REX AMERICAN RESOURCES Corp annual report, FY2018

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REX American Resources Corporation — FY2018 Form 10-K

Reporting period: Fiscal year ended January 31, 2019 (February 1, 2018–January 31, 2019), not calendar 2017 Q4 as stated in the request metadata. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless noted.

Business context

REX is an energy holding company with investments in ethanol and by-products and refined coal. It consolidates majority-owned ethanol businesses One Earth and NuGen, holds a minority equity-method investment in Big River, and owns a majority interest in a refined coal operation acquired in August 2017. Ethanol results are highly exposed to corn, ethanol, distillers grains, corn oil, and natural gas prices.

Financial performance and liquidity

  • Revenue: $486.7 million, up 7.5% from $452.6 million. Higher ethanol and by-products sales drove the increase.
  • Profit and margins: Gross profit was $30.2 million (6.2% of revenue), down from $44.2 million (9.8%). Income before taxes fell to $14.6 million from $25.4 million. Net income was $37.5 million; net income attributable to REX common shareholders was $31.6 million, or $4.91 per diluted share, compared with $39.7 million, or $6.02 per share.
  • Cash flow: Operating cash flow was $47.9 million, versus $41.0 million. Capital expenditures were $10.8 million. Cash, cash equivalents and restricted cash totaled $188.8 million at year-end; the balance sheet separately reported $188.5 million of cash and $15.0 million of short-term investments.
  • Liquidity and debt: Current assets were $250.6 million and current liabilities $17.0 million. REX reported no parent or consolidated subsidiary borrowings. One Earth and NuGen each had a $10 million revolving facility, with no amounts drawn at year-end; both facilities matured June 1, 2019. Big River’s debt agreements restrict distributions, and REX reports that approximately 4.9% of its net assets were restricted through its equity-method investment.
  • Capital returns: REX repurchased about 305,000 shares for $21.9 million during the year. It paid no common dividends in the current or prior year.

Material changes versus the prior year

  • Revenue increased, but cost of sales rose faster; gross profit declined by $13.9 million. The ethanol segment’s gross profit fell to $43.9 million from $51.5 million, and its crush spread contracted to approximately $0.09 per gallon from $0.23.
  • Consolidated ethanol gallons sold by One Earth and NuGen increased to 285.8 million from 256.0 million. Average ethanol selling price declined to $1.29 per gallon from $1.40, while dried distillers grains prices rose to $142.20 per ton from $105.89.
  • The refined coal segment recorded a $13.6 million gross loss, compared with a $7.3 million loss in the partial prior-year period. Its $10.1 million segment profit after tax depended on production tax credits, not operating gross profit.
  • REX recorded a $22.9 million income tax benefit, including approximately $21.2 million of refined-coal production tax credits and research and experimentation credits. Thus, reported net income substantially exceeded pretax income. The prior year also benefited from the federal tax-rate reduction and deferred-tax remeasurement.
  • Cash from operations improved, while capital spending decreased from $24.0 million. The company used $126.0 million to purchase short-term investments and received $112.1 million from maturities during the year.

Outlook, risks and unusual items

  • Management expected One Earth and NuGen annual sales volumes of 275–300 million gallons of ethanol, 580,000–650,000 tons of dried distillers grains, 70–100 million pounds of corn oil, and 170,000–225,000 tons of modified distillers grains. These expectations depend on market conditions, profitability, and plant operations. NuGen production was expected to be below historical levels in FY2019’s first quarter due to weather-related logistics delays.
  • Management forecast FY2019 capital expenditures of approximately $4–6 million, principally for consolidated ethanol plants, and said available cash and operating cash flow were expected to meet One Earth’s and NuGen’s liquidity needs. REX expected to fund refined-coal operating losses at the parent level.
  • Refined-coal credits were expected to be available through November 2021, subject to statutory qualification and emissions testing. The operation depends on one customer and a third-party operator; management expects ongoing operating losses to be subsidized by credits. Loss of eligibility, insufficient taxable income to use credits, reduced coal demand, or customer cessation could materially affect results.
  • Commodity and policy risks remain significant. EPA small-refinery waivers reduced renewable-fuel obligations and contributed to weaker ethanol pricing; future RFS volumes and regulation were uncertain. Management disclosed that a 10% adverse price change could reduce annual revenue by about $45.3 million for ethanol and co-products, while a 10% adverse corn-price change could increase annual cost of goods sold by about $36.9 million.
  • Other disclosed risks include customer concentration (six customers represented about 85% of revenue), export tariffs and trade restrictions, weather and supply disruptions, and the volatility of crush spreads. REX’s approximately $2.0 million eSteam investment remains unproven commercially.
  • Unrecognized tax benefits were approximately $8.8 million, with about $0.4 million of accrued penalties and interest. Management said possible changes in certain uncertain tax positions over the next 12 months were not expected to materially affect results or financial position. Routine legal proceedings were not expected to have a material effect; no legal-contingency liability was recorded.
  • The company expected adoption of the new lease standard to recognize approximately $18–22 million of right-of-use assets and lease liabilities. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether ethanol crush spreads recover, and how corn, ethanol, co-product, and natural-gas prices and hedging affect margins and cash generation.
  • The amount, timing, continued qualification, and practical usability of refined-coal tax credits, and whether the facility can reduce its operating losses.
  • Current status of the refined-coal customer and operator arrangements, as well as the plant’s emissions-test results and credit eligibility.
  • FY2019 operating volumes, NuGen’s recovery from weather-related logistics delays, and actual capital expenditures versus management’s forecast.
  • Cash accessibility at subsidiaries, Big River distribution restrictions, customer concentration, and the status or renewal of the revolving credit facilities that matured June 1, 2019.