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POT > SEC Filings for POT > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for POTASH CORP OF SASKATCHEWAN INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for POTASH CORP OF SASKATCHEWAN INC


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is the responsibility of management and is as of April 30, 2013. 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 this disclosure, pursuant to the authority delegated to it by the Board of Directors. 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 PotashCorp, including our Annual Report on Form 10-K for the year ended December 31, 2012 (Form 10-K), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.shtml. The company is a foreign private issuer under the rules and regulations of the US Securities and Exchange Commission (the SEC); however, it currently files voluntarily on the SEC's domestic forms.

PotashCorp and Our Business Environment

PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world's largest fertilizer company by capacity, producing the three primary crop nutrients: potash (K), nitrogen (N) and phosphate (P). As the world's leading potash producer, we are responsible for approximately 20 percent of global potash capacity through our Canadian operations. To enhance our global footprint, we also have investments in other key global potash-related businesses in South America, the Middle East and Asia. We complement our potash assets with focused positions in nitrogen and phosphate.

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 that buy under contract and on the spot market; while spot market 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 directly to a specified location.

Potash, nitrogen and phosphate 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

We believe that our ability to deliver superior long-term financial returns is the cornerstone of establishing enduring value for all stakeholders. Strong financial performance rewards our shareholders and, at the same time, allows us to focus on our broader social and environmental responsibilities and contribute to the long-term success of our customers, employees, suppliers and communities.

In each nutrient segment, we develop strategies and set priorities that align with our broad goals. Each nutrient plays an important part in our success, but we believe our unique leverage in potash offers the greatest opportunity for future growth.

Our strategic approach in potash is to build on our world-class position whenever opportunities arise that can enhance our value, and to focus on matching our production to market demand (to reduce downside risk and conserve the long-term value of our resource, while still striving to grow our volumes as capacity rises). Our strategic approach in nitrogen is to enhance gross margin and earnings stability by being a lower delivered-cost supplier to the large US market, emphasizing ammonia sales to industrial customers that value long-term secure supply, and to focus on initiatives that can reduce our environmental impact. Our strategic approach in phosphate is to leverage our high-quality rock and produce the industry's most diversified mix of products in an attempt to maximize returns and provide earnings stability, with a focus on reducing our environmental footprint to support the long-term viability of our operations.

We seek to be the supplier of choice to the markets we serve. It is critical to our success that our customers recognize our ability to create value for them based on the price they pay for our products.

As we plan for our future, we carefully weigh our choices for use of our cash flow. We will continue to deploy cash in ways that we believe achieve the best return for our investors, such as enhancing dividends, repurchasing shares and growing our potash business as value-adding opportunities arise.

15 PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q


Key Performance Drivers - Performance Compared to Targets

Through our integrated value model, we set, evaluate and refine our goals and priorities to drive improvements that benefit all those impacted by our business. We demonstrate our accountability by tracking and reporting our progress against targets related to each goal. Our long-term goals and 2013 targets are set out on pages 42 to 52 of our 2012 Annual Integrated Report. A summary of our progress against selected goals and representative annual targets is set out below.

                      Representative        Performance
Goal                  2013 Annual Target    to March 31, 2013
Create superior       Exceed total          PotashCorp's total shareholder return
long-term             shareholder return    was -3 percent in the first three months
shareholder value.    performance for       of 2013 compared to our sector's
                      our sector and the    weighted average return (based on market
                      DAXglobal             capitalization) of -1 percent and the
                      Agribusiness          DAXglobal Agribusiness Index weighted
                      Index.                average return (based on market
                                            capitalization) of 4 percent.
Be the supplier of    Reduce domestic       The domestic potash net rail cycle time
choice to the         potash net rail       through the Chicago corridor during the
markets we serve.     cycle time through    first quarter of 2013 was higher than
                      the Chicago           the comparable quarter in both 2011 and
                      corridor by 10        2012. Rail performance was impacted by
                      percent in 2014,      severe and prolonged winter weather in
                      compared to 2011      the Canadian prairies increasing transit
                      levels.               times and yard dwell during the quarter.
                                            We view this as a single quarter impact
                                            to the business and anticipate improved
                                            performance for the balance of the year.
                                            Improved net rail cycle times during
                                            subsequent quarters should allow us to
                                            achieve our targeted performance on an
                                            annual basis in 2013.
Attract and retain    Maintain an annual    Employee turnover rate (excluding
talented,             employee turnover     retirements) on an annualized basis for
motivated and         rate (excluding       the first three months of 2013 was 4.5
productive            retirements) of       percent.
employees who are     5 percent or less.
committed to our
long-term goals.
Achieve no harm to    Become one of the     A five-year strategic plan and a
people.               safest companies      benchmark group of best-in-class peer
                      in the world          companies are expected to be developed
                      within five years     by the second quarter of 2013.
                      by achieving a
                      recordable injury
                      rate in the lowest
                      quartile of a
                      best-in-class peer
                      group.

                      Reduce total site     During the first three months of 2013,
                      recordable injury     total site recordable injury rate was
                      rate to 1.25 (per     0.90.
                      200,000 hours
                      worked) or lower.
Achieve no damage     Reduce total          Annualized total reportable incidents
to the                reportable            were up 47 percent during the first
environment.          incidents             three months of 2013 compared to 2012
                      (releases, permit     annual levels. Compared to the first
                      excursions and        three months of 2012, total reportable
                      spills) by            incidents were flat.
                      15 percent from
                      2012 levels.

Performance Overview

This discussion and analysis are based on the company's unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q (financial statements in this Form 10-Q) based on International Financial Reporting Standards, as issued by the International Accounting Standards

Board (IFRS), unless otherwise stated. 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 2012 Annual Integrated Report.

Earnings Guidance - First Quarter 2013

Company Guidance Actual Results
Earnings per share $ 0.50 - $0.65 $ 0.63

         PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q   16


--------------------------------------------------------------------------------
Overview of Actual Results





                                                             Three Months Ended March 31
Dollars (millions) - except per-share amounts       2013        2012        Change        % Change
Sales                                             $  2,100     $ 1,746      $   354              20
Gross margin                                           867         698          169              24
Operating income                                       817         685          132              19
Net income                                             556         491           65              13
Net income per share - diluted                        0.63        0.56         0.07              13
Other comprehensive income                             197         110           87              79

Earnings in the first quarter of 2013 were higher than the first quarter of 2012 due mostly to higher potash sales volumes, partially offset by lower potash prices. Record first-quarter nitrogen gross margin improved primarily due to increased sales prices while phosphate gross margin fell mainly due to lower fertilizer prices and volumes.

Potash shipments to all major markets accelerated during the first quarter. In North America, dealers began positioning product to meet farmers' significant spring requirements. First-quarter domestic shipments from North American potash producers rose 56 percent above those of the same period last year and dealers' need to secure additional product remained high as the quarter closed. Buyers in key offshore markets also turned their attention to securing new supply after limited activity in the final quarter of 2012. As a result, offshore shipments from North American producers were 74 percent above last year's first quarter. With China's early settlement of potash supply contracts and strong demand in Brazil, shipments accelerated during the quarter, culminating in a monthly export record in March. Indian customers returned to the potash market, although movement was limited as new contracts with major suppliers were not settled until mid-quarter. Following a weak market to close 2012, prices in all key regions reset late in the year, resulting in lower realizations during the first quarter of 2013.

In nitrogen, the slow start to the spring season in North America delayed demand during the quarter. While prices for nitrogen products - especially ammonia - remained at historically high levels, a significant rise in urea imports to the US ahead of the spring season led to weaker urea prices relative to other nitrogen products.

Phosphate markets continued to face challenges due to uncertainty surrounding the timing and extent of a return in demand from India, which in recent years accounted for more than 30 percent of global trade in solid phosphate fertilizers. While a rebound in North American demand and strong US producer exports to Latin America partially offset the absence of significant Indian demand, total US shipments trailed those of the previous year. This resulted in lower prices for phosphate fertilizer products compared to the first quarter of 2012.

Other significant factors that affected earnings in the first quarter of 2013 compared to the same period in 2012 were higher income taxes due to increased earnings before taxes and higher provincial mining and other taxes on increased potash sales. Other comprehensive income for the first quarter of 2013 was mainly the result of an increase in the fair value of our investments in Israel Chemicals Ltd. (ICL) and Sinofert Holdings Limited (Sinofert). Other comprehensive income for the first quarter of 2012 was primarily impacted by a rise in the fair value of our investment in ICL and was partially offset by a decline in the fair value of our investment in Sinofert.

17 PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q


Balance Sheet

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Property, plant and equipment increased primarily (70 percent) due to our previously announced potash capacity expansions and other potash projects. Available-for-sale investments rose due to the higher fair value of our investments in ICL and Sinofert. As at March 31, 2013, $476 million (December 31, 2012 - $481 million) of our cash and cash equivalents were held in certain foreign subsidiaries. There are no current plans to repatriate these funds in a taxable manner.

Payables and accrued charges were impacted by (1) lower trade payables; (2) higher dividends payable due to announced increases in dividends per share; and
(3) increased interest payable due to timing of routine interest payments. Deferred income tax liabilities increased primarily due to tax depreciation exceeding accounting depreciation.

Equity was impacted by net income, other comprehensive income (both discussed in more detail above) and dividends declared during the first three months of 2013.

Operating Segment Review

We report our results (including gross margin) in three business segments:
potash, nitrogen and phosphate as described in Note 5 to the financial statements in this Form 10-Q. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. Management includes net sales in segment disclosures in the unaudited interim condensed consolidated financial statements pursuant to IFRS, which require 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, nitrogen and phosphate 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. Realized prices refer to net sales prices.

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.

PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q 18


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Potash



Potash Financial Performance





                                                                                                      Three Months Ended March 31
                                                                    Dollars (millions)                      Tonnes (thousands)                   Average per Tonne(1)
                                                             2013        2012        % Change        2013        2012        % Change       2013        2012       % Change
Manufactured product
Net sales
North America                                               $  331      $  199              66          794         400             99     $  417      $  497            (16 )
Offshore                                                       477         344              39        1,432         849             69     $  333      $  406            (18 )
                                                               808         543              49        2,226       1,249             78     $  363      $  435            (17 )
Cost of goods sold                                            (304 )      (218 )            39                                             $ (136 )    $ (175 )          (22 )
Gross margin                                                   504         325              55                                             $  227      $  260            (13 )
Other miscellaneous and purchased product gross margin(2)        -           2            (100 )
Gross Margin                                                $  504      $  327              54                                             $  227      $  262            (13 )

(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.

(2) Comprised of net sales of $6 million (2012 - $6 million) less cost of goods sold of $6 million (2012 - $4 million).

Potash gross margin variance attributable to:

                                                             Three Months Ended March 31
                                                                    2013 vs. 2012
                                                                            Change in
                                                                          Prices/Costs
                                               Change in              Net          Cost of
Dollars (millions)                           Sales Volumes           Sales        Goods Sold       Total
Manufactured product
North America                               $            158        $   (63 )    $          4      $   99
Offshore                                                 182           (105 )               3          80
Change in market mix                                      (7 )            8                (1 )         -
Total manufactured product                  $            333        $  (160 )    $          6         179
Other miscellaneous and purchased product                                                              (2 )
Total                                                                                              $  177

19 PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q



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Canpotex Limited (Canpotex) sales to major markets, by percentage of sales volumes, were as follows:

                                                  Three Months Ended March 31
                                         2013         2012       Change       % Change
     Asia (excluding China and India)        39          70          (31 )          (44 )
     Latin America                           27          12           15            125
     China                                   25           7           18            257
     India                                    3           4           (1 )          (25 )
     Oceania, Europe and Other                6           7           (1 )          (14 )
                                            100         100

PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q 20


The most significant contributors to the change in total gross margin quarter over quarter were as follows(1):

(1) Direction of arrows refers to impact on gross margin.

         Net Sales Prices            Sales Volumes          Cost of Goods Sold
   i Our average realized         h Strong engagement    h Brine management costs
   potash price trailed the       in key markets         fell as our tolling
   first quarter of 2012,         pushed sales           agreement at Esterhazy
   reflecting lower pricing       volumes                expired at the end of
   that took hold late in that    significantly above    2012.
   year.                          first-quarter 2012.
                                  With limited dealer    h 16 shutdown weeks were
                                  inventory carried      taken in 2013 mainly as
                                  into 2013 and          a result of our strategy
                                  strong agricultural    to match production with
                                  fundamentals, North    market demand and for
                                  American sales         expansion-related
                                  volumes nearly         activities (29 shutdown
                                  doubled the volumes    weeks were taken in 2012
                                  sold in the same       to match supply to
                                  period last year.      demand; during this
                                                         downtime, we opted to
                                  h Offshore demand      allocate resources to
                                  accelerated during     non-production
                                  the quarter. Our       activities rather than
                                  New Brunswick          lay off employees, which
                                  facility sold          resulted in higher
                                  record                 shutdown costs).
                                  first-quarter
                                  volumes to Latin
                                  America and
                                  Canpotex shipped,
                                  in March, its
                                  highest one-month
                                  total ever to this
                                  market. China
                                  resumed seaborne
                                  deliveries in the
                                  quarter.

Potash Non-Financial Performance





                                                 Three Months Ended March 31
                                             2013             2012        % Change
      KCl tonnes produced (thousands)          2,025            1,575            29
      Total site recordable injury rate         1.43             2.16           (34 )
      Employee turnover percentage               4.8              4.7             2
      Environmental incidents                      6                2           200

Potash production increased due to the reduction in shutdown weeks as discussed above.

Total site recordable injury rate declined because of the effort by the site teams and an external consultant on targeted safety improvement projects at Allan, Cory and Rocanville.

The increase in environmental incidents in potash is due largely to several failures of refrigerant lines in new HVAC units installed at Picadilly.

21 PotashCorp 2013 First Quarter Quarterly Report on Form 10-Q


Nitrogen

Nitrogen Financial Performance





                                                                                         Three Months Ended March 31
                                                     Dollars (millions)                      Tonnes (thousands)                     Average per Tonne(1)
                                               2013        2012       % Change        2013        2012        % Change        2013         2012        % Change
Manufactured product
Net sales
Ammonia                                       $  311      $  230             35          513         516             (1 )    $   606      $  447              36
Urea                                             145         154             (6 )        305         334             (9 )    $   476      $  462               3
Solutions/Nitric acid/Ammonium nitrate           161         110             46          622         440             41      $   259      $  249               4
                                                 617         494             25        1,440       1,290             12      $   429      $  383              12
Cost of goods sold                              (349 )      (288 )           21                                              $  (242 )    $ (223 )             9
Gross margin                                     268         206             30                                              $   187      $  160              17
Other miscellaneous and purchased product
gross margin(2)                                    3          13            (77 )
Gross Margin                                  $  271      $  219             24                                              $   188      $  170              11

(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.

(2) Comprised of net sales of $17 million (2012 - $27 million) less cost of goods sold of $14 million (2012 - $14 million).

Nitrogen gross margin variance attributable to:

                                                             Three Months Ended March 31
                                                                    2013 vs. 2012
                                                                           Change in
                                                                         Prices/Costs
                                                Change in           Net           Cost of
Dollars (millions)                            Sales Volumes        Sales         Goods Sold       Total
Manufactured product
. . .
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