Intrepid Potash, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a diversified U.S. mineral producer with three segments: potash, Trio® specialty fertilizer, and oilfield solutions. It produces potash and Trio® from facilities in New Mexico and Utah and sells water, brine, salt, magnesium chloride and other oilfield products and services. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $91.7 million | $67.9 million | $196.1 million | $139.4 million |
| Gross margin | $41.8 million | $14.2 million | $89.0 million | $23.3 million |
| Gross margin percentage | 45.6% | 20.9% | 45.4% | 16.7% |
| Operating income | $31.8 million | $10.3 million | $71.9 million | $13.2 million |
| Net income | $23.7 million | $19.5 million | $55.1 million | $22.0 million |
| Diluted EPS | $1.74 | $1.46 | $4.03 | $1.65 |
| Operating cash flow | Not separately provided | Not separately provided | $83.2 million | $51.4 million |
Q2 operating margin was approximately 34.7%, compared with 15.2% in the prior-year quarter. Six-month operating margin was approximately 36.6%, compared with 9.4% in the prior-year period. Income tax expense was $8.1 million in Q2 and $17.2 million for the first six months; the effective tax rates were 25.4% and 23.8%, respectively, versus 0% in 2021 because the company had previously maintained a full valuation allowance against deferred tax assets.
- Potash segment sales were $48.8 million in Q2 and $105.3 million for the first half, with gross margins of $24.9 million and $54.0 million, respectively.
- Trio® segment sales were $35.5 million in Q2 and $76.5 million for the first half, with gross margins of $13.1 million and $29.2 million.
- Oilfield solutions sales were $7.5 million in Q2 and $14.5 million for the first half, with gross margins of $3.8 million and $5.8 million.
- Average net realized pricing increased to $738 per potash ton and $493 per Trio® ton in Q2, compared with $319 and $271, respectively, in Q2 2021. For the first half, pricing was $713 per potash ton and $476 per Trio® ton, versus $300 and $251.
- Sales volumes declined 39% for potash and 21% for Trio® in Q2; first-half potash volume declined 39% and Trio® volume declined 10%.
- Cash and cash equivalents were $81.9 million at June 30, 2022, compared with $36.5 million at December 31, 2021. Including restricted cash, total cash was $82.5 million.
- Net cash used in investing activities was $33.6 million, including $22.8 million of capital expenditures and $10.9 million of investment purchases. Financing cash use was $4.3 million.
- The company had no borrowings under its revolving credit facility and $1.0 million of outstanding letters of credit at June 30. It was in compliance with applicable covenants. In August 2022, after quarter-end, the facility was expanded from $75 million to $150 million and its maturity was extended to August 2027.
Material changes versus the prior comparable period
- Sales increased 35% in Q2 and 41% for the first six months, driven primarily by substantially higher potash and Trio® pricing and stronger oilfield activity.
- Gross margin increased by $27.6 million in Q2 and $65.7 million for the first half, despite lower fertilizer volumes. Higher pricing more than offset inflationary production costs and reduced production.
- Potash production was constrained by below-average 2021 evaporation rates, resulting in reduced inventory available for sale. Management expected production rates to return to normal in Q3 2022, with production beginning in August.
- Oilfield solutions sales increased 126% in Q2 and 91% for the first half, reflecting higher oil prices and activity near the company’s Intrepid South property. Related costs also increased because of contract labor, rentals, royalties, fuel and electricity.
- Interest expense declined materially following repayment of the remaining $15.0 million of senior notes in June 2021 and a $10.0 million credit-facility balance in August 2021.
- Prior-year results included a $10.1 million gain from forgiveness of the PPP loan and a $2.8 million gain on the sale of Texas land. Q2 2022 instead included a $1.1 million loss on asset sales.
Guidance, outlook, risks and unusual items
- Management expected 2022 capital investments of $65 million to $75 million, including approximately $35 million of sustaining capital. Planned projects included an additional Moab cavern, HB pipeline improvements, and brackish and deep-brine wells at Wendover.
- Management expected current commodity prices, favorable farmer economics and constrained global potash supply to support demand, but noted slow early Q3 sales because customers were limiting inventory at elevated prices. Demand was expected to improve as harvest progressed.
- Inflation was increasing labor, supplies, fuel, power and other production costs. Management stated that fertilizer price increases had outpaced cost increases during the first half, but warned that margin and earnings could decline if prices weaken while inflation persists.
- Potash and Trio® sales are seasonal and sensitive to weather, planting decisions, inventory levels, transportation, crop economics and production conditions. Lower 2021 evaporation reduced 2022 potash availability.
- The company’s Pecos River water rights remain subject to appeal. A court ruling reduced recognized rights to 150 acre-feet per year for industrial salt processing. If the appeal is unsuccessful, the company may have to repay water previously pumped 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 was recorded.
- A water customer’s contract was suspended, and the company stated it was likely to repay the $32.6 million contract liability outstanding at June 30, 2022 for undelivered water. The customer could terminate after the suspension period and require repayment of undelivered amounts.
- The company settled and dismissed litigation with NGL Energy Partners in June 2022; the settlement was not material to results and the joint marketing agreement was terminated.
- Management believed available cash, remaining credit capacity and expected operating cash flow were sufficient to meet obligations for the next twelve months.
- Potential growth initiatives included a produced-water treatment pilot, a frac-sand project targeting more than 600,000 tons annually with estimated capital investment of $16 million, and additional oilfield infrastructure. These projects remain subject to feasibility, permitting, execution and market risks.
Most important facts for investors to verify
- Whether elevated potash and Trio® pricing can persist if customers continue reducing inventory and fertilizer volumes remain below prior-year levels.
- Whether potash production normalizes as expected after the weak 2021 evaporation season and whether production costs remain elevated.
- The outcome and timing of the Pecos River water-rights appeal and any related repayment obligation.
- Whether the company must repay the $32.6 million water-related contract liability and the effect on liquidity and future revenue.
- Execution, permitting and funding requirements for the $65 million to $75 million 2022 capital program and planned growth projects.
- The impact of inflation, transportation costs, weather, oilfield activity, fertilizer demand and global potash supply disruptions on future margins and cash flow.
- The terms and covenant capacity of the amended $150 million revolving credit facility completed in August 2022.