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CF Industries’ (CF - Analyst Report) third-quarter 2013 adjusted earnings (excluding one-time items) of $3.89 per share was down roughly 34% from the year-ago earnings of $5.85 a share. However, it exceeded the Zacks Consensus Estimate of $3.84.
Adjusted earnings exclude natural gas derivative losses and foreign exchange related gains. Including one-time items, the company earned $4.07 a share in the quarter, down roughly 36% from $6.35 in the year-ago quarter.
Sales were down 19% to $1,097 million in the quarter from $1,359.4 million in the prior year, and also missed the Zacks Consensus Estimate of $1,146 million.
The decrease reflects lower fertilizer prices along with buyer expectations that price will continue to slide.. Sales also declined due competitive pressure arising from Chinese nitrogen exports and 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 $710.9 million in the reported quarter versus $657.4 million in the year-ago quarter. Gross profit decreased 45% year over year to $386.1 million in the quarter. Selling, general and administrative expenses declined 13.4% to $32.2 million from $36.5 million in the year-ago quarter. The company reported an operating income of $385.4 million, down 42.2% from $667.1 million in the prior-year quarter.
Earnings before interest, taxes, depreciation and amortization (EBITDA) of $477.7 million in the quarter represents a 34% fall from $729.1 million in third-quarter 2012. Despite a challenging global fertilizer market and ground-level global nitrogen prices, EBITDA reflects CF Industries’ competitively strong position on the global nitrogen cost curve.
Sales fell 20% year over year to $876.3 million in the third quarter, due to lower volume and prices for major nitrogen products as a result of weak global nitrogen market. Gross margin declined 44% to $358.4 million due to lower revenues, higher natural gas costs and a $6 million market-to-market loss on natural gas derivatives. CF Industries sold 2.8 million tons of nitrogen products during the third quarter of 2013 compared with 3 million tons in 2012.
Sales fell 16% year over year to $220.7 million. Gross margin declined 56% to $27.7 million due to lower revenues. Volumes sold in the quarter were 526,000 tons, up from 517,000 tons a year ago.
Average selling price of diammonium phosphate (DAP) was $422 and that of monoammonium phosphate (MAP) was $416, a year-over-year decline of 16.8% and 20.2%, respectively. The decrease in average selling prices was attributable to greater supply from Saudi Arabia and China, and lower global demand, chiefly from India.
Cash and cash equivalents totaled $2.29 billion as of Sep 30, 2013, compared with $2.22 billion as of Sep 30, 2012. Long-term debt stood at $3.1 billion as of Sep 30, 2013, compared with $1.60 billion as of Sep 30, 2012.
On Oct 17, 2013, CF Industries’ Board declared a dividend of $1.00 per common share, payable to shareholders of record as of Nov 15, 2013. This dividend will be paid on Nov 29 and represents a 150% hike over the previous quarterly dividend of 40 cents.
Last month, CF Industries entered into various strategic agreements with The Mosaic Company (MOS - Snapshot Report). 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.
CF Industries also entered into an agreement to provide ammonia to Mosaic from the company’s Point Lisas Nitrogen Ltd. (PLNL) joint venture following the close of the phosphate business sale.
CF Industries expects to benefit from a number of factors supporting its growth and cash generation potential. Global population rise, a shift toward higher protein diets and continued use of crops as a source of renewable fuels are increasing the need for grain and plant nutrients.
Though nitrogen demand outlook is positive, the amount of nitrogen supply available, especially from Chinese producers, is expected to restrict price opportunities over the remainder of 2013. CF Industries expects that 92 million acres of corn will be planted in 2014, down from 2013.
For phosphates, the company expects to be active in the export market as South America is predicted to be an area of solid demand. Margins in the phosphate business should be helped by lower input costs for ammonia and sulfur.
The company estimates capital expenditures for its recently announced capacity expansion projects at Donaldsonville, La., and Port Neal, Iowa, to be around $600 million in 2013. All other capital expenditures are expected at roughly $500 million for the year. For 2014, CF Industries anticipates total capital expenditures to be in a range of $2.5 billion.
CF Industries currently carries a Zacks Rank #3 (Hold).
Other fertilizer companies worth considering are China Bluechip ADR , and The Scotts Miracle-Gro Company (SMG - Snapshot Report). Both hold a Zacks Rank #1 (Strong Buy).