REX American Resources Corporation — Form 10-Q Summary
Reporting period: Three months ended April 30, 2013, the company’s first quarter of fiscal 2013 (fiscal year ends January 31). The filing’s comparative period is the three months ended April 30, 2012; this differs from the request metadata’s “2012 Q1.” Financial statements are unaudited.
Business context and results
REX operates in alternative energy, principally ethanol production and related products, and real estate. It also holds equity-method investments in ethanol businesses. Its former retail operations were exited in 2009; remaining service-plan activity and certain property sales are reported as discontinued operations.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales and revenue | $178.7 million | $151.0 million |
| Gross profit / gross margin | $9.1 million / 5.1% | $5.5 million / 3.7% |
| Income from continuing operations before taxes | $5.9 million | $1.9 million |
| Income from continuing operations | $3.8 million | $1.3 million |
| Net income attributable to REX shareholders | $3.5 million | $0.9 million |
| Basic and diluted earnings per share | $0.43 | $0.11 |
| Operating cash flow | $8.8 million | $5.0 million |
Drivers and material changes
- Revenue rose about 18%, primarily in alternative energy. Ethanol sales increased to $132.0 million from $117.3 million; average ethanol selling price increased to $2.33 per gallon from $2.14, while shipments rose to 56.7 million gallons from 54.8 million.
- Alternative-energy gross profit increased to $9.0 million from $5.5 million. Management cited higher distillers-grains prices and greater modified distillers-grains and corn-oil sales as offsets to a weaker ethanol/grain crush spread. The reported crush spread was negative $0.32 per gallon, compared with negative $0.15.
- Equity-method income rose to $1.6 million from $0.4 million, mainly because Patriot moved from a loss to income. Interest expense fell about $0.2 million with scheduled debt repayments. SG&A increased about $1.0 million, primarily from alternative-energy expenses, including higher rail-car leases.
- Reported net income included $0.2 million net of tax from discontinued operations, including a $0.1 million after-tax gain on disposal. The company also reported $0.6 million attributable to noncontrolling interests.
Cash, debt and liquidity
- At April 30, 2013, cash and cash equivalents were $73.8 million; current assets were $120.0 million and current liabilities $33.3 million. Working capital was approximately $86.7 million and the current ratio was 3.6:1.
- Total balance-sheet debt was approximately $102.7 million, comprising $15.6 million current and $87.1 million long-term. Cash exceeded consolidated debt by approximately $28.9 million, though subsidiary cash is primarily intended for subsidiary working-capital needs and debt is nonrecourse to the parent. Debt declined from approximately $106.9 million at January 31, 2013.
- Operating cash flow of $8.8 million was offset in part by $4.2 million of debt payments and $0.6 million of share repurchases. Investing activities provided $0.1 million; capital expenditures were $32,000 in the quarter. Management expected One Earth and NuGen to spend a combined $2–$4 million on plant projects during the rest of fiscal 2013.
- One Earth had $55.4 million of term debt outstanding, maturing July 2014; REX said it intended to refinance or modify the facility before maturity. NuGen had $46.8 million outstanding, maturing October 2016. Neither subsidiary had drawn its $10 million revolving facility. Both were reported in covenant compliance at quarter-end.
Outlook, risks and contingencies
- Management expected One Earth and NuGen to operate at or near capacity, subject to crush spreads, with annual output of approximately 200–230 million gallons of ethanol, 440,000–480,000 tons of dried distillers grains, 230,000–270,000 tons of modified distillers grains, and 40–60 million pounds of corn oil. These are expectations, not guaranteed results.
- Commodity exposure remains substantial: corn prices, ethanol and co-product selling prices, and natural-gas costs can sharply affect margins. Only about 12% of forecast ethanol, 9% of distillers-grains, and 11% of corn-oil sales, and 15% of estimated corn usage, were fixed-price contracted for the next 12 months. The filing estimated that a 10% adverse price change could reduce revenue by $56.1 million across forecast product sales or increase corn costs by $44.3 million.
- Management said it believed liquidity was sufficient for the next 12 months and foreseeable future, and expected both plants to meet covenants. Those assessments depend on production, commodity-price forecasts, expenses and other assumptions. Covenant amendments included waivers of prior fixed-charge coverage requirements; future minimum working-capital and fixed-charge coverage tests apply.
- Variable-rate debt and the One Earth interest-rate swap create rate exposure. The swap’s fair-value liability was $2.3 million; the company reported a $4,000 quarterly gain. Unrecognized tax benefits, including accrued penalties and interest, were approximately $2.2 million. Management did not expect pending legal matters to have a material effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether ethanol, co-product and corn prices support positive plant margins, and how much production and input exposure remains unhedged.
- Progress toward refinancing or modifying One Earth’s July 2014 maturity, and continuing compliance with amended covenant requirements at both subsidiaries.
- Whether the quarter’s improvement in equity-method income and earnings is repeatable, given commodity and crush-spread volatility.
- Availability of cash for parent-company purposes, considering subsidiary working-capital requirements, nonrecourse debt and restrictions on distributions.
- The effect of the stated $2–$4 million remaining-year plant capital program and planned share repurchases on liquidity.