REX American Resources Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2023 (REX fiscal 2023 third quarter), not 2022 Q3. Comparisons below are with the quarter and nine months ended October 31, 2022. Amounts are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context and reporting period
REX operates in ethanol and by-products and reports one segment. At October 31, 2023, it held majority interests in One Earth Energy (75.8%) and NuGen Energy (99.7%), and a 10.3% equity-method interest in Big River Resources. One Earth’s and Big River’s results are included on a one-month reporting lag.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2023 | Three months ended Oct. 31, 2022 | Nine months ended Oct. 31, 2023 | Nine months ended Oct. 31, 2022 |
|---|---|---|---|---|
| Revenue | $221.1 | $220.3 | $645.8 | $654.8 |
| Gross profit | $39.3 | $9.3 | $67.8 | $35.3 |
| Gross margin | 17.8% | 4.2% | 10.5% | 5.4% |
| Net income attributable to REX shareholders | $26.1 | $3.2 | $40.4 | $19.5 |
| Diluted EPS | $1.49 | $0.18 | $2.31 | $1.10 |
- For the first nine months, operating cash flow was $67.2 million, versus $54.0 million a year earlier. Capital expenditures were $22.4 million. Investing activities used $63.3 million, including net purchases of short-term investments; financing activities used $0.7 million.
- At October 31, cash and cash equivalents were $72.8 million, restricted cash was $1.7 million, and short-term U.S. Treasury investments were $259.2 million. Current assets were $418.1 million and current liabilities $48.7 million; working capital was $369.4 million and the current ratio was 8.6:1.
- The balance sheet reports no borrowings. Operating lease liabilities totaled $14.2 million, including $5.1 million current and $9.2 million long-term.
- Total assets were $627.6 million and total equity was $565.5 million. The company held $36.8 million in its Big River equity-method investment.
Material changes versus the prior comparable period
- Third-quarter revenue was nearly flat, while nine-month revenue declined about 1%. Ethanol sales volume increased, but lower average selling prices weighed on revenue. For the quarter, ethanol gallons sold rose 10% while average price fell 7%.
- Gross profit rose by approximately $30.0 million in the quarter and $32.5 million for the nine-month period. Management attributed the improvement mainly to lower corn and natural-gas costs, partially offset by higher corn usage. Third-quarter corn derivative gains also contributed: $10.6 million, compared with approximately $9,000 in the prior-year quarter.
- Quarterly net income attributable to REX shareholders increased to $26.1 million from $3.2 million; the nine-month figure rose to $40.4 million from $19.5 million. Improved plant margins and higher Big River equity income contributed. Higher SG&A, including performance bonuses and stock awards, partly offset the gains.
- Short-term investments increased from $211.3 million at January 31, 2023, to $259.2 million at October 31, 2023. The Treasury bills had maturities under one year and a reported yield to maturity of approximately 5.5%, versus 3.9% at January 31.
- Capital expenditures were higher than in the prior-year nine-month period ($22.4 million versus $7.2 million), principally reflecting plant projects and carbon sequestration work.
Outlook, commentary, risks and unusual items
- Projects: REX expects One Earth’s carbon capture and sequestration facility construction to be completed by July 31, 2024, followed by testing. It plans to increase permitted ethanol capacity from 150 million to 175 million gallons annually, targeted for late 2024. These schedules depend on permits and approvals; the company gave no assurance of success.
- Investment and spending plans: If approvals are obtained, the company estimates total project costs of approximately $165 million, funded from available cash. It reported $16.0 million spent to date and $31.2 million of remaining contractual commitments for sequestration; plant expansion and carbon-intensity work had $8.5 million spent and $6.9 million of commitments. Management planned $40–$50 million of project spending for the remainder of fiscal 2023.
- Industry risks: Results are sensitive to corn, ethanol, distillers grains, corn oil and natural-gas prices and availability, as well as the crush spread, plant operations, logistics, weather, regulation and trade. Management said plants may reduce or stop production if margins are inadequate. Forward sales generally extend no more than four months, limiting visibility.
- Policy and project uncertainty: EPA renewable-fuel requirements, small-refinery exemptions and implementation of Inflation Reduction Act credits may affect results. Potential 45Q and 45Z credits depend on project success and applicable requirements; the full IRA impact was not yet determinable.
- Tax and legal matters: REX reported approximately $19.1 million of unrecognized tax benefits and is undergoing a federal tax examination for fiscal years ended January 31, 2015 through 2020. It maintained a $250,000 accrual for a patent-infringement contingency related to a discontinued refined-coal facility. Management stated current legal proceedings were not expected to have a material adverse effect.
- Derivative exposure: The company uses commodity contracts to manage exposure, but does not apply hedge accounting, so fair-value changes affect current earnings. Its market-risk sensitivity analysis estimated that a 10% adverse price change could reduce pretax income over the following 12 months by $49.4 million for ethanol and $44.6 million for corn, among other exposures, assuming normal operating capacity.
- The filing provides project and capital-spending plans, but no formal earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the reporting-period label: this filing covers fiscal 2023 Q3, ended October 31, 2023, despite the request metadata referring to 2022 Q3.
- Track realized crush spreads, commodity prices, plant volumes and whether the recent margin improvement persists; earnings were materially affected by commodity costs and derivatives.
- Monitor permits, construction progress, total cost and funding for the carbon sequestration and plant-expansion projects, including eligibility and implementation of 45Q/45Z credits.
- Review the status and potential outcome of the IRS examination and the approximately $19.1 million of unrecognized tax benefits.
- Assess cash deployment plans: project spending, potential investments and the remaining authorization to repurchase 876,786 shares.
REX said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.