UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q/A
(Amendment No. 1)
_______________________________________________________
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2016 | |
or | |
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______ to ______ | |
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 July 27, 2016, the registrant had outstanding 76,597,669 shares of common stock, par value $0.001.
Explanatory Note
This Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, as filed on August 2, 2016. The purpose of this amendment is solely (1) to add conformed signatures to the certifications filed as Exhibits 31.1, 31.2, 32.1, and 32.2, and (2) to add Exhibit 95.1. The confirmed signatures and Exhibit 95.1 were inadvertently omitted from the original Form 10-Q.
Except as specifically noted above, this Form 10-Q/A does not modify or update disclosures in the original Form 10-Q. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update any related or other disclosures.
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INTREPID POTASH, INC.
TABLE OF CONTENTS
Page | ||
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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 amounts)
June 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 30,984 | $ | 9,307 | ||||
Short-term investments | 16,599 | 50,523 | ||||||
Accounts receivable: | ||||||||
Trade, net | 8,986 | 9,743 | ||||||
Other receivables, net | 2,352 | 1,470 | ||||||
Inventory, net | 109,570 | 106,531 | ||||||
Prepaid expenses and other current assets | 3,070 | 18,141 | ||||||
Total current assets | 171,561 | 195,715 | ||||||
Property, plant, equipment, and mineral properties, net | 404,690 | 419,476 | ||||||
Long-term parts inventory, net | 18,389 | 17,344 | ||||||
Long-term investments | — | 3,799 | ||||||
Other assets, net | 4,558 | 3,635 | ||||||
Total Assets | $ | 599,198 | $ | 639,969 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable: | ||||||||
Trade | $ | 11,835 | $ | 15,709 | ||||
Related parties | 82 | 45 | ||||||
Accrued liabilities | 10,115 | 15,429 | ||||||
Accrued employee compensation and benefits | 7,895 | 7,409 | ||||||
Other current liabilities | 1,321 | 547 | ||||||
Total current liabilities | 31,248 | 39,139 | ||||||
Long-term debt, net | 147,840 | 149,485 | ||||||
Asset retirement obligation | 23,832 | 22,951 | ||||||
Other non-current liabilities | — | 1,868 | ||||||
Total Liabilities | 202,920 | 213,443 | ||||||
Commitments and Contingencies | ||||||||
Common stock, $0.001 par value; 400,000,000 and 100,000,000 shares authorized; and | ||||||||
75,838,782 and 75,702,700 shares outstanding at June 30, 2016, and December 31, 2015, respectively | 76 | 76 | ||||||
Additional paid-in capital | 581,755 | 580,227 | ||||||
Accumulated other comprehensive loss | (3 | ) | (52 | ) | ||||
Retained deficit | (185,550 | ) | (153,725 | ) | ||||
Total Stockholders' Equity | 396,278 | 426,526 | ||||||
Total Liabilities and Stockholders' Equity | $ | 599,198 | $ | 639,969 | ||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Sales | $ | 51,840 | $ | 73,651 | $ | 125,117 | $ | 190,672 | ||||||||
Less: | ||||||||||||||||
Freight costs | 8,931 | 6,898 | 19,263 | 17,810 | ||||||||||||
Warehousing and handling costs | 2,538 | 3,437 | 5,202 | 7,184 | ||||||||||||
Cost of goods sold | 41,850 | 55,435 | 101,627 | 138,717 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 2,930 | 5,276 | 11,937 | 5,636 | ||||||||||||
Costs associated with abnormal production and other | 1,057 | — | 1,707 | — | ||||||||||||
Gross (Deficit) Margin | (5,466 | ) | 2,605 | (14,619 | ) | 21,325 | ||||||||||
Selling and administrative | 4,536 | 8,424 | 11,106 | 15,892 | ||||||||||||
Accretion of asset retirement obligation | 442 | 424 | 884 | 848 | ||||||||||||
Restructuring expense | 1,914 | — | 2,314 | — | ||||||||||||
Other operating income | (1,801 | ) | (2,312 | ) | (1,905 | ) | (2,246 | ) | ||||||||
Operating (Loss) Income | (10,557 | ) | (3,931 | ) | (27,018 | ) | 6,831 | |||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense, net | (3,000 | ) | (1,602 | ) | (5,229 | ) | (3,246 | ) | ||||||||
Interest income | 101 | 200 | 224 | 355 | ||||||||||||
Other income | 59 | 46 | 201 | 373 | ||||||||||||
(Loss) Income Before Income Taxes | (13,397 | ) | (5,287 | ) | (31,822 | ) | 4,313 | |||||||||
Income Tax (Expense) Benefit | (1 | ) | 350 | (3 | ) | (2,721 | ) | |||||||||
Net (Loss) Income | $ | (13,398 | ) | $ | (4,937 | ) | $ | (31,825 | ) | $ | 1,592 | |||||
Weighted Average Shares Outstanding: | ||||||||||||||||
Basic | 75,838,782 | 75,683,075 | 75,797,658 | 75,636,343 | ||||||||||||
Diluted | 75,838,782 | 75,683,075 | 75,797,658 | 75,731,910 | ||||||||||||
(Loss) Earnings Per Share: | ||||||||||||||||
Basic | $ | (0.18 | ) | $ | (0.07 | ) | $ | (0.42 | ) | $ | 0.02 | |||||
Diluted | $ | (0.18 | ) | $ | (0.07 | ) | $ | (0.42 | ) | $ | 0.02 | |||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net (Loss) Income | $ | (13,398 | ) | $ | (4,937 | ) | $ | (31,825 | ) | $ | 1,592 | |||||
Other Comprehensive Income: | ||||||||||||||||
Unrealized gain on investments available for sale, net of tax | 19 | (35 | ) | 49 | (25 | ) | ||||||||||
Other Comprehensive Income (Loss) | 19 | (35 | ) | 49 | (25 | ) | ||||||||||
Comprehensive (Loss) Income | $ | (13,379 | ) | $ | (4,972 | ) | $ | (31,776 | ) | $ | 1,567 | |||||
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 | Retained Deficit | Total Stockholders' Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance, December 31, 2015 | 75,702,700 | $ | 76 | $ | 580,227 | $ | (52 | ) | $ | (153,725 | ) | $ | 426,526 | ||||||||||
Unrealized gain on investments available for sale, net of tax | — | — | — | 49 | — | 49 | |||||||||||||||||
Net loss | — | — | — | — | (31,825 | ) | (31,825 | ) | |||||||||||||||
Stock-based compensation | — | — | 1,700 | — | — | 1,700 | |||||||||||||||||
Vesting of restricted common stock, net of restricted common stock used to fund employee income tax withholding due upon vesting | 136,082 | — | (172 | ) | — | — | (172 | ) | |||||||||||||||
Balance, June 30, 2016 | 75,838,782 | $ | 76 | $ | 581,755 | $ | (3 | ) | $ | (185,550 | ) | $ | 396,278 | ||||||||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net (loss) income | $ | (31,825 | ) | $ | 1,592 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Deferred income taxes | — | 2,754 | ||||||
Depreciation, depletion, and accretion | 24,209 | 40,673 | ||||||
Amortization of deferred financing costs | 1,666 | 186 | ||||||
Stock-based compensation | 1,700 | 2,595 | ||||||
Lower-of-cost-or-market inventory adjustments | 11,937 | 5,636 | ||||||
Allowance for parts inventory obsolescence | 618 | — | ||||||
Other | 435 | 862 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable, net | 757 | 12,919 | ||||||
Other receivables, net | (726 | ) | (3,671 | ) | ||||
Refundable income taxes | 91 | (174 | ) | |||||
Inventory, net | (16,638 | ) | (10,903 | ) | ||||
Prepaid expenses and other current assets | 14,677 | 1,063 | ||||||
Accounts payable, accrued liabilities, and accrued employee compensation and benefits | (5,401 | ) | 244 | |||||
Other liabilities | (1,097 | ) | 1,418 | |||||
Net cash provided by operating activities | 403 | 55,194 | ||||||
Cash Flows from Investing Activities: | ||||||||
Additions to property, plant, equipment, and mineral properties | (11,775 | ) | (18,989 | ) | ||||
Purchases of investments | (1,500 | ) | (72,227 | ) | ||||
Proceeds from sale of investments | 37,375 | 9,748 | ||||||
Net cash provided by (used in) investing activities | 24,100 | (81,468 | ) | |||||
Cash Flows from Financing Activities: | ||||||||
Debt issuance costs | (2,654 | ) | — | |||||
Employee tax withholding paid for restricted stock upon vesting | (172 | ) | (1,030 | ) | ||||
Net cash used in financing activities | (2,826 | ) | (1,030 | ) | ||||
Net Change in Cash and Cash Equivalents | 21,677 | (27,304 | ) | |||||
Cash and Cash Equivalents, beginning of period | 9,307 | 67,589 | ||||||
Cash and Cash Equivalents, end of period | $ | 30,984 | $ | 40,285 | ||||
Supplemental disclosure of cash flow information | ||||||||
Net cash paid (refunded) during the period for: | ||||||||
Interest | $ | 3,221 | $ | 3,124 | ||||
Income taxes | $ | (88 | ) | $ | 41 | |||
Accrued purchases for property, plant, equipment, and mineral properties | $ | 544 | $ | 5,557 | ||||
See accompanying notes to these condensed consolidated financial statements.
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INTREPID POTASH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
"Intrepid," "our," "we," or "us" means Intrepid Potash, Inc. and its consolidated subsidiaries.
Note 1 | — COMPANY BACKGROUND |
We are the only producer of muriate of potash ("potassium chloride" or "potash") in the United States and one of two producers of langbeinite ("sulfate of potash magnesia"), which we market and sell as Trio®. We sell potash and Trio® primarily into the agricultural market as a fertilizer. We also sell these products into the animal feed market as a nutritional supplement and sell potash into the industrial market as a component in drilling and fracturing fluids for oil and gas wells and other industrial inputs. Our revenues are generated exclusively from the sale of potash and Trio®. 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 represented approximately 2% to 3% of total cost of goods sold in each of the last three years.
During the first half of 2016, we produced potash from three solution mining facilities and two conventional underground mining facilities. Our solution mining production comes from our HB solar solution mine near Carlsbad, New Mexico, a solar solution mine near Moab, Utah, and a solar brine recovery mine in Wendover, Utah. Our conventional production of potash came from our underground West and East mines near Carlsbad, New Mexico. We also operate the North compaction facility near Carlsbad, New Mexico, which services the West and HB mines. We produce Trio® from our underground conventional East mine.
In April 2016, we converted our East facility from a mixed-ore facility that produced both potash and Trio® to a Trio®-only facility. We expect our commissioning activities related to that transition to continue into the second half of 2016. Subsequent to the transition, we no longer produce potash at our East facility.
In May 2016, we initiated a plan to idle mining operations at our West facility and transition it into a care-and- maintenance mode due to the decline in potash prices. As we completed the transition in July 2016, all of our potash is now produced from our three solution mining facilities.
Until the second quarter of 2016, we had one reporting segment; the extraction, production, and sale of potassium-related products. As a result of pricing pressure and the resulting economic factors giving rise to the conversion of our East facility to Trio®-only and the idling of our West facility, the chief operating decision maker separately evaluates our potash and Trio® operations. Accordingly, we reevaluated our segments and determined that, beginning in the second quarter of 2016, we have two segments: potash and Trio®.
Note 2 | — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation—Our consolidated financial statements include our accounts and those of our 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.
The lenders under our credit facility have agreed to waive until no later than September 30, 2016, the requirements under our credit facility that we comply with certain financial covenants and that we deliver audited annual financial statements for the year ended December 31, 2015, without any going concern modification. In addition, the holders of our senior notes have agreed to waive until September 30, 2016, the requirement under the terms of the senior notes that we comply with certain financial covenants for the first and second quarters of 2016. If current market conditions continue, we anticipate that our adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses, as defined in the credit facility) will not be sufficient for us to return to compliance with these covenants through 2016. As a result, we are working with our lenders and evaluating our options, which could include additional covenant amendments, waivers, or forbearances, alternative financing arrangements, a possible further reduction in the amount of the credit facility, and a possible reduction of our outstanding debt, which may include the payment of prepayment penalties. We have reached an agreement in principle regarding revised terms of our senior notes and have received a commitment letter from a third-party lender for a new credit facility to replace our existing credit facility, subject to various conditions, including that the revised terms of the agreement between us and the holders of our senior notes be satisfactory to the third-
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party lender. We are working toward completing documentation to close these transactions by September 30, 2016. However, if we are unable to reach definitive agreements, our continued failure to comply with these covenants after September 30, 2016, will result in an event of default under the terms of the senior notes and the credit facility that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of our senior notes and any amounts outstanding under the credit facility. If the lenders were to make such a demand for repayment, we would be unable to pay the obligations as we do not have existing facilities or sufficient cash on hand to satisfy these obligations. With this material uncertainty surrounding compliance with our debt covenants, declining revenues, lower-of-cost-or-market inventory adjustments, and negative cash flows from operations, there is substantial doubt about our ability to continue as a going concern. While we will continue to work with our lenders, there can be no assurance that we will be successful. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Recently Adopted Accounting Standard—Certain prior period amounts have been reclassified in order to conform to the current period presentation. In accordance with the adoption of a new accounting standard, we have reclassified $515,000 of deferred financing costs associated with our outstanding debt from "Other current assets" and "Other assets" to "Long-term debt, net" as of December 31, 2015 to conform to the June 30, 2016 presentation.
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. We base our 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, valuation of investments, 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 our 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, 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 after shipment and agreed to with our customer, revenue is recognized when the final sales price is fixed and determinable and the other revenue recognition criteria have been met.
Sales are reported on a gross basis. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. When a sale occurs on a delivered basis, we incur and, in turn, bill the customer and record 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.
Inventory—Inventory consists of product and by-product stocks that are ready for sale; mined ore; 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.
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We evaluate our production levels and costs to determine if any should be deemed abnormal and therefore excluded from inventory costs and expensed directly during the applicable period. The assessment of normal production levels is judgmental and unique to each period. We model normal production levels and evaluate historical ranges of production by operating plant in assessing what is deemed to be normal.
Property, Plant, Equipment, Mineral Properties, and Development Costs—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. The estimated useful lives of property, plant, and equipment are evaluated periodically as changes in estimates occur. 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.
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 our mineral leases, including royalty provisions, are subject to periodic readjustment by the state and federal government, which could affect the economics of our reserve estimates. Significant changes in the estimated reserves could have a material impact on our results of operations and financial position.
(Loss) 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.
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Note 3 | — (LOSS) EARNINGS PER SHARE |
Potentially 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. The following table shows the shares that have an anti-dilutive effect and are excluded from the diluted weighted average shares outstanding computations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Anti-dilutive shares of non-vested restricted common stock | 447,661 | 474,481 | 407,186 | 161,675 | ||||||||
Anti-dilutive shares of stock options outstanding | 218,886 | 319,563 | 227,370 | 320,241 | ||||||||
Anti-dilutive shares of non-vested performance units | 126,050 | 194,374 | 127,651 | 131,621 | ||||||||
The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net (loss) income | $ | (13,398 | ) | $ | (4,937 | ) | $ | (31,825 | ) | $ | 1,592 | |||||
Basic weighted average common shares outstanding | 75,839 | 75,683 | 75,798 | 75,636 | ||||||||||||
Add: Dilutive effect of non-vested restricted common stock | — | — | — | 90 | ||||||||||||
Add: Dilutive effect of performance units | — | — | — | 6 | ||||||||||||
Diluted weighted average common shares outstanding | 75,839 | 75,683 | 75,798 | 75,732 | ||||||||||||
(Loss) earnings per share: | ||||||||||||||||
Basic | $ | (0.18 | ) | $ | (0.07 | ) | $ | (0.42 | ) | $ | 0.02 | |||||
Diluted | $ | (0.18 | ) | $ | (0.07 | ) | $ | (0.42 | ) | $ | 0.02 | |||||
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Note 4— CASH, CASH EQUIVALENTS, AND INVESTMENTS
The following table summarizes the fair value of our cash and investments held in our portfolio, recorded as cash and cash equivalents or short-term or long-term investments as of June 30, 2016, and December 31, 2015 (in thousands):
June 30, 2016 | December 31, 2015 | ||||||
Cash | $ | 8,691 | $ | 9,056 | |||
Commercial paper and money market accounts | 22,293 | 251 | |||||
Total cash and cash equivalents | $ | 30,984 | $ | 9,307 | |||
Corporate bonds | $ | 15,592 | $ | 49,518 | |||
Certificates of deposit and time deposits | 1,007 | 1,005 | |||||
Total short-term investments | $ | 16,599 | $ | 50,523 | |||
Corporate bonds | $ | — | $ | 3,799 | |||
Total long-term investments | $ | — | $ | 3,799 | |||
Total cash, cash equivalents, and investments | $ | 47,583 | $ | 63,629 | |||
The following tables summarize the cost basis, unrealized gains and losses, and fair value of our available-for-sale investments held in our portfolio as of June 30, 2016, and December 31, 2015 (in thousands):
June 30, 2016 | ||||||||||||||||
Unrealized | ||||||||||||||||
Cost Basis | Gain | Loss | Fair Value | |||||||||||||
Corporate bonds | $ | 15,596 | $ | 2 | $ | (5 | ) | $ | 15,593 | |||||||
Certificates of deposit and time deposits | 1,007 | — | — | 1,007 | ||||||||||||
Total available-for-sale investments | $ | 16,603 | $ | 2 | $ | (5 | ) | $ | 16,600 | |||||||
December 31, 2015 | ||||||||||||||||
Unrealized | ||||||||||||||||
Cost Basis | Gain | Loss | Fair Value | |||||||||||||
Corporate bonds | $ | 53,403 | $ | 6 | $ | (92 | ) | $ | 53,317 | |||||||
Certificates of deposit and time deposits | 1,005 | — | — | 1,005 | ||||||||||||
Total available-for-sale investments | $ | 54,408 | $ | 6 | $ | (92 | ) | $ | 54,322 | |||||||
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Note 5 | — INVENTORY AND LONG-TERM PARTS INVENTORY |
The following summarizes our inventory, recorded at the lower of weighted average cost or estimated net realizable value, as of June 30, 2016, and December 31, 2015 (in thousands):
June 30, 2016 | December 31, 2015 | |||||||
Finished goods product inventory | $ | 64,195 | $ | 65,200 | ||||
In-process mineral inventory | 24,085 | 19,769 | ||||||
Total product inventory | 88,280 | 84,969 | ||||||
Current parts inventory, net | 21,290 | 21,562 | ||||||
Total current inventory, net | 109,570 | 106,531 | ||||||
Long-term parts inventory, net | 18,389 | 17,344 | ||||||
Total inventory, net | $ | 127,959 | $ | 123,875 | ||||
Parts inventories are shown net of any required allowances. At June 30, 2016, and 2015, allowances for parts inventory obsolescence were $3.3 million and $0.5 million, respectively.
During the six months ended June 30, 2016, and 2015, we recorded charges of approximately $11.9 million and $5.6 million, respectively, as a result of routine assessments of the lower of weighted average cost or estimated net realizable value of our finished goods product inventory.
During the first half of 2016, we suspended potash production at our East facility for a total of seven days as we performed a langbeinite-only testing run and converted the East facility to a Trio®-only facility. As a result of the suspension of production, we determined that approximately $1.1 million and $1.7 million of production costs at our East facility would have been allocated to additional tons produced, assuming we had been operating at normal production rates for the three- and six-month periods ending June 30, 2016, respectively. Accordingly, these costs were excluded from our inventory values and instead expensed in the three- and six-month periods in 2016 as period production costs. We compare actual production relative to what we estimated could have been produced if we had not incurred the production suspensions and lower operating rates in order to determine the abnormal cost adjustment.
Note 6 | — PROPERTY, PLANT, EQUIPMENT, AND MINERAL PROPERTIES |
"Property, plant, equipment, and mineral properties, net" were comprised of the following (in thousands):
June 30, 2016 | December 31, 2015 | |||||||
Buildings and plant | $ | 83,488 | $ | 81,208 | ||||
Machinery and equipment | 221,430 | 209,920 | ||||||
Vehicles | 4,875 | 4,747 | ||||||
Office equipment and improvements | 12,177 | 12,001 | ||||||
Ponds and land improvements | 57,731 | 55,951 | ||||||
Total depreciable assets | 379,701 | 363,827 | ||||||
Accumulated depreciation | (101,754 | ) | (80,707 | ) | ||||
Total depreciable assets, net | $ | 277,947 | $ | 283,120 | ||||
Mineral properties and development costs | $ | 140,250 | $ | 139,751 | ||||
Accumulated depletion | (19,235 | ) | (17,254 | ) | ||||
Total depletable assets, net | $ | 121,015 | $ | 122,497 | ||||
Land | $ | 719 | $ | 719 | ||||
Construction in progress | $ | 5,009 | $ | 13,140 | ||||
Total property, plant, equipment, and mineral properties, net | $ | 404,690 | $ | 419,476 | ||||
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We incurred the following expenses for depreciation, depletion, and accretion, including expenses capitalized into inventory, for the following periods (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Depreciation | $ | 8,862 | $ | 18,485 | $ | 21,344 | $ | 37,364 | ||||||||
Depletion | 537 | 488 | 1,981 | 2,461 | ||||||||||||
Accretion | 442 | 424 | 884 | 848 | ||||||||||||
Total incurred | $ | 9,841 | $ | 19,397 | $ | 24,209 | $ | 40,673 | ||||||||
Note 7 | — DEBT |
Unsecured Credit Facility—We have an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. Throughout the first seven months of 2016, we entered into a series of amendments that ultimately reduced the amount available to us under the credit facility to a maximum of $1 million, which amount may be used only for letters of credit. Any availability of the credit facility is subject to our compliance with financial covenants that provide that our leverage ratio may not exceed 3.5 to 1, and our fixed charge coverage ratio may not be below 1.3 to 1. We were not in compliance with these covenants as of March 31, 2016, and June 30, 2016; however, the lenders under the credit facility have agreed to waive until September 30, 2016, the requirement that we comply with these covenants for the quarters ended March 31, 2016, and June 30, 2016. Further, the lenders agreed that noncompliance with these covenants for the quarters ended March 31, 2016, and June 30, 2016, will not constitute a default or event of default under the credit facility until September 30, 2016. If current market conditions continue, we anticipate that our adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses, as defined in the credit facility) will not be sufficient for us to return to compliance with these covenants through 2016. As a result, we are working with our lenders and evaluating our options which could include additional covenant amendments, waivers, or forbearances, alternative financing arrangements, a possible further reduction in the amount of the credit facility, and a possible reduction of our outstanding debt, which may include the payment of prepayment penalties. We have reached an agreement in principle regarding revised terms of our senior notes and have received a commitment letter from a third-party lender for a new credit facility to replace our existing credit facility, subject to various conditions, including that the revised terms of the agreement between us and the holders of our senior notes be satisfactory to the third-party lender. We are working toward completing documentation to close these transactions by September 30, 2016. However, if we are unable to reach definitive agreements, our continued failure to comply with these covenants after the waiver expires, or our failure to comply with similar covenants under the terms of our senior notes after September 30, 2016, will result in an event of default that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of our senior notes discussed below and any amounts outstanding under the credit facility. In addition, the amount available under the credit facility would be reduced to zero. The maturity date for the credit facility is the earliest of (1) September 30, 2016, (2) any date on which the aggregate commitment under the credit facility is reduced to zero, and (3) the effective date for a new credit facility.
The credit facility also has a covenant that requires us to provide to the lenders audited annual financial statements within 90 days of the end of each year. The audit report must not contain any going concern modification. The audit report accompanying our financial statements for the year ended December 31, 2015, contains a going concern modification, and therefore does not satisfy the credit facility covenant. The lenders under the facility agreed to waive until September 30, 2016, the requirement that we deliver audited annual financial statements for the year ended December 31, 2015, without any going concern modification. Further, the lenders agreed that the existence of audited annual financial statements for the year ended December 31, 2015, with a going concern modification will not constitute a default or event of default under the facility until September 30, 2016. Our continued failure to comply with this covenant after September 30, 2016, will result in an event of default that, if not cured or waived could result in the acceleration of all outstanding indebtedness, including the acceleration of our senior notes discussed below and any amounts outstanding under the credit facility.
The financial covenants under the credit facility are calculated as follows:
• | Our maximum leverage ratio (calculated as the ratio of funded indebtedness to adjusted EBITDA for the prior four fiscal quarters) is 3.5 to 1, where funded indebtedness is calculated as total funded indebtedness minus cash and cash equivalent investments on hand up to a maximum of $75 million. Our leverage ratio at June 30, 2016, was 10.3 to 1. |
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• | Our minimum fixed charge coverage ratio (calculated as the ratio of adjusted EBITDA for the prior four fiscal quarters, minus maintenance capital expenditures and cash paid for income taxes, to interest expense plus scheduled principal amortization of long-term funded indebtedness) is 1.3 to 1, where annual maintenance capital expenditures is set at $20 million. Our fixed charge coverage ratio at June 30, 2016, was (1.4) to 1. |
These ratios and other restrictive covenants under the credit facility could limit our ability to engage in activities that we believe are in our long-term best interests.
The facility is unsecured and is guaranteed by our material subsidiaries. As of June 30, 2016, we had a $0.5 million letter of credit outstanding under the facility.
Unsecured Senior Notes—In April 2013, we issued $150 million aggregate principal amount of unsecured senior notes (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 other unsubordinated unsecured indebtedness of ours. The Notes are subject to the same leverage ratio and fixed charge coverage ratio as apply under the credit facility, as described above. In January 2016, we amended the note purchase agreement to provide that the interest rate for the senior notes will be increased by 0.25% during any time that our leverage ratio exceeds 2.25 to 1. As we did not meet our leverage ratio and fixed charge ratio beginning as of March 31, 2016, in accordance with the terms of the note purchase agreement, the above interest rates increased by 2% beginning April 1, 2016 through July 28, 2016. As part of an amendment and waiver extension in July 2016, the above interest rates increased 3.5% above the rates indicated above beginning July 29, 2016, and will remain at that level as long as we are not meeting these ratios. As described above, these ratios and other restrictive covenants under the Notes could limit our ability to engage in activities that we believe are in our long-term best interests.
Our outstanding long-term debt, net, is as follows as of June 30, 2016 and December 31, 2015 (in thousands):
June 30, 2016 | December 31, 2015 | ||||||
Unsecured Senior Notes | $ | 150,000 | $ | 150,000 | |||
Less deferred financing costs | (2,160 | ) | (515 | ) | |||
Long-term debt, net | $ | 147,840 | $ | 149,485 | |||
We were not in compliance with the financial covenants under the Notes as of March 31, 2016, and June 30, 2016; however, the noteholders have agreed to waive until September 30, 2016, the requirement that we comply with these covenants for the quarters ended March 31, 2016, and June 30, 2016. Further, the noteholders agreed that noncompliance with these covenants for the quarters ended March 31, 2016, and June 30, 2016, will not constitute a default or event of default under the Notes until September 30, 2016. If current market conditions continue, we anticipate that our adjusted EBITDA will not be sufficient for us to return to compliance with these covenants through 2016. We are working with the noteholders and evaluating our options, which could include additional covenant amendments, waivers, or forbearances, alternative financing arrangements, a possible further reduction in the amount of our credit facility, and a possible reduction of our outstanding debt, which may include the payment of prepayment penalties. We have reached an agreement in principle regarding revised terms of our senior notes and have received a commitment letter from a third-party lender for a new credit facility to replace our existing credit facility, subject to various conditions, including that the revised terms of the agreement between us and the holders of our senior notes be satisfactory to the third-party lender. We are working toward completing documentation to close these transactions by September 30, 2016. However, if we are unable to reach definitive agreements, our continued failure to comply with these covenants after September 30, 2016, will result in an event of default under the terms of the senior notes and the credit facility that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of the Notes and any amounts outstanding under the credit facility.
The obligations under the Notes are unconditionally guaranteed by our material subsidiaries.
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. We incurred gross interest expense of $3.1 million and $1.7 million for the three months ended June 30, 2016, and 2015, respectively. Included in the gross interest expense for the
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three months ended June 30, 2016, is the expensing of deferred financing costs of $0.8 million related to the decrease in our unsecured credit facility as described above. We capitalized $0.1 million and an immaterial amount of interest during the three months ended June 30, 2016, and 2015, respectively. For the six months ended June 30, 2016, and 2015, we incurred gross interest expense of $5.4 million and $3.3 million, respectively. Included in the gross interest expense for the six months ended June 30, 2016, is the expensing of deferred financing costs of $1.5 million related to the decrease in our unsecured credit facility as described above. We capitalized $0.2 million and an immaterial amount of interest during the six months ended June 30, 2016, and 2015, respectively.
Note 8 — FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS OF POSSIBLE FUTURE PUBLIC DEBT
Intrepid Potash, Inc., as the parent company, has no independent assets or operations, and operations are conducted solely through its subsidiaries. Cash generated from operations is held at the parent company level as cash on hand and short- and long-term investments. Cash on hand and short- and long-term investments totaled $47.6 million and $63.6 million at June 30, 2016, and December 31, 2015, respectively. In the event that one or more of our wholly-owned operating subsidiaries guarantee public debt securities in the future, those guarantees will be full and unconditional and will constitute the joint and several obligations of the subsidiary guarantors. Our other subsidiaries are minor. There are no restrictions on our ability to obtain cash dividends or other distributions of funds from the subsidiary guarantors, except those imposed by applicable law.
Note 9 — ASSET RETIREMENT OBLIGATION
We recognize an estimated liability for future costs associated with the abandonment and reclamation of our 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.
Our 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 revisions to estimated costs. The credit adjusted risk-free rates used to discount our 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 our asset retirement obligation for the following periods (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Asset retirement obligation, at beginning of period | $ | 23,393 | $ | 22,461 | $ | 22,951 | $ | 22,037 | ||||||||
Liabilities settled | (3 | ) | (16 | ) | (3 | ) | (16 | ) | ||||||||
Liabilities incurred | — | — | — | — | ||||||||||||
Changes in estimated obligations | — | — | — | — | ||||||||||||
Accretion of discount | 442 | 424 | 884 | 848 | ||||||||||||
Total asset retirement obligation, at end of period | $ | 23,832 | $ | 22,869 | $ | 23,832 | $ | 22,869 | ||||||||
The undiscounted amount of asset retirement obligation was $58.4 million as of June 30, 2016.
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Note 10 — COMPENSATION PLANS
Cash Bonus Plans—During 2015, we had 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 our performance in certain production, operational, financial, and other areas, as well as the participants' individual performance. We accrue cash bonus expense related to the current year's performance. In December 2015, we suspended our cash bonus programs for most employees for 2015 and have not implemented a cash bonus plan for 2016 as part of our cost savings initiatives.
Equity Incentive Compensation Plan—Our 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"). We have issued common stock, restricted shares of common stock, performance units, and non-qualified stock option awards under the Plan. As of June 30, 2016, the following awards were outstanding under the Plan: 760,303 shares of non-vested restricted shares of common stock; non-vested performance units representing 252,100 shares of common stock; and options to purchase 218,857 shares of common stock. As of June 30, 2016, approximately 6.4 million shares of common stock remained available for issuance under the Plan.
Common Stock—In the second quarter of 2015, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted shares of common stock under the Plan to our non-employee directors as compensation for service for the period ending on the date of our 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—The Compensation Committee has granted restricted shares of common stock under the Plan to executive officers, other key employees, non-employee directors and consultants. The awards contain service conditions associated with continued employment or service and provide voting and regular dividend rights. Upon vesting, the restrictions on the restricted shares of common stock lapse and the shares are considered issued and outstanding.
In the first quarter of 2015, the Compensation Committee granted restricted shares of common stock under the Plan to our 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. In the second quarter of 2016, the Compensation Committee granted 562,010 restricted shares of common stock under the Plan to members of our Board of Directors, including one employee director. These restricted shares of common stock vest one year after grant.
In measuring compensation expense associated with the grant of non-vested restricted shares of common stock, we use the fair value of the award, determined as the closing stock price for our 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 $0.5 million and $0.8 million for the three months ended June 30, 2016, and 2015, respectively. Total compensation expense was $1.2 million and $1.7 million for the six months ended June 30, 2016 and 2015, respectively. These amounts are net of estimated forfeiture adjustments. As of June 30, 2016, there was $2.2 million of total remaining unrecognized compensation expense related to non-vested restricted shares of common stock that will be expensed through 2018.
A summary of activity relating to our non-vested restricted shares of common stock for the six months ended June 30, 2016, is presented below.
Weighted Average Grant-Date Fair Value | |||||||
Shares | |||||||
Non-vested restricted shares of common stock, beginning of period | 459,663 | $ | 14.93 | ||||
Granted | 562,010 | $ | 1.28 | ||||
Vested | (211,861 | ) | $ | 15.53 | |||
Forfeited | (49,509 | ) | $ | 14.46 | |||
Non-vested restricted shares of common stock, end of period | 760,303 | $ | 11.09 | ||||
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Performance Units—In 2015, the Compensation Committee granted at-risk performance units under the Plan to a member of our executive team as part of their annual compensation package. The performance units vest in February 2018, and payout, if any, is based on market-based conditions relating to one-, two- and three-year performance periods beginning on the grant date. No shares were earned under the first one-year performance period. A total of 252,100 shares of common stock are available for future payout under these performance units, subject to continued employment through the vesting date.
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 our executive management and other selected employees as part of our annual award program. All outstanding stock options are 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.
A summary of our stock option activity for the six months ended June 30, 2016, is as follows:
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value1 | Weighted Average Remaining Contractual Life (in years) | ||||||
Outstanding non-qualified stock | |||||||||
options, end of period | 218,857 | $25.74 | $— | 3.1 | |||||
Vested or expected to vest, end | |||||||||
of period | 218,857 | $25.74 | $— | 3.1 | |||||
Exercisable non-qualified | |||||||||
stock options, end of period | 218,857 | $25.74 | $— | 3.1 | |||||
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 11 — INCOME TAXES
Our effective tax rate is impacted primarily by the amount of taxable income associated with each jurisdiction in which our income is subject to income tax, permanent differences between the financial statement carrying amounts and tax bases of assets and liabilities.
A summary of the provision for income taxes is as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Current portion of income tax expense (benefit) | $ | 1 | $ | (148 | ) | $ | 3 | $ | (34 | ) | ||||||
Deferred portion of income tax (benefit) expense | — | (202 | ) | — | 2,755 | |||||||||||
Total income tax expense (benefit) | $ | 1 | $ | (350 | ) | $ | 3 | $ | 2,721 | |||||||
Effective tax rate | — | % | 6.6 | % | — | % | 63.1 | % | ||||||||
During the three- and six-month periods ended June 30, 2016, our effective tax rate differed from the statutory rate primarily as a result of the impact of recording a valuation allowance to offset the amount of additional deferred tax asset generated during the period. For the three- and six-month periods ended June 30, 2015, our effective tax rate differed from the statutory rate primarily as a result of the benefit from estimated depletion deductions that exceed the tax basis in the mineral reserves.
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 our business and the states in which we have a taxable relationship. This creates fluctuations in the value of our net deferred tax asset.
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As of June 30, 2016, we do not believe it is more likely than not that we will fully realize the benefit of the deferred tax assets. As such, we increased the valuation allowance related to our deferred tax assets by $13.8 million for the six months ended June 30, 2016. Our deferred tax asset, net of the valuation allowance, at June 30, 2016, and December 31, 2015, is zero.
A summary of our valuation allowance activity is as follows (in thousands):
Six Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
Valuation allowance, beginning of period | $ | 300,601 | $ | 268 | ||||
Additions | 13,847 | — | ||||||
Reversals | — | — | ||||||
Valuation allowance, end of period | $ | 314,448 | $ | 268 | ||||
Note 12 — COMMITMENTS AND CONTINGENCIES
Reclamation Deposits and Surety Bonds—As of June 30, 2016, we had $19.5 million of security placed principally with the State of Utah and the Bureau of Land Management for eventual reclamation of our various facilities. Of this total requirement, as of June 30, 2016, $2.0 million consisted of long-term restricted cash deposits reflected in "Other assets, net" on the condensed consolidated balance sheets, and $17.5 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.
We may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as governmental entities change requirements.
Legal—In February 2015, Mosaic Potash Carlsbad Inc. ("Mosaic") filed a complaint and application for preliminary injunction and permanent injunction against Steve Gamble and us in the Fifth Judicial District Court for County of Eddy in the State of New Mexico. Mr. Gamble is a current Intrepid employee and former Mosaic employee. The complaint alleges against us violations of the Uniform Trade Secrets Act and tortious interference with contract relating to alleged misappropriation of Mosaic’s trade secrets. Mosaic seeks monetary relief of an unspecified amount, including damages for actual loss and unjust enrichment, exemplary damages, attorneys' fees, and injunctive relief and has alleged that it has spent hundreds of millions of dollars to research and develop its alleged trade secrets. In August 2015, the court denied Mosaic's application for preliminary injunction. The lawsuit is currently progressing through discovery. We are vigorously defending against the lawsuit. Because this matter is at an early stage, we are unable to reasonably estimate the potential amount of loss, if any.
In July 2016, Mosaic filed a complaint against Steve Gamble and us in US District Court for the District of New Mexico. The complaint alleges violations of the Computer Fraud and Abuse Act, conversion, and civil conspiracy relating to alleged misappropriation of Mosaic's confidential information. Mosaic seeks injunctive relief and compensatory and punitive damages of an unspecified amount. We are vigorously defending against the lawsuit. Because this matter is at an early stage, we are unable to reasonably estimate the potential amount of loss, if any.
We are subject to other 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 other claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations, or cash flows.
Future Operating Lease Commitments—We have operating leases for land, mining and other operating equipment, offices, and railcars, with original terms ranging up to 20 years. In May 2015, we exercised an option to terminate our existing corporate office lease prior to its original expiration date. Under the provisions of the lease agreement, we incurred a termination penalty of $1.1 million, which was included in selling and administrative expense in the second quarter of 2015. In December 2015, we paid $0.5 million of this termination penalty in connection with an amendment reducing the leased square footage and extending the expiration date to May 2017. We expect to pay the remaining $0.6 million in March 2017. Our monthly lease commitment was $83,331 from January 2016 through May 2016, and increased to $85,626 for the period June 2016 through May 2017.
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Rental and lease expenses are shown below for the indicated periods (in thousands):
2016 | ||||
For the three months ended June 30, 2016 | $ | 1,530 | ||
For the six months ended June 30, 2016 | $ | 3,078 | ||
2015 | ||||
For the three months ended June 30, 2015 | $ | 1,977 | ||
For the six months ended June 30, 2015 | $ | 3,721 | ||
Note 13 — FAIR VALUE MEASUREMENTS
We applied 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 our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2016, and December 31, 2015 (in thousands):
Fair Value at Reporting Date Using | ||||||||||||||||
June 30, 2016 | 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 | $ | 15,593 | $ | — | $ | 15,593 | $ | — | ||||||||
Fair Value at Reporting Date Using | ||||||||||||||||
December 31, 2015 | 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 | $ | 53,317 | $ | — | $ | 53,317 | $ | — | ||||||||
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 our valuation methodologies for financial assets and liabilities, which are measured at fair value and are included on the condensed consolidated balance sheets.
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Our 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 we believe that the valuation methods used are appropriate and consistent with the requirements of ASC Topic 820 and the methods used by other marketplace participants, we recognize 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 June 30, 2016, and December 31, 2015, were as follows (in thousands):
June 30, 2016 | December 31, 2015 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Senior notes | $ | 150,000 | $ | 137,000 | $ | 150,000 | $ | 138,000 | ||||||||
For cash and cash equivalents, certificates of deposit and time 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 senior notes is estimated using a discounted cash flow analysis based on current borrowing rates 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 14 — RESTRUCTURING CHARGE
In January 2016, in response to declining potash prices, we 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 5% of the workforce, elimination of the bonus programs for most employees, as well as reductions in compensation.
In April we converted our East facility from a mixed-ore facility to a Trio®-only facility. In May 2016, we initiated a plan to idle mining operations at our West facility and transition it into a care-and-maintenance mode due to the decline in potash prices.
For the three months ended June 30, 2016, we recognized restructuring expense of $1.9 million for severance-related payments related to the idling of the West facility, as well as the conversion of our East facility. The majority of the $1.9 million severance-related charge will be paid in the third quarter 2016.
For the six months ended June 30, 2016, we recognized restructuring expense of $2.3 million related to these events.
Note 15 — BUSINESS SEGMENTS
As a result of pricing pressure and the resulting economic factors giving rise to the conversion of our East facility to Trio®-only and the idling of our West facility, the chief operating decision maker separately evaluates our potash and Trio® operations. Accordingly, we reevaluated our segments and determined that, beginning in the second quarter of 2016, we have two segments: potash and Trio®. The reportable segments are determined by management based on a number of factors including the types of potassium based fertilizer produced, production processes, markets served and the financial information available for our chief operating decision maker. We evaluate performance based on the gross margins of the respective business segments and do not allocate corporate selling and administrative expenses, among others, to the respective segments. Information for each segment is provided in the tables below:
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Three Months Ended June 30, 2016 | Potash | Trio | Corporate | Consolidated | ||||||||||||
Sales | $ | 39,196 | $ | 12,644 | $ | — | $ | 51,840 | ||||||||
Less: Freight costs | 6,882 | 2,049 | — | 8,931 | ||||||||||||
Warehousing and handling costs | 2,132 | 406 | — | 2,538 | ||||||||||||
Cost of goods sold | 32,502 | 9,348 | — | 41,850 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 2,930 | — | — | 2,930 | ||||||||||||
Costs associated with abnormal production and other | — | 1,057 | — | 1,057 | ||||||||||||
Gross (Deficit) Margin | $ | (5,250 | ) | $ | (216 | ) | $ | — | $ | (5,466 | ) | |||||
Depreciation, depletion and amortization incurred1 | $ | 8,647 | $ | 879 | $ | 315 | $ | 9,841 | ||||||||
Six Months Ended June 30, 2016 | Potash | Trio | Corporate | Consolidated | ||||||||||||
Sales | $ | 92,891 | $ | 32,226 | $ | — | $ | 125,117 | ||||||||
Less: Freight costs | 13,433 | 5,830 | — | 19,263 | ||||||||||||
Warehousing and handling costs | 4,286 | 916 | — | 5,202 | ||||||||||||
Cost of goods sold | 79,790 | 21,837 | — | 101,627 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 11,937 | — | — | 11,937 | ||||||||||||
Costs associated with abnormal production and other | 650 | 1,057 | — | 1,707 | ||||||||||||
Gross (Deficit) Margin | $ | (17,205 | ) | $ | 2,586 | $ | — | $ | (14,619 | ) | ||||||
Depreciation, depletion and amortization incurred1 | $ | 20,880 | $ | 2,554 | $ | 775 | $ | 24,209 | ||||||||
Three Months Ended June 30, 2015 | Potash | Trio | Corporate | Consolidated | ||||||||||||
Sales | $ | 57,093 | $ | 16,558 | $ | — | $ | 73,651 | ||||||||
Less: Freight costs | 4,478 | 2,420 | — | 6,898 | ||||||||||||
Warehousing and handling costs | 2,771 | 666 | — | 3,437 | ||||||||||||
Cost of goods sold | 45,867 | 9,568 | — | 55,435 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 5,276 | — | — | 5,276 | ||||||||||||
Costs associated with abnormal production and other | — | — | — | — | ||||||||||||
Gross (Deficit) Margin | $ | (1,299 | ) | $ | 3,904 | $ | — | $ | 2,605 | |||||||
Depreciation, depletion and amortization incurred1 | $ | 15,890 | $ | 3,063 | $ | 444 | $ | 19,397 | ||||||||
Six Months Ended June 30, 2015 | Potash | Trio | Corporate | Consolidated | ||||||||||||
Sales | $ | 147,822 | $ | 42,850 | $ | — | $ | 190,672 | ||||||||
Less: Freight costs | 11,684 | 6,126 | — | 17,810 | ||||||||||||
Warehousing and handling costs | 5,779 | 1,405 | — | 7,184 | ||||||||||||
Cost of goods sold | 113,320 | 25,397 | — | 138,717 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 5,636 | — | — | 5,636 | ||||||||||||
Costs associated with abnormal production and other | — | — | — | — | ||||||||||||
Gross Margin | $ | 11,403 | $ | 9,922 | $ | — | $ | 21,325 | ||||||||
Depreciation, depletion and amortization incurred1 | $ | 33,633 | $ | 6,294 | $ | 746 | $ | 40,673 | ||||||||
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1 Depreciation, depletion and amortization incurred for potash and Trio® includes depreciation, depletion and amortization amounts absorbed in or (relieved from) inventory.
Total assets are not presented for each reportable segment as they are not reviewed by, nor otherwise regularly provided to, the chief operating decision maker. All sales of both segments are to external customers.
During the three months ended June 30, 2016, we recorded restructuring charges of $1.9 million, all of which was attributable to the potash segment.
During the six months ended June 30, 2016, we recorded restructuring charges of $2.3 million, of which $2.1 million was attributable to the potash segment and $0.2 million was attributable to corporate.
Note 16 — RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements Issued But Not Yet Adopted—In August 2013, the FASB issued Accounting Standards Update No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the financial statements. The new standard applies to all entities for the first annual period in fiscal years ending after December 15, 2016, and interim periods thereafter. We are currently evaluating the requirements of this standard, and have not yet determined the impact on our consolidated financial statements and disclosures.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, as amended by Accounting Standards Update No. 2016-12, "Revenue from Contracts with Customers (Topic 606)," which requires revenue to be recognized based on the amount an entity is expected to be entitled to for promised goods or services provided to customers. The standard also requires expanded disclosures regarding contracts with customers. The guidance in this standard supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry-specific guidance. This guidance is effective for us beginning January 1, 2018, with retrospective application required, subject to certain practical expedients. We are currently evaluating the requirements of this standard, and have not yet determined the impact on our results of operations or financial position.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." An entity using an inventory method other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation and is effective for us beginning January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 , "Leases (Topic 842)," which requires, among other things, lessees to recognize lease assets and liabilities on their balance sheets for those leases classified as operating leases under previous generally accepted accounting principles. These assets and liabilities must be recorded generally at the present value of the contracted lease payments, and the cost of the lease must be allocated over the lease term on a straight-line basis. This guidance is effective for us for annual and interim periods in fiscal years beginning after December 15, 2018, with a modified retrospective transition method mandated. We are currently evaluating the requirements of this standard and have not yet determined the impact on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This standard changes several aspects of how we account for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding payments, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. This standard is effective for us for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption, as specified in the guidance, is permitted in any interim or annual period provided that the entire standard is adopted. We are currently evaluating the requirements of this standard and have not yet determined the impact on our consolidated financial statements.
Recently Adopted Accounting Standard—In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which became effective for us beginning January 1, 2016, and requires retrospective adoption. In accordance with this standard, our deferred financing costs associated with outstanding debt balances have been reclassified from "Prepaid expenses and other current assets" and "Other assets, net" to "Long-term debt, net." Amortization of such costs continues to be reported as "Interest expense, net."
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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:
• | our ability to successfully adapt to our new business model after the idling of our West facility and the transition of our East facility to Trio®-only production |
• | our ability to comply with covenants in our debt-related agreements to avoid a default under those agreements; our ability to come to an agreement with our current and potential future lenders on definitive terms for our debt-related agreements going forward; or a further reduction in the total amount available to us under our credit facility |
• | changes in the price, demand, or supply of potash or Trio®/langbeinite |
• | adverse impacts to our business as a result of our independent auditor having expressed substantial doubt as to our ability to continue as a going concern due to the existence of a material uncertainty |
• | the costs of, and our ability to successfully construct, commission, and execute, any of our strategic projects |
• | declines or changes in agricultural production or fertilizer application rates |
• | further write-downs of the carrying value of our assets, including inventories |
• | circumstances that disrupt or limit our production, including operational difficulties or variances, geological or geotechnical variances, equipment failures, environmental hazards, and other unexpected events or problems |
• | changes in our reserve estimates |
• | currency fluctuations |
• | adverse changes in economic conditions or credit markets |
• | the impact of governmental regulations, including environmental and mining regulations, the enforcement of those regulations, and governmental policy changes |
• | adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines |
• | increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise |
• | changes in the prices of raw materials, including chemicals, natural gas, and power |
• | our ability to obtain and maintain any necessary governmental permits or leases relating to current or future operations |
• | declines in the use of potash products by oil and gas companies in their drilling operations |
• | interruptions in rail or truck transportation services, or fluctuations in the costs of these services |
• | our inability to fund necessary capital investments |
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• | 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, 2015, 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 duty to update or revise publicly any forward-looking statements to conform those statements to actual results or to reflect new information or future events.
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Our Company
We are the only producer of potash in the United States and are one of two producers of langbeinite, which we market and sell as Trio®. We sell potash and Trio® primarily into the agricultural market as a fertilizer. We also sell these products into the animal feed market as a nutritional supplement and sell potash into the industrial market as a component in drilling and fracturing fluids for oil and gas wells and other industrial inputs. Our revenues are generated exclusively from the sale of potash and Trio®. 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 represented approximately 2% to 3% of total cost of goods sold in each of the last three years.
During the first half of 2016, we produced potash from three solution mining facilities and two conventional underground mining facilities. Our solution mining production comes from our HB solar solution mine near Carlsbad, New Mexico, a solar solution mine near Moab, Utah, and a solar brine recovery mine in Wendover, Utah. Our conventional production of potash came from our underground West and East mines near Carlsbad, New Mexico. We also operate the North compaction facility near Carlsbad, New Mexico, which services the West and HB mines. We produce Trio® from our underground conventional East mine.
In April 2016, we converted our East facility from a mixed-ore facility that produced both potash and Trio® to a Trio®-only facility. We expect commissioning activities related to that transition to continue into the second half of 2016. We no longer produce potash at our East facility.
In May 2016, we initiated a plan to idle mining operations at our West facility and transition it into a care-and-maintenance mode due to the decline in potash prices. We completed the transition in early July. Accordingly, beginning in July 2016, all of our potash is produced from our three solution mining facilities.
We have additional opportunities to develop mineralized deposits of potash in New Mexico, as well as to continue the optimization of our processing plants. These opportunities potentially include additional solution mining activities, additional recoveries of langbeinite, development of by-product markets and acceleration of production from our reserves.
Until the second quarter of 2016, we had one reportable segment; the extraction, production, and sale of potassium-related products. As a result of pricing pressure and the resulting economic factors giving rise to the conversion of our East facility to Trio®-only and the idling of our West facility, we reevaluated our reportable segments and determined that, beginning in the second quarter of 2016, we have two segments: potash and Trio®.
We routinely post important information about us 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 and Activities
Our financial results have been impacted by several significant trends and activities, which are described below. We expect that these trends will continue to drive our results of operations, cash flows, and financial position.
• Idling of our West facility. Due to the current potash pricing environment, in May 2016, we initiated a plan to idle mining operations at our West facility. Consistent with this plan, in July 2016, we idled the facility and transitioned it to a care-and-maintenance mode. In connection with this transition, we reduced our workforce by approximately 275 employees. We incurred restructuring charges of approximately $1.9 million in the second quarter 2016, primarily related to estimated severance payments in connection with this decision, the majority of which will be paid in the third quarter.
• Conversion of our East facility to Trio®-only. In early April 2016, we transitioned our East facility from a mixed-ore processing facility to a Trio®-only facility. We expect commissioning activities related to this transition to continue into the second half of 2016. As a result of this transition, our Trio® production increased 65% in the second quarter of 2016 over the same period in 2015. We expect our Trio® production to increase in the second half of 2016 as compared to the same period in 2015 as we complete our commissioning efforts.
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• Potash prices and demand. Potash prices continued to decline significantly through the second half of 2015 and the first half of 2016 as global oversupply, combined with the impact the strong U.S. dollar, has had on global producers aggressively pricing tonnage imported into the North American market. Potash prices are a significant driver of profitability for our business. 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. Recent announcements from other producers about selling potash to India and China, and curtailed production, support our belief that we continue to see some signs of firmness in potash pricing, although global potash supply continues to exceed demand.
We sold 168,000 tons of potash in the second quarter of 2016, an increase of 21,000 tons compared to the second quarter of 2015. The timing of our shipments to customers for the winter fill program was earlier in 2015 as compared to 2016, despite an early start to the 2016 spring application season, resulting in more tons sold in the 2016 period. This increase was partially offset by selling fewer potash tons from our East facility, as beginning in April 2016, we no longer produced potash at our East facility. Further, our sales volumes into the industrial market in the first half of 2016 were below those in the same period in 2015, as oil and gas drilling activity decreased in the second half of 2015.
The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the U.S. The timing of potash sales is significantly influenced by the marketing programs of potash producers, as well as storage volumes closer to the farm gate. 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. Our sales volumes into the industrial market are correlated to drilling activity in the oil and gas market.
Our potash production in the second half of 2016 will be less than the second half of 2015 due to the transition of our East facility and the idling of our West facility. We expect to realize our current potash inventory through normal sales channels in the second half of 2016. Beginning in 2017, as we have fewer tons of potash to sell as compared to prior periods, we plan to be more selective in our sales strategy in order to maximize our sales price for each ton of potash that we sell.
• Trio® prices and demand. Sales volumes for Trio® decreased for the three months ended June 30, 2016, as compared to the same period in 2015 due to the overall softness in the fertilizer market. Trio® pricing increased slightly in the second quarter of 2016 as compared to the second quarter of 2015 due to slight differences in the mix of products sold. While Trio® pricing has historically demonstrated more resiliency than potash pricing due to Trio's® unique nutrient make up and application to high-value crops, we expect to see continued pressure on the overall specialty fertilizer markets in 2016. We are focusing our efforts on maximizing our returns in the granular- and premium-sized markets. As we commission our East facility and increase Trio® production, we plan to not only expand our domestic marketing efforts, but also increase our export marketing efforts as they relate to Trio®. As a result, we expect our Trio® prices to decrease in the second half of 2016.
• Costs associated with abnormal production. We routinely evaluate our production levels and costs to determine if any costs are associated with abnormal production, as described under generally accepted accounting principles. The assessment of normal production levels is judgmental and unique to each quarter. During the second quarter of 2016, as we transitioned the East facility to a Trio®-only facility, we had no production of potash or Trio® over which costs could be allocated. As such, these costs were directly expensed as abnormal production costs.
• Weather impact. Our solar facilities experienced below average evaporation rates in 2015. As a result, fewer potash crystals formed in our evaporation ponds for harvesting during the harvest season that began in the second half of 2015, and was completed in April 2016. Therefore, we expect lower production from these facilities in 2016 as compared to 2015.
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Results of Operations
(in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Sales | $ | 51,840 | $ | 73,651 | $ | 125,117 | $ | 190,672 | ||||||||
Cost of goods sold | 41,850 | 55,435 | 101,627 | 138,717 | ||||||||||||
Gross (Deficit) Margin | (5,466 | ) | 2,605 | (14,619 | ) | 21,325 | ||||||||||
Net (Loss) Income | $ | (13,398 | ) | $ | (4,937 | ) | $ | (31,825 | ) | $ | 1,592 | |||||
Production volume (in thousands of tons): | ||||||||||||
Potash | 116 | 152 | 331 | 389 | ||||||||
Langbeinite | 71 | 43 | 115 | 80 | ||||||||
Sales volume (in thousands of tons): | ||||||||||||
Potash | 168 | 147 | 386 | 377 | ||||||||
Trio® | 33 | 37 | 83 | 98 | ||||||||
Average Net Realized Sales Price per Ton1 | ||||||||||||||||
Potash | $ | 193 | $ | 358 | $ | 206 | $ | 361 | ||||||||
Trio® | $ | 320 | $ | 383 | $ | 318 | $ | 373 | ||||||||
1Average net realized sales price is a non-GAAP measure that we calculate as sales less freight costs then divided by production tons. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measures."
Consolidated Results for the Three- and Six-month Periods Ended June 30, 2016
Total sales in the second quarter 2016 decreased as compared to 2015 as the lower average net realized sales price was only partially offset by increased sales volumes for potash and due to lower sales volumes and lower average net realized sales prices for Trio®. Our total cost of goods sold decreased in the second quarter of 2016 as compared to the same period in 2015 primarily due to increased lower-of-cost-or-market adjustments in 2016, caused by the decrease in potash pricing. Our cost of goods sold also decreased as we recorded less depreciation in 2016 due to the impairment of long-lived assets in December 2015. As a result of the decrease in sales volumes and average net realized sales prices, we incurred a gross deficit and an increased net loss for the second quarter 2016 as compared to the second quarter of 2015.
Total sales for the six months ended June 30, 2016 decreased as compared to 2015 due to lower average net realized sales prices for both potash and Trio®. Total cost of goods sold also decreased resulting from fewer tons sold from our East facility, as well as less depreciation expense in 2016 due to the impairment of long lived assets recorded in December 2015.
Based on our expectations for potash and Trio® pricing for the remainder of the year, we anticipate that we will incur a net loss for the year ending December 31, 2016.
Selling and administrative expenses decreased $3.9 million, or 46%, to $4.5 million for the three months ended June 30, 2016, from $8.4 million for the three months ended June 30, 2015. The decrease is primarily due to decreased administrative headcount, and aircraft-related costs in 2016 as compared to 2015. As part of our on-going efforts to reduce our cost structure, we exercised our option to terminate our corporate office lease in May 2015 in accordance with its terms, resulting in a $1.1 million charge in the second quarter of 2015. While part of this lease termination penalty was paid in December 2015 when we reduced our office space, the remaining $0.6 million is expected to be payable in the first quarter of 2017. Selling and administrative expenses in 2015 were also higher due to an increase in legal and professional fees related primarily to one issue that concluded in 2015.
Selling and administrative expenses decreased $4.8 million, or 30%, to $11.1 million for the six months ended June 30, 2016 from $15.9 million for the six months ended June 30, 2015, due to decreased administrative headcount and related expenses.
In January 2016, in response to declining potash prices, we undertook several cost saving actions that were intended to better align our cost structure with the business environment. These initiatives included the elimination of approximately 5% of our workforce, suspension of our cash bonus programs for most employees, and salary decreases for most employees.
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Additionally, in connection with the transition of the East facility in April 2016, and the idling of the West facility, we reduced our overall headcount by approximately 275 employees. As the transition of the East facility occurred in the second quarter of 2016, and we initiated our plan to idle the West facility in the second quarter of 2016, we recorded restructuring expense of approximately $1.9 million during the three months ended June 30, 2016, the majority of which will be paid in the third quarter 2016. For the six months ended June 30, 2016, we recorded restructuring expense of $2.3 million.
In late 2014, we initiated legal action to protest property tax valuations in New Mexico. In the second quarter of 2015, we reached an agreement with the State of New Mexico that resulted in a net $2.0 million reduction in previously paid property taxes. Accordingly, as the inventory produced during 2014 has since been sold, we recorded the settlement in "Other operating income" during the second quarter of 2015.
Interest expense increased $1.4 million to $3.0 million or 88% for the three months ended June 30, 2016, from $1.6 million for the three months ended June 30, 2015. The increase is due to the expensing of deferred financing costs of $0.7 million associated with the decrease in the maximum amount available to us under our unsecured credit facility, as well as amending the termination date of the unsecured credit facility as discussed in more detail in the "Liquidity and Capital Resources" section below. Further, beginning April 1, 2016, the interest rates on our unsecured senior notes increased by 2%.
Interest expense for the six months ended June 30, 2016 increased to $5.2 million as compared to $3.2 million in the same period in 2015. This increase was the result of the expensing of deferred financing costs of $1.5 million referred to above, as well as higher interest rates on our senior notes beginning April 1, 2016.
Potash Segment
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales | $ | 39,196 | $ | 57,093 | $ | 92,891 | $ | 147,822 | ||||||||
Less: Freight costs | 6,882 | 4,478 | 13,433 | 11,684 | ||||||||||||
Warehouse & handling costs | 2,132 | 2,771 | 4,286 | 5,779 | ||||||||||||
Cost of goods sold | 32,502 | 45,867 | 79,790 | 113,320 | ||||||||||||
Lower-of-cost-or-market inventory adjustments | 2,930 | 5,276 | 11,937 | 5,636 | ||||||||||||
Costs associated with abnormal production and other | — | — | 650 | — | ||||||||||||
Gross (Deficit) Margin | $ | (5,250 | ) | $ | (1,299 | ) | $ | (17,205 | ) | $ | 11,403 | |||||
Depreciation, depletion and amortization incurred2 | $ | 8,647 | $ | 15,890 | $ | 20,880 | $ | 33,633 | ||||||||
Sales Volumes (tons in thousands) | 168 | 147 | 386 | 377 | ||||||||||||
Production Volumes (tons in thousands) | 116 | 152 | 331 | 389 | ||||||||||||
Average Net Realized Sales Price per Ton1 | $ | 193 | $ | 358 | $ | 206 | $ | 361 | ||||||||
1Average net realized sales price is a non-GAAP measure that we calculate as sales less freight costs then divided by production tons. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measures."
2 Depreciation, depletion and amortization incurred excludes depreciation, depletion and amortization amounts absorbed in or (relieved from) inventory.
Three Months Ended June 30, 2016, and 2015
Our sales volumes in the second quarter of 2016 were greater those in 2015, driven by the timing of the start of the spring application season as described above, offset by decreased sales volumes into the industrial market due to decreased oil and gas drilling in the U.S.
Despite the increase in potash sales volumes, our potash sales during the three months ended June 30, 2016 decreased over the same period in 2015 due to a 46% decline in our average net realized sales price for potash due to higher levels of supply in the North American market, and aggressive pricing of imported potash by our competitors.
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Our freight costs related to potash sales in the three months ended June 30, 2016 increased over the same period in 2015 primarily due to higher sales volumes. Our freight costs are impacted by the proportion of customers paying for their own freight, the geographic distribution of our products and the freight rates of our carriers.
Our total potash cost of goods sold in the three months ended June 30, 2016 decreased over the same period due to an overall decrease in our production costs primarily resulting from our decision to no longer produce potash at our East facility as noted above. Depreciation and depletion expense for potash decreased in 2016 due to the impairment of long-lived assets recorded in the fourth quarter of 2015.
Further, as we no longer produce potash at our East facility beginning in April 2016, our lower-of-cost-or-market adjustment for potash also decreased over the same period.
Our production volume of potash in the second quarter of 2016 decreased compared to the second quarter of 2015. In 2015, we produced potash at our East plant for all of 2015, whereas in 2016, we only produced langbeinite at our East plant during the majority of the second quarter. Further, we produced more potash at our HB facility in the second quarter as we continued harvesting potash later in the second quarter of 2016 as compared to 2015. This increase in potash produced from the HB mine was more than offset by lower production at our Wendover facility due to the weather issues noted above.
During the three months ended June 30, 2016, and 2015, we recorded lower-of-cost-or-market charges as our weighted average finished goods product inventory cost exceeded the estimated net realizable value of our finished goods product inventory. The lower-of-cost-or-market adjustment recorded during the three months ended June 30, 2016, resulted from lower potash prices. We expect our lower-of-cost-or-market adjustments will decrease in the second half of 2016, as beginning in July 2016, we are no longer producing potash conventionally.
As a result of the items mentioned above, our gross deficit increased in the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
Six Months Ended June 30, 2016, and 2015
We sold 2% more potash in the first six months of 2016 as compared to the first half of 2015 primarily due to the timing of the spring application season in 2016 as compared to 2015, offset by a reduction in sales volumes from our East facility, as we stopped producing potash at that facility beginning in April 2016.
Our sales from potash during the first six months of 2016 decreased due primarily to a 43% decrease in our average net realized sales price. The decrease in our average net realized sales price was impacted by the oversupply of potash as noted above and the aggressive pricing of product imported into North America by our competitors.
Freight costs related to potash sales in the six months ended June 30, 2016 increased slightly over the same period in 2015 primarily due to higher sales volumes. Our freight costs are impacted by the proportion of customers paying for their own freight, the geographic distribution of our products and the freight rates of our carriers.
Our cost of goods sold for potash decreased in the six months ended June 30, 2016 as compared to the same period in 2015. Total cost of goods sold of potash decreased in 2016 as we sold fewer tons of potash from our East facility, which was our highest cost facility for potash. Due to the impairment of our West and East facilities that was recorded in the fourth quarter of 2015, depreciation and depletion expense for potash decreased in the first six months of 2016, which also reduced our cost of goods sold in 2016 as compared to 2015. Our cost of goods sold for potash also benefited from the direct expensing of abnormal production costs related to reduced production levels at East as noted below.
Our production volume of potash in the first half of 2016 decreased compared with the second quarter of 2015. In 2015, we produced potash and langbeinite at our East plant for all of 2015, whereas in 2016, we only produced langbeinite at our East facility during the majority of the second quarter.
During the six months ended June 30, 2016 and 2015, we recorded lower-of-cost-or-market charges as a result of routine assessments of the lower of weighted average cost or estimated net realizable value on our finished goods product inventory. The lower-of-cost-or-market adjustment recorded during the six months ended June 30, 2016, related to our potash inventories from our conventional facilities, and resulted from our higher production costs per ton and overall lower potash pricing.
As discussed above, because of the suspensions of production during the first half of 2016 related to langbeinite-only testing and conversion of our East facility to a Trio®-only facility, we determined that approximately $0.7 million of production costs at our East facility would have been allocated to additional tons produced, assuming we had been operating at normal production rates. Accordingly, these costs were excluded from our inventory values and instead expensed in the first half of 2016 as period production costs. We compare actual production relative to
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what we estimated could have been produced if we had not incurred the production suspensions and lower operating rates in order to determine the abnormal cost adjustment.
As a result of the items mentioned above, we incurred a gross deficit in the six months ended June 30, 2016 compared to a gross margin in the six months ended June 30, 2015.
Additional Information Relating to Potash
The table below shows our potash sales mix for the three months ended June 30, 2016, and 2015:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2016 | 2015 | 2016 | 2015 | |||||
Agricultural | 91% | 74% | 91% | 78% | ||||
Industrial | 4% | 18% | 4% | 16% | ||||
Feed | 5% | 8% | 5% | 6% | ||||
Domestically, the potash market is influenced by global supply and demand, and is impacted by the pricing of imports from our competitors. The strength of the U.S. dollar has resulted in further pressure on potash pricing.
Average Net Realized Sales Price
The table below demonstrates our average net realized sales price for potash for the quarters ended on the dates set forth below:
Average Net Realized Sales Price1 of | ||
Potash | ||
(Per ton) | ||
June 30, 2016 | $193 | |
March 31, 2016 | $216 | |
December 31, 2015 | $277 | |
September 30, 2015 | $319 | |
June 30, 2015 | $358 | |
March 31, 2015 | $362 | |
1Average net realized sales price is a non-GAAP measure that we calculate as sales less freight costs then divided by production tons. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measures."
Trio® Segment
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales | $ | 12,644 | $ | 16,558 | $ | 32,226 | $ | 42,850 | ||||||||
Less: Freight costs | 2,049 | 2,420 | 5,830 | 6,126 | ||||||||||||
Warehouse & handling costs | 406 | 666 | 916 | 1,405 | ||||||||||||
Cost of goods sold | 9,348 | 9,568 | 21,837 | 25,397 | ||||||||||||
Costs associated with abnormal production and other | 1,057 | — | 1,057 | — | ||||||||||||
Gross (Deficit) Margin | $ | (216 | ) | $ | 3,904 | $ | 2,586 | $ | 9,922 | |||||||
Depreciation, depletion and amortization incurred2 | $ | 879 | $ | |||||||||||||