Alto Ingredients, Inc. (formerly Pacific Ethanol, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 3, 2019. The filing names Pacific Ethanol, Inc. as the registrant. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
The company produced and marketed ethanol, specialty alcohols and co-products through nine facilities with stated annual capacity of 605 million gallons. All facilities except Aurora East were operating. Its production and marketing/distribution activities are reported as separate segments.
Financial performance and liquidity
- Revenue: Net sales were $355.8 million, down 11.1% from $400.0 million. Total gallons sold fell 9.0% to 211.8 million; average sales price declined 2.5% to $1.53 per gallon.
- Profitability: Gross loss was $2.3 million (negative 0.6% margin), versus gross profit of $3.4 million (0.8% margin). Operating loss was $10.5 million versus $6.0 million. Consolidated net loss was $14.2 million versus $9.5 million; net loss attributable to common stockholders was $13.2 million, or $0.29 per share, versus $8.2 million, or $0.19 per share.
- Segment results: Production reported a $17.6 million pretax loss, compared with a $12.4 million loss. Marketing and distribution reported $6.1 million of pretax income, compared with $5.8 million.
- Cash flow: Operating activities used $15.0 million, compared with $8.9 million provided in Q1 2018. Investing activities used $1.1 million. Financing activities provided $11.3 million, including $13.2 million net borrowing under Kinergy’s line of credit and $3.7 million of common-stock proceeds. Cash declined $4.9 million to $21.8 million.
- Balance sheet and liquidity: Current assets were $176.7 million and current liabilities $236.2 million, a $59.5 million working-capital deficit; the current ratio was 0.75. Cash was $21.8 million, with $21.8 million of additional Kinergy line availability. Approximately $195.0 million of subsidiary net assets were restricted from transfer to the parent.
- Debt: Gross borrowings were approximately $241.4 million before unamortized discounts and financing costs. Balance-sheet current debt was $143.1 million and long-term debt was $96.4 million. The $63.2 million senior secured notes mature December 15, 2019. Pekin had $75.0 million outstanding across its term and revolving facilities and no additional revolving availability. Operating lease liabilities totaled about $40.7 million after adoption of ASC 842.
- Other metrics: SG&A was $8.2 million, down 11.6%. Capital expenditures were $1.1 million in the quarter. The filing does not provide a clear consolidated EBITDA value.
Material changes versus Q1 2018
- Sales and volumes declined, with production gallons sold down 17.0% and production capacity utilization down to 82% from 94%.
- Management attributed the gross-margin deterioration chiefly to lower ethanol prices and higher corn costs. Delivered corn cost rose 7.0% to $4.11 per bushel, while the average CBOT ethanol price fell 7.0% to $1.32 per gallon.
- Third-party gallons sold increased 3.3% to 94.9 million, partly offsetting lower company-produced volumes. Marketing segment gross profit rose to $7.8 million from $7.2 million.
- Debt carrying balances shifted toward long-term debt, while substantial obligations remained current because of the senior-note maturity and Pekin lender forbearance. The company issued 3.14 million shares through its at-the-market program for approximately $3.7 million net proceeds.
- Adoption of ASC 842 on January 1, 2019 added $43.8 million of initial right-of-use assets and lease liabilities; management said adoption did not significantly affect operating results.
Outlook, risks and unusual items
- Management said margins improved in Q1 and had improved further early in Q2, citing better crush margins, increased higher-margin third-party ethanol sales and cost reductions. It reported operating at approximately 83% of production capacity and continuing to moderate production at locations affected by high inventories.
- Management expected about $9.0 million of SG&A in Q2 and approximately $4.0 million of capital expenditures for full-year 2019, mainly for normal repairs and maintenance. It gave no quantified full-year revenue or earnings guidance.
- The company was pursuing asset sales, debt reduction, liquidity measures, strategic partnerships and capital raising, and said it had engaged a third party to help market certain assets. Management believed these initiatives could meet working-capital, debt-service and other liquidity needs through the next 12 months if implemented timely and on suitable terms.
- Liquidity risk was acute: Pekin’s temporary covenant waivers and principal deferrals were scheduled to expire July 15, 2019 unless required conditions, including a parent contribution based on a specified formula, were met. Pekin also faced $14.0 million of deferred and remaining 2019 principal payments by that date. The senior secured notes’ $63.2 million principal was due in December 2019.
- The filing warned that failure to execute asset sales or raise capital, continued weak margins, or inability to extend or defer debt could leave the company without sufficient liquidity within 12 months or sooner, potentially requiring bankruptcy protection and risking foreclosure on assets.
- Key operating risks include volatile ethanol, corn and natural-gas prices; industry supply and demand; regulatory changes and EPA small-refinery exemptions; customer concentration; facility and logistics disruptions; and debt covenant or refinancing constraints. Management said pending legal matters were not expected to materially affect the company, while noting outcomes remained uncertain.
Most important facts for investors to verify
- Progress and realized proceeds from production-asset sales, refinancing, partnerships or other capital raises, and the resulting liquidity runway.
- Whether Pekin met the July 15, 2019 contribution, working-capital and $14.0 million payment conditions, and the status of its covenant waivers.
- How the $63.2 million senior secured notes due December 2019 were repaid, refinanced or otherwise addressed.
- Subsequent operating margins, cash burn, plant utilization and cash availability, including Kinergy borrowing-base capacity.
- Share-count changes and dilution from the at-the-market program; the filing reports 49,868,433 common shares outstanding as of May 2, 2019.