Compass Minerals International Inc 10-Q, filed Nov 5, 2020
Compass Minerals International Inc (CMP)
10-Q
2020-11-05
For: 2020-09-30
View Original
Added on
April 10, 2026
About this 10-Q
Compass Minerals International Inc filed this 10-Q on November 5, 2020, covering the quarter ended September 30, 2020.
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $282.4M
- down 17.3% from $341.3M a year earlier
- Net loss
- $2.1M
- compared with net income of $10.6M a year earlier
- Diluted EPS
- -$0.07
- compared with $0.31 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2020
or
For the transition period from _______________________ to __________________________
Commission File Number 001-31921
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
(913 ) 344-9200
(Address of principal executive offices, zip code and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to | ||||||||||||||
file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ☑ | No | ☐ | |||||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period | ||||||||||||||
| that the registrant was required to submit such files) | ☑ | No | ☐ | |||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||||||||||||||||||||
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange | ||||||||||||||
| Act. | ☐ | |||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the | ||||||||||||||
| Exchange Act). | Yes | No | ☑ | |||||||||||
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of October 30, 2020, was 33,955,138 shares.
COMPASS MINERALS INTERNATIONAL, INC.
TABLE OF CONTENTS
| Page | ||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| PART II. OTHER INFORMATION | ||||||||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| (Unaudited) | |||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowance for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Other | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Investment in equity investee | |||||||||||
| Other | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued salaries and wages | |||||||||||
| Income taxes payable | |||||||||||
| Accrued interest | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock: $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost — | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
2
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Shipping and handling cost | |||||||||||||||||||||||
| Product cost | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating earnings | |||||||||||||||||||||||
| Other expense (income): | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Net earnings in equity investee | ( | ( | ( | ( | |||||||||||||||||||
| Loss (gain) on foreign exchange | ( | ( | |||||||||||||||||||||
| Other, net | ( | ( | ( | ( | |||||||||||||||||||
| (Loss) earnings before income taxes | ( | ||||||||||||||||||||||
| Income tax (benefit) expense | ( | ||||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
| Basic net (loss) earnings per common share | $ | ( | $ | $ | $ | ||||||||||||||||||
| Diluted net (loss) earnings per common share | $ | ( | $ | $ | $ | ||||||||||||||||||
| Weighted-average common shares outstanding (in thousands): | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Unrealized gain from change in pension obligations, net of tax of $( | |||||||||||||||||||||||
Unrealized (loss) gain on cash flow hedges, net of tax of $ | ( | ||||||||||||||||||||||
| Cumulative translation adjustment | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three and nine months ended September 30, 2020
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Stock options exercised, net of shares withheld for taxes | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three and nine months ended September 30, 2019
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | ( | ( | |||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Balance September 30, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
6
COMPASS MINERALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash flows provided by operating activities: | |||||||||||
| Depreciation, depletion and amortization | |||||||||||
| Finance fee amortization | |||||||||||
| Early extinguishment of debt | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Net earnings in equity investee | ( | ( | |||||||||
| Unrealized foreign exchange (gain) loss | ( | ||||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Receivables | |||||||||||
| Inventories | ( | ( | |||||||||
| Other assets | |||||||||||
| Accounts payable and accrued expenses and other current liabilities | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from revolving credit facility borrowings | |||||||||||
| Principal payments on revolving credit facility borrowings | ( | ( | |||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Deferred financing costs | ( | ( | |||||||||
| Shares withheld to satisfy employee tax obligations | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of the year | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | $ | |||||||||
| Income taxes paid, net of refunds | $ | ( | $ | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
7
COMPASS MINERALS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies and Basis of Presentation:
Compass Minerals International, Inc. (“CMI”), through its subsidiaries (collectively, the “Company”), is a leading producer of essential minerals that solve nature’s challenges, including salt for winter roadway safety and other consumer, industrial and agricultural uses, specialty plant nutrition minerals that improve the quality and yield of crops, and specialty chemicals for water treatment and other industrial processes. The Company’s principal products are salt, consisting of sodium chloride and magnesium chloride; plant nutrients, consisting of sulfate of potash (“SOP”), secondary nutrients and micronutrients; and specialty chemicals. The Company also provides records management services to businesses located in the United Kingdom (the “U.K.”). The Company’s production sites are located in the United States (“U.S.”), Canada, Brazil and the U.K. Except where otherwise noted, references to North America include only the continental U.S. and Canada, and references to the U.K. include only England, Scotland and Wales. References to “Compass Minerals,” “our,” “us” and “we” refer to CMI and its consolidated subsidiaries.
The Company experiences a substantial amount of seasonality in its sales with respect to its deicing salt products. As a result, sales and operating earnings are generally higher in the first and fourth quarters and lower during the second and third quarters of each year. In particular, sales of highway and consumer deicing salt and magnesium chloride products vary based on the severity of the winter conditions in areas where the products are used. Following industry practice in North America and the U.K., the Company seeks to stockpile sufficient quantities of deicing salt throughout the second, third and fourth quarters to meet the estimated requirements for the upcoming winter season. Production of deicing salt can also vary based on the severity or mildness of the preceding winter season. Due to the seasonal nature of the deicing product lines, operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
The Company’s plant nutrition business is also seasonal. For example, the strongest demand for the Company’s plant nutrition products in Brazil typically occurs during the spring planting season. As a result, the Company and its customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales season. The seasonality of this demand results in the Company’s sales volumes and operating income for the Plant Nutrition South America segment usually being the highest during the third and fourth quarters of each year (as the spring planting season begins in September in Brazil).
Significant Accounting Policies
The Company’s significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” within Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price
8
allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The adoption of this guidance on January 1, 2020, did not have an impact on the Company’s consolidated financial statements.
On January 1, 2020, the Company adopted guidance issued by the FASB related to credit losses for financial instruments, which replaces the incurred loss methodology with a current expected credit loss methodology (“CECL”). The Company has determined that its receivables are the only financial instrument that is within scope of this CECL guidance. The CECL methodology requires financial assets to be recorded at the net amount expected to be collected over the lifetime of the asset such that the estimated losses are accrued on the day the asset is acquired. The CECL methodology also requires financial assets to be aggregated and evaluated within pools with similar risk characteristics.
The Company has recorded an allowance on its receivables based on historical loss rates modified to consider supportable forecasts related to customer-specific and macroeconomic factors. For instance, the Company’s 2020 allowance for doubtful accounts considered the potential impact that the coronavirus pandemic could have on the collectability of its outstanding receivables. The Company’s customer pools are comprised of North American highway deicing customers, North American consumer and industrial customers, Plant Nutrition North America customers, Plant Nutrition South America customers and customers whose outstanding receivable balances have been sent to collections. Customers grouped within these pools have similar risk characteristics. The Company’s allowance for doubtful accounts consists of estimates of expected credit losses and accruals for returns and allowances. At the transition date of January 1, 2020, the implementation of CECL had an immaterial impact of less than $0.1 million on the Company’s consolidated financial statements. Under CECL, the Company had an allowance for doubtful accounts of $9.4 million and $8.2 million as of January 1, 2020, and September 30, 2020, respectively.
2. Revenue Recognition:
Nature of Products and Services
The Company’s Salt segment products include salt and magnesium chloride for use in road deicing and dust control, food processing, water softeners, and agricultural and industrial applications. The Company’s plant nutrition products include SOP, secondary nutrients, micronutrients and chemicals for the industrial chemical industry. In the U.K., the Company operates a records management business utilizing excavated areas of the Winsford salt mine with one other location in London, England.
Identifying the Contract
The Company accounts for a customer contract when there is approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Identifying the Performance Obligations
At contract inception, the Company assesses the goods and services it has promised to its customers and identifies a performance obligation for each promise to transfer to the customer a distinct good or service (or bundle of goods or services). Determining whether products and services are considered distinct performance obligations that should be accounted for separately or aggregated together may require significant judgment.
Identifying and Allocating the Transaction Price
The Company’s revenues are measured based on consideration specified in the customer contract, net of any sales incentives and amounts collected on behalf of third parties such as sales taxes. In certain cases, the Company’s customer contracts may include promises to transfer multiple products and services to a customer. For multiple-element arrangements, the Company generally allocates the transaction price to each performance obligation in proportion to its stand-alone selling price.
When Performance Obligations Are Satisfied
The vast majority of the Company’s revenues are recognized at a point in time when the performance obligations are satisfied based upon transfer of control of the product or service to a customer. To determine when the control of goods is transferred, the Company typically assesses, among other things, the shipping terms of the contract, as shipping is an indicator of transfer of control. Some of the Company’s products are sold when the control of the goods transfers to the customer at the time of shipment. There are also instances when the Company provides shipping services to deliver its products. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. The Company recognizes shipping and handling costs that are incurred after the customer obtains control of the goods as fulfillment costs which are accrued at the time of revenue recognition.
9
Significant Payment Terms
The customer contract states the final terms of the sale, including the description, quantity and price of each product or service purchased. Payment is typically due in full within 30 days of delivery. The Company does not adjust the consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the good or service is transferred to the customer and when the customer pays for that good or service will be one year or less.
Refunds, Returns and Warranties
The Company’s products are generally not sold with a right of return and the Company does not generally provide credits or incentives, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized. The Company uses historical experience to estimate accruals for refunds due to manufacturing or other defects.
3. Leases:
In February 2016, the FASB issued guidance which requires lessees to recognize on their balance sheet a right-of-use asset which represents a lessee’s right to use the underlying asset and a lease liability which represents a lessee’s obligation to make lease payments for the right to use the asset. In addition, the guidance requires expanded qualitative and quantitative disclosures. The Company adopted this guidance beginning in the first quarter of 2019, using a modified retrospective transition method, which required the cumulative effect of this change in accounting of $0.1 million to be recorded as an adjustment to beginning retained earnings. The Company elected the package of transition provisions available for existing contracts, which allowed entities to carryforward the historical assessment of whether the contract contained a lease and the lease classification.
The Company enters into leases for warehouses and depots, rail cars, vehicles, mobile equipment, office space and certain other types of property and equipment. The Company determines whether an arrangement is or contains a lease at the inception of the contract. The right-of-use asset and lease liability are recognized based on the present value of the future minimum lease payments over the estimated lease term. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company estimates its incremental borrowing rate for each lease based upon the estimated lease term, the type of asset and the location of the leased asset. The most significant judgments in the application of the FASB guidance include whether a contract contains a lease and the lease term.
Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance Sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. Many of the Company’s leases include one or more options to renew and extend the initial lease term. The exercise of lease renewal options is generally at the Company’s discretion. The lease term includes renewal periods in only those instances in which the Company determines it is reasonably assured of renewal.
The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. In these instances, the assets are depreciated over the useful life of the asset.
The Company has elected the practical expedient available under the FASB guidance to not separate lease and nonlease components on all of its lease categories. As a result, many of the Company’s leases include variable payments for services (such as handling or storage) or payments based on the usage of the asset. In addition, certain of the Company’s lease agreements include rental payments that are adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or any material restrictive covenants. The Company’s sublease income is immaterial.
10
The Company’s Consolidated Balance Sheets includes the following (in millions):
| Consolidated Balance Sheets Location | September 30, 2020 | December 31, 2019 | ||||||||||||
| Assets | ||||||||||||||
| Operating leases | Other assets | $ | $ | |||||||||||
| Finance leases | Property, plant and equipment, net | |||||||||||||
| Total leased assets | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Operating leases | Accrued expenses and other current liabilities | $ | $ | |||||||||||
| Finance leases | Accrued expenses and other current liabilities | |||||||||||||
| Noncurrent liabilities: | ||||||||||||||
| Operating leases | Other noncurrent liabilities | |||||||||||||
| Finance leases | Other noncurrent liabilities | |||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
The Company’s components of lease cost are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of lease assets | $ | $ | $ | $ | |||||||||||||||||||
| Interest on lease liabilities | |||||||||||||||||||||||
| Operating lease cost | |||||||||||||||||||||||
Variable lease cost(a) | |||||||||||||||||||||||
| Net lease cost | $ | $ | $ | $ | |||||||||||||||||||
(a)Short-term leases are immaterial and included in variable lease cost.
Maturities of lease liabilities are as follows (in millions):
| September 30, 2020 | Operating Leases | Finance Leases | Total | |||||||||||||||||
| Remainder of 2020 | $ | $ | $ | |||||||||||||||||
| 2021 | ||||||||||||||||||||
| 2022 | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2024 | ||||||||||||||||||||
| After 2024 | ||||||||||||||||||||
| Total lease payments | ||||||||||||||||||||
| Less: Interest | ( | ( | ( | |||||||||||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||||||||||
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Supplemental lease term and discount rate information related to leases is as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
Supplemental cash flow information related to leases is as follows (in millions):
| Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||
| Leased assets obtained in exchange for new operating lease liabilities | ||||||||||||||
| Leased assets obtained in exchange for new finance lease liabilities | ||||||||||||||
4. Inventories:
Inventories consist of the following (in millions):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials and supplies | |||||||||||
| Total inventories | $ | $ | |||||||||
Based on the nature of our inventories, and specifically related to bulk SOP stockpiles, certain estimates are required to measure the amount of inventories at any point in time. During the third quarter of 2020, the Company identified an error in the valuation of its bulk SOP stockpile inventory at its Ogden facility when one of its stockpiles was largely depleted, which resulted in an estimated overstatement of inventory of approximately $7.4 million. The Company evaluated the error and believes it is not material to any previous period and has therefore recorded this additional expense to product cost within its Plant Nutrition North America segment during the third quarter of 2020.
5. Property, Plant and Equipment, Net:
Property, plant and equipment, net, consists of the following (in millions):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Land, buildings and structures, and leasehold improvements | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Office furniture and equipment | |||||||||||
| Mineral interests | |||||||||||
| Construction in progress | |||||||||||
| Less accumulated depreciation and depletion | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
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6. Goodwill and Intangible Assets, Net:
Amounts related to the Company’s amortization of intangible assets are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Aggregate amortization expense | $ | $ | $ | $ | ||||||||||||||||||||||
Amounts related to the Company’s goodwill are as follows (in millions):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Goodwill - Plant Nutrition North America Segment | $ | $ | |||||||||
| Goodwill - Plant Nutrition South America Segment | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
The change in goodwill between December 31, 2019 and September 30, 2020 was due to the impact from translating foreign-denominated amounts to U.S. dollars.
7. Income Taxes:
The Company’s effective income tax rate differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), foreign income, mining and withholding taxes, global intangible low-taxed income and interest expense recognition differences for book and tax purposes.
The Company had $7.0 million and $18.8 million as of September 30, 2020 and December 31, 2019, respectively, of gross foreign federal net operating loss (“NOL”) carryforwards that have no expiration date, $0.2 million and $1.7 million, respectively, of gross foreign federal NOL carryforwards which expire beginning in 2033 and $0.1 million and $0.3 million, respectively, of net operating tax-effected state NOL carryforwards which expire beginning in 2027.
Canadian provincial tax authorities have challenged tax positions claimed by one of the Company’s Canadian subsidiaries and have issued tax reassessments for years 2002-2015. The reassessments are a result of ongoing audits and total $145.0 million, including interest, through September 30, 2020. The Company disputes these reassessments and will continue to work with the appropriate authorities in Canada to resolve the dispute. There is a reasonable possibility that the ultimate resolution of this dispute, and any related disputes for other open tax years, may be materially higher or lower than the amounts the Company has reserved for such disputes. In connection with this dispute, local regulations require the Company to post security with the tax authority until the dispute is resolved. The Company has posted collateral in the form of a $95.5 million performance bond and has paid $37.2 million to the Canadian tax authorities (most of which is recorded in other assets in the Consolidated Balance Sheets at September 30, 2020).
The Company expects that it will be required by local regulations to provide security for additional interest on the above unresolved disputed amounts and for any future reassessments issued by these Canadian tax authorities in the form of cash, letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authorities until the disputes are resolved.
The Company expects that the ultimate outcome of these matters will not have a material impact on its results of operations or financial condition. However, the Company can provide no assurance as to the ultimate outcome of these matters, and the impact could be material if they are not resolved in the Company’s favor. As of September 30, 2020, the Company believes it has adequately reserved for these reassessments.
Additionally, the Company has other uncertain tax positions as well as assessments and disputed positions with taxing authorities in its various jurisdictions, which are consistent with those matters disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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Settlements
In the fourth quarter of 2017, the Company, the Canadian Revenue Authority (“CRA”) and the U.S. Internal Revenue Service (“IRS”) reached a settlement agreement on transfer pricing issues for the Company’s 2007-2012 tax years. As a result of this settlement agreement, the Company recognized $13.8 million of tax expense in its 2017 Consolidated Statements of Operations related to the Company’s Canadian tax positions for the years 2007-2016. The recording of this settlement resulted in increased sales for the Company’s Canadian subsidiary of $85.7 million and increased offsetting expenses for the Company’s U.S. subsidiary in 2017 causing a domestic loss and significant foreign income. During 2018, in accordance with the settlement agreement, the Company’s U.S. subsidiary made intercompany cash payments of $85.7 million to its Canadian subsidiary and tax payments to Canadian taxing authorities of $17.5 million. The remaining liability was satisfied in 2019 with tax payments of $5.3 million. Corresponding tax refunds of $21.4 million were received primarily in 2019 from U.S. taxing authorities, with the remaining refund of approximately $1.6 million expected in 2020 or early 2021 (recorded in other current assets in the Consolidated Balance Sheets).
In the fourth quarter of 2018, the Company, the CRA and the IRS reached a settlement agreement on transfer pricing and management fees as part of an advanced pricing agreement that covers tax years 2013-2021. The tax expense was previously recognized in 2017, however the recording of this settlement resulted in increased sales for the Company’s Canadian subsidiary of $106.1 million and offsetting expenses for the Company’s U.S. subsidiary in 2018 causing a domestic loss and significant foreign income. During 2019, in accordance with the settlement agreement, the Company’s U.S. subsidiary made intercompany cash payments of $106.1 million to its Canadian subsidiary and tax payments to Canadian taxing authorities of $29.9 million, with the remaining $1.5 million of tax payments to be paid during 2020. Corresponding tax refunds of $59.7 million have been received as of September 30, 2020, from U.S. taxing authorities, of which $55.0 million was received during the first quarter of 2020, with the remaining $1.9 million expected in 2020 or early 2021 (recorded in other current assets in its Consolidated Balance Sheets).
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8. Long-Term Debt:
Long-term debt consists of the following (in millions):
| September 30, 2020 | December 31, 2019 | ||||||||||
| $ | $ | ||||||||||
| Term Loan due January 2025 | |||||||||||
| Revolving Credit Facility due January 2025 | |||||||||||
| AR Securitization Facility expires June 2023 | |||||||||||
| Banco Santander loan due October 2020 | |||||||||||
| Banco Itaú loan due February 2021 | |||||||||||
| Banco Rabobank loan due July 2021 | |||||||||||
| Banco BTG loan due July 2021 | |||||||||||
| Banco Santander loan due September 2021 | |||||||||||
| Banco do Brasil loan due September 2021 | |||||||||||
| Banco Rabobank loan due September 2021 | |||||||||||
| Banco BTG loan due October 2021 | |||||||||||
| Banco Rabobank loan due November 2021 | |||||||||||
| Banco Santander loan due December 2021 | |||||||||||
| Banco Votorantim loan due February 2022 | |||||||||||
| Banco BTG loan due January 2022 | |||||||||||
| Banco Santander loan due March 2022 | |||||||||||
| Banco BTG loan due April 2022 | |||||||||||
| Banco BTG loan due July 2022 | |||||||||||
| Financiadora de Estudos e Projetos loan due November 2023 | |||||||||||
| Less unamortized debt issuance costs | ( | ( | |||||||||
| Total debt | |||||||||||
| Less current portion | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
In the first quarter of 2020, the Company entered into three loans totaling $20.0 million which mature between February 2021 and March 2022, respectively. Two of the loans were denominated in Brazilian reais and one loan was denominated in euros. In connection with the loan denominated in euros, the Company entered into a swap to exchange principal and interest payments denominated in euros to Brazilian reais (see Note 12). These loans bear interest ranging from 143 % - 150 % of CDI.
During the first quarter of 2020, the Company sold approximately $3.4 million of Brazilian receivables for $3.3 million. The proceeds of the transaction were used to maintain liquidity for working capital needs. The Company is contingently liable for up to 20 % of the sale balance up to $0.7 million if the banks are unable to collect on these accounts.
During the third quarter of 2020, the Company entered into six new loans totaling $15.1 million which mature between July 2021 and July 2022. These loans are denominated in Brazilian reais and bear interest rates ranging from 200 % - 204 % of CDI. The liquidity created from these loans allowed the Company to prepay $15.4 million worth of existing loans with maturity date of September 2021.
As of September 30, 2020, the term loans and revolving credit facility under the Company’s credit agreement were secured by substantially all existing and future U.S. assets, the Goderich mine in Ontario, Canada and capital stock of certain subsidiaries. The weighted average interest rate of all of the Company’s outstanding debt as of September 30, 2020, was approximately 5.37 %.
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Securitization
On June 30, 2020, certain of the Company’s U.S. subsidiaries entered into a three-year committed revolving accounts receivable financing facility (the “AR Facility”) of up to $100 million with PNC Bank, National Association (“PNC”), as administrative agent and lender, and PNC Capital Markets, LLC, as structuring agent.
In connection with the AR Facility, two of the Company’s U.S. subsidiaries, from time to time, sell and contribute receivables and certain related assets to a special purposes entity and wholly-owned U.S. subsidiary of the Company (the “SPE”). The SPE finances its acquisition of the receivables by obtaining secured loans from PNC and the other lenders party to a receivables financing agreement. A U.S. subsidiary of the Company services the receivables on behalf of the SPE for a fee. In addition, the Company has agreed to guarantee the performance by its subsidiaries. The Company and its subsidiaries do not guarantee the loan principal or interest under the receivables financing agreement or the collectability of the receivables under the AR Facility. As of September 30, 2020, the Company received proceeds from the loan in the amount of $28.0 million.
The purchase price for the sale of receivables consists of cash available to the SPE from loans under the AR Facility and from collections on previously sold receivables and, to the extent the SPE does not have funds available to pay the purchase price due on any day in cash, through an increase in the principal amount of a subordinated intercompany loan. The SPE pays monthly interest and fees with respect to amounts advanced by the lenders under the AR Facility.
The SPE’s sole business consists of the purchase or acceptance through capital contributions of the receivables and the subsequent granting of a security interest in these receivables and related rights to PNC on behalf of the lenders under the AR Facility. The SPE is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of the SPE’s assets prior to any assets or value in the SPE becoming available to the Company and the assets of the SPE are not available to pay creditors of the Company or any of its affiliates other than the SPE.
9. Commitments and Contingencies:
The Wisconsin Department of Agriculture, Trade and Consumer Protection (“DATCP”) and the Wisconsin Department of Natural Resources (“DNR”) have information indicating that agricultural chemicals are present within the subsurface area of the Company’s property located in Kenosha, Wisconsin. The agricultural chemicals were used by previous owners and operators of the site. None of the identified chemicals have been used in association with the Company’s operations since it acquired the property in 2002. DATCP and DNR have directed the Company to conduct further investigations into the environmental conditions at the Kenosha property. The Company continues on-property investigations and has provided the findings to DATCP and DNR as they have become available. All investigations and mitigation activities to date, and any potential future remediation work, are being conducted under the Wisconsin Agricultural Chemical Cleanup Program, which provides for reimbursement of some of the costs.
The Company conducts business operations in several countries and is subject to various federal and local labor, social security, environmental and tax laws. While the Company believes it complies with such laws, they are complex and subject to interpretation. In addition to the tax assessments discussed in Note 7, the Company’s Brazilian subsidiaries are party to administrative tax proceedings and claims which totaled $7.3 million and $15.8 million as of September 30, 2020 and December 31, 2019, respectively, and relate primarily to value added tax, state tax (ICMS) and social security tax (PIS and COFINS) assessments. The Company has assessed the likelihood of a loss at less than probable and therefore, has not established a reserve for these matters. The Company also assumed liabilities for labor-related matters in connection with the 2016 acquisition of Compass Minerals South America, which are primarily related to compensation, labor benefits and consequential tax claims that totaled $3.8 million and $5.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company believes the maximum exposure for these other labor matters totaled approximately $16 million and $25 million as of September 30, 2020 and December 31, 2019, respectively.
The Division of Enforcement of the SEC is investigating the Company’s disclosures concerning the operation of the Goderich mine. The Company has cooperated with this investigation and will continue to do so. While it is not possible to predict the timing or the outcome of the SEC inquiry, the Company believes that this matter will not have a material impact on its results of operation, cash flows or financial position.
The Company is also involved in legal and administrative proceedings and claims of various types from the ordinary course of the Company’s business.
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10. Operating Segments:
The Company’s reportable segments are strategic business units that offer different products and services, and each business requires different technology and marketing strategies. The Company has three reportable segments: Salt, Plant Nutrition North America and Plant Nutrition South America. The Salt segment produces and markets salt, consisting of sodium chloride and magnesium chloride, for use in road deicing for winter roadway safety and for dust control, food processing, water softeners and other consumer, agricultural and industrial applications. Plant nutrients, including SOP, secondary nutrients and micronutrients are produced and marketed through the Plant Nutrition North America segment. The Plant Nutrition South America segment operates two primary businesses in Brazil – agricultural productivity and chemical solutions. The agricultural productivity division manufactures and distributes a broad offering of specialty plant nutrition solution-based products that are used in direct soil and foliar applications, as well as through irrigation systems and for seed treatment. The chemical solutions division manufactures and markets specialty chemicals for the industrial chemical industry.
Segment information is as follows (in millions):
| Three Months Ended September 30, 2020 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||||||||
| Operating earnings (loss) | ( | ( | ||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||||||||
| Total assets (as of end of period) | ||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||||||||
| Operating earnings (loss) | ( | |||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||||||||
| Total assets (as of end of period) | ||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||||||||
| Operating earnings (loss) | ( | |||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||||||||
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| Nine Months Ended September 30, 2019 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||||||||
| Operating earnings (loss) | ( | |||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||||||||
Disaggregated revenue by product type is as follows (in millions):
| Three Months Ended September 30, 2020 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||||||||
| SOP and Specialty Plant Nutrients | ||||||||||||||||||||||||||||||||
| Industrial Chemicals | ||||||||||||||||||||||||||||||||
| Eliminations & Other | ( | |||||||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||||||||
| SOP and Specialty Plant Nutrients | ||||||||||||||||||||||||||||||||
| Industrial Chemicals | ||||||||||||||||||||||||||||||||
| Eliminations & Other | ( | ( | ||||||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||||||||
| SOP and Specialty Plant Nutrients | ||||||||||||||||||||||||||||||||
| Industrial Chemicals | ||||||||||||||||||||||||||||||||
| Eliminations & Other | ( | ( | ||||||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
18
| Nine Months Ended September 30, 2019 | Salt | Plant Nutrition North America | Plant Nutrition South America | Corporate & Other(a) | Total | |||||||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||||||||
| SOP and Specialty Plant Nutrients | ||||||||||||||||||||||||||||||||
| Industrial Chemicals | ||||||||||||||||||||||||||||||||
| Eliminations & Other | ( | ( | ||||||||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(a)Corporate and other includes corporate entities, records management operations and other incidental operations and eliminations. Operating earnings (loss) for corporate and other includes indirect corporate overhead, including costs for general corporate governance and oversight, as well as costs for the human resources, information technology, legal and finance functions.
The Company’s revenue by geographic area is as follows (in millions):
| Revenue | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||||
United States(a) | $ | $ | ||||||||||||
| Canada | ||||||||||||||
| Brazil | ||||||||||||||
| United Kingdom | ||||||||||||||
| Other | ||||||||||||||
| Total revenue | $ | $ | ||||||||||||
| Revenue | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||||||||
United States(a) | $ | $ | ||||||||||||
| Canada | ||||||||||||||
| Brazil | ||||||||||||||
| United Kingdom | ||||||||||||||
| Other | ||||||||||||||
| Total revenue | $ | $ | ||||||||||||
(a)United States sales exclude product sold to foreign customers at U.S. ports.
11. Stockholders’ Equity and Equity Instruments:
In May 2020, the Company’s stockholders approved the 2020 Incentive Award Plan (the “2020 Plan”), which authorizes the issuance of 2,977,933 shares of Company common stock. Since the date the 2020 Plan was approved, the Company ceased issuing equity awards under the 2015 Incentive Award Plan (as amended, the “2015 Plan”). Since the approval of the 2015 Plan in May 2015, the Company ceased issuing equity awards under the 2005 Incentive Award Plan (as amended, the “2005 Plan”). The 2005 Plan, 2015 Plan and 2020 Plan allow for grants of equity awards to executive officers, other employees and directors, including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options and deferred stock units.
Options
Most of the stock options granted under the 2005 Plan and 2015 Plan vest ratably, in tranches, over a four-year service period. Unexercised options expire after seven years . Options do not have dividend or voting rights. Upon vesting, each option can be exercised to purchase one share of the Company’s common stock. The exercise price of options is equal to the closing stock price on the grant date.
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To estimate the fair value of options on the grant date, the Company uses the Black-Scholes option valuation model. Award recipients are grouped according to expected exercise behavior. Unless better information is available to estimate the expected term of the options, the estimate is based on historical exercise experience. The risk-free rate, using U.S. Treasury yield curves in effect at the time of grant, is selected based on the expected term of each group. The Company’s historical stock price is used to estimate expected volatility. The fair value and inputs used to calculate fair value for options granted in the first nine months of 2020 are included in the table below:
| Fair value of options granted | $ | ||||
| Exercise price | $ | ||||
| Expected term (years) | |||||
| Expected volatility | |||||
| Dividend yield | |||||
| Risk-free rate of return | |||||
RSUs
Typically, the RSUs granted under the 2015 Plan and 2020 Plan vest after to three years of service. RSUs entitle the holders to one share of common stock for each vested RSU. Unvested RSUs do not have voting rights but are entitled to receive non-forfeitable dividends (generally after a performance hurdle has been satisfied for the year of the grant) or other distributions equal to those declared on the Company’s common stock for RSUs that are earned as a result of the satisfaction of the performance hurdle. The closing stock price on the grant date is used to determine the fair value of RSUs.
PSUs
The PSUs granted under the 2015 Plan are either total shareholder return PSUs (“TSR PSUs”) or return on invested capital PSUs (“ROIC PSUs”). The actual number of shares of the Company’s common stock that may be earned with respect to TSR PSUs is calculated by comparing the Company’s total shareholder return to the total shareholder return for each company comprising the Company’s peer group over the three-year performance period and may range from 0 % to 200 % of the target number of shares based upon the attainment of these market conditions. The actual number of shares of common stock that may be earned with respect to ROIC PSUs is calculated based on the average of the Company’s annual return on invested capital for each year in the three-year performance period and may range from 0 % to 200 % of the target number of shares based upon the attainment of these performance conditions.
PSUs represent a target number of shares of the Company’s common stock that may be earned before adjustment based upon the attainment of certain conditions. Holders of PSUs do not have voting rights but are entitled to receive non-forfeitable dividends or other distributions equal to those declared on the Company’s common stock for PSUs that are earned, which are paid when the shares underlying the PSUs are issued.
To estimate the fair value of the TSR PSUs on the grant date, the Company uses a Monte-Carlo simulation model, which simulates future stock prices of the Company as well as the Company’s peer group. This model uses historical stock prices to estimate expected volatility and the Company’s correlation to the peer group. The risk-free rate was determined using the same methodology as the option valuations as discussed above. The Company’s closing stock price on the grant date was used to estimate the fair value of the ROIC PSUs. The Company will adjust the expense of the ROIC PSUs based upon its estimate of the number of shares that will ultimately vest at each interim date during the vesting period.
During the nine months ended September 30, 2020, the Company reissued the following number of shares from treasury stock: 1,342 shares related to the exercise of stock options, 74,103 shares related to the release of RSUs which vested, 11,575 shares related to the release of PSUs which vested and 9,756 shares related to stock payments. In 2019, the Company issued 32,197 shares from treasury stock. The Company withheld 27,291 shares with a fair value of $1.2 million related to the vesting of RSUs and PSUs during the first nine months of 2020. The fair value of the shares were valued at the closing price at the vesting date and represent the employee tax withholding for the employee’s compensation. The Company recognized a tax deficiency of $0.3 million from its equity compensation awards as an increase to income tax expense during the first nine months of 2020. During the first nine months of 2020 and 2019, the Company recorded $7.7 million (includes $0.5 million paid in cash) and $5.1 million (includes $1.1 million paid in cash), respectively, of compensation expense pursuant to its stock-based
20
compensation plans. No amounts have been capitalized. The following table summarizes stock-based compensation activity during the nine months ended September 30, 2020:
| Stock Options | RSUs | PSUs(a) | ||||||||||||||||||||||||||||||||||||
| Number | Weighted-average exercise price | Number | Weighted-average fair value | Number | Weighted-average fair value | |||||||||||||||||||||||||||||||||
| Outstanding at December 31, 2019 | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||||||||||||||
Exercised(b) | ( | ( | ||||||||||||||||||||||||||||||||||||
Released from restriction(b) | ( | |||||||||||||||||||||||||||||||||||||
| Cancelled/expired | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Outstanding at September 30, 2020 | $ | $ | $ | |||||||||||||||||||||||||||||||||||
(a)Until the performance period is completed, PSUs are included in the table at the target level at their grant date and at that level represent one share of common stock per PSU.
(b)Common stock issued for exercised options and for vested and earned RSUs and PSUs was issued from treasury stock.
Other Comprehensive Income (Loss)
The Company’s comprehensive income (loss) is comprised of net (loss) earnings, net amortization of the unrealized loss of the pension obligation, the change in the unrealized gain (loss) on natural gas and foreign currency cash flow hedges and foreign currency translation adjustments. The components of and changes in accumulated other comprehensive loss (“AOCL”) as of and for the three and nine months ended September 30, 2020 and 2019, are as follows (in millions):
Three Months Ended September 30, 2020(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Other comprehensive (loss) income before reclassifications(b) | ( | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Three Months Ended September 30, 2019(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive income (loss) before reclassifications(b) | ( | ( | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Nine Months Ended September 30, 2020(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive income (loss) before reclassifications(b) | ( | ( | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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Nine Months Ended September 30, 2019(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive income (loss) income before reclassifications(b) | ( | ( | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(a)With the exception of the cumulative foreign currency translation adjustment, for which no tax effect is recorded, the changes in the components of accumulated other comprehensive loss presented in the tables above are reflected net of applicable income taxes.
(b)The Company recorded a foreign exchange (loss) gain of $(6.9 ) million and $(96.8 ) million in the three and nine months ended September 30, 2020 and $25.7 million and $15.3 million in the three and nine months ended September 30, 2019, respectively, in accumulated other comprehensive loss related to intercompany notes which were deemed to be of a long-term investment nature.
The amounts reclassified from AOCL to expense (income) for the three and nine months ended September 30, 2020 and 2019, are shown below (in millions):
| Amount Reclassified from AOCL | |||||||||||||||||
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Line Item Impacted in the Consolidated Statements of Operations | |||||||||||||||
| Gains (losses) on cash flow hedges: | |||||||||||||||||
| Natural gas instruments | $ | ( | $ | ( | Product cost | ||||||||||||
| Foreign currency contracts | ( | Interest expense | |||||||||||||||
| Income tax benefit | |||||||||||||||||
| Reclassifications, net of income taxes | ( | ( | |||||||||||||||
| Amortization of defined benefit pension: | |||||||||||||||||
| Amortization of loss | $ | $ | Product cost | ||||||||||||||
| Income tax expense | ( | ( | |||||||||||||||
| Reclassifications, net of income taxes | |||||||||||||||||
| Total reclassifications, net of income taxes | $ | ( | $ | ( | |||||||||||||
| Amount Reclassified from AOCL | |||||||||||||||||
| Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | Line Item Impacted in the Consolidated Statements of Operations | |||||||||||||||
| Gains (losses) on cash flow hedges: | |||||||||||||||||
| Natural gas instruments | $ | ( | $ | ( | Product cost | ||||||||||||
| Foreign currency contracts | ( | ( | Interest expense | ||||||||||||||
| Income tax benefit | |||||||||||||||||
| Reclassifications, net of income taxes | ( | ( | |||||||||||||||
| Amortization of defined benefit pension: | |||||||||||||||||
| Amortization of loss | $ | $ | Product cost | ||||||||||||||
| Reclassifications, net of income taxes | |||||||||||||||||
| Total reclassifications, net of income taxes | $ | ( | $ | ( | |||||||||||||
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12. Derivative Financial Instruments:
The Company is subject to various types of market risks, including interest rate risk, foreign currency exchange rate transaction and translation risk and commodity pricing risk. Management may take actions to mitigate the exposure to these types of risks, including entering into forward purchase contracts and other financial instruments. Currently, the Company manages a portion of its commodity pricing and foreign currency exchange rate risks by using derivative instruments. From time to time, the Company may enter into immaterial foreign exchange contracts to mitigate foreign exchange risk on its sales and accounts receivable. The Company does not seek to engage in trading activities or take speculative positions with any financial instrument arrangement. The Company has entered into natural gas derivative instruments and foreign currency derivative instruments with counterparties it views as creditworthy. However, the Company does attempt to mitigate its counterparty credit risk exposures by, among other things, entering into master netting agreements with some of these counterparties. The Company records derivative financial instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets.
Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. Depending on the exposure being hedged, the Company must designate the hedging instrument as a fair value hedge, a cash flow hedge or a net investment in foreign operations hedge. For the qualifying derivative instruments that have been designated as hedges, the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item in the statements of operations. Any ineffectiveness related to these hedges was not material for any of the periods presented. For derivative instruments that have not been designated as hedges, the entire change in fair value is recorded through earnings in the period of change.
Natural Gas Derivative Instruments
Natural gas is consumed at several of the Company’s production facilities, and changes in natural gas prices impact the Company’s operating margin. The Company’s objective is to reduce the earnings and cash flow impacts of changes in market prices of natural gas by fixing the purchase price of up to 90 % of its forecasted natural gas usage. It is the Company’s policy to consider hedging portions of its natural gas usage up to 36 months in advance of the forecasted purchase. As of September 30, 2020, the Company had entered into natural gas derivative instruments to hedge a portion of its natural gas purchase requirements through December 2022. As of September 30, 2020 and December 31, 2019, the Company had agreements in place to hedge forecasted natural gas purchases of 3.1 million and 2.8 million MMBtus, respectively. All natural gas derivative instruments held by the Company as of September 30, 2020 and December 31, 2019 qualified and were designated as cash flow hedges. As of September 30, 2020, the Company expects to reclassify from AOCL to earnings during the next twelve months $0.8 million of net gains on derivative instruments related to its natural gas hedges.
Foreign Currency Derivatives Not Designated as Hedges
In March 2020, the Company entered into forward instruments to swap currency denominated in U.S. dollars to Canadian dollars for a future intercompany payment from a U.S. subsidiary to a Canadian subsidiary. These instruments matured in April 2020 with combined notional amounts of $89.9 million. The objective of the instruments was to mitigate the foreign currency fluctuation risk related to intercompany payments denominated in a currency other than U.S. dollars, the Company’s functional currency. The instrument was not designated as a hedge. When these agreements settled in April 2020, the Company recognized a foreign exchange loss of $3.1 million in its Consolidated Statements of Operations.
From time to time, the Company’s Brazilian subsidiary may enter into forward instruments to swap currency for sales invoices that are denominated in Brazilian reais. These instruments are not material to the Company’s financial statements.
Foreign Currency Derivatives Designated as Hedges
The Company has entered into euro-denominated debt instruments to provide funds for its operations in Brazil. The Company may also concurrently enter into foreign currency agreements whereby the Company agrees to swap interest and principal payments on loans denominated in euros for principal and interest payments denominated in Brazilian reais, its Brazilian subsidiary’s functional currency. The objective of the swap agreements is to mitigate the foreign currency fluctuation risk related to holding debt denominated in a currency other than the Company’s Brazilian subsidiary’s functional currency. As of September 30, 2020, the Company had a swap agreement in place to hedge $10.0 million of a loan denominated in a currency other than its Brazilian subsidiary’s functional currency. Payments on this loan are due on various dates extending through February 2021. As of September 30, 2020, this foreign currency derivative instrument qualified and was designated as a cash flow hedge. As of September 30, 2020, the Company expects to reclassify from AOCL to earnings during the next twelve months $2.8 million of net gains on derivative instruments related to this foreign currency swap agreement.
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The following tables present the fair value of the Company’s hedged items as of September 30, 2020 and December 31, 2019 (in millions):
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | Consolidated Balance Sheets Location | September 30, 2020 | Consolidated Balance Sheets Location | September 30, 2020 | ||||||||||||||||||||||
Commodity contracts | Other current assets | $ | Accrued expenses and other current liabilities | $ | ||||||||||||||||||||||
Commodity contracts | Other assets | Other noncurrent liabilities | ||||||||||||||||||||||||
Swap contracts | Other current assets | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
Total derivatives designated as hedging instruments(a)(b) | $ | $ | ||||||||||||||||||||||||
(a)The Company has master netting agreements with both of its commodity hedge counterparties and accordingly has netted in its Consolidated Balance Sheets $0.3 million of its commodity contracts that are in a payable position against its contracts in receivable positions.
(b)The Company has commodity hedge agreements with two counterparties and a foreign currency swap agreement with one counterparty. Amounts recorded as liabilities for the Company’s commodity contracts are payable to both counterparties and amounts recorded as assets for the Company’s foreign currency swap agreements are receivable from one counterparty.
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | Consolidated Balance Sheets Location | December 31, 2019 | Consolidated Balance Sheets Location | December 31, 2019 | ||||||||||||||||||||||
Commodity contracts | Other current assets | $ | Accrued expenses and other current liabilities | $ | ||||||||||||||||||||||
Commodity contracts | Other assets | Other noncurrent liabilities | ||||||||||||||||||||||||
Swap contracts | Other current assets | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
Total derivatives designated as hedging instruments(a)(b) | $ | $ | ||||||||||||||||||||||||
(a)The Company has master netting agreements with its commodity hedge counterparties and accordingly has netted in its Consolidated Balance Sheets $0.4 million of its commodity contracts that are in a receivable position against its contracts in payable positions.
13. Fair Value Measurements:
The Company’s financial instruments are measured and reported at their estimated fair values. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction. When available, the Company uses quoted prices in active markets to determine the fair values for its financial instruments (Level 1 inputs) or, absent quoted market prices, observable market-corroborated inputs over the term of the financial instruments (Level 2 inputs). The Company does not have any unobservable inputs that are not corroborated by market inputs (Level 3 inputs).
The Company holds marketable securities associated with its defined contribution and pre-tax savings plans, which are valued based on readily available quoted market prices. The Company utilizes derivative instruments to manage its risk of changes in natural gas prices and its risk of changes in foreign currency exchange rates (see Note 12). The fair values of the natural gas and foreign currency derivative instruments are determined using market data of forward prices for all of the Company’s contracts.
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The estimated fair values for each type of instrument are presented below (in millions):
| September 30, 2020 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | $ | $ | $ | |||||||||||||||||||
| Derivatives – natural gas instruments, net | |||||||||||||||||||||||
| Derivatives – foreign currency contracts, net | |||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | |||||||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Liabilities related to non-qualified savings plan | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Total Liabilities | $ | ( | $ | ( | $ | $ | |||||||||||||||||
(a)Includes mutual fund investments of approximately 30 % in common stock of large-cap U.S. companies, 10 % in common stock of small to mid-cap U.S. companies, 5 % in international companies, 15 % in bond funds, 15 % in short-term investments and 25 % in blended funds.
| December 31, 2019 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | $ | $ | $ | |||||||||||||||||||
| Derivatives – foreign currency contracts, net | |||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | |||||||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Liabilities related to non-qualified savings plan | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Derivatives – natural gas instruments, net | ( | ( | |||||||||||||||||||||
| Total Liabilities | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
(a)Includes mutual fund investments of approximately 30 % in the common stock of large-cap U.S. companies, 15 % in the common stock of small to mid-cap U.S. companies, 5 % in the common stock of international companies, 10 % in bond funds, 20 % in short-term investments and 20 % in blended funds.
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14. Earnings per Share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net (loss) earnings | $ | ( | $ | $ | $ | ||||||||||||||||||
Less: net earnings allocated to participating securities(a) | ( | ( | ( | ( | |||||||||||||||||||
| Net (loss) earnings available to common shareholders | $ | ( | $ | $ | $ | ||||||||||||||||||
| Denominator (in thousands): | |||||||||||||||||||||||
Weighted-average common shares outstanding, shares for basic earnings per share | |||||||||||||||||||||||
Weighted-average awards outstanding(b) | |||||||||||||||||||||||
| Shares for diluted earnings per share | |||||||||||||||||||||||
| Net (loss) earnings per common share, basic | $ | ( | $ | $ | $ | ||||||||||||||||||
| Net (loss) earnings per common share, diluted | $ | ( | $ | $ | $ | ||||||||||||||||||
(a)Weighted participating securities include RSUs and PSUs that receive non-forfeitable dividends and consist of 389,000 and 404,000 weighted participating securities for the three and nine months ended September 30, 2020, respectively, and 321,000 and 291,000 weighted participating securities for the three and nine months ended September 30, 2019, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following: risks related to the coronavirus (“COVID-19”) pandemic; our mining and industrial operations; geological conditions; dependency on a limited number of key production and distribution facilities and critical equipment; weather conditions; strikes, other forms of work stoppage or slowdown or other union activities; the inability to fund necessary capital expenditures or successfully complete capital projects; supply constraints or price increases for energy and raw materials used in our production processes; our indebtedness and inability to pay our indebtedness; restrictions in our debt agreements that may limit our ability to operate our business or require accelerated debt payments; tax liabilities; financial assurance requirements; the inability of our customers to access credit or a default by our customers of trade credit extended by us or financing we have guaranteed; our payment of any dividends; the impact of competition on the sales of our products; risks associated with our international operations and sales, including changes in currency exchange rates and inflation risks; the impact of anticipated changes in plant nutrition product prices and customer application rates; conditions in the agricultural sector and supply and demand imbalances for competing plant nutrition products; increasing costs or a lack of availability of transportation services; the seasonal demand for our products; our rights and governmental authorizations to mine and operate our properties; compliance with foreign and United States (“U.S.”) laws and regulations related to import and export requirements and anti-corruption laws; compliance with environmental, health and safety laws and regulations; environmental liabilities; misappropriation or infringement claims relating to intellectual property; product liability claims and product recalls; inability to obtain required product registrations or increased regulatory requirements; changes in industry standards and regulatory requirements; our ability to successfully implement our strategies, including the strategic review of our Plant Nutrition South America business; the loss of key personnel; a compromise of our computer systems, information technology or operations technology or the inability to protect confidential or proprietary data;
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our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; climate change; domestic and international general business and economic conditions; and other risks referenced from time to time in this report and our other filings with the Securities and Exchange Commission (the “SEC”), including the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2019, Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and this Quarterly Report on Form 10-Q.
In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms or other comparable terminology. Forward-looking statements include without limitation statements about the impact of COVID-19 pandemic on us; our outlook, including expected sales volumes; working capital requirements; our reinvestment of foreign earnings outside the U.S.; our ability to optimize cash accessibility, minimize tax expense and meet debt service requirements; future tax payments and tax refunds; outcomes of matters with taxing authorities; the effects of currency fluctuations and inflation; and the seasonality of our business. These forward-looking statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no duty to update any of the forward-looking statements after the date hereof or to reflect the occurrence of unanticipated events.
Unless the context requires otherwise, references to the “Company,” “Compass Minerals,” “our,” “us” and “we” refer to Compass Minerals International, Inc. (“CMI,” the parent holding company) and its consolidated subsidiaries. Except where otherwise noted, references to North America include only the continental U.S. and Canada, and references to the United Kingdom (the “U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to “short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds. Compass Minerals, Protassium+ and Wolf Trax, and combinations thereof, are trademarks of CMI or its subsidiaries in the U.S. and other countries.
COVID-19 Pandemic
The ongoing COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. As an essential business, we have continued producing and delivering products that support critical industries such as transportation, agriculture, chemical, food, pharmaceutical and animal nutrition. However, we have instituted several measures in response to the COVID-19 pandemic and the COVID-19 pandemic has negatively affected our business in a number of ways.
•Employee welfare: Our management team has taken multiple actions to limit the exposure of employees to the spread of COVID-19, including instituting remote working where possible, adjusting shift schedules and crew sizes, restricting visitation to operational sites, curtailing all business-related commercial air travel, and increasing sanitation of offices and common areas within our facilities.
•Operations and sales: COVID-19 has not interrupted the operations of our mining and manufacturing facilities in North America and Brazil. Operations at our U.K. salt mine were idled near the end of March 2020 due to the very mild winter weather experienced in that market, along with U.K. government guidance on COVID-19 preventative measures. Mine operations resumed in mid-May 2020, utilizing a gradual ramp up. During the third quarter of 2020, we continued to experience an impact to some of our sales channels due to manufacturing outages and retail disruptions primarily for our non-deicing salt products. In total, we estimate that the combined impact of lost sales and incremental operating costs related to COVID-19 totaled approximately $4 million in the third quarter of 2020 and $7 million on a year-to-date basis.
•Supply chain and logistics: To date, we have experienced no material supply chain or logistics issues. We continue to evaluate potential supply chain and logistics impacts, proactively increase inventory levels of critical sourced inputs and identify secondary suppliers where possible. Both our operations and our logistics partners are deemed “essential” under current governmental guidance and we have worked to ensure we understand and comply with their safety precautions to limit potential disruptions.
The ultimate impact that COVID-19 will have on our future results is unknown at this time. For more information, see “Part II–Item 1A–Risk Factors.”
Critical Accounting Estimates
Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments result primarily from the need to make
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estimates about matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. For a further description of our critical accounting policies, see Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Actual results in these areas could differ from management’s estimates.
Company Overview
Compass Minerals is a leading producer of essential minerals, including salt, sulfate of potash (“SOP”) specialty fertilizer and magnesium chloride. As of September 30, 2020, we operated 21 production and packaging facilities, including:
•The largest rock salt mine in the world in Goderich, Ontario, Canada;
•The largest dedicated rock salt mine in the U.K. in Winsford, Cheshire;
•A solar evaporation facility located in Ogden, Utah, which is both the largest SOP production site and the largest solar salt production site in the Western Hemisphere;
•Several mechanical evaporation facilities producing consumer and industrial salt; and
•Several facilities producing essential agricultural nutrients and specialty chemicals in Brazil.
Our salt business provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, agricultural and industrial applications in North America. In the U.K., we operate a records management business utilizing excavated areas of our Winsford salt mine with one other surface location in London, England.
Our plant nutrition business produces and markets specialty plant nutrition products worldwide to distributors and retailers of crop inputs, as well as growers. Our principal plant nutrition product in our Plant Nutrition North America segment is SOP, which we market under the trade name Protassium+. We also sell various secondary nutrients as well as premium micronutrient products under our Wolf Trax brand.
Our Plant Nutrition South America segment operates two primary businesses in Brazil—agricultural productivity, which manufactures and distributes a broad offering of specialty plant nutrition solution-based products; and chemical solutions, which manufactures and markets specialty chemicals, primarily for the water treatment industry and for use in other industrial processes.
Consolidated Results of Operations
The following is a summary of our consolidated results of operations for the three and nine months ended September 30, 2019 and 2020, respectively. The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.
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THREE AND NINE MONTHS ENDED SEPTEMBER 30
* Refer to “—Sensitivity Analysis Related to EBITDA and Adjusted EBITDA” for a reconciliation to the most directly comparable U.S. GAAP financial measure and the reasons we use this non-GAAP measure.
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Total sales decreased 17%, or $58.9 million, due to decreases in all of our segments.
•Operating earnings decreased 42%, or $12.7 million, due to a decrease in our plant nutrition business, which was partially offset by an increase in our Salt segment.
•Earnings before interest, taxes, depreciation and amortization (“EBITDA”)* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* decreased 18%, or $11.9 million.
•Diluted net earnings per share decreased $0.38.
COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Total sales decreased 4%, or $37.8 million, due to a decrease in our Salt and Plant Nutrition South America segments, which was partially offset by an increase in our Plant Nutrition North America segment.
•Operating earnings increased 28%, or $18.7 million, due to increases in our Salt and Plant Nutrition South America segments, which was partially offset by lower earnings in our Plant Nutrition North America segment.
•Adjusted EBITDA increased 10%, or $17.6 million.
•Diluted net earnings per share increased $0.59.
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THREE AND NINE MONTHS ENDED SEPTEMBER 30
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
Gross Profit: Decreased 23%, or $17.7 million; Gross Margin decreased by one percentage point
•Salt segment gross profit increased $3.2 million primarily due to lower per-unit product costs and lower logistics costs.
•The gross profit of the plant nutrition business, on a combined basis, decreased $21.1 million due to an $11.9 million decrease in our Plant Nutrition North America segment gross profit and a $9.2 million decrease in our Plant Nutrition South America segment gross profit. Plant Nutrition South America segment gross profit decreased primarily due to the impact of translating the weaker Brazilian reais and lower sales volumes. Plant Nutrition North America segment gross profit decreased due a decrease in sales volumes and higher product costs due primarily to an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles at our Ogden facility.
COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
Gross Profit: Increased 9%, or $17.5 million; Gross Margin increased by 2 percentage points
•Salt segment gross profit increased $23.6 million primarily due to higher average sales prices and lower logistics costs, which were partially offset by lower sales volumes and higher per-unit product costs at our North American facilities and lower production volumes at our U.K. mine.
•The gross profit of the plant nutrition business, on a combined basis, decreased $7.0 million. Plant Nutrition North America segment gross profit decreased $6.1 million primarily due to lower average sales prices and higher product costs due to an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles at our Ogden facility, partially offset by higher sales volumes. Plant Nutrition South America segment gross profit decreased $0.9 million primarily due to the weaker Brazilian reais, which was partially offset by higher sales volumes.
OTHER EXPENSES AND INCOME
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
SG&A: Decreased $5.0 million; increased 1.0 percentage point as a percentage of sales from 13.6% to 14.6%
•The decrease in SG&A expense was primarily due to lower compensation in all segments, lower corporate professional service fees and reduced travel expenses due to COVID-19, partially offset by increased corporate depreciation expense.
Interest Expense: Decreased $0.6 million to $17.1 million
•The decrease was primarily due to a decrease in debt outstanding, which was partially offset by an increase in interest rates due to the refinancing of our debt in the fourth quarter of 2019.
Loss (Gain) on Foreign Exchange: Decreased $5.9 million from income of $1.8 million to an expense of $4.1 million
•We realized foreign exchange losses of $4.1 million in the third quarter of 2020 compared to gains of $1.8 million in the third quarter of 2019 due primarily to changes in foreign currency exchange rates on our non U.S. dollar denominated intercompany loans.
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Other, Net: Decreased $0.7 million from income of $0.8 million to income of $0.1 million
•The decrease in other income was primarily due to lower interest income.
Income Tax (Benefit) Expense: Decreased $6.1 million from an expense of $4.8 million to a benefit of $1.3 million
•The decrease in income tax expense was primarily due to lower pretax income in the third quarter of 2020 versus the third quarter of 2019.
•Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, global intangible low-taxed income, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
•Our effective tax rate increased from 31% in the third quarter of 2019 to 38% in the third quarter of 2020 primarily due to refinements made in each period related to our expected full-year pretax profit and effective tax rate.
COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
SG&A: Decreased $1.2 million; increased 0.4 percentage points as a percentage of sales from 12.9% to 13.3%
•The decrease in SG&A expense was primarily due to lower travel expenses due to COVID-19 in all segments, partially offset by higher incentive compensation and higher corporate depreciation expense.
Interest Expense: Increased $2.6 million to $53.3 million
•The increase was primarily due to an increase in interest rates due to the refinancing of our debt in the fourth quarter of 2019, which was partially offset by lower debt levels.
Loss (Gain) on Foreign Exchange: Improved $12.5 million from an expense of $7.3 million to income of $5.2 million
•We realized foreign exchange gains of $5.2 million in the first nine months of 2020 compared to a loss of $7.3 million in the first nine months of 2019 due primarily to changes in foreign currency exchange rates on our non U.S. dollar denominated intercompany loans between our U.S. and foreign subsidiaries.
Other, Net: Decreased $1.5 million from income of $1.9 million to income of $0.4 million
•The decrease in other income is primarily due to fees related to our U.S. securitization facility and lower interest income in the current period.
Income Tax Expense: Increased $6.3 million from $5.3 million to $11.6 million
•The increase in income tax expense was primarily due to higher pretax income in the third quarter of 2020 versus the third quarter of 2019, partially offset by the discrete tax expense items in the first quarter of 2019.
•Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, global intangible low-taxed income, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
•Our effective tax rate decreased from 45% in 2019 to 30% in 2020 primarily due to the impact of discrete tax items in the first quarter of 2019.
Operating Segment Performance
The following financial results represent consolidated financial information with respect to sales from our Salt, Plant Nutrition North America and Plant Nutrition South America segments. The results of operations of the consolidated records management business and other incidental revenues include sales of $2.6 million and $2.3 million for the third quarter of 2020 and 2019, respectively, and $7.6 million and $7.1 million for the first nine months of 2020 and 2019, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.
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Salt
THREE AND NINE MONTHS ENDED SEPTEMBER 30
| 3Q 2020 | 3Q 2019 | 2020 YTD | 2019 YTD | ||||||||||||||||||||
| Salt Sales (in millions) | $ | 141.3 | $ | 159.6 | $ | 550.9 | $ | 578.6 | |||||||||||||||
| Salt Operating Earnings (in millions) | $ | 25.0 | $ | 20.6 | $ | 111.6 | $ | 87.5 | |||||||||||||||
| Salt Sales Volumes (thousands of tons) | |||||||||||||||||||||||
| Highway deicing | 1,205 | 1,403 | 5,330 | 5,811 | |||||||||||||||||||
| Consumer and industrial | 458 | 500 | 1,327 | 1,489 | |||||||||||||||||||
| Total tons sold | 1,663 | 1,903 | 6,657 | 7,300 | |||||||||||||||||||
| Average Salt Sales Price (per ton) | |||||||||||||||||||||||
| Highway deicing | $ | 55.28 | $ | 60.01 | $ | 64.41 | $ | 60.19 | |||||||||||||||
| Consumer and industrial | $ | 162.96 | $ | 150.76 | $ | 156.42 | $ | 153.67 | |||||||||||||||
| Combined | $ | 84.94 | $ | 83.84 | $ | 82.75 | $ | 79.25 | |||||||||||||||
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Salt sales decreased 11%, or $18.3 million, primarily due to lower Salt sales volumes and highway deicing average sales prices, which were partially offset by higher consumer and industrial average sales prices.
•Average sales prices contributed $0.1 million to the Salt sales decline, although the sales mix resulted in a 1% increase in combined average Salt sales prices as higher-priced consumer and industrial sales volumes were a higher proportion of total sales in the current period.
•Highway deicing average sales prices decreased 8% due to lower North American highway deicing contract prices for the 2020-2021 winter season and increased sales to chemical customers, which have a lower average sales price. Consumer and industrial average sales prices increased 8% due to price increases implemented during the period.
•Salt sales volumes decreased 13%, or 240,000 tons, and contributed $18.2 million to the sales decline. Highway deicing sales volumes decreased 14% primarily as a result of lower early fill volumes due to the milder winter weather in the first quarter of 2020 in North America, which was partially offset by higher sales volumes in the U.K and higher sales to chemical customers. Consumer and industrial sales volumes decreased 8% due to the impact of COVID-19 on our non-deicing sales and reduced pre-season demand for our consumer and industrial deicing products.
•Salt operating earnings increased 21%, or $4.4 million, due to lower per-unit product cost that resulted from higher production volumes at our Goderich mine and lower per-unit logistics costs. Prior period product costs were negatively impacted by several items including unplanned downtime at our North America mines, labor dispute settlement expense at our Goderich mine and executive transition costs.
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COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Salt sales decreased 5%, or $27.7 million, primarily due to lower Salt sales volumes, which were partially offset by higher highway deicing average sales prices in the first half of 2020 and higher consumer and industrial average sales prices.
•Salt average sales prices increased 4% and contributed $26.1 million to sales due to higher highway deicing sales prices in the first half of 2020 and higher consumer and industrial average sales prices.
•Highway deicing average sales prices increased 7% due to the impact of higher North American highway deicing contract prices for the 2019-2020 winter season realized during the first half of 2020. Consumer and industrial average sales prices increased 2% primarily due to price increases taken during 2020 and sales mix.
•Salt sales volumes decreased 9%, or 643,000 tons, and unfavorably impacted sales by $53.8 million. Highway deicing sales volumes decreased 8% primarily as result of milder winter weather in the first quarter of 2020 in North America and the U.K. Consumer and industrial sales volumes also decreased 11% due to lower first quarter sales of deicing products and lower sales of non-deicing products primarily due to COVID-19.
•Salt operating earnings increased 28%, or $24.1 million, due to higher Salt sales prices and lower per-unit logistics costs, which were partially offset by higher per-unit product cost primarily due to lower production volumes in the U.K. and our consumer and industrial plants and increased professional service fees.
Plant Nutrition North America
THREE AND NINE MONTHS ENDED SEPTEMBER 30
| 3Q 2020 | 3Q 2019 | 2020 YTD | 2019 YTD | ||||||||||||||||||||
| Plant Nutrition North America Sales (in millions) | $ | 35.2 | $ | 44.4 | $ | 150.9 | $ | 129.7 | |||||||||||||||
| Plant Nutrition North America Operating (Loss) Earnings (in millions) | $ | (6.1) | $ | 4.7 | $ | 4.2 | $ | 7.7 | |||||||||||||||
| Plant Nutrition North America Sales Volumes (thousands of tons) | 54 | 69 | 239 | 200 | |||||||||||||||||||
| Plant Nutrition North America Average Sales Price (per ton) | $ | 651 | $ | 641 | $ | 631 | $ | 648 | |||||||||||||||
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Plant Nutrition North America sales decreased 21%, or $9.2 million due to lower sales volumes, which was partially offset by higher average sales prices.
•Plant Nutrition North America sales volumes decreased 22%, or 15,000 tons due to delays in fall application of SOP as a result of drought and wildfires in the western U.S., which were partially offset by increased sales of micronutrient products and resulted in a $9.6 million decrease in sales.
•Plant Nutrition North America average sales prices increased 2% due to a higher proportion of sales from micronutrients, which have a higher sales price resulting in a $0.4 million offset to the decrease in sales. Compared to the prior year, both SOP and micronutrient prices declined.
•Plant Nutrition North America operating earnings decreased $10.8 million to a loss of $6.1 million due to lower sales volumes and higher per-unit product costs due to an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles at our Ogden facility.
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COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Plant Nutrition North America sales increased 16%, or $21.2 million due to higher sales volumes, which was partially offset by lower average sales prices.
•Plant Nutrition North America sales volumes increased 20%, or 39,000 tons, which resulted in a $25.3 million increase in sales. Sales volumes in the first half of 2019 were lower due to the cold and wet weather experienced in our key markets
•Plant Nutrition North America average sales prices decreased 3%, providing a $4.1 million offset to the increase in sales.
•Plant Nutrition North America operating earnings decreased $3.5 million to $4.2 million due to lower average sales prices and higher per-unit product costs due to an inventory adjustment of $7.4 million related to an overstatement of bulk SOP stockpiles at our Ogden facility, which was partially offset higher sales volumes, lower per-unit shipping and handling costs, lower depreciation expense and lower SG&A expenses.
Plant Nutrition South America
THREE AND NINE MONTHS ENDED SEPTEMBER 30
| 3Q 2020 | 3Q 2019 | 2020 YTD | 2019 YTD | ||||||||||||||||||||
| Plant Nutrition South America Sales (in millions) | $ | 103.3 | $ | 135.0 | $ | 243.0 | $ | 274.8 | |||||||||||||||
| Plant Nutrition South America Operating Earnings (in millions) | $ | 15.0 | $ | 22.4 | $ | 24.2 | $ | 21.5 | |||||||||||||||
| Plant Nutrition South America Sales Volumes (thousands of tons) | |||||||||||||||||||||||
| Agricultural productivity | 148 | 166 | 343 | 327 | |||||||||||||||||||
| Chemical solutions | 82 | 84 | 257 | 246 | |||||||||||||||||||
| Total tons sold | 230 | 250 | 600 | 573 | |||||||||||||||||||
| Average Plant Nutrition South America Sales Price (per ton) | |||||||||||||||||||||||
| Agricultural productivity | $ | 582 | $ | 673 | $ | 549 | $ | 635 | |||||||||||||||
| Chemical solutions | $ | 213 | $ | 275 | $ | 213 | $ | 272 | |||||||||||||||
| Combined | $ | 449 | $ | 540 | $ | 405 | $ | 479 | |||||||||||||||
COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Plant Nutrition South America sales decreased 23%, or $31.7 million, due to lower average sales prices resulting from a 38% unfavorable weighted average change in the Brazilian reais versus the U.S. dollar from the prior year and a decline in sales volumes. In local currency, sales increased by 5% due to improved sales prices in agricultural productivity and chemical solutions products.
•Plant Nutrition South America sales volumes decreased 8%, or 20,000 tons, contributing $13.0 million to the decrease in sales. Agricultural productivity sales volumes decreased 11% due to early purchasing of crop inputs in the second quarter as well as some delays in purchasing in the third quarter due to unfavorable weather conditions. Chemical solutions sales volumes decreased 2% due to lower water treatment sales.
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•A 38% weakening of the Brazilian reais caused a 17% decrease in Plant Nutrition South America average sales prices, reducing sales by $18.6 million. In local currency, a stronger mix of agricultural productivity sales resulted in a 15% increase in average sales prices.
•Plant Nutrition South America operating earnings decreased $7.4 million to $15.0 million due to a weaker Brazilian reais, lower sales volumes and higher SG&A costs, primarily from incentive compensation and professional services.
COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
•Plant Nutrition South America sales decreased $31.8 million, due to a 31% unfavorable weighted average change in the Brazilian reais versus the U.S. dollar from the prior year, which was offset by higher sales volumes.
•Plant Nutrition South America sales volumes increased 5%, or 27,000 tons, which contributed $13.2 million to sales. Agricultural productivity sales volumes increased 5% due primarily to improvements in farmer economics and affordability of fertilizer products due to foreign exchange and barter rates. Chemical solutions sales volumes increased 4% due primarily to higher sales of chlor-akali products.
•The 31% weakening of the Brazilian reais reduced sales by $44.7 million. In local currency, a stronger mix of agricultural productivity sales and price increases in most product lines resulted in a 11% increase in average sales prices.
•Plant Nutrition South America operating earnings increased $2.7 million from $21.5 million to earnings of $24.2 million due to higher sales volumes which was partially offset by a weaker Brazilian reais and increased SG&A costs due to incentive compensation and professional services.
2020 Full-Year Outlook
•After completion of the North American highway deicing bid season, we expect Salt sales volumes for 2020 to range from 10.5 million tons to 10.8 million tons.
•Plant Nutrition North America sales volumes for 2020 are expected to range from 340,000 tons to 365,000 tons.
•We expect 2020 Plant Nutrition South America sales volumes to range from 800,000 tons to 900,000 tons.
•For information about the impact of the COVID-19 pandemic on the Company, see “–COVID-19 Pandemic” and “Part II–Item 1A–Risk Factors.”
Liquidity and Capital Resources
Historically, our cash flows from operating activities have generally been adequate to fund our basic operating requirements and ongoing debt service. We have also used cash generated from operations to fund capital expenditures which strengthen our operational position, pay dividends, fund smaller acquisitions and repay our debt. To a certain extent, our ability to meet our short- and long-term liquidity and capital needs is subject to general economic, financial, competitive, legislative, regulatory and weather conditions, effects of climate change, geological variations in our mine deposits and other factors that are beyond our control. Historically, our working capital requirements have been the highest in the fourth quarter and lowest in the second quarter. When needed, we may fund short-term working capital requirements by accessing our $300 million revolving credit facility.
We have been able to manage our cash flows generated and used across Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of September 30, 2020, we had $31.8 million of cash and cash equivalents (in our Consolidated Balance Sheets) that were either held directly or indirectly by foreign subsidiaries. During the fourth quarter of 2018, we revised our permanently reinvested assertion to indicate that we expect to repatriate approximately $150 million of unremitted foreign earnings on which we have recorded a $4.8 million deferred tax liability as of September 30, 2020 for foreign withholding tax and state income tax. Due to our ability to generate adequate levels of domestic cash flow on an annual basis, it is our current intention to continue to reinvest all remaining undistributed earnings of our foreign subsidiaries indefinitely. We review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense. In addition, the amount of permanently reinvested earnings is influenced by, among other things, the profits generated by our foreign subsidiaries and the amount of investment in those same subsidiaries. The profits generated by our domestic and foreign subsidiaries are impacted by the transfer price charged on the transfer of our products between them. As discussed in Note 7 to our Consolidated Financial Statements, our calculated transfer price on certain products between one of our foreign subsidiaries and a domestic subsidiary has been challenged by Canadian federal and provincial governments. In the fourth quarter of 2017, we reached a federal settlement agreement with Canadian and U.S. tax authorities related to our transfer pricing issues for our 2007-2012 tax years. The recording of this settlement resulted in increased sales for our Canadian subsidiary of $85.7 million and increased offsetting expenses for our U.S. subsidiary in 2017 causing a domestic loss and significant foreign income. During 2018, in accordance with the settlement
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agreement, our U.S. subsidiary made intercompany cash payments of $85.7 million to our Canadian subsidiary and tax payments to Canadian taxing authorities of $17.5 million. The remaining liability was satisfied in 2019 with tax payments of $5.3 million. Corresponding tax refunds of $21.4 million were received primarily in 2019 from U.S. taxing authorities, with the remaining refund of approximately $1.6 million expected in 2020 or early 2021. Additionally during the fourth quarter of 2018, we reached a federal settlement agreement with Canadian and U.S. tax authorities on transfer pricing and management fees as part of an advanced pricing agreement that covers tax years 2013-2021. The recording of this settlement in 2018 resulted in increased sales for our Canadian subsidiary of $106.1 million and offsetting expenses for our US subsidiary causing a domestic loss and significant foreign income in 2018. During the second quarter of 2019, in accordance with the settlement agreement, our U.S. subsidiary made intercompany cash payments of $106.1 million to our Canadian subsidiary and tax payments to Canadian taxing authorities of $29.9 million with the remaining $1.5 million of tax payments to be paid during 2020. Corresponding tax refunds of $59.7 million have been received as of September 30, 2020 from U.S. taxing authorities, of which $55 million was received during the first quarter of 2020, with the remaining $1.9 million expected in 2020 or early 2021. There are ongoing challenges by Canadian provincial taxing authorities regarding our transfer prices of certain products. The final resolution of these challenges may not occur for several years. We currently expect the outcome of these matters will not have a material impact on our results of operations. However, it is possible the resolution could materially impact the amount of earnings attributable to our domestic and foreign subsidiaries, which could impact the amount of permanently reinvested foreign earnings as well as future cash flows from our domestic operations. See Note 7 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments and settlement.
A portion of our loans in Brazil are denominated in euros. We have entered into foreign currency agreements whereby we agreed to swap interest and principal payments on the loans denominated in euros for principal and interest payments denominated in Brazilian reais, the functional currency of our Brazil subsidiary. See Note 12 to our Consolidated Financial Statements for a discussion of our foreign currency agreement.
Cash and cash equivalents as of September 30, 2020 of $34.1 million, decreased $0.6 million from December 31, 2019. We generated $188.5 million of operating cash flows in the first nine months of 2020. In the first nine months of 2020, we used cash on hand and cash flows from operations to pay $40.4 million of net long-term debt, to fund capital expenditures of $62.9 million and pay dividends on our common stock of $74.2 million.
As of September 30, 2020, we had $1.36 billion of indebtedness, consisting of $250.0 million outstanding under our 4.875% Senior Notes due 2024, $500.0 million outstanding under our 6.75% Senior Notes due 2027, $492.7 million of borrowings outstanding under our senior secured credit facilities (consisting of term loans and a revolving credit facility), including $100.2 million borrowed against our revolving credit facility, and $88.5 million of Brazilian debt (see Note 8 to our Consolidated Financial Statements for more detail regarding our debt). We had $12.1 million of outstanding letters of credit as of September 30, 2020, which reduced our revolving credit facility borrowing availability to $187.7 million.
On June 30, 2020, certain of our U.S. subsidiaries entered into a three-year committed revolving accounts receivable financing facility of up to $100 million with PNC Bank, National Association, as administrative agent and lender, and PNC Capital Markets, LLC, as structuring agent. As of September 30, 2020 we had $28.0 million of outstanding loans under this accounts receivable financing facility. See Note 8 to our Consolidated Financial Statements for more information.
Our debt service obligations could, under certain circumstances, materially affect our financial condition and impair our ability to operate our business or pursue our business strategies. As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct substantially all of our consolidated operating activities and own substantially all of our operating assets. The principal source of the cash needed to pay our obligations is the cash generated from our subsidiaries’ operations and their borrowings. Our subsidiaries are not obligated to make funds available to CMI. Furthermore, we must remain in compliance with the terms of our credit agreement governing our term loans and revolving credit facility, including the total leverage ratio and interest coverage ratio, in order to make payments on our debt or pay dividends to our stockholders. We must also comply with the terms of our indenture governing our senior notes. Although we are in compliance with our debt covenants as of September 30, 2020, we can make no assurance that we will remain in compliance with these ratios nor can we make any assurance that the agreements governing the current and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund scheduled interest payments on our debt when due. If we consummate an additional acquisition, our debt service requirements could increase. Furthermore, we may need to refinance all or a portion of our indebtedness on or before maturity; however, we cannot provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
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The table below provides a summary of our cash flows by category:
| NINE MONTHS ENDED SEPTEMBER 30, 2020 | NINE MONTHS ENDED SEPTEMBER 30, 2019 | ||||
| Operating Activities: | |||||
| » Net earnings were $27.2 million. | » Net earnings were $6.4 million. | ||||
| » Non-cash depreciation and amortization expense was $103.6 million. | » Non-cash depreciation and amortization expense was $102.8 million. | ||||
| » Working capital items were a source of operating cash flows of $46.3 million. | » Working capital items were a use of operating cash flows of $21.5 million. | ||||
Investing Activities: | |||||
| » Net cash flows used by investing activities included $62.9 million of capital expenditures. | » Net cash flows used by investing activities included $71.6 million of capital expenditures. | ||||
Financing Activities: | |||||
| » Net cash flows used by financing activities included the payment of dividends of $74.2 million. | » Net cash flows used by financing activities included the payment of dividends of $73.6 million. | ||||
| » In addition, we had net payments on our debt $40.4 million. | » In addition, we had net payments on our debt of $49.3 million. | ||||
Other Matters
See Notes 7 and 9 to our Consolidated Financial Statements for a discussion regarding labor, environmental and litigation matters.
Sensitivity Analysis Related to EBITDA and Adjusted EBITDA
Management uses a variety of measures to evaluate our performance. While our consolidated financial statements, taken as a whole, provide an understanding of our overall results of operations, financial condition and cash flows, we analyze components of the consolidated financial statements to identify certain trends and evaluate specific performance areas. In addition to using U.S. GAAP financial measures, such as gross profit, net earnings and cash flows generated by operating activities, management uses EBITDA and Adjusted EBITDA. Both EBITDA and Adjusted EBITDA are non-GAAP financial measures used to evaluate the operating performance of our core business operations, because our resource allocation, financing methods, cost of capital and income tax positions are managed at a corporate level apart from the activities of the operating segments and our operating facilities are located in different taxing jurisdictions, which can cause considerable variation in net earnings. We also use these measures to assess our operating performance and return on capital, and to evaluate potential acquisitions or other capital projects. These measures are not calculated under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings, operating earnings, cash flows or other financial data prepared in accordance with U.S. GAAP or as a measure of our overall profitability or liquidity. EBITDA and Adjusted EBITDA exclude interest expense, income taxes and depreciation and amortization, each of which are an essential element of our cost structure and cannot be eliminated. Furthermore, Adjusted EBITDA excludes other cash and non-cash items including stock-based compensation, loss (gain) on foreign exchange and other expense (income). Our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt. We are also required to pay income taxes, a required and ongoing consequence of our operations. We have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues. Consequently, any measure that excludes these elements has material limitations. While EBITDA and Adjusted EBITDA are frequently used as measures of operating performance, these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation.
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The calculation of EBITDA and Adjusted EBITDA as used by management is set forth in the table below (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) earnings | $ | (2.1) | $ | 10.6 | $ | 27.2 | $ | 6.4 | |||||||||||||||
| Interest expense | 17.1 | 17.7 | 53.3 | 50.7 | |||||||||||||||||||
| Income tax (benefit) expense | (1.3) | 4.8 | 11.6 | 5.3 | |||||||||||||||||||
| Depreciation, depletion and amortization | 35.6 | 33.9 | 103.6 | 102.8 | |||||||||||||||||||
| EBITDA | 49.3 | 67.0 | 195.7 | 165.2 | |||||||||||||||||||
| Adjustments to EBITDA: | |||||||||||||||||||||||
| Stock-based compensation - non cash | 2.1 | 0.6 | 7.2 | 4.0 | |||||||||||||||||||
| Loss (gain) on foreign exchange | 4.1 | (1.8) | (5.2) | 7.3 | |||||||||||||||||||
| Executive transition costs | — | 2.3 | — | 2.3 | |||||||||||||||||||
| Logistics impact from flooding | — | — | — | 2.8 | |||||||||||||||||||
| Other income, net | (0.1) | (0.8) | (0.4) | (1.9) | |||||||||||||||||||
| Adjusted EBITDA | $ | 55.4 | $ | 67.3 | $ | 197.3 | $ | 179.7 | |||||||||||||||
Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Effects of Currency Fluctuations
Our operations outside of the U.S. are conducted primarily in Canada, Brazil and the U.K. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or one of our subsidiaries enters into either a purchase or sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly from time to time and may do so in the future. The majority of revenues and costs are denominated in U.S. dollars, with Canadian dollars, Brazilian reais and British pounds sterling also being significant. Significant changes in the value of the Canadian dollar, Brazilian reais or British pound sterling relative to the U.S. dollar could have a material effect on our financial condition.
Although inflation has not had a significant impact on our operations, our efforts to recover cost increases due to inflation may be hampered as a result of the competitive industries and countries in which we operate.
Seasonality
We experience a substantial amount of seasonality in our sales. Our sales of our salt deicing products are seasonal. Consequently, our Salt sales and operating income are generally higher in the first and fourth quarters and lower during the second and third quarters of each year. In particular, sales of highway and consumer deicing salt and magnesium chloride products vary based on the severity of the winter conditions in areas where the product is used. Following industry practice in North America, we seek to stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season.
Our plant nutrition business is also seasonal. The strongest demand for our Plant Nutrition South America products in Brazil typically occurs during the spring planting season. As a result, we and our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales season. The seasonality of this demand results in our sales volumes and net sales for our Plant Nutrition South America segment usually being the highest during the third and fourth quarters of each year (as the spring planting season begins in September in Brazil).
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our business is subject to various types of market risks that include interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has taken actions to mitigate our exposure to commodity pricing and foreign currency exchange rate risk by entering into natural gas derivative instruments and foreign currency contracts. We may take further actions to mitigate our exposure to interest rates, exchange rates and changes in the cost of transporting our products due to variations in our contracted carriers’ cost of fuel, which is typically diesel fuel. However, there can be no assurance that our hedging activities will eliminate or substantially reduce these risks. We do not enter into any financial instrument arrangements for speculative purposes. Our market risk exposure related to these items has not changed materially since December 31, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020, to ensure that information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in the legal proceedings described in Note 7 and Note 9 to our Consolidated Financial Statements and, from time to time, various routine legal proceedings and claims arising from the ordinary course of our business. These primarily involve tax assessments, disputes with former employees and contract labor, commercial claims, product liability claims, personal injury claims and workers’ compensation claims. Management cannot predict the outcome of legal proceedings and claims with certainty. Nevertheless, management believes that the outcome of legal proceedings and claims, which are pending or known to be threatened, even if determined adversely, will not, either individually or in the aggregate, have a material adverse effect on our results of operations, cash flows or financial condition. There have been no material developments since December 31, 2019 with respect to our legal proceedings, except as described in Note 7 and Note 9 to our Consolidated Financial Statements.
Item 1A. Risk Factors
For a discussion of the risk factors applicable to Compass Minerals, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented by the discussion below related to the COVID-19 pandemic.
The COVID-19 pandemic, or other outbreaks of infectious disease or similar public health threats, could materially and adversely affect our business, financial condition and results of operations.
The ongoing COVID-19 pandemic, and any other outbreaks of contagious diseases or other adverse public health developments in the United States or worldwide, could have a material adverse effect on our business, financial condition and results of operations. As an essential business, we have continued producing and delivering products that support critical industries such as transportation, agriculture, chemical, food, pharmaceutical and animal nutrition. However, COVID-19 has significantly impacted economic activity and markets worldwide in 2020, and it has and may continue to negatively affect our business in a number of ways. These effects include, but are not limited to:
•Disruptions or restrictions on our employees’ ability to work effectively due to illness, travel bans, quarantines, shelter-in-place orders or other limitations could impact our business.
•Temporary closures or disruptions at our facilities or the facilities of our customers or suppliers could reduce demand for our products or affect our ability to timely meet our customer’s orders and negatively impact our supply chain. For example, we experienced lost sales in the second and third quarter of 2020 primarily for certain customers of our non-deicing salt products due to manufacturing outages and retail disruptions. Compliance with new governmental regulations, such as social distancing regulations, could increase our operational costs. COVID-19 has not interrupted the operations of our mining and manufacturing operations in North America and Brazil; however, operations at our U.K. salt mine were idled near the end of March 2020 due to the mild 2019-2020 winter weather experienced in that market, along with U.K. government guidance on COVID-19 preventative measures, with operations resuming in mid-May 2020 using a gradual ramp up. In addition, we have incurred increased costs related to health and safety precautions we have put in place at our facilities, such as increasing sanitation of offices and common areas within our facilities.
•Our mining and manufacturing facilities rely on raw materials and components provided by our suppliers. The impacts of COVID-19 could cause delays or disruptions in our supply chain and we could experience a mining or manufacturing slow-down or seek to obtain alternate sources of supply, which may not be available or may be more expensive. Disruptions to our supply chain and business operations, or to our suppliers’ or customers’ supply chains and business operations, could include disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects on our business.
•Global health concerns, such as COVID-19, have resulted in and may continue to result in social, economic and labor instability in the countries and localities in which we or our suppliers and customers operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.
•The failure of third parties on which we rely, including our suppliers, customers, contractors, commercial banks and external business partners, to meet their respective obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, could have an adverse impact on our business, financial condition or results of operations.
•Remote work arrangements for our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more
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susceptible to hacking attacks, including phishing and other social engineering attempts that seek to exploit the COVID-19 pandemic. These risks could also impact the third parties on which we rely.
•The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global credit and financial markets, which increases the cost of capital and adversely impacts access to capital for both the Company and our customers and suppliers. Disruption and volatility in the global and financial markets or other factors may also cause adverse fluctuations in foreign currency exchange rates, particularly an increase in the value of the U.S. dollar against the Canadian dollar, the Brazilian reais or the U.K. pound sterling, which could negatively affect our business, financial condition and reported results of operations.
The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material adverse effect on us. The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impact our business, financial condition and results of operations is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects on our suppliers, third-party service providers and customers. There is also no certainty about when the adverse impacts of the COVID-19 pandemic will end.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities
The Company withheld 27,291 shares with a fair value of $1.2 million related to the vesting of restricted stock units during the first nine months of 2020. The fair value of the shares were valued at the closing price at the vesting date and represent the employee tax withholding for the employee’s compensation. These shares are not considered common stock repurchases under the Company’s equity compensation plans.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Exhibit Description | |||||||
| 101** | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (contained in Exhibit 101). | |||||||
* Filed herewith | ||||||||
** Furnished herewith | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMPASS MINERALS INTERNATIONAL, INC. | |||||||||||
| Date: November 5, 2020 | By: | /s/ James D. Standen | |||||||||
| James D. Standen | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
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