PotashCorp's Third-Quarter Earnings Per Share, Gross Margin Second Highest Ever |
Listed: TSX, NYSE
Symbol: POT
SASKATOON, SK, Oct. 27 /PRNewswire-FirstCall/ - The continuing growth in
prices for potash, phosphate and nitrogen contributed to PotashCorp's
third-quarter earnings of $1.17 per diluted share, the second-highest quarter
in company history. This is 72 percent more than the $0.68 earned in last
year's third quarter and trails only the record $1.46 per share earned in the
second quarter of 2005. A stronger-than-expected Canadian dollar at
quarter-end negatively impacted earnings by $0.15 per share relative to our
second-quarter end, and impacted earnings by $0.09 per share relative to our
July guidance. The majority of this exchange rate differential is non-cash.
The quarterly results were also reduced by a year-over-year decrease in potash
sales volumes to Brazil and some impact from hurricanes in the US Gulf region.
Total income for the quarter was $130.3 million, a 73-percent increase from
the $75.2 million earned in the third quarter of 2004. Year-to-date net income
rose to $425.8 million ($3.79 per share) versus year-to-date income of
$198.5 million, or $1.82 per share, in 2004.
Gross margin of $279.5 million was up 48 percent from $189.4 million in
last year's third quarter and raised year-to-date gross margin to
$882.8 million, surpassing gross margin of $681.4 million for all of 2004.
Potash contributed $46.8 million of the third-quarter improvement, with higher
product prices offsetting lower volumes. The phosphate segment added another
$31.6 million of this gross margin increase, primarily due to higher product
prices. Nitrogen filled in the rest, also on the back of stronger prices. Cash
flow from operations increased by 87 percent quarter over quarter to
$316.1 million. A portion of the funds was used to complete the repurchase of
5.5 million outstanding common shares by September 1, 2005, and to begin the
purchase of up to 4 million additional shares. Our equity investments in Arab
Potash Company (APC) and Sociedad Quimica y Minera (SQM), along with dividends
received from Israel Chemicals Ltd. (ICL), added $22.9 million to our
quarterly earnings, a 29-percent increase over the same period last year.
"With double-digit price increases in all three nutrients, in almost all
product categories, the underlying fundamentals that drive our success remain
solid," said PotashCorp President and CEO Bill Doyle. "Although the third
quarter showed that unanticipated market conditions in our business can impact
volumes, we still achieved earnings and gross margin that rivaled the best
quarter in our history. Most importantly, our results demonstrated the strong
platform we have with our potash business, its exemplary cash-generating
ability and our focus on employing our capital to deliver the best returns for
our shareholders."
Market Conditions
Throughout the quarter, agricultural conditions in Brazil deteriorated.
The Brazilian real strengthened, soybean prices declined, and agricultural
credit dried up. This resulted in a decrease in potash and phosphate imports
in the third quarter, the beginning of Brazil's spring season and
traditionally a large purchasing quarter for them. In addition, adverse
weather in Southeast Asia, including both drought and flooding, hurt
consumption in Indonesia, Malaysia and Vietnam. In spite of these demand
fluctuations, potash supply continued to be tight, with North American
inventories ending the quarter 22 percent below their five-year average.
According to International Fertilizer Association statistics, overall world
demand for potash was up 3.6 percent for the first six months of 2005.
The hurricanes that struck the US Gulf region impacted the sector in
three ways. First, they drove up prices for natural gas, which affected costs
in all three nutrients and resulted in nitrogen production curtailments. This
led to higher ammonia prices, although the increases are lagging behind the
rise in natural gas costs. Second, the hurricanes disrupted production of
phosphate products and continue to limit sulfur availability. This has led to
tighter supply, supporting higher phosphate prices. Finally, to a lesser
degree, the hurricanes caused disruptions in shipping, which affected sales
volumes.
Potash
Potash gross margin of $167.6 million was 39 percent above the
$120.8 million in the third quarter of 2004 and raised the year-to-date total
to $567.1 million. Gross margin as a percentage of sales increased to
61 percent, a 13-percent improvement quarter over quarter and consistent with
our second-quarter results.
Realized potash prices rose by 36 percent, or $40 per tonne, quarter over
quarter. North American realized prices were up 50 percent from the same
period last year and by late in the third quarter all announced increases,
including an $11-per-tonne hike on September 1, had taken hold. Offshore
realized prices were up 27 percent from last year's third quarter. Shipments
to India in the second half of the quarter included an $18-per-tonne increase,
while negotiation of 2006 prices with China began.
Potash volumes in North America were up 28 percent from the third quarter
of 2004, as dealers purchased in advance of the September price increase.
Year-to-date volumes to North American customers were up 6 percent from last
year. Offshore volumes were down 20 percent quarter over quarter, largely
because of slower sales to Brazil. In addition, China made significant
purchases earlier in the year, which led to lower sales volumes there in the
third quarter. As a result, PotashCorp's total volumes were off 6 percent for
the quarter but up 1 percent over the first nine months of 2004, as
significant volume increases from China and India have offset Brazil's
decline.
We produced 1.7 million tonnes in the quarter and ended the period with
total potash inventories of approximately 440,000 tonnes, down 100,000 tonnes
from levels at the end of the second quarter. The translated cost of
production increased from last year's third quarter, as a stronger average
Canadian dollar effectively added over $4.00 per tonne. Natural gas costs were
up from the third quarter of 2004, raising the cash cost of potash production
by an additional $0.70 per tonne.
Phosphate
Higher product prices increased our phosphate gross margin to
$32.2 million, up from $0.6 million in the same quarter last year. This
surpassed the $22.1 million in the second quarter and raised year-to-date
gross margin to $71.3 million, significantly higher than the gross margin of
$5.4 million through the same period in 2004. Industrial products represented
almost half of this quarter's margin at $15.2 million, while feed and
fertilizer made positive contributions.
Tight supply led to significant price increases in most product
categories, including a 20-percent jump ($39 per tonne) in the price of solid
fertilizers. Liquid fertilizer prices were up 9 percent quarter over quarter.
Realized prices for feed phosphate products were up 25 percent, or $53 per
tonne, from last year's third quarter and 7 percent ($17 per tonne) from the
trailing quarter. Industrial products sold for $10 per tonne more, or
3 percent, quarter over quarter.
Solid fertilizer volumes were down 16 percent from the third quarter of
2004, largely due to slower sales to Brazil. Liquid fertilizer tonnes were up
37 percent from the third quarter of 2004 and 56 percent from the trailing
quarter, as India increased purchases. In feed, volumes were down 15 percent
from last year's third quarter due to a decrease in demand and an increase in
imports. Industrial phosphate volumes rose 12 percent from the same period
last year due to higher sales to Mexico.
Nitrogen
Nitrogen gross margin of $79.7 million was up 17 percent from the third
quarter of 2004 due to higher product prices, demonstrating the value of our
lower-cost gas contracts in Trinidad. While higher natural gas prices
negatively impacted much of the Western Hemisphere, PotashCorp's Trinidad
facility provided $52.3 million of the nitrogen margin. An additional
$13.2 million was recognized from gas hedges sold during the first quarter,
while North American nitrogen production added $14.2 million in gross margin.
For the first nine months of 2005, PotashCorp's nitrogen operations generated
$244.4 million in gross margin, exceeding the $242.8 million in margin for all
of 2004.
PotashCorp's total average natural gas cost for the quarter, including
hedge, was $4.40 per MMBtu, 17 percent higher than last year's third quarter
and 9 percent higher than the second quarter of 2005. This is a result of the
substantial increase in North American natural gas costs. The major storms of
the third quarter reduced gross margin by roughly $3 million largely due to a
temporary shutdown at our Geismar, LA facility, limitations on ammonia
terminaling and the need to divert Trinidad shipments for a short period of
time.
Financial
Third-quarter selling and administrative expenses were virtually flat
compared to last year's same quarter, and were $23 million below the previous
quarter. The second quarter included a $22-million non-cash expense related to
our May 2005 stock option grant, which was required to be expensed in the
quarter the options were granted.
Provincial mining and other taxes continued to be higher than in the
previous year due to higher realized prices and profitability in the potash
segment.
Continuing strong cash flow was reinvested in our core business, with
$213.5 million spent on repurchasing shares during the quarter. Approximately
$121 million was used for capital expenditures, with the majority used to
bring back our excess potash capacity. Another $97 million was spent to
purchase our 9.99 percent stake in Sinofert, which was announced in June 2005.
Even after these expenditures, the total cash balance at the end of the
quarter was $328 million.
Outlook
The factors that have been driving tight potash fundamentals and higher
prices remain, and the global agricultural economy is strong. Many countries
in Asia and Latin America continue to experience significant economic growth,
leading to a demand for better diets and more fertilizer. In 2006, according
to the IMF, China's GDP growth is expected to be 8.2 percent, while India's
growth is projected at 6.3 percent. In addition, offshore customers grow a
wide variety of crops that require potash, such as rice, sugarcane, rubber,
oil palm and coffee. These commodities are generating good returns even as
prices for such traditional North American crops as corn and soybeans are
strained. Global grain consumption continues to grow, while world production
for the 2005-06 crop year declined 5 percent, or 84 million tonnes, from the
previous year. According to the United States Department of Agriculture, this
reduced the world grain stocks-to-use ratio from 20.3 percent to 17.9 percent,
the second lowest level in the last 30 years.
In North America, US net cash farm income is projected at $85.2 billion,
close to the previous year's record of $85.5 billion. Through participation in
government programs and effective forward marketing, a significant portion of
the current year's US corn production enjoyed returns greater than what can be
received in today's harvest corn market. This provides farmers with the cash
necessary to purchase the crop inputs they need.
Although Brazil's 2005 potash imports are projected to fall by
1.5 million tonnes from the record volumes of last year, it is expected to
return to the market in 2006 as it has worked through excess inventory and
needs to feed its potassium-deficient soils to maintain proper yields. With
Brazil out of the market for the remainder of the year, Canpotex has decreased
its annual sales forecast from 8.7 million to 8.4 million tonnes, which will
still exceed last year's record.
Potash pricing growth is expected to continue. Offshore, Canpotex is
negotiating a price increase under the Chinese contract for next year, with
the target of bringing its largest customer on par with prices received from
India and Southeast Asia.
For 2005, we expect record potash sales volumes, record prices and record
potash segment gross margin of approximately $750 million.
Phosphate is entering a period of improvement. North American DAP
inventories are at five-year lows and 16 percent, or 850,000 tonnes, of
DAP/MAP production has been permanently shut down or temporarily impacted by
hurricanes. Given the strong demand for DAP in North America and offshore,
prices should increase, and we have announced a $22-per-tonne boost in the
price of DAP, effective immediately. Industrial products, which have been the
strongest segment of the phosphate business, should continue to perform well.
The outlook for feed is positive and we have announced a $55-per-tonne
increase, effective December 1, 2005.
In nitrogen, the combination of strong world demand, high natural gas
prices and ammonia curtailments in North America should lead to higher prices,
benefiting us with our advantageous gas position in Trinidad. Since October 1,
2005, 2 million tonnes of annual ammonia production in North America have been
curtailed. To service this lost production with imports, the US market would
need four specialized vessels dedicated to ammonia service throughout an
entire year, which are currently not available.
Our Lima facility has been shut down for an extended 45-day turnaround,
due to limited gas availability and high gas prices, and Augusta has been
reduced to minimum operating rates. Difficult North American conditions will
be complicated by issues related to moving imports up the Mississippi River.
Profitability in the North American nitrogen industry will be a challenge, but
we anticipate Trinidad nitrogen gross margin growth of approximately
$12 million in the fourth quarter. In addition, our total US hedge position is
currently valued at approximately $250 million, with 2006 hedges at about
$100 million.
Capital expenditures for 2005 are now estimated to total $420 million, of
which $145 million is related to sustaining capital.
The stronger Canadian dollar and a reduction in offshore potash volumes
from our earlier expectations have caused us to reduce our earnings guidance.
Fourth-quarter net income is expected to be in the range of $0.95 to $1.20 per
share, and we now expect 2005 net income to be in the range of $4.75 to $5.00
per diluted share, based on a $1.18 Canadian dollar. Revised downward guidance
for the full year from $5.00 to $5.50 includes adjustments approximating
$0.15 per share, reflecting an anticipated stronger Canadian dollar at
$1.18 versus prior guidance at $1.20, and anticipated charges related to
production decisions at Cassidy Lake and Aurora. Exclusive of these charges,
our full year earnings guidance is down by approximately five percent.
Conclusion
"The third quarter was an example of the saw's edge we typically see in
the upward trend line in potash," said Doyle. "Despite the decline in sales in
2005 to Brazil, last year's largest potash customer, we will still set an
all-time record this year, and expect another next year. Our confidence in
this business over the foreseeable future remains intact. Our competitors are
operating at capacity and marginal potash expansion announcements will not be
enough to change the dynamics of this powerful industry environment. We are
poised to take advantage of the opportunities that lie ahead."
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer
enterprise producing the three primary plant nutrients and a leading supplier
to three distinct market categories: agriculture, with the largest capacity in
the world in potash, third largest in phosphate and fourth largest in
nitrogen; animal nutrition, with the world's largest capacity in phosphate
feed ingredients; and industrial chemicals, as the largest global producer of
industrial nitrogen products and one of only three North American suppliers of
industrial phosphates.
This release contains forward-looking statements, which involve risks and
uncertainties, including those referred to in the company's annual report to
shareholders for 2004 and in filings with the U.S. Securities and Exchange
Commission and Canadian provincial securities commissions. A number of factors
could cause actual results to differ materially from those in the
forward-looking statements, including, but not limited to: fluctuation in
supply and demand in fertilizer, sulfur, transportation and petrochemical
markets; changes in competitive pressures, including pricing pressures; risks
associated with natural gas and other hedging activities; changes in capital
markets; changes in currency and exchange rates; unexpected geological or
environmental conditions; and government policy changes.
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PotashCorp will host a conference call on Thursday, October 27, 2005, at
1:00 p.m. Eastern Time. To join the call, dial (706) 643-3329 at least
10 minutes prior to the start time. Alternatively, visit
http://www.potashcorp.com for a live webcast of the conference call in a
listen-only mode. This news release is also available at this same
website.
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Financial Position
(in millions of US dollars except share amounts)
(unaudited)
September 30, December 31,
2005 2004
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Assets
Current assets
Cash and cash equivalents $ 328.0 $ 458.9
Accounts receivable 416.6 352.6
Inventories 432.3 396.8
Prepaid expenses and other current assets 49.2 35.3
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1,226.1 1,243.6
Property, plant and equipment 3,173.4 3,098.9
Other assets 844.7 650.2
Intangible assets 35.6 37.1
Goodwill 97.0 97.0
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$ 5,376.8 $ 5,126.8
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Liabilities
Current liabilities
Short-term debt $ 94.7 $ 93.5
Accounts payable and accrued charges 840.8 599.9
Current portion of long-term debt 10.2 10.3
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945.7 703.7
Long-term debt 1,257.8 1,258.6
Future income tax liability 534.3 499.4
Accrued post-retirement/post-employment
benefits 214.1 193.4
Accrued environmental costs and asset retirement
obligations 84.7 81.2
Other non-current liabilities and deferred
credits 19.3 4.9
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3,055.9 2,741.2
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Shareholders' Equity
Share capital (Note 3) 1,425.7 1,408.4
Unlimited authorization of common shares
without par value; issued and outstanding
107,145,871 and 110,630,503 at September 30,
2005 and December 31, 2004, respectively
Contributed surplus (Note 3) - 275.7
Retained earnings (Note 3) 895.2 701.5
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2,320.9 2,385.6
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$ 5,376.8 $ 5,126.8
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Operations and Retained Earnings
(in millions of US dollars except per-share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
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Sales (Note 8) $ 938.0 $ 815.7 $2,916.7 $2,377.8
Less: Freight 59.9 51.2 194.5 178.2
Transportation and
distribution 29.8 23.6 90.8 77.9
Cost of goods sold 568.8 551.5 1,748.6 1,637.6
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Gross Margin 279.5 189.4 882.8 484.1
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Selling and administrative 31.8 32.2 116.0 83.8
Provincial mining and
other taxes 28.8 23.1 111.4 67.5
Provision for PCS Yumbes S.C.M.
(Note 5) - - - 5.9
Foreign exchange loss 24.4 20.1 12.4 2.0
Other income (Note 11) (20.4) (19.1) (54.3) (35.2)
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64.6 56.3 185.5 124.0
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Operating Income 214.9 133.1 697.3 360.1
Interest Expense 20.4 20.8 61.7 63.8
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Income Before Income Taxes 194.5 112.3 635.6 296.3
Income Taxes (Note 6) 64.2 37.1 209.8 97.8
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Net Income $ 130.3 $ 75.2 425.8 198.5
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Retained Earnings, Beginning
of Period 701.5 462.8
Premium Paid on Repurchase
of Common Shares (Note 3) (182.9) -
Dividends (49.2) (43.2)
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Retained Earnings, End of Period $ 895.2 $ 618.1
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Net Income Per Share (Note 7)
Basic $ 1.20 $ 0.69 $ 3.88 $ 1.85
Diluted $ 1.17 $ 0.68 $ 3.79 $ 1.82
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Dividends Per Share $ 0.15 $ 0.15 $ 0.45 $ 0.40
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Cash Flow
(in millions of US dollars)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
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Operating Activities
Net income $ 130.3 $ 75.2 $ 425.8 $ 198.5
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Adjustments to reconcile net
income to cash provided by
operating activities
Depreciation and amortization 59.0 55.6 181.0 179.2
Stock-based compensation 1.7 2.8 25.7 8.4
Loss (gain) on disposal of
long-term assets 0.2 (0.3) 5.7 (0.6)
Foreign exchange on future
income tax 14.0 13.6 10.0 5.8
Provision for future
income tax 6.4 9.9 21.0 34.2
Share of earnings of
equity investees (16.8) (12.0) (43.3) (19.7)
Dividends received from
equity investees 6.5 - 18.6 4.6
Provision for PCS Yumbes
S.C.M. - - - 5.9
Other long-term liabilities 3.6 (4.2) 22.6 1.7
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Subtotal of adjustments 74.6 65.4 241.3 219.5
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Changes in non-cash operating
working capital
Accounts receivable (42.8) (18.7) (70.8) (9.1)
Inventories (43.5) 13.4 (33.9) 16.5
Prepaid expenses and other
current assets (14.7) (18.5) (14.2) (11.6)
Accounts payable and
accrued charges 212.2 51.8 231.8 71.9
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Subtotal of changes in non-cash
operating working capital 111.2 28.0 112.9 67.7
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Cash provided by operating
activities 316.1 168.6 780.0 485.7
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Investing Activities
Additions to property,
plant and equipment (120.6) (43.9) (251.9) (93.3)
Investment in Arab Potash
Company ("APC") - - (18.6) -
Investment in Israel
Chemicals Ltd. ("ICL") - - (74.9) -
Investment in Sinochem Hong
Kong Holdings Limited (97.4) - (97.4) -
Proceeds from disposal of
long-term assets 0.6 0.5 9.0 1.2
Proceeds from sale of shares
of PCS Yumbes S.C.M. - - 5.2 -
Other assets and intangible
assets 4.7 0.3 4.6 4.6
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Cash used in investing
activities (212.7) (43.1) (424.0) (87.5)
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Cash before financing
activities 103.4 125.5 356.0 398.2
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Financing Activities
Repayment of long-term
debt obligations (0.3) (0.2) (0.9) (0.7)
Proceeds from (repayment of)
short-term debt obligations 1.4 3.5 1.2 (81.3)
Dividends (16.2) (12.8) (49.4) (39.8)
Repurchase of common shares (213.5) - (530.9) -
Issuance of common shares 29.9 58.2 93.1 99.6
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Cash (used in) provided by
financing activities (198.7) 48.7 (486.9) (22.2)
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(Decrease) Increase in Cash
and Cash Equivalents (95.3) 174.2 (130.9) 376.0
Cash and Cash Equivalents,
Beginning of Period 423.3 206.5 458.9 4.7
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Cash and Cash Equivalents,
End of Period $ 328.0 $ 380.7 $ 328.0 $ 380.7
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Supplemental cash flow
disclosure
Interest paid $ 14.1 $ 11.4 $ 54.8 $ 55.0
Income taxes paid $ 19.0 $ 6.8 $ 126.4 $ 22.1
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc.
Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(in millions of US dollars except share and per-share amounts)
(unaudited)
1. Significant Accounting Policies
With its subsidiaries, Potash Corporation of Saskatchewan Inc. ("PCS") -
together known as "PotashCorp" or "the company" except to the extent the
context otherwise requires - forms an integrated fertilizer and related
industrial and feed products company. The company's accounting policies
are in accordance with accounting principles generally accepted in Canada
("Canadian GAAP"). The accounting policies used in preparing these
interim condensed consolidated financial statements are consistent with
those used in the preparation of the 2004 annual consolidated financial
statements, except as disclosed in Note 2.
These interim condensed consolidated financial statements include the
accounts of PCS and its subsidiaries; however, they do not include all
disclosures normally provided in annual consolidated financial statements
and should be read in conjunction with the 2004 annual consolidated
financial statements. In management's opinion, the unaudited financial
statements include all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly such information. Interim
results are not necessarily indicative of the results expected for the
fiscal year.
2. Change in Accounting Policy
Consolidation of Variable Interest Entities
Effective January 1, 2005, the company adopted revised CICA Accounting
Guideline 15 ("AcG-15"), "Consolidation of Variable Interest Entities".
AcG-15 is harmonized in all material respects with US GAAP and provides
guidance for applying consolidation principles to certain entities
(defined as VIEs) that are subject to control on a basis other than
ownership of voting interests. An entity is a VIE when, by design, one or
both of the following conditions exist: (a) total equity investment at
risk is insufficient to permit that entity to finance its activities
without additional subordinated support from other parties; (b) as a
group, the holders of the equity investment at risk lack certain
essential characteristics of a controlling financial interest. AcG-15
requires consolidation by a business of VIEs in which it is the primary
beneficiary. The primary beneficiary is defined as the party that has
exposure to the majority of the expected losses and/or expected residual
returns of the VIE. The adoption of this guideline did not have a
material impact on the company's consolidated financial statements.
3. Share Repurchase
On January 25, 2005, the Board of Directors of PCS authorized a share
repurchase program of up to 5.5 million common shares (approximately
5 percent of the company's issued and outstanding common shares) through
a normal course issuer bid. On September 22, 2005, the Board of Directors
authorized an increase in the number of common shares sought under the
share repurchase program. This amendment will allow PotashCorp to
repurchase up to 4.0 million additional common shares. Shares may be
repurchased from time to time on the open market through February 14,
2006 at prevailing market prices. The timing and amount of purchases, if
any, under the program will be dependent upon the availability and
alternative uses of capital, market conditions and other factors.
During the third quarter of 2005, the company repurchased for
cancellation 2,275,600 common shares under the program, at a net cost of
$243.9 and an average price per share of $107.19. The repurchase resulted
in a reduction of share capital of $30.2, and the excess net cost over
the average book value of the shares has been recorded as a reduction of
contributed surplus of $30.8 and a reduction of retained earnings of
$182.9. For the nine months ended September 30, 2005, a total of
5,928,900 shares were repurchased at a net cost of $561.3 and an average
price per share of $94.68, resulting in a reduction of share capital of
$77.7, a reduction of contributed surplus of $300.7, and a reduction of
retained earnings of $182.9.
4. Plant Shutdowns - 2003
In June 2003, the company indefinitely shut down its Memphis, Tennessee
plant and suspended production of certain products at its Geismar,
Louisiana facilities due to high US natural gas costs and low product
margins. The company determined that all employee positions pertaining to
the affected operations would be eliminated, and recorded $4.8 in
connection with costs of special termination benefits in 2003. No
significant payments relating to the terminations remain to be made.
Management expects to incur other shutdown-related costs of
approximately $10.3 should these nitrogen facilities be dismantled, and
nominal annual expenditures for site security and other maintenance
costs. The other shutdown-related costs have not been recorded in the
consolidated financial statements as of September 30, 2005. Such costs
will be recognized and recorded in the period in which they are incurred.
No additional significant costs were incurred in connection with the
plant shutdowns in the first nine months of 2005. The following table
summarizes, by reportable segment, the total costs incurred to date and
the total costs expected to be incurred in connection with the plant
shutdowns described above:
Cumulative Total Costs
Costs Incurred Expected to
to Date be Incurred
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Nitrogen Segment
Employee termination and related benefits $ 4.8 $ 4.8
Writedown of parts inventory 12.4 12.4
Asset impairment charges 101.6 101.6
Other related exit costs - 10.3
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$ 118.8 $ 129.1
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5. Provision for PCS Yumbes S.C.M. - 2004
In December 2004, the company concluded the sale of 100 percent of its
shares of PCS Yumbes to Sociedad Quimica y Minera de Chile S.A. ("SQM").
In the second quarter of 2004, the company recorded a writedown of $5.9
for PCS Yumbes, relating primarily to certain mining machinery and
equipment that was not to be transferred to SQM under the terms of the
agreement. For measurement purposes, fair value was determined in
reference to market prices for similar assets. The machinery and
equipment was sold in 2005 for nominal proceeds.
6. Income Taxes
The company's consolidated income tax rate for each of the three month
and nine month periods ended September 30, 2005 approximates 33 percent
(2004 - 33 percent).
7. Net Income Per Share
Basic net income per share for the quarter is calculated on the weighted
average shares issued and outstanding for the three months ended
September 30, 2005 of 108,164,000 (2004 - 108,232,000). Basic net income
per share for the year to date is calculated on the weighted average
shares issued and outstanding for the nine months ended September 30,
2005 of 109,623,000 (2004 - 107,325,000).
Diluted net income per share is calculated based on the weighted average
number of shares issued and outstanding during the period. The
denominator is: (i) increased by the total of the additional common
shares that would have been issued assuming exercise of all stock options
with exercise prices at or below the average market price for the period;
and (ii) decreased by the number of shares that the company could have
repurchased if it had used the assumed proceeds from the exercise of
stock options to repurchase them on the open market at the average share
price for the period. The weighted average number of shares outstanding
for the diluted net income per share calculation for the three months
ended September 30, 2005 was 111,102,000 (2004 - 111,174,000) and for
the year to date was 112,460,000 (2004 - 109,340,000).
8. Segment Information
The company has three reportable business segments: potash, phosphate and
nitrogen. These business segments are differentiated by the chemical
nutrient contained in the product that each produces. Inter-segment sales
are made under terms that approximate market value. The accounting
policies of the segments are the same as those described in Note 1.
Three Months Ended September 30, 2005
-------------------------------------------------------------------------
Consol-
Potash Phosphate Nitrogen All Others idated
-------------------------------------------------------------------------
Sales $ 313.4 $ 291.9 $ 332.7 $ - $ 938.0
Freight 30.6 20.4 8.9 - 59.9
Transportation and
distribution 8.5 10.3 11.0 - 29.8
Net sales - third
party 274.3 261.2 312.8 -
Cost of goods sold 106.7 229.0 233.1 - 568.8
Gross margin 167.6 32.2 79.7 - 279.5
Depreciation and
amortization 14.6 23.8 18.1 2.5 59.0
Inter-segment sales 0.5 2.5 26.2 - -
Three Months Ended September 30, 2004
-------------------------------------------------------------------------
Consol-
Potash Phosphate Nitrogen All Others idated
-------------------------------------------------------------------------
Sales $ 251.8 $ 257.7 $ 306.2 $ - $ 815.7
Freight 23.0 19.7 8.5 - 51.2
Transportation and
distribution 5.6 8.8 9.2 - 23.6
Net sales - third
party 223.2 229.2 288.5 -
Cost of goods sold 102.4 228.6 220.5 - 551.5
Gross margin 120.8 0.6 68.0 - 189.4
Depreciation and
amortization 13.4 21.3 18.5 2.4 55.6
Inter-segment sales 1.0 3.3 20.8 - -
Nine Months Ended September 30, 2005
-------------------------------------------------------------------------
Consol-
Potash Phosphate Nitrogen All Others idated
-------------------------------------------------------------------------
Sales $1,067.1 $ 847.7 $1,001.9 $ - $2,916.7
Freight 105.3 60.2 29.0 - 194.5
Transportation and
distribution 27.1 27.2 36.5 - 90.8
Net sales - third
party 934.7 760.3 936.4 -
Cost of goods sold 367.6 689.0 692.0 - 1,748.6
Gross margin 567.1 71.3 244.4 - 882.8
Depreciation and
amortization 51.0 69.9 52.7 7.4 181.0
Inter-segment sales 4.9 11.4 74.7 - -
Nine Months Ended September 30, 2004
-------------------------------------------------------------------------
Consol-
Potash Phosphate Nitrogen All Others idated
-------------------------------------------------------------------------
Sales $ 791.9 $ 712.2 $ 873.7 $ - $2,377.8
Freight 97.7 51.5 29.0 - 178.2
Transportation and
distribution 26.8 21.5 29.6 - 77.9
Net sales - third
party 667.4 639.2 815.1 -
Cost of goods sold 358.5 633.8 645.3 - 1,637.6
Gross margin 308.9 5.4 169.8 - 484.1
Depreciation and
amortization 50.2 63.2 58.7 7.1 179.2
Inter-segment sales 4.6 9.8 64.9 - -
9. Stock-Based Compensation
The company has three stock option plans. On May 5, 2005, the company's
shareholders approved the 2005 Performance Option Plan under which the
company may, after February 28, 2005 and before January 1, 2006, issue up
to 1,200,000 common shares pursuant to the exercise of options. Under the
plan, the exercise price is the quoted market closing price of the
company's common shares on the last trading day immediately preceding the
date of grant and an option's maximum term is 10 years. Options will
vest, if at all, based on achievement of certain corporate performance
measures over a three-year period. As of September 30, 2005, options to
purchase a total of 1,188,500 common shares have been granted under the
plan.
Prior to 2003, the company applied the intrinsic value based method of
accounting for its stock option plans. Effective December 15, 2003, the
company adopted the fair value based method of accounting for stock
options prospectively to all employee awards granted, modified or settled
after January 1, 2003. Since the company's stock option awards prior to
2003 vest over two years, the compensation cost included in the
determination of net income for the three and nine month periods ended
September 30, 2004 is less than that which would have been recognized if
the fair value based method had been applied to all awards since the
original effective date of CICA Section 3870, "Stock-based Compensation
and Other Stock-based Payments". The following table illustrates the
effect on net income and the related per-share amount if the fair value
based method had been applied to all outstanding and unvested awards in
each period.
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Net income - as reported $ 130.3 $ 75.2 $ 425.8 $ 198.5
Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects 1.1 2.2 17.2 6.6
Less:Total stock-based employee
compensation expense
determined under fair value
based method for all option
awards, net of related tax
effects (1.1) (3.2) (17.2) (9.6)
-------------------------------------------------------------------------
Net income - pro forma(1) $ 130.3 $ 74.2 $ 425.8 $ 195.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Compensation expense under the fair value method is recognized over
the vesting period of the related stock options. Accordingly, the pro
forma results of applying this method may not be indicative of future
results.
Basic Net Income Per Share -
as reported $ 1.20 $ 0.69 $ 3.88 $ 1.85
Basic Net Income Per Share -
pro forma $ 1.20 $ 0.69 $ 3.88 $ 1.82
Diluted Net Income Per Share -
as reported $ 1.17 $ 0.68 $ 3.79 $ 1.82
Diluted Net Income Per Share -
pro forma $ 1.17 $ 0.67 $ 3.79 $ 1.79
In calculating the foregoing pro forma amounts, the fair value of each
option grant was estimated as of the date of grant using the Black-
Scholes-Merton option-pricing model with the following weighted average
assumptions:
Year of Grant
-------------------------------------------------------------------------
2005 2003 2002
-------------------------------------------------------------------------
Expected dividend $0.60 $0.50 $0.50
Expected volatility 28% 27% 32%
Risk-free interest rate 3.86% 4.06% 4.13%
Expected life of options 6.5 years 8 years 8 years
The company did not grant any stock options during 2004.
10. Post-Retirement/Post-Employment Expenses
Defined Benefit Pension Plans
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Service cost $ 3.4 $ 3.5 $ 10.4 $ 10.5
Interest cost 7.8 7.5 23.4 22.5
Expected return on plan assets (9.5) (8.4) (27.9) (25.2)
Net amortization 1.9 1.1 4.9 3.3
-------------------------------------------------------------------------
Net expense $ 3.6 $ 3.7 $ 10.8 $ 11.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Post-Retirement Plans
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Service cost $ 1.4 $ 1.1 $ 4.2 $ 3.9
Interest cost 3.3 3.0 9.9 10.0
Net amortization 0.4 (0.3) 1.2 0.5
-------------------------------------------------------------------------
Net expense $ 5.1 $ 3.8 $ 15.3 $ 14.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended September 30, 2005, the company contributed
$6.4 to its defined benefit pension plans and $1.5 to its other post-
retirement plans. Contributions for the nine months ended September 30,
2005 were $14.7 to the company's defined benefit pension plans and $5.7
to its other post-retirement plans. Total 2005 contributions to the
company's pension and other post-retirement plans are expected to
approximate $41.5.
11. Other Income
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Share of earnings of equity
investees $ 16.8 $ 12.0 $ 43.3 $ 19.7
Dividend income 6.1 5.7 9.2 7.9
Other (2.5) 1.4 1.8 7.6
-------------------------------------------------------------------------
$ 20.4 $ 19.1 $ 54.3 $ 35.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Comparative Figures
In the third quarter of 2004, the Board of Directors of PCS approved a
split of the company's outstanding common shares on a two-for-one basis
in the form of a stock dividend. All comparative share and per-share data
have been retroactively adjusted to reflect the stock split.
Certain of the prior periods' figures have been reclassified to conform
with the current periods' presentation.
Potash Corporation of Saskatchewan Inc.
Selected Operating and Revenue Data
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Potash Operating Data
Production (KCl Tonnes -
thousands) 1,698 1,623 6,458 5,924
Shutdown weeks 8.9 8.7 17.9 18.9
Sales (tonnes - thousands)
North America 714 557 2,608 2,458
Offshore 1,075 1,346 3,904 3,986
-------------------------------------------------------------------------
1,789 1,903 6,512 6,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Net Sales
(US $ millions)
Sales $313.4 $251.8 $1,067.1 $791.9
Less: Freight 30.6 23.0 105.3 97.7
Transportation and
distribution 8.5 5.6 27.1 26.8
-------------------------------------------------------------------------
Net Sales $274.3 $223.2 $934.7 $667.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America $120.6 $62.8 $405.2 $254.4
Offshore 151.9 150.1 520.7 379.6
-------------------------------------------------------------------------
Potash Subtotal 272.5 212.9 925.9 634.0
Miscellaneous 1.8 10.3 8.8 33.4
-------------------------------------------------------------------------
$274.3 $223.2 $934.7 $667.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Average Price per MT
North America $169.08 $112.83 $155.36 $103.51
Offshore $141.28 $111.55 $133.39 $95.25
-------------------------------------------------------------------------
$152.34 $111.92 $142.19 $98.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Operating Data
Production (P2O5 Tonnes -
thousands) 544 469 1,552 1,413
P2O5 Operating Rate 87% 75% 83% 73%
Sales (tonnes - thousands)
Fertilizer - Liquid
Phosphates 266 194 687 473
Fertilizer - Solid
Phosphates 369 439 1,163 1,221
Feed 198 232 651 645
Industrial 174 156 505 455
-------------------------------------------------------------------------
1,007 1,021 3,006 2,794
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Net Sales
(US $ millions)
Sales $291.9 $257.7 $847.7 $712.2
Less: Freight 20.4 19.7 60.2 51.5
Transportation and
distribution 10.3 8.8 27.2 21.5
-------------------------------------------------------------------------
Net Sales $261.2 $229.2 $760.3 $639.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer - Liquid
Phosphates $58.0 $38.9 $151.0 $100.4
Fertilizer - Solid Phosphates 86.3 85.7 260.3 243.1
Feed 52.9 49.5 163.6 137.6
Industrial 60.4 52.5 175.1 150.6
Miscellaneous 3.6 2.6 10.3 7.5
-------------------------------------------------------------------------
$261.2 $229.2 $760.3 $639.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Average Price per MT
Fertilizer - Liquid
Phosphates $217.93 $200.73 $219.73 $212.04
Fertilizer - Solid
Phosphates $233.77 $194.97 $223.74 $199.04
Feed $266.82 $213.52 $251.36 $213.25
Industrial $347.51 $337.11 $346.91 $331.34
-------------------------------------------------------------------------
$259.35 $224.54 $252.93 $228.75
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Operating Data
Production (N Tonnes -
thousands) 631 652 1,943 1,908
Average Natural Gas Cost
per MMBtu $4.40 $3.76 $4.04 $3.52
Sales (tonnes - thousands)
Manufactured Product
Ammonia 375 392 1,263 1,308
Urea 356 324 1,046 887
Nitrogen solutions/Nitric
acid/Ammonium nitrate 441 419 1,370 1,345
-------------------------------------------------------------------------
Manufactured Product 1,172 1,135 3,679 3,540
Purchased Product 118 204 314 461
-------------------------------------------------------------------------
1,290 1,339 3,993 4,001
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer sales tonnes 524 476 1,532 1,557
Feed/Industrial sales tonnes 766 863 2,461 2,444
-------------------------------------------------------------------------
1,290 1,339 3,993 4,001
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Net Sales
(US $ millions)
Sales $332.7 $306.2 $1,001.9 $873.7
Less: Freight 8.9 8.5 29.0 29.0
Transportation and
distribution 11.0 9.2 36.5 29.6
-------------------------------------------------------------------------
Net Sales $312.8 $288.5 $936.4 $815.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Manufactured Product
Ammonia $104.6 $104.7 $343.2 $325.2
Urea 100.8 72.2 283.6 188.0
Nitrogen solutions/Nitric
acid/Ammonium nitrate 66.0 55.8 204.0 175.5
Miscellaneous 7.0 6.4 19.2 16.9
-------------------------------------------------------------------------
Net Sales Manufactured
Product 278.4 239.1 850.0 705.6
Net Sales Purchased Product 34.4 49.4 86.4 109.5
-------------------------------------------------------------------------
$312.8 $288.5 $936.4 $815.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer net sales $131.5 $102.8 $378.9 $316.1
Feed/Industrial net sales 181.3 185.7 557.5 499.0
-------------------------------------------------------------------------
$312.8 $288.5 $936.4 $815.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Average Price per MT
Ammonia $278.60 $266.96 $271.65 $248.63
Urea $283.04 $222.72 $270.93 $211.87
Nitrogen solutions/Nitric
acid/Ammonium nitrate $149.61 $133.49 $148.91 $130.63
-------------------------------------------------------------------------
Manufactured Product $237.46 $210.78 $230.99 $199.38
Purchased Product $291.95 $241.90 $275.30 $237.31
-------------------------------------------------------------------------
$242.43 $215.52 $234.47 $203.75
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer average price
per MT $250.88 $216.04 $247.39 $203.05
Feed/Industrial average
price per MT $236.65 $215.24 $226.44 $204.20
-------------------------------------------------------------------------
$242.43 $215.52 $234.47 $203.75
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exchange Rate (Cdn$/US$) 2005 2004
-------------------------------------------------------------------------
December 31 1.2036
September 30 1.1611 1.2639
Third-quarter average conversion rate 1.2223 1.3305
Potash Corporation of Saskatchewan Inc.
Selected Non-GAAP Financial Measures and Reconciliations
(in millions of US dollars)
(unaudited)
The following information is included for convenience only. Generally, a
non-GAAP financial measure is a numerical measure of a company's
performance, financial position or cash flows that either excludes or
includes amounts that are not normally excluded or included in the most
directly comparable measure calculated and presented in accordance with
generally accepted accounting principles ("GAAP"). EBITDA, cash flow
prior to working capital changes and free cash flow are not measures of
financial performance (nor do they have standardized meanings) under
either Canadian GAAP or US GAAP. In evaluating these measures, investors
should consider that the methodology applied in calculating such measures
may differ among companies and analysts.
The company uses both GAAP and certain non-GAAP measures to assess
performance. The company's management believes these non-GAAP measures
provide useful supplemental information to investors in order that they
may evaluate PotashCorp's financial performance using the same measures
as management. PotashCorp's management believes that, as a result, the
investor is afforded greater transparency in assessing the financial
performance of the company. These non-GAAP financial measures should not
be considered as a substitute for, nor superior to, measures of financial
performance prepared in accordance with GAAP.
A. EBITDA
------
Set forth below is a reconciliation of "EBITDA" to net income, the most
directly comparable financial measure calculated and presented in
accordance with Canadian GAAP.
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Net income $ 130.3 $ 75.2 $ 425.8 $ 198.5
Income taxes 64.2 37.1 209.8 97.8
Interest expense 20.4 20.8 61.7 63.8
Depreciation and amortization 59.0 55.6 181.0 179.2
-------------------------------------------------------------------------
EBITDA $ 273.9 $ 188.7 $ 878.3 $ 539.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA is calculated as earnings before interest, income taxes,
depreciation and amortization. PotashCorp uses EBITDA as a supplemental
financial measure of its operational performance. Management believes
EBITDA to be an important measure as it excludes the effects of items
which primarily reflect the impact of long-term investment decisions,
rather than the performance of the company's day-to-day operations. As
compared to net income according to GAAP, this measure is limited in that
it does not reflect the periodic costs of certain capitalized tangible
and intangible assets used in generating revenues in the company's
business. Management evaluates such items through other financial
measures such as capital expenditures and cash flow provided by operating
activities. The company believes that this measurement is useful to
measure a company's ability to service debt and to meet other payment
obligations or as a valuation measurement.
Potash Corporation of Saskatchewan Inc.
Selected Non-GAAP Financial Measures and Reconciliations
(in millions of US dollars)
(unaudited)
B. CASH FLOW
---------
Set forth below is a reconciliation of "cash flow prior to working
capital changes" and "free cash flow" to cash provided by operating
activities, the most directly comparable financial measure calculated and
presented in accordance with Canadian GAAP.
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Cash flow prior to working
capital changes(1) $ 204.9 $ 140.6 $ 667.1 $ 418.0
-------------------------------------------------------------------------
Changes in non-cash operating
working capital
Accounts receivable (42.8) (18.7) (70.8) (9.1)
Inventories (43.5) 13.4 (33.9) 16.5
Prepaid expenses and other
current assets (14.7) (18.5) (14.2) (11.6)
Accounts payable and
accrued charges 212.2 51.8 231.8 71.9
-------------------------------------------------------------------------
Changes in non-cash operating
working capital 111.2 28.0 112.9 67.7
-------------------------------------------------------------------------
Cash provided by operating
activities $ 316.1 $ 168.6 $ 780.0 $ 485.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow(2) $ 89.0 $ 97.0 $ 419.8 $ 329.3
Additions to property,
plant and equipment 120.6 43.9 251.9 93.3
Other assets and intangible
assets (4.7) (0.3) (4.6) (4.6)
Changes in non-cash operating
working capital 111.2 28.0 112.9 67.7
-------------------------------------------------------------------------
Cash provided by operating
activities $ 316.1 $ 168.6 $ 780.0 $ 485.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The company uses cash flow prior to working capital changes as a
supplemental financial measure in its evaluation of liquidity.
Management believes that adjusting principally for the swings in non-
cash working capital items due to seasonality assists management in
making long-term liquidity assessments. The company also believes
that this measurement is useful as a measure of liquidity or as a
valuation measurement.
(2) The company uses free cash flow as a supplemental financial measure
in its evaluation of liquidity and financial strength. Management
believes that adjusting principally for the swings in non-cash
operating working capital items due to seasonality, additions to
property, plant and equipment, and changes to other assets assists
management in the long-term assessment of liquidity and financial
strength. The company also believes that this measurement is useful
as an indicator of the company's ability to service its debt, meet
other payment obligations and make strategic investments. Readers
should be aware that free cash flow does not represent residual cash
flow available for discretionary expenditures.
Certain of the prior periods' figures have been reclassified to conform
with the current periods' presentation.
SOURCE Potash Corporation of Saskatchewan Inc.
back to topCONTACT:
Betty-Ann Heggie, Senior Vice President,
Corporate Relations, Phone: (306) 933-8521, Fax: (306) 933-8844,
E-mail: corporate.relations@potashcorp.com; Web Site:
http://www.potashcorp.com
