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, 2022 and December 31, 2021 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, 2022, filed with the SEC on March 7, 2023, 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 sulfur, 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. We sell a portion of water from these water rights to support oil and gas operations and development in the Permian Basin. We continually work to expand our sales of water. In May 2019, we acquired certain land, water rights, federal and 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, 2023, 2022, and 2021, 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. In 2023, potash remained a significant driver of our profitability, comprising 47% of our total sales. Our average net realized sales price for potash decreased in 2023 to $466 per ton compared to $713 per ton for 2022. Agricultural pricing peaked at $800 per ton in April 2022 as a result of sanctions on Belarusian potash and concerns about global potash supply due to Russia's invasion of Ukraine. Prices started to decrease in the fall of 2022 as global potash production rates improved. Agricultural potash pricing was $480 per ton at the beginning of 2023 and decreased from there. Despite the declining potash price, demand remained strong throughout 2023 with two good 56 Table of Contents application seasons in the spring and fall supported by above average commodity prices. In January 2024, a winter-fill agricultural potash program was announced decreasing the list price to $385 per ton in January 2024 during a ten-day order window, before the list price increased by $30 per ton. We saw a good response to the program and expect distributors will continue to layer in tons as the 2024 spring season continues, with most distributors targeting minimal carryover inventory to end the spring. We expect to realize the increased price after the order window on certain spot sales in the first quarter of 2024. 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 ® decreased to $321 per ton in 2023, compared to $479 per ton in 2022, as Trio ® price generally followed price decreases in potash. After the January 2024 price announcement for potash, we maintained our posted Trio ® price of $330 per ton for premium Trio ® , $320 per ton for granular and $290 per ton for standard Trio ® , which is approximately $75 per ton below the price levels in January 2023. We've seen good subscription for the 2024 spring season and similar to past years we expect distributors to target minimal carryover inventory into summer. Our ability to realize the increased prices may be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases, 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 decreased in 2023 to $15.2 million, compared to $22.4 million in 2022. The decrease is attributable to fewer fracs on our South Ranch and more fresh water used at our HB facility to improve injection rates while we complete the second phase of our new HB injection pipeline. In addition to fewer fracs on our South Ranch in 2023, we purchased less water for resale resulting in fewer sales but also a corresponding decrease in costs. In 2023, we purchased $1.4 million of water for resale compared to $6.4 million in 2022. We continue to see certain operators switch 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 water conservation efforts, environmentally responsible operations and 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. 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 $30.6 million in 2023 compared to $26.7 million in 2022, driven primarily by a $1.7 million increase in magnesium chloride sales at our Wendover facility due to increased pricing. Byproduct brine sales into oil and gas markets in southeast New Mexico increased $0.9 million during 2023 as we successfully implemented multiple per-barrel price increases in 2023 while continuing to grow sales volumes. Byproduct water and salt sales both increased $0.7 million compared to the prior year. • Strategic Focus on our Solar Solution Mining Facilities. Key current and future projects include: ◦ We successfully commissioned the Eddy Shaft Brine Extraction Project in October 2023 at our HB Solar Solution Mine. This project targets a significant, high-grade brine pool in the Eddy Cavern that is estimated to contain approximately 270 million gallons of brine at an expected grade of over 9% potassium chloride (“KCl”). Access to this brine pool immediately increases the brine available to our pond system and we expect to see incremental production contributions starting in the second half of 2024. ◦ We continue to work through the permitting and contracting processes for the replacement extraction well at our HB Solar Solution Mine and expect the well will be commissioned in the second quarter of 2024. This new extraction well is designed to have a long-term operational life and will initially target approximately 57 Table of Contents 330 million gallons of high-grade brine from the Eddy Cavern at HB, with this additional brine being at lower depths than the Eddy Shaft project can access. ◦ Phase Two of the HB Injection Pipeline Project is the installation of an in-line pigging system to clean the pipeline and remove scaling to help ensure more consistent flow rates. We continue to work through the permitting requirements with commissioning expected in the first half of 2024, assuming we have no further delays in permitting. Upon Phase 2 commissioning, we expect our brine injection rates to be the highest in company history, which is key for maximizing brine availability and residence time. ◦ We started construction on a new primary pond in Wendover to increase the brine evaporative area, which will result in two primary ponds when complete. Similar to our caverns at Moab and HB, the primary ponds at Wendover serve as the brine storage area, and adding another primary pond will help us meet our goals of maximizing brine availability, increasing our brine grade, and improving our production. We expect this project to be commissioned in the third quarter of 2024. • Diversification of products and services. Our revenue from brine and other oilfield products and services recorded in our oilfield solutions segment increased by $0.6 million in 2023, compared to 2022, mainly driven by an increase in brine sales at Intrepid South. Brine sales from our HB facility are recorded as byproduct revenue in our potash segment. Our total brine sales and byproduct brine sales were $8.3 million during 2023, compared to $6.1 million during 2022. We continue to progress on a sand mine opportunity at Intrepid South and have received all necessary permits to begin construction and full operation. We are currently evaluating the market and our options, including the potential to add a strategic partner. 58 Table of Contents Consolidated Results (in thousands) Year Ended December 31, 2023 2022 Sales 1 $ 279,083 $ 337,568 Cost of Goods Sold $ 187,278 $ 152,276 Gross Margin $ 36,846 $ 141,408 (Loss) Income Before Income Taxes (44,062) 96,509 Income Tax Benefit (Expense) 8,389 (24,289) Net (Loss) Income $ (35,673) $ 72,220 Average Net Realized Sales Price per Ton 2 Potash $ 466 $ 713 Trio ® $ 321 $ 479 1 Sales include sales of byproducts which were $30.6 million and $26.7 million for the years ended December 31, 2023 and 2022, 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, 2023, and 2022 Sales Our total sales decreased $58.5 million, or 17% in 2023, compared to 2022, as potash segment sales decreased $35.5 million, Trio ® segment sales decreased $15.6 million, and our oilfield solutions segment sales decreased $7.4 million. Our total potash segment sales decreased $35.5 million during 2023, compared to 2022, driven by a decrease of $37.4 million in potash sales. Our potash sales decreased as our potash average net realized sales price per ton decreased 35%, partially offset by a 16% increase in tons of potash sold. Generally strong crop prices supported good potash demand during 2023. Potash prices peaked during the second quarter of 2022 and have steadily declined in each succeeding quarter as global production rates and product availability improved. The decrease in potash sales during 2023 was partially offset by an increase of $1.9 million in potash segment byproduct sales. The increase in potash segment byproduct sales was due to increased byproduct magnesium chloride sales and increased byproduct brine sales. Our byproduct magnesium chloride sales increased as we realized higher prices during 2023, compared to 2022. Our byproduct brine sales increased due to continuing strong oil and gas activities near our facilities in New Mexico during 2023. Our total Trio ® segment sales decreased by $15.6 million during 2023, compared to 2022, driven by a decrease of $17.6 million in Trio ® sales. Our Trio ® average net realized sales price per ton decreased 33% during 2023, partially offset by a 16% increase in tons of Trio ® sold. Similar to potash, Trio ® prices have declined in each succeeding quarter after peaking during the second quarter of 2022. Generally strong crop prices and lower Trio ® prices drove good demand for Trio ® . The decrease in Trio ® sales was partially offset by an increase of $2.0 million in Trio ® segment byproduct sales during 2023, as our Trio ® byproduct water sales increased as a larger portion of our total water sales was byproduct water used in our Trio ® production process. Our oilfield solutions segment sales decreased by $7.4 million in 2023, compared to 2022, mainly driven by a decrease of $7.9 million in water sales during 2023. Water sales decreased as we purchased $5.0 million less in third-party water for resale in 2023, compared to 2022, and we used more water at our HB facility to improve injection rates while we complete the second phase of our new HB injection pipeline. Cost of Goods Sold 59 Table of Contents Our total cost of goods sold increased $35.0 million, or 23%, in 2023, compared to 2022. Our potash segment cost of goods increased $20.9 million, or 27%, and our Trio ® segment cost of goods sold increased $19.7 million, or 36%, partially offset by a decrease of $5.6 million, or 27%, in our oilfield solutions segment cost of goods sold. Our potash segment cost of goods sold mainly increased due to selling 16% more tons of potash in 2023, compared to 2022. In addition to selling more tons of potash in 2023, our weighted average carrying cost per ton increased as production labor costs, including contract labor and benefits, increased in 2023. We also produced fewer tons of potash during 2023 compared to 2022 and, because most of our production costs are fixed, a decrease in tons produced causes our weighted average price per ton to increase. Our Trio ® segment cost of goods sold increased in 2023 compared to 2022 as we sold 16% more tons of Trio ® in 2023, and our weighted average carrying costs increased as we incurred more production labor expenses and produced fewer tons compared to the prior year. Our oilfield solutions segment cost of goods sold decreased in 2023, as we purchased $5.0 million less in third-party water for resale in 2023, compared to 2022. Lower of Cost or Net Realizable Value Inventory Adjustments During 2023, we recorded lower of cost or net realizable value inventory adjustments of $6.5 million as our weighted average carrying costs for certain potash and Trio ® products exceeded our expected selling price for those products. As discussed above, our average net realized sales price per ton for potash and Trio ® declined during 2023, and our weighted average carrying costs for potash and Trio ® increased during 2023. We did not record any lower of cost or net realizable value inventory adjustments during 2022. Gross Margin Our gross margin percentage decreased to 13% in 2023, compared to 42% in 2022. The decrease was driven primarily by a decrease in sales revenue due to decreases in our average net realized sales price per ton for both potash and Trio ® , increases in both potash and Trio ® cost of goods sold, and recording lower of cost or net realizable value inventory adjustments during 2023. Selling and Administrative Expense In 2023, selling and administrative expenses increased $0.6 million or 2% from 2023. The increase in 2023 was due mainly to increases in labor and benefits expense as a result of salary increases given to employees in April 2023. Impairment of Long-Lived Assets During the year ended December 31, 2023, we recorded total impairment charges of $43.3 million. During the year ended December 31, 2022, we recorded no impairment charges. In the fourth quarter of 2023, given the decrease in our gross margin for our Trio ® segment we determined that sufficient indicators of potential impairment of our Trio ® segment long-lived assets existed. We performed a recoverability test and determined that the carrying value of our Trio ® segment long-lived assets was not recoverable. We engaged a third-party valuation firm to determine the fair value of our Trio ® segment assets. The fair value of our Trio ® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. The carrying value of our Trio ® segment asset group exceeded its fair value, and we recorded an impairment charge of $31.9 million. Our long-lived assets at our West facility have been in care and maintenance since July 2016. Given the length of time since the assets were placed in care and maintenance, we engaged a third-party valuation firm to determine if the fair value of the West assets supports the carrying value of those assets. The fair value of the West assets was determined using the expected proceeds received in an orderly sale of the individual assets. The carrying value of the West assets exceeded the fair value of those assets, and we recorded an impairment charge of $9.9 million during the fourth quarter of 2023. Finally, during 2023, we recorded impairment charges of $1.5 million related to certain assets in our Oilfield Solutions Segment, specifically certain water recycling equipment and an investment in a non-operating interest in an oil and gas investment. Loss on Sale or Disposal of Assets During 2023, we recorded a $0.8 million loss on the sale or disposal of assets in the normal course of business, compared to a loss of $7.5 million during 2022. 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 60 Table of Contents 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. Other Operating Expense In 2023, we recognized other operating expense of $2.2 million compared to $4.7 million in 2022. During 2023, we recorded an additional $1.0 million for fines and penalties related to a trespass on federal surface minerals at Intrepid South. We settled this trespass issue with the BLM during 2023, and the matter is now closed. We also recorded $0.5 million of additions in our allowance for obsolete inventory, $0.5 million in care and maintenance expenses and we accrued $0.4 million related to a potential violation of one of our environmental permits. 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 a trespass on federal 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. Income Tax During 2023 we recorded income tax benefit of $8.4 million compared to an income tax expense of $24.3 million in 2022. During 2023, we recorded a $1.1 million valuation allowance against certain state net operating loss carryforwards due to a change in the forecast of the amount of the loss carryforwards that may be used before expiration. Net Income Our 2023 net income decreased $107.9 million to a net loss of $35.7 million. The decrease was primarily due to the decreased gross margins in our potash and Trio ® segments and the impairment expense recorded in 2023. Potash Segment Results Year Ended December 31, (in thousands) 2023 2022 Sales 1 $ 155,920 $ 191,378 Less: Freight costs 14,753 14,780 Warehousing and handling costs 5,957 5,305 Cost of goods sold 97,452 76,524 Lower of cost or NRV inventory adjustments 2,709 — Gross Margin $ 35,049 $ 94,769 Depreciation, Depletion, and Amortization Incurred 2 $ 28,378 $ 26,572 Potash Sales Volumes (tons in thousands) 258 222 Potash Production Volumes (tons in thousands) 224 270 Average Potash Net Realized Sales Price per Ton 3 $ 466 $ 713 1 Potash segment sales include byproduct sales which were $24.7 million and $22.8 million for the years ended December 31, 2023, and 2022, 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, 2023, and 2022 Our total potash segment sales in 2023 decreased $35.5 million, or 19%, compared to 2022, as potash sales recorded in the potash segment decreased 22%, partially offset by an 8% increase in potash segment byproduct sales. Potash sales recorded in the potash segment decreased $37.4 million, or 22%, in 2023 compared to 2022, as our potash average net realized sales price per ton decreased 35%, partially offset by a 16% increase in potash tons sold. Potash prices peaked during the second quarter of 2022 and steadily declined in each succeeding quarter as global production rates and 61 Table of Contents product availability improved. Our potash tons sold increased in 2023, as supporting farm commodity prices and lower potash prices continued to drive solid demand. Potash segment byproduct sales increased $1.9 million, or 8%, in 2023 compared to 2022, due to a $1.7 million increase in byproduct magnesium chloride sales, a $0.9 million increase in byproduct brine sales, a $0.7 million increase in potash byproduct salt sales, partially offset by a decrease of $1.3 million in potash byproduct water sales. Our byproduct magnesium chloride sales increased as we realized higher prices during 2023, compared to 2022. Our byproduct brine sales increased due to continuing strong oil and gas activities near our facilities in New Mexico during 2023. Our byproduct salt sales increased due to strong demand from feed and industrial salt customers and higher realized pricing during 2023. Our potash byproduct water sales decreased as we had less byproduct water to sell because we used more water at our HB facility to improve injection rates as we work to complete the second phase of our new HB injection pipeline. Potash cost of goods sold increased $20.9 million, or 27%, in 2023, compared to 2022, mainly due to a 16% increase in potash tons sold. In addition, our weighted average carrying cost per ton increased mainly due to a 15%, or $3.8 million increase in production labor, contract labor, and benefits expenses in 2023. Our total tons of potash produced decreased 17% in 2023, compared to 2022, which also increased our per ton production costs. Because most of our production costs are fixed, decreases in tons produced result in higher per ton costs. Potash segment freight expenses were virtually unchanged in 2023, compared to 2022, even though we sold 16% more tons of potash. Increases in potash freight expense from selling more tons of potash in 2023 were offset by a decrease in freight expense associated with our potash byproduct salt sales. Our freight expense is 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 17% fewer tons of potash during 2023 compared to 2022, due to reduced brine grades at our HB and Wendover facilities. During 2023, we recorded $2.7 million in lower of cost or net realizable value inventory adjustments as our weighted average carry cost per ton exceeded our expected net realizable value per potash ton. As discussed above, our potash average net realized sales price per ton decreased during 2023 while our weighted average carrying cost per ton increased in 2023. We did not record any lower of cost or net realizable value inventory adjustments during 2022. Our potash segment gross margin decreased $59.7 million in 2023, compared to 2022, due to the $35.5 million decrease in potash segment sales, increased cost of goods sold expense, and recording lower of cost or net realizable value inventory adjustments, as discussed above. Our long-lived assets at our West facility have been in care and maintenance since July 2016. Given the length of time since the assets were placed in care and maintenance, we engaged a third-party valuation firm to determine if the fair value of the West assets supports the carrying value of those assets. The fair value of the West assets was determined using the expected proceeds received in an orderly sale of the individual assets. The carrying value of the West assets exceeded the fair value of those assets, and we recorded an impairment charge of $9.9 million during the fourth quarter of 2023. Potash Segment - Additional Information The table below shows our potash sales mix for 2023, and 2022. Year Ended December 31, 2023 2022 Agricultural 74 % 69 % Industrial 3 % 8 % Feed 23 % 23 % Trio ® Segment Results 62 Table of Contents Year Ended December 31, (in thousands) 2023 2022 Sales 1 $ 102,182 $ 117,826 Less: Freight costs 23,211 19,661 Warehousing and handling costs 4,875 4,442 Cost of goods sold 74,308 54,600 Lower of cost or NRV inventory adjustments 3,783 — Gross (Deficit) Margin $ (3,995) $ 39,123 Depreciation, Depletion, and Amortization incurred 2 $ 6,288 $ 4,370 Sales Volumes (tons in thousands) 228 197 Production Volumes (tons in thousands) 216 226 Average Net Realized Sales Price per Ton 3 $ 321 $ 479 1 Trio ® segment sales include byproduct sales which were $5.8 million and $3.9 million for the years ended December 31, 2023, and 2022, 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, 2023, and 2022 Our total Trio ® segment sales decreased $15.6 million, or 13%, in 2023, as compared to 2022, as Trio ® sales decreased $17.6 million, or 15%, partially offset by a $2.0 million increase, or 51%, in Trio ® segment byproduct sales. Our 2023 Trio ® sales decreased $17.6 million, or 15%, in 2023, as compared to 2022, as our average net realized sales price per ton decreased 33%, partially offset by a 16% increase in Trio ® tons sold. Similar to potash, Trio ® prices peaked during the second quarter of 2022, and steadily declined in each succeeding quarter as global production rates and product availability of potassium fertilizers improved. Our increase in tons sold in 2023 benefited from the reduced sales volumes we experienced in the second half of 2022, as customers delayed purchases in anticipation of lower price levels combined with overall strong commodity prices throughout 2023. Our Trio ® byproduct sales increased $2.0 million in 2023 due to an increase in byproduct water sales. Trio ® freight costs increased 18% in 2023, compared to 2022, mainly related to a 16% increase in Trio ® tons sold. 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 sell potash to regional customers located closer to our production facilities. Our Trio ® segment cost of goods sold increased 36% in 2023, compared to 2022, driven by a 16% increase in Trio ® tons sold combined with an increase in our per-ton production costs. We also began 2023 with a higher average cost per ton of inventory compared to 2022. Our Trio ® production costs increased in 2023, compared to the prior year, due to a 6%, or $1.8 million, increase in labor and benefits, a 12%, or $1.8 million, increase in operating and maintenance supplies, a 49%, or $1.8 million increase in depreciation due to increased capital investments, and a 61%, or $1.0 million increase in property taxes and insurance, partially offset by a 22%, or $1.0 million decrease in royalty expense due to decreased sales revenue. We recorded $3.8 million in lower of cost or net realizable value inventory adjustments in 2023, due to increased carrying costs of our Trio ® inventory and lower realized prices compared to 2022. Our Trio ® segment gross margin decreased $43.1 million in 2023, compared 2022, due to the factors discussed above. In the fourth quarter of 2023, given the decrease in our gross margin for our Trio ® segment we determined that sufficient indicators of potential impairment of our Trio ® segment long-lived assets existed. We performed a recoverability test and determined that the carrying value of our Trio ® segment long-lived assets was not recoverable. We engaged a third-party valuation firm to determine the fair value of our Trio ® segment assets. The fair value of our Trio ® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. The carrying value of our Trio ® segment asset group exceeded its fair value of those assets, and we recorded an impairment charge of $31.9 million. 63 Table of Contents 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, 2023 86 % 14 % For the year ended December 31, 2022 82 % 18 % For the year ended December 31, 2021 92 % 8 % Oilfield Solutions Segment Results Year Ended December 31, (in thousands) 2023 2022 Sales $ 21,310 $ 28,668 Less: Cost of goods sold 15,518 21,152 Gross Margin $ 5,792 $ 7,516 Depreciation, Depletion, and Amortization incurred $ 3,849 $ 3,298 Oilfield Solutions Segment Results for the Years Ended December 31, 2023, and 2022 Our oilfield solutions segment sales decreased 26% in 2023, compared to 2022. Water sales decreased $7.9 million in 2023 to $9.6 million, and revenue from right-of-way agreements, surface damages and easements decreased $0.7 million. Brine sales increased $1.4 million, and produced water disposal royalties increased $0.1 million during 2023, compared to 2022. Water sales decreased as we purchased $5.0 million less in third-party water for resale in 2023, compared to 2022 and we used more water at our HB facility to improve injection rates while we complete the second phase of our new HB injection pipeline. Brine sales increased $1.4 million as we sold increased volumes of brine at a higher per-barrel price in 2023, compared to 2022. Oilfield solutions sales are highly correlated to oil and gas activities near our facilities in New Mexico and oil prices continued to support oil and gas exploration activities in the Permian Basin near our Intrepid South property in southeast New Mexico during 2023. Cost of goods sold decreased 27% in 2023, compared to 2022, primarily due to a $5.0 million decrease in third-party water purchased for resale. We incurred $0.6 million in increased labor and benefits expenses and a $0.6 million increase in depreciation related to new infrastructure placed in service in 2023, compared to 2022. These increased costs were partially offset by a $0.5 million decrease in royalty expense in 2023, compared to 2022, due to reduced water sales. Gross margin decreased $1.7 million, or 23%, in 2023 compared to 2022, 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 consider current inventory levels and expect to continue to do so for the foreseeable future. 64 Table of Contents 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 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 varies with the grade of ore extracted. Our average royalty rate was 4.9%, 4.8%, and 4.7% in 2023, 2022, and 2021, 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 $3.2 million was required as of December 31, 2023, and $2.0 million as of December 31, 2022. The amount of valuation allowance increased in 2023 as compared to 2022, due to a change in the forecast of the amount of state net operating losses that may be used before expiration. Our effective tax rate for the years ended December 31, 2023, 2022, and 2021 was 19.0%, 25.2%, and (509.9)%, 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 and the expense for the estimated effect of the disallowed deduction for officers' compensation. The effective tax rate for the year ended December 31, 2023, differs from the U.S. federal statutory rate primarily due to the change in the valuation allowance. The effective tax rate for the years ended December 31, 2022, and 2021, differs from the U.S. federal statutory rate due to state income taxes, and the change in valuation allowance, respectively. 65 Table of Contents During the year ended December 31, 2023, we recognized $8.5 million of deferred federal tax benefit, $0.1 million of deferred state tax expense, and $0.1 million of current state income tax expense. 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. For the year ended December 31, 2021, we recognized $157.3 million deferred federal tax benefit, $51.7 million of deferred state tax benefit and $0.2 million of current state 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 strategies, and results of recent operations. As of December 31, 2023, 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 $197.4 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 2023, we generated $43.2 million in cash flows from operating activities and we ended the year with $4.1 million of cash and cash equivalents, compared with $18.5 million at December 31, 2022. As of December 31, 2023, we had $146.0 million available to borrow under our credit facility, $4.0 million in outstanding borrowings, and no outstanding lette rs 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 may also 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, 2023, and 2022: Year ended December 31, 2023 2022 (In thousands) Cash flows provided by operating activities $ 43,229 $ 88,821 Cash flows used in investing activities $ (59,554) $ (79,179) Cash flows provided by (used in) financing activities $ 1,892 $ (27,704) 66 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, 2023, was $43.2 million, a decrease of $45.6 million compared with the year ended December 31, 2022. The decrease was mainly driven by decreased potash and Trio ® net realized sales prices. Prior year 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 decreased $19.6 million in 2023, compared to 2022, primarily a result of an $11.6 million decrease in purchases of investments compared to the prior year. In 2022, we invested $13.0 million of cash in investment grade, short-term debt instruments. Additions to property, plant, equipment, and mineral properties also decreased $3.5 million in 2023, compared to the prior year. Proceeds from the redemption/maturity of investments increased $3.5 million in 2023, compared to 2022. Financing Activities Total cash flows provided by financing activities increased $29.6 million in 2023, as compared to 2022. During 2022, we paid $22.0 million under a share repurchase program. We did not repurchase any shares in 2023. Proceeds from borrowings on the credit facility (net of repayments) increased $4.0 million and employee tax withholding paid for restricted shares upon vesting decreased $3.3 million in 2023, compared to the prior year. 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. We made no repurchases of shares for the twelve months ended December 31, 2023. 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, 2023, we have approximately $13.0 million of remaining availability under the share repurchase program. 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, 2023, we made $9.0 million in borrowings and $5.0 million in repayments under the facility. For the year ended December 31, 2022, we made no borrowings and made no repayments under the facility. As of December 31, 2023, we had $4.0 million in borrowings outstanding and no outstanding letters of credit under the facility. As of December 31, 2022, we had no borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. We had $146.0 million available under the facility as of December 31, 2023. We were in compliance with the applicable covenants under the facility as of December 31, 2023. Capital Investments During 2023, we paid cash of $65.1 million to acquire property, plant, equipment, and mineral properties. 67 Table of Contents We expect to make capital investments in 2024 of $40 million to $50 million. We anticipate spending approximately $20 million to $25 million on sustaining capital projects in 2024, with the remainder of our estimated spending on opportunity projects, which include the completion of phase two of our new HB injection pipeline project, a new extraction well at our HB mine, and a new primary pond at our Wendover facility. We may adjust our investment plans as our expectations for 2024 change. We anticipate our 2024 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. Recoverability of Long-Lived Assets We evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. An impairment is potentially considered to exist if an asset group's total estimated net future cash flows on an undiscounted basis are less than the carrying amount of the related asset. An impairment loss is measured and recorded based on the excess of the carrying amount of long-lived assets over its estimated fair value. In 2023, we recorded an impairment charge for long-lived assets and mineral properties at two of our facilities in New Mexico. The impairment charge equals the difference between the carrying value of the assets or asset group and the estimated fair value of the assets or asset group. We estimated the fair value of mineral properties using a discounted cash flow technique and we used the estimated fair value of the other assets using estimated proceeds received in an orderly sale of these assets. Significant estimates used in the estimated fair values include inputs to arrive at estimated net cash flows, such as product selling prices, volumes of product sold, and production costs. Estimated proceeds received in an orderly sale of an asset have a high degree of subjectivity and actual proceeds received in an orderly sale of assets may vary from the estimates used, which may result in further impairment charges. 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 updated our mineral reserves and resources as of December 31, 2023, and we determined we do not have any mineral reserves at our East facility because the mineral deposit could not be economically extracted. All mineral deposits at our East facility are categorized as a mineral resource. A mineral reserve is defined as that part of a mineral deposit which can be economically and legally extracted. A mineral resource refers to a concentration or occurrence of material deposits of economic interest. 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. 68 Table of Contents 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 ® to the most directly comparable GAAP measure for the years ended December 31, 2023, and 2022 (in thousands, except per ton amounts): Potash Segment 2023 2022 Total Segment Sales $ 155,920 $ 191,378 Less: Segment byproduct sales 24,714 22,807 Potash freight costs 10,911 10,336 Subtotal $ 120,295 $ 158,235 Divided by: Potash tons sold (in thousands) 258 222 Average net realized sales price per ton $ 466 $ 713 Trio ® Segment 2023 2022 Total Segment Sales $ 102,182 $ 117,826 Less: Segment byproduct sales 5,838 3,864 Trio ® freight costs 23,211 19,661 Subtotal $ 73,133 $ 94,301 Divided by: Trio ® Tons sold (in thousands) 228 197 Average net realized sales price per ton $ 321 $ 479 69 Table of Contents