Business Context and Reporting Period
Company: REX American Resources Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2010 (Second Quarter of Fiscal Year 2010)
Business Overview: The Company operates in two primary segments: Alternative Energy (ethanol production and investments) and Real Estate. The Company completed its exit from the retail appliance business in the prior fiscal year; remaining retail-related activities are classified as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2010 |
Six Months Ended July 31, 2010 |
Six Months Ended July 31, 2009 |
|---|---|---|---|
| Net Sales and Revenue | $65.1 million | $136.4 million | $31.4 million |
| Gross Profit | $4.7 million (7.2% margin) | $12.8 million (9.4% margin) | $1.5 million (4.9% margin) |
| Net Income (Attributable to REX) | $1.2 million | $5.4 million | $(0.9 million) Loss |
| Diluted EPS (Attributable to REX) | $0.12 | $0.54 | $(0.10) |
| Cash and Cash Equivalents | $89.6 million | $89.6 million | $84.1 million |
| Working Capital | $84.9 million | $84.9 million | N/A |
| Total Debt (Current + Long-Term) | $122.3 million | $122.3 million | N/A |
Note: Debt figures include current and long-term portions of debt and capital lease obligations for alternative energy and other categories.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by $48.0 million (280%) for the quarter and $105.0 million (335%) for the six-month period compared to the prior year. This growth is driven almost entirely by the Alternative Energy segment, specifically the full operational capacity of the One Earth ethanol plant.
- Profitability: The Company returned to profitability, reporting net income of $5.4 million for the six months ended July 31, 2010, compared to a net loss of $0.9 million in the same period of 2009. Income from continuing operations improved significantly due to higher ethanol production volumes and improved "crush spreads" (the margin between ethanol sales and grain costs).
- Equity Investments: Equity income from unconsolidated affiliates (Big River and Patriot) increased to $3.9 million for the six-month period, compared to a loss of $0.08 million in the prior year.
- Derivative Losses: The Company recognized a loss of $2.0 million on derivative financial instruments (interest rate swaps) for the six-month period, compared to $0.7 million in the prior year, due to declining interest rates.
- Real Estate Segment: The Real Estate segment reported a gross loss of $1.0 million for the six-month period, primarily due to impairment charges of $0.44 million on two properties and expenses associated with vacant former retail locations.
Guidance, Outlook, and Risks
- Outlook: Management expects ethanol plants to produce approximately 2.8 gallons of ethanol per bushel of grain. Future results are highly dependent on the "crush spread." Management cannot predict future operating results due to commodity price volatility.
- Capital Expenditures: One Earth is expected to incur approximately $5 million in costs to construct additional grain storage silos in the third and fourth quarters of fiscal 2010.
- Liquidity: The Company believes it has sufficient working capital and credit availability to fund operations for the next 12 months. Cash from operations was $16.0 million for the six-month period.
- Risks:
- Commodity Volatility: Operating results are sensitive to prices of corn, sorghum, ethanol, distillers grains, and natural gas.
- Interest Rate Risk: The Company has significant variable-rate debt and interest rate swaps. Declining interest rates result in losses on the swaps, while rising rates would result in gains.
- Real Estate Disposal: The Company is marketing vacant former retail properties for lease or sale; failure to monetize these assets could impact future profitability.
- Unusual Items: The Company purchased a 48% equity interest in NuGen Energy, LLC, for approximately $9.2 million in cash plus contingent consideration. No income from NuGen was recorded for the period due to a one-month reporting delay.
Investor Verification Checklist
- Crush Spread Trends: Verify current market prices for ethanol versus corn/sorghum to assess the sustainability of the Alternative Energy segment's gross margins.
- Debt Covenants: Review the amended loan agreement for Levelland Hockley (amended Sept 1, 2010) to ensure compliance with EBITDAR and debt service coverage ratios.
- Real Estate Valuation: Assess the carrying value of the vacant real estate portfolio and the likelihood of successful lease or sale transactions to reverse the segment's losses.
- Derivative Exposure: Monitor interest rate movements, as the Company's interest rate swaps (notional value ~$69.5 million) will generate further losses if rates continue to decline.
- NuGen Integration: Track the performance of the new NuGen Energy investment once results begin to be recognized in the next reporting period.