Compass Minerals International, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Compass Minerals produces salt, magnesium chloride and sulfate of potash (SOP) plant nutrients in the United States, Canada and the United Kingdom. The company reported results for the three months ended March 31, 2021. Results are seasonal, particularly for highway deicing salt, with sales and operating earnings generally higher in the first and fourth quarters.
Following a strategic review, the company classified its South America chemicals and specialty plant nutrition businesses, Fermavi investment and North America micronutrient business as discontinued operations and assets held for sale. The continuing operations consist primarily of the Salt and Plant Nutrition segments.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $426.0 million | $346.9 million | Up 23% |
| Gross profit | $96.0 million | $75.2 million | Up 28% |
| Gross margin | 22.5% | 21.7% | Up approximately 0.8 percentage points |
| Operating earnings | $63.6 million | $45.4 million | Up 40% |
| Continuing operations earnings | $32.9 million | $33.9 million | Down 3% |
| Net earnings (loss) | $(223.6) million | $27.6 million | Declined primarily due to discontinued-operations impairment |
| Diluted EPS from continuing operations | $0.95 | $0.99 | Down $0.04 |
| Diluted net EPS | $(6.60) | $0.80 | Declined |
| Operating cash flow | $200.2 million | $228.6 million | Down $28.4 million |
| Capital expenditures | $18.2 million | $25.3 million | Down $7.1 million |
| Adjusted EBITDA from continuing operations | $97.3 million | $75.1 million | Up 30% |
Salt sales increased to $369.0 million from $287.8 million, while Salt operating earnings increased to $80.1 million from $56.9 million. Salt volumes rose 41% to 5.028 million tons, primarily due to stronger winter weather activity. Average Salt selling price declined to $73.38 per ton from $80.53 per ton.
Plant Nutrition sales declined to $54.2 million from $56.4 million, and operating earnings declined to $4.4 million from $6.6 million. Volumes decreased 2% to 94,000 tons, and average selling price decreased to $579 per ton from $590 per ton.
At March 31, 2021, cash and cash equivalents totaled $63.6 million, including $20.8 million classified as held for sale. Cash attributable to continuing operations was $42.8 million. Total debt was $1.184 billion, net of issuance costs, including $100.0 million outstanding under the accounts receivable securitization facility. The company had no revolving credit facility borrowings and reported $287.0 million of availability after $13.0 million of letters of credit.
The company paid $24.1 million of dividends and made net debt payments of $115.6 million during the quarter. A $41.7 million required term-loan prepayment reduced future scheduled term-loan payments; no scheduled term-loan payment is due until June 2023.
Material Changes Versus the Prior Comparable Period
- Sales and operating earnings benefited from significantly higher Salt volumes and lower highway deicing product and logistics costs.
- Highway deicing average prices decreased 8%, reflecting lower North American contract prices for the 2020–2021 winter season.
- Plant Nutrition performance weakened because of lower prices, lower volumes and higher product costs associated primarily with a lower-quality pond harvest at the Ogden facility.
- Interest expense decreased $0.9 million to $15.7 million because of lower borrowing rates and use of the lower-cost receivables financing facility.
- Foreign exchange results shifted from an $18.0 million gain in Q1 2020 to a $2.1 million loss in Q1 2021.
- Net loss included a $256.5 million loss from discontinued operations, including a $255.2 million impairment loss related primarily to the weakening of the Brazilian real and accumulated currency translation adjustments.
- Accumulated other comprehensive loss increased to $323.5 million from $303.3 million, primarily due to a $20.5 million cumulative translation adjustment loss.
Guidance, Outlook, Risks and Unusual Items
Management projected 2021 Salt sales volumes of 11.5 million to 12.3 million tons, Plant Nutrition sales volumes of 350,000 to 380,000 tons, and capital expenditures of $95 million to $100 million. No clear full-year earnings or revenue guidance was provided in the filing.
The company agreed to sell its South America specialty plant nutrition business for R$1.11 billion plus an amount set at closing to equal $198.3 million, subject to net debt, working capital and other adjustments. Closing was expected in the third quarter of 2021, subject to customary conditions and Brazilian antitrust approval. The transaction also includes a potential 2022 earn-out. A component of the North America micronutrient business was sold for approximately $60.25 million and closed on May 4, 2021.
Assets and liabilities held for sale totaled $338.8 million and $199.3 million, respectively, at March 31, 2021. Proceeds from the planned divestitures are intended to reduce leverage and focus the company on its core businesses. The impairment measurement remains subject to estimates of working capital, debt, operating results, closing timing and costs to sell, so additional changes could occur.
Key risks include seasonality and weather, mine and production disruptions, energy, transportation and raw-material costs, foreign currency volatility, substantial indebtedness, debt covenant compliance, COVID-19 effects, execution and approval of the planned divestitures, environmental matters and tax disputes.
Canadian provincial tax authorities have issued reassessments totaling $157.0 million, including interest, through March 31, 2021. The company disputes the reassessments and believes it has adequately reserved for them. It has posted a $121.7 million performance bond and paid $39.5 million to Canadian tax authorities. The SEC Division of Enforcement is also investigating disclosures primarily concerning operation of the Goderich mine; management does not currently expect a material impact.
Management stated that COVID-19 did not materially affect results for the first quarter of 2021 or 2020, but the future impact remains uncertain. Disclosure controls and procedures were deemed effective as of March 31, 2021, with no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the South America specialty plant nutrition sale closes on the expected timeline and at the anticipated proceeds, including Brazilian antitrust approval and final working-capital and debt adjustments.
- The final proceeds and accounting impact of the North America micronutrient sale, which closed after quarter-end.
- Whether additional impairment charges or gains arise as the remaining held-for-sale businesses are sold.
- The company’s ability to reduce approximately $1.2 billion of debt while maintaining its $24.1 million quarterly dividend and meeting debt covenants.
- The sustainability of strong Salt volumes and margins after the 2020–2021 winter season, given lower contracted pricing and normal weather variability.
- The impact of the Ogden pond harvest issue on Plant Nutrition production costs and future earnings.
- The ultimate outcome and cash-collateral requirements of the $157.0 million Canadian tax reassessments.
- The filing contains an apparent inconsistency regarding the potential earn-out: the transaction note states up to R$88 million, while a risk-factor passage states “R$88 billion.” The definitive agreement should be reviewed to confirm the correct amount.