The Mosaic Company (10-Q): Quarter Ended September 30, 2018
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients. This filing reports the third quarter and first nine months of 2018. Results include Vale Fertilizantes, acquired January 8, 2018, and a new Mosaic Fertilizantes segment; therefore, year-over-year comparisons are affected by the acquisition and segment realignment.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,928.1 million | $1,984.8 million | $7,066.8 million | $5,317.5 million |
| Gross margin | $495.5 million; 17% | $240.8 million; 12% | $1,032.2 million; 15% | $562.7 million; 11% |
| Operating earnings | $393.3 million | $213.9 million | $670.3 million | $338.6 million |
| Net earnings attributable to Mosaic | $247.5 million | $227.5 million | $357.7 million | $323.9 million |
| Diluted EPS | $0.64 | $0.65 | $0.93 | $0.92 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,259.8 million | $524.3 million |
- Q3 sales rose 48% and nine-month sales rose 33%. Higher phosphate and potash prices and volumes contributed, as did the acquired Brazilian business. Q3 net earnings rose 9%, but diluted EPS fell slightly as the acquisition-issued shares increased the weighted-average share count.
- Q3 operating earnings increased 84%; nine-month operating earnings increased 98%. Phosphate and potash segment gross margins improved, while Mosaic Fertilizantes’ results benefited from the acquisition, pricing, volumes and currency effects.
- Nine-month capital expenditures were $665.4 million. Net cash used in investing activities was $1,660.9 million, including $985.3 million for the acquisition, net of cash acquired. Financing activities used $679.6 million, including $722.4 million in long-term debt repayments. Cash and cash equivalents declined to $1,029.9 million from $2,153.5 million at year-end 2017.
- At September 30, cash and cash equivalents were $1,029.9 million; long-term debt including current maturities was approximately $4.6 billion, with $25.7 million of short-term debt. The company had $1.98 billion available on its $2.0 billion revolving credit facility and was in compliance with financial covenants. Approximately $619 million of trust investments were restricted for environmental closure assurance, not general liquidity.
- Nine-month operating cash flow included a favorable working-capital change of $203.4 million, principally from increased accounts payable and accrued liabilities. Results and cash flow may be seasonal.
Material changes, outlook and risks
- The January acquisition brought Mosaic additional Brazilian mines and processing assets, increased its Miski Mayo ownership to 75%, and made Mosaic a leading fertilizer producer and distributor in Brazil. The acquired business contributed $993.9 million of revenue and $41.6 million of net earnings from acquisition through September 30, excluding acquisition and integration costs. Purchase-price allocation remained preliminary.
- Management said the previously announced $100 million target of 2018 acquisition savings and synergies had already been achieved. The filing provides no full-year earnings or revenue guidance. Management expected ammonia and sulfur market prices to remain high for the rest of 2018.
- Q3 earnings included discrete tax expense, acquisition-related operating costs, realized losses on RCRA trust securities and foreign-currency/derivative effects. Nine-month results also included $113.1 million of foreign-currency transaction losses and $110.5 million of other operating expense. Prior-year comparisons included a $52.1 million land-sale gain and $58.6 million of Q3 foreign-currency gains.
- Environmental and reclamation obligations are significant: asset retirement obligations totaled $1,111.5 million. The company had $63.5 million accrued for known environmental conditions. The New Wales sinkhole repairs were substantially complete; $79 million had been spent and approximately $3 million remained estimated, with additional costs possible.
- Brazilian legal claims allege aggregate damages of approximately $1.02 billion; Mosaic estimates probable losses of $44.2 million, accrued in its statements. Brazilian tax contingencies have maximum potential liability of approximately $366 million, including $203 million contractually subject to Vale indemnification; probable losses were described as immaterial.
- An appeal challenging the South Pasture mine permit remains pending. An adverse result could prevent mining there and affect operations, cash flow and, longer term, liquidity. Other risks include Esterhazy potash-mine brine inflows, permitting and environmental requirements, commodity and raw-material prices, foreign exchange, and execution of the Brazilian integration. The Potash reporting unit’s fair value was not significantly above carrying value, and future goodwill impairment is possible if business conditions or projections weaken.
- Management said available cash, expected operating cash flows and credit facilities were expected to fund operations, capital expenditures, strategic initiatives and dividends for the next 12 months, while cautioning that future cash generation is not assured. Disclosure controls were considered effective; the acquired business was excluded from the internal-control evaluation.
Most important facts for investors to verify
- Whether acquisition synergies persist and the preliminary purchase-price allocation, including acquired asset, liability and earn-out valuations, is finalized without material adjustment.
- Whether higher fertilizer selling prices and volumes can offset elevated sulfur and ammonia costs, idle-asset costs and production constraints.
- How much of reported operating cash flow is sustainable after the favorable working-capital contribution, and how liquidity changes with debt repayment, capital spending and seasonal inventory needs.
- Developments in the South Pasture permit appeal, New Wales remediation, Brazilian legal and tax matters, and the company’s environmental closure funding obligations.
- Potential goodwill impairment, final accounting for the Tax Cuts and Jobs Act, and effects of currency, derivative and tax volatility on reported earnings.