Alto Ingredients, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Alto produces and distributes specialty alcohols, fuel-grade ethanol and essential ingredients, reporting Pekin production, marketing and distribution, and other production segments.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $318.1 | $336.9 | $949.3 | $1,007.2 |
| Gross profit (loss) | $4.2 | $(19.8) | $18.2 | $(6.2) |
| Gross margin | 1.3% | (5.9)% | 1.9% | (0.6)% |
| Net loss | $(3.5) | $(28.0) | $(9.1) | $(8.5) |
| Net loss available to common stockholders | $(3.8) | $(28.4) | $(10.0) | $(9.5) |
| Loss per share, basic and diluted | $(0.05) | $(0.39) | $(0.14) | $(0.13) |
| Adjusted EBITDA, non-GAAP | $4.7 | $(20.6) | $15.7 | $13.7 |
For the first nine months, operating cash flow was $10.2 million (prior year: $1.8 million); investing cash outflow was $28.1 million; financing cash inflow was $3.2 million. Cash, cash equivalents and restricted cash declined $14.7 million to $34.9 million, including $26.2 million unrestricted cash. Capital expenditures were $24.6 million.
At September 30, current assets were $168.2 million and current liabilities $58.4 million, giving working capital of $109.8 million and a 2.88 current ratio. Long-term debt, net of discounts and financing costs, was $75.9 million; principal outstanding was $84.9 million ($24.9 million on Kinergy’s credit line and $60.0 million Orion term loan). The Orion loan bears fixed interest of 10% and matures in November 2028. Reported unused availability was $53.4 million under Kinergy’s line and $40.0 million under the Orion facility, subject to terms and conditions.
Changes and operating drivers
- Q3 sales fell 5.6% year over year, while gross profit improved by $24.0 million. Management attributed the margin recovery chiefly to lower corn costs relative to ethanol prices and improved ethanol crush margins.
- Q3 results were held back by unusually high unscheduled downtime, reduced sales volumes, a lower-margin product mix, higher repair and maintenance costs, and derivative losses. An unexpected rise in corn basis earlier in the quarter was partly offset by lower basis in September.
- Q3 total gallons sold declined 6.5%; specialty alcohol production gallons sold fell 20.2%. For the nine months, total gallons sold fell 7.7%, specialty alcohol gallons sold fell 21.8%, and production capacity utilization was 78% versus 86%.
- Nine-month sales decreased 5.7%, but gross profit improved $24.4 million. The comparison also reflects lower sales prices and reduced volumes, including the Magic Valley plant’s temporary idling from January through April 2023.
- Interest expense rose to $2.0 million in Q3 and $5.3 million for nine months, from $0.3 million and $0.9 million, respectively, reflecting higher debt and interest rates.
Outlook, risks and unusual items
- Management said it believes liquidity is sufficient for anticipated needs over the next 12 months. It also stated that the 2024 specialty-alcohol contracting season was underway and that it was on pace to exceed 2023 delivered gallons at premiums to fuel-grade ethanol; this is a management outlook, not a guarantee.
- Management extended its EBITDA expansion timetable by six to twelve months. It targets more than $65 million of incremental annualized Adjusted EBITDA by mid-2026 after near-term projects, and approximately $125 million by year-end 2027 after longer-term initiatives. These are forward-looking, non-GAAP targets; the filing does not provide a quantitative reconciliation to GAAP earnings.
- Projects include primary yeast production, carbon capture and sequestration, a natural gas pipeline, cogeneration and biogas conversion. Inflation and supply constraints raised estimated primary-yeast project costs and extended expected construction from 18 to 27 months. Management is reviewing project scope, timing, costs and financing.
- Q3 included $2.8 million of USDA Biofuel Producer Program grant income, which is nonrecurring and not repayable. The comparable 2022 nine-month period included $22.7 million of grant income.
- Commodity price and operating risks are significant: results depend on ethanol and specialty-alcohol selling prices, corn and natural-gas costs, product demand, plant reliability and hedging execution. Management’s sensitivity analysis estimated that a hypothetical 10% adverse price change would reduce pretax income by approximately $48.5 million for ethanol and $44.1 million for corn; it excludes future contracted volumes and may differ materially from actual outcomes.
- Open commitments included $23.6 million for capital projects, alongside purchase and sales contracts extending through 2023 and 2024. The company reported ordinary-course legal matters and did not expect pending proceedings to materially affect its financial condition or results, while noting outcomes remain uncertain.
- Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether plant uptime, repair costs and the Magic Valley high-protein system improve as management expects, and whether specialty-alcohol volumes recover.
- Whether the projected EBITDA expansion targets, project schedules, capital costs and financing plans remain achievable.
- Actual liquidity and borrowing availability under the credit agreements, including covenant compliance, debt-service requirements and the Orion loan’s excess-cash-flow prepayments.
- How commodity spreads, corn basis, natural-gas prices and hedging results affect margins and cash generation.
- How much future performance depends on nonrecurring grant income, and whether operating cash flow can support capital spending and debt obligations.