CALGARY, ALBERTA--(CCNMatthews - Aug. 8, 2007) -
ALL AMOUNTS ARE IN US$, UNLESS OTHERWISE STATED
Agrium Inc. (TSX:AGU) (NYSE:AGU) announced today its highest ever quarterly earnings, with net earnings for the second quarter of 2007 of $229-million ($1.70 diluted earnings per share), a more than 60 percent increase over net earnings of $142-million ($1.06 diluted earnings per share) for the same period in 2006. Net earnings for the first six months of the year were a record $218-million ($1.63 diluted earnings per share), more than double 2006 net earnings of $94-million ($0.71 diluted earnings per share) for the same period in 2006.
"Agrium's record second quarter earnings were due to excellent results from all three of our strategic business units. This quarter is a reflection of both the earnings power and future potential for these businesses and we remain committed to our strategy of further diversifying and growing our businesses and products," said Mike Wilson, Agrium President and CEO.
"Results from our Retail operations reflect the synergies we captured from our 2006 Royster-Clark acquisition, as well as the strong agricultural fundamentals. Our Wholesale operations had their best ever quarter with record or near record margins across all product lines. Our Advanced Technologies results doubled on the strength of our ESN sales combined with our recent growth initiatives," continued Mr. Wilson.
Agrium expects the outlook for the second half of the year to continue to be robust with a positive outlook for farm incomes, crop input demand and continued strength in the nutrient markets benefiting our Wholesale businesses in particular. We expect our Retail operations to realize the remainder of the Royster-Clark synergies in the second half of the year when the majority of crop protection rebates are recorded. Advanced Technologies operations should continue to perform well as growers look to our environmentally smart nitrogen (ESN) product as an alternative to urea ammonium nitrate (UAN) solutions. We intend to provide earnings guidance for the second half of the year upon releasing our third quarter earnings.
HIGHLIGHTS & KEY DEVELOPMENTS
Total EBITDA for the second quarter of 2007 increased 59 percent to $405-million. Second quarter earnings included a foreign exchange gain of $12-million (after tax), and stock-based compensation expense of $8-million (after tax). Net sales, EBIT and EBITDA increased for all three of our business units: Retail, Wholesale and Advanced Technologies, as we realized the benefits of our recent growth initiatives, combined with strong industry fundamentals. We generated $83-million in cash from operations in the quarter.
- Retail EBIT increased 45 percent or $44-million to reach $142-million in the second quarter of 2007 due to a combination of fertilizer inventory appreciation, realizing synergies from the Royster-Clark acquisition and strong market conditions. In late May we also further expanded our retail operations with the acquisition of retail outlets in Kansas and Oklahoma.
- Wholesale EBIT increased by $100-million to $232-million in the second quarter of 2007 as prices and margins for virtually all products rose relative to both the prior year and to the first quarter of 2007. International sales volumes will be impacted in the third quarter, as the coldest Argentine winter in almost 50 years resulted in gas supply disruptions at our Profertil facility. Construction of our Egyptian nitrogen facility commenced in the quarter. As well, we concluded a 15-year off-take agreement to market nitrogen products to be produced at the Faustina, LA gasification facility.
- Advanced Technologies EBIT more than doubled to $7-million in the second quarter of 2007 relative to the prior year. This increase was largely due to increased sales of controlled release products as a result of higher ESN sales and the addition of the Pursell Technologies product line which was acquired in August 2006. The market value of our investment in Hanfeng Evergreen Inc. (acquired for C$74-million in April 2007) was approximately C$155-million as of the close of trading on August 3, 2007.
MANAGEMENT'S DISCUSSION AND ANALYSIS
August 8, 2007
The following interim management's discussion and analysis (MD&A) updates our annual MD&A included in our 2006 Annual Report to Shareholders, to which our readers are referred. 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.
2007 Second Quarter Operating Results
NET EARNINGS
Agrium's second quarter consolidated net earnings were $229-million, or $1.70 diluted earnings per share, compared to earnings of $142-million, or $1.06 diluted earnings per share, for the same quarter of 2006. EBIT was $363-million for the second quarter of 2007 versus EBIT of $210-million for the second quarter of 2006. This improved EBIT performance was comprised of an increase in gross profit of $175-million net of an increase in operating expenses of $22-million.
Gross profit in the second quarter of 2007 was $572-million compared to $397-million in the second quarter of 2006. Strong crop prices drove increased retail crop input demand contributing to a $64-million increase in gross profit in our Retail business segment as sales and margins for fertilizer, chemical and seed all showed growth over the comparative period. Higher selling prices for all three nutrients, combined with increased domestic and international potash volumes, contributed to a record gross profit of $277-million in our Wholesale business segment, an increase of $103-million over the same quarter in 2006. Our Advanced Technologies business segment contributed an additional $13-million to our quarter-over-quarter gross profit increase.
The increase in second quarter 2007 operating expenses reflects a combination of the following items:
- $12-million increase in foreign exchange gain to $17-million primarily caused by unrealized foreign exchange gains on U.S. dollar denominated liabilities in our Canadian operations due to the strengthening of the Canadian dollar;
- $9-million increase in stock-based compensation expense to $12-million due to a significant increase in our share price;
- $16-million increase in Retail's selling expenses to $119-million primarily as a result of increased sales activity; and,
- $9-million increase in expenses in Advanced Technologies to $11-million due to increased volume of sales activity resulting from our third quarter 2006 acquisition of Pursell Technologies.
FINANCIAL POSITION AND LIQUIDITY
At June 30, 2007, our net bank indebtedness was $95-million compared to net cash on hand of $43-million at June 30, 2006. The change in our cash position since the second quarter of 2006 reflects our continued commitment to our growth strategy through our acquisitions of Pursell Technologies, an equity interest in Hanfeng Evergreen Inc.(Hanfeng), retail outlets from Archer Daniels Midland (ADM), prepaid construction costs related to our nitrogen facility in Egypt, as well as continued investment in our base businesses.
Operating activities including the effect of changes in non-cash working capital provided cash flow of $83-million in the second quarter of 2007, compared to $150-million for the same quarter of 2006. Non-cash working capital was primarily affected by an increase in accounts receivable resulting from the late start of the spring fertilizer application season and stronger than normal sales activity late in the quarter. These receivables are expected to be collected in the third quarter. The increase in accounts receivable relating to sales activity was partially offset by a $52-million increase in our accounts receivable securitization facility. As at June 30, 2007, we had sold $184-million under the securitization facility compared to $132-million at June 30, 2006.
The 2007 annual tax rate is anticipated to be 34 percent, a three percent increase from previous estimates. This is due to foreign exchange gains for Canadian tax purposes on our U.S. dollar denominated debt resulting from the recent significant increase in the value of the Canadian dollar and to a greater proportion of our earnings coming from higher tax regions.
BUSINESS SEGMENT PERFORMANCE
Retail
Retail's second quarter net sales were $1,147-million compared to $969-million in the second quarter of 2006. Gross profit was $278-million, a $64-million increase over the $214-million gross profit earned in the same quarter last year. EBIT was $142-million compared to 2006 second quarter EBIT of $98-million. During the quarter, we acquired retail outlets from ADM, which contributed $35-million and $5-million in net sales and gross profit, respectively.
The increase in net sales and gross profit in the second quarter of 2007 versus the same quarter of 2006 was attributed to:
- Fertilizer sales increased $139-million and gross profit increased $50-million to $658-million and $159-million, respectively, due to increases in both volumes and sales prices. Volumes increased due to both strong crop prices creating higher fertilizer demand as our customers expanded corn acreage seeking to maximize yields, and incremental sales volumes from our newly acquired retail outlets. Fertilizer margins improved significantly to 24 percent in the second quarter of 2007, from 21 percent in the second quarter of 2006, primarily as a result of inventory appreciation and Royster-Clark synergies.
- Chemical sales increased $6-million and gross profit increased $5-million to $291-million and $52-million, respectively. Increased sales were largely due to our newly acquired ADM retail outlets. The higher gross profit was primarily due to improved chemical margins in locations acquired from Royster-Clark in 2006, where expected synergies have begun to be realized. Chemical margins were 18 percent for the second quarter of 2007 versus 16 percent for the second quarter of 2006.
- Seed sales increased $17-million and gross profit increased $3-million to $131-million and $15-million, respectively, reflecting a shift in sales mix to higher priced corn seed from lower priced soybean seed, consistent with our customers' expanded corn acreage.
Retail expenses increased by $20-million to $136-million primarily due to higher selling expenses associated with the increase in sales and the addition of retail outlets from the ADM acquisition. Selling expenses as a percentage of net sales were approximately 10 percent, which was consistent with the second quarter of 2006.
Wholesale
Wholesale second quarter net sales were $890-million compared to $861-million in the second quarter of 2006. Gross profit increased by $103-million to $277-million compared to $174-million in the same quarter last year. EBIT was $232-million, an increase of $100-million over the second quarter 2006 EBIT of $132-million.
The increase in net sales and gross profit in the second quarter of 2007 versus the same quarter of 2006 was attributed to:
- Nitrogen sales increased $62-million and gross profit increased $69-million, to $556-million and $185-million, respectively. Gross profit for domestic nitrogen increased $77-million, primarily due to higher selling prices. In addition, cost of product sold for domestic nitrogen was lower as sales during the second quarter of 2007 benefited from lower cost inventory built through the first quarter of 2007 compared with higher gas costs in the comparative period. International gross profit decreased $8-million due to both lower sales volumes and higher product costs as a result of decreased production at our Kenai and Profertil plants. In 2007, Kenai began production in May (59 operating days in the quarter) versus a full quarter's operations (92 days) in 2006. Profertil production was negatively affected by 19 days of downtime in May and June of 2007 due to gas supply interruptions resulting from cold weather in Argentina.
- Potash sales increased $28-million and gross profit increased $15-million, to $95-million and $51-million, respectively, primarily as a result of increased sales volumes. Second quarter international sales prices increased, while volumes more than doubled those achieved in the comparative period as the prior year's sales were adversely affected by extended negotiations with China. Domestic sales volumes and prices were also higher than 2006 due to strong domestic demand.
- Phosphate sales increased $23-million and gross profit increased $21-million, to $145-million and $35-million, respectively. Higher selling prices were offset by lower sales volumes, with product availability limited due in part to continued rail service disruptions. In addition, margins were impacted by higher cost of product, primarily as a result of the stronger Canadian dollar and the purchase of higher-cost Moroccan phosphate rock for our Redwater plant to supplement rock from our Kapuskasing mine.
- While results for all three produced nutrients were significantly higher in the second quarter of 2007 versus the comparative period, sales for product purchased for resale decreased $84-million, although gross profit was only $2-million lower. A decrease in volumes was largely offset by higher margins as we focused on higher value sales.
Agrium's overall natural gas cost for product produced in the second quarter of 2007 was $5.76/MMBtu compared to $5.15/MMBtu for the same quarter of 2006, due mostly to higher gas costs at our international facilities. The U.S. benchmark (NYMEX) natural gas price for the second quarter of 2007 was $7.56/MMBtu, with the AECO (Alberta) basis differential averaging $0.90/MMBtu lower than NYMEX. Effective July 1, 2007, we ceased designating natural gas derivatives as cash flow hedges for accounting purposes. This decision was made to allow for a more effective implementation of our hedging strategy. It also avoids the risk of periodically losing qualifying hedge accounting treatment, resulting from the increasing complexity in hedge accounting rules. All existing hedge positions at July 1, 2007 have been de-designated as cash flow hedges for accounting purposes and, as a result, all future realized and unrealized gains or losses related to these positions, as well as any new natural gas derivatives entered into since July 1, 2007, will now be recognized in Other Expense.
During the second quarter of 2007, we began construction of a major nitrogen facility located in Damietta, Egypt through our 60 percent owned EAgrium subsidiary. The results of our interest in EAgrium are fully consolidated with our Wholesale business unit. Included in non-controlling interest is the proportion of operating results and equity related to the 40 percent interest held in EAgrium by our project partners.
Advanced Technologies
Advanced Technologies' second quarter 2007 sales were $81-million compared to $24-million in the second quarter of 2006. Gross profit was $18-million in the second quarter of 2007, or $13-million higher than the second quarter of 2006. EBIT was $7-million versus $3-million for the comparative period. These increases were primarily due to higher volume of sales activity resulting from our third quarter 2006 acquisition of Pursell Technologies and growth of the ESN business.
Other
EBIT for our Other non-operating business segment for the second quarter of 2007 was a loss of $18-million compared to a loss of $23-million for the same period last year. Stock-based compensation costs recorded in our Other business segment increased by $7-million, which was offset by a $12-million unrealized gain on U.S. dollar denominated liabilities in this business segment due to the strengthening of the Canadian dollar in the second quarter of 2007.
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 EBITDA (earnings before interest expense, income taxes, depreciation, amortization and asset impairment). We consider EBITDA to be a useful measure 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 segments on a basis that is meaningful for comparison with other companies.
EBITDA is not a recognized measure under GAAP, and our method 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.
OUTLOOK, KEY RISKS AND UNCERTAINTIES
The outlook for global and North American agricultural markets continues to be supported by rising global GDP levels as well as the rapid growth in demand for grain and oilseeds used for biofuel production. Corn prices have declined over the past month due to the 19 percent increase in U.S. corn acreage (to 92.9 million acres) and generally positive growing conditions, as well as higher forecasted corn production internationally. In contrast, wheat and soybean prices have increased over the past month due to an anticipated tightening in the outlook for these crops. Crop prices remain well above historic levels and North American growers are expected to benefit from strong incomes this year, although a large U.S. corn crop could result in lower corn prices and some switching back to soybeans and wheat in 2008. Strong crop yields should result in higher nutrient uptake levels and lower nutrient carryover levels in the soil, which in turn should support nutrient demand heading into the next crop year. A new U.S. Farm Bill is expected to be introduced in late 2007 and will likely include reduced farm program payments, however this is not expected to have a significant impact on crop input demand given the anticipated strength in farm incomes from the market place. Strong global oil prices combined with the potential for some moderation in crop prices is expected to continue to support the medium-term growth in demand for corn and sugar for ethanol production, in particular, and biofuels, in general.
We believe the nitrogen market remains generally balanced, however international urea prices have been under pressure due to increased Chinese exports, and Chinese exports will likely remain a key risk for 2007. North American urea producer inventories are roughly equal to last year.
The potash market is currently tight and industry analysts expect it to remain balanced to tight for the medium-term. North American producer inventory levels as of the end of June are more than 25 percent lower than the five-year average. The completion of mine expansions, particularly in North America, is expected to increase the supply of potash to the domestic and offshore markets over the next few years. Chinese negotiations for 2008 are a key uncertainty for potash markets.
The phosphate market continues to be firm due to strong global demand and U.S. production curtailments that have occurred over the past two years. U.S. phosphate producer inventories were down 30 percent at the end of June, 2007 versus the prior year. International demand remains firm partly due to strong purchasing from India, South America and Pakistan. The key risk for phosphates would include potential Chinese exports and, as for other nutrients, any unexpected reduction in the rate of future demand growth.
Forward-Looking Statements
Certain statements in this press release constitute forward-looking statements. Such forward-looking statements involve known and unknown risks and uncertainties, including those referred to in the management discussion and analysis section of the Corporation's most recent annual report to shareholders, which may cause the actual results, performance or achievements of the Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. A number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, weather conditions, crop prices, the future supply, demand, price level for our major products, future gas prices and availability in key markets, future operating rates and production costs at Agrium's facilities, the exchange rates for U.S., Canadian, Argentine, and the Euro currencies, domestic fertilizer consumption and any changes in government policy in key agriculture markets, including the application of price controls on fertilizers, the potential inability to integrate and obtain anticipated synergies for recent or new business acquisitions as planned or within the time predict, and changes to construction cost, timing of construction, performance of other parties, and political risks associated with our recently announced Egyptian nitrogen project. Agrium disclaims any intention or obligation to update or revise any forward-looking information as a result of new information or future events.
OTHER
Agrium Inc. is a major Retail supplier of agricultural products and services in North and South America, a leading global Wholesale producer and marketer of all three major agricultural nutrients and the premier supplier of specialty fertilizers in North America through our Advanced Technologies business unit. Agrium's strategy is to grow across the value chain through acquisition, incremental expansion of its existing operations and through the development, commercialization and marketing of new products and international opportunities. Our strategy places particular emphasis on growth opportunities that both increase and stabilize our earnings profile in the continuing transformation of Agrium.
A WEBSITE SIMULCAST of the 2007 2nd Quarter Conference Call will be available in a listen-only mode beginning Thursday, August 8th at 9:30 a.m. MT (11:30 a.m. ET). Please visit the following website: www.agrium.com.
AGRIUM INC.
Consolidated Statements of Operations and Retained Earnings
(Millions of U.S. dollars, except per share information)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------
Sales $ 2,095 $ 1,872 $ 2,956 $ 2,560
Direct freight 61 56 101 87
-------------------------------------------
Net sales 2,034 1,816 2,855 2,473
Cost of product 1,462 1,419 2,095 1,944
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Gross profit 572 397 760 529
-------------------------------------------
Expenses
Selling 125 110 225 188
General and administrative 34 25 56 46
Depreciation and amortization 42 45 84 84
Royalties and other taxes 10 7 19 12
Other (income) expenses(note 6) (2) - 13 53
-------------------------------------------
209 187 397 383
-------------------------------------------
Earnings before interest expense
and income taxes 363 210 363 146
Interest on long-term debt 13 11 26 20
Other interest 4 7 7 9
-------------------------------------------
Earnings before income taxes 346 192 330 117
-------------------------------------------
Current income taxes 64 55 60 51
Future income taxes (recovery) 53 (5) 52 (28)
-------------------------------------------
Income taxes 117 50 112 23
-------------------------------------------
Net earnings 229 142 218 94
Retained earnings - beginning of
period 588 536 602 584
Common share dividends declared (7) (7) (7) (7)
Transition adjustment on
adoption of new accounting
standards (note 1) - - (3) -
-------------------------------------------
Retained earnings - end of
period $ 810 $ 671 $ 810 $ 671
-------------------------------------------
-------------------------------------------
Earnings per share (note 7)
Basic $ 1.71 $ 1.08 $ 1.63 $ 0.71
Diluted $ 1.70 $ 1.06 $ 1.63 $ 0.71
AGRIUM INC.
Consolidated Statements of Cash Flows
(Millions of U.S. dollars)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------
Operating
Net earnings $ 229 $ 142 $ 218 $ 94
Items not affecting cash
Depreciation and amortization 42 45 84 84
Future income taxes (recovery) 53 (5) 52 (28)
Other 7 15 18 50
Net change in non-cash working
capital (248) (47) (128) (69)
-------------------------------------------
Cash provided by operating
activities 83 150 244 131
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Investing
Capital expenditures (40) (51) (66) (79)
Acquisitions, net of cash
acquired - - - (560)
Investment in equity affiliate (68) - (68) -
(Increase) decrease in other
assets (11) 8 (8) 10
Proceeds from disposal of assets
and investments (1) 70 (1) 74
Other - (1) - (2)
Prepaid construction costs at
Egypt facility (153) - (153) -
-------------------------------------------
Cash (used in) provided by
investing activities (273) 26 (296) (557)
-------------------------------------------
Financing
Common shares - 3 8 20
Bank indebtedness (repayment) 126 (328) (77) 13
Long-term debt issuance - 296 - 296
Long-term debt repayment - (127) - (127)
Common share dividends paid - - (7) (7)
Issue of common shares by
subsidiary to non-
controlling interest 74 - 74 -
-------------------------------------------
Cash provided by (used in)
financing activities 200 (156) (2) 195
-------------------------------------------
Increase (decrease) in cash and
cash equivalents 10 20 (54) (231)
Cash and cash equivalents -
beginning of period 45 49 109 300
-------------------------------------------
Cash and cash equivalents - end
of period $ 55 $ 69 $ 55 $ 69
-------------------------------------------
-------------------------------------------
AGRIUM INC.
Consolidated Balance Sheets
(Millions of U.S. dollars)
(Unaudited)
As at As at
June 30, December 31,
-------------------------------
2007 2006 2006
-------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 55 $ 69 $ 109
Accounts receivable 811 627 566
Inventories (note 3) 716 687 747
Prepaid expenses and deposits 215 52 137
-------------------------------
1,797 1,435 1,559
Property, plant and equipment 1,381 1,499 1,332
Intangible assets 73 30 75
Goodwill 180 129 174
Other assets 174 78 103
Future income tax assets 10 44 22
-------------------------------
$ 3,615 $ 3,215 $ 3,265
-------------------------------
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 150 $ 26 $ 227
Accounts payable and accrued liabilities 769 660 732
Current portion of long-term debt 1 1 1
-------------------------------
920 687 960
Long-term debt 664 679 669
Other liabilities 267 281 265
Future income tax liabilities 188 246 131
-------------------------------
2,039 1,893 2,025
Non-controlling interest 81 5 7
Shareholders' equity 1,495 1,317 1,233
-------------------------------
$ 3,615 $ 3,215 $ 3,265
-------------------------------
-------------------------------
AGRIUM INC.
Consolidated Statements of Shareholders' Equity
(Unaudited)
Millions
of shares Millions of U.S. dollars
--------- --------------------------------------------------------
Accumulated
other Total
Common Common Contributed Retained comprehensive shareholders'
shares shares surplus earnings income equity
--------- --------------------------------------------------------
Balance
as at
December
31, 2006 133 $ 617 $ 5 $ 602 $ 9 $ 1,233
Transition
adjustments
for net
deferred
gains on
cash flow
hedges
(net of
tax)
(note 1) (3) 5 2
--------- --------------------------------------------------------
Balance
as at
January
1, 2007 133 617 5 599 14 1,235
--------------
Net
earnings 218 218
Unrealized
gains on
financial
cash flow
hedges
(net of
tax) 5 5
Unrealized
losses on
available
for sale
assets (net
of tax) (1) (1)
Foreign
currency
translation
adjustment 36 36
--------------
Comprehensive
income 258
Common share
dividends (7) (7)
Stock
compensation
exercise and
grants 1 9 9
--------- --------------------------------------------------------
Balance
as at
June 30,
2007 134 $ 626 $ 5 $ 810 $ 54 $ 1,495
--------- --------------------------------------------------------
--------- --------------------------------------------------------
Balance
as at
December
31, 2005 131 $ 583 $ 3 $ 584 $ 10 $ 1,180
--------------
Net
earnings 94 94
Foreign
currency
translation
adjustment 28 28
--------------
Comprehensive
income 122
Common share
dividends (7) (7)
Stock
compensation
exercise and
grants 1 21 1 22
--------- --------------------------------------------------------
Balance
as at
June 30,
2006 132 $ 604 $ 4 $ 671 $ 38 $ 1,317
--------- --------------------------------------------------------
--------- --------------------------------------------------------
AGRIUM INC.
Summarized Notes to the Consolidated Financial Statements
For the six months ended June 30, 2007
(Millions of U.S. dollars, except per share amounts)
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The Corporation's accounting policies are in accordance with accounting principles generally accepted in Canada and are consistent with those outlined in the annual audited financial statements except where stated below. These interim consolidated financial statements do not include all disclosures normally provided in annual financial statements and should be read in conjunction with the Corporation's audited consolidated financial statements for the year ended December 31, 2006. In management's opinion, the interim consolidated financial statements include all adjustments necessary to present fairly such information.
Certain comparative figures have been reclassified to conform to the current year's presentation.
Accounting Standards and Policy Changes Adopted During Reporting Periods
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Date and Method
Description of Adoption Impact
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Comprehensive Income consists of net income January 1, 2007; Material
and other comprehensive income (OCI). OCI prospective prospective
represents changes in shareholders' equity impact
during a period arising from transactions and
other events with non-owner sources. The
Corporation's OCI consists of unrealized gains
or losses on translation of self-sustaining
foreign operations and gains and losses and
changes in the fair value of the effective
portion of cash flow hedging instruments. OCI
is presented net of related income taxes.
Cumulative changes in OCI are included in
accumulated other comprehensive income (AOCI),
which is presented as a new category of
shareholders' equity on the consolidated
balance sheet. Cumulative translation
adjustments (December 31, 2006 $9-million)
consisting of gains and losses on translation
of self-sustaining foreign operations,
previously segregated as a separate component
of shareholders' equity, are now included in
AOCI.
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Financial Instruments - Recognition and January 1, 2007; Material
Measurement. The new standards establish that prospective prospective
all financial assets and financial liabilities impact
must be initially recorded at fair value on
the consolidated balance sheet. Subsequent
measurement is determined by the classification
of each financial asset and liability,
according to the following categories:
Financial Instrument As Classified by Agrium Subsequent Measurement of
Classification Gains or Losses at
Each Period End
Assets or Cash and cash Fair value; unrealized
liabilities held equivalents; gains or losses
for trading derivative financial recognized in net income
instruments that are
not cash flow hedges
Available for sale Other investments Fair value; unrealized
financial assets gains and losses
recognized in OCI (except
for excluded
investments); recognized
in net income on sale of
the asset or when asset
is written down as
impaired
Held to maturity Amortized cost using the
investments None effective interest rate
Loans and method; if asset/
receivables Accounts receivable liability is derecognized
Other financial Bank indebtedness, or asset is impaired,
liabilities accounts payable, recognized in net income
long-term debt
For the Corporation, amortized cost generally corresponds to cost. Certain financial instruments are exempt from the standards, including long-term investments, assets and obligations arising from employee future benefit plans, and obligations relating to stock-based compensation. The Corporation's investments consist mainly of equity instruments that are excluded from the new standards. Equity instruments that do not have a quoted market price in an active market are measured at cost even if the instruments are classified as financial assets available for sale.
Certain deferred debt issuance costs previously reported in other assets have been reclassified prospectively and are now reported as a reduction of debt obligations.
All derivative instruments are recorded in the balance sheet at fair value unless exempted from derivative treatment as normal purchases and sales. Under the previous standards, derivatives that met the requirements for hedge accounting were generally recorded on an accrual basis.
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Date and Method
Description of Adoption Impact
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Hedges. The standard establishes when and how January 1, 2007; See table
hedge accounting may be applied, as well as prospective below
certain disclosure requirements. The standard
specifies three types of hedging
relationships: fair value hedges, cash flow
hedges, and hedges of a net investment in self
sustaining foreign operations. Application of
hedge accounting is optional. The Corporation
has elected to apply hedge accounting to
certain derivative financial instruments
consisting of gas and foreign exchange cash
flow hedge contracts.
Upon initial application of the above, all adjustments to the carrying
amount of financial assets and liabilities were recognized as an adjustment
to opening retained earnings or AOCI, depending on the classification of
existing assets or liabilities. Transition adjustments relating to
derivative contracts designated as cash flow hedges at January 1, 2007
include the following (millions of U.S. dollars):
Balance sheet category Gross Income taxes Net
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Retained earnings
Ineffective portion of qualifying cash flow
hedges $ (4) $ 1 $ (3)
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Accumulated other comprehensive income
Unrealized gains on effective cash flow
hedges $ 8 $ (3) $ 5
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Stripping Costs Incurred in the Production Phase January 1, 2007; No
of a Mining Operation requires that costs of prospective material
removing overburden and mineral waste materials impact
should be accounted for according to the
benefit received by the entity and recorded as
either a component of inventory or a betterment
to the mineral property, depending on the
benefit received.
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Changes in Accounting Policies, Estimates and January 1, 2007; No
Corrections of Errors provides guidance as to prospective material
the application of voluntary changes in impact
accounting policy, and provides for
retrospective application of changes in
accounting policy and error.
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Determining Variability to be Considered in January 1, 2007; No
Consolidation of Variable Interest Entities prospective material
provides guidance in determining the impact
application of accounting standards regarding
consolidation of variable interest entities
based on analysis of the design of the entity,
including its purpose and the nature of risks
in the entity.
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Income Taxes. During the quarter, the April 1, 2007; No
Corporation changed its method of accounting retrospective material
for income taxes whereby a tax benefit will be impact
recognized if it is more likely than not that
the position would be sustained on examination.
Previously, a tax benefit was recognized only
when it was probable that the position would be
sustained on examination. The Corporation
believes that the threshold of "more likely
than not" is more widely understood than
"probable" and, consequently, the new
Accounting Policy provides more reliable and
relevant information.
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Accounting Standards and Policy Changes Not Yet Implemented
----------------------------------------------------------------------------
Date and Method
Description of Adoption Impact
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Financial Instruments - Disclosures, Financial January 1, 2008; Currently
Instruments - Presentation, and Capital prospective being
Disclosures, require the Corporation to reviewed
provide additional disclosures relating to its
financial instruments, including hedging
instruments, and about its capital.
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Accounting Policy Choice for Transaction Costs July 1, 2007; No
requires the same accounting policy choice for retrospective material
all similar financial instruments or groups of impact
financial instruments classified as other expected
than held for trading.
----------------------------------------------------------------------------
Inventories establishes standards for the January 1, 2008; Currently
measurement and disclosure of inventories retrospective being
including guidance on the determination of reviewed
cost.
----------------------------------------------------------------------------
2. ACQUISITION
In the second quarter of 2007, the Corporation finalized the allocation of fair value of net assets acquired from Pursell Technologies ("Pursell"). On August 8, 2006, the Corporation concluded the purchase of 100 percent of certain net assets and technologies of Pursell. The assets and technologies are primarily used in the production and sale of controlled-release fertilizer products. Earnings of Pursell from the date of acquisition are included in the consolidated statement of operations of the Corporation in the Advanced Technologies reporting segment. The final allocation of the fair value of the net assets acquired is summarized below:
----------------------------------------------------------------------------
Working capital $ 6
Property, plant and equipment 12
Intangible assets subject to amortization 38
Other long-term assets 13
Goodwill 22
----------------------------------------------------------------------------
Total consideration $ 91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. INVENTORIES
----------------------------------------------------------------------------
June 30, 2007 June 30, 2006 December 31, 2006
----------------------------------------------------------------------------
Raw materials $ 140 $ 102 $ 123
Finished goods 154 212 189
Product for resale 422 373 435
----------------------------------------------------------------------------
Total inventories $ 716 $ 687 $ 747
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
At June 30, 2007, the Corporation had sold $184-million (June 30, 2006 - $132-million) under its accounts receivable securitization facility.
5. EMPLOYEE FUTURE BENEFITS
-------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------------------------
2007 2006 2007 2006
-------------------------------------
Pension plans
Defined benefit
Service cost $ 2 $ 2 $ 4 $ 3
Interest cost 3 2 5 5
Expected return on plan assets (3) (2) (5) (4)
Amortization of actuarial losses 1 1 1 2
-------------------------------------
3 3 5 6
-------------------------------------
-------------------------------------
Defined contribution 3 3 9 9
-------------------------------------
-------------------------------------
$ 6 $ 6 $ 14 $ 15
-------------------------------------
-------------------------------------
Post-retirement benefit plans
Service cost $ 1 $ - $ 2 $ 1
Interest cost 1 1 2 1
Amortization of actuarial losses - - 1 -
-------------------------------------
$ 2 $ 1 $ 5 $ 2
-------------------------------------
-------------------------------------
Total expense $ 8 $ 7 $ 19 $ 17
-------------------------------------
-------------------------------------
Cash contributions to the defined benefit pension plans for the three and six months ended June 30, 2007 were nil and $1-million, respectively (three and six months ended June 30, 2006 were nil and $1-million, respectively).
6. OTHER (INCOME) EXPENSES
-------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------------------------
2007 2006 2007 2006
-------------------------------------
Interest income $ (6) $ (2) $ (11) $ (5)
Stock-based compensation 12 3 40 9
Environmental remediation and accretion
of asset retirement obligation 1 2 (8) 4
Net realized and unrealized (gain) loss on
non-qualifying derivatives (3) (4) (2) 39
Foreign exchange gain (17) (5) (18) (2)
Provision for doubtful accounts 4 3 6 4
Other 7 3 6 4
-------------------------------------
Total other (income) expenses $ (2) $ - $ 13 $ 53
-------------------------------------
-------------------------------------
7. EARNINGS PER SHARE
The following table summarizes the computation of net earnings per share:
Three months ended Six months ended
June 30, June 30,
-------------------------------------
2007 2006 2007 2006
-------------------------------------
Numerator:
Net earnings and numerator for basic
and diluted earnings per share $ 229 $ 142 $ 218 $ 94
-------------------------------------
-------------------------------------
Denominator:
Weighted average denominator for basic
earnings per share 134 132 133 132
-------------------------------------
-------------------------------------
Dilutive instruments:
Stock options (a) 1 1 1 1
-------------------------------------
Denominator for diluted earnings
per share 135 133 134 133
-------------------------------------
-------------------------------------
Basic earnings per share $ 1.71 $ 1.08 $ 1.63 $ 0.71
Diluted earnings per share $ 1.70 $ 1.06 $ 1.63 $ 0.71
(a) For diluted earnings per share, these dilutive instruments are added
back only when the impact of the instrument is dilutive to basic
earnings per share.
There were 134 million common shares outstanding at June 30, 2007 (June 30,
2006 - 132 million). As at June 30, 2007, the Corporation has outstanding
approximately four million (June 30, 2006 - five million) options and
options with tandem stock appreciation rights to acquire common shares.
8. FINANCIAL INSTRUMENTS
The fair value of qualifying hedging derivative instruments is recorded as the estimated amount that the Corporation would receive (pay) to terminate the contracts. Fair values are determined based on quoted market prices available from active markets or are otherwise determined using a variety of valuation techniques and models. Fair value of natural gas and foreign exchange hedges was $5-million (June 30, 2006 - $27-million; December 31, 2006 - $4-million) and nil (June 30, 2006 - $3-million; December 31, 2006 - nil), respectively, at June 30, 2007.
The earnings impact of ineffectiveness recognized on derivative contracts designated as cash flow hedges recorded in cost of product during the three-month period ended June 30, 2007 was nil (June 30, 2006 - nil).
The estimated net amount of existing gains and losses reported in AOCI expected to be reclassified to net income in the next 12 months is $2-million.
9. COMMITMENTS
The Corporation holds a 60 percent interest in a subsidiary which has entered into contractual obligations for the construction of a nitrogen facility and infrastructure in Egypt. Related commitments include a construction contract, financing, and a 25-year natural gas contract for the facility. Total planned construction and related costs are approximately $1.2-billion. Construction is expected to be completed in 2010.
Exposure to foreign exchange rate fluctuations on Egypt facility construction costs denominated in foreign currency has been fixed through 2010 by purchase of derivative instruments. At June 30, 2007, the instruments had no carrying value or fair value.
10. SEASONALITY
The fertilizer business is seasonal in nature. Sales are concentrated in the spring and fall planting seasons while produced inventories are accumulated throughout the year. Cash collections generally occur after the planting seasons in North and South America.
AGRIUM INC. Schedule 1
Segmentation
(Unaudited - millions of U.S. dollars)
Three Months Ended June 30
-----------------------------------------------------------
Advanced
Retail Wholesale Technologies
-----------------------------------------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
Net sales
- external $ 1,147 $ 969 $ 819 $ 823 $ 68 $ 24
- inter-segment - - 71 38 13 -
-----------------------------------------------------------
Total net sales 1,147 969 890 861 81 24
Cost of product 869 755 613 687 63 19
-----------------------------------------------------------
Gross profit 278 214 277 174 18 5
Gross profit % 24% 22% 31% 20% 22% 21%
-----------------------------------------------------------
-----------------------------------------------------------
Selling Expenses $ 119 $ 103 $ 6 $ 8 $ 2 $ 1
EBITDA (1) $ 150 $ 106 $ 261 $ 167 $ 10 $ 4
EBIT (2) $ 142 $ 98 $ 232 $ 132 $ 7 $ 3
Three Months Ended June 30
-------------------------------------
Other Total
-------------------------------------
2007 2006 2007 2006
---- ---- ---- ----
Net sales
- external $ - $ - $ 2,034 $ 1,816
- inter-segment (84) (38) - -
-------------------------------------
Total net sales (84) (38) 2,034 1,816
Cost of product (83) (42) 1,462 1,419
-------------------------------------
Gross profit (1) 4 572 397
Gross profit % 1% (11%) 28% 22%
-------------------------------------
-------------------------------------
Selling Expenses $ (2) $ (2) $ 125 $ 110
EBITDA (1) $ (16) $ (22) $ 405 $ 255
EBIT (2) $ (18) $ (23) $ 363 $ 210
Six Months Ended June 30
-----------------------------------------------------------
Advanced
Retail Wholesale Technologies
-----------------------------------------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
Net sales
- external $ 1,484 $ 1,249 $ 1,257 $ 1,184 $ 114 $ 40
- inter-segment - - 117 56 19 -
-----------------------------------------------------------
Total net sales 1,484 1,249 1,374 1,240 133 40
Cost of product 1,121 969 1,001 1,004 104 32
-----------------------------------------------------------
Gross profit 363 280 373 236 29 8
Gross profit % 24% 22% 27% 19% 22% 20%
-----------------------------------------------------------
-----------------------------------------------------------
Selling Expenses $ 212 $ 176 $ 13 $ 14 $ 4 $ 1
EBITDA (1) $ 137 $ 97 $ 353 $ 175 $ 18 $ 6
EBIT (2) $ 121 $ 84 $ 294 $ 108 $ 12 $ 4
Six Months Ended June 30
-------------------------------------
Other Total
-------------------------------------
2007 2006 2007 2006
---- ---- ---- ----
Net sales
- external $ - $ - $ 2,855 $ 2,473
- inter-segment (136) (56) - -
-------------------------------------
Total net sales (136) (56) 2,855 2,473
Cost of product (131) (61) 2,095 1,944
-------------------------------------
Gross profit (5) 5 760 529
Gross profit % 4% (9%) 27% 21%
-------------------------------------
-------------------------------------
Selling Expenses $ (4) $ (3) $ 225 $ 188
EBITDA (1) $ (61) $ (48) $ 447 $ 230
EBIT (2) $ (64) $ (50) $ 363 $ 146
(1) Earnings (loss) before interest expense, income taxes, depreciation,
amortization and asset impairment.
(2) Earnings (loss) before interest expense and income taxes.
AGRIUM INC. Schedule 2a
Product Lines
Three Months Ended June 30,
(Unaudited - millions of U.S. dollars)
2007
-------------------------------------------------------
Cost of Sales Selling
Net Product Gross Tonnes Price Margin
Sales Sold Profit (000's) ($/Tonne) ($/Tonne)
-------------------------------------------------------
Wholesale
Nitrogen (1)
Ammonia $189 $140 $49 465 $406 $105
Urea 216 124 92 619 349 149
Nitrate, Sulphate
and Other 151 107 44 547 276 80
-------------------------------------------------------
Total Nitrogen 556 371 185 1,631 341 113
Phosphate 145 110 35 335 433 104
Potash (2) 95 44 51 535 178 95
Product Purchased
for Resale 94 88 6 310 303 19
-------------------------------------------------------
890 613 277 2,811 317 99
Retail (3)
Fertilizers 658 499 159
Chemicals 291 239 52
Other 198 131 67
--------------------------
1,147 869 278
Advanced
Technologies
Controlled Release
Products 68 53 15
Other 13 10 3
--------------------------
81 63 18
Other inter-segment
eliminations (84) (83) (1)
--------------------------
Total $ 2,034 $ 1,462 $ 572
--------------------------
--------------------------
2006
-------------------------------------------------------
Cost of Sales Selling
Net Product Gross Tonnes Price Margin
Sales Sold Profit (000's) ($/Tonne) ($/Tonne)
-------------------------------------------------------
Wholesale
Nitrogen (1)
Ammonia $174 $140 $34 461 $377 $74
Urea 224 163 61 789 284 77
Nitrate, Sulphate
and Other 96 75 21 401 239 52
-------------------------------------------------------
Total Nitrogen 494 378 116 1,651 299 70
Phosphate 122 108 14 377 324 37
Potash (2) 67 31 36 377 178 95
Product Purchased
for Resale 178 170 8 699 255 11
-------------------------------------------------------
861 687 174 3,104 277 56
Retail (3)
Fertilizers 519 410 109
Chemicals 285 238 47
Other 165 107 58
--------------------------
969 755 214
Advanced
Technologies
Controlled Release
Products 13 11 2
Other 11 8 3
--------------------------
24 19 5
Other inter-segment
eliminations (38) (42) 4
--------------------------
Total $ 1,816 $ 1,419 $ 397
--------------------------
--------------------------
(1) International nitrogen sales were 260,000 tonnes (2006-428,000); net
sales were $74-million (2006-$105-million) and gross profit was
$31-million (2006-$39-million).
(2) International potash sales were 237,000 tonnes (2006-116,000); net
sales were $32-million (2006-$15-million) and gross profit was
$17-million (2006-$8-million).
(3) International retail net sales were $60-million (2006-$42-million) and
gross profit was $12-million (2006-$8-million).
AGRIUM INC. Schedule 2b
Product Lines
Six Months Ended June 30,
(Unaudited - millions of U.S. dollars)
2007
-------------------------------------------------------
Cost of Sales Selling
Net Product Gross Tonnes Price Margin
Sales Sold Profit (000's) ($/Tonne) ($/Tonne)
-------------------------------------------------------
Wholesale
Nitrogen (1)
Ammonia $244 $189 $55 629 $388 $87
Urea 346 217 129 1,045 331 123
Nitrate, Sulphate
and Other 245 190 55 968 253 57
-------------------------------------------------------
Total Nitrogen 835 596 239 2,642 316 90
Phosphate 219 174 45 532 412 85
Potash (2) 147 70 77 868 169 89
Product Purchased
for Resale 173 161 12 571 303 21
-------------------------------------------------------
1,374 1,001 373 4,613 298 81
Retail (3)
Fertilizers 859 655 204
Chemicals 371 296 75
Other 254 170 84
--------------------------
1,484 1,121 363
Advanced
Technologies
Controlled Release
Products 113 88 25
Other 20 16 4
--------------------------
133 104 29
Other inter-segment
eliminations (136) (131) (5)
--------------------------
Total $ 2,855 $ 2,095 $ 760
--------------------------
--------------------------
2006
-------------------------------------------------------
Cost of Sales Selling
Net Product Gross Tonnes Price Margin
Sales Sold Profit (000's) ($/Tonne) ($/Tonne)
-------------------------------------------------------
Wholesale
Nitrogen (1)
Ammonia $242 $204 $38 641 $378 $59
Urea 330 248 82 1,160 284 71
Nitrate, Sulphate
and Other 137 109 28 549 250 51
-------------------------------------------------------
Total Nitrogen 709 561 148 2,350 302 63
Phosphate 170 151 19 522 326 36
Potash (2) 113 56 57 643 176 89
Product Purchased
for Resale 248 236 12 953 270 13
-------------------------------------------------------
1,240 1,004 236 4,468 278 53
Retail (3)
Fertilizers 669 528 141
Chemicals 360 289 71
Other 220 152 68
--------------------------
1,249 969 280
Advanced
Technologies
Controlled Release
Products 25 21 4
Other 15 11 4
--------------------------
40 32 8
Other inter-segment
eliminations (56) (61) 5
--------------------------
Total $ 2,473 $ 1,944 $ 529
--------------------------
--------------------------
(1) International nitrogen sales were 368,000 tonnes (2006-672,000); net
sales were $105-million (2006-$165-million) and gross profit was
$39-million (2006-$62-million).
(2) International potash sales were 416,000 tonnes (2006-218,000); net
sales were $55-million (2006-$28-million) and gross profit was
$31-million (2006-$14-million).
(3) International retail net sales were $77-million (2006-$56-million) and
gross profit was $16-million (2006-$10-million).
FOR FURTHER INFORMATION PLEASE CONTACT:
Agrium Inc.
Richard Downey
Senior Director, Investor Relations
(403) 225-7357
Website: www.agrium.com
