The Mosaic Company (NYSE: MOS) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Mosaic produces and markets phosphate and potash crop nutrients and operates through Phosphates, Potash and Mosaic Fertilizantes segments. Comparisons below are with 2018 unless stated otherwise. Amounts are U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.177 billion | $2.205 billion | $4.077 billion | $4.139 billion |
| Gross margin | $227.2 million | $294.6 million | $536.7 million | $536.7 million |
| Gross margin percentage | 10% | 13% | 13% | 13% |
| Operating earnings (loss) | $(241.9) million | $196.3 million | $(39.8) million | $277.0 million |
| Net earnings (loss) attributable to Mosaic | $(233.1) million | $67.9 million | $(102.3) million | $110.2 million |
| Diluted EPS | $(0.60) | $0.18 | $(0.27) | $0.29 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $331.8 million | $736.0 million |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $608.8 million | $424.4 million |
Q2 operating loss included $369.4 million of Plant City closure costs. Those pre-tax charges comprised about $210 million of fixed-asset write-offs, $126 million of asset-retirement obligations and $34 million of inventory and other reserves. Management said the quarter’s notable items, including the closure costs, foreign-exchange gains and tax items, had a net adverse effect of about $347 million, or $0.72 per diluted share.
At June 30, cash and cash equivalents were $401.9 million, compared with $847.7 million at year-end 2018. Total debt, including short-term debt and current maturities, was approximately $4.68 billion; long-term debt including current maturities was $4.585 billion. The company reported $1.98 billion available under its $2.0 billion revolving credit facility and said it was compliant with required financial ratios. Total cash, cash equivalents and restricted cash at period-end was $418.0 million.
Current assets were $4.229 billion and current liabilities $2.527 billion. Inventories rose to $2.714 billion from $2.270 billion at year-end. Total assets were $20.644 billion and total equity $10.682 billion. The company paid $28.9 million in dividends during the first half.
Changes versus prior comparable periods
- Q2 sales decreased 1%, while gross margin fell 23%; the first-half gross margin was unchanged despite sales declining 2%.
- Plant City’s permanent closure drove a reported operating loss in Q2 and a first-half operating loss. The facility had been idled since late 2017.
- Phosphates performance weakened: Q2 segment gross margin was a loss of $11.8 million versus $153.8 million; first-half gross margin was $43.0 million versus $250.3 million. Lower phosphate prices and volumes, higher input and operating costs, and mine idling weighed on results.
- Potash improved: Q2 segment gross margin rose to $181.1 million from $132.2 million, and first-half gross margin to $366.5 million from $234.6 million. Higher selling prices more than offset lower Q2 volumes and higher Canadian resource taxes.
- Mosaic Fertilizantes sales increased, but gross margin declined: Q2 margin was $35.2 million versus $53.0 million; first-half margin was $87.6 million versus $112.2 million. Higher sales volumes and prices were offset by mine-idling and input costs; prior-year results included acquired-inventory fair-value benefits.
- First-half operating cash flow declined 55%. Management attributed the decrease primarily to an unfavorable $372.9 million working-capital movement, including a $413.6 million inventory build; the prior-year period had a favorable working-capital change.
Outlook, management commentary and risks
- Brazil operations: New tailings-dam rules led to temporary idling of the Araxá, Tapira and Catalão mines and related operations. Catalão returned to full production in May; Tapira resumed partial operations in July. Management expected full operations at Tapira and Araxá by the end of Q3, subject to safety certification. It expected higher delivered rock costs and idle costs to increase 2019 expenses by up to $80 million. After quarter-end, Mosaic received an operating permit for a new Araxá dam.
- Potash: After quarter-end, Mosaic announced the temporary idling of its Colonsay mine. It planned to use Esterhazy K3 production and inventory to meet demand, with the stated aim of lowering production costs and accelerating inventory depletion. The filing does not provide broad quantitative earnings or revenue guidance.
- Demand and pricing: Adverse North American weather delayed planting and the spring application season, contributed to lower phosphate demand and sales volumes, and left product inventories in the pipeline. Potash prices benefited from stronger global demand and tight supply, while North American volumes were lower.
- Liquidity and investment: Management said cash, expected operating cash flows and credit facilities should be sufficient for operations, capital expenditures, strategic initiatives and anticipated dividends for the next 12 months, while cautioning that future cash generation is not assured. First-half capital spending included accelerated Esterhazy K3 work and investment in Brazil; Mosaic also paid $55.1 million for the Pine Bend distribution facility.
- Environmental and operating exposures: Asset-retirement obligations totaled $1.284 billion. Mosaic’s Uncle Sam Gypstack in Louisiana experienced lateral movement; containment had not been lost, and mitigation was underway, but continued movement could affect future operations. The New Wales sinkhole remediation was substantially complete, with about $0.9 million of estimated remaining costs; further measures could be material.
- Legal and regulatory matters: Brazilian subsidiaries reported approximately $1.1 billion of asserted damages or fines across proceedings and estimated probable losses of $53.1 million, accrued. Maximum potential Brazilian non-income tax liabilities were estimated at $428 million, including $215 million subject to a Vale indemnity; probable-loss reserves were described as immaterial. The South Pasture mine-permit appeal remained pending; an adverse outcome could prevent mining there and materially affect future results and cash flows.
- Impairment and market risk: No goodwill impairment was identified in Q2, but Phosphates’ estimated fair value was only 16.5% above carrying value and management said it could be at risk of future impairment. Key exposures include fertilizer prices and demand, weather, raw materials and freight, foreign exchange, Brazilian regulation, environmental obligations and mine operations.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether delayed North American planting and elevated channel inventories normalize, and the resulting effect on phosphate and potash volumes and pricing.
- Whether Brazilian mines resume full operations on the stated schedule, obtain required safety certifications, and keep incremental 2019 costs within management’s estimate of up to $80 million.
- Whether inventory levels convert to sales and operating cash flow, given the first-half working-capital outflow and lower cash balance.
- The final cost and cash implications of the Plant City closure and the company’s substantial asset-retirement and financial-assurance obligations.
- Developments in the Uncle Sam Gypstack, the South Pasture permitting appeal, Brazilian claims and tax proceedings, and the Phosphates goodwill impairment assessment.
- How the Colonsay idling and Esterhazy K3 ramp affect production costs, inventory and customer supply.