Compass Minerals International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2017, filed August 8, 2017. Compass Minerals produces salt, magnesium chloride, sulfate of potash, specialty plant nutrients and specialty chemicals through operations in the United States, Canada, Brazil and the United Kingdom. Results include the acquired Produquímica business in Brazil, consolidated since October 3, 2016.
Results are highly seasonal: Salt performance is generally stronger in the first and fourth quarters, while Plant Nutrition South America is typically strongest in the third and fourth quarters.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $228.0 million | $169.5 million | $615.8 million | $515.2 million |
| Gross profit | $44.9 million | $41.3 million | $126.5 million | $143.9 million |
| Gross margin | 19.7% | 24.4% | 20.5% | 27.9% |
| Operating earnings | $6.0 million | $15.5 million | $47.4 million | $89.8 million |
| Operating margin | 2.6% | 9.1% | 7.7% | 17.4% |
| Net earnings | $(6.4) million | $6.3 million | $15.1 million | $56.0 million |
| Diluted EPS | $(0.19) | $0.18 | $0.44 | $1.65 |
| Adjusted EBITDA | $34.2 million | $34.8 million | $104.0 million | $129.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $143.2 million | $149.9 million |
Interest expense increased to $12.3 million in the quarter and $26.0 million year to date, compared with $5.6 million and $11.4 million, respectively, in the prior-year periods. The quarter included a $1.5 million tax benefit; year-to-date income tax expense was $4.8 million.
At June 30, 2017, cash and cash equivalents were $33.9 million, compared with $77.4 million at December 31, 2016. Total debt was $1.26 billion, including $924.7 million under senior secured credit facilities and $250.0 million of senior notes. Revolver availability was $210.3 million after $6.6 million of letters of credit. The company stated that it was in compliance with its debt covenants.
Six-month investing cash use was $58.3 million, including $55.6 million of capital expenditures. Financing cash use was $130.5 million, including $69.9 million of net debt payments, $48.9 million of dividends and a $12.8 million final acquisition-related payment.
Material Changes Versus Prior Comparable Period
- Sales increased 35% in the second quarter and 20% for the first six months, primarily from the Produquímica acquisition.
- Salt sales declined 8% in the quarter and 7% year to date. Salt operating earnings declined 54% in the quarter and 47% year to date, driven by lower volumes and prices, higher unit costs, unfavorable logistics and Goderich mine operating issues.
- Salt highway-deicing volumes declined 10% in the quarter and 7% year to date, reflecting the carryover effects of two consecutive mild winters.
- Plant Nutrition North America sales increased 6% in the quarter and 1% year to date. Operating earnings increased 62% and 52%, respectively, primarily due to higher volumes and lower per-unit costs.
- Plant Nutrition South America contributed $66.1 million of second-quarter sales and $127.4 million year to date, with operating earnings of $0.8 million and $2.6 million, respectively. Produquímica contributed $127.4 million of revenue and an $8.8 million net loss during the first six months.
- Gross margin fell by approximately 4 percentage points in the quarter and 7 percentage points year to date. SG&A increased $13.1 million in the quarter and $25.0 million year to date, mainly due to Produquímica and restructuring-related costs.
- Adjusted EBITDA decreased 2% in the quarter and 20% year to date.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2017 Salt sales volumes of 11.3 million to 11.6 million tons, Plant Nutrition North America volumes of 320,000 to 340,000 tons, and Plant Nutrition South America volumes of 750,000 to 850,000 tons.
- North American highway deicing bid volumes are expected to contract because of mild winter weather in the United States. Plant Nutrition South America has experienced delayed and reduced distributor purchasing, although direct sales of higher-value products to farmers remained strong.
- A restructuring plan initiated in July 2017 is expected to produce an approximately $4 million charge in the third quarter; additional charges may occur.
- Canadian tax authorities have issued unresolved reassessments totaling $99.8 million for 2002–2012, including interest. The company disputes the claims and has posted or paid collateral, including a $61.2 million performance bond and $33.9 million paid to the tax authority. Additional Canadian reassessments for 2007–2008 totaled $35.7 million, supported by a $9.8 million performance bond and a $10.1 million bank guarantee.
- Other contingencies include Brazilian tax proceedings totaling $17.6 million, assumed Produquímica labor-related liabilities of $11.0 million and potential exposure of approximately $43 million for other labor matters. Management believes reserves are adequate and that pending matters will not materially affect results, but acknowledges outcomes could be material if unresolved adversely.
- Key operating risks include weather and climate conditions, mine operations and geological conditions, energy and transportation costs, agricultural market conditions, leverage and covenant compliance, foreign exchange, environmental and regulatory matters, labor disruptions and integration of Produquímica.
- The company hedges portions of natural gas usage through December 2018 and uses foreign-currency swaps for Produquímica-related debt. At June 30, 2017, foreign-currency swap liabilities were $13.8 million.
Investor Verification Priorities
- Verify the outcome of the 2017 highway deicing bid season, Salt volumes, pricing and mine-cost recovery.
- Track Produquímica’s profitability, working-capital requirements, seasonality and integration progress.
- Reconcile debt reduction, interest expense, revolver availability and compliance with leverage and interest-coverage covenants.
- Monitor the Canadian tax reassessments, required collateral and potential cash-flow exposure.
- Assess the effect of the planned restructuring charge and any additional cost-reduction actions.
- Review the company’s ability to sustain dividends while funding capital expenditures and servicing approximately $1.26 billion of debt.
- Confirm the impact of foreign exchange, natural gas prices, transportation costs and agricultural-market conditions on future margins.