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:
Twelve months ended December 31,
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:
Twelve months ended December 31,
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.
(in thousands) Trade Renewables Plant Nutrient Other Total
Equity in earnings of affiliates, net 4,842 — — — 4,842
(in thousands) Trade Renewables Plant Nutrient Other Total
Asset impairment — — — — —
Equity in earnings of affiliates, net 638 — — — 638
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.
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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:
Current Assets from Continuing Operations:
Current Liabilities from Continuing Operations:
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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 13to 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 5to 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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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices foreign currency exchange rates and interest rates as discussed below.
Commodity Prices
The Company's daily net commodity position consists of inventories, related purchase and sale contracts, exchange-traded futures, and over-the-counter contracts. The fair value of the position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices. The Company has established controls to manage and limit risk exposure, which consists of a daily review of position limits and effects of potential market price moves on those positions.
A sensitivity analysis has been prepared to estimate the Company's exposure to market risk of its net commodity futures position. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted market prices. The result of this analysis, which may differ from actual results, is as follows:
December 31,
Net long (short) commodity position $ 10,987 $ (14,093)
Foreign Currency
The Company has subsidiaries located outside the United States where the local currency is the functional currency. To reduce the risks associated with foreign currency exchange rate fluctuations, the Company enters into currency exchange contracts to minimize its foreign currency position related to transactions denominated primarily in the euro, British pound, Mexican peso and Canadian dollar. These currencies represent the major functional or local currencies in which recurring business transactions occur. The Company does not use currency exchange contracts as hedges against amounts indefinitely invested in foreign subsidiaries and affiliates. The currency exchange contracts used are forward contracts, swaps with banks, exchange-traded futures contracts, and over-the-counter options. The changes in market value of such contracts have a high correlation to the price changes in the currency of the related transactions. The potential loss in fair value for such net currency position resulting from a hypothetical 10% adverse change in foreign currency exchange rates is not material.
Interest Rates
The fair value of the Company's long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company's current incremental borrowing rates and credit ratings for similar types of borrowing arrangements. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:
December 31,
Fair value of long-term debt, including current maturities $ 650,765 $ 989,140
Fair value in excess of carrying value 13,795 26,289
Actual results may differ. The estimated fair value and market risk will vary from year to year depending on the total amount of long-term debt and the mix of variable and fixed rate debt.
Additionally, the Company may enter into interest rate swaps from time to time to manage our mix of fixed and variable interest rate debt effectively which may decrease market risk noted above. See Note 5 to the Consolidated Financial Statements for further discussion on the impact of these hedging instruments.
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Item 8. Financial Statements and Supplementary Data
The Andersons, Inc.
Index to Financial Statements
Page No.
Report of the Independent Registered Public Accounting Firm (PCAOB ID No. 34) 28
Consolidated Statements of Operations 30
Consolidated Statements of Comprehensive Income 31
Consolidated Balance Sheets 32
Consolidated Statements of Cash Flows 33
Consolidated Statements of Equity 34
Notes to Consolidated Financial Statements 35
Schedule II - Consolidated Valuation and Qualifying Accounts 83
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Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of The Andersons, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Andersons, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill—GSM and FSI Reporting Units—Refer to Notes 1 and 17 to the Consolidated Financial Statements
Critical Audit Matter Description
Goodwill is tested for impairment annually as of October 1, or more frequently if impairment indicators arise. The Company uses a one-step quantitative approach that compares the business enterprise value (BEV) of each reporting unit with its carrying value. The BEV was computed based on both an income approach (discounted cash flows) and a market approach. The income approach uses a reporting unit’s estimated future cash flows, discounted at the weighted-average cost of capital of a hypothetical third-party buyer. The market approach estimates fair value by applying cash flow multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting unit.
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The consolidated goodwill balance was $129.3 million as of December 31, 2021, of which $78.5 million and $41.3 million was allocated to the Grain Storage and Merchandising (GSM) and Food and Specialty Ingredients (FSI) reporting units, respectively. The BEV of the GSM and FSI reporting units exceeded its carrying values by 26% and 24%, respectively, as of October 1, 2021, and, therefore, no impairment was recognized. The BEV for the GSM and FSI reporting units are sensitive to changes in the weighted-average cost of capital. Given the significant judgments made by management to estimate the BEV of the GSM and FSI reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the weighted-average cost of capital as of October 1, 2021, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the selection of the weighted-average cost of capital used by management to estimate the fair values of the GSM and FSI reporting units included the following, among others:
•We tested the effectiveness of internal control over management’s selection of the valuation assumptions used to determine each BEV, including the weighted-average cost of capital.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) weighted-average cost of capital by:
◦Testing the source information underlying the determination of the weighted-average cost of capital and the mathematical accuracy of the calculation
◦Evaluating the underlying factors that led to management's determination of the company specific risk premium
◦Developing a range of independent estimates and comparing those to the weighted-average cost of capital selected by management
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 24, 2022
We have served as the Company’s auditor since 2015.
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The Andersons, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended December 31,
Other income:
Equity in earnings (losses) of affiliates, net 4,842 638 (7,359)
Gain from remeasurement of equity method investments, net — — 35,214
Income tax provision (benefit) from continuing operations 29,228 (10,910) 9,145
Income from discontinued operations, net of income taxes 4,324 1,956 11,184
Earnings per share attributable to The Andersons, Inc. common shareholders:
Basic earnings:
Diluted earnings:
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Year ended December 31,
Other comprehensive income (loss), net of tax:
Change in unrecognized actuarial gain and prior service cost 607 (856) (4,142)
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Consolidated Balance Sheets
(In thousands)
Assets
Current assets:
Other assets:
Liabilities and equity
Current liabilities:
Commodity derivative liabilities – current (Note 5) 128,911 146,990
Current maturities of long-term debt (Note 4) 32,256 69,366
Accrued expenses and other current liabilities 230,148 153,311
Other long-term liabilities held-for-sale (Note 16) 16,119 48,096
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred shares, without par value (1,000 shares authorized; none issued) — —
Accumulated other comprehensive income (loss) 1,194 (12,076)
Total shareholders’ equity of The Andersons, Inc. 1,072,425 961,891
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
Operating Activities
Income from discontinued operations, net of income taxes 4,324 1,956 11,184
Equity in (earnings) losses of affiliates, net of dividends (4,842) (638) 7,671
Gain on sale of business from continuing operations (14,619) — (5,702)
Loss on sale of business from discontinued operations 1,491 — —
Gain from remeasurement of equity method investments, net — — (35,214)
Changes in operating assets and liabilities:
Investing Activities
Acquisition of businesses, net of cash acquired (11,425) — (102,580)
Proceeds from sale of business from continuing operations 18,130 — 25,171
Proceeds from sale of business from discontinued operations 543,102 — —
Financing Activities
Proceeds from issuance of short-term debt 608,250 — —
Payments of short-term debt (408,250) — —
Contributions from noncontrolling interest owner 4,655 8,576 4,714
Distributions to noncontrolling interest owner (25) (10,322) —
Proceeds from exercises of stock options 6,667 — —
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Consolidated Statements of Equity
(In thousands, except per share data)
The Andersons, Inc. Shareholders’ Equity
Cash received from noncontrolling interest, net 164 4,715 4,879
Restricted share award dividend equivalents 8 250 (258) —
Contributions from noncontrolling interests 8,576 8,576
Distributions to noncontrolling interests (10,322) (10,322)
Restricted share award dividend equivalents 408 (408) —
Contributions from noncontrolling interests 4,655 4,655
Distributions to noncontrolling interests (25) (25)
Restricted share award dividend equivalents 335 (335) —
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation
These Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All material intercompany accounts and transactions are eliminated in consolidation. Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
During the third quarter of 2021, substantially all of the assets and liabilities of the Rail business were classified as held-for-sale in the accompanying Condensed Consolidated Balance Sheets. As discussed further in Note 16, the Company executed a definitive agreement to sell the Rail Leasing business. In conjunction with the sale of the Rail Leasing business, the Company announced its intent to divest the remainder of the Rail business. The majority of the remaining Rail business remaining on the balance sheet as of December 31, 2021 is related to the Rail Repair business.
These transactions effectively constitute the entirety of what has historically been included in the Rail reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Throughout this Annual Report on Form 10-K, with the exception of the statements of cash flows and unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications. The reclassification relates to the Consolidated Balance Sheet presentation of assets and liabilities as held for sale and Consolidated Statement of Operations presentation of results classified as discontinued operations in relation to the Rail business transactions noted above.
At inception of joint venture transactions, we identify entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business enterprise is the primary beneficiary of its operations. A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, do not have a controlling financial interest, or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates investments in VIEs when the Company is determined to be the primary beneficiary. This evaluation is based on an enterprise’s ability to direct and influence the activities of a VIE that most significantly impact that entity’s economic performance.
The Company evaluates its interests in VIEs on an ongoing basis and consolidates any VIE in which it has a controlling financial interest and is deemed to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact its economic performance; and (ii) the obligation to absorb losses of the VIE that could potentially be significant to it or the right to receive benefits from the VIE that could be significant to the VIE.
On October 1, 2019, the Company entered into an agreement with Marathon Petroleum Corporation to merge The Andersons Albion Ethanol LLC (“TAAE”), The Andersons Clymers Ethanol LLC (“TACE”), The Andersons Marathon Ethanol LLC (“TAME”) and the Company's wholly-owned subsidiary, The Andersons Denison Ethanol LLC (“TADE”), into a new legal entity, The Andersons Marathon Holdings LLC ("TAMH"). The Company evaluated its interest in TAMH and determined that TAMH is a VIE and that the Company is the primary beneficiary of TAMH. This is due to the fact that the Company has both the power to direct the activities that most significantly impact TAMH and the obligation to absorb losses or the right to receive benefits from TAMH. Therefore, the Company consolidated TAMH in its financial statements.
On March 2, 2018, the Company invested in ELEMENT. The Company owns 51% of ELEMENT and ICM, Inc. owns the remaining 49% interest. As part of the Company’s investment into ELEMENT, the Company and ICM, Inc. entered into a number of agreements. Most notably, the Company will manage the facility under a management contract, provide corn origination, ethanol marketing and risk management services. The Company evaluated its interest in ELEMENT and determined that ELEMENT is a VIE and that the Company is the primary beneficiary of ELEMENT. This is due to the fact that the Company has both the power to direct the activities that most significantly impact ELEMENT and the obligation to absorb losses or the right to receive benefits from ELEMENT. Therefore, the Company consolidates ELEMENT.
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Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and short-term investments with an initial maturity of three months or less. The carrying values of these assets approximate their fair values. The Company had restricted cash of $8.7 million as of December 31, 2019. The restricted cash balance was a result of a royalty claim assumed in the TAMH merger and included in the Consolidated Financial Statements of the Company. In 2020, this restricted cash was subsequently released, and the Company does not have restricted cash as of December 31, 2020 or 2021.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and may bear interest if past due. The allowance for doubtful accounts is the best estimate of the current expected credit losses in existing accounts receivable and is reviewed quarterly. The allowance is based both on specific identification of potentially uncollectible accounts and the application of a consistent policy, based on historical experience, to estimate the allowance necessary for the remaining accounts receivable. For those customers that are thought to be at higher risk, the Company makes assumptions as to collectability based on past history and facts about the current situation. Account balances are charged off against the allowance when it becomes more certain that the receivable will not be recovered. The Company manages its exposure to counterparty credit risk through credit analysis and approvals, credit limits and monitoring procedures.
Commodity Derivatives and Inventories
The Company's operating results can be affected by changes to commodity prices. The Trade and Renewables businesses have established “unhedged” position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to mitigate the price risk associated with those contracts and inventory). To reduce the exposure to market price risk on commodities owned and forward commodity and ethanol purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over-the-counter forward and option contracts with various counterparties. The forward purchase and sale contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.
The Company accounts for its commodity derivatives at fair value. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, fair value is adjusted for differences in local markets and non-performance risk. While the Company considers certain of its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and commodity inventories are included in Cost of sales and merchandising revenues in the Consolidated Statements of Operations. Additional information about the fair value of the Company's commodity derivatives is presented in Notes 5 and 10 to the Consolidated Financial Statements.
Readily Marketable Inventories, which are grain and other agricultural commodities, may be acquired under provisionally priced contracts, are stated at their net realizable value, which approximates estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
All other inventories are stated at the lower of cost or net realizable value. Cost is determined by the average cost method. Additional information about inventories is presented in Note 2 to the Consolidated Financial Statements.
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Derivatives - Master Netting Arrangements
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a futures, options or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a futures, option or an over-the-counter contract moves in a direction that is adverse to the Company's position, an additional margin deposit, called a maintenance margin, is required. The Company nets, by counterparty, its futures and over-the-counter positions against the cash collateral provided or received. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Consolidated Balance Sheets. Additional information about the Company's master netting arrangements is presented in Note 5 to the Consolidated Financial Statements.
Derivatives - Interest Rate and Foreign Currency Contracts
The Company periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. The Company has long-term interest rate swaps recorded in other assets or other long-term liabilities that expire from 2022 to 2030 and have been designated as cash flow hedges; accordingly, changes in the fair value of the instruments are recognized in Other comprehensive income (loss). While the Company considers all of its derivative positions to be effective economic hedges of specified risks, these interest rate contracts for which hedge accounting is not applied are recorded on the Consolidated Balance Sheets in either other current assets or liabilities (if short-term in nature) or in other assets or other long-term liabilities (if non-current in nature), and changes in fair value are recognized in current earnings as interest expense. Upon termination of a derivative instrument or a change in the hedged item, any remaining fair value recorded on the balance sheet is recorded as interest expense consistent with the cash flows associated with the underlying hedged item. Information regarding the nature and terms of the Company's interest rate derivatives is presented in Note 5 to the Consolidated Financial Statements.
Marketing Agreement
The Company has a marketing agreement that covers certain of its grain facilities, some of which are leased from Cargill, Incorporated ("Cargill"). Under the five-year amended and restated agreement (renewed in June 2018 and ending May 2023), any grain the Company sells to Cargill is at market price. Income earned from operating the facilities (including buying, storing and selling grain and providing grain marketing services to its producer customers) over a specified threshold is shared equally with Cargill. Measurement of this threshold is made on a cumulative basis and cash is paid to Cargill on an annual basis. The Company recognizes its pro rata share of this profit-sharing arrangement as a reduction of revenue in our Consolidated Statements of Operations every month and accrues for any payment owed to Cargill. The profit-sharing arrangement increased the Company's revenues $0.4 million for the year ended December 31, 2021, $1.2 million for the year ended December 31, 2020, and were de minimis in for the year ended December 31, 2019.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Repairs and maintenance costs are charged to expense as incurred, while betterments that extend useful lives are capitalized. Depreciation is provided over the estimated useful lives of the individual assets, by the straight-line method. Estimated useful lives are generally as follows: land improvements - 16 years; leasehold improvements - the shorter of the lease term or the estimated useful life of the improvement, ranging from 3 to 20 years; buildings and storage facilities - 10 to 40 years; and machinery and equipment - 3 to 20 years. The cost of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts, with any gain or loss realized upon sale recorded in the Consolidated Statements of Operations.
Additional information regarding the Company's property, plant and equipment is presented in Note 3 to the Consolidated Financial Statements.
Deferred Debt Issue Costs
Costs associated with the issuance of term debt are deferred and recorded net with debt. Costs associated with revolving credit agreements are recorded as a deferred asset. These costs are amortized, as a component of interest expense, over the earlier of the stated term of the debt or the period from the issue date through the first early payoff date without penalty, or the expected payoff date if the loan does not contain a prepayment penalty. Deferred costs associated with the borrowing arrangement with a syndication of banks are amortized over the term of the agreement.
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Goodwill and Intangible Assets
Goodwill is subject to an annual impairment test or more often when events or circumstances indicate that the carrying amount of goodwill may be impaired. A goodwill impairment loss is recognized to the extent the carrying amount of goodwill exceeds the business enterprise value. Additional information about the Company's goodwill and other intangible assets is presented in Note 17 to the Consolidated Financial Statements.
Acquired intangible assets are recorded at cost, less accumulated amortization, if not indefinite lived. In addition, we capitalize the salaries and payroll-related costs of employees and consultants who devote time to the development of internal-use software projects. If a project constitutes an enhancement to previously-developed software, we assess whether the enhancement is significant and creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once a project is complete, we estimate the useful life of the internal-use software. Changes in our estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the period.
Amortization of intangible assets is provided over their estimated useful lives (generally 1 to 10 years) using the straight-line method.
Impairment of Long-lived Assets and Equity Method Investments
Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the assets to the undiscounted future net cash flows the Company expects to generate with the assets. If such assets are considered to be impaired, the Company recognizes an impairment loss for the amount by which the carrying amount of the assets exceeds the fair value of the assets.
The Company reviews its equity method 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.
Provisionally Priced Commodity Contracts
Accounts payable includes certain amounts related to commodity purchases for which, even though the Company has taken ownership and possession of the commodity the final purchase price has not been fully established. If the futures and basis components are unpriced, it is referred to as a delayed price payable. If the futures component has not been established, but the basis has been set, it is referred to as a basis payable. The unpriced portion of these payables will be exposed to changes in the fair value of the underlying commodity based on quoted prices on commodity exchanges (or basis levels). Those payables that are fully priced are not considered derivative instruments.
The Company also enters into contracts with customers for risk management purposes that allow the customers to effectively unprice the futures component of their inventory for a period of time, subjecting the commodities to market fluctuations. The Company records an asset or liability for the market value changes of the commodities over the life of the contracts based on quoted exchange prices. See Note 10 for additional discussion on these instruments.
Stock-Based Compensation
Stock-based compensation expense for all stock-based compensation awards is based on the estimated grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, adjusted for revisions to performance expectations. Additional information about the Company's stock compensation plans is presented in Note 15 to the Consolidated Financial Statements.
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Per Share Data
We present both basic and diluted earnings per share amounts from continuing operations and discontinued operations attributable to the Company's shareholders. Basic earnings per common share are determined by dividing net earnings attributable to controlling interests by the weighted-average number of common shares outstanding. In computing diluted earnings per share, average number of common shares outstanding is increased by unvested stock awards and common stock options outstanding with exercise prices lower than the average market price of common shares using the treasury share method.
Revenue Recognition
The Company’s revenue consists of sales from commodity contracts that are accounted for under ASC 815, Derivatives and Hedging (ASC 815), and sales of other products and services that are accounted for under ASC 606, Revenue from Contracts with Customers (ASC 606).
Revenue from commodity contracts (ASC 815)
Revenue from commodity contracts primarily relates to forward sales of commodities in the Company’s Trade and Renewables segments, such as corn, soybeans, wheat, oats, ethanol, and corn oil, which are accounted for as derivatives at fair value under ASC 815. These forward sales meet the definition of a derivative under ASC 815 as they have an underlying (e.g. the price of corn), a notional amount (e.g. metric tons), no initial net investment and can be net settled since the commodity is readily convertible to cash. The Company does not apply the normal purchase and normal sale exception available under ASC 815 to these contracts.
Revenue from commodity contracts is recognized in Sales and merchandising revenues for the contractually stated amount when the contracts are settled. Settlement of the commodity contracts generally occurs upon shipment or delivery of the product, when title and risks and rewards of ownership transfers to the customer. Prior to settlement, these forward sales contracts are recognized at fair value with the unrealized gains or losses recorded within Cost of sales and merchandising revenues. Additional information about the fair value of the Company's commodity derivatives is presented in Notes 5 and 10 to the Consolidated Financial Statements.
There are certain transactions that allow for pricing to occur after title of the goods has passed to the customer. In these cases, the Company continues to report the goods in inventory until it recognizes the sales revenue once the price has been determined. Direct ship commodity sales (where the Company never takes physical possession of the commodity) are recognized based on the terms of the contract.
Certain of the Company's operations provide for customer billings, deposits or prepayments for product that is stored at the Company's facilities. The sales and gross profit related to these transactions are not recognized until the product is shipped in accordance with the previously stated revenue recognition policy and these amounts are classified in the Consolidated Balance Sheets as a current liability titled “Customer prepayments and deferred revenue”.
Revenue from contracts with customers (ASC 606)
Information regarding our revenue from contracts with customers accounted for under ASC 606 is presented in Note 7 to the Consolidated Financial Statements. The Company recognizes revenue from these contracts at a point in time when it satisfies a performance obligation by transferring control of a product to a customer, generally when legal title and risks and rewards of ownership transfer to the customer.
Income Taxes
Income tax expense for each period includes current tax expense plus deferred expense, which is related to the change in deferred income tax assets and liabilities. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of assets and liabilities and are measured using enacted tax rates and laws governing periods in which the differences are expected to reverse. The Company evaluates the realizability of deferred tax assets and provides a valuation allowance for amounts that management does not believe are more likely than not to be recoverable, as applicable.
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The annual effective tax rate is determined by Income tax provision (benefit) from continuing operations as a percentage of Income (loss) before income taxes from continuing operations within the Consolidated Statements of Operations. Differences in the effective tax rate and the statutory tax rate may be due to permanent items, tax credits, foreign tax rates and state tax rates in jurisdictions in which the Company operates, or changes in valuation allowances.
The Company records reserves for uncertain tax positions when, despite the belief that tax return positions are fully supportable, it is anticipated that certain tax return positions are likely to be challenged and that the Company may not prevail. These reserves are adjusted for changing facts and circumstances, such as the progress of a tax audit or the lapse of statutes of limitations.
Additional information about the Company’s income taxes is presented in Note 8 to the Consolidated Financial Statements.
Employee Benefit Plans
The Company provides full-time employees hired before January 1, 2003 with postretirement health care benefits. In order to measure the expense and funded status of these employee benefit plans, management makes several estimates and assumptions, including employee turnover rates, anticipated mortality rates and anticipated future healthcare cost trends. These estimates and assumptions are based on the Company's historical experience combined with management's knowledge and understanding of current facts and circumstances. The selection of the discount rate is based on an index given projected plan payouts. Additional information about the Company's employee benefit plans is presented in Note 6 to the Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The provisions of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The new standard did not have a material impact to the Company's financial statements or disclosures.
Reference Rate Reform (Topic 848)
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company has utilized the relief provided by Topic 848 to ensure financial reporting results reflect the intended continuation of such contracts and arrangements during the period of the market-wide transition to alternative reference rates. The expedients allow an eligible modified contract to be accounted for and presented as a continuation of the existing contract.
The Company has identified its LIBOR-based contracts that will be impacted by the cessation of LIBOR and is actively working with counterparties to incorporate fallback language in negotiated contracts, in addition to incorporating non-LIBOR reference rate and fallback language, when applicable, in new contracts to prepare for these changes. The evaluation and modification of contracts is ongoing. The Company continues to evaluate the impacts of this standard on its consolidated financial statements.
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2. Inventories
Major classes of inventories are presented below. Readily Marketable Inventories are agricultural commodity inventories such as corn, soybeans, wheat, and ethanol co-products, among others, carried at net realizable value which approximates fair value based on their commodity characteristics, widely available markets, and pricing mechanisms. The net realizable value of RMI is calculated as the fair value (spot price of the commodity in an exchange), less cost of disposal and transportation based on the local market. All other inventories are held at lower of cost or net realizable value.
December 31,
(a) Includes RMI of $1,410.9 million and $983.2 million at December 31, 2021 and December 31, 2020, respectively.
Inventories do not include 3.0 million bushels of grain and other agricultural product inventories held in storage for others as of December 31, 2021 and December 31, 2020, respectively. The Company does not have title to the inventory and is only liable for any deficiencies in grade or shortage of quantity that may arise during the storage period. Management has not experienced historical losses with regard to any deficiencies and does not anticipate material losses in the future.
The Company recorded lower of cost or net realizable value adjustments of $3.4 million and $11.7 million for the years ended December 31, 2021 and 2020, respectively. The current year charge primarily relates to certain fertilizer values decreasing after the spring application season. The charge in the prior year was a result of lower ethanol market prices and decreased demand as a result of the COVID-19 pandemic.
3. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
December 31,
Land improvements and leasehold improvements 91,122 92,455
Depreciation expense on property, plant and equipment amounted to $126.9 million, $122.4 million and $79.1 million for the years ended 2021, 2020 and 2019, respectively. The increase in depreciation expense from 2019 to 2020 was due to the TAMH merger in October of 2019 and ELEMENT starting its operations in August of 2019.
In December 2021, the Company recorded charges of $7.7 million for impairments of property, plant and equipment in the Trade segment related to its frac sand assets in Oklahoma. The Company also recorded a $0.6 million impairment of property, plant and equipment in the Trade segment related to the shutdown of a facility in Texas.
In 2019, the Company recorded charges of $32.3 million for impairment of property, plant and equipment in the Trade segment related to its frac sand assets. The Company also recorded a $3.7 million impairment of property, plant, and equipment in the Trade segment related to its Tennessee grain assets in 2019.
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4. Debt
The Company’s short-term and long-term debt at December 31, 2021 and 2020 consisted of the following:
December 31,
Current maturities of long-term debt – non-recourse 7,601 678
Current maturities of long-term debt – recourse 24,655 68,688
Total current maturities of long-term debt 32,256 69,366
Long-term debt, less: current maturities – non-recourse 64,972 127,192
Long-term debt, less: current maturities – recourse 535,515 759,261
Total long-term debt, less: current maturities $ 600,487 $ 886,453
On February 4, 2021, the Company completed the second amendment to its credit agreement dated January 11, 2019. The amendment, which replaced an underwritten bridge loan received on January 21, 2021, provided for a short-term $250.0 million note in which the entire stated principal was due on December 31, 2021. The entire principal balance was repaid as of September 30, 2021.
On May 6, 2021, the Company completed the third amendment to its credit agreement dated January 11, 2019. The amendment provides for a short-term note of approximately $358.0 million in which the entire stated principal is due on March 31, 2022. The term note will bear interest at variable rates, which are based on LIBOR plus an applicable spread. As of December 31, 2021 $200.0 million of principal remains outstanding.
As part of the Company's ongoing covenant monitoring process, at September 30, 2021, the Company determined that it was virtually certain that ELEMENT will be out of compliance with its debt service coverage ratio covenant of no less than 1.4 to be initially measured on December 31, 2021. It was determined that if ELEMENT was not in compliance with the debt service coverage ratio at December 31, 2021, it would result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of the ELEMENT’s indebtedness or preventing access to additional funds under the line of credit agreement, or requiring prepayment of outstanding indebtedness under the loan agreement or the line of credit agreement. Because it was determined that it was virtually certain that ELEMENT would violate this covenant in the future and had not yet received a waiver at that time, the $70.0 million of non-recourse debt associated with ELEMENT was classified as a current maturity of long-term debt as of September 30, 2021. On February 14, 2022, ELEMENT executed an amended agreement of the debt whereby the lender retrospectively waived the covenant violations and modified the existing covenants. The debt service coverage ratio covenant was waived as of December 31, 2021 and modified to a target of 1.0 for 2022. As the waiver and amended debt agreement was completed prior to the annual report filing, the debt was classified as noncurrent as of December 31, 2021.
The Company was in compliance with all financial covenants at and during the years ended December 31, 2021 and 2020.
Total interest paid was $38.2 million, $33.9 million and $43.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $650.7 million and $989.1 million, respectively. The Company estimates the fair value of its long-term debt based upon the Company’s credit standing and current interest rates offered by the Company on similar bonds and rates currently available to the Company for long-term borrowings with similar terms and remaining maturities.
At December 31, 2021, the Company had short-term lines of credit capacity totaling $1,195.8 million, of which $890.1 million was unused. The weighted-average interest rates on short-term borrowings outstanding at December 31, 2021 and 2020, were 1.49% and 1.66%, respectively.
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Long-Term Debt
Recourse Long-Term Debt
December 31,
(in thousands, except percentages) 2021 2020
Note payable, variable rate, paid 2021 — 11,250
Less: unamortized prepaid debt issuance costs 4,055 5,479
(a) Debt is collateralized by first mortgages on certain facilities and related equipment or other assets with a book value of $61.9 million.
The aggregate annual maturities of recourse, long-term debt are as follows: 2022 -- $24.7 million; 2023 -- $48.8 million; 2024 -- $25.1 million; 2025 -- $25.3 million; 2026 -- $305.5 million; and $134.8 million thereafter.
Non-Recourse Long-Term Debt
The Company's non-recourse long-term debt consists of the following:
December 31,
Long-term credit facility, variable rate, due 2024 — 56,600
Less: unamortized prepaid debt issuance costs 172 1,555
The aggregate annual maturities of non-recourse, long-term debt are as follows: 2022 -- $7.6 million; 2023 -- $8.0 million; 2024 -- $7.9 million; 2025 -- $7.2 million; 2026 -- $7.1 million; and $34.9 million thereafter.
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5. Derivatives
Commodity Contracts
The Company’s operating results are affected by changes to commodity prices. The Trade and Renewables businesses have established “unhedged” futures position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to lock in the price). To reduce the exposure to market price risk on commodities owned and forward purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over-the-counter forward and option contracts with various counterparties. These contracts are primarily traded via regulated commodity exchanges. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Most contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.
Most of these contracts meet the definition of derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company primarily accounts for its commodity derivatives at estimated fair value. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and commodity inventories are included in Cost of sales and merchandising revenues.
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a future, option or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The margin deposit assets and liabilities are included in current commodity derivative assets (or liabilities), as appropriate, in the Consolidated Balance Sheets.
The following table presents at December 31, 2021 and 2020, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted or received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within current or noncurrent commodity derivative assets (or liabilities) in the Consolidated Balance Sheets:
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The following table presents, on a gross basis, current and non-current commodity derivative assets and liabilities:
The net gains and losses on commodity derivatives not designated as hedging instruments included in the Company’s Consolidated Statements of Operations and the line items in which they are located for the years ended December 31, 2021, 2020 and 2019 are as follows:
Year Ended December 31,
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The Company had the following volume of commodity derivative contracts outstanding (on a gross basis) as of December 31, 2021 and 2020:
(in thousands) Number of Bushels Number of Gallons Number of Tons
Non-exchange traded:
Soybean meal — — 544
Dried distillers grain — — 507
Exchange traded:
(in thousands) Number of Bushels Number of Gallons Number of Tons
Non-exchange traded:
Soybean meal — — 398
Dried distillers grain — — 319
Exchange traded:
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Interest Rate and Other Derivatives
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The gains or losses on the derivatives designated as hedging instruments are recorded in Other comprehensive income (loss) and subsequently reclassified into Interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in Accumulated other comprehensive income (loss) related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. The Company also has foreign currency derivatives which are considered effective economic hedges of specified economic risks.
At December 31, 2021 and 2020, the Company had recorded the following amounts for the fair value of the Company's interest rate and other derivatives:
December 31,
Derivatives not designated as hedging instruments
Interest rate contracts included in Other long-term liabilities — (430)
Derivatives designated as hedging instruments
Interest rate contracts included in Other assets 4,574 164
The recording of derivatives gains and losses and the financial statement line item in which they are located are as follows:
Year Ended December 31,
Derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
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The following table presents the open interest rate contracts at December 31, 2021:
Long-term
6. Employee Benefit Plans
The Company provides certain full-time employees with pension benefits under defined benefit and defined contribution plans. The measurement date for all plans is December 31st. The Company's expense for its defined contribution plans amounted to $14.6 million, $8.1 million and $8.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. The expense for the Company's defined contribution plans increased in the current year as the discretionary contribution increased consistent with the improved operating results. The Company also provides health insurance benefits to certain employees and retirees.
The Company has an unfunded noncontributory defined benefit pension plan. The plan provides defined benefits based on years of service and average monthly compensation using a career average formula. Pension benefits were frozen at July 1, 2010.
The Company also has postretirement health care benefit plans covering substantially all of its full-time employees hired prior to January 1, 2003. These plans are generally contributory and include a cap on the Company's share of the related costs.
Obligation and Funded Status
Following are the details of the obligation and funded status of the pension and postretirement benefit plans:
(in thousands) Pension Benefits Postretirement Benefits
Participant contributions — — 271 298
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(in thousands) Pension Benefits Postretirement Benefits
Fair value of plan assets at beginning of year $ — $ — $ — $ —
Participant contributions — — 271 298
Fair value of plan assets at end of year $ — $ — $ — $ —
Amounts recognized in the Consolidated Balance Sheets at December 31, 2021 and 2020 consist of:
Pension Benefits Postretirement Benefits
Accrued expenses and other current liabilities $ 259 $ 1,014 $ 1,359 $ 1,310
Following are the details of the pre-tax amounts recognized in Accumulated other comprehensive income at December 31, 2021:
Pension Benefits Postretirement Benefits
Amounts arising during the period (4) — (1,260) —
Amounts recognized as a component of net periodic benefit cost (266) — (169) 911
Amounts applicable to the Company's defined benefit plans with accumulated benefit obligations in excess of plan assets are as follows:
December 31,
Projected benefit obligation $ 872 $ 1,884
Accumulated benefit obligation $ 872 $ 1,884
The combined benefits expected to be paid for all Company defined benefit plans over the next ten years are as follows:
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Following are components of the net periodic benefit cost for each year:
Pension Benefits Postretirement Benefits
December 31, December 31,
Expected return on plan assets — — — (911) (911) (911)
Following are weighted-average assumptions of pension and postretirement benefits for each year:
Postretirement Benefits
Used to Determine Benefit Obligations at Measurement Date
Discount rate (a) 2.6 % 2.2 % 3.0 %
Used to Determine Net Periodic Benefit Cost for Years ended December 31
Discount rate (b) 2.2 % 3.0 % 4.1 %
Expected long-term return on plan assets — — —
Rate of compensation increases — — —
(a)The calculated rate for the unfunded employee retirement plan was 1.10%, 0.50% and 2.00% in 2021, 2020, and 2019, respectively. Since it was terminated in 2015, the defined benefit pension plan did not have a discount rate during the three-year period presented above.
(b)The calculated rate for the unfunded employee retirement plan was 0.50%, 2.00% and 3.20% in 2021, 2020, and 2019, respectively. Since it was terminated in 2015, the defined benefit pension plan did not have a discount rate during the three-year period presented above.
Assumed Health Care Cost Trend Rates at Beginning of Year
Health care cost trend rate assumed for next year 3.0 % 3.0 %
Year that the rate reaches the ultimate trend rate (a) N/A N/A
(a)In 2017, the Company's remaining uncapped participants were converted to a Medicare Exchange Health Reimbursement Arrangement, which put a 2% cap on the Company's share of the related costs.
7. Revenue
Many of the Company’s revenues are generated from contracts that are outside the scope of ASC 606 and thus are accounted for under other accounting standards. Specifically, many of the Company's Trade and Renewables sales contracts are derivatives under ASC 815, Derivatives and Hedging. The breakdown of revenues between ASC 606 and ASC 815 is as follows:
Year ended December 31,
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Disaggregation of revenue
The following tables disaggregate revenues under ASC 606 by major product/service line:
(in thousands) Trade Renewables Plant Nutrient Total
(in thousands) Trade Renewables Plant Nutrient Total
(in thousands) Trade Renewables Plant Nutrient Total
Substantially all of the Company's revenues accounted for under ASC 606 for the years ended December 31, 2021, 2020 and 2019, respectively, are recorded as a point in time instead of over time.
Specialty and primary nutrients
The Company sells several different types of specialty nutrient products, including: low-salt liquid starter fertilizers, micro-nutrients and other specialty lawn products. These products can be sold through the wholesale distribution channels as well as directly to end users at the farm center locations. Similarly, the Company sells several different types of primary nutrient products, including: nitrogen, phosphorus and potassium. These products may be purchased and re-sold as is or sold as finished goods resulting from a blending and manufacturing process. The contracts associated with specialty and primary nutrients generally have a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer. Payment terms generally range from 0 - 30 days.
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Products and co-products
In addition to the ethanol sales contracts that are considered derivative instruments, the Renewables Group sells several other co-products that remain subject to ASC 606, including E-85, DDGs, syrups and renewable identification numbers (“RINs”). RINs are credits for compliance with the Environmental Protection Agency's Renewable Fuel Standard program and are created by renewable fuel producers. Contracts for these co-products generally have a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer which follows shipping terms on the contract. Payment terms generally range from 5 - 15 days.
Propane and frac sand
Propane and sand products are primarily sold to United States customers in the energy industry. Revenue is recognized at a point in time when obligations under the terms of a contract with the customer are satisfied. This occurs with the transfer of control of our products to customers when products are shipped for direct sales to customers or when the product is picked up by a customer either at the plant location or transload location. Contracts contain one performance obligation which is the delivery to the customer at a point in time. Revenue is measured as the amount of consideration received in exchange for transferring products. The Company recognizes the cost for shipping as an expense in cost of sales and merchandising revenues when control over the product has transferred to the customer. Payment terms generally range from 0 - 30 days.
Contract balances
The opening and closing balances of the Company’s contract liabilities are as follows:
The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. Contract liabilities relate to the Plant Nutrient business for payments received in advance of fulfilling our performance obligations under our customer contracts. Contract liabilities are built up at year-end and through the first quarter as a result of payments in advance of fulfilling our performance obligations under our customer contracts in preparation for the spring application season. The contract liabilities are then relieved as obligations are met through the year and begin to build in preparation for a new season as we approach year-end. The variance in contract liabilities at December 31, 2021 compared to the prior years was due to the sharp increase of fertilizer prices.
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8. Income Taxes
Income tax provision (benefit) from continuing operations consists of the following:
Year ended December 31,
Current:
Deferred:
Total:
Income (loss) before income taxes from continuing operations consists of the following:
Year ended December 31,
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A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:
Year ended December 31,
Statutory U.S. federal tax rate 21.0 % 21.0 % 21.0 %
Increase (decrease) in rate resulting from:
State and local income taxes, net of related federal taxes 2.5 0.5 15.8
Federal tax rate differential 0.4 (2.1) 2.0
U.S. tax rate change and other tax law impacts (a) 0.5 56.2 4.5
Effect of noncontrolling interest (4.2) (17.0) 5.2
Derivative instruments and hedging activities 0.4 (11.8) (5.4)
U.S. income taxes on foreign earnings 0.7 (1.8) 11.1
Nondeductible compensation 1.9 (5.5) 10.0
Valuation allowance 0.1 (1.9) (2.0)
Foreign tax credits (1.3) (0.5) (10.8)
Research and development and other tax credits (5.0) 75.6 (189.4)
Equity method investments (0.6) (0.1) 12.2
Acquisition related permanent item — — 51.8
(a) Reflects the impact of the CARES Act which provided a financial statement benefit of $14.8 million in 2020.
Net income taxes of $51.7 million, $2.4 million and $2.0 million were paid in the years ended December 31, 2021, 2020 and 2019, respectively.
TAMH and ELEMENT are treated as partnerships for U.S. tax purposes. Partnerships are not taxable entities so the tax consequences of the partnership’s transactions flow through to the partners (i.e., investors) at their proportionate share. As a result, the Consolidated Financial Statements do not reflect such income taxes on income (loss) before taxes attributable to the noncontrolling interest in the partnerships.
The Company has elected to treat Global Intangible Low Tax Income (“GILTI”) as a period cost and, therefore, has not recognized deferred taxes for basis differences that may reverse as GILTI tax in future years.
For the years ended December 31, 2021 and 2020, the Company has not recognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries that were deemed permanently reinvested. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, depends on certain circumstances existing and if/when remittance occurs. A deferred tax liability will be recognized if and when the Company no longer plans to permanently reinvest these undistributed earnings.
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Significant components of the Company's deferred tax liabilities and assets are as follows:
December 31,
Deferred tax liabilities:
Deferred tax assets:
Accounts and notes receivable 2,189 4,207
(a)The Company had deferred tax assets of $1.5 million included in Other assets in the Consolidated Balance Sheets as of December 31, 2021.
On December 31, 2021, the Company had $30.7 million and $4.7 million of state and non-U.S. net operating loss carryforwards that begin to expire in 2022 and 2035, respectively. The Company also has $2.3 million of U.S. foreign tax credits ("FTCs") carryforwards that begin to expire after 2028. The valuation allowance of $2.8 million is related to tax assets of $2.3 million and $0.5 million for U.S. federal FTCs and net operating loss carryforwards, respectively.
The decrease in net deferred tax liabilities of $100.5 million during the year ended December 31, 2021 was primarily related to a decrease in deferred tax liabilities related to the sale of the Company’s Rail Leasing business during the third quarter of 2021 which are reflected in the Consolidated statements of operations as discontinued operations, net of income taxes.
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance will be recorded to reduce deferred tax assets if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. In assessing the realizability of our deferred tax assets, we consider positive and negative evidence, including historical operating results, future reversals of existing taxable temporary differences, projected future earnings, and tax planning strategies.
The Company, or one of its subsidiaries, files income tax returns in the U.S., multiple foreign, state and local jurisdictions. The Company is no longer subject to examination by taxing authorities in the U.S., foreign, state and local jurisdictions federal taxation for years before 2014. The Company and the Company’s subsidiary partnership returns are under federal tax examination by the Internal Revenue Service (“IRS”) for the tax year 2018 and tax years 2015 through 2018, respectively. The Company’s subsidiary is under federal tax examination by the Mexican tax authorities for tax year 2015. Due to the potential for resolution of U.S. federal, foreign, state and local examinations, and the expiration of various statutes of limitations, it is reasonably possible that the gross unrecognized tax benefits may change within the next 12 months by a range of zero to $2.0 million.
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A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Tax positions related to the current year
Tax positions related to prior years
Lapse in statute of limitations — (59) (463)
As of December 31, 2021, 2020 and 2019, if our unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate. As of December 31, 2021, unrecognized tax benefits of $51.7 million include $43.0 million associated with the federal and state R&D Credits.
The Company’s practice is to recognize interest and penalties on uncertain tax positions in the provision for income taxes in the Consolidated Statement of Operations. At December 31, 2021, 2020, and 2019, the Company recorded reserves of $2.7 million, $1.8 million and $2.1 million, respectively, of interest and penalties on uncertain tax positions in the Consolidated Balance Sheets.
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9. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in Accumulated other comprehensive income (loss) attributable to the Company ("AOCI") for the twelve months ended December 31, 2021 and 2020:
Year ended December 31,
Currency Translation Adjustment
Other comprehensive income (loss) before reclassifications (108) 5,331
Tax effect — (657)
Other comprehensive income (loss), net of tax (108) 4,674
Cash Flow Hedges
Other comprehensive income (loss) before reclassifications 8,105 (19,565)
Amounts reclassified from AOCI (a) 8,855 8,068
Other comprehensive income (loss), net of tax 12,771 (8,663)
Pension and Other Postretirement Plans
Beginning balance $ 33 $ 889
Other comprehensive income (loss) before reclassifications 1,699 (200)
Amounts reclassified from AOCI (b) (911) (911)
Other comprehensive income (loss), net of tax 607 (856)
Investments in Convertible Preferred Securities
Other comprehensive income (loss), net of tax — —
(a) Amounts reclassified from gain (loss) on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and is recognized in Interest expense, net. See Note 5 for additional information.
(b) This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost recorded in Operating, administrative and general expenses.
10. Fair Value Measurements
The following table presents the Company's assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and 2020:
(in thousands) December 31, 2021
Assets (liabilities) Level 1 Level 2 Level 3 Total
Convertible preferred securities (c) — — 11,618 11,618
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