Compass Minerals International Inc: Form 10-Q for the period ended Sep 30, 2019

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: risks related to our mining and industrial operations; geological conditions; dependency on a limited number of key production and distribution facilities and critical equipment; weather conditions; strikes, other forms of work stoppage or slowdown or other union activities; the inability to fund necessary capital expenditures or successfully complete capital projects; supply constraints or price increases for energy and raw materials used in our production processes; our indebtedness and ability 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; financial assurance requirements; the inability of our customers to access credit or a default by our customers of trade credit extended by us or financing we have guaranteed; our payment of any dividends; the impact of competition on the sales of our products; risks associated with our international operations and sales; the impact of anticipated changes in plant nutrition product prices and customer application rates; conditions in the agricultural sector and supply and demand imbalances for competing plant nutrition products; increasing costs or a lack of availability of transportation services; the seasonal demand for our products; our rights and governmental authorizations to mine and operate our properties; compliance with foreign and United States (“U.S.”) laws and regulations applicable to our international operations; compliance with environmental, health and safety laws and regulations; environmental liabilities; misappropriation or infringement claims relating to intellectual property; product liability claims and product recalls; inability to obtain required product registrations or increased regulatory requirements; changes in industry standards and regulatory requirements; our ability to successfully implement our strategies; the loss of key personnel; risk of compromise to our computer systems, information technology or operations technology or the inability to protect confidential or proprietary data; our ability to expand our business through acquisitions, integrate acquired businesses and realize anticipated benefits from acquisitions; climate change; 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 the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018.

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, expected sales volumes; working capital requirements; our reinvestment of foreign earnings outside the U.S.; our ability to optimize cash accessibility, minimize tax expense and meet debt service requirements; future tax payments and tax refunds; outcomes of matters with taxing authorities; the effects of currency fluctuations and inflation; and the seasonality of our business. 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 (the “U.K.”) include only England, Scotland and Wales. Except where otherwise noted, all references to tons refer to “short tons” and all amounts are in U.S. dollars. One short ton equals 2,000 pounds. Compass Minerals, Protassium+, Wolf Trax and Proacqua, 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 (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments result primarily from the need to make estimates about matters that are inherently uncertain. Management’s Discussion and Analysis and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. For a description of our critical accounting policies and estimates affecting leases, see Notes 1 and 3 to 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 September 30, 2019, we operated 21 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 in Ogden, Utah, which is both the largest SOP production site and the largest solar salt production site in the Western Hemisphere;
• Several mechanical evaporation facilities producing consumer and industrial salt; and
• Several facilities producing essential agricultural nutrients and specialty chemicals in Brazil.

Our salt business provides highway deicing salt to customers in North America and the U.K. as well as consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other salt-based products for consumer, agricultural and industrial applications in North America. In the U.K., we operate a records management business utilizing excavated areas of our Winsford salt mine with one other surface location in London, England.

Our plant nutrition business produces and markets specialty plant nutrition products worldwide to distributors and retailers of crop inputs, as well as growers. Our principal plant nutrition product in our Plant Nutrition North America segment is SOP, which we market under the trade name Protassium+. We also sell various secondary nutrients as well as premium micronutrient products under our Wolf Trax brand.

Our Plant Nutrition South America segment operates two primary businesses in Brazil—agricultural productivity, which manufactures and distributes a broad offering of specialty plant nutrition solution-based products; and chemical solutions, which manufactures and markets specialty chemicals, primarily for the water treatment industry and for use in other industrial processes.

Consolidated Results of Operations

The following is a summary of our consolidated results of operations for the three and nine months ended September 30, 2018 and 2019, 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 NINE MONTHS ENDED SEPTEMBER 30

* Refer to “—Sensitivity Analysis Related 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 SEPTEMBER 30, 2018 AND 2019

• Total sales increased 6%, or $18.8 million, due to increases in Salt and Plant Nutrition North America sales, which were partially offset by a decrease in Plant Nutrition South America sales.
• Operating earnings decreased 8%, or $2.5 million, due to a decrease in Plant Nutrition South America sales and costs for executive transition, which was partially offset by increases in our Salt and Plant Nutrition North America segments.
• Earnings before interest, taxes, depreciation and amortization (“EBITDA”)* adjusted for items management believes are not indicative of our ongoing operating performance (“Adjusted EBITDA”)* decreased 1%, or $0.5 million.
• Diluted net earnings per share decreased 16%, or $0.06.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Total sales decreased 2%, or $16.9 million, due to a decrease in both of our plant nutrition businesses, which was partially offset by an increase in our Salt segment.
• Operating earnings increased 9%, or $5.4 million, due to higher operating earnings in our Salt segment, which was partially offset by lower operating earnings in both of our plant nutrition businesses and costs for executive transition.
• Adjusted EBITDA* increased 6%, or $9.2 million.
• Diluted net earnings per share decreased 67% or $0.34.

THREE AND NINE MONTHS ENDED SEPTEMBER 30

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

Gross Profit: Increased 7%, or $5.0 million; Gross Margin was unchanged.

• Salt segment gross profit increased $9.7 million primarily due to higher average sales prices and sales volumes, and lower per-unit shipping and handling costs, which was partially offset by higher product costs (see Salt commentary below for further detail).
• The gross profit of the plant nutrition business, on a combined basis, decreased $4.5 million. Plant Nutrition North America segment gross profit increased $3.1 million primarily due to lower depreciation expense and lower per-unit product cost, which was partially offset by higher per-unit shipping and handling costs due to an unfavorable geographic sales mix. Plant Nutrition South America segment gross profit decreased $7.6 million primarily due to lower agricultural productivity sales volumes, lower average sales prices for chemical solutions products and higher raw material input costs.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

Gross Profit: Increased 9%, or $15.5 million; Gross Margin increased 2 percentage points

• Salt segment gross profit increased $29.1 million primarily due to higher average sales prices, which were partially offset by lower sales volumes, increased per-unit shipping and handling costs and higher product costs (see “—Operating Segment Performance—Salt” for additional information).
• The plant nutrition business, on a combined basis, decreased $12.9 million. Plant Nutrition North America segment gross profit decreased $1.8 million primarily due to lower sales volumes, higher per-unit shipping and handling costs due to an unfavorable geographic sales mix and higher carryover inventory costs. Plant Nutrition South America segment gross profit decreased $11.1 million primarily due to higher raw material costs, lower chemical solutions product prices and a weaker Brazilian reais compared to the U.S. dollar, which was partially offset by higher chemical solutions sales volumes.

OTHER EXPENSES AND INCOME

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

SG&A: Increased $7.5 million; increased 1.6 percentage points as a percentage of sales from 12.0% to 13.6%

• The increase in SG&A expense was primarily due to higher CEO and executive transition costs in corporate and Salt and higher corporate professional services expense.

Interest Expense: Increased $1.8 million to $17.7 million

• The increase was primarily due to an increase in borrowings under our revolving credit facility.

Other (Income) Expense, Net: Improved $5.4 million from a loss of $2.8 million to income of $2.6 million

• We realized foreign exchange gains of $1.8 million in the third quarter of 2019 compared to a loss of $3.5 million in the third quarter of 2018.

Income Tax Expense: Increased $3.1 million from $1.7 million to $4.8 million

• The increase in income tax expense was primarily due to discrete tax expense items in the third quarter of 2019 and discrete tax benefits in the third quarter of 2018.
• Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, Global intangible low-taxed income (“GILTI”), foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
• Our effective tax rate increased from 12% in the third quarter of 2018 to 31% in the third quarter of 2019 primarily due to the impact of discrete tax items in the third quarters of 2019 and 2018, GILTI and increased mining tax due to higher production at our Goderich mine in 2019 as compared to 2018.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

SG&A: Increased $10.1 million; increased 1.3 percentage points as a percentage of sales from 11.6% to 12.9%

• The increase in SG&A expense was primarily due to higher costs related to CEO and other executive transition costs, corporate and Plant Nutrition North America employee-related costs and information technology licenses and service agreement costs.

Interest Expense: Increased $6.2 million to $50.7 million

• The increase was primarily due to higher U.S. interest rates and an increase in borrowings under our revolving credit facility.

Other Expense (Income), Net: Decreased $5.8 million from income of $0.4 million to an expense of $5.4 million

• We realized foreign exchange losses of $7.3 million and $2.3 million during the first nine months of 2019 and 2018, respectively. Lower interest income also contributed to the decrease.

Income Tax Expense: Increased $4.3 million from $1.0 million to $5.3 million

• The increase was primarily due to discrete tax expense items in 2019 versus discrete tax benefit items in 2018.
• Our income tax provision in both periods differs from the U.S. statutory rate primarily due to U.S. statutory depletion, state income taxes, GILTI, foreign income, mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes.
• Our effective tax rate increased from 5% in the first nine months of 2018 to 45% in the first nine months of 2019 primarily due to the impact of discrete tax expense items in 2019, discrete tax benefit items in 2018, GILTI and increased mining tax due to higher production at our Goderich mine in 2019 as compared to 2018.

Operating Segment Performance

The following financial results represent consolidated financial information with respect to sales from our Salt, Plant Nutrition North America and Plant Nutrition South America segments. The results of operations of the consolidated records management business and other incidental revenues include sales of $2.3 million and $2.6 million for the third quarter of 2019 and 2018, respectively, and $7.1 million and $8.1 million for the first nine months of 2019 and 2018, respectively. These revenues are not material to our consolidated financial results and are not included in the following operating segment financial data.

Salt

THREE AND NINE MONTHS ENDED SEPTEMBER 30

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Salt sales increased 16%, or $22.6 million, primarily due to higher highway deicing average sales prices and higher Salt sales volumes.
• Salt average sales prices increased 9% and contributed $13.6 million to sales due to higher highway deicing prices.
• Highway deicing average sales prices increased 22% due to higher North American highway deicing contract prices for the 2019-2020 winter season and a favorable customer mix. Consumer and industrial average sales prices decreased 2% due to sales mix.
• Salt sales volumes increased 7%, or 127,000 tons, and favorably impacted sales by $9.0 million. Highway deicing sales volumes increased 8% primarily as result of higher restocking volumes in the current period in North America, which was partially offset by lower restocking in the U.K. following a milder winter season when compared to the significantly above average winter weather in the first quarter of 2018. Consumer and industrial sales volumes increased 5% due to higher sales of deicing products.
• Salt operating earnings increased 70%, or $8.5 million, due to higher highway deicing prices and lower freight rates for consumer and industrial products in the third quarter of 2019. Operating costs at our mines increased over the third quarter of 2018 due to unplanned downtime at our North American mines and labor dispute settlement expense at our Goderich mine in 2019. Production volume and per unit production costs at Goderich mine improved over 2018 when production was impacted by a labor strike. The increase in operating earnings was also offset by executive transition costs.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Salt sales increased 1%, or $4.6 million, due to higher consumer and industrial sales volumes and higher highway deicing average sales prices, which was partially offset by lower highway deicing sales volumes.
• Salt average sales price increased 12% and contributed $38.3 million to sales due to higher highway deicing prices and product sales mix, as consumer and industrial products, which have a higher average sales price than highway deicing products, were a higher proportion of total sales in the current period.
• Highway deicing average sales prices increased 13% reflecting the second consecutive year of increased bid prices in North America. Consumer and industrial average sales prices decreased 1% due to product mix.
• Salt sales volumes decreased 10%, or 844,000 tons, and resulted in approximately $33.7 million of decreased Salt sales. Highway deicing sales volumes decreased 14% as a result of mild weather in the U.K. when compared to the significantly above average winter weather in the first quarter of 2018 and lower North American contract volumes in the 2018-2019 bid season due primarily to lower production volumes at our Goderich mine in 2018. Consumer and industrial sales volumes increased 8% due to higher sales volumes in both deicing and non-deicing products.
• Salt operating earnings increased 49%, or $28.8 million, due to higher highway deicing prices in 2019. Per-unit product costs were higher in the first nine months of 2019 due to a higher mix of consumer and industrial sales which have a higher per-unit cost. Per unit production costs and volumes at our North American mines have improved from 2018 which were unfavorably impacted by the labor strike at Goderich mine and a higher level of higher cost carryover in inventory.

Plant Nutrition North America

THREE AND NINE MONTHS ENDED SEPTEMBER 30

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Plant Nutrition North America sales increased 6%, or $2.7 million due to higher SOP sales volumes, which was partially offset by lower average sales prices for its micronutrient products due to product mix.
• Plant Nutrition North America sales volumes increased 8%, or 5,000 tons, which resulted in a $3.4 million increase in sales. The increase in SOP sales volumes was partially offset by reduced micronutrient sales volumes.
• Plant Nutrition North America average sales prices decreased 3%, providing a $0.7 million offset to the increase in sales volumes reflecting a shift in product mix as sales of micronutrient sales were a lower proportion of our sales volumes in the current period.
• Plant Nutrition North America operating earnings increased $2.4 million to $4.7 million due to higher sales volumes and lower per-unit product cost due to fewer potassium chloride feedstock tons used to supplement production in the current period. In addition, product costs were lower due to lower depreciation expense. This improvement was partially offset by higher per-unit shipping and handling costs. Per-unit shipping and handling costs increased primarily due to longer shipping distances as fewer tons were sold in our primary markets.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Plant Nutrition North America sales decreased 11%, or $16.7 million due to lower sales volumes, which were partially offset by an increase in average sales prices.
• Plant Nutrition North America sales volumes decreased 13%, or 31,000 tons, and resulted in approximately $19.3 million

of reduced Plant Nutrition North America sales. The volume decrease was primarily due to lower demand due to the wet weather conditions in key North American markets in the first half of 2019.

• Plant Nutrition North America average sales prices increased 2% and resulted in an increase in sales of $2.6 million due to a higher average SOP and micronutrient prices in 2019.
• Plant Nutrition North America operating earnings decreased 32%, or $3.7 million, due to lower sales volumes, higher per-unit shipping and handling costs, a less favorable geographic sales mix and higher cost carryover inventory from 2018 into 2019, than from 2017 into 2018. This decrease was partially offset by lower depreciation expense in the 2019 period.

Plant Nutrition South America

THREE AND NINE MONTHS ENDED SEPTEMBER 30

COMMENTARY: THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Plant Nutrition South America sales decreased 4%, or $6.2 million, due to lower sales volumes and lower chemical solutions average prices.
• Plant Nutrition South America sales volumes decreased 2%, or 4,000 tons, which accounted for $6.0 million of the decrease in Plant Nutrition South America sales. Agricultural productivity sales volumes decreased 8% due primarily to lower demand for our products sold to distributors caused by uncertainty in the agriculture market. Chemical solutions sales volumes increased 14% due to higher sales of water treatment products.
• A 3% decrease in Plant Nutrition South America average sales price reduced sales by $0.2 million. The decrease in average sales price was due to a 12% decrease in chemical solutions product prices as a result of shifts in product sales mix and competitive pressure for industrial and water treatment products. The decrease was partially offset by a 3% increase in agriculture product sales prices, reflecting shifts in product sales mix and price increases to cover increased raw material input costs.
• Plant Nutrition South America operating earnings decreased $8.8 million to $22.4 million due to lower agricultural productivity sales volumes, a decrease in chemical solution average sales prices and an increase in raw material input costs.

COMMENTARY: NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

• Plant Nutrition South America sales decreased 1% or $3.8 million reflecting a 6% unfavorable weighted average change in the Brazilian reais versus the U.S. dollar from the prior year.
• Plant Nutrition South America sales volumes increased 4%, or 20,000 tons, and offset the decrease in Plant Nutrition South America sales by $5.4 million due to an increase in chemical solutions product volumes. Sales of agricultural productivity and chemical solutions products were negatively impacted in the second quarter of 2018 by a truck driver strike in Brazil.
• A 5% decrease in Plant Nutrition South America average sales price contributed $9.2 million to the decrease in Plant Nutrition South America sales. The decrease in average sales price was primarily due to a 17% decrease in chemical solutions average sales prices due to a weaker Brazilian reais, shifts in product sales mix and competitive pressure for industrial and water treatment products. This decrease was partially offset by a 2% increase in agriculture product sales prices despite the weaker Reais to cover commodity cost increases.
• Plant Nutrition South America operating earnings decreased $11.2 million, primarily due to increased raw material costs and an unfavorable product mix.

2019 Full-Year Outlook

• With the finalization of the North American highway deicing bid season, we expect Salt sales volumes for 2019 to range from 10.8 million tons to 11.2 million tons.
• We are reducing our full-year 2019 sales volumes outlook for our Plant Nutrition North America products to reflect lower near-term demand expectations. As a result, we expect Plant Nutrition North America sales volumes for 2019 to range from 310,000 tons to 340,000 tons.
• For Plant Nutrition South America,we expect a strong 2019 fourth quarter to recoup some of third-quarter 2019 sales volumes shortfall, although risks remain given challenging crop economics driven by reduced soybean demand from China and general trade uncertainty. As such, Plant Nutrition South America sales volumes for 2019 are expected to range from 775,000 tons to 825,000 tons.

Liquidity and Capital Resources

Historically, our cash flows from operating activities have generally been adequate to fund our basic operating requirements and ongoing debt service. We have also used cash generated from operations to fund capital expenditures which strengthen our operational position, pay dividends, fund smaller acquisitions and repay our debt. To a certain extent, our ability to meet our short- and long-term liquidity and capital needs is subject to general economic, financial, competitive, legislative, regulatory, weather, 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 fourth quarter and lowest in the second quarter. As a result of the acquisition of Produquímica Indústria e Comércio S.A. (which is now known as Compass Minerals América do Sul Indústria e Comércio S.A.), our working capital requirements are less seasonal. When needed, we may fund short-term working capital requirements by accessing our $300 million revolving credit facility.

We have been able to manage our cash flows generated and used across Compass Minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the U.S. As of September 30, 2019, we had $18.9 million of cash and cash equivalents (in our Consolidated Balance Sheets) that were either held directly or indirectly by foreign subsidiaries. During the fourth quarter of 2018, we revised our permanently reinvested assertion to indicate that we expect to repatriate approximately $150 million of unremitted foreign earnings on which we have recorded a $4.8 million deferred tax liability as of September 30, 2019 for foreign withholding tax and state income tax. Due to our ability to generate adequate levels of domestic cash flow on an annual basis, it is our current intention to continue to reinvest all 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 domestic and foreign subsidiaries are impacted by the transfer price charged on the transfer of our products between them. As discussed in Note 7 to our Consolidated Financial Statements, our calculated transfer price on certain products between one of our foreign subsidiaries and a domestic subsidiary has been challenged by Canadian federal and provincial governments. In the fourth quarter of 2017, we reached a federal settlement agreement with Canadian and U.S. tax authorities related to our transfer pricing issues for our 2007-2012 tax years. During 2018, in accordance with the settlement agreement, our U.S. subsidiary made intercompany cash payments of $85.7 million to our Canadian subsidiary and tax payments to Canadian taxing authorities of $17.5 million. Tax payments of $5.7 million were made during the first and second quarters of 2019, leaving an outstanding balance of $1.3 million as of September 30, 2019. Corresponding tax refunds of $3.4 million have been received as of September 30, 2019 from U.S.

taxing authorities, with the remaining refund of approximately $19.5 million expected in late 2019. Additionally during the fourth quarter of 2018, we reached a federal settlement agreement with Canadian and U.S. tax authorities on transfer pricing and management fees as part of an advanced pricing agreement that covers tax years 2013-2021. During the second quarter of 2019, in accordance with the settlement agreement, our U.S. subsidiary made intercompany cash payments of $106.1 million to its Canadian subsidiary and tax payments to Canadian taxing authorities of $29.9 million. Corresponding tax refunds of $4.0 million were received during 2019 from U.S. taxing authorities, with the remaining $57.4 million expected in early 2020. There are ongoing challenges by Canadian provincial taxing authorities regarding our transfer prices of certain products. 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 domestic and foreign subsidiaries, which could impact the amount of permanently reinvested foreign earnings as well as future cash flows from our domestic operations. See Note 7 to our Consolidated Financial Statements for a discussion regarding our Canadian tax reassessments and settlement.

A portion of our loans in Brazil are denominated in U.S. dollars. We have entered into foreign currency agreements whereby we agreed to swap interest and principal payments on the loans denominated in U.S. dollars for principal and interest payments denominated in Brazilian reais, the functional currency of our Brazil subsidiary. See Note 12 to our Consolidated Financial Statements for a discussion of our foreign currency agreements.

Cash and cash equivalents as of September 30, 2019 of $23.9 million, decreased $3.1 million from December 31, 2018. We generated $91.4 million of operating cash flows in the first nine months of 2019. In the first nine months of 2019, we used cash on hand, cash flows from operations and $49.3 million of net borrowings against our revolving credit agreement to fund capital expenditures of $71.6 million and pay dividends on our common stock of $73.6 million.

As of September 30, 2019, we had $1.41 billion of indebtedness, consisting of $250.0 million outstanding under our 4.875% Senior Notes due 2024, $1.07 billion of borrowings outstanding under our senior secured credit facilities (consisting of term loans and a revolving credit facility), including $250.4 million borrowed against our revolving credit facility, and $91.3 million of Brazilian debt (see Note 8 to our Consolidated Financial Statements for more detail regarding our debt). We had $10.5 million of outstanding letters of credit as of September 30, 2019, which reduced our revolving credit facility borrowing availability to $39.1 million.

Our debt service obligations could, under certain circumstances, materially affect our financial condition and impair our ability to operate our business or pursue our business strategies. As a holding company, CMI’s investments in its operating subsidiaries constitute substantially all of its assets. Consequently, our subsidiaries conduct substantially all of our consolidated operating activities and own substantially all of our operating assets. The principal source of the cash needed to pay our obligations is the cash generated from our subsidiaries’ operations and their borrowings. Our subsidiaries are not obligated to make funds available to CMI. Furthermore, we must remain in compliance with the terms of our credit agreement governing our term loans and revolving credit facility, including the total leverage ratio and interest coverage ratio, in order to make payments on our debt or pay dividends to our stockholders. We must also comply with the terms of our indenture governing our senior notes. Although we are in compliance with our debt covenants as of September 30, 2019, we can make no assurance that we will remain in compliance with these ratios nor can we make any assurance that the agreements governing the current and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund scheduled interest payments on our debt when due. If we consummate an additional acquisition, our debt service requirements could increase. Furthermore, we may need to refinance all or a portion of our indebtedness on or before maturity; however, we cannot provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

The table below provides a summary of our cash flows by category:

Other Matters

See Notes 7 and 9 to our Consolidated Financial Statements for a discussion regarding labor, environmental and litigation matters.

Sensitivity Analysis Related 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 these measures to assess our operating performance and return on capital, and to evaluate potential acquisitions or other capital projects. These measures are not calculated under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings, operating 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 restructuring costs and other (income) expense. 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. 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):

Recent Accounting Pronouncements

See Note 1 to our Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Effects of Currency Fluctuations

Our operations outside of the U.S. are conducted primarily in Canada, Brazil 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 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, Brazilian reais and British pounds sterling also being significant. Significant changes in the value of the Canadian dollar, Brazilian reais or British pound sterling relative to the U.S. dollar could have a material effect on our financial condition.

Although inflation has not had a significant impact on our operations, our efforts to recover cost increases due to inflation may be hampered as a result of the competitive industries and countries in which we operate.

Seasonality

We experience a substantial amount of seasonality in our sales. Our sales of our salt deicing products are seasonal. Consequently, our Salt sales and operating income are generally higher in the first and fourth quarters and lower during the second and third quarters of each year. In particular, sales of highway and consumer deicing salt and magnesium chloride products vary based on the severity of the winter conditions in areas where the product is used. Following industry practice in North America, we seek to stockpile sufficient quantities of deicing salt in the second, third and fourth quarters to meet the estimated requirements for the winter season.

Our plant nutrition business is also seasonal. The strongest demand for our Plant Nutrition South America products in Brazil typically occurs during the spring planting season. As a result, we and our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales season. The seasonality of this demand results in our sales volumes and net sales for our Plant Nutrition South America segment usually being the highest during the third and fourth quarters of each year (as the spring planting season begins in September in Brazil).

Our business is subject to various types of market risks that include interest rate risk, foreign currency exchange rate risk and commodity pricing risk. Management has taken actions to mitigate our exposure to commodity pricing and foreign currency exchange rate risk by entering into natural gas derivative instruments and foreign currency contracts. We may take further actions to mitigate our exposure to interest rates, exchange rates and changes in the cost of transporting our products due to variations in our contracted carriers’ cost of fuel, which is typically diesel fuel. However, there can be no assurance that our hedging activities will eliminate or substantially reduce these risks. We do not enter into any financial instrument arrangements for speculative purposes. Our market risk exposure related to these items has not changed materially since December 31, 2018.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (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 Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019 to ensure that information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, the Company implemented new guidance related to leases. The Company has implemented internal controls to monitor and analyze those business practices that, if not followed, could have a material impact on its consolidated financial statements under the guidance.

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 year ended December 31, 2018. There have been no material changes to our risk factors as disclosed in such Annual Report.