Compass Minerals International, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash specialty fertilizer, and other mineral-based products in North America and the U.K. Results are highly seasonal because highway deicing demand depends on winter weather; second- and third-quarter results are generally weaker as the company builds inventory for winter.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $181.0 million | $229.1 million | $674.8 million | $799.6 million |
| Gross profit | $36.2 million | $71.0 million | $157.5 million | $222.9 million |
| Gross margin | 20% | 31% | 23% | 28% |
| Operating earnings | $14.1 million | $48.6 million | $91.0 million | $155.3 million |
| Net earnings | $9.4 million | $34.6 million | $58.8 million | $105.1 million |
| Diluted EPS | $0.28 | $1.03 | $1.75 | $3.14 |
| Adjusted EBITDA | $29.8 million | $64.6 million | $138.2 million | $204.1 million |
Q3 operating margin was approximately 8%, versus 21% in the prior-year quarter; nine-month operating margin was approximately 13%, versus 19% in 2011. Q3 net margin was approximately 5%, versus 15% in 2011; nine-month net margin was approximately 9%, versus 13%.
- Salt: Q3 sales declined to $122.5 million from $175.5 million, while nine-month sales declined to $496.7 million from $635.2 million. Salt volumes fell 36% in Q3 and 26% for nine months, primarily because mild 2011-2012 winter weather left customers with excess inventory and reduced early-fill demand.
- Specialty fertilizer: Q3 sales increased 7% to $54.9 million, and nine-month sales increased 9% to $169.6 million. Nine-month volume increased to 277,000 tons from 259,000 tons, and average price increased to $613 per ton from $603.
- Cash flow: Nine-month operating cash flow was $132.2 million, down from $200.8 million. Capital expenditures were $98.9 million, compared with $66.5 million, and dividends paid were $49.7 million, compared with $45.1 million.
- Liquidity: Cash was $116.4 million at September 30, 2012, versus $130.3 million at year-end 2011. The company had no revolver borrowings and $117.2 million of available revolving capacity after $7.8 million of letters of credit.
- Debt: Principal indebtedness was $483.2 million, consisting primarily of $385.1 million under the refinanced term loan and $98.1 million of 8% Senior Notes due 2019. Net debt based on reported cash was approximately $366.8 million.
- Dividends: Cash dividends were $0.495 per share in Q3 and $1.485 per share for the first nine months, compared with $0.45 and $1.35, respectively, in 2011.
Material changes versus the prior comparable period
- Sales decreased 21% in Q3 and 16% for the first nine months, driven mainly by lower salt volumes.
- Gross profit decreased 49% in Q3 and 29% for nine months. Margins were pressured by lower salt utilization, higher salt unit costs, Goderich-related costs, a Goderich labor strike, Cote Blanche maintenance, and higher SOP production costs.
- The Goderich, Ontario tornado and related operating disruption continued to affect costs and capital spending. The company incurred approximately $31 million of tornado-related capital expenditures during the first nine months and expects approximately $10 million more over the following two quarters.
- Interest expense declined to $4.2 million in Q3 and $13.7 million for nine months, primarily because of lower rates after the May 2012 refinancing.
- Other expense for nine months included a $2.8 million refinancing charge and higher foreign-exchange losses. The company also recognized a $3.0 million reduction in tax expense from settling a tax audit.
- The company amended and restated its senior secured credit facility in May 2012, refinancing prior term loans into a single term loan bearing interest at 1.75% over LIBOR.
Outlook, risks, contingencies, and unusual items
The filing does not provide clear formal numerical earnings or revenue guidance. Management expects lower 2012 rock-salt production and higher unit costs following the mild winter, with customer inventories reducing early-fill demand. SOP costs are expected to remain elevated into early 2013 as higher-cost 2012 feedstock is consumed; more favorable 2012 solar-evaporation conditions are expected to benefit production primarily in 2013.
- Insurance recovery: The company has received $50.0 million of tornado-related insurance advances, including $26.3 million recorded as deferred revenue at September 30, 2012. It has recognized $8.7 million of 2012 cleanup and restoration costs, fully offset by expected recoveries. Approximately $34 million of estimated business-interruption losses have been identified since the tornado, but no business-interruption recovery has been recognized pending settlement. Management does not expect final settlement until 2013 and cautions that actual recoveries and timing may differ materially.
- Tax disputes: Canadian provincial reassessments total approximately $67 million, including interest, and require collateral and cash payments. Approximately $20 million of required cash payments had been made, with approximately $1 million more expected during the remainder of 2012. A separate Canadian federal matter totals approximately $101 million, with approximately $62 million of collateral under discussion for further appeals or litigation.
- Operating disruption: Goderich miners were on strike from August 20 through September 30, 2012, generating approximately $1 million of incremental Q3 costs. Unscheduled maintenance at the Cote Blanche mine also increased unit costs.
- Market risks: Exposure includes winter weather, natural gas and fuel costs, transportation costs, foreign exchange, potash market conditions, mining hazards, labor disruptions, regulatory matters, customer demand, and indebtedness. Natural-gas hedges cover portions of requirements through September 2014.
- The company stated that it remained in compliance with debt covenants at September 30, 2012, but future compliance and access to subsidiary cash could affect dividends, debt service, and liquidity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Timing and amount of final Goderich property, cleanup, and business-interruption insurance recoveries.
- Remaining tornado-related capital spending and its effect on depreciation, costs, and liquidity.
- Resolution, collateral requirements, and potential cash exposure from the Canadian tax reassessments.
- Winter weather, customer salt inventories, 2012-2013 deicing volumes, and resulting salt unit costs.
- Consumption of higher-cost SOP inventories and the timing of expected benefits from the 2012 solar season.
- Compliance with leverage and interest-coverage covenants and refinancing requirements for the term loan and senior notes.
- Seasonal cash generation, dividend funding, and availability under the revolving credit facility.