Green Plains Renewable Energy, Inc. (now Green Plains Inc.) — Q2 2012 Form 10-Q
Business context and reporting period. The unaudited report covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company operated nine ethanol plants and businesses in corn oil, agribusiness, and marketing and distribution. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $870.4 | $861.6 | $1,645.8 | $1,673.9 |
| Gross profit | $18.1 | $35.3 | $26.9 | $72.9 |
| Operating income (loss) | $(1.1) | $17.8 | $(12.2) | $37.8 |
| Net income (loss) attributable to Green Plains | $(7.6) | $5.0 | $(20.2) | $12.7 |
| Diluted earnings (loss) per share | $(0.25) | $0.14 | $(0.65) | $0.34 |
| EBITDA, as defined by management | $11.4 | $29.8 | $12.9 | $61.8 |
Gross margin was approximately 2.1% in Q2 2012 versus 4.1% in Q2 2011; the six-month margin was approximately 1.6% versus 4.4%. Interest expense was $9.8 million in Q2 and $18.9 million for the first half. Income tax benefits were $4.1 million and $12.1 million, respectively, reflecting losses.
- Cash flow: Six-month operating cash use was $40.4 million, compared with $19.6 million in 2011. Investing cash use was $21.7 million, and financing provided $7.8 million. Cash and equivalents declined $54.3 million during the half to $120.7 million.
- Liquidity: The company reported up to $161.6 million available under subsidiary revolving facilities, subject in some cases to borrowing-base limits and other conditions. Restricted cash was $16.2 million on the balance sheet. Subsidiary funds were generally needed for operations, and approximately $475.6 million of subsidiary net assets were restricted from transfer to the parent.
- Debt: Total debt was $678.8 million at June 30, up from $636.8 million at December 31, 2011. Of the June balance, $208.3 million was contractually due within one year; the filing also reports $75.0 million of current maturities and $133.2 million of short-term notes and other borrowings. Variable-rate debt was $434.9 million; management estimated a 10% interest-rate change would affect annual interest cost by about $1.6 million.
- Balance sheet: Total assets were $1,322.7 million and stockholders’ equity was $462.8 million at June 30, down from $1,420.8 million and $505.4 million, respectively, at year-end 2011.
Material changes versus prior comparable periods
- Q2 revenue increased 1.0%, but gross profit fell 48.6% and the company moved from operating and net income to losses. For the first half, revenue declined 1.7%, while gross profit fell 63.1% and operating results also shifted to a loss.
- The ethanol production segment was the principal weakness: Q2 gross loss was $6.9 million versus $15.7 million gross profit a year earlier; first-half gross loss was $16.9 million versus $39.0 million gross profit. Management attributed the deterioration mainly to unfavorable ethanol operating margins and lower average ethanol prices.
- Corn oil production improved with wider deployment of extraction systems: Q2 sales volume was 38.6 million pounds versus 21.5 million; first-half volume was 72.1 million versus 31.6 million. Segment gross profit rose to $9.4 million in Q2 and $17.3 million for the half.
- Agribusiness gross profit increased to $8.6 million in Q2 and $14.8 million for the half, supported by grain volume and unit margins. Marketing and distribution had higher Q2 gross profit but lower first-half gross profit than the prior year.
- The company repurchased 3.7 million shares from NTR plc for $37.2 million in March. It paid $10.0 million in cash and issued a secured $27.2 million, 5% note due March 9, 2013. Treasury shares totaled 7.2 million at June 30.
Outlook, management commentary, risks and unusual items
- Management cited ethanol inventories above normal levels after producers increased output ahead of the December 2011 expiration of the blender’s tax credit. Industry production had subsequently been reduced; Green Plains cut output at two plants by about 30%, or roughly 7% of company capacity, in response to poor margins.
- Management said July 2012 drought conditions had pushed corn prices to all-time highs and expected margin conditions to remain affected in the second half, though it anticipated improvement in the fourth quarter. These were expectations, not guaranteed results. The filing provides no numerical earnings or revenue guidance.
- The company had $14.4 million of capital expenditures in the first half and expected about $16.7 million more during the remainder of 2012. A new Birmingham unit-train terminal was expected to be operational in Q4 2012.
- Management reported covenant compliance at June 30 but said certain ethanol subsidiaries might require parent capital injections to maintain compliance in the remainder of 2012. It cautioned that poor results could cause defaults and lenders could accelerate debt. The company expected to refinance or extend certain facilities before maturity, including facilities with 2013 maturities.
- Commodity-price swings, margin calls, limited access to financing, counterparty exposure, and potential changes to federal renewable-fuel mandates were material risks. Livestock groups had requested an EPA waiver of RFS II due to drought; management considered a waiver unlikely based on then-current agency comments. The filing also discusses the expiration of the ethanol blender’s credit, effective January 1, 2012.
- Derivative gains and losses can cause earnings volatility and require liquidity for margin calls. The company reported $10.1 million of net deferred gains in accumulated other comprehensive income and expected reclassification into income over the next 12 months, subject to commodity-price changes.
- Unusual item: An April 2012 settlement of Aventine litigation required a cash payment and purchase of 20 million gallons of ethanol; a $2.4 million after-tax charge was recorded for the first half.
- Green Plains increased its BioProcess Algae ownership from 35% to 49% in April and described a Phase III project. A possible 200–400 acre build-out was estimated to cost $50–$80 million; the filing states funding sources had not been determined. A commercial supply agreement for EPA-rich algae oils was signed in June.
Most important facts for investors to verify
- Whether ethanol production margins recover as management expected, and how drought-driven corn costs and ethanol prices affect results.
- Actual revolver availability after borrowing-base conditions, restricted cash, subsidiary cash-transfer limits, and parent liquidity needs.
- Progress on covenant compliance, any required capital injections, and refinancing or extension of facilities maturing in 2013.
- Cash-flow performance and the extent to which working-capital changes, grain settlements, and margin calls continue to consume liquidity.
- Costs, funding, and commercial progress for the Birmingham terminal and BioProcess Algae initiatives, and realization of the deferred derivative gains.