UNITED STATES 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 June 30, 2003 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. |
| Delaware (State or other jurisdiction of incorporation or organization) | 48-1135403 (I.R.S. Employer Identification Number) |
8300 College Blvd. 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: Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes: No: X Common Stock, $0.01 Par Value – 1,000 shares outstanding as of August 1, 2003 |
COMPASS MINERALS GROUP, INC.Table of Contents |
| Part I. FINANCIAL INFORMATION | Page | ||||
| Item 1. Financial Statements | |||||
| Consolidated Balance Sheets as of June 30, 2003 | |||||
| (unaudited) and December 31, 2002 | 2 | ||||
| Consolidated Statements of Operations for the three and six month | |||||
| periods ended June 30, 2003 and 2002 (unaudited) | 3 | ||||
| Consolidated Statement of Stockholder’s Equity (Deficit) for the six | |||||
| month period ended June 30, 2003 (unaudited) | 4 | ||||
| Consolidated Statements of Cash Flows for the six | |||||
| month periods ended June 30, 2003 and 2002 (unaudited) | 5 | ||||
| Notes to Consolidated Financial Statements (unaudited) | 6 | ||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and | |||||
| Results of Operations | 17 | ||||
| Item 3. Quantitative and Qualitative Disclosure of Market Risk | 24 | ||||
| Item 4. Controls and Procedures | 25 | ||||
| Part II. OTHER INFORMATION | |||||
| Item 1. Legal Proceedings | 25 | ||||
| Item 2. Changes in Securities and Use of Proceeds | 25 | ||||
| Item 3. Defaults upon Senior Securities | 25 | ||||
| Item 4. Submission of Matters to a Vote of Security Holders | 25 | ||||
| Item 5. Other Information | 25 | ||||
| Item 6. Exhibits & Reports on Form 8-K | 26 | ||||
| SIGNATURES | 26 | ||||
| CERTIFICATIONS | 27 | ||||
1 |
PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCOMPASS MINERALS GROUP, INC. |
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 13.7 | $ | 11.9 | ||||
| Receivables, less allowance for doubtful accounts of | ||||||||
| $1.6 million in 2003 and 2002 | 45.9 | 94.5 | ||||||
| Inventories | 78.1 | 96.5 | ||||||
| Other | 3.5 | 0.7 | ||||||
| Total current assets | 141.2 | 203.6 | ||||||
| Property, plant and equipment, net | 409.4 | 413.2 | ||||||
| Intangibles | 24.5 | — | ||||||
| Other | 30.1 | 27.2 | ||||||
| Total assets | $ | 605.2 | $ | 644.0 | ||||
| LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 0.8 | $ | 1.2 | ||||
| Accounts payable | 42.7 | 62.3 | ||||||
| Accrued expenses | 9.3 | 8.9 | ||||||
| Accrued interest | 12.5 | 12.6 | ||||||
| Accrued salaries and wages | 11.8 | 12.6 | ||||||
| Income taxes payable | 1.5 | 4.8 | ||||||
| Total current liabilities | 78.6 | 102.4 | ||||||
| Long-term debt, net of current portion | 405.9 | 436.4 | ||||||
| Deferred income taxes | 106.6 | 99.6 | ||||||
| Other noncurrent liabilities | 23.6 | 25.3 | ||||||
| Commitments and contingencies | ||||||||
| Stockholder’s equity (deficit): | ||||||||
| Common stock, $.01 par value, 1,000 shares authorized, issued and | ||||||||
| outstanding | — | — | ||||||
| Additional paid in capital | 349.5 | 349.5 | ||||||
| Accumulated deficit | (369.8 | ) | (369.3 | ) | ||||
| Accumulated other comprehensive income | 10.8 | 0.1 | ||||||
| Total stockholder’s equity (deficit) | (9.5 | ) | (19.7 | ) | ||||
| Total liabilities and stockholder’s equity (deficit) | $ | 605.2 | $ | 644.0 | ||||
The accompanying notes are an integral part of the consolidated financial statements. 2 |
COMPASS MINERALS GROUP, INC |
| Three Months ended June 30 | Six Months ended June 30 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Sales | $ | 88.7 | $ | 82.3 | $ | 301.4 | $ | 244.7 | ||||||
| Cost of sales – shipping and handling | 21.1 | 20.2 | 85.2 | 68.7 | ||||||||||
| Cost of sales – products | 48.9 | 45.7 | 144.4 | 120.0 | ||||||||||
| Gross profit | 18.7 | 16.4 | 71.8 | 56.0 | ||||||||||
| Selling, general and administrative expenses | 11.5 | 9.7 | 23.1 | 19.3 | ||||||||||
| Restructuring and other charges | — | 2.2 | — | 4.7 | ||||||||||
| Operating earnings | 7.2 | 4.5 | 48.7 | 32.0 | ||||||||||
| Other expense: | ||||||||||||||
| Interest expense | 9.5 | 10.3 | 19.2 | 20.5 | ||||||||||
| Other, net | 3.2 | 4.4 | 2.9 | 4.4 | ||||||||||
| Income / (Loss) before income taxes | (5.5 | ) | (10.2 | ) | 26.6 | 7.1 | ||||||||
| Income tax expense (benefit) | 0.2 | (2.9 | ) | 5.4 | 2.7 | |||||||||
| Net income / (loss) | $ | (5.7 | ) | $ | (7.3 | ) | $ | 21.2 | $ | 4.4 | ||||
The accompanying notes are an integral part of the consolidated financial statements. 3 |
COMPASS MINERALS GROUP, INC. |
| Accumulated | |||||||||||||||||
| Additional | Other | ||||||||||||||||
| Common | Paid In | Accumulated | Comprehensive | ||||||||||||||
| Stock | Capital | Deficit | Income (Loss) | Total | |||||||||||||
| Balance, December 31, 2002 | $ | — | $ | 349.5 | $ | (369.3 | ) | $ | 0.1 | $ | (19.7 | ) | |||||
| Dividends declared | (21.7 | ) | (21.7 | ) | |||||||||||||
| Comprehensive income: | |||||||||||||||||
| Net income | 21.2 | 21.2 | |||||||||||||||
| Unrealized loss on cash flow hedges, net | |||||||||||||||||
| of tax | (0.2 | ) | (0.2 | ) | |||||||||||||
| Cumulative translation adjustments | 10.9 | 10.9 | |||||||||||||||
| Comprehensive income | 31.9 | ||||||||||||||||
| Balance, June 30, 2003 | $ | — | $ | 349.5 | $ | (369.8 | ) | $ | 10.8 | $ | (9.5 | ) | |||||
The accompanying notes are an integral part of the consolidated financial statements. 4 |
COMPASS MINERALS GROUP, INC. |
| Six months ended June 30, | ||||||||
| 2003 | 2002 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 21.2 | $ | 4.4 | ||||
| Adjustments to reconcile net income to net cash flows provided | ||||||||
| by operating activities: | ||||||||
| Depreciation and depletion | 19.4 | 18.3 | ||||||
| Amortization | 0.8 | 1.0 | ||||||
| Early extinguishment of long-term debt | — | 5.3 | ||||||
| Transition and other charges, net of cash | — | 1.1 | ||||||
| Deferred income taxes | 5.3 | (1.1 | ) | |||||
| Other | — | 0.1 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | 50.7 | 48.2 | ||||||
| Inventories | 21.0 | 8.0 | ||||||
| Other assets | (2.3 | ) | (1.2 | ) | ||||
| Accounts payable and accrued expenses | (32.9 | ) | (13.1 | ) | ||||
| Other noncurrent liabilities | (0.2 | ) | (0.9 | ) | ||||
| Net cash provided by operating activities | 83.0 | 70.1 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (5.4 | ) | (6.5 | ) | ||||
| Acquisition of intangible assets | (21.0 | ) | — | |||||
| Other | — | 0.1 | ||||||
| Net cash used in investing activities | (26.4 | ) | (6.4 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Dividends paid | (21.7 | ) | — | |||||
| Revolver activity | — | (39.8 | ) | |||||
| Issuance of long-term debt | — | 78.4 | ||||||
| Principal payments on other long-term debt, including capital leases | (30.7 | ) | (95.1 | ) | ||||
| Deferred financing costs | — | (3.4 | ) | |||||
| Other | (3.8 | ) | 1.0 | |||||
| Net cash used in financing activities | (56.2 | ) | (58.9 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 1.4 | 0.7 | ||||||
| Net increase in cash and cash equivalents | 1.8 | 5.5 | ||||||
| Cash and cash equivalents, beginning of the period | 11.9 | 15.9 | ||||||
| Cash and cash equivalents, end of the period | $ | 13.7 | $ | 21.4 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid excluding capitalized interest | $ | 18.3 | $ | 10.0 | ||||
| Income taxes paid | 4.8 | 5.3 | ||||||
The accompanying notes are an integral part of the consolidated financial statements. 5 |
COMPASS MINERALS GROUP, INC. 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 with the assets and liabilities of CMG retaining their historical value. The accompanying unaudited 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 six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 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 consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the CMG Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2003. Certain reclassifications were made to prior year amounts in order to conform with the current year’s presentation. 2. Recent Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board (the “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. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position, results of operations or cash flows. 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 Company adopted SFAS No. 146 in the first quarter of 2003 as the provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position, results of operations or cash flows. 6 |
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” and requires certain disclosures in the Company’s quarterly and annual financial statements. SHC has a stock option plan that was adopted on November 28, 2001. The Company elected to continue to follow the accounting method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options and has adopted the pro forma disclosure requirements under SFAS No. 123, as amended by SFAS 148. Under APB No. 25, because the exercise price of the Company’s employee stock options is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. The effect of applying the fair value method under SFAS No. 123, as amended by SFAS 148, to the Company’s stock-based awards resulted in pro forma net income that is not materially different from amounts reported in the accompanying consolidated statement of operations for the six month periods ending June 30, 2003 and 2002. 3. Inventories:Inventories consist of the following (in millions): |
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
| Finished goods | $ | 65.3 | $ | 83.5 | ||||
| Raw materials and supplies | 12.8 | 13.0 | ||||||
| $ | 78.1 | $ | 96.5 | |||||
Raw materials and supplies primarily consist of raw materials purchased to aid in the production of the Company’s mineral products, maintenance materials and packaging materials. Finished goods are comprised of salt and sulfate of potash (“SOP”) products readily available for sale. All costs associated with the production of salt and SOP at the Company’s producing locations are captured as inventory costs. Additionally, since the Company’s products are often stored at third-party warehousing locations, the Company includes in the cost of inventory the freight and handling costs necessary to move the product to storage until the product is sold to a customer. 4. Long-term Debt: On May 5, 2003, the Company amended the senior credit facility (“Senior Credit Facility”) to allow the Company to pay a dividend to be funded with either cash on hand or with borrowings under the amended and restated senior revolving credit facility (“Revolving Credit Facility”). Additionally, the amendment permits the Company to repurchase certain SHC securities (other than the 12¾% Senior Discount Notes due 2012 (“SHC Discount Notes”) and the 12% Senior Subordinated Discount Notes due 2013 (“SHC Subordinated Discount Notes”)) not held by Apollo or management. 7 |
Third-party long-term debt consists of the following (in millions): |
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
| Senior Subordinated Notes | $ | 325.0 | $ | 325.0 | ||||
| Term Loan | 78.6 | 109.3 | ||||||
| Revolving Credit Facility | — | — | ||||||
| Other, including capital lease obligations | — | 0.1 | ||||||
| 403.6 | 434.4 | |||||||
| Premium on senior subordinated notes, net | 3.1 | 3.2 | ||||||
| Current portion of long-term debt | (0.8 | ) | (1.2 | ) | ||||
| $ | 405.9 | $ | 436.4 | |||||
5. Commitments and Contingencies:�� Parent Company Obligations: In May of 2003 SHC issued $179.6 million in aggregate principal amount at maturity of the SHC Subordinated Discount Notes. The proceeds to SHC approximated $100.0 million and were used to pay dividends on SHC’s common stock. No cash interest will accrue on the SHC Subordinated Discount Notes prior to June 1, 2008. The accreted value of each SHC Subordinated Discount Note will increase from the date of issuance until June 1, 2008 at a rate of 12% per annum such that the accreted value will equal the principal amount on June 1, 2008. Cash interest will accrue on the SHC Subordinated Discount Notes at a rate of 12% per annum, beginning June 1, 2008. As of June 30, 2003, approximately $71.1 million and $101.0 million are recorded for the SHC Discount Notes and SHC Subordinated Discount Notes, respectively. The SHC Discount Notes and SHC Subordinated Discount Notes are not a part of CMG’s consolidated financial statements. However, CMG’s operations are currently the main source of cash that is expected to service these notes. 6. Related Party Transactions:In the second quarter of 2003, the Company declared and paid $21.7 million of dividends in order to partially fund SHC’s payment of dividends and the repurchase of a portion of SHC’s common stock and all preferred stock held by IMC. In June 2003, the Company purchased, for $24.5 million, assets related to IMC’s sulfate of potash (SOP) marketing business including its Carlsbad, New Mexico SOP product line. As part of the transaction, the agreement under which the Company, as agent, markets SOP produced by IMC at their Carlsbad, New Mexico facility, will be terminated in 2003. The Company paid $21.0 million in cash with the remaining $3.5 million due no later than November 30, 2003. The Company will evaluate the intangible assets acquired and will finalize the purchase price allocation within the next several months. In connection with this evaluation exercise, the Company will also determine the amortization period for each of the identified intangible assets. The Company also purchased approximately $2.0 million of SOP finished goods inventory from IMC and may be required to purchase additional amounts of SOP finished goods inventory by November 30, 2003. 8 |
For the six months ended June 30, 2003, CMG has made approximately $3.8 million of cash payments to third parties on behalf of SHC. These payments primarily consist of deferred financing costs related to the SHC Discount Notes and SHC Subordinated Discount Notes. As of June 30, 2003, the total receivable due from SHC, recorded as other non-current assets, is approximately $6.1 million. 7. Operating Segments:Beginning in 2003, the Company no longer allocates corporate general and administrative costs incurred by CMG to its operating segments. For purposes of segment disclosure information, these costs are now classified in “Other.” The Company believes that this action will improve its ability to analyze its segment operating results. Certain reclassifications have been made to the 2002 segment information in order to conform with the current year’s presentation. Segment information as of and for the three-month and six-month periods ended June 30, 2003 and 2002, is as follows (in millions): |
| Three months ended June 30, 2003 | Salt | Potash | Other (c) | Total | ||||||||||
| Sales to external customers | $ | 74.4 | $ | 14.3 | $ | — | $ | 88.7 | ||||||
| Intersegment sales | — | 2.1 | (2.1 | ) | — | |||||||||
| Cost of sales – shipping and handling costs | 18.9 | 2.2 | — | 21.1 | ||||||||||
| Operating earnings (loss) | $ | 8.8 | $ | 2.5 | $ | (4.1 | ) | $ | 7.2 | |||||
| Three months ended June 30, 2002 | Salt | Potash | Other (c) | Total | ||||||||||
| Sales to external customers | $ | 70.2 | $ | 12.1 | $ | — | $ | 82.3 | ||||||
| Intersegment sales | — | 2.6 | (2.6 | ) | — | |||||||||
| Cost of sales – shipping and handling costs | 18.6 | 1.6 | — | 20.2 | ||||||||||
| Operating earnings (loss) (a) | $ | 9.1 | $ | 1.7 | $ | (6.3 | ) | $ | 4.5 | |||||
| Six months ended June 30, 2003 | Salt | Potash | Other (c) | Total | ||||||||||
| Sales to external customers | $ | 274.8 | $ | 26.6 | $ | — | $ | 301.4 | ||||||
| Intersegment sales | — | 3.9 | (3.9 | ) | — | |||||||||
| Cost of sales – shipping and handling costs | 80.9 | 4.3 | — | 85.2 | ||||||||||
| Operating earnings (loss) | 54.2 | 2.8 | (8.3 | ) | 48.7 | |||||||||
| Total assets | $ | 445.0 | $ | 139.1 | $ | 21.1 | $ | 605.2 | ||||||
| Six months ended June 30, 2002 | Salt | Potash | Other (c) | Total | ||||||||||
| Sales to external customers | $ | 219.6 | $ | 25.1 | $ | — | $ | 244.7 | ||||||
| Intersegment sales | — | 4.6 | (4.6 | ) | — | |||||||||
| Cost of sales – shipping and handling costs | 65.4 | 3.3 | — | 68.7 | ||||||||||
| Operating earnings (loss) (b) | 41.7 | 1.6 | (11.3 | ) | 32.0 | |||||||||
| Total assets | $ | 462.4 | $ | 118.1 | $ | 18.1 | $ | 598.6 | ||||||
(a) “Other” includes $2.2 million related to restructuring costs. (b) “Other” includes $4.7 million related to restructuring costs. (c) “Other” includes corporate entities and eliminations. 9 |
8. Stock Options:In connection with SHC’s $100.0 million dividend payment on its common stock in May 2003, the number of SHC stock options and the exercise price were adjusted to preserve the intrinsic value of the stock options that existed prior to the dividend through decreasing the exercise price of outstanding options and increasing the number of outstanding options. The following is a summary of SHC’s stock option activity and related information for the six-month period ended June 30, 2003 as adjusted for the transaction described above: |
| Number of options | Weighted-average exercise price | |||||||
| Outstanding at December 31, 2002 | 501,480 | $ | 7.20 | |||||
| Granted | 2,598 | 25.74 | ||||||
| Exercised | (21,434 | ) | 6.97 | |||||
| Cancelled/Expired | (10,484 | ) | 6.97 | |||||
| Outstanding at June 30, 2003 | 472,160 | $ | 7.33 | |||||
9. Other Comprehensive Income:The following tables provide additional detail related to amounts recorded in Other Comprehensive Income during the six month period ended June 30, 2003: |
| Accumulated | ||||||||||||||
| Unfunded | Unrealized gains | Foreign | Other | |||||||||||
| Pension | on cash flow | currency | Comprehensive | |||||||||||
| Losses | hedges | adjustments | Income | |||||||||||
| Balance at December 31, 2002 | $ | (11.9 | ) | $ | 0.1 | $ | 11.9 | $ | 0.1 | |||||
| 2003 changes | — | (0.2 | ) | 10.9 | 10.7 | |||||||||
| Balance at June 30, 2003 | $ | (11.9 | ) | $ | (0.1 | ) | $ | 22.8 | $ | 10.8 | ||||
| Tax | |||||||||||
| For the six months ended June 30, 2003: | Before tax | (expense) | Net-of-tax | ||||||||
| Amount | benefit | amount | |||||||||
| Gas hedging adjustment | $ | (0.3 | ) | $ | 0.1 | $ | (0.2 | ) | |||
| Foreign currency translation adjustment | 10.9 | — | 10.9 | ||||||||
| Other comprehensive income | $ | 10.6 | $ | 0.1 | $ | 10.7 | |||||
10 |
10. Guarantor/Non-guarantor Condensed Consolidating StatementsThe following condensed 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) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Cash and cash equivalents | $ | 4.6 | $ | 9.1 | $ | — | $ | — | $ | 13.7 | |||||
| Receivables, net | 28.0 | 17.8 | 0.1 | — | 45.9 | ||||||||||
| Inventories | 50.2 | 27.9 | — | — | 78.1 | ||||||||||
| Other current assets | 2.6 | 0.9 | — | — | 3.5 | ||||||||||
| Property, plant and equipment, net | 209.2 | 200.2 | — | — | 409.4 | ||||||||||
| Investment in subsidiaries | — | — | 443.4 | (443.4 | ) | — | |||||||||
| Intangibles | 24.5 | — | — | — | 24.5 | ||||||||||
| Other | 7.7 | 8.8 | 13.6 | — | 30.1 | ||||||||||
| Total assets | $ | 326.8 | $ | 264.7 | $ | 457.1 | $ | (443.4 | ) | $ | 605.2 | ||||
| Current portion of long-term debt | $ | — | $ | — | $ | 0.8 | $ | — | $ | 0.8 | |||||
| Other current liabilities | 35.5 | 26.1 | 16.2 | — | 77.8 | ||||||||||
| Total current liabilities | 35.5 | 26.1 | 17.0 | — | 78.6 | ||||||||||
| Due to (from) affiliates | (119.0 | ) | 75.3 | 43.7 | — | — | |||||||||
| Long-term debt, net of current portion | — | — | 405.9 | — | 405.9 | ||||||||||
| Other noncurrent liabilities | 126.4 | 3.8 | — | — | 130.2 | ||||||||||
| Total stockholder’s equity (deficit) | 283.9 | 159.5 | (9.5 | ) | (443.4 | ) | (9.5 | ) | |||||||
| Total liabilities and stockholder’s equity (deficit) | $ | 326.8 | $ | 264.7 | $ | 457.1 | $ | (443.4 | ) | $ | 605.2 | ||||
11 |
CONDENSED CONSOLIDATING BALANCE SHEETS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Cash and cash equivalents | $ | 6.5 | $ | 5.4 | $ | — | $ | — | $ | 11.9 | |||||
| Receivables, net | 59.1 | 35.4 | — | — | 94.5 | ||||||||||
| Inventories | 65.7 | 30.8 | — | — | 96.5 | ||||||||||
| Other current assets | 0.2 | 0.5 | — | — | 0.7 | ||||||||||
| Property, plant and equipment, net | 216.5 | 196.7 | — | — | 413.2 | ||||||||||
| Investment in subsidiaries | — | — | 375.4 | (375.4 | ) | — | |||||||||
| Other | 7.6 | 2.7 | 16.9 | — | 27.2 | ||||||||||
| Total assets | $ | 355.6 | $ | 271.5 | $ | 392.3 | $ | (375.4 | ) | $ | 644.0 | ||||
| Current portion of long-term debt | $ | — | $ | 0.1 | $ | 1.1 | $ | — | $ | 1.2 | |||||
| Other current liabilities | 59.0 | 27.3 | 14.9 | — | 101.2 | ||||||||||
| Total current liabilities | 59.0 | 27.4 | 16.0 | — | 102.4 | ||||||||||
| Long-term debt, net of current portion | — | — | 436.4 | — | 436.4 | ||||||||||
| Due to (from) affiliates | (70.8 | ) | 92.8 | (22.0 | ) | — | — | ||||||||
| Other noncurrent liabilities | 137.0 | 6.3 | (18.4 | ) | — | 124.9 | |||||||||
| Total stockholder’s equity (deficit) | 230.4 | 145.0 | (19.7 | ) | (375.4 | ) | (19.7 | ) | |||||||
| Total liabilities and stockholder’s equity (deficit) | $ | 355.6 | $ | 271.5 | $ | 392.3 | $ | (375.4 | ) | $ | 644.0 | ||||
12 |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Sales | $ | 53.5 | $ | 35.2 | $ | — | $ | — | $ | 88.7 | |||||
| Cost of sales – shipping and handling | 15.3 | 5.8 | — | — | 21.1 | ||||||||||
| Cost of sales – products | 27.3 | 21.6 | — | — | 48.9 | ||||||||||
| Gross profit | 10.9 | 7.8 | — | — | 18.7 | ||||||||||
| Selling, general and administrative expenses | 6.3 | 5.2 | — | — | 11.5 | ||||||||||
| Operating income | 4.6 | 2.6 | — | — | 7.2 | ||||||||||
| Interest expense | 0.2 | 2.0 | 7.3 | — | 9.5 | ||||||||||
| Other (income) expense | (0.2 | ) | 2.3 | 1.1 | — | 3.2 | |||||||||
| (Earnings) in equity of subsidiary | — | — | (3.0 | ) | 3.0 | — | |||||||||
| Income (loss) before income taxes | 4.6 | (1.7 | ) | (5.4 | ) | (3.0 | ) | (5.5 | ) | ||||||
| Income tax expense (benefit) | 0.1 | (0.2 | ) | 0.3 | — | 0.2 | |||||||||
| Net income (loss) | $ | 4.5 | $ | (1.5 | ) | $ | (5.7 | ) | $ | (3.0 | ) | $ | (5.7 | ) | |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Sales | $ | 54.9 | $ | 27.4 | $ | — | $ | — | $ | 82.3 | |||||
| Cost of sales – shipping and handling | 15.2 | 5.0 | — | — | 20.2 | ||||||||||
| Cost of sales – products | 29.8 | 15.9 | — | — | 45.7 | ||||||||||
| Gross profit | 9.9 | 6.5 | — | — | 16.4 | ||||||||||
| Selling, general and administrative expenses | 6.1 | 3.6 | — | — | 9.7 | ||||||||||
| Restructuring and other charges | 0.7 | 0.1 | 1.4 | — | 2.2 | ||||||||||
| Operating income (loss) | 3.1 | 2.8 | (1.4 | ) | — | 4.5 | |||||||||
| Interest expense | 0.1 | 2.7 | 7.5 | — | 10.3 | ||||||||||
| Other (income) expense | (0.4 | ) | (0.5 | ) | 5.3 | — | 4.4 | ||||||||
| (Earnings) in equity of subsidiary | — | — | (0.5 | ) | 0.5 | — | |||||||||
| Income (loss) before income taxes | 3.4 | 0.6 | (13.7 | ) | (0.5 | ) | (10.2 | ) | |||||||
| Income tax expense (benefit) | 2.8 | 0.7 | (6.4 | ) | — | (2.9 | ) | ||||||||
| Net income (loss) | $ | 0.6 | $ | (0.1 | ) | $ | (7.3 | ) | $ | (0.5 | ) | $ | (7.3 | ) | |
13 |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Sales | $ | 193.5 | $ | 107.9 | $ | — | $ | — | $ | 301.4 | |||||
| Cost of sales – shipping and handling | 61.7 | 23.5 | — | — | 85.2 | ||||||||||
| Cost of sales – products | 87.3 | 57.1 | — | — | 144.4 | ||||||||||
| Gross profit | 44.5 | 27.3 | — | — | 71.8 | ||||||||||
| Selling, general and administrative expenses | 13.0 | 10.1 | — | — | 23.1 | ||||||||||
| Operating income (loss) | 31.5 | 17.2 | — | — | 48.7 | ||||||||||
| Interest expense | 0.3 | 4.3 | 14.6 | — | 19.2 | ||||||||||
| Other (income) expense | (0.4 | ) | 2.2 | 1.1 | — | 2.9 | |||||||||
| Equity earning in subsidiaries | — | — | (28.0 | ) | 28.0 | — | |||||||||
| Income (loss) before income taxes | 31.6 | 10.7 | 12.3 | (28.0 | ) | 26.6 | |||||||||
| Income tax expense (benefit) | 9.5 | 4.8 | (8.9 | ) | — | 5.4 | |||||||||
| Net income (loss) | $ | 22.1 | $ | 5.9 | $ | 21.2 | $ | (28.0 | ) | $ | 21.2 | ||||
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (unaudited) |
| Non- | ||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | ||||||||||
| Sales | $ | 162.6 | $ | 82.1 | $ | — | $ | — | $ | 244.7 | ||||
| Cost of sales – shipping and handling | 49.7 | 19.0 | — | — | 68.7 | |||||||||
| Cost of sales – products | 76.3 | 43.7 | — | — | 120.0 | |||||||||
| Gross profit | 36.6 | 19.4 | — | — | 56.0 | |||||||||
| Selling, general and administrative expenses | 11.2 | 8.1 | — | — | 19.3 | |||||||||
| Restructuring and other charges | 2.4 | 0.5 | 1.8 | — | 4.7 | |||||||||
| Operating income (loss) | 23.0 | 10.8 | (1.8 | ) | — | 32.0 | ||||||||
| Interest expense | 0.1 | 5.3 | 15.1 | — | 20.5 | |||||||||
| Other (income) expense | (0.4 | ) | (0.5 | ) | 5.3 | — | 4.4 | |||||||
| Equity earning in subsidiaries | — | — | (17.6 | ) | 17.6 | — | ||||||||
| Income (loss) before income taxes | 23.3 | 6.0 | (4.6 | ) | (17.6 | ) | 7.1 | |||||||
| Income tax expense (benefit) | 8.8 | 2.9 | (9.0 | ) | — | 2.7 | ||||||||
| Net income (loss) | $ | 14.5 | $ | 3.1 | $ | 4.4 | $ | (17.6 | ) | $ | 4.4 | |||
14 |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Net cash provided by operating activities | $ | 74.6 | $ | 25.6 | $ | (17.2 | ) | $ | — | $ | 83.0 | ||||
| Cash flows from investing activities: | |||||||||||||||
| Capital expenditures | (2.8 | ) | (2.6 | ) | — | — | (5.4 | ) | |||||||
| Acquisition of intangible assets | (21.0 | ) | — | — | — | (21.0 | ) | ||||||||
| Net cash used in investing activities | (23.8 | ) | (2.6 | ) | — | — | (26.4 | ) | |||||||
| Cash flows from financing activities: | |||||||||||||||
| Dividends paid | — | — | (21.7 | ) | — | (21.7 | ) | ||||||||
| Principal payments on other long-term | |||||||||||||||
| debt, including capital leases | — | — | (30.7 | ) | — | (30.7 | ) | ||||||||
| Payments (to) from Affiliates, net | (52.7 | ) | (19.2 | ) | 71.9 | — | — | ||||||||
| Other | — | — | (3.8 | ) | — | (3.8 | ) | ||||||||
| Net cash provided by (used in) | |||||||||||||||
| financing activities | (52.7 | ) | (19.2 | ) | 15.7 | — | (56.2 | ) | |||||||
| Effect of exchange rate changes on cash and cash | |||||||||||||||
| equivalents | — | (0.1 | ) | 1.5 | — | 1.4 | |||||||||
| Net increase (decrease) in cash and cash | |||||||||||||||
| Equivalents | (1.9 | ) | 3.7 | — | — | 1.8 | |||||||||
| Cash and cash equivalents, beginning of period | 6.5 | 5.4 | — | — | 11.9 | ||||||||||
| Cash and cash equivalents, end of period | $ | 4.6 | $ | 9.1 | $ | — | $ | — | $ | 13.7 | |||||
15 |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (unaudited) |
| Non- | |||||||||||||||
| Guarantors | guarantors | CMG | Eliminations | Consolidated | |||||||||||
| Net cash provided by operating activities | $ | 56.7 | $ | 18.4 | $ | (5.0 | ) | $ | — | $ | 70.1 | ||||
| Cash flows from investing activities: | |||||||||||||||
| Capital expenditures | (3.5 | ) | (3.0 | ) | — | — | (6.5 | ) | |||||||
| Other | 0.1 | — | — | — | 0.1 | ||||||||||
| Net cash used in investing activities | (3.4 | ) | (3.0 | ) | — | — | (6.4 | ) | |||||||
| 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 | ) | (95.0 | ) | — | (95.1 | ) | |||||||
| Payments (to) from Affiliates, net | (48.6 | ) | (1.6 | ) | 50.2 | — | — | ||||||||
| Deferred financing costs | — | — | (3.4 | ) | — | (3.4 | ) | ||||||||
| Other | — | — | 1.0 | — | 1.0 | ||||||||||
| Net cash provided by (used in) | |||||||||||||||
| financing activities | (48.6 | ) | (12.5 | ) | 2.2 | — | (58.9 | ) | |||||||
| Effect of exchange rate changes on cash and cash | |||||||||||||||
| equivalents | — | (2.1 | ) | 2.8 | — | 0.7 | |||||||||
| Net increase in cash and cash | |||||||||||||||
| Equivalents | 4.7 | 0.8 | — | — | 5.5 | ||||||||||
| Cash and cash equivalents, beginning of period | 8.2 | 7.7 | — | — | 15.9 | ||||||||||
| Cash and cash equivalents, end of period | $ | 12.9 | $ | 8.5 | $ | — | $ | — | $ | 21.4 | |||||
16 |
| 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. 17 |
Results of Operations The consolidated financial statements have been prepared to present the historical financial condition and results of operations and cash flows for the Company. The following tables and discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto included elsewhere in this quarterly report. |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (in millions) | (in millions) | |||||||||||||
| Sales | $ | 88.7 | $ | 82.3 | $ | 301.4 | $ | 244.7 | ||||||
| Cost of sales – shipping and handling | 21.1 | 20.2 | 85.2 | 68.7 | ||||||||||
| Cost of sales – products | 48.9 | 45.7 | 144.4 | 120.0 | ||||||||||
| Gross profit | 18.7 | 16.4 | 71.8 | 56.0 | ||||||||||
| Selling, general and administrative expenses | 11.5 | 9.7 | 23.1 | 19.3 | ||||||||||
| Restructuring and other charges | — | 2.2 | — | 4.7 | ||||||||||
| Operating income | 7.2 | 4.5 | 48.7 | 32.0 | ||||||||||
| Interest expense | 9.5 | 10.3 | 19.2 | 20.5 | ||||||||||
| Other expense / (income) | 3.2 | 4.4 | 2.9 | 4.4 | ||||||||||
| Income / (loss) before income taxes | (5.5 | ) | (10.2 | ) | 26.6 | 7.1 | ||||||||
| Income tax expense / (benefit) | 0.2 | (2.9 | ) | 5.4 | 2.7 | |||||||||
| Net income / (loss) | $ | (5.7 | ) | $ | (7.3 | ) | $ | 21.2 | $ | 4.4 | ||||
| Sales by Segment: | ||||||||||||||
| Salt | $ | 74.4 | $ | 70.2 | $ | 274.8 | $ | 219.6 | ||||||
| Specialty potash fertilizers | 14.3 | 12.1 | 26.6 | 25.1 | ||||||||||
| Total | $ | 88.7 | $ | 82.3 | $ | 301.4 | $ | 244.7 | ||||||
The table below shows shipments of products (thousands of tons): |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Highway deicing salt | 909 | 859 | 5,287 | 4,147 | ||||||||||
| General trade salt | 632 | 621 | 1,364 | 1,255 | ||||||||||
| Specialty potash | 66 | 53 | 124 | 114 | ||||||||||
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Sales Sales for the second quarter of 2003 of $88.7 million increased $6.4 million, or 8% compared to $82.3 million for the second quarter 2002. Sales include revenues from the sale of our products (“Product Sales”) as well as pass-through shipping and handling fees charged to customers to reimburse us for shipping and handling costs incurred in delivering salt and SOP product to the customer. Such shipping and handling fees were $21.1 million during the second quarter of 2003, an increase of $0.9 million compared to the second quarter of 2002 shipping and handling fees of $20.2 million. The increase in shipping and handling related fees for the second quarter of 2003 is due to more tons of products sold as compared to 2002. Product Sales for the second quarter of 2003 of $67.6 million increased $5.5 million, or 9% compared to $62.1 million for the second quarter of 2002. Salt Product Sales for the second quarter of 2003 of $55.5 million increased $3.9 million, or 8% compared to $51.6 million for the second quarter of 2002. This increase was partially due to a 77,000 ton increase in sales volumes in our North American highway deicing product line, partially offset with a 27,000 ton decrease in sales volumes in our U.K. highway deicing product line. Also contributing to the increase was improved pricing in our North American highway deicing and general trade product lines. SOP Product Sales for the second quarter of 2003 of $12.1 million increased $1.6 million, or 15% compared to $10.5 million for the second quarter of 2002. The increase was almost entirely due to a 13,000 ton increase in volumes as compared to the second quarter of 2002. 18 |
Gross Profit Gross profit for the second quarter of 2003 of $18.7 million increased $2.3 million, or 14% compared to $16.4 million for the second quarter of 2002. The increase in gross profit primarily reflects the impact of improved highway deicing and SOP sales volumes and improved pricing partially offset by higher production costs primarily attributable to $0.8 million of higher natural gas costs. Selling, General and Administrative Expenses Selling, general and administrative expenses of $11.5 million for the second quarter of 2003 increased $1.8 million, or 19% compared to $9.7 million for the second quarter of 2002. The increase primarily reflects additional compensation and benefit costs and higher spending on discretionary promotional and marketing costs. Restructuring and Other Charges Restructuring and other charges are transition costs that are non-recurring in nature and relate to charges required to establish us as an independent entity. We incurred $2.2 million of restructuring costs in the second quarter of 2002 consisting primarily of costs to develop stand-alone tax and inventory management strategies. No such costs were incurred in 2003. Interest Expense Interest expense for the second quarter of 2003 of $9.5 million decreased $0.8 million compared to $10.3 million for the second quarter of 2002. This decrease is primarily the result of lower outstanding debt balances during 2003. Income Tax Expense Income tax expense for second quarter of 2003 of $0.2 million increased $3.1 million compared to a $2.9 million income tax benefit for the second quarter of 2002. A lesser portion of pre-tax income was generated in the U.S. in 2003 than in 2002 causing an increase in the effective income tax rate due to lower utilization of previously reserved net operating loss carryforwards (“NOLs”) that would offset U.S. taxable income. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate differentials, changes in the expected utilization of previously reserved NOLs, non-deductible transaction costs incurred in 2002 and foreign mining taxes. We have approximately $95.7 million of NOLs at June 30, 2003 that expire between 2009 and 2020. 19 |
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002 Sales Sales for 2003 of $301.4 million increased $56.7 million, or 23% compared to $244.7 million for 2002. Sales include revenues from Product Sales as well as pass-through shipping and handling fees charged to customers to reimburse us for shipping and handling costs incurred in delivering salt and SOP product to the customer. Such shipping and handling fees were $85.2 million during 2003, an increase of $16.5 million compared to 2002 shipping and handling fees of $68.7 million. The increase in shipping and handling related fees for 2003 is primarily due to more tons of North American highway and consumer deicing salt sold as compared to 2002. Product Sales for 2003 of $216.2 million increased $40.2 million, or 23% compared to $176.0 million for 2002. Salt Product Sales for 2003 of $193.9 million increased $39.7 million, or 26% compared to $154.2 million for 2002. This increase was primarily due to a 1,140,000 ton increase in sales volumes in our North American highway deicing combined with a 109,000 ton increase in sales volumes in our North American general trade product line. Also contributing to the increase was improved pricing in both our North American highway deicing and general trade product lines. SOP Product Sales for the 2003 of $22.3 million remained relatively consistent as compared to 2002. Gross Profit Gross profit for 2003 of $71.8 million increased $15.8 million, or 28% compared to $56.0 million for 2002. The increase in gross profit primarily reflects the impact of improved highway and consumer deicing sales volumes in the March quarter as discussed above. Selling, General and Administrative Expenses Selling, general and administrative expenses of $23.1 million for 2003 increased $3.8 million, or 20% compared to $19.3 million for 2002. The increase primarily reflects additional compensation and benefit costs and higher spending on discretionary promotional and marketing costs. Restructuring and Other Charges Restructuring and other charges are transition costs that are non-recurring in nature and relate to charges required to establish us as an independent entity. We incurred $4.7 million of restructuring costs in 2002 that consisted primarily of compensation costs and costs to develop stand-alone tax and inventory strategies. No such costs were incurred in 2003. Interest Expense Interest expense for 2003 of $19.2 million decreased $1.3 million compared to $20.5 million for 2002. This decrease is primarily the result of lower outstanding debt balances during 2003. Income Tax Expense Income tax expense for 2003 of $5.4 million increased $2.7 million compared to $2.7 million for 2002. A greater portion of pre-tax income was generated in the U.S. in 2003 than in 2002 causing a decrease in the effective income tax rate due to utilization of previously reserved NOL’s offsetting U.S. taxable income. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate differentials, changes in the expected utilization of previously reserved NOLs, non-deductible transaction costs incurred in 2002 and foreign mining taxes. 20 |
Liquidity and Capital Resources Historically, we have used cash generated from operations to meet our working capital needs and to fund capital expenditures. 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 June 30, 2003, we had $403.6 million of principal indebtedness, net of issuance premium, consisting of $325.0 million of Senior Subordinated Notes and a $78.6 million term loan (“Term Loan”) under our Senior Credit Facility. The Senior Credit Facility also provides for a Revolving Credit Facility in an aggregate amount of up to $135.0 million. No borrowings were outstanding under the Revolving Credit Facility and the Company maintained $13.7 million in cash on hand as of June 30, 2003. 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 June 30, 2003, approximately $126.0 million was available under the Revolving Credit Facility. As of June 30, 2003, our parent corporation, SHC, also had $71.1 million and $101.0 million of SHC Discount Notes and SHC Subordinated Discount Notes outstanding, respectively. The discount notes are not part of our consolidated financial statements. These notes have no cash interest obligations until December 15, 2007 and June 1, 2008, respectively. Our operations are currently the main source of cash that is expected to service this debt. On May 5, 2003, we amended our Senior Credit Facility to allow SHC to pay a dividend to be funded with either cash on hand or with borrowings under the amended and restated Revolving Credit Facility. Additionally, the amendment permits SHC to repurchase certain securities issued by SHC (other than the SHC Discount Notes and SHC Subordinated Discount Notes) not held by Apollo or management. During the six months ended June 30, 2003, cash flows from operations were $83.0 million. We used a portion of those cash flows to make a $30.0 million voluntary principal payment on our Term Loan, to pay a $21.7 million dividend to SHC and to purchase certain intangible assets related to IMC’s SOP business. 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 the Senior Subordinated Notes, Senior Credit Facility, SHC Discount Notes and SHC Subordinated Discount Notes. As of June 30, 2003, we are in compliance with all conditions and covenants related to the Senior Subordinated Notes, Senior Credit Facility, SHC Discount Notes and SHC Subordinated Discount Notes. For the Six Months Ended June 30, 2003 and 2002 Net cash flows generated by operating activities for the six months ended June 30, 2003 and 2002 were $83.0 million and $70.1 million, respectively. Of these amounts, $38.8 million and $43.1 million for 2003 and 2002, respectively, were generated by working capital reductions. The primary working capital reductions for 2003 and 2002 were decreases in receivables of $50.7 million and $48.2 million, respectively, decreases in inventories of $21.0 million and $8.0 million, respectively, and decreases in accounts payable and accrued expenses of $32.9 million and $13.1 million, respectively. The reductions are indicative of the seasonal nature of highway deicing product line sales with differences primarily related to more normal winter weather in the 2002 – 2003 winter than in the mild 2001 – 2002 winter. 21 |
Net cash flows used by investing activities for the six months ended June 30, 2003 and 2002, were $26.4 million and $6.4 million, respectively. These cash flows consisted of normal capital expenditures to maintain our facilities of $5.4 million and $6.5 million, respectively, and $21.0 million in 2003 related to our purchase of certain intangible assets related to IMC’s SOP business. Net cash flow used by financing activities was $56.2 million for the six months ended June 30, 2003, primarily due to $21.7 million of dividends paid to SHC and the $30.0 million voluntary principal repayment that reduced the amount of long-term debt outstanding under the Term Loan. Net cash flows used by financing activities were $58.9 million for the six months ending June 30, 2002, primarily due to the $39.8 million repayment of our revolver borrowings combined with a $20.0 million voluntary principle repayment that reduced the amount of long-term debt outstanding under the Term Loan. Additionally, on April 10, 2002, we 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 bondholders at a premium of $3.4 million, plus accrued interest from February 15, 2002 and accordingly, we 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 Revolving Credit Facility. In connection with this transaction, we recorded a charge to Other (income) expense in the accompanying Consolidated Statement of Operations of approximately $5.3 million which was reflected as a non-cash add-back to Net cash provided by operating activities. Contractual Obligations and Commitments The Company’s contractual obligations and commitments at June 30, 2003 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 | $ | 403.6 | $ | 0.8 | $ | 1.6 | $ | 1.6 | $ | 399.6 | |||||||
| Operating Leases (a) | 25.3 | 6.1 | 7.6 | 4.5 | 7.1 | ||||||||||||
| Unconditional purchase obligations (b) | 63.6 | 8.0 | 16.1 | 16.1 | 23.4 | ||||||||||||
| Total Contractual Cash Obligations | $ | 492.5 | $ | 14.9 | $ | 25.3 | $ | 22.2 | $ | 430.1 | |||||||
| (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. |
| Amount of Commitment Expiration per Period | |||||||||||||||||
| Less than | 2 – 3 | 4 – 5 | After 5 | ||||||||||||||
| Other Commitments | Total | 1 Year | Years | Years | Years | ||||||||||||
| Revolver | $ | 126.0 | $ | — | $ | — | $ | 126.0 | $ | — | |||||||
| Letters of Credit | 9.0 | 9.0 | — | — | — | ||||||||||||
| Total Other Commitments | $ | 135.0 | $ | 9.0 | $ | — | $ | 126.0 | $ | — | |||||||
22 |
Our ability to make scheduled payments of principal, to pay the interest on, or 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 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 senior credit facilities, will be adequate to meet our liquidity needs over the next twelve months. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our Senior Credit Facilities in an amount sufficient to enable us to pay our indebtedness 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 on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Seasonality We experience a substantial amount of seasonality in salt sales. The result of this seasonality is that sales and operating income are generally higher in the first and fourth quarters and lower during the second and third quarters of each year. In particular, sales of highway and consumer deicing salt products are seasonal as they vary based on the severity of the winter conditions in areas where the product is used. Following industry practice in North America, we and our customers stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (the “FASB”) issued 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. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position, results of operations or cash flows. 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 Company adopted SFAS No. 146 in the second quarter of 2003 as the provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position, results of operations or cash flows. 23 |
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” and requires certain disclosures in the Company’s quarterly and annual financial statements. SHC has a stock option plan that was adopted on November 28, 2001. The Company elected to continue to follow the accounting method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options and has adopted the pro forma disclosure requirements under SFAS No. 123, as amended by SFAS 148. Under APB No. 25, because the exercise price of the Company’s employee stock options is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. The effect of applying the fair value method under SFAS No. 123, as amended by SFAS 148, to the Company’s stock-based awards resulted in pro forma net income that is not materially different from amounts reported in the accompanying consolidated statement of operations for the six month periods ending June 30, 2003 and 2002. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOur 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 June 30, 2003, we had $78.6 million of debt outstanding under the term loan facility and zero outstanding under our revolving credit 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 June 30, 2003, 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 six months ended June 30, 2003 would have increased by approximately $0.4 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 exchange rate for the Canadian dollar has changed significantly from December 31, 2002 to June 30, 2003. The majority of our revenues and costs are denominated in U.S. dollars, with British pound sterling and Canadian dollars also being significant. Our historical results do not reflect any foreign exchange hedging activity. Considering our currency expenses, a hypothetical 10% unfavorable change in the exchange rates compared to the U.S. dollar could have an estimated $1.0 million impact on earnings for the six months ended June 30, 2003. Actual changes in market prices or rates may differ from hypothetical changes. 24 |
Commodity Pricing Risk: Commodity Derivative Instruments and Hedging Activities We have reviewed various options available to mitigate the impact of fluctuating natural gas prices. During 2002 and 2003, we have entered into certain financial instruments related to the purchase of natural gas. We have determined that these financial instruments qualify as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activity.�� Excluding the effects of our derivative instruments and our commodity price exposures to natural gas, a hypothetical 10% adverse change in our natural gas prices during the six months ended June 30, 2003 could have had an estimated $0.5 million impact on earnings. Actual results may vary based on actual changes in market prices and rates. Item 4. CONTROLS AND PROCEDURESWithin 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 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 INFORMATIONItem 1. LEGAL PROCEEDINGSThe 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 PROCEEDSNone Item 3. DEFAULTS UPON SENIOR SECURITIESNone Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot Applicable Item 5. OTHER INFORMATIONNot Applicable 25 |
Item 6. EXHIBITS AND REPORTS ON FORM 8-KForm 8-K filed May 13, 2003 “Regulation FD Disclosure” Form 8-K filed June 27, 2003 “Other Events” SIGNATURESPursuant 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. |
| Date: August 13, 2003 | COMPASS MINERALS GROUP, INC. /s/ Michael E. Ducey —————————————— Michael E. Ducey President and Chief Executive Officer |
| Date: August 13, 2003 | /s/ Rodney L. Underdown —————————————— Rodney L. Underdown Chief Financial Officer |
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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: |
| (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 officer 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: August 13, 2003 | /s/ Michael E. Ducey —————————————— Michael E. Ducey President and Chief Executive Officer |
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Certification requirements set forth in Section 302 (a) of the Sarbanes-Oxley Act. 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; |
| 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 officer 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: August 13, 2003 | /s/ Rodney L. Underdown —————————————— Rodney L. Underdown Chief Financial Officer |
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