Intrepid Potash, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Quarterly period ended March 31, 2017. Intrepid is the only U.S. producer of muriate of potash and one of two U.S. producers of langbeinite, marketed as Trio. Products serve agricultural, animal-feed and industrial markets. The East facility was converted to Trio-only production in April 2016, and the West facility was idled in July 2016.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $48.3 million | $73.3 million |
| Gross deficit | $2.9 million | $9.2 million |
| Gross margin | (5.9%) | (12.5%) |
| Operating loss | $10.0 million | $16.5 million |
| Net loss | $13.7 million | $18.4 million |
| Loss per diluted share | $0.17 | $0.24 |
| Operating cash flow | $1.8 million | $(1.1) million |
| Capital expenditures | $2.4 million | $6.0 million |
Net loss margin was approximately (28.3%), compared with (25.1%) in the prior-year quarter. Cash and cash equivalents were $20.8 million at March 31, 2017, versus $4.5 million at December 31, 2016. Long-term debt, net, was $88.0 million, down from $133.4 million at year-end 2016. The company had $25.5 million of available capacity under its asset-based revolving credit facility, with no borrowings and $3.5 million of letters of credit outstanding.
- Potash sales were $27.2 million; sales volume was 101,000 tons, versus 218,000 tons, while average net realized price increased to $240 per ton from $216.
- Trio sales were $21.1 million; sales volume increased to 76,000 tons from 50,000 tons, while average net realized price declined to $202 per ton from $316.
- Potash generated a $2.3 million gross margin, while Trio generated a $5.2 million gross deficit, including a $3.8 million lower-of-cost-or-market inventory charge.
- Inventory declined to $86.2 million from $94.4 million at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Sales declined 34% primarily because of lower potash volumes and substantially lower Trio pricing.
- Gross deficit improved by $6.3 million, and net loss improved by $4.7 million, reflecting lower production costs, reduced selling and administrative expense, and the absence of the prior-year $9.0 million inventory charge and $0.7 million abnormal-production charge.
- Selling and administrative expense decreased 33% to $4.4 million. No restructuring expense was recorded, compared with $0.4 million in Q1 2016.
- Interest expense increased to $4.4 million from $2.3 million, including a $0.8 million make-whole payment and higher rates under the revised senior-note agreement.
- In March 2017, the company issued 50.1 million common shares for $57.5 million of net proceeds. It used $40.5 million of those proceeds, plus $5.5 million from an asset sale, to repay $46.0 million of senior-note principal.
- Trio production increased 61% to 71,000 tons, but pricing pressure and increased lower-priced international sales reduced profitability. International Trio sales rose to 25% of volume from 3%.
Guidance, Outlook, Risks and Unusual Items
Management expects a full-year 2017 net loss based on anticipated potash and Trio pricing. Trio prices are expected to remain under pressure, while demand may become more seasonal as domestic customers adopt just-in-time purchasing. Management expects potash production from solar solution facilities to increase in 2017, supported by favorable evaporation rates in 2016.
Expected 2017 capital investment is approximately $13 million to $17 million, primarily sustaining capital. Management expects remaining capital programs and operating needs to be funded through operating cash flow, existing cash and the credit facility, and states that it believes liquidity is sufficient for the next twelve months.
- Senior-note rates are 7.73% for Series A, 8.63% for Series B and 8.78% for Series C. An additional 2% interest charge may begin accruing April 1, 2018 unless specified covenant tests are satisfied.
- The company was in compliance with applicable debt covenants at March 31, 2017. Future covenant compliance, refinancing and access to capital remain material risks.
- The company recorded a $4.4 million increase in its deferred-tax valuation allowance and maintained a full valuation allowance against net deferred tax assets.
- Asset retirement obligations were $20.4 million recorded, with an undiscounted obligation of $59.3 million. Reclamation security totaled $18.4 million.
- Mosaic litigation alleging trade-secret and related violations remains outstanding. Potential damages are unspecified and cannot reasonably be estimated.
- Key operating risks include potash and Trio pricing, global supply-demand conditions, weather affecting solar mines, mine and equipment disruptions, regulatory permits and reclamation requirements, transportation costs, labor availability and the ability to fund capital investments.
Investor Verification Checklist
- Verify the sustainability of positive operating cash flow despite continuing quarterly net losses.
- Monitor Trio pricing, international mix, inventory valuation and additional lower-of-cost-or-market charges.
- Assess compliance with senior-note and revolving-credit covenants as thresholds tighten.
- Confirm whether projected $13 million to $17 million of 2017 capital spending can be funded internally.
- Evaluate the effects of the East conversion, West idling and higher solar-facility production on unit costs and volumes.
- Track the Mosaic litigation, reclamation-security requirements and any changes to deferred-tax asset realizability.