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POT > SEC Filings for POT > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for POTASH CORP OF SASKATCHEWAN INC

Form 10-Q for POTASH CORP OF SASKATCHEWAN INC


29-Apr-2014

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 29, 2014. 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, 2013 (Form 10-K), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. 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 largest potash producer by capacity, we are responsible for nearly one-fifth of global capacity through our Canadian operations. To enhance our global footprint, we have investments in four potash-related businesses in South America, the Middle East and Asia. We complement our potash assets with focused positions in nitrogen and phosphate.

A detailed description of our market and customers can be found on pages 54 and
55 (potash), 65 (nitrogen) and 73 (phosphate) in our 2013 Annual Integrated Report.

PotashCorp Strategy

Our business strategy is detailed on pages 20 to 23 in our 2013 Annual Integrated Report. Key strategies, risks and mitigation are outlined for each of our nutrients on pages 52 (potash), 63 (nitrogen) and 71 (phosphate) in our 2013 Annual Integrated Report.

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 2014 targets are set out on pages 40 to 50 of our 2013 Annual Integrated Report. A summary of our progress against selected goals and representative annual targets is set out below.

                   Representative                              Performance
Goal               2014 Annual Target                          to March 31, 2014
Create superior    Exceed total shareholder return             PotashCorp's total shareholder return
long-term          performance for our sector and the          was 11 percent in the first three months
shareholder        DAXglobal Agribusiness Index.               of 2014 compared to our sector's
value.                                                         weighted average return (based on market
                                                               capitalization) of 6 percent and the
                                                               DAXglobal Agribusiness Index weighted
                                                               average return (based on market
                                                               capitalization) of 1 percent.
Be the supplier    Reduce domestic potash net rail cycle       Severe and prolonged winter weather
of choice to       time through the Chicago corridor by        throughout Canada and the United States,
the markets we     10 percent in 2014, compared to 2011        combined with increased rail shipments
serve.             levels.                                     for grain and other commodities,
                                                               impacted service for all rail customers.
                                                               Our first quarter 2014 net rail cycle
                                                               time through the Chicago corridor was 49
                                                               percent above the benchmark 2011 first
                                                               quarter and 48 percent above the average
                                                               of the prior three first quarter
                                                               periods. We are seeing service
                                                               improvements in the second quarter but
                                                               backlogs persist for all rail shippers
                                                               and we do not anticipate a quick return
                                                               to historical net cycle times.
Attract and        Fill 75 percent of senior staff openings    The percentage of senior staff positions
retain talented,   with qualified internal candidates.         filled internally in the first three
motivated and                                                  months of 2014 was 100 percent.
productive
employees who
are committed
to our long-term
goals.
Achieve no harm    Achieve zero life-altering injuries at      Tragically, we had a fatality at our
to people.         our sites.                                  Cory potash facility during the first
                                                               quarter of 2014.

                   Reduce total site recordable injury rate    During the first three months of 2014,
                   to                                          total site recordable injury rate
                   0.95 (per 200,000 hours worked) or lower.   was 1.06.
Achieve no         Reduce total reportable incidents           Annualized total reportable incidents
damage to the      (releases, permit excursions and spills)    were up 18 percent during the first
environment.       by 15 percent from 2013 levels.             three months of 2014 compared to 2013
                                                               annual levels. Compared to the first
                                                               three months of 2013, total reportable
                                                               incidents were down 29 percent.

15 PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q


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, this Form 10-Q should be read carefully, together with our 2013 Annual Integrated Report.

Earnings Guidance - First Quarter 2014

Company Guidance Actual Results
Earnings per share $ 0.30 - $ 0.35 $ 0.40

Overview of Actual Results





                                                              Three Months Ended March 31
Dollars (millions) - except per-share amounts        2014        2013        Change       % Change
Sales                                               $ 1,680     $ 2,100      $  (420 )          (20 )
Gross margin                                            565         867         (302 )          (35 )
Operating income                                        531         817         (286 )          (35 )
Net income                                              340         556         (216 )          (39 )
Net income per share - diluted                         0.40        0.63        (0.23 )          (37 )
Other comprehensive income                               57         197         (140 )          (71 )

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Earnings in the first quarter of 2014 were lower than the first quarter of 2013 due mostly to lower potash prices. Lower sales prices in nitrogen more than offset higher sales volumes. Phosphate was impacted by both lower prices and sales volumes.

Potash demand and spot market pricing strengthened throughout the first quarter. In North America, demand was robust as fertilizer distributors worked to position product ahead of the spring planting season. Even as shipments from domestic producers climbed 48 percent above those during the same period last year, ongoing rail constraints - precipitated by difficult winter conditions and a record grain harvest in Canada - kept dealer supplies tight. Although demand from Brazil and Southeast Asian countries strengthened, North American producers' offshore shipments fell slightly below those of the same period last year as

logistical challenges constrained their abilities to satisfy all demands for product. Offshore sales were further impacted by delayed supply contracts with Chinese and Indian buyers relative to 2013. Amidst strengthening market fundamentals, potash prices in all spot markets increased from the beginning of 2014 - most notably for granular product - but remained well below those of the comparative period in 2013.

In nitrogen, first-quarter ammonia production in the US reached its highest level in more than a decade as additional capacity came online and producers responded to strong agricultural and industrial demand. While ammonia prices trailed the historically high levels of 2013 - a period characterized by especially strong demand and supply challenges in key producing regions - they moved up sharply as the quarter came to a close. Demand for

PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q 16


urea was also robust ahead of the North American spring planting season. With imports lower than those of the previous year, North American supply tightened and urea prices strengthened over the course of the quarter, although key benchmarks remained below those of the same period in 2013.

Production and logistical challenges also impacted global phosphate markets. This was especially true in North America where a combination of supply disruptions and an improved demand environment caused prices for all phosphate fertilizer products to strengthen during the quarter. Despite this move upward, weak market fundamentals through the second half of 2013 kept pricing levels for the quarter below those of the comparative period last year.

Other significant factors that affected earnings quarter over quarter were lower income taxes (due to decreased ordinary earnings before taxes and fewer discrete tax adjustments), a special dividend received from Israel Chemicals Ltd. (ICL) (none in the first three months of 2013) and a non-tax deductible charge related to the impairment of our investment in Sinofert Holdings Limited (Sinofert) in first-quarter 2014. Other comprehensive income mainly consisted of an increase in the fair value of our investment in ICL. Other comprehensive income for the first quarter of 2013 was mainly the result of an increase in the fair value of our investments in ICL and Sinofert.

Statement of Financial Position

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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.

              Liabilities                                   Equity
i Short-term debt and current portion of    h Equity was impacted by net income
long-term debt declined due to a            and other comprehensive income (both
decrease in our outstanding commercial      discussed in more detail above),
paper.                                      dividends declared and common shares
                                            repurchased for cancellation (see Note
h Long-term debt was higher as a result     5 to the financial statements in this
of the issuance of $750 million in          Form 10-Q) during the first three
senior notes in the first quarter of        months of 2014.
2014.

Cash and cash equivalents held in certain foreign subsidiaries were $13 million at March 31, 2014, down from $480 million at December 31, 2013 as a result of a repatriation of funds in the first quarter of 2014. There are no current plans to repatriate the funds at March 31, 2014 in a taxable manner.

17 PotashCorp 2014 First 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. We include net sales in segment disclosures in the financial statements in this Form 10-Q pursuant to IFRS, which require segmentation based upon our internal organization and reporting of revenue and profit measures. 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. Certain of the prior years' figures within the nitrogen segment have been reclassified to conform with the current year's presentation as disclosed in Note 13 to the financial statements in this Form 10-Q.

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 March 31
                                                                   Dollars (millions)                      Tonnes (thousands)                    Average per Tonne(1)
                                                             2014        2013       % Change        2014        2013        % Change        2014        2013       % Change
Manufactured product
Net sales
North America                                               $  291      $  331            (12 )        988         794             24      $  295      $  417            (29 )
Offshore                                                       287         477            (40 )      1,323       1,432             (8 )    $  217      $  333            (35 )
                                                               578         808            (28 )      2,311       2,226              4      $  250      $  363            (31 )
Cost of goods sold                                            (274 )      (304 )          (10 )                                            $ (119 )    $ (136 )          (13 )
Gross margin                                                   304         504            (40 )                                            $  131      $  227            (42 )
Other miscellaneous and purchased product gross margin(2)       (4 )         -            n/m
Gross Margin                                                $  300      $  504            (40 )                                            $  130      $  227            (43 )

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 $7 million (2013 - $6 million) less cost of goods sold of $11 million (2013 - $6 million).

         PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q   18


--------------------------------------------------------------------------------
Potash gross margin variance attributable to:





                                                             Three Months Ended March 31
                                                                    2014 vs. 2013
                                                                          Change in
                                                                        Prices/Costs
                                                Change in           Net           Cost of
Dollars (millions)                            Sales Volumes        Sales        Goods Sold        Total
Manufactured product
North America                                $            64      $   (121 )    $        11      $    (46 )
Offshore                                                 (27 )        (152 )             25          (154 )
Change in market mix                                     (13 )          12                1             -
Total manufactured product                   $            24      $   (261 )    $        37          (200 )
Other miscellaneous and purchased product                                                              (4 )
Total                                                                                            $   (204 )

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

                                                                     Three Months Ended March 31
                                                        By Canpotex                            From New Brunswick
                                              2014           2013        % Change        2014         2013      % Change
Other Asian countries(1)                          47             39             21            -           -             -
Latin America                                     27             27              -          100         100             -
China                                             16             25            (36 )          -           -             -
India                                              3              3              -            -           -             -
Oceania, Europe and Other                          7              6             17            -           -             -
                                                 100            100                         100         100

(1) All Asian countries except China and India.

19 PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q


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 Potash prices began to      h North American totals       h Two shutdown weeks
trend upward in key markets   were higher as we             were taken in 2014 as a
as the quarter progressed,    leveraged our extensive       result of the fatality
but the sharp decline         warehousing and               at Cory while 16
during the second half of     distribution capabilities     shutdown weeks were
2013 weighed on               to meet strong demand.        taken in 2013 to match
realizations. As a result,                                  production with demand
our first-quarter average     i Our offshore sales          and for
realized potash price was     volumes fell as delayed       expansion-related
well below the same period    Chinese and Indian            activities.
last year.                    contracts and rail
                              constraints limited           h The Canadian dollar
                              shipments.                    weakened relative to the
                                                            US dollar, reducing cost
                                                            of goods sold.

Potash Non-Financial Performance





                                                                       Three Months Ended March 31
                                                                  2014             2013          % Change
Production         KCl tonnes produced (thousands)                  2,395            2,025              18
Safety             Total site recordable injury rate                 1.34             1.43              (6 )
                   Life-altering injuries                               1                -             n/m
Employee           Percentage of senior staff positions
                   filled internally                                 100%               -%             n/m
Environmental      Waste (000's tonnes)                             4,500            4,504               -
                   Environmental incidents                              4                6             (33 )

n/m = not meaningful

Production

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

Safety

Tragically, we had a fatality at our Cory potash facility during the first quarter of 2014.

Employee

Three senior staff positions were filled in the first quarter of 2014. In the same period in 2013 there were no relevant transfers or hires.

Environmental

Environmental incidents in the first three months of 2014 included brine and slurry pipeline failures resulting in brine spills. Environmental incidents in the first three months of 2013 were due largely to several failures of refrigerant lines in new HVAC units installed at New Brunswick.

         PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q   20


--------------------------------------------------------------------------------
Nitrogen

Nitrogen Financial Performance





                                                                                    Three Months Ended March 31
                                                 Dollars (millions)                      Tonnes (thousands)                   Average per Tonne(1)
                                           2014        2013       % Change        2014        2013        % Change       2014        2013       % Change
Manufactured product(2)
Net sales
Ammonia                                   $  246      $  342            (28 )        583         559              4     $  422      $  613            (31 )
Urea                                         150         145              3          348         305             14     $  433      $  476             (9 )
Solutions, Nitric acid,
Ammonium nitrate                             164         161              2          698         622             12     $  234      $  259            (10 )
                                             560         648            (14 )      1,629       1,486             10     $  344      $  436            (21 )
Cost of goods sold                          (324 )      (380 )          (15 )                                           $ (199 )    $ (255 )          (22 )
Gross margin                                 236         268            (12 )                                           $  145      $  181            (20 )
Other miscellaneous and purchased
product gross margin(3)                        3           3              -
Gross Margin                              $  239      $  271            (12 )                                           $  147      $  182            (19 )

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

(2) Includes inter-segment ammonia sales, comprised of: net sales $25 million, cost of goods sold $12 million and 48,000 sales tonnes (2013 - net sales $31 million, cost of goods sold $13 million and 46,000 sales tonnes). Inter-segment profits are eliminated on consolidation.

(3) Comprised of third-party and inter-segment sales, including: third-party net sales $15 million less cost of goods sold $11 million (2013 - net sales $17 million less cost of goods sold $14 million) and inter-segment net sales $NIL less cost of goods sold $1 million (2013 - net sales $14 million less cost of goods sold $14 million). Inter-segment profits are eliminated on consolidation.

Nitrogen gross margin variance attributable to:

                                                              Three Months Ended March 31
                                                                     2014 vs. 2013
                                                                           Change in
                                                                         Prices/Costs
                                                  Change in          Net           Cost of
Dollars (millions)                              Sales Volumes       Sales        Goods Sold       Total
Manufactured product
Ammonia                                        $            13     $   (111 )    $        33     $   (65 )
Urea                                                        12          (15 )              4           1
Solutions, NA, AN                                            -          (17 )             42          25
Hedge                                                        -            -                7           7
Change in product mix                                        7           (7 )              -           -
Total manufactured product                     $            32     $   (150 )    $        86         (32 )
Other miscellaneous and purchased product                                                              -
Total                                                                                            $   (32 )

21 PotashCorp 2014 First Quarter Quarterly Report on Form 10-Q

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                                            Three Months Ended March 31
                                       Sales Tonnes
                                       (thousands)            Price per Tonne
                                     2014        2013         2014         2013
             Fertilizer                 577         410     $    370       $ 453
             Industrial and Feed      1,052       1,076     $    330       $ 430
                                      1,629       1,486     $    344       $ 436

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.

. . .

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