MOSAIC CO quarterly report, Q2 FY2022

The Mosaic Company — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Mosaic produces and markets phosphate and potash crop nutrients. Amounts are in U.S. dollars; financial-statement amounts are in millions unless noted.

Financial performance

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net sales	$5,373.1	$2,800.7	$9,295.4	$5,097.8
Gross margin	$1,846.3; 34% of sales	$752.3; 27%	$3,285.4; 35%	$1,187.2; 23%
Operating earnings	$1,674.2	$484.0	$2,930.0	$797.2
Net earnings attributable to Mosaic	$1,035.9	$437.2	$2,217.9	$593.9
Diluted EPS	$2.85	$1.14	$6.05	$1.55

Q2 sales rose 92% and Mosaic-attributable earnings rose 137% year over year; six-month sales rose 82% and earnings rose to $2.2 billion from $593.9 million.
Higher fertilizer selling prices, amid tight global supply and demand and improved grain prices, were the main earnings driver. The company cited the Russia-Ukraine conflict and Chinese phosphate export restrictions as contributing to constrained supply and higher prices.
Six-month operating cash flow was $2,091.3, compared with $1,333.9 in 2021. Capital expenditures were $553.1. Working capital absorbed $809.4, primarily reflecting higher receivables and inventory, partly offset by higher payables and accrued liabilities.
At June 30, cash and cash equivalents were $839.1; short-term debt was $17.0 and long-term debt, including current maturities, was approximately $4.0 billion. Current assets were $7,298.7 and current liabilities $5,632.0. Total equity was $11,909.0.
Cash, cash equivalents and restricted cash totaled $857.4 at June 30, up $71.1 from year-end. The company reported $2.49 billion available on its $2.50 billion committed revolving facility and approximately $1.08 billion on uncommitted facilities; it was in compliance with financial covenants.
In the first half, Mosaic repurchased $999.4 of stock and paid $94.5 in dividends. It increased its annual regular dividend to $0.60 per share from $0.45 beginning in Q2. After quarter-end, the board authorized a further $2.0 billion repurchase program, effective after completion of the current authorization.

Changes, segment results and notable items

All three operating segments benefited substantially from higher prices. Q2 segment sales were $1.8 billion for Phosphate, $1.6 billion for Potash and $2.3 billion for Mosaic Fertilizantes. Q2 segment gross margins were $641.6, $927.6 and $450.2, respectively.
Higher prices were partly offset by rising input costs, particularly sulfur and ammonia, and lower sales volumes. Q2 finished-product volumes fell 15% in Phosphate; Potash volumes were approximately flat; Fertilizantes volumes declined 1%. Adverse weather, customer purchase deferrals and, in Brazil, shipment delays and lower first-quarter demand were cited.
Canadian resource taxes and royalties rose with Potash margins: resource taxes were $274.5 in Q2 and $431.7 for the first half, versus $54.2 and $89.2, respectively, in 2021. The 2021 comparison also included $158.1 of Esterhazy mine closure costs, absent in 2022.
Q2 included a $227.2 foreign-currency transaction loss, compared with a $111.1 gain a year earlier. Management attributed the loss mainly to U.S.-dollar strengthening against the Brazilian real and Canadian dollar on payables and intercompany loans. First-half currency results were a gain of $83.5.
Other Q2 items included $63.9 of other operating expense, including approximately $30 of environmental reserve increases; $25 of realized losses on RCRA trust securities; a $12 investment write-down; and $13.7 of discrete tax expense. Derivative mark-to-market losses also weighed on Q2 results.

Outlook, risks and contingencies

No specific earnings or sales guidance is provided in the supplied filing text. Management said available cash, expected operating cash flows and credit facilities should be sufficient for operations, capital spending, strategic initiatives, debt repayments and expected dividends for at least the next 12 months, while cautioning that cash generation may not remain at current levels.
Management highlighted seasonal working-capital needs and risks from fertilizer and energy input prices, supply availability, foreign exchange, weather, transportation constraints, customer credit, geopolitical disruption, and changing agricultural demand and commodity markets.
A cavity and liner tear beneath the active New Wales phosphogypsum stack was identified in April 2022. Repairs were underway; a $30.0 reserve was recorded, but possible additional costs could not yet be estimated. A separate 2016 New Wales water-loss incident was substantially repaired, though further remediation or permitting impacts remain possible.
Environmental and reclamation obligations are significant: total asset retirement obligations were $1.724 billion at June 30. Financial assurance, permitting and long-term closure requirements remain relevant; the filing notes possible future additional assurance needs if closure-cost estimates rise.
Brazilian judicial and administrative claims alleged approximately $769.9 in damages or fines; estimated probable losses were approximately $65.8 and accrued. Brazilian tax claims had estimated maximum potential liability of approximately $415.5, including $192.4 subject to a Vale indemnity; probable loss reserves were described as immaterial.
Other disclosed matters include Louisiana coastal-zone lawsuits, a Florida radiation-related putative class action, and continuing environmental and permitting proceedings. Management stated established reserves for known environmental conditions were not expected to have a material effect, but future expenditures could be material.
Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether elevated fertilizer prices and constrained supply persist, and how price changes compare with raw-material, energy, tax and freight costs.
Whether seasonal and weather-related volume weakness, production challenges and Brazilian shipment delays improve.
Cash conversion and working-capital trends, especially receivables, inventories and customer prepayments, alongside planned capital spending.
Debt, liquidity and shareholder-return plans, including completion of the current buyback authorization and the subsequent $2.0 billion authorization.
Final repair costs and regulatory or permitting consequences from the New Wales stack incidents, and the adequacy of environmental, reclamation and litigation reserves.
Foreign-exchange exposure and the effect of currency movements and derivative marks on reported earnings.