Business context and reporting period
This is Pacific Ethanol, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, filed November 9, 2017. The request identifies Alto Ingredients, Inc.; the filing itself identifies the registrant as Pacific Ethanol, Inc., so the company identity should be verified. The company produced and marketed ethanol, specialty alcohols and co-products. Its July 3, 2017 acquisition of Illinois Corn Processing, LLC (ICP) added a 90-million-gallon-per-year facility; ICP’s results are included from the acquisition date.
Financial and operating performance
Dollar amounts below are in millions unless otherwise stated.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $445.4 | $417.8 | $1,237.0 | $1,183.0 |
| Gross profit (margin) | $12.1 (2.7%) | $6.4 (1.5%) | $7.9 (0.6%) | $25.1 (2.1%) |
| Operating income (loss) | $3.3 | $0.4 | $(15.0) | $4.7 |
| Net loss available to common stockholders | $(0.5) | $(3.8) | $(22.6) | $(12.6) |
| Basic and diluted loss per share | $(0.01) | $(0.09) | $(0.53) | $(0.30) |
- Q3 sales rose 6.6%; management attributed the increase mainly to higher ethanol prices and production volumes, including ICP. Q3 production gallons sold rose 13% to 141.8 million, while total gallons sold rose 2.6% to 250.0 million.
- Q3 gross profit nearly doubled year over year as margins improved, particularly in ethanol production. For the nine-month period, gross profit fell 68.4%, reflecting weaker production and marketing margins.
- Nine-month net loss worsened despite interest expense declining 45% to $9.2 million, primarily following the late-2016 plant-debt refinancing. A $3.6 million gain from legal settlements was recorded in SG&A during Q1 2017.
- Operating cash flow was $35.0 million for the first nine months, versus $15.0 million in 2016. Investing activities used $41.3 million, including $28.9 million net cash paid for ICP; financing activities used $5.4 million. Cash declined $11.7 million to $56.9 million.
- At September 30, working capital was $120.4 million, with a 2.30 current ratio. Current assets were $212.8 million and current liabilities $92.4 million.
- Gross borrowings were $243.9 million; balance-sheet current and long-term debt, net of discounts and financing costs, totaled approximately $240.3 million. All long-term borrowings were variable-rate. The filing reports $22.4 million of additional availability on Kinergy’s line and $30.0 million available on Pacific Aurora’s facility. Subsidiary financing restrictions made $305.7 million of net assets unavailable for transfer to the parent.
Material changes, outlook and risks
- ICP acquisition: The stated purchase price was $76.9 million, comprising $30.0 million cash and $46.9 million of seller notes. The seller notes were repaid in September using cash and proceeds from ICP credit facilities. ICP contributed $38.2 million in revenue and $1.4 million in pretax income from the acquisition date through September 30. The purchase-price allocation remained provisional, particularly for property, equipment, seller notes and tax effects.
- Management outlook: Management expected approximately $4.5 million of annual ICP cost savings, with integration progressing and logistics savings expected to build. It described Q4 as starting slowly, with lower margins amid high industry ethanol inventories, while expressing hope for improved supply-demand conditions in 2018. These are forward-looking expectations, not assured results.
- Projects and spending: Full-year 2017 capital expenditures were expected to be below $20 million, versus an initial $46 million budget; nine-month spending was $12.3 million. Management cited expected annual savings of up to $4 million from Stockton cogeneration, about $1 million from Madera membrane-system efficiencies and carbon premiums, and over $1 million from Madera solar power when operational.
- Risks and contingencies: Results are sensitive to ethanol, corn, natural gas and co-product prices, production and inventory levels, customer concentration, transportation and plant operations, and federal and state renewable-fuel policy. Commodity hedges can add volatility. A hypothetical 10% adverse commodity-price change was estimated to reduce pretax income by $62.3 million for ethanol and $51.8 million for corn; a 100-basis-point rate increase was estimated to reduce nine-month pretax income by about $1.8 million. Management said pending legal matters were not expected to materially affect results, but noted outcomes remain uncertain.
- Credit agreements impose working-capital and debt-service covenants; certain requirements were amended during the quarter. Management said available resources should be adequate for anticipated requirements for at least 12 months. The filing also identifies past losses and the possibility of future losses or negative operating cash flow.
- 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.
Important facts for investors to verify
- Confirm whether the filing belongs to the requested company: it names Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Track whether Q4 margins recover and whether the projected 2018 improvement materializes amid industry inventories and commodity-price volatility.
- Assess the final ICP purchase accounting, integration progress, actual cost savings and contribution to earnings and cash flow.
- Review variable-rate debt, subsidiary covenant compliance, borrowing availability, refinancing needs and the restrictions on transferring subsidiary cash to the parent.
- Compare actual capital spending and project savings with management’s estimates, and monitor changes in renewable-fuel policy and customer demand.