REX American Resources Corporation — Form 10-Q Summary
Reporting-period note: The request identifies “2017 Q3,” but the supplied filing is for the quarter ended October 31, 2018 (fiscal 2018 Q3), with comparisons to fiscal 2017 Q3. Figures below are in millions of dollars unless stated otherwise.
Business context and reporting period
REX operates ethanol and by-products businesses and a refined-coal business. Its ethanol segment includes majority-owned One Earth and NuGen and an equity-method investment in Big River. The refined-coal facility was acquired in August 2017. The filing covers the three and nine months ended October 31, 2018; financial statements are unaudited.
Financial performance and liquidity
| Metric | Fiscal 2018 Q3 | Fiscal 2017 Q3 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $123.8 | $121.2 | $373.3 | $343.1 |
| Gross profit | $7.7 | $14.9 | $28.0 | $38.1 |
| Gross margin | 6.3% | 12.3% | 7.5% | 11.1% |
| Income before taxes | $3.8 | $9.3 | $16.3 | $23.7 |
| Income-tax benefit | $10.0 | $5.7 | $18.3 | $1.0 |
| Net income attributable to REX shareholders | $11.9 | $13.2 | $30.6 | $20.7 |
| Diluted EPS | $1.86 | $2.00 | $4.73 | $3.13 |
- Cash flow: Nine-month operating cash flow was $28.9, down from $34.1. Investing used $21.8, including $8.0 of capital expenditures and net purchases of short-term Treasury investments; financing used $19.7, including $18.4 for share repurchases. Cash, cash equivalents and restricted cash ended at $178.7, versus $190.7 a year earlier.
- Cash and liquidity: At October 31, 2018, cash and cash equivalents were $178.2 and short-term investments were $14.9. Working capital was $227.8 and the current ratio was 12.6. The company reported no borrowings on its subsidiaries’ revolving facilities; each facility is $10.0 and matures June 1, 2019, as extended.
- Debt and equity: No outstanding revolving-loan borrowings were reported. Total liabilities were $27.7, comprising $19.6 current and $8.1 long-term. REX repurchased approximately 253,000 shares for $18.4 during the first nine months.
Material changes versus the prior comparable period
- Q3 revenue rose approximately 2%, but gross profit fell about $7.1 and gross margin declined from 12.3% to 6.3%. Management attributed the deterioration primarily to ethanol-segment results and a lower crush spread: about $0.13 per gallon versus $0.29 in the prior-year quarter.
- For the first nine months, revenue increased about 9%, while gross profit declined about $10.1. Ethanol and by-products gross profit fell $3.1, and refined-coal gross loss widened by $7.1.
- REX shareholder net income fell in Q3 despite a larger tax benefit, while nine-month shareholder net income rose. The nine-month comparison was substantially influenced by income-tax benefits, including refined-coal production tax credits and research credits; pretax income declined.
- Higher sales volumes and stronger dried distillers grains prices supported revenue, while ethanol prices were lower. Q3 ethanol selling price averaged $1.28 per gallon versus $1.45; dried distillers grains averaged $139.67 per ton versus $108.34.
Outlook, management commentary, risks and unusual items
- Management expects annual One Earth and NuGen sales of 270–300 million gallons of ethanol, 590,000–630,000 tons of dried distillers grains, 70–90 million pounds of corn oil, and 170,000–225,000 tons of modified distillers grains. These expectations depend on market conditions, plant profitability and efficient operations.
- The refined-coal operation is expected to continue generating gross losses under current agreements; management expects federal Section 45 tax credits to subsidize those losses. Credits are expected through November 2021, subject to emissions-reduction qualification and testing. Management cites a 2018 credit rate of $7.03 per ton.
- Commodity exposure is significant. For the next 12 months, none of forecast ethanol sales, about 14% of forecast distillers-grains sales, about 23% of forecast corn-oil sales, about 2% of estimated corn use and about 39% of estimated natural-gas use were fixed-price contracted. A 10% adverse price change could reduce annual revenue by $35.7 for ethanol, $8.6 for distillers grains and $1.6 for corn oil, or increase annual costs by $33.9 for corn and $1.3 for natural gas.
- The company reported a tax benefit of $18.3 for the first nine months and a negative effective tax rate, driven chiefly by expected refined-coal and research credits and the lower federal corporate tax rate. Unrecognized tax benefits increased; the filing reports approximately $6.6 at October 31 in one disclosure and $6.991 in the tax-position rollforward. Tax-credit realization and tax examinations remain relevant uncertainties.
- Other items to note: inventory was written down by approximately $0.4; the company had $30.972 of future minimum operating-lease rentals and expected adoption of the new lease standard to materially affect the balance sheet. Management reported no material adverse legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the filing period: the supplied 10-Q is fiscal 2018 Q3, not 2017 Q3.
- Assess whether weak crush spreads and commodity-price movements persist, and how much production remains exposed to spot prices.
- Verify the assumptions, qualification and timing behind refined-coal and research tax credits, including the increased uncertain-tax-benefit balance.
- Track refined-coal operating losses, emissions testing and the facility’s dependence on a single utility customer.
- Review the sustainability of operating cash flow, planned capital spending, share repurchases and the company’s use of excess cash.