Intrepid Potash, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2010; filed November 3, 2010. The unaudited results cover five active U.S. potash facilities and the company’s potash, langbeinite/Trio and related by-product operations.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Sales | $91.5 million | $66.4 million | $263.1 million | $228.7 million |
| Gross margin | $26.8 million | $22.9 million | $68.4 million | $105.5 million |
| Gross margin percentage | 29.3% | 34.5% | 26.0% | 46.1% |
| Operating income | $19.9 million | $16.2 million | $46.1 million | $83.3 million |
| Net income | $11.7 million | $9.5 million | $27.1 million | $48.6 million |
| Diluted EPS | $0.16 | $0.13 | $0.36 | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $76.5 million | $58.0 million |
Q3 operating and net margins were approximately 21.8% and 12.7%, respectively, compared with 24.4% and 14.3% in the prior-year quarter. Year-to-date operating and net margins were approximately 17.5% and 10.3%, compared with 36.4% and 21.3% in 2009.
- At September 30, 2010, cash and cash equivalents were $66.7 million, short-term investments were $33.0 million and long-term investments were $26.8 million.
- Total assets were $811.1 million and stockholders’ equity was $738.7 million.
- No borrowings were outstanding under the $125.0 million revolving senior credit facility, which expires in March 2012; the company reported compliance with all covenants.
- Capital expenditures and mineral-property additions totaled $58.0 million through nine months, while investing cash outflows totaled $98.9 million, including purchases of investments.
- Cash decreased by $23.1 million during the first nine months, ending at $66.7 million.
Material changes versus the prior comparable period
- Q3 sales increased 38% to $91.5 million, driven primarily by a 99% increase in potash sales volume to 221,000 tons. Trio sales volume increased 13% to 45,000 tons.
- Year-to-date potash sales volume increased 105% to 594,000 tons and Trio volume increased 44% to 177,000 tons.
- Average net realized potash pricing declined to $343 per ton in Q3 from $458 and to $354 per ton year-to-date from $610. Trio pricing declined to $173 per ton in Q3 from $246 and to $167 year-to-date from $306.
- Lower pricing substantially compressed margins despite stronger volumes. Q3 potash gross margin, excluding abnormal-production costs, fell to $122 per ton from $231; Trio gross margin fell to $3 per ton from $74.
- Cost of goods sold increased 79% in both Q3 and the first nine months, reflecting higher volumes and production spending. However, abnormal-production costs declined to zero in Q3 from $5.8 million and to $0.5 million year-to-date from $12.2 million.
- Year-to-date net income declined 44% despite 12% higher sales, primarily because of sharply lower realized prices and reduced gross margins.
- Operating cash flow increased $18.5 million year-over-year, helped by a $15.8 million inventory reduction compared with a $19.9 million inventory increase in 2009.
Guidance, outlook, risks and unusual items
- Management described potash demand as historically more normal, with strong fall agricultural demand and improving crop economics. It expected seasonal volume declines later in 2010 as winter weather reduced fertilizer applications.
- Post-quarter-end red granular potash pricing was raised to $485 per ton effective November 1, 2010. Management expected only a modest Q4 benefit, with the full effect primarily in early 2011.
- Granular Trio pricing was increased to $246 per ton effective October 15, 2010. Demand was expected to exceed productive capacity for the next several quarters.
- The Moab compaction project, expected to enter service in December 2010, was estimated to cost $11 million to $13 million. The Langbeinite Recovery Improvement Project was estimated at $85 million to $90 million and targeted completion by the end of 2011.
- The HB Solar Solution Mine remained subject to regulatory approvals. Estimated total project cost was $120 million to $130 million, with $31.3 million invested through September 30, 2010; the filing anticipated completion of the BLM environmental review in Q4 2011.
- Total 2010 capital investment was estimated at $110 million to $120 million. Management believed available cash, investments, operating cash flow and the undrawn credit facility were sufficient to fund planned operations and capital spending.
- Heavy rainfall in July caused a 14-day shutdown of the East langbeinite plant, reduced production and increased Trio unit costs. The East facility also underwent maintenance extending approximately 10 days into Q4.
- Interest-rate derivatives had a $2.8 million net liability and generated a $1.2 million year-to-date loss in interest expense, despite no debt being outstanding.
- The company held $11.7 million of deferred insurance proceeds pending final agreement with its insurer. A potential state refundable credit of approximately $4.5 million had not been recognized.
- Material risks include potash and Trio pricing, agricultural and oil-and-gas demand, production interruptions, weather, natural-gas and energy costs, mine-reserve estimates, permitting, environmental regulation, competition and reclamation obligations. New Mexico greenhouse-gas cap-and-trade rules could increase compliance costs.
- Intrepid appealed an order allowing a proposed oil and gas well near its North Mine. A derivative lawsuit alleging fiduciary-duty breaches remained pending, although management reported no material claims outstanding at September 30.
Investor verification checklist
- Verify whether announced potash and Trio price increases translated into higher realized prices and margins in subsequent quarters.
- Review demand, inventory and operating-rate trends at Wendover and the East facility, including the effects of maintenance and weather disruptions.
- Track capital spending, cost-to-complete estimates and permitting milestones for the Langbeinite Recovery Improvement Project and HB Solar Solution Mine.
- Assess liquidity after planned capital expenditures, investment maturities and any potential insurance proceeds or tax credit receipts.
- Monitor potash supply-demand conditions, competitor pricing, agricultural economics and the potential effect of BHP’s proposed Potash Corp. transaction.
- Review reclamation, environmental, mine-safety and litigation exposures, including the North Mine drilling appeal and MSHA proceedings.