PotashCorp Posts Solid First-Quarter Earnings of $0.94 per Diluted
Share Listed: TSX, NYSE Symbol: POT SASKATOON, SK, April 22
/PRNewswire-FirstCall/ -- With improved prices in nitrogen and
potash, Potash Corporation of Saskatchewan Inc. (PotashCorp)
reported first-quarter earnings of $50.7 million or $0.94 per
diluted share. This is $0.88 higher than last year's first-quarter
earnings of $0.06 per diluted share and above the company's
first-quarter earnings guidance of $0.60 to $0.80 per share. The
Canadian dollar was weaker than expected compared to earnings
guidance, and that, along with a slightly lower tax rate
assumption, contributed approximately $0.10 per share. Gross margin
of $124.0 million for the quarter was more than 50 percent above
the $81.1 million in the first quarter last year. Potash, the
cornerstone of the company's business and the basis for its
long-term strategy, provided the greatest contribution with gross
margin of $66.7 million, up $17.3 million over the $49.4 million in
the first quarter of 2003. Nitrogen gross margin showed the biggest
quarter-over-quarter improvement, contributing $58.2 million or
nearly twice the $29.8 million in the same quarter of 2003.
Conditions in phosphate continued to be a challenge as this sector
of the company showed negative gross margin of $0.9 million in the
first quarter of this year compared to last year's $1.9 million
contribution. Cash flow prior to working capital changes(1)
increased 49 percent quarter over quarter, from $85.2 million to
$126.9 million. Cash from operating activities was up more than 200
percent quarter over quarter, from $44.1 million to $134.3 million.
"After a lengthy down cycle for fertilizer, we are seeing the
inevitable rebound as demand grows for our products, which are
essential for global food production," said Bill Doyle, President
and Chief Executive Officer of PotashCorp. "We are in an excellent
position to capitalize on this upside with our excess capacity in
potash complemented by our ability to produce nitrogen with
low-cost gas in Trinidad and specialty phosphate products from our
high- quality ore body in North Carolina." Market Conditions Market
conditions in the fertilizer industry continue to improve as the
world's grain inventories as a percentage of consumption are
reaching the lowest levels on record. That is driving up prices for
many crop commodities. Palm oil, rubber, coffee, wheat, corn and
soybeans are showing year-over-year improvement, which encourages
more planted acreage and higher application rates. While markets
are more buoyant, the fertilizer industry is contending with
logistical challenges created by high ocean freight rates and a
surge in rail demand. Potash Operations The rise in gross margin in
potash is a result of higher prices in the domestic market and
increased offshore volumes. First-quarter domestic volumes were
down 6 percent compared to last year's same quarter for two
reasons: orders were filled in the fourth quarter of 2003 in
advance of price increases, and the company refused to participate
in low-priced barge movement on the Mississippi River. Rail issues
also restricted movement to the port in Vancouver, although
offshore volumes still grew by 12 percent, led by strong shipments
to China, Indonesia and Malaysia. Domestic prices continued their
upward trend. Realized prices in North America were up 7 percent
from the trailing quarter and more than 25 percent over the first
quarter last year. Although offshore prices are also up, the
benefit to PotashCorp was eroded by the increase in ocean freight
rates. For the quarter, the company's realized prices were flat
with the trailing quarter and down 4 percent over the same quarter
in 2003. Lower natural gas prices and higher operating rates
positively affected costs per tonne, but this was offset by a
stronger Canadian dollar relative to last year's first quarter. As
a result, cost of sales on a per-tonne basis was flat compared to
the same quarter last year. The improved results also reflect a
significantly lower loss from PCS Yumbes ($0.3 million margin loss
in the first quarter of 2004 compared to $5.2 million loss in the
first quarter of 2003) as the company liquidates inventory in
preparation for closing the sale to SQM later this year. Phosphate
Operations In phosphate, specialty products continued to show their
value as industrial products contributed $9.5 million gross margin
in this year's first quarter. However, this was more than offset by
gross margin losses in the other phosphate products, primarily due
to higher costs. Increased sulfur prices reduced gross margin by
approximately $3.5 million and higher ammonia prices had a negative
affect of approximately $11.4 million quarter over quarter.
Phosphate rock costs were flat compared to last year's same
quarter. Phosphate prices were up in all products except liquids,
which were down 6 percent quarter over quarter. Sales volumes for
liquid fertilizers were down 23 percent as dealers bought in the
fall for this year's spring season. Although prices for solid
fertilizers improved the most (22 percent), higher input costs more
than offset the increase. Solid fertilizer sales volumes were up
significantly as the company sold nearly 100,000 more tonnes into
the offshore market. Feed prices, up 5 percent over last year's
same quarter, were more than offset by lower sales volumes as the
industry faced decreased demand due to tightening feed formulations
and an abundance of meat and bone meal resulting from restricted
exports due to BSE and the avian influenza. Industrial volumes were
up 19 percent compared to last year's same quarter and prices were
up 3 percent due to the combination of more product available from
the expansion at Aurora and the virtual disappearance of imports.
Nitrogen Operations PotashCorp benefited from its ability to
produce nitrogen with low-cost gas in Trinidad as ammonia prices
rose to record levels in February and gross margin expanded to
$58.2 million from $29.8 million in last year's same quarter.
Nearly 60 percent of this year's gross margin came from Trinidad
with the remainder from the company's US facilities, which included
a natural gas hedging gain of $10.5 million. On a comparative
basis, the hedging gain was $27.0 million in last year's same
quarter. Overall sales volumes were down 19 percent compared to the
first quarter of 2003, due to the decision to keep production shut
down at Memphis and Geismar as well as a 25,000 tonne ammonia
outage at Trinidad in the first quarter of 2004. The continued
shutdowns resulted in a 60 percent reduction in nitrogen solutions
sales volumes and a 39 percent decline of urea compared to last
year's same quarter. Prices were up from both last year's first
quarter and from the trailing quarter. On a year-over-year basis,
prices were up by 36 percent with ammonia leading the way (up 48
percent). Costs, however, also increased as the company's average
price for natural gas rose by 26 percent. Financial During the
quarter, the Canadian dollar weakened compared to the US dollar,
contributing a $4.3 million foreign exchange gain. The remainder of
the gain arose from locking in US dollar receivables. In the first
quarter of 2003, the Canadian dollar strengthened, negatively
affecting our foreign exchange translation by $16.9 million.
Provincial mining and other resource taxes were higher than
anticipated due to greater profitability per tonne, however, they
were lower than last year's same quarter as the company benefited
from changes to the potash profits tax in Saskatchewan. These
changes have allowed the company to begin expanding capacity at
Rocanville while also increasing granular production. PotashCorp's
overall income tax rate has been revised down slightly to 33
percent from 35 percent and the current/future split is now
expected to be 40/60 rather than 25/75. These revisions reflect
revised estimates of the sources of income for the year. Year over
year, selling and administrative expenses rose due to the recording
of stock option expenses. In this year's first quarter, the company
chose to begin disclosing its freight and transportation costs on
its income statement. Previously, these expenses were netted
against sales. It should be noted that offshore freight and
transportation for potash from Saskatchewan is a Canpotex expense
and is therefore not included in the freight and transportation
numbers. Outlook Solid fundamentals for fertilizer are creating
optimism. Potash demand is robust. Canpotex, the industry's
offshore marketing agency, expects to ship record volumes this year
with PotashCorp being the greatest beneficiary. If achieved, these
higher volumes would lower production costs, expanding margins. The
rise in ocean freight rates has begun to ease while potash pricing
continues to improve. By the end of the first quarter, offshore
potash price increases were finally outpacing freight increases,
which should result in higher realized offshore prices for the
company. Along with anticipated price increases in North America,
this should propel potash earnings upward. In nitrogen, prices fell
back by the end of the first quarter and the traditional
relationship between natural gas and ammonia prices returned.
Current high gas prices are expected to lead to the shutdown of
some North American capacity. That would tighten supply/demand and
create room for nitrogen price increases. From April to December
2004, the company is approximately 75 percent hedged at $2.30 per
MMBtu. At current gas prices, the 2004 hedge portfolio is valued at
approximately $30.0 million. Phosphate fertilizers are expected to
remain under pressure, as India and China continue to build their
domestic industries and limit imports from the United States.
Following the pattern of the past few years, this will reduce trade
and increase competition from other world suppliers. This will
continue to keep DAP prices under pressure although lower ammonia
prices will help on the cost side. Until DAP operating rates
improve, phosphate will remain a challenging business. Positive
resolution of the phosphoric acid negotiations currently in
progress in India could improve liquid fundamentals. The continued
absence of imports and expected growth in the world economy should
keep demand strong for industrial products. In feed, DFP is showing
promise with the closure of a competitor, making way for higher
volumes. The company's earnings guidance for the year of $2.70 to
$3.50 per share remains unchanged. This assumes a Canadian dollar
exchange rate of 1.2924, which was the rate in effect at December
31, 2003. Assuming this flat exchange rate, PotashCorp anticipates
earnings of $0.70 to $0.90 per share for the second quarter, noting
that the current exchange rate is approximately 1.36. Factors that
could result in second-quarter earnings being at the lower or upper
end of the range include changes in ocean freight rates, potash
consumption trends, input prices for sulfur and natural gas, and
product prices for DAP and nitrogen. Conclusion Doyle concluded by
saying, "PotashCorp's activities in 2003 were designed to position
the company for growth as the fertilizer sector emerged from its
down cycle. The impact of those decisions became evident with the
improved performance of the company in the first quarter. As we
move forward at PotashCorp, we expect to use our unmatched excess
capacity in potash to capture growth in consumption while reducing
our production cost per tonne. In addition, our recent investment
in Arab Potash Company (APC) should assist us in co-ordinating
shipments based on proximity to markets, allowing us to lower costs
on a delivered basis. Our low-cost nitrogen production in Trinidad
and specialty products in phosphate should continue to augment our
potash activities, adding to the profitability of the company."
Notes The company's accounting policies are in accordance with
accounting principles generally accepted in Canada. All amounts are
expressed in US dollars. (1) See reconciliation and description of
non-GAAP measures in the attached section titled "Selected Non-GAAP
Financial Measures and Reconciliations". 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, fourth largest in phosphate and
third 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 2003
and in filings with the U.S. Securities and Exchange Commission. 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
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, April 22, 2004
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.
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Potash Corporation of Saskatchewan Inc. Consolidated Statements of
Financial Position (in millions of US dollars except share amounts)
March 31, December 31, 2004 2003
-------------------------------------------------------------------------
(unaudited) Assets Current assets Cash and cash equivalents $ 11.2
$ 4.7 Accounts receivable 272.1 305.0 Inventories 420.5 395.2
Prepaid expenses 40.3 29.0
-------------------------------------------------------------------------
744.1 733.9 Property, plant and equipment 3,074.3 3,108.1 Other
assets 623.1 628.3 Goodwill 97.0 97.0
-------------------------------------------------------------------------
$ 4,538.5 $ 4,567.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Short-term debt $ 57.9 $ 176.2
Accounts payable and accrued charges 392.7 380.3 Current portion of
long-term debt 1.3 1.3
-------------------------------------------------------------------------
451.9 557.8 Long-term debt 1,268.4 1,268.6 Future income tax
liability 496.3 484.2 Accrued post-retirement/post-employment
benefits 200.0 194.5 Accrued reclamation costs and asset retirement
obligations 82.4 81.3 Other non-current liabilities and deferred
credits 5.9 7.1
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2,504.9 2,593.5
-------------------------------------------------------------------------
Shareholders' Equity Share capital 1,265.6 1,245.8 Unlimited
authorization of common shares without par value; issued and
outstanding 53,398,713 and 53,112,216 at March 31, 2004 and
December 31, 2003, respectively Contributed surplus 268.0 265.2
Retained earnings 500.0 462.8
-------------------------------------------------------------------------
2,033.6 1,973.8
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$ 4,538.5 $ 4,567.3
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Potash Corporation of Saskatchewan Inc. Consolidated Statements of
Operations and Retained Earnings (in millions of US dollars except
per-share amounts) (unaudited) Three Months Ended March 31 2004
2003
-------------------------------------------------------------------------
Sales $ 728.4 $ 661.8 Less: Freight 58.1 64.4 Transportation and
distribution 23.0 23.0 Cost of goods sold 523.3 493.3
-------------------------------------------------------------------------
Gross Margin 124.0 81.1
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Selling and administrative 26.2 23.7 Provincial mining and other
taxes 15.1 18.1 Provision for plant shutdowns - 2.2 Foreign
exchange (gain) loss (8.2) 16.9 Other income (6.9) (4.5)
-------------------------------------------------------------------------
26.2 56.4
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Operating Income 97.8 24.7 Interest Expense 22.1 19.4
-------------------------------------------------------------------------
Income Before Income Taxes 75.7 5.3 Income Taxes (Note 6) 25.0 2.1
-------------------------------------------------------------------------
Net Income 50.7 3.2 Retained Earnings, Beginning of Period 462.8
641.4 Dividends (13.5) (13.0)
-------------------------------------------------------------------------
Retained Earnings, End of Period $ 500.0 $ 631.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Income Per Share (Note 7) Basic $ 0.95 $ 0.06 Diluted $ 0.94 $
0.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dividends Per Share $ 0.25 $ 0.25
-------------------------------------------------------------------------
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Potash Corporation of Saskatchewan Inc. Consolidated Statements of
Cash Flow (in millions of US dollars) (unaudited) Three Months
Ended March 31 2004 2003
-------------------------------------------------------------------------
Operating Activities Net income $ 50.7 $ 3.2
-------------------------------------------------------------------------
Items not affecting cash Depreciation and amortization 59.7 59.0
Stock-based compensation 2.8 - Foreign exchange on future income
tax (2.9) 11.8 Provision for future income tax 15.0 2.1 Share of
earnings of equity investees (3.8) (2.3) Provision for
post-retirement/post-employment benefits 5.5 11.0 Accrued
reclamation costs and asset retirement obligations 1.1 0.3 Other
non-current liabilities and deferred credits (1.2) 0.1
-------------------------------------------------------------------------
Subtotal of items not affecting cash 76.2 82.0
-------------------------------------------------------------------------
Changes in non-cash operating working capital Accounts receivable
32.9 (50.3) Inventories (26.6) (27.9) Prepaid expenses (11.3) (5.9)
Accounts payable and accrued charges 9.5 54.7 Current income taxes
2.9 (11.7)
-------------------------------------------------------------------------
Subtotal of changes in non-cash operating working capital 7.4
(41.1)
-------------------------------------------------------------------------
Cash provided by operating activities 134.3 44.1
-------------------------------------------------------------------------
Investing Activities Additions to property, plant and equipment
(16.4) (17.0) Proceeds from disposal of (additions to) other assets
0.8 (8.4)
-------------------------------------------------------------------------
Cash used in investing activities (15.6) (25.4)
-------------------------------------------------------------------------
Cash before financing activities 118.7 18.7
-------------------------------------------------------------------------
Financing Activities Proceeds from long-term debt - 250.0 Repayment
of long-term debt (0.2) (0.2) Repayment of short-term debt (118.3)
(208.8) Dividends (13.5) (13.0) Issuance of shares 19.8 0.5
-------------------------------------------------------------------------
Cash (used in) provided by financing activities (112.2) 28.5
-------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 6.5 47.2 Cash and Cash
Equivalents, Beginning of Period 4.7 24.5
-------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 11.2 $ 71.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow disclosure Interest paid $ 13.4 $ 1.4 Income
taxes paid $ 6.2 $ 15.9
-------------------------------------------------------------------------
Potash Corporation of Saskatchewan Inc. Notes to the Consolidated
Financial Statements (in millions of US dollars except share and
per-share amounts) (unaudited) 1. Significant Accounting Policies
The company's accounting policies are in accordance with accounting
principles generally accepted in Canada ("GAAP"). The accounting
policies used in preparing these interim consolidated financial
statements are consistent with those used in the preparation of the
2003 annual consolidated financial statements, except as disclosed
in Note 2. The consolidated financial statements include the
accounts of Potash Corporation of Saskatchewan Inc. and its
subsidiaries. These interim consolidated financial statements do
not include all disclosures normally provided in annual
consolidated financial statements and should be read in conjunction
with the most recent annual consolidated financial statements. In
management's opinion, the unaudited financial information includes
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. In 2003, the company approved plans to restructure certain
operations. Those plans required significant estimates to be made
of: (i) the recoverability of the carrying value of certain assets
based on their capacity to generate future cash flows, and (ii)
employee termination, contract termination and other exit costs.
Because restructuring activities are complex processes that can
take several months to complete, they involve periodically
reassessing estimates. As a result, the company may have to change
originally reported estimates as actual payments are made or
activities are completed. 2. Changes in Accounting Policy Sources
of GAAP Effective January 1, 2004, the company prospectively
adopted new accounting requirements of the Canadian Institute of
Chartered Accountants ("CICA") as issued in Section 1100,
"Generally Accepted Accounting Principles". This section
establishes standards for financial reporting in accordance with
GAAP and provides guidance on sources to consult when selecting
accounting policies and determining appropriate disclosures when a
matter is not dealt with explicitly in the primary sources of GAAP.
In light of the new Section 1100 provisions, the company reviewed
the application of its accounting policies and changed the
consolidated financial statement presentation of sales revenue,
freight costs and transportation and distribution expenses, without
any effect on gross margin or net income. All comparative
information has been appropriately reclassified. In prior years,
the company reported sales revenues (net of discounts, and
including amounts recoverable from customers for freight,
transportation and distribution) net of related freight,
transportation and distribution expenses. The company now reports
sales revenues (net of discounts, and including amounts recoverable
from customers for freight, transportation and distribution),
freight costs, and transportation and distribution expenses as
separate line items on the Consolidated Statements of Operations
and Retained Earnings. Asset Retirement Obligations On January 1,
2004, the company adopted CICA Section 3110, "Accounting for Asset
Retirement Obligations", which requires the company to record an
asset and related liability for the costs associated with the
retirement of long-lived tangible assets when a legal liability to
retire such assets exists. This includes obligations incurred as a
result of acquisition, construction, or normal operation of a
long-lived asset. The provisions of Section 3110 require the asset
retirement obligation to be recorded at fair value at the time the
liability is incurred. Accretion expense is recognized as an
operating expense using the credit-adjusted risk-free interest rate
in effect when the liability was recognized. The associated asset
retirement obligations are capitalized as part of the carrying
amount of the long-lived asset and depreciated over the estimated
remaining useful life of the asset. The company has recorded asset
retirement obligations primarily associated with certain closure,
reclamation, and restoration costs for its potash and phosphate
operations. The adoption of Section 3110 did not have a significant
effect on the results of operations or financial position of the
company. Had the provisions of Section 3110 been applied as of
January 1, 2003, the pro forma effects for the year ended December
31, 2003 on net loss would not have been material. As required
under the standard, the company will make periodic assessments as
to the reasonableness of its asset retirement obligation estimates
and revise those estimates accordingly. The respective asset and
liability balances will be adjusted, which will correspondingly
increase or decrease the amounts expensed in future periods.
Hedging Relationships Effective January 1, 2004, the company
adopted the CICA accounting guideline on hedging relationships.
This guideline sets out the criteria that must be met in order to
apply hedge accounting for derivatives and is based on many of the
principles outlined in the US standards relating to derivative
instruments and hedging activities. Specifically, the guideline
provides detailed guidance on the identification, designation,
documentation and effectiveness of hedging relationships, for
purposes of applying hedge accounting, and the discontinuance of
hedge accounting. Income and expenses on derivative instruments
designated and qualifying as hedges under this guideline are
recognized in earnings in the same period as the related hedged
item. Ineffective hedging relationships and hedges not designated
in a hedging relationship are carried at fair value on the
Consolidated Statement of Financial Position and subsequent changes
in their fair value are recorded in earnings. The adoption of this
accounting guideline did not have a material impact on the
consolidated financial statements for the quarter. 3. Long-term
Debt In January and February 2004, the company entered into
interest rate swap contracts that effectively converted a notional
amount of $300.0 of fixed rate debt (due 2011) into floating rate
debt based on LIBOR rates. Net settlements on the swap instruments
are recorded as adjustments to interest expense. The company did
not enter into any interest rate swap contracts in 2003. 4.
Provision for Plant Shutdowns Memphis and Geismar Nitrogen
Operations In June 2003, the company indefinitely shut down its
Memphis, Tennessee plant and suspended production of ammonia and
nitrogen solutions at its Geismar, Louisiana facilities due to high
US natural gas costs and low product margins. The plants have not
been re-started since that time. 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 the third quarter of 2003. The number of
employees terminated as a result of the shutdowns was 187, of which
185 had left the company as of March 31, 2004. The company has made
payments relating to the terminations totaling $3.5. All remaining
workforce reduction costs pertaining to the 187 employees are
expected to be paid by December 31, 2004. In connection with the
shutdowns, management had determined that the carrying amounts of
the long-lived assets at the Memphis and Geismar nitrogen
facilities were not fully recoverable, and an impairment loss of
$101.6, equal to the amount by which the carrying amount of the
facilities' asset groups exceeded their respective fair values, was
recognized. Of the total impairment charge, $100.6 related to
property, plant and equipment and $1.0 related to other assets. As
part of its review, management also wrote-down certain parts
inventories at these plants in the amount of $12.4. In addition to
the costs described above, management expects to incur other
shutdown-related costs of approximately $11.1 and nominal annual
expenditures for site security and other maintenance costs. These
amounts have not been recorded in the consolidated financial
statements as of March 31, 2004. Such costs will be recognized and
recorded in the period in which they are incurred. Kinston
Phosphate Feed Plant The phosphate feed plant at Kinston, North
Carolina ceased operations in the first quarter of 2003. In that
quarter, the company recorded $0.6 for costs of special termination
benefits for Kinston employees, $0.3 for parts inventory
write-downs, and $1.3 for long-lived asset impairment charges. In
lieu of full plant closure, the company continued to operate the
facility as a warehouse. In the third quarter of 2003, company
management determined that the cost of operating Kinston as a
stand-alone warehouse was uneconomical. This decision triggered a
further review by management of the carrying amounts of the plant's
long-lived assets. As a result of this review, management
determined that the carrying amounts of the long-lived assets were
not recoverable, and an additional impairment charge of $2.7, equal
to the amount by which the carrying amount of the plant's
long-lived assets exceeded their fair value, was recognized. No
additional costs were incurred in connection with the plant
shutdowns in the first quarter of 2004. The following table
summarizes, by reportable segment, the total amount of costs
incurred to date and the total costs expected to be incurred in
connection with the plant shutdowns described above: Cumulative
Total Costs Incurred Expected to to Date be Incurred
--------------------------- Nitrogen Segment ----------------
Employee termination and related benefits $ 4.8 $ 4.8 Write-down of
parts inventory 12.4 12.4 Asset impairment charges 101.6 101.6
Other related exit costs - 11.1 --------------------------- 118.8
129.9 --------------------------- Phosphate Segment
----------------- Employee termination and related benefits 0.6 0.6
Write-down of parts inventory 0.3 0.3 Asset impairment charges 4.0
4.0 --------------------------- 4.9 4.9 ---------------------------
$ 123.7 $ 134.8 ---------------------------
--------------------------- The following table summarizes, by
reportable segment, the costs accrued as of March 31, 2004 in
connection with the plant shutdowns described above: Accrued
Accrued Balance Balance December 31, Cash March 31, 2003 Payments
2004 ----------------------------------- Nitrogen Segment
---------------- Employee termination and related benefits $ 2.1 $
(0.8) $ 1.3 Phosphate Segment ----------------- Employee
termination and related benefits 0.5 (0.1) 0.4
----------------------------------- $ 2.6 $ (0.9) $ 1.7
-----------------------------------
----------------------------------- The accrued balance is included
in accounts payable and accrued charges in the Consolidated
Statement of Financial Position as at March 31, 2004. 5. Provision
for PCS Yumbes S.C.M. In November 2003, the company entered into a
share purchase agreement with Sociedad Quimica y Minera de Chile
S.A. ("SQM"), whereby SQM is to acquire the shares of PCS Yumbes
for an aggregate purchase price of $35.0, subject to adjustments.
Under the terms of the share purchase agreement, and prior to the
sale closing, PCS Yumbes will continue to operate the facility and
expeditiously liquidate the inventory of nitrates. All other
working capital is to be fully realized or discharged (as
applicable) by the company prior to the close. It is expected that
closing will occur no later than the end of 2004. In 2003,
management conducted an assessment of the recoverability of the
long-lived assets of the PCS Yumbes operations. As a result of its
review, management determined that the carrying amounts of PCS
Yumbes' long-lived assets were not recoverable and recorded an
impairment charge of $77.4, equal to the amount by which the
carrying amount of the asset group exceeded fair value. Of the
total impairment charge, $13.0 related to property, plant and
equipment, $63.9 related to deferred pre-production costs, and $0.5
related to deferred acquisition costs. As part of the review,
management also wrote-down certain non-parts inventory by $50.2 due
to the need to liquidate all inventories that would not be
transferred to SQM under the agreement. The company plans to
eliminate all employee positions at PCS Yumbes by December 31, 2004
and has recorded a provision of $1.8 pertaining to contractual
termination benefits to be paid, primarily under Chilean law. As of
March 31, 2004, 124 of the employees had left the company. The
remaining 100 employees are expected to leave the company by
December 31, 2004, and all remaining workforce reduction costs are
expected to be paid by that date. The company had incurred early
termination penalties in respect of certain PCS Yumbes contractual
arrangements. The company recorded a provision of $11.1 in the
third quarter of 2003 for these contract termination costs and $0.5
remained to be paid at March 31, 2004. No costs were incurred in
connection with the above in the first quarter of 2004. The
following table summarizes the total amount of costs incurred to
date and the total costs expected to be incurred in connection with
PCS Yumbes: Cumulative Total Costs Incurred Expected to to Date be
Incurred --------------------------- Potash Segment --------------
Contract termination costs $ 11.1 $ 11.1 Employee termination and
related benefits 1.8 1.8 Write-down of non-parts inventory 50.2
50.2 Asset impairment charges 77.4 77.4 ---------------------------
$ 140.5 $ 140.5 ---------------------------
--------------------------- The following table summarizes the
costs accrued as of March 31, 2004 in connection with PCS Yumbes as
described above: Accrued Accrued Balance Balance December 31, Cash
March 31, 2003 Payments Adjustments 2004
----------------------------------------------- Potash Segment
-------------- Contract termination costs $ 0.6 $ (0.1) $ - $ 0.5
Employee termination and related benefits 1.2 (0.1) (0.2) 0.9
----------------------------------------------- $ 1.8 $ (0.2) $
(0.2) $ 1.4 -----------------------------------------------
----------------------------------------------- The accrued balance
is included in accounts payable and accrued charges in the
Consolidated Statement of Financial Position as at March 31, 2004.
6. Income Taxes The company's consolidated income tax rate for the
current period approximates 33 percent. In the first quarter of
2003, this rate approximated 40 percent. The decrease in rate is
due primarily to the impact of Saskatchewan resource tax incentives
and changes to the federal resource allowance, plus the scheduled
federal statutory rate reduction. 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
March 31, 2004 of 53,343,000 (2003 - 52,089,000). Diluted net
income per share is calculated based on the weighted average shares
issued and outstanding during the period, adjusted 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. For periods in which there was
a loss applicable to common shares, stock options with exercise
prices at or below the average market price for the period were
excluded for the calculations of diluted loss per share, as
inclusion of these securities would have been anti-dilutive to the
net loss per share. Weighted average shares outstanding for the
diluted net income per share calculation for the three months ended
March 31, 2004 were 54,023,000 (2003 - 52,312,000). 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 which
approximate market prices. Three Months Ended March 31, 2004
-------------------------------------------------------------------------
All Consol- Potash Phosphate Nitrogen Others idated
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Sales $ 223.7 $ 217.6 $ 287.1 $ - $ 728.4 Freight 33.5 15.7 8.9 -
58.1 Transportation and distribution 8.7 5.3 9.0 - 23.0 Net sales -
third party 181.5 196.6 269.2 - Cost of goods sold 114.8 197.5
211.0 - 523.3 Gross margin 66.7 (0.9) 58.2 - 124.0 Depreciation and
amortization 16.9 20.5 19.9 2.4 59.7 Inter-segment sales 2.9 3.1
21.8 - Three Months Ended March 31, 2003
-------------------------------------------------------------------------
All Consol- Potash Phosphate Nitrogen Others idated
-------------------------------------------------------------------------
Sales $ 201.2 $ 191.1 $ 269.5 $ - $ 661.8 Freight 32.7 17.9 13.8 -
64.4 Transportation and distribution 8.0 4.8 10.2 - 23.0 Net sales
- third party 160.5 168.4 245.5 - Cost of goods sold 111.1 166.5
215.7 - 493.3 Gross margin 49.4 1.9 29.8 - 81.1 Depreciation and
amortization 15.3 18.6 23.2 1.9 59.0 Inter-segment sales 2.4 2.7
11.6 - 9. Stock-based Compensation The company has two stock option
plans. Prior to 2003, the company applied the intrinsic value based
method of accounting for the 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. Prospective application
of the fair value method did not have an impact on the first three
fiscal quarters of 2003 since the company did not grant any options
during those periods. Since the company's stock option awards vest
over two years, the compensation cost included in the determination
of net income for the first quarter of 2004 and 2003 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 (loss) and net income (loss) per share if the fair
value based method had been applied to all outstanding and unvested
awards in each period. Three Months Ended March 31
-------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------
Net Income - as reported $ 50.7 $ 3.2 Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects 2.2 - Less: Total stock-based employee
compensation expense determined under fair value based method for
all awards, net of related tax effects (3.2) (3.7)
----------------------- Net Income (Loss) - pro forma(1) $ 49.7 $
(0.5) ----------------------- ----------------------- (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 $ 0.95 $
0.06 Basic Net Income (Loss) Per Share - pro forma $ 0.93 $ (0.01)
Diluted Net Income Per Share - as reported $ 0.94 $ 0.06 Diluted
Net Income (Loss) Per Share - pro forma $ 0.92 $ (0.01) In
calculating the foregoing pro forma amounts, the fair value of each
option grant was estimated as of the date of grant using the
Modified Black-Scholes option-pricing model with the following
weighted average assumptions: 2003 2002 2001
-------------------------------------------------------------------------
Expected dividend $ 1.00 $ 1.00 $ 1.00 Expected volatility 27% 32%
32% Risk-free interest rate 4.06% 4.13% 4.54% Expected life of
options 8 years 8 years 8 years Expected forfeitures 16% 10% 10%
10. Post-retirement/Post-employment Expenses Pension Plans Three
Months Ended March 31
-------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------
Service cost $ 3.5 $ 3.0 Interest cost 7.5 7.4 Expected return on
plan assets (8.4) (7.6) Amortization of net loss 1.1 1.3
----------------------- Net expense $ 3.7 $ 4.1
----------------------- ----------------------- Other
Post-retirement Plans Three Months Ended March 31
-------------------------------------------------------------------------
2004 2003 Service cost $ 1.4 $ 1.4 Interest cost 3.5 3.2
Amortization of net loss 0.4 0.5 ----------------------- Net
expense $ 5.3 $ 5.1 ----------------------- -----------------------
Pension plan contributions to be paid by the company during 2004
are not expected to differ significantly from the amounts
previously disclosed in the consolidated financial statements for
the year ended December 31, 2003. 11. Comparative Figures Certain
of the prior period's figures have been reclassified to conform
with the current period's presentation. Potash Corporation of
Saskatchewan Inc. Selected Operating and Revenue Data Three Months
Ended March 31 2004 2003
-------------------------------------------------------------------------
(unaudited) (unaudited) Potash Operating Data Production (KCl
Tonnes - thousands) 2,102 1,928 Shutdown weeks 3.2 6.8 Sales
(tonnes - thousands) North America 782 829 Offshore 1,166 1,039
-------------------------------------------------------------------------
1,948 1,868
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Net Sales (US $ millions) Sales $223.7 $201.2 Less: Freight
33.5 32.7 Transportation and distribution 8.7 8.0
-------------------------------------------------------------------------
Net Sales $181.5 $160.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America $74.1 $62.4 Offshore 91.3 84.5
-------------------------------------------------------------------------
Potash Subtotal 165.4 146.9 Miscellaneous 16.1 13.6
-------------------------------------------------------------------------
$181.5 $160.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Average Net Sales Price per MT North America $94.76 $75.31
Offshore $78.29 $81.31
-------------------------------------------------------------------------
$84.91 $78.65
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Operating Data Production (P2O5 Tonnes - thousands) 443
439 P2O5 Operating Rate 78% 71% Sales (tonnes - thousands)
Fertilizer - Liquid Phosphates 136 176 Fertilizer - Solid
Phosphates 355 234 Feed 207 232 Industrial 145 122
-------------------------------------------------------------------------
843 764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America sales tonnes 669 682 Offshore sales tonnes 174 82
-------------------------------------------------------------------------
843 764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Net Sales (US $ millions) Sales $217.6 $191.1 Less:
Freight 15.7 17.9 Transportation and distribution 5.3 4.8
-------------------------------------------------------------------------
Net Sales $196.6 $168.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer - Liquid Phosphates $30.7 $42.0 Fertilizer - Solid
Phosphates 71.4 38.5 Feed 44.4 47.5 Industrial 47.8 39.1
Miscellaneous 2.3 1.3
-------------------------------------------------------------------------
$196.6 $168.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America net sales $163.6 $154.4 Offshore net sales 33.0 14.0
-------------------------------------------------------------------------
$196.6 $168.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Average Net Sales Price per MT Fertilizer - Liquid
Phosphates $225.36 $239.39 Fertilizer - Solid Phosphates $200.91
$164.54 Feed $215.18 $204.43 Industrial $329.71 $320.92
-------------------------------------------------------------------------
$233.31 $220.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America average price per MT $240.96 $226.39 Offshore average
price per MT $190.36 $170.73
-------------------------------------------------------------------------
$233.31 $220.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Operating Data Production (N Tonnes - thousands) 635 715
Average Natural Gas Cost per MMBtu $3.69 $2.92 Sales (tonnes -
thousands) Manufactured Product Ammonia 412 433 Urea 255 418
Nitrogen Solutions 77 194 Nitric acid/Ammonium nitrate 356 355
-------------------------------------------------------------------------
Manufactured Product 1,100 1,400 Purchased Product 153 155
-------------------------------------------------------------------------
1,253 1,555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer sales tonnes 491 675 Feed/Industrial sales tonnes 762
880
-------------------------------------------------------------------------
1,253 1,555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Net Sales (US $ millions) Sales $287.1 $269.5 Less:
Freight 8.9 13.8 Transportation and distribution 9.0 10.2
-------------------------------------------------------------------------
Net Sales $269.2 $245.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Manufactured Product Ammonia $111.7 $79.0 Urea 55.0 73.0 Nitrogen
Solutions 10.6 20.5 Nitric acid/Ammonium nitrate 46.7 38.8
Miscellaneous 4.7 4.3
-------------------------------------------------------------------------
Net Sales Manufactured Product 228.7 215.6 Net Sales Purchased
Product 40.5 29.9
-------------------------------------------------------------------------
$269.2 $245.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer net sales $104.3 $101.8 Feed/Industrial net sales 164.9
143.7
-------------------------------------------------------------------------
$269.2 $245.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Average Net Sales Price per MT Ammonia $270.77 $182.37
Urea $215.84 $174.66 Nitrogen Solutions $136.59 $105.96 Nitric
acid/Ammonium nitrate $131.34 $109.37
-------------------------------------------------------------------------
Manufactured Product $207.78 $154.04 Purchased Product $265.65
$193.18
-------------------------------------------------------------------------
$214.82 $157.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer average price per MT $212.27 $151.10 Feed/Industrial
average price per MT $216.46 $163.17
-------------------------------------------------------------------------
$214.82 $157.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exchange Rate (Cdn$/US$) 2004 2003
-------------------------------------------------------------------------
December 31 1.2924 March 31 1.3105 1.4693 First-quarter average
conversion rate 1.3126 1.5376 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,
free cash flow, and cash flow prior to working capital changes 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's management believes these
non-GAAP measures provide useful supplemental information to
investors in order that they may evaluate the company's financial
performance using the same measures used by the company's
management. The company'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 March 31 2004 2003
-------------------------------------------------------------------------
Net income $ 50.7 $ 3.2 Income taxes 25.0 2.1 Interest expense 22.1
19.4 Depreciation and amortization 59.7 59.0
-------------------------------------------------------------------------
EBITDA $ 157.5 $ 83.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA is calculated as earnings (loss) before interest, income
taxes, depreciation and amortization. The company 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 costs through other financial
measures such as capital expenditures, and cash flow provided by
operating activities. The company also believes that this
measurement is used by certain investors and analysts 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 March 31 2004 2003
-------------------------------------------------------------------------
Cash flow prior to working capital changes(1) $ 126.9 $ 85.2
-------------------------------------------------------------------------
Changes in non-cash operating working capital Accounts receivable
32.9 (50.3) Inventories (26.6) (27.9) Prepaid expenses (11.3) (5.9)
Accounts payable and accrued charges 9.5 54.7 Current income taxes
2.9 (11.7)
-------------------------------------------------------------------------
Changes in non-cash operating working capital 7.4 (41.1)
-------------------------------------------------------------------------
Cash provided by operating activities $ 134.3 $ 44.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow(2) $ 111.3 $ 59.8 Additions to property, plant and
equipment 16.4 17.0 Additions to other assets (0.8) 8.4 Changes in
non-cash operating working capital 7.4 (41.1)
-------------------------------------------------------------------------
Cash provided by operating activities $ 134.3 $ 44.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 used by certain investors
and analysts 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
additions to other assets assists management in the long-term
assessment of liquidity and financial strength. Management also
believes that this measurement is used by certain investors and
analysts 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. 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/
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