Intrepid Potash, Inc. quarterly report, Q2 FY2017

Intrepid Potash, Inc. — Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2017. Financial statements are unaudited. Intrepid produces potash and Trio^® langbeinite, primarily for agricultural, industrial, and animal-feed markets.

Financial performance and position

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Sales	$43.9 million	$51.8 million	$92.2 million	$125.1 million
Gross margin (deficit)	$3.7 million	$(5.5) million	$0.8 million	$(14.6) million
Operating loss	$(1.7) million	$(10.6) million	$(11.4) million	$(27.0) million
Net loss	$(5.9) million	$(13.4) million	$(19.6) million	$(31.8) million
Loss per diluted share	$(0.05)	$(0.18)	$(0.19)	$(0.42)
Operating cash flow	Not separately disclosed	Not separately disclosed	$11.5 million	$0.4 million

Q2 gross margin was 8.4% of sales; six-month gross margin was 0.9%. The filing does not provide a comparable adjusted or operating margin.
Cash and cash equivalents were $6.2 million at June 30, 2017, compared with $4.5 million at December 31, 2016.
Total assets were $506.1 million and stockholders’ equity was $402.8 million at June 30, 2017.
Senior notes totaled $66.0 million, including $6.0 million classified as current debt; net long-term debt was $59.3 million. This compares with $135.0 million of senior notes and $133.4 million of net long-term debt at year-end 2016.
The $35 million asset-based revolving credit facility had no borrowings outstanding, $3.5 million of letters of credit, and $17.5 million of available capacity at June 30, 2017.
Capital expenditures were $3.6 million in the first six months. Management expects 2017 capital investment of approximately $13 million to $17 million, primarily sustaining capital.

Material changes versus the prior comparable period

Sales declined 15% in Q2 and 26% for the first six months, primarily because potash sales volumes fell after the East facility was converted to Trio-only production and the West facility was idled.
Potash sales volume declined 39% in Q2 and 47% year to date, while average net realized price increased to $235 per ton from $193 in Q2 2016 and to $238 per ton from $206 year to date.
Trio sales volume increased 79% in Q2 and 63% year to date, but average net realized price declined to $198 per ton from $320 in Q2 and to $200 from $318 year to date. Increased international sales contributed to the pricing decline.
Potash segment gross margin improved to $4.0 million in Q2 and $6.3 million year to date, versus deficits of $5.3 million and $17.2 million, respectively, in the prior periods.
Trio generated a Q2 gross deficit of $0.3 million and a six-month gross deficit of $5.5 million, compared with a $0.2 million Q2 deficit and $2.6 million six-month margin in 2016. The six-month 2017 result included $4.1 million of lower-of-cost-or-market inventory charges.
Lower-of-cost-or-market inventory adjustments fell to $0.3 million in Q2 and $4.1 million year to date, from $2.9 million and $11.9 million, respectively. Abnormal production costs were zero in 2017 versus $1.1 million in Q2 2016 and $1.7 million year to date.
Operating cash flow increased to $11.5 million from $0.4 million, primarily due to lower production costs and reduced selling and administrative expenses.
Interest expense increased to $4.2 million in Q2 and $8.6 million year to date, largely because of make-whole payments associated with debt repayments.
In March 2017, the company issued 50.1 million shares for net proceeds of $57.5 million and used the proceeds principally to repay debt. Total debt repayments in the first half were $69 million.

Guidance, outlook, risks, and unusual items

Management expects a net loss for the full year ending December 31, 2017, based on expected potash and Trio pricing.
Management expects Trio pricing to remain under pressure for the remainder of 2017 and intends to operate facilities at production levels approximating expected demand.
Management expects water sales of $20 million to $30 million in 2018, with minimal associated expenditures.
Average to above-average evaporation rates continued during the 2017 evaporation season to date, supporting solar-facility potash production.
The senior-note amendment requires additional prepayments of $6 million by December 31, 2017, and $10 million by December 31, 2018, plus accrued interest and make-whole payments. After these payments, outstanding notes would be $50 million.
The company was in compliance with applicable debt covenants at June 30, 2017. However, covenant requirements become more restrictive beginning in 2018, and the company stated that it would not currently meet a 1-to-1 fixed-charge coverage requirement if revolver availability fell below $6 million.
Senior-note rates ranged from 7.73% to 8.78%; an additional 2% interest charge may begin accruing April 1, 2018, unless specified covenant tests are satisfied.
Material unusual items included $1.6 million of asset-sale losses, $0.6 million accrued for New Mexico land-impact issues, $1.4 million of water-sales income, $0.3 million of restructuring expense, and $1.1 million of West-facility care and maintenance expense during the first six months.
The company faces commodity-price, demand, weather, solar evaporation, production, transportation, regulatory, permitting, labor, environmental, and financing risks. Global potash capacity continued to exceed demand.
Mosaic litigation alleging trade-secret and confidential-information violations remained in discovery. Damages are unspecified, and the company stated that potential loss cannot reasonably be estimated.
Reclamation obligations totaled $20.8 million on the balance sheet; the undiscounted obligation was $59.3 million. Reclamation security totaled $18.4 million, primarily through surety bonds.

Most important facts for investors to verify

Whether potash pricing and selective selling can offset structurally lower volumes following the East conversion and West idling.
Whether Trio pricing stabilizes as international sales expand, and whether inventory write-downs recur.
Ability to generate sufficient operating cash flow to fund the scheduled $16 million of additional note prepayments and planned capital expenditures.
Compliance with increasingly restrictive senior-note and revolving-credit covenants through 2018 and beyond.
Progress and potential exposure from the Mosaic litigation and other environmental, reclamation, land, and permitting matters.
Execution of the stated $20 million to $30 million 2018 water-sales opportunity.
Potential dilution from the $40 million at-the-market equity program and outstanding equity awards.