Compass Minerals International, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, with fourth-quarter results included. Compass Minerals produces salt and magnesium chloride, specialty plant nutrients including sulfate of potash, and specialty chemicals for water treatment and industrial uses. Reportable segments are Salt, Plant Nutrition North America, and Plant Nutrition South America. The company operated 22 production and packaging facilities in the U.S., Canada, Brazil and the U.K.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $1,493.6 million | $1,364.4 million | +9% |
| Gross profit | $293.9 million | $326.6 million | -10% |
| Gross margin | 19.7% | 23.9% | -4.2 percentage points |
| Operating earnings | $130.3 million | $159.2 million | -18% |
| Operating margin | 8.7% | 11.7% | Down |
| Net earnings | $68.8 million | $42.7 million | +61% |
| Diluted EPS | $2.02 | $1.25 | +$0.77 |
| Adjusted EBITDA | $273.3 million | $286.5 million | -5% |
| Cash flow from operations | $190.7 million | $146.9 million | +$43.8 million |
| Capital expenditures | $96.8 million | $114.1 million | -$17.3 million |
| Cash and equivalents | $27.0 million | $36.6 million | -$9.6 million |
| Total debt | $1,364.7 million | $1,362.5 million | +$2.2 million |
Net margin was approximately 4.6%. The company paid $97.7 million of dividends, or $2.88 per share. Fourth-quarter 2018 sales were $486.5 million, gross profit was $114.6 million, net earnings were $51.0 million and diluted EPS was $1.50.
Material changes versus the prior comparable period
- Salt sales increased 12% to $858.1 million, with tons sold rising 10% to 11.627 million and average selling prices increasing 2%. However, Salt operating earnings fell 16% to $115.7 million.
- Salt profitability was pressured by lower Goderich production, the April–July 2018 strike, higher purchased-salt and logistics costs, and higher-cost inventory. The 2017 Goderich ceiling fall also affected production and costs.
- Plant Nutrition North America sales increased 11% to $233.2 million on an 11% volume increase, but operating earnings declined 9% to $25.3 million due primarily to higher depreciation and additional potassium chloride feedstock costs.
- Plant Nutrition South America sales rose 4% to $391.8 million and volumes increased 6%, but operating earnings were approximately flat at $48.7 million. A weaker Brazilian real offset higher prices and volumes.
- Income tax expense declined to $8.8 million from $60.0 million, reducing the effective tax rate to 11% from 58%. The comparison was significantly affected by 2017 U.S. tax reform and tax-settlement charges.
- Operating earnings declined despite higher sales, while net earnings increased because of the lower tax burden and an $8.8 million net other-income benefit in 2018, including foreign-exchange gains.
- Accumulated other comprehensive loss increased substantially, primarily from a $132.6 million adverse foreign-currency translation adjustment.
Liquidity, debt and cash flow
- Operating cash flow of $190.7 million exceeded capital expenditures of $96.8 million, but cash was also used for $97.7 million of dividends and net debt-related payments.
- Debt consisted primarily of $828.9 million of term loans, $197.0 million drawn on the revolving credit facility, $250.0 million of 4.875% senior notes due 2024, and $95.5 million of Brazilian debt.
- The company had $92.4 million of available revolver capacity after $10.6 million of letters of credit. The credit agreement matures in July 2021, with $1.0108 billion of debt scheduled to mature in 2021.
- Total leverage was 4.3x at year-end against a 4.5x default threshold. The company was in compliance with its debt covenants and stated that available cash, operating cash flow and revolver capacity should meet liquidity needs for the next 12 months.
- Interest expense increased $9.6 million to $62.5 million, primarily from higher interest rates and greater revolver borrowings. A 100-basis-point increase in variable borrowing rates would have increased annual interest expense by approximately $11.2 million based on year-end debt.
Guidance, outlook and management commentary
- 2019 Salt sales volumes are expected to range from 10.0 million to 10.5 million tons, reflecting lower North American highway-deicing commitment volumes.
- First-half 2019 Salt EBITDA is expected to be approximately $65 million to $80 million.
- 2019 Plant Nutrition North America volumes are expected at 350,000 to 400,000 tons, with first-half EBITDA of $30 million to $40 million.
- 2019 Plant Nutrition South America volumes are expected at 800,000 to 900,000 tons, with first-half EBITDA of $10 million to $20 million.
- The company incurred $5.1 million of CEO transition costs in 2018 and was led by an interim CEO at filing. A new CEO search was ongoing.
- Management expects to repatriate approximately $150 million of foreign earnings and recorded $3.4 million of related tax expense. Approximately $173.5 million of other foreign undistributed earnings remained treated as permanently reinvested without recorded deferred taxes.
Risks, contingencies and unusual items
- Key operating risks include winter weather variability, agricultural conditions, foreign-exchange movements, mine disruptions, geological conditions, labor actions, transportation availability, energy and raw-material costs, and dependence on a limited number of production facilities.
- Approximately 50% of employees in the U.S., Canada and the U.K., and approximately 30% of the global workforce, were covered by collective bargaining agreements. Five of 13 agreements were scheduled to expire in 2019.
- Canadian provincial tax authorities had issued reassessments totaling approximately $108.5 million, including interest, through December 31, 2018. The company disputed the reassessments and had posted a $77.4 million performance bond and paid $36.2 million of collateral.
- Environmental accruals were $2.2 million at year-end. Environmental-specific capital expenditures were $3.9 million in 2018, with a similar level expected in 2019.
- Other commitments included $181.4 million of performance bonds, $8.5 million of bank guarantees, $55.0 million of operating lease obligations and $47.8 million of unconditional purchase obligations.
- The company adopted the new revenue-recognition standard in 2018 without a material transition adjustment. It expected to record approximately $47 million to $52 million of operating lease assets and liabilities upon adopting the new lease standard on January 1, 2019.
Most important facts for investors to verify
- Whether Salt margins and Goderich production recover after the 2018 strike, prior ceiling fall and related cost inflation.
- The company’s ability to refinance or repay the approximately $1.01 billion of debt maturing in 2021 while maintaining a leverage ratio below covenant limits.
- Actual 2019 winter weather, deicing commitment volumes and Salt EBITDA relative to guidance.
- Progress in improving Plant Nutrition North America profitability and sustaining growth in Brazil despite currency and agricultural-market volatility.
- Resolution and collateral requirements associated with the Canadian tax reassessments and transfer-pricing matters.
- CEO succession, capital-allocation priorities, dividend capacity and the effect of foreign-currency translation on reported earnings and equity.