Green Plains Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Green Plains operates ethanol and corn oil production, agribusiness, and marketing and distribution businesses; it reported being North America’s fourth-largest ethanol producer.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $744.5 | $837.9 | $1,482.9 | $1,571.7 |
| Gross profit / margin | $47.3 / 6.4% | $78.3 / 9.3% | $72.9 / 4.9% | $179.1 / 11.4% |
| Operating income / margin | $24.4 / 3.3% | $58.9 / 7.0% | $28.5 / 1.9% | $137.3 / 8.7% |
| Net income | $7.8 | $32.3 | $4.5 | $75.5 |
| Diluted EPS | $0.19 | $0.82 | $0.11 | $1.88 |
| EBITDA (company measure) | $39.3 | $74.5 | $58.1 | $168.6 |
- Cash flow: First-half operating cash flow was $23.2 million, down from $151.0 million. Investing used $32.0 million, including $28.7 million of property and equipment purchases; financing used $17.2 million. Cash and cash equivalents ended June at $399.5 million, excluding $17.5 million of restricted cash.
- Liquidity: Current assets were $812.8 million and current liabilities $349.6 million. The company reported up to $175.4 million of additional subsidiary revolver availability, subject to borrowing-base and other conditions. It noted that approximately $701.5 million of subsidiary net assets were restricted from transfer to the parent.
- Debt: Short-term notes and other borrowings were $199.6 million; long-term debt, including current maturities, was $452.8 million, or approximately $652.4 million combined. Of the debt, $521.4 million was variable-rate. The company reported compliance with debt covenants at June 30.
- Other: The quarterly dividend declared was $0.08 per share, versus $0.04 in Q2 2014. Capital spending was $28.4 million in the first half; management expected approximately $45.6 million more for the remainder of 2015.
Material changes versus the prior comparable periods
- Q2 revenue fell $93.4 million (11%), while first-half revenue fell $88.9 million (6%). Lower realized ethanol and distillers-grains prices were central; higher cattle and grain sales partly offset the declines. Cattle sales reflected the feedlot business acquired in 2014.
- Profitability declined substantially: Q2 gross profit decreased $31.0 million and operating income decreased $34.5 million. For the first half, gross profit fell $106.2 million and operating income fell $108.8 million.
- Management attributed the largest profit deterioration to lower ethanol production margins. First-half ethanol segment gross profit declined to $17.5 million from $106.9 million. Marketing and distribution operating income also declined to $10.2 million from $36.9 million.
- First-half ethanol production was 471.2 million gallons, about 93.2% of daily average capacity; management said production was reduced at several plants in response to unfavorable margins. Q2 production was 238.7 million gallons, about 93.9% of capacity.
- Operating cash flow was sharply lower, affected by reduced operating profits and working-capital changes, notably a $100.2 million decrease in accounts payable and accrued liabilities.
Outlook, commentary, risks and unusual items
- Outlook and spending: No quantified earnings or revenue guidance was provided. Management planned continued ethanol-capacity and grain-storage expansion, including approximately $31.2 million of additional ethanol-capacity spending and $1.9 million for grain storage in the remainder of 2015. It said it expected sufficient working capital for existing operations, while cautioning that sustained unprofitable operations could pressure liquidity and covenant compliance.
- Partnership IPO after quarter-end: On July 1, Green Plains Partners LP completed an IPO of 11.5 million units at $15 each. The Partnership received approximately $157.9 million net and distributed $155.3 million to Green Plains. Green Plains retained a 62.5% limited-partner interest and a 2% general-partner interest and expected to consolidate the Partnership. The company entered into long-term commercial arrangements with the Partnership, including minimum-volume commitments and possible shortfall payments.
- Debt refinancing: During Q2, a subsidiary increased its secured term facility by $120 million to $345 million, primarily refinancing subsidiary debt. The facility bears interest at 5.5% plus LIBOR, subject to a 1% floor; the stated rate at June 30 was 6.5%. Quarterly principal payments begin in Q3 2015, and the facility includes leverage and fixed-charge covenants and potential free-cash-flow payments.
- Commodity and operating risks: Results are sensitive to corn, ethanol, distillers-grains, corn-oil and natural-gas prices, which may not move together. Derivatives can create losses, basis exposure and cash collateral demands; the company had $15.0 million in broker margin deposits at quarter-end and warned that margin calls could require significant liquidity on short notice. A 10% interest-rate change was estimated to affect annual interest cost by about $2.8 million.
- Other exposures: New railcar safety rules may require retrofits or replacement, increase lease costs, or reduce railcar availability; Green Plains agreed to reimburse the Partnership for certain retrofit costs. The filing also identifies Partnership distribution, tax, governance/conflict, and operational risks. Commodity purchase commitments were approximately $336.4 million. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Unusual accounting items: First-half results included $18.4 million of net derivative losses from instruments not designated as hedges, before tax. Management said unrealized cash-flow-hedge gains at June 30 were expected to be reclassified into operating income over the next 12 months, with realized amounts subject to commodity-price changes.
Important facts for investors to verify
- Whether ethanol margins and operating rates recover, and how commodity prices and hedging results affect future earnings and cash requirements.
- Available borrowing capacity after borrowing-base limits, subsidiary restrictions, capital spending and possible margin calls; also the company’s ability to maintain each subsidiary’s covenants.
- The effect of the Partnership IPO and related fees, minimum-volume commitments, shortfall-payment exposure, distribution capacity and railcar retrofit obligations.
- Execution and returns on planned plant and grain-storage expansions, and the sustainability of cash generation and dividends amid lower first-half profits.
Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.