01—Abstract
Summary
Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.
CF Industries Holdings, Inc. reported a sharp improvement in 2007, with net earnings of $372.7 milliona (diluted EPS of $6.57) compared with $33.3 million in 2006.
Net sales rose to $2.76 billionb from $2.03 billion, and gross margin increased by $522.8 million to $670.0 million. The filing attributes the results to a strong market for fertilizer products, driven by a robust agricultural environment that raised both average selling prices and volumes. Nitrogen sales volume grew 10% to 6.9 million tons, and average nitrogen and phosphate selling prices were 22% and 46% higher, respectively.
The company ended 2007 with cash and cash equivalents of $366.5 millionc and short-term investments of $494.5 million, up from $25.4 million and $300.2 million a year earlier. Customer advances under its forward pricing program rose to $305.8 million, and operating cash flow increased to $690.1 million. Management also raised the quarterly dividend from $0.02 to $0.10 per share in February 2008.
Most of the short-term investments are auction rate securities, and the filing notes that auctions for several of these securities failed in February 2008. Key risks cited include the volatile and relatively high cost of North American natural gas, cyclical industry supply and demand, and concentration among large customers such as CHS Inc., GROWMARK and ConAgra. The filing also describes an EPA Notice of Violation at the Plant City, Florida phosphate complex under RCRA that has been referred to the Department of Justice, and a February 2008 unplanned outage at one of the two ammonia plants at the Medicine Hat facility.
02—Key points
Key Highlights
- Net earnings rose to $372.7 million in 2007 from $33.3 million in 2006; diluted EPS was $6.57 versus $0.60.
- Net sales increased 36% to $2.8 billion, driven by higher average nitrogen and phosphate selling prices and higher nitrogen volume of 6.9 million tons.
- Gross margin more than tripled to $670.0 million, up $522.8 million, including a $17.0 million pre-tax unrealized mark-to-market gain on natural gas derivatives.
- Operating cash flow increased to $690.1 million, supported by $305.8 million in customer advances under the forward pricing program.
- Cash and cash equivalents reached $366.5 million and short-term investments $494.5 million at year-end 2007, though most short-term holdings are auction rate securities with failed auctions emerging in February 2008.
- The quarterly dividend was raised from $0.02 to $0.10 per share in February 2008, with an expected annual rate of $0.40.
- Key risks include volatile North American natural gas costs, cyclical fertilizer supply and demand, customer concentration, and an EPA RCRA enforcement matter at the Plant City facility.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, CF Industries Holdings kept $0.14.
- Revenue$2.76B100.0%
- Cost of revenue−$2.09B75.7%
- Gross profit$670.0M24.3%
- Operating costs−$68.4M2.5%
- Operating income$601.6M21.8%
- Interest, other & tax−$228.9M8.3%
- Net income$372.7M13.5%
Where FY2007 revenue went
$2.76B- Cost of revenue: $2.09B, 76% of revenue
- Net income: $372.7M, 14% of revenue
- SG&A: $65.2M, 2.4% of revenue
- Interest, other & tax: $228.9M, 8.3% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 27, 2008Financial Statements
| Revenue | $2.76B |
| Cost of Revenue | $2.09B |
| Gross Profit | $670.00M |
| SG&A Expenses | $65.20M |
| Operating Income | $601.60M |
| Interest Expense | $1.70M |
| Net Income | $372.70M |
| EPS (Basic) | $6.70 |
| EPS (Diluted) | $6.56 |
| Shares Outstanding (Basic) | 55.70M |
| Shares Outstanding (Diluted) | 56.80M |
05—Questions
Frequently Asked Questions
What drove the large improvement in 2007 earnings?
The filing attributes the increase to a strong agricultural environment that lifted demand and pricing. Average nitrogen and phosphate selling prices were 22% and 46% higher, respectively, than in 2006, and nitrogen sales volume rose 10%. Gross margin also benefited from a favorable unrealized mark-to-market swing on natural gas derivatives.
How strong is the company's liquidity position?
At December 31, 2007, the company held $366.5 million of cash and cash equivalents and $494.5 million of short-term investments, compared with $25.4 million and $300.2 million a year earlier. It had $219.8 million available under its $250 million senior secured revolving credit facility, with no borrowings outstanding. The filing states that management believes these resources are adequate for foreseeable cash requirements.
What are the main risks to the business?
The filing highlights the high and volatile cost of North American natural gas, which accounted for about 50% of nitrogen cost of sales in 2007; cyclical oversupply; intense global competition from lower-cost producers; concentration in large customers such as CHS, GROWMARK and ConAgra; and operational hazards at key facilities. It also cites environmental matters, including an EPA RCRA Notice of Violation at the Plant City complex that has been referred to the Department of Justice.
Is the company changing its dividend policy?
Yes. In February 2008, the board raised the quarterly common dividend from $0.02 to $0.10 per share, implying an annual rate of $0.40 per share for the foreseeable future. Dividends paid in 2007 totaled $4.5 million, and the company's credit facility can limit dividend payments.
Are there any emerging risks in the investment portfolio or operations?
Auction rate securities, a large part of short-term investments, began to show illiquidity in February 2008 and several auctions failed, leaving $276 million still held at February 22, 2008, of which $159 million had a failed most recent auction. Separately, an unplanned outage at one of the two ammonia plants at the Medicine Hat complex occurred in February 2008, with repairs expected by mid-March 2008. The cost impact is not yet known.
06—Continue