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| POT > SEC Filings for POT > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The following discussion and analysis is the responsibility of management and is as of November 5, 2009. 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 its publication, approves, pursuant to the authority delegated to it by the Board of Directors, this disclosure. The term "PCS" refers to Potash Corporation of Saskatchewan Inc. and the terms "we", "us", "our", "PotashCorp" and the "company" refer to PCS and, as applicable, PCS and its direct and indirect subsidiaries as a group. Additional information relating to the company, including our Annual Report on Form 10-K, can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.shtml.
POTASHCORP AND OUR BUSINESS ENVIRONMENT
PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world's largest fertilizer enterprise by capacity, producing the three primary plant nutrients: potash, phosphate and nitrogen. We sell fertilizer to North American retailers, cooperatives and distributors that provide storage and application services to farmers, the end users. Our offshore customers are government agencies and private importers who buy under contract and on the spot market; spot sales are more prevalent in North America, South America and Southeast Asia. Fertilizers are sold primarily for spring and fall application in both Northern and Southern Hemispheres.
Transportation is an important part of the final purchase price for fertilizer so producers usually sell to the closest customers. In North America, we sell mainly on a delivered basis via rail, barge, truck and pipeline. Offshore customers purchase product either at the port where it is loaded or delivered with freight included.
Potash, phosphate and nitrogen are also used as inputs for the production of animal feed and industrial products. Most feed and industrial sales are by contract and are more evenly distributed throughout the year than fertilizer sales.
POTASHCORP STRATEGY
To provide our stakeholders with long-term value, our strategy focuses on generating growth while striving to minimize fluctuations in an upward-trending earnings line. This value proposition has given our stakeholders superior value for many years. We apply this strategy by concentrating on our highest margin products. Such analysis dictates our Potash First strategy, focusing our capital - internally and through investments - to build on our world-class potash assets and meet the rising global demand for this vital nutrient. By investing in potash capacity while producing to meet market demand, we create the opportunity for significant growth while limiting downside risk. We complement our potash operations with focused phosphate and nitrogen businesses that emphasize the production of higher-margin products with stable and sustainable earnings potential.
We strive to grow PotashCorp by enhancing our position as supplier of choice to our customers, delivering the highest quality products at market prices when they are needed. We seek to be the preferred supplier to high-volume, high-margin customers with the lowest credit risk. It is critical that our customers recognize our ability to create value for them based on the price they pay for our products.
As we plan our future, we carefully weigh our choices for our cash flow. We base all investment decisions on cash flow return materially exceeding cost of capital, evaluating the best return on any investment that matches our Potash First strategy. Most of our recent capital expenditures have gone to investments in our own potash capacity, and we look to increase our existing offshore potash investments and seek other merger and acquisition opportunities in this nutrient. We also consider share repurchase and increased dividends as ways to maximize shareholder value over the long term.
KEY PERFORMANCE DRIVERS - PERFORMANCE COMPARED TO GOALS
Each year we set targets to advance our long-term goals and drive results. Our long-term goals and 2009 targets are set out on pages 35 to 37 of our 2008 financial review annual report. A summary of our progress against selected goals and representative annual targets is set out below.
Representative Performance
Goal 2009 Annual Target to September 30, 2009
Achieve no harm to Reduce total site Total site severity injury rate was
people. severity injury 22 percent below the 2008 annual level
rate by 25 percent for the first nine months of 2009. The
by the end of 2011 total site severity injury rate was
from 2008 levels. not tracked in the first nine months
of 2008.
Achieve no damage to Reduce total Reportable release rate on an
the environment. reportable annualized basis declined 24 percent,
releases, permit annualized permit excursions were up
excursions and 33 percent and annualized spills were
spills by up 17 percent during the first nine
15 percent from months of 2009 compared to 2008 annual
2008 levels. levels. Compared to the first nine
months of 2008, reportable releases
and permit excursions were flat while
spills were up 17 percent.
Maximize long-term Exceed total PotashCorp's total shareholder return
shareholder value. shareholder return was 24 percent in the first nine
for our sector and months of 2009 compared to our sector
companies on the weighted average return of 49 percent
DAXglobal and the DAXglobal Agribusiness Index
Agribusiness Index weighted average return of 41 percent.
for 2009.
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FINANCIAL OVERVIEW
This discussion and analysis is based on the company's unaudited interim condensed consolidated financial statements reported under generally accepted accounting principles in Canada ("Canadian GAAP"). These principles differ in certain significant respects from accounting principles generally accepted in the United States. These differences are described and quantified in Note 19 to the unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. All references to per-share amounts pertain to diluted net income per share.
For an understanding of trends, events, uncertainties and the effect of critical accounting estimates on our results and financial condition, the entire document should be read carefully together with our 2008 financial review annual report.
Earnings Guidance - Third Quarter 2009
Initial Company Guidance Actual Results
Earnings per share $0.80 - $1.20 $0.82
Effective tax rate 23% - 25% 24%
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Overview of Actual Results
Operations
Three Months Ended September 30 Nine Months Ended September 30
Dollars (millions) - except Dollar % Dollar %
per-share amounts 2009 2008 Change Change 2009 2008 Change Change
Sales $ 1,099.1 $ 3,064.3 $ (1,965.2 ) (64 ) $ 2,877.6 $ 7,575.9 $ (4,698.3 ) (62 )
Freight 53.7 81.4 (27.7 ) (34 ) 130.2 287.2 (157.0 ) (55 )
Transportation and distribution 36.3 31.6 4.7 15 101.0 97.2 3.8 4
Cost of goods sold 662.9 1,210.3 (547.4 ) (45 ) 1,900.0 3,157.2 (1,257.2 ) (40 )
Gross Margin $ 346.2 $ 1,741.0 $ (1,394.8 ) (80 ) $ 746.4 $ 4,034.3 $ (3,287.9 ) (81 )
Operating Income $ 358.4 $ 1,714.7 $ (1,356.3 ) (79 ) $ 862.6 $ 3,759.7 $ (2,897.1 ) (77 )
Net Income $ 248.8 $ 1,236.1 $ (987.3 ) (80 ) $ 744.2 $ 2,707.2 $ (1,963.0 ) (73 )
Net Income Per Share - Basic $ 0.84 $ 4.07 $ (3.23 ) (79 ) $ 2.52 $ 8.73 $ (6.21 ) (71 )
Net Income Per Share - Diluted $ 0.82 $ 3.93 $ (3.11 ) (79 ) $ 2.45 $ 8.45 $ (6.00 ) (71 )
Other Comprehensive Income (Loss) $ 123.9 $ (1,638.1 ) $ 1,762.0 n/m $ 565.4 $ (479.1 ) $ 1,044.5 n/m
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n/m - not meaningful
Earnings in the third quarter and first nine months of 2009 were lower than the record levels in the same periods of 2008 due to lower prices and volumes for all nutrients except North American potash prices (higher year over year), industrial phosphate prices (higher year over year) and urea volumes (higher quarter over quarter and year over year). Potash represented 73 percent of third quarter gross margin and 70 percent of first nine months gross margin in 2009.
Fertilizer buyers remained cautious in the wake of economic uncertainty. North American potash producer shipments improved from the previous quarter, but third-quarter volumes were still more than 50 percent below the same quarter in 2008 and totals for the first nine months of 2009 were nearly 70 percent lower than in the first nine months of last year. In July, India signed new contracts with global potash producers, which we believed would inspire buyer confidence in other markets. This failed to materialize, as potash buyers appeared to respond instead to their perception of market conditions and risks, including healthy producer inventories, lack of engagement by Chinese buyers and a late US harvest. Moreover, the large inventory writedowns in nitrogen and phosphate taken by dealers over the past year limited the appetite for additional inventory risk. As a result, dealers and farmers continued to buy potash only on an as-needed basis, putting pressure on spot market pricing. In phosphate, US producer solid fertilizer domestic sales volumes moved closer to historical levels, while offshore volumes rose slightly as India continued to import significant quantities and shipments to Brazil increased in advance of its key planting season. In nitrogen, lower domestic natural gas costs allowed North American producers to be more competitive, contributing to a 24 percent decline in ammonia imports to the US compared to last year's third quarter. Lower winter wheat plantings and continued deferral by fertilizer buyers reduced urea demand and prices in the quarter.
Other significant factors that also affected earnings in the third quarter and
first nine months of 2009 compared to the same periods in 2008 were:
(1) provincial mining and other taxes which declined as a result of anticipated
lower potash margins, decreased sales tonnes and credits for expenditures
incurred on our potash expansion projects; (2) other income which declined due
to a decrease in our share of earnings from Sociedad Quimica y Minera de Chile
("SQM") and Arab Potash Company Ltd. ("APC") and a drop in dividends, partially
due to timing differences, from Israel Chemicals Limited ("ICL"), offset in part
for the first nine months of 2009 by a $115.3 million gain on disposal of
auction rate securities in the second quarter; and (3) income taxes which
decreased due to significantly lower earnings, a lower proportion of earnings
from higher-tax jurisdictions and discrete items recognized. Other comprehensive
income increased during the same periods due to the fair value of our
investments in ICL increasing, and Sinofert Holdings Limited ("Sinofert") not
falling as much, compared to when values were falling last year, and the fair
value of natural gas derivatives qualifying for hedge accounting increasing
slightly as compared to decreasing in 2008 when natural gas prices were rapidly
declining.
Balance Sheet
Additions to property, plant and equipment related primarily to our potash capacity expansions (73 percent). Investments increased mainly due to the fair value of our investment in ICL increasing, although the fair value of our investment in Sinofert decreased. The decrease in trade receivables (consistent with the decrease in sales) was partially offset by taxes receivable which were generated by an overpayment of taxes earlier in the year (instalments originally based on anticipated higher earnings). Phosphate finished goods inventory values decreased due to lower inventory levels and lower-cost sulfur and ammonia (more expensive in 2008 due to tight supply-demand fundamentals) being used in phosphate production. The decrease in phosphate inventories was partially offset by a significant increase in potash inventory tonnes (mine strikes limited production towards the end of 2008 and customers were on allocation for most of 2008 before the global economic downturn cut demand). Additional increases in assets pertained to higher cash and prepaid expenses and other current assets.
Long-term debt increased as a result of the settlement of the issuance of $1,000.0 million in senior notes in May and $1,000.0 million in senior notes in September, the net proceeds of which were used to repay outstanding credit facilities borrowings and for general corporate purposes. Accounts payable and accrued charges declined as a result of: (1) lower income taxes payable due to payments made during the first half of 2009 and significantly lower earnings compared to 2008; (2) lower accrued potash production taxes due to significantly reduced demand, forecasted lower potash margins and high deductions for potash capital expansion projects; and (3) lower accrued payroll due to lower incentives and stock-based compensation accruals; these declines were partially offset by higher accruals for capital expenditures in potash and higher interest accruals.
Significant changes in equity were primarily the result of net income and other comprehensive income earned during the first nine months of 2009, which is described above.
Business Segment Review
Note 7 to the unaudited interim condensed consolidated financial statements
provides information pertaining to our business segments. Management includes
net sales in segment disclosures in the consolidated financial statements
pursuant to Canadian GAAP, which requires segmentation based upon our internal
organization and reporting of revenue and profit measures derived from internal
accounting methods. As a component of gross margin, net sales (and the related
per-tonne amounts) are the primary revenue measures we use and review in making
decisions about operating matters on a business segment basis. These decisions
include assessments about potash, phosphate and nitrogen performance and the
resources to be allocated to these segments. We also use net sales (and the
related per-tonne amounts) for business planning and monthly forecasting. Net
sales are calculated as sales revenues less freight, transportation and
distribution expenses.
Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance results where applicable to give further insight into these results. Certain of the prior periods' figures have been reclassified to conform to the current period's presentation.
Potash
Three Months Ended September 30
Dollars (millions) Tonnes (thousands) Average per Tonne(1)
2009 2008 % Change 2009 2008 % Change 2009 2008 % Change
Sales $ 423.4 $ 1,145.2 (63 )
Freight 16.8 36.0 (53 )
Transportation and
distribution 9.2 9.9 (7 )
Net sales $ 397.4 $ 1,099.3 (64 )
Manufactured product
Net sales
North American $ 111.0 $ 298.0 (63 ) 266 530 (50 ) $ 417.38 $ 561.70 (26 )
Offshore 283.7 796.7 (64 ) 748 1,325 (44 ) $ 379.24 $ 601.34 (37 )
394.7 1,094.7 (64 ) 1,014 1,855 (45 ) $ 389.24 $ 590.01 (34 )
Cost of goods sold 139.1 185.6 (25 ) $ 137.17 $ 99.93 37
Gross margin 255.6 909.1 (72 ) $ 252.07 $ 490.08 (49 )
Other miscellaneous and
purchased product
Net sales 2.7 4.6 (41 )
Cost of goods sold 6.9 4.0 73
Gross margin (4.2 ) 0.6 n/m
Gross Margin $ 251.4 $ 909.7 (72 ) $ 247.93 $ 490.40 (49 )
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Nine Months Ended September 30
Dollars (millions) Tonnes (thousands) Average per Tonne(1)
2009 2008 % Change 2009 2008 % Change 2009 2008 % Change
Sales $ 903.3 $ 3,135.9 (71 )
Freight 34.1 151.6 (78 )
Transportation and
distribution 24.4 35.2 (31 )
Net sales $ 844.8 $ 2,949.1 (71 )
Manufactured product
Net sales
North American $ 311.5 $ 1,027.1 (70 ) 599 2,583 (77 ) $ 519.95 $ 397.54 31
Offshore 522.9 1,909.5 (73 ) 1,283 4,527 (72 ) $ 407.57 $ 421.84 (3 )
834.4 2,936.6 (72 ) 1,882 7,110 (74 ) $ 443.34 $ 413.01 7
Cost of goods sold 306.3 629.7 (51 ) $ 162.73 $ 88.55 84
Gross margin 528.1 2,306.9 (77 ) $ 280.61 $ 324.46 (14 )
Other miscellaneous and
purchased product
Net sales 10.4 12.5 (17 )
Cost of goods sold 14.3 8.7 64
Gross margin (3.9 ) 3.8 n/m
Gross Margin $ 524.2 $ 2,310.7 (77 ) $ 278.53 $ 324.99 (14 )
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(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
n/m = not meaningful
Potash gross margin variance attributable to:
Three Months Ended September 30 Nine Months Ended September 30
Dollars (millions) 2009 vs. 2008 2009 vs. 2008
Change in Change in
Prices/Costs Prices/Costs
Change in Cost of Goods Change in Cost of Goods
Sales Volumes Net Sales Sold Total Sales Volumes Net Sales Sold Total
Manufactured product
North American $ (162.8 ) $ (8.9 ) $ (4.9 ) $ (176.6 ) $ (684.2 ) $ 73.3 $ (1.3 ) $ (612.2 )
Offshore (402.6 ) (71.5 ) (2.6 ) (476.7 ) (1,181.6 ) (18.2 ) 33.5 (1,166.3 )
Change in market mix (4.2 ) 2.0 2.0 (0.2 ) (4.3 ) 2.0 2.0 (0.3 )
Total manufactured product $ (569.6 ) $ (78.4 ) $ (5.5 ) $ (653.5 ) $ (1,870.1 ) $ 57.1 $ 34.2 $ (1,778.8 )
Other miscellaneous and purchased product (4.8 ) (7.7 )
Total $ (658.3 ) $ (1,786.5 )
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[[Image Removed: (PERFORMANCE GRAPH)]]
The most significant contributors to the change in total gross margin quarter over quarter were as follows1:
Net Sales Prices Sales Volumes Cost of Goods Sold
â Average realized â Buyers continued to â The price variance was
offshore price dropped manage cash flow in a negative due to
37 percent as pricing in difficult economy. increased maintenance
major markets supplied Dealers and farmers costs this year
by Canpotex Limited2 remained on the (partially deferred in
declined following the sidelines, buying 2008), high royalties
contract settlement with just-in-time due to (did not decline at the
India at prices lower their perception of same rate as potash
than last year's prices market conditions and prices) and increased
á Offshore realized risks, including higher labor costs (due to new
prices increased from producer inventories, union contracts)
the trailing quarter due lack of engagement by partially offset by
to transportation and the Chinese market and a lower brine inflow
distribution costs being late US harvest management costs
allocated over fewer â Offshore volumes fell â Per tonne costs
sales tonnes in the as customers worldwide, increased as fixed costs
previous quarter except India, destocked were allocated over
â US published list inventories fewer tonnes sold
prices declined á India began to restock á The Canadian dollar
35-40 percent during the depleted inventories weakened relative to the
quarter (caused, in part, by the US dollar
absence of a contract
with Canpotex in the
first half of
2009) resulting in a
28 percent increase in
shipped tonnes.
â China did not sign a
contract with Canpotex
(settled by second
quarter in
2008) resulting in a
97 percent drop in
volumes in that market.
Shipments to Brazil were
down 73 percent while
Southeast Asia (except
China) took 38 percent
less tonnes from
Canpotex. Brazil had
more inventory to work
through than Southeast
Asia
â Sales to our North
American customers
declined due to very
late spring plantings
consequentially
compressing the fall
harvest (and subsequent
application season),
poor weather conditions
in certain parts of
Canada and the US
hampering harvest
progress, and perceived
potash price risk
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1 Direction of arrows refer to impact on gross margin 2 Canpotex Limited ("Canpotex") is the offshore marketing company for Saskatchewan potash producers
. . .
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