10-Q: REX American Resources Reports Q1 Earnings Decline Amid Strategic Carbon Capture and Ethanol Expansion Investments

REX American Resources Corporation reported a decrease in net income and revenue for the first quarter ended April 30, 2025, while actively investing in carbon sequestration and ethanol plant expansion projects.

Summary

• REX American Resources Corporation reported net sales and revenue of $158.3 million for the three months ended April 30, 2025, a 2% decrease from $161.2 million in the prior year's first quarter.
• Net income attributable to REX common shareholders decreased to $8.7 million ($0.51 per diluted share) in Q1 2025, down from $10.2 million ($0.58 per diluted share) in Q1 2024.
• Gross profit slightly decreased to $14.3 million in Q1 2025 from $14.5 million in Q1 2024.
• Ethanol revenue increased by 4% to $124.4 million, driven by a 10% increase in average selling price per gallon to $1.76, despite a 5% decrease in gallons sold to 70.9 million.
• Dried distillers grains revenue decreased by 27% to $22.3 million, with average price per ton down 22% to $145.65 and tons sold down 6%.
• Modified distillers grains revenue increased by 36% to $1.6 million, primarily due to a 52% increase in tons sold, partially offset by an 11% decrease in average selling price.
• The company used $3.5 million in cash from operating activities in Q1 2025, compared to $2.3 million used in Q1 2024.
• Capital expenditures were $6.9 million in Q1 2025, significantly lower than $24.8 million in Q1 2024, with $5.1 million for plant expansion and CI scoring reduction, and $0.7 million for carbon sequestration.
• REX repurchased 822,256 shares of its common stock for approximately $32.7 million during the quarter.
• The One Earth carbon sequestration project is in the developmental stage, with a Class VI injection well permit application submitted in October 2022, and a draft permit expected by November 2025 and final decision by April 2026.
• The company has budgeted approximately $220 million to $230 million for the One Earth carbon sequestration and plant expansion projects, with $56.3 million spent on sequestration and $66.4 million on plant expansion/CI reduction since inception.
• NuGen, a majority-owned ethanol plant, signed an agreement to be part of Summit Carbon Solutions' carbon capture and storage pipeline, though a new South Dakota law banning eminent domain for CO2 pipelines could complicate the project.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While current financial performance shows a decline in revenue and net income, the company is actively pursuing significant strategic investments in carbon capture and plant expansion, which are crucial for long-term growth and competitiveness in the evolving renewable fuels sector. The strong liquidity position and active share buyback program are also positive indicators. However, regulatory uncertainties and project delays introduce notable risks.

Positives

• Ethanol revenue increased by 4% due to a 10% rise in average selling price per gallon, indicating strong pricing power in the core product.
• The company is making significant strategic investments in carbon sequestration and plant capacity expansion, totaling a budgeted $220 million to $230 million, which could enhance future profitability and environmental compliance.
• REX repurchased 822,256 shares of its common stock for $32.7 million in Q1 2025, demonstrating a commitment to returning capital to shareholders and confidence in the company's valuation.
• SG&A expenses decreased by $0.2 million due to lower performance bonus expense and $0.3 million in stock compensation expense, reflecting cost management.
• The company maintains a strong working capital position of $356.2 million and a current asset to current liability ratio of 9.4 to 1 at April 30, 2025, indicating robust liquidity.

Negatives

• Net sales and revenue decreased by 2% to $158.3 million in Q1 2025 compared to the prior year, indicating a slight contraction in overall sales.
• Net income attributable to REX common shareholders declined by 15% to $8.7 million in Q1 2025 from $10.2 million in Q1 2024.
• Basic net income per share decreased to $0.51 from $0.58 year-over-year.
• Gross profit saw a slight decrease, suggesting pressure on margins.
• Dried distillers grains revenue decreased significantly by 27%, primarily due to a 22% drop in average selling price and a 6% decrease in tons sold.
• Equity in income of unconsolidated affiliates decreased to $1.0 million from $1.7 million, impacting overall profitability.
• Interest and other income decreased by $1.7 million, mainly due to lower balances and yields on excess cash and short-term investments.
• Net cash used in operating activities increased to $3.5 million in Q1 2025 from $2.3 million in Q1 2024, indicating higher cash consumption from operations.

Risks

• The company's operating results are highly dependent on the volatility of commodity prices for corn, ethanol, distillers grains, distillers corn oil, and natural gas.
• Uncertainty in the enforcement of the Renewable Fuel Standard II (RFS II) and the potential for additional small refinery exemptions (SREs) could lead to decreased RIN values and ethanol pricing.
• Regulatory delays and uncertainties surround the One Earth carbon sequestration project, including the timing of EPA Class VI injection well permits (draft permit expected by November 2025, final by April 2026) and a county special-use zoning permit.
• New Illinois legislation (Senate Bill 1289, signed July 2024) imposes additional safety, environmental, and permitting requirements for carbon capture and sequestration facilities, including a moratorium on new CO2 pipeline construction certificates until federal standards are finalized or July 1, 2026.
• South Dakota signed a bill into law in March 2025 banning the use of eminent domain for carbon dioxide pipelines, which could make the carbon sequestration project for the NuGen facility more difficult to complete.
• The U.S. Department of the Treasury has not yet issued final rules on qualification for Section 45Z tax credits, and proposed amendments to the Inflation Reduction Act could impact the economics of carbon capture projects.
• The approximately $58.2 million of federal production tax credits received from the refined coal facility remain under IRS audit, posing a potential financial risk.
• Broader industry trends, such as the extension of the biodiesel tax credit, creation of new tax credits for synthetic aviation fuel, funding for biofuel refueling infrastructure, and production/purchase credits for electric vehicles, could impact demand for ethanol and its co-products.
• General economic conditions, inflation, ability to attract employees, weather, results of income tax audits, changes in income tax laws or regulations, U.S. foreign trade policy and tariffs, changes in foreign currency exchange rates, terrorism, acts of war, and pandemics could adversely affect business operations.

Future Outlook

REX American Resources plans to continue investing significantly in its One Earth ethanol plant, budgeting approximately $220 million to $230 million for carbon sequestration and plant capacity expansion projects, which it intends to fund from available cash. The company expects the EPA to issue a draft permit for its Class VI injection wells by November 2025 and a final decision by April 2026. It also plans to increase ethanol production capacity from 150 million to 175 million gallons per year, with a future goal of 200 million gallons per year. The company will continue to seek and evaluate various investment opportunities in ethanol, energy, carbon sequestration, agriculture, or other ventures that fit its investment criteria. The company also has an ongoing stock buyback program with 1,181,963 shares remaining authorized for repurchase.

Management Comments

• "We expect our ethanol plants to produce approximately 2.9 gallons of denatured ethanol for each bushel of corn processed in the production cycle."
• "We attempt to manage the risk related to the volatility of commodity prices by utilizing forward corn and natural gas purchase contracts, forward ethanol, distillers grains and distillers corn oil sale contracts, and commodity futures agreements, as management deems appropriate."
• "We currently expect the EPA to prepare a draft permit by November 2025 and make a final permit decision by April 2026, according to the EPAs Class VI Permit Tracker Dashboard on their website."
• "We currently budget capital expenditures for both projects to be approximately $220 million to $230 million, subject to further refinement as we move forward. We plan to pay for all expenditures from available cash."
• "Companies may elect either the 45Q credit or the 45Z credit in periods in which both tax credits are available."
• "We plan to seek and evaluate various investment opportunities including ethanol and/or energy related, carbon sequestration, agricultural or other ventures we believe fit our investment criteria. We can make no assurances that we will be successful in our efforts to find such opportunities."
• "We typically repurchase our common stock when our stock price is trading at a price we deem to be a discount to the underlying value of our net assets."

Industry Context

The ethanol industry continues to be heavily influenced by the Renewable Fuel Standard II (RFS II) and EPA's Renewable Volume Obligations (RVOs), with ongoing uncertainties regarding small refinery exemptions (SREs) and the timing of future RVO proposals. The Inflation Reduction Act (IRA) is a significant factor, offering new tax credits (Section 45Z for Clean Fuel Production and Section 45Q for Carbon Capture) that incentivize carbon intensity (CI) reduction and carbon sequestration, driving strategic investments in these areas. State-level legislative actions, such as Illinois's new carbon capture regulations and South Dakota's eminent domain ban for CO2 pipelines, are creating additional complexities and risks for project development. The export market for ethanol and distillers grains remains crucial, with trade policies and tariffs impacting demand. The renewable biodiesel market also influences the value of co-products like distillers corn oil.

Corporate Governance

Legal Proceedings

• The company is currently undergoing a federal income tax examination for the years ended January 31, 2015, through January 31, 2022, related to refined coal production tax credits (IRC Section 45) and research and experimentation credits (IRC Section 41) totaling approximately $58.2 million.
• The company is involved in various legal actions arising in the normal course of business, but management believes their outcome will not have a material adverse effect on the consolidated financial statements.

Related Party Transactions

• During the first quarter of fiscal year 2025, One Earth and NuGen purchased approximately $24.8 million of corn and other supplies from minority equity investors and board members of those affiliates.
• Amounts payable to related parties were approximately $2.2 million at April 30, 2025, compared to $1.4 million at January 31, 2025.

Stakeholder Impact

• **Shareholders:** Experienced a decrease in net income and earnings per share, but benefited from a significant share buyback program. Future value is tied to the success of strategic carbon capture and plant expansion projects and favorable regulatory outcomes.
• **Employees:** Stock-based compensation is a component of their compensation, with a decrease in stock compensation expense noted in the quarter.
• **Customers:** Product pricing and availability are subject to commodity price volatility, which can impact customer costs and supply.
• **Suppliers:** The company has significant forward purchase contracts for corn and natural gas, and engages in related-party transactions for corn and supplies.
• **Regulatory Bodies:** The company is actively engaged with the EPA for permits and is monitoring state and federal legislative changes impacting its operations and tax credits.

Next Steps

• Continue providing information to the EPA for the Class VI injection well permit application for the One Earth carbon sequestration project.
• Obtain a county special-use zoning permit for the One Earth sequestration site.
• Complete testing of the capture and compression facility at One Earth to prepare for pipeline and sequestration well construction.
• Monitor the progress of Illinois Senate Bill 1723 and evaluate its potential implications for the carbon sequestration project.
• Work towards increasing ethanol production at the One Earth plant from 150 million to 175 million gallons per year, and subsequently apply for a permit to reach 200 million gallons per year.
• Identify ways to reduce the Carbon Intensity (CI) score at the One Earth plant to maximize tax credits under the IRA.
• Monitor the finalization of Section 45Z tax credit regulations by the U.S. Department of the Treasury.
• Monitor any changes to Sections 45Q and 45Z of the Internal Revenue Code from proposed budget and policy bills.
• Spend an estimated $60 million to $80 million on capital projects during the remainder of fiscal year 2025.
• Continue to seek and evaluate various investment opportunities, including ethanol, energy-related, carbon sequestration, or agricultural ventures.
• Continue the stock buyback program, with 1,181,963 shares remaining authorized for repurchase.

Key Dates

Recommendation

Keywords

Ethanol, Carbon Sequestration, Renewable Fuels, Biofuels, Distillers Grains, Distillers Corn Oil, SEC Filing, Form 10-Q, Commodity Prices, IRA Tax Credits, RFS II, Clean Fuel Production Credit, Carbon Capture, Energy, Agriculture