Mosaic Company — FY 2019 Form 10-K
Business context and reporting period
Mosaic produces and markets phosphate and potash crop nutrients and animal-feed ingredients, with operations in North America, Brazil and other international markets. It reports Phosphates, Potash and Mosaic Fertilizantes segments. This filing covers the year ended December 31, 2019; quarterly figures below identify the fourth quarter where relevant.
Financial performance and liquidity
- Full-year results: Net sales were $8.91 billion, down 7% from $9.59 billion in 2018. Gross margin fell 40% to $897.3 million, or 10.1% of sales versus 15.6%. Mosaic reported an attributable net loss of $1.067 billion, or $2.78 per diluted share, compared with net income of $470.0 million, or $1.22 per share, in 2018.
- Fourth quarter: Net sales were $2.076 billion; gross margin was $80.7 million. Operating loss was $1.195 billion and attributable net loss was $921.0 million, or $2.43 per share. The quarter included the Colonsay idling charge and Phosphates goodwill impairment.
- Cash flow and investment: Operating cash flow was $1.095 billion, down from $1.410 billion. Capital expenditures were $1.272 billion, up from $954.5 million. Cash and cash equivalents at year-end were $519.1 million.
- Debt and liquidity: Long-term debt, including current maturities, was $4.573 billion; short-term debt was $41.6 million. Structured accounts payable arrangements were $740.6 million. Mosaic reported $1.99 billion available under its $2.0 billion revolving credit facility and $9.37 billion in total equity. The company targets a liquidity buffer of up to $3.0 billion, including cash and available credit.
- Segments: Phosphates gross margin was a loss of $82.3 million, versus a profit of $581.5 million, primarily reflecting lower prices. Potash gross margin rose 3% to $616.8 million despite lower volumes. Mosaic Fertilizantes gross margin declined 24% to $290.1 million, with Brazilian mine interruptions and higher costs weighing on results.
Material changes versus 2018
- Phosphate finished-product average selling price declined 16% to $379 per tonne; segment net sales fell 17% and gross margin turned negative. Adverse North American weather, delayed planting and harvest, increased supply and weaker demand affected prices and volumes.
- Potash average selling price increased 9% to $270 per tonne, but sales volume fell 11%. Lower production, inventory-related curtailments and higher fixed-cost absorption offset price benefits.
- Mosaic Fertilizantes sales volume increased 1%, while gross margin decreased amid temporary Brazilian mine idlings and imported-rock costs. The 2018 comparison also benefited from an acquisition inventory fair-value adjustment.
- Net loss included $1.462 billion in impairment, restructuring and other expenses: $588.6 million Phosphates goodwill impairment, $341.3 million Plant City closure costs and $529.7 million Colonsay idling costs. These charges were principally noncash fixed-asset write-offs and retirement obligations.
Outlook, management commentary, risks and unusual items
- Management said phosphate prices began strengthening in December 2019 as demand improved, China exports declined and production curtailments improved the supply-demand balance entering 2020. Potash markets remained weak into early 2020, with production cuts intended to rebalance supply.
- Mosaic plans to reduce phosphate output and continue operating Canadian potash mines at lower rates until markets improve. It announced in January 2020 that Colonsay would remain idle for the foreseeable future, in care-and-maintenance mode.
- The Esterhazy K3 mine was being accelerated, with full capacity expected in 2022; transition from K1 and K2 is expected to reduce brine-management costs. Brine inflows remain a risk and could increase costs or disrupt operations.
- Mosaic reported $330 million in acquisition-related savings and synergies in 2019, net of costs to achieve, exceeding its $275 million target. It aims to generate an additional $200 million in annual operating earnings at Mosaic Fertilizantes through transformation efforts by the end of 2022.
- Environmental capital expenditures are expected to be approximately $340 million in 2020, excluding consent-decree projects; additional land reclamation, Gypstack closure and water-treatment spending is estimated at $130 million. For 2021, the respective estimates are $300 million and $170 million.
- Key risks include volatile fertilizer prices and demand, weather and seasonal working-capital needs, raw-material and freight costs, foreign exchange, permitting and environmental obligations, Brazilian tailings-dam regulation, customer credit exposure, and dependence on key facilities. The company reported $1.3 billion of recorded asset-retirement obligations; undiscounted estimated ARO cash outflows were $3.18 billion.
- The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting. Goodwill in the Potash and Mosaic Fertilizantes reporting units was not impaired but was described as potentially at risk in future tests.
Important facts for investors to verify
- Whether fertilizer prices, demand and sales volumes recover, and whether production curtailments adequately manage inventories and fixed costs.
- Progress, cost and timing of K3 ramp-up and the expected operational and cost effects of Colonsay’s continued idling.
- Cash availability after distinguishing unrestricted cash from restricted trust assets, and the size and terms of structured accounts payable arrangements and other contractual commitments.
- Actual environmental, reclamation and water-treatment costs versus estimates, including financial-assurance needs and developments involving Brazilian tailings dams and the Uncle Sam Gypstack.
- Whether the remaining goodwill valuations and Mosaic Fertilizantes transformation savings are supported by operating performance and market assumptions.