MOS

Business Context and Reporting Period

Company: The Mosaic Company (MOSAIC CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2007 (Second Quarter of Fiscal 2008)
Business Overview: Mosaic produces and markets concentrated phosphate and potash crop nutrients. Operations are organized into Phosphates, Potash, and Offshore segments. The Nitrogen business was reclassified as non-core and is now reported within Corporate, Eliminations, and Other.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 44% ($673.4M) for the quarter and 49% ($1,388.1M) for the six months compared to the prior year, driven by historic fertilizer prices and robust global demand.
• Profitability Surge: Net earnings increased 498% for the quarter and 300% for the six months. Gross margin percentage expanded significantly from 10.5% to 28.4% (quarter) and 12.7% to 27.3% (six months).
• Price Increases: Average selling price for Diammonium Phosphate (DAP) rose 72% to $417/tonne (quarter) and 67% to $413/tonne (six months). Potash prices increased 20% to $171/tonne (quarter).
• Foreign Currency Impact: The company recorded a foreign currency transaction loss of $52.4M for the quarter and $71.8M for the six months, compared to gains in the prior year, primarily due to a strengthening Canadian dollar affecting U.S. dollar-denominated intercompany receivables.
• Debt Reduction: Strong cash flows enabled the prepayment of approximately $1 billion in debt between May 1, 2007, and December 31, 2007, including $776 million in fiscal 2008.

Guidance, Outlook, and Risks

• Raw Material Costs: Rising costs for sulfur (up 55% to $102/long tonne) and ammonia are expected to pressure gross margins in the third quarter. Sulfur supply constraints may make securing adequate supplies difficult.
• Operational Issues: Brine inflow at the Esterhazy potash mine negatively impacted gross margins by approximately $12.8M in the quarter. Production at Esterhazy was also temporarily affected by a hoist bearing failure.
• Regulatory and Legal:
  • EPA RCRA Initiative: The EPA is inspecting phosphate facilities for compliance with hazardous waste regulations. Mosaic faces Notices of Violation (NOVs) and potential enforcement actions which could require capital modifications and penalties.
  • Financial Assurance: Mosaic is negotiating with Louisiana regulators regarding financial assurance requirements for phosphogypsum management systems. Failure to meet tests could require providing credit support of approximately $144.2 million.
  • Internal Controls: Management concluded that disclosure controls were not effective as of November 30, 2007, due to a material weakness in internal control over the accounting for income taxes. Remediation is ongoing.
• Tax Outlook: A reduction in the Canadian federal corporate tax rate enacted in December 2007 is expected to reduce net deferred tax liabilities by approximately $30 million, recorded in the third quarter of fiscal 2008.

Investor Verification Checklist

• Internal Control Weakness: Verify the status of remediation for the material weakness in income tax accounting controls.
• Sulfur Supply Chain: Monitor sulfur availability and pricing trends, as shortages could constrain production volumes or further compress margins.
• Regulatory Exposure: Track the resolution of EPA RCRA enforcement actions and the outcome of negotiations with Louisiana regarding financial assurance requirements.
• Foreign Exchange Sensitivity: Assess the impact of the Canadian dollar's strength on future earnings, given the functional currency mismatch in the Potash segment.
• Debt Covenant Compliance: Confirm continued compliance with debt covenants following the significant debt paydowns and review restrictions on future dividends.