Business Context and Reporting Period
Company: REX Stores Corporation (Note: Metadata referenced "REX American Resources Corp," but the filing text identifies the registrant as REX Stores Corporation).
Filing Type: Form 10-Q (Quarterly Report).
Period Ended: October 31, 2009.
Business Overview: The Company operates in three segments: Alternative Energy (ethanol production), Real Estate, and Retail. The Company substantially completed the exit of its retail business during the second quarter of fiscal year 2009, with remaining retail activity limited to administering extended service policies. The Alternative Energy segment includes consolidated operations of Levelland Hockley and One Earth ethanol plants.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2008 |
|---|---|---|---|
| Net Sales and Revenue | $64,416 | $111,180 | $99,642 |
| Gross Profit | $7,860 | $14,772 | $16,306 |
| Gross Margin % | 12.2% | 13.3% | 16.4% |
| Net Income (Attributable to REX) | $2,273 | $1,381 | $2,082 |
| Diluted EPS (Attributable to REX) | $0.24 | $0.15 | $0.19 |
| Cash and Cash Equivalents | $84,448 | $84,448 | $66,215 |
| Total Debt (Current + Long-Term) | $143,307 | $143,307 | $91,910 |
| Working Capital | $76,190 | $76,190 | $76,421 |
Note: Total Debt calculated as sum of current and long-term debt obligations (alternative energy and other) from the Balance Sheet.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 64.4% in the quarter and 11.6% for the nine-month period compared to the prior year. This was driven primarily by the Alternative Energy segment, which saw sales rise $38.9 million in the quarter due to One Earth becoming fully operational.
- Retail Wind-Down: Retail sales declined significantly ($13.9 million in the quarter) as the Company closed 53 stores and exited the retail business. Remaining retail revenue is derived from extended service contracts.
- Profitability: Net income attributable to REX shareholders for the nine months ended Oct 31, 2009, decreased by approximately $0.7 million compared to the prior year, despite higher revenue. This was due to lower investment income, higher interest expense, and losses on derivative instruments.
- Debt Levels: Total debt increased significantly to approximately $143.3 million from $91.9 million in the prior year, primarily due to the conversion of construction loans to term loans for the One Earth ethanol plant ($100 million outstanding).
- Derivative Losses: The Company recognized a loss of $1.6 million on interest rate swaps for the nine months ended Oct 31, 2009, compared to a gain of $0.5 million in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management believes it has sufficient working capital and credit availability to fund commitments for the next twelve months. The Company plans to seek and evaluate various investment opportunities but provides no assurances of success.
- Real Estate: The Company is marketing 38 owned vacant properties (former retail stores and distribution centers) for lease or sale following the termination of leases with Appliance Direct.
- Stock Repurchases: The Board authorized an additional 500,000 shares for repurchase on December 1, 2009. As of Oct 31, 2009, 44,801 shares remained available under the previous authorization.
- Risks: Key risks include the uncertainty of constructing ethanol plants on time/budget, legislative changes, price volatility of corn/sorghum/ethanol/natural gas, and the impact of IRS audits. The Company notes that forward-looking statements are subject to these uncertainties.
- Legal Proceedings: Litigation with Layne Christensen Company regarding water treatment equipment was settled in the third quarter, resulting in a $1.5 million payment to the Company.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial covenants (EBITDAR, debt service coverage) for Levelland Hockley and One Earth, particularly given the recent covenant amendments.
- Commodity Spreads: Monitor the spread between ethanol selling prices and grain/natural gas costs, which drives the profitability of the Alternative Energy segment.
- Real Estate Disposition: Track the progress of leasing or selling the 38 vacant properties to generate cash flow and reduce carrying costs.
- Derivative Exposure: Review the fair value of interest rate swaps ($6.5 million liability) and the impact of interest rate fluctuations on future earnings.
- Noncontrolling Interests: Understand the allocation of income/loss to noncontrolling interests in Levelland Hockley and One Earth, which significantly impacts net income attributable to REX shareholders.