The Mosaic Company: Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Mosaic produces and markets phosphate and potash crop nutrients, with operations in North America and Brazil. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3.394 billion | $5.373 billion | $6.998 billion | $9.295 billion |
| Gross margin | $571 million; 17% | $1.846 billion; 34% | $1.242 billion; 18% | $3.285 billion; 35% |
| Operating earnings | $369 million | $1.674 billion | $914 million | $2.930 billion |
| Net earnings attributable to Mosaic | $369 million | $1.036 billion | $804 million | $2.218 billion |
| Diluted earnings per share | $1.11 | $2.85 | $2.39 | $6.05 |
| Cash from operations | Not separately reported in the supplied quarterly cash-flow data | $1.222 billion | $2.091 billion |
Q2 sales fell 37% year over year and operating earnings fell 78%; six-month sales declined 25% and operating earnings declined 69%. Management attributed the pressure primarily to lower fertilizer selling prices amid softer global markets and buyers delaying purchases. In Q2, a $148.5 million foreign-currency transaction gain compared with a $227.2 million loss a year earlier; this materially supported reported pretax earnings.
By segment, Q2 gross margin was $216 million in Phosphate, $336 million in Potash and $13 million in Mosaic Fertilizantes, versus $642 million, $928 million and $450 million, respectively, a year earlier. Fertilizantes was near break-even at the gross-margin level. Lower input costs partly offset price declines, particularly in Phosphate and Fertilizantes.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $626 million, compared with $735 million at year-end 2022. Total current assets were $5.712 billion and current liabilities were $4.839 billion.
- Short-term debt was $229 million; long-term debt, including current maturities, was approximately $3.393 billion. The filing reports total debt fair value separately as $3.277 billion.
- Six-month operating cash flow was $1.222 billion, down 42%. Capital expenditures were $632 million. Investing cash use was $533 million; financing cash use was $816 million.
- The company repurchased $456 million of shares and paid $220 million in dividends during the first half. A $0.25-per-share special dividend was paid in March.
- Mosaic reported $2.49 billion available under its $2.50 billion committed revolver, approximately $1.0 billion under uncommitted facilities, and $2.3 billion available under its commercial-paper program. Commercial-paper availability is backed by, and reduces availability under, the revolver; these amounts should not be added without accounting for that relationship.
Business changes, outlook and risks
- Lower average selling prices affected all major segments. Q2 average finished-product prices fell 40% in Phosphate, 43% in Potash and 39% in Fertilizantes compared with the prior-year quarter.
- Potash sales volumes were lower in Q2 amid softer export demand; production was also affected by the temporary idling of the Colonsay mine and maintenance. Colonsay was temporarily restarted in July to offset Esterhazy turnaround downtime.
- In July, labor action at four Canadian West Coast ports and equipment failure at the Port of Portland disrupted shipping. Management said Canpotex shipments could continue to be negatively affected in Q3.
- Mosaic sold Streamsong Resort in January for net proceeds of $158 million and recorded a $57 million gain. It also acquired the remaining 50% of Gulf Sulphur Services for $41 million, giving it full ownership.
- Management said expected operating cash flow, cash and available borrowing capacity should be sufficient for operations, capital spending, strategic initiatives, debt repayments and expected dividends for at least the next 12 months. The company targets investment-grade credit metrics. The filing provides no specific earnings or price guidance in the supplied text.
- Environmental and reclamation obligations remain significant. Total asset-retirement obligations were $1.969 billion. A $53.9 million reserve was recorded for repairs to a cavity and liner tear at the New Wales phosphogypsum stack; Phase II repairs were expected to conclude in Q4 2023, and further potential costs could not yet be estimated.
- Other matters include Brazilian legal claims with approximately $868 million of alleged aggregate damages or fines and an estimated probable loss of $74.5 million; Brazilian tax matters with maximum potential liability of $586.5 million, partly subject to indemnification, for which recorded probable-loss reserves were described as immaterial. The company also disclosed ongoing litigation and regulatory proceedings, including a Faustina plant risk-management matter.
- Risks highlighted include fertilizer price and demand volatility, raw-material and freight costs, operational interruptions, weather, foreign exchange, regulatory and environmental requirements, and legal contingencies. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether fertilizer prices, demand and export volumes stabilize, and how continued price pressure affects segment margins.
- Whether Canadian port and terminal disruptions affect Q3 Canpotex shipments and customer deliveries.
- Progress, timing and eventual cost of the New Wales stack repairs, alongside broader reclamation and financial-assurance obligations.
- Cash generation and liquidity after capital expenditures, dividends, repurchases and scheduled debt payments; distinguish overlapping revolver and commercial-paper capacity.
- Developments in Brazilian legal and tax matters, the Faustina proceeding, and other environmental or regulatory contingencies.