REX American Resources Corporation — Form 10-Q Summary
Period note: The request identifies “2016 Q3,” but the supplied filing is for the quarter ended October 31, 2017 (REX fiscal 2017 third quarter), with comparisons to October 31, 2016. The interim financial statements are unaudited; amounts below are in U.S. dollars.
Business context and reporting period
REX’s core business is ethanol and by-products, including ethanol, distillers grains and corn oil. On August 10, 2017, REX acquired a 95.35%-owned refined-coal business for approximately $12.0 million and began reporting it as a second segment. REX also holds an equity-method investment in Big River Resources.
Financial performance and position
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Revenue | $121.2 million | $116.3 million | $343.1 million | $332.2 million |
| Gross profit; gross margin | $14.9 million; 12.3% | $20.2 million; 17.3% | $38.1 million; 11.1% | $45.9 million; 13.8% |
| Income before taxes | $9.3 million | $17.2 million | $23.7 million | $35.7 million |
| Net income attributable to REX shareholders | $13.2 million | $8.9 million | $20.7 million | $20.0 million |
| Diluted earnings per share | $2.00 | $1.36 | $3.13 | $3.03 |
| Operating cash flow | Not presented by quarter | $34.1 million | $41.4 million |
Quarterly revenue rose about 4%, while gross profit fell about 26%. Nine-month revenue increased about 3%, but gross profit declined about 17%. Higher ethanol sales were offset by lower distillers-grains pricing, higher repair and maintenance costs, and the refined-coal segment’s initial gross loss. Quarterly net income attributable to REX increased despite lower pretax income, principally because of a tax benefit associated with expected refined-coal production tax credits.
At October 31, 2017, cash and cash equivalents were $190.5 million, total assets $474.3 million, and equity $413.4 million. Working capital was approximately $209.4 million and the current ratio was 10.1:1. The filing reports no borrowings on One Earth’s or NuGen’s $10 million revolving credit facilities; each facility matures June 1, 2018. Cash increased $1.9 million from January 31, 2017. Nine-month investing cash outflow was $31.2 million, including $19.3 million of capital expenditures and the $12.0 million acquisition. Lease commitments totaled $24.6 million.
Segments, changes and management commentary
- Ethanol and by-products: Nine-month segment profit was $17.7 million, down from $20.9 million. The third-quarter crush spread was approximately $0.29 per gallon versus $0.31 a year earlier. Management attributed weaker results principally to lower distillers-grains prices, higher natural-gas costs and increased plant repairs. China’s duties on U.S. distillers grains and Vietnam’s temporary import suspension pressured pricing; the filing says Vietnam lifted its ban and China announced repeal of its countervailing duty in November 2017.
- Refined coal: The segment reported $0.2 million of sales and a $3.4 million gross loss for the quarter and nine-month period. Segment profit was $4.5 million after tax benefits. Management expects operating gross losses to continue under the existing arrangements, with federal production tax credits expected to offset them through November 2021, subject to qualifying emissions reductions. Independent emissions testing is required every six months.
- Taxes and unusual items: The quarter included a $5.7 million income-tax benefit; the nine-month tax benefit was $1.0 million. Management estimated an annual effective tax benefit of approximately 4%, primarily reflecting anticipated refined-coal credits. The refined-coal acquisition valuation was preliminary. Acquisition-related costs included approximately $2.1 million in nine-month SG&A, including approximately $1.6 million of commission expense; management expected future refined-coal SG&A to be below $1.0 million per quarter.
- Outlook: For One Earth and NuGen, management anticipated annual sales volumes of 260–280 million gallons of ethanol, 590,000–630,000 tons of dried distillers grains, 70–90 million pounds of corn oil, and 170,000–200,000 tons of modified distillers grains, assuming continued operations at or above historical levels. Planned production increases depend on market conditions, profitability and completion of expansion projects. REX expected $2–$3 million of additional capital spending in the remainder of fiscal 2017.
Risks, contingencies and investor verification points
Results remain exposed to volatility in corn, ethanol, distillers-grains, corn-oil and natural-gas prices; crush spreads may become inadequate and could lead to reduced or halted plant production. For the next 12 months, management estimated that a 10% adverse price move could reduce forecast revenue by approximately $47.8 million across ethanol, distillers grains and corn oil, increase grain costs by $32.1 million, and increase natural-gas costs by $2.0 million. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
- Confirm the reporting-period mismatch: the supplied filing is for October 31, 2017, not 2016 Q3.
- Verify refined-coal emissions qualification, expected tax-credit realization, and the preliminary acquisition valuation; credits are conditional and drive a substantial portion of reported earnings.
- Assess whether ethanol crush spreads and distillers-grains pricing recover, particularly in light of trade actions and the limited fixed-price coverage disclosed.
- Track operating cash flow, inventory accumulation, capital spending and plant repair costs; nine-month operating cash flow fell to $34.1 million from $41.4 million.
- Review the refined-coal segment’s continuing gross losses, utility-customer demand, related operating agreements and minority-investor funding arrangements.