Business context and reporting period
REX American Resources Corporation’s unaudited Form 10-Q covers the quarter and six months ended July 31, 2017, in fiscal 2017. This differs from the request metadata’s “2016 Q2.” REX operates in alternative energy, primarily ethanol and related products, through majority-owned plants and an equity-method investment.
Financial performance and position
| Metric | Three months ended July 31, 2017 | Six months ended July 31, 2017 |
|---|---|---|
| Revenue | $108.7 million; down 6.0% year over year | $221.9 million; up 2.8% |
| Gross profit / margin | $10.8 million / 9.9%, versus $17.3 million / 14.9% | $23.3 million / 10.5%, versus $25.7 million / 11.9% |
| Net income | $4.2 million, versus $9.0 million | $9.8 million, versus $12.5 million |
| Net income attributable to REX shareholders | $2.9 million; diluted EPS $0.45, versus $8.2 million and $1.24 | $7.5 million; diluted EPS $1.14, versus $11.0 million and $1.67 |
| Operating cash flow | Not separately presented for the quarter | $13.5 million, versus $11.4 million |
- For the quarter, ethanol sales fell to $88.8 million, while dried distillers grains (DDG) sales fell to $13.5 million from $18.9 million, principally due to lower DDG prices. For the six months, ethanol sales rose to $180.3 million, but DDG sales declined to $28.6 million.
- Quarterly gross profit was pressured by lower DDG revenue and about $2.0 million higher plant repairs and maintenance. Management also cited increased natural gas costs. The reported crush spread was about $0.24 per gallon for the quarter and $0.23 for the half-year.
- At July 31, cash and cash equivalents were $186.0 million, versus $188.6 million at January 31. Working capital was $209.8 million; the current ratio was 12.2:1. Total assets were $459.4 million and total equity $397.6 million.
- The filing reports no borrowings on One Earth and NuGen’s two $10 million revolving facilities; these were renewed through June 1, 2018. No other funded debt is identified in the presented balance sheet.
- Six-month capital expenditures were $14.4 million, mostly for plant capacity projects. REX expected a further $5–7 million of capital spending during the remainder of fiscal 2017. Investing cash outflow was $14.4 million; financing cash outflow was $1.7 million.
Outlook, risks and notable items
- Management’s annual sales-volume expectations for One Earth and NuGen were 260–280 million gallons of ethanol, 590,000–620,000 tons of dried DDG, 65–80 million pounds of corn oil, and 170,000–200,000 tons of modified DDG. These assumptions depend on plant operations, crush spreads, market conditions and capacity projects; they are not earnings guidance.
- Management expected the effective tax rate for the rest of fiscal 2017 to be significantly below year-to-date levels, reflecting anticipated federal tax credits from refined coal. On August 10, 2017, REX acquired a 95.35%-owned refined-coal facility for about $12 million in cash. The facility was expected to begin affecting results in Q3 and to generate pre-tax operating losses; tax credits depend on continued qualification and other conditions.
- Commodity and market risks are substantial. Management estimated that a 10% adverse price move could reduce annual revenue by about $48.4 million for forecast product sales, increase annual grain costs by about $34.2 million, and increase natural-gas costs by about $2.0 million. Most forecast ethanol sales and grain and natural-gas usage were not fixed-price contracted.
- Management linked lower DDG prices to Chinese anti-dumping and countervailing duties and Vietnam’s suspension of U.S. DDG imports. Other stated risks include corn, ethanol and energy price volatility, plant performance, refined-coal tax-credit eligibility, coal demand, third-party facility operation, and environmental or product-liability exposure.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the filing is for the quarter ended July 31, 2017, not 2016 Q2.
- Track DDG pricing and export-market access, plant repair costs, and the effect of commodity spreads on gross margins.
- Assess the refined-coal facility’s operating losses, tax-credit qualification and utilization, and any related environmental or counterparty exposure.
- Monitor planned capacity expansion, capital spending and actual production against management’s volume expectations.
- Review future cash flows and liquidity as the company funds investment and absorbs commodity-price volatility.