Intrepid Potash, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the same period in 2017. Intrepid is the only U.S. producer of potash and one of two U.S. producers of langbeinite, marketed as Trio. It also sells water and by-products including salt, magnesium chloride and brine.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $53.2 million | $48.7 million | Up 9% |
| Gross margin | $7.2 million | $(2.5) million | Improved $9.7 million |
| Operating income (loss) | $2.5 million | $(9.7) million | Improved $12.2 million |
| Net income (loss) | $1.8 million | $(13.7) million | Improved $15.4 million |
| Basic EPS | $0.01 | $(0.17) | Improved |
| Cash flow from operations | $13.9 million | $(1.7) million | Improved $15.6 million |
| Capital expenditures | $6.5 million | $2.4 million | Up $4.0 million |
Gross margin was approximately 13.5% of sales in Q1 2018, compared with a negative gross margin in the prior-year quarter. Selling and administrative expense declined 10% to $4.0 million. Net interest expense declined to $0.9 million from $4.4 million, primarily because average debt was substantially lower and note rates declined.
Water revenue increased to $4.9 million from $0.3 million. Potash revenue was $27.1 million and Trio revenue was $21.2 million. Potash average net realized price increased to $243 per ton from $240, while Trio declined to $194 per ton from $202. These per-ton figures are non-GAAP measures.
Cash and cash equivalents were $6.1 million at March 31, 2018, versus $1.1 million at December 31, 2017. Including restricted cash, total cash, cash equivalents and restricted cash was $6.6 million. Inventory declined to $75.9 million from $83.1 million.
Total debt consisted of $60.0 million of senior notes, including a $10.0 million current portion, and $1.5 million outstanding under the revolving credit facility. The facility had $31.4 million of availability after borrowings and letters of credit. The company was in compliance with its debt covenants at March 31, 2018.
Material changes versus the prior comparable period
- Results shifted from a loss to profitability, driven principally by higher water and by-product sales, lower inventory write-downs and substantially lower interest expense.
- Water sales increased by $4.6 million, reflecting efforts to monetize water rights. Management also recorded $0.7 million of water as a credit to cost of goods sold.
- Lower-of-cost-or-market inventory adjustments decreased to $0.7 million from $3.8 million, with the 2018 charge related to Trio inventory scheduled for export.
- Potash sales volume declined 4% to 97 thousand tons, while production increased to 125 thousand tons from 118 thousand tons.
- Trio sales volume increased 2% to 77 thousand tons, but production declined 34% to 47 thousand tons as management aligned production with expected demand and inventory levels.
- Operating cash flow improved materially, although capital spending increased for projects intended to support water and by-product sales.
- The company adopted ASC Topic 606 using the full retrospective method, recording a $0.5 million increase to opening retained deficit. The filing states that comparative information was adjusted accordingly.
Guidance, outlook, risks and unusual items
- Management expects 2018 water sales of approximately $20 million to $30 million and has pre-arranged water commitments of $15 million annually for five years beginning in 2018.
- Expected 2018 capital investment is approximately $12 million to $16 million, primarily sustaining capital. Management expects to fund the program through operating cash flow and existing cash, with potential use of the revolving facility.
- Management expects domestic Trio price increases to benefit results beginning in the second quarter of 2018 and expects potash and Trio pricing improvements to affect average realized prices beginning in that quarter.
- The company must repay $10 million of senior-note principal, plus accrued interest and a make-whole amount, on or before December 31, 2018.
- Key operating risks include fertilizer pricing and demand, excess global potash capacity, agricultural and oil-and-gas activity, weather effects on solar solution mining, production disruptions, transportation costs, environmental and mining regulation, permits, water-right challenges and the ability to comply with debt covenants.
- Mosaic Potash Carlsbad has asserted trade-secret, contract-interference and related claims against Intrepid and a former employee. The lawsuits were consolidated in January 2018, remain in discovery, seek unspecified monetary and injunctive relief, and cannot presently be reasonably estimated by the company.
- Reclamation security totaled $18.8 million, consisting primarily of $18.3 million in surety bonds and $0.5 million of restricted cash. The undiscounted asset-retirement obligation was $59.5 million, compared with a recorded liability of $21.9 million.
Investor verification points
- Verify whether water sales reach the stated $20 million to $30 million 2018 expectation and whether the water commitments generate recurring cash flow.
- Assess Trio pricing, export volumes, inventory levels and the effect of the $0.7 million inventory adjustment.
- Confirm the company’s ability to fund the required $10 million note repayment while maintaining adequate liquidity.
- Monitor debt covenant performance, credit-facility availability and potential interest-rate increases if covenant performance deteriorates.
- Evaluate the sustainability of improved margins after the unusually large year-over-year reduction in interest expense and inventory adjustments.
- Track the Mosaic litigation, reclamation-security requirements and any changes in environmental, mining or water-right obligations.