REX American Resources Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended October 31, 2011, and the nine months then ended. This differs from the request metadata’s “2010 Q3.” The financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and reporting period
REX had exited its retail business and reported two segments: alternative energy, primarily ethanol investments and operations, and real estate. It continued to report legacy retail service-plan activity as discontinued operations. On November 1, 2011, after quarter-end, REX acquired control of NuGen and began consolidating it.
Financial performance and position
| Metric | Three months ended October 31, 2011 | Nine months ended October 31, 2011 |
|---|---|---|
| Net sales and revenue | $84.5 million, versus $70.3 million | $239.5 million, versus $206.5 million |
| Gross profit and margin | $9.0 million; 10.6%, versus $7.0 million; 9.9% | $13.3 million; 5.6%, versus $20.5 million; 9.9% |
| Income from continuing operations, including noncontrolling interests | $7.8 million, versus $4.5 million | $14.5 million, versus $10.3 million |
| Net income attributable to REX shareholders | $6.5 million, or $0.70 diluted per share, versus $4.3 million, or $0.44 | $13.5 million, or $1.43 diluted per share, versus $9.7 million, or $0.98 |
| Operating cash flow | Not separately provided for the quarter | $22.5 million, versus $18.2 million |
For the nine-month period, equity-method income rose to $15.8 million from $7.6 million. Interest expense declined to $1.9 million from $4.1 million, primarily because Levelland Hockley was no longer consolidated. The current year included a one-time $2.9 million synthetic-fuel payment; REX said no further income from that investment was expected.
At October 31, cash and cash equivalents were $86.8 million, compared with $91.0 million at January 31. Working capital was $84.3 million, down from $101.3 million; the current ratio was 4.4, versus 5.1. Total assets were $356.6 million and total equity was $263.6 million. Debt was approximately $72.8 million at fair value; One Earth had about $71.7 million outstanding on its term loan, with no borrowings on its $10 million revolver. The One Earth loan was nonrecourse to REX and its wholly owned subsidiaries, and One Earth was in compliance with its covenants.
Nine-month investing activities provided $5.6 million, including proceeds from real estate and equipment sales and the final synthetic-fuel payment. Financing activities used $32.4 million, including $8.2 million of debt payments and $21.2 million for treasury stock purchases. Cash declined by $4.3 million during the period.
Material changes versus the prior comparable periods
- Quarterly revenue grew 20%, mainly from higher alternative-energy sales prices. Nine-month revenue grew 16%.
- Quarterly gross profit improved, but nine-month gross profit fell 35%; the alternative-energy crush spread was approximately $0.05 per gallon for the nine months, compared with $0.35 a year earlier.
- Higher ethanol and distillers-grains selling prices were partly offset by sharply higher grain costs. Average grain cost was $6.89 per bushel for the nine months, versus $3.70.
- Equity-method income increased, including higher contributions from NuGen; the prior-year comparison included only three months of NuGen income.
- REX repurchased 1,249,801 shares for $21.2 million during the first nine months. At October 31, 218,243 shares remained authorized for repurchase.
Outlook, risks, contingencies, and unusual items
Management said it had sufficient working capital and credit availability for operations and commitments over the next 12 months. Following the NuGen transaction, REX expected annual production of approximately 200–230 million gallons of ethanol and 600,000–640,000 tons of distillers grains, assuming One Earth and NuGen operated at or near nameplate capacity. Management cautioned that actual output depends on crush spreads and operating conditions. It expected consolidated selling, general and administrative expense and interest expense to increase with NuGen’s consolidation.
The November 1 NuGen transaction gave REX 100% voting control and a 97.55% equity interest. REX paid $12.678 million, including settlement of remaining contingent consideration, and contributed a further $7 million to reduce NuGen debt. NuGen refinanced with a $55 million term loan and a $10 million revolver; the debt is secured by NuGen assets and is nonrecourse to REX. Purchase accounting and valuation of the acquired assets, liabilities, and REX’s previously held interest remained under analysis.
Key risks include volatile corn, ethanol, distillers-grains, natural-gas, and interest rates; short-duration commodity contracting; and real-estate market conditions. Management reported that a hypothetical 10% adverse price change in the nine-month sensitivity analysis would affect income by approximately $19.5 million for ethanol, $19.0 million for grain, $4.3 million for distillers grains, and $1.0 million for natural gas. REX also disclosed that only about 4% of forecast production and 5% of estimated corn usage for the next 12 months were covered by fixed-price contracts. Legal matters were described as arising in the ordinary course and not expected to have a material effect. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether the post-quarter NuGen acquisition and refinancing, including purchase accounting and covenant compliance, affect reported earnings, debt, and liquidity as expected.
- Whether ethanol crush spreads and commodity prices support projected plant utilization and margins; nine-month gross margin declined materially year over year.
- How much of REX’s cash is available to the parent, given restrictions on subsidiary assets and distributions.
- Whether One Earth’s planned corn-oil extraction investment and any further noncontrolling-interest payments change capital needs.
- The effects of continuing share repurchases and the remaining authorization on cash levels and share count.