INTREPID POTASH, INC.
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains
forward-looking statements within the meaning of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the Securities Act of 1933, as
amended. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All
statements in this Quarterly Report other than statements of historical fact are
forward-looking statements. Forward-looking statements include statements about
our future results of operations and financial position, our business strategy
and plans, and our objectives for future operations, among other things. In some
cases, you can identify these statements by forward-looking words, such as
"estimate," "expect," "anticipate," "project," "plan," "intend," "believe,"
"forecast," "foresee," "likely," "may," "should," "goal," "target," "might,"
"will," "could," "predict," and "continue." Forward-looking statements are only
predictions based on our current knowledge, expectations, and projections about
future events.
These forward-looking statements are subject to a number of risks,
uncertainties, and assumptions, including the following:
•changes in the price, demand, or supply of our products and services;
•challenges to our water rights;
•our ability to successfully identify and implement any opportunities to grow
our business whether through expanded sales of water, Trio®, byproducts, and
other non-potassium related products or other revenue diversification
activities;
•our ability to integrate the Intrepid South assets into our existing business
and achieve the expected benefits of the acquisition;
•our ability to sell Trio® internationally and manage risks associated with
international sales, including pricing pressure and freight costs;
•the costs of, and our ability to successfully execute, any strategic projects;
•declines or changes in agricultural production or fertilizer application rates;
•declines in the use of potassium-related products or water by oil and gas
companies in their drilling operations;
•our ability to prevail in outstanding legal proceedings against us;
•our ability to comply with the terms of our senior notes and our revolving
credit facility, including the underlying covenants, to avoid a default under
those agreements;
•further write-downs of the carrying value of assets, including inventories;
•circumstances that disrupt or limit production, including operational
difficulties or variances, geological or geotechnical variances, equipment
failures, environmental hazards, and other unexpected events or problems;
•changes in reserve estimates;
•currency fluctuations;
•adverse changes in economic conditions or credit markets;
•the impact of governmental regulations, including environmental and mining
regulations, the enforcement of those regulations, and governmental policy
changes;
•adverse weather events, including events affecting precipitation and
evaporation rates at our solar solution mines;
•increased labor costs or difficulties in hiring and retaining qualified
employees and contractors, including workers with mining, mineral processing, or
construction expertise;
•changes in the prices of raw materials, including chemicals, natural gas, and
power;
•our ability to obtain and maintain any necessary governmental permits or leases
relating to current or future operations;
•interruptions in rail or truck transportation services, or fluctuations in the
costs of these services;
•our inability to fund necessary capital investments;
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•the impact of the novel coronavirus (COVID-19) pandemic on our business,
operations, liquidity, financial condition and results of operations;
•our ability to regain compliance with the continued listing criteria of the New
York Stock Exchange ("NYSE"); and
•the other risks, uncertainties, and assumptions described in Item 1A. Risk
Factors of our Annual Report on Form 10-K for the year ended December 31, 2019 ,
as updated by our subsequent Quarterly Reports on Form 10-Q, including Item 1A.
Risk Factors of this Quarterly Report.
In addition, new risks emerge from time to time. It is not possible for our
management to predict all risks that may cause actual results to differ
materially from those contained in any forward-looking statements we may make.
In light of these risks, uncertainties, and assumptions, the future events and
trends discussed in this Quarterly Report may not occur and actual results could
differ materially and adversely from those anticipated or implied in these
forward-looking statements. As a result, you should not place undue reliance on
these forward-looking statements. We undertake no duty to update or revise
publicly any forward-looking statements to conform those statements to actual
results or to reflect new information or future events.
Throughout this Quarterly Report, we refer to average net realized sales
price per ton, which is a non-GAAP financial measure. More information about
this measure, including a reconciliation of this measure to the most directly
comparable GAAP financial measure, is below under the heading "Non-GAAP
Financial Measure."
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Company Overview
We are a diversified mineral company that delivers potassium, magnesium, sulfur,
salt, and water products essential for customer success in agriculture, animal
feed and the oil and gas industry. We are the only U.S. producer of muriate of
potash (sometimes referred to as potassium chloride, KCl or potash), which is
applied as an essential nutrient for healthy crop development, utilized in
several industrial applications, and used as an ingredient in animal feed. In
addition, we produce a specialty fertilizer, Trio®, which delivers three key
nutrients, potassium, magnesium, and sulfate, in a single particle. We also
provide water, magnesium chloride, brine and various oilfield products and
services.
Our extraction and production operations are conducted entirely in the
continental United States . We produce potash from three solution mining
facilities: our HB solution mine in Carlsbad, New Mexico , our solution mine in
Moab, Utah , and our brine recovery mine in Wendover, Utah . We also operate our
North compaction facility in Carlsbad, New Mexico , which compacts and granulates
product from the HB mine. We produce Trio® from our conventional underground
East mine in Carlsbad, New Mexico .
We have water rights in New Mexico under which we sell water primarily to
support oil and gas development in the Permian Basin near our Carlsbad
facilities. We continue to work to expand our sales of water. In May 2019 , we
acquired certain land, water rights, and other related assets from Dinwiddie
Cattle Company . We refer to these assets and operations as "Intrepid South."
We have three segments: potash, Trio®, and oilfield solutions. We account
for the sale of byproducts as revenue in the potash or Trio® segment based on
which segment generated the byproduct.
Recent Developments
New York Stock Exchange Notices
On April 17, 2020 , we received notice from the NYSE that we were no longer
in compliance with Section 802.01C of the NYSE Listed Company Manual ("Section
802.01C") that requires listed companies to maintain an average closing share
price of at least $1.00 over a period of 30 consecutive trading days (the
"Notice"). Pursuant to Section 802.01C, we generally have a period of six months
following the receipt of the Notice to regain compliance with the minimum share
price requirement, subject to any extensions by NYSE. We can regain compliance
with the minimum share price requirement at any time during the cure period if,
on the last trading day of any calendar month during the cure period or on the
last day of the cure period, we have a closing share price of at least $1.00 per
share and an average closing share price of at least $1.00 per share over the 30
trading-day period ending on such date. As required by the NYSE, we have
notified the NYSE of our intent to cure the listing standard deficiency and
regain compliance with the minimum share price requirement. On June 2, 2020 , we
received notice that we had regained compliance with the minimum share price
requirement.
On July 24, 2020 , we received notice from the NYSE that we were once again no
longer in compliance with Section 802.01C of the NYSE Listed Company Manual that
requires listed companies to maintain an average closing share price of at least
$1.00 over a period of 30 consecutive trading days (the "July Notice"). Pursuant
to Section 802.01C, we generally have a period of six months following the
receipt of the July Notice or until the next annual meeting to regain compliance
with the minimum share price requirement, subject to any extensions by NYSE. Due
to our reduced stock price, before we received notice of non-compliance we
provided notice of a special meeting of shareholders to vote on four proposals
that would allow our Board of Directors to enact a reverse stock split of
between 1:3 and 1:15. On July 28, 2020 , we held the special meeting and all
proposals voted on at the special meeting were approved and we expect the Board
will implement a reverse split in August 2020 . The final split ratio will be
determined by our stock price at the time of the split and other factors that
could influence the price of our stock. We believe that being able to effect a
reverse stock split is in the best interests of us and our stockholders by
allowing us more flexibility to, among other things, potentially improve the
marketability and liquidity of our commons stock and regain compliance with the
listing requirements of the NYSE, which will allow management to focus on our
business strategy.
For more information, please see Item 1A. "Risk Factors" under the caption "If we cannot meet the continued listing requirements of the NYSE, the NYSE may delist our common stock."
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Significant Business Trends and Activities
The novel strain of coronavirus (COVID-19) has surfaced in nearly all
regions around the world. We have been deemed an essential business and have
continued to operate to produce potash and Trio® and serve oil and gas markets
through our oilfield solutions business. The safety and protection of our
workforce is our first and foremost priority. We continue to follow various
procedures we implemented to help minimize the risks to our employees, including
changes in our operating procedures to accommodate social distancing guidelines,
additional cleaning and disinfection procedures and requiring those employees
who can work from home to do so.
We continue to monitor the rapidly evolving situation and guidance from various authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. There may be developments outside our control that would require us to adjust our operating plans.
Our second quarter results were materially impacted by the COVID-19
pandemic, particularly our oilfield solutions segment as many of the actions
taken to help prevent the spread of COVID-19 decreased demand for oil. Many
areas of the country began to reopen during the second quarter of 2020. However,
governmental authorities may reinstate shelter-in-place orders and other
restrictive orders due to a continued resurgence of COVID-19 related cases. Such
restrictive actions may lead to further decreases in the demand for oil and may
impact our other operations if expanded restrictions are deemed necessary to
mitigate the public health effects of the COVID-19 pandemic. Given the dynamic
nature of this situation, we cannot reasonably estimate the impacts of COVID-19
on our financial condition, results of operations or cash flows in the future.
We do expect that if governmental authorities reinstate shelter-in-place and
other restrictive orders, such actions will have a material effect on revenue
growth, financial condition, liquidity, and overall profitability in future
reporting periods.
Our financial results have been, or are expected to be, impacted by several
significant trends and activities, including impacts from the COVID-19 pandemic,
as discussed below. We expect that the trends described below may continue to
impact our results of operations, cash flows, and financial position.
• Potash pricing and demand. Potash sales volumes in the second quarter of 2020
decreased 22% compared to the second quarter of 2019 and good early season
weather accelerated the spring application season in many parts of the country,
pushing some 2020 agricultural tons forward into the first quarter. First half
2020 sales volume was down 5% compared to the prior year as increases in
agricultural and feed sales were offset by a significant decrease in industrial
potash sales, due in large part to the COVID-19 pandemic. Actions taken in
response to the COVID-19 pandemic, such as work from home and limiting travel,
have decreased the demand for oil and subsequently reduced oil and gas
activities.
Our potash average net realized sales price per ton decreased to $256 for
the three months ended June 30, 2020 , compared to $299 for the same period in
2019. For the six months ended June 30, 2020 our potash average net realized
sale price per ton decreased to $256 , compared to $294 for the six months ended
June 30, 2019 , as price decreases from both the 2019 summer-fill program and the
winter-fill program announced in January 2020 lowered overall price levels.
Price levels increased by $20 per ton in late January after the order window
closed for the 2020 winter-fill program and we realized this pricing in the
western United States . In June 2020 , a summer-fill program was announced by our
competitors that lowered the price $40 per ton and $30 per ton in the corn belt
and western United States , respectively, from current list prices. This is in
effect a decrease of $20 per ton and $10 per ton for the corn belt and western
United States , respectively, when compared to the winter-fill pricing from the
first quarter of 2020. After the summer-fill order window closes, list price is
scheduled to increase $15 per ton. We expect to sell at the summer-fill pricing
levels through the third quarter and we expect to achieve the increased pricing
in the fourth quarter, but this could be affected by, among other things,
weather, planting decisions, rail car availability, commodity price decreases as
a result of the COVID-19 pandemic, and the price and availability of other
potassium products.
With potash sales comprising 46% of our total sales in the first six months
of 2020, potash prices continue to be a significant driver of our profitability.
Pricing of our potash is influenced principally by the price established by our
competitors. The interaction of global potash supply and demand, ocean, land,
and barge freight rates, and currency fluctuations also influence pricing.
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We experience seasonality in potash demand, with more purchases historically
occurring in March through May and September through November when purchasers
are looking to have product on hand for the spring and fall application seasons
in the United States . To date, we have not seen any impacts to the seasonal
demand patterns for potash. However, further actions taken in response to the
COVID-19 pandemic may impact the traditional fall fertilizer application season
if there is an effect on available labor, transportation logistics, or supply
disruptions. The combination of these items results in variability in potash
sales and shipments, thereby increasing volatility of sales volumes from quarter
to quarter and season to season. The specific timing of when farmers apply
potash remains highly weather dependent and varies across the numerous growing
regions within the U.S. The timing of potash sales is also significantly
influenced by the marketing programs of potash producers, as well as storage
volumes closer to the farm gate. Our sales volumes into the industrial market
correlate to drilling activity in the oil and gas market.
• Trio® pricing and demand. Our Trio® average net realized sales price per ton
increased 6% during the second quarter of 2020 as compared to the second quarter
of 2019 as we sold fewer tons internationally, which generally carry lower
per-ton pricing. Our Trio® average net realized sales price per ton was
unchanged for the six months ended June 30, 2020 compared to the six months
ended June 30, 2019 , as decreases in domestic pricing was offset by fewer
international sales.
During the second quarter of 2020, year-over-year domestic Trio® pricing
continued to be negatively impacted by a summer-fill program announced by our
competitor in July 2019 , lowering their list price by $35 to $50 per ton
depending on product grade, and a winter-fill program announced in January of
2020 that held price at the summer-fill levels until early in the second
quarter. After the winter-fill order window expired, we did transact some sales
at the higher pricing in the second quarter, although domestic competition
remained strong which limited our ability to maintain those price levels. In
June 2020 , our competitor announced another summer-fill price decrease of $15 to
$20 per ton from the current list price, or in effect a $5 to $10 per ton
decrease from the winter-fill price level, for orders delivered through the end
of the third quarter. This announcement mirrored the potash summer-fill price
announced earlier in June. Price is scheduled to increase $15 per ton after the
fill window, and we expect to achieve this price in the fourth quarter, but this
could be affected by, among other things, weather, planting decisions, rail car
availability, commodity price decreases as a result of the COVID-19 pandemic,
and the price and availability of other potassium products.
Trio® sales volume increased 10% during the first six months of 2020,
compared to the first six months of 2019, as good weather in most of our
domestic markets resulted in a strong 2020 spring application season. First half
2019 domestic sales were reduced due to wet weather which negatively impacted
the 2019 spring application season. International sales decreased significantly
in the second quarter of 2020, as compared to the second quarter of 2019, due to
the timing of shipments and as we pursue a more limited international sales
strategy.
We also experience seasonality in domestic Trio® demand, with more purchases
coming in the first and second quarters in advance of the spring application
season in the U.S. In turn, we generally have increased inventory levels in the
third and fourth quarters in anticipation of expected demand for the following
year. Further actions taken in response to the COVID-19 pandemic may also impact
seasonal demand patterns if there is an effect on available labor,
transportation logistics, or supply disruptions. We continue to operate our
facilities at production levels that approximate expected demand and allow us to
manage inventory levels. Certain products rely more heavily on international
markets, particularly standard Trio®. Our international warehouse temporarily
closed in response to the COVID-19 pandemic in the first quarter and was
reopened during the second quarter and currently remains open, but we may see
additional closures with the continued resurgence of COVID-19 related cases,
which could reduce demand in future periods. We reduced the production of fine
langbeinite in the second quarter of 2020 to manage inventory levels and if we
experience reduced demand for Trio® due to warehouse closures or other effects
from the COVID-19 pandemic, we may need to continue to operate at reduced
production rates to manage inventory levels.
• Water sales. In the second quarter of 2020, total water sales were $2.5
million compared to $5.7 million during the same period of 2019, and $8.5
million in the first quarter of 2020. During the second quarter, the COVID-19
pandemic impacted the demand for oil as shelter-in-place orders were issued
across most major metropolitan areas, significantly reducing automobile and
airline travel, two major consumers of oil. In addition, most states required
non-essential businesses to close and employees to work from home wherever
possible. While shelter-in-place orders were relaxed towards the end of the
second quarter and demand began to rebound, there continues to be significant
impacts from the COVID-19 pandemic as oil and gas activity in the areas in which
we operate has not yet returned to the levels seen prior to the COVID-19
pandemic. In addition, positive cases of COVID-19 are increasing in most areas
of the United States , which could lead to reinstating shelter-in-place
restrictions in states and major cities. Such restrictions would negatively
impact the demand for oil in the second half of 2020 or beyond.
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For the six months ended June 30, 2020 and June 30, 2019 , total water sales were
$11.0 million The decrease in water sales in the second quarter of 2020, as
discussed above, was offset by operating Intrepid South for the full six month
period in 2020, compared to only two months of the six month period of 2019, as
we purchased the Intrepid South assets in May 2019 .
We expect the planned reduction in activities by operators will continue to
impact our sales of water and other oilfield products and services through at
least the second half of 2020, although the unprecedented conditions resulting
from the COVID-19 pandemic make forecasting future demand difficult.
Water rights in New Mexico are subject to a stated purpose and place of use,
and many of our water rights were originally issued for uses relating to our
mining operations. When water rights temporarily exceed the originally permitted
use, we and other persons or entities with New Mexico water rights are able to
sell water for alternative uses, such as construction, farming, ranching and oil
and gas development, thereby ensuring the highest and best use of New Mexico
water that may otherwise go unused. When applicable we, or any other New Mexico
water right holder, applies for a permit from the New Mexico Office of the State
Engineer ("OSE") to change the purpose and/or place of use of the underlying
water rights. The OSE reviews and makes a determination as to the validity of
the right and if it determines the requested change will not negatively impact
other valid interests, the OSE may issue a preliminary authorization for the
change. The preliminary authorization allows for water sales to begin
immediately, subject to repayment if the underlying water rights were ultimately
found to be invalid, thereby ensuring the highest and best use of New Mexico
water that may otherwise go unused. Third parties may protest the preliminary
authorization at minimal cost and frequently do so. Once protested, the OSE is
required to hold a hearing to determine if the preliminary authorization was
appropriate. Since 2017, we have faced a protest of our rights to use water from
the Pecos River from numerous parties. We have a strong historical and legal
basis supporting 19,836 acre feet of water rights on the Pecos River . While some
parties have challenged our entire water right, recent and historic analysis
from the New Mexico Interstate Stream Commission expert report dated August 30,
2019 by Jennifer Stevens , Ph.D. indicates our rights based on historic
consumptive use to a minimum of 5,800 acre feet of established rights. Further,
on July 21, 2020 the OSE filed its State of New Mexico's Response to CID/Otis's
Motion for Summary Judgment, indicating our rights at up to 6,000 acre feet.
Significant current and historic use of New Mexico Pecos River water rights
comes from water sales made under preliminary authorizations issued by the OSE,
both for us and many other New Mexico water rights users. Third parties have
protested these preliminary authorizations, and the OSE is required to hold a
hearing on the protests. In February 2019 , certain protestants filed an inter se
proceeding in New Mexico District Court at the Pecos Stream System Adjudication
Court challenging the validity of certain of Intrepid's New Mexico Pecos River
water rights. In August 2019 , all of the parties, including us and the
protestants, stipulated to the jurisdiction of the adjudication court. To
promote settlement, the adjudication court established a settlement schedule and
ordered a trial date in August 2020 if the parties have not reached a settlement
by that time. The trial date has since been rescheduled to December 2020 ,
subject to the continued motions of the protestants. Preliminary authorizations
allow for water sales to begin immediately, subject to repayment if the
underlying water rights are ultimately found to be invalid, which repayment may
be made "in-kind" through our utilization of existing water rights which remain
unaffected by actions under the affected leases which do not impact our ability
to deliver water at numerous other locations and/or from the subject diversion
points in service of those unaffected rights. Separate from the adjudication
proceeding, the protestants have challenged these preliminary authorizations
before the OSE. Although the OSE is required to hold a hearing relating to the
protests, it has temporarily stayed the hearing process in this matter until the
agreed-upon adjudication process is complete. In the adjudication proceeding,
the court is expected to make a determination as to the size of Intrepid's Pecos
River water rights.
In February 2020 , the protestant CID/Otis filed a Petition of Writ of
Mandamus against the OSE concerning these permits, despite its agreed
stipulation to jurisdiction of the adjudication court, asking for unspecified
monetary and injunctive relief, as well as attorneys' fees and costs, relating
to our sale of water under these water rights and breach of contract claims. A
hearing regarding this Writ was held in March 2020 , and the non-adjudication
court granted the Writ against the OSE challenging the OSE's right to grant
preliminary authorizations under the New Mexico Water Leasing Act. The
non-adjudication court also denied Intrepid's right to participate as a
potentially harmed party. The non-adjudication court's challenged ruling
required the OSE to withdraw and cancel certain preliminary authorizations the
OSE had issued to us. This challenged ruling by the non-adjudication court does
not impact the validity of our water rights, nor does it impact our ability to
deliver water at numerous other locations. The ruling limits our and our lessees
ability to use water under certain leases, subject to challenge, but does not
affect our continuing ability to utilize the subject diversion points to service
other water rights.
The OSE has filed a Petition for Writ of Superintending Control with the New
Mexico Supreme Court seeking to reverse the decision by the non-adjudication
court and stay any actions taken as a result of the Writ of Mandamus.
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The challenged ruling by the non-adjudication court only affects leases, not
the underlying rights, on two points of diversion on the Pecos river and does
not affect Intrepid's ability to produce potash or Trio®. As stated, we were
denied the right to intervene and challenge both the jurisdiction, grounds and
legitimacy of the non-adjudication court in this matter and we have filed for a
Petition of Writ of Superintending Control in the New Mexico Supreme Court
seeking a reversal of the denial of our request to intervene and seeking to stay
enforcement while the matter is being decided. Also as stated, the OSE has filed
for a Petition for Writ of Superintending Control in the New Mexico Supreme
Court seeking to assert its jurisdiction over permitting under the Water Leasing
Act. Both petitions seek a stay of the Writ of Mandamus issued by the
non-adjudication court. These petitions are currently pending. The adjudication
court has scheduled the underlying issue regarding adjudication of the validity
of the subject water rights for December of 2020. We continue to vigorously
defend our legal position with respect to the validity of our water rights in
all forums and assert the proper jurisdiction of the adjudication court in
determining the validity and extent of Intrepid's water rights in this matter.
We may face other political and regulatory issues relating to the potential
use of the maximum amount of our rights. However, we believe that our legal
position with respect to the validity of our water rights is solid and that we
will be able to meet our water commitments.
• Byproduct sales. We sell byproducts such as salt, magnesium chloride, brines,
and water that are derived from our potash and Trio® operations. Byproduct sales
were $3.4 million for the three months ended June 30, 2020 , compared to $4.6
million for the three months ended June 30, 2019 . Byproduct sales were $8.7
million for the six months ended June 30, 2020 , compared to $11.6 million for
the six months ended June 30, 2019 . The decrease during the second quarter of
2020 was primarily due to a $0.8 million decrease in salt sales and a $0.9
million decrease in water sales, offset by a $0.7 million increase in sales of
magnesium chloride. Salt availability improved in certain regions of the country
in the second quarter of 2020, compared to the same period in 2019, which
reduced our sales footprint while overall water sales were down significantly
due to the impact of the COVID-19 pandemic on oil and gas activity, as discussed
above. Our sales of magnesium chloride increased as good early season
evaporation allowed for the production of magnesium chloride towards the end of
the second quarter of 2020. In the second quarter of 2019, above average wet
weather during the spring limited the production and demand of magnesium
chloride.
The decrease in byproduct sales during the first half of 2020 was due to a $1.9
million decrease in salt sales, a decrease of $0.5 million in brine water sales,
a decrease of $0.3 million in byproduct water sales and a decrease of $0.2
million in magnesium chloride sales. Improved salt availability in certain
regions of the country in the first half of 2020 reduced our sales footprint.
The decrease in byproduct brine water and byproduct water sales was due to
impact of the COVID-19 pandemic on oil and gas activity, as discussed above. The
decrease in magnesium chloride sales is due to having less magnesium chloride to
sell due to wet weather at our Wendover facility, which reduced our magnesium
chloride production.
Magnesium chloride production and sales returned to historic rates towards
the end of the second quarter of 2020 and we expect that will continue in the
second half of 2020 assuming average evaporation rates at our Wendover facility.
We continue to experience decreased demand for water and other oilfield products
and services as a result of the COVID-19 pandemic and expect this to continue
for at least the second half of 2020.
• Diversification of products and services. We continue to diversify our
products and services, particularly on our Intrepid South property. In addition
to water sales, Intrepid South generates revenue from right-of-way agreements,
surface damages and easements, caliche sales, and a produced water royalty. We
added a brine station at our Intrepid South property in February 2020 and are
reviewing opportunities to developing a produced water facility, although the
expectation of reduced oil and gas operations due to the recent decrease in the
price and demand for oil due to the COVID-19 pandemic have made the timing of
this development uncertain. Demand for our high-speed mixing service has also
been negatively impacted as a result of the decrease in oil prices and oilfield
activities.
In March 2020 , we sold approximately 320 acres of fee land from our Intrepid
South property for $4.8 million and recognized a gain on the sale of the land of
$4.7 million . The terms of the sale were highly restrictive and only allow the
buyer to drill Acid Gas Injection ("AGI") wells on the property to dispose of
natural gas with high concentrations of hydrogen sulfide ("H2S"). No water
rights were included in the land sale, we retained surface access, and we
restricted the use of caliche located on the property to the acreage that was
sold in order to prevent sales to third parties or decrease future sales to the
buyer. Our long-term strategic operating plan for Intrepid South includes
selling small parcels of land to other companies, where such sales provide a
solution to a company's needs. We may have additional strategic sales of small
parcels of land in the future.
In May 2020 , we acquired an 11% equity stake in the W.D. Von Gonten Laboratories
("WDVGL"), a global industry leader in drilling and completion chemistry and a
strong supporter of the use of potassium chloride in oil and gas drilling and
completion activities. With this investment we plan to revitalize our industrial
sales and high-speed mixing
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service given the poor performance of clay-inhibition chemical substitutes. Our
investment in WDVGL is also part of our strategy to leverage our existing oil
and gas midstream businesses in southeast New Mexico and expand into additional
oil and gas midstream and upstream activities. This expansion may be through
organic growth, other strategic investments, partnerships, or acquisitions of
complementary businesses that expand our product and service offerings beyond
our existing assets or products. We believe that the investment opportunities in
the current market are generational and provide a unique opportunity to
accelerate our pivot towards oil and gas through accretive transactions.
Additionally, we may expand into oil and natural gas exploration and production
or into new products or services in our current industry or other industries.
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Consolidated Results
(in thousands, except per ton Six Months Ended June
amounts) Three Months Ended June 30, 30,
2020 2019 2020 2019
Sales1 $ 46,450 $ 62,512 $ 110,434 $ 120,066
Cost of goods sold $ 34,008 $ 35,818 $ 77,055 $ 67,512
Gross (Deficit) Margin $ (599) $ 13,171 $ 5,024 $ 26,339
Selling and administrative $ 6,673 $ 6,355 $ 13,272 $ 12,162
Net (Loss) Income $ (8,872) $ 5,611 $ (16,269) $ 11,766
Average net realized sales price
per ton2
Potash $ 256 $ 299 $ 256 $ 294
Trio® $ 208 $ 196 $ 200 $ 200
1Sales include sales of byproducts which were $3.4 million and $4.6 million for
the three months ended June 30, 2020 , and 2019, respectively, and $8.7 million
and $11.6 million for the six months ended June 30, 2020 , and 2019,
respectively.
2Average net realized sales price per ton is a non-GAAP financial measure. More
information about this non-GAAP financial measure is below under the heading
"Non-GAAP Financial Measure."
Consolidated Results for the Three Months Ended June 30, 2020 , and 2019
Our total sales for the three months ended June 30, 2020 , decreased $16.1
million , or 26%, as compared to the three months ended June 30, 2019 . Our potash
sales decreased $10.7 million , or 33%, during the second quarter of 2020 as
compared to the second quarter of 2019. Our tons of potash sold decreased 22% in
the second quarter of 2020, compared to the second quarter of 2019, as favorable
weather resulted in an earlier spring application season in 2020, as compared to
2019. Additionally, we sold fewer tons of potash into the industrial market in
the second quarter of 2020 compared to the second quarter of 2019. Our average
net realized sales price per ton decreased 14% for the three months ended June
30, 2020 , compared to the same period in 2019, as price decreases from both the
2019 summer-fill program and the winter-fill program announced in January 2020
lowered overall price levels.
Our Trio® sales decreased $1.5 million , or 8%, in the second quarter of 2020, as
compared to the second quarter of 2019. The decrease was due to selling 10%
fewer tons in the second quarter of 2020 compared to the second quarter of 2019,
partially offset by a 6% increase in the average net realized sales price per
ton during the second quarter of 2020, compared to the second quarter of 2019.
As with our potash sales, favorable spring weather in 2020 resulted in an
earlier spring application season in 2020, as compared to 2019. Our average net
realized sales price per ton increased slightly in the second quarter of 2020,
compared to the second quarter of 2019, as we sold fewer tons of Trio®
internationally in the second quarter of 2020, compared to the second quarter of
2019. Our Trio® average net realized sales price for international sales is less
than our Trio® average net realized sales price for domestic sales, due to
higher freight costs related to international sales.
Our water sales decreased $2.2 million , or 52%, in the second quarter of 2020,
compared to the second quarter of 2019. Our water sales were negatively impacted
by the COVID-19 pandemic as oil demand decreased significantly leading to
decreased oil and gas activity, as discussed above. We expect our water sales
will continue to be negatively impacted in the second half of 2020, due to the
continued economic effects of the COVID-19 pandemic.
Our byproduct sales decreased $1.2 million in the second quarter of 2020,
compared to the second quarter of 2019, due to a $0.9 million decrease in
byproduct water sales, an $0.8 million decrease in salt sales, a decrease of
$0.3 million in byproduct brine water sales, partially offset by an $0.7 million
increase in magnesium chloride sales. Byproduct water and byproduct brine water
sales decreased due to the negative economic effects related to the COVID-19
pandemic. We expect byproduct water sales and byproduct brine water sales will
continue to be negatively impacted in the second half of 2020, due to the
continued economic effects of the COVID-19 pandemic. Byproduct salt sales
decreased as salt availability improved in certain parts of the U.S. which
reduced our geographic footprint for salt sales. Magnesium chloride sales
increased as we had more product to sell in the second quarter of 2020 compared
to the same quarter in 2019. Wet weather at our Wendover facility reduced our
magnesium chloride production in 2019.
Cost of Goods Sold
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Our total cost of goods sold decreased 5% during the second quarter of 2020
compared to the second quarter of 2019. Our potash cost of goods sold decreased
by $3.6 million , or 17%, during the second quarter of 2020 compared to the
second quarter of 2019, mainly driven by a 22% decrease in potash tons sold.
This decrease was partially offset by $1.6 million increase, or 13%, in our
Trio® cost of goods sold. While Trio® tons sold during the second quarter of
2020, decreased 10% compared to the second quarter of 2019, we sold a higher
percentage of premium Trio® tons in the second quarter of 2020, compared to the
second quarter of 2019, which carry a higher per ton carrying cost than our
other Trio® products.
Gross Margin
During the second quarter of 2020, we generated a gross deficit of $0.6 million
compared to a gross margin of $13.2 million during the second quarter of 2019,
driven by a decrease of 26% decrease in sales as discussed above. Additionally,
during the second quarter of 2020, we recorded a $2.2 million lower of cost or
net realizable value inventory adjustment due to declining potash and Trio®
prices.
Selling and Administrative Expense
During the second quarter of 2020, selling and administrative expenses
increased 5% as compared to the second quarter 2019. The increase was due mainly
to increased legal costs associated with protests over the validity of certain
of our water rights and settlement of outstanding litigation.
Net Income
We generated a net loss of $8.9 million for the three months ended June 30,
2020 , compared to net income of $5.6 million in the same period in 2019 due to
the factors discussed above.
Consolidated Results for the Six Months Ended June 30, 2020 , and 2019
Our total sales for the six months ended June 30, 2020 , decreased $9.6 million
or 8%, as compared to the six months ended June 30, 2019 . Our potash sales
during the first half of 2020 decreased $10.0 million compared to the first half
of 2019. We sold 5% fewer tons of potash during the first half of 2020 compared
to the first half of 2019, driven by selling fewer tons of potash into the
industrial market. Our potash average net realized sales price per ton also
decreased 13% in the first half of 2020 compared to the first half of 2019.
Price decreases from the both the 2019 summer-fill program and the winter-fill
program announced in January 2020 lowered overall price levels. Also, potash
tons sold into the industrial market generally earn a higher average net
realized sales price per ton compared to potash tons sold into the agriculture
markets.
Our Trio® sales increased $3.1 million or 8% during the first half of 2020
compared to the first half of 2019. We sold more tons of Trio® during the first
half of 2020 compared to the first half of 2019, while our Trio® average net
realized sales price per ton was flat. Our increase in Trio® tons sold was
driven by increased domestic sales during the first half of 2020 compared to the
first half of 2019.
Water sales increased $0.3 million , or 4%, in the first half of 2020 compared to
the first half of 2019, due to the additional water rights acquired as part of
Intrepid South in May 2019 . However, as discussed above, our second quarter 2020
water sales were materially impacted by the COVID-19 pandemic as significant
decreases in the demand for oil and the subsequent decreases in oil and gas
activities reduced water demand. We expect a decrease in water sales will
continue at least through the second half of 2020 as a result of the COVID-19
pandemic.
Our sales of other oilfield solution segment offerings, including caliche, brine
water, right-of-way agreements, surface damages and easements, were flat in the
first half of 2020, compared to the first half of 2019.
Our total byproduct sales decreased $2.9 million , or 25%, for the six months
ended June 30, 2020 , compared to the first six months of June 30, 2019 . Our
byproduct salt sales decreased $1.9 million , or 32%, in the first half of 2020
compared to the first half of 2019, as salt availability improved in certain
regions of the country reducing our geographic footprint for salt sales. Our
byproduct brine water sales decreased $0.5 million , or 38%, and our byproduct
water sales decreased $0.3 million , or 12%, due to the COVID-19 pandemic, as
discussed above.
Cost of Goods Sold
Our cost of goods sold increased $9.5 million , or 14%, during the first half of
2020 compared to the first half of 2019. Our Trio® cost of goods sold increased
$8.0 million , or 34% during the first half of 2020, compared to the first half
of 2019, as Trio® sales volumes increased 10%. Also, in the first half of 2020,
as compared to the first half of 2019, we reduced production of Trio® tons by
22% in order to manage our inventory levels. Because a majority of our
production costs are fixed, reductions in tons produced results in a higher per
ton production cost. Finally, we sold a higher percentage of premium Trio® tons
in the first half of 2020, compared to the first half of 2019, which carry a
higher per ton carrying cost than our other Trio® products.
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Our potash cost of goods sold were virtually unchanged during the first half of
2020 compared to the first half of 2019, even though our potash tons sold
decreased by 5%. Below average evaporation during the 2019 evaporation season at
our potash facilities resulted in higher per ton cost of goods sold during the
first half of 2020, as compared to the first half of 2019.
Our oilfield solutions cost of goods sold increased $0.2 million during the
first half of 2020 compared to the first half of 2019, as water transfer and
labor costs at Intrepid South increased $1.5 million , partially offset by a
decrease of $1.3 million of intercompany purchases of potash from our potash
segment that were used in our high-speed mixing service that were eliminated in
consolidation because the cost of goods sold for those intercompany sales are
included in the potash segment and the oilfield solutions segment. The increase
in water transfer costs is due to the acquisition of Intrepid South in May 2019 .
During the first half of 2020, our oilfield solutions segment did not have any
intercompany purchases of potash as we have not had any high-speed mixing sales
in the first half of 2020, due to decreased oil demand as a result of the
COVID-19 pandemic which led to decreased oil and gas activities.
Gross Margin
During the first half of 2020, we generated gross margin of $5.0 million
compared to a gross margin of $26.3 million , driven by an 8% decrease in total
sales coupled with an 14% increase in our total cost of goods sold, as discussed
above. Additionally, during the first half of 2020, we recorded $2.8 million of
lower of cost or net realizable value inventory adjustments due to declining
potash and Trio® prices.
Gain on Sale of an Asset
In March 2020 , we sold approximately 320 acres of fee land from our Intrepid
South property for $4.8 million and recognized a gain on the sale of the land of
$4.7 million . The terms of the sale were highly restrictive and only allow the
buyer to drill Acid Gas Injection (AGI) wells on the property to dispose of
natural gas with high concentrations of hydrogen sulfide (H2S). No water rights
were included in the land sale, we retained surface access, and we restricted
the use of caliche located on the property to the acreage that was sold in order
to prevent sales to third parties or decrease future sales to the buyer. Our
long-term strategic operating plan for Intrepid South includes selling small
parcels of land to other companies, where such sales provide a solution to a
company's needs. We may have additional strategic sales of small parcels of land
in the future.
Litigation Settlement
A settlement conference was held with Mosaic in late March 2020 related to
ongoing litigation. Intrepid and Mosaic agreed to settle the matter and we paid
Mosaic an aggregate of $10 million to dismiss all claims against us in this
litigation, and the matter is now closed. Please see further information in Part
II, Item 1, "Legal Proceedings" contained in this Quarterly Report.
Selling and Administrative Expense
During the first half of 2020, selling and administrative expenses increased
9% as compared to the first half of 2019. The increase was mainly due to
increased legal costs associated with the settlement agreement with Mosaic as
discussed above, and increased legal costs related to various protests against
our water rights.
Net Income
We generated a net loss of $16.3 million for the six months ended June 30,
2020 , compared to net income of $11.8 million in the same period in 2019, due to
the factors discussed above.
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Potash Segment
Six Months Ended June
Three Months Ended June 30, 30,
(in thousands, except per ton amounts) 2020 2019 2020 2019
Sales1 $ 24,526 $ 35,547 $ 58,317 $ 69,877
Less: Freight costs 3,286 4,742 8,727 9,382
Warehousing and handling
costs 1,204 1,319 2,500 2,586
Cost of goods sold 17,650 21,258 40,370 40,317
Lower of cost or net
realizable value inventory
adjustments 371 - 371 -
Gross Margin $ 2,015 $ 8,228 $ 6,349 $ 17,592
Depreciation, depletion, and amortization
incurred2 $ 5,742 $
6,120
Potash sales volumes (in tons) 74 95 173 183 Potash production volumes (in tons) 4 56 140 167 Average potash net realized sales price per ton3 $ 256 $
299
1 Sales include sales of byproducts which were$3.0 million and$3.5 million for the three months endedJune 30, 2020 , and 2019, respectively, and$7.0 million and$9.3 million for the six months endedJune 30, 2020 , and 2019, respectively. 2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory. 3Average net realized per ton sales price per ton is a non-GAAP financial measure. More information about this measure is below under the heading "Non-GAAP Financial Measure." Three Months EndedJune 30, 2020 , and 2019 Potash segment sales in the second quarter of 2020 decreased compared to the same period in 2019, due to a 22% decrease in sales volume and a 14% decrease in our average net realized sales price per ton and a$0.6 million decrease in byproduct sales. Agricultural sales volumes decreased in the second quarter of 2020 compared to the second quarter of 2019, due to good weather in the first quarter of 2020 which pushed the delivery of product to earlier in the year. We also sold fewer tons into the industrial market. Our industrial potash sales were negatively impacted by the COVID-19 pandemic as oil demand decreased significantly leading to decreased oil and gas activity. Average net realized sales price per ton was lower due to price decreases announced in the summer of 2019 and under the winter-fill program announced inJanuary 2020 and due to lower industrial sales volume. Above average evaporation inWendover in the first half of 2020 allowed us to begin normal production and sales rates for magnesium chloride in June which offset a decrease in byproduct water, salt, and brine sales. Salt sales decreased compared to 2019 as salt availability improved in certain regions of the country in the second quarter of 2020 which reduced our sales footprint. Potash segment freight expense decreased$1.4 million , or 31%, in the second quarter of 2020, compared to the second quarter of 2019 as a result of decreased sales volume of potash. Our freight expense is impacted by the geographic distribution of our potash and byproduct sales and by the proportion of customers arranging for and paying their own freight costs. Our potash segment cost of goods sold decreased 17% in the second quarter of 2020, compared to the same period in 2019, due to a 22% decrease in potash sales volume offset by higher per ton production costs across our facilities as a result of the below average evaporation in 2019. Potash production decreased 93% compared to the second quarter of 2019 as we finished the spring production season earlier than the previous year due to reduced pond inventory as a result of lower evaporation rates in the summer of 2019. Our potash segment gross margin decreased$6.2 million in the second quarter of 2020, compared to the same period in 2019, due to the decrease in average net realized sales price per ton, increased per ton production costs, decreased potash sales volumes, and a decrease in byproduct sales. 29
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Six Months Ended June 30, 2020 , and 2019
Potash segment sales for the six months ended June 30, 2020 decreased compared
to the same period in 2019, due to a 5% decrease in sales volume, a 13% decrease
in our average net realized sales price per ton, and a $2.4 million decrease in
byproduct sales. Industrial sales volume decreased 71% as our industrial potash
sales were negatively impacted by the COVID-19 pandemic as oil demand decreased
significantly leading to decreased oil and gas activity. Historically, our
industrial potash sales carried a higher average net realized sales price per
ton, and the decrease in industrial potash sales negatively impacted our overall
potash average net realized sales price per ton. Agricultural volumes were
similar to prior year and feed sales were up 26%. Average net realized sales
price per ton was lower due to price decreases announced in the summer of 2019
and under the winter-fill program announced in January 2020 and due to lower
industrial sales volume. Byproduct sales decreased as reduced oil and gas
activity resulted in decreased byproduct water and brine sales. Salt sales
decreased compared to 2019 as salt availability improved in certain regions of
the country in the second quarter of 2020 which reduced our sales footprint.
Potash segment freight expense decreased $0.7 million , or 7%, in the first six
months of 2020, compared to the first six months of 2019 as a result of
decreased sales volume of potash. Our freight expense is impacted by the
geographic distribution of our potash and byproduct sales and by the proportion
of customers arranging for and paying their own freight costs.
Our potash segment cost of goods sold were similar to the prior year as reduced
sales volume was offset by higher per ton production costs across our facilities
as a result of the below average evaporation in 2019.
Potash production decreased 16% in the first six months of 2020 compared to the
first six months of 2019 due to reduced evaporation during the 2019 evaporation
season.
Our potash segment gross margin decreased $11.2 million in the first six months
of 2020, compared to the same period in 2019, due to the decrease in average net
realized sales price per ton, increased per ton production costs, decreased
potash sales volumes, and a decrease in byproduct sales.
Additional Information Relating to Potash
The table below shows our potash sales mix for the three and six months ended
June 30, 2020 , and 2019:
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
Agricultural 78% 76% 80% 74%
Industrial 3% 12% 4% 14%
Feed 19% 12% 16% 12%
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Trio® Segment
Three Months Ended June 30, Six Months Ended June
30,
(in thousands, except per ton amounts) 2020 2019 2020 2019
Sales1 $ 19,251 $ 21,435 $ 41,832 $ 39,245
Less: Freight costs 5,523 6,471 12,071 11,506
Warehousing and handling
costs 861 911 2,469 1,880
Cost of goods sold 14,222 12,599 31,652 23,673
Lower of cost or net
realizable value inventory
adjustments 1,870 - 2,420 -
Gross (Deficit) Margin $ (3,225) $ 1,454 $ (6,780) $ 2,186
Depreciation, depletion, and amortization
incurred2 $ 1,516 $ 1,520 $ 3,025 $ 3,078
Sales volumes (in tons) 64 71 140 127
Production volumes (in tons) 50 66 100 129
Average Trio® net realized sales price
per ton3 $ 208 $
196
1 Sales include sales of byproducts which were$0.4 million and$1.1 million for the three months endedJune 30, 2020 , and 2019, respectively, and$1.8 million and$2.3 million for the six months endedJune 30, 2020 , and 2019, respectively. 2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory. 3Average net realized per ton sales price per ton is a non-GAAP financial measure. More information about this measure, is below under the heading "Non-GAAP Financial Measure." Three Months EndedJune 30, 2020 , and 2019 Trio® segment sales decreased 10% for the three months endedJune 30, 2020 , as compared to the same period in 2019. The decrease was primarily due to a 10% decrease in Trio® tons sold, while increased average net realized sales price was offset by reduced byproduct sales of water and salt. Record domestic sales volume in the second quarter of 2020 was more than offset by a decrease in international sales volume. International Trio® sales volumes decreased 89% in the second quarter of 2020 compared to the second quarter of 2019, due to our increased focus on domestic shipments and variability in the timing of shipments to international customers. Our international Trio® sales were also negatively impacted as our international Trio® warehouse was closed for a part of the second quarter due to the COVID-19 pandemic. Our Trio® average net realized sales price per ton increased 6% during the second quarter of 2020 as compared to the second quarter of 2019 due primarily to a higher percentage of domestic sales. Trio® freight costs decreased 15% in the second quarter of 2020, compared to the second quarter of 2019, due to the decrease in total sales volumes and a reduction in international shipments. Our freight expense is impacted by the geographic distribution of our Trio® sales and by the proportion of customers arranging for and paying their own freight costs. Our Trio® cost of goods sold increased 13% in the second quarter of 2020, compared to the second quarter of 2019. During the second quarter of 2020, we experienced increased losses in our pelletization process and we reduced our fine langbeinite recovery levels to manage inventory levels, both which led to higher per-ton carrying costs. Also, in the second quarter of 2019, a higher percentage of our tons sold had been written down in prior quarters through lower of cost or net realizable value adjustments which resulted in lower per ton costs of product sold. We recorded a$1.9 million lower of cost or net realizable value inventory adjustment in the second quarter of 2020 due to the summer-fill price announced by our competitor inJune 2020 which lowered the list price on Trio® by$15-$20 per ton. We expect to sell at these reduced prices through at least the third quarter of 2020. Our Trio® production volume decreased 24% in the second quarter of 2020, compared to the second quarter of 2019, as we used fewer tons of work-in-process inventory to convert to premium Trio® , we decreased our fine langbeinite recovery to control inventory levels, and we experienced increased losses in our pelletization process.
Our Trio® segment generated a gross deficit of
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Six Months Ended June 30, 2020 , and 2019
Trio® segment sales increased 7% for the six months ended June 30, 2020 , as
compared to the same period in 2019. The increase was primarily due to a 10%
increase in Trio® tons sold, offset partially by reduced byproduct sales of
water and salt. Increased sales volume was a result of strong domestic sales
offset by a slight decrease in international sales volume. Our Trio® average net
realized sales price per ton was the same as the prior period as lower domestic
pricing was offset by reduced international shipments and higher international
average net realized sales prices as we focused on higher-priced export markets.
Trio® freight costs increased 5% in the first six months of 2020, compared to
the first six months of 2019, due to the increase in total sales volumes, offset
by fewer international shipments. Our freight expense is impacted by the
geographic distribution of our Trio® sales and by the proportion of customers
arranging for and paying their own freight costs.
Our Trio® cost of goods sold increased 34% in the first six months of 2020,
compared to the first six months of 2019. During the first six months of 2020,
sales volume increased 10% and we sold a higher percentage of premium Trio®
which carries a higher per-ton cost than other Trio® products. We also
experienced increased losses in our pelletization process and we reduced our
fine langbeinite recovery levels in the second quarter of 2020 to manage
inventory levels, both which led to higher per-ton carrying costs. Also, in the
first six months of 2019, a higher percentage of our tons sold had been written
down in prior quarters through lower of cost or net realizable value adjustments
which resulted in lower per ton costs of product sold.
We recorded a $2.4 million lower of cost or net realizable value inventory
adjustment in the first six months of 2020, primarily due to the summer-fill
price announced by our competitor in June 2020 which lowered the list price on
Trio® by $15-$20 per ton. We expect to sell at these reduced prices through at
least the third quarter of 2020.
Our Trio® production volume decreased 22% compared to the first six months
of 2019, as we used fewer tons of work-in-process inventory to convert to
premium Trio®, we decreased our fine langbeinite recovery in the second quarter
to control inventory levels, and we experienced increased losses in our
pelletization process.
Our Trio® segment generated a gross deficit of
Additional Information Relating to Trio®
The percentage of Trio® tons sold into the export market decreased during
the three and six months ended June 30, 2020 , compared to the same period in
2019, due to our increased focus on domestic shipments and variability in the
timing of shipments to international customers.
United States Export
For the Three Months Ended June 30, 2020 97% 3%
For the Six Months Ended June 30, 2020 83% 17%
For the Three Months Ended June 30, 2019 75% 25%
For the Six Months Ended June 30, 2019 74% 26%
Oilfield Solutions Segment
Three Months Ended June 30, Six Months Ended June
30,
(in thousands) 2020 2019 2020 2019
Sales $ 2,747 $ 5,641 $ 10,488 $ 12,263
Less: Freight costs - 80 - 861
Cost of goods sold 2,136 2,072 5,033 4,841
Gross Margin $ 611 $ 3,489 $ 5,455 $ 6,561
Depreciation, depletion, and
amortization incurred $ 657 $
232
Three Months Ended
Our oilfield solutions segment sales decreased $2.9 million in the second
quarter of 2020, compared to the same period in 2019, mainly due to a $2.2
million decrease in water sales and a $0.7 million decrease in sales of other
oilfield products and services. Our oilfield solutions water sales decreased as
the COVID-19 pandemic pressured oil prices and reduced oil and gas
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completion activity. We expect the COVID-19 pandemic and related global economic
conditions will reduce sales of water and other oilfield products in the second
half of 2020. Water that we sell that was used in the production of potash and
Trio® is accounted for as byproduct water sales in the potash or Trio® segments.
Cost of goods sold increased 3%, or $0.1 million , as reduced water transfer
expense was offset by the addition of water and real property assets at Intrepid
South in May 2019 which increased depreciation expense compared to the prior
year.
Gross margin decreased $2.9 million compared to the prior year, due to the
factors discussed above.
Six Months Ended June 30, 2020 , and 2019
Our oilfield solutions segment sales decreased $1.8 million in the first six
months of 2020, compared to the same period in 2019, mainly due to a $2.0
million decrease in potash used in our high-speed mixing service. Sales of water
and oilfield related products and services were similar to the prior year as a
strong first quarter of 2020 was offset by reduced sales in the second quarter
due to the COVID-19 pandemic. Water that we sell that was used in the production
of potash and Trio® is accounted for as byproduct water sales in the potash or
Trio® segments.
Cost of goods sold increased 4%, or $0.2 million , as reduced expense related
to our high-speed mixing service was offset by increased water transfer expense
and the addition of water and real property assets at Intrepid South in May 2019
which increased depreciation expense compared to the prior year.
Gross margin decreased $1.1 million compared to the prior year, due to the
factors discussed above.
In March 2020 , we sold approximately 320 acres of fee land from our Intrepid
South property for $4.8 million and recognized a gain on the sale of the land of
$4.7 million . The terms of the sale were highly restrictive and only allow the
buyer to drill Acid Gas Injection (AGI) wells on the property to dispose of
natural gas with high concentrations of hydrogen sulfide (H2S). No water rights
were included in the land sale, we retained surface access, and we restricted
the use of caliche located on the property to the acreage that was sold in order
to prevent sales to third parties or decrease future sales to this customer. Our
long-term strategic operating plan for Intrepid South includes selling small
parcels of land to other companies, where such sales provide a solution to a
company's needs. We anticipate we will continue to have additional strategic
sales of small parcels of land in the future.
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash, Trio®, water, salt,
magnesium chloride, brine water and various other products and services offered
to oil and gas producers. Total sales are determined by the quantities of
product we sell and the sales prices we realize. For potash, Trio® and salt, we
quote prices to customers both on a delivered basis and on the basis of pick-up
at our plants and warehouses. Freight costs are incurred on most of our potash,
Trio® and salt sales, but some customers arrange and pay for their own freight
directly. When we arrange and pay for freight, our quotes and billings are based
on expected freight costs to the points of delivery. When we calculate our
potash and Trio® average net realized sales price per ton, we deduct any freight
costs included in sales before dividing by the number of tons sold. We believe
the deduction of freight costs provides a more representative measure of our
performance in the market due to variations caused by ongoing changes in the
proportion of customers paying for their own freight, the geographic
distribution of our products, and freight rates. Freight rates have been
increasing, and if we are unable to pass the increased freight costs on to the
customer, our average net realized sales price per ton is negatively affected.
We manage our sales and marketing operations centrally and we work to achieve
the highest average net realized sales price per ton we can by evaluating the
product needs of our customers and associated logistics and then determining
which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and
by our production capabilities. We operate our potash and Trio® facilities at
production levels that approximate expected demand and take into account current
inventory levels and expect to continue to do so for the foreseeable future.
Our water sales and other products and services offered through our oilfield
solutions segment are driven by demand from oil and gas exploration companies
drilling in the Permian Basin . As such, demand for our water is generally
stronger during a cyclical expansion of oil and gas drilling. Likewise, a
cyclical contraction of oil and gas drilling may decrease demand for our water
and the other products and services offered through our oilfield solutions
segment. The COVID-19 pandemic has caused an unprecedented decrease in the
demand for oil, resulting in lower prices and significant decreases in oil and
gas activity, and our water sales, including byproduct water sales, decreased
55% in the second quarter of 2020 compared to the second quarter of 2019. We
expect our water sales and sales of other products and services offered through
our oilfield
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solutions segment will continue to be negatively impacted through at least the
second half of 2020, due to the continued economic effects of the COVID-19
pandemic.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our products. Many of
our production costs are largely fixed and, consequently, our cost of sales per
ton on a facility-by-facility basis tends to move inversely with the number of
tons we produce, within the context of normal production levels. Our principal
production costs include labor and employee benefits, maintenance materials,
contract labor, and materials for operating or maintenance projects, natural
gas, electricity, operating supplies, chemicals, depreciation and depletion,
royalties, and leasing costs. There are elements of our cost structure
associated with contract labor, consumable operating supplies, reagents, and
royalties that are variable, which make up a smaller component of our cost base.
Our costs often vary from period to period based on the fluctuation of
inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels
change, due to factors such as changes in the grade of ore delivered to the
plant, levels of mine development, plant operating performance, and downtime. We
expect that our labor and contract labor costs in Carlsbad, New Mexico , will
continue to be influenced most directly by the demand for labor in the local
region where we compete for labor with another fertilizer company, companies in
the oil and gas industry, and a nuclear waste processing and storage facility.
We pay royalties to federal, state, and private lessors under our mineral
leases. These payments typically equal a percentage of sales (less freight) of
minerals extracted and sold under the applicable lease. In some cases, federal
royalties for potash are paid on a sliding scale that vary with the grade of ore
extracted. For the three and six months ended June 30, 2020 , our average royalty
rate was 4.4%. For the three and six months ended June 30, 2019 , our average
royalty rate was 4.3% and 4.4%, respectively.
Income Taxes
We are subject to federal and state income taxes on our taxable income. Our
effective tax rate for the six months ended June 30, 2020 and 2019, was 0%. Our
effective tax rate differed from the statutory rate during each period primarily
due to the valuation allowance established to offset our deferred tax assets.
Our federal and state income tax returns are subject to examination by federal
and state tax authorities.
For the three and six months ended June 30, 2020 we incurred no income tax
expense. For the three months ended June 30, 2019 , we incurred no income tax
expense and for the six months ended June 30, 2019 , we recognized an immaterial
amount of income tax benefit.
We evaluate our deferred tax assets and liabilities each reporting period using
the enacted tax rates expected to apply to taxable income in the periods in
which the deferred tax liability or asset is expected to be settled or realized.
The estimated statutory income tax rates that are applied to our current and
deferred income tax calculations are impacted most significantly by the states
in which we conduct business. Changing business conditions for normal business
transactions and operations, as well as changes to state tax rate and
apportionment laws, potentially alter our apportionment of income among the
states for income tax purposes. These changes in apportionment laws result in
changes in the calculation of our current and deferred income taxes, including
the valuation of our deferred tax assets and liabilities. The effects of any
such changes are recorded in the period of the adjustment. These adjustments can
increase or decrease the net deferred tax asset on our condensed consolidated
balance sheet. However, any resulting impact to the deferred tax benefit or
deferred tax expense would be offset by a corresponding adjustment to the
valuation allowance and would have no income statement effect
As of June 30, 2020 , we were in a near break-even cumulative three-year income
position. Additionally, general uncertainty in the business markets we operate
makes it difficult to forecast sustained amounts of future income. These
circumstances are significant negative evidence when evaluating the
realizability of our deferred tax assets. This negative evidence continues to
outweigh the positive evidence of profitability in 2018, and 2019, thereby
requiring us to maintain the full valuation allowance as of June 30, 2020 .
However, we continue to evaluate the need to maintain the valuation allowance
against the deferred tax assets and to the extent positive evidence trends
continue and our future long-term forecasts show sustained profitability, our
conclusion regarding the need to maintain a full valuation allowance could
change.
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Capital Investments
During the first six months of 2020, cash paid for property, plant,
equipment, mineral properties, intangible and other assets was $10.6 million . In
the second quarter of 2020, we invested $3.5 million for an 11% equity stake in
W.D. Von Gonten Laboratories ("WDVGL"). WDVGL is an industry leader in drilling
and completion chemistry and a strong supporter of the use of potassium chloride
in oil and gas drilling and completion activity.
Given recent economic uncertainty as a result of the COVID-19 pandemic,
particularly in oil and gas markets near our operations, we continue to limit
our 2020 capital program and expect to spend between $15 million and $20 million
on capital investments in 2020, excluding the equity investment discussed above.
We anticipate our remaining 2020 operating plans and capital programs will be
funded out of operating cash flows and existing cash. We may also use our
revolving credit facility, to the extent available, to fund capital investments.
Liquidity and Capital Resources
As of June 30, 2020 , we had cash of $34.6 million , compared with cash of $20.6
million at December 31, 2019 . In April 2020 , we made a $20 million principal
payment due on our Series A Notes. In July 2020 , we reached an agreement with
our noteholders to repay our Series C on July 17, 2020 . As part of the
agreement, we repaid the full $15 million of principal along with a reduced
make-whole payment of $1.9 million . Also, in April 2020 , we applied for and
received a $10 million loan under the CARES Act Paycheck Protection Program (the
"PPP"). The loan matures on April 18, 2022 and bears interest at a rate of 1%
per annum. Beginning November 2020 , we are required to make monthly payments of
principal and interest in the amount of $0.6 million . We may prepay the loan at
any time prior to maturity with no prepayment penalties. We plan to use the
funds exclusively for allowed payroll and benefits expenses and expect the
majority of the loan, if not all, will be forgiven. During the second quarter of
2020, the program was amended to allow borrowers to choose either an eight-week
or 24-week period to use the funds. We elected to use the 24-week period, which
will end in early October. The amount eligible for forgiveness is based on the
amount of loan proceeds used by us (during the 24-week period after the lender
makes the first disbursement of loan proceeds) for the payment of certain
covered costs, including payroll costs (including benefits), subject to certain
limitations and reductions in accordance with the CARES Act. No assurance can be
given that we will obtain forgiveness of the loan in whole or in part. In
addition, as a borrower that received over $2.0 million , we expect to be subject
to an audit to review our eligibility under the PPP. The timing and scope of the
audit remains unclear and as a result we are not able to forecast when we can
expect a decision on loan forgiveness. We do not expect the audit will impact
our eligibility for forgiveness under the PPP. The loan contains customary
events of default relating to, among other things, payment defaults, making
materially false and misleading representations to the lender or breaching the
terms of the loan documents.
During the second quarter, we paid $10 million to Mosaic to settle its lawsuit
against us. The settlement dismisses all current and any future claims by Mosaic
related to this matter against us. This matter is now closed.
Our operations have primarily been funded from cash on hand, cash generated by
operations, borrowing under our revolving credit facility, and proceeds from
debt and equity offerings. We continue to monitor our future sources and uses of
cash and anticipate that we will adjust our capital allocation strategies when,
and if, determined by our Board of Directors. We may, at any time we deem
conditions favorable, attempt to improve our liquidity position by accessing
debt or equity markets in accordance with our existing debt agreements. We also
may raise capital in the future through the issuance of additional equity or
debt securities, subject to prevailing market conditions. However, there is no
assurance that we will be able to successfully raise additional capital on
acceptable terms or at all. With the remaining availability under our credit
facility, the proceeds of our loan pursuant of the Paycheck Protection Program
under the CARES Act and with expected cash generated from operations, we believe
we have sufficient liquidity to meet our obligations for the next twelve months.
The following summarizes our cash flow activity for the six months ended June
30, 2020 , and 2019 (in thousands):
Six
Months Ended
2020 2019
Cash flows provided by operating activities $ 23,548 $ 31,738
Cash flows used in investing activities $ (9,359) $ (69,030)
Cash flows (used in) provided by financing
activities $ (210) $ 19,731
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Operating Activities Total cash provided by operating activities throughJune 30, 2020 , was$23.5 million , a decrease of$8.2 million compared with the first six months of 2019. The decrease was mainly driven by the litigation settlement paid inMay 2020 . Investing Activities Total cash used in investing activities decreased by$59.7 million in the first six months of 2020, compared with the same period in 2019 due to the Intrepid South acquisition in 2019. Other additions to property, plant, equipment, and mineral properties increased$0.9 million compared to the first six months in 2019. Financing Activities Total cash used in financing activities increased by$19.9 million in the first six months of 2020, compared with the same period in 2019 primarily due to$20.0 million paid to retire our Series A senior notes at maturity. During the six months endedJune 30, 2020 , we borrowed an additional$10 million under our credit facility and received$10 million under the CARES Act Paycheck Protection Program. During the six months endedJune 30, 2019 , we made net borrowings under our credit facility of$20 million . We routinely review the creditworthiness of our customers and make decisions to limit our exposure whenever possible. During the quarter we saw an increase in delinquency from our smaller customers that purchase water and brine at our truck stations as the COVID-19 pandemic has dramatically decreased opportunities for those customers near our operations. Our larger customers, who take delivery of water via pipeline or directly from our storage ponds or points of diversion are generally well-capitalized and we have not seen a change in the timing of those receivables. The COVID-19 pandemic has not resulted in any change to the timing of receivables from our potash and Trio® customers. While we continue to monitor the creditworthiness of our customers and have made adjustments to reflect the increased uncertainty in specific markets, we don't believe this will have a material effect on our business. Senior Notes As ofJune 30, 2020 , we had outstanding$30 million of senior notes (the "Notes") consisting of the following series: •$15 million of Senior Notes, Series B, dueApril 14, 2023 •$15 million of Senior Notes, Series C, dueApril 16, 2025 OnApril 16, 2020 , we repaid our Series A Senior Notes ($20 million ) at maturity. InJuly 2020 , we reached an agreement with our noteholders to repay our Series C notes onJuly 17, 2020 . As part of the agreement, we repaid the full$15 million of principal along with a reduced make-whole payment of$1.9 million . The agreement governing the Notes contains certain financial covenants, including the following: •We are required to maintain a minimum fixed charge coverage ratio of 1.3 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our fixed charge coverage ratio as ofJune 30, 2020 , was 3.5 to 1.0, therefore we were in compliance with this covenant. •We are allowed a maximum leverage ratio of 3.5 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our leverage ratio as ofJune 30, 2020 , was 2.0 to 1.0, therefore we were in compliance with this covenant.
Fixed charge coverage ratio and leverage ratio are calculated in accordance with the agreement governing the Notes.
For both the six-month period ended June 30, 2020 , and the six-month period
ended June 30, 2019 , the interest rates on the Notes were 3.73% for the Series A
Notes, 4.63% for the Series B Notes and 4.78% for the Series C Notes. These
rates represent the lowest interest rates available under the Notes. The
interest rates may adjust upward if we do not continue to meet certain financial
covenants.
We have granted to the collateral agent for the noteholders a first lien on
substantially all of our non-current assets and a second lien on substantially
all of our current assets. We are required to offer to prepay the Notes with the
proceeds of dispositions of certain specified property and with the proceeds of
certain equity issuances, as set forth in the agreement governing the Notes. The
obligations under the Notes are unconditionally guaranteed by several of our
subsidiaries.
In April 2020 , we amended the agreement governing the Notes to allow for a
$10 million loan under the Paycheck Protection Program under the Coronavirus
Aid, Relief, and Economic Security Act (the "CARES Act"), as described further
below.
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We were in compliance with the applicable covenants under the agreement
governing the Notes as of
Our outstanding long-term debt, net, as of
June 30, 2020
Notes and Payroll Protection Loan
50,000
Less current portion of long-term debt (24,872) (20,000)
Less deferred financing costs (219)
(247)
Long-term debt, net $ 14,909 $ 29,753
Credit Facility-We maintain a revolving credit facility with Bank of Montreal.
In August 2019 , we amended the credit facility to change it from an asset-backed
facility to a cash-flow facility, to increase the amount available under the
facility from $50 million to $75 million plus an additional $75 million
accordion, and to extend the maturity date to August 1, 2024 .
Borrowings under the amended credit facility bear interest at LIBOR (London
Interbank Offered Rate) plus an applicable margin of 1.25% to 2.00% per annum,
based on average availability under the credit facility. We have granted to Bank
of Montreal a first lien on substantially all of our current assets and a second
lien on substantially all of our non-current assets. The obligations under the
credit facility are unconditionally guaranteed by several of our subsidiaries.
In April 2020 , we amended the credit facility to add a debt basket to allow
for a $10 million loan under the Paycheck Protection Program under the CARES
Act. We plan to fund payroll, benefits, or other allowed expenses under the
program and expect the majority of the loan will be forgiven pursuant to current
guidelines under the CARES Act.
We occasionally borrow and repay amounts under the facility for near-term
working capital needs or other purposes and may do so in the future. As of June
30, 2020 , we had $29.8 million of borrowings and $1.0 million in outstanding
letters of credit under the facility. Including the outstanding letters of
credit, we had $44.2 million available to be borrowed under the facility as of
June 30, 2020 . As of July 31, 2020 , we had $29.8 million of borrowings, $1.0
million in outstanding letters of credit under the facility, and approximately
$12.2 million in cash. Including the outstanding letters of credit, we had $44.2
million available to be borrowed under the facility.
We were in compliance with the applicable covenants under the facility as of
June 30, 2020 .
PPP Loan-In April 2020 , we applied for and received a $10 million loan under the
Paycheck Protection Program (the "PPP") under the CARES Act. The loan matures on
April 18, 2022 and bears interest at a rate of 1% per annum. Beginning November
18, 2020 , we are required to make monthly payments of principal and interest in
the amount of $0.6 million . We may prepay the loan at any time prior to maturity
with no prepayment penalties. We plan to use the funds exclusively for allowed
payroll and benefits expenses and expect the majority of the loan, if not all,
will be forgiven. The loan contains customary events of default relating to,
among other things, payment defaults, making materially false and misleading
representations to the lender or breaching the terms of the loan documents.
During the second quarter of 2020, the PPP was amended to allow borrowers to
choose either an eight-week or 24-week period to use the funds. We elected to
use the 24-week period, which will end in early October. The amount eligible for
forgiveness is based on the amount of loan proceeds used by us (during the
24-week period after the lender makes the first disbursement of loan proceeds)
for the payment of certain covered costs, including payroll costs (including
benefits), subject to certain limitations and reductions in accordance with the
CARES Act. No assurance can be given that we will obtain forgiveness of the loan
in whole or in part. In addition, as a borrower that received over $2.0 million ,
we expect to be subject to an audit to review our eligibility under the PPP. The
timing and scope of the audit remains unclear and as a result we are not able to
forecast when we can expect a decision on loan forgiveness. We do not expect the
audit will impact our eligibility for forgiveness under the PPP.
Off-Balance Sheet Arrangements
As of June 30, 2020 , we had no material off-balance sheet arrangements aside
from the bonding obligations described in Note 14 to the condensed consolidated
financial statements.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended
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adopting ASC 326 on January 1, 2020 , as discussed in Note 2 to the condensed
consolidated financial statements, there have been no significant changes to our
critical accounting policies since December 31, 2019 .
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Non-GAAP Financial Measure
To supplement our consolidated financial statements, which are prepared and
presented in accordance with GAAP, from time to time we use "average net
realized sales price per ton," which is a non-GAAP financial measure. This
non-GAAP financial measure should not be considered in isolation or as a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP. In addition, because the presentation of this non-GAAP
financial measure varies among companies, our presentation of this non-GAAP
financial measure may not be comparable to similarly titled measures used by
other companies.
We believe average net realized sales price per ton, when used in
conjunction with GAAP financial measures, provides useful information to
investors for analysis of our business and operating results, enhances the
overall understanding of past financial performance and future prospects, and
allows for greater transparency with respect to the key metric we use in our
financial and operational decision making. We use this non-GAAP financial
measure as one of our tools in comparing period-over-period performance on a
consistent basis and when planning, forecasting, and analyzing future periods.
We believe this non-GAAP financial measure is used by professional research
analysts and others in the valuation, comparison, and investment recommendations
of companies in the potash mining industry. Many investors use the published
research reports of these professional research analysts and others in making
investment decisions.
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Average Net Realized Sales Price per Ton
We calculate average net realized sales price per ton for each of potash and
Trio®. Average net realized sales price per ton for potash is calculated as
potash segment sales less potash segment byproduct sales and potash freight
costs and then dividing that difference by the number of tons of potash sold in
the period. Likewise, average net realized sales price per ton for Trio® is
calculated as Trio® segment sales less Trio® segment byproduct sales and Trio®
freight costs and then dividing that difference by Trio® tons sold. We consider
average net realized sales price per ton to be useful, and believe it to be
useful for investors, because it shows our potash and Trio® average per-ton
pricing without the effect of certain transportation and delivery costs. When we
arrange transportation and delivery for a customer, we include in revenue and in
freight costs the costs associated with transportation and delivery. However,
some of our customers arrange for and pay their own transportation and delivery
costs, in which case these costs are not included in our revenue and freight
costs. We use average net realized sales price per ton as a key performance
indicator to analyze potash and Trio® sales and price trends.
Below is a reconciliation of average net realized sales price per ton to the
most directly comparable GAAP financial measure for the three and six months
ended June 30, 2020 , and 2019:
Three Months
Ended
2020 2019
(in thousands, except per ton amounts) Potash Trio® Potash Trio®
Total Segment Sales$ 24,526 $ 19,251
Less: Segment byproduct sales 2,977 419 3,527 1,073
Freight costs 2,600 5,523 3,604 6,471
Subtotal $ 18,949 $ 13,309 $ 28,416 $ 13,891
Divided by:
Tons sold 74 64 95 71
Average net realized sales price per ton $ 256 $ 208 $ 299 $ 196
Six Months Ended June 30,
2020 2019
(in thousands, except per ton amounts) Potash Trio® Potash Trio®
Total Segment Sales 58,317 41,832
Less: Segment byproduct sales 6,950 1,799 9,312 2,332
Freight costs 7,140 12,057 6,847 11,507
Subtotal $ 44,227 $ 27,976 $ 53,718 $ 25,406
Divided by:
Tons sold 173 140 183 127
Average net realized sales price per ton $ 256 $ 200 $ 294 $ 200
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