COMPASS MINERALS GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004

		OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 333-82700

Compass Minerals Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		48-1135403
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

8300 College Blvd.
Overland Park, KS 66210
(913) 344-9200
(Address of principal executive offices and telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No:

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes: No: X

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, at May 3, 2004 was 1,000 shares.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COMPASS MINERALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share data)


	March 31,			December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	71.3		$	2.6
Receivables, less allowance for doubtful accounts of $2.1 million in 2004 and in 2003		86.0			117.4
Inventories		56.8			96.7
Other		2.5			3.7

Total current assets		216.6			220.4
Property, plant and equipment, net		257.2			262.0
Intangible assets – mineral interests and other, net.		172.0			172.7
Other		41.3			34.9

Total assets	$	687.1		$	690.0

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current portion of long-term debt	$	0.7		$	0.8
Accounts payable		53.3			72.6
Accrued expenses		15.3			13.3
Accrued interest		4.4			12.5
Accrued salaries and wages		14.0			13.5
Income taxes payable		8.4			—

Total current liabilities		96.1			112.7
Long-term debt, net of current portion		395.3			419.4
Deferred income taxes		77.1			77.7
Other noncurrent liabilities		36.6			36.4
Commitments and contingencies (Note 9)
Stockholder’s equity (deficit):
Common Stock:
$0.01 par value, authorized shares— 1,000 shares authorized, issued and outstanding		—			—
Additional paid in capital		341.9			341.9
Accumulated deficit		(287.2	)		(323.6	)
Accumulated other comprehensive income		27.3			25.5

Total stockholder’s equity		82.0			43.8

Total liabilities and stockholder’s equity	$	687.1		$	690.0

The accompanying notes are an integral part of the consolidated financial statements.

COMPASS MINERALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in millions)


	Three months ended
	March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	36.4		$	26.9
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, depletion and amortization		10.5			9.8
Finance fee amortization		0.4			0.5
Deferred income taxes		0.2			1.7
Changes in operating assets and liabilities:
Receivables		31.6			12.3
Inventories		39.6			43.7
Other assets		0.6			(1.9	)
Accounts payable and accrued expenses		(16.5	)		(20.0	)
Other noncurrent liabilities		—			(0.1	)

Net cash provided by operating activities		102.8			72.9

Cash flows from investing activities:
Capital expenditures		(3.9	)		(2.7	)
Other		0.1			—

Net cash used in investing activities		(3.8	)		(2.7	)

Cash flows from financing activities:
Principal payments on long-term debt, including capital leases		(10.2	)		(30.5	)
Revolver activity		(14.0	)		—
Advances to CMI, net		(6.7	)		(0.3	)

Net cash used in financing activities		(30.9	)		(30.8	)

Effect of exchange rate changes on cash and cash equivalents		0.6			(1.2	)

Net increase in cash and cash equivalents		68.7			38.2

Cash and cash equivalents, beginning of period		2.6			11.9

Cash and cash equivalents, end of period	$	71.3		$	50.1

Supplemental cash flow information:
Interest paid	$	17.3		$	17.4
Income taxes paid, net of refunds		2.7			2.1

The accompanying notes are an integral part of the consolidated financial statements.

COMPASS MINERALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization, Formation and Basis of Presentation:

Compass Minerals Group, Inc. (“CMG” or the “Company”), is a producer and marketer of inorganic mineral products with manufacturing sites in North America and Europe. Its principal products are salt and sulfate of potash (“SOP”). CMG serves a variety of markets, including agriculture, food processing, chemical processing, water conditioning and highway deicing and is a wholly owned subsidiary of Compass Minerals International, Inc. (“CMI”).

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 period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

The balance sheet at December 31, 2003 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, 2003 included in CMG’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 19, 2004.

Certain reclassifications were made to prior year amounts in order to conform with the current year’s presentation.

2. Recent Accounting Pronouncements:

In January 2003, the Financial Accounting Standards Board, or “FASB,” issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. FIN 46 applies to any business enterprise, public or private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. In December 2003, the FASB issued Interpretation No. 46(R) (“FIN 46(R)”) which supercedes FIN 46. FIN 46(R) is effective for all Special Purpose Entities (“SPEs”) created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46(R) is applicable to all non-SPEs created prior to February 1, 2003 by public entities at the end of the first interim or annual reporting period ending after March 15, 2004. The Company has determined that it has no SPEs. The Company reviewed the applicability of FIN 46(R) to entities other than SPEs and has determined that the adoption of FIN 46(R) did not have a material effect on its consolidated financial statements.

3. Inventories:

Inventories consist of the following (in millions):


	March 31,		December 31,
	2004		2003
Finished goods	$	45.6	$	84.1
Raw materials and supplies		11.2		12.6

	$	56.8	$	96.7

4. Property, Plant and Equipment:

Property, plant and equipment consists of the following (in millions):


	March 31,		December 31,
	2004		2003
Land and buildings	$	138.0	$	135.9
Machinery and equipment		407.7		408.3
Furniture and fixtures		9.6		9.6
Mineral properties and rights		20.8		20.3
Construction in progress		9.8		6.5

		585.9		580.6
Less accumulated depreciation		328.7		318.6

	$	257.2	$	262.0

5. Intangible Assets — Mineral Interests and Other:

Mineral interests include probable mineral reserves. The Company leases mineral reserves at several of its extraction facilities. These leases have varying terms, and many provide for a royalty payment to the lessor based on a specific amount per ton of mineral extracted or as a percentage of revenue. The Company’s mineral interests are amortized on a units-of-production basis. The Company acquired other intangible assets related to its SOP segment during 2003. These assets are being amortized on a straight-line basis over their estimated useful lives.

The aggregate amortization of mineral interests and other intangible assets for the three months ended March 31, 2004 and 2003 was $0.7 million and $0.3 million, respectively. The estimated amortization expense from fiscal 2004 to fiscal 2008 is approximately $1.7 million annually.

Mineral interests and other intangible assets consist of the following (in millions):


	March 31, 2004						December 31, 2003
	Gross						Gross
	Carrying		Accumulated		Net Book		Carrying		Accumulated		Net Book
	Value		Amortization		Value		Value		Amortization		Value
Probable mineral reserves	$	158.6	$	11.0	$	147.6	$	158.6	$	10.6	$	148.0
SOP long-term customer contract		0.5		—		0.5		0.5		—		0.5
Other SOP intangible asset		24.3		0.4		23.9		24.3		0.1		24.2

	$	183.4	$	11.4	$	172.0	$	183.4	$	10.7	$	172.7

6. Income Taxes:

Income tax expense for the three months ended March 31, 2004 and 2003 was $11.6 million and $5.2 million, respectively. Our income tax provision differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income tax rate differentials, foreign mining income taxes and changes in the utilization of previously reserved NOLs.

7. Long-term Debt:

Third-party long-term debt consists of the following (in millions):


	March 31,			December 31,
	2004			2003
Senior Subordinated Notes	$	325.0		$	325.0
Term Loan		68.1			78.3
Revolving Credit Facility		—			14.0

		393.1			417.3
Premium on Senior Subordinated Notes, net		2.9			2.9
Less: current portion		(0.7	)		(0.8	)

	$	395.3		$	419.4

8. Pension Plans:

The components of pension expense were as follows for the three-month periods ended March 31, (in millions):


	2004			2003
Service cost for benefits earned during the year	$	0.3		$	0.4
Interest cost on projected benefit obligation		0.8			0.7
Return on plan assets		(0.7	)		(0.6	)
Net amortization and deferral		0.2			0.3

Net pension expense	$	0.6		$	0.8

Employer contributions were approximately $0.4 million during the three-month periods ended March 31, 2004 and 2003.

9. Commitments and Contingencies:

The Company is involved in legal and administrative proceedings and claims of various types from normal Company activities.

The Company has become aware of an aboriginal land claim filed by The Chippewas of Nawash and The Chippewas of Saugeen (the “Chippewas”) in the Ontario Superior Court against The Attorney General of Canada and Her Majesty The Queen In Right of Ontario. The Chippewas claim that a large part of the land under Lake Huron was never conveyed by treaty and therefore belong to the Chippewas. The land claimed includes land in which the Company’s Goderich mine operates and has mining rights granted to it by the government of Ontario. The Company is not a party to this court action. Similar claims are pending with respect to other parts of the Great Lakes by other aboriginal claimants. The Company has been informed by the Ministry of the Attorney General of Ontario that “Canada takes the position that the common law does not recognize aboriginal title to the Great Lakes and its connecting waterways.”

The Company does not believe that this action will result in a material adverse financial effect on the Company. Furthermore, while any litigation contains an element of uncertainty, management presently believes that the outcome of each such proceeding or claim which is pending or known to be threatened, or all of them combined, will not have a material adverse effect on the Company’s results of operations or financial position.

As of March 31, 2004, CMI had recorded approximately $78.3 million and $110.7 million for its senior discount notes and subordinated discount notes, respectively. The senior discount notes and 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 the senior discount notes, subordinated discount notes and any future dividends on CMI common stock.

Throughout the first quarter of 2004 and 2003, CMG advanced CMI cash to pay certain third parties. Advances totaling approximately $6.7 million were made during the first quarter of 2004 that primarily consisted of costs related to CMI’s initial public offering and first quarter dividend. Advances totaling approximately $0.3 million were made during the first quarter of 2003 that primarily consisted of costs related to the senior discount notes issued by CMI during 2002. At March 31, 2004 and December 31, 2003, CMG is due $17.1 million and $10.4 million, respectively, from CMI. This receivable is recorded in other noncurrent assets.

10. Operating Segments:

Segment information is as follows (in millions):


Three months ended March 31, 2004	Salt		Potash		Other^(a)			Total
Sales to external customers	$	228.7	$	21.8	$	—		$	250.5
Intersegment sales		—		2.3		(2.3	)		—
Cost of sales – shipping and handling costs		70.7		3.7		—			74.4
Operating earnings (loss)		60.2		3.0		(5.2	)		58.0
Depreciation, depletion and amortization		8.5		2.0		—			10.5
Total assets		511.6		143.5		32.0			687.1


Three months ended March 31, 2003	Salt		Potash		Other^(a)			Total
Sales to external customers	$	200.4	$	12.3	$	—		$	212.7
Intersegment sales		—		1.8		(1.8	)		—
Cost of sales – shipping and handling costs		62.0		2.1		—			64.1
Operating earnings (loss)		45.4		0.3		(4.2	)		41.5
Depreciation, depletion and amortization		7.8		2.0		—			9.8
Total assets		488.0		119.5		18.1			625.6

^(a) “Other” includes corporate entities and eliminations.

11. Other Comprehensive Income:

The Company’s comprehensive income is comprised of net income, the change in the unrealized gain (loss) on cash flow hedges related to the Company’s gas hedging activities and foreign currency translation adjustments. The components of comprehensive income for the three-month periods ended March 31, are (in millions):


	2004		2003
Net income	$	36.4	$	26.9
Unrealized gain (loss) on cash flow hedges, net of tax		0.3		(0.6	)
Cumulative translation adjustments		1.5		2.2

Comprehensive income	$	38.2	$	28.5

The following tables provide additional detail related to amounts recorded in Other Comprehensive Income during the three-month period ended March 31, 2004:


								Accumulated
	Unfunded							Other
	Pension			Unrealized gains on cash flow		Foreign currency		Comprehensive
	Losses			hedges		Adjustments		Income
Balance at December 31, 2003	$	(7.0	)	$	0.8	$	31.7	$	25.5
2004 changes		—			0.3		1.5		1.8

Balance at March 31, 2004	$	(7.0	)	$	1.1	$	33.2	$	27.3


	Before tax		Tax			Net-of-tax
For the three-months ended March 31, 2004:	Amount		Expense			Amount
Unrealized gain on cash flow hedges	$	0.4	$	(0.1	)	$	0.3
Foreign currency translation adjustment		1.5		—			1.5

Other comprehensive income	$	1.9	$	(0.1	)	$	1.8


Part I. FINANCIAL INFORMATION			Page
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 (unaudited)		2
		Consolidated Statements of Operations for the three month periods ended March 31, 2004 and 2003 (unaudited)		3
		Consolidated Statement of Stockholder’s Equity (Deficit) for the three month period ended March 31, 2004 (unaudited)		4
		Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and 2003 (unaudited)		5
		Notes to Consolidated Financial Statements (unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk		21
	Item 4.	Controls and Procedures		22
Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings		22
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		22
	Item 3.	Defaults upon Senior Securities		22
	Item 4.	Submission of Matters to a Vote of Security Holders		22
	Item 5.	Other Information		22
	Item 6.	Exhibits and Reports on Form 8-K		23
SIGNATURES				24
Certification
Certification
Certification

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								Accumulated
			Additional					Other
	Common		Paid In		Accumulated			Comprehensive
	Stock		Capital		Deficit			Income		Total
Balance, December 31, 2003	$	—	$	341.9	$	(323.6	)	$	25.5	$	43.8
Comprehensive income:
Net income						36.4					36.4
Unrealized gain on cash flow hedges, net of tax									0.3		0.3
Cumulative translation adjustments									1.5		1.5

Comprehensive income											38.2

Balance, March 31, 2004	$	—	$	341.9	$	(287.2	)	$	27.3	$	82.0


	Guarantors		Non-guarantors		CMG		Eliminations			Consolidated
Cash and cash equivalents	$	51.0	$	20.3	$	—	$	—		$	71.3
Receivables, net		50.3		35.7		—		—			86.0
Inventories		36.6		20.2		—		—			56.8
Other current assets		2.1		0.4		—		—			2.5
Property, plant and equipment, net		66.3		190.9		—		—			257.2
Intangible assets – mineral interests and other, net		172.0		—		—		—			172.0
Investment in subsidiaries		—		—		550.2		(550.2	)		—
Other		7.9		4.0		29.4		—			41.3

Total assets	$	386.2	$	271.5	$	579.6	$	(550.2	)	$	687.1

Current portion of long-term debt	$	—	$