Intrepid Potash, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a U.S.-based producer of potash, Trio®, magnesium, sulfur, salt, water, brines and oilfield products and services. Its operations are organized into potash, Trio® and oilfield solutions segments. The filing covers the unaudited quarter ended March 31, 2020, compared with the quarter ended March 31, 2019.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $64.0 million | $57.6 million | Up 11% |
| Gross margin | $5.6 million | $13.2 million | Down 57% |
| Gross margin percentage | 8.8% | 22.9% | Down 14.1 percentage points |
| Operating income (loss) | $(6.8) million | $6.4 million | Declined |
| Net income (loss) | $(7.4) million | $6.2 million | Declined |
| Basic and diluted EPS | $(0.06) | $0.05 | Declined |
| Cash flow from operations | $14.8 million | $8.1 million | Up $6.7 million |
Sales growth reflected higher Trio® and water revenue, while potash revenue was broadly stable. Potash sales volume increased 13% to approximately 99 thousand tons, but average net realized price declined to $255 per ton from $288. Trio® sales volume increased 36% to approximately 76 thousand tons, while average net realized price declined to $193 per ton from $206.
Segment gross margin was $4.3 million for potash, $(3.6) million for Trio® and $4.8 million for oilfield solutions. Trio® results were affected by higher costs, product mix, freight, and a $0.6 million lower-of-cost-or-net-realizable-value inventory adjustment.
Operating results included a $10.1 million litigation settlement accrual related to Mosaic and a $4.7 million gain on the sale of approximately 320 acres of land. Selling and administrative expense increased 14% to $6.6 million, primarily because of litigation costs. The effective income tax rate was 0%, with an immaterial tax benefit and a full valuation allowance against deferred tax assets.
Liquidity, cash flow and debt
- Cash and cash equivalents were $44.4 million at March 31, 2020, compared with $20.6 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $45.0 million.
- Operating cash flow was $14.8 million. Investing cash flow was $(0.9) million, including $5.7 million of capital expenditures and $4.8 million of proceeds from the land sale. Financing cash flow was $10.0 million, primarily from credit-facility borrowings.
- Total debt consisted of $50 million of senior notes and approximately $29.8 million borrowed under the revolving credit facility at March 31, 2020. The facility had $44.2 million of remaining availability, including the effect of $1.0 million of outstanding letters of credit.
- The $20 million Series A senior notes matured and were repaid on April 16, 2020. In April, the company also received a $10 million Paycheck Protection Program loan bearing 1% interest, with expected but not assured forgiveness of most of the balance.
- At March 31, 2020, the company reported a 7.2-to-1.0 fixed-charge coverage ratio and a 1.6-to-1.0 leverage ratio, compared with covenant requirements of at least 1.3-to-1.0 and no more than 3.5-to-1.0, respectively.
Material changes versus the prior comparable period
- Revenue increased $6.4 million, but gross margin fell $7.5 million because of lower realized pricing, higher production costs, increased freight, lower byproduct sales and the Trio® inventory adjustment.
- Potash production increased 25%, while below-average evaporation in 2019 increased per-ton production costs.
- Trio® revenue increased 27%, but the segment moved from a $0.7 million gross margin to a $3.6 million gross deficit.
- Water sales increased to $8.5 million from $5.4 million, supported by strong demand and the Intrepid South acquisition. Salt and magnesium chloride sales declined.
- Inventory declined to $116.3 million, including current and long-term parts inventory, from $121.8 million at year-end 2019.
- The company adopted the current expected credit loss standard on January 1, 2020; the reported effect was immaterial.
Guidance, outlook, commentary and risks
Management stated that COVID-19 did not materially affect first-quarter results but expected a material effect on future revenue growth and profitability, particularly in oilfield solutions. Reduced oil prices and drilling activity were expected to lower water, brine and high-speed mixing demand beginning in the second quarter. The company suspended its 2020 water guidance.
Management reduced the 2020 sustaining capital program to the low end of the previously indicated $10 million to $15 million range and deferred most opportunity capital, with expected opportunity spending of $5 million to $10 million. It expected remaining capital and operating plans to be funded from operating cash flow and existing cash, with possible use of the revolving facility.
The company accrued a $10 million Mosaic settlement payable, expected to be paid in May 2020. Its New Mexico Pecos River water rights remain subject to litigation and regulatory challenges. The company cited historical and legal support for approximately 19,836 acre-feet of rights, while state analysis indicated at least 6,062 acre-feet of established rights. A November 2020 adjudication hearing was scheduled, and a court ruling potentially limited two specific water leases while not affecting mining operations.
On April 17, 2020, the NYSE notified the company that its stock had fallen below the $1.00 average closing-price requirement. The company intended to cure the deficiency, generally within six months, but warned that failure could result in suspension and delisting.
Most important facts for investors to verify
- Whether COVID-19-driven declines in oilfield activity materially reduce water, brine and related revenue beyond the first quarter.
- The timing and final terms of the $10 million Mosaic settlement and the effect on cash liquidity.
- Repayment or forgiveness status of the $10 million PPP loan.
- Progress and outcome of the Pecos River water-rights adjudication and related New Mexico Supreme Court petitions.
- Whether the company regains compliance with the NYSE minimum share-price requirement.
- Potash and Trio® pricing, production costs, freight costs and inventory valuation, given the sharp year-over-year margin deterioration.
- Compliance with senior-note and revolving-credit covenants following the Series A repayment, additional PPP borrowing and potential operating weakness.