Intrepid Potash, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a U.S.-based producer of potash, Trio®, magnesium, sulfur, salt, water, brine and oilfield-related products. Operations are organized into potash, Trio® and oilfield solutions segments. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $86.9 million | $104.4 million | Down 17% |
| Gross margin | $16.4 million | $47.2 million | Down 65% |
| Gross margin percentage | 18.8% | 45.2% | Down 26.4 percentage points |
| Operating income | $5.4 million | $40.1 million | Down 87% |
| Net income | $4.5 million | $31.4 million | Down 86% |
| Diluted EPS | $0.35 | $2.31 | Down $1.96 |
| Net cash provided by operating activities | $8.4 million | $34.1 million | Down $25.7 million |
Potash segment sales were $52.5 million, with gross margin of $14.4 million. Trio® sales were $30.3 million, with gross margin of $1.5 million. Oilfield solutions sales were $4.3 million, with gross margin of $0.5 million.
Average net realized selling prices declined to $485 per ton for potash from $703 and to $344 per ton for Trio® from $469. Potash sales volume increased 29% to 89 thousand tons, while Trio® sales volume decreased 8% to 65 thousand tons.
Cash and cash equivalents were $10.5 million at March 31, 2023, compared with $18.5 million at December 31, 2022. Including restricted cash, cash, cash equivalents and restricted cash totaled $11.0 million. Total assets were $801.0 million and stockholders’ equity was $720.3 million.
The company used $20.4 million in investing activities, including $21.0 million for capital investments, and generated $3.9 million in financing activities. Capital expenditures were funded partly through a $5.0 million draw on the revolving credit facility.
The revolving credit facility provides $150 million of capacity and matures August 4, 2027. Borrowings bear interest at SOFR plus an applicable margin of 1.50% to 2.25%. Borrowings outstanding were $5.0 million at March 31, 2023; the company reported compliance with all covenants. As of April 28, 2023, the company reported approximately $9.5 million of cash and no borrowings under the facility.
Material changes versus the prior comparable period
- Sales declined primarily because of lower potash and Trio® pricing, reduced Trio® volume and lower water-related revenue.
- Gross margin fell sharply as selling prices declined while production costs increased. Cost of goods sold rose 26% despite the lower revenue base.
- Potash pricing declined 31%, partially offset by a 29% increase in volume. Potash production decreased from 103 thousand tons to 90 thousand tons.
- Trio® pricing declined 27%, volume fell 8%, and production decreased 25% due in part to an eight-day East plant outage.
- Oilfield solutions revenue decreased 39%, mainly because of the timing of frac jobs and lower water sales.
- Selling and administrative expense increased 30%, driven by higher corporate salaries, stock compensation and professional services, including legal costs.
- Inventory declined to $107.2 million from $114.8 million at year-end 2022, while property, plant, equipment and mineral properties increased to $387.9 million from $375.6 million.
Outlook, commentary, risks and unusual items
Management expects 2023 capital investments of approximately $60 million to $75 million, including $25 million to $35 million of sustaining capital. The company expects the remaining capital program and operating needs to be funded from operating cash flow, existing cash and, if necessary, the revolving credit facility. Management states that available liquidity is sufficient for the next twelve months.
- A new three-lateral horizontal potash cavern at Moab was substantially completed in April 2023 and was expected to be online in the second quarter. An improved HB pipeline system was expected to be completed in the first half of 2023, with higher flow rates expected in the second half.
- Management expects potash and Trio® pricing to remain pressured after elevated 2022 prices and customer inventory carryover. Distributors are expected to target minimal carryover inventory after the 2023 spring season.
- Inflation continues to affect labor, natural gas, maintenance and other production costs. Because many production costs are fixed, lower production or sales volumes can increase unit costs and reduce margins.
- The company is pursuing a sand mine opportunity targeting approximately one million tons of wet sand annually, with construction targeted for the fourth quarter of 2023, subject to permits, archeological work, supply availability and equipment.
- The company’s Pecos River water rights remain subject to appeal. The adjudication court previously determined that only 150 acre-feet per year remained valid for industrial-salt processing use. If the appeal is unsuccessful, the company may have to repay water previously sold under preliminary authorizations, potentially up to twice the volume removed. The amount, timing and form of any repayment cannot reasonably be estimated, and no loss contingency has been recorded.
- A long-term water customer terminated its contract in 2022, and the company refunded a $32.6 million customer prepayment. Contract liabilities were $2.3 million at March 31, 2023.
- The company recorded $5.2 million of estimated contingent liabilities, mainly related to an Intrepid South trespass matter and potential historical royalty underpayments.
- The company’s investment in W.D. Von Gonten Laboratories depends in part on a proposed transaction involving an acquiror that was delisted from Nasdaq and had not filed current financial statements. Intrepid had not recorded an impairment but stated that an impairment may be required if the transaction is not finalized.
Facts investors should verify
- Whether potash and Trio® prices stabilize near first-quarter levels or decline further.
- Progress, cost and production impact of the Moab cavern, HB pipeline and other capital projects.
- Cash generation relative to the planned $60 million to $75 million of 2023 capital investment.
- Status and potential financial exposure of the Pecos River water-rights appeal and any related repayment obligation.
- Production recovery at the Trio® East facility following the eight-day outage.
- Inflation, labor, natural gas, freight and maintenance costs and their effect on unit costs and margins.
- Liquidity, borrowing availability and covenant compliance as operating cash flow declines.
- Potential impairment of the W.D. Von Gonten Laboratories investment.