Compass Minerals International, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed July 30, 2010. Compass Minerals produces and markets salt, magnesium chloride, sulfate of potash specialty fertilizer, and other mineral products in North America and the United Kingdom. Results are highly seasonal because of deicing demand.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales | $179.0 million | $159.5 million | $536.6 million | $468.6 million |
| Gross profit | $39.9 million | $55.0 million | $154.5 million | $170.3 million |
| Gross margin | 22% | 34% | 29% | 36% |
| Operating earnings | $18.4 million | $34.8 million | $111.1 million | $129.4 million |
| Net earnings | $11.3 million | $14.1 million | $70.2 million | $75.7 million |
| Diluted EPS | $0.34 | $0.42 | $2.10 | $2.27 |
| Adjusted EBITDA | $30.4 million | $45.4 million | $135.2 million | $150.2 million |
- Q2 sales increased 12%, while six-month sales increased 15%. Salt product sales rose 19% in Q2 and 18% for the six-month period.
- Specialty fertilizer product sales increased only 2% in Q2 and 15% for the six-month period, as substantially higher volumes were largely offset by lower average SOP prices: $519 per ton in Q2 2010 versus $944 in Q2 2009, and $516 versus $980 for the six-month period.
- Operating performance weakened despite higher revenue. Q2 gross profit declined 27%, and operating earnings declined 47%; six-month gross profit declined 9% and operating earnings declined 14%.
- Interest expense declined to $5.3 million in Q2 and $11.2 million for six months, compared with $6.6 million and $14.1 million, respectively, in the prior-year periods.
- Cash and equivalents were $112.4 million at June 30, 2010, compared with $13.5 million at December 31, 2009. Total assets were $968.5 million and stockholders’ equity was $265.1 million.
- Net cash provided by operating activities was $171.1 million for the six months, versus $88.3 million in 2009. Capital expenditures were $46.0 million, dividends paid were $26.0 million, and net cash used in financing activities was $24.6 million.
- Total principal indebtedness was $488.8 million, consisting of $391.1 million under the senior secured Credit Agreement and approximately $97.7 million of 8% Senior Notes due 2019. No revolver borrowings were outstanding; $9.5 million of letters of credit reduced revolver availability to $115.5 million.
- The company reported compliance with its debt covenants as of June 30, 2010.
Material changes versus the prior comparable periods
- Salt volumes increased 11% in Q2 to 1.914 million tons and 5% for the six-month period to 6.398 million tons. Higher pricing, volumes, U.K. restocking, and favorable currency translation supported salt revenue.
- Lower SOP pricing reduced fertilizer profitability by approximately $10 million in Q2 and approximately $20 million for the six-month period.
- Lower salt production increased unit costs and reduced Q2 gross profit by approximately $6 million. A strike at the Cote Blanche mine from April 7 through June 15 caused approximately $1.3 million of incremental Q2 costs.
- KCl costs for certain water-conditioning and consumer deicing products increased expenses by approximately $3 million in Q2. Management expected this cost pressure to continue at approximately $3 million per quarter during 2010.
- Q2 2010 included $1.9 million of other income, compared with $5.9 million of other expense in Q2 2009. The prior-year period included a $5.0 million debt-refinancing charge.
- Working-capital releases, particularly from receivables and inventories, were a major contributor to the increase in operating cash flow.
Outlook, risks and unusual items
- Management expected to fund debt service, dividends, capital expenditures, and capital projects with operating cash flow, cash on hand, borrowing capacity, or leasing arrangements.
- The $125 million revolving credit facility was scheduled to mature in December 2010. The company was evaluating an amendment and extension, replacement of the senior secured credit agreement, or allowing the revolving portion to expire.
- Management expected SOP demand to remain improved from 2009 and expected SOP pricing to retain a premium to potassium chloride, but noted significant sensitivity to potash prices, agricultural economics, crop conditions, and customer purchasing behavior.
- Deicing results depend heavily on winter severity. The company stockpiles inventory during non-winter quarters, and interim results may not indicate full-year performance.
- Key risks include mining hazards, weather, transportation and fuel costs, labor disruptions, commodity and input prices, foreign exchange, interest rates, customer and counterparty credit, environmental and legal matters, and compliance with debt covenants.
- The company hedged portions of natural gas purchases through June 2013 and used $100 million of interest-rate swaps. Approximately $4.1 million of natural-gas hedge losses and $2.6 million of interest-rate hedge losses were expected to be reclassified from accumulated other comprehensive income into earnings over the following twelve months.
- An aboriginal land claim includes land beneath Lake Huron where the Goderich mine operates. The company was not a party to the action and believed it would not have a material adverse financial effect.
- No material changes were reported to previously disclosed risk factors, no material legal-proceeding developments were reported, and management concluded that disclosure controls were effective as of June 30, 2010.
Important facts for investors to verify
- Whether the revolving credit facility was amended, extended, replaced, or allowed to expire after December 2010.
- The sustainability of cash generation after seasonal working-capital benefits and the funding requirements for Goderich and SOP expansion projects.
- Future SOP pricing and margins, particularly given the sharp year-over-year price decline.
- The financial and operational effects of the Cote Blanche strike, lower production, inventory management, KCl costs, and transportation costs.
- Continued compliance with leverage and interest-coverage covenants and the company’s ability to refinance debt at maturity.
- Potential effects of the Goderich-related land claim, foreign exchange movements, natural-gas and interest-rate hedges, and other mining or environmental contingencies.