ITEM 1. BUSINESS
COMPANY OVERVIEW
We are the largest producer of rock, or highway deicing, salt in North America
and the United Kingdom, and operate the largest highway deicing salt mines in
these regions. We are also the third-largest producer of general trade salt in
North America and the second-largest in the United Kingdom, serving major
retailers, agricultural cooperatives and food producers. In addition, we are the
largest producer of sulfate of potash, or "SOP," in North America, which is used
in the production of specialty fertilizers. Salt is one of the most widely used
minerals in the world and has a wide variety of end-use applications, including
highway deicing, food-grade applications, water conditioning and various
industrial uses. Our business also includes the following key characteristics:
We believe that our cash flows are not materially impacted by economic cycles
due to the stable end-use markets of salt and the absence of cost-effective
alternatives.
We operate 11 facilities in North America and the United Kingdom, including
the largest rock salt mine in the world in Goderich, Ontario and the largest
salt mine in the United Kingdom in Winsford, Cheshire.
We believe that we are among the lowest cost rock salt producers in our
markets. Our cost advantage is due to the size and quality of our reserves,
effective mining techniques and efficient production processes. In addition,
our salt mines in North America are located near either rail or water
transport systems, thereby minimizing shipping and handling costs, which
constitute a significant portion of the overall delivered cost of salt.
3
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
For the year ended December 31, 2003, we sold approximately 12.8 million tons
of salt and other minerals, generating sales of $600.6 million and net income of
$43.5 million.
On November 28, 2001, Salt Holdings Corporation (now known as Compass
Minerals International, Inc.) completed a leveraged recapitalization (the
"Recapitalization") with our assets and liabilities retaining their historical
value. Immediately following the Recapitalization, Apollo Management V, L.P.
("Apollo"), co-investors and management owned approximately 81% of CMI's,
outstanding common stock and IMC Global, Inc. ("IMC Global") owned approximately
19% of CMI's outstanding common stock as fully diluted for management options
and stock issuable under our stock option plan.
On December 17, 2003, CMI completed an initial public offering of
16,675,000 shares of its common stock, par value $.01 per share, at an initial
public offering price of $13.00 per share. In connection with the offering, our
parent changed its name from Salt Holdings Corporation to Compass Minerals
International, Inc. The shares were sold by CMI's stockholders. Neither CMI nor
CMG received any proceeds from the sale of the shares. Apollo and IMC Global
each sold portions of their holdings of CMI common stock, which reduced the
ownership, on a fully diluted basis, of Apollo and co-investors, management and
IMC Global to approximately 35%, 11% and 2%, respectively.
SALT SEGMENT
Through our salt segment we mine, produce, process and distribute salt in North
America and Europe, including rock, evaporated and solar salt. Our products are
marketed primarily in the United States, Canada and the United Kingdom. Salt is
used in a wide variety of applications, including as a deicer for both highway
and consumer use (rock salt), an ingredient in the production of chemicals for
paper bleaching, water treatment and a variety of other industrial uses, a
flavor enhancer and preservative in food, a nutrient and trace mineral delivery
vehicle in animal feeds and an essential component in both industrial and
residential water softeners. The demand for salt has historically remained
relatively stable during economic cycles due to its relatively low cost and high
value with a diverse number of end uses.
However, demand in the highway deicing market is affected by changes in
winter weather conditions. Approximately 61% of our highway deicing annual
sales, net of shipping and handling costs, are generated from December through
March when the need for highway deicing salt is at its peak.
Salt Industry Overview
The salt industry is characterized by stable demand and steady price increases
across various grades. Salt is one of the most common and widely consumed
minerals in the world due to its low relative cost and its utility in a variety
of applications, including food processing, water conditioning, industrial
chemical processing, nutritional supplements for animal stock and highway
deicing. We estimate that the consumption of highway deicing salt in North
America is 23 million tons per annum (18 million tons per annum in the markets
we serve), while the general trade market totals 11 million tons per annum. In
the United Kingdom, we estimate that the size of the highway deicing market is
1.9 million tons per annum while the general trade market is approximately
1.0 million tons per annum. During the thirty-year period ending 2002, the
production of salt used in highway deicing in the United States has increased at
an historical average of approximately 1% per annum, while the production of
general trade salt products has increased at an historical average of more than
1% per annum over the same period.
Salt prices vary according to purity from the lowest grade (highway deicing
salt) at around $20 per ton to the highest-grade salt (food-grade salt) at more
than $400 per ton. The price difference between highway and food-grade salt
reflects, among other things, the more elaborate refining and packaging
processes for higher-grade salt. Due to its low production cost, transportation
and handling costs tend to be a significant component of the total delivered
cost making logistics management and customer service key competitive factors in
the industry. The higher relative cost associated with transportation also acts
as a barrier to entry in favor of salt manufacturers located in close proximity
to their customers. During the thirty year period ending 2002, prices for salt
used in highway deicing in the United States have increased at a historical
average of approximately 4% per annum, while prices for general trade salt
products have increased at a historical average of approximately 5% per annum
over the same period.
Processing Methods
We have production capacity, including salt purchased under long-term contracts,
of approximately 14.5 million tons of salt per annum. Mining, other production
activities and packaging are currently conducted at 11 of our facilities and at
two facilities where finished product is purchased from IMC Global under
long-term contracts.
Summarized below are the three processing methods we use to produce salt.
Underground Rock Salt Mining. We employ a drill and blast mining technique at
our underground rock salt mines. Mining machinery moves salt from the salt face
to conveyor belts where it is then crushed and screened. Salt is then hoisted to
the surface where it is loaded onto shipping vessels, railcars or trucks. The
primary power sources for each of our rock salt mines are electricity and diesel
fuel. At our Winsford, U.K. facility, we use a continuous miner process. Rock
salt is primarily used in our highway and consumer deicing products. Based on
annual production capacities, our underground rock salt mining represents
approximately 78% of our salt production.
4
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
Mechanical Evaporation. The mechanical evaporation method involves subjecting
salt-saturated brine to vacuum pressure and heat, generated by natural gas or
oil, to precipitate salt. The salt brine is obtained from underground salt
deposits through a series of brine wells. The resulting product has both a high
purity and uniform physical shape. Evaporated salt is primarily used in our
general trade salt product lines. Based on annual production capacities, our
mechanical evaporation represents approximately 12% of our salt production.
Solar Evaporation. The solar evaporation method is used in areas of the world
where high-salinity brine is available and where weather conditions provide for
a high natural-evaporation rate. The brine is pumped into a series of large open
ponds where sun and wind evaporate the water and crystallize the salt, which is
then mechanically harvested and processed through washing, drying and screening.
Solar salt is primarily used in our general trade salt product lines. Based on
annual production capacities, our solar evaporation represents approximately 10%
of our salt production.
Operations and Facilities
United States. Our Central and Midwestern United States general trade customer
base is served by our mechanical evaporation plant in Lyons, Kansas.
Additionally, we serve areas around the Great Lakes with evaporated salt
purchased from IMC Global's potash and salt facility in Michigan. The
Cote Blanche, Louisiana rock salt mine serves chemical customers in the Southern
and Western United States, highway deicing customers through a series of depots
located along the Mississippi and Ohio Rivers, and agriculture customers in the
Southern and Midwestern United States. Our solar evaporation facility located in
Ogden, Utah is the largest solar salt production site in the United States. This
facility principally serves the Western United States general trade markets and
also provides salt for chemical applications and highway deicing, and provides
magnesium chloride which is primarily used in deicing, dust control and soil
stabilization applications. Production capacity of salt at our Ogden facility is
currently only limited by demand. We also own and operate two salt packaging
facilities in Illinois and Wisconsin, which also serve consumer deicing and
water conditioning customers in the Central, Midwestern and parts of the
Northeastern United States.
Canada. Our salt is produced at five different locations in Canada. Mechanically
evaporated salt is produced at three facilities strategically located throughout
Canada: Amherst, Nova Scotia in Eastern Canada; Goderich, Ontario in Central
Canada; and Unity, Saskatchewan in Western Canada. From the Goderich, Ontario
rock salt mine, we serve the consumer and highway deicing markets in Canada and
the Great Lakes region of the United States. We also purchase salt and other
products from IMC Global's potash and salt facilities located in Saskatchewan,
which serve both the general trade and the highway deicing markets.
United Kingdom. Our United Kingdom customer base is served by two facilities.
Highway deicing customers throughout the United Kingdom are served by the
Winsford rock salt mine in Northwest England. The Weston Point mechanical
evaporation plant is located 12 miles north of the mine and serves our general
trade and chemical customers in the United Kingdom as well as in continental
Europe.
The table below shows the capacity and type of salt produced at each of our
owned or leased production locations:
Annual Production
Capacity
Location (tons) Product Type
North America
Goderich, Ontario Mine 6,500,000 Rock
Cote Blanche, Louisiana Mine 2,800,000 Rock
Ogden, Utah Plant 1,500,000 Solar
Lyons, Kansas Plant 425,000 Evaporated
Unity, Saskatchewan Plant 175,000 Evaporated
Goderich, Ontario Plant 170,000 Evaporated
Amherst, Nova Scotia Plant 115,000 Evaporated
United Kingdom
Winsford, Cheshire Mine 2,000,000 Rock
Weston Point, Cheshire Plant 850,000 Evaporated
Salt production at these facilities totaled an aggregate 12.0 million tons,
10.0 million tons and 12.2 million tons for the years ended December 31, 2003,
2002 and 2001, respectively.
Salt is found throughout the world and is typically deposited in extremely
large quantities where it is commercially produced. Our mines at Goderich,
Cote Blanche and Winsford, as well as at our other operating facilities, are
proximate to vast mineral deposits. In most of our production locations, we
estimate the recoverable salt to exceed 100 years of reserves at current
production rates and capacities. Our rights to extract those minerals may
currently be contractually limited by either geographic boundaries or time. We
believe that we will be able to continue to extend these agreements, as we have
in the past, at commercially reasonable terms, without incurring substantial
costs or incurring material modifications to the existing lease terms and
conditions, thereby allowing us to extract the additional salt necessary to
fully develop our existing mineral rights.
Our underground mines in Canada (Goderich, Ontario), the United States
(Cote Blanche, Louisiana) and the United Kingdom (Winsford, Cheshire) make up
approximately three-fourths of our salt producing capacity. Each of these mines
are operated with modern mining equipment and utilize subsurface improvements
such as vertical shaft lift systems, milling and crushing facilities,
maintenance and repair shops and extensive conveyor systems. We believe that the
proper-
5
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
ties and their operating equipment are maintained in good working condition.
The land and related surface rights at the Goderich mine are owned. We also
maintain a mineral lease at Goderich with the provincial government, which
grants us the right to mine salt. This lease expires in 2022 with the option to
renew until 2043. Cote Blanche is operated under land and mineral leases with a
third-party landowner who grants us the right to mine salt. The leases expire in
2060. We own the land, related surface rights and salt reserves at the Winsford
mine.
Our mines at Goderich, Cote Blanche and Winsford have been in operation for
approximately 44, 38 and 158 years, respectively. At current average rates of
production, we estimate that our remaining years of production for the
recoverable minerals we presently own or lease to be 177, 93 and 32 years,
respectively. Our mineral interests are amortized on an individual basis over
estimated useful lives not to exceed 99 years using the units-of-production
method for leased mineral rights and the straight-line method for owned
minerals. Our estimates are based on, among other things, both internal
estimates and the results of reserve studies completed by a third-party
engineering firm. The reserve estimates are primarily a function of the area and
volume covered by the mining rights and estimates of extraction rates utilized
by the company with the reasonable expectation of reliably operating the mines
on a long-term basis. Established criteria for proven and probable reserves is
primarily applicable to mining deposits of discontinuous metal, where both
presence of ore and its variable grade need to be precisely identified. However,
the massive continuous nature of evaporative deposits, such as salts, require
proportionately less data for the same degree of confidence in mineral reserves,
both in terms of quantity and quality. Reserve studies performed by a
third-party engineering firm suggest that our salt reserves most closely
resemble probable reserves and we have therefore classified our reserves as
probable reserves.
We package salt product produced by us or others at two additional
facilities. The table below shows the packaging capacity at each of these
facilities:
Annual Packaging
Capacity
Location (tons)
Kenosha, Wisconsin 100,000
Chicago, Illinois 100,000
We also have a long-term contract to purchase finished salt from IMC Global,
which is produced as a co-product of their potash operations. The table below
shows the amount and type of salt purchased from each of these production
facilities:
Annual Purchasing
Capacity
Location (tons) Product Type
Esterhazy, Saskatchewan 200,000 Rock
Hersey, Michigan 250,000 Evaporated
We divide our salt products into two separate product lines: highway deicing
salt (including chemical salt) and general trade salt.
Highway Deicing Salt Products
Products and Sales
Highway deicing constituted approximately 47% of our gross sales of salt in
2003. Principal customers are states, provinces, counties, municipalities and
road maintenance contractors that purchase bulk salt for ice control on public
roadways. Highway deicing salt is sold primarily through an annual tendered bid
contract system as well as through some longer-term contracts, with price,
product quality and delivery being the primary competitive market factors.
Annual supply contracts generally are awarded on the basis of tendered bids once
the purchaser is assured that the minimum requirements for purity, service and
delivery can be met. The bidding process eliminates the need to invest
significant time and effort in marketing and advertising. Location of the source
of salt and distribution outlets also play a significant role in determining a
supplier. We have an extensive network of approximately 72 depots for storage
and distribution of highway deicing salt in North America. The majority of these
depots are located on the Great Lakes and the Mississippi and Ohio River systems
where our Goderich, Ontario and Cote Blanche, Louisiana mines are located to
serve those markets. Salt from our Ogden, Utah facility is also partially used
for highway deicing.
We produce salt in the United Kingdom for the highway deicing product line
through our facility at Winsford, Cheshire, the largest rock salt mine in the
United Kingdom. We believe our superior production capacity, productivity and
favorable logistics allow us to be the only supplier of highway deicing salt
capable of meeting peak winter demands in the United Kingdom. This strong
position has resulted in us being viewed as a strategic operation by the United
Kingdom's Highway Agency. As such, we work with the Highway Agency to develop
standards for deicing product specifications and to monitor Highway Agency
deicing application contractors. We further act as a primary contact for the
Highway Agency in connection with winter road management in the United
6
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
Kingdom. In the United Kingdom approximately 59% of our highway deicing business
is on multi-year contracts.
Winter weather variability is the most significant factor affecting salt
sales for deicing applications because mild winters reduce the need for salt
used in ice and snow control. Over the last four years, our North American
highway deicing product line has generated over 61% of its annual sales, net of
shipping and handling costs, from December through March when the need for
highway deicing is at its peak. Lower than expected sales during this period
could have a material adverse effect on our results of operations. The vast
majority of North American deicing sales are made in Canada and the Midwestern
United States where winter weather is generally harsher than in other parts of
North America. In keeping with industry practice, we, together with our
customers, stockpile sufficient quantities of salt to meet estimated
requirements for the next winter season. See Item 1, "Business - Risk Factors -
The seasonal demand for our products and the variations in our cash flows from
quarter to quarter as a result of weather conditions may have an adverse effect
on our results of operations" and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Seasonality."
Chemical customers accounted for approximately 6% of our 2003 gross sales of
salt. Principal customers are producers of intermediate chemical products used
in pulp bleaching, water treatment and a variety of other industrial uses that
do not have a captive source of brine. Distribution into the chemical market is
made primarily through multi-year supply agreements, which are negotiated
privately. Price, service and product quality are the major competitive market
factors.
The table below shows our shipments of highway deicing and chemical salt
products to the following regions (thousands of tons):
Year Ended December 31,
2003 2002 2001
Tons % Tons % Tons %
U.S. 6,267 65 5,104 64 5,656 60
Canada 2,560 26 2,162 27 2,301 25
Europe and Others 836 9 699 9 1,445 15
Total 9,663 100 7,965 100 9,402 100
Competition
We face strong competition in each of the markets in which we operate. In North
America, other large, nationally recognized companies compete against our
highway deicing and chemical salt products. In addition, there are several
smaller regional producers of highway deicing salt. There are several importers
of salt into North America but these mostly impact the Eastern seaboard where we
have a minimal position. In the United Kingdom, there are two other companies
that produce highway deicing salt, one in Northern England and the other in
Northern Ireland. There are no significant imports of highway deicing salt into
the United Kingdom.
General Trade Salt Products
Products and Sales
The general trade business accounted for approximately 46% of our 2003 gross
sales of salt. We are the third largest producer of general trade salt in North
America. This product line includes commercial and consumer applications, such
as table salt, water conditioning, consumer ice control, food processing,
agricultural applications, as well as a variety of industrial applications. We
believe that we are the largest private label producer of water conditioning and
salt-based agricultural products in North America and sell more than 70 private
labels of table salt to major retailers. Our Siftoฎ brand is well recognized in
the Canadian market.
In the United Kingdom we operate the largest evaporated-salt plant in the
United Kingdom at Weston Point. We are one of the U.K.'s market leaders in
branded evaporated salt for water conditioning. We also produce salt for the
food, chemical, animal feeds and textile markets.
We have maintained a significant presence in the general trade business over
recent years due to our strong focus on: (i) the Midwestern region of the United
States; (ii) all of Canada and the United Kingdom; (iii) our distribution
network to the grocery trade; and (iv) our relationships with large distributors
of water conditioning salt.
The general trade market is driven by strong customer relationships. Sales in
the general trade salt product line occur through retail channels, such as
grocery stores, building supply, hardware and automotive stores and feed
suppliers. Distribution in the general trade salt product line is channeled
through a direct sales force located in various parts of our service territories
who sell products to distributors, dealers and end users. We also maintain a
network of brokers who sell table salt, consumer deicing and water conditioning
products. These brokers service wholesalers, grocery chains and retailers, as
well as the food service industry.
The table below shows our shipments of general trade salt products to the
following regions (thousands of tons):
Year Ended December 31,
2003 2002 2001
Tons % Tons % Tons %
U.S. 1,758 60 1,629 59 1,725 61
Canada 565 19 506 18 513 18
Europe and Others 604 21 651 23 584 21
Total 2,927 100 2,786 100 2,822 100
Competition
In North America, other large nationally recognized companies compete against
our salt business in production and marketing of general trade salt products. In
addition, there are several smaller regional producers of general trade salt.
There are several importers of salt into North America but they mostly impact
the East Coast and West Coast of the United States where we have a minimal
position. In the United Kingdom, there is one other large domestic producer
7
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
of general trade salt, several small local producers and some imports from
continental Europe. We also export salt from the United Kingdom to Scandinavia
and continental Europe and compete with many other European producers in these
markets.
SPECIALTY POTASH SEGMENT
SOP is primarily used as a specialty fertilizer, providing essential potassium
to high-value, chloride-sensitive crops, such as vegetables, fruits, tea,
tobacco and turf grass. We are the market leader in North America for SOP and
market SOP products both domestically and overseas. We offer several grades of
SOP, which are designed to differentiate us from our competitors, as well as to
better serve the needs of our customers. In 2003, the specialty potash segment
accounted for approximately 10% of our sales after shipping and handling costs.
Potash Industry Overview
The annual worldwide consumption of all potash fertilizers approaches 50 million
tons. Muriate of potash, or potassium chloride, is the most common source of
potassium and accounts for over 90% of all potash consumed in fertilizer
production. SOP represents about 5% of potash consumption. The remainder is
supplied in the forms of potassium magnesium sulfate, nitrate of potassium, and,
to a lesser extent, potassium thiosulfate and monopotassium phosphate. All of
these products contain varying concentrations of potassium expressed as
potassium oxide (K20) and different combinations of co-nutrients.
Muriate of potash is the least expensive form of potash fertilizer based on
the concentration of K20. It is the preferred potassium source for most crops.
However, SOP (containing approximately 50% K20) is utilized by growers for many
high-value crops, especially where the requirements are for fertilizers with low
chloride content. The use of SOP has been scientifically proven to improve the
yield and quality of certain crops.
Examples of crops where SOP is utilized to increase yield and quality include
tobacco, tea, potatoes, citrus fruits, grapes, almonds, some vegetables and on
turfgrass for golf courses. Approximately 73% of our annual SOP sales volumes in
2003 were made to domestic customers, which include retail fertilizer dealers
and distributors of professional turf care products. These dealers and
distributors combine or blend SOP with other fertilizers and minerals to produce
fertilizer blends tailored to individual requirements.
Operations and Facilities
All of our SOP production is located on the Great Salt Lake west of Ogden, Utah.
It is the largest SOP production facility in North America. The evaporation
facility utilizes solar energy and operates over 40,000 acres of evaporation
ponds to manufacture SOP and magnesium chloride from the brines of the Great
Salt Lake. The property utilized in our operation is both owned and leased under
annually renewing leases. This facility has the capacity to annually produce
approximately 450,000 tons of SOP, approximately 400,000 tons of magnesium
chloride and over 1.5 million tons of salt. These recoverable minerals exist in
vast quantities in the Great Salt Lake. We estimate the recoverable minerals
exceed 100 years of reserves at current production rates and capacities. Our
rights to extract these minerals are contractually limited. We believe we will
continue to be able to extend these agreements, as we have in the past, at
commercially reasonable terms, without incurring substantial costs or incurring
material modifications to the existing lease terms and conditions, thereby
allowing us to extract additional quantities of minerals necessary to
significantly extend the economic life of the reserves.
The potassium bearing salts are mechanically harvested and refined to high
purity SOP in an integrated production facility that has been in operation since
1967. We believe that our property and operating equipment are maintained in
good working condition.
The Ogden facility was unable to produce SOP from 1984 through the beginning
of 1989 due to flooding. Following the flood, dikes were raised to a height
three feet over the historic peak flood level. Also, the State of Utah
constructed and implemented the West Desert Pumping Project, which could be
utilized to lower the level of the Great Salt Lake by up to 12 inches per year
thus reducing the risk of flooding. Although we believe that the subsequent dike
improvements and the West Desert Pumping Project have reduced the likelihood of
future pond flooding, we maintain both property damage and business interruption
insurance policies for this risk.
Products and Sales
Our domestic sales of SOP are concentrated in the western states of California,
Oregon, Washington, Idaho and the central tobacco belt area where the crops and
soil conditions favor SOP. We generally export SOP through major trading
companies. International SOP sales volumes in 2003 were 27% of our annual SOP
sales. Prior to the acquisition by IMC Global in 1998, our SOP was marketed and
sold by a sales group consisting of trained agronomists and professional
fertilizer agents. These representatives directly contacted dealers and growers
in the United States. Following the IMC Global acquisition, this SOP sales group
was dissolved and the IMC Global sales force handled SOP sales. The IMC Global
sales group was responsible for selling all potash and phosphate fertilizer
products for IMC Global. Because the bulk of these fertilizers are sold as
commodities, the focus on specialty products such as SOP diminished under
IMC Global. Upon the purchase of the SOP business from IMC Global, we organized
and employed an experienced global sales group similar to the one that was in
place prior to 1998.
8
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
The table below shows our shipments of SOP to the following regions
(thousands of tons):
Year Ended December 31,
2003 2002 2001
Tons % Tons % Tons %
U.S. 182 73 151 62 148 79
Export(a) 69 27 91 38 40 21
Total 251 100 242 100 188 100
(a) Export sales include product sold to foreign customers at U.S. ports.
We previously had a long-term contract with IMC Global following the
Recapitalization, whereby we acted as a sales agent for IMC Global to customers
serviced by IMC Global's Carlsbad, New Mexico facility. The contract did not
limit the amount of SOP we could purchase from IMC Global. As a result of our
June 2003 purchase of IMC Global's remaining SOP marketing business this
long-term contract with IMC Global terminated on November 30, 2003.
Competition
Approximately 56% of the world SOP production is located in Europe, 14% in the
United States and the remaining 30% in various other countries. The world
consumption of SOP totals about 2.9 million tons. Our major competition for SOP
sales in North America include imports from Germany, Chile, Canada and Belgium.
In addition, there is also some functional competition between SOP, muriate of
potash and nitrate of potash. For exports into Asia, the Pacific Rim countries
and Latin America, we compete with various local and European producers.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trademarks, copyright and trade secret
protection, employee and third-party non-disclosure agreements, license
arrangements and domain name registrations to protect our intellectual property.
We sell many of our products under a number of registered trademarks that we
believe are widely recognized in the industry. No single patent, trademark or
trade name is material to our business as a whole.
Any issued patents that cover our proprietary technology and any of our other
intellectual property rights may not provide us with substantial protection or
be commercially beneficial to us. The issuance of a patent is not conclusive as
to its validity or its enforceability. Competitors may also be able to design
around our patents. If we are unable to protect our patented technologies, our
competitors could commercialize our technologies.
With respect to proprietary know-how, we rely on trade secret protection and
confidentiality agreements. Monitoring the unauthorized use of our technology is
difficult, and the steps we have taken may not prevent unauthorized use of our
technology. The disclosure or misappropriation of our intellectual property
could harm our ability to protect our rights and our competitive position. See
Item 1, "Business - Risk Factors - Protection of proprietary technology - Our
intellectual property may be misappropriated or subject to claims of
infringement."
EMPLOYEES
As of December 31, 2003, we had 1,497 employees, of which 708 are employed in
the United States, 596 in Canada and 193 in the United Kingdom. Approximately
38% of our U.S. workforce (54% of our global workforce) is represented by labor
unions. Of our nine material collective bargaining agreements, four will expire
in 2004, one will expire in 2005 and four will expire in 2006. Additionally,
approximately 13% of our workforce is employed in Europe where trade union
membership is common. We consider our labor relations to be good.
9
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
PRINCIPAL PROPERTIES
The table below sets forth our principal properties:
Land and Related
Surface Rights Mineral Reserves
Owned/ Expiration Owned/ Expiration
Location Use Leased of Lease Leased of Lease
Ogden, Utah SOP and solar salt Owned N/A Leased (1)
production facility
Lyons, Kansas Evaporated salt Owned N/A Owned N/A
production facility
Cote Blanche, Rock salt production Leased 2060 Leased 2060
Louisiana facility
Weston Point, Evaporated salt Owned N/A N/A (2) N/A
Cheshire, U.K. production facility
Winsford, Rock salt production Owned N/A Owned N/A
Cheshire, U.K. facility
Goderich, Ontario, Rock salt production Owned N/A Leased 2022 (3)
Canada facility
Evaporated salt Owned N/A Owned N/A
production facility
Unity, Saskatchewan, Evaporated salt Owned N/A Leased 2009/2016 (4)
Canada production facility
Amherst, Nova Evaporated salt Owned N/A Leased (5)
Scotia, Canada production facility
Overland Park, Corporate Leased 2008 N/A N/A
Kansas headquarters
(1) The Ogden lease automatically renews on an annual basis.
(2) Weston Point purchases brine for production purposes from a third party
pursuant to a supply agreement that will expire in 2017.
(3) Subject to the right of renewal through 2043.
(4) Consists of two leases expiring in 2009 and 2016 subject to the right of
renewal through 2030 and 2037, respectively.
(5) Consists of two leases that are currently in the process of being renewed that
will expire in 20 years with rights of renewal at 20-year increments.
With respect to each facility at which we extract salt, brine or SOP, we
obtain any required or necessary permits prior to the commencement of mining.
Permits or licenses are obtained as needed in the normal course of business
based on our mine plans and state, provincial and local regulatory provisions
regarding mine permitting and licensing. Based on our historical permitting
experience, we expect to be able to continue to obtain necessary mining permits
to support historical rates of production.
Our mineral leases have varying terms. Some will expire after a set term of
years, while others continue indefinitely. Many of these leases provide for a
royalty payment to the lessor based on a specific amount per ton of mineral
extracted or as a percentage of revenue. We believe we will be able to continue
to extend our material mineral lease agreements, as we have in the past, at
commercially reasonable terms, without incurring substantial costs or incurring
material modifications to the existing lease terms and conditions. In addition,
we own a number of properties and are party to non-mining leases that permit us
to perform activities that are ancillary to our mining operations, such as
surface use leases, and storage, depot and warehouse leases. We also believe
that all of our leases were entered into on market terms.
The following map shows the locations of our principal salt and SOP
production facilities:
[[Image Removed: LOGO]]
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We produce and distribute crop and animal nutrients, salt and deicing products.
These activities subject us to an evolving set of international, federal, state,
provincial and local environmental, health and safety ("EHS") laws that
regulate, or propose to regulate: (i) product content; (ii) use of products by
both us and our customers; (iii) conduct of mining and production operations,
including safety procedures followed by employees; (iv) management and handling
of raw materials; (v) air and water quality impacts from our facilities;
10
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
(vi) disposal, storage and management of hazardous and solid wastes;
(vii) remediation of contamination at our facilities and third-party sites; and
(viii) post-mining land reclamation. For new regulatory programs, it is
difficult for us to ascertain future compliance obligations or estimate future
costs until implementing regulations have been finalized and definitive
regulatory interpretations have been adopted. We intend to respond to these
regulatory requirements at the appropriate time by implementing necessary
modifications to our facilities and/or operating procedures.
We have expended, and anticipate that we will continue to expend, substantial
financial and managerial resources to comply with EHS standards. We estimate
that our 2004 EHS capital expenditures will total approximately $2.6 million,
primarily related to air quality devices and highway deicing salt storage pads.
We expect that our estimated expenditures in 2004 for reclamation activities
will be approximately $0.2 million. It is possible that greater than anticipated
EHS capital expenditures or reclamation expenditures will be required in 2004 or
in the future.
We maintain accounting accruals for certain contingent environmental
liabilities and believe these accruals comply with generally accepted accounting
principles. We record accruals for environmental investigatory and non-capital
remediation costs when litigation has commenced or a claim or assessment has
been asserted or is imminent, the likelihood of an unfavorable outcome is
probable and the financial impact of such outcome is reasonably estimable. Based
on current information, it is the opinion of management that our contingent
liabilities arising from EHS matters, taking into account established accruals,
will not have a material adverse effect on our business, financial condition or
results of operations. As of December 31, 2003, we had recorded environmental
accruals of $2.3 million.
Product Requirements and Impacts
International, federal, state and provincial standards: (i) require registration
of many of our products before such products can be sold; (ii) impose labeling
requirements on those products; and (iii) require producers to manufacture the
products to formulations set forth on the labels. Environmental, natural
resource and public health agencies at all regulatory levels continue to
evaluate alleged health and environmental impacts that might arise from the
handling and use of products such as those we manufacture. The
U.S. Environmental Protection Agency, or the "EPA," the State of California and
The Fertilizer Institute have each completed independent assessments of
potential risks posed by crop nutrient materials. These assessments concluded
that, based on the available data, crop nutrient materials generally do not pose
harm to human health. It is unclear whether any further evaluations may result
in additional standards or regulatory requirements for the producing industries,
including us, or for our customers. At this stage, it is the opinion of
management that the potential impact of these standards on the market for our
products or on the expenditures that may be necessary to meet new requirements
will not have a material adverse effect on our business, financial condition or
results of operations.
In December 2001, the Canadian government released a Priority Substances List
Assessment Report for road salt. This report found that road salts are entering
the environment under conditions that may have a harmful effect or constitute a
danger to the environment. Based on this report, the Minister of Environment has
proposed designating road salt as a "toxic" substance pursuant to the Canadian
Environmental Protection Act. Canada's federal cabinet, which has ultimate
responsibility, has not yet taken final action with respect to this proposal and
is not subject to any deadline to do so. This proposal was subject to a public
comment, during which individuals and the municipalities which comprise most of
our customers expressed a variety of views, including noting the utility and
cost-efficiency of salt as compared to other potential measures to reduce
ice-related road hazards. At this point, Environment Canada has indicated that,
whether or not road salts are declared toxic, their preferred course of action
is the establishment of voluntary guidelines for users as opposed to any form of
regulation. Environment Canada has been developing these guidelines based on
consultation with a broad-based stakeholders group, which includes the salt
industry. On September 20, 2003, Environment Canada released a proposed Code of
Practice to serve as these guidelines. The proposed Code of Practice remained
subject to public comment until November 19, 2003. Environment Canada has
indicated that it expects to publish the final code in 2004. Although the
proposed Code of Practice remains subject to change, the released draft requires
large road-salt users to develop salt management plans. We do not believe that
this would have a material direct effect on us, but the new salt management
plans may reduce the demand from our customers in Canada for road salt.
Given the importance of road salt for traffic safety and the current lack of
any practical substitute, we deem it unlikely that any final guidance or
regulation would result in a complete ban on the use of road salt. As noted in
the December 2001 report, the use of road salt and other deicing agents "is an
important component of strategies to keep roadways open and safe during the
winter and minimize traffic crashes, injuries and mortality under icy and snowy
conditions." The report further stated that mitigation measures "must be based
on optimization of winter road maintenance practices so as not to jeopardize
road safety, while minimizing the potential for harm to the environment."
Environment Canada recently confirmed the high importance of road safety in its
proposed regulation of road salt. In its September 22, 2003 press release in
connection with the proposed Code of Practice, it indicated that the proposed
code "will provide those who use road salts with a way to reduce harm to the
environment without jeopardizing road safety." Since the dissemination of the
December 2001 report, we have endeavored to work more closely with the national
11
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
government as well as provinces and municipalities to better manage the use,
storage and release of our road salts. As a result, we believe it has become
less likely that road salts will be designated as a toxic substance. Although we
cannot predict whether the proposal to list road salts will be finalized or the
precise form of the proposed Code of Practice or other future regulation, if
standardized guidelines are developed for the use and storage of road salt or
any alternate deicing products, we could suffer reduced sales and incur
substantial costs and expenses that could have a material adverse effect on our
business, financial condition and results of operation. In addition, while we
are not aware of any similar governmental proposals for such designation of road
salt in either the United States or the United Kingdom, we cannot guarantee that
such proposals will not arise.
Operating Requirements and Impacts
We hold numerous environmental, mining and other permits or approvals
authorizing operations at each of our facilities. Our operations are subject to
permits for extraction of salt and brine, discharges of process materials to air
and surface water, and injection of brine and wastewater to subsurface wells.
Some of our proposed activities may require waste storage permits. A decision by
a government agency to deny or delay issuing a new or renewed permit or
approval, or to revoke or substantially modify an existing permit or approval,
could have a material adverse effect on our ability to continue operations at
the affected facility. In addition, changes to environmental and mining
regulations or permit requirements could have a material adverse effect on our
ability to continue operations at the affected facility. Expansion of our
operations also is predicated upon securing the necessary environmental or other
permits or approvals. For example, since we recently installed a new grinding
circuit, some of our existing equipment at our Lyons, Kansas facility is subject
to the Federal Clean Air Act's New Source Performance Standard requirement. We
have completed a compliance program with the Kansas Department of Health and
Environment, and do not expect to incur any additional costs or significant
penalties, although there can be no guarantee.
Pursuant to the Mine Safety and Health Act, new interim regulatory standards
for diesel particulate matter became effective in 2002 and final standards are
expected to become effective in 2006. In response to litigation regarding its
final rule on diesel particulate matter, the Mine Safety and Health
Administration has initiated a new rule regarding certain provisions of the
final standards. We are currently in compliance with the interim standards that
are in effect between 2002 and 2006. However, material expenditures may be
required to achieve compliance with the final standards at the Cote Blanche
facility in Louisiana.
Remedial Activities
Remediation at Our Facilities
Many of our formerly-owned and current facilities have been in operation for a
number of years. Operations have historically involved the use and handling of
regulated chemical substances, salt and by-products or process tailings by us
and predecessor operators which have resulted in soil, surface water and
groundwater contamination. At some locations there are areas where
salt-processing waste and ordinary trash may have been disposed or buried, and
have since been closed and covered with soil and other materials. These past
operating practices at several of our facilities have resulted in soil, surface
water and groundwater contamination.
At many of these facilities, spills or other releases of regulated substances
have occurred previously and potentially could occur in the future, possibly
requiring us to undertake or fund cleanup efforts under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, or "CERCLA," or state
and provincial or United Kingdom laws governing cleanup or disposal of hazardous
substances. In some instances, we have agreed, pursuant to consent orders or
agreements with the appropriate governmental agencies, to undertake
investigations, which currently are in progress, to determine whether remedial
action may be required to address such contamination. At other locations, we
have entered into consent orders or agreements with appropriate governmental
agencies to perform required remedial activities that will address identified
site conditions. At still other locations, we have undertaken voluntary
remediation, and have removed formerly used underground storage tanks. Taking
into account established reserves, expenditures for these known conditions
currently are not expected, individually or in the aggregate, to be material.
However, material expenditures could be required in the future to remediate the
contamination at these or at other current or former sites. In addition, in
connection with the Recapitalization, IMC Global has agreed to indemnify us
against liabilities for certain known and unknown conditions at existing and
former sites.
Remediation at Third-Party Facilities
Along with impacting the sites at which we have operated, various third parties
have alleged that our historic operations have resulted in contamination to
neighboring off-site areas or nearby third-party facilities. CERCLA imposes
liability, without regard to fault or to the legality of a party's conduct, on
certain categories of persons who are considered to have contributed to the
release of "hazardous substances" into the environment. Under CERCLA, or its
various state analogues, one party may potentially be required to bear more than
its proportional share of cleanup costs at a site where it has liability if
payments cannot be obtained from other responsible parties.
We have entered into "de minimis" settlement agreements with the EPA with
respect to several CERCLA sites, pursuant to which we have made one-time cash
payments and
12
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
received statutory protection from future claims arising from those sites. In
some cases, however, such settlements have included "reopeners," which could
result in additional liability at such sites in the event of newly discovered
contamination or other circumstances.
At other sites for which we have received notice of potential CERCLA
liability, we have provided information to the EPA that we believe demonstrates
that we are not liable, and the EPA has not asserted claims against us with
respect to such sites. In some instances, we have agreed, pursuant to orders
from or agreements with appropriate governmental agencies or agreements with
private parties, to undertake or fund investigations, some of which currently
are in progress, to determine whether remedial action, under CERCLA or
otherwise, may be required to address contamination. At other locations, we have
entered into consent orders or agreements with appropriate governmental agencies
to perform required remedial activities that will address identified site
conditions. At the present time, we are not aware of any additional sites for
which we expect to receive a notice from the EPA or any other party of potential
CERCLA liability. However, based on past operations, there is a potential that
we may receive notices in the future for sites of which we are currently unaware
or that our liability at currently known sites may increase. Taking into account
established accruals, expenditures for our known environmental liabilities and
site conditions currently are not expected, individually or in the aggregate, to
be material or have a material adverse effect on our business, financial
condition or results of operations.
RISK FACTORS
You should carefully consider the following risks and all of the information set
forth in this annual report on Form 10-K/ A. The risks described below are not
the only ones facing our company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also
materially and adversely affect our business, financial condition or results of
operations.
Risks Related to Our Business
The seasonal demand for our products and the variations in our cash flows from
quarter to quarter as a result of weather conditions may have an adverse effect
on our results of operations.
Our highway deicing product line is seasonal, with operating results varying
from quarter to quarter as a result of weather conditions and other factors.
Over the last four years, our North American highway deicing product line has
generated over 61% of its annual sales, net of shipping and handling costs,
during the months of December through March when the need for highway deicing is
at its peak. We need to stockpile sufficient highway deicing salt in the first
two fiscal quarters to meet estimated demand for the winter season. Weather
conditions that impact our highway deicing product line include temperature,
levels of precipitation, number of snow days and duration and timing of snow
fall in our relevant geographic markets. Lower than expected sales by us during
this period could have a material adverse effect on our results of operations.
Our SOP operating results are dependent in part upon conditions in the
agriculture markets. The agricultural products business can be affected by a
number of factors, the most important of which for U.S. markets are weather
patterns and field conditions (particularly during periods of traditionally high
crop nutrients consumption) and quantities of crop nutrients imported to and
exported from North America.
Our substantial indebtedness could adversely affect our financial condition and
impair our ability to operate our business.
As of December 31, 2003, we had $420.2 million of outstanding indebtedness,
including approximately $78.3 million under our senior credit facilities,
$14.0 million under our revolving credit facility and $327.9 million of Compass
Minerals Group's senior subordinated notes and stockholder's equity of
$55.2 million. At December 31, 2003, CMI had $75.7 million of senior discount
notes and $107.4 million of subordinated discount notes outstanding.
This level of leverage could have important consequences, including the
following:
it may limit our ability to borrow money or sell stock to fund our working
capital, capital expenditures and debt service requirements;
it may limit our flexibility in planning for, or reacting to, changes in our
business;
we may be more highly leveraged than some of our competitors, which may place
us at a competitive disadvantage;
it may make us more vulnerable to a downturn in our business or the economy;
it will require us to dedicate a substantial portion of our cash flow from
operations to the repayment of our indebtedness, thereby reducing the
availability of our cash flow for other purposes; and
it may materially and adversely affect our business and financial condition
if we are unable to service our indebtedness or obtain additional financing,
as needed.
In addition, our and CMI's indentures and our senior credit facilities
contain financial and other restrictive covenants discussed below that may limit
our ability to engage in activities that may be in our long-term best interests.
Our failure to comply with those covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
debt. See " - Restrictive covenants in the agreements governing our indebtedness
and certain indebtedness of CMI may restrict our ability to pursue our business
strategies."
13
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
Restrictive covenants in the agreements governing our indebtedness and certain
indebtedness of CMI may restrict our ability to pursue our business strategies.
Our senior credit facilities and indebtedness and the indebtedness of CMI limit
our ability and the ability of our restricted subsidiaries, among other things,
to:
incur additional indebtedness or contingent obligations;
pay dividends or make distributions to our stockholders;
repurchase or redeem our stock;
make investments;
grant liens;
make capital expenditures;
enter into transactions with our stockholders and affiliates;
sell assets; and
acquire the assets of, or merge or consolidate with, other companies.
In addition, our senior credit facilities require us to maintain financial
ratios. These financial ratios include an interest coverage ratio and a
consolidated indebtedness leverage ratio. Although we have historically been
able to maintain these financial ratios, we may not be able to maintain these
ratios in the future. Covenants in our senior credit facilities may also impair
our ability to finance future operations or capital needs or to enter into
acquisitions or joint ventures or engage in other favorable business activities.
If we default under our senior credit facilities under certain circumstances,
the lenders could require immediate payment of the entire principal amount.
These circumstances include a change of control, default under agreements
governing our and CMI's other indebtedness, material judgments in excess of
$5,000,000 or breach of representations and warranties. Any default under our
senior credit facilities or agreements governing our and CMI's other
indebtedness could lead to an acceleration of debt under our other debt
instruments that contain cross-acceleration or cross-default provisions. If the
lenders under our senior credit facilities require immediate repayment, we will
not be able to repay them and also repay our other indebtedness in full. Our
ability to comply with these covenants and restrictions contained in our senior
credit facilities and other agreements governing our other indebtedness may be
affected by changes in the economic or business conditions or other events
beyond our control.
Economic and other risks associated with international sales and operations
could adversely affect our business, including economic loss and a negative
impact on earnings.
Since we manufacture and sell our products primarily in the United States,
Canada and the United Kingdom, our business is subject to risks associated with
doing business internationally. Our sales outside the United States, as a
percentage of our total sales, were 34% for the year ended December 31, 2003.
Accordingly, our future results could be adversely affected by a variety of
factors, including:
changes in foreign currency exchange rates;
exchange controls;
tariffs, other trade protection measures and import or export licensing
requirements;
potentially negative consequences from changes in tax laws;
differing labor regulations;
requirements relating to withholding taxes on remittances and other payments
by subsidiaries;
restrictions on our ability to own or operate subsidiaries, make investments
or acquire new businesses in these jurisdictions;
restrictions on our ability to repatriate dividends from our
subsidiaries; and
unexpected changes in regulatory requirements.
Fluctuations in the value of the U.S. dollar may adversely affect our results
of operations. Because our consolidated financial results are reported in
U.S. dollars, if we generate sales or earnings in other currencies the
translation of those results into U.S. dollars can result in a significant
increase or decrease in the amount of those sales or earnings. In addition, our
debt service requirements are primarily in U.S. dollars even though a
significant percentage of our cash flow is generated in Canadian dollars and
pounds sterling. Significant changes in the value of Canadian dollars and pounds
sterling relative to the U.S. dollar could have a material adverse effect on our
financial condition and our ability to meet interest and principal payments on
U.S. dollar-denominated debt.
In addition to currency translation risks, we incur currency transaction risk
whenever we or one of our subsidiaries enter into either a purchase or a sales
transaction using a currency other than the local currency of the transacting
entity. Given the volatility of exchange rates, we cannot assure you that we
will be able to effectively manage our currency transaction and/or translation
risks. It is possible that volatility in currency exchange rates will have a
material adverse effect on our financial condition or results of operations. We
have in the past experienced and expect to continue to experience economic loss
and a negative impact on earnings as a result of foreign currency exchange rate
14
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
fluctuations. We expect that the amount of our revenues denominated in
non-U.S. dollar currencies will continue to increase in future periods. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Effects of Currency Fluctuations and Inflation" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk."
Our overall success as a global business depends, in part, upon our ability
to succeed in differing economic and political conditions. We cannot assure you
that we will continue to succeed in developing and implementing policies and
strategies that are effective in each location where we do business.
Our operations are dependent on natural gas and significant interruption in the
supply or increase in the price of natural gas could have a material adverse
effect on our financial condition or results of operations.
Energy costs, including primarily natural gas and electricity, represented
approximately 12% of the costs of our North American salt production in 2003.
Natural gas is a primary fuel source used in the evaporated salt production
process. Our profitability is impacted by the price and availability of natural
gas we purchase from third parties. In the fourth quarter of 2002, we adopted a
policy of hedging natural gas prices through the use of swap agreements. We have
not entered into any long-term contracts for the purchase of natural gas. Our
contractual arrangements for the supply of natural gas do not specify quantities
and are automatically renewed annually unless either party elects not to do so.
We do not have arrangements in place with back-up suppliers. A significant
increase in the price of natural gas that is not recovered through an increase
in the price of our products or covered through our hedging arrangements, or an
extended interruption in the supply of natural gas to our production facilities,
could have a material adverse effect on our business, financial condition or
results of operations.
Competition in our markets could limit our ability to attract and retain
customers, force us to continuously make capital investments and put pressure on
the prices we can charge for our products.
We encounter competition in all areas of our business. Competition in our
product lines is based on a number of considerations, including product
performance, transportation costs in salt distribution, brand reputation,
quality of client service and support, and price. Additionally, customers for
our products are attempting to reduce the number of vendors from which they
purchase in order to increase their efficiency. Our customers increasingly
demand a broad product range and we must continue to develop our expertise in
order to manufacture and market these products successfully. To remain
competitive, we will need to invest continuously in manufacturing, marketing,
customer service and support and our distribution networks. We may have to
adjust the prices of some of our products to stay competitive. We may not have
sufficient resources to continue to make such investments or maintain our
competitive position. Some of our competitors have greater financial and other
resources than we do.
Environmental laws and regulation may subject us to significant liability and
require us to incur additional costs in the future.
We are subject to numerous environmental, health and safety laws and regulations
in the United States, Canada and Europe, including laws and regulations relating
to land reclamation and remediation of hazardous substance releases, and
discharges to air and water. For example CERCLA, imposes liability, without
regard to fault or to the legality of a party's conduct, on certain categories
of persons (known as "potentially responsible parties") who are considered to
have contributed to the release of "hazardous substances" into the environment.
Although we are not currently incurring material liabilities pursuant to CERCLA,
we may in the future incur material liabilities under CERCLA and other
environmental cleanup laws, with regard to our current or former facilities,
adjacent or nearby third-party facilities, or off-site disposal locations. Under
CERCLA, or its various state analogues, one party may, under some circumstances,
be required to bear more than its proportional share of cleanup costs at a site
where it has liability if payments cannot be obtained from other responsible
parties. Liability under these laws involves inherent uncertainties. Violations
of environmental, health and safety laws are subject to civil, and in some
cases, criminal sanctions.
We have received notices from governmental agencies that we may be a
potentially responsible party at certain sites under CERCLA or other
environmental cleanup laws. We have entered into "de minimis" settlement
agreements with the United States with respect to certain CERCLA sites, pursuant
to which we have made one-time cash payments and received statutory protection
from future claims arising from those sites. At other sites for which we have
received notice of potential CERCLA liability, we have provided information to
the EPA, that we believe demonstrates that we are not liable and the EPA has not
asserted claims against us with respect to such sites. In some instances, we
have agreed, pursuant to consent orders or agreements with the appropriate
governmental agencies, to undertake investigations, which currently are in
progress, to determine whether remedial action may be required to address such
contamination. At other locations, we have entered into consent orders or
agreements with appropriate governmental agencies to perform remedial activities
that will address identified site conditions. At the present time, we are not
aware of any additional sites for which we expect to receive a notice from the
EPA of potential CERCLA liability. However, based on past operations there is a
potential that we may receive such notices in the future for sites of which we
are currently unaware. Taking into account established reserves, expenditures
for our known environmen-
15
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
tal liabilities and site conditions currently are not expected, individually or
in the aggregate, to be material. However, material expenditures could be
required in the future to remediate the contamination at these or at other
current or former sites.
We have also developed alternative mine uses. For example, we entered into a
joint venture with a subsidiary of Violia Environnement that is in the waste
management industry. The joint venture has applied for a permit to allow for the
storage of certain stable types of hazardous waste in our salt mine in the
United Kingdom. We believe that the mine is stable and should provide a secure
storage location. However, we recognize that any temporary or permanent storage
of hazardous waste may involve risks to the environment. Although we believe
that we have taken these risks into account as much as possible in our planning
process, it is possible that material expenditures could be required in the
future to further reduce this risk, or to remediate any future contamination.
Continued government and public emphasis on environmental issues can be
expected to result in increased future investments for environmental controls at
ongoing operations, which will be charged against income from future operations.
Present and future environmental laws and regulations applicable to our
operations may require substantial capital expenditures and may have a material
adverse effect on our business, financial condition and results of operations.
For more information, see Item 1, "Business - Environmental, Health and Safety
Matters."
The Canadian government's proposal to designate road salt as a toxic substance
could have a material adverse effect on our business, including reduced sales
and the incurrence of substantial costs and expenditures.
In December 2001, the Canadian government released a Priority Substances List
Assessment Report for road salt. This report found that road salts are entering
the environment under conditions that may have a harmful effect or constitute a
danger to the environment. Based on this report, the Minister of Environment has
proposed designating road salt as a "toxic" substance pursuant to the Canadian
Environmental Protection Act. Canada's federal cabinet, which has ultimate
responsibility, has not yet taken final action with respect to this proposal and
is not subject to any deadline to do so. At this point, Environment Canada has
indicated that, whether or not road salts are declared toxic, their preferred
course of action is the establishment of voluntary guidelines for users as
opposed to any form of regulation. Environment Canada has been developing these
guidelines based on consultation with a broad-based stakeholders group, which
includes the salt industry. On September 20, 2003, Environment Canada released a
proposed Code of Practice to serve as these guidelines. The proposed Code of
Practice remained subject to public comment until November 19, 2003. Environment
Canada has indicated that it expects to publish the final code in 2004. Although
the proposed Code of Practice remains subject to change, the released draft
requires large road-salt users to develop salt management plans. We do not
believe that this would have a material direct effect on us, but the new salt
management plans may lead our customers in Canada to require less road salt.
Given the importance of road salt for traffic safety and the current lack of
any practical substitute, we deem it unlikely that any final guideline or
regulation would result in a complete ban on the use of road salt. We do,
however, recognize the importance of environmental protection in Canada's
decision-making process. Although we cannot predict whether the proposal to
designate road salt as a toxic substance will be finalized or the precise form
of the proposed Code of Practice or other future regulation, if standardized
guidelines are developed for the use and storage of road salt or any alternate
deicing products, we could suffer reduced sales and incur substantial costs and
expenses that could have a material adverse effect on our business, financial
condition and results of operation. Our road-salt sales, net of shipping and
handling, in Canada generated approximately 13% of our total sales in 2003. In
addition, while we are not aware of any similar governmental proposals for the
designation of road salt as a toxic substance in either the United States or the
United Kingdom, we cannot guarantee that these proposals will not arise.
Our operations are dependent on our having received the required permits and
approvals from governmental authorities.
We hold numerous governmental environmental, mining and other permits and
approvals authorizing operations at each of our facilities. A decision by a
governmental agency to deny or delay issuing a new or renewed permit or
approval, or to revoke or substantially modify an existing permit or approval,
could have a material adverse effect on our ability to continue operations at
the affected facility. Expansion of our existing operations also is predicated
upon securing the necessary environmental or other permits or approvals. We
currently do not have any material pending permits or approvals.
Protection of proprietary technology - Our intellectual property may be
misappropriated or subject to claims of infringement.
We attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret protection, as well as licensing
agreements and third-party nondisclosure and assignment agreements. We cannot
assure you that any of our applications for protection of our intellectual
property rights will be approved or that others will not infringe or challenge
our intellectual property rights. The patents we currently have in place expire
between 2009 and 2018. We also rely on unpatented proprietary technology. It is
possible that others will independently develop the same or similar technology
or otherwise obtain access to our
16
Table of Contents
COMPASS MINERALS GROUP, INC. 2003 FORM 10-K
unpatented technology. To protect our trade secrets and other proprietary
information, we require employees, consultants, advisors and collaborators to
enter into confidentiality agreements. Many of our important brand names are
registered as trademarks in the United States and foreign countries. These
registrations can be renewed if the trademark remains in use. These agreements
may not provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure. If we are unable to maintain the proprietary nature of our
technologies, we may lose the competitive advantage provided by our intellectual
property. As a result, our results of operations may be adversely affected.
If we are unsuccessful in negotiating new collective bargaining agreements, we
may experience significant increases in the cost of labor or a disruption in our
operations.
As of December 31, 2003, we had 1,497 employees. Approximately 38% of our
U.S. workforce (54% of our global workforce) is represented by labor unions. Of
our nine material collective bargaining agreements, four will expire in 2004,
one will expire in 2005 and four will expire in 2006. Additionally,
approximately 13% of our workforce is employed in Europe where trade union
membership is common. Although we believe that our relations with our employees
are good, as a result of general economic, financial, competitive, legislative,
political and other factors beyond our control, we cannot assure you that we
will be successful in negotiating new collective bargaining agreements, that
such negotiations will not result in significant increases in the cost of labor
or that a breakdown in such negotiations will not result in the disruption of
our operations.
We rely on independent distributors and the loss of a substantial number of
these distributors may reduce our profits and sales.
In addition to our own direct sales force, we depend on the services of
independent distributors to sell our products and provide service and
aftermarket support to our customers. In 2003, 12% of our sales, net of shipping
and handling costs, were generated through these independent distributors. Many
of these independent distributors are not bound to us by exclusive distribution
contracts and may offer products of, and services to, businesses that compete
with ours. In addition, the majority of the distribution contracts we have with
these independent distributors are cancelable by the distributor after providing
us with notice, which on average is six months prior to termination. The loss of
a substantial number of these distributors or the decision by many of these
distributors to offer competitors' products to our customers could materially
reduce our sales and profits.
If we cannot successfully complete acquisitions or integrate acquired
businesses, our growth may be limited and our financial condition adversely
affected.
Our business strategy includes supplementing internal growth by pursuing
acquisitions of small complementary businesses. We may be unable to complete
acquisitions on acceptable terms, identify suitable businesses to acquire or
successfully integrate acquired businesses in the future. We compete with other
potential buyers for the acquisition of other small complementary businesses.
This competition and regulatory considerations may result in fewer acquisition
opportunities. If we cannot complete acquisitions, our growth may be limited and
our financial condition may be adversely affected.
Our business is dependent upon highly skilled personnel, and the loss of key
personnel may have a material adverse effect on our development and results of
operations.
The success of our business is dependent on our ability to attract and retain
highly skilled managers and other personnel. We cannot assure you that we will
be able to attract and retain the personnel necessary for the development of our
business. The loss of the services of key personnel or the failure to attract
additional personnel as required could have a material adverse effect on our
development and results of operations. We do not currently maintain "key person"
life insurance on any of our key employees.
Our principal stockholder's interest may conflict with or differ from the
interests of other holders of our securities.
Apollo and its affiliates own 35% of the fully diluted equity of CMI.
Consequently, Apollo has the ability to influence the election of our directors,
the appointment of new management and the potential outcome of all matters
submitted to a vote of our stockholders, including entering into mergers, the
sale of substantially all of our assets and other extraordinary transactions.
The interests of Apollo and its affiliates could conflict with or differ from
the interests of our securities holders.
|