Business Context and Reporting Period
Company: REX American Resources Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011
Business Overview: The Company operates in two primary segments: Alternative Energy (ethanol production and investments) and Real Estate (leasing of former retail properties). The Company exited its retail business in fiscal year 2009, with remaining retail activities classified as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales and Revenue | $81,214 | $71,272 |
| Gross Profit | $4,680 | $8,197 |
| Gross Margin | 5.8% | 11.5% |
| Net Income (Total) | $5,556 | $5,605 |
| Net Income Attributable to REX Shareholders | $4,652 | $4,188 |
| Diluted EPS (Attributable to REX) | $0.49 | $0.42 |
| Operating Cash Flow | $9,122 | $13,779 |
| Cash and Cash Equivalents (Ending) | $96,951 | $101,420 |
| Total Debt (Current + Long-term) | $78,147 | $81,088 |
| Working Capital | $102,053 | $101,282 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased $9.9 million (13.9%) year-over-year, driven primarily by higher sales in the Alternative Energy segment due to increased selling prices for ethanol and distillers grains.
- Margin Compression: Gross profit decreased $3.5 million despite higher revenue. The gross margin declined from 11.5% to 5.8% due to significantly lower "crush spreads" (the difference between ethanol selling prices and grain costs). The crush spread dropped from approximately $0.42 per gallon in Q1 2010 to $0.01 per gallon in Q1 2011.
- Equity Income Surge: Equity in income of unconsolidated ethanol affiliates (Big River, Patriot, NuGen) more than doubled to $5.8 million from $2.8 million, largely due to the inclusion of NuGen (acquired July 2010) and strong performance at Big River.
- Deconsolidation Impact: The Company deconsolidated Levelland Hockley County Ethanol, LLC effective January 31, 2011, reducing its ownership from 56% to 49%. This entity subsequently filed for Chapter 11 bankruptcy in April 2011. The deconsolidation reduced consolidated interest expense by approximately $0.6 million compared to the prior year.
- Discontinued Operations: Income from discontinued operations (retail exit) was $415,000, including a $125,000 gain on the disposal of a property.
Outlook, Risks, and Management Commentary
- Commodity Volatility: Management emphasizes that results are highly dependent on the "crush spread." The Company cannot predict future spreads beyond three months due to the immature market for ethanol futures. A 10% adverse change in ethanol prices could decrease revenue by approximately $23.5 million.
- Production Capacity: The Company expects future production of approximately 100 to 115 million gallons of ethanol and 300,000 to 320,000 tons of distillers grains annually, assuming One Earth operates near nameplate capacity.
- Liquidity: The Company maintains a strong liquidity position with a current ratio of 5.0 to 1. Management believes working capital and credit availability are sufficient to fund operations for the next 12 months.
- Investment Strategy: The Company plans to seek and evaluate additional investment opportunities in the alternative energy sector but provides no assurances of success.
- Key Risks: Significant risks include price volatility of corn, ethanol, and natural gas; the financial health of equity method investees (specifically the bankruptcy of Levelland Hockley); and changes in federal policy regarding ethanol.
Investor Verification Checklist
- Crush Spread Sustainability: Verify current market conditions for corn vs. ethanol prices to assess if the $0.01/gallon spread is sustainable or if margins may turn negative.
- Levelland Hockley Exposure: Confirm the status of the Company's 49% equity interest in Levelland Hockley following its Chapter 11 filing and the valuation of this investment (currently recorded at $0).
- Equity Method Investments: Review the financial health and dividend restrictions of major affiliates (Big River, Patriot, NuGen), which contributed significantly to net income.
- Real Estate Vacancy: Assess the timeline for leasing or selling the 23 vacant former retail stores and the partially vacant distribution center.
- Debt Covenants: Verify continued compliance with financial covenants (EBITDA, debt service coverage) for the One Earth Energy subsidiary, which holds the majority of the Company's debt.