SEC Filing Summary: REX Stores Corporation (10-Q)
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended July 31, 2009 (the second quarter of fiscal year 2009). REX Stores Corporation is transitioning from a specialty retailer to an alternative energy and real estate investment firm. The company has substantially completed the exit of its retail business as of July 31, 2009, shifting focus to its alternative energy segment (ethanol production) and real estate portfolio.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended July 31, 2009 | Six Months Ended July 31, 2009 |
|---|---|---|
| Net Sales and Revenue | $21,477 | $46,926 |
| Gross Profit | $3,565 (16.6% margin) | $7,410 (15.8% margin) |
| Net Income (Loss) Attributable to REX | $837 | $(894) |
| Diluted EPS (Attributable to REX) | $0.09 | $(0.10) |
| Cash and Cash Equivalents | $84,103 | $84,103 |
| Total Debt (Current + Long-term) | $141,829 | $141,829 |
| Working Capital | $79,669 | $79,669 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 48.9% in the quarter and 23.4% in the six-month period compared to the prior year. This is primarily due to the wind-down of the retail segment, which saw sales drop from $17.2 million to $4.3 million in the quarter.
- Profitability Shift: While the retail segment generated a profit of $2.2 million in the quarter (up from $0.5 million) due to significant cost reductions, the alternative energy segment reported a loss of $0.6 million compared to a profit of $1.0 million in the prior year. This was driven by lower ethanol selling prices and losses on derivative instruments.
- Segment Realignment: The company realigned reporting segments to separate Real Estate from Retail. The Real Estate segment reported a gross loss of $0.2 million in the quarter due to expenses associated with vacant properties following lease amendments with Appliance Direct.
- Derivative Losses: The company recognized a loss of $0.1 million on derivative financial instruments in the quarter, compared to a gain of $1.0 million in the prior year quarter.
Outlook, Risks, and Management Commentary
- Operational Status: The One Earth ethanol plant began limited production in the second quarter and is expected to be fully operational in the third quarter of fiscal 2009. Levelland Hockley remains in full production.
- Debt Covenants: Levelland Hockley amended its loan agreement in September 2009 to adjust covenants and waive defaults occurring prior to July 1, 2009. Management believes the subsidiary will maintain compliance for the next twelve months.
- Liquidity: The company maintains a strong liquidity position with $84.1 million in cash. Working capital is $79.7 million, with a current ratio of 3.3 to 1.
- Risks: Key risks include the volatility of ethanol and grain prices, the uncertainty of constructing ethanol plants on time and budget, and the impact of legislative changes on the alternative energy sector. There is also ongoing litigation regarding water treatment equipment at Levelland Hockley, though a settlement is being negotiated.
- Restructuring: The company recorded restructuring charges of approximately $3.0 million in the first six months of 2009 related to lease termination costs. However, it also recognized benefits of $1.3 million due to adjustments in severance and transaction costs.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the specific terms of the September 2009 amendment to the Levelland Hockley loan agreement and the company's projected EBITDAR to ensure continued compliance.
- One Earth Production Ramp-up: Confirm the timeline and capital requirements for One Earth to reach full operational capacity in the third quarter of fiscal 2009.
- Real Estate Vacancy: Assess the strategy and timeline for leasing or selling the 25 vacant owned properties, which are currently contributing to segment losses.
- Derivative Exposure: Review the notional amounts and fair value of interest rate swaps ($113.2 million notional) and their potential impact on future earnings given interest rate fluctuations.
- Discontinued Operations: Monitor the finalization of the retail exit, specifically the resolution of extended service plan liabilities and the sale of remaining real estate assets.