The Mosaic Company — Q1 2021 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Mosaic produces and markets phosphate and potash crop nutrients through its Phosphates, Potash, and Mosaic Fertilizantes segments, with distribution activities also reported in Corporate, Eliminations and Other. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $2,297.1 million | $1,798.1 million |
| Gross margin | $434.9 million; 18.9% of sales | $41.4 million; 2.3% of sales |
| Operating earnings (loss) | $313.2 million | $(66.2) million |
| Net earnings (loss) attributable to Mosaic | $156.7 million | $(203.0) million |
| Diluted EPS | $0.41 | $(0.54) |
| Cash provided by operating activities | $318.8 million | $189.9 million |
| Capital expenditures | $288.6 million | $263.5 million |
Revenue increased 28%. Higher fertilizer selling prices and volumes, stronger demand, and improved results in the China and India distribution businesses drove the improvement. The 2021 period’s operating cash flow less capital expenditures was approximately $30.2 million, calculated from reported amounts.
Segments
- Phosphates: Sales were $1,001.0 million, up 62%; gross margin was $172.6 million versus a loss of $82.9 million. Higher realized prices were the main benefit; higher raw-material costs, particularly sulfur, partly offset it.
- Potash: Sales were $477.4 million, up 8%; gross margin was $140.2 million versus $109.1 million. Higher sales volumes and North American prices supported results.
- Mosaic Fertilizantes: Sales were $763.4 million, up 4%; gross margin was $103.1 million versus $66.5 million. Price gains were partly offset by higher raw-material and production costs and lower production.
- Corporate, Eliminations and Other: Gross margin was $19.0 million versus a loss of $51.3 million, including stronger China and India distribution results and a smaller unrealized derivative loss.
Liquidity, debt and balance sheet
At March 31, 2021, cash and cash equivalents were $692.0 million; short-term debt was $15.1 million; and long-term debt, including current maturities, was approximately $4.47 billion. Total debt including short-term debt was approximately $4.48 billion. Total equity was $9.80 billion. Current assets were $3.73 billion and current liabilities were $3.36 billion. Structured accounts payable arrangements rose to $797.5 million from $640.0 million at year-end.
Operating cash flow was $318.8 million; investing activities used $308.5 million, including $288.6 million of capital expenditures; financing activities provided $121.7 million. Cash, cash equivalents and restricted cash totaled $706.3 million at quarter-end. Mosaic reported $2.19 billion available under its $2.20 billion committed revolving facility and approximately $500 million available under uncommitted facilities. It was in compliance with its financial covenants and said it expected available cash, operating cash flow and facilities to fund operations and planned needs for the next 12 months, while noting there is no assurance cash flows will remain at current levels.
Material changes and management commentary
- The return to profit chiefly reflects improved fertilizer markets versus the pandemic-affected 2020 comparison period. Foreign-currency transaction loss narrowed to $45.8 million from $214.2 million, but remained a material earnings drag.
- Phosphate selling prices rose sharply; North American phosphate production faced operational challenges during a transition to new mining areas. Management expected sales to remain constrained in Q2 because of limited inventory.
- Management said molten sulfur availability was tight due to refinery closures and severe cold weather, and expected supply to remain tight through 2021 before recovering as refinery performance improved.
- Esterhazy K3 was reported on track to reach full operational capacity by mid-2022. Management expected brine-inflow management costs to become immaterial by the end of 2021.
- In March 2021, Mosaic announced an increase in its annual dividend target from $0.20 to $0.30 per share. Dividends paid in the quarter were $18.9 million. No share repurchases were made.
- Final U.S. countervailing-duty orders on phosphate fertilizer imports from Morocco and Russia were issued, scheduled to remain in place for at least five years. Determinations may be challenged, and deposit rates and duties may change in administrative reviews.
Risks, contingencies and unusual items
- Quarter results included a $45.8 million foreign-currency transaction loss, $22 million of accelerated depreciation related to closure of the Esterhazy K1 and K2 shafts, approximately $15 million of costs to maintain closed or idled facilities, and an approximately $11 million recovery of an acquired-business reserve. Management summarized total notable items as a $77 million pre-tax net impact.
- Phosphogypsum-stack closure and other asset-retirement obligations totaled $1.37 billion at quarter-end, including $188.7 million current. The company maintains financial-assurance arrangements and faces ongoing environmental and permitting exposure.
- The New Wales sinkhole repairs were substantially complete, but additional remediation costs could be material and future permitting effects were uncertain. At the Uncle Sam facility, slope movement had slowed after mitigation; no loss of containment had occurred, but continued movement could affect operations.
- Brazilian subsidiaries faced claims alleging approximately $748 million in aggregate damages or fines; the estimated probable loss was approximately $57.5 million and was accrued. Brazilian non-income-tax contingencies had estimated maximum potential liability of approximately $331.2 million, partly subject to Vale indemnification; probable losses were estimated as immaterial.
- Other key exposures include fertilizer price and demand volatility, sulfur and other input costs, foreign exchange, seasonal working-capital needs, mine and facility disruptions, environmental regulation, permits, tailings and impoundment safety, litigation, and potential impairment of goodwill or long-lived assets.
Most important facts for investors to verify
- Whether elevated fertilizer prices, demand, and segment margins persist, and how much of the improvement is offset by higher sulfur, ammonia, and other costs.
- Whether phosphate production and inventory constraints affect Q2 sales, and whether Brazil production and operating issues improve.
- Progress, cost, and timing of the Esterhazy K3 ramp-up, and whether brine-management costs decline as expected.
- Cash generation and seasonal working-capital needs, especially inventory growth and structured accounts payable; confirm available borrowing capacity and covenant compliance.
- Developments in environmental obligations, stack stability, permitting, litigation, and the financial-assurance requirements that could affect cash needs.
- Implementation and possible challenges or revisions to the countervailing-duty orders, including their effects on U.S. phosphate prices and competition.