The Mosaic Company — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 29, 2012, with nine-month results compared with the periods ended February 28, 2011. The request metadata says “2011 Q3,” but the filing covers fiscal 2012 Q3. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and key financial metrics
Mosaic produces and markets phosphate and potash crop nutrients. Its reportable segments are Phosphates and Potash.
| Metric | Three months ended February 29, 2012 | Prior-year quarter | Nine months ended February 29, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $2,189.5 | $2,214.3 | $8,287.3 | $7,077.4 |
| Gross margin | $521.8 | $853.6 | $2,251.2 | $2,126.6 |
| Gross margin percentage | 23.8% | 38.5% | 27.2% | 30.0% |
| Operating earnings | $413.7 | $770.8 | $1,940.3 | $1,839.3 |
| Net earnings attributable to Mosaic | $273.3 | $542.1 | $1,422.9 | $1,865.4 |
| Diluted earnings per share | $0.64 | $1.21 | $3.24 | $4.17 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1,476.5 | $1,453.8 |
| Capital expenditures | Not separately stated for quarter | Not separately stated for quarter | $1,190.3 | $897.3 |
- At February 29, 2012, cash and equivalents were $3,201.9; current assets were $5,930.4 and current liabilities $1,614.8.
- Debt totaled approximately $1,093.3, comprising $81.6 short-term debt, $1.1 current maturities and $1,010.6 long-term debt. Cash exceeded reported debt by approximately $2.1 billion.
- Cash declined $704.5 from May 31, 2011. Nine-month investing cash use was $1,181.8, including $1,190.3 of capital expenditures; financing cash use was $969.1.
Material changes versus comparable periods
- Quarterly sales decreased 1%, while gross margin fell 39%, operating earnings fell 46%, and net earnings attributable to Mosaic fell 50%. Management cited lower potash volumes and higher phosphate raw-material costs; the quarter also included a $44.0 foreign-currency transaction loss.
- Quarterly Phosphates sales rose 13% to $1,651.7, but segment gross margin fell 43% to $259.4. Phosphate volumes rose 9%; higher raw-material costs, including sulfur, ammonia and purchased rock, more than offset volume gains. Segment gross margin percentage fell to 16% from 31%.
- Quarterly Potash sales fell 27% to $553.2 and gross margin fell 34% to $269.8, primarily on a 41% decline in total segment sales volume. Average MOP selling price increased 27% to $453 per tonne. Potash gross margin percentage was 49%, versus 54%.
- Nine-month sales increased 17%, but net earnings declined 24%. The prior-year period included a $685.6 pre-tax gain on the sale of the Fosfertil investment; excluding that item, reported operating earnings increased 5% year over year.
- Potash nine-month gross margin increased 16% to $1,107.8, principally on higher prices, while Phosphates gross margin declined 3% to $1,144.7 as higher costs largely offset improved prices.
Outlook, management commentary, risks and unusual items
- Management said it curtailed up to 20% of planned potash production from February through May 2012 amid high channel inventories and cautious customer buying, and planned to reduce finished phosphate production by up to 250,000 tonnes to manage inventories. It described long-term global crop-nutrient demand fundamentals as strong; no specific earnings or revenue guidance was provided.
- Management expected funds from operations and available cash to finance expansion plans and strategic initiatives for the remainder of fiscal 2012, while cautioning that future operating cash flows were not assured. A $750 million credit facility had $730 million available at quarter-end.
- Potash expansion continued. The Esterhazy K2 above-ground mill expansion was complete; below-ground work was anticipated to finish before fiscal year-end. Capacity began coming online in Q3, with estimated full capacity of 770,000 tonnes expected in early fiscal 2013.
- Esterhazy brine-inflow management costs were $59.0 in the quarter and $142.5 year to date, above prior-year levels. Management expected costs to remain high but decline in Q4 from Q3 levels; it said inflows remained within historical ranges.
- A settlement resolved litigation over the South Fort Meade mine’s Hardee County extension and allows mining to proceed. It required conservation, mitigation and monitoring commitments and generated an approximately $13 pre-tax charge in Q3. Final court approval occurred March 28, 2012, after quarter-end.
- Mosaic issued $750 of senior notes in October 2011 and used $505 of proceeds to redeem $469.3 principal of 7⅝% notes, including the call premium and accrued interest. The redemption generated an approximately $20 pre-tax charge, primarily for the call premium.
- Environmental and permitting risks remain, including EPA RCRA proceedings and potential financial-assurance requirements; the filing says resulting costs cannot yet be predicted. Florida nutrient-discharge regulations could require significant capital spending and increase operating costs, though a court invalidated parts of the federal rule and postponed the effective date of upheld portions to July 2012.
- Other unresolved matters include potash antitrust litigation, a MicroEssentials patent suit, and tax audits. Unrecognized tax benefits increased by $178.0 to $441.5; the timing and amount of changes over the next year could not be reasonably estimated. Management could not determine whether certain litigation or regulatory matters would have a material effect.
- Key business risks identified include crop-nutrient price and demand volatility, raw-material and energy costs, seasonal working-capital needs, foreign exchange, permitting and environmental regulation, operational disruptions, and mine brine inflows.
Most important facts for investors to verify
- Whether potash demand, sales volumes and inventory levels improved after the announced production curtailments, and the resulting effect on margins and cash flow.
- Whether phosphate input costs—especially sulfur, ammonia and purchased rock—moderated, and how South Fort Meade mining resumption affected supply and costs.
- Actual spending, timing and realized capacity from Potash expansion projects, including Esterhazy K2.
- Future Esterhazy brine-inflow rates and management costs, plus any operational or financial impact.
- Developments in EPA proceedings, Florida nutrient standards, mine permits and other litigation, including potential financial-assurance, remediation or compliance costs.
- Cash and debt levels after the $1.2 billion share repurchase, capital spending and debt refinancing; also verify subsequent utilization of the credit facility.