
||||||||||||||||
Proppant Solutions |
35,416 | 103,900 | 119,235 | 192,928 | ||||||||||||
Industrial & Recreational Products |
(894 | ) | 10,613 | 6,182 | 16,835 | |||||||||||
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Total segment contribution margin |
34,522 | 114,513 | 125,417 | 209,763 | ||||||||||||
Operating expenses excluded from segment contribution margin |
||||||||||||||||
Selling, general, and administrative |
12,694 | 18,884 | 28,454 | 32,010 | ||||||||||||
Depreciation, depletion, and amortization |
16,276 | 14,584 | 32,499 | 27,522 | ||||||||||||
Stock compensation expense |
2,618 | 2,219 | 4,501 | 4,313 | ||||||||||||
Corporate restructuring charges and other operating expense (income) |
576 | (345 | ) | 800 | (328 | ) | ||||||||||
Interest expense, net |
14,894 | 16,572 | 30,202 | 34,478 | ||||||||||||
Other non-operating expense (income) |
— | 250 | — | 541 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before provision for taxes |
$ | (12,536 | ) | $ | 62,349 | $ | 28,961 | $ | 111,227 | |||||||
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|
|
|
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|
|
A summary of the restructuring and other costs recognized for the six months ended June 30, 2015 is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Restructuring and other charges |
||||||||||||||||
Workforce reduction costs, including one-time severance payments |
$ | 401 | $ | — | $ | 725 | $ | — | ||||||||
Write-down to net realizable value of exited facilities and other capitalized costs |
7,637 | — | 7,637 | — | ||||||||||||
Other exit costs, including multiemployer pension plan withdrawal liability and additional cash costs to exit facilities |
6,786 | — | 6,786 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total restructuring and other charges |
14,824 | — | 15,148 | — |
A summary of the restructuring and other costs by operating segment is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Restructuring and other charges |
||||||||||||||||
Proppant Solutions |
$ | 2,402 | $ | — | $ | 2,402 | $ | — | ||||||||
Industrial & Recreational Products |
12,085 | — | 12,085 | — | ||||||||||||
Corporate |
337 | — | 661 | — | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total restructuring and other charges |
$ | 14,824 | $ | — | $ | 15,148 | $ | — | ||||||||
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