The Mosaic Company — FY2012 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended May 31, 2012, including the fourth quarter; it is not a filing for calendar-year 2011 Q4. Mosaic produces and markets phosphate and potash crop nutrients, with Phosphates and Potash as its reportable segments. It serves customers in approximately 40 countries.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $11.108 billion | $9.938 billion |
| Gross margin | $3.085 billion; 27.8% | $3.122 billion; 31.4% |
| Operating earnings | $2.611 billion | $2.664 billion |
| Net earnings attributable to Mosaic | $1.930 billion | $2.515 billion |
| Diluted EPS | $4.42 | $5.62 |
| Cash from operating activities | $2.706 billion | $2.427 billion |
| Capital expenditures | $1.639 billion | $1.263 billion |
Fourth-quarter FY2012 net sales were $2.821 billion, gross margin $834 million, operating earnings $671 million, and net earnings attributable to Mosaic $507 million ($1.19 diluted EPS).
Phosphates generated $7.839 billion in sales and $1.467 billion in gross margin; Potash generated $3.301 billion in sales and $1.622 billion in gross margin. Year-over-year, Phosphates gross margin fell 11%, while Potash gross margin rose 10%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $3.811 billion at year-end, versus $3.906 billion a year earlier. Operating cash flow exceeded capital expenditures by approximately $1.067 billion.
- Long-term debt, including current maturities, was $1.011 billion; short-term debt was $42.5 million. The company reported $11.999 billion of total equity and approximately $730 million available under its revolving credit facility.
- Capital spending rose to $1.639 billion, primarily for Potash expansion. Financing cash use included a $1.163 billion share repurchase and $119.5 million of dividends paid.
- Mosaic issued $750 million of senior notes (3.750% due 2021 and 4.875% due 2041) and redeemed $469.3 million of 7.625% notes, recording an approximately $20 million pre-tax charge related primarily to the call premium.
Changes, outlook and significant matters
- Sales increased 12%, but net earnings fell 23%; the prior year included a $685.6 million pre-tax gain on the sale of the Fosfertil investment. Excluding that unusual gain, FY2011 earnings are not directly comparable.
- Higher phosphate selling prices were more than offset by increased input costs, particularly sulfur, ammonia and purchased phosphate rock. Phosphates gross margin percentage declined to 18.7% from 24.0%. Potash prices rose, but segment sales volume declined 11% amid cautious customer purchasing.
- Management cited favorable long-term agricultural demand fundamentals, while noting market recalibration, elevated Potash producer inventories at year-end and customer caution. The company expects to fund FY2013 operating needs and planned expansion from operating cash flow, cash and available credit; this is not a numerical earnings forecast.
- Mosaic expects to add approximately five million tonnes of annual proven peaking Potash capacity by the end of the decade. The Esterhazy K2 expansion was substantially complete, with an estimated 0.7 million tonnes of additional capacity expected in FY2013. Timing of further projects is to remain responsive to demand.
- The South Fort Meade permit litigation was settled; the settlement resulted in an approximately $13 million pre-tax charge, and management expected full production to resume by the end of FY2013’s first quarter. A separate area-wide environmental review could delay future Florida mine permits.
- Esterhazy brine-management costs were $205 million of expense and $44.4 million of capital expenditures in FY2012. The mine is not insured for water-incursion problems; management warned that inflows or remediation costs could worsen and potentially affect operations.
- Potentially material contingencies include EPA RCRA proceedings and proposed Gypstack financial-assurance requirements; a resolution could involve capital expenditures exceeding $150 million over several years and more burdensome financial assurances. The filing does not establish a final settlement amount.
- Other material risks include potash antitrust litigation (loss range not estimable), Florida nutrient-discharge rules, mine permitting, commodity and energy price volatility, seasonal working-capital swings, international and foreign-exchange exposure, and dependence on key facilities. Environmental capital expenditures were expected to be approximately $150 million in FY2013, with a further approximately $110 million for reclamation, Gypstack closure and water treatment.
- After year-end, the board approved a targeted annual dividend program of $1.00 per share, planned to begin with the next regularly declared dividend; future dividends remain subject to board approval. Tax-related agreements associated with the Cargill transaction restrict certain corporate actions into 2013.
Most important facts for investors to verify
- How much of FY2011’s earnings comparison reflects the one-time Fosfertil gain, and how durable are FY2012 margins given higher phosphate input costs?
- Whether Potash demand, sales volumes and inventory levels improve, and whether expansion spending and capacity additions stay aligned with market demand.
- Whether Esterhazy brine inflows remain manageable, including the costs, operational effects and insurance limitations.
- The outcome and potential cash or liquidity impact of EPA proceedings, Gypstack financial assurances, nutrient rules, Florida permitting and pending litigation.
- Whether operating cash flow can sustain expansion, environmental obligations and the announced dividend target while preserving liquidity.