Intrepid Potash, Inc. quarterly report, Q2 FY2011

Intrepid Potash, Inc. — Q2 2011 Form 10-Q Summary

Business Context and Reporting Period

Intrepid Potash produces and sells potash, langbeinite marketed as Trio®, and related by-products from five active facilities in New Mexico and Utah. The unaudited filing covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.

Key Financial Metrics

Metric	Q2 2011	Q2 2010	Six Months 2011	Six Months 2010
Sales	$119.4 million	$64.3 million	$224.4 million	$171.7 million
Gross margin	$55.1 million	$14.7 million	$96.4 million	$41.6 million
Gross margin percentage	46.2%	22.9%	42.9%	24.2%
Operating income	$50.7 million	$6.3 million	$97.3 million	$26.2 million
Net income	$30.7 million	$3.6 million	$59.0 million	$15.4 million
Diluted EPS	$0.41	$0.05	$0.78	$0.21
Operating cash flow	Not separately provided	Not separately provided	$79.3 million	$67.9 million

Q2 operating margin was approximately 42.5%, versus 9.8% in the prior-year quarter; the six-month operating margin was approximately 43.4%, versus 15.3%. Net margin was approximately 25.7% in Q2 and 26.3% for the first six months.

Potash Q2 sales volume increased 74% to 225,000 tons, while the average net realized price increased 23% to $462 per ton.
Trio® Q2 sales volume declined 38% to 39,000 tons, but the average net realized price increased 37% to $222 per ton.
Six-month potash sales volume increased 13% to 421,000 tons; Trio® volume declined 31% to 91,000 tons.
Potash gross margin percentage increased to 52% in Q2 and 51% for the six-month period, compared with 30% and 31%, respectively, in the prior-year periods.
Cash operating cost of goods sold for potash declined to $160 per ton in Q2 and $163 per ton for six months, compared with $206 and $201, respectively.
Capital expenditures were $29.3 million in Q2 and $56.2 million for the first six months. Cash used for property, plant, equipment and mineral development was $64.5 million for the six months.
At June 30, 2011, cash, cash equivalents and investments totaled $157.8 million, including $71.3 million of cash and cash equivalents, $52.1 million of short-term investments and $34.4 million of long-term investments.
The company reported no outstanding debt at June 30, 2011. Total liabilities were $59.2 million and stockholders’ equity was $819.2 million.

Material Changes Versus the Prior Comparable Period

Sales increased 86% in Q2 and 31% for the first six months, driven primarily by higher potash volumes and pricing.
Net income increased 752% in Q2 and 282% for the first six months. The improvement reflected stronger potash pricing, higher volumes, improved operating rates and lower potash unit costs.
Production increased to 209,000 tons of potash and 44,000 tons of langbeinite in Q2, from 165,000 and 39,000 tons, respectively. Six-month potash production increased 31%, while langbeinite production declined 22%.
Cost of goods sold increased 30% in Q2 because of higher sales volumes, but declined 3% for the first six months due in part to inventory absorption and the absence of abnormal production costs recognized in 2010.
Operating cash flow increased $11.4 million year over year to $79.3 million, although inventory and receivables consumed cash as sales and production increased.
The company replaced its former secured $125 million revolving facility in August 2011 with a new unsecured $250 million revolving facility maturing in August 2016. No borrowings were outstanding under either facility at the reporting date.

Guidance, Outlook, Risks and Unusual Items

Management expected favorable farmer economics, strong crop prices and dealer inventory rebuilding to support potash demand and pricing through the fall 2011 application season.
Red granular potash posted pricing increased to $560 per ton effective July 8, 2011; management expected the full benefit to be realized beginning in the fourth quarter.
Management expected 2011 capital investment of $140 million to $165 million, funded from operating cash flow and existing cash and investments. The filing states that expenditures were expected to be near the high end of the range.
The HB Solar Solution Mine remained subject to permitting and approvals. Estimated total investment was expected to be higher, possibly significantly higher, than the previously disclosed $120 million to $130 million range; $28.3 million had been invested by June 30, 2011.
The Langbeinite Recovery Improvement Project was expected to cost $85 million to $90 million, with approximately $43.1 million invested to date. Dense-media plant completion was expected in the fourth quarter of 2011 and the granulation plant near year-end 2011 or early 2012.
Management anticipated higher third- and fourth-quarter unit costs because of scheduled maintenance, equipment tie-ins and seasonal downtime at the Moab mine.
Q2 included approximately $4.7 million of income from an approved New Mexico refundable employment-related credit. The amount was recorded in other operating income and was expected to be collected in the second half of 2011.
Six-month results included approximately $12.5 million of insurance settlement income related to a 2006 warehouse loss. Most proceeds had been received before 2011, so the recognition had little current-period cash impact.
Key risks include potash and Trio® price volatility, agricultural and oil-and-gas demand, production interruptions, transportation constraints, weather and evaporation conditions, labor availability, raw-material costs, permitting and environmental regulation, reserve estimates, project execution and debt covenant compliance.
Five APD-related protests remained pending near Intrepid potash leases. The company also had an appeal pending concerning a proposed oil and gas well near the North Mine. Management reported no material claims outstanding at June 30, 2011.
Reclamation-related commitments included an undiscounted asset retirement obligation of approximately $32.7 million, with no significant payments expected in the next five years, and $8.7 million of reclamation security posted or bonded.

Most Important Facts for Investors to Verify

Whether strong potash pricing and demand continued after the Q2 2011 price increases, particularly through the fall application season.
The sustainability of the sharp improvement in potash margins and whether scheduled maintenance and seasonal downtime increased second-half unit costs as expected.
Actual 2011 capital expenditures versus the $140 million to $165 million estimate and the funding effect on cash and investments.
Permitting status, final cost estimates and construction timing for the HB Solar Solution Mine.
Completion and operating performance of the Langbeinite Recovery Improvement Project and the resulting impact on Trio® production, recoveries and margins.
The cash realization and tax treatment of the $4.7 million employment-related credit and the economic significance of the $12.5 million insurance settlement income.
Changes in agricultural demand, crop economics, industrial drilling activity, weather conditions and transportation availability.
Resolution of the pending oil and gas permitting disputes and any impact on Intrepid’s mining access or lease rights.