Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
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 ASU 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 ASU is expected to
impact the Companys 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 ASU
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. The ASU is expected to impact
the Companys financial statements and disclosures as the Company makes share-based payments to its employees. The ASU is effective beginning January 1, 2017, 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 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
, and ASU No. 2016-12
Revenue from
Contracts with Customers Narrow-Scope Improvements and Practical Expedients
. These ASUs 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 evaluating the effect of the new guidance on its financial statements and disclosures.
2. Inventories
At June 30, 2016 and December 31, 2015,
inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
4,913
|
|
|
$
|
10,145
|
|
Work-in-process
|
|
|
11,353
|
|
|
|
14,613
|
|
Finished goods
|
|
|
43,074
|
|
|
|
48,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,340
|
|
|
|
73,406
|
|
Less: LIFO reserve
|
|
|
(2,647
|
)
|
|
|
(2,912
|
)
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
56,693
|
|
|
$
|
70,494
|
|
|
|
|
|
|
|
|
|
|
9
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
3. Property, Plant, and Equipment
At June 30, 2016 and December 31, 2015, property, plant, and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Land and improvements
|
|
$
|
83,763
|
|
|
$
|
82,966
|
|
Mineral reserves and mine development
|
|
|
248,196
|
|
|
|
323,691
|
|
Machinery and equipment
|
|
|
576,933
|
|
|
|
575,034
|
|
Buildings and improvements
|
|
|
152,951
|
|
|
|
171,791
|
|
Furniture, fixtures, and other
|
|
|
3,455
|
|
|
|
3,609
|
|
Construction in progress
|
|
|
39,260
|
|
|
|
37,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,104,558
|
|
|
|
1,194,138
|
|
Accumulated depletion and depreciation
|
|
|
(347,875
|
)
|
|
|
(323,141
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
756,683
|
|
|
$
|
870,997
|
|
|
|
|
|
|
|
|
|
|
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 continuing adverse business conditions and the idling of certain assets, 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. Critical assumptions for these valuations included future selling prices of
products, future operating costs, and the cost of capital. The Company incurred $90,578 and $6,475 of such asset impairments in the three months ended June 30, 2016 and 2015, respectively, and $90,654 and $6,475 in the six months ended June 30,
2016 and 2015, respectively. These impairments are recorded as asset impairments in operating expenses in the Condensed Consolidated Statements of Income (Loss). See Notes 14 and 15 for further detail. Of the carrying value of the
assets (after impairment), $1,317 is classified as a current asset held-for-sale as of June 30, 2016.
If the ongoing uncertainty in oil and gas markets
continues, it is possible that additional assets, both tangible and intangible, could be subject to additional impairment losses in future periods.
4.
Long-Term Debt
At June 30, 2016 and December 31, 2015, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Term B-1 Loans
|
|
$
|
16,790
|
|
|
$
|
156,134
|
|
Term B-2 Loans
|
|
|
898,153
|
|
|
|
902,402
|
|
Extended Term B-1 Loans
|
|
|
159,103
|
|
|
|
159,878
|
|
2016 Extended Term Loans
|
|
|
69,492
|
|
|
|
|
|
Industrial Revenue bond
|
|
|
10,000
|
|
|
|
10,000
|
|
Revolving credit facility and other
|
|
|
88
|
|
|
|
101
|
|
Capital leases, net
|
|
|
5,472
|
|
|
|
9,301
|
|
Deferred financing costs, net
|
|
|
(12,544
|
)
|
|
|
(14,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,146,554
|
|
|
|
1,223,106
|
|
Less: current portion
|
|
|
(30,677
|
)
|
|
|
(17,385
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt including leases
|
|
$
|
1,115,877
|
|
|
$
|
1,205,721
|
|
|
|
|
|
|
|
|
|
|
10
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
As detailed in Recent Accounting Pronouncements in Note 1, ASU 2015-03 dictates that debt
issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The deferred financing costs, net line
in the table above is the application of this new guidance.
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, the Term B-1 Loans, and the Term B-2 Loans are secured by a first priority lien on substantially all of the Companys domestic
assets.
The 2013 Amended Credit Agreement was amended in March 2014, April 2015, and May 2015 as well as joinder agreements 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 B-1 and B-2 Base Rate loans was 2.5% and the margin on B-1 and B-2 Eurodollar Rate loans was 3.5%.
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. Generally, if the Companys leverage ratio is greater than
4.75:1.00 during the period from the third quarter of 2015 through the fourth quarter of 2016, so long as the stated quarterly adjusted EBITDA thresholds are exceeded, the amount available to borrow under the Revolving Credit Facility is increased
from $31,250 to $40,000. Commencing with the end of the first quarter of 2017, the quarterly adjusted EBITDA thresholds are discontinued and the full amount of the revolving commitment ($100,000) is available so long as the Companys
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). As of June 30, 2016, the Companys leverage ratio was 77.75:1.00.
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.
11
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
Accrued interest on the extended remainder of the Term B-1 Loan is due at maturity on July 15, 2018. Under the terms of the agreement, the change in the maturities of the Term B-1 Loans and
the 2016 Extended Term Loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal Payments
|
|
Due Date
|
|
Prior to Extension
|
|
|
Subsequent to Extension
|
|
4/28/2016
(A)
|
|
$
|
|
|
|
$
|
69,580
|
|
6/30/2016
|
|
|
400
|
|
|
|
43
|
|
9/30/2016
|
|
|
400
|
|
|
|
43
|
|
12/31/2016
|
|
|
400
|
|
|
|
43
|
|
3/17/2017
|
|
|
154,812
|
|
|
|
16,723
|
|
7/15/2018
|
|
|
|
|
|
|
69,580
|
|
|
|
|
|
|
|
|
|
|
Total
(B)
|
|
$
|
156,012
|
|
|
$
|
156,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
-
|
|
The principal payment shown for April 28, 2016 represents a prepayment of principal to the lenders consenting to the extended maturity.
|
(B)
|
|
-
|
|
These amounts do not reflect the amortization of original issue discounts.
|
Accrued interest related to the $16,723 principal payment due on March 17, 2017 will also be due on the same date, as shown
above. The applicable base rate margin on the interest rate for the Base Rate Term B-1 Loans, the Extended Term B-1 Loans, the 2016 Extended Term Loans, and the Term B-2 Loans is 2.5% and the applicable margin on the interest rate for the
Eurodollar Term B-1, Extended Term B-1, 2016 Extended Term Loans, and the Term B-2 Loans is 3.5%. The Eurodollar Extended Term B-1, 2016 Extended Term, and Term B-2 Loans all contain a 1% rate floor, plus the applicable margin. The Term
B-1 Loan does not contain any type of interest rate floor.
As of June 30, 2016, Term B-1 Loans, Term B-2 Loans, Extended Term B-1 Loans, the 2016
Extended Term Loans, and the Revolving Credit Facility had interest rates of 4.2%, 4.5%, 4.5%, 4.5%, and 4.3%, respectively.
As of June 30, 2016, there
was $18,323 available capacity on the Revolving Credit Facility and $12,927 committed to outstanding letters of credit. As of June 30, 2016, 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 0.46% at June 30, 2016. The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10,000.
5. Earnings (Loss) per Share
The table below shows the
computation of basic and diluted earnings (loss) per share for the six months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fairmount Santrol Holdings Inc.
|
|
$
|
(87,886
|
)
|
|
$
|
14,137
|
|
|
$
|
(99,662
|
)
|
|
$
|
44,896
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
161,647
|
|
|
|
161,368
|
|
|
|
161,547
|
|
|
|
161,161
|
|
Dilutive effect of employee stock options, RSUs, and PRSUs
|
|
|
|
|
|
|
5,498
|
|
|
|
|
|
|
|
5,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
161,647
|
|
|
|
166,866
|
|
|
|
161,547
|
|
|
|
166,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic
|
|
$
|
(0.54
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.28
|
|
Earnings (loss) per common share - diluted
|
|
$
|
(0.54
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.27
|
|
12
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
Because the Company experienced a loss in the six months ended June 30, 2016, the impact of dilution has not
been included in the earnings per share calculation as the effect of including these potential common shares would be antidilutive. The calculation of diluted weighted average shares outstanding for the six months ended June 30, 2015 excludes
6,914 potential common shares because the effect of including these potential common shares would be antidilutive.
6. 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 current
notional value of these swap agreements is $525,225, which represents a total of approximately 46% of term debt outstanding at June 30, 2016 and effectively fixes the variable rate in a range of 0.83% to 3.115% for the portion of the debt that is
hedged. The interest rate swap agreements mature at various dates between March 15, 2017 and September 5, 2019.
The derivative instruments are
recorded on the balance sheet at their fair values. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging
relationship and, if it is, depending on the type of hedging relationship. For cash flow hedges in which the Company is hedging the variability of cash flows related to a variable-rate liability, the effective portion of the gain or loss on the
derivative instrument is reported in other comprehensive income in the periods during which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges is recognized in current period
earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income (loss) related to the interest rate swaps are reclassified into income to obtain a net cost on the debt obligation equal to the
effective yield of the fixed rate of each swap. In the event that an interest rate swap is terminated prior to maturity, gains or losses in accumulated other comprehensive income (loss) remain deferred and are reclassified into earnings in the
periods in which the hedged forecasted transaction affects earnings.
The Company formally designates and documents instruments at inception that qualify
for hedge accounting of underlying exposures in accordance with GAAP. Both at inception and for each reporting period, the Company assesses whether the financial instruments used in hedging transactions are effective in offsetting changes in
cash flows of the related underlying exposure.
The following table summarizes the fair values and the respective classification in the Condensed
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
Interest Rate Swap Agreements
|
|
Balance Sheet Classification
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Designated as hedges
|
|
Other long-term liabilities
|
|
$
|
(20,161
|
)
|
|
$
|
(12,107
|
)
|
Designated as hedges
|
|
Other assets
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,161
|
)
|
|
$
|
(11,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $109 and $16 in interest expense, representing the ineffective portion of interest rate swap agreements
designated as hedges, in the six months ended June 30, 2016 and 2015, respectively. The Company expects $6,550 to be reclassified from accumulated other comprehensive income (loss) into interest expense within the next twelve months.
13
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
7. 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 an acquisition that is subject to fair value measurement. Fair value is defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.
Based on the examination of the inputs used in the
valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. Financial assets and liabilities 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 instruments categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
The book value of cash equivalents, accounts receivable and accounts payable are considered to be
representative of their fair values because of their short maturities. The carrying value of the Companys long-term debt (including the current portion thereof) is recognized at amortized cost. The fair value of the Term B-1 Loans,
the Extended Term B-1 Loans, the 2016 Extended Term 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 June 30, 2016 and December 31, 2015 for the Companys 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
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B-1 Loans
|
|
$
|
|
|
|
$
|
15,464
|
|
|
$
|
|
|
|
$
|
15,464
|
|
Term B-2 Loans
|
|
|
|
|
|
|
729,514
|
|
|
|
|
|
|
|
729,514
|
|
Extended Term B-1 Loans
|
|
|
|
|
|
|
127,543
|
|
|
|
|
|
|
|
127,543
|
|
2016 Extended Term Loans
|
|
|
|
|
|
|
60,535
|
|
|
|
|
|
|
|
60,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
933,056
|
|
|
$
|
|
|
|
$
|
933,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B-1 Loans
|
|
$
|
|
|
|
$
|
106,360
|
|
|
$
|
|
|
|
$
|
106,360
|
|
Term B-2 Loans
|
|
|
|
|
|
|
443,580
|
|
|
|
|
|
|
|
443,580
|
|
Extended Term B-1 Loans
|
|
|
|
|
|
|
76,922
|
|
|
|
|
|
|
|
76,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
626,862
|
|
|
$
|
|
|
|
$
|
626,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts carried at fair value as of June 30, 2016 and December 31, 2015 for the
Companys other financial instruments.
14
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
Recurring Fair Value Measurements
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
|
|
|
$
|
(20,161
|
)
|
|
$
|
|
|
|
$
|
(20,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(20,161
|
)
|
|
$
|
|
|
|
$
|
(20,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
|
|
|
$
|
(11,989
|
)
|
|
$
|
|
|
|
$
|
(11,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(11,989
|
)
|
|
$
|
|
|
|
$
|
(11,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Common Stock and Stock-Based Compensation
The Company granted options to purchase 1,731 and 1,615 shares of common stock in the six months ended June 30, 2016 and 2015, respectively. The average
grant date fair value was $2.21 and $3.97 for options issued in the six months ended June 30, 2016 and 2015, respectively. The Company issued restricted stock units (RSUs) of 1,020 and 360 in the six months ended June 30, 2016 and
2015, respectively. The Company issued performance restricted stock units (PRSUs) of 481 and 0 in the six months ended June 30, 2016 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average Exercise
Price, Options
|
|
|
Restricted
Stock Units
|
|
|
Weighted
Average Price at
RSU Issue Date
|
|
|
Performance
Restricted
Stock Units
|
|
|
Weighted
Average Price at
PRSU Issue Date
|
|
Outstanding at December 31, 2015
|
|
|
16,277
|
|
|
$
|
6.28
|
|
|
|
579
|
|
|
$
|
10.45
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
1,731
|
|
|
|
2.21
|
|
|
|
1,020
|
|
|
|
2.40
|
|
|
|
481
|
|
|
|
2.27
|
|
Exercised
|
|
|
(488
|
)
|
|
|
4.11
|
|
|
|
(14
|
)
|
|
|
8.83
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(425
|
)
|
|
|
8.54
|
|
|
|
(97
|
)
|
|
|
7.07
|
|
|
|
(23
|
)
|
|
|
2.04
|
|
Expired
|
|
|
(542
|
)
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
16,553
|
|
|
$
|
5.79
|
|
|
|
1,488
|
|
|
$
|
5.12
|
|
|
|
458
|
|
|
$
|
2.28
|
|
In the three months ended June 30, 2016, the Company recorded approximately $2,135 of stock compensation expense related to a
modification of the retirement provisions of the Companys Long Term Incentive Plans. The modification allows retirement-eligible participants (defined as age 55, plus 10 years of service) to continue to vest in options following
retirement, and also allows retired participants to exercise options for up to 10 years from grant date.
9. Income Taxes
The Company computes and applies to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels
and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income
(loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.
For the three months ended June 30, 2016, the Company recorded a tax benefit of $63,019 on a loss before income taxes of $150,889 resulting in an effective
tax rate of 41.8%, compared to a tax benefit of $26,677 on a loss before income taxes of $12,536 resulting in an effective tax rate of 212.8% for the same period of 2015. The reduction in the effective tax rate is primarily attributable to a
decrease in the impact of depletion applied against forecasted results in 2016 as compared to 2015. The effective rate differs from the U.S. federal statutory rate due primarily to the benefit from a loss carryback and depletion.
15
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
For the six months ended June 30, 2016, the Company recorded a tax benefit $78,773 on a loss before income
taxes of $178,422 resulting in an effective tax rate of 44.1%, compared to a tax benefit of $16,060 on income before income taxes of $28,961 resulting in an effective tax rate of (55.5%) for the same period of 2015. The increase in the effective tax
rate is primarily attributable to the impact of depletion as well as a tax benefit from a loss carryback, applied against forecasted results in 2016 as compared to forecasted results in 2015. The effective rate differs from the U.S. federal
statutory rate due primarily to the benefit from a loss carryback and depletion.
10. Defined Benefit Plans
The Company maintained 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 Wedron plan were frozen effective December 31, 2012.
Net periodic benefit cost recognized for other Company defined benefit pension plans for the six months ended June 30, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
21
|
|
|
|
27
|
|
|
$
|
42
|
|
|
$
|
54
|
|
Interest cost
|
|
|
87
|
|
|
|
85
|
|
|
|
174
|
|
|
|
170
|
|
Expected return on plan assets
|
|
|
(120
|
)
|
|
|
(127
|
)
|
|
|
(240
|
)
|
|
|
(254
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
8
|
|
Amortization of net actuarial loss
|
|
|
35
|
|
|
|
70
|
|
|
|
109
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
23
|
|
|
$
|
59
|
|
|
$
|
85
|
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company contributed $42 and $33 during the six months ended June 30, 2016 and 2015, respectively. Total expected
employer contributions during the year ending December 31, 2016 are $76.
11. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) attributable to Fairmount Santrol Holdings Inc. at June 30, 2016 and December 31, 2015 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Gross
|
|
|
Tax Effect
|
|
|
Net Amount
|
|
Foreign currency translation
|
|
$
|
(10,390
|
)
|
|
$
|
1,627
|
|
|
$
|
(8,763
|
)
|
Additional pension liability
|
|
|
(3,906
|
)
|
|
|
1,464
|
|
|
|
(2,442
|
)
|
Unrealized gain (loss) on interest rate hedges
|
|
|
(18,342
|
)
|
|
|
6,548
|
|
|
|
(11,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(32,638
|
)
|
|
$
|
9,639
|
|
|
$
|
(22,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
The following table presents the changes in accumulated other comprehensive income by component for the six
months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 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
|
|
|
(51
|
)
|
|
|
|
|
|
|
(7,540
|
)
|
|
|
(7,591
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
108
|
|
|
|
2,177
|
|
|
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(8,763
|
)
|
|
$
|
(2,442
|
)
|
|
$
|
(11,794
|
)
|
|
$
|
(22,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the reclassifications out of accumulated other comprehensive income during the six months ended
June 30, 2016:
|
|
|
|
|
|
|
|
|
Amount reclassified
|
|
|
|
|
|
from accumulated
|
|
|
|
|
|
other comprehensive
|
|
|
Affected line item on
|
Details about accumulated other comprehensive income
|
|
income
|
|
|
the statement of income
|
Change in fair value of derivative swap agreements
|
|
|
|
|
|
|
Interest rate hedging contracts
|
|
$
|
3,332
|
|
|
Interest expense
|
Tax effect
|
|
|
(1,156
|
)
|
|
Tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
$
|
2,176
|
|
|
Net of tax
|
Amortization of pension obligations
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
|
Cost of sales
|
Actuarial losses
|
|
|
109
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
Total before tax
|
Tax effect
|
|
|
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
2,285
|
|
|
Net of tax
|
|
|
|
|
|
|
|
12. Commitments and Contingent Liabilities
The Company has entered into numerous mineral rights agreements, in which payments under the agreements are expensed as incurred. Certain agreements
require annual payments while other agreements require payments based upon annual tons mined and others a combination thereof.
The Company 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 $35,156 and $33,503 for the six months ended June 30, 2016 and 2015,
respectively.
17
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
The Company is subject to a contingent consideration arrangement related to the purchase of Self-Suspending
Proppant LLC (SSP), which was accounted for as an acquisition of a group of assets. The contingent consideration is based on a fixed percentage of the cumulative product margin, less certain adjustments, generated by sales of Propel
SSP and other products incorporating SSP technology for the five years commencing on October 1, 2015. The Company entered into an Amendment to this 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 SSP assets at the time a payment is probable and reasonably estimable. Accordingly,
the Company accrued and capitalized $56 in the six months ended June 30, 2016.
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 Companys
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.
In December 2015, the Company was notified by the Securities and Exchange Commission (the SEC) that it was being investigated for
possible violations of the Foreign Corrupt Practices Act (the FCPA) and other securities laws relating to matters concerning certain of the Companys international operations. The Company had previously retained outside legal
counsel to investigate the subject matter of the SECs investigation, and at that time, the Company determined that no further action was necessary. The Company cannot predict what, if any, further action the SEC may take regarding its
investigation, and cannot provide an estimate of the potential costs of the SECs investigation or any possible fines, penalties, or other remedial actions that might result, if any, at this time.
13. Transactions with Related Parties
The Company had
purchases from an affiliated entity for freight, logistic services and consulting services related to its operations in China of $372 and $120 in the six months ended June 30, 2016 and 2015, respectively.
The Company pays American Securities LLC (American Securities), in accordance with its policy, for Board of Directors fees and Company-related
expenses, including travel and lodging, market research, and other miscellaneous expenses. Fees and expenses paid to American Securities were $169 and $0 in the six months ended June 30, 2016 and 2015, respectively.
14. Segment Reporting
The Company organizes its business
into two reportable segments, Proppant Solutions and Industrial & Recreational Products. The reportable segments are consistent with how management views the markets served by the Company and the financial information reviewed by the chief
operating decision maker in deciding how to allocate resources and assess performance.
18
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
The chief operating decision maker primarily evaluates an operating segments performance based on
segment contribution margin, which excludes certain corporate costs not associated with the operations of the segment. These corporate costs are separately stated below and include costs that are related to functional areas such as operations
management, corporate purchasing, accounting, treasury, information technology, legal and human resources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant Solutions
|
|
$
|
82,102
|
|
|
$
|
188,150
|
|
|
$
|
199,565
|
|
|
$
|
461,019
|
|
Industrial & Recreational Products
|
|
|
32,147
|
|
|
|
33,173
|
|
|
|
60,142
|
|
|
|
61,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
114,249
|
|
|
|
221,323
|
|
|
|
259,707
|
|
|
|
522,813
|
|
|
|
|
|
|
Segment contribution margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant Solutions
(A)
|
|
|
(74,398
|
)
|
|
|
35,416
|
|
|
|
(61,790
|
)
|
|
|
119,235
|
|
Industrial & Recreational
Products
(B)
|
|
|
12,006
|
|
|
|
(894
|
)
|
|
|
20,852
|
|
|
|
6,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment contribution margin
|
|
|
(62,392
|
)
|
|
|
34,522
|
|
|
|
(40,938
|
)
|
|
|
125,417
|
|
|
|
|
|
|
Operating expenses excluded from segment contribution margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
15,565
|
|
|
|
12,694
|
|
|
|
26,384
|
|
|
|
28,454
|
|
Depreciation, depletion, and amortization
|
|
|
18,056
|
|
|
|
16,276
|
|
|
|
36,642
|
|
|
|
32,499
|
|
Stock compensation expense
|
|
|
3,914
|
|
|
|
2,618
|
|
|
|
5,567
|
|
|
|
4,501
|
|
Corporate asset impairments, restructuring charges, and other operating expense
|
|
|
34,356
|
|
|
|
576
|
|
|
|
35,028
|
|
|
|
800
|
|
Interest expense, net
|
|
|
16,606
|
|
|
|
14,894
|
|
|
|
33,868
|
|
|
|
30,202
|
|
Other non-operating income
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
$
|
(150,889
|
)
|
|
$
|
(12,536
|
)
|
|
$
|
(178,422
|
)
|
|
$
|
28,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
-
|
|
Includes asset impairments and restructuring charges of $57,224 and $2,337 for the three months ended June 30, 2016 and 2015, respectively, and $57,300 and $2,337 for the six months ended June 30, 2016 and 2015,
respectively.
|
(B)
|
|
-
|
|
Includes asset impairments and restructuring charges of $0 and $12,085 for the three and six months ended June 30, 2016 and 2015, respectively.
|
15. Restructuring Charges
As a result of challenging conditions in the energy market, the Company has taken actions to adjust its overall operational footprint and reduce
costs. The restructuring program primarily consists of workforce reductions and costs to idle or exit facilities. The Company expects to complete these activities prior to the end of 2016, although a continued sustained downturn in the oil
and gas market could extend the duration of this restructuring process. A summary of the restructuring costs recognized for the six months ended June 30, 2016 and 2015, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction costs, including one-time severance payments
|
|
$
|
1,155
|
|
|
$
|
401
|
|
|
$
|
1,155
|
|
|
$
|
725
|
|
Other exit costs, including multiemployer pension plan withdrawal liability and additional
cash costs to exit facilities
|
|
|
|
|
|
|
7,948
|
|
|
|
|
|
|
|
7,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
1,155
|
|
|
$
|
8,349
|
|
|
$
|
1,155
|
|
|
$
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Fairmount Santrol Holdings Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
A summary of the restructuring costs by operating segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant Solutions
|
|
$
|
|
|
|
$
|
1,162
|
|
|
$
|
|
|
|
$
|
1,162
|
|
Industrial & Recreational Products
|
|
|
|
|
|
|
6,786
|
|
|
|
|
|
|
|
6,786
|
|
Corporate
|
|
|
1,155
|
|
|
|
401
|
|
|
|
1,155
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
1,155
|
|
|
$
|
8,349
|
|
|
$
|
1,155
|
|
|
$
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Indefinite-Lived Intangibles Goodwill
As of June 30, 2016, the balance of Goodwill was $15,301, which represents goodwill related to acquisitions in the Companys Industrial & Recreational
Products segment. The Company performed a review of qualitative factors and concluded that, as of June 30, 2016, there were no events or changes in circumstances that would more likely than not reduce the fair value of a reporting unit below
its carrying value.
17. Subsequent Event
On July
26, 2016, the Company completed a public offering of 25,000 shares of its common stock. In addition, the underwriters completed their exercise of an overallotment option on July 28, 2016 to sell an additional 3,750 shares. Cash proceeds
received by the Company for the 28,750 shares sold were approximately $161,000, net of underwriting commissions and estimated offering expenses. After these transactions, there were 191,413 shares of common stock issued and outstanding as of
July 31, 2016.
The Company intends to use the net proceeds of the offering for general corporate purposes, which include, but are not limited to, working
capital, repayment, redemption or refinancing of debt and leases, investments in or loans to subsidiaries, and satisfaction of other obligations.
20
Introduction to Part I, Item 2 and Part II, Item 1 and Item 1A
We define various terms to simplify the presentation of information in this Quarterly Report on Form 10-Q (this Report). Unless we state
otherwise or the context otherwise requires, the terms we, us, our, Fairmount Santrol, our business and our company refer to Fairmount Santrol Holdings Inc. and its consolidated
subsidiaries and predecessor companies. We use Adjusted EBITDA herein as a non-GAAP measure of our financial performance. See further discussion of Adjusted EBITDA at Item 2 Managements Discussion and Analysis.
FORWARD-LOOKING STATEMENTS
This Report contains
forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Report are forward-looking statements. Forward-looking statements give our current
expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical
or current facts. These statements may include words such as anticipate, estimate, expect, project, plan, intend, believe, may, will,
should, can have, likely and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all
statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of
pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
|
|
|
the price of oil and gas and the level of activity in the oil and gas industries;
|
|
|
|
the level of cash flows generated to provide adequate liquidity to meet our working capital needs, capital expenditures, and our lease and debt obligations;
|
|
|
|
increasing costs or a lack of dependability or availability of transportation services or infrastructure and geographic shifts in demand;
|
|
|
|
changes to leased terminal arrangements impacting our distribution network and ability to deliver our products to our customers;
|
|
|
|
our rights and ability to mine our properties and our renewal or receipt of the required permits and approvals from governmental authorities and other third parties;
|
|
|
|
decreased demand for sand-based proppants or the development of either effective alternative proppants or new processes to replace hydraulic fracturing;
|
|
|
|
continuing pressure on market-based pricing;
|
|
|
|
lower of cost or market inventory adjustments and/or obsolete inventory due to lower proppant demand from the oil and gas industry;
|
|
|
|
our ability to protect our intellectual property rights;
|
|
|
|
our ability to successfully develop and market Propel SSP;
|
|
|
|
our ability to succeed in competitive markets;
|
|
|
|
loss of, or reduction in, business from our largest customers;
|
|
|
|
our exposure to the credit risk of our customers and any potential material nonpayments, bankruptcies, and/or nonperformance by our customers;
|
|
|
|
our transactions in, and operating subsidiaries with, functional currencies other than the U.S. dollar. We are exposed to fluctuations in exchange rates of these currencies compared to the U.S. dollar, which is the
primary currency in which we operate. These fluctuations may be significant, and may not be fully mitigated by risk management techniques, such as foreign currency hedging;
|
|
|
|
changes in U.S. or international economic conditions, such as the recent United Kingdom vote to exit the European Union, could adversely impact our operating results;
|
21
|
|
|
fluctuations in demand for industrial and recreational sand;
|
|
|
|
operating risks that are beyond our control, such as changes in the price and availability of transportation, natural gas or electricity; unusual or unexpected geological formations or pressures; cave-ins, pit wall
failures or rock falls; or unanticipated ground, grade or water conditions;
|
|
|
|
our dependence on our Wedron Silica sand-mining facility for a significant portion of our production sales, which currently supplies all of our Northern White frac sand and a portion of our Industrial & Recreational
(I&R) Products segment sand sold into our markets;
|
|
|
|
the availability of raw materials to support our manufacturing of resin-coated proppants;
|
|
|
|
diminished access to water;
|
|
|
|
challenges to our title to our mineral properties and water rights;
|
|
|
|
our ability to make capital expenditures to maintain, develop and increase our asset base and our ability to obtain needed capital or financing on satisfactory terms, including financing for existing commitments such as
future railcar deliveries;
|
|
|
|
the potential impairment of our property, including our mineral reserves, plant, equipment, goodwill, and intangible assets as a result of continuing depressed market conditions;
|
|
|
|
substantial indebtedness, lease and pension obligations;
|
|
|
|
restrictions imposed by our indebtedness and lease obligations on our current and future operations;
|
|
|
|
the accuracy of our estimates of our mineral reserves and our ability to mine them;
|
|
|
|
substantial costs related to mines, resin-coating facilities, and terminals that have been closed;
|
|
|
|
potential disruption of our operations due to severe weather conditions, such as tornados and electrical storms, which frequently occur in areas where we operate;
|
|
|
|
a shortage of skilled labor and rising labor costs in the mining industry;
|
|
|
|
increases in the prices of, or interruptions in the supply of, natural gas and electricity, or any other energy sources;
|
|
|
|
our ability to attract and retain key personnel;
|
|
|
|
our ability to maintain satisfactory labor relations;
|
|
|
|
silica-related health issues and corresponding litigation;
|
|
|
|
our ability to maintain effective quality control systems at our mining, processing and production facilities;
|
|
|
|
fluctuations in our sales and results of operations due to seasonality and other factors;
|
|
|
|
interruptions or failures in our information technology systems;
|
|
|
|
failure to comply with the provisions of the FCPA;
|
|
|
|
the impact of a terrorist attack or armed conflict;
|
|
|
|
cybersecurity breaches;
|
|
|
|
our failure to maintain adequate internal controls;
|
|
|
|
extensive and evolving environmental, mining, health and safety, licensing, reclamation and other regulation (and changes in their enforcement or interpretation);
|
|
|
|
our ability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property; and
|
|
|
|
other factors disclosed in the section entitled Risk Factors and elsewhere in this Report.
|
We
derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are
disclosed under the sections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in this Report. All written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these
22
cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking
statements made in this Report in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not
contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or
affect us or our operations in the way we expect. The forward-looking statements included in this Report are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new
information, future events or otherwise, except as otherwise required by law.
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results,
financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and
related information contained herein and our audited financial statements as of December 31, 2015 and 2014 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on the beliefs of our
management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors,
including those discussed herein, particularly in the section entitled Risk Factors.
Overview
We are one of the worlds largest providers of sand-based proppant solutions and for nearly 40 years have been a pioneer in the development of high
performance proppants used by Exploration & Production (E&P) companies to enhance the productivity of their oil and gas wells. Additionally, for more than 120 years, we and our predecessor companies have provided high
quality sand-based products, strong technical leadership and applications knowledge to end users in the Industrial & Recreational (I&R) markets.
As one of the industry leaders, our asset base at December 31, 2015 included 798 million tons of proven and probable mineral reserves, which we believe is one
of the largest reserve bases in the industry. Due to the continuing challenging conditions in the oil and gas markets, we continue to adjust our operational footprint to consolidate into the lowest-cost footprint possible. As of August
2016, we have 10 sand processing facilities (5 of which are active) with 16.8 million tons of annual sand processing capacity. To date in 2016, we have idled our Shakopee, Minnesota facility, our Wisconsin facilities in Maiden Rock and
Menomonie, and our international facility in Mexico. We also have 9 coating facilities (5 of which are active) with 2.3 million tons of annual coating capacity.
We are capable of Class I railroad deliveries to each of North Americas major oil and gas producing basins and also have the flexibility to ship our
product via barge, marine terminals and trucks to reach our customers as needed. We operate an integrated logistics platform consisting of 42 proppant distribution terminals and a fleet of approximately 10,100 railcars considering car returns
that took place throughout the year and subleases. Our unit train capabilities include two production facilities and eight in-basin terminals, which reduce freight costs and improve cycle times for our railcar fleet. In order to better
align our logistics network with customer demand and to reduce costs, we discontinued activity at three transloading terminals in 2016.
Our operations are
organized into two segments based on the primary end markets we serve: (i) Proppant Solutions and (ii) I&R Products. Our Proppant Solutions segment predominantly provides sand-based proppants for use in hydraulic fracturing operations
throughout the U.S. and Canada, Argentina, Mexico, China, northern Europe and the United Arab Emirates. Our I&R Products segment provides raw, coated, and custom blended sands to the foundry, building products, glass, turf and landscape and
filtration industries primarily in North America. We believe our two market segments are complementary. Our ability to sell to a wide range of customers across multiple end markets allows us to maximize the recovery of our reserve base
within our mining operations and to reduce the cyclicality of our earnings.
Segment Contribution Margin
Segment contribution margin is a key metric that management uses to evaluate our operating performance and to determine resource allocation between
segments. Segment contribution margin is defined as total revenues less the
24
cost of goods sold to produce and deliver the products, less selling, general and administrative expenses that are directly attributable to each segment. The definition excludes certain
corporate costs not associated with the operations of the segment. These unallocated costs include costs related to corporate functional areas such as administration, accounting, finance, treasury, information technology, human resources,
research and development, business development and sustainable development, as well as unallocated costs related to operations such as undeveloped mineral rights reserves.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA
are supplemental non-GAAP financial measures that are used by management and certain external users of our financial statements.
We define EBITDA as net
income before interest expense, income tax expense, depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA before non-cash stock-based compensation, impairment of assets, and certain other non-cash income or expenses.
Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operations from period to period without
regard to our financing methods or capital structure. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives to, or more meaningful than, net income or cash flows from operating activities
as determined in accordance with GAAP as indicators of our operating performance or liquidity. Certain items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing a companys financial
performance, such as a companys cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of EBITDA or Adjusted EBITDA. Although we attempt to determine EBITDA and Adjusted EBITDA
in a manner that is consistent with other companies in our industry, our computations of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that EBITDA and Adjusted EBITDA are
widely followed measures of operating performance and may also be used by investors to measure our ability to meet debt service requirements.
The
following table sets forth a reconciliation of net income, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Reconciliation of Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fairmount Santrol Holdings Inc.
|
|
$
|
(87,886
|
)
|
|
$
|
14,137
|
|
|
$
|
(99,662
|
)
|
|
$
|
44,896
|
|
Interest expense, net
|
|
|
16,606
|
|
|
|
14,894
|
|
|
|
33,868
|
|
|
|
30,202
|
|
Benefit from income taxes
|
|
|
(63,019
|
)
|
|
|
(26,677
|
)
|
|
|
(78,773
|
)
|
|
|
(16,060
|
)
|
Depreciation, depletion, and amortization expense
|
|
|
18,056
|
|
|
|
16,276
|
|
|
|
36,642
|
|
|
|
32,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(116,243
|
)
|
|
|
18,630
|
|
|
|
(107,925
|
)
|
|
|
91,537
|
|
|
|
|
|
|
Non-cash stock compensation
expense
(1)
|
|
|
3,914
|
|
|
|
2,618
|
|
|
|
5,567
|
|
|
|
4,501
|
|
Asset impairments
(2)
|
|
|
90,578
|
|
|
|
6,475
|
|
|
|
90,654
|
|
|
|
6,475
|
|
Other charges
(3)
|
|
|
|
|
|
|
465
|
|
|
|
|
|
|
|
465
|
|
Restructuring charges
(4)
|
|
|
|
|
|
|
8,349
|
|
|
|
|
|
|
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(21,751
|
)
|
|
$
|
36,537
|
|
|
$
|
(11,704
|
)
|
|
$
|
111,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the non-cash expense for stock-based awards issued to our employees and outside directors.
|
(2)
|
Non-cash charges associated with the impairment of mineral reserves and other long-lived assets.
|
(3)
|
Cash payment associated with an audit of our Employee Stock Bonus Plan.
|
(4)
|
For the three months ended June 30, 2016 and 2015, respectively, we incurred cash charges of approximately $1.2 million and $6.1 million for restructuring. We are no longer reflecting cash charges as an adjustment to
EBITDA in 2016 results.
|
25
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fairmount Santrol Holdings Inc.
|
|
$
|
(87,886
|
)
|
|
$
|
14,137
|
|
|
$
|
(99,662
|
)
|
|
$
|
44,896
|
|
EBITDA
|
|
|
(116,243
|
)
|
|
|
18,630
|
|
|
|
(107,925
|
)
|
|
|
91,537
|
|
Adjusted EBITDA
|
|
$
|
(21,751
|
)
|
|
$
|
36,537
|
|
|
$
|
(11,704
|
)
|
|
$
|
111,651
|
|
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proppant Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tons sold
|
|
|
1,290
|
|
|
|
1,594
|
|
|
|
2,816
|
|
|
|
3,372
|
|
Revenues
|
|
$
|
82,102
|
|
|
$
|
188,150
|
|
|
$
|
199,565
|
|
|
$
|
461,019
|
|
Segment contribution margin
|
|
$
|
(74,398
|
)
|
|
$
|
35,416
|
|
|
$
|
(61,790
|
)
|
|
$
|
119,235
|
|
Industrial & Recreational Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tons sold
|
|
|
661
|
|
|
|
641
|
|
|
|
1,248
|
|
|
|
1,176
|
|
Revenues
|
|
$
|
32,147
|
|
|
$
|
33,173
|
|
|
$
|
60,142
|
|
|
$
|
61,794
|
|
Segment contribution margin
|
|
$
|
12,006
|
|
|
$
|
(894
|
)
|
|
$
|
20,852
|
|
|
$
|
6,182
|
|
Our operating results declined in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The
declines in revenues and contribution margin in our Proppant Solutions segment resulted from decreases in proppant volumes, in particular coated proppants, product mix, and lower pricing across the segment. The I&R Products segment offset
some of the declines in the Proppant Solutions business with sequential increase in volume and segment contribution margin due to seasonality and increase in new business. The Proppant Solutions segment contribution margin was also impacted by
asset impairments and inventory write-downs in the three months ended June 30, 2016.
Three Months Ended June 30, 2016 Compared to Three Months
Ended June 30, 2015
Revenues
Revenues
decreased $107.1 million, or 48%, to $114.2 million for the three months ended June 30, 2016 compared to $221.3 million for the three months ended June 30, 2015, primarily due to decreased volumes, a change in product mix, and lower selling prices
in our Proppant Solutions segment.
North American rig counts continued to decline in the second quarter 2016, which softened drilling activity and demand
for proppants in the quarter. E&P companies, in partnership with oilfield service companies, are continuing to refine their well designs and hydraulic fracturing techniques to increase the amount of proppant used per frac stage and,
together, these techniques have greatly increased the volume of proppant used in the completion of each well (proppant intensity). The trend of increasing proppant intensity has offset, to some extent, the decrease in demand for
proppants resulting from reduced rig counts and drilling activity.
Total volumes in the Proppant Solutions segment decreased 19% to 1.3 million tons in
the three months ended June 30, 2016 compared to 1.6 million tons in the three months ended June 30, 2015. Raw frac sand volumes decreased 11% to 1.2 million tons in the three months ended June 30, 2016 compared to the three months ended June
30, 2015. Coated proppant volumes decreased 71% to 0.1 million tons in the second quarter of 2016 compared to 0.2 million tons in the second quarter of 2015. Revenues in the Proppant Solutions segment decreased $106.0 million, or 56%, to
$82.1 million for the three months ended June 30, 2016 compared to $188.2 million for the three months ended June 30, 2015. The decrease in Proppant Solutions revenue was largely due to pricing declines and declines in volumes, particularly
resin-coated proppant.
The rapid decline in oil and gas prices and continued price volatility that has occurred since late 2014 led to reduced drilling
activity and reduced demand for proppants. As a result, the proppant market is in a position of oversupply, which has caused selling prices for all proppants to decline significantly through the second quarter of 2016 relative
26
to the second quarter of 2015. Although uncertain, future increases in demand for proppants are expected to be driven by completion of previously drilled but uncompleted wells
(DUCs), increases in proppant intensity, and climbing North American rig counts.
Revenues in the I&R Products segment decreased $1.0
million, or 3%, to $32.1 million for the three months ended June 30, 2016 compared to $33.2 million for the three months ended June 30, 2015. Volumes increased to 0.7 million tons in the three months ended June 30, 2016 compared to 0.6 million
tons in the three months ended June 30, 2015. I&R Products segment revenue was impacted by seasonal sales growth in the sports and recreation market coupled with stronger volumes in key markets, particularly those aligned with
construction-driven markets.
Revenues in our I&R Products segment are driven by macroeconomic factors such as housing starts, light vehicle sales,
repair and remodel activity and industrial production. To the extent these demand drivers continue on their current trends, we expect that demand for our commercial silica products will remain relatively stable.
Segment Contribution Margin
Contribution margin
decreased $96.9 million to negative $62.4 million for the three months ended June 30, 2016 compared to $34.5 million for the three months ended June 30, 2015, primarily due to decreased volumes and selling prices in our Proppant Solutions segment,
in addition to non-cash asset impairment charges. Contribution margin for the three months ended June 30, 2016 included non-cash asset impairments of $57.2 million and inventory write-downs of $10.3 million. Contribution margin for the
three months ended June 30, 2015 included $14.4 million of asset impairment charges and restructuring costs.
Contribution margin in the Proppant Solutions
segment decreased $109.8 million to negative $74.4 million for the three months ended June 30, 2016 compared to $35.4 million for the three months ended June 30, 2015. The decrease was primarily driven by lower volumes, changes in product mix
between raw frac sand and coated proppant, decreased selling prices, and non-cash impairment charges in the three months ended June 30, 2016. The Proppant Solutions segment contribution margin includes non-cash asset impairment charges of $57.2
million and inventory write-downs of $9.9 million in the three months ended June 30, 2016. Contribution margin for the three months ended June 30, 2015 included $2.3 million of asset impairments and restructuring charges.
Contribution margin in the I&R Products segment increased $12.9 million to $12.0 million for the three months ended June 30, 2016 compared to a negative
$0.9 million for the three months ended June 30, 2015. The increase in contribution margin is primarily due to favorable selling prices, customer mix, and improved manufacturing costs per ton. Contribution margin includes inventory
write-downs of $0.4 million for the three months ended June 30, 2016. Contribution margin for the three months ended June 30, 2015 included $12.1 million of asset impairments and restructuring charges.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses (SG&A) increased $1.9 million, or 10%, to $21.1 million for the three months ended June 30, 2016 compared to $19.2 million for the three months ended June 30, 2015. SG&A attributable to
our segments decreased $0.9 million primarily as a result of workforce reductions made in the first quarter. Corporate SG&A costs increased $2.9 million as a result of $5.3 million in fees committed for additional cost reduction initiatives
and extension of approximately $70 million of our Term B-1 Loans to 2018, partially offset by other SG&A reductions.
27
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased $1.8 million to $18.1 million for the three months ended June 30, 2016 compared to $16.3 million in the
three months ended June 30, 2015. The increase in depreciation is due to more assets placed in service primarily related to the Wedron plant expansion.
Income (Loss) from Operations
Income (loss) from
operations decreased $136.6 million to a loss of $134.3 million for the three months ended June 30, 2016 compared to income of $2.4 million for the three months ended June 30, 2015. Second quarter earnings were largely impacted by declines in
contribution margins due to lower volumes and decreased selling prices, in addition to the non-cash asset impairments, restructuring charges, inventory write-downs, and professional fees totaling $111 million.
Interest Expense
Interest expense increased $1.7
million, or 11%, to $16.6 million for the three months ended June 30, 2016 compared to $14.9 million for the three months ended June 30, 2015 primarily due to an increase in the notional amounts on interest rate swap agreements, entered into in
2013, that became effective October 2015 and a reduction in capitalized interest due to the completion of the Wedron facility expansion, partially offset as a result of the prepayment of $69.6 million of the Term B-1 Loans.
Provision (Benefit) for Income Taxes
Benefit from income
taxes increased $36.3 million to a benefit of $63.0 million for the three months ended June 30, 2016 compared to a benefit of $26.7 million for the three months ended June 30, 2015. The increase in the benefit recorded during the second quarter
of 2016 is primarily related to the decrease in income before income taxes and a loss carryback. The effective tax rate was 41.8% and 212.8% for the three months ended June 30, 2016 and 2015, respectively. The reduction in the effective tax
rate is primarily attributable to a decrease in the impact of depletion applied against forecasted results for 2016 as compared to 2015. The effective rate differs from the U.S. federal statutory rate due primarily to the benefit from a loss
carryback and depletion.
Income before income taxes decreased $138.4 million to a loss of $150.9 million for the three months ended June 30, 2016
compared to a loss of $12.5 million for the three months ended June 30, 2015. The provision (benefit) for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are
taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate. If our estimated effective tax rate changes, we make a cumulative adjustment.
Net Income (Loss) Attributable to Fairmount Santrol Holdings Inc.
Net income attributable to Fairmount Santrol Holdings Inc. decreased $102.0 million to a loss of $87.9 million for the three months ended June 30, 2016
compared to income of $14.1 million for the three months ended June 30, 2015 due to the factors noted above, including asset impairments and restructuring charges totaling $70 million on an after-tax basis.
Adjusted EBITDA
Adjusted EBITDA decreased $58.3 million
to a loss of $21.8 million for the three months ended June 30, 2016 compared to income of $36.5 million for the three months ended June 30, 2015. Adjusted EBITDA excludes the impact of $94.5 million of non-cash stock compensation expense
and impairment charges. The Adjusted EBITDA loss includes inventory write-downs, restructuring charges, and fees committed for cost-reduction initiatives and extension of our debt totaling approximately $16.8 million. The decline in
Adjusted EBITDA was largely due to declines in proppant volumes, change in product mix, and pricing as noted above.
28
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Revenues
Revenues decreased $263.1 million, or 50%, to
$259.7 million for the six months ended June 30, 2016 compared to $522.8 million for the six months ended June 30, 2015, primarily due to decreased volumes and selling prices in our Proppant Solutions segment.
Total volumes in the Proppant Solutions segment decreased 16% to 2.8 million tons in the six months ended June 30, 2016 compared to 3.4 million tons in the
six months ended June 30, 2015. Raw frac sand volumes decreased 8% to 2.6 million tons in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Coated proppant volumes decreased 65% to 0.2 million tons in the
six months ended June 30, 2016 compared to 0.5 million tons in the six months ended June 30, 2015. Revenues in the Proppant Solutions segment decreased $261.5 million, or 57%, to $199.6 million for the six months ended June 30, 2016 compared to
$461.0 million for the six months ended June 30, 2015. The decrease in Proppant Solutions revenue was largely due to pricing declines and declines in volumes, particularly in resin-coated proppant volumes.
Revenues in the I&R Products segment decreased $1.7 million, or 3%, to $60.1 million for the six months ended June 30, 2016 compared to $61.8 million for
the six months ended June 30, 2015. Volumes remained relatively flat at 1.2 million tons in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. I&R Products segment revenue for the six months ended June
30, 2016 was impacted by seasonal sales growth in the sports and recreation market coupled with stronger volumes in key markets, particularly those aligned with construction-driven markets.
Segment Contribution Margin
Contribution margin
decreased $166.4 million to negative $40.9 million for the six months ended June 30, 2016 compared to $125.4 million for the six months ended June 30, 2015, primarily due to decreased volumes and selling prices, in addition to changes in product mix
in our Proppant Solutions segment. Contribution margin for the six months ended June 30, 2016 also included non-cash asset impairments of $57.3 million and inventory write-downs of $10.3 million. Contribution margin in the six months ended
June 30, 2015 included $14.4 million of asset impairment charges and restructuring charges.
Contribution margin in the Proppant Solutions segment
decreased $181.0 million to negative $61.8 million for the six months ended June 30, 2016 compared to $119.2 million for the six months ended June 30, 2015. The decrease was primarily driven by lower volumes, changes in product mix between raw
frac sand and coated proppant, decreased selling prices, and non-cash impairment charges of $57.3 million and inventory write-downs of $9.9 million in the six months ended June 30, 2016. Contribution margin for the six months ended June 30,
2015 included $2.4 million of asset impairments and restructuring charges.
Contribution margin in the I&R Products segment increased $14.7 million to
$20.9 million for the six months ended June 30, 2016 compared to $6.2 million for the six months ended June 30, 2015. The increase in contribution margin is primarily due to favorable selling prices, customer mix, and improved manufacturing
costs per ton. Contribution margin for the six months ended June 30, 2016 includes inventory write-downs of $0.4 million. Contribution margin for the six months ended June 30, 2015 included $12.1 million of asset impairments and
restructuring charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $5.5 million, or 13%, to $37.8 million for the six months ended June 30, 2016 compared to $43.2 million
for the six months ended June 30, 2015. SG&A attributable to our segments decreased $3.4 million and Corporate SG&A costs decreased $2.1 million primarily due to our continued cost reduction initiatives and reductions in
force. SG&A costs included $5.3 million in professional fees for cost reduction initiatives and extension of our Term B-1 Loans for the six months ended June 30, 2016.
29
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased $4.1 million to $36.6 million for the six months ended June 30, 2016 compared to $32.5 million in the six
months ended June 30, 2015. The increase in depreciation is due to more assets placed in service primarily related to the Wedron plant expansion.
Income (Loss) from Operations
Income (loss) from
operations decreased $203.7 million to a loss of $144.6 million for the six months ended June 30, 2016 compared to income of $59.2 million for the six months ended June 30, 2015. Earnings were largely impacted by declines in contribution
margins due to the lower volumes and decreased selling prices, in addition to the non-cash impairments, restructuring costs, inventory write-downs, and professional fees totaling $113 million.
Interest Expense
Interest expense increased $3.7
million, or 12%, to $33.9 million for the six months ended June 30, 2016 compared to $30.2 million for the six months ended June 30, 2015 primarily due to an increase in the notional amounts for interest rate swap agreements, entered into in 2013,
that became effective October 2015 and a reduction in capitalized interest due to the completion of the Wedron facility expansion.
Provision (Benefit)
for Income Taxes
Benefit from income taxes increased $62.7 million to a benefit of $78.8 million for the six months ended June 30, 2016 compared to a
benefit of $16.1 million for the six months ended June 30, 2015. The increase in the benefit primarily related to the decrease in income before income taxes and a loss carryback. The effective tax rate was 44.1% and negative 55.5% in the six months
ended June 30, 2016 and 2015, respectively. The increase in the effective tax rate is primarily attributable to the impact of depletion as well as a tax benefit from a loss carryback, applied against forecasted results for 2016 as compared to
forecasted results in 2015. The effective rate differs from the U.S. federal statutory rate due primarily to the benefit from a loss carryback and depletion.
Income before income taxes decreased $207.4 million to a loss of $178.4 million for the six months ended June 30, 2016 compared to income of $29.0 million for
the six months ended June 30, 2015. The provision (benefit) for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each
quarter, we update our estimate of the annual effective tax rate. If our estimated effective tax rate changes, we make a cumulative adjustment.
Net
Income (Loss) Attributable to Fairmount Santrol Holdings Inc.
Net income attributable to Fairmount Santrol Holdings Inc. decreased $144.6 million to a
loss of $99.7 million for the six months ended June 30, 2016 compared to income of $44.9 million for the six months ended June 30, 2015 due to the factors noted above totaling $71.2 million on an after-tax basis.
Adjusted EBITDA
Adjusted EBITDA decreased $123.4 million
to a loss of $11.7 million for the six months ended June 30, 2016 compared to income of $111.7 million for the six months ended June 30, 2015. Adjusted EBITDA excludes the impact of $96.2 million of non-cash stock compensation expense and
impairment charges. The decline in Adjusted EBITDA was largely due to declines in proppant pricing and volumes as noted above.
Liquidity and
Capital Resources
Overview
Our principal
liquidity requirements have been to service our debt, to meet our working capital and capital expenditure needs. We have met our liquidity and capital investment needs with funds generated through operations. We also have the ability to
raise additional capital, subject to market conditions, through the issuance of shares of our common stock, as was done subsequent to the quarter ended June 30, 2016.
30
As of June 30, 2016, we had outstanding term loan borrowings of $1.15 billion and cash on hand of $61.6
million. In addition, we have a Revolving Credit Facility that can provide additional liquidity, if needed. As of June 30, 2016 we had $31.3 million of availability under our revolving credit facility with $12.9 million committed to
letters of credit, leaving net availability at $18.3 million. On April 28, 2016, we amended our term loan facility. Under the terms of the amendment, we prepaid $69.6 million, plus accrued interest, to certain of our Term B-1 Loans
lenders. These lenders in turn agreed to extend the maturity date to July 15, 2018 for $69.6 million of Term B-1 Loans, which were originally due March 15, 2017.
After the extension of the maturity of certain of the Term B-1 Loans and the additional cash raised in the July 2016 stock offering, as of the date of this
report, we believe that our cash on-hand, cash generated through operations, and amounts available under the Revolving Credit Facility will be sufficient to meet cash obligations, such as working capital requirements, anticipated capital
expenditures, and scheduled debt payments, over the next twelve months. We may use cash at times to negotiate repurchases of a portion of our syndicated term debt to the extent permitted under our credit agreement. See Credit
Facilities below for more information.
A continued sustained downturn in our businesss key markets could significantly impact our
forecasts. While we believe that our operations forecasts are reasonable, the forecasts are based on assumptions and market conditions impacting the industry, primarily the proppant business, are uncertain. In the event the operating
results are significantly worse than projected or we are unsuccessful in generating sufficient liquidity, we may not be able to satisfy our debt obligations and would be necessary to restructure these obligations. In order to address this risk,
we have implemented reductions in operating costs, selling, general, and administrative costs, reduced planned capital spending, and working capital improvements over the past few years.
Working Capital
Working capital is the amount by
which current assets exceed current liabilities, is a measure of liquidity, and source of cash flow. Our working capital was $147.3 million at June 30, 2016 and $274.1 million at December 31, 2015.
Accounts Receivable
Accounts receivable decreased $9.6
million to $63.9 million at June 30, 2016 compared to $73.6 million at December 31, 2015. The decrease is primarily the result of higher sales in the first quarter of 2016 resulting in increased collections during the second quarter of 2016, in
addition to lower overall sales during the first six months of 2016 compared to the prior year. During the six months ended June 30, 2016 and 2015, our top ten proppant customers collectively represented 70% and 71% of our revenues,
respectively. During the same periods, sales in the aggregate to our top two customers, Halliburton Company (Halliburton) and FTS International Services, LLC (FTSI), collectively accounted for 44% and 43% of our
revenues, respectively.
Inventory
Inventory consists
of raw materials, work-in-process and finished goods. The cost of finished goods includes processing costs and transportation costs to terminals. The decrease in inventory to $56.7 million at June 30, 2016 compared to $70.5 million at
December 31, 2015 relates to efforts to decrease inventory levels to match projected decreasing demand, particularly for resin-coated products. The inventory balance at June 30, 2016 also incorporates the impact from $10.3 million of
inventory write-downs as a result of valuation adjustments.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets decreased $6.6 million to $6.8 million at June 30, 2016 from $13.4 million at December 31, 2015, primarily due to a decrease
in prepaid insurance and railcar leases.
31
Refundable Income Taxes
Refundable income taxes increased $15.5 million to $42.0 million at June 30, 2016 from $26.5 million at December 31, 2015, primarily due to the carryback of a
2016 estimated loss.
Accounts Payable
Accounts
payable decreased $6.1 million to $34.3 million at June 30, 2016 compared to $40.4 million at December 31, 2015. The decrease in accounts payable is due to timing for payments and reduced purchasing and freight activity driven by lower sales
volumes and reduced capital spending.
Accrued Expenses
The decrease in accrued expenses to $20.1 million at June 30, 2016 compared to $26.8 million at December 31, 2015 was primarily due a reduction in accrued
bonuses, pension expenses, and accrued real estate taxes.
Cash Flow Analysis
Net Cash Provided (Used in) by Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items, including depreciation, depletion, and amortization, asset impairments, and
the effect of changes in working capital.
Net cash used in operating activities was $13.2 million for the six months ended June 30, 2016 compared with
$173.6 million provided in the six months ended June 30, 2015. This $186.8 million variance was primarily the result of changes in operating income and working capital.
Net Cash Used in Investing Activities
Investing
activities consist primarily of capital expenditures for growth and maintenance. Capital expenditures generally are for expansions of production or terminal capacities. Maintenance capital expenditures generally are for asset replacement
and health, safety, and quality improvements.
Net cash used in investing activities was $18.2 million for the six months ended June 30, 2016 compared to
$61.3 million used for the six months ended June 30, 2015. The $43.1 million variance was primarily the result of a decrease in capital expenditures.
Capital expenditures, including stripping costs, of $21.9 million in the six months ended June 30, 2016 were primarily focused on expansion of our sand
processing capacities at our Wedron facility. Capital expenditures were $61.3 million in the six months ended June 30, 2015 and also primarily associated with the expansion of the Wedron facility.
Net Cash Used in Financing Activities
Financing
activities consist primarily of borrowings and repayments under our term loans and revolving credit facility.
Net cash used in financing activities was
$79.4 million in the six months ended June 30, 2016 compared to $13.5 million used in the six months ended June 30, 2015 primarily due to the prepayment of a portion of our Term B-1 Loans in exchange for an extension of the maturity date of a
portion of the Term B-1 Loans to September 2019.
32
Credit Facilities
As of June 30, 2016, there was $18.3 million available capacity remaining on the Revolving Credit Facility and $12.9 million committed to outstanding letters
of credit. As of June 30, 2016, we have not drawn on the Revolving Credit Facility.
In order to provide greater near-term liquidity in the event of
possible continued downturns in the oil and gas markets we serve, on April 28, 2016, we 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). Under the terms of the amendment, we committed to a prepayment of $69.6 million, plus accrued interest, to certain of our Term B-1 Loans lenders. These lenders in turn agreed to extend the maturity date to July
15, 2018 for $69.6 million of Term B-1 Loans, which were originally due March 15, 2017. This extension lowered the total March 2017 principal payments on our term debt to $16.7 million on the Term B-1 Loans. Our principal payments in 2017
now consist of (i) $16.7 million on the Term B-1 Loans; (ii) $9.3 million on the Term B-2 Loans and; (iii) $1.6 million on the Extended Term B-1 Loans for a total of $27.6 million. The applicable margin on the interest rate for the 2016
Extended Term Loans is now the same as the Extended Term B-1 and Term B-2 Loans, which is the LIBOR interest rate plus 3.5%. With the amendment, the 2016 Extended Term Loans now have a 1% LIBOR floor, which is the same as the Extended Term B-1
and Term B-2 Loans. See Note 4 in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further detail regarding the change in the maturities of the 2016 Extended Term Loans.
As of June 30, 2016, the Term B-1 Loans, Term B-2 Loans, Extended Term B-1 Loans, 2016 Extended Term Loans, and the Revolving Credit Facility had actual
interest rates of 4.2%, 4.5%, 4.5%, 4.5%, and 4.3%, respectively.
We have a $10 million 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 0.46% at June 30, 2016. The bond matures on September 1, 2027 and is collateralized by a letter of credit of
$10 million.
As of the date of this report, we believe that the amount available under the Revolving Credit Facility, cash generated from operations, and
our cash and cash equivalents on hand, in addition to the net proceeds from our July 2016 common stock offering, will provide adequate liquidity to allow us to meet our cash obligations over the next twelve months.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
As of June 30, 2016, we have
contractual obligations for long-term debt, capital leases, operating leases, purchase obligations, terminal operating costs, and other long-term liabilities. The purchase obligations include approximately 1,900 railcars with future delivery
dates in 2017 and 2018. We intend to satisfy these purchase obligations through leasing arrangements with third-party lessors or extend them into the future, although there is no assurance that these arrangements could be financed
satisfactorily in the present environment or extended. Substantially all of the operating lease obligations are for railcars.
In the six months ended
June 30, 2016, except for changes to the timing of long-term debt payments as disclosed within Footnote 4 of the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, there have been no material changes to our
contractual obligations as reported in our 2015 Annual Report on Form 10-K. The 2016 Extended Term Loans change the maturity dates of long-term debt obligations, but not the amount of the obligations.
33
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions,
environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount
of such future expenditures. We may also incur fines and penalties from time to time associated with noncompliance with such laws and regulations.
There have been no other significant changes to environmental liabilities or future reclamation costs since December 31, 2015.
We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure
to crystalline silica and our mining activity and how such matters may affect our business in the future under Regulation and Legislation in our 2015 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the reporting
periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The
results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results
may materially differ from these estimates. These critical accounting policies and estimates should be read in conjunction with our consolidated financial statements as filed in our 2015 Annual Report on Form 10-K.
Among the critical accounting policies and estimates are estimates of the fair values of our reporting units used in determining whether the amount of
recorded goodwill at our I&R Products segment reporting unit has been impaired. The determination of the fair value of the reporting unit is based in part on managements estimates of future cash flows from operations, multiples of
future cash flows as determined by market participants, and discount rates used in evaluating the net present value of these cash flows. The expected amount of and variations in future cash flows from operations is highly judgmental, and is
based on part of estimates from managements internal planning processes. The multiples and present values used in these calculations are estimates based on data that available from the public record, such as analyst reports.
Similarly, these future cash flows from operations are used in determining whether other long-lived tangible and intangible assets have a fair value in excess
of carrying value. In the second quarter of 2016, we recorded an impairment for long-lived assets at several Proppant Solutions locations since the recoverability of these locations could not be assured. The value of the supply agreement
in the FTSI agreement is based on estimates of discounted future cash flows from sales under the agreement. As of June 30, 2016, the fair value of the supply agreement exceeded its carrying value. Should FTSI undergo financial difficulties
or not comply with the terms of this agreement, the fair value could decline such that an impairment in carrying value exists.
There have been no
material changes in our accounting policies and estimates during the six months ended June 30, 2016.
Recent Accounting Pronouncements
New accounting guidance that has been recently issued but not yet adopted by us, is included in Note 1 to our unaudited condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q.
34