Mosaic Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless stated otherwise, amounts are in U.S. dollars. Mosaic produces and markets phosphate and potash crop nutrients. It completed its acquisition of Vale Fertilizantes on January 8, 2018, added a Mosaic Fertilizantes reporting segment, and began consolidating the Miski Mayo mine.
Financial results and condition
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $2,205.0m | $1,754.6m | $4,138.7m | $3,332.7m |
| Gross margin | $294.6m | $192.3m | $536.7m | $321.9m |
| Gross margin percentage | 13% | 11% | 13% | 10% |
| Operating earnings | $196.3m | $94.6m | $277.0m | $124.7m |
| Net earnings attributable to Mosaic | $67.9m | $97.3m | $110.2m | $96.4m |
| Diluted earnings per share | $0.18 | $0.28 | $0.29 | $0.27 |
| Cash provided by operating activities | — | $736.0m | $388.8m |
- Q2 comparison: Sales increased 26%, gross margin 53%, and operating earnings 108%; attributable net earnings fell 30%. Higher phosphate and potash prices and sales, along with the acquired business, supported results. Foreign currency transaction losses, derivative losses, acquisition-related costs, and inventory-costing refinements weighed on earnings.
- First-half comparison: Sales rose 24% and attributable net earnings rose 14%. Earnings included $110.9m of foreign currency transaction losses, $73m of acquisition-related operating expenses, $46m of unrealized derivative losses, and $30m of inventory-costing refinement expenses. A $61m discrete tax benefit was a significant offset.
- Cash flow and investment: First-half operating cash flow was $736.0m, including a favorable $252.9m working-capital change. Investing used $1,417.1m, including about $985m for the acquisition and $424.4m of capital expenditures. Financing used $383.2m; debt payments were $313.9m and dividends paid were $19.2m.
- Liquidity and debt: June 30 cash and cash equivalents were $1,035.3m; long-term debt, including current maturities, was about $5.0bn, with $20.2m of short-term debt. The $2.0bn revolving facility had $1.98bn available, and the company reported compliance with debt covenants. Management targets a $2.5bn liquidity buffer, including cash and committed credit. Restricted trust investments for environmental closure obligations are not general-purpose liquidity.
- Balance sheet: Total assets were $20.4bn and total equity $10.4bn at June 30. Cash and cash equivalents declined from $2.15bn at year-end 2017. Inventory rose to $2.17bn from $1.55bn, partly to prepare for Brazil’s high season.
Material changes, outlook, and risks
- The Vale acquisition expanded Mosaic’s Brazilian production and distribution operations and added assets in Brazil and a 40% economic interest in Miski Mayo, bringing Mosaic’s total interest there to 75%. The acquisition was funded with cash and 34.2m Mosaic shares. Purchase accounting remained preliminary at June 30; final valuation adjustments could be material.
- Management said it was on track to achieve more than $100m of acquisition-related savings and synergies in 2018. After quarter-end, Mosaic prepaid $111m on its term loan and paid $92m of maturing bonds; the filing reports year-to-date debt repayments of $500m.
- Management expected sulfur market prices to remain higher in the second half of 2018 and anticipated a higher international potash sales mix to lower average selling prices. The filing does not provide a formal consolidated earnings or revenue forecast. Management believed available cash, operating cash flow, and credit facilities would fund operations and expected needs over the next 12 months, while cautioning that future cash generation is not assured.
- Operating disruptions included the temporary idling of the Plant City phosphate facility, which reduced phosphate production and sales; the Brazil truckers’ strike, which affected logistics; and Esterhazy potash turnaround and containment/logistics issues. Sulfur costs rose sharply year over year, and the company cited continuing brine-inflow management costs and risks at Esterhazy.
- Environmental and permitting exposures include Florida and Louisiana phosphogypsum-stack closure obligations and related financial-assurance commitments. The New Wales sinkhole repairs were substantially complete; $77.2m had been spent and estimated remaining costs were about $7m, with potential additional costs. The South Pasture mine permit was under appeal; an adverse outcome could impede mining and materially affect future results and cash flows.
- Brazilian legal claims had alleged aggregate damages of about $971.6m, while Mosaic estimated probable losses of about $37m. Brazilian tax claims had maximum potential liability of about $356m, including $217m contractually subject to Vale indemnification; estimated probable non-indemnified losses were immaterial. These are contingent exposures, not stated expected cash payments.
- Mosaic identified its Potash reporting unit as potentially at risk of future goodwill impairment: estimated fair value exceeded carrying value by 16.7%. No impairment was identified in the quarter’s review; the next annual analysis was planned for October 2018.
Important facts for investors to verify
- Reconcile the acquisition-related operating contribution: the notes report $548.7m of acquired-business revenue from January 8 through June 30, while the controls section reports $186.3m for the six months; the filing text does not provide a clear explanation for this apparent inconsistency.
- Track final Vale acquisition purchase-price allocation, including acquired assets, liabilities, contingencies, and any contingent consideration.
- Assess the persistence of operating improvement after excluding discrete tax benefits, currency and derivative effects, acquisition costs, and inventory-costing adjustments.
- Monitor execution of the stated 2018 synergy target, debt repayment and liquidity, and Brazil working-capital needs.
- Follow Plant City restart and phosphate volumes, sulfur costs, Esterhazy brine management, and developments in the South Pasture appeal and environmental closure obligations.