Alto Ingredients, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Financial statement amounts are in millions of dollars, except per-share data and operating metrics. Alto produces and markets specialty and fuel-grade alcohols and essential ingredients.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $218.7 | $311.4 |
| Gross profit (loss) | $13.8 | $(12.9) |
| Gross margin | 6.3% | (4.1)% |
| Operating income (loss) | $5.6 | $(23.1) |
| Net income (loss) attributable to Alto | $4.7 | $(25.1) |
| Net income (loss) available to common stockholders | $4.4 | $(25.4) |
| Diluted earnings (loss) per share | $0.06 | $(0.47) |
| Net cash from (used in) operating activities | $(4.1) | $26.9 |
- Revenue fell 29.8%, primarily as total gallons sold declined 39.4%; higher average selling prices partly offset lower volumes. Gross profit improved by $26.7 million, reflecting stronger specialty-alcohol margins and reduced negative-margin fuel-ethanol sales.
- SG&A was $7.0 million, down 31.3%. Net interest expense was $1.9 million, down 64.5%, largely due to lower average borrowings.
- Cash was $44.1 million at quarter-end, down from $47.7 million at December 31, 2020. Current assets were $241.6 million and current liabilities $112.8 million; working capital was $128.8 million and the current ratio was 2.14.
- Gross borrowings were $102.4 million at March 31, including $37.6 million classified as current and $64.4 million as long-term debt on the balance sheet. The 15% senior secured notes mature in December 2021. Subsidiary credit agreements include financial covenants and restrictions on transferring approximately $231.9 million of subsidiary net assets to the parent.
- Operating cash use reflected increased receivables and inventories, partly offset by earnings and higher payables. Investing cash use was $4.4 million, mainly capital expenditures; financing provided $5.0 million.
Material changes and operating context
- Production gallons sold fell to 39.0 million for fuel-grade ethanol and 19.0 million for specialty alcohols; total gallons sold were 112.0 million versus 184.9 million. Production capacity utilization was 52% in the quarter versus 77% a year earlier. The company said it was operating at approximately 64% of capacity at quarter-end; these figures describe different measures and periods.
- Delivered corn cost rose 24.6% to $5.27 per bushel. Average sales price per gallon increased 28.5% to $1.94. Essential-ingredient tons sold declined 58.8% to 276,900.
- Segment results improved: marketing and distribution reported $4.0 million of pretax income versus $2.9 million; Pekin production reported $9.7 million versus a $6.8 million loss; other production reported a $5.1 million loss versus a $16.6 million loss.
- Alto recorded a $1.2 million impairment charge on facilities held for sale. Commodity derivatives generated a reported $10.5 million net gain, including $6.2 million realized and $4.4 million unrealized; changes in commodity prices and derivative valuations may affect earnings and cash needs.
Outlook, developments and risks
- Management described the quarter as solid and said it remained on track for at least $60 million of full-year gross profit from specialty alcohol sales, based on 70 million gallons contracted in fall 2020 at fixed volumes and prices. This is management’s expectation, not a guarantee.
- Management projected 2021 SG&A of $20 million to $25 million. It had $18 million of capital projects in process or planned for 2021. Two Pekin projects were expected to be completed by Q3, with payback under two years and approximately $5 million of additional annual EBITDA, according to management.
- After quarter-end, Alto sold its Madera, California facility, closing May 14, 2021. Consideration was $28.3 million ($19.5 million cash and $8.8 million assumed liabilities); Alto used proceeds to repay $19.3 million of parent notes. Management expected savings of about $0.7 million per quarter in interest and $0.4 million per quarter in facility carrying costs. The company was still marketing its idled Stockton facility for sale.
- Key uncertainties include volatile alcohol, corn and natural-gas prices; demand and pricing for pandemic-related sanitizer alcohols; fuel-ethanol market and regulatory conditions; customer performance under contracts; operating and logistics disruptions; and the ability to meet debt obligations and covenants. Alto said it believed it had sufficient liquidity for the next 12 months and was in compliance with its stated credit covenants.
- The company had applied for forgiveness of $9.9 million in CARES Act loans but gave no assurance of forgiveness. It reported ordinary-course legal matters and said it did not expect pending proceedings to materially affect its financial position or results, while acknowledging outcomes remain uncertain. Series B preferred dividends of $0.3 million accrued during the quarter but were not paid; no common dividends were planned.
Important facts for investors to verify
- Whether specialty-alcohol contracts support the projected minimum $60 million of full-year gross profit, and how demand changes as pandemic-related sanitizer demand evolves.
- Progress on the Stockton sale and realization of the projected savings from the completed Madera transaction.
- Cash conversion and working-capital requirements, particularly receivables and inventory, alongside actual availability under the credit facilities.
- Debt maturities, covenant compliance, refinancing or repayment plans for the 15% notes, and restrictions on subsidiary cash transfers.
- Execution, costs and returns of the planned capital projects, and the effects of commodity prices and derivative positions on margins and liquidity.