CF Industries Holdings Inc. (CF) reports first quarter delivering an EPS of $3.91 versus a loss of 9 cents in the year-earlier quarter.

The quarter noted some special items including a gain of $32.5 million or 28 cents per share, pertaining to the gain from sales of four dry product warehouses; $19.9 million or 17 cents per share related to the retirement of a bank term loan; $2.1 million or 2 cents per share related to restructuring and integration costs and $0.7 million or 1 cent per share, pertaining to the non-cash mark-to-market gain on natural gas derivatives.

Excluding these charges adjusted EPS amounted to $3.81 versus a loss of 9 cents in the year-ago quarter, striding ahead of the Zacks Consensus Estimate of $3.23.

Total sales of $1.17 billion in the reported quarter outperformed the sales of $502.4 million in the prior-year quarter, missing the Zacks Consensus Estimate of $1.23 billion.

Costs and Margins

Cost of sales amounted to $649 million compared with $373.4 million in the year-earlier quarter. Gross profit increased sharply to $525 million, from $129 million in the prior-year quarter. As a result, gross margin increased by a whopping 1900 basis points year over year to 44.7% in the quarter.

Selling, general and administrative expenses increased to $31 million from $16.2 million in the year-ago quarter. The company reported an operating income of $534.4 million compared with a loss of $26.5 million in the prior-year quarter. Consequently, operating margins also showed a drastic improvement of 4023 basis points year over year to 45.5% in the prior-year quarter.

Segmental Performance

Nitrogen Segment: The segment reported sales of $925.9 million compared with $327 million in the prior-year quarter. Gross profit of the segment jumped to $442.5 million from $97.3 million in the year-ago quarter, leading to a gross margin expansion of 1800 basis points year over year to 47.8% in the quarter.

The segment reported a volume increase of 137% year over year to $2841 tons in the reported quarter; while the average selling prices for ammonia, granular urea, UAN and AN were $494, $371, $277 and $251 per ton, respectively.

Phosphate Segment: Sales in the segment increased to $248.1 million from $175.4 million in the prior-year quarter. Gross profit increased more than two folds to $82.5 million from $31.7 million in the year-earlier quarter, as a result, gross margin expanded 1520 basis points year over year to 33.3% in the quarter.

However, volumes in the segment came down 8.3% year over year to 440 tons; while the average selling prices for DAP and MAP were $562 and $569 per ton, respectively.

Financial Position

Cash and cash equivalents increased to $1.13 billion as of March 31, 2011 from $797.7 million as of December 31, 2010.

The company was also successful in reducing its debt to $1.61 billion as of March 31, 2011 from $1.95 billion as of December 31, 2010.

The cash flow from operating activity increased drastically to $671.2 million from $47.5 million in the year-ago quarter.

CF Holding also declared a quarterly dividend of 10 cents per share of common stock, which will be paid on May 27, 2011, to stockholders of record on May 16, 2011.

Outlook

The company’s outlook seems positive as global grain stocks are expected to drive the high rate of planting for the next several quarters. According to United States Department of Agriculture (USDA), the farmers are expected to plant more than 90 million acres of corn each year through 2015, which in turn would create demand for the company’s products.

However, delayed planting and wet soil might have a negative impact on the farmers’ choice of nitrogen products, reducing the ammonia portion of the mix in favor of UAN and urea compared with the ideal spring ammonia season of 2010.

Our Take

Compared with the prior-year quarter, the company has shown a drastic improvement with revenue and gains increasing manifold. The company also improved its balance sheet position by reducing debt and increasing cash balance. With strong cash flows the company has minimized its balance sheet concerns. Currently, CF Industries holds a Zacks #3 Rank (Hold) on the stock.

CF Industries Holdings Incorporated, headquartered in Deerfield, Illinois, is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products in North America. The company’s principal products in the nitrogenous fertilizer business are ammonia, urea and urea ammonium nitrate solution (UAN). Its principal products in the phosphatic fertilizer business are diammonium phosphate (DAP) and monoammonium phosphate (MAP).

However, CF Industries faces stiff competition from Agrium Inc. (AGU), Potash Corp. of Saskatchewan Inc. (POT) and Koch Industries Inc.

 
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