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POTASH CORP OF SASKATCHEWAN INC 10-Q 2011 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
Commission File Number 1-10351
Potash Corporation of
Saskatchewan Inc.
(Exact name of registrant as
specified in its charter)
306-933-8500
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
As at July 31, 2011, Potash Corporation of Saskatchewan
Inc. had 855,851,141 Common Shares outstanding.
Table of Contents
Item 1. Financial
Statements
Potash
Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Financial Position (in millions of US dollars) (unaudited)
(See Notes to the Condensed
Consolidated Financial Statements)
1 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Potash
Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Income (in millions of US dollars except per-share amounts) (unaudited)
(See Notes to the Condensed
Consolidated Financial Statements)
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 2
Table of Contents
Potash
Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (in millions of US dollars) (unaudited)
(See Notes to the Condensed
Consolidated Financial Statements)
3 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Potash
Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Changes in Equity (in millions of US dollars) (unaudited)
(See Notes to the Condensed
Consolidated Financial Statements)
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 4
Table of Contents
Potash
Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Cash Flow (in millions of US dollars) (unaudited)
(See Notes to the Condensed
Consolidated Financial Statements)
5 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Potash
Corporation of Saskatchewan Inc.
For the Three and Six Months Ended June 30, 2011
(in millions of US dollars except share, per-share,
percentage and ratio amounts)
(unaudited)
Basis of
Presentation
With its subsidiaries, Potash Corporation of Saskatchewan Inc.
(“PCS”) — together known as
“PotashCorp” or “the company” except to the
extent the context otherwise requires — forms an
integrated fertilizer and related industrial and feed products
company.
The company previously prepared its financial statements in
accordance with Canadian generally accepted accounting
principles (“Canadian GAAP”) as set out in the
Handbook of the Canadian Institute of Chartered Accountants
(“CICA Handbook”). In 2010, the CICA Handbook was
revised to incorporate International Financial Reporting
Standards (“IFRS”), and required publicly accountable
enterprises to apply such standards effective for years
beginning on or after January 1, 2011, with early adoption
permitted. Accordingly, these unaudited interim condensed
consolidated financial statements are based on IFRS, as issued
by the International Accounting Standards Board
(“IASB”). In these unaudited interim condensed
consolidated financial statements, the term “Canadian
GAAP” refers to Canadian GAAP before the company’s
adoption of IFRS.
These unaudited interim condensed consolidated financial
statements have been prepared in accordance with International
Accounting Standard (“IAS”) 34, “Interim
Financial Reporting”, and IFRS 1, “First-Time Adoption
of International Financial Reporting Standards” (“IFRS
1”). Subject to certain transition elections disclosed in
Note 13 to the financial statements included in Part I
Item 1 of the company’s 2011 First Quarter Quarterly
Report on
Form 10-Q,
the company has consistently applied the same accounting
policies throughout all periods presented. Note 13 to the
financial statements included in Part I Item 1 of the
company’s 2011 First Quarter Quarterly Report on
Form 10-Q
describes the impact of the transition to IFRS on the
company’s reported financial position and financial
performance, including the nature and effect of significant
changes in accounting policies from those used in its Canadian
GAAP consolidated financial statements as at January 1,
2010 and December 31, 2010, and for the year ended
December 31, 2010. Note 13 describes the impact of the
transition to IFRS on the company’s reported financial
position and financial performance as at and for the periods
ended June 30, 2010. Except as disclosed in Note 12,
these policies are consistent with accounting principles
generally accepted in the United States (“US GAAP”) in
all material respects.
These unaudited interim condensed consolidated financial
statements are as of August 5, 2011. The company will
ultimately prepare its opening statement of financial position
and financial statements for 2010 and 2011 by applying existing
IFRS with an effective date of December 31, 2011 or prior.
Accordingly, the financial statements for 2010 and 2011 may
differ from these unaudited interim condensed consolidated
financial statements.
These unaudited interim condensed consolidated financial
statements include the accounts of PCS and its wholly owned
subsidiaries; however, they do not include all disclosures
normally provided in annual consolidated financial statements
and should be read in conjunction with the 2010 annual
consolidated financial statements. Certain information and note
disclosures which are considered material to the understanding
of the company’s unaudited interim condensed consolidated
financial statements and which are normally included in annual
consolidated financial statements prepared in accordance with
IFRS were provided in Part I Item 1, Notes 1 and
13 of the company’s 2011 First Quarter Quarterly Report on
Form 10-Q,
along with reconciliations and descriptions of the effect of the
transition from Canadian GAAP to IFRS on financial performance
and financial position. In management’s opinion, the
unaudited interim condensed consolidated financial statements
include all adjustments (consisting solely of normal recurring
adjustments) necessary to fairly present such information.
Interim results are not necessarily indicative of the results
expected for the fiscal year.
These unaudited interim condensed consolidated financial
statements were prepared under the historical cost convention,
except for certain items not carried at historical cost as
discussed in Note 1 to the financial statements included in
Part I Item 1 of the company’s 2011 First Quarter
Quarterly Report on
Form 10-Q.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 6
Table of Contents
Recent Accounting
Pronouncements
The following new standards and amendments or interpretations to
existing standards have been published and are mandatory for
periods beginning on or after January 1, 2011, or later:
IFRS
9, Financial Instruments
In November 2009, the IASB issued guidance relating to the
classification and measurement of financial assets. Under IFRS
9, financial assets will generally be measured initially at fair
value plus particular transaction costs, and subsequently at
either amortized cost or fair value. In October 2010, the IASB
issued additions to IFRS 9 relating to accounting for financial
liabilities. Under the new requirements, an entity choosing to
measure a financial liability at fair value will present the
portion of any change in its fair value due to changes in the
entity’s own credit risk in other comprehensive income
(“OCI”), rather than within profit or loss. The
standard is to be applied retrospectively and is effective for
periods commencing on or after January 1, 2013. The company
is currently reviewing the standard to determine the potential
impact, if any, on its consolidated financial statements.
Amendments
to IFRIC 14, Prepayments of a Minimum Funding
Requirement
In November 2009, the International Financial Reporting
Interpretations Committee (“IFRIC”) issued amendments
to IFRIC 14 relating to the prepayments of a minimum funding
requirement for an employee defined benefit plan. The amendments
apply when an entity is subject to minimum funding requirements
and makes an early payment of contributions to cover those
requirements. The amendments permit such an entity to treat the
benefit of such an early payment as an asset. The amendment must
be applied from the beginning of the first comparative period
presented in the first financial statements in which the
amendment is applied and is effective for periods commencing on
or after January 1, 2011. The company has applied these
amendments, which had no effect on these unaudited interim
condensed consolidated financial statements.
Amendments
to IFRS 7, Financial Instruments: Disclosures
In May 2010, the IASB issued amendments to IFRS 7 as part of its
annual improvements process. The amendments addressed various
requirements relating to the disclosure of financial instruments
and are effective for annual periods commencing on or after
January 1, 2011.
Amendments
to IFRS 7, Disclosures — Transfers of Financial
Assets
In October 2010, the IASB issued amendments to IFRS 7,
“Financial Instruments: Disclosures”. The amendments
require entities to provide additional disclosures to assist
users of financial statements in evaluating the risk exposures
relating to transfers of financial assets that are not
derecognized or for which the entity has a continuing
involvement in the transferred asset. As the company does not
typically retain any continuing involvement in financial assets
once transferred, these amendments are not expected to have a
significant impact. The amendments are effective for annual
periods beginning on or after July 1, 2011.
IFRS
10, Consolidated Financial Statements
In May 2011, the IASB issued guidance establishing principles
for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities.
IFRS 10 (which supersedes IAS 27 and Standing Interpretations
Committee (“SIC”) 12) builds on existing
principles by identifying the concept of control as the
determining factor in whether an entity should be included
within the consolidated financial statements of the parent
company. The standard provides additional guidance to assist in
the determination of control where this is difficult to assess.
The standard is to be applied retrospectively, in most
circumstances, and is effective for annual periods commencing on
or after January 1, 2013, with earlier application
permitted. The company is currently reviewing the standard to
determine the potential impact, if any, on its consolidated
financial statements.
IFRS
11, Joint Arrangements
In May 2011, the IASB issued guidance establishing principles
for financial reporting by parties to a joint arrangement. IFRS
11 (which supersedes IAS 31 and SIC 13) requires a party to
a joint arrangement to determine the type of joint arrangement
in which it is involved, either a joint operation or a joint
venture, by assessing its rights and obligations arising from
the arrangement. The existing policy choice of proportionate
consolidation for jointly controlled entities has been
eliminated and under IFRS 11, equity accounting is mandatory for
participants in joint ventures. The standard is to be applied
prospectively and is effective for annual periods commencing on
or after January 1, 2013, with earlier application
permitted. The company is currently reviewing the standard to
determine the potential impact, if any, on its consolidated
financial statements.
7 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
IFRS
12, Disclosure of Interest in Other Entities
In May 2011, the IASB issued guidance relating to the disclosure
requirements of interests in other entities. IFRS 12 is a new
and comprehensive standard on disclosure requirements for all
forms of interest in other entities, including subsidiaries,
joint arrangements, associates and unconsolidated structured
entities. The standard is to be applied prospectively and is
effective for annual periods commencing on or after
January 1, 2013, with earlier application permitted. The
company is currently reviewing the standard to determine the
potential impact, if any, on its consolidated financial
statements.
IFRS
13, Fair Value Measurement
In May 2011, the IASB issued guidance establishing a single
source for fair value measurement. IFRS 13 defines fair value,
sets out a framework for measuring fair value and introduces
consistent requirements for disclosures on fair value
measurements. It does not determine when an asset, a liability
or an entity’s own equity instrument is measured at fair
value. Rather, the measurement and disclosure requirements of
IFRS 13 apply when another IFRS requires or permits the item to
be measured at fair value, with limited exceptions. The standard
is to be applied prospectively and is effective for annual
periods commencing on or after January 1, 2013, with
earlier application permitted. The company is currently
reviewing the standard to determine the potential impact, if
any, on its consolidated financial statements.
Amendments
to IAS 1, Presentation of Financial Statements
In June 2011, the IASB issued amendments to IAS 1 requiring
items within OCI that may be reclassified to the profit or loss
section of the income statement to be grouped together. The
amendments are to be applied retrospectively and are effective
for annual periods commencing on or after July 1, 2012,
with earlier application permitted. The company is currently
reviewing these amendments to determine the potential impact, if
any, on its consolidated financial statements.
Amendments
to IAS 19, Employee Benefits
In June 2011, the IASB issued amendments to IAS 19 relating to
the recognition and measurement of post-employment defined
benefit expense and termination benefits, and to the disclosures
for all employee benefits. The amendments are to be applied
retrospectively, except for changes to the carrying value of
assets that include capitalized employee benefit costs, which
are to be applied prospectively. The amendments are effective
for annual periods commencing on or after January 1, 2013,
with earlier application permitted. The company is currently
reviewing these amendments to determine the potential impact, if
any, on its consolidated financial statements.
On May 31, 2011, the company fully repaid $600 of
7.750 percent
10-year
senior notes.
Authorized
The company is authorized to issue an unlimited number of common
shares without par value and an unlimited number of first
preferred shares. The common shares are not redeemable or
convertible. The first preferred shares may be issued in one or
more series with rights and conditions to be determined by the
Board of Directors. No first preferred shares have been issued.
Issued
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 8
Table of Contents
The company’s operating segments have been determined based
on reports reviewed by the Chief Executive Officer, the
company’s chief operating decision maker, that are used to
make strategic decisions. The company has three reportable
operating segments: potash, phosphate and nitrogen. These
operating segments are differentiated by the chemical nutrient
contained in the product that each produces. Inter-segment sales
are made under terms that approximate market value. The
accounting policies of the segments are the same as those
described in Note 1.
9 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
On May 12, 2011, the company’s shareholders approved
the 2011 Performance Option Plan under which the company may,
after February 22, 2011 and before January 1, 2012,
issue options to acquire up to 3,000,000 common shares. Under
the plan, the exercise price shall not be less than the quoted
market closing price of the company’s common shares on the
last trading day immediately preceding the date of the grant,
and an option’s maximum term is 10 years. In general,
options will vest, if at all, according to a schedule based on
the three-year average excess of the company’s consolidated
cash flow return on investment over weighted average cost of
capital. As of June 30, 2011, options to purchase a total
of 1,144,100 common shares had been granted under the plan. The
weighted average fair value of options granted was $23.64 per
share, estimated as of the date of grant using the
Black-Scholes-Merton option-pricing model with the following
weighted average assumptions:
A separate estimated average annual effective tax rate is
determined for each taxing jurisdiction and applied individually
to the interim period pre-tax income of each jurisdiction.
For the three months ended June 30, 2011, the
company’s income tax expense was $297 (2010 —
$165). For the six months ended June 30, 2011, its income
tax expense was $540 (2010 — $356). The actual
effective tax rate including discrete items for the three and
six months ended June 30, 2011 was 26 percent
(2010 — 26 percent and 28 percent,
respectively). Total discrete tax adjustments that impacted the
rate in the three months ended June 30, 2011 resulted in an
income tax recovery of $1 compared to an income tax expense of
$14 in the same period last year. Total discrete tax adjustments
that impacted the rate in the six months ended June 30,
2011 resulted in an income tax recovery of $24 compared to an
income tax expense of $25 in the same period last year.
Significant items recorded included the following:
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 10
Table of Contents
Income tax balances within the consolidated statements of
financial position were comprised of the following:
Basic net income per share for the quarter is calculated on the
weighted average number of shares issued and outstanding for the
three months ended June 30, 2011 of 854,997,000
(2010 — 889,128,000). Basic net income per share for
the six months ended June 30, 2011 is calculated based on
the weighted average number of shares issued and outstanding for
the period of 854,518,000 (2010 — 888,744,000).
Diluted net income per share is calculated based on the weighted
average number of shares issued and outstanding during the
period. The denominator is: (1) increased by the total of
the additional common shares that would have been issued
assuming the exercise of all stock options with exercise prices
at or below the average market price for the period; and
(2) decreased by the number of shares that the company
could have repurchased if it had used the assumed proceeds from
the exercise of stock options to repurchase them on the open
market at the average share price for the period. For
performance-based stock option plans, the number of contingently
issuable common shares included in the calculation is based on
the number of shares, if any, that would be issuable if the end
of the reporting period were the end of the performance period
and the effect is dilutive. The weighted average number of
shares outstanding for the diluted net income per share
calculation for the three months ended June 30, 2011 was
876,527,000 (2010 — 913,387,000) and for the six
months ended June 30, 2011 was 876,612,000
(2010 — 913,785,000).
Excluded from the calculation of diluted net income per share
were weighted average options outstanding of 1,417,350 relating
to the 2008 Performance Option Plan, as the options’
exercise prices were greater than the average market price of
common shares for the period.
The company’s sales of fertilizer can be seasonal.
Typically, the second quarter of the year is when fertilizer
sales will be highest, due to the North American spring planting
season. However, planting conditions and the timing of customer
purchases will vary each year and sales can be expected to shift
from one quarter to another.
Canpotex
PCS is a shareholder in Canpotex Limited (“Canpotex”),
which markets potash offshore. Should any operating losses or
other liabilities be incurred by Canpotex, the shareholders have
contractually agreed to reimburse it for such losses or
liabilities in proportion to their productive capacity. Through
June 30, 2011, there were no such operating losses or other
liabilities.
Mining
Risk
As is typical with other companies in the industry, the company
is unable to acquire insurance for underground assets.
Legal and Other
Matters
Significant environmental site assessment
and/or
remediation matters of note include the following:
11 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 12
Table of Contents
The company is also engaged in ongoing site assessment
and/or
remediation activities at a number of other facilities and
sites. Based on current information, it does not believe that
its future obligations with respect to these facilities and
sites are reasonably likely to have a material adverse effect on
its consolidated financial position or results of operations.
Other significant matters of note include the following:
13 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
In addition, at the time of filing its Statement of Defence,
Mosaic commenced a counterclaim against the company, asserting
that the company has breached the mining and processing
agreement due to its refusal to take delivery of potash product
under the agreement based on an event of force majeure.
The company was notified on May 2, 2011 that Mosaic
believes that it has satisfied its obligation to produce potash
at the Esterhazy mine for the company under the mining and
processing agreement and as such it has no further obligation to
deliver potash to the company from the Esterhazy mine, other
than the company’s remaining inventory. The company
disagreed and sought relief from the Court. On June 30,
2011, an injunction order was issued by the Court requiring
delivery pursuant to the terms of the mining and processing
agreement pending trial or a further order of the Court
(“Injunction Order”). The trial is currently scheduled
to commence in January 2012. Like every applicant for injunctive
relief, the company was required to provide an undertaking to
pay any damages that may be occasioned to Mosaic as a result of
the granting of the injunction should it later be shown that
Mosaic had, by reason of the injunction, sustained any damages
which the company ought to pay. The company does not believe
that Mosaic will be entitled to any damages arising from the
issuance of the Injunction Order. On July 18, 2011, Mosaic
filed a Notice of Appeal with the Court of Appeal for
Saskatchewan appealing the Injunction Order and seeking to set
it aside.
The company will continue to assert its position in this
litigation vigorously and it denies liability to Mosaic in
connection with its counterclaim.
In addition, various other claims and lawsuits are pending
against the company in the ordinary course of business. While it
is not possible to determine the ultimate outcome of such
actions at this time, and inherent uncertainties exist in
predicting such outcomes, it is the company’s belief that
the ultimate resolution of such actions is not reasonably likely
to have a material adverse effect on its consolidated financial
position or results of operations.
The breadth of the company’s operations and the global
complexity of tax regulations require assessments of
uncertainties and judgments in estimating the taxes it will
ultimately pay. The final taxes paid are dependent upon many
factors, including negotiations with taxing authorities in
various jurisdictions, outcomes of tax litigation and resolution
of disputes arising from federal, provincial, state and local
tax audits. The resolution of these uncertainties and the
associated final taxes may result in adjustments to the
company’s tax assets and tax liabilities.
The company owns facilities that have been either permanently or
indefinitely shut down. It expects to incur nominal annual
expenditures for site security and other maintenance costs at
certain of these facilities. Should the facilities be
dismantled, certain other shutdown-related costs may be
incurred. Such costs are not expected to have a material adverse
effect on the company’s consolidated financial position or
results of operations and would be recognized and recorded in
the period in which they are incurred.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 14
Table of Contents
The company sells potash from its Saskatchewan mines for use
outside of North America exclusively to Canpotex, a potash
export, sales and marketing company owned in equal shares by the
three potash producers in the Province of Saskatchewan. Sales to
Canpotex for the three months ended June 30, 2011 were $559
(2010 — $323) and six months ended June 30, 2011
were $1,040 (2010 — $591). At June 30, 2011, $358
(December 31, 2010 — $298) was owing from
Canpotex. Sales to Canpotex are at prevailing market prices and
account balances resulting from the Canpotex transactions are
settled on normal trade terms.
IFRS vary in certain significant respects from US GAAP. As
required by the United States Securities and Exchange
Commission, the effect of these principal differences on the
company’s unaudited interim condensed consolidated
financial statements is described and quantified below.
(a) Inventories: Under IFRS, when the
circumstances that previously caused inventories to be written
down below cost no longer exist or when there is clear evidence
of an increase in net realizable value because of changed
economic circumstances, the amount of the writedown is reversed.
The reversal is limited to the amount of the original writedown.
Under US GAAP, the reversal of a writedown is not permitted
unless the reversal relates to a writedown recorded in a prior
interim period during the same fiscal year.
Under IFRS, interim price, efficiency, spending and volume
variances of a manufacturing entity are recognized in income at
interim reporting dates to the same extent that those variances
are recognized in income at year-end. Deferral of variances that
are expected to be absorbed by year-end is not appropriate
because such deferrals could result in reporting inventory at
the interim date at more or less than its portion of the actual
cost of manufacture. Under US GAAP, variances that are planned
and expected to be absorbed by the end of the year are
ordinarily deferred at the end of an interim period.
(b) Long-term investments: Certain of the
company’s investments in international entities are
accounted for under the equity method. Accounting principles
generally accepted in those foreign jurisdictions may vary in
certain respects from US GAAP. The company’s share of
earnings of these equity-accounted investees under IFRS has been
adjusted for the significant effects of conforming to US GAAP.
(c) Property, plant and equipment: The net book
value of property, plant and equipment under IFRS differs from
that under US GAAP in certain respects, including the following:
Major repairs and maintenance, including turnarounds, are
capitalized under IFRS and expensed under US GAAP unless costs
represent a betterment, in which case capitalization under US
GAAP is appropriate.
Borrowing costs under IFRS are capitalized to property, plant
and equipment based on the weighted average interest rate on all
of the company’s outstanding third-party debt; under US
GAAP, only the weighted average interest rate on third-party
long-term debt is used to determine the capitalized amount.
(d) Impairment of assets: Upon adopting IFRS,
the company elected not to restate past business combinations,
which resulted in the carrying amount of goodwill under IFRS
being the same amount as it had been under previous Canadian
GAAP at the date of transition to IFRS. Because past provisions
for asset impairment were based on undiscounted cash flows from
use under Canadian GAAP and on fair value under US GAAP, the
carrying amount of goodwill is lower under US GAAP.
In respect of oil and gas assets, US GAAP requires that
writedowns be based on discounted cash flows, a prescribed
discount rate and the unweighted average
first-day-of-the-month
resource prices for the prior 12 months; IFRS requires
discounted cash flows using estimated future resource prices
based on the best information available to the company.
Assets, except goodwill, that were previously impaired can be
reversed in subsequent periods, under IFRS, if the conditions
that led to the original impairment reversed. Reversals of asset
impairments are prohibited under US GAAP.
(e) Depreciation and amortization: Depreciation
and amortization under IFRS differ from that under US GAAP, as a
result of differences in the carrying amounts of property, plant
and equipment under IFRS and US GAAP, as described above.
(f) Exploration costs: Under IFRS, capitalized
exploration costs are classified as exploration and evaluation
assets. For US GAAP, these costs are generally expensed until
such time as a final feasibility study has confirmed the
existence of a commercially mineable deposit.
(g) Pension and other post-retirement
benefits: Under US GAAP, the company recognizes the
difference between the benefit obligation and the fair value of
plan assets in the consolidated statements of financial position
with the offset to OCI. Amounts in OCI are amortized to net
income. Under IFRS, actuarial gains and losses are recognized
directly in OCI without ever being amortized to net income.
Unrecognized prior service costs are not recognized in OCI, but
are amortized to net income over the average remaining vesting
period.
15 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
(h) Offsetting of certain amounts: US GAAP
requires an entity to adopt a policy of either offsetting or not
offsetting fair value amounts recognized for derivative
instruments and for the right to reclaim cash collateral or the
obligation to return cash collateral against fair value amounts
recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement. The
company adopted a policy to offset such amounts. Under IFRS,
offsetting of the margin deposits is not permitted.
(i) Share-based compensation: Under IFRS, stock
options are recognized over the service period, which for
PotashCorp is established by the option performance period.
Under US GAAP, stock options are recognized over the requisite
service period, which does not commence until the option plan is
approved by the company’s shareholders and options are
granted thereunder.
This difference impacts the share-based compensation cost
recorded and may impact diluted earnings per share.
Further, under IFRS the company recognized an estimate of
compensation cost in relation to performance options for which
service commenced but which had not yet been granted.
Specifically, an estimate of compensation cost was recognized at
the end of the first quarter of 2011 in relation to the 2011
Performance Option Plan, which was approved by the
company’s shareholders at the company’s annual meeting
held on May 12, 2011, for which service commenced but for
which performance options had not yet been granted. The
compensation cost recognized was reconciled in the second
quarter once options were granted. Under US GAAP, no
compensation cost is recognized until the option plans are
approved.
(j) Stripping costs: Under IFRS, the company
capitalizes and amortizes costs associated with the activity of
removing overburden and other mine waste minerals in the
production phase. US GAAP requires such stripping costs to be
attributed to ore produced in that period as a component of
inventory and recognized in cost of sales in the same period as
related revenue.
(k) Provisions: Asset retirement obligations
under IFRS are measured and remeasured each reporting period
using a current risk-free discount rate. Under US GAAP, the
obligation is initially measured using a credit-adjusted
risk-free discount rate. Subsequent upward revisions are
measured using the current discount rate while downward
revisions are valued using the historical discount rate. Under
IFRS, obligations incurred through the production of inventory
are included in the cost of that inventory. Under US GAAP,
obligations incurred through the production of inventory are
added to the carrying amount of the related long-lived asset or
charged to expense as incurred. Under IFRS, provisions for asset
retirement obligations include constructive obligations. Under
US GAAP, only legal obligations are recognized.
Under IFRS, a provision is recognized for either a legal or
constructive obligation when the applicable criteria are
otherwise met. Under US GAAP, constructive obligations are
recognized only when required under a specific standard.
(l) Income taxes related to the above
adjustments: The income tax adjustment reflects the
impact on income taxes of the US GAAP adjustments described
above. Accounting for income taxes under IFRS and US GAAP is
similar, except that income tax rates of enacted or
substantively enacted tax law must be used to calculate deferred
income tax assets and liabilities under IFRS, whereas only
income tax rates of enacted tax law can be used under US GAAP.
(m) Income taxes related to US GAAP effective income tax
rate: As it relates to interim periods, under IFRS a
separate estimated average annual effective income tax rate is
determined for each taxing jurisdiction and applied individually
to the interim period pre-tax income of each jurisdiction,
whereas under US GAAP a weighted average of the annual rates
expected across all jurisdictions is applied.
(n) Income tax consequences of share-based employee
compensation: Under IFRS, the income tax benefit
attributable to share-based compensation that is deductible in
computing taxable income but is not recorded in the consolidated
financial statements as an expense of any period includes the
amount realized in the period (the “realized excess
benefit”), as well as the amount of future tax deductions
that the company expects to receive based on the current market
price of the shares (the “unrealized excess benefit”).
The unrealized excess benefit is recognized as a deferred income
tax asset with the offset recorded in contributed surplus. Under
US GAAP, only the realized excess benefit is recorded, in
additional paid-in capital.
Under IFRS, the income tax benefit associated with share-based
compensation that is recorded in the consolidated financial
statements as an expense in the current or previous period is
reviewed at each statement of financial position date and
amended to the extent that it is no longer probable that the
related tax benefit will be realized. Under US GAAP, this income
tax benefit is calculated without estimating the income tax
effects of anticipated share-based payment transactions.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 16
Table of Contents
(o) Uncertain income tax positions: US GAAP
prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its consolidated
financial statements uncertain income tax positions that it has
taken or expects to take on a tax return (including a decision
whether to file or not to file a return in a particular
jurisdiction). IFRS have no similar requirements related to
uncertain income tax positions. The company accounts for
uncertain income tax positions under IFRS using the standards
applicable to current income tax assets and liabilities, i.e.,
both liabilities and assets are recorded when probable at the
company’s best estimate of the amount.
(p) Income taxes related to intragroup
transactions: Under IFRS, unrealized profits resulting
from intragroup transactions are eliminated from the carrying
amount of assets, but no equivalent adjustment is made for tax
purposes. The difference between the tax rates of the two
entities will result in an impact on net income. This differs
from US GAAP, where the current tax payable in relation to such
profits is recorded as a current asset until the transaction is
realized by the group.
(q) Classification of deferred income
taxes: Under IFRS, deferred income taxes are classified
as long-term. Under US GAAP, deferred income taxes are separated
between current and long-term on the consolidated statements of
financial position.
(r) Cash flow statements: US GAAP requires the
disclosure of income taxes paid. IFRS require the disclosure of
income tax cash flows, which would include any income taxes
recovered during the period. For the three months ended
June 30, 2011, income taxes paid under US GAAP were $163
(2010 — $49) and for the six months ended
June 30, 2011, income taxes paid under US GAAP were $358
(2010 — $71). Under IFRS, interest paid is not reduced
for the effects of capitalized interest whereas under US GAAP
this amount is net of capitalized interest. Interest paid under
US GAAP for the three months ended June 30, 2011 was $69
(2010 — $30) and for the six months ended
June 30, 2011, interest paid under US GAAP was $91
(2010 — $54).
17 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
The application of US GAAP, as described above, would have
had the following effects on net income, net income per share,
total assets and shareholders’ equity.
References relate to differences between IFRS and US GAAP
described above.
References relate to differences between IFRS and US GAAP
described above.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 18
Table of Contents
References relate to differences
between IFRS and US GAAP described above.
Supplemental US
GAAP Disclosures
Disclosures
About Derivative Instruments and Hedging Activities
Derivative financial instruments are used by the company to
manage its exposure to commodity price, exchange rate and
interest rate fluctuations. Further information, including
strategies, is provided in Note 12 to the consolidated
financial statements in the company’s 2010 Financial Review
Annual Report.
Fair Values of
Derivative Instruments in the Condensed Consolidated Statements
of Financial Position
(1) All
fair value amounts are gross and exclude netted cash collateral
balances.
19 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
The Effect of
Derivative Instruments on the Condensed Consolidated Statements
of Income for the Three Months Ended June 30
The Effect of
Derivative Instruments on the Condensed Consolidated Statements
of Income for the Six Months Ended June 30
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 20
Table of Contents
Financial
Instruments and Related Risk Management
Financial
Risks
The company is exposed in varying degrees to a variety of
financial risks from its use of financial instruments: credit
risk, liquidity risk and market risk. The source of risk
exposure and how each is managed is described in Note 25 to
the consolidated financial statements in the company’s 2010
Financial Review Annual Report.
Credit
Risk
The company is exposed to credit risk on its cash and cash
equivalents, receivables and derivative instrument assets. The
maximum exposure to credit risk is represented by the carrying
amount of the financial assets.
The company sells potash from its Saskatchewan mines for use
outside Canada and the US exclusively to Canpotex. Sales to
Canpotex are at prevailing market prices and are settled on
normal trade terms. There were no amounts past due or impaired
relating to amounts owing to the company from Canpotex.
Liquidity
Risk
Liquidity risk arises from the company’s general funding
needs and in the management of its assets, liabilities and
optimal capital structure. It manages its liquidity risk to
maintain sufficient liquid financial resources to fund its
operations and meet its commitments and obligations in a
cost-effective manner. In managing its liquidity risk, the
company has access to a range of funding options.
Certain derivative instruments of the company contain provisions
that require its debt to maintain specified credit ratings from
two major credit rating agencies. If the company’s debt
were to fall below the specified ratings, it would be in
violation of these provisions, and the counterparties to the
derivative instruments could request immediate payment or demand
immediate and ongoing full overnight collateralization on
derivative instruments in net liability positions. The aggregate
fair value of all derivative instruments with credit
risk-related contingent features that were in a liability
position on June 30, 2011 was $238, for which the company
has posted collateral of $162 in the normal course of business.
If the credit risk-related contingent features underlying these
agreements had been triggered on June 30, 2011, the company
would have been required to post an additional $73 of collateral
to its counterparties.
Market
Risk
Market risk is the risk that financial instrument fair values
will fluctuate due to changes in market prices. The significant
market risks to which the company is exposed are foreign
exchange risk and price risk (related to natural gas used in
operations).
Foreign Exchange
Risk
At June 30, 2011, the company had entered into foreign
currency forward contracts to sell US dollars and receive
Canadian dollars in the notional amount of $270
(December 31, 2010 — $170) at an average exchange
rate of 0.9832 (December 31, 2010 — 1.0170) per
US dollar with maturities in 2011. At June 30, 2011, the
company had foreign currency swaps to sell US dollars and
receive Canadian dollars in the notional amount of $NIL
(December 31, 2010 — $69) at an average exchange
rate of NIL (December 31, 2010 — 1.0174) per US
dollar.
Price
Risk
At June 30, 2011, the company had natural gas derivatives
qualifying for hedge accounting in the form of swaps for which
it has price risk exposure; derivatives represented a notional
amount of 56 million MMBtu with maturities in 2011 through
2019. At December 31, 2010, the notional amount of swaps
was 103 million MMBtu with maturities in 2011 through 2019.
21 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Fair
Value
Fair value represents
point-in-time
estimates that may change in subsequent reporting periods due to
market conditions or other factors.
Presented below is a comparison of the fair value of each
financial instrument to its carrying value.
Due to their short-term nature, the fair value of cash and cash
equivalents, receivables, short-term debt, and payables and
accrued charges is assumed to approximate carrying value. The
fair value of the company’s senior notes at June 30,
2011 reflected the yield valuation based on observed market
prices. Yield on senior notes ranged from 0.98 percent to
5.62 percent (December 31, 2010 —
1.08 percent to 5.66 percent). The fair value of the
company’s other long-term debt instruments approximated
carrying value.
Interest rates used to discount estimated cash flows related to
derivative instruments that were not traded in an active market
at June 30, 2011 were between 0.35 percent and
4.98 percent (December 31, 2010 — between
0.47 percent and 4.31 percent) depending on the
settlement date.
The following table presents the company’s fair value
hierarchy for those financial assets and financial liabilities
carried at fair value at June 30, 2011.
(1) During
the period ending June 30, 2011, there were no transfers
between Level 1 and Level 2, or into or out of
Level 3. Company policy is to recognize transfers at the
end of the reporting period.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 22
Table of Contents
Fair
Value Measurements Using Significant Unobservable Inputs
(Level 3)
Pension
and Other Post-Retirement Expenses
For the three months ended June 30, 2011, the company
contributed $3 to its defined benefit pension plans, $6 to its
defined contribution pension plans and $3 to its other
post-retirement plans. Contributions for the six months ended
June 30, 2011 were $5 to its defined benefit pension plans,
$16 to its defined contribution pension plans and $5 to its
other post-retirement plans. Total 2011 contributions to these
plans are not expected to differ significantly from the amounts
previously disclosed in Note 14 to the consolidated
financial statements in the company’s 2010 Financial Review
Annual Report.
Uncertainty
in Income Taxes
During the three and six months ended June 30, 2011,
unrecognized income tax adjustments decreased $34 and $35,
respectively. It is reasonably possible that a reduction in the
range of $31 to $33 of unrecognized income tax adjustments may
occur within 12 months as a result of projected resolutions
of worldwide income tax disputes.
23 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Guarantees
In the normal course of operations, the company provides
indemnifications, which are often standard contractual terms, to
counterparties in transactions such as purchase and sale
contracts, service agreements, director/officer contracts and
leasing transactions. These indemnification agreements may
require the company to compensate the counterparties for costs
incurred as a result of various events, including environmental
liabilities and changes in (or in the interpretation of) laws
and regulations, or as a result of litigation claims or
statutory sanctions that may be suffered by the counterparty as
a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract,
the nature of which prevents the company from making a
reasonable estimate of the maximum potential amount that it
could be required to pay to counterparties. Historically, the
company has not made any significant payments under such
indemnifications and no amounts have been accrued in the
accompanying unaudited interim condensed consolidated financial
statements with respect to these indemnification guarantees
(apart from any appropriate accruals relating to the underlying
potential liabilities).
The company enters into agreements in the normal course of
business that may contain features which meet the definition of
a guarantee. Various debt obligations (such as overdrafts, lines
of credit with counterparties for derivatives and
back-to-back
loan arrangements) and other commitments (such as railcar
leases) related to certain subsidiaries and investees have been
directly guaranteed by the company under such agreements with
third parties. The company would be required to perform on these
guarantees in the event of default by the guaranteed parties. No
material loss is anticipated by reason of such agreements and
guarantees. At June 30, 2011, the maximum potential amount
of future (undiscounted) payments under significant guarantees
provided to third parties approximated $558. It is unlikely that
these guarantees will be drawn upon, and since the maximum
potential amount of future payments does not consider the
possibility of recovery under recourse or collateral provisions,
this amount is not indicative of future cash requirements or the
company’s expected losses from these arrangements. At
June 30, 2011, no subsidiary balances subject to guarantees
were outstanding in connection with the company’s cash
management facilities, and it had no liabilities recorded for
other obligations other than subsidiary bank borrowings of
approximately $6.
The company has guaranteed the gypsum stack capping, closure and
post-closure obligations of White Springs and PCS Nitrogen in
Florida and Louisiana, respectively, pursuant to the financial
assurance regulatory requirements in those states. In addition,
it has guaranteed the performance of certain remediation
obligations of PCS Joint Venture and PCS Nitrogen at the
Lakeland, Florida and Augusta, Georgia sites, respectively. The
USEPA has announced that it plans to adopt rules requiring
financial assurance from a variety of mining operations,
including phosphate rock mining. It is too early in the
rulemaking process to determine what the impact, if any, on the
company’s facilities will be when these rules are issued.
The environmental regulations of the Province of Saskatchewan
require each potash mine to have decommissioning and reclamation
plans, along with financial assurances for these plans, approved
by the responsible provincial minister. The Minister of the
Environment for Saskatchewan (“MOE”) has approved the
plans previously submitted by the company. The company had
previously provided a CDN $2 irrevocable letter of credit and a
payment of CDN $3 into the
agreed-upon
trust fund. Under the regulations, the decommissioning and
reclamation plans and financial assurances are to be reviewed at
least once every five years, or as required by the MOE. The next
scheduled review for the decommissioning and reclamation plans
and financial assurances was to be completed by June 30,
2011. The company submitted its decommissioning and reclamation
plans and its financial assurances proposal in May 2011 and is
awaiting a response. The MOE has advised that it considers the
company in compliance with the regulations until the review is
finalized and a response is provided. The MOE had previously
indicated that it would be seeking an increase of the amount
paid into the trust fund by the company for this submission.
Based on current information, the company does not believe that
its financial assurance requirements or future obligations with
respect to this matter are reasonably likely to have a material
impact on its consolidated financial position or results of
operations.
The company has met its financial assurance responsibilities as
of June 30, 2011. Costs associated with the retirement of
long-lived tangible assets have been accrued in the accompanying
unaudited interim condensed consolidated financial statements to
the extent that a legal or constructive liability to retire such
assets exists.
During the period, the company entered into various other
commercial letters of credit in the normal course of operations.
As at June 30, 2011, $52 of letters of credit were
outstanding.
The company expects that it will be able to satisfy all
applicable credit support requirements without disrupting normal
business operations.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 24
Table of Contents
Recent Accounting
Pronouncements
Fair
Value Measurements
In May 2011, the Financial Accounting Standards Board
(“FASB”) issued amendments to its fair value
measurement standard to substantially converge the guidance in
US GAAP and IFRS on fair value measurements and disclosures. The
amendments will be effective for interim and annual periods
beginning after December 15, 2011. The company is currently
reviewing the impact, if any, on its consolidated financial
statements.
Comprehensive
Income
In June 2011, the FASB amended the standard for Comprehensive
Income whereby total comprehensive income, the components of net
income and the components of other comprehensive income can
either be presented in a single continuous statement or in two
separate but consecutive statements. Regardless of which option
is chosen, items that are reclassified from other comprehensive
income to net income should be presented on the face of the
financial statements. The amendments will be effective for
fiscal years, and interim periods within those years, beginning
after December 15, 2011. The company is currently reviewing
the impact, if any, on its consolidated financial statements.
The company adopted IFRS on January 1, 2011 with effect
from January 1, 2010. Its financial statements for the year
ending December 31, 2011 will be the first annual
consolidated financial statements that comply with IFRS. These
unaudited interim condensed consolidated financial statements
were prepared as described in Note 1, including the
application of IFRS 1. Accordingly, the company will make an
unreserved statement of compliance with IFRS beginning with its
2011 annual consolidated financial statements.
Changes in
Accounting Policies
The key areas where the company has identified that accounting
policies will differ or where accounting policy decisions were
necessary that may impact its consolidated financial statements
and the impact of transition policy choices made under IFRS 1
are described in Note 13 to financial statements in
Part I Item 1 of the company’s 2011 First Quarter
Quarterly Report on
Form 10-Q.
The following table outlines some of these key areas related to
the reconciliations from Canadian GAAP to IFRS. Since accounting
policies and standards may change in the period between these
unaudited interim condensed consolidated financial statements
and our first annual consolidated financial statements that
comply with IFRS, the table below reflects the differences
between IFRS and previous Canadian GAAP we expect to apply. See
Note 13 to financial statements in Part I Item 1
of the company’s 2011 First Quarter Quarterly Report on
Form 10-Q
for further details.
25 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 26
Table of Contents
27 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Reconciliations
from Canadian GAAP to IFRS
Reconciliation
of Net Income
References relate to items
described in the Changes in Accounting Policies table above.
Reconciliation
of Shareholders’ Equity
References relate to items
described in the Changes in Accounting Policies table above.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 28
Table of Contents
Reconciliation
of Comprehensive Income
References relate to items
described in the Changes in Accounting Policies table above.
29 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis are the responsibility of
management and are as of August 5, 2011. 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 the company, including our Annual Report
on
Form 10-K,
can be found on SEDAR at www.sedar.com and on EDGAR at
www.sec.gov/edgar.shtml. The company is a foreign private issuer
under the rules and regulations of the US Securities and
Exchange Commission (the “SEC”); however, the company
currently files voluntarily on the SEC’s domestic forms.
Adoption
of International Financial Reporting Standards (“IFRS”)
The unaudited interim condensed consolidated financial
statements included in Item 1 of this Quarterly Report on
Form 10-Q
reflect the adoption of IFRS, with effect from January 1,
2010. Periods prior to January 1, 2010 have not been
restated and were in accordance with Canadian GAAP which, as
discussed in Item 1 of this Quarterly Report on
Form 10-Q,
was applied during the periods prior to the effective date of
the company’s adoption of IFRS. As a foreign private issuer
under the rules and regulations of the SEC, the company is
permitted to use IFRS.
Our unaudited interim condensed consolidated financial
statements included in Part I Item 1 of our 2011 First
Quarter Quarterly Report on
Form 10-Q
contain a detailed description of our conversion to IFRS,
including a reconciliation of key components of our financial
statements previously prepared under Canadian GAAP to those
under IFRS as at January 1 and December 31, 2010, and for
the year ended December 31, 2010. Note 13 to the
unaudited interim condensed consolidated financial statements
included in Item 1 of this Quarterly Report on
Form 10-Q
contains a reconciliation of key components of our financial
statements previously prepared under Canadian GAAP to those
under IFRS as at and for the three months and six months ended
June 30, 2010.
Although the adoption of IFRS resulted in adjustments to our
financial statements, it did not materially impact the
underlying cash flows or profitability trends of our operating
performance, debt covenants or compensation arrangements.
PotashCorp
and Our Business Environment
PotashCorp is an integrated producer of fertilizer, industrial
and animal feed products. We are the world’s largest
fertilizer enterprise by capacity, producing the three primary
plant nutrients: potash, phosphate and nitrogen. We sell
fertilizer to North American retailers, cooperatives and
distributors that provide storage and application services to
farmers, the end users. Our offshore customers are government
agencies and private importers that buy under contract and on
the spot market; 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, phosphate and nitrogen are also used as inputs for the
production of animal feed and industrial products. Most feed and
industrial sales are by contract and are more evenly distributed
throughout the year than fertilizer sales.
PotashCorp
Strategy
To provide our stakeholders with long-term value, our strategy
focuses on generating growth while striving to minimize
fluctuations in an upward-trending earnings line. We apply this
strategy by concentrating on our highest margin products. Such
analysis dictates our Potash First strategy, focusing our
capital — internally and through
investments — on our world-class potash assets to meet
the rising global demand for this vital nutrient. By investing
in potash capacity while producing to meet market demand, we
seek to create the opportunity for significant growth while
limiting downside risk. We complement our potash operations with
focused phosphate and nitrogen businesses that emphasize the
production of higher-margin products with stable and sustainable
earnings potential.
We strive to enhance our position as supplier of choice to our
customers, delivering the highest quality products at market
prices when they are needed. We seek to be the preferred
supplier to high-volume, high-margin customers with the lowest
credit risk. It is critical 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 base investment decisions on cash flow
return materially exceeding cost of capital, evaluating the best
prospects for return on investment that match our Potash First
strategy. Most of our recent capital expenditures have gone to
investments in our own potash capacity, and we look to increase
our existing offshore potash investments and seek other merger
and acquisition opportunities related to this nutrient. We also
consider share repurchases and increased dividends as ways to
maximize shareholder value over the long term.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 30
Table of Contents
Key
Performance Drivers — Performance Compared to Goals
Each year we set targets to advance our long-term goals and
drive results. Our long-term goals and 2011 targets are set out
on pages 41 and 42 of our 2010 Financial Review Annual Report. A
summary of our progress against selected goals and
representative annual targets is set out below.
Financial
Overview
This discussion and analysis are based on the company’s
unaudited interim condensed consolidated financial statements
reported under IFRS, unless otherwise stated. These principles
differ in certain significant respects from accounting
principles generally accepted in the United States. These
differences are described and quantified in Note 12 to the
unaudited interim condensed consolidated financial statements
included in Item 1 of this Quarterly Report on
Form 10-Q.
All references to per-share amounts pertain to diluted net
income per share.
For an understanding of trends, events, uncertainties and the
effect of critical accounting estimates on our results and
financial condition, the entire document should be read
carefully, together with our 2010 Financial Review Annual Report
and our 2011 First Quarter Quarterly Report on
Form 10-Q.
Earnings
Guidance — Second Quarter 2011
Overview of
Actual Results
31 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
Record earnings in the second quarter and first half of 2011
were higher than the same periods of 2010 due to higher sales
prices for all nutrients and increased demand for potash,
phosphate and ammonia. Attractive economics for goods that use
our products continued to increase our customers’
consumption of our products. Strong demand coupled with our low
inventories put upward pressure on pricing for most products.
Second-quarter potash gross margin represented 68 percent
of total second-quarter gross margin (70 percent in
2010) and 68 percent of first six months gross margin
(72 percent in 2010). Sales prices for phosphate fertilizer
products and all nitrogen products increased significantly
during the second quarter and first six months of 2011 compared
to the same periods in 2010.
Despite volatility in commodity markets, crop economics remained
attractive throughout the second quarter, giving farmers the
incentive to improve nutrient applications, which resulted in
rising fertilizer demand and pricing. During the quarter, key
spot-market potash buyers moved aggressively to secure
sufficient volumes to fill immediate needs. With demand putting
pressure on global supply capabilities, producers operated at or
near record production levels in an attempt to keep pace.
Offshore potash shipments from North American producers for the
second quarter were 23 percent higher than in the same
period in 2010 and reached a record 5.9 million tonnes for
the first half of 2011. This was achieved on the strength of
demand in Latin America and spot markets in Asia, which more
than offset the absence of India, where there has been no
contract since the end of the first quarter of 2011. Despite a
late planting season, domestic shipments from North American
producers during the quarter rose 39 percent from the same
period last year. Combined with a strong first quarter,
first-half domestic shipments reached 4.6 million tonnes,
similar to totals for the same period last year. By the end of
the second quarter, North American producer inventories were
reduced to their lowest levels of the year —
26 percent below the average of the last five years.
Tightening supply/demand conditions continued to push prices
higher in most major markets, including China, which signed new
supply commitments late in the second quarter.
In phosphate, second-quarter solid fertilizer shipments from US
producers climbed 9 percent from the same quarter last
year, buoyed by strong export demand. Following the settlement
of six-month commitments with India in late March, exports from
US producers rose 19 percent compared to the second quarter
of 2010. By the end of June, US solid phosphate producer
inventories were 28 percent below the previous five-year
average. The combination of strong demand, higher raw material
costs and the expectation of lower phosphate exports from China
exerted upward pressure on pricing. In nitrogen, demand remained
robust, with second-quarter US domestic shipments of ammonia and
urea comparable to 2010 levels. US producer inventories for both
products tightened in the quarter, pushing up prices for all
nitrogen products. After lagging ammonia through the first
quarter of 2011, prices for urea moved sharply higher on strong
agricultural demand and an expectation of lower urea exports
from China. Competitive US gas prices continued to support
healthy margins for domestic nitrogen producers.
Other significant factors that affected earnings in the second
quarter and first half of 2011 compared to the same periods in
2010 were: (1) higher income taxes due to increased
earnings; (2) lower dividend income from Israel Chemicals
Ltd. (“ICL”); (3) more earnings from
equity-accounted investees; (4) higher selling and
administrative expenses due to certain compensation arrangements
(quarter over quarter, 2010 results were impacted by a lower
share price, while year over year, our share price rose in 2011
but fell in 2010); and (5) increased provincial mining and
other taxes as a result of escalating potash sales revenue and
profits. Other comprehensive loss for the second quarter of 2011
was due to a decline in the fair value of our investment in ICL.
The fair value decline of our investments in ICL and Sinofert
Holdings Limited (“Sinofert”) during the first half of
2011 led to other comprehensive loss for that period. In 2010,
other comprehensive loss for the second quarter and first half
were the result of even larger declines in the fair values of
both ICL and Sinofert.
PotashCorp 2011 Second Quarter
Quarterly Report on Form 10-Q 32
Table of Contents
Balance
Sheet
Property, plant and equipment increased primarily
(80 percent) due to our previously announced potash
capacity expansions and other potash projects.
Available-for-sale
investments declined due to the fair value of our investments in
ICL and Sinofert falling. Receivables were mainly impacted by
higher trade receivables (consistent with higher sales) and
partially offset by declines in hedge margin deposits on our
natural gas derivatives. As at June 30, 2011,
$321 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.
Short-term debt decreased in the first half of 2011 as a result
of repaying
10-year
senior notes in the second quarter and commercial paper
repayments exceeding advances. Deferred income tax liabilities
increased primarily due to tax depreciation exceeding accounting
depreciation.
Significant changes in equity were primarily the result of net
income being partially offset by other comprehensive losses for
the first six months of 2011, as discussed in more detail above.
Operating Segment
Review
Note 5 to the unaudited interim condensed consolidated
financial statements provides information pertaining to our
operating segments. Management includes net sales in segment
disclosures in the unaudited interim condensed consolidated
financial statements pursuant to IFRS, which requires
segmentation based upon our internal organization and reporting
of revenue and profit measures derived from internal accounting
methods. As a component of gross margin, net sales (and the
related per-tonne amounts) are the primary revenue measures we
use and review in making decisions about operating matters on a
business segment basis. These decisions include assessments
about potash, phosphate and nitrogen performance and the
resources to be allocated to these segments. We also use net
sales (and the related per-tonne amounts) for business planning
and monthly forecasting. Net sales are calculated as sales
revenues less freight, transportation and distribution expenses.
33 PotashCorp
2011 Second Quarter Quarterly Report on Form 10-Q
Table of Contents
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.
Potash
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