Compass Minerals International, Inc. 2012 Form 10-K Summary
Business context and reporting period
Compass Minerals produces and markets salt, magnesium chloride and sulfate of potash specialty fertilizer (SOP) in North America and the United Kingdom. Its two reportable segments are Salt and Specialty Fertilizer; a smaller U.K. records-management business is included in corporate and other activities. The filing covers the fiscal year ended December 31, 2012, with comparative results for 2011 and 2010. The company operated 12 production and packaging facilities and had 1,778 employees at year-end.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales | $941.9 million | $1,105.7 million | Down 15% |
| Gross profit | $227.1 million | $309.8 million | Down 27% |
| Gross margin | 24% | 28% | Down 4 percentage points |
| Operating earnings | $133.2 million | $215.3 million | Down 38% |
| Net earnings | $88.9 million | $149.0 million | Down 40% |
| Diluted EPS | $2.65 | $4.45 | Down 40% |
| Adjusted EBITDA | $197.7 million | $280.0 million | Down 29% |
| Operating cash flow | $151.7 million | $252.3 million | Down $100.6 million |
| Capital expenditures | $130.9 million | $107.4 million | Up $23.5 million |
| Cash and equivalents | $100.1 million | $130.3 million | Down $30.2 million |
| Total debt | $482.3 million | $482.7 million | Essentially flat |
- Salt sales were $703.4 million, down from $885.3 million. Salt product sales, excluding shipping and handling, declined 20% to $491.5 million.
- Salt shipments declined 23% to 9.625 million tons, including a 26% decline in highway deicing volumes to 7.530 million tons. Combined salt pricing increased to $73.08 per ton from $70.71.
- SOP sales increased 8% to $226.2 million, with volume rising 7% to 367,000 tons and average price increasing to $616 per ton from $610.
- Salt segment operating earnings declined to $126.0 million from $184.7 million. Specialty fertilizer operating earnings declined to $58.4 million from $77.0 million.
- 2012 cash flow included $66.3 million of dividend payments. Dividends declared were $1.98 per share, compared with $1.80 in 2011.
- At December 31, 2012, the company had $117.2 million of available revolving-credit capacity after $7.8 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Exceptionally mild winter weather in the first and fourth quarters reduced highway deicing demand, production and operating leverage. Customers also carried higher inventories following unusually strong preseason demand in 2011.
- The Goderich, Ontario tornado continued to affect 2012 results. Production and shipping recovered, with full hoisting capability restored in April 2012 and the evaporation plant reaching full capacity by the end of the first quarter. The company estimated that the tornado reduced 2012 operating earnings by approximately $21 million.
- The company received $37.5 million of tornado-related insurance advances in 2012 and had received $25.0 million in 2011. It recognized $11.1 million of recoveries in 2012 against impairment, cleanup and restoration costs and had identified approximately $21 million of potentially recoverable 2012 business-interruption losses.
- Specialty fertilizer margins weakened because poor 2011 solar-evaporation weather reduced raw-material harvests and required the use of higher-cost potassium feedstock. Management expected elevated unit costs to affect margins into early 2013.
- In May 2012, the company refinanced its term loans into a single term loan maturing in May 2017. Interest expense declined to $18.2 million from $21.0 million, but refinancing generated a $2.8 million other expense.
- Capital spending increased, partly because approximately $35 million was spent replacing or improving tornado-damaged assets. The company also acquired approximately 100 million tons of salt reserves in Chile for approximately $6.5 million.
- Management changes included the retirement of the prior CEO, transition costs of approximately $3.3 million, an interim CEO beginning December 29, 2012, and the appointment of Francis Malecha as CEO in January 2013.
Outlook, commentary, risks and contingencies
- Management expected 2013 solar-pond raw-material availability to improve because the 2012 evaporation season was more typical than 2011. Solar-pond-based SOP capacity was expected to reach approximately 350,000 tons in the first half of 2013.
- The company expected to fund ongoing capital projects, debt service and dividends primarily through operating cash flow and its revolving facility. Management stated that available cash, operating cash flow, borrowing capacity and expected insurance recoveries should be adequate for the next 12 months, subject to business and market conditions.
- The Great Salt Lake expansion remains subject to leases, permits and challenges by certain organizations. Capital expenditures related to the expansion totaled $5.9 million at year-end, and unsuccessful permitting could require impairment of capitalized costs.
- Key operating risks include severe or mild winter weather, weather-dependent SOP production, mining accidents, flooding, production interruptions, transportation availability and cost, energy and potassium chloride prices, labor disputes, competition and foreign-exchange movements.
- Variable-rate debt totaled approximately $384.1 million. A 100-basis-point increase in average rates would have increased annual interest expense by approximately $3.8 million based on year-end debt.
- The company was in compliance with its debt covenants at year-end, but its debt agreements restrict additional borrowings, dividends, acquisitions and other activities. The reported total leverage ratio was 2.4x, while dividend restrictions could apply above 4.50x.
- Canadian tax authorities issued disputed reassessments totaling approximately $67 million, including interest, for provincial years 2002–2007, and approximately $102 million, including penalties, for a separate federal matter. Required collateral and cash payments totaled approximately $102.5 million in performance bonds and other commitments, with additional security potentially required.
- The Cote Blanche labor dispute remains subject to an appeal of a National Labor Relations Board finding of unfair labor practices. An adverse outcome could require back-pay obligations, although the company had not accrued a liability because it did not believe a loss was probable.
- Known environmental liabilities were not expected to be material; environmental accruals were $1.6 million at year-end. Estimated 2013 EHS capital expenditures were approximately $11.9 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2012.
Most important facts for investors to verify
- Whether winter conditions normalize and restore salt volumes, margins and operating cash flow.
- The final amount and timing of Goderich tornado insurance recoveries, including business-interruption claims and any potential refunds of advances.
- Whether higher-cost SOP inventory continues to pressure specialty-fertilizer margins in early 2013.
- Progress on Great Salt Lake permits, leases, expansion spending and potential impairment exposure.
- The outcome and required collateral for the disputed Canadian tax reassessments.
- Compliance with debt covenants, refinancing requirements, variable interest-rate exposure and availability under the revolving facility.
- Resolution of labor negotiations and the Cote Blanche unfair-labor-practice appeal.
- The sustainability of the quarterly dividend, which was increased 10% to $0.545 per share for payment in March 2013, subject to board approval, earnings, liquidity and debt restrictions.