Intrepid Potash, Inc. quarterly report, Q3 FY2011

Intrepid Potash, Inc. — Q3 2011 Form 10-Q Summary

Business context and reporting period

Intrepid produces and sells muriate of 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 nine months ended September 30, 2011, compared with the corresponding 2010 periods. The company had 75.2 million common shares outstanding as of October 31, 2011.

Financial performance and liquidity

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Sales	$114.0 million	$91.5 million	$338.4 million	$263.1 million
Gross margin	$47.1 million	$26.8 million	$143.5 million	$68.4 million
Operating income	$41.8 million	$19.9 million	$139.1 million	$46.1 million
Net income	$25.5 million	$11.7 million	$84.5 million	$27.1 million
Diluted EPS	$0.34	$0.16	$1.12	$0.36
Operating cash flow	Not separately provided	Not separately provided	$129.6 million	$76.5 million

Q3 gross margin was approximately 41.3% of sales versus 29.3% in the prior-year quarter; nine-month gross margin was approximately 42.4% versus 26.0%. Q3 operating margin was approximately 36.6% versus 21.8%, and net margin was approximately 22.4% versus 12.7%.

Potash production increased 4% year over year in Q3 to 173,000 tons; Trio production increased 9% to 35,000 tons.
Potash sales volume decreased 14% to 190,000 tons, while Trio sales volume increased 20% to 54,000 tons.
Potash average net realized price rose 43% to $489 per ton; Trio rose 45% to $251 per ton.
For the first nine months, potash production increased 22% to 616,000 tons and sales increased 3% to 610,000 tons. Trio production declined 14% to 110,000 tons and sales declined 18% to 145,000 tons.
Cash used in investing activities was $136.5 million for the nine months, including approximately $101.7 million for property, plant, equipment, and mineral development. Capital investment was approximately $98.1 million.
At September 30, 2011, cash, cash equivalents, and investments totaled $168.8 million. The company had no debt outstanding and full availability under its new $250 million unsecured revolving credit facility maturing in August 2016.
Total assets were $913.8 million and stockholders’ equity was $845.8 million. Current assets were $253.2 million against current liabilities of $54.7 million.

Material changes versus the prior comparable period

Sales increased 25% in Q3 and 29% for the nine months, primarily because of higher realized prices. Nine-month net sales, after freight, increased 32% to $316.0 million.
Q3 potash sales were constrained by rail-service interruptions associated with high Missouri River water levels and drought-related weakness in Texas and surrounding markets.
Nine-month potash cost of goods sold per ton declined 6% to $215, reflecting higher production rates. Q3 potash cost per ton increased 8% to $226 because of East facility maintenance and commissioning inefficiencies.
Trio cost of goods sold per ton increased 46% in Q3 and 38% for the nine months because of lower recovery, reduced production, and the use of higher-cost inventory.
Selling and administrative expense increased 29% in Q3 and 15% for the nine months, primarily due to higher incentive compensation, staffing, aviation costs, and related expenses.
The company recorded $12.5 million of insurance settlement income in the nine months, substantially a non-cash recognition of previously deferred proceeds related to a 2006 wind-event warehouse claim.
The company recorded $4.7 million of New Mexico employment-related credits in the second quarter and an additional $3.8 million receivable in Q3, including $3.2 million recognized in other operating income for prior periods.
In August 2011, Intrepid replaced its secured $125 million facility with the larger unsecured $250 million facility.

Guidance, outlook, commentary, and risks

Management expected fall 2011 demand to approximate historical norms, supported by favorable crop economics, although fall harvest timing and weather remained important variables.
Potash pricing had stabilized after increases during 2011. Management identified potash prices as the most significant profitability driver and noted risks from dealer inventory levels and dealer-to-dealer selling.
Trio demand exceeded productive capacity, but production and recovery challenges at the East facility were expected to continue intermittently. Management expected granular Trio demand to meet production capacity for the next several quarters.
2011 capital investment was estimated at $140 million to $165 million, funded from operating cash flow and existing cash and investments. Management stated that liquidity was sufficient for planned 2011 capital spending.
The HB Solar Solution mine remained subject to regulatory approvals and an expected Bureau of Land Management Record of Decision in the first quarter of 2012. Estimated total capital investment was $200 million to $230 million, with $30.5 million invested through September 30, 2011. First production was expected approximately 18 months after construction began, followed by a further year of ramp-up.
The Langbeinite Recovery Improvement Project was estimated at $85 million to $90 million, with approximately $60.7 million invested by the filing date. The project targeted higher Trio recovery and expanded granulation capacity.
Key risks include potash and Trio pricing, agricultural and oil-and-gas demand, mine and plant operating interruptions, rail and truck availability, weather and evaporation rates, labor availability and costs, environmental and mining regulation, permitting, reserve estimates, project cost overruns, credit-facility covenants, and competition.
Contractual obligations totaled approximately $73.6 million on an undiscounted basis, including $31.3 million of asset retirement obligations, $16.3 million of operating leases, $11.2 million of minimum royalties, and $9.1 million of purchase commitments.
The company reported no material litigation claims, but maintained protests involving four oil-and-gas drilling permits that could interfere with potash mining leases. Mine safety disclosures reported no fatalities, imminent-danger orders, pattern-of-violation notices, or flagrant-violation penalties during the quarter.
Disclosure controls and procedures were assessed as effective at a reasonable assurance level, with no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether potash pricing and farmer economics remained strong after the 2011 fall application season and whether dealer inventories pressured realized prices.
The timing, cost, permitting status, and economic assumptions for the HB Solar Solution mine and Langbeinite Recovery Improvement Project.
Whether East facility maintenance and recovery issues were resolved without sustained increases in Trio and potash unit costs.
The composition and credit quality of the $101.3 million investment portfolio and the company’s exposure to interest-rate derivatives with a $1.4 million net liability.
Whether projected capital spending of $140 million to $165 million for 2011 and planned 2012 programs can be funded solely from cash flow and existing liquidity.
The effect of drought, transportation constraints, oil-and-gas activity, regulatory approvals, and pending drilling-permit proceedings on production, sales volumes, and reserves.