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POT > SEC Filings for POT > Form 10-Q on 29-Oct-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


29-Oct-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 October 29, 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.

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


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 September 30, 2013
Create superior       Exceed total          PotashCorp's total shareholder return
long-term             shareholder return    was -21 percent in the first nine 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 -23 percent and the
                      Agribusiness          DAXglobal Agribusiness Index weighted
                      Index.                average return (based on market
                                            capitalization) of NIL 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    third quarter of 2013 continued to
                      the Chicago           improve compared to both the first and
                      corridor by 10        second quarters of 2013 and the
                      percent in 2014,      comparable third quarter of the
                      compared to 2011      benchmark 2011 period. Improved rail
                      levels.               performance during the third quarter of
                                            2013 resulted in a 10 percent reduction
                                            in the net rail cycle time from the
                                            third quarter 2011 benchmark period.
                                            This improvement helped offset higher
                                            first quarter 2013 cycle times related
                                            to severe winter weather in the Canadian
                                            prairies and lowered our performance for
                                            the first nine months of 2013 to
                                            slightly below the comparable period in
                                            2011.
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 nine months of 2013 was 4.8
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 was developed
people.               safest resource       in the second quarter of 2013. A
                      companies in the      benchmark group of best-in-class peer
                      world within five     companies will be developed in the
                      years by achieving    fourth quarter of 2013.
                      a recordable
                      injury rate in the
                      lowest quartile of
                      a best-in-class
                      peer group.

                      Reduce total site     During the first nine months of 2013,
                      recordable injury     total site recordable injury rate was
                      rate to 1.25 (per     1.12.
                      200,000 hours
                      worked) or lower.
Achieve no damage     Reduce total          Annualized total reportable incidents
to the                reportable            were down 11 percent during the first
environment.          incidents             nine months of 2013 compared to 2012
                      (releases, permit     annual levels. Compared to the first
                      excursions and        nine months of 2012, total reportable
                      spills) by            incidents were down 28 percent.
                      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 - Third Quarter 2013





                                       Original
                                   Company Guidance       Actual Results
             Earnings per share   $     0.45 - $0.60     $           0.41

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


Overview of Actual Results





                                          Three Months Ended September 30                        Nine Months Ended September 30
Dollars (millions) - except
per-share amounts                   2013         2012       Change       % Change        2013         2012        Change       % Change
Sales                             $  1,520      $ 2,143     $  (623 )          (29 )    $ 5,764      $ 6,285     $   (521 )           (8 )
Gross margin                           484          927        (443 )          (48 )      2,330        2,824         (494 )          (17 )
Operating income                       505          918        (413 )          (45 )      2,249        2,460         (211 )           (9 )
Net income                             356          645        (289 )          (45 )      1,555        1,658         (103 )           (6 )
Net income per share - diluted        0.41         0.74       (0.33 )          (45 )       1.77         1.89        (0.12 )           (6 )
Other comprehensive (loss)
income                                (258 )        313        (571 )          n/m         (561 )        444       (1,005 )          n/m

n/m = not meaningful

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Earnings in the third quarter of 2013 were lower than the third quarter of 2012 due mostly to lower potash volumes and lower prices in potash, nitrogen and phosphate. For the first nine months of 2013, earnings were lower than 2012 due to lower potash and phosphate prices, partially offset by higher potash volumes, and a $341 million non-tax deductible charge related to the impairment of our investment in Sinofert Holdings Limited (Sinofert) in the second quarter of 2012 that did not repeat in 2013.

The need for proper crop nutrition fueled strong demand for potash through the first half of 2013, but an announced change in strategy by Uralkali in late July created considerable market uncertainty and stalled global demand. Key offshore markets - particularly large contract buyers in China and India - delayed purchases or were reluctant to accept major tonnage against existing contracts. Although Brazil continued to be a region of relative strength, with buyers procuring tonnes in preparation for their upcoming planting season, offshore shipments from North American producers fell to one of the lowest third-quarter totals in recent history. In North America, a pause in purchasing early in the quarter and a late crop resulted in shipments below the record achieved in 2012, a period when demand was pulled forward because an early harvest enabled strong fall applications. In both the offshore and North American markets, pricing weakened as the quarter progressed.

In nitrogen, US demand for ammonia, urea and nitrogen solutions was relatively flat compared to last year and production from low-

cost domestic producers increased, reducing the need for higher-cost offshore imports. While this situation benefited domestic producers, the combination of typical seasonal slowness and increased availability of new supply from offshore exporting regions softened key global reference prices through the quarter.

Global phosphate markets were subdued during the quarter, as strong Latin American demand was offset by the continued absence of significant engagement from India and a delayed start to the US fall application season. Solid phosphate fertilizer shipments from US producers were slightly below those of both the third quarter and the first nine months of 2012. This environment put downward pressure on prices for most phosphate products.

Other significant factors that affected earnings quarter over quarter and year over year were lower provincial mining and other taxes due primarily to the timing of annual potash production tax accruals, lower income taxes, due to decreased ordinary earnings before taxes, and lower earnings from equity-accounted investees.

Other comprehensive loss for the third quarter of 2013 was due to decreases in the fair value of our investments in Israel Chemicals Ltd. (ICL) and Sinofert. Other comprehensive income in the third quarter of 2012 was primarily the result of an increase in the fair value of our investments in ICL and Sinofert. Other comprehensive loss for the first nine months of 2013 was mainly the result of a decrease in the fair value of our investments in ICL and Sinofert, partially offset by a net actuarial gain resulting from a

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


remeasurement of our defined benefit plans. Other comprehensive income for the first nine months of 2012 was primarily affected by the reclassification to income of a $341 million unrealized loss on

our investment in Sinofert which was impaired in the second quarter of 2012, a remeasurement of our defined benefit plans and an increase in the fair value of our investment in ICL.

Balance Sheet

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The most significant contributors to the changes in our statements of financial position were as follows(1):

(1) Direction of arrows refers to increase or decrease.

                 Assets                                  Liabilities
i  Available-for-sale investments were      i  Long-term debt declined as our
mainly impacted by the lower fair           senior notes due May 15, 2014 were
value of our investments in ICL and         classified as current during the
Sinofert.                                   second quarter of 2013.

h  Property, plant and equipment            h  Deferred income tax liabilities
increased primarily (72 percent) due to     increased primarily due to tax
our previously announced potash capacity    depreciation exceeding accounting
expansions and other potash projects.       depreciation, the tax impact on the
                                            remeasurement of our defined benefit
i  Receivables fell due to a reduction      plans in the second quarter of 2013,
in income tax, potash production tax        reduced deferred tax assets on
and trade receivables from Canpotex         unexercised stock options and a
Limited (Canpotex).                         Canadian income tax rate increase.

                                            i  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) fewer other payables
                                            due to decreases in accrued capital
                                            expenditures across all plant sites
                                            and payments made to settle the
                                            company's eight anti-trust lawsuits.

                                            i  Asset retirement obligations and
                                            accrued environmental costs were
                                            primarily impacted by the use of a
                                            higher risk-free interest rate.

Equity

h Equity was impacted by net income, other comprehensive loss (both discussed in more detail above), dividends declared and common shares repurchased for cancellation (see Note 5 to the financial statements in this Form 10-Q) during the first nine months of 2013.

As at September 30, 2013, $496 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.

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


Operating Segment Review

We report our results (including gross margin) in three business segments:
potash, nitrogen and phosphate as described in Note 6 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.

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Potash

Potash Financial Performance





                                                                                                    Three Months Ended September 30
                                                                   Dollars (millions)                     Tonnes (thousands)                    Average per Tonne(1)
                                                             2013        2012       % Change        2013        2012       % Change        2013        2012       % Change
Manufactured product
Net sales
North America                                               $  240      $  443            (46 )        721         951           (24 )    $  333      $  466            (29 )
Offshore                                                       240         441            (46 )        843       1,107           (24 )    $  285      $  398            (28 )
                                                               480         884            (46 )      1,564       2,058           (24 )    $  307      $  429            (28 )
Cost of goods sold                                            (248 )      (330 )          (25 )                                           $ (159 )    $ (160 )           (1 )
Gross margin                                                   232         554            (58 )                                           $  148      $  269            (45 )
Other miscellaneous and purchased product gross margin(2)       (4 )         -            n/m
Gross Margin                                                $  228      $  554            (59 )                                           $  146      $  269            (46 )

n/m = not meaningful

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

(2) Comprised of net sales of $2 million (2012 - $3 million) less cost of goods sold of $6 million (2012 - $3 million).

         PotashCorp 2013 Third Quarter Quarterly Report on Form 10-Q   22


--------------------------------------------------------------------------------
                                                                                                     Nine Months Ended September 30
                                                                    Dollars (millions)                       Tonnes (thousands)                   Average per Tonne(1)
                                                             2013         2012        % Change        2013        2012        % Change       2013        2012       % Change
Manufactured product
Net sales
North America                                               $   923      $   968             (5 )      2,349       2,002             17     $  393      $  484            (19 )
Offshore                                                      1,271        1,588            (20 )      3,986       3,911              2     $  319      $  406            (21 )
                                                              2,194        2,556            (14 )      6,335       5,913              7     $  346      $  432            (20 )
Cost of goods sold                                             (842 )       (876 )           (4 )                                           $ (133 )    $ (148 )          (10 )
Gross margin                                                  1,352        1,680            (20 )                                           $  213      $  284            (25 )
Other miscellaneous and purchased product gross margin(2)        (7 )          2            n/m
Gross Margin                                                $ 1,345      $ 1,682            (20 )                                           $  212      $  284            (25 )

n/m = not meaningful

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

(2) Comprised of net sales of $9 million (2012 - $10 million) less cost of goods sold of $16 million (2012 - $8 million).

Potash gross margin variance attributable to:

                                                   Three Months Ended September 30                                    Nine Months Ended September 30
                                                            2013 vs. 2012                                                     2013 vs. 2012
                                                                     Change in                                                         Change in
                                                                   Prices/Costs                                                      Prices/Costs
                                        Change in              Net          Cost of                       Change in              Net          Cost of
Dollars (millions)                    Sales Volumes           Sales        Goods Sold      Total        Sales Volumes           Sales        Goods Sold      Total
Manufactured product
North America                        $           (101 )      $   (82 )    $          3     $ (180 )    $            134        $  (213 )    $          6     $  (73 )
Offshore                                          (81 )          (92 )              31       (142 )                  26           (347 )              66       (255 )
Change in market mix                               14            (16 )               2          -                   (17 )           15                 2          -
Total manufactured product           $           (168 )      $  (190 )    $         36       (322 )    $            143        $  (545 )    $         74       (328 )
Other miscellaneous and purchased
product                                                                                        (4 )                                                              (9 )
Total                                                                                      $ (326 )                                                          $ (337 )

[[Image Removed: LOGO]] [[Image Removed: LOGO]]

23 PotashCorp 2013 Third Quarter Quarterly Report on Form 10-Q



[[Image Removed: LOGO]] [[Image Removed: LOGO]]

Offshore sales to major markets, by percentage of sales volumes, were as follows:

                                                        Three Months Ended September 30                                                       Nine Months Ended September 30
                                             By Canpotex                             From New Brunswick                           By Canpotex                              From New Brunswick
                                   2013           2012        % Change        2013         2012       % Change         2013           2012          % Change        2013         2012       % Change
Other Asia (excluding China
and India)                             39             41             (5 )          -           -              -            41             45               (9 )          -           -              -
Latin America                          34             32              6          100         100              -            28             29               (3 )        100         100              -
China                                   8             12            (33 )          -           -              -            17             15               13            -           -              -
. . .
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