Business context and reporting period
REX American Resources Corporation’s 10-K covers the fiscal year ended January 31, 2012 (fiscal 2011, February 1, 2011–January 31, 2012), with comparisons to fiscal 2010. This does not match the request metadata of “2010 Q4.” The filing also reports the quarter ended January 31, 2012 separately.
REX had exited retail in 2009 and focused primarily on ethanol investments, with a smaller real estate business. It held interests in five ethanol entities; after acquiring control of NuGen on November 1, 2011, REX consolidated NuGen. Its two majority-owned operating plants, One Earth and NuGen, underpin management’s production outlook.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales and revenue | $410.0 million | $301.4 million |
| Gross profit / margin | $33.8 million / 8.3% | $30.6 million / 10.2% |
| Income from continuing operations | $31.9 million | $7.1 million |
| Net income attributable to REX shareholders | $28.3 million | $5.1 million |
| Diluted earnings per share | $3.08 | $0.52 |
| Cash provided by operating activities | $34.9 million | $27.9 million |
| Cash and cash equivalents at year-end | $75.0 million | $91.0 million |
| Total debt, including current maturities | $123.7 million | $81.2 million |
- Current assets were $127.0 million and current liabilities were $37.2 million at January 31, 2012. Cash included $28.9 million held by One Earth and NuGen, subject to subsidiary debt-agreement restrictions.
- Alternative energy segment profit was $48.6 million, versus $13.4 million in fiscal 2010. Equity income from unconsolidated ethanol affiliates was $21.5 million, up from $14.6 million.
- Fiscal 2011 investing activities provided $10.6 million, including $12.3 million of net cash acquired with NuGen; capital expenditures were $7.3 million. Financing activities used $61.5 million, including $35.7 million of debt repayments and $22.2 million for share repurchases.
- REX reported $123.7 million of debt at a weighted-average interest rate of approximately 3.7%; approximately $122.7 million was variable-rate debt. Debt maturities ranged from 2013 through 2017.
Material changes versus the prior comparable period
- Revenue rose 36%, primarily reflecting higher ethanol and distillers-grains prices and NuGen’s consolidation in the fourth quarter. Consolidated ethanol sales volume was approximately 134.0 million gallons, below 138.3 million gallons in fiscal 2010; the average selling price increased from $1.81 to $2.49 per gallon.
- Gross profit increased, but gross margin fell to 8.3% from 10.2% as cost of sales grew faster than revenue. Average grain cost rose from $4.10 to $6.66 per bushel; distillers-grains average selling price increased from $126.25 to $196.46 per ton.
- Fiscal 2010 included approximately $18.4 million of Levelland Hockley impairment and deconsolidation charges. That plant had ceased production in January 2011, and filed for Chapter 11 protection in April 2011; REX had written its investment down to zero.
- Fiscal 2011 included a $3.5 million net bargain-purchase gain related to NuGen: an approximately $9.0 million bargain-purchase gain, partly offset by a $5.4 million remeasurement loss on REX’s previously held interest. It also included $2.9 million of final income from a synthetic-fuel investment; no further payments are expected.
- Year-end cash declined by $16.0 million. Total debt increased, principally reflecting the consolidation and refinancing of NuGen’s debt; the new NuGen term loan had $53.6 million outstanding at year-end.
Outlook, risks, contingencies, and unusual items
- Management expected One Earth and NuGen, if operating near nameplate capacity, to produce 200–230 million gallons of ethanol, 580,000–620,000 tons of distillers grains, and 30–40 million pounds of corn oil annually. These estimates depend on operating conditions and commodity margins, and are not guaranteed.
- Management expected ethanol-plant performance in the first quarter of fiscal 2012 to decline from the fourth quarter of fiscal 2011. The near-month CBOT crush spread averaged approximately negative $0.06 per gallon in that first quarter, versus approximately $0.14 per gallon in calendar 2011; spreads had remained negative in 2012 excluding co-product value.
- Commodity exposure is substantial: less than 1% of forecast ethanol sales, approximately 9% of forecast distillers-grains sales, and approximately 1% of expected corn use for the next 12 months were fixed-price contracted. The filing estimates that a 10% adverse price move could reduce ethanol revenue by $42.5 million, reduce distillers-grains revenue by $10.9 million, or increase corn costs by $44.6 million, respectively.
- Other key risks include volatile corn, ethanol, natural-gas and co-product prices; plant operating interruptions; customer concentration; industry capacity and demand; changing renewable-fuel policy; debt covenants and balloon maturities; and restrictions on subsidiary distributions. Three customers represented approximately 78% of fiscal 2011 revenue.
- REX owned 16 vacant former retail properties and had partially vacant space at its former distribution center. Management expected real estate segment losses in fiscal 2012 absent property sales; it anticipated lease revenue to be broadly consistent with fiscal 2011.
- REX reported approximately $24.0 million of alternative-minimum-tax credit carryforwards, dependent on future taxable income for realization. It also disclosed approximately $2.2 million of unrecognized tax benefits and $0.3 million of accrued penalties and interest. Potential IRS challenges to previously recognized synthetic-fuel-related income are a contingency.
- The financial-statement audit opinion was unqualified. Management and the auditor reported effective internal control over financial reporting, but NuGen was excluded from their internal-control assessment following its acquisition; NuGen represented 26% of consolidated assets, 21% of revenue and 14% of net income as reported in the filing.
Important facts for investors to verify
- Confirm the intended period: this filing is the fiscal year ended January 31, 2012, not a fiscal 2010 fourth-quarter filing. The January 31, 2012 quarter reported $170.5 million of revenue and $14.8 million of net income attributable to REX shareholders.
- Assess whether the unusually strong fiscal 2011 earnings are repeatable, given the NuGen acquisition accounting gain, final synthetic-fuel payment, and volatile crush spreads.
- Review subsequent corn, ethanol, distillers-grains and natural-gas prices, and the limited proportion of forecast volumes covered by fixed-price contracts.
- Check subsidiary debt service, covenant compliance, refinancing and maturity needs, and how much subsidiary cash can actually be distributed to REX.
- Monitor NuGen integration and internal controls, as well as the operating status and recoverability of the Levelland Hockley investment and vacant real estate.