Intrepid Potash, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. Intrepid is the only U.S. producer of muriate of potash and one of two producers of langbeinite, marketed as Trio®. Operations are concentrated in New Mexico and Utah, with sales primarily in the United States.
Business Context and Reporting Period
- Products are sold into agricultural, industrial and animal-feed markets. Potash represented 77% of net sales and Trio represented 23% in 2015.
- Potash demand was pressured by global oversupply, lower prices, a strong U.S. dollar and a 60% decline in North American oil-and-gas rig counts, which reduced industrial demand.
- Management began transitioning the East facility to Trio-only production during the second half of 2015, with completion expected in mid-2016. This will eliminate approximately 225,000 tons of annual potash capacity while expanding Trio capacity.
Key Financial and Operating Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $287.2 million | $410.4 million | Down 30% |
| Net sales, after freight | $258.5 million | $367.2 million | Down 30% |
| Net loss | $524.8 million | $9.8 million net income | Material deterioration |
| Diluted loss per share | $6.94 | $0.13 earnings | Material deterioration |
| Cash flow from operations | $22.7 million | $127.5 million | Down $104.8 million |
| Capital expenditures | $46.0 million | $61.8 million | Down $15.8 million |
| Total debt | $150.0 million | $150.0 million | Flat |
| Cash, cash equivalents and investments | $63.6 million | $89.9 million | Down $26.3 million |
| Stockholders’ equity | $426.5 million | $947.3 million | Down $520.8 million |
- Potash sales volume declined to 587,000 tons from 915,000 tons; production declined to 768,000 tons from 859,000 tons.
- Trio sales volume declined to 163,000 tons from 182,000 tons, while production increased slightly to 162,000 tons from 160,000 tons.
- Average net realized potash price was $339 per ton versus $332; however, quarterly pricing declined throughout 2015, reaching $277 per ton in the fourth quarter.
- Average net realized Trio price increased to $364 per ton from $349. Trio gross margin remained $68 per ton, while potash gross margin fell to $27 per ton from $41.
- Fourth-quarter sales were $42.8 million, net loss was $518.3 million, and diluted loss per share was $6.85. Fourth-quarter results included a $323.8 million long-lived asset impairment charge.
Material Changes Versus the Prior Comparable Period
- Net sales fell primarily because potash volume declined 36%; potash pricing was broadly flat on a full-year basis but weakened sharply in the second half.
- Cost of goods sold declined to $217.8 million from $303.9 million, but per-ton costs increased: potash cost rose to $293 from $279 and Trio cost rose to $279 from $270.
- The company recorded $31.8 million of lower-of-cost-or-market inventory adjustments versus $8.2 million in 2014, and $10.4 million of costs associated with abnormal production.
- A $323.8 million impairment charge reduced property, plant, equipment and mineral properties to $419.5 million from $785.3 million.
- A $300.3 million valuation allowance against deferred tax assets produced $150.0 million of income tax expense and reduced the net deferred tax asset to zero.
- Production was disrupted by a 15-day West mine suspension related to shaft maintenance and salt buildup, 11 days of East facility testing, and below-average evaporation conditions at solar facilities.
- The company had no amounts outstanding under its revolving credit facility at year-end, but availability was limited to $133 million by covenant calculations.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued potash price pressure and lower average realized prices in 2016 because supply is expected to exceed demand. Industrial volumes may decline further with continued weakness in oil-and-gas drilling.
- Management expects lower 2016 production from solar facilities because of below-average evaporation seasons in 2014 and 2015.
- 2016 capital investment is expected to be approximately $22 million to $27 million, primarily sustaining capital and East facility conversion costs.
- Management is reviewing the long-term viability of the West mine, the company’s highest-cost conventional potash facility after the East conversion.
- The independent auditor’s report includes a going-concern modification. Management states that EBITDA may be insufficient to maintain debt covenant compliance through 2016.
- Debt agreements require a maximum leverage ratio of 3.5 to 1 and a minimum fixed-charge coverage ratio of 1.3 to 1. Failure to comply could trigger an event of default and acceleration of outstanding debt. The February 2016 lender waiver temporarily addressed the requirement for audited financial statements without a going-concern modification through March 31, 2016.
- The company’s $150 million senior notes mature in 2020, 2023 and 2025. The revolving facility matures in 2020 and was permanently reduced from $250 million to $150 million under a February 2016 amendment.
- Environmental and regulatory exposures include possible capital requirements related to New Mexico tailings ponds that may qualify as jurisdictional dams, discharge issues, reclamation obligations and historical contamination. Undiscounted reclamation obligations were approximately $58.4 million.
- A December 2015 snowstorm caused $2.5 million of recognized losses; the company submitted a $2.2 million insurance claim, subject to a $1 million deductible, but had not received the carrier’s response at filing.
Most Important Facts for Investors to Verify
- Whether lenders waive or amend the going-concern-related covenant and whether Intrepid maintains compliance with leverage and fixed-charge coverage covenants during 2016.
- Available liquidity after considering the $63.6 million of cash and investments, $150 million of senior notes, restricted credit-facility availability and required capital spending.
- Actual 2016 potash and Trio prices, sales volumes, inventory levels and production curtailments.
- Progress, cost and operating benefits of the East conversion to Trio-only production.
- The outcome of the West mine strategic review and any additional impairment or accelerated depreciation charges.
- Whether the $2.2 million snowstorm insurance claim is approved and the amount ultimately recovered.
- Potential expenditures arising from environmental permitting, jurisdictional-dam requirements, reclamation and other regulatory matters.