COMPASS MINERALS INTERNATIONAL INC quarterly report, Q3 FY2022

Compass Minerals International, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Compass Minerals produces salt, magnesium chloride and sulfate of potash specialty fertilizer through its Salt and Plant Nutrition segments. The filing covers the fiscal quarter and nine months ended June 30, 2022. Fiscal 2022 began October 1, 2021, following the company’s transition to a September 30 fiscal year-end. Results are seasonal, with Salt performance generally strongest in the first half of the fiscal year.

The company completed the sale of its remaining South America chemicals business on April 20, 2022, concluding its planned exit from South America. Disposed businesses are presented as discontinued operations.

Key Financial Metrics

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Nine months ended June 30, 2022	Nine months ended June 30, 2021
Sales	$214.7 million	$199.4 million	$994.7 million	$934.1 million
Gross profit	$33.9 million	$30.2 million	$158.4 million	$197.1 million
Gross margin	16%	15%	16%	21%
Operating earnings (loss)	$(3.5) million	$0.9 million	$36.9 million	$105.0 million
Net earnings (loss) from continuing operations	$(10.7) million	$(16.4) million	$(31.8) million	$40.2 million
Net earnings (loss)	$(7.9) million	$57.1 million	$(17.6) million	$(129.2) million
Diluted EPS from continuing operations	$(0.32)	$(0.49)	$(0.94)	$1.15
Adjusted EBITDA from continuing operations	$28.9 million	$33.3 million	$152.1 million	$207.8 million

Revenue: Quarterly sales increased 8%; nine-month sales increased 6%. Quarterly Salt sales rose 10% to $156.2 million, while Plant Nutrition sales rose 3% to $55.6 million. Nine-month Salt sales increased 11% to $821.4 million, but Plant Nutrition sales declined 11% to $164.5 million.
Profitability: Quarterly gross profit increased despite cost inflation, but operating results turned to a loss because of higher Salt costs and corporate expenses. Nine-month gross profit and operating earnings declined substantially.
Cash flow: Nine-month net cash provided by operating activities was $148.9 million, compared with $197.1 million in the prior period. Continuing-operations operating cash flow was $139.4 million. Capital expenditures were $68.9 million, and cash at June 30, 2022 was $47.2 million.
Liquidity and debt: Total debt was $885.9 million net of issuance costs, compared with $935.4 million at September 30, 2021. Principal debt outstanding before issuance costs was $894.8 million. Revolving credit availability was $193.2 million after $13.8 million of letters of credit. Management stated that available cash, operating cash flow and revolver capacity should meet liquidity needs for the next 12 months.
Balance sheet: Total assets were $1.577 billion and stockholders’ equity was $300.9 million at June 30, 2022. Inventory declined to $268.9 million from $321.7 million at September 30, 2021, primarily reflecting seasonal Salt inventory sales.

Material Changes Versus the Prior Comparable Period

Salt operating earnings declined 35% for both the quarter and nine-month period. Higher freight, energy, materials and other product costs, along with additional logistics costs following the Cote Blanche mine maintenance outage, more than offset higher volumes and pricing.
Plant Nutrition operating earnings improved to $10.6 million for the quarter and $24.5 million for the nine months, compared with $0.7 million and $9.3 million, respectively. Higher SOP pricing offset lower volumes and higher unit costs.
Plant Nutrition sales volumes fell 31% year to date because feedstock inconsistencies at the Ogden facility reduced production and inventory available for sale. Average Plant Nutrition selling prices increased 29% year to date.
Corporate and other expenses increased because of the SEC investigation, legal and consulting costs, executive transition costs and lithium development expenses.
Interest expense declined to $13.4 million for the quarter and $41.2 million year to date, primarily because of lower borrowings.
Foreign exchange results improved to a $6.1 million quarterly gain and a $3.5 million year-to-date gain, compared with losses in the prior-year periods.
The company recorded a $30.4 million valuation allowance against deferred tax assets, contributing to year-to-date income tax expense of $28.1 million despite a pretax loss from continuing operations.
Discontinued operations generated $2.8 million of quarterly earnings and $14.2 million of year-to-date earnings, versus $73.5 million and a $169.4 million loss, respectively, in the prior-year periods. The current period includes the South America chemicals business only through its April 20 sale date.
The company invested $46.3 million in equity-method investments during the nine months, including additional investment in Fortress. Its total Fortress investment was $50 million for an approximately 45% ownership interest.

Guidance, Outlook, Risks and Unusual Items

Fiscal 2022 outlook: Salt sales volumes are expected to range from 12.3 million to 12.6 million tons; Plant Nutrition volumes are expected to range from 270,000 to 280,000 tons. Capital expenditures are expected to be approximately $100 million.
Management expects continued effects from Ogden feedstock inconsistencies, including possible production and cost impacts. The company expects to spend $5 million to $7 million in fiscal 2022 on a direct lithium extraction plant and targets lithium market entry by 2025, although total required investment is not yet known.
Inflation increased logistics costs by approximately $21 million to $23 million and product costs by approximately $14 million to $16 million during the nine months. Management states that price increases have only partially recovered these pressures.
The SEC is investigating disclosures concerning the Goderich mine, former South American businesses, related accounting and internal control matters, and Salt interim inventory valuation methodology. The company recorded a $12 million contingent loss accrual at June 30, 2022, but the ultimate amount and timing remain uncertain and could materially affect results, cash flows or financial position.
Canadian provincial tax authorities have issued reassessments totaling $173.9 million, including interest, for fiscal years 2002–2017. The company disputes the reassessments, has posted a $133.1 million performance bond and paid $38.5 million to tax authorities, and states that it has adequately reserved for the matters.
The June 2022 credit agreement amendment increased the permitted consolidated total net leverage ratio to 5.5x through fiscal 2022, stepping down to 4.5x by June 30, 2024. The company reported an approximately 4.4x ratio at June 30, 2022 and was in compliance with its covenants.
Key operating risks include severe or mild winter weather, mine and facility disruptions, labor negotiations, energy and transportation costs, feedstock availability, foreign exchange, inflation, climate change, debt refinancing, litigation and regulatory investigations.
The quarterly dividend was reduced by approximately 80% in November 2021 to preserve liquidity and support investment.

Important Facts for Investors to Verify

Progress and potential financial resolution of the SEC investigation, including whether the $12 million accrual is sufficient.
Status and ultimate exposure from the Canadian tax reassessments and related collateral requirements.
Compliance with leverage and other debt covenants as the permitted leverage thresholds step down.
Ogden feedstock reliability, Plant Nutrition production volumes and the sustainability of higher SOP pricing.
Salt cost recovery, freight and energy inflation, and the financial effects of future mine maintenance or operational disruptions.
Actual fiscal 2022 volumes, capital expenditures and cash flow relative to management’s outlook.
Capital requirements, permitting and commercial feasibility of the lithium development plan and Fortress investment.
Seasonality and the effect of winter weather on Salt volumes, inventory, receivables and operating cash flow.