REX American Resources Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 31, 2012, and the six months then ended—not 2011 Q2. Dollar amounts below are in millions unless otherwise stated.
Business context and reporting period
REX operates alternative-energy and real-estate segments. Its alternative-energy business produces ethanol and related products and includes consolidated interests in One Earth and NuGen, plus equity-method investments in Big River and Patriot. REX exited retail operations in 2009; remaining extended-service-plan activity is reported as discontinued operations. NuGen has been consolidated since November 1, 2011, making year-over-year comparisons materially affected by its inclusion in current-period revenue and expenses.
Financial performance and position
| Metric | Three months ended July 31, 2012 | Three months ended July 31, 2011 | Six months ended July 31, 2012 | Six months ended July 31, 2011 |
|---|---|---|---|---|
| Revenue | $153.2 | $73.8 | $304.2 | $155.0 |
| Gross profit (loss) | $6.8 | ($0.2) | $12.3 | $4.5 |
| Gross margin | 4.4% | (0.3%) | 4.0% | 2.9% |
| Continuing-operations income before tax | $1.5 | $3.2 | $3.4 | $10.9 |
| Net income attributable to REX shareholders | $0.8 | $2.3 | $1.7 | $7.0 |
| Basic net income per share | $0.10 | $0.25 | $0.21 | $0.74 |
- Revenue growth was driven chiefly by NuGen’s consolidation: alternative-energy revenue rose to $152.8 million for the quarter and $303.4 million for the six months. Ethanol made up 76% and 77% of revenue, respectively, in those periods.
- Despite higher gross profit, pre-tax income and REX-attributable earnings declined. Equity-method results shifted from income of $3.8 million in the prior-year quarter and $9.5 million in the prior-year half-year to a $0.5 million loss and a $0.04 million loss, respectively. The prior-year periods also included $2.9 million of synthetic-fuel partnership income, which will not recur.
- Cash from operations was $3.5 million for the six months, versus $12.9 million a year earlier. Investing activities provided $0.6 million; financing activities used $15.1 million, including $11.0 million of debt payments and $2.5 million of share repurchases. Cash fell to $64.0 million from $75.0 million at January 31, 2012.
- At July 31, working capital was $90.4 million and the current ratio was 4.4:1. Total debt was approximately $112.8 million; most was alternative-energy subsidiary debt that is nonrecourse to REX parent. One Earth and NuGen reported compliance with applicable loan covenants and had no revolving-loan borrowings. Approximately $15.9 million of cash held at those plants was primarily for their working capital needs.
- Interest expense for the six months was $2.5 million, compared with $1.3 million, largely reflecting NuGen consolidation. The company reported $3.5 million of interest-rate-swap liabilities.
Changes, outlook, risks, and unusual items
- Management expected the plants to produce approximately 200–230 million gallons of ethanol and 580,000–620,000 tons of distillers grains in future periods, assuming One Earth and NuGen operate near nameplate capacity and market and operational conditions allow. This is an operating expectation, not formal earnings guidance.
- Management expected remaining fiscal 2012 plant capital spending of approximately $1–2 million. It also expected alternative-energy SG&A and interest expense in future quarters to be broadly consistent with the second quarter, based on current conditions and debt levels.
- Commodity prices and the ethanol “crush spread” are major risks. Only about 2% of forecast ethanol sales, 7% of distillers-grains sales, 3% of corn-oil sales, and 2% of estimated corn usage for the next 12 months were covered by fixed-price contracts. The filing estimates a 10% adverse price move could reduce annual revenue by about $60.1 million across the products, or raise corn costs by about $54.3 million.
- One Earth and NuGen had purchase commitments for 7.3 million bushels of corn through September 2012, and sales commitments through December 2012 for 59.8 million gallons of ethanol, 53,000 tons of distillers grains, and 1.3 million pounds of corn oil.
- Management warned that a waiver or reduction of Renewable Fuel Standard volume requirements could materially harm the ethanol business. Other cited risks include crop and commodity volatility, plant operating performance, weather, interest rates, and real-estate conditions.
- REX reported approximately $2.2 million of unrecognized tax benefits and $0.4 million of accrued penalties and interest. Management said pending legal matters were not expected to have a material effect. The Levelland Hockley plant sale and subsequent Chapter 7 conversion left REX with no remaining ownership or financial interest; its results are classified as discontinued operations.
- Management stated that it believed working capital and credit availability were sufficient for commitments and operations for the next 12 months. Interim results are unaudited and management cautioned they are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects NuGen consolidation rather than comparable operating improvement.
- Current crush spreads, plant utilization, and actual results against management’s production expectations.
- Developments in EPA consideration of Renewable Fuel Standard waivers and their potential effect on ethanol demand.
- Debt-service capacity, covenant compliance, maturity and refinancing exposure, and the amount of cash available outside operating subsidiaries.
- Performance and dividend capacity of Big River and Patriot, and the assumptions underlying commodity-price and tax exposures.