Green Plains Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2018, compared with Q1 2017. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel-storage and transportation businesses. The company consolidated Green Plains Partners LP.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $1,045.3 million | $887.7 million |
| Operating income (loss) | $(3.9) million | $17.4 million |
| Net income (loss) | $(19.5) million | $1.7 million |
| Net loss attributable to Green Plains | $(24.1) million; $(0.60) per share | $(3.6) million; $(0.09) per share |
| EBITDA | $23.1 million | $43.8 million |
| Net cash used in operating activities | $(41.1) million | $(60.2) million |
Cost of goods sold was $988.3 million. Cash and cash equivalents were $241.0 million at March 31, 2018, with another $24.3 million restricted. The company reported $471.8 million available under revolving credit agreements, subject to lending conditions and restrictions. Debt was approximately $1.4 billion, including $533.7 million of short-term borrowings and $767.8 million of long-term debt; approximately $1.2 billion had variable rates. Total stockholders’ equity was $1,045.6 million.
Quarter-end total assets were $2,659.9 million, down from $2,784.7 million at December 31, 2017. Capital expenditures were $7.4 million in the quarter. The company paid a $0.12-per-share dividend. It reported compliance with debt covenants at quarter-end.
Material changes versus Q1 2017
- Revenue increased 17.8%, primarily reflecting the 2017 cattle-feedlot acquisitions and higher natural-gas sales; lower ethanol, grain and corn-oil volumes and prices partly offset growth.
- Operating results deteriorated: EBITDA fell 47.3%, and Green Plains’ attributable net loss widened to $24.1 million. Management attributed the decline primarily to weaker ethanol-production margins; interest expense rose $3.6 million.
- Ethanol production fell 14.1% to 280.4 million gallons; average capacity utilization was approximately 76.5%, versus 90.1% a year earlier. Management said production was slowed amid seasonally weaker margins and plant upgrades.
- Ethanol-production segment operating loss widened to $27.5 million from $6.6 million. Food and ingredients operating income increased to $12.6 million, principally reflecting acquired cattle operations and higher cattle volumes and margins. Agribusiness operating income rose to $7.1 million; partnership operating income declined to $15.4 million.
- Operating cash use improved by $19.1 million year over year but remained negative. Investing cash use was $0.9 million and financing cash use was $5.2 million.
Outlook, commentary, risks and unusual items
- Management expected approximately $30 million of additional 2018 capital spending, to be funded with operating cash flow and available borrowings. No consolidated earnings or revenue guidance was provided.
- Management estimated 2018 net ethanol exports of 1.6–1.8 billion gallons. It highlighted regulatory and demand uncertainty, including possible RFS volume resets and small-refinery exemptions, litigation over EPA actions, and tariffs affecting U.S. ethanol exports to Brazil and China. The company also noted that year-round E15 sales were under consideration by the EPA following April 2018 announcements.
- Commodity-price volatility is a key exposure. Derivatives may require short-notice margin cash; management said it believed liquidity was adequate to meet margin calls. A 10% increase in interest rates was estimated to increase annual interest cost by approximately $6.6 million.
- The company recorded a $19.2 million lower-of-cost-or-market inventory adjustment and reclassified $19.2 million of net gains from accumulated other comprehensive income into cost of goods sold in the food and ingredients segment. Verify the combined earnings impact and accounting presentation.
- Unrecognized tax benefits were $35.6 million at quarter-end. Tax reform implementation remained under review, and management said finalization of a research-expenditure study could adjust previously recorded tax credits.
- A court process continues over consideration for two ethanol plants acquired in 2013. Green Plains estimated approximately $5.5 million may be due to it, but the amount remains disputed and was not recorded as a gain contingency.
- The partnership’s planned 50/50 acquisition of two fuel terminals, with an expected Green Plains Partners cash contribution of $81.75 million, was anticipated to close in the second half of 2018, subject to conditions and regulatory approvals.
- Management warned that sustained unprofitable operations could strain liquidity and risk covenant compliance. Approximately $167.4 million of subsidiary net assets were restricted from transfer to the parent; the term loan also provides for annual payments of 50% or 75% of available free cash flow, subject to limitations.
Most important facts for investors to verify
- Whether ethanol margins and production utilization recover, and how commodity prices affect segment profitability and hedge results.
- Liquidity, borrowing availability, covenant headroom, variable-rate exposure, and the upcoming $62.2 million carrying value of convertible notes due in 2018.
- The cash-flow and earnings effects of inventory valuation and hedge accounting, including the $19.2 million items.
- Potential outcomes and timing of the ethanol-plant litigation and the terminal-joint-venture transaction.
- Changes in renewable-fuel policy, RIN markets, export tariffs, and demand for ethanol and distillers grains.