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Section 1: 10-Q (10-Q)

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Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-Q  
_______________________________________________________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
 ¨ 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-32327  
_______________________________________________________________________
395661924_cy18q3image.jpg
The Mosaic Company
(Exact name of registrant as specified in its charter)  
_______________________________________________________________________
 
Delaware
20-1026454
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3033 Campus Drive
Suite E490
Plymouth, Minnesota 55441
(800) 918-8270
(Address and zip code of principal executive offices and registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)  
_______________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 385,470,085 shares of Common Stock as of November 2, 2018.
 



Table of Contents


Table of Contents
 
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
 
Item 2.
 
Item 4.
 
Item 6.
 




Table of Contents


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MOSAIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
2,928.1

 
$
1,984.8

 
$
7,066.8

 
$
5,317.5

Cost of goods sold
2,432.6

 
1,744.0

 
6,034.6

 
4,754.8

Gross margin
495.5

 
240.8

 
1,032.2

 
562.7

Selling, general and administrative expenses
78.5

 
66.1

 
251.4

 
218.2

Other operating expense (income)
23.7

 
(39.2
)
 
110.5

 
5.9

Operating earnings
393.3

 
213.9

 
670.3

 
338.6

Interest expense, net
(40.9
)
 
(36.2
)
 
(135.4
)
 
(98.4
)
Foreign currency transaction (loss) gain
(2.2
)
 
58.6

 
(113.1
)
 
76.6

Other (expense) income
(7.6
)
 
1.1

 
(15.6
)
 
(2.0
)
Earnings from consolidated companies before income taxes
342.6

 
237.4

 
406.2

 
314.8

Provision for income taxes
90.6

 
17.6

 
44.4

 
4.7

Earnings from consolidated companies
252.0

 
219.8

 
361.8

 
310.1

Equity in net (loss) earnings of nonconsolidated companies
(2.3
)
 
9.8

 
(3.9
)
 
15.5

Net earnings including noncontrolling interests
249.7

 
229.6

 
357.9

 
325.6

Less: Net income attributable to noncontrolling interests
2.2

 
2.1

 
0.2

 
1.7

Net earnings attributable to Mosaic
$
247.5

 
$
227.5

 
$
357.7

 
$
323.9

Basic net earnings per share attributable to Mosaic
$
0.64

 
$
0.65

 
$
0.93

 
$
0.92

Basic weighted average number of shares outstanding
385.5

 
351.1

 
384.5

 
350.9

Diluted net earnings per share attributable to Mosaic
$
0.64

 
$
0.65

 
$
0.93

 
$
0.92

Diluted weighted average number of shares outstanding
387.5

 
352.2

 
386.1

 
351.9


See Notes to Condensed Consolidated Financial Statements
1




Table of Contents


THE MOSAIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net earnings including noncontrolling interest
$
249.7

 
$
229.6

 
$
357.9

 
$
325.6

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of tax
0.5

 
177.0

 
(467.6
)
 
293.0

Net actuarial gain and prior service cost, net of tax
3.4

 
1.3

 
7.4

 
5.2

Amortization of gain on interest rate swap, net of tax
0.6

 
0.6

 
1.7

 
1.8

Net gain (loss) on marketable securities held in trust fund, net of tax
1.6

 
0.1

 
(3.6
)
 
3.8

Other comprehensive income (loss)
6.1

 
179.0

 
(462.1
)
 
303.8

Comprehensive income (loss)
255.8

 
408.6

 
(104.2
)
 
629.4

Less: Comprehensive income (loss) attributable to noncontrolling interest
2.8

 
2.9

 
(5.8
)
 
2.2

Comprehensive income (loss) attributable to Mosaic
$
253.0

 
$
405.7

 
$
(98.4
)
 
$
627.2



See Notes to Condensed Consolidated Financial Statements
2




Table of Contents


THE MOSAIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)
 
 
September 30,
2018
 
December 31,
2017
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
1,029.9

 
$
2,153.5

 
Receivables, net
834.9

 
642.6

 
Inventories
1,957.1

 
1,547.2

 
Other current assets
356.1

 
273.2

 
Total current assets
4,178.0

 
4,616.5

 
Property, plant and equipment, net of accumulated depreciation of $6,794.4 million and $6,274.1 million, respectively
11,891.6

 
9,711.7

 
Investments in nonconsolidated companies
828.5

 
1,089.5

 
Goodwill
1,753.0

 
1,693.6

 
Deferred income taxes
307.7

 
254.6

 
Other assets
1,455.9

 
1,267.5

 
Total assets
$
20,414.7

 
$
18,633.4

 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
$
25.7

 
$
6.1

 
Current maturities of long-term debt
61.2

 
343.5

 
Structured accounts payable arrangements
504.1

 
386.2

 
Accounts payable
839.3

 
540.9

 
Accrued liabilities
1,072.1

 
754.4

 
Total current liabilities
2,502.4

 
2,031.1

 
Long-term debt, less current maturities
4,523.1

 
4,878.1

 
Deferred income taxes
1,195.3

 
1,117.3

 
Other noncurrent liabilities
1,540.6

 
967.8

 
Equity:
 
 
 
 
Preferred Stock, $0.01 par value, 15,000,000 shares authorized, none issued and outstanding as of September 30, 2018 and December 31, 2017

 

 
Common Stock, $0.01 par value, 1,000,000,000 shares authorized, 389,242,360 shares issued and 385,470,085 shares outstanding as of September 30, 2018, 388,998,498 shares issued and 351,049,649 shares outstanding as of December 31, 2017
3.8

 
3.5

 
Capital in excess of par value
983.8

 
44.5

 
Retained earnings
10,971.7

 
10,631.1

 
Accumulated other comprehensive loss
(1,517.7
)
 
(1,061.6
)
 
Total Mosaic stockholders' equity
10,441.6

 
9,617.5

 
Noncontrolling interests
211.7

 
21.6

 
Total equity
10,653.3

 
9,639.1

 
Total liabilities and equity
$
20,414.7

 
$
18,633.4


See Notes to Condensed Consolidated Financial Statements
3




Table of Contents


THE MOSAIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Nine months ended
 
September 30,
2018
 
September 30,
2017
 
 
Cash Flows from Operating Activities:
 
 
 
 
Net earnings including noncontrolling interests
$
357.9

 
$
325.6

 
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
648.8

 
493.5

 
Amortization of acquired inventory
(47.4
)
 

 
Deferred and other income taxes
(12.3
)
 
53.9

 
Equity in net loss (earnings) of nonconsolidated companies, net of dividends
11.0

 
(15.5
)
 
Accretion expense for asset retirement obligations
37.2

 
19.6

 
Share-based compensation expense
25.7

 
24.5

 
Unrealized loss (gain) on derivatives
14.3

 
(5.7
)
 
Other
21.2

 
(38.3
)
 
Changes in assets and liabilities, excluding effects of acquisition:
 
 
 
 
Receivables, net
(31.6
)
 
(6.8
)
 
Inventories
(198.1
)
 
(254.6
)
 
Other current and noncurrent assets
(75.9
)
 
(42.7
)
 
Accounts payable and accrued liabilities
466.5

 
(38.4
)
 
Other noncurrent liabilities
42.5

 
9.2

 
Net cash provided by operating activities
1,259.8

 
524.3

 
Cash Flows from Investing Activities:
 
 
 
 
Capital expenditures
(665.4
)
 
(589.9
)
 
Purchases of available-for-sale securities - restricted
(486.1
)
 
(1,546.3
)
 
Proceeds from sale of available-for-sale securities - restricted
470.5

 
1,533.7

 
Investments in nonconsolidated companies

 
(62.5
)
 
Investments in consolidated affiliate
(3.6
)
 
(47.7
)
 
Proceeds from sale of fixed assets
9.3

 
69.1

 
Acquisition, net of cash acquired
(985.3
)
 

 
Other
(0.3
)
 
0.3

 
Net cash used in investing activities
(1,660.9
)
 
(643.3
)
 
Cash Flows from Financing Activities:
 
 
 
 
Payments of short-term debt
(120.1
)
 
(523.2
)
 
Proceeds from issuance of short-term debt
145.2

 
608.1

 
Payments of structured accounts payable arrangements
(582.4
)
 
(238.8
)
 
Proceeds from structured accounts payable arrangements
590.2

 
473.8

 
Payments of long-term debt
(722.4
)
 
(6.2
)
 
Proceeds from issuance of long-term debt
39.3

 
1.5

 
Cash dividends paid
(28.9
)
 
(201.8
)
 
Other
(0.5
)
 
(2.2
)
 
Net cash (used in) provided by financing activities
(679.6
)
 
111.2

 
Effect of exchange rate changes on cash
(62.8
)
 
22.8

 
Net change in cash, cash equivalents and restricted cash
(1,143.5
)
 
15.0

 
Cash, cash equivalents and restricted cash - December 31
2,194.4

 
711.4

 
Cash, cash equivalents and restricted cash - September 30
$
1,050.9

 
$
726.4



See Notes to Condensed Consolidated Financial Statements
4




Table of Contents



THE MOSAIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)

 
Nine months ended
 
September 30,
2018
 
September 30,
2017
 
Reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the unaudited condensed consolidated statements of cash flows:
 
 
 
Cash and cash equivalents
$
1,029.9

 
$
685.7

Restricted cash in other current assets
8.2

 
7.5

Restricted cash in other assets
12.8

 
33.2

Total cash, cash equivalents and restricted cash shown in the unaudited condensed consolidated statement of cash flows
$
1,050.9

 
$
726.4

 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of amount capitalized of $17.0 and $19.1 for the nine months ended September 30, 2018 and 2017, respectively)
$
97.6

 
$
98.4

Income taxes (net of refunds)
13.2

 
(16.7
)
 
 
 
 

See Notes to Condensed Consolidated Financial Statements
5




Table of Contents


THE MOSAIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions, except per share amounts)
(Unaudited)
 
 
 
Mosaic Shareholders
 
 
 
 
 
Shares
 
Dollars
 
 
 
 
 
Capital in Excess of Par Value
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Common Stock
 
Common Stock
 
 
Retained Earnings
 
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
 
Balance as of December 31, 2016
350.2

 
$
3.5

 
$
29.9

 
$
10,863.4

 
$
(1,312.2
)
 
$
37.9

 
$
9,622.5

Total comprehensive income (loss)

 

 

 
(107.2
)
 
250.6

 
2.6

 
146.0

Vesting of restricted stock units
0.8

 

 
(12.8
)
 

 

 

 
(12.8
)
Stock based compensation

 

 
27.4

 

 

 

 
27.4

Dividends ($0.35 per share)

 

 

 
(125.1
)
 

 

 
(125.1
)
Dividends for noncontrolling interests

 

 

 

 

 
(0.7
)
 
(0.7
)
Distribution to noncontrolling interests

 

 

 

 

 
(18.2
)
 
(18.2
)
Balance as of December 31, 2017
351.0

 
3.5

 
44.5

 
10,631.1

 
(1,061.6
)
 
21.6

 
9,639.1

Adoption of ASC Topic 606

 

 

 
2.7

 

 

 
2.7

Total comprehensive income (loss)

 

 

 
357.7

 
(456.1
)
 
(5.8
)
 
(104.2
)
Vesting of restricted stock units
0.3

 

 
(3.4
)
 

 

 

 
(3.4
)
Stock based compensation

 

 
23.0

 

 

 

 
23.0

Acquisition of Vale Fertilizantes
34.2

 
0.3

 
919.7

 

 

 

 
920.0

Dividends ($0.05 per share)

 

 

 
(19.8
)
 

 

 
(19.8
)
Dividends for noncontrolling interests

 

 

 

 

 
(0.5
)
 
(0.5
)
Equity from noncontrolling interests

 

 

 

 

 
196.4

 
196.4

Balance as of September 30, 2018
385.5

 
$
3.8

 
$
983.8

 
$
10,971.7

 
$
(1,517.7
)
 
$
211.7

 
$
10,653.3



See Notes to Condensed Consolidated Financial Statements
6




Table of Contents


THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except per share amounts and as otherwise designated)
(Unaudited)
1. Organization and Nature of Business
The Mosaic Company (“Mosaic”, and, with its consolidated subsidiaries, “we”, “us”, “our”, or the “Company”) produces and markets concentrated phosphate and potash crop nutrients. We conduct our business through wholly and majority owned subsidiaries as well as businesses in which we own less than a majority or a noncontrolling interest, including consolidated variable interest entities and investments accounted for by the equity method.
On January 8, 2018, we completed our acquisition (the “Acquisition”) of Vale Fertilizantes S.A. (now known as Mosaic Fertilizantes P&K S.A. or the “Acquired Business”). Upon completion of the Acquisition, we became the leading fertilizer producer and distributor in Brazil. To reflect the fact that our Brazilian business is no longer strictly a distribution business as well as the significance of our investment in Brazil, we realigned our business segments (the “Realignment”). Beginning in the first quarter of 2018, we report the results of the Mosaic Fertilizantes business as a new segment, along with the other reportable segments of Phosphates and Potash.
After the Realignment, we are organized into the following business segments:
Our Phosphates business segment owns and operates mines and production facilities in Florida which produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana which produce concentrated phosphate crop nutrients. As part of the Acquisition, we acquired an additional 40% economic interest in the Miski Mayo Phosphate Mine in Peru, which increased our aggregate interest to 75%. These results are now consolidated in the Phosphates segment. The Phosphates segment also includes our 25% interest in the Ma'aden Wa'ad Al Shamal Phosphate Company (the “MWSPC”), a joint venture to develop, own and operate integrated phosphate production facilities in the Kingdom of Saudi Arabia. We market approximately 25% of the MWSPC phosphate production. We recognize our equity in the net earnings or losses relating to MWSPC on a one-quarter reporting lag in our Condensed Consolidated Statements of Earnings.
Our Potash business segment owns and operates potash mines and production facilities in Canada and the U.S. which produce potash-based crop nutrients, animal feed ingredients and industrial products. Potash sales include domestic and international sales. We are a member of Canpotex, Limited (“Canpotex”), an export association of Canadian potash producers through which we sell our Canadian potash outside the U.S. and Canada.
Our Mosaic Fertilizantes business segment consists of the assets in Brazil that we acquired in the Acquisition, which includes five Brazilian phosphate rock mines; four phosphate chemical plants and a potash mine in Brazil. The segment also includes our legacy distribution business in South America which consists of sales offices, crop nutrient blending and bagging facilities, port terminals and warehouses in Brazil and Paraguay. We also have a majority interest in Fospar S.A. which owns and operates a single superphosphate granulation plant and a deep-water crop nutrition port and throughput warehouse terminal facility in Brazil.
Intersegment eliminations, unrealized mark-to-market gains/losses on derivatives, debt expenses, Streamsong Resort® results of operations and the results of the China and India distribution businesses are included within Corporate, Eliminations and Other. See Note 17 of the Condensed Consolidated Financial Statements in this report for segment results.
2. Summary of Significant Accounting Policies
Statement Presentation and Basis of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements of Mosaic have been prepared on the accrual basis of accounting and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“GAAP”) can be condensed or omitted. The Condensed Consolidated Financial Statements included in this document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with


7

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the SEC for the year ended December 31, 2017 (the “10-K Report”). Sales, expenses, cash flows, assets and liabilities can and do vary during the year as a result of seasonality and other factors. Therefore, interim results are not necessarily indicative of the results to be expected for the full fiscal year.
The accompanying Condensed Consolidated Financial Statements include the accounts of Mosaic, its majority owned subsidiaries, and certain variable interest entities in which Mosaic is the primary beneficiary. Certain investments in companies where we do not have control but have the ability to exercise significant influence are accounted for by the equity method.
Accounting Estimates
Preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates made by management relate to the estimates of fair value of acquired assets and liabilities, the recoverability of goodwill, the useful lives and net realizable values of long-lived assets, environmental and reclamation liabilities including asset retirement obligations (“ARO”), and income tax-related accounts, including the valuation allowance against deferred income tax assets. Actual results could differ from these estimates.
3. Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” and related amendments (“new revenue standard”) using the modified retrospective method applied to those revenue contracts which were not completed as of January 1, 2018. See Note 4 of our Notes to Condensed Consolidated Financial Statements for additional information regarding the impacts of the new revenue standard.
In January 2016, the Financial Accounting Standards Board ("FASB") issued guidance which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance was effective for us beginning January 1, 2018, and did not have a material effect on our consolidated financial statements.
Pronouncements Issued But Not Yet Adopted
In February 2016, the FASB issued guidance which requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance, including subsequent amendments, is effective for us beginning January 1, 2019, with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach at either the adoption date or the beginning of the earliest comparative period presented in the financial statements. We have determined that we will not early adopt this guidance, and that we will utilize initial calculational guidance for existing leases provided in the standard for use in the modified retrospective approach. We also plan to apply this guidance as of the adoption date. We are finalizing the process of gathering information about our lease arrangements, and evaluating provisions of our leases against the recognition requirements of the new guidance. Additionally, we are in the process of implementing an information system solution and changes to internal procedures necessary to meet the requirements of the new guidance. We continue to integrate technological and process solutions and continue to work to determine the impact this guidance will have on our consolidated financial statements.
In December 2017, The U.S. Tax Cuts and Jobs Act (“The Act”) was enacted, significantly altering U.S. corporate income tax law. The FASB has issued guidance related to the newly enacted corporate income tax law changes enacted in December 2017. We are currently evaluating the potential impacts of the adoption of this guidance, along with guidance issued by the IRS, on our consolidated financial statements. See Note 7 of our Notes to Condensed Consolidated Financial Statements for additional information regarding the impacts of The Act.
4. Revenue
Adoption of ASC Topic 606, “Revenue with Customers”


8

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” and related amendments (“new revenue standard”) using the modified retrospective method applied to those revenue contracts which were not completed as of January 1, 2018. We recognized the cumulative effect of initially applying the new revenue standard as a net increase to opening retained earnings of $2.7 million, net of tax, as of January 1, 2018, with the impact primarily related to deferred North America revenue at December 31, 2017.
The comparative information for the years ended December 31, 2017 and 2016 has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our results of operations on an ongoing basis. The cumulative effects of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows (in millions):
 
Balance at
 
Adjustments
 
Balance at
 
December 31, 2017
 
upon adoption
 
January 1, 2018
Balance Sheet
 
 
 
 
 
Receivables, net
$
642.6

 
$
18.2

 
$
660.8

Inventories
1,547.2

 
(13.3
)
 
1,533.9

Deferred income tax asset
254.6

 
(1.3
)
 
253.3

Accrued Liabilities
754.4

 
0.9

 
755.3

Retained earnings
10,631.1

 
2.7

 
10,633.8

Revenue Recognition
We generate revenues primarily by producing and marketing phosphate and potash crop nutrients. Revenue is recognized when control of the product is transferred to the customer, which is generally upon transfer of title to the customer based on the contractual terms of each arrangement. Title is typically transferred to the customer upon shipment of the product. In certain circumstances, which are referred to as final price deferred arrangements, we ship product prior to the establishment of a valid sales contract. In such cases, we retain control of the product and do not recognize revenue until a sales contract has been agreed to with the customer.
Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our goods. Our products are generally sold based on market prices prevailing at the time the sales contract is signed or through contracts which are priced at the time of shipment based on a formula. Sales incentives are estimated as earned by the customer and recorded as a reduction of revenue. Shipping and handling costs are included as a component of cost of goods sold.
For information regarding sales by product type and by geographic area, see Note 17 of our Notes to Condensed Consolidated Financial Statements.
Under the new revenue standard, the timing of revenue recognition is accelerated for certain sales arrangements due to the emphasis on transfer of control rather than risks and rewards. Certain sales where revenue was previously deferred until risk was fully assumed by the customer will now be recognized when the product is shipped. Additionally, the timing of when we record revenue on sales by Canpotex has been impacted by their adoption of new revenue standards. The total impact of adoption on our Condensed Consolidated Statement of Earnings and Balance Sheet was as follows (in millions):


9

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
For the three months ended September 30, 2018
 
 
 
Elimination of Revenue Deferral
 
Canpotex Impact (a)
 
Balances Without New Revenue Standards
 
 
 
As Reported
 
 
 
Impact
Income Statement
 
 
 
 
 
 
 
 
 
Net sales
$
2,928.1

 
$
(38.2
)
 
$
0.6

 
$
2,890.5

 
$
37.6

Cost of goods sold
2,432.6

 
(28.4
)
 
(8.8
)
 
2,395.4

 
37.2

Provision for (benefit from) income taxes
90.6

 
(1.7
)
 
1.1

 
90.0

 
0.6

Net earnings (loss) attributable to Mosaic
247.5

 
(8.1
)
 
8.3

 
247.7

 
(0.2
)
 
 
 
 
 
 
 

 

 
For the nine months ended September 30, 2018
 
 
 
Elimination of Revenue Deferral
 
Canpotex Impact (b)
 
Balances Without New Revenue Standards
 
 
 
As Reported
 
 
 
Impact
Income Statement
 
 
 
 
 
 
 
 
 
Net sales
$
7,066.8

 
$
(76.5
)
 
$
101.2

 
$
7,091.5

 
$
(24.7
)
Cost of goods sold
6,034.6

 
(54.8
)
 
59.5

 
6,039.3

 
(4.7
)
Provision for (benefit from) income taxes
44.4

 
(0.5
)
 
8.4

 
52.3

 
(7.9
)
Net earnings (loss) attributable to Mosaic
357.7

 
(21.2
)
 
33.3

 
369.8

 
(12.1
)
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 

 

Receivables, net
$
834.9

 
$
(96.1
)
 
$
101.2

 
$
840.0

 
$
(5.1
)
Inventories
1,957.1

 
61.3

 
(48.7
)
 
1,969.7

 
(12.6
)
Other current assets
356.1

 
1.5

 

 
357.6

 
(1.5
)
Deferred income tax asset
307.7

 
1.8

 
(8.4
)
 
301.1

 
6.6

Accrued liabilities
1,072.1

 
(7.5
)
 
10.8

 
1,075.4

 
(3.3
)
Retained earnings
10,971.7

 
(24.0
)
 
33.3

 
10,981.0

 
(9.3
)
______________________________
(a) 
Includes elimination impact from Canpotex's adoption of new revenue standards, resulting in a decrease of 40,000 tonnes deferred compared to the second quarter.
(b) 
Includes elimination impact from Canpotex's adoption of new revenue standards, resulting in a deferral of approximately 490,000 tonnes as of September 30, 2018.

Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We have elected to recognize the cost for freight and shipping as an expense in cost of sales, when control over the product has passed to the customer.


10

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5. Other Financial Statement Data
The following provides additional information concerning selected balance sheet accounts:
 

September 30,
2018
 
December 31,
2017
 
 
Other current assets 
 
 
 
 
Income and other taxes receivable
$
202.2

 
$
141.3

 
Prepaid expenses
87.3

 
69.0

 
Other
66.6

 
62.9

 
 
$
356.1

 
$
273.2

 
 
 
 
 
 
Other assets
 
 
 
 
Restricted cash
$
12.8

 
$
32.6

 
MRO inventory
133.3

 
114.8

 
Marketable securities held in trust
623.6

 
628.0

 
Indemnification asset
147.3

 

 
Long-term receivable
90.2

 

 
Other
448.7

 
492.1

 
 
$
1,455.9

 
$
1,267.5

 
 
 
 
 
 
Accrued liabilities
 
 
 
 
Payroll and employee benefits
$
193.0

 
$
159.5

 
Asset retirement obligations
126.8

 
98.1

 
Customer prepayments
299.5

 
140.4

 
Other
452.8

 
356.4

 
 
$
1,072.1

 
$
754.4

 
 
 
 
 
 
Other noncurrent liabilities
 
 
 
 
Asset retirement obligations
$
984.7

 
$
761.2

 
Accrued pension and postretirement benefits
254.9

 
53.7

 
Unrecognized tax benefits
35.2

 
33.5

 
Other
265.8

 
119.4

 
 
$
1,540.6

 
$
967.8


6. Earnings Per Share
The numerator for basic and diluted earnings per share (“EPS”) is net earnings attributable to Mosaic. The denominator for basic EPS is the weighted average number of shares outstanding during the period. The denominator for diluted EPS also includes the weighted average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued, unless the shares are anti-dilutive.


11

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:
 
Three months ended
 
Nine months ended
September 30,
 
September 30,
2018
 
2017
 
2018
 
2017
Net earnings attributable to Mosaic
$
247.5

 
$
227.5

 
$
357.7

 
$
323.9

Basic weighted average number of shares outstanding
385.5

 
351.1

 
384.5

 
350.9

Dilutive impact of share-based awards
2.0

 
1.1

 
1.6

 
1.0

Diluted weighted average number of shares outstanding
387.5

 
352.2

 
386.1

 
351.9

Basic net earnings per share attributable to Mosaic
$
0.64

 
$
0.65

 
$
0.93

 
$
0.92

Diluted net earnings per share attributable to Mosaic
$
0.64

 
$
0.65

 
$
0.93

 
$
0.92

A total of 2.0 million and 2.6 million shares of Common Stock subject to issuance upon exercise of stock options for the three and nine months ended September 30, 2018 and 3.4 million and 3.5 million shares and for the three and nine months ended September 30, 2017, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
7. Income Taxes
During the nine months ended September 30, 2018, gross unrecognized tax benefits increased by $7.2 million to $46.5 million. The increase is primarily related to U.S. tax positions. If recognized, approximately $27.6 million of the $46.5 million in unrecognized tax benefits would affect our effective tax rate and net earnings in future periods. 
We recognize interest and penalties related to unrecognized tax benefits as a component of our income tax provision. We had accrued interest and penalties totaling $4.7 million and $4.1 million as of September 30, 2018 and December 31, 2017, respectively, that were included in other noncurrent liabilities in the Condensed Consolidated Balance Sheets.
Accounting for uncertain tax positions is determined by prescribing the minimum probability threshold that a tax position is more likely than not to be sustained based on the technical merits of the position. Mosaic is continually under audit by various tax authorities in the normal course of business. Such tax authorities may raise issues contrary to positions taken by the Company. If such positions are ultimately not sustained by the Company this could result in material assessments to the Company. The Company believes that any issues raised are properly accounted for.
For the three months ended September 30, 2018, tax expense specific to the period was approximately $30.7 million. This consisted primarily of $29.8 million related to the revised year-to-date accounting for the valuation allowances on foreign tax credits, and $8.3 million as a result of revisions to the provisional estimates related to The Act. This was partially offset by a change in sequestration charge on AMT refunds of $2.7 million, $5.1 million related to the effect on deferred income tax liabilities of a decrease in the statutory tax rate in the U.S as a result of the Act, and other miscellaneous benefits of $0.4 million. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, by a benefit associated with depletion, and by the impact of certain entities being taxed in both foreign jurisdictions and the US including foreign tax credits for various taxes incurred.
Generally, for interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by our forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where we expect to report losses that we do not expect to receive a tax benefit, we are required to apply separate forecasted effective tax rates to those jurisdictions rather than including in the consolidated effective tax rate. For the nine months ended September 30, 2018, income tax expense was impacted by this set of rules resulting in an additional benefit of $0.5 million compared to what would have been recorded under the general rule on a consolidated basis.
For the three months ended September 30, 2017, tax expense specific to the period was $12.4 million. This consisted primarily of expense of $16.8 million related to the $10.4 million pre-tax charges resulting from the resolution of a royalty matter with the government of Saskatchewan and related royalty impacts (“Royalty Resolution”), partially offset by a benefit of $2.4 million primarily related to non-U.S. audit activity and a benefit of $2.0 million related to changes in estimates related to prior years. In addition to the aforementioned items, tax expense specific to the nine months ended September 30,


12

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2017 was an expense of $5.1 million, which included the Royalty Resolution item of $16.8 million, an expense of $6.7 million related to the effect on deferred income tax liabilities of an increase in the statutory tax rate for one of our equity method investments, and an expense of $8.3 million primarily related to share-based compensation. These costs were partially offset by a benefit of $21.9 million related to a Canadian income tax rate change and a benefit of $4.8 million related to changes in estimates related to prior years.
2017 Impacts of the Tax Cuts and Jobs Act
On December 22, 2017, The Act was enacted, significantly altering U.S. corporate income tax law. The SEC issued Staff Accounting Bulletin 118, which allows companies to record reasonable estimates of enactment impacts where all of the underlying analysis and calculations are not yet complete (“Provisional Estimates”). The Provisional Estimates must be finalized within a one-year measurement period.
Mosaic recorded its Provisional Estimates relating to The Act in the period ending December 31, 2017. The revisions recorded related to the decrease in the statutory tax rate in the U.S as a result of the Act and other items in this period are still considered Provisional Estimates and may differ, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, and actions the Company may take as a result of The Act. The Company expects to complete the accounting for the income tax effects related to The Act and record any necessary adjustments to provisional tax amounts before the end of the measurement period on December 21, 2018. See Note 12-Income Taxes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  
8. Inventories
Inventories consist of the following:
 
 
September 30,
2018
 
December 31,
2017
 
 
Raw materials
$
118.4

 
$
37.8

 
Work in process
611.3

 
349.9

 
Finished goods
1,073.0

 
1,035.1

 
Final price deferred(a)
38.1

 
38.6

 
Operating materials and supplies
116.3

 
85.8

 
 
$
1,957.1

 
$
1,547.2

______________________________
(a) 
Final price deferred is product that has shipped to customers, but the price has not yet been agreed upon.
9. Goodwill
Mosaic had goodwill of $1.8 billion and $1.7 billion at September 30, 2018 and December 31, 2017, respectively. We review goodwill for impairment annually in October or at any time events or circumstances indicate that the carrying value may not be fully recoverable, which is based on our accounting policy and GAAP. The changes in the carrying amount of goodwill, by reporting unit, are as follows:


13

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Phosphates
 
Potash
 
Mosaic Fertilizantes
 
Corporate, Eliminations and Other
 
Total
Balance as of December 31, 2017
$
492.4

 
$
1,076.9

 
$
124.3

 
$

 
$
1,693.6

Foreign currency translation

 
(25.6
)
 
(7.0
)
 

 
(32.6
)
Allocation of goodwill due to Realignment

 

 
(12.1
)
 
12.1

 

Goodwill acquired in the Acquisition
92.0

 

 

 

 
92.0

Balance as of September 30, 2018
$
584.4

 
$
1,051.3

 
$
105.2

 
$
12.1

 
$
1,753.0

In connection with the Realignment and the Acquisition, we performed a review of goodwill in the quarter ended March 31, 2018, and no impairment was identified. However, based on our qualitative evaluation, we determined that our Potash reporting unit had an estimated fair value that was not significantly in excess of its carrying value, at 16.7%, and could be at risk of future impairment. We continue to believe that our long-term financial goals will be achieved. Our other reporting units have substantial fair value in excess of their carrying values. Also, based on the proportionate share of business enterprise value (representative of the fair value) we assigned a portion of goodwill to Corporate and Other at that time.
We are required to perform our next annual goodwill impairment analysis as of October 31, 2018. It is possible that, during the remainder of 2018 or beyond, business conditions could deteriorate from the current state, raw material or product price projections could decline significantly from current estimates, or our common stock price could decline significantly. If assumed net sales and cash flow projections are not achieved or our common stock price significantly declines from current levels, book values of certain operations could exceed their fair values, which may result in goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
10. Marketable Securities Held in Trusts
In August 2016, Mosaic deposited $630 million into two trust funds (together, the “RCRA Trusts”) created to provide cash financial assurance for the estimated costs (“Gypstack Closure Costs”) of closure and long term care of our Florida and Louisiana phosphogypsum management systems (“Gypstacks”), as described further in Note 11 of our Notes to Condensed Consolidated Financial Statements. Our actual Gypstack Closure Costs are generally expected to be paid by us in the normal course of our Phosphate business; however, funds held in each of the RCRA Trusts can be drawn by the applicable governmental authority in the event we cannot perform our closure and long term care obligations. When our estimated Gypstack Closure Costs with respect to the facilities associated with a RCRA Trust are sufficiently lower than the amount on deposit in that RCRA Trust, we have the right to request that the excess funds be released to us. The same is true for the RCRA Trust balance remaining after the completion of our obligations, which will be performed over a period that may not end until three decades or more after a Gypstack has been closed. The investments held by the RCRA Trusts are managed by independent investment managers with discretion to buy, sell, and invest pursuant to the objectives and standards set forth in the related trust agreements. Amounts reserved to be held or held in the RCRA Trusts (including losses or reinvested earnings) are included in other assets on our Condensed Consolidated Balance Sheets.
The RCRA Trusts hold investments, which are restricted from our general use, in marketable debt securities classified as available-for-sale and are carried at fair value. As a result, unrealized gains and losses are included in other comprehensive income until realized, unless it is determined that the carrying value of an investment is impaired on an other-than-temporary basis. There were no other-than-temporary impairment write-downs on available-for-sale securities during the nine months ended September 30, 2018.
We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. We determine the fair market values of our available-for-sale securities and certain other assets based on the fair value hierarchy described below:
Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.


14

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Level 2: Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The estimated fair value of the investments in the RCRA Trusts as of September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Level 1
 
 
 
 
 
 
 
    Cash and cash equivalents
$
0.3

 
$

 
$

 
$
0.3

Level 2
 
 
 
 
 
 
 
    Corporate debt securities
183.3

 
0.1

 
(4.8
)
 
178.6

    Municipal bonds
187.8

 
0.1

 
(4.8
)
 
183.1

    U.S. government bonds
259.8

 

 
(2.8
)
 
257.0

Total
$
631.2

 
$
0.2

 
$
(12.4
)
 
$
619.0

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Level 1
 
 
 
 
 
 
 
    Cash and cash equivalents
$
1.2

 
$

 
$

 
$
1.2

Level 2
 
 
 
 
 
 
 
    Corporate debt securities
186.1

 
0.4

 
(2.2
)
 
184.3

    Municipal bonds
184.5

 
0.5

 
(2.7
)
 
182.3

    U.S. government bonds
261.7

 

 
(4.4
)
 
257.3

Total
$
633.5

 
$
0.9

 
$
(9.3
)
 
$
625.1

The following tables show gross unrealized losses and fair values of the RCRA Trusts' available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary as of September 30, 2018 and December 31, 2017.


15

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
September 30, 2018
 
December 31, 2017
 
Less than 12 months
 
Less than 12 months
 
Fair
Value
 
Gross
Unrealized
Losses(a)
 
Fair
Value
 
Gross
Unrealized
Losses(a)
Corporate debt securities
$
89.1

 
$
(1.5
)
 
$
44.3

 
$
(0.3
)
Municipal bonds
66.7

 
(0.7
)
 
64.5

 
(0.5
)
U.S. government bonds
257.0

 
(2.8
)
 
255.0

 
(4.4
)
Total
$
412.8

 
$
(5.0
)
 
$
363.8

 
$
(5.2
)
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Greater than 12 months
 
Greater than 12 months
 
Fair
Value
 
Gross
Unrealized
Losses(a)
 
Fair
Value
 
Gross
Unrealized
Losses(a)
Corporate debt securities
$
80.1

 
$
(3.3
)
 
$
100.4

 
$
(1.9
)
Municipal bonds
102.3

 
(4.1
)
 
83.3

 
(2.2
)
U.S. government bonds

 

 

 

Total
$
182.4

 
$
(7.4
)
 
$
183.7

 
$
(4.1
)
______________________________
(a) 
Represents the aggregate of the gross unrealized losses that have been in a continuous unrealized loss position as of September 30, 2018 and December 31, 2017.
The following table summarizes the balance by contractual maturity of the available-for-sale debt securities invested by the RCRA Trusts as of September 30, 2018. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations before the underlying contracts mature.
 
September 30, 2018
Due in one year or less
$
39.2

Due after one year through five years
143.8

Due after five years through ten years
396.6

Due after ten years
39.1

Total debt securities
$
618.7

For the three and nine months ended September 30, 2018, realized gains were immaterial and realized losses were $(6.8) million and $(12.9) million, respectively. For the three and nine months ended September 30, 2017, realized gains were $1.3 million and $4.5 million, respectively, and realized losses were immaterial and $(2.8) million, respectively.
11. Asset Retirement Obligations
We recognize our estimated asset retirement obligations (“AROs”) in the period in which we have an existing legal obligation associated with the retirement of a tangible long-lived asset, and the amount of the liability can be reasonably estimated. The ARO is recognized at fair value when the liability is incurred with a corresponding increase in the carrying amount of the related long lived asset. We depreciate the tangible asset over its estimated useful life. The liability is adjusted in subsequent periods through accretion expense, which represents the increase in the present value of the liability due to the passage of time. Such depreciation and accretion expenses are included in cost of goods sold for operating facilities and other operating expense for indefinitely closed facilities.


16

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Our legal obligations related to asset retirement require us to: (i) reclaim lands disturbed by mining as a condition to receive permits to mine phosphate ore reserves; (ii) treat low pH process water in Gypstacks to neutralize acidity; (iii) close and monitor Gypstacks at our Florida and Louisiana facilities at the end of their useful lives; (iv) remediate certain other conditional obligations; (v) remove all surface structures and equipment, plug and abandon mine shafts, contour and revegetate, as necessary, and monitor for five years after closing our Carlsbad, New Mexico facility; (vi) decommission facilities, manage tailings and execute site reclamation at our Saskatchewan potash mines at the end of their useful lives; (vii) de-commission mines in Brazil and Peru acquired as part of the Acquisition and (viii) decommission plant sites and close Gypstacks in Brazil also as part of the Acquisition. The estimated liability for these legal obligations is based on the estimated cost to satisfy the above obligations which is discounted using a credit-adjusted risk-free rate.
A reconciliation of our AROs is as follows:
(in millions)
September 30, 2018
 
December 31, 2017
AROs, beginning of period
$
859.3

 
$
849.9

Liabilities acquired in the Acquisition
261.9

 

Liabilities incurred
21.4

 
27.1

Liabilities settled
(46.5
)
 
(64.8
)
Accretion expense
37.2

 
25.7

Revisions in estimated cash flows
20.9

 
15.7

Foreign currency translation
(42.7
)
 
5.7

AROs, end of period
1,111.5

 
859.3

Less current portion
126.8

 
98.1

 
$
984.7

 
$
761.2

North America Gypstack Closure Costs
A majority of our ARO relates to Gypstack Closure Costs. For financial reporting purposes, we recognize our estimated Gypstack Closure Costs at their present value. This present value determined for financial reporting purposes is reflected on our Consolidated Balance Sheets in accrued liabilities and other noncurrent liabilities.
As discussed below, we have arrangements to provide financial assurance for the estimated Gypstack Closure Costs associated with our facilities in Florida and Louisiana.
EPA RCRA Initiative. On September 30, 2015, we and our subsidiary, Mosaic Fertilizer, LLC (“Mosaic Fertilizer”), reached agreements with the U.S. Environmental Protection Agency (“EPA”), the U.S. Department of Justice (“DOJ”), the Florida Department of Environmental Protection (“FDEP”) and the Louisiana Department of Environmental Quality (the “LDEQ”) on the terms of two consent decrees (collectively, the “2015 Consent Decrees”) to resolve claims relating to our management of certain waste materials onsite at our Riverview, New Wales, Mulberry, Green Bay, South Pierce and Bartow fertilizer manufacturing facilities in Florida and our Faustina and Uncle Sam facilities in Louisiana. This followed a 2003 announcement by the EPA Office of Enforcement and Compliance Assurance that it would be targeting facilities in mineral processing industries, including phosphoric acid producers, for a thorough review under the U.S. Resource Conservation and Recovery Act (“RCRA”) and related state laws. As discussed below, a separate consent decree was previously entered into with EPA and the FDEP with respect to RCRA compliance at the Plant City, Florida phosphate concentrates facility (the “Plant City Facility”) that we acquired as part of our acquisition (the “CF Phosphate Assets Acquisition”) of the Florida phosphate assets and assumption of certain related liabilities of CF Industries, Inc. (“CF”).
The remaining monetary obligations under the 2015 Consent Decrees include:
Modification of certain operating practices and undertaking certain capital improvement projects over a period of several years that are expected to result in capital expenditures likely to exceed $200 million in the aggregate.
Provision of additional financial assurance for the estimated Gypstack Closure Costs for Gypstacks at the covered facilities. The RCRA Trusts are discussed in Note 10 to our Condensed Consolidated Financial Statements. In


17

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

addition, we have agreed to guarantee the difference between the amounts held in each RCRA Trust (including any earnings) and the estimated closure and long-term care costs.
As of December 31, 2017, the undiscounted amount of our Gypstack Closure Costs ARO associated with the facilities covered by the 2015 Consent Decrees, determined using the assumptions used for financial reporting purposes, was approximately $1.4 billion and the present value of our Gypstack Closure Costs ARO reflected in our Consolidated Balance Sheet for those facilities was approximately $420 million.
Plant City and Bonnie Facilities. As part of the CF Phosphate Assets Acquisition, we assumed certain ARO related to Gypstack Closure Costs at both the Plant City Facility and a closed Florida phosphate concentrates facility in Bartow, Florida (the “Bonnie Facility”) that we acquired. Associated with these assets are two related financial assurance arrangements for which we became responsible and that provided sources of funds for the estimated Gypstack Closure Costs for these facilities, pursuant to federal or state law, which the government can draw against in the event we cannot perform such closure activities. One was initially a trust (the “Plant City Trust”) established to meet the requirements under a consent decree with EPA and the FDEP with respect to RCRA compliance at Plant City that also satisfied Florida financial assurance requirements at that site. Beginning in September 2016, as a substitute for the financial assurance provided through the Plant City Trust, we have provided financial assurance for Plant City in the form of a surety bond delivered to EPA (the “Plant City Bond”), in the amount of $245.6 million, reflecting our updated closure cost estimates as of December 31, 2017.  The other was also a trust fund (the “Bonnie Facility Trust”) established to meet the requirements under Florida financial assurance regulations that apply to the Bonnie Facility. On July 27, 2018, we received $21.0 million from the Bonnie Facility Trust by substituting the trust fund for a financial test mechanism (“Bonnie Financial Test”) supported by a corporate guarantee as allowed by state regulations. Both financial assurance obligations require estimates of future expenditures that could be impacted by refinements in scope, technological developments, new information, cost inflation, changes in regulations, discount rates and the timing of activities. Under our current approach to satisfying applicable requirements, additional financial assurance would be required in the future if increases in cost estimates exceed the face amount of the Plant City Bond or the amount supported by the Bonnie Financial Test.
At September 30, 2018 and December 31, 2017, the aggregate amount of ARO associated with the Plant City Facility and the Bonnie Facility that was included in our Condensed Consolidated Balance Sheet was $99.4 million and $97.7 million, respectively. The aggregate amount represented by the Plant City Bond exceeds the aggregate amount of ARO associated with that Facility. This is because the amount of financial assurance we are required to provide represents the aggregate undiscounted estimated amount to be paid by us in the normal course of our Phosphates business over a period that may not end until three decades or more after the Gypstack has been closed, whereas the ARO included in our Condensed Consolidated Balance Sheet reflects the discounted present value of those estimated amounts.
12. Contingencies
We have described below judicial and administrative proceedings to which we are subject.
We have contingent environmental liabilities that arise principally from three sources: (i) facilities currently or formerly owned by our subsidiaries or their predecessors; (ii) facilities adjacent to currently or formerly owned facilities; and (iii) third-party Superfund or state equivalent sites. At facilities currently or formerly owned by our subsidiaries or their predecessors, the historical use and handling of regulated chemical substances, crop and animal nutrients and additives and by-product or process tailings have resulted in soil, surface water and/or groundwater contamination. Spills or other releases of regulated substances, subsidence from mining operations and other incidents arising out of operations, including accidents, have occurred previously at these facilities, and potentially could occur in the future, possibly requiring us to undertake or fund cleanup or result in monetary damage awards, fines, penalties, other liabilities, injunctions or other court or administrative rulings. In some instances, pursuant to consent orders or agreements with governmental agencies, we are undertaking certain remedial actions or investigations to determine whether remedial action may be required to address contamination. At other locations, we have entered into consent orders or agreements with appropriate governmental agencies to perform required remedial activities that will address identified site conditions. Taking into consideration established accruals of approximately $63.5 million and $35.1 million as of September 30, 2018 and December 31, 2017, respectively, expenditures for these known conditions currently are not expected, individually or in the aggregate, to have a material effect on our business or financial condition. However, material expenditures could be required in the future to remediate the contamination at known


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sites or at other current or former sites or as a result of other environmental, health and safety matters. Below is a discussion of the more significant environmental matters.
New Wales Water Loss Incident. In August 2016, a sinkhole developed under one of the two cells of the active Gypstack at our New Wales facility in Polk County, Florida, resulting in process water from the stack draining into the sinkhole. The incident was reported to the FDEP and EPA. In October 2016, our subsidiary, Mosaic Fertilizer, entered into a consent order (the “Order”) with the FDEP relating to the incident. Under the Order, Mosaic Fertilizer agreed to, among other things: implement a remediation plan to close the sinkhole; perform additional monitoring of the groundwater quality and act to assess and remediate in the event monitored off-site water does not comply with applicable standards as a result of the incident; evaluate the risk of potential future sinkhole formation at the New Wales facility and at Mosaic Fertilizer’s active Gypstack operations at the Bartow, Riverview and Plant City facilities with recommendations to address any identified issues; and provide financial assurance of no less than $40.0 million, which we have done without the need for any expenditure of corporate funds through satisfaction of a financial strength test and Mosaic parent guarantee. The Order did not require payment of civil penalties relating to the incident. 
As of September 30, 2018, the sinkhole repairs were substantially complete, with $79 million spent in remediation and sinkhole-related costs through this date. We estimate remaining costs will be approximately $3 million, which is included in accrued liabilities in our Condensed Consolidated Balance Sheets at September 30, 2018. Additional expenditures could be required in the future for additional remediation or other measures in connection with the sinkhole including if, for example, FDEP or EPA were to request additional measures to address risks presented by the Gypstack, and these expenditures could be material.  In addition, we are unable to predict at this time what, if any, impact the New Wales water loss incident will have on future Florida permitting efforts.
EPA RCRA Initiative. We have certain financial assurance and other obligations under consent decrees and a separate financial assurance arrangement relating to our facilities in Florida and Louisiana. These obligations are discussed in Note 11 of our Notes to Condensed Consolidated Financial Statements.
EPA EPCRA Initiative. In July 2008, DOJ sent a letter to major U.S. phosphoric acid manufacturers, including us, stating that EPA’s ongoing investigation indicates apparent violations of Section 313 of the Emergency Planning and Community Right-to-Know Act (“EPCRA”) at their phosphoric acid manufacturing facilities. Section 313 of EPCRA requires annual reports to be submitted with respect to the use or presence of certain toxic chemicals. DOJ and EPA also stated that they believe that a number of these facilities have violated Section 304 of EPCRA and Section 103 of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) by failing to provide required notifications relating to the release of hydrogen fluoride from the facilities. The letter did not identify any specific violations by us or assert a demand for penalties against us. We cannot predict at this time whether EPA and DOJ will initiate an enforcement action over this matter, what its scope would be, or what the range of outcomes of such a potential enforcement action might be.
Florida Sulfuric Acid Plants. On April 8, 2010, EPA Region 4 submitted an administrative subpoena to us under Section 114 of the Federal Clean Air Act (the “CAA”) regarding compliance of our Florida sulfuric acid plants with the "New Source Review" requirements of the CAA. The request received by Mosaic appears to be part of a broader EPA national enforcement initiative focusing on sulfuric acid plants.  On June 16, 2010, EPA issued a notice of violation to CF (the "CF NOV") with respect to "New Source Review" compliance at the Plant City Facility's sulfuric acid plants and the allegations in the CF NOV were not resolved before our 2014 acquisition of the Plant City Facility.  CF has agreed to indemnify us with respect to any penalty EPA may assess as a result of the allegations in the CF NOV. We are negotiating the terms of a settlement with EPA that would resolve both the violations alleged in the CF NOV, and violations which EPA may contend, but have not asserted, exist at the sulfuric acid plants at our other facilities in Florida.  Based on the current status of the negotiations, we expect that our commitments will include an agreement to reduce our sulfur dioxide emissions over the next five years to comply with a sulfur dioxide ambient air quality standard enacted by EPA in 2010. We do not expect that any related penalties assessed against us as part of a potential settlement would be material. In the event we are unable to finalize agreement on the terms of the settlement, we cannot predict at this time whether EPA and DOJ will initiate an enforcement action with respect to “New Source Review” compliance at our Florida sulfuric acid plants other than the Plant City Facility or what its scope would be, or what the range of outcomes might be with respect to such a potential enforcement action or with respect to the CF NOV.


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Other Environmental Matters. Superfund and equivalent state statutes impose liability without regard to fault or to the legality of a party’s conduct on certain categories of persons who are considered to have contributed to the release of "hazardous substances" into the environment. Under Superfund, or its various state analogues, one party may, under certain circumstances, be required to bear more than its proportionate share of cleanup costs at a site where it has liability if payments cannot be obtained from other responsible parties. Currently, certain of our subsidiaries are involved or concluding involvement at several Superfund or equivalent state sites. Our remedial liability from these sites, alone or in the aggregate, currently is not expected to have a material effect on our business or financial condition. As more information is obtained regarding these sites and the potentially responsible parties involved, this expectation could change.
We believe that, pursuant to several indemnification agreements, our subsidiaries are entitled to at least partial, and in many instances complete, indemnification for the costs that may be expended by us or our subsidiaries to remedy environmental issues at certain facilities. These agreements address issues that resulted from activities occurring prior to our acquisition of facilities or businesses from parties including, but not limited to, ARCO (BP); Beatrice Fund for Environmental Liabilities; Conoco; Conserv; Estech, Inc.; Kaiser Aluminum & Chemical Corporation; Kerr-McGee Inc.; PPG Industries, Inc.; The Williams Companies; CF; and certain other private parties. Our subsidiaries have already received and anticipate receiving amounts pursuant to the indemnification agreements for certain of their expenses incurred to date as well as future anticipated expenditures. We record potential indemnifications as an offset to the established accruals when they are realizable or realized.
Phosphate Mine Permitting in Florida
Denial of the permits sought at any of our mines, issuance of the permits with cost-prohibitive conditions, substantial delays in issuing the permits, legal actions that prevent us from relying on permits or revocation of permits may create challenges for us to mine the phosphate rock required to operate our Florida and Louisiana phosphate plants at desired levels or increase our costs in the future.
The South Pasture Extension. In November 2016, the Army Corps of Engineers (the “Corps”) issued a federal wetlands permit under the Clean Water Act for mining an extension of our South Pasture phosphate rock mine in central Florida. On December 20, 2016, the Center for Biological Diversity, ManaSota-88, People for Protecting Peace River and Suncoast Waterkeeper issued a 60-day notice of intent to sue the Corps and the U.S. Fish and Wildlife Service (the “Service”) under the federal Endangered Species Act regarding actions taken by the Corps and the Service in connection with the issuance of the permit. On March 15, 2017, the same group filed a complaint against the Corps, the Service and the U.S. Department of the Interior in the U.S. District Court for the Middle District of Florida, Tampa Division. The complaint alleges that various actions taken by the Corps and the Service in connection with the issuance of the permit, including in connection with the Service's biological opinion and the Corps' reliance on that biological opinion, violated substantive and procedural requirements of the federal Clean Water Act (“CWA”), the National Environmental Policy Act (“NEPA”) and the Endangered Species Act (the “ESA”), and were arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law, in violation of the Administrative Procedure Act (the “APA”). As to the Corps, plaintiffs allege in their complaint, among other things, that the Corps failed to conduct an adequate analysis under the CWA of alternatives, failed to fully consider the effects of the South Pasture extension mine, failed to take adequate steps to minimize potential adverse impacts and violated the ESA by relying on the Service's biological opinion to determine that its permitting decision is not likely to adversely affect certain endangered or rare species. As to the Service, plaintiffs allege in their complaint, among other things, that the Service's biological opinion fails to meet statutory requirements, that the Service failed to properly consider impacts and adequately assess the cumulative effects on certain species, and that the Service violated the ESA in finding that the South Pasture extension mine is not likely to adversely affect certain endangered or rare species. The plaintiffs are seeking relief including (i) declarations that the Corps' decision to issue the permit violated the CWA, NEPA, the ESA and the APA and that its NEPA review violated the law; (ii) declarations that the Service's biological opinion violated applicable law and that the Corps' reliance on the biological opinion violated the ESA; (iii) orders that the Corps rescind the permit, that the Service withdraw its biological opinion and related analyses and prepare a biological opinion that complies with the ESA; and (iv) that the Corps be preliminarily and permanently enjoined from authorizing any further action under the permit until it complies fully with the requirements of the CWA, NEPA, the ESA and the APA. On March 31, 2017, Mosaic's motion for intervention was granted with no restrictions. Plaintiffs filed an amended complaint on June 2, 2017, without any new substantive allegations, and on June 28, 2017, Mosaic (as intervenor) and separately, the defendants, filed answers to the amended complaint. On June 30, 2017, the plaintiffs filed a motion for summary judgment, arguing that the permit


20

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

should not have been issued. On July 15, 2017, Mosaic filed a response in opposition to the plaintiffs' motion, and on July 28, 2017, Mosaic filed its own motion for summary judgment. On December 14, 2017 the Tampa District Court granted Mosaic’s motion for summary judgment in favor of Mosaic and the government defendants, and denied the plaintiffs’ motion to supplement the administrative record. On February 12, 2018, the plaintiffs filed an appeal with the U.S. Court of Appeals for the Eleventh Circuit of the Tampa District Court decision. A mandatory mediation occurred on March 19, 2018, but no settlement was reached. Briefing by all parties was completed on July 13, 2108. Plaintiffs only addressed three out of the eight arguments raised in the U.S. District Court focusing their claims on violations under NEPA and ESA.
We believe the plaintiffs' claims in this case are without merit and we intend to vigorously defend the Corps' issuance of the South Pasture extension permit and the Service's biological opinion. However, if the plaintiffs were to prevail in this case, we would be prohibited from continuing to mine the South Pasture extension, and obtaining new or modified permits could significantly delay our resumption of mining and could result in more onerous mining conditions. This could have a material effect on our future results of operations, reduce future cash flows from operations, and in the longer term, conceivably adversely affect our liquidity and capital resources.
MicroEssentials® Patent Lawsuit
On January 9, 2009, John Sanders and Specialty Fertilizer Products, LLC filed a complaint against Mosaic, Mosaic Fertilizer, LLC, Cargill, Incorporated and Cargill Fertilizer, Inc. in the United States District Court for the Western District of Missouri (the “Missouri District Court”). The plaintiffs alleged several types of the MicroEssentials® value-added ammoniated phosphate crop nutrient products that we produce, infringed on a patent owned by the plaintiffs. Plaintiffs sought to enjoin the alleged infringement and to recover an unspecified amount of damages and attorneys’ fees for past infringement. Through an order entered by the court on September 25, 2014, Cargill was dismissed as a defendant, and the two original plaintiffs were replaced by a single plaintiff, JLSMN LLC, an entity to whom the patent was transferred.
The Missouri District Court stayed the lawsuit pending reexamination of plaintiff's patent claims by the U.S. Patent and Trademark Office (the “PTO”).  On September 12, 2012, Shell Oil Company (“Shell”) filed an additional reexamination request which in part asserted that the claims as amended and added in connection with the reexamination are unpatentable. On October 4, 2012, the PTO issued a Reexamination Certificate in which certain claims of the plaintiff's patent were cancelled, disclaimed and amended, and new claims were added. On December 11, 2012, the PTO issued an initial rejection of all of plaintiff's remaining patent claims but later reversed its decision. Shell appealed the PTO’s decision. On June 7, 2016, the Patent Trial and Appeal Board, issued a decision holding that all patent claims initially allowed to the plaintiff should have been found invalid.  On November 8, 2017, the Federal Circuit Court of Appeals affirmed the Patent Trial and Appeal Board’s decision. On June 25, 2018, the United States Supreme Court denied plaintiffs petition for writ of certiorari. The case in the Missouri District Court has been dismissed with prejudice, and the matter is now concluded.
Brazil Legal Contingencies
Our Brazilian subsidiaries are engaged in a number of judicial and administrative proceedings regarding labor, environmental, and civil claims. We estimate that our maximum potential loss with respect to these claims is approximately $1.02 billion, which refers to the claims’ alleged aggregate damages. We estimate that our probable aggregate loss with respect to these claims is approximately $44.2 million which is included in our accrued liabilities in our Condensed Consolidated Balance Sheets at September 30, 2018.
Approximately $698.2 million of the maximum potential loss relates to labor claims, such as in-house and third party employees’ judicial proceedings alleging the right to receive overtime pay, additional payment due to work in hazardous conditions, risk premium, profit sharing, additional payment due to night work, salary parity and wage differences. We estimate that our probable aggregate loss regarding these claims is approximately $37.2 million, which is included in accrued liabilities in our Condensed Consolidated Balance Sheets at September 30, 2018. Based on Brazil legislation and the current status of similar labor cases involving unrelated companies, we believe we have recorded adequate loss contingency reserves sufficient to cover our estimate of probable losses. If the status of similar cases involving unrelated companies were to adversely change in the future, our maximum exposure could increase and additional accruals could be required.
Approximately $6.4 million of the above mentioned $37.2 million reserves relates to a purported class action filed by one of the unions claiming additional payment for occupational hazard due to the alleged exposure of workers at the Company’s potash mine at Rosário do Catete, Sergipe, to explosive gases that could be found during the mining process.


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The matter currently is before the Brazilian Labor Supreme Court.
The environmental and mining judicial and administrative proceedings claims allege aggregate damages and/or fines in excess of $152.7 million; however, we estimate that our probable aggregate loss regarding these claims is approximately $4.8 million, which has been accrued at September 30, 2018. The majority of the reserves involves a claim filed in 2012 by the State Public Prosecutor Office, alleging that the Company delayed construction of an effluent treatment plant subjecting it to a fine under the commitment agreement.
Our Brazilian subsidiaries also have certain other civil contingent liabilities with respect to judicial, administrative and arbitration proceedings and claims related to contract disputes, pension plan matters, real state disputes and other civil matters arising in the ordinary course of business. These claims allege aggregate damages in excess of $171.7 million. We estimate that the probable aggregate loss with respect to these matters is approximately $2.2 million.
Uberaba Judicial Settlement
In 2008, the Federal Public Prosecutor filed a public civil action requesting the Company adopt several measures to mitigate soil and water contamination related to the gypstack at our Uberaba facility, including compensation for the alleged social and environmental damages. In 2014, our predecessor subsidiary in Brazil entered into a judicial settlement with the federal public prosecutor, the State of Minas Gerais public prosecutor and the federal environmental agency. Under this agreement, we agreed to implement remediation measures such as: constructing a liner under the Gypstack water ponds and lagoons, and monitoring the groundwater and soil quality. We also agreed to create a private reserve of natural heritage and to pay compensation in the amount of approximately $0.3 million which was paid in July 2018. We are currently acting in compliance with our obligations under the judicial settlement and expect them to be completed by December 31, 2023.
Uberaba EHS Class Action
In 2013, the State of Minas Gerais public prosecutor filed a class action claiming that our predecessor company in Brazil did not comply with labor safety rules and working hour laws. This claim was based on an inspection conducted by the Labor and Employment Ministry in 2010, following which we were fined for not complying with several labor regulations. We filed our defense, claiming that we complied with these labor regulations and that the assessment carried out by the inspectors in 2010 was abusive. Following the initial hearing, the court ordered an examination to determine whether there has been any non-compliance with labor regulations. The examination is currently pending. The amount involved in the proceeding is $31.8 million.
Brazil Tax Contingencies
Our Brazilian subsidiaries are engaged in a number of judicial and administrative proceedings, including audits, relating to various non-income tax matters. We estimate that our maximum potential liability with respect to these matters is approximately $366 million. Of that total, $203 million is contractually required to be indemnified by Vale S.A.
Approximately $232 million of the maximum potential liability relates to the Brazilian PIS and Cofins federal value- added-tax tax credit cases, while the majority of the remaining amount relates to various other non-income tax cases including other value-added taxes. The maximum potential liability can increase with new audits. Based on Brazil legislation and the current status of similar tax cases involving unrelated taxpayers, we believe we have recorded adequate loss contingency reserves sufficient to cover our estimate of probable losses which are immaterial. If the status of similar cases involving unrelated taxpayers adversely changes in the future, additional accruals could be required.
Other Claims
We also have certain other contingencies with respect to judicial, administrative and arbitration proceedings and claims of third parties, including tax matters, arising in the ordinary course of business. We do not believe that any of these contingent liabilities will have a material adverse impact on our business or financial condition, results of operations, and cash flows.
13. Accounting for Derivative Instruments and Hedging Activities
We periodically enter into derivatives to mitigate our exposure to foreign currency risks, interest rate movements and the effects of changing commodity prices. We record all derivatives on the Condensed Consolidated Balance Sheets at fair value. The fair value of these instruments is determined by using quoted market prices, third party comparables, or internal


22

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

estimates. We net our derivative asset and liability positions when we have a master netting arrangement in place. Changes in the fair value of the foreign currency, commodity and freight derivatives are immediately recognized in earnings because we do not apply hedge accounting treatment to these instruments. As of September 30, 2018 and December 31, 2017, the gross asset position of our derivative instruments was $34.9 million and $15.6 million, respectively, and the gross liability position of our liability instruments was $80.9 million and $26.7 million, respectively. Due to the Acquisition, our foreign currency derivatives have increased in 2018.
 We do not apply hedge accounting treatments to our foreign currency exchange contracts, commodities contracts, or freight contracts. Unrealized gains and (losses) on foreign currency exchange contracts used to hedge cash flows related to the production of our products are included in cost of goods sold in the Condensed Consolidated Statements of Earnings. Unrealized gains and (losses) on commodities contracts and certain forward freight agreements are also recorded in cost of goods sold in the Condensed Consolidated Statements of Earnings. Unrealized gains or (losses) on foreign currency exchange contracts used to hedge cash flows that are not related to the production of our products are included in the foreign currency transaction gain/(loss) caption in the Condensed Consolidated Statements of Earnings.
We apply fair value hedge accounting treatment to our fixed-to-floating interest rate contracts. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense. These fair value hedges are considered to be highly effective and, thus, as of September 30, 2018, the impact on earnings due to hedge ineffectiveness was immaterial. As of September 30, 2018 we held fixed-to-floating interest rate swap agreements related to our 4.25% senior notes due 2023.
As of September 30, 2018 and December 31, 2017, the following is the total absolute notional volume associated with our outstanding derivative instruments:
(in millions of Units)
 
 
 
 
 
September 30,
2018
 
December 31,
2017
Derivative Instrument
Derivative Category
Unit of Measure
Foreign currency derivatives
 
Foreign currency
 
US Dollars
 
1,806.3

 
813.5
Interest rate derivatives
 
Interest rate
 
US Dollars
 
585.0

 
585.0
Natural gas derivatives
 
Commodity
 
MMbtu
 
57.1

 
43.0
Credit-Risk-Related Contingent Features
Certain of our derivative instruments contain provisions that are governed by International Swap and Derivatives Association agreements with the counterparties. These agreements contain provisions that allow us to settle for the net amount between payments and receipts, and also state that if our debt were to be rated below investment grade, certain counterparties could request full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position as of September 30, 2018 and December 31, 2017, was $41.1 million and $15.0 million, respectively. We have no cash collateral posted in association with these contracts. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2018, we would have been required to post $40.5 million of collateral assets, which are either cash or U.S. Treasury instruments, to the counterparties.
Counterparty Credit Risk
We enter into foreign exchange and certain commodity and interest rate derivatives, primarily with a diversified group of highly rated counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, material losses are not anticipated. We closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
14. Fair Value Measurements


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Following is a summary of the valuation techniques for assets and liabilities recorded in our Condensed Consolidated Balance Sheets at fair value on a recurring basis:
Foreign Currency Derivatives-The foreign currency derivative instruments that we currently use are forward contracts and zero-cost collars, which typically expire within eighteen months. Most of the valuations are adjusted by a forward yield curve or interest rates. In such cases, these derivative contracts are classified within Level 2. Some valuations are based on exchange-quoted prices, which are classified as Level 1. Changes in the fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a component of cost of goods sold in our Corporate, Eliminations and Other segment, or foreign currency transaction (gain) loss. As of September 30, 2018 and December 31, 2017, the gross asset position of our foreign currency derivative instruments was $30.4 million and $15.4 million, respectively, and the gross liability position of our foreign currency derivative instruments was $40.0 million and $6.5 million, respectively.
Commodity Derivatives-The commodity contracts primarily relate to natural gas. The commodity derivative instruments that we currently use are forward purchase contracts, swaps, and three-way collars. The natural gas contracts settle using NYMEX futures or AECO price indexes, which represent fair value at any given time. The contracts’ maturities and settlements are scheduled for future months and settlements are scheduled to coincide with anticipated gas purchases during those future periods. Quoted market prices from NYMEX and AECO are used to determine the fair value of these instruments. These market prices are adjusted by a forward yield curve and are classified within Level 2. Changes in the fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a component of cost of goods sold in our Corporate, Eliminations and Other segment. As of September 30, 2018 and December 31, 2017, the gross asset position of our commodity derivative instruments was $0.5 million and $0.1 million, respectively, and the gross liability position of our commodity instruments was $13.1 million and $17.9 million, respectively.
Interest Rate Derivatives-We manage interest expense through interest rate contracts to convert a portion of our fixed-rate debt into floating-rate debt. We also enter into interest rate swap agreements to hedge our exposure to changes in future interest rates related to anticipated debt issuances. Valuations are based on external pricing sources and are classified as Level 2. Changes in the fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a component of interest expense. As of September 30, 2018 and December 31, 2017, the gross asset position of our interest rate swap instruments was zero and $0.1 million, respectively, and the gross liability position of our interest rate swap instruments was $23.9 million and $2.3 million, respectively.
Financial Instruments
The carrying amounts and estimated fair values of our financial instruments are as follows:
 
 
September 30, 2018
 
December 31, 2017
 
Carrying Amount
 
Fair Value
Carrying Amount
 
Fair Value
 
 
Cash and cash equivalents
$
1,029.9

 
$
1,029.9

 
$
2,153.5

 
$
2,153.5

 
Receivables, net
834.9

 
834.9

 
642.6

 
642.6

 
Accounts payable
839.3

 
839.3

 
540.9

 
540.9

 
Structured accounts payable arrangements
504.1

 
504.1

 
386.2

 
386.2

 
Short-term debt
25.7

 
25.7

 
6.1

 
6.1

 
Long-term debt, including current portion
4,584.3

 
4,623.2

 
5,221.6

 
5,431.8

For cash and cash equivalents, receivables, net, accounts payable, structured accounts payable arrangements, and short-term debt, the carrying amount approximates fair value because of the short-term maturity of those instruments. The fair value of long-term debt, including the current portion, is estimated using quoted market prices for the publicly registered notes and debentures, classified as Level 1 and Level 2, respectively, within the fair value hierarchy, depending on the market liquidity of the debt.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


15. Related Party Transactions
We enter into transactions and agreements with certain of our non-consolidated companies and other related parties from time to time. As of September 30, 2018 and December 31, 2017, the net amount due from (to) our non-consolidated companies totaled $4.4 million and $(45.4) million, respectively. We also have a long-term indemnification asset of $147.3 million from Vale S.A. for reimbursement of pension plan obligations.
The Condensed Consolidated Statements of Earnings included the following transactions with our non-consolidated companies:
 
Three months ended
 
Nine months ended
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Transactions with non-consolidated companies included in net sales
$
248.3

 
$
211.7

 
$
579.0

 
$
543.3

Transactions with non-consolidated companies included in cost of goods sold
426.8

 
301.5

 
817.5

 
717.8

As part of the MWSPC joint venture, we market approximately 25% of the MWSPC production, for which approximately $1.0 million and $5.2 million, respectively, is included in revenue for the three and nine months ended September 30, 2018. In 2017, MWSPC entered into a loan facility with the Saudi Industrial Development Fund. We had anticipated we would be required to guarantee our proportionate share of these loans. In 2018, we were notified that this would not be required.
In November 2015, we agreed to provide funds to finance the purchase and construction of two articulated tug and barge units, intended to transport anhydrous ammonia for our operations, through a bridge loan agreement with Gulf Marine Solutions, LLC (“GMS”).  GMS is a wholly owned subsidiary of Gulf Sulphur Services Ltd., LLLP (“Gulf Sulphur Services”), an entity in which we and a joint venture partner, Savage Companies (“Savage”), each indirectly owns a 50% equity interest and for which a subsidiary of Savage provides operating and management services. GMS provided these funds through draws on the Mosaic bridge loan, and through additional loans from Gulf Sulphur Services.  We determined, beginning in 2015 that we are the primary beneficiary of GMS, a variable interest entity and, at that time, we consolidated GMS’s operations in our Phosphates segment.  
On October 24, 2017, a lease financing transaction was completed with respect to the completed tug and barge unit and, following the application of proceeds from the transaction, all outstanding loans made by Gulf Sulphur Services to GMS, together with accrued interest, were repaid, and the bridge loans related to the first unit’s construction were repaid. At September 30, 2018 and December 31, 2017, $77.4 million and $73.2 million in bridge loans, respectively, which are eliminated in consolidation, were outstanding, relating to a cancelled second barge and the remaining tug. Reserves against the bridge loan of approximately $54.2 million were recorded through December 31, 2017, and no additional charges have been recorded in 2018.  The construction of the remaining tug, funded by the bridge loan advances in excess of the reserves, is recorded within construction in-progress within our consolidated balance sheet. Several subsidiaries of Savage operate vessels utilized by Mosaic under time charter arrangements, including the ammonia tug and barge unit.
16. Acquisition of Mosaic Fertilizantes P&K S.A.
On December 19, 2016, we entered into an agreement with Vale S.A. (“Vale”) and Vale Fertilizer Netherlands B.V. (“Vale Netherlands” and, together with Vale and certain of its affiliates, the “Sellers”) to acquire all of the issued and outstanding capital stock of the now Acquired Business, for a purchase price of (i) $1.25 billion in cash (subject to adjustments) and (ii) 42,286,874 shares of our Common Stock. The agreement was amended by a letter agreement dated December 28, 2017 to, among other things, reduce the cash portion of the purchase price to $1.15 billion and the number of shares to be issued to 34,176,574.
On January 8, 2018, we completed the Acquisition. The aggregate consideration paid by Mosaic at closing was $1.08 billion in cash (after giving effect to certain adjustments based on matters such as the working capital of the Acquired Business, which were estimated at the time of closing) and 34,176,574 shares of our Common Stock, par value $0.01 per


25

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

share (“Common Stock”), which was valued at $26.92 per share at closing. The final purchase price is subject to a fair value determination of potential contingent consideration of up to $260 million, and evaluation of other consideration associated with assumed liabilities.
This acquisition allows us to expand our business in the fast-growing Brazilian agricultural market. Following the Acquisition, we are the leading fertilizer production and distribution company in Brazil. The assets we acquired include five Brazilian phosphate rock mines, four phosphate chemical plants, a potash mine in Brazil, the Sellers’ 40% economic interest in the joint venture which owns the Miski Mayo phosphate rock mine in the Bayovar region of Peru, in which we already held a 35% economic interest, and a potash project in Kronau, Saskatchewan.
On the closing date, we also entered into an investor agreement (“Investor Agreement”) with Vale and Vale Fertilizer Netherlands B.V. that governs certain rights of and restrictions on Vale, Vale Fertilizer Netherlands B.V. and their respective affiliates (the “Vale Stockholders”) in connection with the shares of our Common Stock they own as a result of the Acquisition. These include certain rights to designate two individuals to our board of directors. In connection with the closing of the Acquisition, our board of directors was increased by one director, with Vale designating a new director for appointment to the board. The Vale Stockholders are also subject to certain transfer and standstill restrictions. In addition, until the later of the third anniversary of the closing and the date on which our board of directors no longer includes any Vale designees, the Vale Stockholders will agree to vote their shares of our stock (i) with respect to the election of directors, in accordance with the recommendation of our board of directors and (ii) with respect to any other proposal or resolution, at their election, either in the same manner as and in the same proportion to all voting securities that are not beneficially held by the Vale Stockholders are voted, or in accordance with the recommendation of our board of directors. Also under the Investor Agreement, the Vale Stockholders will be entitled to certain demand and to customary piggyback registration rights, beginning on the second anniversary of the closing of the transaction.
As of September 30, 2018, the fair value allocation for the Acquisition is preliminary and will be finalized when the valuation process and the related internal controls over financial reporting are completed. Differences between the preliminary and final allocation could be material. Our estimates and assumptions are subject to change during the measurement period (up to one year from the closing of the Acquisition), as we finalize the accounting of the purchase price of the assets acquired and liabilities assumed. We have completed our review of contingencies during the third quarter. In addition, we have completed our review of the cash flow assumptions related to ARO and our review of PIS and Cofins balances. However, property, plant and equipment, mineral reserves, goodwill, ARO, indirect taxes and deferred income taxes are not finalized as a few financial assumptions are being finalized. The following table is a revised allocation of the assets acquired and the liabilities we assumed in the Acquisition, as of January 8, 2018, the date of the Acquisition:
Total current assets
$
600.1

Property, plant and equipment, net
2,535.4

Investments in nonconsolidated companies
6.6

Goodwill
92.0

Deferred income taxes
113.9

Other assets
426.9

     Total assets acquired
3,774.9

Total current liabilities
484.4

Other noncurrent liabilities
846.1

     Total liabilities assumed
1,330.5

Net identifiable assets acquired
2,444.4

Noncontrolling interest
(453.0
)
Cash and cash equivalents acquired
(86.1
)
     Total consideration transferred (net of cash acquired and working capital adjustments)
$
1,905.3

Recognized goodwill is attributable to the Miski Mayo portion of the Acquisition and is reflected in the Phosphates segment.


26

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Mosaic gained control of the Miski Mayo mine through the acquisition of the Seller’s 40% economic interest, for a total ownership interest of 75%, and began to consolidate the operations of Miski Mayo effective as of the closing date of the Acquisition. This was accounted for as a step acquisition and required us to remeasure the previously owned equity interest to fair value as of the acquisition date. Their balances are shown in the respective line items above.
As part of the Acquisition, a Brazilian company, Terras Brasil Ltda (“Brazil Landco”), was incorporated for the purpose of owning and transferring control of certain property from the Sellers to Mosaic. Brazil Landco is 51% owned by Vale or one of its subsidiaries and 49% owned by Mosaic. Mosaic is the primary beneficiary of Brazil Landco, a variable interest entity, and began to consolidate its operations effective as of the closing date of the Acquisition.
We recognized approximately $3.0 million and $5.0 million of Acquisition and integration costs that were expensed during the three months ended September 30, 2018 and 2017, respectively, and $39.6 million and $12.7 million, respectively, for the nine months ended September 30, 2018 and 2017. These costs are included within other operating expense in the Condensed Consolidated Statement of Earnings. In the third quarter of 2018, we recorded other operating expense of $8.4 million for a potential earn-out obligation to Vale, bringing the total obligation in our Condensed Consolidated Balance Sheets to $9.7 million at September 30, 2018. This earn-out obligation is subject to re-measurement each reporting period. Subsequent changes to the fair value of the liability will be reflected within other operating expense in the Condensed Consolidated Statement of Earnings. The cash payment, if any, is expected to be paid in the first half of 2019 and 2020, respectively.
The Acquisition contributed revenues and net earnings of $993.9 million and $41.6 million, respectively from January 8, 2018 through September 30, 2018, excluding the effects of the acquisition and integration costs described above.
The following unaudited pro forma information presents the combined results of Mosaic and the acquired entities as if Mosaic had completed the Acquisition on January 1, 2017. As required by GAAP, these unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the Acquisition occurred at the beginning of the period being presented, nor are they indicative of future results of operations.
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2017
Net sales
$
2,383.6

 
$
6,199.4

Net earnings attributable to Mosaic
$
191.3

 
$
203.0

Basic net earnings per share attributable to Mosaic
$
0.50

 
$
0.53

Diluted net earnings per share attributable to Mosaic
$
0.50

 
$
0.53

17. Business Segments
The reportable segments are determined by management based upon factors such as products and services, production processes, technologies, market dynamics, and for which segment financial information is available for our chief operating decision maker.
For a description of our business segments see Note 1 to the Condensed Consolidated Financial Statements in this report. We evaluate performance based on the operating earnings of the respective business segments, which includes certain allocations of corporate selling, general and administrative expenses. The segment results may not represent the actual results that would be expected if they were independent, stand-alone businesses. Intersegment eliminations, including profit on intersegment sales, mark-to-market gains/losses on derivatives, debt expenses, Streamsong Resort® results of operations and the results of the China and India distribution businesses are included within Corporate, Eliminations and Other.
Segment information for the three and nine months ended September 30, 2018 and 2017 was as follows:


27

 
 
 
 
 
 
 
 
 
THE MOSAIC COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Phosphates
 
Potash
 
Mosaic Fertilizantes
 
Corporate, Eliminations and Other (a)
 
Total
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
801.1

 
$
603.0

 
$
1,399.8

 
$
124.2

 
$
2,928.1

Intersegment net sales
240.4

 
6.0

 

 
(246.4
)
 

Net sales
1,041.5

 
609.0

 
1,399.8

 
(122.2
)
 
2,928.1

Gross margin
180.0

 
160.9

 
152.0

 
2.6

 
495.5

Canadian resource taxes

 
40.5

 

 

 
40.5

Gross margin (excluding Canadian resource taxes)
180.0

 
201.4

 
152.0

 
2.6

 
536.0

Operating earnings (loss)
156.7

 
136.4

 
121.3

 
(21.1
)
 
393.3

Depreciation, depletion and amortization expense
100.9

 
72.7

 
35.9

 
5.0

 
214.5

Capital expenditures
103.4

 
97.5

 
39.9

 
0.2

 
241.0

Three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
579.5

 
$
469.9

 
$
806.1

 
$
129.3

 
$
1,984.8

Intersegment net sales
199.5

 
4.2

 

 
(203.7
)
 

Net sales
779.0

 
474.1

 
806.1

 
(74.4
)
 
1,984.8

Gross margin
66.7

 
98.6

 
52.4

 
23.1

 
240.8

Canadian resource taxes

 
(4.7
)
 

 

 
(4.7
)
Gross margin (excluding Canadian resource taxes)
66.7

 
93.9

 
52.4

 
23.1

 
236.1

Operating earnings (loss)
88.3

 
76.9

 
37.5

 
11.2

 
213.9

Depreciation, depletion and amortization expense
86.3

 
72.7

 
4.3

 
5.5

 
168.8

Capital expenditures
86.7

 
102.3

 
3.8

 
4.8

 
197.6

Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
2,345.7

 
$
1,564.5

 
$
2,777.8

 
$
378.8

 
$
7,066.8

Intersegment net sales
614.9