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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS | 12 Months Ended
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Dec. 31, 2012
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS Principles of Consolidation. The consolidated financial statements include the accounts of Axiall Corporation ("Axiall," the "Company," "we," "us" or "our") and its wholly-owned subsidiaries as of December 31, 2012. These consolidated financial statements do not include the accounts of Eagle Spinco Inc. ("Splitco") and its wholly-owned subsidiaries, which were merged with our historical business on January 28, 2013, as described in Note 2 to these consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations. We are a leading North American manufacturer and international marketer of chemicals and building products. Our chlorovinyls and aromatics chemical products are sold for further processing into a wide variety of end-use applications, including plastic pipe and pipe fittings, siding and window frames, bonding agents for wood products, high-quality plastics, acrylic sheeting and coatings for wire and cable. Our building products segment manufactures window and door profiles, mouldings, siding, pipe and pipe fittings and deck products. Our vinyl-based building products are marketed under the Royal Building Products, Celect, Zuri, Korflo, Overture, S4S and Exterior Portfolio brand names. We discontinued manufacturing and selling fence products in March 2012. Use of Estimates. Management is required to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes prepared in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Cash and Cash Equivalents. Marketable securities that are highly liquid with an original maturity of 90 days or less are considered to be the equivalent of cash for purposes of financial statement presentation. Accounts Receivable and Allowance for Doubtful Accounts. We grant credit to customers under credit terms that are customary in the industry and based on the creditworthiness of the customer and generally do not require collateral. We also provide allowances for cash discounts and doubtful accounts based on contract terms, historical collection experience, periodic evaluations of the aging of accounts receivable and specific collectability analysis. Individual accounts are written off once we have determined we have exhausted our collection efforts and the account is not collectable. Inventories. Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for the majority of inventory and the weighted average cost method for the remainder. Costs include raw materials, direct labor and manufacturing overhead. Market is based on current replacement cost for raw materials and supplies and on net realizable value for finished goods. At December 31, 2012 and 2011, we had approximately $19.4 million and $16.9 million, respectively, of inventory on consignment. Property, Plant and Equipment. Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred, and major renewals and improvements are capitalized. Interest expense attributable to funds used in financing the construction of major plant and equipment is capitalized. Interest cost capitalized during 2012, 2011 and 2010 was $0.3 million, $0.4 million and $0.5 million, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense totaled approximately $82.0 million, $91.4 million and $90.5 million, for the years ended December 31, 2012, 2011 and 2010, respectively. The estimated useful lives of our assets are as follows:
Buildings |  | 27–30 years
Land improvements |  | 15 years
Machinery and equipment |  | 2–15 years
Dies and moulds |  | 3–10 years
Office furniture and equipment |  | 2–10 years
Computer equipment and software |  | 3–10 years
Long-Lived Assets. Our long-lived assets consist of property, plant and equipment as well as, intangible assets with definite lives. Our long-lived intangible assets with definite lives include customer lists, trade names and technology that are identified during acquisitions. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Our long-lived assets are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted cash flows over the remaining life of the asset. If our estimated undiscounted cash flows do not exceed the carrying value and the carrying amount of the asset exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value. Assets to be disposed are recorded at the lower of the carrying amount or fair value, less costs to sell and are no longer depreciated. Indefinite-lived Intangible Assets. Our indefinite-lived intangible assets consist only of trade names. The carrying value of our indefinite-lived intangible assets is tested for impairment annually on October 1 and between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Indicators include, but are not limited to significant declines in the markets and industries that buy our products, changes in the estimated future cash flows of our reporting units, changes in capital markets and changes in our market capitalization. Impairment testing for indefinite-lived intangible assets, other than goodwill, consists of comparing the fair value of the assets to the carrying values. The fair values of our trade names are estimated based on the relief from royalty method under the income approach. This approach utilizes a discounted cash flow analysis. Goodwill. Goodwill is the excess of cost of an acquired entity over the amounts specifically assigned to assets acquired and liabilities assumed in purchase accounting for business combinations. The carrying value of our goodwill is tested for impairment annually on October 1 and between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Indicators include, but are not limited to significant declines in the markets and industries that buy our products, changes in the estimated future cash flows of our reporting units, changes in capital markets and changes in our market capitalization. Impairment testing for goodwill is a two-step test performed at a reporting unit level. In step one, we compare the carrying value of the reporting unit to its fair value. If the carrying value of the reporting unit's goodwill exceeds the fair value, we proceed to step two. In step two, we compare the carrying value of goodwill to its implied fair value. If the carrying value of the reporting unit including goodwill exceeds its implied fair value, we record an impairment loss equal to that excess. Our reporting units subject to such testing are window and door profiles, mouldings, siding, deck products and compounds (vinyl and additives). Other Assets. Other assets primarily consist of advances for long-term raw materials purchase contracts, our investment in joint ventures, assets held for sale and unamortized debt issuance costs. Advances for long-term raw materials purchase contracts are being amortized as additional raw materials costs over the life of the related contracts in proportion to raw materials delivery or related contract terms. Debt issuance costs are amortized to interest expense using the effective interest rate method over the term of the related debt instruments. Warranty Costs. We provide warranties for certain building products against defects in material, performance and workmanship. We accrue for warranty claims at the time of sale based on historical warranty claims experience. Our warranty liabilities are included in other accrued liabilities and other non-current liabilities in the Consolidated Balance Sheets. Activity in our warranty liabilities for the years ended December 31, 2012, 2011 and 2010 is as follows:
(In thousands) |  | 2012 |  | 2011 |  | 2010 |
--- | --- | --- | --- | --- | --- | --- | ---
January 1, |  | $ | 11,784 |  | $ | 6,560 |  | $ | 7,368 |
Estimated fair value of warranty liability assumed in acquisition |  |  | 1,084 |  |  | 5,629 |  |  | - |
Warranty provisions |  |  | 6,191 |  |  | 4,906 |  |  | 2,114 |
Foreign currency translation gain (loss) |  |  | 121 |  |  | (119 | ) |  | 334 |
Warranty claims paid |  |  | (5,535 | ) |  | (5,192 | ) |  | (3,256 | )
December 31, |  | $ | 13,645 |  | $ | 11,784 |  | $ | 6,560 |
Self-Insurance Accruals. We are self-insured up to certain limits for costs associated with workers' compensation and employee group medical coverage. Liabilities for insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of estimates of incurred, but not reported claims. These accruals are included in other current liabilities in the accompanying Consolidated Balance Sheets. We also use information provided by independent consultants to assist in the determination of estimated accruals. In estimating these costs, we consider historical loss experience and make judgments about the expected levels of costs per claim. Loss Contingencies. In the normal course of business, we are involved in legal proceedings and other matters that may result in loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. Derivative Financial Instruments. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. We engage in activities that expose us to market risks, including the effects of changes in interest rates, foreign currency and changes in commodity prices. Financial exposures are managed as an integral part of our risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, foreign currency and commodity markets may have on operating results. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. We formally document all hedging instruments and hedging transactions, as well as our risk management objective and strategy for undertaking hedged transactions. This process includes linking all derivatives that are designated as fair value and cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions. We also formally assess, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged transactions. When it is determined that a derivative is not highly effective or the derivative expires or is sold, terminated, exercised or discontinued because it is unlikely that a forecasted transaction will occur, we discontinue the use of hedge accounting for that specific hedge instrument. Pension Plans and Other Postretirement Benefit Plans. We have defined contribution pension plans covering substantially all of our employees. Company matching contributions to our defined contribution plans were suspended in July 2009 and reinstated in July 2010. In October 2012, the company implemented an additional matching contribution to its U.S. and Canadian retirement savings plans. In addition, we had a Canadian defined benefit plan which was fully funded in 2011 to allow benefits to be settled. The Company will make no further contributions to this plan. Asset Retirement Obligation. We account for asset retirement obligations based on the fair value of a liability for an asset retirement obligation and recognize it in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. When a liability is initially recorded, we capitalize the cost by increasing the carrying value of the related long-lived asset. The liability is accreted to its future value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, a gain or loss is recorded. We had $2.8 million and $2.6 million of asset retirement obligations recorded in other non-current liabilities in the Consolidated Balance Sheets at December 31, 2012 and 2011, respectively. Stock-Based Compensation. Share-based payments to employees, including grants of employee stock options, restricted stock, restricted stock units and non-employee director deferred shares and restricted stock units are recognized in the financial statements based on their fair values at the grant date. The Company recognizes the cost of all share-based awards on a straight-line basis over the vesting period of the award. We eliminate unearned compensation (contra-equity account) related to earlier awards against the appropriate equity accounts, which is additional paid-in capital in our circumstance. Tax benefits relating to excess share-based compensation deductions are presented in the Consolidated Statements of Cash Flows as a financing activity cash inflow. Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss includes foreign currency translation of assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature, unrealized gains and losses on derivative financial instruments designated as cash flow hedges and adjustments to pension liabilities. Amounts recorded in accumulated other comprehensive loss, net of tax, on the Consolidated Statements of Stockholders' Equity as of December 31, 2012 and 2011 are as follows:
(In thousands) |  | Accrued Pension Benefit Liability |  | Foreign Currency Items |  | Derivative Cash Flow Hedges |  | Accumulated Other Comprehensive Loss |
--- | --- | --- | --- | --- | --- | --- | --- | --- | ---
Balance at December 31, 2010 |  | $ | (27,641 | ) | $ | 27,167 |  | $ | 264 |  | $ | (210 | )
Net current period change |  |  | (11,682 | ) |  | (4,574 | ) |  | (453 | ) |  | (16,709 | )
Reclassification adjustment for realized loss (gain) included in net income |  |  | (968 | ) |  | - |  |  | (264 | ) |  | (1,232 | )
Balance at December 31, 2011 |  |  | (40,291 | ) |  | 22,593 |  |  | (453 | ) |  | (18,151 | )
Net current period change |  |  | (9,314 | ) |  | 4,084 |  |  | 4 |  |  | (5,226 | )
Reclassification adjustment for realized loss (gain) included in net income |  |  | 1,054 |  |  | - |  |  | 453 |  |  | 1,507 |
Balance at December 31, 2012 |  | $ | (48,551 | ) | $ | 26,677 |  | $ | 4 |  | $ | (21,870 | )
Other comprehensive income (loss) is derived from adjustments to reflect the unrealized gain (loss) on derivatives, change in pension liability adjustment and change in foreign currency translation adjustment. The components of other comprehensive income (loss) are as follows:
(In thousands) |  | Pre-Tax Amount |  | Tax Expense (Benefit) |  | After-Tax Amount |
--- | --- | --- | --- | --- | --- | --- | ---
Year ended December 31, 2010 |  |  |  |  |  |  |  |  |  |
Unrealized gain on derivatives |  | $ | 168 |  | $ | 64 |  | $ | 104 |
Change in pension liability adjustment |  |  | (5,807 | ) |  | (1,543 | ) |  | (4,264 | )
Change in foreign currency translation adjustment |  |  | 17,036 |  |  | 8,772 |  |  | 8,264 |
Other comprehensive income |  | $ | 11,397 |  | $ | 7,293 |  | $ | 4,104 |
Year ended December 31, 2011 |  |  |  |  |  |  |  |  |  |
Unrealized loss on derivatives |  | $ | (1,146 | ) | $ | (429 | ) | $ | (717 | )
Change in pension liability adjustment |  |  | (20,629 | ) |  | (7,979 | ) |  | (12,650 | )
Change in foreign currency translation adjustment |  |  | (8,125 | ) |  | (3,551 | ) |  | (4,574 | )
Other comprehensive loss |  | $ | (29,900 | ) | $ | (11,959 | ) | $ | (17,941 | )
Year ended December 31, 2012 |  |  |  |  |  |  |  |  |  |
Unrealized gain on derivatives |  | $ | 727 |  | $ | 270 |  | $ | 457 |
Change in pension liability adjustment |  |  | (13,361 | ) |  | (5,101 | ) |  | (8,260 | )
Change in foreign currency translation adjustment |  |  | 7,999 |  |  | 3,915 |  |  | 4,084 |
Other comprehensive loss |  | $ | (4,635 | ) | $ | (916 | ) | $ | (3,719 | )
Foreign Currency Translation and Transactions. Our subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the month-end exchange rates in effect as of the balance sheet date and the average exchange rate for revenues and expenses for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within accumulated other comprehensive loss, net of tax where applicable. Gains or losses resulting from transactions denominated in foreign currencies are reported in the same financial statement captions as the underlying transactions in the Consolidated Statements of Income. We recorded related gains of $0.4 million in both the years ended 2012 and 2011 and $2.7 million in the year ended 2010 in operating income in the Consolidated Statements of Income. The year-over-year fluctuation in transaction related gain is due to both the volume of foreign currency denominated transactions and the volatility in the underlying exchange rates. Revenue Recognition. We recognize revenue when the following four basic criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred. We recognize revenue as products are shipped based on free on board ("FOB") terms when title passes to customers, and the customer takes ownership and assumes risk of loss. Sales Incentives. We offer sales incentives, primarily in the form of volume rebates, slotting fees and advertising allowances to our customers, which are classified as a reduction of net sales and are calculated based on contractual terms of customer contracts. We accrue for these sales incentives based on contract terms and historical experience. Shipping Costs. All amounts billed to a customer in a sale transaction related to shipping are classified as revenue. Shipping fees billed to customers and included in sales and cost of goods sold were $81.7 million in 2012, $74.3 million in 2011 and $74.4 million in 2010. Advertising Costs. Advertising costs and promotion expenses generally relate to our vinyl-based building products marketed under the Royal Building Products, Celect, Zuri, Korflo, Overture, S4S and Exterior Portfolio brand names and are charged to earnings during the period in which they are incurred. Advertising and promotion expenses are included in selling, general and administrative expenses and were $12.1 million, $10.8 million and $6.4 million, in 2012, 2011 and 2010, respectively. Environmental Expenditures. Environmental expenditures related to current operations or future revenues are expensed or capitalized consistent with our capitalization policy. Expenditures that relate to an existing condition caused by past operations and do not contribute to future revenues are expensed in the period incurred. Liabilities are recognized when material environmental assessments or cleanups are probable and the costs can be reasonably estimated. Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of deferred tax assets by assessing whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income and tax-planning strategies available to us in making this assessment. If it is not more likely than not, that we will realize a deferred tax asset, we record a valuation allowance against such asset. We use a similar evaluation for determining when to release previously recorded valuation allowances. We recognize tax benefits for uncertain tax positions when it is more likely than not, based upon the technical merits, that the position will be sustained upon examination. Earnings Per Share. We calculate earnings per share using the two-class method. The two-class method requires that share-based awards with non-forfeitable dividends be classified as participating securities. In calculating basic earnings per share, this method requires net income to be reduced by the amount of dividends declared in the period for each participating security and by the contractual amount of dividends or other participation payments that are paid or accumulated for the period. Undistributed earnings for the period are allocated to participating securities based on the contractual participation rights of the security to share in those current earnings assuming all earnings for the period are distributed. Recipients of certain of our restricted stock unit awards have contractual participation rights that are equivalent to those of common stockholders. Therefore, we allocate undistributed earnings to these restricted stock unit participating securities and common stock based on their respective participation percentage. The two-class method also requires the denominator to include the weighted average number of shares of restricted stock units participating securities when calculating basic earnings per share. For the years ended December 31, 2012, 2011 and 2010, there were 0.2 million, 0.7 million and 1.1 million weighted average restricted stock units participating securities, respectively, included in the denominator. Diluted earnings per share also include the additional share equivalents from the assumed conversion of stock based awards including options and certain restricted stock units. Conversion of stock options and certain restricted stock units are calculated using the treasury stock method, subject to anti-dilution provisions. In computing diluted earnings per share for the years ended December 31, 2012, 2011 and 2010, common stock equivalents of 0.2 million shares, for all these periods, were not included due to their anti-dilutive effect. Computations of basic and diluted earnings per share are presented in the following table: Basic and Diluted Earnings Per Share—Two-class Method
|  | Years Ended December 31, |
--- | --- | --- | ---
(In thousands, except per share data) |  | 2012 |  | 2011 |  | 2010 |
Basic earnings per share |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 120,561 |  | $ | 57,757 |  | $ | 42,678 |
Deduct: Net income attributable to participating securities |  |  | 721 |  |  | 1,216 |  |  | 1,294 |
Net income attributable to common stockholders |  | $ | 119,840 |  | $ | 56,541 |  | $ | 41,384 |
Weighted average common shares—Basic |  |  | 34,502 |  |  | 34,086 |  |  | 33,825 |
Total basic earnings per common share |  | $ | 3.47 |  | $ | 1.66 |  | $ | 1.22 |
Diluted earnings per share |  |  |  |  |  |  |  |  |  |
Net income attributable to common stockholders |  | $ | 119,840 |  | $ | 56,541 |  | $ | 41,384 |
Weighted average common shares—Basic |  |  | 34,502 |  |  | 34,086 |  |  | 33,825 |
Plus: Dilutive effect of stock options and awards |  |  | 272 |  |  | 36 |  |  | - |
Weighted average common shares—Diluted |  |  | 34,774 |  |  | 34,122 |  |  | 33,825 |
Total diluted earnings per share |  | $ | 3.45 |  | $ | 1.66 |  | $ | 1.22 |

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Principles Board Opinion (APB) -Number 22 -Paragraph 8 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Name Statement of Position (SOP) -Publisher AICPA -Number 94-6 -Paragraph 10 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Name FASB Interpretation (FIN) -Publisher FASB -Number 46R -Paragraph 4, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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