Compass Minerals International, Inc. — Q2 2015 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The filing is unaudited and prepared under U.S. GAAP.
Business context
Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash fertilizer under the Protassium+ brand, and specialty micronutrients under the Wolf Trax brand. It operates primarily in North America and the U.K., with salt and plant nutrition as its principal segments. Results are highly seasonal because highway deicing demand depends on winter weather; second- and third-quarter results are generally weaker while inventories are built for the following winter.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $183.7 million | $186.6 million | $576.7 million | $608.6 million |
| Gross profit | $50.6 million | $37.5 million | $163.8 million | $129.8 million |
| Gross margin | 28% | 20% | 28% | 21% |
| Operating earnings | $24.0 million | $13.4 million | $108.7 million | $80.4 million |
| Net earnings | $13.2 million | $(0.7) million | $73.8 million | $49.5 million |
| Diluted EPS | $0.39 | $(0.02) | $2.18 | $1.47 |
| Adjusted EBITDA | $43.1 million | $32.2 million | $146.9 million | $117.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $112.2 million | $161.8 million |
Revenue, segment performance and material changes
- Q2 sales: Decreased 2%, primarily because lower product volumes offset higher pricing. Shipping and handling revenue declined $4.0 million to $40.8 million.
- Six-month sales: Decreased 5%. Product sales were approximately flat, as higher plant nutrition sales offset lower salt sales.
- Salt: Q2 product sales declined 1% to $81.2 million as volumes fell 70,000 tons, partly offset by higher selling prices. Six-month salt product sales declined 3% to $303.4 million, with volumes down 1.1 million tons because the 2014 winter was more severe than the 2015 winter. Higher highway deicing prices offset much of the volume decline.
- Plant nutrition: Q2 product sales increased 1% to $58.4 million, while volume declined 13% and average pricing increased to $756 per ton from $670. Six-month product sales increased 7% to $124.6 million, driven by an 18% pricing increase that offset an 11% volume decline.
- Profitability: Gross profit increased 35% in Q2 and 26% for the first six months. Salt gross profit benefited from higher selling prices and product mix. Costs were adversely affected by imported salt, purchased KCl and other feedstock, and first-quarter mine downtime.
- Operating expenses: SG&A increased 10% in Q2 to $26.6 million and 12% for the six months to $55.1 million, due to higher variable compensation, professional and information technology costs, and costs associated with Wolf Trax.
- Other items: Q2 2014 included a $6.9 million debt-refinancing charge. Q2 2015 instead recorded $1.2 million of other income, contributing to the year-over-year improvement in pretax earnings.
Cash flow, liquidity and debt
- Cash and cash equivalents were $233.7 million at June 30, 2015, down from $266.8 million at December 31, 2014.
- Six-month operating cash flow was $112.2 million, down from $161.8 million, principally because working capital provided less cash than in the prior year.
- Capital expenditures were $89.8 million versus $49.0 million in the prior-year period, including projects to expand and refurbish the Ogden, Utah facility and reline a shaft at the Goderich mine.
- Dividends paid were $44.6 million, compared with $40.4 million in 2014. The quarterly dividend was $0.66 per share versus $0.60.
- Total principal indebtedness was $624.5 million, consisting of a $374.5 million term loan and $250.0 million of 4.875% senior notes due 2024. The revolving facility had no borrowings; $6.4 million of letters of credit reduced available capacity to $118.6 million.
- Management stated that the company was in compliance with debt covenants at June 30, 2015. Liquidity depends on seasonal operating cash flow, subsidiary distributions and continued covenant compliance.
Guidance, outlook and management commentary
- 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.
- Salt results remain dependent on winter severity, timing and regional weather conditions. The company expects continued seasonal inventory accumulation during the second through fourth quarters.
- Management expected to continue purchasing KCl and other feedstock to supplement SOP production when economically feasible. These purchases may increase gross profit but raise per-unit costs and reduce margin percentages.
- Ogden solar-pond production is affected by heat, wind and dryness. Effective capacity was expected to be up to approximately 320,000 tons annually under typical conditions; Saskatchewan adds approximately 40,000 tons of SOP capacity.
- Natural gas hedges covered a portion of requirements through December 2016, with the company targeting up to 90% of forecast usage. Approximately $1.8 million of net derivative losses were expected to be reclassified from accumulated other comprehensive loss to earnings over the following twelve months.
Risks, contingencies and unusual items
- Canadian tax authorities have issued reassessments totaling approximately $85 million, $94 million and $32 million for separate groups of tax years. The company disputes the matters, believes reserves are adequate, and has posted or agreed to post performance bonds and bank guarantees. The ultimate outcome could be material if unresolved favorably.
- The company recorded an additional $2 million reserve in the first quarter of 2015 related to a labor dispute at its Cote Blanche mine; total recorded reserves were approximately $7 million. Additional losses remain possible.
- Other contingencies include an aboriginal land claim involving land beneath Lake Huron where the Goderich mine operates, and environmental investigation and remediation at the Kenosha, Wisconsin plant.
- Key operating risks include weather, mining hazards, labor disruptions, transportation and energy costs, KCl and raw-material prices, foreign exchange, fertilizer-market conditions, regulatory and tax proceedings, customer credit, leverage and refinancing risk.
- Foreign subsidiaries held approximately $149.7 million of cash. Repatriation could result in additional U.S. tax under applicable rules.
- No material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether higher salt and SOP pricing can offset expected lower deicing prices, weaker volumes and ongoing purchased-feedstock costs.
- The timing and cost of the Ogden expansion and Goderich shaft-relining projects, and their effect on capital expenditures and free cash flow.
- Compliance with leverage and interest-coverage covenants, available revolver capacity and the company’s ability to refinance debt before maturity.
- Developments in the Canadian tax reassessments, required collateral and potential cash or earnings exposure.
- The ultimate settlement or arbitration outcome of the Cote Blanche labor matter.
- Winter weather conditions and their effect on salt volumes, inventory levels, pricing and seasonally concentrated cash flow.
- The company’s ability to integrate and grow Wolf Trax while controlling plant nutrition SG&A and production costs.