You should read the following discussion along with our financial statements and the notes to our financial statements included elsewhere in this report. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Information" at the beginning of this report.
Overview and Executive Summary
In 2022, we had a record net income of$67.5 million , an increase of$39.5 million from our previous record in 2021. The oil markets continued to be the main driving factor for our 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, as markets were exceptionally strong due to high domestic and export demand. Demand for soybean hulls, moreover, was robust, because elevated hay prices in southern and westernU.S. , following a drought, caused producers to seek alternative feed products. The increased demand for soybean oil has continued to drive margins and expansion of the soybean processing industry in theU.S. In direct response to this growth, we announced in February of 2022 our plans to construct a new oilseed processing plant nearMitchell, South Dakota . Once operational, theMitchell plant will be capable of processing not only soybeans but other crops, like sunflowers, containing a much higher percentage of oil. We also believe the plant's location will be ideally suited to access higher oil seeds increasingly being grown west of the proposed plant site and is near growing hog production which will provide an additional outlet for the sale of meal. Subject to obtaining sufficient financing, we plan to start construction of this plant this fall and begin operations in late 2025. Looking ahead in 2023, oil demand is expected to rebound from a slight decrease in the fourth quarter of 2022, as operations improve at renewable diesel refineries and additional capacity comes online. Domestic meal demand may decrease some, but exports should remain strong due to reduced competition from Argentine processors. Soybean production inArgentina is projected to be impacted by drought conditions which in turn will lower supplies of local soybeans available to the Argentine crushing industry. The reduced crop inArgentina will be partially offset by strong soybean production inBrazil . In addition, CBOT crushing margins in 2023 should remain elevated due to relatively high soybean oil prices as compared to soybean prices. 13 --------------------------------------------------------------------------------
Results of Operations
Comparison of Years Ended
Year Ended December 31, 2022 Year Ended December 31, 2021 % of % of $ Revenue $ Revenue Revenue$ 721,532,329 100.0$ 590,150,153 100.0 Cost of revenues (648,116,685) (89.8) (556,675,807) (94.3) Operating expenses (5,669,426) (0.8) (4,590,227) (0.8) Other income (expense) (282,117) - (876,204) (0.1) Income tax (expense), net - - - - Net income (loss)$ 67,464,101 9.4$ 28,007,915 4.7 Revenue - Revenue increased$131.4 million , or 22.3%, for the year endedDecember 31, 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 32% from 2021 to 2022, due to surging demand from the renewable diesel and food sectors. Gross Profit/Loss - Gross profit increased$39.9 million , or 119.3%, for the year endedDecember 31, 2022 , compared to 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. Partially offsetting the increase in gross profit was a$4.6 million , or 14.5%, increase in production costs in 2022, compared to 2021. The increase in production costs was due to increases in costs of personnel, maintenance, utilities and chemicals mostly from inflation and supply shortages. Operating Expenses - Administrative expenses, including selling, general and administrative expenses, increased approximately$1.1 million , or 23.5%, during the year endedDecember 31, 2022 , compared to the same period in 2021. The increase was primarily due to an increase in personnel costs. Interest Expense - Interest expense increased$570,000 , or 34.9%, during the year endedDecember 31, 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 ofDecember 31, 2022 , the interest rate on our revolving long-term loan was 6.85%, compared to 2.56% as ofDecember 31, 2021 . The increase in interest expense was partially offset by a$3.3 million decrease in borrowings from our lines of credit, as we borrowed less due to improved profitability and less capital improvements. The average debt level during 2022 was approximately$58.3 million , compared to$61.6 million in 2021. Other Non-Operating Income (Expense) - Other non-operating income, including patronage dividend income, increased$1.2 million , or 154.6%, for the year endedDecember 31, 2022 , compared to the same period in 2021. The increase in other non-operating income was due to a$846,000 increase in gains on our interest rate hedge instruments and a$335,000 increase in patronage dividend income. During the year endedDecember 31, 2022 , gains on interest rate hedges totaled$1,092,000 , compared to$246,000 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 2022, compared to$365,000 during the same period in 2021. Net Income/Loss - We generated a net income of$67.5 million during the year endedDecember 31, 2022 , a$39.5 million increase from 2021. The increase is primarily attributable to an increase in gross profit and other non-operating income. 14
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Comparison of Years Ended
Year Ended December 31, 2021 Year Ended December 31, 2020 % of % of $ Revenue $ Revenue Revenue$ 590,150,153 100.0$ 415,025,765 100.0 Cost of revenues (556,675,807) (94.3) (395,772,460) (95.4) Operating expenses (4,590,227) (0.8) (3,819,645) (0.9) Other income (expense) (876,204) (0.1) 148,067 - Income tax (expense), net - - - - Net income (loss)$ 28,007,915 4.7$ 15,581,727 3.8 Revenue - Revenue increased$175.1 million , or 42.2%, for the year endedDecember 31, 2021 , compared to the same period in 2020. The increase in revenues was primarily due to increases in the average sales prices of all soybean products, especially refined soybean oil. The average sales price of soybean oil increased approximately 75% from 2020 to 2021, primarily due to surging demand for soybean oil from the renewable diesel and food sectors. In addition, soybean meal prices increased approximately 21% during the year endedDecember 31, 2021 , largely due to concerns about prospects of a heavily diminished soybean supply prior to the 2021 harvest which resulted from strong demand in the soybean export sector. Gross Profit/Loss - Gross profit increased$14.2 million , or 73.9%, for the year endedDecember 31, 2021 , compared to the same period in 2020. The increase in gross profit was primarily due to surging in demand for oil from the renewable diesel sector as more diesel plants were opened. In addition, the quantity and quality of soybeans grown in theU.S. , especially in our local procurement area, improved in 2021 from 2020 because of more favorable weather conditions. Operating Expenses - Administrative expenses, including selling, general and administrative expenses, increased approximately$771,000 , or 20.2%, during the year endedDecember 31, 2021 , compared to the same period in 2020. The increase was primarily due to increases in personnel costs and professional fees. Interest Expense - Interest expense increased$543,000 , or 49.8%, during the year endedDecember 31, 2021 , compared to the same period in 2020. The increase in interest expense was primarily due to an increase in borrowings from our lines of credit, as we borrowed more due to higher commodity prices and to pay for capital improvements. The average debt level during 2021 was approximately$61.6 million , compared to$32.9 million in 2020. Other Non-Operating Income (Expense) - Other non-operating income, including patronage dividend income, decreased$481,000 , or 38.8%, for the year endedDecember 31, 2021 , compared to the same period in 2020. The decrease was primarily due to the forgiveness of the$1.2 million Payment Protection Plan loan by theU.S. Small Business Administration inNovember 2020 . Partially offsetting the decrease in other income was a$585,000 improvement in gains (losses) on our interest rate hedge instruments. In 2021, gains on interest rate hedges totaled$246,000 , compared to losses of$339,000 in 2020. Net Income/Loss - We generated a net income of$28.0 million during the year endedDecember 31, 2021 , a$12.4 million increase from 2020. The increase is primarily attributable to an increase in gross profit.
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." OnDecember 31, 2022 , we had working capital, defined as current assets less current liabilities, of approximately$76.0 million , compared to working capital of$37.4 million onDecember 31, 2021 . Working capital increased between periods primarily due to increases in net income in 2022. Based on current plans, we will continue funding our capital and operating needs from cash from operations and revolving lines of credit. 15 --------------------------------------------------------------------------------
Comparison of the Years Ended
2022 2021 Net cash from (used for) operating activities$ 27,431,814 $ 18,016,268 Net cash (used for) investing activities (9,951,071) (13,237,991) Net cash from (used for) financing activities (17,447,782) (7,595,489)
Cash Flows From (Used For) Operating Activities
The$9.4 million increase in cash flows from operating activities was largely due to a$39.5 million increase in net income. Partially offsetting the increase in net income was a$13.7 million increase in inventories and a$9.0 decrease in net loss on derivative activities. During the year endedDecember 31, 2022 , our inventories increased by$40.6 million , compared to a$26.9 million increase during the same period in 2021. In 2022, we recognized$1.0 million in losses on derivative activities, compared to$10.0 million in losses during the same period in 2021.
Cash Flows From (Used For) Investing Activity
The$3.2 million decrease in cash flows used for investing activities between 2022 and 2021 was due to a decrease in capital improvements in 2022. In 2022, we spent approximately$10.1 million on capital improvements to enhance the quality and efficiency of operations, compared to$13.4 million in 2021.
Cash Flows From (Used For) Financing Activity
The$9.8 million increase in cash flows used for financing activities was due to a$7.9 million increase in cash distributions to members in 2022, compared to 2021. In 2022, we distributed$17.3 million to our members, compared to$9.4 million in 2021.
Comparison of the Years Ended
2021 2020
Net cash from operating activities
Cash Flows From (Used For) Operating Activities
The$3.8 million increase in cash flows provided by operating activities was primarily attributed to a$12.4 million increase in net income. Partially offsetting the increase in net income was a$9.3 million increase in inventories and accounts receivable in 2021. We increased inventories by$26.9 million in 2021 compared to$20.6 million in 2020. Accounts receivable increased$7.6 million in 2021, compared to only$4.6 million in 2020. The increase in inventories and accounts receivable was the result of increased commodity prices.
Cash Flows From (Used For) Investing Activity
The$8.3 million increase in cash flows used for investing activities between 2021 and 2020 was due to an increase in capital improvements in 2021. In 2021, we spent approximately$13.4 million on capital improvements to enhance the quality and efficiency of operations, compared to$4.7 million in 2019.
Cash Flows From (Used For) Financing Activity
The$1.4 million increase in cash flows used for financing activities was due to a$2.7 million increase in cash distributions to members in 2021, compared to 2020. In 2021, we distributed$9.4 million to our members, compared to$6.7 million in 2020 16 --------------------------------------------------------------------------------
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$8.8 million and$16.9 million as ofDecember 31, 2022 and 2021, respectively. Under this loan,$5.2 million was available to be borrowed as ofDecember 31, 2022 . The second credit line is a revolving working capital (seasonal) loan. The primary purpose of this loan is to finance our operating needs. Prior to the amendments described below, the maximum we could borrow under this line was$85.0 million until the loan's maturity onFebruary 1, 2023 . 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 ofDecember 31, 2022 and 2021, the principal balance outstanding on this credit line was$0.1 million and$0 , respectively, allowing us to borrow an additional$84.9 million as of as ofDecember 31, 2022 . OnJanuary 31, 2023 andMarch 3, 2023 , we amended our seasonal loan with CoBank. Under theJanuary 31st amendment, the principal amount that we could borrow decreased from$85.0 million to$75.0 million and under theMarch 3rd amendment, the principal amount that we can borrow increased to$85.0 million until the loan's new maturity onDecember 1, 2023 . All other material items and conditions under the credit agreement, and subsequent amendments to such agreement, remain the same following these amendments. Both the revolving and seasonal loans with CoBank are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. 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 is 6.85% and 2.56% as ofDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 and 2021, the interest rate on the seasonal loan is 6.55% and 2.31%, respectively. We were in compliance with all covenants and conditions under the loans as ofDecember 31, 2022 . OnApril 20, 2020 , we entered into an unsecured promissory note for$1,215,700 under theU.S. Small Business Administration's Paycheck Protection Program ("PPP Loan"), a loan program created under the Coronavirus Aid, Relief and Economic Security (the "CARES Act"). The PPP Loan, which would have matured onJuly 20, 2022 and had a 1.0% interest rate, was made throughFirst Bank & Trust, N.A. ,Brookings, South Dakota . The PPP Loan has since been forgiven in full by the SBA, with$1,205,700 being forgiven inNovember 2020 , and$10,000 being forgiven inFebruary 2021 . Capital Expenditures We made a total of$7.8 million in capital expenditures on property and equipment in 2022 compared to approximately$13.4 million in 2021. Improvements were made to enhance the quality and efficiency of our soybean crushing facility and oil refinery inVolga, South Dakota , and our oilseed processing plant nearMiller, South Dakota . Depending upon profitability, we anticipate spending between$8.0 million and$16.0 million for capital improvements in 2023, which will be financed from cash flows from operating activities and long-term debt financing. InFebruary 2022 , we announced plans to construct a multi-seed processing plant nearMitchell, South Dakota . InSeptember 2022 , we entered into a capital contribution and commitment agreement withHigh Plains Partners, LLC , a related party company that will invest and own an equity interest in the new processing facility. Per the agreement, we will transfer all rights, title and interest to all of the tangible and intangible development rights, including engineering, permitting, studies, records, etc., held by us in exchange for equity inHigh Plains Partners, LLC . We also committed to invest at least another$70.0 million for additional equity in the entity, which will be primarily financed from cash flows from long-term debt financing. Operation of the facility is expected to begin in late 2025.
Off Balance Sheet Financing Arrangements
We do not utilize variable interest entities or other off-balance sheet financial arrangements.
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Contractual Obligations
The following table shows our contractual obligations for the periods presented: Payment due by period CONTRACTUAL Less than More than 5 OBLIGATIONS Total 1 year 1-3 years 3-5 years years Long-Term Debt Obligations (1)$ 10,064,000 $ 310,000 $ 5,504,000 $ 4,250,000 $ - Operating Lease Obligations 26,245,000 3,642,000 6,393,000 5,382,000 10,828,000 Total$ 36,309,000 $ 3,952,000 $ 11,897,000 $ 9,632,000 $ 10,828,000
(1)Represents principal and interest payments on our notes payable, which are included on our Balance Sheet.
Recent Accounting Pronouncements
See page F-10, Note 1 of our audited financial statements for a discussion on the impact, if any, of the recently pronounced accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We continually evaluate these estimates based on historical experience and other assumptions that we believe to be reasonable under the circumstances. The difficulty in applying these policies arises from the assumptions, estimates, and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.
Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:
Commitments and Contingencies
Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense. In conformity with accounting principles generally accepted in theU.S. , we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated. Inventory Valuation We account for our inventories at estimated market value. These inventories are agricultural commodities that are freely traded, have quoted market prices, may be sold without significant further processing, and have predictable and insignificant costs of disposal. We derive our estimates from local market prices determined by grain terminals in our area. Processed product price estimates are determined by the ending sales contract price as of the close of the final day of the period. This price is determined by the average closing price on theChicago Board of Trade , net of the local basis, for the last two business days of the period and the first business day of the subsequent period. Changes in the market values of these inventories are recognized as a component of cost of goods sold. 18
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Long-Lived Assets
Depreciation and amortization of our property, plant and equipment is provided on the straight-lined method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management's estimates of expected useful lives to differ from actual. Long-lived assets, including property, plant and equipment and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Considerable management judgment is necessary to estimate undiscounted future cash flows and may differ from actual. We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset's carrying value may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss is recognized. The impairment loss is calculated as the amount by which the carrying value of the asset exceeded its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.
Accounting for Derivative Instruments and Hedging Activities
We minimize the effects of changes in the price of agricultural commodities by using exchange-traded futures and options contracts to minimize our net positions in these inventories and contracts. We account for changes in market value on exchange-traded futures and option contracts at exchange prices and account for the changes in value of forward purchase and sales contracts at local market prices determined by grain terminals in the area. Changes in the market value of all these contracts are recognized in earnings as a component of cost of goods sold. Revenue Recognition We account for all of our revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers, which became effectiveJanuary 1, 2018 . As part of the adoption of ASC 606, we applied the new standard on a modified retrospective basis analyzing open contracts as ofJanuary 1, 2018 . However, no cumulative effect adjustment to retained earnings was necessary as no revenue recognition differences were identified when comparing the revenue recognition criteria under ASC 606 to previous requirements. We principally generate revenue from merchandising and transporting manufactured agricultural products used as ingredients in food, feed, energy and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any amounts collected on behalf of third parties (e.g. - taxes). We follow a policy of recognizing revenue at a single point in time when we satisfy our performance obligation by transferring control over a product to a customer. Control transfer typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for instance, destination terms). Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of revenues. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
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