Compass Minerals International, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Compass Minerals produces salt, specialty plant nutrition products and specialty chemicals 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 and nine months ended September 30, 2018; results are unaudited and seasonally affected by winter deicing demand and Brazil’s spring planting season.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $322.5 million | $290.7 million | $1,007.1 million | $906.5 million |
| Gross profit | $71.4 million | $76.1 million | $179.3 million | $202.6 million |
| Gross margin | 22.1% | 26.2% | 17.8% | 22.4% |
| Operating earnings | $32.6 million | $31.4 million | $62.0 million | $78.8 million |
| Operating margin | 10.1% | 10.8% | 6.2% | 8.7% |
| Net earnings | $12.8 million | $32.0 million | $17.8 million | $47.1 million |
| Diluted EPS | $0.37 | $0.94 | $0.51 | $1.38 |
| Adjusted EBITDA | $67.2 million | $68.8 million | $166.5 million | $172.8 million |
Q3 sales increased 11%, while operating earnings increased 4%; however, net earnings declined 60% because of higher interest expense, foreign exchange losses and the absence of the significant Brazilian tax benefit recognized in 2017. Nine-month sales increased 11%, but operating earnings fell 21% and net earnings fell 62%.
Cash flow from operations was $165.4 million for the first nine months, compared with $128.6 million in the prior-year period. Capital expenditures were $72.2 million, dividends paid were $73.4 million and net cash used in financing activities was $85.7 million. Ending cash was $36.1 million, essentially unchanged from $36.6 million at December 31, 2017.
At September 30, 2018, total debt was $1.340 billion, including $1.02 billion under senior secured credit facilities, $250.0 million of senior notes and $80.7 million of Brazilian debt. Revolver borrowings were $184.2 million. Outstanding letters of credit reduced revolver availability to $105.5 million. The company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Salt sales increased 10% in Q3 and 13% year to date, driven by higher volumes, but Salt operating earnings declined 46% in Q3 and 25% year to date. The principal pressures were higher logistics costs, purchased salt costs and production disruption and lower output at the Goderich mine following the 2018 strike and earlier mine ceiling issues.
- Plant Nutrition North America sales increased 3% in Q3 and 5% year to date. Operating earnings were flat in Q3 and decreased 35% year to date, primarily because of higher depreciation from new Ogden production assets and higher potassium chloride feedstock costs.
- Plant Nutrition South America sales increased 15% in Q3 and 11% year to date. Operating earnings increased 46% in Q3 and 36% year to date, supported by higher agricultural productivity volumes and prices, despite an unfavorable Brazilian real exchange-rate effect.
- Gross profit declined because higher Salt costs more than offset increased plant nutrition profitability. Selling, general and administrative expense decreased $5.9 million in Q3 and $6.5 million year to date, partly because 2017 included restructuring charges.
- Interest expense increased to $15.9 million in Q3 and $44.5 million year to date, primarily because of higher U.S. interest rates and greater revolver borrowings.
- The 2017 periods benefited from approximately $17 million of Brazilian valuation allowance releases in Q3 and approximately $18 million year to date. Consequently, the effective tax rate changed from a 64% benefit to a 12% expense in Q3 and from a 20% benefit to a 5% expense year to date.
Guidance, outlook, risks and unusual items
- Management expects approximately 15% Salt revenue growth in Q4 2018 versus Q4 2017, assuming average winter weather. Higher prices are expected to be partly offset by increased logistics costs and residual Goderich production-cost effects.
- Full-year 2018 volume ranges are 11.6–12.0 million tons for Salt, 345,000–360,000 tons for Plant Nutrition North America and 740,000–780,000 tons for Plant Nutrition South America.
- Key risks include winter weather, seasonality, mine operating conditions, strikes, energy and transportation costs, agricultural demand and prices, foreign exchange, substantial leverage, covenant compliance, refinancing needs, environmental matters and international tax disputes.
- Canadian provincial tax authorities have issued reassessments totaling $113.3 million, including interest, through September 30, 2018. The company disputes the assessments, believes it is adequately reserved and has posted a $73.1 million performance bond and paid $38.3 million to Canadian tax authorities. Management expects the ultimate outcome not to be material but cannot assure a favorable resolution.
- The company expects to pay an additional $4.3 million to Canadian taxing authorities in Q4 2018 and expects a $22.8 million U.S. tax refund in late 2018 or early 2019.
- The Goderich mine strike ended when employees ratified a three-year collective bargaining agreement on July 16, 2018. The filing continues to identify production and logistics effects from the strike.
- The company adopted the new revenue recognition standard and related pension-cost presentation guidance in 2018 without a material financial statement impact. It is assessing upcoming lease, credit-loss and other accounting standards.
- Management stated that disclosure controls were effective as of September 30, 2018, and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Salt pricing and average winter weather offset Goderich-related production, purchased-salt and logistics costs in Q4 and beyond.
- Actual 2018 segment volumes compared with management’s stated ranges.
- Progress on reducing leverage, revolver utilization and refinancing obligations beginning in 2019 and 2021.
- Resolution, reserves and required collateral for the Canadian tax reassessments and timing of the expected U.S. tax refund.
- Sustainability of Plant Nutrition South America growth amid Brazilian currency, commodity-cost and agricultural-market volatility.
- Cash generation after dividends, capital expenditures, debt service and potential working-capital build for the seasonal winter business.