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

Show all filings for POTASH CORP OF SASKATCHEWAN INC

Form 10-Q for POTASH CORP OF SASKATCHEWAN INC


29-Jul-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 July 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 June 30, 2014 Create superior Exceed total shareholder return PotashCorp's total shareholder return long-term performance for our sector and the was 17 percent in the first six months shareholder DAXglobal Agribusiness Index. of 2014 compared to our sector's value. weighted average return (based on market capitalization) of 5 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 5 percent. Be the supplier Reduce domestic potash net rail cycle The domestic potash net rail cycle time of choice to time through the Chicago corridor by through the Chicago corridor during the the markets we 10 percent in 2014, compared to 2011 second quarter of 2014 showed serve. levels. improvement over a very difficult 2014 first quarter performance. Persistent congestion created from an increase in North American rail volumes and a backlog of shipments due to severe winter conditions resulted in net rail cycle times higher in the 2014 second quarter than each of the previous three second quarter periods. Our second quarter net rail cycle time was 35 percent above the benchmark 2011 second quarter and 25 percent above the average of the prior three second quarters. For the first six months of 2014 our performance was 50 percent above our targeted net rail cycle time through the Chicago corridor. With continued rail congestion and resource shortages in the North American rail network we do not anticipate reaching our corporate goal of reducing the cycle time by 10 percent below the 2011 benchmark number. We continue to work with our carriers to prioritize our shipments.
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 six motivated and months of 2014 was 89 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 six months of 2014, to total site recordable injury rate
0.95 (per 200,000 hours worked) or lower. was 1.16. Achieve no Reduce total reportable incidents Annualized total reportable incidents damage to the (releases, permit excursions and spills) were up 29 percent during the first six environment. by 15 percent from 2013 levels. months of 2014 compared to 2013 annual levels. Compared to the first six months of 2013, total reportable incidents were up 10 percent.

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


Share Repurchase Program

In the second quarter of 2014, the company completed a share repurchase program as described in Note 5 to the financial statements in this Form 10-Q. During the program a total of 43,345,992 common shares were repurchased for cancellation at a cost of $1,476 million and an average price per share of $34.05.

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 - Second Quarter 2014

Company Guidance Actual Results
Earnings per share $ 0.40 -$ 0.45 $ 0.56

Overview of Actual Results





                                            Three Months Ended June 30                            Six Months Ended June 30
Dollars (millions) - except
per-share amounts                 2014         2013        Change       % Change        2014        2013        Change       % Change
Sales                            $ 1,892      $ 2,144      $  (252 )          (12 )    $ 3,572     $ 4,244      $  (672 )          (16 )
Gross margin                         747          979         (232 )          (24 )      1,312       1,846         (534 )          (29 )
Operating income                     686          927         (241 )          (26 )      1,217       1,744         (527 )          (30 )
Net income                           472          643         (171 )          (27 )        812       1,199         (387 )          (32 )
Net income per share - diluted      0.56         0.73        (0.17 )          (23 )       0.95        1.37        (0.42 )          (31 )
Other comprehensive (loss)
income                                (6 )       (500 )        494            (99 )         51        (303 )        354            n/m

n/m = not meaningful

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Earnings and gross margin in the second quarter and first half of 2014 were lower than the same periods in 2013 due mostly to lower potash prices. Lower sales prices in nitrogen were more than offset by higher sales volumes quarter over quarter. Year over year, lower sales prices in nitrogen were nearly offset by higher sales volumes and cost savings from lower natural gas costs and certain costs in 2013 that did not repeat in 2014. Phosphate was impacted by both lower prices and sales volumes quarter over quarter and year over year.

With all key potash markets engaged, global shipments accelerated through the second quarter. In North America, demand at the farm level was very strong through the spring planting season. Second-quarter shipments from domestic producers exceeded those of the prior year by 28 percent, with shipments for the first six months of 2014 approaching record totals. Shipments by North American producers to offshore markets increased from the first quarter as rail constraints began to improve and customers in all key markets actively secured

17 PotashCorp 2014 Second Quarter Quarterly Report on Form 10-Q


supply. Totals for both the quarter and year were relatively in line with prior period levels. Improving fundamentals - most notably for granular product - resulted in positive spot market pricing trends relative to the first quarter, although potash prices remained well below those of the comparative period in 2013.

In nitrogen, prices reflected typical seasonal patterns and moved lower as the quarter progressed. While offshore prices for ammonia and urea softened during the quarter relative to the same period last year, key North American benchmarks remained comparatively strong due to healthy demand and reduced imports.

After phosphate markets rebounded early in 2014, demand and pricing remained relatively stable through the second quarter. Continuing slow demand in India during first-half 2014 was largely offset by the strength of demand in other regions, in particular Brazil and North America. Increased availability of product from offshore competitors limited exports for US producers, but was offset by healthy domestic demand and lower output due to reported production challenges.

Other significant factors that affected earnings quarter over quarter were lower income taxes (due to decreased ordinary earnings before taxes and discrete tax adjustments) and lower dividends received from Israel Chemicals Ltd. (ICL). Year over year, earnings were impacted by lower income taxes (due to decreased ordinary earnings before taxes and discrete tax adjustments), a reduced share of earnings of equity-accounted investees, a special dividend received from ICL (none in the first half of 2013) and a non-tax deductible charge related to the impairment of our investment in Sinofert Holdings Limited (Sinofert) in the first half of 2014 (none in 2013).

Other comprehensive loss for the second quarter of 2014 mainly resulted from a decrease in the fair value of our investment in ICL. For the first half of 2014 other comprehensive income mainly resulted from an increase in the fair value of our investment in ICL. Other comprehensive loss for the second quarter and first half 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 remeasurement of our defined benefit plans.

Statement of Financial Position

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


--------------------------------------------------------------------------------
The most significant contributors to the changes in our statements of financial
position were as follows (direction of arrows refers to increase or decrease):



                 Assets                                 Liabilities
 i  Cash and cash equivalents held in      i  Short-term debt and current portion
 certain foreign subsidiaries were         of long-term debt declined due to the
 $24 million at June 30, 2014, down from   repayment of $500 million in senior
 $480 million at December 31, 2013 as a    notes in the second quarter of 2014.
 result of a repatriation of funds in
 the first quarter of 2014. There are no   i  Payables and accrued charges were
 current plans to repatriate the funds     lower largely due to reduced capital
 at June 30, 2014 in a taxable manner.     spending and timing of share
                                           repurchases outstanding at December
                                           31, 2013.

                                           h  Long-term debt was higher as a
                                           result of the issuance of $750 million
                                           in senior notes in the first quarter
                                           of 2014.

Equity i Equity was mainly impacted by net income (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 six months of 2014.

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


Potash

Potash Financial Performance





                                                                                                                   Three Months Ended June 30
                                                                               Dollars (millions)                      Tonnes (thousands)                    Average per Tonne (1)
                                                                         2014        2013       % Change        2014        2013        % Change        2014         2013       % Change
Manufactured product
Net sales
North America                                                           $  303      $  352            (14 )        943         834             13      $   321      $  421            (24 )
Offshore                                                                   362         554            (35 )      1,582       1,711             (8 )    $   229      $  324            (29 )
                                                                           665         906            (27 )      2,525       2,545             (1 )    $   263      $  356            (26 )
Cost of goods sold                                                        (261 )      (290 )          (10 )                                            $  (102 )    $ (114 )          (11 )
Gross margin                                                               404         616            (34 )                                            $   161      $  242            (33 )
Other miscellaneous and purchased product gross margin (2)                  (9 )        (3 )          200
Gross Margin                                                            $  395      $  613            (36 )                                            $   156      $  241            (35 )

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

(2) Comprised of net sales of $3 million (2013 - $1 million) less cost of goods sold of $12 million (2013 - $4 million).

                                                                                                                    Six Months Ended June 30
                                                                               Dollars (millions)                       Tonnes (thousands)                    Average per Tonne (1)
                                                                        2014         2013        % Change        2014        2013        % Change        2014         2013       % Change
Manufactured product
Net sales
North America                                                          $   594      $   683            (13 )      1,931       1,628             19      $   307      $  419            (27 )
Offshore                                                                   649        1,031            (37 )      2,905       3,143             (8 )    $   223      $  328            (32 )
                                                                         1,243        1,714            (27 )      4,836       4,771              1      $   257      $  359            (28 )
Cost of goods sold                                                        (535 )       (594 )          (10 )                                            $  (111 )    $ (124 )          (10 )
Gross margin                                                               708        1,120            (37 )                                            $   146      $  235            (38 )
Other miscellaneous and purchased product gross margin (2)                 (13 )         (3 )          333
Gross Margin                                                           $   695      $ 1,117            (38 )                                            $   144      $  234            (38 )

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

(2) Comprised of net sales of $10 million (2013 - $7 million) less cost of goods sold of $23 million (2013 - $10 million).

Potash gross margin variance attributable to:

                                                      Three Months Ended June 30                                      Six Months Ended June 30
                                                            2014 vs. 2013                                                   2014 vs. 2013
                                                                   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                         $            37      $   (95 )    $         (2 )    $  (60 )    $           101      $  (216 )    $          9     $ (106 )
Offshore                                          (30 )       (152 )              30        (152 )                (57 )       (304 )              55       (306 )
Change in market mix                              (14 )         13                 1           -                  (27 )         25                 2          -
Total manufactured product            $            (7 )    $  (234 )    $         29        (212 )    $            17      $  (495 )    $         66       (412 )
Other miscellaneous and purchased
product                                                                                       (6 )                                                          (10 )
Total                                                                                     $ (218 )                                                       $ (422 )

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



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

                                                          Three Months Ended June 30                                                Six Months Ended June 30
                                            By Canpotex (1)                    From New Brunswick                    By Canpotex (1)                    From New Brunswick
                                     2014      2013      % Change        2014         2013      % Change      2014      2013      % Change        2014         2013      % Change
Other Asian countries (2)               42        44            (5 )          -           -             -        44        42             5            -           -             -
Latin America                           29        26            12          100         100             -        28        26             8          100         100             -
China                                   13        15           (13 )          -           -             -        14        19           (26 )          -           -             -
India                                   10        12           (17 )          -           -             -         7         8           (13 )          -           -             -
Oceania, Europe and Other                6         3           100            -           -             -         7         5            40            -           -             -
                                       100       100                        100         100                     100       100                        100         100

(1) Canpotex Limited (Canpotex).

(2) All Asian countries except China and India.

The most significant contributors to the change in total gross margin quarter over quarter were as follows (direction of arrows refers to impact on gross margin):

     Net Sales Prices               Sales Volumes              Cost of Goods Sold
i  Our average realized       h  Strong customer            h  Costs were lower due
potash price was down         engagement in all key         to our workforce
significantly due to price    potash markets and            reduction and
erosion during the second     improving rail logistics      operational changes
half of 2013. Improving       supported increased           announced in December
market fundamentals through   shipments from earlier in     2013 along with our
the first half - most         the year.                     decision to optimize
notably in granular markets                                 production at our lowest
in North America and Brazil   h  Continued strength in      cost facilities.
- resulted in our average     North America led to sales
realized price increasing     volumes significantly         h  The Canadian dollar
relative to first-quarter     exceeding those of the        weakened relative to the
2014.                         comparative period in         US dollar, reducing cost
                              2013.                         of goods sold.

                              i  Although rail              h  More product from our
                              challenges began to abate,    lower-cost mines was
                              offshore sales volumes for    sold to offshore
                              the quarter were impacted     customers resulting in a
                              by backlogs and trailed       positive cost of goods
                              2013 comparative totals.      sold variance.

                                                            i  Costs were incurred
                                                            due to a review of
                                                            potash mining practices.

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


The most significant contributors to the change in total gross margin year over year were as follows (direction of arrows refers to impact on gross margin):

     Net Sales Prices               Sales Volumes              Cost of Goods Sold
i  Potash prices were lower   h  North American totals      h  5 shutdown weeks were
as the sharp decline during   were up due to low            taken in 2014 mainly
the second half of 2013       distributor inventories at    as a result of a
weighed on realizations,      the start of the year and     fatality at Cory and
though prices rose compared   higher acreage and            logistical constraints
to the trailing quarter due   application rates.            at Patience Lake while
to tighter granular                                         20 shutdown weeks were
supplies and logistical       i  Our offshore sales         taken in 2013 mainly as
constraints.                  volumes fell as rail          a result of our strategy
                              constraints limited           to match production with
                              shipments.                    demand and
                                                            weather-related pond
                                                            issues at our Patience
                                                            Lake facility.

                                                            h  The Canadian dollar
                                                            weakened relative to the
                                                            US dollar, reducing cost
                                                            of goods sold.

                                                            h  More product from our
                                                            lower-cost mines was
                                                            sold to offshore
                                                            customers resulting in a
The change in market mix produced an unfavorable            higher cost of goods
variance of $27 million related to sales volumes and a      sold variance.
favorable variance of $25 million in sales prices, due
primarily to more higher-priced granular product being
sold in North America in 2014.

. . .

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