| 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
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
$
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 |
