Intrepid Potash, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and nine months ended September 30, 2016. Intrepid is the only U.S. producer of muriate of potash and one of two U.S. producers of langbeinite, marketed as Trio. Revenue is generated from potash and Trio sales, primarily for agricultural, animal-feed, and industrial markets.
In April 2016, the East facility was converted to Trio-only production. In July 2016, the West potash facility was idled and placed into care-and-maintenance mode because of declining potash prices. Thereafter, potash production came from three solution-mining facilities.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Sales | $43.6 million | $53.7 million | $168.8 million | $244.4 million |
| Gross margin/(deficit) | $(7.6) million | $(8.3) million | $(22.2) million | $13.0 million |
| Operating loss | $(14.6) million | $(14.7) million | $(41.6) million | $(7.9) million |
| Net loss | $(18.2) million | $(8.1) million | $(50.1) million | $(6.5) million |
| Diluted loss per share | $(0.24) | $(0.11) | $(0.66) | $(0.09) |
| Cash flow from operations | Not separately provided | Not separately provided | $(13.6) million | $43.6 million |
Gross margin was approximately negative 17.5% in Q3 and negative 13.2% for the nine months. Net loss margins were approximately negative 41.8% and negative 29.7%, respectively. Lower-of-cost-or-market inventory charges were $5.2 million in Q3 and $17.1 million for the nine months, compared with $4.4 million and $10.1 million in the prior-year periods.
- Potash sales volume increased to 161,000 tons in Q3 from 120,000 tons, while the average net realized price fell to $178 per ton from $319. Nine-month volume increased to 547,000 tons from 498,000 tons, while price fell to $198 from $351.
- Trio sales volume declined to 25,000 tons in Q3 from 26,000 tons, and the average net realized price fell to $274 per ton from $379. Nine-month volume declined to 108,000 tons from 125,000 tons, with price falling to $308 from $374.
- Trio production increased 130% year over year in Q3 to 85,000 tons; nine-month production increased 72% to 200,000 tons.
- Selling and administrative expense declined 20% in Q3 and 28% for the nine months, primarily from lower headcount and administrative costs.
- Interest expense increased to $3.9 million in Q3 and $9.1 million for the nine months, compared with $1.6 million and $4.8 million, respectively, reflecting higher note rates, financing-cost amortization, and a make-whole payment accrual.
Liquidity, debt, and cash flow
At September 30, 2016, cash and cash equivalents were $23.0 million, short-term investments were $4.9 million, and total cash, cash equivalents, and investments were $27.9 million, compared with $63.6 million at December 31, 2015. Current assets were $156.0 million and total assets were $581.5 million.
Senior notes had $150.0 million of principal outstanding at September 30, including $14.7 million classified as current. The company paid $15.0 million of principal and related accrued interest on October 3, 2016. Long-term debt, net, was $132.0 million at September 30, compared with $149.5 million at year-end 2015.
The company was not in compliance with prior senior-note financial covenants as of March 31, June 30, or September 30, 2016. Waivers permanently addressed those periods. A revised agreement executed October 31, 2016 added an adjusted EBITDA covenant, future leverage and fixed-charge coverage tests, higher interest rates of 7.73%, 8.63%, and 8.78% for the three note series, additional collateral liens, and potential 2% payment-in-kind interest beginning in April 2018.
On October 31, 2016, Intrepid entered into a $35 million asset-based revolving credit facility, subject to borrowing-base availability, maturing October 31, 2018. The company also had a $0.5 million letter of credit secured by restricted cash at September 30.
Operating activities used $13.6 million during the first nine months, while investing activities provided $31.2 million, primarily because of investment sales. Capital expenditures were $14.3 million, and management expected full-year 2016 capital investment of approximately $18 million to $22 million.
Material changes versus the prior comparable period
- Sales declined 19% in Q3 and 31% for the nine months, driven primarily by sharply lower realized prices.
- The company moved from a $13.0 million nine-month gross margin in 2015 to a $22.2 million gross deficit in 2016.
- Net loss increased to $50.1 million for the nine months from $6.5 million, partly because the prior-year period benefited from a $5.1 million income-tax benefit.
- Cash from operations declined by $57.1 million year over year, from $43.6 million provided to $13.6 million used.
- West was idled, East became Trio-only, and approximately 275 employees were eliminated in connection with operating changes. Nine-month restructuring expense was $2.3 million.
- Care-and-maintenance expense for West was $1.7 million in Q3; management expected these costs to decrease in future periods.
- The company recorded a full valuation allowance against deferred tax assets and increased the allowance by $20.7 million during the nine months.
Outlook, commentary, risks, and unusual items
Management expected a net loss for the year ending December 31, 2016, based on anticipated potash and Trio pricing. Potash prices began to stabilize late in Q3, but global effective capacity continued to exceed demand. Management expected lower potash production in the second half of 2016, a more selective potash sales strategy beginning in 2017, and lower Trio realized prices in Q4 2016. The company expected to sell most existing potash inventory from the East and West facilities in Q4 and anticipated building Trio inventory as production exceeded near-term sales.
- Key operating risks include commodity-price pressure, oversupply, agricultural demand, lower oil-and-gas drilling activity, weather-dependent solar production, transportation costs, production interruptions, reserve changes, environmental and mine-safety regulation, permits and leases, and the ability to fund capital investment.
- The revised debt agreement and new revolving facility create significant covenant, collateral, interest-rate, and liquidity risks. The company was required to engage an investment bank by November 30, 2016 to evaluate potential strategic alternatives.
- Management stated that the financial statements were prepared on a going-concern basis. The filing references substantial doubt expressed by the independent auditor regarding the company’s ability to continue as a going concern, although management stated that the revised debt arrangements mitigated material uncertainty regarding covenant compliance.
- Mosaic Potash Carlsbad brought lawsuits alleging trade-secret misappropriation and related claims. Damages are unspecified, and the company stated that potential losses cannot currently be reasonably estimated.
- Unusual items included inventory write-downs, restructuring expense, West care-and-maintenance costs, a $1.8 million gain primarily from insurance proceeds and a tax refund, and $0.8 million of accrued interest related to the October note repayment.
Facts investors should verify
- Actual post-quarter debt balances, liquidity, borrowing-base availability, and compliance with the revised adjusted EBITDA covenant.
- Whether potash and Trio prices stabilized or continued to decline after September 30, 2016.
- Fourth-quarter sales and inventory levels, particularly the planned sale of conventionally produced potash and expected Trio inventory build.
- Cash-flow performance and the company’s ability to fund sustaining capital, reclamation obligations, and debt service.
- Progress and outcome of Mosaic litigation and any related financial exposure.
- Strategic alternatives evaluated under the revised note agreement and any resulting asset sales, equity issuance, refinancing, or other transactions.