ANDE Andersons, Inc. - 10-K

Item 1A. Risk Factors

The Company's operations are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this Form 10-K and could have a material adverse impact on the financial results of the Company. The risks described below are not the only risks facing the Company. Additional risks and uncertainties not currently known or currently viewed to be immaterial may also materially and adversely affect business, financial condition or results of operations. These risks can be impacted by factors beyond management's control. The following risk factors should be read carefully in connection with evaluating the Company and the forward-looking statements contained elsewhere in this Form 10-K.

Risks Related to our Business and Industry

Our business is affected by the supply and demand of commodities and is sensitive to factors outside of our control. Adverse price movements could negatively affect our profitability and results of operations.

Our Agribusiness and Renewables businesses buy, sell and hold inventories of agricultural input and output commodities, some of which are readily traded on commodity futures exchanges. Unfavorable weather conditions, both local and worldwide, as well as other factors beyond our control, can affect the supply and demand of these commodities and expose us to liquidity pressures to finance hedges in the commodity business in rapidly rising markets. In our Agribusiness segment, changes in the supply and demand of these commodities can also affect the value of inventories that we hold, as well as the price of raw materials as we are unable to effectively hedge these commodities. Increased inventory and raw material costs would decrease our profit margins and adversely affect our results of operations.

Corn - The principal raw material used to produce ethanol and co-products is corn. As a result, an increase in the price of corn, particularly corn basis, in the absence of a corresponding increase in petroleum-based fuel prices will typically decrease ethanol margins thus adversely affecting financial results in the Renewables segment. At certain levels, the relationship between corn and petroleum-based fuel prices may make ethanol uneconomical to produce for fuel markets. The price of corn is influenced by weather conditions and other factors affecting crop yields, shifts in acreage allocated to corn versus other major crops and general economic and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local supply and demand. The significance and relative impact of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices and adversely impact operating results. In addition, we may also have difficulty, from time to time, in physically sourcing corn on economical terms due to supply shortages. High costs or shortages could require us to suspend ethanol operations until corn is available on economical terms, which would have an adverse impact on operating results.

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Commodities - While we manage the risk associated with agricultural commodity price changes for our commodity inventory positions with derivative instruments, including purchase and sale contracts, we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts, and third-party non-performance risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting all of the risks that we are trying to manage. This can happen when the derivative and the underlying value of grain inventories and purchase and sale contracts are not perfectly correlated. Our commodity derivatives, for example, do not perfectly correlate with the basis component of our commodity inventory and contracts. Differences can reflect time periods, locations or product forms. Although the basis component is smaller and generally less volatile than the futures component of our grain market price, basis moves on a large commodity position can significantly impact the profitability of the Company.

Our futures, options, and over-the-counter contracts are subject to margin calls. If there are large movements in commodity markets, we could be required to post significant levels of margin deposits, which would impact our liquidity. There is no assurance that the efforts we have taken to mitigate the impact of the volatility of the prices of commodities upon which we rely will be successful. Any sudden change in the price of these commodities could have an adverse impact on our business and results of operations.

Natural gas - We rely on third parties for our supply of natural gas, which is consumed in the drying of wet grain, manufacturing of certain lawn products, pelleted lime and gypsum, and manufacturing of ethanol. The prices for and availability of natural gas are subject to market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather and overall economic conditions. Significant disruptions in the supply of natural gas could impact operations at the Company's facilities. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect future results of operations and our financial position.

Gasoline and oil - We market ethanol as a fuel additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended and as a substitute for petroleum-based gasoline. As a result, ethanol prices will be influenced by the supply and demand for gasoline and oil. Our future results of operations and financial position may be adversely affected if gasoline and oil demand or prices decline substantially.

Potash, phosphate and nitrogen - Raw materials used by nutrient business within the Agribusiness segment include potash, phosphate and nitrogen, for which prices can be volatile and are driven by global and local supply and demand factors. Significant increases in the price of these commodities may result in lower customer demand and higher than optimal inventory levels. In contrast, reductions in the price of these commodities may create lower of cost or net realizable value adjustments to inventories.

Some of our business segments operate in highly regulated industries. Changes in government regulations or trade association policies could adversely affect our results of operations.

Many of our business segments are subject to government regulation and regulation by certain private sector associations, compliance with which can impose significant costs on our business. Regulations of financial markets and instruments, including the Dodd-Frank Act and the Commodity Exchange Act may lead to additional risks and costs, which could adversely affect the Company’s futures commission merchant business and its agricultural commodity risk management practices. Future government policies may adversely affect the supply of, demand for, and prices of the Company’s products; adversely affect the Company’s ability to deploy adequate hedging programs; restrict the Company’s ability to do business in its existing and target markets; and adversely affect the Company’s revenues and operating results. Other regulations are applicable generally to all our businesses and corporate functions, including, without limitation, those promulgated under the Internal Revenue Code, the Affordable Care Act, the Employee Retirement Income Security Act and other employment and health care related laws, federal and state securities laws, and the U.S. Patriot Act. Failure to comply with such regulations can result in additional costs, fines or criminal action.

A significant part of our operations is regulated by environmental laws and regulations, including those governing the labeling, use, storage, discharge and disposal of hazardous materials. Because we use and handle hazardous substances in our businesses, changes in environmental requirements or an unanticipated significant adverse environmental event could have an adverse effect on our business. We cannot assure that we have been, or will at all times be, in compliance with all environmental requirements, or that we will not incur costs or liabilities in connection with these requirements. Private parties, including current and former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us, or contained in our products. We are also exposed to residual risk because some of the facilities and land which we have acquired may have environmental liabilities arising from their prior use.

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In addition, changes to environmental regulations may require us to modify our existing plant and processing facilities which could significantly increase the cost of those operations.

International trade disputes can adversely affect agricultural commodity and nutrient trade flows by limiting or disrupting trade between countries or regions. Trade disputes can lead to the implementing of tariffs on commodities in which we merchandise or otherwise use in our operations. This can lead to significant volatility in commodity prices, disruptions in historical trade flows and shifts in planting patterns in the Company's geographic footprint, which would present challenges and uncertainties for our business. Under the current U.S. administration, there has been a heightened risk of new or increased tariffs and trade disputes and there is currently significant uncertainty about the extent of increased tariffs and their enforceability and how they may impact our business and industry. The imposition of new tariffs or uncertainty around future tariff levels can cause significant fluctuations in the futures and basis levels of agricultural commodities and/or increased raw material costs in our nutrients business, impacting our earnings. We cannot predict the effects that future trade policy or the terms of any negotiated trade agreements and their impact on our business.

In our Agribusiness and Renewables businesses, agricultural production and trade flows can be affected by government programs and legislation. Production levels, markets and prices of the commodities we merchandise can be affected by U.S. government programs, which include acreage controls and price support programs administered by the USDA and required levels of ethanol in gasoline through the Renewable Fuel Standards as administered by the EPA. Other examples of government policies that can have an impact on our business include the Inflation Reduction Act, tariffs, taxes, duties, subsidies, import and export restrictions, outright embargoes, Low Carbon Fuel Standard programs, and price controls on agricultural commodities. Because a portion of our commodity sales are to exporters, the imposition of export restrictions and other foreign countries' regulations could limit our sales opportunities and create additional credit risk associated with export brokers if shipments are rejected at their destination.

Our Agribusiness segment also manufactures certain agricultural nutrients and uses potentially hazardous materials. All products containing pesticides, fungicides and herbicides must be registered with the EPA and state regulatory bodies before they can be sold. The inability to obtain or the cancellation of such registrations could have an adverse impact on our business. In the past, regulations governing the use and registration of these materials have required us to adjust the raw material content of our products and make formulation changes. Future regulatory changes may have similar consequences. Regulatory agencies, such as the EPA, may at any time reassess the safety of our products based on new scientific knowledge or other factors. If it were determined that any of our products were no longer considered to be safe, it could result in the amendment or withdrawal of existing approvals, which, in turn, could result in a loss of revenue, cause our inventory to become obsolete or give rise to potential lawsuits against us. Consequently, changes in existing and future government or trade association polices may restrict our ability to do business and have an adverse impact on the Company's financial results.

The Company is subject to uncertainty regarding eligibility and monetization of Section 45Z Tax Credits

Section 45Z of the Internal Revenue Code provides a per‑gallon tax credit for domestically produced transportation fuels, including ethanol, based on the carbon intensity of the fuel produced and sold. The credit applies to qualifying fuel produced after December 31, 2024, and sold through December 31, 2029. Treasury and the IRS have issued proposed regulations and other guidance interpreting statutory requirements for determining eligibility and credit amounts and IRS registration (generally through Form 637) at the time of production, with IRS guidance indicating a signed registration letter dated on or before January 1, 2025 is required to claim the credit for production beginning January 1, 2025. Our ability to qualify depends on consistently achieving certain lifecycle emissions and meeting prevailing wage and apprenticeship standards needed to receive the enhanced rate; otherwise, the credit amount is reduced to one‑fifth of the higher value. Changes to lifecycle modeling assumptions and/or emissions tables could reduce or eliminate the benefits we expect.

Even if we generate eligible credits, the economic value we ultimately realize remains uncertain. Section 45Z tax credits are transferable, but the transfer market is still developing, typically resulting in discounts to face value, and may require buyer diligence and insurance protections that could affect pricing and liquidity. Further, Section 45Z imposes extensive substantiation, certification, and recordkeeping requirements, and evolving IRS and Treasury guidance such as revisions to 45ZCF‑GREET, emissions tables, or qualified‑sale rules, may alter eligibility or reduce credit amounts. If we are unable to meet lifecycle emissions thresholds, prevailing wage or apprenticeship requirements or changing regulatory standards, we may be unable to qualify for or monetize Section 45Z tax credits in the amounts anticipated, which could adversely affect our results of operations and cash flows.

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We are required to carry significant amounts of inventory across all our businesses. If a substantial portion of our inventory becomes damaged or obsolete, its value would decrease, and have an adverse impact on the Company's financial results.

We are exposed to the risk of a decrease in the value of our inventories due to a variety of circumstances in all of our businesses. For example, within both Agribusiness and Renewables, there is the risk that the quality of our inventory could deteriorate due to damage, moisture, insects, disease, or foreign material. If the quality of our inventory were to deteriorate below an acceptable level, the value of our inventory could decrease significantly. Planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs and the producer's perception of demand. Technological advances in agriculture, such as genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could also affect the demand for our crop nutrients and crop protection products. Any of these factors could render some of our inventory obsolete or reduce its value.

Our indebtedness could negatively affect our financial condition, decrease our liquidity and impair our ability to operate the business.

If cash on hand is insufficient to pay our obligations or margin calls as they come due at a time when we are unable to draw on our credit facility, it could have an adverse effect on our ability to conduct our business. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is dependent on various factors. These factors include general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. Certain of our long-term borrowings include provisions that require minimum levels of working capital and equity and impose limitations on additional debt. Our ability to satisfy these provisions can be affected by events beyond our control. Noncompliance with these provisions could result in default and acceleration of debt payments.

We face significant competition and pricing pressure from other companies in our industries. If we are unable to compete effectively with these companies, our sales and profit margins would decrease, and our earnings and cash flows would be adversely affected.

The markets for our products in both of our business segments are highly competitive. While we have substantial operations in certain regions where we operate, some of our competitors are significantly larger, compete in wider markets, have greater purchasing power, and have considerably larger financial resources. We also may enter into new markets where our brand is not recognized and in which we do not have an established customer base. Competitive pressures in all of our businesses could affect the price of, and customer demand for, our products, thereby negatively impacting our profit margins and resulting in a loss of market share.

Our Agribusiness and Renewables businesses use derivative contracts to reduce the impact of volatility in the commodity markets. Non-performance by the counterparties to those contracts could adversely affect our future results of operations and financial position.

A significant number of purchases and sales within the Agribusiness and Renewables segments are made through forward contracting, much of which includes a natural back-to-back hedging relationship. In addition, the Company uses exchange traded and, to a lesser degree, over-the-counter contracts to further reduce volatility in changing commodity prices. A significant adverse change in commodity prices could cause a counterparty of one or more of our derivative contracts to not perform on its obligation.

We face exposure to country risk in countries that face financial, political, and economic unrest through unsecured credit, inventory, forward contract risk or payment origination that could adversely affect our future results of operations, financial position, and cash flows.

With our international merchandising business we have additional country risk through trade flows around the globe with direct exposure to the counterparty, via contract mark-to-market exposure, unsecured accounts receivable or inventory in the country. In certain areas in which we trade (both origination and destination), country risk may be more prevalent given the country’s political and/or economic situations. With the purchases and sales of grain in vessel sized quantities within the international merchandising business increases the size and potential severity of our country risk. Additionally, there could be a rapid increase in interest rates making it difficult for our counterparties to access U.S. dollars to allow us to collect on accounts receivable timely. We have engaged third parties to provide assessments of country risk and business ratings driven by economic indicators. We also have established counterparty credit limits and various monitoring agreements. Additionally, we have a diverse customer base and have the ability to divert cargo in transit to another counterparty, country, or region to limit the exposure of a material financial loss.

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Our business involves considerable safety risks. Significant unexpected costs and liabilities would have an adverse effect on our profitability and overall financial position.

Due to the nature of some of the businesses in which we operate, we are exposed to significant operational hazards such as grain dust explosions, fires, malfunction of equipment, abnormal pressures, blowouts, pipeline and tank ruptures, chemical spills or run-off, transportation accidents, and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage and may result in suspension of operations and the imposition of civil or criminal penalties. If grain dust were to explode at one of our elevators, if an ethanol plant were to explode or catch fire, or if one of our pieces of equipment were to fail or malfunction due to an accident or improper maintenance, it could put our employees and others at serious risk.

We own several aging assets that require regular assessment and continual investments in maintenance capital. If we experience catastrophic damage to our facilities due to structural integrity, this could result in disruptions to operations, potential safety incidents and losses not covered by insurance.

The Company has several aging assets that require continual maintenance to remain reliable and safe to operate. Mitigating asset structural integrity risk is critical to avoid property damage claims, business interruptions, and injuries. Engineers undertake inspections of assets regularly and based on the nature of our business there are some heightened risks. For example, risk of bin failures and fires in bins are mitigated by exercising caution with moving grain and controlling temperatures, respectively. We also have an increased focus on safety and training employees to be able to identify potential safety and asset integrity issues. We also are undergoing capital spending allocations to ensure that proper maintenance can occur timely. To help mitigate losses in the event of a claim, we are insured under several policies, including but not limited to inventory, property, liability and business interruption coverage. However, these policies are subject to deductibles and certain limits. Although we believe we have appropriate levels of insurance to cover material losses, if we continue to experience insurable claims, our annual insurance premiums could increase, and some insurance carriers may cease to cover us. Obtaining adequate insurance at that point could have additional costs and lesser coverage. Then, the occurrence of a claim, could have a material adverse effect on our reputation, financial condition and results of operations.

Adverse weather conditions, including as a result of climate change, may adversely affect the availability, quality and price of agricultural commodities and agricultural commodity products, as well as our operations and operating results.

Adverse weather conditions have historically caused volatility in the agricultural commodity industry and consequently in our operating results by causing crop failures or significantly reduced harvests, which may affect the supply and pricing of the agricultural commodities that we sell and use in our business, reduce demand for our fertilizer products and negatively affect the creditworthiness of agricultural producers who do business with us. While the Company continues to expand its geographic footprint, a significant portion of the Company's assets are still exposed to conditions in the Eastern Grain Belt. In this region, adverse weather during the fertilizer application, planting, and harvest seasons can have negative impacts on our Agribusiness and Renewables businesses. Higher basis levels or adverse crop conditions in the Eastern Grain Belt can increase the input costs or lower the market value of our products relative to other market participants that do not have the same geographic concentration.

Additionally, the potential physical impacts of climate change are uncertain and may vary by region. These potential effects could include changes in rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations, the location, costs and competitiveness of agricultural commodity production and related storage and processing facilities and the supply and demand for agricultural commodities. These effects could be material to our results of operations, liquidity or capital resources.

The Company faces risks related to international conflicts, acts of terrorism and wars that may adversely impact the Company's financial condition or results of operations.

Geopolitical instability and conflicts including acts of terrorism, threats of war or actual war, could cause disruptions in our ability to sell and ship products, collect payments from, and do business with certain customers based on logistic challenges, safety concerns, and conforming with regulatory compliance. There could be trade restrictions including export restrictions and tariffs which would increase costs and have an adverse effect on results from operations.

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General Risk Factors

We rely on a limited number of suppliers for certain of our raw materials and other products and the loss of one or several of these suppliers could increase our costs and have a material adverse effect on any one of our business segments.

We rely on a limited number of suppliers for certain of our raw materials and other products. If we were unable to obtain these raw materials and products from our current vendors, or if there were significant increases in our supplier's prices, it could significantly increase our costs and reduce our profit margins.

We are subject to global and regional economic downturns and related risks including health epidemics, pandemics and similar outbreaks.

The level of demand for our products is affected by global and regional demographic and macroeconomic conditions, including population growth rates, changes in standards of living and the occurrence of any health-related risks. A significant downturn in global economic growth, or recessionary conditions in major geographic regions, may lead to reduced demand for agricultural commodities and food products, which could adversely affect our business and results of operations. The occurrence of health-related risks including epidemics or global pandemics may adversely affect the economy. The extent to future epidemics or pandemics impact our business going forward will depend on the duration or scope of the outbreak and how governmental, businesses, and society respond, along with the economic impact including financial market volatility. The pace of economic improvement is uncertain and there can be no assurance that economic and/or political conditions will not continue to affect market and consumer confidence or deteriorate further in the near term.

The Company may not be able to effectively integrate businesses it acquires.

We continuously look for opportunities to enhance our existing businesses through strategic acquisitions. The process of integrating an acquired business into our existing business and operations may result in unforeseen operating difficulties and expenditures as well as require a significant amount of management resources. There is also the risk that our due diligence efforts may not uncover significant business flaws or hidden liabilities. In addition, we may not realize the anticipated benefits and synergies of an acquisition and they may not generate the anticipated financial results. Additional risks may include the inability to effectively integrate the operations, products, technologies and personnel of the acquired companies. The inability to maintain uniform standards, controls, procedures and policies would also negatively impact operations.

If our goodwill, amortizable intangible assets and long-lived assets become impaired, then we could be required to record a significant charge to earnings.

The Company is required to test for goodwill impairment at least annually. In addition, we review our tangible and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill, amortizable intangible assets and long-lived assets may not be recoverable include prolonged declines in our stock price, market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of our review, we could be required to record a significant charge to earnings in our Consolidated Financial Statements during the period in which any impairment is determined, negatively impacting our results of operations.

Our business depends on our ability to successfully manage productivity improvements and ongoing organizational change, including our ability to attract and retain talented employees.

Our financial projections assume certain ongoing productivity improvements and cost savings, including staffing adjustments as well as employee departures. Failure to deliver these planned productivity improvements and cost savings, while continuing to invest in business growth, could adversely impact our results of operations and cash flows. Additionally, changes in our senior management have recently occurred, and successfully executing organizational change, management transitions at leadership levels of the Company and motivation and retention of key employees, is critical to our business success. This includes developing and retaining organizational capabilities in key growth markets where the depth of skilled or experienced employees may be limited and competition for these resources is intense, as well as continuing the development and execution of strong leadership succession plans. Failure to effectively identify key employees and ensure appropriate training and smooth transitions could adversely impact our ability to execute our business strategies and operations. If we are unable to motivate and retain employees, we may not be able to maximize productivity and effectively operate our facilities. Factors that may affect our ability to attract and retain sufficient numbers of qualified employees include employee morale, our reputation, competition from other employers and availability of qualified individuals.

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Compliance with evolving regulations regarding disclosure of emissions and metrics and/or climate change may impact our reputation, increase our operating costs, and reduce the value of our assets and products.

As an agricultural company, we assess the potential impacts of our business by environmental risks including climate change, greenhouse gas emissions and other environmental issues. The Company, through our Enterprise Risk Management ("ERM") program and other efforts, is actively focused on implementing responsible practices to reduce environmental risks while complying with evolving laws and regulations. We have participated with customers in sustainable sourcing pilot projects which provides farming operations greater visibility into their sustainability activities. If we are unable to properly assess these risks and meet our appropriate disclosure requirements, or if our efforts are considered to be inadequate, then stakeholders, the industry, and investors might perceive that we are not responding appropriately and responsibly. As a result, investors may reconsider their capital investments, and our reputation could be diminished leading to customers and suppliers choosing to refrain from engaging in business with us.

The Company faces transition risks and physical risks related to climate change and electrification.

With the increased regulations and opportunity of electric vehicles comes the transitional risk that biofuels are in lower demand due to environmental concerns with climate change and changing consumer behavior. While biofuels also have less carbon emissions than regular gasoline, electric vehicles have the lowest emissions. A decrease in demand for biofuels as a result of regulatory or market changes would result in ethanol plants being underutilized and would adversely impact the results of our Renewables segment.

In addition, a decrease in corn demand for ethanol production could also impact our Agribusiness segment if it resulted in a greater supply of corn for human and livestock consumption, driving down food costs and potentially overall grain prices. From a physical risk standpoint, there is increased land acreage that was historically used for growing corn that is being left unplanted as there is belief that the empty farmland is aiding in absorbing carbon dioxide. This would result in decreased agriculture productivity, reducing the amount of fertilizers needed and grains harvested. There are many assumptions both domestically and internationally driving the impact of supply and demand for corn, soybeans and other grains so it is too early to quantify the transition and physical risks involved with the gradual shift to electrification and the environmental regulatory changes. Although we believe that many regions both domestically and internationally will still rely on biofuels as they are slower to make changes and might not have immediate resources to do so, we cannot be certain about the pace and nature of changes in the industry and how it will impact demand for our products. These environmental changes could be costly and adversely affect our facilities, financial position and results of operations. While our Company believes that we are strategically positioned so that we can assess our role in actively reducing environmental risks while remaining focused on being a leader in the merchandising of grains and other co-products domestically and internationally, it is not possible to predict exactly how a changing climate will impact our business. If our strategies prove ineffective, our business could be adversely affected.

The Company's information technology systems may impose limitations or failures which may affect the Company's ability to conduct its business.

The Company's information technology systems, some of which are dependent on services provided by third parties, provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, human resources and other processes necessary to manage the business. The Company has put in place business continuity plans for its critical systems. However, if the Company's information technology systems are damaged, or cease to function properly due to any number of causes, such as catastrophic events or power outages, and the Company's business continuity plans do not allow it to effectively recover on a timely basis, the Company may suffer interruptions in the ability to manage its operations, which may adversely impact the Company's operating results.

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We are in the process of reviewing our systems roadmap, to help standardize processes and support growth initiatives. This will result in system implementations as part of our ongoing information technology transformation strategy, and we plan to implement these systems throughout relevant parts of our business. If we do not allocate and effectively manage the resources necessary to explore, build and sustain the proper information technology infrastructure, or if we fail to achieve the expected benefits from this initiative, it may impact our ability to process transactions accurately and remain aligned with the changing needs of our business. In addition, failure to deliver the applications on time or anticipate the necessary readiness and training needs could lead to business disruption, and loss of customers and employees. In connection with potential implementations and resulting business process changes, we will continue to enhance the design and documentation of business processes and controls, including our internal control over financial reporting processes, to maintain effective controls over financial reporting.

We utilize cloud-based services, systems and networks managed by third-party vendors to process, transmit and store information and to conduct certain business activities and transactions with employees, customers, vendors and other third parties. Our utilization of these cloud-based services and systems could increase as we implement our information technology transformation initiatives. If any of these third-party service providers or vendors do not perform effectively, or if we fail to adequately monitor their performance (including compliance with service-level agreements or regulatory or legal requirements), we may have to incur additional costs to correct errors made by such service providers, or we could be subject to litigation, claims, or regulatory proceedings. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, adverse effects on financial reporting, or damage to our reputation. In addition, the management of multiple third-party service providers increases operational complexity and decreases our control.

Data privacy regulations continue to evolve, and non-compliance with such regulations, including as a result of adoption of emerging technologies, such as artificial intelligence, could subject the Company to legal claims or proceedings, potential regulatory fines and penalties and damage to our reputation. These factors may adversely impact our business, results of operations, and financial condition, as well as our competitive position.

We are at risk of cyber-incidents or other security breaches that could undermine our ability to operate effectively.

Our security measures may be breached due to employee error, malfeasance, or otherwise. In addition, although the systems continue to be refreshed periodically, portions of the infrastructure are outdated and may not be adequate to support new business processes, accounting for new transactions, or implementation of new accounting standards if requirements are complex or materially different than what is currently in place.

Additionally, outside parties may attempt to destroy critical information, or fraudulently induce employees, third-party service providers, or users to disclose sensitive information to gain access to our data or our users' data. Notwithstanding the attention the Company pays to cybersecurity risks and the processes and controls implemented, the Company may not be successful in preventing or mitigating a cybersecurity incident. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities from time to time. Cybersecurity risks rapidly evolve and are complex, so the Company must continually adapt and enhance processes and controls. As the Company does this, management must make judgments about where to invest resources to protect the Company and our assets most effectively. These are inherently challenging processes, and management can provide no assurance that the processes and controls implemented will be effective or that we will be able to prevent, repel or mitigate the effects of such an attack by outside parties. The Company also relies on third parties to maintain and process certain information which could be subject to breach or unauthorized access to Company or employee information. We must rely on these entities for adequately detecting and reporting cyber incidents, in which delays could disrupt our operations or potentially affect our ability to report or respond to cybersecurity incidents effectively or in a timely manner. Any such incident to the Company or a third party could result in an inability to perform critical functions, significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our services that could potentially have an adverse effect on our business.

For information on our cybersecurity risk management, strategy and governance, see Item 1C. Cybersecurity .

A change in tax laws or regulations of any federal, state or international jurisdiction in which we operate could increase our tax burden and otherwise adversely affect our financial position, results of operations, cash flows and liquidity.

We continue to assess the impact of various U.S. federal, state, local, and international legislative proposals that could result in a material increase to our U.S. federal, state, local and/or international taxes. We cannot predict what impact, if any, changes in federal policy, including tax policies, will have on our industry or whether any specific legislation will be enacted or the terms

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of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing our cost of tax compliance or otherwise adversely affecting our financial position, results of operations, cash flows and liquidity. Changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our tax expense and profitability. Such impact may also be affected positively or negatively by subsequent potential judicial interpretation or related regulation or legislation which cannot be predicted with certainty.

We are subject to various legal and regulatory proceedings, including litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely impact our business, financial condition and results of operations.

In the ordinary course of business, we are subject to various legal and regulatory proceedings, which may include but are not limited to those involving antitrust, tax, environmental, intellectual property, data privacy and other matters, including general commercial litigation. Any claims raised in legal and regulatory proceedings, whether with or without merit, could be time consuming, expensive to defend, damage our reputation and could divert management’s attention and resources. Additionally, the outcome of legal and regulatory proceedings may differ from our expectations because the outcomes of these proceedings are often difficult to reliably predict. Various factors and developments can lead to changes in our estimates of liabilities and related insurance receivables, where applicable, or may require us to make additional estimates, including new or modified estimates that may be appropriate due to a judicial ruling or judgment, a settlement, regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in damage to our reputation and charges that could have a material adverse impact on our results of operations in any particular period.

In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium levels. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended December 31, 2025, compared to the year ended December 31, 2024. For a discussion of the year ended December 31, 2024, compared to the year ended December 31, 2023, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2024, filed on February 19, 2025.

Executive Overview

Effective January 1, 2025, the Company realigned its organizational structure to better reflect updates in management reporting resulting in a change in reportable segments. As a result, the former Trade segment was combined with the former Nutrient & Industrial segment in the newly formed Agribusiness segment along with several smaller business lines being moved between the Agribusiness and Renewables segments. All prior period segment information has been recast to conform to the current year presentation.

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

Agribusiness

The Agribusiness segment's operating results declined from the prior year as the segment faced difficult market conditions, including an oversupplied market, low commodity prices, and muted volatility through much of the year. These conditions kept commercial activity more short-term in nature, creating margin pressure in our merchandising business. We saw improvement through the record fall corn harvest, as our western footprint was able to accumulate good volumes at favorable values. In addition, our eastern footprint was able to recognize good elevation margins on corn from strong export and ethanol demand in the last part of the year. The premium ingredient business continued its steady performance, leveraging recent investments into this space. The fertilizer business benefited a large spring application season with the highest corn plantings in recent history.

Our complementary asset footprint should provide some uplift in 2026, with more traditional basis appreciation opportunities in the west, while continued export demand would benefit elevation margins for the eastern assets. Sorghum exports remained strong into early 2026 which we expect will benefit our Skyland Grain, LLC ("Skyland") and Houston port export assets. As on-farm grain volumes come to market, merchandising opportunities may arise. Domestic premium ingredient demand is also expected to stay solid and should continue to support recent capital growth investments. Expected corn plantings are higher than historical average, which may drive demand for nitrogen products, but volumes will be dependent on farmer economics.

Total Agribusiness grain storage space capacity at company-owned or leased grain facilities, including temporary pile storage, was approximately 271 million and 291 million bushels at December 31, 2025, and 2024, respectively. The decrease in grain storage capacity from the same period of the prior year was due to a current year incident at a grain terminal in Sunray, Texas, as well as the closing of several smaller underperforming grain locations. The storage capacity at our nutrient facilities was evenly split between dry and liquid storage with a total capacity of approximately one million tons at December 31, 2025, and 2024, respectively.

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Renewables

The Renewables segment had another solid performance in 2025 led by strong operations at the Company's ethanol plants. Our plants had another outstanding production year, once again setting a record for gallons produced. Ethanol board crush improved $0.02 per gallon over 2024, which was more than offset by higher corn basis in the east and higher natural gas cost. We acquired 100% of our ethanol plants at the end of July, which generated nearly $40 million of incremental plant income before income taxes attributable to the company in the back half of the year. Finally, with our focus on running efficient ethanol plants, we were able to qualify for and realize $35 million of Section 45Z clean fuel production tax credits in 2025.

Favorable biofuels policies, continuing elevated export demand, upcoming planned industry maintenance, and the summer gasoline demand should all support ethanol fundamentals this year. Renewable feedstocks merchandising should also benefit this year with the proposed robust Renewable Volume Obligations establishing the volume of renewable fuels that must be blended into transportation fuels.

Volumes shipped were as follows:

Year Ended December 31,

(in thousands)

Ethanol (gallons shipped)

E-85 (gallons shipped)

Renewable feedstocks (pounds shipped) (a)

Dried distillers grains (tons shipped) (b)

(a) Includes corn oil, soybean oil, and other fats, oils, and greases.

(b) Dried distillers grains ("DDG") tons shipped converts wet tons to a dry ton equivalent amount.

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.

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 10 to the Company's Consolidated Financial Statements in Item 8.

Year Ended December 31, 2025

(in thousands)

Agribusiness

Renewables

Other

Total

Sales and merchandising revenues

Cost of sales and merchandising revenues

Gross profit

Operating, administrative and general expenses

Asset impairment

Interest expense (income)

Other income (expense), net

Income (loss) before income taxes

Income (loss) before income taxes attributable to the noncontrolling interests

Non-GAAP Income (loss) before income taxes attributable to the Company

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Year Ended December 31, 2024

(in thousands)

Agribusiness

Renewables

Other

Total

Sales and merchandising revenues

Cost of sales and merchandising revenues

Gross profit

Operating, administrative and general expenses

Interest expense (income)

Other income, net

Income (loss) before income taxes

Income before income taxes attributable to the noncontrolling interests

Non-GAAP Income (loss) before income taxes attributable to the Company

The Company uses Non-GAAP Income (loss) before income taxes attributable to the Company, 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 is a useful measure of the Company’s performance as it provides investors additional information about the Company's operations allowing better evaluation of underlying business performance and better period-to-period comparability. This measure is not intended to replace or be an alternative to Income (loss) before income taxes, the most directly comparable amount reported under GAAP, which is also presented in the table above.

Comparison of 2025 with 2024

Agribusiness

Operating results for the Agribusiness segment decreased by $52.2 million from the prior year results. Sales and merchandising revenues decreased $196.4 million and cost of sales and merchandising revenues decreased by $230.3 million resulting in a $33.9 million increase in gross profit. The decrease in sales and merchandising revenues and cost of sales and merchandising revenues can be attributed to both reduced commodity prices and volumes in the Company's legacy footprint. This decrease in the legacy business was partially offset by the increase in sales and merchandising revenues and cost of sales and merchandising revenues from the full year impact of our Skyland investment, which we acquired in November 2024 and added $468.0 million and $392.0 million, respectively in 2025. Gross profit increased by $33.9 million from the prior year with $76.0 million of the increase as a result of additional Skyland gross profit, which was partially offset by reduced results from our legacy asset and merchandising businesses from limited trade flows due to a surplus of grain supplies and weak customer demand.

Operating, administrative and general expenses increased $68.8 million compared to prior year, with substantially all of the increase related to the acquired Skyland business.

Asset impairment charges of $14.8 million were related to closing several smaller underperforming grain and nutrient locations along with a facility that was damaged from a grain explosion.

Interest expense increased by $12.6 million, with substantially all of the increase due to increased borrowing related to the acquired Skyland business.

Other income, net increased by $9.7 million primarily driven by $16.8 million of additional property insurance recoveries that were partially offset by less interest income from less cash on hand.

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Renewables

Operating results for the Renewables segment were consistent with the prior year before consideration of the noncontrolling interest share. Sales and merchandising revenues, as well as the related cost of sales and merchandising revenues, remained largely in line with the prior year, with a decrease of less than 2%. The slight decline was primarily driven by lower renewable feedstock volumes, while sales prices remained consistent with the prior year. The $14.2 million decrease in gross profit was mainly attributable to an $11.1 million decrease in results of the ethanol plants. Although the plants operated efficiently with improved yields and higher production, they were unable to overcome market pressures stemming from elevated corn basis and natural gas costs in the current year.

Operating, administrative and general expenses increased by $5.7 million, primarily due to $5.9 million in costs associated with the acquisition of the remaining equity interests in TAMH in 2025.

Asset impairment charges increased by $3.4 million from the prior year due to a charge related to equipment used in corn oil refinement.

Interest expense, net increased by $2.9 million from greater borrowings due to less cash on hand as a result of the acquisition of the remaining interest in TAMH.

Other income increased by $26.4 million from prior year as the Company recognized $35.0 million of clean fuel production credits in the current year. This is partially offset by a $3.4 million decline in interest income and the absence of a $3.1 million gain recorded in the prior year related to the deconsolidation of the ELEMENT ethanol plant.

Other

Corporate expenses increased by $7.1 million and were primarily driven by increased long-term incentive costs driven by improved Renewables performance, along with a $1.4 million pension plan settlement charge.

Income Taxes

In 2025, the Company recorded income tax expense of $22.2 million. The Company's effective rate for 2025 was 15.7% on Income before income taxes of $141.5 million. The difference between the 15.7% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax impact of noncontrolling interest, nontaxable clean fuel production credits and the reversal of certain unrecognized tax benefits, partially offset by state and local taxes, nondeductible compensation, and valuation allowances on losses in foreign tax jurisdictions.

In 2024, the Company recorded income tax expense of $30.1 million. The Company’s effective rate for 2024 was 15.0% on Income before income taxes of $200.8 million. The difference between the 15.0% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax impact of noncontrolling interest and U.S. federal tax credits partially offset by state and local income taxes, tax impacts of foreign operations, and nondeductible compensation.

The Company’s subsidiary partnership returns are under U.S. federal and certain state tax examinations for tax years 2018 through 2022. The Company’s subsidiary is under federal tax examination by the Mexican tax authorities for tax year 2015. The U.S. federal, state, and Mexican tax authorities’ examinations could potentially be resolved within the next 12 months. The resolution of these examinations could change our unrecognized tax benefits and favorably impact income tax expense by a range of zero to $2.8 million.

On December 20, 2021, the Organization for Economic Co-operation and Development ("OECD") issued Pillar Two model rules introducing a global minimum tax of 15% on large corporations. Although the U.S. has not adopted the Pillar Two model rules, several foreign countries have enacted legislation which closely follows OECD’s Pillar Two guidance. The impact of Pillar Two legislation in our relevant jurisdictions is immaterial to the Company's 2025 effective tax rate.

On July 4, 2025, the United States passed the One Big Beautiful Bill Act ("OBBBA"), which modified the existing international tax framework and permanently extended select provisions of the Tax Cuts and Jobs Act. This legislation did not materially affect the Company's effective tax rate for 2025 and is not expected to impact the Company's effective tax rate for 2026, with the exception of clean fuel production credits. The bill provides for changes in the calculation of the carbon intensity score which may significantly favorably affect credits, recorded as Other income, and extended the credits through 2029.

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Liquidity and Capital Resources

Working Capital

At December 31, 2025, the Company had working capital of $690.0 million, a decrease of $429.1 million from the prior year. This decrease was attributable to changes in the following components of current assets and current liabilities:

(in thousands)

December 31, 2025

December 31, 2024

Variance

Current Assets

Cash and cash equivalents

Accounts receivable, net

Inventories

Commodity derivative assets – current

Other current assets

Total current assets

Current Liabilities

Short-term debt

Trade and other payables

Customer prepayments and deferred revenue

Commodity derivative liabilities – current

Current maturities of long-term debt

Accrued expenses and other current liabilities

Total current liabilities

Working Capital

Current assets decreased $473.9 million in comparison to prior year. The primary driver behind the decline was the $425.0 million of cash used to acquire the remaining interest in TAMH in 2025.

Current liabilities decreased $44.8 million in comparison to the prior year. The decrease in current liabilities was mainly driven by the decrease in trade payables from a decrease in commodity prices, partially offset by increased borrowings on the Company's revolver in 2025 to acquire the remaining equity in TAMH.

Sources and Uses of Cash in 2025 Compared to 2024

Year Ended

(in thousands)

December 31, 2025

December 31, 2024

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Operating Activities

Operating activities provided cash of $177.0 million in 2025 compared to $331.5 million in 2024. The majority of the decrease in cash provided by operating activities was due to unfavorable changes in operating assets and liabilities that resulted in $109.4 million additional cash used. Although cash generation remains strong, earnings fell behind the prior year results leading to the remainder of the decrease in cash provided by operating activities.

Net income taxes paid were $16.2 million and $31.5 million in the years ended December 31, 2025, and 2024, respectively. The decrease in the current year is generally driven by U.S. Federal and state net operating losses incurred in 2025.

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Investing Activities

Investing activities used cash of $195.3 million in the current year compared to $163.1 million used in the prior year. The $32.2 million increase was primarily driven by $83.9 million in higher capital expenditures to support previously announced growth initiatives. This was partially offset by additional insurance proceeds received in the current year and the impact of a business acquisition that occurred in the prior year.

Capital expenditures of $233.1 million for 2025 on property, plant and equipment and capitalized software includes: Agribusiness - $176.9 million; Renewables - $49.2 million; and $7.1 million in Other.

We expect to invest between $200 to $225 million in property, plant and equipment in 2026; roughly split 50% between growth and maintenance capital.

Financing Activities

Net cash used in financing activities was $447.1 million in 2025, compared to $250.4 million used in 2024. The $196.8 million increase in cash used in financing activities from the prior year was mainly due to the $425.0 million of cash used to purchase the remaining interest in TAMH. This was partially offset by a $171.8 million change in borrowings on the Company's revolving credit facilities and a $68.5 million decrease in distributions to noncontrolling interest shareholders from the prior year.

The Company commenced another common share repurchase plan on August 15, 2024, which authorized $100 million of common share repurchases to be made on or before August 15, 2027. As of December 31, 2025, approximately $17.7 million of the Repurchase Plan had been utilized.

As of December 31, 2025, the Company was party to borrowing arrangements with a syndicate of banks that provide a total borrowing capacity of $2,054.8 million. There was $1,802.6 million available for borrowing at December 31, 2025. The Company's highest levels of borrowing typically occur in the late winter and early spring due to seasonal inventory requirements in the fertilizer and grain businesses. At December 31, 2025, the Company had total available liquidity of $1,900.9 million comprised of cash and cash equivalents and unused lines of credit.

The Company paid $26.8 million in dividends in 2025 compared to $26.3 million in 2024. The Company paid $0.195 per common share for the dividends paid in January, April, July and October 2025, and $0.190 per common share for the dividends paid in January, April, July and October 2024. On December 11, 2025, the Company declared a cash dividend of $0.20 per common share, payable on January 23, 2026, to shareholders of record on January 2, 2026.

Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of working capital and various debt leverage ratios. The Company is in compliance with all covenants as of December 31, 2025. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities.

The Company is typically in a net short-term borrowing position in the first two quarters of the year. The majority of these short-term borrowings bear interest at variable rates, and an increase in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, the Company could receive a return of cash.

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

Contractual Obligations

Long-term Debt

As of December 31, 2025, the Company had total outstanding long-term debt with both floating and fixed rates of varying maturities for an aggregate principal amount outstanding of $625.4 million, of which $63.4 million of the outstanding principal of the 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 long-term debt total $120.3 million, with $31.2 million payable within 12 months. See Note 4 to the Consolidated Financial Statements for additional information.

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Operating Leases

The Company has lease arrangements for certain equipment and facilities, including grain facilities, fertilizer facilities and equipment. As of December 31, 2025, the Company had fixed operating lease payment obligations of $144.9 million, with $32.3 million payable within 12 months. See Note 11 to the Consolidated Financial Statements for additional information.

Commodity Purchase Obligations

The Company enters into forward purchase contracts of commodities with producers through the normal course of business. These forward purchase contracts are largely offset by forward sales contracts of commodities and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts. As of December 31, 2025, the Company had forward purchase contracts of $2,126.0 million, with $2,025.5 million payable within 12 months. See Note 5 to the Consolidated Financial Statements for additional information.

Postretirement Healthcare Program

The Company has a postretirement health care benefit plan that covers substantially all of its full-time employees hired prior to January 1, 2003. Obligations under the retiree healthcare programs are not fixed commitments and will vary depending on multiple factors, including the level of participant utilization and inflation. Our estimates of postretirement payments have considered recent payment trends and actuarial assumptions. As of December 31, 2025, the Company had outstanding benefit obligations of $16.1 million, with $1.3 million payable within 12 months.

Off-Balance Sheet Transactions

During the periods presented we did not have, nor do we currently have, any off-balance sheet transactions as defined under SEC rules, with the exception of standby letters of credit through banking institutions. At December 31, 2025, the Company had standby letters of credit outstanding of $2.8 million.

Critical Accounting Estimates

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

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

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

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Readily Marketable Inventories and Derivative Contracts

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

Impairment of Long-Lived Assets and Goodwill

The Company's 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 asset groups may not be recoverable. This is done by evaluating the recoverability based on undiscounted projected cash flows. 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. Our annual goodwill impairment test is performed as of October 1 each year.

During the year ended December 31, 2025, the Company evaluated goodwill for impairment using a quantitative assessment in two reporting units and a qualitative assessment in one reporting unit. The quantitative review for impairment takes into account an income approach using estimates of future cash flows, as well as a market-based approach. Critical estimates in the determination of the fair value of each reporting unit include, but are not limited to, future expected cash flows, estimated gross margins, and discount rates based on a reporting unit's weighted average cost of capital. Our estimates of future cash flows are based upon a number of assumptions including: gross margins, operating costs, budgets, capital expenditures, working capital needs, and long-range plans. The market-based approach uses an analysis of valuation metrics based upon results of publicly traded companies that reflect economic conditions and risks that are similar to the reporting unit to determine a market multiple to be applied to the reporting unit's past operating performance and estimated future results to calculate a fair value. These factors are discussed in more detail in Note 14 to the Consolidated Financial Statements.

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

Uncertain Tax Positions

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

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