Alto Ingredients, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless noted otherwise, dollar amounts below are in millions. Alto produces and distributes specialty alcohols, essential ingredients and renewable fuels. It operates five production facilities and reported all facilities operating during the period.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $362.2 | $298.1 | $670.3 | $516.8 |
| Gross profit / margin | $8.8 / 2.4% | $15.2 / 5.1% | $13.6 / 2.0% | $29.1 / 5.6% |
| Operating income (loss) | ($0.2) | $6.1 | ($3.0) | $11.7 |
| Net income | $22.1 | $8.4 | $19.5 | $13.1 |
| Net income available to common stockholders | $21.5 | $8.0 | $18.6 | $12.3 |
| Diluted EPS | $0.29 | $0.11 | $0.26 | $0.17 |
| Adjusted EBITDA | $29.9 | $17.0 | $34.3 | $30.4 |
Sales increased 21.5% in Q2 and 29.7% year to date, reflecting higher average selling prices and increased production, partly offset by lower total gallons sold. Gross profit fell as commodity volatility, higher freight and delivery costs, and supply-chain and service disruptions compressed margins. Management said Q2 freight costs doubled sequentially from Q1.
Reported net income included a nonrecurring $22.652 million USDA Biofuel Producer Program cash grant, which is not repayable. Excluding the grant, income before tax would have been a loss of approximately $0.5 million in Q2 and $3.1 million for the first half; these are simple subtractions, not company-reported adjusted measures. Adjusted EBITDA is non-GAAP and should not be treated as a substitute for GAAP earnings or cash flow.
For the six months, operating cash flow was $20.7 million, investing cash outflow was $24.4 million and financing cash inflow was $16.3 million. Capital spending was $9.8 million; the Eagle Alcohol acquisition used $14.7 million net of cash acquired. Cash, cash equivalents and restricted cash totaled $74.7 million at June 30. Working capital was $178.4 million and the current ratio was 2.88, down from 3.30 at year-end 2021.
Long-term debt was $52.5 million, consisting of Kinergy’s line-of-credit borrowings; $28.6 million of borrowing availability remained under its $100 million facility. The company reported covenant compliance and a 8.72 fixed-charge coverage ratio against a 2.00 minimum. Management said it expected to renew the revolving line in Q3 and believed liquidity sufficient for the next 12 months. Series B preferred stock carries a 7% annual dividend; its liquidation preference was $18.1 million.
Material changes and business developments
- Alto acquired 100% of Eagle Alcohol on January 14, 2022, for $14.0 million cash plus an estimated $1.3 million working-capital adjustment. Sellers may receive up to an additional $14.0 million, subject to conditions. The acquisition expands specialty-alcohol break-bulk distribution; Eagle recorded $4.1 million Q2 sales and $7.9 million first-half sales since acquisition.
- Renewable-fuel production gallons sold rose 23.9% in Q2, while specialty-alcohol production gallons sold rose 6.2%. Third-party renewable-fuel gallons sold declined 49.4%, reflecting Alto’s stated focus on its own production assets. Total gallons sold fell 14.3%, while total gallons produced rose 21.1% and capacity utilization increased to 88% from 59%.
- Average sales price per gallon increased 17.8% in Q2, but delivered corn cost per bushel increased 26.2%. For the first half, average sales price per gallon rose 22.1%, while delivered corn cost rose 27.8%.
- Cash and restricted cash rose from $62.1 million at December 31, 2021, to $74.7 million. Current liabilities rose 36.7% over the same period, including higher derivative liabilities.
Outlook, commentary and risks
- Management anticipated positive forward crush margins entering Q3 but cited a late harvest, high corn basis and low corn inventories. It scheduled much of fall maintenance for August, with brief dry-mill shutdowns; the wet mill was not scheduled to shut down.
- Management’s project estimates, based on current market values, include more than $9 million of annual EBITDA from the Magic Valley protein and corn-oil project once operating, with production of high-protein co-products expected to begin in early 2023. Assuming similar economics at all four dry mills, management estimated $34 million of annual EBITDA when systems are fully operational.
- Management expected the Pekin corn-storage expansion, targeted for completion by mid-November, to approximately double storage days and contribute more than $2 million annual EBITDA beginning in Q4 2022. It also estimated Eagle Alcohol could contribute $4 million EBITDA in 2022 and $8–$9 million annually starting in 2023, including synergies.
- A proposed Pekin natural-gas utility bypass was in engineering and design; management estimated approximately $5 million annual EBITDA beginning in 2024. Alto was also evaluating carbon capture and sequestration; project economics could improve if proposed tax-credit legislation took effect. These are forward-looking estimates, not guaranteed results.
- Risks include volatile alcohol, corn and natural-gas prices; inflation, freight and supply-chain pressures; production interruptions (including a lightning-related Pekin power outage); derivative and margin-call exposure; customer credit and demand; regulatory changes affecting renewable fuels; and environmental, operational and cybersecurity risks. A 10% adverse commodity-price sensitivity indicated approximate pre-tax income exposure of $32.3 million for ethanol and $38.7 million for corn, excluding future contracted volumes.
- Alto disclosed ordinary-course legal claims and contingencies; management did not expect pending matters to materially affect financial condition or results, while noting outcomes remain uncertain. The filing reported effective disclosure controls as of June 30, 2022.
Important facts for investors to verify
- How much recurring operating profitability remains after excluding the $22.7 million one-time grant, and how the reported Adjusted EBITDA reconciles to underlying cash generation.
- Whether the sharp gross-margin decline and elevated corn, freight and other input costs persist, and how derivatives and inventory valuation affect reported margins.
- Progress, capital costs and realized returns for the Magic Valley, Pekin storage, natural-gas and carbon-capture initiatives versus management’s estimates.
- Terms and completion of the revolving-credit renewal, borrowing availability, covenant headroom and the liquidity impact of restricted cash and derivative collateral.
- Final purchase accounting and contingent consideration for Eagle Alcohol, and whether its expected sales, profitability and synergies are achieved.