Ethanol and By-Products
At July 31, 2021, investments in our ethanol business include equity investments
in three ethanol limited liability companies, two of which we have a majority
ownership interest in. The following table is a summary of ethanol gallons
shipped at our plants:
Trailing 12 REX's Current Effective
Months Current Ownership of
Entity Ethanol Effective Trailing 12
Gallons Ownership Months Ethanol
Shipped Interest Gallons Shipped
One Earth Energy, LLC 143.9 M 75.6% 108.8 M
NuGen Energy, LLC 137.4 M 99.7% 137.0 M
Big River Resources, LLC:
Big River Resources W Burlington, LLC 108.5 M 10.3% 11.2 M
Big River Resources Galva, LLC 119.6 M 10.3% 12.3 M
Big River United Energy, LLC 126.4 M 5.7% 7.2 M
Big River Resources Boyceville, LLC 62.6 M 10.3% 6.5 M
Total 698.4 M 283.0 M
Our ethanol operations and the results thereof 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 several factors that affect commodity prices in
general, including crop conditions, the amount of corn stored on farms, weather,
federal policy and foreign trade. Because the market prices 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 or distillers grains 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 purchase, forward ethanol, distillers grains and corn
oil sale contracts and commodity futures
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agreements, as management deems appropriate. We attempt to match quantities of
these sale 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 ethanol 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, in conjunction with certain of our grain procurement
activities.
Refined Coal
On August 10, 2017, we purchased the entire ownership interest of an entity that
owns a refined coal facility, along with a minority partner, for approximately
$12.0 million. We own 95.35% of the entity. We began operating the refined coal
facility immediately after the acquisition. We expect that the revenues from the
sale of refined coal produced in the facility will be subsidized by federal
production tax credits through November 18, 2021, subject to meeting qualified
emissions reductions as governed by Section 45 of the Internal Revenue Code. In
order to maintain compliance with Section 45 of the Internal Revenue Code, we
are required to test the effectiveness of our process with respect to emissions
reductions every six months through an independent laboratory. Annually, the IRS
publishes the amount of federal income tax credit earned per ton of refined coal
produced and sold. We expect to earn credits at the rate of approximately $7.38
per ton of refined coal produced and sold during calendar year 2021. The tax
credits can be earned for refined coal produced and sold by our facility through
November 18, 2021. Absent the tax credits, our refined coal operations would not
be profitable and we expect to cease operations at that time. At the conclusion
of the operations we are obligated to remove the equipment from the site but do
not expect the cost to be significant.
The refined coal facility is located at the site of a utility-owned electrical
generating power station, which is our refined coal operation's sole customer.
Refined coal production and sales vary depending on fluctuations in demand from
the site host utility, which generally changes based upon weather conditions in
the geographic markets, competing energy prices, lack of supplies and the state
of the local economy. We have contracted with an experienced third party to
operate and maintain the refined coal facility and to provide us with management
reporting and operating data as required. We do not have any employees on site
at the refined coal facility.
Future Energy
During fiscal year 2013, we entered into a joint venture with Hytken HPGP, LLC
("Hytken") to file and defend patents for eSteam technology relating to heavy
oil and oil sands production methods, and to commercially exploit the technology
to generate license fees, royalty income and development opportunities. The
patented technology is an enhanced method of heavy oil recovery involving zero
emissions downhole steam generation. We own 60% and Hytken owns 40% of the
entity named Future Energy, LLC ("Future Energy").
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We have 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 have funded all costs relating to new intellectual property,
consultants, research and development, pilot field tests and equipment purchases
with respect to the proposed commercialization stage of the technology. To date,
we have paid and expensed approximately $2.5 million cumulatively to purchase
our ownership interest and fund patent and other expenses. We have not yet
tested or proven the commercial feasibility of the technology.
Critical Accounting Policies and Estimates
During the three months ended July 31, 2021, we did not change any of our
critical accounting policies as disclosed in our 2020 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on April 12, 2021.
Fiscal Year
All references in this report to a particular fiscal year are to REX's fiscal
year ended January 31. For example, "fiscal year 2021" means the period February
1, 2021 to January 31, 2022.
Results of Operations
Trends and Uncertainties
In recent years, operating results in our ethanol and by-products segment have
been, at times affected by a weak margin environment including such factors as
higher costs for corn, including increased basis over index pricing, lower
availability of local corn, lower ethanol demand and the EPA granting small
refiner waivers.
During the early months of 2020, COVID-19 spread into the United States and
other countries. In an effort to contain the spread of this virus, there were
various government mandated restrictions, in addition to voluntary privately
implemented restrictions, including limiting public gatherings, retail store
closures, restrictions on employees working and the quarantining of people who
may have been exposed to the virus. This led to reduced demand for gasoline and
ethanol, which consequently resulted in historically low ethanol pricing. As a
result, we idled our NuGen and One Earth 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 late May of
2020 and at NuGen in late June of 2020. In addition, actions by the Federal
Reserve related to the COVID-19 outbreak, reduced interest rates. Given the
amount of cash and short-term investments we have, this has reduced our interest
income and could continue in future periods, depending on the length of time
interest rates remain at these levels. The impacts of the COVID-19 outbreak on
our business operations, including the recent Delta variant, cannot be
reasonably estimated at this time, although a prolonged production stoppage at
our plants could have a material adverse impact on our results of operations,
financial condition and cash flows in future periods.
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Congress passed the CARES Act in March 2020, which provided the United States
department of Agriculture ("USDA") with additional funding from the "Commodity
Credit Corporation. The USDA is using this additional funding to provide direct
payments to farmers, including farmers that we purchase corn from. Such direct
payments to farmers could cause further delays in marketing decisions.
Consequently, this could reduce the supply of available corn and could result in
a price increase. In addition, China has been purchasing large quantities of
corn, which has led to higher prices for corn. We have experienced an increase
in the local basis price paid over Chicago Board of Trade for corn during the
first six months of fiscal year 2021.
Renewable Fuel Standard II ("RFS II"), established in October 2010, has been an
important factor in the growth of ethanol usage in the United States. When it
was originally established by Congress, RFS II required the volume of
"conventional" or corn derived ethanol to be blended with gasoline to increase
each year until it reached 15.0 billion gallons in 2015 and was to remain at
that level through 2022. There are no established congressional target volumes
beginning in 2023. The EPA has the authority to waive the biofuel mandate, in
whole or in part, if there is inadequate domestic renewable fuel supply or the
requirement severely harms the domestic economy or environment. On December 19,
2019, the EPA announced the final 2020 renewable volume obligation for
conventional ethanol, which met the 15.0 billion gallons congressional target.
The EPA has missed its deadline and has not yet released a draft renewable
volume obligation rule for the 2021 volumes. On April 15, 2020, five state
Governors sent a letter to the EPA requesting a general waiver of the RFS II
requirements due to the drop in demand caused by COVID-19 travel restrictions.
On October 21, 2020, 15 U.S. Senators sent a letter to the EPA requesting a
general waiver of the RFS II requirements to reduce the 2021 renewable volume
obligation, citing the reduced demand for fuels due to COVID-19.
On June 25, 2021, the Supreme Court of the United States ruled in favor of small
refiners and reversed a portion of the decision by the U.S. Court of Appeals for
the 10th Circuit on small refiner waivers (SRWs). It only reversed the
interpretation of "extension" of a waiver but not the economic hardship portion
of the decision. It remains unclear how the Supreme Court decision may impact
the EPA's handling of SRWs.
Throughout fiscal year 2020 and the first six months of fiscal year 2021,
operating results in our refined coal segment were affected by inconsistent
utility plant demand (our only customer). By November 18, 2021, we expect to
cease these operations and the resulting earning of production tax credits, as
based upon current legislation this facility will no longer be eligible to earn
additional tax credits beyond that date.
Should these trends and uncertainties continue, our future operating results are
likely to be negatively impacted.
27
Comparison of Three and Six Months Ended July 31, 2021 and 2020
The following sections discuss the results of operations for each of our
business segments and corporate and other. Amounts in the corporate and other
category include activities that are not separately reportable or related to a
segment. We have two reportable segments: i) ethanol and by-products; and ii)
refined coal. We evaluate the performance of each reportable segment 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 summarizes segment and
other results (amounts in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
2021 2020 2021 2020
Net sales and revenue:
Ethanol and by-products $ 195,678 $ 39,242 $ 359,720 $ 122,477
Refined coal 1 165 85 227 100
Total net sales and revenue $ 195,843 $ 39,327 $ 359,947 $ 122,577
1 The Company records sales in the refined coal segment net of the cost of coal
as the Company purchases the coal feedstock from the customer to which refined
coal is sold.
Three Months Ended Six Months Ended
July 31, July 31,
2021 2020 2021 2020
Segment gross profit (loss):
Ethanol and by-products $ 14,155 $ 553 $ 33,631 $ (7,670)
Refined coal (3,081) (1,884) (4,755) (2,991)
Total gross profit (loss) $ 11,074 $ (1,331) $ 28,876 $ (10,661)
Income (loss) before income taxes:
Ethanol and by-products $ 10,732 $ (3,259) $ 21,820 $ (15,610)
Refined coal (3,455) (2,118) (5,260) (2,965)
Corporate and other (902) (702) (1,758) (1,247)
Total income (loss) before income taxes $ 6,375 $ (6,079) $ 14,802 $ (19,822)
(Provision) benefit for income taxes:
Ethanol and by-products $ (1,985) $ 893 $ (4,423) $ 5,054
Refined coal 5,441 2,919 7,639 3,878
Corporate and other 221 234 432 427
Total benefit for income taxes $ 3,677 $ 4,046 $ 3,648 $ 9,359
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Three Months Ended Six Months Ended
July 31, July 31,
2021 2020 2021 2020
Net income (loss) (net of
noncontrolling interests):
Ethanol and by-products $ 6,418 $ (2,178) $ 14,374 $ (9,611)
Refined coal 2,139 898 2,612 1,048
Corporate and other (681) (468) (1,326) (820)
Net income (loss) attributable to REX
common shareholders $ 7,876 $ (1,748) $ 15,660 $ (9,383)
The following table summarizes net sales and revenue from the ethanol and
by-products segment (amounts in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
2021 2020 2021 2020
Ethanol $ 153,990 $ 32,524 $ 280,059 $ 93,121
Dried distillers grains 31,573 5,480 62,691 24,398
Non-food grade corn oil 9,813 1,313 15,407 4,501
Modified distillers grains 1,934 209 4,227 666
Derivative financial instruments losses (1,638) (298) (2,764) (298)
Other 6 14 100 89
Total $ 195,678 $ 39,242 $ 359,720 $ 122,477
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The following table summarizes selected data from the ethanol and by-products
segment:
Three Months Ended Six Months Ended
July 31, July 31,
2021 2020 2021 2020
Average selling price per gallon of
ethanol (net of hedging) $ 2.21 $ 1.23 $ 2.02 $ 1.25
Gallons of ethanol sold (in millions) 69.0 26.5 139.0 74.8
Average selling price per ton of dried
distillers grains $ 206.78 $ 135.54 $ 207.84 $ 143.24Tons of dried distillers grains sold 152,689 40,429 301,640 170,324
Average selling price per pound of
non-food grade corn oil
$ 0.47 $ 0.24 $ 0.41 $ 0.25
Pounds of non-food grade corn oil sold
(in millions) 20.7 5.4 37.8 18.1
Average selling price per ton of
modified distillers grains $ 90.54 $ 31.87 $ 79.13 $ 49.32
Tons of modified distillers grains
sold 21,361 6,566 53,421 13,507
Average cost per bushel of grain $ 6.45 $ 3.63 $ 5.86 $ 3.86
Average cost of natural gas (per
MmBtu)
$ 3.30 $ 2.92 $ 3.24 $ 3.60
Net sales and revenue in the quarter ended July 31, 2021 increased approximately
398% compared to the prior year's second quarter. Net sales and revenue in the
first six months of fiscal year 2021 increased approximately 194%. We had
significantly lower production and sales volumes in our ethanol and by-products
segment during the first six months of fiscal year 2020, as diminished local
availability of corn at the NuGen facility, the effects of the COVID-19 outbreak
and lower ethanol pricing resulted in the idling of the NuGen and One Earth
ethanol plants in March of 2020. We resumed production operations at One Earth
in late May of 2020 and at NuGen in late June of 2020. Both of our consolidated
plants produced at or near capacity during the first six months of fiscal year
2021.
Ethanol sales increased in the second quarter of fiscal year 2021 compared to
the second quarter of fiscal year 2020 as the number of gallons sold increased
160% and the average selling price per gallon increased 80% over the prior year
second quarter. Ethanol sales increased in the first six months of fiscal year
2021 compared to the first six months of fiscal year 2020 as the number of
gallons sold increased 86% and the average selling price per gallon increased
62% over the prior fiscal year. The increase in the ethanol selling price
resulted primarily from an increase in demand and an increase in commodity
prices.
Dried distillers grains sales increased in the second quarter of fiscal year
2021 compared to the second quarter of fiscal year 2020 as the number of tons
sold increased 278% and the average selling price per ton increased 53% over the
prior year second quarter. Dried distillers grains sales increased in the first
six months of fiscal year 2021 compared to the first six months of fiscal year
2020 as the number of tons sold increased 77% and the average selling price per
ton increased 45% over the prior fiscal year. The increase in the dried
distillers grains selling price resulted primarily from increased demand and an
increase in corn prices as dried distillers grains prices often correlate with
corn pricing.
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Non-food grade corn oil sales increased in the second quarter of fiscal year
2021 compared to the second quarter of fiscal year 2020 as the number of pounds
sold increased 283% and the average selling price per pound increased 96% over
the prior year second quarter. Non-food grade corn oil sales increased in the
first six months of fiscal year 2021 compared to the first six months of fiscal
year 2020 as the number of pounds sold increased 109% and the average selling
price per pound increased 64% over the prior year fiscal year. 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 in the second quarter of fiscal year
2021 compared to the second quarter of fiscal year 2020 as the number of tons
sold increased 225% and the average selling price per ton increased 184% over
the prior year second quarter. Modified distillers grains sales increased in the
first six months of fiscal year 2021 compared to the first six months of fiscal
year 2020 as the number of tons sold increased 296% and the average selling
price per ton increased 60% over the prior year fiscal year. The increase in the
modified distillers grains selling price resulted primarily from an increase in
corn prices and increased local demand.
Losses on derivative financial instruments, included in net sales and revenue,
of approximately $1.6 million in the second quarter of fiscal year 2021 related
to our risk management activities and were impacted by the increase in ethanol
prices during that quarter. There were losses on derivative financial
instruments of approximately $0.3 million during the second quarter of fiscal
year 2020. Losses on derivative financial instruments, included in net sales and
revenue, were approximately $2.8 million in the first six months of fiscal year
2021 compared to $0.3 million in the first six months of fiscal year 2020.
Gross profit for the second quarter of fiscal year 2021 increased approximately
$12.4 million compared to the prior year's second quarter. This was primarily
caused by significantly higher production and sales volumes in our ethanol and
by-products segment during the second quarter of fiscal year 2021 compared to
the reduced levels during the second quarter of fiscal year 2020 discussed
above. The crush spread for the second quarter of fiscal year 2021 was
approximately break-even per gallon of ethanol sold compared to $(0.04) per
gallon of ethanol sold during the second quarter of fiscal year 2020. The
selling price per gallon of ethanol sold increased 80% for the second quarter of
fiscal year 2021 compared to the second quarter of fiscal year 2020, slightly
outpacing the 78% increase in the cost per bushel of corn during the same
periods. In addition, higher sales volumes discussed above and prices of
by-products contributed to the increase in gross profit during the second
quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020.
During the second quarter of fiscal year 2020 the impact from the COVID-19
outbreak and lower gasoline pricing resulted in lower ethanol and corn pricing
which severely impacted operations and resulted in the consolidated ethanol
plants being idled for a portion of the quarter.
Grain accounted for approximately 86% ($156.2 million) of our cost of sales
during the second quarter of fiscal year 2021 compared to approximately 68%
($26.1 million) during the second quarter of fiscal year 2020. Natural gas
accounted for approximately 3% ($6.2 million) of our cost of sales during the
second quarter of fiscal year 2021 compared to approximately 5% ($1.9 million)
during the second quarter of fiscal year 2020. The grain and natural gas
expenditure increases were primarily attributable to the higher production
levels in the second quarter of fiscal year 2021 compared to the reduced
production levels in the second quarter of fiscal year 2020 and the significant
rise in corn prices during the second quarter of fiscal year 2021.
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Gross profit for the first six months of fiscal year 2021 increased
approximately $39.5 million compared to the first six months of the prior year.
This was primarily the result of significantly higher production and sales
volumes in our ethanol and by-products segment during the first six months of
fiscal year 2021 compared to the reduced levels during the first six months of
fiscal year 2020 discussed above. The crush spread for the first six months of
fiscal year 2021 was approximately $0.02 per gallon of ethanol sold compared to
$(0.08) per gallon of ethanol sold during the first six months of fiscal year
2020. The selling price per gallon of ethanol sold increased 62% for the first
six months of fiscal year 2021 compared to the first six months of fiscal year
2020, outpacing the 52% increase in the cost per bushel of corn during the same
periods. In addition, higher sales volumes discussed above and prices of
by-products contributed to the increase in gross profit during the first six
months of fiscal year 2021 compared to the first six months of fiscal year 2020.
During the first six months of fiscal year 2020 the impact from the COVID-19
outbreak and lower gasoline pricing resulted in lower ethanol and corn pricing
which severely impacted operations and resulted in the consolidated ethanol
plants being idled for a portion of the year and the large gross loss.
Grain accounted for approximately 85% ($278.2 million) of our cost of sales
during the first six months of fiscal year 2021 compared to approximately 73%
($94.8 million) during the first six months of fiscal year 2020. Natural gas
accounted for approximately 3% ($9.9 million) of our cost of sales during the
first six months of fiscal year 2021 compared to approximately 6% ($7.3 million)
during the first six months of fiscal year 2020. The grain increase was
primarily attributable to the higher production levels in the first six months
of fiscal year 2021 compared to the reduced production levels in the first six
months of fiscal year 2020 and the significant rise in corn prices during the
first six months of fiscal year 2021. The natural gas unit price decrease was
primarily attributable to gains realized on the sales of unused natural gas
during the first quarter of fiscal year 2021. The sales were a result of unusual
and significant increases in the spot price of natural gas during portions of
the first quarter of fiscal year 2021 which resulted in an opportunity for us to
sell forward natural gas purchases at a gain.
We attempt to match quantities of ethanol, distillers grains and non-food grade
corn oil sales contracts with an appropriate quantity of grain purchase
contracts over a given time period when we can obtain a satisfactory 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 sales 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 contracts cover, we generally cannot predict
the future movements in our realized crush spread for more than four months.
SG&A expenses were approximately $6.6 million for the second quarter of fiscal
year 2021, significantly higher than the approximately $4.4 million of expenses
for the second quarter of fiscal year 2020. SG&A expenses were approximately
$16.6 million for the first six months of fiscal year 2021, significantly higher
than the approximately $9.0 million of expenses for the first six months of
fiscal year 2020. A majority of the increase results from higher shipping costs
as more sales contracts in our ethanol and by-products segment provided for
shipping to be paid by us in the second quarter of fiscal year 2021 compared to
the second quarter of fiscal year 2020. In addition, there was an increase in
incentive compensation associated with higher profitability in fiscal year 2021.
32
During the second quarter of fiscal year 2021, we recognized income of
approximately $1.8 million compared to a loss of approximately $0.5 million for
the second quarter of fiscal year 2020, from our equity investment in Big River,
which is included in our ethanol and by-products segment results. We recognized
income of approximately $2.4 million during the first six months of fiscal year
2021 compared to a loss of approximately $1.0 million during the first six
months of fiscal year 2020. Big River has interests in four ethanol production
plants that shipped approximately 417 million gallons in the trailing twelve
months ended July 31, 2021 and has an effective ownership of ethanol gallons
shipped for the same period of approximately 361 million gallons. Big River's
operations also include agricultural elevators. Due to the inherent volatility
of commodity prices within the ethanol industry, we cannot predict the
likelihood of future operating results from Big River being similar to
historical results.
Interest and other income was approximately $39,000 for the second quarter of
fiscal year 2021 versus approximately $197,000 for the second quarter of fiscal
year 2020. Interest and other income was approximately $82,000 for the first six
months of fiscal year 2021 versus approximately $866,000 for the first six
months of fiscal year 2020. Interest income decreased as yields on our excess
cash decreased in the first six months of fiscal year 2021 compared to the first
six months of fiscal year 2020.
As a result of the foregoing, income before income taxes was approximately $6.4
million for the second quarter of fiscal year 2021 versus a loss of
approximately $6.1 million for the second quarter of fiscal year 2020. Income
before income taxes was approximately $14.8 million versus a loss of
approximately $19.8 million for the first six months of fiscal years 2021 and
2020, respectively.
We determined that small changes in estimated "ordinary" income would result in
significant changes in the estimated annual effective tax rate. Thus, the
Company used a discrete effective tax rate method to calculate the provision or
benefit for income taxes for the three and six months ended July 31, 2021 and
2020. Our income tax benefit was approximately $3.7 million and approximately
$4.0 million for the three months ended July 31, 2021 and 2020, respectively,
and was approximately $3.6 million and approximately $9.4 million for the six
months ended July 31, 2021 and 2020, respectively We had a higher benefit in the
prior year periods based upon pre-tax losses for those periods versus pre-tax
income in the current periods. The benefit is also largely impacted by the level
of tax credits generated from the refined coal operation. Through its refined
coal operation, the Company earns production tax credits pursuant to IRC Section
45. The credits can be used to reduce future income tax liabilities for up to 20
years. Our income tax benefit for the first six months of fiscal year 2020
includes approximately $1.8 million related to the lengthening of a net
operating loss carryback allowed by the CARES Act.
As a result of the foregoing, net income was approximately $10.1 million for the
second quarter of fiscal year 2021 compared to net loss of approximately $2.0
million for the second quarter of fiscal year 2020. Net income was approximately
$18.5 million for the first six months of fiscal year 2021 compared to net loss
of approximately $10.5 million for the first six months of fiscal year 2020.
Income related to noncontrolling interests was approximately $2.2 million for
the second quarter of fiscal year 2021 compared to a loss of $0.3 million for
the second quarter of fiscal years 2020. Income related to noncontrolling
interests was approximately $2.8 million for the six months of fiscal year 2021
compared to a loss of approximately $1.1 million for the first six months of
fiscal years 2020. These amounts represent the other owners' share of the income
or loss of NuGen, One Earth and the refined coal entity.
33
As a result of the foregoing, net income attributable to REX common shareholders
for the second quarter of fiscal year 2021 was approximately $7.9 million, an
increase of approximately $9.6 million from net loss attributable to REX common
shareholders of approximately $1.7 million for the second quarter of fiscal year
2020. Net income attributable to REX common shareholders for the first six
months of fiscal year 2021 was approximately $15.7 million, an increase of
approximately $25.0 million from net loss attributable to REX common
shareholders of approximately $9.4 million for the first six months of fiscal
year 2020.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $17.2 million for
the first six months of fiscal year 2021, compared to cash used of approximately
$9.0 million for the first six months of fiscal year 2020. For the first six
months of fiscal year 2021, cash was provided by net income of approximately
$18.5 million, adjusted for non-cash items of approximately $6.6 million, which
consisted of depreciation, amortization of operating lease right-of-use assets,
income from equity method investments, interest income from short-term
investments, the deferred income tax provision and stock based compensation
expense. An increase in the balance of accounts receivable used cash of
approximately $9.8 million, primarily a result of the timing of products shipped
and the receipt of customer payments at One Earth and NuGen in addition to
higher sales and pricing. Inventories increased by approximately $3.9 million,
primarily a result of the timing of receipt of raw materials and the shipment of
finished goods, as well as an increase in the pricing of raw materials. A
decrease in the balance of other assets of approximately $0.3 million primarily
relates to changes in the carrying value of forward purchase contracts recorded
at fair value. An increase in the balance of refundable income taxes of
approximately $0.9 million primarily relates to estimated federal and state
income tax payments made during fiscal year 2021. An increase in the balance of
accounts payable provided cash of approximately $5.5 million, which was
primarily a result of the timing of inventory receipts and vendor payments. An
increase in the balance of other liabilities provided cash of approximately $0.9
million, which was primarily a result of operating lease payments.
Net cash used in operating activities was approximately $9.0 million for the
first six months of fiscal year 2020. For the first six months of fiscal year
2020, cash was used by a net loss of approximately $10.5 million, adjusted for
non-cash items of approximately $9.3 million, which consisted of depreciation,
amortization of operating lease right-of-use assets, loss from equity method
investments, interest income from short-term investments, the deferred income
tax provision and stock based compensation expense. We received dividends from
Big River of approximately $2.0 million during the first six months of fiscal
year 2020. A decrease in the balance of accounts receivable provided cash of
approximately $3.2 million, which was primarily a result of the timing of
customer shipments and payments as well as lower commodity prices. Inventories
decreased by approximately $5.3 million, which was primarily a result of the
timing of receipt of raw materials, shipments of finished goods and lower
commodity prices. An increase in the balance of refundable income taxes of
approximately $4.6 million primarily relates to a net operating loss we intend
to carry back for federal income tax purposes. A decrease in the balance of
accounts payable used cash of approximately $10.3 million, which was primarily a
result of the timing of inventory receipts and vendor payments. A decrease in
the balance of other liabilities used cash of approximately $2.9 million, which
was primarily a result of payments of operating leases and incentive
compensation.
34
At July 31, 2021, working capital was approximately $246.0 million, compared to
approximately $228.0 million at January 31, 2021. The ratio of current assets to
current liabilities was 7.4 to 1 at July 1, 2021 and 8.4 to 1 at January 31,
2021.
Cash of approximately $0.3 million was provided by investing activities for the
first six months of fiscal year 2021, compared to approximately $12.4 million
used during the first six months of fiscal year 2020. During the first six
months of fiscal year 2021, we had capital expenditures of approximately $2.7
million, primarily for improvements at the One Earth and NuGen facilities. We
expect capital expenditures to be in the range of approximately $3.0 million to
$5.0 million for the remainder of fiscal year 2021. During the first six months
of fiscal year 2021, we purchased certificates of deposit (classified as
short-term investments) of approximately $49.3 million. During the first six
months of fiscal year 2021, certificates of deposit (classified as short-term
investments) of approximately $52.2 million matured. The certificates of deposit
had maturities of less than one year. Depending on investment options available,
we may elect to retain the funds, or a portion thereof, in cash investments,
short-term investments or long-term investments.
Cash of approximately $12.4 million was used in investing activities for the
first six months of fiscal year 2020. During the first six months of fiscal year
2020, we had capital expenditures of approximately $5.7 million, primarily for
the purchase of land at One Earth Energy. During the first six months of fiscal
year 2020, we purchased certificates of deposit (classified as short-term
investments) of approximately $45.5 million. During the first six months of
fiscal year 2020, certificates of deposit (classified as short-term investments)
of approximately $39.0 million matured.
Cash of approximately $2.5 million was used in financing activities for the
first six months of fiscal year 2021, compared to approximately $5.7 million for
the first six months of fiscal year 2020. During the first six months of fiscal
year 2021, we used cash of approximately $1.4 million to purchase approximately
17,000 shares of our common stock in open market transactions. We also made
payments of approximately $1.3 million to noncontrolling interests holders.
Cash of approximately $5.7 million was used in financing activities for the
first six months of fiscal year 2020 as we used cash of approximately $5.6
million to purchase approximately 109,000 shares of our common stock in open
market transactions.
We are investigating various uses for our excess cash and short-term
investments. We have historically had a stock buyback program and subsequent to
the end of the fiscal 2021 second quarter completed a 500,000 share buyback
authorization from the Board of Directors and obtained authorization to
repurchase an additional 500,000 shares. We also plan to seek and evaluate
investment opportunities including ethanol and/or energy related, carbon dioxide
related, agricultural or other ventures we believe fit our investment criteria
in addition to investing in highly liquid short-term securities.
We are working with the University of Illinois to explore the development of a
carbon sequestration project to be located near the One Earth ethanol plant. The
University of Illinois has received a United States Department of Energy award
through the CarbonSAFE program, and, will evaluate the greenhouse gas storage
potential by drilling a test well and performing seismic surveys. The seismic
survey has been completed and the data is being sent for processing. Further
work and research is needed to determine if this will be a feasible location for
carbon sequestration and storage.
35
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by use of forward-looking terminology such as "may," "expect,"
"believe," "estimate," "anticipate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. Readers are cautioned that
there are risks and uncertainties that could cause actual events or results to
differ materially from those referred to in such forward-looking statements.
These risks and uncertainties include the risk factors set forth from time to
time in the Company's filings with the Securities and Exchange Commission and
include among other things: the effect of pandemics such as COVID-19 on the
Company's business operations, including impacts on supplies, demand, personnel
and other factors, the impact of legislative and regulatory changes, the price
volatility and availability of corn, distillers grains, ethanol, non-food grade
corn oil, gasoline, natural gas, logistical delays, our ethanol and refined coal
plants operating efficiently and according to forecasts and projections, changes
in the international, national or regional economies, weather, results of income
tax audits, changes in income tax laws or regulations and the effects of
terrorism or acts of war. The Company does not intend to update publicly any
forward-looking statements except as required by law. Other factors that could
cause actual results to differ materially from those in the forward-looking
statements are set forth in Item 1A of the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2021 (File No. 001-09097).
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