The Mosaic Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Mosaic produces and markets phosphate and potash crop nutrients and operates Phosphates, Potash, and International Distribution segments. Figures are in U.S. dollars; amounts are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,984.8 | $1,952.2 | $5,317.5 | $5,300.7 |
| Gross margin | $240.8 | $213.3 | $562.7 | $604.1 |
| Gross margin percentage | 12% | 11% | 11% | 11% |
| Operating earnings | $213.9 | $69.7 | $338.6 | $245.4 |
| Net earnings attributable to Mosaic | $227.5 | $39.2 | $323.9 | $285.9 |
| Diluted earnings per share | $0.65 | $0.11 | $0.92 | $0.81 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $524.3 | $937.7 |
- Q3 sales rose 2%, while gross margin improved 13%. Nine-month sales were essentially flat; gross margin fell 7% and operating earnings increased 38%.
- Q3 earnings included a $52.1 million pretax land-sale gain and $58.6 million in foreign-currency transaction gains. The quarter also included a $27 million after-tax adverse effect from the Saskatchewan royalty resolution. These items materially affect the comparison and reported earnings.
- Nine-month operating cash flow declined $413.4 million, primarily because working capital used $333.3 million, including a $254.6 million inventory increase. Capital expenditures were $589.9 million.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $685.7 million; total assets were $17.8 billion and total equity was $10.2 billion.
- Long-term debt, including current maturities, was approximately $3.9 billion. The balance sheet also reported $58.6 million short-term debt and $370.4 million in structured accounts payable arrangements.
- Mosaic reported $1.98 billion available under its $2.0 billion revolving credit facility and said it was compliant with its financial covenants. Its stated target liquidity buffer is $2.5 billion, including cash and available committed credit lines.
- The $628.9 million of marketable securities held in trust is restricted for environmental closure and long-term-care obligations and is not general-purpose liquidity.
- Cash, cash equivalents and restricted cash totaled $726.4 million at September 30, compared with $711.4 million at year-end 2016.
Segment results and material changes
- Phosphates: Q3 segment sales fell 16% to $779.0 million and gross margin fell 34% to $66.7 million. Sales volumes declined 16%, affected by Hurricane Irma, delayed/lost sales, a late North American fall season, and increased competitor shipments. Nine-month gross margin fell 25% to $199.3 million, reflecting lower selling prices and volumes, Hurricane Irma, and downtime at the Faustina ammonia facility, partly offset by lower input costs.
- Potash: Q3 sales increased 11% to $474.1 million and gross margin increased to $98.6 million from $39.8 million. Higher prices and production efficiency helped; royalty expense related to the Saskatchewan resolution partly offset gains. Nine-month sales rose 6% and gross margin rose 46% to $277.9 million, with higher volumes and production benefits partly offset by lower selling prices and higher royalties.
- International Distribution: Q3 sales rose 10% to $930.8 million on 14% higher volume, but gross margin declined 10% to $63.6 million due to lower average prices and product mix. Nine-month sales rose 8% and gross margin rose 50% to $130.8 million, supported by volume, premium products, and improved inventory positions.
- Depreciation-method and useful-life changes effective January 1, 2017 are expected to lower 2017 depreciation expense and increase operating earnings by approximately $70 million. Management expects maintenance expense to rise in future periods as assets are maintained for longer.
Outlook, transactions, risks and unusual items
- No specific company-wide earnings or sales guidance is provided in the filing. Management said existing cash, expected operating cash flow, and credit facilities should fund operations and expected needs for the next 12 months, but cautioned that cash generation could fall below current levels.
- On October 31, 2017, the board cut the annual dividend target from $0.60 to $0.10 per share; the next quarterly dividend was set at $0.025 per share. Nine-month dividends paid were $201.8 million.
- On October 30, Mosaic decided to idle its Plant City, Florida phosphate facility for at least one year. It expects up to $20 million of fourth-quarter severance expense and said the move should improve phosphate margins and reduce capital needs, subject to regulatory approval.
- The proposed Vale Fertilizantes acquisition calls for $1.25 billion cash plus 42,286,874 Mosaic shares, with up to $260 million additional contingent cash consideration. Mosaic expected closing in late 2017, subject to remaining conditions; the cash portion was expected to be funded primarily with debt. Failure to close by December 31, 2017 could trigger termination rights.
- The New Wales sinkhole remediation had incurred approximately $57 million through September 30; estimated remaining costs were about $27 million, with possible additional expenditures. The filing notes uncertainty about the ultimate cost and potential effects on future permitting.
- Environmental obligations include consent-decree capital projects expected to exceed $250 million in aggregate; approximately $80 million had been spent through September 30. Mosaic also has financial-assurance and closure obligations for phosphogypsum stacks.
- A lawsuit challenges the permit for the South Pasture mine extension. An adverse outcome could prevent mining there, delay a restart, increase costs, and materially affect future operations and cash flow. Other disclosed exposures include Brazil non-income-tax proceedings with estimated maximum potential liability of approximately $127 million, and a MicroEssentials patent suit whose outcome and potential loss could not be estimated.
- Potash operations face Esterhazy mine brine-inflow management risks. Goodwill was not impaired in the interim test, but Phosphates and Potash were described as potentially at risk of future impairment; valuation depends sensitively on assumptions including discount rates, product prices, and costs.
- Other unusual factors included Q3 foreign-currency gains, the land-sale gain, royalty-resolution charges, Hurricane Irma impacts, and prior-year sinkhole and restructuring charges. The nine-month comparisons also reflect differing tax benefits and derivative mark-to-market gains between years.
Important facts for investors to verify
- Whether the Vale acquisition closed, its final financing, consideration adjustments, and realized integration benefits.
- The actual cost, schedule, and operational effects of the Plant City idling and New Wales remediation.
- Whether phosphate and potash pricing, sales volumes, and margins improve or deteriorate, including the effect of competition, input costs, and seasonal demand.
- Working-capital and inventory trends, cash generation, debt and covenant headroom, and the use of restricted environmental trust assets.
- Developments in the South Pasture permit litigation, environmental obligations, Brazil tax cases, and goodwill impairment assumptions.
- The impact of the dividend reduction and whether future maintenance spending offsets savings from lower depreciation.