Intrepid Potash, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Intrepid is a U.S.-based producer of potash and specialty fertilizer Trio, with additional water, salt, magnesium chloride, brine and oilfield products and services. Operations are organized into Potash, Trio and Oilfield Solutions segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Sales | $38.1 million | $51.2 million | $148.5 million | $171.2 million |
| Gross margin | $(0.3) million | $6.9 million | $4.7 million | $33.3 million |
| Operating income (loss) | $(7.8) million | $0.6 million | $(22.7) million | $13.5 million |
| Net income (loss) | $(10.2) million | $(0.2) million | $(26.4) million | $11.5 million |
| Basic EPS | $(0.78) | $(0.02) | $(2.04) | $0.90 |
| Operating cash flow | Not separately provided | Not separately provided | $18.5 million | $37.6 million |
Gross margin was approximately negative 0.8% of sales in Q3 and 3.2% for the first nine months, versus approximately 13.6% and 19.4%, respectively, in the comparable 2019 periods. The nine-month operating margin was approximately negative 15.3%, compared with 7.9% in 2019.
- Potash sales were $22.2 million in Q3 and $80.5 million for nine months. Potash sales volumes declined 15% and 8%, respectively, while average net realized prices decreased to $238 and $251 per ton from $266 and $285.
- Trio sales were $12.9 million in Q3 and $54.7 million for nine months. Nine-month sales increased 2% on a 4% increase in volume, but the segment reported a gross loss of $8.1 million versus gross profit of $1.1 million in 2019.
- Oilfield Solutions sales declined 58% in Q3 to $3.1 million and 31% for nine months to $13.5 million. The segment’s Q3 gross loss was $0.3 million, compared with gross profit of $3.5 million in 2019.
- Cash and cash equivalents were $9.3 million at September 30, 2020, compared with $20.6 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $9.9 million.
- Nine-month investing cash outflows were $12.8 million, including $14.1 million for capital and other asset additions and a $3.5 million investment for an 11% interest in W.D. Von Gonten Laboratories.
- Total debt and PPP borrowings were $25.0 million, net of deferred financing costs, at September 30, compared with $50.0 million at year-end 2019. The company also had $29.8 million drawn under its revolving credit facility, $1.0 million of letters of credit and approximately $30.0 million of remaining availability including letters of credit.
Material changes versus the prior comparable period
- Q3 sales decreased 26%; nine-month sales decreased 13%. The primary drivers were lower potash pricing and volumes, substantially reduced oilfield activity, and lower byproduct sales.
- COVID-19-related reductions in oil demand and drilling activity reduced water and other oilfield sales. Total water sales declined 50% in Q3 and 20% for the first nine months.
- Competitive winter-fill and summer-fill programs reduced potash and Trio pricing. Trio average net realized price declined 7% in Q3 to $189 per ton and 2% for nine months to $197 per ton.
- Cost of goods sold increased 5% for the first nine months despite lower sales, reflecting higher Trio per-ton costs from reduced production rates and fixed-cost absorption. Inventory valuation charges increased to $4.0 million from $1.5 million.
- The company paid $10.0 million to settle Mosaic litigation and recorded the settlement as a $10.1 million operating expense. It also repaid $20.0 million of Series A Notes at maturity and $15.0 million of Series C Notes, including a $1.9 million make-whole payment.
- In March 2020, the company sold approximately 320 acres of land for $4.8 million and recorded a $4.7 million gain.
Guidance, outlook, commentary and risks
- Management expected full-year 2020 capital investment to be at the low end of the previously disclosed $15 million to $20 million range, excluding the W.D. Von Gonten investment. Remaining capital and operating plans were expected to be funded from operating cash flow, cash on hand and, if needed, the revolving facility.
- Management expected oilfield water and related sales to remain negatively affected through at least the fourth quarter of 2020. Future drilling activity remained difficult to forecast because of COVID-19, oil demand and oil price conditions.
- Management expected to realize higher potash and Trio pricing in the fourth quarter after summer-fill programs, but noted that weather, planting decisions, rail availability, competing products and COVID-19 could limit the benefit.
- At September 30, the company was in compliance with its debt covenants. The Series B Senior Notes required a minimum fixed-charge coverage ratio of 1.3x and permitted maximum leverage of 3.5x; actual ratios were 3.0x and 2.1x, respectively. Management warned that further EBITDA declines could result in covenant violations.
- The $10.0 million PPP loan matures in April 2022 at 1% interest. The company applied for forgiveness of the full amount in November 2020, but no assurance was provided that all or any portion would be forgiven. A government audit was expected because the loan exceeded $2.0 million.
- Contract liabilities, primarily customer advances for future water deliveries, increased to $26.5 million from $16.6 million at December 31, 2019. These advances improve liquidity but are excluded from covenant EBITDA until revenue is recognized.
- Approximately $22.3 million of reclamation security was required, including $21.8 million secured by surety bonds. The company may be required to post additional security as reclamation requirements change.
- Water rights covering approximately 20,000 acre-feet per year were subject to ongoing legal and regulatory challenges in New Mexico. Certain preliminary authorizations had been withdrawn or cancelled, and related proceedings remained pending.
- The company completed a one-for-ten reverse stock split effective August 14, 2020 and regained NYSE listing compliance on September 1, 2020.
Important facts for investors to verify
- Whether potash and Trio price increases anticipated for late 2020 were realized and whether fertilizer volumes recovered after seasonal and COVID-19-related disruptions.
- The outcome and timing of PPP loan forgiveness and any related audit or repayment obligation.
- Future EBITDA and compliance with the Series B Notes and revolving credit facility covenants if oilfield demand and commodity pricing remain weak.
- The status and economic impact of the New Mexico water-rights litigation, permit cancellations and potential repayment or replacement-water obligations.
- Liquidity after debt maturities, litigation payments, ongoing reclamation security requirements and the use of revolving credit availability.
- Whether further inventory write-downs, asset impairments or operating losses arise from lower fertilizer prices, reduced production rates or prolonged COVID-19 effects.