REX American Resources Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2014 (fiscal Q2 and first half of fiscal 2014). The request metadata says “2013 Q2,” but the filing itself is for 2014. Financial statements are unaudited. REX operates in alternative energy, primarily ethanol and co-products, and real estate; its former retail business is reported as discontinued operations.
Financial performance
- Quarter revenue: $150.2 million, down 14% from $175.4 million. Gross profit rose to $38.8 million from $10.9 million; gross margin increased to 25.8% from 6.2%.
- Quarter earnings: Continuing-operations income was $26.7 million versus $6.6 million. Net income attributable to REX shareholders was $21.9 million, or $2.68 per diluted share, versus $5.8 million, or $0.71.
- Six-month revenue: $306.2 million, down from $353.8 million. Gross profit was $75.4 million versus $19.9 million, with gross margin of 24.6% versus 5.6%.
- Six-month earnings: Continuing-operations income was $50.9 million versus $10.4 million. Net income attributable to REX shareholders was $43.6 million, or $5.35 per diluted share, versus $9.3 million, or $1.14.
- Drivers: Lower ethanol and distillers-grains selling prices reduced revenue, but lower corn costs materially improved crush spreads and gross profit. Equity-method income from Big River and Patriot was $7.2 million for the quarter and $15.5 million for six months, up from $4.6 million and $6.2 million, respectively.
- Cash flow: Operating cash flow was $61.6 million for the first six months, compared with $8.5 million a year earlier. Investing used $2.1 million, including $3.4 million of capital expenditures; financing used $12.4 million, principally for debt payments. Cash increased to $152.2 million from $105.1 million at January 31.
- Liquidity and debt: Working capital was $142.0 million; the current ratio was 4.0:1. Debt was approximately $62.0 million, down from $75.7 million at January 31; $24.0 million was current and $38.0 million long term. The ethanol-subsidiary loans are secured by subsidiary assets and are nonrecourse to REX and its other subsidiaries. Both One Earth and NuGen were reported in covenant compliance.
Changes, outlook and risks
- Alternative-energy revenue fell as average ethanol prices declined to $2.18 per gallon from $2.38 in the quarter, while gallons sold slipped to 54.5 million from 55.7 million. Corn cost averaged $4.47 per bushel versus $7.15; the reported quarterly crush spread improved to $0.58 per gallon from negative $0.17.
- Management expected One Earth and NuGen to operate at or above nameplate capacity, subject to crush spreads, and gave annual production expectations of 200–230 million gallons of ethanol, 585,000–635,000 tons of dried distillers grains, 40,000–70,000 tons of modified distillers grains, and 40–50 million pounds of corn oil. These are expectations, not formal earnings guidance. Management forecast $4–$7 million of capital spending for the remainder of fiscal 2014 and said it expected liquidity to support operations and commitments for at least 12 months.
- In August 2014, One Earth and NuGen made $17 million of accelerated principal payments that had been expected within the following 12 months. REX reported that it expected an additional $6 million payment from each subsidiary during the next 12 months under excess-cash-flow provisions.
- Commodity exposure remains substantial: only about 1% of forecast ethanol sales, 16% of distillers-grains sales and 15% of corn-oil sales for the next 12 months were fixed-price contracted; about 3% of estimated corn use was fixed-price. A 10% adverse price move was estimated to reduce revenue by $54.8 million across the three products and increase corn costs by $31.6 million.
- China stopped issuing permits for U.S. dried distillers grains in June 2014 after finding a genetically modified organism not approved in China. Management could not estimate the market impact and warned that reduced exports could lower distillers-grains prices. Natural-gas costs also increased versus the prior-year period.
- Other risks include volatile commodity prices and crush spreads, plant operating performance, weather, regulatory or legislative changes, and real-estate market conditions. Management noted that operating results are volatile and interim results are not necessarily indicative of full-year results. No legal proceedings were identified as material.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request metadata: the filed period is July 31, 2014, not 2013.
- Track subsequent crush spreads, commodity prices and the effect of China’s import restrictions on distillers-grains sales and pricing.
- Review the timing and amount of subsidiary debt repayments, covenant compliance, and the availability of subsidiary cash; significant subsidiary assets and cash are subject to lender restrictions.
- Assess whether operating cash generation is repeatable: equity-method earnings, dividends received and working-capital movements contributed to the reported cash-flow result.
- Compare actual production, capital expenditures and future margins with management’s operating expectations and forecasts.