Alto Ingredients, Inc. quarterly report, Q2 FY2021

Alto Ingredients, Inc. — Q2 2021 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2021. Alto produces and markets specialty and fuel-grade alcohols and essential ingredients. It reports three segments: marketing and distribution, Pekin production, and other production. The company sold its Madera, California facility on May 14, 2021, and continued to market its Stockton facility for sale.

Financial performance and position

Metric	Three months ended June 30	Six months ended June 30
Net sales	$298.1 million, up 40.6% from $212.1 million	$516.8 million, down 1.3% from $523.5 million
Gross profit (margin)	$15.2 million (5.1%), versus $31.2 million (14.7%)	$29.1 million (5.6%), versus $18.3 million (3.5%)
Income attributable to Alto	$8.4 million, versus $15.0 million	$13.1 million, versus a $10.1 million loss
Net income available to common stockholders; diluted EPS	$8.1 million; $0.11, versus $14.6 million; $0.27	$12.4 million; $0.17, versus a $10.8 million loss; $(0.20)
Cash from operating activities	Not provided separately for the quarter	$0.8 million, versus $45.7 million

• Balance sheet at June 30: Cash was $50.8 million; current assets $244.3 million; current liabilities $110.7 million; working capital $133.5 million and current ratio 2.21. At December 31, 2020, working capital was $127.1 million and the ratio was 2.46.
• Debt: Gross borrowings were $80.6 million, including $23.7 million current and $56.8 million long-term debt net of financing costs. Gross debt was $97.9 million at year-end 2020. Alto reported $15.0 million of unused availability on Kinergy’s $100 million line of credit.
• Cash flows and capital spending: Investing activities provided $15.3 million, including $19.5 million cash proceeds from the Madera sale; capital expenditures were $4.2 million. Financing activities used $12.9 million, including $37.8 million of principal payments, partly offset by $24.4 million net proceeds from Kinergy’s line of credit. Cash increased $3.1 million over the six months.
• Production and sales metrics: Q2 total gallons sold were 125.0 million, down 4.4%; average sales price was $2.41 per gallon, up 51.6%. Six-month gallons sold fell 24.9% to 237.0 million while average price rose 40.0% to $2.17. The filing reports Q2 capacity utilization of 59%; separately, it states operations were at approximately 71% of estimated capacity as of June 30.

Material changes versus comparable periods

• Q2 revenue rose on higher average selling prices, but gross profit and margin fell sharply. Management attributed the comparison chiefly to unusually high prior-year spot margins for high-quality alcohol used in sanitizers and disinfectants; 2021 sales were predominantly under fixed-price contracts.
• First-half gross profit improved from 2020, when fuel-grade ethanol experienced extreme negative margins. First-half sales nevertheless edged lower, as higher prices were offset by lower volumes, including reduced activity at facilities subsequently idled or sold.
• Q2 Pekin production income before tax was $10.7 million, down from $27.5 million; other production improved to a $1.7 million loss from a $10.3 million loss. For the six months, Pekin reported $20.7 million versus $19.3 million, while other production improved to a $7.6 million loss from a $33.8 million loss.
• Net interest expense declined to $1.0 million in Q2 and $2.9 million for the first half, versus $4.6 million and $10.0 million, respectively, primarily due to lower debt balances. SG&A also declined, to $7.2 million for Q2 and $14.2 million for the first half.
• Operating cash flow decreased substantially year over year, mainly reflecting higher receivables and inventories associated with timing and rising commodity prices, partly offset by higher earnings and accounts payable.

Outlook, commentary, risks and unusual items

• Management said it remained on track to generate at least $60 million of 2021 gross profit from specialty alcohol sales under fixed-price contracts. It cautioned that results depend on exports, customers taking contracted volumes, sanitizer and disinfectant demand, the Stockton sale, and fuel-grade ethanol margins.
• Management forecast 2021 SG&A of $27 million to $30 million. Yeast expansion and Pekin upgrades were expected to be operational by Q3, with an estimated payback of less than two years and approximately $5 million in additional annual EBITDA. A Pekin corn-oil capacity expansion was expected to add approximately $4.5 million in annual EBITDA and finish before year-end. These are management estimates, not reported results.
• A planned mid-August Pekin wet-mill repair shutdown was expected to reduce revenue and increase maintenance expense in Q3; management said it did not expect the work to affect contractual supply obligations. Management also described plans to expand protein production and explore carbon capture and sequestration at Pekin.
• The Madera sale had total consideration of $28.3 million, consisting of $19.5 million cash and $8.8 million of liabilities assumed. Cash proceeds were used to repay debt and accrued interest. The company recorded $3.1 million of first-half asset impairments, including an estimated $1.9 million charge for Canton assets classified as held for sale.
• The SBA approved forgiveness of Alto Pekin’s $3.9 million PPP loan; the resulting forgiveness income was included in Q2 results. Alto’s separate $6.0 million PPP loan remained subject to a forgiveness application, and the company warned that forgiveness could be denied or later challenged.
• Commodity derivatives produced net gains recognized in cost of goods sold of $19.4 million for the first half, including $24.3 million realized gains and $4.9 million unrealized losses. Commodity price and hedge movements can materially affect earnings and liquidity.
• Management stated it believed available liquidity was sufficient for anticipated needs for the next 12 months and reported compliance with applicable credit covenants. It also disclosed $245.7 million of subsidiary net assets restricted from transfer to the parent by credit agreements. Legal proceedings were described as ordinary-course matters not expected to have a material effect, although outcomes remain uncertain.
• Key risks include volatility in alcohol, corn and natural-gas prices; possible weakening in sanitizer-related specialty alcohol demand as the pandemic abates; fuel-grade ethanol demand and policy changes; operational, transportation and maintenance interruptions; debt and covenant requirements; and the pending Stockton sale. The filing also notes that production may be idled or adjusted as market conditions change.

Important facts for investors to verify

• Whether contracted 2021 specialty alcohol volumes are taken by customers and whether the $60 million gross-profit target is achieved.
• Progress and proceeds from the Stockton and Canton asset sales, and the allocation of sale proceeds under debt agreements.
• Debt maturities, refinancing or repayment plans, covenant compliance, and the status of Alto’s outstanding PPP forgiveness application.
• How commodity prices, derivative gains or losses, and working-capital needs affect cash generation and margins in subsequent quarters.
• Actual completion, costs and returns of the announced capital projects, and the Q3 effects of the Pekin maintenance shutdown.