Pacific Ethanol, Inc. (PEIX) — Q2 2020 Form 10-Q
Issuer identification: The supplied filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc. It covers the quarter and six months ended June 30, 2020; amounts below are in U.S. dollars unless stated otherwise. Financial statement amounts are generally in millions, converted from thousands.
Business context and reporting period
Pacific Ethanol produced and marketed fuel ethanol, higher-quality alcohol products and co-products. After selling its 73.93% interest in Pacific Aurora on April 15, 2020, the company reported seven production facilities with combined annual capacity of 450 million gallons. The filing attributes materially stronger Q2 margins to increased demand for alcohol used in sanitizers and disinfectants, while pandemic-related declines in transportation and fuel demand pressured fuel ethanol.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $212.1m | $346.3m | $523.5m | $702.1m |
| Gross profit / margin | $31.2m / 14.7% | $4.0m / 1.1% | $18.3m / 3.5% | $1.7m / 0.2% |
| Operating income (loss) | $22.6m | $(2.7)m | $(0.5)m | $(13.3)m |
| Consolidated net income (loss) | $14.9m | $(8.3)m | $(12.3)m | $(22.5)m |
| Net income (loss) available to common shareholders | $14.6m | $(8.0)m | $(10.8)m | $(21.2)m |
| Basic and diluted earnings (loss) per share | $0.27 | $(0.17) | $(0.20) | $(0.45) |
Q2 sales fell 38.8% year over year; six-month sales fell 25.4%. The company said higher margins on high-quality alcohol more than offset lower production volumes, driving the improvement in gross profit. Q2 production gallons sold declined 52% and production capacity utilization was 40%; six-month production gallons sold declined 23.8%. The filing reports utilization of approximately 50% at quarter-end and approximately 52% at the report date.
- Cash flow: First-half operating cash flow was $45.7m, versus cash used of $25.8m in the prior-year period. Investing activities provided $17.4m, including $19.9m net proceeds from the Pacific Aurora sale; capital expenditures were $2.5m. Financing activities used $52.3m, primarily for debt payments. Q2-only cash flow is not separately stated in the supplied filing text.
- Cash and liquidity: Cash was $29.8m at June 30, up from $19.0m at year-end 2019; Kinergy had $10.0m of additional line availability. Current assets were $131.8m and current liabilities $147.0m, leaving a $15.2m working-capital deficit and a 0.90 current ratio.
- Debt: Reported current debt was $96.0m and long-term debt, net, was $95.9m. The debt schedule lists $193.1m of borrowings before unamortized adjustments. The company made $52.3m of net debt payments in the first half and reported a further $9.2m of term-debt payments after quarter-end.
Material changes versus the prior comparable period
- Revenue contraction reflected reduced fuel demand and lower production volumes, though Q2 gross profit and earnings improved substantially on higher high-quality-alcohol margins.
- The Pacific Aurora sale reduced the company’s footprint and removed noncontrolling interests. Consideration was $52.8m, subject to approximately $35.3m of working-capital adjustments: $19.9m cash proceeds and $16.5m in promissory notes. The company recorded an approximately $1.4m loss on sale and used about $14.5m of cash proceeds to repay term debt.
- Debt carrying value and current classification changed materially: $96.0m was classified as current, in part because lender approval of a comprehensive restructuring plan remained outstanding.
- The company received $9.9m in Paycheck Protection Program loans at 1% interest, with possible forgiveness subject to qualifying-use conditions; forgiveness was not assured.
- Preferred dividends of $0.3m for Q2 and $0.6m for the first half were accrued but not paid, to preserve liquidity. Common dividends were not being paid.
Outlook, management commentary and risks
- Management expected robust high-quality-alcohol demand for at least the next 12 months, supported by fixed-price contracts and hedging of corn costs. It was expanding Pekin high-quality-alcohol capacity, targeting total capacity of 140 million gallons per year in 2021, most meeting or exceeding USP specifications.
- Management described fuel-ethanol demand and margins as volatile and uncertain, with demand still more than 10% below the prior year. It did not plan to restart idled Western fuel-ethanol plants until it could better secure positive forward margins; it was considering repurposing, asset sales and other strategic options. It anticipated restarting the idled Pekin dry mill in September 2020.
- The company was negotiating a comprehensive asset-and-liability restructuring plan with lenders and had appointed a chief restructuring officer. The filing says it was not in compliance with the obligation to obtain Pekin and ICP lender approval of that plan. Lenders could accelerate debt; management did not consider acceleration probable, but stated it lacked sufficient liquidity to repay accelerated debt immediately.
- Management said projected operating cash flows and debt repayments alleviated substantial doubt about the company’s ability to continue as a going concern and that liquidity should be sufficient for the next 12 months. This assessment followed a going-concern explanatory note in the 2019 audit report.
- Key risks include the pandemic and fuel-demand recovery, volatile ethanol and corn prices, variable-rate debt, covenant and refinancing risk, execution of restructuring or asset-sale plans, reliance on customer demand and regulatory support, and potential future operating losses. Approximately $204.4m of subsidiary net assets were restricted from transfer to the parent.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing entity and ticker: the source is Pacific Ethanol, Inc. (PEIX), despite the request metadata naming Alto Ingredients, Inc.
- Track lender negotiations, approval of the restructuring plan, covenant status, current debt classification and any acceleration or waiver developments.
- Assess whether cash generation, debt repayments and available borrowing remain sufficient, particularly given the working-capital deficit and restricted subsidiary assets.
- Verify the collection, interest and repayment terms of the $16.5m Pacific Aurora notes, and progress on any further asset sales or strategic financing.
- Monitor sustained sanitizer/alcohol demand, contract coverage and corn hedges, alongside fuel-ethanol demand, plant restarts and actual margins.
- Check PPP loan forgiveness outcomes and the terms and use of any additional financing or restructuring proceeds.