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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] 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 333-82700
Compass Minerals Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 48-1135403
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8300 College Blvd.
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: X No: ___
Common Stock, $0.01 Par Value - 1,000 shares outstanding as of November 1,
2002
COMPASS MINERALS GROUP, INC.
Table of Contents
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001.............................................................2
Combined and Consolidated Statements of Income for the three and nine
month periods ended September 30, 2002 and 2001 (unaudited)...................................3
Consolidated Statement of Stockholder's Equity (Deficit) for the nine
month period ended September 30, 2002 (unaudited).............................................4
Combined and Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2002 and 2001 (unaudited)...................................5
Notes to Combined and Consolidated Financial Statements (unaudited)...........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................16
Item 3. Quantitative and Qualitative Disclosure of Market Risk.......................................25
Item 4. Controls and Procedures......................................................................26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................26
Item 2. Changes in Securities and Use of Proceeds....................................................26
Item 3. Defaults upon Senior Securities..............................................................26
Item 4. Submission of Matters to a Vote of Security Holders..........................................26
Item 5. Other Information............................................................................26
Item 6. Exhibits & Reports on Form 8-K...............................................................27
SIGNATURES.......................................................................................................27
CERTIFICATIONS...................................................................................................27
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPASS MINERALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
2002 2001
------------------ -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 7.5 $ 15.9
Receivables, less allowance for doubtful accounts of
$2.4 million in 2002 and $2.0 million in 2001................ 47.3 87.9
Inventories..................................................... 101.6 99.4
Other........................................................... 5.0 2.0
------------------ -----------------
Total current assets ..................................... 161.4 205.2
Property, plant and equipment, net.............................. 410.8 422.1
Other .......................................................... 25.8 28.3
----------------- -----------------
Total assets................................................ $ 598.0 $ 655.6
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................... $ 1.6 $ 2.5
Accounts payable................................................ 43.6 52.8
Accrued expenses................................................ 17.4 20.7
Accrued salaries and wages ..................................... 10.4 10.5
Income taxes payable............................................ --- 2.9
Total current liabilities.... 73.0 89.4
Long-term debt, net of current portion ........................... 446.4 512.6
Deferred income taxes............................................. 98.5 101.1
Other noncurrent liabilities ..................................... 16.2 10.3
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding................................................. --- ---
Additional paid in capital ..................................... 347.4 333.6
Accumulated deficit ............................................ (388.1) (389.0)
Accumulated other comprehensive income (loss)................... 4.6 (2.4)
----------------- -----------------
Total stockholder's equity (deficit)........................ (36.1) (57.8)
----------------- -----------------
Total liabilities and stockholder's equity (deficit)........ $ 598.0 $ 655.6
================== =================
The accompanying notes are an integral part of the combined and
consolidated financial statements.
2
COMPASS MINERALS GROUP, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in millions)
Three Months ended Nine Months ended
September 30 September 30
---------------------------- ----------------------------
2002 2001 2002 2001
---------- ---------- --------- ----------
Gross sales................................. $ 92.2 $ 90.9 $ 336.9 $ 365.6
Shipping and handling costs................. 22.5 23.0 91.2 99.7
---------- ---------- --------- ----------
Net sales................................. 69.7 67.9 245.7 265.9
Cost of sales............................... 53.3 56.0 173.3 189.4
---------- ---------- --------- ----------
Gross profit.............................. 16.4 11.9 72.4 76.5
Selling, general and administrative expenses 10.8 9.6 30.1 28.7
Transition and other charges................ 2.1 --- 6.8 ---
---------- ---------- --------- ----------
Operating earnings........................ 3.5 2.3 35.5 47.8
Other (income) expense:
Interest expense.......................... 10.5 2.0 31.0 9.0
Other, net................................ (0.3) (1.0) 4.1 (4.3)
---------- ---------- --------- ----------
Income / (Loss) before income taxes......... (6.7) 1.3 0.4 43.1
Income tax expense (benefit) ............... (3.2) 1.9 (0.5) 20.7
---------- ---------- --------- ----------
Net income / (loss)......................... $ (3.5) $ (0.6) $ 0.9 $ 22.4
========== ========== ========= ==========
The accompanying notes are an integral part of the combined and
consolidated financial statements.
3
COMPASS MINERALS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) (unaudited)
For the nine months ended September 30, 2002
(in millions)
Accumulated
Additional Other
Common Paid In Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
------------ ------------ --------------- -------------- ------------
Balance, December 31, 2001............. $ --- $ 333.6 $ (389.0) $ (2.4) $ (57.8)
Comprehensive income:
Net income ....................... 0.9 0.9
Cumulative translation adjustments 7.0 7.0
------------
Comprehensive income.............. 7.9
Capital contributions.................. 13.8 13.8
------------ ------------ --------------- -------------- ------------
Balance, September 30, 2002 ........... $ --- $ 347.4 $ (388.1) $ 4.6 $ (36.1)
============ ============ =============== ============== ============
The accompanying notes are an integral part of the combined and
consolidated financial statements.
4
COMPASS MINERALS GROUP, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in millions)
Nine months ended
September 30
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income ........................................................... $ 0.9 $ 22.4
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and depletion ...................................... 28.7 24.0
Amortization........................................................ 1.4 ---
Early extinguishment of long-term debt........................... 5.3 ---
Transition and other charges, net of cash ....................... 1.1 ---
Deferred income taxes............................................... (1.9) 9.8
Other............................................................... 0.1 0.4
Changes in operating assets and liabilities:
Receivables................................................. 39.7 72.4
Due to IMC and affiliates.................................... --- (5.6)
Inventories....................................................... (1.6) (14.0)
Other assets................................................ (4.4) 0.8
Accounts payable and accrued expenses............................. (16.7) (27.5)
Other noncurrent liabilities...................................... 5.2 (3.1)
----------- -----------
Net cash provided by operating activities....................... 57.8 79.6
Cash flows from investing activities:
Capital expenditures................................................... (12.1) (30.7)
Other ................................................................. 0.3 (0.7)
----------- -----------
Net cash used in investing activities................................ (11.8) (31.4)
Cash flows from financing activities:
Revolver activity...................................................... (39.8) (4.4)
Issuance of long-term debt............................................. 78.4 ---
Principal payments on other long-term debt, including capital leases... (105.5) (66.2)
Payments to IMC and affiliates, net.................................... --- 49.6
Dividend to IMC and affiliates......................................... --- (26.7)
Deferred financing costs............................................... (3.4) ---
Capital contribution from SHC.......................................... 12.8 ---
Other.................................................................. 1.0 ---
----------- -----------
Net cash used in financing activities.............................. (56.5) (47.7)
Effect of exchange rate changes on cash and cash equivalents............. 2.1 (0.2)
----------- -----------
Net increase (decrease) in cash and cash equivalents................. (8.4) 0.3
Cash and cash equivalents, beginning of the period....................... 15.9 0.4
----------- -----------
Cash and cash equivalents, end of the period............................. $ 7.5 $ 0.7
=========== ===========
Supplemental cash flow information:
Interest paid excluding capitalized interest........................... $ 27.1 $ 13.5
Income taxes paid...................................................... 9.9 12.7
The accompanying notes are an integral part of the combined and consolidated
financial statements.
5
COMPASS MINERALS GROUP, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization, Formation and Basis of Presentation:
On November 28, 2001, IMC Global Inc. ("IMC") completed the sale of Compass
Minerals Group, Inc. ("CMG" or the "Company") to Salt Holdings Corporation
("SHC"), an affiliate of Apollo Management V, L.P. ("Apollo"), whereby SHC
acquired control of CMG in a recapitalization transaction ("Recapitalization").
The acquisition has been accounted for as a leveraged recapitalization. The
excess of the purchase price over the net assets acquired was recorded in
Stockholder's Equity. The purchase price was approximately $625.0 million
subject to certain post closing adjustments. During the third quarter ending
September 30, 2002 SHC concluded their agreement with IMC and finalized the
purchase price. SHC received approximately $13.0 million in cash for the post
closing purchase price adjustment and other IMC indemnified costs. SHC
contributed those proceeds to CMG as a capital contribution.
The accompanying unaudited combined and consolidated financial statements
have been prepared in accordance with 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
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation, have been included. Operating results for the three-month and
nine-month periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the combined and
consolidated financial statements and notes thereto for the year ended December
31, 2001 included in the CMG Registration Statement on Form S-4 (the
"Registration Statement"), as amended (file no. 333-82700), declared effective
by the Securities and Exchange Commission (the "SEC") on April 23, 2002.
The Company's financial statements have been combined through November 27,
2001, the Recapitalization date, and consolidated thereafter.
2. Summary of Significant Accounting Policies:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". The objective
of SFAS No. 143 is to establish an accounting standard for the recognition and
measurement of an obligation related to the retirement of certain long-lived
assets. The retirement obligation must be one that results from the acquisition,
construction or normal operation of a long-lived asset. SFAS No. 143 requires
the legal obligation associated with the retirement of a tangible long-lived
asset to be recognized at fair value as a liability when incurred, and the cost
to be capitalized by increasing the carrying amount of the related long-lived
asset. SFAS No. 143 will be effective for the Company beginning January 1, 2003.
The Company is currently evaluating the effect of implementing SFAS 143.
6
In January of 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and Accounting Principles Board Opinion (APB) No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This Statement establishes an accounting model based
on FAS No. 121 for long lived assets to be disposed of by sale, previously
accounted for under APB No. 30. The Company adopted SFAS No. 144 as of January
1, 2002 without significant effect on its consolidated financial statements.
During the second quarter, the Company early adopted SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4 and SFAS No.
64, which required gains and losses from extinguishment of debt to be classified
as extraordinary items. The early adoption of SFAS No. 145 resulted in a $5.3
million charge to other (income) expense related to the debt refinancing that
occurred in the quarter ended June 30, 2002 (See Note 4). Under previous
guidance this charge would have been recorded as extraordinary loss, net of tax,
on the consolidated statement of income.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This Statement requires that a liability
for costs associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
believes that SFAS 146 will not have a material impact on its financial
position, results of operations or cash flows.
3. Inventories:
Inventories consist of the following (in millions):
September 30, December 31,
2002 2001
------------------- --------------------
Finished goods..................................... $ 89.1 $ 83.0
Raw materials and supplies......................... 12.5 16.4
------------------- --------------------
$ 101.6 $ 99.4
=================== ====================
4. Long-term Debt:
On April 10, 2002, the Company completed an offering of $75.0 million
aggregate principal amount of 10% Senior Subordinated Notes due 2011 (the "New
Notes"). The New Notes were issued to the bondholders at a premium of $3.4
million, plus accrued interest from February 15, 2002 and accordingly, the
Company received gross proceeds of $79.5 million from the offering of the notes.
The New Notes, together with the $250.0 million aggregate principal amount of
notes which were originally issued on November 28, 2001 (the "Old Notes" and,
together with the New Notes, (the "Notes")), are treated as a single class of
securities under the Company's existing indenture. The proceeds from the
offering of the New Notes, net of transaction costs, were used to repay
borrowings under the Company's $360.0 million credit facility (the "Credit
Facility"). In connection with the offering, the Company amended and restated
the Credit Facility with respect to a reduction in the Term Loan to $150.0
million and a 0.75% reduction in the interest rate margin charged to the Company
on the Term Loan. The Company also recorded a charge to Other (income) expense
in the accompanying Consolidated Statements of Income of approximately $5.3
million, related to the write-off of the deferred financing costs associated
with the refinancing of the original Term Loan.
7
During the nine months ended September 30, 2002, cash flow from operations
exceeded working capital and investment needs, and the Company used a portion of
those cash flows to make $30.0 million of voluntary principal payments on its
Term Loan, as permitted by the Credit Facility.
Third-party long-term debt consists of the following (in millions):
September 30, December 31,
2002 2001
------------------- --------------------
Senior Subordinated Notes.......................... $ 325.0 $ 250.0
Term Loan.......................................... 119.6 225.0
Revolving Credit Facility.......................... --- 39.8
Other, including capital lease obligations......... 0.1 0.3
`1
------------------- --------------------
444.7 515.1
Premium on senior subordinated notes, net.......... 3.3 ---
Current portion of long-term debt.................. (1.6) (2.5)
------------------- --------------------
$ 446.4 $ 512.6
=================== ====================
5. Commitments and Contingencies:
During the third quarter ending September 30, 2002, the Company amended an
agreement with a supplier related to the purchase of salt from the supplier's
chemical production facility in Tennessee. The Company has received a one-time
cash payment of $8.0 million related to the amendment. During the third quarter
ending September 30, 2002, the Company recognized $0.6 million as a reduction to
cost of sales in the Consolidated Statement of Income. The remaining amount may
be recognized over the remaining life of the amended agreement, terminating
December 2010, as certain conditions are met by the Company and the supplier.
Alternatively, the Company may elect to resume purchasing salt from the
supplier's facility. In that event, the Company would repay a ratable portion of
the cash received.
8
6. Operating Segments:
Segment information for the three month and nine month periods ended
September 30, 2002 and 2001 is as follows (in millions):
Three months ended September 30, 2002 Salt Potash Other (b) Total
----------- ------------ ---------- -------------
Net sales from external customers........... $ 59.4 $ 10.3 $ --- $ 69.7
Intersegment net sales...................... --- 2.2 (2.2) ---
Operating earnings (loss) (a)............... 5.0 0.7 (2.2) 3.5
Three months ended September 30, 2001 Salt Potash Other (b) Total
----------- ------------ ---------- -------------
Net sales from external customers........... $ 60.6 $ 7.3 $ --- $ 67.9
Intersegment net sales...................... --- 2.4 (2.4) ---
Operating earnings (loss) .................. 5.7 (3.2) (0.2) 2.3
(a) Includes $2.1 million related to transition and other costs.
(b) Other includes corporate entities and eliminations.
Nine months ended September 30, 2002 Salt Potash Other (b) Total
----------- ------------ ---------- -------------
Net sales from external customers........... $ 213.7 $ 32.0 $ --- $ 245.7
Intersegment net sales...................... --- 6.8 (6.8) ---
Operating earnings (loss) (a)............... 39.4 2.9 (6.8) 35.5
Nine months ended September 30, 2001 Salt Potash Other (b) Total
----------- ------------ ---------- -------------
Net sales from external customers........... $ 235.0 $ 30.9 $ --- $ 265.9
Intersegment net sales...................... --- 7.3 (7.3) ---
Operating earnings (loss) .................. 47.4 0.9 (0.5) 47.8
(a) Includes $6.8 million related to transition and other costs.
(b) Other includes corporate entities and eliminations.
Segment information as of September 30, 2002 and December 31, 2001 is as
follows (in millions):
2002 Salt Potash Other (a) Total
----------- ------------ ---------- -------------
Total assets................................ $ 462.3 $ 116.1 $ 19.6 $ 598.0
2001 Salt Potash Other (a) Total
----------- ------------ ---------- -------------
Total assets................................ $ 514.2 $ 120.9 $ 20.5 $ 655.6
(a) Other includes corporate entities and eliminations.
9
7. Guarantor/Non-guarantor Condensed Combining and Consolidating Statements
The following condensed combining and consolidating financial statements
present the financial position, results of operations and cash flows of the
Company, its domestic subsidiaries (guarantors) and its foreign subsidiaries
(non-guarantors).
CONDENSED CONSOLIDATING BALANCE SHEETS (unaudited)
September 30, 2002
(in millions)
Non-guarantors
CMG Eliminations Consolidated
Guarantors
----------- ----------- ---------- ------------ -------------
Cash and cash equivalents.................... $ 5.2 $ 2.3 $ --- $ --- $ 7.5
Receivables, net............................. 28.3 19.0 --- --- 47.3
Inventories.................................. 71.9 29.7 --- --- 101.6
Other current assets......................... 1.4 3.6 --- --- 5.0
Property, plant and equipment, net........... 215.8 195.0 --- --- 410.8
Other........................................ 7.7 3.6 373.5 (359.0) 25.8
----------- ----------- ---------- ------------ -------------
Total assets............................ $ 330.3 $ 253.2 $ 373.5 $ (359.0) $ 598.0
=========== =========== ========== ============ =============
Current portion of long-term debt............ $ --- $ 0.1 $ 1.5 $ --- $ 1.6
Due to (from) affiliates, net................ (60.9) 0.7 60.2 --- ---
Other current liabilities.................... 42.6 16.0 12.8 --- 71.4
Total current liabilities.................... (18.3) 16.8 74.5 --- 73.0
Notes due to (from) affiliates............... --- 95.7 (95.7) --- ---
Long-term debt, net of current portion....... --- --- 446.4 --- 446.4
Other noncurrent liabilities................. 135.0 (4.7) (15.6) --- 114.7
Total stockholder's equity (deficit)......... 213.6 145.4 (36.1) (359.0) (36.1)
----------- ----------- ---------- ------------ -------------
Total liabilities and stockholder's equity $ 330.3 $ 253.2 $ 373.5 $ (359.0) $ 598.0
(deficit) ...................................
=========== =========== ========== ============ =============
10
CONDENSED CONSOLIDATING BALANCE SHEETS (unaudited)
December 31, 2001
(in millions)
Non-guarantors
CMG Eliminations Consolidated
Guarantors
----------- ----------- ---------- ------------- -------------
Cash and cash equivalents.................... $ 8.2 $ 7.7 $ --- $ --- $ 15.9
Receivables, net............................. 50.5 36.0 1.4 --- 87.9
Inventories.................................. 71.1 28.3 --- --- 99.4
Other current assets......................... 1.9 0.1 --- --- 2.0
Property, plant and equipment, net........... 225.2 196.9 --- --- 422.1
Other........................................ 7.9 2.0 370.7 (352.3) 28.3
----------- ----------- ---------- ------------- -------------
Total assets............................ $ 364.8 $ 271.0 $ 372.1 $ (352.3) $ 655.6
=========== =========== ========== ============= =============
Current portion of long-term debt............ $ 0.1 $ 0.1 $ 2.3 $ --- $ 2.5
Due to (from) affiliates, net................ (0.2) (1.3) 1.5 --- ---
Other current liabilities.................... 30.3 37.1 19.5 --- 86.9
----------- ----------- ---------- ------------- -------------
Total current liabilities.................... 30.2 35.9 23.3 --- 89.4
Notes due to (from) affiliates............... --- 97.2 (97.2) --- ---
Long-term debt, net of current portion....... --- 10.8 501.8 --- 512.6
Other noncurrent liabilities................. 123.2 (13.8) 2.0 --- 111.4
Total stockholder's equity (deficit)......... 211.4 140.9 (57.8) (352.3) (57.8)
----------- ----------- ---------- ------------- -------------
Total liabilities and stockholder's equity $ 364.8 $ 271.0 $ 372.1 $ (352.3) $ 655.6
(deficit)....................................
=========== =========== ========== ============= =============
11
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (unaudited)
For the Three Months Ended September 30, 2002 (in millions)
Guarantors Non-guarantors CMG Eliminations Consolidated
----------- ----------- ---------- ------------- -------------
Net sales.................................. $ 44.0 $ 25.7 $ --- $ --- $ 69.7
Cost of sales.............................. 33.0 20.3 --- --- 53.3
----------- ----------- ---------- ------------- -------------
Gross profit.......................... 11.0 5.4 --- --- 16.4
Selling, general and administrative 6.3 4.5 --- --- 10.8
expenses...................................
Transition and other charges............... 2.5 0.1 (0.5) --- 2.1
----------- ----------- ---------- ------------- -------------
Operating income (loss)............... 2.2 0.8 0.5 --- 3.5
Interest expense........................... 0.1 2.9 7.5 --- 10.5
Other (income) expense..................... (0.1) (0.2) (0.1) 0.1 (0.3)
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes..... 2.2 (1.9) (6.9) (0.1) (6.7)
Income tax expense (benefit)............... 0.6 (0.4) (3.4) --- (3.2)
------------ ------------ ------------- ------------- --------------
Net income (loss)..................... $ 1.6 $ (1.5) $ (3.5) $ (0.1) $ (3.5)
============ ============ ============= ============= ==============
CONDENSED COMBINING STATEMENTS OF INCOME (unaudited)
For the Three Months Ended September 30, 2001 (in millions)
Guarantors Non-guarantors CMG Eliminations Consolidated
------------ ------------ ------------- ------------- --------------
Net sales.................................. $ 26.1 $ 41.8 $ --- $ --- $ 67.9
Cost of sales.............................. 19.5 36.5 --- --- 56.0
------------ ------------ ------------- ------------- --------------
Gross profit.......................... 6.6 5.3 --- --- 11.9
Selling, general and administrative 5.4 4.2 --- --- 9.6
expenses...................................
------------ ------------ ------------- ------------- --------------
Operating income (loss)............... 1.2 1.1 --- --- 2.3
Interest expense........................... 0.5 1.5 --- --- 2.0
Other (income) expense..................... 0.1 (1.1) (0.7) 0.7 (1.0)
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes..... 0.6 0.7 0.7 (0.7) 1.3
Income tax expense (benefit)............... (0.4) 2.3 --- --- 1.9
------------ ------------ ------------- ------------- --------------
Net income (loss)..................... $ 1.0 $ (1.6) $ 0.7 $ (0.7) $ (0.6)
============ ============ ============= ============= ==============
12
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (unaudited)
For the Nine Months Ended September 30, 2002 (in millions)
Non-guarantors
CMG Eliminations Combined
Guarantors
------------ ------------ ------------- ------------- --------------
Net sales.................................. $ 156.9 $ 88.8 $ --- $ --- $ 245.7
Cost of sales.............................. 109.3 64.0 --- --- 173.3
------------ ------------ ------------- ------------- --------------
Gross profit.......................... 47.6 24.8 --- --- 72.4
Selling, general and administrative 17.5 12.6 --- --- 30.1
expenses...................................
Transition and other charges............... 4.9 0.6 1.3 --- 6.8
------------ ------------ ------------- ------------- --------------
Operating income (loss)............... 25.2 11.6 (1.3) --- 35.5
Interest expense........................... 0.2 8.2 22.6 --- 31.0
Other (income) expense..................... (0.5) (0.7) (12.4) 17.7 4.1
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes..... 25.5 4.1 (11.5) (17.7) 0.4
Income tax expense (benefit)............... 9.4 2.5 (12.4) --- (0.5)
------------ ------------ ------------- ------------- --------------
Net income (loss)..................... $ 16.1 $ 1.6 $ 0.9 $ (17.7) $ 0.9
============ ============ ============= ============= ==============
CONDENSED COMBINING STATEMENTS OF INCOME (unaudited)
For the Nine Months Ended September 30, 2001 (in millions)
Guarantors Non-guarantors CMG Eliminations Combined
------------ ------------ ------------- ------------- --------------
Net sales.................................. $ 149.0 $ 116.9 $ --- $ --- $ 265.9
Cost of sales.............................. 104.0 85.4 --- --- 189.4
------------ ------------ ------------- ------------- --------------
Gross profit.......................... 45.0 31.5 --- --- 76.5
Selling, general and administrative 16.5 12.2 --- --- 28.7
expenses...................................
------------ ------------ ------------- ------------- --------------
Operating income (loss)............... 28.5 19.3 --- --- 47.8
Interest expense........................... 0.7 8.3 --- --- 9.0
Other (income) expense..................... (2.6) (1.9) (22.4) 22.6 (4.3)
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes..... 30.4 12.9 22.4 (22.6) 43.1
Income tax expense (benefit)............... 11.3 9.4 --- --- 20.7
------------ ------------ ------------- ------------- --------------
Net income (loss)..................... $ 19.1 $ 3.5 $ 22.4 $ (22.6) $ 22.4
============ ============ ============= ============= ==============
13
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (unaudited)
For the Nine Months Ended September 30, 2002
(in millions)
Guarantors Non-guarantors CMG Eliminations Consolidated
------------ ------------ ------------- ------------- --------------
Net cash provided by (used in) operating $ 63.7 $ 14.9 $ (20.8) $ --- $ 57.8
activities.................................
Cash flows from investing activities:
Capital expenditures.................. (6.3) (5.8) --- --- (12.1)
Other................................. 0.4 (0.1) --- --- 0.3
------------ ------------ ------------- ------------- --------------
Net cash used in investing activities..... (5.9) (5.9) --- --- (11.8)
Cash flows from financing activities:
Revolver activity..................... --- (10.8) (29.0) --- (39.8)
Issuance of long-term debt............ --- --- 78.4 --- 78.4
Principal payments on other long-term
debt, including capital leases....... (0.1) (0.1) (105.3) --- (105.5)
Payments (to) from Affiliates, net..... (60.7) 0.5 60.2 --- ---
Deferred financing costs............... --- --- (3.4) --- (3.4)
Capital contribution from SHC.......... --- --- 12.8 --- 12.8
Other.................................. --- --- 1.0 --- 1.0
------------ ------------ ------------- ------------- --------------
Net cash provided by (used in)
financing activities.................. (60.8) (10.4) 14.7 --- (56.5)
Effect of exchange rate changes on cash
and cash --- (4.0) 6.1 --- 2.1
equivalents..............................
------------ ------------ ------------- ------------- --------------
Net increase (decrease) in cash and cash
equivalents.............................. (3.0) (5.4) --- --- (8.4)
Cash and cash equivalents, beginning of 8.2 7.7 --- --- 15.9
period.....................................
------------ ------------ ------------- ------------- --------------
Cash and cash equivalents, end of period.. $ 5.2 $ 2.3 $ --- $ --- $ 7.5
============ ============ ============= ============= ==============
14
CONDENSED COMBINING STATEMENTS OF CASH FLOWS (unaudited)
For the Nine Months Ended September 30, 2001
(in millions)
Guarantors Non-guarantors CMG Eliminations Consolidated
------------ ------------ ------------- ------------- --------------
Net cash provided by operating activities.. $ 55.7 $ 23.9 $ --- $ --- $ 79.6
Cash flows from investing activities:
Capital expenditures.................. (15.9) (14.8) --- --- (30.7)
Other................................. (0.8) 0.1 --- --- (0.7)
------------ ------------ ------------- ------------- --------------
Net cash used in investing activities...... (16.7) (14.7) --- --- (31.4)
Cash flows from financing activities:
Revolver activity..................... --- (4.4) --- --- (4.4)
Principal payments on other long-term
debt, including capital leases....... (0.4) (65.8) --- --- (66.2)
Payments (to) from IMC Global and
Affiliates, net...................... (12.1) 61.7 --- --- 49.6
Dividends to IMC and affiliates........ (26.7) --- --- --- (26.7)
------------ ------------ ------------- ------------- --------------
Net cash used in financing activities. (39.2) (8.5) --- --- (47.7)
Effect of exchange rate changes on cash
and cash --- (0.2) --- --- (0.2)
equivalents..............................
------------ ------------ ------------- ------------- --------------
Net increase (decrease) in cash and cash
equivalents.............................. (0.2) 0.5 --- --- 0.3
Cash and cash equivalents, beginning of 2.3 (1.9) --- --- 0.4
period.....................................
------------ ------------ ------------- ------------- --------------
Cash and cash equivalents, end of period.. $ 2.1 $ (1.4) $ --- $ --- $ 0.7
============ ============ ============= ============= ==============
15
Item 2. MANAGEMENT'S 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 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: 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 Company's products; capacity
constraints limiting the production of certain products; 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; difficulties in integrating acquired businesses and in realizing
related cost savings and other benefits; 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 from time to time in the Company's
Securities and Exchange Commission reports.
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.
Results of Operations
The combined and consolidated financial statements have been prepared to
present the historical financial condition and results of operations and cash
flows for the Company. The following tables and discussion should be read in
conjunction with the information contained in our combined and consolidated
financial statements and the notes thereto included elsewhere in this quarterly
report. However, our historical combined and consolidated results of operations
set forth below and elsewhere in this quarterly report may not necessarily
reflect what would have occurred if we had been a separate, stand-alone entity
during the periods presented or what will occur in the future.
16
The following table sets forth certain unaudited combined and consolidated
historical financial information, in both dollars and percentages of net sales,
for the three and nine months ended September 30, 2002 and 2001.
For the three months ended For the Nine months ended
September 30 September 30
----------------------------------------- --------------------------------------
2002 2001 2002 2001
------------------- -------------------- ----------------- -----------------
Net sales .................. $ 69.7 100.0% $ 67.9 100.0% $245.7 100.0% $265.9 100.0%
Cost of sales .............. 53.3 76.5% 56.0 82.5% 173.3 70.5% 189.4 71.2%
------- -------- -------- ------- ------ ------- ------ -------
Gross margin................ 16.4 23.5% 11.9 17.5% 72.4 29.5% 76.5 28.8 %
Selling, general and
administrative expenses... 10.8 15.5% 9.6 14.1% 30.1 12.3% 28.7 10.8 %
Transition and other
charges ................... 2.1 3.0% --- ---% 6.8 2.8% --- ---%
------- -------- -------- ------- ------ ------- ------ -------
Operating income ........... 3.5 5.0% 2.3 3.4% 35.5 14.4% 47.8 18.0%
Interest expense............ 10.5 15.1% 2.0 2.9% 31.0 12.6% 9.0 3.4%
Other (income) expense...... (0.3) (0.4)% (1.0) (1.5)% 4.1 1.7% (4.3) (1.6)%
------- -------- -------- ------- ------ ------- ------ -------
Income (loss) before income
taxes .................... (6.7) (9.6)% 1.3 1.9% 0.4 0.2% 43.1 16.2%
Provision (benefit) for
income taxes.............. (3.2) (4.6)% 1.9 2.8% (0.5) (0.2)% 20.7 7.8%
------- -------- -------- ------- ------ ------- ------ -------
Net income (loss)........... $ (3.5) (5.0)% $ (0.6) (0.9)% $ 0.9 0.4% $ 22.4 8.4%
======= ======== ======== ======= ====== ======= ====== =======
Net Sales by Segment:
Salt ....................... $ 59.4 85.2% $ 60.6 89.2% $213.7 87.0% $235.0 88.4%
Specialty potash fertilizers 10.3 14.8% 7.3 10.8% 32.0 13.0 30.9 11.6
------- -------- -------- ------- ------ ------- ------ -------
Total....................... $ 69.7 100.0% $ 67.9 100.0% $245.7 100.0% $265.9 100.0%
======= ======== ======== ======= ====== ======= ====== =======
The table below shows shipments of products (thousands of tons):
For the three months ended For the nine months ended
September 30 September 30
---------------------------- ----------------------------
2002 2001 2002 2001
------- -------- -------- --------
Highway deicing salt...........1,119.5 1,231.0 5,266.2 6,378.0
General trade salt............. 671.1 631.2 1,925.8 2,000.0
Specialty potash............... 67.4 29.1 181.2 146.9
Management's Discussion on Critical Accounting Policies
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies," the Company has identified the critical accounting policies that are
most important to the portrayal of the Company's financial condition and results
of operations. The policies set forth below require management's most subjective
or complex judgements, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
17
Inventory Allowances
The Company records allowances for unusable or slow moving finished goods
and raw materials and supplies inventory. The Company adjusts the value of
certain inventory to the estimated market value to the extent that management's
assumptions of future demand, market or functional conditions indicate the cost
basis is either in excess of market or the inventory will not be utilized or
sold in future operations. If actual demand or conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Mineral Rights
The Company maintains $157.5 million of net mineral rights as part of fixed
assets. Mineral rights are stated at cost with amortization being provided on
the units of production method based on estimates of recoverable reserves and,
in certain instances, the length of the mining rights. If the actual size,
quality or recoverability of the minerals is less than that projected by
management or if the length of time of the right to mine the minerals is less
than that projected by management then the rate of amortization could be
increased or the value of the rights could be reduced by a material amount.
Deferred Tax Asset Valuation Allowance
The Company has approximately $114.0 million of net operating loss
carryforwards (NOLs) that expire between 2009 and 2020. The Company has
previously experienced two ownership changes that have placed significant
limitations on the amount of NOL utilization. Since the Company does not
consider utilization of these credits to be more likely than not under its
proposed operating structure and current tax law, a valuation allowance has been
recorded for the entire amount of the NOLs. In making this determination,
management considers a multitude of factors including its internal forecasts.
Many of the assumptions in these forecasts are inherently difficult to predict,
in some cases are outside of the direct control of the Company, and therefore,
may prove to be significantly different than the actual outcomes. As a result,
the amount of required valuation allowance could be materially different.
Pension Plans
Certain assumptions are used in the calculation of the actuarial valuation
of Company-sponsored defined benefit pension plans. These assumptions include
discount rates, expected long-term rates of return on plan assets, and rates of
increase in compensation levels. If actual results vary from those projected by
management, adjustments may be required in future periods to meet minimum
pension funding, to increase pension expense and the pension liability. See Note
7 in the "Notes to Consolidated Financial Statements" included in the Company's
Registration Statement filed with the SEC for additional information regarding
assumptions used by the Company.
18
Other Significant Accounting Policies
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition, financial instruments and consolidation policy require difficult
judgements on complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among topics currently
under reexamination by accounting standards setters and regulators. Although no
specific conclusions reached to date by these standard setters appear likely to
cause a material change in the Company's accounting policies, future outcomes
cannot be predicted with confidence.
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Net Sales
Net sales for the third quarter of 2002 of $69.7 million increased $1.8
million, or 2.7% compared to $67.9 million for the third quarter of 2001. Net
sales of salt for the third quarter of 2002 of $59.4 million decreased $1.2
million, or 2.0% compared to $60.6 million for the third quarter of 2001. This
decrease was primarily the result of lower volumes of highway deicing salt. The
lower volumes were offset in part by higher general trade volumes and by
improved pricing in the North American highway deicing and general trade product
lines. Sulfate of potash ("SOP") net sales for the third quarter of 2002 of
$10.3 million increased $3.0 million compared to $7.3 million for the third
quarter of 2001 due to increased sales volumes resulting from the new specialty
product marketing strategy.
Gross Margins
Gross margins for the third quarter of 2002 of $16.4 million increased $4.5
million, or 37.8% compared to $11.9 million for third quarter of 2001. The
increase in gross margin primarily reflects the impact of improved SOP sales
volumes combined with price increases in the salt segment and the recognition of
$0.6 million related to a supplier agreement amendment (See Note 5). These
increases were partially offset by lower highway deicing volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $10.8 million for the third
quarter of 2002 increased $1.2 million, or 12.5% compared to $9.6 million for
the third quarter of 2001. The increase primarily reflects additional costs
related to the Company being a stand-alone entity for services previously
provided by IMC prior to the Recapitalization.
Transition and Other Charges
Transition costs are non-recurring in nature and relate to charges required
to establish the Company as an independent entity. During the third quarter of
2002, the Company incurred $2.1 million of transition costs primarily related to
costs to develop stand-alone tax strategies and costs associated with
determining the post closing purchase price adjustment.
19
Interest Expense
Interest expense for the third quarter of 2002 of $10.5 million increased
$8.5 million compared to $2.0 million for the third quarter of 2001. This
increase is the result of the Company's new capitalization structure following
the Recapitalization.
Other (Income) Expense
Other income for the third quarter of 2002 of $0.3 million decreased $0.7
million compared to other income of $1.0 million for the third quarter of 2001.
The decrease in other income is primarily due to lower non-cash foreign exchange
gains offset in part by interest earned from overnight investing of cash.
Income Tax Expense
The income tax benefit for the third quarter of 2002 of $3.2 million
increased $5.1 million compared to income tax expense of $1.9 million for the
third quarter of 2001. 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,
changes in the expected utilization of NOLs previously offset by valuation
allowances, and foreign mining taxes.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
Net Sales
Net sales for 2002 of $245.7 million decreased $20.2 million, or 7.6%
compared to $265.9 million for 2001. Net sales of salt for 2002 of $213.7
million decreased $21.3 million, or 9.1% compared to $235.0 million for 2001.
This decrease was primarily the result of lower volumes of both the North
American and the U.K. highway deicing product lines as well as consumer deicing
volumes in the general trade business line, all due to the mild winter
experienced in the March 2002 quarter. In particular, highway deicing and
consumer deicing net sales for the March 2002 quarter decreased $14.1 million
and $9.2 million, respectively, from the prior year period. These reductions
were offset in part by improved pricing in the North American highway and
consumer deicing products. SOP net sales for 2002 of $32.0 million increased
$1.1 million compared to $30.9 million for 2001 due to increased sales volumes
partially offset by lower average prices.
Gross Margins
Gross margins for 2002 of $72.4 million decreased $4.1 million, or 5.4%
compared to $76.5 million for 2001. The reduction in gross margin primarily
reflects the impact of weaker sales of our winter deicing products during the
first quarter of 2002 offset significantly by improved pricing in the North
American highway and consumer deicing products and increased SOP volumes.
20
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $30.1 million for 2002
increased $1.4 million, or 4.9% compared to $28.7 million for 2001. The increase
primarily reflects additional costs related to the Company being a stand-alone
entity for services previously provided by IMC prior to the Recapitalization.
Transition and Other Charges
Transition costs are non-recurring in nature and relate to charges required
to establish the Company as an independent entity. During 2002, the Company
incurred $6.8 million of transition costs that were directly related to the
transition from an entity controlled by IMC and consisted primarily of one-time
compensation costs, costs to develop stand-alone tax and inventory strategies,
and costs associated with determining the post closing purchase price
adjustment.
Interest Expense
Interest expense for 2002 of $31.0 million increased $22.0 million compared
to $9.0 million for 2001. This increase is the result of the Company's new
capital structure following the Recapitalization.
Other (Income) Expense
Other expense for 2002 of $4.1 million increased $8.4 million compared to
other income of $4.3 million for 2001. Other income in 2001 was primarily
interest income earned from IMC. The increase in other expense is primarily due
to the $5.3 million loss related to refinancing of the Term Loan (See Note 4).
Income Tax Expense
Income tax benefit for 2002 of $0.5 million increased $21.2 million
compared to $20.7 million income tax expense for 2001. 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, changes in the expected utilization of previously
reserved NOLs, and foreign mining taxes.
Liquidity and Capital Resources
Historically, we have used cash generated from operations to meet our
working capital needs and to fund capital expenditures. Prior to the
Recapitalization, in North America we participated in IMC Global's centralized
treasury management system whereby all of our cash receipts were remitted to IMC
Global and all of our cash disbursements were paid by IMC Global. While part of
IMC Global, we obtained a (pound)4.0 million revolving credit facility in the
U.K. to manage daily cash receipts and disbursements.
21
Effective with the consummation of the Recapitalization, we no longer
participate in IMC's centralized treasury management system. We have established
our own centralized treasury management system. Our primary sources of liquidity
will continue to be cash flow from operations and borrowings under our revolving
credit facility. We expect that ongoing requirements for debt service and
capital expenditures will be funded from these sources.
We have incurred substantial indebtedness in connection with the
Recapitalization. As of September 30, 2002, we had $444.6 million of principal
indebtedness, net of issuance premium. Our significant debt service obligations
following the Recapitalization could, under certain circumstances, materially
affect our financial condition and prevent us from fulfilling our obligations
under our Notes and Credit Facility.
Concurrent with the Recapitalization, we issued the Old Notes and entered
into the new credit facilities. The new credit facilities provided for a term
loan in the principal amount of $225.0 million and a revolving credit facility
in an aggregate amount of up to $135.0 million. Upon consummation of the
Recapitalization, we borrowed the full amount available under the term loan
facility and made borrowings under the revolving credit facility based upon our
working capital needs. No borrowings were outstanding under the revolving credit
facility as of September 30, 2002. Future borrowings under the revolving credit
facility will be available to fund our working capital requirements, capital
expenditures and for other general corporate purposes. As of September 30, 2002,
approximately $126.5 million was available under the revolving credit agreement.
On April 10, 2002, the Company completed an offering of an additional $75.0
million aggregate principal amount of its New Notes. The Notes are governed by,
and treated as a single class of securities under an indenture, dated November
28, 2001, between the Company and The Bank of New York, as trustee. The net
proceeds from the offering of the New Notes in the amount of $78.4 million,
including a purchase premium in the amount of $3.4 million, were used to
refinance borrowings under the Company's term loan facility and pay related fees
and expenses. The Notes mature in August 2011. As part of the issuance of the
New Notes, the Company amended its credit facilities to reduce the Term Loan to
$150.0 million and reduce the related interest rate margin by 0.75%. Borrowings
under the amended Term Loan are due and payable in quarterly installments
beginning in 2002. The Term Loan amortization payments due before 2009 are
nominal. The remaining balance of the Term Loan will amortize in equal quarterly
installments in the eighth year of the term loan facility. The revolving credit
facility is available until 2008.
During the nine months ended September 30, 2002, cash flow from operations
exceeded working capital needs by $57.8 million, and the Company used a portion
of those cash flows to make $30.0 million of voluntary principal payments on its
Term Loan, as permitted by the Credit Agreement.
22
The Company's contractual obligations and commitments are as follows (in
millions):
Payments Due by Period
Less than 2 -3 4 -5 After 5
Contractual Obligations Total 1 Year Years Years Years
----------- ----------- ---------- ---------- ------------
Long-term Debt ................. $ 444.6 $ 1.5 $ 3.0 $ 3.0 $ 437.1
Capital Lease Obligations ...... 0.1 0.1 --- --- ---
Operating Leases (a)............ 28.2 8.2 7.0 5.4 7.6
Unconditional purchase 52.1 7.4 14.8 14.8 15.1
obligations (b)......................
----------- ----------- ---------- ---------- ------------
Total Contractual Cash Obligations... $ 525.0 $ 17.2 $ 24.8 $ 23.2 $ 459.8
=========== =========== ========== ========== ============
Amount of Commitment Expiration per Period
Less than 2 -3 4 -5 After 5
Other Commitments Total 1 Year Years Years Years
----------- ----------- ---------- ---------- ------------
Revolver ....................... $ 126.5 $ --- $ --- $ --- $ 126.5
Letters of Credit............... 8.5 8.5 --- --- ---
----------- ----------- ---------- ---------- ------------
Total Other Commitments.............. $ 135.0 $ 8.5 $ --- $ --- $ 126.5
=========== =========== ========== ========== ============
(a) The Company leases property and equipment under non-cancelable operating
leases for varying periods.
(b) The Company has long-term contracts to purchase certain amounts of
electricity and steam.
Over the prior three fiscal years, on average, we have spent $17.0 million
per year in growth and cost reduction capital expenditures to upgrade our core
operating facilities, expand and rationalize production capacities and improve
operating efficiencies. The majority of these improvements are completed. We
would expect to spend less than our historical average on capital expenditures
during 2002 and over the next three years.
In connection with the Recapitalization, the Company received approximately
$114.0 million of NOLs. A valuation allowance has been recorded for the entire
amount of the NOLs. The valuation allowance is periodically adjusted to the
extent that it is determined that a portion of the NOLs can be utilized to
offset taxable income.
Our ability to make scheduled payments of principal, to pay the interest on
our indebtedness, to refinance our indebtedness, or to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory, weather and other factors that are beyond our control.
Based on our current level of operations, we believe that cash flow from
operations and available cash, together with available borrowings under our new
credit facilities, will be adequate to meet our short-term liquidity needs.
23
We cannot assure you, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available to us
under our new credit facilities in an amount sufficient to enable us to pay our
indebtedness, including the Notes, or to fund our other liquidity needs. If we
consummate an acquisition, our debt service requirements could increase. We may
need to refinance all or a portion of our indebtedness, including the Notes on
or before maturity. We cannot assure you that we will be able to refinance any
of our indebtedness, including the new credit facilities and the Notes, on
commercially reasonable terms or at all.
For the Nine Months Ended September 30, 2002 and 2001
Net cash flows generated by operating activities for the nine months ended
September 30, 2002 and 2001 were $57.8 million and $79.6 million, respectively.
Of these amounts, $9.9 million and $25.3 million for 2002 and 2001,
respectively, were generated by working capital reductions. The primary working
capital reductions for 2002 and 2001, were decreases in receivables of $39.7
million and $72.4 million, respectively, offset in part by increases in
inventories of $1.6 million and $14.0 million, respectively, and decreases in
accounts payable and accrued expenses of $16.7 million and $27.5 million,
respectively. These reductions are indicative of the seasonality of our business
with differences primarily related to more severe winter weather in the
2000-2001 winter than in the 2001-2002 winter.
Net cash flows used by investing activities for the nine months ended
September 30, 2002 and 2001, were $11.8 million and $31.4 million, respectively,
and were primarily related to capital expenditures. Extensive efforts have been
made throughout 2002 to reduce capital spending.
Net cash flow used by financing activities was $56.5 million for the nine
months ended September 30, 2002, primarily due to the $39.8 million repayment of
our revolver borrowings, combined with $30.0 million of voluntary principal
repayments that reduced the amount of long-term debt outstanding under the Term
Loan. These cash uses were partially offset by approximately $13 million of
capital contribution from SHC.
On April 10, 2002, the Company completed an offering of $75.0 million
aggregate principal amount of the New Notes. The New Notes were issued to the
bondholders at a premium of $3.4 million, plus accrued interest from February
15, 2002 and accordingly, the Company received gross proceeds of $79.5 million
from the offering of the notes. The proceeds from the offering of the New Notes,
net of transaction costs, were used to repay borrowings under the Credit
Facility. In connection with the offering, the Company amended and restated the
Credit Facility with respect to a reduction in the Term Loan to $150.0 million.
In connection with this transaction, the Company recorded a charge to Other
(income) expense in the accompanying Consolidated Statements of Income of
approximately $5.3 million which was reflected as a non-cash add-back to Net
cash provided by operating activities.
Net cash flow used by financing activities for 2001 was $47.7 million,
primarily due to $70.6 million related to the net repayment of third-party debt
including a (pound)45.0 million facility for the U.K. operations, combined with
$26.7 million paid as dividends to an affiliate of IMC. These uses of cash were
partially offset with receipts of $49.6 million from IMC and affiliates.
24
Seasonality
We experience a substantial amount of seasonality in sales. The result of
this seasonality is that net 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 and our customers stockpile sufficient quantities of deicing salt in the
second, third and fourth quarters of each calendar year to meet the estimated
requirements for the winter season. Much of our SOP sales are made between March
and May in order to meet the spring planting season requirements.
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 translation risk, and
commodity pricing risk. In the future, management may take actions that would
mitigate our exposure to these types of risks including forward purchase
contracts and financial instruments. The Company will not enter into any
financial instrument arrangements for speculative purposes.
Interest Rate Risk
As of September 30, 2002, we had $119.6 million of debt outstanding under
the term loan facility and zero outstanding under our revolving credit facility.
On April 10, 2002, the Company completed an offering of $75 million aggregate
principal amount of its New Notes. The net proceeds from the offering of the New
Notes were used to refinance borrowings under the term loan facility. Both the
term loan facility and revolving credit facility are subject to variable rates.
Accordingly, our earnings and cash flows are affected by changes in interest
rates. Assuming no change in the term loan facility borrowings at September 30,
2002, and an average level of borrowings from our revolving credit facility at
variable rates and assuming a one hundred basis point increase in the average
interest rate under these borrowings, it is estimated that our interest expense
for the nine months ended September 30, 2002 would have increased by
approximately $1.0 million.
Effects of Currency Fluctuations
Our operations are subject to both currency transaction risk and currency
translation risk. We incur currency transaction risk whenever we or one of our
subsidiaries enter into either a purchase or sales transaction using a currency
other than the local currency of the transacting entity. With respect to
currency translation risk, our financial condition and results of operations are
measured and recorded in the relevant local currency and then translated into
U.S. dollars for inclusion in our historical combined and consolidated financial
statements. Exchange rates between these currencies and U.S. dollars in recent
years have fluctuated significantly and may do so in the future. The majority of
our revenues and costs are denominated in U.S. dollars, with British pound
sterling and Canadian dollars also being significant.
25
Commodity Pricing Risk: Commodity Derivative Instruments and Hedging Activities
The Company has reviewed various options available to mitigate the impact
of fluctuating natural gas prices. During October 2002, the Company entered into
certain financial instruments related to the purchase of natural gas. The
Company expects that these financial instruments will qualify as hedges under
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activity". The
Company does not engage in speculative activities with these financial
instruments.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this quarterly report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures of Compass Minerals Group, Inc. pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective in timely alerting them to material information relating to us
required to be included in our periodic SEC filings. There were no significant
changes in our disclosure controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation.
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. In addition, in
connection with the Recapitalization, IMC Global has agreed to indemnify us
against certain legal matters.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed July 17, 2002 "Changes in Registrant's Certifying
Accountants" Form 8-K filed August 12, 2002 "Regulation FD Disclosure"
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPASS MINERALS GROUP, INC.
Date: November 14, 2002 /s/ Michael E. Ducey
---------------------
Michael E. Ducey
President and Chief Executive Officer
Date: November 14, 2002 /s/ Rodney L. Underdown
------------------------
Rodney L. Underdown
Chief Financial Officer
CERTIFICATIONS
Certification requirements set forth in Section 302 (a) of the Sarbanes-Oxley
Act.
I, Michael E. Ducey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Compass Minerals
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
27
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Michael E. Ducey
---------------------
Michael E. Ducey
President and Chief Executive Officer
I, Rodney L. Underdown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Compass Minerals
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
28
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Rodney L. Underdown
------------------------
Rodney L. Underdown
Chief Financial Officer
29