REX AMERICAN RESOURCES CORPORATION Overview
We have been an investor in ethanol production facilities beginning in 2006 and a refined coal production facility in 2017. We currently have equity investments in three ethanol production entities, two of which are majority ownership interests, and a majority ownership in one refined coal production entity. We may make additional alternative energy investments in the future.
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Our ethanol operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas. 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, weather, federal policy and foreign trade. Because the market price of ethanol is not always directly related to corn prices, at times ethanol 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 2.8 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 and swap 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.
Our fiscal year 2020 operations and commodity prices in general were
significantly impacted by the coronavirus ("COVID-19") pandemic. In an effort to
contain the virus, there have been various and prolonged restrictions on travel,
public gatherings and work from home orders throughout the world. This has
resulted in reduced demand for gasoline and ethanol. Corn pricing has also been
impacted by this lower demand for ethanol and resulting reduced ethanol
production, although
On
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independent laboratory, the effectiveness of our process with respect to
emissions reductions. Annually, the
Net income attributable to REX common shareholders was approximately
We plan to seek and evaluate various investment opportunities including ethanol and/or energy related, carbon dioxide related, 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.
During fiscal year 2013, through a wholly owned subsidiary
We agreed to fund direct patent expenses relating to patent applications and
defense, annual annuity fees and maintenance on a country by country basis, with
the right to terminate funding and transfer related patent rights to Hytken. We
may also fund all costs relating to new intellectual property, consultants, and
future research and development, pilot field tests and equipment purchases for
commercialization stage of the patents. To date, we have paid and expensed
approximately
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
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utilizing equity investments. The following table is a summary of our ethanol
investments at
Current Effective
REX's Ownership of
Trailing 12 Current Trailing 12
Months Ethanol Ownership Months Ethanol
Entity Gallons Shipped Interest Gallons Shipped
One Earth Energy, LLC 118.6 75.4% 89.4
NuGen Energy, LLC 98.5 99.5% 98.0
Big River Resources, LLC :
Big River Resources W Burlington, LLC 101.0 10.3% 10.4
Big River Resources Galva, LLC 115.3 10.3% 11.9
Big River United Energy 116.1 5.7% 6.6
Big River Resources Boyceville 55.3 10.3% 5.7
Total 604.8 222.0
Trends and Uncertainties
During fiscal years 2020 and 2019, operating results in our ethanol and
by-products segment have been, at times, adversely affected by a weak margin
environment highlighted by higher costs for corn, lower availability of local
corn, lower oil prices resulting from an oversupply of oil, the
Weather conditions delayed, and in some cases prevented the planting of corn in
much of
Under RFS, the
During the early months of 2020, a new strain of COVID-19 spread into
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late May of 2020 and at NuGen in late June of 2020. In addition, actions by the
Renewable Fuel Standard II ("RFS II"), established in
Throughout fiscal years 2020 and 2019, operating results in our refined coal segment have been adversely affected by lower utility plant demand from our only customer. Projections, provided by the utility plant, for fiscal year 2021 indicate this trend may continue and may be further impacted by the COVID-19 pandemic. While this leads to lower pre-tax losses from this segment, it also leads to lower tax benefits from Section 45 credits being recognized. Ultimately, this results in lower amounts of segment profit.
Our refined coal operations will no longer qualify to earn Section 45 credits
after
Should these trends and uncertainties continue, our future operating results are likely to be negatively impacted.
28 Results of Operations
For a detailed analysis of period to period changes, see the segment discussion that follows this section as that discussion reflects how management views and monitors our business.
Comparison of Fiscal Years 2020 and 2019 (Consolidated Results)
Gross Profit - Gross profit was approximately
Selling, General and Administrative ("SG&A") Expenses - SG&A expenses for fiscal
year 2020 were approximately
Equity in Income of Unconsolidated Ethanol Affiliates - During fiscal years 2020
and 2019, 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 2020 was
approximately
Loss Before Income Taxes- As a result of the foregoing, loss before income taxes
was approximately
Benefit for Income Taxes - Our effective tax rate was a benefit of 479.1 % and
1,096.1% for fiscal years 2020 and 2019, 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 with a noncontrolling interest. Our
effective tax rate decreased by 350.0% in fiscal year 2020 (approximately
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Net Income - As a result of the foregoing, net income was approximately
Noncontrolling Interests- Income attributable to noncontrolling interests was
approximately
Net Income Attributable to REX Common Shareholders - As a result of the
foregoing, net income attributable to REX common shareholders was approximately
Business Segment Results
We have two reportable segments, i) ethanol and by-products and ii) refined coal. The following sections discuss the results of operations for each of our business segments and corporate and other. As discussed in Note 13, our chief operating decision maker (as defined by Accounting Standards Codification ("ASC") 280, "Segment Reporting" ("ASC 280") evaluates the operating performance of our business segments using net income attributable to REX common shareholders. Segment profitability measures are determined using the same accounting policies used in the preparation of the consolidated financial statements. The following tables summarize segment and other results and assets (amounts in thousands):
Fiscal Year
Net sales and revenue: 2020 2019
Ethanol and by-products $ 372,664 $ 417,700
Refined coal 1 182 334
Total net sales and revenue $ 372,846 $ 418,034
Segment gross profit (loss):
Ethanol and by-products $ 19,533 $ 20,402
Refined coal (5,672) (7,917)
Total gross profit $ 13,861 $ 12,485
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Fiscal Year
(Loss) income before income taxes: 2020 2019
Ethanol and by-products $ 6,696 $ 8,469
Refined coal 1 (5,826) (7,778)
Corporate and other (2,352) (1,860)
Total (loss) income before income taxes $ (1,482) $ (1,169) Benefit (provision) for income taxes:
Ethanol and by-products$ (31) $ 1,528 Refined coal 6,554 10,828 Corporate and other 577 457 Total benefit for income taxes$ 7,100 $ 12,813
Net income attributable to REX common shareholders:
Ethanol and by-products$ 3,788 $ 5,439 Refined coal 988 3,391 Corporate and other (1,775) (1,403)
Net income attributable to REX common shareholders
1 We record sales in the refined coal segment net of the cost of coal as we purchase the coal feedstock from the customer to which refined coal is sold.
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Ethanol and by-products Segment
The ethanol and by-products segment includes the consolidated financial results
of One Earth and NuGen, our equity investment in
Fiscal Year
2020 2019
Average selling price per gallon of ethanol $ 1.30 $ 1.37
Gallons of ethanol sold (in millions) 217.1 235.3
Average selling price per ton of dried distillers grains
495,915 521,163
Average selling price per pound of non-food grade corn oil
58,928 68,207
Average selling price per ton of modified distillers grains
40,521 121,360
Average cost per bushel of grain $ 3.73 $ 3.82
Average cost of natural gas (per Million British Thermal
Unit (MmBtu) $ 3.00 $ 3.04 The following table summarizes net sales and revenue from the ethanol and by-products segment, by product group (amounts in thousands):
Fiscal Year
Product or Service Category 2020 2019
Ethanol $ 284,191 $ 321,434
Dried distillers grains 71,774 71,755
Non-food grade corn oil 15,066 17,135
Modified distillers grains 2,626 7,240
Derivative financial instruments losses (1,167) -
Other 174 136
Total $ 372,664 $ 417,700 Ethanol sales decreased from approximately
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result of the impact of the COVID-19 outbreak on ethanol demand, lower ethanol pricing, an oversupply of oil and diminished local supplies of corn from a poor 2019 harvest caused by localized weather conditions. These factors resulted in idling both of our consolidated ethanol plants in March of 2020. In May of 2020, businesses and other activities slowly began to reopen, which led to an increase in demand for gasoline and ethanol, and in related prices. As a result, we resumed production operations at the One Earth ethanol plant in May of 2020 and at the NuGen ethanol plant in June of 2020. Because of the uncertainty regarding the economic impact of the COVID-19 virus outbreak and the availability of corn, we do not have a reasonable estimate of future periods' sales volume.
Gross profit was approximately
Grain accounted for approximately 78% (
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.
SG&A expenses for fiscal year 2020 were approximately
During fiscal years 2020 and 2019, we recognized income of approximately
Interest and other income was approximately
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Income related to noncontrolling interests was approximately
The provision for income taxes was approximately
Segment profit for fiscal year 2020 was approximately
Refined Coal Segment
The refined coal segment includes the consolidated financial results of our
refined coal entity and certain administrative expenses. We acquired the refined
coal entity during the third quarter of fiscal year 2017. Our refined coal
facility is eligible to earn Section 45 production tax credits through
The refined coal entity sells one product, refined coal. We record sales in the
refined coal segment net of the cost of coal as we purchase the coal feedstock
from the customer to which refined coal is sold. Sales decreased from
approximately
Gross loss was approximately
SG&A expenses were insignificant for each of fiscal years 2020 and 2019.
Loss related to noncontrolling interests was approximately
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The benefit for income taxes was approximately
As a result of the foregoing, including the benefit of federal tax credits
associated with refined coal production and sales, segment profit was
approximately
Corporate and Other
SG&A expenses for fiscal year 2020 were approximately
Interest and other income was approximately
Corporate and other expenses exceeded interest and other income, for fiscal year
2020 by approximately
Comparison of Fiscal Years 2019 and 2018
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 and 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 34,000 shares
at
We expect capital expenditures to be in the range of approximately
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Operating Activities - Net cash provided by operating activities was
approximately
Net cash provided by operating activities was approximately
Investing Activities - Net cash used in investing activities was approximately
Net cash used in investing activities was approximately
Financing Activities - Net cash used in financing activities was approximately
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Net cash used in financing activities was 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 (because of the COVID-19 pandemic or other factors), One Earth's and NuGen's liquidity, and ability to fund future operating and capital requirements could be negatively impacted.
We expect to fund future operating losses at our refined coal facility with cash at the parent company level.
Approximately 4.0% of our net assets are restricted pursuant to the terms of
various loan agreements of our equity method investment as of
Off Balance Sheet Arrangements
None.
Tabular Disclosure of Contractual Obligations
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 leasing rail cars. The following
table summarizes by category expected future cash outflows associated with
contractual obligations in effect, at
Payment due by period
Less
than 1 1-3 3-5 More than
Contractual Obligations Total Year Years Years 5 Years
Operating lease obligations (a)
32,748 27,727 1,452 702 2,867
Total contractual obligations (c)
(a) Amounts primarily represent payments due for rail car leases at One Earth
and NuGen.
(b) Amounts primarily represent payments due for a natural gas pipeline, grain,
natural gas and other contracts at One Earth and NuGen. We are not able to
determine the likely settlement for forward corn purchase contracts which do
not contain a determinable fixed price; accordingly, payments for such
contracts have been excluded from the table above.
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(c) We are not able to determine the likely settlement period for uncertain tax
positions, accordingly, approximately $8.4 million of uncertain tax positions
and related interest and penalties have been excluded from the table above.
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.
Impact of Inflation
The impact of inflation has not been material to our results of operations for the past three fiscal years.
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.
The full impact of the economic downturn resulting from the spread of COVID-19 is unknown at this time. However, it could lead to material impacts to our financial position and results of operations, including, but not limited to, charges from adjustments of the carrying amount of inventory, long-lived asset impairment charges and deferred tax valuation allowances.
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.
Revenue Recognition - For ethanol and by-products segment sales, 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. For refined coal segment sales, we recognize sales of refined coal when obligations under the term of the contract with its customer are satisfied; this occurs when control of the product transfers to the customer, generally upon the refined coal leaving the plant. Refined coal sales are recorded net of the cost of coal as we purchase the coal feedstock from our customer to which we sell refined coal.
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
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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. 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. We recorded no impairment charges in fiscal years 2020, 2019 and 2018.
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. Despite
the cumulative book loss incurred over the three-year period ended
New Accounting Pronouncements
For information related to recent accounting pronouncements, see Note 1 of the Notes to the Consolidated Financial Statements.
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