The Mosaic Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Mosaic produces and markets phosphate and potash crop nutrients. Results include the Vale Fertilizantes acquisition, completed January 8, 2018, and a new Mosaic Fertilizantes reporting segment.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,933.7 million | $1,578.1 million |
| Gross margin | $242.1 million; 13% of sales | $129.6 million; 8% of sales |
| Operating earnings | $80.7 million | $30.1 million |
| Interest expense, net | $49.4 million | $25.8 million |
| Net earnings (loss) attributable to Mosaic | $42.3 million | $(0.9) million |
| Diluted EPS | $0.11 | $0.00 |
| Cash from (used in) operating activities | $(71.0) million | $146.0 million |
- Sales increased 23% and gross margin increased 87%. Management attributed approximately $240 million of sales growth to the acquired business; higher phosphate and potash selling prices also helped. Results are not directly comparable because the acquisition and segment realignment changed the business mix.
- Net income included a $49.9 million income tax benefit, primarily reflecting a $57 million partial release of valuation allowances related to the Tax Cuts and Jobs Act. Management cited this discrete benefit as approximately $0.13 per diluted share.
- Other operating expense was $67.8 million, including acquisition and integration costs and costs to capture future synergies. Management also cited $20 million of expense from refinement of weighted-average inventory costing, $32.2 million of foreign-currency transaction losses and $12 million of unrealized derivative losses.
- Segment operating earnings were $60.0 million for Phosphates, $73.8 million for Potash, $8.8 million for Mosaic Fertilizantes, and a $61.9 million loss for Corporate, Eliminations and Other.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $659.4 million, down from $2,153.5 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $703.1 million.
- Operating cash use was $71.0 million, including a $289.3 million unfavorable working-capital change. Investing cash use was $1,220.4 million, principally reflecting approximately $995 million net cash paid for the acquisition and $223.3 million in capital expenditures. Financing cash use was $213.3 million, including $206.9 million of long-term debt payments.
- Long-term debt, including current maturities, was approximately $5.07 billion; short-term debt was $71.8 million. Mosaic prepaid $200 million against its term loan in January and reported a further $100 million prepayment after quarter-end in May.
- Mosaic had $1.98 billion available under its $2.0 billion revolving credit facility and was in compliance with applicable financial ratios. Management said available cash, expected operating cash generation and credit facilities should fund operations, capital expenditures, strategic initiatives and expected dividends for the next 12 months. Its target liquidity buffer is $2.5 billion, including cash and available committed credit lines.
Material changes and outlook
- The Vale transaction was funded with $1.08 billion cash and 34,176,574 Mosaic shares. The preliminary purchase-price allocation included $3.76 billion of acquired assets and $1.31 billion of assumed liabilities; the valuation remained subject to change and could materially affect allocations.
- The acquisition made Mosaic the leading fertilizer producer and distributor in Brazil, added Brazilian mines and plants, and increased its Miski Mayo ownership to 75%. The company reorganized reporting into Phosphates, Potash, Mosaic Fertilizantes, and Corporate, Eliminations and Other.
- Phosphates finished-product sales volume fell 14%, while average selling price rose 17%. Potash sales volume fell 14%, while average selling price rose 14%; management expected international sales to represent a larger share of potash sales during the rest of 2018, which would lower average selling prices.
- Management cited North American spring-season delays and transportation challenges, including Canadian rail underperformance, as factors affecting volumes. Higher raw-material costs partly offset selling-price gains. No specific consolidated earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Environmental and reclamation liabilities were significant: asset retirement obligations totaled $1.115 billion, including $255 million assumed in the acquisition. Environmental accruals were approximately $99.3 million. The filing notes that future remediation costs could be material.
- For the New Wales sinkhole incident, Mosaic estimated approximately $11.2 million of remaining remediation and compliance costs, while noting uncertainty and possible additional expenditures. Florida and Louisiana gypstack closure obligations also carry financial-assurance requirements.
- Brazilian legal claims alleged aggregate damages of approximately $1.4 billion; Mosaic estimated probable aggregate losses of approximately $40 million. Brazilian tax claims had approximately $392 million of maximum potential liability, including $197 million contractually subject to Vale indemnification; probable non-indemnified accruals were described as immaterial.
- An appeal challenged the permit for the South Pasture phosphate mine extension. An adverse outcome could prevent mining there and materially affect future results and cash flows. The Potash reporting unit’s estimated fair value was not significantly above carrying value; Mosaic reported no impairment but identified possible future impairment risk.
- Other operating risks discussed include Esterhazy mine brine inflows, product and raw-material price volatility, acquisition integration and synergy execution, seasonality, logistics, foreign exchange, and environmental and permitting matters.
Investor verification points
- Track post-acquisition integration, realized synergies, final purchase accounting and the acquired Brazilian business’s contribution to results and cash generation.
- Assess whether operating cash flow recovers as seasonal inventory and working-capital needs unwind, and how liquidity compares with Mosaic’s $2.5 billion target.
- Verify debt repayment plans, interest costs and the effect of the May 2018 term-loan prepayment.
- Monitor phosphate and potash pricing, sales volumes, raw-material costs, spring demand and rail/logistics performance.
- Follow environmental closure estimates, the New Wales remediation, South Pasture permitting litigation, Brazilian contingencies and Potash goodwill impairment indicators.