Business context and reporting period
This is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. Important identity note: although the request metadata names Alto Ingredients, Inc., the supplied filing is for Pacific Ethanol, Inc. (now associated with Alto Ingredients); verify the issuer and filing before relying on this summary.
Pacific Ethanol marketed and produced renewable fuels in the Western United States, including ethanol and co-products. It consolidated New PE Holdco, which owned four plants with aggregate annual capacity of 200 million gallons; three plants were operating and the 40-million-gallon Madera facility was idled. In July, the company increased its ownership in New PE Holdco from 34% to 67%.
Financial performance and position
Amounts below are in millions of dollars, except per-share figures, percentages, and volumes. The company reported that weaker corn crush margins—affected by ethanol demand and corn and ethanol prices—drove operating losses.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $215.9 | $271.6 | $619.0 | $659.4 |
| Gross profit (loss) | $(2.4) | $8.2 | $(14.8) | $12.0 |
| Gross margin | (1.1%) | 3.0% | (2.4%) | 1.8% |
| Operating income (loss) | $(5.3) | $4.7 | $(24.2) | $0.3 |
| Consolidated net income (loss) | $(9.7) | $4.6 | $(33.7) | $(4.8) |
| Net income (loss) available to common stockholders | $(6.3) | $4.0 | $(14.5) | $4.2 |
| Basic and diluted earnings (loss) per share | $(0.05) | $0.12 | $(0.15) | $0.20 |
Q3 total gallons sold fell 12.4% to 107.3 million; average selling price fell 10.8% to $2.65 per gallon. For the nine months, total gallons sold rose 10.0% to 338.7 million, mainly from third-party marketing, while average selling price declined 12.9% to $2.43.
- Cash flow: Nine-month operating cash use was $11.4 million, investing cash use $12.1 million, and financing cash provided $33.3 million. Cash increased to $18.7 million from $8.9 million at year-end 2011. Financing included $21.0 million net proceeds from stock-and-warrant offerings and $13.2 million net borrowings.
- Liquidity: Working capital was $6.8 million, down from $50.5 million at December 31, 2011; the current ratio fell to 1.11 from 4.10. Current liabilities increased substantially, including from debt reclassified as due in 2013.
- Debt: Balance-sheet debt was approximately $119.1 million, of which $50.1 million was current. The consolidated variable-interest entity had $97.4 million of liabilities for which creditors had no recourse to Pacific Ethanol’s general credit. Kinergy’s line balance was $17.2 million, with $4.2 million available; the Plant Owners had $38.5 million drawn and $0.7 million available under their revolving facility at quarter-end.
- Margins and expenses: SG&A declined to $2.9 million in Q3 and $9.4 million year to date. Net interest expense also declined year over year, but did not offset the deterioration in gross profit.
Material changes versus prior comparable periods
- Q3 sales declined 20.5% and nine-month sales declined 6.1%. The Q3 decline reflected both lower volume and lower selling prices; year-to-date volume increased, but lower prices outweighed that growth.
- Gross profit shifted from positive to negative in both comparison periods, primarily due to lower corn crush margins. The company also received no California Ethanol Producer Incentive Program proceeds in 2012, compared with approximately $1.5 million that reduced 2011 production costs.
- Pacific Ethanol acquired an additional 33% of New PE Holdco for $20.0 million, paying $10.0 million cash and issuing $10.0 million in notes. The increased ownership raised the share of plant-level results attributed to Pacific Ethanol, without changing consolidated net income.
- Common shares outstanding increased from 86.6 million at December 31, 2011 to 144.7 million at September 30, 2012, primarily following two public offerings. The offerings also issued warrants; warrant liabilities were $6.5 million at quarter-end.
Outlook, risks and unusual items
- Management believed available capital, operating revenues, and credit facilities would cover anticipated needs for the next 12 months, but warned that weaker or insufficiently improved corn crush margins or other cash-flow shortfalls could require additional financing. This assessment was qualified by substantial debt-maturity risks.
- After quarter-end, the Plant Owners amended and restated their credit arrangements. The amended facilities provided for $39.5 million due June 25, 2013 and $51.8 million due June 30, 2016, plus a new revolving facility of up to $10.0 million maturing June 25, 2013. The filing warned that failure to restructure or repay 2013 maturities could trigger cross-default and acceleration of debt, materially harm operations, and threaten the plants’ ability to continue as going concerns. Management said it was pursuing restructuring and capital-raising alternatives but gave no assurance of success or terms.
- Pacific Ethanol repaid its $10.0 million senior unsecured notes on October 1, 2012 using September offering proceeds. Series B preferred dividends were 7% annually; $6.6 million remained accrued and unpaid at quarter-end after $0.7 million was settled in common shares. Holders agreed to forbear from exercising rights on unpaid dividends until January 1, 2014.
- The company disclosed a NASDAQ minimum-bid-price deficiency notice, with a December 3, 2012 deadline to regain compliance. It warned that delisting could impair share liquidity, fundraising, and vendor credit terms.
- Risks included volatile ethanol, corn, natural gas and co-product prices; industry demand and regulatory changes; and financing needs. Ordinary-course litigation was disclosed, but management did not expect pending proceedings to have a material financial impact based on then-available facts. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Confirm the issuer identity and the original 10-Q, given the mismatch between the request metadata and the filing text.
- Track the status, maturity, availability, covenants, and cross-default terms of the Plant Owners’ debt, including any later refinancing or repayment.
- Check whether operating margins and cash generation improved, particularly the corn crush margin and performance of the three operating plants.
- Verify the consequences of the NASDAQ bid-price deficiency and any subsequent listing status.
- Review share and warrant dilution, preferred dividend arrears, and the use of offering proceeds.