10-Q: REX American Resources Reports Q3 Earnings Decline

REX American Resources Corporation reported a decrease in net income and EPS for the first nine months of fiscal 2025, despite increased operating cash flow and strategic investments in carbon capture.

Summary

• Net income attributable to REX common shareholders decreased by 16.7% to $39.2 million for the first nine months of fiscal year 2025, compared to $47.1 million in the prior year.
• Basic net income per share attributable to REX common shareholders declined by 11.9% to $1.18 for the first nine months of fiscal year 2025, from $1.34 in the comparable period of 2024.
• Gross profit for the first nine months of fiscal year 2025 decreased by 12.4% to $64.8 million, down from $73.9 million in the prior year.
• Net sales and revenue for the first nine months of fiscal year 2025 saw a slight increase of 1.7% to $492.5 million, compared to $484.3 million in 2024.
• Net cash provided by operating activities significantly increased by 63.8% to $64.0 million for the first nine months of fiscal year 2025, up from $39.1 million in 2024.
• The company is investing heavily in carbon sequestration and plant expansion projects at its One Earth ethanol plant, with a total budget of approximately $220 million to $230 million.
• As of October 31, 2025, $58.1 million has been spent on the carbon sequestration project and $97.7 million on plant capacity expansion and carbon intensity (CI) reduction efforts.
• A two-for-one stock split was effectuated as a 100% stock dividend, payable on September 15, 2025, to stockholders of record on September 8, 2025.
• The IRS plans to deny $58.2 million in federal production tax credits related to refined coal and $24.5 million in research and experimentation tax credits, which the company intends to vigorously defend.

Sentiment

Score: 4

Explanation: While operating cash flow improved significantly and the company is making strategic investments in long-term growth areas like carbon sequestration and plant expansion, the notable decline in net income and EPS for the nine-month period is concerning. The ongoing IRS audit with planned denial of substantial tax credits ($82.7 million total) and regulatory challenges for carbon capture projects introduce considerable uncertainty and downside risk. The share buyback program and strong balance sheet provide some support, but the core financial performance and future project uncertainties weigh negatively on sentiment.

Positives

• Net cash provided by operating activities increased significantly by 63.8% to $64.0 million for the first nine months of fiscal year 2025.
• Ethanol gallons sold increased by 2.2% to 219.9 million for the first nine months of fiscal year 2025.
• Distillers corn oil revenue grew by approximately 35% and pounds sold increased by 11.3% for the first nine months of fiscal year 2025, with average selling price up 22.7%.
• Modified distillers grains tons sold increased by 23% for the first nine months of fiscal year 2025.
• Selling, general and administrative (SG&A) expenses decreased by 2.9% to $20.4 million for the first nine months of fiscal year 2025.
• The company is actively investing in future growth areas, including carbon sequestration and plant expansion, with significant capital expenditures.
• The OBBBA extended the 45Z clean fuel production tax credits through December 31, 2029, providing longer-term incentives.
• The company maintains a strong liquidity position with a current ratio of 7.2x and cash and cash equivalents of $272.0 million as of October 31, 2025.
• The company engaged in stock repurchases totaling $33.4 million in the first nine months of fiscal year 2025, indicating confidence in intrinsic value.

Negatives

• Net income attributable to REX common shareholders decreased by 16.7% to $39.2 million for the first nine months of fiscal year 2025.
• Basic net income per share decreased by 11.9% to $1.18 for the first nine months of fiscal year 2025.
• Gross profit declined by 12.4% to $64.8 million for the first nine months of fiscal year 2025.
• Dried distillers grains revenue decreased by 15% for the first nine months of fiscal year 2025, driven by a 14% decrease in average selling price per ton and a 1% decrease in tons sold.
• Interest and other income, net, decreased by 30% to $10.5 million for the first nine months of fiscal year 2025, primarily due to lower cash balances and yields on investments.
• The IRS plans to deny $58.2 million in federal production tax credits (refined coal) and $24.5 million in research and experimentation tax credits, which could have a material adverse impact if not successfully defended.
• Regulatory hurdles and new state legislation (Illinois SB 1289, SB 1723, South Dakota eminent domain ban) are impacting the progress and feasibility of carbon sequestration projects.
• Uncertainty surrounding the EPA's handling of Small Refinery Exemptions (SREs) and their potential impact on RIN values and ethanol pricing.

Risks

• Price volatility and availability of key commodities including corn, ethanol, distillers grains, distillers corn oil, gasoline, and natural gas.
• Commodity market risk, including the inability to predict future crush spread for more than four months, which can lead to negative or minimally positive operating margins.
• Impact of legislative and regulatory changes, such as RFS II enforcement, Small Refinery Exemptions (SREs), and new tax credit rules (45Z, 45Q), as well as state-level carbon capture legislation.
• Uncertainty and potential delays in obtaining necessary permits and approvals for the One Earth carbon sequestration facility, including EPA Class VI injection well permits and state/county permits.
• Ongoing IRS audit and the planned denial of $58.2 million in federal production tax credits (refined coal) and $24.5 million in research and experimentation tax credits.
• Changes in international, national, or regional economies, and the impact of inflation.
• The ability to attract and retain employees.
• Weather conditions affecting crop yields and commodity prices.
• Impact of U.S. foreign trade policy and tariffs on demand for ethanol and by-products.
• Changes in foreign currency exchange rates.
• The effects of terrorism or acts of war and the effect of pandemics on business operations.
• Risk that hedging activities, while intended to mitigate risk, can themselves result in losses.
• No assurance of success in finding new investment opportunities that fit the company's criteria.

Future Outlook

The company expects the EPA to issue a draft permit for its One Earth carbon sequestration project by February 2026 and a final decision by June 2026. It plans to apply for a permit to increase One Earth ethanol production to 200 million gallons per year after reaching 175 million gallons. Capital expenditures for the One Earth expansion and sequestration projects are budgeted at approximately $220 million to $230 million, to be funded from available cash, with $25 million to $35 million planned for the remainder of fiscal year 2025. The company anticipates that certain tax provisions in the OBBBA, such as the extension of bonus depreciation, will lower cash paid for income taxes for 2025, and intends to leverage 45Z and 45Q tax credits. A replacement equity plan is expected to be presented to shareholders at the 2026 Annual Meeting. The USDA forecasts a 12% increase in corn production for 2025, with a record high average yield.

Management Comments

• "We plan to vigorously defend these credits." (Regarding IRS denial of refined coal and R&E tax credits)
• "We continue to work with the various government agencies involved to obtain all required permits and approvals, with no assurance of the ultimate success or timing of the project." (Regarding One Earth carbon sequestration)
• "We continue to work to identify ways to reduce our CI score at the One Earth plant with the intention of maximizing tax credits available under the IRA."
• "We plan to pay for all expenditures from available cash." (Regarding One Earth projects)
• "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."
• "Repurchases are generally made when management deems the shares to trade at a discount to intrinsic value." (Regarding stock buyback program)

Industry Context

The ethanol industry continues to face volatility in commodity prices for corn, ethanol, and natural gas, impacting operating margins. Regulatory uncertainty from the EPA's Renewable Fuel Standard II (RFS II) and its handling of Small Refinery Exemptions (SREs) remains a significant factor, with recent SRE rulings potentially affecting RIN values and ethanol pricing. New federal legislation like the Inflation Reduction Act (IRA) and the One Big Beautiful Bill Act (OBBBA) are introducing new clean fuel production (45Z) and carbon capture (45Q) tax credits, incentivizing lower carbon intensity and sequestration efforts. However, state-level legislation in Illinois and South Dakota is adding complexity and potential delays to carbon capture and pipeline projects. USDA forecasts for increased corn production in 2025 could influence raw material costs, while global trade policies and demand in the renewable biodiesel market continue to affect ethanol and by-product exports and pricing.

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).
• The IRS has given notice that they plan to deny approximately $58.2 million in refined coal production tax credits and $24.5 million in research and experimentation tax credits.
• The company plans to vigorously defend these credits.
• 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

• One Earth and NuGen purchased approximately $19.4 million of corn (and other supplies) from minority equity investors and board members of those affiliates during the three months ended October 31, 2025.
• Total purchases from related parties amounted to approximately $73.3 million for the nine months ended October 31, 2025.
• Amounts payable to related parties were approximately $0.6 million at October 31, 2025.
• During the nine months ended October 31, 2024, $1.5 million was paid to landowners who are minority equity investors of One Earth Energy for land easements related to the carbon sequestration project; no such payments were made in fiscal year 2025.

Stakeholder Impact

• Shareholders: Experience decreased net income and EPS, but benefit from share repurchases and potential long-term growth from strategic investments. Face uncertainty from IRS tax credit denials and regulatory delays for key projects.
• Employees: Affected by the expiration of the 2015 Incentive Plan and the anticipation of a new equity plan, impacting future stock-based compensation.
• Customers: Benefit from continued production and supply of ethanol and by-products.
• Suppliers: Continue to supply raw materials like corn and natural gas, including related parties.
• Creditors: Strong liquidity and capital resources suggest a low credit risk profile for the company.

Next Steps

• EPA to prepare a draft permit for One Earth carbon sequestration by February 2026.
• EPA to make a final permit decision for One Earth carbon sequestration by June 2026.
• Company to obtain certain state and county permits for the sequestration site and pipeline for the One Earth project.
• Company to begin construction of the CO2 pipeline and sequestration well for One Earth after receiving further permits and approvals.
• Company to apply for another permit to increase One Earth ethanol production to 200 million gallons per year after reaching 175 million gallons.
• Company to continue evaluating the tax and other provisions of the OBBBA and their potential effects on financial position, results of operations, and cash flows.
• Company to vigorously defend the $58.2 million in refined coal production tax credits and $24.5 million in research and experimentation credits against IRS denial.
• Company anticipates requesting shareholders to approve a replacement equity plan at its Annual Meeting in 2026.
• Company plans to spend $25 million to $35 million on all projects during the remainder of fiscal year 2025.
• Company to seek and evaluate various investment opportunities, including ethanol and/or energy related, carbon sequestration, agricultural or other ventures.

Key Dates

Recommendation

While the company demonstrates strong operating cash flow and is making strategic investments in carbon capture and plant expansion, the significant decline in net income and EPS for the nine-month period is concerning. The ongoing IRS audit with planned denial of substantial tax credits ($82.7 million total) and regulatory delays for key growth projects introduce considerable uncertainty and downside risk. The share buyback program and strong balance sheet provide some support, but investors should monitor the resolution of tax disputes and progress on carbon sequestration before considering a stronger position.

Keywords

Ethanol, Carbon Sequestration, Renewable Fuels, Biofuels, SEC Filing, 10-Q, Financial Results, Commodity Prices, Tax Credits, IRA, OBBBA, RFS II, Distillers Grains, Distillers Corn Oil, REX American Resources