Compass Minerals International, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Compass Minerals produces salt, specialty plant nutrition products and specialty chemicals through its Salt, Plant Nutrition North America and Plant Nutrition South America segments, with operations in the U.S., Canada, Brazil and the U.K. Results are highly seasonal, particularly for deicing salt and Brazilian plant nutrition products.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $341.3 million | $322.5 million | $990.2 million | $1,007.1 million |
| Gross profit | $76.4 million | $71.4 million | $194.8 million | $179.3 million |
| Gross margin | 22.4% | 22.1% | 19.7% | 17.8% |
| Operating earnings | $30.1 million | $32.6 million | $67.4 million | $62.0 million |
| Operating margin | 8.8% | 10.1% | 6.8% | 6.2% |
| Net earnings | $10.6 million | $12.8 million | $6.4 million | $17.8 million |
| Diluted EPS | $0.31 | $0.37 | $0.17 | $0.51 |
| Adjusted EBITDA | $66.7 million | $67.2 million | $175.7 million | $166.5 million |
For the nine months, operating cash flow was $91.4 million versus $165.4 million in 2018. Capital expenditures were $71.6 million, dividends paid were $73.6 million and ending cash was $23.9 million, down from $27.0 million at December 31, 2018.
At September 30, 2019, total debt was $1.409 billion, including $250.4 million drawn on the revolving credit facility. Outstanding letters of credit reduced revolver availability to $39.1 million. Stockholders’ equity was $459.5 million, compared with $540.2 million at year-end 2018. The company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q3 sales increased 6%, driven by higher Salt sales and Plant Nutrition North America sales, partly offset by lower Plant Nutrition South America sales.
- Q3 Salt sales increased 16% to $159.6 million and Salt operating earnings increased 70% to $20.6 million, benefiting from higher highway deicing prices and volumes.
- Q3 Plant Nutrition North America sales increased 6% and operating earnings increased to $4.7 million, supported by higher volumes and lower product costs.
- Q3 Plant Nutrition South America sales declined 4% to $135.0 million and operating earnings fell 28% to $22.4 million, reflecting lower agricultural productivity volumes, lower chemical solutions pricing and higher raw-material costs.
- Q3 operating earnings declined 8% because higher segment earnings were more than offset by increased SG&A, including CEO and executive transition costs. SG&A rose to $46.3 million from $38.8 million.
- Interest expense increased to $17.7 million in Q3 and $50.7 million for the nine months, primarily due to higher borrowings and interest rates. Q3 net earnings also reflected a higher effective tax rate of 31%, versus 12% in the prior-year quarter.
- Nine-month sales decreased 2%, while operating earnings increased 9% and Adjusted EBITDA increased 6%. Nine-month EPS declined substantially because of higher interest expense, foreign exchange expense and tax expense.
- Comprehensive loss was $39.7 million in Q3, principally due to a $50.7 million cumulative translation loss, compared with comprehensive income of $4.2 million in Q3 2018.
Guidance, outlook, risks and unusual items
Management expects 2019 Salt sales volumes of 10.8 million to 11.2 million tons, Plant Nutrition North America volumes of 310,000 to 340,000 tons and Plant Nutrition South America volumes of 775,000 to 825,000 tons. The North American plant nutrition range was reduced because of lower near-term demand expectations. Management expects a strong fourth quarter in South America but cited reduced soybean demand from China, crop economics and trade uncertainty as risks.
- The company adopted the new lease standard in 2019, recording $45.7 million of leased assets and $47.5 million of lease liabilities, with a $0.1 million adjustment to beginning retained earnings.
- Canadian provincial tax authorities have issued reassessments totaling $126.2 million, including interest, relating to 2002–2014 tax years. The company disputes the claims, has reserved for them and has posted a $90.2 million performance bond and paid $37.4 million to Canadian tax authorities.
- Expected tax refunds include approximately $19.5 million in late 2019 and $57.4 million in early 2020. Timing and ultimate resolution remain uncertain.
- The SEC is investigating company disclosures concerning operation of the Goderich mine. Management expects no material impact but cannot predict the outcome.
- Key operating risks include weather and seasonality, mine and equipment disruptions, labor disputes, energy and raw-material costs, transportation availability, currency movements, agricultural demand, environmental and regulatory compliance, leverage and debt refinancing.
- The company hedges portions of natural gas and foreign currency exposure but states that hedging may not eliminate these risks.
Important facts for investors to verify
- Whether the limited revolver availability and $1.409 billion debt load remain manageable through seasonal working-capital requirements and 2021 debt maturities.
- Actual fourth-quarter Salt and Plant Nutrition South America volumes versus management’s stated outlook.
- The timing and amount of the expected tax refunds and the ultimate outcome of the Canadian tax reassessments.
- Progress and findings related to the SEC Goderich mine investigation and any related operational or disclosure consequences.
- Whether weaker North American plant nutrition demand, Brazilian crop economics, foreign exchange movements and raw-material costs continue to pressure margins.
- The sustainability of dividends, given nine-month operating cash flow of $91.4 million versus $73.6 million of dividends and $71.6 million of capital expenditures.