Business Context and Reporting Period
Compass Minerals International, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company produces salt, sulfate of potash, specialty plant nutrients, magnesium chloride and specialty chemicals across the United States, Canada, Brazil and the United Kingdom. Results are highly seasonal, particularly for highway deicing salt and Brazilian plant nutrition products.
Comparability with the prior-year quarter is affected by the October 2016 acquisition of Produquímica, which created the Plant Nutrition South America segment and contributed $61.3 million of first-quarter 2017 revenue.
Financial Performance and Liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales | $387.8 million | $345.7 million | Up 12% |
| Gross profit | $81.6 million | $102.6 million | Down 20% |
| Gross margin | 21.0% | 29.7% | Down 8.7 percentage points |
| Operating earnings | $41.4 million | $74.3 million | Down 44% |
| Operating margin | 10.7% | 21.5% | Down 10.8 percentage points |
| Net earnings | $21.5 million | $49.7 million | Down 57% |
| Diluted EPS | $0.63 | $1.46 | Down $0.83 |
| Adjusted EBITDA | $69.8 million | $94.6 million | Down 26% |
Sales growth was driven by Produquímica, partly offset by lower Salt revenue. Salt operating earnings declined to $45.4 million from $82.7 million, while Plant Nutrition North America operating earnings increased to $7.6 million from $5.3 million. Produquímica contributed $1.8 million of operating earnings.
Interest expense increased to $13.7 million from $5.8 million because of higher debt associated with the acquisition, partially offset by lower rates following the 2016 refinancing. The effective tax rate declined to 23% from 29%, primarily due to valuation allowance changes associated with Produquímica.
| Cash and debt | March 31, 2017 |
|---|---|
| Cash and cash equivalents | $48.9 million |
| Total debt, net of issuance costs | $1.231 billion |
| Current portion of debt | $116.5 million |
| Revolving credit borrowings | $22.0 million |
| Revolving facility availability, after letters of credit | $271.4 million |
Operating cash flow was $123.3 million, compared with $92.6 million in the prior-year quarter. Capital expenditures were $21.0 million, dividends paid were $24.4 million, and net debt payments were $93.8 million. Cash declined by $28.5 million during the quarter to $48.9 million.
Material Changes Versus the Prior Comparable Period
- Sales increased $42.1 million, primarily from the Produquímica acquisition.
- Salt sales declined 6% to $274.8 million, reflecting mild winter weather, lower highway deicing prices and lower highway volumes.
- Salt volumes declined 4% to 4.033 million tons; highway deicing volumes declined to 3.491 million tons from 3.724 million tons.
- Salt average selling price declined to $68.14 per ton from $69.45, with highway deicing pricing down 7%.
- Plant Nutrition North America sales declined 4% to $49.2 million because average pricing fell 9%, although volumes increased 7% to 79,000 tons.
- Gross profit was pressured by higher Salt per-unit costs, including sales of higher-cost inventory and lower mine operating rates in 2016.
- Depreciation, depletion and amortization increased to $28.4 million from $19.9 million, and SG&A increased to $40.2 million from $28.3 million, primarily reflecting Produquímica.
- The company recognized a $1.9 million gain from final settlement of Produquímica contingent consideration.
Guidance, Outlook, Risks and Unusual Items
Management expects the mild winter ending to create unfavorable supply and demand conditions for the upcoming North American highway deicing bid season. Full-year 2017 volume expectations are 11.0 million to 11.6 million tons for Salt, 300,000 to 330,000 tons for Plant Nutrition North America and 800,000 to 1.0 million tons for Plant Nutrition South America. Management expects Plant Nutrition South America operating earnings to be minimal in the first half because of seasonality, but to offset part of the adverse Salt impact later in the year. The company continues to pursue cost reductions.
Key risks include weather and climate conditions, mine and production disruptions, energy and transportation costs, agricultural market conditions, leverage and debt covenant compliance, foreign currency exposure, environmental and regulatory requirements, labor disputes, acquisition integration and tax matters.
Canadian tax authorities have issued reassessments totaling $93.2 million, including interest, for certain years. The company disputes the reassessments, believes its reserves are adequate and has posted collateral, including a $59.6 million performance bond and $33.0 million of paid collateral. Separate Canadian reassessments for 2007–2008 total $34.3 million, supported by additional collateral. Brazilian tax proceedings totaled $26.2 million, and assumed Produquímica labor-related liabilities totaled $12.4 million; no reserves were recorded for the Brazilian tax proceedings because management assessed the likelihood of loss as less than probable.
The company settled a labor dispute for $7.3 million, payable by May 2017, and recognized an immaterial gain. Environmental investigations continued at the Kenosha, Wisconsin plant. Produquímica's purchase price allocation remained preliminary, creating potential for further adjustments.
Investor Verification Priorities
- Verify the outcome of the 2017 North American highway deicing bid season and actual Salt volumes, pricing and margins.
- Track whether Produquímica achieves the expected seasonal contribution and whether acquisition synergies offset incremental debt and amortization.
- Reconcile cash generation against $1.231 billion of debt, required principal payments and the company’s debt covenant headroom.
- Monitor Canadian tax reassessments, posted collateral and any potential cash or earnings impact.
- Assess the effect of mild winter conditions, mine operating rates, logistics costs and inventory costs on full-year profitability.
- Review the final Produquímica purchase price allocation and any resulting changes to goodwill, intangible assets, liabilities or amortization.