The Mosaic Company — Q2 2020 Form 10-Q
Business and period: Mosaic produces and markets phosphate and potash crop nutrients. This unaudited filing covers the quarter and six months ended June 30, 2020; amounts are in U.S. dollars. Its segments are Phosphates, Potash, and Mosaic Fertilizantes.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,044.7 million | $2,176.9 million | $3,842.8 million | $4,076.6 million |
| Gross margin | $257.0 million | $227.2 million | $298.4 million | $536.7 million |
| Gross margin percentage | 13% | 10% | 8% | 13% |
| Operating earnings (loss) | $85.8 million | $(241.9) million | $19.6 million | $(39.8) million |
| Net earnings (loss) attributable to Mosaic | $47.4 million | $(233.1) million | $(155.6) million | $(102.3) million |
| Diluted earnings (loss) per share | $0.12 | $(0.60) | $(0.41) | $(0.27) |
| Cash provided by operating activities | Not separately presented for the quarter | $1,003.6 million | $331.8 million |
Cash, debt, and liquidity at June 30: Cash and cash equivalents were $1.073 billion. Short-term debt was $610.0 million; long-term debt, including current maturities, was approximately $4.587 billion. The company reported $8.7 billion in total equity. At quarter-end, approximately $1.99 billion was available under its then-$2.0 billion revolving credit facility, with no borrowings outstanding. Subsequent to quarter-end, Mosaic increased the facility to $2.2 billion and extended maturity to November 2022. Management reported liquidity, including cash and available committed credit lines, above $3 billion at the time of that amendment.
Six-month capital expenditures were $520.7 million, down from $608.8 million. Cash dividends paid were $37.9 million. Cash from operations included a favorable $457.6 million working-capital change, compared with an unfavorable $398.1 million change in the prior-year period. The increase in operating cash flow therefore reflected working-capital movements as well as operating results.
Material changes and segment results
- Quarterly sales declined 6% year over year, while gross margin rose to $257.0 million. Six-month sales also declined 6%, and gross margin fell 44%.
- The prior-year periods included $369.4 million of impairment, restructuring, and other expenses related principally to the Plant City facility closure. Its absence substantially affects comparisons of operating earnings.
- Potash Q2 segment sales were $555.4 million, down 7%, and gross margin was $131.6 million, down 27%. Higher sales volumes were more than offset by lower prices; average finished-product price fell 22% to $217 per tonne.
- Phosphates Q2 segment sales were $762.4 million, down 17%; gross margin improved to $17.7 million from a loss of $11.8 million. Lower sulfur and ammonia costs and lower idle and turnaround costs helped offset lower selling prices and reduced Miski Mayo sales during its temporary shutdown.
- Mosaic Fertilizantes Q2 sales were $787.0 million, down 5%, while gross margin increased to $100.7 million from $35.2 million. Higher volumes, lower raw-material costs, favorable currency effects, and lower idle and turnaround costs partly offset lower selling prices.
- The six-month net loss widened to $155.6 million. A $180.1 million foreign-currency transaction loss, compared with a $43.4 million gain in 2019, and increased equity-method losses were significant factors.
Outlook, commentary, and risks
- Management said COVID-19 had caused limited adverse operating and financial effects through the period. Miski Mayo in Peru and Patrocínio operations in Brazil temporarily shut down and later resumed. The filing warns that later-2020 shipment volumes could be affected if the pandemic continues to pressure biofuel and crop prices; logistics and localized demand remain risks.
- Management said phosphate prices strengthened into Q3 2020 amid improved market sentiment. It also said Mosaic Fertilizantes was on track for $50 million in 2020 transformational savings and that the Esterhazy K3 project continued to progress. The filing provides no clear consolidated earnings or sales guidance.
- At June 30, the Potash reporting unit’s estimated fair value was only 1.6% above carrying value; management said it could be at risk of future goodwill impairment and planned its annual impairment test for October 31, 2020.
- Key operating exposures include fertilizer prices and demand, raw-material availability and costs (including sulfur amid reduced oil-refinery activity), foreign exchange, weather, Brazilian political and regulatory conditions, mine permitting, and seasonal working-capital needs.
- Environmental and mine-related matters include substantial gypstack closure obligations, the Uncle Sam gypstack slope movement, and potential further remediation costs from the New Wales sinkhole. The filing says additional New Wales measures could be material; no loss of containment was reported at Uncle Sam.
- Brazilian subsidiaries reported claims with aggregate alleged damages or fines of approximately $835 million and estimated probable losses of approximately $59.6 million, accrued in the balance sheet. Separate Brazilian tax claims have maximum potential liability of approximately $333.4 million; probable losses were estimated as immaterial.
- The South Pasture Mine reclamation matter was settled with Hardee County for $249,000 and an alternative reclamation schedule extending completion to the end of 2023. A Florida class action concerning alleged radiation at reclaimed land was expected to be dismissed from federal court and potentially refiled in state court; Mosaic said it would defend the matter.
Important facts for investors to verify
- Whether fertilizer selling prices and margins recover, particularly in Phosphates and Potash, and whether higher sales volumes persist.
- How much of first-half operating cash flow was temporary working-capital benefit and the resulting cash needs through seasonal periods.
- Short-term borrowing levels, availability under the amended credit facility, and compliance with financial covenants.
- Potential Potash goodwill impairment at the October 2020 annual test, and the sensitivity of valuation to prices, foreign exchange, and cash-flow projections.
- Updates on COVID-19-related logistics and demand, sulfur supply and cost, and the company’s mine and environmental obligations.
- Whether the stated $50 million 2020 transformation savings target and Esterhazy K3 milestones are achieved.