Intrepid Potash, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Intrepid Potash is a U.S. producer of potash and Trio® specialty fertilizer and provides water, magnesium chloride, brine, salt and other oilfield products and services. Operations are organized into Potash, Trio and Oilfield Solutions segments. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial Performance and Liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $71.5 million | $64.0 million | Up 12% |
| Gross margin | $9.1 million | $5.6 million | Up $3.5 million |
| Gross margin percentage | 12.7% | 8.8% | Up 3.9 percentage points |
| Operating income (loss) | $2.9 million | $(6.8) million | Improved $9.6 million |
| Net income (loss) | $2.5 million | $(7.4) million | Improved $9.8 million |
| Diluted EPS | $0.18 | $(0.57) | Improved $0.75 |
| Cash flow from operations | $19.1 million | $14.8 million | Up $4.3 million |
| Capital expenditures and other investing outflows | $2.4 million paid for capital investments | $5.7 million | Lower year over year |
Potash segment sales increased to $43.6 million from $33.8 million, with sales volumes up 18% and average net realized price per ton up to $282 from $255. Trio sales increased to $23.7 million from $22.6 million; pricing increased to $233 per ton from $193, while volumes declined 9%. Oilfield Solutions sales fell to $4.3 million from $7.7 million, primarily because of lower water demand.
Cash and cash equivalents were $36.0 million at March 31, 2021, compared with $19.5 million at December 31, 2020. Total cash, cash equivalents and restricted cash were $36.7 million. The company reported $29.8 million of borrowings under its revolving credit facility, $1.0 million of outstanding letters of credit and $35.0 million of remaining borrowing availability.
Notes and the PPP loan totaled $25.0 million before deferred financing costs, including $10.0 million classified as current. The company also had $29.8 million outstanding under its revolving credit facility. Series B Senior Notes of $15.0 million mature in April 2023. The company was in compliance with its debt covenants, with a 7.5-to-1.0 fixed charge coverage ratio versus a 1.3 minimum and a 2.0-to-1.0 leverage ratio versus a 3.5 maximum.
Material Changes Versus the Prior Comparable Period
- Results improved substantially as potash pricing and agricultural demand strengthened, while Q1 2020 included a $10.1 million litigation settlement charge and a $4.7 million gain on an asset sale.
- Q1 2021 had no inventory lower-of-cost-or-net-realizable-value charge, compared with a $0.6 million charge in Q1 2020.
- Selling and administrative expense declined 12% to $5.8 million, mainly because of higher legal costs in the prior-year period.
- Interest expense declined to $0.4 million from $0.8 million following the repayment of Series A Notes at maturity in April 2020 and early repayment of Series C Notes in July 2020.
- Oilfield Solutions gross margin declined to $0.5 million from $4.8 million because of lower water sales and higher third-party water purchases.
- Inventory declined to $108.3 million from $117.6 million at year-end 2020, while total liabilities increased to $150.7 million from $138.9 million.
Guidance, Outlook, Risks and Unusual Items
Management expects 2021 capital investments of approximately $25 million to $35 million, including $12 million to $15 million of sustaining capital. The company expects to fund capital programs through operating cash flow and existing cash, with potential use of the revolving credit facility. No explicit revenue or earnings guidance was provided.
Management expects potash and Trio realized prices to increase in Q2 2021 based on recently implemented price increases. Potash demand benefited from strong crop commodity prices and favorable weather. The company expects oilfield activity to improve during 2021, but forecasting remains difficult because of COVID-19, oil prices and economic uncertainty.
The most significant contingency involves disputed Pecos River water rights. A court ruling was expected in late spring or early summer 2021, and an appeal concerning cancelled preliminary authorizations was pending. A customer had asserted default under a long-term water contract because the company could not deliver to specified diversion points. The company had received approximately $32.7 million of related customer advances and may have to repay that amount if the issue is not resolved. The second-quarter installment of approximately $3.9 million was suspended in April 2021.
The $10 million PPP loan forgiveness application was submitted in November 2020. The company expects most or all of the loan to be forgiven, but no assurance was provided; an audit is expected because the loan exceeded $2 million. Reclamation obligations totaled $24.3 million, supported in part by $23.0 million of reclamation security, including surety bonds and restricted cash.
Key risks include potash and fertilizer pricing, agricultural and oilfield demand, COVID-19 impacts, water-rights litigation, production disruptions, weather, transportation and freight costs, environmental and mining regulation, labor availability, asset impairments, debt covenant compliance and access to capital markets. The company stated that there were no material changes to the risk factors disclosed in its 2020 Form 10-K.
Important Facts for Investors to Verify
- Outcome of the Pecos River water-rights adjudication, related appeal and potential repayment of the $32.7 million customer contract liability.
- Status and final amount of PPP loan forgiveness, including the expected eligibility audit.
- Sustainability of higher potash and Trio pricing and the effect of seasonal agricultural demand.
- Recovery of oilfield water demand and whether oilfield margins improve after the Q1 decline.
- Actual 2021 capital spending versus the $25 million to $35 million expectation and its effect on liquidity.
- Compliance with Series B and revolving credit facility covenants and the company’s ability to refinance or repay near-term debt.
- Potential additional reclamation security requirements, water-rights liabilities and other environmental or regulatory obligations.