Green Plains Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Green Plains operates ethanol production, agribusiness and energy services, food and ingredients, and fuel storage and transportation businesses. Results include acquisitions of ethanol plants in 2016, Fleischmann’s Vinegar in October 2016, and cattle feedlots in 2017.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $901.2 million | $841.9 million | $2,675.2 million | $2,478.8 million |
| Operating income | $20.7 million | $30.9 million | $34.3 million | $35.6 million |
| Net income (loss) attributable to Green Plains | $34.4 million | $7.9 million | $14.4 million | $(8.0) million |
| Diluted EPS | $0.74 | $0.20 | $0.48 | $(0.21) |
| EBITDA | $50.4 million | $49.1 million | $118.3 million | $91.0 million |
Q3 gross margin was approximately 9.5% of revenue, versus 9.9% a year earlier; operating margin was approximately 2.3%, versus 3.7%. Nine-month operating margin was approximately 1.3%, versus 1.4%.
- Cash flow: Operating cash flow was negative $122.2 million for the first nine months, compared with positive $63.2 million in 2016. Investing cash flow was negative $110.2 million, including $61.7 million for the 2017 cattle-feedlot acquisition and $36.5 million of property and equipment purchases. Financing cash flow was positive $189.8 million.
- Liquidity: September 30 cash and equivalents were $261.6 million, plus $30.8 million restricted cash. Management reported $297.0 million available under revolving facilities, subject to restrictions and lending conditions. Current assets were $1.10 billion and current liabilities $699.5 million.
- Debt: Short-term borrowings were $457.8 million and total long-term debt, including current maturities, was $836.4 million. Total debt was approximately $1.29 billion; $1.1 billion was variable-rate. The company reported covenant compliance at quarter-end.
- Dividends: Green Plains declared $0.12 per share for Q3. The board’s future declarations remain subject to approval and business and liquidity conditions.
Material changes versus prior year
- Revenue rose 7.1% in Q3 and 7.9% for the first nine months, reflecting higher ethanol volumes and the added vinegar and cattle businesses. Q3 ethanol production was 313.6 million gallons, up 7.3%; plant utilization was 83.7%, versus 92.5% a year earlier.
- Q3 operating income fell 32.9%, primarily from lower ethanol production margins. Q3 EBITDA increased 2.7%, as vinegar and cattle contributions largely offset weaker ethanol margins. Nine-month EBITDA rose 30.1%, largely from the acquired businesses; ethanol and agribusiness segment EBITDA declined.
- Q3 net income included a $48.8 million income-tax benefit despite a $9.3 million pretax loss. The nine-month tax benefit was $60.9 million. Management attributed the change primarily to recognition of research and development tax credits, including $49.5 million related to prior tax years and estimated 2017 credits.
- Interest expense increased to $31.9 million in Q3 from $11.8 million, and to $69.8 million for nine months from $33.1 million. The increase included $12.3 million of charges related to terminating prior credit facilities; Q3 also included financing-fee write-offs and a prepayment penalty.
- Inventory increased to $612.4 million from $422.2 million at year-end 2016, contributing to the working-capital cash outflow.
Outlook, risks and unusual items
- Management estimated 2017 net ethanol exports of 1.1–1.3 billion gallons. It expected approximately $11.9 million of additional 2017 capital expenditures and $7.4 million of joint-venture investments. No earnings guidance was provided.
- The August 2017 $500 million secured term loan refinanced debt at the processing and vinegar businesses and matures in 2023. It bears floating interest, is secured by substantial company assets, and includes quarterly leverage and interest-coverage tests and future excess-cash-flow repayment requirements.
- Management said it believed liquidity was adequate for existing operations, but warned that sustained unprofitable operations could strain liquidity and jeopardize covenant compliance. Commodity price volatility can also require significant, short-notice margin deposits; broker margin deposits were $52.5 million at quarter-end. A 10% increase in interest rates was estimated to increase annual interest cost by about $6.7 million.
- Key ethanol-market uncertainties include EPA renewable volume obligations and potential changes to the Renewable Fuel Standard, export tariffs and policy, gasoline and ethanol demand, and commodity prices. Brazil imposed a tariff on U.S. ethanol imports above a quarterly threshold; China had imported negligible U.S. volumes year to date. The filing also highlights cattle, grain, counterparty, acquisition and regulatory risks.
- The company disclosed ordinary-course litigation it did not expect to have a material adverse effect. In a separate acquisition-related dispute, Green Plains estimated about $5.5 million may be due to it, but the amount is disputed and was not recorded as a gain because contingencies remain unresolved.
- After quarter-end, Green Plains Partners increased its revolving credit facility from $155 million to $195 million. Management also anticipated completion of Phase I of a Beaumont, Texas fuels terminal development in November 2017.
Important facts for investors to verify
- Whether ethanol margins, plant utilization and cash generation recover, and how acquired businesses contribute to earnings.
- The sustainability and tax treatment of the R&D credits that drove the reported tax benefit, including the $27.3 million of unrecognized tax benefits disclosed at quarter-end.
- Debt maturities, variable-rate exposure, collateral and covenant headroom, as well as actual borrowing availability after restrictions.
- Working-capital and inventory movements, derivative positions and potential liquidity needs from margin calls.
- Final EPA renewable fuel obligations, export-market developments, and resolution of the approximately $5.5 million litigation-related gain contingency.