Alto Ingredients, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial figures below are in millions of dollars unless noted. Alto produces and distributes specialty alcohols, fuel-grade ethanol, and essential ingredients. The 2022 results include Eagle Alcohol, acquired January 14, 2022; 2021 also included results from California facilities sold that year.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $336.9 | $305.6 | $1,007.2 | $822.4 |
| Gross profit (loss) | ($19.8) | ($3.4) | ($6.2) | $25.7 |
| Gross margin | (5.9%) | (1.1%) | (0.6%) | 3.1% |
| Net income (loss) | ($28.0) | ($3.1) | ($8.5) | $9.9 |
| Net income (loss) available to common shareholders | ($28.4) | ($3.5) | ($9.5) | $8.9 |
| Adjusted EBITDA, non-GAAP | ($20.6) | $3.0 | $13.7 | $33.4 |
- Revenue rose 10.3% in Q3 and 22.5% year to date, reflecting higher average sales prices and essential-ingredient sales; lower third-party fuel ethanol volumes partly offset the increase.
- Operating cash flow was positive $1.8 million for the nine months, versus cash used of $19.5 million in 2021. Investing activities used $25.2 million, including $25.2 million of property and equipment additions and $14.7 million for Eagle Alcohol, partly offset by $14.8 million of note collections. Financing activities used $6.4 million.
- Cash, cash equivalents and restricted cash totaled $32.4 million at September 30, down from $62.1 million at December 31, 2021. Working capital was $131.8 million and the current ratio was 3.42.
- Long-term debt, net, was $45.9 million, down from $50.4 million at year-end. Kinergy’s credit line had $30.7 million of unused availability; the company reported compliance with its covenants.
Material changes and notable items
- Despite higher revenue, gross margin deteriorated, with Q3 gross loss increasing to $19.8 million. Management attributed pressure to high and volatile corn and other input costs, higher transportation costs, supply-chain and rail disruptions, plant outages exceeding six days at Western facilities, and lower commodity margins.
- Management reported approximately $11.0 million of higher corn-basis costs in Q3, $3.0 million of uncapitalized infrastructure-upgrade costs in cost of goods sold, and additional losses on forward derivative positions. A $7.963 million inventory valuation adjustment was recorded in the nine months.
- Q3 SG&A increased 33.8% to $7.4 million, including $0.9 million of Eagle Alcohol acquisition-related accruals. Nine-month SG&A rose 21.5% to $24.0 million.
- The nine-month results included $22.7 million of nonrecurring USDA Biofuel Producer Program grant income. The prior-year periods included loan-forgiveness income of $6.0 million in Q3 and $9.9 million for the nine months.
- Eagle Alcohol’s preliminary purchase-price allocation included $6.0 million goodwill and $7.0 million of identifiable intangibles. Sellers may receive up to $14.0 million of contingent consideration, subject to conditions.
- The company repurchased 259,000 shares in Q3 for $1.0 million, at an average $3.86 per share. Its program allows repurchases up to $50 million, subject to additional authorization for amounts above the initial $10 million authorization.
Outlook, financing and risks
- Management expected improved Q4 results versus September lows, citing improving crush margins, late corn harvest and corn basis. It expected 2022 contracted specialty-alcohol volume of 90 million gallons to be exceeded by up to 10 million gallons.
- Management projected modest profit improvement in early 2023 and a 2023 baseline EBITDA of $40 million at historical average crush margins, before contributions from pending capital projects. It targeted more than $20 million of additional recurring annual EBITDA by end-2023 and a further $30 million by 2025. These are forward-looking, non-GAAP projections, not guarantees.
- On November 7, 2022, the company closed a senior secured term-loan facility of up to $125 million: up to $100 million in periodic draws, plus $25 million subject to performance conditions. No amount had been drawn as of that date. The six-year loan has a 10% fixed rate, 1.5% original issue discount, security over company assets, and potential issuance of up to 1.6 million shares to lenders. Kinergy’s operating-line maturity was extended to 2027.
- Planned investments include corn-oil extraction, enhanced protein and yeast products, corn storage, specialty-alcohol upgrades, renewable natural gas infrastructure and carbon capture. The filing cites execution, cost, timing and expected-return uncertainty for capital projects.
- Key risks include volatile ethanol, corn, natural gas and product prices; inflation and supply-chain constraints; transport and facility interruptions; hedging and margin-call exposure; dependence of fuel ethanol demand on regulation and blending mandates; and the potential for losses or negative operating cash flow. The filing’s sensitivity analysis estimated that a hypothetical 10% adverse price change would reduce pretax income by approximately $48.9 million for ethanol and $56.7 million for corn, based on the stated analysis assumptions.
- Management stated it believed liquidity was sufficient for anticipated needs over the next 12 months. It did not expect pending legal proceedings to materially affect the company, while noting outcomes remain uncertain. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether production margins recovered after Q3 and whether cost inflation, rail/logistics constraints and plant outages continued to affect results.
- Actual draws, all-in cost and covenants of the new secured loan, and the impact of lender share issuance and cash-flow sweeps on liquidity and dilution.
- Progress, total spending and realized returns from capital projects, including whether the stated EBITDA targets are achieved.
- Whether contracted 2022 specialty-alcohol volumes and 2023 customer-growth expectations were met.
- How commodity derivatives, inventory valuation and working-capital needs affected subsequent earnings and cash generation.