The Mosaic Company — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2010 (Mosaic fiscal 2011 second quarter). The filing was signed January 6, 2011. Mosaic produces and markets phosphate and potash crop nutrients.
Financial results
| Metric | Three months ended Nov. 30, 2010 | Year-over-year | Six months ended Nov. 30, 2010 | Year-over-year |
|---|---|---|---|---|
| Net sales | $2,674.8 million | Up 56% | $4,863.1 million | Up 54% |
| Gross margin | $768.3 million; 28.7% | $307.0 million; 18.0% | $1,273.0 million; 26.2% | $529.2 million; 16.7% |
| Operating earnings | $658.2 million | Up 229% | $1,068.5 million | Up 220% |
| Net earnings attributable to Mosaic | $1,025.6 million; diluted EPS $2.29 | $107.8 million; $0.24 | $1,323.3 million; diluted EPS $2.96 | $208.4 million; $0.47 |
| Cash from operations | Not presented for the quarter | $1,087.9 million | Up from $347.2 million |
The earnings increase includes a $685.6 million pre-tax gain ($570.1 million after tax) on the sale of Mosaic’s Fosfertil equity investment. Excluding that unusual gain, reported net earnings are not a direct measure of underlying operating performance.
- Phosphates: Quarterly segment sales rose 49% to $1,974.0 million and gross margin increased to $476.3 million from $113.2 million. DAP average selling price rose 61% to $461 per tonne. Higher sulfur and ammonia prices weighed on costs; management estimated they reduced quarterly cost of goods sold by about $110 million versus the prior year.
- Potash: Quarterly segment sales rose 69% to $699.0 million and gross margin rose 59% to $285.2 million. Sales volume increased 75% to 1.8 million tonnes, while average MOP price fell 11% to $331 per tonne. Higher production rates helped lower unit costs, partly offset by higher Canadian resource taxes and royalties.
Cash, liquidity and debt: At November 30, cash and cash equivalents were $3,659.4 million, versus $2,523.0 million at May 31. Current assets were $5,524.3 million and current liabilities $1,770.0 million. Short-term debt was $54.5 million; current maturities of long-term debt were $466.3 million and long-term debt excluding current maturities was $788.4 million. Operating cash flow was $1,087.9 million; capital expenditures were $585.7 million. Investing cash flow was positive $58.4 million, including $1,030.0 million in Fosfertil sale proceeds and the $385.3 million Miski Mayo investment.
Material changes and management commentary
- Management attributed stronger phosphate results to recovering fertilizer prices, improved agricultural fundamentals and greater sales volumes. North American demand benefited from higher grain and oilseed prices and a prolonged fall application season.
- Potash sales volumes and production recovered substantially from weak prior-year levels. Domestic spot prices had begun to rise, while some export pricing lagged due to older fixed-price contracts.
- Mosaic acquired a 35% economic interest in the Miski Mayo phosphate mine in Peru for $385 million; production and shipments began in fiscal 2011.
- The company continued potash capacity expansion plans, which management said could add up to 5 million tonnes of annual finished-product capacity over the next decade.
- After the quarter, Mosaic announced redemption of the remaining $455.4 million of its 7⅜% senior notes due 2014, funded with cash. It expected a roughly $19 million pre-tax charge in the next quarter and about $34 million in annual interest savings.
Outlook, risks and contingencies
- Liquidity outlook: Management expected operating cash generation and available cash to fund fiscal 2011 expansion plans and strategic initiatives, while cautioning that future cash flows could fall below current levels. About $2.5 billion of cash was held by non-U.S. subsidiaries; Mosaic said there were no significant restrictions preventing repatriation but did not intend to remit certain undistributed earnings.
- South Fort Meade permitting: A court injunction had halted mining in the Hardee County extension and Mosaic indefinitely closed the South Fort Meade mine. A partial settlement permitted mining on about 200 acres for an estimated four months; mining began in December 2010. If mining cannot continue after that phase, production, sales, cash flow and potentially phosphate-plant operations could be materially affected. An appeal was scheduled for oral argument in April 2011.
- Florida water regulation: The EPA adopted numeric nutrient-discharge standards on December 6, 2010, with limits expected to apply by March 2012. Mosaic challenged the rule and was exploring site-specific alternatives. If those efforts fail, the company expects significant capital expenditures and higher operating costs for Florida phosphate operations.
- Other legal and environmental matters: Disclosed proceedings include EPA phosphate-facility RCRA matters, potash antitrust litigation, and a dispute with PCS over the Esterhazy tolling contract and deliveries. Outcomes and potential financial effects were not reliably determinable in the filing. Environmental liabilities accrued were approximately $23.9 million; the company warned that future remediation costs could be higher.
- Operating and market risks: Fertilizer prices and demand, raw-material and energy costs, foreign exchange, seasonality, transportation availability, permitting, environmental requirements, and mine disruptions—including brine inflows—could affect results. The filing provides no formal earnings guidance.
Important facts for investors to verify
- How much of reported earnings growth is repeatable after separating the Fosfertil sale gain from operating results.
- The status and timing of the South Fort Meade appeal, permits and operations after the limited Phase I mining period.
- The likely compliance costs and operational effects of Florida’s nutrient-discharge standards and other EPA proceedings.
- Execution, spending and returns on potash expansions and the Miski Mayo investment, alongside higher sulfur, ammonia and resource-tax costs.
- Completion and economics of the senior-note redemption, and whether cash generation remains sufficient for planned investment and liquidity needs.
- Developments in the PCS contract dispute, antitrust litigation and tax audits; Cargill held approximately 64.1% of Mosaic’s outstanding common stock.