COMPASS MINERALS INTERNATIONAL INC - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________________
Commission File Number 001-31921
Compass Minerals International, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 36-3972986 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
9900 West 109th Street
Suite 100
Overland Park, KS 66210
(913) 344-9200
(Address of principal executive offices, zip code and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common stock, $0.01 par value | CMP | The New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such | ||||||||||||||
reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | ☐ | ||||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that | ||||||||||||||
| the registrant was required to submit such files) | Yes | ☑ | No | ☐ | ||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||||||||||||||||||||
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | |||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ | ||||||||||
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of May 6, 2022, was 34,148,370 shares.
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page | |||||||
| PART II. OTHER INFORMATION | ||||||||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| (Unaudited) | |||||||||||
| March 31, 2022 | September 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 44.9 | $ | 18.1 | |||||||
Receivables, less allowance for doubtful accounts of $3.9 at March 31, 2022 and $3.0 at September 30, 2021 | 197.3 | 132.8 | |||||||||
| Inventories | 210.7 | 321.7 | |||||||||
| Current assets held for sale | 11.0 | 9.9 | |||||||||
| Other | 58.3 | 48.9 | |||||||||
| Total current assets | 522.2 | 531.4 | |||||||||
| Property, plant and equipment, net | 821.1 | 830.5 | |||||||||
| Intangible assets, net | 48.4 | 48.8 | |||||||||
| Goodwill | 57.9 | 57.8 | |||||||||
| Equity method investments | 49.7 | 5.8 | |||||||||
| Other | 147.9 | 156.6 | |||||||||
| Total assets | $ | 1,647.2 | $ | 1,630.9 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | — | $ | — | |||||||
| Accounts payable | 114.0 | 90.0 | |||||||||
| Accrued salaries and wages | 15.4 | 20.7 | |||||||||
| Income taxes payable | 0.6 | — | |||||||||
| Accrued interest | 14.1 | 14.3 | |||||||||
| Current liabilities held for sale | 12.5 | 9.6 | |||||||||
| Accrued expenses and other current liabilities | 67.6 | 60.8 | |||||||||
| Total current liabilities | 224.2 | 195.4 | |||||||||
| Long-term debt, net of current portion | 922.2 | 935.4 | |||||||||
| Deferred income taxes, net | 65.2 | 57.6 | |||||||||
| Other noncurrent liabilities | 149.1 | 149.4 | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock: $0.01 par value, 200,000,000 authorized shares; 35,367,264 issued shares | 0.4 | 0.4 | |||||||||
| Additional paid-in capital | 144.1 | 136.3 | |||||||||
Treasury stock, at cost — 1,254,354 shares at March 31, 2022 and 1,313,690 shares at September 30, 2021 | (5.9) | (5.5) | |||||||||
| Retained earnings | 252.3 | 272.4 | |||||||||
| Accumulated other comprehensive loss | (104.4) | (110.5) | |||||||||
| Total stockholders’ equity | 286.5 | 293.1 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,647.2 | $ | 1,630.9 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share and per share data)
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales | $ | 448.5 | $ | 425.5 | $ | 780.0 | $ | 734.7 | |||||||||||||||
| Shipping and handling cost | 160.1 | 123.1 | 255.8 | 198.8 | |||||||||||||||||||
| Product cost | 223.8 | 194.0 | 399.7 | 369.0 | |||||||||||||||||||
| Gross profit | 64.6 | 108.4 | 124.5 | 166.9 | |||||||||||||||||||
| Selling, general and administrative expenses | 44.6 | 32.4 | 84.1 | 62.8 | |||||||||||||||||||
| Operating earnings | 20.0 | 76.0 | 40.4 | 104.1 | |||||||||||||||||||
| Other expense: | |||||||||||||||||||||||
| Interest expense | 13.9 | 15.7 | 27.8 | 31.2 | |||||||||||||||||||
| Loss on foreign exchange | 3.0 | 2.1 | 2.6 | 8.3 | |||||||||||||||||||
| Other expense, net | 1.7 | 0.3 | 1.9 | 0.4 | |||||||||||||||||||
| Earnings from continuing operations before income taxes | 1.4 | 57.9 | 8.1 | 64.2 | |||||||||||||||||||
| Income tax expense from continuing operations | 30.4 | 16.0 | 29.2 | 7.6 | |||||||||||||||||||
| Net (loss) earnings from continuing operations | (29.0) | 41.9 | (21.1) | 56.6 | |||||||||||||||||||
| Net earnings (loss) from discontinued operations | 16.9 | (256.3) | 11.4 | (242.9) | |||||||||||||||||||
| Net loss | $ | (12.1) | $ | (214.4) | $ | (9.7) | $ | (186.3) | |||||||||||||||
| Basic net (loss) earnings from continuing operations per common share | $ | (0.85) | $ | 1.22 | $ | (0.62) | $ | 1.64 | |||||||||||||||
| Basic net earnings (loss) from discontinued operations per common share | 0.49 | (7.54) | 0.33 | (7.15) | |||||||||||||||||||
| Basic net loss per common share | $ | (0.36) | $ | (6.32) | $ | (0.29) | $ | (5.50) | |||||||||||||||
| Diluted net (loss) earnings from continuing operations per common share | $ | (0.85) | $ | 1.21 | $ | (0.62) | $ | 1.64 | |||||||||||||||
| Diluted net earnings (loss) from discontinued operations per common share | 0.49 | (7.54) | 0.33 | (7.15) | |||||||||||||||||||
| Diluted net loss per common share | $ | (0.36) | $ | (6.32) | $ | (0.29) | $ | (5.50) | |||||||||||||||
| Weighted-average common shares outstanding (in thousands): | |||||||||||||||||||||||
| Basic | 34,103 | 33,974 | 34,081 | 33,966 | |||||||||||||||||||
| Diluted | 34,113 | 34,012 | 34,100 | 33,994 | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in millions)
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | (12.1) | $ | (214.4) | $ | (9.7) | $ | (186.3) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Unrealized gain (loss) from change in pension obligations, net of tax of $0.0 for the three and six months ended March 31, 2022, and $(0.1) and $0.8 for the three and six months ended March 31, 2021, respectively | 0.1 | 0.2 | 0.2 | (2.8) | |||||||||||||||||||
Unrealized gain (loss) on cash flow hedges, net of tax of $(0.3) and $0.4 for the three and six months ended March 31, 2022, respectively, and $0.0 and $(0.3) for the three and six months ended March 31, 2021, respectively | 1.0 | 0.1 | (1.0) | 0.8 | |||||||||||||||||||
| Cumulative translation adjustment | 10.7 | (20.5) | 6.9 | 34.7 | |||||||||||||||||||
| Comprehensive loss | $ | (0.3) | $ | (234.6) | $ | (3.6) | $ | (153.6) | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three and six months ended March 31, 2022 and 2021
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||||||||
Balance, September 30, 2021 | $ | 0.4 | $ | 136.3 | $ | (5.5) | $ | 272.4 | $ | (110.5) | $ | 293.1 | |||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | 2.4 | (5.7) | (3.3) | |||||||||||||||||||||||||||||
Dividends on common stock ($0.15 per share) | — | (0.1) | — | (5.2) | — | (5.3) | |||||||||||||||||||||||||||||
| Stock options exercised, net of shares withheld for taxes | — | 0.2 | — | — | — | 0.2 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 3.3 | — | — | — | 3.3 | |||||||||||||||||||||||||||||
Balance, December 31, 2021 | $ | 0.4 | $ | 139.7 | $ | (5.5) | $ | 269.6 | $ | (116.2) | $ | 288.0 | |||||||||||||||||||||||
| Comprehensive (loss) income | — | — | — | (12.1) | 11.8 | (0.3) | |||||||||||||||||||||||||||||
Dividends on common stock ($0.15 per share) | — | — | — | (5.2) | — | (5.2) | |||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | (0.1) | (0.4) | — | — | (0.5) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 4.5 | — | — | — | 4.5 | |||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | 0.4 | $ | 144.1 | $ | (5.9) | $ | 252.3 | $ | (104.4) | $ | 286.5 | |||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||||||||
Balance, September 30, 2020 | $ | 0.4 | $ | 124.5 | $ | (4.4) | $ | 556.1 | $ | (356.7) | $ | 319.9 | |||||||||||||||||||||||
| Comprehensive income | — | — | — | 28.1 | 52.9 | 81.0 | |||||||||||||||||||||||||||||
Dividends on common stock ($0.72 per share) | — | 0.2 | — | (25.1) | — | (24.9) | |||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | (0.1) | — | — | — | (0.1) | |||||||||||||||||||||||||||||
| Stock options exercised, net of shares withheld for taxes | — | 0.2 | — | — | — | 0.2 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 2.2 | — | — | — | 2.2 | |||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | 0.4 | $ | 127.0 | $ | (4.4) | $ | 559.1 | $ | (303.8) | $ | 378.3 | |||||||||||||||||||||||
| Comprehensive loss | — | — | — | (214.4) | (20.2) | (234.6) | |||||||||||||||||||||||||||||
Dividends on common stock ($0.72 per share) | — | 0.1 | — | (24.2) | — | (24.1) | |||||||||||||||||||||||||||||
| Stock options exercised, net of shares withheld for taxes | — | 0.2 | — | — | — | 0.2 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 4.0 | — | — | — | 4.0 | |||||||||||||||||||||||||||||
Balance, March 31, 2021 | $ | 0.4 | $ | 131.3 | $ | (4.4) | $ | 320.5 | $ | (324.0) | $ | 123.8 | |||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| Six Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (9.7) | $ | (186.3) | |||||||
| Adjustments to reconcile net earnings to net cash flows provided by operating activities: | |||||||||||
| Depreciation, depletion and amortization | 56.2 | 68.9 | |||||||||
| Amortization of deferred financing costs | 1.5 | 1.6 | |||||||||
| Stock-based compensation | 7.8 | 6.2 | |||||||||
| Deferred income taxes | 16.2 | (0.6) | |||||||||
| Unrealized foreign exchange (gain) loss | (15.2) | 11.2 | |||||||||
| Loss on impairment of long-lived assets | 24.7 | 253.1 | |||||||||
| Other, net | 3.1 | 0.5 | |||||||||
| Changes in operating assets and liabilities, net of sale: | |||||||||||
| Receivables | (63.7) | (73.7) | |||||||||
| Inventories | 108.9 | 91.3 | |||||||||
| Other assets | (9.0) | 13.3 | |||||||||
| Accounts payable and accrued expenses and other current liabilities | 25.9 | 11.7 | |||||||||
| Other liabilities | (0.8) | (10.3) | |||||||||
| Net cash provided by operating activities | 145.9 | 186.9 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (43.5) | (40.2) | |||||||||
| Equity method investments | (46.3) | (2.8) | |||||||||
| Other, net | 1.4 | 3.8 | |||||||||
| Net cash used in investing activities | (88.4) | (39.2) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from revolving credit facility borrowings | 221.3 | 162.0 | |||||||||
| Principal payments on revolving credit facility borrowings | (280.7) | (262.2) | |||||||||
| Proceeds from issuance of long-term debt | 50.8 | 119.5 | |||||||||
| Principal payments on long-term debt | (5.9) | (87.6) | |||||||||
| Dividends paid | (10.5) | (49.0) | |||||||||
| Deferred financing costs | — | (0.1) | |||||||||
| Proceeds from stock option exercised | 0.2 | 0.2 | |||||||||
| Shares withheld to satisfy employee tax obligations | (0.5) | (0.1) | |||||||||
| Other, net | (0.6) | (0.9) | |||||||||
| Net cash used in financing activities | (25.9) | (118.2) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 2.4 | — | |||||||||
| Net change in cash and cash equivalents | 34.0 | 29.5 | |||||||||
| Cash and cash equivalents, beginning of the year | 21.0 | 34.1 | |||||||||
| Cash and cash equivalents, end of period | 55.0 | 63.6 | |||||||||
| Less: cash and cash equivalents included in current assets held for sale | (10.1) | (20.8) | |||||||||
| Cash and cash equivalents of continuing operations, end of period | $ | 44.9 | $ | 42.8 | |||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | 26.7 | $ | 32.3 | |||||||
| Income taxes paid, net of refunds | $ | 13.1 | $ | 22.9 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies and Basis of Presentation:
Compass Minerals International, Inc. (“CMI”), through its subsidiaries (collectively, the “Company”), is a leading producer of essential minerals focused on safely delivering where and when it matters to help solve nature’s challenges for customers and communities. The Company’s salt products help keep roadways safe during winter weather and are used in numerous other consumer, industrial and agricultural applications. Its plant nutrition business is the leading producer of sulfate of potash (“SOP”), which is used in the production of specialty fertilizers for high-value crops and turf. The Company’s principal products are salt, consisting of sodium chloride and magnesium chloride, and SOP. The Company’s production sites are located in the United States (“U.S.”), Canada and the United Kingdom (“U.K.”). The Company also provides records management services to businesses located in the U.K. Except where otherwise noted, references to North America include only the continental U.S. and Canada, and references to the U.K. include only England, Scotland and Wales. References to “Compass Minerals,” “our,” “us” and “we” refer to CMI and its consolidated subsidiaries.
CMI is a holding company with no significant operations other than those of its wholly-owned subsidiaries. The consolidated financial statements include the accounts of CMI and its wholly-owned domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company uses the equity method of accounting for equity securities when it has significant influence or when it has more than a minor ownership interest or more than minor influence over an investee’s operations but does not have a controlling financial interest. Initial investments are recorded at cost (including certain transaction costs) and are adjusted by the Company’s share of the investees’ undistributed earnings and losses. Any difference in the Company’s cost in comparison to its underlying interest in the net assets of equity method companies that is attributable to intangible assets is amortized over the estimated useful lives of the related intangible assets.
The Company’s investment in Fortress North America, LLC (“Fortress”) is accounted for under the equity method of accounting. On November 2, 2021, the Company announced a $45 million equity investment in Fortress, building upon a previous $5 million investment as part of the Company’s strategy to strengthen and grow its essential minerals business. Fortress is a development stage company that intends to achieve commercialization of its magnesium chloride-based fire-retardant products to help combat wildfires. As of March 31, 2022, the Company had invested $50 million in Fortress in exchange for an ownership interest of approximately 45%. Under the equity method of accounting, the Company reflects its proportionate share of the income or loss of Fortress, net of tax, in its results each period on a one quarter reporting lag. The Company recorded its share of Fortress’ net losses of $1.2 million and $1.3 million, including immaterial basis difference adjustments, in the three and six months ended March 31, 2022, respectively. Fortress’ losses were immaterial for each period presented in fiscal 2021.
The carrying value of the Company’s equity investment in Fortress is in excess of its share of Fortress’s net book value by approximately $30 million as of March 31, 2022. The Company’s initial estimates indicate this primarily represents incremental value attributable to intangible assets and goodwill that has not been recognized in the financial statements of Fortress. The Company has the right to purchase units from other Fortress unit holders, subject to certain conditions. Additionally, the Company has the right of first refusal to purchase all or any portion of any available Fortress units, subject to certain conditions.
The balance of the Company’s net investment in Fortress of $48.3 million and $3.9 million is recorded in equity method investments in the Consolidated Balance Sheets as of March 31, 2022 and September 30, 2021, respectively. The Company also has other immaterial equity investments of $1.4 million and $1.9 million as of March 31, 2022 and September 30, 2021, respectively, for which it has recorded $0.5 million and $0.8 million for its share of losses and immaterial basis difference adjustments in the three and six months ended March 31, 2022, respectively.
During 2021, the Company transitioned to a September 30 fiscal year end. The nine-month period from January 1, 2021 to September 30, 2021, served as a transition period, and the Company filed one-time, nine-month transitional financial statements for the transition period in a Transition Report on Form 10-KT filed with the Securities and Exchange Commission (the “SEC”) on November 30, 2021. Prior to the transition period, the Company’s fiscal year was the calendar year ending on December 31. The Company’s fiscal year 2022 (or “fiscal 2022”) commenced on October 1, 2021 and ends on September 30, 2022.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
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consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the transition period ended September 30, 2021, as filed with the SEC in its Transition Report on Form 10-KT on November 30, 2021. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included.
The Company experiences a substantial amount of seasonality in its sales, including its deicing salt product sales. As a result, Salt segment sales and operating income are generally higher in the first and second fiscal quarters (ending December 31 and March 31) and lower during the third and fourth fiscal quarters (ending June 30 and September 30) of each year. In particular, sales of highway and consumer deicing salt and magnesium chloride products vary based on the severity of the winter conditions in areas where the products are used. Following industry practice in North America and the U.K., the Company seeks to stockpile sufficient quantities of deicing salt throughout the first, third and fourth fiscal quarters (ending December 31, June 30 and September 30) to meet the estimated requirements for the winter season. Production of deicing salt can also vary based on the severity or mildness of the preceding winter season. Due to the seasonal nature of the deicing product lines, operating results for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. The Company’s plant nutrition business is also seasonal. As a result, the Company and its customers generally build inventories during the plant nutrition business’ low demand periods of the year (which are typically winter and summer, but can vary due to weather and other factors) to ensure timely product availability during the peak sales seasons (which are typically spring and autumn, but can also vary due to weather and other factors).
Significant Accounting Policies
The Company’s significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” within Part II, Item 8 of its Transition Report on Form 10-KT for the transition period ended September 30, 2021. The Company reports its financial results from discontinued operations and continuing operations separately to recognize the financial impact of disposal transactions apart from ongoing operations. Discontinued operations reporting occurs when a component or a group of components of an entity has been disposed or classified as held for sale and represents a strategic shift that has a major effect on the entity’s operations and financial results. In the Company’s Consolidated Statements of Cash Flows, the cash flows from discontinued operations are not separately classified. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. See Note 2 for information on discontinued operations and Note 10 for information on the Company’s reportable segments.
Recent Accounting Pronouncements
The Company has evaluated all of the recently issued, but not yet effective, accounting standards that have been issued or proposed by the Financial Accounting Standards Board or other standards-setting bodies through the filing date of these unaudited consolidated financial statements and does not believe the future adoption of any such pronouncements will have a material impact on its consolidated financial statements.
Strategic Evaluation and Plan to Sell Businesses
During fiscal 2020, the Company initiated an evaluation of the strategic fit of certain of the Company’s businesses. On February 16, 2021, the Company announced its plan to restructure its former Plant Nutrition South America segment to enable targeted and separate sales processes for each portion of the former segment, including its chemicals and specialty plant nutrition businesses, along with the Company’s equity method investment in Fermavi Eletroquímica Ltda. (“Fermavi”). Concurrently, to optimize its asset base in North America, the Company evaluated the strategic fit of its North America micronutrient product business. On March 16, 2021, the Board of Directors of the Company approved a plan to sell the Company’s South America chemicals and specialty plant nutrition businesses, investment in Fermavi and North America micronutrient product business (collectively, the “Specialty Businesses”) with the goal of reducing the Company’s leverage and enabling increased focus on optimizing the Company’s core businesses. Prior to March 31, 2021, the South America chemicals and specialty plant nutrition businesses and investment in Fermavi were reported as the Company’s Plant Nutrition South America segment. Prior to March 31, 2021, the North America micronutrient product business was included with the Company’s Plant Nutrition North America segment, which has been renamed the Plant Nutrition segment as of March 31, 2021. As of March 31, 2022, the Company has two reportable segments, Salt and Plant Nutrition, as discussed further in Note 10.
The Company concluded that the Specialty Businesses met the criteria for classification as held for sale upon receiving approval from its Board of Directors to sell the Specialty Businesses in the quarter ended March 31, 2021. In addition, the Company believes there is a single disposal plan representing a strategic shift that will have a material effect on its operations and financial results. Consequently, the Specialty Businesses qualify for presentation as assets and liabilities held for sale and
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discontinued operations in accordance with U.S. GAAP. Accordingly, current and noncurrent assets and liabilities of the Specialty Businesses are presented in the Consolidated Balance Sheets as assets and liabilities held for sale for both periods presented and their results of operations are presented as discontinued operations in the Consolidated Statements of Operations for each period presented. Interest expense attributed to discontinued operations represents interest expense for loans in Brazil by the Company’s South America chemicals and specialty plant nutrition businesses, which were fully repaid from proceeds received from the Company’s sale of its South America specialty plant nutrition businesses.
As described further in Note 2, on May 4, 2021, July 1, 2021, August 20, 2021 and April 20, 2022, the Company completed the sales of a component of its North America micronutrient business, its South America specialty plant nutrition business, its investment in Fermavi and its South America chemicals business, respectively. In the quarter ended June 30, 2021, the Company abandoned the remaining inventory of its North America micronutrient product business and reclassified the remaining product lines in this business as discontinued operations for all periods presented.
Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations.
2. Discontinued Operations:
On March 23, 2021, the Company entered into a definitive agreement to sell its South America specialty plant nutrition business to ICL Brasil Ltda., a subsidiary of ICL Group Ltd. The transaction closed on July 1, 2021. Upon closing the Company received gross proceeds of approximately $421.1 million, following a reduction in proceeds of $6.2 million in working capital adjustments (finalized in the quarter ended September 30, 2021), comprised of cash in the amount of approximately $318.4 million and an additional $102.7 million in net debt assumed by ICL Brasil Ltda. The Brazil debt was deducted from gross proceeds from the transaction. The terms of the definitive agreement provide for an additional earnout payment of up to R$88 million Brazilian reais. On April 7, 2022, the Company received the maximum earnout possible under the terms of the sale, or $18.5 million based on exchange rates at the time of receipt. At the closing of the transaction, the parties also entered into a Reverse Transition Services Agreement, which governs the parties’ respective rights and obligations with respect to the provision of certain transition services to the Company’s Brazil subsidiaries after closing.
On April 7, 2021, the Company entered into a definitive agreement to sell a component of its North America micronutrient business (primarily consisting of intangible assets and certain inventory of the business) to Koch Agronomic Services, LLC, a subsidiary of Koch Industries, through an asset purchase and sale agreement. On May 4, 2021, the Company completed the sale for approximately $56.7 million and paid fees totaling $0.5 million. The Company recognized a gain from the sale of $30.6 million, net of $2.8 million from the release of accumulated currency translation adjustment (“CTA”) upon substantial liquidation of the business.
On June 28, 2021, the Company entered into a definitive agreement to sell its investment in Fermavi for R$45 million Brazilian reais (including R$30 million Brazilian reais of deferred purchase price). The transaction closed on August 20, 2021. Upon closing, the Company received gross proceeds of approximately $2.9 million and recorded a discounted deferred proceeds receivable of approximately $4.8 million (based on exchange rates at the time of closing).
On April 20, 2022, the Company completed the sale of its South America chemicals business to a subsidiary of Cape Acquisitions LLC. Upon closing of the all-cash sale, the Company received gross proceeds of approximately $51.0 million based on exchange rates at the time of closing, subject to a post-closing adjustment. The sale includes all of the Company’s remaining operations in Brazil, concluding its previously announced plan to exit the South American market.
In measuring the assets and liabilities held for sale at fair value less estimated costs to sell, the Company completed an impairment analysis when its Board of Directors committed to a plan to sell the Specialty Businesses and the Company updated the analysis each quarter prior to the sale of the Company’s South America chemicals business. Accordingly, management evaluated indicators of fair value of the Company’s South America chemicals business as of March 31, 2022, including the sale price and estimated net proceeds from the sale of the South America chemical business. The amount of CTA loss within accumulated other comprehensive loss (“AOCL”) on the Company’s Consolidated Balance Sheets related to the South America chemicals business was considered in the Company’s determination of the adjustment to fair value less estimated costs to sell.
The Company recorded a loss on the sale of its South American specialty plant nutrition business and its investment in Fermavi totaling approximately $209.8 million and a non-cash impairment loss for the remaining chemical business of approximately $114.9 million (including $16.3 million and $24.7 million recorded for the three and six months ended March 31, 2022, respectively), which included the effect of the significant weakening of the Brazilian real against the U.S. dollar. These losses
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were partially offset by a gain of approximately $30.6 million from the sale of a component of the North America micronutrient business in fiscal 2021.
The information below sets forth selected financial information related to the operating results of the Specialty Businesses classified as discontinued operations. The Specialty Businesses’ revenue and expenses have been reclassified to net earnings from discontinued operations in prior periods. The Consolidated Balance Sheets present the assets and liabilities that were reclassified from the specified line items to assets and liabilities held for sale and the Consolidated Statements of Operations present the revenue and expenses that were reclassified from the specified line items to discontinued operations.
The following table represents summarized Consolidated Balance Sheets information of assets and liabilities held for sale (in millions):
| March 31, 2022 | September 30, 2021 | ||||||||||
| Cash and cash equivalents | $ | 10.1 | $ | 2.9 | |||||||
Receivables, less allowance for doubtful accounts of $0.3 at March 31, 2022 and $0.2 at September 30, 2021 | 18.6 | 13.7 | |||||||||
| Inventories | 11.3 | 7.7 | |||||||||
| Property, plant and equipment, net | 41.1 | 35.6 | |||||||||
| Goodwill | 38.1 | 33.3 | |||||||||
| Loss recognized on held for sale classification | (114.9) | (90.2) | |||||||||
| Other | 6.7 | 6.9 | |||||||||
| Current assets held for sale | $ | 11.0 | $ | 9.9 | |||||||
| Current portion of long-term debt | $ | — | $ | — | |||||||
| Accounts payable | 7.6 | 5.9 | |||||||||
| Accrued expenses and other current liabilities | 4.9 | 3.7 | |||||||||
| Current liabilities held for sale | $ | 12.5 | $ | 9.6 | |||||||
The following table represents summarized Consolidated Statements of Operations information of discontinued operations (in millions):
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales | $ | 24.3 | $ | 85.9 | $ | 46.7 | $ | 197.8 | |||||||||||||||
| Shipping and handling cost | 1.3 | 3.9 | 2.5 | 8.8 | |||||||||||||||||||
| Product cost | 14.4 | 63.0 | 25.3 | 134.4 | |||||||||||||||||||
| Gross profit | 8.6 | 19.0 | 18.9 | 54.6 | |||||||||||||||||||
| Selling, general and administrative expenses | 1.4 | 13.5 | 3.0 | 28.6 | |||||||||||||||||||
| Operating earnings | 7.2 | 5.5 | 15.9 | 26.0 | |||||||||||||||||||
| Interest expense | 0.1 | 1.7 | 0.1 | 4.2 | |||||||||||||||||||
| (Gain) loss on foreign exchange | (20.4) | 4.3 | (17.3) | 2.9 | |||||||||||||||||||
| Net loss on adjustment to fair value less estimated costs to sell | 16.3 | 255.2 | 24.7 | 255.2 | |||||||||||||||||||
| Other income, net | (0.3) | (0.4) | (0.5) | (1.1) | |||||||||||||||||||
| Earnings (loss) from discontinued operations before income taxes | 11.5 | (255.3) | 8.9 | (235.2) | |||||||||||||||||||
| Income tax (benefit) expense | (5.4) | 1.0 | (2.5) | 7.7 | |||||||||||||||||||
| Net earnings (loss) from discontinued operations | $ | 16.9 | $ | (256.3) | $ | 11.4 | $ | (242.9) | |||||||||||||||
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The significant components included in the Company’s Consolidated Statements of Cash Flows for discontinued operations are as follows (in millions):
| Six Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Depreciation, depletion and amortization | $ | — | $ | 8.9 | |||||||
| Loss on impairment of long-lived assets | 24.7 | 253.1 | |||||||||
| Capital expenditures | (1.2) | (5.3) | |||||||||
| Proceeds from issuance of long-term debt | — | 40.5 | |||||||||
| Principal payments on long-term debt | — | (33.9) | |||||||||
3. Revenues:
Nature of Products and Services
The Company’s Salt segment products include salt and magnesium chloride for use in road deicing and dust control, food processing, water softeners, and agricultural and industrial applications. The Company’s Plant Nutrition segment produces and markets SOP in various grades worldwide to distributors and retailers of crop inputs, as well as growers and for industrial uses. In the U.K., the Company operates a records management business utilizing excavated areas of its Winsford salt mine with one other location in London, England.
Identifying the Contract
The Company accounts for a customer contract when there is approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Identifying the Performance Obligations
At contract inception, the Company assesses the goods and services it has promised to its customers and identifies a performance obligation for each promise to transfer to the customer a distinct good or service (or bundle of goods or services). Determining whether products and services are considered distinct performance obligations that should be accounted for separately or aggregated together may require significant judgment.
Identifying and Allocating the Transaction Price
The Company’s revenues are measured based on consideration specified in the customer contract, net of any sales incentives and amounts collected on behalf of third parties such as sales taxes. In certain cases, the Company’s customer contracts may include promises to transfer multiple products and services to a customer. For multiple-element arrangements, the Company generally allocates the transaction price to each performance obligation in proportion to its stand-alone selling price.
When Performance Obligations Are Satisfied
The vast majority of the Company’s revenues are recognized at a point in time when the performance obligations are satisfied based upon transfer of control of the product or service to a customer. To determine when the control of goods is transferred, the Company typically assesses, among other things, the shipping terms of the contract, as shipping is an indicator of transfer of control. Some of the Company’s products are sold when the control of the goods transfers to the customer at the time of shipment. There are also instances when the Company provides shipping services to deliver its products. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. The Company has made an accounting policy election to recognize any shipping and handling costs that are incurred after the customer obtains control of the goods as fulfillment costs which are accrued at the time of revenue recognition.
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Significant Payment Terms
The customer contract states the final terms of the sale, including the description, quantity and price of each product or service purchased. Payment is typically due in full within 30 days of delivery. The Company does not adjust the consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the good or service is transferred to the customer and when the customer pays for that good or service will be one year or less.
Refunds, Returns and Warranties
The Company’s products are generally not sold with a right of return and the Company does not generally provide credits or incentives, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized. The Company uses historical experience to estimate accruals for refunds due to manufacturing or other defects.
4. Inventories:
Inventories consist of the following (in millions):
| March 31, 2022 | September 30, 2021 | ||||||||||
| Finished goods | $ | 155.0 | $ | 272.6 | |||||||
| Raw materials and supplies | 55.7 | 49.1 | |||||||||
| Total inventories | $ | 210.7 | $ | 321.7 | |||||||
5. Property, Plant and Equipment, Net:
Property, plant and equipment, net, consists of the following (in millions):
| March 31, 2022 | September 30, 2021 | ||||||||||
| Land, buildings and structures, and leasehold improvements | $ | 542.3 | $ | 539.3 | |||||||
| Machinery and equipment | 1,079.6 | 1,062.9 | |||||||||
| Office furniture and equipment | 55.8 | 55.7 | |||||||||
| Mineral interests | 172.8 | 172.5 | |||||||||
| Construction in progress | 67.0 | 44.8 | |||||||||
| 1,917.5 | 1,875.2 | ||||||||||
| Less: accumulated depreciation and depletion | (1,096.4) | (1,044.7) | |||||||||
| Property, plant and equipment, net | $ | 821.1 | $ | 830.5 | |||||||
6. Goodwill and Intangible Assets, Net:
Amounts related to the Company’s amortization of intangible assets are as follows (in millions):
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Aggregate amortization expense | $ | 0.4 | $ | 0.4 | $ | 0.8 | $ | 0.8 | |||||||||||||||
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Amounts related to the Company’s goodwill are as follows (in millions):
| March 31, 2022 | September 30, 2021 | ||||||||||
| Plant Nutrition Segment | $ | 51.9 | $ | 51.8 | |||||||
| Other | 6.0 | 6.0 | |||||||||
| Total | $ | 57.9 | $ | 57.8 | |||||||
The change in goodwill between September 30, 2021, and March 31, 2022 was due to the impact from translating foreign-denominated amounts to U.S. dollars. As of March 31, 2022, there were no indicators necessitating an interim impairment test of the Company’s operating segments based on the Company’s review of operating performance for the relevant segments.
7. Income Taxes:
Under ASC 740 “Income Taxes” (ASC 740), companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period. However, under ASC 740, companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable. In this situation, the interim tax rate should be based on the actual year-to-date results. As a result of the low amount of pretax income for the six months ended March 31, 2022 and the full fiscal year pretax projections as of March 31, 2022, as well as the existence of large favorable permanent book-tax differences for fiscal 2022, a reliable projection of the Company’s annual effective tax rate as of March 31, 2022 is not readily determinable, as a small change in forecasted pretax income could cause a significant change in the estimated annual effective tax rate. Consequently, the effective tax rates applied to the three and six months ended March 31, 2022 were determined based on fiscal year-to-date results rather than an estimated annual effective tax rate which was the method previously used for the period ended December 31, 2021 and for the three and six months ended March 31, 2021.
The Company’s effective income tax rate differs from the U.S. statutory federal income tax rate primarily due to U.S. statutory depletion, state income taxes (net of federal tax benefit), nondeductible executive compensation over $1 million, foreign income, mining and withholding taxes, global intangible low-taxed income, interest expense recognition differences for book and tax purposes and, for the period ended March 31, 2022, nondeductible contingent loss accrual and valuation allowances recorded on deferred tax assets.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future income. On the basis of this evaluation, as of March 31, 2022, a valuation allowance of $28.0 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company’s projections for income.
As of March 31, 2022, and September 30, 2021, the Company had $8.8 million and $0, respectively, of gross domestic federal net operating loss (“NOL”) carryforwards which expire in 2042 and $3.2 million and $3.3 million, respectively of gross foreign federal NOL carryforwards that have no expiration date and $1.2 million and $0.3 million, respectively, of net operating tax-effected state NOL carryforwards which expire beginning in 2027.
Canadian provincial tax authorities have challenged tax positions claimed by one of the Company’s Canadian subsidiaries and have issued tax reassessments for fiscal years 2002-2016. The reassessments are a result of ongoing audits and total $172.6 million, including interest, through March 31, 2022. The Company disputes these reassessments and will continue to work with the appropriate authorities in Canada to resolve the dispute. There is a reasonable possibility that the ultimate resolution of this dispute, and any related disputes for other open tax years, may be materially higher or lower than the amounts the Company has reserved for such disputes. In connection with this dispute, local regulations require the Company to post security with the tax authority until the dispute is resolved. The Company has posted collateral in the form of a $137.4 million performance bond and has paid $39.8 million to the Canadian tax authorities (most of which is recorded in other assets in the Consolidated Balance Sheets at March 31, 2022, and September 30, 2021), which is necessary to proceed with future appeals or litigation.
The Company expects that it will be required by local regulations to provide security for additional interest on the above unresolved disputed amounts and for any future reassessments issued by these Canadian tax authorities in the form of cash,
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letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authorities until the disputes are resolved.
The Company expects that the ultimate outcome of these matters will not have a material impact on its results of operations or financial condition. However, the Company can provide no assurance as to the ultimate outcome of these matters, and the impact could be material if they are not resolved in the Company’s favor. As of March 31, 2022, the Company believes it has adequately reserved for these reassessments.
Additionally, the Company has other uncertain tax positions as well as assessments and disputed positions with taxing authorities in its various jurisdictions, which are consistent with those matters disclosed in the Company’s Transition Report on Form 10-KT for the transition period ended September 30, 2021.
8. Long-Term Debt:
Long-term debt consists of the following (in millions):
| March 31, 2022 | September 30, 2021 | ||||||||||
4.875% Senior Notes due July 2024 | $ | 250.0 | $ | 250.0 | |||||||
| Term Loan due January 2025 | 77.5 | 80.8 | |||||||||
| Revolving Credit Facility due January 2025 | 29.0 | 88.4 | |||||||||
6.75% Senior Notes due December 2027 | 500.0 | 500.0 | |||||||||
| AR Securitization Facility expires June 2023 | 75.0 | 26.8 | |||||||||
| 931.5 | 946.0 | ||||||||||
| Less unamortized debt issuance costs | (9.3) | (10.6) | |||||||||
| Total debt | 922.2 | 935.4 | |||||||||
| Less current portion | — | — | |||||||||
| Long-term debt | $ | 922.2 | $ | 935.4 | |||||||
As of March 31, 2022, the term loan and revolving credit facility under the Company’s credit agreement entered into on November 26, 2019 (the “Credit Agreement”) were secured by substantially all existing and future U.S. assets of the Company, the Goderich mine in Ontario, Canada and capital stock of certain subsidiaries. As of March 31, 2022, the weighted average interest rate on all borrowings outstanding under the term loan and revolving credit facility under the Credit Agreement was approximately 2.4%.
The Company is in compliance as of March 31, 2022 with its debt covenants under the Credit Agreement. The Company routinely prepares earnings scenarios and forecasts throughout the year. Due to inflationary pressures and higher costs (including transportation costs), the Company believes it is reasonably possible that its consolidated total leverage ratio, as defined in the Credit Agreement, will exceed the maximum limit of 4.5x by the third quarter of its 2022 fiscal year. If the Company were to violate this financial covenant, the lenders could declare the Company in default and could accelerate the amounts due under its Credit Agreement. Further, a default under the Credit Agreement would trigger cross-default provisions within the Company’s other debt agreements. The Company plans to obtain a waiver or amendment to the relevant provisions of the Credit Agreement, as it has done successfully in the past, to alleviate the reasonable possibility of exceeding its consolidated total leverage ratio for at least the next twelve months. The Company has begun discussions with its lenders, however a waiver or amendment would be granted at the sole discretion of the lenders and there can be no assurance that the Company would be able to obtain such a waiver.
In April 2022, the Company utilized earnout proceeds from the 2021 sale of its South America specialty plant nutrition business and proceeds from the April 2022 sale of the South America chemicals business to repay approximately $60.6 million of its term loan balance.
9. Commitments and Contingencies:
The Wisconsin Department of Agriculture, Trade and Consumer Protection (“DATCP”) has information indicating that agricultural chemicals are present within the subsurface area of the Company’s Kenosha, Wisconsin property. The agricultural chemicals were used by previous owners and operators of the site. None of the identified chemicals have been used in
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association with the Company’s operations since it acquired the property in 2002. DATCP directed the Company to conduct further investigations into the possible presence of agricultural chemicals in soil and ground water at the Kenosha property. The Company has completed initial on-property investigations and has provided the findings to DATCP. All investigations and mitigation activities to date, and any potential future remediation work, are being conducted under the Wisconsin Agricultural Chemical Cleanup Program (the “ACCP”), which provides for reimbursement of some of the costs. The Company may seek participation by, or cost reimbursement from, other parties responsible for the presence of any agricultural chemicals found in soil and ground water at this site if the Company does not receive an acknowledgment of no further action and is required to conduct further investigation or remedial work that may not be eligible for reimbursement under the ACCP.
The Division of Enforcement of the SEC is investigating the Company’s disclosures primarily concerning the operation of the Goderich mine, the former South American businesses, and related accounting and internal control matters including Salt interim inventory valuation methodology issues that were disclosed in the Company’s Form 10-K/A for the year ended December 31, 2020, and Form 10-Q/A for the quarter ended March 31, 2021, each filed with the SEC on September 3, 2021.
In connection with the SEC investigation, the Company’s former Senior Vice President, Salt, received a Wells Notice from the SEC staff on November 22, 2021. The Company’s former President and Chief Executive Officer, its former Chairman of the Board (who also served as its Interim Chief Executive Officer), and its former Director of Investor Relations also each received a Wells Notice from the SEC staff on November 29, 2021. The Company’s Chief Commercial Officer (who previously served as its Chief Financial Officer) received a Wells Notice from the SEC staff on November 30, 2021 and the Company received a Wells Notice from the SEC staff on December 1, 2021. A Wells Notice is a notice from the SEC staff that it has made a preliminary determination to recommend that the SEC take action against a person or company.
The Company has cooperated with the SEC investigation and initiated discussions with the SEC staff about the staff’s investigation with respect to the Company so as to gain a better understanding of specific details of the staff’s investigation. The Company does not agree with the positions taken by the SEC staff in these discussions, and is vigorously defending itself against the SEC staff’s claims. The Company is continuing discussions with the SEC staff, but there can be no assurance those discussions will result in a resolution acceptable to the Company. Any resolution reached by the Company with the SEC staff would also be subject to approval by the SEC, and there can be no assurance that it would be approved.
The Company is unable to predict the ultimate outcome of the SEC investigation or these discussions. However, based upon the current circumstances, the Company has recorded a contingent loss of $8 million in selling, general and administrative expenses in the Consolidated Statements of Operations and accrued expenses and other current liabilities in the Consolidated Balance Sheets in the second quarter of fiscal 2022. As the discussions with the SEC are continuing, there can be no assurance that the Company’s efforts to reach a final resolution with the SEC on terms acceptable to the Company will be successful or, if they are, what the timing, amount or terms of such resolution will be. The ultimate amount of loss could differ materially from the Company’s estimate and could have a material adverse effect on the Company’s results of operations, cash flows or financial position. In the event that the SEC brings a civil action, the Company believes it would have strong defenses and would vigorously defend the case.
The Company is also involved in legal and administrative proceedings and claims of various types from the ordinary course of the Company’s business.
Management cannot predict the outcome of legal claims and proceedings with certainty. Nevertheless, management believes that the outcome of legal proceeding and claims, which are pending or known to be threatened, even if determined adversely, will not, individually or in the aggregate, have a material adverse effect on the Company’s results of operations, cash flows or financial position, except as otherwise described in Note 7 and this Note 9.
The collective bargaining agreement for the Company’s Cote Blanche mine was due to expire on March 31, 2022, but has been extended while the parties negotiate a new agreement.
10. Operating Segments:
The Company’s reportable segments are strategic business units that offer different products and services, and each business requires different technology and marketing strategies. In connection with the executed business disposals discussed in Note 1 and Note 2, the Company has identified two reportable segments. The Specialty Businesses that comprised the Company’s former Plant Nutrition South America reportable segment and the North America micronutrient product business previously reported within the former Plant Nutrition North America reportable segment were classified as discontinued operations for all periods presented in its Consolidated Financial Statements in this Quarterly Report on Form 10-Q. As part of the Company’s strategic shift, the Company renamed the former Plant Nutrition North America segment as the Plant Nutrition segment.
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For the three and six months ended March 31, 2022 and 2021, the Company has presented two reportable segments in its Consolidated Financial Statements: Salt and Plant Nutrition. The Salt segment produces and markets salt, consisting of sodium chloride and magnesium chloride, for use in road deicing for winter roadway safety and for dust control, food processing, water softeners and other consumer, agricultural and industrial applications. The Plant Nutrition segment produces and markets various grades of SOP.
Segment information is as follows (in millions):
| Three Months Ended March 31, 2022 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 391.3 | $ | 54.3 | $ | 2.9 | $ | 448.5 | ||||||||||||||||||
| Intersegment sales | — | 0.7 | (0.7) | — | ||||||||||||||||||||||
| Shipping and handling cost | 153.4 | 6.7 | — | 160.1 | ||||||||||||||||||||||
Operating earnings (loss)(b) | 49.3 | 4.4 | (33.7) | 20.0 | ||||||||||||||||||||||
| Depreciation, depletion and amortization | 16.2 | 8.8 | 2.9 | 27.9 | ||||||||||||||||||||||
| Total assets (as of end of period) | 925.4 | 444.4 | 266.4 | 1,636.2 | ||||||||||||||||||||||
| Three Months Ended March 31, 2021 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 369.0 | $ | 53.7 | $ | 2.8 | $ | 425.5 | ||||||||||||||||||
| Intersegment sales | — | 0.5 | (0.5) | — | ||||||||||||||||||||||
| Shipping and handling cost | 115.4 | 7.7 | — | 123.1 | ||||||||||||||||||||||
Operating earnings (loss)(b) | 91.6 | 5.3 | (20.9) | 76.0 | ||||||||||||||||||||||
| Depreciation, depletion and amortization | 18.0 | 8.8 | 3.1 | 29.9 | ||||||||||||||||||||||
| Total assets (as of end of period) | 901.4 | 481.9 | 191.4 | 1,574.7 | ||||||||||||||||||||||
| Six Months Ended March 31, 2022 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 665.2 | $ | 108.9 | $ | 5.9 | $ | 780.0 | ||||||||||||||||||
| Intersegment sales | — | 3.1 | (3.1) | — | ||||||||||||||||||||||
| Shipping and handling cost | 241.8 | 14.0 | — | 255.8 | ||||||||||||||||||||||
Operating earnings (loss)(b) | 88.7 | 13.9 | (62.2) | 40.4 | ||||||||||||||||||||||
| Depreciation, depletion and amortization | 32.4 | 17.6 | 6.2 | 56.2 | ||||||||||||||||||||||
| Six Months Ended March 31, 2021 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | 597.5 | $ | 131.9 | $ | 5.3 | $ | 734.7 | ||||||||||||||||||
| Intersegment sales | — | 2.9 | (2.9) | — | ||||||||||||||||||||||
| Shipping and handling cost | 179.3 | 19.5 | — | 198.8 | ||||||||||||||||||||||
Operating earnings (loss)(b) | 136.1 | 8.6 | (40.6) | 104.1 | ||||||||||||||||||||||
| Depreciation, depletion and amortization | 35.4 | 17.8 | 6.8 | 60.0 | ||||||||||||||||||||||
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Disaggregated revenue by product type is as follows (in millions):
| Three Months Ended March 31, 2022 | Salt | Plant Nutrition | Corporate & Other(a)(b) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | 300.1 | $ | — | $ | — | $ | 300.1 | ||||||||||||||||||
| Consumer & Industrial Salt | 91.2 | — | — | 91.2 | ||||||||||||||||||||||
| SOP | — | 55.0 | — | 55.0 | ||||||||||||||||||||||
| Eliminations & Other | — | (0.7) | 2.9 | 2.2 | ||||||||||||||||||||||
| Sales to external customers | $ | 391.3 | $ | 54.3 | $ | 2.9 | $ | 448.5 | ||||||||||||||||||
| Three Months Ended March 31, 2021 | Salt | Plant Nutrition | Corporate & Other(a)(b) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | 291.3 | $ | — | $ | — | $ | 291.3 | ||||||||||||||||||
| Consumer & Industrial Salt | 77.7 | — | — | 77.7 | ||||||||||||||||||||||
| SOP | — | 54.2 | — | 54.2 | ||||||||||||||||||||||
| Eliminations & Other | — | (0.5) | 2.8 | 2.3 | ||||||||||||||||||||||
| Sales to external customers | $ | 369.0 | $ | 53.7 | $ | 2.8 | $ | 425.5 | ||||||||||||||||||
| Six Months Ended March 31, 2022 | Salt | Plant Nutrition | Corporate & Other(a)(b) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | 463.8 | $ | — | $ | — | $ | 463.8 | ||||||||||||||||||
| Consumer & Industrial Salt | 201.4 | — | — | 201.4 | ||||||||||||||||||||||
| SOP | — | 112.0 | — | 112.0 | ||||||||||||||||||||||
| Eliminations & Other | — | (3.1) | 5.9 | 2.8 | ||||||||||||||||||||||
| Sales to external customers | $ | 665.2 | $ | 108.9 | $ | 5.9 | $ | 780.0 | ||||||||||||||||||
| Six Months Ended March 31, 2021 | Salt | Plant Nutrition | Corporate & Other(a)(b) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | 421.8 | $ | — | $ | — | $ | 421.8 | ||||||||||||||||||
| Consumer & Industrial Salt | 175.7 | — | — | 175.7 | ||||||||||||||||||||||
| SOP | — | 134.8 | — | 134.8 | ||||||||||||||||||||||
| Eliminations & Other | — | (2.9) | 5.3 | 2.4 | ||||||||||||||||||||||
| Sales to external customers | $ | 597.5 | $ | 131.9 | $ | 5.3 | $ | 734.7 | ||||||||||||||||||
(a)Corporate and Other includes corporate entities, records management operations, equity method investments and other incidental operations and eliminations. Operating earnings (loss) for corporate and other includes indirect corporate overhead, including costs for general corporate governance and oversight, lithium-related expenses, as well as costs for the human resources, information technology, legal and finance functions.
(b)Corporate operating results for the three and six months ended March 31, 2022 include executive transition costs of $0.5 million and $3.8 million, respectively, and a contingent loss accrual and costs related to the ongoing SEC investigation of $13.6 million and $16.7 million, respectively. Corporate operating results include costs related to the ongoing SEC investigation of $2.8 million and $4.4 million for the three and six months ended March 31, 2021, respectively. Refer to Note 9 for more information regarding the SEC investigation.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The Company’s revenue by geographic area is as follows (in millions):
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||
| Revenue | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
United States(a) | $ | 327.8 | $ | 317.0 | $ | 549.1 | $ | 540.6 | ||||||||||||||||||
| Canada | 104.5 | 70.6 | 193.9 | 143.0 | ||||||||||||||||||||||
| United Kingdom | 15.6 | 34.9 | 35.4 | 45.2 | ||||||||||||||||||||||
| Other | 0.6 | 3.0 | 1.6 | 5.9 | ||||||||||||||||||||||
| Total revenue | $ | 448.5 | $ | 425.5 | $ | 780.0 | $ | 734.7 | ||||||||||||||||||
(a)United States sales exclude product sold to foreign customers at U.S. ports.
11. Stockholders’ Equity and Equity Instruments:
In May 2020, the Company’s stockholders approved the 2020 Incentive Award Plan (as amended, the “2020 Plan”), which authorizes the issuance of 2,977,933 shares of Company common stock. Since the date the 2020 Plan was approved, the Company ceased issuing equity awards under the 2015 Incentive Award Plan (as amended, the “2015 Plan”). In February 2022, the Company’s stockholders approved an amendment to the 2020 Plan authorizing an additional 750,000 shares of Company stock. Since the approval of the 2015 Plan in May 2015, the Company ceased issuing equity awards under the 2005 Incentive Award Plan (as amended, the “2005 Plan”). The 2005 Plan, the 2015 Plan and the 2020 Plan allow for grants of equity awards to executive officers, other employees and directors, including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options and deferred stock units.
Options
Substantially all of the stock options granted vest ratably, in tranches, over a four-year service period. Unexercised options expire after seven years. Options do not have dividend or voting rights. Upon vesting, each option can be exercised to purchase one share of the Company’s common stock. The exercise price of options is equal to the closing stock price on the grant date.
To estimate the fair value of options on the grant date, the Company uses the Black-Scholes option valuation model. Award recipients are grouped according to expected exercise behavior. Unless better information is available to estimate the expected term of the options, the estimate is based on historical exercise experience. The risk-free rate, using U.S. Treasury yield curves in effect at the time of grant, is selected based on the expected term of each group. The Company’s historical stock price is used to estimate expected volatility. The fair value and inputs used to calculate fair value for options granted for the six months ended March 31, 2022, are included in the table below:
| Fair value of options granted | $16.83 | ||||
| Exercise price | $73.90 | ||||
| Expected term (years) | 4.75 | ||||
| Expected volatility | 37.9% | ||||
| Dividend yield | 3.9% | ||||
| Risk-free rate of return | 1.1% | ||||
RSUs
Typically, the RSUs granted under the 2015 Plan and the 2020 Plan vest after to three years of service. RSUs entitle the holders to one share of common stock for each vested RSU. Unvested RSUs do not have voting rights but are entitled to receive non-forfeitable dividends (generally after a performance hurdle has been satisfied for the year of the grant) or other distributions equal to those declared on the Company’s common stock for RSUs that are earned as a result of the satisfaction of the performance hurdle. The closing stock price on the grant date is used to determine the fair value of RSUs.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
PSUs
Substantially all of the PSUs outstanding under the 2015 Plan and the 2020 Plan are either total stockholder return PSUs (“TSR PSUs”) or adjusted earnings before interest, taxes, depreciation and amortization growth PSUs (“EBITDA Growth PSUs”). The actual number of shares of the Company’s common stock that may be earned with respect to TSR PSUs is calculated by comparing the Company’s total stockholder return to the total stockholder return for each company comprising the Company’s peer group over a - or three-year performance period and may range from 0% to 300% of the target number of shares based upon the attainment of these performance conditions. The actual number of shares of common stock that may be earned with respect to EBITDA Growth PSUs is calculated based on the attainment of adjusted EBITDA growth during the performance period and may range from 0% to 300% of the target number of shares based upon the attainment of these performance conditions.
PSUs represent a target number of shares of the Company’s common stock that may be earned before adjustment based upon the attainment of certain performance conditions. Holders of PSUs do not have voting rights but are entitled to receive non-forfeitable dividends or other distributions equal to those declared on the Company’s common stock for PSUs that are earned, which are paid when the shares underlying the PSUs are issued.
To estimate the fair value of the TSR PSUs on the grant date for accounting purposes, the Company uses a Monte-Carlo simulation model, which simulates future stock prices of the Company as well as the Company’s peer group. This model uses historical stock prices to estimate expected volatility and the Company’s correlation to the peer group. The risk-free rate was determined using the same methodology as the option valuations as discussed above. The Company’s closing stock price on the grant date was used to estimate the fair value of the EBITDA Growth PSUs. The Company will adjust the expense of the EBITDA Growth PSUs based upon its estimate of the number of shares that will ultimately vest at each interim date during the vesting period.
During the six months ended March 31, 2022, the Company reissued the following number of shares from treasury stock: 2,432 shares related to the exercise of stock options, 29,150 shares related to the release of RSUs which vested, 0 shares related to the release of PSUs which vested, and 37,275 shares related to stock payments. In fiscal 2021, the Company issued 94,236 net shares from treasury stock. The Company withheld a total of 9,503 shares with a fair value of $0.5 million related to the vesting of RSUs, PSUs, and stock payments during the six months ended March 31, 2022. The fair value of the shares were valued at the closing price at the vesting date and represent the employee tax withholding for the employee’s compensation. The Company recognized a tax benefit of $0.1 million from its equity compensation awards as a decrease to income tax expense during the six months ended March 31, 2022. During the six months ended March 31, 2022 and 2021, the Company recorded $9.2 million (includes $1.4 million paid in cash) and $6.2 million (includes $0.0 million paid in cash), respectively, of compensation expense pursuant to its stock-based compensation plans. No amounts have been capitalized. The following table summarizes stock-based compensation activity during the six months ended March 31, 2022:
| Stock Options | RSUs | PSUs(a) | ||||||||||||||||||||||||||||||||||||
| Number | Weighted-average exercise price | Number | Weighted-average fair value | Number | Weighted-average fair value | |||||||||||||||||||||||||||||||||
Outstanding at September 30, 2021 | 828,706 | $ | 61.56 | 223,499 | $ | 59.00 | 279,907 | $ | 64.90 | |||||||||||||||||||||||||||||
| Granted | 72,797 | 73.90 | 97,231 | 68.04 | 111,879 | 79.02 | ||||||||||||||||||||||||||||||||
Exercised(b) | (2,432) | 70.48 | — | — | — | — | ||||||||||||||||||||||||||||||||
Released from restriction(b) | — | — | (30,417) | 61.49 | — | — | ||||||||||||||||||||||||||||||||
| Cancelled/expired | (85,602) | 78.43 | (25,935) | 61.30 | (78,569) | 61.90 | ||||||||||||||||||||||||||||||||
Outstanding at March 31, 2022 | 813,469 | $ | 60.86 | 264,378 | $ | 61.82 | 313,217 | $ | 70.70 | |||||||||||||||||||||||||||||
(a)Until the performance period is completed, PSUs are included in the table at the target level at their grant date and at that level represent one share of common stock per PSU.
(b)Common stock issued for exercised options and for vested and earned RSUs and PSUs was issued from treasury stock.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Accumulated Other Comprehensive Loss
The Company’s comprehensive income (loss) is comprised of net earnings (loss), net amortization of the unrealized loss of the pension obligation, the change in the unrealized gain (loss) on natural gas and foreign currency cash flow hedges and CTA. The components of and changes in AOCL are as follows (in millions):
Three Months Ended March 31, 2022(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | 1.1 | $ | (5.3) | $ | (112.0) | $ | (116.2) | |||||||||||||||
Other comprehensive income before reclassifications(b) | 1.6 | — | 10.7 | 12.3 | |||||||||||||||||||
| Amounts reclassified from AOCL | (0.6) | 0.1 | — | (0.5) | |||||||||||||||||||
| Net current period other comprehensive income | 1.0 | 0.1 | 10.7 | 11.8 | |||||||||||||||||||
| Ending balance | $ | 2.1 | $ | (5.2) | $ | (101.3) | $ | (104.4) | |||||||||||||||
Three Months Ended March 31, 2021(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | 0.2 | $ | (9.4) | $ | (294.6) | $ | (303.8) | |||||||||||||||
Other comprehensive income (loss) before reclassifications(b) | 1.9 | — | (20.5) | (18.6) | |||||||||||||||||||
| Amounts reclassified from AOCL | (1.8) | 0.2 | — | (1.6) | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 0.1 | 0.2 | (20.5) | (20.2) | |||||||||||||||||||
| Ending balance | $ | 0.3 | $ | (9.2) | $ | (315.1) | $ | (324.0) | |||||||||||||||
Six Months Ended March 31, 2022(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | 3.1 | $ | (5.4) | $ | (108.2) | $ | (110.5) | |||||||||||||||
Other comprehensive income before reclassifications(b) | 0.7 | — | 6.9 | 7.6 | |||||||||||||||||||
| Amounts reclassified from AOCL | (1.7) | 0.2 | — | (1.5) | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (1.0) | 0.2 | 6.9 | 6.1 | |||||||||||||||||||
| Ending balance | $ | 2.1 | $ | (5.2) | $ | (101.3) | $ | (104.4) | |||||||||||||||
Six Months Ended March 31, 2021(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Foreign Currency | Total | |||||||||||||||||||
| Beginning balance | $ | (0.5) | $ | (6.4) | $ | (349.8) | $ | (356.7) | |||||||||||||||
Other comprehensive income (loss) before reclassifications(b) | 2.7 | (3.2) | 34.7 | 34.2 | |||||||||||||||||||
| Amounts reclassified from AOCL | (1.9) | 0.4 | — | (1.5) | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 0.8 | (2.8) | 34.7 | 32.7 | |||||||||||||||||||
| Ending balance | $ | 0.3 | $ | (9.2) | $ | (315.1) | $ | (324.0) | |||||||||||||||
(a)With the exception of the CTA, for which no tax effect is recorded, the changes in the components of AOCL presented in the tables above are reflected net of applicable income taxes.
(b)The Company recorded foreign exchange (loss) gain of $(1.9) million and $(0.7) million in the three and six months ended March 31, 2022, respectively, and $(19.2) million and $5.0 million in the three and six months ended March 31, 2021, respectively, in AOCL related to intercompany notes which were deemed to be of a long-term investment nature.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The amounts reclassified from AOCL to expense (income) for the three and six months ended March 31, 2022 and 2021, are shown below (in millions):
| Amount Reclassified from AOCL | |||||||||||||||||||||||||||||
| Three Months Ended March 31, | Six Months Ended March 31, | Line Item Impacted in the Consolidated Statements of Operations | |||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Losses on cash flow hedges: | |||||||||||||||||||||||||||||
| Natural gas instruments | $ | (0.9) | $ | (0.2) | $ | (2.3) | $ | (0.4) | Product cost | ||||||||||||||||||||
| Foreign currency contracts | — | (2.5) | — | (2.5) | Interest expense | ||||||||||||||||||||||||
| Income tax expense | 0.3 | 0.9 | 0.6 | 1.0 | |||||||||||||||||||||||||
| Reclassifications, net of income taxes | (0.6) | (1.8) | (1.7) | (1.9) | |||||||||||||||||||||||||
| Amortization of defined benefit pension: | |||||||||||||||||||||||||||||
| Amortization of loss | 0.1 | 0.3 | 0.2 | 0.6 | Product cost | ||||||||||||||||||||||||
| Income tax benefit | — | (0.1) | — | (0.2) | |||||||||||||||||||||||||
| Reclassifications, net of income taxes | 0.1 | 0.2 | 0.2 | 0.4 | |||||||||||||||||||||||||
| Total reclassifications, net of income taxes | $ | (0.5) | $ | (1.6) | $ | (1.5) | $ | (1.5) | |||||||||||||||||||||
12. Derivative Financial Instruments:
The Company is subject to various types of market risks, including interest rate risk, foreign currency exchange rate transaction and translation risk and commodity pricing risk. Management may take actions to mitigate the exposure to these types of risks, including entering into forward purchase contracts and other financial instruments. Currently, the Company manages a portion of its commodity pricing risks and foreign currency exchange rate risks by using derivative instruments. From time to time, the Company may enter into immaterial foreign exchange contracts to mitigate foreign exchange risk. The Company does not seek to engage in trading activities or take speculative positions with any financial instrument arrangement. The Company has entered into natural gas derivative instruments and foreign currency derivative instruments with counterparties it views as creditworthy. However, the Company does attempt to mitigate its counterparty credit risk exposures by, among other things, entering into master netting agreements with some of these counterparties. The Company records derivative financial instruments as either assets or liabilities at fair value in its Consolidated Balance Sheets. The assets and liabilities recorded as of March 31, 2022 and September 30, 2021 were not material.
Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. Depending on the exposure being hedged, the Company must designate the hedging instrument as a fair value hedge, a cash flow hedge or a net investment in foreign operations hedge. For the qualifying derivative instruments that have been designated as hedges, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item in the Consolidated Statements of Operations. Any ineffectiveness related to these hedges was not material for any of the periods presented. For derivative instruments that have not been designated as hedges, the entire change in fair value is recorded through earnings in the period of change.
Natural Gas Derivative Instruments
Natural gas is consumed at several of the Company’s production facilities, and a change in natural gas prices impacts the Company’s operating margin. The Company’s objective is to reduce the earnings and cash flow impacts of changes in market prices of natural gas by fixing the purchase price of up to 90% of its forecasted natural gas usage. It is the Company’s policy to consider hedging portions of its natural gas usage up to 36 months in advance of the forecasted purchase. As of March 31, 2022, the Company had entered into natural gas derivative instruments to hedge a portion of its natural gas purchase requirements through December 2022. As of March 31, 2022 and September 30, 2021, the Company had agreements in place to hedge forecasted natural gas purchases of 1.0 million and 2.1 million MMBtus, respectively. All natural gas derivative instruments held by the Company as of March 31, 2022 and September 30, 2021 qualified and were designated as cash flow hedges. As of March 31, 2022, the Company expects to reclassify from AOCL to earnings during the next twelve months $2.9
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
million of net gains on derivative instruments related to its natural gas hedges. Refer to Note 13 for the estimated fair value of the Company’s natural gas derivative instruments as of March 31, 2022 and September 30, 2021.
13. Fair Value Measurements:
The Company’s financial instruments are measured and reported at their estimated fair values. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. When available, the Company uses quoted prices in active markets to determine the fair values for its financial instruments (Level 1 inputs) or, absent quoted market prices, observable market-corroborated inputs over the term of the financial instruments (Level 2 inputs). Except as described below, the Company does not have any unobservable inputs that are not corroborated by market inputs (Level 3 inputs).
The Company holds marketable securities associated with its defined contribution and pre-tax savings plans, which are valued based on readily available quoted market prices. The Company utilizes derivative instruments to manage its risk of changes in natural gas prices and foreign exchange rates (see Note 12). The fair values of the natural gas and foreign currency derivative instruments are determined using market data of forward prices for all of the Company’s contracts.
The estimated fair values for each type of instrument are presented below (in millions):
| March 31, 2022 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | 2.1 | $ | 2.1 | $ | — | $ | — | |||||||||||||||
| Derivatives – natural gas instruments, net | 2.9 | — | 2.9 | — | |||||||||||||||||||
| Total Assets | $ | 5.0 | $ | 2.1 | $ | 2.9 | $ | — | |||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Liabilities related to non-qualified savings plan | $ | (2.1) | $ | (2.1) | $ | — | $ | — | |||||||||||||||
| Total Liabilities | $ | (2.1) | $ | (2.1) | $ | — | $ | — | |||||||||||||||
(a)Includes mutual fund investments of approximately 35% in common stock of large-cap U.S. companies, 5% in common stock of small to mid-cap U.S. companies, 10% in international companies, 15% in bond funds, 5% in short-term investments and 30% in blended funds.
| September 30, 2021 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | 2.1 | $ | 2.1 | $ | — | $ | — | |||||||||||||||
| Derivatives – natural gas instruments, net | 4.2 | — | 4.2 | — | |||||||||||||||||||
| Total Assets | $ | 6.3 | $ | 2.1 | $ | 4.2 | $ | — | |||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Liabilities related to non-qualified savings plan | $ | (2.1) | $ | (2.1) | $ | — | $ | — | |||||||||||||||
| Total Liabilities | $ | (2.1) | $ | (2.1) | $ | — | $ | — | |||||||||||||||
(a)Includes mutual fund investments of approximately 30% in the common stock of large-cap U.S. companies, 10% in the common stock of small to mid-cap U.S. companies, 10% in the common stock of international companies, 15% in bond funds, 5% in short-term investments and 30% in blended funds.
Cash and cash equivalents, receivables (net of allowance for doubtful accounts) and accounts payable are carried at cost, which approximates fair value due to their liquid and short-term nature. The Company’s investments related to its nonqualified retirement plan of $2.1 million at both March 31, 2022 and September 30, 2021, are stated at fair value based on quoted market prices. As of March 31, 2022 and September 30, 2021, the estimated fair value of the Company’s fixed-rate 4.875% Senior Notes due July 2024, based on available trading information (Level 2), totaled $247.5 million and $260.0 million, respectively, compared with the aggregate principal amount at maturity of $250.0 million. As of March 31, 2022 and September 30, 2021, the estimated fair value of the Company’s fixed-rate 6.75% Senior Notes due December 2027, based on available trading information (Level 2), totaled $504.6 million and $532.9 million, respectively, compared with the aggregate principal amount at maturity of $500.0 million. The fair value at March 31, 2022 and September 30, 2021 of amounts outstanding under the Company’s term loans and revolving credit facility, based upon available bid information received from the Company’s lender (Level 2), totaled approximately $105.1 million and $166.6 million, respectively, compared with the aggregate principal amount at maturity of $106.5 million and $169.2 million, respectively.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Management performed an analysis for the Company’s South America chemicals business as of March 31, 2022, which resulted in the recognition of a loss related to an adjustment to fair value less estimated costs to sell the business. The fair value measurements used in this analysis were a combination of Level 2 and Level 3 inputs. Refer to Note 2 for a discussion of fair value as it relates to the Company’s South America chemicals business.
14. Earnings per Share:
The Company calculates earnings per share using the two-class method. The two-class method requires allocating the Company’s net earnings to both common shares and participating securities. The following table sets forth the computation of basic and diluted earnings per common share (in millions, except for share and per-share data):
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net (loss) earnings from continuing operations | $ | (29.0) | $ | 41.9 | $ | (21.1) | $ | 56.6 | |||||||||||||||
Less: net loss allocated to participating securities(a) | — | (0.6) | (0.1) | (1.0) | |||||||||||||||||||
| Net (loss) earnings from continuing operations available to common stockholders | (29.0) | 41.3 | (21.2) | 55.6 | |||||||||||||||||||
| Net earnings (loss) from discontinued operations available to common stockholders | 16.9 | (256.3) | 11.4 | (242.9) | |||||||||||||||||||
| Net loss available to common stockholders | $ | (12.1) | $ | (215.0) | $ | (9.8) | $ | (187.3) | |||||||||||||||
| Denominator (in thousands): | |||||||||||||||||||||||
| Weighted-average common shares outstanding, shares for basic earnings per share | 34,103 | 33,974 | 34,081 | 33,966 | |||||||||||||||||||
Weighted-average awards outstanding(b) | 10 | 38 | 19 | 28 | |||||||||||||||||||
| Shares for diluted earnings per share | 34,113 | 34,012 | 34,100 | 33,994 | |||||||||||||||||||
| Basic net (loss) earnings from continuing operations per common share | $ | (0.85) | $ | 1.22 | $ | (0.62) | $ | 1.64 | |||||||||||||||
| Basic net earnings (loss) from discontinued operations per common share | 0.49 | (7.54) | 0.33 | (7.15) | |||||||||||||||||||
| Basic net loss per common share | $ | (0.36) | $ | (6.32) | $ | (0.29) | $ | (5.50) | |||||||||||||||
| Diluted net (loss) earnings from continuing operations per common share | $ | (0.85) | $ | 1.21 | $ | (0.62) | $ | 1.64 | |||||||||||||||
| Diluted net earnings (loss) from discontinued operations per common share | 0.49 | (7.54) | 0.33 | (7.15) | |||||||||||||||||||
| Diluted net loss per common share | $ | (0.36) | $ | (6.32) | $ | (0.29) | $ | (5.50) | |||||||||||||||
(a)Weighted participating securities include RSUs and PSUs that receive non-forfeitable dividends and consist of 407,000 and 419,000 weighted participating securities for the three and six months ended March 31, 2022, respectively, and 445,000 and 411,000 weighted participating securities for the three and six months ended March 31, 2021, respectively.
(b)For the calculation of diluted net earnings per share, the Company uses the more dilutive of either the treasury stock method or the two-class method to determine the weighted-average number of outstanding common shares. In addition, the Company had 1,125,000 and 1,115,000 weighted-average equity awards outstanding for the three and six months ended March 31, 2022, respectively, and 1,278,000 and 1,182,000 weighted-average equity awards outstanding for the three and six months ended March 31, 2021, respectively, that were anti-dilutive.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following: our mining and industrial operations; geological conditions; dependency on a limited number of key production and distribution facilities and critical equipment; weather conditions; uncertainties in estimating our economically recoverable reserves and resources; strikes, other forms of work stoppage or slowdown or other union activities; the inability to fund necessary capital expenditures or successfully complete capital projects; supply constraints or price increases for energy and raw materials used in our production processes; our indebtedness and inability to pay our indebtedness; restrictions in our debt agreements that may limit our ability to operate our business or require accelerated debt payments; tax liabilities; the inability of our customers to access credit or a default by our customers of trade credit extended by us or financing we have guaranteed; our payment of any dividends; financial assurance requirements; risks related to the potential phasing out of LIBOR; the impact of competition on the sales of our products; inflation risks; risks associated with our international operations and sales, including changes in currency exchange rates; increasing costs or a lack of availability of transportation services, equipment, raw materials or other supplies; the seasonal demand for our products; the impact of anticipated changes in plant nutrition product prices and customer application rates; conditions in the sectors where we sell products and supply and demand imbalances for competing products; our rights and governmental authorizations to mine and operate our properties; risks related to unanticipated litigation or investigations or pending litigation or investigations or other contingencies; compliance with foreign and United States (“U.S.”) laws and regulations related to import and export requirements and anti-corruption laws; compliance with environmental, health and safety laws and regulations; environmental liabilities; product liability claims and product recalls; changes in laws, industry standards and regulatory requirements; misappropriation or infringement claims relating to intellectual property; inability to obtain required product registrations or increased regulatory requirements; the impact of the COVID-19 pandemic, or other outbreaks of infectious disease or similar public health threats; our ability to successfully implement our strategies; plans to develop our lithium resource, including market entry; the useful life of our mine properties; our expectation of extending the Goderich mineral lease; conversion of mineral resources into mineral reserves; risks related to labor shortages and the loss of key personnel; a compromise of our computer systems, information technology or operations technology or the inability to protect confidential or proprietary data; climate change and related laws and regulations; our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; domestic and international general business and economic conditions; and other risks referenced from time to time in this report and our other filings with the Securities and Exchange Commission (the “SEC”), including Part I, Item 1A, “Risk Factors” of our Transition Report on Form 10-KT for the transition period ended September 30, 2021.
In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms or other comparable terminology. Forward-looking statements include without limitation statements about our outlook, including expected sales volumes and costs; existing or potential capital expenditures; capital projects and investments; the industry and our competition; projected sources of cash flow; potential legal liability; proposed legislation and regulatory action; the seasonal distribution of working capital requirements; our reinvestment of foreign earnings outside the U.S.; payment of future dividends and ability to reinvest in our business; our ability to optimize cash accessibility, minimize tax expense and meet debt service requirements; future tax payments, tax refunds and valuation allowances; leverage ratios; ability to obtain a waiver or amendment to our credit agreement; outcomes of matters with taxing authorities; the effects of currency fluctuations and inflation, including our ability to recover inflation-based cost increases; the seasonality of our business; the effects of climate change; and the impact of the global economy, COVID-19 pandemic and the war in Ukraine on us. These forward-looking statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no duty to update any of the forward-looking statements after the date hereof or to reflect the occurrence of unanticipated events.
Unless the context requires otherwise, references to the “Company,” “Compass Minerals,” “our,” “us” and “we” refer to Compass Minerals International, Inc. (“CMI,” the parent holding company) and its consolidated subsidiaries. Except where otherwise noted, references to North America include only the continental U.S. and Canada, and references to the United
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Kingdom (“U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to “short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds. Compass Minerals and Protassium+ and combinations thereof, are trademarks of CMI or its subsidiaries in the U.S. and other countries.
Discontinued Operations
During 2020, we initiated an evaluation of the strategic fit of certain of our businesses. On February 16, 2021, we announced our plan to restructure our former Plant Nutrition South America segment to enable targeted and separate sales processes for each portion of the former segment, including our chemicals and specialty plant nutrition businesses along with our equity method investment in Fermavi Eletroquímica Ltda. (“Fermavi”). Concurrently, to optimize our asset base in North America, we evaluated the strategic fit of our North America micronutrient product business. On March 16, 2021, the Board of the Directors approved a plan to sell our South America chemicals and specialty plant nutrition businesses, our investment in Fermavi and our North America micronutrient product business (collectively, the “Specialty Businesses”) with the goal of reducing our leverage and enabling increased focus on optimizing our core businesses.
As described further in Item 1, Note 2 to the Consolidated Financial Statements, on March 23, 2021, April 7, 2021, June 28, 2021 and April 20, 2022, we entered into definitive agreements to sell our South America specialty plant nutrition business, a component of our North America micronutrient business, our Fermavi investment and our South America chemicals business, respectively. The South America specialty plant nutrition business sale closed on July 1, 2021, the North America micronutrient sale closed on May 4, 2021, the sale of our Fermavi investment closed on August 20, 2021, and the sale of our South America chemicals business closed on April 20, 2022.
We believe these dispositions were conducted through a single disposal plan representing a strategic shift that will have a material effect on our operations and financial results. Consequently, the Specialty Businesses qualify for presentation as assets and liabilities held for sale and discontinued operations in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Accordingly, current and noncurrent assets and liabilities of the Specialty Businesses are presented in the Consolidated Balance Sheets as assets and liabilities held for sale for both periods presented and their results of operations are presented as discontinued operations in the Consolidated Statements of Operations for each period presented.
Fiscal Year
During 2021, we transitioned to a September 30 fiscal year end. The nine-month period from January 1, 2021 to September 30, 2021, served as a transition period, and we filed one-time, nine-month transitional financial statements for the transition period in a Transition Report on Form 10-KT filed with the SEC on November 30, 2021. Prior to the transition period, our fiscal year was the calendar year ending on December 31. Our fiscal year 2022 (or “fiscal 2022”) commenced on October 1, 2021 and ends on September 30, 2022.
Critical Accounting Estimates
Preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments result primarily from the need to make estimates about matters that are inherently uncertain. Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8, Note 2 to the Consolidated Financial Statements included in our Transition Report on Form 10-KT for the transition period ended September 30, 2021, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. For a further description of our critical accounting policies, see Item 1, Note 1 of our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Actual results in these areas could differ from management’s estimates.
Company Overview
Compass Minerals is a leading producer of essential minerals, including salt, sulfate of potash (“SOP”) specialty fertilizer and magnesium chloride. As of March 31, 2022, we operated 12 production and packaging facilities (excluding 3 production facilities in South America that were part of our discontinued operations), including:
•The largest rock salt mine in the world in Goderich, Ontario, Canada;
•The largest dedicated rock salt mine in the U.K. in Winsford, Cheshire;
•A solar evaporation facility located near Ogden, Utah, which is both the largest sulfate of potash specialty fertilizer production site and the largest solar salt production site in the Western Hemisphere; and
•Several mechanical evaporation facilities producing consumer and industrial salt.
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In March 2021, we concluded that certain of our assets met the criteria for classification as held for sale and discontinued operations. As a result, we are now presenting two reportable segments in continuing operations, Salt and Plant Nutrition (which was previously known as the Plant Nutrition North America segment) in this Form 10-Q. See Item 1, Note 10 to the Consolidated Financial Statements for more information. Unless otherwise indicated, the information and amounts provided in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” pertain to continuing operations.
Our Salt segment provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, agricultural and industrial applications in North America. In the U.K., we operate a records management business utilizing excavated areas of our Winsford salt mine with one other location in London, England.
Our Plant Nutrition segment produces and markets SOP products in various grades worldwide to distributors and retailers of crop inputs, as well as growers and for industrial uses. We market our SOP under the trade name Protassium+.
Consolidated Results of Continuing Operations
The following is a summary of our consolidated results of continuing operations for the three and six months ended March 31, 2021 and 2022, respectively. The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.
THREE AND SIX MONTHS ENDED MARCH 31
* Refer to “—Reconciliation of Net Earnings from Continuing Operations to EBITDA and Adjusted EBITDA” for a reconciliation to the most directly comparable U.S. GAAP financial measure and the reasons we use this non-GAAP measure.
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Commentary: Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
•Total sales increased 5%, or $23.0 million, due to increases in our Salt and Plant Nutrition segments. The increase in Salt sales primarily reflects higher commitment levels, while the increase in Plant Nutrition sales was driven primarily by higher pricing.
•Operating earnings decreased 74%, or $56.0 million, due to lower Salt operating earnings driven primarily by higher distribution and product costs and slightly lower Plant Nutrition operating earnings. In addition, corporate SG&A expenses were higher primarily due to a contingent loss accrual and increased legal expenses related to the SEC investigation and costs related to our lithium development project.
•Earnings before interest, taxes, depreciation and amortization (“EBITDA”)* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* decreased 42%, or $47.7 million.
•Diluted net loss per share decreased $2.06 to a net loss of $0.85.
Commentary: Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
•Total sales increased 6%, or $45.3 million, due to an increase in our Salt segment sales, which was partially offset by lower Plant Nutrition sales. The increase in Salt sales primarily reflects higher commitment levels. The decline in Plant Nutrition sales was primarily driven by lower production volumes which limited inventory available for sale.
•Operating earnings decreased 61%, or $63.7 million, due to a decrease in the Salt segment, driven primarily by higher distribution and product costs. The decrease in operating earnings was partially offset by an increase in our Plant Nutrition segment due to higher pricing, partially offset by lower sales volumes. Corporate and Other segment SG&A expenses also increased primarily due to a contingent loss accrual in the second quarter of fiscal 2022 and increased legal expenses related to the SEC investigation, executive transition costs and costs incurred for the lithium development project.
•Adjusted EBITDA decreased 29%, or $51.3 million.
•Diluted net loss per share decreased $2.26 to a net loss of $0.62.
THREE AND SIX MONTHS ENDED MARCH 31
Commentary: Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Gross Profit: Decreased 40%, or $43.8 million; Gross Margin decreased 11 percentage points to 14%
•Salt segment gross profit decreased $42.2 million primarily due to higher per-unit logistics and product costs, which were partially offset by higher sales volumes (see Salt operating results).
•The gross profit of the Plant Nutrition segment decreased $1.8 million due to higher per-unit product costs, lower sales volumes and higher per-unit logistics costs, which were partially offset by higher average sales prices (see Plant Nutrition operating results).
Commentary: Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
•Salt segment gross profit decreased $46.4 million primarily due to higher per-unit logistics and product costs, which were partially offset by higher sales volumes (see Salt operating results).
•The gross profit of the Plant Nutrition segment increased $3.5 million due to higher average sales prices, which were partially offset by higher per-unit product costs and logistics costs (see Plant Nutrition operating results).
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OTHER EXPENSES AND INCOME
Commentary: Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
SG&A: Increased $12.2 million; increased 2.3 percentage points as a percentage of sales from 7.6% to 9.9%
•The increase in SG&A expense was primarily due to a contingent loss accrual and increased legal expenses related to the SEC investigation and costs related to our lithium development project.
Interest Expense: Decreased $1.8 million to $13.9 million
•The decrease was primarily due to a decrease in borrowings outstanding under the credit agreement we entered into on November 26, 2019 (the “Credit Agreement”).
Loss on Foreign Exchange: Increased $0.9 million from a loss of $2.1 million to a loss of $3.0 million
•We realized foreign exchange losses of $3.0 million in the first quarter of fiscal 2022 compared to losses of $2.1 million in the same quarter of the prior fiscal year, which primarily reflect changes in translating our intercompany loans from Canadian dollars to U.S. dollars.
Other Expense: Increased $1.4 million from $0.3 million to $1.7 million
•The increase in other expense is primarily due to our share of losses in the current period related to our equity investments.
Income Tax Expense: Increased $14.4 million from $16.0 million to $30.4 million
•Income tax expense increased primarily due to a $28.0 million valuation allowance recorded against the portion of our deferred tax assets that are no longer considered more likely than not to be realized, partially offset by a lower tax expense due to a $56.5 million decrease in pretax book income.
•Our effective tax rate increased from 28% in the prior fiscal year to 2171% in the second quarter of fiscal 2022 reflecting a $28.0 million valuation allowance. See Item 1, Note 7 to the Consolidated Financial Statements.
•Our income tax provision for the three months ended March 31, 2022 differs from the U.S. statutory rate primarily due to the recorded valuation allowance, U.S. statutory depletion, state income taxes, global intangible low-taxed income, nondeductible executive compensation, foreign income, mining and withholding taxes, nondeductible contingent loss accrual and interest expense recognition differences for tax and financial reporting purposes.
Net Earnings (Loss) from Discontinued Operations: Increased from a loss of $256.3 million to income of $16.9 million
•The net earnings from our discontinued operations for the three months ended March 31, 2022 includes only the results from our chemicals business in South America, whereas the net loss for the three months ended March 31, 2021 includes the results of all of the South America businesses and the North America specialty plant nutrition business.
•The current period earnings of the South America chemicals business includes a $20.4 million foreign currency exchange gain partially offset by an impairment loss of $16.3 million compared to the prior period foreign currency exchange loss of $4.3 million and the initial impairment loss of $255.2 million to record the net assets of the South America businesses at their fair value less cost to sell. Refer to Item 1, Note 2 to the Consolidated Financial Statements for additional details.
Commentary: Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
•The increase in SG&A expense was primarily due to a contingent loss accrual in the second quarter of fiscal 2022 and increased legal expenses related to the SEC investigation, executive transition costs and costs related to our lithium development project.
Interest Expense: Decreased $3.4 million to $27.8 million
•The decrease was primarily due to a decrease in outstanding borrowings under the Credit Agreement.
Loss on Foreign Exchange: Decreased $5.7 million from a loss of $8.3 million to a loss of $2.6 million
•We realized a foreign exchange loss of $2.6 million in the first six months of 2022 compared to a loss of $8.3 million in the first six months of 2021 due primarily to changes in translating our intercompany loans from Canadian dollars to U.S. dollars.
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Other Expense: Increased $1.5 million from $0.4 million to $1.9 million
•The increase is due primarily to our share of losses in the current period related to our equity investments.
Income Tax Expense: Increased $21.6 million from $7.6 million to $29.2 million
•The increase in income tax expense was primarily due to a $28.0 million valuation allowance recorded in the second quarter of fiscal 2022 against the portion of our deferred tax assets that are no longer considered more likely than not to be realized, partially offset by a decrease due to lower pretax book income for the six months ended March 31, 2022 compared to the six months ended March 31, 2021.
•Our effective tax rate increased from 12% for the six months ended March 31, 2021 to 360% for the six months ended March 31, 2022, reflecting a $28.0 million valuation allowance recorded in fiscal 2022. See Item 1, Note 7 to the Consolidated Financial Statements.
•Our income tax provision for the six months ended March 31, 2022 differs from the U.S. statutory rate primarily due to the valuation allowance, U.S. statutory depletion, state income taxes, global intangible low-taxed income, nondeductible executive compensation, foreign income, mining and withholding taxes, nondeductible contingent loss accrual and interest expense recognition differences for tax and financial reporting purposes.
Net Earnings (Loss) from Discontinued Operations: Increased from a loss of $242.9 million to income of $11.4 million
•The net earnings from our discontinued operations for the six months ended March 31, 2022 includes only the results from our chemicals business in South America, but includes the results of all the South America businesses and the North America specialty plant nutrition businesses for the six months ended March 31, 2021.
•The current period results of the South America chemicals business includes a foreign currency exchange rate gain of $17.3 million partially offset by an impairment loss of $24.7 million compared to the prior period foreign currency exchange rate loss of $2.8 million and the initial loss of $255.2 million to record the net assets of the South America businesses at their fair value less cost to sell. Refer to Item 1, Note 2 to the Consolidated Financial Statements for additional details.
Operating Segment Performance
The following financial results represent consolidated financial information with respect to the operations of our Salt and Plant Nutrition segments. The results of operations of the records management business and other incidental revenues, include sales of $2.9 million and $2.8 million for the three months ended March 31, 2022 and 2021, respectively, and $5.9 million and $5.3 million for the six months ended March 31, 2022 and 2021, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.
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Salt
THREE AND SIX MONTHS ENDED MARCH 31
| QTD 2022 | QTD 2021 | YTD 2022 | YTD 2021 | ||||||||||||||||||||
Salt Sales (in millions) | $ | 391.3 | $ | 369.0 | $ | 665.2 | $ | 597.5 | |||||||||||||||
Salt Operating Earnings (in millions) | $ | 49.3 | $ | 91.6 | $ | 88.7 | $ | 136.1 | |||||||||||||||
Salt Sales Volumes (thousands of tons) | |||||||||||||||||||||||
| Highway deicing | 4,815 | 4,550 | 7,622 | 6,754 | |||||||||||||||||||
| Consumer and industrial | 516 | 478 | 1,149 | 1,057 | |||||||||||||||||||
| Total tons sold | 5,331 | 5,028 | 8,771 | 7,811 | |||||||||||||||||||
Average Salt Sales Price (per ton) | |||||||||||||||||||||||
| Highway deicing | $ | 62.31 | $ | 64.00 | $ | 60.85 | $ | 62.44 | |||||||||||||||
| Consumer and industrial | $ | 176.86 | $ | 162.70 | $ | 175.28 | $ | 166.32 | |||||||||||||||
| Combined | $ | 73.39 | $ | 73.38 | $ | 75.84 | $ | 76.49 | |||||||||||||||
Commentary: Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
•Salt sales increased 6%, or $22.3 million, primarily due to higher Salt sales volumes primarily reflecting higher commitment levels.
•Average sales prices were flat but reduced Salt sales by $0.9 million as the decrease in average highway deicing sales prices were only partially offset by higher average consumer and industrial prices.
•Highway deicing average sales prices decreased 3% primarily due to lower North American highway deicing contract prices for the fiscal 2022 winter season. Consumer and industrial average sales prices increased 9% due to product sales mix and an increase in sales prices in the first six months of fiscal 2022 to help offset the impact of inflation.
•Salt sales volumes increased 6%, or 303,000 tons, which contributed $23.2 million to the sales increase. Highway deicing sales volumes increased 6%, primarily as a result of higher commitment volumes for the fiscal 2022 winter season while consumer and industrial sales volumes increased 8%.
•Salt operating earnings decreased 46%, or $42.3 million, primarily due to higher per-unit logistics and product costs and lower highway deicing prices. Higher freight costs and inflationary pressures for energy, certain materials and supplies were only partially recovered through increased consumer and industrial sales prices during the period. Additionally, as a result of a maintenance outage at our Cote Blanche mine during the three months ended March 31, 2022, we incurred additional costs to fulfill seasonal demand with salt from other sources.
Commentary: Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
•Salt sales increased 11%, or $67.7 million, primarily due to higher Salt sales volumes.
•Average sales prices decreased 1% and partially offset the increase in Salt sales by $1.8 million as the higher consumer and industrial sales prices only partially offset the impact of lower highway deicing sales prices.
•Highway deicing average sales prices decreased 3% due to lower North American highway deicing contract prices for the 2022 winter season. Consumer and industrial average sales prices increased 5% primarily due to product sales mix and higher sales prices primarily in response to the high inflationary environment.
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•Salt sales volumes increased 12% and contributed $69.5 million to the sales increase. Highway deicing sales volumes increased 13% primarily as a result of an increase in sales commitments. Consumer and industrial sales volumes increased 9% due to an increase in both deicing sales volumes and non-deicing volumes.
•Salt operating earnings decreased 35%, or $47.4 million, due primarily to higher per-unit logistics and product costs and lower highway deicing sales prices. We are experiencing higher freight costs and inflationary pressures for certain materials and supplies that were not recovered through increased consumer and industrial sales prices during the period. Additionally, as a result of a maintenance outage at our Cote Blanche mine during the three months ended March 31, 2022, we incurred additional logistics costs to fulfill seasonal demand with salt from other sources. Higher sales volumes compared to the prior period partially offset the decrease in operating earnings.
Plant Nutrition
THREE AND SIX MONTHS ENDED MARCH 31
| QTD 2022 | QTD 2021 | YTD 2022 | YTD 2021 | ||||||||||||||||||||
Plant Nutrition Sales (in millions) | $ | 54.3 | $ | 53.7 | $ | 108.9 | $ | 131.9 | |||||||||||||||
Plant Nutrition Operating Earnings (in millions) | $ | 4.4 | $ | 5.3 | $ | 13.9 | $ | 8.6 | |||||||||||||||
Plant Nutrition Sales Volumes (thousands of tons) | 74 | 94 | 157 | 237 | |||||||||||||||||||
Plant Nutrition Average Sales Price (per ton) | $ | 736 | $ | 573 | $ | 696 | $ | 558 | |||||||||||||||
Commentary: Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
•Plant Nutrition sales increased 1%, or $0.6 million due to higher average sales prices, which were mostly offset by lower sales volumes.
•Plant Nutrition sales volumes were lower than the same period of the prior fiscal year as feedstock inconsistencies over the past year have reduced production volumes and available inventory levels. The decline in sales volume reduced sales by $11.5 million.
•Plant Nutrition average sales prices increased 28%, which offset the decrease in sales volumes by $12.1 million. Average sales prices increased from the prior period due to the strong worldwide economic climate for fertilizer products.
•Plant Nutrition operating earnings decreased $0.9 million to $4.4 million primarily due to higher product and per-unit logistics costs primarily due to lower production volumes at our Ogden facility as well as higher energy and other input costs. Higher average sales prices partially offset the decrease.
Commentary: Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
•Plant Nutrition sales were $23.0 million lower than prior year as lower sales volumes were partially offset by higher average sales prices.
•Plant Nutrition sales volumes decreased 34%, or 80,000 tons, which resulted in a $44.7 million decrease in sales as feedstock inconsistencies at our Ogden facility have reduced production volumes and available inventory levels.
•Plant Nutrition average sales prices increased 25%, contributing $21.7 million to the increase in sales. Average sales prices increased from the prior period due to the continued strong worldwide economic climate for fertilizer products.
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•Plant Nutrition operating earnings increased $5.3 million to $13.9 million primarily reflecting the higher sales prices which were partially offset by higher product and per-unit logistics costs and lower sales volumes. The increase in per unit product costs was primarily due to lower production yields resulting from feedstock inconsistencies at our Ogden facility.
Fiscal 2022 Outlook
•We expect Salt segment sales volumes for fiscal 2022 to range from 12.2 million tons to 12.7 million tons.
•Plant Nutrition segment sales volumes for fiscal 2022 are expected to range from 270,000 tons to 290,000 tons and are expected to continue to be impacted by feedstock inconsistencies at our Ogden facility, which could also impact our costs.
•Fiscal 2022 capital expenditures are expected to be in the $100 million to $110 million range.
Liquidity and Capital Resources
Historically, our cash flows from operating activities have generally been adequate to fund our basic operating requirements, ongoing debt service and sustaining investment in our property, plant and equipment. We have also used cash generated from operations to fund capital expenditures which strengthen our operational position, pay dividends, fund smaller acquisitions and repay our debt. To a certain extent, our ability to meet our short- and long-term liquidity and capital needs is subject to general economic, financial, competitive, legislative, regulatory and weather conditions, effects of climate change, geological variations in our mine deposits and other factors that are beyond our control. Historically, our working capital requirements have been the highest in the first fiscal quarter (ending December 31) and lowest in the third fiscal quarter (ending June 30). When needed, we may fund short-term working capital requirements by accessing our $300 million revolving credit facility.
We have been able to manage our cash flows generated and used across Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of March 31, 2022, we had $37.3 million of cash and cash equivalents (in our Consolidated Balance Sheets) that was either held directly or indirectly by foreign subsidiaries. As a result of U.S. tax reform, we revised our permanently reinvested assertion and we now expect to repatriate approximately $150 million of unremitted foreign earnings on which $4.8 million of income tax expense has been recorded for foreign withholding tax and state income taxes as of March 31, 2022. Additionally, we changed our permanently reinvested assertion and repatriated $42.5 million of unremitted foreign earnings from our U.K. operations in September 2021 on which $0.1 million of income tax expense was recorded during fiscal 2021. Due to our ability to generate adequate levels of U.S. cash flow on an annual basis, it is our current intention to continue to reinvest the remaining undistributed earnings of our foreign subsidiaries indefinitely. We review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense.
In addition, the amount of permanently reinvested earnings is influenced by, among other things, the profits generated by our foreign subsidiaries and the amount of investment in those same subsidiaries. The profits generated by our U.S. and foreign subsidiaries are impacted by the transfer price charged on the transfer of our products between them. During fiscal 2018, we reached a settlement agreement with federal Canadian and U.S. tax authorities on transfer pricing and management fees as part of an advanced pricing agreement covering our fiscal 2013-2021 tax years. Canadian provincial taxing authorities continue to challenge our transfer prices of certain items. The final resolution of these challenges may not occur for several years. We currently expect the outcome of these matters will not have a material impact on our results of operations. However, it is possible the resolution could materially impact the amount of earnings attributable to our foreign subsidiaries, which could impact the amount of permanently reinvested foreign earnings. See Item 1, Note 7 of our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future income. On the basis of this evaluation, as of March 31, 2022, a valuation allowance of $28.0 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for income. We expect additional valuation allowances will be required in each of the next two quarters assuming our earnings are in line with our current expectations.
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Cash and cash equivalents as of March 31, 2022, of $55.0 million included cash held by our South America chemical business held for sale of $10.1 million. We have $145.9 million of operating cash flows during the six months ended March 31, 2022, reflecting decreases in our working capital. During the period ended March 31, 2022, we used cash on hand and cash flows from operations to invest $46.3 million in equity investments, to fund capital expenditures of $43.5 million, to pay down debt of $14.5 million and pay dividends on our common stock of $10.5 million. Cash and cash equivalents from continuing operations of $44.9 million increased $26.8 million from September 30, 2021. Cash flows from continuing operations totaled $140.6 million during the six months ended March 31, 2022, including a net loss from continuing operations of $21.1 million which included depreciation, depletion and amortization of $56.2 million, and a net working capital decrease of $88.1 million driven primarily by the seasonality of our Salt business. Our working capital decrease primarily reflects the sales of Salt inventory through March 31, 2022, partially offset by uncollected accounts receivable at the conclusion of the winter season which begins in the first quarter (ending December 31) of each fiscal year.
Dispositions
On March 23, 2021, we entered into a definitive agreement to sell our South America specialty plant nutrition business to ICL Brasil Ltda., a subsidiary of ICL Group Ltd. The transaction closed on July 1, 2021. Upon closing we received gross proceeds of approximately $421.1 million, following a reduction in proceeds of $6.2 million in working capital adjustments (finalized during the quarter ended September 30, 2021), comprised of cash in the amount of approximately $318.4 million and an additional $102.7 million in net debt assumed by ICL Brasil Ltd. The Brazilian debt was deducted from gross proceeds from the transaction. The terms of the definitive agreement provide for an additional earnout payment of up to R$88 million Brazilian reais. On April 7, 2022, we received the maximum earnout possible under the terms of the sale, or $18.5 million based on exchange rates at the time.
On April 7, 2021, we entered into a definitive agreement to sell a component of our North America micronutrient business to Koch Agronomic Services, LLC, a subsidiary of Koch Industries. On May 4, 2021, we completed the sale for approximately $56.7 million and we paid fees totaling $0.5 million.
On June 28, 2021, we entered into a definitive agreement to sell our investment in Fermavi for R$45 million Brazilian reais (including R$30 million Brazilian reais of deferred purchase price due in annual installments through August 2025). The transaction closed on August 20, 2021, and we received cash proceeds of approximately $2.9 million.
On April 20, 2022, we completed the sale of our South America chemicals business to a subsidiary of Cape Acquisitions LLC. Upon closing of the all-cash sale, we received gross proceeds of approximately $51.0 million based on exchange rates at the time of closing, subject to a post-closing adjustment. The sale includes all of our remaining operations in Brazil, concluding the previously announced plan to exit the South American market.
We recorded a loss on the sales of the South American specialty plant nutrition business and investment in Fermavi totaling approximately $209.8 million and a non-cash impairment loss for the remaining chemical business of approximately $114.9 million which includes the effect of the significant weakening of the Brazilian real against the U.S. dollar. These losses were partially offset by approximately $30.6 million of gain from the sale of a component of the North America micronutrient business.
Indebtedness
As of March 31, 2022, we had $931.5 million of outstanding indebtedness, consisting of $250.0 million outstanding under our 4.875% Senior Notes due 2024, $500.0 million outstanding under our 6.75% Senior Notes due 2027, $106.5 million of borrowings outstanding under our senior secured credit facilities under the Credit Agreement, consisting of $77.5 million of term loans and $29.0 million borrowed against our revolving credit facility, and $75.0 million of outstanding loans under the accounts receivable financing facility (see Item 1, Note 8 of our Consolidated Financial Statements for more detail regarding our debt). Outstanding letters of credit totaling $13.8 million as of March 31, 2022, reduced available borrowing capacity under our revolving credit facility to $257.2 million. In April 2022, we utilized earnout proceeds from the 2021 sale of our South America specialty plant nutrition business and proceeds from the sale of our South America chemicals business, discussed in Dispositions above, to repay approximately $60.6 million of our term loan balance.
In the quarter ended March 31, 2021, we made a $41.7 million required prepayment of our term loan for 2020 Excess Cash Flow (as such term is defined in the Credit Agreement). This prepayment, along with the prepayment made in the last quarter of fiscal 2021 described above, will reduce the future required term loan payments. As such, we do not have a scheduled term loan payment until January 2025.
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In July 2021, we utilized cash proceeds from the sale of the South America specialty plant nutrition business noted above in Dispositions to repay amounts borrowed against our revolving credit facility of $35.0 million. An additional $265.0 million of proceeds was utilized to pay down our term loan balance.
In the future, including in fiscal 2022, we may borrow amounts under the revolving credit facility or enter into additional financing to fund our working capital requirements, potential acquisitions and capital expenditures and for other general corporate purposes.
Our ability to make scheduled interest and principal payments on our indebtedness, to refinance our indebtedness, to fund planned capital expenditures and to fund acquisitions will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our liquidity needs over the next 12 months.
Our debt service obligations could, under certain circumstances, materially affect our financial condition and prevent us from fulfilling our debt obligations. As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct substantially all of our consolidated operating activities and own substantially all of our operating assets. The principal source of the cash needed to pay our obligations is the cash generated from our subsidiaries’ operations and their borrowings. Our subsidiaries are not obligated to make funds available to CMI. Furthermore, we must remain in compliance with the terms of the Credit Agreement governing our credit facilities, including the total leverage ratio and interest coverage ratio, in order to pay dividends to our stockholders. We must also comply with the terms of our indenture governing our 4.875% Senior Notes due July 2024 and our 6.75% Senior Notes due December 2027, which limit the amount of dividends we can pay to our stockholders.
Our maximum allowed consolidated total leverage ratio (as defined and calculated under the terms of the Credit Agreement) is 4.5x as of the last day of any quarter. As of March 31, 2022, our total leverage ratio was approximately 4.0x (including discontinued operations). In April 2022, we paid down additional debt of $60.6 million in the third quarter of fiscal 2022 with cash received from the earnout payment from the sale of our South America specialty plant nutrition business and sale of our South America chemicals business. We routinely prepare earnings scenarios and forecasts throughout the year. Due to inflationary pressures and higher costs (including transportation costs), we believe it is reasonably possible that our consolidated total leverage ratio will exceed the maximum limit by the third quarter of our 2022 fiscal year. If we were to violate this financial covenant, the lenders could declare the Company in default and could accelerate the amounts due under our Credit Agreement. Further, a default under the Credit Agreement would trigger cross-default provisions within our other debt agreements. We plan to obtain a waiver or amendment to the relevant provisions of the Credit Agreement, as we have done successfully in the past, to alleviate the reasonable possibility of exceeding our consolidated total leverage ratio for at least the next twelve months. We have begun discussions with our lenders, however a waiver or amendment would be granted at the sole discretion of the lenders and there can be no assurance that we would be able to obtain such a waiver.
Although we are in compliance with our debt covenants as of March 31, 2022, we can make no assurance that we will remain in compliance with these ratios nor can we make any assurance that the agreements governing the current and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund scheduled principal or interest payments on our debt when due. If we consummate an additional acquisition, our debt service requirements could increase. Furthermore, we may need to refinance all or a portion of our indebtedness on or before maturity; however, we cannot provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
Principally due to the nature of our deicing business, our cash flows from operations have historically been seasonal, with the majority of our cash flows from operations generated during the first half of the calendar year. When we have not been able to meet our short-term liquidity or capital needs with cash from operations, whether as a result of the seasonality of our business or other causes, we have met those needs with borrowings under our revolving credit facility. We expect to meet the ongoing requirements for debt service, any declared dividends and capital expenditures from these sources. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We manage our capital allocation considering our long term strategic objectives and spending required to sustain our business. We announced on November 15, 2021, that we reduced our dividend by approximately 80% to provide additional liquidity to support the business and invest in strategic expansion opportunities. We expect to reinvest the cash we anticipate retaining from this dividend reduction toward an expansion of our product portfolio, continued investment in our existing core assets and other uses. While our equipment and facilities are generally not impacted by rapid technology changes, our operations require
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refurbishments and replacements to maintain structural integrity and reliable production and shipping capabilities. When possible, we incorporate efficiency, environmental and safety improvement capabilities into our routine capital projects and we plan the timing of larger projects to balance with our liquidity and capital resources. Changes in our operating cash flows may affect our future capital allocation and spending. For fiscal 2022 we have allocated approximately $15 million of our planned capital spending to upgrade the barge dock at our Cote Blanche mine and have incorporated efficiency and safety features into the design. Additionally, we intend to continue to develop our recently identified lithium resource at our Ogden facility and expect to spend approximately $15 million of capital in fiscal 2022 for the construction of a direct lithium extraction plant. These large projects are expected to be balanced with other sustaining and efficiency projects totaling approximately $100 to $110 million in fiscal 2022. We expect to achieve market entry with a lithium product by 2025 and expect significant capital and other expenditures would be required to achieve this market entry; however, the full amount of this expenditure is currently unknown and will depend on a number of factors, including the outcome of our strategic evaluation of development options for our lithium resource. For more information, refer to Part I, Item 1A, “Risk Factors” in our Form 10-KT for the for the transition period ended September 30, 2021.
On November 2, 2021, we announced a $45 million equity investment in Fortress North America, LLC (“Fortress”), building upon a previous $5 million investment. As of March 31, 2022, we had invested $50 million in Fortress in exchange for an ownership interest of approximately 45%. Fortress is a development stage company that intends to achieve commercialization of its magnesium chloride-based fire-retardant products to help combat wildfires. We may make further investments in Fortress or make other acquisitions to grow our business.
The table below provides a summary of our cash flows by category, including cash flows from discontinued operations:
SIX MONTHS ENDED MARCH 31, 2022 | SIX MONTHS ENDED MARCH 31, 2021 | ||||
| Operating Activities: | |||||
Net cash provided by operating activities were $145.9 million | Net cash provided by operating activities were $186.9 million | ||||
» Net losses were $9.7 million. | » Net losses were $186.3 million. | ||||
» Non-cash depreciation and amortization expense was $56.2 million. | » Non-cash depreciation and amortization expense was $68.9 million. | ||||
» Working capital items were a source of operating cash flows of $61.3 million. | » Working capital items were a source of operating cash flows of $32.3 million. | ||||
Investing Activities: | |||||
Net cash flows used in investing activities were $88.4 million | Net cash flows used in investing activities were $39.2 million | ||||
» Net cash flows used in investing activities included equity method investments of $46.3 million. | » Net cash flows used in investing activities included $40.2 million of capital expenditures. | ||||
» Included $43.5 million of capital expenditures. | |||||
Financing Activities: | |||||
Net cash flows used in financing activities were $25.9 million | Net cash flows used in financing activities were $118.2 million | ||||
» Included net payments on our debt of $14.5 million. | » Included net payment on our debt of $68.3 million. | ||||
» Included the payment of dividends of $10.5 million. | » Included the payment of dividends of $49.0 million. | ||||
As mentioned above, our Salt segment’s business is seasonal and our Salt segment results and working capital needs are heavily impacted by the severity and timing of the winter weather, which generally occurs from December through March of each year. Customers tend to replenish their inventory following snow events, consequently the number and timing of snow events during the winter season will impact the amount of our accounts receivable and inventory at the end of each quarter. Our cash flows during the six months ended March 31 of each year reflect the seasonal decrease in inventory due to the end of the winter season partially offset by an increase in accounts receivable for sales not yet collected.
Other Matters
See Item 1, Notes 7 and 9 of our Consolidated Financial Statements for a discussion regarding labor, environmental and litigation matters.
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Reconciliation of Net Earnings from Continuing Operations to EBITDA and Adjusted EBITDA
Management uses a variety of measures to evaluate our performance. While our consolidated financial statements, taken as a whole, provide an understanding of our overall results of operations, financial condition and cash flows, we analyze components of the consolidated financial statements to identify certain trends and evaluate specific performance areas. In addition to using U.S. GAAP financial measures, such as gross profit, net earnings and cash flows generated by operating activities, management uses EBITDA and Adjusted EBITDA. We have presented Adjusted EBITDA for both continuing operations and consolidated including discontinued operations for comparability purposes (see Item 1, Note 2 to the Consolidated Financial Statements for a discussion of discontinued operations). Both EBITDA and Adjusted EBITDA are non-GAAP financial measures used to evaluate the operating performance of our core business operations because our resource allocation, financing methods, cost of capital and income tax positions are managed at a corporate level, apart from the activities of the operating segments, and our operating facilities are located in different taxing jurisdictions, which can cause considerable variation in net earnings. We also use EBITDA and Adjusted EBITDA to assess our operating performance and return on capital against other companies, and to evaluate potential acquisitions or other capital projects. EBITDA and Adjusted EBITDA are not calculated under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings, cash flows or other financial data prepared in accordance with U.S. GAAP or as a measure of our overall profitability or liquidity.
EBITDA and Adjusted EBITDA exclude interest expense, income taxes and depreciation and amortization, each of which are an essential element of our cost structure and cannot be eliminated. Furthermore, Adjusted EBITDA excludes other cash and non-cash items, including stock-based compensation, (gain) loss on foreign exchange, other (income) expense and other infrequent items that management does not consider indicative of normal operations. Our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt. We are also required to pay income taxes, a required and ongoing consequence of our operations. We have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues. Our employees are vital to our operations and we utilize various stock-based awards to compensate and incentivize our employees. Consequently, any measure that excludes these elements has material limitations. While EBITDA and Adjusted EBITDA are frequently used as measures of operating performance, these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation.
The calculation of EBITDA and Adjusted EBITDA as used by management is set forth in the table below (in millions):
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net (loss) earnings from continuing operations | $ | (29.0) | $ | 41.9 | $ | (21.1) | $ | 56.6 | |||||||||||||||
| Interest expense | 13.9 | 15.7 | 27.8 | 31.2 | |||||||||||||||||||
| Income tax expense | 30.4 | 16.0 | 29.2 | 7.6 | |||||||||||||||||||
| Depreciation, depletion and amortization | 27.9 | 29.9 | 56.2 | 60.0 | |||||||||||||||||||
| EBITDA from continuing operations | 43.2 | 103.5 | 92.1 | 155.4 | |||||||||||||||||||
| Adjustments to EBITDA from continuing operations: | |||||||||||||||||||||||
| Stock-based compensation - non cash | 4.5 | 3.8 | 7.7 | 5.9 | |||||||||||||||||||
| Loss on foreign exchange | 3.0 | 2.1 | 2.6 | 8.3 | |||||||||||||||||||
Executive transition costs(a) | 0.5 | — | 4.3 | — | |||||||||||||||||||
Accrued loss and legal costs related to SEC investigation(b) | 13.6 | 2.8 | 16.7 | 4.4 | |||||||||||||||||||
| Other expense (income), net | — | 0.3 | (0.2) | 0.5 | |||||||||||||||||||
| Adjusted EBITDA from continuing operations | 64.8 | 112.5 | 123.2 | 174.5 | |||||||||||||||||||
| Adjusted EBITDA from discontinued operations | 7.3 | 10.7 | 15.9 | 36.4 | |||||||||||||||||||
| Adjusted EBITDA including discontinued operations | $ | 72.1 | $ | 123.2 | $ | 139.1 | $ | 210.9 | |||||||||||||||
(a)We incurred severance and other costs related to executive transition.
(b)We recorded a contingent loss accrual and incurred costs related to the ongoing SEC investigation.
Recent Accounting Pronouncements
See Part 1, Note 1 of our Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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Effects of Currency Fluctuations and Inflation
Our operations outside of the U.S. are conducted primarily in Canada and the U.K. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or one of our subsidiaries enters into either a purchase or sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then translated into U.S. dollars for inclusion in our historical consolidated financial statements. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly from time to time and may do so in the future. The majority of revenues and costs are denominated in U.S. dollars, with Canadian dollars and British pounds sterling also being significant. Significant changes in the value of the Canadian dollar or British pound sterling relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar-denominated debt, including borrowings under our senior secured credit facilities.
We are experiencing increases in freight rates, prices for energy and other costs that have only been partially recovered through price increases for our products. Our efforts to recover inflation-based cost increases from our customers may be hampered as a result of the structure of our contracts and the contract bidding process as well as the competitive industries, economic conditions and countries in which we operate. For more information, see Part I, Item 1A, “Risk Factors” in our Transition Report on Form 10-KT for the transition period ended September 30, 2021 and Part II, Item 1A, “Risk Factors” in this report.
Seasonality
We experience a substantial amount of seasonality in our sales, including our salt deicing product sales. Consequently, our Salt segment sales and operating income are generally higher in the first and second fiscal quarters (ending December 31 and March 31) and lower during the third and fourth fiscal quarters of each year (ending June 30 and September 30). In particular, sales of highway and consumer deicing salt and magnesium chloride products vary based on the severity of the winter conditions in areas where the product is used. Following industry practice in North America and the U.K., we seek to stockpile sufficient quantities of deicing salt throughout the first, third and fourth fiscal quarters (ending December 31, June 30 and September 30) to meet the estimated requirements for the winter season. Our plant nutrition business is also seasonal. As a result, we and our customers generally build inventories during the plant nutrition business’ low demand periods of the year (which are typically winter and summer, but can vary due to weather and other factors) to ensure timely product availability during the peak sales seasons (which are typically spring and autumn, but can also vary due to weather and other factors).
Climate Change
The potential impact of climate change on our operations, product demand and the needs of our customers remains uncertain. Significant changes to weather patterns, a reduction in average snowfall or regional drought within our served markets or at our Ogden facility could negatively impact customer demand for our products and our costs, as well as our ability to produce our products. For example, prolonged periods of mild winter weather could reduce the demand for our deicing products. Drought conditions could similarly impact demand for our SOP products, as well as continue to impact the amount and quality of feedstock used to produce SOP at our Ogden facility due to changes in brine levels and mineral concentrations, which could have a material impact on our Plant Nutrition results of operations. Climate change could also lead to disruptions in the production or distribution of our products due to major storm events or prolonged adverse conditions, changing temperature levels, lake level fluctuations or flooding from sea level changes. Climate change or governmental initiatives to address climate change may necessitate capital expenditures in the future, although capital expenditures for climate-related projects are not expected to be material in fiscal 2022. For more information, see Part I, Item 1A, “Risk Factors” and Part I, Item 1 “Business—Environmental, Health and Safety and Other Regulatory Matters” in our Transition Report on Form 10-KT for the transition period ended September 30, 2021.
Global Economy
The ongoing COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We have continued producing and delivering essential products that support critical industries such as transportation, agriculture, chemical, food, pharmaceutical and animal nutrition. We have instituted several measures in response to the COVID-19 pandemic and have experienced negative impacts to our business from COVID-19, but our results of operations for the three and six months ended March 31, 2022, and 2021, were not materially affected by COVID-19, although the recent supply chain shortages and cost increases may be linked to the COVID-19 pandemic. Also, while we have no operations in Russia or Ukraine, we are monitoring any broader impact from the current war in Ukraine, especially with respect to energy costs.
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The ultimate impact that COVID-19 or the war in Ukraine will have on our future results is unknown at this time. For more information, see Part I, Item 1A, “Risk Factors” in our Transition Report on Form 10-KT for the transition period ended September 30, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our business is subject to various types of market risks that include interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has taken actions to mitigate our exposure to commodity pricing and foreign currency exchange rate risk by entering into natural gas derivative instruments and foreign currency contracts. We may take further actions to mitigate our exposure to interest rates, exchange rates and changes in the cost of transporting our products due to variations in our contracted carriers’ cost of fuel, which is typically diesel fuel. However, there can be no assurance that our hedging activities will eliminate or substantially reduce these risks. We do not enter into any financial instrument arrangements for speculative purposes. Our market risk exposure related to these items has not changed materially since September 30, 2021.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in the legal proceedings described in Part I, Item 1, Note 7 and Part I, Item 1, Note 9 of our Consolidated Financial Statements and, from time to time, various routine legal proceedings and claims arising from the ordinary course of our business. These primarily involve tax assessments, disputes with former employees and contract labor, commercial claims, product liability claims, personal injury claims and workers’ compensation claims. Management cannot predict the outcome of legal proceedings and claims with certainty. Nevertheless, management believes that the outcome of legal proceedings and claims, which are pending or known to be threatened, even if determined adversely, will not, either individually or in the aggregate, have a material adverse effect on our results of operations, cash flows or financial condition, except as otherwise described in Part I, Item 1, Note 7 and Part I, Item 1, Note 9 of our Consolidated Financial Statements. There have been no material developments since September 30, 2021 with respect to our legal proceedings, except as described in Part I, Item 1, Note 7 and Part I, Item 1, Note 9 of our Consolidated Financial Statements.
Item 1A. Risk Factors
For a discussion of the risk factors applicable to Compass Minerals, please refer to Part I, Item 1A, “Risk Factors” in our Transition Report on Form 10-KT for the transition period ended September 30, 2021, as updated and supplemented by the discussion below.
Inflation could result in higher costs and decreased profitability.
Recent inflation, including increases in freight rates, prices for energy and other costs, has adversely impacted us. Sustained inflation could result in higher costs for transportation, energy, materials, supplies and labor. Our efforts to recover inflation-based cost increases from our customers may be hampered as a result of the structure of our contracts and the contract bidding process as well as the competitive industries, economic conditions and countries in which we operate. Accordingly, substantial inflation may result in a material adverse impact on our costs, profitability and financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Exhibit Description | |||||||
| 101** | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (contained in Exhibit 101). | |||||||
* Filed herewith | ||||||||
** Furnished herewith | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMPASS MINERALS INTERNATIONAL, INC. | |||||||||||
| Date: May 10, 2022 | By: | /s/ Lorin Crenshaw | |||||||||
| Lorin Crenshaw | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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