CF Industries Holdings Inc.’s ( CF - Analyst Report ) second-quarter 2012 adjusted earnings (excluding one-time gains and expenses) of $8.71 per share missed the Zacks Consensus Estimate of $8.92.

After including one-time items, the company earned $9.31 a share in the quarter, up 37.9% from $6.75 in the year-ago quarter. Lower natural gas costs as well as share repurchases during the quarter aided the results.
Total sales in the quarter amounted to $1,735.6 million, down 3.7% from $1,801.7 million in the prior-year quarter. Sales missed the Zacks Consensus Estimate of $1,933 million. Lower volumes and lower phosphate product prices arising from soft global demand led to the decline in sales. Total sales volumes decreased 7% year over year to 4 million tons.

Costs and Margins

Cost of sales amounted to $692.3 million compared with $934.3 million in the year-earlier quarter. Gross profit increased sharply by 20.3% to $1,043.3 million in the quarter. Selling, general and administrative expenses increased 30.3% to $41.3 million from $31.7 million in the year-ago quarter. The company reported an operating income of $1,005 million, up 19% from $844.7 million in the prior-year quarter.

Segmental Performance

Nitrogen Segment: Sales were flat year over year at $1.5 billion. Gross margins spiked 27% to $992.9 million. Total sales volumes were 3.5 million tons in the quarter compared with 3.8 million tons in the year-ago quarter. The segment benefited from a huge supply of natural gas, driven by an increase in production of North American shale gas. The realized natural gas price in the quarter declined to $3.13 per MMBtu from $4.32 a year ago, due to continued growth in North American natural gas production, and high storage inventory.

Phosphate Segment: Sales declined 22% year over year to $231.5 million. Gross margin declined 41% to $50.4 million due to lower average selling prices and sales volumes. Volumes sold in the quarter were 493 thousand tons, down from 538 thousand tons a year ago, hurt by the start-up of production of the company’s new MAP-S product during the quarter and building MAP-S inventory for future sale. The average selling prices of diammonium phosphate (DAP) and monoammonium phosphate (MAP) were $472 and $464, respectively, down 15% and 14.7%, respectively, from the prior-year quarter.

Financial Position

Cash and cash equivalents totaled $1.38 billion as of June 30, 2012, compared with $1.21 billion as of December 31, 2011. Long-term debt stood at $1.60 billion as of June 30, 2012, which was almost in line with $1.61 billion as of December 31, 2011.

Outlook

CF Industries remains positive for the remainder of 2012 and 2013 based on high corn planting expectations for 2013, strong global demand, tight domestic nitrogen supply and favorable natural gas costs. The company expects capital expenditures to be around $400 million in 2012.

CF Industries competes with Agrium Inc. ( AGU - Analyst Report ) and Potash Corp. of Saskatchewan Inc. ( POT - Analyst Report ) . Currently, the company maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) “Hold” rating. We have a long-term recommendation of “Neutral” on its shares.