Business Context and Reporting Period
Company: REX Stores Corporation (filing as REX American Resources Corp in metadata)
Reporting Period: Quarterly period ended April 30, 2010 (First Quarter of Fiscal Year 2010).
Business Overview: The Company operates in two primary segments: Alternative Energy and Real Estate. It substantially completed the exit of its former retail business in the second quarter of fiscal 2009; remaining retail-related activities (extended service plans) are classified as discontinued operations. The Alternative Energy segment includes consolidated ethanol plants (Levelland Hockley and One Earth) and equity method investments in other ethanol facilities.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales and Revenue | $71.3 million | $14.2 million |
| Gross Profit | $8.1 million (11.4% margin) | $0.3 million (2.3% margin) |
| Net Income (Total) | $5.6 million | ($2.4) million loss |
| Net Income (Attributable to REX) | $4.2 million | ($1.7) million loss |
| Diluted EPS (Attributable to REX) | $0.42 | ($0.19) |
| Operating Cash Flow | $13.8 million | $10.4 million |
| Cash and Equivalents (Ending) | $101.4 million | $85.9 million |
| Total Debt (Approx. Fair Value) | $125.0 million | $138.4 million |
| Working Capital | $94.9 million | $101.2 million (Jan 31, 2010) |
Material Changes vs. Prior Period
- Revenue Surge: Net sales increased $57.1 million (401%) year-over-year, driven primarily by the Alternative Energy segment ($56.9 million increase). This is largely due to One Earth Energy becoming fully operational in the prior year's third quarter, allowing for full production in Q1 2010.
- Profitability Turnaround: The Company reported a net income of $4.2 million attributable to shareholders compared to a net loss of $1.7 million in the prior year. This shift was driven by improved "crush spreads" (the margin between ethanol sales and grain costs) and increased production volumes.
- Equity Investment Income: Income from equity method investments (Big River and Patriot) turned from a $0.3 million loss in Q1 2009 to a $2.8 million gain in Q1 2010.
- Discontinued Operations: Income from discontinued operations improved from a $0.5 million loss to a $0.7 million gain, attributed to the recognition of deferred income on extended service plans and the absence of unprofitable retail operations.
- Interest Expense: Increased from $0.9 million to $1.4 million due to higher average debt outstanding following the completion of the One Earth plant construction.
Guidance, Outlook, and Risks
- Outlook: Management expects ethanol plants to produce approximately 2.8 gallons of ethanol per bushel of grain. Future sales are projected based on production of 130 to 140 million gallons of ethanol annually, assuming plants operate near nameplate capacity.
- Commodity Risk: Operations are highly dependent on the "crush spread." Management notes that if the spread declines, plants may operate at negative margins or be shut down to minimize costs. They cannot predict future income or loss due to commodity price volatility.
- Interest Rate Risk: The Company uses interest rate swaps to manage variable rate debt. A swap for Levelland Hockley expired in April 2010, leaving approximately $36.1 million of debt exposed to floating rates (LIBOR + 400 bps). Declining interest rates result in losses on the remaining swaps.
- Real Estate: The Real Estate segment reported a loss of $0.4 million due to expenses associated with vacant former retail properties. Management is actively marketing these properties for lease or sale.
- Liquidity: The Company believes it has sufficient working capital and credit availability to fund operations for the next 12 months. No dividends are currently paid.
Investor Verification Checklist
- Crush Spread Volatility: Verify current market prices for corn/sorghum versus ethanol and distillers grains to assess the sustainability of the Q1 2010 gross margins.
- Debt Covenants: Confirm continued compliance with financial covenants (EBITDAR, debt service coverage) for Levelland Hockley and One Earth subsidiaries.
- Real Estate Disposition: Monitor progress on leasing or selling the 30+ vacant former retail properties to reduce the Real Estate segment's operating losses.
- Interest Rate Exposure: Assess the impact of rising LIBOR rates on the $36.1 million of Levelland Hockley debt that is no longer hedged following the April 2010 swap expiration.
- Equity Method Investments: Review the operational status and financial health of Big River Resources and Patriot Renewable Fuels, which contributed significantly to the quarter's income.