Compass Minerals International, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
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. The company also operates a U.K. records-management business. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Results are highly seasonal: Salt sales and operating income are generally strongest in the first and fourth quarters, while Plant Nutrition South America typically has its strongest demand in the third and fourth quarters.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $437.9 million | $387.8 million | +13% |
| Gross profit | $65.4 million | $81.6 million | -20% |
| Gross margin | 14.9% | 21.0% | -6.1 percentage points |
| Operating earnings | $26.6 million | $41.4 million | -36% |
| Operating margin | 6.1% | 10.7% | -4.6 percentage points |
| Net earnings | $12.6 million | $21.5 million | -41% |
| Diluted EPS | $0.37 | $0.63 | -$0.26 |
| Adjusted EBITDA | $60.8 million | $69.8 million | -13% |
| Operating cash flow | $173.0 million | $125.2 million | +38% |
| Capital expenditures | $23.0 million | $21.0 million | +$2.0 million |
Interest expense was $13.7 million in both periods. Income tax expense declined to $4.4 million from $6.3 million, while the effective tax rate increased to 26% from 23%.
Comprehensive loss was $2.2 million, compared with comprehensive income of $35.9 million in the prior-year quarter, primarily because of a $14.4 million foreign-currency translation loss in 2018 versus a $14.8 million gain in 2017.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $44.5 million at March 31, 2018, up from $36.6 million at December 31, 2017.
- Total debt was $1.251 billion, including $1.218 billion of long-term debt and $32.3 million of current maturities.
- Debt consisted principally of $835.2 million of term loans, $46.5 million drawn on the revolving credit facility, $250.0 million of 4.875% senior notes and $125.4 million of Produquímica-related debt.
- The company had $8.4 million of outstanding letters of credit and $245.1 million of remaining revolving-credit availability.
- First-quarter financing activities included $112.0 million of net debt repayments and $24.5 million of dividends paid.
- Receivables and inventories declined to $275.0 million and $217.2 million, respectively, from $344.5 million and $289.9 million at year-end.
The company stated that it was in compliance with its debt covenants at March 31, 2018, but noted that future compliance and the ability of subsidiaries to fund parent-company obligations are not assured.
Material Changes Versus the Prior Comparable Period
- Sales increased in all three reportable segments, but profitability declined in all three.
- Salt sales rose 15% to $315.9 million. Volumes increased 18% to 4.764 million tons, driven by stronger winter weather, but operating earnings fell 25% to $34.1 million because of higher product and logistics costs, higher-cost inventory and lower Goderich production following a prior ceiling fall.
- Plant Nutrition North America sales increased 8% to $52.9 million, while operating earnings declined 36% to $4.9 million. Higher volumes were offset by lower average prices, higher depreciation from new Ogden assets and higher-cost carryover inventory.
- Plant Nutrition South America sales increased 8% to $66.3 million, while operating earnings declined to $0.8 million from $1.8 million. The 2017 period included a $1.9 million gain from finalizing Produquímica acquisition consideration.
- SG&A declined to $38.8 million from $40.2 million, improving SG&A as a percentage of sales to 8.9% from 10.4%.
- Operating cash flow improved primarily from working-capital releases of $123.7 million, including reductions in receivables and inventories.
- The company adopted the new revenue-recognition standard and related cash-flow presentation guidance in the first quarter. Management reported no material transition impact.
- The company early adopted guidance permitting reclassification of certain tax effects from accumulated other comprehensive income to retained earnings, resulting in a $0.2 million reclassification.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 Salt sales volumes of 11.8 million to 12.6 million tons. April winter weather and continued U.K. demand were expected to support higher second-quarter Salt sales, and second-quarter Salt operating margins were expected to improve from first-quarter levels.
- Plant Nutrition North America 2018 sales volumes were expected to range from 320,000 to 350,000 tons. Second-quarter margins were expected to be similar to the first quarter, with lower micronutrient sales and higher depreciation creating pressure.
- Plant Nutrition South America 2018 sales volumes were expected to range from 700,000 to 900,000 tons. Management expected first-half revenue to exceed 2017 levels and second-quarter margins to exceed the prior-year period.
- The collective bargaining agreement at the Goderich mine expired March 31, 2018, and union members went on strike April 27, 2018. Management implemented contingency plans and expected the mine to operate at or near planned rates, but could not predict the strike’s duration or ultimate cost.
- Canadian provincial tax authorities have issued reassessments totaling $103.6 million, including interest, for years 2002–2012. The company disputes the assessments and had posted a $65.0 million performance bond and paid $38.0 million to the authorities. Management believes reserves are adequate but acknowledges that the ultimate outcome could be materially higher or lower.
- The company expects additional Canadian tax security requirements and expects a $22.7 million Canadian tax payment, with a corresponding $22.8 million U.S. tax refund whose timing may lag by at least one year.
- Other risks include seasonality, weather, mine and production disruptions, energy and transportation costs, foreign-currency fluctuations, agricultural-market conditions, leverage and covenant compliance, environmental matters, tax disputes and integration of acquired businesses.
Investor Verification Items
- Verify the duration and operational impact of the Goderich mine strike, including labor-cost and customer-service effects.
- Assess whether Salt cost inflation and Goderich production constraints continue to pressure margins.
- Compare actual 2018 segment volumes and margins with management’s stated ranges and outlook.
- Review debt maturities, leverage-ratio headroom, interest-rate exposure and available revolver capacity.
- Monitor the Canadian tax reassessments, required collateral and timing of the expected U.S. tax refund.
- Evaluate whether the strong first-quarter operating cash flow is sustainable or primarily reflects seasonal working-capital releases.
- Consider the effect of foreign-currency movements, particularly the Canadian dollar, Brazilian real and British pound, on earnings and comprehensive income.