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CF Industries’ (CF - Analyst Report) second-quarter 2013 adjusted earnings (excluding one-time items) of $8.53 per share dropped from the year-ago earnings of $8.71 a share, but it exceeded the Zacks Consensus Estimate of $7.79. Including one-time items, the company earned $8.38 a share in the quarter, down 10% from $9.31 a share in the year-ago quarter.

Sales were down 1.7% to $1,714.9 million in the quarter from $1,735.6 million in the prior-year quarter. But it surpassed the Zacks Consensus Estimate of $1,685 million.

The decrease reflects lower phosphate segment volumes and prices, which were offset partially by higher nitrogen segment revenues. Sales also declined due to the impact of a change in the selling price calculation method used for products sold by Canadian Fertilizers Limited (CFL).

Costs and Margins

Cost of sales stood at $849.7 million in the reported quarter compared with $692.3 million in the year-earlier quarter. Gross profit decreased 17% year over year to $865.2 million in the quarter. Selling, general and administrative expenses increased 7.7% to $44.5 million from $41.3 million in the year-ago quarter. The company reported an operating income of $833.7 million, down 17% from $1,005 million in the prior-year quarter.

Segmental Performance

Nitrogen Segment


Sales rose 1% year over year to $1.53 billion in the second quarter. Gross margin declined 15% to $847.2 million. Total sales volumes of nitrogen products including ammonia, granular urea, UAN and ammonium nitrate were up 2% year over year to 3.6 million tons. Cost of sales increased in the quarter due to mark-to-market loss on natural gas derivatives and higher realized natural gas costs. Realized natural gas price in the quarter increased to $3.79 per MMBtu from $3.13 a year ago.

Phosphate Segment

Sales fell 18% year over year to $189.7 million. Gross margin declined 64% to $18 million due to lower prices and sales volumes, and higher raw material costs. Volumes sold in the quarter were 421,000 tons, down from 72,000 tons a year ago.

Average selling prices of diammonium phosphate (DAP) and monoammonium phosphate (MAP) were $447 and $459, respectively, down 5.3% and 1% year over year, respectively. The decrease in the volumes sold and average selling prices were attributable to overall weakness in the phosphate industry, resulting from lower purchases by India and an increase in supply available from Saudi Arabia and China.

Financial Position

Cash and cash equivalents totaled $1.9 billion as of Jun 30, 2013, up 40% compared with $1.4 billion as of Jun 30, 2012. Long-term debt stood at $3.1 billion as of Jun 30, 2013, compared with $1.60 billion as of Jun 30, 2012.

Dividend

On Jul 24, 2013, CF Industries’ Board declared a dividend of 40 cents per common share, payable to shareholders of record as of Aug 16, 2013. This dividend will be paid on Aug 29.

Share Repurchase

CF Industries bought back 2.6 million shares of its common stock during the second quarter for $474.2 million, at an average price of $185.62.

Outlook

CF Industries, which is among the prominent players in the fertilizer industry along with Potash Corp of Sakatchewan Inc. (POT - Analyst Report), Agrium Inc. (AGU - Analyst Report) and The Mosaic Company (MOS - Analyst Report), expects to benefit from a number of factors that support its growth and cash generation potential. Global population growth, a shift toward higher protein diets and continued use of crops as a source of renewable fuels are increasing the need for more grain and higher use of plant nutrients.    

Attractive crop economics, strong product demand and CF Industries’ North American cost advantage continue to support its long-term earnings prospects. However, seasonal supply build-up is expected to constrain nitrogen fertilizer prices in the near term.

The company expects capital expenditures for its announced capacity expansion projects at Donaldsonville, La., and Port Neal, Iowa, to be in the range of $600-$800 million in 2013. Capital expenditures for the company’s existing facilities are anticipated to be about $450 million.
 
CF Industries currently retains a Zacks Rank #5 (Strong Sell).

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