Business context and reporting period
The Mosaic Company is a global producer and marketer of phosphate and potash crop nutrients, with Phosphates and Potash as its reportable segments. This Form 10-K covers the year ended December 31, 2014. Because Mosaic changed its fiscal year-end, the comparable calendar 2013 figures are unaudited; the filing also reports a separate seven-month transition period. The fourth-quarter figures below are for the three months ended December 31.
Financial performance and position
| Metric | 2014 | 2013 comparable |
|---|---|---|
| Net sales | $9.056 billion | $9.021 billion |
| Gross margin | $1.927 billion; 21.3% of sales | $2.015 billion; 22.3% |
| Operating earnings | $1.312 billion | $1.340 billion |
| Net earnings attributable to Mosaic | $1.029 billion | $1.063 billion |
| Diluted EPS | $2.68 | $2.49 |
| Cash from operating activities | $2.294 billion | $2.020 billion |
| Capital expenditures | $929 million | Filing text does not provide a clear calendar-year comparable |
Annual sales were nearly flat, while gross margin and operating earnings declined. Net earnings fell 3%, but diluted EPS rose 8%, aided by an approximately 10% reduction in weighted-average shares. The effective tax rate was 15.2%, including substantial discrete tax benefits.
Fourth-quarter 2014 net sales were $2.379 billion, gross margin $579 million, operating earnings $365 million, and net earnings $361 million, versus $2.182 billion, $322 million, $179 million, and $129 million, respectively, in the corresponding 2013 quarter.
Phosphates segment sales were $6.194 billion and gross margin was $1.071 billion, up from $6.122 billion and $914 million. Higher volumes, including acquired CF production, and lower raw-material costs supported margin. Potash sales were $2.852 billion and gross margin $898 million, down from $2.973 billion and $1.104 billion, chiefly due to lower realized prices; higher sales volumes partly offset the decline.
At December 31, 2014, cash and cash equivalents were $2.375 billion, long-term debt including current maturities was $3.819 billion, short-term debt was $13.5 million, and stockholders’ equity was $10.7 billion. Cash was down from $5.293 billion a year earlier, largely reflecting acquisitions and $2.8 billion of share repurchases. The company had about $1.477 billion available under its $1.5 billion revolving credit facility. Cash dividends paid were $382.5 million.
Material changes and notable items
- Acquired CF’s Florida phosphate assets for $1.172 billion plus $203.7 million to fund retirement-obligation trusts and escrow. Acquired assets contributed $574 million in revenue from closing through year-end.
- Acquired ADM’s fertilizer distribution business in Brazil and Paraguay for approximately $350 million, including working capital; expected regional distribution capacity to rise from about 4 million to 6 million tonnes annually.
- Repurchased approximately 59.1 million shares for an aggregate expenditure of about $2.8 billion, including $2.0 billion of purchases from the MAC Trusts. The company reported approximately $191 million remaining under the $1 billion repurchase authorization at year-end.
- Discontinued MOP production at Carlsbad and transitioned the facility to K-Mag production. Recorded $125.4 million in pre-tax restructuring charges, primarily accelerated depreciation and depletion and severance.
- Sold Hersey salt operations for approximately $55 million, recording a $13.5 million pre-tax gain; sold Argentina assets, recording an $8.5 million gain. Planned to complete the Chile distribution exit in the first half of 2015.
- Net interest expense rose to $108 million, principally reflecting higher debt, including a $2 billion 2013 note offering and $800 million borrowed under a term-loan facility in 2014.
Outlook, risks and contingencies
- Management stated expected operating cash generation, available cash and borrowings should fund operations, expansion plans, existing strategic initiatives and expected dividends for the next 12 months; it cautioned that future cash flows are not assured. No numerical earnings or sales guidance is provided.
- Potash expansions include the Esterhazy K3 shafts, expected to begin production in 2017 and add an estimated 0.9 million tonnes of capacity. The board approved approximately $1.5 billion of K3-related capital expenditures over ten years. Colonsay expansion added 0.6 million tonnes of operational capacity.
- The Wa’ad Al Shamal joint venture project is estimated to cost $7.5 billion, with operations expected in late 2016. Mosaic owns 25%, estimates its total cash investment at approximately $850 million, and had invested $328.5 million in cash by year-end. The venture obtained approximately $5 billion of financing facilities, but some future funding arrangements remained to be finalized.
- A possible EPA-related RCRA settlement was under negotiation and not final. Potential commitments include more than $150 million in capital expenditures and an estimated $625 million cash deposit into trust funds for phosphogypsum-stack closure assurance; the deposit would restrict liquidity. The company separately estimated 2015 environmental capital expenditures of about $180 million, plus approximately $130 million for reclamation, stack closure and water treatment, excluding possible settlement-related capital spending.
- Key operating risks include volatile crop-nutrient prices and demand, seasonal working-capital needs, raw-material and transportation costs, permitting and environmental requirements, international and currency exposures, and labor and facility interruptions. Esterhazy brine inflows have been managed historically, but could increase costs, disrupt production or, in an extreme scenario, threaten the mine; underground water-incursion insurance is limited.
Important facts for investors to verify
- Review the audited statements and notes for the calendar-year comparison, tax benefits, acquisition accounting, debt and share-repurchase effects; 2013 calendar-year comparisons are unaudited.
- Track realized potash prices and margins, and whether higher volumes can offset commodity-price pressure.
- Assess execution, funding commitments and expected returns for CF, ADM and Wa’ad Al Shamal initiatives, alongside planned capital spending.
- Monitor the status and final cost of the EPA settlement, trust-funding requirements, and other environmental and permitting obligations.
- Evaluate liquidity after repurchases, investment needs and potential restricted-cash requirements, as well as Esterhazy brine-management costs and operating conditions.