Compass Minerals International, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011. The filing is unaudited and covers Compass Minerals’ salt, specialty fertilizer, records management and corporate activities. Results are seasonal, with deicing-related sales and operating income generally higher in the first and fourth quarters.
Financial Performance and Position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $179.9 million | $179.0 million | $570.5 million | $536.6 million |
| Gross profit | $44.3 million | $39.9 million | $151.9 million | $154.5 million |
| Gross margin | 24.6% | 22.3% | 26.6% | 28.8% |
| Operating earnings | $22.1 million | $18.4 million | $106.7 million | $111.1 million |
| Net earnings | $14.0 million | $11.3 million | $70.5 million | $70.2 million |
| Diluted EPS | $0.42 | $0.34 | $2.11 | $2.10 |
| Adjusted EBITDA | $38.5 million | $30.4 million | $139.5 million | $135.2 million |
Second-quarter operating margin increased to approximately 12.3% from 10.3%, while six-month operating margin declined to approximately 18.7% from 20.7%. Net margin was approximately 7.8% in the second quarter versus 6.3% in the prior-year quarter, and approximately 12.4% for the six months versus 13.1%.
- Salt: Second-quarter sales declined to $127.3 million from $134.6 million; operating earnings were $13.6 million versus $13.4 million. Six-month sales increased to $459.7 million from $437.1 million, while operating earnings declined to $90.8 million from $99.0 million.
- Specialty fertilizer: Second-quarter sales increased to $49.5 million from $41.6 million, and operating earnings increased to $18.7 million from $14.9 million. Six-month sales increased to $104.9 million from $94.1 million, and operating earnings increased to $38.0 million from $31.9 million.
- Cash flow: Six-month operating cash flow was $194.1 million, up from $171.1 million. Investing cash flow used $100.8 million, including $43.7 million of capital expenditures and $58.1 million for the Big Quill acquisition. Financing cash flow used $28.7 million, including $30.1 million of dividends.
- Liquidity: Cash and cash equivalents were $158.0 million at June 30, 2011, compared with $91.1 million at December 31, 2010. The company had $484.7 million of principal indebtedness, no revolving-credit borrowings, $12.2 million of letters of credit, and $112.8 million of revolver availability.
- Balance sheet: Total assets were $1.13 billion and stockholders’ equity was $412.6 million at June 30, 2011. Long-term debt, net of the current portion, was $480.5 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales were essentially flat because lower salt product sales offset stronger specialty fertilizer sales.
- Salt volumes declined by 135,000 tons in the second quarter, primarily because flooding on the Mississippi and Ohio river systems caused shipping delays and because prior-year demand had been unusually strong.
- Six-month salt volumes increased by 243,000 tons, but higher first-quarter per-unit costs associated with 2010 production reduced first-half gross profit by approximately $10 million.
- SOP product sales increased 18% in the second quarter and 11% for the six months, primarily because average prices increased to $600 per ton from $519 in the quarter and to $591 from $516 for the six months. Big Quill also added customers and approximately 40,000 tons of annual SOP capacity.
- Shipping and handling costs increased $3.9 million in the second quarter and $19.9 million for the six months, reflecting higher fuel costs and transportation costs.
- The company acquired Big Quill Resources in January 2011 for $58.1 million in cash. The preliminary purchase-price allocation included $37.3 million of intangible assets and $14.6 million of goodwill.
- Cash dividends increased to $0.45 per share in the second quarter and $0.90 per share for the six months, compared with $0.39 and $0.78, respectively, in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific earnings or revenue guidance.
- Management stated that localized rain and cooler weather in June 2011 slowed solar evaporation at the Great Salt Lake SOP operation. Prolonged adverse weather could reduce 2012 production and increase unit costs.
- Demand and pricing for SOP remain sensitive to global potash prices, agricultural economics, crop conditions, food supply, government policies and customer purchasing behavior.
- Salt results remain highly dependent on winter severity, inventory levels, transportation availability and customer demand. The company noted that inventory constraints limited its ability to benefit from above-normal winter weather in some regions.
- Key cost risks include fuel and transportation costs, natural gas, labor, packaging and KCl raw-material prices. Natural gas derivatives hedge a portion of forecast usage through June 2013; approximately $3.7 million of net derivative losses were expected to be reclassified from accumulated other comprehensive income into earnings during the following twelve months.
- Canadian tax authorities issued reassessments for 2002–2006 totaling approximately $48 million, including interest through June 2011. The company disputes the reassessments. It had posted a $27 million performance bond and approximately $21 million of cash security, with additional payments expected before the end of 2012.
- The company was in compliance with its debt covenants at June 30, 2011, but stated that debt service, covenant compliance, dividend restrictions and future refinancing remain material risks. Term loans mature in December 2012, and the extended term loan matures in January 2016.
- The company stated that known legal proceedings, including an aboriginal land claim involving land under the Goderich mine, were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Management concluded that disclosure controls were effective as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the resolution, reserve status and required security arrangements related to the approximately $48 million Canadian tax reassessment.
- Assess the maturity and refinancing risk of the December 2012 term loans and the company’s continuing compliance with debt covenants.
- Monitor Great Salt Lake weather, SOP evaporation yields, Big Quill integration and specialty fertilizer pricing.
- Track winter weather, salt inventory, transportation constraints and fuel costs because of their effect on seasonal salt volumes and margins.
- Reconcile segment product sales with consolidated sales, which include shipping and handling revenues, and evaluate the company’s non-GAAP Adjusted EBITDA against GAAP earnings and operating cash flow.