Intrepid Potash, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2019, filed August 6, 2019. Intrepid produces potash, Trio®, water, salt, magnesium chloride, brines and related oilfield products and services from U.S. operations. Reportable segments are potash, Trio® and oilfield solutions.
In May 2019, the company acquired the Intrepid South assets, including land and water rights, for $53.0 million, plus $3.2 million of capitalized acquisition fees. It also acquired a 50% interest in certain Texas land for $3.1 million.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Sales | $62.5 million | $55.2 million | $120.1 million | $112.5 million |
| Gross margin | $13.2 million | $7.3 million | $26.3 million | $14.5 million |
| Gross margin percentage | 21.1% | 13.2% | 21.9% | 12.9% |
| Operating income | $6.4 million | $(0.1) million | $12.8 million | $2.4 million |
| Net income | $5.6 million | $(1.0) million | $11.8 million | $0.8 million |
| Diluted EPS | $0.04 | $(0.01) | $0.09 | $0.01 |
| Operating cash flow | Not separately provided | Not separately provided | $31.7 million | $38.2 million |
Potash average net realized price increased to $299 per ton in the second quarter and $294 per ton for the first half, compared with $254 and $249, respectively, in the prior-year periods. Trio® pricing increased to $196 per ton in the quarter and $200 per ton for the first half, compared with $191 and $193, respectively.
At June 30, 2019, cash and cash equivalents were $15.5 million, compared with $33.2 million at December 31, 2018. Total cash, cash equivalents and restricted cash were $16.1 million. Current assets were $127.3 million against current liabilities of $78.8 million.
Investing cash outflows were $69.0 million, primarily reflecting the Intrepid South acquisition and other capital investments. Financing cash inflows were $19.7 million, including $20.0 million of net credit-facility borrowings. Capital spending and acquisitions totaled approximately $69.1 million during the first six months.
Debt and Liquidity
- $50.0 million of senior notes outstanding: $20.0 million due April 2020, $15.0 million due April 2023 and $15.0 million due April 2025.
- $20.0 million outstanding under the revolving credit facility, plus $1.0 million of letters of credit; reported borrowing availability was $20.9 million.
- Net long-term debt was $29.7 million, with the $20.0 million Series A maturity classified as current.
- The company reported compliance with debt covenants. The fixed-charge coverage ratio was 13.4x versus a 1.0x minimum, and the leverage ratio was 1.1x versus a 4.5x maximum.
- After quarter-end, the credit facility was amended to increase commitments from $50 million to $75 million, with a $75 million accordion, and to extend maturity to August 1, 2024.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 13%, while six-month sales increased 7%.
- Gross margin increased 81% in the quarter and 82% for the first half, driven by higher potash and Trio® realized pricing and greater sales of higher-margin water and oilfield products.
- Net income improved from a $1.0 million quarterly loss to $5.6 million of income and from $0.8 million to $11.8 million for the first half.
- First-half potash tons sold declined 6%, while potash realized pricing increased 18%. First-half Trio® tons sold declined 13%, despite a 4% increase in realized pricing.
- First-half operating cash flow declined $6.4 million, principally because of lower contract-liability additions and lower refundable income-tax receipts.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording operating lease right-of-use assets and liabilities.
- Water sales increased to $11.1 million for the first half from $10.0 million, primarily due to Intrepid South.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2019 water sales at the high end of its previously reported $20 million to $30 million range and expects water-related cash receipts of $25 million to $35 million.
- Excluding acquisitions, 2019 capital expenditures are expected to be approximately $25 million to $35 million. Management expects remaining operating plans and capital programs to be funded with operating cash flow, existing cash and, if needed, the revolving facility.
- Wet weather delayed agricultural fertilizer applications, reduced first-half potash and Trio® volumes and reduced magnesium chloride demand. Competitor summer-fill pricing programs are expected to lower third-quarter agricultural potash pricing and domestic Trio® pricing.
- Significant risks include commodity pricing and demand, agricultural and oilfield cycles, freight costs, operational interruptions, regulatory requirements, environmental and reclamation costs, labor availability, water-rights challenges, and integration of Intrepid South.
- Many water sales depend on preliminary authorizations from the New Mexico Office of the State Engineer. Third parties have protested those authorizations, and water rights are also subject to a court proceeding.
- Mosaic litigation alleges trade-secret misappropriation and related claims. Mosaic seeks $23 million to $28 million in compensatory damages, $28 million to $37 million in exemplary damages and other relief. No loss contingency was recorded; the September 2019 trial date was vacated and no new date had been set.
- The company had $23.96 million recorded for asset-retirement obligations, with an undiscounted obligation of $59.5 million, and $19.1 million of reclamation security requirements.
- No income tax expense was recorded; the effective tax rate was 0% because the company maintained a full valuation allowance against deferred tax assets.
Important Facts for Investors to Verify
- Execution and financial returns from the Intrepid South acquisition, including the potential additional $12 million payment and the 20-year, 10% royalty on specified water-disposal revenue.
- Status and enforceability of the company’s New Mexico water rights and related preliminary authorizations.
- Third-quarter effects of competitor pricing programs on potash and Trio® realized prices and margins.
- Funding plan for the $20 million Series A note maturity in April 2020 and continued compliance with tighter future debt covenants.
- Outcome and potential exposure from the Mosaic litigation.
- Whether planned water-sales growth and oilfield activity offset weather-related agricultural volume weakness.