The Mosaic Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2011; comparisons are to the periods ended February 28, 2010. The request metadata says “2010 Q3,” but the filing itself is for fiscal 2011’s third quarter.
Business: Mosaic produces and markets phosphate and potash crop nutrients. Its reportable segments are Phosphates and Potash.
Key financial results
| Metric | Three months ended Feb. 28, 2011 | Three months ended Feb. 28, 2010 | Nine months ended Feb. 28, 2011 | Nine months ended Feb. 28, 2010 |
|---|---|---|---|---|
| Net sales | $2,214.3 million | $1,731.9 million | $7,077.4 million | $4,898.8 million |
| Gross margin | $853.6 million; 38.5% | $476.5 million; 27.5% | $2,126.6 million; 30.0% | $1,005.7 million; 20.5% |
| Operating earnings | $770.8 million | $388.9 million | $1,839.3 million | $723.2 million |
| Net earnings attributable to Mosaic | $542.1 million | $222.6 million | $1,865.4 million | $431.0 million |
| Diluted EPS | $1.21 | $0.50 | $4.17 | $0.97 |
- For the quarter, sales rose 28%, operating earnings 98%, and attributable net earnings 144% year over year. Nine-month sales rose 44% and attributable net earnings 333%.
- Nine-month earnings include a $685.6 million pretax ($569.4 million after-tax) gain on the sale of the Fosfertil investment. The gain makes reported earnings growth materially higher than operating earnings growth.
- Cash flow, nine months: Operating cash flow was $1,453.8 million, versus $823.9 million a year earlier. Investing activities used $213.2 million, including $897.3 million of capital expenditures, $1.03 billion of proceeds from the Fosfertil sale, and $385 million invested in the Miski Mayo mine venture. Financing activities used $515.6 million.
- Liquidity and debt, Feb. 28, 2011: Cash and cash equivalents were $3,352.1 million; current assets were $5,693.6 million and current liabilities $1,534.5 million. Total short- and long-term debt, including current maturities, was approximately $886.7 million, down from approximately $1,343.9 million at May 31, 2010. A $500 million revolving credit facility had $478.3 million available.
- Cash included approximately $2.6 billion held by non-U.S. subsidiaries. The filing says there were no significant restrictions on repatriation, but Mosaic did not intend to remit certain undistributed foreign earnings.
Material changes and segment performance
- Phosphates: Quarterly sales rose 43% to $1.46 billion and gross margin rose to $454.2 million from $114.0 million. Higher prices were the principal driver: quarterly DAP price averaged $543/tonne, up 62%; sulfur and ammonia costs also rose substantially. Nine-month sales were $5.01 billion and gross margin $1.18 billion. Nine-month sales volume was up 5%, while phosphate rock production was down from the prior year, partly due to the South Fort Meade mine interruption.
- Potash: Quarterly sales were $757.7 million, up 4%, and gross margin was $411.6 million, up 17%. Nine-month sales rose 41% to $2.08 billion and gross margin rose 45% to $953.5 million, primarily on higher volumes and production. Nine-month average MOP price was $340/tonne, down 5%; quarterly average was $358/tonne, approximately flat year over year.
- Management attributed improved crop-nutrient conditions to stronger agricultural fundamentals, higher grain and oilseed prices, low producer and pipeline inventories, and improving fertilizer application rates. Higher sulfur and ammonia prices partly offset phosphate price benefits.
- Mosaic redeemed the remaining $455.4 million of 7⅜% senior notes due 2014, recording an approximately $19 million pretax charge; it expected annual interest expense to fall by about $34 million. The company also sold its Cubatão facility for $50 million, with minimal earnings impact, and recorded about $40 million of insurance recoveries, primarily in Potash.
- Capital spending was $897.3 million for the nine months, compared with $635.6 million a year earlier, largely reflecting Potash expansion. Management said planned expansions could add up to 5 million tonnes of annual finished-product capacity over the next decade.
Outlook, risks, and contingencies
- Management expected Potash selling prices to continue increasing in fiscal 2011’s fourth quarter, based on contracts covering most domestic sales volume. It expected finished phosphate production not to be negatively affected during the remainder of calendar 2011, assuming continued South Fort Meade mining and mitigation measures; phosphate rock costs could be higher. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
- South Fort Meade permitting: A preliminary injunction restricted mining in parts of the Hardee County Extension. A settlement allowed mining on about 200 acres, which management expected to exhaust in June 2011. If continued mining alternatives are unavailable, production, sales, cash flows, and potentially liquidity could be adversely affected. Appeal arguments were scheduled for April 4, 2011.
- Florida water rules: EPA numeric nutrient-discharge standards were to require significant limits by March 2012. Mosaic challenged the rule and was exploring site-specific relief; absent successful relief, it expected significant capital spending and higher operating costs for Florida Phosphate operations.
- Other significant proceedings include EPA hazardous-waste and environmental matters, potash antitrust litigation, a patent appeal concerning MicroEssentials, and a dispute with Potash Corporation of Saskatchewan over the Esterhazy tolling contract. The filing says outcomes and potential financial effects of several proceedings cannot be predicted.
- Cargill transaction: Agreements contemplated Cargill’s approximately 64% interest being exchanged and distributed through a merger, split-off, and secondary offerings. Closing was expected in the second calendar quarter of 2011, subject to conditions including minority-shareholder approval and regulatory approvals; completion was not assured. The arrangement includes tax-related restrictions and indemnities, potential governance and voting changes, and risks from substantial subsequent share sales. Stockholder lawsuits sought to block the transaction; Mosaic said it intended to defend them.
- Other risks noted include fertilizer price and demand volatility, raw-material and energy costs, foreign exchange, seasonality and working-capital needs, mining disruptions and brine inflows, environmental obligations, and permitting delays. Environmental accruals were approximately $26.8 million; the company cautioned that future expenditures could exceed accruals.
Important facts for investors to verify
- How much of the earnings increase reflects ongoing operations versus the Fosfertil gain and other unusual items.
- Progress on South Fort Meade permitting and the availability, cost, and timing of mining alternatives after the 200-acre phase.
- Expected capital spending, Potash expansion execution, and whether higher prices and volumes offset rising input costs and Canadian resource taxes.
- Whether the Cargill transaction closes, its final governance and tax terms, and the timing and market impact of secondary share sales.
- Developments in the Florida nutrient-discharge rule and material litigation or environmental proceedings, including any resulting capital, operating, or indemnity exposure.