REX American Resources Corporation — Form 10-Q summary
Period clarification: The supplied filing is for the quarter ended October 31, 2019 (REX fiscal 2019 third quarter), not 2018 Q3. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. The interim statements are unaudited.
Business context and reporting period
REX operates in ethanol and by-products and refined coal. Its ethanol business includes majority-owned One Earth and NuGen and an equity investment in Big River. The refined-coal operation has one utility customer. The filing compares the three and nine months ended October 31, 2019 with the corresponding 2018 periods.
Financial results and liquidity
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales and revenue | $86.7 | $123.8 | $297.1 | $373.3 |
| Gross profit (loss) | $(1.8) | $7.7 | $5.9 | $28.0 |
| Gross margin | (2.0)% | 6.3% | 2.0% | 7.5% |
| Income (loss) before taxes | $(4.9) | $3.8 | $(4.0) | $16.3 |
| Net income (loss) attributable to REX shareholders | $(2.1) | $11.9 | $3.0 | $30.6 |
| Basic and diluted EPS | $(0.32) | $1.86 | $0.48 | $4.73 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(2.3) | $28.9 |
- At October 31, 2019, cash and cash equivalents were $196.3 million, restricted cash $0.5 million, and current assets $260.5 million. Working capital was $236.1 million and the current ratio was 10.7:1.
- Total assets were $493.6 million; total equity was $448.9 million. The balance sheet reports no borrowings or other conventional debt; operating lease liabilities totaled $17.0 million ($5.1 million current and $11.9 million long term).
- Nine-month capital expenditures were $2.6 million. Investing activities provided $12.7 million, mainly reflecting $15.0 million of short-term investment maturities. Financing activities used $2.3 million.
- REX reported a $9.4 million income-tax benefit for the nine months, primarily associated with refined-coal production tax credits and the discrete tax-rate method used in 2019.
Material changes versus prior comparable periods
- Third-quarter revenue fell $37.1 million, about 30%; nine-month revenue declined $76.2 million, about 20%. The decline was principally in ethanol and by-products, driven by lower production and sales volumes, particularly at NuGen.
- Ethanol and by-products gross profit was only $0.03 million in Q3 versus $11.3 million a year earlier; its nine-month gross profit fell to $12.3 million from $38.5 million. The reported ethanol crush spread was approximately negative $0.04 per gallon in Q3 and $0.03 for the nine months, compared with $0.13 in each prior-year period.
- REX moved from prior-year Q3 net income attributable to shareholders of $11.9 million to a $2.1 million loss. Nine-month attributable income declined to $3.0 million from $30.6 million.
- Nine-month operating cash flow changed from $28.9 million provided to $2.3 million used. Inventory growth used $12.6 million and accounts receivable growth used $5.0 million; lower other liabilities used $9.0 million.
- Refined-coal gross losses improved to $1.8 million in Q3 and $6.4 million for nine months, from $3.5 million and $10.5 million, respectively. However, the segment’s after-tax profit, which includes production tax credits, fell to $0.6 million for Q3 and $3.2 million for nine months.
Outlook, commentary, risks, and unusual items
- Management attributed ethanol weakness to corn supply and logistics problems, weather-delayed planting, higher corn costs, and reduced NuGen production. It said it could not estimate future sales volumes given uncertainty about corn availability; the filing notes concerns that local supply constraints could persist until the 2020 harvest.
- Management said weak ethanol margins could continue and plants could reduce or halt production to limit variable costs if margins are inadequate. Commodity prices, corn availability, ethanol demand, and the crush spread are key uncertainties.
- Management cited EPA small-refinery exemptions under the Renewable Fuel Standard as reducing domestic ethanol demand and said administration of 2019 exemptions remained uncertain.
- Refined-coal demand was lower at its sole utility customer, and utility projections indicated the trend might continue. Management expects future demand below historical levels and expects the operation to continue incurring gross losses; federal production tax credits are expected to subsidize losses. Credits depend on qualifying emissions reductions and production and are expected to apply through November 2021. The stated 2019 credit rate was approximately $7.17 per ton.
- Management expected $5–6 million of capital spending during the remainder of fiscal 2019. It also said it was considering investment opportunities and had authorization to repurchase approximately 350,000 additional shares; no repurchases were reported in the first nine months of fiscal 2019.
- The company adopted ASC 842 lease accounting effective February 1, 2019, adding approximately $20.9 million of right-of-use assets and lease liabilities at adoption. Management said adoption did not materially affect operating results.
- REX disclosed approximately $8.6 million of unrecognized tax benefits and $0.5 million of accrued penalties and interest at October 31, 2019. Management said pending legal matters were not expected to have a material adverse effect. No material risk-factor changes were reported.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q covers October 31, 2019, despite the request metadata indicating 2018 Q3.
- Track corn availability, NuGen operating levels, ethanol crush spreads, and whether weaker production and margins persist.
- Monitor the utility customer’s refined-coal demand and the continued availability and qualification of Section 45 tax credits.
- Review the quality and sustainability of earnings and cash flow, including tax benefits, working-capital movements, and the gap between reported income and operating cash flow.
- Assess commodity-price exposure, forward commitments, lease obligations, and resolution of uncertain tax positions.