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 ---------------------
--------------------- 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. DATASOURCE: Potash Corporation of
Saskatchewan Inc. CONTACT: Betty-Ann Heggie, Senior Vice President,
Corporate Relations, Phone: (306) 933-8521, Fax: (306) 933-8844,
E-mail: ; Web Site: http://www.potashcorp.com/
Copyright
