REX American Resources Corporation (NYSE: REX) — Form 10-K Summary
Period clarification: Although the request specifies “2018 Q4,” this filing is the annual report for the fiscal year ended January 31, 2020. The company calls this fiscal year 2019. The filing also reports the quarter ended January 31, 2020, summarized below.
Business context and reporting period
REX invests in ethanol and by-products production and operates a refined-coal business. Its ethanol interests include majority-owned One Earth Energy and NuGen, plus a minority equity-method investment in Big River Resources. The filing reports two segments: ethanol and by-products, and refined coal.
Financial performance and liquidity
| Metric | FY ended Jan. 31, 2020 | FY ended Jan. 31, 2019 |
|---|---|---|
| Net sales and revenue | $418.0 million | $486.7 million |
| Gross profit | $12.5 million; 3.0% margin | $30.2 million; 6.2% margin |
| Income (loss) before taxes | ($1.2) million | $14.6 million |
| Income tax benefit | $12.8 million | $22.9 million |
| Net income attributable to REX shareholders | $7.4 million; $1.18 per diluted share | $31.6 million; $4.91 per diluted share |
| Cash provided by operating activities | $10.3 million | $47.9 million |
- FY 2020 revenue declined 14.1% year over year. Ethanol-segment gross profit fell to $20.4 million from $43.9 million; refined coal recorded a $7.9 million gross loss.
- Ethanol and by-products gross margin was 4.9%, versus 9.0% in the prior year. The reported crush spread was approximately $0.05 per gallon, compared with $0.09.
- At January 31, 2020, cash and cash equivalents were $179.7 million and short-term investments were $26.1 million. Current assets were $271.1 million and current liabilities $31.6 million, implying working capital of about $239.5 million.
- The balance sheet reports no borrowings. It includes operating-lease liabilities of $15.6 million; total liabilities were approximately $46.9 million. Total REX shareholders’ equity was $401.0 million.
- Operating cash flow declined substantially, with inventory increasing $17.2 million, partly offset by an $11.4 million increase in accounts payable. Capital expenditures were $3.8 million. The company used $4.0 million in financing activities and ended the year with $180.8 million in cash, cash equivalents and restricted cash.
- The $12.8 million tax benefit materially supported net income, including about $9.0 million of Section 45 refined-coal tax credits. The company reported $36.2 million of general business credit carryforwards.
Material changes and latest quarter
- Lower ethanol margins, higher corn costs and constrained local corn availability reduced production and sales volumes, particularly at NuGen. Consolidated ethanol gallons sold fell 17.7% to 235.3 million.
- Average ethanol selling price rose to $1.37 per gallon from $1.29, but average grain cost rose to $3.82 per bushel from $3.46. Sales volumes of dried and modified distillers grains and corn oil also declined.
- Refined-coal sales fell to $0.3 million from $0.8 million, reflecting lower demand from its sole customer. The segment’s smaller pre-tax loss also meant lower tax credits and lower segment profit.
- For the quarter ended January 31, 2020, revenue was $120.9 million, gross profit $6.6 million, net income $6.2 million, net income attributable to REX shareholders $4.4 million and EPS $0.70. The comparable prior-year quarter reported revenue of $113.3 million, gross profit of $2.2 million, attributable net income of $1.1 million and EPS of $0.17.
Outlook, risks and unusual items
- After year-end, COVID-19 and historically low ethanol prices led REX to idle both One Earth and NuGen. Management said the duration and demand effects were not reasonably estimable; prolonged stoppages could materially harm FY 2020 results, financial condition and cash flows.
- Management forecast FY 2020 capital expenditures of approximately $10–15 million, subject to unexpected needs. It said subsidiary cash and working capital were expected to meet operating and capital requirements, but noted forecasts could be undermined by COVID-19 or other adverse changes.
- Refined-coal credits are available only subject to statutory and emissions requirements and are expected to end in November 2021. The operation depends on one customer and a third-party operator; management expects to cease operations by the credit-program deadline.
- Major risks include commodity price and crush-spread volatility, corn supply and local basis, ethanol demand and EPA small-refinery waivers, customer concentration, transportation interruptions, environmental and regulatory requirements, and the ability to use tax credits. Eight customers represented approximately 85% of FY 2020 sales.
- REX recorded approximately $1.3 million of inventory write-downs. It reported $7.4 million of unrecognized tax benefits and related interest and penalties were approximately $17,000. Management said current legal proceedings were not expected to have a material effect and recorded no legal-contingency liabilities.
- The adoption of lease accounting standard ASC 842 increased reported assets and liabilities by approximately $20.9 million at adoption, without a material impact on FY 2020 operating results. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether the plants resumed production, and the subsequent effects of COVID-19 on ethanol prices, demand, volumes and liquidity.
- Current corn availability, local basis and crush spreads, along with the status and economic impact of EPA small-refinery waivers and RFS requirements.
- Refined-coal customer demand, emissions-test compliance, tax-credit utilization and the timing and costs of shutting down by November 2021.
- The recoverability and timing of use of the $36.2 million tax-credit carryforward, and any changes in uncertain tax positions.
- Cash availability at the parent versus operating subsidiaries, restrictions on distributions from Big River, and actual capital spending against the $10–15 million forecast.