REX American Resources Corporation — Form 10-Q Summary
Period clarification: The request identifies “2018 Q2,” but the filing is for the quarter ended July 31, 2019, covering the second quarter and first six months of fiscal 2019. Comparatives are for the corresponding 2018 periods. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Business context and reporting period
REX operates in ethanol and by-products and refined coal. Its ethanol business includes majority-owned plants and an equity-method investment in Big River Resources. This unaudited Form 10-Q reports three and six months ended July 31, 2019; the company cautions interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales and revenue | $105.9 million, down from $128.8 million | $210.4 million, down from $249.6 million |
| Gross profit | $4.0 million; 3.8% margin, versus $9.4 million; 7.3% | $7.7 million; 3.6% margin, versus $20.3 million; 8.1% |
| Income before income taxes | $0.7 million, versus $4.9 million | $0.9 million, versus $12.5 million |
| Net income attributable to REX shareholders | $2.3 million; $0.36 per diluted share, versus $9.2 million; $1.43 | $5.1 million; $0.80 per diluted share, versus $18.7 million; $2.87 |
| Net cash provided by operating activities | Not presented separately | $12.5 million, versus $18.2 million |
At July 31, 2019, cash and cash equivalents were $212.2 million, current assets $259.0 million, current liabilities $22.3 million, and working capital approximately $236.7 million. The current ratio was 11.6 to 1. Total assets were $494.7 million and total equity $450.5 million. The balance sheet does not list borrowings or debt; operating lease liabilities were $18.4 million in total ($5.3 million current and $13.1 million long-term).
Six-month investing activities provided $13.6 million, including $15.0 million from sales of short-term investments; capital expenditures were $1.4 million. Financing activities used $2.4 million. Cash, cash equivalents and restricted cash increased $23.6 million to $212.5 million. Management expected $2–4 million of additional capital spending during the remainder of fiscal 2019.
Material changes versus the prior comparable periods
- Quarterly revenue fell about 18% and six-month revenue about 16%. Management attributed the decline primarily to lower ethanol and by-product sales volumes.
- Ethanol and by-products gross profit decreased to $6.2 million from $13.7 million in the quarter and to $12.3 million from $27.2 million for six months. The crush spread fell to about $0.07 per gallon in the quarter and $0.06 for six months, compared with $0.13 in each 2018 period.
- Quarterly ethanol gallons sold fell 17% to 60.4 million; six-month volume fell to 121.7 million from 141.9 million. Dried distillers grains sales also declined, reflecting lower volumes and prices.
- Refined coal continued to report gross losses, though losses narrowed year over year. Segment profit, after tax benefits, was $1.2 million for the quarter and $2.6 million for six months, down from $3.0 million and $4.3 million.
- Operating cash flow declined by $5.8 million year over year. In contrast, cash increased, partly reflecting the sale of Treasury bills and lower capital spending than in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management cited delayed corn planting, uncertain harvest size, constrained corn availability and higher corn costs as factors limiting plant production and margins. It could not estimate future production or sales volumes.
- REX warned that EPA small-refinery exemptions under the Renewable Fuel Standard may reduce domestic ethanol demand and pricing. Commodity-price volatility, weather, fuel prices, trade and policy changes, plant operations and tax matters are additional risks.
- Management said ethanol plants may reduce or stop production if crush spreads do not support adequate cash flow. Contract coverage generally extends no more than four months, limiting visibility into future margins.
- Refined coal results depend on demand from its sole utility customer. Management expects the operation to continue at a gross loss, with losses subsidized by federal Section 45 production tax credits; eligibility depends on emissions requirements and production. Credits are expected through November 2021, subject to qualification. The filing cites an expected 2019 credit rate of approximately $7.17 per ton.
- The company changed to a discrete effective tax-rate method for 2019 interim reporting because small changes in estimated ordinary income could make the prior annual-rate method unreliable. Tax benefits were $2.6 million for the quarter and $6.2 million for six months, primarily associated with refined-coal credits relative to low pretax income. These benefits substantially affect reported net income.
- ASC 842 lease adoption added approximately $20.9 million of assets and liabilities at adoption, without a material effect on reported operating results. A $1.2 million inventory write-down was recorded at July 31, 2019; no impairment charges were reported in the first six months.
- Unrecognized tax benefits were approximately $8.8 million, with about $0.5 million of accrued penalties and interest; the filing says prevailing on all unrecognized benefits could reduce the tax provision by approximately $8.3 million. Management said pending legal matters were not expected to have a material adverse effect.
- REX reported no material changes to its previously disclosed risk factors, no material control changes, and effective disclosure controls. It was evaluating uses for excess cash, including investments and its share repurchase authorization.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended July 31, 2019, not 2018 Q2.
- Track corn availability and cost, ethanol and by-product prices, crush spreads, plant utilization and the duration of production constraints.
- Assess how much reported earnings depend on refined-coal production tax credits, their qualification, and the operation’s ongoing gross losses and single-customer exposure.
- Review tax-position uncertainty, including the unrecognized tax benefits and the company’s assumptions for future tax credits.
- Monitor lease obligations, planned capital expenditures, cash deployment and any future share repurchases or investments.