THE ANDERSONS, INC. 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 four reportable business segments: Trade, Ethanol, Plant Nutrient, and Rail. 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. The Company has considered the potential impact of the book value of the Company's total shareholders' equity exceeding the Company's market capitalization for impairment indicators. Management ultimately concluded that, while the Company's shareholders equity exceeded the market capitalization for the period, an impairment triggering event had not occurred. The Company continues to believe that the share price is not an accurate reflection of its current value. While adverse conditions are currently present and pervasive in the agriculture space during this time, the long-term outlook remains positive and management believes that the market's impact on the Company's equity value does not accurately reflect the impact of these external factors on the Company. As a result of prior period and annual impairment tests, reviews of current operating results and other relevant market factors, the Company concluded that no impairment trigger existed as ofDecember 31, 2020 . However, continuing adverse market conditions or alternative management decisions on operations may result in future impairment considerations.
Recent Developments
For fiscal year 2020, the global emergence of COVID-19 has had a significant
impact on the global economy, including several industries in which the Company
operates. Government-mandated stay-at-home orders and other public health
mandates and recommendations, as well as behavioral changes in response to the
pandemic, have reduced demand for gasoline, ethanol and corn. The reduced demand
coupled with a general economic downturn has negatively impacted our Trade,
Ethanol and Rail Groups. 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.
20--------------------------------------------------------------------------------
Table of Contents
The Company is a critical infrastructure industry as defined byThe United States Department of Homeland Security ,Cybersecurity and Infrastructure Agency , in itsMarch 19, 2020 Memorandum. 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 includingHealth Canada , theU.S. Centers for Disease Control and Prevention , and theWorld 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. Management has observed many other companies, including those in our supply chain, taking precautionary and preemptive actions to address the COVID-19 pandemic, and companies may take further actions that alter their normal business operations. 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 an increase in merchandising activity, however, this increase was offset by year over year reductions in income as it pertains to its grain elevator asset and food and specialty ingredients businesses. The reduction in income from the grain elevator asset business was driven by the weak 2019 harvest carryover in the Eastern Corn Belt assets and lower wheat opportunities. Additionally, the food and specialty ingredients business netted lower results that were driven by higher freight costs and lower volumes, a portion of which was due to the impact COVID-19 had on the restaurant industry. Total grain storage capacity, including temporary pile storage, was approximately 202.1 million bushels as ofDecember 31, 2020 and 206.6 million bushels as ofDecember 31, 2019 . Commodity inventories on hand atDecember 31, 2020 were 142.8 million bushels, of which 3.0 million bushels were stored for others. This compares to 152.8 million bushels on hand atDecember 31, 2019 , of which 6.4 million bushels were stored for others. Looking forward, the 2020 corn and soybean harvest improved in the Eastern Corn Belt compared to the prior year. Further, export demand has been robust, especially fromChina , which is expected to continue into the first quarter of 2021. These conditions have led to a significant increase in basis, strong elevation margins and considerable volatility, which will create merchandising opportunities. Nearby futures prices have continued to rally, creating an inverse in corn and soybean markets. If those conditions persist, they will diminish the opportunity to earn storage income through the first part of 2021. As a result of these factors, the current outlook for theTrade Group is stronger on merchandising but reserved on income from storing grain.
Ethanol
The Ethanol Group's results were significantly impacted by the COVID-19 pandemic as the lack of driving demand created a surplus of both oil and ethanol which drove margins negative for the better part of the year. The reduction in income from the prior year was also attributable to a large one time gain as a result of the TAMH merger. As we move into 2021,theEthanol Group expects continued margin headwinds from a current unbalanced supply of ethanol and a high corn basis and futures price. These challenges may continue while oil and gasoline demands remain low as a result of the COVID-19 pandemic. Fortunately, the high corn prices are improving coproducts sales as we are able to sell products such as DDGs and corn oil at higher values. 21
--------------------------------------------------------------------------------
Table of Contents
Volumes shipped for the years endedDecember 31, 2020 andDecember 31, 2019 were as follows: Twelve months ended December 31, (in thousands) 2020 2019 Ethanol (gallons shipped) 592,738 542,146 E-85 (gallons shipped) 27,321 47,708 Corn Oil (pounds shipped) 117,563 48,702 DDG (tons shipped)* 1,850 1,846 * DDG tons shipped converts wet tons to a dry ton equivalent amount. Prior year DDG tons shipped were recast from theTrade Group to theEthanol Group . See Note 12 in the Consolidated Financial Statements for further details of the recast. The above table shows only shipped volumes that flow through the Consolidated Financial Statements of the Company. As the Company merged its former unconsolidated LLCs into the consolidated TAMH entity in the fourth quarter of 2019, these consolidated volumes are now included for the fourth quarter of 2019 and the 2020 amounts above. Total ethanol, DDG, and corn oil production by the unconsolidated LLCs in 2019 was actually higher than disclosed above. However, the portion of this volume that was sold from the unconsolidated LLCs directly to their customers for the nine months endedSeptember 30, 2019 is excluded here.
Plant Nutrient
The Plant Nutrient Group's results increased year-over-year due to favorable planting conditions in both the Spring and Fall application seasons compared to the wet and compressed planting season in 2019. 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 businesses was approximately 463 thousand tons for dry nutrients and approximately 509 thousand tons for liquid nutrients atDecember 31, 2020 , which is similar to the prior year.
At
Looking forward, the group expects continued improvement in 2021 assuming continued higher commodity prices and another strong planting season.
Tons of product sold for the years endedDecember 31, 2020 andDecember 31, 2019 were as follows: Twelve months ended December 31, (in thousands) 2020 2019 Ag Supply Chain 1,585 1,312 Specialty Liquids 351 333 Engineered Granules 416 410 Total tons 2,352 2,055 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. and a variety of corncob-based products. 22
--------------------------------------------------------------------------------
Table of Contents
Rail
The Rail segment's results were lower than the prior year. The reduction in earnings was driven by lower average lease rates, lower North American railcar loadings, a reduction in car sales and certain customer defaults particularly in the sand and ethanol markets. The average utilization rate (Rail assets under management that are in lease service, exclusive of those managed for third-party investors) was 88.1% for the year endedDecember 31, 2020 which was 4.3% lower than the prior year. Rail assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) atDecember 31, 2020 were 23,232 compared to 24,884 atDecember 31, 2019 . The COVID-19 pandemic caused the idling of nearly one-third of the North American railcar fleet at one point during the year and has driven year-to-date railcar loadings lower year over year. While we have seen modest improvements in railcar loadings and fewer idled cars, the recovery in 2021 may be slow. Lease rates are expected to stay relatively flat until later into the year.
Other
The Company's "Other" represents corporate functions that provide support and services to the operating segments. The results contained within this group include expenses and benefits not allocated back to the operating segments, including a portion of our ongoing ERP costs.
Results for Fiscal 2019 compared to Fiscal 2018
For comparisons of the Company's consolidated and segment results of operations and consolidated cash flows for the fiscal years endedDecember 31, 2019 toDecember 31, 2018 , 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 endedDecember 31, 2019 , filed with theSEC onFebruary 27, 2020 . 23
--------------------------------------------------------------------------------
Table of Contents
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.
Year ended December 31, 2020
(in thousands) Trade Ethanol Plant Nutrient Rail Other Total
Sales and merchandising revenues
$ 662,959 $ 143,816 $ -$ 8,208,436 Cost of sales and merchandising revenues 5,863,186 1,278,526 556,711 105,091 - 7,803,514 Gross profit 278,216 (18,267) 106,248 38,725 - 404,922 Operating, administrative and general expenses 244,147 24,405 85,702 21,512 23,441
399,207
Interest expense (income) 21,974 7,461 5,805 17,491 (1,456)
51,275
Equity in earnings (losses) of affiliates, net 638 - - - - 638 Other income (expense), net 11,954 2,795 1,274 2,885 1,540 20,448 Income (loss) before income taxes 24,687 (47,338) 16,015 2,607 (20,445)
(24,474)
Income (loss) before income taxes attributable to the noncontrolling interests - (21,925) - - -
(21,925)
Non-GAAP Income (loss) before income taxes, attributable to the Company$ 24,687 $ (25,413) $ 16,015 $ 2,607 $ (20,445) $ (2,549) Year ended December 31, 2019 (in thousands) Trade Ethanol Plant Nutrient Rail Other
Total
Sales and merchandising revenues
$ 646,730 $ 166,938 $ -$ 8,170,191 Cost of sales and merchandising revenues 5,815,430 1,179,430 547,626 109,813 - 7,652,299 Gross profit 329,096 32,567 99,104 57,125 - 517,892 Operating, administrative and general expenses 276,280 20,639 84,719 27,132 28,072 436,842 Asset impairment 38,536 - 2,175 - 501 41,212 Interest expense (income) 34,843 943 7,954 16,486 (535)
59,691
Equity in earnings (losses) of affiliates, net (6,835) (524) - - - (7,359) Other income (expense), net 10,070 37,199 4,903 1,583 1,568 55,323 Income (loss) before income taxes (17,328) 47,660 9,159 15,090 (26,470)
28,111
Income (loss) before income taxes attributable to the noncontrolling interests - (3,247) - - -
(3,247)
Non-GAAP Income (loss) before income taxes, attributable to the Company$ (17,328) $ 50,907 $ 9,159$ 15,090 $ (26,470) $ 31,358 The Company uses Non-GAAP Income (loss) before income taxes, attributable to the Company, a non-GAAP financial measure as defined by theSecurities and Exchange Commission , to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted inthe 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 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, the most directly comparable amount reported under GAAP. 24
--------------------------------------------------------------------------------
Table of Contents Comparison of 2020 with 2019 Trade Operating results for theTrade Group increased$42.0 million compared to prior year reported results, which included$38.5 million of asset impairments and$8.0 million of acquisition related costs. Sales and merchandising revenues decreased$3.1 million compared to prior year. While the sales and merchandising revenue balances were comparable year over year, cost of sales and merchandising revenues increased by$47.8 million resulting in a decrease in gross profit of$50.9 million . The decreased gross profit compared to the prior year was due to a reduction of$36.4 million in our grain assets business from the carryover effects of a weak 2019 harvest in our Eastern Corn Belt assets and lower wheat carries combined with a$15.2 million reduction in gross profit related to the shutdown of many of our sand facilities. This was partly offset by stronger merchandising results. Operating, administrative and general expenses decreased$32.1 million compared to prior year results. Labor and benefits expenses were lower due to headcount reductions from cost cutting initiatives and the strategic divestiture of certain businesses. Depreciation expense was also lower due to divestitures and impairments of certain asset groups. Additionally, a reduction of$5.1 million for acquisition-related stock compensation did not recur in 2020.The Trade Group recorded asset impairment charges of$38.5 million in 2019. The prior year asset impairment charges include a$34.8 million impairment of the Company's Frac Sand business following a fundamental shift in the operating environment in the areas we are located and a$3.7 million charge related to the Company'sTennessee assets, as it disposed of its remaining assets in this region. No such impairments occurred in the current year.
Interest expense decreased
Equity in earnings of affiliates were$0.6 million in the current year. This resulted in an increase of$7.5 million as compared to the prior year. This was due to a loss of$2.5 million and an other-than-temporary impairment charge of approximately$5.0 million from an investment in 2019.
Ethanol
Operating results for theEthanol Group decreased$76.3 million from the prior year. Sales and merchandising revenues increased$48.3 million due to increased volumes resulting primarily from the ELEMENT plant inColwich, Kansas which commenced operations in the second half of 2019 and cost of sales and merchandising revenues increased$99.1 million compared to the prior year. As a result, gross profit decreased by$50.8 million from significantly lower margins and mark-to-market losses as higher corn prices outpaced ethanol price increases. The lower, and often negative, margins were a direct result of the decreased demand resulting from the COVID-19 pandemic. Operating, administrative and general expenses increased$3.8 million from the prior year due to the first full year of ELEMENT operations, and the impact of the TAMH merger inOctober 2019 . Prior to the merger, the Company's share of operating, administrative and general expenses would have been recognized in equity earnings. This increase was partially offset by lower labor and incentive compensation costs from cost cutting initiatives.
Interest expense increased
Other income, net decreased by$34.4 million from the prior year as a result of a$35.2 million gain on the pre-existing equity method investments that were given as consideration in the 2019 TAMH merger. 25
--------------------------------------------------------------------------------
Table of Contents
Plant Nutrient
Operating results for Plant Nutrient increased$6.9 million compared to the prior year. Sales and merchandising revenues increased$16.2 million and cost of sales and merchandising revenues increased$9.1 million from increases in volumes from more normal planting conditions. The increases in volumes were slightly offset by lower margins as raw material prices increased. These factors led to an increased gross profit of$7.1 million from the prior year. Operating, administrative and general expenses increased$1.0 million primarily due to higher labor and benefits due to increased overtime and incentive compensation. This was largely offset by lower depreciation from reductions in capital spending and the lack of nonrecurring impairment charges from the prior year.
Interest expense decreased
Rail
Operating results for Rail decreased$12.5 million from the prior year. Sales and merchandising revenues decreased$23.1 million and cost of sales and merchandising revenues decreased$4.7 million compared to prior year results. The decreased revenues were driven by a decrease of$15.3 million in leasing revenues due to lower utilization rates with fewer cars on lease and a decrease of$7.8 million in car sale revenues as the Company sold more cars in 2019. Operating, administrative and general expenses decreased$5.6 million due to lower incentives, cost cutting initiatives and more efficient labor costs within the repair business.
Interest expense increased
Other income increased
Other Operating, administrative and general expenses decreased$4.6 million due to headcount reductions, lower incentive compensation and other cost cutting initiatives. Severance related expense of$6.1 million associated with the departure of certain executive officers and key employees is also included in 2020 results. Income Taxes In 2020, the Company recorded income tax benefit of$10.3 million at an effective rate of 41.9%. In 2019, the Company recorded income tax expense of$13.1 million at an effective tax rate of 46.4%. The change in effective tax rate compared to the same period last year was primarily attributed to the tax benefit generated from the current period loss before taxes offset by the effect of non-controlling interest and derivatives instruments and hedging activities, along with the additional benefits from net operating loss carrybacks as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. 26
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Working Capital
At
December 31, December 31,
(in thousands) 2020 2019 Variance
Current Assets:
Cash, cash equivalents and restricted cash $ 29,123 $ 54,895 $ (25,772)
Accounts receivable, net 659,834 536,367 123,467
Inventories 1,300,693 1,170,536 130,157
Commodity derivative assets - current 320,706 107,863 212,843
Other current assets 106,053 75,681 30,372
Total current assets 2,416,409 1,945,342 471,067
Current Liabilities:
Short-term debt 403,703 147,031 256,672
Trade and other payables 957,683 873,081 84,602
Customer prepayments and deferred revenue 180,160 133,585 46,575
Commodity derivative liabilities - current 146,990 46,942 100,048
Accrued expenses and other current liabilities 167,671 176,381 (8,710)
Current maturities of long-term debt 75,475 62,899 12,576
Total current liabilities 1,931,682 1,439,919 491,763
Working capital $ 484,727 $ 505,423 $ (20,696)
December 31, 2020 current assets increased $471.1 million in comparison to prior
year. The increase was noted in all asset categories except cash. The increases
in accounts receivable and inventory balances can largely be attributable to
higher commodity prices. Current commodity derivative assets and liabilities,
which reflect customers net assets or liabilities based on the value of forward
contracts as compared to market prices at the end of the period, show a net
increase. The increase in other current assets is due to significant prepaid
federal income taxes as a result of the CARES Act. 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 increased $491.8 million compared to the prior year largely
due to an increase in short-term debt, trade and other payables and commodity
derivative liabilities as a result of higher commodity prices.
Sources and Uses of Cash 2020 compared to 2019
Operating Activities and Liquidity
Our operating activities used cash of$74.4 million in 2020 compared to cash provided by operations of$348.6 million in 2019. The increase in cash used was primarily due to increases in working capital accounts driven by higher commodity prices, as discussed above, and lower operating results.
Net income taxes of
Investing Activities Investing activities used$86.8 million in 2020 compared to$325.0 million used in 2019. In addition to the significant cash used for the acquisition ofLansing Trade Group in 2019 the remaining decrease was largely driven by the Company's strategic focus on reduced capital spending to conserve cash as a result of the impacts of COVID-19 in conjunction with efforts to pay down long-term debt. Cash used for the purchases of property, plant, equipment, and capitalized software decreased$88.1 million primarily due to the previously mentioned strategic efforts as well as significant prior year costs associated with the construction of the bio-refinery facility in 2019. 27
--------------------------------------------------------------------------------
Table of Contents
Purchases of Rail assets were$27.7 million in the current year compared to$105.3 million in the prior year as the Company strategically reduced capital spending to focus on paying down long-term debt. Proceeds from the sale of Rail assets were$10.1 million in 2020 and$18.1 million in 2019. The decrease is primarily due to fewer railcar portfolio sales. As such, net spend on Rail assets decreased$69.5 million compared to the prior year.
Capital spending of
Proceeds from the sale of assets decreased$19.5 million . This was due to fewer dispositions as compared to the prior year which included a significant facility sale of$25.1 million which did not recur. We expect to invest approximately$100 to$125 million in property, plant and equipment in 2021; approximately 60% of which will be to maintain current facilities.
Financing Arrangements
Net cash provided by financing activities was$136.3 million in 2020, compared to$8.7 million in 2019. This was largely due to an increase in proceeds from short term debt for working capital needs as commodity prices increased significantly through the latter part of the year. The increase in short term borrowings was offset in part by reductions in long-term debt consistent with the Company's strategy to reduce long-term debt and achieving a targeted long-term debt-to-EBITDA ratio of less than 2.5 times by the end of 2023. As ofDecember 31, 2020 , the Company was party to borrowing arrangements with a syndicate of banks that provide a total short and long-term borrowing capacity of$1,374.2 million . This amount includes$20.0 million for ELEMENT and$197 million for TAMH, all of which are non-recourse to the Company. There was$868.4 million available for borrowing atDecember 31, 2020 . 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. The Company paid$23.0 million in dividends in 2020 compared to$22.1 million in 2019. The Company paid$0.175 per common share for the dividends paid in January, April, July andOctober 2020 , and$0.170 per common share for the dividends paid in January, April, July andOctober 2019 . OnDecember 17, 2020 , we declared a cash dividend of$0.175 per common share, payable onJanuary 20, 2021 to shareholders of record onJanuary 4, 2021 . 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 ofDecember 31, 2020 . In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized by ethanol plant assets and railcar 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.
28--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations
Future payments due under contractual obligations atDecember 31, 2020 are as follows: Payments Due by Period (in thousands) Less than 1 year 1-3 years 3-5 years After 5 years Total Long-term debt, recourse $ 69,037$ 122,208 $ 188,202 468,203$ 847,650 Long-term debt, non-recourse 6,438 27,110 85,372 32,479 151,399 Interest obligations (a) 25,245 44,466 32,185 44,107 146,003 Operating leases 21,262 25,087 7,785 7,067 61,201 Purchase commitments (b) 3,096,336 167,280 - - 3,263,616 Retiree healthcare programs (c) 2,324 3,118 3,044 27,947 36,433
Total contractual cash obligations
(a) Future interest obligations are calculated based on interest rates in effect as ofDecember 31, 2020 for the Company's variable rate debt and do not include any assumptions on expected borrowings, if any, under the short-term line of credit. (b) Includes the amounts related to purchase obligations in the Company's operating units, including$3,126.3 million for the purchase of grain from producers. There are also forward grain and ethanol sales contracts to consumers and traders and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts. See the narrative description of businesses for the Trade and Ethanol segments in Item 1 of this Annual Report on Form 10-K for further discussion. (c) Obligations under the retiree healthcare programs are not fixed commitments and will vary depending on various factors, including the level of participant utilization and inflation. Our estimates of postretirement payments have considered recent payment trends and actuarial assumptions.
At
Off-Balance Sheet Transactions
Our Rail segment utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease assets from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leasebacks. We also arrange non-recourse lease transactions under which we sell assets to a financial intermediary and assign the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, we generally provide ongoing maintenance and management services for the financial intermediary and receive a fee for such services. We have a total of 324 railcars that would be considered off-balance sheet atDecember 31, 2020 .
Industrial Revenue Bonds.
OnDecember 3, 2019 , we closed an industrial revenue bond transaction with theCity 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 us and then used the proceeds to purchase the land and facility from us. The City then leased the facilities back to us 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 us 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). 29 -------------------------------------------------------------------------------- Table of Contents 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.
Impairment of Long-Lived Assets,
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. 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. These factors are discussed in more detail in Note 17,Goodwill and Intangible Assets, to the Consolidated Financial Statements. 30
--------------------------------------------------------------------------------
Table of Contents
As part of the Company's on-going assessment of goodwill, management determined that in the first quarter a triggering event occurred due to the Company's reorganization whereby the Company combined its operations between the Trade and Ethanol segments to enhance operating decisions and assessing performance. OnJanuary 1, 2020 , the Company moved its Distillers Dried Grains ("DDG") business from the Trade to Ethanol segment. The reorganization resulted in the reassignment of goodwill to the affected reporting units using a relative fair value approach. As a result of the reassignment and allocation, the Company performed an interim review of the carrying value of goodwill at the Trade and Ethanol segments for possible impairment on both a pre and post-reorganization basis. No impairment of goodwill was indicated at the pre or post-reorganization reporting units. Further, due to the severe decline in ethanol prices, largely impacted by COVID-19 during the first quarter, management determined that a triggering event occurred within the Ethanol segment. Accordingly, an interim impairment test was performed over the Ethanol group's goodwill as well as its other intangible and long-lived assets. Based on the results of the impairment test, the Ethanol segment did not record an impairment charge. The results of the goodwill impairment test within the Ethanol group supported the calculated fair value exceeding the carrying values by greater than 20% at the time of the test. Our annual goodwill impairment test is performed as ofOctober 1st each year which is discussed in further detail in Note 17 to the Consolidated Financial Statements. As our market capitalization remained below our book value through the end of the year, we performed an update to our annual test whereby management reviewed market influences and any relevant changes in assumptions from our annual test. Based on the methodologies used it was determined that the Company's reporting units estimated fair values continued to exceed that of their carrying values. 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. During the year endedDecember 31, 2020 , the Company recognized tax benefits of$1.4 million forFederal Research and Development Credits ("R&D Credits") related to tax years 2015 to 2019. Unrecognized tax benefits of$44.4 million include$40.6 million recorded as a reduction of the deferred tax assets and refundable credits associated with the R&D Credits. 31
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
