Compass Minerals International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited interim financial statements prepared under U.S. GAAP. Compass Minerals produces salt, specialty plant nutrition products, specialty chemicals and provides U.K. records-management services. Results are materially seasonal, particularly for deicing salt and South American plant nutrition.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $413.9 million | $403.7 million | +3% |
| Gross profit | $87.3 million | $72.6 million | +20% |
| Gross margin | 21.1% | 18.0% | +3.1 pts |
| Operating earnings | $44.2 million | $33.2 million | +33% |
| Operating margin | 10.7% | 8.2% | +2.5 pts |
| Net earnings | $27.6 million | $7.6 million | +263% |
| Diluted EPS | $0.80 | $0.22 | +$0.58 |
| Adjusted EBITDA | $79.6 million | $69.2 million | +15% |
| Operating cash flow | $228.6 million | $128.4 million | +$100.2 million |
| Capital expenditures | $25.3 million | $21.5 million | +$3.8 million |
Cash and liquidity: Cash was $109.8 million at March 31, 2020, versus $34.7 million at December 31, 2019. The company reported $230.5 million of availability under its $300 million revolving credit facility after $10.5 million of letters of credit.
Debt: Total debt was approximately $1.31 billion, including $59.0 million drawn on the revolving facility. The weighted-average interest rate was approximately 5.69%. The company stated that it was in compliance with its debt covenants at quarter-end.
Balance sheet: Total assets were $2.11 billion and stockholders’ equity was $361.5 million at March 31, 2020. Accumulated other comprehensive loss increased to $365.3 million, primarily from a $173.5 million cumulative foreign-currency translation loss.
Material changes versus Q1 2019
- Salt: Sales declined 6% to $287.8 million as volumes fell 13% to 3.573 million tons, primarily because of milder winter weather. Higher highway deicing prices helped lift Salt operating earnings 9% to $56.9 million.
- Plant Nutrition North America: Sales rose 63% to $60.6 million, with volume increasing 68% to 96,000 tons. Operating earnings improved to $5.2 million from a $1.6 million loss.
- Plant Nutrition South America: Sales increased 9% to $62.8 million and operating earnings improved to $0.3 million from a $2.6 million loss. Higher volumes were offset in part by weaker Brazilian-reais translation and lower reported prices.
- Profitability: Gross profit benefited from higher Salt pricing, increased plant nutrition volumes, lower plant nutrition production costs and lower per-unit shipping costs. SG&A increased $3.7 million, partly because of higher corporate compensation and severance expense.
- Other income and taxes: Foreign-exchange results improved from a $5.0 million loss to a $14.3 million gain, primarily from translation of Canadian-dollar intercompany loans. Interest expense increased to $19.0 million from $16.2 million following the 2019 debt refinancing. The effective tax rate declined to approximately 30% from 39%.
- Cash generation and debt: Operating cash flow increased substantially because of working-capital sources, including receivables, inventories and other assets. Net debt principal payments were $97.7 million, compared with $64.9 million in the prior-year quarter.
Guidance, outlook and risks
- 2020 Salt sales-volume guidance was 10.7 million to 11.1 million tons following mild winter weather.
- 2020 Plant Nutrition North America volume guidance was lowered to 340,000 to 365,000 tons because of potential COVID-19-related demand effects.
- 2020 Plant Nutrition South America volume guidance was 800,000 to 900,000 tons.
- The strategic review of the Plant Nutrition South America business was temporarily suspended because of COVID-19 and related economic and capital-market uncertainty.
- The company continued operating North American and Brazilian facilities as an essential business. Its U.K. salt mine was idled near the end of March because of mild winter weather and U.K. COVID-19 guidance. No material supply-chain or logistics issues had been experienced as of the filing.
- COVID-19 risks include lower road-salt bids and traffic, reduced consumer and specialty-crop demand, supply-chain disruption, labor or facility interruptions, customer credit deterioration, higher operating or financing costs, and adverse currency movements.
- Canadian provincial tax authorities have issued reassessments totaling $120.4 million, including interest, for 2002–2014. The company disputes the reassessments and believes it is adequately reserved, but acknowledges that the ultimate outcome could be materially higher or lower than recorded reserves. It had posted an $89.6 million performance bond and paid $34.8 million to Canadian tax authorities.
- The SEC is investigating disclosures concerning operation of the Goderich mine. Management stated that it cannot predict the outcome but does not currently expect a material effect.
- Other exposures include Brazilian tax proceedings, labor matters, environmental investigations at the Kenosha, Wisconsin property, mine and operational risks, seasonality, foreign exchange, transportation costs and substantial debt-service requirements.
Investor verification points
- Verify the sustainability of the $228.6 million first-quarter operating cash flow, particularly the extent to which it reflects seasonal working-capital releases and tax refunds.
- Monitor debt reduction, revolver availability, covenant compliance and refinancing requirements for maturities beginning in 2024 and 2025.
- Assess the impact of COVID-19 on deicing demand, plant nutrition volumes, customer credit and operating continuity, including the U.K. mine shutdown.
- Track Salt volumes and pricing after the mild 2019–2020 winter and compare actual results with the 10.7–11.1 million-ton guidance.
- Review the Canadian tax reassessments, required collateral and potential cash-flow consequences.
- Evaluate foreign-currency exposure, especially the Brazilian real, Canadian dollar and U.K. pound, given the significant translation loss in accumulated other comprehensive income.
- Follow developments in the SEC Goderich mine investigation and the suspended Plant Nutrition South America strategic review.