# Compass Minerals International Inc: Form 10-Q for the period ended Mar 31, 2019

- Company: [Compass Minerals International Inc](/companies/cmp.md) (CIK 1227654)
- Form: 10-Q
- Filed: 2019-05-01
- Accepted by EDGAR: May 1, 2019, 20:40 ET
- Period: 2019-03-31
- Accession: 0001227654-19-000110
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1227654/000122765419000110/cmp-20190331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1227654/000122765419000110/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $403.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2019-01-01 to 2019-03-31 | $72.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-01-01 to 2019-03-31 | $39.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-01-01 to 2019-03-31 | $33.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-01-01 to 2019-03-31 | $16.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-01-01 to 2019-03-31 | $4.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | $7.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 33,874,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $123.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $21.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2019-01-01 to 2019-03-31 | $24.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2019-03-31 | $43.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-03-31 | $619.2m | us-gaap:AssetsCurrent |
| Total assets | at 2019-03-31 | $2.31bn | us-gaap:Assets |
| Current liabilities | at 2019-03-31 | $286.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-03-31 | $1.23bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-03-31 | $74.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-03-31 | $538.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,703 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; weather conditions; strikes, other forms of work stoppage or slowdown or other union activities; 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; 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; 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; our payment of any dividends; the impact of competition on the sales of our products; risks associated with our international operations and sales; the impact of anticipated changes in plant nutrition product prices and customer application rates; 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; the seasonal demand for our products; our rights and governmental authorizations to mine and operate our properties; 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; misappropriation or infringement claims relating to intellectual property; product liability claims and product recalls; inability to obtain required product registrations or increased regulatory requirements; changes in industry standards and regulatory requirements; our ability to successfully implement our strategies; the loss of key personnel; if our computer systems, information technology or operations technology are compromised or the inability to protect confidential or proprietary data; our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; climate change; 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, 2018.

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 sales volumes; working capital requirements; our reinvestment of foreign earnings outside the U.S.; our ability to optimize cash accessibility, minimize tax expense and meet debt service requirements; future tax payments and tax refunds; outcomes of matters with taxing authorities; the effects of currency fluctuations and inflation; 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 (“U.S. 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, 2018 describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. For a description of our critical accounting policies and estimates affecting leases, see Note 3 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 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 March 31, 2019, we operated 21 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;
- Several mechanical evaporation facilities producing consumer and industrial salt; and
- Several facilities producing essential agricultural nutrients and specialty chemicals in Brazil.

Our salt business provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, agricultural and industrial applications in North America. In the U.K., we operate a records management business utilizing excavated areas of our Winsford salt mine with one other surface location in London, England.

Our plant nutrition business produces and markets specialty plant nutrition products worldwide to distributors and retailers of crop inputs, as well as growers. Our principal plant nutrition product in our Plant Nutrition North America segment is SOP, which we market under the trade name Protassium+. We also sell various secondary nutrients as well as premium micronutrient products under our Wolf Trax brand.

Our Plant Nutrition South America segment operates two primary businesses in Brazil—agricultural productivity, which manufactures and distributes a broad offering of specialty plant nutrition solution-based products; and chemical solutions, which manufactures and markets specialty chemicals, primarily for the water treatment industry and for use in other industrial processes.

### Consolidated Results of Operations

The following is a summary of our consolidated results of operations for the three months ended March 31, 2018 and 2019, 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 MONTHS ENDED MARCH 31

\* 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 MARCH 31, 2018 AND 2019

- Total sales decreased 8%, or $34.2 million, due to decreases in all three segments.
- Operating earnings increased 25%, or $6.6 million, due to increases in our Salt segment, which was partially offset by declines in both of our plant nutrition businesses.
- Earnings before interest, taxes, depreciation and amortization (“EBITDA”)\* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)\* increased 12%, or $7.3 million.
- Diluted net earnings per share decreased 41%, or $0.15.

### THREE MONTHS ENDED MARCH 31

### COMMENTARY: THREE MONTHS ENDED MARCH 31, 2018 AND 2019

### Gross Profit: Increased 11%, or $7.2 million; Gross Margin increased 3 percentage points

- Salt segment gross profit increased $18.0 million primarily due to higher average sales prices, which were partially offset by increased per-unit shipping and handling costs.
- The gross profit of the plant nutrition business, on a combined basis, decreased $10.8 million. The Plant Nutrition North America segment gross profit decreased $5.8 million primarily due to lower sales volumes and higher per-unit shipping and handling costs. The Plant Nutrition South America segment gross profit decreased $5.0 million primarily due to the timing of planned maintenance and higher raw material input costs.

### OTHER EXPENSES AND INCOME

### COMMENTARY: THREE MONTHS ENDED MARCH 31, 2018 AND 2019

### SG&A: Increased $0.6 million; increased 0.9 percentage points as a percentage of sales from 8.9% to 9.8%

- The increase in SG&A expense was primarily due to higher incentive compensation, corporate professional services and information technology licenses and services agreement costs, which were partially offset by lower Plant Nutrition South America segment costs resulting from a weaker Brazilian reais compared to the U.S. dollar.

### Interest Expense: Increased $2.5 million to $16.2 million

- The increase was primarily due to higher U.S. interest rates and an increase in borrowings under our revolving credit facility.

### Other Expense (Income), Net: Decreased $8.6 million from income of $4.2 million to an expense of $4.4 million

- We realized foreign exchange losses of $5.0 million in the first quarter of 2019 compared to foreign exchange gains of $3.1 million in the prior-year period. Lower interest income also contributed to the decrease.

### Income Tax Expense: Expense increased $0.5 million from $4.4 million to $4.9 million

- The increase in income tax expense was primarily due to an increase in the effective tax rate, which was offset by lower pretax income in the first quarter of 2019.
- Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes. The global intangible low-taxed income (“GILTI”) also affected the 2019 income tax provision.
- Our effective tax rate increased from 26% in the first quarter of 2018 to 39% in the first quarter of 2019 primarily due to the impact of a discrete tax item, GILTI and increased mining tax due to higher production at our Goderich mine in 2019 as compared to 2018.

### 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 $2.8 million for the first quarter of 2019 and 2018, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.

### Salt

### THREE MONTHS ENDED MARCH 31

|  | 1Q 2019 | 1Q 2018 |
| --- | ---: | ---: |
| **Salt Sales (in millions)** | $306.4 | $315.9 |
| **Salt Operating Earnings (in millions)** | $52.3 | $34.1 |
| **Salt Sales Volumes (thousands of tons)** |  |  |
| Highway deicing | 3,543 | 4,262 |
| Consumer and industrial | 551 | 502 |
| Total tons sold | 4,094 | 4,764 |
| **Average Salt Sales Price (per ton)** |  |  |
| Highway deicing | $61.73 | $55.24 |
| Consumer and industrial | $159.23 | $160.26 |
| Combined | $74.84 | $66.32 |

### COMMENTARY: THREE MONTHS ENDED MARCH 31, 2018 AND 2019

- Salt sales decreased 3%, or $9.5 million, primarily due to lower highway deicing volumes, which was partially offset by higher highway deicing average sales prices and higher consumer and industrial sales volumes.
- Average sales prices increased 13% and contributed $22.4 million to sales due to higher highway deicing prices. Salt average sales prices were also impacted by product sales mix, as consumer and industrial products, which have a higher average sales price, were a higher proportion of total sales in the current period.
- Highway deicing average sales prices increased 12% due to the realization of higher North American highway deicing contract prices for the 2018-2019 winter season. Consumer and industrial average sales prices decreased 1%.
- Salt sales volumes decreased 14%, or 670,000 tons, and unfavorably impacted sales by $31.9 million. Highway deicing sales volumes decreased 17% as a result of mild weather in the U.K. when compared to the significantly above average winter weather in the first quarter of 2018 and lower North American contract volumes due primarily to lower production volumes at our Goderich mine. Consumer and industrial sales volumes increased 10% due to higher sales of consumer deicing products.
- Salt operating earnings increased 53%, or $18.2 million, due to higher highway deicing prices in the first quarter of 2019. The first quarter of 2018 was impacted by higher per-unit product costs and higher carryover inventory costs resulting

from lower Goderich mine production levels. As a result of lower Goderich mine production volumes in 2018, we also purchased salt and incurred higher logistics costs to serve markets typically served by our Goderich mine. Per-unit product costs were lower in both businesses in the first quarter of 2019 due to improved production levels at our North America mines and fewer higher cost carryover inventory tons.

### Plant Nutrition North America

### THREE MONTHS ENDED MARCH 31

|  | 1Q 2019 | 1Q 2018 |
| --- | ---: | ---: |
| **Plant Nutrition North America Sales (in millions)** | $37.2 | $52.9 |
| **Plant Nutrition North America Operating (Loss) Earnings (in millions)** | $(1.6) | $4.9 |
| **Plant Nutrition North America Sales Volumes (thousands of tons)** | 57 | 87 |
| **Plant Nutrition North America Average Sales Price (per ton)** | $656 | $610 |

### COMMENTARY: THREE MONTHS ENDED MARCH 31, 2018 AND 2019

- Plant Nutrition North America sales decreased 30%, or $15.7 million.
- Plant Nutrition North America sales volumes decreased 34%, or 30,000 tons, which resulted in a $18.3 million decrease in sales. The decrease in sales volumes resulted primarily from reduced customer purchases attributable to wet and cold weather in the first quarter of 2019.
- Plant Nutrition North America average sales prices increased 8%, providing a $2.6 million offset to the decline in sales volumes reflecting a stronger product mix of our micronutrient sales.
- Plant Nutrition North America operating results decreased $6.5 million to an operating loss of $1.6 million due to lower sales volumes, higher logistics costs and a less favorable geographic mix. Per unit logistics costs increased primarily due to longer shipping distances as fewer tons were sold in our primary markets due to wet and cold weather.

### Plant Nutrition South America

### THREE MONTHS ENDED MARCH 31

|  | 1Q 2019 | 1Q 2018 |
| --- | ---: | ---: |
| **Plant Nutrition South America Sales (in millions)** | $57.7 | $66.3 |
| **Plant Nutrition South America Operating (Loss) Earnings (in millions)** | $(2.6) | $0.8 |
| **Plant Nutrition South America Sales Volumes (thousands of tons)** |  |  |
| Agricultural productivity | 52 | 61 |
| Chemical solutions | 82 | 79 |
| Total tons sold | 134 | 140 |
| **Average Plant Nutrition South America Sales Price (per ton)** |  |  |
| Agricultural productivity | $681 | $646 |
| Chemical solutions | $275 | $339 |
| Combined | $431 | $473 |

### COMMENTARY: THREE MONTHS ENDED MARCH 31, 2018 AND 2019

- Plant Nutrition South America sales decreased 13%, or $8.6 million, which were impacted by a 16% unfavorable weighted average change in the Brazilian reais versus the U.S. dollar from the prior year.
- Plant Nutrition South America sales volumes decreased 4%, or 6,000 tons, which accounted for $5.0 million of the decrease in Plant Nutrition South America sales. Agricultural productivity sales volumes decreased 15% primarily reflecting uncertainty among Brazilian growers regarding the global agriculture market. Chemical solutions sales volumes increased 4% due to higher demand for water treatment products.
- A 9% decrease in Plant Nutrition South America average sales price resulted in $3.6 million of the Plant Nutrition South America’s sales decrease due to a weaker Brazilian reais versus the U.S. dollar. In addition, the decrease in average sales price was due to a 19% decrease in chemical solutions product prices as a result of shifts in product sales mix. The decrease was partially offset by a 5% increase in agriculture product sales prices, reflecting shifts in product sales mix and price increases to cover increased raw material input costs.
- Plant Nutrition South America operating results decreased $3.4 million to an operating loss of $2.6 million, due to lower sales, the timing of planned maintenance and increased raw materials costs.

### Outlook

- Due to better than anticipated year-to-date sales volumes, we expect Salt sales volumes for 2019 to range from 10.5 million tons to 11.0 million tons.
- A shortened spring fertilizer season in many U.S. agriculture markets has reduced our full-year sales volume outlook for our Plant Nutrition North America products. As a result, we expect Plant Nutrition North America sales volumes for 2019 to range from 340,000 tons to 380,000 tons.
- While we have experienced some recent uncertainty in Brazil’s agriculture markets, Plant Nutrition South America sales volumes is expected to range from 800,000 tons to 900,000 tons for 2019.

### 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. As a result of the acquisition of Produquímica Indústria e Comércio S.A. (which is now known as Compass Minerals América do Sul Indústria e Comércio S.A.), our business has achieved 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 March 31, 2019, we had $37.3 million of cash and cash equivalents (in our Consolidated Balance Sheets) that was either held directly or indirectly by foreign subsidiaries. During the fourth quarter of 2018, we revised our permanently reinvested assertion to indicate that we expect to repatriate approximately $150 million of unremitted foreign earnings on which we have recorded a $4.1 million deferred tax liability as of March 31, 2019 for foreign withholding tax, state income tax net of foreign exchange loss. Due to our ability to generate adequate levels of domestic cash flow on an annual basis, it is our current intention to continue to reinvest all remaining undistributed earnings of our foreign subsidiaries indefinitely. 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 7 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. In the fourth quarter of 2017, we reached a federal settlement agreement with Canadian and U.S. tax authorities related to our transfer pricing issues for our 2007-2012 tax years. During 2018, in accordance with the settlement agreement, our U.S. subsidiary made intercompany cash payments of $85.7 million to our Canadian subsidiary and tax payments to Canadian taxing authorities of $17.5 million. Tax payments of $5.6 million were made during the first quarter of 2019, leaving an outstanding balance of $1.4 million. Corresponding tax refunds of $3.4 million have been received as of March 31, 2019 from U.S. taxing authorities, with the remaining refund of approximately $19.4 million expected later in 2019. Additionally during the fourth quarter of 2018, we reached a federal settlement agreement with Canadian and U.S. tax authorities on transfer pricing and management fees as part of an advanced pricing agreement that covers tax years 2013-2021. As a result of the settlement agreement, our U.S. subsidiary is expected to make intercompany cash payments to its Canadian subsidiary of $106.1 million and tax payments to Canadian taxing authorities of approximately $29.6 million during the second quarter of 2019. Corresponding tax refunds of $0.6 million were received during the first quarter of 2019 from U.S. taxing authorities with the remaining $60.3 million expected to be received within the next year. There are ongoing challenges by Canadian provincial taxing authorities regarding our transfer prices of certain products. The final resolution of these challenges may not occur for several 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 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 7 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments and settlement.

A portion of our loans in Brazil are denominated in U.S. dollars. We have entered into foreign currency agreements whereby we agreed to swap interest and principal payments on the loans denominated in U.S. dollars for principal and interest payments denominated in Brazilian reais, the functional currency of our Brazil subsidiary. See Note 12 to our Consolidated Financial Statements for a discussion of our foreign currency agreements.

Cash and cash equivalents as of March 31, 2019 of $43.8 million, increased $16.8 million from December 31, 2018. We generated $123.5 million of operating cash flows in the first three months of 2019. In the first three months of 2019, we used cash on hand and cash flows from operations to make net payments on our debt of $64.9 million, fund capital expenditures of $21.5 million and pay dividends on our common stock of $24.6 million.

As of March 31, 2019, we had $1.31 billion of indebtedness, consisting of $250.0 million outstanding under our 4.875% Senior Notes due 2024, $945.9 million of borrowings outstanding under our senior secured credit facilities (consisting of term loans and a revolving credit facility), including $119.1 million borrowed against our revolving credit facility, and $110.0 million of Brazilian debt (see Note 8 to our Consolidated Financial Statements for more detail regarding our debt). We had $10.6 million of outstanding letters of credit as of March 31, 2019, which reduced our revolving credit facility borrowing availability to $170.3 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 March 31, 2019, 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.

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

| THREE MONTHS ENDED MARCH 31, 2019 | THREE MONTHS ENDED MARCH 31, 2018 |
| --- | --- |
| **Operating Activities:** |  |
| » Net earnings were $7.6 million. | » Net earnings were $12.6 million. |
| » Non-cash depreciation and amortization expense was $35.0 million. | » Non-cash depreciation and amortization expense was $34.3 million. |
| » Working capital items were a source of operating cash flows of $77.5 million. | » Working capital items were a source of operating cash flows of $123.7 million. |
| **Investing Activities:** |  |
| » Net cash flows used by investing activities included $21.5 million of capital expenditures. | » Net cash flows used by investing activities included $23.0 million of capital expenditures. |
| **Financing Activities:** |  |
| » Net cash flows used by financing activities included the payment of dividends of $24.6 million. » In addition, we had net payments on our debt of $64.9 million. | » Net cash flows used by financing activities included the payment of dividends of $24.5 million. » In addition, we had net payments on our debt of $112.0 million. |

### Other Matters

See Notes 7 and 9 to our Consolidated Financial Statements for a discussion regarding labor, environmental and litigation matters.

### 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 these measures to assess our operating performance and return on capital, and to evaluate potential acquisitions or other capital projects. These measures 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 restructuring 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 March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net earnings | $7.6 | $12.6 |
| Interest expense | 16.2 | 13.7 |
| Income tax expense | 4.9 | 4.4 |
| Depreciation, depletion and amortization | 35.0 | 34.3 |
| EBITDA | 63.7 | 65.0 |
| Adjustments to EBITDA: |  |  |
| Other expense (income), net | 4.4 | (4.2) |
| Adjusted EBITDA | $68.1 | $60.8 |

### 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 reais 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, 884 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 rate risk by entering into natural gas derivative instruments and foreign currency contracts. 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, 2018.

## Controls and procedures

As filed, 1,672 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 Interim Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019 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 Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

#### Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, the Company implemented new guidance related to leases. The Company has implemented internal controls to monitor and analyze those business practices that, if not followed, could have a material impact on its consolidated financial statements under the guidance.

## Risk factors

As filed, 301 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, 2018. There have been no material changes to our risk factors as disclosed in such Annual Report and Quarterly Report.

Filed May 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001227654-19-000110. Last ingested by Listed: Oct 24, 2026, 15:10 ET. No prices; not investment advice.