Intrepid Potash, Inc. annual report, FY2020

Intrepid Potash, Inc. — Fiscal 2020 Form 10-K Summary

Business context and reporting period

Intrepid Potash, Inc. is a U.S.-based diversified mineral producer reporting for the fiscal year ended December 31, 2020. Its three operating segments are potash, Trio® specialty fertilizer, and oilfield solutions. Products include potash, Trio®, water, salt, magnesium chloride, brines, and related oilfield services. Operations are located in New Mexico and Utah; the company is the only U.S. producer of muriate of potash.

Fiscal 2020 was materially affected by COVID-19, which reduced oil and gas activity and demand for water, industrial potash, brine, and related services. The filing was signed March 2, 2021. KPMG reported unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Key financial metrics

Metric	2020	2019	Change
Sales	$197.0 million	$220.1 million	Down 11%
Gross margin	$10.5 million	$43.5 million	Down $32.9 million
Gross margin percentage	5%	20%	Down 15 percentage points
Operating income (loss)	$(23.2) million	$16.4 million	Declined $39.6 million
Net income (loss)	$(27.2) million	$13.6 million	Turned to loss
Basic EPS	$(2.09)	$1.06	Declined
Cash flow from operations	$31.1 million	$49.4 million	Down $18.2 million
Capital expenditures and other asset additions	$16.4 million	$80.7 million	Down $64.3 million

Potash represented approximately 47% of total sales, Trio® 33%, and water 10%. Potash average net realized price declined to $250 per ton from $284, while Trio® pricing was unchanged at $195 per ton. Potash sales volume was 317,000 tons versus 319,000 tons; Trio® sales volume increased to 230,000 tons from 225,000 tons.

Potash segment: Sales were $108.1 million and gross margin was $11.6 million, compared with $124.6 million and $27.8 million in 2019. Production declined to 308,000 tons from 328,000 tons.
Trio® segment: Sales increased to $70.3 million from $69.6 million, but the segment generated an $8.5 million gross deficit versus $1.1 million of gross margin. Higher unit costs, reduced production rates, pelletization losses, and a $2.9 million inventory valuation adjustment were significant factors.
Oilfield solutions: Sales fell to $18.9 million from $27.9 million and gross margin declined to $7.5 million from $14.6 million, primarily due to reduced drilling activity. Water sales were $20.4 million versus $25.7 million.
Inventory and unusual items: The company recorded $4.0 million of lower-of-cost-or-net-realizable-value inventory adjustments, including $2.9 million in Trio® and $1.1 million in potash. It also recorded a $10.0 million litigation settlement with Mosaic and a $4.7 million gain on the sale of Intrepid South land.

Liquidity, debt, and balance sheet

Cash and cash equivalents were $19.5 million at December 31, 2020, compared with $20.6 million a year earlier.
Total assets were $550.2 million and stockholders’ equity was $411.3 million.
The company had $29.8 million outstanding under a $75 million secured revolving credit facility, $20.4 million of stated availability, and a $1.0 million letter of credit. The facility matures in 2024 and bears interest at LIBOR plus 1.25% to 2.00%.
Remaining senior notes consisted of $15.0 million of Series B notes due April 2023, bearing interest at 4.63%. The company repaid $20.0 million of Series A notes at maturity and prepaid $15.0 million of Series C notes during 2020, including a $1.9 million make-whole payment.
The company also had a $10.0 million Paycheck Protection Program loan due April 2022 at 1% interest. It applied for forgiveness of the full amount; forgiveness was not assured and an eligibility review was expected.
Debt covenants were satisfied at year-end. The fixed charge coverage ratio was 2.9 to 1.0 versus a 1.3 minimum, and the leverage ratio was 2.3 to 1.0 versus a 3.5 maximum.
Contract liabilities were $30.4 million, primarily customer advances for future water deliveries, compared with $16.6 million in 2019.

Material changes versus the prior comparable period

COVID-19 caused a substantial reduction in oilfield activity, lowering water and industrial-related sales and increasing uncertainty regarding future demand.
Potash pricing weakened during 2020, while the company reported price increases beginning in late 2020 and continuing into February 2021. Management stated that current posted agricultural potash prices were $140 per ton above the 2020 summer-fill price, although realized pricing would depend on shipment timing and market conditions.
Domestic Trio® sales increased and international sales declined as the company focused on domestic markets. Management continued to operate the Trio® facility below capacity to control inventory.
Capital spending was sharply reduced because of economic uncertainty. The company invested $3.5 million for an 11% interest in W.D. Von Gonten Laboratories, a drilling and completion chemistry company.
Intrepid South generated $4.2 million of revenue from rights-of-way, easements, caliche, brine, royalties, and other activities. The company also sold approximately 320 acres for $4.8 million and recognized a $4.7 million gain.
The company completed a one-for-ten reverse stock split in August 2020 after receiving an NYSE noncompliance notice. It regained compliance in September 2020.

Guidance, outlook, commentary, and risks

Management expected COVID-19 economic effects to persist through most of 2021 and potentially longer, while noting that future impacts on revenue, liquidity, cash flow, and profitability could not be reasonably estimated.
Management projected 2021 capital investments of $25 million to $35 million, including approximately $12 million to $15 million of sustaining capital. Funding was expected from operating cash flow, existing cash, and potentially the revolving facility.
Management reported stronger fertilizer demand and pricing and improved oilfield activity in the fourth quarter of 2020 and expected increased potash production in spring 2021 because of above-average 2020 evaporation rates.
Key risks include oversupply and price volatility in potash, Trio® competition and substitutes, dependence on agricultural and oilfield cycles, seasonal working-capital requirements, weather and evaporation conditions, mine safety and operating disruptions, environmental and reclamation liabilities, permit and lease renewals, and potential impairment of long-lived assets.
Water-rights litigation remains material. Challenges involve approximately 20,000 acre-feet per year of Pecos River rights. Seven preliminary authorizations allowing sales of up to 4,700 acre-feet annually were cancelled in April 2020, and the company’s appeal was pending. An adverse outcome could reduce margins, require replacement water, cause defaults under customer agreements, or require repayment of customer advances.
Environmental and reclamation obligations included a $23.9 million discounted asset-retirement obligation, $22.3 million of reclamation security, and expected environmental capital spending of $1 million to $3 million in both 2021 and 2022.

Most important facts for investors to verify

Whether potash and Trio® price increases announced after year-end translate into higher realized prices and margins during 2021.
The status and outcome of the Pecos River water-rights adjudication, related appeals, and the company’s ability to satisfy water-delivery commitments.
Whether the $10.0 million PPP loan is forgiven in whole or in part and the result of any eligibility audit.
Available borrowing capacity, covenant compliance, and the company’s ability to refinance or repay debt as the Series B notes approach maturity in 2023.
The sustainability of improved fourth-quarter fertilizer demand and oilfield activity after COVID-19-related disruptions.
Whether Trio® can return to positive gross margins after the 2020 gross deficit and inventory write-downs.
Potential future costs from environmental compliance, dam modifications, reclamation, lease renewals, and mine or asset impairments.