Green Plains Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel logistics through Green Plains Partners. Comparisons are affected by the 2018 sales of three ethanol plants and Fleischmann’s Vinegar.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $895.9 million | $986.8 million | $1,538.2 million | $2,032.1 million |
| Operating income (loss) | $(39.4) million | $11.8 million | $(79.4) million | $7.8 million |
| Net income (loss) attributable to Green Plains | $(45.3) million | $(1.0) million | $(88.1) million | $(25.1) million |
| Basic and diluted EPS | $(1.13) | $(0.02) | $(2.19) | $(0.63) |
| EBITDA | $(19.8) million | $41.8 million | $(38.4) million | $65.0 million |
Q2 operating margin was approximately -4.4%, versus approximately 1.2% a year earlier. Q2 ethanol production-segment operating loss was $53.9 million, compared with $17.2 million; agribusiness operating income fell to $4.3 million from $12.2 million. Food and ingredients income was $7.3 million versus $13.0 million, while partnership income was $13.2 million versus $16.1 million.
Cash flow and liquidity: First-half operating cash flow was a use of $32.2 million, versus $45.9 million provided in 2018; investing cash use was $20.3 million and financing cash use was $31.8 million. Capital expenditures were $23.5 million. At June 30, cash and cash equivalents were $193.3 million, with an additional $40.6 million restricted cash; management reported $458.8 million available under committed revolving facilities, subject to restrictions and lending conditions.
Debt and equity: Total debt was approximately $895.6 million, including $523.5 million of short-term borrowings and $372.1 million of current and long-term debt. Management reported covenant compliance at June 30. Total stockholders’ equity was $994.6 million. The company repurchased 3.2 million shares for approximately $39.9 million in Q2. The board suspended future quarterly common dividends after the $0.12-per-share dividend paid in June.
Material changes versus prior period
- Revenue fell 9.2% in Q2 and 24.3% in the first half. Management attributed the declines principally to the 2018 plant and vinegar divestitures, lower ethanol production volumes, and lower realized prices.
- Q2 ethanol sold was 224.0 million gallons, down 24.4% year over year. Utilization improved from 56% in Q1 to 80% in Q2, but remained below prior-year production levels.
- Management cited weak ethanol margins, severe winter and spring weather and flooding, higher corn prices, and weaker cattle-feeding margins as pressures on results. First-half operating cash flow also deteriorated, partly because of lower operating income and working-capital movements.
- Interest expense declined year over year, primarily following repayment of the $500 million senior secured term loan in Q4 2018.
Outlook, risks and unusual items
- Management expects to continue higher plant utilization and pursue cost savings through Project 24. It expects the first high-protein technology installation at Shenandoah by year-end 2019, with other locations over the following three years.
- Capital spending for the remainder of 2019 was estimated at $55–$65 million. Management stated it believed working capital was sufficient, but warned sustained unprofitable operations could strain liquidity and affect subsidiary covenant compliance.
- Management estimated 2019 net ethanol exports of 1.4–1.5 billion gallons. The EPA finalized extending the summer RVP waiver to E15; the rule was being challenged in court. RFS volume proposals, small-refinery exemptions, potential mandate resets, and export tariffs and trade disputes remain relevant demand uncertainties.
- Commodity exposure and derivatives can produce earnings volatility and sudden margin-call cash needs. Management disclosed first-half derivative-related net losses in revenue and cost of goods sold, and noted that a 10% increase in interest rates would raise annual interest cost by approximately $3.3 million. LIBOR phase-out after 2021 creates uncertainty for variable-rate facilities.
- Q2 included a $1.6 million charge to interest expense from extinguishing part of the 3.25% convertible notes. The company issued $105 million of 4.00% convertible notes in June, used proceeds in part to repurchase the 2019 notes and common stock, and issued a further $10 million of notes in July; aggregate principal of the new notes was $115 million after that issuance.
- Ordinary-course litigation was not expected by management to have a material adverse effect. A partnership-related tax-credit guarantee was disclosed; management considered recapture or reduction remote and had not recorded a liability. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether improved utilization and Project 24/high-protein investments can restore ethanol margins and cash generation.
- Liquidity, borrowing availability, and refinancing or renewal plans for the Green Plains Cattle facility maturing in April 2020 and the Green Plains Partners revolver maturing in July 2020.
- Actual capital spending against the $55–$65 million remainder-of-year estimate, and the effect of the dividend suspension and share repurchases on liquidity.
- Changes in commodity prices, derivative positions, margin-call requirements, and the impact of RFS policy, E15 litigation, refinery exemptions, and export-market restrictions.
- Post-quarter issuance of the additional $10 million convertible notes and any subsequent changes to debt, covenant compliance, or available liquidity.