REX American Resources Corporation — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended January 31, 2018 (the company calls this fiscal year 2017), not a filing for 2016 Q4. Comparisons below are primarily with the year ended January 31, 2017.
Business context
REX invests in ethanol and related products and, beginning August 10, 2017, refined coal. It consolidates majority-owned ethanol businesses One Earth and NuGen, holds a minority equity-method investment in Big River, and owns a majority interest in the acquired refined coal entity. The company reported ethanol and by-products and refined coal as separate segments beginning in fiscal 2017.
Key financial results
| Metric | Year ended Jan. 31, 2018 | Year ended Jan. 31, 2017 |
|---|---|---|
| Revenue | $452.6 million | $453.8 million |
| Gross profit | $44.2 million; 9.8% margin | $71.0 million; 15.7% margin |
| Income before taxes | $25.4 million | $56.9 million |
| Net income attributable to REX shareholders | $39.7 million; $6.02 diluted EPS | $32.3 million; $4.91 diluted EPS |
| Operating cash flow | $41.0 million | $69.1 million |
| Cash and cash equivalents at year-end | $191.0 million | $188.6 million |
| Long-term debt | None reported | None reported |
Current assets were $239.0 million and current liabilities $21.9 million at January 31, 2018. Total assets were $478.9 million and total equity was $431.9 million. One Earth and NuGen each had a $10 million revolving credit facility, renewed through June 1, 2018; neither had borrowings at year-end. These facilities are recourse to the respective subsidiaries, not REX.
Material changes and unusual items
- Revenue was nearly flat, but gross profit fell $26.9 million. Ethanol-segment gross profit declined $19.5 million, reflecting narrower crush spreads and lower distillers grains prices; the new refined coal segment recorded a $7.3 million gross loss.
- Ethanol and by-products segment sales were $452.2 million. Ethanol volume at One Earth and NuGen increased to 256.0 million gallons from 246.9 million, while average ethanol selling price declined to $1.40 per gallon from $1.45. Average dried distillers grains price fell to $105.89 per ton from $123.97.
- Net income attributable to REX rose despite lower pretax income, principally because of a $19.5 million income-tax benefit. The filing attributes this to approximately $14.4 million from remeasurement of deferred taxes under the Tax Cuts and Jobs Act and approximately $11.5 million of Section 45 refined-coal tax credits, partly offset by other tax effects.
- The refined coal acquisition cost approximately $12.0 million in cash. For the partial-year period, the segment reported $0.4 million of sales, a $10.0 million pretax loss, and $5.6 million of segment profit after tax benefits. Management expects operating losses to continue, supported by tax credits if qualification requirements are met.
- Cash from operations declined to $41.0 million from $69.1 million, while investing used $35.9 million, including $24.0 million of capital expenditures and $12.0 million for the acquisition. Financing used $2.6 million; year-end cash increased by $2.4 million.
Outlook, risks and contingencies
- For fiscal 2018, management expects $6–8 million of capital expenditures at consolidated ethanol plants. It anticipates One Earth and NuGen annual sales of 260–285 million gallons of ethanol, 590,000–660,000 tons of dried distillers grains, 70–100 million pounds of corn oil, and 60,000–200,000 tons of modified distillers grains, subject to market conditions and operations.
- Management states that plant results are highly exposed to corn, ethanol, distillers grains, corn oil and natural gas prices. Fixed-price contracting is limited, and a 10% adverse price movement could materially affect annual revenue or costs. Production may be reduced or stopped if crush spreads are inadequate.
- Refined-coal credits depend on continued satisfaction of Section 45 emissions and other requirements, independent testing, sufficient taxable income, coal-market conditions, and continued purchases by a single customer. Credits are expected to be available through November 2021, subject to qualification; the filing describes potential loss or reduction of credits.
- Other material risks include changes to renewable-fuel mandates and RIN markets, export barriers and trade disputes affecting distillers grains, customer concentration, plant reliability and input supply, environmental regulation, and limited ability to receive distributions from the Big River investment.
- Six customers represented approximately 87% of fiscal 2017 sales and 89% of year-end receivables. Big River’s debt agreements restrict distributions. REX reported no off-balance-sheet arrangements; contractual obligations totaled $32.4 million, primarily for rail-car leases, a natural-gas pipeline, grain and other contracts.
- Management reported no material legal proceedings expected to affect financial condition or results. The financial statements received an unqualified audit opinion; the auditor also gave an unqualified opinion on internal control, while excluding the acquired refined-coal entity from the internal-control assessment.
- After year-end, the board authorized repurchases of an additional 500,000 shares. The filing says no dividends were paid in the current or prior years.
Most important facts for investors to verify
- Confirm the reporting period: this is the fiscal year ended January 31, 2018, despite the request metadata stating 2016 Q4.
- Assess whether ethanol crush spreads and distillers grains pricing recover enough to restore gross margins, and review the company’s commodity exposures and hedges.
- Verify refined-coal facility production, emissions-test results, customer continuity, and actual Section 45 credit realization against management’s expectations.
- Review the quality and recurrence of the tax benefits underlying reported earnings, especially the one-time deferred-tax remeasurement and production tax credits.
- Monitor operating cash flow, capital spending, subsidiary liquidity and distribution restrictions, customer concentration, and the status of the unused revolving facilities.