The Mosaic Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2012; comparable periods ended November 30, 2011. Mosaic produces and markets phosphate and potash crop nutrients. Financial amounts are in U.S. dollars.
Key financial results
| Metric | Three months 2012 | Three months 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2.536 billion | $3.015 billion | $5.041 billion | $6.098 billion |
| Gross margin | $675.9 million | $881.2 million | $1.423 billion | $1.729 billion |
| Gross margin percentage | 27% | 29% | 28.2% | 28.4% |
| Operating earnings | $559.6 million | $797.0 million | $1.170 billion | $1.527 billion |
| Net earnings attributable to Mosaic | $628.8 million | $623.6 million | $1.058 billion | $1.150 billion |
| Diluted EPS | $1.47 | $1.40 | $2.48 | $2.58 |
| Operating cash flow | Not presented by quarter | $661.7 million | $1.072 billion | |
| Capital expenditures | Not presented by quarter | $842.6 million | $778.5 million |
Second-quarter sales fell 16% year over year and operating earnings fell 30%. Phosphates sales declined on lower international volumes—particularly exports to India—and lower selling prices. Potash sales were also affected by reduced international shipments amid delayed supply-contract negotiations. Higher North American domestic volumes partly offset weaker exports. For the six-month period, sales declined 17% and operating earnings declined 23%.
Second-quarter net earnings were broadly flat and diluted EPS rose, despite lower operating earnings. A discrete tax benefit of approximately $179.3 million, or about $0.42 per diluted share, arose from the resolution of tax matters and materially affected the period’s reported results. Six-month net earnings and diluted EPS were lower year over year.
Liquidity, debt and capital spending
At November 30, 2012, cash and cash equivalents were $3.421 billion, down from $3.811 billion at May 31, 2012. Total debt, including short-term debt and current maturities, was approximately $1.033 billion; the filing reports long-term debt at a fair value above its carrying amount. Cash therefore substantially exceeded reported debt. Mosaic also had a $750 million credit facility, of which $730 million was available.
Six-month operating cash flow declined 38% to $661.7 million. Capital spending exceeded operating cash flow, producing approximately $180.9 million of negative operating cash flow less capital expenditures. Spending included $302.0 million for potash expansions. Cash used in investing activities was $839.9 million; financing activities used $235.4 million, including $213.3 million of dividends. Management said available cash, expected operating cash flows and credit facilities should be sufficient to fund fiscal 2013 expansion plans and strategic initiatives, while cautioning that future cash generation is not assured.
Inventories increased to $1.519 billion from $1.238 billion at May 31, reflecting rebuilding of phosphate inventories ahead of the expected spring application season. The company increased its annual dividend program to $1.00 per share, from $0.50 previously announced for the year-ago period.
Segments and operating developments
- Phosphates: Second-quarter sales were $1.762 billion, down 19%; gross margin was $317.5 million, down 33%, and segment margin was 18% versus 22%. DAP average selling price fell 11% to $544 per tonne, while segment sales volume declined 7%. Lower prices and volumes outweighed reduced sulfur and ammonia costs. Six-month segment sales declined 24% and gross margin declined 32%.
- Potash: Second-quarter sales were $780.2 million, down 7%; gross margin fell 10% to $355.4 million, with margin at 46% versus 47%. Segment volume declined 15% as international shipments fell, partly offset by stronger North American sales. Esterhazy brine-management expense was $60.2 million in the quarter and $126.9 million for six months; related capital expenditures were $54.5 million and $95.2 million, respectively. Brine inflows remained above average but management said stored brine remained below levels that would impede mining. Remote-site pumping was expected to be fully operational in fiscal third quarter.
- Mosaic completed the Esterhazy K2 shaft and mill expansion; incremental annual capacity of 0.7 million tonnes was available in the current fiscal year. The company reported continued potash expansion spending.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided in the supplied filing text. Management cited recovering phosphate prices from fiscal 2012 lows, but said prices remained below the prior-year quarter. It attributed cautious international buying to delayed India and China potash contract negotiations; the China agreement was resolved in January 2013, after the reporting period.
- The board approved a fiscal year-end change from May 31 to December 31. The fiscal year ending May 31, 2013 will be followed by a transition period from June through December 2013; the new fiscal year begins January 1, 2014.
- EPA phosphate-waste enforcement: Mosaic was negotiating a possible settlement over RCRA matters at Florida facilities. A settlement could include capital expenditures likely to exceed $150 million over several years and significantly more burdensome financial assurances for phosphogypsum stack closure, potentially including substantial current prefunding. Final settlement terms were not agreed. The company said it believed it had sufficient resources to fund a settlement; if negotiations fail, it could not estimate the potential loss and material costs could result.
- Other environmental and permitting exposure: Florida nutrient-discharge rules and proposed criteria, phosphate mine permitting, and environmental remediation could increase operating costs, require capital spending, or delay mining. Recorded accruals for known environmental conditions were $26.2 million; the company cautioned that future expenditures could be material.
- Litigation: Potash antitrust claims remained in pretrial proceedings, with trial scheduled for February 2014; Mosaic said it could not estimate a loss. A MicroEssentials patent dispute remained pending, with the Patent and Trademark Office having initially rejected the plaintiffs’ remaining claims in December 2012. Outcomes and potential financial effects were not estimable.
- Other notable period items included foreign-currency transaction losses of $17.0 million for the quarter and $45.3 million for six months, versus gains in the prior-year periods; increased legal and environmental accruals; and higher Esterhazy brine-management costs. The annual goodwill impairment review found no impairment.
- Principal business risks include crop-nutrient price and demand volatility, seasonality and working-capital needs, foreign exchange, raw-material and freight costs, weather, regulatory and permitting outcomes, litigation, and operational disruptions including mine brine inflows.
Most important facts for investors to verify
- How much of reported earnings and EPS depended on the approximately $179.3 million tax benefit, and whether the benefit recurs.
- Whether export demand and phosphate pricing improved after the quarter, including the effect of the subsequent China potash contract.
- Progress, costs and operational impact of Esterhazy brine management and the remote injection site.
- Final scope, timing, funding requirements and potential cash restrictions under any EPA settlement or financial-assurance agreement.
- Whether operating cash flow can recover and cover the company’s elevated capital spending, dividends and expansion commitments.
- Developments in Florida nutrient rules, mine permits, antitrust litigation and the patent reexamination, none of which had a clear quantified exposure in the filing.