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CF Industries (CF - Analyst Report) saw a 39% fall in its adjusted profit for first-quarter 2014 to $247.5 million or $4.51 per share from $406.5 million or $6.47 a year ago. However, adjusted earnings per share topped the Zacks Consensus Estimate of $4.38.

Adjusted earnings exclude gains of $461 million (post-tax) on disposal of the company’s phosphate business to Mosaic (MOS - Analyst Report). Profit, as reported, surged 74% year over year to $708.5 million or $12.90 per share, helped by the sizable one-time gain.


Sales slipped 15% year over year to $1,132.6 million in the quarter and missed the Zacks Consensus Estimate of $1,190 million. Sales declined mainly due to lower average selling prices for both nitrogen and phosphate products and lower phosphate sales volume.

CF Industries, in the reported quarter, faced challenges from bad weather across some of its major growth regions, higher natural gas prices, headwinds from low fall applications and buyer reluctance to take inventory positions. However, effective hedging programs and strong execution helped it mostly overcome these challenges.   

Segmental Performance

Sales from the Nitrogen Segment fell 10% year over year to $987.5 million in the quarter as lower average selling prices more than offset an increase in tons of product sold. Gross margin slid 33% to $434.3 million due to lower pricing and higher production costs. Average selling prices for ammonia and urea fell 21% and 9%, respectively.

Phosphate Segment sales tumbled 39% year over year to $145.1 million due to lower average selling prices and lower sales volume resulting from sale of the phosphate business during the quarter. Gross margin skid 69% to $8.5 million due to lower pricing. Average selling prices of diammonium phosphate (DAP) and monoammonium phosphate (MAP) slid 30% and 32% year over year, respectively.

Financials

CF Industries exited the quarter with cash and cash equivalents of $3.5 billion, up 60% year over year. Long-term debt jumped nearly three-fold year over year to $4.6 billion. CF Industries issued $1.5 billion of investment grade debt during the quarter. It plans to utilize a portion of the proceeds from the offering to fund its capital expenditure programs and stock repurchases.

CF Industries bought back 3.2 million shares during the quarter for $794 million. Capital spending during the quarter was $392.4 million, of which, $278.3 million was spent on capacity expansion program. Operating cash flows rose around 11% year over year to $750 million.

Outlook

CF Industries, which is one of the leading players in the fertilizer space along with Potash Corp. (POT - Analyst Report) and Agrium (AGU - Analyst Report), expects to benefit from a number of factors supporting its growth and potential to generate sustainable cash flows. A rise in global population, transition towards higher protein diets and continued use of crops as a source of renewable fuels are increasing the need for grain and plant nutrients.

CF Industries noted that the ammonia season had a solid start in the lower U.S. Midwest and Southern Plains regions and is expected continue the momentum in the upper Midwest, Northern Plains and Western Canada regions as the spring season progresses. Ammonia prices are expected to remain firm due to strong demand and supply constraints.

On the urea front, tight inventory in North America is expected to support prices through the spring season. CF Industries sees North American urea prices to decline toward parity with overseas prices following the spring application season.

Volume movement for urea ammonium nitrate solution (UAN) is expected to be strong for first-half 2014. CF Industries sees healthy spot demand for UAN from farmers given the tight ammonia and urea inventory situation, providing ample UAN sales opportunity in major markets.

CF Industries, in Mar 2014, completed the sale of its phosphate business to Mosaic for $1.4 billion. Under the deal, CF Industries disposed the Hardee County phosphate rock mine, the Plant City phosphate complex, an ammonia terminal, phosphate warehouse and dock at the Port of Tampa and the site of the former Bartow phosphate complex to Mosaic. The facilities acquired by Mosaic currently produce roughly 1.8 million tons of phosphate fertilizer per year.

CF Industries and Mosaic also entered into a long-term ammonia supply agreement, under which, the former agreed to supply ammonia to Mosaic from its Donaldsonville, LA, nitrogen complex and its 50% owned Point Lisas Nitrogen Ltd. (PLNL) facility in the Republic of Trinidad and Tobago. The company has commenced ammonia shipments under the deal.

CF Industries also made significant progress on its two capacity expansion projects during the reported quarter, which will increase its annual nitrogen production capacity by 25% when the plants come on-line (expected in 2015 and 2016). The company anticipates total capital expenditures of roughly $2.5 billion in 2014, of which, $2 billion has been earmarked for capacity expansion projects.

CF Industries is a Zacks Rank #3 (Hold) stock.

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