Intrepid Potash, Inc. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Intrepid Potash 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 into agricultural markets, with additional exposure to animal feed, industrial, oil and gas, water, and by-product markets. The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $32.1 million | $43.6 million | $124.3 million | $168.8 million |
| Gross margin (deficit) | $3.8 million | $(7.6) million | $4.6 million | $(22.2) million |
| Approximate gross margin percentage | 11.8% | (17.5)% | 3.7% | (13.2)% |
| Operating loss | $(0.2) million | $(14.6) million | $(11.5) million | $(41.6) million |
| Net loss | $(1.9) million | $(18.2) million | $(21.5) million | $(50.1) million |
| Loss per share | $(0.02) | $(0.24) | $(0.19) | $(0.66) |
| Operating cash flow | Not separately provided for the quarter | $14.1 million | $(13.6) million |
- Potash sales volume declined 52% in the quarter and 49% year to date, while average net realized price increased to $232 per ton from $178 in Q3 2016 and to $236 per ton from $198 for the nine-month period.
- Trio® sales volume increased 72% in the quarter and 65% year to date, but average net realized price fell to $187 per ton from $274 in Q3 2016 and to $197 per ton from $308 year to date.
- Cash and cash equivalents were $1.7 million at September 30, 2017, compared with $4.5 million at December 31, 2016. Total assets were $507.8 million and stockholders’ equity was $403.5 million.
- Capital expenditures were $6.2 million for the first nine months. Management expected full-year 2017 capital investment of approximately $13 million to $17 million, primarily sustaining capital.
Material changes versus the prior comparable period
- Results improved substantially because of lower production costs following the curtailment of conventional mining, greater use of solution mining, higher potash pricing, lower inventory write-downs, and increased by-product sales.
- Lower potash volumes reflected the conversion of the East facility to Trio®-only production and the idling of the West facility in 2016.
- Trio® sales increased as international volumes expanded, but international freight and lower pricing caused Trio® to generate a gross deficit of $1.2 million in Q3 and $6.7 million for the first nine months.
- Lower-of-cost-or-market inventory charges declined to $0.7 million in Q3 and $4.8 million year to date, compared with $5.2 million and $17.1 million, respectively, in 2016.
- Debt reduction was significant: senior notes declined to $60.0 million from $135.0 million at year-end 2016 after $75.0 million of principal repayments during the first nine months. Equity offerings provided approximately $59.1 million of net proceeds, primarily used to repay debt.
- Common shares outstanding increased to 127.1 million at September 30, 2017, from 75.8 million at December 31, 2016, primarily reflecting the March public offering and subsequent at-the-market issuance.
Liquidity, debt, outlook, and risks
- The company generated $14.1 million of operating cash flow in the first nine months, versus $13.6 million of operating cash use in the prior-year period. Financing cash use was $16.2 million, primarily due to debt repayments.
- The $35 million asset-based revolving credit facility had no borrowings outstanding, $3.5 million of letters of credit, and $22.5 million of availability at September 30, 2017. Management stated that available facility capacity and expected operating cash flows were sufficient for the next twelve months.
- The senior notes require an additional $10 million prepayment, plus accrued interest and a make-whole amount, by December 31, 2018. The company was in compliance with applicable debt covenants, including a $15 million minimum liquidity requirement; covenant liquidity was $24.2 million and covenant adjusted EBITDA was $19.4 million at September 30, 2017.
- Interest rates on the senior notes were 7.73%, 8.63%, and 8.78% during the quarter and were scheduled to decline beginning November 1, 2017, to 3.73%, 4.63%, and 4.78%, respectively, assuming the applicable conditions remained satisfied.
- Management expected a net loss for the full year ending December 31, 2017, based on anticipated potash and Trio® pricing. No specific revenue or earnings guidance was provided.
- Management expected water sales of $20 million to $30 million in 2018 and reported pre-arranged water commitments of $15 million per year for each of the next five years, subject to demand, permits, water-rights challenges, and oil and gas activity.
- Key risks include continued excess global potash capacity, fertilizer price and demand volatility, Trio® pricing pressure, weather-dependent solar production, production disruptions, environmental and mining regulation, permit and water-rights challenges, transportation costs, labor availability, liquidity and covenant compliance, and potential further inventory or asset write-downs.
- The company is defending two Mosaic lawsuits alleging trade-secret and related violations. Damages are unspecified, and the company stated that potential losses cannot currently be reasonably estimated.
- The company recorded a full valuation allowance against net deferred tax assets and increased the allowance by $10.2 million during the first nine months of 2017.
Most important facts for investors to verify
- Whether potash pricing and selective higher-margin sales can offset structurally lower volumes.
- Whether Trio® pricing stabilizes and whether international growth can become profitable after freight costs.
- Progress toward the required additional $10 million senior-note prepayment and ongoing covenant compliance.
- Cash generation, liquidity availability, and the company’s ability to fund planned capital expenditures while remaining loss-making.
- Realization of the projected 2018 water-sales opportunity, including customer commitments, permits, and water-rights risks.
- Potential exposure from the Mosaic litigation, reclamation obligations, surety bonds, and future regulatory requirements.