The Mosaic Company 2016 Form 10-K Summary
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients and operates an international distribution business, serving customers in approximately 40 countries. Its reportable segments are Phosphates, Potash and International Distribution. This Form 10-K covers the year ended December 31, 2016; it is an annual report, not a standalone quarterly filing. The filing was signed February 15, 2017.
Financial performance and key metrics
| Metric (USD millions, except per-share data) | 2016 | 2015 |
|---|---|---|
| Net sales | $7,162.8 | $8,895.3 |
| Gross margin | $810.0 | $1,717.9 |
| Gross margin percentage | 11.3% | 19.3% |
| Operating earnings | $319.0 | $1,278.8 |
| Net earnings attributable to Mosaic | $297.8 | $1,000.4 |
| Diluted earnings per share | $0.85 | $2.78 |
| Cash from operating activities | $1,266.1 | $1,807.6 |
| Capital expenditures | $843.1 | $1,000.3 |
Fourth quarter: 2016 net sales were $1,862.0 million, gross margin $206.0 million, operating earnings $73.6 million, and net earnings attributable to Mosaic $12.0 million, or $0.03 per diluted share. In fourth-quarter 2015, the corresponding figures were $2,163.2 million, $355.5 million, $204.3 million, and $155.0 million, or $0.44 per diluted share.
Segment results: Phosphates sales were $3,710.9 million and gross margin was $349.8 million, down from $4,620.2 million and $837.1 million. Potash sales were $1,685.7 million and gross margin was $256.6 million, down from $2,447.0 million and $788.3 million. International Distribution sales rose to $2,533.5 million from $2,505.5 million; gross margin was $146.2 million versus $147.8 million. Potash gross margin excluding Canadian resource taxes, a non-GAAP measure, was $357.7 million, compared with $1,036.3 million.
Cash, debt and liquidity: At year-end, cash and cash equivalents were $673.1 million, total current assets $3,057.7 million and current liabilities $1,476.8 million. Long-term debt, including current maturities, was $3,818.1 million; total equity was $9,622.5 million. The company reported $1,984.3 million available under its $2.0 billion revolving credit facility. It targets a $2.5 billion liquidity buffer, including cash and available committed credit lines. The filing does not provide a single total-liquidity figure matching that target.
Material changes versus the prior comparable period
- Net sales fell 19%, operating earnings fell 75%, and net earnings attributable to Mosaic fell 70% year over year. Management attributed the deterioration chiefly to lower average selling prices for phosphate and potash.
- Average DAP selling price declined to $335 per tonne from $443; average MOP selling price declined to $176 per tonne from $273. Phosphates and Potash gross margins contracted sharply despite lower phosphate raw-material costs.
- Phosphates sales volume increased to 9.7 million tonnes from 9.3 million, led by MicroEssentials. Potash volume was 7.8 million tonnes versus 7.9 million; production fell to 7.6 million tonnes from 8.4 million. International Distribution volume reached a record 6.8 million tonnes, up from 6.0 million.
- Operating cash flow declined by $541.5 million. Year-end cash fell by $603.2 million from 2015, while long-term debt remained broadly similar.
Outlook, management commentary, risks and unusual items
- Management said phosphate and potash prices began rising in the fourth quarter of 2016 and that the increases continued into 2017, with some benefit offset by higher raw-material costs. The filing gives no specific 2017 earnings or revenue guidance.
- The board approved a reduction in the target annual dividend to $0.60 per share, effective with the next declaration, expected in May 2017; the 2016 dividend was $1.10 per share.
- The proposed Vale Fertilizantes acquisition was valued at $2.5 billion: $1.25 billion in cash and 42,286,874 Mosaic shares, with potential additional cash consideration of up to $260 million tied to specified post-close conditions. Closing was expected in late 2017, subject to conditions and approvals. The FTC granted early termination of the U.S. antitrust waiting period in February 2017.
- Mosaic invested $220 million in MWSPC during 2016; its total investment was approximately $707 million, with approximately $143 million in future contributions expected. The project’s estimated total cost was approximately $8.0 billion, and finished-product production was expected to begin in 2017. Mosaic’s investment could increase if project costs exceed estimates.
- Key operating risks include commodity price and demand cycles, seasonal purchasing and working-capital needs, raw-material and energy price volatility, foreign exchange, transportation constraints, international and customer-credit exposure, permitting and environmental regulation, and labor or facility disruptions.
- Esterhazy potash mine brine inflows have persisted for decades. Management reported inflows within historical experience, but warned that higher inflows or remediation costs could materially affect operations or, in an extreme scenario, require changes to mining or abandonment.
- An August 2016 sinkhole at the New Wales, Florida phosphogypsum stack released process water into the sinkhole. Mosaic recorded an estimated $70 million for remediation and related obligations; a putative class action was pending, and additional costs or permitting effects remained uncertain.
- Other notable 2016 items included $43.5 million of expense from cancelling construction of a second ammonia barge, $54.2 million of period-specific income tax benefits, and $630 million deposited into restricted trusts for phosphogypsum-stack closure assurance. The company also reported $79.6 million accrued for environmental matters and $849.9 million of recorded asset-retirement obligations.
- Cost-saving initiatives were approximately 80% complete toward the goal of $500 million in pre-tax savings by the end of 2018; management also targeted an additional $75 million in support-function savings. Colonsay potash production, idled for the second half of 2016 due to weak demand, resumed in January 2017.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of December 31, 2016.
Important facts for investors to verify
- Whether fertilizer prices, realized margins and demand improved after year-end, and how much higher raw-material costs offset those gains.
- Vale transaction closing conditions, final purchase-price adjustments, financing and dilution, potential contingent consideration, and integration and synergy assumptions.
- MWSPC funding, schedule, cost overruns, guarantees and Mosaic’s remaining cash commitments.
- Progress and costs of the New Wales sinkhole remediation, related litigation, and any effect on Florida permits or operations.
- Esterhazy brine-inflow levels, remediation spending, K3 ramp-up and the sustainability of potash production capacity.
- Environmental financial-assurance requirements, including restricted trust assets, future letters of credit, reclamation spending and possible additional funding needs.
- Whether the reduced dividend and lower capital spending are sufficient to preserve liquidity while meeting debt, purchase and strategic-investment commitments.