The Mosaic Company (NYSE: MOS) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 5, 2020. Mosaic produces and markets phosphate and potash crop nutrients, with operations in North America and Brazil. Figures are in U.S. dollars.
Financial performance and liquidity
- Revenue: $1.798 billion, down 5% from $1.900 billion a year earlier.
- Profitability: Gross margin was $41.4 million (about 2% of sales), versus $309.5 million (16%) in Q1 2019. Operating loss was $66.2 million, compared with operating earnings of $202.1 million. Net loss attributable to Mosaic was $203.0 million, or $0.54 per diluted share, versus earnings of $130.8 million, or $0.34 per share.
- Major earnings impacts: A $214.2 million foreign-currency transaction loss and approximately $51 million of unrealized derivative losses weighed on results. The quarter also included a $28.3 million discrete tax benefit, primarily related to the CARES Act.
- Cash flow: Operating cash flow was $189.9 million, versus cash use of $175.5 million in Q1 2019. The improvement reflected a $193.6 million favorable working-capital change, including higher payables and accrued expenses. Capital expenditures were $263.5 million, down from $313.9 million.
- Cash, debt and liquidity: Cash and equivalents were $1.069 billion at quarter-end. Short-term debt was $1.008 billion and long-term debt, including current maturities, was approximately $4.572 billion. The company reported $1.6 billion available under its $2.0 billion revolving credit facility and compliance with debt covenants. It drew $400 million on that facility amid COVID-19 uncertainty. Its stated liquidity target is up to $3.0 billion, including cash and committed credit lines.
- Balance sheet: Total assets were $18.976 billion and total equity was $8.560 billion at March 31, 2020. Cash and equivalents increased from $519.1 million at year-end 2019; short-term debt rose from $41.6 million.
Material changes and segment results
- Phosphates: Segment sales fell 23% to $619.4 million; gross margin swung to a loss of $82.9 million from earnings of $54.8 million. Lower selling prices were the main drag: average finished-product prices fell 28%, partly offset by 7% higher finished-product volumes and lower raw-material costs.
- Potash: Sales declined 12% to $441.6 million and gross margin fell 41% to $109.1 million. Average finished-product prices decreased 14%; total sales volume increased 2%. Export sales were affected by delayed China contract settlement and adequate inventories in key markets.
- Mosaic Fertilizantes: Sales increased 5% to $731.1 million and gross margin rose 27% to $66.5 million. Volumes increased 36%, but average finished-product prices fell 23%. Higher volumes and lower raw-material costs supported margin.
- Consolidated gross margin was also affected by Corporate, Eliminations and Other, which recorded a $51.3 million loss versus a $16.9 million gain, primarily reflecting derivative mark-to-market losses.
- Other comprehensive loss was $593.1 million, largely from foreign-currency translation, contributing to a $585.8 million increase in accumulated other comprehensive loss.
Outlook, commentary and risks
- Management reported limited COVID-19-related operating impacts through the quarter, citing fertilizer production as essential. Miski Mayo in Peru was shut from March 16, with a mid-May restart expected; Patrocínio operations in Brazil restarted April 7 after a temporary shutdown. The filing warns that later-2020 shipment volumes and demand could be affected by the pandemic, logistics constraints, and weaker biofuel and crop economics.
- The sharp decline in oil demand could reduce molten sulfur availability or increase its cost, creating a risk for phosphate production. The filing did not provide clear numerical full-year earnings or revenue guidance.
- Management said it was managing working capital and capital spending, with Q1 capital expenditures about $50 million below the prior-year period. It continued to target operational goals for 2021 and said Mosaic Fertilizantes was on track for $50 million of transformational savings in 2020. Esterhazy K3 development continued, with a third automated miner placed in service during the quarter.
- Management stated that expected operating cash generation, cash and available credit should be sufficient to fund operations, capital expenditures, strategic initiatives and expected dividends for the next 12 months, while cautioning that future cash flows cannot be assured.
- Goodwill: After reviewing goodwill amid a significant share-price decline, management said Potash’s estimated fair value was only 14.2% above carrying value and could be at risk of impairment. Further deterioration in business conditions, prices, exchange rates or share price could lead to future impairment charges.
- Environmental and legal exposures: Asset retirement obligations totaled $1.261 billion. The company estimated probable losses of $69.3 million on Brazilian legal proceedings alleging approximately $900 million in damages or fines. Brazilian tax claims had maximum potential liability of approximately $344 million, including $166 million subject to a Vale indemnification; probable losses were described as immaterial. Environmental remediation accruals for known conditions were $33.2 million.
- Other notable matters include the Uncle Sam gypstack’s continuing slope movement, possible future costs or operating effects from the New Wales sinkhole incident, and permitting/reclamation proceedings concerning the South Pasture Mine. The South Pasture Extension federal permit was upheld on appeal; the plaintiffs’ deadline to seek U.S. Supreme Court review was May 5, 2020.
- In April 2020, Mosaic terminated interest-rate swap contracts, resulting in a gain in excess of $40 million, according to the filing. This occurred after quarter-end.
Most important facts for investors to verify
- Whether fertilizer prices, volumes and margins recovered after quarter-end, especially in Phosphates and Potash, and whether China contract timing affected exports.
- Whether pandemic-related closures, logistics constraints, crop economics or sulfur supply and pricing materially affected later-2020 operations.
- Cash generation excluding favorable working-capital timing, debt and revolver usage, covenant headroom, and planned capital expenditures and dividends.
- Whether Potash goodwill remained recoverable and whether environmental, permitting or litigation developments changed expected costs or operations.
- The amount and timing of the post-quarter April swap-termination gain and its accounting treatment.