Green Plains Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unless stated otherwise, financial figures are in millions of dollars. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel storage and transportation businesses.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $886.3 | $887.7 | $1,773.9 | $1,636.9 |
| Operating income (loss) | $(3.8) | $27.4 | $13.6 | $4.8 |
| Net income (loss) | $(11.8) | $13.0 | $(10.1) | $(6.8) |
| Net income (loss) attributable to Green Plains | $(16.4) | $8.2 | $(20.0) | $(15.9) |
| EPS attributable to Green Plains | $(0.41) | $0.21 | $(0.51) | $(0.42) |
| EBITDA (non-GAAP) | $24.1 | $47.7 | $67.9 | $41.9 |
Q2 gross profit was $56.2 million, or approximately 6.3% of revenue, versus $78.2 million, or 8.8%, a year earlier. Operating margin was approximately (0.4)% versus 3.1%. For the first half, gross profit was $132.0 million (7.4% of revenue) versus $102.7 million (6.3%); operating margin was approximately 0.8% versus 0.3%.
- Cash flow: First-half operating cash use was $12.6 million, versus $4.9 million provided in 2016. Investing cash use was $98.6 million, including $62.2 million for acquisitions and $28.0 million for property and equipment purchases. Financing provided $2.4 million. Cash and cash equivalents declined $108.8 million to $195.4 million.
- Liquidity: At June 30, cash was $195.4 million and restricted cash was $29.6 million. Management reported $171.1 million available under revolving facilities, subject to restrictions and lending conditions. Subsidiary net assets of approximately $790.5 million were restricted from transfer to the parent under credit agreements.
- Debt: Debt was approximately $1.08 billion, including $341.5 million in short-term borrowings, $6.2 million in current maturities, and $733.8 million in long-term debt. Of approximately $1.1 billion in total debt, $863.6 million carried variable rates. The company reported covenant compliance at June 30.
- Dividends: Green Plains declared $0.12 per share for the quarter. Future dividends remain subject to board approval and liquidity, business needs, and market conditions.
Changes and operating drivers
- Q2 revenue was nearly flat year over year, but operating income fell by $31.2 million. Management attributed the decline primarily to weaker ethanol production margins. Interest expense rose $8.9 million to $19.4 million, reflecting higher average debt and borrowing costs and a $1.3 million charge related to exchanging convertible notes.
- First-half revenue increased 8.4%, while operating income increased $8.8 million. Acquisitions and higher volumes supported growth, particularly in food and ingredients; higher interest expense partly offset operating improvement.
- Q2 ethanol production was 275.5 million gallons, similar to the prior-year quarter, but capacity utilization fell to 74.7% from 89.8% as the company reduced output in response to weak margins. Ethanol production segment EBITDA was $(0.9) million versus $22.7 million.
- Q2 food and ingredients EBITDA rose to $14.0 million from $6.0 million, mainly reflecting the Fleischmann’s Vinegar and cattle-feedlot acquisitions. Agribusiness and energy services EBITDA fell to $3.7 million from $11.9 million, primarily due to weaker trading margins. Partnership EBITDA was $16.1 million, broadly unchanged.
- On May 16, the company acquired two cattle feedlots for $57.7 million, adding capacity for 155,000 head. Together with a March acquisition, the feedlot acquisitions expanded food and ingredients operations. The Cargill supply agreement provides for cattle from specified feedlots to be sold exclusively to Cargill Meat Solutions under an agreed pricing arrangement.
- During Q2, Green Plains exchanged approximately $56.3 million principal amount of 3.25% convertible notes for 2.78 million shares and approximately $8.5 million cash plus accrued interest. $63.7 million principal remained outstanding after the exchanges.
Outlook, risks and contingencies
- No specific company-wide earnings or revenue guidance is provided. Management expected approximately $23.2 million of capital expenditures in the remainder of 2017, following $28.2 million in first-half spending.
- Management estimated U.S. net ethanol exports of 1.1–1.3 billion gallons for 2017. It cited evolving renewable fuel obligations, potential policy changes, gasoline demand and export tariffs as factors affecting the market. The EPA proposed 2018 conventional ethanol obligations of 15.0 billion gallons; related policy and litigation developments could affect industry demand and RIN markets.
- The company’s results are exposed to volatile prices for ethanol, corn, distillers grains, corn oil, natural gas and cattle; hedging can itself generate losses, margin calls and timing mismatches. Management warned that sustained unprofitable operations could strain liquidity and covenant compliance.
- After quarter-end, Green Plains Trade increased its revolving-credit commitment from $150 million to $300 million and extended maturity to 2022. Green Plains Cattle’s facility was also expanded and extended. Management disclosed a July lender meeting about possible refinancing of Green Plains Processing and Fleischmann’s Vinegar debt through a proposed $500 million term loan; this was a discussion, not a completed refinancing.
- Contracted future commodity purchases were approximately $470.7 million. Operating lease commitments totaled $108.7 million. Ordinary-course litigation was not expected by management to materially affect financial condition or results. A separate acquisition-related claim could result in a gain of approximately $5.5 million, but remains disputed and was not recognized.
- Management said it expected adoption of the new revenue standard in 2018 not to materially change the amount or timing of revenue recognition, subject to completion of its assessment. The company expected the 2019 lease standard to significantly increase reported assets and liabilities.
Investor verification priorities
- Assess the sustainability of ethanol margins and whether reduced plant utilization continues; Q2 segment EBITDA weakened sharply despite stable production.
- Review working-capital movements, operating cash use, facility availability and restrictions on moving subsidiary cash to the parent.
- Check variable-rate debt exposure, covenant headroom and the status and terms of any proposed refinancing.
- Evaluate the cattle-feedlot acquisitions, Cargill supply/pricing arrangement and their contribution to food and ingredients earnings and working-capital needs.
- Track renewable fuel policy, export markets, commodity-price and hedging effects, and the unresolved acquisition-related litigation claim.