The Mosaic Company — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2014, compared with the same period in 2013. Mosaic produces and markets phosphate and potash crop nutrients. The quarter includes CF phosphate operations only from the March 17 acquisition date.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,986.2 million | $2,312.4 million |
| Gross margin; margin rate | $411.6 million; 21% | $641.8 million; 28% |
| Operating earnings | $266.6 million | $491.1 million |
| Net earnings attributable to Mosaic | $217.5 million | $379.8 million |
| Diluted EPS | $0.54 | $0.89 |
| Cash from operations | $627.0 million | $579.4 million |
| Capital expenditures | $274.9 million | $367.5 million |
Liquidity and debt at March 31, 2014: Cash and equivalents were $2.49 billion, down from $5.29 billion at December 31, 2013. Short-term debt was $41.3 million and long-term debt was $3.01 billion. The $800 million term loan facility was undrawn; $1.48 billion was available under a separate $1.50 billion credit facility. Total equity was $10.85 billion.
Material changes and operating drivers
- Sales fell 14%, gross margin fell 36%, and Mosaic-attributable net earnings fell 43% year over year. Lower fertilizer selling prices were the principal pressure; lower phosphate raw-material costs and higher potash volumes provided partial offsets.
- Phosphates sales were $1.25 billion versus $1.50 billion; gross margin was $207.2 million versus $253.0 million. DAP average selling price declined 16% to $414 per tonne. Lower sulfur and ammonia costs helped offset weaker prices.
- Potash sales were $733.3 million versus $824.5 million; gross margin was $212.1 million versus $396.9 million. Average MOP price declined 29% to $267 per tonne, while sales volume increased 17%. Cold weather and rail constraints affected production and shipments.
- Operating cash flow increased 8%, supported by favorable working-capital movements, including collection on previously shipped product awaiting final pricing. Investing cash use was $1.63 billion, primarily reflecting the CF acquisition; financing cash use was $1.77 billion, mainly share repurchases.
Transactions, outlook, and risks
- CF phosphate assets: Acquired for $1.15 billion plus $203.7 million funded into asset-retirement trusts and escrow. The acquisition was funded in cash; the acquired operations contributed $18.9 million of revenue and a $0.2 million net loss before acquisition and integration costs during the included period. Purchase-price allocations remained provisional.
- Share repurchases: Cash repurchases totaled approximately $1.68 billion in the quarter. The MAC Trusts agreement had additional scheduled purchases remaining after quarter-end; the filing reports subsequent repurchases and further scheduled commitments. Repurchases reduced cash and share count. A $60 million unfavorable remeasurement of repurchase agreements was recorded in earnings.
- Other items: A $62.5 million period-specific tax benefit primarily related to the intended sale of the Argentina distribution business. Foreign-currency transaction gain was $43.4 million. Q1 2013 included an approximately $42 million charge for potash antitrust litigation settlement costs.
- Outlook: No specific earnings or sales guidance is provided. Management said cash, expected operating cash generation, and available borrowing capacity should be sufficient for operations and planned needs over the next 12 months, while cautioning that future cash flows are not assured. Priorities include growth investment, dividends, strategic opportunities, and shareholder returns.
- Commitments and contingencies: Mosaic was negotiating a potential EPA/agency settlement concerning phosphate waste handling. A potential settlement could require capital spending likely exceeding $150 million over several years and approximately $625 million of cash financial assurance for gypstack closure costs; final terms were not agreed. The company also disclosed environmental, regulatory, tax, and patent litigation risks. Esterhazy potash-mine brine inflows remain an operating risk, though management said inflows were within historical experience and mitigation continued.
- Subsequent events: Mosaic signed an agreement to acquire ADM’s Brazil and Paraguay fertilizer distribution business for $350 million, subject to customary approvals, and contributed $141.9 million to the Northern Promise phosphate joint venture.
Important facts for investors to verify
- Whether fertilizer prices, demand, and potash logistics recover, and how those factors affect segment margins and shipment volumes.
- Final valuation and realized synergies from the CF acquisition, including its assumed asset-retirement obligations and trust funding requirements.
- Final EPA settlement terms, timing, and cash or capital requirements for gypstack closure assurance.
- Remaining share-repurchase commitments and their effects on liquidity, leverage, and per-share results.
- Closing conditions and funding needs for the ADM transaction and Northern Promise investment; the filing provides no final outcome for these plans.