Intrepid Potash, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed February 28, 2017. Intrepid is the only U.S. potash producer and one of two U.S. langbeinite producers. It sells potash and Trio® primarily into agricultural markets, with additional industrial and animal-feed exposure.
Beginning in the second quarter of 2016, management reported two segments: potash and Trio®. In April 2016, the East facility was converted to Trio-only production. In July 2016, the West potash facility was idled and placed in care-and-maintenance mode. All potash production thereafter came from solution mines.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Sales | $210.9 million | $287.2 million | Down 27% |
| Gross margin (deficit) | $(29.2) million | $(15.5) million | Further deterioration |
| Operating loss | $(57.8) million | $(369.8) million | Improved, primarily because 2015 included impairment |
| Net loss | $(66.6) million | $(524.8) million | Improved, primarily because 2015 included major impairment and tax charges |
| Basic and diluted loss per share | $(0.88) | $(6.94) | Improved |
| Cash flow from operations | $(18.3) million | $22.7 million | Declined $41.0 million |
| Capital expenditures | $17.9 million | $46.0 million | Down substantially |
| Cash and cash equivalents | $4.5 million | $9.3 million | Down $4.8 million |
| Total debt | $135.0 million principal | $150.0 million principal | $15.0 million repaid |
Gross margin was affected by $20.4 million of lower-of-cost-or-market inventory adjustments and $1.7 million of abnormal production and other costs. Selling and administrative expense declined to $20.0 million from $27.5 million. Interest expense increased to $11.6 million from $6.4 million.
- Potash sales were $159.5 million, with 681,000 tons sold versus 587,000 tons in 2015. Average net realized price declined to $195 per ton from $339.
- Trio sales were $51.5 million, with 146,000 tons sold versus 163,000 tons in 2015. Average net realized price declined to $287 per ton from $364.
- Potash production declined to 493,000 tons from 768,000 tons; Trio production increased to 279,000 tons from 162,000 tons.
- At December 31, 2016, total assets were $540.9 million and stockholders’ equity was $363.4 million.
Material changes versus the prior comparable period
- Industry oversupply, a strong U.S. dollar, and weak fertilizer demand drove substantial declines in potash and Trio pricing.
- Management shifted production toward Trio, which had historically been more resilient to pricing pressure, while reducing higher-cost potash production.
- Headcount was approximately 48% lower at December 31, 2016 than at December 31, 2015. Restructuring expense was $2.7 million, primarily for severance.
- 2015 included a $323.8 million long-lived asset impairment charge and a $300.3 million increase in the deferred-tax valuation allowance; these items largely explain the year-over-year improvement in reported net loss in 2016.
- All short- and long-term investments were sold during 2016, reducing cash and investments from $63.6 million at year-end 2015 to $4.5 million at year-end 2016.
Debt, liquidity, outlook, and risks
In October 2016, Intrepid amended its senior-note agreements, repaid $15.0 million of notes, and incurred $3.1 million of debt-restructuring expense. The remaining notes comprise $54.0 million due in 2020, $40.5 million due in 2023, and $40.5 million due in 2025. Interest rates were increased by 4.5 percentage points; at year-end, rates were 7.73%, 8.63%, and 8.78%, respectively. An additional 2% interest component may begin accruing in April 2018 if specified covenant tests are not met.
The company entered into a $35 million asset-based revolving credit facility expiring October 31, 2018. No borrowings were outstanding at year-end, other than a $0.5 million letter of credit. Management stated that operating cash flow and available credit were expected to fund 2017 operations, but liquidity was constrained by low cash, negative operating cash flow, and significant debt obligations.
Management expected potash prices to remain firm through the first half of 2017, potash production to increase because of improved 2016 evaporation conditions, and industrial potash sales to benefit from increased nearby oil-and-gas drilling activity. Planned 2017 capital investment was approximately $13 million to $18 million, primarily sustaining capital.
Under the senior-note terms, Intrepid engaged Cantor Fitzgerald in December 2016 to evaluate strategic alternatives, including continued operation, equity offerings, balance-sheet restructuring, acquisitions, partnerships, new businesses, or a sale of the company or assets. The review was ongoing, with no assurance of a transaction.
- Potash markets remained exposed to excess global and North American capacity, imports, currency movements, and commodity-price volatility.
- The company had previously been out of compliance with senior-note financial covenants for the first three quarters of 2016; waivers and revised agreements resolved the reported defaults, and the company was compliant at year-end.
- Environmental and reclamation obligations included a $20.0 million discounted asset-retirement liability and approximately $59.3 million of undiscounted estimated reclamation costs. New Mexico regulators determined that East and West tailings impoundments may constitute jurisdictional dams, potentially requiring significant capital or operational changes.
- Mosaic litigation alleging trade-secret and related violations remained in discovery. Potential damages were unspecified and could not reasonably be estimated.
- The company’s debt agreements were secured by substantially all assets and contained progressively more restrictive financial covenants beginning in 2018.
Most important facts for investors to verify
- Whether potash and Trio pricing and gross margins recover sufficiently to generate positive operating cash flow.
- Compliance with the revised senior-note covenants and the company’s ability to refinance or reduce debt before major maturities.
- Actual availability under the $35 million revolving facility and the pace of cash consumption.
- Progress and outcome of the strategic-alternatives review, including any equity issuance, restructuring, asset sale, or change-of-control transaction.
- Whether the East conversion and West idling deliver sustainable cost savings without impairing future production flexibility.
- Potential costs from tailings-dam compliance, environmental remediation, reclamation, Mosaic litigation, and other contingencies.
- Demand, pricing, and inventory levels for Trio, including the profitability of planned international sales.