Intrepid Potash, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a U.S.-based producer of potash, Trio®, magnesium, sulfur, salt, water and oilfield-related products. Its operations are organized into potash, Trio® and oilfield solutions segments. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $67.9 million | $46.5 million | $139.4 million | $110.4 million |
| Gross margin | $14.2 million | $(0.6) million | $23.3 million | $5.0 million |
| Gross margin percentage | 20.9% | (1.3)% | 16.7% | 4.5% |
| Operating income (loss) | $10.3 million | $(8.2) million | $13.2 million | $(15.0) million |
| Net income (loss) | $19.5 million | $(8.9) million | $22.0 million | $(16.3) million |
| Diluted EPS | $1.46 | $(0.68) | $1.65 | $(1.25) |
| Operating cash flow | Not separately provided | Not separately provided | $51.4 million | $23.5 million |
Sales increased 46% in the quarter and 26% year to date. Potash sales rose 53% in Q2 and 38% year to date; Trio® sales rose 40% and 21%, respectively. Average net realized prices increased to $319 per ton for potash and $271 per ton for Trio® in Q2, versus $256 and $208, respectively, in the prior-year quarter. These are non-GAAP measures.
Cash and cash equivalents were $53.3 million at June 30, 2021, compared with $19.5 million at December 31, 2020. Including restricted cash, total cash was $53.9 million. The company had $29.8 million drawn on its revolving credit facility, $1.0 million of letters of credit and approximately $44.2 million of remaining borrowing availability at quarter-end. It reported a zero leverage ratio and a 16.9-to-1.0 fixed charge coverage ratio, versus required thresholds of 3.25-to-1.0 and 1.2-to-1.0.
In June 2021, the company repaid the remaining $15.0 million of Series B Senior Notes, paid a $0.5 million make-whole premium and terminated the related note agreement. The PPP loan was forgiven, producing a $10.1 million gain on extinguishment of debt. Excluding revolving credit facility advances, long-term debt was zero at June 30, 2021.
Material changes versus the prior comparable period
- Potash sales volumes increased 24% in Q2 and 20% for the first half; Trio® volumes increased 17% and 4%, respectively.
- Higher fertilizer prices, stronger agricultural demand and improved evaporation conditions supported volume, pricing and margins.
- No inventory valuation charges were recorded in 2021, compared with $2.2 million in Q2 2020 and $2.8 million in the first half of 2020.
- Trio® gross margin improved to $3.2 million in Q2 from a $3.2 million deficit; potash gross margin increased to $10.1 million from $2.0 million.
- Oilfield solutions sales declined 28% year to date, and segment gross margin declined to $1.4 million from $5.5 million, although Q2 sales improved 21% year over year as oilfield activity recovered.
- Operating cash flow increased $27.9 million year to date, while capital expenditures declined to $6.6 million from $10.6 million.
- A $6.0 million Texas land sale generated a $2.8 million gain in May 2021; the prior-year period included a $4.7 million land-sale gain and a $10.1 million litigation settlement expense.
Guidance, outlook, commentary and risks
Management expects 2021 capital investments of approximately $20 million to $30 million, including $12 million to $15 million of sustaining capital. The company expects to fund capital needs with operating cash flow and existing cash, with potential use of the revolving facility.
Management announced a $90-per-ton potash price increase in June 2021 and a $35-per-ton Trio® price increase in late June. Most Q3 potash sales had been committed before the potash increase, while management expected most of the Trio® increase to be reflected in Q3 results. Management expects oilfield activity and water sales to improve in the second half of 2021, but noted uncertainty from COVID-19, oil prices, drilling activity and potential restrictions.
The most significant disclosed contingency involves challenged Pecos River water rights covering approximately 20,000 acre-feet per year. A court ruling was expected in late summer 2021, and an appeal concerning cancelled preliminary authorizations was pending. A customer declared a default under a long-term water contract; if unresolved, Intrepid may need to repay the customer’s $32.5 million outstanding contract liability. Contract liabilities totaled $33.6 million at June 30, 2021, primarily for customer advances on future water deliveries.
Other risks include potash and fertilizer pricing, agricultural demand, oilfield cyclicality, production interruptions, weather and evaporation conditions, transportation costs, environmental and mining regulation, reclamation obligations, labor availability, additional inventory or asset impairments and COVID-19 impacts. Reclamation security totaled $23.0 million, consisting primarily of surety bonds.
Important facts for investors to verify
- Resolution and financial consequences of the challenged Pecos River water rights and the potential $32.5 million customer repayment.
- Whether announced potash and Trio® price increases are realized in Q3 and sustain recent margin expansion.
- Continuation of agricultural demand, fertilizer pricing and sales volumes amid seasonal and commodity-market volatility.
- Recovery in oilfield solutions revenue and water sales, particularly after the weak first half.
- Actual 2021 capital spending relative to the $20 million to $30 million estimate.
- Post-quarter debt reduction, including the early-July repayment of approximately $19.8 million under the revolving credit facility.
- The effect of the $10.1 million PPP forgiveness gain and the $2.8 million land-sale gain when assessing recurring earnings.