REX American Resources Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 31, 2016 (REX fiscal 2016 second quarter), not 2015 Q2 as indicated in the request metadata. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
REX operates in the alternative-energy segment, with majority ownership interests in ethanol producers One Earth Energy and NuGen and a 9.7% equity-method investment in Big River Resources. One Earth results are included with a one-month reporting lag. The filing presents unaudited results for the three and six months ended July 31, 2016, compared with the corresponding 2015 periods.
Financial results and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales and revenue | $115.7 (2015: $113.5) | $215.9 (2015: $218.7) |
| Gross profit | $17.3 (2015: $18.3); margin 14.9% (16.1%) | $25.7 (2015: $27.4); margin 11.9% (12.5%) |
| Income before income taxes | $13.5 (2015: $27.4) | $18.5 (2015: $34.2) |
| Net income attributable to REX shareholders | $8.2 (2015: $16.4); diluted EPS $1.24 ($2.16) | $11.0 (2015: $20.3); diluted EPS $1.67 ($2.62) |
| Operating cash flow | Not separately presented for the quarter | $11.4 (2015: $2.6) |
At July 31, 2016, cash and cash equivalents were $134.7, total assets $417.8, current assets $183.8, and current liabilities $15.4. Working capital was $168.4 and the current ratio was 11.9:1. No borrowings were outstanding under the new revolving facilities. The balance sheet lists no separate funded-debt line; it does report $38.3 of deferred-tax liabilities and $1.2 of other long-term liabilities.
Six-month investing cash outflow was $5.7, including $9.3 of capital expenditures; financing cash outflow was $6.8, including $4.7 of common-stock repurchases and $2.1 of payments to noncontrolling owners. Cash decreased by $1.1 to $134.7. Management expected $3–5 million of additional capital spending in the remainder of fiscal 2016.
Material changes versus the prior comparable period
- Second-quarter revenue rose 2.0%, but six-month revenue fell 1.3%. Higher ethanol volumes supported sales: gallons sold increased to 60.9 million for the quarter and 119.7 million for the half-year. Ethanol prices were slightly lower for the quarter and lower year over year for the half-year.
- Gross profit and margins declined in both comparison periods. Management cited a lower crush spread—$0.20 per gallon for the quarter versus $0.22, and $0.16 for the half-year versus $0.18—and weaker dried distillers grains (DDG) pricing.
- Quarterly DDG revenue fell to $18.9 million from $21.6 million; management linked price pressure partly to uncertainty from China’s anti-dumping and countervailing-duty investigations of U.S. DDG imports. Natural-gas costs declined, while grain represented a greater share of cost of sales.
- Equity-method income declined to $1.2 million for the quarter from $5.1 million, and to $1.4 million for the half-year from $6.5 million. The prior-year periods included Patriot, which REX sold in June 2015.
- Prior-year earnings included a $10.4 million gain on the Patriot sale. This was a significant nonrecurring contributor to the year-over-year decrease in pretax income and earnings. Current-period six-month results included a $0.2 million gain related to Patriot sale escrow proceeds.
- SG&A declined to $5.2 million for the quarter and $9.2 million for the half-year, primarily due to lower incentive compensation. Six-month operating cash flow improved despite lower net income, with working-capital movements and prior-year tax-related effects contributing to the comparison.
Outlook, risks, contingencies and unusual items
- Management’s annual sales expectations for One Earth and NuGen were 240–260 million gallons of ethanol, 560,000–660,000 tons of dried DDG, 60–75 million pounds of corn oil, and 60,000–90,000 tons of modified DDG. These expectations assume plants operate near historical levels and depend on crush spreads, profitability, and market conditions. NuGen had EPA pathway approval and permits to increase annual capacity to 150 million gallons; management planned to pursue plant debottlenecking subject to industry conditions.
- Management expected an effective tax rate of approximately 30–35% gross of noncontrolling interests. It was not providing an earnings forecast, and noted that commodity volatility limited its ability to predict future crush spreads and results.
- Commodity exposure is material. For the next 12 months, only about 7% of forecast ethanol sales, 18% of DDG sales, 17% of corn-oil sales, 8% of estimated corn usage, and 3% of natural-gas usage were fixed-price contracted. A 10% adverse price move was estimated to reduce revenue by $42.3 million across the three products, increase corn costs by $29.3 million, or increase natural-gas costs by $1.8 million, as applicable.
- At July 31, One Earth and NuGen had combined commitments to purchase 8.2 million bushels of corn and sell 37.2 million gallons of ethanol, 61,000 tons of DDG, and 9.9 million pounds of corn oil. Deliveries were expected through December 2016 for corn and September 2016 for product sales.
- Each operating subsidiary had a $10 million revolving facility maturing April 1, 2017, secured by that subsidiary’s inventory and receivables and nonrecourse to REX. Neither facility had been drawn. Borrowings bear one-month LIBOR plus 250 basis points; the subsidiaries were reported in covenant compliance.
- REX reported $2.3 million of receivable related to estimated Patriot escrow proceeds and expected a determination of the final payment by December 2016. Big River’s debt agreements restrict distributions; its restricted net assets were approximately $303.3 million.
- Operating leases for rail cars and a natural-gas pipeline carried future minimum rentals of $27.4 million. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material risk-factor changes were reported, and disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the reporting period: the filing covers fiscal Q2 2016, ended July 31, 2016, despite the request’s 2015 Q2 label.
- Track crush spreads, ethanol and coproduct prices, corn and natural-gas costs, and the proportion of production and inputs covered by fixed-price contracts.
- Assess whether the DDG price outlook and China trade investigations affect coproduct revenue and plant margins.
- Review the final Patriot escrow settlement and collectability of the reported $2.3 million receivable.
- Monitor Big River’s earnings, dividend restrictions, and the availability of cash held at majority-owned subsidiaries, as well as planned capital spending and share repurchases.
- Consider the period’s earnings comparison in light of the prior-year Patriot sale gain and the loss of Patriot equity-method income.