Compass Minerals International, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
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 three and six months ended March 31, 2022, within the fiscal year ending September 30, 2022. Results are seasonal, with Salt sales and operating income generally concentrated in the first half of the fiscal year.
The Company continued executing its plan to exit South America. The South America chemicals business was sold on April 20, 2022, after the quarter-end, for approximately $51.0 million of gross proceeds, subject to post-closing adjustment.
Key financial metrics
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Six months ended March 31, 2022 | Six months ended March 31, 2021 |
|---|---|---|---|---|
| Sales | $448.5 million | $425.5 million | $780.0 million | $734.7 million |
| Gross profit | $64.6 million | $108.4 million | $124.5 million | $166.9 million |
| Gross margin | 14.4% | 25.5% | 16.0% | 22.7% |
| Operating earnings | $20.0 million | $76.0 million | $40.4 million | $104.1 million |
| Net earnings from continuing operations | $(29.0) million | $41.9 million | $(21.1) million | $56.6 million |
| Net loss | $(12.1) million | $(214.4) million | $(9.7) million | $(186.3) million |
| Diluted net loss per share | $(0.36) | $(6.32) | $(0.29) | $(5.50) |
| Adjusted EBITDA from continuing operations | $64.8 million | $112.5 million | $123.2 million | $174.5 million |
Six-month operating cash flow was $145.9 million, compared with $186.9 million in the prior-year period. Continuing-operations cash flow was $140.6 million. Capital expenditures were $43.5 million, equity-method investments were $46.3 million, and financing activities used $25.9 million, including $10.5 million of dividends and $14.5 million of net debt repayment.
Cash and cash equivalents totaled $44.9 million for continuing operations at March 31, 2022, compared with $18.1 million on the balance sheet at September 30, 2021. Total debt was $922.2 million net of issuance costs, or $931.5 million before issuance costs. The revolving credit facility had $29.0 million drawn and $13.8 million of letters of credit outstanding, leaving reported borrowing capacity of $257.2 million.
Material changes versus the prior comparable period
- Quarterly sales increased 5%, while six-month sales increased 6%, primarily from higher Salt volumes and higher Plant Nutrition pricing.
- Quarterly operating earnings declined 74% and six-month operating earnings declined 61%. Gross margin fell to 14.4% from 25.5% in the quarter and to 16.0% from 22.7% year to date.
- Salt operating earnings declined to $49.3 million from $91.6 million for the quarter and to $88.7 million from $136.1 million year to date. Higher freight, energy, product and other logistics costs, lower highway deicing prices and a Cote Blanche mine maintenance outage materially pressured results.
- Salt volumes increased 6% for the quarter and 12% year to date. Highway deicing prices declined 3% in both comparative periods, while consumer and industrial pricing increased.
- Plant Nutrition quarterly sales were essentially flat at $54.3 million, as a 28% increase in average selling price offset lower volumes. Year-to-date sales declined 17% to $108.9 million, while operating earnings increased to $13.9 million from $8.6 million due primarily to higher pricing.
- Plant Nutrition volumes declined 21% for the quarter and 34% year to date because feedstock inconsistencies at the Ogden facility reduced production and available inventory.
- Corporate expenses increased, including an $8.0 million contingent loss accrual related to the SEC investigation, additional legal expenses, executive transition costs and lithium development costs.
- Income tax expense increased to $30.4 million for the quarter and $29.2 million year to date, including a $28.0 million valuation allowance against deferred tax assets. Management expects additional valuation allowances in each of the next two quarters if earnings track current expectations.
- Discontinued operations generated $16.9 million of quarterly earnings and $11.4 million of year-to-date earnings, compared with substantial losses in the prior-year periods that included major impairment charges.
Guidance, outlook and management commentary
- Fiscal 2022 Salt sales volume guidance is 12.2 million to 12.7 million tons.
- Fiscal 2022 Plant Nutrition sales volume guidance is 270,000 to 290,000 tons, with continued risk from Ogden feedstock inconsistencies and related costs.
- 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 cash flow from operations, available cash and revolver capacity to meet liquidity needs over the next 12 months, but expects inflation and transportation costs to remain significant pressures.
- The Company expects to pursue lithium market entry by 2025, although total required capital and other expenditures remain uncertain.
- The dividend was reduced by approximately 80% in November 2021 to preserve liquidity and support investment in core assets and strategic expansion.
Risks, contingencies and unusual items
- The Company was in compliance with debt covenants at March 31, 2022, with a reported total leverage ratio of approximately 4.0x against a 4.5x maximum. Management believes inflation and higher costs could cause a covenant breach by the third fiscal quarter. It is seeking a lender waiver or amendment, but there is no assurance one will be granted. A breach could trigger acceleration and cross-defaults.
- The SEC is investigating disclosures concerning the Goderich mine, former South American businesses, accounting and internal controls, including Salt interim inventory valuation. The Company recorded an $8.0 million contingent loss accrual, but states that the ultimate loss could differ materially.
- Canadian provincial tax authorities have issued reassessments totaling $172.6 million, including interest, through March 31, 2022. The Company disputes the reassessments, has reserved for them, and has posted a $137.4 million performance bond and paid $39.8 million to the authorities.
- Inflation, freight and energy costs have only been partially recovered through pricing. Other principal risks include weather and seasonality, mine and production disruptions, labor negotiations, foreign exchange, climate-related effects, supply-chain constraints, litigation and regulatory investigations.
- The collective bargaining agreement at the Cote Blanche mine expired March 31, 2022 and was extended while negotiations continued.
- The Company invested $50.0 million in Fortress North America, representing approximately 45% ownership, to support development of magnesium chloride-based fire-retardant products.
Important facts for investors to verify
- Whether lenders granted the requested covenant waiver or amendment and whether leverage remained within limits after the April 2022 debt repayment.
- The final proceeds and post-closing adjustment from the April 20, 2022 South America chemicals sale, and the effect on debt and liquidity.
- The outcome, timing and potential financial exposure of the SEC investigation and related Wells Notices.
- Future valuation allowances, effective tax rates and developments in the Canadian tax reassessment dispute.
- Whether Ogden feedstock and production constraints improve sufficiently to support Plant Nutrition volume guidance.
- The extent to which Salt pricing, freight, energy and logistics costs affect margins during the remainder of fiscal 2022.
- Actual fiscal 2022 capital spending and the funding requirements for lithium development and other strategic projects.