Compass Minerals International, Inc. — Fiscal 2022 First Quarter Summary
Business context and reporting period
This Form 10-Q covers the three months ended December 31, 2021, the first quarter of fiscal 2022. The company changed its fiscal year-end from December 31 to September 30; the comparable period is the three months ended December 31, 2020. Continuing operations comprise the Salt and Plant Nutrition segments. Certain South American and North American micronutrient businesses are classified as discontinued operations and held for sale.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $331.5 million | $309.2 million | Up 7% |
| Gross profit | $59.9 million | $58.5 million | Up 2% |
| Gross margin | 18.1% | 18.9% | Down approximately 1 percentage point |
| Operating earnings | $20.4 million | $28.1 million | Down 27% |
| Net earnings from continuing operations | $7.9 million | $14.7 million | Down 46% |
| Net earnings/(loss) | $2.4 million | $28.1 million | Down $25.7 million |
| Diluted EPS from continuing operations | $0.23 | $0.42 | Down $0.19 |
| Diluted EPS | $0.07 | $0.81 | Down $0.74 |
| Adjusted EBITDA from continuing operations | $58.4 million | $62.0 million | Down 6% |
| Cash used in operating activities | $14.3 million | $13.3 million | Use increased $1.0 million |
Continuing-operations operating margin was approximately 6.2%, compared with 9.1% in the prior period. Net earnings from discontinued operations were a $5.5 million loss versus $13.4 million of earnings in the prior-year quarter, including an $8.4 million impairment adjustment for the remaining South America chemicals business.
- Salt: Sales increased 20% to $273.9 million, with volumes up 24% to 3.44 million tons. Operating earnings declined 11% to $39.4 million because higher freight, logistics, consumer and industrial product costs, inflation and lower highway deicing prices more than offset volume growth.
- Plant Nutrition: Sales declined 30% to $54.6 million as volumes fell to 83,000 tons from 143,000 tons. Higher average selling prices, up 20% to $660 per ton, drove operating earnings up to $9.5 million from $3.3 million.
- Cash and liquidity: Cash and cash equivalents were $20.3 million for continuing operations at December 31, 2021. Total reported cash was $28.9 million, including $8.6 million associated with businesses held for sale. The company had $1.005 billion of net long-term debt and $158.6 million of available revolving-credit capacity after letters of credit.
- Debt: Total debt increased from $935.4 million at September 30, 2021 to $1.0049 billion at December 31, 2021, primarily due to revolving credit and accounts-receivable facility borrowings. The company reported compliance with its debt covenants.
- Investing and financing: Investing cash use was $41.2 million, including $28.2 million for equity-method investments and $14.5 million of capital expenditures. Financing cash provided was $63.3 million, including net debt proceeds of $68.8 million and $5.3 million of dividends paid.
Material changes versus the prior comparable period
- Sales growth was driven by stronger Salt volumes, while Plant Nutrition volumes were materially lower because of feedstock inconsistencies and reduced available inventory.
- Profitability declined despite higher sales. Freight, energy, materials and other inflationary costs were not fully recovered through pricing, particularly in Salt.
- Corporate and other expenses increased, including executive transition costs, lithium-project expenses and legal costs related to the SEC investigation.
- Interest expense decreased to $13.9 million from $15.5 million, and foreign-exchange results improved from a $6.2 million loss to a $0.4 million gain.
- The prior-year tax benefit was unusually high because of domestic tax-reserve releases. The current-quarter tax benefit was $1.2 million, and the effective tax rate was an 18% benefit versus a 133% benefit in the prior period.
- The company reduced its quarterly dividend to $0.15 per share, an approximately 80% reduction announced in November 2021, to preserve liquidity for operations and strategic investments.
- The company invested $32 million in Fortress North America by December 31, 2021 and invested the remaining $18 million of the planned $50 million investment in January 2022, increasing its ownership interest to approximately 45%.
Guidance, outlook, risks and unusual items
- Fiscal 2022 Salt sales-volume guidance is 11.8 million to 12.8 million tons; Plant Nutrition volume guidance is 280,000 to 320,000 tons.
- Fiscal 2022 capital expenditures are expected to be $100 million to $110 million, including approximately $15 million for the Cote Blanche barge dock and approximately $15 million for a direct lithium-extraction plant. Management expects potential lithium-product market entry by 2025, but the total required investment remains unclear.
- Management expects cash flow from operations, cash on hand and available revolving-credit capacity to meet liquidity needs over the next 12 months, while noting substantial seasonal working-capital requirements and dependence on winter weather.
- The company continues to pursue the sale of its South America chemicals business, which remains classified as held for sale. The filing does not provide a definitive closing date or expected proceeds.
- Canadian provincial tax authorities have issued reassessments totaling $167.0 million, including interest, through December 31, 2021. The company disputes the reassessments, has recorded reserves, posted a $134.3 million performance bond and paid $38.8 million to the authorities. Management expects no material outcome but acknowledges the potential impact could be material.
- The SEC Division of Enforcement is investigating disclosures concerning the Goderich mine, South American operations, accounting and internal controls. The company and several current or former executives received Wells Notices. The outcome and potential financial impact cannot be predicted.
- Key operating risks include winter-weather variability, seasonality, inflation and freight costs, energy prices, supply constraints, foreign-exchange exposure, mine and geological conditions, leverage, environmental matters, litigation, climate change and COVID-19-related disruptions.
- The company stated that its previously reported material weakness involving interim inventory valuation was remediated during the quarter through updated policies and enhanced controls.
Most important facts for investors to verify
- Whether Salt pricing and cost-recovery actions can offset freight, energy and other inflationary pressures.
- Whether Plant Nutrition feedstock availability and volumes recover within the fiscal 2022 guidance range.
- Progress, valuation and closing prospects for the South America chemicals divestiture, including further impairment exposure.
- The outcome and potential monetary or disclosure consequences of the SEC investigation and Wells Notices.
- The ultimate resolution and required collateral for the Canadian tax reassessments.
- Liquidity and covenant headroom as seasonal working-capital needs, capital expenditures, Fortress funding and lithium investments continue.
- Actual fiscal 2022 cash generation and capital spending versus the $100 million to $110 million capital-expenditure outlook.