Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
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| |
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2019 |
or |
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______ to ______ |
Commission File Number: 001-34025
INTREPID POTASH, INC.
(Exact Name of Registrant as Specified in its Charter)
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| |
Delaware | 26-1501877 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1001 17th Street, Suite 1050, Denver, Colorado | 80202 |
(Address of principal executive offices) | (Zip Code) |
(303) 296-3006
(Registrant’s telephone number, including area code)
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|
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act
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| | | | |
Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | IPI | | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | |
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ |
Smaller reporting company ¨ | Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 31, 2019, the registrant had outstanding 131,970,680 shares of common stock, par value $0.001 per share.
INTREPID POTASH, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
| | | | | | | | |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
ASSETS | | | | |
Cash and cash equivalents | | $ | 13,023 |
| | $ | 33,222 |
|
Accounts receivable: | | | | |
Trade, net | | 31,136 |
| | 25,161 |
|
Other receivables, net | | 1,976 |
| | 597 |
|
Inventory, net | | 85,363 |
| | 82,046 |
|
Prepaid expenses and other current assets | | 5,273 |
| | 4,332 |
|
Total current assets | | 136,771 |
| | 145,358 |
|
| | | | |
Property, plant, equipment, and mineral properties, net | | 381,768 |
| | 346,209 |
|
Long-term parts inventory, net | | 28,476 |
| | 30,031 |
|
Intangible Assets | | 19,184 |
| | 2,311 |
|
Other assets, net | | 7,920 |
| | 1,322 |
|
Total Assets | | $ | 574,119 |
| | $ | 525,231 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Accounts payable: | | | | |
Trade | | $ | 9,969 |
| | $ | 9,107 |
|
Related parties | | 19 |
| | 28 |
|
Income taxes payable | | — |
| | 914 |
|
Accrued liabilities | | 15,077 |
| | 8,717 |
|
Accrued employee compensation and benefits | | 3,744 |
| | 4,124 |
|
Advances on credit facility | | 19,817 |
| | — |
|
Current portion of long-term debt | | 20,000 |
| | — |
|
Other current liabilities | | 16,022 |
| | 11,891 |
|
Total current liabilities | | 84,648 |
| | 34,781 |
|
| | | | |
Long-term debt, net | | 29,725 |
| | 49,642 |
|
Asset retirement obligation | | 24,172 |
| | 23,125 |
|
Operating lease liabilities | | 3,374 |
| | — |
|
Other non-current liabilities | | 420 |
| | 420 |
|
Total Liabilities | | 142,339 |
| | 107,968 |
|
Commitments and Contingencies | |
| |
|
Common stock, $0.001 par value; 400,000,000 shares authorized; | | | | |
129,170,282 and 128,716,595 shares outstanding | | | | |
at September 30, 2019, and December 31, 2018, respectively | | 129 |
| | 129 |
|
Additional paid-in capital | | 652,170 |
| | 649,202 |
|
Retained deficit | | (220,519 | ) | | (232,068 | ) |
Total Stockholders' Equity | | 431,780 |
| | 417,263 |
|
Total Liabilities and Stockholders' Equity | | $ | 574,119 |
| | $ | 525,231 |
|
See accompanying notes to these condensed consolidated financial statements.
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Sales | | $ | 51,160 |
| | $ | 41,410 |
| | $ | 171,226 |
| | $ | 153,906 |
|
Less: | | | | | | | | |
Freight costs | | 8,724 |
| | 6,886 |
| | 30,473 |
| | 27,158 |
|
Warehousing and handling costs | | 2,162 |
| | 2,192 |
| | 6,628 |
| | 7,067 |
|
Cost of goods sold | | 31,863 |
| | 23,372 |
| | 99,375 |
| | 95,454 |
|
Lower of cost or net realizable value inventory adjustments | | 1,462 |
| | — |
| | 1,462 |
| | 781 |
|
Gross Margin | | 6,949 |
| | 8,960 |
| | 33,288 |
| | 23,446 |
|
| | | | | | | | |
Selling and administrative | | 5,548 |
| | 5,121 |
| | 17,710 |
| | 15,281 |
|
Accretion of asset retirement obligation | | 513 |
| | 417 |
| | 1,347 |
| | 1,251 |
|
Care and maintenance expense | | 203 |
| | 119 |
| | 417 |
| | 366 |
|
Other operating expense (income) | | 70 |
| | (934 | ) | | 358 |
| | (65 | ) |
Operating Income | | 615 |
| | 4,237 |
| | 13,456 |
| | 6,613 |
|
| | | | | | | | |
Other Income (Expense) | | | | | | | | |
Interest expense, net | | (849 | ) | | (864 | ) | | (2,258 | ) | | (2,620 | ) |
Interest income | | — |
| | — |
| | — |
| | 99 |
|
Other income | | 9 |
| | 23 |
| | 343 |
| | 103 |
|
(Loss) Income Before Income Taxes | | (225 | ) | | 3,396 |
| | 11,541 |
| | 4,195 |
|
| | | | | | | | |
Income Tax Benefit (Expense) | | 8 |
| | (46 | ) | | 8 |
| | (46 | ) |
Net (Loss) Income | | $ | (217 | ) | | $ | 3,350 |
| | $ | 11,549 |
| | $ | 4,149 |
|
| | | | | | | | |
Weighted Average Shares Outstanding: | | | | | | | | |
Basic | | 129,170 |
| | 128,233 |
| | 128,934 |
| | 127,921 |
|
Diluted | | 129,170 |
| | 130,894 |
| | 131,056 |
| | 130,983 |
|
Earnings Per Share: | | | | | | | | |
Basic | | $ | — |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.03 |
|
Diluted | | $ | — |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.03 |
|
See accompanying notes to these condensed consolidated financial statements.
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Nine-Month Period Ended September 30, 2019 |
| | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Total Stockholders' Equity |
| | Shares | | Amount |
Balance, December 31, 2018 | | 128,716,595 |
| | $ | 129 |
| | $ | 649,202 |
| | $ | (232,068 | ) | | $ | 417,263 |
|
Net income | | — |
| | — |
| | — |
| | 11,549 |
| | 11,549 |
|
Stock-based compensation | | — |
| | — |
| | 3,237 |
| | — |
| | 3,237 |
|
Vesting of restricted common stock, net of common stock used to fund employee income tax withholding due upon vesting | | 444,500 |
| | — |
| | (278 | ) | | — |
| | (278 | ) |
Exercise of stock options | | 9,187 |
| | — |
| | 9 |
| | — |
| | 9 |
|
Balance, September 30, 2019 | | 129,170,282 |
| | $ | 129 |
| | $ | 652,170 |
| | $ | (220,519 | ) | | $ | 431,780 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Three-Month Period Ended September 30, 2019 |
| | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Total Stockholders' Equity |
| | Shares | | Amount |
Balance, June 30, 2019 | | 129,170,282 |
| | $ | 129 |
| | $ | 651,195 |
| | $ | (220,302 | ) | | $ | 431,022 |
|
Net loss | | — |
| | — |
| | — |
| | (217 | ) | | (217 | ) |
Stock-based compensation | | — |
| | — |
| | 975 |
| | — |
| | 975 |
|
Balance, September 30, 2019 | | 129,170,282 |
| | $ | 129 |
| | $ | 652,170 |
| | $ | (220,519 | ) | | $ | 431,780 |
|
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| | | | | | | | | | | | | | | | | | | |
| | Nine-Month Period Ended September 30, 2018 |
| | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Total Stockholders' Equity |
| | Shares | | Amount |
Balance, December 31, 2017 | | 127,646,530 |
| | $ | 128 |
| | $ | 645,813 |
| | $ | (243,851 | ) | | $ | 402,090 |
|
Net income | | — |
| | — |
| | — |
| | 4,149 |
| | 4,149 |
|
Stock-based compensation | | — |
| | — |
| | 3,593 |
| | — |
| | 3,593 |
|
Vesting of restricted common stock, net of common stock used to fund employee income tax withholding due upon vesting | | 556,158 |
| | — |
| | (371 | ) | | — |
| | (371 | ) |
Exercise of stock options | | 30,254 |
| | — |
| | 47 |
| | — |
| | 47 |
|
Balance, September 30, 2018 | | 128,232,942 |
| | $ | 128 |
| | $ | 649,082 |
| | $ | (239,702 | ) | | $ | 409,508 |
|
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| | | | | | | | | | | | | | | | | | | |
| | Three-Month Period Ended September 30, 2018 |
| | Common Stock | | Additional Paid-in Capital | | Retained (Deficit)Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | |
Balance, June 30, 2018 | | 128,232,942 |
| | $ | 128 |
| | $ | 647,783 |
| | $ | (243,052 | ) | | $ | 404,859 |
|
Net income | | — |
| | — |
| | — |
| | $ | 3,350 |
| | 3,350 |
|
Stock-based compensation | | — |
| | — |
| | 1,299 |
| | — |
| | 1,299 |
|
Balance, September 30, 2018 | | 128,232,942 |
| | $ | 128 |
| | $ | 649,082 |
| | $ | (239,702 | ) | | $ | 409,508 |
|
See accompanying notes to these condensed consolidated financial statements.
INTREPID POTASH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Cash Flows from Operating Activities: | | | | |
Net income | | $ | 11,549 |
| | $ | 4,149 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 25,333 |
| | 23,838 |
|
Accretion of asset retirement obligation | | 1,347 |
| | 1,251 |
|
Amortization of deferred financing costs | | 217 |
| | 550 |
|
Stock-based compensation | | 3,237 |
| | 3,593 |
|
Lower of cost or net realizable value inventory adjustments | | 1,462 |
| | 781 |
|
Gain on disposal of assets | | (17 | ) | | (84 | ) |
Allowance for doubtful accounts | | 50 |
| | 100 |
|
Allowance for parts inventory obsolescence | | 4 |
| | 15 |
|
Changes in operating assets and liabilities: | | | | |
Trade accounts receivable, net | | (6,026 | ) | | (612 | ) |
Other receivables, net | | (1,379 | ) | | (3,039 | ) |
Refundable income taxes | | — |
| | 2,663 |
|
Inventory, net | | (3,227 | ) | | 5,631 |
|
Prepaid expenses and other current assets | | (787 | ) | | 649 |
|
Accounts payable, accrued liabilities, and accrued employee compensation and benefits | | 5,821 |
| | 3,076 |
|
Income tax payable | | (914 | ) | | 210 |
|
Operating lease liabilities | | (1,474 | ) | | — |
|
Other liabilities | | 2,421 |
| | 10,174 |
|
Net cash provided by operating activities | | 37,617 |
| | 52,945 |
|
| | | | |
Cash Flows from Investing Activities: | | | | |
Additions to property, plant, equipment, mineral properties and other assets | | (59,948 | ) | | (12,668 | ) |
Additions to intangible assets | | (16,873 | ) | | — |
|
Proceeds from sale of property, plant, equipment, and mineral properties | | 68 |
| | 92 |
|
Net cash used in investing activities | | (76,753 | ) | | (12,576 | ) |
| | | | |
Cash Flows from Financing Activities: | | | | |
Proceeds from short-term borrowings on credit facility | | 30,317 |
| | 13,500 |
|
Repayments of short-term borrowings on credit facility | | (10,500 | ) | | (17,400 | ) |
Capitalized debt costs | | (457 | ) | | — |
|
Employee tax withholding paid for restricted stock upon vesting | | (278 | ) | | (371 | ) |
Proceeds from exercise of stock options | | 9 |
| | 47 |
|
Net cash provided by (used in) financing activities | | 19,091 |
| | (4,224 | ) |
| | | | |
Net Change in Cash, Cash Equivalents and Restricted Cash | | (20,045 | ) | | 36,145 |
|
Cash, Cash Equivalents and Restricted Cash, beginning of period | | 33,704 |
| | 1,549 |
|
Cash, Cash Equivalents and Restricted Cash, end of period | | $ | 13,659 |
| | $ | 37,694 |
|
| | | | |
Supplemental disclosure of cash flow information | | | | |
Net cash paid (refunded) during the period for: | | | | |
Interest | | $ | 1,458 |
| | $ | 1,629 |
|
Income taxes | | $ | 968 |
| | $ | (2,828 | ) |
Accrued purchases for property, plant, equipment, and mineral properties | | $ | 1,749 |
| | $ | 915 |
|
Right-of-use assets exchanged for operating lease liabilities | | $ | 6,558 |
| | $ | — |
|
See accompanying notes to these condensed consolidated financial statements.
INTREPID POTASH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1 | — COMPANY BACKGROUND |
We are a diversified mineral company that delivers potassium, magnesium, sulfur, salt, and water products essential for customer success in agriculture, animal feed, and the oil and gas industry. We are the only U.S. producer of muriate of potash (sometimes referred to as potassium chloride, KCl, or potash), which is applied as an essential nutrient for healthy crop development, utilized in several industrial applications, and used as an ingredient in animal feed. In addition, we produce a specialty fertilizer, Trio®, which delivers three key nutrients, potassium, magnesium, and sulfate, in a single particle. We also provide water, magnesium chloride, brine, and various oilfield products and services.
Our extraction and production operations are conducted entirely in the continental United States. We produce potash from three solution mining facilities: our HB solution mine in Carlsbad, New Mexico, our solution mine in Moab, Utah, and our brine recovery mine in Wendover, Utah. We also operate the North compaction facility in Carlsbad, New Mexico, which compacts and granulates product from the HB mine. We produce Trio® from our conventional underground East mine in Carlsbad, New Mexico.
We have water rights in New Mexico under which we sell water primarily to support oil and gas development in the Permian Basin near our Carlsbad facilities. We continue to work to expand our sales of water. In May 2019, we acquired certain land, water rights, and other related assets from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South."
We have three segments: potash, Trio®, and oilfield solutions. We account for sales of byproducts as revenue in the potash or Trio® segment based on which segment generates the byproduct. Intersegment sales prices are market based and are eliminated.
"Intrepid," "our," "we," or "us," means Intrepid Potash, Inc. and its consolidated subsidiaries.
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Note 2 | — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Financial Statement Presentation—Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. 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. These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
We have indefinite-lived intangible assets, which are not amortized. We test indefinite-lived intangible assets for impairment at least annually on October 1, and more frequently if circumstances require. We recognize an impairment loss whenever the indefinite-lived intangible assets' fair value is less than their carrying value.
We have updated our accounting policies for leases as a result of adopting Accounting Standards Update ("ASU") No. 2016-02, Leases, as discussed in more detail below.
We have made no other changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases, ("ASC Topic 842"), which we adopted on January 1, 2019, using a modified retrospective method, applying the new standard to all leases existing at the date of initial application. We used the effective date as our date of initial application. Consequently, financial information will not be updated, and disclosures required under the new standard will not be provided for dates before January 1, 2019.
The new standard requires lessees to recognize lease assets and liabilities on their balance sheet for those leases classified as operating leases under previous GAAP. These assets and liabilities are recorded generally at the present value of
the contracted lease payments, using the rate implicit in the lease if known. If the implicit rate is not known, we use our estimated incremental borrowing rate.
We do not account for lease and non-lease components separately and we do not apply the requirements of ASC Topic 842 to short-term leases with a term of one year or less at inception. Lease expense is recognized on a straight-line basis over the lease term.
As a result of adopting the new standard, we recorded operating lease right-of-use ("ROU") assets of $5.9 million and operating lease liabilities of $6.1 million on January 1, 2019.
Pronouncements Issued But Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This guidance is effective for us for annual and interim periods beginning after December 15, 2019. Because we have historically experienced minimal bad debt expense related to our trade receivables, we do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.
Reclassifications of Prior Period Presentation—Certain prior period amounts have been reclassified in order to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
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Note 3 | — EARNINGS PER SHARE |
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. For purposes of determining diluted earnings per share, basic weighted-average common shares outstanding is adjusted to include potentially dilutive securities, including restricted stock, stock options, and performance units. The treasury-stock method is used to measure the dilutive impact of potentially dilutive shares. Potentially dilutive shares are excluded from the diluted weighted-average shares outstanding computation in periods in which they have an anti-dilutive effect. The following table shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) income | | $ | (217 | ) | | $ | 3,350 |
| | $ | 11,549 |
| | $ | 4,149 |
|
| | | | | | | | |
Basic weighted-average common shares outstanding | | 129,170 |
| | 128,233 |
| | 128,934 |
| | 127,921 |
|
Add: Dilutive effect of restricted stock | | — |
| | 1,741 |
| | 1,296 |
| | 2,098 |
|
Add: Dilutive effect of stock options | | — |
| | 920 |
| | 826 |
| | 964 |
|
Diluted weighted-average common shares outstanding | | 129,170 |
| | 130,894 |
| | 131,056 |
| | 130,983 |
|
| | | | | | | | |
| | | | | | | | |
Basic | | $ | 0.00 |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.03 |
|
Diluted | | $ | 0.00 |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.03 |
|
The following table shows the shares that have an anti-dilutive effect and are excluded from the diluted weighted-average shares outstanding computations (in thousands):
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Anti-dilutive effect of restricted stock | | 2,252 |
| | 278 |
| | 414 |
| | 139 |
|
| | | | | | | | |
Anti-dilutive effect of stock options outstanding | | 3,219 |
| | 1,748 |
| | 1,655 |
| | 1,354 |
|
Note 4— CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Total cash, cash equivalents and restricted cash, as shown on the condensed consolidated statements of cash flows are included in the following accounts at September 30, 2019, and 2018 (in thousands):
|
| | | | | | | | |
| | September 30, 2019 | | September 30, 2018 |
Cash and cash equivalents | | $ | 13,023 |
| | $ | 37,214 |
|
Restricted cash included in other current assets | | 150 |
| | — |
|
Restricted cash included in other long-term assets | | 486 |
| | 480 |
|
Total cash, cash equivalents, and restricted cash as shown in the statement of cash flows | | $ | 13,659 |
| | $ | 37,694 |
|
Restricted cash included in other current and long-term assets on the condensed consolidated balance sheets represents amounts whose use is restricted by contractual agreements with various entities, principally the Bureau of Land Management or the State of Utah, as security to fund future reclamation obligations at our sites.
Note 5— INVENTORY AND LONG-TERM PARTS INVENTORY
The following summarizes our inventory, recorded at the lower of weighted-average cost or estimated net realizable value, as of September 30, 2019, and December 31, 2018 (in thousands): |
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Finished goods product inventory | | $ | 42,533 |
| | $ | 48,370 |
|
In-process mineral inventory | | 30,766 |
| | 24,325 |
|
Total product inventory | | 73,299 |
| | 72,695 |
|
Current parts inventory, net | | 12,064 |
| | 9,351 |
|
Total current inventory, net | | 85,363 |
| | 82,046 |
|
Long-term parts inventory, net | | 28,476 |
| | 30,031 |
|
Total inventory, net | | $ | 113,839 |
| | $ | 112,077 |
|
Parts inventory is shown net of estimated allowances for obsolescence of $0.6 million and $1.7 million as of September 30, 2019, and December 31, 2018, respectively.
As a result of routine assessments of the lower of weighted-average cost or estimated net realizable value of our finished goods product inventory, we recorded charges of $0.0 million and $0.8 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2019, we recorded $1.5 million of such charges.
| |
Note 6 | — PROPERTY, PLANT, EQUIPMENT, AND MINERAL PROPERTIES |
Property, plant, equipment, and mineral properties were comprised of the following (in thousands): |
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Land | | $ | 27,274 |
| | $ | 519 |
|
Ponds and land improvements | | 64,259 |
| | 58,961 |
|
Mineral properties and development costs | | 145,057 |
| | 139,418 |
|
Buildings and plant | | 82,056 |
| | 81,429 |
|
Machinery and equipment | | 248,981 |
| | 241,977 |
|
Vehicles | | 6,131 |
| | 5,669 |
|
Office equipment and improvements | | 8,738 |
| | 13,779 |
|
Operating lease ROU assets | | 6,558 |
| | — |
|
Construction in progress | | 8,896 |
| | 2,822 |
|
Total property, plant, equipment, and mineral properties, gross | | $ | 597,950 |
| | $ | 544,574 |
|
Less: accumulated depreciation, depletion, and amortization | | (216,182 | ) | | (198,365 | ) |
Total property, plant, equipment, and mineral properties, net | | $ | 381,768 |
| | $ | 346,209 |
|
We incurred the following expenses for depreciation, depletion, and amortization, including expenses capitalized into inventory, for the following periods (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Depreciation | | $ | 7,128 |
| | $ | 7,021 |
| | $ | 20,881 |
| | $ | 20,919 |
|
Depletion | | 705 |
| | 742 |
| | 2,812 |
| | 2,919 |
|
Amortization of right of use assets | | 681 |
| | — |
| | 1,640 |
| | — |
|
Total incurred | | $ | 8,514 |
| | $ | 7,763 |
| | $ | 25,333 |
| | $ | 23,838 |
|
When we enter into a new arrangement, we determine if it is or contains a lease. We have operating leases for mining equipment, trucks, rail cars, and office space. Our operating leases have remaining leases terms ranging from less than one year to five years. Leases recorded on the balance sheet consist of the following (amounts in thousands):
|
| | | | | | |
Leases | | Classification on the Balance Sheet | | Balance as of September 30, 2019 |
Assets | | | | |
Operating lease ROU assets, net | | Property, plant, equipment, and mineral properties, net | | $ | 5,105 |
|
| | | | |
Liabilities | | | | |
Current operating lease liabilities | | Other current liabilities | | $ | 1,889 |
|
Non-current operating lease liabilities | | Operating lease liabilities | | $ | 3,374 |
|
Other information related to lease term and discount rate is as follows:
|
| | | |
| | As of September 30, 2019 |
Weighted average remaining lease term - operating leases (in years) | | 2.8 |
|
| | |
Weighted average discount rate - operating leases | | 5.75 | % |
The components of lease expense are as follows:
|
| | | | | | | | |
| | For the Three Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2019 |
The components of lease expense were as follows: | | | | |
Operating lease expense | | $ | 574 |
| | $ | 1,702 |
|
Short-term lease expense | | 29 |
| | 80 |
|
Total lease expense | | $ | 603 |
| | $ | 1,782 |
|
Rental and lease expenses for the three and nine months ended September 30, 2018, were $1.0 million and $2.9 million, respectively.
As of September 30, 2019, maturities of lease liabilities are summarized as follows (amounts in thousands):
|
| | | | |
Years Ending December 31, | | Operating Leases |
2019 (excluding the nine months ended September 30, 2019) | | $ | 575 |
|
2020 | | 2,058 |
|
2021 | | 1,761 |
|
2022 | | 1,135 |
|
2023 | | 169 |
|
Thereafter | | 32 |
|
Total future minimum lease payments | | $ | 5,730 |
|
Less - amount representing interest | | 467 |
|
Present value of future minimum lease payments | | $ | 5,263 |
|
Less - current lease obligations | | 1,889 |
|
Long-term lease obligations | | $ | 3,374 |
|
As of December 31, 2018, and prior to the adoption of ASC Topic 842, the annual future minimum lease payments were as follows:
|
| | | | |
Years Ending December 31, | | Operating Leases |
2019 | | $ | 2,266 |
|
2020 | | 1,874 |
|
2021 | | 1,602 |
|
2022 | | 1,083 |
|
2023 | | 172 |
|
Thereafter | | 1,343 |
|
Total | | $ | 8,340 |
|
Senior Notes—As of September 30, 2019, we had outstanding $50 million of senior notes (the "Notes") consisting of the following series:
| |
• | $20 million of Senior Notes, Series A, due April 16, 2020 |
| |
• | $15 million of Senior Notes, Series B, due April 14, 2023 |
| |
• | $15 million of Senior Notes, Series C, due April 16, 2025 |
The agreement governing the Notes contains certain financial covenants, including the following:
| |
• | We are required to maintain a minimum fixed charge coverage ratio of 1.3 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our fixed charge coverage ratio as of September 30, 2019, was 12.6 to 1.0, therefore we were in compliance with this covenant. |
| |
• | We are allowed a maximum leverage ratio of 3.5 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our leverage ratio as of September 30, 2019, was 1.2 to 1.0, therefore we were in compliance with this covenant. |
Fixed charge coverage ratio and leverage ratio are calculated in accordance with the agreement governing the Notes.
For all of the three- and nine-month periods ended September 30, 2019, and 2018, the interest rates on the Notes were 3.73% for the Series A Notes, 4.63% for the Series B Notes and 4.78% for the Series C Notes. These rates represent the lowest interest rates available under the Notes. The interest rates may adjust upward if we do not continue to meet certain financial covenants.
We have granted to the collateral agent for the noteholders a first lien on substantially all of our non-current assets and a second lien on substantially all of our current assets. We are required to offer to prepay the Notes with the proceeds of dispositions of certain specified property and with the proceeds of certain equity issuances, as set forth in the agreement governing the Notes. The obligations under the Notes are unconditionally guaranteed by several of our subsidiaries.
We were in compliance with the applicable covenants under the agreement governing the Notes as of September 30, 2019.
Our outstanding long-term debt, net, as of September 30, 2019, and December 31, 2018, was as follows (in thousands):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Notes | $ | 50,000 |
| | $ | 50,000 |
|
Less current portion of long-term debt | (20,000 | ) | | — |
|
Less deferred financing costs | (275 | ) | | (358 | ) |
Long-term debt, net | $ | 29,725 |
| | $ | 49,642 |
|
Credit Facility—We maintain a secured revolving credit facility with Bank of Montreal. In August 2019, we amended and restated the credit facility to change it from an asset-backed facility to a cash-flow facility, to increase the amount available under the facility from $50 million to $75 million plus an additional $75 million accordion, and to extend the maturity date to August 1, 2024. The revolving credit facility also provides for a $7.5 million sublimit for the issuance of letters of credit. As of September 30, 2019, borrowings under the credit facility bore interest at LIBOR (London Interbank Offered Rate) plus an applicable margin of 1.25% to 2.00% per annum, based on our leverage ratio. We have granted to Bank of Montreal a first lien on substantially all of our current assets and a second lien on substantially all of our non-current assets. The obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
We occasionally borrow and repay amounts under the facility for near-term working capital needs or other purposes and may do so in the future. During the nine months ended September 30, 2019, we borrowed $30.3 million and repaid $10.5 million under the facility. As of September 30, 2019, we had $19.8 million of borrowings outstanding and $1.0 million in outstanding letters of credit under the facility. Including the outstanding letters of credit, we had $54.2 million available to be borrowed under the facility as of September 30, 2019. We were in compliance with the applicable covenants under the facility as of September 30, 2019.
During the three months ended September 30, 2018, we had no borrowings or repayments under the facility. During the nine months ended September 30, 2018, we borrowed $13.5 million and repaid $17.4 million under the facility.
Interest Expense—Interest expense is recorded net of any capitalized interest associated with investments in capital projects. We incurred gross interest expense of $0.9 million for both the three months ended September 30, 2019, and 2018, and $2.4 million and $2.7 million for the nine months ended September 30, 2019, and 2018, respectively.
Amounts included in interest expense, net for the three and nine months ended September 30, 2019, and 2018, were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Interest on Notes and credit facility | | $ | 804 |
| | $ | 704 |
| | $ | 2,143 |
| | $ | 2,155 |
|
Amortization of deferred financing costs | | 80 |
| | 183 |
| | 217 |
| | 550 |
|
Gross interest expense | | 884 |
| | 887 |
| | 2,360 |
| | 2,705 |
|
Less capitalized interest | | (35 | ) | | (23 | ) | | (102 | ) | | (85 | ) |
Interest expense, net | | $ | 849 |
| | $ | 864 |
| | $ | 2,258 |
| | $ | 2,620 |
|
| |
Note 9 | — INTANGIBLE ASSETS |
Our intangible assets, consisting of water rights, are recorded at their fair market values at the date of acquisition. Our water rights have indefinite lives and are not amortized. We evaluate our water rights at least annually on October 1 for impairment, or more frequently if circumstances require.
As of September 30, 2019, we had water rights valued at $19.2 million. In May 2019, we acquired $16.9 million of water rights in the Intrepid South asset acquisition. We valued the water rights acquired by allocating the total purchase price of the Intrepid South assets by the relative estimated fair values of all Intrepid South assets acquired.
| |
Note 10 | — FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS OF POSSIBLE FUTURE |
PUBLIC DEBT
Intrepid Potash, Inc., as the parent company, has no independent assets or operations, and operations are conducted solely through its subsidiaries. Cash generated from operations is held at the parent-company level as cash on hand and totaled $13.0 million and $33.2 million at September 30, 2019, and December 31, 2018, respectively. If one or more of our wholly-owned operating subsidiaries guarantee public debt securities in the future, those guarantees will be full and unconditional and will constitute the joint and several obligations of the subsidiary guarantors. Our other subsidiaries are minor. There are no restrictions on our ability to obtain cash dividends or other distributions of funds from the subsidiary guarantors, except those imposed by applicable law.
| |
Note 11 | — ASSET RETIREMENT OBLIGATION |
We recognize an estimated liability for future costs associated with the abandonment and reclamation of our mining properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded as the mining operations occur or the assets are acquired.
Our asset retirement obligation is based on the estimated cost to abandon and reclaim the mining operations, the economic life of the properties, and federal and state regulatory requirements. The liability is discounted using credit adjusted risk-free rate estimates at the time the liability is incurred or when there are upward revisions to estimated costs. The credit adjusted risk-free rates used to discount our abandonment liabilities range from 6.9% to 9.7%. Revisions to the liability occur due to construction of new or expanded facilities, changes in estimated abandonment costs or economic lives, or if federal or state regulators enact new requirements regarding the abandonment or reclamation of mines.
Following is a table of the changes to our asset retirement obligation for the following periods (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Asset retirement obligation, at beginning of period | | $ | 23,959 |
| | $ | 22,310 |
| | $ | 23,125 |
| | $ | 21,476 |
|
Accretion of discount | | 513 |
| | 417 |
| | 1,347 |
| | 1,251 |
|
Total asset retirement obligation, at end of period | | $ | 24,472 |
| | $ | 22,727 |
| | $ | 24,472 |
| | $ | 22,727 |
|
The current portion of the asset retirement obligation of $0.3 million is included in "Accrued liabilities" on the condensed consolidated balance sheet as of September 30, 2019. The undiscounted amount of asset retirement obligation was $59.5 million as of September 30, 2019.
Revenue Recognition—We account for revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services.
Contract Balances: The timing of revenue recognition, billings, and cash collection may result in contract assets or contract liabilities. For certain contracts, the customer has agreed to pay us before we have satisfied our performance obligations. Customer payments received before we have satisfied our performance obligations are accounted for as a contract liability, and are included in "Other current liabilities" on the condensed consolidated balance sheets. Our contract liability activity for the three and nine months ended September 30, 2019, and 2018, is shown below (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Beginning balance | | $ | 10,643 |
| | $ | 7,278 |
| | $ | 11,678 |
| | $ | — |
|
Additions | | 3,816 |
| | 6,156 |
| | 7,343 |
| | 13,915 |
|
Recognized as revenue during period | | (1,054 | ) | | (3,597 | ) | | (5,616 | ) | | (4,078 | ) |
Ending balance | | $ | 13,405 |
| | $ | 9,837 |
| | $ | 13,405 |
| | $ | 9,837 |
|
Disaggregation of Revenue: The tables below show the disaggregation of revenue by product and reconciles disaggregated revenue to segment revenue for the three and nine months ended September 30, 2019, and 2018. We believe the
disaggregation of revenue by products best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic conditions (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
Product | | Potash Segment | | Trio® Segment | | Oilfield Solutions Segment | | Intersegment Eliminations | | Total |
Potash | | $ | 24,242 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24,242 |
|
Trio® | | — |
| | 13,370 |
| | — |
| | — |
| | 13,370 |
|
Water | | 574 |
| | 1,211 |
| | 5,488 |
| | — |
| | 7,273 |
|
Salt | | 2,736 |
| | 56 |
| | — |
| | — |
| | 2,792 |
|
Magnesium Chloride | | 949 |
| | — |
| | — |
| | — |
| | 949 |
|
Brines | | 712 |
| | — |
| | — |
| | — |
| | 712 |
|
Other | | — |
| | — |
| | 1,822 |
| | — |
| | 1,822 |
|
Total Revenue | | $ | 29,213 |
| | $ | 14,637 |
| | $ | 7,310 |
| | $ | — |
| | $ | 51,160 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
Product | | Potash Segment | | Trio® Segment | | Oilfield Solutions Segment | | Intersegment Eliminations | | Total |
Potash | | $ | 84,807 |
| | $ | — |
| | $ | 2,040 |
| | $ | (1,319 | ) | | $ | 85,528 |
|
Trio® | | — |
| | 50,283 |
| | — |
| | — |
| | 50,283 |
|
Water | | 1,371 |
| | 3,090 |
| | 13,864 |
| | — |
| | 18,325 |
|
Salt | | 8,105 |
| | 508 |
| | — |
| | — |
| | 8,613 |
|
Magnesium Chloride | | 2,895 |
| | — |
| | — |
| | — |
| | 2,895 |
|
Brines | | 1,912 |
| | — |
| | — |
| | — |
| | 1,912 |
|
Other | | — |
| | — |
| | 3,670 |
| | — |
| | 3,670 |
|
Total Revenue | | $ | 99,090 |
| | $ | 53,881 |
| | $ | 19,574 |
| | $ | (1,319 | ) | | $ | 171,226 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
Product | | Potash Segment | | Trio® Segment | | Oilfield Solutions Segment | | Intersegment Eliminations | | Total |
Potash | | $ | 22,170 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22,170 |
|
Trio® | | — |
| | 10,320 |
| | — |
| | — |
| | 10,320 |
|
Water | | 431 |
| | 494 |
| | 3,803 |
| | — |
| | 4,728 |
|
Salt | | 1,364 |
| | 45 |
| | — |
| | — |
| | 1,409 |
|
Magnesium Chloride | | 2,029 |
| | — |
| | — |
| | — |
| | 2,029 |
|
Brines | | 519 |
| | — |
| | — |
| | — |
| | 519 |
|
Other | | — |
| | — |
| | 235 |
| | — |
| | 235 |
|
Total Revenue | | $ | 26,513 |
| | $ | 10,859 |
| | $ | 4,038 |
| | $ | — |
| | $ | 41,410 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
Product | | Potash Segment | | Trio® Segment | | Oilfield Solutions Segment | | Intersegment Eliminations | | Total |
Potash | | $ | 77,422 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77,422 |
|
Trio® | | — |
| | 50,397 |
| | — |
| | — |
| | 50,397 |
|
Water | | 951 |
| | 1,272 |
| | 12,528 |
| | — |
| | 14,751 |
|
Salt | | 4,929 |
| | 145 |
| | — |
| | — |
| | 5,074 |
|
Magnesium Chloride | | 4,680 |
| | — |
| | — |
| | — |
| | 4,680 |
|
Brines | | 1,192 |
| | — |
| | — |
| | — |
| | 1,192 |
|
Other | | — |
| | — |
| | 390 |
| | — |
| | 390 |
|
Total Revenue | | $ | 89,174 |
| | $ | 51,814 |
| | $ | 12,918 |
| | $ | — |
| | $ | 153,906 |
|
| |
Note 13 | — COMPENSATION PLANS |
Equity Incentive Compensation Plan—Our Board of Directors and stockholders adopted a long-term incentive compensation plan called the Intrepid Potash, Inc. Amended and Restated Equity Incentive Plan (the "Plan"). The Plan was most recently amended and restated in May 2019. We have issued common stock, restricted stock, performance units, and non-qualified stock option awards under the Plan. At September 30, 2019, approximately 8.8 million shares remained available for issuance under the Plan.
For the three months ended September 30, 2019, we granted 17,386 shares of restricted stock under the Plan. These awards vest over one to two years from the date of the grant and, in some cases, contain performance-vesting conditions.
As of September 30, 2019, the following awards were outstanding under the Plan:
|
| | | |
| | |
| | Outstanding as of September 30, 2019 |
Restricted Shares | | 2,800,398 |
|
| | |
Non-qualified Stock Options | | 3,218,670 |
|
Total share-based compensation expense was $1.0 million and $1.3 million for the three months ended September 30, 2019, and 2018, respectively. Total share-based compensation expense was $3.2 million and $3.6 million for the nine months ended September 30, 2019, and 2018, respectively. As of September 30, 2019, we had $6.4 million of total remaining unrecognized compensation expense related to awards, that will be expensed through 2021.
Our anticipated annual tax rate is impacted primarily by the amount of taxable income associated with each jurisdiction in which our income is subject to income tax, permanent differences between the financial statement carrying amounts and tax bases of assets and liabilities.
During the three and nine months ended September 30, 2019, we recognized an immaterial amount of income tax benefit. For the three and nine months ended September 30, 2018, we incurred an immaterial amount of income tax expense. Our effective tax rate for both the three and nine months ended September 30, 2018, was 2%, and 1%, respectively. Our effective tax rates differed from the statutory rate during each period primarily due to changes in the valuation allowance established to offset our deferred tax assets.
| |
Note 15 | — COMMITMENTS AND CONTINGENCIES |
Reclamation Deposits and Surety Bonds—As of September 30, 2019, and December 31, 2018, we had $19.1 million of security placed principally with the State of Utah and the Bureau of Land Management for eventual reclamation of our various facilities. Of this total requirement, $0.5 million consisted of long-term restricted cash deposits reflected in "Other assets, net" on the condensed consolidated balance sheets and $18.6 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 and a letter of credit.
We may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as governmental entities change requirements.
Legal—In February 2015, Mosaic Potash Carlsbad Inc. ("Mosaic") filed a complaint and application for preliminary injunction and permanent injunction against Steve Gamble and us in the Fifth Judicial District Court for the County of Eddy in the State of New Mexico. Mr. Gamble is a former employee of Intrepid and Mosaic. In August 2015, the court denied Mosaic’s application for preliminary injunction. In July 2016, Mosaic filed a second complaint against Mr. Gamble and us in U.S. District Court for the District of New Mexico. In January 2018, the two lawsuits were consolidated into one lawsuit pending in the U.S. District Court for the District of New Mexico. Mosaic alleges against us violations of the New Mexico Uniform Trade Secrets Act, tortious interference with contract relating to Mr. Gamble’s separation of employment from Mosaic, violations of the Computer Fraud and Abuse Act, conversion, and civil conspiracy relating to the alleged misappropriation of Mosaic’s confidential information and related actions. Mosaic seeks $23 million to $28 million in compensatory damages, $28 million to $37 million in exemplary damages, and attorneys' fees, punitive damages, injunctive relief, and future royalty damages in unspecified amounts. Discovery is complete. In September 2019, the court set trial dates of April 27 through May 8, 2020. We believe that we have defenses against the claims asserted, and we are vigorously defending against the lawsuit. We have not recorded a loss contingency in our condensed consolidated statements of operations related to this legal matter.
In February 2019, Pecos Valley Artesian Conservancy District, Carlsbad Irrigation District, and Otis Mutual Domestic Water Consumers & Sewage Works Association (together, the "Protestants") filed an expedited inter se proceeding against us, Henry McDonald, Select Energy Services, LLC d/b/a Gregory Rockhouse Ranch, and Vision Resources, Inc. in the Fifth Judicial District Court for the County of Chaves in the State of New Mexico. This court serves as the adjudication court for the Pecos Stream System, which includes the Pecos River. The Protestants challenge the validity of our Pecos River water rights, representing approximately 20,000 acre feet per year. In August 2019, the parties stipulated to the jurisdiction of the adjudication court. To promote settlement, the adjudication court established a settlement schedule and ordered a trial date in August 2020 if the parties have not reached a settlement by that time. We are currently allowed to sell water associated with 5,700 acre feet per year of these water rights under preliminary authorizations issued in 2017 and 2018 by the New Mexico Office of the State Engineer ("OSE"). The preliminary authorizations allowed for water sales to begin immediately, subject to repayment if the underlying water rights are ultimately found to be invalid. Separate from the adjudication proceeding, the Protestants have protested these preliminary authorizations before the OSE. Although the OSE is required to hold a hearing relating to the protests, it has temporarily stayed the hearing process until the adjudication process is complete. In the adjudication proceeding, the court is expected to make a determination as to the size of our Pecos River water rights. In addition, the Protestants are asking for unspecified monetary and injunctive relief, as well as attorneys' fees and costs, relating to our sale of water under these water rights and breach of contract claims. We believe that our legal position with respect to the validity of our water rights is solid, and we are vigorously defending against this matter. We have not recorded a loss contingency in our condensed consolidated statements of operations relating to this matter.
We are also subject to other claims and legal actions in the ordinary course of business. Legal costs are expensed as incurred. While there are uncertainties in predicting the outcome of any claim or legal action, we believe that the ultimate resolution of these other claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations, or cash flows.
We measure our financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.
As of September 30, 2019, and December 31, 2018, our cash consisted of bank deposits. Other financial assets and liabilities including accounts receivable, refundable income taxes, accounts payable, accrued liabilities, and advances on our credit facility are carried at cost which approximates fair value because of the short-term nature of these instruments.
As of September 30, 2019, and December 31, 2018, the estimated fair value of our outstanding Notes was $50.1 million and $48.1 million, respectively. The fair value of our Notes is estimated using a discounted cash flow analysis based on current borrowing rates for debt with similar remaining maturities and ratings (a Level 2 input) and is designed to approximate the amount at which the instruments could be exchanged in an arm's-length transaction between knowledgeable willing parties.
| |
Note 17 | — BUSINESS SEGMENTS |
Our operations are organized into three segments: potash, Trio®, and oilfield solutions. The reportable segments are determined by management based on several factors including the types of products and services sold, production processes, markets served, and the financial information available for our chief operating decision maker. We evaluate performance based on the gross margins of the respective business segments and do not allocate corporate selling and administrative expenses, among others, to the respective segments. Intersegment sales prices are market-based and are eliminated in the "Other" column. Information for each segment is provided in the tables that follow (in thousands).
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | | Potash | | Trio® | | Oilfield Solutions | | Other | | Consolidated |
Sales | | $ | 29,213 |
| | $ | 14,637 |
| | $ | 7,310 |
| | $ | — |
| | $ | 51,160 |
|
Less: Freight costs | | 4,728 |
| | 3,996 |
| | — |
| | — |
| | 8,724 |
|
Warehousing and handling costs | | 1,190 |
| | 972 |
| | — |
| | — |
| | 2,162 |
|
Cost of goods sold | | 18,707 |
| | 9,315 |
| | 3,841 |
| | — |
| | 31,863 |
|
Lower of cost or net realizable value inventory adjustments | | — |
| | 1,462 |
| | — |
| | — |
| | 1,462 |
|
Gross Margin (Deficit) | | $ | 4,588 |
| | $ | (1,108 | ) | | $ | 3,469 |
| | $ | — |
| | $ | 6,949 |
|
Depreciation, depletion, and amortization incurred1 | | $ | 6,048 |
| | $ | 1,517 |
| | $ | 747 |
| | $ | 202 |
| | $ | 8,514 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2019 | | Potash | | Trio® | | Oilfield Solutions | | Other | | Consolidated |
Sales | | $ | 99,090 |
| | $ | 53,881 |
| | $ | 19,574 |
| | $ | (1,319 | ) | | $ | 171,226 |
|
Less: Freight costs | | 14,110 |
| | 15,502 |
| | 861 |
| | — |
| | 30,473 |
|
Warehousing and handling costs | | 3,776 |
| | 2,852 |
| | — |
| | — |
| | 6,628 |
|
Cost of goods sold | | 59,024 |
| | 32,988 |
| | 8,682 |
| | (1,319 | ) | | 99,375 |
|
Lower of cost or net realizable value inventory adjustments | | — |
| | 1,462 |
| | — |
| | — |
| | 1,462 |
|
Gross Margin | | $ | 22,180 |
| | $ | 1,077 |
| | $ | 10,031 |
| | $ | — |
| | $ | 33,288 |
|
Depreciation, depletion, and amortization incurred1 | | $ | 18,963 |
| | $ | 4,595 |
| | $ | 1,170 |
| | $ | 605 |
| | $ | 25,333 |
|
| | | | | | | | | | |
Three Months Ended September 30, 2018 | | Potash | | Trio® | | Oilfield Solutions | | Other | | Consolidated |
Sales | | $ | 26,513 |
| | $ | 10,859 |
| | $ | 4,038 |
| | $ | — |
| | $ | 41,410 |
|
Less: Freight costs | | 3,750 |
| | 3,136 |
| | — |
| | — |
| | 6,886 |
|
Warehousing and handling costs | | 1,207 |
| | 984 |
| | 1 |
| | — |
| | 2,192 |
|
Cost of goods sold | | 14,467 |
| | 6,917 |
| | 1,988 |
| | — |
| | 23,372 |
|
Lower of cost or net realizable value inventory adjustments | | — |
| | — |
| | — |
| | — |
| | — |
|
Gross Margin (Deficit) | | $ | 7,089 |
| | $ | (178 | ) | | $ | 2,049 |
| | $ | — |
| | $ | 8,960 |
|
Depreciation, depletion, and amortization incurred1 | | $ | 5,928 |
| | $ | 1,612 |
| | $ | 97 |
| | $ | 126 |
| | $ | 7,763 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2018 | | Potash | | Trio® | | Oilfield Solutions | | Other | | Consolidated |
Sales | | $ | 89,174 |
| | $ | 51,814 |
| | $ | 12,918 |
| | $ | — |
| | $ | 153,906 |
|
Less: Freight costs | | 12,091 |
| | 15,067 |
| | — |
| | — |
| | 27,158 |
|
Warehousing and handling costs | | 3,773 |
| | 3,285 |
| | 9 |
| | — |
| | 7,067 |
|
Cost of goods sold | | 54,973 |
| | 37,168 |
| | 3,313 |
| | — |
| | 95,454 |
|
Lower of cost or net realizable value inventory adjustments | | — |
| | 781 |
| | — |
| | — |
| | 781 |
|
Gross Margin (Deficit) | | $ | 18,337 |
| | $ | (4,487 | ) | | $ | 9,596 |
| | $ | — |
| | $ | 23,446 |
|
Depreciation, depletion and amortization incurred1 | | $ | 18,474 |
| | $ | 4,870 |
| | $ | 239 |
| | $ | 255 |
| | $ | 23,838 |
|
1 Depreciation, depletion, and amortization incurred for potash and Trio® excludes depreciation, depletion and amortization amounts absorbed in or relieved from inventory.
| |
Note 18 | — ACQUISITION OF LAND AND OTHER ASSETS |
In May 2019, we acquired certain land, water rights, and other related assets in Lea County, New Mexico, from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South." The purchase price was $53 million. We are required to pay Dinwiddie Cattle Company an additional $12 million pending the resolution by Dinwiddie Cattle Company or others of certain issues identified in the diligence process. Dinwiddie Cattle Company also reserved a 20-year, 10% royalty, proportionally reduced as to our interest, on certain produced water disposal revenue relating to Intrepid South and certain other properties located near Intrepid South. We capitalized $3.2 million of acquisition fees related to the purchase of the Intrepid South assets.
In May 2019, we acquired a 50% undivided interest in certain land in Texas. The purchase price, including certain acquisition-related fees, was $3.1 million.
| |
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. 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 our products and services; |
| |
• | our ability to successfully identify and implement any opportunities to grow our business whether through expanded sales of water, Trio®, byproducts, and other non-potassium related products or other revenue diversification activities; |
| |
• | challenges to our water rights; |
| |
• | our ability to integrate the Intrepid South assets into our existing business and achieve the expected benefits of the acquisition; |
| |
• | our ability to sell Trio® internationally and manage risks associated with international sales, including pricing pressure and freight costs; |
| |
• | the costs of, and our ability to successfully execute, any strategic projects; |
| |
• | declines or changes in agricultural production or fertilizer application rates; |
| |
• | declines in the use of potassium-related products or water by oil and gas companies in their drilling operations; |
| |
• | our ability to prevail in outstanding legal proceedings against us; |
| |
• | our ability to comply with the terms of our senior notes and our revolving credit facility, including the underlying covenants, to avoid a default under those agreements; |
| |
• | further write-downs of the carrying value of assets, including inventories; |
| |
• | circumstances that disrupt or limit production, including operational difficulties or variances, geological or geotechnical variances, equipment failures, environmental hazards, and other unexpected events or problems; |
| |
• | changes in reserve estimates; |
| |
• | adverse changes in economic conditions or credit markets; |
| |
• | the impact of governmental regulations, including environmental and mining regulations, the enforcement of those regulations, and governmental policy changes; |
| |
• | adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines; |
| |
• | increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise; |
| |
• | changes in the prices of raw materials, including chemicals, natural gas, and power; |
| |
• | our ability to obtain and maintain any necessary governmental permits or leases relating to current or future operations; |
| |
• | interruptions in rail or truck transportation services, or fluctuations in the costs of these services; |
| |
• | our inability to fund necessary capital investments; and |
| |
• | 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, 2018, as updated by our subsequent Quarterly Reports on Form 10-Q. |
In addition, new risks emerge from time to time. It is not possible for our management to predict all risks that may cause actual results to differ materially from those contained in any forward-looking statements we may make.
In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. We undertake no duty to update or revise publicly any forward-looking statements to conform those statements to actual results or to reflect new information or future events.
Throughout this report, we refer to average net realized sales price per ton, which is a non-GAAP financial measure. More information about this measure, including a reconciliation of this measure to the most directly comparable GAAP financial measure, is below under the heading "Non-GAAP Financial Measure."
Company Overview
We are a diversified mineral company that delivers potassium, magnesium, sulfur, salt, and water products essential for customer success in agriculture, animal feed, and the oil and gas industry. We are the only U.S. producer of muriate of potash (sometimes referred to as potassium chloride, KCl, or potash), which is applied as an essential nutrient for healthy crop development, utilized in several industrial applications, and used as an ingredient in animal feed. In addition, we produce a specialty fertilizer, Trio®, which delivers three key nutrients, potassium, magnesium, and sulfate, in a single particle. We also provide water, magnesium chloride, brine, and various oilfield products and services.
Our extraction and production operations are conducted entirely in the continental United States. We produce potash from three solution mining facilities: our HB solution mine in Carlsbad, New Mexico, our solution mine in Moab, Utah, and our brine recovery mine in Wendover, Utah. We also operate our North compaction facility in Carlsbad, New Mexico, which compacts and granulates product from the HB mine. We produce Trio® from our conventional underground East mine in Carlsbad, New Mexico.
We have water rights in New Mexico under which we sell water primarily to support oil and gas development in the Permian Basin near our Carlsbad facilities. We continue to work to expand our sales of water. In May 2019, we acquired certain land, water rights, and other related assets from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South." The purchase price was $53 million, and we incurred $3.2 million in acquisition-related fees. We are required to pay Dinwiddie Cattle Company an additional $12 million pending the resolution by Dinwiddie Cattle Company or others of certain issues identified in the diligence process. Dinwiddie Cattle Company also reserved a 20-year, 10% royalty, proportionally reduced as to our interest, on certain produced water disposal revenue relating to Intrepid South and certain other properties located near Intrepid South.
Significant Business Trends and Activities
Our financial results have been, or are expected to be, impacted by several significant trends and activities, which are described below. We expect that these trends will continue to impact our results of operations, cash flows, and financial position.
• Potash pricing and demand. Total potash tons sold increased by 5% compared to the third quarter of 2018 as increased purchases under our summer fill program drove increased agricultural sales volumes. This increase was partially offset by reduced sales volumes into industrial markets as more operators switch to substitutes for KCl in the fracturing process.
Our potash average net realized sales price per ton decreased to $266 for the three months ended September 30, 2019, compared to $299 in the second quarter of 2019, as a result of a summer fill program announced in June 2019, by our competitors. Under the program, the potash list prices decreased by $45 per ton for orders placed before June 27 and scheduled for shipment during the third quarter and were scheduled to increase $25 per ton after the order window closed. However, the increased list prices did not materialize and potash is still selling at the summer-fill list price levels. We expect pricing to remain at the summer-fill levels through the end of 2019. Significant wet weather in the first half of the year, which delayed the spring application season, will result in a later-than-normal harvest across many parts of the U.S., which we expect will limit upside to pricing in the near term.
With potash sales comprising 50% of our total sales in the first nine months of 2019, potash prices continue to be a significant driver of our profitability. 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.
We experience seasonality in potash demand, with more purchases coming in January through April and August through September in anticipation of expected demand for the spring and fall application seasons in the U.S. 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. The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the U.S. The timing of potash sales is also significantly influenced by the marketing programs of potash producers, as well as storage volumes closer to the farm gate. Our sales volumes into the industrial market correlate to drilling activity in the oil and gas market and vary based on oil and gas producers' preference for substitutes.
• Trio® pricing and demand. We saw increased purchases under our Trio® summer fill program as customers delayed purchases late in the second quarter of 2019 due to their expectations of declining prices. On October 7, 2019, a competitor announced a new pricing program that reduced the list price of langbeinite back to the summer fill price level and required customers to purchase product by October 15 for delivery by the end of 2019. This announcement resulted in langbeinite selling at the summer-fill prices. After October 19, our competitor's list price increased by $20 per ton. We matched this pricing program and expect it will keep our fourth quarter domestic average net realized sales price equal to the third quarter. Overall average net realized sales price per ton for Trio® will be impacted by the percentage of international sales, which we expect to increase in the fourth quarter of 2019 compared to the third quarter of 2019 as we expect to finalize certain international sales during the fourth quarter. Although there is still uncertainty in spring season pricing due to the delayed harvest and no potash contracts with China and India at this time, we expect to realize the majority of any price increase midway through the first quarter of 2020.
We experience seasonality in domestic Trio® demand, with more purchases coming in the first and second quarters in advance of the spring application season in the U.S. In turn, we generally have increased inventory levels in the third and fourth quarters in anticipation of expected demand for the following year. We continue to operate our facilities at production levels that approximate expected demand and allow us to manage inventory levels.
• Water sales. Water sales were $7.3 million and $18.3 million in the three and nine months ended September 30, 2019, respectively, compared to $4.7 million and $14.8 million during the same periods of 2018, respectively. Increased sales were primarily due to the acquisition of Intrepid South and associated water rights in May 2019. We continue our efforts to diversify our sources of income by expanding sales of water, particularly to service the oil and gas markets near our operating plants. We have put in place a diverse set of arrangements aimed at generating a long-term recurring revenue stream from water sales.
We expect water sales to increase during the fourth quarter of 2019 compared to the third quarter of 2019 due to increased demand in the northern Delaware Basin around Intrepid South. We expect water sales for 2019 of between $25 million to $28 million and expect to receive cash relating to water sales of approximately $30 million. Oil and gas activity continues to increase in the northern Delaware Basin and we expect water sales to be between $32 and $45 million in 2020.
Water rights in New Mexico are subject to a stated purpose and place of use, and many of our water rights were originally issued for uses relating to our mining operations. To sell water under these rights for oil and gas development, we must apply for a permit from the New Mexico Office of the State Engineer ("OSE") to change the purpose or place of use of the underlying water rights. The OSE reviews and makes a determination as to the validity of the right and if it determines the requested change will not negatively impact other valid interests, the OSE can issue a preliminary authorization for the change. The preliminary authorization allows for water sales to begin immediately, subject to repayment if the underlying water rights are ultimately found to be invalid. Third parties may protest the preliminary authorization at minimal cost and frequently do so. Once protested, the OSE is required to hold a hearing to determine if the preliminary authorization was appropriate. A significant amount of our water sales are being made under preliminary authorizations issued by the OSE. Third parties have protested these preliminary authorizations. In February 2019, certain protestants filed an expedited inter se proceeding in New Mexico District Court as the adjudication court for the Pecos Stream System challenging the validity of our water rights relating to the Pecos River. In August 2019, the parties stipulated to the jurisdiction of the adjudication court. To promote settlement, the adjudication court established a settlement schedule and ordered a trial date in August 2020 if the parties have not reached a settlement by that time. The OSE has temporarily stayed the hearing process until the adjudication process is complete. We continue to operate under the preliminary authorizations until the adjudication and hearing processes are complete. We may face political and regulatory issues relating to the potential use of the maximum amount of our rights. However, we believe that our legal position with respect to the validity of our water rights is solid and that we will be able to meet our water commitments. You can find more information about the adjudication and hearing processes in Note 15 to our condensed consolidated financial statements.
• Byproduct sales. We sell byproducts such as salt, magnesium chloride, brines, and water that are derived from our potash and Trio® operations. Byproduct sales were $6.2 million and $17.9 million for the three and nine months ended September 30, 2019, respectively, compared to $4.9 million and $13.2 million for the three and nine months ended September 30, 2018, respectively. The increase was due to continued growth in byproduct water and brine water for use in oil and gas production. Our brines and water are used primarily by the oil and gas industry to support well development and completion activities. Oil and gas activity in the northern Delaware Basin near our Carlsbad operations is increasing, and we expect strong demand for these byproducts for the remainder of 2019.
Strong sales of water and brine were offset by reduced sales of magnesium chloride as wet weather in Wendover limited the amount of product available for sale.
• Diversification of products and services. As we continue to diversify our portfolio, we may enter into new or complementary businesses that expand our product and service offerings beyond our existing assets or products through acquisition of companies or assets or otherwise. Additionally, we may expand into oil and natural gas exploration and production or into new products or services in our current industry or other industries.
Consolidated Results
|
| | | | | | | | | | | | | | | | |
(in thousands, except per ton amounts) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Sales1 | | $ | 51,160 |
| | $ | 41,410 |
| | $ | 171,226 |
| | $ | 153,906 |
|
| | | | | | | | |
Cost of goods sold | | $ | 31,863 |
| | $ | 23,372 |
| | $ | 99,375 |
| | $ | 95,454 |
|
| | | | | | | | |
Gross Margin | | $ | 6,949 |
| | $ | 8,960 |
| | $ | 33,288 |
| | $ | 23,446 |
|
| | | | | | | | |
Selling and administrative | | $ | 5,548 |
| | $ | 5,121 |
| | $ | 17,710 |
| | $ | 15,281 |
|
| | | | | | | | |
Net (Loss) Income | | $ | (217 | ) | | $ | 3,350 |
| | $ | 11,549 |
| | $ | 4,149 |
|
| | | | | | | | |
Average net realized sales price per ton2 | | | | | | | | |
Potash | | $ | 266 |
| | $ | 258 |
| | $ | 285 |
| | $ | 251 |
|
Trio® | | $ | 204 |
| | $ | 200 |
| | $ | 201 |
| | $ | 194 |
|
1Sales include sales of byproducts which were $6.2 million and $4.9 million for the three months ended September 30, 2019, and 2018, respectively, and $17.9 million and $13.2 million for the nine months ended September 30, 2019, and 2018, respectively.
2Average net realized sales price per ton is a non-GAAP financial measure. More information about this non-GAAP financial measure is below under the heading "Non-GAAP Financial Measure."
Consolidated Results for the Three and Nine Months Ended September 30, 2019, and 2018
Our total sales for the three months ended September 30, 2019, increased 24% as compared to the three months ended September 30, 2018. Combined, our potash and Trio® sales increased $5.1 million, primarily due to an increase in sales volumes coupled with and an increase in the average net realized sales prices for both products.
Our water sales, excluding byproduct water sales, increased $1.7 million, or 44%, in the third quarter of 2019 compared to the same period in 2018. This increase was primarily due to increased water sales from the additional water rights we acquired with Intrepid South in May 2019, as discussed above.
Our sales from other revenue sources, such as sales of caliche, produced water royalties, surface use agreements, right-of-way access, and disturbance fees, increased $1.6 million during the third quarter 2019 compared to the third quarter of 2018 due to the Intrepid South acquisition in May 2019. The Intrepid South assets are located near significant oil and gas exploration activities in the northern Delaware Basin, which drives sales of products and services associated with the other revenue sources.
Our total sales of byproducts derived from potash and Trio® production increased $1.3 million. The increase in byproducts sales was driven by a $1.4 million increase in salt sales. In the third quarter of 2019, compared to the same period in 2018, as we sold more tons of salt and the delivered price per ton was higher due to increased freight costs included in the delivered price. Like our potash and Trio® sales, our salt sales revenue includes the freight costs to deliver the product to the customer. Freight expense included in the delivered salt price increased in the third quarter of 2019, compared to the same period in 2018, as we expanded the geographic footprint of our salt customers. Our byproduct water sales increased $0.9 million in the third quarter of 2019, compared to the third quarter of 2018, due to the ongoing oil and gas activities in the northern Delaware Basin near our facilities. The increases in salt and by product water sales were partially offset by a $1.0 million decrease in magnesium chloride sales. Wet weather in Wendover reduced our production volumes limiting product available to sell.
Gross margin for the three months ended September 30, 2019, decreased 22% compared to the same period in 2018. The decrease in gross margin was driven by a $1.5 million expense related to the net realizable value of product we positioned for an international Trio® sale in the fourth quarter. Also, our gross margin was negatively affected by a 36% increase in cost of goods sold and a 27% increase in freight expense. Cost of goods sold increased due to an increase in tons of potash and Trio® sold, below average evaporation at our potash facilities which increased our per ton potash production costs, the use of third parties to move water on Intrepid South while we expand existing infrastructure, and an increase in the cost of delivering water from the Pecos River. Freight expenses increased in the third quarter of 2019, compared to the third quarter of 2018, due to increased sales volumes of potash, Trio®, and salt and the geographic expansion of our salt customers, as discussed above.
For the nine months ended September 30, 2019, compared to the same period in 2018, our total sales increased 11% due mainly to an $8.1 million increase in potash sales which were driven by a 14% increase in our average net realized sales price, partially offset by a 3% decrease in potash tons sold. Trio® sales were flat during the nine months ended September 30, 2019, compared to the same period in 2018. While average net realized sales price for Trio® increased 4% during the first nine months of 2019, as compared to the first nine months of 2018, sales volume decreased 5%, as wet weather and declining prices pushed sales to later in the year in 2019.
Water sales, excluding byproduct water sales, increased $1.3 million during the first nine months of 2019, compared to the same period in 2018. The increase was mainly due to the acquisition of additional water rights in May 2019 as part of Intrepid South, as discussed above, which allowed us to sell more water.
Our sales from other revenue sources increased $3.3 million during the first nine months of 2019, compared to the same period in 2018. The Intrepid South assets are located near significant oil and gas exploration activities in the northern Delaware Basin, which drives sales of products and services associated with the other revenue sources.
Our total byproduct sales, including byproduct water sales, increased $4.7 million during the first nine months of 2019, compared to the same period in 2018. The increase was driven by a $2.2 million increase in byproduct water sales as a larger portion of our total water sales was from water used in the production of potash and Trio®. Salt sales increased by $3.6 million during the first nine months of 2019, as compared to the same period in 2018 as we sold 30% more salt tons in 2019, and the delivered price per ton of salt was higher due to increased freight costs included in the salt delivered price, as discussed above. The increase in salt tons sold in 2019 was mainly due to expanding the geographic footprint for our salt customers and higher product demand due to the severe winter weather in many regions of the U.S. Brine sales increased $0.7 million during the nine months ended September 30, 2019, as compared to the same period in 2018. Our brines are used in the oil and gas exploration process and demand has been strong due to the significant oil and gas activities in the northern Delaware Basin near our properties. The increase in total byproduct sales was partially offset by a decrease in magnesium chloride sales of $1.8 million during the first nine months of 2019, as compared to the same period in 2018. Wet weather in Wendover reduced our production volumes of magnesium chloride and we had less product to sell.
Gross margin for the nine months ended September 30, 2019, increased 42% compared to the same period in 2018, due to the factors discussed above. The increase in gross margin was partially offset by an increase in lower of cost or net realizable value inventory charges during the nine months ended September 30, 2019, compared to the same period in 2018.
Cost of Goods Sold
Our total cost of goods sold for the three months ended September 30, 2019, increased 36% as compared to the same period in 2018. The increase was due to an increase of $4.2 million in potash cost of goods sold as we sold more potash tons and a higher percentage of our total potash tons sold came from our New Mexico facilities, which tons carry a higher average cost than potash tons produced from our Utah facilities because we incur more depreciation expense on our New Mexico potash facilities. We also experienced below average evaporation across our potash facilities, which increased our per ton potash production costs. Trio® cost of goods sold increased $2.4 million in the third quarter of 2019 compared to the third quarter of 2018 due mainly to a 28% increase in Trio® tons sold. Cost of goods sold in our oilfield solutions segment increased $1.9 million in the third quarter of 2019, as compared to the same period in 2018. Oilfield solutions cost of goods sold increased due to third-party costs incurred to move water at Intrepid South while we expand the existing infrastructure, an increase in the cost of delivering water from the Pecos River, and additional depreciation expense for the Intrepid South assets acquired in May 2019.
For the first nine months of 2019, our cost of goods sold increased 4% as compared to the first nine months of 2018. Potash cost of goods sold increased $4.1 million, as we experienced below-average evaporation across our potash facilities which increased our per ton potash production costs, coupled with a higher percentage of total potash tons sold from our New Mexico facilities, which tons carry a higher average cost than potash tons produced from our Utah facilities, as discussed above. Cost of goods sold in our oilfield solutions segment increased $5.4 million in the first nine months of 2019, as compared to the same period in 2018, due to costs associated with our high-speed potassium mixing service, third-party costs to move water at Intrepid South while we expand the existing infrastructure, and additional depreciation expense for the Intrepid South assets acquired in May 2019. The increases in cost of goods sold were partially offset by a decrease of $4.2 million in Trio®
cost of goods sold as we sold fewer tons during the first nine months of 2019 compared to the same period in 2018 and we produced more tons of Trio®. Many of our production costs are largely fixed and, consequently, our cost of sales per ton tends to move inversely with the number of tons we produce.
Selling and Administrative Expense
Selling and administrative expenses increased 8% for the three months ended September 30, 2019, as compared to the same prior-year period. This increase was due to a $0.6 million increase in legal expenses associated with various water protests and outstanding litigation, an increase in bad debt expense of $0.7 million, partially offset by a decrease $0.7 million in bonus expense. During the third quarter of 2018, we received payments on an account that had a full bad debt allowance against it. Those payments reduced our bad debt allowance, with a corresponding decrease to bad debt expense. Additionally, during the third quarter of 2019, we reduced our accrual for 2019 performance bonuses to employees because it is likely we will not meet all of the performance metrics required to pay the bonuses. Please see Part II, Item 1, "Legal Proceedings," contained in this Quarterly Report on Form 10-Q, for further information on outstanding litigation.
During the first nine months of 2019, selling and administrative expenses increased 16% as compared to the first nine months of 2018. The increase was due to a $1.7 million increase in legal expenses, as discussed above, a $0.4 million increase in bad debt expense, as discussed above, a $0.8 million increase in administrative labor and benefits, which was partially offset be a decrease of $0.7 million in bonus expense, as discussed above, and a $0.2 million increase in marketing expenses.
Net Income
We incurred a net loss of $0.2 million for the three months ended September 30, 2019, compared to net income of $3.4 million for the three months ended September 30, 2018. The decrease was driven by a $2.0 million decrease in gross margin and a $0.4 million increase in selling and administrative expenses, as discussed above, and a decrease in other operating income of $1.0 million. Other operating income decreased in the third quarter of 2019, compared to the third quarter of 2018, due to the reversal of certain accruals.
Our net income for the nine months ended September 30, 2019, increased 178% as compared to the same period in 2018. The increase was driven by $9.8 million increase in gross margin, partially offset by an increase of $2.4 million in selling and administrative expenses.
Potash Segment
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per ton amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Sales1 | | $ | 29,213 |
| | $ | 26,513 |
| | $ | 99,090 |
| | $ | 89,174 |
|
Less: Freight costs | | 4,728 |
| | 3,750 |
| | 14,110 |
| | 12,091 |
|
Warehousing and handling costs | | 1,190 |
| | 1,207 |
| | 3,776 |
| | 3,773 |
|
Cost of goods sold | | 18,707 |
| | 14,467 |
| | 59,024 |
| | 54,973 |
|
Gross Margin | | $ | 4,588 |
| | $ | 7,089 |
| | $ | 22,180 |
| | $ | 18,337 |
|
Depreciation, depletion, and amortization incurred2 | | $ | 6,048 |
| | $ | 5,928 |
| | $ | 18,963 |
| | $ | 18,474 |
|
| | | | | | | | |
Potash sales volumes (in tons) | | 78 |
| | 74 |
| | 261 |
| | 269 |
|
Potash production volumes (in tons) | | 51 |
| | 60 |
| | 217 |
| | 230 |
|
| | | | | | | | |
Average potash net realized sales price per ton3 | | $ | 266 |
| | $ | 258 |
| | $ | 285 |
| | $ | 251 |
|
1 Sales include sales of byproducts which were $5.0 million and $4.3 million for the three months ended September 30, 2019, and 2018, respectively and $14.3 million and $11.8 million for the nine months ended September 30, 2019, and 2018, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3Average net realized per ton sales price per ton is a non-GAAP financial measure. More information about this measure is below under the heading "Non-GAAP Financial Measure."
Three Months Ended September 30, 2019, and 2018
Our potash segment sales include potash sales and sales of byproducts generated or used in the potash production process, such as magnesium chloride, salt, water and brines. Total potash segment revenues increased 10% in the third quarter of 2019, as compared to the third quarter of 2018. Potash sales increased $2.1 million and potash byproduct sales increased $0.7 million in the third quarter of 2019 as compared to the third quarter of 2018.
Potash sales increased 9% in the third quarter of 2019, compared to the same period in 2018, as our average net realized sales price per ton increased 3% and we sold 5% more tons. The increase in potash tons sold was driven be an increase in sales into the agricultural market in the third quarter of 2019 compared to the third quarter of 2018. Our third quarter 2019 potash average net realized sales price per ton was negatively impacted by a summer fill program announced in June 2019 by our competitors. Under the program, the potash list prices decreased by $45 per ton for orders placed before June 27 and scheduled for shipment during the third quarter and list prices were scheduled to increase $25 per ton after the order window closed. However, the increased list prices did not materialize and potash is still selling at the summer fill list price levels. We expect pricing to remain at the summer-fill levels through the end of 2019. Significant wet weather in the first half of the year, which delayed the spring application season, will result in a later-than-normal harvest across many parts of the U.S. limiting upside to pricing in the near term.
Total potash segment byproduct sales increased $0.7 million in the third quarter of 2019, due to a $1.4 million increase in salt sales, a $0.2 million increase in brine sales and a $0.1 increase in byproduct water sales, partially offset by a decrease of $1.1 million of magnesium chloride sales. The increase in salt sales was due to selling more tons of salt combined with an increase in the delivered price for salt. The increase in the delivered price for salt was driven by an increase in freight expenses, which are included in the delivered price, as we expanded the geographic footprint of our salt customers. Our brine sales increased in the third quarter of 2019, as compared to the third quarter of 2018, due to oil and gas activities in the northern Delaware Basin of New Mexico near our facilities. Wet weather in Wendover has reduced our production volumes of magnesium chloride and we had less product to sell.
Potash segment freight expense increased 26%, in the third quarter of 2019, compared to the third quarter of 2018, mainly due to increased potash and salt tons sold. We expanded our geographic footprint of salt customers and incurred additional freight costs to transport salt to customers located farther from our facilities, as discussed above. Our freight expense is also impacted by the geographic distribution of our potash sales and by the proportion of customers arranging for and paying their own freight costs.
Our potash segment cost of goods sold increased 29% in the third quarter of 2019, compared to the same period in 2018, as potash tons sold increased 5% and our per ton production costs increased as we experienced below average evaporation across our potash facilities. We also sold a higher percentage of total potash tons from our New Mexico facility. Tons produced from our New Mexico facilities carry a higher average cost compared to tons produced at our Utah facilities as we incur more depreciation expense at our New Mexico facilities.
Our potash segment gross margin decreased $2.5 million in the third quarter of 2019, compared to the same period in 2018, due to an increase in cost of goods sold, partially offset by an increase in potash segment sales.
Nine Months Ended September 30, 2019, and 2018
Our total potash segment sales increased 11%, during the first nine months of 2019, compared to the first nine months of 2018, as potash sales in the potash segment increased $7.4 million and potash byproduct sales increased $2.5 million.
Potash sales increased 10% during the first nine months of 2019, compared to the first nine months of 2018. The average net sales price per ton increased 14% to $285 per potash ton sold during the first nine months of 2019, compared to the same period in 2018, partially offset by a 3% decrease in potash tons sold. Our year-to-date 2019 potash average net realized sales price per ton was negatively impacted by a summer fill program announced in June 2019 by our competitors. Under the program, the potash list prices decreased by $45 per ton for orders placed before June 27 and scheduled for shipment during the third quarter and list prices were scheduled to increase $25 per ton after the order window closed. However, the increased list prices did not materialize and potash is still selling at the summer fill list price levels. We expect pricing to remain at the summer-fill levels through the end of 2019. Significant wet weather in the first half of the year, which delayed the spring application season, will result in a later-than-normal harvest across many parts of the U.S. limiting upside to pricing in the near term.
Total potash segment byproduct sales increased $2.5 million in the first nine months of 2019, as compared to the same period in 2018. The increase was driven by a $3.2 million increase in salt sales, a $0.7 million increase in brine sales and a $0.4 million increase in potash byproduct water sales, partially offset by a $1.8 million decrease in magnesium chloride sales. We saw increased salt sales due to severe weather in the 2019 winter and spring months. Also, our delivered price per ton for salt increased as we incurred more freight to deliver salt to customers located farther from our facilities. Our byproduct water sales increased in the first nine months of 2019, as compared to the same period in 2018, as a higher proportion of our total water sales was from byproduct water. Wet weather in Wendover has reduced our production of magnesium chloride and we had less product to sell.
Potash segment freight expense increased 17% in the first nine months of 2019, mainly driven by an increase in freight expense related to selling more tons of salt and the increased freight expense incurred to ship salt to customers located farther from our facilities. Our freight expense is also impacted by the rates charged by carriers, geographic distribution of our products and by the proportion of customers arranging for and paying their own freight costs.
Our potash segment cost of goods sold increased 7% during the first nine months of 2019, as compared to the first nine months of 2018. Potash tons sold decreased 3%, but we experienced below average evaporation across our facilities, which contributed to higher per ton production costs. We also sold a higher percentage of potash tons from our New Mexico facility, which carry a higher average cost than potash tons produced from our Utah facilities. Tons produced from our New Mexico facilities carry a higher average cost compared to tons produced at our Utah facilities as we incur more depreciation expense at our New Mexico facilities.
Our potash segment gross margin increased $3.8 million in the first nine months of 2019, compared to the first nine months of 2018, mainly due to the 14% increase in our average potash net realized sales price per ton and increased potash byproduct sales, partially offset by an increase in cost of goods sold, as discussed above.
Additional Information Relating to Potash
The table below shows our potash sales mix for the three and nine months ended September 30, 2019, and 2018:
|
| | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Agricultural | | 81% | | 69% | | 76% | | 79% |
Industrial | | 6% | | 15% | | 12% | | 9% |
Feed | | 13% | | 16% | | 12% | | 12% |
Trio® Segment
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per ton amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Sales1 | | $ | 14,637 |
| | $ | 10,859 |
| | $ | 53,881 |
| | $ | 51,814 |
|
Less: Freight costs | | 3,996 |
| | 3,136 |
| | 15,502 |
| | 15,067 |
|
Warehousing and handling costs | | 972 |
| | 984 |
| | 2,852 |
| | 3,285 |
|
Cost of goods sold | | 9,315 |
| | 6,917 |
| | 32,988 |
| | 37,168 |
|
Lower of cost or net realizable value inventory adjustments | | 1,462 |
| | — |
| | 1,462 |
| | 781 |
|
Gross Margin (Deficit) | | $ | (1,108 | ) | | $ | (178 | ) | | $ | 1,077 |
| | $ | (4,487 | ) |
Depreciation, depletion, and amortization incurred2 | | $ | 1,517 |
| | $ | 1,612 |
| | $ | 4,595 |
| | $ | 4,870 |
|
| | | | | | | | |
Sales volumes (in tons) | | 46 |
| | 36 |
| | 173 |
| | 182 |
|
Production volumes (in tons) | | 54 |
| | 60 |
| | 183 |
| | 162 |
|
| | | | | | | | |
Average Trio® net realized sales price per ton3 | | $ | 204 |
| | $ | 200 |
| | $ | 201 |
| | $ | 194 |
|
1 Sales include sales of byproducts which were $1.3 million and $0.5 million for the three months ended September 30, 2019, and 2018, respectively, and $3.6 million and $1.4 million for the nine months ended September 30, 2019, and 2018, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3Average net realized per ton sales price per ton is a non-GAAP financial measure. More information about this measure, is below under the heading "Non-GAAP Financial Measure."
Three Months Ended September 30, 2019, and 2018
Trio® segment sales increased 35% for the three months ended September 30, 2019, as compared to the same period in 2018. The increase was due to a $3.1 million increase in Trio® sales and a $0.8 million increase in Trio® byproduct sales.
Trio® sales increased 30% in the third quarter of 2019, as compared to the third quarter of 2018. The increase was due to a 28% increase in Trio® tons sold combined with a 2% increase in the average net realized sales price per ton. Domestic Trio® tons sold increased 30%, while international Trio® tons sold were flat. Domestic Trio® tons sold benefited from good subscription under the Trio® summer fill program as customers that delayed purchases late in the second quarter of 2019 due to an expectation of declining prices purchased Trio® in the third quarter of 2019. Our Trio® average net realized sales price improved in the third quarter of 2019, as compared to the third quarter of 2018, due mainly to higher pricing for Trio® products in domestic markets.
Trio® byproduct sales increased due to a $0.7 million increase in byproduct water sales, as a higher proportion of our total water sales in the third quarter of 2019 was from byproduct water used in the Trio® production process.
Trio® freight costs increased 27% in the third quarter of 2019, compared to the third quarter of 2018, mainly due to an increase in Trio® tons sold. Our freight expense is also impacted by the geographic distribution of our Trio® sales and by the proportion of customers arranging for and paying their own freight costs.
Our Trio® cost of goods sold increased 35% in the third quarter of 2019, compared to the third quarter of 2018, due mainly to the 28% increase in Trio® tons sold. We also recorded a $1.5 million expense related to the net realizable value of product we moved to an off-site warehouse for a potential future international shipment.
Our Trio® production volume decreased by 10% in the third quarter of 2019, compared to the third quarter of 2018, as we increased the amount of standard-sized product used to produce our premium Trio® product and we incurred higher loses in the production of our premium Trio®.
Our Trio® segment generated a gross deficit of $1.1 million in the third quarter of 2019, compared to a gross deficit of $0.2 million in the third quarter of 2018, due to the factors discussed above.
Nine Months Ended September 30, 2019, and 2018
Trio® segment sales increased 4% for the nine months ended September 30, 2019, as compared to the same period in 2018. The increase in sales was driven by a $2.2 million increase in Trio® byproduct sales.
Trio® sales for the nine months ended September 30, 2019, decreased $0.1 million as compared to the same period in 2018, as Trio® tons sold decreased 5%, partially offset by a 4% increase in Trio® average net realized sales price per ton. Decreased sales volume resulted from wet weather in parts of the U.S., which reduced our domestic shipments during the first nine months of the year, partially offset by an increase in international sales. Our Trio® average net realized sales price improved, due mainly to higher pricing for Trio® products in domestic markets.
Trio® byproducts sales increased $2.2 million during the first nine months of 2019, as compared to the same period in 2018. The increase was driven by a $1.8 million increase in Trio® byproduct water sales and a $0.4 million increase in Trio® segment salt sales. A higher proportion of our total water sales during the first nine months of 2019, as compared to the same period in 2018, was from Trio® byproduct water and Trio® byproduct salt sales increased due to offering a new road salt product from our Trio® facility in 2019.
Trio® freight costs increased 3% in the first nine months of 2019, compared to the same period in 2018, as lower sales tons were offset by an increase in international shipments which carry higher per ton freight rates. Our freight expense is impacted by the geographic distribution of our Trio® sales and by the proportion of customers arranging for and paying their own freight costs.
Our Trio® cost of goods sold decreased 11%, compared to the first nine months of 2018, due mainly to a 5% decrease in Trio® tons sold and an increase in sales tons in which the carrying cost of those tons had been previously written down to their estimated net realizable value.
Our Trio® production tons increased by 13% in the first nine months of 2019, compared to the same period in 2018, primarily due to increased conversion of work-in-progress inventory into premium Trio®. Most of our production costs are fixed and an increase in production tons lowers our per ton cost of Trio®.
Our Trio® segment generated gross margin of $1.1 million in the first nine months of 2019, compared to a gross deficit of $4.5 million in the first nine months of 2018. The improvement to gross margin during the first nine months of 2019, compared to a gross deficit during the first nine months of 2018, was due to the factors discussed above, partially offset by a decrease to gross margin in 2019 due to an increase of $0.7 million in expense related to the net realizable value of product.
Additional Information Relating to Trio®
The percentage of Trio® tons sold into the export market decreased during the three and nine months ended September 30, 2019, and 2018, as shown below: |
| | | | |
| | United States | | Export |
For the Three Months Ended September 30, 2019 | | 86% | | 14% |
For the Nine Months Ended September 30, 2019 | | 77% | | 23% |
| | | | |
For the Three Months Ended September 30, 2018 | | 83% | | 17% |
For the Nine Months Ended September 30, 2018 | | 81% | | 19% |
Oilfield Solutions Segment
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Sales | | $ | 7,310 |
| | $ | 4,038 |
| | $ | 19,574 |
| | $ | 12,918 |
|
Less: Freight costs | | — |
| | — |
| | 861 |
| | — |
|
Warehousing and handling costs | | — |
| | 1 |
| | — |
| | 9 |
|
Cost of goods sold | | 3,841 |
| | 1,988 |
| | 8,682 |
| | 3,313 |
|
Gross Margin | | $ | 3,469 |
| | $ | 2,049 |
| | $ | 10,031 |
| | $ | 9,596 |
|
Depreciation, depletion, and amortization incurred | | $ | 747 |
| | $ | 97 |
| | $ | 1,170 |
| | $ | 239 |
|
Three Months Ended September 30, 2019, and 2018
We offer a variety of products and services from our oilfield solutions segment, including water, high-speed potassium chloride mixing services, trucking services, and other products and services. In addition to sales of water, Intrepid South also generates revenue from the sale of caliche, a produced water royalty, easements, and surface use agreements with operators. Our oilfield solutions segment sales increased $3.3 million in the third quarter of 2019, compared to the same period in 2018, mainly due to a $1.6 million increase in sales of other products and services and a $1.7 million increase in water sales. Increased water sales during the third quarter were partially offset by an increase in byproduct water sales recorded in the potash and Trio® segments, which has a corresponding decrease in water sales recorded in the oilfield solutions segment. Water that we sell that was used in the production of potash and Trio® is accounted for as byproduct water sales in the potash or Trio® segments.
Cost of goods sold increased $1.9 million due to an increase in the cost of delivering water from the Pecos River, third-party costs to move water on Intrepid South as we expand existing infrastructure, and additional depreciation expense for the Intrepid South assets acquired in May 2019.
Nine Months Ended September 30, 2019, and 2018
Our oilfield solutions segment sales increased $6.7 million in the first nine months of 2019, compared to the same period in 2018, due to a $2.0 million increase in sales of potassium chloride brine used in our high-speed mixing service, a $3.3 million increase in other sales and a $1.3 million increase in water sales compared to the first nine months of 2018.
Cost of goods sold increased $5.4 million in the nine months ended September 30, 2019 compared to the same period in 2018, due to increased sales of potassium chloride used in our high-speed mixing service, third-party costs to move water on Intrepid South while we expand existing infrastructure, and additional depreciation expense for the Intrepid South assets acquired in May 2019.
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash, Trio®, water, various products and services that support the oil and gas industry and byproducts and are determined by the quantities of product we sell and the sales prices we realize. For potash, Trio®, and byproduct salt sales, 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 most of our potash, Trio®, and salt sales, but some 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. When we calculate our potash and Trio® average net realized sales price per ton, we deduct any byproduct sales and freight costs included in sales before dividing by the number of tons sold. We believe the deduction of freight costs provides a more 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. Freight rates have been increasing, thereby negatively influencing our average net realized sales price per ton. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price per ton 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 operate our potash and Trio® facilities at production levels that approximate expected demand and take into account current inventory levels and expect to continue to do so for the foreseeable future.
Our water sales are driven by demand from oil and gas exploration and production companies drilling in the northern Delaware Basin. As such, demand for our water is generally stronger during a cyclical expansion of oil and gas drilling, which is currently occurring in the northern Delaware Basin. Likewise, a cyclical contraction of oil and gas drilling may decrease demand for our water and other products and services that support the oil and gas industry.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our products. Many of our production costs are largely fixed and, consequently, our cost of sales per ton on a facility-by-facility basis tends 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, reagents, and royalties that are variable, which make up a smaller component of our cost base. Our costs often vary 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, evaporation rates at our solar solution ponds, levels of mine development, plant operating performance, and downtime. 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 region where we compete for labor with another fertilizer company, companies in the oil and gas industry, and a nuclear waste processing and storage facility.
We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of sales (less freight) of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that vary with the grade of ore extracted. For the three and nine months ended September 30, 2019, our average royalty rate was 4.3% and 4.4%, respectively. For both the three and nine months ended September 30, 2018, our average royalty rate was 4.3%.
Income Taxes
We are subject to federal and state income taxes on our taxable income. During the three and nine months ended September 30, 2019, we realized an immaterial amount of income tax benefit. During the three and nine months ended September 30, 2018, we incurred immaterial amounts of income tax expense. Our effective tax rate for the three and nine months ended September 30, 2018, was 2% and 1%, respectively. Our effective tax rates differed from the statutory rate during each period primarily due to the valuation allowance established to offset our deferred tax assets.
Our federal and state income tax returns are subject to examination by federal and state tax authorities.
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 conduct 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 such changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on our condensed consolidated balance sheet. However, any resulting impact to the deferred tax benefit or deferred tax expense would be offset by a corresponding adjustment to the valuation allowance and would have no income statement effect.
As of September 30, 2019, we were in a cumulative three-year loss position, which is significant negative evidence when evaluating the realizability of our deferred tax assets. This negative evidence continues to outweigh the positive evidence of profitability in 2018, and the first nine months of 2019, thereby requiring us to maintain the full valuation allowance as of September 30, 2019. We continue to evaluate the need to maintain the valuation allowance against the deferred tax assets and to the extent positive evidence trends continue and our future long-term forecasts show sustained profitability, our conclusion regarding the need to maintain a full valuation allowance could change.
Capital Investments
During the first nine months of 2019, cash paid for property, plant, equipment, mineral properties, intangible, and other assets was $76.8 million, including $59.3 million relating to acquisitions and $17.5 million in other capital expenditures. We expect total capital expenditures excluding acquisitions for 2019 to be approximately $25 million to $30 million, which includes capital investments relating to our newly acquired assets. We anticipate our remaining 2019 operating plans and capital programs will be funded out of operating cash flows and existing cash. We may also use our revolving credit facility, to the extent available, to fund capital investments.
Liquidity and Capital Resources
As of September 30, 2019, we had cash of $13.0 million, compared with cash of $33.2 million at December 31, 2018. In May 2019, we completed our acquisition of Intrepid South. The purchase price was $53.0 million, and in addition we capitalized $3.2 million in acquisition-related fees. We also purchased a 50% undivided interest in certain land in Texas near Intrepid South for $3.1 million, which may be used to support oil and gas activities in the area.
Our operations have primarily been funded from cash generated by operations. We continue to monitor our future sources and uses of cash and anticipate that we will adjust our capital allocation strategies when, and if, determined by our Board of Directors. We may, at any time we deem conditions favorable, attempt to improve our liquidity position by accessing debt or equity markets in accordance with our existing debt agreements. We also may raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all. With the remaining availability under our credit facility and expected cash generated from operations, we believe we have sufficient liquidity to meet our obligations for the next twelve months, including the $20 million principal payment due on our Series A Notes in April 2020.
The following summarizes our cash flow activity for the nine months ended September 30, 2019, and 2018 (in thousands):
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Cash flows provided by operating activities | | $ | 37,617 |
| | $ | 52,945 |
|
Cash flows used in investing activities | | $ | (76,753 | ) | | $ | (12,576 | ) |
Cash flows provided by (used in) financing activities | | $ | 19,091 |
| | $ | (4,224 | ) |
Operating Activities
Total cash provided by operating activities through September 30, 2019, was $37.6 million, a decrease of $15.3 million compared with the first nine months of 2018. The decrease was mainly driven by a decrease in contract liability additions, increases in trade and other receivables balances, and a decrease in cash received from refundable income taxes.
Investing Activities
Total cash used in investing activities increased by $64.2 million in the first nine months of 2019, compared with the same period in 2018, as we paid $56.2 million to complete the Intrepid South asset acquisition and $3.1 million to acquire other land near Intrepid South. Other additions to property, plant, equipment, and mineral properties increased $4.9 million compared to the first nine months in 2018.
Financing Activities
Total cash provided by financing activities increased by $23.3 million in the first nine months of 2019, compared with the same period in 2018. In the first nine months of 2019, we received $19.8 million of net proceeds from borrowings under our credit facility compared to $3.9 million in net repayments made on short-term borrowings under our credit facility in the first nine months of 2018.
Senior Notes
As of September 30, 2019, we had outstanding $50 million of senior notes (the "Notes") consisting of the following series:
| |
• | $20 million of Senior Notes, Series A, due April 16, 2020 |
| |
• | $15 million of Senior Notes, Series B, due April 14, 2023 |
| |
• | $15 million of Senior Notes, Series C, due April 16, 2025 |
The agreement governing the Notes contains certain financial covenants, including the following:
| |
• | We are required to maintain a minimum fixed charge coverage ratio of 1.3 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our fixed charge coverage ratio as of September 30, 2019, was 12.6 to 1.0, therefore we were in compliance with this covenant. |
| |
• | We are allowed a maximum leverage ratio of 3.5 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our leverage ratio as of September 30, 2019, was 1.2 to 1.0, therefore we were in compliance with this covenant. |
Fixed charge coverage ratio and leverage ratio are calculated in accordance with the agreement governing the Notes.
For all of the three- and nine-month periods ended September 30, 2019, and 2018, the interest rates on the Notes were 3.73% for the Series A Notes, 4.63% for the Series B Notes and 4.78% for the Series C Notes. These rates represent the lowest interest rates available under the Notes. The interest rates may adjust upward if we do not continue to meet certain financial covenants.
We have granted to the collateral agent for the noteholders a first lien on substantially all of our non-current assets and a second lien on substantially all of our current assets. We are required to offer to prepay the Notes with the proceeds of dispositions of certain specified property and with the proceeds of certain equity issuances, as set forth in the agreement governing the Notes. The obligations under the Notes are unconditionally guaranteed by several of our subsidiaries.
We were in compliance with the applicable covenants under the agreement governing the Notes as of September 30, 2019.
Our outstanding long-term debt, net, as of September 30, 2019, and December 31, 2018, was as follows (in thousands):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Notes | $ | 50,000 |
| | $ | 50,000 |
|
Less current portion of long-term debt | (20,000 | ) | | — |
|
Less deferred financing costs | (275 | ) | | (358 | ) |
Long-term debt, net | $ | 29,725 |
| | $ | 49,642 |
|
Credit Facility—We maintain a secured revolving credit facility with Bank of Montreal. In August 2019, we amended and restated the credit facility to change it from an asset-backed facility to a cash-flow facility, to increase the amount available under the facility from $50 million to $75 million plus an additional $75 million accordion, and to extend the maturity date to August 1, 2024. The revolving credit facility also provides for a $7.5 million sublimit for the issuance of letters of credit. As of September 30, 2019, borrowings under the credit facility bore interest at LIBOR (London Interbank Offered Rate) plus an applicable margin of 1.25% to 2.00% per annum, based on our leverage ratio. We have granted to Bank of Montreal a first lien on substantially all of our current assets and a second lien on substantially all of our non-current assets. The obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
We occasionally borrow and repay amounts under the facility for near-term working capital needs or other purposes and may do so in the future. During the nine months ended September 30, 2019, we borrowed $30.3 million and repaid $10.5 million under the facility. As of September 30, 2019, we had $19.8 million of borrowings outstanding and $1.0 million in outstanding letters of credit under the facility. Including the outstanding letters of credit, we had $54.2 million available to be borrowed under the facility as of September 30, 2019. We were in compliance with the applicable covenants under the facility as of September 30, 2019.
During the three months ended September 30, 2018, we had no borrowings or repayments under the facility. During the nine months ended September 30, 2018, we borrowed $13.5 million and repaid $17.4 million under the facility.
Off-Balance Sheet Arrangements
As of September 30, 2019, we had no material off-balance sheet arrangements aside from the bonding obligations described in Note 14 to the condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2018, describes the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Except for the accounting policies for leases that were updated as a result of adopting ASC 842 on January 1, 2019, as discussed in Notes 2 and 7 to the condensed consolidated financial statements, there have been no significant changes to our critical accounting policies since December 31, 2018.
Non-GAAP Financial Measure
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, from time to time we use "average net realized sales price per ton," which is a non-GAAP financial measure. This non-GAAP financial measure 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 this non-GAAP financial measure varies among companies, our presentation of this non-GAAP financial measure may not be comparable to similarly titled measures used by other companies.
We believe average net realized sales price per ton, when used in conjunction with GAAP financial measures, provides useful information to investors for analysis of our business and operating results, enhances the overall understanding of past financial performance and future prospects, and allows for greater transparency with respect to the key metric we use in our financial and operational decision making. We use this non-GAAP financial measure as one of our tools in comparing period-over-period performance on a consistent basis and when planning, forecasting, and analyzing future periods. We believe this non-GAAP financial measure is 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.
Average Net Realized Sales Price per Ton
We calculate average net realized sales price per ton for each of potash and Trio®. Average net realized sales price per ton for potash is calculated as potash segment sales less potash segment byproduct sales and potash freight costs and then dividing that difference by the number of tons of potash sold in the period. Likewise, average net realized sales price per ton for Trio® is calculated as Trio® segment sales less Trio® segment byproduct sales and Trio® freight costs and then dividing that difference by Trio® tons sold. We consider average net realized sales price per ton to be useful, and believe it to be useful for investors, because it shows our potash and Trio® average per-ton pricing without the effect of certain transportation and delivery costs. 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, some 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 average net realized sales price per ton as a key performance indicator to analyze potash and Trio® sales and price trends.
Below is a reconciliation of average net realized sales price per ton to the most directly comparable GAAP financial measure for the three and nine months ended September 30, 2019, and 2018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 |
(in thousands, except per ton amounts) | | Potash | | Trio® | | Potash | | Trio® |
Total Segment Sales | | $ | 29,213 |
| | $ | 14,637 |
| | $ | 26,513 |
| | $ | 10,859 |
|
Less: Segment byproduct sales | | 4,971 |
| | 1,267 |
| | 4,343 |
| | 539 |
|
Freight costs | | 3,478 |
| | 3,996 |
| | 3,060 |
| | 3,136 |
|
Subtotal | | $ | 20,764 |
| | $ | 9,374 |
| | $ | 19,110 |
| | $ | 7,184 |
|
| | | | | | | | |
Divided by: | | | | | | | | |
Tons sold | | 78 |
| | 46 |
| | 74 |
| | 36 |
|
Average net realized sales price per ton | | $ | 266 |
| | $ | 204 |
| | $ | 258 |
| | $ | 200 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
(in thousands, except per ton amounts) | | Potash | | Trio® | | Potash | | Trio® |
Total Segment Sales | | $ | 99,090 |
| | $ | 53,881 |
| | $ | 89,174 |
| | $ | 51,814 |
|
Less: Segment byproduct sales | | 14,283 |
| | 3,598 |
| | 11,752 |
| | 1,417 |
|
Freight costs | | 10,325 |
| | 15,503 |
| | 9,801 |
| | 15,062 |
|
Subtotal | | $ | 74,482 |
| | $ | 34,780 |
| | $ | 67,621 |
| | $ | 35,335 |
|
| | | | | | | | |
Divided by: | | | | | | | | |
Tons sold | | 261 |
| | 173 |
| | 269 |
| | 182 |
|
Average net realized sales price per ton | | $ | 285 |
| | $ | 201 |
| | $ | 251 |
| | $ | 194 |
|
| |
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, 2018, describes our exposure to market risk. There have been no significant changes to our market risk exposure since December 31, 2018.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures as defined in Rule 13a-15(e) of 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 the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures as of September 30, 2019. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Intrepid have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
In February 2015, Mosaic Potash Carlsbad Inc. ("Mosaic") filed a complaint and application for preliminary injunction and permanent injunction against Steve Gamble and us in the Fifth Judicial District Court for the County of Eddy in the State of New Mexico. Mr. Gamble is a former employee of Intrepid and Mosaic. In August 2015, the court denied Mosaic’s application for preliminary injunction. In July 2016, Mosaic filed a second complaint against Mr. Gamble and us in U.S. District Court for the District of New Mexico. In January 2018, the two lawsuits were consolidated into one lawsuit pending in the U.S. District Court for the District of New Mexico. Mosaic alleges against us violations of the New Mexico Uniform Trade Secrets Act, tortious interference with contract relating to Mr. Gamble’s separation of employment from Mosaic, violations of the Computer Fraud and Abuse Act, conversion, and civil conspiracy relating to the alleged misappropriation of Mosaic’s confidential information and related actions. Mosaic seeks $23 million to $28 million in compensatory damages, $28 million to $37 million in exemplary damages, and attorneys' fees, punitive damages, injunctive relief, and future royalty damages in unspecified amounts. Discovery is complete. In September 2019, the court set trial dates of April 27 through May 8, 2020. We believe that we have defenses against the claims asserted, and we are vigorously defending against the lawsuit.
In February 2019, Pecos Valley Artesian Conservancy District, Carlsbad Irrigation District, and Otis Mutual Domestic Water Consumers & Sewage Works Association (together, the "Protestants") filed an expedited inter se proceeding against us, Henry McDonald, Select Energy Services, LLC d/b/a Gregory Rockhouse Ranch, and Vision Resources, Inc. in the Fifth Judicial District Court for the County of Chaves in the State of New Mexico. This court serves as the adjudication court for the Pecos Stream System, which includes the Pecos River. The Protestants challenge the validity of our Pecos River water rights, representing approximately 20,000 acre feet per year. In August 2019, the parties stipulated to the jurisdiction of the adjudication court. To promote settlement, the adjudication court established a settlement schedule and ordered a trial date in August 2020 if the parties have not reached a settlement by that time. We are currently allowed to sell water associated with 5,700 acre feet per year of these water rights under preliminary authorizations issued in 2017 and 2018 by the New Mexico Office of the State Engineer ("OSE"). The preliminary authorizations allowed for water sales to begin immediately, subject to repayment if the underlying water rights are ultimately found to be invalid. Separate from the adjudication proceeding, the Protestants have protested these preliminary authorizations before the OSE. Although the OSE is required to hold a hearing relating to the protests, it has temporarily stayed the hearing process until the adjudication process is complete. In the adjudication proceeding, the court is expected to make a determination as to the size of our Pecos River water rights. In addition, the Protestants are asking for unspecified monetary and injunctive relief, as well as attorneys' fees and costs, relating to our sale of water under these water rights and breach of contract claims. We believe that our legal position with respect to the validity of our water rights is solid, and we are vigorously defending against this matter.
We are subject to other claims and legal actions in the ordinary course of business. While there are uncertainties in predicting the outcome of any claim or legal action, we believe that the ultimate resolution of these other claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations, or cash flows.
Our future performance is subject to a variety of risks and uncertainties that could materially and adversely affect our business, financial condition, 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, 2018. There have been no material changes to these risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2018.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4.MINE SAFETY DISCLOSURES
We are committed to providing a safe and healthy work environment. The objectives of our safety programs are to eliminate workplace accidents and incidents, preserve employee health, and comply with all 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 the Mine Safety and Health Administration (“MSHA”) and the New Mexico Bureau of Mine Safety to identify and implement accident prevention techniques and practices.
Our East, West, and North facilities in New Mexico are subject to regulation by MSHA under the Federal Mine Safety and Health Act of 1977 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 federal law. Exhibit 95.1 to this Quarterly Report on Form 10-Q provides the information concerning mine safety violations and other regulatory matters required by SEC rules. Our Utah and HB facilities 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.
None.
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| | |
Exhibit No. | | Description |
| | Amended and Restated Credit Agreement, dated as of August 1, 2019, by and among Intrepid Potash, Inc., the subsidiaries party thereto, Bank of Montreal, as administrative agent, swing line lender, lead arranger, and book runner, and the lenders parties thereto (incorporated by reference to our Current Report on Form 8-K (File No. 001-34025) filed on August 1, 2019). |
| | |
| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* |
| | |
| | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.* |
| | |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| | |
| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| | |
| | 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.* |
| |
+ | Management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements 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: November 5, 2019 | | /s/ Robert P. Jornayvaz III |
| | Robert P. Jornayvaz III - Executive Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) |
| | |
Dated: November 5, 2019 | | /s/ Joseph G. Montoya |
| | Joseph G. Montoya - Vice President and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) |