Compass Minerals International, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Compass Minerals produces salt, specialty plant nutrition products, specialty chemicals and related services through operations in the United States, Canada, Brazil and the United Kingdom. Reported segments are Salt, Plant Nutrition North America and Plant Nutrition South America. The filing covers the three months ended March 31, 2019; financial statements are unaudited and prepared under U.S. GAAP.
Results are highly seasonal. Salt demand generally peaks in the first and fourth quarters, while South American plant nutrition demand is typically strongest in the third and fourth quarters.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $403.7 million | $437.9 million | Down 8% |
| Gross profit | $72.6 million | $65.4 million | Up 11% |
| Gross margin | 18.0% | 14.9% | Up 3.1 percentage points |
| Operating earnings | $33.2 million | $26.6 million | Up 25% |
| Operating margin | 8.2% | 6.1% | Up 2.1 percentage points |
| Net earnings | $7.6 million | $12.6 million | Down 40% |
| Diluted EPS | $0.22 | $0.37 | Down $0.15 |
| Adjusted EBITDA | $68.1 million | $60.8 million | Up 12% |
| Operating cash flow | $123.5 million | $173.0 million | Down $49.5 million |
| Capital expenditures | $21.5 million | $23.0 million | Down $1.5 million |
Interest expense increased to $16.2 million from $13.7 million, primarily because of higher U.S. interest rates and greater revolving-credit borrowings. Other expense was $4.4 million versus other income of $4.2 million in the prior-year period, principally reflecting $5.0 million of foreign-exchange losses in 2019 compared with $3.1 million of foreign-exchange gains in 2018. The effective tax rate increased to 39% from 26%, driven by a discrete tax item, GILTI and higher mining tax.
At March 31, 2019, cash and cash equivalents were $43.8 million, compared with $27.0 million at December 31, 2018. Total debt was $1.30 billion, including $945.9 million under senior secured credit facilities, $250.0 million of senior notes and approximately $110.0 million of Brazilian debt. Revolver borrowings were $119.1 million; $10.6 million of letters of credit reduced revolver availability to $170.3 million. The company stated that it was in compliance with its debt covenants.
Operating cash flow funded $21.5 million of capital expenditures, $24.6 million of dividends and net debt repayments of $64.9 million. Cash increased by $16.8 million during the quarter.
Material changes versus the prior comparable period
- Sales declined $34.2 million as all three operating segments reported lower sales.
- Salt operating earnings rose $18.2 million to $52.3 million despite a 14% decline in volumes, benefiting from higher highway deicing prices, improved mine production and lower-cost inventory.
- Salt volumes declined to 4.094 million tons from 4.764 million tons, primarily because of milder U.K. weather and lower North American contract volumes. The combined average salt selling price increased to $74.84 per ton from $66.32.
- Plant Nutrition North America sales fell 30% to $37.2 million and operating results declined to a $1.6 million loss, primarily because wet and cold weather reduced customer purchases and increased logistics costs.
- Plant Nutrition South America sales fell 13% to $57.7 million and operating results declined to a $2.6 million loss, affected by currency translation, lower agricultural productivity volumes, planned maintenance and higher raw-material costs.
- The company adopted the new lease standard on January 1, 2019, recognizing $53.8 million of leased assets and $56.0 million of lease liabilities; beginning retained earnings was reduced by $0.1 million.
Guidance, outlook, commentary, risks and unusual items
Management expects 2019 Salt sales volumes of 10.5 million to 11.0 million tons, Plant Nutrition North America volumes of 340,000 to 380,000 tons and Plant Nutrition South America volumes of 800,000 to 900,000 tons. The North America plant nutrition outlook was reduced because of a shortened spring fertilizer season. Management also cited uncertainty in Brazil’s agricultural markets.
The company faces material seasonality, weather sensitivity, mining and operating risks, transportation and energy-cost exposure, foreign-currency risk, agricultural-market conditions, leverage and refinancing risk, environmental and regulatory obligations, and customer credit risk. Natural-gas and foreign-currency derivatives are used for hedging, but management stated that hedging may not eliminate these exposures.
Canadian provincial tax authorities have issued reassessments totaling $112.2 million, including interest, through March 31, 2019. The company disputes the reassessments and believes it has adequately reserved for them, but acknowledges that the ultimate resolution could be materially higher or lower. It had posted a $79.1 million performance bond and paid $37.0 million to Canadian tax authorities. The company also expected approximately $106.1 million of intercompany payments and $29.6 million of Canadian tax payments in the second quarter of 2019 under a transfer-pricing settlement, with related U.S. tax refunds expected.
Other contingencies include environmental investigations at the Kenosha, Wisconsin plant, Brazilian tax proceedings totaling $16.0 million, and labor-related matters assumed in the Produquímica acquisition. Management believes pending legal matters are not expected to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether Salt pricing and improved mine production can offset weather-driven volume volatility.
- Whether the reduced plant nutrition volume outlook and Brazilian market uncertainty persist.
- The timing and cash-flow impact of the Canadian tax reassessments, settlements, collateral requirements and expected refunds.
- Compliance with leverage and interest-coverage covenants, revolver availability and debt maturities beginning in 2019 and 2021.
- The sustainability of the $0.72-per-share quarterly dividend in light of leverage and seasonal cash flows.
- Foreign-exchange effects, particularly the Brazilian real, and changes in energy, raw-material and transportation costs.
- Environmental, labor, tax and other contingencies, including potential exposures not reserved because loss was assessed as less than probable.