# Compass Minerals International Inc: Form 10-Q for the period ended Sep 30, 2010

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2010-10-27
- Accepted by EDGAR: Oct 27, 2010, 19:57 ET
- Period: 2010-09-30
- Accession: 0001140361-10-042408
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000114036110042408/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000114036110042408/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-07-01 to 2010-09-30 | $176.0m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2010-01-01 to 2010-09-30 | $712.6m | us-gaap:SalesRevenueGoodsNet |
| Gross profit | 3 months, 2010-07-01 to 2010-09-30 | $53.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2010-01-01 to 2010-09-30 | $207.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2010-07-01 to 2010-09-30 | $20.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2010-01-01 to 2010-09-30 | $64.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2010-07-01 to 2010-09-30 | $32.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2010-01-01 to 2010-09-30 | $143.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2010-07-01 to 2010-09-30 | $5.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2010-01-01 to 2010-09-30 | $16.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2010-07-01 to 2010-09-30 | $6.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2010-01-01 to 2010-09-30 | $34.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-07-01 to 2010-09-30 | $19.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2010-01-01 to 2010-09-30 | $89.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2010-01-01 to 2010-09-30 | $2.68 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.58 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2010-01-01 to 2010-09-30 | $2.68 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-07-01 to 2010-09-30 | 32,785 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2010-01-01 to 2010-09-30 | 32,740 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2010-01-01 to 2010-09-30 | $168.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2010-01-01 to 2010-09-30 | −$77.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2010-01-01 to 2010-09-30 | $39.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2010-09-30 | $68.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-09-30 | $433.8m | us-gaap:AssetsCurrent |
| Total assets | at 2010-09-30 | $1.00bn | us-gaap:Assets |
| Current liabilities | at 2010-09-30 | $121.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2010-09-30 | $483.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2010-09-30 | $4.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2010-09-30 | $285.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,736 characters.

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: domestic and international general business and economic conditions; uninsured risks and hazards associated with underground mining operations; 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 and the availability of transportation services; capacity constraints limiting the production of certain products; the ability to attract and retain skilled personnel as well as labor relations including without limitation, the impact of work rules, strikes or other disruptions, wage and benefit requirements; 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; the impact of the Company’s indebtedness and interest rates changes; foreign exchange rates and fluctuations in those rates; the costs and effects of legal proceedings including environmental and administrative proceedings involving the Company; customer expectations about future potash market prices and availability and agricultural economics; the impact of credit and capital markets, including the risk of customer and counterparty defaults and declining credit availability; changes in tax laws or estimates; and other risk factors reported in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) as updated quarterly on Form 10-Q.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “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 undertake 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,” “CMP,” “we,” “us” and “our” refer to Compass Minerals International, Inc. (“CMI”, the parent holding company) and its consolidated subsidiaries.

### Critical Accounting Estimates

Preparation of our consolidated financial statements in accordance with generally accepted accounting principles 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 result primarily from the need to make estimates about matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on February 22, 2010, 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.

### Results of Operations

Deicing products, consisting of deicing salt and magnesium chloride used by highway deicing and consumer and industrial customers, constitute a significant portion of the Company’s salt segment sales. Our deicing sales are seasonal and can fluctuate from year to year depending on the severity of the winter season weather in our regions. Inventory management practices are employed to respond to the varying level of demand which impacts our production volumes, the resulting per ton cost of inventory and ultimately profit margins, particularly during the non-winter quarters when we build our inventory levels. The 2009 – 2010 winter season was milder than normal in our North American regions, especially our Canadian regions around the Great Lakes. During the 2008 – 2009 winter season, winter weather during the fourth quarter of 2008 was significantly more severe than normal while the first quarter of 2009 was less severe than normal in our North American regions. Our deicing market in the U.K. experienced winter weather which was more severe than normal in both the 2009 – 2010 winter season and the 2008 – 2009 winter season.

Our sulfate of potash (“SOP”) product is used in the production of specialty fertilizers for high-value crops and turf. Our domestic sales of SOP are concentrated in the western and southeastern portions of the United States where some crops and soil conditions favor the use of SOP as a source of potassium nutrients. Consequently, weather patterns and field conditions in these locations can impact the amount of specialty fertilizer sales volumes. Additionally, the demand for and market price of SOP is affected by the broader potash market which is influenced by many factors such as world grain and food supply, changes in consumer diets, general levels of economic activity and government food, agriculture and energy policies around the world. Economic factors may impact the amount or type of crop grown in certain locations, or the type of fertilizer product used. Crop yields and the quality of high-value or chloride-sensitive crops tend to decline when alternative fertilizers are used. Throughout much of 2008, the demand for potassium nutrients for crops exceeded the available supply, which contributed to a substantial increase in the market price for potash, including SOP. Demand for these products waned in the fourth quarter of 2008 and remained suppressed through 2009, as the broad agricultural industry dealt with a global economic slowdown, reduced credit availability and the reluctance of fertilizer customers to purchase potash at historically high prices. Beginning in the first quarter of 2010, we have experienced a rebound in potash demand. Potassium chloride (“KCl”) market pricing declined throughout 2009 and into early 2010 from prices experienced at the end of 2008. However, market prices for potash have stabilized during 2010 at amounts which are well above historical levels though below the levels seen at the end of 2008. These same factors have similarly influenced SOP market pricing, which has historically been sold at prices above KCl market pricing, and the resulting average price of our SOP has fluctuated dramatically. We expect SOP pricing to retain a premium to KCl.

Our North American salt mines and SOP production facility are near either water or rail transport systems, which reduces our shipping and handling costs when compared to alternative methods of distribution, although shipping and handling costs still account for a relatively large portion of the total delivered cost of our products. The tightening of available transportation services together with higher fuel costs has generally increased our shipping and handling costs on a per ton basis. However, declining oil-based fuel costs beginning late in 2008 and continuing through much of 2009 contributed to lower shipping and handling costs on a per ton basis. Salt shipping and handling costs on a per ton basis in the third quarter of 2010 were lower than those experienced in the third quarter of 2009, however fuel costs have increased slightly from 2009 levels.

Manpower costs, energy costs, packaging, and certain raw material costs, particularly KCl, a deicing and water conditioning agent and feed-stock, which can be used to make a portion of our sulfate of potash fertilizer product, are also significant. The Company’s production workforce is typically represented by labor unions with multi-year collective bargaining agreements. Miners at our Cote Blanche mine took part in a strike from April 7 to June 15, 2010 relating to scheduling and wages. The strike resulted in additional direct incremental costs of approximately $1.3 million in the second quarter of 2010. In addition, we had lower salt production for the three and nine months ended September 30, 2010 at both our Cote Blanche and Goderich mines and certain consumer and industrial salt plants. Much of the reduced production related to deicing product inventory management following a mild winter in our primary service area. In addition, both the strike at our Cote Blanche mine in the second quarter of 2010 and a two-month delay in equipment installation in the third quarter of 2010 at our Goderich mine as part of its capacity expansion project significantly reduced salt production volumes. We expect higher per unit costs to persist through the 2010-2011 winter season. Our energy costs result from the consumption of electricity with relatively stable, rate-regulated pricing, and natural gas, which can have significant pricing volatility. We manage the pricing volatility of our natural gas purchases with natural gas forward swap contracts up to 36 months in advance of purchases, helping to reduce the impact of short-term spot market price volatility. We have historically purchased KCl under long-term supply contracts with annual changes in price based on previous year changes in the market price for KCl. The market price for KCl has increased significantly in recent years, causing continued price increases under our supply contracts. Beginning in 2010, we have suspended purchases of (and currently do not have plans to purchase) KCl used to supplement our SOP production from solar ponds, due to several factors including the expected future contract price of KCl, existing inventory levels, as well as the expected additional solar pond-based production capacity gained from the Company’s SOP production capacity expansion projects. We have continued to purchase KCl for certain water conditioning and consumer deicing applications at higher prices, which is expected to increase input costs by approximately $3 million per quarter in 2010 when compared to 2009.

The consolidated financial statements have been prepared to present the historical financial condition and results of operations and cash flows for the Company which include our salt segment, specialty fertilizer segment, our records management business and unallocated corporate activities. The results of operations of the records management business include sales of $2.9 million for both the three months ended September 30, 2010 and 2009, and $8.3 million and $7.7 million for the nine months ended September 30, 2010 and 2009, respectively, and are not material to our consolidated financial statements and consequently, are not included in the table below. 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.

| Salt Sales (in millions) | Three Months Ended September 30, 2010 | 2009 | Nine Months Ended September 30, 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Salt sales | $136.3 | $155.5 | $573.4 | $542.7 |
| Less: salt shipping and handling | 33.9 | 39.0 | 160.8 | 162.6 |
| Salt product sales | $102.4 | $116.5 | $412.6 | $380.1 |
| **Salt Sales Volumes (thousands of tons)** |  |  |  |  |
| Highway deicing | 1,379 | 1,527 | 6,723 | 6,481 |
| Consumer and industrial | 571 | 602 | 1,625 | 1,731 |
| Total tons sold | 1,950 | 2,129 | 8,348 | 8,212 |
| **Average Salt Sales Price (per ton)** |  |  |  |  |
| Highway deicing | $40.23 | $43.62 | $49.63 | $44.36 |
| Consumer and industrial | 141.64 | 147.56 | 147.58 | 147.45 |
| Combined | 69.91 | 73.03 | 68.69 | 66.09 |
| **Specialty Fertilizer ("SOP") Sales (in millions)** |  |  |  |  |
| SOP sales | $36.8 | $23.9 | $130.9 | $100.5 |
| Less: SOP shipping and handling | 4.9 | 2.0 | 16.9 | 6.9 |
| SOP product sales | $31.9 | $21.9 | $114.0 | $93.6 |
| **SOP Sales Volumes (thousands of tons)** | 73 | 34 | 255 | 112 |
| **SOP Average Price (per ton)** | $506 | $706 | $513 | $897 |

### Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

#### Sales

Sales for the third quarter of 2010 of $176.0 million decreased $6.3 million, or 3% compared to $182.3 million for the same quarter of 2009. Sales primarily include revenues from the sale of our products, or “product sales,” revenues from our records management business, and shipping and handling costs incurred to deliver salt and specialty fertilizer products to our customers. Shipping and handling costs decreased $2.2 million from $41.0 million in third quarter of 2009 to $38.8 million in the third quarter of 2010 due, in part, to lower salt sales volumes during the third quarter of 2010 when compared to the same period of 2009 which was partially offset by higher shipping and handling costs for our specialty fertilizer segment due to higher sales volumes.

Product sales for the third quarter of 2010 of $134.3 million decreased $4.1 million, or 3% compared to $138.4 million for the same period in 2009 principally reflecting lower salt segment product sales volumes and higher specialty fertilizer product sales volumes partially offset by lower average specialty fertilizer prices.

Salt product sales for the third quarter of 2010 of $102.4 million decreased $14.1 million, or 12% compared to $116.5 million for the same period in 2009 due primarily to lower sales volumes and an unfavorable shift in product mix, which together, comprised substantially all of the salt product sales decline. Salt sales volumes in 2010 decreased by 179,000 tons or 8% from 2009 levels consisting principally of lower sales volumes for highway and consumer and industrial deicing products, due to a decrease in early fill orders in 2010 when compared to 2009, following the milder than normal 2009-2010 winter weather season in the North American markets we serve. This decrease was partially offset by an increase in restocking activities by highway deicing customers in the U.K. following the severe 2009-2010 winter season in the U.K and resurgent demand in rock salt sold into the North American non-seasonal chlor-alkali market.

SOP product sales for the third quarter of 2010 of $31.9 million increased $10.0 million, or 46% compared to $21.9 million for the same period in 2009. This increase was due to higher sales volumes and contributed approximately $25 million to the increase in SOP product sales as demand rebounded significantly in 2010 following a prolonged period of uncertainty about broader potash pricing throughout 2009. This increase was offset, in large part, by lower prices in the third quarter of 2010 as our average sales price was $506 per ton compared to $706 per ton for the same period in 2009.

#### Gross Profit

Gross profit for the third quarter of 2010 of $53.4 million decreased $13.2 million or 20% compared to $66.6 million in the third quarter of 2009. As a percent of total sales, 2010 gross margin decreased by seven percentage points, from 37% to 30%. The gross profit for the SOP segment was approximately the same as the prior year as higher sales volumes in the 2010 quarter were offset by lower sales prices when compared to the same period in 2009. The gross margin for the salt segment contributed approximately $13 million to the decline in gross profit. Salt per unit production costs were higher in the third quarter of 2010 as a result of sigificantly reduced production volumes, primarily due to a two-month delay in equipment installation at our Goderich mine as part of its capacity expansion project. We also incurred an increase in input costs of approximately $3 million for KCl used for certain packaged water conditioning products and declines in salt gross profit due to lower salt sales volumes during the third quarter of 2010.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of 2010 of $20.7 million decreased $1.2 million, or 5% compared to $21.9 million for the same period of 2009. The decrease in expense is primarily due to lower variable compensation expenses. As a percentage of sales, selling, general and administrative expenses were 12% in both the third quarter of 2009 and the third quarter of 2010.

#### Interest Expense

Interest expense for the third quarter of 2010 of $5.3 million decreased $0.7 million compared to $6.0 million for the same period in 2009. This decrease is primarily due to lower market interest rates on our unhedged floating-rate debt.

#### Other Expense, Net

Other expense of $1.3 million for the third quarter of 2010 decreased $0.2 million when compared to expense of $1.5 million in the third quarter of 2009. Net foreign exchange losses were $1.7 million in the third quarter of 2010 when compared to $2.2 million in the same quarter of 2009 which was partially offset by lower interest income.

#### Income Tax Expense

Income tax expense of $6.8 million for the three months ended September 30, 2010 decreased from $11.5 million for the same period in 2009 primarily reflecting lower pre-tax income in the third quarter of 2010. In addition, our effective tax rate for the three months ended September 30, 2010 decreased due to the effects of refinements made in both the third quarter of 2010 and 2009 related to the expected full-year tax rate. 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 taxes, accrued interest and penalties on uncertain tax positions, and interest expense recognition differences for book and tax purposes.

### Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

#### Sales

Sales for the nine months ended September 30, 2010 of $712.6 million increased $61.7 million, or 9% compared to $650.9 million for the nine months ended September 30, 2009. Shipping and handling costs were $177.7 million during the first nine months of 2010, an increase of $8.2 million compared to $169.5 million for the same period in 2009. The increase in shipping and handling costs primarily reflects the higher sales volumes for the nine months ended September 30, 2010 when compared to same period of 2009.

Product sales for the nine months ended September 30, 2010 of $526.6 million increased $52.9 million, or 11% compared to $473.7 million for the same period in 2009. This increase reflects higher product sales in both salt and specialty fertilizer segments.

Salt product sales of $412.6 million for the nine months ended September 30, 2010 increased $32.5 million or 9% compared to $380.1 million in 2009. This increase was due primarily to higher pricing for our salt products, which contributed approximately $25 million to product sales. In addition, the weakening of the U.S. dollar in the first quarter of 2010 when compared to the prior year exchange rate for the Canadian dollar and British pound sterling, favorably impacted product sales by approximately $12 million. These increases were partially offset by an unfavorable shift in product mix for the nine months ended September 30, 2010 when compared to the same period of 2009. Salt sales volumes in 2010 increased by 136,000 tons from 2009 levels due primarily to restocking activities by customers in the U.K. following the severe 2009-2010 winter season which was partially offset by lower consumer deicing salt volumes. Winter weather in the first quarter of 2009 was significantly milder than normal in our North American regions and the first quarter of 2010 winter weather was also milder than normal in several of our important North American regions, especially in our Canadian regions around the Great Lakes.

SOP product sales of $114.0 million for the nine months ended September 30, 2010 increased $20.4 million or 22% over $93.6 million during the same period in 2009. This increase was due to higher sales volumes as demand rebounded significantly following a prolonged period of uncertainty about broader potash pricing throughout 2009. The higher SOP sales volumes were partially offset by lower prices for the nine months ended September 30, 2010 as our average market price was $513 per ton compared to $897 per ton for the same period in 2009.

#### Gross Profit

Gross profit for the nine months ended September 30, 2010 of $207.9 million decreased $29.0 million, or 12% compared to $236.9 million for the same period in 2009. As a percent of total sales, 2010 gross margin decreased by seven percentage points, from 36% to 29%. The gross margin for the SOP segment contributed approximately $19 million to the decline in gross profit due primarily to lower sales prices partially offset by higher sales volumes. The gross margin for the salt segment contributed approximately $10 million to the decline in gross profit. Salt price realizations were offset by unfavorable product mix and higher per unit productions costs. We had lower salt production for the nine months ended September 30, 2010 when compared to the same period in 2009 at our Cote Blanche and Goderich mines and certain consumer and industrial salt plants. Much of the reduced production related to deicing product inventory management following a mild winter in our primary service area. In addition, the strike at our Cote Blanche mine in the second quarter of 2010 and a two-month delay in equipment installation in the third quarter of 2010 at our Goderich mine as part of its capacity expansion project significantly reduced production volumes. In addition, the weakening of the U.S. dollar when compared to the prior year exchange rate for the Canadian dollar and the British pound sterling unfavorably impacted unit costs by approximately $9 million.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the 2010 nine-month period of $64.1 million increased $1.3 million, or 2% compared to $62.8 million for the same period of 2009. The increase in expense is primarily due to investments in personnel to support ongoing growth and productivity initiatives in 2010 when compared to 2009. As a percentage of sales, selling, general and administrative expenses declined from 10% in the nine months ended September 30, 2009 to 9% in the nine months ended September 30, 2010.

#### Interest Expense

Interest expense for the nine months ended September 30, 2010 of $16.5 million decreased $3.6 million compared to $20.1 million for the same period in 2009. This decrease is primarily due to lower market interest rates on our unhedged floating-rate debt and the refinancing of approximately $90 million of the Company’s 12% Senior Subordinated Discount Notes with 8% Senior Notes in June 2009.

#### Other Expense, Net

Other expense of $3.1 million for the nine months ended September 30, 2010 decreased $3.2 million from $6.3 million in the same period of 2009. Net foreign exchange losses were $3.4 million in the nine months ended September 30, 2010 when compared to losses of $2.6 million in the same period in 2009. The nine months ended September 30, 2009 also includes a $5.0 million charge related to the refinancing of the 12% senior subordinated discount notes, including tender and other fees of $4.1 million and the write-off of deferred financing fees of $0.9 million.

#### Income Tax Expense

Income tax expense of $34.7 million for the nine months ended September 30, 2010 decreased $11.6 million from $46.3 million for the same period in 2009 primarily reflecting the decline in pre-tax income in 2010. 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 taxes, accrued interest and penalties on uncertain tax positions, and interest expense recognition differences for book and tax purposes.

### Liquidity and Capital Resources

Historically, we have used cash generated from operations to meet our working capital needs, to fund capital expenditures, to pay dividends and to repay our debt. Principally due to the nature of our deicing business, our cash flows from operations are seasonal, with the majority of our cash flows from operations generated during the first half of the calendar year. When we have not been able to meet our short-term liquidity or capital needs with cash from operations, whether as a result of the seasonality of our business or other causes, we have met those needs with borrowings under our $125 million revolving credit facility (“Revolving Credit Facility”). We expect to meet the ongoing requirements for debt service, cash dividends and capital expenditures from future cash flows from operations, cash on hand, leasing arrangements or our senior secured credit facilities. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Cash and cash equivalents of $68.9 million as of September 30, 2010 increased $55.4 million from December 31, 2009 due primarily to operating cash flows of $168.1 million generated in the nine months ended September 30, 2010. We used a portion of those cash flows to fund capital expenditures of $77.1 million and to pay dividends on our common stock of $39.0 million.

As of September 30, 2010, we had $487.8 million of principal indebtedness consisting of $97.7 million 8% Senior Notes ($100 million at maturity) due 2019 and $390.1 million of borrowings outstanding under our Credit Agreement. Our Credit Agreement also includes a Revolving Credit Facility which provides borrowing capacity up to an aggregate amount of $125.0 million. In October 2010, the Company amended the terms of its Credit Agreement and entered into a new revolving credit facility. As part of the amendment, the Company extended the maturity of approximately $234 million of its term loans under that credit agreement to 2016. The remaining approximately $156 million outstanding on the term loan will mature in December 2012. No amounts were borrowed under our Revolving Credit Facility as of September 30, 2010. We had $9.4 million of outstanding letters of credit as of September 30, 2010 which reduced our borrowing availability to $115.6 million.

In 2009, we refinanced the remaining $89.6 million in outstanding 12% Senior Subordinated Discount Notes with 8% Senior Notes. Our debt service obligations could, under certain circumstances, materially affect our financial condition and impair our ability to operate our business or pursue our business strategies. As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets. The principal source of the cash needed to pay our obligations is the cash generated from our subsidiaries’ operations and their borrowings. Our subsidiaries are not obligated to make funds available to CMI. Furthermore, we must remain in compliance with the terms of our Credit Agreement, including the total leverage ratio and interest coverage ratio, in order to make payments on our 8% Senior Notes or pay dividends to our stockholders. We must also comply with the terms of our indenture, which limits the amount of dividends we can pay to our stockholders. Although we are in compliance with our debt covenants as of September 30, 2010, we cannot assure you that we will remain in compliance with these ratios nor can we 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 payments on the 8% Senior Notes, when due. If we consummate an acquisition, our debt service requirements could increase. Furthermore, we may need to refinance all or a portion of our indebtedness on or before maturity, however 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, 2010 and 2009

Net cash flows provided by operating activities for the nine months ended September 30, 2010 were $168.1 million, an increase of $99.6 million compared to $68.5 million for the nine months ended September 30, 2009. The $36.5 million reduction in working capital items in the nine months ended September 30, 2010 compared to an increase of $83.0 million in working capital in the nine months ended September 30, 2009 reflects our substantial investment in inventories during 2009 to replenish depleted salt inventories due to strong salt sales in the fourth quarter of 2008 and our election to continue to produce SOP in excess of the demand to replenish previously depleted inventories, leverage our low-cost production methods and gain flexibility to service any possible surge during a rebound in demand. During 2010, we have modestly liquidated inventories since the beginning of the year, resulting in a year-to-date net cash inflow from inventories. Additionally, due to the seasonal nature of our deicing products, our working capital changes will vary with the severity and timing of the winter weather in our regions.

Net cash flows used by investing activities of $78.1 million and $57.8 million for the nine months ended September 30, 2010 and 2009, respectively, resulted from capital expenditures of $77.1 million and $53.6 million respectively. Our capital expenditures in 2010 include expenditures in both our Goderich mine expansion project, to increase that mine’s annual production capacity, and activities to support the SOP evaporation plant expansion and yield improvement projects at the Great Salt Lake. The remaining capital expenditures were primarily for routine replacements. In addition, we acquired the assets of a salt packaging and depot handling facility in Minnesota for $3.6 million in the second quarter of 2009.

Financing activities during the 2010 nine-month period used $36.3 million of cash flows, primarily to make $39.0 million of dividend payments which was partially offset by proceeds received from stock option exercises. During 2009, we used $42.3 million in financing activities primarily to make $8.6 million of payments to reduce our outstanding debt drawn on our Revolving Credit Facility, $35.3 million of dividend payments and $6.5 million of tender costs and other fees related to issuance of our 8% Senior Notes and related redemption of our 12% Senior Subordinated Discount Notes.

### Sensitivity Analysis Related to EBITDA and Adjusted EBITDA

Management uses a variety of measures to evaluate the performance of CMP. While the consolidated financial statements, taken as a whole, provide an understanding of our overall results of operations, financial condition and cash flows, we analyze components of the consolidated financial statements to identify certain trends and evaluate specific performance areas. In addition to using U.S. generally accepted accounting principles (“GAAP”) financial measures, such as gross profit, net earnings and cash flows generated by operating activities, management uses EBITDA and EBITDA adjusted for items which management believes are not indicative of the Company’s ongoing operating performance (“Adjusted EBITDA”), both non-GAAP financial measures to evaluate the operating performance of our core business operations because our resource allocation, financing methods and cost of capital, and income tax positions are managed at a corporate level, apart from the activities of the operating segments, and the operating facilities are located in different taxing jurisdictions, which can cause considerable variation in net income. We also use EBITDA and Adjusted EBITDA to assess our operating performance and return on capital against other companies, and to evaluate expected returns on potential acquisitions or other capital projects. EBITDA and Adjusted EBITDA are not calculated under GAAP and should not be considered in isolation or as a substitute for net income, cash flows or other financial data prepared in accordance with GAAP or as a measure of our overall profitability or liquidity. EBITDA and Adjusted EBITDA exclude interest expense, income taxes and depreciation and amortization, each of which are an essential element of our cost structure and cannot be eliminated. Furthermore, Adjusted EBITDA excludes other cash and non-cash items of other (income) expense. Our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt. We are also required to pay income taxes, a required and on-going consequence of our operations. We have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues. Consequently, any measure that excludes these elements has material limitations. While EBITDA and Adjusted EBITDA are frequently used as measures of operating performance, these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation. The calculation of EBITDA and Adjusted EBITDA as used by management is set forth in the table below (in millions).

|  | Three Months Ended September 30, 2010 | 2009 | Nine Months Ended September 30, 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net earnings | $19.3 | $25.7 | $89.5 | $101.4 |
| Interest expense | 5.3 | 6.0 | 16.5 | 20.1 |
| Income tax expense | 6.8 | 11.5 | 34.7 | 46.3 |
| Depreciation, depletion and amortization | 12.2 | 10.9 | 36.3 | 31.7 |
| EBITDA | $43.6 | $54.1 | $177.0 | $199.5 |
| Other non-operating expenses: |  |  |  |  |
| Other expense, net | 1.3 | 1.5 | 3.1 | 6.3 |
| Adjusted EBITDA | $44.9 | $55.6 | $180.1 | $205.8 |

### Recent Accounting Pronouncements

In January 2010, the FASB issued guidance related to disclosures about fair value measurements. This guidance requires additional disclosures and clarification of existing disclosures for recurring and nonrecurring fair value measurements. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements within Level 3 measurements. The Company has adopted the guidance effective for periods after December 15, 2009 and included the required disclosures in Note 12 of its consolidated financial statements. The Company will adopt the additional Level 3 disclosures for annual and interim periods beginning after December 15, 2010. The adoption of this guidance will not have an impact on the Company’s financial position or results of operations.

### Effects of Currency Fluctuations

In addition to the United States, we conduct operations in Canada and the United Kingdom. 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 the U.S. dollar have fluctuated significantly from time to time 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. Significant changes in the value of the Canadian dollar 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 secured credit facilities.

Although inflation has not had a significant impact on the Company’s operations, our efforts to recover cost increases due to inflation may be hampered as a result of the competitive industry in which we operate.

### Seasonality

We experience a substantial amount of seasonality in salt segment sales, primarily with respect to our deicing products. As a result, 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 and magnesium chloride products vary based on the severity of the winter conditions in areas where the product is used. Following industry practice in North America and the U.K., we stockpile sufficient quantities of deicing salt throughout the second, third and fourth quarters to meet the estimated requirements for the upcoming winter season. Production of deicing salt can vary based on the severity or mildness of the preceding winter season and the timing of planned or unplanned production reductions or outages, which can impact the per-unit production cost. Due to the seasonal nature of the deicing product lines, operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

## Market risk

As filed, 867 characters.

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 and interest rate risk by entering into forward derivative instruments and interest rate swap agreements, and may take further actions to mitigate our exposure to changes in the cost of transporting our products due to variations in our contracted carriers’ cost of fuel, which is typically diesel fuel. However, there can be no assurance that our hedging activities will eliminate or substantially reduce these risks. We do not enter into any financial instrument arrangements for speculative purposes. The Company’s market risk exposure related to these items has not changed materially since December 31, 2009.

## Controls and procedures

As filed, 1,453 characters.

*Evaluation of Disclosure Controls and Procedures –* As of the end of the period covered by this report, an evaluation 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) was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010 to ensure that information required to be disclosed in the reports it files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

*Changes in Internal Control Over Financial Reporting -* There has been no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 152 characters.

There have been no material changes to the risk factors previously discussed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2009.

Filed Oct 27, 2010.
Source: SEC EDGAR, the filing index for accession 0001140361-10-042408. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.