Compass Minerals International, Inc. — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash (“SOP”) specialty fertilizer, Wolf Trax micronutrients and other mineral-based products in North America and the U.K. The company also provides U.K. records-management services. This report covers the three and nine months ended September 30, 2015; financial statements are unaudited.
Results are seasonal: deicing sales and operating income are generally higher in the first and fourth quarters and lower in the second and third quarters. Weather severity, inventory build-up and foreign exchange materially affect interim results.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales | $232.7 million | $240.5 million | $809.4 million | $849.1 million |
| Gross profit | $68.0 million | $149.8 million | $231.8 million | $279.6 million |
| Gross margin | 29% | 62% | 29% | 33% |
| Operating earnings | $40.8 million | $123.0 million | $149.5 million | $203.4 million |
| Net earnings | $27.0 million | $87.9 million | $100.8 million | $137.4 million |
| Diluted EPS | $0.80 | $2.60 | $2.97 | $4.07 |
| Adjusted EBITDA | $60.4 million | $59.7 million | $207.3 million | $177.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $95.1 million | $129.7 million |
- Q3 sales decreased 3%; nine-month sales decreased 5% year over year.
- Q3 salt product sales increased 6% to $131.4 million, while plant nutrition product sales declined 20% to $45.5 million. Salt volumes increased 7% in the quarter, but plant nutrition volumes declined 22%.
- Nine-month salt product sales were essentially unchanged at $434.8 million, as lower volumes and currency effects offset higher highway-deicing prices. Plant nutrition product sales declined 2% to $170.1 million.
- SG&A increased to $27.2 million in Q3 and $82.3 million for nine months, compared with $26.8 million and $76.2 million, respectively, in the prior periods.
- Cash and cash equivalents were $119.1 million at September 30, 2015, compared with $266.8 million at December 31, 2014. Inventories increased to $268.7 million from $199.0 million, reflecting seasonal stockpiling.
- Total principal debt was $623.5 million, consisting of $373.5 million under the term loan and $250.0 million of 4.875% senior notes due 2024. No borrowings were outstanding under the $125 million revolving facility; $6.3 million of letters of credit reduced availability to $118.7 million.
- Capital expenditures were $154.4 million for the first nine months, including projects at the Ogden, Utah plant and Goderich, Ontario mine. Dividends paid were $67.0 million, or $1.98 per share declared for the period.
- Accumulated other comprehensive loss increased to $90.2 million, principally because of a $76.0 million unfavorable foreign-currency translation adjustment during the first nine months.
Material Changes Versus the Prior Comparable Period
- Q3 2014 included an $83.3 million Goderich tornado insurance-settlement gain, including $82.3 million in the salt segment and $1.0 million in corporate and other. No comparable gain was recorded in 2015. This was the principal reason for the sharp decline in reported gross profit, operating earnings and net earnings.
- Excluding the insurance-settlement adjustment and other income, Q3 Adjusted EBITDA was broadly stable at $60.4 million versus $59.7 million. Nine-month Adjusted EBITDA increased to $207.3 million from $177.3 million.
- Salt performance benefited from higher Q3 highway-deicing volumes, lower shipping costs and favorable mix. For the first nine months, salt volumes were down approximately 1.0 million tons because of less severe winter weather than in early 2014.
- Plant nutrition results weakened because of broader agricultural-market weakness in North America, lower volumes and higher per-unit production costs. Poor 2014 evaporation conditions required additional KCl and other feedstock purchases; wet weather also affected the 2015 SOP harvest.
- Operating cash flow declined $34.6 million year over year, while capital spending increased $70.9 million. Financing cash flow changed from a $84.3 million source in 2014 to a $67.5 million use in 2015, primarily because the prior year included debt refinancing proceeds.
Guidance, Outlook, Risks and Unusual Items
- Management expected lower contract highway-deicing prices for the 2015–2016 winter season because the prior winter was near average, but expected contracted highway-deicing volumes to increase.
- Plant nutrition demand remained pressured by agricultural-market weakness. Management expected to continue using purchased KCl to supplement SOP production when economically feasible, which could increase gross profit but reduce margin percentages.
- Key risks include winter-weather variability, mining and operational disruptions, foreign-exchange movements, energy and transportation costs, commodity and fertilizer-market conditions, labor disputes, indebtedness and covenant compliance, and the availability of refinancing.
- Canadian tax authorities issued reassessments totaling approximately $80 million, $89 million and $31 million for separate groups of tax years, including interest and penalties through September 30, 2015. The company disputes the matters and states that reserves are adequate, but the ultimate outcome could be material if unresolved in its favor.
- The company had posted or agreed to post performance bonds and bank guarantees relating to the Canadian tax disputes, including approximately $50 million, $18 million plus $36 million, and $10 million plus $10 million for the respective matters.
- A labor dispute at the Cote Blanche, Louisiana mine resulted in an additional approximately $2 million reserve in Q1 2015, in addition to an approximately $5 million reserve recorded in 2013. Settlement negotiations continued, with possible arbitration and additional losses.
- Natural-gas derivatives hedged forecast purchases through December 2016. The company expected to reclassify approximately $2.1 million of net derivative losses from accumulated other comprehensive loss to earnings during the following twelve months.
- Management stated that debt covenants were satisfied at September 30, 2015 and that no material changes had occurred in previously disclosed risk factors. Disclosure controls were evaluated as effective.
Important Facts for Investors to Verify
- Assess normalized profitability excluding the prior-year $83.3 million insurance gain, including the comparability and calculation of Adjusted EBITDA.
- Monitor winter weather, contracted deicing volumes and pricing for the 2015–2016 season.
- Track plant nutrition volumes, SOP harvest conditions, KCl input costs and agricultural-market recovery.
- Evaluate liquidity after elevated capital expenditures, seasonal inventory requirements, dividends and debt service.
- Follow the Canadian tax reassessments, required collateral and potential cash or earnings exposure.
- Review term-loan maturities, covenant headroom, revolving-credit availability and refinancing requirements.