Intrepid Potash, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is the only U.S. producer of potash and one of two U.S. producers of langbeinite, marketed as Trio. Products are sold primarily into agricultural fertilizer markets, with additional animal-feed and industrial applications. The filing covers the three months ended March 31, 2016, and was filed May 9, 2016.
During the quarter, the company operated three solution mines and two conventional underground mines. In April 2016, East was converted to Trio-only production. In May 2016, management initiated a plan to idle the West facility and place it into care-and-maintenance mode, expected in July 2016.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $73.3 million | $117.0 million | Down 37% |
| Gross margin | $(9.2) million | $18.7 million | Declined $27.9 million |
| Operating income (loss) | $(16.5) million | $10.8 million | Declined $27.2 million |
| Net income (loss) | $(18.4) million | $6.5 million | Declined $25.0 million |
| Basic and diluted EPS | $(0.24) | $0.09 | Declined $0.33 |
| Cash flow from operations | $(1.1) million | $32.7 million | Down $33.8 million |
| Capital expenditures paid | $6.0 million | $8.7 million | Down $2.7 million |
Gross margin was pressured by a $9.0 million lower-of-cost-or-market inventory adjustment, compared with $0.4 million in the prior-year quarter, and $0.7 million of abnormal production costs. Interest expense increased 36% to $2.2 million, partly because of the write-off of deferred financing costs associated with reductions to the credit facility. Income tax expense was immaterial, compared with $3.1 million in Q1 2015, and the company increased its deferred-tax valuation allowance by $8.0 million.
| Balance-sheet metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $24.4 million | $9.3 million |
| Short- and long-term investments | $30.5 million | $54.3 million |
| Total cash, cash equivalents and investments | $54.9 million | $63.6 million |
| Total assets | $627.4 million | $640.0 million |
| Long-term debt, net | $149.1 million | $149.5 million |
| Total stockholders’ equity | $409.0 million | $426.5 million |
Operating performance and changes versus the prior period
- Potash production declined 9% to 215,000 tons, while sales declined 6% to 218,000 tons.
- Trio production increased 22% to 44,000 tons, but sales declined 19% to 50,000 tons.
- Net sales declined 41% to $62.9 million, including potash net sales of $47.1 million, down 44%, and Trio net sales of $15.8 million, down 30%.
- Average net realized potash price fell 40% to $216 per ton from $362; Trio pricing fell 14% to $316 per ton from $367.
- Average potash gross margin declined to negative $11 per ton from $57; Trio gross margin declined to $56 per ton from $98.
- Potash sales were affected by weaker pricing, global oversupply, a strong U.S. dollar, reduced oil-and-gas activity, and shipment timing. Trio sales were affected by softness in the fertilizer market and delayed customer purchases.
- Cost-saving measures included eliminating approximately 5% of the workforce, suspending most employee cash bonuses, and reducing compensation. Q1 restructuring expense was $0.4 million.
Liquidity, debt, outlook, and risks
The company was not in compliance with its debt covenants at March 31, 2016. The leverage ratio was 3.7 to 1 versus a maximum of 3.5 to 1, and the fixed-charge coverage ratio was 1.1 to 1 versus a minimum of 1.3 to 1. The unsecured credit facility was reduced to a maximum of $8 million, usable only for letters of credit; $0.5 million of letters of credit was outstanding at quarter-end.
Credit-facility lenders waived covenant and audit-report requirements through July 31, 2016, subject to specified conditions. Senior-note holders waived covenant compliance through June 30, 2016. The $150 million senior notes mature in 2020, 2023, and 2025. Interest rates increased by 2% beginning April 1, 2016, while the company remained out of compliance.
Management stated that adjusted EBITDA may not be sufficient to restore covenant compliance through 2016 and is evaluating further waivers, amendments, alternative financing, additional facility reductions, and possible debt reduction. Failure to obtain relief could trigger defaults, cross-defaults, and acceleration of outstanding indebtedness. Management stated that the company would be unable to repay accelerated debt with existing cash and facilities.
Because of covenant uncertainty, declining revenues, inventory write-downs, and negative operating cash flow, the filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis and contain no adjustments that might be required if the company cannot continue operations.
Management expects a 2016 net loss based on anticipated potash pricing. Planned 2016 capital investment is approximately $20 million to $25 million, primarily sustaining capital. Management expects higher Trio production after the East conversion, but anticipates pricing pressure. The West idling is expected to result in approximately 300 employee layoffs and $1 million to $3 million of charges in Q2 2016.
Other significant risks include further inventory or asset impairments, weather-related effects on solar production, fertilizer and potash price volatility, regulatory and reclamation obligations, operational disruptions, transportation costs, and the ability to fund necessary capital investment. Reclamation security totaled $18.0 million, including $17.5 million of surety bonds and $0.5 million of restricted cash.
In April 2016, the company received $1.2 million of insurance proceeds related to a December 2015 snowstorm; the proceeds are expected to be recognized in Q2 2016.
Most important facts for investors to verify
- Whether covenant waivers and amendments were extended or replaced before their June 30 and July 31, 2016 expiration dates.
- Whether the company avoided debt acceleration, obtained new financing, or reduced outstanding debt.
- The financial and operational impact of converting East to Trio-only production and idling West.
- Actual potash and Trio pricing, volumes, inventory levels, and additional lower-of-cost-or-market adjustments.
- Whether operating cash flow recovered sufficiently to fund the expected $20 million to $25 million of 2016 capital spending.
- The effect of the West idling, anticipated layoffs, restructuring costs, and any further asset impairments.
- The company’s ability to continue as a going concern, including developments affecting its auditor’s going-concern assessment.