Intrepid Potash, Inc. - Quarter Report: 2014 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the Quarterly Period Ended March 31, 2014 | |
Commission File Number: 001-34025
INTREPID POTASH, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 26-1501877 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
707 17th Street, Suite 4200, Denver, Colorado | 80202 |
(Address of principal executive offices) | (Zip Code) |
(303) 296-3006
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2014, the registrant had 76,077,710 shares of common stock, par value $0.001, outstanding (including 570,619 restricted shares of common stock).
INTREPID POTASH, INC.
TABLE OF CONTENTS
Page | ||
i
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amount)
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 3,234 | $ | 394 | ||||
Short-term investments | 6,586 | 15,214 | ||||||
Accounts receivable: | ||||||||
Trade, net | 30,268 | 20,837 | ||||||
Other receivables | 10,773 | 7,457 | ||||||
Refundable income taxes | 13,697 | 15,722 | ||||||
Inventory, net | 93,065 | 105,011 | ||||||
Prepaid expenses and other current assets | 4,549 | 5,653 | ||||||
Current deferred tax asset | 6,987 | 8,341 | ||||||
Total current assets | 169,159 | 178,629 | ||||||
Property, plant, equipment, and mineral properties, net | 823,508 | 826,569 | ||||||
Long-term parts inventory, net | 14,106 | 12,469 | ||||||
Long-term investments | 2 | 9,505 | ||||||
Other assets, net | 4,231 | 4,252 | ||||||
Non-current deferred tax asset | 147,974 | 143,849 | ||||||
Total Assets | $ | 1,158,980 | $ | 1,175,273 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable: | ||||||||
Trade | $ | 19,388 | $ | 27,552 | ||||
Related parties | 28 | 50 | ||||||
Accrued liabilities | 21,521 | 29,845 | ||||||
Accrued employee compensation and benefits | 9,557 | 9,122 | ||||||
Other current liabilities | 1,234 | 2,059 | ||||||
Total current liabilities | 51,728 | 68,628 | ||||||
Long-term debt | 150,000 | 150,000 | ||||||
Asset retirement obligation | 20,287 | 19,959 | ||||||
Other non-current liabilities | 2,919 | 2,715 | ||||||
Total Liabilities | 224,934 | 241,302 | ||||||
Commitments and Contingencies | ||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; and 75,507,091 and 75,405,410 | ||||||||
shares outstanding at March 31, 2014, and December 31, 2013, respectively | 76 | 75 | ||||||
Additional paid-in capital | 573,033 | 572,616 | ||||||
Accumulated other comprehensive income (loss) | 2 | (10 | ) | |||||
Retained earnings | 360,935 | 361,290 | ||||||
Total Stockholders' Equity | 934,046 | 933,971 | ||||||
Total Liabilities and Stockholders' Equity | $ | 1,158,980 | $ | 1,175,273 | ||||
1
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Sales | $ | 98,875 | $ | 99,257 | ||||
Less: | ||||||||
Freight costs | 9,932 | 8,097 | ||||||
Warehousing and handling costs | 2,812 | 3,579 | ||||||
Cost of goods sold | 78,573 | 53,773 | ||||||
Lower-of-cost-or-market inventory adjustments | 3,566 | 8 | ||||||
Gross Margin | 3,992 | 33,800 | ||||||
Selling and administrative | 6,746 | 9,492 | ||||||
Accretion of asset retirement obligation | 406 | 375 | ||||||
Restructuring expense | 1,827 | — | ||||||
Other operating (income) expense | (2,947 | ) | 171 | |||||
Operating (Loss) Income | (2,040 | ) | 23,762 | |||||
Other (Expense) Income | ||||||||
Interest expense | (1,380 | ) | (213 | ) | ||||
Interest income | 53 | 52 | ||||||
Other income | 234 | 16 | ||||||
(Loss) Income Before Income Taxes | (3,133 | ) | 23,617 | |||||
Income Tax Benefit (Expense) | 2,778 | (8,698 | ) | |||||
Net (Loss) Income | $ | (355 | ) | $ | 14,919 | |||
Weighted Average Shares Outstanding: | ||||||||
Basic | 75,444,953 | 75,340,559 | ||||||
Diluted | 75,444,953 | 75,392,527 | ||||||
(Loss) Earnings Per Share: | ||||||||
Basic | $ | 0.00 | $ | 0.20 | ||||
Diluted | $ | 0.00 | $ | 0.20 | ||||
See accompanying notes to these condensed consolidated financial statements.
2
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Net (Loss) Income | $ | (355 | ) | $ | 14,919 | |||
Other Comprehensive Income: | ||||||||
Pension liability adjustment, net of tax | — | 43 | ||||||
Unrealized gain on investments available for sale, net of tax | 12 | 29 | ||||||
Other Comprehensive Income | 12 | 72 | ||||||
Comprehensive (Loss) Income | $ | (343 | ) | $ | 14,991 | |||
See accompanying notes to these condensed consolidated financial statements.
3
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance, December 31, 2013 | 75,405,410 | $ | 75 | $ | 572,616 | $ | (10 | ) | $ | 361,290 | $ | 933,971 | |||||||||||
Unrealized gain on investments available for sale, net of tax | — | — | — | 12 | — | 12 | |||||||||||||||||
Net (loss) income | — | — | — | — | (355 | ) | (355 | ) | |||||||||||||||
Stock-based compensation | — | — | 1,028 | — | — | 1,028 | |||||||||||||||||
Vesting of restricted common stock, net of restricted common stock used to fund employee income tax withholding due upon vesting | 101,681 | 1 | (611 | ) | — | — | (610 | ) | |||||||||||||||
Balance, March 31, 2014 | 75,507,091 | $ | 76 | $ | 573,033 | $ | 2 | $ | 360,935 | $ | 934,046 | ||||||||||||
See accompanying notes to these condensed consolidated financial statements.
4
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Cash Flows from Operating Activities: | ||||||||
Reconciliation of net (loss) income to net cash provided by operating activities: | ||||||||
Net (loss) income | $ | (355 | ) | $ | 14,919 | |||
Deferred income taxes | (2,778 | ) | 8,381 | |||||
Items not affecting cash: | ||||||||
Depreciation, depletion, and accretion | 19,649 | 14,141 | ||||||
Stock-based compensation | 1,028 | 1,140 | ||||||
Lower-of-cost-or-market inventory adjustments | 3,566 | 8 | ||||||
Other | 223 | 425 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable, net | (9,431 | ) | (12,715 | ) | ||||
Other receivables, net | (3,316 | ) | (344 | ) | ||||
Refundable income taxes | 2,025 | 3 | ||||||
Inventory, net | 6,743 | (8,781 | ) | |||||
Prepaid expenses and other assets | 1,005 | 714 | ||||||
Accounts payable, accrued liabilities, and accrued employee compensation and benefits | (335 | ) | (4,295 | ) | ||||
Other liabilities | (700 | ) | (1,975 | ) | ||||
Net cash provided by operating activities | 17,324 | 11,621 | ||||||
Cash Flows from Investing Activities: | ||||||||
Additions to property, plant, equipment, and mineral properties | (31,919 | ) | (61,148 | ) | ||||
Proceeds from sale of property, plant, equipment, and mineral properties | — | 10 | ||||||
Purchases of investments | (5 | ) | — | |||||
Proceeds from sale of investments | 18,051 | 21,586 | ||||||
Net cash used in investing activities | (13,873 | ) | (39,552 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Employee tax withholding paid for restricted stock upon vesting | (611 | ) | (577 | ) | ||||
Net cash used in financing activities | (611 | ) | (577 | ) | ||||
Net Change in Cash and Cash Equivalents | 2,840 | (28,508 | ) | |||||
Cash and Cash Equivalents, beginning of period | 394 | 33,619 | ||||||
Cash and Cash Equivalents, end of period | $ | 3,234 | $ | 5,111 | ||||
Supplemental disclosure of cash flow information | ||||||||
Net cash paid (refunded) during the period for: | ||||||||
Interest | $ | 112 | $ | 128 | ||||
Income taxes | $ | (2,025 | ) | $ | 2,194 | |||
Accrued purchases for property, plant, equipment, and mineral properties | $ | 13,172 | $ | 27,012 | ||||
See accompanying notes to these condensed consolidated financial statements.
5
INTREPID POTASH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 | — COMPANY BACKGROUND |
Intrepid Potash, Inc. (individually or in any combination with its subsidiaries, “Intrepid”) produces muriate of potash (“potassium chloride” or “potash”) and langbeinite. Langbeinite, which is marketed for sale as Trio®, is a low-chloride potassium fertilizer with the additional benefits of sulfate and magnesium. Intrepid sells potash and Trio® primarily into the agricultural market as a fertilizer. Intrepid also sells these products into the animal feed market as a nutritional supplement and sells potash into the industrial market as a component in drilling and fracturing fluids for oil and gas wells and other industrial inputs. In addition, Intrepid sells by-products including salt and magnesium chloride.
Intrepid owns six active potash production facilities: four in New Mexico and two in Utah. Production comes from two conventional underground mines and the HB Solar Solution mine in the Carlsbad region of New Mexico; a solar evaporation solution mine near Moab, Utah; and a solar evaporation shallow brine mine in Wendover, Utah. Trio® production comes from mining the mixed ore body that contains both potash and langbeinite, which is mined and processed at the East facility near Carlsbad, New Mexico. Intrepid manages sales and marketing operations centrally. This allows Intrepid to evaluate the product needs of its customers and then centrally determine which of its production facilities to use to fill customers’ orders in a manner designed to realize the highest average net realized sales price per ton to Intrepid. Intrepid calculates average net realized sales price per ton by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period. Intrepid also monitors product inventory levels and overall production costs centrally. Intrepid has one reporting segment being the extraction, production, and sale of potassium-related products. Intrepid's extraction and production operations are conducted entirely in the continental United States.
Note 2 | — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation—The consolidated financial statements of Intrepid include the accounts of Intrepid and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of interim financial information, have been included. On the condensed consolidated balance sheet, Intrepid combined property, plant and equipment, net of accumulated depreciation, with mineral properties and development costs, net of depletion, as of December 31, 2013.
Use of Estimates—The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Intrepid bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Significant estimates include, but are not limited to, those for proven and probable mineral reserves, the related present value of estimated future net cash flows, useful lives of plant assets, asset retirement obligations, normal inventory production levels, inventory valuations, the valuation of equity awards, the valuation of receivables, valuation of our deferred tax assets and estimated blended income tax rates utilized in the current and deferred income tax calculations. There are numerous uncertainties inherent in estimating quantities of proven and probable reserves, projecting future rates of production, and the timing of development expenditures. Future mineral prices may vary significantly from the prices in effect at the time the estimates are made, as may estimates of future operating costs. The estimate of proven and probable mineral reserves, the related present value of estimated future cash flows, and useful lives of plant assets can affect various other items including depletion, the net carrying value of Intrepid’s mineral properties, the useful lives of related property, plant, and equipment, depreciation expense, and estimates associated with recoverability of long-lived assets and asset retirement obligations. Specific to income tax items, we experience fluctuations in the valuation of the deferred tax assets and liabilities due to changing state income tax rates and the blend of state tax rates.
Revenue Recognition—Revenue is recognized when evidence of an arrangement exists, risks and rewards of ownership have been transferred to customers, which is generally when title passes, the selling price is fixed and determinable, and collection is reasonably assured. Title passes at the designated shipping point for the majority of sales, but, in a few cases, title passes at the delivery destination. The shipping point may be the plant, a distribution warehouse, a customer warehouse, or a port. Title passes for some international shipments upon payment by the purchaser; however,
6
revenue is not recognized for these transactions until shipment because the risks and rewards of ownership have not transferred pursuant to a contractual arrangement. Prices are generally set at the time of, or prior to, shipment. In cases where the final price is determined upon resale of the product by the customer, revenue is deferred until the final sales price is known.
Sales are reported on a gross basis. Intrepid quotes prices to customers both on a delivered basis and on the basis of pick-up at Intrepid’s plants and warehouses. When a sale occurs on a delivered basis, Intrepid incurs and, in turn, bills the customer and records as gross revenue the product sales value, freight, packaging, and certain other distribution costs. Many customers, however, arrange and pay for these costs directly and, in these situations, only the product sales are included in gross revenues.
By-Product Credits—When by-product inventories are sold, Intrepid records the sale of by-products as a credit to cost of goods sold.
Inventory and Long-Term Parts Inventory—Inventory consists of product and by-product stocks that are ready for sale; mined ore; 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.
Intrepid evaluates its 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 is unique to each period. Intrepid models normal production levels and evaluates historical ranges of production by operating plant in assessing what is deemed to be normal.
Parts inventory, including critical spares, that is not expected to be utilized within a period of one year is classified as non-current. Parts and supply inventory cost is determined using the lower of average acquisition cost or estimated replacement cost. Detailed reviews are performed related to the net realizable value of parts inventory, giving consideration to quality, slow-moving items, obsolescence, excessive levels, and other factors. Parts inventories that have not turned over in more than a year, excluding parts classified as critical spares, are reviewed for obsolescence and, if deemed appropriate, are included in the determination of an allowance for obsolescence.
Property, Plant, and Equipment—Property, plant, and equipment are stated at historical cost. Expenditures for property, plant, and equipment relating to new assets or improvements are capitalized, provided the expenditure extends the useful life of an asset or extends the asset’s functionality. Property, plant, and equipment are depreciated under the straight-line method using estimated useful lives. No depreciation is taken on assets classified as construction in progress until the asset is placed into service. Gains and losses are recorded upon retirement, sale, or disposal of assets. Maintenance and repair costs are recognized as period costs when incurred. Capitalized interest, to the extent of debt outstanding, is calculated and capitalized on assets that are being constructed, drilled, or built or that are otherwise classified as construction in progress.
Recoverability of Long-Lived Assets—Intrepid evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. An impairment is considered to exist if an asset group's total estimated net future cash flows on an undiscounted basis are less than the carrying amount of the related asset. An impairment loss is measured and recorded based on the discounted estimated future cash flows. Changes in significant assumptions underlying future cash flow estimates or fair values of asset groups may have a material effect on our financial position and results of operations. Sales price is a significant element of any cash flow estimate, particularly for higher cost operations.
Mineral Properties and Development Costs—Mineral properties and development costs, which are referred to collectively as mineral properties, include acquisition costs, the cost of drilling production wells, and the cost of other development work, all of which are capitalized. Depletion of mineral properties is calculated using the units-of-production method over the estimated life of the relevant ore body. The lives of reserves used for accounting purposes are shorter than current reserve life determinations due to uncertainties inherent in long-term estimates. These reserve life estimates have been prepared by us and reviewed and independently determined by mine consultants. Tons of potash and langbeinite in the proven and probable reserves are expressed in terms of expected finished tons of product to be realized, net of estimated losses. Market price fluctuations of potash or Trio®, as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves. In addition, the provisions of Intrepid’s mineral leases, including royalty provisions, are subject to periodic readjustment by the state and federal government, which could affect the economics of its reserve
7
estimates. Significant changes in the estimated reserves could have a material impact on Intrepid’s results of operations and financial position.
Exploration Costs—Exploration costs include geological and geophysical work performed on areas that do not yet have proven and probable reserves declared. These costs are expensed as incurred.
Asset Retirement Obligation—Reclamation costs are initially recorded as a liability associated with the asset to be reclaimed or abandoned, based on applicable inflation assumptions and discount rates. The accretion of this discounted liability is recognized as expense over the life of the related assets, and the liability is periodically adjusted to reflect changes in the estimates of either the timing or amount of the reclamation and abandonment costs.
Planned Turnaround Maintenance—Each production operation typically shuts down periodically for planned maintenance activities. The costs of maintenance turnarounds at Intrepid's facilities are considered part of production costs and are absorbed into inventory in the period incurred.
Leases—Upon entering into leases, Intrepid evaluates whether leases are operating or capital leases. Operating lease expense is recognized as incurred. If lease payments change over the contractual term or involve contingent amounts, the total estimated cost over the term is recognized on a straight-line basis.
Income Taxes—Intrepid is a subchapter C corporation and, therefore, is subject to U.S. federal and state income taxes. Intrepid recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Intrepid records a valuation allowance if it is deemed more likely than not that its deferred income tax assets will not be realized in full. These determinations are subject to ongoing assessment.
Cash and Cash Equivalents—Cash and cash equivalents consist of cash and liquid investments with an original maturity of three months or less.
Investments—Intrepid’s short-term and long-term investments consist of certificates of deposit with various banking institutions, municipal tax-exempt and corporate taxable bonds, which are classified as available-for-sale securities. Short-term investments on the condensed consolidated balance sheets have remaining maturities to Intrepid less than or equal to one year and investments classified as long-term on the condensed consolidated balance sheets have remaining maturities to Intrepid greater than one year. The available-for-sale securities are carried at fair value, with changes in fair value recognized through "Accumulated other comprehensive income (loss)" on the condensed consolidated balance sheets. Fair value is assessed using a market‑based approach.
Fair Value of Financial Instruments—Intrepid's financial instruments include cash and cash equivalents, short-term and long-term investments, restricted cash, accounts receivable, refundable income taxes, and accounts payable. These instruments are carried at cost, which approximates fair value due to the short-term maturities of the instruments. All available-for-sale investments are carried at fair value. Allowances for doubtful accounts are recorded against the accounts receivable balance to estimate net realizable value. The fair value of the long-term debt is estimated using discounted cash flow analysis based on current borrowing rates for debt with similar remaining maturities and ratings. Although there are no amounts currently outstanding under Intrepid’s unsecured credit facility, any borrowings that become outstanding would bear interest at a floating rate and therefore be recorded at their estimated fair value.
(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.
Stock‑Based Compensation—Intrepid accounts for stock-based compensation by recording expense using the fair value of the awards at the time of grant. Intrepid has recorded compensation expense associated with the issuance of non-vested restricted shares of common stock, non-vested performance units, and non-qualified stock options, all of which are
8
subject to service conditions. The expense associated with these awards is recognized over the service period associated with each issuance.
Note 3 | — (LOSS) EARNINGS PER SHARE |
Dilutive securities, including non-vested restricted common stock, stock options, and performance units, are excluded from the diluted weighted average shares outstanding computation in periods in which they have an anti-dilutive effect, such as when there is a net loss. The treasury stock method is used to measure the dilutive impact of non-vested restricted common stock, stock options outstanding, and performance units. For the three months ended March 31, 2014, and 2013, 571,609 and 40,314 non-vested shares of restricted common stock and 335,935 and 244,755 stock options, respectively, were anti-dilutive and therefore were not included in the diluted weighted average share calculation. For the three months ended March 31, 2014, 19,874 shares of common stock underlying non-vested performance units were anti-dilutive and therefore were not included in the diluted weighted average share calculation. The following table sets forth the calculation of basic and diluted loss or earnings per share (in thousands, except per share amounts):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Net (loss) income | $ | (355 | ) | $ | 14,919 | |||
Basic weighted average common shares outstanding | 75,445 | 75,341 | ||||||
Add: Dilutive effect of non-vested restricted common stock | — | 38 | ||||||
Add: Dilutive effect of stock options outstanding | — | 9 | ||||||
Add: Dilutive effect of performance units | — | 5 | ||||||
Diluted weighted average common shares outstanding | 75,445 | 75,393 | ||||||
(Loss) Earnings per share: | ||||||||
Basic | $ | 0.00 | $ | 0.20 | ||||
Diluted | $ | 0.00 | $ | 0.20 | ||||
Note 4 — CASH, CASH EQUIVALENTS, AND INVESTMENTS
The following table summarizes the fair value of Intrepid's cash and investments held in its portfolio, recorded as cash and cash equivalents or short-term or long-term investments as of March 31, 2014, and December 31, 2013 (in thousands):
March 31, 2014 | December 31, 2013 | ||||||
Cash | $ | 2,941 | $ | 18 | |||
Commercial paper and money market accounts | 293 | 376 | |||||
Total cash and cash equivalents | $ | 3,234 | $ | 394 | |||
Corporate bonds | 4,321 | 12,954 | |||||
Certificates of deposit and time deposits | 2,265 | 2,260 | |||||
Total short-term investments | $ | 6,586 | $ | 15,214 | |||
Corporate bonds | $ | 2 | $ | 9,505 | |||
Total long-term investments | $ | 2 | $ | 9,505 | |||
Total cash, cash equivalents, and investments | $ | 9,822 | $ | 25,113 | |||
The following table summarizes the cost basis, unrealized gains and losses, and fair value of Intrepid's available-for-sale investments held in its portfolio as of March 31, 2014, and December 31, 2013 (in thousands):
9
March 31, 2014 | |||||||||||||||
Unrealized | |||||||||||||||
Cost Basis | Gain | Loss | Fair Value | ||||||||||||
Corporate bonds | $ | 4,321 | $ | 3 | $ | (1 | ) | $ | 4,323 | ||||||
Certificates of deposit and time deposits | 2,265 | — | — | 2,265 | |||||||||||
Total available-for-sale securities | $ | 6,586 | $ | 3 | $ | (1 | ) | $ | 6,588 | ||||||
December 31, 2013 | |||||||||||||||
Unrealized | |||||||||||||||
Cost Basis | Gain | Loss | Fair Value | ||||||||||||
Corporate bonds | $ | 22,475 | $ | 3 | $ | (19 | ) | $ | 22,459 | ||||||
Certificates of deposit and time deposits | 2,260 | — | — | 2,260 | |||||||||||
Total available-for-sale securities | $ | 24,735 | $ | 3 | $ | (19 | ) | $ | 24,719 | ||||||
For the three months ended March 31, 2014, and 2013, Intrepid recognized gross realized gains of approximately $13,000 and $19,000, respectively, on the sale of investments classified as available-for-sale. For the three months ended March 31, 2014, and 2013, Intrepid recognized gross realized losses of approximately $1,000 and $18,000, respectively, on the sale of investments classified as available-for-sale.
Note 5 — INVENTORY AND LONG-TERM PARTS INVENTORY
The following summarizes Intrepid’s inventory, recorded at the lower of weighted average cost or estimated net realizable value, as of March 31, 2014, and December 31, 2013, respectively (in thousands):
March 31, 2014 | December 31, 2013 | |||||||
Finished goods product inventory, net | $ | 55,861 | $ | 66,565 | ||||
In-process mineral inventory | 16,956 | 17,841 | ||||||
Total product inventory, net | 72,817 | 84,406 | ||||||
Current parts inventory | 20,248 | 20,605 | ||||||
Total current inventory, net | 93,065 | 105,011 | ||||||
Long-term parts inventory | 14,106 | 12,469 | ||||||
Total inventory, net | $ | 107,171 | $ | 117,480 | ||||
Parts inventories are shown net of any required reserves.
During the three months ended March 31, 2014, and 2013, Intrepid recorded charges of approximately $3.6 million and $8,000, respectively, as a result of routine assessments of the lower of weighted average cost or estimated net realizable value on its finished goods product inventory.
10
Note 6 — PROPERTY, PLANT, EQUIPMENT, AND MINERAL PROPERTIES
“Property, plant, equipment, and mineral properties, net" were comprised of the following (in thousands):
March 31, 2014 | December 31, 2013 | |||||||
Buildings and plant | $ | 256,338 | $ | 248,017 | ||||
Machinery and equipment | 506,522 | 472,250 | ||||||
Vehicles | 13,603 | 13,455 | ||||||
Office equipment and improvements | 18,846 | 18,846 | ||||||
Ponds and land improvements | 73,919 | 74,166 | ||||||
Land | 498 | 498 | ||||||
Total depreciable assets | 869,726 | 827,232 | ||||||
Accumulated depreciation | (215,368 | ) | (197,108 | ) | ||||
Total depreciable assets, net | $ | 654,358 | $ | 630,124 | ||||
Mineral properties and development costs | $ | 159,867 | $ | 145,822 | ||||
Accumulated depletion | (14,141 | ) | (13,165 | ) | ||||
Total depletable assets, net | $ | 145,726 | $ | 132,657 | ||||
Construction in progress | 23,424 | 63,788 | ||||||
Total property, plant, equipment, and mineral properties, net | $ | 823,508 | $ | 826,569 | ||||
Intrepid incurred the following costs for depreciation, depletion, and accretion, including costs capitalized into inventory, for the following periods (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Depreciation | $ | 18,260 | $ | 13,180 | ||||
Depletion | 983 | 586 | ||||||
Accretion | 406 | 375 | ||||||
Total incurred | $ | 19,649 | $ | 14,141 | ||||
Note 7 | — DEBT |
Unsecured Credit Facility— Intrepid has an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. This unsecured credit facility provides a revolving credit facility of up to $250 million. The actual amount available to us may be limited by Intrepid's leverage ratio, which may not exceed 3.5, and its fixed charge coverage ratio, which may not be below 1.3.
Under the facility, the leverage ratio is defined as the ratio of total funded indebtedness to adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses) for the prior four fiscal quarters. The fixed charge coverage ratio is defined as the ratio of adjusted EBITDA for the prior four fiscal quarters to fixed charges. Both ratios may operate to limit the total amount available to Intrepid under the facility. As of March 31, 2014, $157 million of the facility was available to Intrepid as a result of the operation of these ratios.
The facility is unsecured and is guaranteed by Intrepid's material subsidiaries. The facility has a maturity date of August 2018. As of March 31, 2014, and December 31, 2013, there were no amounts outstanding under the facility. During the quarter ended March 31, 2014, Intrepid borrowed and repaid $10 million under the demand portion of the credit facility for near-term working capital needs. Intrepid was in compliance with the covenants under the credit facility as of March 31, 2014.
11
Unsecured Senior Notes—In April 2013, Intrepid issued $150 million aggregate principal amount of unsecured senior notes ("the Notes") pursuant to a note purchase agreement entered into in August 2012. Intrepid received proceeds of $149.3 million, net of offering costs. The Notes consist of the following series:
• | $60 million of 3.23% Senior Notes, Series A, due April 16, 2020 |
• | $45 million of 4.13% Senior Notes, Series B, due April 14, 2023 |
• | $45 million of 4.28% Senior Notes, Series C, due April 16, 2025 |
The Notes are senior unsecured obligations of Intrepid and rank equally in right of payment with any other unsubordinated unsecured indebtedness of Intrepid. The Notes are subject to the same leverage ratio and fixed charge coverage ratio as apply under the credit facility. The obligations under the Notes are unconditionally guaranteed by Intrepid's material subsidiaries.
Intrepid was in compliance with the covenants under the Notes as of March 31, 2014.
Interest is paid semiannually on April 16 and October 16 of each year. Interest expense is recorded net of any capitalized interest associated with investments in capital projects. Intrepid incurred gross interest expense for the three months ended March 31, 2014, and 2013, of $1.7 million and $0.2 million, respectively. Intrepid capitalized $0.3 million and $0 of interest during the three months ended March 31, 2014, and 2013, respectively.
Note 8 | — ASSET RETIREMENT OBLIGATION |
Intrepid recognizes an estimated liability for future costs associated with the abandonment and reclamation of its mining properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded as the mining operations occur or the assets are acquired.
Intrepid’s asset retirement obligation is based on the estimated cost to abandon and reclaim the mining operations, the economic life of the properties, and federal and state regulatory requirements. The liability is discounted using credit adjusted risk-free rate estimates at the time the liability is incurred or when there are upward revisions to estimated costs. The credit adjusted risk-free rates used to discount Intrepid’s abandonment liabilities range from 6.9% to 8.5%. Revisions to the liability occur due to construction of new or expanded facilities, changes in estimated abandonment costs or economic lives, or if federal or state regulators enact new requirements regarding the abandonment or reclamation of mines.
Following is a table of the changes to Intrepid’s asset retirement obligation for the following periods (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Asset retirement obligation, at beginning of period | $ | 21,047 | $ | 20,579 | ||||
Liabilities settled | (77 | ) | (24 | ) | ||||
Liabilities incurred | — | 184 | ||||||
Accretion of discount | 406 | 375 | ||||||
Total asset retirement obligation, at end of period | $ | 21,376 | $ | 21,114 | ||||
The current portion of asset retirement obligations of $1.1 million and $1.1 million, respectively, is included in "Other" current liabilities on the condensed consolidated balance sheets as of March 31, 2014, and December 31, 2013. The undiscounted amount of asset retirement obligation is $54.8 million as of March 31, 2014.
Note 9 | — COMPENSATION PLANS |
Cash Bonus Plan—Intrepid has cash bonus plans that allow participants to receive varying percentages of their aggregate base salary. Any awards under the cash bonus plans are based on a variety of elements related to Intrepid’s performance in certain production, operational, financial, and other areas, as well as the participants’ individual performance. Intrepid accrues cash bonus expense related to the current year’s performance.
Equity Incentive Compensation Plan—Intrepid's Board of Directors and stockholders adopted a long-term incentive compensation plan called the Intrepid Potash, Inc. Equity Incentive Plan, as Amended and Restated (the "Plan").
12
Intrepid has issued common stock, restricted shares of common stock, performance units, and non-qualified stock option awards under the Plan. As of March 31, 2014, the following awards were outstanding under the plan: 571,609 shares of non-vested restricted shares of common stock; non-vested performance units representing 19,874 shares of common stock; and options to purchase 335,935 shares of common stock. As of March 31, 2014, approximately 3.4 million shares of common stock remained available for issuance under the Plan.
Common Stock—On an annual basis, under the Plan, the Compensation Committee of the Board of Directors (the "Compensation Committee") has approved the award of shares of common stock to the non-employee members of the Board of Directors as compensation for service for the period ending on the date of Intrepid’s annual stockholders’ meeting for the following year. These shares of common stock were granted without restrictions and vested immediately.
Non-vested Restricted Shares of Common Stock—Under the Plan, grants of non-vested restricted shares of common stock have been awarded to executive officers, other key employees, and consultants. The awards contain service conditions associated with continued employment or service. The terms of the non-vested restricted shares of common stock provide voting and regular dividend rights to the holders of the awards. Upon vesting, the restrictions on the restricted shares of common stock lapse and the shares are considered issued and outstanding.
Since 2009, the Compensation Committee has granted restricted shares of common stock under the Plan in the first quarter of each year to Intrepid's executive management team and other selected employees as part of an annual equity award program. These awards vest ratably over three years. From time to time, the Compensation Committee grants restricted shares of common stock to newly hired or promoted employees or other employees or consultants who have achieved extraordinary personal performance objectives. These restricted shares of common stock generally vest over one- to four-year periods.
In measuring compensation expense associated with the grant of non-vested restricted shares of common stock, Intrepid uses the fair value of the award, determined as the closing stock price for Intrepid’s common stock on the grant date. Compensation expense is recorded monthly over the vesting period of the award. Total compensation expense related to the non-vested restricted shares of common stock awards was $0.8 million and $0.8 million for the three months ended March 31, 2014, and 2013, respectively. These amounts are net of estimated forfeiture adjustments. As of March 31, 2014, there was $9.0 million of total remaining unrecognized compensation expense related to non-vested restricted shares of common stock that will be expensed through 2017.
A summary of activity relating to Intrepid’s non-vested restricted shares of common stock for the three months ended March 31, 2014, is presented below.
Weighted Average Grant-Date Fair Value | |||||||
Shares | |||||||
Non-vested restricted shares of common stock, beginning of period | 352,050 | $ | 21.65 | ||||
Granted | 372,070 | $ | 14.45 | ||||
Vested | (131,838 | ) | $ | 23.16 | |||
Forfeited | (20,673 | ) | $ | 21.25 | |||
Non-vested restricted shares of common stock, end of period | 571,609 | $ | 16.63 | ||||
Performance Units — In 2012 and 2013, the Compensation Committee granted performance units under the Plan to certain members of Intrepid's executive management team as part of the annual equity award program. The performance units vest ratably over three years and contain operational- and market-based conditions relating to the year of grant. The time frames for meeting both the operational- and market-based conditions have passed, and a total of 19,874 shares of common stock are available for future payout under the performance units, subject to continued employment of the individual grantees through the vesting dates. Intrepid recognized stock-based compensation expense related to these agreements of $0.1 million and $0.1 million in the three months ended March 31, 2014, and 2013, respectively. No performance units have been issued in 2014.
Non-qualified Stock Options—From 2009 to 2011, the Compensation Committee issued non-qualified stock options under the Plan in the first quarter of each year to Intrepid’s executive management and other selected employees as part of its annual award program. These stock options generally vested ratably over three years. In measuring compensation expense for this grant of options, Intrepid estimated the fair value of the award on the grant date using the Black‑Scholes
13
option valuation model. Option valuation models require the input of highly subjective assumptions, including the expected volatility of the price of the underlying stock.
For the three months ended March 31, 2014, and 2013, Intrepid recognized stock‑based compensation related to previously issued stock options of approximately $0.1 million and $0.2 million, respectively. As of March 31, 2014, these 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 Intrepid’s stock option activity for the three months ended March 31, 2014, is as follows:
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (1) | Weighted Average Remaining Contractual Life | Weighted Average Grant-Date Fair Value | |||||||
Outstanding non-qualified stock | |||||||||||
options, end of period | 335,935 | $26.21 | $— | 5.5 | $13.10 | ||||||
Vested or expected to vest, end | |||||||||||
of period | 335,935 | $26.21 | $— | 5.5 | $13.10 | ||||||
Exercisable non-qualified | |||||||||||
stock options, end of period | 335,935 | $26.21 | $— | 5.5 | $13.10 | ||||||
(1) | The intrinsic value of a stock option is the amount by which the market value exceeds the exercise price as of the end of the period presented. |
Note 10 | — INCOME TAXES |
Intrepid's effective tax rate is impacted primarily by the amount of taxable income associated with each jurisdiction in which Intrepid's income is subject to income tax, permanent differences between the financial statement carrying amounts and tax bases of assets, liabilities, and the benefit associated with the estimated effect of the depletion and domestic production activities deduction and research and development credits. During the three months ended March 31, 2014, the State of New Mexico enacted legislation that extended the time period over which net operating loss carry forwards may be realized. Accordingly, Intrepid reversed a $1.7 million valuation allowance related to its New Mexico net operating loss carry forwards, as it now believes those carry forwards are realizable.
A summary of the provision for income taxes is as follows (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Current portion of income tax (benefit) expense | $ | — | $ | 317 | ||||
Deferred portion of income tax (benefit) expense | (2,778 | ) | 8,381 | |||||
Total income tax (benefit) expense | $ | (2,778 | ) | $ | 8,698 | |||
Effective tax rate | (88.7 | )% | 36.8 | % | ||||
The blended state tax rate applied to the deferred tax calculation is subject to change due to changes in state laws and changes in the mix of Intrepid's business and the states in which Intrepid has a taxable relationship. This creates fluctuations in the value of Intrepid's net deferred tax asset.
14
Note 11 | — COMMITMENTS AND CONTINGENCIES |
Marketing Agreements—Intrepid has a marketing agreement appointing PCS Sales (USA), Inc. (“PCS Sales”) as its exclusive sales representative for potash export sales, with the exception of sales to Canada and Mexico, and appointing PCS Sales as its non-exclusive sales representative for potash sales into Mexico. Trio® is also marketed under this arrangement. This agreement is cancelable with 30 days' written notice.
Reclamation Deposits and Surety Bonds—As of March 31, 2014, Intrepid had $17.3 million of security placed principally with the State of Utah and the Bureau of Land Management for eventual reclamation of its various facilities. Of this total requirement, as of March 31, 2014, $0.5 million consisted of long-term restricted cash deposits reflected in “Other” long-term assets on the condensed consolidated balance sheets, and $16.8 million was secured by surety bonds issued by an insurer. The surety bonds are held in place by an annual fee paid to the issuer.
Intrepid may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as governmental entities change requirements.
New Mexico Employment Credits—Beginning in 2011, based on an approval and payment of an application with the State of New Mexico, Intrepid began recording an estimate of refundable employment-related credits for qualified wages paid in New Mexico, known as the New Mexico High Wage Jobs Credit. The estimated recoverable value of these credits has been, and continues to be, reflected as a reduction to production costs and amounts yet to be collected are recorded in “Other receivables” in the consolidated balance sheets in the same period in which the credit is earned.
In the third quarter of 2013, the New Mexico Taxation and Revenue Department denied Intrepid's application to receive the New Mexico High Wage Jobs Credit for certain prior years' filings. Intrepid believed it had earned the credits and vigorously pursued recovery of these credits. Considering the uncertainty associated with collection of these claims, as of September 30, 2013, Intrepid recorded an allowance of approximately $2.8 million, for credits relating to the denied periods in order to reflect the denial of the claimed credits. In March 2014, as a result of its continuing efforts to collect these claims, Intrepid received notification from the New Mexico Taxation and Revenue Department that $5.9 million of credits previously denied were approved and would be paid. Accordingly, during the first quarter of 2014, Intrepid reversed $2.6 million of the previously established allowance to reflect the collectability of these claims. These credits are typically considered in Intrepid's product inventory calculations as they relate to the labor associated with operations. As the inventory associated with the periods during which the credits were originally earned has since been sold, Intrepid recorded the reversal of the allowance as "Other (income) expense" in the condensed consolidated statement of operations for the three months ended March 31, 2014. The classification of this item is consistent with the manner in which the initial allowance was recorded in 2013. As of March 31, 2014, including the $5.9 million of credits expected to be paid in the second quarter of 2014, Intrepid has a receivable of $8.9 million, net of an allowance of $1.7 million, associated with the New Mexico High Wage Jobs Credits. Intrepid intends to vigorously pursue recovery of all unpaid credits.
Legal—Intrepid is subject to litigation. Intrepid has determined that there are no material claims outstanding as of March 31, 2014. Intrepid has established a legal accrual for loss contingencies that are considered probable and reasonably estimable.
Future Operating Lease Commitments—Intrepid has operating leases for land, mining and other operating equipment, an airplane, offices, and railcars, with original terms ranging up to 20 years.
Rental and lease expenses follow for the indicated periods (in thousands):
For the three months ended March 31, 2014 | $ | 1,475 | ||
For the three months ended March 31, 2013 | $ | 909 | ||
Note 12— FAIR VALUE
Intrepid applies the provisions of the FASB’s 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
15
topic also establishes a hierarchy for grouping these assets and liabilities based on the significance level of the following inputs, as follows:
• | Level 1—Quoted prices in active markets for identical assets and liabilities. |
• | Level 2—Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model‑derived valuations whose inputs are observable or whose significant value drivers are observable. |
• | Level 3—Significant inputs to the valuation model are unobservable. |
The following is a listing of Intrepid’s assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of March 31, 2014, and December 31, 2013 (in thousands):
Fair Value at Reporting Date Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Investments | ||||||||||||
Corporate bonds as of March 31, 2014 | $ | — | $ | 4,323 | $ | — | ||||||
Corporate bonds as of December 31, 2013 | $ | — | $ | 22,459 | $ | — | ||||||
Financial assets or liabilities are categorized within the hierarchy based upon the lowest level of input that is significant to the fair value measurement. Below is a general description of Intrepid’s valuation methodologies for financial assets and liabilities, which are measured at fair value and are included on the condensed consolidated balance sheets.
Intrepid's available-for-sale investments consist of corporate bonds that are valued using Level 2 inputs. Market pricing for these investments is obtained from an established financial markets data provider.
The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While Intrepid believes that the valuation methods used are appropriate and consistent with the requirements of ASC Topic 820 and the methods used by other marketplace participants, Intrepid recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.
Financial Instruments—The carrying values and fair values of our financial instruments as of March 31, 2014, and December 31, 2013, are as follows (in thousands):
March 31, 2014 | December 31, 2013 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Long-term debt | $ | 150,000 | $ | 133,000 | $ | 150,000 | $ | 129,000 | ||||||||
For cash and cash equivalents, certificate of deposit investments, accounts receivable, refundable income taxes, and accounts payable, the carrying amount approximates fair value because of the short-term maturity of these instruments. The fair value of the long-term debt 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.
16
Note 13 — RESTRUCTURING CHARGE
In January 2014, in response to declining potash prices and completion of our major capital projects, Intrepid undertook a number of cost saving actions that are intended to better align our cost structure with the current business environment. These initiatives included the elimination of approximately 7% of the workforce, temporary decreases in executive and senior management compensation, reduction in the use of outside professionals, and cutbacks in other general and administrative areas. In the first quarter of 2014, Intrepid recognized a restructuring expense of $1.8 million, which is comprised primarily of severance-related payments.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains forward‑looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”). These forward‑looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward‑looking statements. Forward-looking statements include statements about our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, among other things. In some cases, you can identify these statements by forward‑looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue.” Forward‑looking statements are only predictions based on our current knowledge, expectations, and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the following:
• | changes in the price, demand, or supply of potash or Trio®/langbeinite |
• | circumstances that disrupt or limit our production, including operational difficulties or operational variances due to geological or geotechnical variances |
• | interruptions in rail or truck transportation services, or fluctuations in the costs of these services |
• | increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise |
• | the costs of, and our ability to successfully construct, commission, and execute, any of our strategic projects, including our HB Solar Solution mine, our North compaction plant, our West plant upgrades, and our Moab cavern systems |
• | adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines |
• | changes in the prices of raw materials, including chemicals, natural gas, and power |
• | the impact of federal, state, or local governmental regulations, including environmental and mining regulations; the enforcement of those regulations; and governmental policy changes |
• | our ability to obtain any necessary governmental permits relating to the construction and operation of assets |
• | changes in our reserve estimates |
• | competition in the fertilizer industry |
• | declines or changes in U.S. or world agricultural production or fertilizer application rates |
• | declines in the use of potash products by oil and gas companies in their drilling operations |
• | changes in economic conditions |
• | our ability to comply with covenants in our debt-related agreements to avoid a default under those agreements, or the total amount available to us under our credit facility is reduced, in whole or in part, because of covenant limitations |
• | disruption in the credit markets |
• | our ability to secure additional federal and state potash leases to expand our existing mining operations |
• | the other risks, uncertainties, and assumptions described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by this Quarterly Report 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.
17
In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, except as required by law.
Our Company
We are the largest producer of muriate of potash (“potassium chloride” or “potash”) in the United States and are one of two producers of langbeinite (“sulfate of potash magnesia”). Langbeinite is a low-chloride potassium fertilizer with the additional benefits of sulfate and magnesium. We generally describe this multi-nutrient specialty product as langbeinite when we refer to production and as Trio® when we refer to sales and marketing. Our revenues are generated exclusively from the sale of potash and Trio®. Potassium is one of the three primary macronutrients essential to plant formation and growth. Since 2005, we have supplied, on average, approximately 1.5% of annual world potassium consumption and 9.1% of annual U.S. potassium consumption. We also produce salt and magnesium chloride from our potash mining processes, the sales of which are accounted for as by-product credits to our cost of sales. These by-product credits have represented approximately 3% to 4% of total cost of goods sold in each of the last three years.
Our potash is marketed for sale into three primary markets, which are the agricultural market as a fertilizer input, the industrial market as a component in drilling and fracturing fluids for oil and gas wells and the feedstock for other processes, and the animal feed market as a supplemental nutrient. The agricultural market is predominately a user of granular-sized potash and Trio®, while the industrial and animal feed markets largely consume standard- and fine standard-sized product. Each of our operating facilities supplies these markets. Additionally, we have the capability to supply customers from our different locations due to the relatively homogeneous nature of our products. The flexibility to compact all of our production into granular form allows us to meet demand and maximize our average net realized sales price. Our investments in granulation capacity have allowed us to expand our geographical reach for granular product sales that would otherwise be unavailable. This flexibility also allows us to adjust our production to more closely align with specific market needs, thereby decreasing our dependence on sales of any one particular size of potash.
Our sales of potash tend to focus on agricultural areas, feed manufacturers in the central and western United States, and oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin area. We also have domestic agricultural sales, primarily of Trio®, in the southeastern and eastern United States, with a focus on areas with specific agricultural nutrition requirements of crops in those regions. We manage our sales and marketing operations centrally, including our freight and logistics planning. This allows us to evaluate the product needs of our customers and then determine which of our production facilities can be used to fill customer orders, all with the goal of realizing the highest average net realized sales price for our potash.
We own six active potash production facilities—four in New Mexico and two in Utah. One of our four active potash production facilities in New Mexico is our newly constructed HB Solar Solution mine near Carlsbad, New Mexico. The HB Solar Solution mine applies solution mining and solar evaporation techniques to produce potash from previously idled mine workings. We are currently processing our first harvest of ore from the solar evaporation ponds. We began commissioning of the processing plant at the end of December 2013, and we expect that commissioning activities will continue through much of 2014. Because the first harvest production was at volumes substantially lower than design, we have production costs in excess of market prices for potash, resulting in a lower-of-cost-or-market inventory adjustment of $2.9 million in the first quarter of 2014 related to the HB Solar Solution mine. This scenario was expected, and the start-up of the processing plant is progressing as we had anticipated in terms of start-up volumes and ongoing optimization of operations of this new facility. We expect production from the HB Solar Solution mine to increase as we ramp up production through 2016. We have additional opportunities to develop mineralized deposits of potash in New Mexico as well as to improve recoveries in our processing plants. These opportunities potentially include additional solution mining activities and additional recoveries of our langbeinite. Longer-term opportunities include the potential reopening of the North mine, which was operated as a conventional underground mine until the early 1980s, or the acceleration of production from our reserves.
We routinely post important information about Intrepid and our business, including information about upcoming investor presentations, on our website under the Investor Relations tab. We encourage investors and other interested parties to enroll on our website to receive automatic email alerts or Really Simple Syndication (RSS) feeds regarding new postings. Our website is www.intrepidpotash.com.
18
Significant Business Trends and Activities
Our financial results have been impacted by several significant trends, which are described below. We expect that these trends will continue to drive our results of operations, cash flows, and financial position.
• Potash demand. We sold 242,000 tons of potash in the first quarter of 2014, an increase of 57,000 tons compared with the first quarter of 2013. As is often the case, the timing of spring purchasing by customers and the start of the application season were significant drivers of our sales volumes. The early February announcements by Canadian producers of a $20 per ton increase in their list price for potash in North America spurred purchasing of potash as buyers gained confidence in potash pricing. Many customers then placed orders ahead of the increase to meet the needs of their spring application season. We benefited from this increased demand, which resulted in strong sales volumes during the first quarter of 2014. In certain areas that we serve, farmers begin the application of fertilizer during the first quarter of 2014, which also contributed to the increased potash sales volumes. In comparison, during the first quarter of 2013, there was heightened concern over the drought conditions in certain areas of the country that led to cautious buying in the early part of the spring application season. Our industry is currently facing transportation limitations due to reduced rail car availability from railroad operators. In particular, we experienced reduced rail car availability to our Carlsbad, New Mexico, facilities.
We were able to achieve increased sales volume in the first quarter of 2014, compared to the first quarter of 2013 by having product inventory well positioned in our field warehouses to supply our agricultural customers. We also benefited in 2014 by selling more tons in the industrial market, highlighting the diverse markets that we serve. We anticipate the 2014 spring application season for fertilizer will be healthy, assuming favorable weather conditions across our key agricultural markets and the availability of rail cars to ship our products. The availability of rail cars to our Carlsbad, New Mexico, facilities may limit our ability to supply our customers during the second quarter of 2014.
Potash sales into the industrial segment increased in the first quarter of 2014 as compared to the same period a year ago and as a percentage of our total sales volumes. This increase was partially driven by continued strong activity in the oil and gas drilling markets.
The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the United States. In addition, potash demand is significantly influenced by dealer storage volumes and the marketing programs of potash producers and retailers. The combination of these items results in variability in potash sales and shipments, thereby increasing volatility of sales volumes from quarter to quarter and season to season.
• Potash prices. Potash prices are a significant driver of profitability for our business. Our average net realized sales price decreased to $317 per ton in the first quarter of 2014 from $417 per ton in the first quarter of 2013. This decrease was due to the continued downward pressure on potash prices driven by the general view in the market that there is currently adequate global potash supply.
Specifically, in the first quarter, several actions positively impacted both the domestic and international price of potash. Contracts for a portion of the expected demand for both China and India were announced during the first quarter of 2014, which seems to have created some stability and customer confidence in pricing for the short term. Further, as a result of the increased pricing announced by the Canadian producers in February, potash prices are currently higher than they were in January 2014. However, North American potash inventory levels remain above the five-year average, which creates some level of uncertainty as to potash pricing after the spring application season. We anticipate global suppliers of potash will continue to balance global supply and demand as we move through 2014.
• Trio® prices and demand. The average net realized sales price of Trio® decreased to $340 per ton in the first quarter of 2014 from $351 per ton in the first quarter of 2013. Trio® domestic pricing has historically tended to move in a relatively close correlation to potash pricing. Despite sequentially lower potash prices over the last two years, dealers' and farmers' recognition of the added value of magnesium and sulfate and the benefits of a low-chloride specialty product have helped support Trio® pricing. Despite the decreases in potash pricing, we have seen Trio® pricing show resilience over the last nine months. Demand for granular- and premium-sized Trio® continues to be strong in selected markets. Demand for standard-sized Trio®, however, has been weaker, particularly in the export market. We expect that the general trends associated with potash pricing and volumes will have a directional impact on the sales volumes into the Trio® markets. More specifically, should we choose to manage our Trio® inventory levels by increasing our mix of export sales, we would likely see a lower net realized price for Trio®.
• Major capital projects. In late 2013, we began commissioning of the HB Solar Solution processing plant and expect this work to continue through much of 2014. The total expected investment for the HB Solar Solution mine project is estimated to be approximately $240 million to $245 million, of which $239 million had been invested as of March 31, 2014. The start-
19
up production from our initial harvest has a higher per-ton cost due to the relatively low volumes of product being processed and accounted for $2.9 million of the lower-of-cost-or-market inventory adjustments recorded in the quarter ended March 31, 2014.
We have several ongoing recovery enhancement projects at the West facility with total expected investment of approximately $30 million to $35 million, of which $25 million had been invested as of March 31, 2014. The series of projects underway at the West facility, some of which began in 2012, are intended to sustain and increase production by improving recoveries at the West facility as we transition into different ore zones. The majority of these projects are expected to be completed in the first half of 2014. The capabilities of the new North compaction facility allow us the flexibility to make design changes at the West facility to increase recovery as well as to decrease our per-ton operating costs.
The North compaction project is complete and is processing tons produced from both the West facility and the HB Solar Solution mine. The third compaction line was placed into service during the first quarter of 2014. The new facility enables us to produce high quality granular product and expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and ongoing upgrades at our West facility. Capital expenditures for this project totaled $98 million as of March 31, 2014.
We expect the level of capital project investment to decrease significantly in 2014 as compared to 2013, as we have substantially completed these major capital projects over the last two years. During 2014, we intend to continue focusing on optimizing and gaining the efficiencies from these projects, which are intended to increase production, decrease our per-ton operating costs and increase our overall marketing flexibility.
• East facility production. We have dedicated significant resources to the long-term improvement plan that we began in early 2012 to address production challenges at the East facility. Our recovery and production of both potash and langbeinite are directionally impacted by the ore grade and the development work we do. Our production and recovery results historically have had a positive correlation to ore grade. Our production results are also influenced by the amount of development activity we perform. Our potash production from the East facility increased slightly in the first quarter of 2014 as compared to the same period in 2013. Our Trio® production from the East facility decreased in the first three months of 2014 as compared to the comparable period in 2013 as a result of ore grade. Our total production costs at our East facility were flat in the first quarter of 2014 as compared to 2013. Accordingly, production costs for potash were allocated over slightly more tons, resulting in lower per-ton costs for potash from our East facility. Even with this improvement, the relatively lower potash price required that we record lower-of-cost-or-market inventory adjustments of approximately $0.4 million from our East facility during the first quarter of 2014.
• Other (Income) Expense. In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million for tax credits relating to the denied credits. As a result of our efforts working with the State of New Mexico, in March 2014 we received notice that $5.9 million of employment tax credits, a significant portion of which had previously been denied, had been approved for payment. We expect to receive this payment during the second quarter of 2014 for the approved credits. Accordingly, in the first quarter of 2014 we reversed $2.6 million of the allowance associated with the previously reserved employment-related tax credits.
• Restructuring expense. In January 2014, in response to the acceleration of declining potash prices since mid-2013 and the substantial completion of our major capital projects, we undertook a number of cost saving actions that are intended to better align our cost structure with the current business environment. These initiatives include the elimination of approximately 7% of the workforce, including capital project related support associated with the our major capital projects, temporary decreases in executive and senior management compensation, reduction in the use of outside professionals, and cutbacks in other general and administrative areas. We estimate that these measures will result in annual savings of approximately $12 million to $15 million, with the majority being in general and administrative expense and the remainder being cost of goods sold. The workforce reduction occurred in January of 2014, generating a pre-tax restructuring charge of approximately $1.8 million, which is comprised primarily of severance-related payments.
Selected Operating and Financial Data
The following tables present selected operations data for the periods noted. Analysis of the details of this information is contained throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. We calculate average net realized sales price by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period.
20
Change | |||||||||||||||
Three Months Ended March 31, | Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Production volume (in thousands of tons): | |||||||||||||||
Potash | 220 | 222 | (2 | ) | (1 | )% | |||||||||
Langbeinite | 32 | 46 | (14 | ) | (30 | )% | |||||||||
Sales volume (in thousands of tons): | |||||||||||||||
Potash | 242 | 185 | 57 | 31 | % | ||||||||||
Trio® | 36 | 39 | (3 | ) | (8 | )% | |||||||||
Gross sales (in thousands): | |||||||||||||||
Potash | $ | 84,497 | $ | 82,778 | $ | 1,719 | 2 | % | |||||||
Trio® | 14,378 | 16,479 | (2,101 | ) | (13 | )% | |||||||||
Total | 98,875 | 99,257 | (382 | ) | — | % | |||||||||
Freight costs (in thousands): | |||||||||||||||
Potash | 7,661 | 5,466 | 2,195 | 40 | % | ||||||||||
Trio® | 2,271 | 2,631 | (360 | ) | (14 | )% | |||||||||
Total | 9,932 | 8,097 | 1,835 | 23 | % | ||||||||||
Net sales (in thousands)(1): | |||||||||||||||
Potash | 76,836 | 77,312 | (476 | ) | (1 | )% | |||||||||
Trio® | 12,107 | 13,848 | (1,741 | ) | (13 | )% | |||||||||
Total | $ | 88,943 | $ | 91,160 | $ | (2,217 | ) | (2 | )% | ||||||
Potash statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 317 | $ | 417 | $ | (100 | ) | (24 | )% | ||||||
Cash operating costs(1)(2) | 205 | 174 | 31 | 18 | % | ||||||||||
Depreciation and depletion | 64 | 46 | 18 | 39 | % | ||||||||||
Royalties | 11 | 16 | (5 | ) | (31 | )% | |||||||||
Total potash cost of goods sold | $ | 280 | $ | 236 | $ | 44 | 19 | % | |||||||
Warehousing and handling costs | 10 | 16 | (6 | ) | (38 | )% | |||||||||
Average potash gross margin(1) | $ | 27 | $ | 165 | $ | (138 | ) | (84 | )% | ||||||
Trio® statistics (per ton): | |||||||||||||||
Average net realized sales price(1) | $ | 340 | $ | 351 | $ | (11 | ) | (3 | )% | ||||||
Cash operating costs(1) | 216 | 180 | 36 | 20 | % | ||||||||||
Depreciation and depletion | 68 | 54 | 14 | 26 | % | ||||||||||
Royalties | 17 | 18 | (1 | ) | (6 | )% | |||||||||
Total Trio® cost of goods sold | $ | 301 | $ | 252 | $ | 49 | 19 | % | |||||||
Warehousing and handling costs | 10 | 14 | (4 | ) | (29 | )% | |||||||||
Average Trio® gross margin (1) | $ | 29 | $ | 85 | $ | (56 | ) | (66 | )% | ||||||
(1) | Additional information about our non-GAAP financial measures is set forth under the heading "Non-GAAP Financial Measures.” |
(2) | Amounts are presented net of by-product credits. On a per-ton basis, by-product credits were $6 and $10 for the three months ended March 31, 2014, and 2013, respectively. By-product credits were $1.4 million and $1.9 million for the three months ended March 31, 2014, and 2013, respectively. |
21
Results of Operations
Operating Highlights
Net loss for the first quarter of 2014 was $0.4 million, or $0.00 per basic share, and cash flows from operating activities were $17.3 million. During the quarter ended March 31, 2014, we sold 242,000 tons of potash at a net realized sales price of $317 per ton and 36,000 tons of Trio® at a net realized sales price of $340 per ton. We made capital investments of $16.2 in the first three months of 2014, and ended the quarter with $9.8 million of cash and investments. We produced 220,000 tons of potash and 32,000 tons of langbeinite in the three months ended March 31, 2014.
We incurred a loss from operations for the three months ended March 31, 2014 of $2.0 million. The loss from operations includes depreciation, depletion, and accretion of $19.6 million. Although we have implemented various cost savings initiatives as described above under the heading "Significant Business Trends and Activities," if potash prices remain at or decline below current levels, we expect to incur additional losses from operations in 2014. These losses are expected to continue until prices increase or until we begin to realize the expected lower-cost production benefits from our HB Solar Solution mine and our West facility.
Potash
The 242,000 tons of potash we sold in the first quarter of 2014 compared with 185,000 tons sold in the first quarter of 2013. The increase in sales volumes was driven by increased confidence from buyers and our agricultural customers' need to position product for sale into the spring season after the relatively modest sales volumes from the fall of 2013. In addition, we experienced strong industrial sales in the quarter resulting from ongoing strength in the energy sector. Our average net realized sales price of potash was $317 per ton in the first quarter of 2014, compared with $417 per ton in the first quarter of 2013. Potash pricing continued to come under pressure due to uncertainty surrounding increased global potash supply and North American inventory levels that were above the five-year average.
The table below shows our potash sales mix for the three months ended March 31, 2014, and 2013. The percentage of sales into the industrial market increased in 2014 compared with 2013, as use in the oil and gas industry has increased.
Three Months Ended March 31, | ||||
2014 | 2013 | |||
Agricultural | 77% | 79% | ||
Industrial | 19% | 14% | ||
Feed | 4% | 7% | ||
We continue to focus on increasing the flexibility of our operations to produce the right amount of product for the demands of our specific markets. For example, we have invested in granulation facilities at each of our operations. The flexibility to match granular production to demand is important as we continue to see long-term trends that support utilization of potash in agriculture. Data generated by Fertecon Limited, a fertilizer industry consultant, shows that, over the past 25 years, domestic potash consumption has averaged approximately 9.3 million tons with annual volatility of approximately 10%. These results have occurred through historical periods of low and high agricultural commodity prices, weather conditions, variability in oil and gas drilling, negative farmer margins, and a variety of other macro-economic factors. We believe continuing improvements in agriculture production technology, such as hybrid seeds and equipment advancements, now allow for the potential of higher yields per acre. These improvements need to be matched with potassium application rates to maximize agricultural productivity. We believe these factors suggest increased domestic potash consumption is possible in the coming years.
The replacement of potassium in the soil is critical to continue high-yielding agricultural production and to satisfy the demands placed on soils for plant nutrition. The International Plant Nutrition Institute has tracked historical soil potassium levels and trends show a decline in soil potassium which will lead to an increasing potassium deficiency of some agricultural soils in North America. In order for the North American farmer to maximize yields, we believe higher application rates of potash will be necessary in the future. With higher crop yields in 2013, more potassium was removed from the soil. Given the level of activity seen thus far in 2014, farmers appear to be applying recommended amounts of potash this spring.
22
Our production volume of potash in the first quarter of 2014 was essentially flat at 220,000 tons, compared with 222,000 tons produced in the first quarter of 2013. Our production was characterized by a decrease in production from our West facility offset by new production from our HB Solar Solution mine and a modest increase in production at our Wendover facility. Production from our West facility has been impacted primarily by reduced ore grades from year to year and recoveries. Due to the reduced production levels at our West facility, which is our largest production facility, we had fewer tons of potash produced over which to allocate production costs. As a result, and coupled with the expected start-up losses from our HB Solar Solution mine, our cash operating costs increased to $205 per ton for the first quarter of 2014, compared with $174 per ton in the first quarter of 2013.
Trio®
Our Trio® production was lower in the first three months of 2014 than in the same period in 2013 as we experienced lower ore grades and higher than expected losses associated with the conversion to premium-sized products. Our optimization work has resulted in another sequential quarter of increased premium-sized production as we continue to focus on maximizing this production and materially reducing the processing losses. Pricing for Trio® has slightly softened over the last nine months due primarily to softness in potash pricing. Demand for our granular- and premium-sized Trio® has remained strong, even as potash prices have decreased significantly. Our sales of Trio® decreased to 36,000 tons in the first quarter of 2014 as compared with 39,000 tons in the first quarter of 2013, driven primarily by reduced sales of standard-sized Trio® into the export market. The export market for standard product has softened considerably in 2014 compared to the same period a year ago, therefore highlighting the importance of improving our pelletization process, which upgrades the standard-sized product to produce premium-sized product.
Our average Trio® gross margin per ton decreased by $56 per ton in the first quarter of 2014, as compared with the first quarter of 2013. This was driven by an $11 per ton decrease in our average net realized sales price for Trio®, coupled with the increase in our cash operating costs for Trio® of $36 per ton. Our cash operating costs for Trio® increased as a result of the production issues mentioned above. The cash operating costs per ton were negatively affected by the inefficiency and resulting high cost per ton associated with the production of the pelletized product. This resulted in a higher per-unit cash operating cost per ton associated with the pelletized product.
Our export sales of Trio® tend to be in larger quantities and with more variability as to the timing of those sales, which has an impact on the quarterly results, but as noted were particularly low in the first quarter of 2014.
United States | Export | |||
Trio® only | ||||
For the three months ended March 31, 2014 | 91% | 9% | ||
For the three months ended March 31, 2013 | 68% | 32% | ||
Average Net Realized Sales Price
Domestic pricing of our potash is influenced principally by the price established by our competitors. The interaction of global potash supply and demand, ocean, land and barge freight rates, and currency fluctuations also influence pricing. Any of these factors could have a positive or negative impact on the price of our products. Our average net realized sales price for potash decreased $21 per ton in the first quarter of 2014 from the fourth quarter of 2013 largely as a result of ongoing global productive capacity that has exceeded demand, particularly over the last few years. Domestically, the market is influenced by this global scenario and continues to experience ongoing price pressure resulting from higher North American inventory levels.
We market Trio® as a specialty product. Despite farmers recognizing the agronomic value of this product, some softness in demand has occurred as a result of the decrease in potash and sulfate pricing.
The table below demonstrates the progression of our average net realized sales price for potash and Trio® through 2013 and into 2014.
23
Average net realized sales price for the three months ended: | Potash | Trio® | ||
(Per ton) | ||||
March 31, 2014 | $317 | $340 | ||
December 31, 2013 | $338 | $345 | ||
September 30, 2013 | $363 | $353 | ||
June 30, 2013 | $402 | $359 | ||
March 31, 2013 | $417 | $351 | ||
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash and Trio® and are determined by the quantities of product we sell and the sales prices we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred on only a portion of our sales as many of our customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Although our gross sales include the freight that we bill, we do not believe that gross sales provide a representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. Rail freight rates have been steadily increasing, thereby negatively influencing our net realized sales prices. We view net sales, which are gross sales less freight costs, as the key performance indicator of our revenue as it conveys the net sales price of the product that we realize. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and by our production capabilities. We intend to operate our facilities at full production levels, which provide the greatest operating efficiencies. By having adequate warehouse capacity, we can maintain production levels during periods of fluctuating product demand and have product inventory positioned closer to the fields in order to meet peak periods of fertilizer demand.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our potash and Trio® products, less credits generated from the sale of our by-products. Many of our production costs are largely fixed and, consequently, our costs of sales per ton on a facility-by-facility basis tend to move inversely with the number of tons we produce, within the context of normal production levels. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. There are elements of our cost structure associated with contract labor, consumable operating supplies, and reagents and royalties that are variable, which make up a smaller component of our cost base. Our periodic production costs and costs of goods sold will not necessarily match one another from period-to-period based on the fluctuation of inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels change due to factors such as changes in the grade of ore delivered to the plant, levels of mine development, plant operating performance, downtime, and annual maintenance turnarounds. We expect that our labor and contract labor costs in Carlsbad, New Mexico, will continue to be influenced most directly by the demand for labor in the local Carlsbad, New Mexico, region where we compete for labor with the potash, oil and gas, and nuclear waste storage industries. Additionally, the East mine has a complex mineralogy with a mixed ore body comprised of potash and langbeinite. This complex ore is processed through a singular product flow at the surface facility. The specific grade and characterization of the ore that is mined at any particular time is subject to fluctuations due to the nature of the mineral deposits and influences the amount of tons of potash and langbeinite ultimately produced from the facility, which affects our production costs per ton for both products and affects our quarter-to-quarter results.
We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of net sales of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that varies with the grade of ore extracted. For the three months ended March 31, 2014, and 2013, our average royalty rate was 3.6% and 4.1%, respectively.
24
Income Taxes
We are a subchapter C corporation and, therefore, are subject to federal and state income taxes on our taxable income. Our effective tax rate for the three months ended March 31, 2014, and 2013, was (88.7)% and 36.8%, respectively. Our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax and permanent differences between book and tax income for the period, including the benefit associated with the estimated effect of depletion. Our federal and state income tax returns are subject to examination by federal and state tax authorities.
During the three months ended March 31, 2014, we recognized an income tax benefit of $2.8 million, all of which was a deferred income tax benefit. During the three months ended March 31, 2014, the State of New Mexico enacted legislation that extended the time frame over which net operating loss carry forwards may be realized from 5 years to 20 years. Accordingly, we reversed a valuation allowance of $1.7 million related to New Mexico net operating loss carry forwards that had been established in 2013 as we now believe these net operating loss carry forwards will be realized. The reversal of the $1.7 million valuation allowance is included in the $2.8 million of deferred income tax benefit in the three months ended March 31, 2014, which impacts the effective tax rate for the period. For the three months ended March 31, 2013, the total tax expense was $8.7 million. Total tax expense for the three months ended March 31, 2013, was comprised of $0.3 million of current income tax expense and $8.4 million of deferred income tax expense. Our current tax expense for the three months ended March 31, 2013, was less than our total tax expense in large part due to the impact of accelerated tax bonus depreciation and the utilization of percentage depletion.
We evaluate our deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the states in which we do business. Changing business conditions for normal business transactions and operations as well as changes to state tax rate and apportionment laws potentially alter our apportionment of income among the states for income tax purposes. These changes in apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.
Capital Investments
We believe that, in the long term, demand for potash will remain at, or exceed, historical levels. We have been executing a capital investment plan at each of our facilities to respond to this anticipated increase in demand and to structurally lower our cash operating costs per ton. These plans focus on growing productivity and improving recoveries while improving safe and reliable production, ensuring environmental and regulatory compliance, and improving facility reliability. Likewise, as we invest in our facilities, we seek to deploy capital while maintaining sufficient liquidity to react strategically to market conditions.
During 2013, much of our strategic focus was on investing in and completing our large capital projects. Construction of the HB Solar Solution mine was substantially completed in 2013. Two of the three compaction lines at our North compaction facility were also completed in 2013, with the third line being completed in the first quarter of 2014. We expect our level of capital investment to decrease significantly in 2014 compared to 2013. We expect our investments will grow production capacity and decrease cash operating costs per ton while also increasing the flexibility of our production mix to support our marketing efforts. We have already made significant steps towards improving our granulation capacity for both potash and Trio® through previous capital investments.
During the first quarter of 2014, we invested $16.2 million in capital projects, including $0.3 million of capitalized interest. These capital projects included investments related to the substantial completion of the construction for the HB Solar Solution mine and the related production plant, the expansion of our North compaction facility and the recovery improvement projects at our West facility.
In 2014, we expect our level of capital investment to be approximately $40 million to $50 million, which includes approximately $5 million to $10 million of additional investment in recovery improvement projects at our West plant. As these projects are completed, we expect to reduce our capital investment activity, which will allow us to shift our focus to optimizing and increasing efficiencies of our operating facilities to extract the value from the capital investments made over the last several years. We expect our 2014 operating plans and capital programs to be funded out of operating cash flows, existing cash and investments, and availability under our unsecured credit facility.
25
The following details several of our significant projects that are designed to improve the overall reliability of the operations and to increase productive and compaction capacity:
• | During 2013, we substantially completed the construction activities associated with the initial design for the HB Solar Solution mine. In the first quarter of 2014, we produced approximately 13,000 tons of finished product from the HB Solar Solution mine. We expect our production from the HB Solar Solution mine to ramp up throughout 2014, with production levels increasing into the harvest seasons in 2015 and 2016, assuming the benefit of an average annual evaporation cycle applied to full evaporation ponds. The anticipated production schedule may be impacted by delays due to commissioning activities, the rate of injection into the mines, and the impact of weather events or weather patterns on commissioning and evaporation seasons. The total expected investment for the project is estimated to be approximately $240 million to $245 million, of which $239 million had been invested as of March 31, 2014. |
• | We have several ongoing projects at our West facility that are intended to sustain and increase production through improvements in recovery rates. We have made ongoing improvements to the West facility since its acquisition to increase the volume of tons going through the facility. This current phase of improvements is designed to increase recoveries at the West facility as we transition into different ore zones. The majority of these projects are expected to be completed in the first half of 2014. The capabilities of the new North compaction facility allow us the flexibility to make design changes at the West facility to increase recovery as well as to decrease our per-ton operating costs. There is a level of coordination among the projects at the West facility and North compaction facility that will cause some variation in production volumes at the West facility as the projects are placed in service and resulting design changes are realized. We estimate the total investment for these projects will be between $30 million and $35 million, of which $25 million had been invested as of March 31, 2014. |
• | The North compaction project is complete and is processing tons produced from both the West facility and the new HB Solar Solution mine. The third compaction line was placed into service during the first quarter of 2014. The new facility enables us to produce high quality granular product and expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and ongoing upgrades at our West facility. Total capital expenditures for this project totaled $98 million as of March 31, 2014. |
Liquidity and Capital Resources
As of March 31, 2014, we had cash, cash equivalents, and investments of $9.8 million. We also have an unsecured credit facility that provides a revolving credit facility of up to $250 million, provided that we meet specified financial covenants, as described below under the heading “Unsecured Credit Facility.” As of March 31, 2014, we had $157 million available under this facility.
The $9.8 million of cash, cash equivalents and investments at March 31, 2014, was made up of the following:
• | $2.9 million in cash; |
• | $0.3 million in cash equivalent investments, consisting of money market accounts with banking institutions that we believe are financially sound; and |
• | $6.6 million invested in short-term investments. |
Our operations have been and are expected to be primarily funded from cash on hand and cash generated by operations and, if necessary, we have the ability to borrow under our unsecured credit facility.
In April 2013, we received the funding of our Notes with net proceeds of $149.3 million, as described in more detail below.
The following summarizes our cash flow activity for the three months ended March 31, 2014, and 2013:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Cash Flows provided by Operating Activities | $ | 17,324 | $ | 11,621 | ||||
Cash Flows used in Investing Activities | $ | (13,873 | ) | $ | (39,552 | ) | ||
Cash Flows used in Financing Activities | $ | (611 | ) | $ | (577 | ) | ||
26
Operating Activities
Total cash provided by operating activities through March 31, 2014, was $17.3 million, an increase of $5.7 million compared with the first three months of 2013. The higher relative sales volumes in 2014 resulted in a decrease in finished goods inventory and an increase in the receivable balances associated with those sales.
Investing Activities
Total cash used in investing activities decreased by $25.7 million in the first three months of 2014 compared with the same three month period in 2013 as a result of lower capital investment activity in 2014.
Financing Activities
Total cash used in financing activities of $0.6 million was due to employee tax withholding for the vesting of restricted stock. During the quarter ended March 31, 2014, Intrepid borrowed and repaid $10 million under the demand portion of the credit facility for near-term working capital needs
Unsecured Credit Facility
We have an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. This unsecured credit facility provides a revolving credit facility of up to $250 million. The actual amount available to us may be limited by our leverage ratio, which may not exceed 3.5, and our fixed charge coverage ratio, which may not be below 1.3.
Under the facility, the leverage ratio is defined as the ratio of our total funded indebtedness to adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses, as defined in the credit facility) for the prior four fiscal quarters. The fixed charge coverage ratio is defined as the ratio of adjusted EBITDA for the prior four fiscal quarters to fixed charges. Both ratios may operate to limit the total amount available to us under the facility. For example, as of March 31, 2014, $157 million was available to us under the facility due to an increase in our leverage ratio as a result of decreasing levels of adjusted EBITDA over the prior four fiscal quarters. If adjusted EBITDA continues to decrease significantly over several quarters with no change to indebtedness, our leverage ratio could rise to the level where less than $250 million would be available to us. Based on current market conditions, we expect that the total amount available to us under the facility will continue to be limited during 2014. We believe that the amounts available to us will be adequate to fund our operations and our capital investment projects.
Outstanding balances under the unsecured credit facility bear interest at a floating rate, which, at our option, is either (1) the London Interbank Offered Rate (LIBOR), plus a margin of between 1.125% and 2.25%, depending upon our leverage ratio, as defined above; or (2) an alternative base rate, plus a margin of between 0.125% and 1.25%, depending upon our leverage ratio. We pay a quarterly commitment fee on the outstanding portion of the unused revolving unsecured credit facility amount of between 0.15% and 0.35%, depending on our leverage ratio. The interest rate paid under our unsecured credit facility on any debt varies both with changes in the LIBOR and with our leverage ratio.
The facility is unsecured and is guaranteed by Intrepid's material subsidiaries. We are currently in compliance with the covenants under the facility. The facility has a maturity date of August 2018. As of March 31, 2014, and December 31, 2013, there were no amounts outstanding under the facility.
Unsecured Senior Notes
In April 2013, we received net proceeds of $149.3 million from the issuance of $150 million aggregate principal amount of the Notes pursuant to a note purchase agreement entered into in August 2012. The Notes consist of the following series:
• | $60 million of 3.23% Senior Notes, Series A, due April 16, 2020 |
• | $45 million of 4.13% Senior Notes, Series B, due April 14, 2023 |
• | $45 million of 4.28% Senior Notes, Series C, due April 16, 2025 |
The Notes are senior unsecured obligations and rank equally in right of payment with any of our other unsubordinated unsecured indebtedness. The obligations under the Notes are unconditionally guaranteed by our material subsidiaries. The note purchase agreement includes financial covenants requiring a minimum fixed charge ratio and a maximum leverage ratio. We are currently in compliance with the covenants under the Notes. Interest on the Notes is paid semiannually on April 16 and October 16 of each year.
Off-Balance Sheet Arrangements
27
As of March 31, 2014, we had no off-balance sheet arrangements aside from the operating leases and bonding obligations described in the accompanying notes to the condensed consolidated financial statements.
Results of Operations for the Three Months Ended March 31, 2014, and 2013
Net Sales
Net sales of potash decreased slightly from $77.3 million for the three months ended March 31, 2013, to $76.8 million for the three months ended March 31, 2014. This decrease in net sales of potash was primarily the result of a decrease in the average net realized sales price of potash of $100 per ton, or 24%, partially offset by a 31% increase in volume. Our 2014 sales volumes increased over those realized in the same period in 2013, due primarily to the increased purchasing of potash by our customers for the spring application season.
Net sales of Trio® decreased from $13.8 million for the three months ended March 31, 2013, to $12.1 million for the three months ended March 31, 2014, due to an 8% decrease in the volume of sales as well as a 3% decrease in the average net realized sales price. Demand for granular-sized and pelletized Trio® continues to be favorable; however, demand for standard-sized Trio® has been less predictable. Trio® domestic pricing has historically tended to move in a relatively close correlation to potash pricing. Over the last year, despite tight supply, the significant decrease in potash prices has resulted in lower Trio® prices.
Cost of Goods Sold
The following table presents our cost of goods sold for potash and Trio® for the subject periods:
Three Months Ended March 31, | Change Between | ||||||||||||||
2014 | 2013 | Periods | % Change | ||||||||||||
Cost of goods sold (in millions) | $ | 78.6 | $ | 53.8 | $ | 24.8 | 46 | % | |||||||
Cost per ton of potash sold(1) | $ | 280 | $ | 236 | $ | 44 | 19 | % | |||||||
Cost per ton of Trio® sold(2) | $ | 301 | $ | 252 | $ | 49 | 19 | % | |||||||
(1) | Depreciation and depletion expense for potash was $15.6 million and $8.5 million in the first quarter of 2014 and 2013, respectively, which equates to $64 and $46 on a per-ton basis. |
(2) | Depreciation and depletion expense for Trio® was $2.4 million and $2.1 million in the first quarter of 2014 and 2013, respectively, which equates to $68 and $54 on a per-ton basis. |
Total cost of goods sold of potash, which includes royalties and depreciation, depletion and amortization, increased $44 per ton, or 19%, from $236 per ton for the three months ended March 31, 2013, to $280 per ton for the three months ended March 31, 2014. We experienced higher cash operating costs per ton for the first quarter of 2014 largely due to lower production at our West facility as noted above and the costs associated with start-up of the HB Solar Solution plant. As potash pricing has been decreasing, we have recorded lower-of-cost-or-market inventory adjustments during the first quarter of $3.6 million, of which $2.9 million related to the start-up activities of our HB Solar Solution mine. Commissioning of the HB Solar Solution mine is proceeding. The lower-of-cost-or-market inventory adjustments are the result of the modest level of production from the HB Solar Solution mine, resulting in our production costs being allocated over fewer tons, and are expected to continue through much of 2014.
Total cost of goods sold of Trio® increased $49 per ton, or 19%, from $252 per ton for the three months ended March 31, 2013, to $301 per ton for the three months ended March 31, 2014. During the first quarter of 2014, our production of langbeinite decreased compared with the first quarter of 2013 due to lower ore grade. Further, our continuing efforts to convert standard-sized Trio® into premium-sized Trio® has impacted our production. As a result, we have fewer tons of langbeinite over which production costs are allocated, resulting in higher per-ton costs.
In total, our cost of goods sold increased $24.8 million, or 46%, from $53.8 million in the three months ended March 31, 2013, to $78.6 million in the three months ended March 31, 2014. This increase was primarily due to more tons of
28
potash sold in the first quarter of 2014 and higher potash production costs, partially offset by fewer tons of Trio® sold. Our increased potash production costs were due to increases in labor costs, natural gas and maintenance associated with our production facilities.
On a comparative basis, and within our potash and Trio® cost of goods sold, depreciation and depletion increased $7.4 million, or 70%, during the first quarter of 2014 as a result of the significant capital investments being put into service over the last year. We expect depreciation expense to continue to increase into the early part of 2014 on both an actual dollar basis and on a per-ton basis as we complete our major capital projects described previously. We manage capital investments by evaluating capital projects that we believe are necessary to maintain the productivity of our mines and evaluating investment capital that is designed to increase production and generate incremental returns on invested capital.
Other Operating Expense
In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million relating to the denied tax credits. In March 2014, we received notice that the State of New Mexico had approved $5.9 million of employment tax credits for us, a significant portion of which had previously been denied. We now expect to receive payment of $5.9 million for the approved credits during the second quarter of 2014. Accordingly, in the first quarter of 2014, we reversed $2.6 million of the allowance associated with the previously recorded employment-related tax credits.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2013, describes the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant changes to our critical accounting policies since December 31, 2013.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use several non-GAAP financial measures to monitor and evaluate our performance. These non-GAAP financial measures include net sales, average net realized sales price, cash operating costs, and average potash and Trio® gross margin. These non-GAAP financial measures should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, because the presentation of these non-GAAP financial measures varies among companies, our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies.
We believe these non-GAAP financial measures provide useful information to investors for analysis of our business. We also refer to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are widely used by professional research analysts and others in the valuation, comparison and investment recommendations of companies in the potash mining industry. Many investors use the published research reports of these professional research analysts and others in making investment decisions.
Below is additional information about our non-GAAP financial measures, including reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures, for the three months ended March 31, 2014, and 2013:
29
Net Sales and Average Net Realized Sales Price per Ton
Net sales and average net realized sales price are non-GAAP financial measures. Net sales are calculated as sales less freight costs. Average net realized sales price is calculated as net sales, divided by the number of tons sold in the period. We consider net sales and average net realized sales price to be useful because they remove the effect of transportation and delivery costs on sales and pricing. When we arrange transportation and delivery for a customer, we include in revenue and in freight costs the costs associated with transportation and delivery. However, many of our customers arrange for and pay their own transportation and delivery costs, in which case these costs are not included in our revenue and freight costs. We use net sales and average net realized sales price as key performance indicators to analyze sales and price trends. We also use net sales as one of the measures under our performance-based compensation programs for employees.
Three Months Ended March 31, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Sales | $ | 84,497 | $ | 14,378 | $ | 98,875 | $ | 82,778 | $ | 16,479 | $ | 99,257 | ||||||||||||
Freight costs | 7,661 | 2,271 | 9,932 | 5,466 | 2,631 | 8,097 | ||||||||||||||||||
Net sales | $ | 76,836 | $ | 12,107 | $ | 88,943 | $ | 77,312 | $ | 13,848 | $ | 91,160 | ||||||||||||
Divided by: | ||||||||||||||||||||||||
Tons sold (in thousands) | 242 | 36 | 185 | 39 | ||||||||||||||||||||
Average net realized sales price per ton | $ | 317 | $ | 340 | $ | 417 | $ | 351 | ||||||||||||||||
Cash Operating Costs per Ton
Cash operating costs is a non-GAAP financial measure that is calculated as total of cost of goods sold divided by the number of tons sold in the period and then adjusted to exclude per-ton depreciation, depletion, and royalties. Total cost of goods sold is reported net of by-product credits and does not include warehouse and handling costs. We consider cash operating costs to be useful because it represents our core, per-ton costs to produce potash and Trio®. We use cash operating costs as an indicator of performance and operating efficiencies and as one of the measures under our performance-based compensation programs for employees.
Three Months Ended March 31, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Potash | Trio® | Total | Potash | Trio® | Total | |||||||||||||||||||
Cost of goods sold | $ | 67,859 | $ | 10,714 | $ | 78,573 | $ | 43,823 | $ | 9,950 | $ | 53,773 | ||||||||||||
Divided by sales volume (in thousands of tons) | 242 | 36 | 185 | 39 | ||||||||||||||||||||
Cost of goods sold per ton | $ | 280 | $ | 301 | $ | 236 | $ | 252 | ||||||||||||||||
Less per-ton adjustments | ||||||||||||||||||||||||
Depreciation and depletion | $ | 64 | $ | 68 | $ | 46 | $ | 54 | ||||||||||||||||
Royalties | 11 | 17 | 16 | 18 | ||||||||||||||||||||
Cash operating costs per ton | $ | 205 | $ | 216 | $ | 174 | $ | 180 | ||||||||||||||||
Average Potash and Trio® Gross Margin per Ton
Average potash and Trio® gross margin are non-GAAP financial measures and are calculated by subtracting the sum of total cost of goods sold and warehousing and handling costs from the average net realized sales price. We believe the average gross margin for both potash and Trio® to be useful as they represent the average amount of margin we realize on each ton of potash and Trio® sold. The reconciliations of average potash and Trio® net realized sales price to GAAP sales are set forth separately above under the heading "Net Sales and Average Net Realized Sales Price per Ton."
30
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Potash | ||||||||
Average potash net realized sales price | $ | 317 | $ | 417 | ||||
Less total potash cost of goods sold | 280 | 236 | ||||||
Less potash warehousing and handling costs | 10 | 16 | ||||||
Average potash gross margin per ton | $ | 27 | $ | 165 | ||||
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Trio® | ||||||||
Average Trio® net realized sales price | $ | 340 | $ | 351 | ||||
Less total Trio® cost of goods sold | 301 | 252 | ||||||
Less Trio® warehousing and handling costs | 10 | 14 | ||||||
Average Trio® gross margin per ton | $ | 29 | $ | 85 | ||||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Part II, Item 7A., "Quantitative and Qualitative Disclosure About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2013, describes our exposure to market risk. There have been no significant changes to our market risk exposure since December 31, 2013.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to our management, including our Executive Chairman of the Board and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their
31
evaluation as of March 31, 2014, our Executive Chairman of the Board and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Our management, including our Executive Chairman of the Board and Chief Financial Officer, conducted an evaluation of our “internal control over financial reporting,” as defined in Rule 13a-15(f) of the Exchange Act to determine whether any changes in our internal control over financial reporting occurred during the three months ended March 31, 2014, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Executive Chairman of the Board and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Intrepid have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II-OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
We are subject to claims and legal actions in the ordinary course of business. While there are uncertainties in predicting the outcome of any claim or legal action, we believe that the ultimate resolution of these claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. We maintain liability insurance that will apply to some claims and actions and believe that our coverage is reasonable in view of the insurable legal risks to which our business ordinarily is subject.
ITEM 1A. | RISK FACTORS |
Our future performance is subject to a variety of risks and uncertainties that could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common stock. These risks and uncertainties are described in Part I, "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to these risks and uncertainties.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
32
Period | (a) Total Number of Shares Purchased (1) | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs | ||||
January 1, 2014, through January 31, 2014 | — | — | — | N/A | ||||
February 1, 2014, through February 28, 2014 | 42,311 | $14.45 | — | N/A | ||||
March 1, 2014, through March 31, 2014 | — | — | — | N/A | ||||
(1) | Represents shares of common stock delivered to us as payment of withholding taxes due upon the vesting of restricted stock held by our employees. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4.MINE SAFETY DISCLOSURES
We are committed to providing a safe and healthy work environment. The objectives of our safety programs are to eliminate workplace accidents and incidents, to preserve employee health, and to comply with safety- and health-based regulations. We seek to achieve these objectives by training employees in safe work practices; establishing, following, and improving safety standards; involving employees in safety processes; openly communicating with employees about safety matters; and recording, reporting, and investigating accidents, incidents, and losses to avoid recurrence. As part of our ongoing safety programs, we collaborate with regulators to identify and implement new accident prevention techniques and practices.
Our East, West and North facilities in New Mexico are subject to regulation by the Mine Safety and Health Administration ("MSHA") under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the New Mexico Bureau of Mine Safety. MSHA inspects these facilities on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Exhibit 95.1 to this Quarterly Report on Form 10-Q provides the information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K. Our Utah facilities and our HB Solar Solution mine are subject to regulation by the Occupational Health and Safety Administration and, therefore, are not required to be included in the information provided in Exhibit 95.1.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The list of exhibits in the Exhibit Index to this Quarterly Report on Form 10-Q is incorporated herein by reference.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTREPID POTASH, INC. (Registrant) | ||
Dated: April 30, 2014 | /s/ Robert P. Jornayvaz III | |
Robert P. Jornayvaz III - Executive Chairman of the Board (Principal Executive Officer) | ||
Dated: April 30, 2014 | /s/ David W. Honeyfield | |
David W. Honeyfield - President and Chief Financial Officer (Principal Financial Officer) | ||
Dated: April 30, 2014 | /s/ Brian D. Frantz | |
Brian D. Frantz - Vice President-Finance, Controller, and Chief Accounting Officer (Principal Accounting Officer) | ||
34
EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* | |
32.1 | Certification of Executive Chairman of the Board pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
95.1 | Mine Safety Disclosure Exhibit.* | |
101.INS | XBRL Instance Document.* | |
101.SCH | XBRL Taxonomy Extension Schema.* | |
101.CAL | XBRL Extension Calculation Linkbase.* | |
101.LAB | XBRL Extension Label Linkbase.* | |
101.PRE | XBRL Extension Presentation Linkbase.* | |
101.DEF | XBRL Extension Definition Linkbase.* | |
* | Filed herewith. |
** | Furnished herewith. |
35