The Mosaic Company — Q2 2016 Form 10-Q
Business context and reporting period. Mosaic produces and markets phosphate and potash crop nutrients and operates Phosphates, Potash, and International Distribution segments. This unaudited quarterly report covers the three and six months ended June 30, 2016; comparisons are with the same 2015 periods. Dollar amounts are in millions unless noted. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $1,674.6 | $2,487.5 | $3,348.5 | $4,626.6 |
| Gross margin | $154.0 (9%) | $607.9 (24%) | $390.7 (12%) | $1,027.1 (22%) |
| Operating earnings | $12.3 | $510.0 | $175.7 | $828.5 |
| Net earnings attributable to Mosaic | $(10.2) | $390.6 | $246.7 | $685.4 |
| Diluted earnings per share | $(0.03) | $1.08 | $0.70 | $1.88 |
| Operating cash flow | Not separately stated for the quarter | $849.1 | $1,332.2 |
- Q2 sales fell 33% year over year and operating earnings fell 98%. For the first half, sales declined 28% and operating earnings declined 79%.
- First-half capital expenditures were $437.3; cash flow from operations less capital expenditures was approximately $411.8, compared with approximately $875.3 in the prior-year period. This is a simple calculation, not a company-reported non-GAAP measure.
- At June 30, cash and cash equivalents were $1,059.3; restricted cash was $857.5. Long-term debt, including current maturities, was $3,814.9, and short-term debt was $54.0. The company reported $1.48 billion available under its $1.5 billion credit facility and compliance with its financial covenants.
- Current assets were $3,792.5 and current liabilities $1,902.7. Total equity was $9,994.2. The filing states a $2.5 billion target liquidity buffer, including cash and available committed credit lines.
Material changes and segment trends
- Phosphates: Q2 segment sales were $975.9, down 30%; gross margin was $100.4, down 66%. DAP average selling price fell 24% to $343 per tonne, and segment sales volume fell 12%. Lower selling prices and volumes outweighed reduced ammonia and sulfur costs.
- Potash: Q2 segment sales were $456.9, down 37%; gross margin was $53.0, down 82%. Average MOP selling price fell 36% to $178 per tonne, and segment volume declined 13%. Lower prices and reduced production were principal pressures. The company reported Q2 production at a 67% operating rate.
- International Distribution: Q2 sales were $533.9, down 16%, while gross margin fell 84% to $4.7. Lower selling prices and weak Brazilian margins contributed; first-half volume increased 9%, but gross margin fell 66%.
- Management attributed market pressure to cautious customer purchasing, competitors’ shipments and pricing, lower crop-nutrient prices, and delayed settlement of the Chinese potash contract. Potash international volumes were particularly affected by the contract delay. A strong U.S. dollar also pressured global potash pricing.
- SG&A declined 18% in Q2, which management attributed mainly to lower incentive compensation and cost-reduction initiatives. Interest expense, net, rose to $33.5 in Q2 from $23.5.
Outlook, commentary, risks, and unusual items
- Management said phosphate and potash selling prices continued to decline in Q3 2016. No formal revenue or earnings guidance is stated in the provided filing text.
- On July 13, 2016, Mosaic announced it would idle its Colonsay, Saskatchewan potash mine for the remainder of 2016 due to reduced demand and challenging market conditions. Management said Esterhazy and Belle Plaine, together with inventory, could meet short-term supply needs. Esterhazy K3 development remained on track to begin producing ore in 2017.
- The company said it remained on track for its previously established goal of $500 million in cost savings by the end of 2018, and targeted an additional $75 million in support-function savings, expected mostly in 2017. It also reported reducing or eliminating certain capital spending.
- Q2 included a $47 loss related to cancellation of construction of the second ammonia transport barge, approximately $11 of restructuring expense, and a $24 share of an equity-investment project write-off ($16 after tax). First-half results also included approximately $28 of insurance proceeds relating to a 2014 warehouse roof collapse. First-half earnings included a $59 tax benefit, including an $85.8 benefit from resolution of an Advanced Pricing Agreement; tax effects and other discrete items materially influenced reported earnings.
- Environmental matters include consent decrees requiring an aggregate cash penalty of approximately $8, up to $2.2 for environmental projects, and capital improvements expected to exceed $200 over several years. After the decrees become effective, Mosaic expects to place $630 into trust funds for phosphogypsum stack closure and provide a $50 letter of credit in 2017. The filing says the Louisiana decree was entered in July 2016; the Florida decree was still pending entry at the report date. The company believes it has sufficient resources for these commitments.
- Other disclosed uncertainties include Esterhazy mine brine inflows; environmental, reclamation and financial-assurance costs; Brazilian tax proceedings with estimated maximum potential liability of approximately $95 (accruals described as immaterial); and litigation contingencies whose outcomes or loss ranges cannot be estimated clearly. Mosaic also has a guarantee of up to $100 for barge-builder payment obligations and reported $97 outstanding under its bridge loan to the project at June 30.
- Management identified commodity price and demand volatility, customer inventory behavior, foreign exchange, input and freight costs, regulatory and environmental requirements, joint-venture funding and execution, and operational disruptions as material risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the phosphate and potash price declines and delayed Chinese contract settlement persist, and their effects on volumes, margins, and Q3 results.
- The expected production, cost and cash-flow impact of idling Colonsay, and progress and funding needs for the Esterhazy K3 and Ma’aden projects.
- Cash generation relative to capital spending, dividends, repurchases and investment commitments; availability of credit and covenant headroom; and the distinction between unrestricted and restricted cash.
- The timing and final requirements of the Florida and Louisiana consent decrees, closure-cost estimates, trust funding and other environmental financial assurances.
- How much of first-half earnings depended on discrete tax benefits, foreign-currency gains and derivative mark-to-market gains, and whether those items recur.
- Developments in the Brazilian tax matters, the MicroEssentials patent dispute, and the barge project loan and guarantee.