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EX-95 - EXHIBIT 95 - COMPASS MINERALS INTERNATIONAL INCcmp-10qx3q17xex95.htm
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EX-31.1 - EXHIBIT 31.1 - COMPASS MINERALS INTERNATIONAL INCcmp-10qx3q17xex311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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 001-31921
compasslogoa05.jpg
Compass Minerals International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
36-3972986
(State or other jurisdiction of
 incorporation or organization)
(I.R.S. Employer
Identification Number)
9900 West 109th Street
Suite 100
Overland Park, KS 66210
(913) 344-9200
(Address of principal executive offices, zip code and telephone number, including area code)
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: þ     No:  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes: þ     No:  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes: ¨     No: þ
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of October 27, 2017, was 33,827,501 shares.
 



COMPASS MINERALS INTERNATIONAL, INC.

TABLE OF CONTENTS
 
 
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 

1


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
(Unaudited)
 
 
 
September 30,
2017
 
December 31,
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
39.1

 
$
77.4

 Receivables, less allowance for doubtful accounts of $10.9 in 2017 and $9.0 in 2016
209.6

 
320.9

Inventories
336.0

 
280.6

Other
47.4

 
36.1

Total current assets
632.1

 
715.0

Property, plant and equipment, net
1,140.0

 
1,092.3

Intangible assets, net
150.9

 
157.6

Goodwill
421.6

 
412.2

Investment in equity investee
24.7

 
24.9

Other
77.5

 
64.5

Total assets
$
2,446.8

 
$
2,466.5

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Current portion of long-term debt
$
55.4

 
$
130.2

Accounts payable
94.6

 
100.8

Accrued expenses
70.2

 
105.3

Accrued salaries and wages
25.5

 
22.6

Income taxes payable

 
4.4

Accrued interest
5.3

 
8.7

Total current liabilities
251.0

 
372.0

Long-term debt, net of current portion
1,274.2

 
1,194.8

Deferred income taxes, net
123.7

 
130.8

Other noncurrent liabilities
49.9

 
51.8

Commitments and contingencies (Note 8)


 


Stockholders’ equity:
 
 
 
Common stock: $0.01 par value, 200,000,000 authorized shares; 35,367,264 issued shares
0.4

 
0.4

Additional paid-in capital
101.2

 
97.1

Treasury stock, at cost — 1,540,418 shares at September 30, 2017, and 1,577,960 shares at December 31, 2016
(2.9
)
 
(3.0
)
Retained earnings
701.3

 
727.5

Accumulated other comprehensive loss
(52.0
)
 
(104.9
)
Total stockholders’ equity
748.0

 
717.1

Total liabilities and stockholders’ equity
$
2,446.8

 
$
2,466.5


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


2


COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share and per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Sales
$
290.7

 
$
179.6

 
$
906.5

 
$
694.8

Shipping and handling cost
45.5

 
38.4

 
179.8

 
164.9

Product cost
169.1

 
96.0

 
524.1

 
340.8

Gross profit
76.1

 
45.2

 
202.6

 
189.1

Selling, general and administrative expenses
44.7

 
25.7

 
123.8

 
79.8

Operating earnings
31.4

 
19.5

 
78.8

 
109.3

 
 
 
 
 
 
 
 
Other expense (income):
 
 
 
 
 
 
 
Interest expense
13.5

 
5.4

 
39.5

 
16.8

Net (earnings) loss in equity investee
(0.4
)
 
0.4

 
(0.6
)
 
1.7

Other, net
(1.2
)
 
1.5

 
0.5

 
1.6

Earnings before income taxes
19.5

 
12.2

 
39.4

 
89.2

Income tax (benefit) expense
(12.5
)
 
3.1

 
(7.7
)
 
24.1

Net earnings
$
32.0

 
$
9.1

 
$
47.1

 
$
65.1

 
 
 
 
 
 
 
 
Basic net earnings per common share
$
0.94

 
$
0.27

 
$
1.38

 
$
1.92

Diluted net earnings per common share
$
0.94

 
$
0.27

 
$
1.38

 
$
1.92

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
33,825

 
33,786

 
33,817

 
33,772

Diluted
33,825

 
33,789

 
33,817

 
33,775

 
 
 
 
 
 
 
 
Cash dividends per share
$
0.72

 
$
0.695

 
$
2.16

 
$
2.085


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


3


COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
32.0

 
$
9.1

 
$
47.1

 
$
65.1

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain from change in pension obligations, net of tax of $(0.0) in both the three and nine months ended September 30, 2017, and 2016.

 

 
0.2

 
0.2

Unrealized (loss) gain on cash flow hedges, net of tax of $0.4 and $0.9 in the three and nine months ended September 30, 2017, respectively, and $0.0 and $(0.8) in the three and nine months ended September 30, 2016, respectively.
(0.7
)
 
(0.1
)
 
(1.6
)
 
1.3

Cumulative translation adjustment
46.1

 
(3.9
)
 
54.3

 
27.2

Comprehensive income
$
77.4

 
$
5.1

 
$
100.0

 
$
93.8


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


4


COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2017
(Unaudited, in millions)
 
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance, December 31, 2016
$
0.4

 
$
97.1

 
$
(3.0
)
 
$
727.5

 
$
(104.9
)
 
$
717.1

Comprehensive income
 
 
 
 
 
 
47.1

 
52.9

 
100.0

Dividends on common stock
 
 
0.1

 
 
 
(73.3
)
 
 
 
(73.2
)
Shares issued for stock units
 
 
(0.1
)
 
0.1

 
 
 
 
 

Stock options exercised
 
 
0.3

 


 
 
 
 
 
0.3

Stock-based compensation
 
 
3.8

 
 
 
 
 
 
 
3.8

Balance, September 30, 2017
$
0.4

 
$
101.2

 
$
(2.9
)
 
$
701.3

 
$
(52.0
)
 
$
748.0


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


5


COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
  
Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net earnings
$
47.1

 
$
65.1

Adjustments to reconcile net earnings to net cash flows provided by operating activities:
 
 
 
Depreciation, depletion and amortization
89.1

 
62.7

Finance fee amortization
1.7

 
1.0

Early extinguishment of debt

 
0.1

Stock-based compensation
3.8

 
3.8

Deferred income taxes
(11.9
)
 
(4.5
)
Net (earnings) loss in equity method investee
(0.6
)
 
1.7

Gain on settlement of acquisition-related contingent consideration
(1.9
)
 

Other, net
(1.7
)
 
0.5

Changes in operating assets and liabilities:
 
 
 
Receivables
116.6

 
33.6

Inventories
(49.0
)
 
3.1

Other assets
(20.2
)
 
(12.8
)
Accounts payable and accrued expenses
(46.1
)
 
(46.6
)
Other liabilities
(0.2
)
 
(0.6
)
Net cash provided by operating activities
126.7

 
107.1

Cash flows from investing activities:
 
 
 
Capital expenditures
(81.0
)
 
(148.7
)
Investment in equity method investee

 
(4.7
)
Other, net
(3.8
)
 
(2.9
)
Net cash used in investing activities
(84.8
)
 
(156.3
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility borrowings
183.5

 
264.9

Principal payments on revolving credit facility borrowings
(137.9
)
 
(147.4
)
Proceeds from issuance of long-term debt
52.9

 
850.0

Principal payments on long-term debt
(95.6
)
 
(474.5
)
Acquisition-related contingent consideration payment
(12.8
)
 

Dividends paid
(73.3
)
 
(70.5
)
Fees paid to refinance debt
(0.1
)
 
(1.5
)
Deferred financing costs
(0.7
)
 
(5.8
)
Proceeds received from stock option exercises
0.3

 
0.7

Excess tax benefit (deficiency) from equity compensation awards

 
(0.2
)
Other, net
1.0

 

Net cash (used in) provided by financing activities
(82.7
)
 
415.7

Effect of exchange rate changes on cash and cash equivalents
2.5

 
7.3

Net change in cash and cash equivalents
(38.3
)
 
373.8

Cash and cash equivalents, beginning of the year
77.4

 
58.4

Cash and cash equivalents, end of period
$
39.1

 
$
432.2

Supplemental cash flow information:
 

 
 

Interest paid, net of amounts capitalized
$
33.5

 
$
18.6

Income taxes paid, net of refunds
$
22.9

 
$
54.0


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

6


COMPASS MINERALS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Accounting Policies and Basis of Presentation:
 
Compass Minerals International, Inc. (“CMI”), through its subsidiaries (collectively, the “Company”), is a leading producer of essential minerals that solve nature’s challenges, including salt for winter roadway safety and other consumer, industrial and agricultural uses, specialty plant nutrition minerals that improve the quality and yield of crops, and specialty chemicals for water treatment and other industrial processes. The Company’s principal products are salt, consisting of sodium chloride and magnesium chloride, sulfate of potash (“SOP”), various micronutrient products, and specialty chemicals for water treatment and other industrial processes. The Company’s production sites are located in the United States (“U.S.”), Canada, Brazil and the United Kingdom (the “U.K.”). Except where otherwise noted, references to North America include only the continental U.S. and Canada, and references to the U.K. include only England, Scotland and Wales. References to “Compass Minerals,” “our,” “us” and “we” refer to CMI and its consolidated subsidiaries. The Company also provides records management services to businesses located in the U.K. In October 2016, the Company acquired Produquímica Indústria e Comércio S.A. (“Produquímica”), which operates two primary businesses in Brazil – agricultural productivity and chemical solutions.
 
CMI is a holding company with no significant operations other than those of its wholly-owned subsidiaries. The consolidated financial statements include the accounts of CMI and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company uses the equity method of accounting for equity securities when it has significant influence or when it has more than a minor ownership interest or more than minor influence over an investee’s operations but does not have a controlling financial interest. Initial investments are recorded at cost (including certain transaction costs) and are adjusted by the Company’s share of the investees’ undistributed earnings and losses.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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 U.S. GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2016, as filed with the Securities and Exchange Commission in its Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included.
 
The Company experiences a substantial amount of seasonality in its sales with respect to its deicing salt products. As a result, 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 and magnesium chloride products vary based on the severity of the winter conditions in areas where the products are used. Following industry practice in North America and the U.K., the Company seeks to stockpile sufficient quantities of deicing salt throughout the second, third and fourth quarters to meet the estimated requirements for the upcoming winter season. Production of deicing salt can also vary based on the severity or mildness of the preceding winter season. Due to the seasonal nature of the deicing product lines, operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

The Company’s plant nutrition business is also seasonal. For example, the strongest demand for the Company’s plant nutrition products in Brazil typically occurs during the spring planting season. As a result, the Company and its customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales season. The seasonality of this demand results in the Company’s sales volumes and net sales for the Plant Nutrition South America segment usually being the highest during the third and fourth quarters of each year (as the spring planting season begins in September in Brazil).
 
Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted

7


for annual and interim goodwill impairment testing dates after January 1, 2017. The Company plans to early adopt the guidance for its 2017 impairment testing.

In August 2016, the FASB issued guidance to clarify how certain cash receipts and payments should be presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In June 2016, the FASB issued guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, requires a modified retrospective transition method and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this guidance in the first quarter of 2017 on a prospective basis, and prior periods have not been adjusted. The Company elected the option available under the new guidance to continue to estimate the effect of forfeitures in the calculation of share-based payment expense. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued guidance which requires lessees to recognize on their balance sheet a right-of-use asset which represents a lessee’s right to use the underlying asset. Under this guidance, an entity must also recognize a lease liability which represents a lessee’s obligation to make lease payments for the right to use the asset. In addition, the standard requires expanded qualitative and quantitative disclosures. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective transition method. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In July 2015, the FASB issued guidance that requires entities to measure inventory within the scope of the standard at the lower of cost or net realizable value. “Net realizable value” is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance in the first quarter of 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. The new revenue recognition model supersedes existing revenue recognition guidance and requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration an entity expects to receive in exchange for those goods or services. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, and early adoption is permitted. The guidance permits the use of either a full or modified retrospective transition method. The Company plans to use the modified retrospective transition method. While the Company has not identified any material differences in the amount and timing of revenue recognition for the revenue streams management has reviewed to date, the Company is still evaluating the impact of this guidance and has not concluded on the overall impact of adopting this guidance. Adoption of this guidance will significantly impact the Company’s financial statement disclosures regarding revenue.

2.
Acquisition:

Background and Financing

On December 16, 2015, Compass Minerals do Brasil Ltda., a wholly owned subsidiary of the Company (“Compass Minerals Brazil”), entered into (i) a subscription agreement and other covenants (as amended, the “Subscription Agreement”) with certain shareholders of Produquímica and Produquímica and (ii) a share purchase and sale agreement and other covenants (the “Purchase Agreement”) with certain shareholders of Produquímica and Produquímica. Pursuant to the Subscription Agreement and the Purchase Agreement, Compass Minerals Brazil acquired 35% of the issued and outstanding capital stock of Produquímica on December 23, 2015, for R$452.4 million Brazilian Reais (“R” or “BRL”), or $114.1 million U.S. dollars at closing, and paid additional consideration of $4.7 million in the second quarter of 2016 related to Produquímica’s 2015 financial performance.

The Subscription Agreement also contained a put right (the “Put”), allowing the Produquímica shareholders to sell the remainder of their interests in Produquímica to Compass Minerals Brazil. On August 12, 2016, Produquímica shareholders notified Compass

8


Minerals Brazil of their exercise of the Put. On October 3, 2016, the Company acquired the remaining 65% of the issued and outstanding capital stock of Produquímica.

The Company entered into a new $100.0 million term loan tranche in the fourth quarter of 2015 to fund the acquisition of the 35% of Produquímica’s equity. In September 2016, the Company entered into a new $450.0 million term loan tranche to fund the acquisition of the remaining 65% of Produquímica’s equity. See Note 7 for more information regarding these financings.

Based in São Paulo, Brazil, Produquímica operates two primary businesses – agricultural productivity and chemical solutions. The agricultural productivity division manufactures and distributes a broad offering of specialty plant nutrition solution-based products. These include micronutrients, controlled release fertilizers and other specialty supplements that are used in direct soil and foliar applications, as well as through irrigation systems and for seed treatment. Many of these products are developed through Produquímica’s research and development capabilities. Produquímica also manufactures and markets specialty chemicals used primarily in the industrial chemical and water treatment industries in Brazil. The acquisition broadens the Company’s geographic scope of operations and expands its specialty plant nutrition portfolio while reducing the Company’s dependence on winter weather conditions.

Purchase Price Allocation

The Company accounted for the Produquímica acquisition as a business combination in accordance with U.S. GAAP. The accounting guidance for business combinations requires estimates and judgments regarding expectations for future cash flows of the acquired entity as well as other valuation assumptions and an allocation to the net assets acquired. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s best estimates. As of September 30, 2017, the purchase price allocation was finalized.

A summary of the acquisition-date fair value of the consideration transferred is presented in the table below:
Fair Value of Consideration Transferred (in millions)
October 3, 2016

Cash paid at closing
$
317.1

Additional cash due at closing
20.6

Fair value of contingent consideration
31.4

Fair value of 35% equity investment
178.7

Total
$
547.8


The calculation of the purchase price at closing was based in part on an estimate of full-year 2016 operating results of Produquímica. As of the acquisition closing date, some of the periods included in the 2016 operating results of Produquímica had not ended and actual results were not known. The portion of the purchase price which was based on management’s estimate of results relating to periods which occurred after the closing date was classified as contingent consideration. There were no thresholds or tiers in the payment structure, and management used an income approach to estimate the acquisition date fair value of the contingent consideration. As of the closing date, the Company had estimated the fair value of contingent consideration to be $31.4 million.

During the first quarter of 2017, the purchase price was adjusted based on the final full-year 2016 operating results of Produquímica, and a final payment was made to the Produquímica shareholders. The difference between the estimated closing date fair value of the contingent consideration and the final amount paid resulted in the recognition of a gain of $1.9 million in the first quarter of 2017, which was included as a component of operating earnings in the Company’s Plant Nutrition South America segment.

Prior to the acquisition closing date, the Company accounted for its 35% interest in Produquímica as an equity method investment. The acquisition-date fair value of the previously held equity investment was $178.7 million and is included in the consideration transferred. To measure the acquisition closing date fair value of the equity interest, the Company utilized a market-based approach which relied on Level 3 inputs (see Note 12 for a discussion of the levels in the fair value hierarchy). The Company recognized a $59.3 million non-cash gain during the fourth quarter of 2016 as a result of remeasuring its prior equity interest in Produquímica held before the business combination.

Under the acquisition method of accounting, the total purchase price is allocated on a preliminary basis to Produquímica’s assets and liabilities based upon their estimated fair value as of the closing date of the acquisition. During the first nine months of 2017, the Company adjusted the preliminary purchase price allocation based on additional information obtained regarding facts and circumstances which existed as of the acquisition date. These adjustments resulted in a decrease of $3.6 million to goodwill, a decrease of $4.4 million to other noncurrent liabilities and an increase of $0.8 million to net deferred income taxes. Additionally,

9


during the third quarter of 2017 in connection with finalizing the accounting for the acquisition, the Company recorded an adjustment increasing depreciation expense by $1.9 million. This adjustment resulted from finalizing the Company’s estimate of the useful lives of acquired tangible assets.

Based upon the final purchase price and the updated valuation, the final purchase price allocation is presented in the table below:
Recognized amounts of identifiable assets acquired and liabilities assumed (in millions):
Purchase Price Allocation
Cash and cash equivalents
$
73.8

Accounts receivable
89.4

Inventory
77.1

Other current assets
13.7

Property, plant and equipment
189.4

Identified intangible assets
81.2

Investment in equity method investee
24.5

Other noncurrent assets
6.9

Accounts payable
(27.1
)
Accrued expenses
(40.3
)
Current portion of long-term debt
(129.6
)
Other current liabilities
(14.0
)
Long-term debt, net of current portion
(62.0
)
Deferred income taxes, net
(66.0
)
Other noncurrent liabilities
(21.9
)
Total identifiable net assets
195.1

Goodwill
352.7

Total fair value of business combination
$
547.8


The total purchase price in excess of the net identifiable assets has been recognized as goodwill in the amount of $352.7 million and has been assigned to the Company’s new Plant Nutrition South America segment. The goodwill recognized is attributable primarily to expected synergies with the Company’s existing plant nutrition business and the assembled workforce of Produquímica. The future deductibility of the goodwill for income tax purposes is uncertain at this time.

The Company determined that the book value of the accounts receivables included in the purchase price allocation approximates their fair value due to their short-term nature. The gross contractual amounts of the receivables exceeded their fair value by the amount of an allowance for doubtful accounts of approximately $8 million.

In connection with the acquisition, the Company acquired identifiable intangible assets which consisted principally of trade names, developed technologies and customer relationships. The fair values were determined using Level 3 inputs (see Note 12 for a discussion of the levels in the fair value hierarchy). The fair values of the identifiable intangible assets were estimated using an income approach method.

The estimated fair values and weighted average amortization period of the identifiable intangible assets are presented in the table below:
 
Estimated Fair Value
(in millions)
Weighted-Average Amortization Period
(in years)
Trade names
$
36.9

11.0
Developed technology
37.5

5.3
Customer relationships
6.8

13.5
Total identifiable intangible assets
$
81.2

8.6


10


Impact on Operating Results

During the three and nine months ended September 30, 2017, Produquímica contributed revenues of $123.2 million and $250.6 million, respectively, and net earnings of $29.5 million and $20.7 million, respectively, to the Company.

The following table presents combined unaudited pro forma results for the three and nine months ended September 30, 2016. The pro forma financial information combines the historical results of operations for Produquímica and Compass Minerals as though the acquisition occurred on January 1, 2015. The pro forma information does not purport to represent the actual results of operations that Produquímica and Compass Minerals would have achieved had the companies been combined during the periods presented nor is the information intended to project the future results of operations. Certain adjustments to Produquímica’s historical results have been made to conform to U.S. GAAP and amounts have been translated to U.S. dollars.
Unaudited Combined Pro Forma Results of Operations (in millions)
Three Months Ended
September 30, 2016
Nine Months Ended
September 30, 2016
Revenues
$
289.7

$
938.1

Net earnings
18.5

68.7


Significant adjustments to the pro forma information above include:
Adjustments to exclude non-recurring direct incremental costs of the acquisition;
Adjustments to expenses relating to the financing transactions described above;
Adjustments to reflect incremental amortization and depreciation from the preliminary allocation of the purchase price;
Adjustments to reflect certain income tax effects of the acquisition; and
Adjustments to remove net earnings related to the previously held 35% equity interest in Produquímica.

3.
Inventories:
 
Inventories consist of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Finished goods
$
260.3

 
$
206.1

Raw materials and supplies
75.7

 
74.5

Total inventories
$
336.0

 
$
280.6


4.
Property, Plant and Equipment, Net:
 
Property, plant and equipment, net, consists of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Land, buildings and structures, and leasehold improvements
$
507.6

 
$
480.1

Machinery and equipment
914.9

 
848.2

Office furniture and equipment
51.5

 
28.3

Mineral interests
173.1

 
168.5

Construction in progress
267.2

 
243.6

 
1,914.3

 
1,768.7

Less accumulated depreciation and depletion
(774.3
)
 
(676.4
)
Property, plant and equipment, net
$
1,140.0

 
$
1,092.3


5.
Goodwill and Intangible Assets, Net:
 
Aggregate amortization expense for the Company’s finite-lived intangible assets was $4.1 million and $1.1 million in the third quarters of 2017 and 2016, respectively, and $12.2 million and $3.2 million in the first nine months of 2017 and 2016, respectively. The increases in amortization expense were primarily due to amortization of the additional finite-lived intangible assets which were recognized as a result of the purchase price allocation for the Produquímica acquisition (see Note 2 for more information).
 

11


The Company had goodwill of $421.6 million and $412.2 million as of September 30, 2017, and December 31, 2016, respectively, in its consolidated balance sheets. Of these amounts, $57.5 million and $53.6 million of the amounts recorded for goodwill as of September 30, 2017, and December 31, 2016, respectively, were recorded in the Company’s Plant Nutrition North America segment, and $358.1 million and $352.8 million of the amounts recorded for goodwill as of September 30, 2017 and December 31, 2016, respectively, were recorded in the Company’s Plant Nutrition South America segment. The remaining amounts in both periods were immaterial and recorded in the Company’s Salt segment and corporate and other. The change in goodwill between December 31, 2016, and September 30, 2017, was primarily due to the impact from translating foreign-denominated amounts to U.S. dollars and purchase price adjustments made related to the Produquímica acquisition (see Note 2 for more information).

6.
Income Taxes:
 
The Company’s effective income tax rate 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 taxes, domestic manufacturing deductions, interest expense recognition differences for book and tax purposes and a partial release of valuation allowance in connection with the acquisition of Produquímica. The Company’s effective rate is impacted by permanent tax deductions which have a less favorable impact as pretax income increases.

During the nine months ended September 30, 2017, the Company determined it is more likely than not that a portion of its Brazilian deferred tax assets acquired in connection with the acquisition of Produquímica will be used to reduce taxable income. Based on current estimates of taxable income, the Company projects to release approximately $25 million of valuation allowances during the year ending December 31, 2017. For the nine months ended September 30, 2017, the Company included approximately $12 million of this valuation allowance release in the calculation of the estimated annual effective tax rate for the current fiscal year, and approximately $13 million as a discrete income tax benefit.
 
The Company had $52.0 million and $53.6 million as of September 30, 2017, and December 31, 2016, respectively, of gross foreign federal net operating loss (“NOL”) carryforwards that have no expiration date. In addition, the Company had $10.8 million and $7.5 million as of September 30, 2017, and December 31, 2016, respectively, of gross foreign federal NOL carryforwards which expire beginning in 2033 and $1.3 million and $0.9 million as of September 30, 2017, and December 31, 2016, respectively, of tax-effected state NOL carryforwards which expire beginning in 2033.
 
Canadian provincial tax authorities have challenged tax positions claimed by one of the Company’s Canadian subsidiaries and have issued tax reassessments for years 2002-2012. The reassessments are a result of ongoing audits and total $104.4 million, including interest through September 30, 2017. The Company disputes these reassessments and will continue to work with the appropriate authorities in Canada to resolve the dispute. Although the Company believes it has recorded an adequate reserve for this matter, there is a reasonable possibility that the ultimate resolution of this dispute, and any related disputes for other open tax years, may be materially higher or lower than the amounts the Company has reserved for such disputes. In connection with this dispute, local regulations require the Company to post security with the tax authority until the dispute is resolved. The Company has posted collateral in the form of a $63.6 million performance bond, has paid $35.2 million (most of which is recorded in other assets in its consolidated balance sheets) and the remaining balance of $5.6 million is expected to be addressed later this year, which is necessary to proceed with future appeals or litigation.
 
In addition, Canadian federal and provincial taxing authorities had reassessed the Company for years 2004-2006, which had been previously settled by agreement among the Company, the Canada Revenue Agency and the Internal Revenue Service of the United States. The Company sought to enforce the agreement, which provided the basis upon which the returns were previously filed and settled. In July 2016, a trial commenced in the Tax Court of Canada with respect to the Canadian federal tax issues for these matters, and in March 2017, the Tax Court of Canada ruled in favor of the Company. The decision of the Tax Court of Canada was not appealed by the Canada Revenue Agency. As a result, the Company believes that reassessed Canadian tax, penalties and interest for the Company for years 2004-2006 of approximately $94.7 million are effectively resolved. The Company is in the process of having certain posted collateral returned in connection with the resolution of the dispute.
 
The Company received Canadian income tax reassessments for years 2007-2008. The total amount of the reassessments, including penalties and interest through September 30, 2017, related to this matter is $37.2 million. The Company does not agree with these adjustments and is receiving assistance from the tax jurisdictions for relief from the impact of double taxation as available in the tax treaty between the U.S. and Canada. The Company has filed protective Notices of Objection and has posted collateral in the form of a $10.2 million performance bond and a $8.0 million bank letter guarantee, which is necessary to proceed with future appeals or litigation. Although the outcome of examinations by taxing authorities is uncertain, the Company believes it has adequately reserved for this matter.
 

12


The Company expects that it will be required by local regulations to provide security for additional interest on the above unresolved disputed amounts and for any future reassessments issued by these Canadian tax authorities in the form of cash, letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authorities until the disputes are resolved.

The Company expects that the ultimate outcome of these matters will not have a material impact on its results of operations or financial condition. However, the Company can provide no assurance as to the ultimate outcome of these matters, and the impact could be material if they are not resolved in the Company’s favor. As of September 30, 2017, the amount reserved related to these reassessments was immaterial to the Company’s consolidated financial statements.
 
Additionally, the Company has other uncertain tax positions as well as assessments and disputed positions with taxing authorities in its various jurisdictions, which are consistent with those matters disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

7.
Long-term Debt:
 
Long-term debt consists of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Term Loans due July 2021
$
839.5

 
$
845.9

Revolving Credit Facility due July 2021
151.2

 
105.4

4.875% Senior Notes due July 2024
250.0

 
250.0

Banco Bradesco Loan due February 2017

 
13.2

Banco Votorantim Loan due April 2017

 
12.4

Banco Bradesco Loan due July 2017

 
4.8

Scotiabank Loan due August 2017

 
20.2

Scotiabank Loan due September 2017

 
15.1

Banco Votorantim Loan due September 2017

 
0.8

Banco Bradesco Loan due October 2017

 
16.8

Rabobank Loan due November 2017
22.4

 
22.6

Banco Itaú Loans due May 2019 to April 2020
2.3

 
3.1

Financiadora de Estudos e Projetos Loan due November 2023
14.1

 
7.4

Banco do Brasil Loans due October 2017
0.4

 

Banco do Brasil Loan due November 2017
0.5

 

Banco do Brasil Loan due February 2018
0.2

 

Banco Santander Loan due September 2019
20.5

 

Banco Itaú Loans due March 2019(a)
15.0

 
15.1

Banco Scotiabank Loan due September 2019
20.6

 


1,336.7

 
1,332.8

Less unamortized debt issuance costs
(7.1
)
 
(7.8
)
Total debt
1,329.6

 
1,325.0

Less current portion
(55.4
)
 
(130.2
)
Long-term debt
$
1,274.2

 
$
1,194.8


(a)
In September 2017, the maturity date of this loan was extended from September 2017 to March 2019.

In September 2017, the Company entered into an amendment to its credit agreement, which increased the maximum allowed leverage ratio under the credit agreement through September 2018. In connection with this amendment, the Company paid fees totaling $0.6 million ($0.1 million was recorded as an expense and $0.5 million was capitalized as deferred financing costs).

In September 2017, the Company refinanced $32.1 million of its Brazilian loans using proceeds from $41.1 million of new loans. The new loans bear interest rates ranging from 116.25% and 118% of CDI, an overnight inter-bank lending rate in Brazil, and mature in September 2019. No material fees were paid in connection with these transactions. A portion of the loans are denominated in U.S. dollars and a portion of the loans are denominated in Brazilian Reais. In September 2017, the Company also entered into

13


foreign currency swap agreements whereby the Company agreed to swap interest and principal payments on the loans denominated in U.S. dollars for principal and interest payments denominated in Brazilian Reais, Produquímica’s functional currency (see Note 11 for further discussion).

In September 2016, the Company entered into a new $450 million term loan tranche under its existing credit agreement to fund the acquisition of the remaining 65% of Produquímica’s equity in October 2016 (see Note 2 for more information). This additional tranche will mature July 1, 2021, and bears interest at LIBOR plus 2.0%. In connection with this transaction, the Company incurred $2.2 million of financing fees in 2016 ($0.7 million was recorded as an expense and $1.5 million was capitalized as deferred financing costs).

In April 2016, the Company entered into a new credit agreement to refinance its existing $471 million term loans and $125 million revolving credit facility with a new $400 million senior secured term loan and a $300 million senior secured revolving credit facility, which both mature July 1, 2021. The new term loan and revolving credit facility bear interest at LIBOR plus 1.75% based on the Company’s current leverage ratio and credit rating. In connection with the refinancing, the Company incurred $5.8 million of refinancing fees ($1.4 million was recorded as an expense and $4.4 million was capitalized as deferred financing costs) and wrote-off $0.1 million of existing deferred financing costs related to the previous term loans and revolving credit facility.

As of September 30, 2017, the term loans and revolving credit facility under the credit agreement were secured by substantially all existing and future U.S. assets, the Goderich mine in Ontario, Canada, and capital stock of certain subsidiaries.

8.
Commitments and Contingencies:

The Company was involved in proceedings alleging unfair labor practices at its Cote Blanche, Louisiana, mine. This matter arose out of a labor dispute between the Company and the United Steelworkers Union over the terms of a contract for certain employees at the mine. These employees initiated a strike that began on April 7, 2010, and ended on June 15, 2010. In September 2012, the U.S. National Labor Relations Board (the “NLRB”) issued a decision finding that the Company had committed unfair labor practices in connection with the labor dispute. Under the ruling, the Company is responsible for back pay to affected employees as a result of changes made in union work rules and past practices beginning April 1, 2010. In the fourth quarter of 2013, this ruling was upheld by an appeals court. As of December 31, 2016, the Company had recorded a reserve of $7.4 million in its consolidated financial statements related to expected payments, including interest, required to resolve the dispute.

In March 2017, the Company reached a settlement with the United Steelworkers Union and the NLRB with respect to this matter. Under the terms of the agreement, the Company paid $7.7 million to the affected employees in the second quarter of 2017. As a result of the settlement, the Company recognized an immaterial loss in its consolidated financial statements in 2017.

The Wisconsin Department of Agriculture, Trade and Consumer Protection (“DATCP”) has information indicating that agricultural chemicals are present within the subsurface area of the Company’s Kenosha, Wisconsin, plant. The agricultural chemicals were used by previous owners and operators of the site. None of the identified chemicals have been used in association with the Company’s operations since it acquired the property in 2002. DATCP directed the Company to conduct further investigations into the possible presence of agricultural chemicals in soil and ground water at the Kenosha plant. The Company has completed initial on-property investigations and has provided the findings to DATCP. A second series of sampling and analysis is underway. All investigations and mitigation activities to date, and any potential future remediation work, are being conducted under the Wisconsin Agricultural Chemical Cleanup Program (the “ACCP”), which would provide for reimbursement of some of the costs. The Company may seek participation by, or cost reimbursement from, other parties responsible for the presence of any agricultural chemicals found in soil and ground water at this site if the Company does not receive an acknowledgment of no further action and is required to conduct further investigation or remedial work that may not be eligible for reimbursement under the ACCP.

The Company conducts business operations in several countries and is subject to various federal and local labor, social security, environmental and tax laws. While the Company believes it complies with such laws, they are complex and subject to interpretation. In addition to the tax assessments discussed in Note 6, the Company’s Brazilian subsidiaries are party to administrative tax proceedings and claims which totaled $18.7 million as of September 30, 2017, and relate primarily to value added tax, state tax (ICMS) and social security tax (PIS and COFINS) assessments. The Company has assessed the likelihood of a loss at less than probable and therefore, has not established a reserve for these matters. The Company also has assumed liabilities for labor-related matters in connection with the acquisition of Produquímica, which are primarily related to compensation, labor benefits and consequential tax claims and totaled $11.5 million as of September 30, 2017. The Company believes the maximum exposure for these other labor matters totaled approximately $46 million as of September 30, 2017.

The Company is also involved in legal and administrative proceedings and claims of various types from the ordinary course of the Company’s business.

14


Management cannot predict the outcome of legal claims and proceedings with certainty. Nevertheless, management believes that the outcome of legal proceeding and claims, which are pending or known to be threatened, even if determined adversely, will not, individually or in the aggregate, have a material adverse effect on the Company’s results of operations, cash flows or financial position.

9.
Operating Segments:
 
The Company’s reportable segments are strategic business units that offer different products and services, and each business requires different technology and marketing strategies. The Company has three reportable segments: Salt, Plant Nutrition North America and Plant Nutrition South America. The Salt segment produces and markets salt and magnesium chloride for use in road deicing and dust control, food processing, water softeners and agricultural and industrial applications. SOP crop nutrients, industrial-grade SOP, micronutrients and magnesium chloride for agricultural purposes are produced and marketed through the Plant Nutrition North America segment. The Plant Nutrition South America segment represents the results of Produquímica, which was acquired in October 2016. This segment operates two primary businesses in Brazil – agricultural productivity and chemical solutions. See Note 2 for a further discussion of the acquisition. The agricultural productivity division manufactures and distributes a broad offering of specialty plant nutrition solution-based products that are used in direct soil and foliar applications, as well as through irrigation systems and for seed treatment. Produquímica also manufactures and markets specialty chemicals for the industrial chemical industry.

Segment information is as follows (in millions):
Three Months Ended September 30, 2017
 
Salt
 
Plant
Nutrition North America
 
Plant
Nutrition South America
 
Corporate
& Other(a)
 
Total
Sales to external customers
 
$
124.7

 
$
40.3

 
$
123.2

 
$
2.5

 
$
290.7

Intersegment sales
 

 
1.5

 

 
(1.5
)
 

Shipping and handling cost
 
34.9

 
4.8

 
5.8

 

 
45.5

Operating earnings (loss) (b)
 
22.5

 
2.3

 
21.4

 
(14.8
)
 
31.4

Depreciation, depletion and amortization
 
13.5

 
9.2

 
7.5

 
2.5

 
32.7

Total assets (as of end of period)
 
948.7

 
593.1

 
844.2

 
60.8

 
2,446.8


Three Months Ended September 30, 2016
 
Salt
 
Plant
Nutrition North America(c)
 
Plant
Nutrition South America
 
Corporate
& Other(a)
 
Total
Sales to external customers
 
$
135.7

 
$
41.5

 
$

 
$
2.4

 
$
179.6

Intersegment sales
 

 
0.6

 

 
(0.6
)
 

Shipping and handling cost
 
33.3

 
5.1

 

 

 
38.4

Operating earnings (loss) 
 
30.0

 
2.5

 

 
(13.0
)
 
19.5

Depreciation, depletion and amortization
 
12.2

 
8.3

 

 
1.3

 
21.8

Total assets (as of end of period)
 
1,249.3

 
794.1

 

 
59.0

 
2,102.4


Nine Months Ended September 30, 2017
 
Salt
 
Plant
Nutrition North America
 
Plant
Nutrition South America
 
Corporate
& Other(a)
 
Total
Sales to external customers
 
$
508.5

 
$
140.0

 
$
250.6

 
$
7.4

 
$
906.5

Intersegment sales
 

 
4.4

 

 
(4.4
)
 

Shipping and handling cost
 
147.6

 
18.4

 
13.8

 

 
179.8

Operating earnings (loss) (b)
 
78.6

 
17.5

 
24.0

 
(41.3
)
 
78.8

Depreciation, depletion and amortization
 
39.1

 
26.7

 
18.2

 
5.1

 
89.1



15


Nine Months Ended September 30, 2016
 
Salt
 
Plant
Nutrition North America
 
Plant
Nutrition South America
 
Corporate
& Other(a)
 
Total
Sales to external customers
 
$
546.9

 
$
140.4

 
$

 
$
7.5

 
$
694.8

Intersegment sales
 

 
2.7

 

 
(2.7
)
 

Shipping and handling cost
 
147.7

 
17.2

 

 

 
164.9

Operating earnings (loss) 
 
136.0

 
12.5

 

 
(39.2
)
 
109.3

Depreciation, depletion and amortization
 
34.2

 
24.6

 

 
3.9

 
62.7


(a)
Corporate and other includes corporate entities, records management operations and other incidental operations and eliminations. Operating earnings (loss) for corporate and other includes indirect corporate overhead, including costs for general corporate governance and oversight, as well as costs for the human resources, information technology, legal and finance functions.
(b)
Operating results for the three months ended September 30, 2017 include $4.3 million of restructuring charges.
(c)
In 2016, total assets for Plant Nutrition North America include the equity investment in Produquímica.

10.
Stockholders’ Equity and Equity Instruments:
 
In May 2015, the Company’s stockholders approved the 2015 Incentive Award Plan (the “2015 Plan”), which authorizes the issuance of 3,000,000 shares of Company common stock. Since the date the 2015 Plan was approved, the Company ceased issuing equity awards under the 2005 Incentive Award Plan (the “2005 Plan”). The 2005 Plan and 2015 Plan allow for grants of equity awards to executive officers, other employees and directors, including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options and deferred stock units. The grants occur following approval by the compensation committee of the Company’s board of directors, with the amount and terms communicated to employees shortly thereafter. 

Options

Substantially all stock options granted under the 2005 Plan and 2015 Plan vest ratably, in tranches, over a four-year service period. Unexercised options expire after seven years. Options do not have dividend or voting rights. Upon vesting, each option can be exercised to purchase one share of the Company’s common stock. The exercise price of options is equal to the closing stock price on the grant date.

To estimate the fair value of options on the grant date, the Company uses the Black-Scholes option valuation model. Award recipients are grouped according to expected exercise behavior. Unless better information is available to estimate the expected term of the options, the estimate is based on historical exercise experience. The risk-free rate, using U.S. Treasury yield curves in effect at the time of grant, is selected based on the expected term of each group. The Company’s historical stock price is used to estimate expected volatility. The inputs used to calculate fair value for options granted in 2017 are included in the table below:
Fair value of options granted
$9.54
Exercise price
$68.00
Expected term (years)
4.5
Expected volatility
23.2%
Dividend yield
3.5%
Risk-free rate of return
1.8%

RSUs

Substantially all of the RSUs granted under the 2005 Plan and 2015 Plan vest after three years of service, entitling the holders to one share of common stock for each vested RSU. Unvested RSUs do not have voting rights but are entitled to receive non-forfeitable dividends (generally after a performance hurdle has been satisfied for the year of the grant) or other distributions equal to those declared on the Company’s common stock for RSUs that are earned as a result of the satisfaction of the performance hurdle. The closing stock price on the grant date is used to determine the fair value of RSUs.

PSUs

Substantially all of the PSUs granted under the 2005 Plan and 2015 Plan are either total shareholder return PSUs (“TSR PSUs”) or return on invested capital PSUs (“ROIC PSUs”). The actual number of shares of the Company’s common stock that may be earned with respect to TSR PSUs is calculated by comparing the Company’s total shareholder return to the total shareholder return

16


for each company comprising the Russell 3000 Index over the three-year performance period and may range from 0% to 150% of the target number of shares based upon the attainment of these performance conditions. The actual number of shares of common stock that may be earned with respect to ROIC PSUs is calculated based on the average of the Company’s annual return on invested capital for each year in the three-year performance period and may range from 0% to 200% of the target number of shares based upon the attainment of these performance conditions.

PSUs represent a target number of shares of the Company’s common stock that may be earned before adjustment based upon the attainment of certain performance conditions. Holders of PSUs do not have voting rights but are entitled to receive non-forfeitable dividends or other distributions equal to those declared on the Company’s common stock for PSUs that are earned, which are paid when the shares underlying the PSUs are paid.

To estimate the fair value of the TSR PSUs on the grant date, the Company uses a Monte-Carlo simulation model, which simulates future stock prices of the Company as well as the companies comprising the Russell 3000 Index. This model uses historical stock prices to estimate expected volatility and the Company’s correlation to the Russell 3000 Index. The risk-free rate was determined using the same methodology as the option valuations as discussed above. The Company’s closing stock price on the grant date was used to estimate the fair value of the ROIC PSUs. The Company will adjust the expense of the ROIC PSUs based upon its estimate of the number of shares that will ultimately vest at each interim date during the vesting period.

During the nine months ended September 30, 2017, the Company reissued the following number of shares from treasury stock: 3,366 shares related to the exercise of stock options, 15,806 shares related to the release of RSUs which vested, 12,946 shares related to the release of PSUs which vested and 5,424 shares related to stock payments. The Company recognized a tax deficiency of $0.6 million from its equity compensation awards as an increase to income tax expense during the first nine months of 2017. During the first nine months of both 2017 and 2016, the Company recorded $3.8 million of compensation expense pursuant to its stock-based compensation plans. No amounts have been capitalized. The following table summarizes stock-based compensation activity during the nine months ended September 30, 2017:
 
 
Stock Options
 
RSUs
 
PSUs(a)
 
 
Number
 
Weighted-average
exercise price
 
Number
 
Weighted-average
fair value
 
Number
 
Weighted-average
fair value
Outstanding at December 31, 2016
 
442,755

 
$
80.07

 
63,780

 
$
80.25

 
89,011

 
$
89.43

Granted
 
227,351

 
68.00

 
34,635

 
68.00

 
58,878

 
73.08

Exercised(b)
 
(3,366
)
 
76.03

 

 

 

 

Released from restriction(b)
 

 

 
(15,806
)
 
84.77

 
(12,946
)
 
105.77

Cancelled/expired
 
(80,606
)
 
76.05

 
(9,906
)
 
71.54

 
(19,416
)
 
88.18

Outstanding at September 30, 2017
 
586,134

 
$
75.97

 
72,703

 
$
74.62

 
115,527

 
$
79.47


(a)
Until they vest, PSUs are included in the table at the target level at their grant date and at that level represent one share of common stock per PSU. The final performance period for the 2014 PSU grant ended in 2016. The Company cancelled 6,900 PSUs in 2017 related to the 2014 PSU grant.
(b)
Common stock issued for exercised options and for vested and earned RSUs and PSUs was issued from treasury stock.

Other Comprehensive Income (Loss)
 
The Company’s comprehensive income (loss) is comprised of net earnings, net amortization of the unrealized loss of the pension obligation, the change in the unrealized gain (loss) on natural gas and foreign currency swap cash flow hedges, and foreign currency translation adjustments. The components of and changes in accumulated other comprehensive income (loss) (“AOCI”) as of and for the three and nine months ended September 30, 2017, and 2016, are as follows (in millions):
Three Months Ended September 30, 2017(a)
Gains and
(Losses) on
Cash Flow
Hedges
 
Defined
Benefit
Pension
 
Foreign
Currency
 
Total
Beginning balance
$
(0.3
)
 
$
(3.5
)
 
$
(93.6
)
 
$
(97.4
)
Other comprehensive income (loss) before reclassifications(b)
(0.5
)
 

 
46.1

 
45.6

Amounts reclassified from accumulated other comprehensive loss
(0.2
)
 

 

 
(0.2
)
Net current period other comprehensive income (loss)
(0.7
)
 

 
46.1

 
45.4

Ending balance
$
(1.0
)
 
$
(3.5
)
 
$
(47.5
)
 
$
(52.0
)

17


Three Months Ended September 30, 2016(a)
Gains and
(Losses) on
Cash Flow
Hedges
 
Defined
Benefit
Pension
 
Foreign
Currency
 
Total
Beginning balance
$
(0.2
)
 
$
(3.6
)
 
$
(71.8
)
 
$
(75.6
)
Other comprehensive income (loss) before reclassifications(b)
(0.3
)
 

 
(3.9
)
 
(4.2
)
Amounts reclassified from accumulated other comprehensive loss
0.2

 

 

 
0.2

Net current period other comprehensive income (loss)
(0.1
)
 

 
(3.9
)
 
(4.0
)
Ending balance
$
(0.3
)
 
$
(3.6
)
 
$
(75.7
)
 
$
(79.6
)
Nine Months Ended September 30, 2017(a)
Gains and
(Losses) on
Cash Flow
Hedges
 
Defined
Benefit
Pension
 
Foreign
Currency
 
Total
Beginning balance
$
0.6

 
$
(3.7
)
 
$
(101.8
)
 
$
(104.9
)
Other comprehensive income (loss) before reclassifications(b)
(1.4
)
 

 
54.3

 
52.9

Amounts reclassified from accumulated other comprehensive loss
(0.2
)
 
0.2

 

 

Net current period other comprehensive income (loss)
(1.6
)
 
0.2

 
54.3

 
52.9

Ending balance
$
(1.0
)
 
$
(3.5
)
 
$
(47.5
)
 
$
(52.0
)
Nine Months Ended September 30, 2016(a)
Gains and
(Losses) on
Cash Flow
Hedges
 
Defined
Benefit
Pension
 
Foreign
Currency
 
Total
Beginning balance
$
(1.6
)
 
$
(3.8
)
 
$
(102.9
)
 
$
(108.3
)
Other comprehensive income (loss) before reclassifications(b)
(0.1
)
 

 
27.2

 
27.1

Amounts reclassified from accumulated other comprehensive loss
1.4

 
0.2

 

 
1.6

Net current period other comprehensive income (loss)
1.3

 
0.2

 
27.2

 
28.7

Ending balance
$
(0.3
)
 
$
(3.6
)
 
$
(75.7
)
 
$
(79.6
)

(a)
With the exception of the cumulative foreign currency translation adjustment, for which no tax effect is recorded, the changes in the components of accumulated other comprehensive income (loss) presented in the tables above are reflected net of applicable income taxes.
(b)
The Company recorded foreign exchange (gains) losses of $(22.0) million and $(20.6) million in the three and nine months ended September 30, 2017, respectively, and $3.8 million and $(22.9) million in the three and nine months ended September 30, 2016, respectively, in accumulated other comprehensive loss related to intercompany notes which were deemed to be of long-term investment nature.

The amounts reclassified from AOCI to (income) expense for the three and nine months ended September 30, 2017, and 2016, are shown below (in millions):
 
Amount Reclassified from AOCI
 
 
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
Line Item Impacted in the
Consolidated Statement of Operations
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Natural gas instruments
$
0.2

 
$
0.2

 
Product cost
Foreign currency swaps
(0.5
)
 
(0.5
)
 
Interest expense
Income tax expense (benefit)
0.1

 
0.1

 
 
Reclassifications, net of income taxes
(0.2
)
 
(0.2
)
 
 
Amortization of defined benefit pension:
 

 
 
 
 
Amortization of loss
$

 
$
0.2

 
Product cost
Income tax expense (benefit)

 

 
 
Reclassifications, net of income taxes

 
0.2

 
 
Total reclassifications, net of income taxes
$
(0.2
)
 
$

 
 


18


 
Amount Reclassified from AOCI
 
 
 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
 
Line Item Impacted in the
Consolidated Statement of Operations
Gains and (losses) on cash flow hedges:
 
 
 
 
 
Natural gas instruments
$
0.3

 
$
2.2

 
Product cost
Income tax expense (benefit)
(0.1
)
 
(0.8
)
 
 
Reclassifications, net of income taxes
0.2

 
1.4

 
 
Amortization of defined benefit pension:
 

 
 
 
 
Amortization of loss
$

 
$
0.2

 
Product cost
Income tax expense (benefit)

 

 
 
Reclassifications, net of income taxes

 
0.2

 
 
Total reclassifications, net of income taxes
$
0.2

 
$
1.6

 
 

11.
Derivative Financial Instruments:
 
The Company is subject to various types of market risks, including interest rate risk, foreign currency exchange rate transaction and translation risk and commodity pricing risk. Management may take actions to mitigate the exposure to these types of risks, including entering into forward purchase contracts and other financial instruments. Currently, the Company manages a portion of its commodity pricing and foreign currency exchange rate risks by using derivative instruments. The Company does not seek to engage in trading activities or take speculative positions with any financial instrument arrangement. The Company has entered into natural gas derivative instruments and foreign currency derivative instruments with counterparties it views as creditworthy. However, the Company does attempt to mitigate its counterparty credit risk exposures by, among other things, entering into master netting agreements with some of these counterparties.The Company records derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets.

Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. Depending on the exposure being hedged, the Company must designate the hedging instrument as a fair value hedge, a cash flow hedge or a net investment in foreign operations hedge. For the qualifying derivative instruments that have been designated as hedges, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item in the statements of operations. Any ineffectiveness related to these hedges was not material for any of the periods presented. For derivative instruments that have not been designated as hedges, the entire change in fair value is recorded through earnings in the period of change.

Natural Gas Derivative Instruments

Natural gas is consumed at several of the Company’s production facilities, and a change in natural gas prices impacts the Company’s operating margin. The Company’s objective is to reduce the earnings and cash flow impacts of changes in market prices of natural gas by fixing the purchase price of up to 90% of its forecasted natural gas usage. It is the Company’s policy to consider hedging portions of its natural gas usage up to 36 months in advance of the forecasted purchase. As of September 30, 2017, the Company had entered into natural gas derivative instruments to hedge a portion of its natural gas purchase requirements through December 2019. As of September 30, 2017, and December 31, 2016, the Company had agreements in place to hedge forecasted natural gas purchases of 3.3 million and 2.3 million MMBtus, respectively. All natural gas derivative instruments held by the Company as of September 30, 2017, and December 31, 2016, qualified and were designated as cash flow hedges. As of September 30, 2017, the Company expects to reclassify from accumulated other comprehensive loss to earnings during the next twelve months $0.6 million of net losses on derivative instruments related to its natural gas hedges.
 
Foreign Currency Swaps not Designated as Hedges

In conjunction with the acquisition of Produquímica, the Company assumed U.S. dollar-denominated debt which was previously held by Produquímica. Prior to the acquisition, Produquímica entered into foreign currency swap agreements whereby Produquímica agreed to swap interest and principal payments on the loans denominated in U.S. dollars for principal and interest payments denominated in Brazilian Reais, Produquímica’s functional currency. The objective of the swap agreements is to mitigate the foreign currency fluctuation risk related to holding debt denominated in a currency other than Produquímica’s functional currency. None of the swap agreements relating to the debt assumed in conjunction with the acquisition of Produquímica are designated as hedges.


19


As of September 30, 2017, and December 31, 2016, the Company had swap agreements in place to economically hedge $22.4 million and $119.6 million, respectively, of loans denominated in currencies other than Produquímica’s functional currency. During the three and nine months ended September 30, 2017, the Company recognized losses of $4.9 million and $10.2 million, respectively, in its consolidated statement of operations for the change in fair value of the swap agreements not designated as hedges.

Foreign Currency Swaps Designated as Hedges

In September 2017, the Company entered into new U.S. dollar-denominated debt instruments to provide funds for its operations in Brazil (see Note 7 for more information). Concurrently, the Company entered into additional foreign currency swap agreements whereby the Company agreed to swap interest and principal payments on loans denominated in U.S. dollars for principal and interest payments denominated in Brazilian Reais, Produquímica’s functional currency. The objective of the swap agreements is to mitigate the foreign currency fluctuation risk related to holding debt denominated in a currency other than Produquímica’s functional currency. As of September 30, 2017, the Company had swap agreements in place to hedge $35.6 million of loans denominated currencies other than Produquímica’s functional currency. Payments on these loans are due on various dates extending through September 2019. As of September 30, 2017, these foreign currency swap derivative instruments qualified and were designated as cash flow hedges. As of September 30, 2017, the Company expects to reclassify from accumulated other comprehensive loss to earnings during the next twelve months $0.1 million of net losses on derivative instruments related to its foreign currency swap agreements.

The following tables present the fair value of the Company’s hedged items as of September 30, 2017, and December 31, 2016 (in millions):
 
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Balance Sheet Location
 
September 30, 2017
 
Balance Sheet Location
 
September 30, 2017
Commodity contracts
 
Other current assets
 
$
0.1

 
Accrued expenses
 
$
0.7

Commodity contracts
 
Other assets
 

 
Other noncurrent liabilities
 
0.2

Swap contracts
 
Other current assets
 

 
Accrued expenses
 
0.1

Swap contracts
 
Other assets
 

 
Other noncurrent liabilities
 
0.1

Total derivatives designated as hedging instruments(a)
 
 
 
0.1

 
 
 
1.1

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Swap contracts
 
Other current assets
 
$

 
Accrued expenses
 
$
7.0

Swap contracts
 
Other assets
 

 
Other noncurrent liabilities
 

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
7.0

Total derivatives(b)
 
 
 
$
0.1

 
 
 
$
8.1


(a)
The Company has master netting agreements with its commodity hedge counterparties and accordingly has netted in its consolidated balance sheets approximately $0.1 million of its commodity contracts that are in receivable positions against its contracts in payable positions.
(b)
The Company has commodity hedge and foreign currency swap agreements with three counterparties each, respectively. Amounts recorded as assets for the Company’s commodity contracts are receivable from three counterparties, and the amounts recorded as liabilities for the Company’s commodity contracts are payable to two counterparties. The amounts recorded as liabilities for the Company’s swap contracts are payable to two counterparties. There is also an immaterial amount receivable from one counterparty.


20


 
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Balance Sheet Location
 
December 31, 2016
 
Balance Sheet Location
 
December 31, 2016
Commodity contracts
 
Other current assets
 
$
1.2

 
Accrued expenses
 
$
0.3

Commodity contracts
 
Other assets
 
0.1

 
Other noncurrent liabilities
 
0.1

Total derivatives designated as hedging instruments(a)
 
 
 
1.3

 
 
 
0.4

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Swap contracts
 
Other current assets
 
$

 
Accrued expenses
 
$
25.8

Swap contracts
 
Other assets
 

 
Other noncurrent liabilities
 

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
25.8

Total derivatives(b)
 
 
 
$
1.3

 
 
 
$
26.2


(a)
The Company has master netting agreements with its commodity hedge counterparties and accordingly has netted in its consolidated balance sheets approximately $0.4 million of its commodity contracts that are in a payable position against its contracts in receivable positions.
(b)
The Company has commodity hedge and foreign currency swap agreements with two and five counterparties, respectively. Amounts recorded as assets for the Company’s commodity contracts are receivable from both counterparties, and amounts recorded as liabilities for the Company’s swap contracts are payable to all five counterparties. 

12.
Fair Value Measurements:

The Company’s financial instruments are measured and reported at their estimated fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction. When available, the Company uses quoted prices in active markets to determine the fair values for its financial instruments (Level 1 inputs) or, absent quoted market prices, observable market-corroborated inputs over the term of the financial instruments (Level 2 inputs). The Company does not have any unobservable inputs that are not corroborated by market inputs (Level 3 inputs) other than those described in Note 2.
 
The Company holds marketable securities associated with its defined contribution and pre-tax savings plans, which are valued based on readily available quoted market prices. The Company also held short-term investments which were classified as trading securities with any gains or losses recognized through earnings. The Company sold these investments during the first quarter of 2017. The Company utilizes derivative instruments to manage its risk of changes in natural gas prices and its risk of changes in foreign currency exchange rates (see Note 11). The fair value of the natural gas and foreign currency swap derivative instruments are determined using market data of forward prices for all of the Company’s contracts. 

The estimated fair values for each type of instrument are presented below (in millions):
 
September 30,
2017
 
Level One
 
Level Two
 
Level Three
Asset Class:
 
 
 
 
 
 
 
Mutual fund investments in a non-qualified retirement plan(a)
$
2.1

 
$
2.1

 
$

 
$

Total Assets
$
2.1

 
$
2.1

 
$

 
$

Liability Class:
 

 
 

 
 

 
 

Liabilities related to non-qualified retirement plan
$
(2.1
)
 
$
(2.1
)
 
$

 
$

Derivatives – natural gas instruments, net
(0.8
)
 

 
(0.8
)
 

Derivatives – foreign currency swaps, net
(7.2
)
 

 
(7.2
)
 

Total Liabilities
$
(10.1
)
 
$
(2.1
)
 
$
(8.0
)
 
$


(a)
Includes mutual fund investments of approximately 30% in common stock of large-cap U.S. companies, 15% in common stock of small to mid-cap U.S. companies, 5% in international companies, 10% in bond funds, 20% in short-term investments and 20% in blended funds.


21


 
December 31,
2016
 
 
Level One
 
 
Level Two
 
 
Level Three
Asset Class:
 
 
 
 
 
 
 
Mutual fund investments in a non-qualified savings plan(a)
$
1.8

 
$
1.8

 
$

 
$

Derivatives – natural gas instruments, net
0.9

 

 
0.9

 

Trading securities
1.8

 

 
1.8

 

Total Assets
$
4.5

 
$
1.8

 
$
2.7

 
$

Liability Class:
 

 
 

 
 

 
 

Liabilities related to non-qualified savings plan
$
(1.8
)
 
$
(1.8
)
 
$

 
$

Derivatives – foreign currency swaps, net
(25.8
)
 

 
(25.8
)
 

Total Liabilities
$
(27.6
)
 
$
(1.8
)
 
$
(25.8
)
 
$


(a)
Includes mutual fund investments of approximately 25% in the common stock of large-cap U.S. companies, 10% in the common stock of small to mid-cap U.S. companies, 5% in the common stock of international companies, 5% in bond funds, 40% in short-term investments and 15% in blended funds.

Cash and cash equivalents, accounts receivable (net of allowance for bad debts) and payables are carried at cost, which approximates fair value due to their liquid and short-term nature. The Company’s investments related to its nonqualified retirement plan of $2.1 million and $1.8 million at September 30, 2017, and December 31, 2016, respectively, are stated at fair value based on quoted market prices. As of September 30, 2017, the estimated amount a third-party would pay for the Company’s fixed-rate 4.875% senior notes due July 2024, based on available trading information, totaled $245.6 million (Level 2) compared with the aggregate principal amount at maturity of $250.0 million. The estimated amount a third-party would pay at September 30, 2017, for the amounts outstanding under the Company’s term loans and revolving credit facility, based upon available bid information received from the Company’s lender, totaled $974.7 million (Level 2) compared with the aggregate principal balance of $990.7 million. The loans assumed in the Produquímica acquisition have floating rates and their fair value approximates their carrying value.

13.
Earnings per Share:
 
The Company calculates earnings per share using the two-class method. The two-class method requires allocating the Company’s net earnings to both common shares and participating securities. The following table sets forth the computation of basic and diluted earnings per common share (in millions, except for share and per-share data):
 
Three months ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net earnings
$
32.0

 
$
9.1

 
$
47.1

 
$
65.1

Less: net earnings allocated to participating securities(a)
(0.2
)
 
(0.1
)
 
(0.3
)
 
(0.3
)
Net earnings available to common shareholders
$
31.8

 
$
9.0

 
$
46.8

 
$
64.8

 
 
 
 
 
 
 
 
Denominator (in thousands):
 

 
 

 
 

 
 

Weighted-average common shares outstanding, shares for basic earnings per share
33,825

 
33,786

 
33,817

 
33,772

Weighted-average awards outstanding(b)

 
3

 

 
3

Shares for diluted earnings per share
33,825

 
33,789

 
33,817

 
33,775

Net earnings per common share, basic
$
0.94

 
$
0.27

 
$
1.38

 
$
1.92

Net earnings per common share, diluted
$
0.94

 
$
0.27

 
$
1.38

 
$
1.92


(a)
Weighted participating securities include RSUs and PSUs that receive non-forfeitable dividends and consist of 169,000 and 165,000 weighted participating securities for the three and nine months ended September 30, 2017, respectively, and 148,000 weighted participating securities for both the three and nine months ended September 30, 2016.
(b)
For the calculation of diluted earnings per share, the Company uses the more dilutive of either the treasury stock method or the two-class method to determine the weighted-average number of outstanding common shares. In addition, the Company had 695,000 and 637,000 weighted-average equity awards outstanding for the three and nine months ended September 30, 2017, respectively, and 547,000 and 509,000 weighted-average equity awards outstanding for the three and nine months ended September 30, 2016, respectively, which were anti-dilutive and therefore not included in the diluted earnings per share calculation.


22


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q 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: risks related to our mining and industrial operations; geological conditions; dependency on a limited number of key production and distribution facilities and critical equipment; the inability to fund necessary capital expenditures or successfully complete capital projects; any inability to successfully implement our restructuring plan; supply constraints or price increases for energy and raw materials used in our production processes; weather conditions; climate change; our indebtedness and ability to pay our indebtedness; restrictions in our debt agreements that may limit our ability to operate our business or require accelerated debt payments; tax liabilities; financial assurance requirements imposed on us; the inability of our customers to access credit or a default by our customers of trade credit extended by us or financing we have guaranteed; restrictions on or ability to pay dividends; the impact of competition on the sales of our products; conditions in the agricultural sector and supply and demand imbalances for competing plant nutrition products; increasing costs or a lack of availability of transportation services; strikes, other forms of work stoppage or slowdown or other union activities; the loss of key personnel; our rights and governmental authorizations to mine and operate our properties; our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; compliance with foreign and U.S. laws and regulations applicable to our international operations; compliance with environmental, health and safety laws and regulations; environmental liabilities; the ability to access our computer systems and information technology or the inability to protect confidential data; misappropriation or infringement claims relating to intellectual property; changes in industry standards and regulatory requirements; product liability claims and product recalls; inability to obtain required product registrations or increased regulatory requirements; domestic and international general business and economic conditions; and other risks referenced from time to time in this report and our other filings with the Securities and Exchange Commission (the “SEC”), including the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016.
 
In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms or other comparable terminology. Forward-looking statements include without limitation statements about our expected outlook, including expected bid volumes, sales volumes, cost reductions and restructuring charges; the seasonal distribution of working capital requirements; our reinvestment of foreign earnings outside the U.S.; our ability to optimize cash accessibility and minimize tax expense and meet debt service requirements; capital expenditures; outcomes of matters with taxing authorities; and the seasonality of our business. These forward-looking statements are only predictions. Actual events or results may differ materially.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no duty to update any of the forward-looking statements after the date hereof or to reflect the occurrence of unanticipated events.
 
Unless the context requires otherwise, references to the “Company,” “Compass Minerals,” “our,” “us” and “we” refer to Compass Minerals International, Inc. (“CMI,” the parent holding company) and its consolidated subsidiaries. Except where otherwise noted, references to North America include only the continental United States (the “U.S.”) and Canada, and references to the United Kingdom (the “U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to “short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds.
 
Critical Accounting Estimates

Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments result primarily from the need to make estimates about matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. Actual results in these areas could differ from management’s estimates.


23


Company Overview

Compass Minerals is a leading producer of essential minerals, including salt, sulfate of potash (“SOP”) specialty fertilizer and magnesium chloride. As of September 30, 2017, we operated 22 production and packaging facilities, including:
The largest rock salt mine in the world in Goderich, Ontario, Canada;
The largest dedicated rock salt mine in the U.K. in Winsford, Cheshire;
A solar evaporation facility located in Ogden, Utah, which is both the largest SOP production site and the largest solar salt production site in the Western Hemisphere; and
Several facilities producing essential agricultural nutrients and specialty chemicals in Brazil.

Our salt business produces and sells sodium chloride and magnesium chloride, which are used for highway deicing, dust control, consumer deicing, water conditioning, consumer and industrial food preparation and agricultural and industrial applications. 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. In addition, we operate a records management business utilizing excavated areas of our Winsford salt mine with one other location in London, U.K., which provides services to businesses throughout the U.K. The Plant Nutrition South America segment represents the results of Produquímica Indústria e Comércio S.A. (“Produquímica”), which was acquired in October 2016. This segment operates two primary businesses in Brazil – agricultural productivity and chemical solutions.

Consolidated Results of Operations

The following is a summary of our consolidated results of operations for the three and nine months ended September 30, 2017, and September 30, 2016, respectively. The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

THREE AND NINE MONTHS ENDED SEPTEMBER 30
cmp-2017093_chartx10434.jpgcmp-2017093_chartx11640.jpg
cmp-2017093_chartx12853.jpgcmp-2017093_chartx14022.jpg
* Refer to “—Sensitivity Analysis Related to EBITDA and Adjusted EBITDA” for a reconciliation to the most directly comparable U.S. GAAP financial measure and the reasons we use this non-GAAP measure.


24


COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

Total sales increased 62%, or $111.1 million, primarily due to the acquisition of Produquímica, which was partially offset by a decrease in Salt and Plant Nutrition North America segment sales.
Operating earnings increased 61%, or $11.9 million, due to the inclusion of Produquímica in our operating results. This increase was partially offset by a decline in Salt and Plant Nutrition North America segment operating earnings.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* increased 68%, or $27.9 million.
Diluted earnings per share increased 248%, or $0.67.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

Total sales increased 30%, or $211.7 million, primarily due to the acquisition of Produquímica. This increase was partially offset by a decrease in Salt segment sales.
Operating earnings decreased 28%, or $30.5 million, due to lower Salt segment operating earnings, partially offset by an increase in Plant Nutrition North America operating earnings and the inclusion of Produquímica in our operating results.
Adjusted EBITDA* increased 1%, or $2.5 million.
Diluted earnings per share decreased 28%, or $0.54.

THREE AND NINE MONTHS ENDED SEPTEMBER 30
cmp-2017093_chartx15061.jpgcmp-2017093_chartx16290.jpg
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

Gross Profit: Increased 68%, or $30.9 million; Gross Margin increased 1 percentage point
The plant nutrition business, on a combined basis, contributed $37.0 million to the increase in gross profit due to the inclusion of Produquímica in our operating results.
A $6.2 million decrease in Salt segment gross profit partially offset the plant nutrition business’ increase. The decrease was primarily due to lower consumer and industrial sales volumes, higher per-unit shipping costs and restructuring costs.
  
COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

Gross Profit: Increased 7%, or $13.5 million; Gross Margin decreased 5 percentage points
The plant nutrition business, on a combined basis, contributed $69.4 million to the increase in gross profit primarily due to the inclusion of Produquímica in our operating results.
Gross profit for Plant Nutrition North America was favorably impacted by slightly higher sales volumes and lower per-unit product costs, which were partially offset by lower average sales prices and higher per-unit shipping and handling costs during the period.
A $56.0 million decrease in Salt segment gross margin partially offset the plant nutrition business’ increase. The decrease resulted from lower sales and increased per unit product costs.


25


OTHER EXPENSES AND INCOME

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

SG&A: Increased $19.0 million, which represented a 1.1 percentage point of sales increase to 15.4% from 14.3%
The increase in SG&A expense was primarily due to the inclusion of Produquímica in our operating results in 2017 and approximately $1 million in higher corporate depreciation related to a significant software system upgrade. In addition, we incurred charges of approximately $2 million related to ongoing restructuring activities impacting our Salt and Plant Nutrition North America segments as well as corporate SG&A.

Interest Expense: Increased $8.1 million to $13.5 million
The increase was primarily due to our higher aggregate debt level driven by the acquisition of Produquímica.

Net (earnings) loss in equity investee: Increased from a loss of $0.4 million to earnings of $0.4 million
The $0.4 million of earnings in the current period represents our share of Fermavi Eletroquímica Ltda.’s (“Fermavi”) net earnings. As a result of the full acquisition of Produquímica, we hold a 50% interest in Fermavi, which was previously held by Produquímica.
The $0.4 million loss for the prior period represented our share of Produquímica’s net loss based on our initial 35% equity interest in Produquímica prior to the full acquisition.

Other (Income) Expense: Decreased $2.7 million from an expense of $1.5 million to income of $1.2 million
We realized foreign exchange gains of $1.1 million in the third quarter of 2017 and foreign exchange losses of $1.1 million in the third quarter of 2016. In addition, interest income in the quarter increased by $0.8 million.

Income Tax (Benefit) Expense: Decreased $15.6 million from an expense of $3.1 million to a benefit of $12.5 million
The decrease was primarily due to the release of approximately $17 million of valuation allowances related to our Brazil business during the third quarter, of which approximately $13 million was accounted for as a discrete item and approximately $4 million resulted from adjustments made to our annual effective tax rate.
Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, domestic manufacturing deductions, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
Our effective tax rate declined from 25% in the third quarter of 2016 to (64)% in the third quarter of 2017, reflecting the release of the Brazilian valuation allowances.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2017

SG&A: Increased $44.0 million, which represented a 2.2 percentage points of sales increase to 13.7% from 11.5%
The increase in SG&A expense was primarily due to the inclusion of Produquímica in our operating results in 2017, approximately $1 million in higher corporate depreciation related to a significant software system upgrade. In addition, we incurred charges of approximately $2 million related to ongoing restructuring activities impacting our Salt and Plant Nutrition North America segments as well as corporate SG&A.

Interest Expense: Increased $22.7 million to $39.5 million
The increase was primarily due to our higher aggregate debt level driven by the acquisition of Produquímica, which was partially offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in April 2016.

Net (earnings) loss in equity investee: Increased from a loss of $1.7 million to earnings of $0.6 million
The $0.6 million of earnings in the current period represents our share of Fermavi’s net earnings, and the $1.7 million loss for the prior period represented our share of Produquímica’s net loss based on our prior 35% equity interest in Produquímica.

Other Expense: Decreased $1.1 million to $0.5 million
The decrease in other expense was primarily due to an increase in interest income, which was partially offset by foreign exchange losses. Additionally, the comparative 2016 period included $2.1 million of expenses incurred related to the refinancing of our term loans and revolving credit facility.

Income Tax (Benefit) Expense: Decreased $31.8 million from an expense of $24.1 million to a benefit of $7.7 million
The decrease was primarily due to the release of $18 million of Brazilian valuation allowances and lower pre-tax income.

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Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, domestic manufacturing deductions, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
Our effective tax rate declined from 27% in the first nine months of 2016 to (20)% in the first nine months of 2017, reflecting the release of Brazilian valuation allowances.

Operating Segment Performance

The following financial results represent consolidated financial information with respect to sales from our Salt, Plant Nutrition North America and Plant Nutrition South America segments. The results of operations of the consolidated records management business and other incidental revenues include sales of $2.5 million and $2.4 million for the third quarter of 2017 and 2016, respectively, and $7.4 million and $7.5 million for the first nine months of 2017 and 2016, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data. 

THREE AND NINE MONTHS ENDED SEPTEMBER 30
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3Q 2017
 
3Q 2016
 
2017 YTD
 
2016 YTD
Salt Sales (in millions)
$
124.7

 
$
135.7