Intrepid Potash, Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Intrepid Potash is a U.S.-based diversified mineral producer with three segments: potash, Trio® specialty fertilizer, and oilfield solutions. Products include potash, Trio®, water, salt, magnesium chloride, brine, and related oilfield services. The company operates solution-mining facilities in New Mexico and Utah and an underground Trio® mine in New Mexico.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial Results and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $59.2 million | $38.1 million | $198.5 million | $148.5 million |
| Gross margin | $10.6 million | $(0.3) million | $33.9 million | $4.7 million |
| Operating income (loss) | $4.1 million | $(7.8) million | $17.2 million | $(22.7) million |
| Net income (loss) | $4.0 million | $(10.2) million | $26.0 million | $(26.4) million |
| Diluted EPS | $0.30 | $(0.78) | $1.95 | $(2.04) |
| Cash flow from operations | Not separately provided | Not separately provided | $59.4 million | $18.5 million |
Gross margin was approximately 17.9% of sales in Q3 2021 versus negative 0.8% in Q3 2020, and approximately 17.1% for the first nine months of 2021 versus 3.2% in the prior-year period. Net margin was approximately 6.8% in Q3 2021 and 13.1% for the first nine months, compared with negative margins in the comparable 2020 periods.
- Potash sales were $31.7 million in Q3 and $112.9 million for nine months. Average net realized price per ton increased to $381 and $319, respectively, from $238 and $251 in the comparable periods.
- Trio® sales were $20.8 million in Q3 and $71.4 million for nine months. Average net realized price per ton increased to $336 and $271, respectively, from $189 and $197.
- Oilfield solutions sales were $6.7 million in Q3 and $14.3 million for nine months. Q3 gross margin was $0.6 million, while nine-month gross margin was $2.1 million.
- Cash and cash equivalents were $25.6 million at September 30, 2021, compared with $19.5 million at December 31, 2020. Including restricted cash, total cash, cash equivalents, and restricted cash was $26.3 million.
- Total assets were $541.8 million and stockholders’ equity was $439.2 million at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Sales increased 55% in Q3 and 34% for the first nine months, driven primarily by higher potash and Trio® prices, increased fertilizer demand, higher Trio® volumes, and recovering oilfield activity.
- Potash tons sold declined 6% in Q3 but increased 13% for nine months. Trio® tons sold increased 15% in Q3 and 6% for nine months.
- Gross margin improved substantially as pricing and volumes increased and the company recorded no inventory valuation charges, compared with $1.2 million in Q3 2020 and $4.0 million for the first nine months of 2020.
- Operating results benefited from lower selling and administrative expense and substantially lower interest expense. The prior-year periods included a $10.1 million litigation settlement charge and higher financing costs.
- In June 2021, the company repaid its remaining $15.0 million of Series B Senior Notes, paid a $0.5 million make-whole premium, and recognized a $10.1 million gain from forgiveness of its $10.0 million PPP loan and accrued interest.
- The company repaid $29.8 million outstanding under its revolving credit facility during 2021. At September 30, 2021, no borrowings were outstanding and approximately $74.0 million of borrowing capacity remained, including the effect of a $1.0 million letter of credit.
Cash Flow, Capital Spending, Debt, and Liquidity
- Operating cash flow was $59.4 million for the first nine months of 2021, up from $18.5 million in 2020.
- Investing activities used $6.4 million, including $12.4 million of capital expenditures and $6.0 million of proceeds from an asset sale.
- Financing activities used $46.9 million, principally for debt repayments of $44.8 million, including the credit facility and Series B Senior Notes.
- Management expects 2021 capital investments of $18 million to $23 million, including approximately $15 million of sustaining capital. The company expects to fund capital requirements from operating cash flow and existing cash, with potential use of the revolving facility.
- Management stated that cash on hand, remaining credit availability, and expected operating cash flow should provide sufficient liquidity for the next twelve months.
Outlook, Commentary, Risks, and Unusual Items
- Management reported strong fertilizer demand, tight near-term potash supply, and continued price increases. Agricultural potash pricing was increased by $80 per ton in August 2021, and Trio® pricing was increased by $50 per ton.
- Heavy rainfall, humidity, and cooler temperatures reduced evaporation and production at the HB solar solution facility. The company recorded $3.6 million of abnormal production costs and expects approximately 70,000 tons of HB production during the current harvest period, which was expected to end in mid-January.
- Management planned to restart HB production in mid-March and continue through May to support spring demand. Additional Trio® production shifts were expected to add approximately 50,000 tons over the following 12 months, with potential for another 50,000 tons depending on market conditions.
- Oilfield activity and water sales improved as oil prices and drilling activity recovered, but management continued to identify COVID-19 restrictions and economic uncertainty as risks to demand.
- A New Mexico water-rights adjudication court issued August 2021 findings that could leave only approximately 150 acre-feet per year of the company’s challenged Pecos River water rights available, subject to further court analysis and possible appeal. The company cannot estimate any potential repayment obligation.
- A water customer had defaulted under a long-term contract. If unresolved, the company may be required to repay approximately $32.5 million of outstanding customer advances recorded as contract liabilities.
- NGL Energy Partners sued the company regarding the parties’ joint marketing agreement, seeking termination and compensatory damages. The company stated that the matter was at an early stage and that any potential loss could not be reasonably estimated.
- The company had $23.0 million of reclamation security, including $22.5 million of surety bonds and $0.5 million of restricted cash, and may be required to post additional security.
- The company maintained a full valuation allowance against deferred tax assets. No income tax expense was recorded for the first nine months of 2021; any future release of the valuation allowance could materially benefit earnings.
Most Important Facts for Investors to Verify
- Whether elevated potash and Trio® pricing and strong demand persist, and how much of the announced price increases are realized.
- HB facility production, harvest timing, weather conditions, and any additional abnormal production costs.
- The outcome and timing of the Pecos River water-rights adjudication and any resulting repayment or cash exposure.
- The potential repayment of the $32.5 million customer contract liability and the status of the NGL litigation.
- Actual 2021 capital spending relative to the $18 million–$23 million outlook and continued compliance with credit facility covenants.
- Whether recovering oilfield activity translates into sustained water-sales growth without disproportionate third-party water and transfer costs.
- The company’s ability to maintain profitability and support a future release of its deferred-tax-asset valuation allowance.