The Mosaic Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. All financial amounts are in U.S. dollars; amounts below are in millions unless stated otherwise. Mosaic produces and markets phosphate and potash crop nutrients and operates an International Distribution segment. Prior-period segment results were recast following a March 2015 realignment; consolidated results were unchanged.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,487.5 | $2,440.2 | $4,626.6 | $4,426.5 |
| Gross margin | $607.9 | $521.1 | $1,027.1 | $932.8 |
| Gross margin percentage | 24% | 21% | 22% | 21% |
| Operating earnings | $510.0 | $403.2 | $828.5 | $669.8 |
| Net earnings attributable to Mosaic | $390.6 | $248.4 | $685.4 | $466.0 |
| Diluted EPS | $1.08 | $0.64 | $1.88 | $1.18 |
- Quarterly sales rose 2%, while six-month sales rose 5%. Operating earnings increased 26% for the quarter and 24% for the six-month period; Mosaic-attributable earnings increased 57% and 47%, respectively.
- Management attributed improved operating results principally to stronger potash prices and lower costs, and to higher phosphate volumes. Quarterly potash volume fell 6%; six-month volume fell 10%. Phosphate volumes increased 6% for the quarter and 8% year to date.
- Cash from operations was $1,238.6 for the first half, down from $1,423.3. Capital expenditures were $456.9; investing cash outflow was $526.3. Financing cash outflow was $804.2, including $634.5 of share repurchases and $189.5 of dividends paid.
- At June 30, cash and equivalents were $2,209.9, total current assets $5,100.1, and current liabilities $1,883.0. Short-term debt was $27.0 and long-term debt, including current maturities, was $3,818.9; total debt was approximately $3,845.9, or approximately $1,636 net of cash.
- Stockholders’ equity was approximately $10.2 billion. Cash declined $164.7 from year-end 2014. Mosaic reported $1.48 billion available on its $1.5 billion credit facility and a target liquidity buffer of $2.5 billion, including cash and committed credit lines.
Material changes and management commentary
- Potash gross margin rose to $295.0 for the quarter and $536.9 for the first half, despite lower sales volumes, aided by higher realized prices, higher production, cost initiatives and favorable foreign exchange. Canadian resource taxes rose to $54.9 for the quarter and $133.0 for the first half, partly reflecting Saskatchewan rule changes and higher profitability.
- Phosphates gross margin improved to $295.9 for the quarter and $517.6 for the first half. Higher volumes and, year to date, higher selling prices contributed; increased sulfur costs weighed on results. International Distribution sales increased with the ADM acquisition, but gross margin declined to $28.5 for the quarter and $49.0 for the first half amid lower Brazilian margins, weaker customer sentiment, delayed access to subsidized farm credit and currency volatility.
- The six-month results included $38.0 of discrete tax benefits, or approximately $0.10 per diluted share. Prior-year six-month earnings included $76.0 of discrete tax benefits and a $65.5 loss on the share repurchase agreement. Other 2015 unusual items included an approximately $8 million equity-investment write-down.
- The Board authorized a new $1.5 billion repurchase program in May. A $500 million accelerated share repurchase was initiated; 8.3 million shares were delivered by June 30 and another 2.8 million were delivered July 28, for 11.1 million shares in total at a final average price of $45.02. The annual dividend was increased from $1.00 to $1.10 per share, effective with the May 2015 declaration.
- Mosaic said it expected operating cash flow, available cash and credit facilities to fund operations, expansion plans, strategic initiatives, anticipated repurchases and dividends for the next 12 months, while cautioning that future cash generation was not assured. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
- The company contributed $125 million to the Wa’ad Al Shamal phosphate joint venture and reported an estimated project cost of approximately $8.0 billion, $500 million above the initial estimate. Esterhazy K3 development was described as on track to begin producing ore in 2017; Mosaic also continued plans to expand MicroEssentials capacity.
Risks, contingencies and other notable matters
- EPA/DOJ and state discussions concerning phosphate-waste and RCRA matters had not produced an agreed settlement. A possible resolution could require future capital spending likely to exceed $170 million over several years and approximately $630 million of cash funding for trust accounts for phosphogypsum-stack closure assurance. The company said it could not estimate potential losses if settlement failed and it did not prevail.
- Environmental accruals for known conditions were approximately $26.6 million at June 30; management did not expect those known conditions currently to have a material effect, but said future material expenditures were possible. Brazilian tax proceedings had an estimated maximum potential liability of approximately $95 million; recorded accruals were described as adequate and immaterial.
- Esterhazy potash mine brine inflows remain an operational risk. The filing said inflows were within historical experience but noted that storage levels and inflow rates affect the time available to mitigate flooding or mine-loss risk.
- Foreign exchange, fertilizer pricing and demand, North American potash imports, raw-material costs, seasonality, customer credit, regulatory changes, joint-venture funding and project execution are among the cited business risks. Derivatives were used to manage currency, commodity and freight exposures; their fair-value changes were recognized in earnings.
- In the MicroEssentials patent dispute, the Patent Trial and Appeal Board ruled on July 28, 2015 that the claims allowed by the patent examiner should have been found invalid as obvious. Further patent proceedings and the stayed court litigation remained unresolved.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, final cost and funding arrangements for the Wa’ad Al Shamal project, including Mosaic’s future capital commitments.
- Timing and final financial terms of any phosphate-waste/RCRA settlement, particularly the potential trust funding and capital requirements.
- Whether potash prices and North American sales volumes stabilize, and the continuing effects of Canadian resource taxes and imports.
- Whether Brazilian distribution margins recover and the ADM acquisition delivers expected benefits.
- The sustainability of reported earnings after discrete tax benefits and the scale and pace of repurchases, dividends and strategic investment relative to liquidity needs.
- Developments in Esterhazy brine management and the remaining patent and Brazilian tax proceedings.