Green Plains Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Green Plains is a vertically integrated ethanol producer, marketer and distributor with agribusiness and fuel-storage and transportation operations. Unless stated otherwise, dollar amounts below are in millions.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $841.9 | $742.8 | $2,478.8 | $2,225.7 |
| Operating income | $30.9 | $19.8 | $35.6 | $48.3 |
| Consolidated net income | $12.9 | $10.0 | $6.1 | $14.5 |
| Net income (loss) attributable to Green Plains | $7.9 | $6.2 | ($8.0) | $10.7 |
| Green Plains diluted EPS | $0.20 | $0.16 | ($0.21) | $0.27 |
| EBITDA, as defined by the company | $49.1 | $36.3 | $91.0 | $95.2 |
| Operating margin | 3.7% | 2.7% | 1.4% | 2.2% |
Q3 revenue rose 13.3% and operating income 55.6% year over year; higher ethanol-production and cattle margins were key contributors. For the nine months, revenue rose 11.4%, but operating income fell 26.3%, primarily because of lower ethanol-production margins. The difference between consolidated earnings and Green Plains-attributable earnings reflects noncontrolling interests, including the publicly held interest in Green Plains Partners.
Cash flow: Operating activities provided $61.0 million in the first nine months, versus $7.5 million used in the prior-year period. Investing activities used $289.5 million, including $252.5 million for the Abengoa plant acquisition; financing activities provided $251.0 million. Capital expenditures were $33.8 million. Cash and cash equivalents were $407.4 million at September 30, excluding $34.2 million of restricted cash.
Debt and liquidity: Total debt was approximately $923.5 million, compared with $663.6 million at December 31, 2015. The company reported $168.9 million available under revolving credit agreements, subject to restrictions and lending conditions. It was in compliance with debt covenants at quarter-end. Approximately $624.5 million of subsidiary net assets were restricted from transfer to the parent. A 10% increase in interest rates was estimated to increase annual interest costs by about $3.3 million.
Material developments and comparisons
- Green Plains operated at approximately 92.5% of capacity and reported record Q3 ethanol production of 292.2 million gallons, versus 215.6 million gallons a year earlier. Volume growth reflected acquired plants and higher output at existing facilities.
- On September 23, the company acquired three Abengoa ethanol plants with combined annual capacity of 236 million gallons for approximately $237.4 million, plus working capital. The partnership separately acquired related storage assets for $90 million. Purchase accounting remained preliminary, and acquired-plant pro forma results were not yet available.
- In August, Green Plains issued $170 million of 4.125% convertible senior notes due 2022. The partnership increased its revolving credit facility to $155 million; $132 million was outstanding at September 30.
- On October 3, after quarter-end, Green Plains completed its $250 million cash acquisition of Fleischmann’s Vinegar. It used $135 million of new debt ($130 million term loan and $5 million revolver borrowing) and cash on hand. Management expected the acquisition to be immediately accretive; this is an expectation, not a reported result for the quarter.
- Q3 operating income included reversal of approximately $6.3 million in previously accrued acquisition-related contingent liabilities, recorded as a reduction of cost of goods sold. Green Plains stated that a further amount of approximately $5.5 million might be due to it, but did not recognize that potential recovery pending resolution of the contingencies.
Outlook, commentary and risks
- No formal earnings or margin guidance was provided. The company expected approximately $24 million of capital spending for the remainder of 2016 and said it anticipated regular quarterly dividends, subject to board approval and business and market conditions.
- Management said it believed liquidity was sufficient for existing operations and expected to maintain covenant compliance over the next 12 months, while cautioning that actual results could differ from forecasts. Sustained unprofitable operations could strain liquidity.
- Management cited commodity-price volatility, ethanol and other industry competition, counterparty and merchant-trading risks, and changes in federal policy or regulation. Derivatives may reduce exposure but can themselves produce losses.
- China’s preliminary proposed 33.8% tariff on U.S. distillers grains exports was a market risk; China represented 26% of U.S. year-to-date export volume through August 2016. The filing also identified food-ingredient risks following the vinegar acquisition, including input-cost volatility, customer concentration, supply-chain disruption, competition, product liability and regulatory compliance.
- A 50/50 joint venture planned a Phase I fuels terminal in Beaumont, Texas, with expected investment of about $55 million and anticipated completion in Q2 2017. Green Plains said it would offer its interest to the partnership after commercial development.
- The filing reported ordinary-course litigation that management did not believe would materially adversely affect the company. The acquisition-related shortfall dispute remained subject to determination and possible appeal.
Important facts for investors to verify
- Whether ethanol margins recover, and how increased plant capacity affects utilization, costs and cash generation.
- Final Abengoa purchase-price adjustments, plant performance and integration costs; and the realized financial contribution from Fleischmann’s Vinegar and related acquisition debt.
- Debt levels, subsidiary borrowing capacity, covenant headroom, and the practical availability of cash held at subsidiaries.
- Exposure to commodity prices, hedging results and distillers grains export demand, particularly any final Chinese tariff action.
- Outcome and timing of the acquisition-related legal shortfall claim and any cash recovery.