Intrepid Potash, Inc. 10-K

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. 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. 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. A discussion of the changes in our results of operations between the years ended December 31, 2021 and December 31, 2020 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, 2021, filed with the SEC on March 8, 2022, 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 operations and 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, 2022, 2021, and 2020, a majority of our byproduct sales were accounted for in the potash segment. Significant Business Trends and Activities Our financial results have been, or are expected to be, impacted by several significant trends and activities, including impacts from global health issues, such as the COVID-19 pandemic, and other global disruptions. Given the dynamic nature of such disruptions, we cannot reasonably estimate the impacts of such disruptions, if any, on our financial condition, results of operations, liquidity or cash flows in the future. We expect that any such disruptions may have a material effect on revenue growth, financial condition, liquidity, and overall profitability in future reporting periods. Please see further discussion under "Item 1A. Risk Factors." 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 50% of our total sales in 2022. Our average net realized sales price for potash increased in 2022 to $713 per ton compared to $353 per ton for 2021. Throughout 2021, strong commodity pricing led to good application rates and multiple price increases during 2021 and the first half of 2022. Agricultural potash pricing started 2022 at $725 per ton and increased to $800 per ton in April 2022 as Belarusian sanctions and increasing concerns about global potash supply due to Russia's invasion of Ukraine drove further price appreciation. As a result of the higher pricing and good application rates for potash over the prior year, our customers were reluctant to carry over inventory after the spring season and demand slowed down 54 Table of Contents considerably in second half of 2022 compared to 2021. Global demand for potash followed a similar trend in the second half of 2022 leading to ample supply of potash in most markets to end 2022 despite continued strong commodity pricing and favorable farmer economics. Agricultural potash pricing declined to $480 per ton in January 2023, a price level that has spurred an initial round of orders to start the spring season, although most customers remain cautious to purchase potash for their full spring needs immediately as sufficient supply continues to pressure spot pricing. Despite the near-term inventory levels, global potash production remains below normal levels due to sanctions on Belarusian potash and reduced production rates. Canadian producers responded with production increases at existing operations, but we still expect total potash production in 2023 to be below 2021 levels. Our price expectations could be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases and the price and availability of other potassium products. As a smaller producer relative to the overall market, 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 $479 per ton in 2022, compared to $295 per ton in 2021, as Trio ® price followed price increases in potash. Similar to potash trends, buyers were reluctant to hold carryover inventory after the spring season and as potash supply increased in the second half of the year and pricing began to decrease, buyers were reluctant to purchase Trio ® during the fourth quarter of 2022. In January 2023, we announced an updated Trio ® price of $405 per ton for premium Trio ® , $395 per ton for granular and $365 per ton for standard Trio ® , but supply remains sufficient in most regions and pressure on potash spot prices continues to limit our customers' desire to hold significant inventory that is not committed for immediate application. 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. 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. • Water sales. Water sales increased in 2022 to $22.4 million, compared to $22.0 million in 2021 as oilfield activity in the Delaware Basin continued to be supported by strong oil prices. 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 responsible 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 freshwater purchases and decrease the cost of transporting and disposing of produced water into disposal wells. We believe operators are also more focused on reducing the initial capital investment for each well and are switching to lower-cost recycled water despite the potential long-term production advantages of fresh water. 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. • Byproduct sales. Byproduct sales increased to $26.7 million in 2022 compared to $26.2 million in 2021, as improved brine and salt sales in our potash segment were mostly offset by reduced byproduct magnesium chloride and byproduct water sales. • 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 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 of 2021, 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 other oilfield products and services in 2022, compared to 2021. As oilfield activity increased in the Delaware Basin throughout 2022, we saw a corresponding 55 Table of Contents increase in revenue from right-of-way agreements, caliche sales, brine sales, and a produced water royalty. These sales generated revenue of $11.2 million in 2022, compared to $7.2 million in 2021, and with the exception of our brine sales, incur either minimal or no operating expense. 56 Table of Contents Consolidated Results (in thousands) Year Ended December 31, 2022 2021 Sales 1 $ 337,568 $ 270,332 Cost of Goods Sold $ 152,276 $ 161,421 Gross Margin $ 141,408 $ 55,764 Income Before Income Taxes 96,509 40,965 Income Tax (Expense) Benefit (24,289) 208,869 Net Income $ 72,220 $ 249,834 Average Net Realized Sales Price per Ton 2 Potash $ 713 $ 353 Trio ® $ 479 $ 295 1 Sales include sales of byproducts which were $26.7 million and $26.2 million for the years ended December 31, 2022 and 2021, 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, 2022, and 2021 Sales Our total sales increased $67.2 million, or 25% in 2022, compared to 2021, as potash segment sales increased $39.6 million, Trio ® segment sales increased $21.8 million, and our oilfield solutions segment sales increased $5.9 million. Our potash sales increased $38.1 million in 2022, compared to 2021, primarily as our potash average net realized sales price per ton increased 102%, partially offset by a 33% decrease in tons of potash sold. Generally strong crop prices supported good potash demand and combined with global potash supply concerns due to the uncertainty of potash supplied from Eastern Europe, drove the increase in our average net realized sales price per ton. Potash tons sold declined in 2022 compared to 2021, as we had fewer tons of potash available to sell during the first half of 2022, and we sold fewer tons during the second half of 2022 as customers were reluctant to purchase tons for the upcoming spring application season due to anticipated price declines. Our potash segment byproduct sales increased $1.5 million in 2022, due mainly to an increase in byproduct salt and brine water sales, partially offset by a decrease in byproduct magnesium chloride sales. Our Trio ® sales increased $22.8 million in 2022, compared to 2021, as our Trio ® average net realized sales price per ton increased 62%, partially offset by a 18% decrease in tons of Trio ® sold. Generally strong crop prices and the relative value of Trio ® compared to potash drove good demand for Trio ® . Our Trio ® tons sold decreased as we sold fewer tons during the second half of 2022 as, like potash customers, Trio ® customers were reluctant to purchase tons for the upcoming spring application season due to anticipated price declines. Our Trio ® byproduct sales decreased $1.1 million in 2022, due to a decrease in byproduct water sales. Our Trio ® byproduct water sales decreased as a larger portion of our total water sales were sourced from our oilfield solution segment. Our oilfield solutions segment sales increased by $5.9 million in 2022, compared to 2021, as continued robust oil and gas activities near our facilities in New Mexico drove increased demand for our oilfield segment products and services. Cost of Goods Sold Our total cost of goods sold decreased $9.1 million, or 6%, in 2022, as compared to 2021. Our potash segment cost of goods decreased $10.8 million, or 12%, and our Trio ® segment cost of goods sold decreased $0.2 million, partially offset by an increase $1.9 million in our oilfield solutions segment cost of goods sold. Our potash cost of goods sold mainly decreased due to selling 33% fewer tons of potash in 2022 compared to 2021. While we sold fewer tons in 2022, our weighted average carrying cost per ton increased as various production costs increased 57 Table of Contents due to inflationary pressures. In addition, we produced fewer tons of potash and, because most of our production costs are fixed, a decrease in tons produced causes our weighted average price per ton to increase. We also incurred increased royalty expense as our potash sales revenue increased during 2022. Our Trio ® segment cost of goods sold decreased slightly in 2022 compared to 2021. While we sold 18% fewer tons of Trio ® in 2022, our weighted average carrying costs increased due to operating an additional shift during 2022 and increases in various production costs due to inflationary pressures. We also incurred increased royalty expense as our Trio ® revenues increased. Our oilfield solutions segment cost of goods sold increased in 2022, as we incurred increased utility costs due to inflationary pressures, increased depreciation expense related to new infrastructure placed in service in 2022, and increased royalty expense due to an increase in water revenue. Abnormal Production Costs During the third quarter of 2021, 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, along with higher than normal humidity and cooler than average temperatures, all of which reduced our pond production and our ability to extract brine. Because of the wet, humid weather and cooler temperatures, we had fewer harvestable tons of potash from our HB solution ponds. Accordingly, we recorded abnormal production costs of $6.0 million in 2021. We did not incur any abnormal production costs in 2022. Gross Margin Our gross margin percentage increased to 42% in 2022, compared to 21% in 2021. The increase was driven primarily by an increase in sales revenue due to an increase in our average net realized sales price per ton for both potash and Trio ® , and not incurring any abnormal production costs during 2022. Selling and Administrative Expense In 2022, selling and administrative expenses increased $7.8 million or 33% from 2021. The increase in 2022 was due several factors including a $3.1 million increase in equity compensation expense primarily related to certain market-condition awards that had accelerated expense recognition in 2022 because the market-condition for those awards was met sooner than originally estimated. We incurred increased wages and benefits expense due to generally a company-wide salary increase in early 2022, and we hired additional employees in 2022. We incurred increased legal expenses primarily relating to continuing legal issues concerning our water rights and other legal issues. We also saw increased travel and related expenses because our 2021 travel expenses were lower than average due to the continued COVID-19 concerns. Finally, we incurred an increase in lease expense, as we leased additional office space in 2022. Gain (Loss) on Sale or Disposal of Assets During 2022, we recorded a $7.5 million loss on the sale or disposal of assets compared to a gain of $2.5 million during 2021. During the fourth quarter of 2022, we worked on drilling a new extraction well for our HB solar solution mine. During the drilling process, the planned well failed and we expensed approximately $6.2 million of costs related to the project. In addition, we also incurred approximately $1.2 million in losses related to the disposal of various other assets in the normal course of business 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. Other Operating Expense In 2022, we recognized other operating expense of $4.7 million compared to $0.2 million in 2021. During 2022, we recorded $1.8 million of additions in our allowance for obsolete inventory, accrued $1.7 million for fines and penalties related to an encroachment of surface minerals at Intrepid South, $1.6 million related to potential underpayment of royalties found during an ongoing royalty audit by the Department of the Interior's Office of Natural Resources Revenue ("ONRR") and care and maintenance expenses of $0.6 million. During 2021, we recorded care and maintenance expenses of $0.6 million that were partially offset by other operating income of $0.4 million 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. Interest Expense 58 Table of Contents Interest expense decreased $1.4 million in 2022, compared to 2021, 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. We had no outstanding long-term debt or an outstanding balance on our credit facility during 2022. 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. Income Tax During 2022 we recorded income tax expense of $24.3 million compared to an income tax benefit of $208.9 million in 2021. 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 indicated that we will be able to realize the value of most of our deferred tax assets in the future. Net Income Our 2022 net income decreased $177.6 million to $72.2 million. The decrease was primarily due to the income tax benefit recorded in 2021 of $208.9 million related to releasing $215.9 million of our valuation allowance for deferred taxes, and recording a $10.1 million gain related to the forgiveness of the PPP loan, partially offset by the improvement in our 2022 gross margin, as discussed above. Excluding the release of our valuation allowance for deferred taxes and the gain related to the forgiveness of our PPP loan, our net income would have been approximately $30.9 million in 2021. Potash Segment Results Year Ended December 31, (in thousands) 2022 2021 Sales 1 $ 191,378 $ 151,751 Less: Freight costs 14,780 17,483 Warehousing and handling costs 5,305 5,169 Cost of goods sold 76,524 87,281 Costs associated with abnormal production and other — 5,973 Gross Margin $ 94,769 $ 35,845 Depreciation, Depletion, and Amortization Incurred 2 $ 26,572 $ 26,828 Potash Sales Volumes (tons in thousands) 222 331 Potash Production Volumes (tons in thousands) 270 287 Average Potash Net Realized Sales Price per Ton 3 $ 713 $ 353 1 Potash segment sales include byproduct sales which were $22.8 million and $21.3 million for the years ended December 31, 2022, and 2021, 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, 2022, and 2021 Our total potash segment sales in 2022 increased $39.6 million, or 26%, as compared to 2021, as potash sales recorded in the potash segment increased 29% and potash segment byproduct sales increased 7%. Potash sales recorded in the potash segment increased $38.1 million, or 29%, in 2022 compared to 2021, as the average potash net realized sales price per ton increased 102%, partially offset by a 33% decrease in potash tons sold. Generally strong crop commodity prices combined with global potash supply concerns due to the uncertainty of potash supplied from Eastern Europe drove the increase in our average potash net realized sales price per ton. We sold 33% fewer tons of potash in 59 Table of Contents 2022 as our agricultural customers were reluctant to purchase potash during the second half of 2022 that was not committed for immediate application. Potash segment byproduct sales increased $1.5 million, or 7%, in 2022 compared to 2021, due to a $3.4 million increase in byproduct salt sales, a $1.6 million increase in byproduct brine water sales, partially offset by a $3.1 million decrease in byproduct magnesium chloride sales and a $0.4 million decrease in byproduct water sales. Our salt sales increased as we increased sales in the industrial salt market in 2022. Our byproduct brine water sales increased due to increased oil and gas activities near our facilities in New Mexico during 2022. Our magnesium chloride sales decreased as mild winter weather in various parts of the U.S. in the early part of 2022, followed by wet spring weather reduced demand for magnesium chloride used as a deicing agent in the winter months and as a dedusting agent in the spring and summer months. Our potash byproduct water sales decreased as a larger percentage of our water sales were from our Intrepid South property. Water that is used in the production of potash is recorded as byproduct revenue in our potash segment and water sold from our Intrepid South property is recorded as revenue in our oilfield solutions segment. Generally, the source from where we sell water is based on the location that is nearest to the location where a customer needs the water. Potash cost of goods sold decreased $10.8 million, or 12%, in 2022, compared to 2021, mainly due to a 33% decrease in potash tons sold. While our potash tons sold decreased 33% in 2022, our weighted average carrying cost per ton increased due to increased royalties as our sales revenue increased, an increase in labor and benefits expense due to a company-wide salary increase in early 2022, and increased utility expenses due to inflationary pressures and we incurred increased property taxes, and insurance expenses. Additionally, reduced production at our HB facility also increased our per ton of cost of goods sold because most of our production costs are fixed. Potash segment freight expense decreased 15%, in 2022, compared to 2021, mainly related to selling 33% fewer tons of potash, partially offset by increased freight rates. 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 6% fewer tons of potash during 2022 compared to 2021, as our potash production declined during the first half of 2022, because we had fewer harvestable tons of potash in our HB solution ponds after the abnormally wet weather in the Carlsbad, New Mexico area during the summer of 2021. Because of the abnormally wet weather during the summer of 2021, we recorded $6.0 million of abnormal production costs in 2021. We did not record any abnormal production costs in 2022. Our potash segment gross margin increased $58.9 million in 2022, compared to 2021, due to the $39.6 million increase in potash segment sales, decreases in our cost of goods sold and freight expenses, and not incurring abnormal production costs. Potash Segment - Additional Information The table below shows our potash sales mix for 2022, and 2021. Year Ended December 31, 2022 2021 Agricultural 69 % 78 % Industrial 8 % 6 % Feed 23 % 16 % Trio ® Segment Results 60 Table of Contents Year Ended December 31, (in thousands) 2022 2021 Sales 1 $ 117,826 $ 96,058 Less: Freight costs 19,661 20,656 Warehousing and handling costs 4,442 4,113 Cost of goods sold 54,600 54,847 Gross Margin $ 39,123 $ 16,442 Depreciation, Depletion, and Amortization incurred 2 $ 4,370 $ 5,477 Sales Volumes (tons in thousands) 197 239 Production Volumes (tons in thousands) 226 228 Average Net Realized Sales Price per Ton 3 $ 479 $ 295 1 Trio ® segment sales include byproduct sales which were $3.9 million and $4.9 million for the years ended December 31, 2022, and 2021, 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, 2022, and 2021 Our total Trio ® segment sales increased $21.8 million, or 23%, in 2022, as compared to 2021, as Trio ® sales increased 25%, partially offset by a 22% decrease in Trio ® segment byproduct sales. Our 2022 Trio ® sales increased $22.8 million, or 25%, in 2022, as compared to 2021, as our average net realized sales price per ton increased 62%, partially offset by an 18% decrease in Trio ® tons sold. Our Trio ® average net realized sales price per ton increased as generally strong crop prices and the relative value of Trio ® compared to potash drove good demand for Trio ® . Our Trio ® tons sold decreased as we sold fewer tons during the second half of 2022 as, like potash customers, Trio ® customers were reluctant to purchase tons for the upcoming spring application season due to anticipated price declines. Our Trio ® byproduct sales decreased $1.1 million in 2022, due to a decrease in byproduct water sales. Our Trio ® byproduct water sales decreased as a larger portion of our total water sales were sourced from our Intrepid South property and recorded in our oilfield solution segment. Trio ® freight costs decreased 5% in 2022, compared to 2021, mainly related to selling 18% fewer tons of Trio ® , partially offset by increased international sales and increased freight rates. We incur more freight expense on our international Trio ® sales compared to our domestic 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. Generally, our Trio ® freight expense is higher than our potash freight expense because we generally sell potash to regional customers located closer to our production facilities. Our Trio ® cost of goods sold decreased slightly in 2022, as compared to 2021. While we sold 18% fewer Trio ® tons in 2022, our weighted average carrying cost per ton of Trio ® increased as we incurred increased contract labor expenses to operate an additional shift in 2022. We also incurred higher labor and benefits expenses due to a company-wide salary increase in early 2022, increased royalty expense due to increased sales revenues, increased utility expenses due to inflationary pressures, and we incurred increased property taxes and insurance expenses. Our Trio ® segment gross margin increased $22.7 million in 2022, compared 2021, mainly due to the increase in our Trio ® average net realized sales price as 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, 2022 82 % 18 % For the year ended December 31, 2021 92 % 8 % For the year ended December 31, 2020 85 % 15 % Oilfield Solutions Segment Results 61 Table of Contents Year Ended December 31, (in thousands) 2022 2021 Sales $ 28,668 $ 22,770 Less: Cost of goods sold 21,152 19,293 Gross Margin $ 7,516 $ 3,477 Depreciation, Depletion, and Amortization incurred $ 3,298 $ 2,996 Oilfield Solutions Segment Results for the Years Ended December 31, 2022, and 2021 Our oilfield solutions segment sales increased 26% in 2022, compared to 2021. Water sales increased $1.9 million in 2022 to $17.5 million. Sales from right-of-way agreements, surface damages and easements increased $1.9 million, brine water sales increased $1.5 million, and produced water disposal royalties increased $0.5 million. 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 2022, compared to 2021, as oil prices continued to support oil and gas exploration activities in the Permian Basin near our Intrepid South property in southeast New Mexico. Cost of goods sold increased 10% in 2022, compared to 2021, as we incurred increased contract labor expenses to meet the additional demand for our oilfield solution segment products and services. We also incurred increased utility costs due to inflationary pressures, increased depreciation related to new infrastructure placed in service in 2022, and increased royalty expense due to increased water revenue. Gross margin increased $4.0 million, or 116%, in 2022 compared to 2021, 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 and other products and services 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 62 Table of Contents 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 4.8%, 4.7%, and 5.0% in 2022, 2021, and 2020, 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 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 are therefore, 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 a valuation allowance of $2.0 million was required as of December 31, 2022, and December 31, 2021. The amount of valuation allowance was the same in 2022 as compared to 2021. Our effective tax rate for the years ended December 31, 2022, 2021, and 2020 was 25.2%, (509.9)%, and 0.0%, 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 year ended December 31, 2022, differs from the U.S. federal statutory rate primarily due to state income taxes, while the effective tax rate for the years ended December 31, 2021, and 2020, differs from the U.S. federal statutory rate due to the change in valuation allowance. During the year ended December 31, 2022, we recognized $19.4 million of deferred federal tax expense, $3.9 million of deferred state tax expense, and $1.0 million of current state income tax expense. 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. For the year ended December 31, 2020, 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, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning 63 Table of Contents strategies, and results of recent operations. As of December 31, 2022, 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 $187.8 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 2022, we generated $88.8 million in cash flows from operating activities and we ended the year with $18.5 million of cash and cash equivalents, compared with cash on hand of $36.5 million at December 31, 2021. As of December 31, 2022, we had $149.0 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, as 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, 2022, and 2021: Year ended December 31, 2022 2021 (In thousands) Cash flows provided by operating activities $ 88,821 $ 79,067 Cash flows used in investing activities $ (79,179) $ (14,823) Cash flows used in financing activities $ (27,704) $ (47,282) 64 Table of Contents 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, 2022, was $88.8 million, an increase of $9.8 million compared with the year ended December 31, 2021. The increase was mainly driven by an increased potash and Trio ® net realized sales price partially offset by reduced sales volumes of both potash and Trio ® . Operating cash flows included a $32.6 million refund paid in September 2022 of a customer's prepayment for future water deliveries. Investing Activities Total cash used in investing activities increased $64.4 million in 2022, compared to 2021, primarily related to a $48.9 million increase in additions to property, plant, equipment, and mineral properties. Purchases of investments increased $12.0 million compared to the prior year primarily due to investments in investment grade, short-term debt instruments. 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. Financing Activities Total cash flows used in financing activities decreased $19.6 million in 2022, as compared to 2021. During 2022, we paid $22.0 million under a share repurchase program. We did not repurchase any shares in 2021. During 2021, we made payments under our credit facility of $29.8 million and in June 2021, we paid $15.6 million, including the make-whole payment, to retire our Series B Senior Notes. We did not have any outstanding borrowings under our credit facility in 2022. Share Repurchase Program In February 2022, our Board of Directors approved a $35 million share repurchase program. Under the share repurchase program, we may repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, volume and nature of share repurchases, is at our sole discretion and is dependent on market conditions, liquidity, applicable securities laws, and other factors. We may suspend or discontinue the share repurchase program at any time. For the twelve months ended December 31, 2022, we repurchased 608,657 shares with a total cost of $22.0 million, or a weighted average price per share of $36.17. As of December 31, 2022, we have approximately $13.0 million of remaining availability under the share repurchase program. 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 In August 2022, we and certain of our subsidiaries entered into the Second Amended and Restated Credit Agreement with a syndicate of lenders with the Bank of Montreal, as administrative agent, which provides for a revolving credit facility. The agreement amended our existing revolving credit facility to, among other things, increase the amount available under the facility from $75 million to $150 million, extend the maturity date to August 4, 2027, and transition from LIBOR (London Interbank Offered Rate) to SOFR (Secured Overnight Financing Rate) as a reference rate for borrowings under the credit agreement. Borrowings under the amended credit facility bear interest at SOFR plus an applicable margin of 1.50% to 2.25% per annum, based on our leverage ratio as calculated in accordance with the amended agreement governing the revolving credit facility. Borrowings under the revolving credit facility are secured by substantially all of our current and non-current assets, and 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, 2022, we made no borrowings or repayments under the facility. For the year ended December 31, 2021, we made no borrowings and made $29.8 million repayments, under the facility. As of December 31, 2022, and 2021, we had no borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. We had $149.0 million available under the facility as of December 31, 2022. We were in compliance with the applicable covenants under the facility as of December 31, 2022. 65 Table of Contents Capital Investments During 2022, we paid cash of $68.7 million to acquire property, plant, equipment, and mineral properties. We expect to make capital investments in 2023 of $60 million to $75 million. We anticipate spending approximately $25 million to $35 million on sustaining capital projects in 2023, with the remainder of our estimated spending on opportunity projects. We have significant discretion over our opportunity capital investments in 2023 and we may adjust our investment plans as our expectations for 2023 change. We anticipate our 2023 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 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. 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. 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. 66 Table of Contents 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 ® to the most directly comparable GAAP measure for the years ended December 31, 2022, and 2021 (in thousands, except per ton amounts): Potash Segment 2022 2021 Total Segment Sales $ 191,378 $ 151,751 Less: Segment byproduct sales 22,807 21,291 Potash freight costs 10,336 13,639 Subtotal $ 158,235 $ 116,821 Divided by: Potash tons sold (in thousands) 222 331 Average net realized sales price per ton $ 713 $ 353 Trio ® Segment 2022 2021 Total Segment Sales $ 117,826 $ 96,058 Less: Segment byproduct sales 3,864 4,933 Trio ® freight costs 19,660 20,656 Subtotal $ 94,302 $ 70,469 Divided by: Trio ® Tons sold (in thousands) 197 239 Average net realized sales price per ton $ 479 $ 295