CMP 10-Q
Compass Minerals International Inc (CMP)
10-Q
2024-05-15
For: 2024-03-31
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2024
or
For the transition period from _______________________ to __________________________
Commission File Number 001-31921
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
(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 | ||||||||||||
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. | ☑ | 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). | ☑ | 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. | |||||||||||||||||||||||
| ☑ | 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 10, 2024, was 41,333,826 shares.
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page | |||||||
| PART II. OTHER INFORMATION | ||||||||
1
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| (Unaudited) | |||||||||||
| March 31, 2024 | September 30, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowance for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Other | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued salaries and wages | |||||||||||
| Income taxes payable | |||||||||||
| Accrued interest | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock: $ | $ | $ | |||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost — | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
2
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except share and per share data)
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Shipping and handling cost | |||||||||||||||||||||||
| Product cost | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Loss on impairments | |||||||||||||||||||||||
| Other operating (income) expense | ( | ( | |||||||||||||||||||||
Operating (loss) earnings | ( | ( | |||||||||||||||||||||
| Other (income) expense: | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| (Gain) loss on foreign exchange | ( | ( | ( | ||||||||||||||||||||
| Net loss in equity investee | |||||||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
(Loss) earnings before income taxes | ( | ( | |||||||||||||||||||||
Income tax (benefit) expense | ( | ( | |||||||||||||||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Basic net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Diluted net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average common shares outstanding (in thousands): | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in millions)
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Unrealized gain from change in pension obligations, net of tax of $( | |||||||||||||||||||||||
Unrealized income (loss) on cash flow hedges, net of tax of $ | ( | ( | ( | ||||||||||||||||||||
| Cumulative translation adjustment | ( | ||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three and six months ended March 31, 2024 and 2023
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
Balance, September 30, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
Comprehensive (loss) income | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Balance, December 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive loss | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
Balance, September 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
Comprehensive (loss) income | — | — | — | ( | |||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Private placement of common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Balance, December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Comprehensive (loss) income | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Shares issued for stock units, net of shares withheld for taxes | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| Six Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash flows provided by operating activities: | |||||||||||
| Depreciation, depletion and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
Unrealized foreign exchange (gain) loss | ( | ||||||||||
| Loss on impairments | |||||||||||
| Net loss in equity investees | |||||||||||
Net gain from remeasurement of contingent consideration | ( | ||||||||||
| Other, net | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
| Receivables | ( | ||||||||||
| Inventories | |||||||||||
| Other assets | ( | ||||||||||
| Accounts payable and accrued expenses and other current liabilities | ( | ||||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from revolving credit facility borrowings | |||||||||||
| Principal payments on revolving credit facility borrowings | ( | ( | |||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Payments for contingent consideration | ( | ||||||||||
| Net proceeds from private placement of common stock | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Deferred financing costs | ( | ||||||||||
| Shares withheld to satisfy employee tax obligations | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of the year | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | $ | |||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
6
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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 global provider 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, chemical and agricultural applications. Its plant nutrition business is the leading North American producer of sulfate of potash (“SOP”), which is used in the production of specialty fertilizers for high-value crops and turf and helps improve the quality and yield of crops, while supporting sustainable agriculture. The Company’s principal products are salt, consisting of sodium chloride and magnesium chloride, and SOP. The Company is working to develop next-generation, environmentally friendly fire retardants to help to slow, stop and prevent wildfires. Additionally, the Company had been pursuing the development of a sustainable lithium salt resource to support the North American battery market. However, as described in Note 5, the Company has terminated its pursuit of the lithium development. 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 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 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 consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the annual period ended September 30, 2023, as filed with the Securities and Exchange Commission (the “SEC”) in its Annual Report on Form 10-K on November 29, 2023 (“2023 Form 10-K”). Certain amounts in prior periods have been reclassified to conform to the current period presentation. 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 salt deicing product sales. Consequently, 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). 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). Lastly, the results of the Company’s fire retardant business are also seasonal with peak demand for fire retardant products and services occurring from June through September.
Revision of Previously Issued Financial Statements
The Company identified certain misstatements in the historical presentation of its Consolidated Statements of Cash Flows. The misstatements were the result of the Company not reflecting the appropriate amount of non-cash capital expenditures in accounts payable in its operating and investing cash flows and had no effect on the Company’s Consolidated Balance Sheets or its Consolidated Statements of Operations. Management has considered the misstatements, and after evaluating both their quantitative and qualitative impacts, concluded they are not material to the Company’s previously issued consolidated financial statements. To correct the immaterial misstatements, the Company has revised its Consolidated Statements of Cash Flows for
7
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
the interim period ended March 31, 2023 and the interim period ended December 31, 2023. Certain prior period amounts have been reclassified to conform to the current period presentation. For further detail, refer to Note 16.
Impairments
As a result of a sustained decrease in the Company’s publicly quoted share price and market capitalization continuing into fiscal 2024 and recent developments related to its magnesium chloride-based fire retardants impacting its Fortress business, the Company determined that there were indicators of impairment and therefore performed long-lived assets and goodwill impairment testing. The analysis for Plant Nutrition resulted in no long-lived asset impairment but did result in a goodwill impairment, as discussed further below. The Fortress analysis resulted in an impairment of the Company’s magnesium chloride-related assets and goodwill; see below for additional details.
On March 22, 2024, the Company was notified of the decision by the U.S. Forest Service that the Company would not be awarded a contract to supply its magnesium chloride-based aerial fire retardant for the calendar 2024 fire season. For purposes of the long-lived asset impairment evaluation, management grouped and tested the magnesium chloride-related assets given their unique classification and separately identifiable cash flows. As a result of the evaluation using the income approach, the Company impaired all magnesium chloride-related assets which resulted in a long-lived asset, net, impairment of $15.6 million (finite-lived intangible assets) and an impairment of $1.5
The Company performed the interim goodwill impairment tests consistent with its approach for annual impairment testing, including using similar models, inputs and assumptions. As a result of the interim goodwill impairment test, the Company recognized impairment charges totaling $91.0 51.0 40.0 A summary of the impairments incurred for the three and six months ended March 31, 2024, is detailed below (in millions):
Impairment | Financial Statement Line Item | Segment | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2024 | |||||||||||||
Lithium long-lived assets, net | Loss on impairments | Corporate & Other | $ | $ | |||||||||||||
| Plant Nutrition goodwill | Loss on impairments | Plant Nutrition | |||||||||||||||
Fortress goodwill | Loss on impairments | Corporate & Other | |||||||||||||||
Fortress long-lived assets, net | Loss on impairments | Corporate & Other | |||||||||||||||
Fortress inventory | Product cost | Corporate & Other | |||||||||||||||
Total | $ | $ | |||||||||||||||
In connection with the aforementioned impairments, the Company determined the estimated fair value for each reporting unit based on discounted cash flow projections (income approach), market values for comparable businesses (market approach) or a combination of both. Under the income approach, the Company is required to make judgments about appropriate discount rates, long-term revenue growth rates and the amount and timing of expected future cash flows. The cash flows used in its estimates are based on the reporting unit's forecast, long-term business plan, and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. The Company’s estimates may differ from actual future cash flows. The risk adjusted discount rate used is consistent with the weighted average cost of capital of the Company’s peer companies and is intended to represent a rate of return that would be expected by a market participant. Under the market approach, market multiples are derived from market prices of stocks of companies in the Company’s peer group. The appropriate multiple is applied to the forecasted revenue and earnings before interest, taxes, depreciation and amortization of the reporting unit to obtain an estimated fair value.
8
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The most critical assumptions used in the calculation of the fair value of each reporting unit are the projected revenue growth rates, long-term operating margin, terminal growth rates, discount rate, and the selection of market multiples. The projected long term operating margin utilized in the Company’s fair value estimates is consistent with the its operating plan and is dependent on the successful execution of its long-term business plan, overall industry growth rates and the competitive environment. The discount rate could be adversely impacted by changes in the macroeconomic environment and volatility in the equity and debt markets. Although management believes its estimate of fair value is reasonable, if the future financial performance falls below expectations or there are unfavorable revisions to significant assumptions, or if the Company’s market capitalization declines, an additional non-cash goodwill impairment charge may be required in a future period. Management does not believe that the remaining goodwill balance in its Corporate and Other reporting unit is currently at risk of impairment as of March 31, 2024.
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 2023 Form 10-K. There were no material changes in the Company’s significant accounting policies from those described in its 2023 Form 10-K.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which updates reportable segment disclosure requirements primarily to include enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. Management is currently evaluating this ASU to determine its impact on the Company's disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which updates income tax disclosures by requiring consistent categories and additional disaggregation of information in the rate reconciliation and income taxes paid by jurisdiction. The amendments are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied prospectively; however, retrospective application is permitted. Management is currently evaluating this ASU to determine its impact on the Company’s disclosures.
2. Business Acquisition:
Beginning in 2020, the Company began a series of equity investments in Fortress, a next-generation fire retardant business dedicated to developing and producing a portfolio of fire retardant products to help combat wildfires. On May 5, 2023, the Company acquired the remaining 55 % interest in Fortress not previously owned in exchange for an initial cash payment of $18.9 million (net of cash held by Fortress of $6.5 million), and additional contingent consideration of up to $28 million to be paid in cash and/or Compass Minerals common stock upon the achievement of certain performance measures over the next five years , and a cash earn-out based on volumes of certain Fortress fire retardant products sold over a 10-year period. Building upon the previous 45 % minority ownership stake in Fortress, the transaction provided the Company full ownership of all Fortress assets, contracts, and intellectual property. See Note 1 for impairment information. See Note 13 for fair value information related to the contingent consideration as of March 31, 2024.
3. Revenues:
Deferred Revenue
9
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
4. Inventories:
Inventories consist of the following (in millions):
| March 31, 2024 | September 30, 2023 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials and supplies | |||||||||||
| Total inventories | $ | $ | |||||||||
5. Property, Plant and Equipment, Net:
Property, plant and equipment, net, consists of the following (in millions):
| March 31, 2024 | September 30, 2023 | ||||||||||
| Land, buildings and structures, and leasehold improvements | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Office furniture and equipment | |||||||||||
| Mineral interests | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation and depletion | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
The Company had been pursuing the development of a sustainable lithium salt resource to support the North American battery market. The passage of Utah House Bill 513 in March 2023 and the subsequent rulemaking process altered certain aspects of the regulatory landscape that will govern the development of lithium at the Great Salt Lake, introducing uncertainty into how development would proceed. As previously disclosed in the Company’s 2023 Form 10-K, the Company indefinitely paused new investment in its lithium development project pending greater clarity on the evolving regulatory environment in Utah. In December of 2023, a revised draft of the aforementioned rulemaking was published that continued to be, in the Company's assessment, adverse to its lithium development project. In addition, in December of 2023, the Company further refined its engineering estimates that, taken together with the proposed rules and decline in market price for lithium products, would result in inadequate risk-adjusted returns on capital.
10
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
6. Goodwill and Intangible Assets:
Changes in the carrying amount of goodwill are summarized as follows (in millions):
| Plant Nutrition | Corporate & Other | Consolidated | ||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | |||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | |||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ||||||||||||||||||
| Impairments | ( | ( | ( | |||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | |||||||||||||||||
As of March 31, 2024, there were indicators necessitating an interim impairment test of the Company’s goodwill based on the Company’s review of its operating performance, among other factors, for the relevant reporting units. Refer to Note 1 for additional details. In addition to the Plant Nutrition and Fortress impairments, the remaining change in goodwill between September 30, 2023, and March 31, 2024 was due to the impact from translating foreign-denominated amounts to U.S. dollars.
In connection with the Fortress acquisition described in Note 2, the Company acquired identifiable intangible assets which consisted of customer relationships, developed technology, in-process research and development and trade name. The fair values were determined using Level 3 inputs (see Note 13 for a discussion of the levels in the fair value hierarchy). Upon acquisition, the fair value of the customer relationships was estimated using an income approach method while the fair values of developed technology, in-process research and development and trade name were estimated using the relief from royalty method.
As a result of the Fortress-related impairments discussed in Note 1, the Company impaired all magnesium chloride-related assets which resulted in an impairment of the Company’s developed technology intangible asset of $15.6 million, net of accumulated amortization of $0.4 million. The Company continues to have Fortress-related net intangible assets consisting of customer relationships and trade name of $55.2 million and $0.2 million, respectively, as of March 31, 2024. The Company also has $2.2 million of indefinite-lived in-process research and development recognized in connection with the Fortress acquisition as of March 31, 2024, which will be reviewed for impairment at least annually, or in the event of indicators of impairment, until product development is completed.
7. Income Taxes:
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, base erosion and anti-abuse tax, 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 in the U.S. over the three-year period ended March 31, 2024. 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, during the six months ended March 31, 2024, an additional valuation allowance of $28.3 million has been recorded to recognize only the portion of the U.S. deferred tax assets that is 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, 2024, and September 30, 2023, the Company had $65.5 million and $65.4 million, respectively of gross foreign federal NOL carryforwards that have no expiration date and $2.9
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 2002-2018. The reassessments are a result of ongoing audits and total $188.7 million, including interest, through March 31, 2024. 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
11
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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 $161.9 million performance bond and has paid $36.7
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, 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, 2024, 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 2023 Form10-K.
8. Long-Term Debt:
Long-term debt consists of the following (in millions):
| March 31, 2024 | September 30, 2023 | ||||||||||
| $ | $ | ||||||||||
| Term Loan due May 2028 | |||||||||||
| Revolving Credit Facility due May 2028 | |||||||||||
| AR Securitization Facility expires March 2027 | |||||||||||
| Less unamortized debt issuance costs | ( | ( | |||||||||
| Total debt | |||||||||||
| Less current portion | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
On March 27, 2024, the Company entered into an amendment to its 2023 Credit Agreement, which eased the restrictions of certain covenants contained in the agreement. The amendment included increasing the maximum allowed consolidated total net leverage ratio (as defined and calculated under the terms of the amended 2023 Credit Agreement) to 6.0 x as of the fiscal quarter ended March 31, 2024, increasing further to 6.5 x as of the last day of any quarter through the fiscal quarter ended December 31, 2024, then gradually stepping down to 4.75 x by the fiscal quarter ended March 31, 2026 and thereafter. The amendment also removed the flexibility related to the lithium development joint ventures, projects or similar arrangements and any related funding transactions in connection therewith. In connection with this amendment, the Company paid fees totaling $1.7 million which were capitalized as deferred financing costs. Additional arrangement and legal fees of $0.9 million were expensed as of March 31, 2024.
On March 27, 2024, certain of the Company’s U.S. subsidiaries entered into an amendment to its revolving accounts receivable financing facility with PNC Bank, National Association, extending the facility to March 2027. In connection with this amendment, the Company paid fees totaling $0.4 million which were capitalized as deferred financing costs.
As of March 31, 2024, the term loan and revolving credit facility under the 2023 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, 2024 and September 30, 2023, the weighted average interest rate on all borrowings outstanding under the 2023 Credit Agreement was approximately 8.4 % and 7.8 %, respectively. Depending on the type, borrowings under the 2023 Credit Agreement accrue interest at a rate per annum equal to the Adjusted Term SOFR Rate, the Adjusted EURIBO Rate, Prime Rate or the CDO Rate (as defined in the credit agreement), as applicable, plus Applicable
12
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Margins (as defined in the credit agreement) which resulted in interest rates between 8.2 % and 10.3 % as of March 31, 2024, and 7.7 % and 9.8 % as of September 30, 2023.
As of March 31, 2024, the Company had $237.7 million of availability under its $375 million revolving credit facility. The 2023 Credit Agreement requires the Company to maintain certain financial ratios, including a minimum interest coverage ratio and a maximum total net leverage ratio. The Company was in compliance as of March 31, 2024 with its debt covenants under the 2023 Credit Agreement and its AR Securitization Facility. The consolidated total net leverage ratio represents the ratio of (a) consolidated total net debt to (b) consolidated adjusted earnings before interest, taxes, depreciation and amortization. Consolidated total net debt includes the aggregate principal amount of total debt, net of unrestricted cash not to exceed $75.0 million.
9. Commitments and Contingencies:
As previously disclosed, the Company was the subject of an investigation by the Division of Enforcement of the SEC regarding 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.
On September 23, 2022, the Company reached a settlement with the SEC, concluding and resolving the SEC investigation in its entirety. Under the terms of the settlement, the Company, without admitting or denying the findings in the administrative order issued by the SEC, agreed to pay a civil penalty of $12 million and to cease and desist from violations of specified provisions of the federal securities laws and rules promulgated thereunder, and to retain an independent compliance consultant for a period of approximately one year to review certain accounting practices and procedures. As set forth in the administrative order, the $12 million civil penalty was paid in installments with $10 million reflected in accrued expenses and other current liabilities on the Company’s Consolidated Balance Sheets as of September 30, 2023 and subsequently paid in during the first quarter of fiscal 2024.
On April 24, 2024, the Company, one of its former officers and three current officers were named as defendants in a punitive securities class action lawsuit filed in the United States District Court for the District of Kansas, alleging that the Company and such officers made misleading statements damaging shareholders relating to the Company’s fire retardant business. The Company intends to vigorously defend these allegations. At this time, the Company is unable to assess with any certainty what, if any, damages could be awarded in this matter.
On May 1, 2024, Fortress was named as defendant in a trade secrets lawsuit filed by Perimeter Solutions L.P. in the United States District Court for the Eastern District of California, alleging that certain of Fortress’s non-magnesium chloride fire retardant products were developed using Perimeter’s trade secrets, and seeking unspecified damages (including exemplary damages) and injunctive relief. The Company intends to vigorously defend these allegations. At this time, the Company is unable to assess with any certainty what, if any, damages could be awarded in this matter. On May 1, 2024, Perimeter Solutions L.P. also filed a lawsuit in the United States District Court for the Eastern District of Missouri alleging similar claims against an employee of Fortress for breach of contract and misappropriation of trade secrets.
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 proceedings 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.
13
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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. For the three and six months ended March 31, 2024 and 2023, the Company has presented two
Segment information is as follows (in millions):
| Three Months Ended March 31, 2024 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||
Operating earnings (loss)(b)(c)(d) | ( | ( | ( | |||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||
| Total assets (as of end of period) | ||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||
Operating earnings (loss)(c)(d) | ( | ( | ||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||
| Total assets (as of end of period) | ||||||||||||||||||||||||||
| Six Months Ended March 31, 2024 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||
Operating earnings (loss)(b)(c)(d) | ( | ( | ( | |||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||
| Six Months Ended March 31, 2023 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Intersegment sales | ( | — | ||||||||||||||||||||||||
| Shipping and handling cost | ||||||||||||||||||||||||||
Operating earnings (loss)(c)(d) | ( | |||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||
14
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Disaggregated revenue by product type is as follows (in millions):
| Three Months Ended March 31, 2024 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||
| SOP | ||||||||||||||||||||||||||
| Fire Retardant | ||||||||||||||||||||||||||
| Eliminations & Other | ( | |||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended March 31, 2023 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||
| SOP | ||||||||||||||||||||||||||
| Eliminations & Other | ( | |||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Six Months Ended March 31, 2024 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||
| SOP | ||||||||||||||||||||||||||
| Fire Retardant | ||||||||||||||||||||||||||
| Revenue from Services | ||||||||||||||||||||||||||
| Eliminations & Other | ( | |||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
| Six Months Ended March 31, 2023 | Salt | Plant Nutrition | Corporate & Other(a) | Total | ||||||||||||||||||||||
| Highway Deicing Salt | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumer & Industrial Salt | ||||||||||||||||||||||||||
| SOP | ||||||||||||||||||||||||||
| Eliminations & Other | ( | |||||||||||||||||||||||||
| Sales to external customers | $ | $ | $ | $ | ||||||||||||||||||||||
(a)Corporate and Other includes corporate entities, records management operations, the Fortress fire retardant business, equity method investments, lithium costs 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)The Company recognized impairments of $108.1 million and $182.9 million for the three and six months ended March 31, 2024, respectively, which impacted operating results. Refer to Note 1 for additional information regarding the Plant Nutrition and Fortress impairments and Note 5 for additional information about the impairment of lithium development assets.
(c)Corporate operating results were impacted by net gains of $24.3 million and $21.4 million related to the decline in the valuation of the Fortress contingent consideration for the three and six months ended March 31, 2024, respectively. Corporate operating results also include net reimbursements related to the settled SEC investigation of $0.4 million and $0.1 million for the three and six months ended March 31, 2023, respectively. Refer to Note 9 for more information regarding the SEC investigation and settlement and Note 13 for information regarding the Fortress contingent consideration.
(d)The Company continued to take steps to align its cost structure to its current business needs. These initiatives impacted Corporate operating results and resulted in net severance and related charges for reductions in workforce and changes to executive leadership and additional restructuring costs related to the termination of the Company’s lithium development project of $3.1 million and $5.6 million for the three and six months ended March 31, 2024, respectively, and $3.3
15
| 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 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
United States(a) | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
(a)United States sales exclude product sold to foreign customers at U.S. ports.
11. Stockholders’ Equity and Equity Instruments:
Equity Compensation Awards
In May 2020, the Company’s stockholders approved the 2020 Incentive Award Plan (as amended, the “2020 Plan”), which authorized the issuance of 2,977,933 shares of Company common stock. 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 date the 2020 Plan was approved, the Company ceased issuing equity awards under the 2015 Incentive Award Plan (as amended, the “2015 Plan”). 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. For additional information regarding equity awards issued under the Company’s incentive plans refer to “Note 16 – Stockholder’s Equity and Equity Instruments” within Part II, Item 8 of its 2023 Form 10-K.
During the six months ended March 31, 2024, the Company reissued the following number of shares from treasury stock: 224,986 shares related to the release of RSUs which vested and 34,904 shares issued for Board of Director compensation. In fiscal 2023, the Company issued 158,132 net shares from treasury stock. The Company withheld a total of 86,749 shares with a fair value of $1.9 million related to the vesting of RSUs during the six months ended March 31, 2024. The fair value of the shares was valued at the closing price at the vesting date and represent the employee tax withholding for the employee’s compensation. The Company recognized tax expense of $0.6 million from its equity compensation awards during the six months ended March 31, 2024. During the six months ended March 31, 2024 and 2023, the Company recorded $8.3 million and $14.1 million (includes $1.3 million and $0.4 million paid in cash), respectively, of compensation expense pursuant to its stock-based compensation plans. No amounts have been capitalized.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
PSUs
During the six months ended March 31, 2024, the Company issued new PSUs based upon several operational performance measures (“Scorecard PSUs”). The actual number of shares of common stock that may be earned with respect to Scorecard PSUs is calculated based upon the attainment of free cash flow, cash unit costs, cash unit cost reduction, capital expenditures and safety measures during the performance period and may range from 0 % to 300 % for each measure.
The following table summarizes stock-based compensation activity during the six months ended March 31, 2024:
| Stock Options | RSUs | PSUs(a) | ||||||||||||||||||||||||||||||||||||
| Number | Weighted-average exercise price | Number | Weighted-average fair value | Number | Weighted-average fair value | |||||||||||||||||||||||||||||||||
Outstanding at September 30, 2023 | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||||||||||||||
Exercised(b) | ||||||||||||||||||||||||||||||||||||||
Released from restriction(b) | ( | |||||||||||||||||||||||||||||||||||||
| Cancelled/expired | ( | ( | ( | |||||||||||||||||||||||||||||||||||
Outstanding at March 31, 2024 | $ | $ | $ | |||||||||||||||||||||||||||||||||||
(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.
Accumulated Other Comprehensive Loss (“AOCL”)
The Company’s comprehensive income (loss) is comprised of net loss, net amortization of the unrealized loss of the pension obligation, the change in the unrealized gain in other postretirement benefits, the change in the unrealized gain (loss) on natural gas and foreign currency cash flow hedges and currency translation adjustment (“CTA”). The components of and changes in AOCL are as follows (in millions):
Three Months Ended March 31, 2024(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Other Post-Employment Benefits | Foreign Currency | Total | ||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Other comprehensive loss before reclassifications(b) | ( | ( | ( | ||||||||||||||||||||||||||
| Amounts reclassified from AOCL | |||||||||||||||||||||||||||||
Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Three Months Ended March 31, 2023(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Other Post-Employment Benefits | Foreign Currency | Total | ||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Other comprehensive (loss) income before reclassifications(b) | ( | ||||||||||||||||||||||||||||
| Amounts reclassified from AOCL | |||||||||||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Six Months Ended March 31, 2024(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Other Post-Employment Benefits | Foreign Currency | Total | ||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Other comprehensive (loss) income before reclassifications(b) | ( | ( | |||||||||||||||||||||||||||
| Amounts reclassified from AOCL | |||||||||||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Six Months Ended March 31, 2023(a) | Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension | Other Post-Employment Benefits | Foreign Currency | Total | ||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
Other comprehensive (loss) income before reclassifications(b) | ( | ||||||||||||||||||||||||||||
| Amounts reclassified from AOCL | |||||||||||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
(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 gain (loss) of $2.3 million and $0.0 million in the three and six months ended March 31, 2024, respectively, and $(0.1 ) million and $(1.4 ) million in the three and six months ended March 31, 2023, respectively, in AOCL related to intercompany notes which were deemed to be of a long-term investment nature.
The amounts reclassified from AOCL to expense (income) for the three and six months ended March 31, 2024 and 2023, 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 | |||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||
| Loss (gain) on cash flow hedges: | |||||||||||||||||||||||||||||
| Natural gas instruments | $ | $ | $ | $ | Product cost | ||||||||||||||||||||||||
| Income tax expense | ( | ( | |||||||||||||||||||||||||||
| Reclassifications, net of income taxes | |||||||||||||||||||||||||||||
| Amortization of defined benefit pension: | |||||||||||||||||||||||||||||
| Amortization of loss | Product cost | ||||||||||||||||||||||||||||
| Income tax benefit | ( | ( | |||||||||||||||||||||||||||
| Reclassifications, net of income taxes | |||||||||||||||||||||||||||||
| Amortization of other post-employment benefits: | |||||||||||||||||||||||||||||
| Amortization of loss | Product cost | ||||||||||||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||||||||
| Reclassifications, net of income taxes | |||||||||||||||||||||||||||||
| Total reclassifications, net of income taxes | $ | $ | $ | $ | |||||||||||||||||||||||||
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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. 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 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 enters 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, 2024 and September 30, 2023 were not material.
Natural Gas Derivative Instruments
Natural gas is consumed at several of the Company’s production facilities, and changes in natural gas prices impact the Company’s operating margin. The Company seeks 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, 2024, the Company had entered into natural gas derivative instruments to hedge a portion of its natural gas purchase requirements through December 2025. As of March 31, 2024 and September 30, 2023, the Company had agreements in place to hedge forecasted natural gas purchases of 3.1 million and 2.3 million MMBtus, respectively.
On March 1, 2023, the Company de-designated its natural gas cash flow hedges related to its Ogden, Utah production facility as the Company did not believe these hedges were probable of being highly effective in the second fiscal quarter of 2023. Beginning March 1, 2023, the change in the derivative was and will be recorded in other expense, net in the Consolidated Statements of Operations. Since the transactions are still probable of occurring, previously recognized amounts in AOCL of $0.3 million remain in AOCL until the underlying forecasted transaction occurs. The Company recognized $0.0 million and $0.7 million of expense in other expense, net on the Consolidated Statements of Operations during the three and six months ended March 31, 2024, respectively. Following the de-designation, these natural gas economic hedging instruments will be recorded at fair value through earnings unless re-designated or until settlement. Substantially all other natural gas derivative instruments held by the Company as of March 31, 2024 and September 30, 2023 qualified and were designated as cash flow hedges. As of March 31, 2024, the Company expects to reclassify from AOCL to earnings during the next twelve months $2.3 million of net losses 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, 2024 and September 30, 2023.
19
| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The following tables present the fair value of the Company’s derivatives (in millions):
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
| Consolidated Balance Sheet Location | March 31, 2024 | Consolidated Balance Sheet Location | March 31, 2024 | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||
| Commodity contracts | Other current assets | $ | Accrued expenses and other current liabilities | $ | ||||||||||||||||||||||
| Commodity contracts | Other assets | Other noncurrent liabilities | ||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Commodity contracts | Other current assets | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
Total derivatives(a) | $ | $ | ||||||||||||||||||||||||
(a)The Company has master netting agreements with its commodity hedge counterparties and accordingly has netted in its Consolidated Balance Sheets $1.1 million of its commodity contracts that are in receivable positions against its contracts in payable positions.
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
| Consolidated Balance Sheet Location | September 30, 2023 | Consolidated Balance Sheet Location | September 30, 2023 | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||
| Commodity contracts | Other current assets | $ | Accrued expenses and other current liabilities | $ | ||||||||||||||||||||||
| Total derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Commodity contracts | Other current assets | Accrued expenses and other current liabilities | ||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
Total derivatives(a) | $ | $ | ||||||||||||||||||||||||
(a)The Company has master netting agreements with its commodity hedge counterparties and accordingly has netted in its Consolidated Balance Sheets $1.0 million of its commodity contracts that are in receivable positions against its contracts in payable positions.
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). The Company does not have any unobservable inputs that are not corroborated by market inputs (Level 3 inputs), except as stated below and in Note 2.
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.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The estimated fair values for each type of instrument are presented below (in millions):
| March 31, 2024 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | $ | $ | $ | |||||||||||||||||||
| Total Assets | $ | $ | $ | $ | |||||||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Derivatives designated as hedging instruments - natural gas instruments, net | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Derivatives not designated as hedging instruments - natural gas instruments, net | ( | ( | |||||||||||||||||||||
| Liabilities related to non-qualified savings plan | ( | ( | |||||||||||||||||||||
| Total Liabilities | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
(a)Includes mutual fund investments of approximately 30 % in common stock of large-cap U.S. companies, 5 % in common stock of small to mid-cap U.S. companies, 5 % in international companies, 15 % in bond funds, 5 % in short-term investments and 40 % in blended funds.
| September 30, 2023 | Level One | Level Two | Level Three | ||||||||||||||||||||
| Asset Class: | |||||||||||||||||||||||
Mutual fund investments in a non-qualified savings plan(a) | $ | $ | $ | $ | |||||||||||||||||||
| Derivatives not designated as hedging instruments - natural gas instruments, net | |||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | |||||||||||||||||||
| Liability Class: | |||||||||||||||||||||||
| Derivatives designated as hedging instruments - natural gas instruments, net | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Liabilities related to non-qualified savings plan | ( | ( | |||||||||||||||||||||
| Total Liabilities | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
(a)Includes mutual fund investments of approximately 25 % in the common stock of large-cap U.S. companies, 5 % in the common stock of small to mid-cap U.S. companies, 10 % in the common stock of international companies, 10 % in bond funds, 5 % in short-term investments and 45 % 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 non-qualified retirement plan of $3.0 million at March 31, 2024 and $2.6 million at September 30, 2023, are stated at fair value based on quoted market prices. As of March 31, 2024 and September 30, 2023, the estimated fair value of the Company’s fixed-rate 6.75 481.9 million and $472.5 million, respectively, compared with the aggregate principal amount at maturity of $500.0 314.7 million and $277.1 million, respectively, compared with the aggregate principal amount at maturity of $318.5 million and $280.3 million, respectively.
In connection with the acquisition of Fortress, the Company entered into a contingent consideration arrangement (milestone and earnout payments). The fair value of the milestone contingent consideration is estimated using a probability-weighted discounted cash flow model with significant inputs not observable in the market and is therefore considered a Level 3 measurement while the earn-out is valued using a Monte Carlo simulation, also a Level 3 measurement. For the three and six months ended March 31, 2024, the Company recorded income of $24.3 million and $21.4 million, respectively. The change in the second quarter of fiscal 2024 is reflective of milestone and earn-out payments made related to calendar year 2023 activity and recent developments related to the Company’s magnesium chloride-based fire retardants, as discussed further in Note 1. The change is recorded in other operating (income) expense in the Consolidated Statement of Operations to reflect the contingent consideration liability at its fair value as of March 31, 2024. The Company will continue to recognize remeasurement changes in the estimated fair value of contingent consideration in earnings at each reporting date until all contingencies are resolved. Refer to Note 2 for a discussion of the milestone and earnout payments.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
The following table presents the fair value of the Company’s total contingent consideration arrangement (in millions):
| Consolidated Balance Sheet Location | March 31, 2024 | September 30, 2023 | ||||||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||||||||
| Other noncurrent liabilities | ||||||||||||||
| Total contingent consideration | $ | $ | ||||||||||||
The Company has certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. Refer to Note 1 for details of the Company’s impairment of goodwill related to Plant Nutrition and Fortress, Note 5 for details of the Company’s impairment of long-lived assets related the termination of its lithium development and Note 6 for details of the Company’s intangible asset impairment related to Fortress.
14. Earnings per Share:
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net loss from continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Less: net earnings allocated to participating securities(a) | ( | ( | ( | ( | |||||||||||||||||||
Net loss available to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator (in thousands): | |||||||||||||||||||||||
| Weighted-average common shares outstanding, shares for basic earnings per share | |||||||||||||||||||||||
Weighted-average awards outstanding(b) | |||||||||||||||||||||||
| Shares for diluted earnings per share | |||||||||||||||||||||||
| Basic net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(a)Weighted participating securities include RSUs and PSUs that receive non-forfeitable dividends and consist of 684,000 and 732,000 weighted participating securities for the three and six months ended March 31, 2024, respectively, and 439,000 and 477,000 weighted participating securities for the three and six months ended March 31, 2023, respectively.
15. Related Party Transactions:
During the three and six months ended March 31, 2024, the Company recorded SOP sales of approximately $1.0 million and $1.8 million, respectively, to certain subsidiaries of Koch Industries, Inc., compared to $0.9 million and $1.8 million, respectively, during the three and six months ended March 31, 2023. As of March 31, 2024 and September 30, 2023, the Company had approximately $0.5 million and $0.4 million, respectively, of receivables from related parties on its Consolidated Balance Sheets. There were no amounts payable outstanding as of March 31, 2024.
On December 20, 2023 and March 20, 2024, the Company paid a cash dividend to its stockholders of record at the close of business on December 11, 2023 and March 11, 2024, respectively, in the amount of $0.15
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
16. Revision of Previously Issued Financial Statements:
As disclosed in Note 1, the Company identified certain misstatements in the historical presentation of its Consolidated Statements of Cash Flows. The misstatements were the result of the Company not reflecting the appropriate amount of non-cash capital expenditures in accounts payable in its operating and investing cash flows and had no effect on the Company’s Consolidated Balance Sheets or its Consolidated Statements of Operations. Management has considered the misstatements, and after evaluating both their quantitative and qualitative impacts, concluded they are not material to the Company’s previously issued consolidated financial statements. The following tables show the cash flow classifications as reported and as corrected for the interim period ended March 31, 2023 and the interim period ended December 31, 2023.
| Three Months Ended December 31, 2023 | |||||||||||||||||
| (in millions) | As Previously Reported | Adjustments | As Revised | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts payable and accrued expenses and other current liabilities | $ | ( | $ | $ | ( | ||||||||||||
| Net cash used in operating activities | ( | ( | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | ( | ( | ( | ||||||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | $ | ( | |||||||||||
| Six Months Ended March 31, 2023 | |||||||||||||||||
| (in millions) | As Previously Reported | Adjustments | As Revised | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts payable and accrued expenses and other current liabilities | $ | $ | $ | ||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | ( | ( | ( | ||||||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | $ | ( | |||||||||||
17. Subsequent Events:
Dividend
On April 22, 2024, the Board of Directors determined not to declare dividends for the foreseeable future in order to align the Company’s capital allocation priorities with its corporate focus on accelerating cash flow generation and debt reduction. The payment of any future dividends will be at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, and any other factors deemed relevant by the Board of Directors.
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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; our continued ability to access ambient lake brine in the Great Salt Lake; the termination of our lithium development project; geological conditions; dependency on a limited number of key production and distribution facilities and critical equipment; weather conditions; the inability to fund necessary capital expenditures or successfully complete capital projects; uncertainties in estimating our economically recoverable reserves and resources; the useful life of our mine properties; conversion of mineral resources into mineral reserves; strikes, other forms of work stoppage or slowdown or other union activities; 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; our payment of any dividends; financial assurance requirements; the seasonal demand for our products; the impact of anticipated changes in potash product prices and customer application rates; the impact of competition on the sales of our products; inflation risks; increasing costs or a lack of availability of transportation services; risks associated with our international operations and sales, including changes in currency exchange 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 environmental, health and safety laws and regulations; environmental liabilities; compliance with foreign and United States (“U.S.”) laws and regulations related to import and export requirements and anti-corruption laws; changes in laws, industry standards and regulatory requirements; product liability claims and product recalls; misappropriation or infringement claims relating to intellectual property; inability to obtain required product registrations or increased regulatory requirements; our ability to successfully implement our strategies; 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 and investments, realize anticipated benefits from acquisitions and investments and integrate acquired businesses; outbreaks of contagious disease or similar public health threats; 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 Annual Report on Form 10-K for the annual period ended September 30, 2023 (“2023 Form 10-K”).
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 or recently enacted 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; realization of potential savings from our restructuring activities; 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; and the effects of climate change. 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 Kingdom (“U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
“short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds and one metric ton equals 2,204.6 pounds. Compass Minerals and Protassium+ and combinations thereof, are trademarks of CMI or its subsidiaries in the U.S. and other countries.
Critical Accounting Estimates
Preparation of our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“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 2023 Form 10-K, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements.
As previously disclosed in the 2023 Form 10-K and as discussed in Item 1, Note 5 of our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, we indefinitely paused new investment in the lithium salt project pending greater clarity on the evolving regulatory environment in Utah. In December of 2023, a revised draft of rules was proposed, project engineering estimates were refined and, taken together with the decline in market price of lithium products, we determined to terminate the lithium development. Consequently, we evaluated the capitalized assets and recorded an impairment charge of $74.8 million for the six months ended March 31, 2024, including $5.9 million associated with future commitments as of March 31, 2024. Additional restructuring charges of $1.7 million were recorded in other operating (income) expense during the three months ended March 31, 2024. The impairment charges were recognized to value the assets at estimated fair value, considering equipment expected to be used by the on-going business and amounts estimated to be recoverable through returns or salvage value. The determination of fair value of these assets requires us to make estimates and assumptions that include, but are not limited to, estimated proceeds to be received upon sale or return of the equipment, assumptions about the ability to redeploy equipment and materials to other parts of the business and estimates regarding the utility value and replacement cost of the equipment redeployed. Actual proceeds received from asset sales or returns and our ability to utilize the assets may vary from the our estimates resulting in further impairment.
As discussed in Item 1, Note 1 of our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, as a result of a sustained decrease in our publicly quoted share price and market capitalization continuing into fiscal 2024 and recent developments related to our magnesium chloride-based fire retardants impacting our Fortress business, we determined that there were indicators for impairment which necessitated impairment testing of long-lived assets and goodwill. As a result of the evaluation, we recorded a long-lived asset impairment, net, of $15.6 million, an inventory impairment of $1.5 million and goodwill impairment of $40.0 million related to Fortress and goodwill impairment of $51.0 million related to Plant Nutrition. In connection with the impairments, we determined the estimated fair value for each reporting unit based on discounted cash flow projections (income approach), market values for comparable businesses (market approach) or a combination of both. The determination of fair value of the reporting units requires us to make estimates and assumptions that include, but are not limited to, discount rates, long-term revenue growth rates and the amount and timing of expected future cash flows. Our estimates may differ from actual future cash flows.
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, 2024, we operated 12 production and packaging facilities, 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.
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, industrial, chemical and agricultural 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.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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+®.
In May 2023, we completed the purchase of Fortress, a next-generation fire retardant company dedicated to developing and producing a portfolio of environmentally-friendly aerial and ground fire retardant products to help combat wildfires (see Item 1, Note 2 of our Consolidated Financial Statements). December 31, 2023 marked the end of Fortress's first commercially operating fire season with the U.S. Forest Service (“USFS”). As described in Item 1, Note 1 of our Consolidated Financial Statements, the USFS recently notified us that Fortress would not be awarded a contract to supply its magnesium chloride-based aerial fire retardant for the calendar 2024 fire season. We are evaluating various alternatives regarding the path forward for the Fortress business given recent developments.
As discussed above in Critical Accounting Policies and in Item 1, Note 1 of our Consolidated Financial Statements, we recognized a long-lived asset impairment, net, of $15.6 million, an inventory impairment of $1.5 million and goodwill impairment of $40.0 million related to Fortress and goodwill impairment of $51.0 million related to Plant Nutrition. Failure to obtain full qualification by the USFS or a decision by the USFS not to enter into commercial agreements with respect to Fortress’s magnesium or non-magnesium chloride-based fire retardant products could result in additional impairments related to the Fortress business.
Additionally, we had been pursuing development of a sustainable lithium salt resource near Ogden, UT to support the North American battery market. However, as discussed above in Critical Accounting Policies and in Item 1, Note 5 of our Consolidated Financial Statements, we have terminated our pursuit of the lithium development. As a result, we recognized a $74.8 million loss on impairment of long-lived assets for the six months ended March 31, 2024, including $5.9 million associated with future commitments as of March 31, 2024. Additional restructuring charges of $1.7 million were also recorded during the three months ended March 31, 2024.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
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, 2024 and 2023, 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 (Loss) 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.
Commentary: Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
•Total sales decreased 11%, or $47.1 million, due to lower Salt segment sales, partially offset by higher Plant Nutrition segment sales. The decrease in sales for Salt reflected lower sales volumes, partially offset by higher average sales prices. Plant Nutrition sales increased from the prior year due to an increase in sales volumes, partially offset by lower average sales prices.
•Operating loss of $45.8 million decreased $93.7 million from operating income of $47.9 million in the prior-year period, primarily reflecting the impairments in our Fortress business and Plant Nutrition segment (see Item 1, Note 1) and lower Salt operating earnings. Corporate and Other operating loss increased from the prior year primarily due to $57.1 million of goodwill, long-lived asset and inventory impairments related to our Fortress business and $1.7 million restructuring charges related to the terminated lithium development. The increases were partially offset by the non-cash reduction in our Fortress-related contingent consideration of $24.3 million. Plant Nutrition operating earnings decreased due primarily to a write-off of the goodwill balance as a result of reduced cash flow assumptions impacting expected profitability of the Plant Nutrition segment (see Item 1, Note 1). Salt operating earnings decreased due to a 21% decline in Salt sales volumes due to winter weather in the quarter which was substantially below normal levels.
•Earnings before interest, taxes, depreciation and amortization (“EBITDA”)* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* increased 12.8%, or $9.9 million, benefiting from a $24.3 million gain recorded in the current period related to the decline in the valuation of the Fortress contingent consideration.
•Diluted net loss per common share of $1.16 increased by $0.63 from $0.53 per common share in the prior-year period.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
Commentary: Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
•Total sales decreased 8%, or $57.8 million, due to lower Salt segment sales, partially offset by higher Plant Nutrition segment sales and sales by the Fortress fire retardant business. The decrease in Salt sales was primarily driven by lower sales volumes, partially offset by higher average sales prices. The increase in Plant Nutrition sales from the prior year primarily reflects higher sales volumes, partially offset by lower average sales price.
•Operating loss of $101.1 million decreased $176.9 million from operating income of $75.8 million in the prior-year period, primarily reflecting the impairments related to our previous lithium development project (see Item 1, Note 5), our Fortress business and the Plant Nutrition segment (see Item 1, Note 1) and lower Plant Nutrition and Salt operating earnings. Corporate and Other operating loss increased from the prior year primarily due to a $74.8 million lithium asset impairment and $57.1 million of goodwill, long-lived asset and inventory impairments related to the Fortress business. The increases were partially offset by the net non-cash reduction in our Fortress-related contingent consideration of $21.4 million. Plant Nutrition operating earnings decreased due primarily to a $51.0 million goodwill impairment and lower sales prices, which were partially offset by lower per-unit product and distribution costs. In addition, Salt operating earnings decreased due to lower Salt sales volumes and higher per-unit product costs, partially offset by higher average sales prices.
•Adjusted EBITDA increased by 5%, or $7.5 million, benefiting from a $21.4 million net gain recorded in the current year-to-date period related to the decline in the valuation of the Fortress contingent consideration.
•Diluted net loss per common share of $2.99 increased by $2.44 from $0.55 per common share in the prior-year period.
THREE AND SIX MONTHS ENDED MARCH 31
Commentary: Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Gross Profit: Decreased 14%, or $12.3 million; Gross Margin decreased 1 percentage point to 20%
•Salt segment gross profit decreased $7.6 million primarily due to lower sales volumes and higher per-unit product costs, which were partially offset by higher average sales prices (see Salt operating results).
•The gross profit of the Plant Nutrition segment decreased $1.9 million due to lower average sales prices, which were partially offset by lower per-unit product and distribution costs (see Plant Nutrition operating results).
•Gross profit was also negatively impacted by costs incurred related to the Fortress fire retardant business acquired in May 2023.
Commentary: Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
•Salt segment gross profit decreased $5.6 primarily due to lower sales volumes and higher per-unit product costs, which were partially offset by higher average sales prices (see Salt operating results).
•The gross profit of the Plant Nutrition segment decreased $15.4 million due to lower average sales prices, which were partially offset by lower per-unit product and distribution costs and higher sales volumes (see Plant Nutrition operating results).
•Gross profit was also favorably impacted by the acquisition of the Fortress fire retardant business in May 2023.
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| COMPASS MINERALS INTERNATIONAL, INC. | ||||||||
OTHER EXPENSES AND INCOME
Commentary: Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
SG&A: Decreased $1.1 million; increased 0.7 percentage points as a percentage of sales from 8.4% to 9.1%
•The decrease in SG&A expense was primarily due to lower corporate, Salt and lithium expenses, which was partially offset by expenses related to our Fortress fire retardant business that was acquired in May 2023.
Loss on Impairments: $106.6 million in the current-year period
•During the three months ended March 31, 2024, we performed an interim impairment test of our reporting units. As a result, we recognized goodwill impairments of $51.0 million related to our Plant Nutrition segment and $40.0 million related to our Fortress operations (within the Corporate and Other segment). The Plant Nutrition impairment was primarily the result of reduced cash flow assumptions impacting expected profitability of the Plant Nutrition segment. The Fortress impairment was primarily related to uncertainty surrounding our magnesium chloride-based fire retardants which impacted projected future revenues and cash flows. Also, during the three months ended March 31, 2024, we recognized a $15.6 million long-lived asset impairment, net, related to Fortress magnesium chloride-based products. See Item 1, Note 1 for additional information.
Other Operating (Income) Expense: Decreased $24.1 million from expense of $2.9 million to income of $21.2 million
•The decrease in other operating expense was primarily the result of a $24.3 million decrease in the contingent consideration related to the Fortress acquisition due to changes in projected revenues and cash flows from our magnesium chloride-based fire retardants. We also recognized additional restructuring charges of $1.7 million for the three months ended March 31, 2024 related to the termination of the lithium development (see Item 1, Note 5).
Interest Income: Decreased $1.7 million to $0.2 million
•The decrease in interest income during the current period is primarily due to the higher average cash balance in the prior year resulting from proceeds received from a private placement of our common stock.
Interest Expense: Increased $2.9 million to $17.1 million
•Interest expense increased $2.9 million due to higher interest rates and debt levels in the current period.
Gain on Foreign Exchange: Increased $2.3 million from $0.2 million to $2.5 million
•We realized a gain on foreign exchange of $2.5 million in the second quarter of fiscal 2024 compared to $0.2 million in the same quarter of the prior-year period, primarily reflecting the translation of our intercompany loans from Canadian dollars to U.S. dollars.
Net Loss in Equity Investees: $1.4 million in the prior-year period
•We realized a net loss of $1.4 million in the prior-year period reflecting our share of losses related to our equity investments as these development stage businesses positioned themselves for commercialization.
Income Tax (Benefit) Expense: Decreased $68.2 million from expense of $55.1 million to a benefit of $13.1 million
•The decrease in income tax expense was due primarily to a significant decrease in annual effective tax rate driven by a significant decrease in forecasted pretax book income for the remainder of the year. Additionally, the majority of the impairments recorded in the three months ended March 31, 2024 were either not tax deductible or the tax benefit was offset by tax expense for a valuation allowance on the related deferred tax asset.
•Our effective tax rate was 21.4% for the three months ended March 31, 2024, which is primarily driven by the income mix by country with income recognized in foreign jurisdictions offset by losses recognized in the U.S. for which a valuation allowance has been recorded against the U.S. tax benefit carryforward. Additionally, no tax benefit was recorded on the Plant Nutrition impairment as the impairment is not tax deductible.
•Our income tax provision for the three months ended March 31, 2024 and 2023 differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, base erosion and anti-abuse tax, nondeductible executive compensation, foreign income, mining and withholding taxes and valuation allowance expense.
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Commentary: Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
•The increase in SG&A expense was primarily due to expenses related to our Fortress fire retardant business that was acquired in May 2023.
Loss on Impairments: $181.4 million in the current-year period
•During the six months ended March 31, 2024, we recognized goodwill impairments of $51.0 million related to our Plant Nutrition segment and $40.0 million related to our Fortress operations (within the Corporate and Other segment). The Plant Nutrition impairment was primarily the result of reduced cash flow assumptions impacting expected profitability of the Plant Nutrition segment. The Fortress impairment was primarily related to uncertainty surrounding our magnesium chloride-based fire retardants which impacted projected future revenues and cash flows. Also, during the six months ended March 31, 2024, we recognized a $15.6 million long-lived asset impairment, net, related to Fortress magnesium chloride-based products. See Item 1, Note 1 for additional information.
•We recognized an impairment loss of $74.8 million for the six months ended March 31, 2024 related to the termination of the lithium development (see Item 1, Note 5).
Other Operating (Income) Expense: Decreased $19.0 million from expense of $3.2 million to income of $15.8 million
•The decrease in other operating expense was due to a decrease in the contingent consideration related to the Fortress acquisition, partially offset by severance costs resulting from the decision to discontinue the pursuit of the lithium development and corporate restructuring charges in the current period.
Interest Income: Decreased $2.4 million from $3.0 million to $0.6 million
•The decrease in interest income during the current period is primarily due to a higher average cash balance in the prior period resulting from proceeds received from the private placement of our common stock.
Interest Expense: Increased $4.8 million to $32.9 million
•Interest expense increased due to higher debt levels and higher interest rates in the current period.
(Gain) Loss on Foreign Exchange: Rose by $2.9 million from a loss of $2.3 million to a gain of $0.6 million
•We realized a gain on foreign exchange of $0.6 million in the first six months of 2024, compared to a loss of $2.3 million in the same period of the prior fiscal year, due primarily reflecting the translation of our intercompany loans from Canadian dollars to U.S. dollars.
Net Loss in Equity Investees: $2.3 million in the prior-year period
•We realized a net loss of $2.3 million in the prior-year period reflecting our share of losses related to our equity investments as these development stage businesses positioned themselves for commercialization.
Other Expense, net: Increased $0.6 million to $1.6 million
•The increase is due primarily to fees to refinance our debt.
Income Tax (Benefit) Expense: Decreased $78.3 million from expense of $67.0 million to a benefit of $11.3 million
•The decrease in income tax expense was due primarily to a significant decrease in the annual effective tax rate for fiscal year 2024 versus 2023, driven by a significant decrease in fiscal year 2024’s forecasted pretax book income for the remainder of the year. Additionally, the majority of the impairments recorded in the six months ended March 31, 2024 were either not tax deductible or the tax benefit was offset by tax expense for a valuation allowance on the related deferred tax asset.
•Our effective tax rate of 8.4% for the six months ended March 31, 2024 is primarily driven by the income mix by country with income recognized in foreign jurisdictions offset by losses recognized in the U.S., for which a valuation allowance has been recorded against the U.S. tax benefit carryforward. Additionally, the majority of the impairments recorded in the six months ended March 31, 2024 were either not tax deductible or the tax benefit was offset by tax expense for a valuation allowance on the related deferred tax asset.
•Our income tax provision for the six months ended March 31, 2024 and 2023 differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, base erosion and anti-abuse tax, nondeductible executive compensation, foreign income, mining and withholding taxes and valuation allowance expense.
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Operating Segment Performance
The following financial results represent consolidated financial information with respect to the operations of our Salt and Plant Nutrition segments. Sales primarily include revenue from the sales of our products, or “product sales,” and the impact of shipping and handling costs incurred to deliver our salt and plant nutrition products to our customers.
The results of operations of the Fortress business include sales of $0.1 million and $14.6 million for the three and six months ended March 31, 2024. The results of operations of the consolidated records management business and other incidental revenues include sales of $3.4 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively, and $6.6 million and $5.6 million for the six months ended March 31, 2024 and 2023, respectively. These sales are not material to our consolidated financial results and are not included in the following operating segment financial data.
Salt Results
| QTD 2024 | QTD 2023 | YTD 2024 | YTD 2023 | ||||||||||||||||||||
Salt Sales (in millions) | $ | 310.4 | $ | 360.5 | $ | 584.7 | $ | 668.6 | |||||||||||||||
Salt Operating Earnings (in millions) | $ | 66.4 | $ | 73.1 | $ | 116.9 | $ | 120.2 | |||||||||||||||
Salt Sales Volumes (thousands of tons) | |||||||||||||||||||||||
| Highway deicing | 3,045 | 3,915 | 5,311 | 6,816 | |||||||||||||||||||
| Consumer and industrial | 421 | 488 | 1,010 | 1,108 | |||||||||||||||||||
| Total tons sold | 3,466 | 4,403 | 6,321 | 7,924 | |||||||||||||||||||
Average Salt Sales Price (per ton) | |||||||||||||||||||||||
| Highway deicing | $ | 74.72 | $ | 69.90 | $ | 72.86 | $ | 68.07 | |||||||||||||||
| Consumer and industrial | $ | 196.93 | $ | 177.77 | $ | 195.77 | $ | 184.63 | |||||||||||||||
| Combined | $ | 89.55 | $ | 81.87 | $ | 92.50 | $ | 84.37 | |||||||||||||||
Commentary: Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
•Salt sales decreased $50.1 million, primarily due to lower sales volumes, partially offset by higher average sales prices.
•Salt sales volumes decreased 21% in total, or 937,000 tons, reducing sales by approximately $72.8 million. Highway deicing sales volumes decreased 22%, reflecting a combination of exceptionally mild weather and the impact of 5% lower total committed bid volumes compared to the prior-year bid season. Consumer and industrial sales volumes decreased 14% primarily due to lower deicing volumes.
•Average sales prices increased 9% partially offsetting the volume decline by approximately $22.7 million with increases in both highway and consumer and industrial average sales prices.
•Highway deicing average sales price increased 7% across all product categories as we have sought to restore profitability and offset the impact of prior year inflation on costs by executing a commercial bidding strategy emphasizing pricing over volume. Consumer and industrial average sales price increased 11% due to price increases taken to offset inflation realized in prior years. The higher average sales prices are also reflective of sales mix.
•Salt operating earnings decreased 9%, or $6.7 million, due primarily to lower sales volumes for both highway and consumer and industrial products, which were partially offset by higher average sales prices.
Commentary: Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
•Salt sales decreased $83.9 million, primarily due to lower sales volumes, partially offset by higher average sales prices.
•Salt sales volumes decreased 20% reducing sales by approximately $120.6 million. Highway deicing sales volumes decreased 22% reflecting a combination of exceptionally mild weather and the impact of 5% lower total committed bid volumes year over year compared to the prior-year bid season. Consumer and industrial sales volumes decreased 9% primarily due to lower consumer deicing volumes.
•Average sales prices increased 10% partially offsetting the volume decline by approximately $36.7 million with increases in both highway and consumer and industrial average sales prices.
•Highway deicing average sales prices increased 7% across all product categories as we have sought to restore profitability and offset the impact of prior year inflation on costs by executing a commercial bidding strategy emphasizing pricing over volume. Consumer and industrial average sales prices increased 6% due to price increases taken to offset inflation realized in prior years. The higher average sales prices are also reflective of sales mix.
•Salt operating earnings decreased 3%, or $3.3 million, due primarily to lower sales volumes for both highway and consumer and industrial products, which were partially offset by higher average sales prices.
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Plant Nutrition Results
| QTD 2024 | QTD 2023 | YTD 2024 | YTD 2023 | ||||||||||||||||||||
Plant Nutrition Sales (in millions) | $ | 50.1 | $ | 47.7 | $ | 99.8 | $ | 89.3 | |||||||||||||||
Plant Nutrition Operating (Loss) Earnings (in millions) | $ | (53.4) | $ | (0.7) | $ | (55.7) | $ | 10.3 | |||||||||||||||
Plant Nutrition Sales Volumes (thousands of tons) | 74 | 60 | 149 | 105 | |||||||||||||||||||
Plant Nutrition Average Sales Price (per ton) | $ | 680 | $ | 796 | $ | 670 | $ | 851 | |||||||||||||||
Commentary: Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
•Plant Nutrition sales increased 5%, or $2.4 million, due to higher sales volumes, partially offset by lower average sales prices.
•Plant Nutrition sales volumes increased 23% year over year driven by normalization of demand levels in fiscal 2024 following lower demand in fiscal 2023 reflective of impacts from weather events in key markets and uncertainty regarding future fertilizer prices causing customers to cancel or delay purchases. The higher sales volumes increased sales by approximately $11.0 million.
•Plant Nutrition average sales prices decreased 15%, partially offsetting the increase in sales by approximately $8.6 million. Average sales prices decreased throughout fiscal 2024 due to global supply and demand dynamics for fertilizer products resulting in weakening pricing year over year.
•Plant Nutrition operating earnings decreased $52.7 million to a $53.4 million operating loss primarily due to the write-off of goodwill (see Item 1, Note 1) and lower averages sales prices, which was partially offset by lower per-unit product and distribution costs and higher sales volumes.
Commentary: Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
•Plant Nutrition sales increased 12%, or $10.5 million, due to higher sales volumes, partially offset by lower average sales prices.
•Plant Nutrition sales volumes increased 42%, or 44,000 tons, which resulted in a $37.4 million increase in sales driven by normalization of demand levels in fiscal 2024 following lower demand in fiscal 2023 reflective of impacts from weather events in key markets and uncertainty regarding future fertilizer prices causing customers to cancel or delay purchases.
•Plant Nutrition average sales prices decreased 21%, partially offsetting the increase in sales volume by $26.9 million. Average sales prices decreased throughout fiscal 2024 due to global supply and demand dynamics for fertilizer products resulting in weakening pricing year over year.
•Plant Nutrition operating earnings decreased $66.0 million to an operating loss of $55.7 million primarily reflecting the write-off of goodwill and lower average sales prices, which were partially offset by lower per-unit product and distribution costs and higher sales volumes.
Outlook
•The North American highway deicing season saw an exceptionally mild winter across our core service markets. As a result, we now expect Salt sales volumes and adjusted EBITDA to range from 9.2 million to 9.4 million tons and $200 million to $210 million, respectively, in fiscal year 2024.
•Plant Nutrition segment sales volumes and adjusted EBITDA to be within a range of 280,000 to 310,000 tons and $15 million to $30 million, respectively, in fiscal year 2024.
•Fiscal year 2024 capital expenditures are now expected to be in the $115 million to $130 million range. This includes approximately $80 million to $90 million in sustaining capital for the core Salt and Plant Nutrition businesses. In the fire retardant business, approximately $5 million to $10 million has been budgeted for fiscal year 2024, with approximately $3 million invested through the first six months of fiscal 2024. Finally, we expect capital expenditures of roughly $30 million related to the now-terminated lithium project for items that had been committed to prior to the project’s suspension in November 2023. As a result of the termination of the lithium project and the related impairments in the first half of fiscal 2024, a portion of the expenditures related to committed items that had not been received by December 31, 2023, will not be classified as capital expenditures within the Consolidated Statements of Cash Flows when paid.
•Production has been curtailed at our Goderich mine to reduce the inventory levels in the coming deicing season. We expect that this will result in incremental expenses of approximately $14 million, split evenly over the next two
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quarters of fiscal 2024, including accelerated recognition of a portion of fixed production costs that would normally be included in inventory and then expensed when sold.
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, 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 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 $375 million revolving credit facility and our $100.0 million revolving AR Securitization Facility. As of March 31, 2024, we had liquidity of approximately $277.7 million, comprised of $40.0 million of cash and cash equivalents and $237.7 million of availability under our $375 million revolving credit facility.
We have been able to manage our cash flows generated and used across Compass Minerals to indefinitely reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of March 31, 2024, we had $13.6 million of cash and cash equivalents that was either held directly or indirectly by foreign subsidiaries. As a result of U.S. tax reform, we revised our permanently reinvested assertion, expecting to repatriate approximately $150 million of unremitted foreign earnings from Canada. Throughout fiscal years 2022 and 2023, we increased our repatriation expectation to include an additional $16 million from our U.K. operations. During the first quarter of fiscal 2023, $89.2 million was repatriated from Canada and in the third quarter of fiscal 2023, $15.6 million was repatriated from the U.K. Net income tax expense of $3.8 million has been recorded for foreign withholding tax, state income tax and foreign exchange losses on these changes in assertion as of March 31, 2024, consisting of a tax benefit of $0.7 million recorded in fiscal 2023 and tax expense of $4.5 million, most of which was recorded in years prior to fiscal 2021. 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. 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 in the U.S. over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future income. On the basis of this evaluation, during the six months ended March 31, 2024, an additional valuation allowance of $28.3 million has been recorded to recognize only the portion of the U.S. 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.
Indebtedness
As of March 31, 2024, we had $883.3 million of outstanding indebtedness, consisting of $500.0 million outstanding under our 6.75% Senior Notes due 2027, $318.5 million of borrowings outstanding under our senior secured credit facilities under the Credit Agreement, consisting of $196.3 million of term loans and $122.2 million borrowed against our revolving credit facility, and $64.8 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 $15.1 million as of March 31, 2024 further reduced available borrowing capacity under our revolving credit facility to $237.7 million.
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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, climate-related, 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. Furthermore, we must remain in compliance with the terms of the 2023 Credit Agreement governing our credit facilities, including the consolidated total net 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 6.75% Senior Notes due December 2027, which limit the amount of dividends we can pay to our stockholders.
On March 27, 2024, we entered into an amendment to our 2023 Credit Agreement, which eased the restrictions of certain covenants contained in the agreement. The amendment included increasing the maximum allowed consolidated total net leverage ratio (as defined and calculated under the terms of the amended 2023 Credit Agreement) to 6.0x as of the fiscal quarter ended March 31, 2024, increasing further to 6.5x as of the last day of any quarter through the fiscal quarter ended December 31, 2024, gradually stepping down to 4.75x for the fiscal quarter ended March 31, 2026 and thereafter. The amendment also removed the flexibility related to the lithium development joint ventures, projects or similar arrangements and any related funding transactions in connection therewith. Consolidated total net debt includes the aggregate principal amount of total debt, net of unrestricted cash not to exceed $75.0 million. As of March 31, 2024, our consolidated total net leverage ratio was approximately 4.26x.
Although we are in compliance with our debt covenants as of March 31, 2024, we can make no assurance that we will remain in compliance with these ratios. 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.
On March 27, 2024, certain of our U.S. subsidiaries entered into an amendment to our revolving accounts receivable financing facility with PNC Bank, National Association, extending the facility to March 2027.
Capital Allocation
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, required spending to sustain our business and focus on generating adequate returns on capital. On April 22, 2024, our Board of Directors determined not to declare dividends for the foreseeable future in order to align our capital allocation policy with our corporate focus on accelerating cash flow generation and debt reduction. While our equipment and facilities are generally not impacted by rapid technology changes, our operations require 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.
During fiscal 2024, we expect to spend between $80 million and $90 million of sustaining capital in our Salt and Plant Nutrition businesses. We incurred approximately $23.9 million, including amounts accrued and unpaid, of previously committed capital in the first two quarters of fiscal 2024 (approximately $75.2 million cumulatively) towards the development phase of our
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former lithium development project. However, during the first quarter of fiscal 2024, we ceased further development of the lithium project. For more information, refer to Item 1, Note 5 of our Consolidated Financial Statements and Part I, Item 1A, “Risk Factors” in our 2023 Form 10-K.
The table below provides a summary of our cash flows by category:
SIX MONTHS ENDED MARCH 31, 2024 | SIX MONTHS ENDED MARCH 31, 2023 | ||||
| Operating Activities: | |||||
Net cash provided by operating activities were $22.3 million | Net cash provided by operating activities were $149.5 million | ||||
» Net loss was $123.1 million. | » Net loss was $21.9 million. | ||||
» Non-cash depreciation and amortization expense was $52.3 million. | » Non-cash depreciation and amortization expense was $48.4 million. | ||||
» Non-cash stock-based compensation expense was $7.0 million. | » Non-cash stock-based compensation expense was $13.7 million. | ||||
» Non-cash loss on impairments was $181.4 million. | » Non-cash net loss in equity investees was $2.3 million. | ||||
» Non-cash net gain from remeasurement of contingent consideration was $21.4 million. | » Working capital items were a source of operating cash flows of $105.0 million. | ||||
» Working capital items were a use of operating cash flows of $77.2 million. | |||||
Investing Activities: | |||||
Net cash flows used in investing activities were $66.4 million | Net cash flows used in investing activities were $49.6 million | ||||
» Net cash flows used in investing activities included $65.3 million of capital expenditures. | » Net cash flows used in investing activities included $49.3 million of capital expenditures. | ||||
Financing Activities: | |||||
Net cash flows provided by financing activities were $45.3 million | Net cash flows provided by financing activities were $102.9 million | ||||
» Included net proceeds from the issuance of debt of $72.1 million. | » Included net payments on our debt of $123.1 million. | ||||
» Included the payment of dividends of $12.7 million. | » Included net proceeds from private placement of common stock of $240.7 million. | ||||
» Included the payment of contingent consideration of $9.1 million. | » Included the payment of dividends of $12.6 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 prior to the start of the winter season and 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. During the six months ended March 31, 2024, we also paid liabilities accrued as of September 30, 2023, including the remaining $10 million settlement payment to the SEC, accrued incentive compensation, and other liabilities. Additionally, at the end of Fortress’ contract term with the USFS, we recognized revenue previously deferred in accrued liabilities and decreased our contingent consideration liability due to recent revisions of potential payouts. Our operating cash flows during the six months ended March 31, 2023, reflect the seasonal decrease in inventory due to the end of the winter season and an increase in accounts receivable as the end of the winter season sales have not been 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 (Loss) 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. 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, interest income, (gain) loss on foreign exchange, other (income) expense, net and other significant items that management does not consider indicative of normal operations. Other significant items, such as executive transition costs, restructuring charges and impairment charges involve distinct initiatives that are not reflective of core operating activities and affect the comparability of our operational results across reporting periods. 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, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Net loss | $ | (48.0) | $ | (21.6) | $ | (123.1) | $ | (21.9) | |||||||||||||||
| Interest expense | 17.1 | 14.2 | 32.9 | 28.1 | |||||||||||||||||||
Income tax (benefit) expense | (13.1) | 55.1 | (11.3) | 67.0 | |||||||||||||||||||
| Depreciation, depletion and amortization | 26.8 | 24.5 | 52.3 | 48.4 | |||||||||||||||||||
| EBITDA | (17.2) | 72.2 | (49.2) | 121.6 | |||||||||||||||||||
| Adjustments to EBITDA: | |||||||||||||||||||||||
| Stock-based compensation - non cash | (4.9) | 3.1 | 7.0 | 13.7 | |||||||||||||||||||
| Interest income | (0.2) | (1.9) | (0.6) | (3.0) | |||||||||||||||||||
(Gain) loss on foreign exchange | (2.5) | (0.2) | (0.6) | 2.3 | |||||||||||||||||||
Restructuring charges(a) | 3.1 | 3.7 | 5.6 | 3.7 | |||||||||||||||||||
Loss on impairments(b) | 108.1 | — | 182.9 | — | |||||||||||||||||||
Accrued loss and legal costs related to SEC investigation(c) | — | (0.4) | — | (0.1) | |||||||||||||||||||
| Other expense, net | 0.9 | 0.9 | 1.6 | 1.0 | |||||||||||||||||||
| Adjusted EBITDA | $ | 87.3 | $ | 77.4 | $ | 146.7 | $ | 139.2 | |||||||||||||||
(a)We incurred severance and related charges related to reductions in workforce and changes to executive leadership and additional restructuring costs related to the termination of our lithium development project.
(b)We recognized impairments of long-lived assets related to the termination of the lithium development project; Fortress goodwill, intangible assets and inventory; and Plant Nutrition goodwill. Refer to Item 1, Note 1, Item 1, Note 5 and Item 1, Note 6 for additional details.
(c)We recognized costs, net of reimbursements, related to the settled SEC investigation.
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Recent Accounting Pronouncements
See Part 1, Note 1 of our Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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.
Although inflation has not had a significant impact on our operations in the current period, 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 2023 Form 10-K.
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). Lastly, the results of our fire retardant business are also seasonal with peak demand for fire retardant products and services occurring from June through September.
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 or excessive precipitation 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, mineral concentrations or other factors, 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 affect our operations and necessitate capital expenditures in the future, although capital expenditures for climate-related projects are not expected to be material in fiscal 2024. 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 2023 Form 10-K.
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 fuel consumed at our production
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locations or 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, 2023.
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.
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, 2024, at the reasonable assurance level.
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 have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company is in the process of integrating Fortress’ operations, including integration of financial reporting processes and procedures and internal controls 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, 2023 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 Annual Report on Form 10-K for the annual period ended September 30, 2023.
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
Rule 10b5-1 Trading Plans
During the three and six months ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted terminated
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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, 2024, 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 15, 2024 | By: | /s/ Lorin Crenshaw | |||||||||
| Lorin Crenshaw | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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