Intrepid Potash, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Intrepid Potash is a U.S.-based mineral producer with three reportable segments: potash, Trio® specialty fertilizer, and oilfield solutions. Operations include potash solution mines in New Mexico and Utah, the East underground Trio mine in New Mexico, and water assets serving the Permian Basin. The filing covers the fiscal year ended December 31, 2019; fourth-quarter data is also presented but this is not a standalone quarterly filing.
In May 2019, the company acquired the Intrepid South land and water-rights assets for $53.0 million, incurred $3.2 million of acquisition fees, and funded the transaction with cash and borrowings. The seller retained a 20-year, 10% royalty on specified produced-water disposal revenue.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $220.1 million | $208.3 million | +6% |
| Gross margin | $43.5 million | $38.3 million | +14% |
| Gross margin percentage | 19.8% | 18.4% | +1.4 points |
| Operating income | $16.4 million | $15.5 million | +6% |
| Net income | $13.6 million | $11.8 million | +16% |
| Diluted EPS | $0.10 | $0.09 | +1 cent |
| Operating cash flow | $49.4 million | $64.2 million | -$14.9 million |
| Cash and cash equivalents | $20.6 million | $33.2 million | -$12.6 million |
| Total assets | $578.4 million | $525.2 million | +10% |
| Stockholders’ equity | $434.7 million | $417.3 million | +4% |
Sales growth was driven primarily by oilfield solutions and byproduct revenue. Water sales increased to $25.7 million from $19.8 million, while total byproduct sales increased to $26.5 million from $19.3 million. Oilfield solutions segment sales increased 60% to $27.9 million and generated $14.6 million of gross margin.
Potash segment sales were essentially flat at $124.6 million, but potash tons sold declined 12% to 319,000 tons. The average net realized sales price increased to $284 per ton from $256 per ton. Potash segment gross margin declined to $27.8 million from $29.0 million.
Trio sales increased 4% to $69.6 million, primarily because of higher byproduct sales. Trio tons sold were 225,000 in both years, while average net realized sales price declined to $195 per ton from $199 per ton. Trio gross margin improved to $1.1 million from a $3.8 million deficit, despite a $1.8 million lower-of-cost-or-net-realizable-value inventory adjustment.
Interest expense declined to $3.0 million from $3.9 million. The effective tax rate was 0.4%; the company maintained a full valuation allowance against $211.6 million of deferred tax assets.
Material changes versus the prior comparable period
- Intrepid South expanded water rights and oilfield-related revenue but materially increased investing cash outflows.
- Cash used in investing activities rose to $80.6 million from $16.8 million, primarily due to the Intrepid South acquisition and a $3.1 million Texas land investment.
- Inventory increased to $94.2 million from $82.0 million, contributing to lower operating cash flow.
- Debt increased because the company drew $19.8 million under its revolving credit facility; year-end cash declined to $20.6 million.
- Wet weather reduced potash evaporation and Wendover magnesium chloride production. The company expects lower potash availability in spring 2020 and limited magnesium chloride availability until the 2020 evaporation season.
- The company adopted ASC 842 leases accounting in 2019, recording operating lease right-of-use assets of $5.9 million and lease liabilities of $6.1 million at adoption.
Fourth-quarter 2019 information
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Sales | $48.8 million | $54.4 million |
| Gross margin | $10.2 million | $14.8 million |
| Net income | $2.1 million | $7.6 million |
| EPS | $0.02 | $0.06 |
The fourth quarter was affected by delayed harvest activity, customer reluctance to purchase ahead of expected price declines, and lower product pricing.
Debt, liquidity, guidance, and outlook
- Senior notes totaled $50.0 million: $20.0 million due April 2020, $15.0 million due April 2023, and $15.0 million due April 2025.
- The revolving credit facility was increased to $75.0 million, with a $75.0 million accordion feature and maturity extended to August 2024. At year-end, $19.8 million was drawn, $1.0 million was represented by a letter of credit, and $54.2 million remained available.
- Management reported compliance with debt covenants, including a 10.4-to-1 fixed-charge coverage ratio and a 1.3-to-1 leverage ratio at December 31, 2019.
- Management expected available liquidity and operating cash flow to fund obligations for the next twelve months, including the $20.0 million senior-note maturity in April 2020.
- 2020 capital investment was expected to be $25 million to $35 million, funded primarily with operating cash flow and existing cash, with potential use of the revolver.
- Existing water contracts were expected to generate $32 million to $45 million of 2020 revenue.
- Management expected potash pricing to improve after winter-fill programs, but timing and pricing remained dependent on inventories, competitor production curtailments, weather, planting decisions, transportation, and imports.
- Management intended to continue operating Trio at reduced production levels, pursue a price-over-volume strategy, expand water and brine offerings, and develop a produced-water facility expected to begin operating in mid-2020.
Risks, contingencies, and unusual items
- Potash markets remained oversupplied, with pricing exposed to global production capacity, imports, competitor actions, currency movements, and agricultural demand.
- Water sales depend on oil and gas activity and on contested New Mexico water rights. Protestants challenged rights representing approximately 20,000 acre-feet per year; the company was authorized to sell 5,700 acre-feet per year under preliminary authorizations subject to potential repayment if the rights are invalidated.
- Mosaic litigation sought $23 million to $28 million of compensatory damages and $28 million to $37 million of exemplary damages, plus other relief. The company recorded no loss contingency and was vigorously defending the matter.
- Environmental, mine-safety, reclamation, permitting, tailings, water-discharge, and dam-modification requirements could require significant additional expenditures. The discounted present value of reclamation obligations was approximately $22.3 million.
- The company recorded $1.8 million of inventory valuation adjustments, $1.2 million of other operating expense, and $1.6 million of additional legal expense in 2019.
- Debt includes floating-rate exposure under the revolver, and the company identified uncertainty surrounding the transition away from LIBOR.
- No cash dividend was anticipated. The company’s stock price ranged from $2.06 to $4.39 during 2019 and remained subject to NYSE minimum-price requirements.
Important facts for investors to verify
- Availability of cash and refinancing capacity after the April 2020 $20.0 million senior-note maturity.
- Actual 2020 potash and Trio pricing, sales volumes, inventory levels, and competitor production discipline.
- Resolution and financial consequences of the Pecos River water-rights adjudication and related permit protests.
- Progress, capital requirements, and returns from Intrepid South, the brine station, and the planned produced-water facility.
- Outcome or settlement terms of the Mosaic litigation and any related legal-cost escalation.
- Actual evaporation rates, potash production, magnesium chloride availability, and environmental compliance costs.
- Whether continued profitability supports reversal of the $211.6 million deferred-tax-asset valuation allowance.