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CMP > SEC Filings for CMP > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for COMPASS MINERALS INTERNATIONAL INC

Form 10-K for COMPASS MINERALS INTERNATIONAL INC


24-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in this discussion regarding the industry outlook, our expectations for the future performance of our business, and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors." You should read the following discussion together with Item 1A, "Risk Factors" and the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report on Form 10-K.

COMPANY OVERVIEW

Based in the Kansas City metropolitan area, Compass Minerals is a leading producer of minerals, including salt, sulfate of potash specialty fertilizer ("SOP") and magnesium chloride. As of December 31, 2013, we operated 12 production and packaging facilities, including the largest rock salt mine in the world in Goderich, Ontario Canada and the largest rock salt mine in the U.K. in Winsford, Cheshire. In addition, we operate a records management business utilizing excavated areas of our Winsford salt mine with two other locations in London, U.K., which provide services to businesses throughout the U.K. Our solar evaporation facility located in Ogden, Utah, is both the largest SOP production site and the largest solar salt production site in North America. Our salt business sells sodium chloride and magnesium chloride, which is used for highway deicing, dust control, consumer deicing, water conditioning, consumer and industrial food preparation, and agricultural and industrial applications. In addition, we are North America's leading producer of sulfate of potash, which is used in the production of specialty fertilizers for high-value crops and turf.

Salt Segment
Salt is indispensable and enormously versatile with thousands of reported uses. In addition, there are no known cost-effective alternatives for most high-volume uses. As a result, our cash flows from salt have not been materially impacted through a variety of economic cycles. We are among the lowest-cost salt producers in our markets because our salt deposits are high-grade quality and among the most extensive in the world, and because we use effective mining techniques and efficient production processes. Since the highway deicing business accounts for nearly half of our annual sales, our business is seasonal, therefore results and cash flows will vary depending on the severity of the winter weather in our markets.
The severity of the winter seasons in the markets we serve has varied considerably over the last three years. We assess the severity of winter weather compared to recent averages, using official government snow data and comparisons of our sales volumes to historical trends and other relevant data. In 2011, winter weather was near average in the first quarter and was significantly milder than average in the fourth quarter. In 2012, winter weather was significantly milder than average in both the first and fourth quarters. In 2013, the frequency of winter weather events was near average in the first quarter and was more severe than average in the fourth quarter in our served markets. Not only does the weather affect our highway and consumer and industrial deicing salt sales volumes and resulting gross profit and cash flows, but it also impacts our inventory levels, which influences production volume, the resulting cost per ton, and ultimately our profit margins.
In August 2011, a tornado in Goderich, Ontario, struck our salt mine and our salt mechanical evaporation plant. There was no damage to the underground operations at the mine. However, 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 September 2011 and regained full hoisting capability in April 2012. Repairs and reconstruction activities to fully restore the damaged surface structures and long-lived operating assets were substantially completed in 2013. The evaporation plant resumed limited activities in September 2011 and reached full capability by the end of the first quarter of 2012. We expect to be reimbursed by our insurers for substantially all of the replacement and repair costs for our property, plant and equipment and associated clean-up costs incurred. Since the tornado occurred, we have received insurance advances totaling $86.3 million, including $23.8 million, $37.5 million and $25.0 million in 2013, 2012 and 2011, respectively. We recorded approximately $1.2 million, $11.1 million and $14.5 million in 2013, 2012 and 2011, respectively, of these insurance advances received as a reduction to salt product costs in the consolidated statements of operations to offset recognized impairment charges and site clean-up and restoration costs. We have approximately $56.5 million of deferred revenue recorded as of December 31, 2013 in our consolidated balance sheets. The actual insurance recoveries related to the replacement cost of property, plant and equipment are expected to exceed the net book value of the damaged and destroyed property, plant and equipment and the related impairment charges.
We also will have a substantial business interruption claim to offset lost profits and to offset certain additional expenses incurred related to the ongoing operations. We estimate that the effects from the tornado were immaterial in 2013 and were approximately $21 million and $16 million in 2012 and 2011, respectively. The Company has estimated total losses of approximately $37 million resulting from the effects of the tornado. We believe our losses, including the impact of estimated lost sales, lost production and additional expenses that have been incurred related to the tornado will be substantially covered by our insurance policies as business interruption losses. However, the amount of actual business interruption recoveries may differ materially from our current and future estimates. Any insurance recoveries related to business interruption will be recognized as a reduction to product cost in the consolidated statements of operations when the insurance claim has been settled. The Company has not recognized any reduction to product cost from insurance recoveries related to estimated business interruption losses. We also incurred significant amounts of capital expenditures during 2013 and 2012 to replace and, in some instances, improve property, plant and equipment damaged or destroyed by the tornado. Capital expenditures to replace damaged


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COMPASS MINERALS INTERNATIONAL, INC. 2013 FORM 10-K

property, plant and equipment have resulted in an increase in depreciation expense.

Specialty Fertilizer Segment
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. The yields and/or quality of many high-value or chloride-sensitive crops are generally better when SOP is used as a potassium nutrient rather than potassium chloride ("MOP" or "KCl").
Worldwide consumption of potash has increased in response to growing populations and the need for additional food supplies. We expect the long-term demand for potassium nutrients to continue to grow as arable land per capita decreases, thereby encouraging improved crop yield efficiencies. In recent years, potash prices, including SOP, have experienced more volatility when compared to prices experienced in previous years.
Our SOP production facility in Ogden, Utah, the largest in North America and one of only three SOP solar brine evaporation operations in the world, utilizes naturally occurring brines in its production process. The brine moves through a series of solar evaporation ponds over a two to three-year production cycle. Since our production process relies on solar evaporation during the summer to produce SOP at our Ogden facility, the intensity of heat and wind speeds, and relative dryness of the weather conditions during that time impacts the amount of solar evaporation which occurs and correspondingly, the amount of raw SOP mineral feedstock available to convert into finished product. During the summer of 2011, unusual localized rains and cooler weather, especially early in the summer, slowed the summer solar evaporation process at this operation, when compared to more-typical weather, reducing the amount of precipitated minerals over the solar season, which are the raw materials utilized to produce SOP. The reduced quantity of minerals deposited decreased SOP finished goods production volumes from our solar ponds primarily in 2012, and increased per-unit production costs accordingly. Due to this lower raw material solar pond harvest, we purchased and consumed high-cost potassium mineral feedstock for SOP production in 2012. The higher per-unit production costs for the inventory produced in 2012 significantly impacted our margins in the first quarter of 2013 when the remaining inventory produced in 2012 was sold. In the 2012 solar evaporation season, the weather was more typical than during the 2011 season. Therefore, we achieved a better-than-historical deposit of raw materials from which we produce our finished SOP, and significantly more than the same period of 2011's solar season. These raw materials were utilized to produce SOP primarily in 2013.
In 2013, our SOP production facility in Ogden experienced operational issues which impacted the process that converts these raw materials to finished goods. In addition, the Ogden facility began operating at production volumes which were lower than the anticipated design capacities of the expansion. We expect the current solar pond-based effective capacity to be up to 320,000 tons annually for the Ogden facility beginning in 2014. We have focused our sales efforts domestically in markets which typically yield higher average selling prices and higher margins. In the latter half of 2013, we purchased and consumed KCl feedstock at our Ogden facility for conversion into SOP. These KCl feedstock purchases helped increase production volumes, yet resulted in increased per-unit costs. As the spread between market prices for SOP and KCl has increased, the economics of producing SOP partly from KCl has improved. While these KCl purchases will increase our expected full year product cost and reduce the resulting margin percentages, they also are expected to increase the amount of our gross profit. Future purchases of KCl will be based upon several factors, including but not limited to, the cost of converting KCl to SOP and SOP market prices.
We acquired Big Quill Resources, Inc., Canada's leading SOP producer, in January 2011 which has added approximately 40,000 tons to our annual SOP capacity. The acquisition has broadened and strengthened our specialty fertilizer segment by adding higher-value applications and unique production capabilities. Customers delayed making SOP fertilizer purchases in the third quarter of 2013 due to uncertainty about future SOP market prices. Demand for our SOP fertilizer was robust in the fourth quarter of 2013.
In the fourth quarter of 2013, we recognized a gain of $9 million in product cost in our consolidated financial statements from the settlement of an insurance claim resulting from a loss of mineral-concentrated brine due to an asset failure at our solar evaporation ponds in 2010.

General
We contract bulk shipping vessels, barge, trucking and rail services to move products from our production facilities to distribution outlets and customers. Our North American salt mines and SOP production facilities are near either water or rail transport systems, which reduces our shipping and handling costs. However, shipping and handling costs still account for a relatively large portion of the total delivered cost of our products. Increasing oil-based fuel costs contributed to higher per ton shipping and handling costs in the three years following 2009 when compared to previous years. In 2013, oil prices leveled off and then declined when compared to the prior year, and shipping and handling costs on a per ton basis were lower in both our salt and specialty fertilizer segments. Future period shipping and handling 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 SOP deicing and water conditioning products, are also significant. Our production workforce is typically


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COMPASS MINERALS INTERNATIONAL, INC. 2013 FORM 10-K

represented by labor unions with multi-year collective bargaining agreements. In first quarter of 2011, we experienced significantly higher per-unit costs due to sales of salt inventory produced in 2010. We had lower salt production volumes in 2010 at both our Cote Blanche and Goderich mines and certain consumer and industrial salt plants. However, this trend began to reverse beginning in the second quarter of 2011 as production costs, net of estimated costs related to the tornado, trended lower due to more typical production volumes. During 2012, this trend again reversed as a mild 2011-2012 winter weather season resulted in lower production needs in 2012. Lower salt production volumes in 2012 also were a result of a strike by miners at our Goderich, Ontario mine during the third quarter of 2012. In addition, we incurred additional costs and other losses associated with the Goderich tornado through 2012 when the remaining tornado-impacted finished goods inventories were sold and other losses and costs associated with the tornado ceased to be incurred. In the first quarter of 2013, we experienced higher per-unit costs resulting from the salt inventory produced in 2012. Beginning in the second quarter of 2013, our per-unit production costs were lower as a result of more typical salt production volumes. 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. The Company's SOP production in Saskatchewan, Canada purchases KCl under a long-term supply agreement. One of the production methods uses the brine of Big Quill Lake, which is rich in sodium sulfate, and adds the purchased KCl to create high-purity SOP.
We focus on building intrinsic value by improving our earnings before interest, income taxes, depreciation and amortization, or "EBITDA," (adjusted for an average winter weather season) and by improving our asset quality. We can employ our operating cash flow and other sources of liquidity to pay dividends, re-invest in our business, pay down debt and make acquisitions. We have completed expansion projects at our Goderich rock salt mine increasing that mine's annual capability to 9.0 million tons. Over the past several years, we have invested in our Ogden facility to strengthen solar-pond based SOP production through upgrades to our processing plant and our solar evaporation ponds. The objectives have included modifying our existing solar evaporation ponds to increase the annual solar harvest and increasing the extraction yield and processing capacity of our SOP plant. These improvements have increased our current annual solar-pond-based SOP production capacity from our nameplate capacity of 250,000 tons per year to up to 320,000 tons beginning in 2014.

RESULTS OF OPERATIONS

The following table presents consolidated financial information with respect to sales from our salt and specialty fertilizer segments for the years ended December 31, 2013, 2012 and 2011. The results of operations of the consolidated records management business and other incidental revenues include sales of $10.5 million, $12.3 million, and $10.8 million for 2013, 2012 and 2011, respectively. These revenues are not material to our consolidated financial results and are not included in the following table. The following discussion should be read in conjunction with the information contained in our Consolidated Financial Statements and the Notes thereto included in this annual report on Form 10-K.

                                                        Year Ended December 31,
                                                     2013         2012         2011
Salt Sales (in millions)
Salt sales                                         $  920.5     $  703.4     $  885.3
Less: salt shipping and handling                      280.7        211.9        268.5
Salt product sales                                 $  639.8     $  491.5     $  616.8

Salt Sales Volumes (thousands of tons)
Highway deicing                                      10,944        7,530       10,235
Consumer and industrial                               2,321        2,095        2,285
Total tons sold                                      13,265        9,625       12,520

Average Salt Sales Price (per ton)
Highway deicing                                    $  53.19     $  53.11     $  52.30
Consumer and industrial                              145.78       144.87       153.12
Combined                                              69.39        73.08        70.71

Specialty fertilizer ("SOP") sales (in millions)
SOP sales                                          $  198.6     $  226.2     $  209.6
Less: SOP shipping and handling                        21.0         26.2         25.3
SOP product sales                                  $  177.6     $  200.0     $  184.3

SOP Sales Volumes (thousands of tons)                   315          367          344
SOP Average Price (per ton)                        $    630     $    616     $    610


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COMPASS MINERALS INTERNATIONAL, INC. 2013 FORM 10-K

Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Sales
Sales for the year ended December 31, 2013 of $1,129.6 million increased $187.7 million, or 20% compared to $941.9 million for the year ended December 31, 2012. Sales primarily include revenues from the sale of our products, or "product sales," and the impact on pricing of shipping and handling costs incurred to deliver salt and specialty fertilizer products to our customers. Shipping and handling costs for salt and specialty fertilizer products were $301.7 million during the year ended December 31, 2013, an increase of $63.6 million, or 27% compared to $238.1 million for the year ended December 31, 2012. The increase in shipping and handling costs was primarily due to a 38% increase in salt sales volumes in 2013 when compared to 2012, which was partially offset by lower specialty fertilizer sales volumes and lower per-unit shipping and handling costs in 2013.
Product sales for salt and specialty fertilizer for the year ended December 31, 2013 of $817.4 million increased $125.9 million, or 18% compared to $691.5 million for 2012. Salt product sales for the year ended December 31, 2013 of $639.8 million increased $148.3 million, or 30% compared to $491.5 million in 2012 while specialty fertilizer product sales of $177.6 million decreased $22.4 million, or 11% compared to $200.0 million in 2012.
The increase in salt product sales of $148.3 million was due to higher salt sales volumes, which contributed approximately $173 million to the increase in salt product sales and was partially offset by a decline in combined salt average selling prices due to changes in product mix as a higher proportion of our sales related to deicing products which have a lower average selling price. Salt sales volumes in 2013 increased by approximately 3,640,000 tons or 38% from 2012 levels due to higher highway sales of rock salt and specialty deicing products and higher consumer and industrial volumes principally from packaged deicing products which was partially offset by lower sales volumes to our chemical customers. The increase in volumes was due to the near average winter weather experienced in the first quarter of 2013 and more severe winter weather in fourth quarter of 2013 when compared to the significantly milder than average winter weather experienced in both the first and fourth quarters of 2012 in the markets we serve.
The decrease in specialty fertilizer product sales of $22.4 million was due primarily to a decrease in specialty fertilizer sales volumes from 367,000 tons in 2012 to 315,000 tons in 2013, a decrease of 52,000 tons, or 14%. The decline in sales volumes comprised substantially all of the decrease in specialty fertilizer product sales. Our average market price increased slightly from $616 per ton in 2012 to $630 in 2013 as we have focused our sales efforts principally in those domestic markets which yield higher average selling prices and higher margins.

Gross Profit
Gross profit for the year ended December 31, 2013 of $286.0 million increased $58.9 million, or 26% compared to $227.1 million for 2012. As a percent of sales, gross profit increased 1% from 24% in 2012 to 25% in 2013. The gross profit for the salt segment contributed approximately $60 million to the increase in gross profit due to higher salt deicing volumes, which were partially offset by the impact of lower combined salt average selling prices in 2013 due to product mix and a charge of $4.7 million recorded in the fourth quarter of 2013 resulting from a ruling related to a labor matter. In 2013, salt gross profit was favorably impacted by higher salt production volumes which contributed to lower per-unit costs of salt produced in 2013. The increase in salt gross profit was partially offset by higher per-unit costs due to sales in 2013 of salt inventory produced in 2012 resulting from lower production volumes in 2012 relating to the significantly milder than normal 2012 winter season and the strike by miners at our Goderich, Ontario, mine in the third quarter of 2012. We estimate that the effects from the tornado were immaterial in 2013 and unfavorably impacted 2012 by approximately $21 million. Any insurance recoveries related to business interruption and any gains related to recoveries for the replacement of damaged and destroyed property, plant and equipment will be recognized as a reduction to product cost in the consolidated statements of operations when the insurance claim has been settled. We recorded $1.2 million and $11.1 million of asset impairment charges and clean-up and restoration costs in 2013 and 2012, respectively, which were offset by $1.2 million and $11.1 million of expected insurance recoveries in the same respective periods. Specialty fertilizer segment gross profit in 2013 was essentially flat with 2012. Specialty fertilizer segment gross profit was unfavorably impacted by lower specialty fertilizer sales volumes when compared to 2012. The decrease in specialty fertilizer gross profit from lower sales volumes was offset by increases in our average specialty fertilizer selling price and a gain of $9 million recorded in the fourth quarter of 2013 from the settlement of an insurance claim resulting from a loss of mineral-concentrated brine due to an asset failure at our solar evaporation ponds in 2010. Both 2013 and 2012 were unfavorably impacted by higher than historical per-unit production costs. During 2012 and early in 2013, we purchased and consumed mineral feedstock to supplement production, which increased our average per-unit production costs in both periods. During 2012, production volumes from lower-cost solar ponds were reduced principally as a result of localized rains and cooler weather which our Ogden facility experienced in the summer of 2011. In 2013, our SOP production facility in Ogden experienced operational issues which impacted the process that converts these raw materials to finished goods leading to lower production volumes resulting in higher than planned per-unit costs. We also purchased and consumed KCl in the latter half of 2013 which increased our per-unit production costs.

Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2013 of $100.4 million increased $6.5 million or 7% compared to $93.9 million in 2012, and decreased to 8.9% from 10.0% as a percentage of sales. The increase in expense


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COMPASS MINERALS INTERNATIONAL, INC. 2013 FORM 10-K

is partially due to higher compensation costs which include a restructuring charge of approximately $1.7 million related to a reorganization of our management during the second quarter of 2013 and a greater reduction in variable compensation expenses in 2012 when compared to 2013, which was partially offset by transition costs of approximately $3.3 million related to the retirement of our Chief Executive Officer in 2012. In addition, we incurred modestly higher professional services expense in 2013 and an increase in segment selling costs related to higher sales volumes in 2013 when compared to 2012.

Other (Income) Expense, Net
Other income was $6.4 million for the year ended December 31, 2013 and compared to other expense of $3.7 million for the year ended December 31, 2012. Net foreign exchange gains were $4.9 million in 2013 when compared to foreign exchange losses of $2.5 million in 2012. In addition, the second quarter of 2012 included a $2.8 million charge related to the refinancing of our term loans in May 2012, comprised of refinancing fees of $1.8 million and the write-off of existing deferred financing fees of $1.0 million.

Income Tax Expense
Income tax expense for the year ended December 31, 2013 of $43.3 million increased $20.9 million compared to $22.4 million in 2012. The income tax expense increase in 2013 when compared to 2012 was primarily due to higher pre-tax income in 2013. In addition, we settled an income tax audit which resulted in a $3.0 million reduction to income tax expense in the second quarter of 2012. Our income tax provision also differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, domestic manufacturing deductions, state income taxes (net of federal benefit), foreign income, mining and withholding taxes (net of U.S. deductions) and interest expense recognition differences for tax and financial reporting purposes.

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Sales
Sales for the year ended December 31, 2012 of $941.9 million decreased $163.8 million, or 15% compared to $1,105.7 million for the year ended December 31, 2011. Sales primarily include revenues from the sale of our products, or "product sales," and the impact on pricing of shipping and handling costs incurred to deliver salt and specialty fertilizer products to our customers. Shipping and handling costs for salt and specialty fertilizer products were $238.1 million during the year ended December 31, 2012, a decrease of $55.7 million, or 19% compared to $293.8 million for the year ended December 31, 2011. The decrease in shipping and handling costs is primarily due to lower salt sales . . .

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