Intrepid Potash, Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and nine months ended September 30, 2019, filed November 5, 2019. Intrepid produces potash, Trio®, water, magnesium, sulfur, salt, brines and oilfield-related products from U.S. operations. Reportable segments are potash, Trio® and oilfield solutions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $51.2 million | $41.4 million | $171.2 million | $153.9 million |
| Gross margin | $6.9 million | $9.0 million | $33.3 million | $23.4 million |
| Gross margin percentage | 13.6% | 21.6% | 19.4% | 15.2% |
| Operating income | $0.6 million | $4.2 million | $13.5 million | $6.6 million |
| Net income (loss) | $(0.2) million | $3.4 million | $11.5 million | $4.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $37.6 million | $52.9 million |
- Q3 diluted earnings per share were approximately $0.00 versus $0.03 in the prior-year quarter. Nine-month diluted EPS was $0.09 versus $0.03.
- Q3 sales increased 24%, but gross margin declined 22% because of higher costs, freight, lower evaporation and a $1.5 million Trio® inventory valuation charge. Nine-month gross margin increased 42%.
- September 30 cash and cash equivalents were $13.0 million, compared with $33.2 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $13.7 million.
- Nine-month investing cash use was $76.8 million, including the Intrepid South acquisition and other capital spending. Financing cash inflow was $19.1 million.
- Total assets were $574.1 million and stockholders’ equity was $431.8 million at September 30, 2019.
Debt and liquidity
- 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.
- Credit-facility borrowings were $19.8 million, with $1.0 million of letters of credit and $54.2 million of remaining availability. The facility was amended in August 2019, increasing committed availability to $75 million plus a $75 million accordion and extending maturity to August 2024.
- Management stated that cash, operating cash flow and available revolver capacity were sufficient for the next twelve months, including the $20 million Series A note maturity.
- Debt covenants were satisfied: fixed-charge coverage was 12.6x versus a 1.3x minimum, and leverage was 1.2x versus a 3.5x maximum.
Material changes versus the prior comparable period
- Intrepid South was acquired in May 2019 for $53.0 million, with $3.2 million of acquisition fees and a potential additional $12.0 million payment. The acquisition added land, water rights and related assets in the northern Delaware Basin.
- Water sales increased to $7.3 million in Q3 and $18.3 million for nine months, compared with $4.7 million and $14.8 million, respectively, primarily because of Intrepid South.
- Oilfield solutions sales increased to $7.3 million in Q3 from $4.0 million and to $19.6 million for nine months from $12.9 million.
- Potash sales volumes increased 5% in Q3, while the average net realized price increased to $266 per ton from $258. For nine months, potash volumes declined 3%, but price increased to $285 per ton from $251.
- Trio® Q3 sales volumes increased 28%, but the segment recorded a $1.1 million gross deficit, including the $1.5 million inventory valuation charge. For nine months, the segment improved to a $1.1 million gross margin from a $4.5 million deficit.
- Operating cash flow declined $15.3 million year over year, primarily because of lower contract-liability additions, higher receivables and lower cash received from refundable income taxes.
- The company adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities.
Guidance, outlook, risks and unusual items
- Management expected 2019 water sales of $25 million to $28 million and approximately $30 million of cash receipts related to water sales; 2020 water sales were projected at $32 million to $45 million.
- Management expected 2019 capital expenditures excluding acquisitions of approximately $25 million to $30 million.
- Potash prices were expected to remain at summer-fill levels through the end of 2019. Wet weather delayed agricultural demand and was expected to limit near-term pricing upside.
- Management expected Q4 domestic Trio® pricing to remain approximately equal to Q3 pricing, with increased international sales potentially affecting the overall average price.
- Key risks include potash and fertilizer pricing, agricultural and oilfield demand, weather and evaporation rates, production interruptions, freight and input costs, regulatory requirements, water-rights challenges, asset impairments, debt covenant compliance and the ability to integrate Intrepid South.
- Mosaic litigation seeks $23 million to $28 million in compensatory damages and $28 million to $37 million in exemplary damages, plus other relief. Trial was scheduled for April-May 2020; no loss contingency was recorded.
- Protestants challenged water rights representing approximately 20,000 acre-feet per year. The company was authorized to sell water associated with 5,700 acre-feet per year, subject to potential repayment if the rights are invalidated. A trial was scheduled for August 2020 if settlement was not reached.
- The company had $24.5 million of recorded asset-retirement obligations and $19.1 million of reclamation security requirements, primarily supported by surety bonds.
Investor verification checklist
- Verify the funding plan and refinancing or repayment of the $20 million Series A notes due April 2020.
- Track revolver borrowings, remaining availability and compliance with debt covenants.
- Assess whether potash and Trio® pricing remains at the disclosed summer-fill levels and how that affects margins.
- Evaluate Intrepid South’s water-sales growth, infrastructure spending, potential $12 million acquisition payment and 10% royalty obligation.
- Monitor the Pecos River water-rights adjudication and possible repayment, operational or regulatory consequences.
- Follow the Mosaic litigation and the scheduled trial, noting that no loss contingency was recorded.
- Reconcile future cash generation against planned capital spending, reclamation requirements and inventory levels.