REX American Resources Corporation — Form 10-Q Summary
Period note: Although the request metadata identifies “2011 Q3,” this filing is for the quarter ended October 31, 2012 (fiscal 2012 Q3), and reports nine-month results through that date. Financial amounts below are in U.S. dollars; figures are in millions unless stated otherwise.
Business context and reporting period
REX reports alternative energy and real estate segments. Its alternative energy business includes ethanol production and investments in ethanol facilities; the former retail business is reported as discontinued operations. REX began consolidating NuGen in November 2011, so current-period results include NuGen’s operations while prior-year comparisons generally do not.
Key financial metrics
| Metric | Three months ended Oct. 31, 2012 | Three months ended Oct. 31, 2011 | Nine months ended Oct. 31, 2012 | Nine months ended Oct. 31, 2011 |
|---|---|---|---|---|
| Revenue | $179.0 | $84.5 | $483.1 | $239.5 |
| Gross profit | $3.6 | $9.0 | $16.1 | $13.5 |
| Gross margin | 2.0% | 10.7% | 3.3% | 5.6% |
| Income from continuing operations | $0.8 | $7.9 | $3.2 | $14.6 |
| Net income attributable to REX common shareholders | $0.4 | $6.5 | $2.1 | $13.5 |
| Basic net income per share | $0.05 | $0.70 | $0.26 | $1.44 |
| Operating cash flow | Not separately stated for the quarter | $13.2 | $22.5 |
At October 31, 2012, cash was $68.1, total assets $418.1, and working capital $89.1; the current ratio was 3.7 to 1. Cash declined $6.9 from January 31, 2012. Total debt on the balance sheet was approximately $108.6, down from $123.7 at January 31, 2012. Debt is primarily at One Earth and NuGen and is nonrecourse to REX; both subsidiaries reported covenant compliance. The $10 million revolving facilities at each subsidiary had no borrowings outstanding. Cash used in financing was $20.7, including $15.2 of debt payments and $3.8 of share repurchases.
Material changes versus the prior comparable period
- Revenue more than doubled in both the quarter and nine-month period, principally because NuGen was consolidated, increasing reported sales volumes. Ethanol represented 74% of alternative energy sales in the quarter; distillers grains and other products made up the remainder.
- Profitability weakened sharply despite higher sales. Quarterly gross profit fell to $3.6 from $9.0, and REX-attributable quarterly earnings fell to $0.4 from $6.5. For nine months, REX-attributable earnings fell to $2.1 from $13.5.
- Management attributed pressure on alternative energy results to lower crush spreads: approximately negative $0.46 per gallon in the quarter and negative $0.28 per gallon for the nine months, versus positive $0.18 and $0.05, respectively, in the prior-year periods. Lower income from equity-method investments also reduced results; NuGen’s earnings are now consolidated rather than recorded as equity income.
- Interest expense rose to $1.2 for the quarter and $3.7 for nine months, largely reflecting NuGen consolidation. The nine-month prior period included $2.9 of income from a final synthetic-fuel partnership payment, which will not recur.
Outlook, risks and unusual items
- Management expected One Earth and NuGen to support annual production of approximately 200–230 million gallons of ethanol and 580,000–620,000 tons of dried distillers grains, assuming near-nameplate operations and adequate crush spreads. This is an expectation, not formal earnings guidance.
- Management said it expected sufficient working capital and credit availability to fund operations for at least the next 12 months. It expected limited remaining-year capital spending and future interest expense and corporate costs broadly consistent with third-quarter levels.
- Commodity exposure is significant. Less than 1% of forecast ethanol sales and estimated corn usage for the next 12 months were fixed-price contracted; approximately 6% of distillers grains and 12% of corn oil sales were fixed-price contracted. The filing estimates a 10% adverse price move could reduce annual revenue by $45.9 for ethanol, $17.6 for distillers grains, and $1.3 for corn oil, while increasing annual corn costs by $55.7.
- Variable-rate debt was approximately $107.7, of which $38.8 was covered by an interest-rate swap. The filing estimates a 10% adverse interest-rate change would increase interest cost by approximately $298,000 over the debt term; swap fair value is also rate-sensitive.
- REX reported $2.5 of unrecognized tax benefits, including interest and penalties, and stated that approximately $82,000 of the reserve could benefit the effective tax rate if resolved favorably. Management said pending legal matters were not expected to have a material effect. The filing reported no material change to previously disclosed risk factors.
- Real estate remained a modest business: 12 former retail stores were vacant, and the former distribution center was partly leased, occupied, and vacant. The company continued marketing vacant properties for lease or sale.
Important facts for investors to verify
- Confirm the intended reporting period: the filing itself covers fiscal 2012 Q3, not 2011 Q3.
- Assess whether negative crush spreads and limited fixed-price contracting persist, and compare realized margins with management’s production assumptions.
- Review the debt amortization, balloon maturities, subsidiary covenant headroom, and restrictions on cash distributions to REX.
- Track equity-method investee performance and distinguish operating changes from the accounting effect of consolidating NuGen.
- Monitor tax-position developments, real estate vacancy and disposition activity, and the use of remaining share-repurchase authorization.