REX American Resources Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 31, 2020 (REX fiscal 2020 second quarter), not 2019 Q2. Dollar figures below are in millions unless stated otherwise. Financial statements are unaudited.
Business context and reporting period
REX operates in ethanol and by-products and refined coal. Its ethanol segment includes majority-owned One Earth and NuGen and an equity-method investment in Big River. The refined-coal operation earns federal production tax credits. The six-month period covers February 1 through July 31, 2020.
Key financial metrics
| Metric | Three months ended July 31, 2020 | Three months ended July 31, 2019 | Six months ended July 31, 2020 | Six months ended July 31, 2019 |
|---|---|---|---|---|
| Net sales and revenue | $39.3 | $105.9 | $122.6 | $210.4 |
| Gross profit (loss) | $(1.3) | $4.0 | $(10.7) | $7.7 |
| Loss (income) before tax | $(6.1) | $0.7 | $(19.8) | $0.9 |
| Income tax benefit | $4.0 | $2.6 | $9.4 | $6.2 |
| Net income (loss) | $(2.0) | $3.4 | $(10.5) | $7.1 |
| Net income (loss) attributable to REX shareholders | $(1.7) | $2.3 | $(9.4) | $5.1 |
| Basic and diluted EPS | $(0.28) | $0.36 | $(1.50) | $0.80 |
Quarterly gross margin was approximately negative 3.4%, compared with positive 3.8% in the prior-year quarter. For the six months, gross margin was approximately negative 8.7%, compared with positive 3.6%. The filing does not report operating cash flow by quarter.
- Cash flow: Six-month operating cash flow was a use of $9.0, versus a source of $12.5 a year earlier. Investing used $12.4, including $5.7 of capital expenditures; financing used $5.7, including $5.6 for share repurchases. Cash, cash equivalents and restricted cash decreased by $27.1 to $153.7.
- Liquidity: At July 31, cash and cash equivalents were $152.7 and short-term investments were $32.7. Working capital was $225.8; the current ratio was 8.6:1. Total current assets were $246.9 and current liabilities were $21.2.
- Debt and obligations: The balance sheet reports no conventional borrowings. Operating lease liabilities totaled $14.9, including $5.3 current and $9.6 long-term. This does not include other contractual commitments described in the filing.
- Equity and repurchases: Total equity was $437.7. During the six months REX repurchased approximately 109,000 shares for $5.6; 241,185 shares remained authorized for repurchase at July 31.
Material changes versus the prior comparable period
- Quarterly revenue fell $66.5, or about 63%, and six-month revenue fell $87.9, or about 42%, primarily due to reduced ethanol production and sales.
- Both consolidated ethanol plants were idled in March amid COVID-19-related demand weakness and corn-supply challenges. One Earth resumed production in late May and NuGen in late June; the filing says both operated for only about one month during the second quarter.
- Ethanol and by-products segment gross profit was $0.6 for the quarter, down from $6.2; the six-month segment recorded a $7.7 gross loss versus $12.3 gross profit. The reported crush spread was negative $0.04 per gallon for the quarter and negative $0.08 for the six months, compared with positive $0.07 and $0.06, respectively, in 2019.
- Six-month Big River equity-method results shifted to a $1.0 loss from $0.4 income. REX received $2.0 in Big River dividends during the period.
- Interest and other income declined: $0.2 versus $1.3 for the quarter and $0.9 versus $2.4 for the six months, reflecting lower rates and investment balances.
Outlook, management commentary, risks and unusual items
- Management said the duration and business impact of COVID-19, including ethanol demand and any future production stoppage, could not be reasonably estimated. It warned a prolonged stoppage could materially harm results, financial condition and cash flows.
- Management expected capital expenditures of $3–$5 for the remainder of fiscal 2020. No full-year revenue or earnings guidance is provided.
- Management described ongoing exposure to volatile corn, ethanol, distillers-grains, corn-oil and natural-gas prices; corn availability; and short contract coverage that limits visibility into crush spreads. NuGen had faced inconsistent local corn supply. EPA small-refinery waivers were also cited as a source of uncertainty and potential reduced ethanol demand.
- Refined coal depends on a single utility customer, whose demand had been lower; management expected varying and intermittent demand. The segment continued to incur gross losses, which management expects to be subsidized by federal production tax credits. Credits are expected to be available through November 2021, subject to qualifying emissions reductions and other requirements; the stated 2020 credit rate was approximately $7.30 per ton.
- The six-month income tax benefit included approximately $1.8 related to the CARES Act extension of net operating loss carrybacks. The filing reports approximately $7.3 of unrecognized tax benefits; prevailing on all positions could reduce income tax expense by approximately $7.4.
- REX tested certain long-lived assets after identifying COVID-19 and other factors as potential impairment indicators and recorded no impairment. Management cautioned a prolonged downturn could lead to future impairment. It reported no legal proceedings expected to have a material adverse effect.
- REX was exploring a potential carbon-sequestration project near One Earth with the University of Illinois; feasibility remained undetermined. The filing also notes approximately $2.5 of cumulative spending on Future Energy technology, whose commercial feasibility had not been proven.
Most important facts for investors to verify
- Whether One Earth and NuGen sustained production after their late-May and late-June restarts, and the resulting utilization and sales volumes.
- Subsequent ethanol demand, realized crush spreads, corn availability and costs, and the impact of EPA small-refinery waiver decisions.
- Cash-flow and liquidity trends, including the timing of tax refunds, working-capital needs, investment maturities and planned capital spending.
- The availability and qualification of refined-coal tax credits, operating demand from the sole utility customer, and the November 2021 credit-program endpoint.
- Developments in the $7.3 of unrecognized tax benefits and whether any asset impairment or material contingency emerges.