FAIRMOUNT SANTROL HOLDINGS INC., 10-K filed on 3/13/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Mar. 9, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
FMSA 
 
 
Entity Registrant Name
Fairmount Santrol Holdings Inc. 
 
 
Entity Central Index Key
0001010858 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
224,630,307 
 
Entity Public Float
 
 
$ 580,770,641 
Consolidated Statements of Income (Loss) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenues
$ 959,795 
$ 535,013 
$ 828,709 
Cost of goods sold (excluding depreciation, depletion, and amortization shown separately)
659,758 
459,714 
608,845 
Operating expenses
 
 
 
Selling, general and administrative expenses
113,240 
79,140 
85,191 
Depreciation, depletion and amortization expense
79,144 
72,276 
66,754 
Goodwill and other asset impairments
 
93,148 
87,476 
Restructuring charges
 
1,155 
9,221 
Other operating (income) expense
(1,072)
8,899 
1,357 
Income (loss) from operations
108,725 
(179,319)
(30,135)
Interest expense
56,408 
65,367 
62,242 
Loss (gain) on debt extinguishment and repurchase, net
2,898 
(5,110)
 
Other non-operating (income) expense
 
(10)
1,492 
Income (loss) before benefit from income taxes
49,419 
(239,566)
(93,869)
Benefit from income taxes
(4,666)
(99,441)
(1,939)
Net income (loss)
54,085 
(140,125)
(91,930)
Less: Net income attributable to the non-controlling interest
297 
67 
205 
Net income (loss) attributable to Fairmount Santrol Holdings Inc.
$ 53,788 
$ (140,192)
$ (92,135)
Earnings (loss) per share
 
 
 
Basic
$ 0.24 
$ (0.78)
$ (0.57)
Diluted
$ 0.23 
$ (0.78)
$ (0.57)
Weighted average number of shares outstanding
 
 
 
Basic
223,993 
179,429 
161,297 
Diluted
229,084 
179,429 
161,297 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ 54,085 
$ (140,125)
$ (91,930)
Other comprehensive income (loss), before tax
 
 
 
Foreign currency translation adjustment
555 
(774)
(5,051)
Pension obligations
336 
425 
222 
Change in fair value of derivative agreements
5,863 
(3,018)
(1,836)
Total other comprehensive income (loss), before tax
6,754 
(3,367)
(6,665)
Provision (benefit) for income taxes related to items of other comprehensive income (loss)
2,850 
(2,058)
(1,780)
Comprehensive income (loss), net of tax
57,989 
(141,434)
(96,815)
Comprehensive income attributable to the non-controlling interest
297 
67 
205 
Comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc.
$ 57,692 
$ (141,501)
$ (97,020)
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets
 
 
Cash and cash equivalents
$ 127,967 
$ 194,069 
Accounts receivable, net of allowance for doubtful accounts of $2,003 and $3,055 at December 31, 2017 and 2016, respectively
156,916 
78,942 
Inventories, net
70,528 
52,650 
Prepaid expenses and other assets
6,841 
7,065 
Refundable income taxes
924 
21,077 
Total current assets
363,176 
353,803 
Property, plant and equipment, net
785,513 
727,735 
Deferred income taxes
350 
1,244 
Goodwill
15,301 
15,301 
Intangibles, net
93,268 
95,341 
Other assets
7,711 
9,486 
Total assets
1,265,319 
1,202,910 
Current liabilities
 
 
Current portion of long-term debt
19,189 
10,707 
Accounts payable
70,633 
37,263 
Accrued expenses
74,007 
26,110 
Deferred revenue
5,660 
75 
Total current liabilities
169,489 
74,155 
Long-term debt
729,741 
832,306 
Deferred income taxes
3,606 
7,057 
Other long-term liabilities
42,189 
38,272 
Total liabilities
945,025 
951,790 
Commitments and contingent liabilities (Note 17)
   
   
Equity
 
 
Preferred stock: $0.01 par value, 100,000 authorized shares Shares outstanding: 0 at December 31, 2017 and 2016
   
   
Common stock: $0.01 par value, 1,850,000 authorized shares Shares issued: 242,366 and 242,267 at December 31, 2017 and 2016, respectively Shares outstanding: 224,291 and 223,601 at December 31, 2017 and 2016, respectively
2,423 
2,422 
Additional paid-in capital
299,912 
297,649 
Retained earnings
318,207 
264,852 
Accumulated other comprehensive loss
(15,098)
(19,002)
Total equity attributable to Fairmount Santrol Holdings Inc. before treasury stock
605,444 
545,921 
Less: Treasury stock at cost Shares in treasury: 18,075 and 18,666 at December 31, 2017 and 2016, respectively
(285,520)
(294,874)
Total equity attributable to Fairmount Santrol Holdings Inc.
319,924 
251,047 
Non-controlling interest
370 
73 
Total equity
320,294 
251,120 
Total liabilities and equity
$ 1,265,319 
$ 1,202,910 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 2,003 
$ 3,055 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
100,000,000 
100,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,850,000,000 
1,850,000,000 
Common stock, shares issued
242,366,000 
242,267,000 
Common stock, shares outstanding
224,291,000 
223,601,000 
Shares in treasury
18,075,000 
18,666,000 
Consolidated Statements of Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Subtotal [Member]
Non-controlling Interest [Member]
Beginning balances at Dec. 31, 2014
$ 33,474 
$ 2,387 
$ 771,888 
$ 497,179 
$ (12,809)
$ (1,227,663)
$ 30,982 
$ 2,492 
Beginning balances, shares at Dec. 31, 2014
 
160,913 
 
 
 
77,765 
 
 
Share-based awards exercised or distributed
1,767 
1,763 
 
 
 
1,767 
 
Share-based awards exercised or distributed, shares
 
520 
 
 
 
 
 
 
Stock compensation expense
4,525 
 
4,525 
 
 
 
4,525 
 
Tax effect of share-based awards exercised, forfeited, or expired
(1,471)
 
(1,471)
 
 
 
(1,471)
 
Transactions with non-controlling interest
(1,849)
 
 
 
 
 
 
(1,849)
Net (loss) income
(91,930)
 
 
(92,135)
 
 
(92,135)
205 
Other comprehensive income (loss)
(4,884)
 
 
 
(4,884)
 
(4,884)
 
Ending balances at Dec. 31, 2015
(60,368)
2,391 
776,705 
405,044 
(17,693)
(1,227,663)
(61,216)
848 
Ending balances, shares at Dec. 31, 2015
 
161,433 
 
 
 
77,765 
 
 
Re-issuance of treasury stock
439,556 
 
(493,233)
 
 
932,789 
439,556 
 
Re-issuance of treasury stock, shares
 
59,000 
 
 
 
(59,000)
 
 
Share-based awards exercised or distributed
6,438 
31 
6,407 
 
 
 
6,438 
 
Share-based awards exercised or distributed, shares
 
3,168 
 
 
 
(99)
 
 
Stock compensation expense
8,870 
 
8,870 
 
 
 
8,870 
 
Tax effect of share-based awards exercised, forfeited, or expired
(1,100)
 
(1,100)
 
 
 
(1,100)
 
Transactions with non-controlling interest
(842)
 
 
 
 
 
 
(842)
Net (loss) income
(140,125)
 
 
(140,192)
 
 
(140,192)
67 
Other comprehensive income (loss)
(1,309)
 
 
 
(1,309)
 
(1,309)
 
Ending balances at Dec. 31, 2016
251,120 
2,422 
297,649 
264,852 
(19,002)
(294,874)
251,047 
73 
Ending balances, shares at Dec. 31, 2016
 
223,601 
 
 
 
18,666 
 
 
Re-issuance of treasury stock
9,354 
 
 
 
 
9,354 
9,354 
 
Re-issuance of treasury stock, shares
 
591 
 
 
 
(591)
 
 
Share-based awards exercised or distributed
(8,506)
(8,507)
 
 
 
(8,506)
 
Share-based awards exercised or distributed, shares
 
99 
 
 
 
 
 
 
Stock compensation expense
10,770 
 
10,770 
 
 
 
10,770 
 
Impact of adoption of ASU 2016-09, net of tax (ASU 2016-09 [Member])
(433)
 
 
(433)
 
 
(433)
 
Net (loss) income
54,085 
 
 
53,788 
 
 
53,788 
297 
Other comprehensive income (loss)
3,904 
 
 
 
3,904 
 
3,904 
 
Ending balances at Dec. 31, 2017
$ 320,294 
$ 2,423 
$ 299,912 
$ 318,207 
$ (15,098)
$ (285,520)
$ 319,924 
$ 370 
Ending balances, shares at Dec. 31, 2017
 
224,291 
 
 
 
18,075 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Cash Flows [Abstract]
 
 
 
Net income (loss)
$ 54,085 
$ (140,125)
$ (91,930)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and depletion
71,397 
67,614 
62,218 
Amortization
12,784 
11,641 
11,416 
Reserve for doubtful accounts
(387)
1,851 
1,968 
Write-off of deferred financing costs
389 
2,618 
864 
Loss (gain) on debt extinguishment and repurchase, gross
2,898 
(8,178)
 
Goodwill and other asset impairments
 
93,148 
76,038 
Non-cash restructuring charges
 
 
1,162 
Inventory write-downs and reserves
1,266 
10,302 
1,591 
Loss on disposal of fixed assets
846 
420 
8,712 
Unrealized loss on interest rate swaps
14 
 
49 
Deferred income taxes and taxes payable
(5,634)
(82,732)
20,983 
Stock compensation expense
10,071 
8,870 
4,525 
Change in operating assets and liabilities:
 
 
 
Accounts receivable
(77,587)
(4,385)
127,718 
Inventories
(19,144)
7,543 
59,527 
Prepaid expenses and other assets
(2,398)
11,496 
23,234 
Refundable income taxes
20,154 
5,428 
(26,506)
Accounts payable
18,575 
4,196 
(38,698)
Accrued expenses
51,874 
11,718 
(6,051)
Deferred revenue
5,585 
75 
 
Net cash provided by operating activities
144,788 
1,500 
236,820 
Cash flows from investing activities
 
 
 
Proceeds from sale of fixed assets
4,939 
5,670 
 
Capital expenditures and stripping costs
(69,573)
(30,597)
(113,750)
Leasehold interest payments for sand reserves
(30,000)
 
 
Earnout payments
(4,170)
(1,287)
 
Other investing activities
 
 
(250)
Net cash used in investing activities
(98,804)
(26,214)
(114,000)
Cash flows from financing activities
 
 
 
Proceeds from borrowings on term loan
689,500 
 
 
Payments on term loans
(6,469)
(10,840)
(13,532)
Prepayments on term loans
(832,655)
(155,926)
 
Repurchase of term loans
 
(216,000)
 
Fees for debt restructure and repurchase of term loans
(2,790)
(450)
 
Payments on capital leases and other long-term debt
(4,752)
(5,947)
(6,975)
Proceeds from borrowing on revolving credit facility
50,000 
 
 
Payments on revolving credit facility
(5,000)
 
 
Proceeds from option exercises
845 
6,438 
1,767 
Proceeds from primary stock offering
 
439,556 
 
Tax payments for withholdings on share-based awards exercised or distributed
(1,321)
(8,092)
(826)
Tax effect of share-based awards exercised, forfeited, or expired
 
(1,100)
(1,472)
Transactions with non-controlling interest
 
(842)
(301)
Other financing activities
 
 
(4,578)
Net cash (used in) provided by financing activities
(112,642)
46,797 
(25,917)
Change in cash and cash equivalents related to assets classified as held-for-sale
 
1,376 
(1,376)
Foreign currency adjustment
556 
(876)
(964)
(Decrease) increase in cash and cash equivalents
(66,102)
22,583 
94,563 
Cash and cash equivalents:
 
 
 
Beginning of period
194,069 
171,486 
76,923 
End of period
127,967 
194,069 
171,486 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of capitalized interest
59,498 
60,833 
61,395 
Income taxes paid (refunded)
(19,278)
(21,311)
(19,898)
Non-cash investing activities:
 
 
 
Equipment purchased under capital leases
$ 10,988 
 
$ 4,552 
Organization
Organization

1.

Organization

Fairmount Santrol Holdings Inc. and its consolidated subsidiaries (collectively, the “Company”) is a supplier of proppants and sand products.  The Company is organized into two segments: Proppant Solutions and Industrial & Recreational Products.  This segmentation is based on the end markets served, management structure, and the financial information that is reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance.

The Proppant Solutions business serves the oil and gas markets in the United States, Canada, Argentina, Mexico, China, and northern Europe, providing raw and value-added proppants primarily for use in hydraulic fracturing.  The raw sand and substrate for value-added proppants generally consists of high-purity silica sands produced at facilities in Illinois, Minnesota, Wisconsin, and Texas.

The Industrial & Recreational Products (“I&R”) business provides raw and value-added products to the foundry, building products, glass, turf and landscape, and filtration industries.  Raw sand for the I&R business is produced at facilities in Ohio, Wisconsin, and Illinois.

In addition to its wholly-owned subsidiaries, the Company owns 90% of a holding company, Technimat LLC, which owns 70% of Santrol (Yixing) Proppant Co., a manufacturer of resin-based proppants located in China.  The non-controlling interests in both entities are presented as “non-controlling interest” on the balance sheet.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.

Summary of Significant Accounting Policies

Principle of Consolidation

The consolidated financial statements include the accounts of Fairmount Santrol Holdings Inc. and its wholly-owned and majority-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“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.

Revenue Recognition

Revenue is recognized when delivery of products has occurred, the selling price is fixed or determinable, collectability is reasonably assured and title and risk of loss have transferred to the customer.  This generally occurs when products leave a distribution terminal or, in the case of direct shipments, when products leave a production facility.  In a majority of cases, transportation costs to move product from a production facility to a storage terminal are borne by the Company and capitalized into the cost of inventory.  These costs are included in the cost of sales as the product is sold.  The Company derives its revenue primarily by mining and processing minerals that its customers purchase for various uses.  Its net sales are primarily a function of the price per ton realized and the volumes sold.  In a number of instances, its net sales also include a separate charge for transportation services it provides to its customers.

In the Proppant Solutions segment, the Company primarily sells its products under market rate contracts with terms typically ranging from one to eight years.  The Company invoices the majority of its customers on a per shipment basis when the customer takes possession of the product.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  At various times, the Company maintains funds on deposit at its banks in excess of FDIC insurance limits.

Accounts Receivable

Trade accounts receivable are stated at the amount management expects to collect, and do not bear interest.  Management provides for uncollectible amounts based on its assessment of the current status of individual accounts.  Accounts receivable are net of allowance for doubtful accounts of $2,003 and $3,055 as of December 31, 2017 and 2016, respectively.

Inventories

Inventories are stated at the lower of cost or market.  Certain subsidiaries determine cost using the last-in, first-out (LIFO) method.  If the first-in, first-out (FIFO) method of inventory accounting had been used, inventories would have been higher by $634 and $1,256 at December 31, 2017 and 2016, respectively.

LIFO inventories comprise 22% and 21% of inventories reflected in the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016, respectively.  The cost of inventories of all other subsidiaries is determined using the FIFO method.  In the years ended December 31, 2017 and 2016, respectively, the Company recorded $1,266, $10,302 and $1,591 of adjustments to increase the inventory reserve to recognize the decline in value of work-in-process and finished goods inventory, which are recorded in cost of goods sold.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost.  Expenditures, including interest, for property, plant, and equipment and items that substantially increase the useful lives of existing assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred.

Depreciation on property, plant, and equipment is computed on a straight-line basis over the estimated useful lives of the related assets.  Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.  Depletion expense calculated for depletable land and mineral rights is based on cost multiplied by a depletion factor. The depletion factor varies based on production and other factors, but is generally equal to annual tons mined divided by total estimated remaining reserves for the mine.

The estimated useful lives of property and equipment are principally as follows:

 

Land improvements

 

3-40 years

 

Leasehold improvements

 

10-20 years

 

Machinery and equipment

 

2-30 years

 

Buildings and improvements

 

10-40 years

 

Furniture, fixtures, and other

 

3-10 years

 

 

Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction.  No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use.  Construction in progress at December 31, 2017 and 2016 represents machinery and facilities under installation.

The Company capitalizes interest cost incurred on funds used to construct property, plant, and equipment.  The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.  Interest cost capitalized was $1,063, $1,380, and $4,903 in 2017, 2016, and 2015, respectively.

Depreciation and depletion expense was $71,397, $67,614, and $62,218 in the years ended December 31, 2017, 2016, and 2015, respectively.

The net book value of long-lived assets and intangible assets are reviewed when circumstances indicate the recoverability of the asset may be impaired.  This review is to determine if facts and circumstances suggest that the asset groups or individual assets within the asset groups may be impaired.  If these facts and circumstances and the undiscounted cash flows indicate that the carrying amount of the asset group or individual asset may not be recoverable, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset group or individual asset.   The facts and circumstances considered by management in performing this assessment include a review of current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.  Refer to Note 5 for additional information.  

Deferred Revenue

The Company enters into certain contracts with customers that include provisions requiring receipt of payment at the inception of the contract.  Deferred revenues are recorded when payment is received or due in advance of delivery of the product.  The balance of deferred revenue at December 31, 2017 and 2016 was $5,660 and $75, respectively.  

Deferred Financing Costs

Deferred financing costs are amortized over the terms of the related debt obligations.  Deferred financing costs associated with terms loans are included in long-term debt and deferred financing costs associated with the revolving credit facility are included in other assets.  In connection with certain long-term debt transactions in 2017, 2016 and 2015, the Company wrote off financing costs in the amount of $7,665, $2,618 and $864 respectively.  Refer to Note 8 for additional information.

The following table presents deferred financing costs as of December 31, 2017 and 2016:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Deferred financing costs

 

$

39,782

 

 

$

39,924

 

Accumulated amortization

 

 

(33,207

)

 

 

(29,530

)

Deferred financing costs, net

 

$

6,575

 

 

$

10,394

 

 

Goodwill

Goodwill is tested annually for impairment at the reporting segment level, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.  The impairment testing is first subject to a qualitative assessment which includes a review of macroeconomic conditions, industry and market environments, overall performance of the reporting segment and specific events or changes.  If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the an impairment loss is recorded for the amount by which the carrying amount (including goodwill) exceeds the reporting segment’s fair values, but not to exceed the total amount of the goodwill allocated to the reporting segment.   Refer to Note 7 for additional information.  

Earnings per Share

Basic and diluted earnings per share is presented for net income (loss) attributable to Fairmount Santrol Holdings Inc.  Basic earnings per share is computed by dividing income (loss) available to Fairmount Santrol Holdings Inc. common stockholders by the weighted-average number of outstanding common shares for the period.  Diluted earnings per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after exercise of outstanding stock options and restricted stock units.  Potential common shares in the diluted earnings per share calculation are excluded to the extent that they would be anti-dilutive.

Derivatives and Hedging Activities

Due to its variable-rate indebtedness, the Company is exposed to fluctuations in interest rates.  The Company uses interest rate swaps to manage this exposure.  These 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 or no longer qualifies for hedge accounting, gains or losses in accumulated other comprehensive income (loss) remain deferred and are reclassified into earnings in the periods during 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.

Foreign Currency Translation

Assets and liabilities of all foreign operations are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year.  The related translation adjustments are reflected as accumulated other comprehensive income (loss) in equity.

Concentration of Labor

Approximately 16% of the Company’s domestic labor force is covered under two union agreements.  These agreements were successfully renegotiated during 2016 and expire in 2019.  

Concentration of Credit Risk

At December 31, 2017, the Company had two customers whose receivable balances exceed 10% of total receivables.  Approximately 30% and 12% of the accounts receivable balance were from these two customers, respectively.  At December 31, 2016, the Company had two customers whose receivable balances exceed 10% of total receivables.  Approximately 34% and 11% of the accounts receivable balance were from these two customers, respectively.

Income Taxes

The Company uses the asset and liability method to account for deferred income taxes.  Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax bases.  Management reviews the Company’s deferred tax assets to determine whether their value can be realized based upon available evidence.  A valuation allowance is established if management believes it is more likely than not that some portion of the deferred tax assets will not be realized.

Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change.

The Company recognizes a tax benefit associated with an uncertain tax position when the tax position is more-likely-than-not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.  The Company recognizes interest and penalties accrued related to unrecognized tax uncertainties in income tax expense.

Asset Retirement Obligation

The Company estimates the future cost of dismantling, restoring, and reclaiming operating excavation sites and related facilities in accordance with federal, state, and local regulatory requirements.  The Company records the future obligation of reclamation costs, which the Company has determined is not materially different than the present value, as an asset retirement obligation and increases the carrying amount of the related asset by a corresponding amount.  The related assets and liability are adjusted for changes resulting from the amount of the original obligation estimate.  If the asset retirement obligation is settled for more or less than the carrying amount of the liability, a loss or gain will be recognized, respectively.

Research and Development (“R&D”)

The Company’s research and development expenses consist of personnel and other direct and indirect costs for internally-funded project development.  Total expenses for R&D for the years ended December 31, 2017, 2016, and 2015 were $5,302, $3,703, and $5,036, respectively, and are recorded in selling, general and administrative expenses in the Consolidated Statements of Income (Loss).  Total R&D expenditures represented 0.55%, 0.69%, and 0.61% of revenues in 2017, 2016, and 2015, respectively.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is a separate line within equity that reports the Company’s cumulative income that has not been reported as part of net income.  Items that are included in this line are the income or loss from foreign currency translation, actuarial gains and losses and prior service cost related to pension liabilities, and unrealized gains and losses on certain investments or hedges, net of taxes.  The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

 

 

Gross

 

 

Tax Effect

 

 

Net Amount

 

Foreign currency translation

 

$

(10,249

)

 

$

1,849

 

 

$

(8,400

)

Additional pension liability

 

 

(3,253

)

 

 

1,220

 

 

 

(2,033

)

Unrealized gain (loss) on interest rate hedges

 

 

(7,283

)

 

 

2,618

 

 

 

(4,665

)

 

 

$

(20,785

)

 

$

5,687

 

 

$

(15,098

)

 

 

 

December 31, 2016

 

 

 

Gross

 

 

Tax Effect

 

 

Net Amount

 

Foreign currency translation

 

$

(10,804

)

 

$

2,533

 

 

$

(8,271

)

Additional pension liability

 

 

(3,589

)

 

 

1,291

 

 

 

(2,298

)

Unrealized gain (loss) on interest rate hedges

 

 

(13,146

)

 

 

4,713

 

 

 

(8,433

)

 

 

$

(27,539

)

 

$

8,537

 

 

$

(19,002

)

 

The following table presents the changes in accumulated other comprehensive income by component for the year ended December 31, 2017:

 

 

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Foreign

 

 

Additional

 

 

gain (loss)

 

 

 

 

 

 

 

currency

 

 

pension

 

 

on interest

 

 

 

 

 

 

 

translation

 

 

liability

 

 

rate hedges

 

 

Total

 

Beginning balance

 

$

(8,271

)

 

$

(2,298

)

 

$

(8,433

)

 

$

(19,002

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   before reclassifications

 

 

(129

)

 

 

21

 

 

 

(506

)

 

 

(614

)

Amounts reclassified from accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   other comprehensive income (loss)

 

 

-

 

 

 

244

 

 

 

4,274

 

 

 

4,518

 

Ending balance

 

$

(8,400

)

 

$

(2,033

)

 

$

(4,665

)

 

$

(15,098

)

 

The following table presents the reclassifications out of accumulated other comprehensive income during the year ended December 31, 2017:

 

 

 

Amount reclassified

 

 

 

 

 

from accumulated

 

 

 

Details about accumulated other

 

other comprehensive

 

 

Affected line item on

comprehensive income (loss)

 

income (loss)

 

 

the statement of income (loss)

Change in fair value of derivative swap agreements

 

 

 

 

 

 

Interest rate hedging contracts

 

$

6,656

 

 

Interest expense

Tax effect

 

 

(2,382

)

 

Tax expense

 

 

$

4,274

 

 

Net of tax

Amortization of pension obligations

 

 

 

 

 

 

Actuarial losses

 

$

244

 

 

Cost of sales

Total reclassifications for the period

 

$

4,518

 

 

Net of tax

 

Recent Accounting Pronouncements
Recent Accounting Pronouncements

3.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or the “Standard”) No. 2016-09 – Compensation – Stock Compensation (Topic 718), which simplifies the accounting treatment for excess tax benefits and deficiencies, forfeitures, and cash  flow considerations related to share-based payment transactions.  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 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, which is the policy election made by the Company.  The Standard was effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption was permitted. The Company’s adoption of the standard did not have a material impact on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU No. 2017-04 – Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.  The ASU eliminates Step 2 from the goodwill impairment testing.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  As a result of the ASU, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.   The ASU is effective beginning after December 15, 2019 with early adoption permitted, and applied prospectively.  The Company has elected to early adopt this ASU, effective the current reporting period, in its impairment testing and analyses.  The Company’s goodwill is described in Note 7.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606).  The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.  The ASU may be applied using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach.  The Standard is effective for annual reporting periods beginning after December 15, 2017 and the Company will report under the ASU beginning with the quarter ended March 31, 2018.  The Company will use the modified retrospective approach and apply the new guidance to contracts not completed at the adoption date and not adjust prior reporting periods.  The Company has performed a review of its existing customer contracts and does not believe the adoption of the Standard will result in a material impact to its current method of revenue recognition, and will comply with the required expanded disclosures to include a discussion of variable consideration, contract balances, deferred revenue, and disaggregated revenue information.

In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC 842), which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expense on their income statements over the lease term.  The ASU also requires disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases.  The Standard is effective for fiscal years, and related interim periods, beginning after December 15, 2018 and early adoption is permitted.  The ASU mandates a modified retrospective transition method.  The Company believes the adoption of this Standard will likely have a material impact on its consolidated balance sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities and is in the process of analyzing its lease portfolio and evaluating systems to comply with adoption.  The Company’s operating lease obligations are described in Note 17 of the consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07 – Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The ASU requires that an employer report the service cost component in the same line item in the income statement as other compensation costs arising from services rendered by the pertinent employees during the period.  The Standard also requires only the service cost component to be eligible for capitalization when applicable.  The ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods within those annual periods with early adoption permitted.  The Company is in the process of evaluating the impact of this new guidance on its consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09 – Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.  The ASU provides further guidance on changes to the terms or conditions of a share-based payment award and which changes require the application of modification accounting.  Further, an entity should apply modification accounting unless the following conditions are met:

 

The award’s fair value is the same immediately before and after the original award is modified;

 

The vesting conditions of the modified award are the same immediately before and after the award is modified; and

 

The classification of the modified award, as either an equity instrument or liability instrument, is the same immediately before and after the award is modified.

This guidance is effective beginning after December 15, 2017 and early adoption is permitted and should be applied prospectively.  The Company has determined this ASU does not apply to its stock compensation accounting as the Company has not modified existing awards and does not anticipate the need to modify awards in the future.

In August 2017, the FASB issued ASU No. 2017-12 – Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities.  The ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.  Subject matters addressed include risk component hedging, accounting for the hedged item in fair value hedges of interest rate risk, recognition and presentation of the effects of hedging instruments, amounts excluded from the assessment of hedge effectives, and effectiveness testing.  The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted.  All transition requirement and elections should be applied to existing hedging relationships as of the date of adoption and reflected as of the beginning of the fiscal year of adoption.  The Company is in the process of evaluating the impact of this new guidance on its consolidated financial statements and disclosures.

In February 2018, the FASB issued ASU No. 2018-02 – Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The FASB is providing ongoing guidance on certain accounting and tax effects of the legislation in the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted in December 2017.  Specifically, the ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from this legislation and eliminates said stranded tax effects.  The ASU relates only to the reclassification of the income tax effects of the Tax Cuts and Jobs Act and the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.  The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted.  The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.  The Company is in the process of evaluating the impact of this new guidance on its consolidated financial statements and disclosures.

Inventories, net
Inventories, net

4.

Inventories, net

At December 31, 2017 and 2016, inventories consisted of the following:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Raw materials

 

$

7,412

 

 

$

7,465

 

Work-in-process

 

 

14,819

 

 

 

12,681

 

Finished goods

 

 

48,931

 

 

 

33,760

 

 

 

 

71,162

 

 

 

53,906

 

Less: LIFO reserve

 

 

(634

)

 

 

(1,256

)

Inventories, net

 

$

70,528

 

 

$

52,650

 

 

Property, Plant, and Equipment, net
Property, Plant, and Equipment, net

5.

Property, Plant, and Equipment, net

At December 31, 2017 and 2016, property, plant, and equipment consisted of the following:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Land and improvements

 

$

85,012

 

 

$

82,991

 

Mineral reserves and mine development

 

 

310,923

 

 

 

250,566

 

Machinery and equipment

 

 

590,584

 

 

 

577,093

 

Buildings and improvements

 

 

186,466

 

 

 

187,458

 

Furniture, fixtures, and other

 

 

3,478

 

 

 

3,415

 

Construction in progress

 

 

54,661

 

 

 

6,748

 

 

 

 

1,231,124

 

 

 

1,108,271

 

Accumulated depletion and depreciation

 

 

(445,611

)

 

 

(380,536

)

Property, plant, and equipment, net

 

$

785,513

 

 

$

727,735

 

 

All of the Company’s capital leases are categorized as machinery and equipment.  The depreciation of capital leases is recorded in depreciation, depletion, and amortization expenses in the Consolidated Statements of Income (Loss).  Their cost and related accumulated depreciation in the balance sheet are as follows:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Cost

 

$

29,098

 

 

$

18,350

 

Accumulated depreciation

 

 

(14,854

)

 

 

(10,994

)

Net book value

 

$

14,244

 

 

$

7,356

 

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 adverse business conditions and the idling of certain assets on an other-than-temporary basis in 2016, 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.  Using Level 3 inputs of the fair value hierarchy, critical assumptions for these valuations included future selling prices of products, future operating costs, and the cost of capital.  The Company incurred $93,148 and $18,230 of such asset impairments in the years ended December 31, 2016 and 2015, respectively.  These impairments are recorded as asset impairments in operating expenses in the Consolidated Statements of Income (Loss).  There were no such asset impairments in the year ended December 31, 2017.

On July 18, 2017, the Company entered into a 40-year lease agreement for approximately 3,250 acres of sand reserves in Kermit, Texas.  The Company has capitalized the entire $40,000 leasehold interest obligation and related exploratory and transaction costs to mineral reserves and mine development.  The initial payment of $20,000 was paid at lease commencement.  Another $10,000 was paid in October 2017 upon the issuance of all federal, state, and local permits.  The remaining $10,000 is payable upon the earlier of two years from the commencement date of the agreement or the date the Company makes its first sale of sand from this property, which the Company expects within twelve months of the date of this Report.  The capitalized leasehold interest payments will begin to be recognized as expense as production occurs.  Additionally, the Company is obligated for certain royalty payments based on volumes sold.

In the year ended December 31, 2017, the Company disposed of $988 of property, plant and equipment, which were determined to be no longer in use.  These assets were primarily a part of the Proppant Solutions segment.  This amount is included in other operating (income) expense in our Consolidated Statements of Income (Loss).  

Accrued Expenses
Accrued Expenses

6.

Accrued Expenses

At December 31, 2017 and 2016, accrued expenses consisted of the following:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Accrued payroll and fringe benefits

 

$

11,233

 

 

$

6,657

 

Accrued bonus

 

 

37,166

 

 

 

3,897

 

Accrued income taxes

 

 

504

 

 

 

421

 

Accrued real estate taxes

 

 

5,098

 

 

 

4,821

 

Accrued leasehold interest payments

 

 

10,000

 

 

 

-

 

Other accrued expenses

 

 

10,006

 

 

 

10,314

 

Accrued expenses

 

$

74,007

 

 

$

26,110

 

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

7.

Goodwill and Intangible Assets

As of December 31, 2017 and 2016, the balance of goodwill was $15,301 and is attributable entirely to the I&R segment.

Goodwill represents the excess of purchase price over the fair value of net assets acquired.  The Company evaluates goodwill on an annual basis and also when management believes indicators of impairment exist.  The Company performed a qualitative assessment of the I&R segment as of October 31, 2017 (the Company’s annual valuation date) and determined the fair value of this segment was, more likely than not, greater than its carrying value.  Based on the Company’s assessment in 2015, the Company concluded that the goodwill attributable to the Proppant Solutions segment was fully impaired in the three months ended December 31, 2015 and recognized an impairment charge of $69,246 in that period.

Information regarding acquired intangible assets as of December 31, 2017 and 2016 is as follows:

 

 

 

December 31, 2017

 

 

 

Gross

 

 

Accumulated

 

 

Intangible

 

 

 

Carrying Amount

 

 

Amortization

 

 

Assets, net

 

Acquired technology and patents

 

$

65,788

 

 

$

(3,289

)

 

$

62,499

 

Supply agreement

 

 

50,700

 

 

 

(19,942

)

 

 

30,758

 

Other intangible assets

 

 

573

 

 

 

(562

)

 

 

11

 

Intangible assets

 

$

117,061

 

 

$

(23,793

)

 

$

93,268

 

 

 

 

December 31, 2016

 

 

 

Gross

 

 

Accumulated

 

 

Intangible

 

 

 

Carrying Amount

 

 

Amortization

 

 

Assets, net

 

Acquired technology and patents

 

$

60,115

 

 

$

-

 

 

$

60,115

 

Supply agreement

 

 

50,700

 

 

 

(15,548

)

 

 

35,152

 

Other intangible assets

 

 

573

 

 

 

(499

)

 

 

74

 

Intangible assets

 

$

111,388

 

 

$

(16,047

)

 

$

95,341

 

 

Amortization expense of intangible assets was $7,747, $4,662, and $4,537 in years ended December 31, 2017, 2016, and 2015, respectively.  Acquired technology represents technology acquired in the SSP acquisition.  The carrying value of this asset represents its original cost, plus amounts owed to the seller as deferred purchase price.  The Company determined that it is probable additional amounts will be due to the seller and recorded $5,674 and $3,794 in 2017 and 2016, respectively, as additional purchase price.  Of this additional purchase price, approximately $5,458 has been paid to the seller and $4,010 was accrued as of December 31, 2017.  The Company determined that the proper period to begin the amortization of this intangible was January 1, 2017, which was the first period products using the SSP technology were sold in a full commercial protocol.  The Company considered the potential ranges of useful lives and believes a 20-year useful life for the intangible asset is appropriate.  The Company’s determination of the 20-year useful life of the intangible asset is based upon the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company.  Refer to Note 17 for additional information.

The value of a supply agreement with FTSI was based on estimates of discounted future cash flows from sales under the agreement.  The supply agreement was previously amortized ratably over the life of the agreement, which was 10 years.  However, in May 2015, the supply agreement was amended, extending the maturity date from September 2023 to December 2024.  The supply agreement is now being amortized over the amended life.

Estimated future amortization expense related to intangible assets at December 31, 2017 is as follows:

 

 

 

Amortization

 

2018

 

$

7,694

 

2019

 

 

7,683

 

2020

 

 

7,683

 

2021

 

 

7,683

 

2022

 

 

7,683

 

Thereafter

 

 

54,842

 

Total

 

$

93,268

 

 

Long-Term Debt
Long-Term Debt

8.

Long-Term Debt

At December 31, 2017 and 2016, long-term debt consisted of the following:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Term Loan B

 

$

688,990

 

 

$

-

 

Term B-2 Loans

 

 

-

 

 

 

719,632

 

Extended Term B-1 Loans

 

 

-

 

 

 

117,634

 

Industrial Revenue Bond

 

 

10,000

 

 

 

10,000

 

ABL Revolver, Revolving Credit Facility, and other

 

 

45,073

 

 

 

88

 

Capital leases, net

 

 

9,884

 

 

 

3,634

 

Deferred financing costs, net

 

 

(5,017

)

 

 

(7,975

)

 

 

 

748,930

 

 

 

843,013

 

Less: current portion

 

 

(19,189

)

 

 

(10,707

)

Long-term debt including leases

 

$

729,741

 

 

$

832,306

 

 

On April 28, 2016, the Company entered into an amendment to the 2013 Amended Credit Agreement that extended the maturity of a portion of the then existing B-1 Loan to July 15, 2018 (the “2016 Extended Term Loans”).  The Company made a prepayment of principal of $69,580 and accrued interest of $227 on April 28, 2016 to the lenders consenting to the amendment.  

On October 17, 2016, the Company repurchased $3,000 of the Extended Term B-1 Loans at 91.5% of par.  On November 17, 2016, the Company fully prepaid $16,766 of the Term B-1 Loans due March 2017 and fully prepaid $69,580 of the 2016 Extended Term Loans.  On November 29, 2016, the Company repurchased, at an average of 96.3% of par, a total of $213,000 of term loans, which consisted of $37,867 of the Extended Term B-1 Loans and $175,133 of the Term B-2 Loans.  The related net gain on the October and November 2016 debt repurchases was $5,110.  On June 27, 2017, the Company prepaid $50,000 of term loans at par, which consisted of $42,979 of the Term B-2 Loans and $7,021 of the Extended Term B-1 Loans and recognized expenses of $389 relating to the write-off of unamortized capitalized debt issuance costs.

On November 1, 2017 (the “Closing Date”), the Company entered into a new five-year asset-based revolving credit facility (the “ABL Revolver”) with PNC Capital Markets LLC, as administrative agent, which replaced the existing revolving credit facility.  The ABL Revolver has a borrowing capacity of up to $125,000 with an option to increase by $50,000 to $175,000.  An initial draw of $50,000 upon closing of the ABL Revolver was used to partially refinance existing term debt, pay expenses associated with debt refinancing, and can be later used for funding capital expenditures, and providing ongoing working capital.  The ABL Revolver is interest only at a rate derived from LIBOR plus 1.5% to 2.0% (depending on excess availability under the ABL Revolver) or from a Base Rate, which is the higher of the prime rate, the Federal Funds open rate plus 0.5% and the Daily LIBOR Rate plus 1.0%.  The interest payments on the ABL Revolver are payable in quarterly installments, with the principal balance due at November 1, 2022.  If the Term Loan B is still outstanding, then any balance outstanding under the ABL Revolver is due on May 1, 2022.  Availability under the ABL Revolver is based upon an available borrowing base, which includes a specified percentage of eligible accounts receivable and inventory and excludes outstanding letters of credit and applicable reserves.  In addition to interest charged on the ABL Revolver, the Company is also obligated to pay certain fees, quarterly in arrears, including letter of credit fees and unused facility fees.  The ABL Revolver includes financial covenants requiring a minimum fixed charge coverage ratio of 1.1, based on availability thresholds, and is primarily secured by all accounts receivable and inventory, with security interest second to the Term Loan B on substantially all other assets of the Company.  

Additionally, on the Closing Date, the Company entered into an agreement with Barclays Capital Inc., as administrative agent, for a $700,000 Senior Secured Term Loan (the “Term Loan B”) to refinance all of its existing Term B-2 Loans and Extended Term B-1 Loans.  The Term Loan B was issued with original issue discount at 98.5% of face.  The Term Loan B, which has a maturity date of November 1, 2022, requires quarterly interest payments and 2.5% annual principal amortization payments for the first half of the loan period, 5.0% for the second half of the loan period, with the balance payable at the maturity date.  Interest accrues at the rate of the three-month LIBOR plus 6.0% with a LIBOR floor of 1.0%.  The Term Loan B is secured by a first priority security interest in substantially all assets of the Company and its subsidiaries, except for accounts receivable and inventory, in which it has a second priority security interest.  The Company has the option to prepay the Term Loan B.  Should the Company choose to refinance the Term Loan B, it would be subject to a 1.02% premium if refinanced at a lower interest rate within one year of the Closing Date or a 1.01% premium if refinanced at a lower interest rate within two years of the Closing Date. In the event of a change in control of 35% or more of the voting interests of the Company and at the request of the lenders, the unpaid principal and interest of the Term Loan B may become immediately due and payable. There are no financial covenants governing the Term Loan B.

As a result of these transactions on the Closing Date, the Company recorded a loss on debt extinguishment of $2,898 and a loss on debt modification of $4,733. The loss on debt modification is recorded in interest expense.

As of December 31, 2017, the Term Loan B and the ABL Revolver had actual interest rates of 7.7% and 3.3%, respectively.  As of December 31, 2016, the Term B-2 Loans, Extended Term B-1 Loans, and Revolving Credit Facility had actual interest rates of 4.5%, 4.5%, and 4.7%, respectively.  

As of December 31, 2017, the Company was in compliance with all covenants in accordance with the ABL Revolver.  As of December 31, 2017, there was $63,416 available unused capacity on the ABL Revolver, $15,558 committed to outstanding letters of credit, and $1,026 withheld for collateral.    

The Company has a $10,000 Industrial Revenue Bond outstanding related to the construction of a mining facility in Wisconsin.  The bond bears interest, which is payable monthly, at a variable rate.  The rate was 1.46%  and 0.80% at December 31, 2017 and 2016, respectively.  The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10,000.

Maturities of long-term debt are as follows:

 

 

 

Capital Lease Obligations

 

 

 

 

 

 

 

 

 

 

 

Lease

 

 

Less

 

 

Present

 

 

Other Long-

 

 

Aggregate

 

 

 

Payment

 

 

Interest

 

 

Value

 

 

Term Debt

 

 

Maturities of Debt

 

Year Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

$

4,346

 

 

$

270

 

 

$

4,076

 

 

$

17,517

 

 

$

21,593

 

2019

 

 

3,886

 

 

 

149

 

 

 

3,737

 

 

 

17,518

 

 

 

21,255

 

2020

 

 

2,052

 

 

 

36

 

 

 

2,016

 

 

 

26,269

 

 

 

28,285

 

2021

 

 

55

 

 

 

-

 

 

 

55

 

 

 

35,019

 

 

 

35,074

 

2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

648,750

 

 

 

648,750

 

Thereafter

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,000

 

 

 

10,000

 

Subtotal

 

 

10,339

 

 

 

455

 

 

 

9,884

 

 

 

755,073

 

 

 

764,957

 

Less:  unamortized discount

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,010

)

 

 

(11,010

)

Total

 

$

10,339

 

 

$

455

 

 

$

9,884

 

 

$

744,063

 

 

$

753,947

 

 

Earnings (Loss) per Share
Earnings (Loss) per Share

9.

Earnings (Loss) per Share

The table below shows the computation of basic and diluted earnings (loss) per share for the years ended December 31, 2017, 2016, and 2015, respectively:

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Fairmount Santrol Holdings Inc.

 

$

53,788

 

 

$

(140,192

)

 

$

(92,135

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

223,993

 

 

 

179,429

 

 

 

161,297

 

Dilutive effect of employee stock options, RSUs, and PRSUs

 

 

5,091

 

 

 

-

 

 

 

-

 

Diluted weighted average shares outstanding

 

 

229,084

 

 

 

179,429

 

 

 

161,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share – basic

 

$

0.24

 

 

$

(0.78

)

 

$

(0.57

)

Earnings (loss) per common share – diluted

 

$

0.23

 

 

$

(0.78

)

 

$

(0.57

)


The calculation of diluted weighted average shares outstanding for the year ended December 31, 2017 excludes 6,412 potential common shares, respectively, because the effect of including these potential common shares would be antidilutive.  Potentially dilutive shares of 6,572 and 6,990 were excluded from the calculation of diluted weighted average shares outstanding and diluted earnings per share in the years ended December 31, 2016 and 2015, respectively, because the Company was in a loss position in those periods.  

As a result of ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), windfalls and excess tax benefits are no longer included in the calculation of assumed proceeds and the calculation of diluted weighted average shares outstanding.  The Company adopted this guidance as of January 1, 2017 on a prospective basis, which could impact the comparability of earnings per share between periods presented.  However, the Company was in a loss position for prior periods presented and, accordingly, basic and diluted earnings per share are calculated in the same manner.

Derivative Instruments
Derivative Instruments

10.

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 notional value of the swap agreements of $210,000 and $525,225 represents a total of approximately 30% and 63% of term debt outstanding at December 31, 2017 and 2016, respectively.  The decline in notional value was due to $105,225 of swap agreements maturing and a swap agreement of $210,000 terminated in November 2017.  Upon such termination, the remaining balance of $4,571 in accumulated other comprehensive income will be amortized into interest expense until September 2019, the date of the original expected swap maturity.  At December 31, 2017, the Company has one outstanding interest rate swap agreement, which terminates on September 5, 2019. For the portion of the debt that is hedged, the swap agreements effectively fix the variable rate to 2.92% at December 31, 2017 and a range of 0.83% to 3.12% at December 31, 2016.  

The Company’s derivative financial instruments were previously designated as cash flow hedges.  No components of the hedging instruments were excluded from the assessment of hedge effectiveness.  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 derivative instruments that are designated and qualify as a cash flow hedge, 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 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.  

The Company recognizes changes in fair value for derivatives not qualifying for hedge accounting in current period earnings.  In the event 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.

In December 2017, the Company determined that the remaining swap with a notional value of $210,000 no longer qualified as a cash flow hedge as the underlying transaction was no longer probable of occurring.  No gain or loss was recognized and the remaining balance of accumulated other comprehensive income of $3,235 will be amortized into interest expense until September 2019, the date of the expected swap maturity.

The following table summarizes the fair values and the respective classification in the Consolidated Balance Sheets as of December 31, 2017 and 2016:

 

 

 

 

 

Assets (Liabilities)

 

Interest Rate Swap Agreements

 

Balance Sheet Classification

 

December 31, 2017

 

 

December 31, 2016

 

Designated as cash flow hedges

 

Other long-term liabilities

 

$

-

 

 

$

(14,488

)

Non-qualifying cash flow hedge

 

Other long-term liabilities

 

 

(3,208

)

 

 

-

 

Designated as cash flow hedges

 

Other assets

 

 

-

 

 

 

39

 

 

 

 

 

$

(3,208

)

 

$

(14,449

)

 

The Company recognized in interest expense the following in the years ended December 31, 2017, 2016, and 2015, respectively, in order to represent the ineffective portion of interest rate swap agreements designated as hedges and interest rate swap agreements no longer qualifying for hedge accounting treatment:

 

Derivatives Designated as

 

Location of (Gain) Loss

 

 

 

 

 

 

 

 

 

 

 

 

ASC 815-20 Cash Flow

 

Recognized in Income on

 

Year Ended December 31,

 

Hedging Relationships

 

Derivative (Ineffective Portion)

 

2017

 

 

2016

 

 

2015

 

Interest rate swap agreements

 

Interest expense

 

$

(78

)

 

$

(7

)

 

$

(51

)

 

 

 

 

$

(78

)

 

$

(7

)

 

$

(51

)

 

Derivatives Not Designated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as ASC 815-20 Cash Flow

 

Location of (Gain) Loss

 

Year Ended December 31,

 

Hedging Relationships

 

Recognized in Income on Derivative

 

2017

 

 

2016

 

 

2015

 

Interest rate swap agreements

 

Interest expense

 

$

537

 

 

$

-

 

 

$

-

 

 

 

 

 

$

537

 

 

$

-

 

 

$

-

 


The Company expects $4,327 to be reclassified from accumulated other comprehensive income (loss) into interest expense within the next twelve months.

Fair Value Measurements
Fair Value Measurements

11.

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 the acquisition of Self-Suspending Proppant LLC (“SSP”) 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 carrying 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 SSP approximates the fair value. 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 Loan B, the Extended Term B-1 Loans, and the Term B-2 Loans differs from amortized cost 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 December 31, 2017 and 2016, respectively, 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

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan B

 

$

-

 

 

$

708,750

 

 

$

-

 

 

$

708,750

 

 

 

$

-

 

 

$

708,750

 

 

$

-

 

 

$

708,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term B-2 Loans

 

$

-

 

 

$