Compass Minerals International, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Filed February 26, 2020, for the fiscal year ended December 31, 2019. Compass Minerals produces salt and magnesium chloride, specialty plant nutrients including sulfate of potash, and specialty chemicals. Operations span the United States, Canada, Brazil and the United Kingdom, with 21 production and packaging facilities and 3,131 employees.
The reportable segments are Salt, Plant Nutrition North America and Plant Nutrition South America. Salt represented approximately 60% of 2019 gross sales; the combined plant nutrition businesses represented approximately 40%. The business is seasonal, with deicing demand concentrated in the first and fourth quarters and Brazilian plant nutrition demand generally strongest in the third and fourth quarters.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $1,490.5 million | $1,493.6 million | Down $3.1 million |
| Gross profit | $336.8 million | $293.9 million | Up $42.9 million |
| Gross margin | 23% | 20% | Up 3 percentage points |
| Operating earnings | $163.6 million | $130.3 million | Up 26% |
| Net earnings | $62.5 million | $68.8 million | Down $6.3 million |
| Diluted EPS | $1.81 | $2.02 | Down $0.21 |
| Adjusted EBITDA | $307.3 million | $273.3 million | Up $34.0 million, or 12% |
| Operating cash flow | $159.6 million | $182.3 million | Down $22.7 million |
| Capital expenditures | $98.1 million | $96.8 million | Up $1.3 million |
Net earnings were pressured by higher interest expense, foreign-exchange losses and a higher effective tax rate. Interest expense increased to $68.4 million from $62.5 million, other expense was $11.3 million versus $8.8 million of other income in 2018, and the effective tax rate rose to 26% from 11%.
At December 31, 2019, cash and cash equivalents were $34.7 million, total assets were $2.44 billion, total debt was $1.416 billion and stockholders’ equity was $529.6 million. The company had $160.0 million drawn on its revolving credit facility and $129.5 million of remaining borrowing availability after letters of credit.
Cash flow was affected by a $59.9 million working-capital use, including increases in receivables and inventories. Financing cash use was $50.5 million, including $98.1 million of dividends. The company paid dividends of $2.88 per share during 2019 and declared a quarterly dividend of $0.72 per share in February 2020.
Material changes versus the prior comparable period
- Salt: Sales increased 4% to $889.5 million and operating earnings increased 45% to $168.0 million. Average selling price rose 10% to $81.43 per ton, led by higher highway deicing prices, while volumes declined 6% to 10.923 million tons. Results benefited from improved North American mine performance after the 2018 Goderich strike.
- Plant Nutrition North America: Sales declined 12% to $206.2 million and operating earnings declined 11% to $22.5 million. Volumes fell 12% to 317,000 tons, primarily because of wet weather in key markets, while average price increased 1%.
- Plant Nutrition South America: Sales decreased 2% to $385.1 million and operating earnings declined 18% to $40.0 million. Volumes increased 4% to 790,000 tons, but average price fell 5%, mainly due to lower chemical solutions prices, product mix, competitive pressure and a weaker Brazilian real.
- 2019 included $2.8 million of additional logistics costs from Mississippi River flooding and $2.3 million of executive-transition costs. 2018 included $5.1 million of executive-transition costs.
- In November 2019, the company refinanced its credit facilities with a $400 million term loan and a $300 million revolving facility maturing in January 2025, and issued $500 million of 6.75% senior notes due December 2027.
- The company adopted the new lease accounting standard in 2019, recording $59.5 million of leased assets and $61.1 million of lease liabilities at year-end.
Guidance, outlook, commentary and risks
Management expected 2020 sales volumes of 11.0–11.5 million tons for Salt, 340,000–380,000 tons for Plant Nutrition North America and 800,000–900,000 tons for Plant Nutrition South America. The company noted increased commitments for the 2019–2020 North American highway deicing bid season.
Management initiated a strategic evaluation of the long-term fit of the Plant Nutrition South America business. The filing states that the evaluation could produce several outcomes, including a potential transaction, but provides no assurance that any transaction will be identified or completed.
- Leverage remains material: the total leverage ratio was 4.1x versus a 4.75x default threshold under the credit agreement. Debt agreements restrict additional borrowing, dividends, acquisitions, investments, asset sales and other corporate actions.
- Debt service, variable interest rates and foreign-currency exposure may constrain liquidity. A 100-basis-point increase in rates on variable-rate debt would have increased annual interest expense by approximately $6.8 million based on year-end balances.
- Canadian provincial tax authorities have issued reassessments totaling approximately $130.5 million, including interest, through December 31, 2019. The company disputes the assessments and had posted a $98.4 million performance bond and paid $38.2 million of collateral.
- The SEC Division of Enforcement was investigating disclosures concerning the operation of the Goderich mine. Management stated that it could not predict the outcome but did not expect a material impact.
- Operations depend on a limited number of mines, evaporation facilities and distribution depots. Key risks include mine accidents, geological conditions, equipment failures, weather, labor disruptions, transportation constraints, energy and raw-material costs, and environmental compliance.
- Environmental and regulatory exposure includes the Great Salt Lake facility, the mercury-cell facility in Brazil, mine reclamation requirements and remediation activities at the Kenosha, Wisconsin property. Environmental-specific capital expenditures were $3.6 million in 2019, and recorded contingent environmental liabilities were $2.2 million.
- Goodwill totaled $343.0 million, principally in the two plant nutrition segments. The annual impairment tests indicated that estimated fair value exceeded carrying value, but the valuation remains sensitive to revenue growth, margins, discount rates and other assumptions.
Most important facts for investors to verify
- Whether Salt pricing and expected 2020 volumes offset weather-driven volatility and the lower 2019 sales volumes.
- The sustainability of the $307.3 million Adjusted EBITDA and the extent to which 2019 results benefited from favorable winter weather and nonrecurring items.
- Liquidity, debt maturities, covenant headroom and the availability of the revolving credit facility, particularly with $52.1 million of debt due in 2020 and $85.2 million due in 2021.
- The resolution, required collateral and potential cash impact of the Canadian tax reassessments.
- The outcome and strategic implications of the Plant Nutrition South America evaluation.
- Potential goodwill impairment in the plant nutrition businesses if operating performance or valuation assumptions deteriorate.
- Updates regarding the SEC Goderich investigation, environmental obligations, mine permits and collective bargaining agreements.