# Andersons, Inc. (ANDE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Andersons, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/821026/000082102622000050/ande-20211231.htm
Accession: 0000821026-22-000050
Filing date: 2022-02-24
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ANDE/
All MD&A years: /company/ANDE/mda/
Next year: /company/ANDE/mda/fy2022/ (FY 2022)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following “Management's Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. Without limitation, these risks include economic, weather and regulatory conditions, competition, the COVID-19 pandemic and those listed under Item 1.A, "Risk Factors." The reader is urged to carefully consider these risks and factors. In some cases, the reader can identify forward-looking statements by terminology such as “may”, “anticipates”, “believes”, “estimates”, “predicts”, or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Executive Overview

Our operations are organized, managed and classified into three reportable business segments: Trade, Renewables, and Plant Nutrient. Each of these segments is generally based on the nature of products and services offered and aligns with the management structure.

The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales between periods may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes in gross profit.

Recent Developments

The global emergence of COVID-19 continues to have a significant impact on the global economy. Government-mandated stay-at-home orders and other public health mandates and recommendations, as well as behavioral changes in response to the pandemic, have created labor shortages as labor force participation has remained below pre-pandemic levels. Additionally, supply constraints, low inventory levels and inflationary pressures from the pandemic have affected the industries in which the Company operates. The Company is continuing to actively manage its response to the COVID-19 pandemic, however, the future impacts of the ongoing pandemic on the Company’s business remain uncertain at this time.

The Company is a critical infrastructure industry as defined by The United States Department of Homeland Security, Cybersecurity and Infrastructure Agency. As COVID-19 continues to spread and certain regions experience accelerated spread or resurgences, the Company is currently conducting business as usual to the greatest extent possible in the current circumstances. The Company is taking a variety of measures to ensure the availability of its services throughout our network, promote the safety and security of our employees, and support the communities in which we operate. Certain modifications the Company has made in response to the COVID-19 pandemic include: implementing working at home protocols for all non-essential support staff; restricting employee business travel; strengthening clean workplace practices; reinforcing socially responsible sick leave recommendations; limiting visitor and third-party access to Company facilities; launching internal COVID-19 resources for employees; creating a pandemic response team comprised of employees and members of senior management; encouraging telephonic and video conference-based meetings along with other hygiene and social distancing practices recommended by health authorities including Health Canada, the U.S. Centers for Disease Control and Prevention, and the World Health Organization; and maintaining employment benefit coverage of employees through the pandemic. The Company is responding to this crisis through measures designed to protect our workforce and prevent disruptions to the Company's operations within the North American agricultural supply chain.

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The Company will continue to actively monitor the situation and may take further actions that could materially alter our business operations as may be required or recommended by federal, provincial, state or local authorities, or that management determines are in the best interests of our employees, customers, shareholders, partners, suppliers and other stakeholders.

Additional information concerning the impact COVID-19 may have to our future business and results of operations is provided in Part I, Item 1A. Risk Factors.

Trade

The Trade Group's performance reflects a substantial increase over the prior year as the Group was able to capitalize on commodity price volatility and market dislocations brought on by a demand-driven agricultural rally. During the course of the year, this demand driven rally created an inversion in the futures market for the majority of the agricultural commodities handled by the Group's asset business, resulting in strong elevation margins. Our recent growth from the Swiss trading and Southwest US feed merchandising businesses also contributed to the improved year-over-year results. Additionally, the food and specialty ingredients business netted higher results as the industry continues to recover from the COVID-19 impacts.

Total grain storage capacity, including temporary pile storage, was approximately 185.5 million bushels as of December 31, 2021 and 202.1 million bushels as of December 31, 2020. Commodity inventories on hand at December 31, 2021 were 187.0 million bushels, of which 3.0 million bushels were stored for others. This compares to 142.8 million bushels on hand at December 31, 2020, of which 3.0 million bushels were stored for others.

Looking forward, the Group is well-positioned to capture value and growth across the diverse portfolio of commodities in which it operates with expected ongoing strong fundamentals.

Renewables

The Renewables Group results attributable to the Company were significantly improved compared to the prior year with the largest increase from strong co-product margins as a result of increased high-protein and corn oil values. Further, the Group benefited as spot ethanol crush margins recovered due to gasoline demand returning to pre-pandemic levels coupled with overall low industry stocks. As we move into 2022, the Renewables Group anticipates strong trading opportunities due to robust co-product margins including high corn oil values from strong renewable diesel demand. While high corn prices may place pressure on crush margins, they also improve co-products sales as we are able to sell products such as DDGs and corn oil at higher values.

Volumes shipped for the years ended December 31, 2021 and December 31, 2020 were as follows:

[[GREPCENT_TABLE]]
[["","Twelve months ended December 31,"],["(in thousands)","2021","","2020"],["Ethanol (gallons shipped)","726,512","","","592,738"],["E-85 (gallons shipped)","41,572","","","27,321"],["Corn Oil (pounds shipped)","286,082","","","117,563"],["DDG (tons shipped)","2,040","","","1,850"]]
[[/GREPCENT_TABLE]]

Plant Nutrient

The Plant Nutrient Group's results increased year-over-year due to well-positioned inventory and high fertilizer prices. Fertilizer prices have increased year-over-year due to tight global supplies and increased demand from improved grain prices and strong farmer income. The benefit from higher prices were partially offset by higher input costs and a tight labor market, specifically in the manufactured products business. Further, the Group continues to benefit from cost reduction initiatives and effective working capital management.

Total storage capacity at our ag supply chain and engineered granules locations was approximately 450 thousand tons for dry nutrients and approximately 511 thousand tons for liquid nutrients at December 31, 2021, which is similar to the prior year.

Looking forward, the Group expects continued opportunities in 2022 with high commodity prices, higher farmer income and well-positioned inventory.

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Tons of product sold for the years ended December 31, 2021 and December 31, 2020 were as follows:

[[GREPCENT_TABLE]]
[["","Twelve months ended December 31,"],["(in thousands)","2021","","2020"],["Ag Supply Chain","1,621","","","1,585"],["Specialty Liquids","410","","","351"],["Engineered Granules","453","","","416"],["Total tons","2,484","","","2,352"]]
[[/GREPCENT_TABLE]]

In the table above, Ag Supply Chain represents facilities principally engaged in the wholesale distribution and retail sale and application of primary agricultural nutrients such as bulk nitrogen, phosphorus, and potassium. Specialty Liquid locations produce and sell a variety of low-salt liquid starter fertilizers, micronutrients for agricultural use, and specialty products for use in various industrial processes. Engineered Granules facilities primarily manufacture granulated dry products for use in specialty turf and agricultural applications.

Other

The Company's “Other” activities include corporate income and expense and cost for functions that provide support and services to the operating segments. The results include expenses and benefits not allocated to the operating segments and other elimination and consolidation adjustments.

Results for Fiscal 2020 compared to Fiscal 2019

For comparisons of the Company's consolidated and segment results of operations and consolidated cash flows for the fiscal years ended December 31, 2020 to December 31, 2019, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 25, 2021.

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Operating Results

The following discussion focuses on the operating results as shown in the Consolidated Statements of Operations with a separate discussion by segment. Additional segment information is included in Note 12 to the Company's Consolidated Financial Statements in Item 8.

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2021"],["(in thousands)","Trade","","Renewables","","Plant Nutrient","","Other","","Total"],["Sales and merchandising revenues","$","9,304,357","","","$","2,440,798","","","$","866,895","","","$","\u2014","","","$","12,612,050"],["Cost of sales and merchandising revenues","8,968,675","","","2,324,172","","","726,506","","","\u2014","","","12,019,353"],["Gross profit","335,682","","","116,626","","","140,389","","","\u2014","","","592,697"],["Operating, administrative and general expenses","251,605","","","31,019","","","95,547","","","45,581","","","423,752"],["Asset impairment","8,321","","","\u2014","","","\u2014","","","\u2014","","","8,321"],["Interest expense","23,688","","","7,602","","","4,355","","","1,647","","","37,292"],["Equity in earnings of affiliates, net","4,842","","","\u2014","","","\u2014","","","\u2014","","","4,842"],["Other income (expense), net","31,036","","","3,200","","","2,128","","","(3,768)","","","32,596"],["Income (loss) before income taxes from continuing operations","87,946","","","81,205","","","42,615","","","(50,996)","","","160,770"],["Income (loss) before income taxes attributable to the noncontrolling interests","\u2014","","","31,880","","","\u2014","","","\u2014","","","31,880"],["Non-GAAP Income (loss) before income taxes attributable to the Company from continuing operations","$","87,946","","","$","49,325","","","$","42,615","","","$","(50,996)","","","$","128,890"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2020"],["(in thousands)","Trade","","Renewables","","Plant Nutrient","","Other","","Total"],["Sales and merchandising revenues","$","6,141,402","","","$","1,260,259","","","$","662,959","","","$","\u2014","","","$","8,064,620"],["Cost of sales and merchandising revenues","5,863,186","","","1,278,526","","","556,711","","","\u2014","","","7,698,423"],["Gross profit (loss)","278,216","","","(18,267)","","","106,248","","","\u2014","","","366,197"],["Operating, administrative and general expenses","244,147","","","24,405","","","85,702","","","23,441","","","377,695"],["Asset impairment","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Interest expense (income)","21,974","","","7,461","","","5,805","","","(1,456)","","","33,784"],["Equity in earnings of affiliates, net","638","","","\u2014","","","\u2014","","","\u2014","","","638"],["Other income, net","11,954","","","2,795","","","1,274","","","1,540","","","17,563"],["Income (loss) before income taxes from continuing operations","24,687","","","(47,338)","","","16,015","","","(20,445)","","","(27,081)"],["Income (loss) before income taxes attributable to the noncontrolling interests","\u2014","","","(21,925)","","","\u2014","","","\u2014","","","(21,925)"],["Non-GAAP Income (loss) before income taxes attributable to the Company from continuing operations","$","24,687","","","$","(25,413)","","","$","16,015","","","$","(20,445)","","","$","(5,156)"]]
[[/GREPCENT_TABLE]]

The Company uses Non-GAAP Income (loss) before income taxes, attributable to the Company from continuing operations, a non-GAAP financial measure as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Management believes that Non-GAAP Income (loss) before income taxes, attributable to the Company from continuing operations is a useful measure of the Company’s performance because it provides investors additional information about the Company's operations allowing better evaluation of underlying business performance and better period-to-period comparability. This measure is not intended to replace or be an alternative to Income (loss) before income taxes from continuing operations, the most directly comparable amount reported under GAAP.

The Andersons, Inc. | 2021 Form 10-K | 19

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Comparison of 2021 with 2020

Trade

Operating results for the Trade Group improved significantly as Income before taxes increased $63.3 million compared to prior year reported results. Sales and merchandising revenues increased $3,163.0 million and Cost of sales and merchandising revenues increased by $3,105.5 million resulting in an increase in gross profit of $57.5 million. Most of the increase to Sales and merchandising revenues and Cost of sales and merchandising revenues is the result of increased commodity prices as the Group benefited from the demand-driven agricultural rally. The net increase in gross profit was driven by improved merchandising results as geographic dislocations created volatility that allowed traders to identify arbitrage opportunities. Additionally, our traditional asset locations were significantly better than the prior year due to strong elevation margins in our draw areas.

Operating, administrative and general expenses increased $7.5 million compared to prior year results. Labor and benefits expenses were higher primarily due to higher incentive compensation costs from improved operating results. Despite the expense increase, the Company continues to benefit from cost saving initiatives, much of which is headcount reduction, both from acquisition integration and in response to the COVID-19 pandemic.

The Trade Group recorded asset impairment charges of $8.3 million in 2021. The current year asset impairment charges include a $7.7 million impairment of the Company's Frac Sand business following a fundamental shift in the operating environment and a $0.6 million charge related to a small food grade asset location in Texas that was shuttered. No such impairments occurred in the prior year.

Interest expense increased $1.7 million due to higher group borrowings on the Company's short-term line of credit compared to the prior year despite lower interest rates and decreased long-term borrowings.

Equity in earnings of affiliates were $4.8 million in the current year. This resulted in an increase of $4.2 million as compared to the prior year, most of which relates to our Canadian equity method investment.

Other income increased by $19.1 million from prior year largely driven by a gain on the sale of a grain asset location in the current year.

Renewables

The Renewables group had a strong year operationally as Income before income taxes attributable to the Company increased $74.7 million from the prior year. Sales and merchandising revenues increased $1,180.5 million and Cost of sales and merchandising revenues increased $1,045.6 million compared to the prior year. As a result, gross profit increased by $134.9 million. Most of the increase to Sales and merchandising revenues and Cost of sales and merchandising revenues is the result of increased commodity prices. The net increase to gross profit in the current period results reflect significantly improved crush margins, higher co-product sales from traditional and high-protein feed products and corn oil and strong merchandising revenues. The prior year results were significantly impacted by COVID-19, resulting in a lack of demand and included an $11.7 million inventory write down.

Operating, administrative and general expenses increased $6.6 million from the prior year due to higher labor and incentive compensation costs from increased production and improved operating results, respectively.

Plant Nutrient

The Plant Nutrient Group finished off a record year with income before taxes increasing $26.6 million compared to the prior year. Sales and merchandising revenues increased $203.9 million and cost of sales and merchandising revenues increased $169.8 million resulting in increased gross profit of $34.1 million from the prior year. Gross profit improved year over year due to increases in volumes and margins across the breadth of product lines and reflects higher demand, strong grower income and well-positioned inventory.

Operating, administrative and general expenses increased $9.8 million primarily due to increased incentive compensation costs from improved results, and other variable expenses supporting additional volume in the current year.

Interest expense decreased $1.5 million from lower interest rates in the current year.

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Other

Operating, administrative and general expenses increased $22.1 million from the same period last year. The increase in operating losses was primarily driven by increased variable incentive-based compensation in Operating, administrative and general expenses due to improved company-wide performance year over year, as well as approximately $5.0 million of stranded costs from the sale of our Rail Leasing business. The prior year results also include severance related expenses of $6.1 million associated with the departure of certain executive officers and key employees.

Income Taxes

In 2021, the Company recorded Income tax expense from continuing operations of $29.2 million. The Company's effective rate for 2021 was 18.2% on income before taxes from continuing operations of $160.8 million. The difference between the 18.2% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax benefit generated from Federal Research and Development Credits ("R&D Credits"), foreign tax credits and the effect of non-controlling interest offset by state and local income taxes, nondeductible compensation, and changes in unrecognized tax benefits.

In 2020, the Company recorded income tax benefit from continuing operations of $10.9 million. The Company’s effective rate for 2020 was 40.3% on losses before tax from continuing operations of $27.1 million. The difference between the 40.3% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax benefit generated from Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and R&D Credits offset by the effect of non-controlling interest, derivative instruments and hedging activities, nondeductible compensation, and changes in unrecognized tax benefits.

Liquidity and Capital Resources

Working Capital

At December 31, 2021, the Company had working capital from continuing operations of $900.9 million, an increase of $423.5 million from the prior year. This increase was attributable to changes in the following components of current assets from continuing operations and current liabilities from continuing operations:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2021","","December 31, 2020","","Variance"],["Current Assets from Continuing Operations:"],["Cash and cash equivalents","$","216,444","","","$","29,123","","","$","187,321"],["Accounts receivable, net","835,180","","","641,326","","","193,854"],["Inventories","1,814,538","","","1,293,066","","","521,472"],["Commodity derivative assets \u2013 current","410,813","","","320,706","","","90,107"],["Other current assets","74,468","","","99,529","","","(25,061)"],["Total current assets from continuing operations","3,351,443","","","2,383,750","","","967,693"],["Current Liabilities from Continuing Operations:"],["Short-term debt","501,792","","","403,703","","","98,089"],["Trade and other payables","1,199,324","","","954,809","","","244,515"],["Customer prepayments and deferred revenue","358,119","","","178,226","","","179,893"],["Commodity derivative liabilities \u2013 current","128,911","","","146,990","","","(18,079)"],["Accrued expenses and other current liabilities","230,148","","","153,311","","","76,837"],["Current maturities of long-term debt","32,256","","","69,366","","","(37,110)"],["Total current liabilities from continuing operations","2,450,550","","","1,906,405","","","544,145"],["Working Capital from Continuing Operations","$","900,893","","","$","477,345","","","$","423,548"]]
[[/GREPCENT_TABLE]]

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Current assets from continuing operations increased $967.7 million in comparison to prior year. This increase was noted in all working capital asset accounts. The increases in accounts receivable, current commodity derivative assets and inventory balances can largely be attributable to the significant increases in the prices of agricultural commodities, including fertilizer, that the Company transacts in the ordinary course of business. The significant increase in cash and cash equivalents is largely due to the timing of accounts payable including expected deferred farmer payments. See also the discussion below on additional sources and uses of cash for an understanding of the increase in cash from prior year.

Current liabilities from continuing operations increased $544.1 million compared to the prior year primarily due to increases in short-term debt, customer prepayments and trade and other payables. The increase in short-term debt is the result of higher working capital needs and driven by significant increases in the prices of agricultural commodities. The increase in trade and other payables is also the result of increasing agricultural commodity prices. The increase in accrued expenses is largely driven by increased income tax payables as well as increased accrued variable based incentive compensation as a result of the significant improvement in operating results in the current year. The decrease in current maturities of long-term debt is due to the Company executing on its strategy to pay down long-term debt with proceeds received from the Rail Leasing sale.

Sources and Uses of Cash in 2021 compared to 2020

Operating Activities and Liquidity

Our operating activities used cash of $51.1 million in 2021 compared to cash used in operations of $74.4 million in 2020. The decrease in cash used was primarily due to increased operating results and offset by working capital accounts driven by higher commodity prices, as discussed above. However, when removing the impact from changes in working capital, cash provided by operating activities was much stronger than the prior period due to favorable operating results.

Net income taxes of $51.7 million and $2.4 million were paid in the years ended December 31, 2021 and 2020, respectively. The increase in the current year is driven by the taxable gain associated with the sale of our Rail Leasing business which was partially offset by refunds primarily related to the CARES Act.

Investing Activities

Investing activities provided $487.2 million in the current year compared to $86.8 million used in the prior year. The significant increase from the prior year was a result of proceeds received from the sale of the Rail Leasing business as well as a grain asset location within the Trade segment. Additional contributing factors to the increase were higher proceeds from sales of assets and railcars in the normal course of business, fewer purchased railcars and the continued strategic use of capital spending to enhance overall liquidity and cash management.

Capital expenditures of $71.8 million for 2021 on property, plant and equipment includes: Trade - $17.8 million; Renewables - $28.5 million; Plant Nutrient - $21.6 million; and $3.8 million in Other.

We expect to invest approximately $100 to $125 million in property, plant and equipment in 2022; approximately 60% of which will be to maintain current facilities.

Financing Arrangements

Net cash used in financing activities was $248.8 million in 2021, compared to $136.3 million provided in 2020. This change from the prior year was largely due to the Company's continued strategic effort to pay down long-term debt which was accelerated with proceeds from the Rail Leasing sale.

As of December 31, 2021, the Company was party to borrowing arrangements with a syndicate of banks that provide a total short and long-term borrowing capacity of $1,345.8 million. This amount includes $20.0 million for ELEMENT and $130.0 million for TAMH, all of which are non-recourse to the Company and classified as long-term. There was $1,019.9 million available for borrowing at December 31, 2021. Typically, our highest borrowing occurs in the late winter and early spring due to seasonal inventory requirements in our fertilizer and grain businesses, however, rising commodity prices during the fourth quarter required more borrowing than the prior year. At December 31, 2021, we had standby letters of credit outstanding of $3.9 million.

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The Company paid $23.7 million in dividends in 2021 compared to $23.0 million in 2020. The Company paid $0.175 per common share for the dividends paid in January, April, July and October 2021, and $0.175 per common share for the dividends paid in January, April, July and October 2020. On December 16, 2021, the Company declared a cash dividend of $0.180 per common share, payable on January 21, 2022 to shareholders of record on January 3, 2022.

Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. We are in compliance with all such covenants as of December 31, 2021. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities. Our non-recourse long-term debt is collateralized by ethanol plant assets.

Because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high commodity prices and/or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, we receive a return of cash.

We believe our sources of liquidity will be adequate to fund our operations, capital expenditures and payments of dividends in the foreseeable future.

Contractual Obligations

Long-term Debt

As of December 31, 2021, the Company had outstanding recourse and non-recourse long-term debt with both floating and fixed-rates of varying maturities for an aggregate principal amount outstanding of $560.2 million and $72.6 million, respectively. $24.7 million and $7.6 million of the outstanding principal of the recourse and non-recourse long-term debt is payable within 12 months. See Note 4 to the Consolidated Financial Statements for additional information.

Future interest payments associated with the recourse long-term debt total $92.5 million, with $14.4 million payable within 12 months. Future interest payments associated with the non-recourse long-term debt total $9.1 million, with $2.4 million payable within 12 months.

Operating Leases

The Company has lease arrangements for certain equipment and facilities, including grain facilities, fertilizer facilities and equipment. As of December 31, 2021, the Company had fixed operating lease payment obligations of $53.8 million, with $20.6 million payable within 12 months. See Note 13 to the Consolidated Financial Statements for additional information.

Commodity Purchase Obligations

The Company enters into forward purchase contracts of commodities with producers through the normal course of business. These forward purchase contracts are largely offset by forward sales contracts of commodities and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts. As of December 31, 2021, the Company had forward purchase contracts of $4,488.5 million, with $4,383.7 million payable within 12 months. See Note 5 to the Consolidated Financial Statements for additional information.

Retiree Healthcare & Pension Programs

The Company has both a postretirement health care benefit plan and a noncontributory defined benefit pension plan. The postretirement health care benefit plan covers substantially all of its full-time employees hired prior to January 1, 2003 and pension benefits were frozen at July 1, 2010. Obligations under the retiree healthcare programs are not fixed commitments and will vary depending on multiple factors, including the level of participant utilization and inflation. Our estimates of postretirement payments have considered recent payment trends and actuarial assumptions. As of December 31, 2021, the Company had outstanding benefit obligations of $24.8 million, with $1.6 million payable within 12 months.

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Off-Balance Sheet Transactions

Industrial Revenue Bonds

On December 3, 2019, the Company closed an industrial revenue bond transaction with the City of Colwich, Kansas (the "City") in order to receive a 20-year real property tax abatement on our renovated and newly-constructed ELEMENT ethanol facility. Pursuant to this transaction, the City issued a principal amount of $166.1 million of its industrial revenue bonds to the Company and then used the proceeds to purchase the land and facility from the Company. The City then leased the facilities back to the Company under a finance lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds. Subsequent to the issuance of the bonds, the Company redeemed $165.1 million of the bonds, leaving $1.0 million issued and outstanding. Our obligation to pay rent under the lease is in the same amount and due on the same date as the City’s obligation to pay debt service on the bonds which we hold. The lease permits the Company to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled. The bonds' maturity date is 2029, at which time the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred. We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets. Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the finance lease obligation with the bond asset. No amount for our obligation under the finance lease is reflected on our Consolidated Balance Sheets, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 14 to the Consolidated Financial Statements).

Critical Accounting Estimates

The process of preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Management evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical experience and management's knowledge and understanding of current facts and circumstances. Actual results, under conditions and circumstances different from those assumed, may change from these estimates.

Certain of our accounting estimates are considered critical, as they are important to the depiction of the Company's financial statements and/or require significant or complex judgment by management. There are other items within our financial statements that require estimation, however, they are not deemed critical as defined above. Note 1 to the Consolidated Financial Statements in Item 8 describes our significant accounting policies which should be read in conjunction with our critical accounting estimates.

Management believes that the accounting for readily marketable inventories and commodity derivative contracts, including adjustments for counterparty risk, uncertain tax positions, impairment of long-lived assets, goodwill and equity method investments and business combinations involve significant estimates and assumptions in the preparation of the Consolidated Financial Statements.

Readily Marketable Inventories and Derivative Contracts

Readily Marketable Inventories ("RMI") are stated at their net realizable value, which approximates fair value based on their commodity characteristics, widely available markets, and pricing mechanisms. The Company marks to market all forward purchase and sale contracts for commodities and ethanol, over-the-counter commodity and ethanol contracts, and exchange-traded futures and options contracts. The overall market for commodity inventories is very liquid and active; market value is determined by reference to prices for identical commodities on regulated commodity exchange (adjusted primarily for transportation costs); and the Company's RMI may be sold without significant additional processing. The Company uses forward purchase and sale contracts and both exchange traded and over-the-counter contracts (such as derivatives generally used by the International Swap Dealers Association). Management estimates fair value based on exchange-quoted prices, adjusted for differences in local markets, as well as counter-party non-performance risk in the case of forward and over-the-counter contracts. The amount of risk, and therefore the impact to the fair value of the contracts, varies by type of contract and type of counterparty. With the exception of specific customers thought to be at higher risk, the Company looks at the contracts in total, segregated by contract type, in its quarterly assessment of non-performance risk. For those customers that are thought to be at higher risk, the Company makes assumptions as to performance based on past history and facts about the current situation. Changes in fair value are recorded as a component of Cost of sales and merchandising revenues in the Statement of Operations.

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Impairment of Long-Lived Assets, Goodwill, and Equity Method Investments

The Company's business segments are each highly capital intensive and require significant investment. Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. This is done by evaluating the recoverability based on undiscounted projected cash flows, excluding interest. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group's carrying amount exceeds its fair value.

Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below the operating segment. The quantitative review for impairment takes into account our estimates of future cash flows, as well as a market based approach. Our estimates of future cash flows are based upon a number of assumptions including operating costs, life of the assets, potential disposition proceeds, budgets and long-range plans. The Market based approach compares internal results public companies that reflect economic conditions and risks that are similar to the Company to calculate an estimated enterprise value. These factors are discussed in more detail in Note 17, Goodwill and Intangible Assets, to the Consolidated Financial Statements.

Our annual goodwill impairment test is performed as of October 1 each year which is discussed in further detail in Note 17 to the Consolidated Financial Statements.

In addition, the Company holds investments in several companies that are accounted for using the equity method of accounting. The Company reviews its investments to determine whether there has been a decline in the estimated fair value of the investment that is below the Company's carrying value which is other than temporary. Other than consideration of past and current performance, these reviews take into account forecasted earnings which are based on management's estimates of future performance as well as the market or other income approach to estimate fair value.

Management considers several factors to be significant when estimating fair value including expected financial outlook of the business, changes in the Company's stock price, the impact of changing market conditions on financial performance and expected future cash flows, the geopolitical environment and other factors. Deterioration in any of these factors may result in a lower fair value assessment, which could lead to impairment charges in the future. Specifically, actual results may vary from the Company's forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions could result in non-cash impairment charges.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to the future expected cash flows of the acquired company's operations, the assumptions regarding the attrition rates associated with customer relationships and the period of time non-compete agreements will continue, and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Uncertain Tax Positions

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior year audit settlements. To account for uncertainty in income taxes, the Company evaluates the likelihood of a tax position based on the technical merits of the position, performs a subsequent measurement related to the maximum benefit and degree of likelihood, and determines the benefits to be recognized in the financial statements, if any.

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