The Mosaic Company — Q3 2016 Form 10-Q
Business context and reporting period. Mosaic produces and markets phosphate and potash crop nutrients and operates an international distribution business. This unaudited quarterly report covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $1,952.2 | $2,105.5 | $5,300.7 | $6,732.1 |
| Gross margin | $213.3 | $335.3 | $604.1 | $1,362.4 |
| Gross margin as % of sales | 11% | 16% | 11% | 20% |
| Operating earnings | $69.7 | $246.0 | $245.4 | $1,074.5 |
| Net earnings attributable to Mosaic | $39.2 | $160.0 | $285.9 | $845.4 |
| Diluted EPS | $0.11 | $0.45 | $0.81 | $2.33 |
| Operating cash flow | Not presented separately | Not presented separately | $944.9 | $1,520.7 |
| Capital expenditures | Not presented separately | Not presented separately | $633.7 | $702.2 |
Liquidity and debt at September 30, 2016: Cash and cash equivalents were $653.5, down from $1,276.3 at year-end 2015. Long-term debt, including current maturities, was approximately $3.8 billion; total equity was $9.9 billion. Mosaic also reported $868.0 of restricted cash and marketable securities held in trust for future obligations. It had $1.48 billion available under its $1.5 billion credit facility and was in compliance with its financial covenants. Management cited a $2.5 billion target liquidity buffer, including cash and available committed credit lines.
Material changes and operating trends
- For Q3, sales declined 7% and operating earnings fell 72% year over year; for the first nine months, sales declined 21% and operating earnings fell 77%. Lower phosphate and potash selling prices were the primary pressure. Higher volumes partly offset price declines in Q3, while lower raw-material costs partially mitigated phosphate margin pressure.
- Phosphates Q3 sales were $929.6 and gross margin was $101.3, down from $1,032.4 and $198.9. DAP average selling price fell 28% to $326 per tonne; segment sales volume rose 23% to 2.5 million tonnes.
- Potash Q3 sales were $428.1 and gross margin was $39.8, versus $491.5 and $96.9. Average MOP price fell 40% to $160 per tonne, while volume increased 36% to 2.2 million tonnes. Mosaic idled its Colonsay mine through the end of 2016 in response to reduced demand.
- International Distribution Q3 sales rose 3% to $848.5 and gross margin rose to $70.6 from $60.5, reflecting higher volume. For the first nine months, sales and gross margin declined 3% and 21%, respectively.
- SG&A declined 13% in Q3 and 14% for the first nine months, which management attributed to cost reductions and lower incentive compensation. Mosaic said it remained on track for $500 million of cost savings by the end of 2018 and was targeting a further $75 million in support-function savings, mostly in 2017.
Outlook, unusual items and risks
- Q3 results included a $60 million reserve for estimated New Wales sinkhole costs, or about $0.18 per diluted share. The company estimated approximately $56 million to close and remediate the sinkhole and another $4 million for related obligations; additional costs could arise. A related putative class action seeks damages and injunctive relief; Mosaic said it would defend the claims and could not estimate a loss.
- Environmental obligations include $630 million deposited into RCRA trusts for phosphogypsum-stack closure and long-term care. The 2015 consent decrees require operating changes and capital improvements expected to exceed $200 million in aggregate, and a $50 million letter of credit in 2017. Mosaic also expects about $200 million held in the Plant City Trust to be released in Q4 2016 following regulatory acceptance of a surety bond.
- Other nine-month items included a $43.5 million charge for cancellation of the second ammonia barge unit, $19 million of restructuring costs, approximately $44 million from a construction-in-process write-off, and a $24 million share of a write-off at an equity investment. These were partly offset by $28 million of insurance proceeds. Results also included a $60.7 million discrete tax benefit, a $70.2 million foreign-currency transaction gain and $74.1 million of unrealized derivative gains.
- Management said expected operating cash generation, existing cash and credit facilities should fund operations, expansion plans, strategic initiatives and expected dividends for the next 12 months, but cautioned that future cash flows are not assured. It invested $220 million in the Saudi MWSPC joint venture in the first nine months; the project’s estimated development and construction cost is about $8 billion, with expected funding from external debt and joint-venture partners. MWSPC began ammonia production during the quarter.
- Key risks cited include crop-nutrient prices and demand, competitor capacity and pricing, seasonal working-capital needs, foreign-exchange and raw-material fluctuations, environmental and permitting obligations, the New Wales incident, Esterhazy mine brine inflows, and funding and execution risks for MWSPC. Management noted that declining selling prices may reduce goodwill headroom, although it reported no impairment-triggering event at the time.
Investor verification priorities
- Track phosphate and potash realized prices, sales volumes, and whether cost savings can offset continued price pressure.
- Verify actual New Wales remediation spending, regulatory developments, permitting effects, and progress or exposure in the related litigation.
- Monitor trust assets, financial-assurance requirements, expected Plant City Trust release, and the timing and cost of required environmental capital projects.
- Assess cash generation, liquidity against the $2.5 billion target, debt maturities, and funding needs for MWSPC and other investments.
- Separate recurring operating performance from discrete tax benefits, currency and derivative movements, restructuring, asset write-offs, and other unusual items.