Agrium Reports Improved Third Quarter Results, Cites Exceptional Outlook and Industry Fundamentals
CALGARY, ALBERTA -- (Marketwire) -- 11/03/10 -- Agrium Inc. (TSX: AGU) (NYSE: AGU) announced today net earnings of $57-million ($0.37 diluted earnings per share) for the third quarter of 2010, compared with the net earnings of $26-million in the third quarter of 2009 ($0.16 diluted earnings per share).
The 2010 third quarter results included a pre-tax expense of $85-million ($0.39 diluted earnings per share)(1) on stock-based compensation and pre-tax gains of $10-million ($0.05 diluted earnings per share)1 on natural gas and other hedge positions. Excluding these items, our net earnings would have been $111-million ($0.70 diluted earnings per share) for the third quarter of 2010.
'We believe the outlook for Agrium's products and businesses are as good as they have ever been, supported by excellent fundamentals for the agricultural and crop input markets,' said Mike Wilson, Agrium President and CEO. 'While EBITDA from our Retail operations this quarter was almost double last year's level and Wholesale's rose by more than 60 percent, we expect the improvements in the crop input markets to become even more evident in the fourth quarter of 2010. Furthermore, we anticipate the strength in crop input demand and prices to continue into the spring of 2011, benefiting all three of our strategic business units', added Mike Wilson.(2)
Agrium is providing guidance for the fourth quarter of 2010 of $1.00 to $1.30 diluted earnings per share, excluding estimated hedging gains or losses and stock-based compensation expense in the fourth quarter. (2)
(1) Third quarter effective tax rate of 28 percent used for adjusted diluted earnings per share calculations.
(2) See disclosure in the section 'Outlook, Key Risks and Uncertainties' in our 2010 third quarter MD&A and additional assumptions in the section 'Management's Discussion and Analysis'.
MANAGEMENT'S DISCUSSION AND ANALYSIS
November 3, 2010
The following interim management's discussion and analysis (MD&A) updates our annual MD&A included in our 2009 Annual Report to Shareholders, to which our readers are referred and is as of November 3, 2010. The Board of Directors carries out its responsibility for review of this disclosure principally through its audit committee, comprised exclusively of independent directors. The audit committee reviews, and prior to publication, approves, pursuant to the authority delegated to it by the Board of Directors, this disclosure. No update is provided where an item is not material or there has been no material change from the discussion in our annual MD&A. Forward-Looking Statements are outlined after the Outlook, Key Risks and Uncertainties section of this press release. The major assumptions made in preparing our fourth quarter guidance are outlined below and include, but are not limited to:
- Wholesale fertilizer prices through the fourth quarter of 2010 approximating current benchmark prices except for volumes already committed under pricing programs;
- Wholesale fertilizer sales volumes consistent with levels in the same quarter of 2009;
- Retail fertilizer sales volumes higher than levels in the same quarter of 2009;
- Retail fertilizer gross margin percentages significantly higher than the third quarter of 2010 and the fourth quarter of 2009;
- Normal North American weather patterns providing for a strong fall application season;
- Average NYMEX gas pricing for the fourth quarter approximating $3.85 per MMBtu;
- The exclusion from the guidance range of the effects of stock-based compensation income or expense resulting from movement in Agrium's share price for which a $1 change in stock price equates to approximately a $.01 change in earnings per share
- The exclusion from the guidance range of mark-to-market gains or losses on non-qualifying commodity hedge positions settling in future periods;
- The exclusion from the guidance range of the results of the potential acquisition of the AWB Limited (AWB); and
- An effective tax rate for the fourth quarter of 27 percent.
2010 Third Quarter Operating Results
NET EARNINGS
Agrium's third quarter consolidated net earnings were $57-million, or $0.37 diluted earnings per share, compared to net earnings of $26-million, or $0.16 diluted earnings per share, for the same quarter of 2009. Consolidated net earnings for the first nine months of 2010 were $556-million, or $3.53 diluted earnings per share, compared to $336-million, or $2.13 diluted earnings per share, for the same period last year.
Financial Overview
Three months ended Nine months ended
September 30 September 30
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(Millions of U.S.
dollars, except per
share amounts
and effective tax
rate) 2010 2009 Change 2010 2009 Change
----------------------------------------------------------------------------
Net sales 2,009 1,844 165 8,174 7,687 487
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Gross profit 500 397 103 1,924 1,560 364
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Expenses 397 334 63 1,109 1,010 99
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Net earnings before
interest expense
and income taxes
('EBIT')(a) 103 63 40 814 550 264
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Net earnings 57 26 31 556 336 220
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Diluted earnings
per share 0.37 0.16 0.21 3.53 2.13 1.40
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Effective tax rate 28% 30% (2%) 25% 28% (3%)
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(a) A reconciliation of EBIT to net earnings is provided in the section
'Non-GAAP Measures'.
Our consolidated gross profit for the third quarter of 2010 increased by $103-million versus the third quarter of 2009 primarily due to higher gross profit from Retail's crop nutrients and Wholesale's phosphate and product purchased for resale. With a $63-million increase in expenses for the third quarter of 2010 driven mainly by a $60-million increase in stock-based compensation expense, our consolidated EBIT increased by $40-million for this quarter.
Consolidated gross profit for the first nine months of 2010 increased by $364-million versus the corresponding period of 2009 primarily due to higher Retail crop nutrient gross profit and Wholesale potash sales volumes. With a $99-million increase in expenses for the first nine months of 2010 compared to the same period last year, our consolidated EBIT for the first nine months of 2010 increased by $264-million. Year-to-date expenses were higher largely due to a $73-million increase in selling expenses, primarily for Retail, and a $22-million increase in stock-based compensation expense.
Below is a summary of our other expenses (income) for the third quarter and first nine months of 2010 and 2009:
Three months ended Nine months ended
September 30, September 30,
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(Millions of U.S. dollars) 2010 2009 2010 2009
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Stock-based compensation 85 25 61 39
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Realized loss on derivative financial
instruments 6 29 34 105
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Unrealized (gain) loss on derivative
financial instruments (16) (34) 16 (56)
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Acquisition costs - - 45 -
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Gain on disposal of marketable
securities - - (52) -
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Environmental remediation and
accretion of asset retirement
obligations 6 5 8 6
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Interest income (15) (16) (36) (45)
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Foreign exchange loss 11 6 5 17
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Bad debt expense 4 6 28 25
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Other 2 1 (2) (5)
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83 22 107 86
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Effective tax rate was 28 percent for the third quarter of 2010, compared to 30 percent for the same period last year due to a higher proportion of income earned in lower taxed jurisdictions in 2010. The effective tax rate was 25 percent for the first nine months of 2010 compared to 28 percent for the corresponding period in 2009. The 3 percent decrease in the effective tax rate for the first nine months of 2010 versus the first nine months of 2009 was primarily due to the recognition of a previously unrecognized tax benefit in the first quarter of 2010.
For discussion on the performance of each business unit, see section 'Business Segment Performance'.
BUSINESS SEGMENT PERFORMANCE
Retail
Retail's 2010 third quarter net sales were $1.2-billion, the same as the third quarter of 2009. Gross profit was $319-million in the third quarter of 2010, a 26 percent increase from the $254-million earned last year, while EBIT increased to $75-million this quarter, more than double the $31-million achieved in the third quarter of 2009. This improvement was due to a return to more comparable five-year average crop nutrient margins and sales volumes, versus the challenges experienced in 2009.
Crop nutrient net sales were $411-million this quarter compared to $345-million in the same quarter last year. The increase was due to the 15 percent increase in crop nutrient sales volumes and higher nutrient prices. Gross profit for crop nutrients was $86-million this quarter compared to the third quarter results of $31-million achieved in 2009. Crop nutrient margins returned to historical levels, averaging 21 percent in the third quarter of 2010, compared to the unusually compressed margins of 9 percent experienced in the third quarter of 2009. We anticipate strong crop nutrient margins and gross profit to continue in the fourth quarter of 2010 due to the recent rise in most crop and nutrient prices and a wider window for fall application.1 Sales volumes and margins in our South American operations were also higher this quarter than the same period last year due to higher wheat prices, fertilizer price appreciation, and improved moisture conditions.
Crop protection net sales were $712-million in the third quarter of 2010, a 7 percent decrease from the $768-million in sales for the same period last year. This decrease was due to lower pest pressure this summer, supplier programs which encouraged sales in the first quarter of 2010, and glyphosate price devaluation. Gross profit this quarter was $172-million, slightly higher than the same period last year. Crop protection product margins as a percentage of net sales were 24 percent for the third quarter of 2010, up 2 percent from the same period last year, largely due to the lower cost of product per unit.
Net sales for seed increased by 19 percent to $44-million this quarter, from $37-million in the third quarter of 2009. Gross profit was $24-million in the third quarter of 2010, compared to $8-million for the same period last year due to fewer private label seed returns and higher supplier rebate programs this quarter. Gross margin as a percentage of net sales was 55 percent this quarter, versus 22 percent for the same period in 2009. On a year-to-date basis, 2010 margins are slightly below 2009.
Application services and other net sales were $77-million this quarter, consistent with the third quarter of 2009. Gross profit was $37-million in the third quarter of 2010, compared to $46-million for the same period last year. The decline in gross profit was due to lower pest pressure this season.
Retail selling expenses for the third quarter of 2010 were $220-million, a 10 percent increase over last year's level, primarily due to increased hiring and head count associated with current year acquisitions. Selling expenses as a percentage of net sales were 18 percent in the third quarter of 2010 compared with 16 percent for the same period last year.
On June 30, 2010, Retail acquired 24 farm centres and a world-class formulation facility in Casilda, Argentina, from DuPont Crop Protection. The Casilda formulation facility provides a versatile range of herbicides, insecticides, and fungicides for the Argentinean market, as well as toll manufacturing for third party companies. This brings the total number of Agrium's retail farm centers in South America under the Agroservicios Pampeanos (ASP) name to 51 outlets and a formulation facility.
In addition to this acquisition, and the recently announced AWB retail business in Australia, Agrium continues to grow our North American retail business. We recently completed an asset purchase agreement with Miles Farm Supply to acquire its 19 branches primarily located in Kentucky and the deal is expected to close very shortly. We also acquired an additional 45 independent retail branches across Canada and the U.S. so far in 2010. The combined annualized retail net sales in 2010 from these 88 new retail branches across North and South America is approximately $440-million.
(1) See disclosure in the section 'Outlook, Key Risks and Uncertainties' in our 2010 third quarter MD&A and additional assumptions in the section 'Management's Discussion and Analysis'.
Wholesale
Wholesale reported strong net sales of $799-million for the third quarter of 2010 compared to $658-million for the third quarter of 2009. Gross profit was $179-million in the third quarter of 2010, a $46-million increase over same period last year. EBIT of $135-million in the third quarter of 2010 was the second highest on record for a third quarter and significantly higher than the $83-million earned in the third quarter of 2009. The strong results across all products were due to a combination of higher nutrient sales prices and volumes, the majority of the improvement over last year was from improved results in our phosphate and Purchase for Resale businesses. Agrium reported equity earnings of $6-million for its interest in the MOPCO Egyptian nitrogen facility. In addition the project to triple the production capacity is on schedule for completion by mid-2012.
Nitrogen gross profit was $80-million this quarter, the same as the third quarter of 2009, as higher prices and volumes were offset by higher costs. Nitrogen prices were higher than last year across all products for both benchmark and Agrium's realized prices. Domestic ammonia and urea volumes were up compared to the third quarter of 2009, while our international sales volumes were significantly lower this quarter due to a planned turnaround at our South American facility. Nitrogen cost of product sold was $221 per tonne this quarter compared with $196 per tonne in the third quarter of 2009. The higher cost of product sold was due to higher North American natural gas prices and higher costs associated with the extended planned turnaround at our South American facility. Agrium's average nitrogen margin was $84 per tonne this quarter, compared with $87 per tonne in the third quarter of last year, while margins for our domestic urea sales remained over $100 per tonne this quarter.
The U.S. benchmark (NYMEX) natural gas price for the third quarter of 2010 was $4.41/MMBtu, versus $3.41/MMBtu in the same quarter last year and $4.07/MMBtu in the second quarter of 2010. The AECO (Alberta) basis differential was a $0.86/MMBtu discount to NYMEX for the third quarter of 2010. Agrium's overall gas cost for the current quarter was $4.01/MMBtu ($3.73/MMBtu excluding $7-million in realized hedging losses). The overall gas cost was the same in the third quarter of 2009 ($4.01/MMBtu), but was significantly lower ($2.88/MMBtu) excluding realized hedging losses of $29-million. Hedging gains and losses on gas derivatives are reported below gross profit and therefore not included in cost of goods sold.
Potash gross profit was $59-million in the third quarter of 2010 versus $56-million in the third quarter of 2009. Sales volumes were up 42 percent or 115,000 tonnes over the same period last year. The average sales price was $327 per tonne this quarter, down from $399 per tonne for the same period last year. Both international and domestic demand showed significant strength this quarter. Cost of product sold on a per tonne basis was $175 per tonne or $19 per tonne lower than for the same quarter last year, due to fixed costs and turnaround spend being allocated over higher sales tonnes. Gross margin was $152 per tonne compared with $205 per tonne in the third quarter of last year.
Phosphate gross profit was $24-million, compared to a loss of $1-million in the same quarter last year. The significant improvement was due to higher realized sales prices of $517 per tonne this quarter, compared to $368 per tonne for the same quarter last year, as strong phosphate demand resulted in very tight industry inventory levels. Phosphate cost of product sold was $438 per tonne, or $67 per tonne higher than the third quarter of 2009, due to a combination of higher sulphur, rock costs, and the impact of the higher Canadian dollar at our Canadian phosphate operation. Gross margin was $79 per tonne, an $82 per tonne increase over the third quarter of 2009 and a $38 per tonne improvement over the second quarter of 2010.
Gross profit for the Purchase for Resale business in the third quarter of 2010 was $9-million, a significant increase over the same period last year. The improvement was due to an increase in both sales prices and volumes in our European and North American markets.
Wholesale expenses were $6-million lower in the third quarter of 2010 than the same period last year, due primarily to a $17-million decrease in potash profit and capital taxes compared with the same period in 2009 and a $6-million increase in equity earnings from our 26 percent Egyptian investment, partly offset by a $12-million increase in stock based compensation. The third quarter of 2010 included realized losses on natural gas and power derivatives of $7-million and mark-to-market gains of $4-million. The same quarter in 2009 included realized losses of $29-million and mark-to-market gains of $31-million on the same type of derivatives.
Advanced Technologies
Advanced Technologies' third quarter 2010 net sales were $92-million compared to $60-million in the third quarter of 2009. Gross profit was $15-million for the quarter, compared with $11-million for the same period last year. The increase in net sales and gross profit for the quarter was due to higher Environmentally Smart Nitrogen ('ESN') sales volumes and the transfer of Agrium's Retail turf and ornamental business in late 2009, which contributed $6-million in gross profit in the current quarter.
ESN sales volumes were up approximately 35,000 tonnes or 146 percent in the third quarter of 2010 when compared to the same period last year, as a result of sales execution and additional production volumes from our new facility at New Madrid, Missouri. Production at the New Madrid facility is meeting expectations and planned targets for 2010.
EBITDA for the current quarter was $1-million, a decrease of $3-million versus the comparable period in 2009. The reduction in EBITDA was due to the $7-million increase in selling costs primarily related to the inclusion of the turf and ornamental business transferred from Retail in late 2009.
Other
EBIT for our Other non-operating business unit for the third quarter of 2010 was a loss of $103-million, an increase in loss of $52-million compared to a loss of $51-million for the third quarter of 2009. The increase in loss was primarily driven by higher stock-based compensation expense from a larger increase in share price during the third quarter of 2010 versus the same period last year, and a deferral of gross profit on Wholesale products sold to Retail that have yet to be sold to external customers.
EBIT for Other for the first nine months of 2010 was a loss of $119-million, an increase in loss of $85-million compared to a loss of $34-million for the same period of 2009. The increase in loss reflected the deferral of gross profit on Wholesale products sold to Retail that have yet to be sold to external customers and the expensing of costs related to the proposed acquisition of CF Industries Holdings Inc. ('CF') incurred in 2009. The decrease in EBIT was partially offset by gains realized from the sale of 1.2 million CF shares (see discussion under 'Business Acquisitions').
FINANCIAL CONDITION
The following are changes to working capital on our Consolidated Balance Sheets in the nine-month period ended September 30, 2010.
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As at September December
(Millions of 30, 31, Explanation of
U.S. dollars) 2010 2009 Change the change in balance
----------------------------------------------------------------------------
Current assets
Cash and cash 897 933 (36) See discussion under the Section
equivalents 'Liquidity and Capital
Resources'.
Accounts 2,199 1,324 875 Increased sales activities in Q3
receivable vs. lower receivables typically
in Q4; and higher
Retail vendor rebates
receivable.
Inventories 1,758 2,137 (379) Retail inventory draw-down due
to increased sales activities
during the year and reduction
in inventory purchases heading
into Q4.
Prepaid expenses 186 612 (426) Drawdown of prepaid inventory
and deposits where typically Retail prepays
for products at year end and
take possession of pre-bought
inventory throughout the year;
and expensing CF acquisition
costs related to the
termination of the CF offer in
Q1'10 (see discussion under the
section 'Business
Acquisitions').
Marketable 17 114 (97) Sale of CF shares in Q1'10. See
securities discussion under the section
'Business Acquisitions'.
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Current
liabilities
Bank Increased working capital needs
indebtedness 188 106 82 for South American Retail and
Agrium Europe due to increased
inventory purchases.
Accounts 1,803 2,475 (672) Drawdown of customer prepayments
payable during the year and a decrease
and accrued in accrued current income taxes
liabilities liability.
Current portion 125 - 125 Debentures due February 15, 2011
of long-term debt previously reported as
long-term debt.
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Working capital 2,941 2,539 402
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LIQUIDITY AND CAPITAL RESOURCES
Below is a summary of our cash provided by or used in operating, investing, and financing activities as reflected in the Consolidated Statements of Cash Flow:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------
(Millions of U.S.
dollars)
2010 2009 Change 2010 2009 Change
----------------------------------------------------------------------------
Cash provided by
operating
activities 88 227 (139) 12 494 (482)
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Cash used in
investing
activities (113) (91) (22) (172) (341) 169
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Cash provided by
(used in)
financing
activities 105 (164) 269 118 (291) 409
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Effect of exchange
rate changes
on cash 12 2 10 6 6 -
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Increase (decrease)
in cash and cash
equivalents-end
of period 92 (26) 118 (36) (132) 96
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The sources and uses of cash for the three months ended September 30, 2010
are summarized below:
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Cash provided by operating activities - Drivers behind the $139-million
decrease in source of cash
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Source of cash - $31-million resulting from increase in net earnings
adjusted for changes in non-cash items, primarily
associated with a $46-million increase from future
income taxes and $60-million increase from stock-based
compensation.
Use of cash - $300-million increase in non-cash working capital. The
increase in non-cash working capital was primarily driven
by an increase in prepaid expenses and deposits and a
lower decrease in inventories in the third quarter of
2010 compared to the third quarter of 2009. These were
partially offset by a lower decrease in accounts payable
and accrued liabilities in the third quarter of 2010
versus the third quarter of 2009.
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Cash provided by financing activities - Drivers behind the $269-million
increase in source of cash
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Source of cash - Increase in bank indebtedness in Q3'10 due to higher
working capital needs for product purchases versus
pay-down of bank indebtedness in Q3'10.
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The sources and uses of cash for the nine months ended September 30, 2010
are summarized below:
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Cash used in operating activities - Drivers behind the $482-million
decrease in source of cash
----------------------------------------------------------------------------
Source of cash - $220-million resulting from increase in net earnings
adjusted for changes in non-cash items, primarily
associated with a $217-million increase from future
income taxes.
Use of cash - $979-million increase in non-cash working capital.
The increase in non-cash working capital was
primarily driven by a lower decrease in inventories
and a higher decrease in accounts payable and accrued
liabilities in the first nine months of 2010 compared
to the first nine months of 2009.
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Cash used in investing activities - Drivers behind the $169-million
decrease in use of cash
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Source of cash - Proceeds of $117-million received on the sale of our
shares in CF in Q1'10 that were purchased for
$65-million in Q1'09;
- Proceeds of $25-million received in Q1'10 on the sale
of other marketable securities; and
- Other favourable adjustments, including costs related
to the proposed CF acquisition incurred in 2009.
Use of cash - $124-million increase in capital expenditures.
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Cash provided by financing activities - Drivers behind the $409-million
increase in source of cash
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Source of cash - Pay-down of our bank indebtedness due to lower working
capital needs in the first nine months of 2009 and
removal of EAgrium bank indebtedness in Q1'09 as
result of the deconsolidation of EAgrium.
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Our bank indebtedness is summarized as follows:
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Short-term credit facilities available
at September 30, 2010 (a) Total Unutilized Utilized
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(Millions of U.S. dollars)
North American revolving credit
facilities expiring 2012 (b) 775 775 -
European credit facilities expiring
2010 to 2012 (c) 193 54 139
South American credit facilities
expiring 2010 to 2012 96 47 49
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1,064 876 188
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a) As of September 30, 2010, a total of $200-million was available from our
accounts receivable securitization facility. For further information,
see discussion under the section 'Off-Balance Sheet Arrangements' on
page 68 of our 2009 Annual Report.
b) Outstanding letters of credit issued under our revolving credit
facilities at September 30, 2010 were $104-million, reducing credit
available under the facilities to $671-million.
c) Of the total, $1-million is secured. Security pledged for the utilized
balance includes inventory, accounts receivable and other items with a
total carrying value of $5-million. The utilized balance includes
Euro-denominated debt of $127-million.
Credit Rating
Following Agrium's announcement on March 11, 2010 that it will no longer pursue an acquisition of CF, DBRS Limited removed Agrium from Under Review on March 12, 2010. On March 18, 2010, Moody's concluded its review and removed Agrium from Under Review for negative watch to Stable outlook. Following Agrium's announcement to acquire AWB, DBRS placed Agrium under review on August 16, 2010. For further discussion on AWB and CF, see disclosure in the section 'Business Acquisitions' below.
OUTSTANDING SHARE DATA
The number of outstanding shares as at October 31, 2010 was 158 million. As at October 31, 2010, there were approximately 1 million stock options outstanding and issuable assuming full conversion, where each option granted can be exercised for one common share.
SELECTED QUARTERLY INFORMATION
(Unaudited, in millions of U.S. dollars, except per share information)
2010 2009 2008
---------------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Net sales 2,009 4,367 1,798 1,442 1,844 4,090 1,753 1,941 3,113
Gross profit 500 1,063 361 383 397 890 273 522 1,048
Net earnings (loss) 57 506 (7) 30 26 370 (60) 124 367
(Loss) earnings per
share
-basic 0.37 3.21 (0.04) 0.19 0.16 2.36 (0.38) 0.79 2.32
-diluted 0.37 3.20 (0.04) 0.19 0.16 2.35 (0.38) 0.79 2.31
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The agricultural products business is seasonal in nature. Consequently, quarter-to-quarter results are not directly comparable. Sales are concentrated in the spring and fall planting seasons, while produced inventories are accumulated ahead of the application season. Cash collections generally occur after the planting seasons in North and South America.
BUSINESS ACQUISITIONS
On August 15, 2010, Agrium announced that it had made a proposal to acquire AWB and on August 19, 2010, Agrium announced that it entered into a definitive agreement with AWB to acquire all of the outstanding shares and performance rights of AWB for AUD$1.50 per share in cash for AUD$1.238-billion pursuant to a Scheme of Arrangement under Australian law (the 'Scheme'). On August 24, 2010, Agrium announced that the AWB Board of Directors had recommended Agrium's proposed acquisition to AWB shareholders. On October 3, 2010, the Australian Foreign Investment Review Board notified Agrium that there are no objections to the proposed acquisition in terms of the Australian Government's foreign investment policy. The implementation of the Scheme remains subject to the approval of the shareholders of AWB and of the Supreme Court of Victoria. The shareholders of AWB will vote on the Scheme at an AWB shareholders' meeting to be held on November 16, 2010 in Melbourne, Australia and, assuming the shareholders of AWB approve the Scheme, the approval of the Supreme Court of Victoria will be sought on November 18, 2010. We have also sought the approval of the New Zealand Overseas Investment Authority and anticipate a response to our application by mid-November. Assuming these conditions are met and the required approvals are received, Agrium expects the Scheme to be implemented around December 6, 2010. Agrium will primarily use cash on hand to fund the acquisition, and if required will access unused lines of credit.
On March 11, 2010, Agrium announced that it would no longer pursue an acquisition of CF and allowed its offer for CF to expire on March 22, 2010. Acquisition costs of $45-million, previously recorded in prepaid expenses and deposits, were expensed on expiry of the offer. In March 2010, Agrium sold its investment in CF, consisting of 1.2 million common shares, and recorded a pre-tax gain in other expenses of $52-million. Unrealized gains on the shares had previously been recorded in other comprehensive income. Following termination of the CF offer, the conditional sale of 50 percent of the Carseland nitrogen facility to Terra Industries Inc. was also terminated.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS')
Agrium continues to work towards completing the design and development phase of the transition project. The table below outlines our key IFRS project plan progress to date.
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IFRS Transition Project
Key Elements Milestones/Timelines Status
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Accounting policies: - Final quantification - Provided draft of IFRS
of IFRS transition financial statement
- Analyze accounting effects for 2010 and format with disclosures
policy differences comparative year Q1, to the Audit Committee
2011 for review
- Select IFRS - Provided IFRS draft
accounting policies opening balance sheet
and determine IFRS 1 transitional impacts
elections to Audit Committee for
- Develop IFRS financial review
statement format with - Continuing to finalize
appropriate disclosures IFRS impacts on transition
- Quantify IFRS impacts
on transition
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Information systems: - Information system - Continuing IFRS data
- Analyze changes solutions in place capture in the financial
necessary to enable for parallel reporting systems
recording/tracking/ year for all - Parallel GAAP consolidated
reporting of financial applicable GAAP, 2010 reporting process testing
information required is complete
under all applicable
GAAP for the parallel
reporting year(s)
- Develop and implement
solution
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Business impacts: - Applicable negotiation - Analysis of income tax
- Analysis of business of covenants and impacts complete
activities that compensation
may be impacted by arrangements by end - Continuing to identify
GAAP measures, such of 2010 tax impacts on
as debt covenants - Identification of transitional adjustments
and significant tax as project progresses
compensation and impacts Q3, 2010
identification of
solutions where
necessary
- Analysis of tax
impacts on transition
to IFRS
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Training requirements: - Appropriate level of - Impact workshops to
- Communicate IFRS financial business groups
accounting policy reporting expertise throughout Agrium to
changes and resulting achieved by changeover communicate impact of
impacts across date transition to IFRS
organization - Communication of the - Quarterly communications
- Communicate transition effects of IFRS will continue on the
project plan progress transition on the IFRS transition
both internally and organization both project progress across
externally internally and the organization and
externally by changeover externally through MD&A
date disclosures
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First-time adoption of IFRS
Agrium's adoption of IFRS will require the application of IFRS 1 - First Time Adoption of International Financial Reporting Standards. This standard provides guidance for Agrium's initial adoption which requires, in general, that Agrium apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and permits certain optional exemptions from this general requirement. Agrium continues to assess the implications of IFRS 1 on its opening balance sheet.
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Area of IFRS Summary of Action
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Business Combinations
Agrium may elect, on transition to Policy selection: expect to elect,
IFRS, to either restate all on transition to IFRS, to apply
past business combinations in the exemption such that
accordance with IFRS 3 transactions entered into prior
Business Combinations or to the transition date will not be
to apply an elective exemption restated.
from applying IFRS 3 to past
business combinations.
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Share-Based Payments
Agrium may elect not to apply IFRS 2, Policy selection: expect to elect
Share-Based Payments, to equity not to apply IFRS 2 to equity
instruments granted on or instruments granted on or before
before November 7, 2002 or which November 7, 2002 or which vested
vested before Agrium's date of before the Agrium's date of
transition to IFRS. Agrium may transition to IFRS. Agrium may also
also elect not to apply IFRS 2 to elect not to apply IFRS 2 to
liabilities arising from liabilities arising from
share-based payment transactions share-based payment transactions
which settled before the date of which settled before the date of
transition to IFRS. transition to IFRS.
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Employee Benefits
IFRS permits the recognition of Policy selection: expect to
actuarial gains and losses recognize all cumulative actuarial
immediately in equity, immediately gains and losses at the date of
to earnings, or on a deferred basis transition as an adjustment to
to earnings. retained earnings.
Canadian GAAP does not permit
immediate recognition in equity.
Further, under IFRS, vested past
service costs are required to be
expensed immediately while unvested
costs are to be amortized on a
straight-line basis over the vesting
period. Under Canadian GAAP, past
service costs are amortized over the
expected average remaining service
life of active employees, unless
employees in that plan are inactive.
Costs are then amortized over the
average life expectancy of the
former employees. This change is
expected to accelerate the
recognition of past service costs.
Agrium may elect to recognize all
cumulative actuarial gains and
losses through opening retained
earnings at the date of transition
to IFRS. Actuarial gains and losses
would have to be recalculated under
IFRS from the inception of each of
our defined benefit plans if the
exemption is not taken. Agrium's
choice must be consistently applied
to all defined benefit plans.
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Foreign Exchange
On transition, cumulative Policy selection: expect to elect
translation gains or losses the exemption and reclassify the
in accumulated other balance of cumulative foreign
comprehensive income can be exchange translation gains or
reclassified to retained earnings losses will be adjusted from other
at Agrium's election. comprehensive income to retained
If not elected, all cumulative earnings, with no resulting change
translation differences must be to shareholders' equity.
recalculated under IFRS from
inception.
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Area of IFRS Summary of Action
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Decommissioning Liabilities
In accounting for changes in Policy selection: expect to elect
obligations to dismantle, remove and to take the exemption from full
restore items of property, plant and retrospective application as
equipment, the guidance in IFRS permitted by IFRIC 1 Changes in
requires changes in such obligations Existing Decommissioning
to be added to or deducted from the Restoration and Similar
cost of the asset to which it Liabilities
relates. The adjusted depreciable
amount of the asset is then
depreciated prospectively over its
remaining useful life. Rather than
recalculating the effect of all such
changes throughout the life of the
obligation, Agrium may elect to
measure the liability and the
related depreciation effects at the
date of transition to IFRS.
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Following are the standards that may have significant impact on Agrium's consolidated financial statements. This is not an exhaustive listing of changes on transition to IFRS. Detailed analysis and quantification of these changes is continuing. Agrium does not expect a significant impact to its business activities nor to its operating cash flows from the transition to IFRS.
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Significant Differences Between IFRS
and Canadian GAAP Estimated Impact
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Employee Benefits
IFRS permits actuarial gains and Transition date impact: none
losses to be recognized directly in
other comprehensive income rather Future impact: greater variability
than through profit or loss while in shareholders' equity within
Canadian GAAP does not allow other comprehensive income
immediate recognition in equity.
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Share-based payments
IFRS requires cash-settled, share- Transition date impact: reduction in
based awards to be measured at fair shareholders' equity and an
value, while Canadian GAAP allows increase in liabilities
these awards to be measured at
intrinsic value. In addition, Agrium Future impact: a continued
currently uses straight line measurement difference between the
depreciation to recognize graded intrinsic value and the fair value
vesting stock based instruments, of share based awards
while IFRS requires that each
installment be accounted for as a
separate arrangement.
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Income Taxes
Classification of future income tax Transition date impact:
under IFRS is non-current whereas reclassifying all future income
Canadian GAAP splits future income taxes to non-current is expected
taxes between current and non- to result in a decrease in current
current components. assets and a decrease in
non-current income tax liabilities
Future impact: remains a
classification difference
IFRS requires recognition of the Transition date impact: increase in
deferred tax impact for temporary deferred tax liabilities and a
differences arising on translation corresponding decrease in retained
of certain foreign denominated non- earnings
monetary assets or liabilities.
Canadian GAAP does not allow similar Future impact: continued recognition
treatment. of the deferred tax impact with
respect to the translation of
foreign denominated non-monetary
assets or liabilities
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Significant Differences Between IFRS Estimated Impact
and Canadian GAAP
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Provisions
IFRS requires discounting of Transition date impact: decrease in
provisions where the effect of the environmental liabilities and a
discounting is material. Provisions corresponding increase to retained
are not discounted under Canadian earnings
GAAP unless specifically required or
when a provision is required to be Future impact: each period there
measured at fair value. will be a charge to earnings for
accretion of the discount
The specific provisions for asset Transition date impact: increase to
retirement obligations under IFRS asset retirement obligations and a
are measured based on management's corresponding decrease to retained
best estimate. The discount rate earnings
used in calculating the present
value of the cash flow estimates is Future impact: decrease in charge to
to be based on risks specific to the earnings each period for accretion
liability unless these risks have of the discount
been incorporated into the cash flow
estimates. Canadian GAAP measures
asset retirement obligations at fair
value incorporating market
assumptions. The discount rate used
is a credit-adjusted risk-free rate.
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Impairment of Assets
Under IFRS, the impairment of Transition date impact: increased
assets, excluding financial assets, potential for impairment losses and
is tested and measured by comparing reversal of previously recorded
the carrying value of an asset or losses
cash generating unit to its
recoverable amount. Recoverable Future impact: increased potential
amount is measured as the higher of for impairment losses and reversal
fair value less cost to sell or of previously recorded losses
value-in-use (discounted future cash
flows). IFRS permits impairment
reversals for assets (excluding
goodwill). The IFRS approach has the
potential to increase income
statement volatility due to the
potential for increased write-downs
and reversals of write-downs.
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Business Combinations
IFRS does not include acquisition- Transition date impact: decrease in
related costs within consideration shareholders' equity
transferred in a business
combination whereas the cost of Future impact: potential increase in
acquisition does include direct, charges to earnings in the amount
incremental acquisition-related of acquisition-related costs for
costs under Canadian GAAP. any business combination
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Non-Controlling Interest
IFRS requires non-controlling Transition date impact: increase in
interest to be presented as a shareholders' equity
component of shareholders' equity
separate from the parent's equity Future impact: non-controlling
while Canadian GAAP presents non- interest will continue to be
controlling interest as a separate presented within shareholders'
component between liabilities and equity
equity.
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Financial Impact
The following unaudited table shows the impacts of the differences between IFRS and Canadian GAAP identified to date with a transition date of January 1, 2010. Mandatory and optional exemptions and policy choices we have made to date are applied. These amounts are subject to change as Agrium continues to consider both its transitional exemption options and the impacts on transition to IFRS.
Estimated Adjustments to Shareholders' equity on Adoption of IFRS
As at
(Unaudited, in millions of U.S. dollars) January 1, 2010
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Total shareholders' equity as reported under previous
Canadian GAAP 4,592
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Adjustments to increase (decrease) reported total
shareholders' equity:
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Recognition of cumulative actuarial gains and losses in
equity (45)
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Acquisition-related costs (45)
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Provisions for asset retirement and environmental liabilities 1
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Provisions for share-based payments (37)
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Deferred tax liability adjustment (42)
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Income tax effect of transitional adjustments 30
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Reclassification of non-controlling interest 11
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Total shareholders' equity as reported under IFRS 4,465
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NON-GAAP MEASURES
In the discussion of our performance for the quarter, in addition to the primary measures of earnings and earnings per share, we make reference to EBIT (net earnings before interest expense and income taxes) and EBITDA (net earnings before interest expense, income taxes, depreciation, amortization and asset impairment). We consider EBIT and EBITDA to be useful measures of performance because income tax jurisdictions and business segments are not synonymous and we believe that allocation of income tax charges distorts the comparability of historical performance for the different business segments. Similarly, financing and related interest charges cannot be allocated to all business units on a basis that is meaningful for comparison with other companies.
EBIT and EBITDA are not recognized measures under GAAP, and our methods of calculation may not be comparable to other companies. Similarly, EBITDA should not be used as an alternative to cash provided by (used in) operating activities as determined in accordance with GAAP.
The following table is a reconciliation of EBITDA and EBIT to net earnings as calculated in accordance with GAAP:
Three Months Ended September 30
2010
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(millions of Advanced
U.S. dollars) Retail Wholesale Technologies Other Consolidated
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EBITDA 103 190 1 (100) 194
Depreciation and
amortization 28 55 5 3 91
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EBIT 75 135 (4) (103) 103
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Interest expense (24)
Income taxes (22)
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Net earnings 57
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2009
-----------------------------------------------------
Advanced
Retail Wholesale Technologies Other Consolidated
----------------------------------------------------------------------------
EBITDA 57 115 4 (49) 127
Depreciation and
amortization 26 32 4 2 64
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EBIT 31 83 - (51) 63
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Interest expense (26)
Income taxes (11)
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Net earnings 26
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Nine Months Ended September 30
2010
-----------------------------------------------------
(millions of Advanced
U.S. dollars) Retail Wholesale Technologies Other Consolidated
----------------------------------------------------------------------------
EBITDA 445 713 24 (112) 1,070
Depreciation and
amortization 82 153 14 7 256
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EBIT 363 560 10 (119) 814
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Interest expense (77)
Income taxes (181)
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Net earnings 556
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2009
Advanced
Retail Wholesale Technologies Other Consolidated
----------------------------------------------------------------------------
EBITDA 296 438 22 (28) 728
Depreciation and
amortization 76 83 13 6 178
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EBIT 220 355 9 (34) 550
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Interest expense (84)
Income taxes (130)
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Net earnings 336
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BUSINESS RISKS
The information presented on enterprise risk management and business risks on pages 81 - 88 in our 2009 Annual Report has not changed materially since December 31, 2009.
CONTROLS & PROCEDURES
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OUTLOOK, KEY RISKS AND UNCERTAINTIES
Global agricultural supply and demand fundamentals have strengthened significantly over the past few months. The United States Department of Agriculture (USDA) projects that global grain ending stocks will decline by 12 percent in the 2010/11 crop year. In its October forecast, the USDA significantly reduced its projection of U.S. corn production resulting in U.S. corn stocks expected to be at their lowest level since 1996/97.
U.S. corn growers are expected to respond to the tight supply and demand balance by planting in excess of 90 million acres of corn in 2011. The earlier than normal harvest in the U.S. and improved fall weather in Western Canada is expected to lead to strong crop nutrient applications in the fourth quarter. Increased seeded area, in particular for corn and wheat, and anticipated strong cash margins for most crops are all expected to be highly supportive of robust demand for crop nutrients, seed and crop protection product demand in the fall of 2010 and s