The Mosaic Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Mosaic produces and markets phosphate and potash crop nutrients and operates an international distribution business. Amounts are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,578.1 | $1,674.0 | Down 6% |
| Gross margin | $129.6 | $236.7 | Down 45%; margin 8% vs. 14% |
| Operating earnings | $30.1 | $163.4 | Down 82% |
| Net earnings attributable to Mosaic | $(0.9) | $256.8 | Loss vs. profit |
| Diluted earnings per share | $0.00 | $0.73 | Down $0.73 |
| Net cash from operating activities | $146.0 | $265.9 | Down 45% |
| Capital expenditures | $223.8 | $235.6 | Down $11.8 |
Operating cash flow less capital expenditures was negative $77.8 million. Operating cash flow was pressured by a $104 million unfavorable working-capital change, mainly from higher inventory. Investing cash flow was negative $245.6 million, including capital spending; financing cash flow was positive $102.2 million, including net short-term borrowing and structured-payables proceeds. Cash, cash equivalents and restricted cash totaled $717.0 million at quarter-end; balance-sheet cash and cash equivalents were $675.3 million.
At March 31, total debt was approximately $3.95 billion: $124.1 million short-term debt and $3.83 billion long-term debt including current maturities. Stockholders’ equity was $9.62 billion. Mosaic also reported $614.1 million of marketable securities held in restricted trusts for environmental financial assurance; these funds are not available for general use. The company had $1.98 billion available under its $2.0 billion revolving credit facility and was in compliance with its financial covenants.
Segments and changes versus prior year
- Phosphates: Segment net sales were $839.1 million, down 8%; gross margin was $56.5 million, down 13%. Lower DAP prices reduced sales, while lower ammonia and sulfur costs helped offset the pressure. Sales volume increased 3%, including stronger MicroEssentials sales, while North American DAP/MAP volume declined.
- Potash: Net sales were $414.1 million, up 5% on 28% higher segment tonnes; gross margin fell 29% to $69.4 million. Average MOP selling price fell 17% to $172 per tonne. The company cited a $22 million impact from an Esterhazy mechanical skip failure, which halted production at that shaft for most of March. Gross margin excluding Canadian resource taxes was $92.7 million versus $116.5 million.
- International Distribution: Net sales rose 4% to $487.4 million and gross margin increased to $27.8 million from $11.7 million, reflecting higher volumes and more favorable inventory positions.
Lower crop-nutrient prices, reduced foreign-currency transaction gains ($8.9 million versus $87.8 million), and the absence of the prior-year period’s substantial unrealized derivative gains contributed to the earnings decline. Cost-reduction initiatives lowered selling, general and administrative expense by 10%. The prior-year comparison also included an $85.8 million tax benefit related to an Advanced Pricing Agreement resolution. Q1 2017 income-tax expense was $9.7 million, including $8.9 million of period-specific expense, and the effective tax rate was 111.5%.
Outlook, risks and unusual items
- Management said phosphate and potash selling prices had continued to increase into Q2 2017; it did not provide formal earnings or revenue guidance in the supplied filing text.
- A depreciation-method and useful-life change effective January 1, 2017 is expected to reduce 2017 depreciation expense and increase operating earnings by approximately $70 million. The Q1 impact was approximately $20 million. Management expects maintenance expense to rise in future periods as assets are maintained for longer lives.
- Mosaic expected the Vale Fertilizantes acquisition to close in late 2017, subject to remaining conditions. Consideration includes $1.25 billion cash, subject to adjustments, and 42,286,874 Mosaic shares, with up to $260 million additional cash potentially payable based on specified post-closing price and currency conditions. Mosaic expected to fund the cash portion primarily with debt. Closing, financing, integration and Brazilian operating and political risks remain.
- For the New Wales sinkhole and water-loss incident, the company estimated approximately $40 million of remaining costs to complete remediation and related obligations; additional costs could be material. A related putative class action was stayed, and the company said the outcome could not be predicted.
- Environmental consent decrees require operational changes and capital projects expected to exceed $200 million in aggregate, additional financial assurance, and a $50 million letter of credit in 2017. The company reported approximately $1.4 billion of undiscounted closure-cost asset-retirement obligations for covered facilities as of December 31, 2016; the reported present value was approximately $414 million.
- Litigation challenging the South Pasture mine extension permit could, if successful, prevent mining there and materially affect future operations. The DeSoto permits were issued after a challenge was voluntarily dismissed. Other disclosed exposures include up to $118 million of maximum potential Brazilian non-income-tax liability, for which Mosaic said recorded accruals were immaterial, and a $100 million guarantee tied to the tug-and-barge project.
- Other operational risks include Esterhazy brine inflows, crop-nutrient price and demand volatility, seasonal working-capital needs, and regulatory and permitting uncertainty. The company said it expected cash, operating cash flow and credit facilities to fund operations and expected dividends for the next 12 months, while cautioning that future cash generation was not assured.
Most important facts for investors to verify
- Whether fertilizer prices, segment margins and operating cash flow recover after the steep year-over-year earnings decline.
- Whether inventory accumulation unwinds and working-capital requirements improve through the seasonal cycle.
- The realized effect of the depreciation estimate change, including whether higher future maintenance costs offset some benefit.
- Funding, closing conditions, final consideration and integration risks for the Vale Fertilizantes transaction.
- Actual costs and schedule for New Wales remediation, RCRA obligations and other environmental and permitting matters.
- Production recovery and brine-management developments at Esterhazy, and progress on the South Pasture permit litigation.