The Mosaic Company — 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports fourth-quarter results. Mosaic produces and markets phosphate and potash crop nutrients and animal-feed ingredients. Following its January 8, 2018 acquisition of Vale Fertilizantes, Mosaic became a leading fertilizer producer and distributor in Brazil and reported three segments: Phosphates, Potash and Mosaic Fertilizantes.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $9.59 billion | $7.41 billion | +29% |
| Gross margin | $1.50 billion (15.6%) | $843 million (11.4%) | +78% |
| Operating earnings | $928 million | $466 million | +99% |
| Net earnings attributable to Mosaic | $470 million | $(107) million | Returned to profit |
| Diluted earnings per share | $1.22 | $(0.31) | Improved |
| Cash from operating activities | $1.41 billion | $936 million | +51% |
| Capital expenditures | $955 million | $820 million | +16% |
| Long-term debt, including current maturities | $4.52 billion | $5.22 billion | Down $704 million |
Operating cash flow less capital expenditures was approximately $455 million. At year-end, cash and cash equivalents were $848 million, total equity was $10.60 billion, and $1.99 billion was available under the revolving credit facility. Current assets were $4.24 billion against current liabilities of $2.48 billion. These figures exclude $632 million of restricted trust investments, which are earmarked for environmental obligations. Mosaic repaid $803 million of long-term debt during 2018.
Fourth-quarter 2018 net sales were $2.52 billion, gross margin $466 million, operating earnings $258 million, and net earnings attributable to Mosaic $112 million, or $0.29 per diluted share. Fourth-quarter 2017 net earnings were a loss of $431 million, or $1.23 per diluted share.
Segments and material changes
- Phosphates: Sales were $3.89 billion and gross margin $582 million, versus $3.59 billion and $332 million in 2017. Average finished-product selling price rose 20% to $453 per tonne, while finished-product sales volume fell 12% to 8.36 million tonnes. Higher prices and lower rock costs more than offset sharply higher sulfur and ammonia costs, as well as costs from idled facilities.
- Potash: Sales were $2.17 billion and gross margin $597 million, versus $1.85 billion and $392 million. Average selling price rose 15% to $248 per tonne; sales volume increased 2% to 8.78 million tonnes. Canadian resource-tax expense rose to $159 million from $70 million, while Esterhazy brine-management expense was $155 million.
- Mosaic Fertilizantes: Sales were $3.75 billion and gross margin $383 million, compared with $2.22 billion and $129 million. The increase primarily reflects the acquired Brazilian operations; 2018 average selling price rose 11% to $410 per tonne. The acquired business contributed $1.3 billion in revenue and $84 million in net earnings from the acquisition date through year-end, before acquisition and integration costs.
Consolidated sales growth also reflects the acquisition and therefore is not directly comparable with 2017. The purchase consideration at closing was $1.08 billion in cash and 34.18 million Mosaic shares. Acquisition-related savings and synergies were $158 million in 2018, net of costs to achieve; management also cited $21 million of business-to-business marketing benefits. The prior target remains $275 million of annual savings and synergies by the end of 2019.
Net earnings included $192 million of foreign-currency transaction losses, $80 million of acquisition-related operating costs and synergies expenses, a $57 million write-off of discontinued project costs, $30 million of asset-retirement-obligation expenses and adjustments, $33 million of unrealized derivative losses, and $30 million of inventory-costing refinement expense. The 2017 result included a $451 million discrete tax expense, primarily related to U.S. tax reform; this was a major reason 2017 reported a net loss despite positive operating earnings.
Outlook, risks and unusual items
- Management said expected operating cash generation, cash balances and borrowing capacity should fund operations, strategic initiatives and expected dividends for the next 12 months, while cautioning that future cash flows are not assured.
- In January 2019, Mosaic raised its annual dividend target to $0.20 per share. It announced after year-end that it would reduce North American spring-planting phosphate production by about 300,000 tonnes due to weather concerns and higher-than-normal carryover inventory.
- The Esterhazy K3 expansion is expected to add about 0.9 million tonnes of potash capacity after ramp-up and provide an opportunity to eliminate K1 and K2 brine-management costs and risks by 2024. Brine inflows have been managed for decades, but increased inflows or remediation costs could disrupt production or, in an extreme case, threaten the mine.
- MWSPC’s DAP plant began commercial operations in December 2018; the joint venture produced 1.4 million tonnes of phosphate products during the year and expects gradual ramp-up toward 3.0 million tonnes of annual capacity. Mosaic had invested approximately $770 million and could be required to contribute about $70 million more if needed.
- Environmental and closure obligations are significant: asset-retirement obligations were $1.16 billion on the balance sheet, with estimated undiscounted ARO cash outflows of $2.83 billion. Management expected approximately $200 million of 2019 environmental capital expenditures, plus about $140 million for reclamation, gypstack closure and water treatment. Financial-assurance requirements may also consume liquidity.
- Other principal risks include volatile fertilizer prices and demand, weather and seasonality, raw-material and transport costs, foreign-exchange exposure, Brazil political and regulatory conditions, permitting and environmental litigation, customer credit, labor relations, cybersecurity, and risks to Brazilian tailings dams. One of Mosaic’s 11 Brazilian dams lacked a current external stability certificate; independent assessments were expected in the second quarter of 2019.
- Brazilian legal and administrative claims alleged aggregate damages or fines of about $1.08 billion; Mosaic estimated probable losses of approximately $48 million and had accrued for them. The filing also describes environmental and permitting proceedings and other contingencies. The New Wales sinkhole repairs were substantially complete; Mosaic reported $79.5 million spent and estimated about $1.5 million of remaining costs, while noting additional measures could be required.
Important facts for investors to verify
- Whether higher fertilizer prices and demand persist, and whether phosphate and potash volumes recover from outages, weather effects and inventory conditions.
- Progress toward the $275 million synergy target, integration costs and operating performance of the acquired Brazilian business.
- Esterhazy brine inflow trends, K3 schedule and cost, and the remaining risk and expense associated with K1 and K2.
- Funding needs for environmental, reclamation and financial-assurance commitments, including potential changes in gypstack closure estimates and Brazilian dam requirements.
- Debt repayment capacity, liquidity and working-capital needs; inventory increased to $2.27 billion from $1.55 billion, and structured accounts payable rose to $573 million from $386 million.
- Canpotex revenue-standard timing effects: approximately 450,000 tonnes were deferred at year-end. The filing also states that internal-control assessment excluded the acquired Brazilian business, which represented $3.3 billion of assets and $1.3 billion of 2018 net sales.
- Potential sensitivity of Potash goodwill to future results: no impairment was recorded, but management said the reporting unit’s fair value was not significantly above carrying value and goodwill could be at risk in future periods.
KPMG issued unqualified opinions on the consolidated financial statements and on internal control over financial reporting, with the acquired Brazilian business excluded from the internal-control audit assessment.