e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-31921
Compass Minerals International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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36-3972986 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
9900 West 109th Street
Suite 600
Overland Park, KS 66210
(913) 344-9200
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: þ No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes:
o No:
þ
The number of shares outstanding of the registrants common stock, $0.01 par value per share, at
October 23, 2006 was 32,078,938 shares.
COMPASS MINERALS INTERNATIONAL, INC.
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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(Unaudited) |
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8.4 |
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$ |
47.1 |
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Receivables, less allowance for doubtful accounts of
$1.6 in 2006 and $1.7 in 2005 |
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73.8 |
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183.0 |
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Inventories |
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144.7 |
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81.5 |
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Deferred income taxes, net |
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15.5 |
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12.7 |
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Other |
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6.0 |
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10.1 |
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Total current assets |
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248.4 |
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334.4 |
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Property, plant and equipment, net |
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366.2 |
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366.1 |
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Intangible assets, net |
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21.7 |
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22.5 |
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Other |
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34.3 |
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27.3 |
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Total assets |
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$ |
670.6 |
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$ |
750.3 |
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
3.4 |
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$ |
3.5 |
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Accounts payable |
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60.8 |
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82.4 |
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Accrued expenses |
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16.4 |
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23.4 |
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Accrued salaries and wages |
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14.7 |
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21.4 |
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Income taxes payable |
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3.1 |
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7.8 |
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Accrued interest |
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4.8 |
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0.9 |
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Total current liabilities |
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103.2 |
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139.4 |
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Long-term debt, net of current portion |
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568.9 |
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612.4 |
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Deferred income taxes, net |
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30.4 |
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43.7 |
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Other noncurrent liabilities |
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42.3 |
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33.9 |
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Commitments and contingencies (Note 8) |
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Stockholders equity (deficit): |
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Common stock: $0.01 par value, 200,000,000 authorized shares;
35,367,264 issued shares |
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0.4 |
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0.4 |
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Additional paid-in capital |
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0.6 |
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1.0 |
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Treasury stock, at cost 3,302,949 shares at September 30, 2006 and
3,532,940 shares at December 31, 2005 |
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(6.3 |
) |
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(6.7 |
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Accumulated deficit |
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(112.8 |
) |
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(115.5 |
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Accumulated other comprehensive income |
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43.9 |
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41.7 |
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Total stockholders equity (deficit) |
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(74.2 |
) |
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(79.1 |
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Total liabilities and stockholders equity (deficit) |
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$ |
670.6 |
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$ |
750.3 |
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The accompanying notes are an integral part of the consolidated financial statements.
2
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Sales |
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$ |
123.6 |
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$ |
107.5 |
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$ |
449.6 |
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$ |
459.2 |
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Shipping and handling cost |
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34.1 |
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30.6 |
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141.6 |
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139.1 |
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Product cost |
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59.9 |
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52.7 |
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193.4 |
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203.3 |
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Gross profit |
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29.6 |
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24.2 |
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114.6 |
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116.8 |
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Selling, general and administrative expenses |
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12.7 |
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13.5 |
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39.7 |
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41.0 |
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Operating earnings |
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16.9 |
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10.7 |
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74.9 |
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75.8 |
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Other (income) expense: |
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Interest expense |
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13.5 |
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15.4 |
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40.1 |
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45.7 |
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Other, net |
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(0.4 |
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3.4 |
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(2.4 |
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4.4 |
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Earnings (loss) from continuing operations
before income taxes |
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3.8 |
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(8.1 |
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37.2 |
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25.7 |
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Income tax expense (benefit) |
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1.5 |
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(3.3 |
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8.4 |
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8.2 |
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Net earnings (loss) from continuing operations |
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2.3 |
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(4.8 |
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28.8 |
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17.5 |
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Net earnings from discontinued operations, net of
tax expense (benefit) of $0.1 and ($0.2) in 2005 |
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0.4 |
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Net earnings (loss) |
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$ |
2.3 |
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$ |
(4.4 |
) |
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$ |
28.8 |
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$ |
17.5 |
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Basic net earnings (loss) per share: |
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Continuing operations |
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$ |
0.07 |
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$ |
(0.15 |
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$ |
0.89 |
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$ |
0.56 |
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Discontinued operations |
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0.01 |
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Basic net earnings (loss) per share |
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$ |
0.07 |
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$ |
(0.14 |
) |
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$ |
0.89 |
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$ |
0.56 |
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Basic weighted-average shares outstanding |
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32,436,995 |
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31,593,768 |
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32,295,999 |
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31,388,460 |
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Diluted net earnings (loss) per share: |
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Continuing operations |
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$ |
0.07 |
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$ |
(0.15 |
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$ |
0.88 |
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$ |
0.55 |
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Discontinued operations |
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0.01 |
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Diluted net earnings (loss) per share |
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$ |
0.07 |
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$ |
(0.14 |
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$ |
0.88 |
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$ |
0.55 |
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Diluted weighted-average shares outstanding |
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32,660,605 |
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31,593,768 |
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32,553,654 |
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32,006,095 |
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Cash dividends per share |
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$ |
0.305 |
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$ |
0.275 |
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$ |
0.915 |
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$ |
0.825 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
For the nine months ended September 30, 2006
(Unaudited, in millions)
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Accumulated |
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Additional |
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Other |
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Common |
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Paid In |
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Treasury |
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Accumulated |
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Comprehensive |
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Stock |
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Capital |
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Stock |
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Deficit |
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Income |
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Total |
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Balance, December 31, 2005 |
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$ |
0.4 |
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$ |
1.0 |
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$ |
(6.7 |
) |
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$ |
(115.5 |
) |
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$ |
41.7 |
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$ |
(79.1 |
) |
Dividends on common stock |
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(3.5 |
) |
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(26.1 |
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(29.6 |
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Stock options exercised |
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2.0 |
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0.4 |
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2.4 |
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Stock-based compensation |
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1.1 |
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1.1 |
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Comprehensive income: |
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Net earnings |
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28.8 |
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28.8 |
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Unrealized loss on cash flow hedges |
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(5.0 |
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(5.0 |
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Foreign currency translation adjustments |
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7.2 |
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7.2 |
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Total comprehensive income |
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31.0 |
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Balance, September 30, 2006 |
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$ |
0.4 |
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$ |
0.6 |
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$ |
(6.3 |
) |
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$ |
(112.8 |
) |
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$ |
43.9 |
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$ |
(74.2 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
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Nine Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
28.8 |
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$ |
17.5 |
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Adjustments to reconcile net earnings to net cash flows provided by operating activities: |
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Depreciation, depletion and amortization |
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30.2 |
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32.2 |
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Finance fee amortization |
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1.0 |
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1.7 |
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Accreted interest |
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21.9 |
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19.4 |
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Deferred income taxes |
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(11.3 |
) |
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(9.7 |
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Excess tax benefits from stock option exercises |
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6.1 |
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Changes in operating assets and liabilities: |
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Receivables |
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111.1 |
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67.3 |
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Inventories |
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(62.0 |
) |
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(22.8 |
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Other assets |
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0.4 |
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0.6 |
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Accounts payable and accrued expenses |
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(43.6 |
) |
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(44.2 |
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Other noncurrent liabilities |
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1.4 |
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1.8 |
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Other, net |
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1.4 |
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0.2 |
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Net cash provided by operating activities |
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79.3 |
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70.1 |
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Cash flows from investing activities: |
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Capital expenditures |
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(24.5 |
) |
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(19.1 |
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Other, net |
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(3.9 |
) |
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(3.5 |
) |
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Net cash used in investing activities |
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(28.4 |
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(22.6 |
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Cash flows from financing activities: |
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Principal payments on long-term debt |
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(34.5 |
) |
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(30.2 |
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Revolver activity |
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(31.0 |
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18.0 |
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Dividends paid |
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(29.6 |
) |
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(25.9 |
) |
Proceeds received from stock option exercises |
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0.4 |
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1.2 |
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Excess tax benefits from stock option exercises |
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2.0 |
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Other, net |
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(0.2 |
) |
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(0.1 |
) |
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Net cash used in financing activities |
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(92.9 |
) |
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(37.0 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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3.3 |
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3.6 |
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Net change in cash and cash equivalents |
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(38.7 |
) |
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|
14.1 |
|
Cash and cash equivalents, beginning of the year |
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47.1 |
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9.7 |
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Cash and cash equivalents, end of period |
|
$ |
8.4 |
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$ |
23.8 |
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Supplemental cash flow information: |
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Interest paid, net of amounts capitalized |
|
$ |
13.7 |
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$ |
34.3 |
|
Income taxes paid, net of refunds |
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|
20.9 |
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19.4 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
COMPASS MINERALS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies and Basis of Presentation:
Compass Minerals International, Inc. (CMP or the Company), is a producer and marketer of
inorganic mineral products with manufacturing sites in North America and Europe. Its principal
products are salt, which includes sodium chloride and magnesium chloride, and sulfate of potash
(SOP), a specialty fertilizer. CMP serves a variety of markets, including highway deicing,
agriculture, food processing, chemical processing, water conditioning and dust control. The
consolidated financial statements include the accounts of CMP and its wholly owned subsidiary,
Compass Minerals Group, Inc. (CMG), and the consolidated results of CMGs wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles (GAAP) for
complete financial statements. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of CMP for the year ended December 31, 2005
as filed with the Securities and Exchange Commission in its Annual Report on Form 10-K. In the
opinion of management, all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation, have been included.
The Company experiences a substantial amount of seasonality in salt sales. As a result, 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 products are
seasonal as they vary based on the severity of the winter conditions in areas where the product is
used. Following industry practice in North America, we stockpile sufficient quantities of deicing
salt in the second, third and fourth quarters to meet the estimated requirements for the winter
season. Due to the seasonal nature of the highway deicing product lines, operating results for the
interim periods are not necessarily indicative of the results that may be expected for the full
year.
Discontinued Operations On December 30, 2005, CMP sold its evaporated salt business in the U.K.
Accordingly, the results of operations from this business have been reclassified to discontinued
operations in the Consolidated Statements of Operations and related notes for the three and nine
months ended September 30, 2005.
Reclassifications Certain reclassifications have been made to the prior period amounts to conform
to the current year presentation.
New Accounting Pronouncements During the second quarter of 2006 the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (FIN 48). This guidance is intended to provide increased consistency in the application of
FASB Statement No. 109 Accounting for Income Taxes by providing guidance with regard to the
recognition and measurement of uncertain tax positions, the accrual of interest and penalties, and
increased disclosure requirements. In particular, this interpretation requires uncertain tax
positions to be recognized only if they are more-likely-than-not to be upheld based on their
technical merits. The measurement of the uncertain tax position will be based on the largest
benefit amount that is more likely than not (determined on a cumulative probability basis) to be
realized upon settlement. Any resulting cumulative effect of applying the provisions of FIN 48
upon adoption will be reported as an adjustment to the beginning balance of retained earnings
(deficit) in the period of adoption. This interpretation is effective for fiscal years beginning
after December 15, 2006. The Company has not yet completed its evaluation of its uncertain tax
positions under the new interpretation and has not yet determined whether the adoption of this new
guidance will have a material effect on its financial condition or results of operations.
During the third quarter of 2006, the FASB issued Statement of Financial Accounting Standards No.
157 Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements for fair-value measurements
that are already required or permitted by other GAAP. It is effective for fiscal years beginning
after November 15, 2007. Considering the items currently recorded at fair value on the Companys
Consolidated Balance Sheets, management does not expect the adoption of SFAS 157 to have a material
effect on the Companys financial condition or results of operations.
During the third quarter of 2006, the FASB also issued SFAS 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans which amends SFAS No. 87, 88, 106, and
132(R). This statement requires an employer to recognize the over-funded or under-funded status of
its defined postretirement plans as an asset or liability in its statement of financial position
and recognize changes in that funded status in the year in which the changes occur through
comprehensive income. The funded status of defined benefit pension plans will be based on the
difference between the actuarially determined projected benefit obligation and the plan assets as
of the measurement date. The previously unrecognized under- or over-funded status will be recorded
as an asset or liability with the offset to other comprehensive income for public
6
companies with fiscal years ending after December 15, 2006. Additionally, this statement requires
the employer to measure the plan status as of the balance sheet date although the measurement date
requirement is not effective until fiscal years ending after December 15, 2008, with earlier
application allowed. This statement also requires additional disclosures and modifies or deletes
certain of the existing requirements.
The Company has two defined benefit pension plans which are currently measured as of November 30th
of each year. While management intends to recognize the over-funded or under-funded status as of
December 31, 2006, it is unknown when the measurement date provision will be adopted. Though the
funded status will not be determined until the annual measurement date, management currently does
not expect the adoption of this statement to have a material impact on the Companys financial
condition.
2. Inventories:
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
Finished goods |
|
$ |
127.1 |
|
|
$ |
67.7 |
|
Raw materials and supplies |
|
|
17.6 |
|
|
|
13.8 |
|
|
Total inventories |
|
$ |
144.7 |
|
|
$ |
81.5 |
|
|
3. Property, Plant and Equipment, Net:
Property, plant and equipment, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
Land and buildings |
|
$ |
137.2 |
|
|
$ |
137.6 |
|
Machinery and equipment |
|
|
412.6 |
|
|
|
403.8 |
|
Furniture and fixtures |
|
|
12.0 |
|
|
|
13.3 |
|
Mineral interests |
|
|
179.7 |
|
|
|
178.0 |
|
Construction in progress |
|
|
28.3 |
|
|
|
12.6 |
|
|
|
|
|
769.8 |
|
|
|
745.3 |
|
Less accumulated depreciation and depletion |
|
|
(403.6 |
) |
|
|
(379.2 |
) |
|
Net property, plant and equipment |
|
$ |
366.2 |
|
|
$ |
366.1 |
|
|
4. Intangible Assets, Net:
Intangible assets consist of rights to produce SOP and a customer list acquired in connection with
the purchase of an SOP marketing business in 2003. The accumulated amortization of intangible
assets at September 30, 2006 and December 31, 2005 was $3.0 million and $2.3 million, respectively.
Amortization expense during the three and nine months ended September 30, 2006 was $0.2 million and
$0.7 million, respectively, and $0.3 million and $0.8 million, respectively for the same periods of
2005.
5. Income Taxes:
The Company recorded income tax expense of $1.5 million for the three months ended September 30,
2006 compared to a benefit of $3.3 million for same period of 2005, and income tax expense of $8.4
million for the nine months ended September 30, 2006 compared to expense of $8.2 million for the
nine-month period of 2005. For the 2006 nine-month period, the Company filed foreign tax returns
and recorded a $0.6 million benefit for a true-up of previous accruals. In the 2005 nine-month
period, the Internal Revenue Service and Canada Revenue Agency developed a framework to minimize
the inconsistent treatment of tax matters involving the two taxing authorities causing management
to change certain tax estimates
and reverse previously recorded income tax reserves of $5.9 million, partially offset by other tax
adjustments of $1.1 million ($0.15 per basic and diluted common share), related to matters
previously determined to have an uncertain outcome. This 2005 benefit was partially offset by
$5.4 million of income tax expense resulting from a repatriation of funds. During the 2005
nine-month period the Companys U.K. subsidiary made a one-time repayment of a
pound-sterling-denominated loan to a U.S. subsidiary which resulted in a foreign exchange gain for
tax purposes only. For financial reporting purposes, the unrealized foreign exchange gain is a
component of accumulated other comprehensive income in stockholders equity and had not been
recognized in the consolidated statements of operations.
7
In addition to the specific tax items discussed above, the Companys income tax provision differs
from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state
income taxes (net of federal tax benefit), foreign income tax rate differentials, foreign mining
taxes and interest expense recognition differences for book and tax purposes.
At September 30, 2006, the Company had approximately $70.3 million of NOLs expiring between 2006
and 2022. The Company records valuation allowances for portions of its deferred tax assets relating
to NOLs that it does not believe will, more likely than not, be realized. As of September 30, 2006
and December 31, 2005, the Companys valuation allowance was $10.4 million. In the future, if the
Company determines, based on the existence of sufficient evidence, that it should realize more or
less of its deferred tax assets, an adjustment to any existing valuation allowance will be made in
the period such determination is made.
6. Long-term Debt:
Long-term debt consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
10% Senior Subordinated Notes due 2011 |
|
$ |
|
|
|
$ |
2.0 |
|
12 3/4% Senior Discount Notes due 2012 |
|
|
106.6 |
|
|
|
97.1 |
|
12% Senior Subordinated Discount Notes due 2013 |
|
|
148.2 |
|
|
|
135.8 |
|
Term Loan due 2012 |
|
|
317.5 |
|
|
|
350.0 |
|
Revolving Credit Facility due 2010 |
|
|
|
|
|
|
31.0 |
|
|
|
|
|
572.3 |
|
|
|
615.9 |
|
Less current portion |
|
|
(3.4 |
) |
|
|
(3.5 |
) |
|
Long-term debt, net of current portion |
|
$ |
568.9 |
|
|
$ |
612.4 |
|
|
During the third quarter of 2006, the Company redeemed and retired the remaining outstanding
balance of its 10% senior subordinated notes, incurring a call premium of $0.1 million which was
included in other, net on the Consolidated Statements of Operations for the three and nine months
ended September 30, 2006.
7. Pension Plans:
The components of net periodic benefit cost for the three and nine months ended September 30, 2006
and 2005 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Service cost for benefits earned during the year |
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
$ |
0.7 |
|
|
$ |
1.1 |
|
Interest cost on projected benefit obligation |
|
|
0.8 |
|
|
|
1.0 |
|
|
|
2.6 |
|
|
|
2.8 |
|
Return on plan assets |
|
|
(1.0 |
) |
|
|
(0.9 |
) |
|
|
(3.1 |
) |
|
|
(2.7 |
) |
Net amortization and deferral |
|
|
|
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
Net pension expense |
|
$ |
0.1 |
|
|
$ |
0.6 |
|
|
$ |
0.4 |
|
|
$ |
1.7 |
|
|
During 2006 the Company made $4.9 million of contributions to its plans including a special
contribution of approximately $4.0 million in the first quarter to fund the portion of the U.K.
plan for benefits earned and expected to be paid to former employees of the evaporated salt
business that was sold in December 2005.
8. Commitments and Contingencies:
The Company is involved in legal and administrative proceedings and claims of various types from
normal Company activities.
The Company is aware of an aboriginal land claim filed by The Chippewas of Nawash and The Chippewas
of Saugeen (the Chippewas) in the Ontario Superior Court against The Attorney General of Canada
and Her Majesty The Queen In Right of Ontario. The Chippewas claim that a large part of the land
under Lake Huron was never conveyed by treaty and therefore belongs to the Chippewas. The land
claimed includes land under which the Companys Goderich mine operates and has mining rights
granted to it by the government of Ontario. The Company is not a party to this court action.
Similar claims are
pending with respect to other parts of the Great Lakes by other aboriginal claimants. The Company
has been informed by the
8
Ministry of the Attorney General of Ontario that Canada takes the
position that the common law does not recognize aboriginal title to the Great Lakes and its
connecting waterways.
The Company does not believe that this action will result in a material adverse financial effect on
the Company. Furthermore, while any litigation contains an element of uncertainty, management
presently believes that the outcome of each such proceeding or claim which is pending or known to
be threatened, or all of them combined, will not have a material adverse effect on the Companys
results of operations, cash flows or financial position.
9. Operating Segments:
Segment information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Salt |
|
Potash |
|
and Other (a) |
|
Total |
|
Sales to external customers |
|
$ |
97.9 |
|
|
$ |
25.7 |
|
|
$ |
|
|
|
$ |
123.6 |
|
Intersegment sales |
|
|
|
|
|
|
2.3 |
|
|
|
(2.3 |
) |
|
|
|
|
Shipping and handling cost |
|
|
30.6 |
|
|
|
3.5 |
|
|
|
|
|
|
|
34.1 |
|
Operating earnings (loss) |
|
|
17.1 |
|
|
|
6.3 |
|
|
|
(6.5 |
) |
|
|
16.9 |
|
Depreciation, depletion and amortization |
|
|
7.8 |
|
|
|
2.1 |
|
|
|
|
|
|
|
9.9 |
|
Total assets |
|
|
488.4 |
|
|
|
145.4 |
|
|
|
36.8 |
|
|
|
670.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Salt |
|
Potash |
|
and Other (a) |
|
Total |
|
Sales to external customers |
|
$ |
85.4 |
|
|
$ |
22.1 |
|
|
$ |
|
|
|
$ |
107.5 |
|
Intersegment sales |
|
|
|
|
|
|
2.3 |
|
|
|
(2.3 |
) |
|
|
|
|
Shipping and handling cost |
|
|
27.7 |
|
|
|
2.9 |
|
|
|
|
|
|
|
30.6 |
|
Operating earnings (loss) |
|
|
10.5 |
|
|
|
6.4 |
|
|
|
(6.2 |
) |
|
|
10.7 |
|
Depreciation, depletion and amortization(b) |
|
|
8.7 |
|
|
|
2.0 |
|
|
|
|
|
|
|
10.7 |
|
Total assets |
|
|
510.1 |
|
|
|
133.1 |
|
|
|
42.8 |
|
|
|
686.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Salt |
|
Potash |
|
and Other (a) |
|
Total |
|
Sales to external customers |
|
$ |
368.5 |
|
|
$ |
81.1 |
|
|
$ |
|
|
|
$ |
449.6 |
|
Intersegment sales |
|
|
|
|
|
|
7.9 |
|
|
|
(7.9 |
) |
|
|
|
|
Shipping and handling cost |
|
|
130.2 |
|
|
|
11.4 |
|
|
|
|
|
|
|
141.6 |
|
Operating earnings (loss)(c) |
|
|
71.2 |
|
|
|
22.5 |
|
|
|
(18.8 |
) |
|
|
74.9 |
|
Depreciation, depletion and amortization |
|
|
23.9 |
|
|
|
6.3 |
|
|
|
|
|
|
|
30.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Salt |
|
Potash |
|
and Other (a) |
|
Total |
|
Sales to external customers |
|
$ |
385.1 |
|
|
$ |
74.1 |
|
|
$ |
|
|
|
$ |
459.2 |
|
Intersegment sales |
|
|
|
|
|
|
7.1 |
|
|
|
(7.1 |
) |
|
|
|
|
Shipping and handling cost |
|
|
128.2 |
|
|
|
10.9 |
|
|
|
|
|
|
|
139.1 |
|
Operating earnings (loss) |
|
|
73.2 |
|
|
|
20.6 |
|
|
|
(18.0 |
) |
|
|
75.8 |
|
Depreciation, depletion and amortization(b) |
|
|
26.0 |
|
|
|
6.2 |
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
(a) |
|
Corporate and Other includes unallocated corporate expenses and eliminations. Corporate
assets include deferred tax assets, deferred financing fees, and other assets not directly
related to the reportable segments. |
|
(b) |
|
The salt segment includes approximately $0.9 million and $2.7 million of depreciation,
depletion and amortization expense related to discontinued operations for the three and nine
months ended September 30, 2005, respectively. |
|
(c) |
|
The salt segment includes $5.1 million of insurance proceeds for the nine months ended
September 30, 2006 as discussed below. |
9
During the 2006 nine-month period, the Company settled with its insurers and recognized $5.1
million of business interruption insurance proceeds as a reduction to product cost for the salt
segment. The business interruption claim was due to a temporary production interruption at the
Goderich mine in late 2004 that resulted in reduced sales during the first quarter of 2005.
10. Stockholders Equity and Equity Instruments:
Effective January 1, 2006 the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 123(R) Share-Based Payment for accounting for its equity compensation awards using the
modified prospective transition method. Because the Company had previously recognized compensation
expense for the fair value of its stock-based compensation in accordance with SFAS 123
Accounting for Stock-Based Compensation, the adoption of SFAS 123(R) had no impact on the amount
of compensation expense recognized in the Consolidated Statements of Operations. However,
beginning in 2006, the tax benefits realized upon the exercise of stock options in excess of
amounts accrued for book purposes are included as a financing activity in the Consolidated
Statements of Cash Flows whereas the excess tax benefits were included in operating activities in
periods prior to 2006. SFAS 123(R) also includes additional disclosure requirements with respect
to equity compensation plans beyond those previously required by SFAS 123. The following
information should be read in conjunction with the disclosures provided in the consolidated
financial statements for the year ended December 31, 2005 included in CMPs Annual Report on Form
10-K.
The Company grants options and restricted stock units to a limited number of executive officers and
other key employees under its 2005 Incentive Award Plan. The Companys closing stock price on the
day of grant is used to set the exercise price for the options and the fair value of the restricted
stock units (RSUs). The options generally vest ratably over a four-year service period.
Unexercised options expire after seven years. The RSUs vest on the third anniversary following the
grant date. Both types of instruments entitle the holders to receive non-forfeitable dividends or
other distributions equal to and at the same time as those declared on the Companys common stock.
During the nine months ended September 30, 2006, the Company granted to employees 58,900 RSUs with
a weighted average grant-date fair value of $26.11. As of September 30, 2006, there were 72,900
RSUs outstanding with a weighted average grant-date fair value of $25.60.
During 2006 the Company also granted 248,800 stock options to employees. To estimate the fair
value of options on the day of grant, the Company uses the Black Scholes option valuation model.
Award recipients are grouped according to expected exercise behavior. Unless better information is
available to estimate the expected term of the options, the estimate is based on historical
exercise experience. The risk-free rate, using U.S. Treasury yield curves in effect at the time of
grant, is selected based on the expected term of each group. The Companys historical stock price
is used to estimate expected volatility. The range of estimates and fair values for options
granted during 2006 is included in the table below. The weighted average grant date fair value of
these options was $8.51.
|
|
|
|
|
|
|
Range |
|
Fair value of options granted |
|
$ |
4.52 - $10.30 |
|
Exercise price |
|
$ |
25.69 - $28.31 |
|
Expected term (years) |
|
|
2 - 6.5 |
|
Expected volatility |
|
|
24% |
|
Dividend yield(a) |
|
|
0% |
|
Risk-free rate of return |
|
|
4.3% - 5.05% |
|
|
(a) |
|
The assumed dividend yield reflects the non-forfeiting dividend feature. |
The following table provides a summary of stock option activity during 2006.
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Number of |
|
Weighted- |
|
|
Options |
|
Average |
|
|
Outstanding |
|
Exercise price |
|
Outstanding at December 31, 2005 |
|
|
757,901 |
|
|
$ |
7.60 |
|
Granted |
|
|
248,800 |
|
|
|
26.08 |
|
Exercised |
|
|
(227,171 |
) |
|
|
1.41 |
|
|
Outstanding at September 30, 2006 |
|
|
779,530 |
|
|
$ |
15.30 |
|
|
The intrinsic value of stock options exercised during the nine months ended September 30, 2006
totaled approximately $5.4 million. The Company recorded additional tax benefits of $2.0 million
from the exercise of these options as additional paid-in capital. The Companys common stock was
issued from treasury shares. As of September 30, 2006, the intrinsic value of options outstanding
aggregated approximately $10.1 million, of which 383,641 options with an intrinsic value of $8.8
million were exercisable. The number of shares held in treasury is sufficient to cover all
outstanding equity awards as of September 30, 2006.
10
The Company recognizes compensation expense for its share-based awards over the vesting period
using the straight-line method. Unrecognized compensation expense totaling approximately $3.5
million is expected to be recognized over a weighted-average period of approximately two years.
During the nine months ended September 30, 2006, the Company recorded $0.8 million of compensation
expense related to share-based awards ($0.5 million, net of tax benefit). No amounts have been
capitalized.
Other Comprehensive Income
The Companys comprehensive income is comprised of net earnings, the change in the unrealized gain
(loss) on natural gas and interest rate swap cash flow hedges and foreign currency translation
adjustments. The components of comprehensive income for the three and nine months ended September
30, 2006 and 2005 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Net earnings (loss) |
|
$ |
2.3 |
|
|
$ |
(4.4 |
) |
|
$ |
28.8 |
|
|
$ |
17.5 |
|
Unrealized gain (loss) on cash flow hedges |
|
|
(4.0 |
) |
|
|
3.7 |
|
|
|
(5.0 |
) |
|
|
4.7 |
|
Cumulative translation adjustments |
|
|
(0.7 |
) |
|
|
5.6 |
|
|
|
7.2 |
|
|
|
1.3 |
|
|
Total comprehensive income (loss) |
|
$ |
(2.4 |
) |
|
$ |
4.9 |
|
|
$ |
31.0 |
|
|
$ |
23.5 |
|
|
The components of accumulated other comprehensive income as of September 30, 2006 are provided
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
Balance |
|
|
December 31, |
|
2006 |
|
September 30, |
|
|
2005 |
|
Change |
|
2006 |
|
Minimum pension liability |
|
$ |
(3.3 |
) |
|
$ |
|
|
|
$ |
(3.3 |
) |
Unrealized gain (loss) on cash flow hedges |
|
|
2.2 |
|
|
|
(5.0 |
) |
|
|
(2.8 |
) |
Cumulative foreign currency translation adjustment |
|
|
42.8 |
|
|
|
7.2 |
|
|
|
50.0 |
|
|
Accumulated other comprehensive income |
|
$ |
41.7 |
|
|
$ |
2.2 |
|
|
$ |
43.9 |
|
|
The minimum pension liability is adjusted annually during the fourth quarter. With the exception
of the cumulative foreign currency translation adjustment, for which no tax effect is recorded, the
components of other comprehensive income are reflected net of applicable income taxes. A net
deferred tax benefit of $3.1 million was recorded for the net unrealized loss on cash flow hedges
during the nine months ended September 30, 2006.
11
11. Earnings per Share:
The following table sets forth the computation of basic and diluted earnings per common share (in
millions, except for share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
2.3 |
|
|
$ |
(4.8 |
) |
|
$ |
28.8 |
|
|
$ |
17.5 |
|
Net earnings from discontinued operations |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
2.3 |
|
|
$ |
(4.4 |
) |
|
$ |
28.8 |
|
|
$ |
17.5 |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding,
shares for basic earnings per share(a) |
|
|
32,436,995 |
|
|
|
31,593,768 |
|
|
|
32,295,999 |
|
|
|
31,388,460 |
|
Weighted average stock options outstanding (b) |
|
|
223,610 |
|
|
|
|
|
|
|
257,655 |
|
|
|
617,635 |
|
|
Shares for diluted earnings per share |
|
|
32,660,605 |
|
|
|
31,593,768 |
|
|
|
32,553,654 |
|
|
|
32,006,095 |
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share from continuing operations, basic |
|
$ |
0.07 |
|
|
$ |
(0.15 |
) |
|
$ |
0.89 |
|
|
$ |
0.56 |
|
Net earnings per share from discontinued operations, basic |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic |
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.89 |
|
|
$ |
0.56 |
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share from continuing operations, diluted |
|
$ |
0.07 |
|
|
$ |
(0.15 |
) |
|
$ |
0.88 |
|
|
$ |
0.55 |
|
Net earnings per share from discontinued operations, diluted |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted |
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.88 |
|
|
$ |
0.55 |
|
|
|
|
|
(a) |
|
Includes the weighted-average number of participating securities outstanding during the
period unless securities are anti-dilutive. |
|
(b) |
|
For the calculation of diluted earnings per share, the Company uses the treasury stock method
to determine the weighted average number of outstanding common shares. |
Share-based awards relative to 870,779 shares of common stock were outstanding at September 30,
2005 but were not included in the computation of diluted earnings (loss) per share for that quarter
because they were anti-dilutive.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
All statements, other than statements of historical fact, contained herein constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995.
Forward-looking statements relating to future events or our future financial performance involve
known and unknown risks, uncertainties, and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by these forward-looking statements.
Factors that could cause actual results to differ materially from those expressed or implied by the
forward-looking statements include, but are not limited to, the following: general business and
economic conditions; governmental policies affecting the agricultural industry or highway
maintenance programs in localities where the Company or its customers operate; weather conditions;
the impact of competitive products; pressure on prices realized by the Company for its products;
constraints on supplies of raw materials used in manufacturing certain of the Companys products
and the availability and price of transportation services; capacity constraints limiting the
production of certain products; labor relations including without limitation, the impact of work
rules, strikes or other disruptions, wage and benefit requirements; difficulties or delays in the
development, production, testing and marketing of products; difficulties or delays in receiving
required governmental and regulatory approvals; market acceptance issues, including the failure of
products to generate anticipated sales levels; the effects of and changes in trade, monetary,
environmental and fiscal policies, laws and regulations; foreign exchange rates and fluctuations in
those rates; the costs and effects of legal proceedings including environmental and administrative
proceedings involving the Company; and other risk factors reported in the Companys Annual Report
on Form 10-K filed with the Securities and Exchange Commission as updated quarterly on Form 10-Q.
In some cases, you can identify forward-looking statements by terminology such as may, will,
should, expects, intends, plans, anticipates, believes, estimates, predicts,
potential, continue, or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We
are under no duty to update any of the forward-looking statements after the date hereof or to
reflect the occurrence of unanticipated events.
Unless the context requires otherwise, references in this quarterly report to the Company,
Compass, Compass Minerals, CMP, we, us and our refer to Compass Minerals International,
Inc. and its consolidated subsidiaries.
Critical Accounting Estimates
Preparation of our consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Management believes the most
complex and sensitive judgments result primarily from the need to make estimates about matters that
are inherently uncertain. Managements Discussion and Analysis and Note 2 to the Consolidated
Financial Statements included in our Annual Report on Form 10-K filed with the SEC on February 24,
2006, describe the significant accounting estimates and policies used in preparation of our
consolidated financial statements. Actual results in these areas could differ from managements
estimates.
Results of Operations
Deicing products, consisting of deicing salt and magnesium chloride used by highway deicing and
general trade customers, constitute a significant portion of the Companys salt segment sales.
Those sales are seasonal and can fluctuate from year to year depending on the severity of the
winter season weather in our markets. Due to the relatively low value of salt, transportation
costs constitute a relatively large portion of the cost of our delivered product.
Our sulfate of potash (SOP) product is used in the production of specialty fertilizers for
high-value crops and turf. Agricultural activities are also affected by weather conditions,
primarily in the western and southeastern portions of the United States where the crops and soil
conditions favor SOP. Agricultural activities may also be responsive to economic factors as they
may impact the amount or type of crop grown in certain locations.
The consolidated financial statements have been prepared to present the historical financial
condition and results of operations and cash flows for the Company. The following table provides a
summary of sales information of the three and nine months ended September 30, 2006 compared to the
same periods of 2005. This table and the following discussion should be read in conjunction with
the information contained in our consolidated financial statements and the accompanying notes
included elsewhere in this quarterly report.
13
|
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|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
Millions of dollars, except per ton data |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Sales by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salt sales |
|
$ |
97.9 |
|
|
$ |
85.4 |
|
|
$ |
368.5 |
|
|
$ |
385.1 |
|
Less: salt shipping and handling |
|
|
30.6 |
|
|
|
27.7 |
|
|
|
130.2 |
|
|
|
128.2 |
|
|
Salt product sales |
|
$ |
67.3 |
|
|
$ |
57.7 |
|
|
$ |
238.3 |
|
|
$ |
256.9 |
|
|
Specialty potash sales |
|
$ |
25.7 |
|
|
$ |
22.1 |
|
|
$ |
81.1 |
|
|
$ |
74.1 |
|
Less: specialty potash shipping and handling |
|
|
3.5 |
|
|
|
2.9 |
|
|
|
11.4 |
|
|
|
10.9 |
|
|
Specialty potash product sales |
|
$ |
22.2 |
|
|
$ |
19.2 |
|
|
$ |
69.7 |
|
|
$ |
63.2 |
|
|
|
Sales Volumes (thousands of tons) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highway deicing |
|
|
1,166 |
|
|
|
1,134 |
|
|
|
5,584 |
|
|
|
6,958 |
|
General trade |
|
|
554 |
|
|
|
552 |
|
|
|
1,614 |
|
|
|
1,688 |
|
Specialty potash |
|
|
89 |
|
|
|
85 |
|
|
|
281 |
|
|
|
293 |
|
|
Average Sales Price (per ton) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highway deicing |
|
$ |
31.42 |
|
|
$ |
27.76 |
|
|
$ |
34.72 |
|
|
$ |
31.70 |
|
General trade |
|
|
110.57 |
|
|
|
97.73 |
|
|
|
108.22 |
|
|
|
97.43 |
|
Specialty potash |
|
|
287.57 |
|
|
|
259.60 |
|
|
|
288.52 |
|
|
|
252.88 |
|
|
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
Sales
Sales for the third quarter of 2006 of $123.6 million increased $16.1 million, or 15%, compared to
$107.5 million for the same quarter of 2005. Sales include revenues from the sale of our products,
or product sales, as well as shipping and handling costs incurred to deliver our products to the
customer. Such shipping and handling costs were $34.1 million during the third quarter of 2006, an
increase of $3.5 million compared to the same quarter of 2005 primarily reflecting the higher per
unit costs of transportation services due to increased demand for transportation services and
higher fuel costs.
Product sales for the third quarter of 2006 of $89.5 million increased $12.6 million, or 16%,
compared to $76.9 million for the same period in 2005 with increases in both the salt and specialty
potash fertilizer segments.
Salt product sales for the third quarter of 2006 of $67.3 million increased $9.6 million, or 17%,
compared to $57.7 million for the same period in 2005 due primarily to price increases in the
general trade and highway deicing product lines. Price increases improved sales by approximately
$6.5 million compared to the third quarter of 2005. Salt sales volumes increased by approximately
34,000 tons or $1.5 million, primarily due to increased sales of North American highway deicing
products for the 2006 quarter compared to the same quarter of 2005. For the portion of our salt
sales denominated in Canadian dollars and British pounds sterling, the weakening of the U.S. dollar
relative to those currencies also improved sales by approximately $1.5 million when compared to
exchange rates for the prior year quarter.
Specialty potash fertilizer (SOP) product sales for the third quarter of 2006 of $22.2 million
increased $3.0 million, or 16%, compared to $19.2 million for the same period in 2005. Higher
sales prices improved sales by approximately $1.8 million over the same quarter of 2005 while the
higher quantity sold increased sales by approximately $1.2 million.
Gross Profit
Gross profit for the third quarter of 2006 of $29.6 million increased $5.4 million, or 22%,
compared to $24.2 million in the third quarter of 2005. As a percent of sales, the gross margin
increased to 24% in the third quarter of 2006 compared to 23% for the same quarter of 2005
reflecting the sales price increases discussed above. The favorable impact of the price and sales
volume increases was partially offset by higher transportation costs and higher production costs,
principally due to higher prices for natural gas and increased raw material costs for our specialty
potash fertilizer products. Potassium chloride (KCl), a raw material used in making our sulfate of
potash fertilizer, is purchased under a long-term supply contract with annual price
changes based on prior year changes in the market price of KCl. While the pricing under this
contract is favorable to market, the price has increased significantly over the prior year and is
expected to increase further for 2007. While our sales price increases achieved during 2006 have
more than offset the cost increase, we cannot predict whether SOP sales prices will increase
correspondingly in 2007.
14
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 2006 of $12.7 million
decreased $0.8 million, or 6%, from $13.5 million for the same quarter of 2005 primarily reflecting
lower costs incurred for outside services.
Interest Expense
Interest expense for the third quarter of 2006 of $13.5 million decreased $1.9 million compared to
$15.4 million for the same period in 2005. Our 2006 overall weighted average interest rate
decreased for the third quarter of 2006 compared to 2005 primarily due to the December 2005
refinancing of $323.0 million of our 10% senior subordinated notes with the lower-rate senior
secured credit agreement. The remaining $2.0 million of 10% notes were redeemed in August 2006.
This decrease was partially offset by the higher principal balances on the discount notes due to
interest accretion, and the prior year allocation of $0.6 million of interest expense to
discontinued operations.
Other (Income) Expense, Net
Other (income) expense, net for the three months ended September 30, 2006 improved $3.8 million
compared to the same quarter of 2005. The other income in 2006 primarily reflects interest income
while other expense in 2005 primarily reflects foreign currency exchange losses.
Income Tax Expense (Benefit)
Income tax expense of $1.5 million for the three months ended September 30, 2006 increased from a
benefit of $3.3 million for the same period in 2005 due primarily to a higher level of pretax
income.
Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to
U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate
differentials, foreign mining taxes and interest expense recognition differences for book and tax
purposes.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Sales
Sales for the nine months ended September 30, 2006 of $449.6 million decreased $9.6 million, or 2%,
compared to $459.2 million for the nine months ended September 30, 2005. Shipping and handling
costs were $141.6 million during nine months of 2006, an increase of $2.5 million compared to
$139.1 million for the same 2005 period despite lower sales volumes, reflecting the higher per unit
costs of transportation services due to increased demand for transportation services and increased
fuel prices.
Product sales for the nine months ended September 30, 2006 of $308.0 million decreased $12.1
million, or 4%, compared to $320.1 million for the same period in 2005 reflecting a decrease in the
salt segment partially offset by an increase in the specialty fertilizer segment.
Salt product sales of $238.3 million for nine months of 2006 decreased $18.6 million, or 7%,
compared to $256.9 million in 2005. During 2006, we sold approximately 1,448,000 fewer tons of
salt than in 2005, a 17% decline. This sales volume decline reduced sales by approximately $35.2
million, primarily due to the milder than normal winter weather in the first quarter of 2006
compared to the more severe than normal weather of 2005. The decline in sales volume was also due
in part to the eight-week strike at our Goderich mine which depleted inventory levels resulting in
lower sales to our chemical customers. Partially offsetting this 2006 volume decrease, our salt
product sales reflect higher average sales prices which improved sales by approximately $12.5
million. For the portion of our salt sales denominated in Canadian dollars and British pounds
sterling, the changes in those exchange rates relative to the U.S. dollar also improved sales by
approximately $3.8 million compared to the same period of 2005.
Specialty potash fertilizer product sales of $69.7 million for the nine months ended September 30,
2006 increased $6.5 million, or 10%, over $63.2 million during the same period in 2005 despite
fewer tons sold, reflecting the increase in sales price which improved sales by approximately $8.5
million. The lower sales volumes primarily reflect reduced domestic sales, due in part to the
prolonged wet weather conditions during the 2006 spring season in the western United States.
Gross Profit
Gross profit for the nine months ended September 30, 2006 of $114.6 million decreased $2.2 million,
or 2%, compared to $116.8 million for the same period in 2005, though as a percentage of sales
gross margin remained consistent with 2005 at 25%. Gross profit decreased despite the price
increases discussed above ($21.1 million) due to the lower sales volumes ($18.4 million), higher
transportation costs, the impact of the strike at our Goderich mine and higher production costs,
principally higher natural gas costs and increased raw material costs for our specialty potash
fertilizer products. These reductions in gross margin were partially offset by a $5.1 million
business interruption insurance recovery recorded as a reduction to product cost. The business
interruption claim was due to a temporary production interruption at the Goderich mine in late 2004
which resulted in unavailable finished goods product inventory during the first quarter of 2005
when winter weather conditions continued to be more severe than normal in certain of the Companys
markets. Inventory levels at some
15
locations in early 2005 were not adequate to meet the
incremental demand for deicing salt products. For sales in our Canadian and British markets, the
changes in exchange rates relative to the U.S. dollar also improved gross margin by approximately
$1.6 million.
Management expects raw material costs for our specialty potash fertilizer will continue to increase
over 2006 levels. Potassium chloride (KCl), a raw material used in making our sulfate of potash
fertilizer, is purchased under a long-term supply contract with annual price changes based on prior
year changes in the market price of KCl. While the pricing under this contract is favorable to
market, the price has increased significantly over the prior year. While our sales price increases
achieved in 2006 have more than offset the cost increase, we cannot predict whether SOP sales
prices will increase correspondingly in 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2006 of $39.7
million decreased $1.3 million, or 3%, from $41.0 million for the same period of 2005 primarily
reflecting lower costs incurred for outside services and lower administrative expenses following
the sale of the evaporated salt business in December 2005.
Interest Expense
Interest expense for the nine months ended September 30, 2006 of $40.1 million decreased $5.6
million compared to $45.7 million for the same period in 2005. Our 2006 overall weighted average
interest rate decreased compared to 2005 due to the December 2005 refinancing of $323.0 million of
our 10% senior subordinated notes with the lower-rate senior secured credit agreement. The
remaining $2.0 million of 10% notes were redeemed in August 2006. This decrease was partially
offset by the higher principal balances on the discount notes due to interest accretion and the
prior year allocation of $1.9 million of interest expense to discontinued operations.
Other (Income) Expense, Net
Other (income) expense, net for the nine months ended September 30, 2006 improved compared to the
same period of 2005 primarily due to foreign exchange gains in 2006 compared to losses in 2005 and
increased interest income. The increased interest income reflects the higher average balance of
cash and cash equivalents during 2006 and higher market interest rates.
Income Tax Expense (Benefit)
Income tax expense of $8.4 million for the nine months ended September 30, 2006 increased $0.2
million from $8.2 million for the same period in 2005. During 2006, the Company filed foreign tax
returns and recorded a $0.6 million benefit for a true-up of previous accruals. During the nine
months ended September 30, 2005 the Companys U.K. subsidiary made a one-time repayment of a
pound-sterling-denominated loan to a U.S. subsidiary which resulted in a foreign exchange gain for
tax purposes only causing the Company to record $5.4 million of income tax expense resulting from a
repatriation of funds. For financial reporting purposes, the unrealized foreign exchange gain is a
component of accumulated other comprehensive income in stockholders equity and was not recognized
in the consolidated statements of operations. Additionally, in 2005 the Internal Revenue Service
and Canada Revenue Agency developed a framework to minimize the inconsistent treatment of tax
matters involving the two taxing authorities causing management to change certain tax estimates and
reverse previously recorded income tax reserves of $5.9 million, partially offset by other tax
adjustments of $1.1 million ($0.15 per basic and diluted common share), related to matters
previously determined to have an uncertain outcome.
Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to
U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate
differentials, foreign mining income taxes, and interest expense recognition differences for book
and tax purposes.
Liquidity and Capital Resources
Historically, we have used cash generated from operations to meet our working capital needs, fund
capital expenditures, pay dividends and make payments on our debt. When we cannot meet our
liquidity needs with cash flows from operations due to the seasonality of our business, we borrow
under our revolving credit facility. We expect that ongoing cash requirements will be funded from
our operations or available borrowing facilities. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that are beyond our
control.
During the nine months ended September 30, 2006, cash flows from operations were $79.3 million. We
used those cash flows, together with cash on hand at the beginning of the year, to fund capital
expenditures of $24.5 million, pay $29.6 million of dividends to the holders of our common stock,
repay $31.0 million of borrowings on our revolving credit facility, voluntarily
make $30.0 million of early principal payments on our term loan and redeem the remaining $2.0
million of the 10% senior subordinated notes.
As of September 30, 2006, we had $572.3 million of principal indebtedness including $106.6 million
of senior discount notes with a face value of $123.5 million, $148.2 million of senior subordinated
discount notes with a face value of $179.6 million,
16
and $317.5 million of term loan under our
senior secured credit agreement. We also have a revolving credit facility that provides borrowing
capacity up to an aggregate amount of $125.0 million. As of September 30, 2006, borrowing
availability under our revolving credit facility was reduced by $12.2 million of letters of credit,
leaving an available balance of approximately $112.8 million and we had a cash balance of $8.4
million. As of September 30, 2006, we are in compliance with all conditions and covenants related
to these borrowings.
Our significant 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, our operations are conducted through our subsidiaries. Our
senior secured credit agreement is collateralized by substantially all of the operating assets of
our subsidiaries. Our subsidiaries have not guaranteed and have no legal obligation to make funds
available to us for payment on our senior subordinated notes or discount notes (Notes) or to pay
dividends on our capital stock. Accordingly, our ability to make payments on our Notes and
distribute dividends to our stockholders is dependent on the earnings and the distribution of funds
from our subsidiaries. The terms of our senior secured credit agreement limit the transferability
of assets and the amount of dividends that our subsidiaries can distribute to us. The terms also
restrict our subsidiaries from paying dividends to us in order to fund cash interest on our
discount notes if we do not comply with the provisions relating to the adjusted total leverage
ratio and consolidated fixed charge coverage ratio, or if a default or event of default has
occurred and is continuing under our senior secured credit agreement. In addition, we cannot assure
you that we will maintain these ratios. We cannot assure you that the agreements governing the
current and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with
sufficient dividends, distributions or loans to fund scheduled interest and principal payments on
our Notes when due. If we consummate an acquisition, our debt service requirements could increase.
Furthermore, we may need to refinance all or a portion of our Notes on or before maturity and we
cannot assure you that we will be able to refinance any of it on commercially reasonable terms or
at all.
For the Nine Months Ended September 30, 2006 and 2005
Net cash flows provided by operating activities for the nine months ended September 30, 2006 and
2005 were $79.3 million and $70.1 million, respectively. In both years, the working capital
generated through collections of accounts receivable was used to fund inventory increases and pay
current liabilities, including income taxes. These net working capital changes are indicative of
the seasonal nature of our highway deicing product line.
Net cash flows used by investing activities for the nine months ended September 30, 2006 and 2005,
of $28.4 million and $22.6 million, respectively, primarily reflect capital expenditures. The 2006
capital expenditures include $11.2 million of expenditures to replace an existing underground rock
salt mill in Canada and complete the expansion our magnesium chloride facilities. In July 2006, we
also announced plans to increase our rock salt production capacity at our Goderich mine by
approximately 750,000 tons by 2008. This expansion, consisting primarily of new equipment, began
during the third quarter with expenditures to date totaling $2.2 million and is expected to cost
approximately $11 million. We estimate fourth quarter 2006 spending for these projects will total
approximately $1 million. The remaining capital expenditures during the 2006 nine-month period
were primarily for routine replacements primarily at our North American facilities.
Financing activities in the 2006 nine-month period used $92.9 million, consisting primarily of
$29.6 million of dividend payments and $65.5 million of payments to reduce our outstanding debt.
During 2006, we repaid $31.0 million of borrowings under our revolving credit facility, voluntarily
made early principal repayments totaling $30.0 million to reduce the balance of our term loan and
redeemed the remaining $2.0 million of senior subordinated notes. As discussed below, beginning in
2006 the excess tax benefits realized from the exercise of stock options are classified as source
of funds from financing activities. During 2005 these benefits were presented as operating cash
flows. Net cash flow used in financing activities during 2005 was $37.0 million, primarily for
$12.2 million of net debt reduction and $25.9 million of dividends.
Recent Accounting Pronouncements
Effective January 1, 2006 the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 123(R) Share-Based Payment for accounting for its equity compensation awards using the
modified prospective transition method. Because the Company had previously recognized compensation
expense for the fair value of its stock-based compensation in accordance with SFAS 123, the
adoption of SFAS 123(R) had no impact on the amount of compensation expense recognized in the
Consolidated Statements of Operations. However, beginning in 2006, the tax benefits realized upon
the exercise of stock options in excess of amounts accrued for book purposes have been included as
a financing activity in the Consolidated Statements of Cash Flows whereas the excess benefits were
included in operating activities in prior years. See Note 10 to the Consolidated Financial
Statements for further discussion of the Companys equity compensation awards.
During the second quarter of 2006 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). This guidance is
intended to provide increased consistency in the application of FASB Statement No. 109
Accounting for Income Taxes by providing guidance with regard to the recognition
and measurement of uncertain tax positions, the accrual of interest and penalties, and increased
disclosure requirements. In particular, this interpretation requires uncertain tax positions to be
recognized only if they are more-likely-than-not to be upheld based on their technical merits.
The measurement of the uncertain tax position will be based on the largest benefit amount that is
more likely than not (determined on a cumulative probability basis) to be realized upon settlement.
Any
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resulting cumulative effect of applying the provisions of FIN 48 upon adoption will be
reported as an adjustment to the beginning balance of retained earnings (deficit) in the period of
adoption. This interpretation is effective for fiscal years beginning after December 15, 2006.
The Company has not yet completed its evaluation of its uncertain tax positions under the new
interpretation and has not yet determined whether the adoption of this new guidance will have a
material effect on its financial condition or results of operations.
During the third quarter of 2006, the FASB issued Statement of Financial Accounting Standards No.
157 Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements for fair-value measurements
that are already required or permitted by other GAAP. It is effective for fiscal years beginning
after November 15, 2007. Considering the items currently recorded at fair value on the Companys
Consolidated Balance Sheets, management does not expect the adoption of SFAS 157 to have a material
effect on the Companys financial condition or results of operations.
During the third quarter of 2006, the FASB also issued SFAS 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans which amends SFAS No. 87, 88, 106, and
132(R). This statement requires an employer to recognize the over-funded or under-funded status of
its defined postretirement plans as an asset or liability in its statement of financial position
and recognize changes in that funded status in the year in which the changes occur through
comprehensive income. The funded status of defined benefit pension plans will be based on the
difference between the actuarially determined projected benefit obligation and the plan assets as
of the measurement date. The previously unrecognized under- or over-funded status will be recorded
as an asset or liability with the offset to other comprehensive income for public companies with
fiscal years ending after December 15, 2006. Additionally, this statement requires the employer
to measure the plan status as of the balance sheet date although the measurement date requirement
is not effective until fiscal years ending after December 15, 2008, with earlier application
allowed. This statement also requires additional disclosures and modifies or deletes certain of
the existing disclosure requirements.
The Company has two defined benefit pension plans which are currently measured as of November 30th
of each year. While management intends to recognized the over-funded or under-funded status as of
December 31, 2006, we have not yet decided when we will change the measurement date. Though the
funded status of our plans will not be determined until the annual measurement date, Management
currently does not expect the adoption of this statement to have a material impact on the Companys
financial condition.
Effects of Currency Fluctuations
We conduct operations in Canada, the United Kingdom and the United States. 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 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
consolidated financial statements. The majority of our revenues and costs are denominated in U.S.
dollars, with pounds sterling and Canadian dollars also being significant. Exchange rates between
those currencies and U.S. dollars in recent years have fluctuated significantly and may do so in
the future. Significant changes in the value of the Canadian dollar or pound sterling relative to
the U.S. dollar could have a material adverse effect on our financial condition and our ability to
meet interest and principal payments on U.S. dollar denominated debt.
Seasonality
We experience a substantial amount of seasonality in salt sales. The result of this seasonality is
that 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 products are seasonal as they vary based on the severity of the winter conditions in
areas where the product is used. Following industry practice in North America, we stockpile
sufficient quantities of deicing salt in the second, third and fourth quarters to meet the
estimated requirements for the winter season.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our business is subject to various types of market risks that include, but are not limited to,
interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has
taken actions to mitigate our exposure to commodity pricing and interest rate risk by entering into
forward derivative instruments and an interest rate swap agreement, and may take further actions to
mitigate our exposure to other risks. However, there can be no assurance that our hedging
activities will eliminate or substantially reduce these risks. We do not enter into any financial
instrument arrangements for speculative purposes. The Companys market risk exposure related to
these items has not changed materially since December 31, 2005.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this
report, an evaluation of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under
the supervision and with the participation of the Companys management, including the CEO and CFO.
Based on that evaluation, the Companys CEO and CFO concluded that the Companys
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disclosure
controls and procedures were effective as of September 30, 2006 to ensure that information required
to be disclosed in the reports it files and submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported as and when required.
Changes in Internal Control Over Financial Reporting There has been no change in the Companys
internal control over financial reporting during the most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time is involved in various routine legal proceedings. These primarily
involve commercial claims, product liability claims, personal injury claims and workers
compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims
with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined
adversely, would not have a material adverse effect on our business, financial condition and
results of operations. There have been no material developments during 2006 with respect to legal
proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously discussed in Item 1A of the
Companys Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit |
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No. |
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Description of Exhibit |
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31.1*
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Section 302 Certifications of Angelo C. Brisimitzakis, President and Chief Executive Officer. |
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31.2*
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Section 302 Certifications of Rodney L. Underdown, Vice President and Chief Financial Officer. |
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32*
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Certification Pursuant to 18 U.S.C.§1350 of Angelo C. Brisimitzakis, President and Chief
Executive Officer and Rodney L. Underdown, Vice President and Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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COMPASS MINERALS INTERNATIONAL, INC. |
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Date: October 31, 2006
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/s/ ANGELO C. BRISIMITZAKIS
Angelo C. Brisimitzakis
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President and Chief Executive Officer |
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Date: October 31, 2006
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/s/ RODNEY L. UNDERDOWN
Rodney L. Underdown
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Vice President and Chief Financial Officer |
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