Intrepid Potash, Inc. — Q2 2016 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 as agricultural fertilizers, with additional animal-feed and industrial applications. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Beginning in the second quarter of 2016, management reported two operating segments: potash and Trio®. The East facility was converted to Trio®-only production in April, and the West facility was idled and placed into care-and-maintenance mode in July 2016. The company stated that all potash production thereafter would come from its three solution-mining facilities.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $51.8 million | $73.7 million | $125.1 million | $190.7 million |
| Gross margin (deficit) | $(5.5) million | $2.6 million | $(14.6) million | $21.3 million |
| Operating income (loss) | $(10.6) million | $(3.9) million | $(27.0) million | $6.8 million |
| Net income (loss) | $(13.4) million | $(4.9) million | $(31.8) million | $1.6 million |
| Diluted EPS | $(0.18) | $(0.07) | $(0.42) | $0.02 |
| Cash flow from operations | Not separately provided | Not separately provided | $0.4 million | $55.2 million |
Calculated margins were approximately (10.5%) gross, (20.4%) operating, and (25.8%) net in Q2 2016, compared with 3.5%, (5.3%), and (6.7%), respectively, in Q2 2015. Six-month gross, operating, and net margins were approximately (11.7%), (21.6%), and (25.4%), compared with 11.2%, 3.6%, and 0.8% in the prior-year period.
- Potash sales volume increased to 168,000 tons in Q2 from 147,000 tons, while the average net realized price fell 46% to $193 per ton. Six-month potash volume increased 2% to 386,000 tons, while price declined 43% to $206 per ton.
- Trio® sales volume declined to 33,000 tons in Q2 from 37,000 tons, and the average net realized price declined 16% to $320 per ton. Six-month volume declined to 83,000 tons from 98,000 tons, with price declining 15% to $318 per ton.
- Q2 gross deficit included $2.9 million of lower-of-cost-or-market inventory adjustments and $1.1 million of abnormal production costs. Six-month charges were $11.9 million and $1.7 million, respectively.
- Selling and administrative expense declined 46% year over year in Q2 to $4.5 million and 30% for the six months to $11.1 million.
- Interest expense increased to $3.0 million in Q2 and $5.2 million for the six months, partly because of higher senior-note rates and the write-off of deferred financing costs.
Liquidity, debt, and balance sheet
| Balance-sheet item | June 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $31.0 million | $9.3 million |
| Short-term investments | $16.6 million | $50.5 million |
| Cash, cash equivalents, and investments | $47.6 million | $63.6 million |
| Long-term debt, net | $147.8 million | $149.5 million |
| Stockholders’ equity | $396.3 million | $426.5 million |
- Operating cash flow was only $0.4 million for the first six months, compared with $55.2 million in 2015. Capital expenditures were $11.8 million, and management expected full-year 2016 capital investment of approximately $20 million to $25 million.
- Investing activities provided $24.1 million, primarily from $37.4 million of investment-sale proceeds. Financing activities used $2.8 million, principally for debt issuance costs and employee tax withholding.
- The $150 million senior notes were outstanding at June 30, 2016, with a carrying value of $147.8 million and estimated fair value of $137.0 million. The company also had a $0.5 million letter of credit outstanding under its credit facility.
Material changes versus the prior comparable period
- Revenue fell 30% in Q2 and 34% for the first six months, primarily because of sharply lower potash and Trio® realized prices and weaker Trio® volumes.
- Potash pricing was pressured by global oversupply, imported product, and the strong U.S. dollar. Industrial-market demand was also affected by reduced oil and gas drilling activity.
- Production was restructured: East shifted to Trio®-only production, West was idled, and approximately 275 employees were reduced in connection with the transition. The company recorded $1.9 million of Q2 restructuring expense and $2.3 million for the first six months.
- Trio® production increased 65% in Q2 and 44% for the first six months as East was converted, although sales remained below the prior year.
- The company recorded a $13.8 million increase in its deferred-tax-asset valuation allowance during the first six months; the net deferred tax asset was zero at June 30, 2016.
Outlook, risks, contingencies, and unusual items
- Management expected a net loss for the year ending December 31, 2016, based on anticipated potash and Trio® pricing.
- Management expected lower second-half potash production, lower potash cost of goods sold as production shifted to lower-cost solution mining, and continued Trio® commissioning. It also expected Trio® pricing to decline in the second half as production increased and specialty-fertilizer markets remained pressured.
- The company was not in compliance with the financial covenants governing both its credit facility and senior notes at June 30, 2016. The applicable waivers generally extended through September 30, 2016. The credit facility’s availability had been reduced to a maximum of $1 million, usable only for letters of credit.
- At June 30, 2016, the leverage ratio was 10.3x versus a maximum of 3.5x, and the fixed-charge coverage ratio was (1.4)x versus a minimum of 1.3x. Senior-note interest rates increased by 2% beginning April 1, 2016 and by 3.5% above stated rates beginning July 29, 2016 while covenant noncompliance continued.
- The company had reached an agreement in principle on revised senior-note terms and received a commitment letter for a replacement credit facility, subject to conditions. Failure to finalize these arrangements or obtain further waivers could trigger defaults and acceleration of substantially all debt. Management stated that existing cash would not be sufficient to repay accelerated obligations.
- Because of covenant uncertainty, declining revenue, inventory adjustments, and negative operating cash flow, the filing stated that substantial doubt existed about the company’s ability to continue as a going concern. The financial statements were nevertheless prepared on a going-concern basis.
- Other unusual items included $1.8 million of Q2 insurance-related operating income, recognition of $1.1 million of previously deferred New Mexico tax-refund proceeds, and $1.9 million of restructuring expense.
- Mosaic has asserted trade-secret, computer-fraud, conversion, civil-conspiracy, and related claims against the company and an employee in two proceedings. Damages are unspecified, and the company stated that potential losses could not reasonably be estimated.
Most important facts for investors to verify
- Whether the senior-note amendments and replacement credit facility were finalized by the September 30, 2016 waiver deadline.
- Whether covenant compliance was restored or additional waivers were obtained, and whether any debt was accelerated or restructured.
- Actual post-June 30 performance of potash and Trio® prices, volumes, inventory levels, and operating cash flow.
- Execution and cost profile of the East Trio® conversion and West facility idling, including restructuring cash payments and production effects.
- Whether continued losses or lower commodity prices require additional inventory, property, plant, and equipment, or mineral-property impairments.
- The potential financial and operational impact of the Mosaic litigation and reclamation obligations, including $19.5 million of reclamation security and a $23.8 million asset-retirement obligation.