Business context and reporting period
Green Plains Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates ethanol and corn-oil production, agribusiness, and marketing and distribution businesses. It reported results amid improved ethanol margins and expanded production following 2013 plant acquisitions.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $837.9 | $804.7 | $1,571.7 | $1,570.2 |
| Gross profit | $78.3 | $32.6 | $179.1 | $59.8 |
| Operating income | $58.9 | $18.6 | $137.3 | $31.3 |
| Net income | $32.3 | $6.0 | $75.5 | $8.5 |
| Diluted EPS | $0.82 | $0.19 | $1.88 | $0.28 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $151.0 | $69.8 |
Calculated gross margin was approximately 9.3% for Q2 and 11.4% for the first half of 2014, versus 4.1% and 3.8%, respectively, in 2013. Calculated operating margin was approximately 7.0% and 8.7%, versus 2.3% and 2.0%. Management attributed the earnings improvement primarily to better ethanol production margins and higher production volumes. Q2 diluted EPS also reflects a larger share base following conversion of the 5.75% notes.
- Cash and liquidity: At June 30, cash and cash equivalents were $333.4 million, restricted cash was $41.3 million, and reported current assets and current liabilities were $712.9 million and $354.6 million. The company reported up to $145.4 million of additional availability under subsidiary revolving credit agreements, subject to borrowing-base and other conditions.
- Debt: Short-term borrowings and long-term debt totaled approximately $631.7 million at June 30, including $131.6 million of short-term borrowings. Of outstanding debt, $480.3 million was variable-rate. A new $225 million Term Loan B, bearing 5.5% plus LIBOR (6.5% at quarter-end) and maturing in 2020, refinanced several plant-level loans. The company said it was in compliance with debt covenants.
- Cash flows and investment: First-half investing cash use was $56.1 million, including $28.9 million of capital expenditures and $23.9 million for business acquisitions. Financing cash use was $33.5 million; cash increased by $61.4 million during the period.
Material changes versus the prior period
- Q2 revenue rose 4.1%, while first-half revenue was nearly unchanged. First-half gross profit increased to $179.1 million from $59.8 million, and net income rose to $75.5 million from $8.5 million.
- In ethanol production, first-half gallons sold increased to 472.6 million from 343.4 million. The company cited higher volumes, including output from acquired plants, and a 36% decrease in average corn cost per bushel as major contributors to improved segment results.
- Marketing and distribution revenue increased, but Q2 segment gross profit declined, principally due to reduced crude-oil transportation activity. First-half segment profit improved, primarily from increased trading activity.
- In June, the company acquired a cattle-feeding business in Kansas, with capacity for 70,000 head and 3.8 million bushels of grain storage.
- Approximately $89.95 million of the 5.75% convertible notes converted into 6.53 million common shares; the remaining notes were redeemed. The share issuance increased outstanding shares, and the company began using the treasury-stock method for diluted EPS on its 3.25% notes in Q2.
Outlook, commentary, risks and unusual items
- Management reported ethanol production at approximately 95.3% of daily average capacity in the first half. It expected approximately $34.1 million of capital spending for the remainder of 2014, mainly for plant improvements and fine-grind technology. The filing provides no specific full-year earnings or revenue guidance.
- Management said it expected to maintain adequate liquidity and covenant compliance over the next 12 months based on forecasts and the current margin environment, while cautioning that results could differ and that subsidiary covenant breaches could trigger acceleration of debt. It noted that commodity-related margin calls can require substantial cash at short notice.
- Commodity prices and the relationship among corn, ethanol, distillers grains, corn oil and natural gas prices are significant risks. Other cited risks include regulatory changes to renewable-fuel requirements, railcar safety rules that could raise costs or constrain transportation, credit-market access, and cattle-feeding risks including volatile input and sale prices, disease, water constraints and customer demand.
- Q2 consolidated operating income included a $19.8 million benefit from a reduction in previously deferred intersegment profit as product in transit declined. The company also recorded $2.2 million of income from forgiveness of debt related to Otter Tail financing. An Otter Tail plant fire caused property damage and business interruption, but insurance coverage meant no material financial impact was reported through June 30.
- Commodity derivatives materially affected reported results and other comprehensive income. The company expected the $13.9 million net unrealized loss in accumulated other comprehensive loss to be reclassified into operating income over the following 12 months; the amount realized could vary with commodity prices.
- The company reported ordinary-course litigation that it did not expect to have a material adverse effect, and stated that disclosure controls were effective with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved ethanol margins and production levels persisted, and how acquired plants contributed to cash generation and earnings.
- The sustainability and cash impact of derivative gains and losses, margin calls, and the expected reclassification of hedge losses.
- Debt service, variable-rate exposure, borrowing-base availability, subsidiary distribution restrictions and compliance with covenants.
- The extent to which Q2 earnings depended on the $19.8 million deferred-profit reversal and the $2.2 million debt-forgiveness gain.
- Progress and economics of the Kansas cattle-feeding acquisition, planned capital spending, and the company’s ability to fund future growth while paying dividends.