The Mosaic Company (NYSE: MOS) — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; dollar amounts are in millions except per-share data. Mosaic produces and markets phosphate and potash crop nutrients and operates an International Distribution segment. Comparative segment results were recast following a March 2015 reporting realignment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $2,105.5 | $2,250.7 | $6,732.1 | $6,677.2 |
| Gross margin | $335.3; 16% | $414.7; 18% | $1,362.4; 20% | $1,347.5; 20% |
| Operating earnings | $246.0 | $277.3 | $1,074.5 | $947.2 |
| Net earnings attributable to Mosaic | $160.0 | $201.9 | $845.4 | $667.9 |
| Diluted EPS | $0.45 | $0.54 | $2.33 | $1.72 |
| Operating cash flow | Not separately provided | Not separately provided | $1,520.7 | $1,779.8 |
- Q3: Sales fell 6%, operating earnings 11%, and Mosaic-attributable earnings 21% year over year. The foreign-currency transaction loss was $48.6, versus a $27.1 gain a year earlier; lower sales and margins also weighed on results.
- Nine months: Sales increased 1%, operating earnings 13%, and attributable earnings 27%. Results included approximately $41 million of discrete tax benefits, or $0.11 per diluted share. The comparable 2014 period included a $60.2 million share-repurchase-agreement valuation loss and approximately $105 million of discrete tax benefits.
- Segments, Q3: Phosphates operating earnings were $157.2 versus $187.7; Potash $65.7 versus $68.7; International Distribution $44.0 versus $29.5. Potash and phosphate sales volumes and/or realized prices declined; distribution sales growth largely reflected the ADM acquisition, while distribution margins per tonne weakened.
- Cash flow and investment: Nine-month operating cash flow was $1,520.7, down $259.1. Capital expenditures were $702.2. Investing cash outflow was $1,348.9, including $630.0 moved to restricted cash for planned environmental financial assurance. Financing cash outflow was $1,028.8, including $709.4 of share repurchases and $287.8 of dividends. Cash declined to $1,284.9 from $2,374.6 at year-end 2014.
- Liquidity and debt: At September 30, cash was $1,284.9, restricted cash was $851.6, current assets were $4,263.0, and current liabilities were $1,871.5. Long-term debt including current maturities was $3,780.3; short-term debt was $18.0. Mosaic reported $1.48 billion available under its $1.5 billion credit facility and a $2.5 billion target liquidity buffer.
Changes, outlook and risks
- Q3 phosphate segment gross margin declined 16% to $198.9, reflecting lower volumes and prices, partly offset by lower ammonia costs. Potash gross margin fell 37% to $96.9, mainly on lower sales volumes and prices. Nine-month Potash gross margin rose to $633.7 from $596.4, supported by higher prices, lower costs and increased production, despite lower sales volumes and higher Canadian resource taxes.
- Management attributed weak market conditions to cautious customer purchasing, lower crop-commodity prices, global economic conditions and foreign-exchange volatility, particularly in Brazil. Potash prices had softened in 2015. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
- Management said expected operating cash flow, available cash and borrowing capacity should fund operations, expansion plans, strategic initiatives, share repurchases and dividends over the next 12 months, while cautioning that future cash flow is not assured. Priorities include maintaining liquidity, paying dividends, investing for growth and returning excess cash.
- Projects included the Esterhazy K3 mine, targeted to begin producing ore in 2017, and a planned 1.2-million-tonne increase in MicroEssentials capacity. Mosaic’s Wa’ad Al Shamal joint-venture investment was approximately $507 million; estimated project cost rose by $500 million to approximately $8.0 billion. Mosaic contributed a further $100 million in October, after quarter-end.
- EPA-related consent decrees signed September 30, 2015, subject to court approval, provide for approximately $8 million in penalties, operating changes and capital projects expected to exceed $170 million, and substantial financial assurance. The company set aside $630 million for trust funding expected in early 2016 and committed to a $50 million letter of credit in 2017. Management said it believed resources were adequate.
- Other material exposures include environmental remediation and reclamation obligations, potential additional costs from regulatory requirements, Esterhazy mine brine inflows, foreign-exchange and commodity-price volatility, and tax and litigation matters. The MicroEssentials patent litigation remained stayed while patent proceedings continued; the outcome and potential loss could not be estimated. Brazilian tax proceedings carried an estimated maximum potential liability of approximately $78 million, with only immaterial accruals recorded for probable liability.
- The filing disclosed correction of prior presentation errors for structured accounts payable and cash flows; management concluded the errors were not material. Disclosure controls were reported effective, with no material change in internal control identified during the quarter.
Key facts for investors to verify
- Whether the decline in Q3 potash and phosphate volumes and prices persists, and how customer purchasing patterns and Brazilian currency conditions develop.
- The timing, court approval and ultimate cost of the EPA consent decrees, including the more-than-$170 million expected capital program and adequacy of financial assurance.
- Cash available for operations after restricted funds, share repurchases, dividends, capital spending and joint-venture commitments; also reconcile the filing’s cash-location disclosures with reported cash balances.
- Progress, funding and revised cost estimates for Wa’ad Al Shamal, Esterhazy K3 and planned MicroEssentials capacity expansion.
- Potential changes in tax exposures, environmental and reclamation estimates, brine-management costs, and the outcomes of disclosed legal proceedings.