REX AMERICAN RESOURCES CORPORATION Overview
We have been an investor in ethanol production facilities beginning in 2006 and
a refined coal production facility during the period from 2017 through
Our ethanol operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil, and natural gas, and availability of corn. As a result of price volatility for these commodities, our operating results can fluctuate substantially. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, the amount of corn stored on farms, weather, federal policy, foreign trade and international disruptions caused by wars or conflicts. Because the market price of ethanol and distillers grains are not always directly related to corn prices (for example, demand for crude and other energy and related prices, the export market demand for ethanol and distillers grains, soybean meal prices, and the results of federal policy decisions and trade negotiations can impact ethanol and distillers grains prices), at times ethanol and distillers grains prices may not follow movements in corn prices and, in an environment of higher corn prices or lower ethanol prices, reduce the overall margin structure at the plants. As a result, at times, we may operate our plants at negative or minimally positive operating margins.
We expect our ethanol plants to produce approximately 2.9 gallons of denatured ethanol for each bushel of grain processed in the production cycle. We refer to the actual gallons of denatured ethanol produced per bushel of grain processed as the realized yield. We refer to the difference between the price per gallon of ethanol and the price per bushel of grain (divided by the realized yield) as the "crush spread." Should the crush spread decline, it is possible that our ethanol plants will generate operating results that do not provide adequate cash flows for sustained periods of time. In such cases, production at the ethanol plants may be reduced or stopped altogether in order to minimize variable costs at individual plants.
We attempt to manage the risk related to the volatility of commodity prices by utilizing forward grain and natural gas purchase contracts, forward ethanol, distillers grains and non-food grade corn oil sale contracts and commodity futures agreements, as management deems appropriate. We attempt to match quantities of these sales contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain an adequate gross margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol sales contracts generally lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price contracts for no more than four months into the future at any given time and we may lock in our corn or ethanol price without having a corresponding locked in ethanol or corn price for short durations of time. As a result of the relatively short period of time our fixed price contracts cover, we generally cannot predict the future movements in our realized crush spread for more than four months; thus, we are unable to predict the likelihood or amounts of future income or loss from the operations of our ethanol facilities. We utilize derivative financial instruments, primarily exchange traded commodity future contracts and swaps, in conjunction with certain of our grain procurement and commodity marketing activities.
We reported net income attributable to REX common shareholders of
24
profitability are corn and ethanol pricing, both of which experienced
significant volatility within the year.
On
One
In addition, we have signed a construction contract to capture, dehydrate, and compress carbon to a state suitable for sequestration for the One Earth Energy ethanol plant. We are currently working on an engineering Design study for a short pipeline to deliver carbon from the ethanol plant to the sequestration site. Although we have made meaningful progress, we continue to complete documents required from various government agencies and obtain other approvals with no assurances of ultimate success.
During fiscal year 2013, we entered into a joint venture to file and defend
patents for eSteam technology. The patented technology is an enhanced method of
heavy oil recovery involving zero emissions downhole steam generation. To date,
we have not successfully had a field operation nor demonstrated that the
technology is commercially feasible. We own 60% and our partner owns 40% of the
entity named
We plan to seek and evaluate various investment opportunities including ethanol and/or energy related, carbon sequestration, agricultural or other ventures we believe fit our investment criteria. We can make no assurances that we will be successful in our efforts to find such opportunities.
Ethanol Investments
In fiscal year 2006, we entered the ethanol industry by investing in several
entities organized to construct and subsequently operate, ethanol producing
plants. We are invested in three entities as of
25 The following table is a summary of our ethanol entity ownership interests atJanuary 31, 2023 : REX's Current Entity Ownership InterestOne Earth Energy, LLC 75.8%NuGen Energy, LLC 99.7%Big River Resources, LLC :Big River Resources W Burlington, LLC 10.3%Big River Resources Galva, LLC 10.3%Big River United Energy, LLC 5.7%Big River Resources Boyceville, LLC 10.3%
The three entities own a total of six ethanol production facilities, which in
aggregate shipped approximately 691 millions gallons of ethanol over the
twelve-month period ended
Trends and Uncertainties
Renewable Fuel Standard II ("RFS II"), established in
On
The
Due to the Russian-Ukraine conflict, corn and natural gas supplies worldwide
have been adversely affected, which has contributed to volatility in the prices
for both commodities and has impacted corn availability in
The recently enacted Inflation Reduction Act of 2022 will likely impact our
business by creating a new Clean Fuel Production Credit, section 45Z of the
Internal Revenue Code ("45Z"), that would be dependent on the level of
greenhouse gas emissions reduction for each gallon of ethanol produced and sold,
available for years 2025 to 2027. The Act also raises the carbon capture tax
credit from
26
metric ton, under section 45Q of the Internal Revenue Code ("45Q"). Taxpayers
may elect to be treated as making a payment against tax for 100% of the value of
the 45Q credit ("direct pay") for the first five years, starting with the year a
qualifying carbon sequestration facility is placed in service, but not beyond
Should these trends and uncertainties continue, our future operating results could be impacted.
Results of Operations
The following table summarizes our results from operations (amounts in
thousands):
Fiscal Year
2022 2021
Net sales and revenue $ 855,000 $ 774,802
Cost of sales 800,269 677,242
Gross profit $ 54,731 $ 97,560
Income before income taxes $ 47,479 $ 75,838
Provision for income taxes $ (9,542) $ (19,031)
Net income attributable to REX common
shareholders (continuing operations) $ 27,697 $ 47,572
Net income attributable to REX common
shareholders (discontinued operations) $ - $ 4,792
27
The following table summarizes net sales and revenue by product group (amounts
in thousands):
Fiscal Year
2022 2021
Ethanol $ 649,501 $ 613,597
Dried distillers grains 139,118 125,009
Non-food grade corn oil 55,595 38,852
Modified distillers grains 11,579 9,104Derivative financial instruments losses (1,024) (12,109) Other
231 349
Total, continuing operations $ 855,000 $ 774,802 Refined coal (discontinued operations) 1 $ -
1 Refined coal sales were recorded net of the cost of coal as the Company purchased the coal feedstock from the same customer to which the processed refined coal was sold.
The following table summarizes selected operating data:
Fiscal Year
2022 2021
Average selling price per gallon of ethanol (net
of hedging) $ 2.44 $ 2.21
Gallons of ethanol sold (in millions) 265.8 277.8
Average selling price per ton of dried distillers
grains $ 232.98 $ 197.86
Tons of dried distillers grains sold 597,126 631,818
Average selling price per pound of non-food grade
corn oil $ 0.71 $ 0.50
Pounds of non-food grade corn oil sold (in
millions) 77.8 77.2
Average selling price per ton of modified
distillers grains $ 123.66 $ 85.19
Tons of modified distillers grains sold 93,637 106,864
Average cost per bushel of grain $ 7.24 $ 5.99
Average cost of natural gas (per MmBtu) $ 6.66 $ 4.27 Comparison of Fiscal Years 2022 and 2021 (Consolidated Results)
Continuing Operations
Ethanol sales increased in fiscal year 2022 compared to fiscal year 2021 as the average price per gallon increased 10%, offset partially by a decrease in gallons sold of 4%. The increase in ethanol selling price resulted primarily from an increase in commodity prices.
Dried distillers grains sales increased 11% in fiscal year 2022 compared to fiscal year 2021 as the average price per ton sold increased 18%, offset by a decrease in tons sold of 5%. The increase in the dried
28
distillers grains selling price resulted primarily from an increase in corn prices as dried distillers grains prices often correlate with corn pricing.
Non-food grade corn oil sales increased 43% in fiscal year 2022 compared to fiscal year 2021 as the average selling price per pound increased approximately 42%. The increase in the non-food grade corn oil selling price resulted primarily from an increase in demand from the biodiesel industry.
Modified distillers grains sales increased 27% in fiscal year 2022 compared to fiscal year 2021 as the average selling price per ton increased 45%, offset partially by a 12% decrease in the number of tons sold. The increase in the modified distillers grains selling price resulted primarily from an increase in corn prices as distillers grain pricing often correlates with corn pricing.
Losses on derivative financial instruments were approximately
Gross Profit - Gross profit for fiscal year 2022 decreased approximately
Grain accounted for approximately 83% (
We attempt to match quantities of ethanol, distillers grains and non-food grade corn oil sale contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain an adequate margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol sales contracts generally lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price contracts for no more than four months into the future at any given time and we may lock in our corn or ethanol price without having a corresponding locked in ethanol or corn price for short durations of time. As a result of the relatively short period of time our fixed price contracts cover, we generally cannot predict the future movements in our realized crush spread for more than four months. We utilize derivative financial instruments, primarily exchange traded commodity future contracts and swaps, in conjunction with our grain procurement and commodity marketing activities.
Selling, General and Administrative ("SG&A") Expenses - SG&A expenses for fiscal
year 2022 were approximately
29
Equity in Income of Unconsolidated Ethanol Affiliates - During fiscal years 2022
and 2021, we recognized income of approximately
We expect the operating experience of Big River to be generally consistent with the trends in crush spread margins described in the "Overview" section as Big River's results are dependent on the same key drivers as our other ethanol investments (ethanol, corn, dried distillers grains and natural gas pricing).
Interest and Other Income - Interest and other income for fiscal year 2022 was
approximately
Income from Continuing Operations Before Income Taxes - As a result of the
foregoing, income from continuing operations before income taxes was
approximately
Provision for Income Taxes - Our effective tax rate was a provision of 20.1% and
25.1% for fiscal years 2022 and 2021, respectively. Our effective rate is
impacted by the noncontrolling interests of the companies we consolidate, as we
recognize 100% of their income or loss before income taxes and noncontrolling
interests. However, we only provide an income tax provision or benefit for our
portion of the subsidiaries' income or loss. During fiscal years 2022 and 2021,
our effective tax rate decreased 5.4% (approximately
Net Income from Continuing Operations- As a result of the foregoing, net income
from continuing operations was approximately
Noncontrolling Interests (continuing operations) - Income attributable to
noncontrolling interests (continuing operations) was approximately
Net Income Attributable to REX Common Shareholders (continuing operations) - As
a result of the foregoing, net income attributable to REX common shareholders
(continuing operations) was approximately
Discontinued Operations
The Company ceased operation of its refined coal business as tax credits could
no longer be earned on its operation beginning
30
business operated at a pre-tax loss but generated tax credits that normally exceeded the operating loss. There was no activity related to the discontinued operations in fiscal year 2022.
Gross loss was approximately
Net Income
As a result of the foregoing, including results from both continuing and
discontinued operations, net income attributable to REX common shareholders was
approximately
Comparison of Fiscal Years 2021 and 2020
See "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
Liquidity and Capital Resources
Our primary sources of cash have been income from operations. Our primary uses of cash have been capital expenditures at our ethanol plants, stock repurchases, payments to noncontrolling interests holders and, in prior years, contributions to fund refined coal operating losses.
Outlook - Our cash and short-term investments balance of approximately
We are investigating various uses of our excess cash. We have a stock buyback
program with an authorization level of an additional approximately 877,000
shares at
Depending on progress made on our carbon sequestration project, we expect
capital expenditures to be in the range of approximately
Operating Activities - Net cash provided by operating activities was
approximately
31
income from investments, and the deferred income tax provision. Big River paid
dividends to REX of approximately
Net cash provided by operating activities was approximately
Investing Activities - Net cash used in investing activities was approximately
Net cash provided by investing activities was approximately
Financing Activities - Net cash used in financing activities was approximately
Net cash used in financing activities was approximately
32
in open market transactions. During fiscal year 2021, we used cash of
approximately
Based on our forecasts, which are primarily based on estimates of plant production, prices of ethanol, corn, distillers grains, non-food grade corn oil and natural gas as well as other assumptions, management believes that cash flow from operating activities together with working capital will be sufficient to meet One Earth's and NuGen's respective liquidity needs. However, if a material adverse change in the financial position of One Earth or NuGen should occur, or if actual sales or expenses are substantially different than what has been forecasted, One Earth's and NuGen's liquidity, and ability to fund future operating and capital requirements could be negatively impacted.
Approximately 2.6% of our net assets are restricted pursuant to the terms of
various loan agreements of our equity method investee as of
Contractual Obligations and Commitments
In the ordinary course of business, we enter into agreements under which we are
legally obligated to make future cash payments. These agreements include
obligations related to purchasing inventory and natural gas and leasing rail
cars. Aggregate minimum lease payments under the operating lease agreements for
future fiscal years as of
Seasonality and Quarterly Fluctuations
Our business is directly affected by the supply and demand for ethanol. The demand for ethanol typically increases during the spring and summer months and during holiday travel.
Critical Accounting Policies
We believe the application of the following accounting policies, which are important to our financial position and results of operations, require significant assumptions, judgments and estimates on the part of management. We base our assumptions, judgments, and estimates on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented in accordance with generally accepted accounting principles (GAAP). However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Further, if different assumptions, judgments and estimates had been used, the results could have been different and such differences could be material. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 to the Consolidated Financial Statements.
Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
33
Revenue Recognition - We recognize sales of ethanol, distillers grains and non-food grade corn oil when obligations under the terms of the respective contracts with customers are satisfied; this occurs with the transfer of control of products, generally upon shipment from the ethanol plant or upon loading of the rail car used to transport the products.
Impairment of Long-Lived Assets - We review our long-lived assets, consisting of property and equipment, equity method investments and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. We assess long-lived assets for impairment by first determining the forecasted, undiscounted cash flows the asset group is expected to generate. If this total is less than the carrying value of the asset, we will then determine the fair value of the asset group. An impairment loss would be recognized in the amount by which the carrying amount of the asset exceeded the fair value of the asset. Significant management judgement is required to determine the fair value of long-lived assets, which includes discounted cash flows. Such estimates could be significantly affected by future changes in market conditions. We recorded no impairment charges in fiscal years 2022, 2021, and 2020. During fiscal year 2020, we concluded the impact of the COVID-19 pandemic on our industry and our operating results was an indicator that impairment may exist related to certain of our long-lived assets. As a result, we performed a recoverability test for the One Earth and NuGen asset groups (the lowest level at which related cash flows can be identified) and determined that there was no impairment as the gross undiscounted future cash flows substantially exceeded the respective carrying values.
Income Taxes - Income taxes are recorded based on the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes, net of valuation allowances. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and other expectations about future outcomes. Changes in existing regulatory tax laws and rates and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. We have established valuation allowances for certain state net operating loss carryforwards. We assessed all available positive and negative evidence to determine whether we expect sufficient future taxable income will be generated to allow for the realization of existing federal deferred tax assets. We believe there is sufficient objectively verifiable income for management to conclude that it is more likely than not that the Company will utilize available federal deferred tax assets prior to their expiration. However, realization of these deferred tax assets is not certain. Changes in our current estimates for factors such as unanticipated market conditions and legislative developments could have a material effect on our ability to utilize deferred tax assets.
New Accounting Pronouncements
For information related to recent accounting pronouncements, see Note 1 of the Notes to the Consolidated Financial Statements.
34
© Edgar Online, source
