Agrium Reports Strong Third Quarter Results, Expects Record Earnings Year
(firmenpresse) - CALGARY, ALBERTA -- (Marketwire) -- 11/03/11 -- ALL AMOUNTS ARE STATED IN U.S.$
Agrium Inc. (TSX: AGU) (NYSE: AGU) announced today consolidated net earnings ("net earnings") of $293-million ($1.85 diluted earnings per share) for the third quarter of 2011, compared with the net earnings of $61-million in the third quarter of 2010 ($0.39 diluted earnings per share).
"Results from our Retail business were particularly strong this quarter, as we achieved record sales and our second highest earnings for a third quarter. Agrium's Wholesale results were also the second highest on record for a third quarter, due to yet another quarter of excellent margins supported by strong crop nutrient prices. We expect the strength in our business to extend through the fall application season and into 2012, due to the continuation of tight agricultural fundamentals providing economic incentive for growers to optimize crop acreage, yields and crop inputs (1)," said Mike Wilson, Agrium President and CEO.
"Despite the recent global economic uncertainty and volatility, we believe that the strong fundamental drivers supporting demand in agricultural and crop input markets remain firmly in place. Consequently, the outlook for Agrium's businesses and products is excellent. This will enable us to continue to capitalize on our unique competitive strengths and deliver value to our shareholders and customers alike," added Mr. Wilson.
Agrium is providing guidance for the fourth quarter of 2011 of $1.80 to $2.30 diluted earnings per share. This excludes any estimates for hedging gains or losses or share-based payments expense in the fourth quarter.(1)
The 2011 third quarter results included a pre-tax gain of $1-million ($nil diluted earnings per share) on natural gas and other hedge positions and a pre-tax recovery of $46-million ($0.21 diluted earnings per share) on share-based payments expense.(2)
(1)See disclosure in the section "Outlook, Key Risks and Uncertainties" in our 2011 third quarter MD&A and additional assumptions in the section "Management's Discussion and Analysis".
(2)Third quarter effective tax rate of 28 percent used for adjusted diluted earnings per share calculations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
November 3, 2011
Unless otherwise indicated, the financial information presented and discussed in this Management's Discussion and Analysis ("MD&A") is prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and all comparisons of results for the third quarter of 2011 (three months ended September 30, 2011) are against results for the third quarter of 2010 (three months ended September 30, 2010) and all comparisons of results for the first nine months of 2011 (nine months ended September 30, 2011) are against results for the first nine months of 2010 (nine months ended September 30, 2010). All dollar amounts refer to United States ("U.S.") dollars except where otherwise stated.
The following interim MD&A updates our annual MD&A included in our 2010 Annual Report to Shareholders, to which our readers are referred and is as of November 3, 2011. The Board of Directors carries out its responsibility for review of this disclosure principally through its Audit Committee, comprised exclusively of independent directors. The Audit Committee reviews, and prior to publication, approves, pursuant to the authority delegated to it by the Board of Directors this disclosure. No update is provided where an item is not material or there has been no material change from the discussion in our annual MD&A. Forward-Looking Statements are outlined after the Outlook, Key Risks and Uncertainties section of this press release.
The major assumptions made in preparing our fourth quarter guidance on continuing operations are outlined below and include but are not limited to:
2011 Third Quarter Operating Results
CONSOLIDATED NET EARNINGS
Agrium's 2011 third quarter consolidated net earnings ("net earnings") were $293-million, or $1.85 diluted earnings per share, compared to net earnings of $61-million, or $0.39 diluted earnings per share, for the same quarter of 2010. Net earnings for the first nine months of 2011 were approximately $1.2-billion, or $7.48 diluted earnings per share, compared to $578-million, or $3.65 diluted earnings per share for the same period in 2010.
Financial Overview
(1) See "Discontinued Operations" below for a discussion of our discontinued operations.
Our consolidated gross profit for the third quarter and first nine months of 2011 increased by $390-million and approximately $1.4-billion, respectively, primarily due to higher gross profit from all three of our strategic business units, with highlights as follows:
The $48-million increase in expenses for the third quarter of 2011 was primarily driven by higher Retail selling and general and administrative expenses due to the addition of the Landmark business in the fourth quarter of 2010 and other recent acquisitions. These increases were partially offset by a $46-million recovery in share-based payments expense, which is a $124-million favourable change from the same period in 2010 (see section "Other" for further discussion).
Our consolidated EBIT increased by $342-million for the third quarter of 2011.
The $475-million increase in expenses for the first nine months of 2011 was primarily driven by:
Our consolidated EBIT increased by $890-million for the first nine months of 2011.
Below is a summary of our other expenses (income) for the third quarter and first nine months of 2011 and 2010:
The effective tax rate was 28 percent for the third quarter of 2011 compared to 24 percent for the same period last year. The effective tax rate was 28 percent for the first nine months of 2011 compared to 26 percent for the same period last year. The increase in the effective tax rate was due to the recognition of a previously unrecognized tax benefit in 2010.
Financial Overview
BUSINESS SEGMENT PERFORMANCE
Retail
Retail's 2011 third quarter sales were $2.0-billion, a significant increase over the $1.2-billion in sales for the third quarter of 2010. Strong demand for crop input products and services across our global retail operations contributed to record sales for a third quarter. Gross profit was $498-million this quarter, a 56 percent increase over the $319-million earned in the third quarter of 2010. We also achieved an EBIT of $92-million this quarter, compared to an EBIT of $70-million in the third quarter of 2010.
Crop nutrient sales increased to $692-million this quarter, compared to $411-million in the same quarter last year. This 68 percent increase in sales was due to a combination of higher nutrient prices and a 25 percent increase in volumes across our global Retail business, with most of the increase due to the addition of the Landmark business. North American fertilizer volumes were approximately 3 percent higher than the third quarter of 2010 due to the late seeding in parts of North America. Gross profit for crop nutrients was $124-million this quarter, up significantly from the $86-million reported in the third quarter of 2010. We anticipate strong crop nutrient demand from growers and solid margins to continue in the fourth quarter of 2011, despite the recent uncertainty across global economic markets.(1) Sales volumes and margins in our South American operations were also higher this quarter than the same period last year, supported by higher wheat prices and improved moisture conditions. Total crop nutrient margins were 18 percent in the third quarter of 2011, down 3 percent from the same quarter last year due to the inclusion of the Landmark business. Nutrient margins in North America were 22 percent this quarter, down 1 percent from the third quarter of 2010.
(1)See disclosure in the section "Outlook, Key Risks and Uncertainties" in our 2011 third quarter MD&A and additional assumptions in the section "Management's Discussion and Analysis".
Crop protection sales were $943-million in the third quarter of 2011, a 32 percent increase over the $712-million in sales for the same period last year. The increase in sales and gross profit for crop protection products was evident across all three continents in which we operate due to strong industry fundamentals. Markets were particularly strong for plant health and insect control products. Gross profit this quarter was $226-million, a 31 percent increase over the $172-million recorded in the third quarter of 2010 due to both higher volumes and higher margins in North America. Crop protection product margins as a percentage of sales for total Retail were 24 percent for the third quarter of 2011, unchanged from the third quarter of 2010. However, margins in our North American operations were 1 percent higher than the same period last year.
Our seed sales reached $85-million this quarter, almost double the $44-million in sales in the third quarter of 2010. Gross profit increased to $30-million this quarter, compared to the $24-million for the third quarter of 2010. Higher sales were supported by late seeding in some regions this spring and re-planting of early flood areas.
Sales for application services and other were $157-million this quarter, almost three times higher than the $54-million reported in the third quarter of 2010. Gross profit was $99-million in the third quarter of 2011, compared to $35-million for the same period last year. The sizeable increase in sales and gross profit this year was due to the addition of the Australian Landmark business and to a significant increase in North American demand for application, resulting from the strength in agricultural fundamentals.
Sales of Merchandise this quarter were $134-million, compared to $23-million in the third quarter of 2010. Gross profit for this product line was $19-million, compared to $2-million in the third quarter of 2010. The increase in sales and gross profit was due to the addition of the Landmark retail business.
Retail selling expenses for the third quarter of 2011 were $390-million, which was $140-million higher than last year. The increase was due to a combination of increased operating expenses associated with the Landmark operations and higher fuel and incentive costs within our North American operations. Selling expenses as a percentage of sales were 19 percent in the third quarter of 2011, similar to the same period last year.
Wholesale
Wholesale's sales were $1.2-billion for the third quarter of 2011, a 36 percent increase from the $865-million achieved in the third quarter of 2010. Gross profit was $397-million in the third quarter of 2011, which is more than double the $177-million reported in the same period in 2010. Wholesale also reported third quarter EBIT of $393-million in 2011, the second highest third quarter on record and significantly higher than the $151-million earned in the third quarter of 2010. The significant increase in earnings was attributable to higher realized prices and margins across all three crop nutrients, resulting from the robust global demand and solid market fundamentals. Volumes were lower in the third quarter of 2011 than the same period last year, as strong sales in June 2011 resulted in lower beginning inventories in the quarter. Volumes were also impacted by subdued buying by some distributors and retailers and lower nitrogen production volumes in the third quarter of 2011.
Nitrogen gross profit was $177-million this quarter, more than double the $82-million reported in the same quarter last year due to higher realized prices, which more than offset lower sales volumes and higher production costs. Compared to the same period last year, prices for all nitrogen products were higher on average during the third quarter of 2011 for both benchmark and Agrium's realized prices due to favourable supply/demand dynamics. North American nitrogen sales volumes decreased as compared to the same period last year, primarily due to planned and unplanned outages this quarter. International urea sales volumes were higher this quarter than the same period last year due to higher operating rates at our Profertil facility. Nitrogen cost of product sold was $280 per tonne this quarter, which was higher than the $252 per tonne in the third quarter of last year partly due to the lower production volumes and to slightly higher average natural gas costs. Nitrogen margins averaged $217 per tonne this quarter, compared with $84 per tonne in the same period last year.
For the third quarter of 2011, Agrium's average natural gas cost in cost of product sold was $3.95/MMBtu ($4.13/MMBtu including the impact of realized losses on natural gas derivatives) compared to $3.73/MMBtu for the same period in 2010 ($4.01/MMBtu including the impact of realized losses on natural gas derivatives). Hedging gains or losses on all gas derivatives are reported below gross profit in other expenses and therefore not included in cost of product sold. The U.S. benchmark (NYMEX) natural gas price for the third quarter of 2011 was $4.19/MMBtu, compared to $4.41/MMBtu in the same quarter last year and $4.36/MMBtu in the second quarter of 2011. The AECO (Alberta) basis differential was a $0.33/MMBtu discount to NYMEX in the third quarter of 2011, which was narrower than the $0.86/MMBtu discount that existed in the third quarter of 2010.
Potash gross profit for the third quarter of 2011 was $102-million, compared to $60-million in the same quarter last year. The significant increase was due to stronger domestic and international pricing, driven by a combination of robust global demand and tight supply conditions. International sales volumes were 206,000 tonnes this quarter, higher than the 183,000 tonnes in the same period last year due to strong international demand and settlement of key contracts by Canpotex in July 2011. Domestic sales volumes were 141,000 tonnes this quarter, down from the 205,000 tonnes in the third quarter of 2010 due to supply constraints, resulting from lower beginning inventory levels in the third quarter of 2011 compared to the same period last year. Potash cost of product sold was $188 per tonne this quarter, similar to the $186 per tonne reported in the same period last year. Gross margin on a per tonne basis was $292 this quarter, which represents a significant increase over the gross margin of $154 per tonne realized during the same quarter in 2010.
Phosphate gross profit was $82-million this quarter, more than triple the $25-million reported for the third quarter of 2010. The increase was due to significantly higher realized sales prices, which averaged $784 per tonne for the quarter, compared to $563 per tonne for the third quarter of 2010. Increase in price was partially offset by an 8 percent decrease in sales volumes as a result of lower demand resulting from customer resistance due to pricing levels. Phosphate cost of product sold was $487 per tonne, marginally higher than $481 per tonne in the same period last year due to slightly higher sulphur costs. On a per tonne basis, gross margin was significantly higher this quarter at $297 per tonne, compared to $82 per tonne in the third quarter of 2010.
Gross profit for product purchased for resale was $21-million, more than double the $9-million reported in the third quarter of 2010. The substantial increase was due to stronger international market conditions, which have driven domestic prices higher. Gross margins in the third quarter of 2011 were $35 per tonne, which is $21 per tonne higher than the same quarter last year.
Wholesale's Other product category, which is primarily comprised of ammonium sulphate and Rainbow granulated products, achieved sales of $52-million this quarter, compared to $38-million in the third quarter of 2010. Gross profit was $15-million in the third quarter of 2011, significantly higher than the $1-million for the same period last year. The sizeable increase in gross profit was due to a combination of higher volumes for ammonium sulphate and higher prices for both product categories.
Wholesale expenses in the third quarter of 2011 were $4-million, $22-million lower than the same period last year. Decrease in expenses was primarily due to insurance recoveries of $17-million. Mark-to-market gains on natural gas and other derivatives were $6-million in the third quarter of 2011, compared to $4-million in gains for the same quarter in 2010. Realized losses on natural gas and power derivatives were $3-million, compared to a loss of $7-million in 2010.
Advanced Technologies
Advanced Technologies' ("AAT") gross profit was $24-million in the third quarter of 2011, significantly higher than the $15-million reported in the third quarter of 2010. The increase was attributable to both higher realized sales prices and margins for Environmentally Smart Nitrogen ("ESN"), as well as contributions to gross profit from recent acquisitions.
EBIT was a loss of $3-million in the third quarter of 2011, an improvement of $1-million compared to the same period last year, despite lower earnings from Hanfeng in the third quarter of 2011 versus last year. Earnings from continuing operations before finance costs, income taxes, depreciation and amortization ("EBITDA") was $3-million this quarter, which exceeded the $1-million reported in the third quarter of 2010. Stronger sales and gross profit were partly offset by higher selling and general and administrative costs in the third quarter of 2011, as compared to the same period last year. Selling and general and administrative costs for AAT were $8-million higher this quarter versus the same period in 2010, due primarily to acquisitions and continued efforts to support the expansion of AAT's retail sales footprint and presence in turf and ornamental markets in the U.S.
Other
EBIT for our Other non-operating business unit for the third quarter of 2011 was a loss of $34-million, compared to a loss of $111-million for the third quarter of 2010. This change was primarily driven by a $124-million favourable change in share-based payments expense, where we had a $46-million recovery due to a significant drop in share price during the third quarter of 2011, compared to an expense of $78-million due to a significant rise in share price in the third quarter of 2010. This change was partially offset by:
EBIT for Other for the first nine months of 2011 was a loss of $152-million, compared to a loss of $82-million for the same period of 2010. This change in EBIT reflected:
These were partially offset by a $44-million recovery in share-based payments expense, which is a $101-million favourable change from the same period in 2010.
FINANCIAL CONDITION
The following are changes to working capital on our Condensed Consolidated Balance Sheets in the nine-month period ended September 30, 2011.
LIQUIDITY AND CAPITAL RESOURCES
Below is a summary of our cash provided by or used in operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows:
The sources and uses of cash for the nine months ended September 30, 2011 are summarized below:
Our short-term debt as at September 30, 2011 is summarized as follows:
a) Outstanding letters of credit issued under our revolving credit facilities at September 30, 2011 were $77-million, reducing credit available under the facilities to $698-million.
b) For further information, see discussion under the section "Off Balance Sheet Arrangements" on page 55 of our 2010 Annual Report.
c) Of the total facility, $4-million is secured by accounts receivable.
OUTSTANDING SHARE DATA
The number of Agrium's outstanding shares as at October 31, 2011 was approximately 158 million. As at October 31, 2011, the number of shares issuable pursuant to stock options outstanding (issuable assuming full conversion, where each option granted can be exercised for one common share) was approximately 0.3 million.
a) Presented in accordance with previous Canadian generally accepted accounting principles ("Canadian GAAP")
The agricultural products business is seasonal in nature. Consequently, sales and gross profit comparisons made on a year-over-year basis are more appropriate than quarter-over-quarter. Crop input sales are primarily concentrated in the spring and fall crop input application seasons, which are in the second quarter and fourth quarter. Crop nutrient inventories are normally accumulated leading up to the application season. Cash collections generally occur after the application season is complete in the Americas and Australia. Our recent acquisition of AWB, which has a majority of its earnings from the first and second quarters of the calendar year, may have some impact on comparability.
Effective January 1, 2011, Agrium adopted IFRS as issued by the International Accounting Standards Board. The selected quarterly information for 2011 and 2010 are presented based on IFRS, while those for 2009 are presented based on Canadian GAAP. As such, direct comparison may not be appropriate.
BUSINESS ACQUISITIONS
On December 3, 2010, we acquired 100 percent of AWB, an agribusiness operating in Australia, for $1.2-billion in cash and $37-million of acquisition costs. On May 11, 2011, we completed the sale of the majority of the Commodity Management businesses acquired from AWB, in accordance with an agreement dated December 15, 2010 (for further discussion, see section "Discontinued Operations"). Cash received from the sale was $694-million. We retained the Landmark retail operations, including over 200 company-owned retail locations and over 140 retail franchise and wholesale customer locations in Australia. The acquired business is included in the Retail operating segment.
As part of the acquisition, we acquired a 50 percent interest in Hi-Fert, over which receivers and administrators have been appointed. Previously recorded amounts have been written off. The company has been sold by the administrators. AWB had provided guarantees for letters of credit issued by lenders supporting operations of Hi-Fert. Our potential payment obligations under these guarantees, net of proceeds obtained to date from the sale of secured assets, are approximately $33-million. The amount, if any, that we will ultimately be required to pay under these guarantees, net of recoveries from a charge over related assets, is not determinable, pending the outcome of external administration and litigation processes.
On May 2, 2011, we acquired 100 percent of Cerealtoscana S.p.A. ("CT"), and its subsidiary Agroport, for total consideration of $27-million plus working capital. CT is a fertilizer distribution company in Italy and Agroport is its subsidiary in Romania. The acquired business is included in the Wholesale operating segment.
On July 4, 2011, we acquired certain assets and liabilities of Evergro Canada ("Evergro") for total consideration of $52-million. Evergro is a manufacturer and distributor of horticulture and professional turf products in Western Canada and operates seven distribution facilities throughout British Columbia and Alberta. The acquired net assets and related earnings are included in the Agrium Advanced Technologies operating segment.
On July 7, 2011, we acquired certain assets and liabilities of International Mineral Technologies ("Tetra Micronutrients") for total consideration of $44-million. Tetra Micronutrients is located in Nebraska and specializes in the production, marketing and distribution of custom liquid plant nutrition and dry micro nutrient products. The acquired net assets and related earnings are included in the Agrium Advanced Technologies and Retail operating segments.
DISCONTINUED OPERATIONS
Discontinued operations include the operation of Commodity Management businesses and AWB Harvest Finance Limited sold on May 11, 2011. Also included are the operations and assets and liabilities of the Commodity Management businesses not included in the sale. We have agreed to various terms and conditions and indemnifications pursuant to the sale of the Commodity Management business, including an indemnity by AWB for litigation related to the Oil-For-Food Programme, as described in note 2 of our Condensed Consolidated Interim Financial Statements for the three and nine months ended September 30, 2011.
Net earnings from discontinued operations was nil for the third quarter of 2011 and $1-million for the first nine months of 2011, compared to nil in the same periods of 2010.
NON-IFRS FINANCIAL MEASURES
In the discussion of our performance for the quarter, in addition to the primary measures of earnings and earnings per share reported in accordance with IFRS, we make reference to EBITDA (earnings (loss) from continuing operations before finance costs, income taxes, depreciation and amortization). 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 units on a basis that is meaningful for comparison with other companies.
EBITDA is not a recognized measure under IFRS, and our method of calculation may not be comparable to other companies. Similarly, EBITDA should not be used as an alternative to net earnings from continuing operations as determined in accordance with IFRS.
The following table is a reconciliation of EBITDA to consolidated net earnings from continuing operations as calculated in accordance with IFRS:
ACCOUNTING STANDARDS AND CRITICAL ACCOUNTING ESTIMATES
Please refer to note 1 of our Condensed Consolidated Interim Financial Statements for the three and nine months ended September 30, 2011 for our significant accounting policies and critical accounting estimates, which includes, among others, purchase price allocations in business combinations; collectability of receivables; rebates; net realizable value of inventory; estimated useful lives and impairment of long-lived assets; goodwill impairment testing; allocation of acquisition purchase prices; asset retirement obligations; environmental remediation; employee future benefits; share-based payments; income taxes; fair value of financial assets and liabilities; and, amounts and likelihood of contingencies.
BUSINESS RISKS
The information presented on risk management and key business risks on pages 70 - 79 in our 2010 Annual Report has not changed materially since December 31, 2010.
CONTROLS & PROCEDURES
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OUTLOOK, KEY RISKS AND UNCERTAINTIES
Strong agricultural fundamentals are expected to drive robust demand for crop inputs in the fourth quarter of 2011 and into 2012. The United States Department of Agriculture ("USDA") projects that despite record global harvested area of grains and oilseeds in 2011/12, global grain and oilseed production will fall short of consumption. Looking ahead to 2012, tighter crop ending stocks are expected to lead to higher planted area and competition between crops for acreage. Analysts project that U.S. corn area will increase in 2012 to between 92 and 94 million acres and that combined planted area of corn and soybeans in the U.S. will reach 170 million acres, exceeding the record set in 2011 by over 3 million acres. The increase in planted area is expected to lead to strong demand for seed, crop nutrients, crop protection products and services. However, some fertilizer distributors and retailers may delay purchases as late as possible to ensure they hold minimal inventories given the recent volatility in global economic markets.
The global economic situation continues to be a source of uncertainty and has driven significant volatility in commodity prices, including agricultural commodities. While agricultural supply and demand fundamentals are relatively immune to short-term macroeconomic events, the uncertainty has contributed to significant volatility as non-commercial traders have significantly lowered their positions in commodity markets.
Strong demand combined with a number of production outages globally supported nitrogen prices in the third quarter of 2011, a situation that is expected to continue in the fourth quarter. The merchant ammonia market has had supply shortfalls, notably in Trinidad, where natural gas supplies to domestic producers have been reduced significantly. New nitrogen supply is expected to come to the market from Qatar in late 2011 and Algeria in early 2012. The urea market has benefitted from strong demand from India, which has purchased over 2 million tonnes of urea in its most recent tenders. Industry analysts expect 2011 Chinese urea exports to be less than half of the 7 million tonnes exported in 2010 due to the trend to more restrictive export tax policies.
The resurgence of spot Indian phosphate demand has been a key driver in the global phosphate market. India is expected to import about 7 million tonnes of diammonium phosphate ("DAP") in the 2011/12 agricultural year, slightly lower than in 2010/11, but very strong considering year-over-year imports in the April through September 2011 period were down 33 percent. Chinese DAP exports are expected to be restricted due to the high tax rate until June 2012 and there are reports that this may be extended to compound and other phosphate products (Triple Super Phosphates and NP products). The Ma'aden phosphate project in Saudi Arabia is now expected to ramp up slowly in the first half of 2012 and industry analysts expect production of about 300,000 tonnes of DAP in 2011. Current finished phosphate prices are close to non-integrated producers' cost of production due to high global ammonia and sulphur prices, a tight global phosphate rock situation on inventory drawdown in the U.S. and lower production in some areas in the Middle East and North Africa.
The global potash market has remained firm over the past few months. Available supply is expected to limit global shipments of potash in 2011. North American potash capacity utilization rates in the first nine months of 2011 were the highest on record, as producers try to meet growing global potash demand. Brazilian potash demand from January through September exceeded the record 2008 pace. Through the first eight months of 2011, Chinese potash demand was 26 percent higher than the same period in 2010 and imports are expected to be at least 6 million tonnes in 2011. North American potash applications are expected to be supported this fall by higher forecasted crop acreage for 2012.
Forward-Looking Statements
Certain statements and other information included in this MD&A constitute "forward-looking information" within the meaning of applicable Canadian securities legislation or constitute "forward-looking statements" within the meaning of applicable U.S. securities legislation (collectively, the "forward-looking statements"). All statements in this MD&A, other than those relating to historical information or current conditions, are forward-looking statements, including, but not limited to, statements as to management's expectations with respect to: future crop and crop input volumes, demand, margins, prices and sales; business and financial prospects; and other plans, strategies, objectives and expectations, including with respect to future operations of Agrium. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such forward-looking statements.
All of the forward-looking statements are qualified by the assumptions that are stated or inherent in such forward-looking statements, including the assumptions listed below. Although Agrium believes that these assumptions are reasonable, this list is not exhaustive of the factors that may affect any of the forward-looking statements and the reader should not place an undue reliance on these assumptions and such forward-looking statements. The key assumptions that have been made in connection with the forward-looking statements include Agrium's ability to successfully integrate and realize the anticipated benefits of its acquisitions, including the acquisition of retained AWB businesses.
Events or circumstances that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to: general economic, market and business conditions, weather conditions including impacts from regional flooding and/or drought conditions; crop prices; the supply and demand and price levels for our major products; governmental and regulatory requirements and actions by governmental authorities, including changes in government policy, changes in environmental, tax and other laws or regulations and the interpretation thereof, and political risks, including civil unrest, actions by armed groups or conflict. Additionally, there are risks associated with Agrium's recent acquisition of AWB, including: size and timing of expected synergies could be less favourable than anticipated; AWB is subject to dispute and litigation risk (including as a result of being named in litigation commenced by the Iraqi Government relating to the United Nations Oil-For-Food Programme), as well as counterparty and sovereign risk; and other risk factors detailed from time to time in Agrium reports filed with the Canadian securities regulators and the Securities and Exchange Commission in the United States.
Agrium disclaims any intention or obligation to update or revise any forward-looking statements in this press release as a result of new information or future events, except as may be required under applicable U.S. federal securities laws or applicable Canadian securities legislation.
OTHER
Agrium Inc. is a major Retail supplier of agricultural products and services in North America, South America and Australia and 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 2011 3rd Quarter Conference Call will be available in a listen-only mode beginning Thursday, November 3, 2011 at 9:30 a.m. MT (11:30 a.m. ET). Please visit the following website: .
AGIRUM INC.
Summarized Notes to the Condensed Consolidated Financial Statements
For the nine months ended September 30, 2011
(Millions of U.S. dollars, except per share amounts)
(Unaudited)
1. CORPORATE INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Corporate information
Agrium Inc. is incorporated under the laws of Canada with common shares listed under the symbol "AGU" on the New York Stock Exchange and the Toronto Stock Exchange. Agrium Inc. (with its subsidiaries) is a major retail supplier of agricultural products and services in North and South America and Australia and a leading global producer and marketer of agricultural nutrients and industrial products. We produce and market three primary groups of nutrients: nitrogen, phosphate and potash as well as controlled-release crop nutrients and micronutrients. Our Corporate head office is located at 13131 Lake Fraser Drive S.E. Calgary, Alberta, Canada. Our operations are conducted globally from our Wholesale head office in Calgary, and our Retail and Advanced Technologies head offices in Loveland, Colorado, U.S.
Basis of preparation and statement of compliance
These condensed consolidated interim financial statements ("interim financial statements") of Agrium Inc. were approved for issuance by the Audit Committee on November 2, 2011. We prepared the interim financial statements in accordance with IAS 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"). We prepared our first interim financial statements for our first quarter of 2011 as part of the period covered by our first consolidated annual financial statements prepared in accordance with IFRS for the year ending December 31, 2011. Disclosures concerning the transition from Canadian generally accepted accounting principles to IFRS are provided in note 19. These interim financial statements do not include all disclosures normally provided in consolidated annual financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2010.
Seasonality in our business results from the increased demand for our products during planting seasons. Sales are generally higher in the spring and fall.
These interim financial statements are presented in U.S. dollars, which is our presentation and functional currency. We have prepared these interim financial statements using the historical cost basis, with the exception of certain financial instruments and non-current assets, liabilities for cash-settled share-based payment arrangements, and assets and obligations of post-employment benefit plans. Our policies for these items are set out in the notes below.
Significant accounting policies
a) Key accounting estimates and judgments
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates are used when accounting for items such as collectability of receivables, rebates, net realizable value of inventory, estimated useful lives and impairment of long-lived assets, goodwill impairment testing, allocation of acquisition purchase prices, asset retirement obligations, environmental remediation, employee future benefits, share-based payments, income taxes, fair value of financial assets and liabilities and amounts and likelihood of contingencies. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
b) Principles of consolidation
Subsidiaries
These consolidated financial statements include the accounts of Agrium Inc., its subsidiaries, and its proportionate share of revenues, expenses, assets and liabilities of joint ventures, which are the entities over which Agrium has control. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In these interim financial statements, we, us, our and Agrium mean Agrium Inc., its subsidiaries and joint ventures. All intercompany transactions and balances have been eliminated.
Associates
Associates are those entities in which we have significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when we hold between 20 and 50 percent of the voting power of another entity, but can also arise if we hold less than 20 percent of an entity if we have the power to be actively involved and influential in policy decisions affecting the entity.
Investments in associates are accounted for using the equity method and are recognized initially at cost. Our investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include our share of the income and expenses and equity movements of equity accounted investees from the date that significant influence commences until the date that it ceases.
Joint ventures
Joint ventures are those entities over whose activity we have joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Jointly controlled entities are accounted for using proportionate consolidation. Our share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line by line basis. Where we transact with our jointly controlled entities, unrealized profits and losses are eliminated to the extent of our interest in the joint venture.
c) Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments we issued in exchange for control of the acquiree. Acquisition-related costs are recognized in net earnings as incurred.
The interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholders' proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.
d) Foreign currency translation
The functional currency for each of our subsidiaries, jointly controlled entities and associates is the currency of the primary economic environment in which they operate, which is the U.S. dollar, the Canadian dollar, the Australian dollar, the New Zealand dollar and the Euro. Determining the primary economic environment in which an entity operates requires management to consider several factors and use judgment.
All transactions that are not denominated in an entity's functional currency are foreign currency transactions. These transactions are initially recorded in the functional currency by applying the appropriate monthly average rate which best approximates the actual rate of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-measured at the functional currency rate of exchange at the balance sheet date. All differences are recognized in the consolidated statement of operations. Non monetary items measured at historical cost are not re-measured - they remain at the exchange rate from the date of the transaction. Non monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
The assets and liabilities of foreign operations that are not denominated in the presentation currency, including goodwill and fair value adjustments arising on acquisition, are translated to our presentation currency at exchange rates at the reporting date. Income, expenses and capital transactions are translated at the average exchange rate for the month. Foreign currency differences are recognized directly in equity. When a foreign operation is disposed of, the relevant amount of foreign currency translation in equity is reclassified to net earnings.
e) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. We recognize revenue based on individual contractual terms when all of the following criteria are met: the significant risks and rewards of ownership of the goods have been transferred to the customer; we retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue and costs incurred or to be incurred can be measured reliably; and, it is probable that the economic benefits associated with the transaction will flow to us. These conditions are generally satisfied when title passes to the customer according to the sales agreement which in most cases, is when product is picked up by the customer or delivered to the destination specified by the customer, which is typically a customer's premises, the vessel on which the product will be shipped, or the destination port. Revenue is reported net of sales taxes, returns, discounts and rebates.
f) Rebates
We enter into agreements with suppliers providing for vendor rebates typically based on the achievement of specified purchase volumes or sales levels. We account for rebates and prepay discounts as a reduction of the prices of the suppliers' products. Rebates that are probable and can be reasonably estimated are accrued based on total estimated crop year performance. Rebates that are not probable or estimable are accrued when certain milestones are achieved. Rebates not covered by binding agreements or published vendor programs are accrued when conclusive documentation of right of receipt is obtained.
Rebates based on the amount of materials purchased reduce cost of product as inventory is sold. Rebates that are based on sales volume are offset to cost of product when we determine that they have been earned based on sales volume of related products.
g) Income taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in net earnings except to the extent that it relates to items recognized directly in equity, in which case it is recognized directly in equity or in other comprehensive income.
Current income tax is the expected tax payable (recoverable) on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable (recoverable) in respect of previous years.
Deferred income tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income. Deferred income tax liabilities are generally recognized for all taxable temporary differences. Deferred income tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which those deductible temporary differences can be utilized.
The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current income tax assets against current income tax liabilities and when they relate to income taxes levied by the same taxation authority.
h) Financial instruments
All financial assets and financial liabilities are initially recognized at fair value. The subsequent measurement of financial instruments depends on their classification as follows:
Where commodity derivative contracts under master netting arrangements include both asset and liability positions, we offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty, including any related cash collateral asset or obligation. Transaction costs of financial instruments are recorded as a reduction of the cost of the instruments except for costs of financial instruments classified as fair value through profit or loss, which are expensed as incurred.
i) Cash and cash equivalents
Cash equivalents are carried at fair value, and consist of short-term investments with an original maturity of three months or less.
j) Accounts receivable and allowance for doubtful accounts
We evaluate collectability of specific customer receivables depending on the nature of the sale. Collectability of receivables is reviewed and the allowance for doubtful accounts is adjusted on an ongoing basis. Account balances are charged to net earnings when we determine that it is probable that the receivable will not be collected. Interest accrues on all trade receivables from the due date, which may vary with certain geographic or seasonal programs.
We have facilities in the U.S. and Australia that enable us to sell certain short-term trade accounts receivable to third parties on an ongoing basis. We continue to service the sold accounts receivable; amounts associated with the servicing liability are not material. We record sales and derecognize accounts receivable when the arrangement transfers substantially all the risks and rewards of ownership of the receivables to a third party. Where this does not occur, the arrangements are recorded as secured borrowings.
k) Inventories
Wholesale inventories, consisting primarily of crop nutrients, operating supplies and raw materials, include both direct and indirect production and purchase costs, depreciation and amortization on assets employed directly in production, and freight to transport the product to the storage facilities. Crop nutrients include our produced products and products purchased for resale. Operating supplies include catalysts used in the production process, materials used for repairs and maintenance and other supplies. Inventories are valued at the lower of cost on a weighted-average basis and net realizable value.
Retail inventories, consisting primarily of crop nutrients, crop protection products, seed and merchandise include the cost of delivery to move the product to storage facilities. Inventories are recorded at the lower of cost on a weighted-average basis and net realizable value.
Advanced Technologies inventories, consisting primarily of raw materials and controlled-release products, include both direct and indirect production costs and depreciation on assets employed directly in production. Inventories are recorded at the lower of cost determined on a first-in, first-out basis and net realizable value.
l) Property, plant and equipment
Property, plant and equipment are measured at historical cost less accumulated depreciation and accumulated impairment loss. The cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. If a legal or constructive obligation exists to decommission property, plant and equipment, the discounted value of the obligation is included in the carrying value of the assets when the obligation arises.
Expenses in connection with day-to-day maintenance and repairs are recognized in the statement of operations as they are incurred. Expenses incurred in connection with major replacements, plant turnarounds and renewals that materially extend the life of property, plant and equipment or result in future economic benefits are capitalized and depreciated on a systematic basis. The carrying amount of replaced components is expensed.
If the construction or preparation for use of property, plant or equipment extends over a period of longer than twelve months, the borrowing costs incurred on borrowed capital up to the date of completion are capitalized as part of the cost of acquisition or construction.
Property, plant and equipment are depreciated on a straight-line basis using the following estimated useful lives:
If the cost of an individual part of property, plant and equipment is significant relative to the total cost of the item, the individual part is accounted for and depreciated separately. Expected useful life and residual value is re-assessed annually.
m) Goodwill and intangible assets
Goodwill represents the difference between the fair value of the consideration transferred in a business combination and the fair value of the identifiable net assets acquired at the date of acquisition. Goodwill is initially determined based on provisional fair values. Fair values are finalized within 12 months of the acquisition date. Goodwill on acquisition of subsidiaries and jointly controlled entities is separately disclosed and goodwill on acquisitions of associates is included within investments in equity accounted units. Goodwill, including goodwill in equity accounted units, is not amortized; rather it is tested annually for impairment or when there is an indication of impairment.
Intangible assets acquired as part of an acquisition of a business are capitalized separately from goodwill if the asset is separable or arises from contractual or legal rights, and the fair value can be measured reliably on initial recognition.
Purchased intangible assets are initially recorded at cost and finite-lived intangible assets are amortized over their useful economic lives on a straight-line basis. Intangible assets having indefinite lives and intangible assets that are not yet ready for use are not amortized and are tested for impairment annually or when there is an indication of impairment.
Intangible assets are considered to have indefinite lives when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate cash flows for us. The factors considered in making this determination include the existence of contractual rights for unlimited terms; or evidence that renewal of the contractual rights without significant incremental cost can be expected for indefinite periods into the future in view of our future investment intentions. The life cycles of the products and processes that depend on the asset are also considered.
The following estimated useful lives, which are re-assessed annually, have been determined for classes of finite-lived intangible assets:
n) Impairment
The carrying amounts of non-current assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any indication of impairment exists, then the asset's recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year during the third quarter.
The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that have the ability to generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash generating unit"). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash generating units or groups of cash generating units that are expected to benefit from the synergies of the combination and reflects the lowest level at which goodwill is monitored for internal reporting purposes. If there is an indication of an impairment of an asset or cash generating unit below the level to which goodwill has been allocated, the asset or cash generating unit is tested for impairment first and any impairment loss for that asset or cash generating unit is recognized before testing at the level to which goodwill has been allocated.
An impairment loss is recognized if the carrying amount of an asset or its cash generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in net earnings. Impairment losses recognized in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.
o) Leases
Leases whereby we assume substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the finance cost and the reduction of the outstanding liability. The finance cost is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Other leases are operating leases and are not recognized on our balance sheet. Payments made under operating leases are recognized in net earnings over the term of the lease.
p) Post-employment benefits
We maintain contributory and non-contributory defined benefit and defined contribution pension plans in Canada and the United States. The majority of employees are members of defined contribution pension plans. We also maintain health care plans and life insurance benefits for retired employees. Benefits from defined benefit plans are based on either a percentage of final average earnings and years of service or a flat dollar amount for each year of service. Pension plan and post-retirement benefit costs are determined annually by independent actuaries and include current service costs, interest cost of projected benefits, return on plan assets and actuarial gains or losses. We also have non-contributory defined benefit and defined contribution plans which provide supplementary pension benefits for senior management.
Post-employment benefits are funded by us and obligations are determined using the projected unit credit method of actuarial valuation prorated over the expected length of employee service. Post-employment benefit costs for current service, interest costs and return on plan assets are charged to net earnings in the year incurred. Actuarial gains or losses are recognized immediately in other comprehensive income. Past service costs and the effects of changes in plan assumptions are amortized on a straight-line basis over the average period until the benefits become vested, or immediately if the benefits have already vested. Our contributions to defined contribution post-employment benefit plans are expensed as incurred.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. Liabilities for bonuses and profit-sharing are recognized based on a formula that takes into consideration the profit attributable to our shareholders after certain adjustments. We recognize a liability when we have a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
q) Provisions
A provision is recognized if, as a result of a past event, we have a present legal or constructive obligation that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Where the effect of discounting is material, the expected future cash flows associated with a provision are discounted at a pre-tax rate that reflects current market assessments of the time value of money. The unwinding of the discount is recognized as a finance cost.
Environmental remediation
Environmental expenditures that relate to existing conditions caused by past operations that do not contribute to current or future revenue generation are expensed. Environmental expenditures that extend the life of the property, increase its capacity or mitigate or prevent contamination from future operations are capitalized. Costs are recorded when environmental remediation efforts are probable and the costs can be reliably estimated based on current law and existing technologies. Estimated costs are based on management's best estimate of undiscounted future costs.
Decommissioning and restoration
Provisions for decommissioning and restoration costs (asset retirement obligations) are measured based on current requirements, technology and price levels and the present value is calculated using amounts discounted over the useful economic life of the assets. The liability is recognized in the period when there is a legal or constructive obligation and a reasonable estimate can be made. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recognized and is subsequently depreciated as part of the asset. The effects of changes resulting from revisions to the timing or the amount of the original estimate of the provision are reflected on a prospective basis, by adjustment to the carrying amount of the related property, plant and equipment.
r) Share-based payments
Cash-settled plans are accounted for as liabilities where the fair value of the award is determined at the grant date using a valuation model which includes an estimated forfeiture rate. A Black-Scholes option pricing model is used for plans with a service condition and a Monte Carlo simulation model is used for plans with service and market conditions. Compensation expense is accrued and recognized over the vesting period of the award. The fair value is re-measured at each balance sheet date and fluctuations in the fair value are recognized in the period in which the fluctuation occurs.
Equity-settled plans are accounted for using a fair value-based method. The fair value of the share-based award is determined at the grant date using a market-based option valuation model which includes an estimated forfeiture rate. The fair value of the award is recorded as compensation expense amortized over the vesting period of the award, with a corresponding increase to share capital. On exercise of the award, the proceeds are recorded as share capital.
If an employee is eligible to retir
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