Intrepid Potash, Inc. 2017 Form 10-K Summary
Business context and reporting period
Filing covers the fiscal year ended December 31, 2017, with audited comparisons for 2016 and 2015. Intrepid is the only U.S. potash producer and one of two global langbeinite producers. It operates potash solution mines in New Mexico and Utah, a Trio® underground mine in Carlsbad, New Mexico, and related compaction facilities. The West mine remained in care-and-maintenance mode, while the East mine operated as Trio-only following its 2016 conversion.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $157.6 million | $210.9 million | Down 25% |
| Gross margin (deficit) | $5.8 million | $(29.2) million | Improved |
| Operating loss | $(14.4) million | $(57.8) million | Improved |
| Net loss | $(22.9) million | $(66.6) million | Improved |
| Loss per share | $(0.20) | $(0.88) | Improved |
| Operating cash flow | $17.2 million | $(18.3) million | Improved |
| Capital expenditures | $13.5 million | $17.9 million | Down 25% |
| Cash and equivalents | $1.1 million | $4.5 million | Down $3.4 million |
| Total debt, net | $63.3 million | $133.4 million | Down $70.1 million |
| Stockholders’ equity | $402.6 million | $363.4 million | Up $39.2 million |
Potash sales were $95.5 million, with 352,000 tons sold and an average net realized sales price of $238 per ton, compared with $159.5 million, 681,000 tons, and $195 per ton in 2016. Trio sales were $62.1 million, with 229,000 tons sold and an average net realized sales price of $196 per ton, compared with $51.5 million, 146,000 tons, and $287 per ton in 2016.
Potash generated a gross margin of $15.7 million, compared with a $28.7 million deficit in 2016. Trio generated a gross deficit of $9.9 million, compared with a $0.6 million deficit in 2016, primarily because of pricing pressure, higher international freight, and a $6.8 million inventory lower-of-cost-or-market adjustment.
Material changes versus the prior comparable period
- Potash production fell to 359,000 tons from 493,000 tons, reflecting the continued idling of West and the cessation of East potash production. All 2017 potash production came from lower-cost solar solution mines.
- Trio sales volume increased 57%, while the average net realized price fell 32%. International Trio sales represented 28% of Trio sales versus 6% in 2016.
- Total cost of goods sold declined to $105.8 million from $170.9 million, aided by the lower-cost production mix and increased by-product credits.
- Lower-of-cost-or-market inventory adjustments declined to $7.3 million from $20.4 million, although $6.8 million related to Trio inventory.
- The company repaid $75 million of senior-note principal, funded primarily by $57.2 million of net proceeds from a March 2017 equity offering, $5.5 million from an asset sale, and operating cash flow.
- Shares outstanding increased substantially following the issuance of approximately 50.1 million shares in March 2017 and 0.5 million shares under the at-the-market program in September 2017.
- Interest rates on the senior notes declined beginning November 1, 2017, to 3.73% for Series A, 4.63% for Series B, and 4.78% for Series C.
Liquidity, debt, outlook, and risks
At December 31, 2017, the company had $1.1 million of cash, $3.9 million drawn under its $35 million asset-based revolving facility, $3.1 million of outstanding letters of credit, and $22.0 million of calculated availability. Senior notes totaled $60 million, with $10 million classified as current and maturities in 2020, 2023, and 2025. An additional $10 million note prepayment, plus accrued interest and a make-whole amount, is required by December 31, 2018.
Management stated that available credit-facility capacity and expected operating cash flow provide sufficient liquidity for the next twelve months. The company expects 2018 capital investments of $12 million to $16 million, primarily sustaining capital. It also expects $20 million to $30 million of 2018 water sales, supported by pre-arranged commitments of $15 million per year for each of the next five years.
Management expects continued pressure in the potash market because global productive capacity exceeds demand. Trio pricing may have stabilized after a prolonged decline; the company announced a Trio price increase in December 2017, but continued competitive pressure remains likely. Production will be managed to approximate expected demand and inventory levels.
- Key risks include commodity-price volatility, oversupply, agricultural and oil-and-gas demand fluctuations, weather and evaporation rates, mining disruptions, labor availability, transportation constraints, and interest-rate exposure.
- Environmental and regulatory matters include potential modifications to East and West tailings impoundments classified as jurisdictional dams, intermittent water and brine discharges, reclamation obligations, and possible remediation costs.
- Recorded reclamation obligations were $21.5 million on a discounted basis and approximately $59.5 million undiscounted. Total contractual obligations were $159.4 million.
- Mosaic is pursuing consolidated litigation alleging trade-secret misappropriation and related claims. The damages sought are unspecified, and the company is vigorously defending the matter.
- The company carries a full valuation allowance against its $221.6 million of deferred tax assets, so the net deferred tax asset was zero at year-end.
Important facts for investors to verify
- Whether potash and Trio pricing, sales volumes, and inventory adjustments improve or deteriorate in 2018.
- Whether the company generates sufficient operating cash flow to fund capital spending, the required $10 million note prepayment, and ongoing working-capital needs.
- Compliance with senior-note and revolving-credit covenants as leverage and fixed-charge tests become more restrictive.
- Realization of projected water sales and the durability of related customer commitments.
- Potential costs or operational restrictions arising from tailings-dam, discharge, reclamation, and other environmental matters.
- The outcome and potential financial exposure from the Mosaic litigation.
- Further dilution from the remaining $37.8 million capacity under the at-the-market equity program.