CF Industries Beats on Earnings & Revs in Q4

CF Industries’ (CF) fourth-quarter 2013 adjusted earnings (excluding one-time items) of $4.47 per share was down roughly 38.5% from the year-ago earnings of $7.27 a share. However, the results exceeded the Zacks Consensus Estimate by a penny.

Adjusted earnings exclude non-cash pre-tax mark-to-market gains on natural gas derivatives, pre-tax gains on foreign currency derivative and share buyback impact. Including one-time items, the company earned $5.71 a share in the quarter, down roughly 22.8% from $7.40 in the year-ago quarter. Lower prices and higher natural gas costs led to the decline in earnings.

For full-year 2013earnings, as reported, came in at $24.74 per share, down 13% from $28.59 in the year ago.

Sales were down 10% to $1,326.3 million in the quarter from $1,481.4 million in the prior year, but exceeded the Zacks Consensus Estimate of $1,266 million. Sales declined primarily due to lower average selling prices for both nitrogen and phosphate products, and lower phosphate sales volume.

Revenues for the full year fell around 10% year over year to $5,474.7 million.

Costs and Margins

Cost of sales stood at $732.5 million in the reported quarter versus $825.2 million in the year-ago quarter. Gross profit decreased 9.5% year over year to $593.8 million in the quarter. Selling, general and administrative expenses increased 11.9% to $45 million from $40.2 million in the year-ago quarter. The company reported an operating income of $564.8 million, down 8.3% from $616.1 million in the prior-year quarter.

Earnings before interest, taxes, depreciation and amortization (:EBITDA) were $643 million in the quarter, indicating a 23% fall from $470.7 million in fourth-quarter 2012. Despite a challenging global fertilizer market and ground-level global urea prices, the company generated strong EBITDA.

Segmental Performance

Nitrogen Segment

Sales fell 4% year over year to $1,178.7 million in the fourth quarter due to a decline in overall average selling prices, partially offset by an increase in tons of product sold. Gross margin declined 4.5% to $592.1 million due to lower revenues and an increase in natural gas costs.

Phosphate Segment

Sales fell 42% year over year to $147.6 million due to lower average selling prices resulting from lower global demand, mostly from India, and lower sales volume. Gross margin declined 95% to $1.7 million due to lower revenues.

Average selling price of diammonium phosphate (:DAP) was $348 and monoammonium phosphate (:MAP) was $382, down 30% and 28% year over year, respectively.

Financial Position

Cash and cash equivalents totaled $1.7 billion as of Dec 31, 2013, compared with $2.3 billion as of Dec 31, 2012. Long-term debt stood at $3.1 billion as of Dec 31, 2013, compared with $1.6 billion as of Dec 31, 2012.

Dividend

On Jan 31, 2014, CF Industries’ Board declared a regular quarterly dividend of $1.00 per common share. The dividend, which will be paid on Feb 28, 2014, to stockholders of record as of Feb 14, 2014, represents a 150% hike over the previous quarterly dividend.

Strategic Agreements

Last month, CF Industries entered into various strategic agreements with The Mosaic Company (MOS). These agreements are expected to strengthen CF Industries’ nitrogen centric programs. CF Industries entered into a deal to sell the entirety of its phosphate business to Mosaic for a cash consideration of $1.4 billion. The company also entered into a long-term agreement to supply Mosaic between 600,000 and 800,000 tons of ammonia per year from its Donaldsonville, La., nitrogen complex beginning in 2017.

Both these contracts will provide CF Industries with a defined margin independent of gas costs, and increased confidence in the cash flow profile associated with a portion of the company’s production capacity.

CF Industries also reached several milestones on its capacity expansion projects, which will increase its annual nitrogen production capacity by 25% when the plants come on-line in 2015 and 2016.

Outlook

CF Industries expects to benefit from a number of factors supporting its growth and cash generation potential. Global population rise, a shift towards higher protein diets and continued use of crops as a source of renewable fuels are increasing the need for grain and plant nutrients.

Global nitrogen prices have improved significantly since November. Nitrogen floor prices are expected to continue to be the cash cost of Chinese urea producers. During the high-tariff season of November to June, nitrogen cash cost is estimated to be about $340 to $350 per ton delivered to the U.S. Gulf compared to $285 to $300 per ton during the low-tariff season of July to October.

North America is expected to have strong ammonia demand through the first half of 2014.

Prices of urea and UAN in North America have increased and are expected to remain firm in order to attract imports required to fill 22 million nutrient tons of expected full year nitrogen demand, which is well in excess of the 15 million nutrient tons of expected North American production.
During 2014, CF Industries expects after-tax proceeds of roughly $1 billion following the close of the sale of the phosphate business to Mosaic in the first half of 2014.

CF Industries also intends to raise up to $1.5 billion of additional long-term debt in early 2014. These new borrowings along with cash from operations and proceeds from the sale of the phosphate business will fund the company’s capital expenditures, working capital, dividends and additional share repurchases.

CF Industries anticipates total capital expenditures of roughly $2.5 billion in 2014. This consists of $2 billion for the capacity expansion projects and $0.5 billion for sustaining and other capital expenditures. These amounts exclude the phosphate business.

CF Industries’ objective is to deliver higher total shareholder return. It aims on selectively investing in projects with return profiles significantly above its cost of capital while minimizing the overall cost of financing the enterprise.

CF Industries, which is one of the leading fertilizer makers along with Potash Corp. (POT) and Agrium (AGU), currently carries a Zacks Rank #3 (Hold).

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