Business context and reporting period
The supplied filing is Pacific Ethanol, Inc.’s Form 10-Q for the quarter ended September 30, 2015, not a filing under the name Alto Ingredients, Inc. The company produced and marketed ethanol and co-products. It acquired Aventine Renewable Energy Holdings on July 1, 2015, issuing approximately 17.8 million voting and non-voting shares; Aventine’s results are included only from the acquisition date.
After the acquisition, the company operated eight plants with combined annual ethanol capacity of 515 million gallons and marketed more than 800 million gallons annually. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $380.6 | $275.6 | $814.4 | $851.3 |
| Gross profit (loss); margin | ($7.4); (1.9%) | $18.0; 6.5% | ($2.1); (0.3%) | $90.1; 10.6% |
| Operating income (loss) | ($14.8) | $13.6 | ($18.5) | $77.7 |
| Net income (loss) attributable to Pacific Ethanol | ($14.7) | $4.0 | ($18.0) | $8.8 |
| Loss available to common stockholders per share | ($0.36) | $0.16 income | ($0.63) | $0.40 income |
- Q3 sales rose 38.1%, largely from the newly acquired Midwest operations and higher co-product volumes; the average ethanol sales price per gallon fell 28% to $1.67. Nine-month sales fell 4.3%, as a 35% decrease in average ethanol price more than offset increased volume.
- Operating cash flow was negative $17.4 for the first nine months of 2015, versus positive $76.3 in 2014. Investing cash use was $3.5 and financing provided $11.9. Cash declined $9.0 to $53.1.
- At September 30, current assets were $183.0 and current liabilities $75.6, for working capital of $107.3 and a 2.42 current ratio. Available borrowing was $4.6 under Kinergy’s line and $19.5 under West plants’ facilities.
- Debt outstanding before unamortized discount was approximately $209.8, including $47.1 on Kinergy’s line, $145.6 of Central plants’ term debt and $17.0 of West plants’ term debt. Balance-sheet debt was $207.2 net of discount. Q3 net interest expense was $5.2; nine-month expense was $7.2.
- Total assets were $668.0 and total liabilities $297.3 at quarter-end. Capital expenditures were $17.7 for the first nine months.
Material changes and unusual items
- Aventine added significant production, sales and debt. It contributed $143.6 of Q3 net sales and a $16.6 pre-tax loss. The acquisition was financed with stock, valued at $174.6; purchase-price allocations remained provisional, with property, equipment, deferred taxes and environmental remediation valuations still in progress.
- Approximately $8.7 of purchase-accounting inventory and open-contract adjustments increased Q3 cost of goods sold. Management also reported $1.4 of acquisition-related costs for the first nine months.
- Lower ethanol prices and weak crush margins drove the gross-profit reversal. The company attributed the industry pressure chiefly to excess ethanol inventories; corn delivered cost also declined, but not enough to offset the lower selling prices and margin compression.
- Q3 results included $1.2 of fair-value income from warrant adjustments, compared with $4.4 of expense in Q3 2014. These adjustments are non-cash and can vary with the company’s share price. A one-time settlement payment contributed to other income.
Outlook, risks and contingencies
- Management said margins improved entering Q4 2015 as ethanol demand increased and inventories moderated. It did not provide formal earnings or revenue guidance. It targeted at least $12.0 of annualized Aventine synergies and approximately $7.0 of SG&A expense for Q4 2015.
- Management believed available resources would meet anticipated needs for at least 12 months. However, operations used cash in the first nine months, and approximately $320.9 of subsidiary net assets were restricted from transfer to the parent by credit agreements.
- Central plants’ term debt matures in September 2017 and bears 10.5% interest if paid in cash or 15.0% if paid in kind; West plants’ $17.0 term debt was current and due in June 2016. All long-term debt was variable-rate; management estimated a 100-basis-point rate increase would reduce nine-month pre-tax income by about $1.9.
- Key exposures include volatile ethanol, corn and natural-gas prices; commodity hedging risk; debt service and covenant requirements; integration and realization of acquisition synergies; customer and supplier concentration; and changes to renewable-fuel mandates. The EPA’s proposed 2015 and 2016 blending requirements were below statutory levels, with a final rule expected by November 30, 2015.
- The company recorded $3.3 of litigation contingency liabilities. A Western Sugar suit sought approximately $8.6 in damages and was in discovery; the company said it was evaluating the claim and might accrue a reserve. Aurora Cooperative litigation was settled in July 2015. In a separate patent case, a court had found the asserted patents invalid; one remaining claim was awaiting a decision.
- Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Pacific Ethanol, Inc.; the request metadata names Alto Ingredients, Inc.
- Track whether ethanol and co-product margins recover, and whether the Q4 improvement described by management persists.
- Monitor operating cash generation, Kinergy borrowing availability and covenant compliance, variable-rate interest costs, and the June 2016 and September 2017 debt maturities.
- Assess progress toward the $12.0 annualized synergy target and review the final Aventine purchase-price allocation and any resulting valuation adjustments.
- Review final EPA renewable-fuel requirements and developments in the Western Sugar litigation and recorded contingencies.