Pacific Ethanol, Inc. (issuer mapping to Alto Ingredients should be verified) — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. The filing identifies the registrant as Pacific Ethanol, Inc., not Alto Ingredients, Inc. The company had acquired Aventine in July 2015, so Q1 2016 includes the Midwest operations while Q1 2015 does not; year-over-year comparisons are therefore not fully like-for-like.
Business context and results
The company produced and marketed ethanol and co-products through eight plants, with stated annual ethanol capacity of 515 million gallons. It reported two segments: ethanol production and marketing and distribution. Unless otherwise noted, financial amounts below are in millions of dollars.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $342.4 | $206.2 |
| Gross profit (loss) | $1.1 | ($1.0) |
| Gross margin | 0.3% | (0.5%) |
| Operating loss | ($7.2) | ($5.9) |
| Net loss | ($13.2) | ($4.5) |
| Net loss attributable to common stockholders | ($13.5) | ($4.7) |
| Basic and diluted loss per share | ($0.32) | ($0.19) |
| Operating cash flow | ($5.2) | $7.3 |
| Capital expenditures | $5.0 | $8.2 |
- Sales rose 66.1%, mainly from the acquired Midwest plants and higher sales volumes, partly offset by lower ethanol prices. Total gallons sold increased 52.2% to 206.6 million; average sales price per gallon fell 7.3% to $1.53.
- Despite a small consolidated gross profit, the production segment recorded a pretax loss of $17.3 million; marketing and distribution recorded pretax income of $4.0 million. Management cited a weak industry crush-margin environment.
- Net loss widened primarily with higher SG&A and interest expense. SG&A increased to $8.3 million from $4.9 million, and net interest expense rose to $6.2 million from $1.0 million. Q1 2016 had no income-tax benefit, versus a $2.7 million benefit in Q1 2015.
Liquidity, debt and balance sheet
- At March 31, cash was $19.2 million, down from $52.7 million at year-end. Current assets were $170.2 million and current liabilities $57.6 million, giving working capital of $112.7 million and a current ratio of 2.96.
- Operating, investing and financing activities used $5.2 million, $5.0 million and $23.4 million of cash, respectively; the resulting cash decrease was $33.5 million. Financing cash use included a $17.0 million payment to retire West plant term debt.
- Reported long-term debt, net of current portion, was $203.0 million. Gross borrowings before discounts and financing costs were $205.4 million, including a $56.0 million Kinergy revolving line and $149.4 million of Central plant term debt. Capital-lease liabilities totaled $7.4 million.
- The Central term loan matures September 24, 2017. Interest is 10.5% if paid in cash or 15.0% if paid in kind; the company deferred $3.8 million of Q1 interest and added it to principal. Management said it continued to pursue refinancing.
- Kinergy’s facility has a $75.0 million maximum and expires December 31, 2020. At quarter-end, the borrowing base was $63.4 million, with $7.4 million available. The company reported a fixed-charge coverage ratio of 11.68 against a 2.00 requirement and stated it believed it was compliant.
- Approximately $145.0 million of subsidiary net assets were restricted from transfer to the parent under credit-facility terms. Management believed available resources and expected sources of liquidity would cover working-capital and capital-spending needs for at least 12 months.
Outlook, risks and unusual items
- Management described Q1 as likely the weakest-margin quarter of 2016 and reported significant margin improvement in early Q2, citing lower industry production and record ethanol demand. This was commentary, not a guarantee of future results.
- The company said it was on track to market more than 800 million gallons of ethanol in 2016. It expected quarterly SG&A of approximately $7.5 million through year-end and cut its 2016 capital-improvements budget from $26 million to $15 million.
- Initiatives included a membrane system at Madera, hybrid-corn trials, cellulosic ethanol production at Stockton and planned cogeneration technology. The company was working with its technology provider and the EPA on qualification of Stockton cellulosic ethanol for potential premiums.
- Key risks include volatile ethanol, corn and natural-gas prices; compressed or negative crush margins; uncertain renewable-fuel mandates and demand; plant, logistics and environmental disruptions; customer concentration; acquisition integration; and substantial debt and refinancing needs. A hypothetical 10% adverse price move implied estimated pretax-income exposure of $17.4 million for ethanol and $16.0 million for corn.
- A Western Sugar lawsuit alleges storage-contract damages of approximately $8.6 million; the acquired subsidiary denied the allegations and the case was in discovery. The company recorded $3.3 million in aggregate litigation contingencies for matters it considered probable and estimable.
- The company recognized $0.6 million of gains on settled non-designated commodity hedges, partly offset by $0.3 million of unrealized losses. It also recorded a $256,000 bad-debt expense and reported a $281,000 allowance for doubtful accounts.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm that this Pacific Ethanol filing is the intended filing for Alto Ingredients and verify issuer identity and any relevant corporate succession.
- Assess Central term-loan refinancing prospects, the September 2017 maturity, capitalized interest and restrictions on moving subsidiary cash to the parent.
- Track cash consumption, Kinergy borrowing availability and covenant compliance, especially if margins remain weak.
- Compare reported results with management’s early-Q2 margin commentary and 2016 volume, SG&A and capital-spending expectations.
- Monitor the Western Sugar litigation, other contingencies, commodity-price exposure and changes in renewable-fuel regulation.