The Mosaic Company — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Mosaic produces and markets phosphate and potash crop nutrients, with operations in North America and Brazil. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3,548.3 | $5,348.5 | $10,546.6 | $14,643.9 |
| Gross margin | $409.6 | $1,502.0 | $1,651.1 | $4,787.4 |
| Gross margin percentage | 12% | 28% | 16% | 33% |
| Operating earnings | $145.8 | $1,154.7 | $1,059.6 | $4,084.7 |
| Net earnings (loss) attributable to Mosaic | $(4.2) | $841.7 | $799.6 | $3,059.6 |
| Diluted EPS | $(0.01) | $2.42 | $2.39 | $8.50 |
| Operating cash flow | Not separately provided | Not separately provided | $1,869.1 | $2,980.1 |
For the nine months, capital expenditures were $1,043.5 million and net cash used in investing activities was $955.0 million. Net cash used in financing activities was $1,069.8 million. Cash and cash equivalents were $591.0 million at September 30, 2023, compared with $735.4 million at December 31, 2022.
At September 30, 2023, short-term debt was $299.8 million and long-term debt, including current maturities, was approximately $3.36 billion. Total current assets were $5.16 billion and current liabilities were $4.70 billion. Mosaic reported $2.49 billion available under its committed revolving credit facility, approximately $1.3 billion under uncommitted facilities, and $2.2 billion available under its commercial paper program; commercial paper availability reduces revolving-facility availability. The company said it was in compliance with its credit-facility financial ratios.
Material changes and operating drivers
- Q3 sales fell 34% year over year and nine-month sales fell 28%. Management attributed the broad decline in segment results chiefly to lower fertilizer selling prices as markets softened, supply rebounded, and buyers delayed purchases. Management noted that deferred buying reversed later in the quarter and seasonal price strength emerged in many markets.
- Phosphate: Q3 segment net sales were $986.4 million and operating loss was $57.5 million, versus operating earnings of $131.2 million a year earlier. Lower prices were partly offset by cheaper sulfur and ammonia. Production was affected by rock geology and operational challenges, and a Faustina equipment failure reduced the processed-phosphate operating rate to 64%; repairs were expected in Q4.
- Potash: Q3 segment net sales were $719.9 million and operating earnings were $200.0 million, compared with $1,432.1 million and $793.0 million, respectively, in Q3 2022. Lower prices were partly offset by stronger North American volumes and lower Canadian resource taxes. Nine-month results also reflected Colonsay mine idling and maintenance turnarounds.
- Mosaic Fertilizantes: Q3 segment net sales were $1,730.6 million and operating earnings were $77.3 million, versus $2,628.7 million and $323.0 million in the prior-year quarter. Higher volumes and lower input costs partly offset lower selling prices. Nine-month operating earnings were $25.1 million, down from $930.2 million.
- Q3 foreign-currency transaction loss was $96.9 million, compared with a $61.1 million loss a year earlier; the nine-month period had a $103.0 million gain. Equity earnings from nonconsolidated companies declined to $15.8 million in Q3 and $60.0 million year to date, primarily reflecting lower selling prices at MWSPC.
Liquidity, capital allocation, and unusual items
- Nine-month operating cash flow declined 37% to $1.87 billion. Working capital provided a net benefit of $252.4 million, including a $1.11 billion inventory reduction, partly offset by lower accounts payable and accrued liabilities.
- Mosaic returned $606.0 million through share repurchases and paid $286.5 million in dividends in the first nine months. It also spent $1.04 billion on capital expenditures. A $0.25-per-share special dividend was paid in March; the equity statement reports $0.65 per share in dividends for the nine-month period.
- The January sale of Streamsong Resort generated $158.4 million in proceeds and a $56.5 million gain. Mosaic purchased the remaining 50% interest in Gulf Sulphur Services for $41 million and entered a 10-year, $700 million term-loan facility in May; no amount had been drawn by September 30.
- Q3 other expense included an approximately $42 million pension settlement loss. The nine-month tax provision included approximately $41.1 million of discrete tax benefits; Q3 included approximately $17.3 million.
- Asset-retirement obligations rose to $2.15 billion from $1.91 billion at year-end, including $293.7 million of revisions in estimated cash flows, partly offset by settlements. The company’s estimates for gypstack closure and long-term care are significant obligations.
Outlook, risks, and contingencies
Mosaic stated that available cash, expected operating cash flow, and borrowing capacity should be sufficient to fund operations, capital expenditures, strategic initiatives, debt repayments, and expected dividends for at least the next 12 months, while cautioning that future cash generation is not assured. The filing provides no specific earnings or sales guidance.
- Market conditions, fertilizer prices and demand, raw-material and energy costs, foreign exchange, weather, logistics, and seasonal working-capital needs could materially affect results. Canpotex shipments faced supply-chain challenges and a port equipment failure that management said was continuing into Q4.
- Environmental exposure includes a $36.3 million reserve for repairs to the New Wales phosphogypsum stack; Phase II work was expected to conclude in Q1 2024, and the company said it could not estimate potential additional financial impacts. Environmental accruals were $144.2 million at quarter-end.
- Brazilian judicial and administrative claims alleged approximately $695.4 million in damages or fines; Mosaic estimated probable losses of $76.8 million. Brazilian tax proceedings had maximum potential liability of approximately $606.9 million, including $215.1 million subject to a Vale indemnity; estimated probable losses were described as immaterial.
- Litigation and regulatory matters include challenges to U.S. countervailing-duty orders on phosphate fertilizer imports from Morocco and Russia. The filing reports November 2023 subsidy-rate results, which are subject to appeal, and says future rates may change. It also discusses the Cruz litigation and EPA discussions regarding the Faustina plant’s Risk Management Plan compliance.
- The Supreme Court’s Sackett decision narrowed the federal definition of “waters of the United States”; implementation and permitting requirements vary by jurisdiction. Goodwill impairment testing was scheduled for October 31, 2023, with management assessing Mosaic Fertilizantes projections and warning that an impairment could result if projections or share-price conditions deteriorate.
Important facts for investors to verify
- Whether fertilizer prices and demand strengthen, and whether price recovery offsets lower selling prices and operating costs.
- Whether the Faustina repairs and Canpotex port equipment work are completed on schedule, and the effect on production and shipments.
- Updates to gypstack closure estimates, New Wales repair costs, asset-retirement obligations, and required financial assurance.
- Developments in the phosphate countervailing-duty appeals and reviews, and any effect on competitive conditions or Mosaic’s results.
- Actual cash generation, capital spending, debt and liquidity trends, and the outcome of goodwill impairment testing.
- Changes in Brazilian legal and tax exposures, indemnification recoveries, and the company’s environmental and other contingencies.