Andersons Inc

14. Commitments and Contingencies

Litigation activities

The Company is party to litigation, or threats thereof, both as defendant and plaintiff with some regularity, although individual cases that are material in size occur infrequently. As a defendant, the Company establishes reserves for claimed amounts that are considered probable and capable of estimation. If those cases are resolved for lesser amounts, the excess reserves are taken into income and, conversely, if those cases are resolved for larger than the amount the Company has accrued, the Company will record additional expense in the Consolidated Statements of Operations. The Company believes it is unlikely that the results of its current legal proceedings for which it is the defendant, even if unfavorable, will be material. As a plaintiff, amounts that are collected can also result in sudden, non-recurring income.

Litigation results depend upon a variety of factors, including the availability of evidence, the credibility of witnesses, the performance of counsel, the state of the law, and the impressions of judges and jurors, any of which can be critical in importance, yet difficult, if not impossible, to predict. Consequently, cases currently pending, or future matters, may result in unexpected, and non-recurring losses, or income, from time to time. Finally, litigation results are often subject to judicial reconsideration, appeal and further negotiation by the parties, and as a result, the final impact of a particular judicial decision may be unknown for some time or may result in continued reserves to account for the potential of such post-verdict actions.

The estimated losses for all outstanding claims that are considered estimable and reasonably possible are not material.

15. Stock Compensation Plans

The Company's 2019 Long-Term Incentive Compensation Plan, dated February 22, 2019, and subsequently approved by shareholders on May 10, 2019, and amended and restated on May 6, 2022, is authorized to issue up to 7.0 million shares of common stock as options, share appreciation rights, restricted shares and units, performance shares and units and other stock or cash-based awards. Approximately 3.8 million shares remain available for issuance at December 31, 2023.

Stock-based compensation expense for all stock-based compensation awards is based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award and recognizes forfeitures as they occur. Total compensation expense recognized in the Consolidated Statements of Operations for all stock compensation programs was $12.9 million, $11.2 million, and $11.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Restricted Stock Awards & Units ("RSUs")

These awards are contingent to requisite service periods established within the grant documents and range from 1 to 3 years. RSUs graded vest in conjunction with the requisite service period. Total restricted stock expense is equal to the market value of the Company's common shares on the date of the award and is recognized over the requisite service period on a straight-line basis.

A summary of the status of the Company's non-vested RSUs as of December 31, 2023, and changes during the period then ended, is presented below:

As of December 31, 2023, there was $3.8 million of total unrecognized compensation cost related to non-vested RSUs that is expected to be recognized over a weighted-average period of 1.4 years.

Earnings Per Share-Based Performance Share Units (“EPS PSUs”)

Each EPS PSU gives the participant the right to receive common shares dependent on the achievement of specified performance results over a 3-year performance period. At the end of the performance period, the number of shares of stock issued will be determined by adjusting the award upward or downward from a target award. Fair value of EPS PSUs issued is based on the market value of the Company's common shares on the date of the award. The related compensation expense is recognized over the performance period when achievement of the award is probable and is adjusted for changes in the number of shares expected to be issued if changes in performance are expected. Currently, the Company is accounting for the awards granted in 2023 at 50% of the maximum available for issuance; and the awards granted in 2022 and 2021 at the maximum amount available for issuance.

A summary of the status of the Company's EPS PSUs as of December 31, 2023, and changes during the period then ended, is presented below:

As of December 31, 2023, there was $3.7 million unrecognized compensation cost related to non-vested EPS PSUs that is expected to be recognized over a weighted-average period of 1.1 years.

Total Shareholder Return-Based Performance Share Units (“TSR PSUs”)

Each TSR PSU gives the participant the right to receive common shares dependent on total shareholder return on the Company's Common Shares over a 3-year period. At the end of the period, the number of shares of stock issued will be determined by adjusting the award upward or downward from a target award. The fair value of TSR PSUs is estimated at the date of grant using a Monte Carlo Simulation with the following assumptions: Expected volatility was estimated based on the historical volatility of the Company's common shares over the 2.83 years period prior to the grant date. The average expected life was based on the contractual term of the plan. The risk-free rate is based on the U.S. Treasury Strips available with maturity period consistent with the expected life.

A summary of the status of the Company's TSR PSUs as of December 31, 2023, and changes during the period then ended, is presented below:

As of December 31, 2023, there was approximately $4.4 million unrecognized compensation cost related to non-vested TSR PSUs that is expected to be recognized over a weighted-average period of 1.1 years.

Employee Share Purchase Plan (the “ESP Plan”)

The ESP Plan allows employees to purchase common shares through payroll withholdings. The Company has approximately 297 thousand common shares remaining available for issuance to and purchase by employees under this plan. The Company's 2004 ESP Plan restated and amended in 2023 authorized the Company to issue an additional 270 thousand common shares in 2023. The ESP Plan also contains an option component. The purchase price per share under the ESP Plan is the lower of the market price at the beginning or end of the year. The Company records a liability for withholdings not yet applied towards the purchase of common stock. This liability is included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

The fair value of the option component of the ESP Plan is estimated at the date of grant under the Black-Scholes option pricing model with the following assumptions at the grant date. Expected volatility was estimated based on the historical volatility of the Company's common shares over the past year. The average expected life was based on the contractual term of the plan. The risk-free rate is based on the U.S. Treasury yield curve rate with aone year term. Forfeitures are estimated at the date of grant based on historical experience.

16. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2023, 2022, and 2021 are as follows:

(a) Removal of allocated goodwill due to the sale of a grain asset location in Illinois.

(b) Removal of allocated goodwill due to the sale of a grain asset location in Nebraska.

Goodwill for the Trade segment is $119.1 million as of December 31, 2023, which is net of prior years' accumulated impairment losses of $46.4 million. All goodwill for the Nutrient & Industrial segment has been fully impaired as of December 31, 2023, with net accumulated impairment losses $69.6 million.

The Company had goodwill of approximately $127.9 million at December 31, 2023, which includes approximately $77.8 million related to the Company's Grain Storage and Merchandising ("GSM") reporting unit, approximately $41.3 million related to the Company's Food and Specialty Ingredients ("FSI") reporting unit, and approximately $8.8 million related to the Company's Renewables reporting unit.

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 ("WACC") of a hypothetical third-party buyer. The WACC is the rate used to discount each reporting unit’s estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate and an equity risk factor, which is derived from public companies similar to the reporting units and which captures the perceived risks and uncertainties associated with the reporting unit's cash flows. The cost of debt is the rate that a prudent investor would require to lend money to the reporting units on an after-tax basis and is estimated based on a market-derived analysis of corporate bond yields. The cost of debt and equity is weighted based on the debt-to-market capitalization ratio of publicly traded companies with similarities to the reporting units being tested. The WACC applied in each reporting unit's last quantitative test ranged from 10.75% to 11.00%, which includes a company specific risk premium range from 2.0% to 2.5%. Differences in the WACC used between reporting units is primarily due to distinct risks and uncertainties regarding the cash flows of the different reporting units.

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. Any excess of the carrying value of the goodwill over the BEV will be recorded as an impairment loss. The calculation of the BEV is based on significant unobservable inputs, such as price trends, customer demand, material costs and discount rates, and are classified as Level 3 in the fair value hierarchy.

There can be no assurance that anticipated financial results will be achieved and the goodwill balances remain susceptible to future impairment charges. The goodwill related to the GSM and FSI reporting units are determined to have the greatest risk of future impairment charges given the difference (approximately 18% and 19%, respectively) between the BEV and carrying value of these reporting units as of the Company's annual impairment test date. Management performed a qualitative test for the Renewables reporting unit and determined that it was highly unlikely that the BEV is less than its carrying amount. If the Company's projected future cash flows were lower, or if the assumed weighted-average cost of capital were higher, the testing performed at year-end may have indicated an impairment of the goodwill related to one or more of the Company's reporting units. Any impairment charges that the Company may take in the future could be material to its Consolidated Statements of Operations and financial condition.

The Company recorded approximately $0.7 million of goodwill impairment charges in the year ended December 31, 2023, related to the Engineered Granules reporting unit within the Nutrient & Industrial segment. No goodwill impairment charges were incurred in the years ended December 31, 2022 or 2021 as a result of our annual impairment testing.

The Company's other intangible assets are as follows:

Amortization expense for intangible assets was $24.5 million, $24.1 million and $30.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. Expected future annual amortization expense for the assets above is as follows: 2024 -- $21.8 million; 2025 -- $15.5 million; 2026 -- $13.3 million; 2027 -- $13.2 million; 2028 -- $11.3 million; and thereafter -- $10.6 million.

17. Other Income, Net

The following table sets forth the items in Other income, net for the periods presented below:

Individually significant items included in the table above are:

Interest income -In 2023, the Company earned $11.1 million in interest income on cash and cash equivalents with an additional $1.9 million earned from an inventory financing program. In 2022, an inventory financing program earned $1.5 million, the remaining interest income consisted of individually insignificant amounts in the ordinary course of business. In 2021, the Company earned $1.3 million, the remaining interest income consisted of individually insignificant amounts in the ordinary course of business.

Property insurance recoveries-In 2023, property insurance recoveries consisted of $1.5 million related to a conveyor collapse at a Louisiana grain asset in the prior year, proceeds of $5.5 million related to a fire at a Michigan grain asset in the prior year, and proceeds of $2.7 million related to a grain bin collapse at a Indiana grain facility in the prior year, the remaining proceeds consists of several individually insignificant amounts in the ordinary course of business. In 2022, property insurance recoveries consisted of approximately $3.0 million relating to a prior period incident at the Company's port facility in Texas, proceeds of $2.6 million related to a conveyor collapse at a Louisiana grain asset, and proceeds of $5.0 million related to a grain bin collapse at an Indiana grain facility. In 2021, property insurance recoveries consisted of approximately $3.8 million relating to a prior period incident at the Company's port facility in Texas,

Gain on deconsolidation of joint venture -On April 18, 2023, ELEMENT was placed into receivership. As the receiver took control of ELEMENT, under the VIE consolidation model, the Company deemed to have lost control of the entity and therefore deconsolidated ELEMENT from its Consolidated Financial Statements. As a result of these activities, the Company recognized a gain on deconsolidation. See footnote 19 for additional information.

Gain on sale of assets and businesses - In 2023, the vast majority of the gain was from the sale of a Nebraska grain facility of $5.6 million. In 2022, the gain was primarily attributed to the sale of the Company's remaining frac sand facilities and assets in Oklahoma and Minnesota of $3.9 million. The Company In 2021, the gain was primarily attributed to the sale of an Illinois grain facility of $14.6 million.

Patronage income -As part of the Company's normal operations it relies heavily on short-term lines of credit in order to support working capital needs in addition to long-term debt presented on the Consolidated Balance Sheets. As part of these programs the Company receives patronage income from its lenders.

Biofuel Producer Program funds - The USDA as a part of the Biofuel Producer Program, created under CARES Act, provided funding to support biofuel producers who faced unexpected market losses due to the COVID-19 pandemic. In 2023, the Company received proceeds of $2.2 million under this program, of which $0.8 million was attributable to noncontrolling interest. In 2022, TAMH and ELEMENT received proceeds of $13.3 million and $4.3 million, respectively. Of these proceeds, $8.7 million was attributable to noncontrolling interest.

Equity earnings (losses) in affiliates - In 2023 and 2022, the Company recorded impairment charges on equity method investments for $1.0 million and $4.5 million, respectively. The remaining activity consists of routine earnings and losses in equity method investments through the ordinary course of business.

18. Earnings Per Share

(a) All Net income attributable to noncontrolling interests is within the continuing operations of the Company.

Antidilutive shares were de minimis for all periods presented above.

19. ELEMENT

ELEMENT was structured as a limited liability company established for the primary purpose of producing ethanol and additional co-products such as distiller’s dried grain and corn oil. The facility located in Colwich, Kansas, was designed to produce 70 million gallons of ethanol per year and began operations in August 2019.

The Company holds 51% of the membership units and ICM Holdings, Inc. (“ICM”) owns the remaining 49% of the membership units. The Company had acted as the manager of the facility, responsibilities which were assumed per the Management Services Agreement dated January 1, 2021. As a result, ELEMENT was concluded to be a variable interest entity (“VIE”) and had been consolidated within the Company’s Consolidated Financial Statements.

In early 2023, ELEMENT was unable to make its scheduled debt payments and was placed into default. The default led to an impairment triggering event, concluding in an $87.2 million impairment charge in the first quarter.

On April 18, 2023, ELEMENT was placed into receivership and a receiver was appointed, which took possession and control of the rights and interests of ELEMENT. With this appointment, while retaining its investment in ELEMENT, the Company ceased to have a controlling financial interest and was no longer deemed to be the primary beneficiary in the subsidiary. Accordingly, the Company deconsolidated ELEMENT at that time and began accounting for the subsidiary as an equity method investment which resulted in a pretax gain of $18.1 million. Additionally, at the time of deconsolidation the Company had $9.6 million in raw material and fee receivables as well as $2.0 million in loans and interest due from ELEMENT that were previously eliminated in consolidation, among other minor balances. Upon deconsolidation, the fair values of these receivables and loans from ELEMENT to the Company were ascertained to have minimal value, resulting in a pretax loss of $11.6 million. The combination of this activity triggered by the ELEMENT deconsolidation resulted in a cumulative net pretax gain of $6.5 million which was recorded in Other income, net in the Condensed Consolidated Statements of Operations.

On January 31, 2024, the receiver sold substantially all of the assets of ELEMENT for approximately $44.0 million. From the point of deconsolidation to December 31, 2023, the ELEMENT entity continued to incur losses and there have been no payments on the outstanding receivables or loan mentioned previously. No equity method losses related to ELEMENT have been recorded since deconsolidation as the investment is in a negative position as of December 31, 2023. The Company is currently in negotiations with the receiver to recover a portion of the outstanding receivables and loan which could potentially result in a nominal gain in early 2024.