COMPASS MINERALS INTERNATIONAL INC (CMP) FY 2020 MD&A

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

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

COMPANY OVERVIEW

Compass Minerals is a leading provider of essential minerals focused on safely delivering where and when it matters to help solve nature’s challenges for customers and communities. Our salt products help keep roadways safe during winter weather and are used in numerous other consumer, industrial and agricultural applications. Our plant nutrition business manufactures an innovative and diverse portfolio of products that improve the quality and yield of crops, while supporting sustainable agriculture. Additionally, our specialty chemical business serves the water treatment industry and other industrial processes. As of December 31, 2020, we operate 21 production and packaging facilities with more than 3,000 personnel throughout the U.S., Canada, Brazil and the U.K, 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 near Ogden, Utah, which is both the largest SOP specialty fertilizer production site and the largest solar salt production site in the Western Hemisphere;

•Several mechanical evaporation facilities producing consumer and industrial salt; and

•Multiple facilities producing essential agricultural nutrients and specialty chemicals in Brazil.

Our Salt segment provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, agricultural and industrial applications in North America. In the U.K., we operate a records management business utilizing excavated areas of our Winsford salt mine with one other surface location in London, England.

Our plant nutrition businesses produce and market specialty plant nutrition products worldwide to distributors and retailers of crop inputs, as well as growers. Our principal plant nutrition product in our Plant Nutrition North America segment is SOP, which we market under the trade name Protassium+. We also sell various premium micronutrient products under our Wolf Trax and other brands.

Our Plant Nutrition South America segment operates two primary businesses in Brazil—agricultural productivity, which manufactures and distributes a broad offering of specialty plant nutrition solution-based products, and chemical solutions, which manufactures and markets specialty chemicals, primarily for the water treatment industry and for use in other industrial processes.

We focus on building intrinsic value by growing our earnings before interest, taxes, depreciation and amortization (“EBITDA”) and by improving our asset quality. We can employ our operating cash flow and other sources of liquidity to pay dividends, re-invest in our business, pay down debt and make acquisitions.

COVID-19 Pandemic

The ongoing COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. As an essential business, we have continued producing and delivering products that support critical industries such as transportation, agriculture, chemical, food, pharmaceutical and animal nutrition. However, we have instituted several measures in response to the COVID-19 pandemic and the COVID-19 pandemic has negatively affected our business in a number of ways.

•Employee welfare: Our management team has taken multiple actions to limit the exposure of employees to the spread of COVID-19, including instituting remote working where possible, adjusting shift schedules and crew sizes, restricting visitation to operational sites, curtailing all business-related commercial air travel, and increasing sanitation of offices and common areas within our facilities.

•Operations and sales: The COVID-19 pandemic has not interrupted the operations of our mining and manufacturing facilities in North America and Brazil. Operations at our U.K. salt mine were idled near the end of March 2020 through mid-May 2020 due to the very mild winter weather experienced in that market, along with U.K. government guidance on COVID-19 preventative measures. During 2020, we also experienced an impact to some of our sales channels due to manufacturing outages and retail disruptions related to COVID-19, primarily for our non-deicing salt products. In total, we estimate that the combined impact of lost sales and incremental operating costs related to the COVID-19 pandemic totaled approximately $10 million on a year-to-date basis.

•Supply chain and logistics: To date, we have experienced no material supply chain or logistics issues related to COVID-19. We continue to evaluate potential supply chain and logistics impacts, proactively increase inventory levels of critical sourced inputs and identify secondary suppliers where possible. Both our operations and our logistics partners are deemed “essential” under current governmental guidance, and we have worked to ensure we understand and comply with their safety precautions to limit potential disruptions.

The ultimate impact that COVID-19 will have on our future results is unknown at this time. For more information, see “Part I, Item 1A, Risk Factors.”

Consolidated Results of Operations

* Refer to “—Reconciliation of Net Earnings to EBITDA and Adjusted EBITDA” for a reconciliation to the most directly comparable GAAP financial measure and the reasons we use this non-GAAP measure.

CONSOLIDATED RESULTS COMMENTARY: 2019 – 2020

•Total sales decreased $117.0 million, due to a decrease in the Salt and Plant Nutrition South America segments, partially offset by an increase in the Plant Nutrition North America segment.

•Operating earnings decreased 14%, or $23.1 million, due to lower operating earnings in our Salt and Plant Nutrition North America segments and higher corporate expenses.

•Diluted earnings per share decreased 5%, or $0.09.

•EBITDA* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* decreased 8%, or $24.4 million.

CONSOLIDATED RESULTS COMMENTARY: 2018 – 2019

•Total sales decreased $3.1 million, due to a decrease in both plant nutrition businesses, partially offset by an increase in the Salt segment.

•Operating earnings increased 26%, or $33.3 million, due to higher operating earnings in our Salt segment, which was partially offset by lower operating earnings in both of our plant nutrition businesses.

•Diluted earnings per share decreased 10%, or $0.21.

•Adjusted EBITDA* increased 12%, or $32.5 million.

GROSS PROFIT & GROSS MARGIN COMMENTARY: 2019 – 2020

Gross Profit: Decreased 7%, or $24.5 million; Gross Margin was 23% in both periods

•Salt segment gross profit decreased $8.8 million primarily due to lower sales volumes, which were partially offset by higher average sales prices and lower logistics costs (see “—Operating Segment Performance—Salt” for additional information).

•Gross profit for the plant nutrition businesses, on a combined basis, decreased $16.5 million. Plant Nutrition North America segment gross profit decreased $13.3 million primarily due to lower average sales prices and higher product costs including an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles, feedstock inconsistency and unplanned downtime at our Ogden facility, partially offset by higher sales volumes. Plant Nutrition South America segment gross profit decreased $3.2 million primarily due to a weaker Brazilian real compared to the U.S. dollar, which was partially offset by higher agricultural product sales volumes.

GROSS PROFIT & GROSS MARGIN COMMENTARY: 2018 – 2019

Gross Profit: Increased 15%, or $42.9 million; Gross Margin increased 3 percentage points to 23% from 20%

•Salt segment gross profit increased $54.0 million primarily due to higher average sales prices, which were partially offset by lower sales volumes, increased per-unit shipping and handling costs and higher product costs (see “—Operating Segment Performance—Salt” for additional information).

•The plant nutrition business, on a combined basis, decreased $10.7 million. Plant Nutrition North America segment gross profit decreased $1.8 million primarily due to lower sales volumes and higher per-unit shipping and handling costs due to an unfavorable geographic sales mix, partially offset by improved per-unit product costs. Plant Nutrition South America segment gross profit decreased $8.9 million primarily due to higher raw material costs, lower chemical solutions product prices and a weaker Brazilian real compared to the U.S. dollar.

OTHER EXPENSES AND INCOME COMMENTARY: 2019 – 2020

SG&A: Decreased $1.4 million; Increased 0.9 percentage points as a percentage of sales to 12.5% from 11.6%

•The reduction in SG&A expense was primarily due to lower travel expenses due to COVID-19, which was partially offset by higher corporate incentive compensation and higher corporate depreciation expense.

Interest Expense: Increased $2.8 million to $71.2 million

•The increase was primarily due to an increase in interest rates due to the refinancing of our debt in the fourth quarter of

2019, which was partially offset by lower debt levels.

Net Earnings in Equity Investee: Increased from $0.7 million to $1.4 million

•Net earnings in our equity investee increased by $0.7 million to $1.4 million due to higher sales volumes.

(Gain) loss on Foreign Exchange: Improved $13.4 million from a loss of $13.0 million in 2019 to a gain of $0.4 in 2020

•The improvement of $13.4 million was due primarily to changes in foreign currency exchange rates on our non U.S. dollar denominated intercompany loans between our U.S. and foreign subsidiaries.

Other Income, Net: decreased $1.6 million from income of $1.7 million to income of $0.1 million

•The decrease in other income, net is primarily due to fees related to our U.S. securitization facility and lower interest income in 2020.

Income Tax Expense: Decreased $10.4 million to $11.7 million

•Income tax expense and our income tax rate decreased in 2020 due to the release of domestic tax reserves in 2020.

•Our effective tax rate decreased from 26% in 2019 to 16% in 2020. Our effective tax rate in 2020 was impacted by the release of domestic tax reserves due to statute expirations.

•Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, foreign income, mining and withholding taxes, global intangible low-taxed income (“GILTI”) and interest expense recognition differences for tax and financial reporting purposes.

OTHER EXPENSES AND INCOME COMMENTARY: 2018 – 2019

SG&A: Increased $9.6 million; Increased 0.6 percentage points as a percentage of sales to 11.6% from 11.0%

•The increase in SG&A expense was primarily due to higher employee-related costs to bolster operational and mining expertise in our Salt and Plant Nutrition North America segments, corporate incentive compensation and higher corporate professional services expense.

Interest Expense: Increased $5.9 million to $68.4 million

•The increase was primarily due to an increase in average outstanding borrowings under our revolving credit facility and higher interest rates on our term loans.

Net Earnings in Equity Investee: Decreased from $1.0 million to $0.7 million

•Net earnings in our equity investee decreased by $0.3 million to $0.7 million.

(Gain) loss on Foreign Exchange: Decreased from gain of $5.8 million to loss of $13.0 million

•The change resulted from differences in foreign exchange rates on our non U.S. dollar denominated intercompany loans between our U.S. and foreign subsidiaries.

Other Income, Net: decreased $1.3 million from income of $3.0 million to income of $1.7 million

•The decrease was primarily due to lower interest income and debt refinance fees in 2019.

Income Tax Expense: Increased $13.3 million to $22.1 million

•Income tax expense and our income tax rate increased in 2019 due to the release of valuation allowances related to Plant Nutrition South America in 2018 and discrete tax expense items in 2019 compared to benefits in 2018.

•Our effective tax rate increased from 11% in 2018 to 26% in 2019. Our effective tax rate in 2018 was impacted by the release of valuation allowances related to Plant Nutrition South America.

•Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.

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 for the years ended December 31, 2020, 2019 and 2018. Sales primarily include revenue from the sales of our products, or “product sales,” and the impact of shipping and handling costs incurred to deliver our salt and plant nutrition products to our customers.

The results of operations of the consolidated records management business and other incidental revenues include sales of $10.1 million, $9.7 million and $10.5 million for 2020, 2019 and 2018, respectively. These sales are not material to our consolidated financial results and are not included in the following operating segment financial data.

SALT SEGMENT RESULTS

SALT SEGMENT RESULTS COMMENTARY: 2019 – 2020

•Salt sales decreased 12%, or $110.1 million, due to lower Salt sales volumes, which was partially offset by higher average sales prices.

•Salt sales volumes decreased 14%, or 1,483,000 tons, and contributed approximately $118 million to the decrease in sales. Highway deicing sales volumes decreased 14% as a result of mild weather in North America and the U.K. when compared to 2019, which was partially offset by higher sales volumes to our chemical customers. Consumer and industrial sales volumes decreased 12% due to lower sales of deicing products due to the mild weather in 2020 and lower non-deicing sales volumes primarily due to COVID-19.

•Salt average sales price increased 1% and partially offset the decrease in sales by approximately $8 million due to slightly higher average sales prices.

•Highway deicing average sales prices increased 1%, reflecting higher prices realized in the first half of the year from higher North American highway deicing contract prices for the 2019-2020 winter season, and higher chemical customer prices, partially offset by lower North American highway deicing contract prices for the 2020-2021 winter season. Consumer and industrial average sales prices increased 1% due to non-deicing price increases in 2020.

•Salt operating earnings decreased 4%, or $6.2 million, due to lower sales volumes and higher per-unit product costs in 2020, which was partially offset by lower per-unit logistics costs. Per-unit product costs were higher in 2020 due to higher per-unit costs in the U.K. and at our consumer and industrial plants largely due to lower production volumes.

SALT SEGMENT RESULTS COMMENTARY: 2018 – 2019

•Salt sales increased 4%, or $31.4 million, due to higher highway deicing average sales prices and higher consumer and industrial sales volumes, which was partially offset by lower highway deicing sales volumes.

•Salt sales volumes decreased 6%, or 704,000 tons, which offset the increase in Salt segment sales by approximately $24 million. Highway deicing sales volumes decreased 9% as a result of mild weather in the U.K. when compared to the significantly above average U.K. winter weather in the first quarter of 2018 and lower North American contract volumes in the 2018-2019 bid season due primarily to lower production volumes at our Goderich mine in 2018. Consumer and industrial sales volumes increased 7% due to higher sales volumes of deicing and non-deicing products.

•Salt average sales price increased 10% and contributed approximately $55 million to the increase in Salt segment sales due to higher highway deicing prices and product sales mix, as consumer and industrial products, which have a higher average sales price than highway deicing products, were a higher proportion of total sales in the current period.

•Highway deicing average sales prices increased 12%, primarily as a result of the realization of higher North American highway deicing bid prices for the 2019-2020 winter season. Consumer and industrial average sales prices decreased 2% due to sales mix.

•Salt operating earnings increased 45%, or $52.3 million, due to higher highway deicing prices in 2019. Per-unit product costs were higher in 2019 due to a higher mix of consumer and industrial sales which have a higher per-unit cost. Per-unit production costs and volumes at our North American mines have improved from 2018 which was unfavorably impacted by the labor strike at the Goderich mine.

PLANT NUTRITION NORTH AMERICA RESULTS

PLANT NUTRITION NORTH AMERICA RESULTS COMMENTARY: 2019 – 2020

•Plant Nutrition North America sales increased 16%, or $33.4 million, primarily due to higher sales volumes, which was partially offset by lower sales prices.

•Plant Nutrition North America sales volumes increased 21%, or 66,000 tons, and increased sales by approximately $43 million. The volume increase was primarily the result of suppressed demand in the first half of 2019 due to the cold and wet weather conditions in key North American markets and an upturn in the agriculture market during 2020.

•Plant Nutrition North America average sales prices decreased 4% which partially offset the increase in sales by approximately $10 million.

•Plant Nutrition North America operating earnings decreased 46%, or $10.4 million, due to higher per-unit product costs and lower average sales prices, which was partially offset by higher sales volumes and lower SG&A expenses. The higher per-unit product cost in 2020 was due to an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles, unplanned downtime and feedstock inconsistency at our Ogden facility.

PLANT NUTRITION NORTH AMERICA RESULTS COMMENTARY: 2018 – 2019

•Plant Nutrition North America sales decreased 12%, or $27.0 million, primarily due to lower sales volumes.

•Plant Nutrition North America sales volumes decreased 12%, or 45,000 tons, and reduced sales by approximately $29 million. The volume decrease was primarily the result of lower demand due to the wet weather conditions in key North American markets in the first half of 2019.

•Plant Nutrition North America average sales prices increased 1% which partially offset the decrease in sales by approximately $2 million.

•Plant Nutrition North America operating earnings decreased 11%, or $2.8 million, due to lower sales volumes, higher per-unit shipping and handling costs, a less favorable geographic sales mix and higher cost carryover inventory from 2018 into 2019, as compared to 2018 beginning inventory. This decrease was partially offset by lower production costs resulting from improved production yield from our pond-based feedstock.

PLANT NUTRITION SOUTH AMERICA RESULTS

PLANT NUTRITION SOUTH AMERICA RESULTS COMMENTARY: 2019 – 2020

•Plant Nutrition South America sales decreased 11% or $40.7 million due to a 32% unfavorable weighted average change in the Brazilian real versus the U.S. dollar from the prior year, which was partially offset by higher sales volumes.

•Plant Nutrition South America sales volumes increased 4%, or 34,000 tons, which contributed approximately $22 million to Plant Nutrition South America sales. Agricultural productivity sales volumes increased 7% due primarily to improvements in farmer economics and affordability of fertilizer products due to foreign exchange and barter rates. Chemical solutions sales volumes were essentially unchanged from the prior year as higher sales of chlor-alkali products were offset by reduced sales of water conditioning products.

•A 14% decrease in Plant Nutrition South America average sales price resulted in a decrease of approximately $63 million in Plant Nutrition South America sales due to the weakening of the Brazilian real versus the U.S. dollar. In local currency, average sales prices were up 14% due primarily to a 14% increase in agricultural productivity product sales prices as a result of a stronger product mix and price increases in most product lines.

•Plant Nutrition South America operating earnings increased 1%, or $0.3 million, primarily due to higher sales volumes and improved chemical margins due to production efficiencies, which were mostly offset by the weaker Brazilian real and higher SG&A costs in local currency due to incentive compensation and professional services.

PLANT NUTRITION SOUTH AMERICA RESULTS COMMENTARY: 2018 – 2019

•Plant Nutrition South America sales decreased 2% or $6.7 million as lower average sales prices were partially offset by higher sales volumes.

•Plant Nutrition South America sales volumes increased 4%, or 29,000 tons, and added approximately $6 million to Plant Nutrition South America sales. Chemical solutions sales volumes increased 13% due to new water treatment business in São Paulo. Agricultural productivity sales volumes decreased 2% primarily due to lower sales through our distribution sales channel which more than offset strong growth in our direct to grower sales channel.

•A 5% decrease in Plant Nutrition South America average sales price resulted in a decrease of approximately $13 million in Plant Nutrition South America sales. The decrease in average sales price was primarily due to a 16% decrease in chemical solutions average sales prices due to shifts in product sales mix, a weaker Brazilian real and competitive pressure for industrial and water treatment products. This decrease was partially offset by a 2% increase in agriculture product sales prices despite the weaker real.

•Plant Nutrition South America operating earnings decreased 18%, or $8.7 million, primarily due to lower chemical solutions prices, higher raw materials input costs and continued investment in our direct to grower sales force.

OUTLOOK

•We expect Salt sales volumes to range from 11.0 million to 11.8 million tons in 2021.

•Plant Nutrition North America sales volumes are expected to range from 350,000 to 380,000 tons in 2021.

•We expect 2021 Plant Nutrition South America sales volumes to range from 850,000 to 925,000 tons.

•We have initiated a strategic evaluation of the long-term fit of our South America business and a strategic separation of our South American assets into two businesses, chemicals and specialty plant nutrition, with the intention of enabling a targeted and efficient sales process to unlock maximum value for each set of assets. This evaluation and separation could result in a variety of outcomes (see “Risk Factors—We may not successfully implement our strategies.” for more information).

•For information about the impact of the COVID-19 pandemic on the Company, see “–COVID-19 Pandemic” and “Risk Factors.”

Investments, Liquidity and Capital Resources

Overview

Over the last several years, we have made significant investments in order to strengthen our operational capabilities.

•We shifted all of our Goderich mine production to continuous mining in the fourth quarter of 2017 following significant investments in this technology. Our continuous mining and haulage system at the Goderich mine is expected to provide a safer, more sustainable production environment and enhance our ability to ramp up and down to meet demand fluctuations. In addition, we recently completed our shaft relining project at our Goderich mine, which we undertook to help secure the integrity of the mine and our hoisting capacity for the future.

•We have invested in our Ogden facility to strengthen our solar-pond-based SOP production through upgrades to our processing plant and our solar evaporation ponds. This included modifying our existing solar evaporation ponds to increase the annual solar harvest as well as the extraction yield and processing capacity of our SOP plant, which allows us to increase our SOP production capacity to approximately 550,000 tons when supplemental KCl feedstock is used. We also recently completed a project to expand our ability to compact product into various product grades at our Ogden facility.

As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets. The principal source of cash needed to pay our obligations is the cash generated from our subsidiaries’ operations and their borrowings. Our subsidiaries are not obligated to make funds available to CMI. Furthermore, we must remain in compliance with the terms of the credit agreement governing our credit facilities, including the total leverage ratio and interest coverage ratio, in order to pay dividends to our stockholders. We must also comply with the terms of our indentures governing our 4.875% Senior Notes due July 2024 (the “4.875% Notes”) and our 6.75% Senior Notes due December 2027 (the “6.75% Notes), which limit the amount of dividends we can pay to our stockholders. We are in compliance with our debt covenants as of December 31, 2020. See Item 8, Note 10 to our Consolidated Financial Statements for a discussion of our outstanding debt.

Historically, our cash flows from operating activities have generally been adequate to fund our basic operating requirements, ongoing debt service and sustaining investment in our property, plant and equipment. We have also used cash generated from operations to fund capital expenditures which strengthen our operational position, to pay dividends, to fund smaller acquisitions and to repay our debt. We have been able to manage our cash flows generated and used across Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of December 31, 2020, we had $14.8 million of cash and cash equivalents (in our Consolidated Balance Sheets) that was either held directly or indirectly by foreign subsidiaries. Due in large part to the seasonality of our deicing salt business, we have experienced large changes in our working capital requirements from quarter to quarter. Historically, our working capital requirements have been the highest in the fourth quarter and lowest in the second quarter. When needed, we fund short-term working capital requirements by accessing our $300 million revolving credit facility.

We have historically considered the undistributed earnings of our foreign subsidiaries to be permanently reinvested. In December 2017, however, U.S. tax reform legislation was enacted, which included a one-time mandatory tax on previously deferred foreign earnings. As such, we revised our permanently reinvested assertion and we now expect to repatriate approximately $150 million of unremitted foreign earnings on which $4.3 million of income tax expense has been recorded for foreign withholding tax and state income taxes, consisting of $0.9 million recorded in 2019 and $3.4 million recorded in 2018. All of our non-U.S. undistributed earnings through December 31, 2017, were subject to the one-time mandatory tax for which we recorded a net tax expense of $52.1 million, which is comprised of tax expense of $55.2 million in 2017 offset by a benefit of $3.1 million in 2018. Due to our ability to generate adequate levels of U.S. cash flow on an annual basis, it is our current intention to continue to reinvest the remaining undistributed earnings of our foreign subsidiaries indefinitely. We review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense. As of December 31, 2020, we have $213.6 million of outside basis differences for which no deferred taxes have been recorded. See Item 8, Note 8 to our Consolidated Financial Statements for a discussion regarding U.S. tax reform.

In addition, the amount of permanently reinvested foreign earnings is influenced by, among other things, the profits generated by our foreign subsidiaries and the amount of investment in those same subsidiaries. The profits generated by our U.S. and foreign subsidiaries are impacted by the transfer price charged on the transfer of our products between them. As discussed in Item 8, Note 8 to our Consolidated Financial Statements, our calculated transfer price on certain products between one of our foreign subsidiaries and a domestic subsidiary has been challenged by Canadian federal and provincial governments. During 2018, in accordance with the settlement agreement, our U.S. subsidiary made intercompany cash payments of $85.7 million to our Canadian subsidiary and tax payments were made to Canadian taxing authorities of $17.5 million. Additional tax payments of $5.3 million were made during 2019 with the remaining liability of $1.4 million expected to be paid in 2021. Corresponding tax refunds of $22.2 million have been received as of December 31, 2020, from U.S. taxing authorities with the remaining refund of approximately $0.9 million expected in 2021. Additionally during 2018, we reached a settlement agreement on transfer pricing and management fees as part of an advanced pricing agreement with federal Canadian and U.S. tax authorities covering our 2013-2021 tax years. The recording of this settlement in 2018 resulted in increased sales for our Canadian subsidiary of $106.1 million and offsetting expenses for our U.S. subsidiary causing a domestic loss and significant foreign income in 2018. During 2019, in accordance with the settlement agreement, our U.S. subsidiary made an intercompany cash payment of $106.1 million to our Canadian subsidiary and tax payments were made to Canadian taxing authorities of $29.9 million with the remaining $1.4 million balance paid during 2020. Corresponding tax refunds of $59.7 million have been received as of December 31, 2020, from U.S. taxing authorities, with the remaining refund of $1.9 million expected in 2021. Canadian provincial taxing authorities continue to challenge our transfer prices of certain items. The final resolution of these challenges may not occur for several years. We currently expect the outcome of these matters will not have a material impact on our results of operations. However, it is possible the resolution could materially impact the amount of earnings attributable to our foreign subsidiaries, which could impact the amount of permanently reinvested foreign earnings. See Item 8, Note 8 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments and settlements.

Principally due to the nature of our deicing business, our cash flows from operations have historically been seasonal, with the majority of our cash flows from operations generated during the first half of the calendar year (see “—Seasonality” for more information). When we have not been able to meet our short-term liquidity or capital needs with cash from operations, whether as a result of the seasonality of our business or other causes, we have met those needs with borrowings under our revolving credit facility. We expect to meet the ongoing requirements for debt service, any declared dividends and capital expenditures

from these sources. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

The table below provides a summary our cash flows by category and year.

Capital Resources

We believe our primary sources of liquidity will continue to be cash flow from operations and borrowings under our revolving credit facility. We believe that our current banking syndicate is secure and believe we will have access to our entire revolving credit facility. We expect that ongoing requirements for debt service and committed or sustaining capital expenditures will primarily be funded from these sources.

Our debt service obligations could, under certain circumstances, materially affect our financial condition and prevent us from fulfilling our debt obligations. See Item 1A, “Risk Factors—Our indebtedness and any inability to pay our indebtedness could adversely affect our business and financial condition.” Furthermore, CMI is a holding company with no operations of its own and is dependent on its subsidiaries for cash flow. As discussed in Item 8, Note 10 to our Consolidated Financial Statements, at December 31, 2020, we had $1.41 billion of outstanding indebtedness consisting of $250.0 million under our 4.875% Notes, $500.0 million under our 6.75% Notes, $520.3 million of borrowings outstanding under our senior secured credit facilities (consisting of term loans and a revolving credit facility), including $130.3 million borrowed against our revolving credit facility, and $92.8 million of debt related to our Plant Nutrition South American segment in Brazil. Letters of credit totaling $12.5 million as of December 31, 2020, reduced available borrowing capacity under the revolving credit facility to $157.2 million.

On June 30, 2020, certain of our U.S. subsidiaries entered into a three-year committed revolving accounts receivable financing facility for up to $100.0 million of borrowing with PNC Bank, National Association, as administrative agent and lender, and PNC Capital Markets, LLC, as structuring agent. At December 31, 2020, we had $51.2 million of outstanding loans under this accounts receivable financing facility. See Item 8, Note 10 to our Consolidated Financial Statements for more information.

In the future, including in 2021, we may borrow amounts under the revolving credit facility or enter into additional financing to fund our working capital requirements, potential acquisitions and capital expenditures and for other general corporate purposes.

Our ability to make scheduled interest and principal payments on our indebtedness, to refinance our indebtedness, to fund planned capital expenditures and to fund acquisitions will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our liquidity needs over the next 12 months.

We have various foreign and state net operating loss (“NOL”) carryforwards that may be used to offset a portion of future taxable income to reduce our cash income taxes that would otherwise be payable. However, we may not be able to use any or all of our NOL carryforwards to offset future taxable income and our NOL carryforwards may become subject to additional limitations due to future ownership changes or otherwise. At December 31, 2020, we had $7.8 million of gross NOL carryforwards ($7.7 million of gross foreign federal NOL carryforwards that have no expiration date and $0.1 million of gross foreign federal NOL carryforwards that expire in 2033) and $0.2 million of net operating tax-effected state NOL carryforwards that expire beginning in 2027.

We have a defined benefit pension plan for certain of our current and former U.K. employees. Beginning December 1, 2008, future benefits ceased to accrue for the remaining active employee participants in the plan concurrent with the establishment of a defined contribution plan for these employees. Generally, our cash funding policy is to make the minimum annual contributions required by applicable regulations. As of December 31, 2020, the fair value of the plan’s assets are less than the accumulated benefit obligations and we could be required to use cash from operations above our historical levels to fund the plan in the future.

Off-Balance Sheet Arrangements

At December 31, 2020, we had no off-balance sheet arrangements that have or are likely to have a material current or future effect on our consolidated financial statements.

Contractual Obligations

Our contractual cash obligations and commitments as of December 31, 2020, are as follows (in millions):

Payments Due by Period

(a)Based on maintaining existing debt balances to maturity. Interest on our credit facilities varies with the Eurodollar rate and the base rate. The December 31, 2020 blended rate of 4.5%, including the applicable spread, was used for this calculation for CMI debt. The amounts in the table do not include interest payments of approximately $5.4 million each year which may be required to be deposited with the taxing authorities if other collateral arrangements cannot be made as long as disputes with Canadian taxing authorities remain outstanding. Item 8, Note 8 to our Consolidated Financial Statements provides additional information related to our Canadian tax reassessments.

(b)We lease property and equipment under non-cancelable operating and capital leases for varying periods.

(c)We have contracts to purchase certain amounts of electricity, equipment and raw materials. In addition, we have minimum throughput commitments in certain depots and warehouses.

(d)Item 8, Note 9 to our Consolidated Financial Statements provides additional information.

(e)Item 8, Note 12 to our Consolidated Financial Statements provides additional information.

Reconciliation of Net Earnings to EBITDA and Adjusted EBITDA

Management uses a variety of measures to evaluate our performance. While our consolidated financial statements, taken as a whole, provide an understanding of our overall results of operations, financial condition and cash flows, we analyze components of the consolidated financial statements to identify certain trends and evaluate specific performance areas. In addition to using U.S. generally accepted accounting principles (“GAAP”) financial measures, such as gross profit, net earnings and cash flows generated by operating activities, management uses EBITDA and Adjusted EBITDA. Both EBITDA and Adjusted EBITDA are non-GAAP financial measures used to evaluate the operating performance of our core business operations because our resource allocation, financing methods and cost of capital, and income tax positions are managed at a corporate level, apart from the activities of the operating segments, and the operating facilities are located in different taxing jurisdictions, which can cause considerable variation in net earnings. We also use EBITDA and Adjusted EBITDA to assess our operating performance and return on capital against other companies, and to evaluate potential acquisitions or other capital projects. EBITDA and Adjusted EBITDA are not calculated under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings, cash flows or other financial data prepared in accordance with U.S. GAAP or as a measure of our overall profitability or liquidity. EBITDA and Adjusted EBITDA exclude interest expense, income taxes and depreciation and amortization, each of which are an essential element of our cost structure and cannot be eliminated. Furthermore, Adjusted EBITDA excludes other cash and non-cash items, including restructuring costs, refinancing costs, stock-based compensation and other (income) expense. Our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt. We are also required to pay income taxes, a required and ongoing consequence of our operations. We have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues. Our employees are vital to our operations and we utilize various stock-based awards to compensate and incentivize our employees. Consequently, any measure that excludes these elements has material limitations. While EBITDA and Adjusted EBITDA are frequently used as measures of operating performance, these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation.

The calculation of EBITDA and Adjusted EBITDA as used by management is set forth in the table below (in millions).

In 2019, operating results included $2.8 million of additional logistics costs related to Mississippi river flooding and $2.3 million of severance and other costs related to executive transition. In 2018, we incurred $5.1 million of executive transition costs. Adjusted EBITDA also includes other non-operating income, primarily non-cash stock-based compensation expense, foreign exchange gains (losses) resulting from the translation of intercompany obligations, interest income and investment income (loss) relating to our nonqualified retirement plan.

Our net earnings, EBITDA and Adjusted EBITDA are impacted by other events or transactions that we believe to be important in understanding our earnings trends such as the variability of weather. The impact of weather has not been adjusted in the amounts presented above. Our 2020 results were unfavorably impacted by mild winter in the markets we serve and 2019 results were favorably impacted by above average winter weather. In 2018, winter weather was average.

Management’s Discussion of Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the reporting date and the reported amounts of revenue and expenses during the reporting period. Actual results could vary from these estimates. We have identified the critical accounting policies and estimates that are most important to the portrayal of our financial condition and results of operations. The policies set forth below require significant subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Goodwill – We test goodwill for impairment annually in the fourth quarter or more frequently if an impairment indicator is present. The quantitative impairment test requires judgment, including the identification of reporting units and the determination of fair value of each reporting unit. We determine the estimated fair value for each reporting unit based on discounted cash flow projections (income approach) and market values for comparable businesses (market approach). Under the income approach, we are required to make judgments about appropriate discount rates, long-term revenue growth rates and the amount and timing of expected future cash flows. The cash flows used in our estimates are based on the reporting unit's forecast, long-term business plan, and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. Our estimates may differ from actual future cash flows. The risk adjusted discount rate used is consistent with the weighted average cost of capital of our peer companies and is intended to represent a rate of return that would be expected by a market participant. Under the market approach, market multiples are derived from market prices of stocks of companies in our peer group. The appropriate multiple is applied to the forecasted revenue and earnings before interest, taxes, depreciation and amortization of the reporting unit to obtain an estimated fair value.

As of December 31, 2020, we have recorded goodwill of $281.3 million, primarily including $56.4 million in our Plant Nutrition North America segment and $218.8 million in our Plant Nutrition South America segment. As of the October 1, 2020 annual measurement date, each segment had an estimated fair value that exceeded its carrying value. The most critical assumptions used in the calculation of the fair value are the projected revenue growth rates, long-term operating margin, working capital requirements, terminal growth rates, discount rate, and the selection of market multiples. The projected long term operating margin utilized in our fair value estimates is consistent with our operating plan and is dependent on the successful execution of our long-term business plan, overall industry growth rates and the competitive environment. The discount rate could be adversely impacted by changes in the macroeconomic environment and volatility in the equity and debt markets. Although management believes its estimate of fair value is reasonable, if the future financial performance falls below our expectations or there are negative revisions to significant assumptions, or if our market capitalization declines, we may need to record a non-cash goodwill impairment charge in a future period.

Mineral Interests – As of December 31, 2020, we maintained $123.1 million of net mineral properties as a part of property, plant and equipment. Mineral interests include probable mineral reserves. We lease mineral reserves at several of our extraction facilities. These leases have varying terms, and many provide for a royalty payment to the lessor based on a specific amount per ton of mineral extracted or as a percentage of sales.

Mineral interests are primarily depleted on a units-of-production method based on third-party estimates of recoverable reserves. Our rights to extract minerals are generally contractually limited by time or lease boundaries. If we are not able to continue to extend 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, if the assigned lives realized are less than those projected by management, or if the actual size, quality or recoverability of the minerals is less than the estimated probable reserves, then the rate of amortization could be increased or the value of the reserves could be reduced by a material amount.

Income Taxes – Developing our provision for income taxes and analyzing our potential tax exposure items requires significant judgment and assumptions as well as a thorough knowledge of the tax laws in various jurisdictions. These estimates and judgments occur in the calculation of certain tax liabilities and in the assessment of the likelihood that we will be able to realize our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense, carryforwards and other items. Based on all available evidence, both positive and negative, the reliability of that evidence and the extent such evidence can be objectively verified, we determine whether it is more likely than not that all, or a portion of, the deferred tax assets will be realized.

In evaluating our ability to realize our deferred tax assets, we consider the sources and timing of taxable income, our ability to carry back tax attributes to prior periods, qualifying tax planning and estimates of future taxable income exclusive of reversing temporary differences. In determining future taxable income, our assumptions include the amount of pre-tax operating income according to multiple federal, international and state taxing jurisdictions, the origination of future temporary differences and the implementation of feasible and prudent tax planning. These assumptions require significant judgment about material estimates, assumptions and uncertainties in connection with the forecasts of future taxable income, the merits in tax law and assessments regarding previous taxing authorities’ proceedings or written rulings. While these assumptions are consistent with

the plans and estimates we use to manage the underlying businesses, differences in our actual operating results or changes in our tax planning, tax credits, tax laws or our assessment of the tax merits of our positions could affect our future assessments.

In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax regulations in multiple jurisdictions. We recognize potential liabilities in accordance with applicable GAAP for anticipated tax issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. See Item 8, Note 8 to our Consolidated Financial Statements for further discussion of our income taxes.

We have elected to account for GILTI in the year the tax is incurred, rather than recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years.

Taxes on Foreign Earnings – Our 2018 effective tax rate includes a tax benefit of $3.1 million related to the one-time mandatory tax on non-U.S. undistributed earnings deemed repatriated under U.S tax reform. As such, we revised our permanently reinvested assertion and we now expect to repatriate approximately $150 million of unremitted foreign earnings on which $4.3 million of income tax expense has been recorded for foreign withholding tax and state income taxes, consisting of $0.9 million recorded in 2019 and $3.4 million recorded in 2018. We consider all remaining non-U.S. earnings to be permanently reinvested outside the U.S. to the extent these earnings are not subject to U.S. income tax under an anti-deferral tax regime. As of December 31, 2020, we have approximately $213.6 million of outside basis differences on which no deferred taxes have been recorded.

U.K. Pension Plan – We have a defined benefit pension plan covering some of our current and former employees in the U.K. The U.K. pension plan was closed to new participants in 1992. As we elected to freeze our pension plan, our remaining active employees ceased to accrue future benefits under the plan beginning December 1, 2008. We select the actuarial assumptions for our pension plan after consultation with our actuaries and consideration of market conditions. These assumptions include the discount rate and the expected long-term rates of return on plan assets, which are used in the calculation of the actuarial valuation of our defined benefit pension plans. If actual conditions or results vary from those projected by management, adjustments may be required in future periods to meet minimum pension funding or to increase pension expense or our pension liability. A decrease of 25 basis points in our discount rate would have increased our projected benefit obligation as of December 31, 2020, by approximately $2.6 million and would increase our net periodic pension expense for 2020 by approximately $0.3 million. A decrease of 25 basis points in our expected return on assets assumption as of December 31, 2020, would increase our net periodic expense for 2020 by approximately $0.2 million.

We set our discount rate for our U.K. pension plan based on a forward yield curve for a portfolio of high credit quality bonds with expected cash flows and an average duration closely matching the expected benefit payments under the plan. The assumption for the return on plan assets is determined based on expected returns applicable to each type of investment within the portfolio expected to be maintained over the next 15 to 20 years. Our funding policy has been to make the minimum annual contributions required by applicable regulations. However, we have made special payments during some years when changes in the business could reasonably impact the pension plan’s available assets and when special early retirement payments or other inducements are made to pensioners. Contributions totaled $0.4 million, $1.7 million and $0.7 million during the years ended December 31, 2020, 2019 and 2018, respectively. If supplemental benefits were approved and granted under the provisions of the plan, or if periodic statutory valuations cause a change in funding requirements, our contributions could increase to fund all or a portion of those benefits. See Item 8, Note 9 to our Consolidated Financial Statements for additional discussion of our U.K. pension plan.

Other Significant Accounting Policies – Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above are nevertheless important to an understanding of our consolidated financial statements. Policies related to revenue recognition, allowance for doubtful accounts, valuation of inventory reserves, equity compensation instruments, intangible assets, legal reserves, derivative instruments and environmental accruals require judgments on complex matters.

Effects of Currency Fluctuations and Inflation

Our operations outside of the U.S. are conducted primarily in Canada, Brazil and the U.K. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then translated into U.S. dollars for inclusion in our historical consolidated financial statements. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly from time to time and may do so in the future. The majority of revenues and costs are denominated in U.S. dollars, with

Canadian dollars, Brazilian reais and British pounds sterling also being significant. We generated 43% of our 2020 sales in foreign currencies, and we incurred 44% of our 2020 total operating expenses in foreign currencies. Additionally, we have approximately $1.0 billion of net assets denominated in foreign currencies. In 2018 and 2019, the average rate for the U.S. dollar strengthened against the Brazilian real, the Canadian dollar and the British pound sterling. In 2020, the average rate for the U.S. dollar strengthened against the Brazilian real but weakened against the Canadian dollar and the British pound sterling. Significant changes in the value of the Canadian dollar, Brazilian real or the British pound 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, including borrowings under our senior secured credit facilities.

Although inflation has not had a significant impact on our operations, our efforts to recover cost increases due to inflation may be hampered as a result of the competitive industries and countries in which we operate.

Seasonality

We experience a substantial amount of seasonality in our sales, including our salt deicing product sales. Consequently, our Salt segment 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 product is used. Following industry practice in North America, we seek to stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season.

Our plant nutrition businesses are also seasonal. The strongest demand for our Plant Nutrition South America segment products in Brazil typically occurs during the spring planting season. As a result, we and our 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 our sales volumes and sales for our 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

See Item 8, Note 2 to our Consolidated Financial Statements for a discussion of recent accounting pronouncements.