01—Abstract
Summary
Summary of the 10-K filed March 20, 2006. Cited figures are marked; the original filing is the authoritative source.
CF Industries Holdings, Inc. reported a net loss of $39.0 milliona for 2005, compared with net earnings of $67.7 million in 2004.
The loss reflects a $99.9 millionb non-cash charge to establish a valuation allowance against net operating loss carryforwards generated while the company operated as a cooperative, along with a $28.3 million loss on extinguishment of debt and $9.3 million of unrealized mark-to-market losses on natural gas derivatives. Net sales rose to $1,908.4 million from $1,650.7 million, driven by higher average selling prices, while gross margin fell to $209.2 million from $216.1 million as natural gas costs rose sharply in the second half of 2005. The company completed its initial public offering in August 2005, selling 47,437,500 shares for net proceeds of approximately $715.4 million, which it did not retain; it used the proceeds to pay its pre-IPO owners in the reorganization that ended its status as a cooperative.
It repaid $235.6 millionc of term notes, leaving no long-term debt at year-end 2005, and ended the year with $37.4 million of cash and $179.3 million of short-term investments. Nitrogen fertilizer, which accounted for $1,469.7 million of net sales, remains the larger segment, while the phosphate segment produced $438.7 million in sales and a gross margin of $36.3 million.
Investors should weigh the company's heavy dependence on North American natural gas, its concentrated customer base (Agriliance and GROWMARK together accounted for approximately 43% of 2005 net sales), and open environmental matters, including an EPA Notice of Violation at the Plant City, Florida complex. The company also disclosed a history of net losses in six of the last seven years and a dividend of $0.02d per share declared in February 2006.
02—Key points
Key Highlights
- Net loss of $39.0 million in 2005 versus net earnings of $67.7 million in 2004, including a $99.9 million non-cash income tax valuation allowance charge.
- Net sales increased to $1,908.4 million from $1,650.7 million, reflecting higher average selling prices for both nitrogen and phosphate fertilizers.
- Gross margin declined to $209.2 million from $216.1 million as higher natural gas costs and purchased product costs offset price gains.
- The August 2005 IPO raised net proceeds of approximately $715.4 million, which were paid to pre-IPO owners in the reorganization; the company retained none of the proceeds.
- Long-term debt was fully repaid by year-end 2005; the company had no long-term debt outstanding and $192.6 million of available credit under a new $250 million senior secured revolving facility.
- Customer concentration is significant: GROWMARK and Agriliance together made purchases of approximately $811.1 million, representing about 43% of total net sales.
- EPA issued a Notice of Violation regarding RCRA compliance at the Plant City, Florida phosphate complex, with potential civil penalties and referral to the Department of Justice.
03—Questions
Frequently Asked Questions
Why did CF Industries report a net loss in 2005 after earning $67.7 million in 2004?
The main driver was a $99.9 million non-cash charge recorded in the third quarter to establish a 100% valuation allowance against deferred tax assets from net operating loss carryforwards generated while the company was a cooperative. The company also recorded a $28.3 million loss on early extinguishment of debt and $9.3 million of unrealized mark-to-market losses on natural gas derivatives in the fourth quarter.
What happened to the proceeds from the initial public offering?
The company received net proceeds of approximately $715.4 million from the August 2005 IPO, but it did not retain any of the proceeds. In the reorganization, the pre-IPO owners' equity interests in CF Industries, Inc. were cancelled in exchange for all of the proceeds and 7,562,499 shares of common stock.
How exposed is the company to natural gas prices?
Natural gas is the principal raw material for nitrogen fertilizers, and expenditures on it were approximately 56% of total nitrogen fertilizer cost of sales in 2005. Henry Hub prices averaged approximately $8.86 per mmBTU in 2005 and ranged from $5.53 to $15.40 during the year, and the company curtailed production at Donaldsonville in the second half of 2005 when fertilizer prices fell below production costs.
What are the company's dividend plans?
The board declared a $0.02 per share cash dividend in February 2006, payable March 15, 2006, and the company expects to pay quarterly dividends at an annual rate of approximately $0.08 per share for the foreseeable future. The company's ability to pay dividends is limited under its senior secured revolving credit facility.
What environmental risks could affect the company's Plant City operations?
The EPA issued a Notice of Violation in September 2005 alleging that reuse of phosphoric acid process water at Plant City resulted in disposal of hazardous waste without a permit. If upheld, the company could incur material expenditures or be required to cease operating its water recirculating system, which would significantly disrupt Plant City operations. The company believes the allegation is inconsistent with recent case law, and the matter has been referred to the Department of Justice.
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