Compass Minerals International, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, with fourth-quarter results included. Compass Minerals produces salt, specialty plant nutrition products, and specialty chemicals across the U.S., Canada, Brazil, and the U.K. Reportable segments are Salt, Plant Nutrition North America, and Plant Nutrition South America.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $1,364.4 million | $1,138.0 million | +20% |
| Gross profit / margin | $326.6 million / 23.9% | $299.5 million / 26.3% | Margin down approximately 2 points |
| Operating earnings / margin | $159.2 million / 11.7% | $174.6 million / 15.3% | -9% |
| Net earnings | $42.7 million | $162.7 million | -74% |
| Diluted EPS | $1.25 | $4.79 | -74% |
| Adjusted EBITDA | $286.5 million | $275.0 million | +4% |
| Operating cash flow | $146.9 million | $167.3 million | Down $20.4 million |
| Capital expenditures | $114.1 million | $182.2 million | Down $68.1 million |
At December 31, 2017, cash and cash equivalents were $36.6 million, total assets were $2.57 billion, and total debt was $1.36 billion. Debt included $1.01 billion under senior secured credit facilities, $250.0 million of 4.875% senior notes due 2024, and $112.9 million related to the Brazilian business. Revolver availability was $122.7 million after $8.4 million of outstanding letters of credit. The company was in compliance with its debt covenants; total leverage was 4.3x.
Quarterly fourth-quarter sales were $457.9 million, gross profit was $124.0 million, and net loss was $4.4 million, or $(0.13) per diluted share. Fourth-quarter results included a $46.8 million net tax charge related to the U.S. Tax Cuts and Jobs Act and other tax items.
Segment performance and material changes
- Salt: Sales declined 5% to $769.2 million and operating earnings declined 31% to $138.0 million. Volumes fell 5% to 10.6 million tons, primarily because two consecutive mild winters left customers with elevated inventories. Highway deicing prices also declined, while higher per-unit product, logistics, and depreciation costs pressured margins.
- Plant Nutrition North America: Sales increased 3% to $210.0 million and operating earnings increased 31% to $27.7 million. Volumes increased 4% to 327,000 tons, while average selling prices declined 1%. The company launched the ProAcqua water-soluble product line in North America during the fourth quarter.
- Plant Nutrition South America: Sales were $375.0 million and operating earnings were $49.1 million. The 2016 comparison is not directly comparable because it includes only the period from the October 3, 2016 acquisition of Produquímica through year-end. Full-year inclusion of Produquímica was the primary driver of consolidated sales growth.
- The company completed the transition of all Goderich mine production to continuous mining in the fourth quarter of 2017. Management expects approximately $15 million of annual cost savings in 2018 and $30 million in 2019 if projected efficiencies are realized.
- Operating earnings were reduced by higher depreciation, increased selling, general and administrative expenses, restructuring charges of approximately $4.3 million, and higher interest expense. Interest expense increased to $52.9 million from $34.1 million.
Cash flow, liquidity, outlook, and risks
Management expects operating cash flow, cash on hand, and available revolver borrowings to fund debt service, sustaining capital expenditures, working capital, and declared dividends for the next 12 months. Dividends paid in 2017 totaled $97.5 million, or $2.88 per share; the board declared a quarterly dividend of $0.72 per share payable in March 2018.
For 2018, management expects Salt volumes of 11.8 million to 12.6 million tons, Plant Nutrition North America volumes of 320,000 to 350,000 tons, and Plant Nutrition South America volumes of 700,000 to 900,000 tons. Late-December and January winter weather was expected to benefit Salt sales, but first-half Salt margins were expected to be affected by high-cost carryover inventory and increased shipping costs. Plant Nutrition North America margins were expected to face higher logistics and depreciation costs, including approximately $10 million of incremental annual depreciation.
- Key risks include weather variability, seasonality, mine and facility disruptions, geological conditions, labor negotiations, transportation availability, energy and raw-material costs, agricultural market conditions, foreign exchange, and competition.
- Environmental, health, and safety requirements remain significant. The company recorded $2.3 million of contingent environmental liabilities, spent approximately $4.4 million on EHS capital expenditures in 2017, and expected approximately $11 million in 2018.
- The company faces Canadian provincial tax reassessments of approximately $106 million, including interest through December 31, 2017. It disputes the assessments and had posted $66.9 million of performance bonds and paid $39.1 million of collateral.
- A 2017 settlement with Canadian and U.S. tax authorities resulted in expected intercompany cash payments of $85.7 million, Canadian tax payments of $23.4 million, and a U.S. tax refund of $21.8 million, with the refund expected to lag the Canadian payment by at least a year.
- U.S. tax reform produced a provisional $46.8 million net tax charge, including a $55.2 million one-time tax on deferred foreign earnings. The company expected to complete its analysis by the fourth quarter of 2018.
- A 100-basis-point increase in average rates on variable-rate debt would have increased annual interest expense by approximately $11.2 million based on year-end debt levels.
Important facts for investors to verify
- Whether continuous mining at Goderich delivers the projected $15 million of 2018 and $30 million of 2019 annual savings.
- Salt volume recovery and margin performance following the mild-winter inventory buildup.
- Integration, growth, pricing, and cash generation from the Produquímica acquisition.
- Final accounting effects of the U.S. Tax Cuts and Jobs Act and resolution of Canadian tax reassessments.
- Debt covenant headroom, refinancing requirements concentrated in 2021, and available revolver capacity.
- Progress on environmental obligations, the Ogden air-quality requirements, and Brazil’s potential phaseout of mercury-cell technology.
- Exposure to weather, foreign exchange, energy, transportation, and agricultural commodity conditions.