Intrepid Potash, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed March 12, 2019. Intrepid is a U.S.-based mineral producer of potash, Trio® specialty fertilizer, water, salt, magnesium chloride, brines, and oilfield products and services. Operations are concentrated in New Mexico and Utah. Beginning in the fourth quarter of 2018, the company reported three segments: potash, Trio®, and oilfield solutions.
The company produces potash through solution and brine-mining facilities, produces Trio® at its East underground mine, and has kept its West potash mine in care-and-maintenance mode since July 2016.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $208.3 million | $177.9 million | 17% increase |
| Gross margin | $38.3 million | $11.9 million | Improved |
| Gross margin percentage | 18% | 7% | Improved |
| Operating income (loss) | $15.5 million | $(14.1) million | Improved |
| Net income (loss) | $11.8 million | $(22.6) million | Returned to profitability |
| Basic and diluted EPS | $0.09 | $(0.20) | Improved |
| Operating cash flow | $64.2 million | $16.7 million | Increase of $47.5 million |
| Capital expenditures | $16.9 million | $13.5 million | Increased |
| Cash and cash equivalents | $33.2 million | $1.1 million | Increased |
| Stockholders’ equity | $417.3 million | $402.1 million | Increased |
Product revenue consisted primarily of potash at $107.5 million, Trio® at $64.1 million, water at $19.8 million, salt at $6.9 million, magnesium chloride at $6.8 million, and brines at $1.8 million. Water revenue increased substantially from $7.0 million in 2017. No customer represented more than 10% of annual sales.
Segment performance and material changes
| Segment | 2018 sales | 2018 gross margin | 2017 comparison |
|---|---|---|---|
| Potash | $124.1 million | $29.0 million | Sales increased from $107.9 million; margin increased from $15.7 million |
| Trio® | $66.8 million | $(3.8) million | Sales increased modestly from $63.7 million; deficit improved from $(9.5) million |
| Oilfield solutions | $17.4 million | $13.0 million | Sales increased from $6.3 million |
- Potash tons sold increased 3% to 364,000 tons, while average net realized price increased to $256 per ton from $238.
- Trio® tons sold declined to 225,000 from 237,000, but average net realized price increased to $199 per ton from $191. The segment remained loss-making after freight, production costs, and a $1.7 million inventory valuation adjustment.
- Potash production declined slightly to 344,000 tons from 359,000, reflecting average evaporation conditions at the solar facilities.
- Oilfield solutions benefited from strong Permian Basin drilling activity, especially water sales and new service offerings.
- Interest expense declined to $3.9 million from $11.7 million, primarily because senior-note rates were reduced beginning November 2017 and debt prepayment costs declined.
- The company adopted ASC 606 using the full retrospective method. Prior-period amounts were recast, and opening retained deficit was increased by $3.3 million. Byproduct sales are now reported as revenue rather than as a reduction of cost of goods sold.
Liquidity, debt, and cash flow
- At December 31, 2018, the company had $50.0 million of senior notes outstanding: $20.0 million due in 2020, $15.0 million due in 2023, and $15.0 million due in 2025.
- The asset-based revolving credit facility was expanded to $50.0 million and extended to October 2023. The company had no borrowings outstanding, $1.0 million of letters of credit, and $49.0 million of availability at year-end.
- The company repaid $10.0 million of senior notes during 2018 and remained in compliance with debt covenants. The reported fixed-charge coverage ratio was 12.0 to 1.0 and leverage ratio was 0.9 to 1.0 at year-end.
- Cash provided by operations was $64.2 million, compared with capital expenditures of $16.9 million. Financing cash outflows were $15.3 million, primarily reflecting debt repayment and related costs.
- Management expects 2019 capital investments of $15 million to $25 million, funded primarily by operating cash flow and existing cash, with potential use of the revolving facility.
Outlook, commentary, risks, and unusual items
- Management expects the oversupplied global potash market and related pricing pressure to continue for several years, although production curtailments and improved product mix supported 2018 pricing.
- Domestic Trio® pricing is expected to trend slightly higher in the first half of 2019 following a fourth-quarter 2018 price increase. The company intends to prioritize price over volume, particularly in international markets.
- Water contracts were expected to generate $20 million to $30 million of 2019 revenue and $25 million to $35 million of 2019 cash receipts. These expectations depend on customer demand, oil-and-gas activity, and regulatory approval of water-rights changes.
- On February 5, 2019, Intrepid agreed to acquire a 51% interest in Dinwiddie Jal Ranch assets for approximately $33.2 million, as part of an overall $65 million transaction. The assets primarily include land and water rights. Closing was expected in the first quarter of 2019, subject to customary conditions, and was expected to be funded primarily with cash.
- Third parties have protested preliminary authorizations supporting substantially all water sales. The New Mexico Office of the State Engineer was expected to hold hearings in 2019. An adverse outcome could restrict water sales, increase costs, or require refunds of customer prepayments.
- The company recorded a $1.7 million lower-of-cost-or-net-realizable-value inventory adjustment in 2018, compared with $6.4 million in 2017 and $20.4 million in 2016.
- Environmental and reclamation obligations remain material. The discounted asset retirement obligation was $23.1 million, while the undiscounted estimated reclamation cost was approximately $59.5 million. Environmental capital projects were expected to require $4 million to $5 million annually in 2019 and 2020.
- Mosaic alleges trade-secret and related claims seeking at least $22 million to $28 million plus other damages. Trial was scheduled for September 2019. The company recorded no loss contingency and stated that it is vigorously defending the matter.
- Potash pricing, agricultural demand, weather and evaporation rates, oil-and-gas activity, water-rights permits, mine safety, environmental compliance, reserve estimates, transportation costs, and potential impairment of long-lived assets are significant risks.
- The company did not anticipate paying cash dividends and reported effective disclosure controls and internal control over financial reporting as of December 31, 2018. KPMG issued unqualified audit opinions.
Most important facts for investors to verify
- Whether potash pricing and volumes remain sufficient to sustain the 2018 improvement in margins.
- Whether Trio® can reach profitability after remaining loss-making in 2018.
- Actual 2019 water revenue, cash collections, customer concentration, and resolution of protested water-rights authorizations.
- Completion, funding, and operating economics of the Dinwiddie asset acquisition.
- Compliance with progressively tighter debt covenants, including the fixed-charge coverage and leverage requirements beginning in late 2019.
- Cash conversion after seasonal working-capital needs, capital spending, debt maturities, environmental spending, and the acquisition.
- Potential exposure from the Mosaic litigation, East tailings-dam requirements, environmental matters, reclamation obligations, and future asset impairments.
- Comparability of prior-period results after the retrospective adoption of ASC 606 and reclassification of byproduct sales.