Pacific Ethanol, Inc. (now identified in the request as Alto Ingredients, Inc.) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing is under the name Pacific Ethanol, Inc.; it describes a U.S. producer and marketer of renewable fuels, specialty alcohols and co-products, with nine plants and 605 million gallons of annual ethanol capacity. Aurora East was idle; the other facilities were operating.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $365.2m | $370.4m | $1,067.3m | $1,181.0m |
| Gross profit (loss) | $(14.8)m | $3.8m | $(13.1)m | $5.9m |
| Gross margin | (4.1)% | 1.0% | (1.2)% | 0.5% |
| Operating loss | $(23.5)m | $(5.2)m | $(36.8)m | $(21.3)m |
| Net loss attributable to company | $(27.3)m | $(7.5)m | $(47.9)m | $(28.3)m |
| Loss per share, basic and diluted | $(0.58) | $(0.18) | $(1.04) | $(0.68) |
Cash flow: For the first nine months, operating cash flow was negative $27.2m, versus positive $26.1m a year earlier. Investing cash outflow was $2.1m; financing provided $21.6m. Cash declined $7.7m from year-end 2018 to $18.9m.
Liquidity and debt: At September 30, cash was $18.9m, with $2.2m of excess availability on Kinergy’s line of credit. Current assets of $161.9m were below current liabilities of $228.4m, a $66.5m working-capital deficit. Reported borrowings totaled $244.4m before discounts and fees; $144.5m was classified as current and $98.7m as long-term. The company also recorded $37.2m of operating lease liabilities.
Changes versus prior comparable periods
- Q3 sales fell 1.4%; nine-month sales fell 9.6%. Lower production volumes drove much of the decline.
- Gross results shifted from profit to loss in both comparison periods. Management attributed weaker margins primarily to higher corn costs without a matching increase in ethanol prices; Q3 commodity derivative changes also included a $3.3m loss.
- Q3 production capacity utilization was 82%, compared with 91%; nine-month utilization was 81%, compared with 94%. Production gallons sold fell 7% in Q3 and 14% year to date.
- SG&A declined 3.2% in Q3 and 13.1% year to date, primarily due to lower compensation and health insurance costs. Interest expense rose to $5.2m in Q3 and $15.0m year to date.
Outlook, financing, and risks
- Management said margins rebounded toward the end of Q3 and into Q4, and expressed optimism about continued production discipline, year-round E15 sales, EPA policy and export demand. These are expectations, not quantified earnings guidance; the filing provides no clear numerical forecast.
- The company was pursuing potential asset sales, debt reduction, strategic partnerships and capital raising. Management said these initiatives, if timely and on suitable terms, were expected to support liquidity for at least 12 months, while warning that it might not have enough cash for near-term scheduled debt payments.
- Approximately $63.2m of parent-company senior secured notes matured December 15, 2019; the company was negotiating an extension or refinancing. Pekin lenders had deferred payments and temporarily waived certain covenant violations, with $10.5m of payments and a parent contribution condition due by November 15, 2019. The filing said extensions were being pursued. Failure to reach agreements could lead to acceleration, foreclosure on plant assets or bankruptcy protection.
- Management cited prolonged weak industry margins, demand and inventory conditions, EPA small-refinery exemptions, U.S.-China trade disputes, volatile corn and ethanol prices, and potential insufficient cash flows as significant challenges. It warned that failure to implement initiatives or extend debt could leave insufficient liquidity within 12 months or sooner.
- All but one facility was operating; the company operated at about 82% of capacity in Q3 and said further production curtailments could be necessary if margins did not improve sustainably. Ordinary-course litigation was disclosed; management did not expect a material impact based on information then available.
Important facts for investors to verify
- Confirm the issuer identity and corporate name: this filing is for Pacific Ethanol, Inc., although the request identifies Alto Ingredients, Inc.
- Check subsequent filings for the outcome of the December 2019 senior-note maturity, Pekin lender extensions and required payments, and the company’s liquidity and going-concern status.
- Verify whether proposed asset sales, financing or strategic transactions closed, on what terms, and how proceeds affected debt and liquidity.
- Track ethanol-to-corn margins, plant utilization, derivative results and operating cash flow, which drove the period’s losses and cash usage.
- Assess restrictions on moving subsidiary cash: approximately $184.8m of subsidiary net assets was unavailable for transfer to the parent under credit agreements.