Basis of Presentation

The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows of the reported interim periods.  The condensed consolidated balance sheet as of December 31, 2016 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 2016 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 – Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors).  The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.  The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  The Update is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee.  ASC 842 supersedes the previous leases standard, ASC 840 – Leases.  The standard is effective on January 1, 2019, with early adoption permitted.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), which provides guidance on simplified accounting for and presentation of share-based payment transactions, including income tax consequences, minimum tax withholding requirements, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The ASU requires all tax effects of share-based payments to be recorded through the income statement, windfall tax benefits to be recorded when the benefit arises, and all share-based payment tax-related cash flows to be reported as operating activities in the statement of cash flows.  Regarding tax withholding requirements, the ASU allows entities to withhold an amount up to the employees’ maximum individual tax rates without classifying the award as a liability.  The ASU also permits entities to make an accounting policy election for the impact of forfeitures on expense recognition, either recognized when forfeitures are estimated or when forfeitures occur, which is the policy election made by the Company.  The ASU is effective beginning January 1, 2017.  Accordingly, the Company has incorporated this guidance in its financial statements and disclosures beginning with this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.  This guidance has no material impact on the Company’s financial statements and disclosures.

In April and May 2016, the FASB issued ASU No. 2016-10 – Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing, ASU No. 2016-11 – Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance, ASU No. 2016-12 – Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20 – Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.  These ASU’s each affect the guidance of the new revenue recognition standard in ASU No. 2014-09 – Revenue from Contracts with Customers and related subsequent ASUs.  This guidance is effective beginning January 1, 2018.  The Company is in the process of reviewing its various customer contracts in both of its business segments with a combination of applicable sales, legal, and accounting personnel.  The review of several contracts to date has been completed.  In this review, the Company has identified several issues with regards to potential variable consideration, including price adjustments in the contracts as well as provisions similar to take-or-pay arrangements.  The Company is in the process of further review of these issues and whether they constitute a change in the timing of revenue recognition.  The Company intends to use the cumulative effect transition method as of the date of adoption.  This review is in discussion and data-gathering stages and, therefore, the effect of the new guidance on the Company’s financial statements and disclosures is not yet readily determinable.

In January 2017, the FASB issued ASU 2017-04 – Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.  The ASU eliminates Step 2 from 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.  The ASU is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.  

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 as well as appropriately described relevant line items.  The ASU also requires only the service cost component to be eligible for capitalization when applicable.  The ASU is effective beginning January 1, 2018 with early adoption permitted.  The income statement components of the ASU should be applied retrospectively while the balance sheet component should be applied prospectively.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.  

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

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

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 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 $76 of such asset impairments in the three months ended March 31, 2016.  These impairments are recorded as asset impairments in operating expenses in the Condensed Consolidated Statements of Income (Loss).  There were no such impairments in the three months ended March 31, 2017.

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

On September 5, 2013, the Company entered into the Second Amended and Restated Credit Agreement (the “2013 Amended Credit Agreement”).  The 2013 Amended Credit Agreement initially contained a revolving credit facility (“Revolving Credit Facility”) and two tranches of term loans, a term B-1 facility (“Term B-1 Loans”) and a term B-2 facility (“Term B-2 Loans”).  The Revolving Credit Facility, and the Term B-1 and Term B-2 Loans are secured by a first priority lien on substantially all of the Company’s domestic assets.  

The 2013 Amended Credit Agreement was amended in March 2014, April 2015, and May 2015 and joinder agreements were entered into as of August 2014 and September 2014.  These amendments and joinder agreements made various changes to maturity dates and interest rate margins.  In addition, amounts that were initially Term B-1 Loans and balances on the Revolving Credit Facility were converted into term loans with essentially the same terms as the Term B-2 Loans (the “Extended Term B-1 Loans”).  The applicable margin for Term B-1 and Term B-2 Base Rate loans was 2.5% and the margin on Term B-1 and Term B-2 Eurodollar Rate loans was 3.5%.  The Revolving Credit Facility, the Extended Term B-1 Loans, and Term B-2 Loans are secured by a first priority lien on substantially all of the Company’s domestic assets.

On September 30, 2015, the Company entered into an amendment to the 2013 Amended Credit Agreement that modified the Revolving Credit Facility.  These modifications consisted primarily of (i) a reduction in the U.S. revolving commitments from $124,000 to $99,000 (while the aggregate Canadian revolving commitment remained at $1,000) and (ii) changes in the financial covenant governing the availability of amounts under the Revolving Credit Facility if, and only if, the Company has drawn, including letters of credit, more than $31,250 on the Revolving Credit Facility.  At March 31 2017, the full amount of the revolving commitment ($100,000) is available so long as the Company’s leverage ratio does not exceed a revised limit (6.50:1.00 for the first quarter of 2017 declining quarterly to 4.75:1.00 for the fourth quarter of 2017).  The Revolving Credit Facility termination date is September 6, 2018.

On April 28, 2016, the Company entered into an amendment to the 2013 Amended Credit Agreement that extended the maturity of certain of the Term B-1 Loans to July 15, 2018 (the “2016 Extended Term Loans”).  The Company made a prepayment of accrued interest of $227 and principal of $69,580 on April 28, 2016 to the lenders consenting to the amendment.  Accrued interest on the extended remainder of the Term B-1 Loans was due at maturity on July 15, 2018.  Accrued interest related to the $16,723 principal payment due on March 17, 2017 was also due on the same date.

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 the $16,766 of the Term B-1 Loans due March 2017 as well as the $69,580 of the 2016 Extended Term Loans.  On November 29, 2016, the Company repurchased, at an average of 96.3% of par, $37,867 of the Extended Term B-1 Loans and $175,133 of the Term B-2 Loans.  The related gain on the October 2016 debt repurchase and the November 2016 debt repurchase was recorded in operating expense.

As of March 31, 2017, the Term B-2 Loans, Extended Term B-1 Loans, and the Revolving Credit Facility had actual interest rates of 4.65%, 4.65%, and 4.3%, respectively.

As of March 31, 2017, there was $15,745 available unused capacity on the Revolving Credit Facility and $15,505 committed to outstanding letters of credit.  As of March 31, 2017, the Company has not drawn on the Revolving Credit Facility.

The Company has a $10,000 Industrial Revenue Bond outstanding related to the construction of a manufacturing facility in Wisconsin.  The bond bears interest, which is payable monthly, at a variable rate.  The rate was 0.96% at March 31, 2017.  The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10,000.

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

The table below shows the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2017 and 2016:

All potentially dilutive shares were excluded from the calculation of diluted weighted average shares outstanding and diluted earnings per share because the Company was in a loss position in the three months ended March 31, 2017 and 2016.

As of March 31, 2017, the amount of outstanding options, RSUs, and PRSUs was 13,887, 1,610, and 597, respectively.

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 these swap agreements is $420,000, which represents a total of approximately 50% of term debt outstanding at March 31, 2017 and effectively fixes the variable rate in a range of 2.92%  to 3.115% for the portion of the debt that is hedged.  The interest rate swap agreements mature on 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 March 31, 2017 and December 31, 2016:

In order to represent the ineffective portion of interest rate swap agreements designated as hedges, the Company recognized in interest expense the following in the three months ended March 31, 2017 and 2016:

The Company expects 6,384 to be reclassified from accumulated other comprehensive income (loss) into interest expense within the next twelve months.

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 SSP acquisition that is subject to fair value measurement.  Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.

Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities at fair value will be classified and disclosed in one of the following three categories:

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 the Company’s long-term debt (including the current portion thereof) is recognized at amortized cost.  The fair value of the Extended Term B-1 Loans and the Term B-2 Loans differs from amortized costs and is valued at prices obtained from a readily-available source for trading non-public debt, which represent quoted prices for identical or similar assets in markets that are not active, and therefore is considered Level 2.  The following table presents the fair value as of March 31, 2017 and December 31, 2016 for the Company’s long-term debt:

The following table presents the amounts carried at fair value as of March 31, 2017 and December 31, 2016 for the Company’s other financial instruments.  Fair value of interest rate swap agreements in based on the present value of the expected future cash flows, considering the risks involved, and using discount rates appropriate for the maturity date.  These are determined using Level 2 inputs.

The Company granted options to purchase 443 and 1,532 shares of common stock in the three months ended March 31, 2017 and 2016, respectively.  The average grant date fair value was $10.03 and $2.04 for options issued in the three months ended March 31, 2017 and 2016, respectively.  The Company issued restricted stock units (“RSUs”) of 366 and 862 in the three months ended March 31, 2017 and 2016, respectively.  The Company issued performance restricted stock units (“PRSUs”) of 139 and 407 in the three months ended March 31, 2017 and 2016, respectively.    

As discussed in Note 1, the FASB issued ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), which provides guidance on simplified accounting for and presentation of share-based payment transactions, including income tax consequences, minimum tax withholding requirements, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The guidance updates to ASC 718 were adopted by the Company in the quarter ended March 31, 2017.  As part of this adoption, the Company elected to change its method of accounting for award forfeitures from estimation of the impact upon grant, to instead recognize the forfeiture upon occurrence. As a result of this change, the Company recognized a reduction to retained earnings of $699 for the impact of the change in this method of recording expense.

The Company recorded $2,416 and $1,653 of stock compensation expense related to these options, RSUs, and PRSUs for the three months ended March 31, 2017 and 2016, respectively.  Stock compensation expense is included in selling, general, and administrative expenses on the Consolidated Statements of Income (Loss) and in additional paid-in capital on the Consolidated Balance Sheets.

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 March 31, 2017, the Company recorded a tax benefit of $1,148 on a loss before income taxes of $12,558 resulting in an effective tax rate of 9.1%, compared to a tax benefit of $15,754 on a loss before income taxes of $27,533 resulting in an effective tax rate of 57.2% for the same period of 2016.  The decrease in the effective tax rate is primarily attributable to the impact of a tax benefit from a loss carryback recorded in 2016, an increase in depletion applied against forecasted results in 2017 as compared to 2016, and 2017 forecasted U.S. results with nominal tax due to a valuation allowance, offset partly by discrete tax benefits of $577 primarily related to the impacts of stock compensation.  The effective rate differs from the U.S. federal statutory rate due primarily to depletion and the valuation allowance against certain U.S. tax attributes.

The Company maintains two defined benefit pension plans, the Wedron pension plan and the Troy Grove pension plan, covering union employees at certain facilities that provide benefits based upon years of service or a combination of employee earnings and length of service.  The benefits under the plans were frozen effective December 31, 2012.

Net periodic benefit cost recognized for other Company defined benefit pension plans for the three months ended March 31, 2017 and 2016 is as follows:

The Company contributed $19 and $25 during the three months ended March 31, 2017 and 2016, respectively.  Total expected employer contributions during the year ending December 31, 2017 are $69.

The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at March 31, 2017 and December 31, 2016 were as follows:

The following table presents the changes in accumulated other comprehensive income by component for the three months ended March 31, 2017:

The following table presents the reclassifications out of accumulated other comprehensive income during the three months ended March 31, 2017:

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 require a combination thereof.

The Company has entered into agreements with third party terminal operators whereby certain minimum payments are due regardless of terminal utilization.  

The Company leases certain machinery, equipment (including railcars), buildings and office space under operating lease arrangements.  Total rent expense associated with these leases was $13,714 and $17,803 for the three months ended March 31, 2017 and 2016, 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 the SSP technology for five years commencing on October 1, 2015.  The Company entered into an amendment to the SSP purchase agreement on December 17, 2015.  This amendment (a) extends the period during which the aggregate earnout payments must equal or exceed $45,000 from the two-year period ending October 1, 2017 until the three-year period ending October 1, 2018; and (b) provides that the aggregate earnout payments during the two-year period ending October 1, 2017 must equal or exceed $15,000 and granted the Seller a security interest in 51% of the equity interests in the Company to secure such $15,000.  The amendment does not alter the final threshold earnout amount, which continues to be $195,000 (inclusive of the $45,000 payment, if any) by October 1, 2020.  The contingent consideration is accrued and capitalized as part of the cost of the acquired technology from the SSP acquisition at the time a payment is probable and reasonably estimable.  Based upon current results, the Company accrued and capitalized an additional $757 in the three months ended March 31, 2017.

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 had purchases from an affiliated entity for freight, logistic services and consulting services related to its operations in China of $57 and $263 in the three months ended March 31, 2017 and 2016, respectively.  

The Company pays American Securities LLC (“American Securities”), in accordance with its policy, for Board of Directors’ fees and Company-related expenses, including reimbursement for travel and lodging, market research, and other miscellaneous expenses.  Fees and expenses paid to American Securities were $86 and $104 in the three months ended March 31, 2017 and 2016, respectively.  

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 gross profit, which does not include any selling, general, and administrative costs or corporate costs.  

Total assets reported in the Proppant Solutions segment were $513,409 and $477,777 as of March 31, 2017 and December 31, 2016, respectively.  Total assets reported in the I&R segment were $61,213 and $57,029 as of March 31, 2017 and December 31, 2016, respectively.  

As of March 31, 2017, the balance of Goodwill was $15,301, which represents goodwill related to acquisitions in the Company’s Industrial & Recreational Products segment.  As part of Company policy in its normal course of business, the Company performed a review of qualitative factors and concluded that, as of March 31, 2017, there were no events or changes in circumstances that would more likely than not result in an impairment of the carrying value of its intangible assets, including goodwill.  With the current volatile market conditions in the oil and gas industry, there could be future changes that impact the carrying value of other long-lived intangibles, including the supply agreement with FTS International Services, LLC (“FTSI”) or the value of the acquired technology from the SSP acquisition.  As of March 31, 2017, the balance of the FTSI supply agreement, net of accumulated amortization, was $34,053.    

Beginning in the first quarter of 2017, the Company began selling products using the SSP technology in full commercial protocol.  Accordingly, the Company began to amortize this intangible asset over a 20-year useful life, which is based upon the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company.  Amortization expense of the SSP technology was $761 in the three months ended March 31, 2017.  Based on future results of sales of products utilizing the SSP technology, it is possible the fair value of the intangible asset could decline below its cost such that an impairment in carrying value exists.  

Basis of Presentation

The unaudited condensed consolidated financial statements of Fairmount Santrol Holdings Inc. and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows of the reported interim periods.  The condensed consolidated balance sheet as of December 31, 2016 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 2016 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 – Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors).  The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.  The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  The Update is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee.  ASC 842 supersedes the previous leases standard, ASC 840 – Leases.  The standard is effective on January 1, 2019, with early adoption permitted.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09 – Compensation – Stock Compensation (Topic 718), which provides guidance on simplified accounting for and presentation of share-based payment transactions, including income tax consequences, minimum tax withholding requirements, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The ASU requires all tax effects of share-based payments to be recorded through the income statement, windfall tax benefits to be recorded when the benefit arises, and all share-based payment tax-related cash flows to be reported as operating activities in the statement of cash flows.  Regarding tax withholding requirements, the ASU allows entities to withhold an amount up to the employees’ maximum individual tax rates without classifying the award as a liability.  The ASU also permits entities to make an accounting policy election for the impact of forfeitures on expense recognition, either recognized when forfeitures are estimated or when forfeitures occur, which is the policy election made by the Company.  The ASU is effective beginning January 1, 2017.  Accordingly, the Company has incorporated this guidance in its financial statements and disclosures beginning with this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.  This guidance has no material impact on the Company’s financial statements and disclosures.

In April and May 2016, the FASB issued ASU No. 2016-10 – Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing, ASU No. 2016-11 – Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance, ASU No. 2016-12 – Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20 – Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.  These ASU’s each affect the guidance of the new revenue recognition standard in ASU No. 2014-09 – Revenue from Contracts with Customers and related subsequent ASUs.  This guidance is effective beginning January 1, 2018.  The Company is in the process of reviewing its various customer contracts in both of its business segments with a combination of applicable sales, legal, and accounting personnel.  The review of several contracts to date has been completed.  In this review, the Company has identified several issues with regards to potential variable consideration, including price adjustments in the contracts as well as provisions similar to take-or-pay arrangements.  The Company is in the process of further review of these issues and whether they constitute a change in the timing of revenue recognition.  The Company intends to use the cumulative effect transition method as of the date of adoption.  This review is in discussion and data-gathering stages and, therefore, the effect of the new guidance on the Company’s financial statements and disclosures is not yet readily determinable.

In January 2017, the FASB issued ASU 2017-04 – Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.  The ASU eliminates Step 2 from 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.  The ASU is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.  

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 as well as appropriately described relevant line items.  The ASU also requires only the service cost component to be eligible for capitalization when applicable.  The ASU is effective beginning January 1, 2018 with early adoption permitted.  The income statement components of the ASU should be applied retrospectively while the balance sheet component should be applied prospectively.  The Company is in the process of evaluating the impact of this new guidance on its financial statements and disclosures.  

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

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

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

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

The table below shows the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2017 and 2016:

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

In order to represent the ineffective portion of interest rate swap agreements designated as hedges, the Company recognized in interest expense the following in the three months ended March 31, 2017 and 2016: