Intrepid Potash, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Intrepid Potash is a U.S.-based producer of potash, Trio®, magnesium, sulfur, salt, water and oilfield products. Its operations are organized into potash, Trio® and oilfield solutions segments. The filing covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $46.5 million | $62.5 million | $110.4 million | $120.1 million |
| Gross margin | $(0.6) million | $13.2 million | $5.0 million | $26.3 million |
| Operating income (loss) | $(8.2) million | $6.4 million | $(15.0) million | $12.8 million |
| Net income (loss) | $(8.9) million | $5.6 million | $(16.3) million | $11.8 million |
| Basic EPS | $(0.07) | $0.04 | $(0.13) | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $23.5 million | $31.7 million |
Gross margin was approximately negative 1.3% of sales in Q2 and 4.5% for the first six months, versus approximately 21.1% and 21.9%, respectively, in the comparable 2019 periods. Selling and administrative expense increased 5% in Q2 and 9% year to date, primarily from legal costs.
- Potash sales were $24.5 million in Q2 and $58.3 million year to date. Potash volume declined 22% in Q2 and 5% year to date; average net realized price declined to $256 per ton from $299 and $294, respectively.
- Trio® sales were $19.3 million in Q2 and $41.8 million year to date. Volume declined 10% in Q2 but increased 10% year to date; average net realized price was $208 per ton in Q2 and $200 year to date.
- Oilfield solutions sales were $2.7 million in Q2 and $10.5 million year to date, down from $5.6 million and $12.3 million, respectively.
- Cash and cash equivalents were $34.6 million at June 30, 2020, versus $20.6 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $35.2 million.
- Capital expenditures and other asset additions were $10.6 million year to date. Investing cash outflows were $9.4 million, including a $3.5 million investment for an 11% interest in W.D. Von Gonten Laboratories.
- Total debt and PPP borrowings were $40.0 million at June 30, consisting of $30.0 million of senior notes and a $10.0 million PPP loan. Credit-facility borrowings were $29.8 million, with $44.2 million of availability including letters of credit.
Material changes versus the prior comparable period
- Q2 sales declined 26%, and first-half sales declined 8%, primarily because of lower potash volumes and pricing and sharply lower oilfield-related demand.
- Cost of goods sold increased 14% year to date despite lower sales, driven by higher Trio® costs, lower production levels, fixed-cost absorption and unfavorable prior-year evaporation conditions.
- The company recorded inventory write-downs of $2.2 million in Q2 and $2.8 million year to date; no comparable charges were recorded in 2019.
- Water sales were $2.5 million in Q2 versus $5.7 million in Q2 2019. COVID-19-related reductions in oil demand and drilling activity materially affected water and other oilfield sales.
- The company paid $10.0 million in May to settle litigation with Mosaic; the matter was dismissed and is closed. It also recognized a $4.7 million gain on the March sale of approximately 320 acres of land for $4.8 million.
- Series A senior notes of $20.0 million were repaid at maturity in April. After quarter-end, the company repaid its $15.0 million Series C notes on July 17, 2020, including a $1.9 million reduced make-whole payment.
- At June 30, total assets were $567.8 million and stockholders’ equity was $420.2 million, compared with $578.4 million and $434.7 million, respectively, at December 31, 2019.
Guidance, outlook, commentary and risks
- Management expects 2020 capital investments of approximately $15 million to $20 million, excluding the W.D. Von Gonten Laboratories investment, funded primarily by operating cash flow and existing cash.
- Management expects potash and Trio® sales at reduced summer-fill pricing through at least the third quarter, with scheduled price increases potentially achievable in the fourth quarter. Weather, planting decisions, transportation, COVID-19 effects and competing products could prevent those increases.
- Management expects COVID-19-related weakness in oilfield solutions, water and related byproduct demand to continue at least through the second half of 2020. Future effects on liquidity, revenue and profitability cannot be reasonably estimated.
- The $10.0 million PPP loan bears 1% interest, matures in April 2022 and is expected by management to be mostly or fully forgiven. Forgiveness is uncertain, and the company expects an eligibility audit because the loan exceeded $2.0 million. Monthly payments of approximately $0.6 million were scheduled to begin in November 2020.
- The company remained compliant with debt covenants at June 30, with a fixed-charge coverage ratio of 3.5x versus a 1.3x minimum and leverage of 2.0x versus a 3.5x maximum. Management stated that liquidity was sufficient for the next twelve months.
- New Mexico Pecos River water rights remain subject to litigation and regulatory challenges. Certain preliminary authorizations were withdrawn or canceled; petitions before the New Mexico Supreme Court were pending, and the underlying adjudication was scheduled for December 2020. Potential repayment obligations may be satisfied in kind, but the ultimate extent of the rights remains uncertain.
- The company received a second NYSE notice of noncompliance with the $1.00 average closing share-price requirement on July 24, 2020. Shareholders approved a potential 1-for-3 to 1-for-15 reverse split on July 28, with implementation expected in August 2020.
Important facts for investors to verify
- Actual Q3 and Q4 potash and Trio® pricing, volumes, inventory levels and additional write-down exposure.
- COVID-19 effects on oilfield activity, water sales, customer credit quality and operating cash flow.
- PPP loan forgiveness, audit results and the resulting debt and cash obligations.
- Post-quarter-end debt repayment effects, including the Series C repayment and $1.9 million make-whole payment.
- Status and potential economic consequences of the Pecos River water-rights litigation and related authorizations.
- Completion and ratio of the reverse stock split and continued NYSE listing compliance.
- Ability to fund the planned $15 million to $20 million capital program while maintaining liquidity and debt-covenant compliance.