The Mosaic Company — 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are in millions of U.S. dollars unless otherwise noted. Mosaic produces and markets phosphate and potash crop nutrients.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,440.2 | $2,618.7 | $4,426.5 | $4,931.2 |
| Gross margin | $521.1 | $665.3 | $932.8 | $1,307.0 |
| Gross margin percentage | 21% | 25% | 21% | 27% |
| Operating earnings | $403.2 | $525.7 | $669.8 | $1,016.8 |
| Net earnings attributable to Mosaic | $248.4 | $429.8 | $466.0 | $809.6 |
| Diluted EPS | $0.64 | $1.01 | $1.18 | $1.90 |
- Revenue fell 7% in the quarter and 10% year to date; Mosaic-attributable earnings declined 42% in both periods.
- Potash was the main pressure: Q2 segment sales declined 22% and gross margin 36%; six-month sales declined 17% and gross margin 41%. Lower selling prices outweighed increased volumes. Average MOP price was $267 per tonne in both 2014 periods, versus $366 in Q2 2013 and $371 for first-half 2013.
- Phosphates Q2 sales rose 2%, with gross margin up 1%; first-half sales fell 7% and gross margin 8%. Higher volumes and lower ammonia and sulfur costs partly offset lower selling prices. First-half average DAP price fell 8% year over year to $443 per tonne.
- Q2 included a $13.5 tax benefit; first-half results included a $76.0 tax benefit, principally relating to the planned Argentina distribution-business sale and tax-estimate changes. First-half earnings also included a $65.5 charge from remeasuring share repurchase obligations.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $1,423.3, down from $1,561.7. Investing cash outflow was $1,994.6, including the CF phosphate-assets acquisition; financing cash outflow was $2,344.8, primarily reflecting share repurchases.
- Cash and cash equivalents were $2,367.0 at June 30, 2014, down from $5,293.1 at year-end 2013. The company reported long-term debt of $3,012.9 and short-term debt of $12.7. An $800 million term-loan facility was undrawn; $1.48 billion was available under a separate credit facility.
- Current assets were $5,188.4 and current liabilities $1,922.3. Mosaic said it targets a $2.25 billion liquidity buffer and expected cash, operating funds and available borrowing capacity to fund operations and planned commitments for the next 12 months.
- During the first half, capital expenditures were $488.9; cash dividends paid were $194.8; and stock repurchases were $2,132.7. The quarterly dividend was $0.50 per share. The remaining MAC Trusts share repurchases, approximately $300 million, were completed after quarter-end.
Material developments, outlook and risks
- Mosaic completed its $1.17 billion CF phosphate-assets acquisition on March 17, 2014. Acquired operations contributed $217.0 in revenue and a $2.2 net loss through June 30, excluding acquisition and integration costs. Purchase-price allocation remained provisional.
- The company signed agreements to acquire ADM’s fertilizer distribution business in Brazil and Paraguay for approximately $350 million; Brazilian antitrust approval had been obtained, other regulatory approvals remained pending, and closing was expected near year-end 2014.
- The Northern Promise phosphate joint venture estimated project costs of approximately $7.5 billion and entered into about $5.0 billion of funding facilities. Mosaic estimated its total cash investment at approximately $850 million and agreed to proportionate funding commitments, including cost-overrun and debt-service support.
- A potential EPA/state settlement concerning phosphate-waste regulation could require capital spending likely exceeding $150 million and approximately $625 million of cash financial assurance over time. Terms were not final. Mosaic also disclosed environmental, water-quality, tax and patent proceedings; outcomes or potential losses were not clear or estimable in several matters.
- On July 21, Mosaic announced it would discontinue MOP production at Carlsbad by year-end 2014 and transition the facility to K-Mag production. It estimated total pretax charges of $135–$160 million, mainly noncash accelerated depreciation and depletion, with $55–$75 million expected in Q3.
- Management said potash prices had stabilized and strengthened in 2014 but remained below prior-year levels; phosphate prices had improved from late-2013 lows. Results remain exposed to crop-nutrient pricing and demand, input and freight costs, foreign exchange, rail capacity, seasonality, environmental obligations and execution and funding risks for major projects. No specific earnings or revenue guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether potash pricing and margins recover, and how much of the year-over-year earnings decline reflects market prices versus acquisition and other items.
- The final EPA settlement terms, timing and funding requirements for phosphate environmental assurance.
- Final CF acquisition valuations, integration results and realization of expected synergies; and approvals, price and closing terms for the ADM transaction.
- Mosaic’s actual funding exposure under Northern Promise commitments and the project’s future financing needs.
- The timing and total cash and noncash costs of the Carlsbad transition, alongside the status of other legal, tax and environmental contingencies.