Intrepid Potash, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2019, with comparative results for the quarter ended March 31, 2018. Intrepid is a U.S.-based producer of potash and Trio® specialty fertilizer, with additional water, brine, magnesium chloride, salt, and oilfield services businesses. Operations are organized into Potash, Trio®, and Oilfield Solutions segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $57.6 million | $57.3 million | Flat |
| Gross margin | $13.2 million | $7.2 million | +83% |
| Gross margin percentage | 22.9% | 12.6% | +10.3 percentage points |
| Operating income | $6.4 million | $2.5 million | +155% |
| Net income | $6.2 million | $1.8 million | +$4.4 million |
| Diluted EPS | $0.05 | $0.01 | Improved |
| Cash flow from operations | $8.1 million | $13.9 million | -$5.8 million |
| Capital expenditures | $4.0 million | $6.5 million | Lower |
- Potash segment sales were $34.3 million versus $30.6 million; gross margin increased to $9.4 million from $5.0 million. Potash sales volume declined 9% to approximately 88 thousand tons, while average net realized price increased to $288 per ton from $243.
- Trio® sales fell to $17.8 million from $21.8 million as sales volume declined 27% to approximately 56 thousand tons. Pricing increased to $206 per ton from $194, and segment gross margin improved to $0.7 million from a $2.1 million gross deficit.
- Oilfield Solutions sales increased to $6.6 million from $4.9 million, but gross margin declined to $3.1 million from $4.3 million because growth in lower-margin brines and mixing services more than offset the effect of water sales.
- Operating expenses increased, primarily due to higher administrative labor costs and legal fees. No income tax expense was recorded; the effective tax rate was 0% because of a full valuation allowance against deferred tax assets.
- Cash and cash equivalents were $34.0 million at March 31, 2019, compared with $33.2 million at December 31, 2018. Total assets were $538.1 million and stockholders’ equity was $424.3 million.
- Total inventory increased to $116.2 million from $112.1 million at year-end, including $76.4 million of product inventory. No lower-of-cost-or-net-realizable-value inventory adjustment was recorded in Q1 2019, compared with a $0.7 million charge in Q1 2018.
Debt, liquidity, and material changes
- Long-term debt was $50.0 million principal, or $49.7 million net of deferred financing costs. Senior Notes consist of $20 million due in April 2020, $15 million due in April 2023, and $15 million due in April 2025.
- The company had no credit-facility borrowings at March 31, 2019, $1.0 million of outstanding letters of credit, and approximately $49.0 million of available capacity.
- Debt covenants were satisfied at quarter-end. The fixed-charge coverage ratio was 14.2 to 1.0 versus a 0.75 minimum, and the leverage ratio was 0.9 to 1.0 versus a 5.5 maximum.
- Cash flow from operations declined because of lower contract-liability additions and the absence of the prior-year refundable income-tax receipt. Investing cash use included a $3.3 million deposit for the Dinwiddie acquisition.
- Operating lease assets and liabilities were recognized beginning January 1, 2019 under ASC 842. The company recorded approximately $5.9 million of right-of-use assets and $6.1 million of operating lease liabilities at adoption.
Guidance, outlook, risks, and unusual items
- Management expected potash prices to remain steady for the remainder of 2019. Wet weather delayed the U.S. spring application season and reduced first-quarter potash and Trio® volumes.
- Management expected 2019 water sales to be at the high end of its previously reported $20 million to $30 million range and expected cash receipts of $25 million to $35 million. Additional water transportation infrastructure was expected to support growth.
- Management expected 2019 operating capital expenditures of approximately $25 million to $35 million, including investment related to newly acquired assets, funded primarily through operating cash flow and existing cash.
- On May 1, 2019, after quarter-end, the company completed the acquisition of Dinwiddie Jal Ranch assets for $53 million, including the $3.3 million deposit paid in February. Up to an additional $12 million may be payable, and the seller retained a 20-year, 10% royalty on certain produced-water disposal revenue.
- After the acquisition, cash was $15.6 million as of May 3, 2019. The company had $30 million of credit-facility borrowings and approximately $19 million of remaining availability, including letters of credit. Management stated that liquidity was sufficient for the next twelve months, including the April 2020 senior-note maturity.
- Water rights are subject to protests, regulatory proceedings, and a February 2019 court challenge to their validity. The company continues to operate under preliminary authorizations and believes its legal position is strong.
- Mosaic alleges trade-secret, interference, computer-fraud, conversion, and conspiracy claims and seeks at least $22 million to $28 million plus other damages. Trial was scheduled for September 2019; no loss contingency was recorded.
- Other key risks include commodity pricing and demand, weather, production interruptions, environmental and mining regulation, labor and freight costs, water-rights challenges, acquisition integration, and compliance with debt covenants.
Important facts for investors to verify
- Whether the Dinwiddie assets generate the expected water-related growth and whether the additional payment obligation of up to $12 million is triggered.
- Post-acquisition leverage, credit-facility borrowings, liquidity, and ability to repay the $20 million Series A Notes due April 2020.
- The status and outcome of the Mosaic litigation and the September 2019 trial referenced in the filing.
- Resolution of protests and adjudication proceedings concerning New Mexico water rights.
- Whether wet-weather-related volume delays reverse and whether potash and Trio® pricing remains supportive.
- Actual 2019 capital expenditures, water sales, operating cash flow, and compliance with tightening debt covenants.