Compass Minerals International, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited interim financial statements. Compass produces and markets salt, magnesium chloride, sulfate of potash specialty fertilizer, micronutrients and other mineral products in North America and the U.K. Results are highly seasonal, with deicing sales generally strongest in the first and fourth quarters.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Sales | $179.6 million | $232.7 million | $694.8 million | $809.4 million |
| Gross profit | $45.2 million | $68.0 million | $189.1 million | $231.8 million |
| Gross margin | 25% | 29% | 27% | 29% |
| Operating earnings | $19.5 million | $40.8 million | $109.3 million | $149.5 million |
| Net earnings | $9.1 million | $27.0 million | $65.1 million | $100.8 million |
| Diluted EPS | $0.27 | $0.80 | $1.92 | $2.97 |
| Adjusted EBITDA | $40.9 million | $60.4 million | $170.3 million | $207.3 million |
Q3 sales declined 23%, operating earnings declined 52%, and adjusted EBITDA declined 32%. Nine-month sales declined 14%, operating earnings declined 27%, and adjusted EBITDA declined 18%. The filing attributes the deterioration primarily to lower salt volumes and pricing, weak plant nutrition pricing and demand, and unfavorable foreign exchange effects.
- Salt: Q3 sales declined 25% to $135.7 million; volumes fell 24% to 1.696 million tons. Nine-month sales declined 11% to $546.9 million and volumes fell 8% to 7.402 million tons.
- Plant nutrition: Q3 sales declined 17% to $41.5 million despite a 4% volume increase; average price declined 21% to $591 per ton. Nine-month sales declined 25% to $140.4 million, with volumes down 12% and average price down 15%.
- Cash flow: Nine-month operating cash flow was $107.1 million versus $95.1 million in the prior year. Capital expenditures were $148.7 million, and dividends paid were $70.5 million.
- Liquidity: Cash was $432.2 million at September 30, 2016, compared with $58.4 million at December 31, 2015. The increase primarily reflected borrowing for the Produquímica acquisition.
- Debt: Debt, net of deferred financing costs, was $1.213 billion, comprising $843.8 million of term loans, $122.0 million drawn on the revolving facility and $246.8 million of senior notes. Revolving availability was $171.8 million after $6.2 million of letters of credit.
- Dividends: Cash dividends were $0.695 per share in Q3 and $2.085 per share for the first nine months, compared with $0.66 and $1.98, respectively, in 2015.
Material changes versus the prior comparable periods
- Salt results were pressured by lower pre-winter demand, lower highway deicing prices, reduced early-fill volumes and mild U.K. winter weather earlier in 2016. Favorable logistics costs partially offset the impact.
- Plant nutrition margins deteriorated because of lower selling prices, weak agricultural demand and, during the first nine months, lower volumes and higher-cost inventory effects. Management expects improved production costs after the remaining higher-cost 2015 inventory was sold.
- The company refinanced its credit facilities in April 2016 and added a $450 million term-loan tranche in September 2016 to fund the acquisition of Produquímica’s remaining equity.
- Corporate and other operating loss improved slightly to $39.2 million for nine months from $40.0 million, but included $2.0 million of plant nutrition and corporate severance costs and $0.7 million of acquisition-related financing expense.
- Accumulated other comprehensive loss improved to $79.6 million from $108.3 million at year-end, principally because of foreign-currency translation movements.
Outlook, unusual items and risks
- North American highway deicing bid prices declined 7% and awarded volumes declined approximately 15% versus the prior bid season. Expected 2016 salt volume is 10.8 million to 11.1 million tons.
- Management expects 2016 plant nutrition volume of 285,000 to 300,000 tons and fourth-quarter volume above the prior-year quarter.
- Produquímica is expected to contribute R$60 million to R$70 million of fourth-quarter 2016 adjusted EBITDA, based on an exchange rate of R$3.25 per U.S. dollar and excluding purchase-accounting adjustments.
- A cost-structure review and workforce reduction of approximately 150 positions produced a $3.4 million restructuring charge in Q1 2016. Management expects approximately $15 million of annualized savings beginning in 2018.
- On October 3, 2016, the company acquired the remaining 65% of Produquímica for $331.9 million and assumed approximately $138.5 million of net debt. Purchase accounting was incomplete at the filing date; the filing does not provide final acquired asset, liability, goodwill, contingent-consideration or pro forma earnings amounts.
- Canadian tax authorities have issued disputed reassessments totaling approximately $221.2 million, including interest and penalties, across several matters. The company has posted performance bonds, cash and bank guarantees and considers its reserves adequate, but acknowledges the ultimate outcome could be material if unresolved favorably.
- Other contingencies include a labor dispute at the Cote Blanche mine, with $7.0 million of recorded reserves plus interest, and potential environmental remediation at the Kenosha, Wisconsin, plant.
- Key operating risks include winter weather, agricultural market conditions, mining hazards, energy and transportation costs, foreign exchange, regulatory and tax proceedings, leverage and covenant compliance, integration of Produquímica, and low Great Salt Lake water levels affecting Ogden operations.
Investor verification points
- Verify the final purchase-price allocation, goodwill, debt assumed, remeasurement of the pre-existing 35% Produquímica interest and pro forma results in the 2016 Form 10-K.
- Assess whether salt bid-price and volume declines, weather conditions and seasonality support management’s full-year salt-volume outlook.
- Track plant nutrition pricing, volumes, production costs and Produquímica’s realized EBITDA against management’s projections.
- Review leverage, interest expense, revolving availability and covenant compliance following the Produquímica acquisition.
- Monitor the Canadian tax reassessments, required collateral and potential cash-flow impact, as well as the Cote Blanche labor matter and Kenosha remediation.
- Reconcile non-GAAP adjusted EBITDA to GAAP results and consider the effects of restructuring, acquisition, refinancing, foreign-exchange and purchase-accounting items.