Compass Minerals International, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the same periods in 2016. Compass Minerals produces salt, magnesium chloride, sulfate of potash, specialty plant nutrition products and specialty chemicals, with operations in the U.S., Canada, Brazil and the U.K. The Plant Nutrition South America segment reflects Produquímica, acquired in October 2016.
Results are seasonal: Salt sales and operating income are generally strongest in the first and fourth quarters, while Brazilian plant nutrition demand is typically strongest in the third and fourth quarters.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $290.7 million | $179.6 million | $906.5 million | $694.8 million |
| Gross profit | $76.1 million | $45.2 million | $202.6 million | $189.1 million |
| Gross margin | 26.2% | 25.2% | 22.3% | 27.2% |
| Operating earnings | $31.4 million | $19.5 million | $78.8 million | $109.3 million |
| Net earnings | $32.0 million | $9.1 million | $47.1 million | $65.1 million |
| Diluted EPS | $0.94 | $0.27 | $1.38 | $1.92 |
| Adjusted EBITDA | $68.8 million | $40.9 million | $172.8 million | $170.3 million |
- Q3 sales increased 62%, principally from the Produquímica acquisition. Q3 gross profit increased 68%, and operating earnings increased 61%.
- Q3 operating margin was approximately 10.8%, versus 10.9% in the prior-year quarter. Nine-month operating margin declined to approximately 8.7% from 15.7%.
- Q3 net earnings benefited from a $12.5 million income tax benefit, including approximately $13 million of discrete benefit from releasing Brazilian valuation allowances. The nine-month tax benefit was $7.7 million.
- Interest expense increased to $13.5 million in Q3 and $39.5 million for nine months, primarily because of higher debt associated with the Produquímica acquisition.
- Q3 Salt sales declined 8% to $124.7 million and Salt operating earnings declined 25% to $22.5 million. Nine-month Salt sales declined 7% and operating earnings declined 42%.
- Plant Nutrition North America Q3 sales declined 3% to $40.3 million, while nine-month operating earnings increased 40% to $17.5 million.
- Plant Nutrition South America contributed $123.2 million of Q3 sales and $21.4 million of operating earnings; nine-month sales were $250.6 million and operating earnings were $24.0 million.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow for the first nine months was $126.7 million, compared with $107.1 million in 2016.
- Capital expenditures were $81.0 million, down from $148.7 million. Dividends paid were $73.3 million, compared with $70.5 million.
- Cash and cash equivalents were $39.1 million at September 30, 2017, down from $77.4 million at December 31, 2016. Approximately $36.9 million was held by foreign subsidiaries.
- Total debt was $1.330 billion, including $250.0 million of senior notes, $990.7 million under senior secured credit facilities and $96.0 million of Produquímica-related debt. Long-term debt, net of current maturities, was $1.274 billion.
- The company had $151.2 million drawn on its $300 million revolving credit facility. After $8.2 million of letters of credit, reported availability was $140.6 million.
- In September 2017, the credit agreement was amended to increase the maximum permitted leverage ratio through September 2018. Brazilian loans were also refinanced, and additional foreign-currency swaps were entered into.
- Management stated that the company was in compliance with its debt covenants at September 30, 2017, but noted that future compliance and refinancing capacity are not assured.
Material changes versus the prior comparable period
- The Produquímica acquisition materially expanded revenue and operating earnings, but also increased debt, interest expense, depreciation, amortization and foreign-exchange exposure.
- Nine-month profitability weakened despite higher sales: operating earnings fell 28% and net earnings fell 28%, primarily because of lower Salt performance and higher corporate and financing costs.
- Salt was affected by two consecutive mild winters, lower bid prices, reduced volumes, higher unit costs from older inventory, logistics costs and mine operating issues.
- Q3 included $4.3 million of restructuring charges, with approximately $2 million recognized in SG&A and additional segment-related charges. Further restructuring charges may occur.
- Foreign-currency translation produced a $54.3 million nine-month increase in other comprehensive income, while non-designated foreign-currency swaps generated losses of $4.9 million in Q3 and $10.2 million year to date.
- The company finalized the Produquímica purchase price allocation and recorded a $1.9 million gain in Q1 from settling contingent consideration. A Q3 adjustment increased depreciation expense by $1.9 million.
Guidance, outlook, risks and contingencies
- Management expects approximately a 3% contraction in North American highway deicing bid volumes versus the 2016-2017 bid season.
- 2017 volume outlook: Salt 10.6–11.0 million tons; Plant Nutrition North America 320,000–340,000 tons; Plant Nutrition South America 750,000–800,000 tons.
- The Brazilian planting season started later than expected, negatively affecting Plant Nutrition South America.
- Key risks include weather and seasonality, mine and equipment disruptions, energy and raw-material costs, transportation availability, agricultural market conditions, leverage and covenant compliance, foreign exchange, acquisition integration, environmental matters, labor issues and regulatory requirements.
- Canadian tax authorities have issued reassessments totaling $104.4 million, including interest, for certain years. The company disputes the assessments, has posted a $63.6 million performance bond and paid $35.2 million toward required security; management believes reserves are adequate but acknowledges the ultimate outcome could be materially higher or lower.
- Additional Canadian reassessments for 2007–2008 total $37.2 million, supported by a $10.2 million performance bond and an $8.0 million bank letter of guarantee.
- Brazilian tax proceedings totaled $18.7 million and acquired labor-related liabilities totaled $11.5 million at September 30, 2017; management assessed the Brazilian tax claims as less than probable and recorded no reserve for them.
- Management believes pending legal, environmental and other claims will not materially affect results, cash flows or financial condition, but outcomes remain uncertain.
Important facts for investors to verify
- Whether Salt volumes, pricing and unit costs improve following the mild winter period and mine operating disruptions.
- The sustainability of reported earnings after excluding the Brazilian valuation-allowance tax benefits and other unusual items.
- Produquímica’s normalized profitability, seasonal performance and integration benefits relative to the incremental debt burden.
- Compliance with leverage and interest-coverage covenants and the company’s ability to refinance or reduce approximately $1.33 billion of debt.
- The ultimate cost and timing of the Canadian tax disputes and required collateral.
- Whether restructuring savings offset the $4.3 million of Q3 charges and any additional costs expected in 2017.