Business Context and Reporting Period
Compass Minerals International, Inc. is a producer of salt, specialty plant nutrients and specialty chemicals, with operations in the United States, Canada, Brazil and the United Kingdom. Reported segments are Salt, Plant Nutrition North America and Plant Nutrition South America. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results are seasonal: Salt sales and operating earnings are generally strongest in the first and fourth quarters, while Plant Nutrition South America typically peaks in the third and fourth quarters.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $256.1 million, up 4% | $670.0 million, up 3% |
| Gross profit | $66.3 million | $153.6 million |
| Gross margin | 25.9%, versus 18.7% | 22.9%, versus 18.2% |
| Operating earnings | $24.5 million, versus $4.1 million | $68.7 million, versus $37.3 million |
| Operating margin | 9.6%, versus 1.7% | 10.3%, versus 5.7% |
| Net earnings | $1.7 million, versus a loss of $11.8 million | $29.3 million, versus a loss of $4.2 million |
| Diluted EPS | $0.04, versus $(0.36) | $0.84, versus $(0.14) |
| Adjusted EBITDA | $62.3 million, up 44% | $141.9 million, up 26% |
Six-month operating cash flow was $233.9 million, compared with $111.9 million in 2019. Working-capital changes provided $132.0 million, primarily reflecting a $139.2 million receivables benefit. Capital expenditures were $42.7 million, compared with $49.8 million, and dividends paid were $49.5 million.
Cash and cash equivalents were $67.2 million at June 30, 2020, compared with $34.7 million at December 31, 2019. Total debt was $1.2865 billion, including $39.0 million of current maturities. Debt decreased from $1.4160 billion at year-end, primarily from $100.5 million of net debt repayments. The weighted-average interest rate was approximately 5.49%.
The company had $59.0 million drawn on its $300 million revolving credit facility and $10.4 million of letters of credit, leaving reported availability of $230.6 million. On June 30, 2020, it established a committed accounts-receivable financing facility of up to $100 million; it received $24.0 million of proceeds in July 2020.
Material Changes Versus the Prior Comparable Period
- Second-quarter Salt sales increased 8% to $121.8 million and Salt operating earnings more than doubled to $29.7 million. Higher highway-deicing prices and volumes and lower logistics costs were key drivers; the 2019 period included $2.8 million of Mississippi River flooding-related logistics costs.
- For the first six months, Salt sales declined 2% to $409.6 million because volumes fell 7% to 4.994 million tons, mainly from mild winter weather, despite higher prices. Salt operating earnings increased 29% to $86.6 million.
- Plant Nutrition North America sales rose 15% in the second quarter and 36% year to date, driven by volume growth, while average selling prices declined. Year-to-date operating earnings increased to $10.3 million from $3.0 million.
- Plant Nutrition South America second-quarter sales declined 6% to $76.9 million because of currency-driven price pressure, partially offset by 12% higher volume. Operating earnings increased to $8.9 million from $1.7 million. Year-to-date operating earnings improved to $9.2 million from a $0.9 million loss.
- Gross margin expanded by approximately 7 percentage points in the second quarter and 5 percentage points year to date. The six-month effective tax rate increased to 31% from 14%, primarily because of higher pretax income and discrete tax items.
- Foreign exchange results improved year to date, producing a $9.3 million gain versus a $9.0 million loss in 2019, but the second quarter included a $5.0 million loss.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2020 Salt sales volumes of 10.7 million to 11.1 million tons, Plant Nutrition North America volumes of 340,000 to 365,000 tons, and Plant Nutrition South America volumes of 800,000 to 900,000 tons.
- COVID-19 may reduce highway bid volumes, consumer and industrial demand, specialty-crop demand and demand for South American agricultural and chemical products. The company remained operational in North America and Brazil; its U.K. mine was idled in late March and gradually restarted in mid-May.
- The company is subject to Canadian tax reassessments totaling $127.4 million, including interest, through June 30, 2020. It disputes the reassessments, has posted a $93.7 million performance bond and paid $36.3 million to Canadian tax authorities. Management believes reserves are adequate and expects no material impact, but acknowledges the outcome could be material if unresolved unfavorably.
- The SEC Division of Enforcement is investigating disclosures concerning operation of the Goderich mine. The company is cooperating and states that it does not expect a material impact, although timing and outcome are uncertain.
- Other exposures include Brazilian tax proceedings totaling $7.5 million, environmental investigations at the Kenosha, Wisconsin property, labor matters, mine and operational risks, foreign currency volatility, seasonality, transportation and energy costs, leverage and debt-covenant compliance.
- Natural-gas and foreign-currency hedges mitigate portions of commodity and currency exposure. The company reported no material change in market-risk exposure from December 31, 2019.
- Management stated that disclosure controls were effective as of June 30, 2020 and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether COVID-19 affects 2020 volumes, customer demand, supply chains or the company’s stated segment guidance.
- The severity of subsequent winter weather and its effect on Salt volumes, pricing and inventory levels.
- Plant Nutrition South America’s exposure to Brazilian-real depreciation and local agricultural and chemical demand.
- Liquidity, debt maturities, revolving-credit availability, covenant compliance and use of the new receivables facility.
- The ultimate resolution and cash-collateral requirements of the Canadian tax reassessments.
- The progress and potential consequences of the SEC Goderich mine investigation.
- The reconciliation and limitations of Adjusted EBITDA, a non-GAAP measure, against GAAP operating earnings, net earnings and operating cash flow.