# Compass Minerals International Inc: Form 10-Q for the period ended Jun 30, 2011

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2011-07-29
- Accepted by EDGAR: Jul 29, 2011, 21:19 ET
- Period: 2011-06-30
- Accession: 0001140361-11-038588
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000114036111038588/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000114036111038588/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-04-01 to 2011-06-30 | $179.9m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 6 months, 2011-01-01 to 2011-06-30 | $570.5m | us-gaap:SalesRevenueGoodsNet |
| Gross profit | 3 months, 2011-04-01 to 2011-06-30 | $44.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2011-01-01 to 2011-06-30 | $151.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-04-01 to 2011-06-30 | $22.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2011-01-01 to 2011-06-30 | $45.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | $22.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-01-01 to 2011-06-30 | $106.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-04-01 to 2011-06-30 | $5.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2011-01-01 to 2011-06-30 | $10.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | $3.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-01-01 to 2011-06-30 | $25.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | $14.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-01-01 to 2011-06-30 | $70.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | $2.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2011-01-01 to 2011-06-30 | $2.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 32,922 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2011-01-01 to 2011-06-30 | 32,894 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | $194.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-01-01 to 2011-06-30 | $43.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2011-01-01 to 2011-06-30 | $30.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2011-06-30 | $158.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-06-30 | $447.3m | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $1.13bn | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $118.1m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2011-06-30 | $480.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-06-30 | $4.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2011-06-30 | $412.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,811 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, consumer and industrial 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, and wage and benefit requirements; difficulties or delays in the development, production, testing and marketing of products; difficulties or delays in receiving and renewing required governmental and regulatory approvals; the impact of new technology on the demand for our products; 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, 2011, 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 served 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 second and third quarters when we build our inventory levels and earnings are typically lower than the first and fourth quarters. While the frequency of winter weather events in the first quarter of 2011 was higher than long-term averages, Company inventory constraints limited our ability to capitalize on above-normal weather in some regions. As a result, we estimate that there was no significant impact on our sales or operating earnings in the first quarter of 2011 from winter weather. In the first quarter of 2010, the impact on our operating results due to winter weather was estimated by the Company to have lowered sales and operating earnings from what would have been reported had winter weather been more normal. Variations in winter weather affect our highway and consumer and industrial deicing salt sales volumes and resulting gross profit, and impacts our inventory levels, which influence production volume, the resulting cost per ton, and ultimately our profit margins.

Our sulfate of potash (“SOP”) product is used in the production of specialty fertilizers for high-value crops and turf. We operate the largest SOP production facility in North America at the Great Salt Lake near Ogden, Utah where we utilize over 40,000 acres of solar ponds to produce raw SOP which is purified into salable SOP at its processing plant. Our current annual capacity to produce SOP at the Great Salt Lake site is approximately 350,000 tons, though we are currently investing in a multi-phased project to substantially increase our annual production capabilities. Because our production process relies on solar evaporation during the summer to produce SOP at our Great Salt Lake site, the intensity of heat and relative dryness of the weather conditions during that time impacts the amount of solar evaporation which occurs and correspondingly, the amount of raw SOP available to convert to finished product. In June 2011, localized rains and cooler weather have thus far slowed the summer solar evaporation process at this operation, when compared to more-typical weather. The duration and relative intensity of the weather through the summer evaporation season will determine the amount of any solar pond yield loss. Any reduction in yields would likely primarily reduce 2012 SOP finished goods production volumes and increase per-unit production costs accordingly. In January 2011, we acquired Big Quill Resources, Inc. (“Big Quill”), Canada’s leading SOP producer, which is expected to add approximately 40,000 tons to our annual SOP production capacity. The acquisition has broadened and strengthened the specialty fertilizer segment by adding unique production capabilities and higher-value applications.

Our domestic sales of SOP are concentrated in the Western and Southeastern U.S. for agricultural use as a crop fertilizer 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 (“KCl” or “MOP”) market. The potash market is influenced by many factors such as world grain and food supply, changes in consumer diets, general levels of economic activity, governmental food programs, and governmental 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. High-value or chloride-sensitive crop yields and/or quality tend to decline when alternative fertilizers are used. Demand for potassium nutrients for crops was suppressed through 2009, as the broader 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 began to experience a rebound in potash demand, which has continued in 2011. KCl market pricing declined throughout 2009 and into early 2010 from prices experienced at the end of 2008. However, market prices for KCl stabilized during much of 2010 and have recently increased to levels which are well above historical levels though below the historic-high prices 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; as a result, the average price of our SOP has fluctuated dramatically, and similarly to KCl. We expect SOP pricing to continue to retain a premium to KCl.

Our North American salt mines and SOP production facilities 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 increased our shipping and handling costs on a per-ton basis over the last several years. Shipping and handling costs on a per-ton basis in the first six months of 2011 have increased when compared to those experienced in the first six months of 2010 partially as a result of higher oil-based fuel costs. Future period per-unit costs will continue to be influenced by oil-based fuel costs.

Manpower costs, energy costs, packaging, and certain raw material costs, particularly KCl, a deicing and water conditioning agent and feedstock, 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 in the second quarter of 2010 relating to shift scheduling and wages. We had lower salt production in 2010 at both our Cote Blanche and Goderich mines and certain consumer and industrial salt plants. These 2010 events resulted in significantly higher per-unit salt production costs, especially for mined rock salt, when compared to our historical costs, a portion of which remained in inventory at the end of 2010. This inventory was sold during the first quarter of 2011 as part of the Company’s normal seasonal inventory changes, which resulted in higher per-unit costs in the first quarter of 2011. However, this trend reversed in the second quarter of 2011 as the sale of 2011 production, at more-historical per-unit costs, were lower than the prior year elevated unit cost levels. 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 increased significantly in recent years, causing continued price increases under our supply contracts. In 2010, we suspended purchases of, and currently do not have plans to purchase, KCl used to supplement our SOP production from solar ponds. We have continued to purchase KCl for certain water conditioning and consumer deicing applications at higher prices, which has increased input costs, although the impact on the Company’s gross margin is not expected to be significant. The Company’s SOP production in Canada purchases KCl under a very long-term supply agreement. The primary production method uses the brine of Big Quill Lake, which is rich in sodium sulphate and adds the purchased KCl to create high-purity SOP.

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 for Big Quill have been included in our specialty fertilizer segment results from the date of acquisition. The results of operations of the records management business include sales of $3.1 million and $2.8 million for the three months ended June 30, 2011 and 2010, respectively, and $5.9 million and $5.4 million for the six months ended June 30, 2011 and 2010, 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 June 30, 2011 | 2010 | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Salt sales | $127.3 | $134.6 | $459.7 | $437.1 |
| Less: salt shipping and handling | 38.0 | 35.3 | 144.9 | 126.9 |
| Salt product sales | $89.3 | $99.3 | $314.8 | $310.2 |
| **Salt Sales Volumes (thousands of tons)** |  |  |  |  |
| Highway deicing | 1,296 | 1,395 | 5,574 | 5,344 |
| Consumer and industrial | 483 | 519 | 1,067 | 1,054 |
| Total tons sold | 1,779 | 1,914 | 6,641 | 6,398 |
| **Average Salt Sales Price (per ton)** |  |  |  |  |
| Highway deicing | $43.28 | $42.42 | $53.42 | $52.05 |
| Consumer and industrial | 147.58 | 145.47 | 151.86 | 150.80 |
| Combined | 71.58 | 70.36 | 69.23 | 68.32 |
| **Specialty Fertilizer ("SOP") Sales (in millions)** |  |  |  |  |
| SOP sales | $49.5 | $41.6 | $104.9 | $94.1 |
| Less: SOP shipping and handling | 6.1 | 4.9 | 13.9 | 12.0 |
| SOP product sales | $43.4 | $36.7 | $91.0 | $82.1 |
| **SOP Sales Volumes (thousands of tons)** | 83 | 80 | 178 | 182 |
| **SOP Average Price (per ton)** | $600 | $519 | $591 | $516 |

### Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

#### Sales

Sales for the second quarter of 2011 of $179.9 million increased $0.9 million, or 1% compared to $179.0 million for the same quarter of 2010. 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 increased $3.9 million from $40.2 million in second quarter of 2010 to $44.1 million in the second quarter of 2011 due primarily to higher fuel costs, which are a component of shipping and handling costs, charged by our third-party carriers.

Product sales for the second quarter of 2011 of $132.7 million decreased $3.3 million, or 2% compared to $136.0 million for the same period in 2010 principally reflecting lower salt segment product sales partially offset by higher specialty fertilizer segment product sales.

Salt product sales for the second quarter of 2011 of $89.3 million decreased $10.0 million, or 10% compared to $99.3 million for the same period in 2010. The decrease in the second quarter was due primarily to lower salt segment sales volumes, which comprised the entire product sales decline. Salt sales volumes in the quarter decreased by 135,000 tons from 2010 levels principally due to lower sales of rock salt and specialty deicing products used in highway and consumer deicing due to shipping delays caused by flooding of the Mississippi and Ohio River systems. Salt sales volumes in the second quarter of 2010 were robust as preseason demand in the U.K. following a very severe winter and as North American customers purchased salt under annual minimum volume contract commitments following the mild 2009-2010 winter weather season. Normal or above average winter precipitation throughout the U.K. and much of North America during the 2010-2011 winter weather season resulted in lower sales in the second quarter of 2011 due to these factors.

SOP product sales for the second quarter of 2011 of $43.4 million increased $6.7 million, or 18% compared to $36.7 million for the same period in 2010. This increase was due to an increase in our average market price from $519 per ton in the second quarter of 2010 to $600 per ton in the second quarter of 2011, which contributed approximately $6 million. Additionally, we experienced higher sales volumes due to new costumer sales associated with the acquisition of Big Quill in January 2011, which were partially offset by lower sales to our traditional customers.

#### Gross Profit

Gross profit for the second quarter of 2011 of $44.3 million increased $4.4 million or 11% compared to $39.9 million in the second quarter of 2010. As a percent of total sales, 2011 gross margin increased by three percentage points, from 22% in the second quarter of 2010 to 25% in the second quarter of 2011. The gross margin for the SOP segment increased primarily due to higher average market prices, net of shipping costs increases, and the acquisition of Big Quill in January 2011. The gross margin for the salt segment increased slightly principally due to lower per-unit production costs in the second quarter of 2011 when compared to the prior year resulting from improved efficiencies on higher production tons compared to 2010.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the second quarter of 2011 of $22.2 million increased $0.7 million, or 3% compared to $21.5 million for the same period of 2010. The increase in expense is primarily due to higher compensation expenses.

#### Other (Income) Expense, Net

Other income of $0.4 million for the second quarter of 2011 decreased $1.5 million when compared to income of $1.9 million in the second quarter of 2010. Net foreign exchange gains were $0.2 million in the second quarter of 2011 when compared to foreign exchange gains of $2.2 million in the same quarter of 2010. The lower gain in the second quarter of 2011 was partially offset by higher interest income in the second quarter of 2011.

#### Income Tax Expense

Income tax expense of $3.3 million for the three months ended June 30, 2011 decreased from $3.7 million for the same period in 2010 and our effective tax rate for the three months ended June 30, 2011 decreased. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, domestic production activities deduction, 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.

### Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

#### Sales

Sales for the six months ended June 30, 2011 of $570.5 million increased $33.9 million, or 6% compared to $536.6 million for the six months ended June 30, 2010. Shipping and handling costs were $158.8 million during the first six months of 2011, an increase of $19.9 million compared to $138.9 million for the same period in 2010. The increase in shipping and handling costs primarily reflects the higher sales volumes for the six months ended June 30, 2010 when compared to same period of 2010 and higher fuel costs, which are a component of shipping and handling costs, charged by our third-party carriers.

Product sales for the six months ended June 30, 2010 of $405.8 million increased $13.5 million, or 3% compared to $392.3 million for the same period in 2010. This increase reflects higher product sales in both salt and specialty fertilizer segments.

Salt product sales of $314.8 million for the six months ended June 30, 2011 increased $4.6 million or 1% compared to $310.2 million in 2010. The increase in the first six months of 2011 was due primarily to higher salt segment sales volumes, which contributed approximately $10 million to product sales. Salt sales volumes in 2011 increased by 243,000 tons from 2010 levels principally due to higher sales of rock salt and specialty deicing products used in highway and consumer deicing. In the first quarter of 2011, the impact on our salt sales due to winter weather was estimated by the Company to be near normal. While the frequency of winter weather events in the first quarter of 2011 was higher than long-term averages, Company inventory constraints limited our ability to capitalize on above-normal weather in some regions. In the first quarter of 2010, the impact on salt sales due to winter weather was estimated by the Company to have lowered product sales from what would have been reported had winter weather been more normal. The salt product sales increase for the six months ended June 30, 2011 was partially offset by changes in customer mix. In addition, the weakening of the U.S. dollar in the first six months of 2011 when compared to the prior year exchange rate for the Canadian dollar and British pound sterling, favorably impacted product sales by approximately $6 million.

SOP product sales of $91.0 million for the six months ended June 30, 2011 increased $8.9 million or 11% over $82.1 million during the same period in 2010. This increase was due to an increase in our average market price to $591 per ton in the first six months of 2011 compared to $516 per ton in the same period of 2010, or approximately $10 million. This increase was partially offset by lower sales volumes, net of increased sales volumes from the acquisition of Big Quill in January 2011.

#### Gross Profit

Gross profit for the six months ended June 30, 2011 of $151.9 million decreased $2.6 million, or 2% compared to $154.5 million for the same period in 2010. As a percent of total sales, 2011 gross margin decreased by two percentage points, from 29% to 27%. The gross profit for the salt segment contributed approximately $10 million to the decline in gross profit due to higher per-unit salt costs in the first six months of 2011 as a result of higher per-unit production costs in 2010, a portion of which remained in inventory at the end of 2010. These higher-cost inventories were essentially all sold in the first quarter of 2011, which unfavorably impacted gross profit. Average per-unit salt costs in the second quarter of 2011 were lower than in the prior year second quarter, principally due to the sale of 2011 production, which have been more efficiently produced than in 2010. These decreases were partially offset by higher specialty fertilizer segment gross profit of approximately $7 million in the first six months of 2011 due to higher average market prices and the acquisition of Big Quill in January 2011.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the 2011 six-month period of $45.2 million increased $1.8 million, or 4% compared to $43.4 million for the same period of 2010. The increase in expense is primarily due to higher professional services costs associated with the acquisition of Big Quill and higher compensation expenses in the first six months of 2011 when compared to the same period in 2010.

#### Other (Income) Expense, Net

Other expense of $0.2 million for the six months ended June 30, 2011 improved $1.6 million from $1.8 million of other expenses in the same period of 2010. Net foreign exchange losses were $0.6 million in the six months ended June 30, 2011 when compared to losses of $1.7 million in the same period in 2010. In addition, interest income increased for the six months ended June 30, 2011.

#### Income Tax Expense

Income tax expense of $25.1 million for the six months ended June 30, 2011 decreased $2.8 million from $27.9 million for the same period in 2010 partially reflecting the decline in pre-tax income in 2011. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, domestic production activities deduction, 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. We expect to meet the ongoing requirements for debt service, any declared dividends and capital expenditures 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.

Cash and cash equivalents of $158.0 million as of June 30, 2011 increased $66.9 million over December 31, 2010 resulting principally from operating cash flows of $194.1 million generated in the first six months of 2011. We used a portion of those cash flows to purchase Big Quill for $58.1 million, fund capital expenditures of $43.7 million and to pay dividends on our common stock of $30.1 million.

As of June 30, 2011, we had $484.7 million of principal indebtedness consisting of $97.8 million 8% Senior Notes ($100 million at maturity) due 2019 and $386.9 million of borrowings outstanding under our Credit Agreement. No amounts were borrowed under our Revolving Credit Facility as of June 30, 2011. We had $12.2 million of outstanding letters of credit as of June 30, 2011 which reduced our Revolving Credit Facility borrowing availability to $112.8 million.

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 June 30, 2011, 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 additional 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 Six Months Ended June 30, 2011 and 2010

Net cash flows provided by operating activities for the six months ended June 30, 2011 were $194.1 million, an increase of $23.0 million compared to $171.1 million for the first six months of 2010. The $74.3 million reduction in working capital items in the first six months of 2011 and the $71.9 million reduction in working capital items in the first six months of 2010, which provided a large portion of our cash flows from operations each year, principally reflects the seasonal nature of our deicing products and can vary significantly due to the severity and timing of winter weather in our regions.

Net cash flows used by investing activities of $100.8 million and $46.6 million for the six months ended June 30, 2011 and 2010, respectively, resulted from capital expenditures of $43.7 million and $46.0 million respectively. Our capital expenditures in 2011 include expenditures to support the SOP evaporation plant expansion and yield improvement projects at our Great Salt Lake operations. The remaining capital expenditures were primarily for routine replacements. In addition, we invested $58.1 million for the acquisition of Big Quill in January 2011.

Net cash flows used by financing activities for the six months ended June 30, 2011 were $28.7 million of cash flows, resulting from dividend payments of $30.1 million which was partially offset by proceeds received from stock option exercises. During the first six months of 2010, we used $24.6 million of cash flows, primarily to make $26.0 million of dividend payments which was partially offset by proceeds received from stock option exercises.

### Sensitivity Analysis Related to EBITDA and Adjusted EBITDA

Management uses a variety of measures to evaluate the performance of the Company. 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 EBITDA and Adjusted EBITDA are non-GAAP financial measures used 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 earnings. We also use EBITDA and Adjusted EBITDA to assess our operating performance and return on capital, and to evaluate 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 earnings, 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 in 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 ongoing 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 June 30, 2011 | 2010 | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net earnings | $14.0 | $11.3 | $70.5 | $70.2 |
| Interest expense | 5.2 | 5.3 | 10.9 | 11.2 |
| Income tax expense | 3.3 | 3.7 | 25.1 | 27.9 |
| Depreciation, depletion and amortization | 16.4 | 12.0 | 32.8 | 24.1 |
| EBITDA | $38.9 | $32.3 | $139.3 | $133.4 |
| Other non-operating expenses: |  |  |  |  |
| Other (income) expense, net | (0.4) | (1.9) | 0.2 | 1.8 |
| Adjusted EBITDA | $38.5 | $30.4 | $139.5 | $135.2 |

### Recent Accounting Pronouncements

In June 2011, the FASB issued guidance related to the presentation of comprehensive income in the financial statements. The new accounting guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Under the new guidance, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this standard will not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

In May 2011, the FASB issued guidance related to fair value measurements and disclosures in the financial statements. This guidance conforms the wording to describe many of the requirements in U.S. GAAP to International Financial Reporting Standards to ensure the related standards are consistently applied. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard will not materially expand the Company’s consolidated financial statement footnote disclosures.

### Effects of Currency Fluctuations

We conduct operations in Canada and the U.K. 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 industries in which we operate.

### Seasonality

We experience a substantial amount of seasonality in our sales, primarily with respect to our deicing products. Consequently, 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, we stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season.

## Market risk

As filed, 855 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 may take further actions to mitigate our exposure to changes in interest rates and 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, 2010.

## Controls and procedures

As filed, 1,448 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 June 30, 2011 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, 2010.

Filed Jul 29, 2011.
Source: SEC EDGAR, the filing index for accession 0001140361-11-038588. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.