Compass Minerals International, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash specialty fertilizer, micronutrients and related mineral products in North America and the U.K., with a 35% equity investment in Brazil-based Produquímica. This unaudited Form 10-Q covers the three and six months ended June 30, 2016. Results are seasonal, with deicing activity generally strongest in the first and fourth quarters.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $169.5 million | $183.7 million | $515.2 million | $576.7 million |
| Gross profit | $41.3 million | $50.6 million | $143.9 million | $163.8 million |
| Gross margin | 24% | 28% | 28% | 28% |
| Operating earnings | $15.5 million | $24.0 million | $89.8 million | $108.7 million |
| Net earnings | $6.3 million | $13.2 million | $56.0 million | $73.8 million |
| Diluted EPS | $0.18 | $0.39 | $1.65 | $2.18 |
| Adjusted EBITDA | $34.8 million | $43.1 million | $129.4 million | $146.9 million |
| Operating cash flow | Not separately provided | Not separately provided | $149.9 million | $112.2 million |
Q2 operating margin was approximately 9%, versus 13% in the prior-year quarter; six-month operating margin was approximately 17%, versus 19%. The company paid dividends of $0.695 per share in Q2 and $1.39 per share year to date.
- Cash and cash equivalents were $92.7 million at June 30, 2016, up from $58.4 million at December 31, 2015.
- Total debt, net of deferred financing costs, was $750.2 million, consisting of $246.7 million of senior notes, $396.0 million of term debt and $107.5 million drawn on the revolving facility.
- The $300 million revolving facility had $186.3 million of availability after $6.2 million of letters of credit.
- Capital expenditures were $94.8 million in the first six months, and the company invested an additional $4.7 million in Produquímica.
- Total assets were $1.657 billion and stockholders’ equity was $684.4 million at June 30, 2016.
Material changes versus the prior comparable period
- Q2 sales declined 8%, operating earnings declined 35%, net earnings declined 52%, and adjusted EBITDA declined 19%. For the first six months, sales declined 11%, operating earnings declined 17%, net earnings declined 24%, and adjusted EBITDA declined 12%.
- Salt performance improved: Q2 salt sales increased 2% to $119.1 million and salt operating earnings increased 10%. Higher highway deicing volumes, product mix and lower logistics costs offset lower consumer and industrial volumes.
- Plant nutrition was the primary weakness. Q2 sales declined 25% to $47.8 million and operating earnings declined 72%; six-month sales declined 28% and operating earnings declined 73%. Lower agricultural demand, reduced prices and volumes, and higher per-unit costs pressured results.
- Q2 salt volumes increased 2% to 1.5 million tons, while six-month salt volumes declined 2% to 5.7 million tons. Plant nutrition volumes declined 13% in Q2 and 19% year to date.
- Interest expense increased to $5.6 million in Q2 and $11.4 million year to date, primarily because of higher debt associated with the Produquímica investment.
- The company refinanced its prior debt in April 2016 with a $400 million term loan and a $300 million revolving facility, both maturing July 1, 2021, at LIBOR plus 1.5% based on leverage and credit rating.
- The company recognized a $1.7 million Q2 loss and $1.3 million year-to-date loss from Produquímica, reported on a three-month lag.
- A restructuring charge of $3.2 million was recorded in Q1 2016 for a workforce reduction of approximately 150 positions. Management expects approximately $15 million of annualized savings beginning in 2018.
Guidance, outlook, risks and unusual items
- Management expects 2016 salt sales volumes of 10.6 million to 11.0 million tons, reflecting expected contraction in North American highway deicing bid volumes following mild winter weather.
- Management expects 2016 plant nutrition sales volumes of 275,000 to 305,000 tons and continues to expect pressure from agriculture and SOP market conditions. Improved production costs are expected in the second half of 2016 as higher-cost 2015 inventory is sold through.
- The majority shareholders of Produquímica may exercise a put option in October 2016, 2017 or 2018. If exercised in 2016, Compass estimates a purchase cost of approximately $320 million to $350 million plus assumed Brazilian-real debt of approximately $110 million, subject to performance, exchange rates, regulatory review and other factors.
- Canadian tax authorities have issued disputed reassessments totaling approximately $223.8 million, including interest and penalties disclosed for multiple matters. The company has posted performance bonds, bank guarantees and cash collateral and states that reserves are immaterial; however, an unfavorable resolution could be material.
- The company faces an unfair-labor-practices matter at its Cote Blanche mine. Recorded reserves total at least $7.0 million plus interest, and additional losses may be required depending on settlement or arbitration.
- Other risks include mining hazards, weather-driven deicing demand, agricultural and SOP market weakness, foreign exchange, energy and transportation costs, leverage and covenant compliance, regulatory matters, environmental remediation and access to subsidiary cash.
- Natural gas hedges cover a portion of forecast usage through December 2017; the company does not use derivatives for speculative purposes.
Most important facts for investors to verify
- Whether salt bid volumes and winter weather support the 10.6 million to 11.0 million ton 2016 outlook.
- Whether plant nutrition pricing, demand, volumes and production costs improve as projected.
- The timing and financing implications of any Produquímica put-option exercise.
- Debt covenant headroom, revolving-facility availability and the company’s ability to fund dividends, capital expenditures and potential acquisitions.
- Developments in the Canadian tax reassessments, including collateral requirements and the pending Tax Court proceedings.
- Progress toward the stated $15 million annualized cost savings beginning in 2018.