Intrepid Potash, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010; filed August 4, 2010. The unaudited statements cover Intrepid’s U.S. potash and langbeinite operations, including five active facilities in New Mexico and Utah. The company reports one operating segment.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $64.3 million, versus $73.4 million | $171.7 million, versus $162.3 million |
| Gross margin | $14.7 million; approximately 22.9% margin | $41.6 million; approximately 24.2% margin |
| Operating income | $6.3 million, versus $26.9 million | $26.2 million, versus $67.1 million |
| Net income | $3.6 million, versus $14.4 million | $15.4 million, versus $39.1 million |
| Diluted EPS | $0.05, versus $0.19 | $0.21, versus $0.52 |
| Operating cash flow | Not provided for the quarter | $67.9 million, versus $51.4 million |
- Six-month sales increased 6%, but quarterly sales declined 12% year over year. Higher volumes were more than offset in the quarter by sharply lower realized prices.
- Gross margin declined from approximately 48.2% to 22.9% in the quarter and from approximately 50.9% to 24.2% year to date. Operating margin declined from approximately 36.6% to 9.8% in the quarter and from approximately 41.3% to 15.3% year to date.
- Potash sales volume increased 61% in the quarter and 108% year to date, while Trio sales volume increased 40% and 59%, respectively. Average net realized potash prices fell 44% in the quarter and 49% year to date; Trio prices fell 52% and 51%.
- Cost of goods sold was $41.4 million in the quarter and $108.7 million year to date, up 56% and 78%, respectively. Quarterly potash cost per ton increased 8% to $249, while six-month potash cost per ton decreased 7% to $240. Trio cost per ton decreased 18% to $149 in both comparable presentations.
- Cash, cash equivalents and investments totaled $136.3 million at June 30, 2010. Cash and cash equivalents were $98.0 million, compared with $89.8 million at December 31, 2009.
- Total assets were $781.2 million and stockholders’ equity was $726.1 million at June 30, 2010. Total liabilities were $55.1 million.
- There was no outstanding debt under the $125.0 million revolving credit facility; the entire facility was available. The company was in compliance with all covenants.
- Capital expenditures and mineral-property additions totaled $38.1 million in the first six months, while investing cash outflows totaled $59.0 million, including purchases of investments.
Material Changes Versus the Prior Comparable Period
- Profitability weakened substantially because industry potash and Trio prices remained well below 2009 levels, despite significantly higher sales volumes.
- Quarterly production increased 26% for potash to 165,000 tons, but langbeinite production decreased 13% to 39,000 tons. Year-to-date potash production increased 26% to 337,000 tons and langbeinite production increased 10% to 96,000 tons.
- Quarterly potash gross margin, excluding abnormal-production costs, fell to $114 per ton from $426 per ton. Trio gross margin fell to $3 per ton from $142 per ton.
- Operating cash flow improved by $16.5 million year over year, primarily because inventory and trade receivables declined as sales volumes recovered. This improvement occurred despite lower net income.
- Inventory declined to $57.8 million from $69.1 million at year-end 2009, while property, plant and equipment increased to $237.7 million from $221.4 million.
- Abnormal-production costs were $0.5 million in the first six months of 2010, compared with $6.4 million in the prior-year period; no such cost was recorded in the second quarter of 2010.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2010 fall fertilizer demand to follow more historically normal seasonal patterns. Summer price incentives were expected to reduce third-quarter average net realized potash prices by approximately $35 per ton from the second-quarter level.
- Management estimated revised 2010 capital investment of $105 million to $125 million, funded from cash flow and existing cash. The Langbeinite Recovery Improvement Project was expected to cost $85 million to $90 million and operate by the end of 2011.
- The Moab compaction facility, expected to cost approximately $16 million, was scheduled to operate in early 2011. The HB Solar Solution Mine project was estimated at $120 million to $130 million, with $30.7 million invested to date and additional spending dependent on permits.
- Heavy rainfall in the Carlsbad region caused a 14-day shutdown of the East langbeinite plant in July 2010. Management warned that significant precipitation could continue to affect production until planned water-management improvements are completed.
- The East facility experienced higher maintenance, chemical and utility costs, lower energy efficiency and other operating challenges. Wendover continued to operate below capacity because of weak demand for standard-sized potash.
- A proposed New Mexico greenhouse-gas cap-and-trade regulation could apply to the East facility. The filing states that approval and final requirements were uncertain but could increase compliance costs.
- Key risks include potash and Trio pricing, agricultural and oil-and-gas demand, operational disruptions, weather, natural gas and other input costs, reserve estimates, environmental and mining regulation, permitting, competition, reclamation requirements and debt-covenant compliance.
- Contractual obligations totaled $70.6 million on an undiscounted basis, including $32.3 million for asset retirement obligations, $21.8 million of operating leases and $11.4 million of minimum royalties.
- A potential refundable state tax credit of approximately $4.5 million was under audit and was not included in the financial statements. The company also maintained a $2.8 million net liability for interest-rate derivatives despite having no debt outstanding.
- There were no material legal claims outstanding according to management, although litigation concerning oil-and-gas drilling near potash resources and a derivative lawsuit remained pending or active.
Important Facts for Investors to Verify
- Whether potash and Trio pricing stabilizes after the 2010 industry price decline and how third-quarter incentives affect realized prices and margins.
- Progress, cost increases and timing for the Langbeinite Recovery Improvement Project, Moab compaction facility and HB Solar Solution Mine permits and construction.
- Whether East facility reliability, rainfall exposure and water-management constraints cause further langbeinite production interruptions or cost escalation.
- The sustainability of higher sales volumes and operating cash flow as inventory is reduced and production approaches capacity.
- The final status and financial impact of proposed New Mexico greenhouse-gas regulations and the approximately $4.5 million potential state tax credit.
- Reclamation security requirements, asset retirement obligations, interest-rate derivative settlements and the company’s continued compliance with revolving-credit covenants.