The Mosaic Company — Form 10-Q Summary
Business context and reporting period. Mosaic produces and markets phosphate and potash crop nutrients. This filing covers the quarter and six months ended November 30, 2011—the second quarter and first half of fiscal 2012, respectively. Comparisons are with the corresponding periods of fiscal 2011. Amounts are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Quarter ended November 30, 2011 | Six months ended November 30, 2011 |
|---|---|---|
| Net sales | $3,014.5 million, up 13% | $6,097.8 million, up 25% |
| Gross margin | $881.2 million; 29.2% of sales, versus 28.7% | $1,729.4 million; 28.4% of sales, versus 26.2% |
| Operating earnings | $797.0 million, up 21% | $1,526.6 million, up 43% |
| Net earnings attributable to Mosaic | $623.6 million, down 39% | $1,149.6 million, down 13% |
| Diluted earnings per share | $1.40, versus $2.29 | $2.58, versus $2.96 |
| Operating cash flow | $1,072.0 million for the six months, versus $1,087.9 million | |
| Capital expenditures | $778.5 million for the six months, including $474.6 million for Potash expansion |
At November 30, cash and cash equivalents were $3,627.6 million. Total reported debt was approximately $1.55 billion, comprising $28.3 million of short-term debt and $1,522.4 million of long-term debt, including current maturities. A $750 million credit facility had $729 million available. Cash declined $278.8 million from May 31, primarily reflecting the share repurchase, capital spending, and foreign-exchange effects.
Material changes and segment performance
- Quarterly earnings comparison: Prior-year results included a $685.6 million pretax gain ($570.1 million after tax) from the sale of Mosaic’s Fosfertil investment. Its absence was the principal reason net earnings fell despite higher sales and operating earnings.
- Phosphates: Quarterly sales rose 10% to $2.18 billion, but gross margin was essentially flat at $475.7 million and margin rate declined to 22% from 24%. Higher selling prices were offset by lower sales volumes and increased sulfur, ammonia, and purchased-rock costs. For the six months, segment sales increased 24% and gross margin increased 23%.
- Potash: Quarterly sales increased 20% to $838.6 million and gross margin rose 38% to $393.7 million; margin rate improved to 47% from 41%. Higher prices more than offset lower North American volumes. For the six months, sales increased 30% and gross margin increased 55%.
- Input costs and demand: Quarterly North American consumed sulfur and ammonia prices rose 77% and 60%, respectively. Phosphate and potash volumes were affected by cautious customer buying and comparison with exceptionally strong prior-year demand.
Outlook, management commentary, and significant items
- Management said long-term global agricultural demand fundamentals remained strong, but global economic concerns were affecting customer purchasing and were expected to weigh unfavorably on sales and gross margins in fiscal 2012’s third quarter. No specific earnings or revenue guidance was provided.
- Mosaic expected to sustain planned fiscal 2012 finished-phosphate production through mitigation measures, including using other Florida mines, Miski Mayo supply, and third-party rock purchases. Management cautioned that longer-term mitigation remained uncertain and could raise costs or constrain production.
- Potash expansion continued. Management expected Esterhazy expansion capacity to begin coming online in the third quarter of fiscal 2012, with estimated full capacity of 770,000 tonnes in early fiscal 2013.
- Mosaic spent approximately $1.2 billion to repurchase 21.3 million shares from the MAC Trusts. It also issued $750 million of senior notes in October. On December 1, 2011, it redeemed $469.3 million of 7-5/8% notes using offering proceeds and expected to record an approximately $20 million pretax charge in the following quarter.
- On December 7, 2011, Mosaic settled its Esterhazy tolling dispute with PCS. The supply arrangement ends December 31, 2012, with approximately 1.1 million tonnes to be supplied during calendar 2012 and an additional 0.1 million tonnes available for delivery in early 2013. Mosaic said the expiry and the related 1.3 million tonnes of Canpotex capacity credit could materially increase potash available for sale and positively affect earnings and liquidity.
- Other unusual quarterly items included $16.4 million of other operating income, primarily from approximately $25 million of insurance proceeds, including an advance related to a Faustina ammonia-plant incident, and a $55.1 million foreign-currency transaction gain. The plant incident added about $30 million to ammonia costs.
Risks and contingencies
- South Fort Meade permitting: A court injunction halted mining in the Hardee County extension, including uplands-only mining. Limited extraction continued from lower-yield Polk County reserves. A prolonged restriction could increase purchased-rock costs, reduce phosphate production and sales, and affect cash flows; the company was appealing and defending the permit.
- Environmental regulation: EPA RCRA proceedings, facility consent orders, and related notices could require operational changes, capital spending, financial assurances, or penalties; the eventual costs were not predictable. Mosaic had accrued $33.3 million for known environmental conditions, which management did not then expect to materially affect the business or financial condition, while warning that future costs could be material.
- Florida water-quality rules: Absent success in its legal challenge or approval of alternative criteria, Mosaic expected nutrient-discharge requirements could adversely affect Florida phosphate operations, require significant capital expenditures, and substantially increase annual operating costs.
- Legal matters: Potash antitrust litigation remained unresolved after an appellate rehearing was granted; the MicroEssentials patent case had been remanded; and other environmental, permitting, tax, and regulatory matters remained contingent. Outcomes and potential impacts were not reliably estimable in the filing.
- Operational and market risks: Esterhazy brine inflows, commodity and foreign-exchange volatility, raw-material and transportation availability, seasonality, customer credit and demand, and changes in crop-nutrient prices could affect results. Certain derivatives could require $36.3 million of collateral if specified credit-risk features were triggered.
Most important facts for investors to verify
- Whether phosphate and potash demand, selling prices, and sales volumes recover after the cautious purchasing described for the quarter and expected third quarter.
- Developments in the Hardee County mining injunction, permitting, and the resulting cost and production effects of substitute phosphate rock.
- Delivery and capacity arrangements under the PCS settlement, and whether the expected additional potash availability translates into improved earnings and liquidity after 2012.
- Actual costs and timing of Potash expansion, including Esterhazy’s expected ramp to full capacity.
- Cash generation and liquidity after the $1.2 billion repurchase, capital spending, and debt refinancing, including the approximately $20 million expected redemption charge.
- Developments in EPA and Florida environmental matters, tax audits and uncertain tax positions, and outstanding litigation.