Forward Looking Statements
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. Such factors include, but are not limited to, the effects on our business from the COVID-19 pandemic and the pace of recovery from the pandemic, economic and political conditions, globally and in the markets we serve, fluctuations in cost and availability of commodities, weather and agricultural conditions, governmental regulations, the effectiveness of our internal control over financial reporting and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify all such factors. The reader is urged to carefully consider these risks and others, including those risk factors listed under Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 Form 10-K"). In some cases, the reader can identify forward-looking statements by terminology such as may, anticipates, believes, estimates, predicts, or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Critical Accounting Policies and Estimates
Our critical accounting policies and critical accounting estimates, as described in our 2020 Form 10-K, have not materially changed through the first quarter of 2021. Executive Overview
Our operations are organized, managed and classified into four reportable business segments: Trade, Ethanol, Plant Nutrient, and Rail. Each of these segments is generally based on the nature of products and services offered and aligns with the management structure.
The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales between periods may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes in gross profit. The Company has considered the potential impact of the book value of the Company's total shareholders' equity exceeding the Company's market capitalization for impairment indicators. The Company continues to believe that the share price is not an accurate reflection of its current value. The long-term outlook remains positive for agricultural commodities due to market volatility driven by crop supply shortages and export demand fromChina increasing to pre-pandemic levels. Management believes that the market's impact on the Company's equity value does not accurately reflect the impact of these external factors on the Company. As a result of prior period tests, reviews of current operating results and other relevant market factors, management ultimately concluded that, while the Company's shareholders equity exceeded the market capitalization for a majority of the period, that no impairment trigger existed as ofMarch 31, 2021 . However, adverse market conditions or alternative management decisions on operations may result in future impairment considerations.
Trade
The Trade Group's first quarter results improved substantially over the prior year as the Group saw the benefits of a demand-driven agriculture rally. Commodity price volatility and market dislocations created merchandising opportunities for the Group to be well positioned and execute on many commodities in both the domestic and export markets. This demand driven rally has created an inversion in the futures market for the majority of the agricultural commodities stored by the Group's asset business. However, traditional space income through the old crop carryout has been accelerated and replaced by strong elevation margins and merchandising results. The Group's propane business added significant volume both through a new terminal location and due to the late winter causing widespread cold temperatures. Finally, the business continued to benefit from synergies and other cost-cutting efforts. 22
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Agricultural inventories on hand atMarch 31, 2021 were 124.9 million bushels, of which 1.6 million bushels were stored for others. These amounts compare to 128.8 million bushels on hand atMarch 31, 2020 , of which 3.9 million bushels were stored for others. Total Trade storage space capacity, including temporary pile storage, was approximately 202 million bushels atMarch 31, 2021 compared to 205 million bushels atMarch 31, 2020 . While the 2020 corn and soybean harvest were smaller and drier than originally anticipated, this combined with improving export demand, especially fromChina , has led to a significant increase in basis, strong elevation margins and considerable volatility. These factors should continue to create volatility and market dislocations which should present good merchandising opportunities into the future. Nearby futures prices have rallied, creating an inverse in corn, soybean and wheat futures markets. While the volume of grain in store is expected to remain at levels below recent years for some time, high prices and strong elevation margins are expected to continue at least until next harvest.
Ethanol
The Ethanol Group's first quarter results were profitable, and a substantial improvement compared to the prior year. The Group's prior year results were significantly impacted by COVID-19 as negative crush margins and weak demand plagued the ethanol industry. The 2021 results reflect a considerable improvement in crush margins, overall ethanol demand and higher ethanol trading results. The Group also benefited from increased co-product values, including high protein and traditional DDG products, as well as corn and other vegetable oils. Spot ethanol crush margins have continued to improve from the prior year and rising corn and soybean meal prices continue to support feed product values. While there is a level of uncertainty that persists regarding a tighter corn balance sheet and how quickly the ethanol industry as a whole will recover from COVID-19, recently, the group has observed rebounding driving demand and a higher export program which should provide some tailwind to the Group.
Ethanol and related co-products volumes for the three months ended
Three months ended March
31,
(in thousands)
2021 2020
Ethanol (gallons shipped)
172,212 147,345
E-85 (gallons shipped)
7,890 9,093
Corn oil (pounds shipped)
47,947 29,294 DDG (tons shipped)* 442 536
* DDG tons shipped converts wet tons to a dry ton equivalent amount.
Plant Nutrient
We expect our Plant Nutrient business to build on another strong year. The group's near-term outlook is positive, anticipating a strong planting season, higher fertilizer prices and strong demand across many other product lines.
Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 463 thousand tons for dry nutrients and approximately 509 thousand tons for liquid nutrients atMarch 31, 2021 , compared to approximately 486 thousand tons for dry nutrients and approximately 515 thousand tons for liquid nutrients atMarch 31, 2020 . 23
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Tons of product sold for the three months endedMarch 31, 2021 and 2020 were as follows: Three months ended March 31, (in thousands) 2021 2020 Ag Supply Chain 222 211 Specialty Liquids 100 73 Engineered Granules 157 121 Total tons 479 405 In the table above, Ag Supply Chain represents facilities principally engaged in the wholesale distribution and retail sale and application of primary agricultural nutrients such as bulk nitrogen, phosphorus, and potassium. Specialty Liquid locations produce and sell a variety of low-salt liquid starter fertilizers, micronutrients for agricultural use, and specialty products for use in various industrial processes. Engineered Granules facilities primarily manufacture granulated dry products for use in specialty turf and agricultural applications and a variety of corncob-based products.
Rail
Rail results increased driven by the opportunistic sale of older railcars due to high scrap prices and a$1.6 million recovery of bad debt. The leasing business improved due to lower maintenance expenses and bad debt recoveries despite slightly decreased utilization rates. Average utilization rates decreased from 89.0 percent in the first quarter of 2020 to 88.0 percent in the first quarter of 2021 as the Group had fewer cars on lease from the sand and ethanol market headwinds. Rail assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) atMarch 31, 2021 were 22.4 thousand compared to 24.4 thousand atMarch 31, 2020 . The COVID-19 pandemic has caused a significant idling of the North American railcar fleet, with almost 25% of the fleet idle atMarch 31, 2021 , and has continued to drive railcar loadings lower than pre-pandemic levels. While these conditions are showing signs of a slow recovery, lease rates are expected to stay relatively flat for much of the year.
Other
Our "Other" activities include corporate income and expense and cost for functions that provide support and services to the operating segments. The results include expenses and benefits not allocated to the operating segments and other elimination and consolidation adjustments.
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Operating Results
The following table presents a comparison of the three months endedMarch 31, 2021 with the three months endedMarch 31, 2020 including a reconciliation of GAAP to non-GAAP measures: Three months ended March 31, 2021 (in thousands) Trade Ethanol Plant Nutrient Rail Other Total
Sales and merchandising revenues
$ 169,252 $ 41,010 $ -$ 2,635,729 Cost of sales and merchandising revenues 1,909,951 434,476 136,851 31,739 - 2,513,017 Gross profit 72,557 8,483 32,401 9,271 - 122,712 Operating, administrative and general expenses 56,931 6,656 23,399 2,874 10,012
99,872
Interest expense (income), net 7,051 2,073 1,066 3,180 (201)
13,169
Equity in earnings (losses) of affiliates, net 1,794 - - - - 1,794 Other income (expense), net 3,486 1,327 587 1,674 468 7,542
Income (loss) before income taxes
$ 8,523$ 4,891 $ (9,343) $ 19,007 Income (loss) before income taxes attributable to the noncontrolling interests - (1,845) - - -
(1,845)
Non-GAAP Income (loss) before income taxes attributable to the Company$ 13,855 $ 2,926 $ 8,523$ 4,891 $ (9,343) $ 20,852 Three months ended March 31, 2020 (in thousands) Trade Ethanol Plant Nutrient Rail Other Total
Sales and merchandising revenues
$ 124,913 $ 37,113 $ -$ 1,853,105 Cost of sales and merchandising revenues 1,315,574 342,438 104,549 27,414 - 1,789,975 Gross profit 62,466 (29,399) 20,364 9,699 - 63,130 Operating, administrative and general expenses 68,155 6,115 19,741 5,259 5,790
105,060
Interest expense (income), net 7,188 2,357 1,785 4,483 (226)
15,587
Equity in earnings (losses) of affiliates, net 129 - - - - 129 Other income (expense), net 2,765 446 (30) 1,050 582 4,813
Income (loss) before income taxes
$ (1,192) $ 1,007 $ (4,982) $ (52,575) Income (loss) before income taxes attributable to the noncontrolling interests - (13,449) - - -
(13,449)
Non-GAAP Income (loss) before income taxes attributable to the Company$ (9,983) $ (23,976) $ (1,192) $ 1,007 $ (4,982) $ (39,126) The Company uses Income (loss) before income taxes attributable to the Company, a non-GAAP financial measure as defined by theSecurities and Exchange Commission , to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted inthe United States and should be considered in addition to, and not in lieu of, GAAP financial measures. Management believes that Income (loss) before income taxes attributable to the Company is a useful measure of the Company's performance because it provides investors additional information about the Company's operations allowing evaluation of underlying business performance and period-to-period comparability. This measure is not intended to replace or be alternatives to Income (loss) before income taxes, the most directly comparable amounts reported under GAAP. 25
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Trade
Operating results for theTrade Group increased by$23.8 million compared to the results of the same period last year. Sales and merchandising revenues increased by$604.5 million and cost of sales and merchandising revenues increased by$594.4 million for an increased gross profit impact of$10.1 million . Most of the increase to sales and cost of sales is the result of increased commodity prices. The net increase in gross profit was primarily driven by improved merchandising results as weather and export demand created volatility that allowed traders to identify arbitrage opportunities from geographical dislocations. This increase was partially offset by a decrease in the Group's traditional assets, however, as inverted futures markets in several commodities provided less space income, replacing and accelerating the income with merchandising opportunities noted above. Operating, administrative and general expenses decreased by$11.2 million . The decrease from the prior year is primarily related to the Company's cost saving initiatives, much of which is headcount reduction, both from acquisition integration and in response to the COVID-19 pandemic.
Interest expense decreased by
Ethanol Operating results for theEthanol Group increased by$26.9 million from the same period last year. Sales and merchandising revenues increased by$129.9 million and cost of sales and merchandising revenues increased by$92.0 million compared to prior year. As a result, gross profit increased by$37.9 million compared to prior year. Most of the increase to sales and cost of sales is the result of increased commodity prices. The net increase to gross profit in the current period results reflect significantly improved crush margins, higher coproduct sales from DDGs and corn oil and strong merchandising revenues. The prior year results were significantly impacted by COVID-19 and the group recorded a$10.4 million inventory write down and a$9.6 million mark to market loss.
Operating, administrative and general expenses increased by
Plant Nutrient Operating results for thePlant Nutrient Group increased by$9.7 million compared to the same period in the prior year. Sales and merchandising revenues increased$44.3 million and cost of sales and merchandising revenues increased by$32.3 million resulting in a gross profit increase of$12.0 million . Gross profit improved year over year due to increases in volumes and margins across the breadth of product lines and reflects higher spring demand, strong grower income and well positioned fertilizer inventory.
Operating, administrative and general expenses increased by
Interest expense decreased by
Rail Operating results increased by$3.9 million from the same period last year. Sales and merchandising revenues increased by$3.9 million driven by an increase of$6.6 million in car sales, most of which were scrap sale revenues which were partially offset by lower base leasing income due to fewer cars on lease and lower average lease rates. Cost of sales and merchandising increased by$4.3 million compared to the prior year driven by the book value of cars that were sold in the quarter. As a result, gross profit decreased by$0.4 million compared to the same period last year. Operating, administrative and general expenses decreased by$2.4 million driven by a$1.6 million recovery of previously written off bad debt and overall lower expenses in the quarter.
Interest expense decreased by
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Other
Operating results declined by$4.4 million from the same period last year. The increase in operating losses was primarily driven by higher operating, administrative and general expenses largely driven by increased incentive-based compensation due to improved company-wide performance year over year.
Income Taxes
For the three months endedMarch 31, 2021 , the Company recorded an income tax expense of$5.7 million at an effective rate of 30.2%. For the three months endedMarch 31, 2020 , the Company recorded an income tax benefit of$1.5 million at an effective tax rate of 2.8%. The increase in effective tax rate for the three months endedMarch 31, 2021 as compared to the same period last year primarily attributed improved operating results in the current year, including additional nondeductible compensation and increased foreign tax expense, as well as the difference in nondeductible income related to our noncontrolling interests within the Ethanol group.
Liquidity and Capital Resources
Working Capital AtMarch 31, 2021 , the Company had working capital of$518.8 million . The following table presents changes in the components of current assets and current liabilities: (in thousands) March 31, 2021 March 31, 2020 Variance Current Assets: Cash and cash equivalents$ 35,393 $ 19,693 $ 15,700 Accounts receivable, net 699,725 539,671 160,054 Inventories 1,295,061 1,028,076 266,985 Commodity derivative assets - current 317,939 149,070 168,869 Other current assets 88,771 85,372 3,399 Total current assets$ 2,436,889 $ 1,821,882 $ 615,007 Current Liabilities: Short-term debt 915,205 392,450 522,755 Trade and other payables 538,691 553,416 (14,725) Customer prepayments and deferred revenue 163,935 121,148 42,787 Commodity derivative liabilities - current 91,448 90,491 957 Current maturities of long-term debt 49,937 80,758 (30,821) Accrued expenses and other current liabilities 158,900 147,225 11,675 Total current liabilities$ 1,918,116 $ 1,385,488 $ 532,628 Working Capital$ 518,773 $ 436,394 $ 82,379 Current assets as ofMarch 31, 2021 increased$615.0 million in comparison to those as ofMarch 31, 2020 . This increase was noted in all areas. The increases in accounts receivable, current commodity derivative assets and inventory balances can largely be attributable to the significant increases in the prices of agricultural commodities that the Company transacts in the ordinary course of business. See also the discussion below on additional sources and uses of cash for an understanding of the increase in cash from prior year. Current liabilities increased$532.6 million compared to the prior year primarily due to increases in short-term debt and trade and customer prepayments and deferred revenue. The increase in short-term debt is the result of higher working capital needs driven by significant increases in the prices of agricultural commodities. Short-term borrowings, while typically at a seasonal high in the spring, are further supporting an unusual price run-up in our core commodities. As we liquidate these commodities in advance of harvest, we expect a reduction to the level of short-term borrowing. The increase in current liabilities was slightly offset by reductions in current maturities of long-term debt and trade and other payables. 27 --------------------------------------------------------------------------------
Table of Contents Sources and Uses of Cash Three Months Ended (in thousands) March 31, 2021 March 31, 2020
Net cash used in operating activities$ (445,727) $ (228,430) Net cash used in investing activities (15,730) (30,416) Net cash provided by financing activities 467,762 223,577 Operating Activities Our operating activities used cash of$445.7 million and$228.4 million in the first three months of 2021 and 2020, respectively. The increase in cash used was primarily due to a result in the change of working capital, as discussed above, driven by significant increases in agricultural commodity prices. The cash used for operating activities was slightly offset by higher operating results as compared to the prior period, however. Investing Activities Investing activities used cash of$15.7 million through the first three months of 2021 compared to cash used of$30.4 million in the prior year. The decrease from the prior year was a result of fewer purchased railcars and the continued strategic use of capital spending to enhance overall liquidity and cash management. We expect to invest approximately$100 million in property, plant and equipment in 2021; approximately 60% of which will be to maintain facilities. Financing Activities Financing activities provided cash of$467.8 million and$223.6 million for the three months endedMarch 31, 2021 and 2020, respectively. This change from the prior year was largely due to a significant increase in short term borrowings to cover working capital needs as the prices of agricultural commodities continue to rise. The Company is party to borrowing arrangements with a syndicate of banks that provide a total of$1,405.0 million in borrowings. Of the total capacity,$214.0 million is non-recourse to the Company. As ofMarch 31, 2021 , the Company had$635.8 million available for borrowing with$78.6 million of that total being non-recourse to the Company. The Company paid$5.8 million in dividends in the first three months of 2021 compared to$5.7 million in the prior year. The Company paid$0.175 per common share for the dividends paid in January of 2021 and 2020. OnFebruary 19, 2021 , the Company declared a cash dividend of$0.175 per common share payable onApril 21, 2021 to shareholders of record onApril 1, 2021 . Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. The Company is in compliance with all such covenants as ofMarch 31, 2021 . In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized by ethanol plant assets and railcar assets. Because the Company is a significant borrower of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and/or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, the Company could receive a return of cash. Management believes our sources of liquidity will be adequate to fund our operations, capital expenditures and service our indebtedness.
At
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