Forward-Looking Statements
The information in this quarterly report on Form 10-Q for the nine-month period endedSeptember 30, 2022 , (including reports filed with theSecurities and Exchange Commission (the "SEC" or "Commission"), contains "forward-looking statements" that deal with future results, expectations, plans and performance, and should be read in conjunction with the financial statements and Annual Report on Form 10-K for the year endedDecember 31, 2021 . Forward-looking statements may include statements which use words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "predict," "hope," "will," "should," "could," "may," "future," "potential," or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year endedDecember 31, 2021 . We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.
Executive Overview and Summary
Crush margins, which remained above average during the third quarter of 2022, contributed significantly to our record net profit of$51.5 million for the nine months endedSeptember 30, 2022 . The oil markets continued to serve as the main driving factor for strong margins, as high demand for oil from the food, fuel and export sectors increased margins to record levels. The meal markets pushed margins even higher during the quarter as markets were exceptionally strong due to high domestic and export demand. Demand for soybean hulls was very strong because drought conditions in the south and west elevated hay prices which caused producers to seek alternative feed products. Our plants also operated well. The annual maintenance shutdown at ourVolga plant, which was originally scheduled for eight full days, was completed in just four days. Strong margins at the time of the shutdown forced management and operational staff to work around the clock to get the plant up and running again to ensure optimal performance for 2023. As we look ahead, we anticipate above-average processing margins for the remainder of 2022 and into 2023. The market continues to provide opportunities to secure above average returns. Strong demand for oil is likely to continue in the near future as additional renewable diesel plants inWestern U.S. are scheduled to begin production in late 2022. In addition, the new crop beans appear to contain above average oil and protein content and are easier to process than last year's crop. Transportation issues, however, will most likely provide the greatest challenges moving forward which could affect our operations and financial performance. High diesel fuel costs are having a crippling effect in every sector. The potential for a railroad strike and other operating challenges also loom on the horizon for the railroads. Lastly, extremely low water levels in the majorU.S. river systems are contributing to the overall transportation and supply chain issues, causing disruptions never seen before in theU.S. Long term, we continue to take additional steps toward the plan of building a crushing plant nearMitchell, South Dakota . 18 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of the three months ended
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 $ % of Revenue $ % of Revenue Revenue$ 184,725,873 100.0$ 147,796,292 100.0 Cost of revenues (172,733,989) (93.5) (131,800,191) (89.2) Gross profit 11,991,884 6.5 15,996,101 10.8 Operating expenses (1,249,945) (0.7) (1,220,595) (0.8) Interest expense (638,690) (0.3) (470,522) (0.3) Other non-operating income (expense) 331,933 0.2 162,306 0.1 Net income$ 10,435,182 5.6$ 14,467,290 9.8 Revenue - Revenue increased$36.9 million , or 25.0%, for the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. The increase in revenue was primarily due to increases in the average sales price of refined soybean oil and soybean meal. The average sales price of soybean oil increased approximately 17% in the three months endedSeptember 30, 2022 from the same period in 2021, due to surging demand from the renewable diesel and food sectors. The average sales price of soybean meal increased 19% during the three months endedSeptember 30, 2022 , compared to the same period in 2021, due to drought conditions inArgentina as well asNorth America . A severe drought inArgentina , which is responsible for almost 30% of the world's soybean meal exports, shifted demand for meal to theU.S. , allowing producers like us to benefit from increased export opportunities. Gross Profit/Loss - Gross profit decreased$4.0 million , or 25.0%, for the three months endedSeptember 30, 2022 , compared to the same period in 2021. The decrease in gross profit was primarily due to a$9.2 million decrease in net gains (loss) recognized on derivative activities and a$1.1 million increase in production costs. During the three-month period endedSeptember 30, 2022 , we recognized$5.6 million in net gains (losses) on derivative activities, compared to$14.8 million during the same period in 2021. The increase in production costs was largely due to increased maintenance expenses in 2022. Partially offsetting the decrease in net gains on derivatives and increase in production costs was an increase in profitability due to surging oil demand from the renewable diesel sector as more diesel plants open. Operating Expenses - Administrative expenses, including all selling, general and administrative expenses, remained relatively constant during the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. Interest Expense - Interest expense increased$168,000 , or 35.7%, during the three months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in interest expense was due to an increase in interest rates on our senior debt with CoBank and borrowings from our lines of credit. As ofSeptember 30, 2022 , the interest rate on our revolving long-term loan was 5.54%, compared to 2.54% as ofSeptember 30, 2021 . Partially offsetting the increase in interest rates was a$13.6 million (19.0%) decrease in borrowings from our lines of credit. The average debt level during the three-month period endedSeptember 30, 2021 was approximately$58.0 million , compared to$71.6 million during the same period in 2021. Other Non-Operating Income - Other non-operating income (expense), including patronage dividend income, improved$170,000 during the three months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in other non-operating income was due to a$285,000 improvement in gains (losses) on our interest rate hedge instruments. During the three-month period endedSeptember 30, 2022 , gains on interest rate hedges totaled$348,000 , compared to$63,000 during the same period in 2021. The increase in gains on our interest rate hedges was partially offset by a decrease in gains from the sales of property and equipment. For the three months endedSeptember 30, 2021 , we recorded gains on the sales of property and equipment of$94,000 , compared to$0 during the same period in 2022. 19 -------------------------------------------------------------------------------- Net Income/Loss - During the three-month period endedSeptember 30, 2022 , we generated a net income of$10.4 million , compared to$14.5 million for the same period in 2021. The$4.1 million decrease was primarily attributable to a decrease in gross profit.
Comparison of the nine months ended
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 $ % of Revenue $ % of Revenue Revenue$ 531,698,305 100.0$ 431,696,940 100.0 Cost of revenues (476,328,311) (89.6) (405,925,495) (94.0) Gross profit 55,369,994 10.4 25,771,445 6.0 Operating expenses (4,124,844) (0.8) (3,295,243) (0.8) Interest expense (1,574,020) (0.3) (1,280,832) (0.3) Other non-operating income (expense) 1,825,990 0.3 622,069 0.1 Net income$ 51,497,120 9.7$ 21,817,439 5.1 Revenue - Revenue increased$100.0 million , or 23.2%, for the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021. The increase in revenues was primarily due to an increase in the average sales price of refined soybean oil. The average sales price of soybean oil increased approximately 38% in the nine months endedSeptember 30, 2022 from the same period in 2021, due to surging demand from the renewable diesel and food sectors. Gross Profit/Loss - Gross profit increased$29.6 million , or 114.9%, for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in gross profit was primarily due to increased demand for oil from the renewable diesel sector as more diesel plants were opened in theU.S. Operating Expenses - Administrative expenses, including all selling, general and administrative expenses, increased approximately$830,000 , or 25.2%, during the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021. The increase was primarily due to increases in personnel costs. Interest Expense - Interest expense increased$293,000 , or 22.9%, during the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in interest expense was due to an increase in interest rates on our senior debt with CoBank. As ofSeptember 30, 2022 , the interest rate on our revolving long-term loan was 5.54%, compared to 2.94% as ofSeptember 30, 2021 . Other Non-Operating Income - Other non-operating income (expense), including patronage dividend income, increased$1,204,000 during the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021. The increase in other non-operating income was due to a$999,000 increase in gains on our interest rate hedge instruments and a$335,000 increase in patronage dividend income. During the nine-month period endedSeptember 30, 2022 , gains on interest rate hedges totaled$1,134,000 , compared to$135,000 during the same period in 2021. We also received$700,000 in patronage distributions from CoBank, a cooperative lender of which we are a member, during the nine months endedSeptember 30, 2022 , compared to$365,000 during the same period in 2021.
Net Income/Loss - During the nine-month period ended
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations and borrowings under our two revolving lines of credit which are discussed below under "Indebtedness." OnSeptember 30, 2022 , we had working capital, defined as current assets less current liabilities, of approximately$63.8 million , compared to$37.5 million onSeptember 30, 2021 . Working capital increased$26.3 million between periods primarily due to increases in net income during that 20 --------------------------------------------------------------------------------
period. Based on current plans, we will continue funding our capital and operating needs from cash from operations and revolving lines of credit.
Comparison of the Nine Months Ended
2022
2021
Net cash provided by (used for) operating activities
(7,004,786)
Net cash provided by (used for) financing activities 33,263,945
43,588,663
Cash Flows Used For Operations
The$12.7 million decrease in cash flows used for operating activities was largely due to a$29.7 million increase in net income and an$8.0 million decrease in inventory. During the nine-month period endedSeptember 30, 2022 , our inventories increased by$51.1 million , compared to a$59.1 million increase during the same period in 2021. Partially offsetting the changes in net income and inventory was a$14.5 million decrease in accrued commodity purchases and an$11.0 million increase in net gains on derivative activities. Accrued commodity purchases increased$0.3 million during the nine-month period endedSeptember 30, 2022 , compared to$14.8 million during the same period in 2021. During the nine months endedSeptember 30, 2022 , we recognized$12.9 million in gains on derivative activities, compared to$1.9 million during the same period in 2021.
Cash Flows Used For Investing Activities
The$0.7 million decrease in cash flows used for investing activities during the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021, was due to a$1.0 million decrease in capital improvements. During the nine months endedSeptember 30, 2022 , we spent$6.2 million on capital improvements, compared to$7.2 million during the same period in 2021.
Cash Flows Provided By (Used For) Financing Activities
The$10.3 million decrease in cash flows provided by financing activities was principally due to a$12.5 million decrease in net proceeds on borrowings and a$7.9 million increase in cash distributions to our members during the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021. During the nine months endedSeptember 30, 2022 , net proceeds on borrowings increased$36.6 million , compared to$49.1 million during the same period in 2021. Partially offsetting the increase was a$10.1 million increase in the excess of outstanding checks over the bank balance during the nine months endedSeptember 30, 2022 . The change in the excess of outstanding checks over bank balance increased$14.0 million during the nine-month period endedSeptember 30, 2022 , compared to$3.9 million in the same period in 2021.
Indebtedness
We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under this loan, we may borrow funds as needed up to the credit line maximum, or$14.0 million , and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. The available credit line decreases by$2.0 million every six months until the credit line's maturity onMarch 20, 2026 . We pay a 0.40% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan was$14.0 million and$16.9 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Under this loan, there were no additional funds available to borrow as ofSeptember 30, 2022 . The second credit line is a revolving working capital (seasonal) loan. The primary purpose of this loan is to finance our operating needs. The maximum we may borrow under this line is$85.0 million until the loan's maturity onDecember 1, 2022 . We pay a 0.20% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the credit agreement to avoid the commitment fee. As ofSeptember 30, 2022 andDecember 31, 2021 , the principal balance outstanding on this credit line was$39.5 million and$0 , respectively, allowing us to borrow an additional$45.5 million as ofSeptember 30, 2022 . 21 -------------------------------------------------------------------------------- Both the revolving and seasonal loans with CoBank are set up with a variable rate option. The variable rate is set daily by CoBank. We also have a fixed rate option on both loans, allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on the revolving term loan was 5.54% and 2.56% as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , the interest rate on the seasonal loan was 5.24% and 2.31%, respectively. We were in compliance with all covenants and conditions under the loans as ofSeptember 30, 2022 .
OFF BALANCE SHEET FINANCING ARRANGEMENTS
We do not utilize variable interest entities or other off-balance sheet financial arrangements.
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