Compass Minerals International, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2023. Results are unaudited and reflect continuing operations unless otherwise noted. The business comprises Salt, Plant Nutrition, lithium development activities and, after May 5, 2023, full ownership of Fortress North America.
Financial performance
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 |
|---|
| Sales | $411.1 million | $448.5 million | $763.5 million | $780.0 million |
| Gross profit | $85.2 million | $64.6 million | $155.2 million | $124.5 million |
| Gross margin | 20.7% | 14.4% | 20.3% | 16.0% |
| Operating earnings | $47.9 million | $20.0 million | $75.8 million | $40.4 million |
| Net loss from continuing operations | $(21.6) million | $(29.0) million | $(21.9) million | $(21.1) million |
| Net loss per diluted share | $(0.53) | $(0.85) | $(0.55) | $(0.62) |
| Adjusted EBITDA from continuing operations | $77.4 million | $64.8 million | $139.2 million | $123.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $143.9 million | $145.9 million |
- Quarterly sales declined 8%, while six-month sales declined 2%. Higher pricing was more than offset by lower volumes.
- Quarterly operating earnings increased 140%; six-month operating earnings increased 88%. Salt pricing and lower logistics costs were the primary drivers.
- SG&A declined to $37.3 million in the quarter from $44.6 million, reflecting lower SEC-related legal costs, partially offset by restructuring costs.
- Effective tax rates were unusually high at 164% for the quarter and 149% for the six-month period, primarily because U.S. losses generated limited tax benefit while income was recognized in foreign jurisdictions. The company recorded an additional $15.8 million valuation allowance against U.S. deferred tax assets during the six months.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $249.7 million at March 31, 2023, compared with $46.1 million at September 30, 2022.
- Six-month operating cash flow was $143.9 million. Capital expenditures were $43.7 million, and net cash used in investing activities was $44.0 million.
- Total debt, net of issuance costs, was $825.7 million at March 31, 2023, consisting principally of $250.0 million of 4.875% senior notes due 2024, $500.0 million of 6.75% senior notes due 2027, $16.9 million of term debt and $65.9 million under the accounts receivable securitization facility.
- The company used $240.7 million of net proceeds from a private placement to Koch Minerals & Trading to reduce debt and fund lithium development. Koch obtained approximately 17% ownership and two board seats.
- The company reported a consolidated total net leverage ratio of approximately 3.52x and compliance with its debt covenants at March 31, 2023. Management stated that available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
- On May 5, 2023, the company entered into a new $575 million secured credit agreement due 2028, comprising a $375 million revolver and $200 million term loan. Proceeds were used to redeem the $250 million 2024 notes and repay the existing $16.9 million term loan.
Segment performance and changes versus prior period
| Segment | Q2 2023 sales | Q2 2022 sales | Q2 2023 operating earnings/(loss) | Q2 2022 operating earnings/(loss) |
|---|
| Salt | $360.5 million | $391.3 million | $73.1 million | $49.3 million |
| Plant Nutrition | $47.7 million | $54.3 million | $(0.7) million | $4.4 million |
- Salt: Volumes declined 17% to 4.4 million tons, primarily from lower North American highway deicing commitments. Average selling price increased 12% to $81.87 per ton, driving higher operating earnings despite lower sales.
- Plant Nutrition: Volumes declined 19% to 60,000 tons. Wet weather and flooding in California, customer uncertainty about fertilizer prices, higher production and energy costs, and less favorable geographic mix drove the segment to an operating loss. Average price increased 8% to $796 per ton.
- Prior-year results included $16.9 million of discontinued-operation earnings for the quarter and $11.4 million for the six-month period, including foreign-exchange gains and impairment-related items. No discontinued-operation earnings were reported in 2023.
- Quarterly results included approximately $3.3 million of restructuring charges, approximately $1.6 million of costs related to a small Ogden facility fire and $0.5 million of expense from de-designated natural-gas hedges.
Guidance, outlook and material risks
- Fiscal 2023 Salt volume guidance is 11.35 million to 12.2 million tons, with Salt EBITDA guidance of $215 million to $255 million.
- Fiscal 2023 Plant Nutrition volume guidance is 205,000 to 270,000 tons, with EBITDA guidance of $30 million to $60 million.
- Fiscal 2023 capital expenditures are expected to be $150 million to $175 million, including $60 million to $75 million for phase one of lithium development. Management expects lithium market entry by 2025, but total required investment remains uncertain.
- Restructuring is expected to generate approximately $17 million to $18 million of annual operating expense and adjusted EBITDA benefit beginning in fiscal 2024. An additional $0.7 million of restructuring charges was anticipated for the quarter ending June 30, 2023, with possible further charges.
- On May 5, 2023, the company acquired the remaining 55% of Fortress for approximately $26 million of upfront cash, approximately $28 million of contingent consideration in cash and/or stock, and a 10-year product-volume earn-out. Fortress was expected to contribute $20 million to $25 million of fiscal 2023 revenue and operating profit, with EBITDA in the low double-digit millions.
- Key risks include weather-driven demand and seasonality, inflation in energy, logistics and product costs, fertilizer price and volume volatility, Great Salt Lake levels and permitting, mine and operational risks, foreign exchange, debt refinancing and covenant compliance, environmental matters, litigation, and execution of the lithium and Fortress strategies.
Contingencies and controls
- Canadian provincial tax authorities have issued reassessments totaling $173.1 million, including interest, through March 31, 2023. The company disputes the reassessments, believes it is adequately reserved and has posted a $143.6 million performance bond and paid $36.7 million to the tax authorities. The ultimate outcome could be materially higher or lower than recorded reserves.
- The SEC investigation was settled in September 2022 for a $12 million civil penalty; $2 million was paid and $10 million remained payable by September 30, 2023. An independent compliance consultant was retained for approximately one year.
- Management concluded that disclosure controls and procedures were ineffective at March 31, 2023 because of material weaknesses involving privileged IT access, sales pricing and order entry, and inventory existence controls. Remediation and testing were in progress.
Investor verification checklist
- Verify Salt volume recovery, pricing, winter severity and the effect of lower North American commitments on fiscal 2023 guidance.
- Assess Plant Nutrition demand, SOP pricing, Ogden production and energy costs, California weather effects and inventory levels.
- Review the May 2023 refinancing, the redemption of the 2024 notes, interest rates, required amortization and covenant headroom.
- Monitor the Canadian tax reassessments, required collateral and potential cash or earnings impact.
- Evaluate progress and total funding needs for the lithium project and the financial contribution of the newly consolidated Fortress business.
- Confirm remediation of the three material weaknesses and whether subsequent filings report effective internal controls.
