01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
CF Industries Holdings, Inc. reported net sales of $4.13 billiona for 2017, up 12% from $3.69 billion in 2016, driven by an 18% increase in sales volume that offset a 5% decline in average selling prices to $207 per ton.
Gross margin fell to $430 millionb from $840 million, reflecting lower selling prices, a $61 million unrealized mark-to-market loss on natural gas derivatives (versus a $260 million gain in 2016), and higher depreciation from the completed capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa. Net earnings attributable to common stockholders were $358 million, or $1.53 per diluted share, compared with a net loss of $277 million in 2016. The result was supported by a $491 million income tax benefit from the Tax Cuts and Jobs Act, which the filing says added $2.10 to diluted earnings per share.
The filing describes a market in transition: new global nitrogen capacity has outpaced demand, and the company expects the lower-priced environment to persist until supply and demand become more balanced. Management notes that the final North American capacity additions are expected to come fully online by mid-2018. Operating cash flow rose to $1.63 billionc, aided by an $815 million federal tax refund, and cash and cash equivalents ended the year at $835 million.
Total funded debt was $4.69 billiond, and the company redeemed its $800 million 6.875% notes due 2018 and repurchased about $300 million of its 7.125% notes due 2020, recording a $53 million loss on debt extinguishment. Subsequent to year end, Terra Nitrogen GP Inc. elected to purchase all 4,612,562 publicly traded common units of Terra Nitrogen Company, L.P.
(TNCLP) on April 2, 2018, at $84.033 per unit, for approximately $390 million in cash, which would give the company 100% ownership of TNCLP. The filing also reports credit ratings of BB+ (S&P, negative outlook), Ba2 (Moody's, stable outlook), and BB+ (Fitch, negative outlook) as of February 15, 2018.
02—Key points
Key Highlights
- Net sales rose 12% to $4.13 billion in 2017, with sales volume up 18% to 19.95 million product tons, partly offset by a 5% decline in average selling prices to $207 per ton.
- Gross margin fell 49% to $430 million (10.4% margin) from $840 million, mainly due to lower selling prices, higher depreciation of $883 million, and a $61 million unrealized loss on natural gas derivatives versus a $260 million gain in 2016.
- Net earnings attributable to common stockholders were $358 million ($1.53 per diluted share), compared with a net loss of $277 million in 2016, helped by a $491 million benefit from the Tax Cuts and Jobs Act.
- Operating cash flow increased to $1.63 billion, including an $815 million federal tax refund, and cash and cash equivalents were $835 million at year end.
- Total funded debt was $4.69 billion, approximately 41% of total capitalization, after early redemption of $800 million of 6.875% notes due 2018 and a roughly $300 million tender for 7.125% notes due 2020.
- The company agreed to buy the remaining publicly traded units of Terra Nitrogen Company, L.P. for about $390 million on April 2, 2018, taking its ownership to 100%.
- Management expects oversupplied nitrogen markets to persist until global supply and demand balance, with final North American capacity additions expected by mid-2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, CF Industries Holdings kept $0.09.
- Revenue$4.13B100.0%
- Cost of revenue−$3.70B89.5%
- Gross profit$434.0M10.5%
- Operating costs−$200.0M4.8%
- Operating income$234.0M5.7%
- Interest, other & tax$124.0M3.0%
- Net income$358.0M8.7%
Where FY2017 revenue went
$4.13B- Cost of revenue: $3.70B, 90% of revenue
- Operating income: $234.0M, 5.7% of revenue
- SG&A: $191.0M, 4.6% of revenue
Kept 5.7% as operating incomeOperating income $234.0M · 5.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $4.13B$3.69B | +12.1% |
| Cost of Revenue | $3.70B$2.85B | +30.1% |
| Gross Profit | $434.00M$843.00M | −48.5% |
| SG&A Expenses | $191.00M$173.00M | +10.4% |
| Operating Income | $234.00M$138.00M | +69.6% |
| Interest Expense | $315.00M$303.00M | +4.0% |
| Net Income | $358.00M-$277.00M | +229.2% |
| EPS (Basic) | $1.53$-1.19 | +228.6% |
| EPS (Diluted) | $1.53$-1.19 | +228.6% |
| Shares Outstanding (Basic) | 233.50M233.10M | +0.2% |
| Shares Outstanding (Diluted) | 233.90M233.10M | +0.3% |
05—Questions
Frequently Asked Questions
Why did the company's gross margin decline so sharply in 2017 despite higher sales volume?
Gross margin fell to $430 million from $840 million. The filing attributes the decline mainly to a $321 million swing in unrealized mark-to-market results on natural gas derivatives, a $293 million reduction from lower average selling prices, a $162 million increase in physical natural gas costs, and a $160 million increase in depreciation excluding volume effects. These were partly offset by a $275 million gain from higher sales volume.
How much of the 2017 earnings improvement came from the U.S. tax law change?
The filing states that the Tax Cuts and Jobs Act produced a $491 million income tax benefit in 2017, which it says added $2.10 to diluted earnings per share. Net earnings per diluted share were $1.53 in 2017, compared with a loss of $1.19 per share in 2016.
What is the company's outlook for nitrogen fertilizer prices?
The filing says new global nitrogen capacity has grown faster than demand, creating an oversupply that has pressured selling prices. Management expects the lower-priced environment to continue until supply and demand become more balanced, and says the final set of North American capacity additions is expected to come fully online by mid-2018. It also notes that new global capacity after 2018 is expected to be lower than in recent years.
What is the Terra Nitrogen transaction announced in February 2018?
Terra Nitrogen GP Inc., an indirect wholly owned subsidiary, elected to purchase all 4,612,562 publicly traded common units of Terra Nitrogen Company, L.P. on April 2, 2018, at $84.033 per unit, for about $390 million in cash from existing funds. The company would then own 100% of TNCLP, and the units would stop trading on the NYSE.
What are the main credit risks investors should be aware of?
Total funded debt was $4.69 billion at December 31, 2017. The company's credit ratings are BB+ (S&P, negative outlook), Ba2 (Moody's, stable outlook), and BB+ (Fitch, negative outlook) as of February 15, 2018. The filing warns that downgrades could raise borrowing costs and restrict access to capital, and that the revolving credit agreement and senior secured notes contain financial covenants and liens on collateral.
06—Continue