REX American Resources Corporation — Form 10-Q Summary
Period clarification: The request identifies 2014 Q2, but this filing covers the quarter and six months ended July 31, 2015 (REX fiscal 2015 Q2 and first half). It presents 2014 as the comparative period. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context and reporting period
REX operates in alternative energy, principally ethanol and related products. It consolidates One Earth and NuGen and holds an equity-method investment in Big River. REX sold its Patriot investment on June 1, 2015. Results for One Earth are included on a one-month reporting lag.
Financial performance and position
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales and revenue | $113.5 in 2015; $150.2 in 2014 | $218.7 in 2015; $306.2 in 2014 |
| Gross profit and margin | $18.3; 16.1% in 2015, versus $38.8; 25.9% in 2014 | $27.4; 12.5% in 2015, versus $75.5; 24.7% in 2014 |
| Income from continuing operations | $18.7 in 2015; $26.7 in 2014 | $23.2 in 2015; $50.9 in 2014 |
| Net income attributable to REX shareholders | $16.4 in 2015; $21.9 in 2014 | $20.3 in 2015; $43.6 in 2014 |
| Basic EPS attributable to REX shareholders | $2.16 in 2015; $2.68 in 2014 | $2.62 in 2015; $5.36 in 2014 |
| Operating cash flow | $2.6 in first half 2015, versus $61.6 in first half 2014 |
At July 31, 2015, cash and cash equivalents were $138.1, current assets $186.5, current liabilities $20.2, and working capital approximately $166.3. The current ratio was 9.2x. Total assets were $425.4 and total equity $369.4. The balance sheet reports no debt balance; REX said prior repayments had paid off debt in fiscal 2014 and reported no interest expense in the 2015 periods. One Earth and NuGen each had a $10 million revolving facility, with no borrowings at July 31.
Investing activities provided $41.6 in the first half, including $45.5 from the Patriot sale; capital expenditures were $5.9. Financing activities used $43.8, including $43.3 for treasury-stock purchases. Cash increased $0.4 to $138.1 over the six months.
Material changes versus the prior comparable period
- Second-quarter revenue fell 24% and first-half revenue fell 29%, mainly as selling prices declined. Ethanol’s average selling price was $1.50 per gallon in Q2 2015 versus $2.18 in Q2 2014; first-half prices were $1.46 versus $2.16.
- Gross profit and margins contracted sharply. Management reported crush spreads of $0.22 per gallon in Q2 and $0.18 in the first half of 2015, versus $0.61 and $0.60, respectively, in 2014.
- First-half equity-method income declined to $6.5 from $15.5, reflecting weaker investee results amid lower crush spreads and the end of Patriot equity accounting after its sale.
- REX recognized a $10.4 gain on the Patriot transaction. Approximately $4.4 of estimated escrow proceeds remained recognized in receivables and other long-term assets; final escrow determination was expected by December 1, 2016.
- Cash from operations was substantially lower than in the prior first half, with working-capital outflows, deferred-tax effects and lower earnings among the factors described by management.
Outlook, risks, contingencies and unusual items
- Management expected One Earth and NuGen to sell annually approximately 215–240 million gallons of ethanol, 550,000–650,000 tons of dried distillers grains, 40–60 million pounds of corn oil and 10,000–40,000 tons of modified distillers grains, assuming continued operation at or above capacity. These are volume expectations, not earnings guidance, and depend on crush spreads.
- Management expected $10–15 million of capital spending during the remainder of fiscal 2015, anticipated continuing the share-buyback program, and said it did not plan to build a new ethanol plant. It was evaluating potential 10–15% capacity expansions at existing plants and other investment opportunities.
- Commodity-price exposure is significant. Management estimated that a 10% adverse price move across forecast product sales could reduce annual revenue by approximately $43.7 million; a 10% adverse corn-price move could increase annual cost of goods sold by approximately $30.4 million. Most forecast ethanol sales and corn usage were not fixed-price contracted.
- At July 31, One Earth and NuGen had commitments to purchase approximately 10.8 million bushels of corn through December 2015, and sales commitments for approximately 53.7 million gallons of ethanol, 84,000 tons of distillers grains and 6.4 million pounds of corn oil, generally for delivery through November 2015. Forward contracts and hedging may not fully offset commodity volatility and can themselves result in losses.
- REX reported $34.7 of future minimum operating-lease rentals. It also disclosed routine legal actions, with management stating their outcome was not expected to materially affect the financial statements. No material risk-factor changes were reported.
- After quarter-end, REX purchased 233,243 additional shares for approximately $11.6 million, completing the then-authorized repurchase program; the board subsequently authorized repurchases of an additional 500,000 shares. REX paid no dividends.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for Q2 2015, not Q2 2014.
- Assess whether weaker ethanol and coproduct prices and the substantially narrower crush spread persisted after July 31, 2015.
- Review the Patriot sale’s final escrow proceeds, timing and any adjustments to the recognized gain.
- Check subsequent operating cash flow, capital spending, buybacks and use of the company’s large cash balance.
- Monitor commodity-price sensitivities, unhedged volumes, plant utilization and compliance with the subsidiary revolving-credit covenants.