# Compass Minerals International Inc: Form 10-Q for the period ended Jun 30, 2017

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2017-08-08
- Accepted by EDGAR: Aug 8, 2017, 21:00 ET
- Period: 2017-06-30
- Accession: 0001227654-17-000172
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000122765417000172/cmp-20170630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000122765417000172/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2017-04-01 to 2017-06-30 | $44.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-01-01 to 2017-06-30 | $126.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $38.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $79.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $6.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $47.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $12.3m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $26.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | −$1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $4.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | −$6.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $15.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 33,823,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 33,813,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $143.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $55.6m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $48.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2017-06-30 | $33.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $539.5m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $2.30bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $254.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2017-06-30 | $1.17bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $82.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-06-30 | $693.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,320 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: risks related to our mining and industrial operations; geological conditions;

dependency on a limited number of key production and distribution facilities and critical equipment; the inability to fund necessary capital expenditures or successfully complete capital projects; supply constraints or price increases for energy and raw materials used in our production processes; weather conditions; climate change; our indebtedness and ability to pay our indebtedness; restrictions in our debt agreements that may limit our ability to operate our business or require accelerated debt payments; tax liabilities; financial assurance requirements imposed on us; the inability of our customers to access credit or a default by our customers of trade credit extended by us or financing we have guaranteed; restrictions on or ability to pay dividends; the impact of competition on the sales of our products; conditions in the agricultural sector and supply and demand imbalances for competing plant nutrition products; increasing costs or a lack of availability of transportation services; strikes, other forms of work stoppage or slowdown or other union activities; the loss of key personnel; our rights and governmental authorizations to mine and operate our properties; our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; compliance with foreign and U.S. laws and regulations applicable to our international operations; compliance with environmental, health and safety laws and regulations; environmental liabilities; the ability to access our computer systems and information technology or the inability to protect confidential data; misappropriation or infringement claims relating to intellectual property; changes in industry standards and regulatory requirements; product liability claims and product recalls; inability to obtain required product registrations or increased regulatory requirements; domestic and international general business and economic conditions; and other risks referenced from time to time in this report and our other filings with the Securities and Exchange Commission (the “SEC”), including the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016.

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 results of the highway deicing bid season, sales volumes, operating results, cost reductions and restructuring charges; the seasonal distribution of working capital requirements; our reinvestment of foreign earnings outside the U.S.; our ability to optimize cash accessibility and minimize tax expense and meet debt service requirements; capital expenditures; outcomes of matters with taxing authorities; and the seasonality of our business. 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 Minerals,” “our,” “us” and “we” 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, 2016, 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

Compass Minerals is a leading producer of essential minerals, including salt, sulfate of potash (“SOP”) specialty fertilizer and magnesium chloride. As of June 30, 2017, we operated 22 production and packaging facilities, including:

- The largest rock salt mine in the world in Goderich, Ontario, Canada;
- The largest dedicated rock salt mine in the U.K. in Winsford, Cheshire;
- A solar evaporation facility located in Ogden, Utah, which is both the largest SOP production site and the largest solar salt production site in the Western Hemisphere; and
- Several facilities producing essential agricultural nutrients and specialty chemicals in Brazil.

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. The Plant Nutrition South America segment represents the results of Produquímica Indústria e Comércio S.A. (“Produquímica”), which was acquired in October 2016. This segment 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 six months ended June 30, 2017, and June 30, 2016, 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 SIX MONTHS ENDED JUNE 30

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

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2016 AND 2017

- Total sales increased 35%, or $58.5 million, primarily due to the acquisition of Produquímica and a modest increase in Plant Nutrition North America sales. This increase was partially offset by a decrease in Salt segment sales.
- Operating earnings decreased 61%, or $9.5 million, due to lower Salt segment operating earnings, partially offset by an increase in Plant Nutrition North America operating earnings and the inclusion of Produquímica in our operating results.
- Earnings before interest, taxes, depreciation and amortization (“EBITDA”)\* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)\* decreased 2%, or $0.6 million.
- Diluted earnings per share decreased $0.37.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2016 AND 2017

- Total sales increased 20%, or $100.6 million, primarily due to the acquisition of Produquímica. This increase was partially offset by a decrease in Salt segment sales.
- Operating earnings decreased 47%, or $42.4 million, due to lower Salt segment operating earnings, partially offset by an increase in Plant Nutrition North America operating earnings and the inclusion of Produquímica in our operating results.
- Adjusted EBITDA\* decreased 20%, or $25.4 million.
- Diluted earnings per share decreased 73%, or $1.21.

### THREE AND SIX MONTHS ENDED JUNE 30

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2016 AND 2017

### Gross Profit: Increased 9%, or $3.6 million; Gross Margin decreased 4 percentage points

- The total plant nutrition business, on a combined basis, contributed approximately $16 million to the increase in gross profit.
- Gross profit for Plant Nutrition North America was favorably impacted by higher sales volumes and lower per-unit costs, which were partially offset by higher per-unit shipping and handling costs during the period.
- A decrease in Salt gross profit partially offset the increase in total gross profit by approximately $12 million.
- The decrease in Salt gross profit was primarily due to significantly higher per-unit costs and lower sales.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2016 AND 2017

### Gross Profit: Decreased 12%, or $17.4 million; Gross Margin decreased 7 percentage points

- The Salt segment contributed approximately $50 million to the decrease in gross profit.
- Salt gross profit decreased primarily due to lower sales and higher per-unit costs.
- The total plant nutrition business, on a combined basis, partially offset the decline in gross profit by approximately $32 million.
- Gross profit for Plant Nutrition North America was favorably impacted by higher sales volumes and lower per-unit costs, which were partially offset by lower average sales prices and higher per-unit shipping and handling costs during the period.

### OTHER EXPENSES AND INCOME

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2016 AND 2017

### SG&A: Increased $13.1 million; increased 1.9 percentage points to 17.1% from 15.2% as a percentage of sales

- The increase in SG&A expense was primarily due to the inclusion of Produquímica in our operating results in 2017 and approximately $1 million of charges primarily in our Salt segment related to ongoing restructuring activities.

### Interest Expense: Increased $6.7 million to $12.3 million

- The increase was primarily due to our higher aggregate debt level driven by the acquisition of Produquímica.

### Other Expense: Increased $0.9 million to $1.8 million

- The increase in other expense was primarily due to foreign exchange losses, which were partially offset by an increase in interest income. Additionally, the comparative 2016 period included $1.6 million of expenses incurred related to the refinancing of our term loans and revolving credit facility.

### Income Tax (Benefit) Expense: Decreased $2.5 million to a benefit of $1.5 million

- The decrease was primarily due to lower pre-tax income and a lower effective tax rate.
- 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 increased from 14% in the second quarter of 2016 to 19% in the second quarter of 2017, reflecting refinements made in each respective period related to the expected full-year pretax profit and expected tax rate.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2016 AND 2017

### SG&A: Increased $25.0 million; increased 2.3 percentage points to 12.8% from 10.5% as a percentage of sales

- The increase in SG&A expense was primarily due to the inclusion of Produquímica in our operating results in 2017.

### Interest Expense: Increased $14.6 million to $26.0 million

- The increase was primarily due to our higher aggregate debt level driven by the acquisition of Produquímica, which was partially offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in April 2016.

### Other Expense: Increased $1.6 million to $1.7 million

- The increase in other expense was primarily due to foreign exchange losses, which were partially offset by an increase in interest income. Additionally, the comparative 2016 period included $1.6 million of expenses incurred related to the refinancing of our term loans and revolving credit facility.

### Income Tax Expense: Decreased $16.2 million to $4.8 million

- The decrease was primarily due to lower pre-tax income and a lower effective tax rate.
- 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 declined from 27% in the first six months of 2016 to 24% in the first six months of 2017, reflecting a reduction in certain tax valuation allowances associated with the acquired Produquímica business.

### Operating Segment Performance

The following financial results represent consolidated financial information with respect to sales from our Salt, Plant Nutrition North America and Plant Nutrition South America segments. 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 second quarter of 2017 and 2016, respectively, and $4.9 million and $5.1 million for the first six months of 2017 and 2016, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.

### THREE AND SIX MONTHS ENDED JUNE 30

|  | 2Q 2017 | 2Q 2016 | 2017 YTD | 2016 YTD |
| --- | ---: | ---: | ---: | ---: |
| **Salt Sales (in millions)** | $109.0 | $119.1 | $383.8 | $411.2 |
| **Salt Operating Earnings (in millions)** | $10.7 | $23.3 | $56.1 | $106.0 |
| **Salt Sales Volumes (thousands of tons)** |  |  |  |  |
| Highway deicing | 948 | 1,058 | 4,439 | 4,782 |
| Consumer and industrial | 424 | 442 | 966 | 924 |
| Total tons sold | 1,372 | 1,500 | 5,405 | 5,706 |
| **Average Salt Sales Price (per ton)** |  |  |  |  |
| Highway deicing | $49.95 | $53.02 | $54.12 | $58.08 |
| Consumer and industrial | $145.32 | $142.47 | $148.65 | $144.38 |
| Combined | $79.44 | $79.39 | $71.01 | $72.06 |

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2016 AND 2017

- Salt sales decreased 8%, or $10.1 million, due to lower highway deicing average sales prices and lower highway and consumer and industrial sales volumes, which were partially offset by an increase in consumer and industrial average sales prices.
- Salt average sales prices were essentially flat due to an increase in consumer and industrial products average sales prices offset by lower highway deicing average sales prices.
- Highway deicing average sales prices decreased 6%, primarily as a result of lower North American highway deicing bid prices for the 2016-2017 winter season and product sales mix. Consumer and industrial average sales prices increased 2% due to price increases introduced last year as well as an improvement in product sales mix.
- Salt sales volumes decreased 9%, or 128,000 tons, and contributed approximately $10 million to the decline in Salt segment sales. Highway deicing sales volumes decreased 10% primarily due to the carryover impact of two consecutive mild winters. Consumer and industrial sales volumes decreased 4%.
- Salt operating earnings decreased 54%, or $12.6 million, due to higher per-unit production costs resulting from lower operating rates due to lower than expected demand and costs associated with the on-going implementation of continuous

mining at our Goderich mine.

- In addition, unfavorable logistics costs contributed to the decline in Salt segment operating earnings.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2016 AND 2017

- Salt sales decreased 7%, or $27.4 million, due to lower highway deicing average sales prices and sales volumes, which were partially offset by an increase in consumer and industrial sales volumes and average sales prices.
- Salt average sales price decreased 1% and contributed approximately $6 million to the decrease in Salt segment sales. The decrease in average sales price was due to a decrease in highway deicing average sales prices, partially offset by an increase in consumer and industrial products average sales prices.
- Highway deicing average sales prices decreased 7%, primarily as a result of lower North American highway deicing bid prices for the 2016-2017 winter season. Consumer and industrial average sales prices increased 3% due to price increases introduced last year as well as an improvement in product sales mix.
- Salt sales volumes decreased 5%, or 301,000 tons, and contributed approximately $21 million to the decline in Salt segment sales. Highway deicing sales volumes decreased 7% primarily due to the carryover impact of two consecutive mild winters. This increase was partially offset by a 5% volume improvement in the consumer and industrial business.
- Salt operating earnings decreased 47%, or $49.9 million, primarily due to lower sales during the first six months of 2017 and higher per-unit costs due to sales of higher-cost 2016 inventory sold during the period. We experienced lower mine operating rates throughout 2016 and unplanned downtime at our Goderich mine in the fourth quarter of 2016, which increased 2017 per-unit costs.
- In addition, unfavorable logistics costs contributed to the decline in Salt segment operating earnings.

### THREE AND SIX MONTHS ENDED JUNE 30

|  | 2Q 2017 | 2Q 2016 | 2017 YTD | 2016 YTD |
| --- | ---: | ---: | ---: | ---: |
| **Plant Nutrition North America Sales (in millions)** | $50.5 | $47.8 | $99.7 | $98.9 |
| **Plant Nutrition North America Operating Earnings (in millions)** | $7.6 | $4.7 | $15.2 | $10.0 |
| **Plant Nutrition North America Sales Volumes (thousands of tons)** | 78 | 74 | 157 | 148 |
| **Plant Nutrition North America Average Sales Price (per ton)** | $642 | $651 | $633 | $670 |

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2016 AND 2017

- Plant Nutrition North America sales increased 6%, or $2.7 million.
- Plant Nutrition North America sales volumes increased 5%, or 4,000 tons, and contributed approximately $3 million to the increase in Plant Nutrition North America sales. This increase was due to strengthening demand for specialty plant nutrients at modestly lower prices.
- The 1% decrease in Plant Nutrition North America average sales price partially offset the increase in Plant Nutrition North America sales by approximately $1 million.
- Plant Nutrition North America operating earnings increased 62%, or $2.9 million, primarily due to a 9% reduction in per-unit costs as lower SOP manufacturing costs more than offset a modest rise in SG&A expense related to increasing the innovation and commercialization capabilities of the plant nutrition business.
- Unfavorable logistics costs partially offset the increase in Plant Nutrition North America operating earnings.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2016 AND 2017

- Plant Nutrition North America sales increased 1%, or $0.8 million.
- Plant Nutrition North America sales volumes increased 6%, or 9,000 tons, and contributed approximately $6 million to the increase in Plant Nutrition North America sales. This increase was due to a modest improvement in North American SOP market fundamentals.
- The 5% decrease in Plant Nutrition North America average sales price partially offset the increase in Plant Nutrition North America sales by approximately $6 million. The lower average selling prices resulted from the depressed agriculture market.
- Plant Nutrition North America operating earnings increased 52%, or $5.2 million, primarily due to a 13% reduction in per-unit costs.
- Unfavorable logistics costs partially offset the increase in Plant Nutrition North America operating earnings.

### PLANT NUTRITION SOUTH AMERICA SEGMENT RESULTS

|  | 2Q 2017 | 2017 YTD |
| --- | ---: | ---: |
| **Plant Nutrition South America Sales** | $66.1 | $127.4 |
| **Plant Nutrition South America Operating Earnings** | $0.8 | $2.6 |
| **Plant Nutrition South America Sales Volumes (thousands of tons)** |  |  |
| Agricultural productivity | 79 | 139 |
| Chemical solutions | 72 | 144 |
| Total tons sold | 151 | 283 |
| **Average Plant Nutrition South America Sales Price (per ton)** |  |  |
| Agricultural productivity | $519 | $553 |
| Chemical solutions | $350 | $352 |
| Combined | $439 | $451 |

### COMMENTARY: THREE MONTHS ENDED JUNE 30, 2017

- Plant Nutrition South America sales were $66.1 million for the second quarter. Plant Nutrition South America’s operating results are impacted by seasonality. Sales volumes are usually higher in the third and fourth quarter and lower in the first and second quarters. See “—Seasonality” for more information.
- Plant Nutrition South America average sales price was $439 per ton.

### COMMENTARY: SIX MONTHS ENDED JUNE 30, 2017

- Plant Nutrition South America sales were $127.4 million for the first six months of 2017. Plant Nutrition South America’s operating results are impacted by seasonality. Sales volumes are usually higher in the third and fourth quarter and lower in the first and second quarters. See “—Seasonality” for more information.
- Plant Nutrition South America average sales price was $451 per ton.

### Outlook

- The annual bidding process for North American highway deicing contracts is underway, and because of mild winter weather in the U.S., we expect a contraction of bid volumes in our served markets when compared to the 2015-2016 bid season. We expect Salt sales volumes to range from 11.3 million to 11.6 million tons in 2017.
- We expect Plant Nutrition North America sales volumes to range from 320,000 to 340,000 tons in 2017.
- Our Plant Nutrition South America business has been negatively impacted by delayed and reduced purchasing by distribution customers, however sales of its higher-value products sold directly to farmers have remained strong. As a result, we expect Plant Nutrition South America sales volumes to range from 750,000 to 850,000 tons in 2017.
- In July 2017, we initiated a restructuring plan to reduce ongoing costs and further streamline the organization. These initiatives are expected to result in a charge of approximately $4 million in the third quarter of 2017. We continue to actively pursue additional cost reductions in all areas of our business and may incur additional charges in 2017 as a result of these activities.

### Liquidity and Capital Resources

Historically, our cash flows from operating activities have generally been adequate to fund our basic operating requirements, ongoing debt service and sustaining investment in property, plant and equipment. We have also used cash generated from operations to fund capital expenditures which strengthen our operational position, pay dividends, fund smaller acquisitions and repay our debt. 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. Historically, our working capital requirements have been the highest in the fourth quarter and lowest in the second quarter. With the addition of our Plant Nutrition South America segment, we expect a less seasonal distribution of working capital requirements. When needed, we may fund short-term working capital requirements by accessing our $300 million revolving credit facility.

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 June 30, 2017, we had $30.5 million of cash and cash equivalents (in our consolidated balance sheets) that was either held directly or indirectly by foreign subsidiaries. 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 impacted by the transfer price charged on the transfer of our products between them. As discussed in Note 6 to our consolidated financial statements, our calculated transfer price on certain products between one of our foreign subsidiaries and a domestic subsidiary has been challenged by Canadian federal and provincial governments. 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 materially impact the amount of earnings attributable to our domestic and foreign subsidiaries, which could impact the amount of permanently reinvested foreign earnings as well as future cash flows from our domestic operations. See Note 6 to our consolidated financial statements for a discussion regarding our Canadian tax reassessments.

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 1.75% based on our current leverage ratio and credit rating. In connection with this transaction, we paid $5.8 million of refinancing fees in 2016 ($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 $33.9 million as of June 30, 2017, decreased $43.5 million from December 31, 2016. We generated $143.2 million of operating cash flows in the first six months of 2017. In the first six months of 2017, we used cash on hand and cash flows from operations to make $69.9 million of net debt payments, fund capital expenditures of $55.6 million and pay dividends on our common stock of $48.9 million.

As of June 30, 2017, we had $1.26 billion of indebtedness, consisting of $250.0 million outstanding under our 4.875% Notes, $924.7 million of borrowings outstanding under our senior secured credit facilities (consisting of term loans and a revolving credit facility), including $83.1 million borrowed against our revolving credit facility, and $87.9 million of debt related to Produquímica. We had $6.6 million of outstanding letters of credit as of June 30, 2017, which reduced our revolving credit facility borrowing availability to $210.3 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 June 30, 2017, 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.

See Note 8 to our consolidated financial statements for a discussion regarding labor, environmental and litigation matters.

The table below provides a summary of our cash flows by category:

| SIX MONTHS ENDED JUNE 30, 2017 | SIX MONTHS ENDED JUNE 30, 2016 |
| --- | --- |
| **Operating Activities:** |  |
| » Net earnings were $15.1 million. | » Net earnings were $56.0 million. |
| » Non-cash depreciation and amortization expense was $56.4 million. | » Non-cash depreciation and amortization expense was $40.9 million. |
| » Working capital items were a source of operating cash flows of $69.4 million. | » Working capital items were a source of operating cash flows of $53.1 million. |
| **Investing Activities:** |  |
| » Net cash flows used by investing activities included $55.6 million of capital expenditures. | » Net cash flows used by investing activities included $94.8 million of capital expenditures. |
| **Financing Activities:** |  |
| » Net cash flows used by financing activities included the payment of dividends of $48.9 million. » In addition, we had net payments on our debt of $69.9 million. » We also paid $12.8 million for the final payment related to the Produquímica acquisition. | » Net cash flows used by financing activities included the payment of dividends of $47.1 million and payments of $5.0 million to refinance debt. » In addition, we had net borrowings on our debt of $29.6 million and $0.7 million in proceeds received from stock option exercises. |

### Sensitivity Analysis Related to EBITDA and Adjusted EBITDA

Management uses a variety of measures to evaluate our performance. While our 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. GAAP financial measures, such as gross profit, net earnings and cash flows generated by operating activities, management uses EBITDA and 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, cost of capital and income tax positions are managed at a corporate level apart from the activities of the operating segments and our 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 U.S. 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 U.S. 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 including refinancing costs and other (income) expense. Our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt. We are also required to pay income taxes, a required and ongoing consequence of our operations. We have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues. Consequently, any measure that excludes these elements has material limitations. While EBITDA and Adjusted EBITDA are frequently used as measures of operating performance, these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation. The calculation of EBITDA and Adjusted EBITDA as used by management is set forth in the table below (in millions):

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) earnings | $(6.4) | $6.3 | $15.1 | $56.0 |
| Interest expense | 12.3 | 5.6 | 26.0 | 11.4 |
| Income tax (benefit) expense | (1.5) | 1.0 | 4.8 | 21.0 |
| Depreciation, depletion and amortization | 28.0 | 21.0 | 56.4 | 40.9 |
| EBITDA | 32.4 | 33.9 | 102.3 | 129.3 |
| Adjustments to EBITDA: |  |  |  |  |
| Other expense, net | 1.8 | 0.9 | 1.7 | 0.1 |
| Adjusted EBITDA | $34.2 | $34.8 | $104.0 | $129.4 |

32

### Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.

### Effects of Currency Fluctuations

Our operations outside of the U.S. are conducted primarily in Canada, Brazil 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 revenues and costs are denominated in U.S. dollars, with Canadian dollars, Brazilian Reais and British pounds sterling also being significant. Significant changes in the value of the Canadian dollar, Brazilian real or British pound sterling 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 and countries in which we operate.

### Seasonality

We experience a substantial amount of seasonality in our sales. Our sales of our salt deicing products are seasonal. Consequently, our Salt 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 seek to stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season.

Our plant nutrition business is also seasonal. The strongest demand for our Plant Nutrition South America products in Brazil typically occurs during the spring planting season. As a result, we and our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales season. The seasonality of this demand results in our sales volumes and net sales for our Plant Nutrition South America segment usually being the highest during the third and fourth quarters of each year (as the spring planting season begins in September in Brazil).

## Market risk

As filed, 880 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 and foreign currency exchange risk rate by entering into natural gas derivative instruments and foreign currency swaps. We 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, 2016.

## Controls and procedures

As filed, 2,148 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 June 30, 2017, 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.

The scope of management’s evaluation did not include any disclosure controls or procedures (to the extent that they are subsumed by internal control over financial reporting) of Produquímica, which the Company acquired on October 3, 2016. Produquímica represented approximately 34% of total assets as of December 31, 2016, and 10% of total revenues and 2% of net income for the year ended December 31, 2016. Further discussion of this acquisition can be found in Note 2 to the Company’s consolidated financial statements.

#### 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, 2016. There have been no material changes to our risk factors as disclosed in such Annual Report.

Filed Aug 8, 2017.
Source: SEC EDGAR, the filing index for accession 0001227654-17-000172. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.