REX American Resources Corporation — Form 10-Q summary
Period clarification: The request metadata says 2010 Q2, but the filing is for the quarter and six months ended July 31, 2011, compared with the corresponding 2010 periods. Fiscal 2011 is the year ending January 31, 2012. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
REX operates in alternative energy, principally ethanol and distillers grains, and real estate. It also earns equity-method income from ethanol affiliates. The company had exited retail operations; remaining service-contract administration and certain property results are reported as discontinued operations. Its statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $73.9 million, up 13.5% from $65.1 million | $155.1 million, up 13.7% from $136.4 million |
| Gross profit (loss) | $(0.3) million, versus $5.0 million; margin approximately (0.4)% versus 7.7% | $4.4 million, versus $13.4 million; margin 2.8% versus 9.8% |
| Net income attributable to REX shareholders | $2.3 million versus $1.2 million | $7.0 million versus $5.4 million |
| Basic earnings per share | $0.25 versus $0.13 | $0.74 versus $0.55 |
| Operating cash flow | Not separately provided in the filing excerpt | $12.9 million versus $16.0 million |
- Cash and cash equivalents were $96.4 million at July 31, 2011, compared with $91.0 million at January 31, 2011. Working capital was $96.6 million and the current ratio was 4.9, versus $101.3 million and 5.1 at year-end.
- Total reported debt was approximately $75.9 million, down from $81.0 million at January 31. Approximately $74.3 million was One Earth variable-rate debt; the filing says this debt is recourse only to One Earth. One Earth had no borrowings on its $10 million revolver and was covenant-compliant.
- Six-month investing activities provided $3.8 million; financing activities used $11.3 million, including debt payments, share repurchases, contingent-consideration payments and payments to noncontrolling holders.
- Equity-method investments totaled $74.5 million. Income from those investments was $3.8 million for the quarter and $9.5 million for the six months, compared with $1.1 million and $3.9 million, respectively.
Material changes and unusual items
- Higher ethanol and distillers-grains prices lifted revenue, but higher grain costs and weaker crush spreads reduced alternative-energy gross profit. The reported crush spread was approximately $0.16 per gallon for the quarter and negative $0.03 per gallon for the six months, versus $0.31 and $0.33 in 2010.
- Quarterly alternative-energy sales rose, but ethanol volume fell to about 23.6 million gallons from 34.4 million. The filing attributes the comparison partly to Levelland Hockley’s prior-year consolidation and partly to One Earth maintenance shutdown and power interruptions.
- REX recognized $2.9 million of synthetic-fuel investment income in the quarter, a final payment for past production; management said no further income was expected. This supported reported earnings and cash flow and is not presented as recurring.
- Real estate recorded a $1.153 million impairment charge related to a former distribution center, contributing to segment losses. The company reported 17 vacant former retail stores and additional vacant space at its distribution center.
- Levelland Hockley filed for Chapter 11 protection on April 27, 2011. REX’s investment carrying value was reported as zero; REX changed to cost-method accounting after concluding it no longer had significant influence.
- Interest-rate swaps had a $4.915 million fair-value liability at July 31; swap losses were $0.8 million for the quarter and $0.7 million for the six months. Swaps were not designated for hedge accounting.
Outlook, risks and contingencies
- Management said it believed working capital and credit availability were sufficient for commitments and operations over the next 12 months and foreseeable future. No formal earnings guidance was provided.
- Management estimated future annual production of approximately 100–115 million gallons of ethanol and 300,000–320,000 tons of distillers grains, assuming One Earth operates near nameplate capacity. Output depends on crush spreads and operating conditions. SG&A and interest expense were expected to remain near first-half levels, based on current conditions.
- Commodity prices and availability are key risks. REX’s sensitivity analysis estimated that a 10% adverse price change over the six-month volumes would reduce income by approximately $12.5 million for ethanol, $12.7 million for grain, and $0.7 million for natural gas. About 13% of forecast production and 15% of estimated corn usage for the next 12 months were under fixed-price contracts.
- Other stated risks include interest-rate changes, plant operating performance, weather, legislative changes, regional economic conditions and real estate market conditions. Management reported no material changes to the risk factors in its latest annual report and no legal proceedings believed likely to have a material adverse effect.
- One Earth had commitments for 5.3 million bushels of corn and sales commitments for 13.0 million gallons of ethanol and 46,000 tons of distillers grains, scheduled for delivery through August 2011. The company also disclosed approximately $3.0 million of unrecognized tax benefits, including accrued penalties and interest as presented in the tax note.
Investor verification priorities
- Confirm the reporting period: the filing covers Q2 and first-half fiscal 2011, not 2010 Q2.
- Assess whether weak crush spreads, including the negative first-half spread, persist and how they affect REX and its ethanol affiliates.
- Separate recurring earnings from the $2.9 million final synthetic-fuel payment and consider the effect of affiliate earnings and noncontrolling interests.
- Review One Earth’s debt, swap exposure, covenant status and the availability of cash: the filing reports $96.4 million consolidated cash but also substantial restricted assets at One Earth and affiliates.
- Monitor the Levelland Hockley Chapter 11 case, real estate occupancy and potential further impairment charges.