Mosaic Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Mosaic produces and markets phosphate and potash crop nutrients. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $2,139.1 | $1,986.2; up 8% |
| Gross margin | $419.2; 20% of sales | $411.6; 21% of sales |
| Operating earnings | $318.5 | $266.6; up 19% |
| Net earnings attributable to Mosaic | $294.8 | $217.5; up 36% |
| Diluted earnings per share | $0.80 | $0.54 |
| Cash provided by operating activities | $655.5 | $627.0 |
| Capital expenditures | $229.5 | $274.9 |
- At March 31, cash and cash equivalents were $2,517.4; total current assets were $5,251.6 and current liabilities were $1,620.7.
- Debt comprised $3,775.2 of long-term debt, $41.0 of current maturities, and $10.4 of short-term debt. The company reported $1.48 billion available under its $1.5 billion credit facility.
- Cash increased $142.8 during the quarter. Investing activities used $182.9, including capital expenditures; financing activities used $227.0, including $134.4 of share repurchases and $91.4 of dividends.
- Foreign currency translation drove other comprehensive loss of $612.1, leaving comprehensive loss attributable to Mosaic of $314.7 despite positive net earnings. Total equity declined to $10,206.7 from $10,720.6 at year-end 2014.
Material changes and operating drivers
- Phosphates segment sales rose 22% to $1,172.3 and gross margin rose 11% to $221.8. Higher DAP prices and sales volumes supported results; acquired Florida assets contributed additional production and volume. Higher ammonia and sulfur costs partly offset those benefits, and segment gross margin as a share of sales fell to 19% from 21%.
- Potash segment sales fell 11% to $652.8, mainly on lower North American volumes, while gross margin increased 12% to $241.9. Higher selling prices, cost savings, increased production and favorable foreign exchange supported margin. Canadian resource taxes rose to $78.1 from $30.3, partly reflecting Saskatchewan tax-rule changes.
- International Distribution sales increased 12% to $438.9, while gross margin declined to $20.6 from $21.7. Management cited weaker Brazilian margins amid fertilizer imports, a weaker real and cautious farmer purchasing.
- On March 15, Mosaic realigned its reporting segments, moving international distribution out of Phosphates into a separate segment. Prior-period segment results were recast; the filing says this was not a restatement.
- Consolidated results also benefited from lower SG&A and other operating expense and the absence of the prior-year $60.0 share-repurchase-agreement loss. Q1 2014 included a $62.5 discrete tax benefit; Q1 2015 included $28.3 of period-specific tax benefits. Q1 2015 included $38.4 of net unrealized derivative mark-to-market losses in cost of goods sold, versus $3.5 in Q1 2014.
Outlook, risks and unusual items
- Mosaic gave no specific earnings or sales guidance in the supplied filing text. Management said available cash, expected operating cash flow and credit capacity should be sufficient for operations, expansion plans, share repurchases and dividends over the next 12 months, while cautioning that future cash flows are not assured.
- The Board approved increasing the annual dividend to $1.10 per share from $1.00, effective with the next declaration, expected in May 2015. The company repurchased 2.56 million shares for approximately $123.3 during the quarter; $149.4 remained under the repurchase authorization at March 31.
- Management said the Esterhazy K3 mine development remained on track to begin producing ore in 2017 and continued work on expanding MicroEssentials capacity by 1.2 million tonnes.
- A potential EPA/DOJ/state settlement concerning phosphate-waste regulation remains unresolved. Mosaic said it may entail future capital expenditures likely to exceed $150 and approximately $630 of trust funding for phosphogypsum-stack closure costs, plus civil penalties. The company stated it could not predict the outcome or loss range if settlement is not reached. Environmental accruals for known conditions were approximately $32.8.
- Other disclosed exposures include Brazilian non-income tax proceedings with an estimated maximum potential liability of approximately $77 (accruals described as immaterial), a MicroEssentials patent lawsuit for which the loss cannot presently be estimated, and continuing environmental and regulatory matters. The filing says known Superfund liabilities are not currently expected to be material.
- Key business risks include fertilizer price and demand volatility, seasonality and channel inventories, raw-material and freight costs, currency movements, regulatory and environmental obligations, and operational risks including brine inflows at Esterhazy. Mosaic reported $44.0 of Esterhazy brine-related expense in Q1 2015; inflows were within its historical range.
Most important facts for investors to verify
- Whether phosphate selling-price gains and higher volumes can offset elevated ammonia and sulfur costs.
- Potash demand, pricing, Canadian resource taxes and production/inventory trends, including effects of the delayed China contract and inventory build-ups noted by management.
- The terms, timing and funding impact of any phosphate-waste regulatory settlement, including potential trust deposits and capital expenditures.
- Brazil distribution margins, currency exposure, and the outcome or accrual adequacy of Brazilian tax and patent litigation matters.
- Whether operating cash generation can support planned capital investment, the higher dividend, repurchases and other commitments while maintaining the stated liquidity target.