e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended September 30, 2005
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-31921
Compass Minerals International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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36-3972986
(I.R.S. Employer
Identification Number) |
9900 West 109th Street
Suite 600
Overland Park, KS 66210
(913) 344-9200
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes: R No:
£
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes: R No: £
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes: £ No: R
The number of shares outstanding of the registrant’s common stock, $0.01 par value per
share, at October 27, 2005 was 31,717,434 shares.
COMPASS MINERALS INTERNATIONAL, INC.
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
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(Unaudited) |
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September 30, |
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December 31, |
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2005 |
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2004 |
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ASSETS
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Current assets: |
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|
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Cash and cash equivalents |
|
$ |
23.8 |
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|
$ |
9.7 |
|
Receivables, less allowance for doubtful accounts of
$2.1 million in 2005 and $2.3 million in 2004 |
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|
74.7 |
|
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|
143.0 |
|
Inventories |
|
|
119.5 |
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|
|
96.3 |
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Deferred income taxes, net |
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|
13.7 |
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|
13.7 |
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Other |
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|
11.1 |
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3.3 |
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Total current assets |
|
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242.8 |
|
|
|
266.0 |
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Property, plant and equipment, net |
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388.3 |
|
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402.9 |
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Intangible assets, net |
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22.8 |
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|
23.6 |
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Other |
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32.1 |
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|
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31.4 |
|
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Total assets |
|
$ |
686.0 |
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|
$ |
723.9 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current liabilities: |
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Current portion of long-term debt |
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$ |
0.1 |
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$ |
0.4 |
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Accounts payable |
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59.7 |
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|
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79.4 |
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Accrued expenses |
|
|
11.9 |
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|
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14.8 |
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Accrued salaries and wages |
|
|
16.1 |
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|
|
19.3 |
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Income taxes payable |
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|
1.4 |
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|
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8.6 |
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Accrued interest |
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|
4.3 |
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12.4 |
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Total current liabilities |
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93.5 |
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|
|
134.9 |
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Long-term debt, net of current portion |
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|
590.0 |
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|
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582.7 |
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Deferred income taxes, net |
|
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44.2 |
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|
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55.1 |
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Other noncurrent liabilities |
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41.3 |
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|
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39.6 |
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Commitments and contingencies (Note 9)
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Stockholders’ equity (deficit): |
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Common Stock: |
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$0.01 par value, 200,000,000 authorized shares;
35,367,264 issued shares |
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0.4 |
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0.4 |
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Additional paid-in capital |
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0.5 |
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0.2 |
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Treasury
stock, at cost — 3,700,337 shares at September 30, 2005 and
4,470,029 shares at December 31, 2004 |
|
|
(7.0 |
) |
|
|
(8.5 |
) |
Accumulated deficit |
|
|
(121.2 |
) |
|
|
(118.8 |
) |
Accumulated other comprehensive income |
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44.3 |
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38.3 |
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Total stockholders’ equity (deficit) |
|
|
(83.0 |
) |
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(88.4 |
) |
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Total liabilities and stockholders’ equity (deficit) |
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$ |
686.0 |
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$ |
723.9 |
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The accompanying notes are an integral part of the consolidated financial statements.
2
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Sales |
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$ |
120.3 |
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$ |
111.7 |
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$ |
498.1 |
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$ |
459.1 |
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Cost of sales — shipping and handling |
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33.5 |
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27.8 |
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147.6 |
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124.9 |
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Cost of sales — products |
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60.9 |
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58.0 |
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229.8 |
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216.2 |
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Gross profit |
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25.9 |
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25.9 |
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120.7 |
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118.0 |
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Selling, general and administrative expenses |
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14.1 |
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13.3 |
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43.2 |
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40.3 |
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Other charges |
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— |
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0.6 |
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— |
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1.0 |
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Operating earnings |
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11.8 |
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12.0 |
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77.5 |
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76.7 |
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Other (income) and expense: |
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Interest expense |
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16.0 |
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15.4 |
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47.6 |
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45.9 |
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Other, net |
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3.4 |
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3.3 |
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4.4 |
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4.0 |
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Earnings (loss) before income taxes |
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(7.6 |
) |
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(6.7 |
) |
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25.5 |
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26.8 |
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Income tax expense (benefit) |
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(3.2 |
) |
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(12.2 |
) |
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8.0 |
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(3.1 |
) |
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Net earnings (loss) |
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$ |
(4.4 |
) |
|
$ |
5.5 |
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$ |
17.5 |
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$ |
29.9 |
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Net earnings (loss) per share, basic |
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$ |
(0.14 |
) |
|
$ |
0.18 |
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$ |
0.56 |
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$ |
0.98 |
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Net earnings (loss) per share, diluted |
|
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(0.14 |
) |
|
|
0.17 |
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|
|
0.55 |
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|
0.93 |
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Cash dividends per share |
|
|
0.275 |
|
|
|
0.250 |
|
|
|
0.825 |
|
|
|
0.6875 |
|
Basic weighted-average shares outstanding |
|
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31,593,768 |
|
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30,785,285 |
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31,388,460 |
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30,514,439 |
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Diluted weighted-average shares outstanding |
|
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31,593,768 |
|
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32,273,436 |
|
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32,006,095 |
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32,224,950 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
COMPASS
MINERALS INTERNATIONAL, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the nine months ended September 30, 2005
(Unaudited, in millions)
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Accumulated |
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Additional |
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Other |
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Common |
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Paid In |
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Treasury |
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Accumulated |
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Comprehensive |
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Stock |
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Capital |
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Stock |
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Deficit |
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Income |
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Total |
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Balance, December 31, 2004 |
|
$ |
0.4 |
|
|
$ |
0.2 |
|
|
$ |
(8.5 |
) |
|
$ |
(118.8 |
) |
|
$ |
38.3 |
|
|
$ |
(88.4 |
) |
Dividends on common stock |
|
|
|
|
|
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(6.0 |
) |
|
|
|
|
|
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(19.9 |
) |
|
|
|
|
|
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(25.9 |
) |
Stock options exercised |
|
|
|
|
|
|
5.8 |
|
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1.5 |
|
|
|
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|
|
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|
7.3 |
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Stock-based compensation |
|
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|
|
0.5 |
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0.5 |
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Comprehensive income: |
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Net earnings |
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|
|
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17.5 |
|
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|
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17.5 |
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Unrealized gain on cash flow hedges |
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4.7 |
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4.7 |
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Cumulative translation adjustments |
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1.3 |
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1.3 |
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Total comprehensive income |
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23.5 |
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Balance, September 30, 2005 |
|
$ |
0.4 |
|
|
$ |
0.5 |
|
|
$ |
(7.0 |
) |
|
$ |
(121.2 |
) |
|
$ |
44.3 |
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|
$ |
(83.0 |
) |
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The accompanying notes are an integral part of the consolidated financial statements.
4
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net earnings |
|
$ |
17.5 |
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$ |
29.9 |
|
Adjustments to reconcile net earnings to net cash flows
provided by operating activities: |
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Depreciation, depletion and amortization |
|
|
32.2 |
|
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|
30.4 |
|
Finance fee amortization |
|
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1.7 |
|
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|
1.8 |
|
Accreted interest |
|
|
19.4 |
|
|
|
17.6 |
|
Deferred income taxes |
|
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(9.7 |
) |
|
|
(13.6 |
) |
Tax benefit from exercise of stock options |
|
|
6.1 |
|
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|
3.6 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
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Receivables |
|
|
67.3 |
|
|
|
54.7 |
|
Inventories |
|
|
(22.8 |
) |
|
|
(15.5 |
) |
Other assets |
|
|
0.6 |
|
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|
0.6 |
|
Accounts payable and accrued expenses |
|
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(44.2 |
) |
|
|
(22.1 |
) |
Other noncurrent liabilities |
|
|
1.8 |
|
|
|
(1.2 |
) |
Other, net |
|
|
0.2 |
|
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|
0.6 |
|
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Net cash provided by operating activities |
|
|
70.1 |
|
|
|
86.8 |
|
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Cash flows from investing activities: |
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Capital expenditures |
|
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(19.1 |
) |
|
|
(16.4 |
) |
Other, net |
|
|
(3.5 |
) |
|
|
0.3 |
|
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Net cash used in investing activities |
|
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(22.6 |
) |
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(16.1 |
) |
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Cash flows from financing activities: |
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Principal payments on long-term debt |
|
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(30.2 |
) |
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|
(30.6 |
) |
Revolver activity |
|
|
18.0 |
|
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|
(14.0 |
) |
Dividends paid |
|
|
(25.9 |
) |
|
|
(21.0 |
) |
Proceeds received from stock option exercises |
|
|
1.2 |
|
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|
1.2 |
|
Other, net |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
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Net cash used in financing activities |
|
|
(37.0 |
) |
|
|
(64.5 |
) |
| |
Effect of exchange rate changes on cash and cash equivalents |
|
|
3.6 |
|
|
|
(0.5 |
) |
| |
Net change in cash and cash equivalents |
|
|
14.1 |
|
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|
5.7 |
|
Cash and cash equivalents, beginning of the year |
|
|
9.7 |
|
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|
2.6 |
|
| |
Cash and cash equivalents, end of period |
|
$ |
23.8 |
|
|
$ |
8.3 |
|
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Supplemental cash flow information: |
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Interest paid |
|
$ |
34.3 |
|
|
$ |
34.9 |
|
Income taxes paid, net of refunds |
|
|
19.4 |
|
|
|
6.7 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
COMPASS MINERALS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization, Formation and Basis of Presentation:
Compass Minerals International, Inc. (“CMI” or the “Company”), is a producer and marketer of
inorganic mineral products with manufacturing sites in North America and Europe. Its principal
products are salt and sulfate of potash (“SOP”). CMI serves a variety of markets, including highway
deicing, agriculture, food processing, chemical processing and water conditioning. The consolidated
financial statements include the accounts of CMI and its wholly owned subsidiary, Compass Minerals
Group, Inc. (“CMG”), and the consolidated results of CMG’s wholly owned subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting of normal recurring
accruals, considered necessary for a fair presentation, have been included.
The balance sheet at December 31, 2004 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December 31, 2004 included
in CMI’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2005.
The Company experiences a substantial amount of seasonality in salt sales. The result of this
seasonality is that sales and operating income are generally higher in the first and fourth
quarters and lower during the second and third quarters of each year. In particular, sales of
highway and consumer deicing salt products are seasonal as they vary based on the severity of the
winter conditions in areas where the product is used. Following industry practice in North America,
we stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet
the estimated requirements for the winter season. Due to the seasonal nature of the highway deicing
product lines, operating results for the three-month and nine-month periods ended September 30,
2005 are not necessarily indicative of the results that may be expected for the year ended December
31, 2005.
2. Recent Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (“SFAS”) No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4,”
that is effective for the Company beginning in the first quarter of 2006. This Statement amends
the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “...under some
circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges ... .” This
Statement requires that those items be recognized as current-period charges regardless of whether
they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The adoption of SFAS No. 151 is not expected to have a material impact on
the Company’s financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (the “AJCA”),” allowing companies additional time to evaluate the effect of the AJCA on plans
for reinvestment or repatriation of foreign earnings. The Company is in the process of evaluating
the effects of the repatriation provision and expects to complete this evaluation before the end of
its tax year (February 2006).
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS 123(R) is a revision
of SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedes Accounting Principles
Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Among other items SFAS
123(R) eliminates the use of APB 25 and the intrinsic value method of accounting, and requires
companies to follow guidance previously set forth in SFAS 123, and recognize the cost of employee
services received in exchange for awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. The Company began recognizing compensation expense
for the fair value of stock-based compensation in its financial statements in accordance with SFAS
123 in 2003. The effective date of SFAS 123(R) is the first annual reporting period beginning after
June 15, 2005, which is the first quarter of 2006 for calendar year companies. The Company will
adopt SFAS 123(R) in the first quarter of 2006. The adoption of SFAS 123(R) is not expected to have
a material impact on the Company’s financial position, results of operations or cash flows.
In March 2005, the SEC staff issued additional guidance on SFAS 123(R) in the form of Staff
Accounting Bulletin (“SAB”) No. 107. SAB 107 was issued to assist preparers by simplifying some of
the implementation challenges of FAS 123(R) while enhancing the information that investors receive.
SAB 107 creates a framework that is premised on two themes: (a)
6
considerable judgment will be required by preparers to successfully implement FAS 123(R),
specifically when valuing employee stock options; and (b) reasonable individuals, acting in good
faith, may conclude differently on the fair value of employee stock options. Key topics covered by
SAB 107 include: (a) valuation models — SAB 107 reinforces the flexibility allowed by FAS 123(R) to
choose an option-pricing model that meets the standard’s fair value measurement objective; (b)
expected volatility — the SAB provides guidance on when it would be appropriate to rely exclusively
on either historical or implied volatility in estimating expected volatility; and (c) expected term
— the new guidance includes examples and some simplified approaches to determining the expected
term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction
with its adoption of SFAS 123(R).
In March 2005, FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset
Retirement Obligations.” FIN 47 clarifies that the term “Conditional Asset Retirement Obligation”
as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation,” refers to a legal
obligation to perform an asset retirement activity in which the timing and/or method of settlement
are conditional on a future event that may or may not be within the control of the entity.
Accordingly, an entity is required to recognize a liability for the fair value of a Conditional
Asset Retirement Obligation if the fair value of the liability can be reasonably estimated. FIN 47
is effective no later than the end of fiscal years ending after December 15, 2005. Management does
not believe the adoption of FIN 47 will have a material affect on the Company’s financial position,
results of operations or cash flows.
3. Inventories:
Inventories consist of the following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
| |
|
2005 |
|
2004 |
| |
Finished goods |
|
$ |
105.2 |
|
|
$ |
83.4 |
|
Raw materials and supplies |
|
|
14.3 |
|
|
|
12.9 |
|
| |
Total inventories |
|
$ |
119.5 |
|
|
$ |
96.3 |
|
| |
4. Property, Plant and Equipment, Net:
Property, plant and equipment, net consists of the following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
| |
|
2005 |
|
2004 |
| |
Land and buildings |
|
$ |
144.0 |
|
|
$ |
143.6 |
|
Machinery and equipment |
|
|
436.6 |
|
|
|
436.8 |
|
Furniture and fixtures |
|
|
11.1 |
|
|
|
11.5 |
|
Mineral interests |
|
|
178.6 |
|
|
|
180.1 |
|
Construction in progress |
|
|
19.4 |
|
|
|
5.0 |
|
| |
|
|
|
789.7 |
|
|
|
777.0 |
|
Less accumulated depreciation and depletion |
|
|
(401.4 |
) |
|
|
(374.1 |
) |
| |
Net property, plant and equipment |
|
$ |
388.3 |
|
|
$ |
402.9 |
|
| |
5. Intangible Assets, Net:
Intangible assets consist of rights to produce SOP and a customer list acquired in connection with
the purchase of an SOP marketing business. The accumulated amortization of intangible assets at
September 30, 2005 and December 31, 2004 was $2.0 million and $1.2 million, respectively.
Amortization expense during the three months ended September 30, 2005 and 2004 was $0.3 million and
$0.2 million, respectively, and during the nine months ended September 30, 2005 and 2004 was $0.8
million and $0.8 million, respectively. Amortization expense for fiscal 2005 through fiscal 2009 is
estimated to be approximately $1.1 million, annually.
6. Income Taxes:
Income tax benefit for the three months ended September 30, 2005 and 2004 was $3.2 million and
$12.2 million, respectively. Income tax expense for the nine months ended September 30, 2005 was
$8.0 million compared to a benefit of $3.1 million during the 2004 nine-month period. In addition
to the specific tax items discussed below, the Company’s income tax provision differs from the U.S.
statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes
(net of
7
federal tax benefit), foreign income tax rate differentials, foreign mining income taxes,
non-deductible interest expense, and changes in the expected utilization of previously reserved net
operating loss carryforwards (“NOLs”).
During the second quarter of 2005, the Internal Revenue Service and Canada Revenue Agency developed
a framework to minimize the inconsistent treatment of tax matters involving the two taxing
authorities. The event resulted in a change in
certain tax estimates by management. Accordingly, in the second quarter of 2005, the Company
reversed previously recorded income tax reserves of $5.9 million, partially offset by other income
tax adjustments of $1.1 million, ($0.15 per basic and diluted common share) related to matters
previously determined to have an uncertain outcome.
In the first quarter of 2005, the Company repatriated funds from its U.K. subsidiary, through a
one-time repayment of a portion of a pound-sterling-denominated loan to a U.S. subsidiary. The
repayment resulted in a foreign exchange gain for tax purposes only, which is taxable in the U.S.
and for which the Company recorded a $5.4 million charge to income tax expense. The previously
unrealized foreign exchange gain was recorded as a component of accumulated other comprehensive
income in stockholders’ equity in previous periods and does not appear in the consolidated
statements of operations.
During the third quarter of 2004, management determined a valuation allowance against deferred tax
assets, in the amount of $11.1 million, was no longer necessary based on an assessment of potential
sources of future taxable income other than future reversals of existing taxable temporary
differences. As a result, the Company reduced its valuation allowance resulting in a decrease in
income tax expense for the three and nine month periods ended September 30, 2004.
At September 30, 2005, we had approximately $65.7 million of NOLs that expire between 2007 and
2022. The Company records valuation allowances for portions of its deferred tax assets relating to
NOLs that it does not believe will, more likely than not, be realized. As of September 30, 2005 and
December 31, 2004, the Company’s valuation allowance was $7.1 million and $12.6 million,
respectively. In the future, if the Company determines, based on the existence of sufficient
evidence, that it should realize more or less of its deferred tax assets, an adjustment to any
existing valuation allowance will be made in the period such determination is made.
7. Long-term Debt:
Long-term debt consists of the following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
| |
|
2005 |
|
2004 |
| |
Senior Subordinated Notes |
|
$ |
325.0 |
|
|
$ |
325.0 |
|
Senior Discount Notes |
|
|
94.2 |
|
|
|
85.8 |
|
Senior Subordinated Discount Notes |
|
|
131.9 |
|
|
|
120.9 |
|
Term Loan |
|
|
7.5 |
|
|
|
37.7 |
|
Revolving Credit Facility |
|
|
29.0 |
|
|
|
11.0 |
|
| |
|
|
|
587.6 |
|
|
|
580.4 |
|
Premium on Senior Subordinated Notes, net |
|
|
2.5 |
|
|
|
2.7 |
|
Less current portion |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
| |
Long-term debt, net of current portion |
|
$ |
590.0 |
|
|
$ |
582.7 |
|
| |
8. Pension Plans:
The components of net periodic benefit cost for the three-month and nine-month periods ended
September 30, 2005 and 2004 are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
September 30, |
|
September 30, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Service cost for benefits earned during the year |
|
$ |
0.4 |
|
|
$ |
0.3 |
|
|
$ |
1.1 |
|
|
$ |
0.9 |
|
Interest cost on projected benefit obligation |
|
|
1.0 |
|
|
|
0.8 |
|
|
|
2.8 |
|
|
|
2.4 |
|
Return on plan assets |
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
|
(2.7 |
) |
|
|
(2.1 |
) |
Net amortization and deferral |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.5 |
|
| |
Net pension expense |
|
$ |
0.6 |
|
|
$ |
0.6 |
|
|
$ |
1.7 |
|
|
$ |
1.7 |
|
| |
Employer contributions during the nine months ended September 30, 2005 were approximately $1.4
million.
8
9. Commitments and Contingencies:
The Company is involved in legal and administrative proceedings and claims of various types from
normal Company activities.
The Company has become aware of an aboriginal land claim filed by The Chippewas of Nawash and The
Chippewas of Saugeen (the “Chippewas”) in the Ontario Superior Court against the Attorney General
of Canada and Her Majesty The Queen In Right of Ontario. The Chippewas claim that a large part of
the land under Lake Huron was never conveyed by treaty and therefore belongs to the Chippewas. The
land claimed includes land in which the Company’s Goderich mine operates and
has mining rights granted to it by the government of Ontario. The Company is not a party to this
court action. Similar claims are pending with respect to other parts of the Great Lakes by other
aboriginal claimants. The Company has been informed by the Ministry of the Attorney General of
Ontario that “Canada takes the position that the common law does not recognize aboriginal title to
the Great Lakes and its connecting waterways.”
The Wisconsin Department of Agriculture, Trade and Consumer Protection (“DATCP”) reportedly has
information indicating that agricultural chemicals are present in the groundwater in the vicinity
of the Kenosha, Wisconsin plant. DATCP has directed the Company to conduct an investigation into
the possible presence of agricultural chemicals in soil and groundwater at the Kenosha plant. The
Company has developed a plan which has been approved by DATCP to investigate soils and groundwater
at the Kenosha site. Depending on the results of the investigation, remedial efforts may be
necessary. Although little is currently known about the possible source of such contamination, or
who should be responsible for it, the Company expects DATCP will look to the Company to
undertake those efforts. If required, the Company intends to conduct all phases of the
investigation and any required remediation work under the Wisconsin Agricultural Chemical Cleanup
Program, which will provide for reimbursement of some of the costs. None of the identified
contaminants have been used in association with the Company’s site operations. The Company expects
to seek participation by, or cost reimbursement from, other parties responsible for the presence of
any agricultural chemicals found in soils at this site.
The Company does not believe that these actions will result in a material adverse financial effect
on the Company. Furthermore, while any litigation contains an element of uncertainty, management
presently believes that the outcome of each such proceeding or claim which is pending or known to
be threatened, or all of them combined, will not have a material adverse effect on the Company’s
results of operations, cash flows or financial position.
10. Operating Segments:
Segment information is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2005 |
| |
|
Salt |
|
Potash |
|
Other (a) |
|
Total |
| |
Sales to external customers |
|
$ |
98.2 |
|
|
$ |
22.1 |
|
|
$ |
— |
|
|
$ |
120.3 |
|
Intersegment sales |
|
|
— |
|
|
|
2.3 |
|
|
|
(2.3 |
) |
|
|
— |
|
Cost of sales — shipping and handling costs |
|
|
30.6 |
|
|
|
2.9 |
|
|
|
— |
|
|
|
33.5 |
|
Operating earnings (loss) |
|
|
11.6 |
|
|
|
6.4 |
|
|
|
(6.2 |
) |
|
|
11.8 |
|
Depreciation, depletion and amortization |
|
|
8.7 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
10.7 |
|
Total assets |
|
|
510.1 |
|
|
|
133.1 |
|
|
|
42.8 |
|
|
|
686.0 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, 2004 |
| |
|
Salt |
|
Potash |
|
Other (a) |
|
Total |
| |
Sales to external customers |
|
$ |
94.4 |
|
|
$ |
17.3 |
|
|
$ |
— |
|
|
$ |
111.7 |
|
Intersegment sales |
|
|
— |
|
|
|
2.6 |
|
|
|
(2.6 |
) |
|
|
— |
|
Cost of sales — shipping and handling costs |
|
|
25.2 |
|
|
|
2.6 |
|
|
|
— |
|
|
|
27.8 |
|
Operating earnings (loss) |
|
|
12.8 |
|
|
|
5.0 |
|
|
|
(5.8 |
) |
|
|
12.0 |
|
Depreciation, depletion and amortization |
|
|
8.1 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
10.1 |
|
Total assets |
|
|
485.9 |
|
|
|
134.6 |
|
|
|
21.2 |
|
|
|
641.7 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2005 |
| |
|
Salt |
|
Potash |
|
Other (a) |
|
Total |
| |
Sales to external customers |
|
$ |
424.0 |
|
|
$ |
74.1 |
|
|
$ |
— |
|
|
$ |
498.1 |
|
Intersegment sales |
|
|
— |
|
|
|
7.1 |
|
|
|
(7.1 |
) |
|
|
— |
|
Cost of sales — shipping and handling costs |
|
|
136.7 |
|
|
|
10.9 |
|
|
|
— |
|
|
|
147.6 |
|
Operating earnings (loss) |
|
|
74.9 |
|
|
|
20.6 |
|
|
|
(18.0 |
) |
|
|
77.5 |
|
Depreciation, depletion and amortization |
|
|
26.0 |
|
|
|
6.2 |
|
|
|
— |
|
|
|
32.2 |
|
| |
9
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, 2004 |
| |
|
Salt |
|
Potash |
|
Other (a) |
|
Total |
| |
Sales to external customers |
|
$ |
397.4 |
|
|
$ |
61.7 |
|
|
$ |
— |
|
|
$ |
459.1 |
|
Intersegment sales |
|
|
— |
|
|
|
7.4 |
|
|
|
(7.4 |
) |
|
|
— |
|
Cost of sales — shipping and handling costs |
|
|
115.1 |
|
|
|
9.8 |
|
|
|
— |
|
|
|
124.9 |
|
Operating earnings (loss) |
|
|
79.3 |
|
|
|
14.2 |
|
|
|
(16.8 |
) |
|
|
76.7 |
|
Depreciation, depletion and amortization |
|
|
24.4 |
|
|
|
6.0 |
|
|
|
— |
|
|
|
30.4 |
|
| |
(a) “Other” includes corporate entities and eliminations.
11. Stockholders’ Equity and Stock Options:
During the nine months ended September 30, 2005, the Company reissued 788,541 shares of treasury
stock related to the exercise of stock options from the Company’s 2001 Stock Option Plan and 151
shares related to the distribution of deferred stock units from the Directors’ Deferred
Compensation Plan. The Company recorded a tax benefit of $6.1 million from the exercise of stock
options that was recorded as additional paid in capital.
12. Earnings per Share:
The following table sets forth the computation of basic and diluted earnings per common share (in
millions, except for share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Nine months ended |
| |
|
September 30, |
|
September 30, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(4.4 |
) |
|
$ |
5.5 |
|
|
$ |
17.5 |
|
|
$ |
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding |
|
|
31,593,768 |
|
|
|
30,785,285 |
|
|
|
31,388,460 |
|
|
|
30,514,439 |
|
Shares for basic earnings per share |
|
|
31,593,768 |
|
|
|
30,785,285 |
|
|
|
31,388,460 |
|
|
|
30,514,439 |
|
Stock Options (a) |
|
|
— |
|
|
|
1,488,151 |
|
|
|
617,635 |
|
|
|
1,710,511 |
|
Shares for diluted earnings per share |
|
|
31,593,768 |
|
|
|
32,273,436 |
|
|
|
32,006,095 |
|
|
|
32,224,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic |
|
$ |
(0.14 |
) |
|
$ |
0.18 |
|
|
$ |
0.56 |
|
|
$ |
0.98 |
|
Earnings (loss) per share, diluted |
|
$ |
(0.14 |
) |
|
$ |
0.17 |
|
|
$ |
0.55 |
|
|
$ |
0.93 |
|
| |
(a) For the calculation of diluted earnings per share, the Company uses the treasury stock method
to determine the weighted average number of outstanding common shares.
Options to purchase 870,779 shares of our common stock were outstanding at September 30, 2005 but
were not included in the computation of diluted earnings (loss) per share for the quarter ended
September 30, 2005 because the options were anti-dilutive.
13. Other Comprehensive Income (Loss):
The Company’s comprehensive income (loss) is comprised of net earnings, the change in the
unrealized gain (loss) on natural gas cash flow hedges and foreign currency translation
adjustments. The components of comprehensive income are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
September 30, |
|
September 30, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Net earnings (loss) |
|
$ |
(4.4 |
) |
|
$ |
5.5 |
|
|
$ |
17.5 |
|
|
$ |
29.9 |
|
Unrealized gain on cash flow hedges |
|
|
3.7 |
|
|
|
0.7 |
|
|
|
4.7 |
|
|
|
1.3 |
|
Cumulative translation adjustments |
|
|
5.6 |
|
|
|
4.8 |
|
|
|
1.3 |
|
|
|
3.5 |
|
| |
Total comprehensive income (loss) |
|
$ |
4.9 |
|
|
$ |
11.0 |
|
|
$ |
23.5 |
|
|
$ |
34.7 |
|
| |
10
The following table provides additional detail related to amounts recorded in other comprehensive
income during the nine-month period ended September 30, 2005 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance |
|
|
|
|
|
Balance |
| |
|
December 31, |
|
2005 |
|
September 30, |
| |
|
2004 |
|
Change |
|
2005 |
|
|
Unrealized gain on cash flow hedges |
|
$ |
0.9 |
|
|
$ |
4.7 |
|
|
$ |
5.6 |
|
Cumulative translation adjustments |
|
|
43.8 |
|
|
|
1.3 |
|
|
|
45.1 |
|
Minimum pension liability |
|
|
(6.4 |
) |
|
|
— |
|
|
|
(6.4 |
) |
|
|
Accumulated other comprehensive income |
|
$ |
38.3 |
|
|
$ |
6.0 |
|
|
$ |
44.3 |
|
| |
The minimum pension liability is adjusted annually during the fourth quarter. With the exception
of cumulative translation adjustments, for which no tax effect is recorded, the components of other
comprehensive income are reflected net of applicable income taxes. A deferred tax liability of
$2.2 million was recorded for unrealized gains on cash flow hedges during the nine months ended
September 30, 2005.
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements, other than statements of historical fact contained herein constitute
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995.
Forward-looking statements relate to future events or our future financial performance, and involve
known and unknown risks, uncertainties, and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by these forward-looking statements.
Factors that could cause actual results to differ materially from those expressed or implied by the
forward-looking statements include, but are not limited to, the following: general business and
economic conditions; governmental policies affecting the agricultural industry or highway
maintenance programs in localities where the Company or its customers operate; weather conditions;
the impact of competitive products; pressure on prices realized by the Company for its products;
constraints on supplies of raw materials used in manufacturing certain of the Company’s products;
capacity constraints limiting the production of certain products; difficulties or delays in the
development, production, testing and marketing of products; difficulties or delays in receiving
required governmental and regulatory approvals; market acceptance issues, including the failure of
products to generate anticipated sales levels; the effects of and changes in trade, monetary,
environmental and fiscal policies, laws and regulations; foreign exchange rates and fluctuations in
those rates; the costs and effects of legal proceedings including environmental and administrative
proceedings involving the Company; and other risk factors reported from time to time in the
Company’s Securities and Exchange Commission (the “SEC”) reports.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” “continue,” or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We
are under no duty to update any of the forward-looking statements after the date hereof or to
reflect the occurrence of unanticipated events.
Unless the context requires otherwise, references in this quarterly report to the “Company,”
“Compass,” “Compass Minerals,” “CMI,” “we,” “us” and “our” refer to Compass Minerals International,
Inc. and its consolidated subsidiaries.
Critical Accounting Estimates
Preparation of our consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Management believes the most complex and sensitive judgments, because of their significance to our
consolidated financial statements, result primarily from the need to make estimates about the
effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2
to the Consolidated Financial Statements in our Annual Report on Form 10-K filed with the SEC on
March 16, 2005, describe the significant accounting estimates and policies used in preparation of
our consolidated financial statements. Actual results in these areas could differ from management’s
estimates. Except as disclosed in Note 6 to the consolidated financial statements, there have been
no significant changes in our critical accounting estimates during the first nine months of 2005.
Results of Operations
The consolidated financial statements have been prepared to present the historical financial
condition and results of operations and cash flows for the Company. The following tables and
discussion should be read in conjunction with the information contained in our consolidated
financial statements and the accompanying notes included elsewhere in this quarterly report.
12
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
| Millions of dollars except per ton data |
|
2005 |
|
2004 |
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2005 |
|
2004 |
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Sales by Segment: |
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Salt sales |
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$ |
98.2 |
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|
$ |
94.4 |
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$ |
424.0 |
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$ |
397.4 |
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Salt shipping and handling |
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|
30.6 |
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|
|
25.2 |
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|
|
136.7 |
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|
|
115.1 |
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|
|
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Specialty potash sales |
|
|
22.1 |
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|
|
17.3 |
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|
|
74.1 |
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|
|
61.7 |
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Specialty potash shipping and handling |
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2.9 |
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|
|
2.6 |
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|
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10.9 |
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9.8 |
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Sales Volumes (thousands of tons) |
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Highway deicing |
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1,134 |
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1,219 |
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|
6,958 |
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6,744 |
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General trade |
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|
701 |
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|
|
692 |
|
|
|
2,125 |
|
|
|
2,107 |
|
Specialty potash |
|
|
85 |
|
|
|
76 |
|
|
|
293 |
|
|
|
276 |
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Average Sales Price (per ton) |
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|
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Highway deicing |
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$ |
27.76 |
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|
$ |
26.39 |
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|
$ |
31.70 |
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$ |
30.07 |
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General trade |
|
|
95.21 |
|
|
|
89.97 |
|
|
|
95.68 |
|
|
|
92.40 |
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Specialty potash |
|
|
259.60 |
|
|
|
227.09 |
|
|
|
252.88 |
|
|
|
223.53 |
|
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
Sales
Sales for the third quarter of 2005 of $120.3 million increased $8.6 million, or 8% compared to
$111.7 million for the same quarter of 2004. Sales include revenues from the sale of our products,
or “product sales,” as well as shipping and handling costs incurred to deliver salt and sulfate of
potash (“SOP”) products to the customer. Such shipping and handling costs were $33.5 million during
the third quarter of 2005, an increase of $5.7 million compared to the same quarter of 2004,
primarily reflecting higher fuel costs and increases in transportation rates.
Product sales for the third quarter of 2005 of $86.8 million increased $2.9 million, or 3% compared
to $83.9 million for the same period in 2004 reflecting increased sales in our specialty potash
fertilizer line partially offset by lower salt sales. Salt product sales for the third quarter of
2005 of $67.6 million decreased $1.6 million, or 2% compared to $69.2 million for the same period
in 2004 reflecting reduced North American highway deicing sales volumes (approximately $2.9
million) primarily due to lower preseason “early fill” sales volumes as the Company was awarded
more “in season” contracts during the most recent deicing salt contract bidding process for the
upcoming winter season. The reduced North American highway deicing volumes were partially offset
by increased volumes in our North American general trade product line ($0.6 million). The North
American general trade sales volume increase is primarily due to higher water conditioning sales
volumes. Salt product sales were also negatively impacted by approximately $1.0 million due to
increases in shipping and handling costs in excess of price increases for the North American
highway deicing and general trade product lines, although that decrease was more than offset by the
positive impact of foreign currency exchange rates due to the strengthening of the Canadian dollar
($1.6 million).
Specialty potash fertilizer product sales for the third quarter of 2005 of $19.2 million increased
$4.5 million, or 31% compared to $14.7 million for the same period in 2004 primarily reflecting the
impact of previously announced price increases ($2.5 million) and increased sales volumes ($1.7
million). The increases were for both agricultural and turf grass uses, primarily in the export
market where a portion of the autumn sales volumes occurred earlier in 2005 when compared to the
last half of 2004.
Gross Profit
Gross profit for the third quarter of 2005 of $25.9 million was consistent with the third quarter
of 2004 as the net increase in sales discussed above was offset by higher shipping and handling
costs. Overall, the gross margin percent on salt products decreased 3% or $1.7 million, which was
offset by a gross margin percentage improvement on SOP of 1%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 2005 of $14.1 million
increased $0.8 million, or 6% compared to $13.3 million for the same period in 2004 primarily
reflecting higher costs of employee wages and benefits and higher professional services costs.
13
Other Charges
Other charges for the 2004 three-month period includes costs incurred for a secondary stock
offering and registration statement on Form S-1 to register the remaining shares previously held by
stockholders. Compass did not receive any of the proceeds from the sale of the shares in the
secondary offerings. Consequently, the costs related to these stock offerings were recorded as
other operating costs in our consolidated statements of operations.
Interest Expense
Interest expense for the third quarter of 2005 of $16.0 million increased $0.6 million compared to
$15.4 million for the same period in 2004. This increase is primarily the result of higher
principal balances of the senior discount notes and senior subordinated discount notes due to
interest accretion (see Note 8 to the audited consolidated financial statements and notes thereto
for the year ended December 31, 2004 included in our Form 10-K filed with the SEC on March 16,
2005). Partially offsetting this increase is a reduction in interest expense resulting from the
payments made on our term loan.
Other (Income) Expense, Net
Other (income) expense, net for the three months ended September 30, 2005 and 2004 primarily
includes foreign currency exchange losses.
Income Tax Expense (Benefit)
Income tax benefit for the three months ended September 30, 2005 was $3.2 million compared to an
income tax benefit of $12.2 million for the same period of 2004. As discussed in Note 6 to the
consolidated financial statements, during the third quarter of 2004 we recorded a tax benefit
related to a reduction in the valuation allowance against our deferred tax assets by $11.1 million.
Excluding the 2004 reduction to the valuation allowance discussed above, our income tax provision
differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion,
state income taxes (net of federal tax benefit), foreign income tax rate differentials, foreign
mining income taxes, nondeductible interest expense, and changes in the expected utilization of
previously reserved NOLs.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Sales
Sales for the nine months ended September 30, 2005 of $498.1 million increased $39.0 million, or 8%
compared to $459.1 million for the nine months ended September 30, 2004. Sales include revenues
from the sale of our products, or “product sales,” as well as shipping and handling costs incurred
to deliver salt and SOP products to the customer. Such shipping and handling costs were $147.6
million during nine months of 2005, an increase of $22.7 million, or 18% compared to $124.9 million
for the same 2004 period. The increase in shipping and handling-related costs for 2005 is due to
the increased volume of products sold as compared to 2004, combined with higher shipping costs. The
higher shipping costs are also reflective of higher fuel costs and increases in transportation
rates.
Product sales for the nine months ended September 30, 2005 of $350.5 million increased $16.3
million, or 5% compared to $334.2 million for the same period in 2004. Salt product sales for the
nine months of 2005 of $287.3 million increased $5.0 million, or 2% compared to $282.3 million for
the same period in 2004, while sales of specialty potash fertilizer products of $63.2 million
increased $11.3 million, or 22% compared to $51.9 million for the same period in 2004.
The $5.0 million increase in salt product sales for the nine months ended September 30, 2005
reflects North American highway deicing product price increases resulting in $2.0 million of
additional salt sales over the same period of 2004. However, this improvement was offset by $3.2
million of lower general trade salt sales volumes in the U.K. Additionally, salt sales are higher
than the prior year due to $6.0 million of favorable impact from the strengthening of the Canadian
dollar.
Specialty potash fertilizer product sales for the nine months ended September 30, 2005 increased
$11.3 million over the same period in 2004 primarily reflecting a $7.8 million impact of price
increases and an improvement of $3.2 million due to higher domestic and export sales volumes.
While a portion of the volume increase is due to export sales activity occurring earlier in 2005
compared with 2004, the volume increase also reflects modest sales growth.
Gross Profit
Gross profit for the nine months ended September 30, 2005 of $120.7 million increased $2.7 million,
or 2% compared to $118.0 million for the same period in 2004. While gross profit reflects $8.4
million of sales price increases, this improvement was offset by $8.4 million of higher costs of
production and shipping and handling. Additionally, gross profit reflects a $2.8 million favorable
impact due to the strengthening of the Canadian dollar. Overall, the gross margin percentage on
salt products decreased 3%, or $3.8 million while SOP gross margin percentage increased 5%, or $6.5
million.
14
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2005 of $43.2
million increased $2.9 million, or 7% compared to $40.3 million for the same period in 2004. The
increase primarily reflects higher costs of benefits and salaries ($0.8 million), higher costs for
professional services and compliance with the Sarbanes Oxley Act ($1.0 million), and higher costs
in terms of U.S. dollars due to changes in foreign exchange rates ($0.7 million).
Other Charges
Other charges for the 2004 nine-month period includes costs incurred for a secondary stock offering
and registration statement on Form S-1 to register the remaining shares previously held by
stockholders. Compass did not receive any of the proceeds from the sale of the shares in the
secondary offerings. Consequently, the costs related to these stock offerings were recorded as
other operating costs in our consolidated statements of operations.
Interest Expense
Interest expense for the nine months ended September 30, 2005 of $47.6 million increased $1.7
million compared to $45.9 million for the same period in 2004. This increase is primarily the
result of higher principal balances of the senior discount notes and senior subordinated discount
notes due to interest accretion (see Note 8 to the audited consolidated financial statements and
notes thereto for the year ended December 31, 2004 included in CMI’s Form 10-K filed with the SEC
on March 16, 2005). Partially offsetting this increase is a reduction in interest expense resulting
from the payments made on our term loan.
Other (Income) Expense, Net
Other (income) expense, net for the nine months ended September 30, 2005 and 2004 primarily
includes foreign exchange losses partially offset by interest income.
Income Tax Expense (Benefit)
Income tax expense for the nine months ended September 30, 2005 was $8.0 million compared to a
benefit of $3.1 million for the same period in 2004. The increase in expense primarily relates to
the specific tax items discussed as follows. As discussed in Note 6 to the consolidated financial
statements, during the nine months ended September 30, 2005 the Company recorded a $5.4 million
charge to income tax expense related to taxable foreign exchange gains on a
pound-sterling-denominated loan to our wholly owned subsidiary, Compass Minerals Group, Inc. (CMG),
and a tax benefit of $5.9 million from the reversal of previously recorded income tax reserves
which was partially offset by other income tax adjustments of $1.1 million, related to matters
previously determined to have an uncertain outcome. During the third quarter of 2004, we benefited
from the $11.1 million reversal of the valuation allowance against our deferred tax assets.
Additionally, our income tax provision differs from the U.S. statutory federal income tax rate
primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign
income tax rate differentials, foreign mining income taxes, nondeductible interest expense, and
changes in the expected utilization of previously reserved NOLs.
Liquidity and Capital Resources
Historically, we have used cash generated from operations to meet our working capital needs and to
fund capital expenditures. Our primary sources of liquidity continue to be cash flows from
operations and borrowings under our revolving credit facility. We expect that ongoing requirements
for debt service and capital expenditures will be funded from these sources. This, to a certain
extent, is subject to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
As of September 30, 2005, we had $587.6 million of principal indebtedness, net of issuance premium,
consisting of $325.0 million of senior subordinated notes at CMG, $94.2 million of senior discount
notes with a face value of $123.5 million, $131.9 million of senior subordinated discount notes
with a face value of $179.6 million, $7.5 million of term loan, and $29.0 million of borrowing
against our revolving credit facility. Our revolving credit facility provides borrowing capacity up
to an aggregate amount of $135.0 million. As of September 30, 2005, borrowing availability under
our revolving credit facility was also reduced by $10.6 million of letters of credit, leaving an
available balance of approximately $95.4 million. Future borrowings under our revolving credit
facility will be available to fund our working capital requirements, capital expenditures and for
other general corporate purposes.
During the nine months ended September 30, 2005, cash flows from operations were $70.1 million. We
used those cash flows to fund capital expenditures of $19.1 million and pay $25.9 million of
dividends to the holders of our common stock and, together with proceeds from our revolving credit
facility, we voluntarily made early principal payments of $30.0 million on our term loan. As of
September 30, 2005, we had cash and cash equivalents on hand of $23.8 million.
Our significant debt service obligations could, under certain circumstances, materially affect our
financial condition and prevent us from fulfilling our obligations under the senior subordinated
notes of CMG, revolving credit facility, senior discount notes
15
and senior subordinated discount notes. As of September 30, 2005, we are in compliance with all
conditions and covenants related to the senior credit facility, senior subordinated notes, senior
discount notes and senior subordinated discount notes.
Although our operations are conducted through our subsidiaries, our subsidiaries have not
guaranteed and have no legal obligation to make funds available to us for payment on our
indebtedness or to pay dividends on our capital stock. Accordingly, our ability to make payments
on our indebtedness and distribute dividends to our stockholders is dependent on the earnings and
the distribution of funds from our subsidiaries. The terms of our senior credit facilities and the
indenture governing the senior subordinated notes of CMG significantly restrict our subsidiaries
from paying dividends and otherwise transferring assets to us. Furthermore, our subsidiaries will
be permitted under the terms of our senior credit facilities and other indebtedness to incur
additional indebtedness that may severely restrict or prohibit the making of distributions, the
payment of dividends or the making of loans by our subsidiaries to us. The terms of our senior
credit facilities also restrict our subsidiaries from paying dividends to us in order to fund cash
interest on our senior discount notes and subordinated discount notes if we do not maintain an
adjusted senior leverage ratio (as defined in our Credit Agreement dated November 28, 2001, as
amended) of 4.5 or less (as of September 30, 2005) or if a default or event of default has occurred
and is continuing under our senior credit facilities. As of September 30, 2005, our adjusted senior
indebtedness leverage ratio (as defined in the terms of our senior credit facility) was 2.0. We
cannot assure you that we will maintain this ratio. This ratio is not necessarily comparable to
other similarly titled ratios of other companies due to inconsistencies in the method of
calculation and we encourage you to read our amended and restated credit agreement, as amended,
contained in the exhibits to our Annual Report on Form 10-K filed with the SEC on March 16, 2005.
We cannot assure you that the agreements governing the current and future indebtedness of our
subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or
loans to fund scheduled interest and principal payments on our indebtedness when due. If we
consummate an acquisition, our debt service requirements could increase. We may need to refinance
all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at all.
For the Nine Months Ended September 30, 2005 and 2004
Net cash flows provided by operating activities for the nine months ended September 30, 2005 and
2004 were $70.1 million and $86.8 million, respectively. For 2005, the reduction in accounts
receivable balances of $67.3 million was offset by an increase in inventory of $22.8 million and
payment of $44.2 million of current liabilities, including income taxes. In 2004, working capital
reductions generated $17.7 million of cash flows, as the reduction of $54.7 million of receivables
was in excess of the $15.5 million and $22.1 million used to build inventory and pay accounts
payable and accrued expenses, respectively. These working capital changes are indicative of the
seasonal nature of highway deicing product line sales.
Net cash flows used by investing activities for the nine months ended September 30, 2005 and 2004,
of $22.6 million and $16.1 million, respectively, were principally related to capital expenditures.
The 2005 capital expenditures were primarily for routine replacements at our facilities and cost
reduction projects at our North American evaporated salt and specialty potash fertilizer
facilities. For the remainder of 2005, the Company expects to spend approximately $12.8 million,
including $3.7 million of expenditures to expand our magnesium chloride facilities and replace an
existing underground rock salt mill in Canada (see Note 10 to the Consolidated Financial
Statements). Anticipated expenditures to complete these projects by mid-year 2006 total
approximately $14 million.
Net cash flow used in financing activities was $37.0 million for the 2005 nine-month period
primarily for $25.9 million of dividend payments and $12.2 million of net debt reduction. During
2005, we voluntarily made $30.0 million of early principal repayments to reduce the long-term debt
outstanding under our term loan credit facility and increased borrowing under our revolving credit
facility by $18.0 million. Net cash flow used in financing activities during the nine months of
2004 was $64.5 million, primarily used to fund
$30.0 million of early principal repayments
under our term loan credit facility, a $14.0 million pay down of our revolving credit facility, and
$21.0 million of dividends. No gain or loss was recorded upon repayment of debt.
Effects of Currency Fluctuations and Inflation
We conduct operations in Canada, the United Kingdom and the United States. Therefore, our results
of operations are subject to both currency transaction risk and currency translation risk. We incur
currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or
sales transaction using a currency other than the local currency of the transacting entity. With
respect to currency translation risk, our financial condition and results of operations are
measured and recorded in the relevant local currency and then translated into U.S. dollars for
inclusion in our historical consolidated financial statements. Exchange rates between these
currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the
future. The majority of our revenues and costs are denominated in U.S. dollars, with pounds
sterling and Canadian dollars also being significant. The weakened U.S. dollar against the pound
sterling and Canadian dollar has had a positive impact on our reported consolidated sales. However,
significant changes in the value of the Canadian dollar, the euro or pound sterling relative to the
U.S. dollar could have a material adverse effect on our financial condition and our ability to meet
interest and principal payments on U.S. dollar denominated debt, including borrowings under our
senior credit facilities.
16
Seasonality
We experience a substantial amount of seasonality in salt sales. The result of this seasonality is
that sales and operating income are generally higher in the first and fourth quarters and lower
during the second and third quarters of each year. In particular, sales of highway and consumer
deicing salt products are seasonal as they vary based on the severity of the winter conditions in
areas where the product is used. Following industry practice in North America, we stockpile
sufficient quantities of deicing salt in the second, third and fourth quarters to meet the
estimated requirements for the winter season.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151,
“Inventory Costs — an amendment of ARB No. 43, Chapter 4” that is effective for us beginning in the
first quarter of 2006. This Statement amends the guidance in Accounting Research Bulletin (“ARB”)
No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that “...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges ... .” This Statement requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of “so abnormal.” In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The adoption of SFAS No.
151 is not expected to have a material impact on our financial position, results of operations or
cash flows.
In December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (the “AJCA”),” allowing companies additional time to evaluate the effect of the AJCA on plans
for reinvestment or repatriation of foreign earnings. We are in the process of evaluating the
effects of the repatriation provision and expect to complete this evaluation before the end of our
tax year (February 2006).
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) is a revision
of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Among other items SFAS
123(R) eliminates the use of APB 25 and the intrinsic value method of accounting, and requires
companies to follow guidance previously set forth in SFAS 123, and recognize the cost of employee
services received in exchange for awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. We began recording compensation expense for the fair
value of stock-based compensation in accordance with SFAS 123 in 2003. The effective date of SFAS
123(R) is the first annual reporting period beginning after June 15, 2005, which is the first
quarter of 2006 for calendar year companies. We will adopt SFAS 123(R) in the first quarter of
2006. The adoption of SFAS 123(R) is not expected to have a material impact on our financial
position, results of operations or cash flows.
In March 2005, the SEC staff issued additional guidance on SFAS 123(R) in the form of Staff
Accounting Bulletin (“SAB”) No. 107. SAB 107 was issued to assist preparers by simplifying some of
the implementation challenges of FAS 123(R) while enhancing the information that investors receive.
SAB 107 creates a framework that is premised on two themes: (a) considerable judgment will be
required by preparers to successfully implement FAS 123(R), specifically when valuing employee
stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on
the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation
models — SAB 107 reinforces the flexibility allowed by FAS 123(R) to choose an option-pricing model
that meets the standard’s fair value measurement objective; (b) expected volatility — the SAB
provides guidance on when it would be appropriate to rely exclusively on either historical or
implied volatility in estimating expected volatility; and (c) expected term — the new guidance
includes examples and some simplified approaches to determining the expected term under certain
circumstances. We will apply the principles of SAB 107 in conjunction with the adoption of SFAS
123(R).
In March 2005, FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset
Retirement Obligations.” FIN 47 clarifies that the term “Conditional Asset Retirement Obligation”
as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation,” refers to a legal
obligation to perform an asset retirement activity in which the timing and/or method of settlement
are conditional on a future event that may or may not be within the control of the entity.
Accordingly, an entity is required to recognize a liability for the fair value of a Conditional
Asset Retirement Obligation if the fair value of the liability can be reasonably estimated. FIN 47
is effective no later than the end of fiscal years ending after December 15, 2005. Management does
not believe the adoption of FIN 47 will have a material affect on the Company’s financial position,
results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our business is subject to various types of market risks that include, but are not limited to,
interest rate risk, foreign currency exchange rate risk and commodity
pricing risk. Management has taken actions to mitigate our exposure
to commodity pricing risk including entering into
forward derivative instruments, and may take actions to mitigate
our exposure to other risks. However, there can be no assurance that our
hedging activities will eliminate or substantially reduce risks associated with these risks. We do
not enter into any
17
financial instrument arrangements for speculative purposes. The Company’s market risk exposure
related to these items has not changed materially since December 31, 2004.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of the Company’s management, including the CEO and CFO, of
the effectiveness of the design and operation of the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Company’s CEO
and CFO determined that the Company’s disclosure controls and procedures were not effective as of
September 30, 2005 at the reasonable assurance level, because of the material weakness described
below.
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected. As of December 31,
2004, the Company had determined that it did not maintain effective controls over the valuation and
completeness of its income taxes payable, deferred income tax assets and liabilities (including the
associated valuation allowance) and the income tax provision because it did not have accounting
personnel with sufficient knowledge of generally accepted accounting principles related to income
tax accounting and reporting. Specifically, the Company’s processes, procedures and controls
related to the preparation and review of the liability for income taxes payable were not effective
to ensure that the additions to the liability were complete and accurate. Also, the Company did not
have effective controls over the preparation and review of the valuation allowance related to
deferred tax assets. Additionally, this control deficiency could result in a misstatement to the
aforementioned accounts that would result in a material misstatement to annual or interim financial
statements that would not be prevented or detected. Accordingly, management determined that this
control deficiency constituted a material weakness. Because of this material weakness, the Company
concluded that it did not maintain effective internal control over financial reporting as of
December 31, 2004, based on criteria in Internal Control-Integrated Framework. At September 30,
2005, the Company determined that the material weakness had not been completely remediated.
In order to remediate this matter, the Company identified and is implementing actions to improve
the effectiveness of its disclosure controls and procedures and internal control over financial
reporting related to its income tax accounting. In connection with this effort, the Company has
implemented a standardized tax accounting software package to assist in the SFAS No. 109 accounting
process, implemented greater senior level financial officer review of the income tax balance sheet
accounts and the related journal entries, performed detailed analyses of our tax accounts to ensure
proper recording and classification of all income tax matters, engaged a third party specialist to
assist the Company’s personnel by conducting comprehensive and detailed reviews of the Company’s
tax reporting and accounting, in particular with respect to developing more effective processes for
establishing and monitoring deferred income taxes, valuation allowances and the Company’s annual
effective tax rate. Additionally, the Company has recently hired a Vice President of Income Tax to
assist with and manage these efforts. As a result, management believes consolidated financial
statements do fairly present, in all material respects, the Company’s financial condition, results
of operations and cash flows as of and for the period ended September 30, 2005. The Company
continues to adopt more rigorous policies and procedures with respect to the income tax account
balance sheet review process, including the income taxes payable and deferred tax asset valuation
allowance accounts.
Changes in Internal Control Over Financial Reporting
Except as otherwise discussed herein, there have been no changes in the Company’s internal control
over financial reporting during the most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time is involved in various routine legal proceedings. These primarily
involve commercial claims, product liability claims, personal injury claims and workers’
compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims
with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined
adversely, would not have a material adverse effect on our business, financial condition and
results of operations. There have been no material developments during 2005 with respect to other
legal proceedings.
18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on August 4, 2005 in Overland Park, Kansas. Three
items were submitted to a vote of stockholders as described in our 2005 Proxy Statement dated June
30, 2005. The following table briefly describes the proposals and result of the stockholders’
vote.
1. To elect the following persons as directors for a term of three years.
| |
|
|
|
|
|
|
|
|
| |
|
Votes in Favor |
|
Votes Withheld |
Vernon G. Baker, II |
|
|
29,465,308 |
|
|
|
189,795 |
|
Bradley J. Bell |
|
|
29,221,518 |
|
|
|
433,585 |
|
Richard S. Grant |
|
|
29,233,934 |
|
|
|
421,169 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Votes in Favor |
|
Votes Against |
|
Votes Abstaining |
| 2. |
|
To ratify the appointment of Ernst & Young LLP as
Compass’s independent auditors for fiscal year 2005. |
|
|
29,625,375 |
|
|
|
26,940 |
|
|
|
2,788 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3. |
|
To approve the Compass Minerals International, Inc.
2005 Incentive Award Plan |
|
|
26,749,665 |
|
|
|
638,709 |
|
|
|
28,995 |
|
Item 5. Other Information
Not Applicable
Item 6. Exhibits
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| No. |
|
Description of Exhibit |
10.1
|
|
Annual Incentive Plan and Director and Executive Officer Compensation as approved by the
Board of Directors on August 3, 2005 (incorporated herein by reference to Form 8-K dated
August 3, 2005). |
|
|
|
31.1*
|
|
Section 302 Certifications of Michael E. Ducey, President and Chief Executive Officer. |
|
|
|
31.2*
|
|
Section 302 Certifications of Rodney L. Underdown, Vice President and Chief Financial Officer. |
|
|
|
32*
|
|
Certification Pursuant to 18 U.S.C.§1350 of Michael E. Ducey, President and Chief Executive
Officer and Rodney L. Underdown, Vice President and Chief Financial Officer. |
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
COMPASS MINERALS INTERNATIONAL, INC. |
|
|
|
|
|
/s/ MICHAEL E. DUCEY
Michael E. Ducey |
|
|
President and Chief Executive Officer |
Date: November 1, 2005
| |
|
|
|
|
/s/ RODNEY L. UNDERDOWN
Rodney L. Underdown |
|
|
Vice President and Chief Financial Officer |
Date: November 1, 2005
20