Green Plains Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel storage and transportation businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $986.8 | $886.3 | $2,032.1 | $1,773.9 |
| Operating income (loss) | $11.8 | $(3.8) | $7.8 | $13.6 |
| Consolidated net income (loss) | $3.8 | $(11.8) | $(15.7) | $(10.1) |
| Net income (loss) attributable to Green Plains | $(1.0) | $(16.4) | $(25.1) | $(20.0) |
| EPS attributable to Green Plains | $(0.02) | $(0.41) | $(0.63) | $(0.51) |
| EBITDA | $41.8 | $24.1 | $65.0 | $67.9 |
Q2 operating margin was approximately 1.2%, versus negative 0.4% a year earlier; first-half operating margin was approximately 0.4%, versus 0.8%. Interest expense was $22.0 million in Q2 and $44.1 million in the first half, increasing year over year in both periods. The company declared dividends of $0.12 per share in Q2 and $0.24 per share for the first half.
At June 30, cash and cash equivalents were $235.1 million, restricted cash was $15.9 million, and reported working-capital assets included $625.3 million of inventory. The company reported $568.6 million available under revolving credit agreements, subject to restrictions and lending conditions. Operating cash flow was $45.9 million for the first half, versus cash used of $37.7 million in the prior-year period; investing cash use was $11.0 million and financing cash use was $96.2 million. Capital expenditures were $14.6 million.
Total debt was approximately $1.3 billion at June 30, including $457.5 million of short-term borrowings, $69.8 million of current long-term debt, and $768.1 million of long-term debt. Approximately $1.1 billion carried variable interest rates. The company was in compliance with its debt covenants at quarter-end. Subsidiary credit restrictions made approximately $166 million of net assets unavailable for transfer to the parent.
Material changes and operating performance
- Q2 revenue rose 11.3% year over year, largely reflecting cattle-feeding acquisitions completed in 2017. First-half revenue rose 14.6%, while operating income and EBITDA declined 42.4% and 4.4%, respectively.
- Ethanol production segment operating loss was $17.2 million in Q2 and $44.7 million for the first half. First-half ethanol output fell 4.2% year over year to 576.7 million gallons; management cited weaker ethanol margins, lower sales volumes, and lower realized ethanol and corn-oil prices. Q2 plant utilization averaged about 80%.
- Agribusiness and energy services operating income increased to $12.2 million in Q2 and $19.2 million for the first half, primarily on improved trading activity margins. Food and ingredients benefited from acquired cattle-feeding capacity; cattle sold were approximately 118,000 in Q2 and 255,000 in the first half.
- Q2 results included a $2.6 million gain on insurance proceeds related to damaged Hereford feed-yard assets. First-half tax benefit included $8.3 million of federal and state R&D credits relating to current and prior periods.
Outlook, risks, and contingencies
- No specific company-wide earnings or margin guidance is provided. Management estimated 2018 net ethanol exports of 1.6–1.8 billion gallons and expected approximately $11.3 million of additional capital spending in the remainder of 2018.
- Management said plants were operating below capacity due to scheduled downtime and domestic ethanol oversupply. It highlighted uncertain renewable-fuel mandates and RIN prices, small-refinery exemptions, export tariffs and trade barriers, and demand for higher ethanol blends as material industry factors.
- Commodity price exposure includes corn, ethanol, distillers grains, corn oil, natural gas, and cattle. Margin calls may require significant liquidity at short notice. A 10% increase in interest rates was estimated to increase annual interest costs by approximately $6 million.
- Management stated it believed liquidity was adequate, but warned that sustained unprofitable operations could strain liquidity and covenant compliance. Approximately $47.9 million of uncertain tax benefits were unrecognized at quarter-end.
- A court-related acquisition shortfall claim could result in approximately $5.5 million payable to Green Plains, but the amount is disputed and no gain was recorded pending resolution. Other ordinary-course litigation was not considered likely to have a material adverse effect by management.
- After quarter-end, Green Plains closed an acquisition of two cattle-feeding operations with 97,000-head capacity for $16.2 million plus approximately $108.9 million of working capital, funded with cash and revolver proceeds. The cattle facility commitment was increased from $425 million to $500 million. A proposed terminal-assets acquisition by the DKGP joint venture was terminated August 1, 2018 due to regulatory obstacles, without liability or penalty.
Important facts for investors to verify
- Whether ethanol production margins and utilization recover amid oversupply, commodity volatility, and uncertainty around RFS/RIN policy.
- How much of reported liquidity is practically available after subsidiary restrictions, borrowing-base requirements, and potential derivative margin calls.
- Near-term debt and working-capital financing needs, variable-rate exposure, covenant headroom, and the impact of post-quarter cattle acquisition funding.
- How much Q2 and first-half performance depended on cattle acquisitions, R&D tax credits, and the insurance gain, versus recurring operating results.
- Developments in the disputed $5.5 million acquisition claim, tax positions, and other litigation or regulatory matters.