Business Context and Reporting Period
Compass Minerals International, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The company produces and markets salt, magnesium chloride, sulfate of potash specialty fertilizer, consumer and industrial mineral products, and U.K. records-management services. Results are seasonal, with salt sales and operating income generally higher in the first and fourth quarters.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Sales | $176.0 million | $182.3 million | $712.6 million | $650.9 million |
| Gross profit | $53.4 million | $66.6 million | $207.9 million | $236.9 million |
| Gross margin | 30% | 37% | 29% | 36% |
| Operating earnings | $32.7 million | $44.7 million | $143.8 million | $174.1 million |
| Net earnings | $19.3 million | $25.7 million | $89.5 million | $101.4 million |
| Diluted EPS | $0.58 | $0.77 | $2.68 | $3.05 |
| Adjusted EBITDA | $44.9 million | $55.6 million | $180.1 million | $205.8 million |
For the nine months, operating cash flow was $168.1 million versus $68.5 million in the prior-year period. Capital expenditures were $77.1 million, dividends paid were $39.0 million, and net cash used in financing activities was $36.3 million. Cash increased to $68.9 million at September 30, 2010 from $13.5 million at December 31, 2009.
Total principal indebtedness was $487.8 million, consisting of approximately $390.1 million under the senior secured credit agreement and $97.7 million of 8% Senior Notes. No revolving-facility borrowings were outstanding; $9.4 million of letters of credit reduced stated revolving availability to $115.6 million. Total stockholders’ equity was $285.4 million versus $223.1 million at year-end 2009.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 3%, while nine-month sales increased 9%.
- Third-quarter gross profit fell 20% and nine-month gross profit fell 12%; gross margin declined seven percentage points in both comparisons.
- Salt product sales decreased 12% in the third quarter because of lower volumes and unfavorable product mix. Salt sales volumes fell 8% to 1.95 million tons, primarily because the mild 2009–2010 North American winter reduced early-fill orders.
- Nine-month salt product sales increased 9%, supported by higher pricing, favorable first-quarter currency translation, and U.K. customer restocking, partly offset by mix and production-cost pressures.
- Specialty fertilizer product sales increased 46% in the third quarter and 22% for the nine months, driven by stronger volumes following a recovery in potash demand. Average SOP prices fell to $506 per ton in Q3 and $513 per ton for the nine months, from $706 and $897, respectively.
- Lower salt production, a two-month delay in Goderich expansion equipment installation, and the Cote Blanche mine strike increased per-unit costs. The strike generated approximately $1.3 million of incremental direct costs in Q2.
- Interest expense declined to $5.3 million in Q3 and $16.5 million for the nine months, primarily from lower floating-rate debt costs and the 2009 refinancing of higher-cost notes.
- Capital expenditures increased to $77.1 million from $53.6 million, including Goderich mine expansion and SOP evaporation-plant expansion and yield-improvement projects.
Outlook, Commentary, Risks, and Unusual Items
- Management expects higher salt per-unit costs to persist through the 2010–2011 winter season because of reduced production volumes and the Goderich project delay.
- Management reported that potash pricing stabilized during 2010 above historical levels but below late-2008 levels, and expects SOP to retain a premium to potassium chloride pricing. No formal quantitative earnings or revenue guidance is provided in the filing.
- Management expects approximately $3 million of additional quarterly 2010 input costs, versus 2009, for potassium chloride used in certain water-conditioning and consumer-deicing applications.
- Natural-gas hedges covered forecast purchases through June 2013; interest-rate swaps hedged $100 million of floating-rate debt, with the swaps effectively fixing the LIBOR-based portion at 4.7% on the hedged amount. Approximately $6.0 million of natural-gas hedge losses and $1.7 million of interest-rate hedge losses were expected to be reclassified from accumulated other comprehensive income during the following twelve months.
- In October 2010, the company amended its credit agreement and entered a new revolving facility. Approximately $234 million of term loans was extended to 2016, while approximately $156 million remained due in December 2012. The amended facilities bear interest at LIBOR plus 2.75% based on the company’s leverage ratio.
- Key risks include severe or mild winter weather, mining hazards, labor disruptions, transportation and fuel costs, natural-gas and potassium-chloride prices, potash-market conditions, foreign exchange, interest rates, customer and counterparty credit, environmental and regulatory matters, and debt-covenant compliance.
- The Cote Blanche mine received five significant-and-substantial violations and proposed MSHA assessments of $4,323 during the quarter; no mining-related fatalities or other listed orders were reported. Management stated that known legal proceedings, including an aboriginal land claim involving the Goderich mine area, are not expected to have a material adverse effect.
- Management concluded that disclosure controls were effective as of September 30, 2010 and reported no material change in internal control over financial reporting.
Facts Investors Should Verify
- Whether the Goderich expansion was completed as planned and whether salt production and per-unit costs improved during the 2010–2011 winter season.
- The sustainability of the SOP volume recovery relative to materially lower realized prices.
- Compliance with leverage and interest-coverage covenants following the October debt amendment and the maturity profile of the remaining 2012 term loan.
- Actual winter weather, salt restocking demand, and resulting seasonal working-capital and cash-flow effects.
- Exposure to foreign exchange, fuel, natural-gas, potassium-chloride, transportation, and labor-cost changes.
- The status and potential operational implications of the Goderich-related land claim and Cote Blanche MSHA matters.