The Mosaic Company — Form 10-Q Summary
Business context and reporting period. Mosaic produces and markets phosphate and potash crop nutrients. This filing covers the three months ended August 31, 2011, the first quarter of fiscal 2012, and compares results with the three months ended August 31, 2010. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Quarter ended Aug. 31, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3.083 billion | $2.188 billion | +41% |
| Gross margin | $848.2 million; 28% of sales | $504.7 million; 23% of sales | +68% |
| Operating earnings | $729.6 million | $410.3 million | +78% |
| Net earnings attributable to Mosaic | $526.0 million | $297.7 million | +77% |
| Diluted EPS | $1.17 | $0.67 | Up $0.50 |
| Cash from operating activities | $554.3 million | $556.2 million | Down $1.9 million |
- Growth reflected higher fertilizer selling prices and higher sales volumes. DAP averaged $576 per tonne, up 34%; average MOP potash price was $446 per tonne, up 35%.
- Phosphates segment sales rose 40% to $2.220 billion and gross margin increased to $409.6 million from $245.0 million. Potash sales rose 40% to $873.0 million and gross margin increased to $444.4 million from $256.7 million.
- Higher input costs partly offset price gains: North American sulfur and ammonia consumed prices rose 53% and 41%, respectively. Phosphates also incurred higher costs from purchased rock; Potash resource taxes and royalties rose to $95.5 million from $52.2 million.
- Cash and equivalents were $4.038 billion at August 31, versus $3.906 billion at May 31, 2011. Current assets were $6.758 billion and current liabilities $1.784 billion.
- Debt totaled approximately $825 million, calculated from short-term debt, current maturities and long-term debt, compared with approximately $833 million at May 31. Cash substantially exceeded debt. The $750 million credit facility had $729 million available.
- Capital expenditures were $391.4 million, including $207 million for Potash expansion projects. Investing cash outflow was $392.5 million; financing cash outflow was $28.8 million. Cash dividends paid were $22.4 million.
Material changes, outlook and management commentary
- Management attributed market strength to favorable agricultural fundamentals, strong grain and oilseed prices, and customers replenishing inventories ahead of the application season. Production increased year over year: potash by 29% and phosphate rock by 20%.
- Management expected to support planned fiscal 2012 finished-phosphate production through alternative sourcing, including Florida mines, Miski Mayo and third-party purchases. These sources raise costs; longer-term mitigation remains uncertain.
- Mosaic continued Potash capacity expansion, which management said could add up to 5 million tonnes of annual finished-product capacity over the next decade. Management believed operating cash generation and available cash would fund fiscal 2012 expansion and strategic initiatives, while cautioning that future cash generation is not assured. No specific earnings or revenue guidance was provided in the supplied filing text.
- The Hardee County Extension of the South Fort Meade phosphate mine remained subject to a preliminary injunction entered July 8, 2011, halting all mining there. Mosaic said it would defend the permit and pursue mitigation. A prolonged interruption could raise costs, reduce production and sales, and affect cash flows and liquidity.
- The Esterhazy potash tolling dispute continued. A June 30, 2011 court order required Mosaic to continue supplying potash under the agreement until trial begins; Mosaic appealed. Trial was scheduled for January 2012. PCS alleged damages exceeding $1 billion; Mosaic disputed the claims and said expiry of its supply obligation could benefit future saleable volume and results.
- Environmental and regulatory exposure includes EPA phosphate-waste proceedings and potential financial-assurance requirements, Florida nutrient-discharge standards that could require significant capital and operating expense, and permitting litigation. Accrued environmental liabilities were $39.9 million; the company warned that future remediation costs could be material.
- Other notable items: $8.3 million of expenses related to the Cargill Transaction contributed to higher operating expenses. On September 23, after quarter-end, S&P added Mosaic to the S&P 500; on September 29, the Cargill Trusts completed a secondary offering of 20.7 million shares.
Key investor verification points
- Track phosphate and potash prices, demand, customer inventories, and whether higher raw-material costs erode margins.
- Check progress and cost of phosphate-rock sourcing and the legal status of the Hardee County mine injunction and related permits.
- Monitor the Esterhazy tolling litigation, court-ordered deliveries, and potential operational or financial consequences.
- Assess planned Potash expansion spending against operating cash flow, available liquidity, and project execution.
- Follow EPA and Florida environmental requirements, potential financial-assurance needs, and any changes to environmental or legal accruals.
- Review tax-audit developments: Mosaic reported increased unrecognized tax benefits and said the expected change over the next 12 months could not be reasonably estimated.