Intrepid Potash, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a diversified U.S. mineral producer offering potash, Trio® (langbeinite), water, salt, magnesium chloride, brine and related products. It operates solution-mining facilities in New Mexico and Utah and an underground Trio® mine in New Mexico. The filing covers the unaudited quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $36.5 million | $34.0 million | $140.7 million | $127.7 million |
| Gross margin | $9.0 million | $5.6 million | $23.4 million | $7.8 million |
| Gross margin percentage | 24.5% | 16.5% | 16.7% | 6.1% |
| Operating income (loss) | $4.2 million | $(0.2) million | $6.6 million | $(11.5) million |
| Net income (loss) | $3.4 million | $(1.9) million | $4.1 million | $(21.5) million |
| Diluted EPS | $0.03 | $(0.02) | $0.03 | $(0.19) |
| Operating cash flow | Not separately provided | Not separately provided | $52.9 million | $10.5 million |
- Q3 sales increased 7%, while nine-month sales increased 10%. Water and potash sales drove the improvement; Q3 Trio® sales declined 9%.
- Q3 gross margin expanded by $3.4 million, and nine-month gross margin expanded by $15.7 million. The 2017 comparison included larger inventory write-downs: $4.8 million in the first nine months of 2017 versus $0.8 million in 2018.
- Potash average net realized price increased to $258 per ton in Q3 from $232 and to $251 for nine months from $236. Trio® pricing increased to $200 per ton in Q3 from $187 but was $194 for nine months versus $197.
- Q3 potash sales volume was 74 thousand tons versus 77 thousand; Trio® volume was 36 thousand tons versus 43 thousand. Nine-month potash volume was 269 thousand tons versus 281 thousand, while Trio® volume increased to 182 thousand tons from 178 thousand.
- Operating cash flow increased primarily from improved profitability, higher water and by-product sales, deferred water revenue and lower inventory. Capital expenditures were $12.7 million, producing cash used in investing activities of $12.6 million.
- At September 30, cash and cash equivalents were $37.2 million, or $37.7 million including restricted cash, versus $1.1 million and $1.5 million, respectively, at December 31, 2017.
- Total senior notes were $60.0 million, with $10.0 million classified as current. The company had no credit-facility borrowings, $3.8 million of outstanding letters of credit and $25.7 million of borrowing availability at September 30.
Material changes versus the prior comparable period
- Profitability improved substantially as higher potash pricing, increased water and by-product sales, lower production-related costs and reduced inventory adjustments more than offset lower Trio® volumes.
- Interest expense declined to $2.6 million for nine months from $10.6 million, reflecting lower average debt, lower interest rates and the absence of 2017 make-whole payments and related debt-prepayment costs.
- Water and other revenue increased to $12.9 million for nine months from $3.4 million. Water sales were supported by a five-year commitment requiring the customer to pay $15 million annually, subject to contract terms.
- Trio® sales became more domestically focused: domestic sales represented 81% of nine-month volume versus 69% in 2017. Management continued a price-over-volume strategy in international markets.
- The company adopted ASC 606 retrospectively on January 1, 2018, recording a $0.5 million increase to opening retained deficit, primarily related to variable-pricing contracts.
Guidance, outlook, commentary and risks
- Management expected potash pricing to remain strong through the remainder of 2018 and into Q1 2019, following announced price increases and strong global demand.
- Management expected domestic Trio® pricing to trend slightly higher into Q1 2019 after a fourth-quarter 2018 price increase, while domestic demand was expected to remain the majority of total volume.
- Management forecast 2018 capital investment of approximately $14 million to $18 million, principally sustaining capital for the remainder of the year, funded by operating cash flow and existing cash.
- Management expected $28 million to $35 million of cash relating to water in 2018; $23 million had been received through nine months. Contract liabilities were $9.8 million at September 30 for amounts received before future water deliveries.
- The revolving credit facility was amended in October 2018, after the reporting date, to extend maturity to October 2023 and increase borrowing capacity from $35 million to $50 million, subject to borrowing-base limits.
- The company was required to prepay $10 million of senior notes, plus accrued interest and a make-whole amount, by December 31, 2018. It was in compliance with debt covenants at September 30, including a 1.4-to-1 leverage ratio and 7.9-to-1 fixed-charge coverage ratio.
- Principal risks include fertilizer and water demand and pricing, weather effects on solar mines, freight costs, production disruptions, environmental and mining regulation, labor availability, commodity and energy costs, water-rights challenges, debt-covenant compliance and the ability to fund capital investments.
- Most water sales were made under preliminary authorizations subject to protests and future hearings by the New Mexico Office of the State Engineer. The company expected hearings in 2019 and believed its water-rights position was strong.
- Mosaic Potash is pursuing trade-secret and related claims seeking unspecified damages and injunctive relief. The case was in discovery, and the company stated that potential loss could not reasonably be estimated.
- A water-metering dispute resulted in a $1.5 million credit to future water deliveries, replacing the previously recorded $0.6 million contingent liability estimate.
Most important facts for investors to verify
- Verify completion and funding of the required $10 million senior-note prepayment and the resulting covenant headroom.
- Verify whether strong potash pricing and announced price increases persisted beyond Q3 2018.
- Monitor Trio® volume, pricing, inventory levels and the profitability impact of the price-over-volume strategy.
- Verify realization of the projected 2018 water cash receipts and the enforceability and regulatory status of related water commitments and rights.
- Assess the impact of the Mosaic litigation, water-rights proceedings, reclamation obligations and other environmental contingencies.
- Reconcile cash available for operations and capital spending after restricted cash, letters of credit, debt maturities and the required note prepayment.