# Compass Minerals International Inc: Form 10-Q for the period ended Sep 30, 2009

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2009-10-28
- Accepted by EDGAR: Oct 28, 2009, 15:14 ET
- Period: 2009-09-30
- Accession: 0001227654-09-000060
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000122765409000060/q310q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000122765409000060/

## Management's discussion and analysis

As filed, 33,500 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: general business and economic conditions; uninsured risks and hazards associated with underground mining operations; governmental policies affecting the agricultural industry or highway maintenance programs in localities where the Company or its customers operate; weather conditions; the impact of competitive products; pressure on prices realized by the Company for its products; constraints on supplies of raw materials used in manufacturing certain of the Company’s products and the availability of transportation services; capacity constraints limiting the production of certain products; the ability to attract and retain skilled personnel as well as labor relations including without limitation, the impact of work rules, strikes or other disruptions, wage and benefit requirements; difficulties or delays in the development, production, testing and marketing of products; difficulties or delays in receiving required governmental and regulatory approvals; market acceptance issues, including the failure of products to generate anticipated sales levels; the effects of and changes in trade, monetary, environmental and fiscal policies, laws and regulations; 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; volatility in credit and capital markets, including the risk of customer and counterparty defaults and credit availability; changes in tax laws or estimates for tax liabilities; 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 20, 2009, 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 markets. Inventory management practices are employed to respond to the varying level of demand which impacts our production volumes, the resulting per ton cost of inventory and ultimately profit margins, particularly during the non-winter quarters when we build our inventory levels. During the 2008-2009 winter season, in our North American markets the fourth quarter of 2008 was significantly more severe than normal while the first quarter of 2009 was below normal. By contrast, the 2007 – 2008 winter season in our North American markets was more severe than normal in both quarters. Our U.K. subsidiary experienced a more severe winter in the 2008 – 2009 winter season after a year of significantly milder than normal weather in the 2007 – 2008 winter season.

Our sulfate of potash (SOP) product is used in the production of specialty fertilizers for high-value crops and turf. Our domestic sales of SOP are concentrated in the western and southeastern portions of the United States where some crops and soil conditions favor the use of SOP as a source of potassium nutrients. Consequently, weather patterns and field conditions in these locations can impact the amount of specialty fertilizer sales volumes. Additionally, the demand for and market price of SOP is affected by the broader potash market which is influenced by many factors such as world grain and food supply, changes in consumer diets, general levels of economic activity and government food and agriculture 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. Beginning late in 2007 and throughout much of 2008, the demand for potassium nutrients for crops exceeded the available supply which contributed to a substantial increase in the market price for potash, including SOP. Demand for these products waned in the fourth quarter of 2008 and that has extended through 2009, as the broad agricultural industry has dealt with a global economic slowdown and reduced credit availability. Recently, muriate of potash (MOP) market pricing has declined, although pricing is still well above historical pricing levels which has resulted in lower SOP market pricing. We still expect SOP pricing to retain its historical premium to MOP.

Our North American salt mines and SOP production facility are near either water or rail transport systems, which reduces our shipping and handling costs when compared to alternative methods of distribution, although shipping and handling costs still account for a relatively large portion of the total delivered cost of our products. The tightening of available transportation services together with higher fuel costs has increased our shipping and handling costs on a per ton basis over the last several years. However, declining oil-based fuel costs beginning late in 2008 and continuing through the first nine months of 2009 has reversed this trend.

Manpower costs, energy costs, packaging, and certain raw material costs, particularly potassium chloride (KCl), a deicing and water conditioning agent and feed-stock used in making 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. 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 contracts up to 36 months in advance of purchases, helping to reduce the impact of price volatility. We purchase KCl under long-term supply contracts with annual changes in price based on previous year changes in the market price for KCl. The market price for KCl has increased significantly in recent years, causing continued price increases under our contracts, though still below current market due to the annual price adjustment mechanism. We cannot predict future changes in market prices for KCl, however our per ton costs to purchase KCl have been moderately higher in 2009. In the future, we may elect to forego or reduce our KCl purchases if we estimate prices have become impracticable or if we estimate demand conditions require lower SOP finished goods production volumes.

The consolidated financial statements have been prepared to present the historical financial condition and results of operations and cash flows for the Company which include our salt segment, specialty fertilizer segment, our records management business and unallocated corporate activities. The results of operations of the records management business include sales of $2.9 million and $2.8 million for the three months ended September 30, 2009 and 2008, respectively, and $7.7 million and $9.1 million for the nine months ended September 30, 2009 and 2008, respectively, and are not material to our consolidated financial statements and consequently, are not included in the table below. The following tables and discussion should be read in conjunction with the information contained in our consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

| Salt Sales (in millions) | Three Months Ended September 30, 2009 | 2008 | Nine Months Ended September 30, 2009 | 2008 |
| --- | ---: | ---: | ---: | ---: |
| Salt sales | $155.5 | $161.2 | $542.7 | $595.3 |
| Less: salt shipping and handling | 39.0 | 57.0 | 162.6 | 217.1 |
| Salt product sales | $116.5 | $104.2 | $380.1 | $378.2 |
| **Salt Sales Volumes (thousands of tons)** |  |  |  |  |
| Highway deicing | 1,527 | 1,837 | 6,481 | 8,083 |
| Consumer and industrial | 602 | 647 | 1,731 | 1,975 |
| Total tons sold | 2,129 | 2,484 | 8,212 | 10,058 |
| **Average Salt Sales Price (per ton)** |  |  |  |  |
| Highway deicing | $43.62 | $39.72 | $44.36 | $41.54 |
| Consumer and industrial | 147.56 | 136.32 | 147.45 | 131.39 |
| Combined | 73.03 | 64.87 | 66.09 | 59.18 |
| **Specialty Fertilizer (SOP) Sales (in millions)** |  |  |  |  |
| Specialty fertilizer sales | $23.9 | $73.4 | $100.5 | $175.1 |
| Less: SOP shipping and handling | 2.0 | 5.8 | 6.9 | 19.0 |
| Specialty fertilizer product sales | $21.9 | $67.6 | $93.6 | $156.1 |
| **Specialty Fertilizer Sales Volumes (thousands of tons)** | 34 | 98 | 112 | 332 |
| **Specialty Fertilizer Average Sales Price (per ton)** | $706 | $752 | $897 | $528 |

### Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

#### Sales

Sales for the third quarter of 2009 of $182.3 million decreased $55.1 million, or 23% compared to $237.4 million for the same quarter of 2008. Salt segment sales of $155.5 million for the third quarter of 2009 decreased $5.7 million from $161.2 million in the third quarter of 2008 while specialty fertilizer sales of $23.9 million decreased $49.5 million from $73.4 million in the third quarter of 2008. Sales primarily include revenues from the sale of our products which, in most instances, includes delivery to our customers, and revenues from our records management business. Product sales include sales as defined above less shipping and handling costs incurred to deliver salt and specialty fertilizer products to our customers. Shipping and handling costs decreased $21.8 million from $62.8 million in third quarter of 2008 to $41.0 million in the third quarter of 2009 due, in part, to lower sales volumes during the third quarter of 2009 when compared to the same period of 2008. In addition, the lower price of fuel and transportation services and product mix changes in the third quarter of 2009 have decreased our average per unit cost of shipping and handling products to our salt customers by approximately 20%.

Total salt and specialty fertilizer product sales for the third quarter of 2009 of $138.4 million decreased $33.4 million, or 19% compared to $171.8 million for the same period in 2008 reflecting lower specialty fertilizer segment product sales partially offset by higher salt segment product sales.

Salt product sales for the third quarter of 2009 of $116.5 million increased $12.3 million, or 12% compared to $104.2 million for the same period in 2008 due primarily to higher realized prices for salt products which contributed approximately $28 million to product sales. Salt sales volumes in 2009 declined by 355,000 tons or 14% from the 2008 period, consisting principally of lower sales volumes for deicing products. Deicing volumes declined due primarily to the unusually large early fill experienced in the third quarter of 2008 as customers replenished their inventories from the more severe 2008 winter season. In addition, lower sales volumes related to non-seasonal chlor-alkali products contributed to the decline in volumes due to weakness in the broader economy. Consumer and industrial products sales volumes declined primarily related to the Company’s focus on maximizing the value of its production, which has led the Company to relinquish sales to some of its lower priced customers. These changes in sales volumes unfavorably impacted product sales by approximately $13 million. In addition, the strength of the U.S. dollar in the third quarter of 2009 when compared to the prior year exchange rate for the Canadian dollar and British pound sterling, unfavorably impacted product sales.

SOP product sales for the third quarter of 2009 of $21.9 million decreased $45.7 million, or 68% compared to $67.6 million for the same period in 2008, as sales volumes declined due to the ongoing effects of the uncertain economy on the global agricultural industry and the reluctance of fertilizer customers to purchase potash at historically high prices. The lower sales volumes contributed approximately $42 million to the decline in product sales. In addition, SOP pricing declined by approximately 6% in the third quarter of 2009 from prior year levels which contributed an additional $4 million to the product sales decline. Although we have experienced a decline in our sales volumes since the fourth quarter of 2008 and a recent decline in SOP pricing, we believe the market for fertilizer products over the long-term has responded to factors which have increased worldwide demand for crop nutrients, including the need for improved yields in locations with growing populations and less arable land per capita, and alternative crop uses. Conditions such as these have affected the agricultural markets and the demand for all types of potash fertilizer products, including SOP.

#### Gross Profit

Gross profit for the third quarter of 2009 of $66.6 million decreased $10.2 million or 13% compared to $76.8 million in the third quarter of 2008. As a percent of total sales, 2009 gross margin increased by five percentage points, from 32% to 37%. The decline in gross margin for the SOP segment contributed approximately $31 million to the decrease due to lower sales volumes as well as a 6% decrease in average selling price. This decrease was partially offset by improvements to the gross margin for the salt segment of approximately $21 million due to price improvements combined with lower average per unit shipping and handling costs.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of 2009 of $21.9 million increased $1.1 million, or 5% compared to $20.8 million for the same period of 2008. The increase in expense is primarily due to higher costs for professional services.

#### Interest Expense

Interest expense for the third quarter of 2009 of $6.0 million decreased $3.5 million compared to $9.5 million for the same period in 2008. This decrease is primarily due to the early extinguishment of $20 million of the Company’s 12% Senior Subordinated Discount Notes during the fourth quarter of 2008, lower market interest rates on our floating-rate debt and the refinancing of the remaining balance of the Company’s 12% Senior Subordinated Discount Notes with senior notes (“8% Senior Notes”) in June 2009.

#### Other Expense, Net

Other expense of $1.5 million in the third quarter of 2009 and $2.9 million in the third quarter of 2008 primarily includes foreign currency exchange losses.

#### Income Tax Expense

Income tax expense of $11.5 million for the three months ended September 30, 2009 decreased from $14.9 million for the same period in 2008 primarily reflecting a decline in pre-tax income in 2009 as compared to 2008. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate differentials, foreign mining taxes, interest on uncertain tax positions, and interest expense recognition differences for book and tax purposes.

### Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

#### Sales

Sales for the nine months ended September 30, 2009 of $650.9 million decreased $128.5 million, or 16% compared to $779.4 million for the nine months ended September 30, 2008. Salt segment sales of $542.7 million for the nine months ended September 30, 2009 decreased $52.6 million from $595.3 million for the same period in 2008 while specialty fertilizer sales of $100.5 million for the nine months ended September 30, 2009 decreased $74.6 million from $175.1 million for the same period in 2008. Shipping and handling costs were $169.5 million during the first nine months of 2009, a decrease of $66.6 million compared to $236.1 million for the same period in 2008. The decrease in shipping and handling costs primarily reflects the lower sales volumes for the nine months ended September 30, 2009 when compared to same period of 2008, and the impact of lower per unit fuel and transportation costs.

Total salt and specialty fertilizer product sales for the nine months ended September 30, 2009 of $473.7 million decreased $60.6 million, or 11% compared to $534.3 million for the same period in 2008. This decrease reflects a decline in the specialty fertilizer segment partially offset by a modest increase in the salt segment as discussed below.

Salt product sales of $380.1 million for the nine months ended September 30, 2009 increased $1.9 million or 1% compared to $378.2 million in 2008. The milder than normal winter weather in our North American markets during the first quarter of 2009 compared to the more severe weather in the first quarter of 2008 led to lower sales volumes for highway deicing and consumer and industrial deicing products. In addition, lower sales volumes related to consumer and industrial products due primarily to the Company’s focus on maximizing the value of its production, has led the Company to relinquish sales to some of its lower priced customers. Lower sales volumes on non-seasonal chlor-alkali products due to weakness in the broader economy, also contributed to the sales decline. In the U.K., we experienced more severe than normal winter weather and stronger early fill orders which resulted in higher U.K. sales volumes for the first nine months of 2009 when compared to the same period in 2008. Overall, salt segment sales volumes in 2009 declined 1.8 million tons from 2008 levels which decreased sales by approximately $64 million. Higher realized prices contributed approximately $92 million to product sales. In addition, the strength of the U.S. dollar in the first nine months of 2009 when compared to the prior year exchange rate for the Canadian dollar and British pound sterling, unfavorably impacted product sales by approximately $26 million.

SOP product sales of $93.6 million for the nine months ended September 30, 2009 decreased $62.5 million or 40% over $156.1 million during the same period in 2008, as sales volumes declined due to the ongoing effects of the uncertain economy on the agricultural industry and the reluctance of fertilizer customers to apply potash at historically high prices. The lower sales volumes contributed approximately $101 million to the decline in product sales which was partially offset by price improvements in the first nine months of 2009 which yielded approximately $39 million in additional product sales.

#### Gross Profit

Gross profit for the nine months ended September 30, 2009 of $236.9 million increased $26.0 million, or 12% compared to $210.9 million for the same period in 2008. As a percent of total sales, 2009 gross margin increased by nine percentage points, from 27% to 36%. The gross margin for the salt segment contributed approximately $43 million to the increase due to price improvements combined with slightly lower average per unit shipping and handling costs which were partially offset by lower sales volumes. The gross margin for the SOP segment declined approximately $17 million from the prior year due primarily to lower sales volumes offset by higher average prices for the nine months ended September 30, 2009.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the 2009 nine month period of $62.8 million increased $4.9 million, or 8% compared to $57.9 million for the same period of 2008. The increase in expense is primarily due to professional services and modestly higher salt promotional activities.

#### Interest Expense

Interest expense for the nine months ended September 30, 2009 of $20.1 million decreased $12.4 million compared to $32.5 million for the same period in 2008. This decrease is primarily due to the early extinguishment of $90 million of the Company’s 12% Senior Subordinated Discount Notes during 2008, lower market interest rates on our floating-rate debt and the refinancing of the remaining balance of the Company’s 12% Senior Subordinated Discount Notes with 8% Senior Notes in June 2009.

#### Other expense, net

Other expense of $6.3 million for the nine months ended September 30, 2009 primarily includes a $5.0 million charge related to the refinancing of the 12% senior subordinated discount notes, including tender and other fees of $4.1 million and the write-off of deferred financing fees of $0.9 million. Other expense of $5.5 million for the nine months ended September 30, 2008 primarily consists of a call premium of $4.2 million and a write-off of $0.9 million related to the early extinguishment of $70.0 million of the Company’s 12% senior subordinated discount notes. Both periods also include foreign currency exchange losses.

#### Income Tax Expense

Income tax expense of $46.3 million for the nine months ended September 30, 2009 increased $10.7 million from $35.6 million for the same period in 2008 primarily reflecting the higher level of pre-tax income in 2009. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate differentials, foreign mining taxes, interest 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. 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 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 $13.2 million as of September 30, 2009 decreased $21.4 million from December 31, 2008. Our operating cash flows were $68.5 million in the first nine months of 2009. We used a portion of those cash flows and our cash on hand at the beginning of the year to fund capital expenditures of $53.6 million and to pay dividends on our common stock of $35.3 million. During 2009, we also refinanced our 12% Senior Subordinated Notes and repaid the December 31, 2008 balance of our revolving credit facility of $8.6 million.

As of September 30, 2009, we had $491.7 million of principal indebtedness including $97.5 million of 8% Senior Notes and $394.2 million of term loan borrowings under our senior secured credit agreement. Our senior secured credit agreement also includes a revolving credit facility which provides borrowing capacity up to an aggregate amount of $125.0 million. No amounts were borrowed under our revolving credit facility as of September 30, 2009. Our availability under the revolving credit facility was $115.2 million, net of $9.8 million of outstanding letters of credit as of September 30, 2009.

In June of 2009, we issued senior notes with an aggregate face amount of $100 million due in 2019 which bear interest at a rate of 8% per year payable semi-annually in June and December. The 8% Senior Notes were issued at a discount at 97.497% of their face value and the carrying value of the debt will accrete to their face value over the notes’ term, resulting in an effective interest rate of approximately 8.4%. With the proceeds of the 8% Senior Notes, the Company redeemed $89.6 million of its 12% Senior Subordinated Discount Notes due 2013. In connection with the debt refinancing, the Company paid approximately $4.1 million in call premiums and tender and other fees, and paid $2.4 million of fees that were capitalized as deferred financing costs.

We believe our cash flows from operations and borrowing availability under the revolving credit agreement will allow us to pay cash interest without materially adversely affecting our liquidity or financial condition. In addition, we plan on funding our 2009 capital needs primarily from cash on hand at September 30, 2009, cash expected to be generated from operations in 2009 and other financing arrangements, including leasing transactions.

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 senior secured credit facilities, 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. Although we are in compliance with our debt covenants as of September 30, 2009, 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 and principal payments on any of our debt when due. If we consummate an acquisition, our debt service requirements could increase and terms and conditions of our debt could change. Furthermore, we may need to refinance all or a portion of our indebtedness on or before maturity. However, we cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

### For the Nine Months Ended September 30, 2009 and 2008

Net cash flows provided by operating activities for the nine months ended September 30, 2009 were $68.5 million, a decrease of $107.9 million compared to $176.4 million for the nine months ended September 30, 2008. Working capital increases (reductions) accounted for approximately $(83.0) million and $48.7 million for 2009 and 2008, respectively, of the amounts included in cash flows provided by operations. These working capital changes are partially indicative of the seasonal nature of our deicing products and will vary with the severity of the winter weather in our markets. Additionally, in 2009 we have elected to continue to purchase KCl under our supply agreement and produce SOP in excess of the current, depressed demand to replenish previously depleted inventories, leverage our low-cost production methods and gain flexibility to service any possible surge during a potential rebound in demand. These potash inventory strategies have resulted in a $51 million decline in cash flows from operations when compared to the prior year.

Net cash flows used by investing activities of $57.8 million and $35.4 million for the nine months ended September 30, 2009 and 2008, respectively, resulted from capital expenditures of $53.6 million and $36.5 million respectively. In addition, the Company acquired the assets of a salt packaging and depot handling facility in Minnesota for $3.6 million in the second quarter of 2009.

Financing activities during the 2009 nine-month period used $42.3 million of cash flows, primarily to make payments of $8.6 million to reduce our outstanding debt and $35.3 million for dividends to stockholders. During 2008, we used $140.4 million in financing activities primarily to make $111.3 million of payments to reduce our outstanding debt and $33.2 million of dividend payments.

### Recent Accounting Pronouncements

In June, 2009, the FASB issued the “FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” to establish the FASB Accounting Standards Codification

(“Codification”) as the single source for authoritative nongovernmental U.S. GAAP. SEC rules and interpretive releases are also considered sources of authoritative GAAP. This guidance supersedes all prior accounting and reporting standards issued by entities other than the SEC. The Codification was effective for the Company in the third quarter of 2009 and did not have a material impact on its consolidated financial statements.

### Effects of Currency Fluctuations

In addition to the United States, we conduct operations in Canada and the United Kingdom. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then translated into U.S. dollars for inclusion in our historical consolidated financial statements. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly from time to time and may do so in the future. The majority of our revenues and costs are denominated in U.S. dollars, with pounds sterling and Canadian dollars also being significant. Significant changes in the value of the Canadian dollar or pound sterling relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar denominated debt, including borrowings under our senior secured credit facilities.

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

### Seasonality

We experience a substantial amount of seasonality in 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, 867 characters.

Our business is subject to various types of market risks that include, but are not limited to, interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has taken actions to mitigate our exposure to commodity pricing and interest rate risk by entering into forward derivative instruments and interest rate swap agreements, and may take further actions to mitigate our exposure to changes in the cost of transporting our products due to variations in our contracted carriers’ cost of fuel, which is typically diesel fuel. However, there can be no assurance that our hedging activities will eliminate or substantially reduce these risks. We do not enter into any financial instrument arrangements for speculative purposes. The Company’s market risk exposure related to these items has not changed materially since December 31, 2008.

## Controls and procedures

As filed, 1,073 characters.

*Evaluation of Disclosure Controls and Procedures –* As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2009 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 as and when required.

*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, 1,818 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, 2008 except as discussed below.

*Our tax liabilities are based on existing tax laws in our relevant tax jurisdictions and include estimates. Changes in tax laws or estimates could adversely impact our future profitability and cash flows.*

We file U.S., Canadian and U.K. tax returns at the federal and local taxing jurisdictional levels. Developing our provision for income taxes and analyzing our potential tax exposure items requires significant judgment and assumptions as well as a thorough knowledge of the tax laws in various jurisdictions. We are subject to audit by various taxing authorities and we may be assessed additional taxes during an audit. We regularly assess the likely outcomes of these audits, including any appeals, in order to determine the appropriateness of our tax provision. However, there can be no assurance that the actual outcomes of these audits or appeals will approximate our estimates and could have a material impact on our net earnings or financial condition. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, recently proposed significant changes to the U.S. tax laws could, if enacted, adversely impact our future profitability and cash flows.

Filed Oct 28, 2009.
Source: SEC EDGAR, the filing index for accession 0001227654-09-000060. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.