Alto Ingredients, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Figures are in U.S. dollars. Alto produces and distributes specialty alcohols, essential ingredients and renewable fuel. Results include Eagle Alcohol from its January 14, 2022 acquisition; Q1 2021 included the California facilities later sold in 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $308.1 million | $218.7 million; up 40.9% |
| Gross profit and margin | $4.8 million; 1.5% | $13.8 million; 6.3% |
| Operating income (loss) | $(2.9) million | $5.6 million |
| Net income (loss) | $(2.6) million | $4.7 million |
| Net income (loss) available to common stockholders | $(2.9) million; $(0.04) per share | $4.4 million; $0.06 per share |
| Adjusted EBITDA, non-GAAP | $4.4 million | $13.4 million |
| Cash from operating activities | $11.1 million provided | $4.5 million used |
| Cash, cash equivalents and restricted cash | $60.0 million | $62.1 million at December 31, 2021 |
| Long-term debt | $53.7 million | $50.4 million at December 31, 2021 |
| Working capital / current ratio | $161.0 million / 3.01 | $159.9 million / 3.30 at December 31, 2021 |
Cash used in investing was $17.0 million, including $14.7 million for Eagle Alcohol net of acquired cash and $2.3 million in capital expenditures. Financing provided $3.8 million. Of the $60.0 million in cash, cash equivalents and restricted cash, $23.8 million was restricted cash associated with commodity derivatives.
Performance changes and drivers
- Sales growth reflected higher average selling prices and greater company production, partly offset by lower third-party renewable-fuel volumes. Average sales price per gallon rose 26.8% to $2.46. Total gallons sold fell 7.9% to 103.2 million, while gallons produced rose 28.1% to 74.3 million.
- Gross profit declined despite higher sales. Management cited volatile commodity prices, supply-chain and rail disruptions, higher transportation costs, weak renewable-fuel crush margins, and $7.0 million of non-cash mark-to-market inventory adjustments and unrealized forward-derivative losses recorded in cost of goods sold.
- Essential ingredients tons sold increased 44.0% to 398,800. Corn costs also rose: delivered corn averaged $6.86 per bushel, up 30.2%. Pekin production margins weakened, while the Other production segment improved from a gross loss to gross profit, helped by the Magic Valley restart in November 2021.
- Interest expense declined to $0.2 million from $1.9 million. SG&A increased 8.8% to $7.6 million, including $0.9 million of Eagle Alcohol-related contingent-consideration expense.
Liquidity, debt and market exposure
Kinergy’s operating line of credit had $53.7 million outstanding and $15.2 million of unused availability at March 31, 2022. The facility permits borrowings up to $100 million, matures August 8, 2023, and bears interest at SOFR plus a stated margin of 1.75%–2.25%. The company reported a 10.18 fixed-charge coverage ratio against a 2.00 minimum and said it believed it was in compliance. Management said available liquidity was sufficient for anticipated needs over the next 12 months, while noting it may seek secured debt for accretive projects.
Alto uses commodity derivatives to manage exposure to corn and ethanol prices; derivatives are not designated for hedge accounting, so fair-value changes are recognized immediately in cost of goods sold. At quarter-end, derivative assets were $19.5 million and liabilities were $27.5 million. Management’s hypothetical 10% adverse price-change analysis estimated pre-tax income impacts of $(15.7) million for ethanol and $(17.4) million for corn; the analysis excludes future contracted volumes and may differ materially from actual results.
Acquisition, outlook and risks
- Alto acquired Eagle Alcohol for $14.0 million cash plus an estimated $1.3 million working-capital payment. Sellers may receive up to another $14.0 million over five years, subject to conditions including continued employment. Management expects Eagle to contribute $4.0 million of EBITDA in 2022 and $9.0 million annually from 2023, including synergies; these are forward-looking estimates, not guarantees.
- Management planned $5.0 million of 2022 investment to enhance specialty-alcohol quality and distribution. It also described the Magic Valley CoPromax project, with estimated annualized EBITDA benefits of $4.0 million from corn-oil extraction in the second half of 2022 and a further $5.0 million from protein enhancement expected by early 2023. A four-facility rollout was estimated to cost $70.0 million and contribute $34.0 million of annual EBITDA at current market values.
- Other stated projects included approximately $6.0 million for Pekin corn storage, expected to yield over $2.0 million annual EBITDA beginning in Q1 2023, and a potential $9.0 million Pekin natural-gas bypass investment in 2023, with estimated annual EBITDA of $5.0 million beginning in 2024. Management was also evaluating carbon capture and sequestration. These plans and estimates are subject to execution, market and cost risks; the filing does not provide formal consolidated earnings guidance.
- Principal risks include volatile alcohol, corn and natural-gas prices; inflation and supply-chain effects, including those associated with the war in Ukraine; production, transportation and utility disruptions; derivative margin calls; changing fuel-ethanol demand and regulation; and the possibility of future losses or negative operating cash flow.
- The company disclosed ordinary-course litigation and contingencies. It said, based on currently available facts, it did not expect pending proceedings to materially affect financial condition or results, while acknowledging outcomes could adversely affect future results or cash flows. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether gross margins recover from Q1’s 1.5%, and how corn, natural gas, alcohol prices, production costs and derivative mark-to-market effects develop.
- How much of reported cash is restricted and available for operations, and whether line availability and covenant compliance remain adequate.
- Whether Eagle Alcohol achieves the stated EBITDA expectations and how contingent payments, synergies and the purchase-price allocation evolve.
- Whether announced capital projects meet their budgets, timelines and projected returns, including the CoPromax rollout.
- How comparable operating trends are after accounting for the acquired business, the prior-year California facility sales, and the Magic Valley restart.
- The filing reported 8.9 million warrants at $9.76 per share outstanding at March 31, 2022; they expired unexercised on April 28, 2022.