COMPASS MINERALS INTERNATIONAL INC annual report, FY2010

Compass Minerals International, Inc. — 2010 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 principal reportable segments are salt and specialty fertilizer; a U.K. records-management business is immaterial. The filing covers the fiscal year ended December 31, 2010, with quarterly information for the fourth quarter included.

Highway deicing represented approximately 48% of 2010 gross sales, making results highly seasonal and dependent on winter weather. SOP represented approximately 18% of gross sales. The company operated 11 production and packaging facilities and had 1,776 employees at year-end.

Financial performance and key metrics

Metric	2010	2009	Change
Sales	$1,068.9 million	$963.1 million	Up 11%
Gross profit	$314.9 million	$354.1 million	Down 11%
Gross margin	29%	37%	Down 8 percentage points
Operating earnings	$226.5 million	$270.2 million	Down 16%
Net earnings	$150.6 million	$163.9 million	Down 8%
Diluted EPS	$4.51	$4.92	Down 8%
Adjusted EBITDA	$278.5 million	$313.9 million	Down 11%
Operating cash flow	$241.2 million	$118.9 million	Up $122.3 million
Capital expenditures	$112.1 million	$94.1 million	Up $18.0 million

Salt product sales increased 7% to $626.1 million, supported primarily by higher pricing. Salt volumes rose 2% to 12.365 million tons, including a 4% increase in highway deicing volumes and a 4% decline in consumer and industrial volumes. SOP product sales increased 39% to $163.1 million, while SOP volumes more than doubled to 362,000 tons; the average SOP price fell to $518 per ton from $828 per ton.

Fourth-quarter 2010 sales were $356.3 million, gross profit was $107.0 million and net earnings were $61.1 million, compared with fourth-quarter 2009 sales of $312.2 million, gross profit of $117.2 million and net earnings of $62.5 million.

Liquidity, debt and balance sheet

Cash and cash equivalents increased to $91.1 million from $13.5 million.
Total debt was $486.7 million at December 31, 2010, compared with $490.7 million in 2009. Debt consisted primarily of $389.0 million under senior secured term loans and $97.7 million of 8% Senior Notes due 2019.
The company had no revolver borrowings and $114.6 million of available revolving capacity after $10.4 million of letters of credit.
Debt maturities include $156.0 million in 2012 and $321.8 million thereafter. Total contractual cash obligations were $753.8 million, excluding the separate $86.9 million of letters of credit and performance bonds.
The company was in compliance with its debt covenants at year-end. The reported total leverage ratio was 1.7x.
Financing cash outflows were $55.1 million, including $52.0 million of dividends. The 2010 dividend was $1.56 per share; a quarterly dividend of $0.45 per share was declared in February 2011.

Operating cash flow benefited from approximately $70 million of cash released through salt and SOP inventory liquidation. Management stated that cash from operations, available cash and revolver capacity should cover debt service, dividends and planned capital expenditures over the next 12 months.

Material changes versus the prior comparable period

Revenue increased because of higher salt pricing, favorable Canadian-dollar translation, higher salt volumes and a rebound in SOP demand.
Profitability declined despite higher revenue. Salt margins were pressured by lower production, unfavorable mix and higher unit costs; SOP margins were pressured by sharply lower prices.
Production disruptions included a Cote Blanche labor strike, a two-month delay in Goderich expansion equipment installation and unplanned repairs and maintenance at North American rock salt mines. The strike caused approximately $1.3 million of incremental direct costs.
Purchased KCl costs for water-conditioning and consumer-deicing applications increased input costs by approximately $3 million per quarter compared with 2009. The company suspended KCl purchases used to supplement SOP production from solar ponds.
Capital spending increased to $112.1 million, primarily for the Goderich mine expansion and Great Salt Lake SOP projects.
Cash generation improved materially as the company reduced inventories, reversing the significant inventory investment made in 2009.
In October 2010, the credit agreement was amended, approximately $234 million of term debt was extended to 2016, and a new $125 million revolving facility was established.
The effective tax rate declined to 23% from 31%, including a $5.9 million tax benefit from the resolution of uncertain tax positions.

Guidance, outlook, commentary and unusual items

Management expected higher per-unit salt costs to persist through the 2010–2011 winter season because of lower 2010 production and disruption-related inventory costs.
Management expected SOP demand to remain supported by the recovery in potash markets and expected SOP to retain a premium to KCl, but pricing remained subject to agricultural conditions, competing potash supply and customer purchasing behavior.
The Goderich expansion was essentially complete, increasing available annual capacity to 9.0 million tons.
Great Salt Lake projects were expected to raise solar-pond-based SOP capacity to approximately 350,000 tons annually during 2011. A multi-year technology project was expected to add approximately 220,000 tons, reaching a potential 570,000 tons of solar-pond-based capacity, at an expected total cost of approximately $160 million.
In January 2011, the company acquired Big Quill Resources, Canada’s leading SOP producer, for approximately $56 million in cash and expected to add 40,000 tons of SOP capacity.
Expansion of Great Salt Lake pond acreage remains subject to leases, permits and challenges by certain organizations. Capital expenditures related to the project totaled $4.3 million at year-end, and no construction on additional undeveloped lands was expected during 2011.
Energy costs represented approximately 10% of production costs, while labor costs represented approximately 33%. Natural gas exposure was partly hedged, but the $50 million interest-rate swap was scheduled to expire in March 2011.
Key risks include severe or mild winter weather, mining accidents or interruptions, permitting and lease renewals, environmental liabilities, labor negotiations, transportation availability and costs, energy and KCl prices, foreign exchange, agricultural economics, competition and debt covenant compliance.
The company disclosed a Canadian tax dispute involving reassessments for 2002–2005. It posted $36 million of security for the earlier dispute and received a further $5.1 million reassessment for 2005; the ultimate resolution could differ materially from recorded reserves.
The U.K. defined benefit pension plan was underfunded by $12.8 million at year-end. Known environmental liabilities were not expected to be material, and environmental accruals were $1.7 million.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.

Most important facts for investors to verify

Whether winter weather, customer inventory levels and deicing contract awards support salt volumes and margins in the 2010–2011 season.
Whether mine repairs, labor negotiations and production reliability normalize sufficiently to reduce elevated salt unit costs.
Actual SOP pricing, volumes and margins following the 2010 demand rebound and the Big Quill acquisition.
Funding requirements, permitting status and final economics of the Great Salt Lake SOP expansion.
Debt maturities, covenant headroom, refinancing needs and exposure to higher floating interest rates after the swap expiration.
Resolution and required security for the Canadian tax reassessments.
Potential effects of environmental, mining, road-salt regulation, lease-renewal and Great Lakes land-claim matters.
The sustainability of dividends while the company funds capital projects, acquisitions and debt obligations.