Compass Minerals International, Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash and other mineral-based products in North America and the U.K., with plant nutrition products sold worldwide. The filing covers the quarter and six months ended June 30, 2014. Results are seasonal: deicing demand generally makes the first and fourth quarters stronger, while the second and third quarters are typically weaker.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $186.6 million | $173.8 million | $608.6 million | $557.5 million |
| Gross profit | $37.5 million | $41.9 million | $129.8 million | $133.2 million |
| Gross margin | 20.1% | 24.1% | 21.3% | 23.9% |
| Operating earnings | $13.4 million | $14.7 million | $80.4 million | $82.2 million |
| Net earnings | $(0.7) million | $10.6 million | $49.5 million | $57.0 million |
| Diluted EPS | $(0.02) | $0.32 | $1.47 | $1.69 |
| Adjusted EBITDA | $32.2 million | $32.8 million | $117.6 million | $117.6 million |
Q2 sales increased 7%, while six-month sales increased 9%. The Q2 loss principally reflected lower gross profit and $7.1 million of other expense, including a $6.9 million debt-refinancing charge. Interest expense was $4.5 million in Q2 and $8.9 million for the six-month period.
- Salt: Q2 sales declined to $118.7 million from $127.3 million, and operating earnings fell to $6.8 million from $15.7 million. Highway deicing volumes declined 14% year over year, while total salt volumes declined 7% to 1.547 million tons. For the six months, salt sales increased to $471.9 million, but operating earnings declined to $70.3 million from $81.1 million because of lower pricing, product mix and foreign-exchange effects.
- Plant nutrition: Q2 sales increased 49% to $65.6 million, and operating earnings increased to $17.9 million from $14.0 million. Product sales increased 46% to $57.8 million, supported by higher volumes and the Wolf Trax acquisition. Six-month sales increased 34% to $131.7 million and operating earnings increased to $34.2 million.
- Cash flow: Six-month operating cash flow was $161.8 million versus $175.8 million in the prior year. Investing cash use was $123.3 million, including $86.1 million for Wolf Trax and $49.0 million of capital expenditures. Financing cash flow was $104.7 million, including debt refinancing and $40.4 million of dividends.
- Liquidity: Cash and cash equivalents were $304.0 million at June 30, 2014, up from $159.6 million at December 31, 2013. The company had $628.3 million of principal debt, consisting of $378.3 million under the term loan and $250.0 million of 4.875% senior notes due 2024. No revolving credit borrowings were outstanding; $7.8 million of letters of credit reduced available revolver capacity to $117.2 million.
- Balance sheet: Total assets were $1.541 billion and stockholders’ equity was $574.2 million. Goodwill increased to $73.8 million and intangible assets to $114.9 million, primarily because of Wolf Trax.
- Dividends: Cash dividends were $0.60 per share in Q2 and $1.20 per share for the six-month period, compared with $0.545 and $1.09, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Compass completed the acquisition of Wolf Trax, Inc. in April 2014 for approximately $86.1 million in cash. Wolf Trax develops specialty crop-nutrient products and was included in the plant nutrition segment from the acquisition date. The preliminary allocation included $42.8 million of identifiable intangible assets and $51.4 million of goodwill.
- The company issued $250.0 million of 4.875% senior notes due 2024 and redeemed its $100.0 million of 8% senior notes due 2019. The refinancing generated a $6.9 million charge for call premiums, write-offs of deferred financing fees and original issue discount.
- Q2 gross margin declined by approximately four percentage points, primarily because of lower salt volumes and unfavorable salt product mix. Six-month gross margin declined by approximately three percentage points.
- SG&A expense declined to $24.1 million in Q2 and $49.4 million for the six months, partly because the prior-year periods included a $1.7 million management-restructuring charge.
- Foreign currency translation increased comprehensive income by $18.9 million in Q2 and $3.4 million for the six months, compared with losses in the prior-year periods.
Outlook, commentary, risks and unusual items
- Management expected to settle the Goderich tornado insurance claim in the third quarter of 2014 and recognize a gain of more than $80 million as a reduction of product cost. No business-interruption recovery had been recognized through June 30, 2014. The company had received $100.0 million of insurance advances since the tornado, with $70.4 million recorded as deferred revenue.
- Results remain highly dependent on winter weather, particularly highway deicing demand, inventory timing and regional sales volumes. Management cautioned that interim results are not necessarily indicative of full-year performance.
- Plant nutrition margins were affected by the use of purchased potassium chloride and other feedstock to increase sulfate-of-potash production. Purchased feedstock increased per-unit costs but was expected to increase total gross profit where market spreads supported production.
- Canadian tax authorities have issued reassessments of approximately $83 million and a separate approximately $104 million reassessment, including interest and penalties. The company disputes the matters, has recorded an immaterial reserve, and expects no material effect, but acknowledges that an unfavorable resolution could be material. Required collateral includes performance bonds, cash payments and additional security arrangements.
- Other risks include salt and fertilizer pricing, energy and transportation costs, foreign exchange, mining hazards, weather, customer and counterparty credit, regulatory matters, litigation, labor disruptions and the company’s debt obligations. Natural-gas hedges covered a portion of forecast purchases through December 2016.
- Pending litigation includes claims of approximately $13 million related to the collapse of a Goderich salt-storage dome. Management does not expect material adverse effects from this or other disclosed proceedings.
- The company adopted no new material accounting standard during the period. It was evaluating the future revenue-recognition standard, effective for fiscal years beginning after December 15, 2016.
Important facts for investors to verify
- Whether the expected Goderich insurance settlement occurred in Q3 2014 and the actual amount and accounting treatment of the gain.
- The final purchase-price allocation, operating contribution and integration performance of Wolf Trax.
- The resolution, collateral requirements and potential cash impact of the Canadian tax reassessments.
- Compliance with credit-agreement leverage and interest-coverage covenants, particularly after the refinancing and acquisition.
- Salt volumes, pricing and margins through the next winter season, including the effect of weather and the 2013–2014 bid cycle.
- The sustainability of plant nutrition volume growth and the margin impact of purchased KCl feedstock.
- Future cash requirements for dividends, capital expenditures, debt service and any additional acquisitions.