The Mosaic Company — Q1 2019 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2019, compared with the same period in 2018. Mosaic produces and markets phosphate and potash crop nutrients and operates through Phosphates, Potash and Mosaic Fertilizantes segments. Results are seasonal and are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1.900 billion | $1.934 billion |
| Gross margin | $309.5 million (16% of sales) | $242.1 million (13% of sales) |
| Operating earnings | $202.1 million | $80.7 million |
| Net earnings attributable to Mosaic | $130.8 million | $42.3 million |
| Diluted earnings per share | $0.34 | $0.11 |
| Net cash used in operating activities | $175.5 million | $71.0 million |
| Capital expenditures | $313.9 million | $223.3 million |
At March 31, 2019, cash and cash equivalents were $384.6 million, versus $847.7 million at year-end. Long-term debt, including current maturities, was approximately $4.574 billion; short-term debt was $167.5 million. The company reported $1.98 billion available under its $2.0 billion revolving credit facility and said it was in compliance with financial covenants. Stockholders’ equity was approximately $10.8 billion. Restricted trust investments for future obligations were approximately $647.8 million and are not available for general use.
Changes versus the prior period
- Sales declined about 2%, while gross margin increased 28% and operating earnings rose 150%.
- Potash segment sales increased 25% to $503.5 million; higher prices and volumes lifted gross margin to $185.4 million.
- Phosphates segment sales fell 7% to $806.0 million, and gross margin declined to $54.8 million, reflecting lower volumes and higher raw-material costs.
- Mosaic Fertilizantes sales rose 5% to $698.0 million, but gross margin decreased 11% to $52.4 million as lower volumes and idle costs outweighed higher prices.
- Q1 2019 earnings included approximately $42 million of favorable notable items, including foreign-currency and derivative gains. Q1 2018 included a $48 million discrete tax benefit, as well as acquisition and inventory-related expenses. These items make reported earnings comparisons less representative of underlying performance.
Cash flow, outlook and risks
- Operating cash use widened year over year, principally because of a $520.5 million unfavorable working-capital change, including a $304.5 million inventory build and a $186.7 million decrease in accounts payable and accrued liabilities. Management attributed inventory growth partly to delayed North American spring planting and higher pipeline inventories.
- Mosaic said available cash, expected operating cash flow and credit facilities should fund operations, capital spending, strategic initiatives and expected dividends for the next 12 months, while cautioning that future cash generation is not assured. Its target liquidity buffer is up to $3.0 billion, including cash and committed credit lines.
- New Brazilian tailings-dam rules and inspections led to temporary idling of the Araxá mine during the quarter and Tapira and Catalão mines after quarter-end. Management expected certificates and a return to full operations within six months, with timing varying by mine. Higher delivered rock costs and idle mine and plant costs were expected to increase 2019 expenses by up to $100 million.
- Mosaic reduced planned phosphate production by 300,000 tons for the North American spring season because of weather concerns. It also expected approximately $35 million of additional Canadian resource-tax expense for the remainder of 2019.
- At the Uncle Sam facility in Louisiana, slope movement at an active phosphogypsum stack had slowed after mitigation measures; the filing reported no loss of containment. Management could not predict the potential impact on future operations.
- Environmental and legal exposures include approximately $1.16 billion of recorded asset-retirement obligations. Brazilian judicial and administrative claims allege about $1.1 billion in damages or fines; estimated probable losses were approximately $46.4 million. Potential Brazilian tax liabilities were estimated at up to $481 million, including $233 million subject to a Vale indemnity; recorded reserves were described as immaterial.
- The South Pasture mine-permit litigation remained on appeal, with oral argument scheduled for May 22, 2019. An adverse outcome could restrict mining and affect future operations and cash flows. The company also disclosed potential future environmental expenditures and permitting risks.
- After quarter-end, Mosaic purchased the Pine Bend distribution facility for $55 million. Management said it should improve Midwest customer service and logistics.
Important facts for investors to verify
- Whether Brazilian mines return to operation on management’s anticipated schedule, and the realized financial impact of idling and mitigation work.
- Whether seasonal demand and weather-related delays resolve, and how inventory levels and working capital affect cash generation.
- Potash and phosphate pricing, sales volumes, raw-material costs and the durability of segment margin gains.
- Progress and costs related to Esterhazy K3, environmental obligations and tailings-dam compliance, including any changes in estimates or required financial assurance.
- Developments in the South Pasture permit appeal and other material environmental, Brazilian legal and tax contingencies.
- Underlying earnings and liquidity excluding favorable foreign-currency and derivative movements and other unusual items.