Green Plains Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel storage and transportation businesses. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
- Q3 revenue: $1,000.1, up 11.0% from $901.2 a year earlier. Nine-month revenue: $3,032.2, up 13.3% from $2,675.2.
- Profitability: Q3 operating income was $0.6 versus $20.7; net loss attributable to Green Plains was $12.5 versus net income of $34.4, or $(0.31) per diluted share versus $0.74. For nine months, operating income was $8.5 versus $34.3; attributable net loss was $37.6 versus income of $14.4, or $(0.94) per diluted share versus $0.48.
- Margins: Q3 cost of goods sold was $936.4, leaving $63.7 before other operating expenses; operating margin was approximately 0.1%, down from 2.3%. Nine-month operating margin was approximately 0.3%, down from 1.3%. EBITDA, a non-GAAP measure, was $32.0 in Q3 versus $50.4 and $97.0 for nine months versus $118.3.
- Cash flow: Nine-month operating cash flow was $84.4, compared with cash use of $114.2 in 2017. Investing used $150.5, including $124.4 for acquisitions; financing used $11.8. Cash, cash equivalents and restricted cash totaled $234.5 at period-end, down from $312.4 at year-end 2017.
- Balance sheet and liquidity: Cash and cash equivalents were $171.7 and restricted cash $62.8. Current assets were $1,187.6 versus current liabilities of $867.5. The company reported $491.6 of availability under revolving credit agreements, some subject to restrictions and lending conditions; $171.2 of subsidiary net assets were restricted from transfer to the parent.
- Debt: Debt was approximately $1.4 billion at September 30, including $556.6 of short-term notes and borrowings and $832.8 of current and long-term debt net of issuance costs. About $1.2 billion was variable-rate debt. The company was in compliance with debt covenants. A 10% increase in interest rates was estimated to increase annual interest cost by approximately $6.4.
- Dividends: Green Plains declared $0.12 per share for Q3. Nine-month declared dividends were $0.36 per share.
Material changes and management commentary
- Ethanol production operating loss was $16.0 in Q3 versus income of $3.1 a year earlier; nine-month loss was $60.7 versus $26.0. Management attributed the deterioration mainly to compressed ethanol production margins. Q3 production fell 2.8% to 304.8 million gallons; utilization was approximately 81.3% versus 83.7%.
- Food and ingredients revenue rose substantially with acquired cattle-feeding operations. Cattle sold in Q3 increased to approximately 147,000 from 48,000; segment operating income nevertheless declined to $8.3 from $10.1, primarily on lower cattle margins.
- Agribusiness and energy services had Q3 operating income of $2.9 versus $3.7, reflecting lower trading margins. Partnership operating income was $16.7 versus $16.3.
- In August, Green Plains acquired two cattle-feeding operations with capacity for 97,000 head, for $16.2 plus approximately $106.6 of working capital, primarily inventory. The acquisition was funded with cash and borrowing.
- Management said it would adjust ethanol production run rates to market conditions. It expected approximately $4 of capital spending for the remainder of 2018. No consolidated earnings or EPS guidance is provided in the filing.
Outlook, risks and unusual items
- Subsequent proposed sales: After quarter-end, the company agreed to sell three ethanol plants to Valero for an estimated $300 plus approximately $22 of working capital; related storage assets would be sold to Green Plains Partners for $120.9, subject to adjustments. The company estimated a pretax gain of approximately $100 and expected to use proceeds to repay term debt. These transactions were expected to close in Q4, subject to customary conditions and regulatory approvals.
- Green Plains also agreed to sell Fleischmann’s Vinegar for $350 in cash, subject to working-capital adjustments, with an estimated pretax gain of approximately $62. Closing was expected in Q4, subject to customary conditions and regulatory approvals. Management estimated combined net cash proceeds from the announced sales, net of fees and taxes, at approximately $645, expected to be used to repay the term loan.
- The remaining $6.9 principal of 3.25% convertible notes due 2018 was paid at maturity on October 1. In Q3, $56.8 principal was exchanged for 3.25% notes due 2019; the exchange generated a $4.7 noncash increase to additional paid-in capital. The new notes mature October 1, 2019 unless converted.
- Management cited ethanol-market risks including EPA decisions on renewable fuel obligations and small-refinery exemptions, low RIN prices, possible changes to the RFS, and trade barriers. China had raised its ethanol tariff on U.S. imports; Brazil also applied a tariff above its quota. The company estimated 2018 U.S. net ethanol exports at 1.6–1.7 billion gallons.
- Commodity-price, counterparty and margin-call exposure remain significant. The filing also notes variable-rate debt, potential covenant noncompliance if forecasts are not achieved, and a risk that sustained unprofitable operations could strain liquidity.
- Unrecognized tax benefits for uncertain tax positions were $50.4 at September 30. The filing says the company was still analyzing certain Tax Cuts and Jobs Act provisions. An acquisition-related litigation matter was settled October 30, with the settlement to be recorded in Q4; the settlement amount is not stated in the supplied filing text.
- Operating lease commitments totaled $103.9. The company anticipated that adoption of the new lease standard in 2019 would significantly increase recognized right-of-use assets and lease liabilities.
Investor verification priorities
- Verify whether the Valero plant and storage-asset transactions and the Fleischmann’s Vinegar sale closed, their final proceeds and adjustments, and actual debt repayment and gains.
- Track ethanol margins, production utilization and volume, and the drivers of the substantial year-to-date ethanol-segment loss.
- Review available borrowing capacity, restrictions on subsidiary cash transfers, debt maturities and covenant headroom, including the 2019 convertible notes.
- Assess the effect of EPA/RFS decisions, RIN prices, export tariffs and commodity-price volatility on operating results and liquidity.
- Confirm the Q4 accounting impact of the litigation settlement and any remaining tax-law measurement adjustments.