Business Context and Reporting Period
Compass Minerals International, Inc. filed this unaudited Form 10-Q for the three and nine months ended June 30, 2023, its fiscal third quarter. The company produces salt and magnesium chloride, sulfate of potash specialty fertilizer, and fire-retardant products, and is developing a sustainable lithium resource. Results are highly seasonal, particularly for deicing salt, plant nutrition and Fortress fire-retardant products.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 |
|---|---|---|---|---|
| Sales | $207.6 million | $214.7 million | $971.1 million | $994.7 million |
| Gross profit | $34.6 million | $33.9 million | $189.8 million | $158.4 million |
| Gross margin | 17% | 16% | 20% | 16% |
| Operating earnings (loss) | $(0.6) million | $(3.5) million | $75.2 million | $36.9 million |
| Net earnings (loss) | $39.9 million | $(7.9) million | $18.0 million | $(17.6) million |
| Diluted earnings (loss) per share | $0.96 | $(0.23) | $0.44 | $(0.52) |
| Adjusted EBITDA | $28.6 million | $28.9 million | $167.8 million | $152.1 million |
| Cash flow from operations | Not separately provided | Not separately provided | $121.3 million | $148.9 million |
Quarterly net earnings included a $16.2 million non-cash gain from remeasuring the previously held Fortress investment at fair value and a $42.7 million income tax benefit. The resulting 1,525% effective tax rate was distorted by these items and the relatively small pretax loss.
- Salt sales were $155.5 million in the quarter and $824.1 million year to date. Salt operating earnings increased to $21.7 million for the quarter and $141.9 million year to date, primarily from higher pricing.
- Plant Nutrition sales were $47.5 million in the quarter and $136.8 million year to date. Plant Nutrition operating earnings declined to $2.5 million and $12.8 million, respectively.
- At June 30, 2023, cash was $58.0 million, total assets were $1.73 billion and stockholders’ equity was $536.7 million.
- Total debt was $721.0 million net of issuance costs, including $500.0 million of 6.75% senior notes due 2027, $200.0 million of term loans and $30.2 million under the accounts receivable securitization facility.
- Reported liquidity was approximately $417.9 million, consisting of cash and $359.9 million of availability under the revolving credit facility, after outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales declined 3% in the quarter and 2% year to date, primarily because of lower Plant Nutrition volumes and pricing and lower Salt volumes.
- Salt pricing increased 12% in the quarter and 11% year to date, while total Salt volumes declined 11% in the quarter and 10% year to date. Management continued to prioritize pricing over volume in highway deicing contracts.
- Plant Nutrition volumes declined 6% in the quarter and 25% year to date. Management cited adverse weather, lower fertilizer demand and customer delays while customers anticipated lower prices.
- Gross profit increased $0.7 million in the quarter and $31.4 million year to date, reflecting improved Salt pricing that more than offset weaker Plant Nutrition results.
- The company completed the acquisition of the remaining 55% of Fortress on May 5, 2023. The preliminary acquisition-date consideration was $132.4 million, including $18.9 million of net cash paid, $47.4 million of contingent consideration and the $59.6 million fair value of the previously held 45% interest.
- The company entered into a new $575 million senior secured credit agreement due 2028, used to redeem $250 million of 4.875% senior notes and repay a $16.9 million prior term loan. The weighted-average interest rate on the new term loan was approximately 7.5% at June 30, 2023.
- Year-to-date operating cash flow decreased $27.6 million, while investing cash outflows increased to $100.3 million because of capital expenditures and the Fortress acquisition.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2023 Salt sales volumes are expected to be 11.0 million to 11.55 million tons, with Salt EBITDA of $220 million to $235 million.
- Fiscal 2023 Plant Nutrition sales volumes are expected to be 200,000 to 225,000 tons, with EBITDA of $40 million to $50 million.
- Fiscal 2023 capital expenditures are expected to be $130 million to $150 million, including $40 million to $50 million for phase one of the lithium development project.
- Fortress is expected to generate $20 million to $25 million of fiscal 2023 revenue and operating profit, with EBITDA in the low-double-digit millions, assuming typical Western U.S. fire activity.
- The company expects cash flow from operations, available cash and revolver capacity to meet liquidity needs for the next 12 months. Its consolidated total net leverage ratio was approximately 3.10x at June 30, 2023, versus a 5.0x maximum covenant threshold for the quarter; the threshold steps down to 4.5x beginning with the quarter ending June 30, 2024.
- Canadian provincial tax authorities have issued reassessments totaling $180.2 million, including interest, through June 30, 2023. The company disputes the reassessments, believes it is adequately reserved, and has posted a $146.9 million performance bond and paid $37.6 million to the authorities. Management states that the ultimate effect could be material if the matters are not resolved favorably.
- The company recorded an additional $10.8 million valuation allowance against U.S. deferred tax assets because of cumulative U.S. losses.
- The company remains subject to a $10 million SEC settlement payment due no later than September 30, 2023; the full $12 million settlement penalty had previously been accrued.
- Management disclosed that disclosure controls and procedures were ineffective at June 30, 2023 because of three material weaknesses involving privileged system access, sales pricing and order entry, and inventory existence. Remediation and testing are underway, while Fortress controls were excluded from the assessment.
- Key operating risks include weather and climate variability, fertilizer pricing and demand, inflation in energy and logistics costs, foreign exchange, mine and production disruptions, debt covenant compliance, tax disputes, lithium development execution and the seasonal nature of the business.
Investor Verification Priorities
- Verify the sustainability of Salt pricing and operating earnings as lower contract volumes flow through future periods.
- Assess Plant Nutrition demand, pricing, inventory levels and the effects of weather and just-in-time customer purchasing.
- Reconcile reported net earnings and tax benefits excluding the Fortress remeasurement gain and other unusual items.
- Review Fortress’s contingent consideration, preliminary purchase-price allocation, integration progress and expected fire-season revenue.
- Monitor leverage, interest costs, covenant thresholds and refinancing requirements under the 2028 credit agreement.
- Review the status and potential cash-security requirements of the Canadian tax reassessments.
- Evaluate remediation of the three material weaknesses and the potential effect on future financial reporting.
- Confirm the capital requirements, funding plan and milestone assumptions for the lithium project.