Business Context and Reporting Period
Compass Minerals International, Inc. is a producer of salt, specialty plant nutrients and specialty chemicals, with operations in the U.S., Canada, Brazil and the U.K. Its reportable segments are Salt, Plant Nutrition North America and Plant Nutrition South America. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, compared with the prior-year periods.
Results are seasonal: deicing salt sales and operating earnings are generally strongest in the first and fourth quarters, while Plant Nutrition South America typically benefits from Brazil's spring planting season in the third and fourth quarters.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $245.2 million | $246.7 million | $648.9 million | $684.6 million |
| Gross profit | $45.8 million | $42.5 million | $118.4 million | $107.9 million |
| Gross margin | 18.7% | 17.2% | 18.2% | 15.8% |
| Operating earnings | $4.1 million | $2.8 million | $37.3 million | $29.4 million |
| Operating margin | 1.7% | 1.1% | 5.7% | 4.3% |
| Net income (loss) | $(11.8) million | $(7.6) million | $(4.2) million | $5.0 million |
| Diluted EPS | $(0.36) | $(0.23) | $(0.14) | $0.14 |
| Adjusted EBITDA | $40.9 million | $38.5 million | $109.0 million | $99.3 million |
Quarterly net losses reflected $16.8 million of interest expense and $3.6 million of other expense, including foreign-exchange losses. Six-month results also reflected $33.0 million of interest expense and $8.0 million of other expense. Adjusted EBITDA is a non-GAAP measure and includes adjustments for flooding-related logistics costs and other expense.
- Salt: Q2 sales declined 7% to $112.6 million, while operating earnings increased 17% to $14.6 million. Total volumes fell 19% to 1.303 million tons, primarily because of lower highway deicing shipments, flooding-related delays and milder U.K. winter conditions. Average selling price increased to $86.41 per ton from $75.47.
- Plant Nutrition North America: Q2 sales declined 7% to $48.1 million as volumes fell 8% to 74,000 tons amid wet weather. Operating earnings increased to $4.6 million from $4.2 million, helped by lower depreciation.
- Plant Nutrition South America: Q2 sales increased 15% to $82.1 million as volumes rose 19% to 189,000 tons. Operating earnings increased to $1.7 million from $0.7 million, despite currency pressure, lower chemical-solutions pricing and higher raw-material costs.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $103.2 million for the six months ended June 30, 2019, compared with $181.6 million in the prior-year period. The decline primarily reflected less favorable working-capital movements.
- Capital expenditures were $49.8 million, compared with $52.1 million. Dividends paid were $49.2 million, or $0.72 per share for each of the first two quarters.
- Cash and cash equivalents were $20.4 million at June 30, 2019, down from $27.0 million at December 31, 2018. Foreign subsidiaries held $15.7 million of the June 30 cash balance.
- Total debt was $1.35 billion, including $250.0 million of 4.875% senior notes due 2024, $995.4 million under senior secured credit facilities and $108.8 million of Brazilian debt. Current debt was $72.8 million.
- The company had $170.8 million outstanding under its revolving credit facility. After $10.5 million of letters of credit, reported revolver availability was $118.7 million. Management stated that the company was in compliance with its debt covenants at June 30, 2019.
- Lease accounting adoption under ASC 842 added $49.9 million of leased assets and $51.8 million of lease liabilities at June 30, 2019, with a $0.1 million cumulative adjustment to beginning retained earnings.
Material Changes Versus the Prior Comparable Period
- Six-month sales declined 5%, driven by lower Salt and Plant Nutrition North America volumes; Plant Nutrition South America sales increased modestly.
- Gross profit increased 10% for the six-month period, and gross margin expanded by approximately 2.4 percentage points, primarily because of higher Salt pricing, improved mine production and lower carryover inventory costs.
- Six-month operating earnings increased 27%, led by a $20.3 million improvement in Salt operating earnings. This was partly offset by lower earnings in both plant nutrition businesses.
- Six-month net results deteriorated from $5.0 million of earnings to a $4.2 million loss, mainly because of higher interest expense, foreign-exchange losses and other expense.
- Interest expense increased $4.4 million for the six-month period, reflecting higher borrowings and U.S. interest rates. Other expense shifted from $3.2 million of income to $8.0 million of expense, largely because of foreign-exchange losses.
- The company paid net debt of $17.9 million during the first six months, versus $67.3 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
Management's 2019 volume outlook calls for Salt volumes of 10.8 million to 11.2 million tons, Plant Nutrition North America volumes of 340,000 to 360,000 tons and Plant Nutrition South America volumes of 800,000 to 900,000 tons. The North American plant nutrition outlook was reduced because of a shortened spring fertilizer season and wet weather in key markets. Management also cited an improved rock salt supply position and some uncertainty in Brazil's agriculture markets.
- Canadian provincial tax authorities have issued reassessments totaling $126.3 million, including interest, through June 30, 2019. The company disputes the reassessments, believes it has adequately reserved, and has posted an $80.9 million performance bond and paid $37.9 million to the tax authorities.
- The company expects approximately $19.5 million and $58.9 million of tax refunds from prior settlements in late 2019 or late 2019/early 2020, respectively.
- Other contingencies include environmental investigations at the Kenosha, Wisconsin facility, Brazilian tax proceedings totaling $16.4 million, and assumed Brazilian labor-related matters with approximately $29 million of maximum exposure. Management does not currently expect these matters to have a material adverse effect, but outcomes are uncertain.
- Key operating risks include severe or mild winter weather, mine and equipment performance, flooding and transportation constraints, energy and raw-material costs, agricultural demand, foreign-exchange movements, leverage and refinancing needs, debt-covenant compliance, environmental and tax liabilities, and regulatory or geopolitical developments.
- The company hedges portions of natural-gas and foreign-currency exposure but states that hedging may not eliminate these risks. Natural-gas hedges extend through December 2021, and foreign-currency swaps hedge $26.0 million of Brazilian-related loans through March 2020.
Important Facts for Investors to Verify
- Whether Salt volumes and pricing support the 2019 outlook after the significant first-half volume decline.
- Whether Plant Nutrition North America demand recovers following wet weather and the shortened fertilizer season.
- The timing and amount of expected tax refunds and the ultimate resolution of the $126.3 million Canadian reassessments.
- Liquidity, revolver availability, debt maturities and continued compliance with leverage and interest-coverage covenants.
- Whether higher interest expense, foreign-exchange losses and Brazilian raw-material costs continue to pressure net earnings despite improved operating performance.
- The effect of seasonal inventory build, capital expenditures and dividend payments on second-half cash balances.