Compass Minerals International, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2021. Compass Minerals produces salt, magnesium chloride and sulfate of potash (SOP) plant nutrients in the U.S., Canada and U.K. The company changed its fiscal year-end from December 31 to September 30 and expects to file a transition report for the period ending September 30, 2021.
Following a strategic review, the company now reports two continuing-operation segments: Salt and Plant Nutrition. Certain South American businesses and the North American micronutrient business are classified as discontinued operations and held for sale.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $199.4 million | $175.2 million | $624.9 million | $521.1 million |
| Gross profit | $30.2 million | $39.6 million | $138.6 million | $123.7 million |
| Gross margin | 15% | 23% | 22% | 24% |
| Operating earnings | $0.9 million | $9.7 million | $76.9 million | $64.0 million |
| Net earnings from continuing operations | $(16.4) million | $(7.2) million | $25.5 million | $32.8 million |
| Net earnings (loss) from discontinued operations | $73.5 million | $3.9 million | $(182.8) million | $(2.1) million |
| Net earnings (loss) | $57.1 million | $(3.3) million | $(157.3) million | $30.7 million |
| Diluted EPS from continuing operations | $(0.49) | $(0.22) | $0.73 | $0.94 |
| Adjusted EBITDA from continuing operations | $33.1 million | $42.0 million | $142.7 million | $126.1 million |
Q2 sales increased 14%, but operating earnings declined 91% and adjusted EBITDA declined 21%. For the first six months, sales increased 20%, operating earnings increased 20% and adjusted EBITDA increased 13%. Q2 performance was affected by higher logistics costs in Salt and higher product costs at Plant Nutrition, including lower-quality pond harvests and reduced production yields at Ogden.
Segments and operating drivers
- Salt: Q2 sales increased to $142.6 million from $121.9 million, while operating earnings declined to $19.2 million from $22.5 million. Volumes increased 17% to 1.657 million tons, but higher shipping and handling costs pressured earnings. Six-month sales increased 25% to $511.6 million and operating earnings increased 23% to $110.8 million.
- Plant Nutrition: Q2 sales increased to $53.8 million from $51.0 million, while operating earnings declined to $0.7 million from $6.3 million. Volumes were broadly stable at 88,000 tons, and average selling price increased 6% to $610 per ton. Six-month operating earnings declined to $6.0 million from $10.9 million.
Cash flow, liquidity and debt
- Six-month operating cash flow was $210.4 million, compared with $233.9 million in the prior-year period.
- Capital expenditures were $39.0 million, and proceeds from the North American micronutrient business sale were $56.7 million.
- Cash and cash equivalents were $53.6 million, including $27.3 million classified as held for sale; continuing-operations cash was $26.3 million.
- Total debt was $1.153 billion at June 30, 2021, consisting primarily of $250.0 million of 2024 senior notes, $500.0 million of 2027 senior notes, $380.8 million under the senior secured credit facilities and $33.2 million under the accounts receivable facility.
- Revolving credit availability was approximately $251.4 million after $13.6 million of letters of credit. The company stated that it was in compliance with debt covenants at June 30, 2021.
- The company paid $48.7 million of dividends and made net long-term debt repayments of $147.8 million during the first six months.
In July 2021, proceeds from business sales were used to repay $35.0 million of revolving borrowings and $265.0 million of term debt. Management stated that debt declined to approximately $864.0 million following these transactions, with $80.8 million remaining outstanding under the term loan.
Material changes, unusual items and outlook
- The company completed the sale of a North American micronutrient business component on May 4, 2021, recognizing a $30.8 million gain.
- The South America specialty plant nutrition business sale closed July 1, 2021, for gross proceeds of approximately $432.3 million, including $325.5 million of cash and $106.8 million of net debt assumed by the buyer. An earn-out of up to R$88 million may be payable in 2022.
- The six-month loss from discontinued operations included a $240.6 million adjustment to fair value less estimated costs to sell, primarily related to the South American businesses and currency translation. The company continues to pursue the sale of its South America chemicals business and Fermavi investment.
- Prior periods were restated for an interim inventory valuation error and other immaterial corrections. The inventory error shifted Salt product costs between quarters without affecting full-year 2020 results.
- Management expects fiscal 2021 Salt volumes of 8.6 million to 9.0 million tons, Plant Nutrition volumes of 230,000 to 240,000 tons and capital expenditures of approximately $70 million.
- The business is highly seasonal, with Salt sales and operating earnings generally higher in the first and fourth quarters. Management said COVID-19 did not materially affect reported results for the periods presented, but future effects remain uncertain.
Risks, contingencies and controls
- Material weakness: Management concluded that disclosure controls were ineffective at June 30, 2021 because controls over interim capitalization of Salt inventory variances were not properly designed. The company plans to amend its 2020 Form 10-K and first-quarter 2021 Form 10-Q; the independent auditor is expected to issue an adverse internal-control opinion for December 31, 2020.
- Canadian provincial tax reassessments totaled $168.7 million, including interest, through June 30, 2021. The company disputes the assessments and had posted a $123.5 million performance bond and paid $40.1 million to Canadian tax authorities.
- The SEC Division of Enforcement is investigating disclosures primarily concerning the Goderich mine. The company cannot predict the timing or outcome but does not currently expect a material impact.
- Key operating risks include weather-driven Salt demand, mining and equipment risks, energy and transportation costs, foreign currency movements, commodity prices, leverage and debt covenant compliance, environmental matters, regulatory requirements, tax disputes, COVID-19 disruption and execution of planned divestitures.
Facts investors should verify
- Confirm the final cash proceeds, debt assumed, earn-out terms and accounting treatment of the July 1 South America specialty plant nutrition sale.
- Monitor completion and proceeds from the remaining South America chemicals and Fermavi transactions.
- Assess remediation of the material weakness and the impact of any amended filings or adverse internal-control opinion.
- Reconcile post-closing debt of approximately $864.0 million with subsequent balance sheets and covenant calculations.
- Evaluate whether Ogden production yields, Salt logistics costs and seasonal winter demand support the stated volume outlook and capital-spending plan.
- Track the Canadian tax reassessments, required collateral and potential changes to reserves or cash accessibility.