All statements, other than statements of historical fact, contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

 

Forward-looking statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following: domestic and international general business and economic conditions; uninsured risks and hazards associated with underground mining operations; losses for acts of nature which may not  be fully reimbursable through our insurance carriers; the timing of any insurance reimbursements may not correspond to the period in which the loss was incurred; governmental policies affecting the agricultural industry, consumer and industrial industry or highway maintenance programs in localities where the Company or its customers operate; weather conditions; the impact of competitive products; pressure on prices realized by the Company for its products; constraints on supplies of raw materials used in manufacturing certain of the Company’s products and the availability of transportation services; capacity constraints limiting the production of certain products; the ability to attract and retain skilled personnel as well as labor relations including without limitation, the impact of work rules, strikes or other disruptions, wage and benefit requirements; difficulties or delays in the development, production, testing and marketing of products; difficulties or delays in receiving and renewing required governmental and regulatory approvals; the impact of new technology on the demand for our products; 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; the impact of the Company’s indebtedness and interest rates changes; foreign exchange rates and fluctuations in those rates; the costs and effects of legal proceedings including environmental and administrative proceedings involving the Company; customer expectations about future potash market prices and availability and agricultural economics; the impact of credit and capital markets, including the risk of customer and counterparty defaults and declining credit availability; changes in tax laws or estimates; and other risk factors reported in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) as updated quarterly on Form 10-Q.

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no duty to update any of the forward-looking statements after the date hereof or to reflect the occurrence of unanticipated events.

 

Unless the context requires otherwise, references in this quarterly report to the “Company,” “Compass,” “Compass Minerals,” “CMP,” “we,” “us” and “our” refer to Compass Minerals International, Inc. (“CMI”, the parent holding company) and its consolidated subsidiaries.

 

Critical Accounting Estimates

 

Preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments result primarily from the need to make estimates about matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on February 22, 2012, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. Actual results in these areas could differ from management’s estimates.

 

Results of Operations

 

In August 2011, a tornado struck our Goderich salt mine and salt mechanical evaporation plant.  As a result, some of the mine’s surface structures and the evaporation plant incurred significant damage which temporarily ceased production at both facilities. We resumed production and shipping activities, on a reduced basis, at the Goderich mine in early September and resumed limited activities at the evaporation plant in late September.  In the last half of 2011, we recorded approximately $4.8 million for the impairment of our property, plant and equipment at the facilities. However, we may need to record additional impairment charges as more information becomes available.  In addition, we have incurred clean-up and restoration costs related to the tornado. We expect to be fully reimbursed by our insurers for the replacement and repair costs for our property, plant and equipment and associated clean-up costs incurred.  In 2011, we recognized in the consolidated statements of operations the asset impairment charges and clean-up costs incurred of $14.5 million offset by the expected insurance recoveries of $14.5 million. In the first quarter of 2012, we recorded an additional $5.9 million of clean-up costs which were offset by $5.9 million of expected insurance recoveries in the consolidated statements of operations.  We incurred approximately $9 million of capital expenditures during the first quarter of 2012 to replace damaged or destroyed property, plant and equipment from the tornado bringing total capital expenditures for replacement property, plant and equipment to $26 million.  We estimate we will spend another

 

 

approximately $35 million primarily during the remainder of 2012 to complete the replacement of all property, plant and equipment impacted by the tornado.  Capital expenditures to replace damaged property, plant and equipment will result in an increase in depreciation expense in future years.  We also expect to have a substantial business interruption claim to offset the lost profits and to offset certain additional expenses incurred related to the ongoing operations. Since the tornado occurred, we have identified approximately $30 million ($16 million in 2011 and $14 million in the first quarter of 2012) of estimated losses that we believe qualify as recoverable business interruption losses. However, we may not have been able to estimate the full amount of losses incurred since the tornado occurred. The amount of actual business interruption recoveries may differ materially from the Company’s current and future estimates.  We expect to incur significant costs and other losses associated with the tornado (which we intend to seek recovery from a business interruption insurance claim) through at least the fourth quarter of 2012.  These costs and losses are largely related to higher per-unit costs to produce inventory and to purchase finished goods inventories and are expected to continue into the 2012-2013 winter season when the inventories are likely sold to serve contracted business.  We also experienced other incremental losses and costs due to the tornado related to our ongoing business.  We believe the impact from lost sales, lost production and additional expenses we will incur will be substantially covered by our insurance policies.  Any business interruption insurance recoveries will be recognized in “product cost” in the consolidated statements of operations when the insurance claim has been settled.

 

Deicing products, consisting of deicing salt and magnesium chloride used by highway deicing and consumer and industrial customers, constitute a significant portion of the Company’s salt segment sales.  Our deicing sales are seasonal and can fluctuate from year to year depending on the severity of the winter season weather in our served regions.  Inventory management practices are employed to respond to the varying level of demand which impacts our production volumes, the resulting per ton cost of inventory and ultimately profit margins, particularly during the second and third quarters when we build our inventory levels for the upcoming winter and earnings are typically lower than the first and fourth quarters.  In the first quarter of 2012, winter weather was significantly milder than average and unfavorably impacted our sales and operating earnings.  In the first quarter of 2011, the frequency of winter weather was higher than long-term averages, yet inventory constraints limited our ability to capitalize on more-severe-than-average weather in some of the regions we serve.  As a result, we estimate that there was no significant impact on our sales or operating earnings in the first quarter of 2011 from winter weather.  Not only does the weather affect our highway and consumer and industrial deicing salt sales volumes and resulting gross profit, but it also impacts our inventory levels, which influence production volume, the resulting cost per ton, and ultimately our profit margins.

 

Our sulfate of potash (“SOP”) product is used in the production of specialty fertilizers for high-value crops and turf. Our domestic sales of SOP are concentrated in the Western and Southeastern U.S. where the crops and soil conditions favor the use of low-chloride potassium nutrients, such as SOP.  Consequently, weather patterns and field conditions in these locations can impact the amount of specialty fertilizer sales volumes.  Additionally, the demand for and market price of SOP is affected by the broader potash market.  The potash market is influenced by many factors such as world grain and food supply, changes in consumer diets, general levels of economic activity, governmental food programs, and governmental agriculture and energy policies around the world.  Economic factors may impact the amount or type of crop grown in certain locations, or the type of fertilizer product used.  High-value or chloride-sensitive crop yields and/or quality are generally lower when potassium chloride chloride (“MOP” or “KCl”) is used as a potassium nutrient, rather than SOP. Market prices for MOP are well above historical levels though below the historic-high prices seen at the end of 2008.  These same factors have similarly influenced SOP market pricing, which has historically been sold at prices above MOP market pricing, and the resulting average price of our SOP has fluctuated dramatically in recent years.  We expect SOP pricing to retain a premium to MOP although as MOP pricing increases, the size of the premium tends to decrease.

 

Our North American salt mines and SOP production facilities are near either water or rail transport systems, which reduces our shipping and handling costs when compared to alternative methods of distribution, although shipping and handling costs still account for a relatively large portion of the total delivered cost of our products.  The tightening of available transportation services together with higher fuel costs has increased our shipping and handling costs on a per ton basis over the last several years.  Shipping and handling costs on a per ton basis in the first quarter of 2012 have increased when compared to those experienced in the first quarter of 2011 partially as a result of higher oil-based fuel costs.  Future period per-unit costs will continue to be influenced by oil-based fuel costs.

 

Manpower costs, energy costs, packaging, and certain raw material costs, particularly KCl, which can be used to make a portion of our deicing and water conditioning products, as well as a small portion of our sulfate of potash fertilizer, are also significant.  The Company’s production workforce is typically represented by labor unions with multi-year collective bargaining agreements.  We had lower salt production in 2010 at both our Cote Blanche and Goderich mines and certain consumer and industrial salt plants. The 2010 lower production resulted in significantly higher per-unit salt production costs, especially for mined rock salt, when compared to our historical costs, a portion of which remained in inventory at the end of 2010.  This inventory was sold during the first quarter of 2011 as part of the Company’s normal seasonal inventory changes, which resulted in higher per-unit costs in the first quarter of 2011.  However, this trend began to reverse in the second and third quarters of 2011 as the sale of 2011 production, at more-historically typical per-unit costs, were lower than the prior year elevated unit cost levels.  (See discussion above for expected trends in costs due to the effects of the Goderich tornado.) Our energy costs result from the consumption of

 

 

electricity with relatively stable, rate-regulated pricing, and natural gas, which can have significant pricing volatility. We manage the pricing volatility of our natural gas purchases with natural gas forward swap contracts up to 36 months in advance of purchases, helping to reduce the impact of short-term spot market price volatility.  We have historically purchased KCl under long-term supply contracts with annual changes in price based on previous year changes in the market price for KCl.  The market price for KCl increased significantly in recent years, causing continued price increases under our supply contracts.  We continued to purchase KCl for certain water conditioning and consumer deicing applications at higher prices, which has increased input costs, although the impact on the Company’s gross margin is not expected to be significant.  The Company’s SOP production in Canada purchases KCl under a very long-term supply agreement.  Our production methods at that site use the purchased KCl to create high-purity SOP.

 

The consolidated financial statements have been prepared to present the historical financial condition and results of operations and cash flows for the Company which include our salt segment, specialty fertilizer segment, our records management business and unallocated corporate activities.  The results of operations for Big Quill Resources have been included in our specialty fertilizer segment results from the date of acquisition in January 2011. The results of operations of the records management business, include sales of $2.5 million and $2.8 million for the three months ended March 31, 2012 and March 31, 2011, respectively, and are not material to our consolidated financial statements and consequently, are not included in the table below.  The following tables and discussion should be read in conjunction with the information contained in our consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

 

 

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

Sales

 

Sales for the first quarter of 2012 of $315.3 million decreased $75.3 million, or 19% compared to $390.6 million for the same quarter of 2011. Sales primarily include revenues from the sale of our salt and specialty fertilizer products, or “product sales,” revenues from our records management business, and shipping and handling costs incurred to deliver salt and specialty fertilizer products to our customers.  Shipping and handling costs were $93.5 million during the first quarter of 2012, a decrease of $21.2 million or 18% compared to $114.7 million for the same quarter of 2011.  The decrease in shipping and handling costs is primarily due to lower salt sales volumes in the first quarter of 2012 when compared to same period of 2011.  Fuel costs were higher in 2012 when compared with 2011 and unfavorably impacted shipping and handling costs.

 

Product sales for the first quarter of 2012 of $219.3 million decreased $53.8 million, or 20% compared to $273.1 million for the same period in 2011 principally reflecting lower product sales in the salt segment and higher product sales for our specialty fertilizer segment.