The Mosaic Company — Form 10-Q Summary
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients. This filing covers the three months ended August 31, 2012, the first quarter of fiscal 2013, with comparisons to the quarter ended August 31, 2011. Balance-sheet comparisons are to May 31, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $2,505.1 | $3,083.3 | -19% |
| Gross margin | $747.3; 30% | $848.2; 28% | -$100.9 |
| Operating earnings | $610.2 | $729.6 | -16% |
| Net earnings attributable to Mosaic | $429.4 | $526.0 | -18% |
| Diluted EPS | $1.01 | $1.17 | -$0.16 |
| Operating cash flow | $339.3 | $554.3 | -$215.0 |
| Capital expenditures | $449.1 | $391.4 | +$57.7 |
- Cash and cash equivalents were $3,594.8 at August 31, down from $3,811.0 at May 31. Current assets were $6,540.9 and current liabilities $1,676.1.
- Short-term debt was $17.6 and long-term debt, including current maturities, was $1,011.5. Cash exceeded reported debt by approximately $2.57 billion.
- Investing cash outflow was $443.8 and financing cash outflow $131.8; cash declined $216.2 during the quarter. Operating cash flow less capital expenditures was negative $109.8.
- Phosphates: sales were $1,560.9, down 30%; gross margin was $287.6, down 30%, with margin rate flat at 18%. Segment tonnes sold fell 16%; DAP average selling price fell 8% to $529 per tonne.
- Potash: sales were $959.8, up 10%; gross margin rose 3% to $459.3, while margin rate declined to 48% from 51%. Sales volumes rose 6%; average MOP price was $444 per tonne versus $446.
Material changes and management commentary
- Lower phosphate prices and volumes drove the earnings decline. International phosphate shipments fell, particularly to India due to shipment timing and to South America due to product availability. Longer maintenance shutdowns, weather and low Mississippi River levels also affected production and logistics.
- Lower phosphate raw-material costs partly offset weaker sales: ammonia and sulfur prices declined, and the Faustina ammonia plant operated near full capacity. Phosphate gross margin was also affected by increased production and rebuilding of rock inventories after South Fort Meade mining resumed.
- Potash sales volume increased, but lower production rates, planned maintenance, mechanical issues and weather-related power outages raised unit costs. Esterhazy brine-management expenses were $66.7 and related capital expenditures were $40.7, compared with $38.9 and $10.5, respectively, a year earlier. Management said brine levels remained below levels that would impede mining and expected a remote injection site to come online during fiscal 2013.
- Foreign currency transaction loss increased to $28.3 from $5.7, mainly from the U.S. dollar’s weakening against the Canadian dollar on intercompany receivables and cash held by Canadian affiliates. Other operating expense rose to $25.4, including higher legal estimates and phosphate asset write-offs.
- Capital expenditures included $157.8 for potash expansion projects. The Esterhazy K2 shaft and mill expansion was substantially complete; Mosaic anticipated approximately 0.7 million tonnes of incremental annual capacity coming online during the fiscal year.
- The quarterly dividend was $0.25 per share, up from $0.05 a year earlier. Management stated that available cash and expected operating results should fund fiscal 2013 expansion plans and strategic initiatives, while cautioning that future cash generation is not assured. A $750 million credit facility had $730 million available.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management noted phosphate prices were recovering from fiscal 2012 lows but remained below the prior-year quarter, and emphasized market, shipment and seasonal uncertainties. Interim results may not indicate full-year performance.
- The EPA and DOJ were negotiating a possible settlement concerning RCRA compliance at phosphate facilities. Potential terms could include capital expenditures exceeding $150 million over several years and substantially more burdensome financial assurances for phosphogypsum stack closure, including significant pre-funding. Final terms were not agreed; the amount of any required pre-funding was not clear.
- Other environmental and regulatory exposure includes Florida nutrient-discharge rules, federal review of future phosphate mine permits, and ongoing proceedings concerning phosphate operations. The filing warns that compliance could require significant capital spending and increase operating costs.
- Potash antitrust litigation proceeded to discovery after the Seventh Circuit allowed claims to continue; Mosaic intended to seek U.S. Supreme Court review. The company said it could not estimate a potential loss. A MicroEssentials patent case remained stayed pending patent reexamination.
- Unrecognized tax benefits totaled $503.7; the company said approximately $200 million could decrease over the next 12 months as certain non-U.S. audits are expected to resolve. U.S. tax audits for fiscal 2009–2010 and Canadian audits for fiscal 2001–2008 were ongoing.
- Management identified commodity and fertilizer price volatility, demand and inventory conditions, weather, transportation, foreign exchange, permitting, regulation, environmental obligations, brine inflows, and litigation as material risks. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Whether phosphate prices and international shipment volumes recover, and how product availability and logistics affect sales.
- Potash expansion timing and costs, Esterhazy brine inflows, the remote injection site schedule, and the expiration of the tolling reimbursement during fiscal 2013.
- Final terms and cash consequences of any EPA/DOJ settlement, especially financial assurances and potential pre-funding for phosphogypsum stacks.
- Progress and potential exposure in antitrust, permitting, water-quality and tax matters; the filing does not provide clear loss estimates for several proceedings.
- Whether operating cash flow can support elevated capital spending and the higher dividend while preserving liquidity.