Alto Ingredients, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context and reporting period
Alto produces and markets specialty and fuel-grade alcohols and essential ingredients. It reported three segments: marketing and distribution, Pekin production, and other production. The company sold its Madera facility in May 2021 and, after quarter-end, sold Stockton on November 5, 2021. It reported that it was operating at approximately 71% of 410 million gallons of annual capacity in one section of the filing; another section cites approximately 83% utilization and 350 million gallons of capacity.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $305.6 million | $204.7 million | $822.4 million | $728.2 million |
| Gross profit (loss) | $(3.4) million | $20.9 million | $25.7 million | $39.2 million |
| Gross margin | (1.1)% | 10.2% | 3.1% | 5.4% |
| Net income (loss) attributable to Alto | $(3.1) million | $15.2 million | $9.9 million | $5.1 million |
| Net income (loss) available to common stockholders | $(3.5) million | $14.9 million | $9.0 million | $4.1 million |
| Basic earnings (loss) per share | $(0.05) | $0.25 | $0.13 | $0.07 |
Quarterly sales increased 49%, primarily from higher average selling prices and production volumes. Nine-month sales rose 13%, as higher prices more than offset lower volumes. Q3 gross profit turned to a loss, chiefly reflecting increased corn and basis costs and costs from the planned Pekin wet-mill shutdown and upgrades. Prior-year results benefited from unusually strong specialty-alcohol spot demand for sanitizers and disinfectants. Nine-month gross profit declined 35%.
For the nine months, operating cash flow was $(19.7) million, versus $75.7 million provided in 2020. The company attributed the cash use principally to increased receivables and inventory, including the effects of higher commodity prices. Investing activities provided $7.3 million, including $19.5 million of Madera sale proceeds, partly offset by $12.2 million of capital expenditures. Financing activities provided $0.9 million. Cash declined to $36.0 million from $47.7 million at year-end 2020.
At September 30, 2021, working capital was $142.2 million and the current ratio was 2.68. Total debt in the debt note was $88.4 million, including $17.7 million current and $70.6 million long-term net of financing costs. Kinergy’s line of credit had $70.7 million outstanding and $5.9 million available. The company reported $250.3 million of subsidiary net assets restricted from transfer to the parent under credit-facility terms.
Material changes versus the prior comparable period
- Q3 net sales rose, but higher production costs and the Pekin maintenance shutdown drove gross margin from 10.2% to negative 1.1% and resulted in a net loss.
- Nine-month sales increased despite lower total gallons sold: 362.2 million gallons, down 16.9% year over year. Average sales price per gallon increased 41.9%.
- Delivered corn cost rose 98.9% in Q3 and 65.1% for the nine-month period. Corn coproduct revenues did not keep pace with higher corn costs, according to management.
- Nine-month net income increased to $9.9 million from $2.9 million consolidated net income in 2020. Results included $9.9 million of CARES Act loan-forgiveness income and a $3.1 million impairment charge; the 2020 comparison included a $11.8 million litigation-settlement gain and $7.5 million of fair-value losses.
- Interest expense fell to $3.4 million for the nine months from $14.2 million, primarily due to debt repayment. The Madera sale proceeds were used to repay debt and accrued interest.
- After quarter-end, Stockton was sold for $24.0 million in cash. The filing says proceeds repaid the parent notes and Pekin and ICP loans in full; management also described the broader realignment as having repaid approximately $150 million of debt and removed more than $16 million of annual interest expense.
Outlook, management commentary, and risks
- Management expected 2021 consolidated gross profit of at least $40 million, excluding any Q4 derivative impact, and projected full-year SG&A of $27–$30 million. It cautioned that commodity volatility, export conditions, and high logistics and corn-basis costs could materially affect results.
- Management estimated capital projects and realignment-related cost savings would contribute $18.5 million of EBITDA in 2022 compared with 2021. These are forward-looking estimates, not reported results.
- Management projected more than $9 million of annual EBITDA from the Magic Valley CoPromax system at current market prices, including $5 million in 2022, and estimated rollout across four dry mills could contribute $40 million annually once implemented. It also expected yeast expansion and feed-dryer upgrades to contribute about $5 million annually, and Pekin corn-oil capacity expansion about $4.5 million annually, beginning in 2022.
- The Magic Valley facility was being prepared for restart by year-end, with the new system expected to be commissioned in the first half of 2022. Additional yeast production was contracted through 2022. Specialty-alcohol contracting for 2022 was expected to continue through the rest of 2021 amid customer caution and volatile commodity prices.
- The company said it had locked in fuel-ethanol margins through year-end and utility costs for the next twelve months, and planned to lock in other variable inputs, including corn, through Q1 2022. Derivatives can still create earnings and liquidity volatility; the filing reported $12.98 million of derivative assets and $2.74 million of derivative liabilities at quarter-end.
- Management stated it believed liquidity was sufficient for at least twelve months from the report date. Key risks include commodity-price spreads, supply and demand for alcohols and coproducts, pandemic-related demand changes, operating disruptions and logistics, regulatory changes affecting ethanol, environmental obligations, and customer credit risk.
- The SBA approved forgiveness of the company’s $6.0 million PPP loan in September and Alto Pekin’s $3.9 million loan in June. The SBA may audit forgiveness eligibility, and the company said it could not assure that forgiven amounts would not later require repayment. Management did not expect pending legal matters to have a material impact based on currently available facts, while noting outcomes remain uncertain.
Most important facts for investors to verify
- Reconcile the filing’s differing capacity and utilization disclosures: 410 million gallons and approximately 71% versus 350 million gallons and approximately 83%.
- Track whether Q4 and full-year gross profit meet management’s at-least-$40-million outlook, and assess derivative effects separately.
- Confirm the completion and debt-repayment effects of the Stockton sale, including the exact balances repaid and remaining debt after closing.
- Monitor cash conversion and working-capital needs, particularly receivables, inventory, revolver usage, and the $19.1 million of capital-project commitments disclosed at quarter-end.
- Test the timing, funding, and realized economics of the CoPromax, yeast, feed-dryer, and corn-oil projects against management’s EBITDA estimates.
- Review the SBA forgiveness audit risk and the effect of credit-facility restrictions on access to subsidiary cash.