Green Plains Renewable Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial amounts below are in U.S. dollars; monetary figures are converted from thousands to millions unless noted. The filing describes an integrated ethanol producer and marketer with ethanol, corn oil, agribusiness, and marketing and distribution segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $758.0m | $947.4m | $2,328.1m | $2,593.2m |
| Gross profit | $41.0m | $27.9m | $100.8m | $54.8m |
| Operating income (loss) | $25.5m | $8.6m | $56.8m | $(3.6)m |
| Net income (loss) attributable to Green Plains | $9.4m | $(1.0)m | $17.9m | $(21.2)m |
| Diluted EPS | $0.28 | $(0.03) | $0.56 | $(0.70) |
Gross margin was approximately 5.4% in Q3 (2.9% prior year) and 4.3% for the first nine months (2.1% prior year). Operating margin was approximately 3.4% and 2.4%, respectively, versus 0.9% and negative 0.1% in the comparable periods.
- Cash flow: Operating activities provided $121.1m in the first nine months, versus $17.4m used in 2012. Investing activities used $31.0m and financing activities used $9.8m. Cash and cash equivalents rose to $334.5m from $254.3m at year-end 2012. The operating cash-flow improvement included a $56.3m inventory-related source of cash.
- Liquidity: Current assets were $595.7m and current liabilities $283.7m, for a current ratio of about 2.1, compared with 1.3 at December 31, 2012. Cash excludes $27.6m of restricted cash. Management reported another $159.1m available under subsidiary revolving facilities, subject to borrowing-base and other conditions. Approximately $548.4m of subsidiary net assets were restricted from transfer to the parent.
- Debt: Total debt was approximately $647.2m, comprising $550.8m of long-term debt (including current maturities) and $96.4m of short-term borrowings, compared with approximately $663.3m at year-end 2012. The company issued $120m of 3.25% convertible senior notes due 2018 in September; it also had $90m of 5.75% convertible notes due 2015. Variable-rate debt was $425.2m; management estimated a 10% interest-rate change would affect annual interest cost by about $1.9m.
- Capital returns: The company initiated a quarterly dividend and paid $0.04 per share in September. Future dividends remain subject to Board approval and business conditions.
Changes and operating drivers
- Q3 revenue fell 20% year over year; nine-month revenue fell 10%. Management attributed the declines largely to the 2012 sale of grain elevators and agronomy assets and lower ethanol volumes, partly offset in the nine-month period by higher average ethanol and distillers-grains prices.
- Profitability improved chiefly because ethanol production margins recovered from weak 2012 levels, alongside lower SG&A and a contractor recovery. A $4m recovery relating to grain silo issues benefited cost of goods sold.
- Q3 ethanol production-segment operating income was $17.9m versus a $7.5m loss. Ethanol production was 176.8 million gallons in the quarter and 519.6 million gallons year to date, about 91% and 92% of capacity, respectively. The Atkinson, Nebraska plant, acquired in June, began production July 25 and contributed 8.2 million gallons and $22.7m of revenue during the reported periods.
- Agribusiness operating income declined to $0.2m in Q3 and $0.8m for nine months, partly reflecting the sale of elevators and a shift toward supplying the company’s own ethanol plants. Marketing and distribution operating income improved to $26.7m for nine months, helped by commodity trading, logistics, crude-oil railcar deployment, and the Birmingham unit-train terminal.
- The 2012 elevator and agronomy divestiture materially affects comparisons: it reduced external grain and agronomy sales and changed segment activity.
Outlook, risks, contingencies, and unusual items
- Outlook and spending: No specific earnings or revenue guidance was provided. Management expected approximately $7.4m of capital spending in the remainder of 2013. It planned to add 10–15 million bushels of grain storage in 2014, targeting 50 million bushels by the end of 2015, and intended to install corn-oil extraction at Atkinson in Q4 2013. Management said existing operations had sufficient working capital, but warned sustained unprofitable operations could strain liquidity.
- Industry and policy: Results are highly exposed to corn, ethanol, distillers-grains, corn-oil, and natural-gas prices and their margins. Risks include reduced ethanol-blending mandates, EPA changes to renewable-fuel requirements, the E10 blend wall, competition, and changes in consumer demand. The EPA had announced plans to propose adjustments to 2014 renewable-fuel volumes.
- Liquidity and covenants: Commodity-price moves and hedging can trigger significant, short-notice margin calls. The company said it was in covenant compliance at September 30 and expected to remain compliant, while cautioning that forecasts might not be achieved and subsidiary defaults could accelerate debt. Several subsidiary revolvers had November 2013 maturities; management expected to extend or refinance them. A Shenandoah loan amendment in October 2013 revised working-capital and net-worth covenants.
- Derivatives and taxes: Derivative volatility affected reported revenue, cost of goods sold, and other comprehensive income; the company expected all $0.7m of net unrealized gains in accumulated other comprehensive income to be reclassified to operating income within 12 months, though realized amounts could differ. The nine-month effective tax rate was 43.0%, affected by nondeductible compensation and increased uncertain-tax-position accruals; unrecognized tax benefits were $1.1m.
- Other items: A New Markets Tax Credits transaction included a $5.0m tax-credit recapture guarantee; management considered recapture remote and recorded no liability. Ordinary-course litigation was not expected by management to materially affect financial position, results, or cash flows. The company reported no material off-balance-sheet arrangements and no material changes in internal control; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether improved ethanol margins and cash generation persist, and the extent to which Q3 profit benefited from the $4m contractor recovery.
- Refinancing or extension of near-term subsidiary facilities, covenant compliance, and actual availability of the stated $159.1m in revolver capacity.
- Cash accessibility given subsidiary distribution restrictions and the $548.4m of restricted subsidiary net assets.
- EPA decisions on 2014 renewable-fuel volumes, blending demand, and resulting effects on ethanol prices and operating margins.
- Convertible-note dilution, cash-settlement terms, and the effect of debt-discount accretion on reported interest expense and earnings per share.
- Execution and funding of planned storage expansion, and performance of the Atkinson acquisition and BioProcess Algae investment.