# Compass Minerals International Inc: Form 10-Q for the period ended Sep 30, 2016

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2016-10-25
- Accepted by EDGAR: Oct 25, 2016, 18:00 ET
- Period: 2016-09-30
- Accession: 0001227654-16-000257
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000122765416000257/cmp-20160930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000122765416000257/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $179.6m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $694.8m | us-gaap:SalesRevenueGoodsNet |
| Gross profit | 3 months, 2016-07-01 to 2016-09-30 | $45.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2016-01-01 to 2016-09-30 | $189.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $25.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $79.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $19.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $109.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $5.4m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $16.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $3.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $24.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $9.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $65.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.27 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.92 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.92 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 33,789,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 33,775,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $107.1m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $148.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2016-01-01 to 2016-09-30 | $70.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2016-09-30 | $432.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $860.8m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $2.10bn | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $134.3m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-09-30 | $1.20bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-09-30 | $8.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-09-30 | $667.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,453 characters.

All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q 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: hazards of mining, including acts of nature; uninsured risks; difficulties or delays in receiving or renewing required governmental or regulatory approvals; the impact of new technology on the demand for our products; the price or lack of availability of transportation services; agricultural economics, customer expectations about future plant nutrition prices and customer application rates; weather conditions; cyber security issues; the ability to attract and retain skilled personnel or avoid a disruption in our workforce; the impact of competitive products; governmental policies affecting highway maintenance programs, or consumer, industrial or agricultural sectors in localities where we or our customers operate; constraints on supplies and prices of raw materials and energy used in manufacturing certain of our products; changes in tax laws or estimates; domestic and international general business and economic conditions; foreign exchange rates and their fluctuations; the effects of and changes in trade, monetary, environmental and fiscal policies, laws and regulations; the costs and effects of legal and tax proceedings, including environmental and administrative proceedings; the impact of indebtedness and interest rates, including access to additional credit and capital markets; the ability to successfully complete acquisitions or integrate acquired businesses; misappropriation or infringement claims relating to intellectual property; capacity constraints limiting the production of certain products; difficulties or delays in the development, production, testing and marketing of products; market acceptance issues, including the failure of products to generate anticipated sales levels; and other risks referenced from time to time in this report and our other filings with the Securities and Exchange Commission (“SEC”), including the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015.

In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms or other comparable terminology. Forward-looking statements include without limitation statements about our expected outlook, including expected sales volumes, production costs, EBITDA contributions from Produquímica Indústria e Comércio S.A. (“Produquímica”), and savings from our cost structure review; our ability to meet debt service requirements, optimize cash accessibility and minimize tax expense; capital expenditures; and outcomes of matters with taxing authorities. These forward-looking 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 to the “Company,” “Compass,” “Compass Minerals,” “we,” “us” and “our” refer to Compass Minerals International, Inc. (“CMI,” the parent holding company) and its consolidated subsidiaries. Except where otherwise noted, references to North America include only the continental United States (the “U.S.”) and Canada, and references to the United Kingdom (the “U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to “short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds.

### Critical Accounting Estimates

Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 for the year ended December 31, 2015, 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.

### Company Overview

Based in the Kansas City metropolitan area, Compass Minerals is a leading producer of essential minerals, including salt, sulfate of potash (“SOP”) specialty fertilizer and magnesium chloride. As of September 30, 2016, we operated 13 production and packaging facilities, including the largest rock salt mine in the world in Goderich, Ontario, Canada, and the largest dedicated rock salt mine in the U.K. in Winsford, Cheshire. Our salt business produces and sells sodium chloride and magnesium chloride, which are used for highway deicing, dust control, consumer deicing, water conditioning, consumer and industrial food preparation and agricultural and industrial applications. Our solar evaporation facility located in Ogden, Utah, is both the largest SOP production site and the largest solar salt production site in North America. In addition, we operate a records management business utilizing excavated areas of our Winsford salt mine with one other location in London, U.K., which provides services to businesses throughout the U.K. In October 2016, we acquired Produquímica which operates two primary businesses in Brazil – agricultural productivity and chemical solutions.

### Consolidated Results of Operations

The following is a summary of our consolidated results of operations for the three and nine months ended September 30, 2016, and September 30, 2015, respectively. The following discussion should be read in conjunction with the information contained in our Consolidated Financial Statements and the Notes thereto included in this Quarterly Report on Form 10-Q.

### THREE AND NINE MONTHS ENDED SEPTEMBER 30

\* Refer to “—Sensitivity Analysis Related to EBITDA and Adjusted EBITDA” for a reconciliation to the most directly comparable GAAP financial measure and the reasons we use this non-GAAP measure.

### COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Sales decreased 23% to $179.6 million.
- Operating earnings decreased 52% to $19.5 million.
- Salt segment operating earnings decreased 33%, and plant nutrition operating earnings decreased 72%.
- Adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”)\* decreased 32% to $40.9 million.
- Diluted earnings per share decreased 66% to $0.27.

### COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Sales decreased 14% to $694.8 million.
- Operating earnings decreased 27% to $109.3 million.
- Salt segment operating earnings decreased 5%, and plant nutrition operating earnings decreased 73%.
- Adjusted EBITDA\* decreased 18% to $170.3 million.
- Diluted earnings per share decreased 35% to $1.92.

### THREE AND NINE MONTHS ENDED SEPTEMBER 30

### COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

### Gross Profit: Decreased $22.8 million or 34%; Gross Margin decreased 4 percentage points from 29% to 25%

- Salt gross profit decreased by approximately $16 million.
- The decrease in salt gross profit was due primarily to lower sales volumes due to a decrease in pre-winter demand and lower average selling prices, which was partially offset by lower logistics costs in the third quarter of 2016.
- Plant nutrition gross profit decreased by approximately $7 million.
- The decrease in plant nutrition gross profit was primarily due to a decline of 21% in average sales prices, which was partially offset by a 4% increase in sales volumes and sales of lower-cost SOP inventory during the third quarter of 2016.

### COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

### Gross Profit: Decreased $42.7 million or 18%; Gross Margin decreased 2 percentage points from 29% to 27%

- Salt gross profit decreased by approximately $9 million.
- The decrease in salt gross profit was due primarily to reduced salt average selling prices and lower salt sales volumes.
- The decrease in salt gross profit was partially offset by lower logistics costs and lower sales of purchased salt. We purchased salt in the first quarter of 2015 to supplement production due to unplanned downtime at our North American mines.
- Plant nutrition gross profit decreased by approximately $33 million.
- The decrease in plant nutrition gross profit was primarily due to lower average sales prices, lower sales volumes and a slight increase in per-unit production costs as we sold the remaining higher-cost SOP inventory from 2015 in the second quarter of 2016.
- The decrease in plant nutrition segment gross profit was partially offset by a $1.9 million gain from a transaction to exchange land at our Ogden, Utah, facility.

### OTHER EXPENSES AND INCOME

### COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

### SG&A: Decreased $1.5 million; increased 2.6 percentage points to 14.3% from 11.7% as a percentage of sales

- The decrease in expense was due to lower marketing expenses of $1.5 million in our plant nutrition segment and a decrease in incentive compensation, primarily in corporate and our salt segment, which was partially offset by higher corporate information and technology costs.

### Interest Expense: $5.4 million in both periods

- Interest expense related to our higher aggregate debt level was offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in April 2016.

### Net Loss from Equity Investee: Loss of $0.4 million in the three months ended September 30, 2016

- We recognized a loss of $0.4 million related to our share of Produquímica’s net loss from the second quarter of 2016, which includes $1.0 million of charges related to adjustments for the impact of the fair value of assets acquired in excess of their book value. We report Produquímica’s results on a three-month lag.

### Other (Income) Loss: Decreased from income of $4.3 million to a loss of $1.5 million

- Foreign exchange losses were $1.1 million in the third quarter of 2016 compared to foreign exchange gains of $4.1 million in same period of the prior year. In addition, we incurred $0.7 million of expenses related to the additional term loan incurred in September 2016, which was used to acquire the remaining 65% of Produquímica’s equity in October 2016.

### Income Tax Expense: Decreased $9.6 million to $3.1 million

- The decrease was primarily due to lower pre-tax income.
- Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, domestic manufacturing deductions, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
- Our effective tax rate decreased from 32% in the third quarter of 2015 to 25% in the third quarter of 2016 due to refinements made in each respective period related to the expected full-year pretax profit and effective tax rate.

### COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

### SG&A: Decreased $2.5 million; increased 1.3 percentage points to 11.5% from 10.2% as a percentage of sales

- The decrease in expense was due to a $1.9 million decrease in professional services expenses in corporate, lower marketing expenses of $1.4 million in both our salt and plant nutrition segments and lower total corporate incentive compensation.
- The decrease in expense was partially offset by $2.0 million of plant nutrition and corporate severance costs related to the restructuring of our business.

### Interest Expense: Increased $0.7 million to $16.8 million

- Interest expense related to our higher aggregate debt level was offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in April 2016.

### Net Loss from Equity Investee: Loss of $1.7 million in the nine months ended September 30, 2016

- We recognized a loss of $1.7 million related to our share of Produquimica’s net loss from the date of acquisition through the second quarter of 2016, which includes $1.9 million related to adjustments for the impact of the fair value of assets acquired in excess of their book value.

### Other Income: Decreased from income of $9.0 million to a loss $1.6 million

- The decrease was primarily due to lower foreign exchange gains of $8.0 million in 2016 and $2.2 million of expenses related to the refinancing of our credit facility in April 2016 and the additional term loan incurred in September 2016, which was used to acquire the remaining 65% of Produquímica’s equity in October 2016.

### Income Tax Expense: Decreased $17.5 million to $24.1 million

- The decrease was primarily due to lower pre-tax income.
- Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, domestic manufacturing deductions, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
- Our effective tax rate decreased from 29% in the first nine months of 2015 to 27% in the first nine months of 2016.

### Operating Segment Performance

The following financial results represent consolidated financial information with respect to sales from our salt and plant nutrition segments. Sales primarily include revenues from the sales of our products, or “product sales,” and the impact of shipping and handling costs incurred to deliver salt and plant nutrition products to our customers.

The results of operations of the consolidated records management business and other incidental revenues include sales of $2.4 million and $2.6 million for the third quarter of 2016 and 2015, respectively, and $7.5 million and $8.6 million for the first nine months of 2016 and 2015, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.

### SALT SEGMENT RESULTS THREE AND NINE MONTHS ENDED SEPTEMBER 30

| Salt Sales (in millions) | Q3 2016 | Q3 2015 | 2016 YTD | 2015 YTD |
| --- | ---: | ---: | ---: | ---: |
| Salt sales | $135.7 | $179.9 | $546.9 | $612.9 |
| Less: salt shipping and handling | 33.3 | 48.5 | 147.7 | 178.1 |
| Salt product sales | $102.4 | $131.4 | $399.2 | $434.8 |
| **Salt Sales Volumes (thousands of tons)** |  |  |  |  |
| Highway deicing | 1,162 | 1,618 | 5,944 | 6,476 |
| Consumer and industrial | 534 | 600 | 1,458 | 1,573 |
| Total tons sold | 1,696 | 2,218 | 7,402 | 8,049 |
| **Average Salt Sales Price (per ton)** |  |  |  |  |
| Highway deicing | $48.23 | $55.62 | $56.15 | $59.32 |
| Consumer and industrial | $149.44 | $149.82 | $146.23 | $145.39 |
| Combined | $80.05 | $81.10 | $73.89 | $76.14 |

24

### COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Salt sales were $135.7 million, a decrease of 25%, due to lower salt sales volumes and lower average salt selling prices.
- Salt average selling price decreased 1%, as the increased proportion of sales from higher-priced consumer and industrial products offset the decline in highway deicing average sales prices.
- Highway deicing average sales prices decreased 13%, primarily as a result of lower North American highway deicing contract prices, negative impacts of UK exchange rates and a higher mix of sales to chemical customers compared to the third quarter of 2015.
- Salt sales volumes decreased 522,000 tons, or 24%, and contributed approximately $33 million to the decline in salt segment product sales. Lower pre-season demand for bulk and packaged deicing products resulted in a 28% reduction in highway deicing sales volumes and an 11% decline in consumer and industrial sales volumes.
- Favorable logistics costs partially offset the decline in salt product sales.

### COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Salt sales were $546.9 million, a decrease of 11%, primarily due to lower average salt selling prices, lower early fill volumes in the third quarter and mild winter weather in the first quarter of 2016 in the U.K.
- Salt average selling price decreased 3% due to lower highway deicing prices partially offset by higher consumer and industrial product mix.
- Salt sales volumes declined 647,000 tons, or 8%, due to lower highway and consumer deicing sales volumes, primarily as a result of mild winter weather experienced in the first quarter of 2016 in the U.K. when compared to the same period in the prior year. This decline in sales volumes contributed approximately $34 million to the decline in salt segment product sales.
- Salt sales volumes in North America were unfavorably impacted by lower highway deicing early fill volumes in the third quarter, which was partially offset by an increase in the first six months resulting from the fulfillment of contract volumes associated with the 2015-2016 bid season.
- A decrease of 3% in salt average selling prices contributed approximately $15 million to the decline in salt product sales and included unfavorable foreign currency exchange rates.
- Favorable logistics costs partially offset the decline in salt product sales.

### PLANT NUTRITION SEGMENT RESULTS THREE AND NINE MONTHS ENDED SEPTEMBER 30

| Plant Nutrition Sales (in millions) | Q3 2016 | Q3 2015 | 2016 YTD | 2015 YTD |
| --- | ---: | ---: | ---: | ---: |
| Plant nutrition sales | $41.5 | $50.2 | $140.4 | $187.9 |
| Less: Plant nutrition shipping and handling | 5.1 | 4.7 | 17.2 | 17.8 |
| Plant Nutrition product sales | $36.4 | $45.5 | $123.2 | $170.1 |
| **Plant Nutrition Sales Volumes (thousands of tons)** | 70 | 67 | 218 | 249 |
| **Plant Nutrition Average Price (per ton)** | $591 | $751 | $645 | $756 |

### COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Plant nutrition sales were $41.5 million, a decrease of 17%.
- The 21% decrease in plant nutrition average selling price contributed approximately $11 million to the decrease in plant nutrition product sales. The lower average selling prices resulted from price actions we initiated to increase demand.
- Plant nutrition sales volumes increased 3,000 tons, or 4%, and offset the decline in plant nutrition product sales by approximately $2 million.

### COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016

- Plant nutrition sales were $140.4 million, a decrease of 25%.
- The 15% decrease in plant nutrition average selling price contributed approximately $31 million to the decrease in plant nutrition product sales.
- Plant nutrition sales volumes declined 31,000 tons, or 12%, and contributed approximately $15 million to the decrease in plant nutrition product sales primarily due to the continued weak demand in the agriculture market.

### Outlook

- The annual bidding process for North American highway deicing contracts has been completed and resulted in a decline of 7% in our awarded bid price when compared to our 2015-2016 bid season.
- Our awarded bid volume has declined approximately 15 percent compared to the prior bid season. We expect 2016 full-year salt sales volumes to range from 10.8 million tons to 11.1 million tons.
- We expect fourth quarter of 2016 plant nutrition sales volumes to exceed the sales volumes experienced in the fourth quarter of 2015.
- We continue to expect annual 2016 plant nutrition sales volumes in the range of 285,000 to 300,000 tons.
- We continue to expect to benefit from improved plant nutrition production costs in the fourth quarter of 2016, as we have sold our higher-cost, KCl-based inventory from 2015.
- We expect that the acquisition of Produquímica will contribute between R$60 million and R$70 million in adjusted EBITDA in the fourth quarter of 2016, based on a Brazilian Real-to-US$ exchange rate of R$3.25/US$1.00 and excluding any impact of purchase accounting adjustments.
- In February 2016, we announced steps to align our inventories with market demand, and we are undergoing a thorough review of our cost structure. This effort resulted in a restructuring charge in the first quarter of 2016 of $3.4 million, or $0.06 per diluted share, related to a workforce reduction of approximately 150 positions. A significant portion of this total results from our investment in continuous mining at our Goderich, Ontario location. We expect ongoing annualized savings of approximately $15 million beginning in 2018.

### Liquidity and Capital Resources

Historically, we have used cash generated from operations to meet our working capital needs, fund capital expenditures, pay dividends and repay our debt. Principally due to the nature of our deicing salt 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 revolving credit facility. We expect to meet the ongoing requirements for debt service, any declared dividends and capital expenditures from these sources. To a certain extent, our ability to meet our short- and long-term liquidity and capital needs is subject to general economic, financial, competitive, legislative, regulatory, weather, effects of climate change, geological variations in our mine deposits and other factors that are beyond our control. For example, our Ogden, Utah, operations use a portion of the Great Salt Lake which currently has unusually low lake levels as a result of drought conditions that have been exacerbated by delays in the opening of a causeway that allows bi-directional water flows. If these conditions continue, we may incur increased capital expenditures.

In April 2016, we refinanced our existing $471 million term loans and $125 million revolving credit facility with a new $400 million senior secured term loan and a $300 million senior secured revolving credit facility, which both mature July 1, 2021. The new term loan and revolving credit facility bear interest at LIBOR plus 1.5% based on our current leverage ratio and credit rating. In connection with the refinancing, we paid $5.8 million of refinancing fees ($1.4 million was recorded as an expense and $4.4 million was capitalized as deferred financing costs) and wrote-off $0.1 million of existing deferred financing costs related to the previous term loans and revolving credit facility. In September 2016, we amended our credit facility to increase our senior secured term loan by $450 million. This additional tranche will mature July 1, 2021, and bears interest at LIBOR plus 2.0%. In connection with this transaction, we incurred $2.2 million of financing fees ($0.7 million was recorded as an expense and $1.5 million was capitalized as deferred financing costs). Proceeds of this additional tranche were used to fund the acquisition of the remaining 65% of Produquímica’s equity in October 2016.

Cash and cash equivalents of $432.2 million as of September 30, 2016, increased $373.8 million over December 31, 2015, due to increased borrowings under our credit facility to fund the acquisition of Produquímica. We generated $107.1 million of operating cash flows in the first nine months of 2016. In the first nine months of 2016, we used cash on hand and cash flows from operations to fund capital expenditures of $148.7 million and to pay dividends on our common stock of $70.5 million.

As of September 30, 2016, we had $1,212.6 million of indebtedness, net of deferred financing costs, consisting of $246.8 million outstanding under our 4.875% senior notes due July 2024, $843.8 million outstanding under our term loans and $122.0 million outstanding under our revolving credit facility. We had $6.2 million of outstanding letters of credit as of September 30, 2016, which reduced our revolving credit facility borrowing availability to $171.8 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 substantially all of our consolidated operating activities 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 governing our term loans and revolving credit facility, including the total leverage ratio and interest coverage ratio, in order to make payments on our debt or pay dividends to our stockholders. We must also comply with the terms of our indenture governing our senior notes. Although we are in compliance with our debt covenants as of September 30, 2016, we can make no assurance that we will remain in compliance with these ratios nor can we make any assurance 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 our debt 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 provide assurance 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 Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of September 30, 2016, we had $30.6 million of cash and cash equivalents (in our consolidated balance sheets) that was either held directly or indirectly by foreign subsidiaries. Due in large part to the seasonality of our deicing salt business, we experience large changes in our working capital requirements from quarter to quarter. Typically, our consolidated working capital requirements are the highest in the fourth quarter and lowest in the second quarter. When needed, we fund short-term working capital requirements by accessing our revolving credit facility. Due to our ability to generate adequate levels of domestic cash flow on an annual basis, it is our current intention to permanently reinvest our foreign earnings outside of the U.S. However, if we were to repatriate our foreign earnings to the U.S., we may be required to accrue and pay U.S. taxes in accordance with the applicable U.S. tax rules and regulations as a result of the repatriation. We review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense.

In addition, 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 of our products between them. We calculate values charged on transfers based on guidelines established by a 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 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, as well as future cash flows from operations.

See Note 6 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments. See Note 8 to our Consolidated Financial Statements for a discussion regarding labor, environmental and litigation matters.

In December 2015, we completed the acquisition of a 35% equity stake in Produquímica, one of Brazil’s leading manufacturers and distributors of specialty plant nutrients. The purchase price for this all-cash transaction was R$452.4 million Brazilian Reais (or $114.1 million U.S. dollars at closing), subject to customary post-closing adjustments. Of the 35% equity stake, 6% consisted of common shares and the remaining 29% consisted of preferred shares that converted to common shares upon the settlement of certain post-closing adjustments, including additional consideration that was paid by us based upon Produquímica’s 2015 financial performance. The additional consideration of $4.7 million U.S. dollars was paid in the second quarter of 2016 and was recorded as an increase in investment in equity investee in our consolidated financial statements.

In October 2016, we completed the acquisition of the remaining 65% of Produquímica’s equity. The purchase price for this all-cash transaction was R$1,066 million Brazilian Reais (or $331.9 million U.S. dollars at closing), subject to customary post-closing adjustments. As a result of the transaction, we assumed approximately R$445 million Brazilian Reais (or $138.5 million U.S. dollars at closing) in net debt (inclusive of cash on hand at closing). During the fourth quarter of 2016, we expect to retire a portion of the debt assumed.

| NINE MONTHS ENDED SEPTEMBER 30, 2016 | NINE MONTHS ENDED SEPTEMBER 30, 2015 |
| --- | --- |
| **Operating Activities:** |  |
| » Net earnings were $65.1 million. » Non-cash depreciation and amortization expense was $62.7 million. » Working capital items were a use of operating cash flows of $22.7 million. | » Net earnings were $100.8 million. » Non-cash depreciation and amortization expense was $57.8 million. » Working capital items were a use of operating cash flows of $73.8 million. |
| **Investing Activities:** |  |
| » Net cash flows used by investing activities included $148.7 million of capital expenditures and an additional investment in Produquímica of $4.7 million. | » Net cash flows used by investing activities included $154.4 million of capital expenditures. |
| **Financing Activities:** |  |
| » Net cash flows used by financing activities included the payment of dividends of $70.5 million. » In addition, we had net proceeds from issuance of debt of $493.0 million, payments of $7.3 million related to the refinancing of our credit facility in April and September 2016 and proceeds from stock option exercises of $0.7 million. | » Net cash flows used by financing activities included the payment of dividends of $67.0 million. » In addition, we had net payments on long-term debt of $2.9 million and proceeds from stock option exercises of $2.3 million. |

### Sensitivity Analysis Related to EBITDA and Adjusted EBITDA

Management uses a variety of measures to evaluate the performance of Compass Minerals. 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 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 our 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. Our resource allocation, financing methods, cost of capital and income tax positions are managed at a corporate level, apart from the activities of the operating segments. In addition, 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 September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net earnings | $9.1 | $27.0 | $65.1 | $100.8 |
| Interest expense | 5.4 | 5.4 | 16.8 | 16.1 |
| Income tax expense | 3.1 | 12.7 | 24.1 | 41.6 |
| Depreciation, depletion and amortization | 21.8 | 19.6 | 62.7 | 57.8 |
| EBITDA | 39.4 | 64.7 | 168.7 | 216.3 |
| Adjustments to EBITDA: |  |  |  |  |
| Other (income) expense, net | 1.5 | (4.3) | 1.6 | (9.0) |
| Adjusted EBITDA | $40.9 | $60.4 | $170.3 | $207.3 |

29

### Recent Accounting Pronouncements

See Note 1 to our Consolidated Financial Statements for a discussion of recent accounting pronouncements.

### Effects of Currency Fluctuations

We conduct operations in Canada and the U.K. As of September 30, 2016, we also had an equity investment in Produquímica, a Brazilian corporation. 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. As of September 30, 2016, the majority of our revenues and costs is denominated in U.S. dollars, with British pounds sterling and Canadian dollars also being significant. Significant changes in the value of the Canadian dollar, British pound sterling or Brazilian real relative to the U.S. dollar could have a material effect on our financial condition.

Although inflation has not had a significant impact on our 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 and the U.K., we seek to stockpile sufficient quantities of deicing salt throughout the second, third and fourth quarters to meet the estimated requirements for the upcoming winter season.

## Market risk

As filed, 809 characters.

Our business is subject to various types of market risks that include interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has taken actions to mitigate our exposure to commodity pricing by entering into forward derivative instruments and may take further actions to mitigate our exposure to interest rates, exchange rates and 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. Our market risk exposure related to these items has not changed materially since December 31, 2015.

## Controls and procedures

As filed, 1,630 characters.

#### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016, to ensure that information required to be disclosed in the reports it files and submits under the Exchange Act 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 Chief Executive Officer and Chief Financial Officer, 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, 280 characters.

For a discussion of the risk factors applicable to Compass Minerals, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to our risk factors as disclosed in such Annual Report.

Filed Oct 25, 2016.
Source: SEC EDGAR, the filing index for accession 0001227654-16-000257. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.