SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Quarter Report: 2013 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

 

 

For the quarterly period ended June 30, 2013

 

 

For the transition period from                to          

 

COMMISSION FILE NO. 000-50253

 

 

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

100 Caspian Avenue, PO Box 500, Volga, South Dakota 57071

(Address of Principal Executive Offices)

 

(605) 627-9240

(Registrant’s Telephone Number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x   No   ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x    Yes       o    No

 

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes  ¨  No  ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On August 9, 2013, the registrant had 30,419,000 capital units outstanding.

 

 

 

Table of Contents

 

			Page
Part I.	FINANCIAL INFORMATION		3
	Item I.	Financial Statements (Unaudited)	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
Part II.	OTHER INFORMATION		25
	Item 1.	Legal Proceedings	25
	Item 1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults among Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	26
Signatures			26

 

 

2

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

South Dakota Soybean Processors, LLC

 

Condensed Consolidated Financial Statements

 

June 30, 2013 and 2012

 

 

3

South Dakota Soybean Processors, LLC

Condensed Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 

 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Balance Sheets (continued)

 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Statements of Operations (Unaudited)

For the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

 

 

South Dakota Soybean Processors, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six-Month Periods Ended June 30, 2013 and 2012

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

 

 

 

Note 1 - Principal Activity and Significant Accounting Policies

 

The unaudited condensed consolidated financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although South Dakota Soybean Processors, LLC (the “Company”, “LLC”, “we”, “our”, or “us”) believes that the disclosures made are adequate to make the information not misleading.

 

In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year due in part to the seasonal nature of some of the Company’s businesses. The consolidated balance sheet data as of December 31, 2012 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

The condensed consolidated financial statements include the accounts of the Company and Urethane Soy Systems Company (USSC), which was the Company’s wholly-owned subsidiary. The effects of all intercompany accounts and transactions have been eliminated. During 2011, the Company determined to discontinue operations of its polyurethane segment, including USSC, and put the assets and business up for sale. For all periods presented, amounts associated with the polyurethane segment have been classified as discontinued operations on the accompanying condensed consolidated financial statements.

 

On October 16, 2012, USSC’s Board of Directors and the Company’s Board of Managers approved the legal dissolution of USSC, and on December 7, 2012, USSC was formally dissolved as a corporation.

 

These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2012, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2013.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is recognized when the title to the related products is transferred to the customer. When a sales contract has delivery terms of ‘FOB Shipping Point’, revenue is recognized when the products are shipped. For those sales contracts with delivery terms of ‘FOB Destination’, revenue is not recognized until the products are delivered to the agreed-upon location. Revenues are presented net of discounts and sales allowances.

 

(continued on next page)

8

 

 

 

 

Recent accounting pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company’s financial condition or results of operations.

 

Reclassifications

 

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or members’ equity.

Note 2 - Accounts Receivable

 

Accounts receivable are considered past due when payments are not received on a timely basis in accordance with the Company’s credit terms, which is generally 30 days from invoice date. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.

 

The following table presents the aging analysis of trade receivables as of June 30, 2013 and December 31, 2012:

 

		June 30,			December 31,
		2013			2012
Past due:
Less than 30 days past due		$	3,025,616		$	2,717,120
31-90 days past due			1,048,804			185,168
Greater than 90 days past due			-			45
Total past due			4,074,420			2,902,333
Current			25,974,561			27,693,829
Totals		$	30,048,981		$	30,596,162

 

The following table provides information regarding the Company’s allowance for doubtful accounts receivable of continued operations as of June 30, 2013 and December 31, 2012:

 

		June 30,			December 31,
		2013			2012
Balances, beginning of period		$	-		$	-
Amounts charged (credited) to costs and expenses			-			(7,838)
Additions (deductions)			-			7,838
Balances, end of period		$	-		$	-

 

In general, cash is applied to the oldest outstanding invoice first, unless payment is for a specified invoice. The Company, on a case by case basis, may charge a late fee of 1 ½% per month on past due receivables.

 

(continued on next page)

9

 

 

 

Note 3 - Inventories

 

The Company’s inventories of continued operations consist of the following at June 30, 2013 and December 31, 2012:

 

		2013			2012
Finished goods		$	34,649,380		$	28,345,806
Raw materials			31,787,752			44,003,018
Supplies & miscellaneous			120,675			120,675
Totals		$	66,557,807		$	72,469,499

 

Finished goods and raw materials are valued at estimated market value, which approximates net realizable value. In addition, futures and option contracts are marked to market through cost of revenues, with unrealized gains and losses recorded in the above inventory amounts. Supplies and other inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

Note 4 - Investments in Cooperatives

 

The Company’s investments in cooperatives consist of the following at June 30, 2013 and December 31, 2012:

 

		2013			2012
Minnesota Soybean Processors:
Common stock and Class A Preferred Shares		$	3,964,728		$	3,455,876
Class B Preferred Shares, 8% non-cumulative, convertible			575,000			575,000
CoBank			1,399,934			1,317,687
CHS (formerly Cenex Harvest States)			124,819			2,849,269
Totals		$	6,064,481		$	8,197,832

 

On February 6, 2013, the Company received $2,724,450 from CHS for the retirement of previous retained patronage allocations.

 

(continued on next page)

10

 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

 

Depreciation of property and equipment of continued operations amounts to $954,454 and $883,478 for the six months ended June 30, 2013 and 2012, respectively.

Note 6 - Note Payable – Seasonal Loan

 

The Company has entered into a revolving credit agreement with CoBank. Prior to the amendment described in Note 13, the Company could borrow up to $40 million under this agreement until it matured on August 1, 2013, to finance inventory and accounts receivable. Interest accrues at a variable rate (2.95% at June 30, 2013). Advances on the revolving credit agreement are secured and limited to qualifying inventory and accounts receivable, net of any accrued commodity purchases. There were advances outstanding of $38,216,294 and $16,917,303 at June 30, 2013 and December 31, 2012, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement are approximately $1,784,000 as of June 30, 2013.

Note 7 - Long-Term Debt

 

 

(continued on next page)

11

 

   

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

The Company entered into an agreement as of March 21, 2013 with CoBank to amend and restate its Master Loan Agreement (MLA), which includes both the revolving term loan and the seasonal loan. Under the terms and conditions of the MLA, CoBank agreed to make advances to the Company for up to $12,900,000 on the revolving term loan. The available commitment decreases in scheduled periodic increments of $1,300,000 every six months starting September 20, 2013 until maturity on March 20, 2018. The principal balance outstanding on the revolving term loan was $12,900,000 and $14,200,000 as of June 30, 2013 and December 31, 2012, respectively. There were no remaining commitments available to borrow on the revolving term loan as of June 30, 2013.

 

Under this agreement, the Company is subject to compliance with standard financial covenants and the maintenance of certain financial ratios. The Company was in compliance with all covenants and conditions, or obtained waivers, with CoBank as of June 30, 2013.

 

Effective March 1, 2013, the State of South Dakota Department of Transportation agreed to loan the Brookings County Regional Railway Authority a total sum of $964,070 for purposes of making improvements to the railway infrastructure near the Company’s soybean processing facility in Volga, South Dakota. The interest rate on the loan is 2.0% per year. Principal and interest payments are due annually with the first payment due on June 1, 2014 and the final payment due at maturity on June 1, 2020. In consideration of this unsecured loan, the Company agreed to guarantee to the State of South Dakota Department of Transportation the full amount of the loan, plus interest. This guaranty, however, became a direct obligation of the Company’s on March 1, 2013, when the Company became responsible for paying the above-described principal and interest payments on an annual basis. There were no advances outstanding on this loan as of June 30, 2013 and December 31, 2012.

 

The minimum principal payments on long-term debt obligations, assuming the Company will advance the entire amount on the railway improvement loan, are expected to be as follows:

 

Note 8 - Member Distribution

 

On February 7, 2013, the Company’s Board of Managers approved a cash distribution of approximately $5.1 million, or 16.7¢ per capital unit. The distribution was paid in accordance with the Company’s operating agreement and distribution policy on February 8, 2013.

 

(continued on next page)

12

 

 

 

Note 9 - Derivative Instruments and Hedging Activities

 

In the ordinary course of business, the Company enters into contractual arrangements as a means of managing exposure to changes in commodity prices. The Company’s derivative instruments primarily consist of commodity futures, options and forward contracts. Although these contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. These contracts are recorded in inventory on the Company’s consolidated balance sheets at fair value as discussed in Note 11, Fair Value of Financial Instruments.

 

As of June 30, 2013 and December 31, 2012, the value of the Company’s open futures, options and forward contracts was approximately $831,296 and $1,601,219, respectively.

 

				Amounts As of June 30, 2013
		Balance Sheet		Asset			Liability
		Classification		Derivatives			Derivatives
Derivatives not designated as hedging instruments:
Commodity contracts		Current Assets		$	5,335,450		$	4,501,950
Foreign exchange contracts		Current Assets			5,520			7,724
Totals				$	5,340,970		$	4,509,674
				Amounts As of December 31, 2012
		Balance Sheet		Asset			Liability
		Classification		Derivatives			Derivatives
Derivatives not designated as hedging instruments:
Commodity contracts		Current Assets		$	5,248,420		$	3,647,637
Foreign exchange contracts		Current Assets			1,846			1,410
Totals				$	5,250,266		$	3,649,047

 

During the three-month and six-month periods ended June 30, 2013 and 2012, net realized and unrealized gains (losses) on derivative transactions were recognized in the consolidated statement of operations as follows:

 

		Net Gain (Loss) Recognized on						Net Gain (Loss) Recognized on
		Derivative Activities for the Three-						Derivative Activities for the Six-
		Month Periods Ending June 30:						Month Periods Ending June 30:
		2013			2012			2013			2012
Derivatives not designated as hedging instruments:
Commodity contracts		$	(1,930,762)		$	1,031,501		$	(86,536)		$	4,411,595
Foreign exchange contracts			1,708			-			885			-
Totals		$	(1,929,054)		$	1,031,501		$	(85,651)		$	4,411,595

 

(continued on next page)

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The Company recorded gains (losses) of $(85,651) and $4,411,595 in cost of goods sold related to its commodity derivative instruments for the six-month periods ended June 30, 2013 and 2012, respectively.

 

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, this guidance establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. The three levels of hierarchy and examples are as follows:

 

·

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange and commodity derivative contracts listed on the Chicago Board of Trade (“CBOT”).

·

Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs, such as commodity prices using forward future prices.

·

Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

 

The following tables set forth financial assets and liabilities measured at fair value in the condensed consolidated balance sheets and the respective levels to which fair value measurements are classified within the fair value hierarchy as of June 30, 2013 and December 31, 2012:

 

 

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South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

 

The Company considers the carrying amount of significant classes of financial instruments on the balance sheets, including cash, accounts receivable, prepaid expenses, notes receivable, accounts payable, and accrued liabilities, to be reasonable estimates of fair value due to their length or maturity. The fair value of the Company’s long-term debt approximates the carrying value. The interest rates on the long-term debt are similar to rates the Company would be able to obtain currently in the market.

 

The Company enters into various commodity derivative instruments, including futures, options, swaps and other agreements. The fair value of the Company’s commodity derivatives is determined using unadjusted quoted prices for identical instruments on the CBOT. The Company estimates the fair market value of their finished goods and raw materials inventories using the market price quotations of similar forward future contracts listed on the CBOT and adjusts for the local market adjustments derived from other grain terminals in our area.

 

The assets of discontinued division represent a nonrecurring level 3 fair value measurement. The fair value measurements were based on managements’ best estimate of fair market value, which includes comparisons to similar assets within the industry.

 

The Company has patronage investments in other cooperatives and common stock in a privately held entity. There is no market for their patronage credits or the entity’s common shares, and it is impracticable to estimate fair value of the Company’s investments. These investments are carried on the balance sheet at original cost plus the amount of patronage earnings allocated to the Company, less any cash distributions received.

 

The following table presents the changes in Level 3 instruments measured on a recurring basis as of June 30, 2013 and December 31, 2012:

 

 

(continued on next page)

15

 

 

South Dakota Soybean Processors, LLC

Notes to Condensed Consolidated Financial Statements

 

Note 11 - Business Segment Information

 

The Company organizes its business units into two reportable segments: soybean processing and polyurethane. Separate management of each segment is required because each segment is subject to different marketing, production, and technology strategies. The soybean processing segment purchases soybeans and processes them in primarily three products: soybean meal, oil and hulls. The polyurethane segment, which was classified as a discontinued operation in 2011, manufactured a soy-based polyol called Soyol^® and its resin systems and sold them to the polyurethane industry. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. Market prices are used to report intersegment sales.

 

Segment information for the three-month and six-month periods ended June 302013 and 2012 are as follows:

 

 

 

Note 12 - Commitments

 

As of June 30, 2013, the Company had unpaid commitments of approximately $279,000 for construction and acquisition of property and equipment, all of which expected to be incurred by October 2013.

Note 13 - Subsequent Event

 

We evaluated all of our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our financial statements.

 

On July 23, 2013, the Company entered into an amendment of the Master Loan Agreement with CoBank, the terms of which affect the seasonal loan, revolving term loan, and covenants. Under the seasonal loan, the maximum amount the Company may borrow is increased from $40 million to $50 million. In addition, the working capital covenant under the Master Loan Agreement is amended. Prior to the amendment, the minimum working capital requirement was $11.0 million at the end of each fiscal year and $9.0 million at the end of each other period for which financial statements are required to be furnished. After the amendment, the minimum working capital requirement is increased to $12.5 million at the end of each fiscal year and $10.0 million at the end of each other period. Finally, the amount the Company may distribute to members without the prior written consent of CoBank is increased from 35% to 50% of consolidated net income of the prior fiscal year. All other material items and conditions under the Master Loan Agreement and subsequent amendments remain the same following this amendment.

 

17

 

 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The information in this quarterly report on Form 10-Q for the three-month and six-month periods ended June 30, 2013, (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contains “forward-looking statements” that deal with future results, expectations, plans and performance, and should be read in conjunction with the consolidated financial statements and Annual Report on Form 10-K for the year ended December 31, 2012. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. Forward-looking statements involve numerous assumptions, risks and uncertainties. Actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements are identified in our Form 10-K for the year ended December 31, 2012.

 

We are not under any duty to update the forward-looking statements contained in this report, nor do we guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

 

Executive Overview and Summary

 

During the six-month period ended June 30, 2013, we recorded a net profit of $8.4 million. We continue to benefit from favorable soybean quality in terms of oil and protein content, as well as low moisture. In addition, demand for soybean meal and oil has increased as a result of domestic and international soybean shortages caused by a drought and other inclement weather in 2012. Despite the effect of the weather, we have had an adequate soybean supply from our area for our crushing process. We also have been experiencing a strong demand for our oil from the biodiesel sector. From a market standpoint, we have been well positioned for purchasing soybeans and selling product.

 

For the third quarter of 2013, we anticipate continuing to benefit from favorable soybean quality and believe we will have sufficient soybean quantities to crush until this fall’s harvest. We also anticipate a resurgence in restaurant demand for oil as the economy improves. There are still, however, major challenges for the remainder of 2013. Our primary challenge, as always this time of year, is the uncertainty associated with new crop supplies. If inclement weather and other adverse growing conditions affect this year’s growing season, we may be left with an inadequate supply of soybeans going into next year. In addition, we continue to experience shortages of qualified personnel to operate our facility. In May 2013 the South Dakota Department of Labor reported an unemployment rate of only 3.4% within Brookings County, within which our plant is located. With the notice of another new large employer locating to Brookings County in late 2013, we expect to experience additional employee turnover and thus be forced to increase our efforts to hire new employees.

 

Our experienced management team, product diversity, effective use of risk management, and operating prudently will likely be our best tools for handling these challenges.

 

 

18

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended June 30, 2013 and 2012 

 

 

Revenue – Consolidated revenue decreased $309,000, or 0.3%, for the three-month period ended June 30, 2013, compared to the same period in 2012. The decrease in revenues is primarily due to a decrease in sales quantity of all products. In May 2013 we performed our annual plant shut-down, ceasing production for approximately eight days for necessary maintenance and improvements to the plant. In contrast, we performed our annual shutdown in 2012 during the third quarter (August). The decrease in sales quantity is offset in part by a 17% increase in average sales price of soybean meal in the three-month period ended June 30, 2013, compared to the same period in 2012. The increase in sale price is primarily due to a poor soybean crop in 2012 caused by drought, which caused substantial price increases in many commodities in 2013 including soybean meal.

 

Gross Profit/Loss – Consolidated gross profit decreased $2.4 million, or 52.9%, for the three-month period ended June 30, 2013, compared to the same period in 2012. The $2.4 million decrease in gross profit is primarily attributed to a poor domestic soybean crop in 2012, which increased soybeans’ cost in relation to soybean meal and oil, and an increase in production costs. Production expenses increased $753,000 during the three-month period ended June 30, 2013, compared to the same period in 2012. This increase is primarily a result of performing our annual plant shut-down in May 2013, compared to the shutdown in August of 2012. Partially offsetting higher soybeans and production costs is the improved soybean quality within our region and increased demand for soybean meal. While many U.S. soybean processors have been dealing with substandard soybean quality in 2013 due to last year’s drought, the locally-grown beans we received have been low in moisture, high in oil and protein content, and producing higher than historical yields. In addition, demand for soybean meal increased primarily because of a decrease in supply of distillers grains, a competing feed substitute for soybean meal.

 

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, decreased $30,000, or 5.0%, for the three-month period ended June 30, 2013, compared to the same period in 2012. The decrease in administrative costs is mainly due to a decrease in legal fees.

 

Interest Expense – Interest expense remained relatively unchanged during the three-month period ended June 30, 2013, compared to the same period in 2012. Our debt levels used for continuing operations increased as a result of increased inventory quantities and commodity prices. The average debt level during the three-month period ended June 30, 2013 is approximately $44.3 million, compared to $29.6 million for the same period in 2012. The increase in interest expense is offset by a decrease in interest rates on our senior debt with CoBank. As of June 30, 2013, the interest rate on our seasonal line of credit was 2.95% compared to 4.60% as of June 30, 2012.

 

Other Non-Operating Income – Other non-operating income, including patronage dividend income, also remained relatively unchanged during the three-month period ended June 30, 2013, compared to the same period in 2012.

 

Income (Loss) from Discontinued Operations – In 2011, we discontinued operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and placed for sale the segment’s assets and business. This decision was made because of a history of significant operating losses. During the three-month period ended June 30, 2013, we generated an income $7,500 within this segment, compared to a loss of $160,000 during the same period in 2012. On December 7, 2012, we officially dissolved USSC.

 

 

 

Net Income/Loss – We generated a net income of $1.5 million during the three-month period ended June 30, 2013, compared to $3.7 million during the same period in 2012. The $2.2 million decrease in net income is primarily attributable to a decrease in gross profit associated with a tight supply of soybeans in the U.S. and higher production costs associated with our annual plant shutdown that occurred in May 2013.

 

Comparison of the six months ended June 30, 2013 and 2012

 

 

Revenue – Consolidated revenue increased $24.3 million, or 12.8%, for the first six-months ended June 30, 2013, compared to the same period in 2012. The increase in revenues is primarily due to an increase in the average sales price of soybean meal and hulls. The average sales price of our soybean meal and hulls increased approximately 30% in the six-month period ended June 30, 2013, compared to the same period in 2012. The increase in sale price is primarily due to a poor soybean crop in 2012 caused by drought, which caused substantial price increases in many commodities in 2013 including soybean meal.

 

Gross Profit/Loss – Consolidated gross profit increased $1.6 million, or 22.6%, for the six-month period ended June 30, 2013, compared to the same period in 2012. The $1.6 million improvement in gross profit is primarily attributed to improved soybean quality within our region and increased demand for soybean meal. While many U.S. soybean processors have been dealing with substandard soybean quality in 2013 due to drought, the locally-grown beans we received have been low in moisture, high in oil and protein content, and producing higher than historical yields. In addition, demand for soybean meal increased primarily because of a decrease in supply of distillers grains, a competing feed substitute for soybean meal.

 

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, increased $112,000, or 9.2%, for the six-month period ended June 30, 2013, compared to the same period in 2012. The increase in administrative costs is mainly due to an increase in personnel costs resulting from an accrual for our employee profit-sharing program. The increase in personnel costs is partially offset by a decrease in legal fees during the six-month period ended June 30, 2013, compared to the same period in 2012.

 

Interest Expense – Interest expense increased $161,000 during the six-month period ended June 30, 2013, compared to the same period in 2012. This increase is due to increased debt levels used for continuing operations, which resulted from increased inventory quantities and commodity prices. The average debt level during the six-month period ended June 30, 2013 is approximately $43.7 million, compared to $27.1 million for the same period in 2012. The increase in interest expense is partially offset by a decrease in interest rates on our senior debt with CoBank. As of June 30, 2013, the interest rate on our seasonal line of credit was 2.95% compared to 4.60% as of June 30, 2012.

 

 

 

Other Non-Operating Income – Other non-operating income, including patronage dividend income, increased $482,000, or 37.4%, for the six-month period ended June 30, 2013, compared to the same period in 2012. The increase is primarily due to an increase in patronage allocations from our associated cooperatives, including CoBank and Minnesota Soybean Processors.

 

Income (Loss) from Discontinued Operations – In 2011, we discontinued operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and placed for sale the segment’s assets and business. The decision to discontinue operations was made because of a history of significant operating losses. During the six-month period ended June 30, 2013, we generated a loss of $1,000 within this segment, compared to $44,000 during the same period in 2012.

 

Net Income/Loss – We generated a net income of $8.4 million during the six-month period ended June 30, 2013, compared to $6.5 million during the same period in 2012. The $1.9 million improvement in net income is primarily attributable to an increase in gross profit associated with improved soybean quality within our region and increased demand for soybean meal.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under “Indebtedness.” On June 30, 2013, we had working capital, defined as current assets less current liabilities, of approximately $20.5 million, compared to working capital of approximately $12.2 million on June 30, 2012. Working capital increased between periods primarily due to an increase in net income and $2.7 million received as a retirement on patronage allocations. Based on our current operating plans, we believe that we will be able to fund our needs for the foreseeable future from cash from operations and revolving lines of credit.

 

A summary of our cash flow from operating, investing and financing activities for each of the six-month periods ended June 30, 2013 and 2012:

 

 

Cash Flows from Operations

 

The $1.6 million increase in cash flows used for operating activities is primarily attributed to a $34.1 million decrease in accrued commodity purchases during the six-month period ended June 30, 2013, compared to $17.8 million during the same period in 2012. This decrease in accrued commodity purchases is a result of increased commodity prices.

 

The increase in cash flows used for operating activities is partially offset by increases in accounts receivable and inventory as a result of the increased commodity prices.

 

Cash Flows Used For Investing Activities

 

The cash flows from (used for) investing activities is relatively unchanged during the six-month period ended June 30, 2013, compared to the same period in 2012. We spent more on capital improvements in 2013 compared to 2012 in order to enhance the quality and efficiency of our operations. Offsetting this increase in cash spent on capital improvements is our receipt of $2.7 million from CHS in February 2013 for the retirement of previous patronage allocations.

 

 

 

Cash Flows Used For Financing Activities

 

The $1.2 million increase in cash flows from financing activities is principally due to a $5.0 million increase in short-term borrowings as a result of the decrease in accrued commodity purchases and increases to accounts receivable and inventory, as discussed above, during the six-month period ended June 30, 2013, compared to the same period in 2012.

 

The increase in cash flows from financing activities is partially offset by a $5.1 million distribution to members during the first quarter of 2013. We did not make a member distribution in 2012.

 

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 the terms of this loan, we may borrow funds as needed up to the credit line maximum, or $12.9 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 is reduced by $1.3 million every six months from September 20, 2013 to the credit line’s maturity on March 20, 2018. The final payment at maturity is equal to the remaining unpaid principal balance of the loan. We pay a 0.50% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan is $12.9 million and $14.2 million as of June 30, 2013 and December 31, 2012, respectively. Under this loan, there are no available funds to borrow as of June 30, 2013.

 

The second credit line is a revolving working capital (seasonal) loan that matures on August 1, 2014. The primary purpose of this loan is to finance inventory and receivables. The maximum available to borrow under this credit line is $50 million. Borrowing base reports and financial statements are required monthly to justify the balance borrowed on this line. We pay a 0.25% 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 agreement to avoid the commitment fee. The principal balance outstanding on the working capital loan is $38.2 and $16.9 million as of June 30, 2013 and December 31, 2012, respectively. Under this loan, there was an additional $1.8 million in available funds to borrow as of June 30, 2013.

 

Both 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 3.20% and 4.21% as of June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the interest rate on the seasonal loan is 2.95% and 3.96%, respectively. We were in compliance with all covenants and conditions, or obtained waivers, under the loans as of June 30, 2013 and the date of this filing.

 

On July 23, 2013, we entered into an amendment of the Master Loan Agreement with CoBank, the terms of which affect our revolving term and seasonal loans and covenants. Under the seasonal loan, the amount that we may borrow is increased from $40 million to $50 million. In addition, the working capital covenant under our Master Loan Agreement is amended. Prior to the amendment, our minimum working capital requirement was $11.0 million at the end of each fiscal year and $9.0 million at the end of each other period for which financial statements are required to be furnished. After the amendment, our minimum working capital requirement is increased to $12.5 million at the end of each fiscal year and $10.0 million at the end of each other period. Finally, the amount we may distribute to members without the prior written consent of CoBank is increased from 35% to 50% of consolidated net income of the prior fiscal year. All other material items and conditions under the Master Loan Agreement and subsequent amendments remain the same following this amendment.

 

On March 1, 2013, we became the guarantor of a loan between the State of South Dakota Department of Transportation and the Brookings County (South Dakota) Regional Railway Authority. Effective March 1, 2013, the State of South Dakota Department of Transportation agreed to loan the Brookings County Regional Railway Authority a total sum of $964,070 for purposes of making improvements to the railway infrastructure near our soybean processing facility in Volga, South Dakota. The interest rate on the loan is 2.0% per year. Principal and interest payments are due annually with the first payment due on June 1, 2014 and the final payment due at maturity on June 1, 2020. In consideration of this unsecured loan, we agreed to guarantee to the State of South Dakota Department of Transportation the full amount of the loan, plus interest. This guaranty, however, became a direct obligation of ours on March 1, 2013, when we became responsible for paying the above-described principal and interest payments on an annual basis. There were no advances outstanding on this loan as of June 30, 2013.

 

 

 

OFF BALANCE SHEET FINANCING ARRANGEMENTS

 

Except as described below, we do not utilize variable interest entities or other off-balance sheet financial arrangements.

 

Lease Commitments

 

We have commitments under various operating leases for rail cars, various types of vehicles, and lab and office equipment. Our most significant lease commitments are the rail car leases we use to distribute our products. We have a number of long-term leases for hopper rail cars and oil tank cars with GE Capital, Trinity Capital, Flagship Rail Services and GATX Corporation. Total lease expenses under these arrangements are approximately $1.1 million for each of the six-month periods ended June 30, 2013 and 2012. The hopper rail cars earn mileage credit from the railroad through a sublease program, which totaled $0.9 million and $0.8 million for the six-month periods ended June 30, 2013 and 2012, respectively.

 

In addition to rail car leases, we have several operating leases for various equipment and storage facilities. Total lease expense under these arrangements is $83,000 and $81,000 for the six-month periods ended June 30, 2013 and 2012, respectively. Some of our leases include purchase options, none of which, however, are for a value less than fair market value at the end of the lease.

 

Other Long-Term Commitments

 

We have a commitment under a Grain Storage and Transportation Agreement with H&I Grain of Hetland, Inc. (H&I). This agreement is for the handling, storage and transportation of soybeans to and from the H&I facilities located in DeSmet, Hetland, and Arlington, South Dakota, at established rates per bushel. The agreement provides for an annual minimum payment of $200,000 and expires on August 31, 2014. Expenses under this agreement were $617,000 and $502,000 for the six-month periods ended June 30, 2013 and 2012, respectively.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 1 of our Financial Statements under Part I, Item 1, 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 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 the U.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 net realizable 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 closing price on the Chicago Board of Trade (CBOT), 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.

 

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 would be recognized. The impairment loss would be 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, as well as our forward purchase and sales contracts, using quoted exchange prices for identical instruments. Changes in the market value of all these contracts are recognized in earnings as a component of cost of goods sold.

 

 

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk.

 

Commodities Risk & Risk Management. To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight or options futures contract) on a regulated commodity futures exchange, the CBOT. While hedging activities reduce the risk of loss from changing market prices, such activities also limit the gain potential which otherwise could result from these significant fluctuations in market prices. Our policy is generally to maintain a hedged position within limits, but we can be long or short at any time. Our profitability is primarily derived from margins on soybeans processed, not from hedging transactions. We do not anticipate that our hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a cash contract.

 

At any one time, our inventory and purchase contracts for delivery to our facility may be substantial. We have risk management policies and procedures that include net position limits. They are defined by commodity, and include both trader and management limits. This policy and procedure triggers a review by management when any trader is outside of position limits. The position limits are reviewed at least annually with the board of managers. We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.

 

Foreign Currency Risk. We conduct essentially all of our business in U.S. dollars and have no direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.

 

Interest Rate Risk. We manage exposure to interest rate changes by using variable rate loan agreements with fixed rate options. Long-term loan agreements can utilize the fixed option through maturity; however, the revolving ability to pay down and borrow back would be eliminated once the funds were fixed.

 

Item 4.   Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Changes in Internal Control Over Financial Reporting. There were no changes to internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.          Legal Proceedings.

 

 From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual dispute. Currently, we are not involved in any legal proceeding that we believe is material. In the event we become involved in a legal proceeding, we carry insurance that provides protection against general commercial liability claims, claims against our directors, officers and employees, business interruption, automobile liability, and workers’ compensation claims. We are not currently involved in any material legal proceeding and are not aware of any potential claims.

 

Item 1A. Risk Factors.

 

During the quarter ended June 30, 2013, there were no material changes to the Risk Factors disclosed in Item 1A (Part I) of our 2012 Annual Report on Form 10-K.

 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

 

 

Item 3.          Defaults Upon Senior Securities.

 

None.

 

Item 4.          Mine Safety Disclosures.

 

None.

 

Item 5.          Other Information.

 

None.

 

Item 6.          Exhibits.

 

See Exhibit Index. 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SOUTH DAKOTA
	SOYBEAN PROCESSORS, LLC
Dated: August 9, 2013
	By	/s/ Thomas Kersting
		Thomas Kersting
		Chief Executive Officer (Principal Executive Officer)
Dated: August 9, 2013
	By	/s/ Mark Hyde
		Mark Hyde
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

TO

FORM 10-Q