REX AMERICAN RESOURCES Corp quarterly report, Q1 FY2019

Business Context and Reporting Period

REX American Resources Corporation operates ethanol and by-products businesses and a refined-coal business. This Form 10-Q covers the three months ended April 30, 2019, compared with the three months ended April 30, 2018. Although the request metadata says “2018 Q1,” the filing itself is for the quarter ended April 30, 2019 (REX fiscal 2020 first quarter, under the company’s fiscal-year definition).

Unless otherwise noted, financial figures below are in millions of dollars. The statements are unaudited.

Financial Performance and Liquidity

• Revenue fell approximately 13% year over year. The ethanol and by-products segment generated $104.5 million of revenue, down from $120.7 million; refined-coal revenue was $0.1 million.
• Gross profit declined approximately $7.2 million. Ethanol and by-products gross profit was $6.1 million versus $13.5 million; refined coal recorded a $2.5 million gross loss, broadly consistent with the prior-year loss.
• At April 30, 2019, cash and cash equivalents were $204.7 million, current assets were $253.6 million and current liabilities were $20.3 million. Working capital was $233.3 million and the current ratio was 12.5:1. Cash, cash equivalents and restricted cash totaled $204.8 million.
• The company reported no borrowings under its revolving facilities. One Earth and NuGen each had a $10 million facility maturing June 1, 2019; management did not expect to renew them. Operating lease liabilities totaled $19.4 million, including $5.4 million current. These are lease obligations, not reported funded borrowings.
• Capital expenditures were $0.6 million. Management expected to spend $3 million to $6 million on capital projects during the remainder of fiscal 2019. The quarter’s $14.4 million of investing cash inflow primarily reflected the sale of $15.0 million in Treasury bills.

Material Changes Versus the Prior Comparable Period

• Lower ethanol sales drove most of the revenue decline: ethanol sales fell to $77.6 million from $91.9 million, reflecting an 11% reduction in gallons sold and a $0.06 decrease in average price per gallon. Management attributed lower volumes chiefly to weather-related logistical delays and weaker prices partly to industry oversupply and reduced domestic demand.
• The ethanol crush spread was approximately $0.02 per gallon, compared with $0.12 a year earlier. Average grain cost rose to $3.53 per bushel from $3.50, while natural gas cost rose to $3.66 per MMBtu from $3.46.
• Big River equity-method income decreased to $0.1 million from $0.7 million. Interest and other income increased to $1.1 million from $0.7 million, which management attributed to improved yields and higher excess-cash balances.
• Operating cash flow improved from a $3.5 million use to $1.5 million provided. Cash and cash equivalents increased from $188.5 million at January 31, 2019 to $204.7 million at April 30, 2019.
• REX adopted ASC 842 on February 1, 2019. Adoption added approximately $20.9 million of right-of-use assets and corresponding lease liabilities to the balance sheet, with no reported effect on quarterly operating results.

Outlook, Commentary, Risks and Unusual Items

• Management’s production-based sales expectations for One Earth and NuGen were 270–300 million gallons of ethanol, 580,000–650,000 tons of dried distillers grains, 70–90 million pounds of non-food-grade corn oil, and 180,000–270,000 tons of modified distillers grains annually. These expectations assume slightly above historical production and depend on market conditions, logistics, profitability and efficient plant operations; they are not presented as earnings guidance.
• Management warned that commodity-price volatility and the relationship between corn costs and ethanol and co-product prices can sharply affect margins; plants could reduce or stop production if margins remain inadequate. The company’s fixed-price coverage was limited, and it disclosed potential annual pre-tax-income impacts from a 10% adverse price change, including $34.3 million for ethanol and $34.8 million for corn.
• Weather-related planting and transportation conditions, corn availability and prices, ethanol oversupply, demand, natural gas costs, and plant operating performance are identified risks. Management also noted recent EPA small-refinery waivers as a factor it believes weakened domestic ethanol demand.
• The refined-coal operation is expected to continue at a gross loss, offset in part by federal production tax credits under IRC Section 45. Management expected credits of approximately $7.15 per ton for calendar 2019 and described the program as continuing through November 2021, subject to emissions-reduction qualification and testing. The tax benefit can vary with production and profitability.
• The unusually large reported income tax benefit reflects production tax credits relative to low pre-tax income and use of a discrete effective-tax-rate method. The reported effective tax rate was approximately negative 2,124.6%; the percentage is highly affected by the small pre-tax-income denominator.
• Unrecognized tax benefits were approximately $8.9 million at April 30, 2019, with approximately $0.5 million of accrued penalties and interest. Management stated that legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
• Forward grain, natural-gas and product sales commitments extended mainly through June and July 2019. Commodity hedges and forward contracts are used for risk management, but can themselves result in losses.

Most Important Facts for Investors to Verify

1. Confirm the intended reporting period: the filing is for the quarter ended April 30, 2019, notwithstanding the “2018 Q1” metadata.
2. Assess whether ethanol volumes and crush spreads recover after weather-related disruptions and weak market pricing, and compare actual results with management’s production expectations.
3. Review the assumptions and qualification requirements behind refined-coal tax credits, including the expected duration of credits and emissions testing.
4. Track commodity exposure, contract coverage and disclosed sensitivity estimates, especially corn and ethanol prices.
5. Monitor liquidity and capital allocation after the revolving facilities mature, including planned capital spending, repurchases and potential investments.
6. Evaluate the tax benefit, uncertain tax positions and lease obligations when interpreting earnings and balance-sheet liquidity.