The Mosaic Company — Q3 2013 Form 10-Q
Reporting period: Three months ended September 30, 2013, compared with the three months ended September 30, 2012. Mosaic was transitioning from a May 31 fiscal year-end to a calendar-year reporting cycle; the filing also presents four-month results for June through September 2013, which are not directly compared with a prior-year period.
Business context and financial performance
Mosaic produces and markets phosphate and potash crop nutrients. Results weakened sharply amid lower fertilizer prices and sales volumes, customer caution, delayed purchases and a delayed North American harvest.
| Metric | Q3 2013 | Q3 2012 |
|---|---|---|
| Net sales | $1,908.7 million | $2,645.7 million |
| Gross margin | $386.9 million; 20% of sales | $774.6 million; 29% of sales |
| Operating earnings | $144.1 million | $643.7 million |
| Net earnings attributable to Mosaic | $124.4 million | $417.4 million |
| Diluted EPS | $0.29 | $0.98 |
| Cash from (used in) operating activities | $(45.0) million | $343.8 million |
| Capital expenditures | $332.5 million | $384.6 million |
Phosphates sales fell 18% to $1.419 billion and segment gross margin declined 41% to $193.3 million. DAP’s average selling price decreased 18% to $436 per tonne; total phosphate segment tonnage declined 7%.
Potash sales fell 44% to $523.2 million and segment gross margin declined 58% to $184.4 million. Total potash segment tonnage declined 23%; average MOP selling price fell 25% to $342 per tonne. Potash production increased to 2.0 million tonnes from 1.5 million as expansion projects came online.
Liquidity, debt and cash flows
Cash and cash equivalents were $3.339 billion at September 30, 2013, down from $3.697 billion at May 31. Total debt was approximately $1.027 billion, compared with approximately $1.079 billion at May 31; cash substantially exceeded debt. The company also reported a $750 million credit facility, with $737.4 million available.
Operating cash outflow reflected working-capital movements, including lower accounts payable and accrued liabilities and higher other assets. Management expected some working-capital effects from the late fall application season to partially reverse in the fourth quarter. Investing cash outflow was $465.7 million, including $332.5 million of capital expenditures and a $134.5 million contribution to the Saudi joint venture. Financing cash outflow was $89.5 million, including $106.8 million of dividends, or $0.25 per share.
Management said cash, expected operating cash flows and credit facilities should fund operations, expansion plans, strategic initiatives and dividends over the next 12 months. It also anticipated higher long-term debt and described a target $2.25 billion liquidity buffer, approximately one-third cash and two-thirds committed credit lines.
Material changes, outlook and unusual items
- Revenue declined 28%, gross margin 50%, operating earnings 78% and Mosaic-attributable net earnings 70% year over year. Management attributed the deterioration chiefly to lower phosphate and potash prices and weaker volumes.
- A $122.8 million asset write-down included approximately $50 million related to exiting Argentina and Chile distribution, approximately $48 million for the Hersey, Michigan mine and salt operations, and approximately $25 million for abandoning the proposed Faustina ammonia plant. The reported charge also includes other related write-downs; the filing does not provide a complete reconciliation of the total by item. Tax benefits were recorded for some, but not all, components.
- On October 28, Mosaic agreed to acquire CF Industries’ Florida phosphate assets for $1.2 billion plus $200 million to fund CF’s asset-retirement escrow. Closing was expected in the first half of 2014, subject to approvals. Mosaic also agreed to ammonia supply arrangements. Management estimated $2.1 billion of acquisition, development and marine-asset spending, expected to be offset by about $2.1 billion of capital savings, including cancellation of the Faustina plant and a planned beneficiation facility. These are estimates, not guaranteed savings.
- The August Saudi Arabia phosphate joint venture with Ma’aden and SABIC is approximately a $7 billion project. Mosaic owns 25%, expects to invest about $1 billion over four years, and had invested $156 million by September 30. Operations were expected to begin in late 2016.
- Prices continued to decline after quarter-end, according to management, as customers remained cautious. No specific earnings or price guidance was provided.
- A potential EPA/DOJ environmental settlement concerning phosphate operations could require capital spending likely to exceed $150 million over several years and approximately $625 million of cash funding for a trust for closure obligations. Terms were not final; if no settlement is reached, the company said it could not estimate potential losses and could face material costs. Environmental accruals for known conditions were approximately $23.7 million.
- Other notable exposures include Brazilian non-income-tax proceedings with estimated maximum potential liability of approximately $96 million (about $94 million maximum cash liability after judicial deposits), uncertain tax positions of $270.5 million, and ongoing environmental, permitting and patent matters. Mosaic said recorded accruals for the Brazilian matters were immaterial and believed adequate for probable liability.
Important facts for investors to verify
- Whether fertilizer prices, customer purchasing and sales volumes recover, and how quickly the reported post-quarter price declines affect results.
- Whether operating cash flow rebounds as management expected, given seasonal working-capital demands and continued capital investment.
- Final terms, timing and funding implications of the potential EPA settlement and any resulting restrictions on cash or financial assurance.
- Regulatory approval, closing, assumed liabilities, integration costs and realized savings from the CF acquisition and ammonia agreements.
- Funding, project execution and returns for the Saudi joint venture and potash expansion plans, alongside the company’s anticipated increase in debt.
- Developments in tax, environmental, mine-permitting and litigation contingencies. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.