Intrepid Potash, Inc. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and six months ended June 30, 2018, filed August 2, 2018. Intrepid is the only U.S. producer of muriate of potash and one of two U.S. producers of langbeinite, marketed as Trio. It also sells water and by-products including salt, magnesium chloride and brine.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $51.0 million, versus $45.0 million | $104.2 million, versus $93.7 million |
| Gross margin | $7.3 million, versus $4.7 million | $14.5 million, versus $2.2 million |
| Gross margin percentage | 14.3%, versus 10.4% | 13.9%, versus 2.3% |
| Operating income (loss) | $(0.1) million, versus $(1.7) million | $2.4 million, versus $(11.4) million |
| Net income (loss) | $(1.0) million, or $(0.01) per diluted share | $0.8 million, or $0.01 per diluted share |
| Operating cash flow | Not separately presented for the quarter | $38.2 million, versus $8.0 million |
Six-month sales growth was driven primarily by water sales of $8.9 million, versus $1.4 million, and Trio sales of $40.1 million, versus $37.2 million. Potash sales were broadly stable at $55.2 million, versus $55.0 million.
At June 30, 2018, cash and cash equivalents were $26.2 million, compared with $1.1 million at December 31, 2017. Total cash, cash equivalents and restricted cash were $26.7 million. Total debt consisted of $60.0 million of senior notes, including a $10.0 million current portion. The company had no credit-facility borrowings, $3.8 million of outstanding letters of credit and $25.7 million of remaining credit-facility availability.
Total assets were $512.0 million and total stockholders’ equity was $404.9 million at June 30, 2018. Inventory declined to $100.2 million, including long-term parts inventory, from $113.7 million at year-end.
Material changes versus the prior comparable period
- Second-quarter sales increased 13%; first-half sales increased 11%.
- Gross margin improved substantially, reflecting higher water and by-product sales and lower inventory valuation adjustments. Six-month lower-of-cost-or-market adjustments declined to $0.8 million from $4.1 million.
- Six-month operating results improved to $2.4 million of operating income from an $11.4 million operating loss; net results improved to $0.8 million of income from a $19.6 million loss.
- Net interest expense declined to $1.8 million for the first half from $8.6 million, primarily because average debt declined and prior-year make-whole payments and financing-cost write-offs did not recur.
- Potash average net realized price increased to $249 per ton for the first half, from $238, while sales volume declined to 195 thousand tons from 204 thousand tons. Second-quarter potash pricing was $254 per ton.
- Trio sales volume increased to 146 thousand tons from 135 thousand tons for the first half, but average net realized price declined to $193 per ton from $200 because of higher freight costs. Trio production was reduced to manage inventory.
- Operating cash flow increased by $30.2 million, while capital expenditures increased to $8.9 million from $3.6 million.
Guidance, outlook, commentary and risks
- Management expects 2018 capital investment of approximately $14 million to $18 million, primarily sustaining capital, funded mainly from operating cash flow and existing cash.
- Management expects $25 million to $35 million of 2018 cash receipts related to water, including a $15 million-per-year, five-year commitment. The company received $13.4 million of water-related cash in the first half.
- Management expects potash pricing to remain strong during the remainder of 2018 and anticipates a slight increase in domestic Trio pricing in the fourth quarter.
- Most water sales are made under preliminary authorizations from the New Mexico Office of the State Engineer. Third parties have protested those authorizations, with hearings expected in late 2018 or early 2019.
- The company must 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 June 30, 2018.
- A water customer disputed metering results. Intrepid recorded a $0.6 million operating expense and estimated potential overreported water usage of $0.6 million to $1.7 million.
- Mosaic Potash has asserted trade-secret, contractual and related claims seeking unspecified monetary and injunctive relief. The litigation was in discovery, and the company could not reasonably estimate potential loss.
- Other risks include fertilizer pricing and demand, global excess potash capacity, freight rates, weather affecting solar mines, production disruptions, regulatory and environmental requirements, water-rights challenges, labor availability and the company’s ability to fund capital investments.
Important facts for investors to verify
- Whether water-rights protests or regulatory proceedings affect the company’s water commitments and projected $25 million to $35 million of 2018 water-related cash receipts.
- The source and sustainability of the significant improvement in operating cash flow and gross margin, including the contribution from water and by-products.
- The company’s ability to fund the required $10 million senior-note prepayment by year-end while maintaining adequate liquidity.
- Whether higher freight costs and reduced Trio production continue to pressure Trio margins.
- The eventual outcome and potential exposure from the Mosaic litigation and the water-metering contingency.
- Progress against the $14 million to $18 million capital-investment plan and the expected operating benefits from water and by-product projects.