Business Context and Reporting Period
Company: REX American Resources Corp.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2011 (Fiscal Year 2010)
Business Overview: REX has transitioned from a specialty retailer of consumer electronics and appliances to an alternative energy investment company. The company completed its exit from the retail business in July 2009; remaining retail activities (extended service plans) are classified as discontinued operations. Current operations focus on investments in ethanol production entities and real estate leasing.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net Sales and Revenue | $301,674 | $170,088 |
| Gross Profit | $30,374 | $20,708 |
| Net Income (Attributable to REX) | $5,069 | $8,652 |
| EPS (Diluted) | $0.52 | $0.91 |
| Operating Cash Flow | $27,921 | $10,978 |
| Total Assets | $375,722 | $451,505 |
| Long-Term Debt | $70,973 | $126,689 |
| Cash and Equivalents | $91,019 | $100,398 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 77.4% to $301.7 million, driven primarily by a full year of production at the consolidated subsidiary One Earth Energy, LLC, and increased ethanol sales volume.
- Profitability Decline: Net income attributable to shareholders decreased 41.4% to $5.1 million. This decline was primarily due to a $18.4 million pre-tax charge related to the impairment of notes receivable and the deconsolidation of Levelland Hockley County Ethanol, LLC.
- Deconsolidation: Effective January 31, 2011, REX sold a portion of its interest in Levelland Hockley, reducing ownership to 49%. Consequently, Levelland Hockley was deconsolidated, and the remaining investment was written down to $0 fair value.
- Debt Reduction: Long-term debt decreased significantly by approximately $55.7 million due to scheduled repayments and early payoffs of mortgage debt.
- Segment Performance: Alternative energy segment profit was $13.4 million (down from $17.8 million in 2009). The real estate segment reported a loss of $1.0 million.
Guidance, Outlook, and Risks
- Outlook: Management expects future operating results to be based on annual production of 100 to 115 million gallons of ethanol, assuming One Earth operates near nameplate capacity. However, results are highly sensitive to the "crush spread" (difference between ethanol and grain prices).
- Market Conditions: Crush spreads declined in early 2011, at times becoming negative. The Levelland Hockley plant ceased production in January 2011 due to low margins and inability to source affordable grain.
- Key Risks:
- Commodity Volatility: Returns are highly dependent on corn, sorghum, ethanol, and natural gas prices.
- Legislative Risk: The industry relies on federal tax incentives (Blender's Credit) and Renewable Fuel Standards (RFS), which are subject to expiration or modification.
- Debt Covenants: Ethanol subsidiaries have restrictive debt covenants; failure to meet these could trigger defaults.
- Real Estate: The company holds 22 vacant former retail properties and a partially vacant distribution center, which may require impairment charges if not leased or sold.
Investor Verification Checklist
- Levelland Hockley Write-off: Verify the $18.4 million impairment charge and the rationale for the $0 fair value assessment of the remaining investment.
- Crush Spread Sensitivity: Monitor the spread between ethanol and corn prices, as a sustained decline could force production shutdowns at other facilities.
- Debt Maturities: Review the $81 million in long-term debt obligations, noting that a significant portion matures within five years and is subject to variable interest rates.
- Real Estate Disposal: Track progress on leasing or selling the 22 vacant former retail properties to avoid further impairment charges.
- One Earth Restrictions: Note that approximately $18.4 million of cash is held by One Earth and is restricted from dividend distribution due to debt covenants.