The Mosaic Company — Q3 2014 Form 10-Q
Business context and period. Mosaic produces and markets phosphate and potash crop nutrients. This unaudited quarterly report covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The CF phosphate assets acquired on March 17, 2014 are included from that date.
Key financial results
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Net sales | $2,250.7 million | $1,908.7 million | $6,677.2 million | $6,839.9 million |
| Gross margin | $414.7 million; 18% | $386.9 million; 20% | $1,347.5 million; 20% | $1,693.9 million; 25% |
| Operating earnings | $277.3 million | $144.1 million | $947.2 million | $1,160.9 million |
| Net earnings attributable to Mosaic | $201.9 million | $124.4 million | $667.9 million | $934.0 million |
| Diluted EPS | $0.54 | $0.29 | $1.72 | $2.19 |
| Operating cash flow | Not separately presented for the quarter | $1,911.9 million | $1,516.7 million |
Balance sheet and liquidity at September 30, 2014: Cash and equivalents were $2,970.6 million, versus $5,293.1 million at December 31, 2013. Long-term debt, including current maturities, was $3,815.2 million; short-term debt was $0.4 million. Total equity was $10,962.5 million. Mosaic reported $1.48 billion available under its $1.5 billion credit facility and had borrowed the full $800 million term loan facility.
- For the first nine months, investing cash outflow was $2,152.7 million and financing cash outflow was $2,021.5 million. Cash declined $2,322.5 million.
- Investing outflows included $1,375.8 million for the CF acquisition and $677.3 million in capital expenditures. Financing outflows included $2,507.7 million in stock repurchases and $288.6 million in dividends, partly offset by $807.2 million of long-term debt proceeds.
Material changes and operating performance
- Quarter: Sales increased 18% and Mosaic-attributable earnings increased 62% year over year. Earnings per share also benefited from a 12% lower average share count. Gross margin percentage fell to 18% from 20%.
- Nine months: Sales decreased 2%, net earnings fell 28%, and gross margin percentage declined to 20% from 25%. Diluted EPS fell to $1.72 from $2.19, despite the lower share count.
- Phosphates: Q3 segment sales rose 17% to $1,657.8 million and gross margin rose 52% to $294.4 million, supported by higher volumes, including acquired CF production, and lower product costs. Nine-month gross margin increased 8% to $785.1 million; lower selling prices offset much of the benefit from higher volumes and lower input costs.
- Potash: Q3 sales rose 13% to $593.0 million on higher volume, but gross margin fell 29% to $131.3 million as lower selling prices outweighed volume growth. Nine-month sales fell 10% to $2,088.5 million and gross margin fell 39% to $593.9 million; average MOP prices were down 25% year over year.
- Management attributed the weaker nine-month results principally to lower phosphate and potash prices. It cited stronger demand and improving potash prices during 2014, but said potash prices remained below the prior-year comparable quarter.
Outlook, notable items and risks
- No formal earnings or revenue guidance is provided in the supplied filing text. Management said available cash, expected operating cash flows and borrowing capacity should fund operations, expansion plans, strategic initiatives and expected dividends for the next 12 months, while cautioning that cash generation could fall below current levels.
- Mosaic decided to end MOP production at Carlsbad by December 31, 2014 and transition the facility to K-Mag production. It estimated total pretax charges of $125 million to $140 million, primarily noncash accelerated depreciation and depletion; $67 million was recorded in Q3, with most remaining costs expected in Q4.
- The company announced a phosphate fertilizer production reduction, principally in response to high raw-material prices, particularly ammonia, to limit seasonal inventory accumulation.
- Strategic portfolio activity included the completed sale of Hersey salt operations for $55 million, producing a $13.5 million pretax gain; an agreement to sell Argentina distribution assets, with a Q3 $18.2 million pretax gain; and the planned completion of Argentina and Chile exit activities in Q4 2014. Mosaic also expected its approximately $350 million ADM Brazil and Paraguay distribution-business acquisition to close by year-end, subject to completion of the transaction.
- For the Northern Promise phosphate project, estimated total construction cost was approximately $7.5 billion. Mosaic estimated its total cash investment at approximately $850 million and held a 25% interest. The joint venture had approximately $5.0 billion of funding facilities, alongside shareholder commitments and potential additional funding obligations.
- Environmental exposure: A potential EPA/DOJ RCRA settlement could require future capital expenditures likely exceeding $150 million over several years and approximately $625 million of trust funding for phosphogypsum-stack closure assurance. Settlement terms were not final. Failure to settle could expose Mosaic to material costs; the company said the outcome and potential loss could not be estimated.
- Other disclosed uncertainties include environmental and water-quality regulation, legal proceedings and tax contingencies, Esterhazy mine brine inflows, weather and transport disruptions, commodity and foreign-exchange volatility, and the funding and execution risks of major investments. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether potash and phosphate prices, volumes and segment margins continued to recover after September 30, 2014.
- Final Carlsbad closure and conversion costs, including the timing and cash versus noncash composition of remaining charges.
- Final EPA/DOJ settlement terms, required trust contributions and capital spending, and any additional environmental funding needs.
- Completion, cost and integration of the ADM acquisition, and Mosaic’s funding commitments and exposure on Northern Promise.
- Cash use, debt levels and liquidity after repurchases, dividends, capital spending and strategic commitments; also assess the effect of the disclosed tax benefits and share-repurchase-agreement valuation on reported earnings.