The Mosaic Company — Form 10-K Summary
Period: Fiscal year ended May 31, 2013; comparative figures are for fiscal 2012. Although the request metadata says “2012 Q4,” this filing is an annual report for fiscal 2013. The filing also presents unaudited fourth-quarter results, but does not describe this as a standalone quarterly filing. Amounts are in U.S. dollars.
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients, animal-feed ingredients and related products. Its reportable segments are Phosphates and Potash, with sales to customers in about 40 countries. The company describes itself as the world’s leading producer and marketer of concentrated phosphate and potash nutrients. It announced that it would move from a May 31 fiscal year-end to a calendar year-end, with a June 1–December 31, 2013 transition period.
Financial and operating metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $9.974 billion | $11.108 billion | Down 10% |
| Gross margin | $2.760 billion | $3.085 billion | Down 11% |
| Gross margin percentage | 27.7% | 27.8% | Nearly flat |
| Operating earnings | $2.210 billion | $2.611 billion | Down 15% |
| Net earnings attributable to Mosaic | $1.889 billion | $1.930 billion | Down 2% |
| Diluted EPS | $4.42 | $4.42 | Unchanged |
| Operating cash flow | $1.888 billion | $2.706 billion | Down 30% |
| Capital expenditures | $1.588 billion | $1.639 billion | Down slightly |
FY2013 net earnings included an approximately $179 million discrete tax benefit from resolution of tax matters, lowering the effective tax rate to 15.4% from 27.1%. Operating cash flow fell mainly because of higher receivables and inventories. Cash and equivalents were $3.697 billion at year-end, versus $3.811 billion a year earlier.
- Phosphates: Segment sales were $6.495 billion, down 17%; gross margin was $1.162 billion, down 21%. Lower selling prices and volumes reduced margin by about $580 million, partly offset by lower product costs of about $280 million. DAP averaged $512 per tonne, down 8%. Total segment sales volume fell 5%.
- Potash: Segment sales were $3.529 billion, up 7%; gross margin was $1.611 billion, approximately flat. Sales volume increased 16% to 7.8 million tonnes, offsetting lower prices: average MOP price declined 10% to $405 per tonne. Gross margin as a share of sales fell to 45.7% from 49.1%.
- Debt and liquidity: Long-term debt was $1.011 billion and short-term debt was $68.7 million; cash substantially exceeded reported debt. About $737 million remained available under the $750 million revolving credit facility. Total equity was $13.443 billion. The company stated that operating cash flows, cash and borrowing capacity should fund operating needs and anticipated projects through the transition period and calendar 2014.
- Fourth quarter, unaudited: Net sales were $2.692 billion, gross margin $768.6 million, operating earnings $620.7 million, net earnings attributable to Mosaic $485.9 million and diluted EPS $1.14. Corresponding prior-year fourth-quarter values were $2.821 billion, $833.8 million, $670.8 million, $507.3 million and $1.19.
Material changes and developments
- Year-over-year sales and operating earnings declined, with lower phosphate prices and volumes weighing on results. Potash volumes rebounded, but average prices were lower. Management cited cautious purchasing ahead of major China and India supply contracts, phosphate product availability, and changing channel inventories.
- Phosphate rock production rose to 15.4 million tonnes from 12.1 million, chiefly because South Fort Meade returned to normal operations after settlement of permit litigation. Phosphate finished-product production remained at an 85% operating rate.
- The Esterhazy potash tolling agreement ended December 31, 2012, freeing capacity for Mosaic’s own sales. Its Canpotex allocation rose to 43% at year-end, with a stated reduction to approximately 40% effective July 1, 2013.
- Potash expansion continued, with a planned increase of about 5 million tonnes of annual finished-product capacity from the expansion program; construction for about 2 million tonnes was deferred pending lower costs and improved expected returns. FY2013 potash capital expenditures were $1.018 billion.
- The annual dividend was increased to $1.00 per share, from $0.50 previously announced in February 2012; FY2013 dividend payments totaled $426.6 million. Share repurchases remained restricted until November 26, 2013 under the Cargill transaction agreements.
Outlook, risks, contingencies and unusual items
- Management said crop nutrient market prices were weak but continued to view long-term agricultural fundamentals as supportive, citing global demand for grains and oilseeds and modest stocks. The filing provides no specific earnings or revenue guidance.
- A proposed Saudi Arabian phosphate joint venture with Ma’aden and SABIC was subject to definitive agreements and financing. Mosaic expected a 25% interest, marketing rights for about 25% of output and an investment of up to $1 billion over four years. The approximately $7 billion project was expected to begin operations in late 2016; Mosaic had invested $15 million by year-end.
- The company was negotiating a possible EPA/DOJ and state settlement under the RCRA review. Potential key terms included more than $150 million of capital expenditures over several years and an estimated $625 million cash deposit into a trust for phosphogypsum-stack closure obligations. Terms were not final or approved.
- Environmental and permitting exposure includes Florida nutrient-discharge rules, phosphate mine permit challenges, reclamation and water-treatment requirements. Management estimated FY2014 environmental capital expenditures of about $80 million, excluding potential RCRA-settlement spending, plus approximately $130 million for reclamation, stack closure and water treatment.
- Esterhazy has experienced salt-saturated brine inflows since 1985. FY2013 related expenses, including depreciation, were $235.5 million and capital expenditures were $131.5 million. The mine’s underground operations were not insured for water-incursion problems; management warned that higher inflows, remediation costs or operational changes could be material.
- Other significant risks include commodity-price and demand cycles, seasonal working-capital needs, raw-material and energy cost volatility, weather, foreign exchange, customer credit, labor agreements, mine and plant disruptions, and changing environmental regulation. The company settled potash antitrust cases for $43.8 million; related FY2013 charges totaled $51 million. A MicroEssentials patent case remained unresolved.
Most important facts for investors to verify
- Whether phosphate and potash pricing, volumes and margins improved after the reported market weakness, and whether inventories and seasonal working capital normalized.
- Final terms, timing and funding implications of the potential $625 million environmental trust and related capital commitments.
- Progress and cost trends in Esterhazy brine management, including pumping and storage capacity and any effect on mine operations.
- Status of Florida mine permits and nutrient-discharge rules, including implications for future phosphate-rock supply.
- Whether the Saudi joint venture reached definitive agreements and financing, and whether the proposed investment and returns remained within management’s expectations.
- Actual potash expansion spending, in-service timing and realized capacity, alongside the company’s liquidity-buffer and planned debt/share-repurchase decisions.
- The effect of the one-time tax benefit on comparisons of recurring earnings and the company’s ongoing tax position.