Business context and reporting period
REX American Resources Corporation filed this unaudited Form 10-Q for the three months ended April 30, 2017, its fiscal 2017 first quarter, with comparison to the three months ended April 30, 2016. This differs from the “2016 Q1” period in the request metadata. REX operates in alternative energy and has majority-owned ethanol subsidiaries One Earth and NuGen, plus an equity-method investment in Big River. One Earth’s results are reported on a one-month lag.
Key financial metrics
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales and revenue | $113.1 | $100.2 |
| Gross profit / gross margin | $12.5 / 11.0% | $8.4 / 8.4% |
| Income before taxes | $8.0 | $5.0 |
| Net income | $5.6 | $3.5 |
| Net income attributable to REX shareholders | $4.5 | $2.8 |
| Diluted earnings per share | $0.69 | $0.43 |
| Cash from (used in) operating activities | $8.8 | $(5.7) |
| Capital expenditures | $5.9 | $4.5 |
At April 30, 2017, cash and cash equivalents were $191.5 million, current assets $229.4 million, current liabilities $22.9 million, and working capital approximately $206.5 million. The current ratio was 10.0 to 1. The balance sheet reports no borrowings; One Earth’s and NuGen’s $10 million revolving facilities had matured April 1, 2017, with no outstanding balances during the quarter. Management expected to seek renewal in Q2. Future minimum operating-lease rentals totaled $25.9 million. Total assets were $459.4 million and total equity was $393.9 million.
Material changes versus the prior comparable period
- Revenue rose about 12.9%; ethanol revenue increased to $91.5 million from $77.6 million, reflecting both higher sales volume (63.3 million versus 58.7 million gallons) and higher average price ($1.44 versus $1.32 per gallon).
- Gross profit increased about $4.1 million. Management attributed the improvement mainly to a higher ethanol crush spread, approximately $0.23 per gallon versus $0.10.
- Dried distillers grains revenue declined to $15.1 million from $17.1 million as the average price fell to $100.06 from $125.29 per ton, partly offset by higher volume. Management cited uncertainty and Chinese duties on U.S. imports.
- SG&A increased to $5.4 million from $4.0 million, mainly due to rail-car repair and lease costs, professional fees, and incentive compensation.
- Equity-method income increased to $0.7 million from $0.2 million. The prior-year quarter also included a $0.2 million gain on sale of an investment; none was recorded in Q1 2017.
- Operating cash flow improved by $14.4 million, aided by net income and a reduction in receivables; inventory purchases used $3.4 million of cash in Q1 2017.
Outlook, risks, contingencies and unusual items
- Management expects One Earth and NuGen annual sales of 250–275 million gallons of ethanol, 580,000–640,000 tons of dried distillers grains, 65–75 million pounds of non-food-grade corn oil, and 160,000–180,000 tons of modified distillers grains, assuming plants operate near historical levels and market conditions support production.
- Management planned $15–25 million of additional capital spending during the remainder of fiscal 2017, principally for plant projects. It also cited plant debottlenecking and gradual capacity increases, dependent on industry conditions, profitability, and project completion.
- Commodity-price volatility is a central risk. For the next 12 months, the filing estimates that a 10% adverse price move could reduce revenue by about $48.6 million across forecast ethanol, distillers grains, and corn-oil sales; a 10% increase in corn or natural-gas prices could increase cost of goods sold by about $33.1 million or $2.3 million, respectively. Fixed-price coverage was limited: none of forecast ethanol sales, about 7% of distillers-grains sales, 19% of corn-oil sales, 1% of corn usage, and none of natural-gas usage.
- Management expects an effective tax rate of approximately 28%–32%; the reported Q1 2017 rate was 29.9%. Unrecognized tax benefits were approximately $2.0 million at quarter-end, with accrued penalties and interest of approximately $0.2 million.
- The filing reports no material legal proceedings or material changes to the prior annual-report risk factors. Management said the quarter’s financial statements include normal recurring adjustments; interim results are not necessarily indicative of full-year results.
- Management is evaluating uses for excess cash, including plant expansion and other investment opportunities. The company had authorization to repurchase approximately 155,000 additional shares and paid no dividends.
- The filing’s commitments disclosures appear inconsistent on delivery timing: Note 13 says distillers-grains and corn-oil commitments run through June 2017, while the later market-risk discussion says delivery of those products runs through December 2017. Verify the applicable dates.
Important facts for investors to verify
- Confirm the applicable reporting period: this filing covers fiscal Q1 2017, ended April 30, 2017, not Q1 2016.
- Assess current and forward crush spreads, commodity prices, and the limited fixed-price coverage underlying the sensitivity estimates.
- Verify the status and terms of renewal of the One Earth and NuGen revolving credit facilities, which had matured with no borrowings reported.
- Review the planned capital spending and plant-capacity projects against operating performance and available cash.
- Reconcile the differing commitment-delivery dates in the filing and assess the Chinese trade duties’ continuing effect on distillers-grains pricing.