UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the Quarterly Period Ended September 30, 2014 | |
Commission File Number: 001-34025
INTREPID POTASH, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 26-1501877 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
707 17th Street, Suite 4200, Denver, Colorado | 80202 |
(Address of principal executive offices) | (Zip Code) |
(303) 296-3006
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 29, 2014, the registrant had 76,012,465 shares of common stock, par value $0.001, outstanding (including 484,230 restricted shares of common stock).
INTREPID POTASH, INC.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amount)
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 70,833 | $ | 394 | ||||
Short-term investments | 3,019 | 15,214 | ||||||
Accounts receivable: | ||||||||
Trade, net | 32,558 | 20,837 | ||||||
Other receivables | 5,662 | 7,457 | ||||||
Refundable income taxes | 527 | 15,722 | ||||||
Inventory, net | 78,676 | 105,011 | ||||||
Prepaid expenses and other current assets | 5,456 | 5,653 | ||||||
Current deferred tax asset | 5,228 | 8,341 | ||||||
Total current assets | 201,959 | 178,629 | ||||||
Property, plant, equipment, and mineral properties, net | 799,095 | 826,569 | ||||||
Long-term parts inventory, net | 15,248 | 12,469 | ||||||
Long-term investments | 1 | 9,505 | ||||||
Other assets, net | 4,134 | 4,252 | ||||||
Non-current deferred tax asset | 146,987 | 143,849 | ||||||
Total Assets | $ | 1,167,424 | $ | 1,175,273 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable: | ||||||||
Trade | $ | 17,905 | $ | 27,552 | ||||
Related parties | 233 | 50 | ||||||
Accrued liabilities | 20,037 | 29,845 | ||||||
Accrued employee compensation and benefits | 13,680 | 9,122 | ||||||
Other current liabilities | 1,171 | 2,059 | ||||||
Total current liabilities | 53,026 | 68,628 | ||||||
Long-term debt | 150,000 | 150,000 | ||||||
Asset retirement obligation | 21,051 | 19,959 | ||||||
Other non-current liabilities | 2,784 | 2,715 | ||||||
Total Liabilities | 226,861 | 241,302 | ||||||
Commitments and Contingencies | ||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; and 75,528,235 and | ||||||||
75,405,410 shares outstanding at September 30, 2014, and December 31, 2013, respectively | 76 | 75 | ||||||
Additional paid-in capital | 575,225 | 572,616 | ||||||
Accumulated other comprehensive income (loss) | 2 | (10 | ) | |||||
Retained earnings | 365,260 | 361,290 | ||||||
Total Stockholders' Equity | 940,563 | 933,971 | ||||||
Total Liabilities and Stockholders' Equity | $ | 1,167,424 | $ | 1,175,273 | ||||
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales | $ | 102,280 | $ | 70,569 | $ | 312,104 | $ | 262,506 | ||||||||
Less: | ||||||||||||||||
Freight costs | 10,925 | 5,952 | 32,616 | 20,575 | ||||||||||||
Warehousing and handling costs | 3,270 | 2,854 | 9,070 | 9,527 | ||||||||||||
Cost of goods sold | 77,794 | 46,780 | 235,750 | 155,556 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 3,403 | 2,080 | 8,110 | 2,092 | ||||||||||||
Gross Margin | 6,888 | 12,903 | 26,558 | 74,756 | ||||||||||||
Selling and administrative | 6,466 | 7,921 | 20,276 | 26,052 | ||||||||||||
Accretion of asset retirement obligation | 405 | 375 | 1,217 | 1,124 | ||||||||||||
Restructuring expense | — | — | 1,827 | — | ||||||||||||
Other operating expense (income) | 2 | 2,921 | (3,249 | ) | 1,752 | |||||||||||
Operating Income | 15 | 1,686 | 6,487 | 45,828 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (1,632 | ) | (248 | ) | (4,569 | ) | (680 | ) | ||||||||
Interest income | 35 | 165 | 110 | 380 | ||||||||||||
Other income (expense) | 343 | 73 | 803 | (1,747 | ) | |||||||||||
(Loss) Income Before Income Taxes | (1,239 | ) | 1,676 | 2,831 | 43,781 | |||||||||||
Income Tax Benefit (Expense) | 3 | 350 | 1,139 | (15,519 | ) | |||||||||||
Net (Loss) Income | $ | (1,236 | ) | $ | 2,026 | $ | 3,970 | $ | 28,262 | |||||||
Weighted Average Shares Outstanding: | ||||||||||||||||
Basic | 75,528,235 | 75,394,377 | 75,496,365 | 75,372,879 | ||||||||||||
Diluted | 75,528,235 | 75,404,138 | 75,611,070 | 75,394,731 | ||||||||||||
(Loss) Earnings Per Share: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.03 | $ | 0.05 | $ | 0.37 | |||||||
Diluted | $ | (0.02 | ) | $ | 0.03 | $ | 0.05 | $ | 0.37 | |||||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net (Loss) Income | $ | (1,236 | ) | $ | 2,026 | $ | 3,970 | $ | 28,262 | |||||||
Other Comprehensive Income: | ||||||||||||||||
Pension liability adjustment, net of tax | — | — | — | 1,700 | ||||||||||||
Unrealized gain (loss) on investments available for sale, net of tax | — | 200 | 12 | (21 | ) | |||||||||||
Other Comprehensive Income | — | 200 | 12 | 1,679 | ||||||||||||
Comprehensive (Loss) Income | $ | (1,236 | ) | $ | 2,226 | $ | 3,982 | $ | 29,941 | |||||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance, December 31, 2013 | 75,405,410 | $ | 75 | $ | 572,616 | $ | (10 | ) | $ | 361,290 | $ | 933,971 | |||||||||||
Unrealized gain on investments available for sale, net of tax | — | — | — | 12 | — | 12 | |||||||||||||||||
Net income | — | — | — | — | 3,970 | 3,970 | |||||||||||||||||
Stock-based compensation | — | — | 3,220 | — | — | 3,220 | |||||||||||||||||
Vesting of restricted common stock, net of restricted common stock used to fund employee income tax withholding due upon vesting | 122,825 | 1 | (611 | ) | — | — | (610 | ) | |||||||||||||||
Balance, September 30, 2014 | 75,528,235 | $ | 76 | $ | 575,225 | $ | 2 | $ | 365,260 | $ | 940,563 | ||||||||||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Cash Flows from Operating Activities: | ||||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 3,970 | $ | 28,262 | ||||
Deferred income taxes | (31 | ) | 16,299 | |||||
Items not affecting cash: | ||||||||
Depreciation, depletion, and accretion | 59,630 | 44,040 | ||||||
Stock-based compensation | 3,220 | 3,881 | ||||||
Lower-of-cost-or-market inventory adjustments | 8,110 | 2,092 | ||||||
Other | 172 | 2,112 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable, net | (11,722 | ) | 6,114 | |||||
Other receivables, net | 1,794 | 757 | ||||||
Refundable income taxes | 15,196 | (1,199 | ) | |||||
Inventory, net | 15,446 | (39,373 | ) | |||||
Prepaid expenses and other assets | (3 | ) | (1,273 | ) | ||||
Accounts payable, accrued liabilities, and accrued employee compensation and benefits | 9,995 | 1,253 | ||||||
Other liabilities | (942 | ) | (838 | ) | ||||
Net cash provided by operating activities | 104,835 | 62,127 | ||||||
Cash Flows from Investing Activities: | ||||||||
Additions to property, plant, equipment, and mineral properties | (55,325 | ) | (186,227 | ) | ||||
Proceeds from sale of property, plant, equipment, and mineral properties | — | 108 | ||||||
Purchases of investments | (7 | ) | (80,235 | ) | ||||
Proceeds from sale of investments | 21,547 | 32,663 | ||||||
Net cash used in investing activities | (33,785 | ) | (233,691 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from long-term debt | — | 150,000 | ||||||
Debt issuance costs | — | (1,032 | ) | |||||
Employee tax withholding paid for restricted stock upon vesting | (611 | ) | (577 | ) | ||||
Net cash (used in) provided by financing activities | (611 | ) | 148,391 | |||||
Net Change in Cash and Cash Equivalents | 70,439 | (23,173 | ) | |||||
Cash and Cash Equivalents, beginning of period | 394 | 33,619 | ||||||
Cash and Cash Equivalents, end of period | $ | 70,833 | $ | 10,446 | ||||
Supplemental disclosure of cash flow information | ||||||||
Net cash paid (refunded) during the period for: | ||||||||
Interest | $ | 2,946 | $ | 398 | ||||
Income taxes | $ | (16,304 | ) | $ | 2,302 | |||
Accrued purchases for property, plant, equipment, and mineral properties | $ | 4,129 | $ | 27,821 | ||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 | — COMPANY BACKGROUND |
Intrepid Potash, Inc. (individually or in any combination with its subsidiaries, “Intrepid”) produces muriate of potash (“potassium chloride” or “potash”) and langbeinite. Langbeinite, which is marketed for sale as Trio®, is a low-chloride potassium fertilizer with the additional benefits of sulfate and magnesium. Intrepid sells potash and Trio® primarily into the agricultural market as a fertilizer. Intrepid also sells these products into the animal feed market as a nutritional supplement and sells potash into the industrial market as a component in drilling and fracturing fluids for oil and gas wells and other industrial inputs. In addition, Intrepid sells by-products including salt and magnesium chloride.
Intrepid owns six active potash production facilities: four in New Mexico and two in Utah. Production comes from two conventional underground mines, the HB Solar Solution mine and a compaction facility in the Carlsbad region of New Mexico; a solar evaporation solution mine near Moab, Utah; and a solar evaporation shallow brine mine in Wendover, Utah. Trio® production comes from mining a mixed ore body that contains both potash and langbeinite, which is mined and processed at the East facility near Carlsbad, New Mexico. Intrepid manages sales and marketing operations centrally. This allows Intrepid to evaluate the product needs of its customers and then centrally determine which of its production facilities to use to fill customers’ orders in a manner designed to realize the highest average net realized sales price per ton to Intrepid. Intrepid calculates average net realized sales price per ton by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period. Intrepid also monitors product inventory levels and overall production costs centrally. Intrepid has one reporting segment being the extraction, production, and sale of potassium-related products. Intrepid's extraction and production operations are conducted entirely in the continental United States.
Note 2 | — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation—The consolidated financial statements of Intrepid include the accounts of Intrepid and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of interim financial information, have been included. On the condensed consolidated balance sheet, Intrepid combined property, plant and equipment, net of accumulated depreciation, with mineral properties and development costs, net of depletion, as of December 31, 2013.
Use of Estimates—The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Intrepid bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Significant estimates include, but are not limited to, those for proven and probable mineral reserves, the related present value of estimated future net cash flows, useful lives of plant assets, asset retirement obligations, normal inventory production levels, inventory valuations, the valuation of equity awards, the valuation of receivables, valuation of our deferred tax assets and estimated blended income tax rates utilized in the current and deferred income tax calculations. There are numerous uncertainties inherent in estimating quantities of proven and probable reserves, projecting future rates of production, and the timing of development expenditures. Future mineral prices may vary significantly from the prices in effect at the time the estimates are made, as may estimates of future operating costs. The estimate of proven and probable mineral reserves, the related present value of estimated future cash flows, and useful lives of plant assets can affect various other items including depletion, the net carrying value of Intrepid’s mineral properties, the useful lives of related property, plant, and equipment, depreciation expense, and estimates associated with recoverability of long-lived assets and asset retirement obligations. Specific to income tax items, we experience fluctuations in the valuation of the deferred tax assets and liabilities due to changing state income tax rates and the blend of state tax rates.
Revenue Recognition—Revenue is recognized when evidence of an arrangement exists, risks and rewards of ownership have been transferred to customers, which is generally when title passes, the selling price is fixed and determinable, and collection is reasonably assured. Title passes at the designated shipping point for the majority of sales, but, in a few cases, title passes at the delivery destination. The shipping point may be the plant, a distribution warehouse, a customer warehouse, or a port. Title passes for some international shipments upon payment by the purchaser; however,
6
revenue is not recognized for these transactions until shipment because the risks and rewards of ownership have not transferred pursuant to a contractual arrangement. Prices are generally set at the time of, or prior to, shipment. In cases where the final price is determined upon resale of the product by the customer, revenue is deferred until the final sales price is known.
Sales are reported on a gross basis. Intrepid quotes prices to customers both on a delivered basis and on the basis of pick-up at Intrepid’s plants and warehouses. When a sale occurs on a delivered basis, Intrepid incurs and, in turn, bills the customer and records as gross revenue the product sales value, freight, packaging, and certain other distribution costs. Many customers, however, arrange and pay for these costs directly and, in these situations, only the product sales are included in gross revenues.
By-Product Credits—When by-product inventories are sold, Intrepid records the sale of by-products as a credit to cost of goods sold.
Inventory and Long-Term Parts Inventory—Inventory consists of product and by-product stocks that are ready for sale; mined ore; concentrate production and potash in evaporation ponds, which is considered work-in-process; and parts and supplies inventory. Product and by-product inventory cost is determined using the lower of weighted average cost or estimated net realizable value and includes direct costs, maintenance, operational overhead, depreciation, depletion, and equipment lease costs applicable to the production process. Direct costs, maintenance, and operational overhead include labor and associated benefits.
Parts inventory, including critical spares, that is not expected to be utilized within a period of one year is classified as non-current. Parts and supply inventory cost is determined using the lower of average acquisition cost or estimated replacement cost. Detailed reviews are performed related to the net realizable value of parts inventory, giving consideration to quality, slow-moving items, obsolescence, excessive levels, and other factors. Parts inventories that have not turned over in more than a year, excluding parts classified as critical spares, are reviewed for obsolescence and, if deemed appropriate, are included in the determination of an allowance for obsolescence.
Property, Plant, and Equipment—Property, plant, and equipment are stated at historical cost. Expenditures for property, plant, and equipment relating to new assets or improvements are capitalized, provided the expenditure extends the useful life of an asset or extends the asset’s functionality. Property, plant, and equipment are depreciated under the straight-line method using estimated useful lives. No depreciation is taken on assets classified as construction in progress until the asset is placed into service. Gains and losses are recorded upon retirement, sale, or disposal of assets. Maintenance and repair costs are recognized as period costs when incurred. Capitalized interest, to the extent of debt outstanding, is calculated and capitalized on assets that are being constructed, drilled, or built or that are otherwise classified as construction in progress.
Recoverability of Long-Lived Assets—Intrepid evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. An impairment is considered to exist if an asset group's total estimated net future cash flows on an undiscounted basis are less than the carrying amount of the related asset. An impairment loss is measured and recorded based on the discounted estimated future cash flows. Changes in significant assumptions underlying future cash flow estimates or fair values of asset groups may have a material effect on our financial position and results of operations. Sales price is a significant element of any cash flow estimate, particularly for higher cost operations.
Mineral Properties and Development Costs—Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, the cost of drilling production wells, and the cost of other development work, all of which are capitalized. Depletion of mineral properties is calculated using the units-of-production method over the estimated life of the relevant ore body. The lives of reserves used for accounting purposes are shorter than current reserve life determinations due to uncertainties inherent in long-term estimates. These reserve life estimates have been prepared by us and reviewed and independently determined by mine consultants. Tons of potash and langbeinite in the proven and probable reserves are expressed in terms of expected finished tons of product to be realized, net of estimated losses. Market price fluctuations of potash or Trio®, as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves. In addition, the provisions of Intrepid’s mineral leases, including royalty provisions, are subject to periodic readjustment by the state and federal government, which could affect the economics of its reserve estimates. Significant changes in the estimated reserves could have a material impact on Intrepid’s results of operations and financial position.
Exploration Costs—Exploration costs include geological and geophysical work performed on areas that do not yet have proven and probable reserves declared. These costs are expensed as incurred.
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Asset Retirement Obligation—Reclamation costs are initially recorded as a liability associated with the asset to be reclaimed or abandoned, based on applicable inflation assumptions and discount rates. The accretion of this discounted liability is recognized as expense over the life of the related assets, and the liability is periodically adjusted to reflect changes in the estimates of either the timing or amount of the reclamation and abandonment costs.
Planned Turnaround Maintenance—Each production operation typically shuts down periodically for planned maintenance activities. The costs of maintenance turnarounds at Intrepid's facilities are considered part of production costs and are absorbed into inventory in the period incurred.
Leases—Upon entering into leases, Intrepid evaluates whether leases are operating or capital leases. Operating lease expense is recognized as incurred. If lease payments change over the contractual term or involve contingent amounts, the total estimated cost over the term is recognized on a straight-line basis.
Income Taxes—Intrepid is a subchapter C corporation and, therefore, is subject to U.S. federal and state income taxes. Intrepid recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Intrepid records a valuation allowance if it is deemed more likely than not that its deferred income tax assets will not be realized in full. These determinations are subject to ongoing assessment.
Cash and Cash Equivalents—Cash and cash equivalents consist of cash and liquid investments with an original maturity of three months or less.
Investments—Intrepid’s short-term and long-term investments consist of certificates of deposit with various banking institutions, municipal tax-exempt and corporate taxable bonds, which are classified as available-for-sale securities. Short-term investments on the condensed consolidated balance sheets have remaining maturities to Intrepid less than or equal to one year and investments classified as long-term on the condensed consolidated balance sheets have remaining maturities to Intrepid greater than one year. The available-for-sale securities are carried at fair value, with changes in fair value recognized through "Accumulated other comprehensive income (loss)" on the condensed consolidated balance sheets. Fair value is assessed using a market‑based approach.
Fair Value of Financial Instruments—Intrepid's financial instruments include cash and cash equivalents, short-term and long-term investments, restricted cash, accounts receivable, refundable income taxes, and accounts payable. These instruments are carried at cost, which approximates fair value due to the short-term maturities of the instruments. All available-for-sale investments are carried at fair value. Allowances for doubtful accounts are recorded against the accounts receivable balance to estimate net realizable value. The fair value of the long-term debt is estimated using discounted cash flow analysis based on current borrowing rates for debt with similar remaining maturities and ratings. Although there are no amounts currently outstanding under Intrepid’s unsecured credit facility, any borrowings that become outstanding would bear interest at a floating rate and therefore be recorded at their estimated fair value.
Earnings per Share—Basic net income or loss per common share of stock is calculated by dividing net income or loss available to common stockholders by the weighted average basic common shares outstanding for the respective period.
Diluted net income or loss per common share of stock is calculated by dividing net income or loss by the weighted average diluted common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted earnings or loss per share calculation consist of awards of non-vested restricted shares of common stock, non-vested performance units, and non-qualified stock options. The dilutive effect of stock based compensation arrangements are computed using the treasury stock method. Following the lapse of the vesting period of restricted shares of common stock, the shares are considered issued and therefore are included in the number of issued and outstanding shares for purposes of these calculations.
Stock‑Based Compensation—Intrepid accounts for stock-based compensation by recording expense using the fair value of the awards at the time of grant. Intrepid has recorded compensation expense associated with the issuance of non-vested restricted shares of common stock, non-vested performance units, and non-qualified stock options, all of which are subject to service conditions. The expense associated with these awards is recognized over the service period associated with each issuance.
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Note 3 | — EARNINGS PER SHARE |
Dilutive securities, including non-vested restricted common stock, stock options, and performance units, are excluded from the diluted weighted average shares outstanding computation in periods in which they have an anti-dilutive effect, such as when there is a net loss. The treasury stock method is used to measure the dilutive impact of non-vested restricted common stock, stock options outstanding, and performance units. For the three months ended September 30, 2014, and 2013, 535,668 and 277,284 non-vested weighted average shares of restricted common stock and 329,116 and 342,495 weighted average stock options, respectively, were anti-dilutive and therefore were not included in the diluted weighted average share calculation. For the three months ended September 30, 2014, and 2013, 18,372 and zero weighted average shares of common stock underlying non-vested performance units were anti-dilutive and therefore were not included in the diluted weighted average share calculation.
For the nine months ended September 30, 2014, and 2013, zero and 171,058 non-vested weighted average shares of restricted common stock and 333,129 and 310,471 weighted average stock options, respectively, were anti-dilutive and therefore were not included in the diluted weighted average share calculation. For the nine months ended September 30, 2014, and 2013, zero and zero weighted average shares of common stock underlying non-vested performance units, respectively, were anti-dilutive and therefore were not included in the diluted weighted average share calculation. The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net (loss) income | $ | (1,236 | ) | $ | 2,026 | $ | 3,970 | $ | 28,262 | |||||||
Basic weighted average common shares outstanding | 75,528 | 75,394 | 75,496 | 75,373 | ||||||||||||
Add: Dilutive effect of non-vested restricted common stock | — | 10 | 102 | 19 | ||||||||||||
Add: Dilutive effect of stock options outstanding | — | — | — | 3 | ||||||||||||
Add: Dilutive effect of performance units | — | — | 13 | — | ||||||||||||
Diluted weighted average common shares outstanding | 75,528 | 75,404 | 75,611 | 75,395 | ||||||||||||
(Loss) Earnings per share: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.03 | $ | 0.05 | $ | 0.37 | |||||||
Diluted | $ | (0.02 | ) | $ | 0.03 | $ | 0.05 | $ | 0.37 | |||||||
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Note 4— CASH, CASH EQUIVALENTS, AND INVESTMENTS
The following table summarizes the fair value of Intrepid's cash and investments held in its portfolio, recorded as cash and cash equivalents or short-term or long-term investments as of September 30, 2014, and December 31, 2013 (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Cash | $ | 35,233 | $ | 18 | |||
Commercial paper and money market accounts | 35,600 | 376 | |||||
Total cash and cash equivalents | $ | 70,833 | $ | 394 | |||
Corporate bonds | $ | 2,019 | $ | 12,954 | |||
Certificates of deposit and time deposits | 1,000 | 2,260 | |||||
Total short-term investments | $ | 3,019 | $ | 15,214 | |||
Corporate bonds | $ | 1 | $ | 9,505 | |||
Total long-term investments | $ | 1 | $ | 9,505 | |||
Total cash, cash equivalents, and investments | $ | 73,853 | $ | 25,113 | |||
The following tables summarize the cost basis, unrealized gains and losses, and fair value of Intrepid's available-for-sale investments held in its portfolio as of September 30, 2014, and December 31, 2013 (in thousands):
September 30, 2014 | ||||||||||||||||
Unrealized | ||||||||||||||||
Cost Basis | Gain | Loss | Fair Value | |||||||||||||
Corporate bonds | $ | 2,019 | $ | 1 | $ | — | $ | 2,020 | ||||||||
Certificates of deposit and time deposits | 1,000 | — | — | 1,000 | ||||||||||||
Total available-for-sale securities | $ | 3,019 | $ | 1 | $ | — | $ | 3,020 | ||||||||
December 31, 2013 | ||||||||||||||||
Unrealized | ||||||||||||||||
Cost Basis | Gain | Loss | Fair Value | |||||||||||||
Corporate bonds | $ | 22,475 | $ | 3 | $ | (19 | ) | $ | 22,459 | |||||||
Certificates of deposit and time deposits | 2,260 | — | — | 2,260 | ||||||||||||
Total available-for-sale securities | $ | 24,735 | $ | 3 | $ | (19 | ) | $ | 24,719 | |||||||
For the three months ended September 30, 2014, and 2013, Intrepid recognized gross realized gains of approximately zero and $12,000, respectively, on the sale of investments classified as available-for-sale. For the three months ended September 30, 2014, and 2013, Intrepid had no recognized gross realized losses on the sale of investments classified as available-for-sale. For the nine months ended September 30, 2014, and 2013, Intrepid recognized gross realized gains of approximately $13,000 and $48,000, respectively, on the sale of investments classified as available-for-sale. For the nine months ended September 30, 2014, and 2013, Intrepid recognized gross realized losses of approximately zero and $19,000, respectively, on the sale of investments classified as available-for-sale.
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Note 5 | — INVENTORY AND LONG-TERM PARTS INVENTORY |
The following summarizes Intrepid’s inventory, recorded at the lower of weighted average cost or estimated net realizable value, as of September 30, 2014, and December 31, 2013, respectively (in thousands):
September 30, 2014 | December 31, 2013 | |||||||
Finished goods product inventory | $ | 35,327 | $ | 66,565 | ||||
In-process mineral inventory | 21,901 | 17,841 | ||||||
Total product inventory | 57,228 | 84,406 | ||||||
Current parts inventory, net | 21,448 | 20,605 | ||||||
Total current inventory, net | 78,676 | 105,011 | ||||||
Long-term parts inventory, net | 15,248 | 12,469 | ||||||
Total inventory, net | $ | 93,924 | $ | 117,480 | ||||
Parts inventories are shown net of any required reserves.
During the nine months ended September 30, 2014, and 2013, Intrepid recorded charges of approximately $8.1 million and $2.1 million, respectively, as a result of routine assessments of the lower of weighted average cost or estimated net realizable value on its finished goods product inventory. Of the approximately $8.1 million lower-of-cost-or-market adjustment during the nine months ended September 30, 2014, $4.0 million related to the start-up activities of our HB Solar Solution mine, and approximately $3.8 million primarily related to standard-sized inventory at our East facility.
Note 6 | — PROPERTY, PLANT, EQUIPMENT, AND MINERAL PROPERTIES |
“Property, plant, equipment, and mineral properties, net" were comprised of the following (in thousands):
September 30, 2014 | December 31, 2013 | |||||||
Buildings and plant | $ | 266,900 | $ | 248,017 | ||||
Machinery and equipment | 525,747 | 472,250 | ||||||
Vehicles | 13,735 | 13,455 | ||||||
Office equipment and improvements | 19,057 | 18,846 | ||||||
Ponds and land improvements | 74,023 | 74,166 | ||||||
Land | 908 | 498 | ||||||
Total depreciable assets | 900,370 | 827,232 | ||||||
Accumulated depreciation | (252,778 | ) | (197,108 | ) | ||||
Total depreciable assets, net | $ | 647,592 | $ | 630,124 | ||||
Mineral properties and development costs | $ | 163,294 | $ | 145,822 | ||||
Accumulated depletion | (15,793 | ) | (13,165 | ) | ||||
Total depletable assets, net | $ | 147,501 | $ | 132,657 | ||||
Construction in progress | 4,002 | 63,788 | ||||||
Total property, plant, equipment, and mineral properties, net | $ | 799,095 | $ | 826,569 | ||||
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Intrepid incurred the following expenses for depreciation, depletion, and accretion, including expenses capitalized into inventory, for the following periods (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Depreciation | $ | 18,868 | $ | 14,792 | $ | 55,764 | $ | 41,470 | ||||||||
Depletion | 834 | 394 | 2,649 | 1,446 | ||||||||||||
Accretion | 405 | 375 | 1,217 | 1,124 | ||||||||||||
Total incurred | $ | 20,107 | $ | 15,561 | $ | 59,630 | $ | 44,040 | ||||||||
Note 7 | — DEBT |
Unsecured Credit Facility— Intrepid has an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. This unsecured credit facility provides a revolving credit facility of up to $250 million. The actual amount available to Intrepid is limited by Intrepid's leverage ratio, which may not exceed 3.5, and its fixed charge coverage ratio, which may not be below 1.3. As of September 30, 2014, $148 million of the facility was available to Intrepid as a result of the operation of these ratios.
Under the facility, the leverage ratio is defined as the ratio of total funded indebtedness to adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses) for the prior four fiscal quarters. The fixed charge coverage ratio is defined as the ratio of adjusted EBITDA for the prior four fiscal quarters to fixed charges.
The facility is unsecured and is guaranteed by Intrepid's material subsidiaries. The facility has a maturity date of August 2018. As of September 30, 2014, and December 31, 2013, there were no amounts outstanding under the facility. During the nine months ended September 30, 2014, Intrepid borrowed and repaid $12 million under the demand portion of the credit facility for near-term working capital needs. Intrepid was in compliance with the covenants under the credit facility as of September 30, 2014.
Unsecured Senior Notes—In April 2013, Intrepid issued $150 million aggregate principal amount of unsecured senior notes ("the Notes") pursuant to a note purchase agreement entered into in August 2012. Intrepid received proceeds of $149.3 million, net of offering costs. The Notes consist of the following series:
• | $60 million of 3.23% Senior Notes, Series A, due April 16, 2020 |
• | $45 million of 4.13% Senior Notes, Series B, due April 14, 2023 |
• | $45 million of 4.28%Senior Notes, Series C, due April 16, 2025 |
The Notes are senior unsecured obligations of Intrepid and rank equally in right of payment with any other unsubordinated unsecured indebtedness of Intrepid. The Notes are subject to the same leverage ratio and fixed charge coverage ratio as apply under the credit facility. The obligations under the Notes are unconditionally guaranteed by Intrepid's material subsidiaries.
Intrepid was in compliance with the covenants under the Notes as of September 30, 2014.
Interest is paid semiannually on April 16 and October 16 of each year. Interest expense is recorded net of any capitalized interest associated with investments in capital projects. Intrepid incurred gross interest expense for the three months ended September 30, 2014, and 2013, of $1.7 million and $1.7 million, respectively. Intrepid incurred gross interest expense for the nine months ended September 30, 2014, and 2013, of $5.0 million and $3.3 million, respectively. Intrepid capitalized $30,000 and $1.4 million of interest during the three months ended September 30, 2014, and 2013, respectively. Intrepid capitalized $400,000 and $2.6 million of interest during the nine months ended September 30, 2014, and 2013, respectively.
Note 8 | — ASSET RETIREMENT OBLIGATION |
Intrepid recognizes an estimated liability for future costs associated with the abandonment and reclamation of its mining properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded as the mining operations occur or the assets are acquired.
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Intrepid’s asset retirement obligation is based on the estimated cost to abandon and reclaim the mining operations, the economic life of the properties, and federal and state regulatory requirements. The liability is discounted using credit adjusted risk-free rate estimates at the time the liability is incurred or when there are upward revisions to estimated costs. The credit adjusted risk-free rates used to discount Intrepid’s abandonment liabilities range from 6.9% to 8.5%. Revisions to the liability occur due to construction of new or expanded facilities, changes in estimated abandonment costs or economic lives, or if federal or state regulators enact new requirements regarding the abandonment or reclamation of mines.
Following is a table of the changes to Intrepid’s asset retirement obligation for the following periods (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Asset retirement obligation, at beginning of period | $ | 21,737 | $ | 21,532 | $ | 21,047 | $ | 20,579 | ||||||||
Liabilities settled | (3 | ) | (174 | ) | (125 | ) | (302 | ) | ||||||||
Liabilities incurred | — | 19 | — | 351 | ||||||||||||
Accretion of discount | 405 | 375 | 1,217 | 1,124 | ||||||||||||
Total asset retirement obligation, at end of period | $ | 22,139 | $ | 21,752 | $ | 22,139 | $ | 21,752 | ||||||||
The current portion of the asset retirement obligation of $1.1 million and $1.1 million, respectively, is included in "Other" current liabilities on the condensed consolidated balance sheets as of September 30, 2014, and December 31, 2013. The undiscounted amount of asset retirement obligation is $54.8 million as of September 30, 2014.
Note 9 | — COMPENSATION PLANS |
Cash Bonus Plan—Intrepid has cash bonus plans that allow participants to receive varying percentages of their aggregate base salary. Any awards under the cash bonus plans are based on a variety of elements related to Intrepid’s performance in certain production, operational, financial, and other areas, as well as the participants’ individual performance. Intrepid accrues cash bonus expense related to the current year’s performance.
Equity Incentive Compensation Plan—Intrepid's Board of Directors and stockholders adopted a long-term incentive compensation plan called the Intrepid Potash, Inc. Equity Incentive Plan, as Amended and Restated (the "Plan"). Intrepid has issued common stock, restricted shares of common stock, performance units, and non-qualified stock option awards under the Plan. As of September 30, 2014, the following awards were outstanding under the plan: 484,230 shares of non-vested restricted shares of common stock; non-vested performance units representing 15,522 shares of common stock; and options to purchase 328,844 shares of common stock. As of September 30, 2014, approximately 3.5 million shares of common stock remained available for issuance under the Plan.
Common Stock—On an annual basis, under the Plan, the Compensation Committee of the Board of Directors (the "Compensation Committee") has approved the award of shares of common stock to the non-employee members of the Board of Directors as compensation for service for the period ending on the date of Intrepid’s annual stockholders’ meeting for the following year. These shares of common stock were granted without restrictions and vested immediately.
Non-vested Restricted Shares of Common Stock—Under the Plan, grants of non-vested restricted shares of common stock have been awarded to executive officers, other key employees, and consultants. The awards contain service conditions associated with continued employment or service. The terms of the non-vested restricted shares of common stock provide voting and regular dividend rights to the holders of the awards. Upon vesting, the restrictions on the restricted shares of common stock lapse and the shares are considered issued and outstanding.
Since 2009, the Compensation Committee has granted restricted shares of common stock under the Plan in the first quarter of each year to Intrepid's executive management team and other selected employees as part of an annual equity award program. These awards vest ratably over three years. From time to time, the Compensation Committee grants restricted shares of common stock to newly hired or promoted employees or other employees or consultants who have achieved extraordinary personal performance objectives. These restricted shares of common stock generally vest over one- to four-year periods.
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In measuring compensation expense associated with the grant of non-vested restricted shares of common stock, Intrepid uses the fair value of the award, determined as the closing stock price for Intrepid’s common stock on the grant date. Compensation expense is recorded monthly over the vesting period of the award. Total compensation expense related to the non-vested restricted shares of common stock awards was $0.7 million and $0.9 million for the three months ended September 30, 2014, and 2013, respectively. Total compensation expense related to the non-vested restricted shares of common stock awards was $2.6 million for both of the nine month periods ended September 30, 2014 and 2013. These amounts are net of estimated forfeiture adjustments. As of September 30, 2014, there was $5.7 million of total remaining unrecognized compensation expense related to non-vested restricted shares of common stock that will be expensed through 2017.
A summary of activity relating to Intrepid’s non-vested restricted shares of common stock for the nine months ended September 30, 2014, is presented below.
Weighted Average Grant-Date Fair Value | |||||||
Shares | |||||||
Non-vested restricted shares of common stock, beginning of period | 352,050 | $ | 21.65 | ||||
Granted | 379,246 | $ | 14.47 | ||||
Vested | (131,838 | ) | $ | 23.16 | |||
Forfeited | (115,228 | ) | $ | 17.42 | |||
Non-vested restricted shares of common stock, end of period | 484,230 | $ | 16.62 | ||||
Performance Units — In 2012 and 2013, the Compensation Committee granted performance units under the Plan to certain members of Intrepid's executive management team as part of the annual equity award program. The performance units vest ratably over three years and contain operational- and market-based conditions relating to the year of grant. The time frames for meeting both the operational- and market-based conditions have passed, and a total of 15,522 shares of common stock are available for future payout under the performance units, subject to continued employment of the individual grantees through the vesting dates. Intrepid recognized stock-based compensation expense related to these agreements of $20,000 and $0.2 million in the three months ended September 30, 2014, and 2013, respectively. Intrepid recognized stock-based compensation expense related to these agreements of $0.1 million and $0.5 million in the nine months ended September 30, 2014, and 2013, respectively. No performance units have been issued in 2014.
Non-qualified Stock Options—From 2009 to 2011, the Compensation Committee issued non-qualified stock options under the Plan in the first quarter of each year to Intrepid’s executive management and other selected employees as part of its annual award program. These stock options generally vested ratably over three years. In measuring compensation expense for options, Intrepid estimated the fair value of the award on the grant dates using the Black‑Scholes option valuation model. Option valuation models require the input of highly subjective assumptions, including the expected volatility of the price of the underlying stock.
For the three months ended September 30, 2014, and 2013, Intrepid recognized stock‑based compensation related to previously issued stock options of approximately zero and $0.1 million, respectively. For the nine months ended September 30, 2014, and 2013, Intrepid recognized stock‑based compensation related to previously issued stock options of approximately $0.1 million and $0.5 million, respectively. As of September 30, 2014, all outstanding stock options were fully vested. Realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation for these options are recorded as “excess tax benefits” when the tax deductions occur.
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A summary of Intrepid’s stock option activity for the nine months ended September 30, 2014, is as follows:
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (1) | Weighted Average Remaining Contractual Life | Weighted Average Grant-Date Fair Value | |||||||
Outstanding non-qualified stock | |||||||||||
options, end of period | 328,844 | $26.20 | $— | 4.1 | $13.09 | ||||||
Vested or expected to vest, end | |||||||||||
of period | 328,844 | $26.20 | $— | 4.1 | $13.09 | ||||||
Exercisable non-qualified | |||||||||||
stock options, end of period | 328,844 | $26.20 | $— | 4.1 | $13.09 | ||||||
(1) | The intrinsic value of a stock option is the amount by which the market value exceeds the exercise price as of the end of the period presented. |
Note 10 | — INCOME TAXES |
Intrepid's effective tax rate is impacted primarily by the amount of taxable income associated with each jurisdiction in which Intrepid's income is subject to income tax, permanent differences between the financial statement carrying amounts and tax bases of assets, liabilities, and the benefit associated with the estimated effect of the depletion and domestic production activities deduction and research and development credits.
A summary of the provision for income taxes is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Current portion of income tax (benefit) expense | $ | — | $ | (1,123 | ) | $ | (1,108 | ) | $ | (780 | ) | |||||
Deferred portion of income tax (benefit) expense | (3 | ) | 773 | (31 | ) | 16,299 | ||||||||||
Total income tax (benefit) expense | $ | (3 | ) | $ | (350 | ) | $ | (1,139 | ) | $ | 15,519 | |||||
Effective tax rate | (0.3 | )% | (20.9 | )% | (40.3 | )% | 35.4 | % | ||||||||
During the three months ended September 30, 2014, Intrepid's effective tax rate differed from the statutory rate as a result of the benefit from estimated depletion deductions, as well as from a discrete adjustment to the estimated impact of a graduated decrease in the State of Mexico income tax rate discussed below. During the nine months ended September 30, 2014, in addition to the items noted above, Intrepid also benefited from a discrete adjustment related to the reversal of a $1.7 million valuation allowance related to its New Mexico net operating loss carry forwards, as it now believes those carry forwards are realizable based on legislation passed by the State of New Mexico in the first quarter of 2014. Lastly, Intrepid benefited from a discrete adjustment related to the calculation of the benefit of the net operating loss carry back incurred in 2013. The impact on Intrepid's effective tax rate during 2014 of these discrete adjustments is more pronounced given the current level of income before income taxes.
The blended state tax rate applied to the deferred tax calculation is subject to change due to changes in state laws and changes in the mix of Intrepid's business and the states in which Intrepid has a taxable relationship. This creates fluctuations in the value of Intrepid's net deferred tax asset. In April 2013, the State of New Mexico lowered its corporate income tax rate pursuant to a schedule that goes into effect over the next five years. Intrepid has estimated that the lower state income tax rates will result in a lower future income tax expense. As a result, Intrepid recorded additional deferred state income tax expense of $1.3 million in the second quarter of 2013, as its deferred tax asset had decreased in value. In the third quarter 2014, Intrepid revised its estimate of the timing for the use of the deferred income tax asset based on estimated taxable income to be earned over future periods, resulting in a decrease in its deferred tax assets and resulting increase in deferred income tax expense of $0.7 million. The actual amount to be incurred from this decrease in state income tax rates in New Mexico will likely be different from the current estimate.
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Note 11 | — COMMITMENTS AND CONTINGENCIES |
Marketing Agreements—Intrepid has a marketing agreement appointing PCS Sales (USA), Inc. (“PCS Sales”) as its exclusive sales representative for potash export sales, with the exception of sales to Canada and Mexico, and appointing PCS Sales as its non-exclusive sales representative for potash sales into Mexico. Trio® is also marketed under this arrangement. This agreement is cancelable with 30 days' written notice.
Reclamation Deposits and Surety Bonds—As of September 30, 2014, Intrepid had $17.3 million of security placed principally with the State of Utah and the Bureau of Land Management for eventual reclamation of its various facilities. Of this total requirement, as of September 30, 2014, $0.5 million consisted of long-term restricted cash deposits reflected in “Other” long-term assets on the condensed consolidated balance sheets, and $16.8 million was secured by surety bonds issued by an insurer. The surety bonds are held in place by an annual fee paid to the issuer.
Intrepid may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as governmental entities change requirements.
New Mexico Employment Credits—Beginning in 2011, based on an approval and payment of an application with the State of New Mexico, Intrepid began recording an estimate of refundable employment-related credits for qualified wages paid in New Mexico, known as the New Mexico High Wage Jobs Credit. The estimated recoverable value of these credits has been, and continues to be, reflected as a reduction to production costs and amounts yet to be collected are recorded in “Other receivables” in the condensed consolidated balance sheets in the same period in which the credit is earned.
In the third quarter of 2013, the New Mexico Taxation and Revenue Department denied Intrepid's application to receive the New Mexico High Wage Jobs Credit for certain prior years' filings. Considering the uncertainty associated with collection of these credits, Intrepid recorded an allowance of approximately $2.8 million in the third quarter of 2013, for credits relating to the denied periods in order to reflect the denial of the claimed credits. In March 2014, as a result of its continuing efforts to collect these credits, Intrepid received notification from the New Mexico Taxation and Revenue Department that $5.9 million of credits previously denied were approved. Accordingly, during the first quarter of 2014, Intrepid reversed $2.6 million of the previously established allowance to reflect the collectability of these credits. These credits are typically considered in Intrepid's product inventory calculations as they relate to the labor associated with operations. As the inventory associated with the periods during which the credits were originally earned has since been sold, Intrepid recorded the reversal of the allowance as "Other (income) expense" in the condensed consolidated statement of operations for the nine months ended September 30, 2014. The classification of this item is consistent with the manner in which the initial allowance was recorded in 2013. During the second quarter of 2014, Intrepid received the $5.9 million of credits noted above. As of September 30, 2014, Intrepid has a receivable of $3.3 million, net of an allowance of $2.1 million, associated with the New Mexico High Wage Jobs Credits and intends to continue to vigorously pursue recovery of all unpaid credits.
Legal—Intrepid is subject to litigation. Intrepid has determined that there are no material claims outstanding as of September 30, 2014. Intrepid has established a legal accrual for loss contingencies that are considered probable and reasonably estimable.
Future Operating Lease Commitments—Intrepid has operating leases for land, mining and other operating equipment, an airplane, offices, and railcars, with original terms ranging up to 20 years.
Rental and lease expenses follow for the indicated periods (in thousands):
2014 | ||||
For the three months ended September 30, 2014 | $ | 1,776 | ||
For the nine months ended September 30, 2014 | $ | 4,986 | ||
2013 | ||||
For the three months ended September 30, 2013 | $ | 1,091 | ||
For the nine months ended September 30, 2013 | $ | 3,115 | ||
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Note 12 | — FAIR VALUE |
Intrepid applies the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification™ (“ASC”) Topic 820, Fair Value Measurements and Disclosures, for all financial assets and liabilities measured at fair value on a recurring basis. The topic establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The topic establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The topic also establishes a hierarchy for grouping these assets and liabilities based on the significance level of the following inputs, as follows:
• | Level 1—Quoted prices in active markets for identical assets and liabilities. |
• | Level 2—Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model‑derived valuations whose inputs are observable or whose significant value drivers are observable. |
• | Level 3—Significant inputs to the valuation model are unobservable. |
The following is a listing of Intrepid’s assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2014, and December 31, 2013 (in thousands):
Fair Value at Reporting Date Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Investments | ||||||||||||
Corporate bonds as of September 30, 2014 | $ | — | $ | 3,020 | $ | — | ||||||
Corporate bonds as of December 31, 2013 | $ | — | $ | 22,459 | $ | — | ||||||
Financial assets or liabilities are categorized within the hierarchy based upon the lowest level of input that is significant to the fair value measurement. Below is a general description of Intrepid’s valuation methodologies for financial assets and liabilities, which are measured at fair value and are included on the condensed consolidated balance sheets.
Intrepid's available-for-sale investments consist of corporate bonds that are valued using Level 2 inputs. Market pricing for these investments is obtained from an established financial markets data provider.
The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While Intrepid believes that the valuation methods used are appropriate and consistent with the requirements of ASC Topic 820 and the methods used by other marketplace participants, Intrepid recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.
Financial Instruments—The carrying values and estimated fair values of our financial instruments as of September 30, 2014, and December 31, 2013, are as follows (in thousands):
September 30, 2014 | December 31, 2013 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Long-term debt | $ | 150,000 | $ | 137,000 | $ | 150,000 | $ | 129,000 | ||||||||
For cash and cash equivalents, certificate of deposit investments, accounts receivable, refundable income taxes, and accounts payable, the carrying amount approximates fair value because of the short-term maturity of these instruments. The estimated fair value of the long-term debt is estimated using a discounted cash flow analysis based on current borrowing rates
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for debt with similar remaining maturities and ratings (a Level 2 input) and is designed to approximate the amount at which the instruments could be exchanged in an arm's length transaction between knowledgeable willing parties.
Note 13 | — EMPLOYEE BENEFITS |
In accordance with the terms of the Moab Purchase Agreement associated with the purchase of the assets relating to its Moab facility in 2000, Intrepid and its predecessor established the Moab Salt, L.L.C. Employees' Pension Plan ("Pension Plan"). In February 2002, Intrepid froze the benefits to be paid under the Pension Plan. In December 2011, Intrepid adopted resolutions to terminate the Pension Plan. After receiving the necessary regulatory approvals, plan amendments, and participant settlement elections, Intrepid funded $2.0 million to settle all Pension Plan liabilities in April 2013. Upon funding, Intrepid was released from any further obligations under the Pension Plan. Accordingly, Intrepid recorded the additional expense of approximately $1.9 million to reflect the termination of the Pension Plan in the nine months ended September 30, 2013. This amount is recorded as "Other income (expense)" in the condensed consolidated statement of operations.
Note 14 | — RESTRUCTURING CHARGE |
In January 2014, in response to declining potash prices and completion of our major capital projects, Intrepid undertook a number of cost saving actions that were intended to better align our cost structure with the business environment. These initiatives included the elimination of approximately 7% of the workforce, reduction in the use of outside professionals, and cutbacks in other general and administrative areas. In early 2014, we also temporarily decreased executive and senior management compensation; we reinstated most executive and senior management salaries in mid-2014 and expect to reinstate other compensation elements in 2015. For the nine months ended September 30, 2014, Intrepid recognized a restructuring expense of $1.8 million, which is comprised primarily of severance-related payments.
Note 15 | — RECOGNITION OF COMPENSATING TAX REFUND |
In the second quarter of 2013, Intrepid received a refund from the State of New Mexico related to a compensating tax refund submitted for the period from December 2008 to October 2011. This refund consisted of items for which Intrepid made certain tax payments on behalf of vendors, as well as compensating tax payments subsequently deemed not required as a result of a New Mexico court decision. Upon receipt of the refund, which removed uncertainty about the amount and collection of the refund, Intrepid recorded $1.7 million of income, which is reflected in "Other operating (income)" in the condensed consolidated statement of operations for the nine months ended September 30, 2013.
Note 16 — RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The new standard provides new principles for the timing and amounts of revenue to be recognized. ASU 2014-09 is effective for fiscal years beginning after December 15, 2016. Intrepid continues to study the new standard to determine whether it will have a material impact on its consolidated financial statements upon adoption.
In June 2014, FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). This standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015. Intrepid does not anticipate this standard will have a material impact on its consolidated financial statements upon adoption.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains forward‑looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”). These forward‑looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward‑looking statements. Forward-looking statements include statements about our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, among other things. In some cases, you can identify these statements by forward‑looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue.” Forward‑looking statements are only predictions based on our current knowledge, expectations, and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the following:
• | changes in the price, demand, or supply of potash or Trio®/langbeinite |
• | circumstances that disrupt or limit our production, including operational difficulties or operational variances due to geological or geotechnical variances |
• | interruptions in rail or truck transportation services, or fluctuations in the costs of these services |
• | increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise |
• | the costs of, and our ability to successfully construct, commission, and execute, any of our strategic projects |
• | adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines |
• | changes in the prices of raw materials, including chemicals, natural gas, and power |
• | the impact of federal, state, or local governmental regulations, including environmental and mining regulations; the enforcement of those regulations; and governmental policy changes |
• | our ability to obtain any necessary governmental permits relating to the construction and operation of assets |
• | changes in our reserve estimates |
• | competition in the fertilizer industry |
• | declines or changes in U.S. or world agricultural production or fertilizer application rates |
• | declines in the use of potash products by oil and gas companies in their drilling operations |
• | changes in economic conditions |
• | our ability to comply with covenants in our debt-related agreements to avoid a default under those agreements, or the total amount available to us under our credit facility is reduced, in whole or in part, because of covenant limitations |
• | disruption in the credit markets |
• | our ability to secure additional federal and state potash leases to expand our existing mining operations |
• | the other risks, uncertainties, and assumptions described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by our subsequent Quarterly Reports on Form 10-Q |
In addition, new risks emerge from time to time. It is not possible for our management to predict all risks that may cause actual results to differ materially from those contained in any forward-looking statements we may make.
In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, except as required by law.
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Our Company
We are the largest producer of muriate of potash (“potassium chloride” or “potash”) in the United States and are one of two producers of langbeinite (“sulfate of potash magnesia”). Langbeinite is a low-chloride potassium fertilizer with the additional benefits of sulfate and magnesium. We generally describe this multi-nutrient specialty product as langbeinite when we refer to production and as Trio® when we refer to sales and marketing. Our revenues are generated primarily from the sale of potash and Trio®. Potassium is one of the three primary macronutrients essential to plant formation and growth. Since 2005, we have supplied, on average, approximately 1.5% of annual world potassium consumption and 9.1% of annual U.S. potassium consumption. We also produce salt and magnesium chloride from our potash mining processes, the sales of which are accounted for as by-product credits to our cost of sales. These by-product credits have represented approximately 3% to 4% of total cost of goods sold in each of the last three years.
Our potash is marketed for sale into three primary markets, which are the agricultural market as a fertilizer input, the industrial market as a component in drilling and fracturing fluids for oil and gas wells and the feedstock for other processes, and the animal feed market as a supplemental nutrient. The agricultural market is predominately a user of granular-sized potash and standard, granular and premium-sized Trio®, while the industrial and animal feed markets largely consume standard- and fine standard-sized potash. Each of our operating facilities supplies these markets. Additionally, we have the capability to supply customers from our different locations due to the relatively homogeneous nature of our products. The flexibility to compact all of our production into granular form allows us to meet demand and maximize our average net realized sales price. Our investments in granulation capacity have allowed us to expand our geographical reach for granular product sales that would otherwise be unavailable. This flexibility also allows us to adjust our product mix to more closely align with specific market needs, thereby decreasing our dependence on sales of any one particular size of potash.
Our sales of potash tend to focus on agricultural areas, feed manufacturers in the central and western United States, and oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin area. We also have domestic agricultural sales, primarily of Trio®, in the southeastern and eastern United States, with a focus on areas with specific agricultural nutrition requirements of crops in those regions. We manage our sales and marketing operations centrally, including our freight and logistics planning. This allows us to evaluate the product needs of our customers and then determine which of our production facilities can be used to fill customer orders, all with the goal of realizing the highest average net realized sales price for our potash.
We own six active potash production facilities—four in New Mexico and two in Utah. One of our four active potash production facilities in New Mexico is our newly constructed HB Solar Solution mine near Carlsbad, New Mexico. The HB Solar Solution mine applies solution mining and solar evaporation techniques to produce potash from previously idled mine workings. We completed our first harvest of ore from the solar evaporation ponds earlier this year and recently began our second harvest. Much of the commissioning activity for the processing plant is complete and we produced 59,000 tons of finished product in the first nine months of 2014. As expected, there is a ramp-up of production with the HB Solar Solution mine, with the first harvest production at volumes substantially lower than the designed capacity of the plant. Accordingly, we had production costs in excess of market prices for potash, resulting in a lower-of-cost-or-market inventory adjustment of $4.0 million in the nine months ended September 30, 2014, all of which occurred in the first six months of 2014, related to the start-up of the HB Solar Solution mine. We expect production from the HB Solar Solution mine to increase as we ramp up production through 2016. We have additional opportunities to develop mineralized deposits of potash as well as to continue optimization of our processing plants. These opportunities potentially include additional solution mining activities, additional recoveries of langbeinite and acceleration of production from our reserves.
We routinely post important information about Intrepid and our business, including information about upcoming investor presentations, on our website under the Investor Relations tab. We encourage investors and other interested parties to enroll on our website to receive automatic email alerts or Really Simple Syndication (RSS) feeds regarding new postings. Our website is www.intrepidpotash.com.
Significant Business Trends
Our financial results have been impacted by several significant trends, which are described below. We expect that these trends will continue to drive our results of operations, cash flows, and financial position.
• Potash demand. In the second half of 2013, our sales volumes were negatively impacted by increased concerns about global supply and demand levels, which created significant uncertainty in the market. However, in the first half of 2014, sales volumes increased after Canadian producers announced price increases, which established a floor for potash pricing. Sales volumes continued to be strong into the third quarter of 2014, in advance of the fall application season. In addition, we took advantage of robust agricultural demand for granular-sized potash. We also saw solid industrial demand primarily
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driven by continued strong activity in the oil and gas drilling markets. We expect to see good demand continue through the fourth quarter of 2014.
Our ability to supply tons to our customers on a timely basis was a fundamental element to our success in the first nine months of 2014 as rail logistics, including rail car availability, were challenging. We expect rail car availability to remain an issue for the foreseeable future. We utilized our geographic location advantage and our warehouse system to effectively position product closer to our customers.
The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the United States. We believe farmers need to replenish nutrients drawn from the soil in this past growing season, and will spread workload across both fall and spring fertilizer application seasons. In addition, potash demand is significantly influenced by dealer storage volumes and the marketing programs of potash producers and retailers. The combination of these items results in variability in potash sales and shipments, thereby increasing volatility of sales volumes from quarter to quarter and season to season.
• Potash prices. Potash prices are a significant driver of profitability for our business. Potash prices decreased significantly in the third quarter of 2013 and through early 2014 as a result of the uncertainty in the marketplace, as discussed above. In early 2014, the Canadian producers took actions to curtail production, and we saw strong farmer demand, which reduced producer inventory levels. Challenging logistics have also hindered dealer efforts to obtain inventory on a timely basis. As a result of solid overall demand and these lower inventory levels, potash prices have increased steadily over the past two quarters. Our sales volumes for the fourth quarter of 2014 are substantially committed, and we expect our average net realized price for the fourth quarter to approximate the price achieved for the third quarter of 2014.
• Trio® prices and demand. An imbalance between supply and demand, as well as dealers and farmer recognition of the added value of magnesium and sulfate and the benefits of a low-chloride specialty product, helped support Trio® pricing despite lower potash prices in the past few years. Demand for granular- and premium-sized Trio® continues to be strong in the domestic market. We have seen weaker demand and softer pricing for standard-sized Trio® in the export market. Should we choose to manage our Trio® inventory levels by increasing our mix of export sales, we would likely see a lower net realized sales price for Trio®.
• Major capital projects. Our capital project investment has decreased significantly in 2014 as compared to 2013. Over the last two years, we have completed several major capital projects that are intended to increase production, decrease our per-ton operating costs and increase our overall marketing flexibility. We are focused on optimizing and gaining the efficiencies from these projects.
In late 2013, we began commissioning of the HB Solar Solution processing plant and this work continued through much of 2014. The start-up production from our initial harvest has a higher per-ton cost due to the relatively low volumes of product being processed and accounted for $4.0 million of the lower-of-cost-or-market inventory adjustments recorded in 2014, all of which occurred in the first half of the year. Production from the HB Solar Solution mine remains in line with our expectations for the year ending December 31, 2014.
We recently completed a series of projects at the West facility, some of which began in 2012, intended to sustain and increase production by improving recoveries at the West facility as we transition into different ore zones. The West facility provides the majority of the feedstock for the North plant. The capabilities of the new North compaction facility allow us the flexibility to make process changes at the West facility, not previously possible, to increase recovery as we transition to different ore zones as well as to decrease our per-ton operating costs.
The North compaction project was completed in June 2014, as all three compaction lines are now in service. This plant processes concentrate tons produced from both the West facility and the HB Solar Solution mine. The new facility enables us to produce high quality granular product and expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and production from our West facility.
• Weather impact. The Carlsbad area received approximately 13 inches of rain in September 2014, compared to an average rainfall of 2.1 inches for the month. The Moab and Wendover areas also received higher-than-normal precipitation in the third quarter of 2014. As a result, a portion of the potash crystals that we expected to harvest from our solar evaporation ponds in the 2014/2015 harvest season has been re-dissolved in the ponds and remains available for recrystallization and harvest in the future. Further, our solar evaporation ponds in Wendover are expected to have lower production in 2015, as we experienced below average evaporation conditions in 2014.
Due to the heavy rainfall in September in Carlsbad, we voluntarily shut down our East facility for six days to manage water levels in our water management system. We also experienced weather-related regional power interruptions which affected our Carlsbad facilities throughout September. These factors exacerbated the planned lower production
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associated with our annual scheduled maintenance turnarounds at our East and West facilities, which occurred in August. As our production costs during the period are distributed over fewer tons produced, our costs per ton of production at our East facility were elevated, resulting in a $3.4 million lower-of-cost-or-market adjustment in the third quarter 2014.
• East facility production. We have dedicated significant resources to improve production from our East facility. Our production of both potash and langbeinite are directionally impacted by the ore grade and the development work we do. Our production historically has had a positive correlation to ore grade. Despite the annual scheduled maintenance shutdown and weather-related downtime at our East facility as discussed above, we were again able to increase our production of premium-sized Trio® product during the third quarter as we continue to improve the operating performance of the process.
• Other Operating Income. In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million relating to the denied credits. As a result of our efforts working with the State of New Mexico, in March 2014 we received notice that $5.9 million of employment tax credits, a significant portion of which had previously been denied, had been approved for payment. Accordingly, in the first quarter of 2014, we reversed $2.6 million of the allowance associated with the previously reserved employment-related tax credits. We received the $5.9 million payment during the second quarter of 2014.
• Restructuring expense. In January 2014, in response to lower potash prices and the substantial completion of our major capital projects, we undertook a number of cost saving actions that were intended to better align our cost structure with the current business environment. These initiatives include the elimination of approximately 7% of the workforce, including capital project related support associated with our major capital projects, reduction in the use of outside professionals, and cutbacks in other general and administrative areas. We estimate that these measures will result in annual savings of approximately $12 million to $15 million, with the majority being in general and administrative expense and the remainder being cost of goods sold. In early 2014, we also temporarily decreased executive and senior management compensation; we reinstated most executive and senior management salaries in mid-2014 and expect to reinstate other compensation elements in 2015.
The workforce reduction occurred in January 2014, generating a pre-tax restructuring charge of $1.8 million, which is comprised primarily of severance-related payments.
Selected Operating and Financial Data
The following tables present selected operations data for the periods noted. Analysis of the details of this information is contained throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. We calculate average net realized sales price by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period.
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Change | |||||||||||||||
Three Months Ended September 30, | Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Production volume (in thousands of tons): | |||||||||||||||
Potash | 194 | 167 | 27 | 16 | % | ||||||||||
Langbeinite | 34 | 40 | (6 | ) | (15 | )% | |||||||||
Sales volume (in thousands of tons): | |||||||||||||||
Potash | 227 | 156 | 71 | 46 | % | ||||||||||
Trio® | 43 | 22 | 21 | 95 | % | ||||||||||
Gross sales (in thousands): | |||||||||||||||
Potash | $ | 84,142 | $ | 61,170 | $ | 22,972 | 38 | % | |||||||
Trio® | 18,138 | 9,399 | 8,739 | 93 | % | ||||||||||
Total | 102,280 | 70,569 | 31,711 | 45 | % | ||||||||||
Freight costs (in thousands): | |||||||||||||||
Potash | 7,846 | 4,499 | 3,347 | 74 | % | ||||||||||
Trio® | 3,079 | 1,453 | 1,626 | 112 | % | ||||||||||
Total | 10,925 | 5,952 | 4,973 | 84 | % | ||||||||||
Net sales (in thousands)(1): | |||||||||||||||
Potash | 76,296 | 56,671 | 19,625 | 35 | % | ||||||||||
Trio® | 15,059 | 7,946 | 7,113 | 90 | % | ||||||||||
Total | $ | 91,355 | $ | 64,617 | $ | 26,738 | 41 | % | |||||||
Potash statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 336 | $ | 363 | $ | (27 | ) | (7 | )% | ||||||
Cash operating costs(1)(2) | 204 | 198 | 6 | 3 | % | ||||||||||
Depreciation and depletion | 73 | 54 | 19 | 35 | % | ||||||||||
Royalties | 12 | 1 | 11 | 1,100 | % | ||||||||||
Total potash cost of goods sold | $ | 289 | $ | 253 | $ | 36 | 14 | % | |||||||
Warehousing and handling costs | 12 | 16 | (4 | ) | (25 | )% | |||||||||
Average potash gross margin(1) | $ | 35 | $ | 94 | $ | (59 | ) | (63 | )% | ||||||
Trio® statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 351 | $ | 353 | $ | (2 | ) | (1 | )% | ||||||
Cash operating costs(1) | 206 | 243 | (37 | ) | (15 | )% | |||||||||
Depreciation and depletion | 59 | 61 | (2 | ) | (3 | )% | |||||||||
Royalties | 18 | 18 | — | — | % | ||||||||||
Total Trio® cost of goods sold | $ | 283 | $ | 322 | $ | (39 | ) | (12 | )% | ||||||
Warehousing and handling costs | 12 | 17 | (5 | ) | (29 | )% | |||||||||
Average Trio® gross margin(1) | $ | 56 | $ | 14 | $ | 42 | 300 | % | |||||||
(1) | Additional information about our non-GAAP financial measures is set forth under the heading "Non-GAAP Financial Measures.” |
(2) | Amounts are presented net of by-product credits. On a per-ton basis, by-product credits were $7 for each of the three months ended September 30, 2014, and 2013, respectively. By-product credits were $1.6 million and $1.1 million for the three months ended September 30, 2014, and 2013, respectively. |
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Change | |||||||||||||||
Nine Months Ended September 30, | Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Production volume (in thousands of tons): | |||||||||||||||
Potash | 605 | 571 | 34 | 6 | % | ||||||||||
Langbeinite | 109 | 136 | (27 | ) | (20 | )% | |||||||||
Sales volume (in thousands of tons): | |||||||||||||||
Potash | 705 | 525 | 180 | 34 | % | ||||||||||
Trio® | 141 | 96 | 45 | 47 | % | ||||||||||
Gross sales (in thousands): | |||||||||||||||
Potash | $ | 253,443 | $ | 222,142 | $ | 31,301 | 14 | % | |||||||
Trio® | 58,661 | 40,364 | 18,297 | 45 | % | ||||||||||
Total | 312,104 | 262,506 | 49,598 | 19 | % | ||||||||||
Freight costs (in thousands): | |||||||||||||||
Potash | 23,003 | 14,316 | 8,687 | 61 | % | ||||||||||
Trio® | 9,613 | 6,259 | 3,354 | 54 | % | ||||||||||
Total | 32,616 | 20,575 | 12,041 | 59 | % | ||||||||||
Net sales (in thousands): | |||||||||||||||
Potash | 230,440 | 207,826 | 22,614 | 11 | % | ||||||||||
Trio® | 49,048 | 34,105 | 14,943 | 44 | % | ||||||||||
Total | $ | 279,488 | $ | 241,931 | $ | 37,557 | 16 | % | |||||||
Potash statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 327 | $ | 396 | $ | (69 | ) | (17 | )% | ||||||
Cash operating costs(1)(2) | 199 | 182 | 17 | 9 | % | ||||||||||
Depreciation and depletion | 68 | 49 | 19 | 39 | % | ||||||||||
Royalties | 11 | 12 | (1 | ) | (8 | )% | |||||||||
Total potash cost of goods sold | $ | 278 | $ | 243 | $ | 35 | 14 | % | |||||||
Warehousing and handling costs | 11 | 15 | (4 | ) | (27 | )% | |||||||||
Average potash gross margin(1) | $ | 38 | $ | 138 | $ | (100 | ) | (72 | )% | ||||||
Trio® statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 348 | $ | 354 | $ | (6 | ) | (2 | )% | ||||||
Cash operating costs(1) | 202 | 194 | 8 | 4 | % | ||||||||||
Depreciation and depletion | 60 | 54 | 6 | 11 | % | ||||||||||
Royalties | 17 | 18 | (1 | ) | (6 | )% | |||||||||
Total Trio® cost of goods sold | $ | 279 | $ | 266 | $ | 13 | 5 | % | |||||||
Warehousing and handling costs | 10 | 15 | (5 | ) | (33 | )% | |||||||||
Average Trio® gross margin(1) | $ | 59 | $ | 73 | $ | (14 | ) | (19 | )% | ||||||
(1) | Additional information about our non-GAAP financial measures is set forth under the heading "Non-GAAP Financial Measures.” |
(2) | Amounts are presented net of by-product credits. On a per-ton basis, by-product credits were $7 and $8 for the nine months ended September 30, 2014, and 2013, respectively. By-product credits were $4.7 million and $4.3 million for the nine months ended September 30, 2014, and 2013, respectively. |
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Results of Operations
Operating Highlights
Net loss for the third quarter of 2014 was $1.2 million, or $(0.02) per basic share, and cash flows from operating activities were $49.0 million. During the three months ended September 30, 2014, we recorded a lower-of-cost-or-market adjustment of $3.4 million primarily the result of lower production from the East facility, resulting in our production costs being allocated over fewer tons. Net income for the first nine months of 2014 was $4.0 million, or $0.05 per diluted share, and cash flows from operating activities were $104.8 million. We made capital investments of $30.6 million in the first nine months of 2014, and ended the quarter with $73.9 million of cash and investments.
Potash
We sold 227,000 tons of potash in the third quarter of 2014 compared with 156,000 tons sold in the third quarter of 2013. For the first nine months of 2014, we sold 705,000 tons of potash compared to 525,000 tons in the first nine months of 2013. The increase in sales volumes was driven by increased confidence from buyers and our agricultural customers' demand for product in 2014. Our sales volumes in the third quarter of 2013 were impacted by the uncertainty in the market, as discussed above. Our ability to supply tons to our customers on a timely basis was a fundamental element of our success in 2014. We utilized our geographic advantage as well as our warehouse system to effectively position product closer to our customers. In addition, we experienced continued strong industrial sales in the quarter resulting from ongoing strength in our industrial markets, primarily driven by the energy sector.
Our average net realized sales price of potash was $336 per ton in the third quarter of 2014, compared with $363 per ton in the third quarter of 2013. Although potash pricing has decreased over the same period a year ago, we were able to achieve a sequential increase in our average net realized sales price in the third quarter of 2014 due to recent price increase announcements by the Canadian producers combined with low granular-sized inventory levels in North America.
The table below shows our potash sales mix for the three and nine months ended September 30, 2014, and 2013.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2014 | 2013 | 2014 | 2013 | |||||
Agricultural | 78% | 67% | 76% | 73% | ||||
Industrial | 17% | 25% | 19% | 19% | ||||
Feed | 5% | 8% | 5% | 8% | ||||
The percentage of potash tons sold into our industrial markets decreased during the three months ended September 30, 2014 compared to the same period a year ago, due to the increase in volumes sold into the agricultural market. The total volume of potash tons sold into the industrial markets for the nine months ended September 30, 2014, increased compared to the same period in the prior year.
Data generated by Fertecon Limited, a fertilizer industry consultant, shows that over the past 25 years annual domestic potash consumption has averaged approximately 9.3 million tons with volatility of approximately 10%. These results have occurred through historical periods of low and high agricultural commodity prices, weather conditions, variability in oil and gas drilling, negative farmer margins, and a variety of other macro-economic factors. We believe continuing improvements in agriculture production technology, such as hybrid seeds and equipment advancements, now allow for the potential of higher crop yields per acre. These improvements need to be matched with potassium application rates to maximize agricultural productivity.
The replacement of potassium in the soil is critical to continue high-yielding agricultural production and to satisfy the demands placed on soils for plant nutrition. The International Plant Nutrition Institute has tracked historical soil potassium levels and trends show a decline in soil potassium which will lead to an increasing potassium deficiency in some agricultural soils within North America. In order for the North American farmer to maximize yields, we believe higher application rates of potash will be necessary in the future. With higher crop yields in 2014, we believe more potassium was removed from the soil. Although we believe farmers may reduce some fertilization applications in advance of the 2015 growing season, we expect to continue to sell all of our production.
Our potash production in the third quarter of 2014 increased to 194,000 tons, compared with 167,000 tons produced in the third quarter of 2013. The production increase was due to new production from our HB Solar Solution mine as well as higher production from our West facility. Production from our West facility benefited from bringing into service the third compaction line at our North facility to process higher levels of compactor feed inventory at the beginning of the third quarter of 2014. These production increases were offset by decreases in production from our East and Wendover facilities. Our
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production at East was impacted by the adverse weather in the Carlsbad area in September as discussed above. Our Wendover production decreased in 2014 as compared to 2013 as the result of the dry winter conditions in 2012 resulting in less brine flowing through our ponds in 2013, ultimately which reduced the amount of potash in our evaporation ponds.
Our cash operating cost of goods sold increased to $204 per ton for the third quarter of 2014, compared with $198 per ton in the third quarter of 2013. This increase was primarily attributable to our East facility. Our cash costs of goods sold from our East facility during the third quarter 2014 was higher than in the same period in 2013, primarily as a result of the weather- related issues discussed previously.
Trio®
Our Trio® production was lower in the first nine months of 2014 than in the same period in 2013 as we experienced lower ore grade and higher losses associated with the conversion to premium-sized products. Pricing for Trio® has been essentially flat over the last year. As the export market for Trio® remains soft, we continue to focus on the domestic market. Demand for our granular- and premium-sized Trio® has remained strong, even as potash prices have decreased significantly. Our sales of Trio® increased to 43,000 tons in the third quarter of 2014 as compared with 22,000 tons in the third quarter of 2013, driven primarily by increased sales of premium-sized Trio®. The export market for standard product was weaker in 2014 compared to the same period a year ago, highlighting the importance of the improvements we have made in our pelletization process, which upgrades the standard-sized product to premium-sized product.
Our average Trio® gross margin per ton decreased by $42 per ton in the third quarter of 2014 as compared with the third quarter of 2013 primarily due to an increase in our cash operating costs for Trio® of $37 per ton. Our cash operating costs for Trio® increased as a result of the production issues at our East facility mentioned above. The cash operating costs per ton are also affected by the cost to convert standard-sized product to premium-sized product. We continue to work towards improving our process to produce premium-sized product, which provides us greater flexibility in pursuing the highest margin sales opportunities with our Trio® product offerings.
Our export sales of Trio® tend to be in larger quantities and with more variability as to the timing of those sales. As a result, the percentage of sales into the export market as compared to the domestic market can fluctuate significantly from period to period, as shown in the table below.
United States | Export | |||
Trio® only | ||||
2014 | ||||
For the three months ended September 30, 2014 | 84% | 16% | ||
For the nine months ended September 30, 2014 | 91% | 9% | ||
2013 | ||||
For the three months ended September 30, 2013 | 89% | 11% | ||
For the nine months ended September 30, 2013 | 74% | 26% | ||
Average Net Realized Sales Price
Domestic pricing of our potash is influenced principally by the price established by our competitors. The interaction of global potash supply and demand, ocean, land and barge freight rates, and currency fluctuations also influence pricing. Any of these factors could have a positive or negative impact on the price of our products. Our average net realized sales price for potash decreased $27 per ton in the third quarter of 2014 from the third quarter of 2013 largely as a result of concerns that global productive capacity exceeds demand. Domestically, the potash market is influenced by this global scenario. North American potash inventory levels are now below the average inventory levels over the last five years. As a result of strong demand following the efforts by the Canadian producers to manage inventory levels, we experienced a sequential increase in our potash average net realized sales price during the third quarter of 2014.
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The table below demonstrates the progression of our average net realized sales price for potash and Trio® through 2013 and into 2014.
Average net realized sales price for the three months ended: | Potash | Trio® | ||
(Per ton) | ||||
September 30, 2014 | $336 | $351 | ||
June 30, 2014 | $329 | $350 | ||
March 31, 2014 | $317 | $340 | ||
December 31, 2013 | $338 | $345 | ||
September 30, 2013 | $363 | $353 | ||
June 30, 2013 | $402 | $359 | ||
March 31, 2013 | $417 | $351 | ||
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash and Trio® and are determined by the quantities of product we sell and the sales prices we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred on only a portion of our sales as many of our customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Although our gross sales include the freight that we bill, we do not believe that gross sales provide a representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. Rail freight rates have been steadily increasing, thereby negatively influencing our net realized sales prices. We view net sales, which are gross sales less freight costs, as the key performance indicator of our revenue as it conveys the net sales price of the product that we realize. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and by our production capabilities. We intend to operate our facilities at full production levels, which provides the greatest operating efficiencies. By having adequate warehouse capacity, we can maintain production levels during periods of fluctuating product demand and have product inventory positioned closer to the fields in order to meet peak periods of fertilizer demand.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our potash and Trio® products, less credits generated from the sale of our by-products. Many of our production costs are largely fixed and, consequently, our costs of sales per ton on a facility-by-facility basis tend to move inversely with the number of tons we produce, within the context of normal production levels. We expect to experience variability in our cost of goods sold due to fluctuations in the relative mix of product that we produce through conventional mining as compared to through solar solution mining. Our per ton cost of goods sold for our solar solution facilities is less than the per ton cost of goods sold for our conventional facilities. However, our solar solution production is impacted by weather variability. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. There are elements of our cost structure associated with contract labor, consumable operating supplies, and reagents and royalties that are variable, which make up a smaller component of our cost base. Our periodic production costs and costs of goods sold will not necessarily match one another from period-to-period based on the fluctuation of inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels change due to factors such as changes in the grade of ore delivered to the plant, levels of mine development, plant operating performance, downtime, and annual maintenance turnarounds. We expect that our labor and contract labor costs in Carlsbad, New Mexico, will continue to be influenced most directly by the demand for labor in the local Carlsbad, New Mexico, region where we compete for labor with the oil and gas, potash, and nuclear waste storage industries. Additionally, the East mine has a complex mineralogy with a mixed ore body comprised of potash and langbeinite. This complex ore is processed through a singular product flow at the surface facility. The specific grade and characterization of the ore that is mined at any particular time is subject to fluctuations
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due to the nature of the mineral deposits and influences the amount of tons of potash and langbeinite ultimately produced from the facility, which affects our production costs per ton for both products and affects our quarter-to-quarter results.
We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of net sales of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that varies with the grade of ore extracted. For both the three and nine months ended September 30, 2014, our average royalty rate was 3.8%. For the three and nine months ended September 30, 2013, our average royalty rate was 1.0% and 3.4%, respectively. During the three months ended September 30, 2013, we recorded certain reductions for royalty expense, which artificially lowered the average royalty rate in the third quarter 2013. We believe the average royalty rate in 2014 is more indicative of future trends.
Income Taxes
We are a subchapter C corporation and, therefore, are subject to federal and state income taxes on our taxable income. Our effective tax rate for the three and nine months ended September 30, 2014, was (0.3)% and (40.3)%, respectively. Our effective tax rate for the three and nine months ended September 30, 2014, differed from the blended statutory income tax rate as a result of the estimated benefit of depletion, and an adjustment to the estimated impact of the graduated decrease in the New Mexico state income tax rate. During the nine months ended September 30, 2014, in addition to the items noted above, Intrepid also benefited from the reversal of a $1.7 million valuation allowance related to its New Mexico net operating loss carry forwards, as we now believe those carry forwards are realizable based on legislation passed by the State of New Mexico in the first quarter of 2014. Further, we benefited from an adjustment to the benefits received from the carry back of the net operating loss incurred in 2013. The impact of these discrete items on our 2014 effective tax rate is more pronounced given the current level of income before income taxes.
Our effective tax rate for the three and nine months ended September 30, 2013, was (20.9)% and 35.4%, respectively. Our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax and permanent differences between book and tax income for the period, including the benefit associated with the estimated effect of depletion. During the three months ended September 30, 2013, the estimated depletion and domestic production activities deductions had a more pronounced impact on the effective tax rate due to the normal recurring update to Intrepid's estimated income before income taxes for the 2013 calendar year. Our federal and state income tax returns are subject to examination by federal and state tax authorities.
For the three and nine months ended September 30, 2014, the total tax benefit was $3,000 and $1.1 million, respectively. Total tax benefit for the three months ended September 30, 2014, was solely comprised of deferred income tax benefit. Total tax benefit for the nine months ended September 30, 2014, was comprised of $1.1 million of current income tax benefit and $31,000 of deferred income tax benefit.
During the three months ended September 30, 2013, we recognized an income tax benefit of $0.4 million compared with income tax expense of $15.5 million during the nine months ended September 30, 2013. Total tax expense for the three months ended September 30, 2013, was comprised of $1.1 million of current income tax benefit and $0.7 million of deferred income tax expense. Total tax expense for the nine months ended September 30, 2013, was comprised of $0.8 million of current income tax benefit and $16.3 million of deferred income tax expense.
We evaluate our deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the states in which we do business. Changing business conditions for normal business transactions and operations as well as changes to state tax rate and apportionment laws potentially alter our apportionment of income among the states for income tax purposes. These changes in apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.
Capital Investments
We believe that, in the long term, demand for potash will remain at, or exceed, historical levels. Over the past several years, we have been executing a capital investment plan at each of our facilities to respond to this anticipated increase in demand and to lower our cash operating costs per ton. These plans have focused on growing production capacity, decreasing cash operating costs per ton and increasing our production flexibility to support our marketing efforts, while also improving safe and reliable production, ensuring environmental and regulatory compliance, and improving facility reliability. We have now completed our major capital projects and are focused on optimizing efficiencies of our operating facilities to extract the value from these projects.
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We expect our level of capital investment to be approximately $40 million to $50 million for 2014. This compares to $256.2 million of capital invested during 2013. Our 2014 operating plans and capital programs are being funded out of operating cash flows, existing cash and investments, and availability under our unsecured credit facility.
During the first nine months of 2014, we invested $30.6 million in capital projects, including $0.4 million of capitalized interest. These capital projects included investments related to the completion of the HB Solar Solution mine and the related production plant, the expansion of our North compaction facility and the recovery improvement projects at our West facility.
The following details several of our significant projects over the past several years that are designed to improve the overall reliability of the operations and to increase productive and compaction capacity:
• | During 2013, we substantially completed the construction activities associated with the initial design for the HB Solar Solution mine. In the first nine months of 2014, we produced 59,000 tons of finished product from the HB Solar Solution mine. We expect our production from the HB Solar Solution mine to continue increasing into the 2015/2016 harvest season, assuming the benefit of an average annual evaporation cycle. The anticipated production schedule may be impacted by delays due to commissioning activities, the rate of injection into the mines, and the impact of weather events or weather patterns on evaporation seasons. We invested $240 million in the project as of September 30, 2014. |
• | We have completed a series of projects at our West facility that are intended to sustain and increase production through improvements in recovery rates. We have made ongoing improvements to the West facility since its acquisition to increase the volume of tons going through the facility. This most recent phase of improvements was designed to stabilize production at the West facility as we transition into different ore zones with higher levels of insoluble material. The capabilities of the new North compaction facility allow us the flexibility to make process changes at the West facility to increase recovery of potash from the different ore zones as well as to decrease our per-ton operating costs. The last of these projects was completed in the third quarter of 2014. The total investment for these projects was approximately $30 million. |
• | The North compaction project is complete and is processing tons produced from both the West facility and the HB Solar Solution mine. All three compaction lines are now in service and operating as an integrated system. The new facility enables us to produce high quality granular product and expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and ongoing upgrades at our West facility. Total capital expenditures for this project totaled $98 million as of September 30, 2014. |
Liquidity and Capital Resources
As of September 30, 2014, we had cash, cash equivalents, and investments of $73.9 million. We also have an unsecured credit facility that provides a revolving credit facility of up to $250 million, provided that we meet specified financial covenants, as described below under the heading “Unsecured Credit Facility.” As of September 30, 2014, we had $148 million available under this facility.
The $73.9 million of cash, cash equivalents and investments at September 30, 2014, was made up of the following:
• | $35.2 million in cash; |
• | $35.6 million in cash equivalent investments, consisting of money market accounts with banking institutions that we believe are financially sound; and |
• | $3.0 million invested in short-term investments. |
Our operations have been and are expected to be primarily funded from cash on hand and cash generated by operations and, if necessary, we have the ability to borrow under our unsecured credit facility.
The following summarizes our cash flow activity for the nine months ended September 30, 2014, and 2013:
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Cash flows provided by operating activities | $ | 104,835 | $ | 62,127 | ||||
Cash flows used in investing activities | $ | (33,785 | ) | $ | (233,691 | ) | ||
Cash flows (used in) provided by financing activities | $ | (611 | ) | $ | 148,391 | |||
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Operating Activities
Total cash provided by operating activities through September 30, 2014, was $104.8 million, an increase of $42.7 million compared with the first nine months of 2013. Our higher sales volumes in 2014 resulted in a decrease in finished goods inventory, which was partially offset by an increase in the receivable balances associated with those sales.
Investing Activities
Total cash used in investing activities decreased by $199.9 million in the first nine months of 2014 compared with the same nine month period in 2013 as a result of lower capital investment activity in 2014.
Financing Activities
Total cash used in financing activities of $0.6 million was due to employee tax withholding for the vesting of restricted stock. During the nine months ended September 30, 2014, Intrepid borrowed and repaid $12 million under the demand portion of the credit facility for near-term working capital needs. During the nine months ended 2013, Intrepid received $149.3 million of net proceeds from the funding of our unsecured senior notes ("Notes") described below.
Unsecured Credit Facility
We have an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. This unsecured credit facility provides a revolving credit facility of up to $250 million. The actual amount available to us may be limited by our leverage ratio, which may not exceed 3.5, and our fixed charge coverage ratio, which may not be below 1.3.
Under the facility, the leverage ratio is defined as the ratio of our total funded indebtedness to adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses, as defined in the credit facility) for the prior four fiscal quarters. The fixed charge coverage ratio is defined as the ratio of adjusted EBITDA for the prior four fiscal quarters to fixed charges. Both ratios may operate to limit the total amount available to us under the facility. If adjusted EBITDA continues to decrease significantly over several quarters with no change to indebtedness, our leverage ratio could rise to the level where less than $250 million would be available to us. For example, as of September 30, 2014, $148 million was available to us under the facility due to an increase in our leverage ratio as a result of lower levels of adjusted EBITDA over the prior four fiscal quarters. Based on current market conditions, we expect that the total amount available to us under the facility will continue to be limited during 2014 and 2015. We believe that the amounts available to us will be adequate to fund our operations and our capital investment projects.
Outstanding balances under the unsecured credit facility bear interest at a floating rate, which, at our option, is either (1) the London Interbank Offered Rate (LIBOR), plus a margin of between 1.125% and 2.25%, depending upon our leverage ratio, as defined above; or (2) an alternative base rate, plus a margin of between 0.125% and 1.25%, depending upon our leverage ratio. We pay a quarterly commitment fee on the outstanding portion of the unused revolving unsecured credit facility amount of between 0.15% and 0.35%, depending on our leverage ratio. The interest rate paid under our unsecured credit facility on any debt varies both with changes in the LIBOR and with our leverage ratio.
The facility is unsecured and is guaranteed by Intrepid's material subsidiaries. We are currently in compliance with the covenants under the facility. The facility has a maturity date of August 2018. As of September 30, 2014, and December 31, 2013, there were no amounts outstanding under the facility.
Unsecured Senior Notes
In April 2013, we received net proceeds of $149.3 million from the issuance of $150 million aggregate principal amount of the Notes pursuant to a note purchase agreement entered into in August 2012. The Notes consist of the following series:
• | $60 million of 3.23% Senior Notes, Series A, due April 16, 2020 |
• | $45 million of 4.13% Senior Notes, Series B, due April 14, 2023 |
• | $45 million of 4.28% Senior Notes, Series C, due April 16, 2025 |
The Notes are senior unsecured obligations and rank equally in right of payment with any of our other unsubordinated unsecured indebtedness. The obligations under the Notes are unconditionally guaranteed by our material subsidiaries. The note purchase agreement includes financial covenants requiring a minimum fixed charge ratio and a maximum leverage ratio. We are currently in compliance with the covenants under the Notes. Interest on the Notes is paid semiannually on April 16 and October 16 of each year.
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Off-Balance Sheet Arrangements
As of September 30, 2014, we had no off-balance sheet arrangements aside from the operating leases and bonding obligations described in the accompanying notes to the condensed consolidated financial statements.
Results of Operations for the Three Months Ended September 30, 2014, and 2013
Net Sales
Net sales of potash increased to $76.3 million for the three months ended September 30, 2014, from $56.7 million for the three months ended September 30, 2013. This increase in net sales of potash was primarily the result of a 46% increase in sales volume partially offset by a decrease $27 per ton in the average net realized sales price of potash. Our 2014 sales volume increased over those realized in the same period in 2013, due primarily to higher demand and the increased purchasing of potash as our customers had increased confidence in the price of potash in 2014 compared to the same period a year ago.
Net sales of Trio® increased to $15.1 million for the three months ended September 30, 2014, from $7.9 million for the three months ended September 30, 2013, due to a 95% increase in the volume of sales partially offset by a 1% decrease in the average net realized sales price. Demand for granular-sized and pelletized Trio® continues to be favorable; however, the margin opportunity for standard-sized Trio® in the export market has decreased resulting in our increased focus on pelletizing standard-sized Trio® for sale in the domestic market.
Cost of Goods Sold
The following table presents our cost of goods sold for potash and Trio® for the subject periods:
Three Months Ended September 30, | Change Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Cost of goods sold (in millions) | $ | 77.8 | $ | 46.8 | $ | 31 | 66 | % | |||||||
Cost per ton of potash sold(1) | $ | 289 | $ | 253 | $ | 36 | 14 | % | |||||||
Cost per ton of Trio® sold(2) | $ | 283 | $ | 322 | $ | (39 | ) | (12 | )% | ||||||
(1) | Depreciation and depletion expense for potash was $16.5 million and $8.4 million in the third quarter of 2014 and 2013, respectively, which equates to $73 and $54 on a per-ton basis. |
(2) | Depreciation and depletion expense for Trio® was $2.5 million and $1.4 million in the third quarter of 2014 and 2013, respectively, which equates to $59 and $61 on a per-ton basis. |
Total cost of goods sold of potash, which includes royalties and depreciation, depletion and amortization, increased as we experienced higher cash operating costs per ton for the third quarter of 2014 from our West and East facilities, as noted above. We recorded lower-of-cost-or-market inventory adjustments during the third quarter of 2014 of $3.4 million, primarily the result of lower production from the East facility as described above, resulting in our production costs being allocated over fewer tons. A portion of the 2014 lower-of-cost-or-market adjustment is attributable to certain sales of standard-sized potash inventory sold at prices agreed to in 2013.
Total cost of goods sold of Trio® increased due to lower ore grade and the intentional focus on producing more premium-sized Trio®. Further, our continuing efforts to convert standard-sized Trio® into premium-sized Trio® have impacted our production volume. As a result of the lower ore grade and losses incurred in the pelletization process, we have fewer tons of langbeinite over which production costs are allocated, resulting in higher per-ton costs.
In total, our cost of goods sold increased primarily due to more tons of potash and Trio® sold in the third quarter of 2014 as well as higher production costs. Our increased potash production costs were due to increases in labor costs, electricity and property taxes associated with our production facilities.
On a comparative basis, and within our potash and Trio® cost of goods sold, depreciation and depletion increased $9.2 million, or 94%, during the third quarter of 2014 as a result of the significant capital investments being put into service over the last year. We expect depreciation expense to continue to increase in the fourth quarter of 2014 on an actual dollar
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basis as our major capital projects described previously have been completed. We manage capital investments by evaluating capital projects that we believe are necessary to maintain the productivity of our mines and evaluating investment capital that is designed to increase production and generate incremental returns on invested capital.
Other Operating Income
In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million relating to the denied tax credits, as discussed previously.
Other Income (Expense)
In April 2013, we funded $2.0 million to settle all pension plan liabilities and recorded an additional expense of approximately $1.9 million to reflect the termination of the pension plan. This amount is recorded as "Other income (expense)" in the condensed consolidated statement of operations for the nine months ended September 30, 2013, and represents the difference between the final amount funded, and the sum of the recorded pension liability and the unrecognized actuarial loss included in accumulated other comprehensive income.
Results of Operations for the Nine Months Ended September 30, 2014, and 2013
Net Sales
Net sales of potash increased from $207.8 million for the nine months ended September 30, 2013, to $230.4 million for the nine months ended September 30, 2014. This increase in net sales of potash was primarily the result of a 34% increase in sales volume partially offset by a decrease in the average net realized sales price of potash of $69 per ton, or 17%. Our 2014 sales volume increased over those realized in the same period in 2013, due primarily to the increased purchasing of potash by our customers in the 2014 application season which can be attributed to increased confidence in the price of potash in 2014 as compared to 2013.
Net sales of Trio® increased from $34.1 million for the nine months ended September 30, 2013, to $49.0 million for the nine months ended September 30, 2014, due to a 47% increase in the volume of sales offset by a 2% decrease in the average net realized sales price. Domestic demand for granular-sized and premium-sized Trio® continues to be favorable; however, demand for standard-sized Trio® into the export market has been less predictable. Trio® domestic pricing has historically tended to move in a relatively close correlation to potash pricing. Over the last year, due to tight supply levels, Trio® pricing has been resilient despite the significant decrease in potash prices.
Cost of Goods Sold
The following table presents our cost of goods sold for potash and Trio® for the subject periods:
Nine Months Ended September 30, | Change Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Cost of goods sold (in millions) | $ | 235.8 | $ | 155.6 | $ | 80.2 | 52 | % | |||||||
Cost per ton of potash sold(1) | $ | 278 | $ | 243 | $ | 35 | 14 | % | |||||||
Cost per ton of Trio® sold(2) | $ | 279 | $ | 266 | $ | 13 | 5 | % | |||||||
(1) | Depreciation and depletion expense for potash was $47.7 million and $27.0 million in the first nine months of 2014 and 2013, respectively, which equates to $68 and $49 on a per-ton basis. |
(2) | Depreciation and depletion expense for Trio® was $8.5 million and $4.8 million in the first nine months of 2014 and 2013, respectively, which equates to $60 and $54 on a per-ton basis. |
Total cost of goods sold of potash, which includes royalties and depreciation, depletion and amortization, increased as we experienced higher sales volumes in 2014 compared to 2013. Further, our cash operating costs per ton for the first nine months of 2014 were higher than in 2013, largely due to lower production at our West facility and the costs associated with start-up of the HB Solar Solution plant. As noted above, we recorded lower-of-cost-or-market inventory adjustments during the first nine months of 2014 of $8.1 million, of which $4.0 million related to the start-up activities of our HB Solar Solution mine, and approximately $3.8 million primarily related to standard-sized inventory at our East facility as noted above.
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Total cost of goods sold of Trio® increased as our sales volumes in 2014 were significantly higher than in 2014. Further, production of langbeinite decreased compared with the first nine months of 2013 due to lower ore grade and production inefficiencies related to our efforts to convert standard-sized Trio® into premium-sized Trio®, as described previously.
In total, our cost of goods sold increased $80.2 million primarily due to more tons of potash and Trio® sold in the first nine months of 2014 as well as higher potash production costs. Our increased potash production costs were due to increases in labor costs, natural gas, electricity, property taxes and maintenance associated with our production facilities.
On a comparative basis, and within our potash and Trio® cost of goods sold, depreciation and depletion increased $24.4 million, or 77%, during the first nine months of 2014 as a result of the significant capital investments being put into service over the last year. We expect depreciation expense to continue to increase in the fourth quarter of 2014 on an actual dollar basis as our major capital projects described previously have been completed. We manage capital investments by evaluating capital projects that we believe are necessary to maintain the productivity of our mines and by evaluating investment capital that is designed to increase production and generate incremental returns on invested capital.
Other Operating Income
In the second quarter of 2013, we received a $1.7 million refund from the State of New Mexico related to a compensating tax refund, as previously discussed.
In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million relating to the denied tax credits. In March 2014, we received notice that the State of New Mexico had approved $5.9 million of employment tax credits, a significant portion of which had previously been denied. Accordingly, in the first quarter of 2014, we reversed $2.6 million of the allowance associated with the previously recorded employment-related tax credits. We received payment of $5.9 million for the approved credits during the second quarter of 2014.
Other Income (Expense)
Other income (expense) was impacted by the settlement of all pension plan liabilities as of April 2013, as previously discussed.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2013, describes the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant changes to our critical accounting policies since December 31, 2013.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use several non-GAAP financial measures to monitor and evaluate our performance. These non-GAAP financial measures include net sales, average net realized sales price, cash operating costs, and average potash and Trio® gross margin. These non-GAAP financial measures should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, because the presentation of these non-GAAP financial measures varies among companies, our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies.
We believe these non-GAAP financial measures provide useful information to investors for analysis of our business. We also refer to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are widely used by professional research analysts and others in the valuation, comparison and investment recommendations of companies in the potash mining industry. Many investors use the published research reports of these professional research analysts and others in making investment decisions.
Below is additional information about our non-GAAP financial measures, including reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures, for the three and nine months ended September 30, 2014, and 2013:
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Net Sales and Average Net Realized Sales Price per Ton
Net sales and average net realized sales price are non-GAAP financial measures. Net sales are calculated as sales less freight costs. Average net realized sales price is calculated as net sales, divided by the number of tons sold in the period. We consider net sales and average net realized sales price to be useful because they remove the effect of transportation and delivery costs on sales and pricing. When we arrange transportation and delivery for a customer, we include in revenue and in freight costs the costs associated with transportation and delivery. However, many of our customers arrange for and pay their own transportation and delivery costs, in which case these costs are not included in our revenue and freight costs. We use net sales and average net realized sales price as key performance indicators to analyze sales and price trends. We also use net sales as one of the measures under our performance-based compensation programs for employees.
Three Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Sales | $ | 84,142 | $ | 18,138 | $ | 102,280 | $ | 61,170 | $ | 9,399 | $ | 70,569 | ||||||||||||
Freight costs | 7,846 | 3,079 | 10,925 | 4,499 | 1,453 | 5,952 | ||||||||||||||||||
Net sales | $ | 76,296 | $ | 15,059 | $ | 91,355 | $ | 56,671 | $ | 7,946 | $ | 64,617 | ||||||||||||
Divided by: | ||||||||||||||||||||||||
Tons sold (in thousands) | 227 | 43 | 156 | 22 | ||||||||||||||||||||
Average net realized sales price per ton | $ | 336 | $ | 351 | $ | 363 | $ | 353 | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Sales | $ | 253,443 | $ | 58,661 | $ | 312,104 | $ | 222,142 | $ | 40,364 | $ | 262,506 | ||||||||||||
Freight costs | 23,003 | 9,613 | 32,616 | 14,316 | 6,259 | 20,575 | ||||||||||||||||||
Net sales | $ | 230,440 | $ | 49,048 | $ | 279,488 | $ | 207,826 | $ | 34,105 | $ | 241,931 | ||||||||||||
Divided by: | ||||||||||||||||||||||||
Tons sold (in thousands) | 705 | 141 | 525 | 96 | ||||||||||||||||||||
Average net realized sales price per ton | $ | 327 | $ | 348 | $ | 396 | $ | 354 | ||||||||||||||||
Cash Operating Costs per Ton
Cash operating costs per ton is a non-GAAP financial measure that is calculated as total of cost of goods sold divided by the number of tons sold in the period and then adjusted to exclude per-ton depreciation, depletion, and royalties. Total cost of goods sold is reported net of by-product credits and does not include warehousing and handling costs. We consider cash operating costs to be useful because it represents our core, per-ton costs to produce potash and Trio®. We use cash operating costs as an indicator of performance and operating efficiencies and as one of the measures under our performance-based compensation programs for employees.
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Three Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Cost of goods sold | $ | 65,670 | $ | 12,124 | $ | 77,794 | $ | 39,547 | $ | 7,233 | $ | 46,780 | ||||||||||||
Divided by sales volume (in thousands of tons) | 227 | 43 | 156 | 22 | ||||||||||||||||||||
Cost of goods sold per ton | $ | 289 | $ | 283 | $ | 253 | $ | 322 | ||||||||||||||||
Less per-ton adjustments | ||||||||||||||||||||||||
Depreciation and depletion | $ | 73 | $ | 59 | $ | 54 | $ | 61 | ||||||||||||||||
Royalties | 12 | 18 | 1 | 18 | ||||||||||||||||||||
Cash operating costs per ton | $ | 204 | $ | 206 | $ | 198 | $ | 243 | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Cost of goods sold | $ | 196,289 | $ | 39,461 | $ | 235,750 | $ | 130,030 | $ | 25,526 | $ | 155,556 | ||||||||||||
Divided by sales volume (in thousands of tons) | 705 | 141 | 525 | 96 | ||||||||||||||||||||
Cost of goods sold per ton | $ | 278 | $ | 279 | $ | 243 | $ | 266 | ||||||||||||||||
Less per-ton adjustments | ||||||||||||||||||||||||
Depreciation and depletion | $ | 68 | $ | 60 | $ | 49 | $ | 54 | ||||||||||||||||
Royalties | 11 | 17 | 12 | 18 | ||||||||||||||||||||
Cash operating costs per ton | $ | 199 | $ | 202 | $ | 182 | $ | 194 | ||||||||||||||||
Average Potash and Trio® Gross Margin per Ton
Average potash and Trio® gross margin per ton are non-GAAP financial measures that are calculated as average net realized sales price less per ton total cost of goods sold and per ton warehousing and handling costs. We consider average potash and Trio® gross margin per ton to be useful because they represent the average margin we realize on each ton of potash and Trio® sold. The reconciliations of average potash and Trio® net realized sales price to GAAP sales are set forth separately above under the heading "Net Sales and Average Net Realized Sales Price per Ton."
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Potash | ||||||||||||||||
Average potash net realized sales price | $ | 336 | $ | 363 | $ | 327 | $ | 396 | ||||||||
Less total potash cost of goods sold | 289 | 253 | 278 | 243 | ||||||||||||
Less potash warehousing and handling costs | 12 | 16 | 11 | 15 | ||||||||||||
Average potash gross margin per ton | $ | 35 | $ | 94 | $ | 38 | $ | 138 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Trio® | ||||||||||||||||
Average Trio® net realized sales price | $ | 351 | $ | 353 | $ | 348 | $ | 354 | ||||||||
Less total Trio® cost of goods sold | 283 | 322 | 279 | 266 | ||||||||||||
Less Trio® warehousing and handling costs | 12 | 17 | 10 | 15 | ||||||||||||
Average Trio® gross margin per ton | $ | 56 | $ | 14 | $ | 59 | $ | 73 | ||||||||
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Part II, Item 7A., "Quantitative and Qualitative Disclosure About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2013, describes our exposure to market risk. There have been no significant changes to our market risk exposure since December 31, 2013.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation as of September 30, 2014, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of our “internal control over financial reporting,” as defined in Rule 13a-15(f) of the Exchange Act to determine whether any changes in our internal control over financial reporting occurred during the three months ended September 30, 2014, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Intrepid have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II-OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS |
We are subject to claims and legal actions in the ordinary course of business. While there are uncertainties in predicting the outcome of any claim or legal action, we believe that the ultimate resolution of these claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. We maintain liability insurance that will apply to some claims and actions and believe that our coverage is reasonable in view of the insurable legal risks to which our business ordinarily is subject.
ITEM 1A. | RISK FACTORS |
Our future performance is subject to a variety of risks and uncertainties that could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common stock. These risks and uncertainties are described in Part I, "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to these risks and uncertainties.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4.MINE SAFETY DISCLOSURES
We are committed to providing a safe and healthy work environment. The objectives of our safety programs are to eliminate workplace accidents and incidents, to preserve employee health, and to comply with safety- and health-based regulations. We seek to achieve these objectives by training employees in safe work practices; establishing, following, and improving safety standards; involving employees in safety processes; openly communicating with employees about safety matters; and recording, reporting, and investigating accidents, incidents, and losses to avoid recurrence. As part of our ongoing safety programs, we collaborate with regulators to identify and implement new accident prevention techniques and practices.
Our East, West and North facilities in New Mexico are subject to regulation by the Mine Safety and Health Administration ("MSHA") under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the New Mexico Bureau of Mine Safety. MSHA inspects these facilities on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Exhibit 95.1 to this Quarterly Report on Form 10-Q provides the information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K. Our Utah facilities and our HB Solar Solution mine are subject to regulation by the Occupational Health and Safety Administration and, therefore, are not required to be included in the information provided in Exhibit 95.1.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The list of exhibits in the Exhibit Index to this Quarterly Report on Form 10-Q is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTREPID POTASH, INC. (Registrant) | ||
Dated: October 29, 2014 | /s/ Robert P. Jornayvaz III | |
Robert P. Jornayvaz III - Executive Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) | ||
Dated: October 29, 2014 | /s/ Brian D. Frantz | |
Brian D. Frantz - Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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EXHIBIT INDEX
Exhibit No. | Description | |
10.1 | Aircraft Dry Lease, dated as of September 1, 2014, by and between Intrepid Potash, Inc. and Odyssey Adventures, LLC (incorporated by reference to Intrepid Potash, Inc.’s Current Report on Form 8-K (File No. 001-34025) filed on August 18, 2014). | |
10.2 | Amendment to Aircraft Dry Lease, dated as of September 1, 2014, by and between Intrepid Potash, Inc. and Intrepid Production Holdings LLC (incorporated by reference to Intrepid Potash, Inc.’s Current Report on Form 8-K (File No. 001-34025) filed on August 18, 2014). | |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* | |
32.1 | Certification of Executive Chairman of the Board, President, and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
32.2 | Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
95.1 | Mine Safety Disclosure Exhibit.* | |
101.INS | XBRL Instance Document.* | |
101.SCH | XBRL Taxonomy Extension Schema.* | |
101.CAL | XBRL Extension Calculation Linkbase.* | |
101.LAB | XBRL Extension Label Linkbase.* | |
101.PRE | XBRL Extension Presentation Linkbase.* | |
101.DEF | XBRL Extension Definition Linkbase.* | |
* | Filed herewith. |
** | Furnished herewith. |
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