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 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 two to ten 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 $3,055 and $2,470 as of December 31, 2016 and 2015, 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 $1,256 and $2,912 at December 31, 2016 and 2015, respectively. LIFO inventories comprise 21% and 18% of inventories reflected in the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015, respectively. The cost of inventories of all other subsidiaries is determined using the FIFO method. In the years ended December 31, 2016 and 2015, respectively, the Company recorded $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. In the year ended December 31, 2014, the Company recorded a write-down of $908 of certain inventory to recognize a permanent decline in the value of the inventory, which is included in other operating expense. 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 service lives of property and equipment are principally as follows: Land improvements 10-40 years Machinery and equipment 3-20 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, 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 $1,380 and $4,903 in 2016 and 2015, respectively. Depreciation and depletion expense was $67,614, $62,218, and $54,111 in the years ended December 31, 2016, 2015, and 2014, respectively. The Company reviews property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets or asset groups. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. See Note 5 for further detail. Deferred Financing Costs Deferred financing costs are amortized over the terms of the related debt obligations and are included in long-term debt. In connection with the amendment to the Revolving Credit Facility in 2015, the Company wrote off $864 of costs that were previously capitalized. In connection with the repurchase of portions of the Company’s debt in 2016, the Company wrote off $2,618 of deferred financing costs that were previously capitalized. See Note 9 for further detail. The following table presented deferred financing costs as of December 31, 2016 and 2015: December 31, 2016 December 31, 2015 Deferred financing costs $ 39,924 $ 42,541 Accumulated amortization (29,530 ) (24,145 ) Deferred financing costs, net $ 10,394 $ 18,396 Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate that impairment may have occurred. The Company evaluates qualitative factors such as economic performance, industry conditions, and other factors to determine if it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an indication of goodwill impairment exists. The second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to the excess. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The Company reviews definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a definite-lived intangible asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets or asset groups. The evaluation of goodwill or other intangible assets for possible impairment includes estimating fair value using one or a combination of valuation techniques, such as discounted cash flows or based on comparable companies or transactions. These valuations require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result. Earnings per Share Basic and diluted earnings per share is presented for net income attributable to Fairmount Santrol Holdings Inc. Basic earnings per share is computed by dividing income 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, 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 18% 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, 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. At December 31, 2015, the Company had one customer whose receivable balance exceeded 10% of total receivables. Approximately, 35% of the Company’s accounts receivable balance was from this customer. 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 initial estimated present value of reclamation costs as an asset retirement obligation and increases the carrying amount of the related asset by a corresponding amount. The Company allocates reclamation costs to expense over the life of the related assets and adjusts the related liability for changes resulting from the passage of time and revisions to either the timing or amount of the original present value 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, 2016, 2015, and 2014 were $3,703, $5,036, and $6,286, respectively. Total research and development expenditures represented 0.69%, 0.61%, and 0.46% of revenues in 2016, 2015, and 2014, respectively. Change in Classification For the year ended December 31, 2016, the Company changed the classification of certain operating expenses on the Consolidated Statements of Income (Loss). Previously, the Company classified expenses incurred related to the downturn in the proppant market as “restructuring and other charges.” The Company now further classifies these types of expenses between asset impairments and restructuring charges. All periods presented have been reclassified accordingly. In the three months ended December 31, 2016, the Company changed the presentation of non-cash stock compensation expense on the Consolidated Statements of Income (Loss). The expenses were previously separately stated but are now included in selling, general, and administrative expenses. All periods presented have been reclassified accordingly. 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 the 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, 2016 and 2015 were as follows: 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 ) December 31, 2015 Gross Tax Effect Net Amount Foreign currency translation $ (10,030 ) $ 1,318 $ (8,712 ) Additional pension liability (4,014 ) 1,464 (2,550 ) Unrealized gain (loss) on interest rate hedges (10,128 ) 3,697 (6,431 ) $ (24,172 ) $ 6,479 $ (17,693 ) The following table presents the changes in accumulated other comprehensive income by component for the year ended December 31, 2016: Year Ended December 31, 2016 Unrealized Foreign Additional gain (loss) currency pension on interest translation liability rate hedges Total Beginning balance $ (8,712 ) $ (2,550 ) $ (6,431 ) $ (17,693 ) Other comprehensive income (loss) before reclassifications 441 (14 ) (6,238 ) (5,811 ) Amounts reclassified from accumulated other comprehensive income (loss) - 266 4,236 4,502 Ending balance $ (8,271 ) $ (2,298 ) $ (8,433 ) $ (19,002 ) The following table presents the reclassifications out of accumulated other comprehensive income during the year ended December 31, 2016: Amount from accumulated Details about accumulated other other comprehensive Affected line item on comprehensive income income the statement of income Change in fair value of derivative swap agreements Interest rate hedging contracts $ 6,522 Interest expense Tax effect (2,286 ) Tax $ 4,236 Net of tax Amortization of pension obligations Prior service cost $ - Cost of sales Actuarial losses 265 Cost of sales Curtailment 182 Cost of sales 447 Total before tax Tax effect (181 ) Tax expense 266 Net of tax Total reclassifications for the period $ 4,502 Net of tax |