# Andersons, Inc. (ANDE) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Andersons, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/821026/000082102623000068/ande-20221231.htm
Accession: 0000821026-23-000068
Filing date: 2023-02-23
Report date: 2022-12-31
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/
Previous year: /company/ANDE/mda/fy2021/ (FY 2021)
Next year: /company/ANDE/mda/fy2023/ (FY 2023)

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 ongoing economic impacts from the war in Ukraine, 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 merchandising revenues and cost of sales and merchandising revenues and a much less significant impact on gross profit. As a result, changes in sales and merchandising revenues 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.

The Company has considered the potential impact of the book value of the Company’s total shareholders’ equity exceeded the Company’s market capitalization during the quarter for impairment indicators. Management ultimately concluded that an impairment triggering event had not occurred. The Company believes that the share price is not an accurate reflection of its current value as conditions are currently strong in the agriculture space with a positive long-term outlook. Management believes that the market’s impact on the Company’s equity value does not actually reflect the impact of these external factors on the Company. As a result of prior period tests, reviews of current operating results and other relevant market factors, the Company concluded that no impairment trigger existed as of December 31, 2022.

Management reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of an asset group may no longer be recoverable. This was the case in 2022 for the Company's 51% owned ELEMENT plant located in Colwich, Kansas. The plant faced a combination of high corn basis, increased natural gas prices and a rapid decline in Low Carbon Fuel Standards credit values, that negatively impacted operations. The adverse operating conditions led to a failure of a debt covenant during the year, as well as, a forecasted failure of another covenant within the next 12 months. Accordingly, it was deemed that a triggering event occurred as of September 30, 2022, related to the ELEMENT ethanol plant. Management performed a recoverability test of the ELEMENT plant’s long-lived assets as this is the lowest level of identifiable cash flows. The key assumptions used in the recoverability test included input costs (corn, natural gas, etc.), production days, and co-product premiums. Each of these inputs were given probability weightings based on management's assessment regarding the likelihood of the respective forecasts. Using future forecasted cash flows, the ELEMENT asset group passed its recoverability test on an undiscounted cash flow basis by 15% over the carrying value of its assets. Assumptions used in the model did not change materially during the fourth quarter. However, if there are changes to key assumptions in the analysis it is reasonably possible management's estimate that it will recover the carrying amount of these assets could change, even in the near term. See further discussion on ELEMENT developments subsequent to December 31, 2022, in Note 4 of the Consolidated Financial Statements.

The Andersons, Inc. | 2022 Form 10-K | 15

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Trade

The Trade segment's operating results improved from the prior year as the segment had a second consecutive record year. Both asset and merchandising businesses exceeded prior year results as they were able to successfully navigate global disruptions and a volatile market. Assets in the segment's core geography benefited from strong elevation margins, even seeing storage income return on wheat. Our merchandising business executed well, optimizing income across a broad portfolio. Our food and specialty ingredients business also delivered strong results in the year as they realized significant premiums on organic products.

Agricultural inventories on hand were 129.7 million and 187.0 million bushels at December 31, 2022, and December 31, 2021, respectively. These bushels consist of inventory held at company-owned or leased facilities, transload inventory, in-transit inventory, and third-party held inventory. Total Trade storage space capacity at company owned or leased facilities, including temporary pile storage, was approximately 183.6 million bushels at December 31, 2022, and 185.5 million bushels at December 31, 2021.

Looking forward, ag supply chain opportunities are expected to remain strong into 2023. Continued worldwide demand coupled with supply uncertainty due to the ongoing war in Ukraine and potential weather impacts in global grain production regions continues to keep commodity prices relatively high and provide ongoing merchandising opportunities.

Renewables

The Renewables segment results were significantly improved compared to the prior year due to the continued growth of the vegetable oil merchandising business and continued strength in co-product values with production margins in our ethanol plants decreasing slightly from the outsized prior year, particularly in the fourth quarter. Sales volumes for ethanol, corn oil, and feed ingredients were up, driven by higher production and additional third-party sales from the merchandising business. Also contributing to the improved results from the prior year was $17.6 million of USDA Biofuels Producer Program funds received during the year, of which, $8.9 million is included in Income before income taxes attributable to the Company.

Spot ethanol crush margins have declined into 2023 and are expected to seasonally move upward with driving demand. Corn oil demand is expected to remain high and merchandising of low-carbon-intensive renewable feedstocks should remain strong as additional renewable diesel facilities begin operations driving growth.

Volumes shipped for the years ended December 31, 2022 and December 31, 2021, were as follows:

[[GREPCENT_TABLE]]
[["","Twelve months ended December 31,"],["(in thousands)","2022","","2021"],["Ethanol (gallons shipped)","771,142","","","726,512"],["E-85 (gallons shipped)","38,980","","","41,572"],["Corn Oil (pounds shipped)","507,143","","","286,082"],["Dried Distillers Grain (tons shipped)","1,836","","","2,040"]]
[[/GREPCENT_TABLE]]

Plant Nutrient

The Plant Nutrient segment's 2022 operating results decreased slightly from the segment's record year in 2021. Ag Supply Chain and Specialty Liquids product lines experienced strong margins on well-positioned inventory in a market of rising fertilizer prices, which more than offset the reduction in volumes from the prior period. The Engineered Granules product lines recorded some inventory write-offs on lawn products, which negatively impacted the current year performance. Fourth quarter fertilizer price declines have likely shifted some demand from the fourth quarter of 2022 into 2023 as buyers anticipate prices to continue to decline. Strong farmer income and lower fertilizer prices are expected to drive higher volumes of agricultural fertilizers in the 2023 spring season, albeit at more normalized margins.

Total storage capacity at our Ag Supply Chain and Engineered Granules locations was approximately 448 thousand tons for dry nutrients and approximately 515 thousand tons for liquid nutrients at December 31, 2022, which is similar to the prior year.

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Tons of product sold for the years ended December 31, 2022 and December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","Twelve months ended December 31,"],["(in thousands)","2022","","2021"],["Ag Supply Chain","1,143","","","1,621"],["Specialty Liquids","338","","","410"],["Engineered Granules","360","","","453"],["Total tons","1,841","","","2,484"]]
[[/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 2021 compared to Fiscal 2020

For comparisons of the Company's consolidated and segment results of operations and consolidated cash flows for the fiscal years ended December 31, 2021 to December 31, 2020, 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, 2021, filed with the SEC on February 24, 2022.

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, 2022"],["(in thousands)","Trade","","Renewables","","Plant Nutrient","","Other","","Total"],["Sales and merchandising revenues","$","13,047,537","","","$","3,178,539","","","$","1,099,308","","","$","\u2014","","","$","17,325,384"],["Cost of sales and merchandising revenues","12,639,830","","","3,051,544","","","949,846","","","\u2014","","","16,641,220"],["Gross profit","407,707","","","126,995","","","149,462","","","\u2014","","","684,164"],["Operating, administrative and general expenses","282,592","","","30,730","","","106,003","","","47,231","","","466,556"],["Interest expense (income)","42,551","","","8,775","","","7,298","","","(1,775)","","","56,849"],["Other income (expense), net","12,661","","","20,731","","","3,001","","","(2,570)","","","33,823"],["Income (loss) before income taxes from continuing operations","95,225","","","108,221","","","39,162","","","(48,026)","","","194,582"],["Income before income taxes attributable to the noncontrolling interests","\u2014","","","35,899","","","\u2014","","","\u2014","","","35,899"],["Non-GAAP Income (loss) before income taxes attributable to the Company from continuing operations","$","95,225","","","$","72,322","","","$","39,162","","","$","(48,026)","","","$","158,683"]]
[[/GREPCENT_TABLE]]

The Andersons, Inc. | 2022 Form 10-K | 17

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[[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","","","$","12,612,050"],["Cost of sales and merchandising revenues","8,968,675","","","2,324,172","","","726,506","","","\u2014","","","12,019,353"],["Gross profit","335,682","","","116,626","","","140,389","","","\u2014","","","592,697"],["Operating, administrative and general expenses","259,926","","","31,019","","","95,547","","","45,581","","","432,073"],["Interest expense","23,688","","","7,602","","","4,355","","","1,647","","","37,292"],["Other income (expense), net","35,878","","","3,200","","","2,128","","","(3,768)","","","37,438"],["Income (loss) before income taxes from continuing operations","87,946","","","81,205","","","42,615","","","(50,996)","","","160,770"],["Income before income taxes attributable to the noncontrolling interests","\u2014","","","31,880","","","\u2014","","","\u2014","","","31,880"],["Non-GAAP Income (loss) before income taxes attributable to the Company from continuing operations","$","87,946","","","$","49,325","","","$","42,615","","","$","(50,996)","","","$","128,890"]]
[[/GREPCENT_TABLE]]

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 as 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, which is also presented in the table above.

Comparison of 2022 with 2021

Trade

Operating results for the Trade segment increased $7.3 million compared to prior year results. Sales and merchandising revenues increased $3,743.2 million and cost of sales and merchandising revenues increased by $3,671.2 million resulting in an increase in gross profit of $72.0 million. The increase to sales and merchandising revenues and cost of sales and merchandising revenues is mainly a result of new merchandising locations opened in the second half of 2021 as these new locations account for approximately 56% of the increase from the prior year, with the remainder of the increase a result of increased commodity prices and volumes in the existing business. The $72.0 million increase in gross profit was an even split between increases in both margins and volumes. The improved margins were driven by strong elevation margins and well-positioned animal feed ingredients and organic food and specialty inventories with the volume increases mainly attributable to new merchandising locations opened and acquired in the second half of 2021.

Operating, administrative and general expenses increased $22.7 million compared to prior year results. The increase from the prior year is primarily related to an additional $18.1 million of higher labor and benefits costs, with about half of the increase from business growth and half from wage inflation and increased incentive compensation from the strong operating results.

Interest expense increased $18.9 million from prior year primarily due to rising interest rates on the Company's short-term line of credit combined with higher borrowings with the addition of our new merchandising locations and increased commodity prices.

Other income decreased by $23.2 million in the current year and was primarily attributable to the prior year sale of a grain asset in Champaign, Illinois in which the Company recorded a $14.6 million gain. Also contributing to the decrease was one of the Company's equity method investments being $10.7 million more favorable in the prior year. Included in this decrease from the prior year was an impairment on this investment of $4.5 million in 2022.

The Andersons, Inc. | 2022 Form 10-K | 18

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Renewables

The Renewables segment had a strong year operationally as Income before income taxes attributable to the Company increased $23.0 million from the prior year. Sales and merchandising revenues increased $737.7 million and cost of sales and merchandising revenues increased $727.4 million compared to the prior year. As a result, gross profit increased by $10.4 million. The vast majority of the increase to sales and merchandising revenues and cost of sales and merchandising revenues is the result of increased ethanol and corn commodity prices as ethanol volumes sold only slightly increased from the prior year. The main driver of the increased gross profit was an improvement from the Company's growing renewable diesel feedstocks merchandising business as gross profit from that business increased $10.0 million from the prior year. The Company also had unrealized mark-to-market adjustments adding approximately $6.5 million to gross profit that were partially offset by a reduction of gross profit from the ethanol plants of $2.6 million as the plants did not experience the outsized crush margins that occurred in the prior year.

Other income increased by $17.5 million from prior year as a result of $17.6 million in proceeds received as a part of the USDA Biofuel Producer Program that was enacted as a part of the CARES Act, of which approximately $8.7 million of these proceeds were attributable to the noncontrolling interest.

Plant Nutrient

The Plant Nutrient segment had a decrease of $3.5 million in operating results when compared to the record results of the prior year. Sales and merchandising revenues increased $232.4 million and cost of sales and merchandising revenues increased $223.3 million resulting in increased gross profit of $9.1 million from the prior year. The increase in sales and merchandising revenues and cost of sales and merchandising revenues was due a significant appreciation of fertilizer prices from the prior year. This increase in fertilizer prices from the prior year was partially offset by a decrease in demand as volumes sold decreased by approximately 25%. Gross profit improved year-over-year due to increased margins on well-positioned inventory from the prior year representing a $43.4 million margin difference that was partially offset by a $34.3 million decrease in margins directly correlated with the reduced sales volumes. Ag Supply Chain led the way in 2022 with a $9.2 million increase in gross profit as a result of strong margins from well-positioned inventory in a tight supply market.

Operating, administrative and general expenses increased $10.5 million from the prior year. The vast majority of this increase is due to inflationary pressures on the business, with labor costs being the single biggest driver.

Interest expense increased $2.9 million from higher interest rates in the current year.

Other

Results improved by $3.0 million from the prior year. This improvement from the prior year was mainly due to $3.4 million of stranded costs from the sale of our Rail Leasing business being held in Corporate in the prior year.

Income Taxes

In 2022, the Company recorded Income tax expense from continuing operations of $39.6 million. The Company's effective rate for 2022 was 20.4% on Income before income taxes from continuing operations of $194.6 million. The difference between the 20.4% 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, derivative instruments and hedging activities and the effect of non-controlling interest offset by state and local income taxes, nondeductible compensation, and changes in unrecognized tax benefits.

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 income 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 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.

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The Company’s subsidiary partnership returns are under federal tax examination by the Internal Revenue Service (“IRS”) for the tax years 2015 through 2018, respectively. The Company’s subsidiary is under federal tax examination by the Mexican tax authorities for tax year 2015. The IRS and Mexican tax authorities’ examinations could potentially be resolved within the next 12 months. The resolution of these examinations could change our unrecognized tax benefits and favorably impact income tax expense by a range of $6.4 million to $20.3 million.

Liquidity and Capital Resources

Working Capital

At December 31, 2022, the Company had working capital from continuing operations of $941.8 million, an increase of $40.9 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, 2022","","December 31, 2021","","Variance"],["Current Assets from Continuing Operations:"],["Cash and cash equivalents","$","115,269","","","$","216,444","","","$","(101,175)"],["Accounts receivable, net","1,248,878","","","835,180","","","413,698"],["Inventories","1,731,725","","","1,814,538","","","(82,813)"],["Commodity derivative assets \u2013 current","295,588","","","410,813","","","(115,225)"],["Other current assets","71,622","","","74,468","","","(2,846)"],["Total current assets from continuing operations","3,463,082","","","3,351,443","","","111,639"],["Current Liabilities from Continuing Operations:"],["Short-term debt","272,575","","","501,792","","","(229,217)"],["Trade and other payables","1,423,633","","","1,199,324","","","224,309"],["Customer prepayments and deferred revenue","370,524","","","358,119","","","12,405"],["Commodity derivative liabilities \u2013 current","98,519","","","128,911","","","(30,392)"],["Current maturities of long-term debt","110,155","","","32,256","","","77,899"],["Accrued expenses and other current liabilities","245,916","","","230,148","","","15,768"],["Total current liabilities from continuing operations","2,521,322","","","2,450,550","","","70,772"],["Working Capital from Continuing Operations","$","941,760","","","$","900,893","","","$","40,867"]]
[[/GREPCENT_TABLE]]

Current assets from continuing operations increased $111.6 million in comparison to prior year. This increase was attributable to the increase in accounts receivable as all other current asset accounts decreased from the prior year. The main driver behind the substantial increase in receivables is the addition of the growing international merchandising business along with the timing of some large vessel shipments from our U.S. port facilities. See also the discussion below on additional sources and uses of cash for an understanding of the decrease in cash from prior year.

Current liabilities from continuing operations increased $70.8 million compared to the prior year primarily due to increases in current maturities of long-term debt. This was driven by a reclassification of the long-term non-recourse debt associated to the ELEMENT ethanol plant to current maturities of long-term debt in the current year. There was a large increase in trade payables from the addition of the growing international merchandising business that was offset by a similar decrease in short-term debt as commodity prices stabilized toward the end of the current year.

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Sources and Uses of Cash in 2022 Compared to 2021

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["(in thousands)","","December 31, 2022","","December 31, 2021"],["Net cash provided by (used in) operating activities","","$","287,117","","","$","(51,050)"],["Net cash (used in) provided by investing activities","","(52,902)","","","487,248"],["Net cash used in financing activities","","(334,730)","","","(248,769)"]]
[[/GREPCENT_TABLE]]

Operating Activities and Liquidity

Our operating activities provided cash of $287.1 million in 2022 compared to cash used in operations of $51.1 million in 2021. The increase in cash provided by operating activities was primarily due to increased operating results and a decrease in the cash used through working capital changes. However, when removing the impact from changes in operating assets and liabilities, taxes paid on the Rail Leasing sale in the prior year and the timing of CARES Act tax refunds cash provided by operating activities exceeded the prior year.

Net income taxes of $88.7 million and $51.7 million were paid in the years ended December 31, 2022 and 2021, respectively. The increase in the current year is driven by the increased Income before income taxes from continuing operations combined with the taxable gain associated with the sale of the remaining pieces of the Company's Rail segment in 2022.

Investing Activities

Investing activities used cash of $52.9 million in the current year compared to $487.2 million provided in the prior year. The significant change from the prior year was mainly driven by approximately $500 million more net proceeds from the sale of discontinued operations received in the prior year. Additional contributing factors to the change from the prior year were higher amounts of purchases of property, plant and equipment combined with additional spending on business acquisitions.

Capital expenditures of $108.3 million for 2022 on property, plant and equipment includes: Trade - $29.4 million; Renewables - $42.7 million; Plant Nutrient - $34.7 million; and $1.4 million in Other.

We expect to invest approximately $125 to $150 million in property, plant and equipment in 2023; approximately 60% of which will be to maintain current facilities.

Financing Arrangements

Net cash used in financing activities was $334.7 million in 2022, compared to $248.8 million used in 2021. The increase in cash used in financing activities from the prior year was due to several factors. First, the Company made distributions of approximately $44.9 million to the non-controlling interest shareholder of TAMH due to the strength of the financial results in both 2021 and 2022. The Company also continued to pay down both long and short-term debt in the current year which resulted in additional cash of $17.7 million used. Lastly, the Company also began to repurchase common shares under its Repurchase Plan where $100 million of repurchases were authorized to be repurchased on or before August 20, 2024. As of December 31, 2022, approximately $12.7 million of the Repurchase Plan had been utilized, with all of these repurchases being made in the year ended December 31, 2022.

As of December 31, 2022, the Company was party to borrowing arrangements with a syndicate of banks that provide a total borrowing capacity of $1,990.8 million. There was $1,659.6 million available for borrowing at December 31, 2022. Typically, the Company's highest borrowing occurs in the late winter and early spring due to seasonal inventory requirements in the fertilizer and grain businesses. At December 31, 2022, the Company had standby letters of credit outstanding of $38.6 million.

The Company paid $24.6 million in dividends in 2022 compared to $23.7 million in 2021. The Company paid $0.180 per common share for the dividends paid in January, April, July and October 2022, and $0.175 per common share for the dividends paid in January, April, July and October 2021. On December 16, 2022, the Company declared a cash dividend of $0.185 per common share, payable on January 20, 2023, to shareholders of record on January 3, 2023.

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Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of working capital and a minimum ratio of owner's equity. The Company has concluded as of December 31, 2022, that within the next twelve months ELEMENT is virtually certain to be out of compliance for an owner's equity ratio covenant in relation to the $63.3 million non-recourse credit agreement associated with the ELEMENT operations. As such, the Company classified the total $63.3 million of non-recourse debt under the ELEMENT credit agreement as a current maturity of long-term debt as of December 31, 2022. Additionally, ELEMENT did not make a required debt payment in February 2023 and subsequently received a default notice from the lender on February 17, 2023. Subsequent to year end, the Company began to consider various strategies related to the investment. The Company is in compliance with all covenants as of December 31, 2022. In addition, certain of our recourse long-term borrowings are collateralized by first mortgages on various facilities. Our non-recourse long-term debt that is currently classified in current maturities of long-term debt as described above, is collateralized by ELEMENT 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 additional margin deposits on the Company's exchange traded futures contracts. Conversely, in periods of declining prices, the Company would receive a return of cash.

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

Contractual Obligations

Long-term Debt

As of December 31, 2022, 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 $541.4 million and $64.2 million, respectively. $46.3 million and $63.8 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 $165.6 million, with $28.1 million payable within 12 months. Substantially all of the future interest payments associated with the non-recourse long-term debt is related to the $63.3 million non-recourse credit agreement associated with the ELEMENT operations that has been classified as a current maturity of long-term debt as of December 31, 2022, for the reasons described above. See Note 4 to the Consolidated Financial Statements for additional information.

Operating Leases

The Company has lease arrangements for certain equipment and facilities, including grain facilities, fertilizer facilities and equipment. As of December 31, 2022, the Company had fixed operating lease payment obligations of $67.5 million, with $28.1 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, 2022, the Company had forward purchase contracts of $4,866.5 million, with $4,757.3 million payable within 12 months. See Note 5 to the Consolidated Financial Statements for additional information.

Postretirement Healthcare Program

The Company has a postretirement health care benefit plan that covers substantially all of its full-time employees hired prior to January 1, 2003. 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, 2022, the Company had outstanding benefit obligations of $17.4 million, with $1.3 million payable within 12 months. See Note 6 to the Consolidated Financial Statements for additional information.

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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 the 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. Land and buildings are recorded as assets in Property, plant, and equipment, net, on the 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 the Consolidated Balance Sheets, nor do we reflect an amount for the corresponding industrial revenue bond asset. See Note 14 to the Consolidated Financial Statements for additional information.

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 Consolidated Financial Statements and/or require significant or complex judgment by management. There are other items within the Company's Consolidated 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 the Company's 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, impairment of long-lived assets, goodwill and equity method investments, and uncertain tax positions 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 counterparty 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 Consolidated Statements 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 results of 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.

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 Consolidated Financial Statements, if any.

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