Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read in conjunction with the accompanying consolidated financial statements and related notes contained in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.
This Management's Discussion and Analysis contains forward‑looking statements that involve risks, uncertainties, and assumptions as described under the heading "Cautionary Note Regarding Forward‑Looking Statements," in Part I of this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward‑looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K.
A discussion of the changes in our results of operations between the years ended December 31, 2020 and December 31, 2019 has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 2, 2021, which is available free of charge on the SEC's website at www.sec.gov and our corporate website (www.intrepidpotash.com).
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 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. Until mid-2016, we also produced potash from our East and West mines in Carlsbad, New Mexico.
We have permitted, licensed, declared and partially adjudicated 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, state grazing leases for cattle, and other related assets from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South." Due to the strategic location of Intrepid South, part of our long-term operating strategy is selling small parcels of land to other companies, where such sales provide a solution to a company's need.
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. For each of the years ended December 31, 2021, 2020, and 2019, a majority of our byproduct sales were accounted for in the potash segment.
Significant Business Trends and Activities
We continued to operate through-out the COVID-19 pandemic 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 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.
Economic activity and our financial results improved in 2021 as most cities and states reduced restrictions when compared to 2020. Given the dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts of COVID-19, if any, on our financial condition, results of operations, liquidity or cash flows in the future. We expect that if governmental authorities increase restrictive orders, such actions may have a material effect on revenue growth, financial
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condition, liquidity, and overall profitability in future reporting periods. Please see further discussion under "Item 1A. Risk Factors."
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 remained a significant driver of our profitability, comprising 48% of our total sales in 2021. Our average net realized sales price for potash increased in 2021 to $353 per ton compared to $250 per ton for 2020 due to multiple price increases since the summer of 2020. The posted price for agricultural potash, announced in December 2021, was $725 per ton or $480 per ton above the 2020 summer fill program. After this announcement, we booked orders for first quarter 2022 delivery and continue to fill orders as the spring season begins. Another price increase of $25 per ton was announced in February 2022 for second quarter deliveries. Strong commodity prices continue to support application rates across our markets and we believe customers see good value in potash in today's market. Our price expectations could be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases as a result of the COVID-19 pandemic or other reasons, and the price and availability of other potassium products.
Our sales volumes into industrial markets improved in 2021 compared to the prior year as oilfield activity rebounded from 2020. The majority of our industrial potash sales are into oil and gas markets and correlate to drilling and completion activity, which slowed significantly during 2020 due to the containment actions taken to help reduce the spread of COVID-19. Oil price remains supportive of drilling and completion activity although additional or renewed restrictions enacted in response to the COVID-19 pandemic may impact our sales if such actions affect available labor, transportation logistics, or cause supply disruptions.
Global effective production capacity continues to exceed demand and larger producers have worked to balance the market through production curtailments. Sanctions on Belarusian potash imports were recently announced and are expected to take effect in April 2022. Belarusian potash has historically supplied approximately 7% of the annual potash consumption in the United States. We expect other suppliers will increase their volume of imports in response to the sanctions although timing of these changes and the overall effect of the sanctions on the potash market are uncertain. As a small producer, domestic 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, currency fluctuations, and crop commodity values and outlook, also influence pricing.
• Trio ® pricing and demand. Our average net realized sales price for Trio ® increased to $295 per ton in 2021, compared to $195 per ton in 2020 as we announced multiple Trio ® price increases over the past 18 months. In December 2021, we announced a $30 to $40 per ton price increase depending on grade, bringing our posted price to $480 per ton for Trio ® granular and $505 per ton for Trio ® premium. Similar to potash, after the price announcement, we saw good subscription from our historic customers and committed a majority of our first quarter volumes. We announced a $35 per ton price increase in February 2022, effective immediately, and we are starting to book sales at the higher price levels. Our ability to realize the increased prices may 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.
Overall average net realized sales price per ton for Trio ® will continue to be impacted by the percentage of international sales, particularly to offshore markets. Competition from lower cost alternatives and freight costs continue to negatively impact our average net realized sales price per ton to offshore markets. Limited supply of containers and vessels in recent quarters has also increased the cost of international shipments compared to previous years, further pressuring our margins into international markets. We plan to continue a price-over-volume strategy internationally, by focusing on those international markets where we obtain the highest average net realized sales price per ton and thus the highest margin.
We 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. We continue to operate our facilities at reduced production levels that approximate expected demand and allow us to manage inventory levels. If we experience reduced demand for Trio ® due to warehouse closures or other effects from the COVID-19 pandemic, we may need to further reduce production rates to manage inventory levels.
• Water sales. Water sales increased in 2021 to $22.0 million, compared to $20.4 million in 2020 as oilfield activity in the Delaware Basin improved throughout 2021, supported by increasing oil prices. Compared to previous years, fracs
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are requiring more total water and higher daily refresh rates which required us to purchase more third party water than in previous years. Although water sales have improved compared to previous years, some operators have switched to using exclusively recycled water or a combination of fresh water and recycled water when completing wells. We believe this change is due to the growing focus on environmentally friendly operations and a response to the large amounts of produced water that is present in certain basins and formations, such as the Delaware Basin in southeast New Mexico. By recycling and reusing produced water, operators are able to reduce fresh water purchases and decrease the cost of transporting and disposing of produced water into disposal wells.
An update to legal proceedings concerning our water rights is contained in Note 14 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
• Byproduct sales. Byproduct sales increased to $26.2 million in 2021 compared to $20.5 million in 2020, primarily due to a $3.0 million increase in magnesium chloride sales. Record wet weather in the summer of 2019 in Wendover limited our production of magnesium chloride, reducing sales in the first half of 2020. Our 2021 sales of magnesium chloride were near historic averages. Salt sales increased $1.6 million in 2021 compared to the prior year due mainly to growth in the pool salt market. Byproduct water sales increased $0.7 million compared to 2020 as we saw increased oilfield activity, particularly in the second half of 2021.
• Weather impact. Evaporation rates in 2021 were below average across our facilities which led to decreased potash production in the second half of 2021 and will lead to decreased potash production in the spring of 2022 when compared to the prior year. We received a significant amount of rainfall at our HB facility in Carlsbad, New Mexico late in the summer which limited the amount of solids available in our ponds. As a result of the reduced potash production, we recorded abnormal production costs of $3.6 million and $2.4 million in the third and fourth quarters of 2021 respectively.
• Diversification of products and services. We increased our revenue from byproducts and other oilfield products and services in 2021 when compared to the prior year. As oilfield activity increased in the Delaware Basin throughout 2021, we saw a corresponding increase in revenue from right-of-way agreements, surface damages and easements, caliche sales, brine sales, and a produced water royalty. These sales generated revenue of $7.2 million in 2021 compared to $4.2 million in 2020, and with the exception of our brine sales, incur either minimal or no operating expense. As operators increase the use of recycled water in their completion activity we acquired multiple mobile recycling units in the second half of 2021 with the intent of adding produced water recycling services in 2022.
We announced in the first quarter of 2022 a joint feasibility study alongside the New Mexico Water Consortium and the New Mexico Environment Department to evaluate the potential of using treated produced water from oil and gas operations as injectate for our HB solar solution mine. Recycling and treatment technology have improved considerably over the last few years and the potential to convert a waste stream into a sustainable source for producing potash is a unique opportunity for the basin and we look forward to the pilot project beginning as early as the third quarter of 2022.
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 AGI wells on the property to dispose of natural gas with high concentrations of hydrogen sulfide (H 2 S). 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 customers, where such sales provide a solution to a customer's specific needs. We may have additional strategic sales of small parcels of land to customers 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 service given the poor performance of clay-inhibition chemical substitutes in certain formations. 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. Additionally, we may expand into oil and natural gas development and production or into new products or services in our current industry or other industries.
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Consolidated Results
(in thousands) Year Ended December 31,
2021 2020 2019
Sales 1
$ 270,332 $ 196,954 $ 220,075
Cost of Goods Sold $ 161,421 $ 135,843 $ 126,110
Gross Margin $ 55,764 $ 10,530 $ 43,478
Income (Loss) Before Income Taxes 40,965 (27,149) 13,684
Income Tax Benefit (Expense) 208,869 (5) (53)
Net Income (Loss) $ 249,834 $ (27,154) $ 13,631
Average Net Realized Sales Price per Ton 2
Potash $ 353 $ 250 $ 284
Trio ®
$ 295 $ 195 $ 195
1 Sales include sales of byproducts which were $26.2 million, $20.5 million and $26.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.
2 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Consolidated Results for the Years Ended December 31, 2021, and 2020
Sales
Our total sales increased $73.4 million, or 37% in 2021, compared to 2020, as potash sales increased $38.0 million, Trio ® sales increased $25.8 million, magnesium chloride sales increased $3.0 million, salt sales increased $1.6 million, water sales increased $1.6 million, brine water sales increased $1.2 million and sales of our other products and services from our oilfield solutions segment increased $2.2 million.
Our combined potash and Trio ® sales increased $63.8 million in 2021, compared to 2020. Our potash average net realized sales price per ton increased 41% and our Trio ® average net realized sales price per ton increased 51% in 2021 compared to 2020. Rising crop prices have driven strong demand for potash and Trio ® which, combined with tight supplies have driven the significant increases in both our potash and Trio ® average net realized sales prices per ton during 2021.
Our total water sales, including byproduct water sales increased 8% in 2021 compared to 2020, as oil and gas activities near our facilities in New Mexico continued to rebound from the negative economic effects caused by the COVID-19 pandemic.
Our total byproduct sales, excluding byproduct water sales, increased $5.0 million during 2021 compared to 2020. Our magnesium chloride sales increased 62% as we had more product to sell during 2021, as compared to 2020, as above average evaporation at our Wendover facility during the summer of 2020 resulted in more product available to sell during 2021. Our byproduct brine water sales increased 34% as oil and gas activities increased as discussed above. Our byproduct salt sales increased 18% due mainly to an increase in sales to the pool salt market.
Cost of Goods Sold
Our cost of goods sold increased $25.6 million, or 19%, in 2021, as compared to 2020 due to a $6.0 million increase in labor and benefits expense, a $5.2 million increase in third party water purchases on our South ranch to meet daily frac requirements, and a $3.3 million increase in royalty expense as a result of higher fertilizer prices. Inflationary pressures and rising commodity prices led to a $3.0 million increase in energy expense across our facilities and a $2.2 million increase in maintenance and operating supplies. Reduced production at our HB facility also increased our per ton of cost of goods sold compared to the prior year.
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Abnormal Production Costs
The Carlsbad, New Mexico area where our HB solar solution mining facility is located, received significant rainfall, well above the historical rainfall average during this period. Additionally, humidity was higher than normal and temperatures were cooler than average during this period which reduced our pond production and our ability to extract brine. Because of the wet, humid weather and cooler temperatures, we have fewer harvestable tons of potash from our HB solution ponds. Accordingly, we recorded abnormal production costs of $6.0 million, and we may incur additional abnormal production costs in future periods. We did not incur any abnormal production costs in 2020.
Gross Margin
Our gross margin percentage increased to 21% in 2021, compared to 5% in 2020. The increase was driven primarily by an increase in sales driven by an increase in our average net realized sales price per ton for both potash and Trio ® , partially offset by the increase in abnormal production costs and our cost of goods sold, as discussed above.
Selling and Administrative Expense
In 2021, selling and administrative expenses decreased $1.5 million or 6% from 2020. This was due mainly to a $1.6 million decrease in legal and other professional services expenses in 2021, as compared to 2020. During 2020, we incurred increased legal and other professional services expenses relating to the settlement of outstanding litigation during 2020, and defending various protests to our water rights. The decrease in legal and other professional services expenses was partially offset by increased bonus expense for administrative labor.
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 Note 14 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.
Gain on Sale of an Asset
In May 2021, we sold 326 acres of land in Texas for $6.0 million and recognized a gain on the sale of the land of $2.8 million. We purchased this land in May 2019 for the development of a produced water disposal facility and had permitted two disposal wells on the property. Unlike the strategic land sale completed in March 2020 discussed below, we did not include any restrictions on the buyer of this land.
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 AGI wells on the property to dispose of natural gas with high concentrations of H 2 S. 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.
Other Operating Expense
In 2021, we recognized other operating expense of $0.2 million compared to $0.7 million in 2020. In 2021, care and maintenance expenses increased $0.6 million that were partially offset by other operating income recorded related to earning certain contractual bonuses on a project to modify the tailings pond at our West facility. We modified our West tailings pond to allow for the construction of an underground natural gas pipeline near our West facility. During 2020, we recorded $0.4 million in care and maintenance expense and $0.3 million in other expenses.
Interest Expense
Interest expense decreased $2.8 million in 2021 compared to 2020, as we repaid the outstanding balance of our Series B Senior Notes in June 2021, and we repaid the outstanding balance on our credit facility in early August 2021.
Gain on Extinguishment of Debt
In April 2020, we received a $10 million loan under the CARES Act Paycheck Protection Program (the "PPP"). In June 2021, we received notice that the SBA had remitted funds to our bank to fully repay our PPP loan and accrued interest. Accordingly, we recognized a gain of $10.1 million related to the forgiveness of the PPP loan and the associated accrued interest on the loan.
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Income Tax Benefit
During 2021, our valuation allowance for deferred tax assets decreased as we released $215.9 million from the valuation allowance during the fourth quarter. We released the valuation allowance because our long-term projection of future taxable income indicates that we will be able to realize the value of most of our deferred tax assets in the future. The release of our valuation allowance allowed us to record a tax benefit of $208.9 million during 2021.
Net Income
Net income increased from a net loss of $27.2 million in 2020 to net income of $249.3 million in 2021. The increase was primarily due to releasing $215.9 million of our valuation allowance for deferred taxes, a $10.1 million gain related to the forgiveness of the PPP loan and the improvement in our gross margin, as discussed above. Excluding the release of our valuation allowance for deferred taxes, our net income would have been $33.9 million.
Potash Segment Results
Year Ended December 31,
(in thousands) 2021 2020 2019
Sales 1
$ 151,751 $ 108,060 $ 124,648
Less: Freight costs 17,483 17,026 18,715
Warehousing and handling costs 5,169 4,857 4,745
Cost of goods sold 87,281 73,496 73,401
Lower of cost or NRV inventory adjustments — 1,130 —
Costs associated with abnormal production and other 5,973 — —
Gross Margin $ 35,845 $ 11,551 $ 27,787
Depreciation, Depletion, and Amortization Incurred 2
$ 26,828 $ 26,536 $ 25,796
Potash Sales Volumes (tons in thousands) 331 317 319
Potash Production Volumes (tons in thousands) 287 308 328
Average Potash Net Realized Sales Price per Ton 3
$ 353 $ 250 $ 284
1 Potash segment sales include byproduct sales which were $21.3 million, $15.6 million and $21.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Potash Segment Results for the Years Ended December 31, 2021, and 2020
Our total potash segment sales in 2021 increased $43.7 million, or 40%, as compared to 2020, as potash sales recorded in the potash segment increased 41% and potash segment byproduct sales increased 37%.
Potash sales recorded in the potash segment increased $38.0 million, or 41%, in 2021 compared to 2020, as the average potash net realized sales price per ton increased 41%, and we sold 4% more tons of potash. Strong crop commodity prices and tight near-term inventory levels led to multiple potash price increases during 2021. We saw increased potash tons sold into the agricultural and industrial markets, while potash tons sold into the animal feed market were similar to prior year.
Potash segment byproduct sales increased $5.7 million, or 37%, in 2021 compared to 2020, due to a $3.0 million increase in byproduct magnesium chloride sales, a $1.5 million increase in byproduct salt sales, an $0.8 million increase in byproduct water sales and a $0.4 million increase in byproduct brine water sales. Our magnesium chloride sales increased as we had more product to sell in 2021, due to good evaporation during the summer of 2020. Our salt sales increased as we increased sales in the pool salt market in 2021. Byproduct water and byproduct brine water sales increased in 2021 as oilfield activities increased as many of the containment measures that were adopted during 2020 in response to the COVID-19 pandemic were relaxed in 2021.
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Potash cost of goods sold increased $13.8 million, or 19%, in 2021, as compared to 2020, due to a $2.6 million increase in labor and benefits expense, a $1.6 million increase in energy expense, a $1.1 million increase in contract labor for various maintenance projects, and a $2.1 million increase in royalty expense as a result of higher fertilizer prices. Reduced production at our HB facility also increased our per ton of cost of goods sold compared to the prior year.
Potash segment freight expense increased $0.5 million, or 3%, in 2021, as compared to 2020, mainly driven by an increase in freight expense related to selling 4% more tons of potash. Our freight expense is also impacted by the rates charged by carriers, geographic distribution of our products and by the proportion of customers arranging for and paying their own freight costs.
We produced 7% fewer tons of potash during 2021 compared to 2020, mainly due to the wet weather and reduced evaporation rates at our HB solar solution facility. We recorded abnormal production expenses of $6.0 million in 2021, as we had fewer harvestable tons of potash in our HB solution ponds. We did not record any abnormal production costs during 2020. We expect our near-term potash production from our HB facility will be lower than average, and we may incur additional abnormal production costs in future periods.
Our potash segment gross margin increased $24.3 million in 2021, compared to 2020, due mainly to the $43.7 million increase in potash segment sales, as discussed above.
Potash Segment - Additional Information
The table below shows our potash sales mix for 2021, 2020, and 2019.
Year Ended December 31,
2021 2020 2019
Agricultural 78 % 79 % 74 %
Industrial 6 % 3 % 12 %
Feed 16 % 18 % 14 %
Trio ® Segment Results
Year Ended December 31,
(in thousands) 2021 2020 2019
Sales 1
$ 96,058 $ 70,287 $ 69,551
Less: Freight costs 20,656 20,431 20,514
Warehousing and handling costs
4,113 4,574 3,876
Cost of goods sold
54,847 50,902 42,251
Lower of cost or NRV inventory adjustments
— 2,885 1,810
Gross Margin (Deficit) $ 16,442 $ (8,505) $ 1,100
Depreciation, Depletion, and Amortization incurred 2
$ 5,477 $ 6,068 $ 6,163
Sales Volumes (tons in thousands) 239 230 225
Production Volumes (tons in thousands) 228 213 228
Average Net Realized Sales Price per Ton 3
$ 295 $ 195 $ 195
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1 Trio ® segment sales include byproduct sales which were $4.9 million, $4.9 million and $5.3 million for the years ended December 31, 2021, 2020, and 2019, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Trio ® Segment Results for the Years Ended December 31, 2021, and 2020
Our total Trio ® segment sales increased $25.8 million, or 37%, in 2021, as compared to 2020, as Trio ® sales increased 39%, while Trio ® segment byproduct sales were flat.
Our 2021 Trio ® sales increased $25.8 million, or 39%, in 2021, as compared to 2020, as our average net realized sales price per ton increased 52% and we sold 4% more Trio ® tons. Our Trio ® average net realized sales price per ton increased as rising crop prices and the continued economic rebound from the COVID-19 pandemic drove an increase in demand. Trio ® tons sold domestically increased 13% in 2021, as compared to 2020. The 2021 increase in domestic tons of Trio ® sold was partially offset by a decrease in international tons sold, as we continue to focus our Trio ® sales on the domestic market, which has a higher average net realized sales price per ton due to lower freight costs incurred for domestic sales as compared to international sales
Trio ® freight costs increased 1% in 2021, compared to 2020. While we sold 4% more tons in 2021, we sold more tons of Trio ® domestically and fewer tons of Trio ® internationally. We incur less freight expense on our domestic Trio ® sales compared to international Trio ® sales. 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 8% in 2021, as compared to 2020, primarily due to a 4% increase in Trio ® tons sold during 2021. We also incurred higher labor and benefits expense, royalty expense, and increased energy expense compared to the prior year, which increased our per ton costs of goods sold.
We recorded lower of cost or net realized value inventory adjustments of $2.9 million in 2020, as our weighted average price per ton was higher than our average net realized sales price per ton. As our average net realized sales price per ton increased 52% during 2021, we did not record any lower of cost or net realized value inventory adjustments during 2021.
Our Trio ® segment generated a gross margin of $16.4 million in 2021, compared to a gross deficit of $8.5 million in 2020, due to the factors discussed above.
Trio ® Segment - Additional Information
The table below shows the percentage of total Trio ® sales that were sold internationally in the past three years.
United States Export
For the year ended December 31, 2021 92 % 8 %
For the year ended December 31, 2020 85 % 15 %
For the year ended December 31, 2019 74 % 26 %
Oilfield Solutions Segment Results
Year Ended December 31,
(in thousands) 2021 2020 2019
Sales $ 22,770 $ 18,929 $ 27,894
Less: Cost of goods sold 19,293 11,445 12,367
Gross Margin $ 3,477 $ 7,484 $ 14,591
Depreciation, Depletion, and Amortization incurred $ 2,996 $ 2,663 $ 1,566
Oilfield Solutions Segment Results for the Years Ended December 31, 2021, and 2020
Our oilfield solutions segment sales increased 20% in 2021, compared to 2020. Water sales increased $0.9 million in 2021 to $15.6 million. Sales from right-of-way agreements, surface damages and easements increased $1.2 million, produced water disposal royalties increased $0.9 million and brine water sales increased $0.7 million. Other sales in our oilfield solutions segment, such as sales of caliche and other oilfield services increased $0.2 million.
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Our oilfield solutions sales are highly correlated to oil and gas activities near our facilities in New Mexico. Overall sales increased due to increased oil and gas activities in 2021 as compared to 2020 as oil prices continued to improve from the lows made in April 2020 due to the negative economic effects from the COVID-19 pandemic.
Cost of goods sold increased 69% in 2021, compared to 2020, primarily due to a $3.9 million increase in third-party water purchases to meet the significant daily refresh rates for certain fracs on our South ranch. Additionally, rental, lease, contract labor and depreciation expenses increased in 2021 as compared to 2020.
Gross margin decreased $4.0 million, or 54%, in 2021 compared to 2020, due to the factors described above.
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.
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. Some elements of our cost structure associated with contract labor, consumable operating supplies, reagents, and royalties are variable, but such elements 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. Our average royalty rate was 4.7%, 5.0%, and 5.0% in 2021, 2020, and 2019, respectively.
We incur costs to transfer water from our water source to our customers' facilities. Our operating costs depend on the distance and amount of water we must transfer. For water sold from certain of our water sources, we pay the State of New Mexico $0.11 per barrel of water sold. Additionally, water rights in New Mexico are subject to a stated point of diversion, purpose and place of use, and many of our water rights were originally issued for uses relating to our mining operations, or in
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the case of the water rights at Intrepid South, for agricultural uses. To sell water commercially under these rights, we must apply for a permit from the OSE to change point of diversion, purpose and/or place of use of the underlying water rights. Third parties often protest our applications and the decisions made by the OSE concerning the changes to our water rights permits. As we have worked to sell more water commercially, we have incurred significant legal expenses associated with defending our water rights as they proceed through adjudication and obtaining water permits and approvals.
Income Taxes
We are a subchapter C corporation and, therefore are subject to U.S. federal and state income taxes on our taxable income. We recognize deferred tax assets and liabilities for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at enacted tax rates in effect when the related taxes are expected to be settled or realized. We also reduce deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining how much of a valuation allowance to recognize we consider our projections of future taxable income. All available evidence, both positive and negative, that may affect the realizability of deferred tax assets is identified and considered in determining the appropriate amount of the valuation allowance. We have concluded valuation allowances of $2.0 million and $217.9 million were required as of December 31, 2021, and 2020, respectively.
The amount of valuation allowance decreased in 2021 as compared to 2020 primarily from a release of $215.9 million of valuation allowance. Our effective tax rate for the years ended December 31, 2021, 2020, and 2019 was (509.9)%, 0.0%, and 0.4%, respectively. Our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax, the need for a valuation allowance or release, and permanent differences between book and tax income for the period, including the benefit associated with the estimated effect of the percentage depletion deduction.
The effective tax rate for the years ended December 31, 2021, 2020, and 2019, respectively, differs from the U.S. federal statutory rate due to the change in valuation allowance.
During the year ended December 31, 2021, we recognized $157.3 million of deferred federal tax benefit, $51.7 million of deferred state tax benefit, and $0.2 million of current state income tax expense. During the years ended December 31, 2020, and 2019, we recognized an immaterial amount of income tax expense.
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 the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.
A valuation allowance is recognized for deferred tax assets if it is more likely than not that a portion or all of the net deferred tax assets will not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2021, we were in a cumulative three-year income position. The cumulative three-year income position is significant positive evidence when evaluating the realizability of our deferred tax assets. Additionally, industry trends and forecasts as well as internal forecasts of future business show sustained amounts of taxable income. Thus, we have concluded it is more likely than not that most of our $211.1 million of deferred tax assets will be realized.
Liquidity and Capital Resources
Our operations have primarily been funded from cash on hand, cash generated by operations, and proceeds from debt and equity offerings. During 2021, we generated $79.1 million in cash flows from operating activities and we ended the year with $36.5 million of cash on hand, compared with cash on hand of $19.5 million at December 31, 2020.
In June 2021, we repaid the remaining $15.0 million of principal outstanding on our Series B Senior Notes and satisfied all obligations under the related Note Purchase Agreement. In connection with this repayment, the Company paid in aggregate approximately $15.6 million, which consisted of (i) $15.0 million of remaining aggregate principal amount of Series B Senior Notes, (ii) approximately $0.1 million of accrued interest and (iii) a "make-whole" premium of $0.5 million. As a result of the repayment, the Note Purchase Agreement was terminated.
In April 2020, we received a $10 million loan under the CARES Act Paycheck Protection Program (the "PPP"). In June 2021, we received notice that the SBA had remitted funds to our bank to fully repay our PPP loan and accrued interest.
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Accordingly, we recognized a gain of $10.1 million related to the forgiveness of the PPP loan and the associated accrued interest on the loan.
As of December 31, 2021, we had $74.0 million available to borrow under our credit facility, no outstanding borrowings, and $1.0 million outstanding in a lette r of credit. With the remaining availability under our credit facility and expected cash generated from operations, we believe we have sufficient liquidity to meet our obligations for the next twelve months.
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 revolving credit agreement. 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.
The following summarizes our cash flow activity for the years ended December 31, 2021, 2020, and 2019:
Year ended December 31,
2021 2020 2019
(In thousands)
Cash flows provided by operating activities $ 79,067 $ 31,145 $ 49,381
Cash flows used in investing activities $ (14,823) $ (15,157) $ (80,641)
Cash flows (used in) provided by financing activities $ (47,282) $ (17,043) $ 18,795
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Our revolving credit agreement contains restrictions on our ability to declare and pay dividends. The terms of our credit facility prohibit us from declaring and paying a dividend unless availability under the credit facility after giving effect to the dividend and during a specified period before the dividend is more than $15 million.
Operating Activities
Total cash provided by operating activities for the year ended December 31, 2021, was $79.1 million, an increase of $47.9 million compared with the year ended December 31, 2020. The increase was mainly driven by an increased potash and Trio ® net realized sales price.
Investing Activities
Total cash used in investing activities decreased $0.3 million in 2021, compared to 2020, primarily related to a $2.4 million decrease in cash paid for investments and a $1.3 million increase in cash proceeds from the sale of property, plant, equipment, and mineral properties. Other additions to property, plant, equipment, and mineral properties increased $3.3 million in 2021 compared to 2020. In May 2021, we sold 326 acres of land in Texas that was adjacent to our South ranch for $6.0 million. This land was originally purchased in May 2019 for the potential development of a produced water disposal facility. Proceeds from the sale of property, plant, equipment, and mineral properties totaled $4.8 million during 2020 due primarily to a strategic sale of land on our Intrepid South property.
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.
Financing Activities
Total cash flows used in financing activities increased $30.2 million in 2021, as compared to 2020. During the third quarter of 2021, we made payments under our credit facility of $29.8 million. In June 2021, we paid $15.6 million, including the make-whole payment, to retire our Series B Senior Notes. In April 2020, we paid $20.0 million to retire our Series A Senior Notes at maturity. In July 2020, we paid $16.9 million, including the make-whole payment, to retire our Series C Senior Notes. During 2020, we borrowed an additional $10.0 million under our credit facility and received $10.0 million under the CARES Act Paycheck Protection Program.
We routinely review the creditworthiness of our customers and make decisions to limit our exposure whenever possible. As economic activities improved in 2021, our delinquencies declined as compared to 2020. During 2020, we saw an increase in delinquencies from our smaller customers that purchase water and brine at our truck stations. These smaller customers mainly serve oil and gas exploration companies and the COVID-19 pandemic had dramatically decreased oil and gas drilling activity.
Senior Notes
In June 2021 we repaid the remaining $15.0 million of principal outstanding on our Series B Senior Notes and satisfied all obligations under the related Note Purchase Agreement. In connection with this repayment, the Company paid in aggregate approximately $15.6 million, which consisted of (i) $15.0 million of remaining aggregate principal amount of Series B Senior Notes, (ii) approximately $0.1 million of accrued interest and (iii) a "make-whole" premium of $0.5 million. As a result of the repayment, the Note Purchase Agreement was terminated.
Credit Facility
We maintain a secured revolving credit facility with Bank of Montreal. As of December 31, 2021, borrowings under the credit facility bore interest at LIBOR (London Interbank Offered Rate) plus an applicable margin of 1.25% to 2.00% per annum, based on our leverage ratio. We have granted to Bank of Montreal a first lien on substantially all of our assets. The obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
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. For the year ended December 31, 2021, we made no borrowings and repaid $29.8 million under the facility. For the year ended December 31, 2020, we borrowed $10.0 million and made no repayments, under the facility. As of December 31, 2021, we had no borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. As of December 31, 2020, we had $29.8 million of borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. We had $74.0 million available under the facility as of December 31, 2021.
We were in compliance with the applicable covenants under the facility as of December 31, 2021.
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PPP Loan
In April 2020, we received a $10 million loan under the CARES Act Paycheck Protection Program (the "PPP"). In June 2021, we received notice that the SBA had remitted funds to our bank to fully repay our PPP loan and accrued interest. Accordingly, we recognized a gain of $10.1 million related to the forgiveness of the PPP loan and the associated accrued interest on the loan.
Capital Investments
During 2021, we paid cash of $19.8 million to acquire property, plant, equipment, and mineral properties. Due to the economic uncertainty as a result of the COVID-19 pandemic, particularly in oil and gas markets near our operations, we limited our 2021 capital program to mostly sustaining capital projects.
We expect to make capital investments in 2022 of $40 million to $60 million. We anticipate spending approximately $25 million to $35 million on sustaining capital projects in 2022, with the remainder of our estimated spending on opportunity projects. We have significant discretion over our opportunity capital investments in 2022 and we may adjust our investment plans as our expectations for 2022 change. We anticipate our 2022 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements. Actual results could differ from our estimates and assumptions, and these differences could result in material changes to our financial statements.
Our significant accounting policies are further described in Note 2 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K. We believe the following accounting policies include a higher degree of subjective and complex judgments in their application and are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
Reserves and Resources
We prepare our reserves and resources estimates in accordance with SEC requirements. We have prepared these reserve and resources estimates and they have been reviewed and independently determined by mine consultants. We express tons of potash and langbeinite in resources and reserves in terms of expected finished tons of product to be realized, net of estimated losses. Market price fluctuations of potash or Trio ® , as well as increased production costs or reduced recovery rates, could render resources and reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of resources and reserves.
We deplete our mineral properties using the units-of production method. Under this method, we determine a depletion rate for one ton of finished product by dividing the total mineral properties net balance by the number expected finished tons of product, which is obtained from the resources and reserve estimates. Depletion expense is calculated by multiplying the number of tons of product produced by the depletion rate per ton.
Indefinite-lived Intangible Assets
Water rights are accounted for as indefinite-lived intangible assets and are not amortized. We test indefinite-lived intangible assets for impairment at least annually on October 1, and more frequently if circumstances require. We use a qualitative assessment to determine whether it is more likely than not that the fair value of the intangible is less than its carrying value. If our qualitative assessment indicates it is more likely than not that the fair value of the intangible asset is less than its carrying value, we estimate the fair value of the intangible asset and record an impairment loss based on the excess of the carrying amount of the intangible asset over its estimated fair value. Fair value is estimated using quoted market prices, if available. If quoted market prices are not available, the estimated fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. Changes in significant assumptions underlying fair value estimates may have a material effect on our financial position and results of operations.
Asset Retirement Obligations
All of our mining properties involve certain reclamation liabilities as required by the states in which they operate or by the BLM. Reclamation costs are initially recorded as a liability associated with the asset to be reclaimed or abandoned, based on
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applicable inflation assumptions and discount rates. The accretion of this discounted liability is recognized as expense over the life of the related assets, and the liability is periodically adjusted to reflect changes in the estimates of the time or amount of the reclamation and abandonment costs. These asset retirement obligations are reviewed and updated at least annually with any changes in balances recorded as adjustments to the related assets and liabilities. The estimates of amounts to be spent are subject to considerable uncertainty and long timeframes. Changes in these estimates could have a material impact on our results of operations and financial position.
Income Taxes
We are a subchapter C corporation and therefore are subject to U.S. federal and state income taxes. We recognize income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured 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. We record a valuation allowance if it is deemed more likely than not that our deferred income tax assets will not be realized in full; such determinations are subject to ongoing assessment.
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 provides useful information to investors for analysis of our business. 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.
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 for potash and Trio ® and to the most directly comparable GAAP measure for the years ended December 31, 2021, 2020, and 2019 (in thousands, except per ton amounts):
Potash Segment
2021 2020 2019
Total Segment Sales $ 151,751 $ 108,060 $ 124,648
Less: Segment byproduct sales 21,291 15,560 21,245
Potash freight costs 13,639 13,270 12,936
Subtotal $ 116,821 $ 79,230 $ 90,467
Divided by:
Potash tons sold (in thousands) 331 317 319
Average net realized sales price per ton $ 353 $ 250 $ 284
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Trio ® Segment
2021 2020 2019
Total Segment Sales
$ 96,058 $ 70,287 $ 69,551
Less: Segment byproduct sales 4,933 4,943 5,252
Trio ® freight costs
20,656 20,416 20,514
Subtotal
$ 70,469 $ 44,928 $ 43,785
Divided by:
Trio ® Tons sold (in thousands)
239 230 225
Average net realized sales price per ton $ 295 $ 195 $ 195