The Mosaic Company: Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Mosaic produces and markets phosphate and potash crop nutrients and operates its Phosphates, Potash and Mosaic Fertilizantes segments. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,800.7 million | $2,044.7 million | $5,097.8 million | $3,842.8 million |
| Gross margin | $752.3 million; 27% | $257.0 million; 13% | $1,187.2 million; 23% | $298.4 million; 8% |
| Operating earnings | $484.0 million | $85.8 million | $797.2 million | $19.6 million |
| Net earnings (loss) attributable to Mosaic | $437.2 million | $47.4 million | $593.9 million | $(155.6) million |
| Diluted EPS | $1.14 | $0.12 | $1.55 | $(0.41) |
- Cash flow, first six months: Operating cash flow was $1,333.9 million, versus $1,003.6 million. Investing cash outflow was $579.6 million, including $585.8 million of capital expenditures. Financing cash inflow was $39.6 million. Cash, cash equivalents and restricted cash ended the period at $1,437.4 million.
- Balance sheet, June 30: Cash and cash equivalents were $1,417.6 million; long-term debt including current maturities was approximately $4.5 billion; total equity was $10,515.6 million. Current assets were $4,987.6 million and current liabilities $4,137.9 million. Structured accounts payable arrangements totaled $830.7 million.
- Liquidity: Mosaic reported $2.19 billion available under its $2.20 billion committed revolving facility and approximately $500 million under uncommitted facilities. It was in compliance with applicable financial ratios at quarter-end.
Changes and operating drivers
- Sales rose 37% in Q2 and 33% for the first half year over year. Management attributed the stronger results primarily to higher fertilizer selling prices amid tight global supply and demand and improved farmer economics. Higher raw-material costs and lower volumes partly offset the price benefit.
- Q2 segment operating earnings were $283.1 million for Phosphates, $48.9 million for Potash and $170.5 million for Mosaic Fertilizantes. For the first half, the respective amounts were $436.0 million, $173.8 million and $261.0 million.
- Q2 Phosphates gross margin increased to $308.5 million from $17.7 million, principally on higher selling prices; sulfur availability constrained production and sales volumes, while sulfur and ammonia costs increased.
- Q2 Potash gross margin increased to $217.2 million from $131.6 million, reflecting higher prices, partly offset by lower volumes, maintenance and higher fixed-cost absorption.
- Q2 Mosaic Fertilizantes gross margin increased to $185.1 million from $100.7 million, primarily on higher prices, partly offset by greater raw-material and production costs and lower finished-product volumes.
- Operating cash flow improved despite an unfavorable $229.7 million working-capital change in the first half, including a $402.0 million inventory increase. Accounts payable and accrued liabilities increased $724.0 million, primarily reflecting customer prepayments in Brazil.
Outlook, material events and risks
- Esterhazy mine closure: Increased brine inflows led Mosaic to accelerate closure of the K1 and K2 shafts by about nine months. The company recorded $158.1 million of pre-tax closure costs in Q2, including asset write-offs, asset-retirement obligations, and inventory and other reserves. Mosaic expects the closures, partly offset by restarting Colonsay and ramping up K3, to reduce 2021 potash sales volumes by approximately 500,000 tonnes. Colonsay production was expected to begin in Q3 2021; K3 was expected to reach full capacity in Q2 2022.
- Management outlook: The company said available cash, expected operating cash flows and borrowing capacity should fund operations, capital expenditures, strategic initiatives and expected dividends over the next 12 months, while cautioning that future cash generation is not assured. It cited a target liquidity buffer of up to $3.0 billion and investment-grade-aligned leverage targets. The filing does not provide a comprehensive earnings or revenue forecast.
- Shareholder returns and debt: Mosaic announced an increase in its annual dividend target to $0.30 per share from $0.20. It announced that its $450 million 3.75% senior notes due November 15, 2021 were expected to be redeemed at par on August 15, 2021.
- Foreign currency and unusual items: Q2 included a $111.1 million foreign-currency transaction gain; the first-half gain was $65.3 million, compared with a $180.1 million loss in the prior-year half. Other notable items included a $20 million gain on a Houston warehouse sale and a $38 million Q2 unrealized derivative gain. These items affect comparability.
- Trade actions: U.S. countervailing-duty orders on phosphate fertilizer imports from Morocco and Russia were issued for at least five years. The determinations and duty rates remain subject to litigation and administrative reviews.
- Key risks and contingencies: Brine inflows, mine and production disruptions, sulfur and other input availability and costs, seasonal working-capital needs, foreign exchange, permitting and environmental regulation, and international political and market conditions could affect results. The filing also describes significant environmental and reclamation obligations, including phosphogypsum-stack closure assurance; Brazilian legal claims with approximately $872 million of alleged damages or fines and an estimated probable loss of $66.6 million; and other proceedings. Management states that known environmental expenditures, after recorded accruals, were not expected to materially affect the business or financial condition, but future costs could be material.
- Management reported disclosure controls were effective as of June 30, 2021 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether fertilizer prices and tight supply conditions persist, and how raw-material inflation affects margins.
- Actual production, sales-volume and cost impacts from the K1/K2 closures, Colonsay restart and K3 ramp-up.
- Cash conversion and working-capital needs, particularly inventory and customer prepayments in Brazil, alongside capital spending and debt repayment.
- Developments in environmental, reclamation and legal exposures, including stack stability and financial-assurance requirements.
- Outcomes of litigation and reviews concerning the phosphate countervailing-duty orders and any resulting changes to import competition or duty rates.