01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
CF Industries Holdings, Inc. reported net earnings of $33.3 milliona for 2006, compared with a net loss of $39.0 million in 2005, on net sales of $1,949.5 million, essentially flat with $1,908.4 million in 2005.
Gross margin fell to $147.2 millionb from $209.2 million, driven mainly by unfavorable natural gas costs and higher phosphate raw material costs, partly offset by higher ammonia and phosphate selling prices. The 2006 results included a $30.7 million pre-tax unrealized mark-to-market loss on natural gas derivatives and a $21.6 million pre-tax charge for asset retirement obligations and demolition costs, mainly tied to the closed Bartow, Florida complex. The 2005 loss was driven by a $99.9 million tax valuation allowance and a $28.3 million loss on debt extinguishment following the August 2005 IPO.
The company operates two segments: nitrogen fertilizers (Donaldsonville, Louisiana, and a 66% economic interest in CFL's Medicine Hat, Alberta complex) and phosphate fertilizers (Plant City, Florida, and the Hardee County rock mine). Nitrogen gross margin declined to $98.5 millionc from $172.9 million, while phosphate gross margin rose to $48.7 million from $36.3 million. Stockholders' equity was $767.0 million at year-end 2006, with cash and cash equivalents of $25.4 million and short-term investments of $300.2 million.
Total debt was $4.2 milliond, and $176.4 million was available under the $250 million senior secured revolving credit facility. The filing highlights material risks, including a pending EPA RCRA enforcement matter at Plant City in which the EPA has referred the matter to the Department of Justice, dependence on North American natural gas prices, customer concentration (three customers accounted for approximately 48% of 2006 net sales), and permitting for the Hardee mine expansion.
02—Key points
Key Highlights
- Net earnings rose to $33.3 million in 2006 from a net loss of $39.0 million in 2005, though net sales were essentially flat at $1,949.5 million.
- Consolidated gross margin declined to $147.2 million from $209.2 million, primarily due to unfavorable natural gas costs and higher phosphate raw material costs.
- Nitrogen gross margin fell to $98.5 million from $172.9 million, while phosphate gross margin increased to $48.7 million from $36.3 million.
- 2006 results included a $30.7 million pre-tax unrealized mark-to-market loss on natural gas derivatives and a $21.6 million pre-tax charge for asset retirement obligations and demolition costs related to the closed Bartow complex.
- Year-end 2006 liquidity included $25.4 million in cash, $300.2 million in short-term investments and $176.4 million of available credit under the $250 million revolving facility, with total debt of $4.2 million.
- The EPA issued a Notice of Violation over Plant City process water practices under RCRA and referred the matter to the Department of Justice; the filing states that penalties could be substantial and the process water system could be regulated as hazardous waste units.
- Three customers (Agriliance, GROWMARK and ConAgra) accounted for approximately 48% of 2006 net sales, and the company paid cash dividends of $0.08 per share in 2006.
03—Questions
Frequently Asked Questions
Why did CF Industries swing from a net loss in 2005 to net earnings in 2006?
The 2005 net loss of $39.0 million included a $99.9 million non-cash income tax charge to establish a valuation allowance on pre-IPO net operating loss carryforwards and a $28.3 million loss on extinguishment of debt. In 2006, net earnings of $33.3 million did not include those items, although they were partly offset by a $30.7 million mark-to-market loss on natural gas derivatives and a $21.6 million charge for asset retirement obligations and demolition costs.
What drove the decline in gross margin in 2006?
The filing attributes the decline primarily to unfavorable variances related to natural gas costs and higher phosphate raw material costs, partially offset by higher average selling prices for ammonia and phosphate fertilizers. Nitrogen gross margin fell to $98.5 million from $172.9 million, while phosphate gross margin rose to $48.7 million from $36.3 million.
What is the most significant legal or regulatory risk disclosed?
The EPA issued a Notice of Violation in September 2005 alleging that reuse of phosphoric acid process water at the Plant City, Florida complex resulted in disposal of hazardous waste without a permit. The EPA has referred the matter to the Department of Justice. The company states that if the EPA's position is upheld it could incur material expenditures or be required to cease operation of the water recirculating system, which would cause significant disruption to Plant City operations. The company believes the allegation is inconsistent with recent case law.
How dependent is the company on its customers and natural gas supply?
Three customers (Agriliance, GROWMARK and ConAgra) made combined purchases of approximately $944.0 million, representing about 48% of 2006 net sales. Natural gas purchases accounted for approximately 54% of 2006 nitrogen fertilizer cost of sales, and the filing notes that North American natural gas prices are significantly higher and more volatile than those in Russia and Trinidad and Tobago.
What is the company's capital return and balance sheet position?
The company paid $4.4 million in cash dividends in 2006 at an annual rate of $0.08 per share and expects to continue quarterly dividends at that rate, subject to restrictions in its revolving credit facility. At December 31, 2006, stockholders' equity was $767.0 million, total debt was $4.2 million, and $176.4 million of credit was available under the senior secured revolving credit facility.
04—Continue