The Mosaic Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Mosaic produces and markets phosphate and potash crop nutrients and operates in North America and Brazil through its Phosphates, Potash, and Mosaic Fertilizantes segments. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2.753bn | $2.928bn | $6.830bn | $7.067bn |
| Gross margin | $279.9m | $495.5m | $816.6m | $1.032bn |
| Operating earnings | $139.5m | $393.3m | $99.7m | $670.3m |
| Net earnings (loss) attributable to Mosaic | $(44.1)m | $247.5m | $(146.4)m | $357.7m |
| Diluted EPS | $(0.11) | $0.64 | $(0.38) | $0.93 |
| Net cash from operating activities | Not separately stated | Not separately stated | $817.8m | $1.260bn |
- Gross margin percentage declined to 10% in Q3 from 17%; for the nine months it was 12%, versus 15%.
- For the first nine months, cash used in investing was $1.014bn, including $931.1m of capital expenditures; cash used in financing was $16.3m. Operating cash flow less capital expenditures was approximately negative $113m.
- At September 30, cash and cash equivalents were $641.1m; total debt, including current maturities, was approximately $4.576bn; and total equity was $10.311bn. The company reported $1.99bn available under its $2bn revolving credit facility and was in compliance with financial covenants.
Drivers and changes versus prior year
- Lower phosphate prices and weather-delayed North American planting weighed heavily on results. Q3 phosphate finished-product price fell 22% to $355 per tonne; Phosphates segment gross margin shifted to a $19.3m loss from $180.0m income. Nine-month Phosphates gross margin fell to $23.7m from $430.3m.
- Potash prices improved, but volumes and production were lower. Nine-month Potash segment gross margin increased 33% to $524.8m, while Canadian resource taxes and royalties rose.
- Mosaic Fertilizantes’ nine-month sales rose 5% to $2.919bn, but gross margin declined 17% to $219.7m. Temporary mine idlings in Brazil reduced production and increased imported-rock and fixed-cost burdens.
- Q3 results included a $53.8m foreign-currency transaction loss, $69.2m income-tax expense despite pretax earnings of $52.2m, and a $23.0m equity-method loss. The nine-month period included $353.8m of Plant City closure costs; the Q3 income statement recorded a $15.6m closure-cost benefit from revised estimates.
- Operating cash flow declined 35% year over year. Management cited unfavorable working capital, including inventory growth, compared with a favorable working-capital change in the prior-year period. Capital expenditures increased from $665.4m to $931.1m.
Outlook, management commentary and risks
- No formal consolidated earnings or revenue guidance is provided in the supplied filing text. Management said expected operating cash flow, cash on hand and credit facilities should fund operations, capital expenditures, strategic initiatives and dividends for the next 12 months, while cautioning that future cash flows are not assured.
- Management planned to reduce Louisiana phosphate production by approximately 500,000 tonnes during the remainder of 2019 to help reduce high inventories. It also announced total 2019 potash curtailments of approximately 600,000 tonnes and an accelerated Esterhazy K3 schedule, targeting completion by mid-2022.
- The company said it had actions in place to meet or exceed its $275m Mosaic Fertilizantes synergy target for 2019 and intended to generate an additional $200m of annual value through transformation efforts by the end of 2022.
- Plant City, a previously idled Florida phosphate facility, was permanently closed. Nine-month costs included approximately $210m of fixed-asset write-offs, $110m related to asset retirement obligations and $34m of inventory and other reserves.
- Brazilian tailings-dam regulations and inspections led to temporary idling of mines; the company reported that Catalão returned to full operations in June and Tapira and Araxá in September. Dam safety, compliance and any future shutdowns remain material operational risks.
- Other material exposures include Florida and Louisiana gypstack closure obligations (total asset retirement obligations were $1.301bn), the Uncle Sam gypstack’s reported lateral movement, phosphate permitting litigation, and Brazilian legal and tax contingencies. Brazilian proceedings allege up to approximately $1.1bn of damages or fines, versus an estimated probable loss of $58.1m; Brazilian tax matters have maximum potential exposure of approximately $460m, partly subject to indemnification.
- Phosphates and Potash goodwill fair values were only 12.1% and 9.4% above carrying values, respectively, and management said the units could be at risk of future impairment if business assumptions deteriorate.
Most important facts for investors to verify
- Whether phosphate and potash pricing, demand, channel inventories and delayed planting conditions improve, and how planned production curtailments affect volumes and margins.
- Whether Brazil mine operations remain fully available under evolving tailings-dam requirements, and whether Uncle Sam gypstack movement or Florida permitting issues lead to further costs or constraints.
- Whether Plant City closure and asset-retirement estimates, including the substantial increase in AROs, prove adequate as actual costs and regulatory requirements evolve.
- Whether cash generation can support elevated capital spending, dividends and buybacks while preserving investment-grade credit metrics; confirm the status and use of the revolving facility.
- Whether the 2019 synergy target and additional value-creation plan are achieved, and whether goodwill assumptions remain supportable in Phosphates and Potash.