Intrepid Potash, Inc. — 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Intrepid is the only U.S. producer of muriate of potash and one of two U.S. producers of langbeinite, marketed as Trio®. Products are sold primarily as agricultural fertilizers, with additional animal-feed and industrial applications. The filing covers the three and six months ended June 30, 2015; financial statements are unaudited.
Financial Performance and Position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Sales | $73.7 million | $110.9 million | $190.7 million | $209.8 million |
| Gross margin | $2.6 million | $15.7 million | $21.3 million | $19.7 million |
| Gross margin percentage | 3.5% | 14.1% | 11.2% | 9.4% |
| Operating income (loss) | $(3.9) million | $8.5 million | $6.8 million | $6.5 million |
| Net income (loss) | $(4.9) million | $5.6 million | $1.6 million | $5.2 million |
| Diluted EPS | $(0.07) | $0.07 | $0.02 | $0.07 |
- Second-quarter sales declined 34%, primarily because potash sales volumes fell 37% and Trio® volumes fell 40%. Higher realized prices partially offset the volume declines.
- Six-month sales declined 9%; potash sales fell 12%, while Trio® sales increased 8%.
- Second-quarter gross margin fell sharply as conventional-facility production costs increased and a $5.3 million lower-of-cost-or-market inventory charge was recorded. The six-month gross margin improved modestly despite lower sales.
- Operating cash flow was $22.5 million in the second quarter and $55.2 million for the first six months, compared with $55.8 million in the prior-year six-month period.
- Investing cash outflow was $81.5 million in the first half, including $19.0 million of capital expenditures and $72.2 million of investment purchases. Net cash declined $27.3 million to $40.3 million.
- Cash, cash equivalents and investments totaled $124.4 million at June 30, 2015, including $63.2 million of short-term and $20.9 million of long-term investments.
- Long-term debt was $150.0 million. No borrowings were outstanding under the $250 million revolving credit facility; $212 million was available, subject to covenant-based limitations. The company was in compliance with its debt covenants.
- Total assets were $1.17 billion and stockholders’ equity was $950.4 million at June 30, 2015.
Material Changes Versus the Prior Comparable Period
- Potash second-quarter sales volume decreased to 147,000 tons from 235,000 tons; first-half volume decreased to 377,000 tons from 478,000 tons.
- Potash average net realized price increased to $358 per ton in the second quarter from $329 and to $361 per ton for the first half from $323.
- Potash second-quarter gross margin declined to $27 per ton from $51, reflecting higher cash operating costs, depreciation and warehousing costs. Trio® gross margin increased to $106 per ton from $76.
- Potash cash operating cost increased to $224 per ton in the second quarter from $188, primarily due to lower production and a greater contribution from higher-cost conventional facilities. First-half cost increased to $209 per ton from $197.
- Trio® first-half sales volume was unchanged at 98,000 tons, while average realized price increased to $373 per ton from $347 and cash operating costs decreased to $183 per ton from $201.
- Selling and administrative expense increased 19% in the second quarter and 15% for the first half, including a $1.2 million charge for early termination of the corporate office lease.
- Other operating income included a net $2.0 million reduction in previously paid New Mexico property taxes during the second quarter.
- The prior-year six-month period included a $1.8 million restructuring expense and a favorable tax effect from reversal of a $1.7 million valuation allowance related to New Mexico net operating losses; neither item recurred in 2015.
Guidance, Outlook, Risks and Unusual Items
- Management expects net losses in both the third and fourth quarters of 2015 based on expected potash pricing.
- Global potash supply was described as exceeding demand, with imports and competitive pricing expected to pressure potash prices during the remainder of 2015.
- Fall fertilizer demand remained uncertain because of wet weather, a shorter spring application season and elevated customer inventory levels.
- Production is affected by solar evaporation and harvesting timing, weather, ore grade, recoveries, operating uptime and facility shutdowns. The Wendover facility was expected to shut down for approximately six weeks in the third quarter.
- Management expects 2015 capital investment of approximately $45 million to $55 million, primarily sustaining capital, funded from operating cash flow and existing cash and investments.
- Key risks include potash and Trio® pricing and demand, agricultural and oil-and-gas activity, transportation constraints, weather, labor and energy costs, mine and plant performance, reserve estimates, permitting, environmental and mining regulation, reclamation obligations, competition and debt-covenant availability.
- Reclamation security requirements totaled $18.0 million, consisting principally of $17.5 million of surety bonds and $0.5 million of restricted cash. The asset retirement obligation was $22.9 million discounted, with an undiscounted amount of $57.7 million.
- The company reported no material change in previously disclosed legal risks and stated that ordinary-course claims were not reasonably likely to have a material adverse effect.
Investor Verification Checklist
- Verify subsequent-quarter potash volumes, realized prices, inventory levels and the expected third- and fourth-quarter losses.
- Monitor covenant calculations and the amount actually available under the revolving credit facility as adjusted EBITDA changes.
- Assess whether the $45 million to $55 million capital program remains funded by operating cash flow without additional borrowing.
- Review the effect of lower-of-cost-or-market inventory adjustments and conventional-mine production costs on future margins.
- Track New Mexico property-tax and employment-credit receivables, reclamation security requirements and the $1.2 million lease termination payment expected in the first quarter of 2016.
- Evaluate exposure to global potash oversupply, imports, agricultural demand, weather-driven application timing and solar-mine operating variability.