The Mosaic Company: 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing also reports fourth-quarter results. Mosaic produces and markets phosphate and potash crop nutrients and operates international fertilizer distribution businesses.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $7.41 billion | $7.16 billion |
| Gross margin | $842.8 million; 11.4% of sales | $810.0 million; 11.3% of sales |
| Operating earnings | $465.7 million | $319.0 million |
| Net earnings (loss) attributable to Mosaic | $(107.2) million; $(0.31) per diluted share | $297.8 million; $0.85 per diluted share |
| Cash from operating activities | $935.5 million | $1.26 billion |
| Capital expenditures | $820.1 million | $843.1 million |
Fourth-quarter 2017 sales were $2.09 billion, operating earnings were $127.1 million, and Mosaic reported a net loss attributable to the company of $431.1 million, or $1.23 per diluted share. A major contributor to the annual loss was a $451 million discrete income-tax expense, primarily associated with enactment of the U.S. Tax Cuts and Jobs Act. The reported full-year effective tax rate was 132.3%.
At year-end, cash and cash equivalents were $2.15 billion, including $1.08 billion used for the January 2018 acquisition. Long-term debt, including current maturities, was $5.22 billion; short-term debt was $6.1 million. The $2.0 billion revolving credit facility had approximately $1.985 billion available. Operating cash flow fell 26% year over year, in part because working capital was a $316.9 million use of cash.
Changes versus prior year
- Sales rose 3%, and operating earnings increased 46%, supported mainly by higher potash sales volumes and production efficiency. Net income nevertheless turned to a loss, largely because of the tax charge and other unusual items.
- Potash segment sales increased to $1.85 billion from $1.69 billion; volumes rose 11% to 8.6 million tonnes, and gross margin increased to $391.6 million from $256.6 million.
- Phosphates segment sales declined 3% to $3.59 billion and gross margin slipped to $332.2 million from $349.8 million. Lower volumes and selling prices were partly offset by lower raw-material costs.
- International Distribution sales increased 7% to $2.71 billion; volume reached a record 7.4 million tonnes, up 8%.
- Debt increased from $3.82 billion to $5.22 billion, reflecting a $1.25 billion senior-note offering in November. The offering funded the cash portion of the Vale transaction, transaction costs and a portion of a subsequent term-loan prepayment.
Outlook, management commentary, and notable items
- Mosaic completed its acquisition of Vale Fertilizantes on January 8, 2018, after the reporting period. Closing consideration was $1.08 billion in cash and 34,176,574 Mosaic shares. The acquired assets include Brazilian phosphate and potash operations and an additional 40% interest in Peru’s Miski Mayo mine, bringing Mosaic’s interest to 75%. Final purchase-price adjustments and acquisition accounting remained subject to determination.
- Management said phosphate and potash selling prices began to improve in the fourth quarter and that the gains continued into 2018. No specific company-wide earnings or revenue guidance is provided in the filing.
- The company said it was about 85% of the way toward its goal of $500 million in cost savings by the end of 2018 and had achieved a separate $75 million support-function savings target in 2017.
- Mosaic temporarily idled its higher-cost Plant City phosphate facility for at least one year and recorded $20 million in related restructuring charges. It expects the change to reduce exposure to new market capacity, support phosphate margins and lower capital needs.
- The annual dividend was reduced from $0.60 to $0.10 per share, effective with the December 2017 payment. Mosaic spent $210.6 million on dividends in 2017.
- Other unusual items included a $52.1 million pretax gain on a Louisiana land sale, $26 million of acquisition-related professional-service costs, and a $14 million increase in the New Wales sinkhole cost reserve. A change in depreciation estimates reduced 2017 depreciation expense and increased operating earnings by approximately $65 million.
- Mosaic had invested approximately $770 million in the Saudi MWSPC project and expected total cash investment of about $840 million, leaving roughly $70 million in future contributions. Management estimated total project costs at $8 billion, with about $7 billion spent by the filing date.
Principal risks and contingencies
- Esterhazy potash mine brine inflows have continued for decades. Management reported they remained within historical experience, but higher inflows, remediation costs or safety concerns could disrupt production or, in an extreme case, require changing mining methods or abandoning the mine. Insurance for underground water-incursion risk is limited.
- Crop-nutrient prices and demand are cyclical and exposed to global supply, competitors’ capacity, farmer economics, weather, inventories, raw-material prices and transportation costs. Seasonal demand also creates significant working-capital needs.
- Environmental obligations are material: the company reported $859.3 million in recorded asset-retirement obligations and approximately $1.6 billion in undiscounted estimated phosphogypsum-stack closure costs. $630 million was held in restricted financial-assurance trusts.
- For the 2016 New Wales water-loss incident, Mosaic estimated approximately $22 million remained to complete remediation and related obligations at year-end 2017; additional work or costs could arise.
- Permitting, environmental regulation, litigation, foreign-exchange exposure, customer credit risk, labor relations and successful integration of the Brazilian acquisition could materially affect results. The South Pasture mine permit faced an appeal after a favorable district-court ruling.
Important facts for investors to verify
- Reconcile the $451 million tax-related charge, valuation allowances and provisional Tax Act estimates; management said final estimates could change materially.
- Review post-acquisition leverage and liquidity after the $1.08 billion cash payment, 34.2 million shares issued and $200 million term-loan prepayment.
- Track acquisition integration, final working-capital adjustments, contingent consideration of up to $260 million and the expected 2018 segment realignment.
- Assess whether phosphate and potash price improvement, cost savings and production efficiency are sustained, and whether cash generation supports capital needs and dividends.
- Monitor Esterhazy brine management, New Wales remediation, environmental financial-assurance requirements and related permitting or legal developments.