Overview
We have been an investor in ethanol production facilities beginning in 2006 and
a refined coal production facility in 2017. We currently have equity investments
in three ethanol production entities, two of which are majority ownership
interests, and a majority ownership in one refined coal production entity. We
may make additional alternative energy investments in the future.
24
Our ethanol operations are highly dependent on commodity prices, especially
prices for corn, ethanol, distillers grains, non-food grade corn oil and natural
gas. As a result of price volatility for these commodities, our operating
results can fluctuate substantially. The price and availability of corn is
subject to significant fluctuations depending upon a number of factors that
affect commodity prices in general, including crop conditions, weather, federal
policy and foreign trade. Because the market price of ethanol is not always
directly related to corn prices, at times ethanol prices may not follow
movements in corn prices and, in an environment of higher corn prices or lower
ethanol prices, reduce the overall margin structure at the plants. As a result,
at times, we may operate our plants at negative or minimally positive operating
margins.
We expect our ethanol plants to produce approximately 2.8 gallons of denatured
ethanol for each bushel of grain processed in the production cycle. We refer to
the actual gallons of denatured ethanol produced per bushel of grain processed
as the realized yield. We refer to the difference between the price per gallon
of ethanol and the price per bushel of grain (divided by the realized yield) as
the "crush spread." Should the crush spread decline, it is possible that our
ethanol plants will generate operating results that do not provide adequate cash
flows for sustained periods of time. In such cases, production at the ethanol
plants may be reduced or stopped altogether in order to minimize variable costs
at individual plants.
We attempt to manage the risk related to the volatility of commodity prices by
utilizing forward grain and natural gas purchase contracts, forward ethanol,
distillers grains and non-food grade corn oil sale contracts and commodity
futures and swap agreements as management deems appropriate. We attempt to match
quantities of these sales contracts with an appropriate quantity of grain
purchase contracts over a given period of time when we can obtain an adequate
gross margin resulting from the crush spread inherent in the contracts we have
executed. However, the market for future ethanol sales contracts generally lags
the spot market with respect to ethanol price. Consequently, we generally
execute fixed price contracts for no more than four months into the future at
any given time and we may lock in our corn or ethanol price without having a
corresponding locked in ethanol or corn price for short durations of time. As a
result of the relatively short period of time our fixed price contracts cover,
we generally cannot predict the future movements in our realized crush spread
for more than four months; thus, we are unable to predict the likelihood or
amounts of future income or loss from the operations of our ethanol facilities.
We utilize derivative financial instruments, primarily exchange traded commodity
future contracts and swaps, in conjunction with certain of our grain procurement
and commodity marketing activities.
Our fiscal year 2020 operations and commodity prices in general were
significantly impacted by the coronavirus ("COVID-19") pandemic. In an effort to
contain the virus, there have been various and prolonged restrictions on travel,
public gatherings and work from home orders throughout the world. This has
resulted in reduced demand for gasoline and ethanol. Corn pricing has also been
impacted by this lower demand for ethanol and resulting reduced ethanol
production, although China increased its imports of U.S. corn during the latter
part of fiscal year 2020. In the early periods of the COVID-19 pandemic, CBOT
ethanol pricing declined sharply to approximately $0.84 per gallon while CBOT
corn pricing declined to a low of approximately $3.03 per bushel. These and
other market factors led to the shutdown of our NuGen ethanol plant from late
March 2020 to late June 2020 and the shutdown of our One Earth ethanol plant
from late March 2020 to late May 2020. CBOT ethanol and corn prices were at
their highest levels during fiscal year 2020 at the end of January 2021 as the
ethanol price was approximately $1.64 per gallon and the corn price was
approximately $5.47 per bushel.
On August 10, 2017, we, through a 95.35% owned subsidiary, purchased the entire
ownership interest of an entity that owns a refined coal facility for
approximately $12.0 million. 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 and other requirements as governed by Section 45 of the IRC. In order
to maintain compliance with Section 45 of the IRC, we are required to test every
six months, through an
25
independent laboratory, the effectiveness of our process with respect to
emissions reductions. Annually, the IRS publishes the amount of federal income
tax credit earned per ton of refined coal produced and sold for a given calendar
year, which for 2020 is approximately $7.30 per ton. The tax credits can be
earned for refined coal produced and sold by our facility through November 18,
2021. We expect to cease refined coal production operations on or before that
date.
Net income attributable to REX common shareholders was approximately $3.0
million in fiscal year 2020 compared to approximately $7.4 million in fiscal
year 2019. Both fiscal years 2020 and 2019 benefitted from reductions in our
effective tax rate resulting from the impact of federal production tax credits
associated with our refined coal operations and from the impact of research and
experimentation credits associated with our ethanol and by-products operations.
However, as refined coal production declined significantly in fiscal year 2020
compared to fiscal year 2019, the benefit of the related tax credits also
declined.
We plan to seek and evaluate various investment opportunities including ethanol
and/or energy related, carbon dioxide related, agricultural or other ventures we
believe fit our investment criteria. We can make no assurances that we will be
successful in our efforts to find such opportunities.
During fiscal year 2013, through a wholly owned subsidiary REX I.P., LLC, we
entered into a joint venture to file and defend patents for technology relating
to heavy oil and oil sands production methods, and to attempt 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, an Ohio limited
liability company. Future Energy is managed by a board of three managers, two
appointed by us and one by Hytken.
We agreed to fund direct patent expenses relating to patent applications and
defense, annual annuity fees and maintenance on a country by country basis, with
the right to terminate funding and transfer related patent rights to Hytken. We
may also fund all costs relating to new intellectual property, consultants, and
future research and development, pilot field tests and equipment purchases for
commercialization stage of the patents. To date, we have paid and expensed
approximately $2.5 million to purchase our ownership interest and fund patent
and other expenses. We have not tested or proven the commercial feasibility of
the technology.
Ethanol Investments
In fiscal year 2006, we entered the ethanol industry by investing in several
entities organized to construct and subsequently operate, ethanol producing
plants. We are invested in three entities as of January 31, 2021,
26
utilizing equity investments. The following table is a summary of our ethanol
investments at January 31, 2021 (gallons in millions):
Current Effective
REX's Ownership of
Trailing 12 Current Trailing 12
Months Ethanol Ownership Months Ethanol
Entity Gallons Shipped Interest Gallons Shipped
One Earth Energy, LLC 118.6 75.4% 89.4
NuGen Energy, LLC 98.5 99.5% 98.0
Big River Resources, LLC:
Big River Resources W Burlington, LLC 101.0 10.3% 10.4
Big River Resources Galva, LLC 115.3 10.3% 11.9
Big River United Energy 116.1 5.7% 6.6
Big River Resources Boyceville 55.3 10.3% 5.7
Total 604.8 222.0
Trends and Uncertainties
During fiscal years 2020 and 2019, operating results in our ethanol and
by-products segment have been, at times, adversely affected by a weak margin
environment highlighted by higher costs for corn, lower availability of local
corn, lower oil prices resulting from an oversupply of oil, the EPA granting
small refiner waivers, and in the first quarter of fiscal year 2020, the
outbreak of a new strain of COVID-19.
Weather conditions delayed, and in some cases prevented the planting of corn in
much of the United States during 2019. Weather also contributed to intermittent
logistical delays during fiscal year 2019. Throughout most of fiscal year 2019
and for the first six months of fiscal year 2020, we struggled to obtain
adequate supplies of corn at our NuGen facility, on a consistent basis, at
acceptable price levels. Consequently, we were not able to operate our NuGen
ethanol plant at production levels near our historical averages. Should these
trends continue, we may experience intermittent production slowdowns or
stoppages. We cannot reasonably predict the likelihood of future period
production levels compared to historical averages.
Under RFS, the EPA assigns individual refiners, blenders and importers the
volume of renewable fuels they are obligated to use based on their percentage of
total domestic transportation fuel sales. The EPA can waive the obligation for
individual small refineries that are experiencing "disproportionate economic
hardship" due to compliance with the RFS. Previously, the EPA approved
relatively few such waivers. However, for the 2016 to 2018 compliance years, the
EPA approved 85 SRWs totaling approximately 4.0 billion gallons. These actions
affect ethanol demand as obligated parties such as refiners can use the waivers
granted by the EPA to help them meet their obligations in different years. There
continues to be uncertainty regarding how the EPA will administer the SRWs as
the EPA has not ruled on SRWs for years after 2018.
During the early months of 2020, a new strain of COVID-19 spread into the United
States and other countries. In an effort to contain the spread of this virus,
there have been 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, and consequently, historically low
ethanol pricing. As a result, we idled our NuGen and One Earth ethanol plants in
late 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
27
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, have reduced interest rates.
Given the amount of cash and short-term investments we have, this will
significantly reduce our interest income 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 duration and impact
on ethanol demand, cannot be reasonably estimated at this time, although a
future prolonged production stoppage at our plants would have a further material
adverse impact on our results of operations, financial condition and cash flows
in future periods.
Congress passed the CARES Act in March 2020, which provided the United States
department of Agriculture ("USDA") with additional funding for the "Commodity
Credit Corporation ("CCC"). 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 them to delay marketing decisions.
Consequently, this could reduce the supply of corn and result in a price
increase for what we pay for corn. In addition, China has been purchasing large
quantities of corn, which could lead to sustained higher prices for corn.
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, 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 Governors sent a letter to the EPA
requesting a general waiver from RFS II due to the drop in demand caused by
COVID-19 travel restrictions. On October 21, 2020, 15 Senators sent a letter to
the EPA requesting a general waiver from RFS II to reduce the 2021 renewable
volume obligation, citing the reduced demand for fuels due to COVID-19. It is
unclear when the renewable volume obligation for 2021 will be released.
Throughout fiscal years 2020 and 2019, operating results in our refined coal
segment have been adversely affected by lower utility plant demand from our only
customer. Projections, provided by the utility plant, for fiscal year 2021
indicate this trend may continue and may be further impacted by the COVID-19
pandemic. While this leads to lower pre-tax losses from this segment, it also
leads to lower tax benefits from Section 45 credits being recognized.
Ultimately, this results in lower amounts of segment profit.
Our refined coal operations will no longer qualify to earn Section 45 credits
after November 18, 2021. Absent a change in tax regulations, this will result in
the cessation of our refined coal operations on or before this date.
Should these trends and uncertainties continue, our future operating results are
likely to be negatively impacted.
28
Results of Operations
For a detailed analysis of period to period changes, see the segment discussion
that follows this section as that discussion reflects how management views and
monitors our business.
Comparison of Fiscal Years 2020 and 2019 (Consolidated Results)
Net Sales and Revenue - Net sales and revenue in fiscal year 2020 were
approximately $372.8 million, a 10.8% decrease from approximately $418.0 million
in fiscal year 2019. The decrease was primarily caused by lower sales in our
ethanol and by-products segment of approximately $45.0 million.
Gross Profit - Gross profit was approximately $13.9 million in fiscal year 2020,
or 3.7% of net sales and revenue, versus approximately $12.5 million in fiscal
year 2019 or 3.0% of net sales and revenue. Gross profit for fiscal year 2020
decreased by approximately $0.9 million compared to fiscal year 2019 as a result
of operations in the ethanol and by-products segment and increased by
approximately $2.2 million as a result of operations in the refined coal
segment.
Selling, General and Administrative ("SG&A") Expenses - SG&A expenses for fiscal
year 2020 were approximately $17.7 million (4.7% of net sales and revenue), a
decrease of approximately $1.6 million or 8.3% from approximately $19.3 million
(4.6% of net sales and revenue) for fiscal year 2019. A majority of the decrease
results from lower shipping costs as less of our sales contracts provided for
shipping to be paid by us in fiscal year 2020 compared to fiscal year 2019. In
addition, professional fees were lower in fiscal year 2020 compared to fiscal
year 2019. The decrease was also related to lower incentive compensation expense
associated with lower profitability levels in fiscal year 2020 compared to
fiscal year 2019.
Equity in Income of Unconsolidated Ethanol Affiliates - During fiscal years 2020
and 2019, we recognized income of approximately $0.5 million and $1.4 million,
respectively, from our equity investment in Big River Resources, LLC ("Big
River"), which is included in our ethanol and by-products segment results. Our
investment in Big River, which has interests in four ethanol production plants,
has an effective ownership of approximately 336 million gallons of ethanol
shipped in the trailing twelve months ended January 31, 2021. Big River's
financial results were impacted by reduced ethanol demand related to the
COVID-19 pandemic.
We expect the operating experience of Big River to be generally consistent with
the trends in crush spread margins described in the "Overview" section as Big
River's results are dependent on the same key drivers as our other ethanol
investments (ethanol, corn, dried distillers grains and natural gas pricing).
Interest and Other Income- Interest and other income for fiscal year 2020 was
approximately $1.8 million compared to approximately $4.2 million for fiscal
year 2019. Interest income decreased as yields on our excess cash and our excess
cash investment balances both decreased in fiscal year 2020.
Loss Before Income Taxes- As a result of the foregoing, loss before income taxes
was approximately $1.5 million for fiscal year 2020 versus loss of approximately
$1.2 million for fiscal year 2019.
Benefit for Income Taxes - Our effective tax rate was a benefit of 479.1 % and
1,096.1% for fiscal years 2020 and 2019, respectively. Our effective rate is
impacted by the noncontrolling interests of the companies we consolidate, as we
recognize 100% of their income or loss before income taxes and noncontrolling
interests. However, we only provide an income tax provision or benefit for our
portion of the subsidiaries' income or loss with a noncontrolling interest. Our
effective tax rate decreased by 350.0% in fiscal year 2020 (approximately $5.2
million) and by 770.1% in fiscal year 2019 (approximately $9.0 million) as a
result of federal production tax credits earned by our refined coal facility.
The amount of these credits earned in fiscal year 2021 will vary with refined
coal production levels and are expected to end by November 18, 2021. During
fiscal years 2020 and 2019, our effective tax rate decreased by 135.5%
(approximately $2.0 million) and 116.5% (approximately $1.4 million),
respectively, as a result of research and experimentation credits earned by our
ethanol plants. The amount of these credits earned in future periods will vary
depending on the level of qualifying research expenditures at our ethanol
plants. The provision for uncertain tax positions increased our effective tax
rate by 70.6% (approximately $1.0 million) in fiscal year 2020. Primarily
related to the statutes of limitation expiring, the provision for uncertain tax
positions decreased our effective tax rate by 94.4% (approximately $1.1 million)
in fiscal year 2019.
29
Net Income - As a result of the foregoing, net income was approximately $5.6
million for fiscal year 2020 versus approximately $11.6 million for fiscal year
2019.
Noncontrolling Interests- Income attributable to noncontrolling interests was
approximately $2.6 million and $4.2 million during fiscal years 2020 and 2019,
respectively, and represents the other owners' share of the income or loss of
NuGen, One Earth and the refined coal entity. Income attributable to
noncontrolling interests of One Earth and NuGen combined was approximately $2.9
million and approximately $4.6 million, during fiscal years 2020 and 2019,
respectively. The loss attributable to noncontrolling interests of the refined
coal entity was approximately $0.3 million during each of fiscal years 2020 and
2019. We do not expect to recover any portion of the noncontrolling interests
holder's share of current and prior Future Energy losses; thus, we did not
recognize any income or expense related to the noncontrolling interests of
Future Energy in fiscal years 2020 and 2019.
Net Income Attributable to REX Common Shareholders - As a result of the
foregoing, net income attributable to REX common shareholders was approximately
$3.0 million for fiscal year 2020 compared to $7.4 million for fiscal year 2019.
Business Segment Results
We have two reportable segments, i) ethanol and by-products and ii) refined
coal. The following sections discuss the results of operations for each of our
business segments and corporate and other. As discussed in Note 13, our chief
operating decision maker (as defined by Accounting Standards Codification
("ASC") 280, "Segment Reporting" ("ASC 280") evaluates the operating performance
of our business segments using net income attributable to REX common
shareholders. Segment profitability measures are determined using the same
accounting policies used in the preparation of the consolidated financial
statements. The following tables summarize segment and other results and assets
(amounts in thousands):
Fiscal Year
Net sales and revenue: 2020 2019
Ethanol and by-products $ 372,664 $ 417,700
Refined coal 1 182 334
Total net sales and revenue $ 372,846 $ 418,034
Segment gross profit (loss):
Ethanol and by-products $ 19,533 $ 20,402
Refined coal (5,672) (7,917)
Total gross profit $ 13,861 $ 12,485
30
Fiscal Year
(Loss) income before income taxes: 2020 2019
Ethanol and by-products $ 6,696 $ 8,469
Refined coal 1 (5,826) (7,778)
Corporate and other (2,352) (1,860)
Total (loss) income before income taxes $ (1,482) $ (1,169)
Benefit (provision) for income taxes:
Ethanol and by-products $ (31) $ 1,528
Refined coal 6,554 10,828
Corporate and other 577 457
Total benefit for income taxes $ 7,100 $ 12,813
Net income attributable to REX common shareholders:
Ethanol and by-products $ 3,788 $ 5,439
Refined coal 988 3,391
Corporate and other (1,775) (1,403)
Net income attributable to REX common shareholders $ 3,001 $ 7,427
1 We record sales in the refined coal segment net of the cost of coal as we
purchase the coal feedstock from the customer to which refined coal is sold.
31
Ethanol and by-products Segment
The ethanol and by-products segment includes the consolidated financial results
of One Earth and NuGen, our equity investment in Big River and certain
administrative expenses. The following table summarizes selected data of our
ethanol segment:
Fiscal Year
2020 2019
Average selling price per gallon of ethanol $ 1.30 $ 1.37
Gallons of ethanol sold (in millions) 217.1 235.3
Average selling price per ton of dried distillers grains $ 144.73 $ 137.68
Tons of dried distillers grains sold
495,915 521,163
Average selling price per pound of non-food grade corn oil $ 0.26 $ 0.25
Pounds of non-food grade corn oil sold (in millions)
58,928 68,207
Average selling price per ton of modified distillers grains $ 64.80 $ 59.66
Tons of modified distillers grains sold
40,521 121,360
Average cost per bushel of grain $ 3.73 $ 3.82
Average cost of natural gas (per Million British Thermal
Unit (MmBtu) $ 3.00 $ 3.04
The following table summarizes net sales and revenue from the ethanol and
by-products segment, by product group (amounts in thousands):
Fiscal Year
Product or Service Category 2020 2019
Ethanol $ 284,191 $ 321,434
Dried distillers grains 71,774 71,755
Non-food grade corn oil 15,066 17,135
Modified distillers grains 2,626 7,240
Derivative financial instruments losses (1,167) -
Other 174 136
Total $ 372,664 $ 417,700
Ethanol sales decreased from approximately $321.4 million in the prior year to
approximately $284.2 million in the current year, primarily a result of a
decrease of 18.2 million gallons (7.7%) sold during fiscal year 2020. In
addition, a $0.07 decrease in the price per gallon sold contributed to the
ethanol sales decrease from the prior year. Dried distillers grains sales were
consistent with the prior year as a decrease of 4.8% in tons sold during fiscal
year 2020 was offset by a 5.1% increase in the price per ton sold during fiscal
year 2020. Non-food grade corn oil sales decreased from approximately $17.1
million in the prior year to approximately $15.1 million in the current year,
primarily a result of a 13.6% decrease in pounds sold during fiscal year 2020.
Modified distillers grains sales decreased from approximately $7.2 million in
the prior year to approximately $2.6 million in the current year, primarily a
result of a 66.7% decrease in tons sold during fiscal year 2020 as production
was shifted towards more profitable dried distillers grains during fiscal year
2020. Losses on derivative financial instruments were approximately $1.0 million
during fiscal year 2020 and were insignificant during fiscal year 2019. The
volume decreases discussed above were primarily a
32
result of the impact of the COVID-19 outbreak on ethanol demand, lower ethanol
pricing, an oversupply of oil and diminished local supplies of corn from a poor
2019 harvest caused by localized weather conditions. These factors resulted in
idling both of our consolidated ethanol plants in March of 2020. In May of 2020,
businesses and other activities slowly began to reopen, which led to an increase
in demand for gasoline and ethanol, and in related prices. As a result, we
resumed production operations at the One Earth ethanol plant in May of 2020 and
at the NuGen ethanol plant in June of 2020. Because of the uncertainty regarding
the economic impact of the COVID-19 virus outbreak and the availability of corn,
we do not have a reasonable estimate of future periods' sales volume.
Gross profit was approximately $19.5 million in fiscal year 2020, or 5.2% of net
sales and revenue which was approximately $0.9 million lower compared to
approximately $20.4 million of gross profit in fiscal year 2019 or 4.9% of net
sales and revenue. The crush spread for fiscal year 2020 was approximately $0.03
per gallon of ethanol sold compared to approximately $0.05 per gallon of ethanol
sold during fiscal year 2019. Both of our consolidated ethanol plants were idled
for portions of fiscal year 2020. Consequently, lower production and resulting
sales volumes reduced gross profit for fiscal year 2020 compared to fiscal year
2019. Given the inherent volatility in ethanol, distillers grains, non-food
grade corn oil, grain and natural gas prices, we cannot predict the likelihood
that the spread between ethanol, distillers grains, non-food grade corn oil and
grain prices in future periods will be consistent with prices in historical
periods.
Grain accounted for approximately 78% ($274.6 million) of our cost of sales
during fiscal year 2020 compared to approximately 78% ($311.2 million) during
fiscal year 2019. Natural gas accounted for approximately 5% ($17.7 million) of
our cost of sales during fiscal year 2020 compared to approximately 5% ($19.6
million) during fiscal year 2019. Both the grain and natural gas dollar
decreases were primarily attributable to the lower production levels incurred in
fiscal year 2020 compared to fiscal year 2019.
We attempt to match quantities of ethanol, distillers grains and non-food grade
corn oil sale contracts with an appropriate quantity of grain purchase contracts
over a given period of time when we can obtain an adequate margin resulting from
the crush spread inherent in the contracts we have executed. However, the market
for future ethanol sales contracts generally lags the spot market with respect
to ethanol price. Consequently, we generally execute fixed price contracts for
no more than four months into the future at any given time and we may lock in
our corn or ethanol price without having a corresponding locked in ethanol or
corn price for short durations of time. As a result of the relatively short
period of time our fixed price contracts cover, we generally cannot predict the
future movements in our realized crush spread for more than four months. We
utilize derivative financial instruments, primarily exchange traded commodity
future contracts and swaps, in conjunction with our grain procurement and
commodity marketing activities.
SG&A expenses for fiscal year 2020 were approximately $14.8 million (4.0% of net
sales and revenue) which was approximately $1.6 million lower compared to
approximately $16.4 million (3.9% of net sales and revenue) for fiscal year
2019. A majority of the decrease results from lower shipping costs as less of
our sales contracts provided for shipping to be paid by us in fiscal year 2020
compared to fiscal year 2019. In addition, professional fees were lower in
fiscal year 2020 compared to fiscal year 2019. The decrease was also related to
lower incentive compensation expense associated with lower profitability levels
in fiscal year 2020 compared to fiscal year 2019.
During fiscal years 2020 and 2019, we recognized income of approximately $0.5
million and approximately $1.4 million, respectively, from our equity investment
in Big River. Big River's results for fiscal year 2020 were negatively impacted
by the COVID-19 outbreak. Big River has interests in four ethanol production
plants, has an effective ownership of ethanol gallons shipped in the trailing
twelve months ended January 31, 2021 of approximately 336 million gallons. Big
River's operations also include agricultural elevators.
Interest and other income was approximately $1.5 million for fiscal year 2020
compared to approximately $3.0 million for fiscal year 2019. Interest income
decreased as yields on our excess cash and our excess cash investment balances
both decreased in fiscal year 2020.
33
Income related to noncontrolling interests was approximately $2.9 million and
approximately $4.6 million during fiscal years 2020 and 2019, respectively.
These amounts represent the other owners' share of the income or loss of NuGen
and One Earth.
The provision for income taxes was approximately $31,000 in fiscal year 2020
compared to a benefit for income taxes of approximately $1.5 million in fiscal
year 2019. During fiscal years 2020 and 2019, we recognized the tax benefits of
research and experimentation credits earned by our ethanol plants. We recognized
a provision for increasing the liability for unrecognized tax benefits during
fiscal year 2020 and recognized a tax benefit from reducing the liability for
unrecognized tax benefits during fiscal year 2019 as a result of statutes
expiring.
Segment profit for fiscal year 2020 was approximately $3.8 million, a decrease
of approximately $1.7 million from approximately $5.4 million for fiscal year
2019. The decrease from fiscal year 2019 results is primarily related to lower
interest and other income and lower income from our equity investment in Big
River in fiscal year 2020 compared to fiscal year 2019. In addition, we
recognized a tax provision in fiscal year 2020 compared to a tax benefit in
fiscal year 2019.
Refined Coal Segment
The refined coal segment includes the consolidated financial results of our
refined coal entity and certain administrative expenses. We acquired the refined
coal entity during the third quarter of fiscal year 2017. Our refined coal
facility is eligible to earn Section 45 production tax credits through November
2021. The operations of the facility are not profitable without such credits. We
therefore expect to cease operating our refined coal facility by November 2021.
The refined coal entity sells one product, refined coal. We record sales in the
refined coal segment net of the cost of coal as we purchase the coal feedstock
from the customer to which refined coal is sold. Sales decreased from
approximately $334,000 in the prior year to approximately $182,000 in the
current year. During fiscal year 2020, operating results have been adversely
affected by lower utility plant demand from our only customer. We expect sales
to vary depending on fluctuations in demand from the site host utility, which
generally change based upon weather conditions in the geographic markets the
utility serves and competing fuel prices and supplies. Based upon projections
from the site host utility, we expect varying and intermittent demand for
refined coal.
Gross loss was approximately $5.7 million in fiscal year 2020, which was
approximately $2.2 million lower compared to approximately $7.9 million of gross
loss in fiscal year 2019. The decrease in gross loss results primarily from
lower refined coal production in fiscal year 2020 compared to fiscal year 2019.
We expect future period gross loss to vary in generally the same manner as the
sales fluctuations described above. Based on the agreements in place that govern
the operations, sales and purchasing activities of the refined coal plant, we
expect that the refined coal operation will continue operating at a gross loss
and that the ongoing losses will be subsidized by federal production income tax
credits through November 18, 2021.
SG&A expenses were insignificant for each of fiscal years 2020 and 2019.
Loss related to noncontrolling interests was approximately $0.3 million during
each of fiscal years 2020 and 2019. This amount represents the other owner's
share of the pre-tax loss of refined coal operations.
34
The benefit for income taxes was approximately $6.6 million and approximately
$10.8 million during fiscal years 2020 and 2019, respectively. These amounts
include the benefit of Section 45 production tax credits and a benefit related
to segment loss before income taxes. The decrease in the benefit for income
taxes primarily results from lower production in fiscal year 2020 compared to
fiscal year 2019. The refined coal facility is eligible to earn tax credits
through November 2021. However, the amount of credits earned will vary with
annual production levels.
As a result of the foregoing, including the benefit of federal tax credits
associated with refined coal production and sales, segment profit was
approximately $1.0 million and approximately $3.4 million for fiscal years 2020
and 2019, respectively.
Corporate and Other
SG&A expenses for fiscal year 2020 were approximately $2.7 million, consistent
with approximately $3.0 million for fiscal year 2019.
Interest and other income was approximately $0.3 million for fiscal year 2020
versus approximately $1.2 million for fiscal year 2019. Interest income
decreased as yields on our excess cash and our excess cash investment balances
both decreased in fiscal year 2020.
Corporate and other expenses exceeded interest and other income, for fiscal year
2020 by approximately $1.8 million, compared to approximately $1.4 million for
fiscal year 2019.
Comparison of Fiscal Years 2019 and 2018
See "Item 7 Management's discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
January 31, 2020.
Liquidity and Capital Resources
Our primary sources of cash have been income from operations. Our primary uses
of cash have been capital expenditures at our ethanol plants, stock repurchases
and contributions to fund refined coal operating losses.
Outlook - Our cash and short-term investments balance of approximately $180.7
million at January 31, 2021 includes approximately $132.5 million held by One
Earth and NuGen. We expect that One Earth and NuGen will use a majority of their
cash for working capital needs, capital expenditures, general corporate purposes
and dividend payments. We expect our equity method investee to limit the payment
of dividends based upon working capital needs.
We are investigating various uses of our excess cash. We have a stock buyback
program with an authorization level of an additional approximately 34,000 shares
at January 31, 2021. We typically repurchase our common stock when our stock
price is trading at prices we deem to be a discount to the underlying value of
our net assets. We plan to seek and evaluate various investment opportunities
including ethanol and/or energy related, carbon dioxide related, agricultural or
other ventures we believe fit our investment criteria.
We expect capital expenditures to be in the range of approximately $5 million to
$10 million in fiscal year 2021 for various projects at our consolidated ethanol
plants. However, actual capital expenditures could vary from this range for
unexpected expenditures as our plants continue to age. We expect to fund these
capital expenditures with available cash at our ethanol plant subsidiaries.
35
Operating Activities - Net cash provided by operating activities was
approximately $8.6 million for fiscal year 2020 compared to approximately $10.3
million in fiscal year 2019. During fiscal year 2020, operating cash flow was
provided by net income of approximately $5.6 million and adjustments of
approximately $17.9 million, which consisted of depreciation, amortization of
operating lease right-of-use assets, stock based compensation expense, income
from equity method investments, interest income from investments, and the
deferred income tax provision. Big River paid dividends to REX of approximately
$3.5 million during fiscal year 2020. Accounts receivable increased
approximately $6.7 million, primarily a result of the timing of products shipped
and the receipt of customer payments at One Earth and NuGen. Inventory increased
approximately $2.2 million, primarily a result of larger quantities of finished
goods and higher per unit costs at January 31, 2021. Prepaid expenses and other
assets increased approximately $3.1 million, primarily a result of higher fair
values of forward purchase contracts. Accounts payable decreased approximately
$2.3 million, primarily a result of the timing of inventory receipts and vendor
payments. Accrued expenses and other liabilities decreased approximately $3.8
million, which was primarily a result of operating lease payments, lower
incentive compensation in fiscal year 2020 and lower refined coal segment
related commissions.
Net cash provided by operating activities was approximately $10.3 million for
fiscal year 2019. During fiscal year 2019, operating cash flow was provided by
net income of approximately $11.6 million and adjustments of approximately $17.2
million, which consisted of depreciation, amortization of operating lease
right-of-use assets, stock based compensation expense, income from equity method
investments, interest income from investments, and the deferred income tax
provision. Big River paid dividends to REX of approximately $1.0 million during
fiscal year 2019. Accounts receivable increased approximately $1.6 million,
primarily a result of the timing of products shipped and the receipt of customer
payments at One Earth and NuGen. Inventory increased approximately $17.2
million, primarily a result of larger quantities of corn and higher per unit
costs at January 31, 2020. Accounts payable increased approximately $11.4
million, primarily a result of the inventory increase. Accrued expenses and
other liabilities decreased approximately $13.0 million, which was primarily a
result of operating lease payments, lower incentive compensation in fiscal year
2019 and lower refined coal segment related commissions.
Investing Activities - Net cash used in investing activities was approximately
$20.8 million during fiscal year 2020 compared to approximately $14.4 million
during fiscal year 2019. Capital expenditures in fiscal year 2020 totaled
approximately $10.4 million, the majority of which were various projects at One
Earth's and NuGen's ethanol plants. During fiscal year 2020, we used cash of
approximately $96.2 million for purchases of short-term investments and received
cash of approximately $86.3 million related to maturities of these investments
as certain of these investments remained outstanding at January 31, 2021. We
began investing in highly liquid short-term investments during fiscal year 2018
in order to increase earnings on excess cash.
Net cash used in investing activities was approximately $14.4 million during
fiscal year 2019. Capital expenditures in fiscal year 2019 totaled approximately
$3.8 million, the majority of which were various projects at One Earth's and
NuGen's ethanol plants. During fiscal year 2019, we used cash of approximately
$26.0 million for purchases of short-term investments and received cash of
approximately $15.0 million related to maturities of these investments as
certain of these investments remained outstanding at January 31, 2020.
Financing Activities - Net cash used in financing activities was approximately
$22.4 million during fiscal year 2020 compared to approximately $4.0 million for
fiscal year 2019. During fiscal year 2020, we purchased approximately 315,000
shares of our common stock for approximately $19.6 million in open market
transactions. During fiscal year 2020, we used cash of approximately $2.9
million to purchase shares from and pay dividends to noncontrolling members of
the entities that own One Earth's and NuGen's ethanol plants. During fiscal year
2020, we received approximately $0.1 million in capital contributions from the
minority investor in the refined coal entity.
36
Net cash used in financing activities was approximately $4.0 million during
fiscal year 2019. During fiscal year 2019, we used cash of approximately $4.3
million to purchase shares from and pay dividends to noncontrolling members of
the entities that own One Earth's and NuGen's ethanol plants. During fiscal year
2019, we received approximately $0.3 million in capital contributions from the
minority investor in the refined coal entity.
Based on our forecasts, which are primarily based on estimates of plant
production, prices of ethanol, corn, distillers grains, non-food grade corn oil
and natural gas as well as other assumptions, management believes that cash flow
from operating activities together with working capital will be sufficient to
meet One Earth's and NuGen's respective liquidity needs. However, if a material
adverse change in the financial position of One Earth or NuGen should occur, or
if actual sales or expenses are substantially different than what has been
forecasted (because of the COVID-19 pandemic or other factors), One Earth's and
NuGen's liquidity, and ability to fund future operating and capital requirements
could be negatively impacted.
We expect to fund future operating losses at our refined coal facility with cash
at the parent company level.
Approximately 4.0% of our net assets are restricted pursuant to the terms of
various loan agreements of our equity method investment as of January 31, 2021.
None of our consolidated subsidiaries or the parent company has restricted net
assets at January 31, 2021.
Off Balance Sheet Arrangements
None.
Tabular Disclosure of Contractual Obligations
In the ordinary course of business, we enter into agreements under which we are
legally obligated to make future cash payments. These agreements include
obligations related to purchasing inventory and leasing rail cars. The following
table summarizes by category expected future cash outflows associated with
contractual obligations in effect, at January 31, 2021 (amounts in thousands):
Payment due by period
Less
than 1 1-3 3-5 More than
Contractual Obligations Total Year Years Years 5 Years
Operating lease obligations (a) $ 13,308 $ 5,397 $ 6,214 $ 1,697 $ -
Purchase obligations (b)
32,748 27,727 1,452 702 2,867
Total contractual obligations (c) $ 46,056 $ 33,124 $ 7,666 $ 2,399 $ 2,867
(a) Amounts primarily represent payments due for rail car leases at One Earth
and NuGen.
(b) Amounts primarily represent payments due for a natural gas pipeline, grain,
natural gas and other contracts at One Earth and NuGen. We are not able to
determine the likely settlement for forward corn purchase contracts which do
not contain a determinable fixed price; accordingly, payments for such
contracts have been excluded from the table above.
37
(c) We are not able to determine the likely settlement period for uncertain tax
positions, accordingly, approximately $8.4 million of uncertain tax positions
and related interest and penalties have been excluded from the table above.
Seasonality and Quarterly Fluctuations
Our business is directly affected by the supply and demand for ethanol. The
demand for ethanol typically increases during the spring and summer months and
during holiday travel.
Impact of Inflation
The impact of inflation has not been material to our results of operations for
the past three fiscal years.
Critical Accounting Policies
We believe the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant assumptions, judgments and estimates on the part of management. We
base our assumptions, judgments, and estimates on historical experience, current
trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure
that our financial statements are presented in accordance with generally
accepted accounting principles (GAAP). However, because future events and their
effects cannot be determined with certainty, actual results could differ from
our assumptions and estimates, and such differences could be material. Further,
if different assumptions, judgments and estimates had been used, the results
could have been different and such differences could be material. For a summary
of all of our accounting policies, including the accounting policies discussed
below, see Note 1 to the Consolidated Financial Statements.
The full impact of the economic downturn resulting from the spread of COVID-19
is unknown at this time. However, it could lead to material impacts to our
financial position and results of operations, including, but not limited to,
charges from adjustments of the carrying amount of inventory, long-lived asset
impairment charges and deferred tax valuation allowances.
Management believes that the following accounting policies are the most critical
to aid in fully understanding and evaluating our reported financial results, and
they require management's most difficult, subjective or complex judgments,
resulting from the need to make estimates about the effect of matters that are
inherently uncertain.
Revenue Recognition - For ethanol and by-products segment sales, we recognize
sales of ethanol, distillers grains and non-food grade corn oil when obligations
under the terms of the respective contracts with customers are satisfied; this
occurs with the transfer of control of products, generally upon shipment from
the ethanol plant or upon loading of the rail car used to transport the
products. For refined coal segment sales, we recognize sales of refined coal
when obligations under the term of the contract with its customer are satisfied;
this occurs when control of the product transfers to the customer, generally
upon the refined coal leaving the plant. Refined coal sales are recorded net of
the cost of coal as we purchase the coal feedstock from our customer to which we
sell refined coal.
Impairment of Long-Lived Assets -We review our long-lived assets, consisting of
property and equipment, equity method investments and operating lease
right-of-use assets, for impairment whenever events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. We assess
long-lived assets for impairment by first determining the forecasted,
undiscounted cash flows the asset group is expected to generate. If this total
is less than the carrying value of the asset, we will then determine the fair
value of the asset group. An impairment loss would be recognized in the amount
by which the carrying amount of the asset
38
exceeded the fair value of the asset. Significant management judgement is
required to determine the fair value of long-lived assets, which includes
discounted cash flows. Such estimates could be significantly affected by future
changes in market conditions. During fiscal year 2020, we concluded the impact
of the COVID-19 pandemic on our industry and our operating results was an
indicator that impairment may exist related to certain of our long-lived assets.
As a result, we performed a recoverability test for the One Earth and NuGen
asset groups (the lowest level at which related cash flows can be identified)
and determined that there was no impairment as the gross undiscounted future
cash flows substantially exceeded the respective carrying values. We recorded no
impairment charges in fiscal years 2020, 2019 and 2018.
Income Taxes - Income taxes are recorded based on the current year amounts
payable or refundable, as well as the consequences of events that give rise to
deferred tax assets and liabilities based on differences in how those events are
treated for tax purposes, net of valuation allowances. We base our estimate of
deferred tax assets and liabilities on current tax laws and rates and other
expectations about future outcomes. Changes in existing regulatory tax laws and
rates and future business results may affect the amount of deferred tax
liabilities or the valuation of deferred tax assets over time. We have
established valuation allowances for certain state net operating loss
carryforwards. We assessed all available positive and negative evidence to
determine whether we expect sufficient future taxable income will be generated
to allow for the realization of existing federal deferred tax assets. Despite
the cumulative book loss incurred over the three-year period ended January 31,
2021, we believe there is sufficient objectively verifiable income for
management to conclude that it is more likely than not that the Company will
utilize available federal deferred tax assets prior to their expiration.
However, realization of these deferred tax assets is not certain. Changes in our
current estimates for factors such as unanticipated market conditions and
legislative developments could have a material effect on our ability to utilize
deferred tax assets. As we earn federal income tax credits (pursuant to IRC
Section 45) based on the amount of refined coal produced and sold, variations in
refined coal production and related sales will result in changes in our future
effective income tax rate.
New Accounting Pronouncements
For information related to recent accounting pronouncements, see Note 1 of the
Notes to the Consolidated Financial Statements.
39
© Edgar Online, source Glimpses