UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-32597

CF INDUSTRIES HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

20-2697511

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

4 Parkway North, Suite 400

 

 

Deerfield, Illinois

 

60015

(Address of principal executive offices)

 

(Zip Code)

 

(847) 405-2400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

55,674,891 million shares of the registrant’s common stock, $0.01 par value per share, were outstanding at June 30, 2007.

 




CF INDUSTRIES HOLDINGS, INC.
TABLE OF CONTENTS

PART I.

 

Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Statements of Operations

 

1

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

2

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

 

 

Consolidated Statements of Cash Flows

 

4

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

5

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

PART II.

 

Other Information

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

37

 

 

 

Item 6.

 

Exhibits

 

37

 

 




CF INDUSTRIES HOLDINGS, INC.

PART I—FINANCIAL INFORMATION

ITEM 1.                FINANCIAL STATEMENTS.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except per share amounts)

 

Net sales

 

$ 848.9

 

$ 688.7

 

$ 1,321.3

 

$ 1,107.9

 

Cost of sales

 

671.3

 

587.5

 

1,038.6

 

1,029.4

 

Gross margin

 

177.6

 

101.2

 

282.7

 

78.5

 

Selling, general and administrative

 

17.5

 

14.3

 

31.2

 

27.3

 

Other operating—net

 

0.7

 

1.6

 

2.0

 

3.1

 

Operating earnings

 

159.4

 

85.3

 

249.5

 

48.1

 

Interest expense

 

0.3

 

1.5

 

0.8

 

2.0

 

Interest income

 

(5.0

)

(2.8

)

(8.9

)

(5.5

)

Minority interest

 

19.6

 

16.4

 

26.6

 

22.3

 

Other non-operating—net

 

(0.4

)

(0.1

)

(0.9

)

(0.2

)

Earnings before income taxes

 

144.9

 

70.3

 

231.9

 

29.5

 

Income tax provision

 

51.3

 

27.7

 

81.1

 

11.5

 

Net earnings

 

$ 93.6

 

$ 42.6

 

$  150.8

 

$    18.0

 

Net earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$ 1.69

 

$ 0.77

 

$    2.73

 

$    0.33

 

Diluted

 

$ 1.65

 

$ 0.77

 

$    2.67

 

$    0.33

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

55.4

 

55.0

 

55.3

 

55.0

 

Diluted

 

56.6

 

55.0

 

56.4

 

55.0

 

Dividends declared per common share

 

$ 0.02

 

$ 0.02

 

$    0.04

 

$    0.04

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

1




CF INDUSTRIES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

     2007     

 

     2006     

 

2007

 

2006

 

 

 

(in millions)

 

Net earnings

 

 

$

93.6

 

 

 

$

42.6

 

 

$

150.8

 

$

18.0

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment—no tax effect

 

 

1.8

 

 

 

1.1

 

 

2.0

 

1.0

 

Defined benefit plans—net of taxes

 

 

0.2

 

 

 

 

 

0.6

 

 

Unrealized gain (loss) on securities—net of taxes

 

 

0.2

 

 

 

(0.1

)

 

0.1

 

0.1

 

Unrealized loss on derivatives—net of taxes

 

 

 

 

 

(1.3

)

 

 

(3.4

)

 

 

 

2.2

 

 

 

(0.3

)

 

2.7

 

(2.3

)

Comprehensive income

 

 

$

95.8

 

 

 

$

42.3

 

 

$

153.5

 

$

15.7

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

2




CF INDUSTRIES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in millions, except share
and per share amounts)

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

59.6

 

 

 

$

25.4

 

 

Short-term investments

 

 

506.0

 

 

 

300.2

 

 

Accounts receivable

 

 

158.0

 

 

 

113.9

 

 

Inventories

 

 

180.1

 

 

 

176.1

 

 

Assets held for sale

 

 

6.0

 

 

 

 

 

Other

 

 

13.6

 

 

 

17.5

 

 

Total current assets

 

 

923.3

 

 

 

633.1

 

 

Property, plant and equipment—net

 

 

596.0

 

 

 

597.0

 

 

Deferred income taxes

 

 

 

 

 

1.7

 

 

Goodwill

 

 

0.9

 

 

 

0.9

 

 

Asset retirement obligation escrow account

 

 

21.4

 

 

 

11.5

 

 

Other assets

 

 

46.3

 

 

 

46.2

 

 

Total assets

 

 

$

1,587.9

 

 

 

$

1,290.4

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

182.0

 

 

 

$

172.3

 

 

Income taxes payable

 

 

37.6

 

 

 

1.9

 

 

Customer advances

 

 

167.7

 

 

 

102.7

 

 

Deferred income taxes

 

 

4.8

 

 

 

9.8

 

 

Distributions payable to minority interest

 

 

 

 

 

27.8

 

 

Other

 

 

37.3

 

 

 

38.9

 

 

Total current liabilities

 

 

429.4

 

 

 

353.4

 

 

Notes payable

 

 

4.6

 

 

 

4.2

 

 

Deferred income taxes

 

 

17.6

 

 

 

 

 

Other noncurrent liabilities

 

 

159.2

 

 

 

152.2

 

 

Contingencies (Note 15)

 

 

 

 

 

 

 

 

 

Minority interest

 

 

43.3

 

 

 

13.6

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock—$0.01 par value, 50,000,000 shares authorized

 

 

 

 

 

 

 

Common stock—$0.01 par value, 500,000,000 shares authorized, 2007—55,674,891 and 2006—55,172,101 shares issued and outstanding

 

 

0.6

 

 

 

0.6

 

 

Paid-in capital

 

 

766.7

 

 

 

751.2

 

 

Retained earnings

 

 

197.2

 

 

 

48.6

 

 

Accumulated other comprehensive loss

 

 

(30.7

)

 

 

(33.4

)

 

Total stockholders’ equity

 

 

933.8

 

 

 

767.0

 

 

Total liabilities and stockholders’ equity

 

 

$

1,587.9

 

 

 

$

1,290.4

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

3




CF INDUSTRIES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six months ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Operating Activities:

 

 

 

 

 

Net earnings

 

$

150.8

 

$

18.0

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Minority interest

 

26.6

 

22.3

 

Depreciation, depletion and amortization

 

40.5

 

47.4

 

Deferred income taxes

 

12.3

 

4.6

 

Stock compensation expense

 

4.1

 

3.6

 

Excess tax benefit from stock-based compensation

 

(3.4

)

 

Unrealized (gain) loss on derivatives

 

(2.2

)

8.3

 

Changes in:

 

 

 

 

 

Accounts receivable

 

(36.9

)

(28.9

)

Margin deposits

 

4.7

 

9.7

 

Inventories

 

(2.9

)

50.7

 

Accounts payable, accrued expenses, and income taxes

 

39.9

 

(22.8

)

Product exchanges—net

 

0.8

 

11.7

 

Customer advances—net

 

65.0

 

(61.5

)

Other—net

 

2.9

 

(0.2

)

Net cash provided by operating activities

 

302.2

 

62.9

 

Investing Activities:

 

 

 

 

 

Additions to property, plant and equipment—net

 

(39.4

)

(23.2

)

Purchases of short-term investments

 

(480.6

)

(323.9

)

Sales and maturities of short-term investments

 

274.7

 

299.9

 

Deposit to asset retirement obligation escrow account

 

(9.4

)

(11.1

)

Other—net

 

1.2

 

 

Net cash used in investing activities

 

(253.5

)

(58.3

)

Financing Activities:

 

 

 

 

 

Dividends paid on common stock

 

(2.2

)

(2.2

)

Distributions to minority interest

 

(30.0

)

(15.1

)

Issuances of common stock under employee stock plans

 

8.0

 

 

Excess tax benefit from stock-based compensation

 

3.4

 

 

Net cash used in financing activities

 

(20.8

)

(17.3

)

Effect of exchange rate changes on cash and cash equivalents

 

6.3

 

 

Increase (decrease) in cash and cash equivalents

 

34.2

 

(12.7

)

Cash and cash equivalents at beginning of period

 

25.4

 

37.4

 

Cash and cash equivalents at end of period

 

$

59.6

 

$

24.7

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

4




CF INDUSTRIES HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.                 Background and Basis of Presentation

All references to “CF Holdings,” “the Company,” “we,” “us” and “our” refer to CF Industries Holdings, Inc. and its subsidiaries, including CF Industries, Inc. We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. Our operations are organized into two business segments: the nitrogen fertilizer business and the phosphate fertilizer business. Our principal products in the nitrogen fertilizer business are ammonia, urea and urea ammonium nitrate solution, or UAN. Our principal products in the phosphate fertilizer business are diammonium phosphate, or DAP, and monoammonium phosphate, or MAP. Our core market and distribution facilities are concentrated in the midwestern U.S. grain-producing states. Our principal customers are cooperatives and independent fertilizer distributors.

The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2006 and in accordance with accounting principles generally accepted in the United States for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments that are necessary for the fair representation of the information for the periods presented. These statements should be read in conjunction with our audited consolidated financial statements and related disclosures in our Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 28, 2007. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.

2.                 Summary of Significant Accounting Policies

For a complete discussion of the Company’s significant accounting policies, refer to our 2006 Annual Report on Form 10-K as of and for the year-ended December 31, 2006, filed with the SEC on February 28, 2007.

In the first quarter of 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48—Accounting for Uncertainty in Income Taxes. See Note 7—Income Taxes for our accounting policy for interest and penalties related to unrecognized tax benefits.

3.                 New Accounting Standards

Following are summaries of recently issued accounting pronouncements that are either currently applicable or may become applicable to our consolidated financial statements.

·       FIN No. 48—Accounting for Uncertainty in Income Taxes.   This Interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (SFAS or Statement) No. 109—Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN No. 48 in the first quarter of 2007 did not have a material impact on our consolidated financial statements.

5




CF INDUSTRIES HOLDINGS, INC.

·       FASB Staff Position (FSP) No. AUG AIR-1—Accounting for Planned Major Maintenance Activities.   This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The adoption of this FSP in the first quarter of 2007 did not have a material impact on our consolidated financial statements.

·       SFAS No. 157—Fair Value Measurements.   This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. It does not require any new fair value measurements; however, for some entities, the application of this Statement may change current practice. This Statement is effective for the Company beginning January 1, 2008. We have not yet determined the impact of this Statement on our consolidated financial statements.

·       SFAS No. 159—The Fair Value Option for Financial Assets and Financial Liabilities.   This Statement permits entities to measure eligible financial instruments and certain other items at fair value and record unrealized gains and losses in earnings. It also establishes presentation and disclosure requirements for items reported at fair value in the financial statements. This Statement is effective for the Company beginning January 1, 2008. We have not yet determined the impact of this Statement on our consolidated financial statements.

·       Emerging Issues Task Force (EITF) Issue No. 06-11—Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.   This EITF Issue clarifies how a company should recognize the income tax benefit received on dividends that are paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options that are charged to retained earnings under SFAS No. 123R—Share-Based Payment. This EITF Issue is effective for income tax benefits that result from dividends on equity-classified share-based payment awards that are declared by the Company after December 31, 2007. We have not yet determined the impact of this EITF Issue on our consolidated financial statements.

·       FSP No. FIN 39-1—Amendment of FASB Interpretation No. 39Offsetting of Amounts Related to Certain Contracts.   This FSP amends FIN No. 39 to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in SFAS No. 133—Accounting for Derivative Instruments and Hedging Activities. It also permits the offset of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement in accordance with FIN No. 39. If a policy of offsetting is elected, the fair value of the right to reclaim or return cash collateral must be offset against amounts recognized for derivative instruments. This FSP is effective for the Company beginning January 1, 2008. We have not yet determined the impact of this FSP on our consolidated financial statements.

·       FSP No. 48-1—Definition of Settlement in FIN No. 48Accounting for Uncertainty in Income Taxes.   This FSP provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. This FSP was effective for the Company upon the initial adoption of FIN No. 48 with retrospective application required to the date of initial adoption. The Company does not currently have any issues for which this FSP would apply. As a result, this FSP did not impact our consolidated financial statements.

6




CF INDUSTRIES HOLDINGS, INC.

4.                 Change in Estimate of Useful Lives of Depreciable Assets

We periodically review the depreciable lives assigned to our production facilities and related assets, as well as estimated production capacities used to develop our units-of-production (UOP) depreciation expense, and we change our estimates to reflect the results of those reviews. In the fourth quarter of 2006 we completed such a review and, as a result, we increased the depreciable lives of certain assets at our nitrogen production facilities from ten years to fifteen years. Separately, we revised the estimates of production capacities for certain UOP assets at our Donaldsonville, Louisiana nitrogen complex and all UOP assets at our Plant City, Florida phosphate complex. The effect of this change in estimate for the three months ended June 30, 2007 was an increase in earnings before income taxes of $2.9 million, an increase in net earnings of $1.9 million, and an increase in diluted earnings per share of $0.04. The effect of this change in estimate for the six months ended June 30, 2007 was an increase in earnings before income taxes of $4.9 million, an increase in net earnings of $3.2 million, and an increase in diluted earnings per share of $0.06.

5.                 Net Earnings Per Share

Net earnings per share were computed as follows:

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except per share amounts)

 

Net earnings available to common shareholders

 

 

$

93.6

 

 

 

$

42.6

 

 

 

$

150.8

 

 

 

$

18.0

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

55.4

 

 

 

55.0

 

 

 

55.3

 

 

 

55.0

 

 

Net earnings

 

 

$

1.69

 

 

 

$

0.77

 

 

 

$

2.73

 

 

 

$

0.33

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

55.4

 

 

 

55.0

 

 

 

55.3

 

 

 

55.0

 

 

Dilutive common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

1.1

 

 

 

 

 

 

1.0

 

 

 

 

 

Restricted stock

 

 

0.1

 

 

 

 

 

 

0.1

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

56.6

 

 

 

55.0

 

 

 

56.4

 

 

 

55.0

 

 

Net earnings

 

 

$

1.65

 

 

 

$

0.77

 

 

 

$

2.67

 

 

 

$

0.33

 

 

 

For the three and six months ended June 30, 2006, the computation of diluted earnings per share excludes approximately 2.9 million and 2.8 million potentially dilutive stock options because the effect of their inclusion would be antidilutive.

6.                 Pension and Other Postretirement Benefits

CF Industries, Inc. and its Canadian subsidiary both maintain noncontributory, defined-benefit pension plans. The U.S. pension plan is a closed plan. We also provide group insurance to our retirees. Until age 65, retirees are eligible to continue to receive the same Company-subsidized medical coverage provided to active employees. When a retiree reaches age 65, medical coverage ceases.

7




CF INDUSTRIES HOLDINGS, INC.

Net periodic benefit cost and other amounts recognized in accumulated other comprehensive loss included the following components:

 

 

Pension Plans

 

Retiree Medical

 

 

 

Three months ended

 

Six months ended

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Service cost for benefits earned during the period

 

 

$

1.7

 

 

 

$

1.8

 

 

 

$

3.4

 

 

 

$

3.5

 

 

 

$

0.3

 

 

 

$

0.3

 

 

 

$

0.6

 

 

 

$

0.6

 

 

Interest cost on projected benefit obligation

 

 

3.4

 

 

 

3.2

 

 

 

6.7

 

 

 

6.3

 

 

 

0.4

 

 

 

0.3

 

 

 

0.9

 

 

 

0.8

 

 

Expected return on plan assets

 

 

(3.6

)

 

 

(3.5

)

 

 

(7.1

)

 

 

(6.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of transition obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.2

 

 

Amortization of prior service cost

 

 

 

 

 

0.1

 

 

 

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

 

0.6

 

 

 

0.7

 

 

 

1.0

 

 

 

1.3

 

 

 

0.1

 

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

Net periodic benefit cost

 

 

2.1

 

 

 

$

2.3

 

 

 

4.0

 

 

 

$

4.3

 

 

 

0.9

 

 

 

$

0.8

 

 

 

1.8

 

 

 

$

1.8

 

 

Amortization of actuarial loss

 

 

(0.6

)

 

 

 

 

 

 

(1.0

)

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

Amortization of transition obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

(0.2

)

 

 

 

 

 

Total recognized in accumulated other comprehensive loss

 

 

(0.6

)

 

 

 

 

 

 

(1.0

)

 

 

 

 

 

 

(0.2

)

 

 

 

 

 

 

(0.3

)

 

 

 

 

 

Total recognized in net periodic benefit cost and accumulated other comprehensive loss

 

 

$

1.5

 

 

 

 

 

 

 

$

3.0

 

 

 

 

 

 

 

$

0.7

 

 

 

 

 

 

 

$

1.5

 

 

 

 

 

 

 

Our pension funding contributions in 2007 are estimated to total $11.7 million.

In addition to our qualified defined benefit pension plans, we also maintain nonqualified supplemental pension plans for highly compensated employees as defined under federal law. We also maintain a closed plan in which no current employees are eligible to participate. We recognized expense for these plans of $0.4 million and $0.5 million, respectively, for the three months ended June 30, 2007 and 2006, and $0.7 million and $0.7 million, respectively, for the six months ended June 30, 2007 and 2006. Included in the amounts recognized as expense for the three and six months ended June 30, 2007, was $0.2 million and $0.3 million, respectively, of  amortization for amounts included in our accumulated other comprehensive loss.

7.   Income Taxes

The income tax provisions recorded for the three and six months ended June 30, 2007 and 2006 were determined in accordance with the requirements of SFAS No. 109—Accounting for Income Taxes, APB Opinion No. 28—Interim Financial Reporting and FIN No. 18—Accounting for Income Taxes in Interim Periods.

8




CF INDUSTRIES HOLDINGS, INC.

The Company has adopted FIN No. 48—Accounting for Uncertainty in Income Taxes as of January 1, 2007. The effect of adoption was not material. The Company files federal, provincial, state and local income tax returns in the United States and Canada. In general, the Company’s filed tax returns remain subject to examination by United States tax jurisdictions for years 2001 and thereafter and by Canadian tax jurisdictions for years 2002 and thereafter.

The Company’s accounting policy is to recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and other non-operating-net, respectively.

8.   Inventories

Inventories consist of the following:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Fertilizer

 

 

$

134.8

 

 

 

$

135.1

 

 

Spare parts, raw materials and supplies

 

 

45.3

 

 

 

41.0

 

 

 

 

 

$

180.1

 

 

 

$

176.1

 

 

 

9.   Assets Held for Sale

In 2006, we committed to a plan to sell our corporate office facility located in Long Grove, Illinois and entered into a long-term lease for a new corporate office facility in Deerfield, Illinois. During the first quarter of 2007, we relocated our corporate headquarters to the Deerfield facility. As a result, we have classified our Long Grove facility as an asset held for sale based on the guidance of SFAS No. 144—Accounting for the Impairment or Disposal of Long-Lived Assets. The amount presented in our consolidated balance sheet as assets held for sale represents the net book value of the building and the related land. These assets are included within our Other segment in Note 16—Segment Disclosures.

10.   Asset Retirement Obligations

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. We account for AROs in accordance with SFAS No. 143—Accounting for Asset Retirement Obligations and FIN No. 47—Accounting for Conditional Asset Retirement Obligations (conditional AROs).

In the first quarters of 2007 and 2006, we made annual contributions of $9.4 million and $11.1 million, respectively, to an escrow account established for the benefit of the Florida Department of Environmental Protection in order to comply with Florida’s regulations governing financial assurance related to the closure of phosphogypsum stacks. Over the next nine years, we expect to contribute between $4 million and $7 million annually based upon the required funding formula as defined in the regulations and an assumed rate of return of 4% on invested funds. The amount of funds that will have accumulated in the account by the year 2016, including interest earned on invested funds, is currently estimated to be approximately $85 million. After 2016, contributions to the fund are estimated to average less than $1 million annually for the following 17 years. The balance in the account is estimated to be approximately $170 million by 2033. The required balance in the account is based on predetermined funding requirements as prescribed by the state of Florida. Therefore, contributions to the account will differ from amounts recognized as expense in our financial statements. Ultimately, the cash in the account will be used to complete settlement of the AROs. The balance in this account is reported as an asset at fair value on our consolidated balance sheet.

9




CF INDUSTRIES HOLDINGS, INC.

Additionally, Florida regulations require mining companies to demonstrate financial assurance for wetland and other surface water mitigation measures in advance of any mining activities. We will be required to demonstrate financial assurance for wetland and other surface water mitigation measures in advance of any mining activities if and when we are able to expand our Hardee mining activities into areas not currently permitted.

11.   Credit Agreement

Our senior secured revolving credit facility (the credit facility) with JPMorgan Chase provides up to $250 million, subject to a borrowing base, for working capital and general corporate purposes, including up to $50 million for the issuance of letters of credit. As of June 30, 2007, there was $190.0 million of available credit, based on the borrowing base, and there were no loans or letters of credit outstanding under the credit facility.

The credit facility is guaranteed by CF Holdings and certain domestic subsidiaries of CF Industries, Inc. (the Loan Parties). The credit facility is secured by substantially all of the personal property and assets, both tangible and intangible, of the Loan Parties, 100% of the equity interests of each Loan Party’s direct and indirect domestic subsidiaries other than immaterial subsidiaries, 65% of the equity interests of each Loan Party’s first-tier foreign subsidiaries and the real property located in Donaldsonville, Louisiana.

12.   Derivative Financial Instruments

We use natural gas in the manufacture of nitrogen fertilizer products. Because natural gas prices are volatile, our Natural Gas Acquisition Policy includes the objective of providing protection against significant adverse natural gas price movements. We manage the risk of changes in gas prices through the use of physical gas supply contracts and derivative financial instruments covering periods not exceeding three years. The derivative instruments that we currently use are swaps. These contracts reference primarily NYMEX futures contract prices, which represent fair value at any given time. The contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. We use derivative instruments primarily to lock in a substantial portion of our margin on sales under the forward pricing program. We may also establish natural gas derivative positions that are associated with anticipated natural gas requirements unrelated to our forward pricing program.

We use natural gas derivatives, primarily as an economic hedge of gas price risk, but without the application of hedge accounting for financial reporting purposes. Accordingly, changes in the fair value of the derivatives are recorded in cost of sales as the changes occur. Cash flows related to natural gas derivatives are reported as operating activities.

Derivative gains (losses) recorded directly to cost of sales consist of the following:

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Realized losses

 

 

$

(1.8

)

 

 

$

(26.0

)

 

$

(17.7

)

$

(47.3

)

Unrealized mark-to-market gains (losses)

 

 

(36.3

)

 

 

11.7

 

 

2.2

 

(8.3

)

Net derivative losses

 

 

$

(38.1

)

 

 

$

(14.3

)

 

$

(15.5

)

$

(55.6

)

 

10




CF INDUSTRIES HOLDINGS, INC.

On the consolidated balance sheet at June 30, 2007, we had net unrealized losses of $35.6 million on 34.0 million MMBtus of gas swap contracts. At December 31, 2006, we had net unrealized losses of $37.8 million on 30.6 million MMBtus of gas swap contracts.

13.   Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123R—Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards based on grant date fair values. We estimate the fair value of each stock option award using the Black-Scholes option valuation model. The fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.

At June 30, 2007, we had 2.7 million stock options outstanding with an aggregate intrinsic value of $120.0 million. At December 31, 2006, we had 3.2 million stock options outstanding with an aggregate intrinsic value of $31.4 million. During the three months ended June 30, 2007, we granted 21,500 stock options and 5,600 shares of restricted stock to employees and 9,690 shares of restricted stock to non-management members of our Board of Directors under the CF Industries Holdings, Inc. 2005 Equity and Incentive Plan. The weighted-average grant-date fair value per share for stock options and restricted stock awards granted during the three months ended June 30, 2007 was $17.21 and $40.75, respectively. There were no stock compensation awards granted in the first quarter of 2007.

Compensation cost is recorded primarily in selling, general, and administrative expense. The following table summaries stock-based compensation costs and related income tax benefits for the three and six months ended June 30, 2007 and 2006.

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Stock-based compensation expense

 

 

$

2.2

 

 

 

$

1.8

 

 

 

$

4.1

 

 

 

$

3.6

 

 

Income tax benefit

 

 

(0.8

)

 

 

(0.7

)

 

 

(1.6

)

 

 

(1.4

)

 

Stock-based compensation expense, net of income taxes

 

 

$

1.4

 

 

 

$

1.1

 

 

 

$

2.5

 

 

 

$

2.2

 

 

 

Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $8.0 million as of June 30, 2007, which will be recognized as expense over a weighted-average period of 1.1 years. Pre-tax unrecognized compensation expense for restricted stock awards, net of estimated forfeitures, was $1.4 million as of June 30, 2007, which will be recognized as expense over a weighted-average period of 1.3 years.

During the three and six months ended June 30, 2007, 0.3 million and 0.5 million stock options were exercised with a pre-tax intrinsic value of $7.7 million and $11.6 million, respectively. Cash received from stock option exercises for the three and six months ended June 30, 2007 was $4.7 million and $8.0 million, respectively. At June 30, 2007, 0.6 million stock options were exercisable with an aggregate intrinsic value of $27.4 million. At December 31, 2006, 0.9 million stock options were exercisable with an intrinsic value of $8.7 million.

An excess tax benefit is generated when the realized tax benefit from the vesting of restricted stock, or a stock option exercise, exceeds the previously recognized deferred tax asset. SFAS No. 123R requires excess tax benefits to be reported as a financing cash inflow rather than a reduction of taxes paid. Excess

11




CF INDUSTRIES HOLDINGS, INC.

tax benefits for the three and six months ended June 30, 2007 was $2.4 million and $3.4 million, respectively.

14.   Other Comprehensive Income (Loss)

Stockholders’ equity includes accumulated other comprehensive loss, which consists of the following components:

 

 

Foreign

 

Unrealized

 

 

 

Accumulated

 

 

 

Currency

 

Gain

 

Defined

 

Other

 

 

 

Translation

 

on

 

Benefit

 

Comprehensive

 

 

 

Adjustment

 

Securities

 

Plans

 

Income (Loss)

 

 

 

(in millions)

 

Balance at December 31, 2006

 

 

$

(2.9

)

 

 

$

0.4

 

 

 

$

(30.9

)

 

 

$

(33.4

)

 

Net change

 

 

2.0

 

 

 

0.1

 

 

 

0.6

 

 

 

2.7

 

 

Balance at June 30, 2007

 

 

$

(0.9

)

 

 

$

0.5

 

 

 

$

(30.3

)

 

 

$

(30.7

)

 

 

The unrealized gain on securities in our nonqualified employee benefit plan trust of $0.1 million is net of deferred taxes of $0.1 million. The $0.6 million adjustment to our defined benefit plans is net of deferred taxes of $0.4 million and consists of amortization of actuarial losses, prior service costs and transition obligations.

15.   Contingencies

Litigation

From time to time, we are subject to ordinary, routine legal proceedings related to the usual conduct of our business, including proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of our various plants and facilities. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these matters will not have a material adverse effect on our consolidated financial position or results of operations.

Environmental

In December 2004 and January 2005, the United States Environmental Protection Agency (EPA) inspected our Plant City, Florida phosphate fertilizer complex to evaluate the facility’s compliance with the Resource Conservation and Recovery Act (RCRA), the federal statute that governs the generation, transportation, treatment, storage and disposal of hazardous wastes. This inspection was undertaken as a part of a broad enforcement initiative commenced by the EPA to evaluate whether mineral processing and mining facilities, including, in particular, all wet process phosphoric acid production facilities, are in compliance with RCRA, and the extent to which such facilities’ waste management practices have impacted the environment.

By letter dated September 27, 2005, EPA Region 4 issued to the Company a Notice of Violation (NOV) and Compliance Evaluation Inspection Report. The NOV and Compliance Evaluation Inspection Report alleged a number of violations of RCRA, including violations relating to recordkeeping, the failure to properly make hazardous waste determinations as required by RCRA, and alleged treatment of sulfuric acid waste without a permit. The most significant allegation in the NOV is that the Plant City facility’s reuse of phosphoric acid process water (which is otherwise exempt from regulation as a hazardous waste) in the production of ammoniated phosphate fertilizer, and the return of this process water to the facility’s process water recirculating system, have resulted in the disposal of hazardous waste into the system without

12




CF INDUSTRIES HOLDINGS, INC.

a permit. The Compliance Evaluation Inspection Report indicates that as a result, the entire process water system, including all pipes, ditches, cooling ponds and gypsum stacks, could be regulated as hazardous waste management units under RCRA.

Several of our competitors have received NOVs making this same allegation. This particular recycling of process water is common in the industry and, the Company believes, was authorized by the EPA in 1990. The Company also believes that this allegation is inconsistent with recent case law governing the scope of the EPA’s regulatory authority under RCRA. If the EPA’s position is eventually upheld, the Company could incur material expenditures in order to modify its practices, or it may be required to comply with regulations applicable to hazardous waste treatment, storage or disposal facilities. If the Company is required to comply with such obligations, it could incur material capital and operating expenditures or may be required to cease operation of the water recirculating system if it is determined that it does not meet RCRA standards. This would cause a significant disruption of the operations of the Plant City facility.

The NOV indicated that the Company is liable for penalties up to the statutory maximum (for example, the statutory maximum per day of noncompliance for each violation that occurred after March 15, 2004 is $32,500 per day). Although penalties of this magnitude are rarely, if ever, imposed, the Company is at risk of incurring substantial civil penalties with respect to these allegations. The EPA has referred this matter to the United States Department of Justice (DOJ) for enforcement. The Company has entered into discussions with the DOJ that have included not only the issues identified in the NOV but other operational practices of the Company and its competitors. The Company does not know if this matter will be resolved prior to the commencement of litigation by the United States.

In connection with the RCRA enforcement initiative, the EPA collected samples of soil, groundwater and various waste streams at the Plant City facility. The analysis of the split samples collected by the Company during the EPA’s inspection did not identify hazardous waste disposal issues impacting the site. The EPA’s sampling results appear to be consistent with the Company’s results. Pursuant to a 1992 consent order with the State of Florida, the Company captures and reuses groundwater that has been impacted as a result of the former operation of an unlined gypsum stack at the site. Although the Company believes that it has evaluated and is remediating the impacts resulting from its historic activities, the DOJ and the EPA have indicated that they will be seeking additional environmental investigation at the facilities subject to the enforcement initiative, including Plant City. In addition, we understand that the EPA may decide to inspect our Bartow, Florida property, where we formerly manufactured phosphoric acid. The EPA has requested and the Company has provided copies of existing monitoring data for this facility. Depending on the conclusions that the EPA reaches after reviewing this data, the EPA may require that an investigation of environmental conditions be undertaken at the Bartow facility.

We are subject to a variety of environmental laws and regulations in all jurisdictions in which we operate. When it is probable that environmental liabilities exist and when reasonable estimates of such liabilities can be made, we have established associated reserves. These estimated liabilities are subject to change as additional information becomes available regarding the magnitude and timing of possible cleanup costs, the relative expense and effectiveness of alternative clean-up methods, and other possible liabilities associated with such situations. However, based on the information available as of the date of this filing, we believe that any additional costs that may be incurred as more information becomes available will not have a material adverse effect on the Company’s financial position, although such costs could have a material effect on the Company’s results of operations or cash flows in a particular period.

13




CF INDUSTRIES HOLDINGS, INC.

16.          Segment Disclosures

We are organized and managed based on two segments, which are differentiated primarily by their products, the markets they serve and the regulatory environments in which they operate. The two segments are the nitrogen and phosphate fertilizer businesses.

Segment data for sales, cost of sales and gross margin for the three and six months ended June 30, 2007 and 2006, and assets at June 30, 2007 and December 31, 2006, are presented below. Other assets include amounts attributable to the corporate headquarters and unallocated corporate assets.

 

 

Nitrogen

 

Phosphate

 

Consolidated

 

 

 

(in millions)

 

Three months ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Ammonia

 

 

$

264.6

 

 

 

$

 

 

 

$

264.6

 

 

Urea

 

 

237.9

 

 

 

 

 

 

237.9

 

 

UAN

 

 

165.6

 

 

 

 

 

 

165.6

 

 

DAP

 

 

 

 

 

141.9

 

 

 

141.9

 

 

MAP

 

 

 

 

 

35.5

 

 

 

35.5

 

 

Other

 

 

3.4

 

 

 

 

 

 

3.4

 

 

 

 

 

671.5

 

 

 

177.4

 

 

 

848.9

 

 

Cost of sales

 

 

548.7

 

 

 

122.6

 

 

 

671.3

 

 

Gross margin

 

 

$

122.8

 

 

 

$

54.8

 

 

 

$

177.6

 

 

Three months ended June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Ammonia

 

 

$

217.3

 

 

 

$

 

 

 

$

217.3

 

 

Urea

 

 

202.2

 

 

 

 

 

 

202.2

 

 

UAN

 

 

128.1

 

 

 

 

 

 

128.1

 

 

DAP

 

 

 

 

 

111.6

 

 

 

111.6

 

 

MAP

 

 

 

 

 

26.3

 

 

 

26.3

 

 

Other

 

 

3.2

 

 

 

 

 

 

3.2

 

 

 

 

 

550.8

 

 

 

137.9

 

 

 

688.7

 

 

Cost of sales

 

 

460.8

 

 

 

126.7

 

 

 

587.5

 

 

Gross margin

 

 

$

90.0

 

 

 

$

11.2

 

 

 

$

101.2

 

 

 

14




CF INDUSTRIES HOLDINGS, INC.

 

 

 

Nitrogen

 

Phosphate

 

Consolidated

 

 

 

(in millions)

 

Six months ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Ammonia

 

$

300.6

 

 

$

 

 

 

$

300.6

 

 

Urea

 

433.5

 

 

 

 

 

433.5

 

 

UAN

 

284.6

 

 

 

 

 

284.6

 

 

DAP

 

 

 

243.8

 

 

 

243.8

 

 

MAP

 

 

 

55.1

 

 

 

55.1

 

 

Other

 

3.7

 

 

 

 

 

3.7

 

 

 

 

1,022.4

 

 

298.9

 

 

 

1,321.3

 

 

Cost of sales

 

808.9

 

 

229.7

 

 

 

1,038.6

 

 

Gross margin

 

$

213.5

 

 

$

69.2

 

 

 

$

282.7

 

 

Six months ended June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Ammonia

 

$

264.7

 

 

$

 

 

 

$

264.7

 

 

Urea

 

364.8

 

 

 

 

 

364.8

 

 

UAN

 

214.2

 

 

 

 

 

214.2

 

 

DAP

 

 

 

213.7

 

 

 

213.7

 

 

MAP

 

 

 

47.0

 

 

 

47.0

 

 

Other

 

3.5

 

 

 

 

 

3.5

 

 

 

 

847.2

 

 

260.7

 

 

 

1,107.9

 

 

Cost of sales

 

790.1

 

 

239.3

 

 

 

1,029.4

 

 

Gross margin

 

$

57.1

 

 

$

21.4

 

 

 

$

78.5

 

 

 

 

 

Nitrogen

 

Phosphate

 

Other

 

Consolidated

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2007

 

 

$

504.5

 

 

 

$

475.9

 

 

$

607.5

 

 

$

1,587.9

 

 

December 31, 2006

 

 

$

493.9

 

 

 

$

426.9

 

 

$

369.6

 

 

$

1,290.4

 

 

 

15




CF INDUSTRIES HOLDINGS, INC.

17.          Correction of an Error

In the second quarter of 2007, we identified an error in our previously issued financial statements related to our classification of shipping and handling costs billed to our customers. Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 00-10—Accounting for Shipping and Handling Fees and Costs states that the amount billed to a customer in a sales transaction related to shipping and handling should be classified as revenue in the consolidated statement of operations. Prior to correcting the error we treated the amounts billed to our customers for shipping and handling as a reduction of shipping and handling costs included in cost of sales. Because the correction was between net sales and cost of sales, there was no change to our previously reported gross margin. The correction had no effect on any other financial statement line item or per-share amount. Even though the error is immaterial to the previously presented consolidated financial statements taken as a whole, we corrected our previously presented consolidated financial statements as follows:

 

 

Three months ended

 

 

 

June 30, 2006

 

 

 

As previously
presented

 

Correction

 

As presented
herein

 

 

 

($ in millions)

 

Nitrogen segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

536.2

 

 

 

$

14.6

 

 

 

$

550.8

 

 

Cost of sales

 

 

446.2

 

 

 

14.6

 

 

 

460.8

 

 

Gross margin

 

 

$

90.0

 

 

 

$

 

 

 

$

90.0

 

 

Gross margin percentage

 

 

16.8

%

 

 

 

 

 

 

16.3

%

 

Phosphate segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

128.6

 

 

 

$

9.3

 

 

 

$

137.9

 

 

Cost of sales

 

 

117.4

 

 

 

9.3

 

 

 

126.7

 

 

Gross margin

 

 

$

11.2

 

 

 

$

 

 

 

$

11.2

 

 

Gross margin percentage

 

 

8.7

%

 

 

 

 

 

 

8.1

%

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

664.8

 

 

 

$

23.9

 

 

 

$

688.7

 

 

Cost of sales

 

 

563.6

 

 

 

23.9

 

 

 

587.5

 

 

Gross margin

 

 

$

101.2

 

 

 

$

 

 

 

$

101.2

 

 

Gross margin percentage

 

 

15.2

%

 

 

 

 

 

 

14.7

%

 

 

16




CF INDUSTRIES HOLDINGS, INC.

 

 

 

Six months ended

 

 

 

June 30, 2006

 

 

 

As previously
presented

 

Correction

 

As presented
herein

 

 

 

($ in millions)

 

Nitrogen segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

822.0

 

 

 

$

25.2

 

 

 

$

847.2

 

 

Cost of sales

 

 

764.9

 

 

 

25.2

 

 

 

790.1

 

 

Gross margin

 

 

$

57.1

 

 

 

$

 

 

 

$

57.1

 

 

Gross margin percentage

 

 

6.9

%

 

 

 

 

 

 

6.7

%

 

Phosphate segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

243.3

 

 

 

$

17.4

 

 

 

$

260.7

 

 

Cost of sales

 

 

221.9

 

 

 

17.4

 

 

 

239.3

 

 

Gross margin

 

 

$

21.4

 

 

 

$

 

 

 

$

21.4

 

 

Gross margin percentage

 

 

8.8

%

 

 

 

 

 

 

8.2

%

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

1,065.3

 

 

 

$

42.6

 

 

 

$

1,107.9

 

 

Cost of sales

 

 

986.8

 

 

 

42.6

 

 

 

1,029.4

 

 

Gross margin

 

 

$

78.5

 

 

 

$

 

 

 

$

78.5

 

 

Gross margin percentage

 

 

7.4

%

 

 

 

 

 

 

7.1

%

 

 

17




CF INDUSTRIES HOLDINGS, INC.

ITEM 2.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data, of our 2006 Annual Report on Form 10-K as well as Item 1, Financial Statements, in this Form 10-Q. All references to “CF Holdings,” “we,” “us” and “our” refer to CF Industries Holdings, Inc. and its subsidiaries, including CF Industries, Inc., except where the context makes clear that the reference is only to CF Holdings itself and not its subsidiaries.

Overview

We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. Our operations are organized into two business segments: the nitrogen fertilizer business and the phosphate fertilizer business. Our principal products in the nitrogen fertilizer business are ammonia, urea and urea ammonium nitrate solution, or UAN. Our principal products in the phosphate fertilizer business are diammonium phosphate, or DAP, and monoammonium phosphate, or MAP. Our core market and distribution facilities are concentrated in the midwestern U.S. grain-producing states. Our principal customers are cooperatives and independent fertilizer distributors.

Our principal assets include:

·       the largest nitrogen fertilizer complex in North America (Donaldsonville, Louisiana);

·       a 66% economic interest in the largest nitrogen fertilizer complex in Canada (which we operate in Medicine Hat, Alberta through Canadian Fertilizers Limited (CFL), a consolidated variable interest entity);

·       one of the largest integrated ammonium phosphate fertilizer complexes in the United States (Plant City, Florida);

·       the most-recently constructed phosphate rock mine and associated beneficiation plant in the United States (Hardee County, Florida); and

·       an extensive system of terminals, warehouses and associated transportation equipment located primarily in the midwestern United States.

Executive Summary

We reported net earnings of $93.6 million in the second quarter of 2007 compared to net earnings of $42.6 million in the second quarter of 2006. Our results for the second quarter of 2007 included a net $36.3 million pre-tax mark-to-market loss ($23.4 million after tax) on natural gas derivatives. Net earnings of $42.6 million for the second quarter of 2006 included a net $11.7 million pre-tax mark-to-market gain ($7.1 million after tax) on natural gas derivatives.

Our gross margin increased $76.4 million to $177.6 million in the second quarter of 2007 compared to $101.2 million in the second quarter of 2006. The increase in gross margin resulted mainly from higher average nitrogen and phosphate fertilizer selling prices and increased nitrogen fertilizer sales volumes, partially offset by unfavorable variances related to mark-to-market adjustments on natural gas derivatives.

Our net sales increased 23% to $848.9 million in the second quarter of 2007 compared to $688.7 million in the second quarter of 2006. The increase primarily reflected higher average nitrogen and

18




CF INDUSTRIES HOLDINGS, INC.

phosphate fertilizer selling prices and higher nitrogen fertilizer sales volume. A 165,000 ton increase in fertilizer sold during the second quarter of 2007 resulted in total sales volume of 2.75 million tons in the second quarter of 2007 compared to 2.58 million tons in the second quarter of 2006.

We paid cash dividends of $1.1 million in the second quarter of 2007.

Net earnings of $150.8 million for the six months ended June 30, 2007 were $132.8 million greater than net earnings of the comparable period of 2006. The improvement in net earnings was due primarily to higher average nitrogen and phosphate fertilizer selling prices, decreases in natural gas costs, increased demand for nitrogen fertilizers and favorable variances related to natural gas derivatives.

The following significant item affected the comparability of our reported results for the six months ended June 30, 2007 and 2006:

Hurricane activity in the Gulf of Mexico region during the latter portion of 2005 significantly affected the domestic fertilizer industry. These hurricanes caused substantial damage to the natural gas production and distribution facilities in the region, affecting the supply and price of natural gas, the primary raw material used to produce nitrogen fertilizers. By the end of the first quarter of 2006, natural gas prices had moderated, returning to approximately pre-hurricane levels. These storms also affected the availability of barges used to transport urea and DAP/MAP on the Mississippi River and adversely affected the supply of sulfur, a raw material used in the production of phosphate fertilizers, by causing refinery closures and transportation disruptions.

19




CF INDUSTRIES HOLDINGS, INC.

Results of Operations

The following table presents our consolidated results of operations:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007 v. 2006

 

2007

 

2006

 

2007 v. 2006

 

 

 

(in millions, except per share amounts)

 

Net sales

 

$

848.9

 

$

688.7

 

 

$

160.2

 

 

$

1,321.3

 

$

1,107.9

 

 

$

213.4

 

 

Cost of sales

 

671.3

 

587.5

 

 

83.8

 

 

1,038.6

 

1,029.4

 

 

9.2

 

 

Gross margin

 

177.6

 

101.2

 

 

76.4

 

 

282.7

 

78.5

 

 

204.2

 

 

Selling, general and administrative

 

17.5

 

14.3

 

 

3.2

 

 

31.2

 

27.3

 

 

3.9

 

 

Other operating—net

 

0.7

 

1.6

 

 

(0.9

)

 

2.0

 

3.1

 

 

(1.1

)

 

Operating earnings

 

159.4

 

85.3

 

 

74.1

 

 

249.5

 

48.1

 

 

201.4

 

 

Interest expense

 

0.3

 

1.5

 

 

(1.2

)

 

0.8

 

2.0

 

 

(1.2

)

 

Interest income

 

(5.0

)

(2.8

)

 

(2.2

)

 

(8.9

)

(5.5

)

 

(3.4

)

 

Minority interest

 

19.6

 

16.4

 

 

3.2

 

 

26.6

 

22.3

 

 

4.3

 

 

Other non-operating—net

 

(0.4

)

(0.1

)

 

(0.3

)

 

(0.9

)

(0.2

)

 

(0.7

)

 

Earnings before income taxes

 

144.9

 

70.3

 

 

74.6

 

 

231.9

 

29.5

 

 

202.4

 

 

Income tax provision

 

51.3

 

27.7

 

 

23.6

 

 

81.1

 

11.5

 

 

69.6

 

 

Net earnings

 

$

93.6

 

$

42.6

 

 

$

51.0

 

 

$

150.8

 

$

18.0

 

 

$

132.8

 

 

Net earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.69

 

$

0.77

 

 

$

0.92

 

 

$

2.73

 

$

0.33

 

 

$

2.40

 

 

Diluted

 

$

1.65

 

$

0.77

 

 

$

0.88

 

 

$

2.67

 

$

0.33

 

 

$

2.34

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

55.4

 

55.0

 

 

 

 

 

55.3

 

55.0

 

 

 

 

 

Diluted

 

56.6

 

55.0

 

 

 

 

 

56.4

 

55.0

 

 

 

 

 

 

We have corrected an error in our previously presented results of operations to include in net sales amounts billed to our customers for shipping and handling. These amounts were previously included as a reduction in cost of sales. The correction did not impact any other financial statement line item or per-share amount. See “Critical Accounting Policies and Estimates” for additional discussion of this correction.

Second Quarter of 2007 Compared to the Second Quarter of 2006

Consolidated Operating Results

During the second quarter of 2007, the domestic nitrogen fertilizer industry benefited from increased demand resulting from an increase in corn acreage planted and a strong international market. Concurrently, tight worldwide industry supply/demand conditions and increased domestic demand led to improved operating results in our phosphate fertilizer business. Our total gross margin increased by $76.4 million to $177.6 million for the second quarter of 2007 compared to $101.2 million for the same period in 2006, due largely to a strong fertilizer pricing environment, partially offset by unfavorable variances on mark-to-market adjustments on natural gas derivatives. Net earnings of $93.6 million for the second quarter of 2007 included a net pre-tax mark-to-market loss of $36.3 million ($23.4 million after tax) on natural gas derivatives. Net earnings of $42.6 million for the second quarter of 2006 included a net pre-tax mark-to-market gain of $11.7 million ($7.1 million after tax) on natural gas derivatives.

20




CF INDUSTRIES HOLDINGS, INC.

Net Sales

Our net sales increased 23% to $848.9 million in the second quarter of 2007 compared to $688.7 million in the second quarter of 2006, due primarily to higher average nitrogen and phosphate fertilizer selling prices as well as an increase in nitrogen fertilizer sales volume. Average nitrogen fertilizer prices in the second quarter of 2007 increased by 10% compared to average prices in the same period of 2006. Second quarter 2007 average phosphate fertilizer prices a