Green Plains Inc. — Form 10-Q Summary
Business context and reporting period
Green Plains is a vertically integrated ethanol producer, marketer and distributor, with ethanol and distillers grains, corn oil, agribusiness, and marketing and distribution operations. This unaudited report covers the quarter and nine months ended September 30, 2014; financial statement amounts are in millions of dollars unless stated otherwise.
Results include the acquired Fairmont and Wood River ethanol plants, with Fairmont operating from January 2014, and a cattle-feeding business acquired in June 2014. The company reported ethanol production at approximately 96% of daily capacity in the quarter and 95.5% for the nine-month period.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $833.9 | $758.0 | $2,405.7 | $2,328.1 |
| Gross profit | $98.1 | $41.0 | $277.1 | $100.8 |
| Operating income | $75.1 | $25.5 | $212.3 | $56.8 |
| Net income | $41.7 | $9.4 | $117.3 | $17.9 |
| Diluted EPS | $1.03 | $0.28 | $2.90 | $0.56 |
| Gross margin | 11.8% | 5.4% | 11.5% | 4.3% |
| Operating margin | 9.0% | 3.4% | 8.8% | 2.4% |
Revenue increased 10% in Q3 and 3% year to date. Operating income and net income rose substantially, led by higher ethanol volumes and improved ethanol production margins, along with greater merchant trading activity. Ethanol production segment operating income was $54.9 million in Q3 and $151.2 million year to date, compared with $17.9 million and $22.5 million, respectively, in 2013. The company attributed the improvement partly to lower corn costs; average corn cost per bushel was down about 40% in Q3 and 37% year to date versus the comparable periods.
Q3 selling, general and administrative expense increased to $23.0 million from $15.5 million; year-to-date expense rose to $64.8 million from $44.0 million, mainly reflecting higher personnel costs and expanded operations. Interest expense increased to $10.3 million in Q3 and $29.8 million year to date, reflecting higher average debt and borrowing costs. Effective tax rates were 36.7% for Q3 and 36.9% year to date, versus 44.8% and 43.0% in 2013.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $225.6 million, versus $121.1 million in 2013. Investing cash use was $71.6 million, including $44.2 million of capital expenditures and $23.9 million for acquisitions. Financing cash use was $24.9 million. Cash increased $129.1 million to $401.1 million; restricted cash was an additional $13.2 million.
- At September 30, current assets were $782.8 million and current liabilities were $369.8 million, a current ratio of approximately 2.1. Management reported up to $167.7 million of additional subsidiary revolver availability, subject to borrowing-base restrictions and other conditions.
- Total debt, including short-term notes and current maturities, was approximately $615.6 million, versus $735.2 million at December 31, 2013. Cash less total debt was approximately negative $214.5 million, excluding restricted cash. Debt fair value was estimated at $619.8 million. The company said it was in compliance with debt covenants.
- Stockholders’ equity increased to $773.3 million from $545.4 million at year-end. Shares outstanding rose, notably after approximately $89.95 million of 5.75% convertible notes converted into 6.53 million common shares.
Material changes, outlook and risks
- In Q2, a new $225 million Term Loan B facility refinanced several plant loans and the Bluffton revenue bonds; $224.4 million was outstanding at quarter-end. It is secured by six ethanol plants, bears interest at 5.5% plus LIBOR (6.5% at September 30), and matures in 2020. The Fairmont/Wood River term loan matures in November 2015, with $55.0 million outstanding.
- The company expects approximately $20.3 million of capital spending in the remainder of 2014, primarily for plant improvements. Management anticipated regular quarterly dividends, subject to Board approval and changing business and market conditions; Q3 declared dividend was $0.08 per share. A share repurchase program of up to $100 million was announced in August; no shares had been repurchased by quarter-end.
- No specific earnings or revenue guidance was provided. Management cited improved ethanol margins and a record projected U.S. corn harvest as supportive factors, while emphasizing that results depend on volatile corn, ethanol, distillers grains and natural gas prices; regulation and the Renewable Fuel Standard; demand and blend-wall constraints; and trading, counterparty and operational risks.
- Commodity derivatives are a material earnings and liquidity exposure. The filing reports derivative-related losses in revenue and cost of goods sold, while noting that settled hedge results generally offset physical commodity positions; timing differences can still affect reported earnings. Margin calls may require significant cash with little notice. Approximately $479.3 million of debt was variable-rate; a 10% interest-rate change was estimated to affect annual interest cost by about $2.7 million.
- A March fire at the Otter Tail plant caused property damage and business interruption. By September 30, approved property-damage proceeds of $6.9 million produced a $3.3 million gain; $8.5 million of business-interruption proceeds had been received and reduced cost of goods sold. Further insurance proceeds were expected in Q4, with final amounts not yet determined.
- Litigation arising in the ordinary course was not expected by management to materially affect the company. Separate litigation related to the Fairmont/Wood River acquisition could produce a future gain if resolved favorably; a negative outcome was stated to have no impact. The company also noted proposed rail-safety rules that could require retrofit or replacement of its approximately 2,200 leased tank cars, potentially increasing costs or limiting availability.
Most important facts for investors to verify
- Whether stronger ethanol margins and high plant utilization persist as corn and product prices change, and how much reported profitability depends on derivative timing and hedge accounting.
- Actual post-quarter insurance recoveries and the final accounting for the Otter Tail fire and business-interruption claim.
- Liquidity available at the parent versus subsidiaries, borrowing-base availability, covenant headroom, and the near-term maturity and refinancing of the Fairmont/Wood River loan and cattle-business revolver.
- Cash flow and capital needs after the expected remaining-2014 capital spending, dividends, and any use of the authorized share repurchase program.
- Potential effects of railcar regulations, ethanol policy and demand constraints, commodity-price volatility, and the Fairmont/Wood River acquisition litigation.