Business context and reporting period
This is Pacific Ethanol, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019 (ticker PEIX); the filing does not identify the registrant as Alto Ingredients. The company produced and marketed ethanol, specialty alcohols and co-products through nine plants with 605 million gallons of annual capacity. Aurora East was idled; other facilities were operating, although aggregate utilization was about 80% in Q2.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $346.3 million | $410.5 million | $702.1 million | $810.5 million |
| Gross profit (loss) | $4.0 million | $(1.3) million | $1.7 million | $2.1 million |
| Gross margin | 1.1% | (0.3)% | 0.2% | 0.3% |
| Operating loss | $(2.7) million | $(10.2) million | $(13.3) million | $(16.1) million |
| Net loss attributable to Pacific Ethanol | $(7.6) million | $(12.9) million | $(20.5) million | $(20.7) million |
| Net loss per share | $(0.17) | $(0.31) | $(0.45) | $(0.50) |
| Operating cash flow | Not separately presented for Q2 | $(25.8) million | $4.9 million |
At June 30, 2019, cash was $16.5 million, current assets were $174.5 million, current liabilities were $226.3 million, and working capital was negative $51.9 million (current ratio 0.77). Total reported borrowings were $247.6 million before unamortized discounts and financing costs; $143.4 million was classified as current. Separately, the balance sheet included $40.2 million of operating lease assets and $38.8 million of lease liabilities. Kinergy had $12.6 million of additional line availability. Approximately $195.5 million of subsidiary net assets were restricted from transfer to the parent.
Material changes versus prior comparable periods
- Q2 sales fell 15.6%; first-half sales fell 13.4%, reflecting lower production volumes and lower average selling prices. First-half total gallons sold declined 7.7%, production gallons sold declined 13.5%, and capacity utilization fell to 81% from 94%.
- Q2 gross results improved from a loss to a profit, mainly because boiler repair costs incurred in 2018 did not recur. First-half gross profit declined 19.5%, primarily due to weaker first-quarter commodity margins.
- SG&A declined 24.6% in Q2 and 18.0% for the first half, mainly from lower compensation and health insurance costs. Interest expense increased to $5.1 million in Q2 and $9.9 million for the first half.
- Cash declined $10.1 million from year-end, while operating cash flow swung from $4.9 million provided to $25.8 million used. Higher inventory, payment timing and weather-related transportation constraints affected cash use.
Outlook, risks and unusual items
- Management cited slightly improved Q2 crush margins, cost reductions and efficient plant operations, but continued to moderate production due to elevated inventories and temporary river-flooding logistics constraints at Pekin. It expected to complete strategic initiatives over the next four months, including potential asset sales, debt reduction, liquidity measures, partnerships and capital raising.
- Management said the initiatives were expected to provide liquidity for at least 12 months, but warned that delayed or unsuccessful execution, weak margins, or inability to extend or defer debt could leave the company without adequate liquidity and potentially require bankruptcy protection.
- Pacific Ethanol’s $63.2 million senior secured notes were due December 15, 2019. Pekin’s credit amendments required a parent contribution calculated using a $30 million working-capital target plus specified adjustments, and $10.5 million of deferred and remaining 2019 principal payments, by November 15, 2019. The filing warned that failure to meet these conditions could trigger acceleration and foreclosure. Subsequent to quarter-end, the company reported amendments extending certain Pekin deadlines and an August 6 payment of $3.5 million.
- Kinergy’s line terms were amended July 31, 2019, extending temporary borrowing-base accommodations through November 30, 2019. The filing also says the company was exploring refinancing or repayment of the senior notes and marketing certain production assets.
- Management expected 2019 capital expenditures of about $4.0 million. The Stockton CO₂ plant had begun commercial operations and was expected to contribute about $1.0 million in annual operating income; the Stockton cogeneration system was expected to generate over $4.0 million in annual value when fully operational. Revised contractor milestones were expected to improve 2019 cash flow by about $8.0 million.
- Industry risks included volatile ethanol, corn and natural-gas prices; lower demand and high inventories; U.S.–China trade disputes; EPA small-refinery exemptions from the Renewable Fuel Standard; regulatory changes; and operational or transportation disruptions. Commodity derivatives were not designated as accounting hedges; reported derivative gains materially affected results.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $43.8 million of initial right-of-use assets and lease liabilities, with no significant income-statement impact. Management reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether asset sales, refinancing, equity raising or other strategic actions were completed on sufficient terms and in time to address the December 2019 notes and Pekin’s November 2019 requirements.
- Current borrowing availability, covenant compliance, lender waivers and any subsequent changes to debt maturities or payment obligations.
- Whether operating cash flow and margins improved, and whether production utilization, inventory levels and shipment logistics normalized.
- Whether the Stockton CO₂ and cogeneration projects achieved the stated operating-income, annual-value and cash-flow expectations.
- Confirm the issuer identity and corporate name relevant to the investment: this filing is presented under Pacific Ethanol, Inc. and ticker PEIX, not Alto Ingredients.