Alto Ingredients, Inc. (as identified in request) — filing identity note
The supplied Form 10-Q is for Pacific Ethanol, Inc., not Alto Ingredients, Inc. The summary below reflects the filing’s stated registrant and should not be attributed to Alto without verifying the filing identity.
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2015, filed August 10, 2015. Pacific Ethanol produced and marketed ethanol and co-products. Results through June 30 exclude Aventine, acquired on July 1, 2015; the acquisition therefore affects subsequent-period results, not reported Q2 results.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages and gallons.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $227.6 | $321.1 | $433.8 | $575.7 |
| Gross profit / margin | $6.3 / 2.7% | $33.6 / 10.5% | $5.3 / 1.2% | $72.1 / 12.5% |
| Operating income (loss) | $2.3 | $29.3 | $(3.6) | $64.1 |
| Net income (loss) attributable to Pacific Ethanol | $1.0 | $15.6 | $(3.4) | $4.7 |
| Income (loss) available to common stockholders | $0.7 | $15.3 | $(4.0) | $4.1 |
| Diluted earnings (loss) per share | $0.03 | $0.68 | $(0.16) | $0.20 |
- Q2 ethanol sales volume rose 6.4% to 140.7 million gallons, while average sales price per gallon fell 36.7% to $1.76. For the half year, volume rose 12.9% to 276.4 million gallons and average price fell 37.8% to $1.71.
- Operating cash flow for the six months was $11.4 million, compared with $51.3 million in 2014. Capital expenditures were $12.2 million; cash declined $12.8 million to $49.3 million.
- At June 30, cash was $49.3 million, working capital $91.7 million and the current ratio 4.54, down from 5.48 at year-end 2014. Long-term debt was $25.6 million; capital lease liabilities totaled $3.4 million.
- At June 30, Kinergy’s credit line balance was $8.6 million, with $21.4 million available under the borrowing base; West plant revolving facilities had no borrowings and $19.5 million availability. On July 1, Kinergy’s facility maximum increased to $75 million and maturity extended to 2020.
Material changes versus prior comparable periods
- Lower ethanol and co-product prices, amid oversupply and weak crush margins, drove sharp declines in sales and gross profit despite higher ethanol volumes. Management said margins improved during Q2 and were positive by the time of the report.
- Six-month net loss attributable to Pacific Ethanol was $3.4 million, versus income of $4.7 million a year earlier. Q2 remained profitable, but attributable income fell from $15.6 million to $1.0 million.
- Net interest expense declined to $2.0 million for the half year from $7.2 million, primarily reflecting lower average debt balances. The prior-year period also included a $35.4 million fair-value and warrant-inducement expense; 2015 recorded $0.2 million of income in that line.
- In May, the company bought the remaining 4% of PE Op Co. for $3.8 million and became its 100% owner; noncontrolling interests were zero at June 30.
Outlook, commentary, risks and contingencies
- Management targeted at least $12 million in annualized synergies from Aventine, citing staffing, support-function, operating and merchandising improvements. It also identified integration execution, potential liabilities and the risk that expected benefits may not be achieved.
- Management expected quarterly SG&A of approximately $7 million and average quarterly capital expenditures of approximately $10 million through the end of 2015. It said it believed available resources would meet anticipated needs for at least 12 months.
- After the acquisition, the filing reported approximately $171.2 million of consolidated debt, including Aventine’s debt. Aventine’s term loan balance was approximately $145.6 million, bearing 10.5% cash interest or 15% payment-in-kind interest and maturing September 24, 2017. Management was evaluating debt consolidation and refinancing.
- The EPA had proposed lower Renewable Fuel Standard volumes for 2014–2016; the final rule was expected by November 30, 2015. Changes to mandates, commodity prices, ethanol demand, supply, operating conditions and interest rates were identified as significant risks.
- Aventine-related Western Sugar litigation sought approximately $8.6 million; the company was evaluating the claim and said it might accrue a reserve. Acquired environmental remediation costs were also under evaluation and were not included in the preliminary purchase-price allocation. The filing reported that Aurora Coop litigation was settled on July 26, 2015, with each party bearing its own costs.
- A court had ruled the GS CleanTech patents at issue invalid and therefore not infringed; a remaining inequitable-conduct claim and possible appeal remained. The company recorded no provision, stating a material adverse ruling was not probable.
- The Aventine purchase-price allocation was preliminary: estimated consideration was $174.6 million and estimated goodwill $37.3 million, subject to final valuation. The acquisition issued 17.76 million shares.
Most important facts for investors to verify
- Confirm the registrant: this filing identifies Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Track realized crush margins and whether management’s reported Q2 recovery continued, given the large year-over-year gross-margin decline.
- Verify actual Aventine integration results, realized synergies versus the $12 million annualized target, and final purchase accounting.
- Assess post-acquisition debt service, interest terms, refinancing progress and compliance with credit-facility covenants.
- Follow the Western Sugar claim, environmental obligations and other acquired contingencies, along with the final Renewable Fuel Standard requirements.