REX American Resources Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended April 30, 2020 (REX fiscal 2020 first quarter), not 2019 Q1 as stated in the request metadata. Comparisons below are with the quarter ended April 30, 2019. Amounts are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Business context and reporting period
REX operates in ethanol and by-products and refined coal. Its ethanol business includes majority-owned One Earth and NuGen and an equity-method investment in Big River. The quarter was affected by COVID-19, weak ethanol demand and prices, and limited local corn availability. Both consolidated ethanol plants were idled in March; One Earth resumed production May 27, 2020. NuGen’s status after quarter-end is not clearly stated in the filing.
Financial performance and liquidity
| Metric | Three months ended Apr. 30, 2020 | Three months ended Apr. 30, 2019 |
|---|---|---|
| Net sales and revenue | $83.3 million | $104.6 million |
| Gross profit (loss) | $(9.3) million | $3.6 million |
| Gross margin | Approximately (11.2)% | Approximately 3.5% |
| Loss (income) before income taxes | $(13.7) million | $0.2 million |
| Income tax benefit | $5.3 million | $3.5 million |
| Net income (loss) attributable to REX shareholders | $(7.6) million | $2.8 million |
| Diluted earnings (loss) per share | $(1.21) | $0.45 |
| Net cash from (used in) operating activities | $(0.3) million | $1.5 million |
Revenue fell about 20% year over year. Ethanol and by-products gross loss was $8.2 million, compared with $6.1 million gross profit; refined coal gross loss narrowed to $1.1 million from $2.5 million. SG&A was approximately $4.6 million, versus $4.7 million. The ethanol crush spread was approximately negative $0.08 per gallon, compared with positive $0.02. A $9.1 million inventory write-down, partly offset by $3.1 million of hedging gains, weighed on results.
At April 30, cash and cash equivalents were $163.8 million and short-term investments were $32.6 million. Working capital was $227.3 million and the current ratio was 12.4:1. Total current liabilities were $19.9 million. The balance sheet reports no interest-bearing borrowings; operating lease liabilities totaled $16.2 million. Operating cash flow was affected by working-capital movements, including lower receivables and inventory, partly offset by lower accounts payable. Investing activities used $11.4 million, including $4.7 million of capital expenditures and net purchases of short-term investments. Financing activities used $3.9 million, principally for share repurchases.
Total assets were $476.0 million at April 30, down from $500.5 million at January 31, 2020; total equity was $441.3 million. REX repurchased 78,140 shares for approximately $3.9 million during the quarter, at an average price of $50.20. Approximately 271,721 shares remained authorized for repurchase.
Material changes versus prior comparable period
- Lower ethanol volumes and pricing drove the revenue decline: ethanol gallons sold fell to 48.3 million from 61.3 million, while the average ethanol selling price was $1.25 per gallon versus $1.27.
- Average grain cost rose to $3.93 per bushel from $3.53, contributing to deteriorated ethanol margins. COVID-related demand weakness and corn supply constraints led to plant idling.
- REX shifted from shareholder-attributable income of $2.8 million to a loss of $7.6 million. Big River contributed a $0.5 million equity-method loss, versus $0.1 million of income.
- Interest and other income declined to $0.7 million from $1.1 million, reflecting lower investment yields and balances.
- Operating cash flow moved from a $1.5 million inflow to a $0.3 million outflow; capital expenditures increased to $4.7 million from $0.6 million, primarily for land at One Earth.
Outlook, risks, contingencies and unusual items
- Management said it could not estimate future sales volumes or remaining fiscal 2020 capital expenditures because of COVID-19, ethanol demand and price uncertainty, and corn availability. It warned that prolonged plant stoppages could materially harm results, financial condition and cash flows.
- One Earth resumed operations May 27. The filing provides no earnings or production guidance, and does not clearly quantify the expected pace of recovery.
- Key exposures include volatile corn, ethanol, distillers grains, corn oil and natural gas prices; regional corn supply and logistics; COVID-19 impacts; and EPA small-refinery waivers that management believes have reduced ethanol demand. Twenty-seven waivers for 2019 compliance were pending.
- Refined coal depends on a single utility customer, with lower demand projected. Production tax credits are expected to support the business through November 2021, subject to emissions qualification; the estimated 2020 credit rate is about $7.30 per ton. Credits and related tax benefits vary with production.
- The quarter’s $5.3 million tax benefit included approximately $1.4 million from the CARES Act’s extended net-operating-loss carryback. Unrecognized tax benefits were approximately $7.35 million; prevailing on all recorded positions could reduce the income tax provision by about $7.3 million.
- COVID-19 and other factors triggered a long-lived asset impairment assessment; management recorded no impairment. It cautioned that a prolonged downturn could reduce expected cash flows and lead to future impairment.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It reported no material changes to the risk factors in its most recent Form 10-K.
Important facts for investors to verify
- Confirm subsequent production, utilization and financial performance at One Earth and whether and when NuGen resumed operations.
- Track ethanol demand, selling prices, crush spreads, corn availability and costs, and the effect of pending or future EPA waiver decisions.
- Assess cash generation and capital needs, including lease obligations, planned investments, and use of the remaining share-repurchase authorization.
- Monitor refined coal production, utility demand, emissions qualification and the remaining period of Section 45 tax credits.
- Review future inventory valuation, impairment assessments and the resolution of approximately $7.35 million in unrecognized tax benefits.