Compass Minerals International, Inc. — Form 10-Q Summary
Business context and reporting period
Compass Minerals produces salt, sulfate of potash and other specialty plant nutrients, magnesium chloride and specialty chemicals. Operations span the United States, Canada, Brazil and the United Kingdom, with reportable segments of Salt, Plant Nutrition North America and Plant Nutrition South America. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Results are highly seasonal: deicing salt activity is generally strongest in the first and fourth quarters, while Brazilian plant nutrition demand is typically strongest in the third and fourth quarters.
Financial performance and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Sales | $246.7 million | $228.0 million | $684.6 million | $615.8 million |
| Gross profit | $42.5 million | $44.9 million | $107.9 million | $126.5 million |
| Gross margin | 17.2% | 19.7% | 15.8% | 20.5% |
| Operating earnings | $2.8 million | $6.0 million | $29.4 million | $47.4 million |
| Operating margin | 1.1% | 2.6% | 4.3% | 7.7% |
| Net earnings (loss) | $(7.6) million | $(6.4) million | $5.0 million | $15.1 million |
| Diluted EPS | $(0.23) | $(0.19) | $0.14 | $0.44 |
| Adjusted EBITDA | $38.5 million | $34.2 million | $99.3 million | $104.0 million |
Six-month operating cash flow was $181.6 million, compared with $145.1 million in the prior-year period. Capital expenditures were $52.1 million, dividends paid were $49.0 million, and net debt payments were approximately $67.3 million. Cash and cash equivalents were $40.8 million at June 30, 2018, versus $36.6 million at December 31, 2017.
Total debt was $1.285 billion, including $929.1 million under senior secured credit facilities, $250.0 million of senior notes and approximately $112.0 million of Produquímica-related debt. The $300 million revolving credit facility had $96.0 million drawn and $10.4 million of letters of credit outstanding, leaving reported borrowing availability of $193.6 million. The company stated that it was in compliance with debt covenants at June 30, 2018.
Total assets were $2.274 billion and stockholders’ equity was $550.5 million at June 30, 2018. Accumulated other comprehensive loss increased substantially, primarily because of a $103.1 million unfavorable foreign-currency translation adjustment for the first six months.
Material changes versus the prior comparable period
- Second-quarter sales increased 8%, driven by higher sales in all three segments. Six-month sales increased 11%.
- Gross profit declined 5% in the quarter and 15% year to date. Gross margin fell approximately 3 percentage points in the quarter and 5 percentage points year to date.
- Salt second-quarter sales increased 11% to $121.1 million, with volumes up 17% to 1.604 million tons. Salt operating earnings rose 17% to $12.5 million in the quarter, but declined 17% year to date because of higher product and logistics costs, lower Goderich production and higher-cost carryover inventory.
- Plant Nutrition North America sales increased 3% in the quarter and 5% year to date, while operating earnings declined 45% and 40%, respectively. Higher depreciation from new Ogden production assets and increased potassium chloride feedstock costs were the principal factors.
- Plant Nutrition South America sales increased 8% in both the quarter and year-to-date periods, but operating earnings declined 13% in the quarter and 42% year to date. The year-to-date comparison was affected by the $1.9 million acquisition-related contingent-consideration gain recognized in the first quarter of 2017, as well as currency weakness and the Brazilian truck-driver strike.
- Interest expense increased $2.6 million to $14.9 million in the quarter and to $28.6 million year to date, primarily because of higher U.S. interest rates.
- The company adopted the new revenue recognition standard and related cash-flow guidance in 2018; management reported no material transition impact.
Guidance, outlook, risks and unusual items
Management expects stronger highway deicing pricing and volumes in the second half of 2018, assuming average winter weather. Full-year Salt volumes are expected to range from 11.8 million to 12.3 million tons, Plant Nutrition North America volumes from 340,000 to 360,000 tons, and Plant Nutrition South America volumes from 750,000 to 875,000 tons. Management expects higher logistics costs and post-strike transition effects at Goderich to partially offset Salt pricing benefits.
The Goderich mine strike began April 27, 2018 and ended July 16, 2018 after employees ratified a three-year collective bargaining agreement. The company cautions that post-strike disruptions or additional costs remain possible.
Canadian provincial tax authorities have issued reassessments totaling $110.2 million, including interest, through June 30, 2018. The company disputes the assessments and has posted a $63.7 million performance bond, paid $37.3 million to Canadian tax authorities, and expects to address an additional $9.3 million security requirement later in 2018. Separately, it paid $18.4 million in the second quarter under a prior transfer-pricing settlement, expects an additional $3.9 million payment later in 2018, and expects a $22.8 million U.S. tax refund in late 2018 or early 2019.
Other principal risks include weather and seasonality, mine and production interruptions, labor actions, energy and transportation costs, foreign-currency movements, agricultural demand, leverage and covenant compliance, environmental and tax matters, and the company’s ability to refinance debt. Management states that it believes current legal and tax reserves are adequate, but adverse outcomes could be material.
Important facts for investors to verify
- Whether Salt pricing, volumes and logistics costs develop as expected after the Goderich strike and through the 2018 winter season.
- Progress toward restoring Plant Nutrition North America margins as Ogden assets are commissioned and feedstock costs normalize.
- Actual resolution, collateral requirements and cash impacts of the Canadian tax reassessments and related transfer-pricing matters.
- Debt covenant headroom, revolving-credit availability and refinancing requirements before 2021 maturities.
- Whether the reported guidance ranges for Salt and plant nutrition volumes are achieved amid weather, currency and agricultural-market uncertainty.
- The extent to which foreign-currency translation, particularly the Brazilian real and Canadian dollar, affects earnings, equity and debt-service capacity.