Compass Minerals International, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, with quarterly information including the fourth quarter. The company produces salt, magnesium chloride, sulfate of potash specialty fertilizer, and related mineral products in North America and the U.K.; it also operates a small U.K. records-management business.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $1,105.7 million | $1,068.9 million | Up 3% |
| Gross profit | $309.8 million | $314.9 million | Down 2% |
| Gross margin | 28% | 29% | Down 1 percentage point |
| Operating earnings | $215.3 million | $226.5 million | Down 5% |
| Net earnings | $149.0 million | $150.6 million | Down 1% |
| Diluted EPS | $4.45 | $4.51 | Down 1% |
| Adjusted EBITDA | $280.0 million | $278.5 million | Up 1% |
| Cash flow from operations | $252.3 million | $241.2 million | Up $11.1 million |
| Capital expenditures | $107.4 million | $112.1 million | Down $4.7 million |
| Cash and equivalents | $130.3 million | $91.1 million | Up $39.2 million |
| Total debt | $482.7 million | $486.7 million | Down $4.0 million |
Sales growth was driven primarily by specialty fertilizer pricing and the January 2011 acquisition of Big Quill Resources. Salt product sales declined 1% to $616.8 million despite a 1% increase in salt volumes to 12.52 million tons. Specialty fertilizer product sales increased 13% to $184.3 million; SOP average price increased to $610 per ton from $518, while volumes declined to 344,000 tons from 362,000 tons.
Operating cash flow funded dividends, capital investment and the $58.1 million Big Quill acquisition. Financing activities used $55.7 million, including $60.1 million of dividend payments. The company ended the year with no revolver borrowings and $115.8 million of available revolving capacity after letters of credit.
Material changes versus the prior comparable period
- The August 2011 tornado at the Goderich, Ontario mine and evaporation plant temporarily halted or reduced production. The company recorded $4.8 million of property, plant and equipment impairment and $9.7 million of cleanup and restoration costs, offset by $14.5 million of expected insurance recoveries.
- Management estimated approximately $16 million of 2011 business-interruption losses related to the tornado. The fourth quarter was estimated to have reduced gross profit by approximately $16 million and net earnings by approximately $11.4 million.
- Salt profitability declined because of higher unit costs, elevated inventory costs carried from 2010, tornado-related production disruption, higher fuel and transportation costs, and a significantly mild fourth-quarter winter. Salt segment operating earnings fell to $184.7 million from $206.0 million.
- Specialty fertilizer operating earnings increased to $77.0 million from $61.4 million, benefiting from higher SOP pricing and the Big Quill acquisition, partially offset by lower volumes.
- Sales and general and administrative expenses increased 7% to $94.5 million. Interest expense decreased to $21.0 million from $22.7 million, while other income improved to $3.0 million from an $8.6 million expense, principally due to favorable foreign-exchange results.
- Debt maturities shifted materially into the current portion: $156.0 million of term-loan principal was scheduled for December 2012. Management was evaluating refinancing alternatives and indicated that cash and revolver availability could alternatively fund repayment.
- The company declared a quarterly dividend of $0.495 per share in February 2012, a 10% increase from the 2011 quarterly dividend of $0.45.
Guidance, outlook, commentary and risks
- Management expected Goderich facilities to return to pre-tornado production capabilities by the end of the second quarter of 2012. Approximately $40 million of additional 2012 capital spending was expected for restoration, and approximately $25 million of 2012 business-interruption losses were anticipated before insurance recovery.
- The company expected to fund ongoing operations, debt service and capital expenditures primarily through operating cash flow, available cash, the $125 million revolving facility and expected insurance recoveries. Management stated that liquidity should be adequate for the next 12 months, subject to operating and market conditions.
- Solar-pond SOP capacity was expected to increase to approximately 350,000 tons during 2012. The longer-term pond-efficiency project was expected to add approximately 220,000 tons of annual capacity, with an expected total project cost of approximately $160 million.
- Cooler and wetter 2011 summer conditions reduced mineral deposition at the Great Salt Lake, potentially lowering 2012 SOP production and increasing unit costs. The company expected to source some mineral feedstock in 2012.
- Key risks include weather-driven demand and production variability, mining and environmental permits, natural-gas and transportation costs, labor negotiations, competition and potash-market pricing, foreign exchange, interest rates, debt refinancing, insurance recoveries, and environmental or legal liabilities.
- Canadian tax authorities have issued reassessments totaling approximately $56.8 million, including interest through December 2011. The company disputes the reassessments and had posted or agreed to post collateral, including a $26 million performance bond and cash payments totaling approximately $30.8 million.
- Three material collective bargaining agreements were scheduled to expire in 2012. The company also faced an unfair-labor-practice proceeding related to the Cote Blanche labor dispute; potential back-pay obligations could arise if adverse findings were upheld.
- The U.K. defined-benefit pension plan was underfunded by approximately $3.0 million at year-end. Management expected approximately $1.6 million of 2012 contributions, subject to future funding requirements.
- The company reported no material off-balance-sheet arrangements and stated that known environmental liabilities were not expected to be material, although future remediation and permitting outcomes remain uncertain.
Important facts for investors to verify
- Progress of Goderich restoration, production normalization, total restoration costs and the timing and amount of insurance recoveries.
- Whether the $156.0 million of 2012 term-loan maturities were refinanced or repaid without materially increasing borrowing costs or leverage.
- Actual 2012 winter weather, salt volumes, inventory costs and transportation expenses.
- Great Salt Lake evaporation conditions, SOP production volumes, pricing, feedstock requirements and the status of pond-expansion permits.
- Resolution of the Canadian tax reassessments, related collateral requirements and any additional tax exposure.
- Outcomes of Cote Blanche labor proceedings and collective bargaining renewals.
- Compliance with debt covenants and restrictions on dividends, acquisitions and capital expenditures.
- Final insurance settlement amounts, including business-interruption claims, which had not been recognized in earnings as of December 31, 2011.