CF Industries Holdings Inc. (CF) reported fourth quarter EPS of $6.66 per share versus $2.78 per share in the year-ago quarter. However, the results missed the Zacks Consensus estimate by a penny.
In fiscal 2011, net earnings were $21.98 per share versus $5.34 per share in fiscal 2010.
Total sales of $1.72 billion in the reported quarter increased 38.8% from $1.24 billion in the prior-year quarter. Total sales volume of 3.8 million tons was down 44,000 tons compared with the fourth quarter of 2010. The company has enjoyed double-digit year-over-year percentage revenue growth for the past five quarters.
In fiscal 2011, total sales were $6.1 billion, compared with $4.0 billion in 2010.
Costs and Margins
Cost of sales amounted to $853.2 million compared with $753.7 million in the year-earlier quarter. Gross profit increased sharply to $865.2 million from $483.9 million in the prior-year quarter. As a result, gross margin increased to a whopping 78.8% in the quarter.
Selling, general and administrative expenses increased to $36.8 million from $32.8 million in the year-ago quarter. The company reported an operating income of $829.1 million compared with $435.0 million in the prior-year quarter.
Segmental Performance
Nitrogen Segment:During the fourth quarter of 2011, CF Industries shipped 3.3 million tons of ammonia, urea, urea ammonium nitrate solution (UAN), ammonium nitrate (AN) and other nitrogen products, about equal to the sales volume in the year-ago quarter.
Ammonia volume of 874,000 tons was sold at an average price of $633 per ton in the fourth quarter of 2011 compared with 917,000 tons at an average price of $452 in the fourth quarter of 2010.
Capping a year of outstanding manufacturing performance, the company’s ammonia plants collectively operated at 100% of rated capacity in the fourth quarter, as they had done in all previous quarters of 2011. The company sold 2.7 million tons of ammonia in 2011 at an average realized price of $586 compared with 2.8 million tons in 2010 at an average price of $402.
CF Industries sold 568,000 tons of granular urea at an average price of $465 in the fourth quarter of 2011 compared with 591,000 tons at an average price of $331 in the fourth quarter of 2010.
The company sold 1.6 million tons of UAN in the fourth quarter of 2011 at an average price of $354 compared with 1.4 million tons at an average price of $206 in the year-ago quarter.
In the reported quarter, volume of 198,000 tons was sold at an average price of $258 compared with 263,000 tons at an average price of $211 in the fourth quarter of 2010.
Total nitrogen net sales in the fourth quarter were $1.5 billion, up 46% from the prior-year quarter. Gross margin was $786.0 million, or 54% of sales compared with $420.6 million, or 42% of sales in the year-ago quarter. The increase in the percentage was primarily due to higher product prices and lower natural gas costs, offset partially by mark-to-market losses on natural gas derivatives in the fourth quarter of 2011 compared to mark-to-market gains in the year-ago quarter.
CF Industries’ realized natural gas cost averaged $4.06 per MMBtu in the fourth quarter of 2011 compared with $4.29 per MMBtu during the fourth quarter of 2010. Cash prices at Henry Hub averaged $3.31 per MMBtu in the fourth quarter, falling rapidly late in the quarter resulting from mild weather and record levels of production and storage.
Phosphate Segment:Fourth quarter phosphate segment sales volume of 439,000 tons was 8% lower than in the fourth quarter of 2010, with domestic volume down 39% and export volume up 137%. Exports comprised 45% of total phosphate sales volume, reflecting attractive net prices and stronger buying interest outside the U.S., especially in the first half of the quarter.
Average fourth quarter price realizations of $576 per ton for diammonium phosphate (DAP) and $604 per ton for monoammonium phosphate (MAP) were about 18% and 21% higher, respectively, than average realizations in the same period last year.
Fourth quarter net sales of DAP and MAP of $255.3 million were 9% year over year, reflecting higher average selling prices. Gross margin of $79.2 million was 25% higher than the previous year’s fourth quarter results. As a percentage of sales, gross margin was 31% versus 27% in the year-earlier period, with the increase attributable to higher prices.
The company’s Plant City, Florida, phosphate complex operated at 94% of rated capacity during the fourth quarter of 2011.
Financial Position
Cash, cash equivalents and short-term investments totaled $1.2 billion, after a $621 million reduction in customer deposits and common share repurchases of $198 million.
Share Repurchase
As previously announced, the company repurchased 0.9 million of its common shares in October 2011 at an average price of $127.32. These transactions brought the total amount repurchased under the $1.5 billion program, which was approved by the company’s board of directors in August 2011, to 6.5 million shares at a cost of $1.0 billion. No further repurchases were performed.
Dividend
On February 3, 2012, CF Industries’ board of directors announced that it had declared the regular quarterly dividend of $0.40 per common share. The dividend will be paid on February 29, 2012 to stockholders of record as of February 14, 2012.
Outlook
The company’s outlook for North American crop nutrient producers remains positive.
Strong demand and tight inventories are expected to support crop prices and continuing high levels of plantings in 2012, particularly corn. This tight balance should be expected to support high corn prices for the next several years, providing farmers with a compelling incentive to plant corn. The company projects that U.S. farmers will plant 93.5 million acres of corn in 2012, an increase of 1.6 million acres from 2011.
The U.S Department of Agriculture projects that the farm price for corn will average $6.20 per bushel during the 2011-2012 marketing year, which would be an all-time record.
CF Industries expects robust wholesale demand for nitrogen and phosphate fertilizers this spring. Distributors and retailers are reluctant to take positions, but first quarter sales of UAN and urea are benefiting from application on winter wheat that was planted without nitrogen fertilizer in the fall due to dry conditions during the time.
The excellent fall ammonia season was followed by unusually high January shipments due to mild weather, leaving the company’s and other producers’ ammonia inventories depleted. In fact, some ammonia was applied to parts of the Corn Belt in January, a rare occurrence. The availability of ample ammonia storage capacity gives CF Industries considerable flexibility in production planning and nitrogen product mix for 2012.
Potential further delays in new nitrogen fertilizer projects elsewhere in the world are expected to keep supply and demand in reasonable balance during the first half of 2012. North American nitrogen producers continue to experience higher floor margins as the domestic advantage to global swing producers widens. Declining natural gas costs in North America and higher oil-linked European contract gas costs have driven the natural gas cost advantage to $9 per MMBtu or more compared to the highest-cost producers.
As of December 31, 2011, CF Industries had opened natural gas derivatives contracts for 156 million MBtus, covering about 65% of expected nitrogen production needs for 2012. These contracts reduced the company’s exposure to potential natural gas price increases with respect to the hedged production. Before the fourth quarter of 2011, it was the company’s practice to fix natural gas costs corresponding to forward product sales, but generally not to fix significant gas costs corresponding to other planned production. Essentially none of the company’s gas purchases are hedged beyond 2012.
The global supply/demand balance for DAP and MAP is improving, largely due to production curtailments by several of the world’s largest producers. CF Industries also has curtailed phosphate production, partially in the first quarter by advancing the timing of scheduled plant turnarounds. Plans for this action were finalized in December in recognition of the then-prevailing market imbalance.
CF Industries accepted relatively few forward orders for nitrogen and phosphate in November and December as prices were declining. Therefore, its order book at the end of 2011 was smaller, which is typical for this time of year, but reflected very favorable average prices and margins. The restraint exercised in the fourth quarter preserved the company’s opportunity to benefit from recent price improvements and any future price escalation that may occur as the spring season approaches.
Management projects capital expenditures of approximately $400 million in 2012, higher than 2011 due to an increased pace of planned maintenance and some capital spending in support of expansion plans at existing facilities, which the company announced in August 2011. Front-end engineering and design studies for expansion projects are in process and should lead to investment decisions in the second half of 2012.
Our Take
Compared with the prior-year quarter, the company has shown a drastic improvement with revenue and gains increasing manifold. With strong cash flows, the company has minimized its balance sheet concerns. Currently, CF Industries holds a Zacks #1 Rank (Hold) on the stock.
CF Industries Holdings Incorporated, headquartered in Deerfield, Illinois, is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products in North America.
The company’s principal products in the nitrogenous fertilizer business are ammonia, urea and urea ammonium nitrate solution (UAN). Its principal products in the phosphatic fertilizer business are diammonium phosphate (DAP) and monoammonium phosphate (MAP.V).
However, CF Industries faces stiff competition from Agrium Inc. (AGU), Potash Corp. of Saskatchewan Inc. (POT) and Koch Industries Inc.
AGRIUM INC (AGU): Free Stock Analysis Report
CF INDUS HLDGS (CF): Free Stock Analysis Report
POTASH SASK (POT): Free Stock Analysis Report
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