Compass Minerals International Inc: Form 10-Q for the period ended Jun 30, 2012

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; losses for acts of nature which may not be fully reimbursable through our insurance carriers; the timing of any insurance reimbursements may not correspond to the period in which the loss was incurred; 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, 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, 2012, 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

In August 2011, a tornado struck the Company’s salt mine and its salt mechanical evaporation plant, both located in Goderich, Ontario. There was no damage to the underground operations at the mine. However, some of the mine’s surface structures and the evaporation plant incurred significant damage which temporarily ceased production at both facilities. The Company resumed production and shipping activities, on a reduced basis, at the Goderich mine in early September 2011 and regained full hoisting capability in April 2012. The evaporation plant resumed limited activities in late September 2011 and reached full capacity by the end of the first quarter of 2012. However, the mine still requires significant repairs and reconstruction to fully restore the damaged surface structures and operating assets. In the last half of 2011, we recorded approximately $4.8 million for the impairment of our property, plant and equipment at the facilities. However, we may need to record additional impairment charges as more information becomes available. In addition, we have incurred clean-up and restoration costs related to the tornado. We expect to be fully reimbursed by our insurers for the replacement and repair costs for our property, plant and equipment and associated clean-up costs incurred. In the latter half of 2011, we recognized in the consolidated statements of operations the asset impairment charges and clean-up costs incurred of $14.5 million offset by the expected insurance recoveries of $14.5 million. In 2012, we recorded $1.1 million and $7.0 million of clean-up and restoration costs in the consolidated statements of operations for the three and six months ended June 30, 2012, respectively, which were fully offset in each period by the expected insurance recoveries.

We incurred approximately $23 million of capital expenditures during the first six months of 2012 to replace damaged or destroyed property, plant and equipment from the tornado bringing total capital expenditures for replacement property, plant and equipment to $40 million. We estimate we will spend another approximately $20 million primarily during the remainder of 2012 to complete the replacement of all property, plant and equipment impacted by the tornado. Capital expenditures to replace damaged property, plant and equipment will result in an increase in depreciation expense in future years. We also expect to have a substantial business interruption claim to offset the lost profits and to offset certain additional expenses incurred related to the ongoing operations. Since the tornado occurred, we have identified to date approximately $33 million ($16 million in 2011, $14 million in the first quarter of 2012 and $3 million in the second quarter of 2012) of estimated losses that we believe qualify as recoverable business interruption losses. However, we may not have been able to estimate the full amount of losses incurred since the tornado occurred. The amount of actual business interruption recoveries may differ materially from the Company’s current and future estimates. We expect to incur significant costs and other losses associated with the tornado (which we intend to seek recovery from a business interruption insurance claim) through at least the fourth quarter of 2012. These costs and losses are largely related to higher per-unit costs to produce inventory and to purchase finished goods inventories and are expected to continue into the 2012-2013 winter season when the inventories are likely sold to serve contracted business. We also experienced other incremental losses and costs due to the tornado related to our ongoing business. We believe the impact from lost sales, lost production and additional expenses we will incur will be substantially covered by our insurance policies. Any business interruption insurance recoveries will be recognized in “product cost” in the consolidated statements of operations when the insurance claim has been settled.

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 for the upcoming winter and earnings are typically lower than the first and fourth quarters. In the first quarter of 2012, winter weather was significantly milder than average and unfavorably impacted our sales and operating earnings. As a result, we expect to have lower rock salt production at our mines in 2012, which is also expected to result in increased per-unit costs through the 2012-2013 winter season. Due to the milder than average 2011-2012 winter season, we expect that highway deicing volumes will be lower in the third quarter of 2012 principally related to a decline in early fill orders as compared to the same period in 2011. In the first quarter of 2011, the frequency of winter weather was higher than long-term averages, yet inventory constraints limited our ability to capitalize on more-severe-than-average weather in some of the regions we serve. 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. Not only does the weather affect our highway and consumer and industrial deicing salt sales volumes and resulting gross profit, but it also 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. Our domestic sales of SOP are concentrated in the Western and Southeastern U.S. where the crops and soil conditions favor the use of low-chloride potassium nutrients, such as SOP. Consequently, weather patterns and field conditions in these locations can impact the amount of specialty fertilizer sales volumes. Because our production process relies on solar evaporation during the summer to produce SOP at our Ogden facility, the intensity of heat and relative dryness of the weather conditions during that time impact the amount of solar evaporation which occurs and correspondingly, the amount of raw SOP feedstock available to convert to finished product. During the summer of 2011, localized rains and cooler weather, especially early in the summer, slowed the summer solar evaporation process at this operation, when compared to more-typical weather, reducing the amount of precipitated minerals over the solar season, which are the raw materials utilized to produce SOP. The reduced minerals deposited will likely reduce SOP finished goods production volumes from our solar ponds in 2012, and increase per-unit production costs accordingly. We have also purchased and consumed some higher-cost mineral feedstock for SOP production in 2012. We expect the higher per-unit production costs for the inventory produced in 2012 to continue to impact our margins until early 2013 when we expect the remaining inventory produced in 2012 will be sold. In the early stages of the 2012 solar evaporation season, the weather has been hot and dry. Thus far, we have experienced a more typical precipitation of raw materials from which we produce our finished SOP, and significantly more than in the same period as last year’s solar season. These raw materials will be utilized to produce SOP primarily in 2013.

Additionally, the demand for and market price of SOP is affected by the broader potash 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 are generally lower when potassium chloride (“MOP” or “KCl”) is used as a potassium nutrient, rather than SOP. Market prices for MOP 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 MOP market pricing, and the resulting average price of our SOP has fluctuated dramatically in recent years. We expect SOP pricing to retain a premium to MOP although as MOP pricing increases, the amount and percentage of the premium tends to decrease.

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 for the six months ended June 30, 2012 have increased when compared to those experienced in the first six months of 2011 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, which can be used to make a portion of our deicing and water conditioning products, are also significant. The Company’s production workforce is typically represented by labor unions with multi-year collective bargaining agreements. We expect to incur significant costs and other losses associated with the tornado. These costs and losses are related to higher per-unit costs to produce inventory and to purchase finished goods inventories from third parties to serve anticipated deliveries we were committed to serve. These costs and losses are expected to continue into the 2012-2013 winter season when the inventories are likely sold to serve contracted business. (See discussion above for historical and expected trends in costs and losses due to the effects of the Goderich tornado and our expectations of recovering these costs and losses.) 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 purchased KCl for certain water conditioning and consumer deicing applications at higher prices than the prior year, 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. Our production methods at that site use 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 Resources have been included in our specialty fertilizer segment results from the date of acquisition in January 2011. The results of operations of the records management business include sales of $2.4 million and $3.1 million for the three months ended June 30, 2012 and 2011, respectively, and $4.9 million and $5.9 million for the six months ended June 30, 2012 and 2011, 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.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Sales

Sales for the second quarter of 2012 of $178.5 million decreased 1.4 million, or 1% compared to $179.9 million for the same quarter of 2011. Sales primarily include revenues from the sale of our salt and specialty fertilizer 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 $1.2 million from $44.1 million in the second quarter of 2011 to $42.9 million in the second quarter of 2012 due primarily to lower salt sales volumes in the second quarter of 2012 when compared to same period of 2011.

Product sales for the second quarter of 2012 of $133.2 million increased $0.5 million compared to $132.7 million for the same period in 2011 principally reflecting higher specialty fertilizer segment product sales partially offset by lower salt segment product sales.

Salt product sales for the second quarter of 2012 of $83.1 million decreased $6.2 million, or 7% compared to $89.3 million for the same period in 2011. 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 185,000 tons from 2011 levels principally due to lower sales of rock salt and specialty deicing products in our highway business particularly in the U.K. where preseason demand in 2011 was more robust than in 2012. In the second quarter of 2012, we realized average selling price improvements in our highway business, which were principally the result of the bid award pricing achieved in last year’s summer bid season and which were partially offset by the impact of the modest strengthening of the U.S. dollar in the second quarter of 2012 when compared to the prior year exchange rate for the Canadian dollar.

SOP product sales for the second quarter of 2012 of $50.1 million increased $6.7 million, or 15% compared to $43.4 million for the same period in 2011. This increase was due primarily to an 8,000 ton (10%) increase in sales volumes in the second quarter of 2012 when compared to the prior year, which contributed approximately $6 million to the increase in specialty fertilizer product sales. In addition, our average per-ton market price increased 2% in the second quarter of 2012 and contributed approximately $1 million of the increase in specialty fertilizer product sales.

Gross Profit

Gross profit for the second quarter of 2012 of $38.5 million decreased $5.8 million or 13% compared to $44.3 million in the second quarter of 2011. As a percent of total sales, 2012 gross margin decreased by three percentage points, from 25% in the second quarter of 2011 to 22% in the second quarter of 2012. The gross margin for the SOP segment decreased primarily due to the impact of higher per-unit production costs relating to the impact on production of localized rains and cooler weather at our Ogden facility experienced in the summer of 2011 and the related higher costs associated with the use of purchased mineral feedstock to supplement the reduction of pond-based SOP production. The gross margin for the salt segment decreased primarily to lower highway deicing sales volumes and the impact of higher average per-unit salt product costs in the second quarter of 2012 as a result of the effects of a tornado which struck our salt mine and salt mechanical evaporation plant, both located in Goderich, Ontario in August 2011. Thus far, we have identified approximately $3 million of estimated losses incurred in the second quarter of 2012 that we believe qualify as recoverable business interruption losses. Any insurance recoveries related to business interruption will be recognized in “product cost” in the consolidated statements of operations when the insurance claim has been settled. Also during the second quarter of 2012, we recorded approximately $1.1 million of clean-up and restoration costs which were offset by $1.1 million of expected insurance recoveries.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the second quarter of 2012 of $23.0 million increased $0.8 million, or 4% compared to $22.2 million for the same period of 2011. The increase in expense is primarily due to higher compensation expenses.

Interest Expense

Interest expense for the second quarter of 2012 of $4.5 million decreased $0.7 million compared to $5.2 million for the same period in 2011. This decrease is primarily due to lower interest rates resulting from the refinancing of our term loans in May 2012.

Other (Income) Expense, Net

Other expense was $3.1 million for the second quarter of 2012 and other income was $0.4 million for the second quarter of 2011. The second quarter of 2012 includes a $2.8 million charge related to the refinancing of our term loans in May 2012, comprised of refinancing fees of $1.8 million and the write-off of existing deferred financing fees of $1.0 million. In addition, net foreign exchange losses were $0.4 million in the second quarter of 2012 as compared to foreign exchange gains of $0.2 million in the second quarter of 2011.

Income Tax (Benefit) Expense

Income taxes for the second quarter of 2012 resulted in a benefit of $1.6 million as compared to an expense of $3.3 million for the second quarter of 2011 partially reflecting lower pretax income. In the second quarter of 2012, we settled an income tax audit which resulted in a $3.0 million reduction to income tax expense. 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, and interest expense recognition differences for book and tax purposes.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Sales

Sales for the six months ended June 30, 2012 of $493.8 million decreased $76.7 million, or 13% compared to $570.5 million for the six months ended June 30, 2011. Shipping and handling costs were $136.4 million during the first six months of 2012, a decrease of $22.4 million compared to $158.8 million for the same period in 2011. The decrease in shipping and handling costs is primarily due to lower salt sales volumes in the first six months of 2012 when compared to same period of 2011. Fuel costs were slightly higher for the six months ended June 30, 2012 when compared with 2011, principally during the first quarter of 2012, and unfavorably impacted shipping and handling costs.

Product sales for the first six months of 2012 of $352.5 million decreased $53.3 million, or 13% compared to $405.8 million for the same period in 2011 principally reflecting lower product sales in the salt segment and higher product sales for our specialty fertilizer segment.

Salt product sales of $251.4 million for the six months ended June 30, 2012 decreased $63.4 million or 20% compared to $314.8 million in 2011. The decrease in the first six months of 2012 was due primarily to lower salt segment sales volumes, which contributed approximately $63 million to the reduced salt product sales. Salt sales volumes in 2012 decreased by 1,437,000 tons from 2011 levels consisting of lower highway sales volumes principally due to lower sales of rock salt and specialty deicing products and lower consumer and industrial volumes from consumer deicing products. The decrease in volumes was due to the significantly milder than average weather in the first quarter of 2012 in the markets we serve. In the first quarter of 2011, the impact on our salt sales due to winter weather was estimated by the Company to be near average. In the first six months of 2012, price improvements for our highway business were partially offset by lower average selling prices for our consumer and industrial business due to product mix. In addition, the strengthening of the U.S. dollar in the first half of 2012 when compared to the prior year exchange rate for the Canadian dollar, unfavorably impacted product sales by approximately $2 million.

SOP product sales of $101.1 million for the six months ended June 30, 2012 increased $10.1 million, or 11% over $91.0 million during the same period in 2011. This increase was due to an increase in specialty fertilizer sales volumes and an increase in our average market price to $612 per ton in the first six months of 2012 compared to $591 per ton in the same period in 2011.

Gross Profit

Gross profit for the six months ended June 30, 2012 of $121.3 million decreased $30.6 million, or 20% compared to $151.9 million for the same period in 2011. As a percent of total sales, 2012 gross margin decreased by two percentage points, from 27% to 25%. The gross profit for the salt segment contributed approximately $27 million to the decline in gross profit due to lower salt deicing volumes and the impact of higher average per-unit salt product costs in the first six months of 2012 as a result of the effects of a tornado which struck our salt mine and salt mechanical evaporation plant, both located in Goderich, Ontario in August 2011. The reduction in gross profit was offset by improved per-unit costs, excluding the estimated effects of the tornado, due to improved operating efficiencies primarily at our North American salt mining operations related to 2011 operations. The first six months of 2011 was also unfavorably impacted by higher costs, when inventory with higher-than typical production costs in 2010, was sold in the first quarter of 2011. However, as a result of the tornado, we have identified to date approximately $17 million of estimated losses incurred in the first half of 2012 that we believe qualify as recoverable business interruption losses. Any insurance recoveries related to business interruption will be recognized in “product cost” in the consolidated statements of operations when the insurance claim has been settled. Also during the first six months of 2012, we recorded $7.0 million of clean-up and restoration costs which were offset by $7.0 million of expected insurance recoveries. The specialty fertilizer segment gross profit decreased by approximately $3 million in the first six months of 2012 principally due to higher per-unit production costs resulting from localized rains and cooler weather experienced in the summer of 2011 at our Ogden facility, which reduced solar pond-based SOP production volumes and resulted in the Company using higher cost purchased mineral feedstock.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the first six months of 2012 of $44.4 million decreased $0.8 million, or 2% compared to $45.2 million for the same period of 2011. The decrease in expense is primarily due to lower variable compensation expense in the first six months of 2012 partially offset by higher other compensation expenses and professional services costs when compared to the same period in 2011.

Interest Expense

Interest expense for the first six months of 2012 of $9.5 million decreased $1.4 million compared to $10.9 million for the same period in 2011. This decrease is primarily due to the expiration of our interest rate swap agreements which fixed interest rates in the first quarter of 2011 and lower interest rates due to the refinancing of our term loans in May 2012.

Other (Income) Expense, Net

Other expense of $4.7 million for the first six months of 2012 increased $4.5 million from $0.2 million in the same period of 2011. The second quarter of 2012 includes a $2.8 million charge related to the refinancing of our term loans in May 2012, comprised of refinancing fees of $1.8 million and the write-off of existing deferred financing fees of $1.0 million. In addition, net foreign exchange losses were $2.6 million in the first six months of 2012 when compared to foreign exchange losses of $0.6 million in the same period in 2011.

Income Tax (Benefit) Expense

Income tax expense of $13.3 million for the six months ended June 30, 2012 decreased $11.8 million from $25.1 million for the same period in 2011 partially reflecting the decline in pre-tax income in 2012. In addition, we settled an income tax audit which resulted in a $3.0 million reduction to income tax expense in the six months ended June 30, 2012. 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, 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 $147.6 million as of June 30, 2012 increased $17.3 million over December 31, 2011 resulting principally from operating cash flows of $115.5 million generated in the first six months of 2012. We used a portion of those cash flows to fund capital expenditures of $64.4 million and to pay dividends on our common stock of $33.2 million.

As of June 30, 2012, we had $484.1 million of principal indebtedness consisting of $98.1 million 8% Senior Notes ($100 million at maturity) due 2019 and $386.0 million of borrowings outstanding under our Credit Agreement. In May 2012, we amended and restated our senior secured credit facility and refinanced our term loans into a single term loan. The new term loan carries an interest rate of 1.75 percent over LIBOR. No amounts were borrowed under our Revolving Credit Facility as of June 30, 2012. We had $7.8 million of outstanding letters of credit as of June 30, 2012 which reduced our Revolving Credit Facility borrowing availability to $117.2 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, 2012, 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.

We have been able to manage our cash flows generated and used across the Company to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. The amount of permanently reinvested earnings is influenced by, among other things, the profits generated by our foreign subsidiaries and the amount of investment in those same subsidiaries. The profits generated by our domestic and foreign subsidiaries are, to some extent, impacted by the values charged on the transfer price of our products between them. We calculate values charged on transfers based on guidelines established by the multi-national organization which publishes accepted tax guidelines recognized in all of the jurisdictions in which we operate, and those calculated values are the basis upon which our subsidiary income taxes, profits and cash flows are realized. Some of our calculated values have been approved by taxing authorities for certain periods while the values for those same periods or different periods have been challenged by the same or other taxing authorities. While we believe our calculations are proper and consistent with the accepted guidelines, we can make no assurance that the final resolution of these matters with all of the relevant taxing authorities will be consistent with our existing tax return calculations and resulting financial statements. Additionally, the timing for settling these challenges may not occur for many years. We currently expect the outcome of these matters will not have a material impact on our results of operations. However, it is possible the resolution could impact the amount of earnings attributable to our domestic and foreign subsidiaries, which could impact the amount of permanently reinvested earnings and the tax-efficient access to consolidated cash on hand in all jurisdictions and future cash flows from operations.

Canadian tax authorities have issued tax reassessments for years 2002-2006 which are under audit, totaling approximately $58.3 million, including interest through June 2012, challenging tax positions claimed by one of the Company’s Canadian subsidiaries. The Company disputes these reassessments and plans to continue to work with the appropriate authorities in Canada to resolve the dispute. There is a reasonable possibility that the ultimate resolution of this dispute, and any related disputes for other open tax years, may be materially higher or lower than the amounts reserved for such disputes by the Company. In connection with this dispute, local regulations require us to post security with the tax authority until the dispute is resolved. The Company and the tax authority have agreed that the Company would post collateral in the form of a $33.7 million performance bond (including approximately $7.5 million of the performance bond which will be cancelled and paid in cash) and make cash payments of approximately $32.1 million (including the $7.5 million of cash to be paid when a portion of the performance bond is cancelled). Of these cash payments, the Company has paid $17.7 million and it has agreed to pay an additional $2.2 million in 2012 with the remaining balance to be paid after 2012. The Company will be required by the same local regulations to provide security for additional interest on the above disputed amounts and for any future reassessments issued by the Canadian tax authorities in the form of cash, letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authorities until the dispute is resolved.

In addition, the Company has recently been notified by a Canadian taxing authority that the authority intends to reassess the Company for periods which have already been settled by agreement between the Company, the Canadian taxing authority and the U.S. taxing authorities. We have fully complied with the agreement since entering into it and we believe this threatened action is highly unusual. We intend to seek to enforce the contract which provided the basis upon which our tax returns were previously filed and settled, should that be necessary. It is not possible to reasonably estimate the exposure at this time. However, we currently expect the ultimate outcome of this matter will not have a material impact on our results of operations or financial condition. In the event that a reassessment is issued, Canadian regulations would require us to post security with the tax authority for a portion of the reassessment until the dispute is resolved, and the security would be required to be posted in the form of cash, letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authority. The security posted may be material, and could materially impact our available liquidity. Depending on the final outcome of these reassessments, our available liquidity could change.

In August 2011, a tornado struck our salt mine and salt mechanical evaporation plant in Goderich, causing extensive damage to our property, plant and equipment; significant clean up costs; and interference with our operations. Losses caused by the tornado have affected our 2011 and 2012 consolidated financial statements and liquidity and will continue to impact our 2012 consolidated financial statements through at least the fourth quarter of 2012. While we expect to be reimbursed for these losses by our insurance carriers, there can be no assurance that all losses will be fully or even substantially reimbursed. We do not believe a final settlement will occur until 2013. In addition, we may not have been able to estimate the full amount of losses caused by the tornado. In 2012, we recorded $1.1 million and $7.0 million of clean-up and restoration costs in the consolidated statements of operations for the three and six months ended June 30, 2012, respectively, which were fully offset in each period by the expected insurance recoveries. Since the tornado occurred, we have identified to date approximately $33 million ($16 million in 2011, $14 million in the first quarter of 2012 and $3 million in the second quarter of 2012) of estimated losses that we believe qualify as recoverable business interruption losses. Thus far in 2012, we have had approximately $23 million of capital expenditures due to the tornado. Business interruption losses and capital expenditures to replace or repair assets reduce cash flows available for other operating needs of our business. The amount of actual business interruption recoveries may differ materially from the Company’s current and future estimates and the ultimate collection and timing of any insurance recoveries could materially impact our short-term or long-term financial position and liquidity. We received approximately $25.0 million of insurance advances in the first quarter of 2012. The Company recorded approximately $7.0 million of insurance advances as a reduction to salt product cost in the consolidated statements of operations and the remaining balance of approximately $18.0 million as deferred revenue in accrued expenses in the consolidated balance sheets n the first six months of 2012. In total, the Company has received $50 million of insurance advances since the tornado and recorded approximately $27.5 million of deferred revenue in accrued expenses in its consolidated balance sheets as of June 30, 2012. We have also recorded $21.5 million of total insurance advances received as a reduction to salt product costs in the consolidated statements of operations in 2011 and 2012 to offset recognized impairment charges and site clean-up and restoration costs.

For the Six Months Ended June 30, 2012 and 2011

Net cash flows provided by operating activities for the six months ended June 30, 2012 were $115.5 million, a decrease of $78.6 million compared to $194.1 million for the first six months of 2011. We had a reduction in working capital items of $10.6 million in the first six months of 2012 compared to a reduction of $74.3 million in the first six months of 2011. These reductions provided a portion of our cash flows from operations, and reflects the seasonal nature of our deicing products and will vary largely due to the severity and timing of the winter weather in our regions.

Net cash flows used by investing activities of $65.1 million and $100.8 million for the six months ended June 30, 2012 and 2011, respectively, resulted from capital expenditures of $64.4 million and $43.7 million respectively. Our capital expenditures in 2012 include expenditures to support the SOP evaporation plant expansion and yield improvement projects at our Great Salt Lake operations and capital expenditures of approximately $23 million for the replacement of assets damaged or destroyed by the tornado. The remaining capital expenditures were primarily for routine replacements. In 2011, we invested $58.1 million for the acquisition of Big Quill.

Net cash flows used by financing activities for the six months ended June 30, 2012 were $33.4 million, resulting from dividend payments of $33.2 million, which was partially offset by proceeds received from stock option exercises. During the first six months of 2011, we used $28.7 million of cash flows, primarily to make $30.1 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 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 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).

Thus far, we have identified approximately $3 million and $17 million of estimated losses in the consolidated statements of operations in the three and six months ended June 30, 2012, respectively, related to the effects of the 2011 tornado at Goderich. While we expect to be reimbursed for these losses by our insurance carriers, there can be no assurance that all losses will be fully or even substantially reimbursed. Also, our operating earnings were unfavorably impacted in the six months ended June 30, 2012 by significantly milder than average winter weather in the markets we serve. In the six months ended June 30, 2011, we estimate that there was no significant impact on our sales or operating earnings from winter weather.

Recent Accounting Pronouncements

In December 2011, the FASB issued guidance which requires an entity to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The update is effective for annual reporting periods beginning on or after January 1, 2013 and retrospective disclosure is required for all comparative periods presented. The adoption of this standard will not have a significant impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued guidance related to fair value measurements and disclosures in the consolidated financial statements. This guidance conforms the wording which describes 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 did not have a significant impact on the Company’s consolidated financial statements.

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.

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, 2011.

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, 2012 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.

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, 2011.