# COMPASS MINERALS INTERNATIONAL INC (CMP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from COMPASS MINERALS INTERNATIONAL INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1227654/000122765423000226/cmp-20230930.htm
Accession: 0001227654-23-000226
Filing date: 2023-11-29
Report date: 2023-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/CMP/
All MD&A years: /company/CMP/mda/
Previous year: /company/CMP/mda/fy2022/ (FY 2022)
Next year: /company/CMP/mda/fy2024/ (FY 2024)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in this discussion regarding the industry outlook, our expectations for the future performance of our business, and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, “Risk Factors.” You should read the following discussion together with Item 1A, “Risk Factors” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.

COMPANY OVERVIEW

Compass Minerals 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. Our Salt segment products help keep roadways safe during winter weather and are used in numerous other consumer, industrial, chemical and agricultural applications. Our Plant Nutrition segment is the leading North American producer of sulfate of potash, 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. Our next-generation fire retardants help to slow, stop and prevent wildfires through the use of high-performing and environmentally-friendly products. Additionally, we have been pursuing development of a sustainable lithium salt resource to support the North American battery market, although that project has been suspended indefinitely beyond certain already committed items associated with the early stages of construction of our commercial scale demonstration unit. As of September 30, 2023, we operate 12 production and packaging facilities with nearly 2,000 personnel throughout the U.S., Canada and the U.K , 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 the source of the lithium salt resource that we intend to develop; and

•Several mechanical evaporation facilities producing consumer and industrial salt.

We concluded that certain of our assets met the criteria for classification as held for sale and discontinued operations in the first quarter of 2021, as discussed further in the “Discontinued Operations” section below. As a result, we are presenting two reportable segments, Salt and Plant Nutrition (which was previously known as the Plant Nutrition North America segment) in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See Item 8, Note 15 to our Consolidated Financial Statements for more information. Unless otherwise indicated, the information and amounts provided in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” pertain to continuing operations.

Our Salt segment provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, 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.

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 magnesium chloride-based aerial and ground fire retardant products to help combat wildfires (see Part II, Item 8, Note 3 of our Consolidated Financial Statements). Magnesium chloride is an existing product stream out of our Ogden, Utah, solar evaporation facility. During the third quarter of fiscal 2023, Fortress entered into an agreement with the U.S. Forest Service (“USFS”) to supply product and provide associated services for the 2023 fire season, as described further in Part II, Item 8, Note 5 of our Consolidated Financial Statements.

Additionally, we have been pursuing development of a sustainable lithium salt resource near Ogden, UT to support the North American battery market. As previously announced, we have suspended indefinitely any further investment in the lithium project in Utah beyond certain already committed items associated with the early stages of construction of our commercial scale demonstration unit until further clarity is provided on the evolving regulatory climate. We are considering seeking partners at the project level with an aim of reducing our share of capital costs and lowering execution risk in the event that the project is restarted.

We focus on building intrinsic value by growing our earnings before interest, taxes, depreciation and amortization (“EBITDA”) and by improving our asset quality. We can employ our operating cash flow and other sources of liquidity to pay dividends, re-invest in our business, pay down debt and make acquisitions.

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Discontinued Operations

On March 16, 2021, our Board of Directors approved a plan to sell our South America chemicals and specialty plant nutrition businesses, our investment in Fermavi and our North America micronutrient product business (collectively, the “Specialty Businesses”) with the goal of reducing our leverage and enabling increased focus on optimizing our core businesses and as described further in Item 8, Note 1 and Note 4 to our Consolidated Financial Statements, we subsequently sold our South America specialty plant nutrition business, a component of our North America micronutrient business, our Fermavi investment and our South America chemicals business, respectively. We believe these dispositions were conducted through a single disposal plan representing a strategic shift that has had a material effect on our operations and financial results. Consequently, the Specialty Businesses qualify for presentation as discontinued operations in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The dispositions were completed during fiscal 2022; accordingly, the results of operations of the Specialty Businesses are presented as discontinued operations in the Consolidated Statements of Operations for each period presented.

Change in Fiscal Year

On June 23, 2021, our Board of Directors approved a change in our fiscal year end from December 31 to September 30. As a result, our results of operations, cash flows and all transactions impacting shareholders equity presented in this Annual Report on Form 10-K are for the twelve months ended September 30, 2023 (“fiscal 2023”), the twelve months ended September 30, 2022 (“fiscal 2022”) and the nine month transition period ended September 30, 2021 (“fiscal 2021”) unless otherwise noted. As such, our fiscal 2023 refers to the period from October 1, 2022 to September 30, 2023.

This Annual Report on Form 10-K also includes an unaudited Consolidated Statement of Operations for the comparable twelve month period of October 1, 2020 to September 30, 2021; see Item 8, Note 21 to our Consolidated Financial Statements for additional information.

The discussion below provides a comparison of (1) the twelve months ended September 30, 2023 to the twelve months ended September 30, 2022 and (2) the twelve months ended September 30, 2022 to the twelve ended September 30, 2021. All information for the twelve months ended September 30, 2021 is unaudited.

Consolidated Results of Operations

* 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-U.S. GAAP measure.

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CONSOLIDATED RESULTS COMMENTARY: Fiscal Year Ended September 30, 2023 – Fiscal Year Ended September 30, 2022

•Total sales decreased 3%, or $39.4 million, due to a decrease in the Plant Nutrition segment, which was partially offset by the inclusion of sales of Fortress following its acquisition in May 2023.

•Operating earnings increased 84%, or $36.2 million, primarily due to higher operating earnings in our Salt segment and operating earnings of Fortress following its acquisition, which were partially offset by lower Plant Nutrition segment operating earnings.

•Diluted earnings per share increased $1.47 to a net earnings per share of $0.37.

•EBITDA* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* increased 7%, or $12.3 million.

CONSOLIDATED RESULTS COMMENTARY: Twelve Months Ended September 30, 2022 – Twelve Months Ended September 30, 2021

•Total sales increased $98.3 million, due to an increase in the Salt segment, which was partially offset by a decrease in the Plant Nutrition segment.

•Operating earnings decreased 60%, or $64.2 million, due to lower operating earnings in our Salt segment and higher corporate expenses, which was partially offset by higher Plant Nutrition segment earnings.

•Diluted earnings per share decreased $2.10 to a loss of $1.10.

•Adjusted EBITDA decreased 22%, or $52.3 million.

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GROSS PROFIT & GROSS MARGIN COMMENTARY: Fiscal Year Ended September 30, 2023 – Fiscal Year Ended September 30, 2022

Gross Profit: Increased 19%, or $37.1 million; Gross Margin increased 3% from 16% to 19%

•Salt segment gross profit increased $57.9 million primarily due to higher average sales prices, which were partially offset by higher per-unit logistics and product costs (see “—Operating Segment Performance—Salt” for additional information).

•Gross profit for the Plant Nutrition segment decreased $27.3 million due to lower sales volumes and higher per-unit product and logistics costs, which were partially offset by slightly higher average sales prices (see “—Operating Segment Performance—Plant Nutrition” for additional information).

•Fortress contributed $6.4 million of gross profit following its acquisition in May 2023.

GROSS PROFIT & GROSS MARGIN COMMENTARY: Twelve Months Ended September 30, 2022 – Twelve Months Ended September 30, 2021

Gross Profit: Decreased 15%, or $33.4 million; Gross Margin decreased 4% from 20% to 16%

•Salt segment gross profit decreased $59.7 million primarily due to higher per-unit logistics and product costs, which were partially offset by higher sales volumes (see “—Operating Segment Performance—Salt” for additional information).

•Gross profit for the Plant Nutrition segment increased $26.3 million due to higher average sales prices, which were partially offset by lower sales volumes and higher per-unit product costs (see “—Operating Segment Performance—Plant Nutrition” for additional information).

OTHER EXPENSES AND INCOME COMMENTARY: Fiscal Year Ended September 30, 2023 – Fiscal Year Ended September 30, 2022

SG&A: Increased $0.9 million; Increased 0.4 percentage points as a percentage of sales to 12.8% from 12.4%

•The increase in SG&A expense was primarily due to costs incurred by Fortress in fiscal 2023 following its acquisition, which were mostly offset by lower legal expenses in fiscal 2023 due to the prior year settlement of the SEC investigation.

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Interest Income: Increased $4.5 million to $5.3 million

•The increase in interest income during the current period is primarily due to higher interest rates and the higher average cash balance during fiscal 2023 resulting from proceeds received from the private placement of our common stock.

Interest Expense: Increased $0.3 million to $55.5 million

•The increase was primarily due to an increase in interest rates mostly offset by a decrease in outstanding borrowings.

Loss (Gain) on Foreign Exchange: Changed by $17.2 million from a gain of $14.9 million to a loss of $2.3 million in 2023

•We realized a foreign exchange loss of $2.3 million for the fiscal year ended September 30, 2023 compared to a gain of $14.9 million in the prior year due primarily to changes in translating our intercompany loans from Canadian dollars to U.S. dollars.

Net Loss in Equity Investees: Decreased $2.1 million to $3.1 million

•We realized a net loss in equity investees of $3.1 million for the fiscal year ended September 30, 2023 compared to $5.2 million in the comparable period of the prior year as we acquired Fortress in May 2023; therefore we recognized only a partial year of results attributed to Fortress as an equity investee for the period of time prior to acquisition.

Gain from Remeasurement of Equity Method Investment

•We recognized a gain of $13.7 million for the fiscal year ended September 30, 2023 related to our previously held equity investment in Fortress, which was remeasured to fair value upon our full acquisition of the business in May 2023.

Other Expense, Net: Increased $3.8 million from expense of $0.5 million to expense of $4.3 million

•Other expense, net increased primarily due to losses on derivatives not designated as hedging instruments and debt refinancing fees related to our May debt restructuring.

Income Tax Expense from Continuing Operations: Decreased $17.6 million to $17.4 million

•The decrease in income tax expense was due primarily to the recognition of a valuation allowance of $18.1 million in fiscal 2022 recorded against the beginning of the fiscal year deferred tax assets that were no longer considered more likely than not to be realized and a tax benefit in fiscal 2023 from a change in Canadian tax law which allows for deductibility of certain interest expense items, partially offset by an increase in pretax book income in fiscal 2023 compared to the prior year.

•Our effective tax rate was 53% for the fiscal year ended September 30, 2023, which is primarily driven by the income mix by country with income recognized in foreign jurisdictions partially offset by losses recognized in the U.S., for which a valuation allowance has been recorded against the U.S. tax benefit carryforward. Additionally, a tax benefit was recorded in fiscal 2023 related to the change in Canadian tax law permitting the deductibility of certain interest expense items.

•Our income tax provision in both periods 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. Additionally, the income tax provision for the fiscal year ended September 30, 2022 included interest expense recognition differences for tax and financial reporting purposes, global intangible low-taxed income (“GILTI”) and the nondeductible SEC settlement loss accrual.

Net Earnings from Discontinued Operations: Earnings of $12.2 million in fiscal 2022

•The net earnings from our discontinued operations for the fiscal year ended September 30, 2022 includes the results from our previously-owned chemicals business in South America through the April 20, 2022 sale date.

•The prior period results of the South America chemicals business includes a foreign currency exchange rate gain of $17.5 million and an impairment loss of $23.1 million. Refer to Item 1, Note 4 to the Consolidated Financial Statements for additional details.

OTHER EXPENSES AND INCOME COMMENTARY: Twelve Months Ended September 30, 2022 – Twelve Months Ended September 30, 2021

SG&A: Increased $30.8 million; Increased 1.7 percentage points as a percentage of sales to 12.4% from 10.7%

•The increase in SG&A expense was primarily due to the fiscal 2022 accrued settlement and increased legal expenses related to the settled SEC investigation, costs related to our lithium development and increased employee compensation costs which include executive transition costs.

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Interest Income: Increased $0.5 million to $0.8 million

•The increase in interest income is primarily due to higher interest rates.

Interest Expense: Decreased $4.6 million to $55.2 million

•The decrease was primarily due to a decrease in outstanding borrowings.

(Gain) Loss on Foreign Exchange: Improved $20.5 million from a loss of $5.6 million to a gain of $14.9 million in 2022

•We realized a foreign exchange gain of $14.9 million for the twelve months ended September 30, 2022 compared to a loss of $5.6 million in the comparable period for the prior year due primarily to changes in translating our intercompany loans from Canadian dollars to U.S. dollars.

Net Loss in Equity Investees: Increased $4.7 million to $5.2 million

•We realized a net loss in equity investees of $5.2 million for the twelve months ended September 30, 2022 compared to $0.5 million in the comparable period due to our share of losses related to our equity investments in the period ended September 30, 2022.

Other Expense, Net: Increased $0.4 million from $0.1 million to $0.5 million

•Other income, net primarily reflects an increase in losses in our deferred compensation plan in fiscal 2022.

Income Tax Expense from Continuing Operations: Increased $29.2 million to $35.0 million

•The increase in income tax expense was due to a $37.5 million of valuation allowance recorded in the twelve months ended September 30, 2022 against the portion of our deferred tax assets that are no longer considered more likely than not to be realized, partially offset by a decrease due to lower pretax book income for the twelve months ended September 30, 2022 compared to the twelve months ended September 30, 2021.

•Our effective tax rate decreased from 14% for the twelve months ended September 30, 2021, reflecting $37.5 million of valuation allowance recorded in fiscal 2022 on pretax book losses. See Item 1, Note 11 to the Consolidated Financial Statements.

•Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, nondeductible executive compensation, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes. Our provision for the twelve months ended September 30, 2022 also included valuation allowances and nondeductible contingent loss accrual.

Net (Loss) Earnings from Discontinued Operations: Increased from a loss of $220.8 million to income of $12.2 million

•The net earnings from our discontinued operations for the twelve months ended September 30, 2022 includes only the results from our chemicals business in South America through the April 20, 2022 sale date, but includes the results of all the South America businesses and the North America specialty plant nutrition business for the twelve months ended September 30, 2021.

•The twelve months ended September 30, 2022 results of the South America chemicals business includes a foreign currency exchange rate gain of $17.5 million offset by an impairment loss of $23.1 million compared to the prior period foreign currency exchange rate gain of $11.3 million and net impairment loss of $269.4 million to record the net assets of the South America businesses at their fair value less cost to sell net of a gain on the sale of the Plant Nutrition micronutrient business. Refer to Item 1, Note 4 to the Consolidated Financial Statements for additional details.

OPERATING SEGMENT PERFORMANCE

The following financial results represent consolidated financial information with respect to sales from our Salt and Plant Nutrition segments for the fiscal years ended September 30, 2023 and 2022 and the twelve months ended September 30, 2021. 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 $10.4 million for the fiscal year ended September 30, 2023. The results of operations of the consolidated records management business and other incidental revenues include sales of $11.4 million, $11.5 million and $11.3 million for the twelve months ended September 30, 2023, 2022, and 2021, respectively. These sales are not material to our consolidated financial results and are not included in the following operating segment financial data.

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SALT SEGMENT RESULTS

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SALT SEGMENT RESULTS COMMENTARY: Fiscal Year Ended September 30, 2023 – Fiscal Year Ended September 30, 2022

•Salt sales of $1,010.8 million were essentially flat to the prior year reflecting higher Salt average sales prices, which were offset by lower sales volumes.

•Salt sales volumes decreased 10%, or 1,237,000 tons, and reduced sales by approximately $89.8 million. Highway deicing sales volumes decreased 11% largely reflecting our 2022 bidding strategy emphasizing pricing over volume which resulted in a decrease in North American sales commitments. Consumer and industrial sales volumes decreased 6% primarily reflecting a decrease in deicing sales volumes.

•Salt average sales price increased 11% and contributed approximately $90.3 million to the increase in sales due to higher highway and consumer and industrial average sales prices.

•Highway deicing average sales prices increased 12% when compared to the prior year due to higher North American highway deicing contract prices for the 2023 winter season and stronger pricing in the UK. Consumer and industrial average sales prices increased 6% due to higher sales prices primarily in response to the recent inflationary environment.

•Salt operating earnings increased 47%, or $54.5 million, due primarily to higher average sales prices for both highway and consumer and industrial products, which were partially offset by higher per-unit product and logistics costs and $1.5 million of restructuring costs recognized in the current year. In addition, lower sales volumes compared to the prior period partially offset the increase in operating earnings.

SALT SEGMENT RESULTS COMMENTARY: Twelve Months Ended September 30, 2022 – Twelve Months Ended September 30, 2021

•Salt sales increased 12%, or $110.7 million, due to higher Salt sales volumes and average sales prices.

•Salt sales volumes increased 11%, or 1,265,000 tons, and contributed approximately $90.6 million to the increase in sales. Highway deicing sales volumes increased 12% primarily as a result of an increase in sales commitments. Consumer and industrial sales volumes increased 6% due to an increase in both deicing and non-deicing sales volumes.

•Salt average sales price increased 1% and contributed approximately $20.1 million to the increase in sales due to higher consumer and industrial average sales prices.

•Highway deicing average sales prices were relatively flat when compared to the prior year as lower North American highway deicing contract prices for the 2022 winter season and the weaker pound sterling were mostly offset by favorable product sales mix. Consumer and industrial average sales prices increased 6% due to higher sales prices primarily in response to the high inflationary environment.

•Salt operating earnings decreased 35%, or $61.5 million, due primarily to higher per-unit product and logistics costs. We experienced higher freight costs and inflationary pressures for certain materials and supplies that were not recovered through increased sales prices during the period. We estimate increased Salt product cost of approximately $15.5 million to $17.5 million during fiscal 2022 due to inflation impacts. Additionally, as a result of a maintenance outage at our Cote Blanche mine during the three months ended March 31, 2022, we incurred approximately $9.2

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million of additional product and logistics costs to fulfill seasonal demand with salt from other sources. Higher sales volumes compared to the prior period partially offset the higher costs.

PLANT NUTRITION RESULTS

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PLANT NUTRITION RESULTS COMMENTARY: Fiscal Year Ended September 30, 2023 – Fiscal Year Ended September 30, 2022

•Plant Nutrition sales decreased 23%, or $50.2 million, due to lower sales volumes, which was partially offset by higher average sales prices.

•Plant Nutrition sales volumes decreased 23%, or 67,000 tons, due to a combination of weather conditions in select key markets, including California, and uncertainty about future fertilizer prices causing customers to cancel or delay purchases. The lower sales volumes resulted in a sales decline of approximately $52.1 million.

•Strong Plant Nutrition sales prices early in fiscal 2023 resulted in a 1% increase average sales price for the year increasing sales by approximately $1.9 million. Sales prices have since moderated closer to historical levels.

•Plant Nutrition operating earnings decreased 70%, or $25.9 million primarily reflecting higher per-unit product costs primarily driven by lower production volumes and higher energy and other input costs, $2.9 million of expenses associated with the small fire at Ogden and proportionately fewer sales to more profitable regions, which were partially offset by higher average sales prices and lower SG&A expenses.

PLANT NUTRITION RESULTS COMMENTARY: Twelve Months Ended September 30, 2022 – Twelve Months Ended September 30, 2021

•Plant Nutrition sales decreased 5%, or $12.7 million, due to lower sales volumes, which was partially offset by higher average sales prices.

•Plant Nutrition sales volumes decreased 29%, or 117,000 tons, as feedstock inconsistencies in the twelve months ended September 30, 2022 have reduced production volumes and available inventory levels. The lower sales volumes resulted in a sales decline of approximately $68.2 million.

•Plant Nutrition average sales prices increased 33% and increased sales by approximately $55.5 million.

•Plant Nutrition operating earnings increased 308%, or $28.0 million primarily due to significantly higher average sales prices, which were partially offset by reduced sales volumes due to inventory constraints and higher per-unit product and logistics costs primarily due to lower production volumes at our Ogden facility as well as approximately $5 million to $7 million of higher energy and other input costs.

OUTLOOK

•Due to weaker winter weather in the company’s served markets in fiscal year 2023, committed volumes for fiscal year 2024 in the North American highway deicing business are down approximately 5%. Despite these lower volume commitments, we expect Salt segment sales volumes to increase between 3% and 5% year over year assuming average winter weather. Pricing for the Salt segment is expected to improve year over year, driven by higher North American highway deicing bid season results that saw average contract pricing improve by approximately 3%. Accordingly, we expect Salt segment sales volumes and adjusted EBITDA to range from 11.3 million to 12.2 million tons and $230 million to $270 million, respectively, in fiscal year 2024.

•Plant Nutrition segment sales volumes are expected to improve to a range of 290,000 to 320,000 tons in fiscal year 2024, up from depressed levels in fiscal year 2023 that reflected abnormal weather in California. We expect lower average selling prices throughout fiscal 2024 as prices have moderated from peak prices obtained in fiscal 2023. For fiscal year 2024, we expect adjusted EBITDA in a range of $20 million to $40 million.

•Fiscal year 2024 capital expenditures are expected to be in the $125 million to $140 million range. This includes approximately $90 million to $100 million in sustaining capital for the core Salt and Plant Nutrition business. Capital

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expenditures in the lithium project are projected in a range of $25 million to $30 million and includes only amounts related to previously committed items associated with early stage construction of the commercial scale demonstration unit. We have suspended further investment in our lithium salt project pending regulatory clarity from the State of Utah. In the fire retardant business, approximately $10 million of growth capital is anticipated to be spent in fiscal year 2024.

Investments, Liquidity and Capital Resources

Overview

As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets. The principal source of 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 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 indentures governing our 6.75% Senior Notes due December 2027 (the “6.75% Notes), which limits the amount of dividends we can pay to our stockholders. We are in compliance with our debt covenants as of September 30, 2023. See Item 8, Note 13 to our Consolidated Financial Statements for a discussion of our outstanding debt.

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. We have been able to manage our cash flows generated and used across Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of September 30, 2023, we had $20.0 million of cash and cash equivalents (in our Consolidated Balance Sheets) that was either held directly or indirectly by foreign subsidiaries. Due in large part to the seasonality of our deicing salt business, we have experienced large changes in our working capital requirements from quarter to quarter. 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 million revolving accounts receivable financing facility (our “AR Facility”).

Notwithstanding our strategic decision to exit our South America chemicals and specialty plant nutrition businesses, as discussed in Item 8, Note 1 and Note 4 to our Consolidated Financial statements, we have historically considered the undistributed earnings of our foreign subsidiaries to be permanently reinvested. As a result of U.S. tax reform, we revised our permanently reinvested assertion in fiscal 2018 expecting to repatriate approximately $150 million of unremitted foreign earnings from Canada. Additionally, we changed our permanently reinvested assertion and repatriated $42.5 million of unremitted foreign earnings from our U.K. operations in September 2021. In fiscal 2022, we revised our permanently reinvested assertion, expecting to repatriate an additional $10 million of unremitted foreign earnings from our U.K. operations and in fiscal 2023 we revised it again expecting to repatriate an additional approximately $6 million of unremitted foreign earnings 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 September 30, 2023, 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. Due to our ability to generate adequate levels of U.S. cash flow on an annual basis, it is our current intention to continue to reinvest the remaining undistributed earnings of our foreign subsidiaries indefinitely. We review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense. As of September 30, 2023, we have $194.9 million of outside basis differences for which no deferred taxes have been recorded. See Item 8, Note 11 to our Consolidated Financial Statements for additional information.

In addition, the amount of permanently reinvested foreign 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. As discussed in Item 8, Note 11 to our Consolidated Financial Statements, 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 8, Note 11 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments.

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 (see “—Seasonality” for more information). When we have not been able to meet our short-term liquidity or capital needs with cash from operations, whether

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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 related to our Salt, Plant Nutrition and Fortress businesses from these sources. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We manage our capital allocation considering our long-term strategic objectives and required spending to sustain our business. During the first quarter of fiscal 2021, we reduced our dividend by approximately 80% to provide additional liquidity and align our capital allocation policy with our corporate strategy. 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 improvements 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.

In fiscal 2023, we spent $156.2 million on capital expenditures. During fiscal 2024, we expect to spend between $90 million to $100 million of sustaining capital in our Salt, Plant Nutrition and Fortress businesses, including approximately $15 million to $20 million towards replacing the existing underground mill at Goderich mine over multiple years, which will be located in a built-for-purpose area of the mine and improve operating efficiencies. Additionally, we have spent approximately $48.7 million of capital in fiscal 2023 (approximately $51.3 million cumulatively) towards the development phase of our sustainable lithium development project. As previously announced, we have suspended indefinitely any further investment in the lithium development project beyond certain already committed items associated with the early stages of construction of our commercial scale demonstration unit until further clarity is provided on the evolving regulatory climate. We are considering seeking potential partners at the project level to reduce our share of capital costs and lower execution risk in the event that the project is restarted. We can no longer provide an estimate of when we expect to achieve market entry, but expect significant capital and other expenditures would be required to achieve this market entry if we decide to continue with the lithium development project at some point in the future. For more information, see Item 1A, “Risk Factors.”

On October 18, 2022, we received aggregate net proceeds of approximately $240.7 million, net of transaction costs, from Koch Minerals & Trading, LLC (“KM&T”) as part of a strategic equity partnership. We have used, or committed to use, approximately $78 million of the proceeds from the private placement for capital expenditures to advance the first development phase of the lithium project, including the early stages of construction of our commercial scale demonstration unit, with the remainder of the proceeds used to reduce debt or for general corporate purposes.

In connection with our strategy to strengthen and grow our essential minerals businesses, in fiscal 2022, we made an additional $45 million equity investment in Fortress, resulting in a total investment of $50 million representing a 45% ownership interest. Fortress is a development stage company that has achieved commercialization during fiscal 2023 of its magnesium chloride-based fire-retardant products to help combat wildfires.

On May 5, 2023, we acquired the remaining 55% interest in Fortress not previously owned in exchange for an initial cash payment of approximately $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, and a cash earn-out based on financial performance and volumes of Fortress fire retardant products sold over a 10-year period. Building upon the previous 45% minority ownership stake in Fortress, the transaction provides us full ownership of all Fortress assets, contracts, and intellectual property. We initially recognized a $16.2 million non-cash gain in the period ended June 30, 2023, as a result of remeasuring the value of our prior equity interest in Fortress, which is generally attributable to Fortress’ advancement from a pre-revenue, development-stage company to commercialization. The gain was reduced to $13.7 million in the period ended September 30, 2023, as a result of measurement period adjustments, discussed further in Item 8, Note 3. During the third quarter of fiscal 2023, Fortress entered into an agreement with the USFS to supply product and provide associated services for the 2023 fire season.

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The table below provides a summary our cash flows by category and period ended.

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[["Fiscal Year Ended","Nine Months Ended"],["September 30, 2023","September 30, 2022","September 30, 2021"],["Operating Activities:"],["Net cash flows provided by operating activities were $107.9 million.\u00bbNet earnings were $15.5 million.\u00bbNon-cash depreciation and amortization expense was $98.6 million.\u00bbNon-cash stock-based compensation was $20.6 million.\u00bbNon-cash remeasurement gain of $13.7 million related to the acquisition of Fortress.\u00bbNon-cash loss on disposition of assets was $4.5 million.\u00bbNon-cash net loss in equity investees was $3.1 million.\u00bbWorking capital items were a use of operating cash flows of $22.4 million.","Net cash flows provided by operating activities were $120.5 million.\u00bbNet losses were $25.1 million.\u00bbNon-cash depreciation and amortization expense was $113.7 million.\u00bbNon-cash impairment loss was $23.1 million.\u00bbNon-cash stock-based compensation was $15.7 million.\u00bbNon-cash net loss in equity investees was $5.2 million.\u00bbNon-cash loss on disposition of assets was $3.7 million.\u00bbWorking capital items were a use of operating cash flows of $9.4 million.","Net cash flows provided by operating activities were $162.7 million.\u00bbNet losses were $213.3 million.\u00bbNon-cash depreciation and amortization expense was $94.6 million.\u00bbNon-cash impairment loss was $300.0 million.\u00bbNon-cash gain on disposition of assets of $27.3 million, including $30.6 million from the sale of a component of our North America micronutrient business.\u00bbWorking capital items were a source of operating cash flows of $46.7 million."],["Investing Activities:"],["Net cash flows used in investing activities were $179.8 million.\u00bbNet cash flows used in investing activities included $156.2 million of capital expenditures. \u00bbIncluded cash investment of $18.9 million, net of cash held by Fortress, for the acquisition of the remaining interest in Fortress.","Net cash flows used in investing activities were $80.0 million.\u00bbNet cash flows used in investing activities included $96.7 million of capital expenditures. \u00bbInvesting activity outflows were partially offset by proceeds of $61.2 million from the sale of our South America specialty chemicals business and specialty plant nutrition earnout. \u00bbIncluded investments in equity method investees of $46.3 million.","\u00bbNet cash flows provided by investing activities included proceeds of $348.6 million from the sale of our South America specialty plant nutrition business ($289.5 million), a component of our North America micronutrient business ($56.2 million) and our Fermavi investment ($2.9 million). \u00bbInvesting proceeds were offset by $71.8 million of capital expenditures."],["Financing Activities:"],["Net cash flows provided by financing activities were $64.0 million.\u00bbIncluded payments of dividends of $24.9 million.\u00bbNet payments on our debt of $144.7 million.\u00bbIncluded payment of deferred financing costs of $3.9 million.\u00bbIncluded net proceeds from private placement of common stock of $240.7 million.","Net cash flows used in financing activities were $14.3 million.\u00bbIncluded payments of dividends of $20.8 million.\u00bbNet proceeds from the issuance of debt of $9.9 million.","Net cash flows used in financing activities were $439.6 million.\u00bbIncluded payments of dividends of $73.1 million.\u00bbNet payments on our debt of $365.8 million."]]
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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 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. The lower accounts receivable balance and higher inventory balance as of September 30, 2023, as compared to September 30, 2022, primarily reflects lower sales volumes in the fourth fiscal quarter in our Salt and Plant Nutrition segments. The acquisition of Fortress resulted in an increase in current liabilities due to accrued contingent consideration and deferred revenue recorded on its contract with the USFS as of September 30, 2023 as compared to September 30, 2022. The higher accounts receivable balance as of September 30, 2022, as compared to September 30, 2021, reflects higher

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sales in the fourth fiscal quarter due to higher preseason deicing demand and higher SOP pricing in fiscal 2022. The higher sales activity and increased costs resulted in a higher level of current liabilities as of September 30, 2022 as compared to September 30, 2021. The working capital reduction for the nine months ended September 30, 2021 reflects the collection of the prior winter season accounts receivable net of subsequent rebuilding of inventory in advance of the next winter season.

See Dispositions below for a discussion of the sale of our South America Plant Nutrition business and North America micronutrient business.

Capital Resources

With regard to our Salt, Plant Nutrition and Fortress businesses, we believe our ongoing primary sources of liquidity will continue to be cash flow from operations and borrowings under our revolving credit facility. We believe that our current banking syndicate is secure and believe we will have access to our entire revolving credit facility. We expect that ongoing requirements for debt service and sustaining capital expenditures will primarily be funded from these sources. On October 18, 2022, we received approximately $240.7 million of proceeds, net of transaction costs, from the private placement of common stock with KM&T, of which approximately $200 million had previously been committed to fund the capital expenditure needs of our planned lithium development with the remaining approximately $40.7 million used to repay outstanding debt. As noted above, we have suspended indefinitely any further investment in the lithium development project beyond certain already committed items associated with the early stages of construction of our commercial scale demonstration unit until further clarity is provided on the evolving regulatory climate. For additional information, see Item 8, Note 16. 

Our debt service obligations could, under certain circumstances, materially affect our financial condition and prevent us from executing our business strategies. See Item 1A, “Risk Factors—Our indebtedness and any inability to pay our indebtedness could adversely affect our business and financial condition.” Furthermore, CMI is a holding company with no operations of its own and is dependent on its subsidiaries for cash flow. As discussed in Item 8, Note 13 to our Consolidated Financial Statements, at September 30, 2023, we had $811.2 million of outstanding indebtedness consisting of $500.0 million under our 6.75% Notes, $280.3 million of borrowings outstanding under our senior secured credit facilities (consisting of a term loan and a revolving credit facility), including $81.5 million borrowed against our revolving credit facility. Letters of credit totaling $15.2 million as of September 30, 2023, reduced available borrowing capacity under the revolving credit facility to $278.3 million.

On May 5, 2023, we entered into an agreement to amend and restate our credit agreement entered into on November 26, 2019 (as in effect prior to such restatement, the “Existing Credit Agreement”) with a new $575 million senior secured credit agreement due May 5, 2028 (as amended, the “2023 Credit Agreement”), comprised of a $375 million revolving credit facility and $200 million term loan. The term loan is payable in quarterly installments of interest and principal, which began September 30, 2023. The 2023 Credit Agreement increases the Applicable Margins by 25 basis points over those defined in the Existing Credit Agreement and adds an additional level at a consolidated total leverage ratio (defined below) of greater than 4.00 to 1.00. Consolidated total net debt includes the aggregate principal amount of total debt, net of unrestricted cash of up to $75 million as per the 2023 Credit Agreement. Proceeds from the 2023 Credit Agreement were used to redeem our $250 million 4.875% Senior Notes on May 10, 2023 and pay off the Existing Credit Agreement term loan balance of $16.9 million. Refer to Item 8, Note 13 of our Consolidated Financial Statements for additional details.

In November 2022, we entered into the third amendment to the Credit Agreement, principally to affect a transition from the London Inter-Bank Offered Rate to the Secured Overnight Financing Rate pricing benchmark provisions.

Pursuant to the terms of the 2023 Credit Agreement, the maximum allowed consolidated total net leverage ratio (as defined and calculated under the terms of the 2023 Credit Agreement and discussed further below) is 5.0x as of the last day of any quarter through the fiscal quarter ended December 31, 2023, which steps down to 4.75x in the quarter ending March 31, 2024, and to 4.5x for the fiscal quarter ended June 30, 2024 and thereafter. The consolidated total net leverage ratio represents the ratio of (a) consolidated total net debt to (b) consolidated adjusted EBITDA. As of September 30, 2023, our consolidated total net leverage ratio was approximately 3.70x. Consolidated total net debt is defined as the aggregate principal amount of debt outstanding, net of unrestricted cash not to exceed $75 million.

In April 2022, we utilized earnout proceeds from the fiscal 2021 sale of our South America specialty plant nutrition business and proceeds from the sale of our South America chemicals business, both discussed in Dispositions below, to repay approximately $60.6 million of our term loan balance.

In July 2021, we utilized cash proceeds from the sales of our South America specialty plant nutrition business and North America micronutrient business noted below in Dispositions to repay amounts borrowed against our revolving credit facility of $35.0 million. An additional $265.0 million of proceeds was utilized to pay down our term loan balance.

On June 30, 2020, certain of our U.S. subsidiaries entered into a three-year committed revolving accounts receivable financing facility for up to $100.0 million of borrowing with PNC Bank, National Association, as administrative agent and lender, and PNC Capital Markets, LLC, as structuring agent. On June 27, 2022, certain of our U.S. subsidiaries entered into an amendment to our AR Facility, extending the facility to June 2025. In January 2023, certain of the Company’s U.S. subsidiaries entered into the second amendment to the AR Securitization Facility with PNC Bank, which temporarily eased the restrictions of certain covenants contained in the agreement through March 2023. The amendment made certain adjustments to the financial

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tests including: (i) the default ratio and (ii) the delinquency ratio to make compliance with such tests more likely. At September 30, 2023, we had $30.9 million of outstanding loans under this accounts receivable financing facility. See Item 8, Note 13 to our Consolidated Financial Statements for more information.

In the future, including in fiscal 2024, 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. Although we are in compliance with our debt covenants as of September 30, 2023, 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.

Our ability to make scheduled interest and principal payments on our indebtedness, to refinance our indebtedness, to fund planned capital expenditures and to fund acquisitions will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our liquidity needs over the next 12 months.

We have various foreign and state net operating loss (“NOL”) carryforwards that may be used to offset a portion of future taxable income to reduce our cash income taxes that would otherwise be payable. However, we may not be able to use any or all of our NOL carryforwards to offset future taxable income and our NOL carryforwards may become subject to additional limitations due to future ownership changes or otherwise. At September 30, 2023, we had $65.4 million of gross foreign federal NOL carryforwards and $2.9 million of net operating tax-effected state NOL carryforwards that expire beginning in 2035. Also at September 30, 2023 and 2022, we had $2.0 million and $2.1 million, respectively, of tax-effected state capital losses that expire beginning in 2027 and $1.6 million and $0.2 million, respectively, of tax-effected federal capital losses that expire beginning in 2025. The NOL carryforwards in Brazil and related valuation allowances were eliminated as of September 30, 2022 given the ending of the Company’s operations in Brazil.

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 September 30, 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, for the fiscal year 2023, an additional valuation allowance of $10.8 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.

We have a defined benefit pension plan for certain of our current and former U.K. employees. Beginning December 1, 2008, future benefits ceased to accrue for the remaining active employee participants in the plan concurrent with the establishment of a defined contribution plan for these employees. Generally, our cash funding policy is to make the minimum annual contributions required by applicable regulations. As of September 30, 2023, the fair value of the plan’s assets are in excess of the accumulated benefit obligations and we expect to be required to use cash from operations above our historical levels to fund the plan in the future.

Dispositions

On March 23, 2021, we entered into a definitive agreement to sell our South America specialty plant nutrition business to ICL Brasil Ltda., a subsidiary of ICL Group Ltd. The transaction closed on July 1, 2021. Upon closing we recorded gross proceeds of approximately $421.1 million, including a reduction in proceeds of $6.2 million in working capital adjustments which were finalized during the third quarter of fiscal 2021 and associated selling costs of $8.4 million, comprised of a cash payment of approximately $318.4 million and an additional $102.7 million in net debt assumed by ICL Brasil Ltd. The Brazilian debt was deducted from gross proceeds from the transaction. The terms of the definitive agreement provided for an additional earnout payment of up to R$88 million Brazilian reais. On April 7, 2022, we received the maximum earnout possible of $18.5 million based on exchange rates at the time.

On April 7, 2021, we entered into a definitive agreement to sell a component of our North America micronutrient business to Koch Agronomic Services, LLC, a subsidiary of Koch Industries. On May 4, 2021, we completed the sale for approximately $56.7 million and we paid fees totaling $0.5 million.

On June 28, 2021, we entered into a definitive agreement to sell our investment in Fermavi for R$45 million Brazilian reais (including R$30 million Brazilian reais of deferred purchase price due in annual installments through August 2025). The transaction closed on August 20, 2021, and we received gross proceeds of approximately $2.9 million (based on exchange rates at the time of closing).

On April 20, 2022, we completed the sale of our South America chemicals business to a subsidiary of Cape Acquisitions LLC. Upon closing of the all-cash sale, we received gross proceeds of approximately $51.5 million based on exchange rates at the time of receipt, including a post-closing adjustment and compensation for $6.4 million cash on hand that transferred to the

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buyer. The sale included all of our remaining operations in Brazil, concluding the previously announced plan to exit the South American market. We recorded losses on the sales of the South American specialty plant nutrition business, the investment in Fermavi and the South America chemicals business totaling approximately $323.1 million. These losses were partially offset by approximately $30.6 million of gain from the sale of a component of the North America micronutrient business.

Off-Balance Sheet Arrangements

At September 30, 2023, we had no off-balance sheet arrangements that have or are likely to have a material current or future effect on our consolidated financial statements.

Contractual Obligations

We believe we have sufficient liquidity to fund our operations and meet both short-term and long-term obligations. Our material future obligations include the contractual obligations and other commitments as described below.

We are party to contractual obligations involving commitments to make payments to third parties. These obligations impact our liquidity and capital resource needs. As of September 30, 2023, we had total future contractual obligations of approximately $1.2 billion, with approximately $104.2 million due during fiscal 2024.

We have a contractual commitment to repay our long-term debt of $811.2 million based on the terms of our debt agreements, of which $5.0 million is payable within the next twelve months. Our interest commitment based on the debt balances at September 30, 2023 is $240.4 million, with $57.0 million expected within the next twelve months. The remainder of our contractual commitments consist of lease payments, purchase obligations and commitments, income taxes and employer pension and benefit plan obligations.

See Item 8, Note 6 and Item 8, Note 13 to our Consolidated Financial Statements for amounts outstanding as of September 30, 2023 related to leases and debt, respectively. Our contractual obligations related to income taxes represent the one-time transition tax obligation. Refer to Item 8, Note 14 for amounts related to purchase obligations and performance bonds. See Item 8, Note 11 for information related to income taxes. Our contractual obligations related to employer pension plan obligations represent the funded status recognized as of September 30, 2023. See Item 8, Note 12 for information related to these plans.

In addition, we have other future contingent commitments of approximately $247.8 million, consisting of letters of credit and performance bonds, due during fiscal 2024. At September 30, 2023, we had $232.6 million of outstanding performance bonds, which includes bonds related to Ontario mining tax reassessments. Refer to Item 8, Note 14 for additional details. We also have contingent consideration liabilities related to the Fortress acquisition currently valued at combined $43.7 million as of September 30, 2023. The milestone portion of the contingency is to be paid upon the achievement of certain performance measures over the next five years (currently estimated to be $22.6 million in total), and a cash earn-out based on financial performance and volumes of certain Fortress fire retardant products sold over a 10-year period (currently estimated to be $21.1 million in total). Refer to Item 8, Note 3 for additional information.

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. We have presented Adjusted EBITDA for both continuing operations and consolidated including discontinued operations for comparative purposes (see Item 8, Note 4 to our Consolidated Financial Statements for a discussion of discontinued operations). Both EBITDA and Adjusted EBITDA are non-U.S. GAAP financial measures used to evaluate the operating performance of our core business operations because our resource allocation, financing methods and cost of capital, and income tax positions are managed at a corporate level, apart from the activities of the operating segments, and the 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, depletion 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, loss (gain) on foreign exchange, other, net and other infrequent items that management does not consider indicative of normal operations. Other infrequent items, such as executive transition costs, restructuring charges and gain from remeasurement of equity method investment, involve distinct initiatives that are not reflective of management’s expectations for future operations 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

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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).

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(a)We incurred severance and other costs related to executive transition.

(b)We incurred severance and related charges related to a reduction of its workforce.

(c)We recorded a settlement loss accrual during the twelve months ended September 30, 2022, and recognized costs, net of reimbursements, related to the settled SEC investigation during each of the twelve months ended September 30, 2023, 2022 and 2021.

Adjusted EBITDA also excludes other non-operating income, primarily non-cash stock-based compensation expense, foreign exchange gains (losses) resulting from the translation of intercompany obligations, interest income and investment income (loss) relating to our nonqualified retirement plan.

Our net earnings, EBITDA and Adjusted EBITDA are impacted by other events or transactions that we believe to be important in understanding our earnings trends such as the variability of weather. The impact of weather has not been adjusted in the amounts presented above. Our fiscal 2023, 2022 and 2021 results were unfavorably impacted by winter weather activity as compared to an average winter in the markets we serve.

Management’s Discussion of Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the reporting date and the reported amounts of revenue and expenses during the reporting period. Actual results could vary from these estimates. We have identified the critical accounting policies and estimates that we believe are most important to the portrayal of our financial condition and results of operations. The policies set forth below require significant subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Business Combinations – From time to time, we may enter into business combinations. We account for our business combinations using the acquisition accounting method, which requires us to determine and recognize assets acquired and liabilities assumed at their acquisition date fair values, including any contingent consideration, and the recognition of acquisition-related costs in the Consolidated Statements of Operations in accordance with the Financial Accounting Standards Board “(FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”.

Accounting for business combinations requires the Company to make significant estimates and assumptions at the acquisition date. Significant assumptions relevant to the determination of the fair value of the assets acquired and liabilities

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assumed include, but are not limited to, future expected cash flows, contract renewal rates, discount rates, terminal growth rate and other assumptions. The approach to valuing initial contingent consideration, including milestone achievement and earn-out, associated with the purchase price also uses similar unobservable factors such as projected revenues and expenses over the term of the contingent milestone achievement and earn-out periods, discounted for the period of time over which the initial contingent consideration is earned. Based upon these assumptions, the initial earn-out contingent consideration is then adjusted for relevant volatility rates and valued using a Monte Carlo simulation. These significant assumptions are based on company specific information and projections, which are not observable in the market and, therefore, are considered Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.

We generally use third-party qualified consultants to assist management in determining the fair value of assets acquired, liabilities assumed and contingent consideration liabilities. This includes, when necessary, assistance with the determination of economic useful lives and valuation of property, plant and equipment and identifiable intangibles. The purchase price allocation process also involves refining these estimates over a measurement period not to exceed one year to reflect new information obtained surrounding facts and circumstances existing at acquisition date. The excess of the purchase price over the fair value of the identified assets acquired and liabilities assumed is recorded as goodwill.

Goodwill – Based on guidance under FASB ASC Topic 350, “Goodwill”, we test goodwill annually or more frequently if an impairment indicator is present. The quantitative impairment test under ASC Topic 350 requires judgment, including the identification of reporting units and the determination of fair value of each reporting unit. We determine the estimated fair value for each reporting unit based on discounted cash flow projections (income approach) and market values for comparable businesses (market approach). Under the income approach, we are 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 our 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. Our estimates may differ from actual future cash flows. The risk adjusted discount rate used is consistent with the weighted average cost of capital of our 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 our 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.

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, working capital requirements, terminal growth rates, discount rate, and the selection of market multiples. The projected long term operating margin utilized in our fair value estimates is consistent with our operating plan and is dependent on the successful execution of our 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 our expectations or there are unfavorable revisions to significant assumptions, or if our market capitalization declines, we may need to record a non-cash goodwill impairment charge in a future period. There were no indications of impairment as of our July 1, 2023 annual measurement date.

Mineral Interests – As of September 30, 2023, we maintained $118.3 million of net mineral properties as a part of property, plant and equipment. Mineral interests include probable mineral reserves. We lease mineral reserves at several of our extraction facilities. These leases have varying terms, and many provide for a royalty payment to the lessor based on a specific amount per ton of mineral extracted or as a percentage of sales.

Mineral interests are primarily depleted on a units-of-production method based on a combination of third-party and internal qualified geologists’ estimates of recoverable reserves. Our rights to extract minerals are generally contractually limited by time or lease boundaries. If we are not able to continue to extend lease agreements, as we have in the past, at commercially reasonable terms, without incurring substantial costs or incurring material modifications to the existing lease terms and conditions, if the assigned lives realized are less than those projected by management, or if the actual size, quality or recoverability of the minerals is less than the estimated probable reserves, then the rate of amortization could be increased or the value of the reserves could be reduced by a material amount.

Income Taxes – Developing our provision for income taxes and analyzing our potential tax exposure items requires significant judgment and assumptions as well as a thorough knowledge of the tax laws in various jurisdictions. These estimates and judgments occur in the calculation of certain tax liabilities and in the assessment of the likelihood that we will be able to realize our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense, carryforwards and other items. Based on all available evidence, both positive and negative, the reliability of that evidence and the extent such evidence can be objectively verified, we determine whether it is more likely than not that all, or a portion of, the deferred tax assets will be realized.

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In evaluating our ability to realize our deferred tax assets, we consider the sources and timing of taxable income, our ability to carry back tax attributes to prior periods, qualifying tax planning and estimates of future taxable income exclusive of reversing temporary differences. In determining future taxable income, our assumptions include the amount of pre-tax operating income according to multiple federal, international and state taxing jurisdictions, the origination of future temporary differences and the implementation of feasible and prudent tax planning. These assumptions require significant judgment about material estimates, assumptions and uncertainties in connection with the forecasts of future taxable income, the merits in tax law and assessments regarding previous taxing authorities’ proceedings or written rulings. While these assumptions are consistent with the plans and estimates we use to manage the underlying businesses, differences in our actual operating results or changes in our tax planning, tax credits, tax laws or our assessment of the tax merits of our positions could affect our future assessments.

In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax regulations in multiple jurisdictions. We recognize potential liabilities in accordance with applicable U.S. GAAP for anticipated tax issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. See Item 8, Note 11 to our Consolidated Financial Statements for further discussion of our income taxes.

We have elected to account for GILTI in the year the tax is incurred, rather than recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years.

Taxes on Foreign Earnings – As a result of U.S. tax reform, in fiscal 2018, we revised our permanently reinvested assertion expecting to repatriate approximately $150 million of unremitted foreign earnings from Canada. Additionally, we changed our permanently reinvested assertion and repatriated $42.5 million of unremitted foreign earnings from our U.K. operations in September 2021. In fiscal 2022, we revised our permanently reinvested assertion, expecting to repatriate an additional $10 million of unremitted foreign earnings from our U.K. operations and in fiscal 2023 we revised it again expecting to repatriate an additional approximately $6 million of unremitted foreign earnings 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 September 30, 2023, 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. We consider all remaining non-U.S. earnings to be permanently reinvested outside the U.S. to the extent these earnings are not subject to U.S. income tax under an anti-deferral tax regime. As of September 30, 2023, we have approximately $194.9 million of outside basis differences on which no deferred taxes have been recorded.

U.K. Pension Plan – We have a defined benefit pension plan covering some of our current and former employees in the U.K. The U.K. pension plan was closed to new participants in 1992. As we elected to freeze our pension plan, our remaining active employees ceased to accrue future benefits under the plan beginning December 1, 2008. We select the actuarial assumptions for our pension plan after consultation with our actuaries and consideration of market conditions. These assumptions include the discount rate and the expected long-term rates of return on plan assets, which are used in the calculation of the actuarial valuation of our defined benefit pension plans. If actual conditions or results vary from those projected by management, adjustments may be required in future periods to meet minimum pension funding or to increase pension expense or our pension liability. A decrease of 25 basis points in our discount rate would have increased our projected benefit obligation as of September 30, 2023, by approximately $0.9 million and would increase our net periodic pension expense for 2023 by approximately $0.1 million. A decrease of 25 basis points in our expected return on assets assumption as of September 30, 2023, would increase our net periodic expense for 2023 by approximately $0.1 million.

We set our discount rate for our U.K. pension plan based on a forward yield curve for a portfolio of high credit quality bonds with expected cash flows and an average duration closely matching the expected benefit payments under the plan. The assumption for the return on plan assets is determined based on expected returns applicable to each type of investment within the portfolio expected to be maintained over the next 15 to 20 years. Our funding policy has been to make the minimum annual contributions required by applicable regulations. However, we have made special payments during some years when changes in the business could reasonably impact the pension plan’s available assets and when special early retirement payments or other inducements are made to pensioners. Contributions totaled $0, $0.4 and $0 during the fiscal years ended September 30, 2023 and 2022, and the nine months ended September 30, 2021, respectively. If supplemental benefits were approved and granted under the provisions of the plan, or if periodic statutory valuations cause a change in funding requirements, our contributions could increase to fund all or a portion of those benefits. See Item 8, Note 12 to our Consolidated Financial Statements for additional discussion of our U.K. pension plan.

Other Significant Accounting Policies – Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above are nevertheless important to an understanding of our consolidated financial statements.

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Policies related to revenue recognition, allowance for doubtful accounts, valuation of inventory reserves, equity compensation instruments, intangible assets, legal reserves, derivative instruments, post-employment benefit obligations and environmental accruals require judgments on complex matters.

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 enter 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. We generated 27% of our fiscal 2023 sales in foreign currencies, and we incurred 28% of our fiscal 2023 total operating expenses in foreign currencies. Additionally, we have approximately $400 million of net assets denominated in foreign currencies. In fiscal 2023 and 2021, the average rate for the U.S. dollar weakened against the Canadian dollar and the British pound sterling. In fiscal 2022, the average rate for the U.S. dollar strengthened against the Canadian dollar and the British pound sterling. Significant changes in the value of the Canadian dollar or the British pound sterling relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar-denominated debt, including borrowings under our senior secured credit facilities.

We have experienced increases in logistics costs, prices for energy and other costs that have only been partially recovered through price increases for our products. While it appears that inflation has recently moderated or in some cases receded, we estimate that the impact of inflation increased full year logistics costs by approximately $3 million to $5 million and product costs by approximately $7 million to $9 million for the fiscal year ended September 30, 2023. 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”.

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 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 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 were not material in fiscal 2023 and are not expected to be material in fiscal 2024. For more information, see Part I, Item 1A, “Risk Factors” and Part I, Item1 “Business—Environmental, Health and Safety and Other Regulatory Matters.”

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Critical Accounting Estimates and Recent Accounting Pronouncements 

See Item 8, Note 2 to our Consolidated Financial Statements for a discussion of critical accounting estimates and recent accounting pronouncements.