Alto Ingredients, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless noted. Alto produces and distributes specialty and fuel-grade alcohols and essential ingredients across its marketing and distribution, Pekin production, and other production segments.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $317.3 | $362.2 | $631.2 | $670.3 |
| Gross profit / margin | $17.2 / 5.4% | $8.8 / 2.4% | $14.0 / 2.2% | $13.6 / 2.0% |
| Operating income (loss) | $9.3 | $(0.2) | $(2.4) | $(3.0) |
| Net income (loss) | $7.6 | $22.1 | $(5.6) | $19.5 |
| Net income (loss) available to common stockholders | $7.2 | $21.5 | $(6.2) | $18.6 |
| Adjusted EBITDA (non-GAAP) | $15.5 | $29.9 | $11.0 | $34.3 |
- Q2 sales fell 12.4% year over year, reflecting fewer gallons sold and lower average selling prices. Gross profit nearly doubled, which management attributed primarily to improved commodity margins as corn costs declined relative to ethanol prices.
- For the first half, sales declined 5.8%; gross profit rose 2.9%. The six-month net loss contrasts with prior-year income that included a nonrecurring $22.7 million USDA biofuel grant. No income tax provision was recorded in the periods shown.
- Q2 diluted earnings per share were $0.10, versus $0.29 a year earlier; first-half diluted loss per share was $0.08, versus earnings of $0.26.
- Six-month operating cash flow was negative $12.9 million, versus positive $20.7 million in 2022. Investing cash outflow was $21.5 million, including $18.0 million of capital expenditures and $3.5 million of Eagle Alcohol contingent purchase payments. Financing provided $9.9 million, mainly from Kinergy’s credit line.
- At June 30, cash and cash equivalents were $22.7 million, with restricted cash of $2.4 million. Working capital was $120.8 million and the current ratio was 3.06. Gross debt principal was $91.3 million ($31.3 million on Kinergy’s line and $60.0 million under the Orion term loan); reported long-term debt, net, was $82.1 million.
- Available borrowing was $49.4 million under Kinergy’s $100 million line and $40.0 million under the Orion facility, with a conditional option to expand the latter by up to $25 million. Orion bears 10% fixed interest and matures in November 2028. Management stated liquidity was sufficient for anticipated needs over the next 12 months.
Changes, operations and management outlook
- Specialty alcohol production gallons sold decreased 35.7% in Q2 and 22.6% for the first half; total gallons sold declined 11.9% and 8.3%, respectively. Essential ingredient tons sold fell 12.1% in Q2 and 18.4% for the half.
- Magic Valley was temporarily hot-idled from January through April because of extreme natural gas prices, unfavorable market conditions, and installation of high-protein systems; it restarted in April. Management said all facilities were operating at quarter-end. The filing’s KPI table reports Q2 capacity utilization of 78% versus 88% a year earlier; management separately cited sequential utilization of 81% in Q2 versus 70% in Q1.
- Management cited improved crush margins and favorable specialty alcohol and ingredient economics. It expected positive Q3 Adjusted EBITDA based on July spreads and the forward crush margin curve; this is forward-looking and not a GAAP earnings forecast.
- Management expects to achieve full production value from the Magic Valley high-protein and corn-oil systems in Q4, subject to alignment and permitting. It is pursuing higher-value GNS, corn oil and protein products, as well as a Pekin natural-gas pipeline, renewable natural gas, cogeneration, primary yeast and carbon capture and sequestration (CCS).
- Management projected annualized EBITDA increases of more than $65 million by the end of 2025 from near-term projects, and approximately $125 million by the end of 2026 when CCS, cogeneration and other longer-term initiatives are fully realized. These targets depend on project execution, costs, financing, market conditions and other assumptions; forward-looking reconciliation to GAAP was not provided.
Risks, commitments and notable items
- Commodity price volatility is a central risk: margins depend on ethanol and ingredient prices relative to corn, natural gas and other inputs. A sensitivity analysis estimated that a hypothetical adverse 10% price move could reduce pretax income by approximately $30.9 million for ethanol and $30.4 million for corn, based on stated volumes and assumptions that exclude future contracted volumes.
- Derivative gains recognized in cost of goods sold were $5.2 million for the first half of 2023, compared with $21.9 million in 2022. Derivative fair values at June 30 included $14.0 million of assets and $8.4 million of liabilities; market movements and margin calls can affect earnings and liquidity.
- Capital-project commitments totaled $17.4 million, scheduled through 2024. The company also has up to $5.5 million of contingent Eagle Alcohol payments over two years if specified targets are met. First-half capital expenditures were $18.0 million.
- The Kinergy facility has a fixed-charge coverage covenant when availability falls below specified levels. The company reported a 3.89 ratio against a 1.10 requirement for the three months ended June 30, 2023, and stated it believed it was in compliance. Orion requires semiannual excess-cash-flow prepayments beginning with the period ending December 31, 2023, based on leverage.
- Ordinary-course legal claims and contingencies remain; management did not expect pending proceedings to materially affect financial condition or results, while noting outcomes can be uncertain. Principal risks also include production or transport disruptions, environmental and climate regulation, ethanol-policy changes, project execution and financing, debt service, and cyberattacks.
- The company repurchased 1.249 million shares for $2.7 million in the first half. Series B preferred stock carries a 7% annual dividend and an approximately $18.1 million liquidation preference; the company does not anticipate common-stock cash dividends in the near future. Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control.
Key facts for investors to verify
- Whether production utilization, Magic Valley ramp-up, dryer permitting and high-protein/corn-oil system alignment meet management’s stated timelines.
- Whether positive margins and Q3 Adjusted EBITDA expectations materialize, and how commodity prices, hedge positions and working-capital movements affect cash generation.
- Project spending, funding sources and returns—particularly the $17.4 million commitments, primary yeast cost increases, and the financing, economics and schedule for CCS and cogeneration.
- Debt covenant headroom, Kinergy borrowing availability, Orion excess-cash-flow prepayments, and the effect of 10% term-loan interest on liquidity.
- Whether management’s 2025 and 2026 annualized EBITDA targets are achieved; these are projections, not reported results.