REX American Resources Corporation — Form 10-Q Summary
Period clarification: The request metadata says “2017 Q1,” but the filing is for the quarter ended April 30, 2018 (REX fiscal 2018 first quarter), compared with the quarter ended April 30, 2017. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and key financial metrics
REX operates ethanol and by-products businesses and, following its August 2017 acquisition, a refined coal business. It also holds an equity-method investment in Big River Resources.
| Metric | Three months ended April 30, 2018 | Prior-year quarter |
|---|---|---|
| Net sales and revenue | $120.8 million | $113.1 million |
| Gross profit / margin | $10.9 million / 9.0% | $12.5 million / 11.0% |
| Income before income taxes | $7.6 million | $8.0 million |
| Income tax benefit (provision) | $2.7 million benefit | $2.4 million provision |
| Net income | $10.4 million | $5.6 million |
| Net income attributable to REX shareholders | $9.5 million; $1.45 per share | $4.5 million; $0.69 per share |
| Operating cash flow | $(3.5) million | $8.8 million |
| Capital expenditures | $3.1 million | $5.9 million |
At April 30, 2018, total assets were $476.6 million, current assets $239.9 million, current liabilities $19.8 million, and equity $433.3 million. Cash and cash equivalents were $64.2 million, with $111.5 million of short-term investments and $0.9 million of restricted cash. Working capital was approximately $220.1 million and the current ratio was 12.1 to 1. The company reported no borrowings on the revolving credit facilities; the facilities provide $10 million each to One Earth and NuGen and mature June 1, 2019.
Changes versus the prior comparable period
- Revenue increased $7.7 million, mainly from ethanol and by-products. Ethanol and by-products segment revenue rose to $120.7 million; refined coal contributed $0.1 million.
- Gross profit declined $1.6 million and margin fell two percentage points. Ethanol and by-products gross profit increased about $1.1 million, but refined coal recorded a $2.7 million gross loss.
- REX shareholder net income increased about $5.0 million, although pretax income was lower. The swing from a tax provision to a tax benefit materially affected the comparison.
- Operating cash flow shifted from $8.8 million provided to $3.5 million used, primarily amid increases in receivables and inventory. Investing cash outflow rose largely because the company bought $111.2 million of U.S. Treasury bills; financing included $8.6 million of share repurchases.
- REX bought approximately 126,000 shares during the quarter for an average $72.36 per share. About 529,000 shares remained authorized for repurchase at April 30, 2018.
Outlook, commentary, risks and unusual items
- Management expects One Earth and NuGen annual sales of 260–290 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, contingent on market conditions, plant profitability and operations.
- Management expected $6–$8 million of capital spending during the remainder of fiscal 2018. It was evaluating uses for excess cash, including investments and liquid short-term securities, and could repurchase shares under its authorization.
- REX expects refined coal operations to continue generating gross losses under current agreements, offset by federal Section 45 production tax credits. Credits are subject to emissions qualification and testing requirements and are expected to support the operation through November 2021. The filing cites an expected fiscal 2018 credit rate of $7.03 per ton.
- The estimated annual effective tax rate for fiscal 2018 was a tax benefit of approximately 25%–30%. The quarter’s reported effective rate was negative 35.3%; tax credits, the Tax Act’s lower federal rate, and expected research credits were cited as key drivers. Accounting for the Tax Act was not yet complete.
- Commodity prices and ethanol crush spreads are significant risks. At quarter-end, fixed-price contracts covered about 9% of forecast ethanol sales, 13% of distillers grains sales, 22% of corn oil sales, 11% of estimated corn use and 20% of estimated natural gas use for the next 12 months. The filing estimates that a 10% adverse price move could reduce annual revenue by $47.5 million across the three products, or increase annual costs by $34.1 million for corn and $1.8 million for natural gas, based on remaining forecast exposure.
- Other risks include weather, raw-material availability and cost, plant operating performance, policy or tax-law changes, and uncertainty in Big River’s commodity-sensitive results. Management reported no material legal proceedings, no material changes to the prior annual report’s risk factors, and effective disclosure controls.
- Operating cash flow was negative despite reported net income. The filing attributes much of the working-capital use to shipment and payment timing and raw-material purchasing. The refined coal segment’s reported profit also depends on tax credits despite its operating gross loss.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this summary covers the filing’s actual quarter ended April 30, 2018, not a 2017 quarter.
- Assess the sustainability of earnings excluding tax benefits and credits, particularly refined coal Section 45 credits and anticipated research credits.
- Track ethanol crush spreads, commodity prices, fixed-price contract coverage, and the operating performance of the ethanol plants.
- Monitor working-capital cash use, Treasury bill holdings, planned capital spending, and continued share repurchases.
- Review refined coal emissions qualification, utility demand, operating costs, and the timing and availability of expected tax credits.
- Consider the planned adoption of lease accounting effective February 1, 2019, which the company expected to materially affect its balance sheet.