The Mosaic Company — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Mosaic produces and markets phosphate and potash crop nutrients and operates Phosphates, Potash, and International Distribution segments. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,754.6 | $1,674.6 | $3,332.7 | $3,348.5 |
| Gross margin | $192.3; 11% of sales | $154.0; 9% | $321.9; 10% | $390.7; 12% |
| Operating earnings | $94.6 | $12.3 | $124.7 | $175.7 |
| Net earnings attributable to Mosaic | $97.3 | $(10.2) | $96.4 | $246.7 |
| Diluted earnings per share | $0.28 | $(0.03) | $0.27 | $0.70 |
- Q2 sales increased 5% and Mosaic returned to profit, with operating earnings up $82.3. Six-month sales were nearly flat, but net earnings fell 61% year over year.
- Q2 improvement reflected stronger Potash and International Distribution results and lower other operating expense than in 2016. For the six-month comparison, lower foreign-exchange and derivative gains were significant: foreign currency gains were $18.0 versus $102.6, and derivative mark-to-market gains were $3.2 versus $82.6.
- Segment trends were mixed. Q2 Potash gross margin rose to $109.9 from $53.0, supported by higher production and sales volumes. Phosphates gross margin declined to $76.1 from $100.4, as lower selling prices outweighed volume gains and lower input costs. International Distribution gross margin improved to $39.4 from $4.7, reflecting higher volumes and a richer premium-product mix.
- Six-month operating cash flow was $388.8, down from $849.4. Working capital used $101.1, principally as inventories increased $305.7, partly offset by higher payables and accrued liabilities. Capital expenditures were $392.3; operating cash flow less capital expenditures was approximately negative $3.5. Dividends paid were $149.1.
Financial position and liquidity
- At June 30, cash and cash equivalents were $660.6; total debt, including current maturities, was approximately $3,842.2. Total equity was $9,794.6.
- Current assets were $3,337.2 and current liabilities $1,872.0. Cash, cash equivalents and restricted cash totaled $699.0 for cash-flow reporting purposes. Separately, approximately $622.9 of marketable securities in environmental trusts was restricted and not available for general use.
- Mosaic reported $1.99 billion available under its $2.0 billion revolving credit facility and compliance with applicable financial covenants. Management targets a $2.5 billion liquidity buffer, including cash and available committed credit lines.
Outlook, commentary, and risks
- Mosaic expected the proposed Vale Fertilizantes acquisition to close in late 2017, subject to remaining conditions. Consideration includes $1.25 billion cash, expected to be funded primarily with debt, and 42,286,874 Mosaic shares; an additional payment of up to $260 million may be due if specified price and currency thresholds are met. Brazil approved the deal unconditionally on July 31, 2017. Completion, financing terms, integration, and anticipated benefits remained uncertain.
- A change in depreciation method and useful-life estimates is expected to reduce 2017 depreciation expense and increase operating earnings by approximately $70 million. Management expects maintenance expense to increase in future periods.
- The New Wales sinkhole remediation estimate increased by $14 million in Q2. Mosaic had incurred approximately $48 million by June 30 and estimated about $36 million of remaining costs; additional measures could be material. The related putative class action was dismissed in June 2017.
- A lawsuit challenges the South Pasture Extension mine permit. An adverse outcome could halt mining under the permit, delay new or modified permits, raise costs, and materially affect future results and cash flows. Mosaic said it intended to defend the permit.
- Other material exposures include long-term phosphogypsum-stack closure obligations and associated financial-assurance requirements, environmental and tax proceedings, Esterhazy potash-mine brine inflows, and fertilizer-price, raw-material, foreign-exchange, and seasonal working-capital volatility.
- After quarter-end, Mosaic contributed $62.5 million to MWSPC; MWSPC also entered into approximately $560 million of project financing agreements. Mosaic reported an agreement to sell land near its Faustina facility, with expected proceeds and gain of approximately $52 million.
Important facts for investors to verify
- Whether the Vale acquisition closed on the expected terms and timing, how it was financed, and the resulting share dilution and debt burden.
- Whether phosphate pricing and segment margins stabilized, and whether Potash production and International Distribution volume gains persisted.
- Actual New Wales remediation costs and developments in the South Pasture permit litigation and related permitting.
- Working-capital and inventory trends, cash generation relative to capital spending and dividends, and liquidity available after acquisition funding.
- Whether the projected depreciation savings are achieved and how higher future maintenance expense affects operating results.