Green Plains Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, with unaudited fourth-quarter results also presented. The filing was dated February 14, 2018. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel storage and transportation businesses.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Revenue | $3.596 billion | $3.411 billion | Up 5.4% |
| Operating income | $41.7 million | $91.7 million | Down 54%; operating margin fell to about 1.2% from 2.7% |
| Income (loss) before tax | $(43.2) million | $38.4 million | Turned to a pretax loss |
| Income tax benefit (expense) | $124.8 million | $(7.9) million | Primarily reflects tax reform and R&D credits |
| Net income attributable to Green Plains | $61.1 million | $10.7 million | Includes substantial tax benefits despite the pretax loss |
| Diluted EPS | $1.47 | $0.28 | 2017 diluted EPS used the if-converted method for convertible debt |
| EBITDA (non-GAAP) | $154.4 million | $174.4 million | Down 11.5% |
| Operating cash flow | $(159.8) million | $85.2 million | Primarily affected by inventory growth and income-tax movements |
Cost of goods sold was $3.302 billion, leaving $294.6 million before other operating expenses. Interest expense increased to $90.2 million from $51.9 million, including costs associated with refinancing and extinguishing debt. The company reported a $124.8 million income tax benefit; this included a $52.8 million benefit from revaluing deferred tax liabilities after the federal tax rate fell to 21%, and recognized $48.1 million of net R&D tax credits for prior and current years. It also recorded $9.2 million of refundable credits as a reduction of cost of goods sold.
At year-end, cash and cash equivalents were $266.7 million, current assets were $1.206 billion, and current liabilities were $886.3 million. Approximate working capital was $320.2 million and the current ratio was 1.36. Management reported $391.9 million available under revolving credit agreements, subject to restrictions and lending conditions; $198.3 million of cash was available at the parent company. About $142.8 million of subsidiary net assets were restricted from transfer to the parent.
Total debt was approximately $1.4 billion; $1.2 billion bore variable interest rates. The company estimated that a 10% increase in interest rates would raise annual interest cost by about $6.2 million. It reported compliance with debt covenants at December 31, 2017. Operating cash flow was negative, while investing activities used $128.5 million and financing activities provided $250.7 million.
Fourth-quarter results
For the three months ended December 31, 2017, revenue was $921.0 million, operating income was $7.4 million, and net income attributable to Green Plains was $46.6 million. Basic and diluted EPS were $1.16 and $0.99, respectively. The quarter included a $63.9 million income tax benefit; quarterly earnings therefore should not be viewed as a measure of operating performance alone.
Material changes and operating developments
- Revenue grew with higher ethanol and corn oil volumes and the inclusion of acquired businesses, partly offset by lower grain-trading activity and lower average realized prices for ethanol, grain, and distillers grains.
- Ethanol production segment operating results weakened: the segment reported a $45.1 million operating loss, versus $28.1 million of operating income in 2016. Segment EBITDA fell to $40.1 million from $97.1 million. Management attributed the decline mainly to compressed ethanol margins; plants operated at about 85% of daily average capacity, particularly reflecting weak margins in the first half.
- Food and ingredients segment operating income increased to $36.0 million from $16.4 million, reflecting cattle-feedlot acquisitions and a full year of Fleischmann’s Vinegar operations. The segment’s revenue increased to $471.8 million from $318.2 million.
- Green Plains acquired a Texas cattle-feeding operation in March and two operations in Kansas and Colorado in May, adding combined capacity of 185,000 head; total cattle-feeding capacity reached approximately 258,000 head.
- In August, the company entered into a $500 million secured term loan due in 2023, refinancing about $405 million of existing debt and paying related costs. The loan bears floating interest at base rate plus 4.50% or LIBOR plus 5.50%, is secured by substantially all company and obligor assets, and includes annual payments of 50% or 75% of available free cash flow from 2018, subject to limitations.
- The company exchanged approximately $56.3 million principal amount of 3.25% convertible notes for 2.78 million shares and about $8.5 million cash plus accrued interest; $63.7 million principal remained outstanding. It repurchased 394,677 shares for approximately $6.7 million during the year.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management projected approximately $80 million of 2018 capital spending, subject to review before projects begin, for expansions, joint-venture investments, and maintenance.
- Management said it expected ethanol exports to remain active in 2018. Industry conditions remain sensitive to commodity spreads, ethanol supply and demand, gasoline demand, weather, and export markets. The company uses hedging and may reduce or suspend production when margins are compressed, but hedges may not fully offset exposure and can create liquidity needs from margin calls.
- Federal renewable-fuel policy is a significant uncertainty. The 2018 conventional ethanol obligation remained at 15 billion gallons, but a statutory reset could be triggered if total renewable-volume obligations remain more than 20% below statutory levels for two consecutive years. The company also cited legal challenges to EPA decisions and uncertainty around future RVOs and RIN markets.
- Export risks include tariffs and trade restrictions: Brazil imposed a 20% tariff on U.S. ethanol imports above a quarterly threshold, and China raised duties on U.S. dried distillers grains. Changes to trade agreements or retaliatory tariffs could affect sales and margins.
- Other material risks include high leverage and variable rates, restrictive debt covenants, environmental and safety regulation, railcar availability and compliance costs, customer and counterparty credit risk, and cattle, vinegar, and food-safety exposures. The company noted that some assets secure its borrowings.
- The $124.8 million tax benefit materially affected reported net income. The company was still evaluating parts of the Tax Cuts and Jobs Act, including interest-deduction limits; subsequent tax-accounting adjustments could affect results.
- In acquisition-related litigation over two ethanol plants, Green Plains estimated approximately $5.5 million might be due to it, but treated this as a gain contingency and did not record it pending resolution. The company said ordinary-course litigation was not expected to have a material adverse effect.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded acquired cattle businesses—about 8% of consolidated assets and 3% of revenue—from the internal-control assessment.
Key facts for investors to verify
- How much of FY2017 attributable earnings and EPS is repeatable without the tax-reform and R&D-credit benefits, and how will the remaining tax uncertainties be resolved?
- Can ethanol margins and operating cash flow recover, given the ethanol segment loss, 85% utilization, and $159.8 million of cash used in operations?
- What are current debt balances, borrowing availability, covenant headroom, and cash-transfer restrictions across subsidiaries, particularly after the term-loan refinancing and cattle-feedlot expansion?
- How do future EPA RVOs, RIN prices, export tariffs, and higher-blend ethanol adoption affect realized prices, production volumes, and margins?
- What returns and working-capital needs are the cattle acquisitions generating, and what are the implications of the exclusive Cargill cattle-supply agreement?
- How will the 2018 capital program, dividend, and partnership distributions be funded if commodity volatility continues to pressure operating cash generation?