Compass Minerals International, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Compass Minerals produces salt, specialty plant nutrition products, sulfate of potash, magnesium chloride and specialty chemicals. Operations span the United States, Canada, Brazil and the United Kingdom. Reported segments are Salt, Plant Nutrition North America and Plant Nutrition South America. The filing covers the three and nine months ended September 30, 2020; results are unaudited and materially seasonal.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Sales | $282.4 million | $341.3 million | $952.4 million | $990.2 million |
| Gross profit | $58.7 million | $76.4 million | $212.3 million | $194.8 million |
| Gross margin | 20.8% | 22.4% | 22.3% | 19.7% |
| Operating earnings | $17.4 million | $30.1 million | $86.1 million | $67.4 million |
| Operating margin | 6.2% | 8.8% | 9.0% | 6.8% |
| Net earnings (loss) | $(2.1) million | $10.6 million | $27.2 million | $6.4 million |
| Diluted EPS | $(0.07) | $0.31 | $0.76 | $0.17 |
| Adjusted EBITDA | $55.4 million | $67.3 million | $197.3 million | $179.7 million |
- Q3 sales declined 17%, while operating earnings declined 42% and Adjusted EBITDA declined 18%.
- Nine-month sales decreased 4%, but operating earnings increased 28% and Adjusted EBITDA increased 10%, driven primarily by Salt segment performance and favorable foreign-exchange effects.
- Q3 net loss reflected lower operating earnings, a $4.1 million foreign-exchange loss and continued interest expense of $17.1 million.
- Q3 selling, general and administrative expense decreased to $41.3 million from $46.3 million, largely due to lower compensation, professional fees and travel.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $188.5 million, compared with $97.9 million in the prior-year period.
- Capital expenditures were $62.9 million, compared with $71.6 million in the prior-year period. Dividends paid were $74.2 million.
- Cash and cash equivalents were $34.1 million at September 30, 2020, essentially unchanged from $34.7 million at December 31, 2019.
- Total debt was $1.346 billion, consisting of $1.289 billion of long-term debt and $56.4 million of current debt. The weighted-average interest rate was approximately 5.37%.
- The company had $100.2 million drawn under its revolving credit facility and $12.1 million of letters of credit, leaving reported revolving availability of $187.7 million.
- A new three-year accounts receivable financing facility of up to $100 million was entered into in June 2020; $28.0 million was outstanding at quarter-end.
- Total assets declined to $2.158 billion from $2.443 billion at year-end 2019, while stockholders’ equity declined to $324.1 million from $529.6 million, primarily reflecting foreign-currency translation losses and dividends.
Material changes versus the prior comparable period
- Salt: Q3 sales fell 11% to $141.3 million, but operating earnings increased 21% to $25.0 million. Volumes declined 13%, primarily because of milder winter weather and lower early-fill demand; lower unit product and logistics costs supported earnings.
- Plant Nutrition North America: Q3 sales declined 21% to $35.2 million and the segment recorded a $6.1 million operating loss versus $4.7 million of earnings. Volumes fell 22% because drought and wildfires delayed fall SOP applications. Results included a $7.4 million inventory valuation adjustment related to an overstatement of bulk SOP stockpiles at the Ogden facility.
- Plant Nutrition South America: Q3 sales declined 23% to $103.3 million and operating earnings declined to $15.0 million from $22.4 million. The Brazilian real weakened 38% against the U.S. dollar on a weighted-average basis, and volumes also declined 8%.
- Nine-month Salt operating earnings increased to $111.6 million from $87.5 million, while Plant Nutrition North America earnings declined to $4.2 million from $7.7 million and Plant Nutrition South America earnings increased to $24.2 million from $21.5 million.
- Accumulated other comprehensive loss increased to $356.5 million from $192.1 million at year-end, primarily due to a $165.0 million cumulative foreign-currency translation loss.
Guidance, outlook and management commentary
- For full-year 2020, management expected Salt volumes of 10.5 million to 10.8 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-related lost sales and incremental operating costs were estimated at approximately $4 million in Q3 and $7 million year to date. North American and Brazilian mining and manufacturing operations continued, while the U.K. salt mine was idled near the end of March and gradually restarted in mid-May.
- The company stated that it had not experienced material supply-chain or logistics disruptions but was increasing inventories of critical inputs and identifying secondary suppliers.
- Results remain highly dependent on winter weather, seasonal deicing demand and the Brazilian spring planting season; interim results are not necessarily indicative of full-year performance.
Risks, contingencies and unusual items
- Canadian provincial tax authorities have issued reassessments totaling $145.0 million, including interest, for 2002–2015. The company disputes the reassessments and had posted a $95.5 million performance bond and paid $37.2 million to Canadian tax authorities.
- The SEC Division of Enforcement is investigating disclosures concerning operation of the Goderich mine. Management believes the matter will not have a material impact, but timing and outcome are uncertain.
- Other exposures include Brazilian tax proceedings totaling $7.3 million, environmental investigations at the Kenosha, Wisconsin property, labor-related matters and ordinary-course litigation.
- Debt agreements require compliance with leverage and interest-coverage covenants. The company reported compliance at September 30, 2020, but warned that future compliance and access to subsidiary cash flows are not assured.
- Key operating risks include COVID-19, weather and seasonality, mine and equipment interruptions, energy and transportation costs, foreign-exchange volatility, agricultural market conditions, environmental and regulatory requirements, cybersecurity and the company’s substantial indebtedness.
Most important facts for investors to verify
- Whether full-year volume guidance was achieved, particularly for Salt and Plant Nutrition South America.
- The sustainability of improved nine-month operating margins and cash generation despite Q3 revenue and earnings weakness.
- Progress and ultimate resolution of the $145.0 million Canadian tax reassessments and related collateral requirements.
- Status and potential consequences of the SEC investigation into Goderich mine disclosures.
- Debt covenant compliance, refinancing needs and available liquidity after seasonal working-capital requirements.
- Impact of foreign-currency movements, winter weather, Brazilian agricultural demand and continuing COVID-19 disruptions.