The Mosaic Company — Q1 2016 Form 10-Q
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients and operates International Distribution. This unaudited quarterly report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Management cautions that interim results are seasonal and not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $1.674 billion | $2.139 billion; down 22% |
| Gross margin | $236.7 million; 14% of sales | $419.2 million; 20% of sales |
| Operating earnings | $163.4 million | $318.5 million; down 49% |
| Net earnings attributable to Mosaic | $256.8 million | $294.8 million; down 13% |
| Diluted EPS | $0.73 | $0.80 |
| Cash from operations | $265.9 million | $728.9 million |
| Capital expenditures | $235.6 million | $229.5 million |
At March 31, cash and cash equivalents were $1.058 billion; restricted cash was $851.9 million, including $630 million committed to environmental trust funds. Long-term debt was approximately $3.8 billion, with total equity of $10.0 billion. The company had $1.48 billion available under its $1.5 billion credit facility and targeted a $2.5 billion liquidity buffer, including cash and committed credit lines. Cash declined $218.6 million during the quarter. Operating cash flow fell sharply, reflecting lower earnings after noncash adjustments and an unfavorable $107.6 million working-capital change.
Material changes and segment results
- Phosphates: Segment sales fell 22% to $909.4 million and gross margin fell 71% to $64.6 million. DAP average selling price declined 22% to $355 per tonne; sales volume was down 4%. Lower prices and volumes outweighed lower raw-material costs.
- Potash: Segment sales fell 40% to $394.2 million; gross margin excluding Canadian resource taxes fell 64% to $116.5 million. Average MOP price declined 28% to $207 per tonne, and total sales volume fell 24%, mainly from weaker international sales.
- International Distribution: Sales increased 6% to $466.8 million as volume rose 30%, but gross margin declined 43% to $11.7 million amid lower prices and weaker Brazilian margins.
- Consolidated net sales and operating earnings declined despite a $52.7 million net unrealized derivative gain, compared with a $38.4 million loss in Q1 2015. Average diluted shares outstanding decreased to 353.2 million from 367.9 million.
Outlook, management commentary, risks, and unusual items
- Management said phosphate and potash selling prices remained weak into Q2 2016. It cited North American imports and competitive supply, delayed Chinese potash contract settlement, cautious buying, and delayed Indian purchases ahead of a possible lower subsidy.
- Q1 earnings included an approximately $64 million discrete income-tax benefit, primarily tied to resolution of an Advanced Pricing Agreement, and an $87.8 million foreign-currency transaction gain. The quarter also included $28 million of insurance proceeds related to a 2014 warehouse roof collapse.
- Management stated that expected operating cash flow, cash, and available credit should fund operations, expansion plans, strategic initiatives, and expected dividends over the next 12 months, but cautioned that future cash generation is not assured.
- Environmental consent decrees, subject to court approval, contemplate approximately $8 million in penalties, up to $2.2 million for environmental projects, capital expenditures expected to exceed $200 million, and additional financial assurance. The company planned $630 million in trust deposits and a $50 million letter of credit in 2017. Management believed resources were sufficient to meet these commitments.
- Other risks include nutrient-price and demand volatility, foreign-exchange and commodity exposure, environmental and tax proceedings, and brine inflows at the Esterhazy potash mine. The filing says Esterhazy inflows remained within historical experience, while noting that higher stored-brine levels could reduce time to mitigate unusually high inflows and increase flooding or mine-loss risk.
- Potential legal matters include the MicroEssentials patent dispute, Brazilian tax proceedings with estimated maximum potential liability of approximately $87 million, and possible future nutrient-discharge standards. Management said the outcomes and potential effects of several matters could not be predicted clearly.
Most important facts for investors to verify
- Whether weak phosphate and potash pricing and delayed international purchasing continued after Q1, and how these trends affected volumes and margins.
- Cash-flow and liquidity trends, including working-capital movements, available credit, and the treatment and restrictions on cash held for environmental assurance.
- Timing, court approval, funding requirements, and ultimate cost of the phosphate environmental consent decrees and related closure obligations.
- The sustainability of earnings excluding the quarter’s discrete tax benefit, foreign-currency gains, and unrealized derivative gains.
- The filing gives inconsistent dates for settlement of the February 2016 accelerated share repurchase: Note 12 says March 29, while the later repurchase disclosure says March 23. Confirm the settlement date and related share delivery.
- The liquidity discussion reports approximately $1.3 billion of cash held by non-U.S. subsidiaries, while reported consolidated cash at March 31 was $1.058 billion. Confirm the basis and period for the overseas-cash figure.