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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Quarterly Report on Form 10-Q contains forward‑looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”). These forward‑looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward‑looking statements. Forward-looking statements include statements about our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, among other things. In some cases, you can identify these statements by forward‑looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue.” Forward‑looking statements are only predictions based on our current knowledge, expectations, and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the following:
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our ability to successfully execute on our plans to idle our West facility and transition our East facility to Trio®-only production
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adverse impacts to our business as a result of our independent auditor having expressed substantial doubt as to our ability to continue as a going concern due to the existence of a material uncertainty
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changes in the price, demand, or supply of potash or Trio®/langbeinite
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our ability to comply with covenants in our debt-related agreements to avoid a default under those agreements or a reduction in the total amount available to us under our credit facility
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the costs of, and our ability to successfully construct, commission, and execute, any of our strategic projects
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declines or changes in agricultural production or fertilizer application rates
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further write-downs of the carrying value of our assets, including inventories
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circumstances that disrupt or limit our production, including operational difficulties or variances, geological or geotechnical variances, equipment failures, environmental hazards, and other unexpected events or problems
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changes in our reserve estimates
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adverse changes in economic conditions or credit markets
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the impact of governmental regulations, including environmental and mining regulations, the enforcement of those regulations, and governmental policy changes
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adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines
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increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise
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changes in the prices of raw materials, including chemicals, natural gas, and power
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our ability to obtain and maintain any necessary governmental permits or leases relating to current or future operations
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declines in the use of potash products by oil and gas companies in their drilling operations
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interruptions in rail or truck transportation services, or fluctuations in the costs of these services
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our inability to fund necessary capital investments
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the other risks, uncertainties, and assumptions described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by this Quarterly Report on Form 10-Q
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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.
Our Company
We are the only producer of potash in the United States and are one of two producers of langbeinite, which we market and sell as Trio
®
. We sell potash and Trio
®
primarily into the agricultural market as a fertilizer. We also sell these products into the animal feed market as a nutritional supplement and sell potash into the industrial market as a component in drilling and fracturing fluids for oil and gas wells and other industrial inputs. Our revenues are generated exclusively from the sale of potash and Trio
®
. We also produce salt and magnesium chloride from our potash mining processes, the sales of which are accounted for as by-product credits to our cost of sales. These by-product credits represented approximately 2% to 3% of total cost of goods sold in each of the last three years.
During the first quarter, we produced potash from three solution mining facilities and two conventional underground mining facilities. Our solution mining production comes from our HB solar solution mine near Carlsbad, New Mexico, a solar solution mine near Moab, Utah, and a solar brine recovery mine in Wendover, Utah. Our conventional production of potash came from our underground West and East mines near Carlsbad, New Mexico. We also operate the North compaction facility near Carlsbad, New Mexico, which services the West and HB mines. We produce Trio
®
from our underground conventional East mine.
In April 2016, we converted our East facility from a mixed-ore facility that produced both potash and Trio
®
to a Trio
®
-only facility. We expect our commissioning activities related to that transition to continue into the second half of 2016. Since the transition, we no longer produce potash at our East facility.
In May 2016, we initiated a plan to idle mining operations at our West facility and transition it into a care-and-maintenance mode due to the decline in potash prices. We expect the transition to occur in July. After the idling of West, all of our potash will be produced from our three solution mining facilities.
We have additional opportunities to develop mineralized deposits of potash in New Mexico, as well as to continue the optimization of our processing plants. These opportunities potentially include additional solution mining activities, additional recoveries of langbeinite, development of by-product markets and acceleration of production from our reserves.
We routinely post important information about us and our business, including information about upcoming investor presentations, on our website under the Investor Relations tab. We encourage investors and other interested parties to enroll on our website to receive automatic email alerts or Really Simple Syndication (RSS) feeds regarding new postings. Our website is
www.intrepidpotash.com
.
Significant Business Trends and Activities
Our financial results have been impacted by several significant trends and activities, which are described below. We expect that these trends will continue to drive our results of operations, cash flows, and financial position.
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Idling of our West facility.
Due to the current potash pricing environment, in May 2016, we initiated a plan to idle mining operations at our West facility. We expect operations to continue until July 2016, after which time the facility will be transitioned to a care-and-maintenance mode. We expect to lay off approximately 300 employees in connection with the idling of the West facility. We estimate that we will incur charges of approximately $1 to $3 million in the second quarter 2016, primarily related to estimated severance payments and other charges in connection with this decision.
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Conversion of our East facility to Trio
®
-only.
In early April 2016, we transitioned our East facility from a mixed-ore processing facility to a Trio
®
-only facility. We expect our commissioning activities related to that transition to continue into the second half of 2016. As a result of this conversion, we expect our production of Trio
®
to increase in the second half of 2016 as compared to historical levels.
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Potash demand.
We sold
218,000
tons of potash in the first quarter of 2016, a decrease of
13,000
tons compared to the first quarter of 2015. The timing of our shipments to customers for the winter fill program was earlier in 2015 as compared to 2016, despite an early start to the 2016 spring application season, resulting in fewer tons sold in the 2016 period. We continue to expect lower sales volumes in 2016 into the industrial market as compared to 2015 due to the decrease in oil and gas drilling in the U.S.
The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the U.S. The timing of potash sales is significantly influenced by the marketing programs of potash producers, as well as storage volumes closer to the farm gate. The combination of these items results in variability in potash sales and shipments, thereby increasing volatility of sales volumes from quarter to quarter and season to season.
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Potash prices.
Our average net realized sales price for potash decreased to
$216
per ton in the first quarter of 2016 compared to
$362
per ton in the first quarter of 2015, as potash prices declined throughout the second half of 2015 and into early 2016. Potash prices are a significant driver of profitability for our business. Domestic pricing of our potash is influenced principally by the price established by our competitors. The significant price decline from the first quarter of 2015 has primarily been caused by global oversupply combined with the impact the strong U.S. dollar has had on global producers aggressively pricing tonnage imported into the North American potash market. The interaction of global potash supply and demand, ocean, land, and barge freight rates, and currency fluctuations also influence pricing. While we are beginning to see some signs of firmness in potash pricing, global and U.S. potash supply continues to exceed demand and, commodity prices continue to be pressured.
As we reduce our inventory levels due to the reduction in potash production from our East and West facilities, we expect to reduce our potash distribution geography, which we expect will result in increased average net realized sales prices for potash.
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Trio
®
prices and demand.
Sales volumes for Trio
®
decreased for the three months ended March 31, 2016, as compared to the same period in 2015. Trio
®
demand was also negatively impacted by the overall softness in the fertilizer market.
Our average net realized sales price for Trio
®
was
$316
per ton in the first quarter of 2016, a decrease from
$367
per ton in the first quarter 2015. While Trio
®
pricing has historically demonstrated more resiliency than potash pricing due to Trio's
®
unique nutrient make up and application to high-value crops, we expect to see continued downward pressure on the overall potassium markets in 2016. We are focusing our efforts on maximizing our returns in the granular- and premium-sized markets. As we commission our East facility and increase Trio
®
production, we plan to not only expand our domestic marketing efforts, but also increase exports of Trio
®
. As a result, we expect our average net realized sales price of Trio
®
to be pressured in the second half of 2016.
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Costs associated with abnormal production
. We routinely evaluate our production levels and costs to determine if any costs are associated with abnormal production, as described under generally accepted accounting principles. The assessment of normal production levels is judgmental and unique to each quarter. During the first quarter of 2016, we temporarily suspended potash production at our East facility for a total of three days as we performed our final testing related to the conversion of our East facility to Trio
®
-only production.
As a result of the temporary suspension of production, we determined that approximately $0.7 million of production costs at our East facility would have been allocated to additional potash tons produced, assuming we had been operating at normal production rates. Accordingly, these costs were excluded from our inventory values and instead directly expensed in the first quarter 2016 as period production costs. We compare actual production levels relative to what we estimated could have been produced if we had not incurred the temporary production suspensions and lower operating rates in order to determine the abnormal cost adjustment.
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Weather impact.
Our solar facilities experienced below average evaporation rates in 2015. As a result, fewer potash crystals have formed in our evaporation ponds for harvesting during the harvest season that began in the second half of 2015, and was completed in April 2016. Therefore, we expect lower production from these facilities in 2016 as compared to 2015.
Selected Operating and Financial Data
The following table presents selected operations data for the quarter ended March 31, 2016. Analysis of the details of this information is contained throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. We calculate average net realized sales price by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period.
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Change
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Three Months Ended March 31,
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Between
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2016
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2015
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Periods
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% Change
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Production volume (in thousands of tons):
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Potash
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215
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237
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(22
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)
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(9
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)%
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Langbeinite
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44
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36
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8
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22
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%
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Sales volume (in thousands of tons):
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Potash
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218
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231
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(13
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)
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(6
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)%
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Trio
®
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50
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62
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(12
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(19
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)%
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Gross sales (in thousands):
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Potash
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$
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53,695
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$
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90,729
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$
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(37,034
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)
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(41
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)%
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Trio
®
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19,582
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26,292
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(6,710
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)
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(26
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)%
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Total
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73,277
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117,021
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(43,744
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)
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(37
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)%
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Freight costs (in thousands):
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Potash
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6,551
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7,206
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(655
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)
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(9
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)%
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Trio
®
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3,781
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3,706
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75
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2
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%
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Total
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10,332
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10,912
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(580
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)
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(5
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)%
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Net sales (in thousands)
(1)
:
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Potash
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47,144
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83,523
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(36,379
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)
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(44
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)%
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Trio
®
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15,801
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22,586
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(6,785
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)
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(30
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)%
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Total
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$
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62,945
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$
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106,109
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$
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(43,164
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)
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(41
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)%
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Potash statistics (per ton):
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Average net realized sales price
(1)
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$
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216
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$
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362
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$
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(146
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)
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(40
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)%
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Cash operating costs
(1)(2)
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$
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148
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$
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199
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$
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(51
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)
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(26
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)%
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Depreciation and depletion
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58
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79
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(21
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)
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(27
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)%
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Royalties
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11
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14
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(3
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)
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(21
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)%
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Total potash cost of goods sold
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$
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217
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$
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292
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$
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(75
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(26
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)%
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Warehousing and handling costs
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10
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13
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(3
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)
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(23
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)%
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Average potash gross margin
(1)(3)
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$
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(11
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)
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$
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57
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$
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(68
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)
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(119
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)%
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Trio
®
statistics (per ton):
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Average net realized sales price
(1)
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$
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316
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$
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367
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$
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(51
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)
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(14
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)%
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Cash operating costs
(1)
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$
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195
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$
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181
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$
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14
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8
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%
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Depreciation and depletion
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39
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58
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(19
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)
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(33
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)%
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Royalties
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16
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18
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(2
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)
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(11
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)%
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Total Trio
®
cost of goods sold
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$
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250
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$
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257
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$
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(7
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)
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(3
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)%
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Warehousing and handling costs
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10
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12
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(2
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)
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(17
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)%
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Average Trio
®
gross margin
(1)(3)
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$
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56
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$
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98
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$
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(42
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)
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(43
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)%
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(1)
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Additional information about our non-GAAP financial measures is set forth under the heading "Non-GAAP Financial Measures.”
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(2)
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Amounts are presented net of by-product credits. On a per-ton basis, by-product credits were
$12
and
$8
for the three months ended
March 31, 2016
, and
2015
, respectively. By-product credits were
$2.5 million
and
$1.8 million
for the three months ended
March 31, 2016
, and
2015
, respectively.
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(3)
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Amounts presented exclude lower-of-cost-or-market inventory adjustments and costs associated with abnormal production. Lower-of-cost-or-market inventory adjustments were
$41
per ton and
$2
per ton of potash sold in the three month periods ended March 31, 2016 and 2015, respectively. Costs associated with abnormal production were
$3
per ton and $0 per ton of potash produced in the three months ended
March 31, 2016
, and
2015
, respectively.
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Results of Operations
Operating Highlights
Net loss for the first quarter of 2016 was
$18.4 million
, or
$0.24
per basic and diluted share, and cash flows used by operating activities were
$1.1 million
. Based on our expectations for potash pricing for the remainder of the year, we anticipate that we will incur a net loss for the year ending December 31, 2016.
Potash
The majority of our revenues and gross margin are currently derived from the production and sale of potash.
We sold
218,000
tons of potash in the first quarter of 2016 compared with
231,000
tons sold in the first quarter of 2015. Our sales volumes in the first quarter of 2016 were below those in 2015, driven by the timing of the start of the spring application season as described above, as well as decreased sales into the industrial market due to decreased oil and gas drilling in the U.S.
The table below shows our potash sales mix for the three months ended
March 31, 2016
, and
2015
.
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Three Months Ended March 31,
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2016
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2015
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Agricultural
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91%
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81%
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Industrial
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4%
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14%
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Feed
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5%
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5%
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Our production volume of potash in the first quarter of 2016 decreased to
215,000
tons, compared with
237,000
tons produced in the first quarter of 2015. Beginning in late December 2015, and continuing to early February 2016, we curtailed production at our HB facility to manage inventory levels. As a result, production from our HB facility in the first quarter of 2016 was lower than in 2015. Our lower-of-cost-or-market adjustments have increased in the first quarter of 2016 compared with the same period in 2015. As a result, our potash cash operating cost per ton was
$148
in the first quarter of 2016 as compared with
$199
in the first quarter of 2015.
Trio
®
Our Trio
®
production increased
22%
in the first quarter of 2016. During the first quarter of 2016, we continued to focus on increasing our Trio
®
production with the conversion from standard- to premium-sized Trio
®
. Our net realized sales price for Trio
®
in the first quarter of 2016 decreased as compared to a year ago, as well as sequentially from the fourth quarter of 2015. In April 2016, we converted our East facility to a Trio
®
-only facility, and we expect our production of Trio
®
for the remainder of 2016 to exceed 2015 levels. This increase in production is expected to put downward pressure on our average net realized sales price of Trio
®
for the remainder of 2016. We expect the incremental production will provide us the opportunity to pursue markets that have been under-served in previous years and work with our customers to provide a consistent supply of our Trio
®
product. Our sales of Trio
®
decreased to
50,000
tons in the first quarter of 2016 as compared with
62,000
tons in the first quarter of 2015, as our customers delayed purchases due to uncertainties in commodities pricing.
In the first quarter of 2016 compared with 2015, our average Trio
®
gross margin decreased by
$42
per ton. This decrease was primarily due to the decrease in average net realized sales price of
$51
per ton mentioned above, partially offset by a decrease in depreciation expense resulting from the impairment charges recorded in the fourth quarter of 2015. Our cash operating costs of Trio
®
increased by
$14
per ton as we produced more premium-sized product in 2016 as compared to 2015.
Our export sales of Trio
®
tend to have more variability as to the timing of those sales. As a result, the percentage of sales into the export market as compared to the domestic market can fluctuate significantly from period to period, as shown in the table below.
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United States
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Export
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Trio
®
only
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For the three months ended March 31, 2016
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97%
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3%
|
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|
For the three months ended March 31, 2015
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94%
|
|
6%
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Average Net Realized Sales Price
Compared with the first quarter of 2015, our average net realized sales price for potash decreased by
$146
per ton in the first quarter of 2016, to
$216
per ton, largely a result of declining commodity prices and potash supply exceeding demand in 2016. Domestically, the potash market is influenced by global supply and demand, and is impacted by the pricing of imports from our competitors. The strength of the U.S. dollar has resulted in further pressure on potash pricing.
The table below demonstrates our average net realized sales price for potash and Trio
®
through March 31, 2016.
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Average net realized sales price for the three months ended:
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Potash
|
|
Trio
®
|
|
|
(Per ton)
|
March 31, 2016
|
|
$216
|
|
$316
|
December 31, 2015
|
|
$277
|
|
$330
|
September 30, 2015
|
|
$319
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|
$379
|
June 30, 2015
|
|
$358
|
|
$383
|
March 31, 2015
|
|
$362
|
|
$367
|
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash and Trio
®
and are determined by the quantities of product we sell and the sales prices we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred on only a portion of our sales as many of our customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Although our gross sales include the freight that we bill, we do not believe that gross sales provide a representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. Rail freight rates have been steadily increasing, thereby negatively influencing our net realized sales prices. We view net sales, which are gross sales less freight costs, as the key performance indicator of our revenue as it conveys the net sales price of the product that we sold. We manage our sales and marketing operations centrally, and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and by our production capabilities. We generally intend to operate our facilities at full production levels, which provide the greatest operating efficiencies; however, at times we have temporarily curtailed production to manage inventory levels. By having adequate warehouse capacity, we can maintain production levels during periods of fluctuating product demand and have product inventory positioned closer to the fields in order to meet peak periods of fertilizer demand.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our potash and Trio
®
products, less credits generated from the sale of our by-products. Many of our production costs are largely fixed, and, consequently, our costs of sales per ton on a facility-by-facility basis tend to move inversely with the number of tons we produce, within the context of normal production levels. We expect to experience variability in our cost of goods sold due to fluctuations in the relative mix of product that we produce through conventional and solar solution mining. Our cost of goods sold per ton for our solar solution facilities is less than our cost of goods sold per ton for our conventional facilities. However, our solar solution production is impacted by weather variability. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. A smaller component of our cost base includes variable costs associated with contract labor, consumable operating supplies, reagents, and royalties. Our periodic production costs and costs of goods sold will not necessarily match one another from period-to-period based on the fluctuation of inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels change, due to factors such as changes in the grade of ore mined, levels of mine development, plant operating performance, downtime, and annual maintenance turnarounds. We expect that our labor and contract labor costs in Carlsbad, New Mexico, will continue to be influenced most directly by the demand for labor in the local Carlsbad, New Mexico, region where we compete for labor with the potash, oil and gas, and nuclear waste storage industries. Additionally, the East mine has a complex mineralogy. Historically, and through the first quarter of 2016, we produced both potash and Trio
®
at our East facility using a mixed-ore body and processing the ore through a singular product flow at the surface facility. The specific grade, volume, and characterization of the ore that was mined at any particular time was subject to fluctuations due to the nature of the mineral deposits and influenced the tons of potash and langbeinite ultimately produced from the facility, which affected our production costs per ton for both products and affected our quarter-to-quarter results. With the conversion of our East facility to a Trio
®
-only facility in April 2016, we believe we have simplified our process flow, which we expect will ultimately lead to a lower cost structure for our Trio
®
operations once the plant is fully commissioned.
We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of net sales of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that varies with the grade of ore extracted. For the three months ended March 31, 2016, and 2015 our average royalty rate was 5.0% and 4.2%, respectively.
Income Taxes
We are subject to federal and state income taxes on our taxable income. Our effective tax rate for the three months ended March 31, 2016, and 2015 was
zero
and
32.0%
, respectively. Our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax and permanent differences between book and tax income for the period, including the benefit associated with the estimated effect of depletion, research and development credits, and any changes in valuation allowances. During the three months ended March 31, 2016, our effective tax rate was impacted primarily by a valuation allowance placed on the additional deferred tax assets recorded during the period. During the three months ended March 31, 2015, our effective tax rate was impacted primarily by the benefit from estimated depletion deductions.
Our federal and state income tax returns are subject to examination by federal and state tax authorities.
For the three months ended March 31, 2016, we recognized an immaterial amount of income tax expense. For the three months ended March 31, 2015, the total tax expense was
$3.1 million
. Total tax expense for the three months ended March 31, 2015, was comprised of
$0.1 million
of current income tax expense and
$3.0 million
of deferred income tax expense.
We evaluate our deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the states in which we do business. Changing business conditions for normal business transactions and operations, as well as changes to state tax rate and apportionment laws, potentially alter our apportionment of income among the states for income tax purposes. These changes in apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any such changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.
Results of Operations for the Three Months Ended
March 31, 2016
, and
2015
Net Sales
Net sales of potash decreased to
$47.1 million
for the three months ended
March 31, 2016
, from
$83.5 million
for the three months ended
March 31, 2015
. This decrease in net sales of potash was primarily the result of a
6%
decrease in sales volume, as noted above, and a decrease of
$146
per ton in the average net realized sales price.
Net sales of Trio
®
decreased to
$15.8 million
for the three months ended
March 31, 2016
, from
$22.6 million
for the three months ended
March 31, 2015
, due to a
19%
decrease in the volume of sales and a
14%
decrease in the average net realized sales price. Sales volumes for Trio
®
decreased in the first quarter of 2016 compared with the same period in 2015, reflecting overall softness in the fertilizer market as described above.
Cost of Goods Sold
The following table presents our cost of goods sold for potash and Trio
®
for the subject periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Change Between
|
|
|
|
|
2016
|
|
2015
|
|
Periods
|
|
% Change
|
Cost of goods sold (in millions)
|
|
$
|
59.8
|
|
|
$
|
83.3
|
|
|
$
|
(23.5
|
)
|
|
(28
|
)%
|
Cost per ton of potash sold
(1)
|
|
$
|
217
|
|
|
$
|
292
|
|
|
$
|
(75
|
)
|
|
(26
|
)%
|
Cost per ton of Trio
®
sold
(2)
|
|
$
|
250
|
|
|
$
|
257
|
|
|
$
|
(7
|
)
|
|
(3
|
)%
|
|
|
(1)
|
Depreciation and depletion expense for potash was
$12.6 million
and
$18.1 million
in the first quarter of 2016 and 2015, respectively, which equates to
$58
and
$79
on a per-ton basis.
|
|
|
(2)
|
Depreciation and depletion expense for Trio
®
was
$2.0 million
and
$3.5 million
in the first quarter of 2016 and 2015, respectively, which equates to
$39
and
$58
on a per-ton basis.
|
Total per ton cost of goods sold of potash, which includes royalties, depreciation, depletion and amortization, decreased due to the impairment of our West and East facilities that was recorded in the fourth quarter of 2015, increased production from our HB mine, as well as the direct expensing of abnormal production costs related to reduced production levels at East as noted above. We recorded lower-of-cost-or-market inventory adjustments of
$9.0 million
during the first quarter of 2016, primarily the result of lower potash prices. We also recorded
$0.7 million
of abnormal production costs during the first quarter of 2016. Both our lower-of-cost-or-market adjustments and abnormal production costs are excluded from our cost of goods sold.
Our total cost per ton of Trio
®
sold decreased in the first quarter of 2016 as compared to the same period in 2015 primarily due to a decrease in depreciation and depletion due to the impairment of our East facility recorded in the fourth quarter of 2015.
Our total cost of goods sold decreased as a result of lower sales volume for both potash and Trio
®
in the first quarter of 2016, as well as depreciation and depletion expense resulting from the impairment of our West and East facilities recorded in the fourth quarter of 2015. Our potash production costs decreased due to the direct expensing of costs related to reduced production at East, as noted above, and decreased natural gas and electricity costs.
Lower-of-Cost-or-Market Adjustment
During the three months ended March 31, 2016, and 2015, we recorded charges of approximately
$9.0 million
and $
0.4 million
, respectively, as our weighted average finished goods product inventory cost exceeded the estimated net realizable value of our finished goods product inventory. The
$9.0 million
of lower-of-cost-or-market adjustment recorded during the three months ended March 31, 2016, related to our potash inventories, and resulted from lower potash prices. We expect additional lower-of-cost-or-market adjustments to continue into the second quarter of 2016.
Selling and Administrative Expense
Selling and administrative expenses decreased
$0.9 million
, or
12%
, to
$6.6 million
for the three months ended March 31, 2016, from
$7.5 million
for the three months ended March 31, 2015. The decrease is primarily due to decreased administration labor and benefits costs.
Costs Associated with Abnormal Production
During the first quarter of 2016, we temporarily suspended potash production at our East facility for a total of three days as we performed a langbeinite-only testing run. As a result of the temporary suspension of production, we determined that approximately
$0.7 million
would have been allocated to additional tons produced, assuming we had been operating at normal production rates. Accordingly, these costs were excluded from our inventory values and instead expensed in the first quarter of 2016 as period production costs. We compare actual production relative to what we estimated could have been produced if we had not incurred the temporary production suspensions and lower operating rates in order to determine the abnormal cost adjustment.
Restructuring Expense
In January 2016, in response to declining potash prices, we undertook several cost saving actions that were intended to better align our cost structure with the business environment. These initiatives included the elimination of approximately 5% of our workforce, suspension of our cash bonus programs for most employees, and salary decreases for most employees. For the three months ended March 31, 2016, we recognized a restructuring expense of $0.4 million, which is comprised primarily of severance-related payments, all of which was paid in the first quarter of 2016.
Interest Expense
Interest expense increased $0.6 million to
$2.2 million
or 36% for the three months ended March 31, 2016, from
$1.6 million
for the three months ended March 31, 2015. The increase is due to the expensing of deferred financing costs associated with the decrease in the maximum amount available to us under our unsecured credit facility, as discussed in more detail in the "Liquidity and Capital Resources" section below.
Capital Investments
We expect our level of capital investment to be approximately $20 million to $25 million for 2016, the majority of which we expect to be sustaining capital. We anticipate our 2016 operating plans and capital programs will be funded out of operating cash flows and existing cash and cash equivalents.
The above expected capital investment includes amounts to convert our East facility to a Trio
®
-only facility, which occurred in April 2016, and our subsequent activities to optimize our langbeinite recovery techniques and maximize the amount of granular- and premium-sized Trio
®
that we produce.
During the first three months of 2016, we paid cash of
$6.0 million
for capital projects.
Liquidity and Capital Resources
As of
March 31, 2016
, we had cash, cash equivalents, and investments of
$54.9 million
. This amount was made up of the following:
|
|
•
|
$13.1 million
in cash equivalent investments, consisting of money market accounts with banking institutions that we believe are financially sound; and
|
|
|
•
|
$30.0 million
and $
0.5 million
invested in short- and long-term investments, respectively.
|
Our operations have primarily been funded from cash on hand and cash generated by operations. We will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, and if determined by our Board of Directors.
The following summarizes our cash flow activity for the three months ended
March 31, 2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Cash flows (used in) provided by operating activities
|
|
$
|
(1,094
|
)
|
|
$
|
32,674
|
|
Cash flows provided by (used in) investing activities
|
|
$
|
17,616
|
|
|
$
|
(32,440
|
)
|
Cash flows used in financing activities
|
|
$
|
(1,407
|
)
|
|
$
|
(1,037
|
)
|
Operating Activities
Total cash used in operating activities through
March 31, 2016
, was
$1.1 million
, a decrease of
$33.8 million
compared with the first three months of 2015. The decrease was driven by lower net realized sales price per tons in the first three months of 2016 as compared to the same period in 2015.
Investing Activities
Total cash provided by investing activities increased by
$50.1 million
in the first three months of 2016 compared with the same three month period in 2015 as a result of increased investment sales and lower capital investment activity.
Financing Activities
Total cash used in financing activities of
$1.4 million
was due to an increase in debt issuance costs related to the on-going negotiations with our lenders.
Unsecured Credit Facility
We have an unsecured credit facility, led by U.S. Bank, as administrative agent, and Wells Fargo Bank, as syndication agent. In February, March, and May 2016, we entered into a series of amendments that reduced the amount available to us under the credit facility to a maximum of $8 million, which amount may be used only for letters of credit. Any availability of the credit facility is subject to our compliance with financial covenants that provide that our leverage ratio may not exceed 3.5 to 1 and our fixed charge coverage ratio may not be below 1.3 to 1. We were not in compliance with these covenants as of March 31, 2016; however, the lenders under the credit facility have agreed to waive until July 31, 2016, the requirement that we comply with these covenants for the quarter ended March 31, 2016. Further, the lenders agreed that noncompliance with these covenants for the quarter ended March 31, 2016, will not constitute a default or event of default under the credit facility until July 31, 2016. However, if the noteholder waiver discussed below expires before July 31, 2016, as it may be mutually extended, then the waiver under the credit facility will also expire at that earlier date. If current market conditions continue, we anticipate that our adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, and certain other expenses, as defined in the credit facility) will not be sufficient for us to return to compliance with these covenants through 2016. As a result, we are proactively working with our lenders and evaluating our options, which could include additional covenant amendments, waivers, or forbearances, alternative financing arrangements, a possible further reduction in the amount of the facility, and a possible reduction of our outstanding debt, including the payment of prepayment penalties. Our continued failure to comply with these covenants after the waiver expires, or our failure to comply with similar covenants under the terms of our senior notes after June 30, 2016, will result in an event of default that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of our senior notes discussed below and any amounts outstanding under the credit facility. In addition, the amount available under the credit facility would be reduced to zero. In May 2016, we entered into an amendment that provides that the maturity date for the credit facility is the earliest of (1) July 31, 2016, (2) any date on which the aggregate commitment under the credit facility is reduced to zero, and (3) the effective date for a new bank credit facility.
The credit facility also has a covenant that requires us to provide to the lenders audited annual financial statements within 90 days of the end of each year. The audit report must not contain any going concern modification. The audit report accompanying our financial statements for the year ended December 31, 2015, contained a going concern modification, and therefore does not satisfy the credit facility covenant. The lenders under the facility have agreed to waive until July 31, 2016, the requirement that we deliver audited annual financial statements for the year ended December 31, 2015, without any going concern modification. Further, the lenders agreed that the existence of audited annual financial statements for the year ended December 31, 2015, with a going concern modification will not constitute a default or event of default under the facility until July 31, 2016. Our continued failure to comply with this covenant after July 31, 2016, will result in an event of default that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of our senior notes discussed below and any amounts outstanding under the credit facility.
The financial covenants under the credit facility are calculated as follows:
|
|
•
|
Our maximum leverage ratio (calculated as the ratio of funded indebtedness to adjusted EBITDA for the prior four fiscal quarters) is 3.5 to 1, where funded indebtedness is calculated as total funded indebtedness minus cash and cash equivalent investments on hand up to a maximum of $75 million. Our leverage ratio at March 31, 2016, was 3.7 to 1.
|
|
|
•
|
Our minimum fixed charge coverage ratio (calculated as the ratio of adjusted EBITDA for the prior four fiscal quarters, minus maintenance capital expenditures and cash paid for income taxes, to interest expense plus scheduled principal amortization of long-term funded indebtedness) is 1.3 to 1, where annual maintenance capital expenditures is set at $20 million. Our fixed charge coverage ratio at March 31, 2016, was 1.1 to 1.
|
These ratios and other restrictive covenants under the credit facility could limit our ability to engage in activities that we believe are in our long-term best interests.
The facility is unsecured and is guaranteed by our material subsidiaries. We occasionally borrow and repay amounts under the facility for near-term working capital needs and may do so in the future. As of March 31, 2016, we had a $0.5 million letter of credit outstanding under the facility.
Unsecured Senior Notes
In April 2013, we issued $150 million aggregate principal amount of unsecured senior notes (the "Notes") pursuant to a note purchase agreement entered into in August 2012. The Notes consist of the following series:
|
|
•
|
$60 million of 3.23% Senior Notes, Series A, due April 16, 2020
|
|
|
•
|
$45 million of 4.13% Senior Notes, Series B, due April 14, 2023
|
|
|
•
|
$45 million of 4.28% Senior Notes, Series C, due April 16, 2025
|
The Notes are senior unsecured obligations and rank equally in right of payment with any other unsubordinated unsecured indebtedness of ours. The Notes are subject to the same leverage ratio and fixed charge coverage ratio covenants as apply under the credit facility, as described above. In January 2016, we amended the note purchase agreement to provide that the interest rate for the senior notes will be increased by 0.25% during any time that our leverage ratio exceeds 2.25 to 1. As we are not in compliance with our leverage ratio and fixed charge ratio as of March 31, 2016, in accordance with the terms of the note purchase agreement, the above interest rates are increased by 2% beginning April 1, 2016, and will continue as long as we are not meeting these ratios. As described above, these ratios and other restrictive covenants under the Notes could limit our ability to engage in activities that we believe are in our long-term best interests.
We were not in compliance with the financial covenants under the Notes as of March 31, 2016; however, the noteholders have agreed to waive until June 30, 2016, the requirement that we comply with these covenants for the quarter ended March 31, 2016. Further, the noteholders agreed that noncompliance with these covenants for the quarter ended March 31, 2016, will not constitute a default or event of default under the Notes until June 30, 2016. If current market conditions continue, we anticipate that our adjusted EBITDA will not be sufficient for us to return to compliance with these covenants through 2016. As a result, we are proactively working with the noteholders and evaluating our options, which could include additional covenant amendments, waivers, or forbearances, alternative financing arrangements, a possible further reduction in the amount of our credit facility, and a possible reduction of our outstanding debt, including the payment of prepayment penalties. Our continued failure to comply with these covenants after June 30, 2016, will result in an event of default that, if not cured or waived, could result in the acceleration of all outstanding indebtedness, including the acceleration of the Notes and any amounts outstanding under the credit facility.
The obligations under the Notes are unconditionally guaranteed by our material subsidiaries.
Interest is paid semiannually on April 16 and October 16 of each year. Interest expense is recorded net of any capitalized interest associated with investments in capital projects. We incurred gross interest expense of $2.3 million and $1.7 million for the three months ended March 31, 2016, and 2015, respectively. We capitalized $0.1 million and an immaterial amount of interest during the three months ended March 31, 2016, and 2015, respectively.
Off-Balance Sheet Arrangements
As of
March 31, 2016
, we had no off-balance sheet arrangements aside from the operating leases and bonding obligations described in the accompanying notes to the condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2015,
describes the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant changes to our critical accounting policies since December 31, 2015.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use several non-GAAP financial measures to monitor and evaluate our performance. These non-GAAP financial measures include net sales, average net realized sales price per ton, cash operating costs per ton, and average potash and Trio
®
gross margin per ton. These non-GAAP financial measures should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, because the presentation of these non-GAAP financial measures varies among companies, our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies.
We believe these non-GAAP financial measures provide useful information to investors for analysis of our business. We use these non-GAAP financial measures as one of our tools in comparing performance period over period on a consistent basis and when planning, forecasting, and analyzing future periods. We believe these non-GAAP financial measures are widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the potash mining industry. Many investors use the published research reports of these professional research analysts and others in making investment decisions.
Below is additional information about our non-GAAP financial measures, including reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures, for the three months ended March 31, 2016, and 2015.
Net Sales and Average Net Realized Sales Price per Ton
Net sales and average net realized sales price per ton are non-GAAP financial measures. Net sales are calculated as sales less freight costs. Average net realized sales price per ton is calculated as net sales, divided by the number of tons sold in the period. We consider net sales and average net realized sales price per ton to be useful because they remove the effect of transportation and delivery costs on sales and pricing. When we arrange transportation and delivery for a customer, we include in revenue and in freight costs the costs associated with transportation and delivery. However, many of our customers arrange for and pay their own transportation and delivery costs, in which case these costs are not included in our revenue and freight costs. We use net sales and average net realized sales price per ton as key performance indicators to analyze sales and price trends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
Potash
|
|
Trio
®
|
|
Total
|
|
Potash
|
|
Trio
®
|
|
Total
|
Sales
|
|
$
|
53,695
|
|
|
$
|
19,582
|
|
|
$
|
73,277
|
|
|
$
|
90,729
|
|
|
$
|
26,292
|
|
|
$
|
117,021
|
|
Freight costs
|
|
6,551
|
|
|
3,781
|
|
|
10,332
|
|
|
7,206
|
|
|
3,706
|
|
|
10,912
|
|
Net sales
|
|
$
|
47,144
|
|
|
$
|
15,801
|
|
|
$
|
62,945
|
|
|
$
|
83,523
|
|
|
$
|
22,586
|
|
|
$
|
106,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands)
|
|
218
|
|
|
50
|
|
|
|
|
231
|
|
|
62
|
|
|
|
Average net realized sales price per ton
|
|
$
|
216
|
|
|
$
|
316
|
|
|
|
|
$
|
362
|
|
|
$
|
367
|
|
|
|
Cash Operating Costs per Ton
Cash operating costs per ton is a non-GAAP financial measure that is calculated as total cost of goods sold divided by the number of tons sold in the period and then adjusted to exclude per-ton depreciation, depletion, and royalties. Total cost of goods sold is reported net of by-product credits and does not include warehousing and handling costs. We consider cash operating costs per ton to be useful because it represents our core, per-ton costs to produce potash and Trio
®
. We use cash operating costs per ton as an indicator of performance and operating efficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
Potash
|
|
Trio
®
|
|
Total
|
|
Potash
|
|
Trio
®
|
|
Total
|
Cost of goods sold
|
|
$
|
47,288
|
|
|
$
|
12,489
|
|
|
$
|
59,777
|
|
|
$
|
67,454
|
|
|
$
|
15,828
|
|
|
$
|
83,282
|
|
Divided by sales volume (in thousands of tons)
|
|
218
|
|
|
50
|
|
|
|
|
231
|
|
|
62
|
|
|
|
Cost of goods sold per ton
|
|
$
|
217
|
|
|
$
|
250
|
|
|
|
|
$
|
292
|
|
|
$
|
257
|
|
|
|
Less per-ton adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and depletion
|
|
$
|
58
|
|
|
$
|
39
|
|
|
|
|
$
|
79
|
|
|
$
|
58
|
|
|
|
Royalties
|
|
11
|
|
|
16
|
|
|
|
|
14
|
|
|
18
|
|
|
|
Cash operating costs per ton
|
|
$
|
148
|
|
|
$
|
195
|
|
|
|
|
$
|
199
|
|
|
$
|
181
|
|
|
|
Average Potash and Trio
®
Gross Margin per Ton
Average potash and Trio
®
gross margin per ton are non-GAAP financial measures that are calculated by subtracting the sum of per ton total cost of goods sold and per ton warehousing and handling costs from the average net realized sales price. We believe these measures are useful because they represent the average margin we realize on each ton of potash and Trio
®
sold. The reconciliations of average potash and Trio
®
net realized sales price to GAAP sales are set forth separately above under the heading "Net Sales and Average Net Realized Sales Price per Ton." Amounts presented exclude lower-of-cost-or-market inventory adjustments of
$41
per ton and
$2
per ton of potash sold for the three months ended March 31, 2016, and 2015, respectively. Further, our average potash gross margin per ton excludes costs associated with abnormal production of
$3
per ton and $0 per ton of potash produced during the three months ended March 31, 2016 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Potash
|
|
|
|
|
Average potash net realized sales price
(1)
|
|
$
|
216
|
|
|
$
|
362
|
|
Less total potash cost of goods sold
|
|
217
|
|
|
292
|
|
Less potash warehousing and handling costs
|
|
10
|
|
|
13
|
|
Average potash gross margin per ton
|
|
$
|
(11
|
)
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Trio®
|
|
|
|
|
Average Trio
®
net realized sales price
(1)
|
|
$
|
316
|
|
|
$
|
367
|
|
Less total Trio
®
cost of goods sold
|
|
250
|
|
|
257
|
|
Less Trio
®
warehousing and handling costs
|
|
10
|
|
|
12
|
|
Average Trio
®
gross margin per ton
|
|
$
|
56
|
|
|
$
|
98
|
|
(1)
The reconciliations of average potash and Trio
®
net realized sales price to GAAP sales are set forth above.