The Mosaic Company (NYSE: MOS) — Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are with 2019. Amounts are in U.S. dollars unless noted. Mosaic produces and markets phosphate and potash crop nutrients, with operations in North America and Brazil.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,381.5 million | $2,753.4 million | $6,224.3 million | $6,830.0 million |
| Gross margin | $355.1 million; 15% | $279.9 million; 10% | $653.5 million; 10% | $816.6 million; 12% |
| Operating earnings | $98.5 million | $139.5 million | $118.1 million | $99.7 million |
| Net loss attributable to Mosaic | $6.2 million; $0.02 per share | $44.1 million; $0.11 per share | $161.8 million; $0.43 per share | $146.4 million; $0.38 per share |
| Operating cash flow | Not separately provided for the quarter | $1,344.2 million | $817.8 million | |
| Capital expenditures | Not separately provided for the quarter | $785.8 million | $931.1 million |
Q3 operating earnings were below the prior year despite higher gross margin, reflecting higher other operating expenses and SG&A. For the nine months, the net loss widened despite higher operating earnings, principally amid a $174.3 million foreign currency transaction loss and larger equity-method losses.
At September 30, cash and cash equivalents were $923.0 million; short-term debt was $215.5 million and long-term debt, including current maturities, was $4,577.8 million. Total debt was approximately $4.8 billion, excluding structured accounts payable arrangements of $626.5 million. Stockholders’ equity was $8.5 billion. The company reported approximately $2.19 billion available under its $2.20 billion committed revolving facility and about $500 million under uncommitted facilities; it reported no revolver borrowings at quarter-end.
Operating cash flow increased by $526.4 million year over year for the nine-month period, aided by a $673.3 million favorable working-capital change, including higher payables and accrued liabilities and lower inventories. Investing cash use was $794.7 million and financing cash use was $50.9 million. Cash, cash equivalents and restricted cash totaled $945.1 million at period-end.
Material changes and segment trends
- Phosphates: Nine-month segment sales declined 16% to $2.13 billion and gross margin fell to a $43.4 million loss from $23.7 million of income. Lower phosphate prices more than offset reduced raw-material costs. Q3 gross margin improved to $21.8 million from a $19.3 million loss, supported by lower ammonia and sulfur costs.
- Potash: Nine-month sales fell 15% to $1.46 billion and gross margin declined 34% to $348.3 million, mainly due to lower selling prices, partly offset by higher volumes and lower costs. Q3 average selling price was $205 per tonne, down 23% year over year.
- Mosaic Fertilizantes: Nine-month sales decreased 9% to $2.66 billion, while gross margin increased 57% to $344.1 million. Higher volumes, improved production, lower input costs and favorable currency effects partly offset lower selling prices. Q3 sales fell 18%, but gross margin rose 34% to $176.9 million.
- Net sales declined 14% in Q3 and 9% year to date. Q3 finished-product volumes in Phosphates were constrained by limited inventories after a strong spring season, planned maintenance and severe weather. Potash prices remained weak, while management said prices had begun strengthening in North America and Brazil and phosphate prices continued to strengthen into Q4.
Outlook, commentary, risks and unusual items
- Mosaic gave no specific consolidated earnings or sales guidance in the supplied filing text. Management said available cash, expected operating cash generation and borrowing capacity should fund operations, capital expenditures, strategic initiatives and expected dividends for the next 12 months, while cautioning that future cash generation is not assured. Its target liquidity buffer is up to $3.0 billion.
- Management said it was progressing toward 2021 operational targets; Mosaic Fertilizantes was on track to exceed its previously announced $50 million 2020 transformation-savings target. The Esterhazy K3 project continued, with a fourth automated miner placed in service during Q3 and a fifth afterward.
- Q3 included notable charges and gains, including $76 million of asset-retirement obligation revisions, a $35 million New Wales environmental remediation reserve increase, and a $25 million unrealized derivative gain. Nine-month results included a $174 million foreign-currency loss, $126 million of asset-retirement revisions, $63 million of accelerated depreciation for Esterhazy K1/K2 closures, and $35 million for the New Wales reserve. Prior-year nine-month results included $354 million of Plant City closing costs.
- Asset-retirement obligations totaled $1.37 billion at September 30; the filing cites substantial long-term gypstack closure responsibilities and financial-assurance requirements. The company also disclosed $58.5 million of accrued environmental liabilities. Potential future environmental, reclamation and legal costs could exceed recorded accruals.
- The Potash reporting unit’s estimated fair value exceeded carrying value by 19.7%, but Mosaic said it could be at risk of future impairment. The company planned its annual goodwill impairment analysis for October 31, 2020.
- COVID-19 had caused temporary shutdowns at Miski Mayo in Peru and Patrocinio in Brazil; both had resumed operations. Management reported limited adverse impacts to date but flagged possible Q4 shipment, logistics and demand risks, including effects tied to biofuel and crop prices.
- Other risks include fertilizer price and demand volatility, foreign exchange movements, sulfur availability and cost, weather, operational disruptions, mine permitting, environmental regulation, Brazilian legal and tax matters, and brine inflows at Esterhazy. Brazilian subsidiaries disclosed approximately $830 million in claimed damages or fines, with estimated probable losses of about $61 million, net of deposits.
Most important facts for investors to verify
- Whether fertilizer prices and volumes strengthened as management described, and how that affected subsequent-quarter results and margins.
- How much of nine-month operating cash flow depended on working-capital movements, and whether those benefits are repeatable.
- Updated estimates, financial assurance and potential cash requirements for gypstack closure, New Wales remediation and other environmental obligations.
- Results of the planned goodwill impairment review, particularly for Potash, and sensitivity to prices, foreign exchange and cash-flow assumptions.
- Debt, liquidity and covenant headroom after repayment of short-term financing drawn during the early COVID-19 period; the filing says the RPA was repaid in October and short-term COVID-related financing was retired after quarter-end.
- Developments in COVID-19-related logistics and demand, mine permitting, and material environmental, Brazilian legal and tax contingencies.